[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
EASING PAIN AT THE GASOLINE PUMP: FINDING SOLUTIONS FOR WESTERN WOES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY POLICY, NATURAL
RESOURCES AND REGULATORY AFFAIRS
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
MAY 28, 2004
__________
Serial No. 108-203
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
______
U.S. GOVERNMENT PRINTING OFFICE
96-091 WASHINGTON : 2004
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
COMMITTEE ON GOVERNMENT REFORM
TOM DAVIS, Virginia, Chairman
DAN BURTON, Indiana HENRY A. WAXMAN, California
CHRISTOPHER SHAYS, Connecticut TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana CAROLYN B. MALONEY, New York
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
DOUG OSE, California DENNIS J. KUCINICH, Ohio
RON LEWIS, Kentucky DANNY K. DAVIS, Illinois
JO ANN DAVIS, Virginia JOHN F. TIERNEY, Massachusetts
TODD RUSSELL PLATTS, Pennsylvania WM. LACY CLAY, Missouri
CHRIS CANNON, Utah DIANE E. WATSON, California
ADAM H. PUTNAM, Florida STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia CHRIS VAN HOLLEN, Maryland
JOHN J. DUNCAN, Jr., Tennessee LINDA T. SANCHEZ, California
NATHAN DEAL, Georgia C.A. ``DUTCH'' RUPPERSBERGER,
CANDICE S. MILLER, Michigan Maryland
TIM MURPHY, Pennsylvania ELEANOR HOLMES NORTON, District of
MICHAEL R. TURNER, Ohio Columbia
JOHN R. CARTER, Texas JIM COOPER, Tennessee
MARSHA BLACKBURN, Tennessee ------ ------
PATRICK J. TIBERI, Ohio ------
KATHERINE HARRIS, Florida BERNARD SANDERS, Vermont
(Independent)
Melissa Wojciak, Staff Director
David Marin, Deputy Staff Director/Communications Director
Rob Borden, Parliamentarian
Teresa Austin, Chief Clerk
Phil Barnett, Minority Chief of Staff/Chief Counsel
Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs
DOUG OSE, California, Chairman
EDWARD L. SCHROCK, Virginia JOHN F. TIERNEY, Massachusetts
CHRISTOPHER SHAYS, Connecticut TOM LANTOS, California
JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania
CHRIS CANNON, Utah DENNIS J. KUCINICH, Ohio
NATHAN DEAL, Georgia CHRIS VAN HOLLEN, Maryland
CANDICE S. MILLER, Michigan JIM COOPER, Tennessee
PATRICK J. TIBERI, Ohio
Ex Officio
TOM DAVIS, Virginia HENRY A. WAXMAN, California
Barbara F. Kahlow, Staff Director
Melanie Tory, Professional Staff Member
Lauren Jacobs, Clerk
Krista Boyd, Minority Counsel
C O N T E N T S
----------
Page
Hearing held on May 28, 2004..................................... 1
Statement of:
Burdette, Richard, energy advisor to Governor Kenny Guinn,
State of Nevada; William Keese, chairman, California Energy
Commission; and Lynette Evans, policy advisor regulatory
affairs, Office of Governor Janet Napolitano, State of
Arizona.................................................... 28
Sparano, Joseph, president, Western States Petroleum
Association; Sean Comey, media relations representative,
AAA of northern California, Nevada and Utah; David Hackett,
president, Stillwater Associates; and Tyson Slocum,
research director, Public Citizen's Energy Program......... 68
Letters, statements, etc., submitted for the record by:
Berkley, Hon. Shelley, a Representative in Congress from the
State of Nevada, prepared statement of..................... 133
Burdette, Richard, energy advisor to Governor Kenny Guinn,
State of Nevada, prepared statement of..................... 31
Comey, Sean, media relations representative, AAA of northern
California, Nevada and Utah, prepared statement of......... 80
Evans, Lynette, policy advisor regulatory affairs, Office of
Governor Janet Napolitano, State of Arizona, prepared
statement of............................................... 50
Gibbons, Hon. Jim, a Representative in Congress from the
State of Nevada, prepared statement of..................... 130
Hackett, David, president, Stillwater Associates, prepared
statement of............................................... 88
Keese, William, chairman, California Energy Commission,
prepared statement of...................................... 39
Ose, Hon. Doug, a Representative in Congress from the State
of California, prepared statement of....................... 18
Slocum, Tyson, research director, Public Citizen's Energy
Program, prepared statement of............................. 96
Sparano, Joseph, president, Western States Petroleum
Association, prepared statement of......................... 72
Tierney, Hon. John F., a Representative in Congress from the
State of Massachusetts, letter dated May 25, 2004.......... 7
EASING PAIN AT THE GASOLINE PUMP: FINDING SOLUTIONS FOR WESTERN WOES
----------
FRIDAY, MAY 28, 2004
House of Representatives,
Subcommittee on Energy Policy, Natural Resources
and Regulatory Affairs,
Committee on Government Reform,
Henderson, NV.
The subcommittee met, pursuant to notice, at 10 a.m., in
Henderson Convention Center and Visitor's Bureau, 200 South
Water Street, Henderson, NV, Hon. Doug Ose (chairman of the
subcommittee) presiding.
Present: Representatives Ose, Schrock, and Tierney.
Also present: Representatives Porter and Gibbons.
Staff present: Barbara F. Kahlow, staff director; Melanie
Tory, professional staff member; Megan Taormino, press
secretary; Lauren Jacobs, clerk; and Krista Boyd, minority
counsel.
Mr. Ose. Good morning. I want to welcome everybody to
today's hearing of the Subcommittee on Energy Policy, Natural
Resources and Regulatory Affairs. I ask consent to allow
Congressman Gibbons and Congressman Porter to join us. Hearing
no objection, so ordered. I would like to turn to our host,
Congressman Porter.
Mr. Porter. Thank you, Mr. Chairman. Good morning and
welcome to Henderson, NV. We appreciate the committee being
here and your staff, and on behalf of the whole Las Vegas
community we appreciate this bipartisan approach to a very
serious challenge that we're facing in Las Vegas and regionally
in California, Arizona.
I hope you all have an opportunity to enjoy our community
of Henderson, Las Vegas. It is a great place and one of the
fastest growing communities in the country. 5,000 to 7,000
people a month are moving into our community and with that
comes numerous challenges. We're very, very proud of what we
have as a community so please enjoy your stay; and, to the
staff, we appreciate you being with us from Washington, and we
look forward to a very productive meeting this morning with
solutions to help families in Nevada.
Thank you very much.
Mr. Ose. Thank you, Congressman Porter. Here is the way
this works. We're going to have two panels of witnesses today.
First will be folks associated with the State or local
governments. Second will be private citizens and the
organizations they represent. There is no open testimony here.
People who are testifying have been invited. They have written
statements. We'll be submitting those statements to the record.
There are copies of those statements outside the door if you
care to follow along.
The way these hearings proceed is that each of us up here
will make an opening statement. Statements are limited to 5
minutes in turn. We alternate between Republicans and
Democrats. I do want to compliment my friend John Tierney from
Massachusetts for traveling this far. I know it's not easy, but
it is appreciated.
Now, there will not be questions from the audience during
the course of this hearing. That's not the way congressional
hearings proceed. These are invited witnesses and they will be
the ones that we direct our inquiry to. With that we will
proceed.
Mr. Gibbons, you are our co-host here. I'll turn to you
next.
Mr. Gibbons. Mr. Chairman, I want to thank you and this
committee for allowing me, a nonmember of this committee, the
generous opportunity to appear and be a panel member with you
and I do thank you and Mr. Tierney for that courtesy. I also
want to thank my colleague Jon Porter for spearheading this
effort to bring attention to a national level problem, high
price of gasoline as it affects not just Nevada but every
American over this holiday and preceding days.
As we all know, the price of gasoline in Nevada alone has
risen 60 cents since January of this year and it's anticipated
that it will rise and continue to steadily increase over the
next several months. This has brought a great deal of concern
to many Nevadans because we are a tourist industry based State.
In order to have our economy flourish we need to be able to
bring tourists to Nevada.
One of our principal means by which tourist arrive in
Nevada, of course, is by the vehicle and we are beginning the
Memorial weekend, a period of time when Las Vegas and Nevada
alone flourishes with tourism in an effort to seek an
entertainment value for their time over the weekend.
So Nevada, like California, is suffering from high gas
prices, and I want to say there are several causes of that high
gasoline cost, one of which of course is the fact that OPEC
does control a great deal of the supply and has actually a
hostage holding effort and effect on the price of gasoline.
I know that in the 108th Congress I and our colleagues have
made a strong effort to pass an energy policy to give the
United States an opportunity to create meaningful efforts to
regulate and control the price of fuel that affects each and
every one of our lives. We need to have that bill passed both
through the Senate. There are disagreements among individuals,
disagreements among bodies, disagreements among parties with
regard to the passage of the energy bill, but nonetheless, the
energy bill is the basis by which a sound policy for energy
problems in this country must be addressed.
We're hoping today that by this hearing we can allow more
dialog to be brought forward that will allow for us to
understand the energy problem, and to understand why the fuel
costs in this Nation are rising dramatically, and we hope that
through the testimony that is also going to be presented here
today that we'll find solutions to those problems. Whether
those solutions are government, regulatory, restricted
permitting, needs to expand our own domestic production of oil
and gasoline for this country's energy problem, a need to back
away from our dependence upon foreign supplies of oil and gas
which in fact do change the market conditions dramatically, and
we also need to look at, in my view, a broad effort alternative
energy solution to our dependence on fossil fuels in this
country.
Mr. Chairman, I'm looking forward to the testimony of the
witnesses that will appear before you today and again I want to
thank the committee for holding this hearing in Nevada, holding
it here in Henderson. I want to thank Mr. Porter one more time
and I want to thank the audience for being here and the people
who are going to be testifying before you today. Again, it's a
real honor and privilege for me to be here on your committee.
Thank you, Mr. Chairman.
Mr. Ose. Thank you. Gentlemen, I would like to ask your
consent to enter into the record the statement of Congresswoman
Shelley Berkley regarding this hearing. Shelley is actually
engaged in activities related to another of her committees,
International Relations, and is not able to join us today, but
we will put this statement in the record.
I would now like to recognize my friend from Massachusetts,
Mr. Tierney, for purpose of opening statement.
Mr. Tierney. Thank you, Mr. Chairman, thank you, Mr.
Porter, for hosting this out here and the people of Henderson,
NV, for their courtesies. I enjoy being out here, and I want to
thank you, Mr. Chairman, for having another in a series of
hearings on the important issue of energy and the cost of
energy. We've done it at several locations, one in my district
up in Massachusetts and seems to be an issue that periodically
raises its head as we'll see in some of the testimony.
I don't think I need to repeat what might also be mentioned
by others here but obviously between January of this year and
May the U.S. average gasoline price has increased 50 cents or
more. It's been most dramatic in the West, I believe, but in
Massachusetts you should know our current price is $2.06 a
gallon. That's about 57 cents higher than it was last year at
this time. Families are going to spend about $375 on average
more for gas this year than they did last year and about an
average of $540 more per year than they did in 2002, eating up
just about all of any tax break they may have gotten over the
last several years. This affects the family car but also
truckers, shippers, and many small businesses, all who are
suffering from these skyrocketing prices.
Comments from the industry and from the Bush administration
run the gamut, run from somewhat plausible contributing reasons
all the way to flat-out excuses. Mostly, as studies like that
done by the Consumer Federation of America and Consumers Union
earlier this year show, the explanation for the high and
volatile price of gasoline offered by the industry and the Bush
administration is so oversimplified and incomplete that it must
be considered at best misleading. At worst, it's wrong because
it points to policies that do not address important underlying
causes of the problem and, therefore, will not provide a
solution.
First, let me say there may well be merit to the issue
raised by Mr. Ose and others from his delegation. California
has been a pioneer in environmental policy and generally they
have found the price to be higher but acceptable. In California
refiners truly can, if they can truly produce gasoline that is
cleaner or as clean an alternative as that comprised of 2
percent ethanol by weight, then the EPA should act on the
State's request for relief. We've had other hearings on that
and I think we'll talk about that again today.
With that said, eliminating the small gasoline markets that
result from efforts to tailor gasoline to microenvironments of
individual cities will not increase refinery capacity, nor
improve stockpile policy to ensure lower, less volatile prices
if the same handful of companies dominate the regional markets.
Markets should be expanded by creating more uniform product
requirements. These should not result in a relaxation of clean
air requirements.
Blaming tight refinery markets on the Clean Air Act
requirements to reformulate gasoline ignores the fact that in
the mid-1990's the industry adopted a business strategy of
mergers and acquisitions to increase profits that was intended
to tighten refinery markets and reduce competition at the pump.
Blaming high gasoline prices on high crude oil price also
ignores the fact that over the past few years the domestic
refining market and marketing sectors have imposed larger
increases on consumers at the pump than crude price increases
would warrant. In other words, while they pass on the cost of
higher crude prices, they don't stop there. They jack the
prices up higher still, padding their profits.
Claiming that the antitrust laws have not been violated in
recent price spikes ignores the fact that forces of supply and
demand are weak in the energy markets and that local gasoline
markets have become sufficiently concentrated to allow
unilateral actions by oil companies to push prices up faster
and keep them up longer than would normally be warranted in a
vigorously competitive market.
What price increases are not caused by cost increases are
the result of profit increases, a sign of the exercise of
market power and the market failure. Net operating income for
the domestic downstream industry, refining and marketing side
of the business, have tripled from 1997 to 1999 to 2001. While
profits were down in 2002, due to the serious economic downturn
and the post September 11, 2001 travel slowdown, they have
skyrocketed since.
In 2000, the petroleum industry reported a return on equity
of 25 percent, more than twice the historic average for the
industry and about 50 percent more than what other large
corporations earned. 2003 was the equivalent of another year of
record profits. So far, the first quarter of 2004 has also been
incredibly profitable, especially in the downstream operations.
A good part of the reason for these spikes in price come
from mergers and acquisitions. This wave of mergers and
acquisitions in 2003 saw 52.2 percent of the U.S. oil refinery
industry controlled by just five companies, that compared to
34\1/2\ percent in 1993. 78\1/2\ percent was controlled by the
top 10 companies in 2003 as compared to 55.6 percent in 1993.
Companies have let supplies become tight in their area and
they have kept the stocks low. There is too few competitors to
counter this strategy. Companies can simply push prices up when
demand increases with no fear the competitors will keep their
prices down to steal customers. Individual companies don't feel
compelled to quickly increase supplies with imports because
their control of refining and distribution ensures that
competitors won't be able to deliver supplies to the market in
their area. Operating at very high levels of capacity places
strains on the physical infrastructure and renders it
susceptible to accidents.
Let me make one point, Mr. Chairman, refineries have been
closed by business, not by government. In the 1980's the
policies of support for smaller refineries ended. That
accounted for the loss of over 100 refineries from 1980 to
1983. Since then scores of others have been shut down. In 1990
alone 50 or more refineries were closed. Since 1995 more than
20 have been shut. The number of operating refineries have been
reduced 13 percent since just 1995. Refineries get larger but
they get smaller in number and they're owned by fewer and fewer
entities. Over the period of 1980 to 2000 the number of firms
engaged in refining in the United States has declined by two-
thirds.
Let me make another point. Blaming the decline of capacity
relative to demand on the Clean Air Act does not stand close
scrutiny. Consolidation of the industry is a business decision
that began long before the changes in the Clean Air Act
amendments of 1990 and continued after the adjustment to
changes in gasoline formulation.
Moreover, stock levels are down. Number of days of demand
for gasoline that is held in storage has gone from 4 to 5 days
down to just 1 or 2 days. Any stock levels are no accident.
They are a result of business decisions.
In the face of all this industry activity, the Bush
administration stands idle, merely watching as prices on
regular Americans rise and profits on the President, Vice
President Cheney's cronies skyrocket. The President continues
to divert oil for the Strategic U.S. Petroleum reserve, even
though it's at an all-time high, 660 million barrels. This
purchases 170,000 barrels per day. According to Valero Energy
Corp. CEO William Greehey, if the President stopped purchasing
for the oil reserve it would signal to the commodity traders
that the White House is serious about oil prices and the prices
would fall fast.
The President's administration sanctions refinery mergers.
They've approved 33 oil refinery takeovers worth $19\1/2\
billion and haven't even tried to block one.
The President continues to fail to jawbone OPEC or the
Saudis into increasing supplies despite the fact that there is
a 2000 campaign promise to do just that and criticized
President Clinton for not doing that. We can only hope the
administration is not waiting for a politically opportune time
to take action as was asserted in Bob Woodward's book Plan of
Attack, in essence that the Saudis would act to lower prices
closer to election time.
Finally, the President's energy bill does nothing to
address overconcentration or conservation. It does nothing that
would lower prices much. Instead, it gives billions of dollars
of taxpayers' money, large oil companies in the form of
subsidies and tax breaks with no real conservation
requirements.
The administration's own analysis concludes that the
legislation's incentives to reduce our reliance on foreign
sources of oil will have only negligible success. In fact the
administration's own analysis indicates it will reduce net
imports only 1.2 percent between now and 2025. It's hard to
think that's worth billions of dollars in taxpayer money in
subsidies and tax breaks.
The Department of Interior concluded only 15 percent of the
oil in the 104 million acres of Federal land between Montana
and New Mexico is currently unavailable due to wilderness
designation and other environmental restrictions. So we can,
therefore, conclude that the vast majority of oil reserves on
Federal land are easily accessible for drilling. Environmental
laws do not need to be weakened in order for America's needs to
be supplied.
Mr. Chairman, I've joined a number of colleagues in writing
the President seeking action, and I'd like with unanimous
consent to submit a copy of that letter.
Mr. Ose. No objection.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] T6091.001
[GRAPHIC] [TIFF OMITTED] T6091.002
[GRAPHIC] [TIFF OMITTED] T6091.003
[GRAPHIC] [TIFF OMITTED] T6091.004
[GRAPHIC] [TIFF OMITTED] T6091.005
Mr. Tierney. Here are some of the things we believe we
should do. We should require the oil companies to expand
storage capacity, require them to hold significant amounts in
that storage, and reserve the right to order the companies to
release the stored gas to address supply and demand
fluctuations.
We should block mergers that make it easy for oil companies
to manipulate gasoline supplies and take steps, such as forcing
asset sales, to remedy the current highly concentrated market:
Discontinue filling the strategic petroleum reserve while the
prices are so high; consider building crude and product
reserves that can be used as economic stockpiles to dampen
price increases. We did that recently in the Northeast and it
worked quite well. We should consider doing it in other areas.
Reduce oil consumption by implementing strong fuel economy
standards. Substantially improving CAFE standards over a 10
year period to reduce the oil used by a third in 2020 and save
consumers $16 billion at the gas pump. We should re-regulate
energy trading exchanges that were exploited by Enron and
continue to be abused by other energy traders.
We should have the Federal Trade Commission study the
reasons why the market forced the closure of over 50
predominantly small and independent refiners in the past 10
years and assess how to bring fair competition back to refinery
market and thus expand competition.
Mr. Chairman, it's strategies such as these, not the
administration's billions of dollars in giveaways to its
cronies in faulty legislation, not the industries crying wolf
over environmental regulations when in fact it's the
industries' decision to cause less competition and decreased
supply and capacity that result in the higher prices. That's
what we need and hopefully there will be other suggestions.
Thank you.
Mr. Ose. Thank you for his comments. We're now going to our
host for purpose of an opening statement. Congressman Porter.
Mr. Porter. Again, thank you, Mr. Chairman. I appreciate
you being here today. I'm looking across the room and wondering
how many were around when we were paying about 20 cents a
gallon for gas. I think there are a couple here. I can remember
filling my 1968 Volkswagen. I think it cost me about $3 or
something to fill the tank. That gives my age. I'm a ripe old
age of 49. I remember the early seventies, 1973, 1974 with the
oil embargo. I do not wish for that to ever happen again to the
United States of America although I would love to have 20 cents
or 25 cents a gallon. The Nevada economy, Las Vegas, Henderson
specificly, is tourist dependent. How do tourists get here?
They either come by car or by air; almost 50/50. Close to 40
million visitors a year come into Nevada economy. Add to that
the fact that we're growing at 6,000 to 7,000 people a month.
Although we may have a State of a little over 2 million people,
with an additional 40 million in tourist, we are very, very
dependent upon the cost of fuel. Not only for our economic
future, to make sure that tourists can visit Nevada at a
reasonable cost, but for our residents, moms and dads and
families that are trying to get to work.
Nevada is truly a part of a regional economy. What happens
in California directly impacts Nevada. What happens in Arizona
directly impacts Nevada. Our sister States, although much
larger, have a huge influence over our economic future, whether
it be visitors or whether it be the cost of fuel.
There are a number of issues that have come forward in
light of the increased prices in Nevada and in the region in
the past few months and I've asked staff to come up with a few
key areas that appear to have caused a major increase in our
fuel. One, of course I mentioned that we're a part of the whole
region, but with gas tightening the markets around the world,
the U.S. growth in gasoline supply is not keeping pace with the
growth in demand.
One of the serious challenges is truly supply and demand.
Over the last 20 years many refineries have closed. I think
there are different opinions and we'll probably hear many
opinions as to why, but the fact is they've closed. And, no
refineries have been built since 1976. However, demand for
gasoline has remained strong and continues to increase at about
2 percent a year. The result is an ever-increasing imbalance
between supply and demand.
It's my understanding that the current refineries are
operating at about 95 to 96 percent of their capacity. There is
ample crude oil available but we don't have the refineries to
process that for whatever reason. I'm sure we're going to hear
about it this morning.
The ethanol mandate in California. From January to March,
refineries in California transition from winter-grade gasoline
to harder to produce summer-grade gasoline. This year, because
of overlapping Federal and State regulations, California
refineries were required to begin blending their gasoline with
ethanol. There are lots of opinions on ethanol as to how it
impacts the environment, but the fact remains that they began
blending this year.
As a result of the blending properties of ethanol,
California gasoline productions ability was decreased by almost
10 percent, causing upward pressure on gasoline prices in
California, Nevada, and in the Southwest. Because Nevada
receives almost all of our gasoline from California, these
changes also exert upward pressure on Nevada's gasoline prices.
The cost of crude oil, you know, as I talked about my 1968
Volkswagen in the early seventies and the oil embargo, at that
time about 30 percent of our resources in this country were
dependent upon foreign oil. Now, in 2004, we're more dependent
than ever, at almost 63 percent on foreign oil. Now, let's use
a little common sense. Sixty-three percent dependency on other
countries and their economies and their political problems and
their challenges can and do hold us hostage.
The cost of a barrel of crude oil has increased from about
$25 to an all-time high of $41.85. This is due to a strong
demand in the United States and China. China is importing all
it can find. They don't care about the grade. We do as we
should be very cautious and be careful with the crude that we
bring into the States. They don't care.
Production cuts by the Organization of Petroleum Exporting
Countries [OPEC], political instability in Iraq and Venezuela.
As a rule of thumb a dollar increase in the cost of a barrel of
crude oil translates into about 2\1/2\ cent increase at the gas
pump. Those are some of the key areas that I think specific to
Nevada. Also, we have a challenge here with storage in Nevada.
We have limited storage space, which is another challenge as
I've heard from the wholesalers and suppliers here in the great
State of Nevada.
What can be done to address some of these prices in the
short-term? Because today we're here to talk about some short-
term fixes but really some long-term solutions as the morning
unfolds. But what are some of the things we can do in the
short-term?
Well, there are a few things that we can take, that
consumers can take to decrease the amount of their hard-earned
money that goes to the cost of gasoline, things that we have
taken for granted. One, we certainly can combine some of our
trips to the grocery store, but in reality simply checking
inflation in tires would help immensely right now, here and
today. Now, this isn't a big government suggestion. This is
just some common sense approach. Of course carpooling, and I
applaud the Regional Transportation Commission here in Nevada
for working on the monorail, an additional resource that's
being proposed here in the Henderson corridor. All of these
things are actually in the works today, and I consider some
short-term solutions. Long-term I believe is why we're here
today also and probably most important.
Some possible solutions that will be addressed today
include expanding and enhancing the petroleum infrastructure,
including additional refineries and being able to expedite
regulations. I want to make it clear, when I talk about
expediting approval process, it's not about changing or
weakening or making our environmental regulations more lax. We
must preserve and protect the environment and that's the
priority. But we all know how government can be. It can be very
slow, inefficient. We need to elevate the priority of oil
production as we have energy in the Southwest over the last 24
months.
The fuel challenge we're having today is almost parallel to
the electricity problem we're having in the Southwest. The
difference is when it comes to fuels, we can't bring in fuel
from the Northwest, from Oregon or Idaho, or from other States,
because there are over 60 different fuels being used in
different communities. Now, in fairness, they follow the proper
regulations that have been proposed. I applaud Christine
Robinson here, the Air Quality Control Board of Clark County.
As you know, I helped reorganize that agency just last year.
But, each community has different options.
One of the possible solutions, as we're looking at the
supply side solution, is to make sure that we look at some of
these regulations in a regional basis. So, we may not need 60
different boutique fuels across the Southwest or the West. We
can combine and still meet the important stringent requirements
of the Clean Air Act.
Increasing imports of finished gasoline, that's another
option. I'm not suggesting necessarily that we do that, but we
can purchase additional gasoline that's already been refined
from other countries. And fuel blending, of course the number
of boutiques as I mentioned and the blending of components, but
No. 4 which is really important to Nevada is finding a way to
have additional gasoline storage and capacity right here in
southern Nevada.
The demand side is critical. Improving vehicle fuel
economy, encouraging the use of alternative fuels, hybrid
vehicles, providing in public incentives for public
transportation and carpooling. These are some of the solutions
that I think will be mentioned today.
In conclusion, Mr. Chairman, during the hearing we're going
to investigate why consumers are paying so much at the pump.
More importantly we'll discuss potential short- and long-term
solutions to address the rise in gasoline prices. By the end of
the day only clean renewable energy sources can meet our
growing energy needs while protecting the economy, freeing us
from foreign suppliers and maintaining our commitment to the
environment. Thank you, Mr. Chairman.
Mr. Ose. Thank you, Congressman Porter. I want to add my
compliments to the others. I don't know whether your people
here in Clark County or Henderson know exactly the type of
Member you are, but the reason we're here today is to get you
off my back. That's why we're here. Jon Porter has dogged me to
death about the importance of this issue to this area and I
thank the gentleman for being persistent in that regard.
Mr. Porter. Thank you.
Mr. Ose. I want to ask unanimous consent, actually I think
this is normal, unanimous consent that Mr. Gibbons' written
statement be entered into the record; without objection, so
ordered.
I want to recognize the vice chairman of the subcommittee
from Virginia, gentleman, who is recognized, Mr. Schrock.
Mr. Schrock. Thank you, Mr. Chairman. Thank you for holding
this very timely and important hearing. I also want to thank
our Nevada colleagues, Congressman Porter, Congressman Gibbons,
for having us in their wonderful State and I was amused, Jon,
when you said you were bemoaning the fact that you were at the
ripe old age of 49. I would kill to be 49 again. So don't feel
so bad. There is a lot of life ahead of you.
I wasn't going to come here today because I live in
Virginia; it was a long haul. I didn't get here until last
night, and I have to speak at a commencement ceremony at 9 a.m.
tomorrow at home. But like the chairman, Jon Porter said you
will be here because this is such an important issue, and it
really is. As I left home, we were well into our $2 range as
well, and I never thought we'd see that in Virginia. I can
assure you that's why I'm here because Jon said for me to be
here, and, consequently I am.
We all know why we're here. That's because gas prices have
reached record highs and Americans want to know the answers to
two very important questions: How did we get to this point and
what do we do about it now?
To answer the first question of how we got to this point,
the answer is that America has gone too long without a national
energy policy and we have all been forced to adopt a fly by-
the-seat-of-your-pants approach. Though Congress and the
administration have tried over the last few years, we have not
been able to agree on a plan that sets the course in the right
direction with regards to an energy plan. This lack of policy
have forced Americans to be beholden to foreign producers, to
their oil supply, and we have been held hostage by the
decisions of OPEC so that our loss is their gain.
In May 2001, the administration came out with a policy
statement outlining their plan for tackling America's energy
needs. The bulk of these initiatives required congressional
action, which has not yet taken place 3 years later. It is
clear that some have chosen to make this stalemate and the
resulting energy crisis a political issue rather than seeking
out real solutions.
The House passed an energy bill conference report last
year. The Senate has yet to pass that legislation. The House
has done its part in establishing a national policy, but like
any other issue, we're waiting for the Senate to take issues.
So where do we go from here? Well, I think that passing the
current energy bill would be a giant step in the right
direction and while not including all the policies that will
get gas prices and other energy sources on track, it will put
in place a number of measures to boost production, curb
consumption, and encourage the use of alternative fuel. Once we
get the energy conference report out of the way, we can move on
to the more difficult issues of boosting domestic production by
drilling in Alaska and increasing the refinery capacity right
here in America.
We're here today to hear from our witnesses and to get
their input from where we are heading and how we can point this
ship in the right direction. I was in the Navy for 24 years. I
understand how important it is to have a ship aimed in the
right direction. The same is true with this energy policy. I
thank my colleagues again for hosting us in their fine State
and I look forward to hearing from our witnesses this morning.
Thank you, Mr. Chairman.
Mr. Ose. Thank you, gentleman. First of all I want to say
how much fun I had a year and a half ago when I brought my
family through this part of the country on a Christmas
vacation. We actually went right down Lake Mead Boulevard and
on over to Hoover Dam. We were inspected just like everybody
else. Doing their job. My family did spend the evening here,
and we had a great time. This is a great part of the country
and my kids and I and my wife thank you for the opportunity to
come here.
As we were driving out here today, I was watching the
gasoline stations on the corners trying to keep track of the
different pricing. It was clear that the pricing here is no
different perhaps than it is in California. Everybody is above
$2.25 for regular. It's as high as $2.43 for premium. I think
we're all somewhat unsettled by that.
The purpose of this hearing is to try and examine the root
causes of that. Why is it that we're in this situation where we
find few alternatives and the only near term or immediate thing
we can do is pay through the nose for fuel?
Now, Congressman Tierney and I have been on the road for 4
years looking at this, different areas, different times of the
year, and while we may differ in terms of a number of things,
some of the things we have found I think we consistently
understand. No. 1, we have an imbalance between supply on one
hand and demand on the other. We have growth in demand that is
exceeding growth in capacity to refine. So the differences, the
imbalance, are growing, not shrinking.
As Congressman Porter said, we're impacted by events in
Venezuela, Iraq, and Indonesia, and by growth in the economy in
China where demand for oil has gone through the roof. In
effect, we find ourselves in a marketplace where we're having
to bid against people who previously could not afford to bid
against us.
There are a any number of ways to address this. We can talk
about CAFE standards, which are the fuel efficiency standards.
We can talk about increased production domestically. We can
talk about increased ability to import. We can talk about
alternative means of propulsion, whether they be carbon based
or otherwise for our vehicles. But whatever, whatever you want
to do, the reality is that 97 percent of the means of
propelling our vehicles remains based on petroleum. That's a
fact. Cannot get around that. It's not going to change by
tomorrow.
In order to increase supply, there are estimates as high as
$20 billion being needed to upgrade facilities that refine
petroleum into fuel, whether it be diesel or regular or premium
or what have you. Now, others have spoken about the winter to
summer changeover in fuel and I'm sure a number of our
witnesses will testify about that today so I'm not going to
touch on that.
Over in California there is a refinery that's being closed.
Shell Oil is closing its Bakersfield refinery. Stated reasons
appear to be they can't get enough heavy fuel oil out of the
Kern County supply source to efficiently supply the Bakersfield
refinery. I want to explore that today. I want to ask the
people who are experts in this field whether that's the case.
Frankly, if Shell is going to close their refinery, why
don't they put a price on it and sell it? Now, it's my
understanding that there have been 21 inquiries made as to the
status of that refinery, its condition, what the price is, but
there has been no final closure on that. I would hope to have
some of our witnesses speak to that today.
[The prepared statement of Hon. Doug Ose follows:]
[GRAPHIC] [TIFF OMITTED] T6091.006
[GRAPHIC] [TIFF OMITTED] T6091.007
[GRAPHIC] [TIFF OMITTED] T6091.008
[GRAPHIC] [TIFF OMITTED] T6091.009
[GRAPHIC] [TIFF OMITTED] T6091.010
[GRAPHIC] [TIFF OMITTED] T6091.011
[GRAPHIC] [TIFF OMITTED] T6091.012
[GRAPHIC] [TIFF OMITTED] T6091.013
[GRAPHIC] [TIFF OMITTED] T6091.014
[GRAPHIC] [TIFF OMITTED] T6091.015
Mr. Ose. I do want to just go through and introduce our
witnesses here. We're going to have two panels of witnesses.
Our first panel is comprised of the following individuals:
Richard Burdette, who is the energy adviser to Governor Guinn
here in the State of Nevada, William Keese, who is the chairman
of the California Energy Commission, and who has testified in
front of this subcommittee regularly, and Lynette Evans, who is
the policy advisor on regulatory affairs for Governor
Napolitano in the State of Arizona.
Our second panel, four individuals, is comprised of Joe
Sparano, president of Western States Petroleum Association;
Sean Comey, media relations representative of AAA of Northern
California, Nevada, Utah, an organization I used to be on the
board of directors for; Mr. David Hackett, president of
Stillwater Associates; and, Tyson Slocum, research director for
Public Citizen's Energy Program.
Again, we're taking testimony from these invited witnesses
who have statements for the record which will be entered into
the record which we have copies of outside that door back there
for anybody who wants to follow along as they summarize. With
that I would ask the first panel, Mr. Burdette, Mr. Keese, Ms.
Evans to come forward and join us up here.
Standard practice in our subcommittee as well as full
Committee on Government Reform is to swear our witnesses in. If
you all will please rise.
[Witnesses sworn.]
Mr. Ose. Let the record show the witnesses answered in the
affirmative. The first witness on the first panel is Mr. Dick
Burdette, who is the energy advisor to Governor Kenny Guinn
here in the State of Nevada. He is also the director of the
Nevada State Office of Energy. Sir, welcome to our subcommittee
hearing. You're recognized for 5 minutes.
STATEMENTS OF RICHARD BURDETTE, ENERGY ADVISOR TO GOVERNOR
KENNY GUINN, STATE OF NEVADA; WILLIAM KEESE, CHAIRMAN,
CALIFORNIA ENERGY COMMISSION; AND LYNETTE EVANS, POLICY ADVISOR
REGULATORY AFFAIRS, OFFICE OF GOVERNOR JANET NAPOLITANO, STATE
OF ARIZONA
Mr. Burdette. Thank you, Mr. Chairman and members. Let me
add, Governor Guinn welcomes you and thanks you for offering us
the opportunity to talk a little bit about our views and the
continuing challenge of gasoline prices in Nevada, California
and Arizona.
We are linked pretty closely together. Nevada is greatly
dependent on the availability and price of gasoline, diesel
fuel, and jet fuel, and as the prices of those fossil fuels
rise it directly affects our employment, our tax base, and, of
course, nearly every one of our citizens.
It is going to take a little bit of an academic tack here
because I think the problem is academic. Much has been said
about the preference for using the free market to allocate
products to consumers. This, of course, is what markets do.
When this is done efficiently, we call them competitive or
free. When markets are not free, goods and services are not
allocated efficiently and economic rents, that's a term that is
less inflammatory than excess profits, economic rents are
collected usually by suppliers.
The truth is that there are virtually no free markets or
competitive markets in the classical sense. To an economist the
word implies a series of standard assumptions such as the
market allows easy price discovery. The price discovery during
the Western energy crisis 3 years ago, electricity, was
exceedingly difficult because as FERC determined some market
participants manipulated the electricity market and extracted
substantial rents that nearly bankrupted Nevada's electric
utilities and the State of California. Nevertheless, we still
refer to those markets as free or for those who like to hedge
their bets as governed by free market principles.
Unfortunately, there exist a crucial defect in the gasoline
market that is even more fundamental. In a reasonably free
gasoline market, when supply shortages occur, prices increase
until they are high enough to allocate available gasoline to
its most efficient use. Generally this means that some refiners
will collect rents, ordinarily a bad thing. But in a free
market these rents are used to provide the capital needed to
expand, to build new refineries, and to attract new capital.
Those who fail to make those kind of investments would lose
market share and profitability. Most importantly when that
happens consumers benefit.
We can spend a lot of time pointing fingers at who created
the market that we have now, but in my opinion we in the West
have allowed ourselves to drift or perhaps be nudged into a
situation that is economically unsound. We don't want the
government to ration gasoline but we are increasingly aware
that the rents collected, principally by refiners, are not
being used to serve the public interest as they would be in a
free market.
The international crude market is not a free market either.
It's characterized by institutional collusion of OPEC. The
consequence is higher crude prices now exceeding $40 a barrel.
If we had known that crude prices would remain high, the
domestic supply of crude would increase substantially. After
all, there is a whole lot more $40 a barrel oil than there is
$23 a barrel oil. Unfortunately we don't know that. And, the
ability of OPEC to drop prices is very effective in minimizing
competition from renewable energy development, hydrogen
technology and other methods we would take here in the United
States.
Crude prices, however, are like the tidal forces beneath
waves. The waves are the price spikes generally caused by
conditions unique to our Western market and are similar to
State taxes and gasoline environmental attributes that affect
the price level but generally, not always but generally do not
affect price spikes. Price spikes are caused by excess demand,
when demand exceeds supply. But because refiners are operated
so close to full capacity it is sometimes possible, not
possible for them to make enough product for peak demand.
Supply interruptions cause--also result in price spikes and
unwarranted collection of rents. Unplanned maintenance of
refineries is an especially troublesome type of interruption.
It is very difficult to ascertain whether the occurrence or
duration of an unplanned maintenance outage was the result of a
legitimate problem or withholding capacity. The situation is
uncomfortably close to the electricity crisis of 2000 and 2001.
But, in this market it may not even be illegal to withhold
capacity. Governor Guinn and Senator Reid had just such concern
in mind when they jointly asked the FTC for a systematic method
of overseeing the western petroleum market.
With regard to solution, the most direct solution for our
refined products supply problem is to build more refineries.
While it may still be possible, this is very unlikely and
improving the short-term refining capacity has been largely a
matter of relying on imports. There is one potential mid-term
solution which is not fully developed: ethanol and biodiesel,
not generally available.
With regard to demand-side problems, demand-side options,
the easiest thing to do is to get people to live closer to
their job, to have cars with higher mileage, or to offer public
transportation. But, in any event, changing behavior is a long-
term process. That would be helped most by what we want the
least, high gasoline prices.
[The prepared statement of Mr. Burdette follows:]
[GRAPHIC] [TIFF OMITTED] T6091.016
[GRAPHIC] [TIFF OMITTED] T6091.017
[GRAPHIC] [TIFF OMITTED] T6091.018
[GRAPHIC] [TIFF OMITTED] T6091.019
[GRAPHIC] [TIFF OMITTED] T6091.020
[GRAPHIC] [TIFF OMITTED] T6091.021
Mr. Ose. I thank the gentleman. Our next witness, chairman
of the California Energy Commission, has been before us in the
past, testified on any number of things, and is a welcome guest
here. Mr. Keese, you're recognized for 5 minutes to summarize
your testimony.
Mr. Keese. Thank you, Mr. Chairman, members of the
committee. I was noticing that we have an AAA chart over here
on the wall. I believe our last hearing was at the last peak we
had. The good news, I guess, it looks like says $2.40 is as
high as it will go. That's as high as their chart goes.
I'm going to briefly summarize what has happened on our
price increases, what the impacts have been, and the measures
that California is looking at. Crude actually does contribute
to the price, as we heard when the barrel goes up $1, the price
of gas goes up 2\1/2\ cents. That's a cost factor that the
refineries have. It's OPEC but California relies on Kern and
California relies on Alaska. The oil isn't quite as good but
our price goes up commensurate. They've gone up 25 percent
since January 1st and our prices have gone up pretty much the
same as we've heard from the members of the committee.
We had a particular problem this spring because with the
turnaround from using MTBE to switching to ethanol, coinciding
with the turnaround that refiners take to move from winter-
grade to summer-grade gasoline, 9 I believe of our 13
refineries decided to have major outages. They put away
inventories to cover their needs during that time. So we went
in to the turnaround time with historically high inventories.
Well, a number of the refineries that weren't going to go out
went out at that time. A number of the refineries that were
going to come back on in 2 or 3 weeks didn't come back in 2 or
3 weeks. We went through historically low level of inventories
which started our price spike.
We do import product and we import the ingredients for
gasoline. Unfortunately, our capacity to import liquid products
has been going down as our ports have been shutting down their
tankage. We had tankers that couldn't get into port and had to
divert to other ports.
Our price reached $2.27 last week. We may hear higher from
AAA. It's a little higher. We see a leveling out about this
time. The diesel situation was actually worse and coincided
with the time for spring planning which is a heavy demand time.
As you know, up in the Sacramento area we had a rupture of the
Kinder Morgan pipeline. That and a rumor that the Energy
Commission was on the verge of declaring an energy emergency,
which we can do drove prices up another nickel or dime. We were
not. We were in the investigative stage, not about to declare
an emergency. Diesel got to $2.34.
We are an island, somewhat, but we are affected by
conditions in other regions. We routinely import from out of
the country, out of the State, but they have to give a fuel
that will meet our specifications. We compete with imports for
these other areas. Most of their markets are closer than
California. We have to pay a premium to get it shipped to us.
That adds money.
I'd like to say just one thing about ethanol. We did add
ethanol. We like the flexibility of not having to add ethanol.
Ethanol does not contribute to the price, however. Ethanol
ingredients today are cheaper than gasoline ingredients. So, we
do not expect if there is a major change in Washington and they
give us the waiver, we do not expect to see California refiners
leaving ethanol. It's the cheapest ingredient. We would like to
see them have an alternative to import alkylates. If they can
import alkylates that will probably keep the price of ethanol
down and the price of gasoline down.
Price is up 65 cents. I think I'll just stop right there.
We do supply virtually all of Nevada's fuel. We supply most of
Arizona's fuel and we supply much of Oregon's fuel.
The alternatives available to us are to restrain prices,
increase refinery capacity. We're not going to build a new one.
We need to change the rules so we can expand the ones we have.
Increase imports. We have to change the rules in the ports,
let more product get in. Perhaps we have to pipe it from the
coast inland to store it, but we have to counteract this idea
that the ports want to move to container cargos for some liquid
cargos and we have to reduce demand. We've asked for the
waiver. We certainly hope that rumored discussions taking place
back in Washington will culminate in getting the waiver. The
flexibility, as I say, of a refiner to either use ethanol or
not is what will bring down the price.
We need to have permission to study about the problems in
the ports. We're going to have workshops in the next month on
that issue and we hope to solve that problem.
I'm going to defer discussion of the Shell refinery to
others who would like to talk about that. I guess our other
hope is that the Federal Government will look at CAFE
standards. CAFE standards can help, and we'd like to see fuel
cell light-duty vehicles incentive as another strategy. Thank
you.
[The prepared statement of Mr. Keese follows:]
[GRAPHIC] [TIFF OMITTED] T6091.022
[GRAPHIC] [TIFF OMITTED] T6091.023
[GRAPHIC] [TIFF OMITTED] T6091.024
[GRAPHIC] [TIFF OMITTED] T6091.025
[GRAPHIC] [TIFF OMITTED] T6091.026
[GRAPHIC] [TIFF OMITTED] T6091.027
[GRAPHIC] [TIFF OMITTED] T6091.028
[GRAPHIC] [TIFF OMITTED] T6091.029
[GRAPHIC] [TIFF OMITTED] T6091.030
Mr. Ose. I thank the gentleman. Our third witness on the
first panel is Ms. Lynette Evans. She is a policy advisor for
regulatory affairs to Governor Napolitano in Arizona. Ma'am,
welcome. It's a pleasure to have you here. We do have your
statement, and we've read it. We recognize you for 5 minutes to
summarize.
Ms. Evans. Chairman, members of the subcommittee, thank you
for inviting me here today to testify about the impact of high
gas prices on the State of Arizona. I just wanted you to
recognize that also present with me today is the assistant
attorney general, Emma Lehner, representing the Arizona
Attorney General's Office, and they submitted written testimony
for the subcommittee.
Needless to say, this is a timely topic. In fact, since
March when our office was initially asked to testify until
early this week, the average price throughout the Nation has
risen more than 18 percent and it seems we set new records
every day. Usually Arizona prices tend to be among the highest
in the country. Our retail prices typically track the ups and
downs of the California market minus 10 to 20 cents. This
pattern is largely due to our State's dependence on California
refineries.
Arizona has no refineries, no shipping ports, and as a
result we import all of our gasoline and are dependent on two
pipelines to supply almost all of our fuel. Approximately 60
percent of the fuel consumed in Maricopa County comes from
California and remaining 40 percent from Texas and New Mexico.
The Phoenix area alone consumes 65 percent, roughly 109,000
barrels of the State's average daily gasoline supply.
Our relative isolation from the primary supply sources
became painfully clear last summer when the east pipeline
ruptured and seriously disrupted the gasoline distribution
system in Phoenix for several weeks. At the peak of the
disruption, we estimate that more than half of all the gasoline
stations in Maricopa County were forced to close and ran dry.
At the same time, pump prices rose approximately 60 percent.
Now, at the beginning of this year the average price for a
gallon of gas in Arizona was $1.53. By early this week, it had
increased a total of 40 percent to $2.15 a gallon and I think
it's even up more today. Even recognizing seasonal variations,
the price is still 47 cents more than the same point last year.
Now, at the same time there has been lots of media coverage
about the increased profits enjoyed by the oil industry. The
Oil Price Information Service data indicates that refinery
margins are currently above 35 cents a gallon, which is
significantly above the 2000 through 2003 average of 15 cents
per gallon.
Now, interestingly, despite these high prices, driving
behavior does not change much. According to a recent survey
conducted by AAA, record numbers of drivers are expected to hit
the road for this weekend and hotel occupancy rates in Arizona
are expected to be higher than average.
Instead, consumers do appear to be responding in other
ways. Last week CNN reported that SUV sales have slipped 22 to
33 percent over the last quarter. While this is definitely
encouraging to hear that consumers may be adjusting their
behavior, it's difficult to predict whether this apparent move
toward fuel conservation will last.
There are some industry concerns that our State has.
According to Bloomberg News there have been 33 mergers in U.S.
oil industry, I think that was mentioned earlier, during the
last 4 years alone. Unlike other markets the petroleum industry
offers the greatest benefit to consumers when they have
options. I am concerned that the continuing consolidation of
the industry is decreasing choice and depressing competition.
We need to take a more careful and holistic look at mergers as
they're being proposed and better analyze how they will impact
the overall market.
In the short-term, the Governor in February wrote to
President Bush requesting an investigation of the high prices.
Nine of the Governors later joined the request and sent a
second letter to President Bush. Unfortunately, the
administration has declined to undertake such an investigation.
Needless to say, we are disappointed by this decision, and
Governor Napolitano along with 10 other Governors have written
the President to urge reconsideration and several State
attorney generals have made similar pleas. There is no reason
why the Federal Government should not begin an immediate
inquiry into why prices and profits have risen simultaneously
at the expense of American consumers.
Long-term, we need to reevaluate our overall energy policy.
In Arizona, there has been some discussion about the
possibility of a new in-State refinery. I'll say that our
office is certainly receptive to exploring opportunities that
would increase the fuel supply for Arizona and our regional
sister States.
In order to successfully address this issue we need to look
beyond today, even the next year, and do some real long-term
planning. That means increasing CAFE standards, promoting the
manufacture and purchase of fuel-efficient hybrid vehicles, and
exploring nonconventional fuel sources.
Hybrid vehicles are proving to be popular with buyers
despite the limited production of these cars to date.
Continuing existing Federal tax incentives for these kinds of
vehicles will encourage drivers to purchase more hybrids. I
also recommend we reexamine current tax laws that offer tax
deductions for the purchase of fuel inefficient vehicles like
Hummers.
Without long-term solutions we may end up like policymakers
nearly 30 years ago who were faced with supply shortages during
the 1970's. That fuel crisis was followed by lots of talk of
reducing our dependence on foreign oil and fossil fuels, but
ultimately very little has changed. Fossil fuels are a finite
resource that we should be weaning ourselves from. We must be
proactive now or our future gasoline crises will be even more
devastating to consumers and our economy. Thank you.
[The prepared statement of Ms. Evans follows:]
[GRAPHIC] [TIFF OMITTED] T6091.031
[GRAPHIC] [TIFF OMITTED] T6091.032
[GRAPHIC] [TIFF OMITTED] T6091.033
[GRAPHIC] [TIFF OMITTED] T6091.034
Mr. Ose. Thank you, Ms. Evans. Now what happens next is we
go through a round of questions for our witnesses. Typically,
the questioning proceeds in 5 minute increments. We'll just go
one, one, one, one, one. The panelists are asked to keep their
answers brief, again, to respect the Member's 5 minutes. We can
always followup in writing with clarification and the like.
We're going to recognize our host for the first round of
questions. Congressman Porter, I recognize you for 5 minutes.
Mr. Porter. Thank you. I'm going to come to the home team
here for a second.
Mr. Schrock. Smart move.
Mr. Porter. This past December, seems to me it was
somewhere around Christmas, in our big sister State of
California there was a challenge in that there were floods that
caused the pipeline to break, our single pipeline into southern
Nevada for fuel. I know that there is a certain finite amount
of storage in Nevada to help allow for emergencies in the line.
My question would be should we be looking at additional
pipelines into Nevada also?
Mr. Burdette. Mr. Porter, absolutely. We have three
pipelines into Nevada from California. There are actually two.
There are two right together in the south and one up north.
Actually, the pipe didn't break in December, but it shut down
because they had to fix the overlayment.
But, the point is very well taken. Obviously, capacity is
helpful, storage capacity is helpful to the distributor, both
the distributor market, wholesale market and retail market.
Yes, we should have more pipelines and yes, it would be nice to
have one from a different source than California. Take some of
the pressure off them and give us some reliability.
Mr. Porter. Can you cover for us briefly and followup at
some point what steps the Governor is taking in Nevada today to
help with the fuel crisis? Are there some things that we need
to know as Members of Congress to put into our findings?
Mr. Burdette. Well, I think, to be frank, there are limited
options available to the Governor. I think the primary
initiative is we want to make sure that no matter how flooded
the market is, that there is some oversight at the Federal
level, some access to books and records or some effort to deal
with the principal problem.
The principal problem is the investment of the excess
profits that are earned, I'm sorry, rents that are earned are
not plowed back into something that benefits people, benefits
our consumers and California's consumers and Arizona's
consumers, and an effort that would somehow try to deal with
that constructively we would be very enthusiastic about
supporting.
We are interested in much of the research that my colleague
to my left and the CEC is doing. CEC does very fine work and is
very helpful not only to California but it's helpful to us as
well. We have begun to try to work more closely, and I think
that's important for us. We can learn a lot from California and
not always from mistakes either.
Mr. Porter. We know someday they're going to fall off into
the ocean so we want to be prepared, right, when California
drops into the ocean. I ask those questions to make sure we're
not duplicating some of our efforts and make sure we can
coordinate.
The storage situation has come up in our research from
Washington but also from those suppliers here in southern
Nevada. Any thoughts on the storage and things that we can do
to help with that?
Mr. Burdette. There are private forces that have increased
the amount of storage, particularly after the problem we had
with pumping power during the energy crisis. There were
approximately 120,000 barrels of storage capacity increased in
the Las Vegas area, largely for regular gasoline and commercial
diesel, plus, and I don't have the number for the airport, but
we did increase airport jet fuel capacity storage as well.
I think private forces are working reasonably well there
but we are short. We would certainly be supportive and helpful
if we can in that regard.
Mr. Porter. One additional question, Mr. Chairman? Mr.
Keese, from a regional perspective, California, Nevada, with
the boutique fuels, I understand the Clean Air Act and believe
that those steps should be followed. Is there some things that
we can do more regionally to make sure that there is additional
fuels available between the two States?
Mr. Keese. Actually, yes. I was interested to hear the line
of your questioning because over the last 2 or 3 years in
California we looked at three alternatives that the legislature
asked us specifically to look at. New refinery capacity
perhaps, perhaps State owned, storage capacity, and a pipeline
from Houston.
New refinery, probably impossible. We are going to be
working very actively on allowing more expedited permitting
process on current refineries.
Storage is a major problem because the fuels are fungible.
You have to keep moving them through. Yes, some enhancement but
it does add to the cost of the product. We wind up thinking
that we'd like to see the pipeline from Houston and if the
pipeline from Houston even only goes to Phoenix and Las Vegas
and meets your needs, it frees up plenty of supply in
California. So, the pipeline is a very viable thought. We would
love to talk to you about the pipeline.
Mr. Porter. Thank you. Thank you Mr. Chairman.
Mr. Ose. Gentleman from Massachusetts.
Mr. Tierney. Mr. Burdette, you were talking during your
testimony about outages. I understand it's so concentrated
refineries now, so few being around and the stress under which
they're working that we're liable to have more accidents,
really working at capacity for a good deal of time. I suppose
outages are somewhat a necessary part of the business during
particular times.
At some point, when we start to see the number of unplanned
outages happen with the frequency that we've been witnessing,
particularly this past year and others, should we be concerned
about probably having some sort of investigation as to whether
any of these are planned outages as opposed to accidental or
coincidental outages.
Mr. Burdette. Congressman, I guess a couple of things about
that. First off, it isn't surprising equipment as complicated
and as old as the equipment to see unplanned forced outages we
call them in the electric business, forced outages, unplanned
outages, but I'm not, I'm not an expert on refineries. I don't
have credentials that could comment technically about what you
said.
As an economist, I look at it though and I am very worried
about whether these unplanned outages are as unplanned as
perhaps they may have been described. The problem I think is
that it's not illegal for them to be withheld.
Mr. Tierney. I would agree. I would agree. The other part
of your testimony, these rents as you like to call them, you're
much nicer than I am I guess, these excess profits, most
industries in a free market would reinvest some of that money
into capital needs of their business. You would want to fix
your refineries or make storage capacity, whatever. That's not
happening in this industry, is it.
Mr. Burdette. That's correct, it's not. Not in the
refineries that serve our State. I'm not sure about elsewhere
but it's not happening here.
Mr. Tierney. Mr. Keese, you indicated that you don't think
there will be any refineries in California. Would you explain
to me why that's the case? You think society won't allow it or
the industries won't invest the money or what is it?
Mr. Keese. Correct.
Mr. Tierney. Both of those.
Mr. Keese. Society won't allow it and, therefore, it
becomes easier to do it in New Zealand or Australia or
someplace else. There is investment taking place a broad.
Mr. Tierney. So, not in my backyard.
Mr. Keese. Not in my backyard.
Mr. Tierney. How many refineries have been closed in
California during the last 5 years.
Mr. Keese. I'm going to guess one.
Mr. Tierney. In the last 10 years.
Mr. Keese. Probably two or three small ones and then we
have Shell, looks like it's going to go down. That's of great
concern to us, and I guess where I come from I can understand
shutting down a 7-year-old essentially refinery that was three
small refineries on different pieces of property combined. I
can understand the economics of it. What I want to see is that
6 percent of California's diesel and 2 percent of California's
gasoline that came out of that is replaced. I'd like to see a
commitment to do that.
Mr. Tierney. From the industry.
Mr. Keese. Yes.
Mr. Tierney. I'm a little concerned. I do think we need to
streamline the whole process, permitting process. I know most
of these refineries have been expanded. A lot of them have been
expanded. We have fewer refineries but they're larger and
controlled by fewer and fewer people on this and it gets to be
an issue there.
The other way to go about it, of course, Ms. Evans, is to
do more conservation in the CAFE standards out there. What is
your State doing about the standards and conservation?
Ms. Evans. Actually Arizona is one of the leading States
when it comes to purchase of the State vehicles that are
alternative fuel regarding the vehicles. The only problem with
that is apparently one of the big national producers, Chevy, is
going to be not producing the Cavalier which is one of the
common vehicles we use, but we've been very proactive in making
sure the State buys those type of vehicles and less dependent
on gasoline.
Mr. Tierney. I was just sharing with the chairman that
we've had people that talk about increasing the fuel efficiency
standards generally get jumped on both by the industry and by
labor unions because everybody has worked together, decided
this is a bad thing. In fact, I was hoping they would join
together and ask us help retooling facilities and keep the
industry going, keep the jobs going and move in that direction
so we can make the kind of vehicles we would.
It makes a lot more sense to me than giving out subsidies
to everybody, doesn't make a lot of sense to me to look at the
President's energy bill who moves away from conservation, away
from alternatives, loads it up on fossil fuel industries and
subsidies that don't do much for anybody. In the long-run, we
have to look at that industry perhaps not making fuel-efficient
cars, let them retool. Got other countries do it. Perhaps we
ought to look in that direction. Thank you.
Mr. Ose. Thank you. Gentleman from Nevada, Mr. Gibbons.
Mr. Gibbons. Thank you very much, Mr. Chairman, Ms. Evans
and gentlemen. Thank you very much for your testimony today.
It's been very helpful. Mr. Burdette, maybe I'm going to ask
you a question that you know or do not know. If you don't,
that's fine.
Would you for us, for me individually, break down the cost
of a gallon of gasoline for us. Tell us what the various
percentages are that are related to taxes, production,
refinery, transportation, etc., and then tell us the second
part of that question, which ones can we control? Which ones
can we affect that are under our control that will make a
difference in the price of gasoline today?
Mr. Burdette. Thank you, Mr. Gibbons. First of all, we're
only talking about 25 percent that we can directly affect
because roughly half or a little bit more is the price of
crude. That obviously goes up and down as the price of crude
goes up and down. About a quarter or more, maybe 30 percent, is
taxes.
In Nevada we have fairly high taxes and the--I believe
there is good reason for that. We are a pretty partially
populated State. We have long roads and we have in places where
we do have lots of people, a lot of growth, a lot of capital
required. So taxes and cost of crude are the overwhelming
majority of the cost we deal with. They're not always the cause
of the spikes that we see.
The cause of the spikes that we're seeing, in my opinion,
is in that last 25 percent where we're talking about the cost
of refining and the cost of distributing, storing it, piping it
and finally making it available at retail. We have some ability
to control that but this is a free market. Particularly the
distribution and the retail side of that market there is a fair
amount of competition in our State and that folks have
different places to go.
So there is probably not a great deal that can be done to
effect the price there which is why I focused mostly, at least
my comments, on refining and the fact that the market seems to
absolutely forget those, the rents that are collected there
that should be helping us that aren't.
Mr. Gibbons. Let me ask a followup question if I may.
Perhaps either Mr. Keese or Ms. Evans would like to add to
this. If we cap those rents or production profits that you're
speaking of, what would be the short-term and indeed the long-
term effect of such an action.
Mr. Burdette. Frankly, Mr. Gibbons, I'm not sure how the
Governor would answer that so I'm going to answer it for
myself. I really don't believe that caps are a good idea. They
may sound great and may work just fine for 6 months or a year,
but eventually they get you in trouble because they skew
investment also.
Because our markets aren't perfect, we try to gain from our
markets those things that a free market would give us. So, what
I believe we need is a method of perhaps even working with
refiners, working with the other States to find a way to use
those profits, and it would be hard to define but use those
profits in a constructive way that would help relieve the
supply shortage. Perhaps to purchase the diesel that is going
to hurt Nevada, by the way, just as badly as California when
and if Bakersfield shuts down.
Mr. Porter. Mr. Chairman, if I can yield time.
Mr. Ose. Gentleman from Nevada would yield.
Mr. Gibbons. I'll yield.
Mr. Ose. Stop the clock for a minute.
Mr. Porter. Thank you. I appreciate that. I could possibly
help with the question of the cost of fuel on the taxes. We're
the fifth highest in the country. Federal tax of course is 18.4
cents per gallon. Second highest. Sorry. State taxes are 18
cents. County and sales tax is 14.4 which equals about 15.8
cents per gallon.
Now, let's define a little step further. I applaud local
governments. In the early 1990's in southern Nevada they put
forth a petition, initiative petition that was voted on by the
people of Nevada, to help fund our streets and highways. So,
this is an example of how Nevada has been paying its own share
and its fair share if not more than its fair share. But part of
the reason that we are some of the highest is because of local
initiative petitions that were exerted by the community to help
fund our streets and highways. I want to enter that for the
record.
Mr. Ose. Senior member of Nevada delegation.
Mr. Gibbons. Thank you, Mr. Chairman. I appreciate Mr.
Porter's clarification on that issue as well. It was a very
important point to have been made. I don't know if I gave Mr.
Keese or Ms. Evans an opportunity to answer the final question
about the controlling of profits, capping of those profits.
Your philosophy, your ideas, should it be done?
Because it seems to me that part of the issues, part of the
concerns are in fact the mergers of companies; therefore, the
ability of these companies to make larger profits which seems
to be economic stimulus of American economy to begin with. But
what's your individual thoughts on capping those? Should we do
it in fact?
Mr. Keese. I'll answer specifically. I think it would be
extremely difficult. I also have electricity under my purview.
Let me make a quick distinction here. If you have three or four
generating plants and you shut one down, we saw that you can
drive the price up and profit. If you have an oil refinery, you
have contracted, committed to supply everything that comes out
of that refinery. If you have an inadvertent shutdown, you go
next-door to your neighbor and you pay that economic rent to
them to buy the product at a higher price to meet what your
commitment was. You lose.
Mr. Gibbons. So it's not----
Mr. Keese. Unforced outage at a refinery is a loss. Now, if
Chevron has to go to Shell and pay an extra 30 cents a gallon
to buy it because that's what Shell wants, is that an excess
profit? And then, when Chevron does the same thing to Shell
when Shell goes out and Chevron says, well, I want 40 cents.
There is winners and there is losers is what I would say. It
seems to me it would be very difficult to try to figure out.
You get taxed when you win. You get a credit when you lose.
Mr. Gibbons. Mr. Chairman, I know my time is up.
Mr. Ose. Ms. Evans, I think Mr. Tierney and I are
interested in Ms. Evans' answer.
Ms. Evans. Absolutely. I have the same caveat that Mr.
Burdette had is that haven't had a direct conversation with the
Governor about this particular issue, but I think from our
perspective we would like to see a little more transparency to
understand exactly what's going on in marketplace to ensure we
don't have market manipulation going on, that we don't have
refineries that are purposely making decisions to shut down to
increase their profits. So at this time, I'd hate to speak to
whether or not we would need a cap that is a little more down
the road. Transparency first.
Mr. Tierney. Yield the floor.
Mr. Ose. Certainly.
Mr. Tierney. Mr. Keese, are you telling me you don't think
that industry raises its prices to recoup that loss at some
point down the chain.
Mr. Keese. Oh, I think throughout many different segments,
production, refining, distribution, it does, and I don't want
to be misunderstood. You see those spikes over there, we want
them down. We don't want those spikes.
Mr. Tierney. I want to make sure I was clear with your
answer. They may temporarily have to go somewhere else and use
those rents to replace them, but in the long run they can
charge more for the product they do generate.
Mr. Keese. Certainly try to recoup it.
Mr. Tierney. Thank you.
Mr. Ose. Gentleman from Virginia.
Mr. Schrock. Thank you, Mr. Chairman. Ms. Evans, for
whatever it's worth if you can't get Chevys, Ford in 90 days
will be coming out with the new Escape.
Ms. Evans. I've heard it.
Mr. Schrock. It's going to be a hybrid. My wife drives a
current Escape. My son is No. 4 on the list of 20,000 to get
the new Escape and I'm dying to see what it's going to look
like. It's good that they're doing that. It's going to be
interesting to see when that happens.
We're talking about these rents and such and I understand
that. The refineries are just saying they're playing by the
rules that Congress set up for them. There is an FTC report
from 2001. Long time ago. It said the commission found no
evidence of conduct by the refiners. Are we the problem? Is
Congress the problem? Could we fix this? Don't be politically
correct. Tell us what you think.
Mr. Burdette. I'm sorry, are you addressing the question to
me.
Mr. Schrock. All three of you. If we're the problem we need
to know it because everything emanates from there that causes
some of these problems. If we have to change the way the game
is played then so be it.
Mr. Burdette. I personally don't believe that Congress is
the problem, although, by the way----
Mr. Schrock. I was hoping you would say we were. We could
fix it.
Mr. Burdette. The new Ford hybrid won't count. It's not an
alternative fuel vehicle. Now that's controlled by the feds,
not by the government.
Mr. Schrock. What do you mean ``won't count.''
Mr. Burdette. We can't use Prius or Ford, the new Ford
because it doesn't comply with the Clean Air Act. We're a clean
cities initiative, which requires alternative fuel. The
definition of alternative fuel doesn't include savings of
fossil fuel. But that's----
Mr. Schrock. But that's our fault, right.
Mr. Burdette. Well, I think it's EPA.
Mr. Schrock. That is our fault, yes or no.
Mr. Burdette. Yes, sir, it's a Federal problem.
Mr. Schrock. Good. If we're truly interested in getting
people into hybrid cars we need to change the rules of the game
so they can get in them.
Mr. Burdette. To get the States more involved, sure, that
would help out.
Mr. Keese. You could fix that. Arizona buys alternative
fuels, natural gas vehicles. They can't buy hybrid because they
get 40 or 50 or 60 because it doesn't meet the requirement. You
can change that. That's yours to change.
Mr. Schrock. OK.
Mr. Burdette. The broader issue is one that we fell into, I
think. 1950, by the way, I remember driving in the 1950's.
Mr. Schrock. Good. I'm glad there is somebody here besides
me that remembers that.
Mr. Burdette. Maybe Bill, too. We rely almost as an article
of faith on the free market to deal with many of our markets,
all of them, and true, we should and did in this market but
this market has changed. This is not the same market that
existed in 1950's, and the same level of faith and its ability
to drive the kinds of results, the kinds of outcomes are very
different, and so the Congress in 1950 faced a very different
problem than the Congress of 2004. Again, the aim is to get
results that mirror what a free market would give us.
Mr. Schrock. In Nevada, for instance, would Nevada be
prepared to build their own refinery? I'm probably going to get
asked that in Virginia. Everybody says not my backyard, but if
we don't do it in our backyard then we're going to have to
depend on foreign oil companies to provide it. We're going to
continue to have these problems. Could you or would you build
one in Nevada, Arizona as well?
Mr. Burdette. We have one refinery that is underutilized in
Tonopah. We are much more fragile than Virginia but, yes, we'd
have to go through the permitting process.
Mr. Ose. If I understand the issue on the Tonopah refinery
is the throughput to the refinery does not allow the refinery
to actually meet its total capacity; is that correct?
Mr. Burdette. That's correct. It's also a problem with the
crude itself.
Mr. Ose. It's a little broader than just will you build a
refinery. It also relates to the infrastructure that feeds the
refinery.
Mr. Burdette. Absolutely. Yes, sir. Yes, Mr. Chairman.
Ms. Evans. If I could speak to that point, too. I think the
economics and in some other panels have mentioned is not
necessarily there to afford a new refinery in United States.
It's much less expensive generally for someone to go out of the
country and build a refinery than have one here brand new in
the United States.
Mr. Schrock. How do we solve that?
Ms. Evans. Well, I think----
Mr. Schrock. Tell me why you think it's cheaper out there
than it is here.
Ms. Evans. Well, a small portion of that, and I can't say
exactly how much, probably does go to some of the permitting
and those areas that do add some cost. There is labor costs
that are obviously less expensive outside the United States. On
the cost of importing could be offset through increased price
in the United States and we've been willing to pay those prices
so far.
Mr. Schrock. Really no answer to it, is there.
Ms. Evans. I think short-term it is a challenge. We're
looking at very high prices that we're seeing this summer.
Again, to think more long-term, to look at our overall demand
and supply, reducing that demand, making ourselves more
efficient, energy efficiency, and conservation I think will get
us a long way, not all the way but a long way toward reducing
our dependence.
Mr. Schrock. One of the ways is using hybrid cars but the
Federal Government won't allow the local jurisdiction to use
it. There is something wrong here somewhere.
Ms. Evans. Absolutely.
Mr. Schrock. We're talking out both sides of our mouth when
we say that. We up here have to get that fixed for people like
you at home.
Ms. Evans. Absolutely. If I could speak to I realize it's
not a large percent of the market but the fact that they have a
Federal tax incentive that indirectly creates an incentive for
a purchase of a Hummer is not the kind of policy that we want
to be encouraging.
Mr. Schrock. I agree. Thanks, Mr. Chairman.
Mr. Ose. Mr. Keese, I was unclear about your testimony. Was
it the Commission or the State of California that was
advocating for a new pipeline from Texas, Houston?
Mr. Keese. The legislature asked us to study the three
alternatives. We essentially came to the conclusion that the
first two aren't feasible. The pipeline is feasible. As the
Energy Commission, yes, we would like to encourage the
expansion of that pipeline but it isn't the California part
that's the problem. It's other States.
Mr. Ose. Has the State of Texas said they're willing to
expand the pipeline.
Mr. Keese. Mr. Hackett probably knows quite a bit about
this who is on the next panel. There is a segment of the
pipeline that is having difficulty getting permitted to operate
at a higher capacity as I understand it.
Mr. Ose. In what State.
Mr. Keese. We'll ask Mr. Hackett.
Mr. Ose. Do you know if any inquiry has been made to the
State of New Mexico that they would be willing to permit a
larger pipeline.
Mr. Keese. I don't know if it's been a direct request. I
know our people have been in contact with the other States.
Mr. Ose. Do you know anything about that?
Ms. Evans. I can speak quickly. The pipeline we're
discussing is the Long Horn pipeline. It comes out of west
Texas. The problem that we have in Arizona is that pipeline
although would expand the capacity would stop in Arizona at the
Kinder Morgan pipeline which currently has an 8 to 12-inch
pipeline. It would get bottlenecked basically in El Paso
because there is no additional expansion on the pipeline.
Although it would introduce Gulf Coast product, it wouldn't
necessarily increase the amount of product that comes in in
total.
Mr. Ose. Would you support expanding the Kinder Morgan
pipeline?
Ms. Evans. Absolutely. I think I told you that seriously
has to be considered. I have concerns that the estimation by
Kinder Morgan about the growth of the State are a little low
and they aren't anticipating the kind of growth that we should
be experiencing and the expansion that we need.
Mr. Ose. Do you speak for the Governor on that issue.
Ms. Evans. I believe so I do.
Mr. Ose. In terms of being willing to support expansion of
Kinder Morgan pipeline?
Ms. Evans. I believe I do, yes.
Mr. Ose. What about Governor Guinn, would he have any
objection to the expansion of the Kinder Morgan pipeline.
Mr. Burdette. I haven't had direct conversation. I would be
very surprised if he would not, that he would not support an
expansion of that pipeline from Arizona to Nevada.
Mr. Ose. You would be very surprised if he would not
support it?
Mr. Burdette. Support it.
Mr. Ose. Let's put that in a positive. You would expect him
to support it?
Mr. Burdette. I would expect him to support it, yes, sir.
Mr. Ose. When we talk about these pipelines that is
jurisdictional in many respects to FERC and we actually do have
a bite of that apple and I'm just trying to make sure geography
of which this pipeline would pass that we're not going to have
some unintended impediment places in the way.
Mr. Burdette. It would pass almost entirely through
Arizona.
Mr. Ose. I understand that. Also, take a stem from there
and head it north to Vegas.
Mr. Burdette. Yes, sir.
Ms. Evans. Certainly we want to have consideration for
where the pipeline is, what the expansion is, proximity to
homes and all those other factors. In general, with the right
situation I would be surprised if we would not support its
passage.
Mr. Ose. At the existing right-of-way today at the Kinder
Morgan pipeline seems to be that the pipeline is 8 or 12
inches.
Ms. Evans. It varies between 8 and 12 inches.
Mr. Ose. Seems to me if we move 1 foot over to the side
we'd have room for another 8 or 12-inch pipeline.
Ms. Evans. Right. Well, the concern obviously in Arizona is
when we experienced a rupture--if I could give you a little
more detail. The rupture that we had actually spewed gasoline
over homes that were under construction. No one was in the
area. We didn't have any deaths or injuries. Obviously people
in the community are concerned about the safety and reliability
of these lines.
Mr. Ose. What's the spacing between lines that the State of
Arizona would require?
Ms. Evans. Well, we have not nailed down a specific number.
I think right now we're at the stage where we feel like there
should be adequate disclosure to the people that live near
there so at least they know what they are purchasing and what
risks might be associated with that but we haven't determined
specific distance between a pipeline and the neighborhood.
Mr. Ose. We do have an existing pipeline through this
neighborhood.
Ms. Evans. That's right.
Mr. Ose. It did have a rupture?
Ms. Evans. It did have a rupture.
Mr. Ose. Did it cause price spikes?
Ms. Evans. Yes, absolutely.
Mr. Ose. If I understand correctly from Mr. Keese's
testimony, that the creation of additional 8 or 12-inch buried
pipeline bringing refined product or otherwise from Texas would
allow fuel that is currently coming from California to both
Nevada and Arizona to then stay in California. Is my logic
correct?
Mr. Keese. Yes.
Mr. Burdette. Yes.
Mr. Keese. It would offer both those States options to get
it where it's cheaper. Get it from California if it's cheaper,
get it from Houston if it's cheaper.
Mr. Ose. The nature of the crude that comes from Texas
westerly on the existing pipeline, is that the same type of
crude that's currently usable in the refineries in----
Mr. Keese. Product. We're talking about product, gasoline,
diesel, aviation gas.
Mr. Ose. My time has expired. The gentleman from
Massachusetts.
Mr. Tierney. My reaction was a reaction to something Mr.
Shrock said. I think the Federal role can be significant. One,
the Federal Trade Commission can certainly look at mergers. I
understand that people aren't alleging that there has been an
antitrust violation, but I want to read to you a couple
reports. One is the March 2001 report from the FTC. It said the
completed FTC investigation uncovered no evidence of collusion
or any other antitrust violation. In fact, the varying
responses of industry participants to the gasoline price spike
suggest that the firms were engaged in individual, not
coordinated conduct. Prices rose both because of factors beyond
the industry's immediate control and because of conscious but
independent choices by industry participants, each industry
participant acted unilaterally and followed individual profit
and acquisition strategies.
One firm increased its summer-grade gasoline production
substantially, as a result had excess supplies of RFG available
and had additional capacity to produce more RFG at the time of
the price spike.
This firm did sell off some inventory RFG, but it limited
its response because selling extra supply would have pushed
down prices and thereby reduced the profitability of the
existing RFG sales.
I think what you're talking about there is no current law
against that except that as I read and as the FTC's own merger
considerations, rules and regulations allow for they can still
decide that this consolidation of the market is too extreme. It
may not amount to a monopoly of the antitrust law but would be
too extreme.
An executive of a company made clear that he would rather
sell less gasoline and earn a higher margin on each gallon sold
than sell more gasoline and earn a lower margin. So, on that
theory a RAND study which came out in 2003 made pretty much the
same point. The central tactic is to allow markets to become
tight by relying on existing plant and equipment to the
greatest possible extent, even if that ultimately meant
curtailing output of certain refined product, again not
investing the profits that are made on that.
Talking about having some storage capacity. We did that
with the Northeast oil during the winter season and it worked
out pretty well. We Ought to perhaps think about having more of
those storage capacities around, ability to have that when the
fluctuations are coming in. Things like that I think that the
government can do, some minor regulations on that.
Otherwise, I'm not sure that this industry is ever going to
reinvest the resources it needs into its capital, do what it
has to do to get the NIMBY, not-in-my-backyard attitude
resolved. This industry may decide that profit going up is a
happier day for them. It's not a totally free market. There has
to be some modicum of regulation when we let them make the
same--reasonable that somehow serve the public good. The length
of a filing as necessary to our human existence as these fuel
products have become and I think that may be appropriate for us
to make sure we do some modicum of regulation. Thanks, Mr.
Chairman.
Mr. Ose. Mr. Gibbons.
Mr. Gibbons. Mr. Chairman, I, first of all, want to thank
our witnesses on this panel for being here today.
Mr. Ose. We're not done with them yet.
Mr. Gibbons. This is my one last opportunity to ask a
question before I got shut off. I wanted to thank them.
Mr. Schrock. Just like the oil.
Mr. Gibbons. Before they shut it off. I guess my concern
is, Mr. Burdette, I want to direct my final question to you, if
we look at the price of gasoline as I asked earlier, the
percentage you indicated was 50 percent of that price is due to
taxes and crude oil. Was that----
Mr. Burdette. Seventy-five percent. Fifty percent for
crude.
Mr. Gibbons. That makes it even more difficult. When I look
at the price of crude oil going up from $30 to $40 per barrel,
that's a $10 barrel increase times the 2, 2\1/2\ cent gallon
cost per gas, that would make it a 25 cents increase in per
gallon cost. So, the overall crude oil which seems to be the
villain here is only a small part if it's 75 percent of the
increase in the cost of gasoline.
Mr. Burdette. Mr. Gibbons, one of the things that we
haven't talked about at all is speculation in how that affects
the market. I know this is a very controversial subject, but
speculation exists. It exists because we don't know what the
Saudis will do 3 months from now. We don't know what's going to
happen in Iraq. We don't know what's going to happen to
political instability in Venezuela.
But, there are people who are willing to take that risk and
they will buy it and there is a risk premium, whether there is
no market that says here is the risk premium for petroleum, but
there are risk premiums in petroleum and those risk premiums
are paid and they are a significant part of--and I wasn't
careful about does that belong with the crude price or is that
in the extra 25 percent, but the point is right now risk
premiums are very high because of the instability and because
of the new demand from China and because of--well, many
reasons. Risk premiums are an important part of the situation
today.
Mr. Gibbons. Well, I agree with Mr. Tierney about the fact
that we need to start looking at our production capability,
building new refineries. We have all 30 year infrastructure
legacy refineries that are going to be growing in their need
for repairs and maintenance as they get older, as any large or
aging system would. I think it behooves us, including
California, to start looking at the ability to supply the
demands within our region and our areas.
The NIMBY issue which is something that is troubling a lot
of us out here, well, it troubles everybody across America, has
to be resolved politically. It is something that all of us are
responsible for addressing. I think that's probably one of the
biggest solutions to cause, being able to generate a given
supply or a constant supply to meet a growing demand or
increase in demand as we have in this country. Again, thank
you, Mr. Chairman for indulging me in my questions.
Mr. Ose. The gentleman from Virginia.
Mr. Schrock. I don't have anything further.
Mr. Ose. I want to go back to something Mr. Burdette said.
Refinery at Tonopah, roughly 5,000 barrels per day production
capacity.
Mr. Burdette. I don't know, Mr. Chairman.
Mr. Ose. Are there any plans to expand its capacity?
Mr. Burdette. Not that I'm aware of. I don't expect so. It
uses crude from a railroad valley in central and eastern
Nevada. It is crude that is not, not particularly suited for
transportation fuels.
Mr. Ose. The information I have is as of 2002, it indicates
the State has crude oil production of 2,000 barrels per day.
Mr. Burdette. That's about right. We make about a million
and a half a year is top production. It's a little bit more
than that.
Mr. Ose. You have a refinery in Tonopah that's processing
5,000 or can process up to 5,000 barrels per day.
Mr. Burdette. I don't know that number, Mr. Chairman.
Mr. Ose. What I'm trying to get at is the infrastructure
that delivers the crude to the refinery, there is a difference
here of 3,000 barrels per day and it's coming from somewhere.
Where is it coming from?
Mr. Burdette. The crude that's cracked in Tonopah is
shipped out of State to finish its refining process. It's
refined----
Mr. Ose. It's cracked in Tonopah.
Mr. Burdette. In fact not completely. It's just an initial
step in Tonopah. I'm going to have to learn more about exactly
what happens in Tonopah and will be happy to supply you with
additional details.
Mr. Ose. As I scratch around for solutions to the problems
here in Nevada that will help us in California, it seems to me
that with the refinery already in operation in Tonopah, that I
think your testimony a little while ago was had unused capacity
because of throughput constraints. With one already established
it would seem to me we could move forward with or maybe you
guys more accurately could go forward with a permit application
to either expand the refining process from simply the first cut
on the crack or expand the capacity beyond the 5,000 barrels a
day that would go to some degree toward addressing deficit here
in the State.
Mr. Burdette. Our problem is that we don't have crude that
is suitable for making transportation fuels.
Mr. Ose. Very heavy.
Mr. Burdette. A lot of wax.
Mr. Ose. Maybe we need to figure out how to get you a
pipeline that brings you crude.
Mr. Burdette. The economics, if the economics are there we
have communities like Tonopah that are anxious for economic
development. There is not to say that there aren't people who
won't be concerned about it.
Mr. Ose. Now, as it relates to the petroleum
infrastructure--I know that Congressman Shrock has a plane to
catch. Don't feel badly he has to leave. As it relates to
Arizona, California, Nevada, each of you probably have a better
understanding of the infrastructure within the State. Are each
of your States looking at ways to expand the infrastructure,
for instance, to allow a greater amount of throughput or to
permit larger refineries from capacity standpoint? Start with
Arizona.
Ms. Evans. I am aware, and I mentioned in my testimony,
that there is a discussion about a refinery in Yuma which is in
the western part of the State. I'm not sure exactly where they
are in the process. Again, I think they submitted written
testimony. To the extent again that we can meet our air quality
standards and end up the community is receptive we would
certainly be open again to increasing the supply to the State
and the region.
Mr. Ose. Is the State advocating for the development of a
refinery somewhere in Arizona.
Ms. Evans. I don't think advocating would be the
appropriate term for us at this stage. We are watching, we're
monitoring, we're interested, but not necessarily advocating at
this point.
Mr. Ose. What about in California?
Mr. Keese. As I mentioned, we have identified the problems
in the ports for import and in the refineries for expansion. We
use to see refiners capacity creep about 2 percent a year. It's
now under half percent. That's not enough. There is an active
proposal in California, the legislature and in the
administration, to look at a streamlined licensing process for
expansion of refineries without changing any environmental
laws.
Mr. Ose. How about in Nevada?
Mr. Burdette. In Nevada we are actively pursuing both
ethanol and biodiesel production. We currently produce about 3
million gallons of biodiesel down south. We're opening new
biodiesel facilities up north. They are marginal fuels at best,
marginal addition.
We are concerned about the economics of ethanol. The fact
is we have some renewable resources that we can use to provide
energy for a refinery for ethanol that would help the cost but
we still have to deal with the fundamental cost of shipping
unit trains of grains into the State, processing it, and
selling the byproducts and making that productive, and we
haven't got somebody who is quite ready to that, frankly.
Mr. Ose. Flip this question around. Instead of looking at
it from the State's perspective about what the State can or
should be doing, within your respective States what
recommendations would you make to the Federal Government about
how to help the States with their infrastructure? Mr. Keese.
Mr. Keese. I would think that probably would get around to
the port situation which is the ability to bring in the product
that Arizona and Nevada will need to. It will probably have to
come through California. There well may be something that the
Federal Government can do there. We're in the analytical stage
right now. I don't have the----
Mr. Ose. Mr. Burdette.
Mr. Burdette. Pipelines are clearly important part of our
infrastructure. We should acknowledge that California's air
quality is affected by the amount of fuel they make for Nevada.
We're grateful for that, but the truth is we need additional
pipelines. Additional pipeline infrastructure and storage
infrastructure would be helpful for us. Not sure we need a
great deal of Federal help on that but certainly on the
pipeline we would. That's a FERC jurisdiction.
Mr. Ose. Ms. Evans.
Ms. Evans. I would reiterate that in any dynamic activity,
it might be changing since, but one issue we looked at in the
State of Arizona is our west pipeline and east pipeline. East
pipeline was older, west line was a little bit newer and the
tariff was higher in the west line so we were wondering and
concerned that might be creating some kind of disincentive
perhaps on the part of the company to expand that pipeline.
That was one issue that we were looking at and would have some
FERC obviously.
Mr. Ose. Mr. Tierney.
Mr. Tierney. Thank you very much. The witnesses are great.
Mr. Keese, if you had the port situation resolved is that going
to increase the transportation costs of getting that material
inland.
Mr. Keese. We have to solve that, the tankage also but I
don't think it would--gives you options. The option we're
talking about on the pipeline is that there is excess refining
capacity in Houston today. So, the pipe would be full.
Mr. Tierney. Thank you very much all of you.
Mr. Ose. I want to thank this panel for their
participation. We have questions that may have occurred to any
of the Members up here that we will forward to you in writing.
We appreciate timely response. Generally once you've got them,
you will have 10 days to 2 weeks to respond. We'll be in touch.
We appreciate you guys participating. We'll take a 5 minute
recess.
[Recess.]
Mr. Ose. Welcome back. I am pleased to welcome our second
panel of witnesses. We are joined on the second panel by Mr.
Joseph Sparano, president of Western States Petroleum
Association; Mr. Sean Comey, media relations representative for
AAA of northern California, Nevada, Utah; Mr. David Hackett,
president of Stillwater Associates; and Mr. Tyson Slocum,
research director for Public Citizen's Energy Program.
Gentlemen, you saw on the first panel we swore everybody
in. We do that for everybody. We're not picking on you. If
you'd all rise, raise your right hands.
[Witnesses sworn.]
Mr. Ose. Let the record show that the witnesses answered in
the affirmative. As you saw in the first panel, what we do is
we ask our witnesses to summarize in 5 minutes the essence of
their testimony. We have received your written statements and
they have been entered into the record. I'm sure that Mr.
Tierney and I have both read them. To the extent that you can
briefly summarize we'd appreciate it so we can get right to the
questions.
Mr. Sparano, you're recognized for 5 minutes.
STATEMENTS OF JOSEPH SPARANO, PRESIDENT, WESTERN STATES
PETROLEUM ASSOCIATION; SEAN COMEY, MEDIA RELATIONS
REPRESENTATIVE, AAA OF NORTHERN CALIFORNIA, NEVADA AND UTAH;
DAVID HACKETT, PRESIDENT, STILLWATER ASSOCIATES; AND TYSON
SLOCUM, RESEARCH DIRECTOR, PUBLIC CITIZEN'S ENERGY PROGRAM
Mr. Sparano. Thank you, Congressman, other members of the
committee. Appreciate the opportunity to testify today. The
Western States Petroleum Association is a trade association
that represents companies that explore for, produce, refine,
transport and market petroleum products in six western States:
California, Nevada, Arizona, Oregon, Washington and Hawaii.
I've worked in the petroleum industry for 35 years and have
held positions including CEO and chairman and president of
regional businesses.
We've been engaged with State policymakers exploring how to
address many of the petroleum supply-side and demand-side
issues that were raised in your staff report. My testimony will
focus primarily on gasoline price issues and, as importantly,
ways to improve the current situation.
To put current gasoline prices in perspective, I used
Bureau of Labor Statistics data covering 20 years to compare
the real growth in gas prices to other products and services we
use every day. What I found is that gasoline prices have risen
far less at 19 percent than most everything else we use in our
lives including food, clothing, housing, health care,
electricity and college tuition which is up about 400 percent
during the same period.
Gasoline prices in the West are a function not only of
local and regional market conditions but also worldwide
petroleum market conditions. According to the Energy
Information Administration [EIA], nearly one-half the price of
a gallon of gasoline is a result of crude cost.
Crude prices have risen dramatically over the past several
months to almost $42 a barrel. They are currently settled near
record highs. According to the EIA, and other experts, crude
costs have increased due to surging worldwide demand and
tightening of supplies by OPEC.
Another reason gasoline cost more in the West is the fact
that gasoline taxes are generally higher here; about 52 cents
per gallon in both Nevada and California. As was mentioned
earlier, higher margins, several folks mentioned higher
margins, they do not equal profits. Margins do not equal
profits.
In addition to those comments, demand for gasoline on the
west coast and cities like Phoenix and Las Vegas has grown at a
significant rate. In California, demand has grown at two to
four times the rate of in-State production capacity increases.
This growing imbalance between supply and demand growth is due
in part to regulatory barriers to expanding refineries and
other infrastructure. This means there is an increasing
reliance on importation of blending stocks and finished
products, subsequently higher marginal costs to supply the
western marketplace. This puts a lot of pressure on an already
inadequate infrastructure.
Whether it's in the area of refining capacity, pipeline
capacity, port handling and storage equipment, marketing
facilities or terminals, removal of permitting constraints and
barriers to infrastructure projects are needed to improve
capacity and reliability.
Throughput limits on refinery equipment and ports,
repetitive environmental compliance reviews and continuous
permit delays when our industry wants to add refining capacity
or more retail units all need immediate attention. These
barriers stop or slow down construction of new petroleum
facilities and upgrades to existing equipment that together
would allow petroleum companies to more effectively and
efficiently produce, transport and sell more gasoline in the
West or to import fuels from other areas. Of course, as with
any industry, projects must also meet shareholders' and boards
of directors' economic criteria in order for any implementation
to proceed.
Well, given that, what can be done? Here are some specific
observations and suggestions. Most of my remarks will focus on
California State policies. This is because many of the
refineries, other forms of petroleum infrastructure that are
located in California provide fuel products to Nevada, Arizona
and other parts of the west.
The first area of improvement is to avoid counterproductive
policies. For example, California State government has been
sending less than positive signals to the business community in
general and to our industry in particular that it does not want
companies to invest in new facilities and to add new jobs. High
operating and administrative costs and the challenges of
complying with cost-ineffective environmental regulations have
made it difficult for investments, companies and jobs to stay
in the State.
In addition, our industry must constantly fight back
legislative proposals that would dramatically increase the cost
of doing business.
Permit reviews need to be streamlined. Permit streamlining
and establishing policies to ensure timely processing of
permits by State agencies, local air districts and regional
water boards are critical components of improving business
competitiveness. California Energy Commission's Integrated
Energy Policy Report contains some specific recommendations for
permit system streamlining.
Another of the critical areas affecting permitting is the
Federal New Source Review. New Source Review reforms adopted by
the Federal Government but negated by the California
legislature in 2003 do promote permitting and construction of
critical energy projects without increasing emissions or
negatively impacting the environment or local communities.
Another effort that will help the situation will be to
create consolidated permitting for energy projects. We strongly
urge development of consolidated State-level permitting agency
whose intervention could be requested by project proponents
when duplicative or counterproductive regulatory requirements
endanger a project.
To succeed in this effort we must eliminate overlapping and
conflicting regulations. Unnecessary regulatory processes that
add cost without adding value environmentally should be
eliminated. This can be done without sacrificing environmental
standards or diminishing local control over land use decisions
that affect community values. One agency could manage the
permitting of many energy facilities.
In fact, California Energy Commission has just launched an
Order Instituting Investigation focusing on examining the
causes of petroleum intrafracture development constraints. WSPA
is participating in this process.
Obtaining a waiver of the Federal minimum oxygenate mandate
would also be very helpful. WSPA has long supported California
in its effort to exempt the State from the Federal EPA's
requirement that gasoline include an oxygenate. Since the
removal of MTBE from California's gasoline formula, the only
viable oxygenate additive is ethanol. Being forced to use
ethanol entails additional costs, limits refiner flexibility
and may even reduce production capacity.
California's air quality agencies agree that our industry
can continue to produce the cleanest gasoline on the planet
without the addition of ethanol. A waiver would provide the
flexibility for California refineries to produce and marketers
to sell cleanest fuel available as efficiently and cost
effectively as possible. What we would like is to be able to
use ethanol when it is economically attractive and when market
conditions support that choice.
Private and public sector research into alternative fuel is
also important. Our industry is working closely with California
legislators to produce a bill that would help us move forward
and level the playing field for new refinery and other
infrastructure projects.
Let me finish up here, just a couple of points to make, in
California there were 33 refineries in 1985. Now there are 13.
We haven't built one since 1969. Thirty-five years without a
new refinery in the State. Despite that, petroleum industry in
the last 20 years has met the challenge of reliably supplying
our customers with all types of products despite continually
growing demand and increased regulatory hurdles. I believe we
can continue doing this but we really need a concerted and
cooperative effort with all the parties that are involved here
today. Thank you.
[The prepared statement of Mr. Sparano follows:]
[GRAPHIC] [TIFF OMITTED] T6091.035
[GRAPHIC] [TIFF OMITTED] T6091.036
[GRAPHIC] [TIFF OMITTED] T6091.037
[GRAPHIC] [TIFF OMITTED] T6091.038
[GRAPHIC] [TIFF OMITTED] T6091.039
Mr. Ose. Thank the gentleman for his testimony. Mr. Comey,
AAA of northern California, Nevada and Utah. Welcome, sir.
We've had your statement in writing, we appreciate its
submittal. Please summarize in 5 minutes.
Mr. Comey. Thanks. Let me start by saying that we're
probably going to have to amend that chart because $2.40 may
not be the top of where we go this summer. My apologies about
that.
AAA began tracking gas prices in the mid-1970's as a
service to our members and to the public. Our survey tracks
60,000 gas stations nationwide every day and the results are
released to the public and media.
The price of gasoline, like few other consumer goods, seems
to strike a raw nerve among consumers. No other consumer
product's price is displayed so prominently in public places.
When it comes to buying gasoline, many feel they have few
practical alternatives. The majority of driving is not a matter
of discretion. People need to drive to get to and from work,
take their children to school, go shopping, and for many there
are really no other realistic or convenient alternatives.
For people who use a lot of fuel, like families forced to
commute a long distance from their homes to their jobs in order
to find affordable housing, a hike in gas prices can have a
significant impact on the family budget. It can mean the
difference between being able to balance their checking account
at the end of the month and going deeper into debt. Or gas
prices can influence their other spending decisions, forcing
consumers to cut back on other purchases so they have enough
money to fill their gas tanks.
Unlike many consumer products, the cost of gasoline is
subject to dramatic fluctuations. After reviewing the data
available on gas prices over the last 3 years some patterns are
apparent. Prices tend to increase in March and April. The
seasonal increase in gas prices is generally attributed to the
refineries switching their production over to summer-blend
fuel. Supplies tend to decrease at that time as refineries use
up their winter blend of gasoline before switching over to the
summer blend.
This year that trend began early with significant increases
in February which is normally a period of the year when we
expect to see relatively stable prices. During the summer we
often see prices increase around the 4th of July weekend which
is typically one of the biggest holidays during the year in
terms of automobile travel. Prices also tend to rise in late
August, early September around Labor Day weekend, another
holiday with large numbers of driving vacations. This typically
marks the end of the season characterized by high fuel
consumption.
In general, prices in the summertime tend to be higher than
winter, largely due to higher demand. Generally prices tend to
move up or down by less than 10 cents per month. California and
Nevada, however, are susceptible to dramatic price swings when
experiencing supply or distribution problems or when crude oil
prices change significantly.
Since 2000, here in Nevada, there have been 21 months where
the price of a gallon of regular unleaded gasoline has changed
by 10 cents or more. For purposes of comparison nationwide, the
average price has changed by 10 cents or more only 14 times
during the same period of time. So, Nevada consumers have seen
far more price volatility than residents of many other States.
Statewide average price per gallon in Nevada is usually
among the highest in the Nation. Typically only Hawaii and
California residents pay more. Right now Nevada drivers are
paying about 25 cents more than the national average, 2003 was
a particularly volatile year. Prices hit record highs
throughout Nevada and California in late March. At that time
the statewide average in Nevada was $1.97 per gallon, an
increase of 29 cents per gallon from the previous month.
Although that would look like kind of a bargain today. Again,
analysts at the time largely attributed the situation to the
rise in the price of crude oil. Crude oil hit nearly $40 per
barrel in February of that year during the buildup to the war
in Iraq. It was back down to about $28 a barrel by mid-April
and consumer gas prices also declined between April and May as
a result.
In 2004 gas prices have risen significantly since the
beginning of the year. Between January and May, the Statewide
average price for a gallon of regular unleaded in Nevada
increased by 58 cents a gallon, a jump of nearly 35 percent.
Again, the high cost of crude oil seems to be the main cause of
the price hike.
What can we do about the problem? Any meaningful change
would team to have to address both supply and demand. On the
supply-side of the ledger AAA of northern California, Nevada
and Utah would support plans to increase domestic production,
reserves and fuel distribution in order to increase the
certainty that consumers will have a reliable source of
transportation energy as long as these steps could be
undertaken in an environmentally responsible manner. Likewise,
we would also back a reduction in dependency of oil imports,
again, in an environmentally responsible manner.
In terms of reducing demand we believe it is important to
promote transportation energy efficiency and continue research
in this area in order to provide a wide variety of fuel-
efficient technologies. A wider range of options, including
hybrid vehicles, would give consumers more choices when it
comes to vehicle purchasing and use.
We also support the elimination of the oxygenate
requirement for fuel that was discussed before. We believe we
can meet the requirements set by the Clean Air Act without
being forced to use ethanol. Cleaner emissions could be
achieved by requiring tougher performance standard rather than
by insisting on a particular ingredient.
To summarize, the pattern that we've seen emerging over the
last few years, prices rise, consumers complain, politicians
investigate, then prices go back down again, we shift the focus
of our attention to other issues, and then after a period of
time the cycle repeats.
As George Santayana once wrote, ``Those who cannot learn
from history are doomed to repeat it.'' In some respects
history may serve as our guide in attempting to understand and
ultimately solve this problem.
At the onset of the oil embargo in the 1970's, many
Americans drove a car powered by gas-guzzling V8 engine. By the
end of the decade the Honda Accord, much more fuel efficient
vehicle, was one of the most popular cars in the country. It
wasn't because people just wanted a more fuel-efficient car. It
was a car they actually wanted to buy. Technology really rose
to meet the challenge of the times and perhaps it may do so
again. But, based on the pattern we've seen over the last
couple years it may take a more sustained period of
unpleasantness such as what happened three decades ago in order
to precipitate some of those changes.
Unfortunately, there is no quick-fix to this situation. If
there was an easy answer I suspect we would have found it a
long time ago. At AAA of northern California, Nevada and Utah
we believe that today's high gas prices underscore the need to
keep exploring alternative fuels, step up conservation efforts,
and implement a national energy policy that will meet our
transportation needs without sacrificing the environment. Thank
you.
[The prepared statement of Mr. Comey follows:]
[GRAPHIC] [TIFF OMITTED] T6091.040
[GRAPHIC] [TIFF OMITTED] T6091.041
[GRAPHIC] [TIFF OMITTED] T6091.042
[GRAPHIC] [TIFF OMITTED] T6091.043
[GRAPHIC] [TIFF OMITTED] T6091.044
[GRAPHIC] [TIFF OMITTED] T6091.045
Mr. Ose. Thank the gentleman. The next witness, president
of Stillwater Associates, David Hackett. Sir, welcome. I
appreciate your participation.
Mr. Hackett. Thank you, Mr. Chairman. Good afternoon,
ladies and gentlemen. I've been invited here today to address
the issues around high gasoline prices and to specifically
address the effects that government regulations, Federal,
State, local, have had on the cost of gasoline. I will also
make recommendations on steps that government can take to
improve gasoline supply and, therefore, reduce gasoline price
rises and price volatility.
Stillwater Associates has been retained by a number of
government agencies to study high gasoline prices. California
Energy Commission we conducted studies that included creation
of a strategic fuel reserve, MTBE phaseout and petroleum marine
infrastructure. Our studies for the State of Hawaii have
included gasoline price controls and ethanol production. Last
year, Stillwater Associates provided assistance to the
Department of Energy's Energy Information Administration's
studies, which were requested by this committee, on California
gasoline prices and the forecast for gasoline supply in New
York and Connecticut.
Clearly the most significant impact that government
regulations have had in recent times on gasoline prices has
been the oxygen mandate and then the subsequent MTBE ban.
Starting in 2002, we warned that an MTBE ban would result in a
reduction of gasoline supply to the region and higher prices
for consumers. The additional gasoline supply needed to meet
demand would have to be imported by tanker from distant
refineries.
Recently, Stillwater Associates calculated that the MTBE
ban in California, coupled with the mandate to blend with
ethanol, is costing consumers in the Pacific southwest, and
that's California, Arizona, Nevada, more than $2 billion per
year.
In many respects today's high gasoline prices and diesel
prices are the result of government policy, or lack of policy.
This afternoon I'll make five specific recommendations for
policymakers. These recommendations are: one, eliminate
oxygenate mandate; two, cancel Unocal's patents on gasoline;
three, improve local permitting processes so that necessary
infrastructure can be constructed in a timely manner; four,
rationalize the number of grades of gasoline that are required
around the country; and, five, improve oil company reporting to
appropriate government agencies.
Relative to the elimination of the oxygen mandate, in 1998
refinery economics modeler MathPro, Inc., estimated the cost
for local refiners to produce California cleaner burning
gasoline without ethanol would be reduced by about 2 cents per
gallon or $300 million per year. Today Stillwater Associates
believes that elimination of the oxygen mandate will make it
easier for offshore refiners to make CARB gasoline because they
will not have to reject clean-burning butane and pentane from
their gasoline blends.
As to the patent issue, Unocal was granted patents in the
mid-1990's for cleaner burning gasoline, including gasoline
that qualifies under California's strict specifications. These
patents have held up under legal challenge, but they are being
reviewed on other grounds.
We estimate that they pad the cost to consumers $150
million a year.
Through our work for the California Energy Commission, we
came to realize that it is difficult, expensive, and time
consuming for companies to make infrastructure improvements in
order to improve the manufacture and importation of oil
products into this market. I've listed a couple examples here.
The telling one though is with the Port of Los Angeles Mr.
Keese mentioned earlier. This was a quote from the local paper.
There is a company that wants to build an oil terminal on their
property in the port. When asked about the issue, an official
is quoted as saying, ``We don't need the addition of any more
facilities of this nature whatsoever.''
Then of course over the years individual States have
decided to mandate changes in gasoline composition sold in
their jurisdictions to help achieve air pollution reduction
goals. Many of these programs have had success from an air
quality perspective but at unnecessarily high cost to gasoline
consumers.
Then we've got representation here on reporting. Government
agencies don't collect, analyze, or publish the proper data in
a timely fashion to help participants in the marketplace
understand the supply and demand issues. Of course on the other
side you can argue that industry makes reports to all sorts of
government agencies, and so all that, that whole recording
process needs to be sorted out and it comes back to the
transparency that Arizona spoke about a few minutes ago, trying
to understand what's going on.
We've got a demand side suggestion. Experts say if
motorists properly inflated their tires, they could save 6
percent on gas mileage. Assume everyone did that and reduced
their gasoline demand by merely 2 percent. That would save
about 180,000 barrels a day of gasoline, the equivalent
production of a new refinery or the delivery of 18 tanker loads
of gasoline imports every month.
It is Stillwater Associates' conclusion that the root cause
of high gasoline prices in this region are government
regulations, including the California ban on MTBE and the
continuation of the oxygenate mandate which have reduced
gasoline supply. Government policies limiting gasoline supply
expansion are adding to the problem.
[The prepared statement of Mr. Hackett follows:]
[GRAPHIC] [TIFF OMITTED] T6091.046
[GRAPHIC] [TIFF OMITTED] T6091.047
[GRAPHIC] [TIFF OMITTED] T6091.048
[GRAPHIC] [TIFF OMITTED] T6091.049
[GRAPHIC] [TIFF OMITTED] T6091.050
[GRAPHIC] [TIFF OMITTED] T6091.051
Mr. Ose. I thank the gentleman for his testimony. Our final
witness on the second panel is Mr. Tyson Slocum. He is the
Research Director for Public Citizen's Energy Group. Sir, we've
received your testimony, welcome your participation. I
Recognize you for 5 minutes to summarize.
Mr. Slocum. Mr. Chairman, thank you for having me here
today. Two months ago I released a report called Mergers,
Manipulation and Mirages: How Oil Companies Keep Gasoline
Prices High, and Why the Energy Bill Doesn't Help. And among
other conclusions that I reached in the course of my research I
found that recent mergers, for example, those between Exxon and
Mobil, Chevron and Texaco, and Conoco and Phillips, among
others have resulted in dangerous levels of concentration in
the domestic oil industry, particularly in the refining sector.
My research documented that in just one decade as a direct
result of mergers, largest five oil refiners went from owning
one-third of capacity to over one-half, and the largest 10
refiners went from owning 55 percent of refinery capacity to
nearly 80 percent. It is not just Public Citizen's reaching
these conclusions. Just yesterday the U.S. General Accounting
Office released this report, ``Effects of Mergers and Market
Concentration in the U.S. Petroleum Industry.'' Among the
conclusions that this Federal agency reached was GAO's economic
analyses indicate that mergers and increased market
concentration generally led to higher wholesale gasoline prices
in the United States.
Prior to that, in March 2001, the U.S. Federal Trade
Commission, which is the agency that is supposed to be
enforcing antitrust laws, found that oil companies, because of
their large market share, were able to unilaterally
intentionally withhold gasoline supplies from the marketplace
for the sole purpose of engaging in what they called profit
maximization strategies, what I would call price gouging.
Now, while the Federal Trade Commission found those
practices were perfectly legal, now I'm not an attorney but I
do know right from wrong and I think it is wrong, Mr. Chairman,
that oil companies are intentionally price gouging consumers in
the United States today and I think that Congress has many
tools at its disposal to help address this crisis.
Unfortunately, none of those tools are included in the
energy bill which has been championed by many in Congress and
by the current administration. That's because the current
energy bill has zero chapters or portions of it that address
industry consolidation. In fact, the energy bill as crafted by
Congress would make matters worse by repealing the Public
Utility Holding Company Act which is one of the Federal
Government's most effective structural regulations over the
energy industry, and if the energy bill became law, companies
like ExxonMobil freed from PUHCA's restrictions would be able
to acquire electric utilities, natural gas utilities, and other
electric assets that are currently regulated by PUHCA.
If we are experiencing damaging levels of concentration
within the domestic refining sector, just imagine what would
happen if PUHCA was repealed and the same companies with a
stranglehold over gasoline markets were allowed to engage in
that kind of behavior in our electricity and natural gas
markets as well.
The solutions that Public Citizen's advocates that are
unfortunately not included in the energy bill would be to
mandate minimum storage requirements. One of the key problems
that I found and Federal investigations have found is that
financial incentives exist in today's uncompetitive gasoline
markets for companies to restrict capacity. The FTC clearly
found that the inelasticity of some of these reformulated blend
requirements in certain markets make it very easy for these
companies to unilaterally withhold gasoline.
If an entity is unilaterally withholding, that is clear
evidence of uncompetitive market. A solution would be to have
mandated storage requirements that the government could also
order its release and that would take away the financial
incentive of these companies to engage in these manipulative
behaviors.
Another option would be to launch a serious multi-agency
investigation of these anticompetitive practices and possibly a
comprehensive review of recent mergers that have been approved
and whether or not those recent mergers have indeed resulted in
these anticompetitive practices.
There are other solutions as well. We could implement fuel-
economy standards that would reduce our demand. The United
States uses 25 percent of the world's oil and we can also
improve our management of the Strategic Petroleum Reserve by
ceasing filling it. We're already at 92 percent capacity. Thank
you very much, Mr. Chairman.
[The prepared statement of Mr. Slocum follows:]
[GRAPHIC] [TIFF OMITTED] T6091.052
[GRAPHIC] [TIFF OMITTED] T6091.053
[GRAPHIC] [TIFF OMITTED] T6091.054
[GRAPHIC] [TIFF OMITTED] T6091.055
[GRAPHIC] [TIFF OMITTED] T6091.056
[GRAPHIC] [TIFF OMITTED] T6091.057
[GRAPHIC] [TIFF OMITTED] T6091.058
[GRAPHIC] [TIFF OMITTED] T6091.059
[GRAPHIC] [TIFF OMITTED] T6091.060
Mr. Ose. Thank you for joining us today. We appreciate your
testimony. Gentleman from Nevada.
Mr. Porter. Thank you, Mr. Chairman. I guess I have a
couple questions but first, Mr. Slocum.
Mr. Slocum. Yes.
Mr. Porter. Regarding investigations, who else should be
doing the investigations? You may have said it. I was trying to
read your testimony as you were speaking, but is there some
other steps we should be taking in that.
Mr. Slocum. I did not mention specific agencies. I think
that getting all of the various antitrust entities such as the
Department of Justice involved in this review of specific
mergers, and in my written testimony that I've submitted to
you, sir, I go through some of the problems where the Federal
Trade Commission did not place adequate conditions on the
approval of mergers. They allowed these companies, for example,
when you merge fully vertically integrated entities like
ExxonMobil or Chevron and Texaco to merge they were allowed to
retain much of their downstream assets, and that as also
concluded by the General Accounting Office they have found that
has directly led to overconcentration of this industry which is
leading to anticompetitive practices.
Mr. Porter. Thank you. Regarding travel to Las Vegas, I
guess this is an AAA question, you know this weekend begins one
of the most popular weekends and moving into the season of tour
and travel. At what point do you think the gas prices are going
to keep people home?
Mr. Comey. Right now they are not detering people from
traveling. We're actually predicting a more robust travel
season this year than we've seen since 2001. Despite the high
gas prices, people are still traveling in large numbers. How
long that will continue is uncertain. Our survey suggests that
some people are adjusting their travel plans, taking shorter
vacations closer to home. It doesn't seem to be adversely
affecting tourist-dependent economies at this point.
The problem seems to be that these periods of
unpleasantness with regards to high gas prices don't last long
enough to really have a significant impact in terms of changing
people's behavior. They kind of soldier on, they grumble at the
gas pump, they go anyway. Whether or not that continues into
the future is very uncertain. With global demand, particularly
from China increasing, we may not have seen the end to these
high prices.
The short answer is we don't exactly know when it will
start undercutting economies like it does in Las Vegas. At the
present time it does not.
Mr. Porter. Do you track also the airline industry impact
or I know you're an automobile association.
Mr. Comey. I read press accounts and that sort of thing,
but we don't do any independent research in regard to the
airline industry. The airline industry seems to be reluctant to
pass along the added fuel costs for competitive reasons, but
people seem to be traveling by air in larger numbers than they
have in the last couple years.
Mr. Porter. For the balance of the panel, what I'm asked
every day is what we can do today. I know we touched upon some
things with the automobile efficiency, getting it repaired,
serviced, tires, 6, 7 percent savings I think, Mr. Hackett, you
mentioned that. Some other things people can do today to help
with the problem. I know we're looking at some long-term
solutions but what about some quick short-term fixes. Any
suggestions?
Mr. Comey. One of the main things, the suggestions that you
referenced with regard to keeping your car in proper operating
order, not accelerating rapidly, driving the speed limit, those
are things that people might have heard. I try to focus on
things that maybe they haven't heard of.
One of the biggest waste is buying higher octane fuel than
you need. Fewer than 10 percent of the cars on the road
actually require high octane fuel and consumers purchase
between mid-grade and premium fuel up to 30 percent, that
represents up to 30 percent of fuel purchases. It's less now
with high prices. It's down to around 20 percent. But, if your
car's manufacturer and the owner's manual does not specifically
require you to use high octane fuel then you shouldn't buy it
because you're just wasting your money.
People often will buy premium or mid-grade fuel in belief
they can enhance engine performance, increase the life span of
their vehicle. It's just not the case. You're not getting any
value for your money if you're overbuying on premium fuel.
Tire pressure inflation I think is something that can have
a big impact. For every pound of pressure that your tires are
underinflated you can lose up to 2 percent of your fuel
economy. A lot of people judge whether or not their tires are
properly inflated based on looking at them. You can easily be
off by 5 pounds and your tires would still work just fine, so
that could be 10 percent of your gas mileage right there.
People who are reluctant to use tire pressure gauge are
probably also reluctant to change their own oil. So an easy way
to get it checked is to make sure they do that when they change
the oil. It is supposed to be part of the service. Sometimes
they neglect to do it.
Also taking stuff out of your trunk. A lot of us use our
trunks as mobile storage facilities. While it doesn't have a
huge impact on gas mileage it does add up over time. Could be
up to an extra tank during the course of a year. If a tank of
gas costs $40, $50, do you really want to buy an extra one?
Those would be the suggestions that we've been giving to
consumers as some way they can combat this.
Also we encourage consumers to shop aggressively for lowest
price on gasoline. Many of us may have chosen a gas station at
one time because it had the lowest price but because prices
fluctuate so much the cheapest station today could be the most
expensive next week.
So, what AAA encourages people to do is just pay attention
to the posted prices of gasoline as they're driving throughout
their normal routine. That way they know what a fair price is
once they have to fill up. It doesn't make sense to drive all
the way across town to save a couple pennies on gas, although I
have talked to consumers who are so bent out of shape about
this issue that they will do that. It does pay to find a
station that offers the best value and is equally convenient to
the one you normally shop at.
I have told people who want to go the extra step further
that if they politely discuss this with the station owner by
saying, look, your prices are out of line and I normally shop
here but I'm going to go to your competition, I'll keep my eye
on your price if you lower it, I'll be back, this is also a way
for the consumers to use their dollars to send a message.
Mr. Porter. Mr. Sparano, unless you have a----
Mr. Sparano. I think Mr. Comey's comments are well taken. I
think it's important for people to know that in the United
States there are 160,000 service stations. In Nevada there are
1,008 as of last look. California has about 9,500. People do
have a choice. It's a very competitive industry.
In California, according to the Lundberg survey, 10 percent
of those 9,500 stations are owned and operated, that is with
salaried employees, by the major corporations, some of which
were mentioned earlier. The other 90 percent are either owned
or leased by independent business people who are involved in
making a living, and recently we saw an e-mail that floated
around challenging folks to boycott stations. That just hurts
the independent owner.
I think people can exercise their choice. They shouldn't
drive too far as was suggested. They should do all the things
that represent efficiency. But, this problem didn't start last
week or last year or in 1999. It started 30 plus years ago when
we stopped building refineries. We stopped building
infrastructure.
The U.S. production of crude went from 10 million barrels a
day to 5\1/2\ million barrels a day. The use of products in
this country is now 20\1/2\ million barrels a day. We import as
you mentioned earlier, Congressman, almost 63 percent. Twelve
and a half million barrels a day. Ten of crude, two and a half
of product comes from somebody else's refineries and production
fields.
Those issues are important for us to focus on and they'll
require longer term fixes. I think the AAA representative hit
it right on the head when he talked about the kind of things
that folks can do day in and day out.
Mr. Porter. Mr. Hackett.
Mr. Hackett. I can't add to the list.
Mr. Porter. Mr. Slocum.
Mr. Slocum. I would respectfully challenge the contention
that inadequate refinery capacity has been built. It's true
that no new refineries have been built in a little while but
we've got internal company documents that were turned up by a
Senator from Oregon, Senator Ron Wyden, in a recent report that
discusses explicit strategies by large refiners to muscle
smaller independents out of the market.
For example, Castle Energy owned and operated a refinery
just outside of Los Angeles called the Powerine refinery and it
shut down in 1995 and at the time the CEO told the San
Francisco Examiner that, ``operating as a small independent
refinery in California has been very difficult because of the
competition and poor refining economics.''
Now, at the same time, Senator Ron Wyden had in his
possession an internal communication from the Mobil Corp.,
which is now part of ExxonMobil which states, ``if Powerine
restarts and gets the small refiner exemption, I believe the
CARB market,'' which is the California--the cleaner burning
California Air Resources Board gasoline blend, ``I believe the
CARB market premium will be impacted. Could be as much as 2 to
3 cents per gallon. The restart of Powerine, which results in
20,000 to 25,000 barrels per day of gasoline supply, could
effectively set the CARB premium a couple of cents per gallon
lower. Needless to say, we would all like to see Powerine stay
down. Full court press is warranted in this one.''
That is an indication to me of some fairly aggressive
tactics by larger companies using their dominance of the market
to muscle smaller independents to intentionally restrict
supplies so that they and not the market determine how much
gasoline is available to consumers.
Mr. Porter. I've got one more question.
Mr. Ose. Yield for one moment?
Mr. Porter. Yes.
Mr. Ose. Because we have the person who actually ran the
Powerine. Do you care to add to this.
Mr. Sparano. Congressman, thank you. That has been
misreported. I was chairman, CEO of Pacific Refining Co., an
equally small independent refiner that was shut down in 1995. I
can assure you after 35 years in this business that's not the
way it operates. This country has lost 1.8 million barrels a
day of refining capacity, not 10,000 barrels, not 180,000 which
is a good size refinery. 1.8 million barrels a day since the
mid-1980's.
I don't know where the report came from. I do know the FTC,
the EIA, the CEC, the attorney general of the State of
California on repeated occasions have examined the kind of
allegations that are being made by the Citizen's group and have
found no wrongdoing, not just no wrongdoing, nothing illegal,
no collusion, no market manipulation.
So, as a head of a refining operation I will share with you
that Pacific Refining in 1995 shut down because it spent 5
years and millions of dollars trying to get permits just to
make CARB gasoline, not to expand, not to grow bigger, not to
put someone else out of business; to make the gasoline that the
State required.
We had tremendous amounts of resistance, influence by
government officials to not proceed with our project despite
the lack of belief that we would ever accomplish our task we
did in fact get the permits and the partners who happened at
the time to be a Texas corporation and a foreign national oil
company, Peoples Republic of China specifically, they decided
they weren't having much fun in this industry and they closed
down the plant. I had to personally layoff 220 people.
I did examine as part of a team the Powerine refinery
because one of our thoughts was if we could combine with
Powerine we might be able to keep our plant open and keep all
those people in business in both plants. It wasn't a very good
operation. It didn't have the tools to be competitive. That's
the fact.
Mr. Ose. I thank the gentleman for yielding.
Mr. Porter. Thank you. Close to home, again, Bakersfield,
what will happen, once it's shut down, to Nevada?
Mr. Sparano. Shell has made a decision to shut down that
refinery. They indicated that they are in a position where
valley heavy crudes have been produced for probably 100 plus
years. They don't have access to the kind of heavy crudes that
make that refinery economic. It's been reported that it made
money in the last 4 of 6 years. People have tossed around
internal documents. The refinery made, according to Shell, $14
million in a 6 year period. That's not exactly what I would
call excess profits.
The plant is older. It requires upgrades. It is a very
difficult environment. Shell has indicated they will supply all
of their contract customers with both gasoline and diesel.
Where they get it is not certain. What happens in the
marketplace I cannot predict whether others step in to fill the
void or not.
The closure of that refinery which produces 2 percent of
the gasoline for the State of California and 6 percent of the
diesel may or may not have an impact. It's too early to tell.
I'm sure that others will have the opportunity to fill the
capacity when it leaves the marketplace.
Mr. Porter. Thank you.
Mr. Ose. Thank you. The gentleman from Massachusetts.
Mr. Tierney. Thank you very much.
Mr. Sparano, I do think you'll agree these are business
decisions, not building refineries. Government didn't decide to
stop having refineries built.
Mr. Sparano. I disagree.
Mr. Tierney. Can you point me to something that said the
government came out and said we're not going to----
Mr. Sparano. No, sir. It's not that----
Mr. Tierney. You want to tell me how it's all the
regulations and all that, right.
Mr. Sparano. No. If you were to build a new refinery today
in the State of California, and you built a small one, 100,000
barrels----
Mr. Tierney. Let's talk about keeping the ones open that
were open.
Mr. Sparano. I'd like to answer your question.
Mr. Tierney. First of all--in fact, I've been through these
hearings before. I've had other members from organizations like
yours that tell us how it's the environmental regulations that
is shutting them down. In fact, I sat through one hearing, we
haven't built a new refinery, got a new permit for new refinery
since God knows when. Only to find out from the administrator
for the EPA said they haven't asked for any.
The fact, if you're not seeking any, you're not likely to
get them. If you want to expand as you indicated was your thing
and you did get your permit and then there is a business
decision made to shut it down anyway, that's not the
government.
From 1995 to 2002, 97 percent of the more than 920,000
barrels of oil per day of capacity that have been shut down
were owned by smaller independent refiners. They either decided
to shut down or they were squeezed out of the market, one or
the other. I can assure you that you can't come up with an
instance where the government ordered them to shut down.
Mr. Sparano. I think we're almost playing with the chicken
and the egg here. Who produced the regulations? It is the
response or lack of the ability----
Mr. Tierney. You believe the regulations made them shut
down.
Mr. Sparano. If you run a refinery, as I have done in my
career on more than one occasion, you face a myriad of costs.
They're in the millions of dollars. Those costs in large part
are constituted by regulatory requirements of some sort. For
example, in California----
Mr. Tierney. Some of the cost is.
Mr. Sparano. I said in some respects they're made up of
environmental costs. In California, between 1990 and 1995,
refiners spent $5 billion. Someone said earlier that the
industry doesn't reinvest its profits. $5 billion in a 5 year
period, another billion to make clean diesel. Not to make extra
product. To make clean diesel.
Regulations exist on the local level, on the county level,
on the local air and water district level, on the State level
and on the Federal level and they are multilayered. They are
duplicative. They are very expensive to meet. You're correct,
many of the refiners that shut down in the period you
described, Congressman Tierney, were as a result of people not
having the money to reinvest. That's a business decision.
Mr. Tierney. You say it's not having money. The profit in
this industry has been phenomenal since 1997, 1998, 1999, 2001.
It dipped a little in 2002 and then it went back up again. It's
incredibly profitable again now. So the question is how much
money is enough for these people to make a business decision to
shut it down. If your profits are 50 percent higher than they
were the year before, you decide it's not enough, you shut it
down, it's not the government or its regulations shutting it
down.
Now, let me just ask Mr. Hackett for a second. You talked
about filling your tires. Mr. Comey, you talked about taking
things out of your trunk. The fact is about 180,000 barrels a
day that are being saved if people fill their tires. Right now
the President continues to buy about 107,000 barrels a day for
the reserves. If he just stopped buying that for the time being
because the price is up so high, what impact would that have on
the market? Would it send a message to people that the White
House is serious about the supply? Would it have an impact.
Mr. Hackett. As near as we can tell. Major impact would be
the signal it would send. Volume is not very big on an overall
basis. So that physically might not have a lot of impact on the
market but it certainly does send a signal.
Mr. Tierney. Now, when we talk about the price at the pump
is there any ability to defend that unbranded is going to be
less expensive than branded supplies? Does anybody know that?
Mr. Comey. Independent stations tend to be more competitive
when there is a lot of supply because they buy on what's called
the spot market meaning the stations that are affiliated with a
large corporation get under contract the gasoline first and
that price might be higher than the market price would set when
supplies are good. When supplies are down, independent stations
tend to be less competitive because they may be paying more on
the spot market and the contracted stations that are part of
the big chains may have actually a better deal.
It just goes to show you that shopping around is important.
The independent station that had good value last year when you
decided that was your gas station might be more expensive. So,
it varies depending on what the supply situation is.
Mr. Tierney. Would independent refineries be more inclined
to sell to the nonbranded?
Mr. Comey. I'm not sure if I can answer that question.
Mr. Sparano. Any independent refiners, some of those are
independent refiners in that they are not associated with the
bigger companies that have been mentioned but they have retail
operations of their own. Both independent refiners and major
refiners have segments of their production that may be sold to
the independent gasoline stations.
I think there is an important point that I would like to
share with you about concentration of stations. Another factor
about where you might find the cheapest gas and whether it's an
independent station flying independent flag or independently-
owned station flying someone's brand or branded station, if you
have 25 service stations in a 5 square mile area you're going
to have a heck of a lot of competition. They're all going to be
vying for the same motorists, having to meet the same amount of
volumetric demand. If you have four or five stations in that
same 5 square mile area they won't be nearly as competitive.
California is a wonderful example of that. Again, according
to Lundberg, in Los Angeles there are almost 2,000 stations. In
San Diego there are 700 and in San Francisco there is 130. That
makes a big difference in terms of local pricing practices and
the availability of affordable product to the local consumers.
Mr. Tierney. Same would be true with refineries, if you
have fewer of those then the prices will also be expected to be
impacted by that.
Mr. Sparano. Prices are governed by local markets. Prices
are an issue of supply and demand. I can't argue with the fact
that we are barely meeting the demand requirements but that's
because supply is increased, as Mr. Keese said earlier, at half
a percent a year and demand is currently growing this year 5
percent more than the same period last year. That's a function
of people's driving habits, where they drive, how much they
drive and what they drive.
Mr. Tierney. You're not going to tell me the lack of
refinery capacity has no impact on this.
Mr. Sparano. I'm saying the lack of the ability of the
refiners to construct more capacity and the restraints caused
by the permit system, other local constraints and just the
sheer cost of building all have influence.
Mr. Tierney. Just so I get it on the record because I read
to you the RAND report, Public Citizen's report talked about
General Accounting Office report; we've talked about consumer
reports, had testimony of Mr. Wyden's committee on this. Are
you saying to me, sir, that the only reason that these places
shut down, those refineries which have been extraordinary
number shut down not because of business decision but it's all
because of government regulation?
Mr. Sparano. No, I didn't say that, nor am I saying that.
Mr. Tierney. You would agree with me to some degree it's a
business decision to shut these down?
Mr. Sparano. I guess I would take it a step further. It's
always a business decision. It's what causes the business
decision to occur that's what's important.
Mr. Tierney. We lost 100 or more refineries from 1980 to
1983. Over 50 from 1990 on, over 20 since 1995. We lost two-
thirds of the firms engaged in refinery business in the United
States from 1980 to 2000. You think the primary culprit here is
regulation?
Mr. Sparano. I think the overwhelming number of regulations
and the cost to meet those regulations, to buy land, to keep
land, to pay taxes on land all have had influence over this.
There were 301 refineries in the mid-eighties. There are 149
now. I closed one of them down personally so I feel this
perhaps more than----
Mr. Tierney. I think you do. Step outside that one
experience for a moment. This happened about the same time all
the consolidations was happening in the market. Companies are
gobbling each other up. We're ending up now with five companies
essentially owning half of the capacity around here. You don't
think there is any possibility these companies deciding this is
a good thing to decrease, especially when we have all these
internal memos coming from people telling us they have
strategies to decrease the amount so they can increase their
prices.
Mr. Sparano. I'd like to make a couple of observations.
First and foremost, there have been 29 investigations in the
last 20 years that have said there is nothing illegal going on.
Including not just the FTC that is responsible for making
determinations but the attorneys general for the States.
Mr. Tierney. That's a nicety. I agree with you none of
those reports have found there is collusion or other antitrust
violations. What I'm saying to you is the high concentrations
right now is you don't have to be a monopoly. You don't have to
be violating antitrust to be able to have such a concentration
in your particular region, whatever, that you can decide what
you're going to do without being in fear of a competitor coming
in and doing something else.
Again, I go right back to the finding that the FTC made. In
addition to finding that there was no antitrust violation, it
specifically found that the choices by industry participants,
each industry participant acted unilaterally and followed
individual profit-maximization strategies, that's essentially
what it did. The firm did sell off some of its RFG. Didn't sell
the rest, want to buy when the price is up. Executive of the
company made clear that he would rather sell less gasoline and
earn a higher margin on each gallon sold than sell more
gasoline and earn a lower margin. That may not be illegal but
as a matter of public policy I'm not sure it's good for this
country's energy needs and the things people need.
I'm not trying to argue that your firm is out there
breaking the law. I may be making the argument they are making
business decisions for their shareholders which they believe is
their obligation to do and that as public policy we may not
have been doing what we can do to make sure that enough of the
supply got out to where it had to be, the prices were in the
range of where it should be and they had the kind of capacity
on hand that is necessary. If companies are going to make those
legal but tough decisions on that basis, going to shut down
refineries and do things like that, maybe we ought to take a
tough stand on this end.
Mr. Sparano. Two important points, if I may respond, which
I think there was a question in there somewhere.
Mr. Tierney. There wasn't.
Mr. Sparano. OK. Industry, there has been a lot of talk
about companies combining. Companies have combined over the
last 10, 15 years for survival. We've gotten an industry that
factually, according to Business Week, last 5 years makes a
nickel on the dollar. I'm not in the habit of investing for a
nickel on the dollar.
Mr. Tierney. Which industry are you talking about?
Mr. Sparano. The petroleum industry. According to Business
Week, the last 5 years, 5.2 percent, oil industry 5.3 percent.
Business Week score card published quarterly. In the first
quarter of 2004 petroleum industry made 6.9 percent, coal
industry average 7\1/2\ percent. Business Week score card. I
have it here.
Mr. Tierney. I've got what Business Week said about the
profit. You can go where you want to go on that. I think the
profit margins here, profits down 2002 but afterwards they went
up. 2000 petroleum industry reported return on equity of 25
percent. That's a nickel? Twenty-five percent. That was twice
the historic average for the industry which ain't so bad and
was about 50 percent more than that of other large
corporations.
Mr. Sparano. Which year are you talking about, sir.
Mr. Tierney. Talking about 2000, 2002, 2003, 2004.
Mr. Sparano. There is a point here. It's over a long period
of time. This is not a one quarter or 1 year of the ultimate
history of this business, the return on capital employed on
refining is about a nickel.
Mr. Tierney. It ain't a nickel now.
Mr. Sparano. It's better at the moment, grant that, but it
has been over the long haul not a particularly profitable
business. That's why companies have gotten together. That's why
many companies have left the business. There are no people
lining up that I know of at California's borders to build new
plants.
Mr. Tierney. How would anybody break into a marketplace
where five companies own over half of the capacity on that?
Mr. Sparano. It's a great market.
Mr. Tierney. We can go back and forth on this. I find it
hard pressed you want to be on the record saying that they're
making 50 percent more than other corporations, large
corporations and they're making twice the historic average for
their own industry, that there is some sort of impoverished
industry.
Mr. Sparano. No. 1, I didn't say that. No. 2, what I did
say, the industry made 6.9 percent profit margin in the first
quarter of 2004. That's not 50 percent. It's not 25 percent.
Mr. Tierney. Disagree. Go ahead.
Mr. Ose. I thank the gentleman.
Mr. Slocum, what I get from your written statement a
concern about the level of profits that the refining industry
is making. As a percentage of sales what should the industry be
making?
Mr. Slocum. That's a good question. And I think that----
Mr. Ose. Let me add, I'm sorry, I mischaracterized the
question. From your perspective what advice would you give to
us if we were to mandate what the return on sales should be?
Mr. Slocum. Well, I don't think that I advocate the
government setting a return on sales. The primary tool that I
was recommending to the committee, Mr. Chairman, was some sort
of mandatory minimum storage requirements that the government
could also order its release during periods of tight supply and
rising crisis and that would act as a deterrent against what we
are now experiencing as a financial incentive by the industry
to keep supplies tight.
I would not advocate that the government be in the business
of telling a company how much profit it should or should not be
making, nor am I saying that companies do not deserve to make a
profit. Profit is what it is.
I think that there are tools that the government should
develop to recognize that we have uncompetitive markets, and
again it isn't just Public Citizen reaching these conclusions.
It's economists with the Federal Government and others who have
examined the industry and seen that these mergers are having
negative impact and that it is the government's duty to take
some affirmative steps to protect consumers and protect the
economy.
Mr. Ose. As it relates to the storage issue, at what point
in your thinking would the government direct the holding
company, whatever company that held the petroleum product, at
what point would the government order the release of that
product?
Mr. Slocum. When some sort of either the Department of
Energy or some sort of regional committee made up of Governors
or other energy officials within regions or specific States
could make a recommendation to the Federal Government to
release those reserves because some sort of formal assessment
and conclusion had been reached that supplies were too tight
and, therefore, necessitate some sort of release of storage.
I clearly have not developed an enormous amount of detail
on this. I think talking to other individuals who are familiar
with the industry that it is one tool that may be successful in
reducing prices and reducing some of the volatility that we're
currently now experiencing.
Mr. Ose. I was curious of the details. Clearly you've got
more thought to put into that?
Mr. Slocum. Yes, sir.
Mr. Ose. We may give you a question to that effect.
Mr. Slocum. I would be happy to answer that, Mr. Chairman.
Mr. Ose. Mr. Sparano, I want to talk to you. It's my
understanding California consumption right now is around 15\1/
2\ to 16 billion gallons of gas per year.
Mr. Sparano. That's correct, according to the Energy
Commission.
Mr. Ose. Nevada, it's about a billion gallons of gas per
year. Arizona it's about 2\1/2\ billion gallons of gas per
year. Do you have any information about what the refining
capacity in the three States is?
Mr. Sparano. Refining capacity in Arizona is zero for all
intents and purposes. With all due respect to the Tonopah
refinery, the capacity in Nevada is close to zero. In
California, California refiners produce about 45 million
gallons per day. If you put it in a refining term it's 1.1
million barrels per day of capacity of gasoline production. I
think that's what you were asking, Mr. Chairman.
Mr. Ose. 1.1 million?
Mr. Sparano. Barrels per day of gasoline produced by
California refineries. That gasoline serves California
consumers, about 60 to 70 percent of Arizona.
Mr. Ose. So 400 million barrels per year? 365 times 1.1?
Mr. Sparano. Times 42 you get 16 billion gallons.
Mr. Ose. California is imbalanced. As a percent is there a
1 percent play, is there 5 percent play?
Mr. Sparano. If I may describe the way the western region
works because I think it's important to not just identify this
as a California issue even though the bulk of the----
Mr. Ose. I live in California. That's why I'm interested.
Mr. Sparano. Me, too. California produces and transports
for sale about 60 percent of Arizona's gasoline, about 100
percent certainly of southern Nevada's gasoline, about 100
percent comes from California pipelines, and then we actually
send about 30 to 35 percent of Oregon's gasoline requirements.
Now, when you add those up you say, well, if you use 45
million a day and you make 45 million a day and send a bunch
out, it's backfilled. Washington refineries can make the
California quality gasoline. We have the most stringent
specifications in the world. We do get some product from there.
There is some product that is imported--I think the last
numbers I saw, about 100,000 barrels a day of imports into
California from either a United States or foreign source. So
there is a balance you can draw around the five State area:
Washington, Oregon, California, Arizona and Nevada. Roughly in
balance every day.
I think in response to your question, there is not much of
a buffer. I believe Chairman Keese touched on that earlier.
Earlier this year there were a number of refineries that were
undertaking planned maintenance and some of them did not
startup on schedule and at the same period there were others
that had some unplanned outages and as a result there were 9 or
13 experiencing some kind of problem. Set a very difficult
situation in place whereby the supply in the region and
nationally has been well behind last year's supply in terms of
inventory gasoline.
Mr. Ose. The reason I ask the question is from an
operational standpoint, one of the things we discovered in our
examination of electricity was that historical standards within
the industry were that you had a 7\1/2\ percent spending
reserve and another 7\1/2\ percent standby in the event
something went down. What is the historical tradition in the
refining business? Is it to always run right at maximum?
Mr. Sparano. No. Refiners in the 1980's were running in the
70 percent capacity range and because of the number of plants
that have shut down that capacity utilization now is year to
date about 91 percent nationwide. In California, I think
Chairman Keese can support this, plants have run at about 95
percent of capacity.
That's essentially full because when you do that
calculation it doesn't take into account the days that plants
must be down every 3 or 4 years to do plant maintenance because
the equipment doesn't run infinitely. It requires very costly
and long-planned maintenance. Sometimes up to 2 or 3 years of
planning go into creating maintenance planning. We're operating
pretty much at full capacity and there is not a great deal, if
any, spare capacity.
Mr. Ose. You're saying there is no margin of error?
Mr. Sparano. There is very little margin for error.
Mr. Ose. It would seem like with no margin for error it
just highlights the urgency with which we need to deal with
this issue. Now, let's say we do the deal with inflation. Was
it you that had inflation of tires.
Mr. Hackett. (Nodded.)
Mr. Ose. That adds 180,000 barrels.
Mr. Hackett. Nationwide.
Mr. Ose. Per day? Per year?
Mr. Hackett. 180,000 barrels----
Mr. Sparano. If every driver----
Mr. Ose. It would save 180,000 barrels.
Mr. Hackett. Right.
Mr. Ose. Now, somebody mentioned CAFE standards. Let's say
we take CAFE standards and we raise them from the current
average 26 or 27 to 30?
Mr. Hackett. How long do you assume it could take to turn
it over----
Mr. Ose. If I'm the buyer of the vehicle it's like 14
years. You tell me.
Mr. Hackett. Seven to 10 years.
Mr. Ose. Seven to 10 years to turn the fleet over?
Mr. Hackett. Yes.
Mr. Sparano. Mr. Chairman, one of the things that have
happened as CAFE standards have improved vehicle mileage
efficiency enormously since the early 1980's and into the
1990's, the vehicle miles driven and the demand for the product
has gone up commensurately. So, despite the fact that CAFE
standards have created an improvement in vehicle efficiency,
more miles are driven, more gasoline is consumed. So I'm not
sure that's an absolute method to get at reducing demand and
bringing thing back into balance. I'm not negative on it at
all. Please don't misunderstand me.
Mr. Ose. One of the things that Mr. Tierney and I and
others in Congress struggle with, we have a range of choices.
We can do a whole of bunch of X, a little of Y and some of Z or
whatever. But I can tell you, the statistical data is very
clear that as we seek to raise CAFE standards we're going to
take weight out of vehicles and that's going to compromise the
structural integrity of those vehicles.
We are making a tradeoff in terms of an increase in number
of highway fatalities. Currently we're maybe at 50,000 a year
nationwide. How many more do we want? How many more can we
stomach?
Conversely, the tradeoffs that we make on the permitting
side, I mean, if the argument is that if refining is such a
profitable business, why aren't people lined up to do it
because Lord knows money is cheap right now. Why aren't they
lined up to do it? Why aren't they coming to the State, local,
Federal permitting agencies and submitting their applications?
Mr. Hackett. Some of the answer to that is the time that it
takes to make the change. From my perspective--I'll agree with
Mr. Sparano. For a long time refining was not a very good
business to be in. Frankly, what happened is the government
regulations that have constrained the supply have in fact put
money in the refiners pockets.
Mr. Ose. Actually, I think Mr. Tierney is correct. The
government regulations have been a conscious decision on the
part of the people of the United States that they want
something and they've asked their elected official to pass
statute and the agencies have adopted regulation to implement
statute, and it may be that statute led to regulation that said
New Source Reviews required or that we're going to reduce the
particulate matter that comes out of the end of your tailpipe
or what have you. That is a conscious decision. What I'm trying
to highlight here is that we have made a series of conscious
decisions that have had consequences.
Mr. Hackett. Thank you, Mr. Chairman. From my perspective
one of the consequences is that it's made refining profitable.
Mr. Ose. At $2.50 a gallon or whatever it is.
Mr. Hackett. Well, probably less than that. In our analysis
it's really sort of the last few years that these things have
been profitable. A good place to go look at that is as Mr.
Tierney indicated check the facts, look at the stock prices of
the independent refiners, the Senecas, Valeros, the Desarros
and the like. You can see how their stock prices have gone up
dramatically, nearly doubled in some cases over the last
perhaps 18 months or so. So you can see Wall Street talks ill
of refiners. Lately they've caught on and they see that these
independent refiners are making money. That's probably a good
place to go to validate how much money they're making.
But, from my perspective what happened is the regulation--
everybody in this room is for clean air and clean water and
fair prices for gasoline. Nobody will dispute that. But in
order to get those clean air and clean water regulations,
that's wound up reducing the amount of gasoline that refiners
in the United States can make and that's a fact. So then----
Mr. Tierney. Excuse me.
Mr. Hackett. Yes, sir.
Mr. Tierney. Don't say that's a fact. It's an opinion.
Cause and relation is your opinion. I'm going to point out once
again when you blame the decline of capacity to those
regulations you do away with the fact that this began, these
decisions to close these things down began long before the
Clean Air Act Amendments ever took effect and they continued
long after.
Mr. Hackett. Let me explain my opinion on a shutdown of
refineries. There were 300 of them. Now there are 148. Most of
that 150 or so that shut down, most of those went in the 1980's
and those were primarily bonus. They were the result of
government's support for refiners. Government essentially paid
those guys to be in business. Once President Reagan de-
controlled oil, they made a business decision to close down
because they were losing money. Most of them went because of
that.
So then we talk about mergers. When did the merger start?
Merger started in mid-1990's. I want to say--let's pick 1996
because I can't quite remember. Mr. Sparano's refinery and the
Powerine refinery both shut down in 1995. I think most of these
refinery shutdowns have been primarily business decisions, but
I can't find a cause and relationship between mergers and
refinery shutdowns. I think there are other factors there.
Mr. Tierney. RAND found it, General Accounting Office found
it, several other people found it.
Mr. Hackett. I read the RAND report and I didn't reach that
conclusion.
Mr. Tierney. RAND did.
Mr. Hackett. That mergers shut down refineries?
Mr. Tierney. That had a lot to do with it, yeah. I read it
into the record earlier twice.
Mr. Ose. You were fidgeting there. I'm the chairman of
fidgeting. I watch for that.
Mr. Slocum. I can't remember if there was something
specific I wanted to say or not.
Mr. Ose. If it comes to you, share it with us.
Mr. Tierney. I want to finish up with Mr. Hackett. I'll
read you again from the 2003 RAND study. ``Indeed, many RAND
discussants openly questioned the once-universal imperative of
a refinery not going short, that is not having enough product
to meet market demand. Rather than investing in and operating
refineries to ensure that markets are fully supplied all the
time, refiners suggested that they were focusing first on
ensuring that their branded retailers are adequately supplied
by curtailing sales to wholesale markets if needed. Central
tactic is to allow markets to become tight by relying on
existing plant and equipment to the greatest possible extent,
even if that ultimately meant curtailing output of certain
refined product.'' So, basically, they were trying to curtail
the output of the refined product.
Mr. Hackett. I understand your point. I'm not disagreeing
with that.
Mr. Tierney. The elimination of spare capacity generates
upward pressure on prices at the pump, on and on from there.
Last thing, I think the Energy Information Agency, if
that's--it's report in the first quarter of this year,
``Twenty-four major energy companies reported overall net
income of $13.9 billion on revenues of $198.3 billion during
the first quarter of 2004. The level of net income for a
quarter one of 2004 was significantly higher than in the first
quarter of 2003, rising 18 percent.''
Mr. Sparano. That's 6 percent.
Mr. Tierney. Overall, the petroleum line of business
registered an 8 percent increase in net income between first
quarter of 2003 and first quarter of 2004, as the 3 percent
increase in oil and gas production net income was augmented by
a 30 percent increase in refining/marketing net income.
Moreover, all lines of business fared better in first quarter
of 2004 relative to first quarter of 2003.
Downstream petroleum operations in the United States majors
rose from $2.9 billion first quarter of 2003 to $3.8 billion
the first quarter of 2004. Higher U.S. gross refining margins
contributed to a 41 percent increase in U.S. refining/marketing
earnings from $1.8 billion in first quarter of 2003 to $2.6
billion in first quarter of 2004. Higher refining margins,
despite higher fuel costs, is one of the basic reasons they
cited as to why the earnings were higher.
Mr. Ose. Would you like to submit that for the record?
Mr. Tierney. Sure.
Mr. Ose. April 2004?
Mr. Tierney. January to March 2004.
Mr. Ose. Actually have the April 2004 report, EIA.
Mr. Sparano. Mr. Tierney, in response to your comment to
Mr. Hackett about refineries closing down due to mergers. I
think just to clarify that point, one of the things that has
occurred to a great extent when mergers have taken place is
that refineries, the FTC has chosen to force the merging
parties to divest in more and more refineries and that has in
fact built the independent refiner asset base.
So I might characterize it more as a shift in the assets as
opposed to the mergers themselves being merging of partners
being forced to shut down facilities. They've shifted hands.
Mr. Tierney. One big company to another big company in the
instances you talked about most recently, right?
Mr. Sparano. From a major to an independent. Exxon Benicia
refinery was sold to an independent first. The Shell refinery
in Martinez is now run by an independent.
Mr. Tierney. They weren't asked to divest. In both those
instances they gave up one refinery and then they passed it
over to somebody else.
Mr. Sparano. My point is not to argue how much. I just
wanted to clarify that it's really not shutdowns. It's a
shifting of ownership of those refineries. They're not shutting
down. They're continuing to run.
Mr. Tierney. Everybody has testified here that there has
been a significant number of shutdowns.
Mr. Sparano. Not because of mergers. That's the point I'm
trying to make. The mergers have resulted in the FTC and
certain attorney generals forcing mergers to divest at one or
more plants, or in the case of where there is petroleum, in
ours they divested on production on the north slope.
Mr. Tierney. Once companies have merged and they close down
facilities who is to say what the business reason was there.
What we're saying is once they merged it was a better business
decision for them, you know, to have less capacity than it was
to not. That's what the internal memo says.
Mr. Ose. Are we all in agreement that we have less
production today than we had previously?
Mr. Hackett. No.
Mr. Ose. OK. Why not?
Mr. Hackett. Because we can find this in the stuff we did
for the California Energy Commission. If you look at gasoline
production in California has been roughly constant.
Mr. Ose. Two million barrels per day?
Mr. Hackett. Gasoline production are around 1.1 million
barrels per day. It has grown slightly. That's the refinery
people talk about. Fundamentally as the smaller refiners were
shutting down, the bigger refiners were spending the money to
make the upgrades that they needed in order to make CARB
gasoline.
I can think of two shutdowns in California. One was post
de-control of oil where uneconomic ones shut down because they
couldn't make money without government support. The next was in
the early to mid-1990's, that required like Pacific Powerine,
Fletcher, Golden West, et al., shutdown because they couldn't
raise the capital to make investments in order to make the new
flavor of clean-burning gasoline. I can't think of one that,
maybe it has, I can't think of a refinery that has been shut
down post-merger in the mid 1995 timeframe.
Having said all that I really don't care about that. My
particular interest is coming up with more gasoline for
consumers in the Pacific southwest region. Shuffling around who
is running refineries only makes a difference in my view of the
margin especially when we're short gasoline.
The issue here is how do you get more gasoline into this
market. Do you expand the refineries? Do you expand the port
handling facilities? What are those things that will make a
physical difference and get 1 more gallon in here to help get
the price down.
Mr. Ose. Is it your testimony that for whatever reason
closures of refineries that have been discussed, that the
production from those refineries has been replaced and we still
have a constant, albeit slightly increasing level of supply in
California?
Mr. Hackett. Yes. Now, having said that, demand has grown
faster than refinery production so that's why we're here today.
Mr. Ose. All right. I want to recognize Congressman Porter.
I know he has a 2 p.m. meeting with a bunch of folks that he
intends on attending, so as the host I thought I would give you
another round here.
Mr. Porter. Thank you, Mr. Chairman. What percentage of the
gas retailers are independent in Nevada, approximately?
Mr. Sparano. I don't know that number for Nevada. I'm not
familiar with that at all.
Mr. Porter. What would they be in California, ballpark?
Mr. Sparano. California, about 90 percent of the stations
are either owned or leased or franchised by independent owners.
Now, saying that, they may be owned by a major and leased from
the major and fly the brand but 10 percent, solid figure is
that in California 10 percent of the 9,500 service stations are
both owned and physically operated, staffed and salaried by
major companies. The other 90 are a mix of lessee dealers, true
independents.
I think I have the independent figure if you bear with me
for a second. I believe I do have that for California, the
exact independent figure according to Lundberg. It's about 30
percent I believe that are in the categories of job or
distributor, non-major salary, non-major lessee and non-major
opening dealers. They are all the ones that would simply have
the ability to go buy their own supply and to sell it under
their own brand, a flavor of that.
Mr. Porter. If we were to talk about franchises,
independent 90 some percent?
Mr. Sparano. Yes.
Mr. Porter. Had a question with status and numbers. That
was in your testimony earlier?
Mr. Hackett. Yes, it was.
Mr. Porter. How best for us to streamline that process and
who should be doing that?
Mr. Hackett. Someone has to sit down and study the issue
because as a practical matter it's all over the place. All
kinds of government agencies using all kinds of computer
systems.
The first step is to--is put a little--put some resources
in to understanding exactly how big this problem is and what
the likely solutions are. This is the kind of computer system
problem I think that companies solve all the time.
Mr. Porter. Just want some consistency?
Mr. Hackett. Sort of the issue here is it's very hard to
know--what you really like to know is what's going on in the
market. How much is really getting imported? How much is being
moved from the Gulf Coast? I'll give you an example. The Corps
of Engineers keeps track of port movement. Every time a boat
goes in and out of a port it generates a piece of paper,
electronic thing, and it goes to New Orleans.
New Orleans accumulates these reports. It's part of the
water boring statistics group. I'm not complaining about it,
but it takes them a year to turn around the data. So if I want
to know how much gasoline if I'm helping Chairman Keese
understand supply and demand in California and some of that is
gasoline coming from the Gulf Coast, the best data I've got is
a year old because it takes water boring data center a year to
turn it around. That's an example.
Mr. Ose. Mr. Tierney.
Mr. Tierney. In a report for the Consumer Federation of
America Consumers Union talk about with oil companies merging
and eliminating redundant capacity, that's their assumption
that you don't agree with it, should not be surprised to find
capacity is not kept up. Refining capacity has not expanded to
keep up with growth and demand. Documents from the mid-1990's
indicate that industry officials and corporate officers were
concerned about how to reduce capacity, and obviously because
as you mentioned you don't think the industry was profitable,
and they made--these are direct quotes from some of the
corporate documents on that.
``If the United States petroleum industry doesn't reduce
its refining capacity, it will never see any substantial
increase in refinery profits.'' That from a Chevron Corp.
document written in November 1995. A Texaco official, in a
March 1996 memorandum, said ``refinery overcapacity was the
most critical factor facing the industry and was responsible
for very poor refining financial results.''
Some could argue that the companies merged and some of the
capacity disappeared, whatever, because to have all that
capacity out there made it less profitable. If that's the case
I think one of the questions for us is what's going to increase
that capacity and what's going to give those companies
incentive to do that.
We're all agreed that the regulations, I think we all agree
we want to have clean air to breathe and the environmental
regulations ought not be disturbed. As I've said before, these
things are going on long before the Clean Air Act got in.
That's not really a viable argument. What are the incentives
going to be? What is the taxpayer going to get in return?
Mr. Slocum. I think that there was an interesting example
that, Mr. Chairman, you made earlier when talking about reserve
capacities and you were comparing the fairly significant
reserve requirements in electricity markets and you were
discussing how it seems in oil and gas markets it's not that
big.
It's interesting to note the history of electricity
markets, which is actually my primary focus at Public Citizen
is a heavily regulated industry up until fairly recently and
the State Public Utility Commission in California mandated that
utilities have those reserve requirements for good reason, and
now FERC is trying to do it through standard market design,
trying to have regional markets where they will require
participants selling market-based power to have certain minimum
reserve requirements because they recognize that market power
abuses occur when you do not have that kind of excess capacity.
We've seen as the California energy crisis introduced to us
that even with excess capacity you can have all sorts of
manipulations if your market is not adequately supervised.
So, I think the question at hand here is how do we increase
capacity. Well, the market by itself is not going to produce
excess capacity. There are such significant barriers to entry,
especially with these wave of mergers that have occurred that
it's going to take some sort of government intervention in the
marketplace to make it a more competitive market because
competitive markets will flourish but it seems as though right
now the elements are not there for successful competition and
so--yes.
Mr. Hackett. Let me tell you a story. The Kinder Morgan
pipeline not only provides fuel up here to Las Vegas, but they
also, and to Phoenix and Tucson, but they also have a large
import terminal in the port of Los Angeles in the city of
Carson. For at least 2 years Kinder Morgan has been trying to
get permits to build two more gasoline storage tanks in their
Carson storage tank terminal facility. If you've been to
Carson, Carson is well refineries and storage tanks and the
like.
They've been working on the permits for 2 years. The reason
that they've been working on the, to build these tanks is they
got an oil company who is not a California oil company, a
trading company, an arbitrageur, to put up the money. They
guaranteed that they'll rent the tanks over a long enough
period of time for Kinder Morgan to be able to get their
investment back.
In preparation for this meeting, talking with chairman of
the staff, I got told that Kinder Morgan's permitting process
has been derailed, 2 years into it, been derailed, going to be
another 6, 9 months before they get the permits and they can
start building the tanks which takes 6 months or so. In this
particular little story here, what I observe is that here are
companies willing to spend money to make the infrastructure
improvements that they think will provide them with an adequate
return and they're not allowed to.
Mr. Ose. You're saying the investor is going to park oil in
those tanks waiting for the peaks and then put it into the
market?
Mr. Hackett. That's the kind of business that this
particular business is in.
Mr. Ose. They are trying to get permits to build storage--
--
Mr. Tierney. That's the NIMBY issue. It's communities
holding it up, right.
Mr. Hackett. When we did our work with California Energy
Commission, what we concluded was that a lot of the holdup is
not inside the beltway or in Sacramento. It's the folks in the
local planning communities who are making the decisions and
holding these activities up.
Mr. Tierney. You don't have any equivalent, is what you're
saying, if FERC when it wants to put a gas pipeline in
somewhere can actually do a taking and go through and there is
very little local community can do about it but there is no
equivalent what we're talking about here as far as for storage
refinery or anything like that?
Mr. Hackett. I think that is what Mr. Sparano and Chairman
Keese is talking about.
Mr. Tierney. Is the industry prepared for some sort of a
tradeoff, some incentive to increase capacity in return for
limited regulation of either profit, excess profits, plow back
in mandatorily back into this thing or some regulation that
requires storage as Mr. Slocum talks about and consequently
being able to direct that storage out when fluctuations are in
place?
Mr. Hackett. Let me address that. First is price controls.
We looked at price controls for Hawaii and that doesn't work.
Never have worked. They generally lead to higher prices of oil
prices. Depending on the market, they can lead to shortages. We
saw that in the 1970's. Mr. Porter left but I remember waiting
in gas lines. That was prior to price controls. Price controls
are a bad idea.
Second thing, fuel reserves. We thought about this a lot.
In general they're bad ideas. They agreed to let us look at
areas to supply. This is the stuff we've been talking about.
Permitting and oxygenate mandate, etc.
But given that we took the legislature's money to do a
report we figured one out, and so it turns out Energy
Commission decided not to put any more resources into that
particular idea but I think there is some interest--we did some
interesting thinking about that.
But the fundamental issue here is that if the industry is
not preparing enough inventory, somehow or other it's because
they can't. You quoted days of supply going down. I think
that's probably right. I think that's more the fact that
inventories are not necessarily going down but demand is going
up. And so, the denominator is getting bigger than the
numerator. Get some effect there because they're not building
facilities.
Mr. Ose. Are you saying the numerator is fixed but the
denominator is getting larger?
Mr. Hackett. That's right. I have to look at the numbers to
make sure we're talking apples to apples.
Mr. Sparano. I think I mentioned earlier and I hope I got
it across, the amount--the demand increases are running at
about four times the amount of production capacity increases
and that does certainly have an influence on how much inventory
you can hope to keep in place while it's being sucked away by
demand. Dave raises a good point.
Back to one of your earlier points on what's responsible.
It's very difficult for an industry that goes through years of
permitting that gets stifled. You called it NIMBYism but
NIMBYism uses the regulatory structure to fight projects in the
neighborhood. I mean, that's the connection. I think you've got
an industry that has run a pretty low return business, 5 cents
on the dollar, and the reason people refine, gentlemen, is that
you can't burn crude.
It is a very simple, and I don't mean to be glib, it's a
very simple fact that in order to take that precious supply of
hydrocarbon resource and turn it into something we can put in
our cars and airplanes and diesel trucks and locomotives, a
huge amount of capital investment, time and effort and risk,
capital risk, physical risk goes into making those products
that we all use. And, it's not been a great return business,
and there are people as David just described who are trying to
fight their way into it and are not being allowed.
Mr. Tierney. So if, if people in the local level would
allow these places in you're telling me that you think
companies would go out and build more refineries?
Mr. Hackett. I know of several examples. Of refineries? I'm
sorry. My head is in tanks and pipelines and docks.
Mr. Sparano. It's an important question. It's one that we
both know no one can provide a guaranty because at the end of
the day if you're going to spend $2 billion to build a new one
you better have good economics and certainty for your
shareholders that you'll be able to build the project in the
timeframe.
Mr. Tierney. Set aside the regulatory issues on that,
NIMBYism, whatever you want to say, we're talking about a
demand that you tell me keeps going up, that it's not going to
go down any time soon, and enough profit so this would be a
reasonable investment for you to think they would make. So, my
question is given those circumstances would you expect that the
industry would go out there and do that or do you think they
would keep what they have now?
Mr. Sparano. I would say the environment is a lot better
than it's been in the history of the planet. I don't think you
can just ignore the fact that you can't just pick the quarter
you like where you made money in refining but you didn't make
money in production. These companies all have multi-national
portfolios of assets. That whole balance is what has to be
looked at.
Whether or not a company would take advantage of a refining
opportunity in California, I don't know. I'm not privy to their
economics. The dynamics of the marketplace appear to be
improving such that becomes a better idea but there is no one
who can guarantee that would happen.
Mr. Tierney. What if we prohibited the vertical
integration? What if we didn't let refinery producers refine?
Mr. Sparano. I think you probably break the model of the
guy I admired, Adam Smith. I don't think that's how our country
works.
Mr. Tierney. It's worked that way in the past, regulation
on that. Maybe that's one way to look at it as long as they're
integrated in that sense, we have a problem. Maybe if you set
up the refining as a separate industry then there is----
Mr. Hackett. As a student of the industry I think we've
seen a lot of that. We've seen the rise of--what you've seen is
the vertically integrated majors, the Shells, Exxons, et al.,
have sold off refining. Some of it is due to the FTC to sell
off, if you couldn't merge you had to sell off refineries, and
some of it is because there have been companies, Valero, you
talked about Greehey, I think you quoted him, who built a big
company on nothing but refinery. They've got about that much
marketing and they have no crude oil whatsoever.
I think you can look to the marketplace and see in fact
that kind of thing has already happened and so you don't have
vertically integrated mergers in refining today as you did
let's say 10 years ago.
Mr. Tierney. Four of the five companies are vertically
integrated.
Mr. Hackett. That's right. The other half aren't.
Mr. Tierney. But they've got over half the market.
Mr. Hackett. How much competition is enough.
Mr. Tierney. Four of the top five companies are vertically
integrated and they've got over half the market.
Mr. Hackett. The nonvertically has the other half.
Mr. Slocum. The arguments that are made today about placing
some of the blame on environmental regulations to me sound
unfortunately very familiar. I worked extensively on trying to
expose certain elements of the California energy crisis, and
during the height of the crisis it was often said that
environmental restrictions were the leading contributor to the
power shortages.
Well, on April 8th of this year John Ashcroft held a press
conference in Washington, DC announcing the criminal indictment
of Reliant Energy, Houston-based company. In the remarks he
made he mentioned how Reliant intentionally shut down four of
its power plants. I understand I'm talking about power plants
which are different from the oil industry obviously but there
are some similarities in the economics. And, how Reliant
intentionally shut down four power plants and publicly sent out
press releases and their PR people, John Ashcroft said this on
April 8th, and blamed environmental laws for the shut down of
those power plants when actually it was the company's own
economic strategies that led to the intentional shutdown of
those plants.
So, I understand it's a little different but for me from
looking at the industry, from reading other academic and
economic surveys of the industry, I see where there are
numerous economic incentives to mandate as tight margins as
possible because they are going to make far more money, and I'm
just afraid that we're going to have deja vu here where we are
going to blame environmental regulations. We already did that
before and we turned out to be wrong. I'm just afraid of
placing all the blame on environmental regulations.
Sure, I think that there is some credibility to re-examine
some of these reformulated blend requirements. We've got an
enormous number of blends, possibly streamlining them should
definitely be on the table but not without a very tough
critique of the way that the oil industry conducts business
today. It's been well documented that they do indeed engage in
anticompetitive behavior and I don't think it's fair to place
the blame solely on excessive permits or other sensible public
health laws.
Mr. Sparano. May I respond? That was a direct shot I
believe at the industry. There are a couple of very simple
things. We lost sight of something this morning. The cost of
crude and the tax structure in this country create a very
enormous segment of costs that is related to water refiner I
guess to start with and what is transported in the market and I
don't think we should lose sight of that, but that's not the
real issue.
Mr. Tierney. Those are constants. The taxes remain
constant. Set that aside. Talking about the crude.
Mr. Sparano. Crude does move up and down and it's been more
and more controlled in the last several years I've been in this
business by increasingly smaller group of people I think that
have a pretty dominant cartel position.
Mr. Tierney. Before you go, except over the last few years
as crude prices go up the profit margins have also gone up more
so than the crude so what we've seen has been that the company
has not only taken the rise for the crude but taken the excess
on top of that and that's pretty well documented.
Mr. Sparano. I do not want to start us going around and
around again on that. I'll stick to my original point if I
might.
Mr. Ose. I've got a couple questions about solutions.
Mr. Sparano. You have the gavel, sir.
Mr. Ose. Do you have a mortgage on your house?
Mr. Sparano. I have a mortgage on my house and I live in an
apartment. So I'm double blessed.
Mr. Ose. Mr. Comey, do you have a mortgage?
Mr. Comey. Yes.
Mr. Ose. Do you have a mortgage?
Mr. Hackett. Yes.
Mr. Slocum. No, sir. I'm a fairly young man.
Mr. Ose. I just wanted to touch on something. You suggested
a cause of the electric crisis we had in California. The
mortgage is a promise to pay some amount of money in the
future. With all due respect to your conclusions as it relates
to electric crisis which you brought up----
Mr. Slocum. Yes, sir.
Mr. Ose [continuing]. The sole cause and accelerant of that
whole thing was an absolute refusal by the PUC to give the
right to contract for future delivery of power at reasonable
prices and traceable to one single individual, the rental. It
followed PUC's refusal to do that?
Mr. Slocum. If I leave the doors to my apartment unlocked,
does that give anyone the right to come in and take everything.
Mr. Ose. If the PUC removes the carpet and the paintings
and the beds and the dining room table and everything else,
you're not going to have much of a place to live and that's
exactly what happened.
Mr. Slocum. The criminal convictions against several energy
traders----
Mr. Ose. All followed from the PUC's refusal to give safe
provisions for forward contracting of power purchases. It
started in August 2001 when the PUC absolutely uniformly said
we're not going to do it.
I want to go back to my question. I couldn't pass that one
up, having paid that price. I want to get your collective
opinions. We have in this country different air quality
regions. Each of those air quality regions has a different fuel
that they've adopted to comply with the Clean Air Act.
One of the things that just baffles me is, as I count,
there are abouit 60 different boutique fuels, which means this
refinery over here produces one kind, that refinery produces
another and this one produces a third, and the product from
each of these refineries goes to a different air market. Have I
got it right so far.
Mr. Hackett. Well, that's the simplified version.
Mr. Ose. We're going to keep it simple until you expand on
it. Now, this refinery goes down, it can no longer provide fuel
to the air market that it otherwise is servicing and these
other refineries can't either because they're all designed to
provide fuel to different air markets.
What would be the impact of the Federal Government saying,
OK, we're going to reduce 60 to 3 or 4 as a safe harbor, we're
going to say if you cook these 3 or 4 fuels so that the exhaust
coming out of people's tailpipes meet our air quality
requirement, you're fine. What would be the result of that?
Would we have more fuel or more fungible fuel? Would we have
any abatement in price.
Mr. Hackett. From our perspective, vulcanization of fuel is
inefficient in normal times. If a refinery, for example, and I
know something about this because we're currently----
Mr. Tierney. Can we all agree it's inefficient? Just go on
from there.
Mr. Hackett. Where it really gets to be a problem though is
when there is some kind of supply constraint. Refinery goes
down, pipeline breaks, something else happens and so that
market can't be resupplied with its fuel and then you get the
price spikes. You saw them in Chicago, saw them in Phoenix last
summer and there are other examples. So it's the harmonization
of fuels is going to be probably one step in reducing those
price spikes because of regional----
Mr. Ose. Do you agree with that as a former producer.
Mr. Sparano. As a person who represents the industry, I
think one thing you have to take into consideration is that a
lot of members of the industry, not just refiners but marketers
and transporters have set up their systems and spent billions
of dollars. It's $100 billion since 1990 for the whole industry
for all varieties of investments. They've got investments built
around this 18 boutique fuel map. So, there may be some
complications there.
I'm guessing that there are some States like California
that will insist if there are fewer boutique fuels that one and
the most prominent one, that would be California's CARB fuel
because it is in fact the cleanest one. So, that's an issue.
I want to get to one thing that you all can do. You asked
about what are solutions. There is this I think very
counterproductive Federal minimum oxygenate mandate that I
think you can in fact influence the EPA to grant the waivers
that are requested by California and New York. I think that
would go a long way toward beginning to create greater
flexibility on the part of refiners, greater fungibility in the
system.
You can't put ethanol in at a plant. You have to build
tanks at a terminal in order to put it in because it has some
characteristics that make it unacceptable to transport. So, I
think that's one of the big things you can do. You can also
think about whether or not there is some relief EPA might grant
on a plant basis for the SIPs. If I work as I've done----
Mr. Ose. You need to tell me what SIPs are.
Mr. Sparano. I'm sorry. The State Implementation Plan. Each
State has an air quality State implementation plan where they
sign up for air quality improvements that they're going to make
over a series of years.
While working with the Energy Commission, we really are
working hard with coming up with permit streamlining and other
ways to make the system work better. We're trying to work with
the air districts. In California you have local ones throughout
the State, to help them come up with ways to not only get
emissions out of the air but fund them.
They went up often against the SIP and whether or not the
emissions they take credit for are creditable against the SIP.
It's something to look at, see whether or not there is a
greater risk of emission reductions that might be credible
again the SIP. That might promote more activity within a number
of States that would both reduce emissions and allow proponents
of projects to get them moving and to have a certainty of
cooperation from those air districts because they all know that
they all are going to get credit for that approval.
Mr. Ose. Are the processes that you're referring to that
might be put into new construction significantly more efficient
than those that might exist in the field today otherwise?
Mr. Sparano. I think with every year the efficiency of
refinery operation improves. The technology is so much better.
The biggest piece of that is advanced computer control. So,
yes, I think new projects will almost always be more efficient
than old. The processes haven't changed that much. Catalytic
cracking was invented in 1941 or earlier. It's the heart of
every refinery, but it is those technological advances and
controls that I think you will see year after year better and
better.
Mr. Ose. Mr. Slocum.
Mr. Slocum. Yes, Mr. Chairman. Like I said a few moments
ago, I do support revisiting all of these various reformulated
blend and boutique fuel requirements, and I would potentially
support a streamlining of that. There is no question that those
multiple requirements make it far easier for the majors to
manipulate the market as the FTC has found. That said, even
streamlining those environmental regulations is not going to
alter the fundamental disfunction that clearly are present in
the domestic industry, particularly the refining industry.
The GAO is very clear it does not place the blame on
boutique fuels. It places the blame on higher gasoline prices,
on mergers and consolidation. And so, if we are going to
examine a streamlining of these boutique fuels it should be
done at the same time as an investigation and other attempts to
obtain competitive domestic energy markets.
Mr. Sparano. Before we put too much faith in the GAO report
I would like to observe something I read in the paper today
through the industry Internet.
Mr. Tierney. You put more faith in the paper.
Mr. Sparano. I don't believe I said that. I said I read
that.
Mr. Ose. Got it on the record as saying that?
Mr. Sparano. The FTC has said in response to the report,
which is 527 pages--I haven't read the whole thing. My little
Blackberry wouldn't accept it. FTC said the report, the GAO
report is flawed, quote.
So there needs to be I think some examination before we run
off too quickly and say that's the answer to all of our
prayers.
Mr. Ose. We have a little time on our hands to do that. Mr.
Hackett, Mr. Comey, anything you want to add?
Mr. Hackett. I think that, Mr. Tierney, you observed and
Mr. Slocum's bad behavior--apparent bad behavior on (inaudible)
talked about how they would act, try to shut down competitive
refiner or to withhold supplies from the market and that
clearly happens, no question about that.
I think that these issues come back to things that
government needs to do which is pay attention to this stuff but
ensure there is adequate supply so that these guys got to
compete. They don't get to a point where they can actually
withhold stuff in the market because if they do the competitors
will take their heads off.
Mr. Ose. That's Governor Wall right there.
Mr. Tierney. That's the issue though. How are we going to
do that?
Mr. Hackett. I do it from the supply side. Government works
hard to ensure adequate supply. Government doesn't get in the
way of Kinder Morgan and their customers spending money to
import gasoline in California.
Mr. Ose. Well, there is a caveat though to that. We had
testimony earlier about that pipeline that went through that
neighborhood where we had a disruption in the pipeline and we
lost the neighborhood. Government does have a duty for safety.
I don't think you're suggesting any compromise of that?
Mr. Hackett. No compromise to safety whatsoever. The issue
here is the process of getting this stuff done.
Mr. Ose. All right.
Mr. Tierney. Thank you, Mr. Chairman.
Mr. Ose. Thank you for coming all this way.
Mr. Tierney. Thank you, witnesses.
Mr. Ose. I appreciate your testimony. If we do have
additional questions, we'll send to you in writing. And we will
appreciate a timely response. Again, our thanks to our host
here at the convention center. Sorry he had to leave. It's been
great being here. We're adjourned.
[Whereupon the proceedings concluded.]
[The prepared statements of Hon. Jim Gibbons and Hon.
Shelley Berkley, and additional information submitted for the
hearing record follow:]
[GRAPHIC] [TIFF OMITTED] T6091.064
[GRAPHIC] [TIFF OMITTED] T6091.065
[GRAPHIC] [TIFF OMITTED] T6091.066
[GRAPHIC] [TIFF OMITTED] T6091.061
[GRAPHIC] [TIFF OMITTED] T6091.062
[GRAPHIC] [TIFF OMITTED] T6091.063
[GRAPHIC] [TIFF OMITTED] T6091.067
[GRAPHIC] [TIFF OMITTED] T6091.068
[GRAPHIC] [TIFF OMITTED] T6091.069
[GRAPHIC] [TIFF OMITTED] T6091.070
[GRAPHIC] [TIFF OMITTED] T6091.071
[GRAPHIC] [TIFF OMITTED] T6091.072
[GRAPHIC] [TIFF OMITTED] T6091.073
[GRAPHIC] [TIFF OMITTED] T6091.074
[GRAPHIC] [TIFF OMITTED] T6091.075
[GRAPHIC] [TIFF OMITTED] T6091.076
[GRAPHIC] [TIFF OMITTED] T6091.077
[GRAPHIC] [TIFF OMITTED] T6091.078
[GRAPHIC] [TIFF OMITTED] T6091.079
[GRAPHIC] [TIFF OMITTED] T6091.080