[Senate Hearing 107-]
[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

                              ----------                              

                                                                   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

                              ----------                              


                       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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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).
---------------------------------------------------------------------------
    \11\ Exxon Corp., C-3907 (Nov. 30, 1999) (consent order).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \14\ Federal Trade Commission v. BP Amoco PLC, Civ. Action No. C00 
0420-SI (N.D. Cal. 2000).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.''
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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.)
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
  

                                
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