[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



                                                   S. Hrg. 102-000 deg.

 IMPACT OF HIGH NATURAL GAS PRICES ON SMALL FARMERS AND MANUFACTURERS
                                   

=======================================================================

                                HEARING

                               before the

      SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE, & TECHNOLOGY

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                   WASHINGTON, DC, SEPTEMBER 22, 2004

                               __________

                           Serial No. 108-77

                               __________

         Printed for the use of the Committee on Small Business


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
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                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                  California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
PATRICK J. TOOMEY, Pennsylvania      G. K. BUTTERFIELD, North Carolina
JIM DeMINT, South Carolina           ENI FALEOMAVAEGA, American Samoa
SAM GRAVES, Missouri                 DONNA CHRISTENSEN, Virgin Islands
EDWARD SCHROCK, Virginia             DANNY DAVIS, Illinois
TODD AKIN, Missouri                  GRACE NAPOLITANO, California
SHELLEY MOORE CAPITO, West Virginia  ANIBAL ACEVEDO-VILA, Puerto Rico
BILL SHUSTER, Pennsylvania           ED CASE, Hawaii
MARILYN MUSGRAVE, Colorado           MADELEINE BORDALLO, Guam
TRENT FRANKS, Arizona                DENISE MAJETTE, Georgia
JIM GERLACH, Pennsylvania            JIM MARSHALL, Georgia
JEB BRADLEY, New Hampshire           MICHAEL MICHAUD, Maine
BOB BEAUPREZ, Colorado               LINDA SANCHEZ, California
CHRIS CHOCOLA, Indiana               BRAD MILLER, North Carolina
STEVE KING, Iowa                     [VACANCY]
THADDEUS McCOTTER, Michigan

                  J. Matthew Szymanski, Chief of Staff

          Phil Eskeland, Policy Director/Deputy Chief of Staff

                  Michael Day, Minority Staff Director

     SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE AND TECHNOLOGY

SAM GRAVES, Missouri, Chairman       G. K. BUTTERFIELD, North Carolina
BILL SHUSTER, Pennsylvania           DONNA CHRISTENSEN, Virgin Islands
SUE KELLY, New York                  ED CASE, Hawaii
SHELLEY MOORE CAPITO, West Virginia  MICHAEL MICHAUD, Maine
MARILYN MUSGRAVE, Colorado           BRAD MILLER, North Carolina
PATRICK TOOMEY, Pennsylvania

                   Piper Largent, Professional Staff

                                  (ii)


                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
King, Hon. Steve, U.S. House of Representatives (IA-5), Co-
  Founder, House Agriculture Energy Users Caucus.................     5
Peterson, Hon. John, U.S. House of Representatives (PA-5), Co-
  Chairman, House Rural Caucus...................................     7
Swaney, Mr. Hal, Missouri Farm Bureau............................     9
Rockhold, Mr. Brent, National Association of Corn Growers........    11
Smoak, Mr. J. Fletcher, Chairman & CEO, Old Virginia Brick, Inc..    13
Willard, Mr. Billy, President, Willard Agri-Service of Frederick, 
  Inc............................................................    16
Huntsman, Mr. Peter, Huntsman, LLC...............................    18
Prindle, Mr. Bill, Deputy Director, American Council for an 
  Energy Efficient Economy.......................................    20

                                Appendix

Opening statements:
    Graves, Hon. Sam.............................................    34
    Butterfield, Hon. G.K........................................    36
Prepared statements:
    King, Hon. Steve, U.S. House of Representatives (IA-5), Co-
      Founder, House Agriculture Energy Users Caucus.............    38
    Peterson, Hon. John, U.S. House of Representatives (PA-5), 
      Co-Chairman, House Rural Caucus............................    40
    Swaney, Mr. Hal, Missouri Farm Bureau........................    45
    Rockhold, Mr. Brent, National Association of Corn Growers....    47
    Smoak, Mr. J. Fletcher, Chairman & CEO, Old Virginia Brick, 
      Inc........................................................    50
    Willard, Mr. Billy, President, Willard Agri-Service of 
      Frederick, Inc.............................................    53
    Huntsman, Mr. Peter, Huntsman, LLC...........................    58
    Prindle, Mr. Bill, Deputy Director, American Council for an 
      Energy Efficient Economy...................................    61
For the record:
    American Chemical Council....................................    79

                                 (iii)
      


 
   HEARING ON IMPACT OF HIGH NATURAL GAS PRICES ON SMALL FARMERS AND 
                             MANUFACTURERS

                              ----------                              


                     WEDNESDAY, SEPTEMBER 22, 2004

                  House of Representatives,
  Subcommittee on Rural Enterprises, Agriculture & 
                                         Technology
                                Committee on Small Business
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:06 a.m. in 
Room 311, Cannon Building, Hon. Sam Graves, [chairman of the 
Subcommittee] presiding.
    Present: Representatives Graves, Butterfield, Shuster and 
Capito. 

    Chairman Graves. At this hearing we are going to explore 
the outrageously high natural gas prices and its impact and how 
that is having an effect on small businesses, specifically 
farmers and manufacturers. I do appreciate everyone being here 
today.
    Currently over 60 million homes, farms, businesses and 
industries are dependent on natural gas. With the spike in the 
price of natural gas, one would think there is a shortage out 
there. Nothing could be farther from the truth. The United 
States has an abundance of natural gas, and yet prices are two 
or three times higher today than historic averages.
    Beginning in the mid 1980s gas prices dropped, and for 
nearly a decade the price stabilized. It was an inexpensive 
energy source, and supply was extremely plentiful. For years 
natural gas was promoted, and public policy encouraged 
Americans to utilize the clean, cheap and efficient energy. The 
abundance of the gas supply would keep prices low, and that was 
the answer to all our energy needs. When additional clean air 
regulation was added to the books, converting to natural gas 
seemed to be the most efficient solution.
    Prices have been skyrocketing in the past three years, and 
demand is expected to increase 30 to 40 percent by the year 
2025, nearly 20 years from now, yet recent studies show that 
our recoverable natural gas reserves are sufficient to meet our 
demand for years to come, and it is believed that we have more 
natural gas resources than we thought nearly 20 years ago.
    So what is the problem? Many say our supply chain is the 
problem, and I am sure many of our witnesses today are going to 
shed some light on that particular problem. In the meantime, we 
have to deal with these high prices and what those prices are 
doing. They are driving manufacturing and driving our 
manufacturing base right out of this country and hurting our 
farmers.
    Energy costs are frequently cited as one of the biggest 
costs to businesses, second only to labor. Many sectors rely 
significantly on natural gas. Natural gas accounts for more 
than 40 percent of commercial energy consumption.
    Our manufacturing sector has been hard hit by the 
recession. While it is slowly turning around, soaring energy 
prices threaten this recovery. High natural gas prices have 
increased the cost of producing important fertilizers that 
farmers rely on for their crops.
    Natural gas is a primary component in nitrogen fertilizers 
and accounts for 90 percent of the production cost. Fertilizer 
producers have had to turn to foreign imports, causing an 
upsurge in cost. As I think everyone knows, fertilizers plays 
an important role in the development of crops. As a farmer, I 
know how tough it is to meet the bottom line. When you have to 
take on additional costs profits become more difficult to 
realize.
    We rely on our farmers three times a day. Farmers have been 
forced to decrease production by 25 percent in some cases, 
causing adverse financial damage to the agriculture industry, 
which has been hard hit over the years, and causing additional 
challenges to our slowly recovering economy, particularly in 
the rural areas.
    There are answers to this problem. One, pass an energy bill 
that will allow us to explore for more natural gas, repeal the 
red tape surrounding further exploration and build a pipeline 
to increase gas supplies are all solutions that will help to 
stabilize the price volatility of natural gas.
    Liquified natural gas is another solution to supply 
stability. We already know that there are abundant supplies 
under our lands and seas, and we need to tap these natural 
resources. However, many say the short-term recovery that we 
have is nearly three years away, and the pipeline that many 
talk about is at least a decade before it will impact supply 
and prices.
    The fact is, high natural gas prices are driving jobs out 
of this country and hurting our farmers and manufacturing 
segment. I want to hear from our witnesses on how these prices 
affect them and any solutions they have to remedy the 
situation. In my eyes, we need to stabilize the price of 
natural gas and increase domestic exploration in an 
environmentally safe manner, and in turn help our economy.
    [Chairman Graves' statement may be found in the appendix.]
    Again, I want to thank all of our witnesses for being here 
today, and I look forward to hearing their testimony.
    I want to welcome Judge Butterfield, Congressman 
Butterfield, to the Committee today. He is the new Ranking 
Member from North Carolina. I am very pleased to have you on 
board and look forward to hearing your opening statement.

    Mr. Butterfield. Thank you so much, Mr. Chairman, for 
holding this hearing to review the impact of high natural gas 
prices on rural enterprises and manufacturers. I also want to 
thank you for your work on this Committee.
    I am pleased that we will have the opportunity to examine 
the far reaching impacts of high energy prices. In particular, 
I am concerned about the impact that energy prices, 
specifically natural gas, are having on our farming operations.
    I am deeply concerned about the consistent high cost of 
fuel. Experts do not see these costs coming down in the 
foreseeable future. It will cost Americans more to heat their 
homes and drive their cars, while costing businesses more to 
operate. Hardest hit will be the manufacturers that use energy 
intensive processes to produce.
    I am most concerned about the state of the fertilizer 
industry. I am sure we will hear a lot about that today. Mr. 
Chairman, fertilizer is a necessary input in all crops. Eighty 
percent of the cost of fertilizer manufacturing comes from the 
cost of natural gas used to heat massive ovens that create the 
finished product. These ovens are not easily turned off and on 
again and are often kept heated throughout the night and 
weekends when the plant is closed. The result is that 
fertilizer manufacturers live and die by the prices of natural 
gas.
    Natural gas is now three times as expensive today as it was 
two years ago, which means that the cost of fertilizer is also 
three time as expensive as it was two years ago. When the cost 
of fertilizer goes up, so does the cost of our food. Some 
farmers, as a result of these increasing costs, have been 
forced to the auction block.
    Those of us from agricultural districts make the connection 
between the farm and the dinner table, although I realize that 
not everyone else does. American agriculture feeds 283 million 
Americans and consistently generates a surplus in foreign 
trade. A surplus. USDA instruments will reach $62 billion 
during 2004.
    American agriculture also accounts for more than 60 percent 
of all food aid distributed throughout the world. Americans 
spend less than 13 percent of their total income on food, a 
lower percentage than any other nation in the world.
    The rising cost of inputs into our food supply should be a 
reason for alarm. In addition, the fertilizer industry is 
feeling a severe pinch. Production plans are built to take 
advantage of economies of scale, so when capacity falls below 
90 percent the facility ceases to be profitable.
    Over the last three years, a number of plant closings 
throughout the south has put an increasing number of Americans 
out of work as farmers are forced to use cheaper foreign 
products. That, Mr. Chairman, is not good.
    [Ranking Member Butterfield's statement may be found in the 
appendix.]
    I may address some more of these points with the witnesses 
when they begin to testify in just a few minutes, but I thank 
you, Mr. Chairman, and I look forward to this process.

    Chairman Graves. Mr. Shuster?

    Mr. Shuster. Thank you, Mr. Chairman. I want to thank you 
and commend you for holding a hearing on this today. It is 
extremely important that we figure out a way here in Congress 
how to have a reliable, stable supply of natural gas.
    As I travel around and talk to my manufacturers, where two 
and three and four years ago they were talking about the low 
cost of labor in the global market that they were competing in 
that has really taken a back seat now to the high cost of 
natural gas and energy in this country, so we need to move 
forward.
    It is a shame--it is tragic--that we have not been able to 
pass an energy bill to be able to go out and explore new areas, 
find new sources of natural gas. I am hopeful that in the 
coming months we will finally be able to pass an energy bill 
here and do the things we need to do to, as I said, have a 
stable, reliable source of natural gas in this country.
    Again, Mr. Chairman, thanks for holding this hearing today.

    Chairman Graves. Thank you, Mr. Shuster.
    Ms. Capito?

    Ms. Capito. Yes. Thank you, Mr. Chairman. Again, thank you 
for holding this hearing and bringing attention to the problem 
of rising energy costs. It is an issue that Congress must 
address.
    We are getting ready to head into the winter season, and 
our seniors are going to bear the cost of the high heating 
prices. Rising energy makes it harder for small businesses to 
make ends meet. I live in West Virginia where we have quite a 
large chemical industry, and they are feeling the effects daily 
of the rising energy costs of the price of natural gas.
    I would like to use this hearing to call to attention 
something that has been brought to my attention, which is that 
the burden of the higher energy cost prices could be because of 
a manipulation of the trading markets. Unlike other commodity 
and trading markets, the market for natural gas does not have 
effective trading stops that limits sudden and massive price 
increases that can hurt folks in their pocketbooks.
    In 2003, in spite of record natural gas inventories, and a 
record amount of gas production, the U.S. experienced more 
price volatility, including a price spike of more than $11. 
Unlike what exists with the trading of other commodities, there 
are no meaningful stops in place to prevent rumor or 
speculation from causing massive market disruptions.
    Gas prices may rise $3 per million BTU before trading is 
stopped for five minutes. Then trading may resume. In theory, 
natural gas prices could climb $162 per MMBTU in one trading 
session. If you contrast that with beef prices, for instance, 
it may change 1.5 cents per pound before trading is suspended 
for 24 hours.
    While consumers can choose to eat chicken if the price of 
beef jumps, seniors and small business people unfortunately 
cannot change on a dime how they want to heat their homes or 
heat their small businesses.
    We cannot sweep this issue under the table. I look forward 
to hearing the testimony that is being brought forth today. 
Thank you for giving us this opportunity.

    Chairman Graves. Thank you.
    All statements of the Members and witnesses are going to be 
placed in the record in their entirety. We will get started 
right away. I know that Representative King and Representative 
Peterson have other commitments, so we will jump right in.
    We will start off with Representative Steve King from Iowa. 
Representative King is the co-founder of the House Agriculture 
Energy Users Caucus. Steve, I appreciate you being here today.

  STATEMENT OF HON. STEVE KING, U.S. HOUSE OF REPRESENTATIVES 
         (IA-5), HOUSE AGRICULTURE ENERGY USERS CAUCUS


    Mr. King. Thank you, Mr. Chairman. I appreciate you holding 
this hearing and having an opportunity to testify before this 
Committee. It is a perspective I do not often get to enjoy.
    The Subcommittee knows that high energy costs are affecting 
farmers and small business owners in the Fifth District of Iowa 
and across this nation, and I do appreciate this hearing. In 
June I brought together a bipartisan coalition of Members to 
form a new caucus, the Ag Energy Users Caucus. I serve as the 
co-chair of this caucus, along with the Chairman of this 
Subcommittee, you, Mr. Chairman, and the Ranking Member of the 
House Ag Committee, Charlie Stenholm, Representative Earl 
Pomeroy, all as members of that caucus.
    The mission of the caucus is to provide Members and staff 
with access to a forum where they can be educated and activated 
on issues affecting agricultural use of energy. Agriculture is 
an energy dependent industry that is affected by energy prices 
both directly and indirectly.
    Let me give you some examples. Fertilizer, almost all of 
the nitrogen fertilizer, is made from natural gas. Of course, 
that is the foundation for most of our crops. Natural gas also 
runs irrigation pumps in many parts of the country. Propane gas 
is used to heat hog confinements, poultry houses and nearly all 
of our animal livestock enclosed facilities. Propane is used to 
dry our grain. Of course, we use gasoline and diesel for all of 
our crop production, from planting to harvest, and on the roads 
when we deliver our crops.
    While all energy costs have become high input costs to 
farming and ranching, natural gas prices are of significant 
concern. I listened to the opening remarks by Mr. Butterfield, 
and 80 percent of the cost of the production of nitrogen 
fertilizer comes directly from the cost of natural gas.
    That percentage has gone from around 60 percent in past 
years to 70 to 80. My producers in Iowa informed me a couple of 
months ago that now it is up to 90 percent of the cost of the 
nitrogen fertilizer. As a result, over the last four years 
nitrogen fertilizer costs to the farmer have skyrocketed by 
nearly 50 percent.
    Another result is the decreased capacity of fertilizer 
production. Nearly 20 percent of our capacity that existed in 
this country prior to the year 2000 has been permanently closed 
with more at risk of closing. This has caused the agricultural 
industry to import over half of the total U.S. nitrogen supply 
compared to only 30 percent just four years ago.
    If you remember, we had an oil crisis a couple of decades 
ago or 25 years ago when we were looking at about 30 percent 
imported oil. Now we are up to 60 percent imported oil. Our 
fertilizer has gone from 30 percent to 50 percent. We are 
headed in a direction where we are so dependent on foreign 
suppliers that we may not be in control of our own food supply 
if this continues.
    The outlook for the winter ahead does not look good either 
because natural gas prices have decreased over the summer due 
to the relatively mild temperatures. Storage levels are above 
average for this time of year, which could be seen as good 
news, but some of this gas was purchased into storage at fairly 
high prices, and really cold weather can lead to unexpected 
demand spikes. It is also important to note that 60 percent of 
our stored natural gas is for residential needs. That leaves 
only 40 percent then for industrial and agricultural needs.
    U.S. fertilizer producers just cannot compete because 
natural gas supplies are simply too expensive. Supply is not 
keeping up with demand when it comes to natural gas, and it 
will not for many years unless we, the elected officials, act.
    Switching gears, gasoline and diesel fuel used for 
planting, harvest and transportation have continued to 
experience prices that are higher than the average in the past 
several years. Diesel fuel has been especially high, and that 
is because of strong demand and, of course, low domestic 
production.
    According to the American Petroleum Institute, U.S. imports 
60 percent of the crude oil in petroleum products we consume. 
Our refineries are operating at record levels and are producing 
record amounts of gas and diesel. Moreover, as our economy 
grows, the demand for gas and diesel fuel strengthens.
    In conclusion, Mr. Chairman, something must be done unless 
we want to see our domestic fertilizer industry go overseas and 
our agricultural producers go out of business due to expensive 
input costs.
    In the area of natural gas, let us see the Senate pass the 
energy bill conference report that this House has passed twice. 
A pipeline from Alaska would do wonders for natural gas prices 
in this country. Let us allow the United States geological 
survey to explore other domestic sources of natural gas in the 
Rocky Mountains, off the coast of Florida and other areas 
around and especially on public lands in the United States.
    Let us encourage the Administration to work through the WTO 
to persuade Russia to stop negative pricing effects of massive 
nitrogen exports produced with natural gas supplied at 
government set rates that do not even cover the full cost of 
gas.
    In the area of petroleum, let us see the Senate pass the 
energy bill conference report. Our own homegrown sources of 
energy, such as ethanol and biodiesel, will help if we produce 
more of that. Let us also drill in ANWR, the Arctic National 
Wildlife Refuge. I have been up there. I have inspected the 
place. I do not know if there is a better place and a safer 
place environmentally in the world to drill for gas and oil 
than up in ANWR.
    The facts are clear. Safe production on just 2,000 acres, 
which is actually really less than .01 percent of ANWR, will 
yield more than one million barrels of oil a day, and that will 
go on for at least 30 years. Whenever we have opened an oil 
field, we have always found more oil there than was predicted.
    The current use is about nine million barrels a day. We 
could have one-ninth of that oil coming out of the Arctic 
National Wildlife Refuge at no environmental disadvantage. If 
the pattern at the North Slope is consistent from 30 years ago 
to today, 7,000 caribou in 1970, 28,000 caribou today, then the 
environment has actually been enhanced, if there is any 
argument it has been affected at all.
    I would also emphasize that I represent western Iowa. We 
are in the heart of the corn belt. The corn belt runs across 
the country at least as far as Pennsylvania in an effective 
way, and corn is very sensitive to the nitrogen price. It takes 
a lot of nitrogen to raise corn. We get ethanol out of that. We 
get food products. We get 300 other products out of corn.
    If we cannot purchase our nitrogen fertilizer at a 
competitive rate then the entire corn production is held, as I 
will say, hostage to those prices of imported fertilizer from 
foreign countries, that being Venezuela and Russia.
    I think we need to be talking with the environmentalists. I 
do not think we have a very good dialogue there. When we cannot 
get down to sound science and have a dialogue, that barrier is 
keeping us from passing an energy bill.
    Again, Mr. Chairman, I want to thank you for allowing me to 
testify today. Energy costs to ag producers are clearly a 
challenge of our time. I hope we can work together for some 
solutions.
    Thank you very much.[Congressman King's statement may be 
found in the appendix.]

    Chairman Graves. Thank you, Representative King.
    We will now hear from Representative John Peterson, who is 
the co-chairman of the House Rural Caucus.
    Thank you very much, John, for coming in. I appreciate it. 
I know you are busy, but it is a pleasure to have you.

STATEMENT OF HON. JOHN PETERSON, U.S. HOUSE OF REPRESENTATIVES 
                   (PA-5), HOUSE RURAL CAUCUS


    Mr. Peterson. Thank you very much, Chairman Graves, Ranking 
Member Butterfield and Members of the Subcommittee. Thank you 
for allowing me to testify today on an issue critical to the 
future of rural America.
    I represent the second largest congressional district east 
of the Mississippi. Along with Congressman Alan Boyd of 
Florida, I am the co-chair of the congressional Rural Caucus. 
The Rural Caucus is a bipartisan group of 145 Members 
advocating for strong rural health care for rural veterans, all 
rural citizens, broadband access for all our rural communities, 
maintaining rural jobs, particularly our ailing manufacturing 
and natural resource base industries.
    Taken together, all of these issues have one goal in mind: 
To preserve our rural way of life by having quality health 
care, education and jobs close to home. I have worked closely 
with the full Committee chairman, Mr. Manzullo, in support of 
our domestic manufacturers and am pleased to be here today to 
add my voice to those of my colleagues from Pennsylvania--
Congressman Shuster, Toomey and Capito, my neighbor to the 
south in West Virginia--on the impact of high natural gas 
prices on the small farmer and manufacturers in America.
    I am going to turn the rest of my prepared statement in to 
the record--it gives a lot of details--and share with you how I 
think we got here, which I do not hear much discussion.
    About 10 years ago, shortly before I came to Congress, 
there was a change in law that removed the prohibition of using 
natural gas to generate electricity in mass amounts. Prior to 
that, you only used natural gas to make electricity for peak 
power in the morning and the evening. That was the limit. That 
limitation was removed.
    About five or six years ago I attended breakfasts put on by 
the Edison Energy Institute that talked about a 12 year bubble 
where we were going to generate a lot of our electricity in 
this country with natural gas. Now, I was not opposed to that, 
but I also attended a hearing in the Senate that talked about 
with some experts saying this was all being done without proven 
reserves available. In other words, the supply was not there.
    Twenty-five percent of our natural gas today is used to 
generate electricity. It used to be a single digit. That amount 
of natural gas has not been replaced. Eighty-two to 83 percent 
of our gas is derived from our own country. Twelve to 13 
percent we import from Canada. One to two percent is liquified 
natural gas. We actually export a little bit to Mexico because 
they do not have the system to get it to us. They have lots of 
gas, but they do not have the system to produce it.
    So what do we do to fix this? I believe personally that the 
continuing skyrocketing prices of natural gas are going to 
impact home ownership in America and the ability of people to 
stay in their homes because the cost of heat is going up 
dramatically every year. It is going to put certain businesses 
offshore.
    I think natural gas prices are offshoring more jobs than 
any other issue, maybe even more than China. The fertilizer 
business is leaving, as we heard, quickly, because you just 
cannot afford to make it here. The petrochemical businesses are 
moving. Dow Chemical recently moved 2,000 jobs not to a cheap 
labor market, but to Germany because our gas price has been 
averaging $6 per 1,000. Europe's has been under $4. North 
Africa is $1.20. Russia is 70 cents. We are not competitive for 
any industry that uses natural gas.
    Now, we do not want to go back to $2 gas. There was no real 
way to drill. The gas price increases, in my view, are going to 
continue to escalate just as fast as they have in the past 
because we do not have the will to open up and drill.
    A gas well is a six inch hole in the ground with a steel 
casing put in as it is drilled. It is not an environmental 
threat. It is not an oil well. It is not like an oil well, and 
it should be separated. We should not treat them the same. You 
drill a well. You put the casing in as you drill. You cement 
the bottom. You cement the top. You let gas out.
    Most nations in the world drill offshore everywhere. Canada 
drills in our Great Lakes and sells us the gas. My staff have 
gone there and observed it. We have most of the Rocky Mountains 
locked up legislatively or by Presidential decree. We have 60 
percent of the Gulf locked up legislatively. We have the 
Florida coastline locked up legislatively. We have the east and 
west coast locked up legislatively.
    Folks, until we change, this country is going to have 
skyrocketing natural gas prices that make any industry that 
depends on them uncompetitive. I have businesses in my district 
that have gone out of business because of natural gas prices, 
others who are limping along and if they had not had a little 
cash reserve would not have made it.
    Natural gas prices, in my view, are the greatest threat to 
the American economy if we do not stabilize them. All we have 
to do to stabilize them is to drill for natural gas. It is not 
an environmental hazard. We have lots of it. We do not have to 
import any.
    Greenspan says LNG is the answer. It is a small piece. To 
bring liquified natural gas to this country we have to build 
the most expensive ships in the world. We have to build very 
controversial ports. Then we have to build pipelines hooking 
into our natural gas system. It will take a decade to have a 
dent in the natural gas supply.
    In my view, this Congress is the problem because we have 
locked up all the natural gas reserves in this country that 
hold promise. We are drilling more natural gas wells today than 
we have ever drilled, but with less production because we are 
in the old fields. We need to be in some new fields, and 
Congress needs to bite the bullet.

    Chairman Graves. Thank you very much, Representative 
Peterson. I appreciate it. Thanks, Jon.
    Both of you, I know you have other commitments. I 
appreciate you being here. Thank you so much for your 
testimony.
    [Pause.]

    Chairman Graves. I appreciate all of you coming in today. 
You have come quite a distance, and we are just now in some 
parts of the country, at least my part of the country, starting 
into the harvest season, so I know it is a sacrifice to come 
in, but I do appreciate it. This is a very important issue and 
important to all of us, so we do appreciate your testimony.
    We will start right out with Hal Swaney, who is a farmer 
from Platte City, Missouri, and representing the Missouri Farm 
Bureau. Hal, I appreciate you being here.

         STATEMENT OF HAL SWANEY, MISSOURI FARM BUREAU


    Mr. Swaney. Thank you, Mr. Chairman, and good morning, 
everyone. My name is Hal Swaney, and I am a farmer.
    I suppose it would have been nice if I had been turned in, 
would it not? Are we all right to continue, Mr. Chairman?

    Chairman Graves. Absolutely. It happens to the best of us.

    Mr. Swaney. Okay. I am sorry. I will start with our 
industry is more efficient than ever before. I use 30 percent 
less gasoline and diesel than I did 15 years ago, but my total 
expenditures for energy keep going up. It remains essential 
that we have access to reliable, affordable energy inputs, 
including gasoline, diesel, electricity and natural gas.
    Natural gas is particularly important to agriculture 
because it is used to produce a host of farm inputs, one of 
which is nitrogen fertilizer. That is one of the more important 
ones. Natural gas by our standards accounts for about 90 
percent of the cost of nitrogen fertilizer.
    During the past four years, the cost of natural gas has 
risen dramatically. This has caused the price of nitrogen 
fertilizer between the year 2000 and 2003, the national average 
retail cost of nitrogen fertilizer has skyrocketed from $100 a 
ton to more than $350 a ton.
    On my farm, in 2002 I paid $270 a ton for anhydrous 
ammonia. This spring, anhydrous ammonia was $400 a ton. That is 
a 48 percent increase. Due to these drastic price increases, I 
have reduced the amount of fertilizer I am applying to my corn 
and bean acreage. I am drawing down my soils' own reserves.
    Another example. LP gas has gone from 86 cents a gallon to 
the price of $1.19 a gallon. That is a 34 percent increase. To 
offset this, I am allowing my corn to stand in the field and 
dry down on its own. Of course, what that does is increase my 
chances for losses in the field.
    These two practices that I am doing right now are what I 
consider to be very short-term solutions to what appears to be 
a very long-term problem. Why do we feel this is a long-term 
problem? Eleven fertilizer plants closed due to high natural 
gas prices. That is 21 percent of our capacity in this nation.
    As we have heard, another 15 to 20 percent are temporarily 
shut down due to high prices of natural gas. The loss of 
supplies has forced U.S. farmers to import nearly 60 percent of 
the area to grow this year's crop. Losing the domestic 
fertilizer industry negatively impacts America's food security. 
The issue of affordable natural gas is critical to the 
fertilizer industry.
    Now, there are numerous research projects underway to help 
alleviate the problem. One of those is to produce from our 
abundant coal supply and use it to produce nitrogen fertilizer. 
This technology does show some early signs of being a good 
thing, but it is years away.
    Farm Bureau has long been calling for a comprehensive 
energy bill that would increase domestic gas production. 
Missouri Farm Bureau policy specifically calls for an inventory 
of the natural gas potential in the United States and the 
development of the domestic natural gas reserves.
    The Department of Interior announced plans that would 
provide for more natural gas drilling in the shallow waters off 
the Gulf of Mexico. That is a good start, but it is only a 
start. More action is needed. Energy rich deposits of natural 
gas that are now off limits must be considered for gas 
exploration and production immediately.
    The demand for natural gas is increasing at an increasing 
rate. Congress should review the current policies that restrict 
the use of coal generation for electricity and provide 
incentives for clean coal technology as a way to alleviate some 
of the demand for natural gas.
    Mr. Chairman, thank you for the opportunity to be here 
today.
    [Mr. Swaney's statement may be found in the appendix.]

    Chairman Graves. Thank you, Hal.
    I think it is important to note, too, that we talk a lot 
about natural gas and the importance it has on the fertilizer 
industry. A lot of people think that is just because of using 
natural gas to generate that fertilizer, but it is actually an 
ingredient. That is what a lot of people do not realize. It is 
an ingredient in fertilizer. It is not just used to generate 
it. It is a beginning ingredient, so it is important to note 
that.
    Next on our panel is Brent Rockhold from Missouri with the 
National Corn Growers Association. Brent, you might also point 
out, and I do not know if it is in your testimony or not, but 
we have had hearings in this Committee on ethanol as an 
alternative fuel, and you guys have your NASCAR that is powered 
by ethanol or race car that is powered by ethanol. I think it 
is on display out here right now, is it not?

    Mr. Rockhold. It will be at 1:00, from 1:00 until 4:00 
today in the Garfield Circle.

    Chairman Graves. Okay. I think it is important. That is 
obviously another area that when it comes to the energy bill 
and trying to reduce our reliance on foreign oil and increase 
our production, which has an impact on natural gas, we 
certainly want to highlight any ethanol use that we can.
    I would appreciate you mentioning that, but go ahead with 
your testimony.

    Mr. Rockhold. We certainly appreciate you and your staff 
and the Members to come over and view the car while it is on 
display over there.

    Chairman Graves. Absolutely.

   STATEMENT OF BRENT ROCKHOLD, NATIONAL ASSOCIATION OF CORN 
                            GROWERS


    Mr. Rockhold. Good morning, Chairman Graves, Ranking Member 
Butterfield and the rest of the Committee Members. Thank you 
for the opportunity to testify on the impact of high natural 
gas prices on farmers.
    My name is Brent Rockhold. I am the immediate past 
president of the Missouri Corn Growers, president of Missouri 
MOSA, a new generation cooperative trying to build a value 
added producer owned processing plan in northeast Missouri. I 
am also a producer member of the Nemo grain ethanol plant in 
Macon, Missouri, but first and foremost a farmer from Arbela.
    I am also a member of the National Corn Growers Association 
Ethanol Committee. NCGA was founded in 1957 and represents more 
than 33,000 dues-paying members from 48 states. NCGA also 
represents the interests of more than 300,000 farmers who 
contribute to corn checkoff programs in 19 states. NCGA's 
mission is to create and increase opportunities for corn 
growers and to enhance corn's profitability and use.
    My purpose today is to provide insight to the Subcommittee 
on how high natural gas prices affect the cost of producing 
important fertilizers that farmers rely on for their crops. 
Increased natural gas prices have already had an adverse effect 
on farmers due to higher production costs and will continue to 
do so in the future.
    Growers rely on affordable natural gas as feedstock for 
fertilizer, but also energy for irrigation, powering farm 
equipment, drying grain, cooking corn and producing ethanol. 
Whether used directly as a feedstock or for heat and power 
generation, reasonably priced natural gas is essential to 
grower profitability.
    Fertilizers account for more than 40 percent of the total 
energy input per acre of corn harvested. Most of that energy is 
consumed in the production of nitrogen fertilizer. Retail 
prices for fertilizer--the prices paid by farmers --rise 
sharply when natural gas prices increase. According to the 
USDA, farm gate prices for fertilizer have jumped to near 
record highs. The largest cost component of making all basic 
fertilizer cost is natural gas, accounting for more than 90 
percent of the cost of production.
    Nitrogen fertilizer is a key input for the bountiful yields 
achieved by U.S. corn farmers. Nitrogen fertilizer in northeast 
Missouri has increased nearly $25 an acre since the year 2000. 
For my typical 600 acres of corn, that means an increase of 
$15,000 since 2000 to 2004. My total fertilizer costs have 
increased $24,000 in those four years.
    Committee people, when it gets to my end there is nobody to 
pass that extra cost to. I just have to absorb it. I think it 
is the same for those senior citizens trying to buy natural gas 
for heating. There is no place else to pass that on.
    Rising natural gas prices in the U.S. have caused domestic 
nitrogen fertilizer producers to greatly curtail production, 
but production curtailments and higher nitrogen prices are 
largely the cause of the current surge in nitrogen imports. 
Lower natural gas prices in Europe, Asia and South America make 
it difficult for U.S. nitrogen producers to compete with 
foreign nitrogen fertilizer producers who can buy natural gas 
at lower prices and export their products to the U.S.
    Natural gas accounts for up to 90 percent of the cost of 
producing anhydrous ammonia, a key source of nitrogen 
fertilizer. In the midwest, in the beginning of 2000 anhydrous 
was selling for $160 per ton. By the end of that year, the 
price had climbed to $210 per ton. This spring, prices in 
northeast Missouri were close to $400 per ton.
    Unfortunately, these high and volatile prices are expected 
to continue into the foreseeable future. Tight supplies and 
increasing demand will continue to pressure producers' margins 
and profitability.
    Higher natural gas prices will also negatively impact this 
country's growing ethanol industry. According to USDA's latest 
crop production report, this year's corn crop will be the 
largest ever, and yields will be increased by nearly seven 
bushels per acre compared to last year. When harvested, more 
than 10 percent of that crop will be converted into ethanol.
    Natural gas costs account for more than half of the energy 
costs for ethanol production. The corn industry becomes more 
energy efficient every year, but we still must have adequate, 
reliable and affordable natural gas to fuel the industry.
    Government policy is creating a supply squeeze for natural 
gas. On one hand, electric utilities and other industries are 
moving from using our plentiful supplies of coal towards use of 
natural gas. Natural gas has been the choice for most of the 
new electric generation to come on line in the last decade. In 
addition, as that happens our access to natural gas is limited 
due to environmental policy. Clearly, we cannot have it both 
ways.
    Our ability to be efficient and environmentally friendly 
corn producers will face huge obstacles if our nation cannot 
come to grips with its desire to have limitless resources like 
natural gas for production and not realize these resources have 
to come from somewhere.
    I am sure the Members of the Subcommittee and individuals 
as well know this. However, Congress seems unaware of this 
fact. We can produce corn, but we need you to produce the kind 
of policy that enables us to use the needed resources to do so.
    A renewable fuels standard as part of a comprehensive 
energy policy would result in the expansion of ethanol 
production, directly contributing to domestic fuel supply and 
reduction in our dependence on imported oil. Our ability to 
produce food and fuel our nation, and the world, depends on a 
sound energy policy.
    We urge Congress to pass a comprehensive energy policy now 
that provides an enhanced role for renewable energy sources, 
further development of all energy resources for a more diverse 
portfolio and environmentally sensitive production of adequate 
domestic supplies of natural gas.
    I encourage this Subcommittee to continue to address the 
energy and natural gas issues. Your decision directly impacts 
my farming operation. Simply, farmers need access to reliable 
sources of energy and raw materials so they can use the 
fertilizers necessary to produce an abundant, affordable and 
healthy food supply.
    Thank you, Mr. Chairman.
    [Mr. Rockhold's statement may be found in the appendix.]

    Chairman Graves. Thank you, Mr. Rockhold.
    Next we will hear from Mr. J. Fletcher Smoak, who is 
chairman and CEO of the Old Virginia Brick, Inc. He is also 
here representing the National Association of Manufacturers.
    I appreciate you being here, Mr. Smoak, and I look forward 
to your testimony.

    STATEMENT OF J. FLETCHER SMOAK, OLD VIRGINIA BRICK, INC.


    Mr. Smoak. Thank you, Chairman Graves. Good morning, 
Chairman Graves and Members of the Committee. I am Fletcher 
Smoak, chairman and CEO of Old Virginia Brick.
    It is a great honor, as a member of the National 
Association of Manufacturers, to have the opportunity to 
address you regarding our concerns about the huge impact of 
energy costs, especially natural gas costs, on our company and 
the manufacturing industry.
    The National Association of Manufacturers is the largest 
industrial trade association, representing small and large 
manufacturers in every industrial sector in all 50 states.
    Old Virginia Brick has been manufacturing brick for 125 
years, and our products grace some of the most beautiful 
buildings on university and college campuses in the eastern 
United States. We operate three plants in Virginia, and our 185 
employees take great pride in the brick we produce.
    They are very patriotic. In fact, we erected a very moving 
9-11 memorial by using two 36 foot beams weighing 14,000 pounds 
from the World Trade Center Tower One at our corporate 
headquarters in Salem, Virginia. It is open from dusk to dawn, 
lit all night for the public. We invite anyone who is down our 
way to get off on Exit 137 and come by and see this memorial. 
It will really touch you.
    As is the case with all energy intensive manufacturers, Old 
Virginia Brick faces major cost increases that threaten the 
survival of our company. Fortunately, the construction economy 
has remained very strong in large part due to the strong 
productivity growth that has offset or moderated inflation.
    High energy cost increases have historically driven the 
economy into a recession, and the construction industry is 
usually the first to feel the effects. I must give the Federal 
Reserve Board and the President's three tax relief bills over 
the past three years credit for keeping the economy afloat in 
the face of unprecedented natural gas and oil costs.
    In addition, credit must be given to the continuous 
improvements in energy efficiency in the manufacturing sector, 
particularly which has led the company to be 46 percent more 
energy efficient per unit of gross domestic product versus 30 
years ago.
    Despite these general improvements, high energy prices are 
still devastating to energy intensive industries like mine. We 
have struggled, as has everyone, with increases in group 
insurance and workmen's comp insurance, but these increases 
pale by comparison to our cost increases from 2002 to 2004 of 
60 percent or $1,160,000 from natural gas. We experienced a 
similar natural gas run up from 1999 to 2000, but not of this 
magnitude. Prices did moderate in 2002, but they were still 19 
percent above 1999.
    We are currently producing and shipping at record levels. 
However, our pretax profit will be only very modest, at 
approximately three percent of sales, compared with the 11 
percent we should achieve at these shipment levels. If it was 
not for the high volume of shipments, we could not operate our 
plants with these natural gas costs. We have increased our 
selling price, but it is difficult to increase prices to cover 
such high cost run ups in a year to 18 months. We have 
contracts with our customers, and they must have some price 
protection.
    Just one quick aside. I think this past weekend in the 
Washington Post there was an article about the high cost of 
building materials in the Washington area/Northern Virginia 
area. If you look at that, next to the bottom thing was 22 
percent, and I think it was plywood or something. 
Unfortunately, brick is down there at a 3.2 percent increase. 
Our industry is very conservative, and we keep getting squeezed 
and squeezed. The natural gas cost is just killing us.
    During the winter months, November to March, the price of 
natural gas delivered to our distribution company increased 
from $5.22 per decatherm in 2002 to $6.58 in 2004, or 26 
percent. The greatest impact was the summer cost, which 
increased from $3.09 in 2002 to $6.21 per decatherm in 2004, an 
increase of over 100 percent. For the first time in our 
history, we are paying more for summer gas at the Henry hub 
than the preceding winter's prices. It is absolutely upside 
down.
    The persistent high prices in the summertime underscore a 
number of changes that have occurred in the natural gas supply/
demand balance. First, during the 1990s natural gas became the 
overwhelming choice for new electric generation. Second, the 
natural gas domestic supply bubble shrank and disappeared 
during the 1990s, and Canadian imports grew every year to pick 
up the gap between domestic demand and supply.
    Starting in 2003, Canadian gas imports began to drop. 
Meanwhile, despite active drilling in some areas of the U.S., 
domestic production dropped while the industrial economy began 
to revive. In other words, there is not enough gas to meet 
demand. Thus, the summer, despite a relatively cool summer, 
less natural gas was used in the utility section, but demand 
pressures on tight supplies have kept the market clearing price 
far above affordable levels.
    In my view, these summer prices may have been driven by 
large investors such as hedge funds and commodity trading 
advisors, as referenced in an article on oil trading in the 
Wall Street Journal on September 2.
    I suggest for the immediate term a study, perhaps by this 
Committee, be undertaken to determine if pure speculation and 
market manipulation created the summer price run up. However, 
the core issue remains the same. The nation needs adequate 
supplies to reduce both price spikes and volatility.
    Old Virginia Brick has started an investigation into using 
landfill gas for part of our natural gas needs. Unfortunately, 
the landfill is over 20 miles from our plants, and the only 
economical means of transportation is through the local 
distribution company's pipeline.
    This is possible except the BTU content has to be increased 
from 490 to 950 BTUs per MCF. This can be accomplished but at 
substantial cost. The ultimate risk to us are whether the 
fowler gas quality is satisfactory and what will be the useful 
life of the landfill output. Funding to help develop this type 
of resource could greatly reduce the natural gas demand by 
allowing brick companies in many locations to convert. This 
would also reduce pollution since the landfills would no longer 
need to flare the gas that is being generated.
    For the short term, two to four years, we must increase 
drilling in new fields and offshore, and we must expedite the 
permitting of LNG facilities. Long term, we need to start 
pipeline development from Alaska and, as needed, pipelines for 
LNG terminals. This should have been accomplished several years 
ago.
    It is the responsibility of Congress to protect our jobs, 
our economy and our nation by ensuring that these efforts be 
put on a fast track without fear of litigation. We applaud the 
House for passing a comprehensive energy legislative package 
the last two congressional sessions, including provisions to 
facilitate the Alaskan gas pipeline project.
    The House had it right. We need improvements in every 
energy area. Congress needs to facilitate improvements for 
natural gas and the electricity infrastructure and put in place 
incentives for additional energy efficient investments. Most of 
all, Congress must recognize we need more of every type of 
energy supply; not just oil and natural gas, but also coal, 
nuclear and affordable renewables.
    Congress must put statesmanship ahead of politics and 
develop a workable short term, mid term and long term energy 
plan because energy is the life blood of our economy.
    Thank you.
    [Mr. Smoak's statement may be found in the appendix.]

    Chairman Graves. Thank you, Mr. Smoak.
    We are now going to hear from Billy Willard, who is 
president of Willard Agri-Service of Frederick, Inc., and he is 
also representing The Fertilizer Institute.
    I thank you, Mr. Willard, for being here. I look forward to 
your testimony.

   STATEMENT OF WILLIAM F. WILLARD, WILLARD AGRI-SERVICE OF 
                        FREDERICK, INC.


    Mr. Willard. Thanks for having me. Good morning, Mr. 
Chairman and Members of the Subcommittee. My name is Billy 
Willard. I am president of Willard Agri-Service of Frederick, 
Maryland.
    Our company is a family owned business operating out of 
five locations--Marion, Pennsylvania; Frederick, Maryland; Mt. 
Airy, Maryland; Lynch, Maryland; and Greenwood, Delaware. Our 
primary customer is the farmer, accounting for approximately 95 
percent of our total gross sales. The remaining sales are 
attributed to our specialty division, which serves turf grass, 
golf course and the nursery industry.
    Our products and services include crop protectants, 
application, agronomic consulting and fluid fertilizers. We 
employ about 60 full-time employees and hire about another 50 
part-timers during the busy season.
    My family has a longstanding history with involvement in 
agriculture, being in the farm supply business since 1970 and 
also operating a 2,200 acre grain farm in Poolesville, 
Maryland, just about 25 miles up the river from here, which was 
started by my great-great-grandfather in 1871.
    T.F.I. is the leading voice of the nation's fertilizer 
industry, representing public policy, communication and 
statistical needs of manufacturers, producers, retailers and 
transporters of fertilizer. Other issues of interest to TFI 
members include the environment, international trade, security, 
transportation and worker health and safety issues. Willard 
Agri-Service has been a member of the TFI for the past 25 
years.
    On behalf of these two groups, I appreciate the opportunity 
to testify before this Subcommittee regarding the impact of 
high natural gas prices on farmers and manufacturers. 
Furthermore, I would like to thank you, Mr. Chairman, for 
scheduling this very important hearing and for your leadership 
in this critical issue impacting my family farm, my family 
business and the farmers that are our customers who depend on 
us for their fertilizer needs.
    I am present here today to speak to you concerning our 
inability to purchase for our farm and our farmer customers 
nitrogen products that are essential to produce corn, small 
grains and the very important grass hay crops, which, by the 
way, are critical components of dairy production in 
Representative Shuster's region of Pennsylvania. Ninety percent 
of our customers we serve up in that Pennsylvania area are 
dairy farmers, and they use a lot of hay.
    The aforementioned crops simply will not grow and achieve 
economical yields without the addition of nitrogen fertilizers. 
The nitrogen product that is most commonly used by our 
companies is called liquid urea ammonium nitrate. It is the 
most accepted product for a nitrogen source in our region and a 
good part of the country at that. I will refer to that as UAN 
or UAN solution.
    It is important to note that there really is not any 
substitute product for UAN solution fertilizer because of how 
we use it in production agriculture in our region. It is the 
most cost effective product to use, and our 1,800 farmer 
customers depend on us to supply them with that product to feed 
their crops.
    As a side note, UAN is a relatively inert product. It is 
non-flammable, and its chemical characteristics are not in any 
way usable in the manufacturing of explosives or illegal 
substances. Natural gas was alluded to this morning as a 
fundamental feedstock ingredient for the production of nitrogen 
fertilizers and represents 70 to 90 percent of the production 
cost of one ton of anhydrous ammonia. UAN solutions, which we 
use, and other forms of nitrogen such as urea are all derived 
from anhydrous.
    To get right to the important part of this matter, the 
issue of why farmers are paying very high prices for their 
nitrogen products and the reason we as manufacturers are having 
a difficult time procuring product comes down to the basic 
principle of supply and demand. There just is not enough 
nitrogen product being produced in the U.S. to meet our needs 
for agriculture.
    Since mid 2000, as was mentioned here earlier, when the 
natural gas price crises began, 15 nitrogen production 
facilities in the U.S. representing more than 22 percent of 
U.S. capacity have permanently closed. They will not be back. 
During this period, many other production facilities have been 
idled due to the volatility of U.S. natural gas prices, all of 
this jeopardizing the farm profitability.
    The shortage/high price issue is more severe on the east 
coast, we feel, because of our inability to access the river 
system as the midwest can. We in the east are very dependent on 
imports and are getting most of our product now from the 
Ukraine, Russia and Bulgaria.
    A quick overview of where our business has been over the 
past few years concerning UAN solutions is as follows: For the 
crop year 2003, UAN solution, which is 32 percent of solution, 
cost us on the average $110 a ton delivered by rail, and this 
was all U.S. product, most of it coming out of Augusta, 
Georgia.
    We prefer and aggressively try to purchase U.S. product, 
and in the past this product was very cost competitive. One 
reason for this was that it could be railed directly to our 
facilities from the factory where it is produced. Imported 
product that arrives at Baltimore or Norfolk or Philadelphia 
has to be offloaded from the ship, put into a tank, for which 
there is a charge, and then reloaded and trucked to our 
locations.
    For the crop year 2004, we were unable to purchase any 
domestically produced UAN. We paid the average cost for 32 
percent nitrogen of $135 per ton.
    For the upcoming season, 2005, we are now trying to make 
purchases and have only been able to secure about 50 percent of 
our needs for our customers. Usually by this time of year we 
have about 75 percent of our needs covered. The product that we 
have committed to is all imported material, averaging a cost of 
about $180 a ton for 32 percent again.
    At present, there is no producer in the market, import or 
domestic, in our area with product to sell us except for one 
recent quote we just got last week from Terra out of Canada for 
$204 a ton for 32 percent nitrogen. They could ship it in 
February of 2005.
    As was mentioned also earlier, these increases of $70 a ton 
is really going to hit farmers hard. Farmers cannot pass that 
on when they are selling corn, wheat, milk, et cetera. That 
just cannot be passed on to the consumer. The farmer has to eat 
that.
    Again, I thank you for allowing me to testify today on this 
very important subject. The TFI will issue you an in-depth 
analysis of possible solutions to our problem, two of which 
include supporting comprehensive federal energy policies that 
allow for increased exploration, drilling and supplies of 
natural gas and supporting research into clean coal and coal 
gasification technologies.
    I would like to invite any of the Members of this Committee 
to visit any of our outlets, which are pretty close to D.C., or 
our farming operation if they wish to learn more about our 
industry.
    Thanks for much for having me.
    [Mr. Willard's statement may be found in the appendix.]

    Chairman Graves. Thank you, Mr. Willard.
    We will now hear from Mr. Peter Huntsman with Huntsman, 
LLC, in Houston, Texas. Did I get that right?

    Mr. Huntsman. That is right.

    Chairman Graves. I appreciate you being here and look 
forward to your testimony.

           STATEMENT OF PETER HUNTSMAN, HUNTSMAN LLC


    Mr. Huntsman. Mr. Chairman, thank you very much. I would 
like to express my appreciation to this Committee as well for 
taking a keen interest in this.
    I am president and chief executive officer of the Huntsman 
group of companies. We are the largest privately held chemical 
company in the world. We employ roughly 15,000 people around 
the world. We have annual sales of just over $10 billion.
    I will not reiterate much of what has been said. We fully 
agree that a long-term solution is more exploration and more 
production, better conservation of natural gas prices. I want 
to address something that literally hits these companies and 
our company and the American economy on a day-to-day basis.
    Our company was struck very hard in 2000-2001 with price 
volatility of natural gas. Over a six month period, we absorbed 
over $250 million and pushed our group of companies to the 
brink of bankruptcy. Over that six month period, we laid off 
over 1,000 positions in North America alone and 600 contractors 
during that same time period. Like the nitrogen and like the 
fertilizer industry, these are jobs that are going, and they 
are gone for good.
    Our largest concern rotates around the issue of price 
volatility. I understand the laws of supply and demand. We 
trade products all over the world on a global basis and 
manufacture products. The United States has not only the 
highest natural gas prices, but also the most volatile natural 
gas prices.
    As we have had an opportunity to go back and examine what 
happened between 2000 and 2001, it is now very apparent that 
the market was under huge manipulation of companies like Enron, 
El Paso and other companies that had been fined billions of 
dollars and caused billions of dollars of damage to the western 
United States, to the American Gulf coast and the agricultural 
industry.
    We saw the same sort of pricing manipulation take place in 
2002-2003 as Reuter's reported an epidemic of false prices, 
sham trades, round trip trades and so forth that continue.
    As we look at where natural gas prices are set in the 
United States economy, you must focus on the New York 
Mercantile Exchange or the NYMEX. This is a group that is 
largely self-regulated. This is a group that from a 
manufacturer's perspective I have great concern that three 
weeks ago they reported that the CFTC who oversees the NYMEX 
had studied the gas trading markets and could find no signs of 
price manipulation, though they themselves have fined 
companies, many of which are members of the NYMEX, $230 million 
over the course of the last 24 months.
    At the very time that the CFTC was reporting these 
findings, the chairman of the CFTC took a job as chairman of 
the NYMEX. The chief of staff for the CFTC, while this 
investigation was taking place, took a job with one of the 
largest hedge fund traders that trades on the NYMEX and moves 
the price of natural gas.
    I want to just give you one example as to how the 
volatility is devastating the industry. Look at the events of 
the trading prices over the course of the last three trade 
sessions. The price of natural gas has moved nearly 25 percent 
up over the course of the last three trading sessions--Friday, 
Monday and Tuesday of this past week.
    This morning, the headline article in Platt's Daily, which 
reports the movement of price and movement of traders, 
attributed this to aggressive short covering and fresh buying. 
They quoted one trader as saying that the frenzy on the floor 
was to buy first and ask questions later.
    I am not proposing government control of natural gas 
prices. Government control is precisely what I just mentioned 
here. It is when a group of traders can put billions of dollars 
behind certain investments and push the price up and down. We 
read these quotes almost on a daily basis as to what is 
happening.
    Simply put, let me offer two solutions that would cost 
taxpayers no money, that do not require any further jobs in the 
federal government or anything else. Let us look at two simple 
solutions here.
    First, the price of natural gas on the NYMEX, again which 
largely influences and sets the price of natural gas on a 
nationwide basis, is largely unregulated. Look at what is going 
on with beef. Look at what is going on with agricultural 
products and so forth. One and a half cent movement per trade 
session.
    The stops that are put in for natural gas is $162 per day 
per MMBTU. Now, what does that mean? That is the equivalency of 
a movement in crude oil of $1,000 per barrel per day. The NYMEX 
says that these stops have worked well and have served them 
well in the past. There is no point in having stops when you 
have an equivalency of $1,000 per barrel movement per day.
    We would propose that this Committee would seriously 
propose legislation that would put similar sorts of stops in 
with natural gas that are in agricultural products. We are 
doing a better job in this economy of protecting the price of a 
Big Mac and the price of a hot dog than we are the price of 
natural gas.
    Secondly, as we get into looking at who is trading and any 
sort of market manipulation, there is no public accountability 
here. As you see in the New York Stock Exchange, as you see in 
most other exchanges, we have no idea which companies are 
moving what sort of volumes, what sort of terms and so forth.
    One single gas company in the United States is capable of 
trading up to 42 percent. That is more than the entire OPEC, 
any legal cartel, is capable of controlling on crude oil, one 
company controlling 42 percent of the trading volume that is 
consumed on a daily basis in the United States.
    We would propose just two simple solutions. Let us look at 
putting in some sort of daily meaningful stops in the price of 
natural gas. I have said nothing about high natural gas prices. 
Meaningful stops.
    Secondly, we believe that transparency and openness with 
some sort of an idea of who is trading and what volumes are 
trading would be of great help to industry today, not three to 
five years out when ANWR can be developed and pipelines put in. 
This can be enacted today, and it could help industry today.
    Thank you very much.
    [Mr. Huntsman's statement may be found in the appendix.]

    Chairman Graves. Thank you, Mr. Huntsman.
    We will now hear from Bill Prindle, who is the Deputy 
Director of the American Council for an Energy Efficient 
Economy. I appreciate you being here today.

STATEMENT OF WILLIAM R. PRINDLE, AMERICAN COUNCIL FOR AN ENERGY 
                       EFFICIENT ECONOMY


    Mr. Prindle. Thank you, Mr. Chairman and Members of the 
Committee. My name is Bill Prindle. I am with the American 
Council for an Energy Efficient Economy. We are a national non-
profit organization that specializes in technology research and 
policy analysis.
    Today I want to talk to you about how energy efficiency can 
help on the demand side to bring balance into the natural gas 
markets. There is a supply and a demand challenge that we face 
in these markets. We have done some research that shows that 
energy efficiency can not only help individual farmers and 
businessmen and homeowners save energy. If done in a concerted 
way, we can actually help bring prices down on the margin as 
much as 20 percent.
    While I think we all understand intuitively that if we 
invest in efficiency we can make our businesses and our homes 
less costly to run, in a tight market like we have today we can 
actually affect prices. That is really the bottom line of my 
message. I want to say a little more about how we got to that.
    Just to say a little bit about how we got into this 
situation with these tight gas markets, we have an increasingly 
challenging supply picture in the lower 48 of the United States 
for both oil and gas. Oil production peaked in this country in 
1970. Gas production peaked in 1973.
    We have average depletion rates in U.S. gas fields of 29 
percent a year. That means that regardless of how much we open 
up lands and new areas to production, the drillers have to work 
that much harder every year just to account for depletion. The 
supply side is continually challenging. That is why we are 
looking at LNG and the Alaska pipeline and the other sources.
    The other problem that we face with the supply options is 
that they are typically six, eight, 10 or even 12 years out. We 
can get relief from those sources. We need new sources clearly, 
but what do we do for the next five years? That was the focus 
of our research last year. What can we do in the next five 
years to bring some relief to gas markets to help all 
consumers, farmers and small businesses and homeowners?
    Energy efficiency has proven itself as a resource in this 
country. As my colleague down the panel here said, we have 
become 46 percent more energy efficient as a nation. What that 
means is that we are using about 25 quads of energy, if you 
will. We use about 100 quads overall today.
    What that means is if we had not saved that much energy we 
would have to be using more than double the amount of coal we 
now produce, more than double the amount of petroleum or more 
than double the amount of gas. That would be a huge penalty to 
our economy. We would be spending an additional $400 plus 
billion in the economy today if we had not made those 
improvements.
    Some may get the impression that because we have saved a 
lot of energy there is no more to be saved. Well, that is 
actually not correct. We and others, the national laboratories, 
do a lot of research on this. The good news is that technology 
continues to improve, so even as we have made investments in 
efficiency in the past, there is a large resource potential 
that remains. We are estimating 20 to 25 percent of our gas 
consumption can be saved looking forward through energy 
efficiency.
    I want to say a little bit about the study we did last 
year. Last year, some of you may be aware, the National 
Petroleum Council issued a major study called for by the 
Department of Energy on the natural gas industry future for the 
United States. They did some very detailed modeling of natural 
gas markets using a very sophisticated computer model run by a 
consulting firm named EEA.
    Well, we decided to work in parallel with the NPC study, 
and we used the EEA model to look at what would happen if we 
were able to ramp up the efficiency resource a little bit on 
the demand side. The bottom line is that by achieving 
relatively modest gains in efficiency--we are talking about 
maybe a four percent gain in energy efficiency across the 
board--we could bring gas prices down about 20 percent over the 
next five years. That is about $1 an MCF.
    It is not where we want to be totally, but it is a 
contribution that would bring significant relief to everyone 
who is represented on this panel--the fertilizer industry, 
small manufacturers and farmers--so we think it is important 
that Congress and the Administration really focus on this over 
the next five years and try to do what we can from the demand 
side to bring energy markets, especially the gas markets, back 
into balance before these new supply options can be brought on 
line.
    There is one interesting fact. You know, when you think 
about saving gas you think about well, maybe I will put in a 
new furnace, or maybe I will make my industrial boiler a little 
more efficient, or I will do this or that. There are direct 
savings in natural gas end uses, but what we found in our study 
is that the majority of the natural gas savings actually come 
from saving electricity.
    How is that? The fastest growing end use for natural gas in 
the last 15 years has been electric generation, so in many 
markets today the marginal unit that is on line at a given hour 
is a gas fired unit. That means if you achieve an energy 
efficiency gain, you back out a little bit of natural gas as 
the power plant.
    Of course, not all of the gas that goes into the power 
plant turns into electricity. There is some thermal waste. You 
actually save two to five times the amount of gas for every 
unit of electricity you save, so there is a very broad spectrum 
of efficiency opportunity out there that we can use to affect 
the natural gas markets.
    You might ask well, will the market not just correct 
itself? Will people not just invest in efficiency because 
prices are high? The answer is yes, markets do work. However, 
what we are finding is they are not working fast enough. What 
we need is a little bit of a policy boost to get the kind of 
efficiency resources that we need to bring markets back into 
balance, especially in the small business world.
    A lot of small businesses do not have engineers who 
understand energy or whose job it is to walk around and worry 
about energy all day. They have too many other things to do. A 
lot of small businesses do not have the capital to go out and 
invest in new technology.
    We need to get technology to market. You know, it is a big 
country out there. There are millions of farmers, millions of 
homeowners, thousands of businesses. Just getting that 
technology out to market is a challenge. It needs help from the 
government side.
    What can Congress and the Administration do in the next 
five years to use the resources we have on the demand side to 
help balance the gas market situation? Well, the good news is 
that there are some programs already in place.
    For the farm sector, the good news is that in the 2002 farm 
bill there was a new provision created for energy efficiency/
renewable energy grants, Section 9006. It is funded currently 
at about $20 million. We would like to see that go up, given 
the need that is out there. The Ag Department just announced 
their new round of grants last week. They gave about 175 
grants. Clearly not enough. We would like to see that program 
do better.
    At the Department of Energy there is an industrial 
assessment center where schools of engineering around the 
country take skilled graduate students, and they go out to 
small manufacturers and they show them practical, low-cost, 
fast payback ways to save energy. It is a very successful 
program. It has been recommended for a small cut in the 2005 
appropriations. I would like to see that come back.
    There is a whole range of other energy efficiency programs 
in the appropriations process that I will not go into, but we 
would like to see Congress boost those energy efficiency R&D 
programs. There is an energy bill, as many of my colleagues on 
the panel have referred to. There are many worthwhile energy 
efficiency provisions in that bill and so we support those.
    However, there is also the tax incentive portion of the 
energy bill, which includes a range of homeowner and business 
tax credits for energy efficiency and renewable energy and also 
from the farm point of view includes the production tax credit 
for wind energy. A lot of farmers, as many of you know, are 
beginning to see the profit potential and becoming hosts for 
wind machines.
    The FSC/ETI bill, which is trying to work its way through 
conference, has some of those tax credits embodied in it. We 
would like to see the full set of efficiency and renewable 
credits included in the FSC/ETI bill. That is something that 
Congress could pass this month, could start getting tax 
incentives out to businesses, farmers and homeowners starting 
next year and really start to make a dent in this problem.
    There are several other policy options out there. Appliance 
efficiency standards have been a very successful program. It 
works across the board. We have refrigerators that are three 
times more efficient than they were 20 years ago, even though 
they are bigger and have more ice coming through the door. 
There are technology success stories out there that need to be 
continued.
    Many states run public benefits energy efficiency programs, 
about 20 states currently. We would like to see more states get 
into that role because that provides a small funding source to 
help farmers, small businesses and homeowners invest in energy 
efficiency.
    Combined heat and power. We currently waste about two-
thirds of the energy that goes into a power plant out the 
stack. Through combined heat and power technologies, we can cut 
those losses in half. That is a huge opportunity. Those 
opportunities are available even down at the small manufacturer 
and the commercial building level with today's technology.
    Last, but not least, we need to keep the technology 
pipeline flowing. We need strong R&D programs because 
ultimately this is a technology challenge. We need the new 
technologies for new drilling and exploration. We also need the 
new technologies for more and more efficient end use. Again, 
that is an appropriations question. We would like to see the 
Administration up its request and like to see the Congress 
support that.
    I will stop now, and thank you again for the invitation to 
speak.
    [Mr. Prindle's statement may be found in the appendix.]

    Chairman Graves. Thank you, Mr. Prindle.
    We will now open it up for questions. I do have one for you 
real quick, too.
    You did not mention increasing production in your options. 
Do you think that is just as much a part of this process as 
getting better as far as efficiency goes?

    Mr. Prindle. Yes, certainly. We are going to need more 
supplies. We do not believe that we can totally save our way to 
economic prosperity. However, we do believe that in the near 
term, before some of the bigger supply projects come on line, 
we have a lot of opportunity on the margin to use the demand 
side resources that we know about to bring some balance to the 
markets. Then, you know, as new pipelines, LNG or whatever come 
on line the markets will begin to correct themselves.

    Chairman Graves. Thank you.
    I do have a question for Mr. Rockhold and Mr. Swaney 
because both of you have farming operations, and it has often 
been said that agriculture farmers are the only industry out 
there that buy everything--all their inputs --at retail and 
sell all their outputs at wholesale, which is completely 
backwards to the way it is when fertilizer prices continue to 
go up the way they have, but yet your output price continues to 
stay relatively the same. In fact, it has been approximately 
the same for the last several decades.
    What does that do to your bottom line? How do you recover 
from that? How do you react to that when you are continuing to 
get squeezed, and there is not a thing you can do? You cannot 
pass that on to the consumer.

    Mr. Swaney. I think if you look at our industry, Mr. 
Chairman, as being a farmer you well know there are certain 
things we can do. As I said, we have cut the amount of diesel 
and gas we are using. We have become more efficient to try and 
offset those higher costs of inputs.
    The other thing that we can do, that we are doing, is we 
expand our operations. We try to absorb those that are less 
efficient. That is why the number of farmers are dropping 
rapidly in this country.
    I will give you an example of one of the things, a group 
that really cannot pass their costs on. I was in southwest 
Missouri just a few days ago and had dinner with some chicken 
producers. Their natural gas price was 35 cents a gallon, now 
$1.
    That is a pretty good increase, and you know chicken prices 
have not changed at all. These gentlemen use 50,000 to 60,000 
gallons or units of that every year, so that is a huge addition 
to their bottom line.
    You know, two years ago we had so much chicken in this 
country that if you bought one at the store they almost gave 
you another one just to get them out of there, so there is no 
way that these prices can be passed on to the consumer.

    Mr. Rockhold. Mr. Chairman, I would pretty much echo what 
he just said. I think it is in the numbers. You have seen the 
amount of producers dwindle significantly in the last decade, 
and that is going to continue to happen. These margins have 
been tight even without the higher natural gas price.
    I know in my area, as well as in your area, there has been 
a severe crop production loss in the last couple years as well, 
and we have just seen several people just have to sell and move 
on to other things.
    I think if it gets into more bigger corporate farms it is 
going to be a higher cost to everybody in the food chain, so we 
have to look for ways to continue to help the small farmer stay 
on the farms.
    Another number that I think reflects very highly is the 
average age of farmers is nearly 60 years old, so I think it 
shows that it is very hard for a new guy to break in or a young 
person to stay on the farm.
    Our value added opportunities like the ethanol plants are 
one way of giving those people a chance to come back to the 
farm, but with natural gas highs like we mentioned in our 
testimony even it affects those ventures too.
    I just think we have to figure out some way to keep our 
young people coming back. The numbers are going the other way 
against us right now.

    Mr. Swaney. One additional point, Mr. Chairman, would be 
that the GMOs--everybody talks about the GMO crops that we now 
produce, but if it was not for the technology and the 
advancements in quality of seed and what they can produce with 
the limits that we can place on ourselves with how much 
fertilizer we can put on and chemicals. If it probably was not 
for those we would be a lot worse off than we are now, sir.

    Chairman Graves. We are going to have some votes here 
coming up at any time. I have a lot more questions, but I want 
to move right on down so we can allow Mr. Shuster and Ms. 
Capito to ask some too.
    Mr. Shuster?

    Mr. Shuster. Thank you, Mr. Chairman.
    I first want to welcome Mr. Willard. Thanks for coming here 
today. I would extend an invitation to all Members of Congress 
if they want to see not only a fertilizer facility or the 
business that you are in. It is only about an hour and 20 
minutes up the road. It is an award winning facility. It won 
the EPA award for being environmentally friendly. Thank you for 
all the good work you do up there.
    My question is to Mr. Huntsman, and then I would like maybe 
all the panel members to comment on it. The two ideas that you 
put forward, the transparency I think makes perfectly good 
sense and finding out who is out there so it is easier for us 
to determine if there is manipulation going on in the markets. 
I do not doubt that there was some of that going on.
    The first one, though, the stops. I have some concern, and 
maybe you can talk about it a little more in depth. It is not 
price controls, but price influencing that always concerns me 
when we put stops on. The difference, too. We talk about beef 
and other commodities.
    I think Ms. Capito pointed out, you know, that you do not 
have to buy beef. You can buy chicken if something is going on 
in the market. With natural gas, if you are using natural gas 
and producing fertilizer in your business then you pretty much 
have to use natural gas.
    Do you believe that those stops are going to be effective, 
or is it just going to be a one day deal where we stop trading 
natural gas, and then the next day the prices spike up anyway?

    Mr. Huntsman. I think again if you look at the realities of 
the marketplace I would just ask my colleagues here to the 
right, who are all considered manufacturers, can you absorb a 
25 percent increase in your raw materials in three days, and 
can you pass that along? I do not have to wait for their 
response. It is impossible.
    You know, the reason, if you go back three days ago and you 
read why the price of gas went up, it was because Hurricane 
Jeanne was heading into the U.S. Gulf coast. That was the 
reason that was given three days ago. Jeanne is now heading to 
the Azores Islands the last I looked this morning, yet the 
prices never went back down.
    All I am saying is people can have some sort of rational 
sentiment. I think that we all would be very familiar in this 
room with what happened with the cattle prices and cattle 
futures during the mad cow scare. There was a legitimate 
concern that could have driven the price of cattle to near 
zero.
    If my memory serves me, over a four day period the cattle 
futures stopped out four days in a row. Finally after a week, 
the news reports came out that there had been a single cow that 
had been affected, that the herd had been isolated, and cattle 
future prices were able to recover quite rapidly after that.
    I am for free trade. We have as much manufacturing outside 
the U.S. as inside the U.S., but if you want to talk about 
price controls the price is being controlled today. It is not 
being controlled by people who manufacture, people who 
transport or people who consume natural gas. It is being 
controlled by people who trade paper and profit on the 
volatility of it.
    Now, if a product can move in price one, two percent a day, 
think of what would happen to your stock portfolio. One or two 
percent a day? That is a 700 percent increase a year. Nobody 
sees a return like that.
    You know, I am not proposing that we should not be trading 
gas. I am not proposing it should not be a commodity that is 
traded. I am merely saying that we ought to treat it like we do 
other commodities that are, in my opinion at least, less 
important to the welfare and the future viability of our 
overall manufacturing economy.
    Efficiency is fine. Our industry became 15 percent more 
efficient in four months. In four months in the winter of 2000-
2001, we went from battling the agricultural industry as being 
the nation's largest exporter of goods. In six months we were 
importing.
    The chemical industry, for the first time in its history, 
became a net importer. We lost the ability to compete overseas. 
It was not just our company that lost 1,000 jobs, you know. We 
became very efficient overnight. I do not think that that is a 
very decent model to follow here.

    Mr. Shuster. Again, we talked about beef. They put a stop 
because the beef prices were falling. Natural gas has not 
fallen for many, many months, as far as I can see, or just a 
little bit of a dip up and down.
    What you are talking about is stopping the increase, for 
instance, on the storm when it went up, and it has not come 
down. Does that not indicate that that is what the market will 
bear? Whether it is good or bad for the market, the market says 
prices go up and stay up.

    Mr. Huntsman. My question I guess to that would be who is 
the market? I am a consumer. For every dollar that gas moves, 
it costs my company between $80 and $85 million per year.
    I do not ever have anybody come and sit down with me and 
negotiate gas prices. It is set because of what is done on the 
NYMEX. When we talk about what the market can bear, the people 
trading paper can bear all sorts of outrageous price because 
they do not have to live with the consequences of it.

    Mr. Shuster. Right.

    Mr. Huntsman. We do in manufacturing. We do in the 
agricultural industry. That is of grave concern to us.
    I would propose that prices ought to be capped going both 
up and down. I believe when I talk to my friends who are in the 
gas exploration business, when they see the price of gas fall 
by 50 cents or $1 per MMBTU they say, because of this extreme 
volatility, we do not want to go out and risk money and be 
punching new holes in the ground because we are afraid that it 
could fall as fast as it has gone up.

    Mr. Shuster. All right.

    Mr. Huntsman. On the manufacturing side, we do not want to 
invest in any more capital projects in the United States 
because we do not know where our raw materials are going to be 
priced.

    Mr. Shuster. Sure. Would anybody else like to comment on 
that about the stops?

    Mr. Smoak. Yes. How about instead of stops if they put 
trading caps at so much percent and let the trading--and they 
can still trade. Not stop trading, but say all right, you have 
reached the cap. This is all you can do for a certain period of 
time. Either daily caps or monthly caps.
    There is one more thing, and I had not looked at this, but 
electric generation is a very, very inefficient use of any fuel 
and especially premium fuel like natural gas. Now, a lot of my 
associates say well, it does not matter. The electric companies 
can just pass it on. They can only pass on so much.
    If my memory serves me correctly, many years ago at EE they 
told us that only about 25 percent of the energy out for the 
energy in. You put 100 percent energy in. You get 25 percent 
out with electric generation. Line losses, power losses also. 
It is a very, very inefficient way. We have to have it, but it 
is a very inefficient way to use fuel.
    Therefore, the need for nuclear, the need for coal firing, 
and short-term maybe if some of the power companies can be 
given some waivers so they could go back to firing coal with 
existing technology, with existing scrubbers, that would take a 
tremendous amount of load off of the natural gas markets 
because these utilities really suck up the gas, even just the 
peak units.
    In my view, if we could do something with that short term 
and then go back when we get the pipelines in and, you know, we 
all keep talking seven to 10 years out, but we need to do 
something for the next two or three years to keep our economy 
healthy.

    Mr. Shuster. I think what you say there is true, and I have 
seen that the utility companies now are moving towards building 
coal fired plants, which is good for West Virginia and 
Pennsylvania. We are happy to see that and try to encourage 
that.
    You mentioned caps. Now, are you talking about caps, or are 
you talking about what Mr. Huntsman mentioned about stops?

    Mr. Smoak. Well, stops and caps are a little different I 
think. Caps, you can continue to trade, but you have just 
reached the maximum you can trade for that day. Maybe it is a 
one or two percent margin, not ten and twenty percent per day. 
Maybe monthly caps of ten percent. That equates to 120 percent 
a year so there is still a lot of upside, and it can be on the 
downside to keep the same thing so that companies can at 
least--
    For instance, two years ago as we tried to budget for the 
coming year we have to start the process in June and July for 
the following year. We start either locking in gas or 
attempting to lock in gas unless it is so obscenely high that 
we cannot lock it in, as has been the case for the last 22 
months.
    You know, I put down 20 to 25 percent increases. I had $4 
well head gas for the summer. I said gosh, it has never been 
that bad. Well, it is $6. I mean, you cannot budget. You cannot 
project what you need to do when it is that volatile. As the 
gentleman over there says, you cannot pass that much on.

    Mr. Shuster. Right.

    Mr. Smoak. We have tried to, and you would have thought we 
were asking some of our distributors to give us the second and 
third generation of their children when we try to go up four or 
five percent in price, you know.

    Mr. Shuster. I see that my time has expired. I want to make 
certain that Ms. Capito--

    Mr. Huntsman. Mr. Shuster?

    Mr. Shuster. Yes?

    Mr. Huntsman. I think we are both in violent agreement, 
whether it is caps or stops.

    Mr. Shuster. Right. It sounds that way.

    Mr. Huntsman. I would just note, too, we are sitting today 
on the highest inventories, near record high inventories and 
production today.
    I mean, if you want to say why do you not just hedge for 
the winter, all supply and demand market indicators would tell 
me the prices ought to be going down under that sort of 
scenario.

    Mr. Shuster. Right. Again, it is your belief that the 
manipulation is what is causing much of this?

    Mr. Huntsman. I frankly do not know what it is, but when 
the price goes up 25 percent in three trade sessions it is not 
because we have all of a sudden increased capacity by that 
amount.

    Mr. Shuster. Okay. Again, my time has expired. Just a final 
comment. I think that in the long term, the answer has to be 
more supply. We have to find it out there. We have to be able 
to go into these various other places of the country and bring 
the gas out so that we do not have to depend on other nations 
and we do not have to limit the supply that we have now.
    Thank you all very much for being here today. I appreciate 
it.
    Thank you, Mr. Chairman.

    Chairman Graves. Ms. Capito?

    Ms. Capito. Thank you. Yes. I have a couple comments to 
make and then a couple questions.
    I am pleased, coming from one of the largest coal producing 
with one of the largest coal reserves, the State of West 
Virginia, pleased to see that there is an overwhelming belief 
across your businesses and across your experiences that coal 
has a place in the future of the energy production here in 
America, and there are ways to clean it up and burn it safely, 
more efficiently. Efficient is really going to be the key as we 
move towards the future.
    I would like to go back to this question of stops and caps, 
Mr. Huntsman, and I am going to pull a little naivete here. In 
terms of stocks and other commodity trading, I mentioned beef 
prices do have this. Are there other stocks and commodity 
trading markets that do have the cap and stop or range of 
trading?

    Mr. Huntsman. Every commodity that is traded on the Chicago 
or the New York Mercantile Exchange has caps. They are all much 
less, everything from diesel fuel to crude oil. They are all 
much less than natural gas.
    There is a direct corresponding effect to caps and price 
volatility. That is just not my opinion. Natural gas, of all 
the commodities, is the most volatile of all of these, and it 
is also the most widely consumed. As was said earlier, if you 
are living on a fixed income in January, you cannot go out and 
boycott your utility.
    Utilities, by the way, they do not have to put up with the 
pricing pressure that we do. They just put it on through to the 
consumer, so naturally they do not take an interest in this.

    Ms. Capito. Yes. Let me ask a follow-up question to that. 
When you see the volatility, for instance, in the last three 
days the rise in price of 25 percent, let us take it down to 
the general consumer, the elderly couple heating their home 
through this winter.
    I know you all see it probably much more immediately than 
an individual consumer might because in my state, for instance, 
they have to go to the Public Service Commission to raise the 
rates and all this. Where does that individual consumer see it? 
Do they see it this winter? Do they see it in three days? Do 
they see it two years down the road?

    Mr. Huntsman. We obviously are not a utility, but my 
understanding is that most utilities buy their natural gas in 
strips. They will go out for multiple months.
    A three day increase like this, if it stays at the present 
price, will obviously affect the value of those long-term 
strips, and they will most likely see it during the winter 
months. Those strips are usually three to six months out, and 
the highest consumption will take place either in the heat of 
the summer or in the cold of the winter.
    They will also see it--the minority of the amount of gas 
consumed in this country is for utility purposes. The rest of 
it is used in manufacturing, agriculture and so forth. They 
will see it in inflationary indexes with higher prices and so 
forth as we attempt to try to put our prices up to try to 
reconcile this.

    Ms. Capito. Let me ask another question in final. Anybody 
can answer this if they have an opinion. I have heard you all 
talk, several folks talk, about LNG, you know, bringing it in 
from Africa and all these other places where you can liquify 
the natural gas and then bring it in across the ocean.
    You know, in this day and world that we are living in right 
now, that raises a bit of a red flag for me, even though I am 
sure we can assure some of the safety issues. But it has to be 
an enormous safety consideration that is going to be built into 
the price of LNG as it is imported into this country.
    Does anybody have an opinion on that?

    Mr. Huntsman. Ms. Capito, I do not think that the price of 
oil today is $47 a barrel. I think it is about $80 a barrel 
when you take into account the costs that we spend in our 
foreign policy.
    I am not trying to point fingers at what is going on in 
Iraq or anything, but just our macro foreign policy to try to 
preserve the sea lanes and try to preserve the ability to 
import in the energy and these hydrocarbons.
    If the average American understood the price of crude oil 
is more like $80 to $100 a barrel and the price of gasoline 
ought to be about $4 to $5 a gallon when you take into account 
those subsidies, I think your point is exactly well taken.
    We are now consuming 60 percent of our crude oil in this 
country. That is increasing. That does not worry me nearly as 
much as when our agricultural industry or the chemical 
industry, when we have to start importing in all of our basic 
raw materials for food production.
    Again, we are going to be dependent on--no offense to our 
allies overseas and neighbors in the U.N. and so forth, but we 
are going to be dependent on countries that I do not know if 
they have our best interests at heart when it comes to pricing, 
when it comes to price stability. That I think is a very real 
issue.

    Ms. Capito. Anybody else?
    [No response.]

    Ms. Capito. I thank the Chairman. This has been an 
interesting discussion. Obviously if we would all burn more 
coal we would be in great shape. That is my parting comment. 
Thank you.

    Chairman Graves. Mr. Willard, I wanted to ask you and also 
Mr. Swaney mentioned too that a number of fertilizer plants 
have closed. Can you expand on that just a little bit the 
reasons for that and what is happening there, who is picking up 
that production? Is that just lost production?

    Mr. Willard. It is indeed just lost production. The 
importers have tried to scramble, and I will speak about our 
little area of the world in the mid-Atlantic. In the last 
couple years they have been scrambling and buying materials for 
us.
    This year almost mirrors maybe what had happened in 1973. 
If you recall, we did have a shortage in the U.S. of product. 
It is my understanding that some of the suppliers have sold off 
or the manufacturers will sell off their natural gas contracts 
if in fact the natural gas becomes so high. They figure they 
can make more money selling off those contracts rather than 
converting it into agricultural nitrogen.
    I understand also that there is probably some industrial 
capacity at these plants, that they will turn their production 
towards industrial capacities and generate greater profits than 
agricultural.

    Mr. Swaney. Actually, those that did not sell off their 
natural gas and made fertilizer were probably foolish because 
farmers can only pay so much for nitrogen fertilizer.
    They probably would have done better to have sold their 
natural gas and had their money as compared to taking the risk 
of producing something like anhydrous ammonia, the exposure you 
have in transporting that, collecting from farmers as you sell 
it to them at an extremely high price.
    That production is gone, and in my opinion and American 
Farm Bureau and Missouri Farm Bureau is that it will probably 
not come back for several reasons. What has happened, and I 
served on the board of a local cooperative for nine years. We 
kept inventory, you know, just so that when a farmer called in 
and said I need some nitrogen fertilizer, you know, whether it 
was early in the season or late in the season we had some.
    Today that is not the case. Anhydrous delivery is coming in 
almost as fast as it is going out. I say almost as fast because 
there is always people waiting for that next transport to show 
up, waiting for that next load of dry fertilizer to come in to 
the elevator to be redistributed out to the farms.
    There is just very little inventory. They cannot afford to 
keep inventory. When prices go up this high and you try to keep 
margin, when you are selling anhydrous at $100 a ton or even 
$200 a ton and then it goes to $400 a ton and you try to make 
margin on that, it becomes very difficult.
    I have a concern because that supplier-- you have to be 
there for me to do business. If the supplier goes broke, where 
am I going to get my anhydrous? Who is going to handle that dry 
fertilizer? You know, for us on our individual farm we cannot 
bring in and stockpile those commodities or inputs.

    Mr. Willard. May I make one other comment, please?

    Chairman Graves. Yes.

    Mr. Willard. You know what else is happening also that I 
think further complicates the issues is the development of 
other agricultural regions in the world. There has actually 
been a tremendous additional demand for some of these products, 
nitrogen products especially, that we are trying to get shipped 
into the mid-Atlantic are coming. They are going somewhere 
else.
    Not only nitrogen products. If you have not shopped potash 
for your fall needs yet, the potash market is just absolutely 
crazy right now. World demand is also impacting what is 
happening.

    Chairman Graves. Any more questions?

    Mr. Shuster. No, sir.

    Ms. Capito. No.

    Chairman Graves. I appreciate all the witnesses coming 
down. Again, all the statements of the witnesses and Members 
will be placed in the record in their entirety.
    Obviously we have a huge problem out there. There are no 
good short-term solutions obviously, but certainly we need to 
start down this road in figuring out what we are going to do in 
the future.
    I think efficiency is obviously important, but as much as 
anything else we have got to increase supply in this country. 
Getting an energy bill passed through the Senate would be a 
huge step in that direction.
    I appreciate everybody coming out today, and I appreciate 
your testimony. Again, I know it is a very busy time right now, 
but thank you all so much.
    The hearing is adjourned.
    [Whereupon, at 11:43 a.m. the Subcommittee was adjourned.]

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