[Senate Hearing 107-1022]
[From the U.S. Government Publishing Office]
WEST COAST GASOLINE PRICES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CONSUMER AFFAIRS,
FOREIGN COMMERCE AND TOURISM
OF THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
APRIL 25, 2001
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana DANIEL K. INOUYE, Hawaii
TRENT LOTT, Mississippi JOHN D. ROCKEFELLER IV, West
KAY BAILEY HUTCHISON, Texas Virginia
OLYMPIA J. SNOWE, Maine JOHN F. KERRY, Massachusetts
SAM BROWNBACK, Kansas JOHN B. BREAUX, Louisiana
GORDON SMITH, Oregon BYRON L. DORGAN, North Dakota
PETER G. FITZGERALD, Illinois RON WYDEN, Oregon
JOHN ENSIGN, Nevada MAX CLELAND, Georgia
GEORGE ALLEN, Virginia BARBARA BOXER, California
JOHN EDWARDS, North Carolina
JEAN CARNAHAN, Missouri
Mark Buse, Republican Staff Director
Kevin D. Kayes, Democratic Staff Director
----------
Subcommittee on Consumer Affairs, Foreign Commerce and Tourism
PETER G. FITZGERALD, Illinois, Chairman
CONRAD BURNS, Montana JOHN D. ROCKEFELLER IV, West
SAM BROWNBACK, Kansas Virginia
GORDON SMITH, Oregon RON WYDEN, Oregon
JOHN ENSIGN, Nevada BARBARA BOXER, California
GEORGE ALLEN, Virginia JOHN EDWARDS, North Carolina
JEAN CARNAHAN, Missouri
C O N T E N T S
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Page
Hearing held on April 25, 2001................................... 1
Statement of Hon. Barbara Boxer.................................. 8
Statement of Hon. Peter Fitzgerald............................... 34
Statement of Hon. John McCain.................................... 2
Statement of Hon. Frank H. Murkowski............................. 11
Statement of Hon. Gordon Smith................................... 1
Statement of Hon. Ted Stevens.................................... 28
Statement of Hon. Ron Wyden...................................... 3
Witnesses
Pitofsky, Hon. Robert, Chairman, Federal Trade Commission........ 18
Prepared statement........................................... 21
Wells, Jim, Director for Natural Resources and Environment, U.S.
General Accounting Office...................................... 40
Prepared statement........................................... 42
Cook, John, Director, Petroleum Division, Energy Information
Administration................................................. 46
Prepared statement........................................... 49
McAfee, R. Preston, Visiting Professor of Economics and Strategy,
University of Chicago.......................................... 56
Prepared statement........................................... 57
Shapiro, Carl, Transamerica Professor of Business Strategy, Haas
School of Business, University of California at Berkeley....... 63
Prepared statement........................................... 65
Malone, Robert, Regional President, Western United States, BP.... 76
Prepared statement........................................... 78
Mau, Chuck, Oregon gasoline dealer, Portland, OR................. 89
Prepared statement........................................... 91
Additional Material Submitted for the Record
Boxer, Hon. Barbara:
Senator Boxer's record on high gasoline prices and mergers by
oil
companies.................................................. 8
Letter to Senator Boxer dated Dec. 14, 1999.................. 31
Carnahan, Hon. Jean, prepared statement.......................... 97
Seafarers International Union of North America, AFL-CIO, prepared
statement...................................................... 97
WEST COAST GASOLINE PRICES
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WEDNESDAY, APRIL 25, 2001
U.S. Senate,
Subcommittee on Consumer Affairs,
Foreign Commerce and Tourism,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:36 p.m., in
room
SR-253, Russell Senate Office Building, Hon. Gordon Smith,
presiding.
OPENING STATEMENT OF HON. GORDON SMITH,
U.S. SENATOR FROM OREGON
Senator Smith. Welcome, Senator Murkowski. You are first in
the dock and we thank you, sir, for coming.
Good afternoon, ladies and gentlemen. I have convened this
hearing of the Senate Subcommittee on Consumer Affairs, Foreign
Commerce, and Tourism to investigate high gasoline prices on
the West Coast. I want to thank our Chairman, Senator McCain,
who is present at this hearing, also Senator Fitzgerald, who is
the Chairman of this Subcommittee, for allowing us this hearing
today.
I want to extend also a warm welcome to Chuck Mau from
Portland, Oregon, who will be testifying on our third panel.
Finally, I want to thank Senator Murkowski for being here
to testify as well.
In the last 2 years, the impacts of high gas prices have
been felt by most every American. This week the national
average for gas prices jumped nearly 13 cents per gallon, or
8.4 cents, and the West Coast continues to pay more than any
other region in the United States.
For the constituents I represent, Oregonians all, the sting
of high gasoline prices is particularly blistering. For those
with limited means or those who drive long distances for their
livelihoods, even a small increase in gas prices can be
disastrous. My constituents have already been slapped once on
the cheek with inflated electricity prices and are now being
asked to turn another cheek for record high gas prices.
It is important to remember that there are a number of
factors affecting consumer fuel prices, particularly on the
West Coast. I believe that all of our witnesses today will
converge upon this point. The cost of delivering gasoline in
the West Coast, the lack of crude refining capacity, and the
specialized fuel requirements for California make the entire
West Coast region susceptible to supply disruption and severe
price spikes.
Yesterday's refinery fire in California reminds us how
fragile our infrastructure is and may reverberate into this
summer's gas prices, yet to be announced. They are already
projected to be higher than they have ever been before.
There are also State-specific factors that affect gas
prices. In California, which currently faces the highest gas
prices in our Nation, the cost of refining clean-burning fuel
has driven up costs to consumers. In my State of Oregon,
several inherent factors affect prices. In response to my
request to an investigation, the General Accounting Office
identified these factors: there are no refineries in Oregon,
the cost of getting fuel to rural areas is high, and Oregon
State taxes at 24 cents a gallon are some of the highest in the
country.
But this hearing is not just about Oregon. Our goal here
today is to shed some light on a difficult problem that affects
everyone in Oregon and elsewhere. As we have seen in other
energy and fuel issues, there is no silver bullet. Just as
electricity does not come from a flicking a light switch,
gasoline does not come from a filling station. It must be
drilled for and then shipped and piped thousands of miles,
refined to meet our environmental standards, and distributed to
customers in cities and in rural locations as well.
I also want to note that this cannot be a partisan matter.
I am glad to be here today with my colleague Ron Wyden. We are
united in this effort to find out the truth.
Ron and I have worked hard to bring together clarity and
balance to this issue on behalf of Oregonians and we hope for
the broader constituency of the American people.
Having said these things, I want to make it very clear the
seriousness of the charge that brings us to this hearing this
day. I would say to all the public in all our constituencies,
this above-the-fold headline in our largest paper in Oregon,
The Oregonian: ``Experts: BP Rigged Prices,'' and today
apparently a memo detailing this. My constituents are prepared
to pay the prices that are legitimate costs, but they are not
willing to pay the price of market manipulation. That is the
charge. There is no conviction, but we are due some answers.
Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman.
I note the Chairman of the Full Committee is here. He has
been very gracious in terms of letting us have this hearing and
I am sure his schedule is short. Mr. Chairman, if you would
rather go ahead and I will go after you.
STATEMENT OF HON. JOHN McCAIN,
U.S. SENATOR FROM ARIZONA
Chairman McCain. I want to thank Senator Smith and Senator
Wyden for being involved in this issue. This hearing is
important. I also want to applaud them for being two of the
most valued Members of our Committee.
This hearing is about the reasons why West Coast gasoline
prices are higher than in any other part of the country. I
think Americans around the country have been watching with
dismay as the signs posting prices at their corner gas stations
are changed daily and changed upwards. It has been reported
that gasoline prices in the U.S., not adjusted for inflation,
have risen more in the past 2 weeks than in any other 2-week
period in the past 50 years, meaning that this is an incredibly
appropriate time for this hearing.
The real hikes may be yet to come. Energy industry analysts
and some of the witnesses who will appear today say that prices
could go higher as we head into the summer months. Combine this
with the news yesterday that one oil company's profits are up
44 percent over last year, and analysts being reported as
saying that the company's biggest problem will be what to do
with all the cash flowing into its coffers, and you have some
perplexed drivers with lots of questions they want answered.
While there may be no relationship between the high
worldwide oil company profits and skyrocketing gasoline prices
in the U.S., I would like to know more about the profitability
of the refining sector. I understand the witnesses here today
all agree that we have a major capacity problem in our refining
sector and that this problem is going to get worse as U.S.
demand for gas and oil products increases.
Does the lack of refining capacity mean that every time
there is a refinery outage prices skyrocket along with oil
company profits? I hope this topic is covered at this hearing
as it has implications not just for the West Coast, but for the
entire country.
I also hope that our distinguished Chairman will examine
whether the balkanization of gasoline, with States adopting
their own peculiar gasoline reformulations for laudable
environmental purposes, is contributing to higher prices
because we no longer have a common product that can be shipped
for use to combat shortages.
Again, I am very pleased Senator Smith and Senator Wyden
are holding this hearing. I hope the information today helps to
answer questions on people's minds throughout the country, not
just those on the West Coast. I thank my colleagues.
Senator Smith. Senator Wyden.
STATEMENT OF HON. RON WYDEN,
U.S. SENATOR FROM OREGON
Senator Wyden. Thank you, Mr. Chairman.
Before Chairman McCain leaves, I do want to express my
appreciation to him for giving us a chance to work together on
a bipartisan basis with the Committee and the staff. This
hearing could not go forward without your leadership, Mr.
Chairman and I appreciate it.
I also want to begin by thanking my friend and colleague
from Oregon, Senator Smith. He and I have worked together on a
whole host of issues that have been important, but especially
on this one today. I am very grateful. We have teamed up
consistently on this issue and I just want the record to show
that I am particularly grateful for your willingness to join me
in the effort to try to get access to those 1400 boxes of
records involved in the BP-ARCO acquisition case that experts
have stated contain numerous smoking gun documents showing how
consumers in western States are being gouged.
Mr. Chairman and colleagues, there is substantial evidence
that the juices of competition are being sucked out of West
Coast gasoline markets and that it is no accident that
Oregonians have lost more than 600 gas stations, typically pay
gas prices far higher than the national average, and have 70
percent of our gas distributed by four oil companies. The
evidence indicates that communities up and down the West Coast
are being red-lined by the major oil companies. Red-lining is
about as anti-free enterprise as it gets. With red-lining, oil
companies restrict who independent gas wholesalers can sell to,
and red-lining breaks down the marketplace forces that are so
critical because it denies choice to whole segments of
communities on the West Coast.
There is evidence that communities up and down the West
Coast are being victimized by zone pricing. With this form of
discriminatory pricing, one oil company sells the same gas to
its own brand service stations at different prices. The cost of
the gas to the company is the same, but the price the stations
pay is not. Eventually the station that pays the higher price
cannot remain competitive and yet another community in the West
has monopoly pricing.
Recently, as Chairman Smith has noted, The Oregonian
newspaper published a story documenting secret oil company
records revealing that BP-Amoco exported Alaskan North Slope
crude oil to keep West Coast prices higher. These documents
show that BP exported oil to Asia at a lower price than what it
sold the same oil for on the West Coast as a part of a strategy
to make even higher profits on the West Coast sales.
Since the newspaper story that Chairman Smith has
highlighted, I have obtained documentation that before BP
bought ARCO, ARCO exported gasoline--that is refined oil--out
of the West Coast market in order to drive up West Coast
prices. In fact, this documentation shows that ARCO had a
business strategy to ``export to keep the market tight.''
Chairman Smith, I would ask unanimous consent that this
document be made a part of the record.
Senator Smith. Without objection.
[The material referred to follows:]
[GRAPHIC] [TIFF OMITTED] 88463.008
Senator Wyden. Mr. Chairman and colleagues, this ARCO
document cannot be shrugged off as inconsequential. It was
prepared for the senior management of the company as a snapshot
picture of what ARCO's business strategy was at that time. The
president of ARCO Products Company described it as a ``study of
our manufacturing and wholesale marketing efforts of the
purpose of looking at strategies that were in place.'' Now,
this ARCO document is relevant because recently BP has made the
argument that they are no longer exporting and have no plans to
resume such exports. BP argues that any oil they produce in
Alaska is less than what the company needs to supply its West
Coast refineries and therefore they have no interest in
exporting.
I believe that the new ARCO document knocks the legs out
from under BP by revealing that ARCO was exporting under
circumstances exactly like BP is in now. ARCO then owned and BP
now owns the very same refineries and both companies produce
less Alaskan oil than needed to supply those refineries.
What is troubling with this evidence is that BP exported
oil when they could have sold it for more on the West Coast and
ARCO exported gas to tighten the West Coast market and
consumers ended up virtually defenseless in the West.
Here is my bottom line concern. Despite the evidence that
Chairman Smith has highlighted, despite the further
documentation from ARCO's files, our government now simply has
to take BP-ARCO's word that they are going to act in the public
interest in the future. This is hard to do, given the fact that
BP-ARCO lawyers have pulled out all the stops to conceal more
than 1400 boxes of records involved in the BP-ARCO acquisition
case that several experts have stated contain numerous smoking
gun documents showing how consumers in western States are
getting gouged.
I would like to conclude by referring to one other newly
obtained document which raises additional questions about the
nature of competition among oil companies on the West Coast.
ARCO Products Company in 1996 stated that it was their plan
to ``exchange and trade gasoline selectively to preserve market
discipline.'' The significance of this document is that it
raises serious questions about whether ARCO was competing
against or cooperating with the other major West Coast oil
companies.
Chairman Smith, I would ask unanimous consent that this
document be included in the record as well.
Senator Smith. Without objection.
[The material referred to follows:]
[GRAPHIC] [TIFF OMITTED] 88463.009
Senator Wyden. The question therefore is whether the West
Coast is being victimized and by what amounts to a West Coast-
wide system where a handful of companies pretend to compete
while quietly making certain that they profit at the consumer's
expense. It is going to be important for the Subcommittee to
examine this issue and I am happy that we have this
opportunity.
This Subcommittee's hearing is important because it gives
us a chance to examine key anti-competitive practices that are
distorting West Coast gas markets. But more needs to be done,
and it is especially important to West Coast consumers that the
cloak of secrecy shrouding the BP-ARCO case be lifted so that
all the evidence can be examined. This Subcommittee has the
power to examine the documents now sealed in Federal court in
San Francisco and I believe that this action is critical to
Congress learning why West Coast gas prices are so high.
Mr. Chairman, I want to wrap up by joining you in welcoming
Chuck Mau from our home State to this hearing, and also take
note of the fact that Senator Boxer has had a great interest in
this issue over a number of years and has worked closely with
the western delegation on a bipartisan basis as well.
Senator Smith. Thank you, Senator Wyden.
Senator Boxer, do you have a statement?
STATEMENT OF HON. BARBARA BOXER,
U.S. SENATOR FROM CALIFORNIA
Senator Boxer. Yes, Mr. Chairman, I do. First I want to
commend you, Senator Smith, and you, Senator Wyden, for your
work here. I have to say we started working on this together a
long time ago.
What I would like to do is ask unanimous consent to place
into the record all the various things that my office has been
involved in since 1996 on this issue.
Senator Smith. Without objection.
[The material referred to follows:]
Senator Barbara Boxer's Record on High Gasoline Prices
and Mergers by Oil Companies
In Spring 1996, I wrote to then-Energy Secretary Hazel
O'Leary asking her to investigate possible price gouging in California.
In June 1997, I wrote to FTC Chairman Robert Pitofsky,
asking him to block the proposed joint venture between Shell and
Texaco. The FTC agreed with my concerns and required the divestment of
gas stations in the San Diego area before allowing the joint venture to
proceed.
In August 1997, I wrote to then-Energy Secretary Federico
Pena and then-Attorney General Reno to take the necessary steps to
ensure fair gasoline prices for California drivers.
I opposed the Shell Oil and Texaco joint venture. I wrote
to the FTC to urge them to block it.
In March 1998, I wrote to the FTC to launch an
investigation of anti-competitive oil company prices throughout
California.
In August 1998, I and several gas station operators asked
Pitofsky to open a formal investigation of anti-competitive practices
in the California oil industry. He responded to me that he agreed that
charges ``warrant further inquiry.'' He directed the Commission's
Bureau of Competition to investigate gasoline pricing practices in
California.
I provided the FTC with information about possible
harassment of gas station operators by major oil companies (May 1998),
over a hundred pages of data on California gasoline pricing practices,
and petitions containing the signatures of 50,000 California motorists
concerned about high gas prices.
I opposed the BP/Amoco and the Exxon/Mobil mergers by
asking the FTC to oppose both mergers that the defy antitrust laws
restricting the consolidation and abuse of market power.
I wrote to the FTC to call on them to require oil
companies, as a condition of allowing mergers to proceed, to guarantee
access to oil and gasoline for independent refiners and nonbranded gas
stations. This would promote competition to keep prices in check.
In the 106th Congress, I introduced S. 1137 the Integrated
Oil Company Antitrust Act, which amends the Clayton Act to give the
Attorney General additional authority to prevent certain
anticompetitive mergers and acquisitions in the oil industry. Mergers
of major oil companies are banned unless:
The Attorney General finds that the merger or acquisition
will promote competition.
The FTC has approved an agreement by the merging or
acquiring company to guarantee adequate supplies of crude oil and
petroleum products to independent refiners and marketers.
I supported a ``Gas Out'' as a day for consumers to
protest higher prices.
I wrote to the FTC, in May 1999, to expand the gas price
investigation to examine whether anti-competitive activities were to
blame for slower than anticipated gas price reductions.
In the last Congress and this Congress, I have introduced
legislation to ban the exportation of oil from Alaska's North Slope.
Currently, the companies are doing this on a voluntary basis.
Senator Boxer. Thank you, and I will summarize it.
In 1996, I wrote to Hazel O'Leary asking her as the Energy
Secretary to investigate price-gouging in California. In 1997,
I wrote to FTC Chairman Pitofsky, whom we will be hearing from
today, asking him to block the proposed joint venture between
Shell and Texaco. The FTC did not block it, but they did agree
with my concerns and required the divestment of gas stations in
the San Diego area before allowing the joint venture to
proceed.
In August 1997, I wrote to Secretary Pena and Attorney
General Reno asking them to take necessary steps to ensure fair
gasoline prices for our drivers. I then outright opposed the
Shell Oil and Texaco joint venture and I asked the FTC to block
it.
In 1998, I asked the FTC to launch an investigation on
California prices. I am very distressed to tell you that I
still have not gotten that report. I am very disturbed about
it, and it is not for lack of trying. I have met with them
often. I have presented them with many documents, including
hundreds of pages of data on pricing policies, petitions, the
fact that we proved that there was harassment going on by big
oil companies to the independent gas station owners and the
independent dealers. We got them together. They came out there
and they talked to them. But, we still do not have an answer.
We know that competition has gone down. You know, if anyone
tells you it is supply and demand I would tell you this. If the
supply is manipulated, as Senators Wyden and Smith have
indicated may well be the case, there is no real supply and
demand at work. When supply is manipulated, that is not a fair
picture. That is what has been going on.
I have introduced legislation with Senator Wyden dealing
with the exports from Alaska's North Slope, and there are other
things I will not go into. I want to make a couple of points.
This is what gas prices look like in San Francisco. This
was yesterday. Today who knows if it is higher? If you are
lucky enough to take the lowest grade of gasoline, it is $2.19.
This is on Franklin Street in San Francisco yesterday. It is
higher elsewhere. If you have to take the special super-duper
kind, it is $2.39.
This is an outrage. People do not have a choice, especially
right before the summer driving season.
Senator McCain already talked about the record profits that
we are seeing from big oil. Exxon Mobil, up 44 percent from a
year ago. In 2000 they had record earnings of $17.7 billion, so
record earnings in 2000 and now on top of that a 44 percent
increase. Conoco, 59 percent increase over the quarter last
year.
So all you have to do is follow the money and talk to
consumers in my State and talk to the independent dealers to
find out how they have been discriminated against. I have a
copy of a letter where Chevron threatened to double rents on
independent gas station owners if they continued the support
gas price reform legislation in California. They were being
retaliated against because they said: It is outrageous; we do
not want to charge these prices; we do not think we should have
to.
I have other letters that I will put in the record later
from independent gas station owners about the questionable
business practices of these oil companies. Oil companies came
in to do an investigation of their dealers and if there was a
light out in the bathroom and everything else was perfect, they
said: That is a warning; we are going to take over your
station. We have all that documented, and consumers are getting
killed at the pump.
I am all for people making a good dollar. I think it is
important to succeed. But I have to tell you, when I read that
Exxon Mobil's chair--and this may be the most wonderful human
being; I do not know him and he may even be here--earned a
$13.9 million bonus in 2000 and a $17.4 million--a $13 million
bonus in 1999 and a $17 million bonus in 2000, while consumers
are struggling to pay at the pump.
Where is the FTC? I do not know. Where is corporate
responsibility? I do not know. I am waiting and I am hopeful,
because we are getting the report supposedly in June now, just
a few years after we asked for it. So maybe we are going to get
some--you know, the FTC does have the power to disgorge profits
that have been unfair. So we hope that they will maybe come
down with that kind of a report.
We have the highest gasoline prices in the country. Three
years ago, I asked for this report. Yet the problem is getting
worse.
Oh, you will hear it is the environmentalists. Well, we
just took our latest check. Eight cents a gallon absolutely for
cleaner air, that is what we pay. I think the vast majority of
Californians are happy to pay 8 cents a gallon for clean air.
But you cannot explain anything because the same law has been
in effect for a decade. So it is not clean air requirements
that are causing the problem.
In closing, let me say there are a number of things I am
going to be working on. First, I am going to be pressing the
FTC and hoping we get some redress. I am going to be appealing
to the oil companies, although I know I have tried that before,
but I will keep appealing to them, that they are going to bring
down this economy. We are already entering a period of weakness
here. This is a terrible situation, and it is not just
California's problem. You hear it is the West Coast's problem.
California, we are the sixth largest economy in the world and
when we get a cold everybody sneezes. So we have to pay
attention to what happens here.
But there are things we can do. We can start driving hybrid
vehicles. You do not make any sacrifice. You fill up your car
with gas and you get 50 miles to the gallon. I drive one
myself. Comfortable, wonderful, no culture shock. You do not
have to plug it in. It is real simple. We ought to do that.
We ought to give more incentives for that. We ought to have
Senator Wyden's and my bill on the floor to reinstitute the ban
on exports of Alaskan North Slope oil. We know that the
companies are doing it voluntarily, but it could change.
SUVs, there is no reason why they cannot get the same fuel
mileage as an average car. If we did that, that is equal to one
ANWR every 6 years, a million barrels of oil a day.
So yes, there are things we can do. But Mr. Chairman, I
cannot thank you enough, both you, Senator Wyden, Senator
McCain. It is just a few of us who have been talking about this
for a long time. I know Senator Murkowski is very interested in
this consumer issue as well. I thank you very much.
Senator Smith. Thank you, Senator Boxer.
Chairman Murkowski, we welcome you, and thank you for
taking the time to be with the Commerce Committee today in your
capacity as Chairman of the Energy Committee.
STATEMENT OF HON. FRANK H. MURKOWSKI,
U.S. SENATOR FROM ALASKA
Senator Murkowski. Thank you very much, Mr. Chairman, and I
appreciate the opportunity to spend a few minutes with you. I
think you have got a balanced agenda, a list of witnesses, and
I hope that you proceed to dwell into the areas that you
brought up in your opening statements and get some specific
answers to your legitimate concerns.
I am here for one purpose and that is to set the record
straight on Alaska oil and where it goes. I think it is fair to
say that the industry can comment on the allegations that have
been made collectively by your Members here today.
I am going to refer over here to this chart, and I will
speak loudly, so hopefully, the court reporter can hear me. As
you know, Alaska's proximity to the West Coast is very real,
and as a consequence where our oil goes today, the million
barrels that we produce: 60,000 barrels are consumed within our
State. However, California is the second largest consumer with
395,000 barrels a day; Washington State at 495,000 barrels a
day and Hawaii at 50,000 barrels a day. That is where Alaska
oil goes.
There is an assumption that somehow the connections between
Alaska's oil production and the issue of oil exports has
something to do with the price. There has not been a barrel of
oil exported from Alaska since last June. The record will note
that. So I would ask you to consider the reality that, while
there may have been exports up to about 60,000 barrels a day
prior to a year ago, that does not occur as a consequence of
the change in the market.
I will explain that change very briefly in the realization
that the West Coast consumes somewhere in the area of 2.5 to 3
million barrels a day. A million barrels roughly comes, as I
have indicated, from Alaska. A million barrels is roughly
produced in California. Approximately 700,000 barrels a day
comes in from the Mideast. So as you can see, as Alaska's
production declined, the decline in Prudhoe Bay, that has been
displaced with oil coming in from the Mideast.
I will refer to my written comments here, because I know
what you want to get at is the bottom line, an explanation of
why prices are higher on the West Coast, and hopefully I can
shed some light on that. As you know, as Chairman of the Energy
and Natural Resources Committee, this matter and matters of
rising energy costs in general are of great concern, because
they affect the economy, they affect the national security of
our country, and as a consequence they need explanations.
But to a large degree, as I have indicated, you have a
supply and demand problem. The West Coast is consuming more oil
than is produced on the West Coast and the difference is being
exported in.
I would like to point out a couple of other differences.
All the oil that moves from Alaska without exception moves in
U.S.-flag vessels built in U.S. shipyards with U.S. crews. That
is the Cabotage Law. It does not suggest that you could bring
it in cheaper if you could bring it in in foreign vessels. It
mandates that the carriage of goods between two American ports
be carried in a U.S.-built vessel. That also occurs in the
passenger service as well. It is one of our laws that
occasionally we overlook, but recognize in the interest of
protectionism of our American merchant marine it is necessary.
Otherwise we would not have any U.S.-flag vessels. We mandate
this.
The cost of a vessel built in a U.S. yard--and we have
built--currently we have got about six under construction,
three in San Diego and another five in Louisiana--about twice
as much to build as you could build that ship in a foreign
yard. Those ships in the U.S. cost about $200 million. You can
build them in Korea for $100 million.
So you have got to recognize the reality that this is
passed on to the consumer. I am not arguing the merits of the
Jones Act, but I am simply explaining one reason why it costs
more to move Alaskan oil down to the West Coast than it would
if you were able to move that oil down in a foreign vessel.
So, those facts being out there, I think it is important to
recognize the recent increase in the cost of gasoline focuses
again on our problems at the pump because States along the
Pacific have traditionally had the highest gasoline prices in
the country, averaging somewhere in the area of $1.70 per
gallon. As the Senator from California indicated, they are
going up. They may well reach $3 a gallon.
But as I think all of you recognize, the price of oil is
primarily set by the major producers. The major producers are
OPEC. As you have observed OPEC and the discipline that has
come about as a consequence of OPEC getting together, they have
effectively put a floor and a ceiling on the price of crude
oil. They have been able to reduce production, and since they
are the key supplier they have got the leverage and will
continue to have it, and will continue to frustrate those of us
on the West Coast, and particularly my State of Alaska, where
we have the capability of producing more domestic oil and
clearly we can do it safely.
Now, do you really care, California, Washington, Oregon,
where your oil comes from? There does not seem to be much
interest in where it comes from as long as you get it and that
you get it at the lowest price. I can understand that, but
there is no concern over the scorched earth policies of
developing oil in the Mideast or the national security of our
Nation as we become more dependent on importing oil from Saddam
Hussein, 700,000 barrels a day.
Is it not rather ironic that our foreign policy is so
inconsistent, that on the one hand we would enforce a no-fly
zone, we bomb him often, we cut out his radar sites, but we are
importing his oil? We put it in our airplanes to go fly over,
enforce a no-fly zone, bomb Iraq, with his oil. Now, what kind
of a foreign policy is that? A bit inconsistent.
What does he do with our money? He pays his Republican
Guards, keep them alive certainly. He develops a missile
competition, an energy competition with biological technology.
Who does he aim it at? He aims it at our ally Israel. This is
the cost of depending on foreign sources of oil.
I am not going to give you my usual pitch about the merits
of producing it from Alaska, but recognize where your oil comes
from now and as we decline where it is coming from and what
care and concern you have as long as you can get it.
You indicated, Senator Smith, the cost associated with
Oregon. Oregon has no refineries. That is a choice of their own
to some degree. On the other hand, your taxes and your gasoline
costs are higher than 33 other States. A portion of that is due
to your tax rate. You set your own tax rate, 18 cents a gallon
Federal and, what is it, 24 States, for 42 cents a gallon.
Again, that is higher than 33 other States.
California requires reformulated gasoline and it is
necessary in that State, and I understand that. But what we
have seen as a consequence of the previous administration
opening up, if you will, the salt caverns in Louisiana by
making that 30 million barrels available from SPRO, we did not
have the refining capacity to refine it. So what did we do? We
offset what we import by taking the oil out of SPRO. Was there
any net increase in refined product? Clearly there was not,
because we also have a problem of refining capacity in this
country, have not built a new refinery in 25 years.
If it is so profitable for the oil companies to build
refineries or to make money in refined product, why are they
not building more refineries? It is clear the reason they are
not. The permitting time is of a consequence that they do not
feel they can generate a return.
But they should respond to those questions, which I agree
are certainly legitimate.
I am sensitive about calls for reimposing an export ban on
Alaskan oil, which continually comes up even though since last
June there has not been a drop of oil that has been exported
from Alaska. There is an assumption out there that somehow we
bear a responsibility for your high prices or that we are
exporting oil out of Alaska and therefore that is the
consequence of your high prices. We are not and I think the
record should recognize that and once and for all put behind us
the issue of exporting Alaskan oil as being part of your
solution.
We are tired of being a scapegoat for the failures and
excesses of local and State actions that impact prices at the
pump. We have all heard about ``not in my back yard''; I do not
want a refinery in my back yard, I do not want to be exposed to
developing oil and gas off the shores of California or
Washington or Oregon. But that is the case, and I respect your
opinions. If you do not want it, you should not have it. But
somebody has got to produce it because you have got to have it.
Only Alaska has ever suffered an export ban. No other State
in the Union was precluded from exporting its oil or petroleum
products--not California, not Oregon, not Washington. There
have been no attempts to ban such exports. Why should we be
treated differently? A legitimate question. If you are going to
ban exports, let us ban them from everybody, let us ban exports
from California, let us ban exports of refined product. Do not
look at my State of Alaska. We are not exporting any oil. We
are not your problem.
Should there be a ban on exporting Boeing airplanes or
Starbucks coffee or a ban on food products from Oregon? How
about California wines? Hollywood films? That would be a good
idea.
[Laughter.]
There is another thing I think you have overlooked, and
that is the GAO Report, which we requested in my committee. I
think some history is in order. When Congress passed, with the
Clinton Administration's support, a law to give the President
the authority to lift the ban in 1995, it required the GAO to
conduct a study about the impacts. That study was done in 1999.
The results were very simple:
One, lifting the ban increased--increased--total West Coast
crude oil production from where it would have been, simply
because it spurred development of some of the marginal wells.
This happened because the price of crude oil on the West Coast
was raised at that time from 89 cents to $1.30 a barrel. We all
know that strippers cannot operate at a figure below their
recovery costs.
The third reason, consumers were not impacted. Instead,
refineries who were profiting from a flood of Alaskan crude oil
lowered their profit margins. Now, I hope the record will note
that, but that is what the GAO said. This is not Frank
Murkowski talking.
A review of the GAO Report tells us what really happened,
and what really happened was that Alaskan oil stopped being
shipped through the Panama Canal and around the Horn to
refineries in the Gulf Coast and the Virgin Islands. That was
terminated because the market changed. If there is anyone who
believes that reducing Alaska crude shipments to the Virgin
Islands somehow affected gasoline prices in the Pacific
Northwest, I would urge him or her to speak up, because
obviously, the Virgin Islands, part of it is in the United
States in the sense of the territorial status.
What have we done that has been so terrible in Alaska in
this issue of oil export? Well now, the GAO study--and this is
not Frank Murkowski--told us that exports were averaging about
60,000 barrels per day, 60,000 barrels, ladies and gentlemen,
out of 1.2 million, which is what we were producing. Hardly a
point of leverage. About 5 percent of Alaska's North Slope
production, obviously a very small percentage.
Since that time, Alaska's production has fallen about
200,000 barrels a day. In fact, in the past decade, Alaska
production has fallen by 1 million barrels. Now, that is the
reality.
If we are so concerned about 60,000 barrels of Alaskan oil
that was being exported each day to the Pacific Rim, are we not
just a little bit concerned today about the million barrels of
extra Alaskan oil that was produced in 1990 but is not being
produced today because Prudhoe Bay is in decline? We have the
capability of producing more oil to replace that deficit if
given the opportunity, which only Congress can address. Well, I
think you should be concerned where you get your oil.
Furthermore, as a result of the recent FTC-approved merger
between ARCO and BP, BP now has a domestic home for virtually
all of its Alaska crude to be refined on the West Coast because
they acquired, if you will, ARCO's refineries.
Finally, I urge the Members of the Commerce Committee to
look closely at what is happening to our Nation's energy and
stop kidding ourselves. We have a supply and demand problem.
The demand is increasing and the supply is coming from
overseas. We have different fuel standards in many parts of the
country for different places at different times of the year.
The refiners have to batch that. They have to ship it
separately, they have to store it separately. That costs money.
Some adjacent counties are required to use different fuels.
Congress and the Federal Government first tells the refiners to
add, what, MTBE to fuel to make it burn cleaner, and later they
outlaw it. OK, those are the irregularities that occur in any
free market.
Well, we need to do better. As a consequence, tomorrow my
Energy Committee is holding a hearing about the realities of
the fuel situation across the country, and our goal is to shed
some new light on the real costs of balkanization of our
gasoline standards. I think it is time to stop scapegoating and
blaming the symptoms. It is time to get on with the hard job of
fixing the problem so the symptoms stop hurting so many
American people, whether they be in Washington, Oregon, or
California.
I hope you will join the Energy Committee--I know two of
you are on that Committee--in a bipartisan way to come up with
some real solutions to real problems, because the American
people certainly deserve no less. But I hope my statements here
today underline the realities associated with where Alaskan oil
goes and the realization that as Alaska oil's contribution
declines to its natural markets on the West Coast you are
simply going to depend on oil coming in from someplace else,
and you do not seem to care where or how.
I would be happy to respond to any questions.
Senator Smith. Thank you, Senator Murkowski. As a
Northwesterner as well, I want you to know that I have no ax to
grind with Alaska. Yours is a great State. As I indicated in my
opening statement, my real beef here is the allegation--and I
emphasize, allegation--of market manipulation. Oregonians will
not pay for it. We will pay market prices and that is fair. The
other is not.
I have no questions of our Energy Chairman.
Senator Boxer.
Senator Boxer. Yes. I have a couple of comments.
I do care where my oil comes from. I want it to come from
Alaska, not from Saddam.
Senator Murkowski. Well, we both share that.
Senator Boxer. Good, good. That is why it was difficult
before this voluntary move when we saw that oil leaving for
Asia. I am happy to look at oil produced anywhere in America
when we are in such a shortage situation to keep it in America.
That is a patriotic thing to do. So I agree, it should not be
discriminatory. I think we ought to look at it. I do not know
if anyone else is exporting it. I do not think so.
Senator Murkowski. California exports a little bit.
Senator Boxer. We should definitely look at that, because I
do not think that is right. I think we ought to, certainly in
California where we are short--and you make that point.
I also so much agree with you that we need an energy policy
in this country. We have needed it since the 1970s. I suspect
where we probably differ a little bit is where to stress. I
mean, I think we need a balance of supply and demand. I tend to
look at ways in which we can curb usage--we are the biggest
energy user in the world. We are fifth in population. There are
really ways we can conserve and do very well at it and not
change our lifestyle.
I pointed out one way. If we could drive more fuel
efficient vehicles, if we chose to do so, we would almost be
out of our problem. We would be very much close to being out of
our problem, because if you look at the gasoline use in
automobiles, that is a huge part of the problem in
transportation.
Last, I will defend some movies. I think it would be a good
thing for the world to see ``Schindler's List'' and a good
thing for the world to see the movie ``Traffic,'' Orrin Hatch
was in.
Senator Smith. And Barbara Boxer starred as well.
Senator Boxer. Well, I was being very humble. And Don
Nickles was in it. It was a good movie and made a good point.
And a good thing for the world to see ``Erin Brockovich,'' and
it would be a bad thing for anyone to see ``Sun Mothers''--
examples good and bad. But I just do that to defend my State.
But I do feel that we do have agreement that we need an
energy policy. It would be really a wonderful thing if we could
come to some common ground on what that ought to be. But I
think that the issues raised by Senator Wyden on the oil
companies' pricing strategies, I think you agree we should ask
them about it. It is very discouraging.
My sense in dealing all these years with it is these are
multinational companies--and I used to think as a kid growing
up when I saw those oil signs, these were our people and they
cared about us. I've got to say, when I see these prices, I do
not think these people care, because I honestly believe, when
you look at the facts, when they are merging as they are, when
they are driving independent dealers, I am deeply concerned. We
have had the same environmental laws for the last 10 years. We
have the same taxing structure. Yet, you see the profits and
you see these bonuses and you've got to wonder.
In California we are very upset. But I do thank you, Mr.
Chairman for your presence here. I hope we do find some common
ground.
Senator Murkowski. Well, I hope, Senator Boxer, that at
some point in a time in the not too distant future you do not
raise that up and we see $3-a-gallon, because if we do I think
many Members will have to revisit the merits of whether or not
we should look to Alaska and the opening up of that small
segment of ANWR for relief, because many, many of our
constituents are going to be asking why we did not support
opening up a domestic supply that is believed to be of the
magnitude of Prudhoe Bay that we have been relying on for the
last 27 years for 20 percent of our crude oil, as opposed to
the environmental constituency out there that says we cannot
open it up safely.
Clearly, we have the American engineering technology, the
can-do spirit. I do not know about you, but I have always
believed that charity begins at home. We have done a good job
of providing the United States, particularly the West Coast,
with its oil needs and we can do so in the future, only we can
do a better job in the future.
As you know, oil is where you find it, and when you have
taken individually the action to prohibit the exploration off
the shores of the West Coast of the United States and
duplicated that by taking the offshore areas off limits from
the East Coast, you have left very little area left other than
the Gulf of Mexico and the Overthrust Belt, where there has
been a difficulty in opening that area up, and my State of
Alaska, who I think has been responsible in the manner in which
we have allowed the development of our resources.
So with that, I would suggest that you look for oil where
you are most apt to find it, because if you do not you probably
will not find it.
Thank you.
Senator Boxer. Mr. Chairman, you know, the Chairman and I
go at this all the time, and usually it is when I am in his
Committee and he gets the last word. Since I am on this
Subcommittee----
Senator Murkowski. Fair enough.
Senator Boxer. I think it is fair, it is fair.
I think we have our very strong differences on ANWR, as
does Senator Stevens.
Senator Murkowski. Why do you not come up there, take a
look.
Senator Boxer. Well, as you well know, I am going to do
that, and I have sent my chief person----
Senator Murkowski. Give me a date and we will set it up.
Senator Boxer. Well, the last date you picked, it was so
frozen I probably never would have come back, and I think that
was the plan.
Senator Murkowski. That is the way it is 7 months of the
year, you know. That is the way it is.
[Laughter.]
Senator Boxer. That was the plan. You invited me up there
when I probably would be freezing and could never get home.
Senator Murkowski. You got the last word.
Senator Boxer. No, I did not get the last word. I am going
to get the last word, maybe, at least in this setting.
Senator Murkowski. I will concede the last word.
Senator Boxer. Thank you.
We have a huge difference on the ANWR issue and that is so
fair, and I am not going to get into it. I did not raise it in
my opening because to my view when you deal with this
particular issue many other issues come behind it, namely how
much is there, when will it be there for us, what does it do to
the wildlife. We are one Nation under God. I consider all the
States to be a responsibility of all of us. I want you to care
as much about California as I care about Alaska.
But on the issue of taking California off the table in
terms of a lot of our offshore tracts, I want to tell you this
is the most bipartisan decision that has ever been made in
history, from Pete Wilson to everybody else, to Gray Davis to
all of us. You know why? It is not just an environmental issue,
although it certainly is that, but it is a tourism issue. Since
this is the Subcommittee that deals with it, our tourism is
based around our magnificent coast, and this is a decision that
we have made.
I know that you have made the decision to drill in Alaska.
I just look at all of our States as God's gift. It is just an
issue that we have to deal with. But we need an energy policy.
Senator Smith. If I may as the Subcommittee Chair, just as
a reminder, our focus is on the allegation of market
manipulation, not the well-being of the caribou today.
Senator Murkowski. I am going to leave my closing statement
to Senator Stevens.
Senator Boxer. You are in good shape. You are in good
hands.
Senator Smith. We are pleased to be joined by Senator
Stevens, probably the most senior Member of the Commerce
Committee. Senator, if you have an opening statement or a
comment.
Senator Stevens. No, I shall listen.
Senator Smith. All right. Thank you.
The first panel after Senator Murkowski is the Honorable
Robert Pitofsky, Chairman, Federal Trade Commission. We welcome
you, sir, and the mike is yours.
STATEMENT OF HON. ROBERT PITOFSKY,
CHAIRMAN, FEDERAL TRADE COMMISSION
Mr. Pitofsky. Thank you very much, Mr. Chairman. As always,
it is a great pleasure and honor for me to appear before this
Subcommittee and its Members, who have supported in my years at
the FTC so constantly the work that we have been engaged in.
The subject today is the level of gasoline prices on the
West Coast, which, as several speakers have noted, have been
for the most part the highest gasoline prices in the United
States for quite a while. As background, let me say that I can
not isolate any one or two reasons why the West Coast prices
are so high. I do think blaming it on OPEC--I am no defender of
OPEC--but blaming high West Coast prices on OPEC does not make
any sense. OPEC prices are high in New York, they are high in
Louisiana, they are high on the West Coast.
As to why the West Coast prices are so high, it is true, as
I will discuss in a moment, the level of concentration on the
West Coast is higher than in other sections of the U.S. There
are fewer players. There are regulations, like the CARB
regulations in California, designed to protect the environment,
that are very special and probably add a few cents to the cost
of a gallon of gasoline. There is no self-service in Oregon,
which may be a factor there.
I do not want to let pass, however, the opportunity to talk
about something that Senator McCain mentioned, and also Senator
Murkowski, and that is this business of refinery capacity in
the United States. Let me put some numbers on this. In the U.S.
generally, capacity utilization is 82 percent. Generally, in
the United States, month-in and month-out, the oil industry
operates at 95 percent of capacity. That is higher than any
other sector that I am aware of.
But that does not even tell the story, because when you
roll around to April, May and June that percentage kicks up to
97 and 98 percent. In different sectors of the country it is
even higher. I would not be at all surprised to find that
refinery utilization right now in California is 100 percent.
The consequence of that is when anything happens, when
there is a pipeline rupture, as there was in the Midwest last
summer, when there is an explosion at a refinery in California,
as there was two summers ago, prices skyrocket. Until this
country addresses the question of refinery capacity, I think we
are in danger of seeing this kind of behavior almost every
summer. The unpredictable is predictable, and price spikes are
going to happen.
Specifically, I would like to address three questions:
merger activity, exports out of the West Coast, and
distribution practices. Let me say that much of this is not in
the testimony of the Commission. These are my own views this
afternoon.
On mergers, we all know there has been an almost
unparalleled merger wave in this country over the last 7 or 8
or 9 years--3 times as many mergers, 11 times as many assets
scooped up in mergers, than was true 9 or 10 years ago. That
has been especially true in the oil industry. Indeed, of our
resources, the FTC probably spends more reviewing energy
mergers than any other single sector of the economy.
But I do want to put this in context. I am very troubled
about the wave of mergers in the oil industry, and I will come
back to that. But let us recognize that even after all these
mergers there are still ten oil companies in the United States
competing and they have less than 70 percent of the market.
It is more concentrated on the West Coast because there the
top seven have something between 90 and 95 percent. But I do
suggest that if there are reasons for these higher prices I do
not think it is the merger activity of the last decade. First
of all, there has not been a major merger that we reviewed and
we did not require restructuring.
Senator Boxer referred to Shell-Texaco. Exxon-Mobil was the
largest restructuring in the history of antitrust. In BP-ARCO,
we challenged that deal in court until the parties agreed, or
when they agreed, because we were comfortable with the
settlement, that they would bring Phillips in as a replacement
for the competition that was lost by the acquisition of ARCO.
If there were seven players on the West Coast before the
merger, there were seven players after the merger.
By the way, in the Midwest, where we had a price spike last
summer, there were no significant mergers that affected
competition in that area.
Let me turn next to exports. Let me emphasize that we did
take a position on exports in the BP-ARCO case, but it was a
very, very narrow point. The FTC has no stake whatsoever in the
question of whether there is a ban across the board on exports.
That is a question for Congress. Congress decided it. We take
the world as a given.
In BP-ARCO, however, there was what I would describe as an
unusual allegation. We alleged and we were prepared to prove in
court that BP systematically had sold in Asia at a lower price,
a lower netback, a lower profit to BP, than they could have
sold on the West Coast, for the purpose of keeping West Coast
prices high or raising West Coast prices.
That was not speculation. That was discussed in the
documents that we had in that matter. We were prepared to prove
it. We alleged it in our briefs. The case was settled to my
satisfaction, with one exception. The case was settled and
therefore we were never put to our proof. But I think the
documents were there.
I would have preferred that our order include a provision
that said that BP, and Phillips for that matter, could not and
would not export in the future. My colleagues did not think
that was necessary. Their position was that these companies had
promised not to export anyway. Incidentally, as far as I know,
there have been no exports away from the West Coast by these
two companies anywhere since that case was settled.
Since they were going to do it anyway, I would have liked
to have seen that in the order. Circumstances change. Who knows
what the world will be like next year. But the fact of the
matter is that there have not been exports since the case was
settled.
I also would say that we were never called upon to quantify
how much of a difference to West Coast motorists this export
program to the Far East made. We could probably come up with
some very rough estimates, and I know two witnesses later will
have some views on that. But I emphasize, we alleged and we
were prepared to prove that these exports did occur.
Finally on distribution. This has to do with our ongoing
investigation of red-lining and zone pricing. It is an ongoing
investigation and therefore I cannot discuss the documents we
have and I will not have anything to say about particular
companies.
Let me say that, Senator Boxer, we have been doing this for
2\1/2\ years and I am not comfortable here defending a 2\1/2\
year investigation. It should have been completed more
promptly. I will say that you and Senator Wyden supplied us
with witnesses and documents and we have followed up every one
of those. We have attained enormous numbers of documents from
the companies.
I will predict today--we are at the end of this
investigation and I will predict today that the Commission will
come to its conclusion within 30 days. I cannot justify taking
this long, except that it is a complicated question and the law
that we would have to deal with is not hospitable to plaintiffs
challenging this kind of behavior. So we have been cautious, we
have been careful, we have run down every lead.
What we are looking at is red-lining and zone pricing. I do
not want to get into it too deeply, but red-lining is a
practice in which the refineries say to the jobbers--and
incidentally, the jobbers usually buy at a lower price than
anybody else--you can have this low price, but we are telling
you, or we are agreeing with you that you may not sell in
certain parts of your market. It is usually large center
cities, like San Francisco. You may not sell there without our
permission. I think the jobbers are so convinced they will
never get permission they do not ask in the first place.
Site-specific red-lining, which is a different sort of red-
lining, is one in which the refiners agree with the jobbers to
control the price at which they sell in cities like San
Francisco and San Diego.
Zone pricing, of course, has been described. It is a
technique for setting up pricing in particular areas of a city
or particular rural areas depending on what the refiners think
is the level of competition in those areas.
All I can say is we will come to a conclusion in this
matter and I am confident that it will be within 30 days or so.
Let me bring this to a conclusion by summarizing. One, as I
say, we will finish our investigation. Two, we have and will
continue to pay special attention to merger activity in this
industry. In general, I would describe the oil industry as
having gone from deconcentrated to moderately concentrated. But
I say again, there are still nationally 10 oil companies that
are competing for business. That is not a level of
concentration that ordinarily concerns antitrust enforcement
people, but the oil industry is made up of enormously large
companies and there is some history of disregard for antitrust
in that industry.
Finally, I can only say again I think that Congress needs
to address this question of energy policy and particularly
refining capacity. There is plenty of oil in the world. There
is a lot of oil in the world, but there does appear to be a
bottleneck with respect to refineries in this country.
Thank you very much and, of course, I would be delighted to
answer questions.
[The prepared statement of Chairman Pitofsky follows:]
Prepared Statement of Hon. Robert Pitofsky,
Chairman, Federal Trade Commission.
Mr. Chairman and Members of the Subcommittee, I am Robert Pitofsky,
Chairman of the Federal Trade Commission.\1\ I am pleased to appear
before you today to present the Commission's testimony concerning the
important topic of competition in the gasoline industry in West Coast
markets. Competition in the energy sector--particularly in the
petroleum industry--is vitally important to the health of the economy
of the United States, and to the various regions of the country. Our
experience has taught us that gasoline markets can be much narrower
than the entire country, and the West Coast markets have their own
particular features that set them apart from the rest of the country.
In all markets, antitrust enforcement has an important role to play in
ensuring that the gasoline industry is, and remains, competitive.
Merger enforcement in particular has recently been at the forefront of
efforts to maintain and protect a competitive environment in various
gasoline markets, and our testimony today is directed at that ongoing
effort.
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\1\This written statement represents the views of the Commission.
My oral responses to questions are my own, and are not necessarily
those of the Commission or any other Commissioner.
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The FTC is a law enforcement agency with two distinct but related
missions: preserve competition in the marketplace through antitrust law
enforcement and protect the consumer from unfair or deceptive acts or
practices. The Commission's statutory authority covers a broad spectrum
of sectors in the American economy, including the companies that
comprise the energy industry and its various components. Among the
statutes the Commission enforces are two antitrust laws, the FTC Act
\2\ and the Clayton Act.'' \3\ Under section 5 of the FTC Act, the
Commission prohibits ``unfair methods of competition'' and ``unfair or
deceptive acts or practices.'' The Commission shares jurisdiction with
the Department of Justice under section 7 of the Clayton Act, which
prohibits mergers or acquisitions that may ``substantially lessen
competition or tend to create a monopoly.\4\
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\2\ 15 U.S.C. Sec. Sec. 41-58.
\3\ 15 U.S.C. Sec. Sec. 12-27.
\4\ 15 U.S.C. Sec. 18.
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ii. level of merger activity
It is no secret that merger activity in the United States is at an
all-time high. The number of mergers reported to the FTC and the
Justice Department pursuant to the Hart-Scott-Rodino Act has more than
tripled over the past decade, from 1,529 transactions in fiscal year
1991 to 4,926 transactions in fiscal 2000. Although filings have
declined so far this year because of higher filing thresholds \5\ and
the slowing economy, the Bureau of Competition remains heavily focused
on merger work. Currently, more than two-thirds of our competition
resources are dedicated to merger enforcement, compared to an
historical average of closer to 50 percent.
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\5\ 16 C.F.R. Parts 801, 802, and 803, Premerger Notification:
Reporting and Waiting Period Requirements for Certain Mergers and
Acquisitions: Implementation of Recent Amendments to the Clayton Act
(Jan. 25, 2001).
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While the number of merger filings has more than tripled in the
past decade, the dollar value of commerce affected by these mergers has
increased an astounding elevenfold during the same period. But mere
numbers do not fully capture the complexity and the challenge of the
recent merger wave. Today's merger transactions not only are larger,
but often raise novel or complex competitive issues requiring more
detailed analysis. In the past year alone, companies filed
notifications for 288 mergers with a transaction size of one billion
dollars or more, and many of these mergers involved overlaps in several
products or services.
There are many reasons for the current merger wave. A large
percentage of these transactions appear to be a strategic response to
an increasingly global economy. Many are in response to new economic
conditions produced by deregulation (e.g., telecommunications,
financial services, and electric utilities). Still others result from
the desire to reduce overcapacity in more mature industries. The
rapidly evolving world of electronic commerce has a substantial impact
on the merger wave, because consolidations often quickly follow the
emergence of a new marketplace. These factors indicate that the merger
wave reflects a dynamic economy, which, on the whole, is a positive
phenomenon. But some mergers, as well as some other forms of
potentially anticompetitive conduct, may be designed to stifle
competition in important sectors of this dynamic economy.
iii. merger enforcement in the gasoline industry
Out of necessity, our scarce resources are directed at preserving
competition in the most important areas of the economy. The Commission
dedicates the bulk of its antitrust enforcement to sectors that are
critical to our everyday lives, such as health care, pharmaceuticals,
retailing, information and technology, and, in particular, energy.
Much of the Commission's experience with enforcing the antitrust
laws in energy industries has been in analyzing mergers.\6\ Merger
enforcement is the first line of defense in protecting a competitive
marketplace, because it preserves rivalry that brings lower prices and
better services to consumers. The Commission blocks or obtains relief
in those mergers that increase the likelihood that the merged firm can
unilaterally, or in concert with others, increase prices or reduce
output or innovation. The Commission has an extensive history of
carefully investigating mergers in the energy industries, particularly
petroleum, and the FTC has challenged mergers in those industries that
would be likely to reduce competition, result in higher prices, and
injure the economy of the Nation or any of its regions.\7\
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\6\ Under the Commission's shared jurisdiction with the Justice
Department, antitrust investigations are allocated to one of the
agencies under a long-established clearance procedure, based on
expertise gained over the years in various industries. The Commission
has expertise in oil mergers.
\7\ Section 7 of the Clayton Act specifically prohibits
acquisitions where the anticompetitive acts affect ``commerce in any
section of the country.'' 15 U.S.C. Sec. 18.
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In each merger investigation, the Commission will intervene if the
consummated merger would significantly reduce competition in any sector
of an industry that affects the United States or its citizens. The
specific question the Commission must ask is whether the result of a
merger ``may be''-- i.e. it would be reasonably likely--that the
remaining firms in the industry could reduce output and raise prices to
the detriment of consumers anywhere in the United States.
The Commission approaches its antitrust mission by examining the
areas in which merging companies compete, looking at the existing State
of competition in that marketplace and the likely changes in that
marketplace in the future, both from new competition entering and from
existing competition exiting. We also look at the effect of recent
mergers on competition in the particular marketplaces at issue, and
whether the merger is a part of a trend toward concentration that
limits competition.\8\ The Commission has recognized the existence of
such a trend toward consolidation in the petroleum industry.\9\
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\8\ Industries might also consolidate for procompetitive or
competitively neutral reasons, such as increasing scale efficiencies or
a secular decrease in demand.
\9\ British Petroleum Company p.l.c., C-3868 (April 19, 1999)
(consent order), Analysis to Aid Public Comment.
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On the other hand, many mergers actually increase competition. So,
the Commission also considers efficiencies in deciding whether to
challenge an otherwise anticompetitive merger because they may
counteract the merger's threatened anticompetitive effects. However,
the Commission engages in a rigorous analysis of efficiencies. Merely
claiming cost savings is not enough to allow an anticompetitive merger;
they must be proven. The Commission demands that cost savings of the
merger be real and substantial; they cannot result from reductions in
output; they cannot be practicably achievable by the companies
independent of the merger; and they must counteract the merger's
anticompetitive effect, not merely flow to the shareholders' bottom
line.\10\
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\10\ See United States Department of Justice and Federal Trade
Commission, Horizontal Merger Guidelines Sec. 4 (1992), reprinted in
Trade Reg. Rep. (CCH) Sec. 13,104 (1992).
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Protecting competition and consumers is the goal of antitrust
enforcement across all industries; its importance is particularly clear
in the energy industry, where price increases can have a direct and
lasting impact on the entire economy. Toward that end, the Commission
has expended a substantial part of its resources in recent years in
addressing the wave of consolidation in the petroleum and gasoline
industry. In fiscal years 1999 and 2000, the Bureau of Competition
spent almost one-third of its total enforcement budget on
investigations in energy industries, and that level of effort has
continued into 2001. Our merger review investigations revealed that
several of these transactions threatened competition in local or
regional markets. In those instances, the Commission allowed the merger
only after demanding significant changes that would fully restore the
competition lost as a result of the merger.
The Commission's investigation of the merger between Exxon and
Mobil highlights many of the issues, and difficulties, in large oil
company mergers. After an extensive review, the Commission required the
largest retail divestiture in FTC history--the sale or assignment of
2,431 Exxon and Mobil gas stations in the Northeast and Mid-Atlantic
regions, and in California, Texas and Guam.\11\ The Commission also
ordered the divestiture of Exxon's Benicia refinery in California;
light petroleum terminals in Boston, Massachusetts, Manassas, Virginia,
and Guam; a pipeline interest in the Southeast; Mobil's interest in the
Trans-Alaska Pipeline; Exxon's jet turbine oil business; and a volume
of paraffinic lubricant base oil equivalent to Mobil's production. The
Commission coordinated its investigation with the Attorneys General of
several states and with the European Commission (about 60 percent of
the merged firm's assets are located outside the United States).
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\11\ Exxon Corp., C-3907 (Nov. 30, 1999) (consent order).
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There are several particularly noteworthy aspects of the Exxon/
Mobil settlement. First, the divestiture requirements eliminated all of
the overlaps in areas in which the Commission had evidence of
competitive concerns. Second, while several different purchasers ended
up buying divested assets, each purchased a major group of assets
constituting a business unit. This replicated, as nearly as possible,
the scale of operations and competitive incentives that were present
for each of these asset groups prior to the merger. Third, these
divestitures, while extensive, represented a small part of the overall
transaction. The majority of the transaction did not involve
significant competitive overlaps. In sum, we were able to resolve the
competitive concerns presented by this massive merger without
litigation.
The Commission also required divestitures in the merger between BP
and Amoco,\12\ and in a joint venture combining the refining and
marketing businesses of Shell, Texaco and Star Enterprises to create at
the time the largest refining and marketing company in the United
States.\13\ BP/Amoco involved very large companies but relatively few
significant competitive overlaps. There was competitive concern in a
few local markets. The Commission ordered divestitures and other relief
to preserve competition in the wholesaling of gasoline in 30 cities or
metropolitan areas in the eastern and southeastern United States, and
in the terminaling of gasoline and other light petroleum products in
nine geographic markets.
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\12\ British Petroleum Company p.l.c., C-3868 (April 19, 1999)
(consent order).
\13\ Shell Oil Co., C-3803 (April 21, 1998) (consent order).
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The Shell/Texaco transaction raised competitive concerns in markets
for gasoline and other refined petroleum products in the Pacific
Northwest (Oregon and Washington), California, and Hawaii, for crude
oil in California, and in the transportation of refined light petroleum
products to several southeastern states. The two companies had
substantial market overlaps. Both Shell and Texaco owned refineries in
Puget Sound and, between them, made about 50 percent of the gasoline
refined in the Puget Sound area. The Commission alleged that
eliminating direct competition between those refineries could result in
price increases for gasoline and jet fuel in the Pacific Northwest and
California of more than $150 million per year. The Commission, in
conjunction with the Attorneys General of California, Washington,
Oregon, and Hawaii, required the divestiture of a refinery in
Anacortes, Washington, which was a major supplier of refined products
to Oregon via the Olympic pipeline; a terminal on the island of Oahu,
Hawaii; retail gasoline stations in Hawaii and California; and a
pipeline interest in the Southeast.
During 1999, the Commission investigated the proposed $27 billion
merger of BP Amoco (``BP'') and ARCO, the two largest competitors for
the production, delivery, and sale of Alaska North Slope (``ANS'')
crude.\14\ BP was the largest producer of ANS crude and the largest
supplier to various West Coast refineries. ARCO was the second largest
ANS producer.
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\14\ Federal Trade Commission v. BP Amoco PLC, Civ. Action No. C00
0420-SI (N.D. Cal. 2000).
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The Commission conducted its investigation in cooperation with the
Attorneys General of Oregon, Washington, and California. As part of
that investigation, the Commission looked at the West Coast crude oil
market to determine if the acquisition would increase the likelihood
that the merged firm would be able to exercise market power, either
unilaterally or in conjunction with other firms. The Commission found
reason to believe that BP was already exercising market power in the
production and sale of ANS crude oil to refineries on the West Coast,
and that the merger would increase BP's ability to keep ANS prices high
by eliminating the one firm with the ability and incentive to produce
and sell more ANS crude oil.
The Commission's investigation revealed that BP was able to
discriminate in price by charging some West Coast refineries higher
prices than others, based on the ability of some refineries to
substitute more easily other crude oil for ANS crude.\15\ Economic
theory teaches that the ability to practice price discrimination is
limited to firms that have market power.\16\ As crude oil is the major
input into gasoline, preserving competition upstream directly affects
retail competition.
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\15\ More complex refineries are usually better able to substitute
different types of crude oil in their production mix. The Puget Sound
refineries that serve Oregon and Washington are less complex than
others on the West Coast.
\16\ As Judge Posner has noted, ``price discrimination implies
market power, that is, the power to charge a price above cost . . .
without losing so much business so fast to competitors that the price
is unsustainable.'' In re Brand Name Prescription Drugs Antitrust
Litigation, 186 F.3d 781, 786 (7 th Cir 1999).
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The Commission and the Attorneys General filed lawsuits to block
the merger in Federal district court, and the case was settled with
divestiture of all of ARCO's Alaska assets, including oil and gas
interests, tankers, pipeline interests (in the Trans-Alaska Pipeline),
real estate exploration data and selected long-term supply agreements.
Those assets, now owned by Phillips, are currently the major supplier
to the Puget Sound refineries, which are the primary suppliers of
gasoline to the States of Oregon and Washington.
Much of BP's ANS crude oil is now used in the former ARCO
refineries in Los Angeles and Puget Sound, thus eliminating BP as the
dominant supplier of ANS crude to other West Coast refineries. By
combining BP's ANS production with ARCO's refining capacity, the
Commission's Order reduces BP's incentive to elevate the price of ANS
crude. By divesting ARCO's Alaska assets to Phillips, the Order retains
an independent competitive force with the incentive to find and deliver
additional ANS crude oil.
iv. conclusion
By strictly enforcing the prohibition against mergers where the
effect of the merger ``may be substantially to lessen competition, or
to tend to create a monopoly,'' \17\ the antitrust agencies ensure that
already concentrated markets do not become more so. By challenging the
Shell/Texaco joint venture and BP's acquisition of ARCO, the Commission
helped preserve competition in several West Coast markets, both
wholesale and retail. Requiring the divestiture of Shell's Anacortes
refinery preserved competition in the supply of refined products to
Washington and Oregon. Requiring the divestiture of ARCO's Alaska
assets to a rival company (Phillips), prevented BP from enhancing its
dominant position in the market to supply ANS to West Coast refineries.
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\17\ 15 U.S.C. Sec. 18.
Senator Smith. Mr. Pitofsky, I have one fundamental
question for you as the Chairman of the FTC. Did your
Commission protect Oregon consumers from monopolistic pricing
practices?
Mr. Pitofsky. Well, we certainly--yes, I think we did.
Senator Smith. I am troubled by that answer, frankly,
because I think you said that you were aware of the memos
Senator Wyden has referenced, The Oregonian has reported on,
that suggest that there was manipulation involved. You must
have concluded that it was manipulation, and that was not
illegal. Was that what you found?
Mr. Pitofsky. Senator, I hope I did not say that. Until
this morning I did not know about the memos that Senator Wyden
called to my attention. When I was talking about memos and
witnesses, it had to do on zone pricing and red-lining.
Senator Smith. So you did not know of any of the factors
that led The Oregonian to report allegations of manipulation?
Mr. Pitofsky. Let me break this down. We of course knew
about the documents that describe BP's policy of exporting oil
to the Far East. That was a part of our case. As far as we knew
at that time, there was no evidence that that was other than
single firm behavior. We relied on that heavily in challenging
the BP-ARCO deal.
On this more recent set of documents dealing with ARCO's
behavior, I was not aware of that and the Commission was not
aware of it.
Senator Smith. Had you been aware of it, would that have
affected your vote to approve the merger?
Mr. Pitofsky. Senator, I want to be cautious here. I have
not seen the document. I do not know what ARCO would say about
it.
Senator Smith. That is fair.
Mr. Pitofsky. But it is certainly something that one would
look at if you had a document like that. But I have not seen
it. You would have to ask the companies what they have to say
about it.
Senator Smith. We intend to ask.
Mr. Pitofsky, I believe you and Commissioner Thompson
commented separately that you thought the Commission should
have explicitly prohibited BP and Phillips from exporting ANS
crude to Asia. Do you still think this condition should be
imposed?
Mr. Pitofsky. I do, but can I elaborate on that?
Senator Smith. Yes, please.
Mr. Pitofsky. We were concerned about exporting it for the
purpose of raising prices on the West Coast. If they want to
export to Asia to make a profit in Japan they cannot make in
California, I do not have any problem with that. Of course they
would do that.
This is different. This was an allegation that they were
selling in Japan at a price that was lower than they could have
received on the West Coast, in order to raise prices on the
West Coast.
I thought that should have been covered by the order, as
did my colleague.
Senator Smith. What can be done to ensure adequate
competition in the West going forward, on the West Coast for
gasoline? What can we do specifically. Got to have more
refining, more marketing sectors; those are the recommendations
you have had, would have today to this Subcommittee?
Mr. Pitofsky. Well, certainly I would underscore this
refining problem. I understand there was a fire in a major
refinery in California just a day or 2 ago. Our initial
reaction--we have not had a chance to really study it and the
company says it is not going to affect prices. But if that
refinery is put out of commission for a substantial period of
time, history indicates that will affect prices in California.
We certainly will take the most careful look at any
proposed mergers that affect the marketplace in California, as
we have in the past and as we will in the future.
Senator Smith. One more time on this earlier issue. You
said that your concerns, except for one, were addressed in the
conditioning of the merger. What was your other concern?
Mr. Pitofsky. It is the point you made, Senator, about
exports. I thought the order should have covered that. Now, I
know the companies said they would not export. They made that
announcement publicly and as far as I know they have not
exported since it went through. But I thought we ought to get
that down in writing, because who knows who will be running
those companies and what the circumstances will be next year
and the year after.
Senator Smith. Thank you.
Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman.
Chairman Pitofsky, I thank you for coming and for your
service. I think your service is going to be marked by a
standard of fairness. I have watched the Federal Trade
Commission, how often decisions are not even close, that the
Commissioners can come together on even some of the most
difficult issues, and I commend you for your service to the
government.
Mr. Pitofsky. Thank you, and I agree that the Commission
can come together.
Senator Wyden. Let me start with this question of red-
lining to begin with. In my view, red-lining is about as anti-
free enterprise as you can possibly get. On the basis of my
inquiries, there is substantial evidence that this is going on
up and down the West Coast, and that this is, in fact, sucking
the competitive juices out of our West Coast gasoline markets,
because with red-lining there is a restriction with respect to
choice and who one can sell to.
My question to begin with for you is, in your opinion is
there substantial evidence that red-lining of gasoline markets
on the West Coast is taking place?
Mr. Pitofsky. Yes.
Senator Wyden. I understand that you cannot get into all of
the details on this matter. I have essentially the same
question with respect to zone pricing, because I again think
that there is substantial evidence that West Coast gasoline
markets are being priced by zone and that this is anti-
competitive as well.
Do you believe in your opinion that that is the case as
well?
Mr. Pitofsky. Let me break it down. There is no question
that it is going on. The companies do not make any apologies
for that. They say they are engaged in these practices, what we
call red-lining--I am not sure they would call it that--and
zone pricing.
As to whether it is anti-competitive, I wonder if I could
reserve on that. It is a matter of concern. We would not have
spent 2\1/2\ years investigating in this area if it was not a
matter of concern. I would like to reserve on balance whether
or not there are justifications for that behavior.
Senator Wyden. Can an oil company practice be legal and
anti-competitive?
Mr. Pitofsky. Can it be legal and anti-competitive? Well,
not ordinarily, not ordinarily. If it is anti-competitive,
under our statute that would make it illegal as an antitrust
matter.
Senator Wyden. Beside the e-mail exchange reported in The
Oregonian between BP trading managers where they talk about
shorting the West Coast market to leverage up the price, did
you find other evidence from company files that BP was
exporting at a lower price to Asia to manipulate West Coast
prices?
Mr. Pitofsky. I have asked about that in the past and the
answer is yes. We were not a party to the effort by The
Oregonian to obtain these documents and the assignment of that
matter to a special master. But I understand that the special
master did not turn over all the documents that were sought and
there are other documents of the kind that you describe.
Senator Wyden. The Oregonian also reported that BP used a
computer model to manipulate West Coast prices by setting non-
competitive discriminatory prices for many years. Are there
other company documents that have not been made public that
show BP engaged in discriminatory pricing practices?
Mr. Pitofsky. This is BP's so-called optimizer model. I
believe there are other documents. I am not as sure of that as
I am about the earlier question. But I am fairly sure there are
other documents not yet made public, placed under seal by the
judge, that discuss that issue.
Senator Wyden. Now, recognizing that it is hard to
quantify, is it likely that I, my staff, and other Oregon
consumers paid higher prices at the pump because of BP's
exports of Alaskan oil to Asia and discriminatory pricing
practices?
Mr. Pitofsky. Yes. Our allegation was that the reason the
company engaged in this practice of exporting oil was to raise
prices on the West Coast. That was their goal. Now, I do not
know that they achieved their goal, but that was what they were
trying to do.
Senator Wyden. Mr. Chairman, that is essentially the reason
why we need to get access to these other boxes of documents.
What the Chairman has just said is there is substantial
evidence in his opinion that red-lining is taking place on the
West Coast and he has found evidence of zone pricing. Besides
the e-mail exchange reported in The Oregonian with respect to
shorting the West Coast market, the Chairman has indicated that
there was additional evidence in documents that have not been
made public with respect to BP's export practices. The Chairman
has indicated that there is evidence that BP used a computer
model to manipulate West Coast prices. Finally, you, I, and
other Oregonians, there is a likelihood that we paid higher
prices at the pump because of BP's exports of Alaskan oil and
discriminatory pricing practices.
So I am of the view that the Chairman has just spelled out
why it is so critically important that this Subcommittee use
its power to work with the Federal Trade Commission so as to
see these documents, because with the answers that the Chairman
just gave to my questions, which by the way did not even go
into this matter of the ARCO strategy on gas prices, which I
did not ask about because you had not seen, what you have
painted is a very troublesome picture.
What concerns me is that a company can go out and begin
exporting in the middle of this hearing if they choose to do
so. We can debate who did it and when they did it and the like.
The fact of the matter is under current law they can begin to
export at any time. The position of the government for West
Coast consumers and others is we just have to trust them. Given
the answers you have just given to my questions plus the memo
that I did not even ask about today, I think we ought to get to
the bottom of this and on a bipartisan basis look at those
boxes to find out what is really taking place here.
I thank you for the chance to begin this hearing and
Chairman Pitofsky for his answers.
Senator Smith. Senator Stevens.
STATEMENT OF HON. TED STEVENS,
U.S. SENATOR FROM ALASKA
Senator Stevens. Thank you.
Mr. Pitofsky, I assume you are familiar with the fact that
Oregon does not allow self-service in their service stations?
Mr. Pitofsky. Yes, I am.
Senator Stevens. They pay 5 cents more than anywhere else
in the country just because of that, do they not?
Mr. Pitofsky. I do not know exactly the number.
Senator Stevens. That is my information.
On September 26th the FTC wrote to Senator Wyden, and I am
quoting from our committee memorandum here. It wrote that:
``The practices of red-lining and zone pricing raise
serious questions about the effects on competition in gasoline
markets.'' It went on to state how you define red-lining and
zone pricing. It says `Oil companies in Oregon and elsewhere,'
the Commission noted, `use red-lining. Though not all companies
use red-lining on the West Coast, Chevron does, but BP does
not.''
As to its legality, the Commission wrote that
``Arrangements by which independent business people are
prevented by agreement from competing in the marketplace raise
serious questions under antitrust laws. Whether they are legal
or not depends on additional factors, such as market share and
possible justifications.''
Are you changing that statement now?
Mr. Pitofsky. No, it sounds right to me.
Senator Stevens. You just answered the question of whether
it was legal or not without regard to the additional factors.
Mr. Pitofsky. Oh, I want to be clear about this. Two
points. One is, as your comment makes clear, red-lining and
zone pricing is not limited to the West Coast. It goes on in
other parts of the United States.
Senator Stevens. It is not illegal per se?
Mr. Pitofsky. It is certainly not--it is neither legal nor
illegal per se.
Senator Stevens. Right.
Mr. Pitofsky. You have to find out the context and that is
what we have been about for a long time now.
Senator Stevens. That is the subject of another inquiry of
yours, right?
Mr. Pitofsky. It is.
Senator Stevens. Now, my colleagues seem to believe that
somehow or other you should have the power to limit where
Alaskan oil can be marketed. To my knowledge, the only reason
it was limited in the first place was that it was a condition
required on the right-of-way permit for the Alaska oil
pipeline, which was modified by Congress when we finally proved
to Congress that it was unconstitutional.
I know of no other commodity that is limited in terms of
where it can be marketed. If it is being marketed for another
ulterior motive, which is the process that you are going
through, that might be a different matter.
Do you disagree with what I have just said?
Mr. Pitofsky. Not at all, Senator. That is exactly the
point.
Senator Stevens. I want to encourage my friends here from
California and Oregon, the West Coast, to understand that so
long as I am in the Senate we are not going back to the
unconstitutional practice of limiting where Alaska products can
be sold. Let us just make sure we have that basically
understood.
We had this fight in Maryland once, by the way, over an
amendment to a treaty that we had to have defeated on the floor
of the Senate because of a similar limitation on where products
from Alaska could be marketed.
Now, I do believe that there are a lot of problems involved
in this matter today. For instance, it worries me considerably
that between 1982 and 1999 the number of refineries on the West
Coast decreased from 42 to 23. Yet somehow the decision to sell
oil elsewhere--now, you may have some other facts that I do not
have at my command. But the decision to sell elsewhere than the
West Coast by the producers of Alaskan North Slope oil is, I
think, partially reflected on the markets, is it not, down
there? Their markets are limited because of the number of
refineries.
In addition to that, California has some specific
restrictions on the type of oil that can be refined in specific
locations. So that the markets down there are not free markets.
They are limited by California law. They are limited by Oregon
law, too, as I understand it.
You understand those conditions?
Mr. Pitofsky. That is why I opened my discussion by saying
there is no one reason, this is a complicated area, and there
were many factors. I do not disagree with the factors that you
are now calling our attention to.
Senator Stevens. Now, in the heyday of the Alaska pipeline
when we were exporting 2.1 million barrels a day from Alaska,
all of it going down to the West Coast from the North Slope,
that was not purchased in Washington and in Oregon and in
northern California. It got into southern California and the
producers then faced the question of, shall we send that oil
down and send it through the Panama Canal and send it back up
into the East Coast or shall we just dump it in southern
California?
I think the case can be made that for years the producers
dumped oil in California rather than pay the costs of that
shipping because their net-net was higher because of the cost
of transportation and the fees of going through the pipeline or
through the Panama Canal pipeline.
Since this, since the reduction in our throughput, we are
down now to about 1.2, 1.3 million barrels a day, almost a
million barrels a day less. There is not the supply. There is
some competition now for Alaskan oil. I wonder about that in
terms of your inquiries and to what extent that has been taken
into account, or is that proper for me to ask?
Mr. Pitofsky. On past cases, absolutely proper. That is
certainly an issue. I do not know as much about the history
going back to 1982, but your description of the decline in the
supply of North Slope oil is exactly right, and we took that
into account in our review of cases that affected West Coast
prices.
Senator Stevens. You and I had a disagreement before. We
patched that up a little bit.
Mr. Pitofsky. I hope so.
Senator Stevens. I do, too. But as a practical matter, one
of our differences of opinion was that you had described the
West Coast market as a separate market from the global market.
Do you still maintain that position?
Mr. Pitofsky. Yes, I do. Well, no, I am sorry. Senator what
we, what the Commission described, was a product market that
was limited to Alaskan North Slope crude which was separate
from the world market. It was not that the West Coast
geographically was different. It was that those two types of
oil competed in separate markets.
Senator Stevens. Well, perhaps we will have some time again
to discuss that. I personally believe we have made a historical
mistake in not establishing a posted price for oil in Alaska.
We are the only market in the world that does not have a posted
price in the place of production. As such, we are destination
priced. As such, that affects this competition for Alaskan oil
because of the net-net to the producer. The further you go, the
less your net is.
In many respects it is closer to Japan than it is to Los
Angeles. I hope people keep that in mind in this hearing.
Senator Smith. Thank you, Senator Stevens.
Senator Boxer.
Senator Boxer. Thank you.
First of all, Chairman Pitofsky, thank you for saying that
you are going to have this study on California high prices
completed in 30 days. I am very grateful for that. It has been
a source of tremendous frustration for me because, as you point
out, it is a complicated area, but our constituencies expect us
to get something done for them and they do not understand, and
they keep asking me all the time, where is that? You promised
us the FTC was going to do this. Where is it?
So now I am going to tell them, and I've got you on the
record and I am happy. May 25th I look forward to getting the
report.
These prices are hurting us in California and anyone can
put any spin they want on it. But to me there are a lot of
things that I see that are not right. It is not right to red-
line. It is not right to have the zone pricing. It is not right
to drive people out of independent stations. I ask unanimous
consent that this letter be placed in the record from Gary and
Deborah Ray, whose family owned a station for 39 years and were
run out of town on a rail. I would like to include that. There
are so many more of those.
Senator Smith. Without objection.
[The material referred to follows:]
December 14, 1999
Hon. Barbara Boxer,
Dear Mr. Hagen: I spoke with you a few days ago regarding our
Chevron station at 2007 Redwood Rd. Napa, CA. This is a three party
station. My father-in-law opened the station 39 years ago, when he
passed away 7 years ago, we purchased it from the estate for $300,000.
My husband, Gary, has worked there since he was 15, he is now 45. Every
2 years Chevron gives us a hard time on our lease renewal. Our station
pumps over 230,000 gallons a month and makes a good living for us, even
though Chevron charges us a rent of $14,000-$16,000 a month, depending
on what we pump.
In June, Larry Oliver had a meeting with my husband and me stating
that they would not renew with us because they wanted all the profits
and that if it was not a company-owned station it would not be there.
Furthermore they would not be buying us out. Which means they are
probably going to slide in after the lease ends. The land owner told us
that be has to wait until they decline, stating that they have first
right of refusal, otherwise we could go ahead and do a deal with him.
So we have to wait until the eve of December 31, 1999, when our lease
is out. If we leave at that time, they can say that we abandoned it.
Also, for some unknown reason our in-house credit card accounts have
been denied.
My husband has become a Shell dealer hoping to put a Shell Station
there, since Chevron says that they are leaving the site. We along with
our Shell Rep find this all very hard to believe. All we request from
Chevron is a letter that they are not renewing the lease with the land
owner after we leave, but they refuse to comply.
Please help us out if you can. If this had to go to court, we would
go broke because we all know that we cannot afford to fight the
corporations. The person to contact concerning the letter that states
Chevron is leaving that site is Greg Wankent at (925) 842-9551. We
would appreciate future contact with you on this matter. Thank you for
your time.
Sincerely, Gary & Debra Ray
Senator Boxer. Then you put all of these little pieces
together and you have to be just born into the world yesterday
not to see a pattern of disturbing things. Red-lining, oh, it
is not illegal. Zone pricing, well, it is not technically
illegal. Mergers, well, we do not know that they are
responsible for the problems.
But yet if you take a graph and you show the number of
mergers that have been approved and then you show the price of
gas, there is a correlation with the number of mergers and
price increases. So somebody could say, fine, it is not
illegal, it is not a problem. Meanwhile, my people are paying
$2.16 for the lowest grade of gasoline today. That was
yesterday. I do not have a later picture. I do not know where
it is headed. It is not right.
I see a pattern that is very disturbing to me. Then I see
Ron Wyden's work here along with The Oregonian, and I just want
to read what he said, the little jump quote here: ``When you
look at the ARCO report, it is clear that their very business
model, the essence of their business, was to take advantage of
the lifting of the export ban to manipulate supply and stick it
to the people on the West Coast.''
That is a strong statement. But guess what? It is backed up
when you read the document, which you have not had a chance to
examine.
Senator Stevens. Are those documents here, Senator?
Senator Boxer. I do not know.
Senator Wyden. Would the Chairman yield to me? These
documents are not confidential. They are public documents. They
come from the California lawsuit. I am happy to make them
available to the Chairman. These are not the confidential
documents.
I appreciate the Chairman's question because I want to draw
the distinction. I think it is extremely important on a
bipartisan basis for this Subcommittee to have access to those
sealed documents involving the BP-ARCO acquisition matter. I
think that that will shed a great deal of light on this. I am
interested in working with you, Mr. Chairman, figuring out a
way to do this in a fair process.
But the memo that Senator Boxer is talking about is one
that, I have obtained it already. It is a public document
involving the California lawsuit. I am happy to make it
available to you.
Senator Stevens. Well, I do not want to interfere with
Senator Boxer's comments, but I take the position that there
are documents that the Federal Government requires to review a
proposed business transaction which are by law confidential. If
you want to make them not confidential, then pass a law to
break the confidentiality. They were acquired in the process of
a confidential disclosure to determine whether or not the
merger was in the public interest, and I oppose and shall
oppose the breaking of that confidentiality by our Committee
without really advice from the Justice Department and others
about what that is going to do to future disclosure by
companies that are under review for antitrust, concerns of the
government over antitrust. But it is a merger, a private series
of documents that are disclosed in order to justify their case.
Senator Boxer. This document has nothing to do with the
merger, Senator Stevens, and that is what I think Senator Wyden
was saying.
Senator Stevens. These are documents that were filed in
connection with the merger, are they not?
Senator Wyden. No.
Senator Boxer. No, this is a lawsuit because of the
pricing.
Senator Stevens. Are they confidential?
Senator Wyden. No.
Senator Boxer. No.
Senator Wyden. There are two sets of documents in question:
the one involving the merger, which I think those 1400 boxes
which have been sealed, this Subcommittee should work out a way
to look at. That is sealed and is confidential.
But as Senator Boxer and I have both said, this memo does
not involve merger activity. It is not sealed. It is not
confidential. It is a public document.
Senator Stevens. I will withhold until we get to the
subject of the ones in the boxes, because those were given, as
I understand it, under a process that confidentiality was
assured in terms of complete disclosure, and it will harm the
antitrust situation in my opinion if we put a mar on that by
saying if we give them to the FTC or the Justice Department
under a confidentiality restriction the Congress can come on
later and wash it off.
Senator Wyden. Mr. Chairman, would you just yield further
on that, because you are making a very important point. I am
not interested in breaking that confidentiality through a
public process. What I am interested in is seeing that this
Subcommittee, through a process that protects the
confidentiality, can examine those documents, because I think
the Subcommittee needs to see those documents in order to
address these important issues.
Senator Stevens. If they are confidential, how did they get
into The Oregonian?
Senator Wyden. Mr. Chairman, again this story does not deal
with those documents involving the 1400 boxes, nor does the
previous story.
Senator Boxer. If I might say, these are documents that
were gotten during discovery process by the consumer attorneys
who were trying to make the case that there was price
collusion. If I could just continue my point, I agree with
Senator Wyden's conclusion here in which he says when you look
at this, again you would have to be pretty naive not to think
there was manipulation of the supply.
I am all for supply and demand, but it is not real, it does
not work, when the supply is manipulated. In this discovery--
and again, I am reading. I have not seen the actual documents,
although Senator Wyden, I assume has seen them--it describes--
there is a memo there that describes ARCO's action plan ``to
export to keep the market tight'' as part of ``maintaining
balance on the West Coast.'' Then e-mails that say--records
obtained included e-mail exchanges in which BP trading managers
discussed the benefits of ``shorting the West Coast market to
leverage up prices.''
Well, maybe if you are from a State where people are not
hurting this sort of goes over your head. But when you are
hurting like we are in our State, this makes us get angry. I am
sorry about it.
I also feel very differently on the confidentiality. I have
a different view. It is not before us now, but I believe
taxpayers pay good money for the FTC to operate and it is a
government agency. It does not run at the behest of oil
companies, multinational oil companies. It is supposed to
protect consumers right here in America. So I view the issue a
little differently.
I would like to work out some kind of compromise. I think I
have been talking to the FTC Chairman for a long time about
getting a look at some documents. He said absolutely not,
cannot even look at them, cannot even see them, cannot even get
a hold of them, you cannot know what I know. I mean, he
defended the confidentiality, as he should, under the law. I
want you to know that.
But I feel at a great disadvantage. The people elected us
to do a job. If I do not know what is going on and I have got
to piece it together--red-lining here, zone pricing there,
exporting to Asia when we needed the oil on our West Coast
here, 60 percent increase in profits there, $17 million bonus
to a CEO on top of a $13 million bonus to an oil company, and I
am adding it all up and I am saying on behalf of my
constituents I am concerned.
Mergers, you follow the mergers and you follow the prices.
It is not that hard. I have got it in Los Angeles. I held a
press conference at a corner where there were four different
gas stations. All had the same price. One was a Shell, one was
a Chevron, one was something, something, and they all had this.
It is in the zone.
It is frustrating. So today I am so relieved that we are
having this hearing. I am relieved to hear we are going to have
a report soon. I am very concerned. I know Senator Stevens
probably has the votes on the export issue. I said that I am
willing to even look if California companies are exporting out
of the country at a time when--you know, this is not a piece of
candy or something--this is a necessity for our economy, to
keep our engine going.
Anyway, I am quite concerned. Again, I just want to thank
our two co-chairs today.
Senator Smith. Thank you, Senator Boxer.
We have been joined by the Subcommittee Chairman, Mr.
Fitzgerald.
STATEMENT OF HON. PETER FITZGERALD,
U.S. SENATOR FROM ILLINOIS
Senator Fitzgerald. Well, thank you, Mr. Chairman, I guess
I should call on you, for the day anyway.
Senator Smith. Only in your stead.
Senator Fitzgerald. Thank you very much. I would like to
have an opportunity just to ask Mr. Pitofsky about the
situation we had in Chicago--I remember it was a little over a
year ago--when our gas prices in the Chicago metropolitan area
were going up much faster than in the rest of the country.
There were a lot of calls for investigations at that time of
the oil companies, but ultimately the FTC did a study to see
whether there had been any collusion amongst refiners.
Mr. Pitofsky, if I am correct your study ultimately
concluded that you did not find any collusion amongst oil
company executives in the Chicago area; is that correct?
Mr. Pitofsky. That is correct.
Senator Fitzgerald. There were allegations or suggestions
or innuendo that there had been something amiss amongst the oil
marketers in the Chicago area. There was a lot of suspicion.
People did not know why prices were going up. But it turned out
as I recall that your report suggested that actually two
pipelines bursting, the taking effect of new Clean Air Act
requirements in the Chicago area, a variety of factors caused
the supply to be very low and the demand to be very high, and
the prices went up.
I just wonder. My experience has led me to believe that we
ought to be kind of careful before going out and potentially
ruining the reputation of good people by alleging criminal
conspiracies before we have any facts. The allegation of
collusion is very serious. There are criminal penalties in the
law, are there not, Mr. Pitofsky, for collusion by oil
companies or others?
Mr. Pitofsky. Price-fixing can be treated criminally.
Senator Fitzgerald. And you can be thrown in jail for that.
Mr. Pitofsky. Yes.
Senator Fitzgerald. So I think, while it is fine to have
these investigations, we ought to wait until we have some
evidence before we start throwing out those allegations,
because they are very serious allegations and I think there can
be good explanations for why prices go up.
Do you have a copy of the report? Would your staff have a
copy of the report that you ultimately issued on Midwest
gasoline?
Mr. Pitofsky. Absolutely. We will get it to you promptly.
Senator Fitzgerald. Mr. Chairman, I would ask for unanimous
consent that, if we get a copy of that report on the
investigation that was done of Midwest oil prices a year ago,
that we enter that into the record. After a lengthy
investigation, they found that there had been no collusion and
that, in fact, supply was tight and demand was high and that is
why prices went up so dramatically in Chicago. After it was up
for a while, actually demand died down and product was rushed
to the market and prices fell again.
Senator Smith. Without objection, we will include that.
[The report is available on www.FTC.gov and in Committee
files.]
Senator Fitzgerald. Thank you very much, Mr. Chairman.
Senator Smith. If the Chairman will yield, the point you
are making is a good one, but what we are concerned with is the
ARCO memo from 1996 and the internal BP-Amoco memo was from
1995. I guess the question is when it comes to an allegation of
market manipulation, you approved a merger between this. Did
you, Mr. Pitofsky, the FTC, essentially ratify a price-rigging
scheme?
Mr. Pitofsky. In BP-ARCO?
Senator Smith. Yes.
Mr. Pitofsky. Absolutely not.
Can I just clarify one point, Senator? You are absolutely
right. The report speaks for itself on the Midwest gas prices.
You are right, after a careful investigation we found no
collusion. We also found that for the most part the reasons
prices spiked up in Chicago as they did were reasons that were
beyond the control of the oil companies, like a rupture in a
pipeline and many other reasons.
However, we also found that at least one and maybe more
companies engaged in strategic behavior to make sure that
prices did not come down. That is the sort of thing we are
talking about here in terms of exporting oil to the Far East to
make sure prices do not come down. But there was no collusion
and I think that is in the report.
Senator Fitzgerald. There is nothing illegal about that,
though, is there? I mean, companies try every day to keep their
prices as high as the market will bear, do they not?
Mr. Pitofsky. Single firm behavior taking advantage of that
situation is not illegal. But we were asked by Congress, not
just whether there was a violation of the antitrust laws, but
whether there was profiteering of some sort, and we addressed
that question. But it is not illegal, you are right.
Senator Fitzgerald. It becomes illegal when they collude to
try and fix the prices, and that was not found in the Chicago
situation. But you did find, sure, companies were trying to on
their own, hoping that the demand would stay high and the low
supply could give them the opportunity to sell their product at
a high cost.
Mr. Pitofsky. They were taking advantage of that situation,
in some cases to the maximum extent possible. One case, a
company kept oil that it had off the market to make sure the
prices did not come down during that price spike.
Senator Fitzgerald. Is there anything illegal about that?
Mr. Pitofsky. No.
Senator Fitzgerald. No.
Senator Boxer. Mr. Chairman, would you yield to me?
There is a lot that is not illegal in life. You could walk
up to the line of being unethical and not be illegal. I would
hope that what we are about--and I agree with you, we should
not throw around criminal terminology. That is not appropriate,
to do that. But I would really hope that we would not sit by
and be silent.
If people were manipulating the supply, even if it is
legal, and if it hits our people in such a way that it is
disadvantageous; you must see this as an ugly thing. Look at
this ugly thing. This is San Francisco gas prices yesterday. I
would hope that we would work with the corporate community for
some sense of responsibility here. Maybe that is impossible.
Maybe the attitude is you walk up to the line; it is not
illegal, so sue me.
Senator Fitzgerald. But you would agree that we have a low
supply of crude oil in this country, would you not, Senator?
Senator Boxer. I think in this case, when you export some
of it out to another country, yes. If you manipulate the
supply, yes.
You know, we are facing this in California, and maybe it is
not illegal, but gee, it is amazing how many plants are shut
down for repair all at the same time. It is amazing. It is a
great concern to me that the consumer does not seem to have--
well, I will not go there.
I would just say that we are waiting for a report that we
asked for 2\1/2\ years ago.
Senator Fitzgerald. Will the Senator yield for a question?
Senator Boxer. Yes. I will just finish my point.
If I might just tell my friend that in 30 days we are going
to have a report on California pricing. I will also want to
enter it into the record here. I do not know if it will show
illegality or immorality or something in between or something
or neither. But we are going to show something there, because
it has taken 2\1/2\ years to get it done. I think there is
something there. But I will share that with you.
Senator Fitzgerald. If the Senator would yield, you would
agree that the oil companies are doing very well right now?
They are making a lot of money in this current climate, where
they can resell gasoline at very high prices.
Senator Boxer. Yes, some of them are up 60 percent in their
profits. Conoco is up 59 percent.
Senator Fitzgerald. Now, a couple years ago when oil was
close to $10 a barrel, a lot of oil companies were not doing as
well. That is when they started doing the mergers. Their stock
prices were low. They were not as profitable as they are today.
Would you not think they would be more likely to collude or to
have criminal behavior when they were desperate and they are
not making money and jobs are on the line and those executives
you talk about are not getting the bonus?
It almost does not make sense to me that at the moment
their companies are most profitable they would resort to
illegal collusion. I know it is a good sound bite because a lot
of politicians in Illinois were running up and down the State
saying: We cannot explain these high oil prices; there has got
to be criminal collusion on the part of the executives. But I
thought, boy, that is a serious charge, and to think that some
of those oil company executives are sitting in a back room
engaging in a criminal conspiracy for which they could have
time in a Federal penitentiary--I think we have got to be
careful about going out and hurling those kind of charges.
Ultimately in Chicago, after a lot of people were implying
there was criminal allegations or criminal conduct on the part
of a lot of oil company executives, they found nothing criminal
after an investigation by Mr. Pitofsky's agency.
So I just wanted to share that experience with you that we
had in Chicago. It may well be that there are very good reasons
that the prices have gone up on the West Coast as they have
gone back everywhere else in this country now.
Senator Boxer. Well, Senator, let me just say the record
will show I have not used the word ``collusion'' since I sat
down here. What I have said is there is a lot of things going
on that when you put it into a pattern it raises concern to me.
No, I do not expect that corporate executives who are
ethical would ever collude or would ever break the law, and I
expect that they would never do that. I would hope that, in
addition to never doing that, I hope that they would not take
advantage of a situation. Again, I think asking the question,
is it illegal, is a good one. It is a very good one,
particularly in a court of law. But around this place I would
hope we are concerned about the way consumers are treated,
whether supply is manipulated, whether it is legal or not.
I think it is a concern for consumers and it could impact
this economy in a very heavy way.
Senator Fitzgerald. Can I offer one note of encouragement
to the West Coast?
Senator Boxer. Yes.
Senator Fitzgerald. After our prices were the highest in
the country in the Midwest for a sustained period of time, for
several weeks, they started rushing supply to the Midwest
because you could make more reselling your oil in the Midwest
than anywhere else in the country, and by the end of last
summer the Chicago area had amongst the lowest gas prices in
the country.
Senator Smith. We look forward to that this summer. I do
not expect it, though.
Senator Fitzgerald. That is reassurance for those who
believe in the free market system, because I think we see this
same cycle in agriculture. When the price of cattle is really
high, people rush to production and then it plummets. I think
that we are seeing a cycle that is old as the ages of supply
and demand here. That was my impression after going through
this last year in the Chicago area.
I think we need to increase supplies of fuel oil and
decrease demand the best we can.
Senator Smith. Thank you, Senator.
Mr. Pitofsky, we are not quite done with you. Just a few
more questions. So if anyone has a second round, we will
proceed with that.
You have heard the charge and my question to you is this.
If the FTC's allegations are true and BP kept oil prices on the
West Coast higher by exporting Alaskan North Slope crude to
Asia, is this a violation of Federal law?
Mr. Pitofsky. Is that behavior in and of itself a
violation?
Senator Smith. A violation.
Mr. Pitofsky. No, it is not.
Senator Smith. If not, why not? We have not done anything
about it.
Mr. Pitofsky. Even if I were on the Supreme Court, I do not
think I--it is single firm behavior. Our antitrust laws are
very generous to single firm. We are tough as can be on
collusion, but on single firms behavior--proving an attempt to
monopolize, which is what that is all about, is enormously
difficult and there is no precedent for challenging that kind
of behavior.
Senator Smith. The expert that you hired during the FTC's
review of the BP-ARCO merger and who we will hear from later
today says that BP's Asian exports increased West Coast
gasoline prices by at most a quarter-of-a-cent per gallon. Do
you agree with that figure?
Mr. Pitofsky. I do not know. We were not required to
quantify. We did not quantify. At the time we went into court
all we said is they had the power to do it and they did it.
What the consequences were we were never called upon to
address.
Senator Smith. Finally, without commenting too much on the
investigation and the report that you are about to submit, are
you finding any other reasons for the loss of over 600 gasoline
stations since 1990?
Mr. Pitofsky. In Oregon? We have not looked at that
question.
Senator Smith. Thank you.
Senator Wyden had a question.
Senator Wyden. I just want to draw again the distinction
between collusion, which is obviously illegal, and these anti-
consumer practices. As you know, Mr. Chairman, I asked your
opinion today because you have an ongoing inquiry. So I just
ask you your opinion. I did not ask you if there was
substantial evidence of collusion. I asked you if there was
substantial evidence in your opinion of, in effect, supply
manipulation. You indicated to me that there was. You said that
with respect to red-lining and also laid out your views with
respect to zone pricing as well.
Is it not correct to say that supply manipulation can be
anti-consumer?
Mr. Pitofsky. It can be. On the other hand, I want to be
clear about this. In this area of the law what the courts do is
they look at the competitive effect, but then they look at the
business justifications. Generally speaking, when you are
talking about where jobbers or distributors can sell, location,
the law is very generous to the manufacturer or the refiner.
I think I said to you, I once checked, and of the first 20
cases, the defendants won 19. That is one of the reasons that
we are so careful about examining this situation. Yes, there
can be anti-competitive effects. But unlike price-fixing, they
can be outweighed by good business justifications.
Senator Wyden. One additional question with respect to the
effect of the BP merger on the consumer at the pump. The
Oregonian recently quoted the economist that you hired, one of
the two economists that you hired to analyze the merger, R.
Preston McAfee, a Professor at the University of Texas at
Austin, who said in his opinion that the merger translated to 1
to 3 cents a gallon extra cost at the gas pump.
Now, if you were to take the millions of gallons of gas
sold on the West Coast and Mr. McAfee was right that it was 1-
to 3-cents-a-gallon, we would be talking about a very
substantial sum of money to BP, is that not correct?
Mr. Pitofsky. Yes, although I do want to signal that----
Senator Wyden. You have not quantified it.
Mr. Pitofsky [continuing]. testimony later will be that
that 1 to 3 cents is a little on the high side. But we have not
quantified it, but obviously, it would be a very big number.
Senator Wyden. Would it not be fair to say if you are
talking about millions of gallons, even if it was 1 cent a
gallon, you would be talking about a pretty big number in terms
of the company's bottom line, would you not?
Mr. Pitofsky. We did a rough estimate some time ago based
on government statistics and I believe 1 cent per gallon would
translate into about $200 million.
Senator Wyden. A year?
Mr. Pitofsky. A year.
Senator Wyden. Thank you, Mr. Chairman.
Senator Smith. Senator Stevens.
Senator Stevens. I have one last question or comment.
Mr. Pitofsky, ARCO is gone. This is 1995-96 we are talking
about. We have had oil and gas prices drop down to $9 to $10 a
barrel. We have had other mergers. We have had other
investigations. We have had situations where the industry tried
to build up markets in Asia as the markets were becoming
flooded with foreign oil in California.
Have you had any reason to investigate as the FTC the
pricing situation as far as the North Slope oil in terms of the
Asian markets in general?
Mr. Pitofsky. We have not.
Senator Stevens. Have there been any complaints filed with
you about unfair practices, of people being denied oil in
California because oil was being shipped to Japan or Asia by
our North Slope producers?
Mr. Pitofsky. I am not certain. I can find out the answer
to that. Offhand, I do not recall. Well, there may have been.
There may have been complaints, Senator. Let me get the answer
for that question.
Senator Stevens. I would like to see that, because when I
look at the situation here I understand that gasoline prices
are up pretty high in California right now, but I also know
that in the period of $9 to $10 a barrel oil, my State lost
billions of dollars. We had producer after producer fold and
leave Alaska. We are a very high-priced area.
It seems to me very strange that we are going back to 1995
and 1996 allegations concerning a company that is dead and now
bringing all that and putting it on the one surviving major
that is there in terms of this West Coast production. I would
like to see if you have had allegations to that effect.
Mr. Pitofsky. We will look for that, Senator.
Senator Boxer. If I might, Mr. Chairman. I would just say
in this article that we have been quoting extensively from----
Senator Stevens. Ma'am, I have got to tell you I did not
come here to debate with you. I came to listen to witnesses.
Senator Boxer. I wanted to give you the answer to your
question, Senator.
Senator Stevens. I did not ask you a question, Senator.
Senator Boxer. Well then, I will take my own time. That is
fine.
Mr. Chairman, may I have a minute, please?
Senator Smith. Yes, we are on the third round and it is
your turn.
Senator Boxer. Thank you very much.
If anyone is interested as to whether there has ever been a
question from California consumers about the export of Alaska
oil, I would ask them that they should read this article and
they should go to this particular case, which is Aguilar vs.
ARCO. In fact, that is where these documents come from, and
they are from 1997.
So yes, there have been, if anyone is concerned--any
Senator or any person in the audience--as to whether California
consumers have complained, there is a class action suit filed
by a number of California consumers dealing with this. It is
actually Aguilar vs. Atlantic Richfield et al., a 1997 consumer
class action that accused ARCO and other California refiners of
price-fixing. It goes to all of these issues.
So we have had these complaints and that is where these
documents are now being made public.
Thank you very much. Thank you again; I am looking forward
to your report.
Senator Smith. Mr. Pitofsky, I think that concludes our
questioning and we thank you for your appearance today.
Mr. Pitofsky. Thank you all.
Senator Smith. We will now call forward our next panel,
which is: Mr. Jim Wells, the Director of the Natural Resources
and Environment of the General Accounting Office; and also Mr.
John Cook, the Director of the Petroleum Division of the Energy
Information Administration.
STATEMENT OF JIM WELLS, DIRECTOR FOR NATURAL
RESOURCES AND ENVIRONMENT, U.S. GENERAL
ACCOUNTING OFFICE; ACCOMPANIED BY FRANK RUSCO,
SENIOR ECONOMIST, RESOURCES, COMMUNITY, AND
ECONOMIC DEVELOPMENT DIVISION, GAO
Mr. Wells. Thank you, Mr. Chairman and Members of the
Subcommittee. Accompanying me today is Frank Rusco, a fellow
team member who worked on our gasoline work.
As you know, gasoline prices in the West Coast States are
frequently among the highest in the Nation. The West Coast
States also tend to experience longer periods of high prices
compared to other areas in the United States. It is sort of a
legacy of the West Coast. High prices have caused public
concern and can be a hardship to consumers, especially with
low-income families and those that depend on driving for their
livelihoods.
GAO has done a body of work over a number of years that
sheds some light on some of the root causes for West Coast high
gasoline prices, which I will summarize today. But before I do,
I want to begin with four points that will help put the
discussion in context. As you, Mr. Chairman, mentioned in your
opening statement about clarity and balance, what I want to do
is talk about four comments here to put some balance on what is
going on in the marketplace right now, and then we will talk
about the West Coast prices.
Gasoline prices differ from other commodities in that
prices are very visible to the public. Prices are publicly
displayed virtually at every station on every street and
consumers are making frequent purchases. When prices rise
quickly, as they have numerous times in the past, not only do
the consumers immediately observe it, but they also feel it in
their wallets. I doubt that consumers can tell you the same
about milk or bread price behavior.
Gasoline and oil prices typically fluctuate widely from
season to season and even year to year. For example, in 1998,
GAO was called upon to explain why crude oil prices were so low
that some domestic producers were actually closing their wells
and going out of business. One year later, GAO was called in
again to explain how refinery outages in California led to high
gasoline prices and price spikes. Again, high fluctuation as a
commodity.
While rising prices are alarming to consumers, it is
important to put gasoline prices in real dollar terms to
understand their actual economic impact. For example, the 30
cent per gallon gasoline of the 1960s would be equivalent to a
price roughly today of $1.75 in today's dollar, while the $1.25
gasoline of the 1980s would be equivalent to roughly $2.50 per
gallon today. So to place that in context, the national average
today, although not on the street corner of the photograph in
San Francisco, of $1.65 per gallon is not a historically high
figure.
I want to pause just a second to point out that
nevertheless, in terms of real dollars, these recent increases
in prices and the potential for higher prices this summer is a
very valid legal concern--legitimate concern, as expressed so
ably by Senator Boxer and others.
The fourth factor I want to talk about is a consideration
of the large and growing demand for this commodity, gasoline.
While fuel economy efficiency for automobiles almost doubled
from 1973 to 1985, there has been very little improvement
occurring today. This is partially explained by the increase in
popularity of the SUVs and light duty trucks, both of which are
subject to lower fuel efficiency standards.
My point is, the fact today, Americans are consuming over
130 billion gallons of gasoline per year, which equates to
about 1 gallon of gasoline out of every 9 consumed worldwide.
So with that context in mind, I just want to briefly turn
to the work that GAO has done in the past 3 years and talk to
some of the root causes, not all causes, for high gasoline
prices on the West Coast. The West Coast market, which you have
heard, is clearly characterized by a tight balance between
supply and demand, and the West Coast is, in effect, isolated a
little bit from the U.S. gasoline markets elsewhere. For
example, in order to meet consumer demand in the West Coast,
the refineries in California are operating flat out.
Another important factor in determining prices in the short
run is this level of gasoline inventory figure that can be
documented. A disruption in production causes an immediate
response to turn to inventories to meet the demand. Classic
economics say that if the inventories are insufficient, demand
will quickly push that price up. In recent years that is
typically what has been happening in the West Coast. There has
been low inventories of gasoline. There is no storage place to
turn to meet that demand, and this has added to the tendency
for prices to soar quickly.
Our comparison of gasoline prices in the cities throughout
California, Oregon, and the State of Washington, in the three
States, confirmed to us that essentially the entire three
States are part of a single market for gasoline. What that
means is what happens in one State, whether it is California or
Oregon, has some impact on all three.
I can also say that there are individual States that have
attributes that do also tend to increase the gasoline prices.
For example, California uses the boutique gasoline designed to
reduce harmful exhaust emissions that causes smog. This is a
good thing, not to have smog. Oregon, on the other hand,
depends completely on out-of-State supplies for its gasoline.
It has no refinery capacity, but most of it must come from a
single pipeline in the State of Washington. If something
happens to that pipeline, Oregon pays the price.
In conclusion, Mr. Chairman, our work has shown that prices
have been volatile in the past and we have every reason to
believe that this is going to continue in the foreseeable
future. It is not going to change overnight. Unexpected events
will continue to cause price spikes. While the timing of these
events is unpredictable, clearly they will occur.
For example, the unexpected refinery outages and pipeline
disruptions cause prices to rise. More recently, there have
been unexpected refinery outages in the U.K., Aruba and just
last Monday, as mentioned in Carson, California. Looking toward
this summer, there are also potential concerns: potential
electricity blackouts in California and the West. Some would
say the word ``potential'' is not the right word, but clearly
this has the potential to affect refinery production and
distribution on the West Coast. If they occur, gasoline prices,
high gasoline prices this summer are a sure bet.
I want to end here not so much on a sour note. If there is
any kind of a silver lining in the current situation, to the
current cloud of high gasoline prices, it is that historically
we have observed that if you have high gasoline prices, as
Chairman Fitzgerald was alluding to earlier, it has always had
a tendency to encourage eventually a supply response that could
perhaps bring down prices. So I want to end with: Perhaps there
is hope this summer for gasoline prices.
Thank you, Mr. Chairman, and when the panel concludes we
will be glad to answer questions.
[The prepared statement of Mr. Wells follows:]
Prepared Statement of Jim Wells, Director, Natural Resources and
Environment, U.S. General Accounting Office
Mr. Chairman and Members of the Subcommittee: I am pleased to
participate in the Subcommittee's hearing on the causes of high retail
gasoline prices in California, Oregon, and Washington. As you know,
prices in West Coast states are frequently among the highest in the
Nation and these states tend to experience longer periods of high
prices compared with other areas in the United States. As of March 27,
2001, the retail prices of gasoline in West Coast states were higher
than the national average--the average national price for a gallon of
unleaded regular gasoline was $1.43, compared with $1.72 in California,
$1.57 in Oregon, and $1.56 in Washington. Furthermore, according to the
Energy Information Administration, gasoline prices are expected to rise
this summer and price volatility remains a concern.
Over the last 3 years, GAO has issued several reports on gasoline
prices and gasoline price behavior in two West Coast states--California
and Oregon.\1\ Our analyses focused on observable factors that affect
gasoline prices and did not address issues concerning the
competitiveness of gasoline markets, which may also affect prices in
these states. In addition, we issued a report in response to a mandate
in Public Law 104-58 to determine the effects of lifting the ban on
Alaskan crude oil exports on crude oil prices and production, refiners,
consumers, and the oil shipping industry on the U.S. West Coast.\2\ My
testimony, which is based on these reports and related work,
specifically discusses factors affecting gasoline prices in California,
Oregon, and, more generally, the West Coast. In summary, I will make
the following points:
---------------------------------------------------------------------------
\1\ Motor Fuels: Gasoline Prices in Oregon (GAO-01-33R, February
23, 2001), Motor Fuels: Gasoline Price Spikes in Oregon in 1999 (GAO/
RCED-00-100R, Feb. 23, 2000) and Motor Fuels: California Gasoline Price
Behavior (GAO/RCED-00-121, Apr. 28, 2000).
\2\ Alaskan North Slope Oil: Limited Effects of Lifting Export Ban
on Oil and Shipping Industries and Consumers (GAO/RCED-99-191, Jul. 1,
1999).
---------------------------------------------------------------------------
The West Coast gasoline market is characterized by a tight
balance between supply and demand, and is isolated from other U.S.
gasoline markets. For example, in order to meet consumer demand,
refineries in California operated at about 97 percent of capacity in
1999 compared with about 93 percent nationally. In addition to the
overall tight balance between supply and demand, the West Coast market
is isolated from out-of-state sources of gasoline so that supply
shortages cannot easily be replaced. Both these situations cause rapid
price increases in reaction to supply disruptions.
Our comparisons of gasoline prices in cities in
California, Oregon, and Washington found that individual markets in the
three states are closely linked and are essentially part of a single
market for gasoline on the West Coast. Gasoline prices for cities in
these states, while differing at any given moment in time, generally
followed similar patterns with respect to price increases and
decreases. As a result, any event that caused a significant price
change in one State could affect the gasoline prices in other West
Coast states.
While California, Oregon, and Washington are essentially
part of the same West Coast market, each State has attributes that tend
to increase its respective gasoline prices. For example, California
uses a ``boutique'' gasoline designed to reduce the harmful exhaust
emissions that cause smog. In contrast, Oregon depends completely on
out-of-state supplies for its gasoline, much of which comes through a
single pipeline from the State of Washington. These attributes, among
others, lead to higher gasoline prices in these states. Moreover,
within any given state, local market conditions may cause prices to
vary considerably.
Our analysis found that lifting the export ban on Alaska
North Slope (ANS) crude oil caused the West Coast price of this oil to
rise but it did not significantly affect the price of gasoline.
west coast market is tight and isolated
The West Coast gasoline market is characterized by an especially
tight balance between supply and demand, and is isolated from other
U.S. gasoline markets. In general, California's gasoline demand
dominates the West Coast market. Based on 1997 data, the last year data
on international gasoline consumption were available to us, California
is the third largest gasoline consumer in the world--behind only the
rest of the United States and Japan--and its consumption is being met
almost entirely by supply from refinery production within the state. In
addition to making California's boutique CARB gasoline, some of
California's refineries produce conventional and other reformulated
gasoline to supply to western markets, such as Oregon, Arizona, and
Nevada.\3\ To meet this high demand for gasoline, California's
refineries produce at almost full capacity. For example, in 1999,
California's refineries operated at about 97 percent of capacity
compared with a national average of about 93 percent. Because the
existing refineries in California have virtually no spare capacity,
unanticipated refinery outages, such as those caused by mechanical
problems, can cause supply disruptions and rapid price increases not
only within the State but also in other western states that it
supplies. California refineries experienced unanticipated outages every
year from 1995 through 1999.
---------------------------------------------------------------------------
\3\ CARB stands for California Air Resources Board, the State
agency that administers California's emissions-reducing gasoline
program. CARB gasoline is designed to reduce harmful exhaust emissions
that cause smog.
---------------------------------------------------------------------------
When unanticipated refinery outages occur, other out-of market
sources have to supply gasoline to make up for the lost production.
However, the West Coast market is isolated from other major refining
centers because it has few, if any, pipelines that can bring gasoline
to the West Coast states. Therefore, tankers and other means must be
used. The process is slow and costly compared with pipelines. Gasoline
shipped into California (and other West Coast states) by tanker from
such places as the U.S. Gulf Coast, the U.S. Virgin Islands, Europe,
and Asia, can take between 11 and 40 days and add 3 to 12 cents per
gallon to the retail price. In addition, the uniqueness of California's
CARB gasoline further isolates the state's gasoline market, because
only a few refineries outside California can produce CARB gasoline.
Moreover, these few refineries are not designed to make CARB gasoline
routinely and the refining operations have to be reconfigured to
produce it. This reconfiguration process, some oil industry officials
told us, can take up to a week and adds to the cost of production.
west coast states are essentially part of a single market
Our comparisons of gasoline prices in cities in California, Oregon,
and Washington found that individual markets in the three states are
closely linked and that they are essentially part of a single gasoline
market on the West Coast. When we compared gasoline prices in Portland,
with prices in Los Angeles, San Francisco, and Seattle, we found that
although average prices in the four cities differed, they generally
moved in the same direction simultaneously and hence, the price
differences remained fairly stable over time. Variations in price
levels could be attributed in part to differences in transportation
costs, taxes, and other local regulations and conditions.
Figure 1 shows a comparison between retail prices of regular
unleaded gasoline in Portland and those in Los Angeles, San Francisco,
and Seattle for January 5, 1994, through October 18, 2000.\4\
---------------------------------------------------------------------------
\4\ The data come from survey results published weekly in the Oil &
Gas Journal. We chose this timeframe in order to cover sufficient
periods of time before and after the Olympic pipeline disruption of
June 10, 1999.
[GRAPHIC] [TIFF OMITTED] 88463.001
Gasoline prices in the four cities, while differing at any given
moment in time, generally followed similar price fluctuation patterns.
For the entire period, retail regular gasoline prices in Portland
averaged about 4 cents higher than in Los Angeles, about 1.4 cents
higher than in Seattle, and about 10 cents lower than in San Francisco.
Despite these average price differences, the gasoline markets in
all four cities responded similarly to rapid price fluctuations caused
by supply disruptions or other factors. In addition to examining price
trends, we conducted a statistical analysis of retail gasoline prices
in the four cities and found that an increase in price in one city was
quickly followed by price increases in the other cities. We found that
prices fully adjust to the change within about 5 to 6 weeks.\5\
---------------------------------------------------------------------------
\5\ A similar process of supply adjustments would occur for an
initial drop in price.
---------------------------------------------------------------------------
state-specific attributes affect gasoline prices
While California, Oregon, and Washington are essentially part of
the same West Coast market, each State has specific attributes that
tend to increase its respective gasoline prices. Moreover, within any
given state, local market conditions may cause prices to vary
considerably, as illustrated by our analyses of California and Oregon
markets.
For California, we identified the following specific attribute:
CARB gasoline requirements. In 1996, California introduced
reformulated gasoline standards that were more stringent than the
Federal standards and different from those of any other state. The
additional refining cost for CARB gasoline has contributed to the
higher retail price of gasoline in California relative to the rest of
the United States. Also, California's gasoline market has become more
sensitive to supply disruptions because, as mentioned above, outside
sources of CARB gasoline are not readily available to make up for
disrupted supplies in a timely and cost-effective manner.
For Oregon, we identified the following specific attributes:
Higher transportation costs for gasoline. Oregon depends
completely on out-of-state supplies for its gasoline because it has no
refineries and, thus, must acquire gasoline via pipeline from
refineries located in northern Washington, and--to a lesser extent--in
California via tanker and/or truck. As a result, transportation costs
tend to be higher in Oregon than in areas closer to the refining
centers of northern California, southern California, or northern
Washington. Furthermore, of the West Coast states, Oregon has the
highest proportion of miles driven in rural areas--about 53 percent--
compared with 19 percent for California and 32 percent for Washington.
To meet rural demand in areas that are generally not served by
pipelines, gasoline must be trucked in from the nearest pipeline,
increasing transportation costs further.\6\
---------------------------------------------------------------------------
\6\ Of the three principal means of shipping gasoline--pipeline,
tanker or barge, and trucking--per gallon costs are typically lowest
for pipelines and highest for trucking.
---------------------------------------------------------------------------
A gasoline tax higher than the national average. At 24
cents per gallon, in 2000, Oregon had the highest State gasoline tax
among the West Coast states and the eighth highest in the country.\7\
The average State tax on gasoline at the retail level in the United
States is about 20 cents per gallon.
---------------------------------------------------------------------------
\7\ While not included above, State excise taxes and/or other local
charges may apply and these would also be expected to have an upward
impact on gasoline prices. For example, in addition to California's
State gasoline tax of 18 cents per gallon, the state's sales tax of
7.25 percent would, at current gasoline prices, also add about 12 cents
to the price of a gallon of gasoline.
---------------------------------------------------------------------------
No self-service lanes at gasoline stations. According to
industry sources, Oregon's prohibition on self-service gasoline
stations may add as much as 5 cents to the cost of a gallon of
gasoline.
Finally, local supply and demand conditions affect both
California's and Oregon's gasoline prices. For example, our analysis of
California gasoline prices showed that when CARB gasoline was
introduced in 1996, the difference in gasoline prices between San
Francisco and Los Angeles changed. Both wholesale and retail gasoline
prices increased more in San Francisco than in Los Angeles--wholesale
prices increased by about 2 cents a gallon and retail prices increased
about 11 cents. There was no consensus among experts and industry
officials as to why prices increased more in San Francisco. One
explanation offered was that higher refining costs are easier to pass
on to consumers in San Francisco because of its local supply and demand
conditions. Another was that the new fuel requirements might have
tightened the gasoline supply and demand balance more in the northern
part of the State than in the southern part.
Similarly, local conditions have affected Oregon gasoline prices.
For example, in June 1999, an explosion in the pipeline connecting
Washington refineries with Oregon consumers caused an immediate
reduction in the supply of gasoline to Portland and Eugene. To
compensate for this shortfall, additional gasoline had to be shipped in
by barge or tanker from Washington and California or by truck from
other locations. As a result, transportation costs for gasoline coming
to Portland increased and prices rose compared with Seattle and Los
Angeles. This supply disruption coincided with a period of
unanticipated refinery outages in northern California, which
exacerbated the region's supply shortfall, making it more costly for
Oregon to replace the gasoline supply lost by the damaged pipeline.
lifting export ban increased crude oil prices, but had no observable
effect on gasoline prices
We found that lifting the export ban on ANS crude oil in 1995
increased the price of crude oil on the West Coast.\8\ However, our
analysis found no evidence that lifting the export ban caused increases
in the prices of three petroleum products used by consumers--gasoline,
diesel, and jet fuel.
---------------------------------------------------------------------------
\8\ See Alaskan Crude Oil Exports (GAO/T-RCED-90-59, Apr. 5, 1990).
---------------------------------------------------------------------------
Lifting the export ban raised the relative prices of Alaskan North
Slope (ANS) and comparable California crude oils between $0.98 and
$1.30 higher per barrel than they would have been had the ban not been
lifted. The higher ANS price provided North Slope producers an
incentive to produce more oil and therefore should lead to greater
total oil production in Alaska than would have occurred had the export
ban remained in place. Lifting the ban also increased the efficiency of
the West Coast crude oil market by lowering the total shipping costs
associated with transporting ANS to its final destination. The
magnitude of reduced shipping costs was at least $65 million in the
first 2\1/2\ years after the removal of the export ban. These impacts
measured by GAO were consistent with predictions of prior studies by
the Department of Energy and private sector analysts.\9\
---------------------------------------------------------------------------
\9\ Exporting Alaskan North Slope Crude Oil: Benefits and Costs,
U.S. Department of Energy (June 1994), and Samuel Van Vactor, ``Time to
End the Alaskan Oil Export Ban,'' Policy Analysis 227 (May 18, 1995).
---------------------------------------------------------------------------
Aside from higher crude oil costs for refiners buying ANS oil, we
observed no increases in consumer prices on the West Coast during the
period that we analyzed. According to GAO's statistical and economic
analyses, the prices of gasoline, diesel, and jet fuel on the West
Coast did not significantly change as a result of lifting the export
ban. Moreover, the consumer groups and industry experts GAO contacted
were unaware of any adverse effects on consumers from lifting the ban.
GAO's findings were consistent with the expectations of some industry
analysts. Several industry analysts believed that consumer prices would
be unaffected because these prices were determined by the costs of
foreign imported crude oil and final products and imported products
were already selling at their world prices on the West Coast, rather
than the artificially low ANS price.
Mr. Chairman, this concludes my prepared remarks. We would be
pleased to answer any questions you or any Member of the Subcommittee
may have.
Senator Smith. Thank you, Mr. Wells. That is the best word
we have heard yet.
Mr. Cook.
STATEMENT OF JOHN COOK, DIRECTOR, PETROLEUM DIVISION, ENERGY
INFORMATION ADMINISTRATION
Mr. Cook. Thank you, Mr. Chairman and Members of the
Subcommittee, for the opportunity to testify.
As we have heard repetitively today, gasoline prices have
risen sharply over the last few weeks, with regular grades now
up over 20 cents a gallon and additional increases likely to
follow. While the largest increases have occurred in the
Midwest and Gulf Coast regions as well, average prices remain
on the West Coast somewhat higher than elsewhere, with an
average of about $1.70 in our latest survey.
Higher still is regular grade reformulated gasoline, RFG,
in California, currently averaging about $1.83 statewide. We
saw that there are some locations already reporting over $2-a-
gallon prices in the San Francisco area, and premium grades are
over $2 throughout the State.
Clearly, when gasoline prices reach these levels consumers
demand to know the underlying causes. My testimony summarizes
some of these factors, beginning with the drivers behind the
West Coast elevated prices. Gasoline prices on the West Coast
are usually the highest in the Nation, largely due to several
factors.
First, the West Coast is geographically isolated. That is,
usually gasoline demand is almost entirely supplied from West
Coast refineries. When supplies get tight, it can take several
weeks for added supply to arrive from outside the region. To
satisfy consumption, West Coast refineries normally operate at
relatively high levels, especially during the peak summer
season.
When refinery or other distribution problems occur, West
Coast markets tighten quickly, causing prices to rise behind
them. Since the entire West Coast market is highly
interconnected, price pressures in one area often affect the
whole region.
The second reason for high West Coast prices is that
California comprises, of course, the dominant share of the
market and uses a unique type of reformulated gasoline.
California RFG must conform to more stringent requirements than
federally-mandated RFG, making it more expensive to produce.
More importantly, with no short-term complying supply readily
available, significant shifts in market conditions can cause
large price changes.
Still another but often unrecognized factor is that not
only does California consume more gasoline than any other
State, but in recent years demand has grown at a pace roughly 2
to 4 times capacity growth. These factors combine to put
pressure on refineries to produce at near-maximum rates. Thus,
with the balance between supply and demand so fragile, any
problems with infrastructure can be expected to cause
substantial price increases.
I think the April 2000 GAO Report has already been noted.
The point I want to underscore here is that it showed that
California has not experienced more price spikes, but that when
they do experience these fluctuations they tend to be higher
and last longer. This finding is exactly consistent with a
system operating with a finely tuned balance between supply and
demand, with little or no room for error.
Although California strongly influences gasoline market
conditions on the entire West Coast, it can also have impacts
on other regions of the country, especially this year. A
problem in California can result in extra supplies of gasoline
being purchased on the Gulf Coast for delivery to the West
Coast. These marginal barrels add price pressure to the Gulf
market, which also serves the East Coast and Midwest.
With gasoline balances very tight in these other regions,
especially the Midwest, additional product demand from
California can increase prices throughout areas east of the
Rockies.
For the remainder of my testimony I want to focus then
briefly on the remainder of the country. As stated earlier,
prices are increasing dramatically across all regions of the
country, for a number of reasons. First, as we have heard
earlier, crude prices remain relatively high, nearly triple
what they were in early 1999. This change in crude oil prices
since then alone explains 35 to 45 cents of that increase.
Perhaps more importantly, gasoline inventories are
currently very low in virtually every region of the country and
especially in the Midwest. Our preliminary estimate show stocks
at the lowest end March level since EIA began compiling these
data in 1963. The situation has not improved in recent weeks.
Mid-April levels are significantly less than the past 5-year
average and especially again in the Midwest.
When inventories are this low, supplies immediately
available to cover unexpected imbalances in supply and demand
are minimal. This raises the risk sharply of price increases.
Since U.S. refineries operate at high utilization rates
during the summer, absent adequate inventories, added supplies
have to come from other parts of the country or even from
foreign sources. As such, even the perception of tightening
conditions, such as a rumored refinery problem--witness the
Tosco situation the other day; it turned out not to be a
serious gasoline impact--even rumored refinery problems can
precipitate price pressure through ``precautionary buying.'' In
fact, gasoline production has generally exceeded year ago
levels since the beginning of this year. Despite that,
extensive refinery maintenance this spring has begun to limit
these production levels, even resulting in a brief dip below
year ago levels in the second half of last month.
On the other hand, with demand resuming growth rates so far
this year more typical of the late 1990s, despite an apparent
slowdown in the U.S. economy, this exceedingly tight balance
has emerged, resulting in low stocks and rapidly rising
wholesale prices. With spot prices now rising 25 to 30 cents a
gallon or more in almost all regions since mid-March, retail
prices have begun to respond accordingly, and further increases
should be expected over the next several weeks.
In particular, the Midwest is especially tight again this
year. Retail prices for conventional gasoline have already
risen 20 cents a gallon in the last 4 weeks and reformulated
gasoline is up over 40 cents a gallon, in part due to the pull
on the Gulf Coast clean products by California. Like
California, parts of the Midwest also use a unique reformulated
gasoline, one blended with ethanol rather than MTBE. This
unique nature of gasoline consumed in the Chicago and Milwaukee
areas is one of the reasons Midwest gasoline prices temporarily
rose above West Coast prices last summer.
While not geographically isolated per se, the Chicago-
Milwaukee market is partially depending on distant Gulf Coast
production. This combination effectively makes the Chicago-
Milwaukee area an RFG island and can result in very high
prices. This is because significant distances are involved in
acquiring this unique blend of RFG not produced by many
refineries outside the Chicago market.
Like my colleague, to conclude on a brighter note, retail
prices may be nearing an early seasonal peak barring further
significant operating problems. Preliminary EIA data show that
currently high prices have sparked the expected sharp increase
in refinery production and imports over the last 2 weeks. For
illustration, refinery production is up maybe a million barrels
a day in the last 2 weeks, fairly close to flat out, and we
have not even gotten into the summer season.
If these continued high supplies occur, we may yet see
inventories stabilize and prices weaken as we go forward into
the summer.
This concludes my testimony.
[The prepared statement of Mr. Cook follows:]
Prepared Statement of John Cook, Director, Petroleum Division,
Energy Information Administration
Thank you, Mr. Chairman. I would like to thank the Committee for
the opportunity to testify on behalf of the Energy Information
Administration (EIA).
As you know, gasoline prices have increased substantially in recent
weeks. Prices for regular grade gasoline have risen over 20 cents per
gallon across the country over the past 4 weeks, with additional
increases likely to follow. While the largest increases in gasoline
prices over this period have occurred in the Midwest and Gulf Coast
regions of our country, average prices along the West Coast are still
the highest in the country at over $1.70 per gallon (Figure 1). Regular
grade Reformulated Gasoline (RFG) prices along the West Coast are
currently averaging nearly $1.83 per gallon, with premium grade RFG
averaging over $2.02 per gallon. When gasoline prices reach these
levels, consumers, industry, and policymakers alike demand to know the
underlying causes. In my testimony before you today, I will attempt to
describe these factors.
why west coast gasoline is often the most expensive in the nation
Typically, gasoline prices on the West Coast, are the highest in
the nation. This is largely due to two factors. First, the West Coast
is geographically isolated from the rest of the country; petroleum
markets in this region are mostly self-contained (i.e., supplied by
West Coast refineries). Thus, if supplies get tight, it can take weeks
for resupply to arrive from outside the region. To satisfy demand, West
Coast refineries operate at relatively high utilization rates,
especially during the peak summer season. If there is a problem with a
refinery or the distribution of supplies, or demand increases
dramatically, markets along the West Coast can tighten very quickly,
thus causing prices to rise quickly. Since the entire West Coast market
is interconnected, price pressures in one area often affect the whole
region.
The second reason gasoline prices are typically higher along the
West Coast is that California, which represents a dominant share of the
West Coast market, uses a unique type of reformulated gasoline.
California RFG has more stringent requirements that federally mandated
RFG. Not only is California RFG more expensive to produce, but when
supplies get tight, there is not a ready source of gasoline available
immediately outside the region. By having a ``boutique'' blend of
gasoline (i.e., a type only used in a limited area) changes in market
conditions may cause larger price changes than might otherwise occur.
Parts of the Midwest have their own ``boutique'' blend of RFG, one
that is blended with ethanol, rather than MTBE, which is used by most
of the rest of the country as a blend stock for the federally mandated
RFG. The unique nature of gasoline in the Chicago and Milwaukee areas
was one of the reasons why Midwest gasoline prices temporarily rose
above West Coast prices last summer when supplies were initially unable
to meet demand at the start of the summer season. While not
geographically isolated per se, the Chicago/Milwaukee market is
partially dependent on distant Gulf Coast production. This combination,
which effectively makes the Chicago/Milwaukee area an ``RFG island'',
can result in very high prices, because significant distances are
involved in acquiring a blend of RFG not produced by many refineries
outside their market.
gasoline prices are high across the country
As I stated earlier, prices are increasing dramatically across all
regions of the country. There are a number of reasons for this.
First, crude oil prices remain high, nearly triple what they were
as recently as early 1999. The change in crude oil prices alone would
explain about 35-45 cents per gallon of the increase in gasoline prices
since that time.
As importantly, gasoline inventories are currently very low
throughout most of the country. EIA's preliminary estimate has total
gasoline inventories at the lowest end-March level since 1963, which is
as far back as EIA has compiled data. The situation has not improved in
recent weeks, with mid-April gasoline inventories significantly less
than has been averaged over the previous 5 years (Figure 2). For
example, as of April 13, gasoline inventories in the East Coast (PADD
I) and the Midwest (PADD II) are 10-15 percent less than the 5-year
average for this time of year and even about 10 percent less than last
year's low levels. When inventories are low, supplies immediately
available to cover any imbalances in supply and demand are reduced and
prices can become more volatile. Since U.S. refineries operate at very
high utilization rates throughout the gasoline season, without
inventories on hand, additional supplies must come from farther away,
either from other parts of the country, or even foreign sources. As
such, even the perception of tightening conditions, such as rumored
refinery problems, can precipitate price pressure through
``precautionary buying''. In fact, while gasoline production has
generally exceeded year-ago levels since the beginning of the year,
extensive refinery maintenance this Spring has somewhat limited recent
operations, resulting in a brief dip below year-ago levels in the
second half of March. With demand resuming growth rates so far this
year typical of the late 1990s, despite an apparent slowdown in the
U.S. economy, an exceedingly tight gasoline balance has emerged,
resulting in very low stocks and rapidly rising wholesale prices. With
spot prices rising 25 to 30 cents per gallon since mid-March in almost
all regional markets, retail prices have begun to respond accordingly.
Of course, high gasoline prices would encourage additional supply, both
through increased production and imports. Thus, barring a sudden
reversal in current patterns, further retail increases should be
expected over the next few weeks, but prices could fall some thereafter
if increased gasoline supplies enter the market.
While gasoline inventories are much lower than is normal for this
time of year, crude oil inventories remain below typical levels as
well, despite a dramatic increase in recent weeks. Nationally, crude
oil inventories have improved considerably in the last few weeks,
rising by over 35 million barrels to 313 million barrels, with the Gulf
Coast region (PADD III) finally returning to 5-year average levels this
past week. But, the situation is much worse in the West Coast (PADD V),
where crude oil inventories are over 17 percent less than the 5-year
average and more than 6 percent less than last year's low levels. With
the West Coast a largely self-contained region, low crude oil
inventories could contribute added pressure to already high product
prices in the near future.
california and oregon gasoline markets
As I mentioned earlier, the West Coast gasoline market is an
interconnected one, where price pressures in one area can affect other
areas in the West Coast. However, there are a few unique
characteristics about both the California and Oregon gasoline markets
that I would like to take a moment to address now.
Certainly, the use of California RFG is the most unique factor
affecting California gasoline markets. But an often, unnoticed factor
is that California consumes more gasoline than any other state, nearly
39 million gallons daily in 1999, and whose demand is growing at 2 to 4
times the rate of California's gasoline production growth in recent
years. These two factors combine to put pressure on refineries to
produce at near maximum rates. With the balance between supply and
demand so fragile, any problems with infrastructure, whether refining
or distribution, could cause prices to increase substantially. An April
2000 General Accounting Office (GAO) report noted that while California
had not experienced a greater number of price ``spikes'' than other
regions of the United States, the increases experienced were larger.
This finding is consistent with a system that has a finely tuned
balance between supply and demand, with little or no room for error.
A new concern for California this summer is the possibility of
rolling blackouts. California has already experienced rolling blackouts
this Spring and hot summer weather suggests more are likely this
summer. Without sufficient backup capability offline from the
California grid, a rolling blackout could cause an entire refinery to
have to shut down, which besides meaning less product being made
available, would also disrupt pipeline flows. Typically, refineries are
not built to shut down abruptly or to begin smooth operations
immediately following a ``cold start''. With the delicate system that I
have already described, many analysts are concerned rolling blackouts
could further affect gasoline prices this summer. We are in
communication with the California Energy Commission, as well as
industry groups regarding this issue and will be closely monitoring the
situation this summer.
Although California strongly influences gasoline market conditions
for the entire West Coast, there are a few unique factors unique to
Oregon that I would like to address.
Oregon's gasoline prices are usually about 15 cents per gallon
higher than the national average, although currently they are about 10
cents below the national average, since prices have been increasing
more elsewhere in the country than in Oregon recently. Oregon is one of
only two states (the other being New Jersey) which has a ban on self-
service gasoline stations. A GAO memo on Oregon gasoline prices
released in March 2001 cited ``industry experts'' estimating that the
self-service ban could add as much as 5 cents per gallon to the final
retail price. In addition, Oregon's lack of refinery capacity makes it
dependent on product shipments from outside the state, primarily
California and Washington, thus increasing the transportation costs to
get gasoline into the state. Then once in the state, transportation
costs to get the gasoline to the retail station is generally higher
than in other states since a large proportion of Oregon's gasoline is
in rural areas. A tight supply and demand balance, a lack of excess
refining capacity, stringent standards on California reformulated
gasoline all impact the West Coast conventional gasoline market by
effectively reducing the capacity available to make other products,
including the conventional gasoline used in Oregon.
conclusion
U.S. retail gasoline prices have risen substantially in the last
three to 4 weeks, with further increases likely since even greater
jumps have occurred at the spot level. This situation has come about as
a result of low gasoline inventories across the country, a tight supply
and demand balance, little excess refining capacity, and low crude oil
inventories, particularly in the West Coast. With California requiring
some of the cleanest gasoline in the world and the geographic isolation
of West Coast markets from other regions, West Coast gasoline prices
are typically the highest in the country, as they are now. The specter
of rolling blackouts this summer adds uncertainty to a typically
delicate balance between supply and demand. The potential exists for a
substantial price ``spike'' to occur on the West Coast this summer,
even from already high levels, if problems are experienced at
refineries or in the delivery system. Although it may take weeks to
arrive, if gasoline prices get high enough, supply into the West Coast
system would be encouraged, thus reducing prices eventually. But of
course, no one really knows what will happen this summer. I can assure
you that EIA will be actively monitoring the summer season and will
provide as timely analyses as possible throughout the summer months.
This concludes my testimony, and I would be pleased to answer any
questions the Committee may have.
[GRAPHIC] [TIFF OMITTED] 88463.002
[GRAPHIC] [TIFF OMITTED] 88463.003
Senator Stevens. Could you repeat that, Mr. Cook? Up from
what? You said a million barrels up from what?
Mr. Cook. Would you like the number?
Senator Stevens. I mean, for what date.
Mr. Cook. Oh, just over the last 2 weeks. As the
maintenance has wound down, these fellows have cranked up from
already fairly high levels to fairly close to peak levels,
levels like we saw last summer. If this continues and the high
level of imports that we have seen in the last few weeks
continues--well, it is not a surprise stocks have built a
little bit in the last couple of weeks.
Senator Smith. Do you anticipate that the fire in
California at the refinery, will that have an impact on the
fragile supply and demand existing on the West Coast?
Mr. Cook. Well, it is too early to say one way or another,
really. It will have an impact, but it is currently expected to
be a minimal impact. This is because the fire occurred in a
unit that does not produce a lot of gasoline.
On the other hand, that balance is so tight that any loss
for any period of time of gasoline can have some effect on
prices.
Senator Smith. Have you concluded your statement, then?
Mr. Cook. Yes.
Senator Smith. I thought so. My first question was about
that refinery and the balance. But I am wondering. We have
talked a lot about supply and demand here and we have all
mentioned how long it has been since a refinery has been built.
If it is so profitable in the oil business right now, what is
holding back new refinery construction?
Mr. Cook. Well, I think someone alluded to the fact that it
has not always been that way. Even as recent as a little over a
year ago, refinery margins, well, throughout 1999, refinery
margins were almost nonexistent. Profits were almost
nonexistent. Obviously, not an environment to attract capital.
In fact, if you look over the last 20 years or so, on average
the U.S. refining sector has done rather poorly.
Senator Smith. Has that not changed? It seems to me enough
have gone out of business, and they are running at 98 percent
capacity. That is an extraordinary use of assets. I wonder if
there is not some incentive there for somebody to build another
refinery.
Mr. Cook. Well, that only occurs in the summertime.
They do not run at anywhere near that rate during the
wintertime. Although you did not ask, they would run at higher
rates during the wintertime barring non-discretionary
maintenance that has to be performed if the economics of crude
are attractive. But as long as crude prices are relatively
high, the law of demand says refiners are going to buy less,
stock less, produce less product over time in the face of
continuing rising gasoline demand, diesel demand, and what have
you. Therefore, product stocks will erode to the point where
you have this fragile situation.
Senator Smith. Thank you.
Senator Wyden, do you have a question?
Senator Wyden. Just a couple, Mr. Chairman.
With respect to GAO's report on Alaskan oil exports, did
GAO have access to the various issues raised by The Oregonian,
the e-mail exchange between BP trading managers where they talk
about shorting the West Coast market to leverage up the price,
the question of BP selling oil to Asia at lower net prices than
they could get on the West Coast? You did not have access to
any of that information that was in The Oregonian article, did
you?
Mr. Wells. That is correct, we did not see those documents.
Our work started in 1998, completed in early 1999. Our audit
teams did, in fact, talk to the FTC. We talked to the oil
companies during the work. But we did not see those documents,
no, sir.
Senator Wyden. You did not have any access to the documents
that are under seal in Federal court in San Francisco, either?
Mr. Wells. Did not.
Senator Wyden. Is that right?
Mr. Wells. Yes.
Senator Wyden. One other question for the GAO folks. BP
asserts that your July 1999 report on the effects of lifting
the ban on exporting Alaskan North Slope oil shows there was no
increase in prices. But my understanding is on page 6 of your
report you state that that is not the case. Could you describe
what the ramifications are with respect to lifting the ban as
it relates to prices?
Mr. Wells. We have page 6 here. I will be glad to let Mr.
Frank Rusco answer this question.
Mr. Rusco. Yes, Senator. What we found was that the price
of Alaskan North Slope crude oil did rise on the West Coast,
somewhere in the neighborhood of $1 per barrel. But we found
that that was not passed on to consumer prices. There are a
number of explanations for why that might not have been the
case.
For one, the amount of Alaskan North Slope oil that was
sold in third party transactions on the West Coast was
relatively small compared to the total amount of Alaskan North
Slope oil. On the West Coast there was ARCO and Exxon that
produced Alaskan North Slope oil and largely refined their own
product. So that oil never saw a third party transaction or a
market price.
Senator Wyden. What were you saying, then, at page 31 of
the report, where you said: ``West Coast refiners we contacted
did not reveal the extent to which they passed on increased
acquisition costs for crude oil to consumers?''
Mr. Rusco. Yes. No refiner told us that they had passed on
any of the increased crude oil costs. We did not have access to
proprietary information to determine that ourselves. We did our
own analysis of what happened to prices at the time that the
export ban was lifted and found an effect on crude oil prices,
but not on consumer prices, consumer product prices, I should
say.
Senator Wyden. I will tell you, I question that finding. I
think it is late in the day and I am not going to belabor this,
but you say at page 6 ``Lifting the ban caused the relative
prices of Alaskan North Slope and California oils with
comparable characteristics to be between 98 cents and $1.30
higher per barrel than they would have been had the ban not
been removed.''
Then of course you all were not able--and I understand it--
to look at the sealed documents and the e-mail exchange that
talks about shorting the West Coast market. So I want to be
clear that at least this Member of the U.S. Senate feels that
you worked with the information you had, but it was very, very
limited. At least from my standpoint, I want the record to show
that.
I thank you, Mr. Chairman.
Senator Smith. Thanks, Senator Wyden.
Senator Stevens, do you have a question for these
witnesses?
Senator Stevens. No, I have no question for these
witnesses.
Senator Smith. Senator Boxer.
Senator Boxer. Thank you.
Mr. Cook, what did you say the average price of gasoline
was in California when you opened up your remarks?
Mr. Cook. The average price as of our Monday survey was
$1.83.
Senator Boxer. I just wanted to point out that the AAA said
it is $2.03. So I don't know.
Mr. Cook. Well, you showed a sign of a Shell price of $2.02
in San Francisco and our survey is consistent with that. It
does show San Francisco----
Senator Boxer. I am not talking about San Francisco. I
represent the whole State.
Mr. Cook. I know.
Senator Boxer. I am just suggesting to you that AAA has a
different price, average price. I would like us to get together
and figure out exactly why there is this difference.
Mr. Cook. Well, we may be comparing apples and oranges. I
am not sure, because I have not seen that survey. But usually
our surveys are within a penny or two of theirs.
Senator Boxer. Yes, that is why--well, we will get that to
you, because my understanding is--I showed you one gas station
that is higher than lots of others for the regular gas. But I
wanted to show it to you, because if you are more than a penny
or two off, then I think that is a problem.
Mr. Cook. Right. I think that survey--they tend to do city
pricing, so maybe the survey that you are thinking of was for
San Francisco at over $2, and we show that in our survey also.
Senator Boxer. Laurie Saroff, what did you tell me that the
AAA said was the average price of gasoline?
Ms. Saroff. $2.03.
Senator Boxer. For gasoline across the whole State?
Ms. Saroff. San Francisco.
Senator Boxer. You are right. She said San Francisco.
I mean the whole State. What do they show for the whole
State?
Ms. Saroff. I do not have that.
Senator Boxer. Let us get that number.
Then you are right. I stand corrected.
I would like to say that two Commissioners, FTC
Commissioners, did believe that the shipping of the Alaska oil
to Asia had a direct impact on California prices. I do not know
whether or not you saw--and one of them happened to be Chairman
Pitofsky. They tried to make it a part of that last merger, BP
merger, a condition in the merger that they will not be able to
export it. He lost on the vote. I believe it was a 3-2 vote.
So did you not have access to that information that he had
access to? This gentleman, I am not sure your name, sir.
Mr. Rusco. Thank you, Senator. No, we did not have access
to any FTC documents related to the merger, and our report came
out about the time that the merger was getting underway as well
as the investigation.
Senator Boxer. I disagree with Senator Wyden. I just do not
think that there is a question there, because you have to
realize we are not talking about the whole country. We get our
oil essentially from Alaska and California and the rest of it
is elsewhere. We get a third from Alaska, a third of our oil.
So if they short us, if a third of our supply that we count on
is somehow shorted--and I do not know about Oregon. I do not
know what the sources of your oil. But you probably depend,
maybe even more, on Alaska.
It just does not add up that you could possibly say that
there is no proof that it had any impact. So I would like you
to go back and, since you did not have the benefit of the FTC's
information, I would like you to take a look at that because I
think it is pretty relevant.
Mr. Rusco. May I respond? The work that we did was based on
a statistical model of prices. The increase in crude oil prices
that we found was precisely the same model that we employed for
product prices. So we looked for an effect in the prices
themselves. The documents I think that you are referring to
would not have changed the statistical results of the model.
Senator Boxer. Let me just talk common sense. You get a
third of your supply from a place that now decides to export
it. That is a problem. If you are counting on a certain supply
and it is shorted and then the market is shorted, if we are a
capitalistic society, which we are, why would it not have an
impact if less supply is going there?
Mr. Rusco. Yes, Senator, it does have an impact on the
price of crude oil. The question is whether that price is then
passed on to consumer products. That I think is where the
disconnect is. What many analysts said going into the lifting
of the export ban was that prior to the lifting of the export
ban, refiners were earning high margins as a result of getting
what they said were artificially low Alaskan North Slope oil
prices prior to the lifting of the ban.
After the ban was lifted, the price of Alaska oil rose in
the West Coast to closer to world levels and the refining
margins shrank, but that was not passed on to consumers, just
as the low oil prices prior to the ban being lifted were not
passed on to consumers in the form of low consumer prices for
all those years prior to the ban being lifted.
Senator Boxer. Yes, we know that. I do not know. I have a
problem with the logic of it all. I was an economics major, but
that was a long time ago. It seemed to me you have a cost; the
bottom line price is going to be reflective of that. As I say,
two of the FTC Commissioners did not agree.
Well, we are going to have this debate about this export
question, but it seems to me just common sense, but maybe
common sense does not apply in this case, which would not be
the first time. But thank you very much.
Senator Smith. Gentlemen, thank you for your testimony, and
Frank as well. We did not announce you, but we are glad you are
here. Thank you for your contribution.
We will now call on our third panel. We invite Professor
Preston McAfee, Visiting Professor of Economics and Strategy of
the University of Chicago; Professor Carl Shapiro, Transamerica
Professor of Business Strategy at the Haas School of Business,
University of California at Berkeley; Mr. Robert Malone, the
Regional President, Western United States, of BP; Mr. Chuck
Mau, Oregon gasoline dealer from Portland, Oregon.
Senator Stevens has asked that we proceed in the order that
they were announced, because he is hoping to return and ask
some questions as well. So, Professor McAfee, we thank you for
being here and the microphone is yours.
STATEMENT OF R. PRESTON McAFEE, VISITING PROFESSOR OF ECONOMICS
AND STRATEGY, UNIVERSITY OF CHICAGO
Dr. McAfee. Mr. Chairman and Members of the Subcommittee:
My name is Preston McAfee. I am a Professor at the University
of Texas and I am currently visiting the University of Chicago.
I assisted the Federal Trade Commission in its analysis of the
Exxon-Mobil mergers and the BP-ARCO merger, and I am pleased to
have the opportunity to address this Subcommittee and have
provided a report which makes the following points.
First, the West Coast gasoline market is integrated. Supply
and demand events in California, Oregon, or Washington affect
all three States. Generally, Nevada and Arizona are part of
this market area as well.
West Coast gasoline refining is concentrated in the hands
of a relatively small number of firms and the fact that the
same firms control terminaling, refining, and retail
exacerbates antitrust issues. So that is to say it does not
necessarily imply uncompetitive behavior, but it would raise
flags in the event for merger analysis.
Third, inelastic demand for gasoline implies that modest
supply disruptions have very large impacts on prices. Inelastic
demand also exacerbates antitrust concerns.
The divestitures that were obtained in the Exxon-Mobil
merger ensured that the competition by refineries and retailers
was maintained. So that is, the level of competition that
existed prior to the merger persisted after the merger.
Absent the divestitures in the BP-ARCO merger, there would
have been a reduction in competition for bidding, exploration,
and development of oil resources in Alaska. However, the
divestitures of ARCO's Alaskan assets to Phillips has preserved
competition for the oil bidding, exploration and development
and ensured an increased flow of oil.
BP in the past has exercised some monopoly power in the
sale of oil to refineries, and that is evidenced by price
discrimination. Price discrimination is very common. In fact,
whenever you see a store advertise ``Buy one, get a second at
half price,'' that is the same phenomenon. That is price
discrimination. It is very common.
BP's attempts to increase West Coast oil prices had a very,
very small impact on West Coast gasoline prices, and the
manipulation of oil prices certainly does not account for the
extent to which West Coast residents pay higher prices for
gasoline than are paid in other parts of the country.
The divestiture of ARCO's Alaska assets has eliminated BP's
profits from increasing West Coast oil prices. So now as a
major buyer of oil on the West Coast their incentive to
increase prices has vanished.
Let me also say that to my knowledge--and I have read a
very large number of BP documents--to my knowledge, BP has
never engaged in rigging prices. Now, I understand ``rigging''
to imply collusion. I have tried to find out where this got
into the newspaper record and as far as I can tell it was a
reporter paraphrasing the term ``manipulation.'' Manipulation
can be done by a single firm. ``Rigging'' as I understand it,
implies two firms or more, and I know of no event, no instance
of BP rigging prices on the West Coast. I have not seen Senator
Wyden's new documents concerning ARCO.
Let me finally say that the major factors that have
increased the West Coast prices include the increased world oil
prices that have increased the price for gasoline all Americans
pay, increased West Coast demand, the CARB requirements over
the last decade have decreased West Coast supply, there have
been no new refineries and limited expansion of refineries and,
in fact, mothballing of some. Also, the West Coast market is
isolated, say, from the Gulf Coast and that increases its
sensitivity to refinery outages.
Thank you.
[The prepared statement of Professor McAfee follows:]
Prepared Statement of R. Preston McAfee, Visiting Professor of
Economics and Strategy, University of Chicago
Mr. Chairman and members of the Committee, my name is R. Preston
McAfee. I am Murray S. Johnson Professor of Economics and former Chair
of the Department of Economics at the University of Texas at Austin,
and Visiting Professor of Strategy at the University of Chicago
Graduate School of Business.\1\ In 1999 and 2000, I was retained by the
Federal Trade Commission (``FTC'') to provide expert economic analysis
and potential testimony in connection with the FTC's investigations of
the mergers of Exxon Corporation (Exxon) and Mobil Corporation (Mobil)
and of British Petroleum PLC (BP) and the Atlantic Richfield Company
(ARCO). In addition, I provided assistance to the FTC in its
investigation of last summer's price increase in the Midwest. I am
pleased to be here today to discuss the economic issues that I
researched, as they pertain to your examination of West Coast gasoline
prices in general and Oregon in particular.\2\
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\1\ I attach a copy of my curriculum vita for the Committee's
reference. (Maintained in the Committee's files.)
\2\ I have not made any study of gasoline prices in Oregon beyond
what I have done in preparing for this testimony and my knowledge of
the subject is necessarily limited.
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As part of my studies of the two mergers, I had access to and
studied a substantial amount of information, including the documents
that the FTC had gathered in the course of its investigations. I am
advised that much of this information was provided to the FTC under
statutory authority that generally requires the FTC to keep the
information submitted to it confidential,\3\ and, except to the extent
that information has independently been made public, I am not at
liberty to disclose today information submitted to the FTC pursuant to
confidentiality restrictions.
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\3\ I was authorized to receive FTC confidential information as a
consultant to the FTC, and I gave the FTC written assurances that I
would not disclose confidential information that I received from the
FTC.
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However, as the Committee is aware, the U.S. District Court for the
Northern District of California has ordered the release of some of the
documents filed under seal in FTC v. BP Amoco, and I understand that I
am at liberty to discuss those documents. In addition, some of the
information I examined as part of my analysis was obtained from public
sources.
exxon mobil
One of the major focuses of my Exxon Mobil investigation was the
West Coast refining and retailing markets, where Exxon and Mobil had
been the fifth and sixth largest firms. Six firms, including Chevron,
ARCO, Equilon, and Tosco refined over 90 percent of all California Air
Resources Board (CARB) gasoline. There has not been a new refinery
built on the West Coast, or anywhere else in the United States for that
matter, for decades, and there was no prospect of new entry into the
market in the foreseeable horizon. Older refineries that have been
mothballed, such as the Powerine refinery in Southern California, could
theoretically be returned to the market to produce conventional
gasoline, but they would face extraordinary and probably prohibitive
costs in upgrading to produce a significant quantity of CARB.
Furthermore, it is very expensive to ship refined products to the
West Coast from the nearest major refining center,\4\ the Gulf Coast,
in part because of the Jones Act requirements that such shipments be
made on U.S. built, owned, and crewed vessels, but also because of size
restrictions in the Panama Canal as well as its costs, and the lack of
a gasoline pipeline alternative. Moreover, even provided a company
succeeded in bringing CARB gasoline from the Gulf Coast or the
Caribbean, it is not trivial to get the gasoline to consumers. In
particular, transporting gasoline to consumers requires terminaling
facilities and retailing facilities, which are in large part controlled
by incumbent refiners. Thus, it is unlikely that imports of CARB
gasoline will enhance West Coast supply at current, or even moderately
higher, prices.
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\4\ It is estimated to cost 8 to 12 cents, Oxy Fuel News, September
6, 1999. The Jones Act accounts for about four cents per gallon in
added shipping costs.
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Demand for gasoline is highly inelastic, meaning that small
reductions in supply that are not offset by other increases can lead to
significant price increases. Thus, even quite modest levels of market
power may translate into significant producer margins. Inelastic demand
exacerbates concerns about any enhancement of market power.
For these reasons, it is my opinion that the FTC was right to be
concerned about the increase in market concentration that the Exxon
Mobil merger would have caused on the West Coast. I believe that the
Commission was right to require the divestiture of the Exxon refinery
in Benecia, California as a condition for approval of the merger.
bp-arco
The combination of BP and ARCO would have meant that a single
company would have dominated oil exploration and production in Alaska.
This domination would likely have given the combined company a great
deal of monopsony power in the purchase and development of oil leases
on the North Slope of Alaska. (Monopsony power is power for buyers
corresponding to monopoly power for sellers.) This power covers
negotiations with Federal and State authorities as well as other
producers that depend on BP and ARCO infrastructure.
BP and ARCO were the two largest firms in bidding for exploration
leases in Alaska, in exploring for oil in Alaska, in producing oil in
Alaska, in transporting oil from the North Slope of Alaska to the port
of Valdez via the Trans-Alaska Pipeline, and in shipping Alaskan oil to
refineries on the West Coast. From 1989 to 1999, ARCO and BP were first
and second respectively in dollar value of bids made and bids won for
Northern Lease Area auctions held by Alaska and the Federal Government.
During that 10-year period, the two firms submitted 85 percent of the
winning bids, won 70 percent of all leases sold, drilled 90 percent of
the wells, ran 10 of 11 operatorships, and produced 74 percent of the
crude oil.\5\ BP and ARCO owned 72 percent of the Trans- Alaska
Pipeline and 70 percent of the tankers in the Alaska trade.
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\5\ Exxon, the next largest producer in Alaska, had essentially
dropped out of bidding and exploring. While Exxon had made 276 bids
(winning 123) from 1959 to 1982, it made only 13 bids from 1989 to
1999, winning 2. It appears that Exxon has taken a ``harvest'' strategy
with respect to Alaska.
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Absent the divestiture ordered by the FTC, the merger would have
eliminated the competition BP faced from ARCO to find and produce ANS
crude oil. This reduction in competition would have reduced revenues on
the oil, and might have led to a reduction in exploration and
development in Alaska. Economic theory makes a strong presumption that
a monopsonist would have been likely to eliminate some investments in
oil production that likely would be made in a more competitive
environment.\6\ Primarily for this reason, I believe the FTC was
justified in imposing a requirement that BP divest itself of most or
all of ARCO's Alaskan properties as a precondition for the merger. The
sale of all the stock in the ARCO Alaska company to Phillips Petroleum
gave me great confidence that the merger would not harm competition on
the North Slope.
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\6\ The risk of this happening was much greater at the time the
merger was announced than it would be now, because of the large
increase in world crude oil prices.
---------------------------------------------------------------------------
A second issue that arose in the BP ARCO merger was BP's efforts to
raise price on the West Coast through price discrimination, including
most prominently the sale of some oil in the Far East, but also
differences in prices charged to refiners on the basis of their
willingness to pay.\7\ While this issue has received a great deal of
publicity, and was important to the evaluation of the merger, it was a
very minor factor in determining West Coast gasoline prices: at the
most a penny per gallon and probably less than half that.\8\ FTC
Commissioners Anthony, Swindle, and Leary have also stated that they
believe that half a cent is the upper bound.\9\ The desire of BP to
export even with net earnings on exports (the ``netback'') lower than
those prevailing on sales to the West Coast was important for the
analysis of the proposed merger, even if it ultimately had little to do
with West Coast gasoline prices. BP's price discrimination demonstrates
that BP's marginal value of ANS was lower than ARCO's, because ARCO's
marginal value was typically determined by transactions at or near the
spot price. Thus, the merged entity could inherit BP's lower value for
oil, which would lead to reduced efforts to explore and develop ANS.
BP's perception that it faced a downward sloping demand exacerbates
concerns about the increased concentration in Alaska.
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\7\ BP described the means by which it sets the prices as follows:
``By building computer models of each major WC refinery and our
knowledge of product and import crude prices, we can approximate the
required ANS price to displace the foreign imports for each refinery.
Integrating the individual refinery models together along with
transportation costs into a single ANS model, allows determination of
the optimum ANS price and geographic disposition that maximizes BP's
overall ANS revenues. As exports are allowed, Far East sales will
replace Gulf Coast, Virgin Island and Mid-continent placements. The
model will be modified to take into account the Far East refineries.''
[PX 425, BPA-ORG 003830]
\8\ This estimate comes from BP's optimizer model, which was used
by its traders as a tool for making export decisions. This model
indicated in some months that for every 10 thousand barrels per day the
company exported, it would be able to raise the price of Alaska North
Slope crude oil (ANS) by perhaps a tenth of a cent per gallon, or 4
cents per barrel. Because sales to Asia would raise the spot price on
the West Coast, and therefore BP's price to all consumers who had
contracts tied to that spot price, BP was willing to export oil to Asia
even when the profit margins on such sales were smaller than what could
have been earned on the West Coast. While BP's exports are not a matter
of public record, total exports from the region have averaged 50 to 60
thousand barrels per day since 1996 and 74 mbd in 1999. Therefore a
rough estimate would be that BP's exports raised the price of ANS by
about half a cent per gallon at the refinery level. Prior to 1996 there
was a ban on exports abroad, although oil was shipped to the Gulf. Not
all of BP's exports were at net prices below what could have been
earned on the West Coast. At times when West Coast supply was high
relative to demand, for example when a refinery was shut down, there
were no buyers in California willing to pay as much as the export price
(less a transport discount). Public data source: Petroleum Supply
Annual, Table 13; Petroleum Supply Monthly, Table 25.
\9\ ``Statement of Commissioners Anthony, Swindle, and Leary in BP
Amoco/ARCO, File No. 991-0192, Docket No. C-3938'', footnote 3: ``We
have reason to believe that the upward price effects of these sporadic
sales amounted to no more than one-half cent per gallon at the pump.''
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ANS represents less than half of all the crude used in West Coast
refineries, so a reasonable estimate is that the typical refinery might
have experienced one quarter of a cent price per gallon increase
because of the exports. Some of that price increase may have been
absorbed by firms rather than passed on to consumers, so the impact of
the exports on consumer prices was probably even lower.\10\ I do not
know if BP was able to earn the margins suggested in their theoretical
Optimizer model.
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\10\ GAO, ``Alaska North Slope Oil: Limited Effects of Lifting
Export Ban on Oil and Shipping Industries and Consumers,'' Report No.
RCED-99-191 (July 1999). The GAO report states: ``Despite higher crude
costs for some refiners, no observed increases occurred in West Coast
consumer prices as a result of lifting the export ban.'' Id. at 8.
However, this issue is complicated by the fact that increased ANS
prices might increase prices of California crudes.
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That the maximum amount that BP could leverage prices in the US
West Coast is small is also guaranteed from the existence of
substitutes. There are good substitutes for ANS available, although at
somewhat higher transportation and logistics costs. These substitutes
insure that the maximum possible price variations that could be
sustained are modest. In addition, BP's ability to export is
constrained by the availability of shipping. Few ships meet Valdez
requirements and existing ships are being retired. It is implausible
that new ships would be built for the purpose of exports, and thus BP's
ability to restrict sales to the West Coast was diminishing even absent
the merger. Exports to the Far East essentially ended in May, 2000.
Exports serve a potentially useful role in promoting exploration. A
very large discovery or a sequence of medium discoveries in Alaska
could produce more than the West Coast can absorb at world prices; in
this happy circumstance basic economic theory suggests that our Nation
is better off selling oil at high prices rather than consuming at
artificially low prices. BP's modest attempt at increasing West Coast
oil prices in the recent past does not economically justify a return to
the export ban. The Nation prospers by exporting resources and other
goods and services for high market prices, not consuming internally at
lower prices, and the primary effect of the export ban was to reduce
the value of Alaskan exploration and production, by reducing the
options available to explorers.
BP also discriminated among targeted West Coast refineries,
charging what BP estimated the refinery was willing to pay. This
discrimination presumably was done to raise BP's profits, but it is
unclear whether the effect on consumer prices was to increase them or
lower them.\11\ In any event the overall effect on gasoline prices of
BP's discrimination was probably very small, and might have even
contributed to lowering the prices.\12\ It would be important for the
refineries themselves, of course.
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\11\ Price discrimination can either increase or decrease total
output--that is, the effect of price discrimination to the West Coast
may have been to increase the total sales of oil, which would have
reduced gasoline prices overall. BP had an incentive to keep
inefficient refineries in business as consumers of oil, and thus may
have offered lower prices to refineries that would otherwise shut down.
However, BP's pricing could discourage refinery investment. The main
importance of price discrimination for the merger is its evidence of
market power, and thus an increased concern in bidding, exploration and
production, rather than its direct impact on gasoline consumers.
\12\ Price discrimination involves reducing prices to some
refineries while increasing prices to others, so the average price
increase even at the refinery level would be much less than the
difference between the average and lowest prices charged.
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The divestiture of ARCO's Alaska assets to Phillips has preserved
existing competition in Alaska--Phillips should become a strong
competitor to BP in the same way that ARCO was. Moreover, the incentive
of BP to export in order to increase West Coast prices is mitigated or
eliminated by the terms of the merger. The acquisition of ARCO's West
Coast refining assets substantially reduces the value of increased West
Coast oil prices to the combined entity. Overall, the divestitures
required by the FTC have definitely preserved and likely enhanced
competition to supply Alaskan oil to the West Coast.
other factors influencing current west coast prices
If not exports, then, what does account for the higher prices in
places like California and Oregon? As noted above, exports account for
only a small portion of the higher West Coast prices. I claim no
special expertise relative to many other economists in answering this
question: I have not performed the sort of detailed analysis required
for the Exxon-Mobil and BP-ARCO mergers. However, there are a number of
causes, besides OPEC, that are uncontroversial among economists. The
California Energy Commission breaks down prices every week. For the 52
weeks ended April 16, 2001 the prices for branded gasoline broke down
in the following way: \13\
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\13\ See California Energy Commission, ``Estimated 2000 Gasoline
Price Breakdown and Margin Details'' and ``Estimated 2001 Gasoline
Price Breakdown and Margin Details'', available at www.energy.ca.gov.
Dealer Cost and Profit Margin includes all costs associated with the
distribution and retailing of motor fuel, including but not limited to:
franchise fees, and/or rents, wages, utilities, supplies, equipment
maintenance, environmental fees, licenses, permitting fees, credit card
fees, insurance, depreciation, advertising and profit. Dealer Margin
normally lags changes in the wholesale price of gasoline. Refinery Cost
and Profit Margin must cover all costs associated with production,
distribution, and acquisition of gasoline. The Refinery Margin covers
all costs associated with refining and terminal operation, crude oil
processing, oxygenate additives, product shipment and storage, oil
spill fees, depreciation, brand advertising, purchases of gasoline to
cover refinery shortages and profits. The CEC acknowledges that the
refiner margin estimates may not equal actual margins.
---------------------------------------------------------------------------
Gasoline Cost Breakdown
Dealer Cost and Profit Margin: $.07
Crude Oil Cost: .66
Other Refining Costs and Profit Margin: .48
State and Local Taxes: \14\ .31
---------------------------------------------------------------------------
\14\ State excise taxes in Oregon are 24 cents, to which must be
added 1.5 to 3 cents per gallon for local taxes (3 cents in Portland).
Steve Sou, ``Taxes help State prices float near top of nation'', The
Oregonian, February 24, 1999.
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Federal Taxes: .24
Total Retail Price: $1.76
Increases in crude oil costs, which averaged about 30 cents a
gallon in 1998 when crude prices were $12-13 per barrel, is the single
largest contributor to the recent price increases. I will focus my
comments on the Refiner Cost and Profit margin, which usually though
not always is higher on the West Coast than it is elsewhere in the
country.\15\
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\15\ In Oregon, for example, refiner sales of conventional gasoline
for resale were at prices that were about 9 cents above the national
average in December 2000 and 4 cents below the national average in
January 2001, the last 2 months for which data is available. (Petroleum
Marketing Monthly, April 2001, table 35.)
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First, CARB gasoline costs refiners an additional 3-4 cents per
gallon in marginal production costs to manufacture, after producers
have incurred the fixed expense of upgrading their refineries to make
them capable of producing reformulated gasoline.\16\
---------------------------------------------------------------------------
\16\ A 1999 Energy Information Administration (EIA) report on Phase
II reformulated gasoline (RFG) regulations estimated that the Phase II
RFG standard would increase costs by approximately 3.5 to 4 cents per
gallon over the cost of conventional gasoline. (California's CARB
standard is even more stringent than Phase II RFG.) Although that
report did not directly estimate the cost of the CARB standard, the EIA
observed that the actual wholesale price difference between CARB and
conventional gasoline was 4.2 cents per gallon between January 1997 and
December 1998. See Tancred Lidderdale and Aileen Bohn, EIA, ``Demand
and Price Outlook for Phase 2 Reformulated Gasoline, 2000'' (Aug.
6,1999), www.eia.doe.gov/emeu/steo/pub/special/rfg4.html
---------------------------------------------------------------------------
Second, in addition to the higher marginal costs West Coast
refiners incurred around $3 billion in fixed costs to be able to
produce CARB. These expenses would not be incurred unless higher retail
prices justify the expenditures, and consequently we should expect
these costs to be reflected in the average price of CARB gasoline. The
cost of upgrading was enough to cause some smaller refiners to shut
down, thereby reducing California refining capacity.\17\ Furthermore,
because CARB gasoline gets 1 to 3 percent less miles per gallon than
conventional gasoline, the switch to CARB likely caused California
consumers to demand more gasoline just to go the same distance.\18\ The
combination of higher demand and lower supply would be expected to lead
to higher prices as a matter of basic economics. These higher prices in
part compensate the suppliers for large expenditures in refinery
upgrades.
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\17\ During the 1990s, four smaller refineries in California shut
down: Golden West and Fletcher in 1992 and Pacific Refining and
Powerine in 1995. In addition, Paramount Refining continues to produce
conventional gasoline, but has not upgraded to produce CARB. See
Leffler, Keith and Barry Pulliam. ``Preliminary Report to the Attorney
General Regarding California Gasoline Prices,'' November 22, 1999, p.8.
\18\ See California Air Resources Board press release, ``Fuel-
Economy Reduction From Cleaner-Burning Gas Within Expected Range,
According To Statistics'', October 10, 1996.
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As there are no refineries in Oregon, Oregonians must compete for
the gasoline from the same refineries that supply California and
Washington. That is why a shortage of CARB gasoline that leads to a
price increase in California should lead to a similar price increase in
Oregon, even though Oregonians usually consume conventional
gasoline.\19\ The wholesale price of conventional gasoline in Oregon,
which was, on average, about eight cents higher than in the rest of the
country \20\ in 2000, reflects the shortage of refining capacity on the
West Coast.
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\19\ During the summer months, the Portland area uses an
oxygenated, low-Reid Vapor Pressure (RVP) gasoline, which contains some
of the same blending components employed in the production of
California's CARB gasoline. This low-RVP product is not as expensive as
CARB but costs more than conventional gasoline. The Klamath Falls area
also requires a low-RVP gasoline in the summer, which would be less
expensive than Portland gasoline but more expensive than the
conventional gasoline used elsewhere.
\20\ See Energy Information Administration, Petroleum Marketing
Monthly, Table 31, various issues. The retail price includes full
service in Oregon, but in the rest of the country, only about 10
percent of customers opt for full service. In January 2001, the latest
month available, the rack price in Oregon was 5.5 cents below the
national average. The rack price is a wholesale price at the terminal.
---------------------------------------------------------------------------
The most significant gasoline problem facing the West Coast is the
lack of new refineries. The West Coast market, which largely operates
separately from the rest of the country in terms of gasoline
production, has a relatively small number of large firms. The fact that
the industry is so stable, with no entry and the small number of firms,
creates an oligopoly rather than a perfectly competitive market. This
oligopoly is reinforced by concentration by the same firms at the
terminaling and retail stages of production. Concentration of
production facilities was a key reason for requiring a divestiture of a
refinery in the Exxon and Mobil mergers.\21\ Oligopolies may charge
prices above competitive levels without explicitly coordinating or
colluding, by following their individual interests.\22\
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\21\ Since 1990 California refining capacity has fallen by about 9
percent while capacity in the rest of the country has risen by about 11
percent. See Petroleum Supply Annual, Table 38.
\22\ While antitrust authorities can prevent further consolidation
of the West Coast refineries, they are not in a position to encourage
or promote new entry of refineries.
---------------------------------------------------------------------------
Fourth, it is expensive to ship refined products to the West Coast.
While there are serious logistical problems associated with bringing
gasoline to the West Coast, the threat of imports exerts some pressure
on West Coast gasoline prices. These costs are increased by the Jones
Act, which increases transportation costs by around four cents per
gallon.
The tight supply situation on the West Coast, combined with the
expense of shipping into the region, means that supply disruptions are
likely to lead to price increases. A fifth major factor in the high
prices that Oregonians paid in 2000 was the rupture of the Olympic
pipeline, which is normally the main source of gasoline in Oregon.\23\
The pipeline ruptured in Bellingham, Washington, on June 10, 1999, and
remained closed for shipments from BP's Cherry Point refinery and
Tosco's Ferndale refinery throughout the remainder of 1999 and all of
2000. Gasoline shipments did not resume until February 3, 2001, and
operations on the Olympic system will be limited to 80 percent of
capacity until sometime in 2002.\24\ Inelastic demand insures that
modest supply disruptions have a significant impact on prices.
---------------------------------------------------------------------------
\23\ The Olympic Pipeline is a 400-mile system running from
Ferndale, Washington to Portland, Oregon, that connects the four main
Puget Sound refineries.
\24\ Overall shipments on the Olympic Pipeline in 1999 were 25
percent below 1998 levels, while overall shipments in 2000 were more
than 45 percent below 1998. As for gasoline and jet fuel, 1999
shipments were 27 percent below 1998 levels, while shipments in 2000
were 26 percent below the levels of 1998. Olympic Pipeline Company,
FERC Form 6, 1998-2000.
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The pipeline shutdown required the four main Puget Sound refineries
to ship gasoline to Oregon via barge, which increased costs by about 2
cents per gallon \25\ or more. In addition to refinery production
problems, at least one refinery, the ARCO (now BP) refinery at Cherry
Point, Washington, was forced to reduce production as a result of
logistical constraints that arose out of the Olympic Pipeline
break.\26\ Oregon is one of only two states (with New Jersey) to ban
self-service gasoline sales. Nationally, about 90 percent of all
consumers choose self-serve. The Oregon law means that consumers are
forced to buy gasoline bundled with some services that are costly to
produce. One estimate by an FTC economist implies that the self-serve
ban adds about 3.5 cents to average prices in Oregon.\27\ This
calculation is consistent with Oregon's higher than average retailing
costs and margins as reported by the Energy Information
Administration.\28\
---------------------------------------------------------------------------
\25\ Kim Christensen and James Long, ``Lack of competition holds
Oregon hostage at the pump,'' The Oregonian (Aug. 29, 1999),
www.oregonlive.com / news / 99 / 08 / st082901.html (quoting an
employee of a barge company to the effect that shipping by barge should
cost around 2 cents per gallon more than shipping via pipeline).
\26\ Atlantic Richfield Company S.E.C. report 10k for 1999, pp. 9-
10.
\27\ Michael G. Vita, ``Regulatory Restrictions on Vertical
Integration and Control: The Competitive Impact of Gasoline Divorcement
Policies,'' 18:3 J. Regulatory Econ. 217 (2000). In areas that permit
self-service stations, sales through full-service pumps represent only
about 10 percent of all gasoline sales.
\28\ See for example, the EIA's Petroleum Marketing Monthly for
April 2001, Table 31. The difference between the pre-tax prices for
``sales to end users'' and ``sales for resale'' are typically several
cents per gallon higher in Oregon than they are in the U.S. as a whole.
---------------------------------------------------------------------------
Many of these factors that lead to higher prices reflect the
public policy choices of government officials whose concerns are not
limited to the price of gasoline, but include clean air, land use, and
other factors. It should not be surprising that cleaner-burning, lower
pollution gasoline, regulations on refineries, zoning rules limiting
entry, and laws designed to protect maritime and gasoline station jobs
will lead to higher consumer prices. I have not performed any analysis
of the benefits of these governmental policies, nor their overall
costs.
conclusion
The main points I would make before this committee are:
The West Coast gasoline market is integrated: supply and
demand events in California, Oregon and Washington affect all three
states.
West Coast gasoline refining is concentrated in the hands
of a small number of firms.
Inelastic demand for gasoline implies that modest supply
disruptions have significant impacts on prices.
The divestitures obtained in the Exxon-Mobil merger
insured that competition by refineries and retailers was maintained.
The merger of BP and ARCO, absent the divestiture, would
have reduced competition for bidding, exploration and development of
oil resources in Alaska.
The divestiture of ARCO's Alaskan assets to Phillips
preserves competition for oil bidding, exploration and development in
Alaska.
BP exercised monopoly power in the sale of oil to
refineries, evidenced by price discrimination, which requires monopoly
power.
BP's attempts to increase West Coast oil prices had a very
small impact of West Coast gasoline prices, and manipulation of oil
prices does not account for the extent to which West Coast prices are
higher than in other parts of the country.
The divestiture of ARCO's Alaska assets reduces or
eliminates BP's potential profits from increasing West Coast oil
prices. Thus, it is unlikely that BP-ARCO will attempt to increase West
Coast prices by exporting.
Major factors that have recently increased Oregon prices
include:
Increased world oil prices.
Growing West Coast demand.
Reduced West Coast supply due to CARB requirements.
The absence of new refineries \29\
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\29\ The proposed ban on MTBE as an oxygenate additive in gasoline
will likely exacerbate the already tight supply situation. This ban
will effectively reduce the capacity of refineries producing CARB by as
much as 11 percent, making it more likely that in the future the
marginal source of supply for gasoline in California will be the Gulf
Coast, for all or at least most of the year, unless substantial
refining capacity is added.
---------------------------------------------------------------------------
The isolation of the West Coast market.
Senator Smith. Let us go on to the next panel. I will come
back to you, professor, for questions.
Professor Shapiro.
STATEMENT OF CARL SHAPIRO, TRANSAMERICA PROFESSOR OF BUSINESS
STRATEGY, HAAS SCHOOL OF BUSINESS,
UNIVERSITY OF CALIFORNIA AT BERKELEY
Dr. Shapiro. Thank you very much, Mr. Chairman. I am Carl
Shapiro. I am a Professor at the University of California at
Berkeley. I do a lot of work in the antitrust area and I worked
with BP and ARCO studying the effects of their transactions for
their FTC investigation and the subsequent litigation. I am now
appearing on my own behalf, however, and I believe I am
probably the person in the room who has most recently suffered
the high prices, at least in California, since I filled up my
car on the way to the airport yesterday before I came here.
I actually am a big believer in antitrust enforcement and
have served previously in the Justice Department as their Chief
Economist in the Antitrust Division.
I would like to make two main points and then I will
articulate them. First, I believe that the higher West Coast
gasoline prices are fundamentally not based on what is going on
at the level of crude oil. We are all throughout the country
paying basically worldwide crude oil prices. That does not
explain the problems with the high prices on gasoline on the
West Coast. The same is true; the Alaskan exports when they
were taking place were not the cause of the price premium on
the West Coast.
The second point is what is the cause and I think there is
really a chorus, a consensus on this, and I would particularly
agree with Chairman Pitofsky that fundamentally it is a problem
of limited refinery capacity on the West Coast which reflects
somewhat higher refinery costs that is the root of the problem.
As far as the crude oil, let me talk about crude and then
the products. I provided a series of exhibits with my prepared
testimony that demonstrate how the Alaskan crude oil prices
move very, very closely over time with a number of other crude
oil prices throughout the world and the increasing importance
of imported crude oil on the West Coast. This is a classic
economic situation where the prices for this commodity, crude
oil, are governed by worldwide conditions.
In fact, one of the clearest things from the study I did in
the merger context between BP and ARCO was that the prices that
BP could get for its crude oil were based on competition with
imported crude oils.
So yes, I suppose there is collusion going on, but it is
OPEC and that is at the crude oil level the fundamental factor.
Now, I understand, of course, both of you Senators from Oregon
in particular are very concerned about the issues about BP's
conduct and pricing in exports. That is very clear to me. I
have looked at this very closely. It is my belief that the
price that BP received for selling its Alaskan oil on the West
Coast was at what can reasonably and I think accurately be
called a competitive level, not a monopoly level.
I think there is agreement here among economists that the
competitive level is the level that would give the same return
on the West Coast versus an export opportunity. On average--not
every single transaction, but on average--that is what BP was
able to get for its oil on the West Coast. There has certainly
been a focus on certain transactions where it was out of
balance, as you put it, and I recognize that and the documents
indicate that. But on average, the prices were at this
competitive level, and I think that is, I think, a key point
here.
Also I would say the notion that if there had been, at a
time when BP was exporting 50- or 60,000 barrels a day to the
Far East, if those barrels had appeared on the West Coast
instead, that it would have really made a significant
difference for West Coast prices I just do not think is
correct. We can go back a few years and the shipments to the
West Coast of Alaskan oil were considerably higher--several
hundred-thousand barrels a day higher--and the Alaskan prices
were no lower. So we do not need to theorize or speculate about
that. The West Coast did absorb considerably higher volumes of
Alaskan crude oil in the years past when the production was
higher, without any reduction in price. This is again perfectly
consistent with the worldwide market in which they are trading.
I also want to say I think there is a considerable degree
of agreement, even if you accept some of the short-run trading
documents and the calculations you have asked about what is the
effect, is it 1 cent a gallon, 3 cents a gallon, this question
about pass-through. I have done also a statistical analysis. I
know that you questioned the GAO results, but it is a question
of pass-through and there is no evidence of any significant
pass-through that we can detect of Alaskan prices to West Coast
gasoline prices. So GAO has looked at that, just testified
about that. I have done the same.
But even if you believe there was some pass-through and
recognizing how much of the Alaskan crude oil actually gets
purchased at these prices that you are concerned about, my
calculations I put in my prepared statement, if you would take
that approach you are talking about something like one-tenth-
of-a-cent a gallon. Professor McAfee has indicated something
less than one-quarter-of-a-cent a gallon.
We can quibble about that, but I think it is sort of
ancient history in the sense it does not really matter in
today's market and that it is just not going to solve the
problem that we have on the West Coast. That really goes, to
return to what are the problems, it would be the refinery
capacity. I think we have heard pretty clearly, and I have seen
statistics to this, that the refineries are running flat out.
So they are producing what they can.
It is not a problem of crude oil supplies. We need more
gasoline on the West Coast to drive the prices down. We need to
think about how long it takes to build a facility, the
permitting. The environmental restrictions obviously have to be
respected, but is there a way to get more capacity.
The alternative would be to import more gasoline from other
parts of the country, which is pretty expensive. So it is a
supply problem that needs to be addressed.
[The prepared statement of Professor Shapiro follows:]
Prepared Statement of Carl Shapiro, Transamerica Professor of Business
Strategy, Haas School of Business, University of California at Berkeley
1. introduction and summary
I am Carl Shapiro, Transamerica Professor of Business Strategy at
the Haas School of Business, and Director of the Institute of Business
and Economic Research, both at the University of California at
Berkeley. I regularly conduct research and provide economic advice in
the area of antitrust economics and business strategy. I served as
Deputy Assistant Attorney General for Economics in the Antitrust
Division of the Department of Justice from 1995 to 1996, and have
recently testified as an expert witness on behalf of the Department of
Justice and the Federal Trade Commission in antitrust cases. My
curriculum vitae is available on my web site at U.C. Berkeley,
www.haas.berkeley.edu/shapiro. I thank the Committee for inviting me to
offer an economic analysis of West Coast crude oil and gasoline prices
here today.
Two years ago, when BP Amoco (``BP'') and ARCO announced their
plans to merge, I was retained by BP and ARCO to conduct an economic
analysis of the antitrust issues associated with their merger. During
the subsequent year, I closely studied West Coast crude oil and
refined-product markets, focusing on the supply of Alaskan North Slope
(``ANS'') crude oil and the role of ANS crude oil in West Coast crude
oil and refined-product markets. My analysis included an examination of
competition and pricing in these markets, BP's strategy regarding the
sale and disposition of its ANS crude oil, and the impact of ANS crude
oil supply and exports on West Coast prices. I am now appearing before
the Committee on my own behalf as an antitrust economist and California
citizen, not on behalf of BP.
I offer the following observations to the Committee:
West Coast Crude Oil Prices
The price paid by West Coast refineries for crude oil,
including Alaskan North Slope crude oil, is governed by conditions in
the worldwide crude oil market.
Over the 1995 to 2000 time period, BP was a major supplier
of ANS crude oil to West Coast refineries. During that time, the price
BP received for its ANS crude oil was at a competitive level, not a
level reflecting monopoly power. BP's exports did not have a material
effect on the price of ANS crude oil, much less the price of gasoline.
BP's historical trading strategies as a net seller of ANS
crude oil are no longer relevant in today's markets. Today, BP is a net
buyer of ANS crude oil to serve its refineries at Los Angeles and Puget
Sound.
West Coast Gasoline Prices
West Coast gasoline prices move up and down directly with
movements in world crude oil prices. But crude oil prices do not
explain the higher level of gasoline prices that prevails on the West
Coast vs. the rest of the country.
Reimposing the ban on the export of ANS crude oil is not a
solution to the problem of high West Coast gasoline prices. There have
been no exports of ANS crude oil to the Far East since May 2000.
The West Coast gasoline price premium is primarily
explained by (a) the higher costs of refining gasoline to meet
California's more stringent requirements for reformulated gasoline, (b)
the limited amount of refinery capacity on the West Coast, along with
(c) the cost of importing gasoline from refineries in other parts of
the country.
2. alaskan north slope crude oil prices are driven by world crude oil
prices
The West Coast is part of the worldwide crude oil market. Alaskan
North Slope crude oil prices closely track the prices of other grades
of crude oil. As shown in Exhibit 1, ANS crude oil prices move up and
down extremely closely with other prices in the world crude oil market
such as the widely traded benchmark crude oils West Texas Intermediate
(WTI) and Brent. Exhibit 2 measures the correlation between ANS crude
oil prices and the prices of some other benchmark crude oils. The
correlations shown in Exhibit 2 are exceptionally high and indicate
that ANS crude oil trades in a market with these other crude oils.
For the past 5 years, the West Coast has been a net importer of
crude oil. From 1995 to 2000, Alaskan North Slope production declined
by 516 thousands of barrels per day (``MBD''), and shipments of ANS
crude oil to the West Coast declined by 302 MBD.\1\ Since the
production of California crude oil has been approximately constant, at
roughly 800 to 900 MBD, and since total usage of crude oil on the West
Coast also has been approximately constant, at roughly 2500 MBD, the
shortfall created by declining ANS production has necessarily been made
up by imports. Exhibit 3 shows the increasing volume of imports of
crude oil into the West Coast from 1989 through 2000. As shown in
Exhibit 4--a pie chart of crude oil sources in 2000--last year imports
made up 28 percent of the supply of crude oil on the West Coast.
---------------------------------------------------------------------------
\1\ Shipments of ANS crude oil to the West Coast were 1314 MBD in
1995, 1348 MBD in 1996, 1222 MBD in 1997, 1184 MBD in 1998, 1070 MBD in
1999, and 1012 MBD in 2000. Department of Energy, Petroleum Supply
Monthly, DOE/EIA 0109, Table 28, various issues.
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Under these conditions, the price of crude oil on the West Coast,
including ANS crude oil, has been determined by the delivered price of
imported crude oil to the West Coast. The fact that there has been no
increase in the price of ANS relative to the prices of other crude
oils, despite a very large decline of 302 MBD in ANS shipments to the
West Coast, is powerful evidence that ANS crude oil prices on the West
Coast are governed by world crude oil prices, not by the volume of ANS
shipped to the West Coast. This is a classic economic demonstration
that ANS crude oil competes directly with these other crude oils.
Technically, the demand for ANS crude oil exhibits a very high price
elasticity.\2\ These facts are central to any assessment of the impact
of ANS exports.
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\2\ Along with my colleagues John Hayes and Robert Town, I have
performed an econometric analysis to estimate the elasticity of demand
for ANS crude oil on the West Coast. This analysis shows an extremely
high elasticity of demand for ANS crude oil. See John Hayes, Carl
Shapiro, and Robert Town, ``The Extent of the Market: Estimating the
Effects of the BP/ARCO Merger.''
---------------------------------------------------------------------------
By looking at specific West Coast refineries, we can see just how
competition between ANS crude oil with other grades of crude oil plays
out in the marketplace. As ANS supplies and shipments have fallen,
refineries have smoothly substituted imports for ANS crude oil. For
example, market intelligence indicates that Chevron's Richmond and El
Segundo refineries replaced significant volumes of ANS crude oil with
imported crude oils during 1995-2000, and that UDS eliminated ANS at
its Wilmington refinery in favor of imports. Likewise, Valero announced
last November its plans to import crude oil from the Mideast to compete
with Alaskan North Slope crude and drive ANS prices lower.\3\ I say
this substitution has been very ``smooth'' because there has been no
increase in the relative price of ANS crude oil. This tells us that a
number of West Coast refineries were able to switch from ANS to
imported crude oils at minimal expense. In contrast, when a freeze in
Florida reduces the supply of oranges, the price of orange juice rises.
In that case, many orange juice drinkers find it ``costly'' to switch
to other drinks, and will keep drinking orange juice even if orange
juice prices go up.
---------------------------------------------------------------------------
\3\ According to a November 9, 2000 press release, ``Valero plans
to import crude to the US West Coast from the mideast over the next few
months to compete with Alaska North Slope crude and drive ANS prices
lower, a Valero official told analysts Thursday. The refiner will be
bringing in three cargoes of imported crude which will `put pressure on
the ANS price,' improving the economics at the company's Benicia,
California refinery.''
---------------------------------------------------------------------------
3. bp's historical trading strategies for alaskan north slope crude oil
I understand that the Committee is interested in BP's historical
ANS trading strategies, and specifically in understanding the impact of
BP's exports of ANS crude oil on West Coast crude oil and gasoline
prices. I now address those issues.
I believe the starting place for this inquiry is to ask whether BP
received prices for ANS crude oil from West Coast refineries that
exceeded the prices that would prevail in a competitive market. In a
perfectly competitive market, a company selling ANS crude oil would
ship that oil to the location giving the highest price, net of
transportation costs. This net price is known as the ``netback,'' in
this case measured from Valdez, Alaska, where the oil exits the Trans-
Alaska Pipeline and is put onto tankers. The ``competitive price'' for
ANS crude oil on the West Coast is the price that yields equal netbacks
(out of Valdez) to the Far East, which has been the most attractive
alternative destination over the past 5 years.
In fact, the netback that BP received from its sales of ANS to the
West Coast was no higher than the netback it received from its exports
to the Far East.\4\ In other words, BP's prices for Alaskan North Slope
crude oil were at competitive levels. The prices BP actually received
for its ANS crude oil simply do not indicate that BP had monopoly
power.
---------------------------------------------------------------------------
\4\ My calculations show that BP's netback on sales to the West
Coast were approximately equal to BP's netback on sales to the Far East
over the 1997-1999 time period. These calculations include both spot
and term contract sales.
---------------------------------------------------------------------------
Economists generally regard trading and arbitrage activities as an
important part of the operation of competitive markets. When a market
participant sells its output in the geographic location yielding the
highest price, market efficiency is promoted because products flow to
the buyers who value them most highly. This is a general principle in
commodity markets, from crude oil to bulk chemicals to agricultural
markets. In my opinion, BP's trading activities and exports are best
seen in this light, namely as a normal part of the workings of
competitive markets. Exports certainly are a normal part of competitive
commodity markets. Given that BP had sufficient shipping capacity to
send some ANS crude oil to the Far East rather than the West Coast, and
given the willingness of some customers in the Far East to pay enough
to compensate BP for the extra cost of shipping the oil to the Far East
(so that the Far East netback was equal to the West Coast netback), we
should expect to see exports in a competitive market.
I understand that FTC Chairman Robert Pitofsky has suggested that
BP's exports may be indicative of monopoly power, because BP recognized
that selling additional ANS crude oil on the West Coast at certain
times would tend to lower the West Coast spot price of ANS. Of course,
it is common for traders in competitive markets to have small,
transitory effects on prices. In financial markets, for example, the
price of a stock may fall by 1 percent (e.g., 25 cents for a $25 stock)
or more as a result of a single trader unloading his or her position.
In BP's case, since BP sold significant volumes of ANS crude oil under
long-term contracts with prices indexed to the West Coast spot price of
ANS, BP naturally accounted for the fact that temporarily lowering the
ANS spot price by, say 0.5 percent (10 cents per barrel on a $20 barrel
of oil) would lower BP's revenues under its term contracts.\5\
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\5\ Now that ANS term contracts (which Phillips has taken over from
BP) are indexed to crude oil prices other than the ANS spot price, with
these other crude oils being much more thickly traded, neither BP nor
Phillips has the same incentives to refrain from specific ANS spot
market trades that have the effect of temporarily lowering the spot
price of ANS.
---------------------------------------------------------------------------
I believe it is mistaken to characterize this type of short-run
impact on spot prices as monopoly power. As I indicated earlier, BP's
sales of ANS crude oil to West Coast refineries were at competitive
prices, not monopoly prices. Furthermore, we directly observe a
reduction in ANS shipments to the West Coast from 1314 MBD in 1995 to
1070 MBD in 1999. Compare this number to the average level of ANS
exports by BP during 1998 and 1999 of 60 MBD. We can ask how much lower
West Coast ANS prices would have been, had BP exported no ANS crude
oil, so that ANS shipments to the West Coast in 1999 would have been
1130 MBD rather than 1070 MBD. Well, we know that ANS prices were not
lower relative to other crude oil prices even when ANS shipments were
as high as 1314 MBD, as they were back in 1995. The inescapable
conclusion is that 60 MBD more ANS shipments to the West Coast would
not have led to lower ANS prices during the 1998-1999 timeframe. BP's
exports of ANS did not have any measurable impact on the West Coast
price of ANS, much less the price of gasoline.
In any event, for three powerful reasons, BP's historical trading
strategies are not a fruitful place to look to explain why West Coast
gasoline prices are higher than gasoline prices elsewhere in the
country.
First, while the overall level of worldwide crude oil prices
directly affects gasoline prices, no connection has been found between
the level of ANS crude oil prices (moving alone) and West Coast
gasoline prices. The GAO studied this question and was unable to detect
any impact on West Coast gasoline prices even when ANS prices rose by
roughly $1 per barrel. According to the GAO, ``Despite higher crude oil
prices for some refiners, no observed increases occurred in the prices
of gasoline, diesel, and jet fuel.'' \6\ I have conducted my own study
of the relationship between ANS crude oil prices and West Coast
gasoline prices, and I find no statistically significant relationship
between ANS prices (moving alone) and West Coast gasoline prices.
---------------------------------------------------------------------------
\6\ General Accounting Office, ``Alaskan North Slope Oil: Limited
Effects of Lifting Export Ban on Oil and Shipping Industries and
Consumers,'' GAO/RCED-99-191, July 1999, p.6.
---------------------------------------------------------------------------
Second, even those who suggest that BP's exports of ANS crude oil
led to higher prices on the West Coast recognize that any such effects
are small as regards ANS crude oil prices, and smaller still when it
comes to West Coast gasoline prices. The majority of the Federal Trade
Commission indicated at the time of the BP/ARCO merger that ANS exports
at most raised gasoline prices on the West Coast by one-half cent per
gallon. Referring to BP's exports of ANS crude oil, Commissioners
Anthony, Swindle, and Leary said: ``We have reason to believe that the
upward price effects of these sporadic sales amounted to no more than
one-half cent per gallon at the pump.'' \7\ They go on to say: ``We
acknowledge the public concern over the relatively high price of
gasoline on the West Coast, but people will be cruelly disappointed if
they are led to believe that the export restriction would have a
detectable effect on the situation.''
---------------------------------------------------------------------------
\7\ See Statement of Commissioners Anthony, Swindle, and Leary in
BP Amoco/ARCO, April 13, 2000, available at http:2 // www.ftc.gov / os
/ 2000 / 04 / bpstateasl.htm. It is my understanding that the FTC's
economic expert in the BP/ARCO case, Professor Preston McAfee, agrees
that BP's ANS exports had at most a very small effect on West Coast
gasoline prices.
---------------------------------------------------------------------------
In fact, going back to the model from which the FTC majority
calculated the half-cent per gallon of gasoline upper bound , it is
clear that the actual effect estimated using this model would be no
more than one-tenth of a cent per gallon of gasoline. The underlying
model upon which the FTC relied translated 60 MBD of exports to a
temporary increase of about one-half cent per gallon in the price of
ANS crude oil . But higher ANS crude oil prices, moving apart from
other crude oil prices, simply do not translate one-for-one into higher
gasoline prices. In fact, during 1998 and 1999, only around 25 percent
of the crude oil used on the West Coast was sold at prices tied to the
ANS spot price. So, even if refiners fully passed on an increase of
one-half cent per gallon in the price of ANS crude oil, this would only
correspond to an increase in gasoline prices of about one-tenth of a
penny per gallon.\8\ Furthermore, for the reasons I gave above, I
believe it is mistaken to rely on a short-run trading model, rather
than longer-term data on ANS production and shipments, to estimate the
effects of ANS exports on ANS crude oil prices. Looking at longer-term
production and shipment data, 60 MBD of exports in 1998 and 1999 had no
measurable effect on the price of ANS.
---------------------------------------------------------------------------
\8\ Even this number is too high, for two reasons: (1) There is no
allegation that all of BP's exports to the Far East were at netbacks
less than BP could have earned selling those cargoes on the West Coast.
Even Chairman Pitofsky objects to BP's exports only when the Far East
netback is less than the West Coast netback. Therefore, a number
smaller than 60 MBD should be used for these calculations. (2) There is
no reason to expect 100 percent of any increases in refineries' cost of
purchasing ANS crude oil to be passed on to motorists in the form of
higher gasoline prices. Generally, the passthrough rate for higher
input costs depends upon how much marginal costs are affected, and the
ratio of the elasticities of supply and demand.
---------------------------------------------------------------------------
Third, BP's historical trading strategies and exports of ANS are
simply not relevant in today's market. BP produces about 280 to 290 MBD
of ANS and uses about 350 to 400 MBD of ANS crude oil at its two West
Coast refineries at Carson and Cherry Point. So BP is a net buyer of
ANS crude oil of more than 70 MBD. Phillips, which acquired ARCO Alaska
as part of the settlement between BP and the FTC, also inherited term
contracts that BP had signed with Equilon, U.S. Oil, and Tosco. None of
these term contracts are now indexed to ANS spot prices. As a result,
both buyers and sellers in the (very thin) ANS spot market no longer
have incentives to influence the ANS spot price as a result of having
term contracts tied to that price. Finally, there have been no exports
of ANS since May 2000.\9\ Phillips appears to lack sufficient shipping
capacity to export its ANS to the Far East, even when netbacks to the
Far East (calculated based on excess tonnage economics) are higher than
netbacks on the West Coast.
---------------------------------------------------------------------------
\9\ See Department of Energy, Petroleum Supply Monthly, DOE/EIA-
0109, Table 46, various issues.
---------------------------------------------------------------------------
4. explaining the west coast gasoline price premium
The evidence is compelling that the higher West Coast gasoline
prices we are now experiencing, in comparison with the rest of the
country, are not the result of higher West Coast prices for crude oil,
either for imported crude oil or for Alaskan North Slope crude oil. The
West Coast gasoline price premium certainly is not today, and has not
been, the result of ANS exports.\10\ What does explain these prices
differences, and what can be done to reduce gasoline prices on the West
Coast?
---------------------------------------------------------------------------
\10\ As noted above, there have been no exports of ANS for nearly a
year. Re-imposing the ban on ANS exports would not have any material
impact on West Coast crude oil or gasoline prices.
---------------------------------------------------------------------------
The causes of the West Coast gasoline price premium have been
closely studied by many others, including the Energy Information
Administration and the California Energy Commission. Happily, there is
considerable consensus as to the causes of the West Coast gasoline
price premium. I will simply summarize what I consider the consensus
findings on this issue, adding in my own observations on possible
policy responses.
First, refinery capacity on the West Coast is limited. Building new
refineries appears to be nearly impossible, and existing refineries
have limited ability to expand their capacity.\11\ The result is that
the West Coast is perilously close to having insufficient refinery
capacity to meet its needs. Since the demand for gasoline is quite
inelastic, this creates a situation where disruptions in supply (e.g.,
from refinery outages) create a genuine scarcity, causing price to rise
sharply to clear the market. In other words, at the refinery level,
West Coast gasoline markets are habitually tight, leaving no margin for
error. Inventories are not sufficient to buffer shocks resulting from
supply disruptions. Consumers on the West Coast are thus vulnerable to
price spikes as a result of refinery outages or breaks in pipelines.
Policies to encourage the addition of refinery capacity on the West
Coast would help ease these problems. The Federal Trade Commission
should also scrutinize any mergers or joint ventures that would
increase the concentration of ownership of West Coast refinery
capacity.
---------------------------------------------------------------------------
\11\ Many West Coast refineries have expanded their capacity over
time through debottlenecking and other capital expenditures. However,
the ability of these refineries further to expand capacity is limited
by a range of permitting requirements and environmental restrictions,
as well as various other factors.
---------------------------------------------------------------------------
Second, refinery costs are higher in California than in the rest of
the country, due in part to California's stringent rules for
reformulated gasoline (RFG), specifically the California Air Resources
Board (CARB) standard for RFG. The CARB standard raises the cost of
gasoline refining by about four cents per gallon.\12\
---------------------------------------------------------------------------
\12\ Since its introduction in 1996, the wholesale price for CARB
has averaged roughly 4 cents per gallon more than conventional
gasoline. ``Report on Gasoline Pricing in California,'' Staff Report
and Attorney General's Comments and Recommendations, May 2000, p. 5.
Before CARB regulations were implemented in 1996, the California Air
Resources Board estimated the new formulation would cost between 5 and
15 cents more per gallon than conventional gasoline. Keith Leffler and
Barry Pulliam. ``Preliminary Report to the Attorney General Regarding
California Gasoline Prices,'' November 22, 1999, n. 11.
---------------------------------------------------------------------------
Third, it is costly for the West Coast to import gasoline from
other parts of the country.\13\ On top of these transportation costs is
the fact that California standards for RFG are more stringent than
Federal standards, so refineries elsewhere in the country cannot simply
ship to California the gasoline they normally produce. In fact, there
are a limited number of refineries outside California that produce CARB
gasoline.\14\ Thus, refinery capacity outside PADD V has very limited
ability to keep West Coast gasoline prices in line with gasoline prices
elsewhere in the country. Policies designed to reduce the cost of
transporting gasoline from the Gulf Coast to the West Coast would help
integrate gasoline markets on the West Coast with those in the rest of
the country.
---------------------------------------------------------------------------
\13\ It costs 8 to 12 cents per gallon to import gasoline from the
Houston area. Keith Leffler and Barry Pulliam. ``Preliminary Report to
the Attorney General Regarding California Gasoline Prices,'' November
22, 1999, p. 7 (citing Octane Week, August 2, 1999).
\14\ Refineries outside California that produce CARB include Valero
(Gulf Coast), Amerada Hess (Caribbean), and Neste (Europe). ``Report on
Gasoline Pricing in California,'' Staff Report and Attorney General's
Comments and Recommendations, May 2000, p. 5. These refineries do not
produce CARB gasoline on a regular basis.
---------------------------------------------------------------------------
Unfortunately, there is reason to believe that the West Coast
gasoline price premium is likely to grow rather than shrink in the near
future. First, as West Coast demand for gasoline slowly grows and
refinery capacity does not, the basic problem of supply/demand
imbalance on the West Coast will tend to worsen. Second, the price
premium for CARB gasoline over conventional gasoline may rise as
California refineries are forced to pay royalties to Unocal on Unocal's
RFG patents.\15\ Third, as MTBE is phased out in California, effective
refinery capacity will be further reduced and refinery costs will
likely rise.\16\ Finally, the West Coast electricity mess may spill
over and cause disruptions in the supply of gasoline on the West
Coast.\17\
---------------------------------------------------------------------------
\15\ A jury decision awarding Unocal 5\3/4\ cents per gallon on its
393 patent was affirmed on appeal in March 2000. Unocal claims a total
of five RFG patents.
\16\ MTBE is prohibited in California gasoline after December 31,
2002. California Air Resources Board Press Release, March 10, 2000 (
http: // www.arb.ca.gov / newsrel / ph3cbg.htm). Removing MTBE from
gasoline will cause effective production capacity to decline by from 5
to 11 percent. Gordon Schremp, ``Staff Findings: Timetable for Phaseout
of MTBE from California's Gasoline Supply,'' California Energy
Commission, presentation dated June 18, 1999, and Keith Leffler and
Barry Pulliam. ``Preliminary Report to the Attorney General Regarding
California Gasoline Prices,'' November 22, 1999, p. 8. Replacing MTBE
with ethanol will initially add 4 to 7 cents per gallon to the price of
gasoline; over the long term, removing MTBE is expected to raise
gasoline prices by to 2 to 6 cents per gallon. ``Supply and Cost of
Alternatives to MTBE in Gasoline,'' California Energy Commission, P300-
98-013, February 1999, and California Air Resources Board Press
Release, March 10, 2000 (http: // www.arb.ca.gov / newsrel /
ph3cbg.htm).
\17\ The Los Angeles Times reported that blackouts have already
shut down product pipelines, and threatened to shut down refineries in
California. Chris Kraul, ``Gas Shortage Possible as Crisis Affects
Refineries, Pipelines,'' LA Times, January 20, 2001. I understand that
BP reduced production at its Cherry Point refinery for a brief period
of time because of the high price of electricity.
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Senator Smith. I think it is important right now to stop
and ask questions of these two professors. This is important
for the constituents Senator Wyden and I serve. BP has taken a
hammering in our State because of an article in our State-wide
newspaper. Are you aware of that?
Dr. Shapiro. I certainly am.
Dr. McAfee. Yes, sir.
Senator Smith. In fairness to this company, I want to ask
you some questions, not impugning your integrity at all, but I
think people need to know the truth. You have no affiliation
with BP, do you?
Dr. Shapiro. I do not, that is correct.
Senator Smith. Professor McAfee.
Dr. McAfee. I do not and never have.
Senator Smith. I think it is important that people know.
Professor McAfee, you are aware of this article in The
Oregonian, is that correct?
Dr. McAfee. Is that the one I am quoted in?
Senator Smith. You are front and center. You are the first
witness, and this is ``Experts: BP Rigged Prices.'' Now, you
are here today saying you never said they rigged prices?
Dr. McAfee. Correct. I said they manipulated prices. I have
never used the phrase ``rigged'' because that means collusion.
Senator Smith. No collusion. So in your view, your
understanding of the law and their business practices, they did
not break any law?
Dr. McAfee. They did not break any law that I know of.
Senator Smith. You have also testified that at one time
that what they did translated in a cost to Oregonians of 1 to 3
cents a gallon higher. Have you revised your testimony now down
to a quarter-of-a-cent?
Dr. McAfee. The quarter-of-a-cent referred to gasoline, not
oil. The 1 to 3 cents was intended to refer to oil on a per-
gallon basis. So translating into barrels would be 40 cents to
$1.20 on a barrel. But that was also intended to be an upper
bound. That is, the largest extent of manipulation, not the
average extent of manipulation, was on that order.
Senator Smith. So you think it is a fairly de minimis
impact, if at all?
Dr. McAfee. Absolutely.
Senator Smith. Notwithstanding that it was de minimis, your
testimony is that there was overwhelming evidence that the
company manipulated West Coast oil prices?
Dr. McAfee. That is correct.
Senator Smith. But there is no evidence that they broke any
law?
Dr. McAfee. Not that I know of.
Senator Smith. Because you have not seen the documents
Senator Wyden has referenced?
Dr. McAfee. I have not. Am I correct, Senator, that those
documents refer to ARCO's behavior and not BP's?
Senator Wyden. I think both the Chairman and I would be
interested in whether you have seen the FTC documents that are
under seal in court for purposes of the question he just asked
you.
Dr. McAfee. I have seen very extensive--there were millions
of pages of documents. I have read a very small fraction of
those, but I have seen many documents that remain under seal,
including the report I wrote. Parts of that were released, but
parts--it was a redacted version.
Senator Wyden. I was not going to ask either of you any
questions because I have many for the other two. I think what I
feel very strongly about is that it seems that virtually no one
here has seen those documents that are under seal, the 1400
boxes, and has seen various and sundry other things. I gather
you as part of your assignment--and that is why I happen to
think it is critical to get to the bottom of this issue, that
there be a process for examining those documents.
Dr. McAfee. May I respond to that?
Senator Wyden. Of course.
Senator Smith. May I ask to Senator Wyden's comment.
Frankly, I believe you two are the experts on this merger, so
you surely saw all the documents involved.
Dr. Shapiro. I certainly have had access to and seen
mountains of documents. I believe the same is true for
Professor McAfee. I do not think either of us--I think there is
a tremendous amount of consensus between the two experts who
have seen these documents and reviewed this case.
Senator Wyden. But have you, in fact, seen the 1400 boxes
that are under seal, and also have had access to the full
extent of the information, rather than the redacted version?
That is what is under question.
Dr. Shapiro. I have had full access to all this information
as part of my role as an expert witness in the case. Professor
McAfee can speak for himself.
Dr. McAfee. I have had full access. I have actually seen
all 1400 of the boxes and I have gone through, not 1400, but a
large number of them personally.
Senator Wyden. We are glad to have that resolved.
Senator Smith. Professor McAfee, on the basis of having
seen all of that and read this article in which you are the
featured character, is this an unfair characterization of what
BP has done?
Dr. McAfee. I objected to the headline on that article
strenuously because I have seen no evidence of rigging prices.
I have seen evidence of manipulating prices. Now, this is not
manipulating at the level of 20 cents per gallon. It is much,
much smaller than that. But there is evidence of trying to
affect the prices.
Senator Smith. Very good.
Senator Wyden, do you have any further questions?
Senator Wyden. Not for the two professors. As I indicated,
I have questions for Mr. Malone and Mr. Mau.
Senator Smith. OK.
Mr. Malone, the mike is yours.
STATEMENT OF ROBERT MALONE, REGIONAL
PRESIDENT-WESTERN UNITED STATES, BP
Mr. Malone. Thank you, Mr. Chairman and Members of the
Subcommittee. Good afternoon. My name is Bob Malone and I am
the Regional President for BP based in Los Angeles. I want to
thank you for inviting me to testify.
I am here to talk about gasoline prices on the West Coast
today. That is a matter of concern to you because of the impact
of gasoline prices on your constituents and to me because your
constituents are my customers. I think it is particularly
important that the main focus for discussion be firmly grounded
in the present context, the West Coast as it is today. A lot
has changed during the last several years and BP is a new and a
different company. We have combined the best of five great
companies: British Petroleum, Amoco, ARCO, Vastar, and Castrol.
Our role on the West Coast has changed, too. Two years ago,
BP was an ANS producer and a seller. Today BP is an ANS
producer, an ANS buyer, a refiner, and a gasoline marketer.
Other West Coast participants have changed, too. Phillips
acquired ARCO's Alaskan operations. Exxon and Mobil merged.
Valero acquired Exxon's Benecia refinery, and relative shares
of ANS production were reallocated with the realignment of
Prudhoe Bay interests among BP, Exxon, and Phillips.
All of these changes took place under FTC review and with
the FTC's close involvement and understanding of the details of
these changes. Our perspective and our comments on gasoline
prices today take into account all of these changes.
Before focusing on the main topic of West Coast gasoline
prices today, I feel I need to address some of the historic
topics. That is, BP's historical ANS exports and our trading
documents. Let me begin with ANS exports. In spite of some
press reports to the contrary, ANS exports do not affect the
price of gasoline on the West Coast. In 1999, the GAO found no
observed increases occurred in West Coast consumer prices as a
result of lifting the export ban. The FTC made a similar
observation in their statement on the BP-ARCO merger approval,
stating: ``We acknowledge the public concern over the
relatively high price of gasoline in the West, but people will
be cruelly disappointed if they are led to believe that the
proposed ANS export restriction would have detectible effect on
the situation.''
We just heard now from noted economists that there is no
significant correlation between ANS exports and gasoline prices
on the West Coast. Today BP does not export any ANS crude. We
stopped those shipments last June for commercial reasons.
There have been allegations that BP was manipulating retail
gasoline prices on the West Coast by shipping ANS crude to
Asia. Let me be clear that one company's ANS trades cannot
manipulate the global oil market. If you consider this just for
a moment, on average we exported at the highest peak about
76,000 barrels a day. These exports equated to 3 percent of
West Coast consumption, which is four-tenths of 1 percent of
refining consumption and less than one-tenth of 1 percent of
world consumption.
I would like to now turn to the confidential documents. We
strongly disagree with those who suggest that confidential
documents held in agreement with the Federal Trade Commission
be released. Confidential documents are standard procedures for
all merger applications. This request affects a number of
companies other than BP who are not here today. Some of these
companies currently have matters that are pending before the
Commission.
This matter has been given rigorous Federal court review
and a Federal judge, the FTC, the attorneys general of Oregon,
California, Washington, and Alaska participated and endorsed
the process and its outcome.
My last point is the trader e-mails. I will say this, that
our traders were doing what traders do, which is to try to
aggressively work to maximize profits. This is the fundamental
notion behind a strong U.S. economy. Are some of the trader e-
mails poorly worded? Yes? Did they do anything illegal or
improper? No. Did they do anything that affected the world
price of oil? Absolutely not. Did they do anything that
impacted the price of gasoline on the West Coast? Absolutely
not.
I would like to turn to today. Today BP produces 290,000
barrels a day on the North Slope of Alaska. All of this
production is transported to our refineries in California and
Washington State, where it is refined and sold through our ARCO
branded retail stations. We are very proud of our ARCO brand
and the long history it has providing consumers with
competitively priced gasoline in the western United States.
In general, gasoline prices on the West Coast tend to be
higher for three reasons: Logistically, it is difficult for
products to reach the West Coast; State taxes on the West Coast
are generally higher; and West Coast fuel specifications are
among the most stringent in the country. In particular,
California Air Resource Board gasoline is unique and more
expensive to manufacture.
There are specific actions that we can take that will help
alleviate this for our customers and your constituents. A
national energy policy should consider the following. The
required use of oxygenates in gasoline complicates my
industry's ability to move gasoline to areas in short supply.
This happens frequently on the West Coast. Simplicity and
consistency in fuel specifications are needed.
We need infrastructure to ensure that growing energy demand
can be managed. The current pipeline network must be expanded
to ensure that natural gas, crude oil, gasoline and other fuels
are efficiently delivered to customers. We have to stop
polarizing the debate between energy issues and the
environment. We must be able to strike a balance so that we can
continue to meet our commitment to a clean environment while
allowing for the building of additional capacity to manufacture
these cleaner fuels.
Again, I want to thank you for the opportunity to work with
this Subcommittee and others as we move forward on an energy
policy.
[The prepared statement of Mr. Malone follows:]
Prepared Statement of Robert Malone,
Regional President, BP
My name is Bob Malone and I am Regional President for BP. BP is a
global energy company, formed from the recent mergers of five great
companies, BP, Amoco, ARCO, Vastar and Burma Castrol. We are proud of
our heritage and the conduct of each company that came together to form
BP. Today we stand in front of the Committee as a completely new
company.
Energy policy has been in the news on a daily basis over the past
few months and West Coast energy concerns have been given particular
focus. At BP we are committed to working together with this committee
and all stakeholders to better understand the forces at work in the
energy marketplace. We must also remain vigilant on behalf of our
employees, contractors, shareholders and customers to ensure that the
record is accurate as to how we operate in the market.
Our intention is to once again provide answers to any remaining
questions regarding the past, with an eye to solving the future energy
challenges of our customers, your constituents. We are fundamentally
committed as a company and members of the community to give our
customers choice for heat, light and mobility; these are the products
we sell. We believe our record is second to none in the United States
with regard to cleaner fuels, climate change initiatives and openness
to the community.
I thank the Committee for this opportunity to address the topic of
West Coast gasoline prices. Let me turn directly to some of the issues
that I was told would be the subject of today's hearing.
west coast gasoline prices
West Coast gasoline marketing is extremely competitive, yet West
Coast gasoline prices are among the highest in the nation. Numerous
studies and findings have determined that the situation is caused by a
variety of market conditions. Specifically, West Coast gasoline prices
are higher because:
1. Logistically, the West Coast is not easily accessible as
compared to other regions. The West Coast infrastructure is challenged
in that there is limited pipeline connection to other regions, and the
primary mode of product import is by tanker and barge. Additionally,
manufacturing is operating at full capacity resulting in significant
risk to supply should an unexpected outage occur.
2. State gasoline taxes on the West Coast are among the highest in
the nation.
3. West Coast fuel specifications are among the most stringent in
the country. In particular, California Air Resources Board (CARB)
gasoline is unique and more expensive to manufacture. California
gasoline demand cannot easily be satisfied through imports from
adjacent regions nor from other refineries within PADD V. Since CARB
gasoline is not fungible among other western states, supply volatility
is increased.
pricing practices
We have fully cooperated with an ongoing FTC investigation of West
Coast gasoline prices and expect the results soon. We believe the
evidence will show that BP is one of the most competitive marketers in
the region and show no findings of wrongdoing, similar to findings from
past investigations.
We also understand that the FTC investigation has become primarily
focused on the practice of `redlining.' Our distributor supply
contracts do not contain territorial restrictions, sometimes called
`redlining.' On the West Coast, we have very few distributor supply
agreements and this practice does not apply to us. Our decision to use
direct marketing facilities is based on the efficiencies of the supply
chain for effective cost management.
Concerning dealer pricing practices, we use price zones to meet
competition and comply with the law. The Robinson-Patman Act prohibits
a supplier from discriminating in price among its customers who are in
direct competition. We use price zones to ensure that all branded
facilities in a price zone receive the same wholesale price. Price
zones are defined through analysis of traffic patterns and physical
boundaries such as rivers, freeways and industrial parks, etc. There is
no station count criterion for establishing a price zone. As a result,
while the wholesale price is the same for every site within a price
zone, each station operator independently sets its retail or street
price.
ans exports
A coalition of Alaska and California oil producers, Maritime Labor,
shippers and contractors banded together to repeal the ANS export ban
in 1995. The idea originated in Vice President Gore's Report,
Reinventing Government that was acted upon through a study by then
Secretary of Energy Hazel O'Leary. Legislation was introduced in the
House of Representatives where it passed by a vote of 361 to 54, and in
the Senate where it passed a vote of 69 to 29. President Clinton signed
the bill into law on November 28, 1995.
Regarding the suggestion that BP's ANS exports have increased West
Coast gasoline prices, several things can and should be said on this
topic:
1. BP's ANS exports have not affected West Coast crude oil prices.
Crude oil is a global commodity, and ANS is traded in that global
market. The trading activity of no single person or company can affect
crude oil prices. On the West Coast as elsewhere, exports are balanced
by imports, and the global forces of supply and demand establish
prices.
2. ANS exports have had no effect on West Coast gasoline prices.
According to the General Accounting Office's statistical and economic
analyses in this connection, ``the prices of gasoline, diesel, and jet
fuel on the West Coast did not significantly change as a result of
lifting the [ANS] export ban.'' The same study found that, ``West Coast
consumers appear to have been unaffected by lifting the [ANS export]
ban, because the prices of important petroleum products they use have
not increased.'' General Accounting Office, ``Alaskan North Slope Oil:
Limited Effects of Lifting Export Ban on Oil and Shipping Industries
and Consumers,'' GAO/RCED-99-191, (July 1999) at 30,31. Economist Carl
Shapiro's own study of the relationship between ANS prices (moving
alone) and West Coast gasoline prices came to the same conclusion--
increases in the price of ANS crude relative to other crude oils does
not affect the price of gasoline.
3. ANS exports have no relevance to current discussions of West
Coast gasoline prices. Today, BP is a West Coast refiner and currently
refines more Alaska North Slope crude oil than it produces. We have not
exported ANS crude since June 2000. To our knowledge, no other company
has exported Alaska North Slope crude since that time, either. BP has
no plans to export ANS crude at this time.
crude trading
We also would like to take this opportunity to address the
suggestion made in the press recently that documents produced to the
FTC in connection with BP's acquisition of ARCO somehow reflect illegal
or improper conduct. The suggestion is simply not true. Some of BP's
trading documents may have been unfortunately worded, and the press has
highlighted that fact, but the documents do not change the global
nature of these West Coast crude markets. Considered in the context of
these market realities, BP's trading documents reflect nothing more
than efforts to engage in normal trading activities, which are not only
proper, but, in the larger view, essential to the efficient operation
of global markets.
In this connection, the FTC, in approving the BP/ARCO merger,
specifically noted that BP's trading activity was legal: ``It is
important to emphasize that BP's unilateral actions were not illegal
under the antitrust laws--and, indeed, the complaint makes no
allegations that exports were illegal.'' Further, as most relevant to
the focus of the hearing, BP's ANS exports have not been a factor in
West Coast gasoline prices as established by the General Accounting
Office and Shapiro analyses referenced earlier.
confidential documents
We strongly disagree with those who suggest that confidential
documents held in agreement with the Federal Trade Commission be
released. These documents must remain confidential.
1. Confidential documents are standard procedure for all merger
applications.
2. This request affects a number of companies other than BP, who
are not here today and some of these companies currently have matters
pending before the Commission.
3. This matter has been the subject of a rigorous Federal court
review, and a Federal judge, the FTC and the Attorneys General of
Oregon, California, Washington and Alaska have participated in and
endorsed this process and its outcome.
The essential information concerning BP's pre-merger ANS exports
and trading activity is summarized in the public record. The FTC's
interpretation of those documents and activities was included in public
filings as part of the FTC's BP/ARCO merger lawsuit last year, and many
of the documents themselves were made public as the result of
proceedings to unseal the record. The only portions of the BP documents
that have not been made public have been determined by Federal court
proceedings to contain confidential and legitimately protected trade
secret information. BP and third parties alike provide large volumes of
sensitive documents to the FTC in reliance upon the continued
confidentiality of their trade secrets. These expectations of continued
confidentiality need to be honored for the proper and efficient conduct
of this system of regulatory review. We have confidence that these
rigorous Federal proceedings have struck a proper balance concerning
what information should be made public, and what information is
properly kept confidential.
recommendations
Returning to the specific issue for this hearing, West Coast
gasoline prices are higher than the national average. We have listed
some of the reasons for this fact. While some of these factors can be
managed through public policy, we need a national energy policy. We
recommend the following:
1. Gasoline must be made more fungible to reduce supply volatility
and increase flexibility. Oxygenates are not required in gasoline to
meet air emission standards. The required use of oxygenates in gasoline
complicates the industry's ability to move gasoline to areas in short
supply.
2. We need infrastructure to ensure that growing energy demand can
be managed. The current pipeline network must be expanded to ensure
that natural gas, crude oil, gasoline and other fuels are efficiently
delivered to customers.
3. The tradeoff between energy and environmental policy must be
managed so that we continue to meet our commitment to a clean
environment, while allowing for the building of new units required to
manufacture the new cleaner fuels, which BP supports.
4. The Unocal fuels patent unnecessarily complicates the
manufacturing process and increases costs. The patent formulation adds
little value and should be reviewed by the United States Patent office.
I thank you for the opportunity to testify.
Senator Smith. Thank you, Mr. Malone. I want to ask you
this because I want to give BP a fair shot at making its case
to Oregon, and I think your testimony has done very well. No
one here is under oath, so we want people to just tell us the
truth. You are not under oath, but I hope you would answer as
though you were.
This probably would never have made The Oregonian had there
not been an e-mail correspondence between BP employees that was
somehow obtained by them, where it was discussed that exporting
Alaskan North Slope crude to the Far East was a way that the
company could short West Coast refiners in order to short the
West Coast and leverage up prices. A BP spokesman is quoted in
the article as saying that this conduct was well within the
bounds of the law.
Does BP deny that it sought to inflate the West Coast price
of crude oil by selling its Alaskan North Slope crude to the
Far East or does the company just claim that in its opinion its
conduct was not illegal? Do you deny it happened or do you deny
that it is illegal?
Mr. Malone. I am that spokesperson with The Oregonian. Let
me begin there. I will answer your questions absolutely direct,
Mr. Chairman.
Mr. Chairman, that particular e-mail I am familiar with,
but I have not been able the get the whole document. So let me
begin by saying just a couple of things to set the direct
response to your question. Number one, again that document was
produced when we were an ANS trader. We had excess and we were
selling on the market. Today we do not. We consume all of our
ANS as a result of the ARCO acquisition. So the conditions that
are referenced in that memorandum do not exist today.
Second, crude oil is a world commodity and traders are
looking for arbitrage opportunities within a very narrow band
on a product that is sold on a global basis. So if the world
price of crude oil is $24.25, we are looking at opportunities
to maximize our earnings around $24.25, but we are not going to
impact a global commodity on a sustained basis.
Third, I just would like to emphasize that we have heard
from our experts and we also heard from the GAO about the
relationship of exports to the retail market, and that it is
inconsequential if even measurable. So much of the implication
for your constituents, Senator, was that they were paying for
that at the retail price, versus a document that is talking
about looking for opportunities to enhance profitability around
a band of crude oil trading, not retail market pricing.
Senator Smith. Mr. Malone, these experts, who are unrelated
to your company, have testified, and I assume you would swear
to it, that you have seen all of the confidential documents?
You have seen everything that there is to see, and there was
not illegal practice?
Dr. McAfee. That is correct.
Senator Smith. The same, Dr. Shapiro?
Dr. Shapiro. I agree.
Mr. Malone. Mr. Chairman, to your question, there were
times when we were selling ANS and we were selling those on
term contracts. We could have multiple term contracts at the
same time. Those term contracts were normally based upon a spot
price, and there were times that we shipped that last cargo to
the Far East because, not necessarily at a lower price, but
maybe at a lower netback, in order that our term contracts
already in place, the spot price would be higher than if we
brought that last cargo to market.
Mr. Chairman, that is working with the market in order to
be able to look for those type of opportunities to maximize our
product. We did not have a downstream marketing system at that
time, nor a refining system.
Senator Smith. Very good. One last question that I had.
Senator Stevens has indicated his implacable opposition to any
export ban of Alaska oil. I wonder how you feel about such
legislation should it prohibit export of Alaskan oil. Would BP
be opposed to that and, if so, why?
Mr. Malone. Yes, we would be opposed to putting the ban
back in place, although as has been in my statement and others
we have not exported ANS since June of last year. The idea that
we would try to restrict a product to try to create a false
market versus letting it be with the rest of crude oil in the
world is to us restrictive. Second, we never know when, either
for commercial reasons, but maybe more importantly, the
importance of moving crude oil off of the pad to other
locations in order to alleviate an oversupply which could shut
down North Slope operations. We have seen that happen, sir.
Senator Smith. You undoubtedly do not have any current
plans to export that oil to Asia at this point. You have need
for it on the West Coast. But can you--as the leader of BP on
the West Coast--do you understand the political dilemma that
creates for some of us who have to explain to constituents why
it is, when we are already so dependent upon foreign oil, we
would be exporting oil that comes off American shores?
I am trying to get you to say: We will not do it any more.
Mr. Malone. I cannot say that, Chairman. It is very
important, I think, that oil be able to move at a fair market
value on a world price. Any commodity that is world priced
should be able to do that.
Senator Smith. You understand the political down side of
it?
Mr. Malone. I do. But I also understand the importance of
that to my former home State of Alaska and the importance in
what we are able to do now as a refiner and marketer on the
West Coast.
If I could also just add, we buy ANS on the open market
right now. We are buying all the ANS to meet our needs. We are
also importing other crudes on occasion to meet the needs of
our refining system. I might also mention, we are also buying
gasoline on the market today in order to meet the needs of the
California market.
Senator Smith. Thank you.
Senator Wyden.
Senator Wyden. Mr. Chairman, I have a number of questions
for Mr. Malone, but Senator Stevens indicated he was under a
tight time schedule.
Senator Stevens. No longer.
Senator Smith. He is back from the doctor. He is going to
live, too.
Senator Stevens. I got my ear fixed.
Senator Wyden. Well then, let me begin by focusing on this
1995 e-mail exchange. My colleague described it, well, we have
got this situation where these BP trading managers are I gather
sitting around talking about the benefits to the company of
shorting the West Coast, in their words, to leverage up prices,
and they described this as being a no-brainer.
Mr. Malone, this took place in 1995. You were not in charge
of BP's West Coast operations in 1995, were you?
Mr. Malone. No, I was not.
Senator Wyden. I understand the individual who held your
job for West Coast operations in 1995 is still working for BP
and that person, in effect, was the supervisor of these people,
but BP chose to send you to the Subcommittee as its witness.
Would you just tell us whether that is correct?
Mr. Malone. There was not a regional president on the West
Coast until I arrived.
Senator Wyden. No, I understand that. But the person that
supervised the people wrote this e-mail and is still with the
company, is that not correct?
Mr. Malone. Both are with the company.
Senator Wyden. Both the people and their supervisor, is
that not correct?
Mr. Malone. Senator Wyden, I am not sure who their
supervisor was, so I cannot say whether they are still with the
company or not. I assume so.
Senator Wyden. My understanding is that the person who was
in charge of the folks doing the e-mail who we asked for is
still there and you have been sent instead.
You indicated to me in a meeting that you have not reviewed
the documents under seal in the FTC matter. Have you reviewed
them since we spoke?
Mr. Malone. No, Senator Wyden, I have not.
Senator Wyden. Mr. Chairman and Chairman Stevens as well,
this is to me the key point in terms of where we are. I have
met with Mr. Malone on a number of occasions now and he strikes
me as a decent person, an easy to talk to, decent person. But
it seems to me what your company is essentially asking is that
this Subcommittee trust BP on a matter that occurred long
before you took over the West Coast operation, involving
documents you have never seen.
You just said, in response to questions from my colleague
Senator Smith, that you will start selling the oil to Asia any
time you feel like it, that you are going to just do it when
you think it is in your interest. Given that, and given the
fact that you are asking this Subcommittee to trust BP when
there is documentary evidence uncovered by The Oregonian that
you all exported crude oil to Asia to keep West Coast prices
high, that your employees were sitting around and talking about
the benefits of doing it, I sort of feel like President Reagan.
President Reagan said: I want to trust you, but I have got an
obligation to verify.
So my question to you at this point is would you be
willing--would BP be willing--to make arrangements with this
company to provide all of the documents under seal if this
Subcommittee assures the security of those documents?
Mr. Malone. Senator Wyden, as we have talked about before,
we would object because the assumption that you have said is
that I ask you to trust me and my company. But in my statement,
as you heard, the FTC has seen those documents, the Federal
court has seen those documents, a special master has seen those
documents, and they released, and we did not object, including
that memo--we did not object, Senator Wyden, to that being
released to The Oregonian.
The other documents the special master and the Federal
court found to be competitively sensitive material and that it
should remain confidential.
Senator Wyden. I have no quarrel with your asserting that
these are proprietary. But when you say you have nothing to
hide and yet you go to great lengths to keep them under seal,
even saying, as you just have, that you are not willing to work
out an arrangement. I sit on the Senate Intelligence Committee,
Mr. Malone, and so I work with secret documents quite a bit.
What you are saying is in effect that Members of the U.S.
Senate, this Subcommittee, cannot be trusted to see these
documents, and I think that is a regrettable statement.
If you are going to assert that you have nothing to hide,
your company ought to be willing to work out an arrangement
with this Subcommittee to let us take a look at them.
Mr. Malone. Senator Wyden, if you interpreted my remarks to
have shown lack of the least bit of respect for the U.S.
Congress and the U.S. Senate, then I apologize, because I have
the utmost respect for this body. That is why I am here today.
What I said is that the very agencies that are entrusted by
us to look through those documents have looked through them on
behalf of all of us, as has a Federal court, and that we were
guaranteed the protection of those documents by the Federal
Trade Commission.
Senator Wyden. But none of those people gave Senator Smith
and I an election certificate. We got an election certificate
to represent more than 3 million Oregonians, and those people
are asking questions when they read in their morning newspaper
about e-mail, e-mail that says that your people sat around and
talked about the benefits of sticking it to our constituents.
When you tell us you have nothing to hide, and yet go to great
lengths to describe all these convoluted processes where you
tell Members of the U.S. Senate who sit on the Senate
Intelligence Committee that you cannot work out an arrangement
to see documents and have them treated confidentiality, I have
got to tell you I do not think that is in the public interest.
I know the light is on and I do not want to hold up Senator
Stevens. I have other questions in a moment, but I want to
yield to the Chairman for his time.
Senator Smith. Senator Stevens.
Senator Stevens. Well, Senator, I am prepared to stay here
as long as you are, but I take offense at that comment. I
presume we are all familiar with the process and the processes
of the various courts. As a Senator, we do not have a right to
tell the courts to release documents that they received under a
seal of confidentiality.
I think this is rather absurd, as a matter of fact.
Mr. Malone, as I understand this e-mail, it pertained to
wholesale prices of crude oil, did it not?
Mr. Malone. Yes, sir, it did, the market price of crude.
Senator Stevens. The market price of crude, right. It did
not concern consumer pricing in Oregon or California, did it?
Mr. Malone. No, it did not.
Senator Stevens. I do not understand this failure to really
examine the difference between that. These people have told us
that, yes, it might have affected the price of crude oil, but
it has not affected the consumer prices in these States.
Is there any evidence here that has been brought to your
attention that your company tried to manipulate consumer
pricing?
Mr. Malone. No, Senator.
Senator Stevens. I really would urge my colleagues to
consider the difference. We produce crude oil. Unfortunately,
we do not have many refineries. We do not have a posted price.
I do not even know if these gentlemen understand that, but as a
practical matter our oil is priced at the destination. And
there is a process--is there not a building up of a market,
like a market in Japan, for instance? We never were able to
export before under that ban, which I always thought was
unconstitutional. Once the ban was lifted, you did have sort of
a responsibility to find out if it was possible to build up a
market in Japan, is that not correct?
Mr. Malone. That is correct, Senator.
Senator Stevens. Now, if you look at--I do not know if I am
overstepping my own band of expertise, but I have always
thought that there was a crude stream in the world and that
really it would be to the great advantage of the world if the
oil was delivered to the nearest destination and we did not
have oil coming from Saudi Arabia into California and oil going
from Alaska to California. I really think we would be better
off in the long run, if we did not have all these political
problems, having a destination concept, to ship it to the
nearest place, so the risk to the oceans would be less.
We have tried to bring up a concept of cutting down the
distance that we ship oil. Your shipments to Japan, they were
not under any long-term contracts, were they?
Mr. Malone. No, most were spot shipments.
Senator Stevens. Spot shipments. Once you had this merger,
as I understand Mr. Pitofski and I think your statement, too,
you have retail markets, marketing capability now, right?
Mr. Malone. We take all of our production and run it
through our refineries.
Senator Stevens. So are we not just sort of beating a dead
horse of 1995, 1996, 1997, something that cannot happen again,
will not happen again? You have got the marketing capability
for your crude. You are not going to sell it to Japan when you
need it in California, are you?
Mr. Malone. We have no plans to export because we need it
in our refineries.
Senator Stevens. I would like to some time, Mr. Chairman to
get into the reason why Oregonians and Californians pay more
for gasoline. I do not think I have the time right now, but
clearly, gasoline taxes are higher than anywhere else. You
prohibit your people from having self-service. You limit
yourself in terms of refineries. Oregon has been unwilling to
even build one single refinery, in a State that has the demand
that it has.
The West Coast in general went down from 42 to 23
refineries on the whole West Coast, despite the fact that we
were increasing the supply. The refinery capability went down.
And everyone says, ``Oh my God, what has happened?'' Alaska has
driven up the price of oil in California and Oregon.
Now, he is ``Bob'' to me. Bob, you have been around that
company long enough to answer me. Have you been involved in any
collusive activity to drive up consumer prices?
Mr. Malone. Absolutely not, Senator.
Senator Stevens. I know this guy. We have spent Christmas
arguing with one another, things like that. He will tell you
that, but about other things rather than this.
But this concept that you two are driving home, that
somehow or other back in 1995, 1996, 1997 our oil people tried
to drive up consumer prices, is wrong. I do not think you have
any evidence to justify that statement. You have made it
repeatedly, Senator, and I think you are ignoring the fact that
the testimony here shows they were talking about crude oil
prices and not about consumer prices.
There is no connection in this market, direct connection,
between those two. Is that not a fair statement?
Senator Wyden. Would the Chairman just yield?
Senator Stevens. Yes, sir.
Senator Wyden. Because I do not want to encroach on your
time.
First I would like to note I was the first person so far
today to say that Mr. Malone seems like a decent guy.
Senator Stevens. You said ``seems.'' I will say is.
[Laughter.]
Senator Wyden. I will be willing in the name of
Subcommittee comity to stipulate to the fact that Mr. Malone is
a decent guy.
Senator Stevens. You have a new friend, Bob.
Senator Wyden. He had before.
I also want to again reiterate that I am not talking about
any confidential document getting out to the public. What I
have been interested in, which I think my constituents feel
strongly about, is setting up a process by which this
Subcommittee, while assuring the confidentiality of documents
that are considered proprietary, can examine them. That is what
is in question.
Senator Stevens. I think it is still my time, if I may.
Do you have any evidence that there is anything in those
boxes that pertains to consumer pricing? The two documents that
I have heard pertain to crude oil pricing, and I hope you will
understand the difference in this concept of crude oil
marketing. Is there anything that has been brought to your
attention that affected consumer pricing?
Senator Wyden. Mr. Chairman, all we have with respect to
this issue is we have lost these stations. Bob Pitofsky says
that there is evidence of red-lining, evidence of zone pricing.
We have got e-mail that talks--these are their quotes--the
benefits of shorting the West Coast to leverage up prices, it
is a no-brainer.
Senator Stevens. At that time they were dealing with
exporting crude, not consumer pricing.
Senator Wyden. Mr. Chairman, what I would say, again as a
way to resolve this issue, is that we would set up a process to
confidentially examine these documents so as to address the
question you are talking about.
We have been here for--I do not know, well over 3 hours. I
have not used the word ``collusion.'' Not once. I have not used
the word ``illegal conduct.''
Senator Stevens. I heard it here today, though.
Senator Wyden. Not by me, because I went in here with a
very detailed set of questions and they were designed to elicit
what Bob Pitofsky told us, which is in his opinion he has found
substantial evidence of market manipulation. That was
essentially his words.
Senator Stevens. He also said it was not illegal.
Senator Wyden. Correct.
Senator Stevens. All right. Why do you want the documents?
Senator Wyden. Because I think we need to find out exactly
what was going on when you have got management sitting around
talking about the benefit of sticking it to the West Coast.
Senator Stevens. I do not think you have any evidence that
we stuck it to the West Coast. That is the bottom line, and I
join my colleague in saying no to opening up documents unless
you have some proof that there is evidence in those documents
of manipulating consumer pricing. Again, there could be
evidence of manipulating, trying to manipulate, the market for
crude oil. They needed more markets for crude oil.
Senator Wyden. I have great respect for the Chairman. I
think he knows that we have worked together on a lot of
matters. But I do think that when you have people in our State
consistently paying gasoline prices over the national average
and you have the testimony we even heard from Bob Pitofsky
today, it is not too much to ask that we examine these
documents, not in public, not on the streetcorner in the
National Enquirer, but in private, to essentially assess what
is going on.
I will tell my colleagues at least today that I feel even
stronger about this than I did coming in, because Bob Malone,
to his credit, said that he is prepared to resume exporting gas
to Asia any time he feels like it.
Senator Stevens. Gas.
Senator Wyden. Again, we can have the debate about what is
exported. The documents that I have been dealing with, the BP
issue involved oil. With respect to ARCO it involved gas. As
the Chairman of the Appropriations Committee knows, these lines
can blur, which is all the more reason for us to look at these
documents confidentially to try to assess what was going on.
Senator Stevens. Mr. Chairman, I do not want to prolong
this, but I hope my friend understands that about one-half of a
barrel of crude oil goes into other than gasoline.
Senator Wyden. Correct.
Senator Stevens. And when you export crude oil you are
dealing with a lot of other prices than gasoline.
Senator Wyden. That is correct.
Senator Stevens. That is one of the reasons why I think you
cannot draw the direct connection between crude oil pricing and
consumer pricing in California. But for the purpose of this go-
round, let me tell you. We have fought a lot of battles in our
lives and we have probably more oil than anywhere in the
country, and one of the things that we do is produce it. We are
the only State that ever faced a ban on an export of the
product from that State, the only State in the Union that ever
had that.
It was unconstitutional to start with, and you are
suggesting initiating it once again. I think that is where I
draw the line.
Thank you, Mr. Chairman.
Senator Smith. Thank you, Senator Stevens.
Mr. Malone, here is the article. You have read it. I
believe you disagree with it, do you not?
Mr. Malone. Yes, I do.
Senator Smith. It says, the headline, ``Experts: BP Rigged
Prices.'' You believe that is wrong?
Mr. Malone. I believe it is wrong and I went to Oregon and
met with The Oregonian and told them so.
Senator Smith. If it read ``Experts: BP Rigged Prices, But
Acted Legally,'' would you agree with that?
Mr. Malone. I would object to that as well.
Senator Smith. Senator Wyden, any further questions?
Senator Wyden. Does Senator Stevens want to go next?
Senator Stevens. No, no. Go ahead and I will interrupt you.
Senator Wyden. All right, fair enough.
[Laughter.]
Senator Wyden. I want to ask a question about the ARCO
documents, recognizing again, Mr. Malone, you have not seen
this. So I want to talk conceptually about it. You say in your
testimony: ``Logistically, the West Coast is not easily
accessible as compared to other regions. There is limited
pipeline connection to other regions.'' That is your quote.
Given these logistics, if gasoline supply to the West Coast
is reduced because of a refinery fire or other disruption, it
would be fair to say that it would be difficult to replace that
gas, is that not correct?
Mr. Malone. Yes, sir.
Senator Wyden. When the supply is reduced, that typically
raises the price, does it not?
Mr. Malone. It depends on the gasoline market itself at
that time. I think the assumption is that if there is a
shortage of it what you would buy on the market would probably
have a premium on it. So if there is a shortage in the market
and you buy it, it is probably more expensive than the average
price.
Senator Wyden. That is what the GAO said as well, that
supply disruptions would increase prices. So my question is, if
a company could reduce the supply by exporting gas or through
other means, I could create a shortage and increase the price.
Given the difficulty of bringing in alternate supply that you
have testified about, having a business strategy to ``export to
keep the market tight,'' as ARCO did in the mid-1990s, would
make pretty good sense for them, would it not?
Mr. Malone. Senator, I have not seen the memo. I do not
know that document. One of the documents, I received a call
last night from The Oregonian about it. I followed up and found
out that that one particular recommendation that was attached
to the Aguilar case they did not, ARCO did not act on that. In
fact, there have been four judges now that have reviewed that
case and found no collusion by ARCO.
Senator Wyden. Well, no, I recognize that this is a
document that, though public, is still being considered in the
legal process. What I am concerned about, and I went through it
in my opening statement, is that there was by appearances
certainly to a significant degree a strategy to keep the market
tight and export and inevitably drive up prices on the West
Coast.
As you heard me say in my opening statement, I see an awful
lot of parallels between ARCO then and the new entity now,
which is why I am so troubled.
Senator Stevens. Would you yield just a moment?
Senator Wyden. Of course.
Senator Stevens. Did you know that was jet fuel that you
were referring to and not crude oil?
Senator Wyden. Again, Mr. Chairman, we do have some
questions about exactly what the fuel was used for.
Senator Stevens. No, no. It was jet fuel when it was
exported. It had been refined in my State.
Senator Wyden. You are certain of that?
Senator Stevens. That is what I am told.
Senator Wyden. Well, again, my central interest here is not
for more legislation. This Subcommittee has jurisdiction to
really get to the bottom of this issue, and again, without
sounding repetitive, it is late in the day, I think it is
important to set up a process to examine these documents,
rather than to have Senator Smith and I go back to the people
of Oregon and say: Well, Mr. Malone is a good guy, he met with
us, so we are going to trust him.
I think it is especially hard to do that given he said: It
is our business judgment; we will start exporting tomorrow if
we think it is in our interest. We will export to Asia or South
America or anywhere else.
I thank you, Mr. Chairman.
Senator Smith. Thank you, Senator Wyden.
There have been a lot of tough words used in this hearing
and they have always been preceded by ``alleged.'' I think that
is important, that we bear this in mind. Part of the purpose of
this hearing is to bring light to an issue that just has
questions to date, but I think there is a lot more light now.
We appreciate very much, Mr. Malone, your testimony.
Mr. Mau from Portland, Oregon, you are the cleanup hitter.
We look forward to hearing where the gasoline hits the road.
STATEMENT OF CHUCK MAU, OREGON GASOLINE DEALER,
PORTLAND, OREGON
Mr. Mau. Thank you, Senators, for the opportunity to come
here and testify. My name is Chuck Mau and I have been a
gasoline dealer in Oregon for 15 years, the last 12 selling
Texaco branded fuel. My station is located in southwest
Portland about one mile off of I-5.
Less than one mile away is another Texaco station that
regularly sells gasoline for 5 to 10 cents less than I can
afford to sell. At one point, my competitor's cost was 18 cents
cheaper than mine, plus the county tax difference of 2 cents,
which totaled 20. It translates out I could sell my fuel at
cost and go broke and he still makes a living at 20 cents a
gallon. What kind of competition is that, is my question.
The reason for these price differences are I have to buy my
fuel directly from Texaco. My competitor buys from a jobber, an
independent wholesaler. The gasoline I buy and my competitor
buys is delivered from the same terminal. Sometimes even the
same truck delivers to me and my competitor. The same gasoline,
delivered by the same truck, the same driver, but I get charged
a higher price than the same station, less than one mile away.
I tried to get wholesalers to sell to me at the price my
competitor pays and the answer was no. They said if they did it
would jeopardize their relationship with Texaco.
The consumer does not know there is a difference in the
price that each station pays. They just think that I am the one
that is gouging them because I have to charge a higher price
because I am being charged a higher price.
Today in Oregon, a consumer can pay a lower retail price in
central Oregon than the wholesale price that I pay in Portland.
It costs more to transport gasoline to central Oregon from
Portland. It should be cheaper in Portland. The fuel gets
trucked from Portland. The consumer is really the loser, paying
far more than they should in the Portland metro area.
Several years ago, Texaco began to turn dealer-operated
stations into company-operated stations. Now their operations
in the Portland metro area are dominated by company-operated
units. There are far less of us independents left today.
I watched Texaco push out one dealer by not taking care of
his station. They would replace the pipes, repair the furnace
when they needed to be. The dealer finally gave up. Texaco took
it, turned it into a company store, and made a huge investment,
turned it into one of their Price Starmarts, run by the
company.
I have also experienced firsthand how Texaco can squeeze
dealers by charging high rents for leased stations. My station
was an Exxon station. In November 1988, it was sold to Texaco.
I had no choice. Texaco more than doubled the rent on my
station. I know that Texaco paid the landlord of the property
it was on $1500 per month. They in turn charged me $6700 per
month.
Texaco also squeezes dealers out by lowering the price at
their company-operated stations and controlling the street.
During the fall of 1999, Texaco lowered the street price of all
company stations in the Portland area 2 cents overnight, with
no reduction in the wholesale cost as a factor for the move.
All of a sudden, my customers are asking: Why is not your price
going down? All the other Texacos have gone down 2 cents. Well,
I cannot compete with a company the size of Texaco.
It looks to me like Texaco does not want to have dealers.
They squeeze out their dealers to get control of the entire
gasoline market, from refinery all the way down to retail. It
is like we are in a lobster pot and they are slowly turning up
the heat. We do not know we are getting cooked because it has
been happening little by little.
I worry about what Texaco is going to do next. They could
put me in my own zone and charge me 20 cents more a gallon than
my competition.
I fear retribution for me testifying here today. The way
things are going, we will only have about two brands left in
Oregon. We will not have any more dealers, and that is not good
for dealers and it is not good for our consumers.
I hope that Congress will look into what is happening to
the dealers and how there is less and less competition in the
gasoline market.
Thank you.
[The prepared statement of Mr. Mau follows:]
Prepared Statement of Chuck Mau, Oregon Gasoline Dealer
My name is Chuck Mau. I have been a gasoline dealer in Oregon for
15 years, the last 12 selling Texaco brand.
My station is located in Southwest Portland about one mile from
Interstate 5. Less than one mile away is another Texaco station that
regularly sells the same gasoline for 5-6 cents less than I can afford
to sell. At one point last year, my competitor was 18 cents cheaper
plus there's a 2 cent difference in county tax, making the total price
difference 20 cents per gallon. With this 20 cent price difference, I
could sell my gasoline at cost and still go broke. And my competitor
would make 20 cents per gallon.
The reason for these price differences is I have to buy my gasoline
from Texaco directly. My competitor buys from a jobber--an independent
wholesaler. The gasoline I buy and my competitor buys is delivered from
the same terminal. Sometimes even the same truck that delivers to me
also delivers to my competitor. The same gasoline delivered by the same
truck charges me a higher price than the station less than a mile away.
It's the same fuel in the same truck with the same driver.
I have tried to get jobbers to sell to me at the price my
competitor is getting. They wouldn't. They said if they did, it would
jeopardize their relationship with Texaco.
The consumer doesn't know there's difference in the prices dealers
pay. They think I'm the one who's gouging the price. But I have to
charge a higher price because Texaco is charging me a higher price than
my competitor.
Today in Oregon, a consumer can pay a lower retail price in Bend in
Central Oregon than the wholesale price I pay in Portland. It costs
more to transport the gasoline to Bend than to Portland. It should be
cheaper in Portland than in Bend. There's no way the price in Portland
should be as high as it is.
Several years ago, Texaco began to turn dealer operated stations
into company operated stations. Now, Texaco's operations in Oregon are
dominated by company stations.
I've watched Texaco push out one dealer by not taking care of his
station. They wouldn't replace the pipes when they needed to be fixed.
When the dealer gave up the station, Texaco turned it into a company
store and made the investment to fix it up.
I've also experience firsthand how Texaco can squeeze dealers by
charging high rents for leased stations. My station was an Exxon
station. Then, in November 1988, my station was sold to Texaco. I had
no choice. Texaco more than doubled the rent on the station. I know
that Texaco paid the landlord $1500 per month, but they charged me
$6700 per month.
Texaco also squeezes dealers out by lowering the price of gasoline
at their company operated stations. During the fall of 1999, Texaco
lowered the price of all company stations in the Portland area 2 cents
at the same time. There was no reduction in the wholesale price Texaco
charged to dealers. A dealer can't compete with a company the size of
Texaco.
It looks to me like Texaco doesn't want to have dealers. They want
to squeeze out dealers to get control of the entire gasoline market--
from refinery down to the retail gasoline stations.
It's like we're in a lobster pot and they're slowly turning up the
heat. We don't know we're getting cooked because it's happening little
by little.
I worry about what Texaco will do next. They could put me into my
own zone, charge me 20 cents more a gallon than my competition. I am
sure there will be retribution against me for testifying about Texaco's
actions.
With the way things are going, we'll have only two brands of
gasoline in Oregon. We won't have any more dealers. That's not good for
dealers and it's not good for consumers. I hope that Congress will look
into what's happening to dealers and how there's less and less
competition in gasoline markets.
Senator Smith. It sounds like you are about cooked already.
Mr. Mau. Yes.
Senator Smith. Are you familiar with the legislation in the
Oregon legislature on open supply?
Mr. Mau. Currently, yes.
Senator Smith. If that passes, does that help?
Mr. Mau. Yes. It would benefit me greatly.
Senator Smith. Will it pass?
Mr. Mau. Will it pass? I do not know.
Senator Smith. If it did pass, what assurance would
consumers have that dealers would pass any savings along to
their customers?
Mr. Mau. Well, the way the legislation is written, I
believe, in a divorcement issue, in an open contract it would
divorce the refineries from having more than 25 percent
company-owned stations in the marketplace, which in the
Portland metro area would gather quite a few more units up for
lease by dealers.
Senator Smith. Is there anything that you think this
Congress should do that could be helpful to you?
Mr. Mau. I think looking into that red-lining and the zone
pricing is a big issue.
Senator Smith. You think that one of the reasons 600
stations have disappeared is what you are experiencing?
Mr. Mau. Yes.
Senator Smith. Senator Wyden.
Senator Wyden. Thank you, Mr. Chairman.
Chuck, first thanks for coming. I have done a lot of work
on consumer rights issues over the years, really going back to
my days when I was director of the Grey Panthers. I do not
think I have ever seen a small business sector like yours as
frightened as the small gas stations are about their
relationship with the suppliers. I have been out talking to the
small service stations now for over 2 years and the very first
thing that they tell me when I talk about taking notes and
getting it down is they say: Ron, I am really worried about
retaliation.
Are you worried that you are going to face retaliation for
coming to the U.S. Senate today?
Mr. Mau. Yes, I am.
Senator Wyden. What are you worried about?
Mr. Mau. I am worried about my supply. I am worried about
how transactions get taken place with electronic funds
transfers and applying of credit cards, and also my price. I
have watched as zone pricing--Texaco did not used to do that.
But a few years ago they started that. It used to be an east
and west, and then all of a sudden it got down smaller and
smaller, and I see it going smaller and smaller and ending up
being station by station. That is the way I see it could go to.
It is very close now.
Senator Wyden. Does that affect your livelihood? When a
small station like yours comes to the Congress or the
legislature, you are basically taking the livelihood and your
well-being in your hands by coming and speaking the truth?
Mr. Mau. Well, I am coming here with several other Texaco
dealers knowing that I am here, and trying to speak out for
what is going on there in the State of Oregon.
Senator Wyden. You say in your statement that you are
paying more for the gas you buy from Texaco than other dealers
are. How did you go about coming to that conclusion?
Mr. Mau. Well, we get e-mails every day or faxes on our
prices, what it is going to be for the next day.
Senator Wyden. You have invoices showing?
Mr. Mau. Yes. I have provided you with the invoices showing
one Texaco retailer who is a lessee dealer at one unit and a
wholesaler-supplied in another unit, and on the same day in
December of last year the price differential was 15.4 cents for
the same gasoline.
Senator Wyden. When you bring this to Texaco's attention,
this huge price differential, what do they say?
Mr. Mau. Nothing.
Senator Wyden. They do not even try to----
Mr. Mau. No. I have talked to my rep about it and there is
nothing we can do. At one point, I e-mailed my dissatisfaction
with that procedure, price differential--I call it price
discrimination--and my Texaco rep showed up the very next day
and he was halfway out of his car asking me: Chuck, who did you
send that e-mail to?
Senator Wyden. You are not the only dealer charged these
higher prices or with what certainly does it seem to you to be
discriminatory prices?
Mr. Mau. No, I am not.
Senator Wyden. You have got others?
Mr. Mau. Yes. There is a gentleman in Salem--Salem is
dominated by a wholesale market and he is a lessee dealer and
he has to buy his fuel directly from Texaco. Well, it comes out
of Portland. He pays the Portland price. He is surrounded by
wholesale-operated stations, wholesale-supplied stations,
company-run stations by Chevron, consistently pricing 10 to 15
cents below him. What kind of competition is that?
Senator Wyden. I think you have summed it up. We have been
talking about theories for over 3 hours. Chairman Pitofsky told
me he found in his opinion substantial evidence of red-lining.
Mr. Malone says he will resume exporting whenever he feels like
it. But you are the human face on it.
You are the human face that I have been talking to over the
last 2 years. It is why I feel so strongly about this subject.
I just want to wrap this up by expressing my gratitude to
Senator Smith for being willing to work with me on this on a
bipartisan basis, because I think at the end of the day what we
are talking about, I do not think we need to pass new laws.
This is not an area where you have got to run around and pass
new laws and have new bills. What you have got to do is try to
bring some free enterprise and marketplace forces back to this
industry in Oregon, so people like you can go do your thing and
give good service to the people of Oregon. That is what I am
committed to doing. I am glad you put a human face on this to
wrap it up.
I thank you, Mr. Chairman.
Senator Smith. Thank you, Senator Wyden.
Senator Stevens.
Senator Stevens. I went to Oregon State before any of you
were born. Maybe I am missing the point here, Mr. Mau. Are you
telling me these people are charging less money than you are
charged for gasoline?
Mr. Mau. Yes.
Senator Stevens. And the consumers from those stations are
paying 12 to 15 cents less a gallon?
Mr. Mau. Sometimes.
Senator Stevens. I thought this was the Consumer
Subcommittee. Is there a complaint that some people in Oregon
are getting gasoline cheaper, priced below what you can sell it
for? I do not quite get the point, Senator. If you want to talk
something about collusion or something, that usually is
associated with raising consumer prices. There seems to be
objection here that someone can sell gasoline in Portland for
less price than Mr. Mau can sell it.
Is that your objection, Mr. Mau?
Mr. Mau. My objection is that there is no way for me to
compete and the consumer can drive right by my station and see
the red and the black and the white and drive right down the
street.
Senator Stevens. And get gasoline for less money.
Mr. Mau. Yes, and I would like to be able to sell it.
Senator Stevens. That is free enterprise as far as I am
concerned. I thought we were trying to protect the consumer in
this Subcommittee.
Senator Wyden. Would the Chairman just yield briefly?
Senator Stevens. Sure.
Senator Wyden. What Mr. Mau is saying is he would like the
same deal as that guy down the street, and that when Mr. Mau
gets the same deal as the guy down the street, then we can have
the kind of competition that Chairman Stevens wants and that I
want, too.
Senator Stevens. Well, I would like to be able to buy
gasoline for the price you can buy it in Oregon. We produce the
oil, but we pay more for gasoline than you do.
Thank you very much. I am sorry, Mr. Mau. I understand your
situation, but I do not think that it is a consumer matter.
Consumers ought to be happy to be able to drive by your station
and buy it for less money. I will tell you, if I was buying
gasoline I would drive right by you, because I buy the lowest
priced gasoline. I am sorry to say, I think you are off the
mark.
Senator Smith. I think, Chuck, your point is that you would
like to be able to buy it at a price that is competitive as
well.
Mr. Mau. I would like to be able to buy it at the lowest
price, so that I can offer it, because the way I view
competition is that in the gasoline market, when you price
gasoline you decide, I am going to sell it cheaper than that
guy down the street, because you would like to sell it, so you
do it, because I want to sell the gallons. Obviously, the oil
companies, as well as me, like to move the gallons.
Senator Smith. But you feel trapped, obviously?
Mr. Mau. Obviously.
Senator Smith. You must have felt pretty desperate to come
to this Subcommittee knowing that retribution could be taken
against you.
Mr. Mau. The other issue that I think is involved here is,
in the Portland metro area all the people that live there are
consistently paying 15 cents a gallon more than in the central
part of the State. 80 percent of the population of Oregon lives
in that 5-county area and we have the highest prices in the
State there. It has to be trucked everywhere else.
The consumer in the Portland metro area is the loser, not
me.
Senator Smith. A reasonable question. Mr. Mau, thank you. I
think Senator Wyden and I would be very interested to know if
you suffer any retribution for appearing before a Subcommittee
of the U.S. Senate. We would hate to see that and would not be
amused by it at all. So we hope you will stay in touch.
Mr. Mau. Thank you.
Senator Smith. Ladies and gentlemen, we are appreciative of
your attendance, your participation, your testimony. We hope
there is more light now, less heat, but hopefully, prices we
can all afford this summer.
We are adjourned.
[Whereupon, at 6:07 p.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Jean Carnahan,
U.S. Senator from Missouri
Thank you, Mr. Chairman, I welcome this opportunity to be with you,
our fellow Committee members and distinguished guests to participate in
this important hearing.
Although our focus here today is on the price of gas on the West
Coast, this is an issue that affects all of us nationwide, no matter
where we reside.
As you know, I have been in office only a few short months.
However, I have received hundreds of phone calls and letters from angry
and distraught constituents in Missouri who, like your constituents in
Oregon, California or most anywhere on the West Coast, are faced with
the somewhat painful reality of today's national energy market.
Many consumers have experienced sharp increases in the prices of
gasoline, natural gas, home heating oil and electricity. Many in
Missouri who use natural gas are paying double and triple what they
paid last year to heat their homes and businesses. The cost of a gallon
of unleaded, self-serve regular gasoline in the St. Louis area has shot
up from $1.31 to $1.69. That's 38 cents in less than 4 weeks.
And with the high-demand summer season less than 5 weeks away, we
are hearing that we should brace ourselves for more price spikes in the
near future.
These price spikes, combined with the crisis in California and the
current debate about a national energy policy, have left many consumers
surprised and angry about energy costs and anxious about the immediate
future.
Further complicating this issue and contributing to consumer unease
are reports in the media about the possibility of companies
intentionally manipulating the oil and gas markets to strategically
benefit from certain market conditions.
These types of allegations are of great concern to all of us
nationwide. We would like to believe that, in the complicated world of
energy transactions, we have a structure in place that would look out
for the general public and would protect the interests of working
families, our elderly on fixed incomes, and others who often struggle
to make ends meet.
As many of you may know, Senator Lieberman and I, on behalf of a
number of our colleagues on the Governmental Affairs Committee,
recently wrote to the General Accounting Office to express our concern
about recent reports that market power has been abused in the
transmission of natural gas in California. It is alleged that this, in
turn, has contributed to the spiraling cost of electricity generation
in the state.
We have asked Mr. Wells and his colleagues at the GAO to use their
oversight authority to review whether the Federal Energy Regulatory
Commission, or FERC, is up to the task of protecting consumers and
safeguarding the public interest as it works to promote competitive
energy markets.
Although this review will take some time, I hope that anything we
learn from the GAO review will help us position ourselves to better
handle changes not only in the natural gas market, but in all of our
energy markets.
In that light, I hope our review today of West Coast gas prices
will help us as well. I look forward to hearing from each of you.
Mr. Chairman and Senator Wyden, I thank both of you for calling for
this hearing today and look forward to working with the Subcommittee on
an ongoing basis to review this issue that affects us all.
__________
Prepared Statement of The Seafarers International Union
of North America, AFL-CIO
Mr. Chairman and Members of the Committee: The Seafarers
International Union of North America, AFL-CIO, shares the concerns of
the members of this panel regarding the rising cost of fuel on the West
Coast of the United States and appreciates the opportunity to share our
thoughts on this most pressing issue. The SIU represents the unlicensed
crew on U.S.-flag vessels engaged in all aspects of the Nation's
waterborne commerce. A number of our members are employed by U.S.-flag
vessel operators engaged in the U.S. West Coast shipping trades and
live with their families in port communities in California, Oregon,
Washington and Alaska. Like other Americans, our members have been
faced with high home-heating costs and high prices at the gasoline
pumps and personally feel their wallets and checkbooks pinched each
time they fill up their cars or pay their monthly energy bills.
The energy difficulties we face today are not new. Over the last 30
years, Americans have witnessed firsthand fluctuating energy prices,
long gas lines at the pumps, OPEC production cutbacks, and even the
engagement of our troops in a war in the Persian Gulf in an effort to
protect vital energy interests. Time and again, we have heard the
Congress and the Administration speak of the need for a revitalized
national energy policy. As we begin the 21st Century, the SIU joins
concerned Members of Congress and the Administration in calling for a
re-examination of our long-term energy goals. It is time that the
Nation formulates a program that will ensure energy independence to
future generations.
The SIU's expertise is in the maritime industry and therefore we do
not suggest that we are experts in energy policy. However, at home we
are consumers of the product and at work we are often engaged in its
transport. As such, we take a great interest in national policy as it
impacts our daily lives. In our view, a number of factors have
coalesced to result in the escalating fuel prices the Nation is
presently encountering. In recent testimony before the Senate Energy
and Natural Resources Committee, the National Association of State
Energy Officials pointed out that the Nation's energy infrastructure
(e.g., production capacity, refinery utilization, pipeline capacity and
terminal storage) is stretched to its limits. Historically low energy
product inventories have been coupled with tremendous price volatility
over the last 2 years. While benefiting from downward price swings as
low as $11 per barrel of oil in 1998, consumers were faced with
historically high heating fuel and gasoline prices a year later. Adding
to the high costs of energy products in the United States are actions
recently taken by the OPEC nations. In March, OPEC members agreed to
reduce production quotas an additional one million barrels per day
effective April 1st. This follows an earlier production quota cut of
1.5 million barrels per day announced at the beginning of this year.
Unfortunately, these actions will not result in price reductions for
the average American, but most likely will result in higher prices to
drive our cars and cool our homes during the upcoming hot summer
months.
Recently, some Members of Congress have suggested that the House of
Representatives and the Senate adopt legislation prohibiting the export
of Alaska North Slope oil as one way to address the Nation's high
energy costs. The SIU does not agree with that position. Since the ban
on exports was lifted in 1995, only about 5 percent (60,000 barrels per
day) of all Alaska North Slope oil has been exported. In fact, since
June 2000 exports of Alaska crude oil have stopped and are not expected
to resume in the near future. A 1999 Government Accounting Office (GAO)
report found that ``lifting the export ban generally had limited
effects on refiners, consumers, and the shipping industry on the West
Coast.'' While finding that lifting the export ban raised the relative
price of Alaska North Slope oil for refiners, higher market prices have
given oil producers more incentive to develop new oil fields. In
addition, despite higher crude oil prices for some refiners, the GAO
report found that ``no observed increases occurred in the prices of
three important petroleum products used by consumers on the West
Coast--gasoline, diesel, and jet fuel.'' The GAO also concluded in its
1999 report that ``future production should increase because the ban
was lifted.'' It is understandable that concerned Members of Congress
are looking at the ability to export Alaska oil as a. threat to their
constituents' energy well being. When the Congress began contemplating
legislation in the mid-1990s, the SIU was apprehensive at first, as
there was minimal communication between the seafaring unions and its
contracted-tanker companies and the oil companies. However, we became
convinced after discussions with BP that a change in policy would
reverse the decline in oil production and would be in the national good
and to the benefit of our membership. Through the requirement that
exported oil must be transported on U.S.-flag tankers, we were able to
retain and improve the jobs of U.S. seafarers. Working closely with BP
over the last several years, the SIU has the highest respect for the BP
management team as they are of high integrity and committed to their
word.
The 107th Congress and the Bush Administration face rather
difficult energy policy challenges. The SIU is pleased that members
from both sides of the aisle have focused on this complex issue and
have introduced comprehensive legislation for discussion and debate. We
are gratified that the Bush Administration has created a cabinet-level
task force and look forward to their recommendations in the very near
future. The SIU pledges to work with the Congress to develop a balanced
energy policy--a policy that addresses supply side needs by promoting
responsible oil and gas development and incentives for the development
of renewable energy sources with a policy that addresses demand side
issues concerning energy efficiency and conservation. With all parties
working together, a reasonable and realistic national energy policy can
be a gift we present to the next generation.