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





                  DRIVING DOWN THE COST OF FILLING UP

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON ENERGY POLICY, NATURAL
                    RESOURCES AND REGULATORY AFFAIRS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                              JULY 7, 2004

                               __________

                           Serial No. 108-241

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform


                                 ______

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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
DAN BURTON, Indiana                  HENRY A. WAXMAN, California
CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana              CAROLYN B. MALONEY, New York
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
DOUG OSE, California                 DENNIS J. KUCINICH, Ohio
RON LEWIS, Kentucky                  DANNY K. DAVIS, Illinois
JO ANN DAVIS, Virginia               JOHN F. TIERNEY, Massachusetts
TODD RUSSELL PLATTS, Pennsylvania    WM. LACY CLAY, Missouri
CHRIS CANNON, Utah                   DIANE E. WATSON, California
ADAM H. PUTNAM, Florida              STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia          CHRIS VAN HOLLEN, Maryland
JOHN J. DUNCAN, Jr., Tennessee       LINDA T. SANCHEZ, California
NATHAN DEAL, Georgia                 C.A. ``DUTCH'' RUPPERSBERGER, 
CANDICE S. MILLER, Michigan              Maryland
TIM MURPHY, Pennsylvania             ELEANOR HOLMES NORTON, District of 
MICHAEL R. TURNER, Ohio                  Columbia
JOHN R. CARTER, Texas                JIM COOPER, Tennessee
MARSHA BLACKBURN, Tennessee          BETTY McCOLLUM, Minnesota
PATRICK J. TIBERI, Ohio                          ------
KATHERINE HARRIS, Florida            BERNARD SANDERS, Vermont 
                                         (Independent)

                    Melissa Wojciak, Staff Director
       David Marin, Deputy Staff Director/Communications Director
                      Rob Borden, Parliamentarian
                       Teresa Austin, Chief Clerk
          Phil Barnett, Minority Chief of Staff/Chief Counsel

Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs

                     DOUG OSE, California, Chairman
EDWARD L. SCHROCK, Virginia          JOHN F. TIERNEY, Massachusetts
CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
CHRIS CANNON, Utah                   DENNIS J. KUCINICH, Ohio
NATHAN DEAL, Georgia                 CHRIS VAN HOLLEN, Maryland
CANDICE S. MILLER, Michigan          JIM COOPER, Tennessee
PATRICK J. TIBERI, Ohio

                               Ex Officio

TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                   Barbara F. Kahlow, Staff Director
                Melanie Tory, Professional Staff Member
                          Lauren Jacobs, Clerk
                     Krista Boyd, Minority Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 7, 2004.....................................     1
Statement of:
    Caruso, Guy F., Administrator, EIA, DOE; Mark R. Maddox, 
      Acting Assistant Secretary for Fossil Energy, DOE; Jeffrey 
      R. Holmstead, Assistant Administrator for Air and 
      Radiation, EPA; William E. Kovacic, General Counsel, FTC; 
      and Jim Wells, Director, Natural Resources and Environment, 
      GAO, accompanied by Scott Farrow, Chief Economist, GAO.....    31
    Slaughter, Robert, president, National Petrochemical and 
      Refiners Association; Michael Ports, president, Ports 
      Petroleum Co., Inc.; Ben Lieberman, senior policy analyst, 
      Competitive Enterprise Institute; and A. Blakeman Early, 
      environmental consultant, American Lung Association........   196
Letters, statements, etc., submitted for the record by:
    Caruso, Guy F., Administrator, EIA, DOE, prepared statement 
      of.........................................................    33
    Early, A. Blakeman, environmental consultant, American Lung 
      Association:
        Letter dated July 6, 2004................................   252
        Prepared statement of....................................   255
    Holmstead, Jeffrey R., Assistant Administrator for Air and 
      Radiation, EPA, prepared statement of......................    67
    Kovacic, William E., General Counsel, FTC, prepared statement 
      of.........................................................    96
    Kucinich, Hon. Dennis J., a Representative in Congress from 
      the State of Ohio, letter dated May 25, 2004...............    26
    Lieberman, Ben, senior policy analyst, Competitive Enterprise 
      Institute, prepared statement of...........................   239
    Maddox, Mark R., Acting Assistant Secretary for Fossil 
      Energy, DOE, prepared statement of.........................    55
    Ose, Hon. Doug, a Representative in Congress from the State 
      of California, prepared statement of.......................     4
    Ports, Michael, president, Ports Petroleum Co., Inc., 
      prepared statement of......................................   224
    Slaughter, Robert, president, National Petrochemical and 
      Refiners Association, prepared statement of................   199
    Tierney, Hon. John F., a Representative in Congress from the 
      State of Massachusetts:
        Charts...................................................    16
        Prepared statement of....................................    19
    Wells, Jim, Director, Natural Resources and Environment, GAO, 
      prepared statement of......................................    79

 
                  DRIVING DOWN THE COST OF FILLING UP

                              ----------                              


                        WEDNESDAY, JULY 7, 2004

                  House of Representatives,
  Subcommittee on Energy Policy, Natural Resources 
                            and Regulatory Affairs,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9:30 a.m., in 
room 2154, Rayburn House Office Building, Hon. Doug Ose 
(chairman of the subcommittee) presiding.
    Present: Representatives Ose, Schrock, Tiberi, Tierney, 
Kucinich, and Cooper.
    Staff present: Barbara F. Kahlow, staff director; Melanie 
Tory, professional staff member; Lauren Jacobs, clerk; Megan 
Taormino, press secretary; Krista Boyd, minority counsel; 
Earley Green, minority chief clerk; and Jean Gosa, minority 
assistant clerk.
    Mr. Ose. Good morning. Recognizing a quorum we are going to 
go ahead and convene this hearing of the Subcommittee on Energy 
Policy, Natural Resources and Regulatory Affairs. This hearing 
is entitled, ``Driving Down the Cost of Filling Up.''
    I want to welcome my friend, Mr. Cooper. The way we handle 
these hearings is, this is an investigative subcommittee. 
You'll see in the course of our proceedings that all the 
witnesses get sworn in prior to that. All the Members who wish 
to participate are provided the opportunity to make an opening 
statement. Those statements are limited to 5 minutes. The 
statements that our witnesses will make, while lengthy in 
written form, will be summarized within 5 minutes, which will 
be provided to each of them in order. In front of you, see a 
little rectangular box that has three squares. There are green, 
yellow and red lights in those squares. When the red light 
shows, the gavel comes down. So I'm encouraging you to keep 
your summaries to the 5 minutes.
    One request I would make is that you turn your cell phones 
off or turn it to just vibrate mode. That would be helpful.
    During the first 5 months of 2004, the gasoline prices rose 
nearly every week, peaking at a nationwide average of $2.05 per 
gallon. Gasoline prices in my district in California climbed 
even higher, hitting an astounding $2.30 per gallon on June 
1st. Fortunately, gasoline prices have begun to decline in 
recent weeks, bringing consumers and businesses much needed 
relief.
    With this respite, however, comes a critical juncture for 
policymakers, and that is, do we allow the issue of high 
gasoline prices to once again fade into the background, or do 
we actively seek to implement solutions that address what seems 
to be a cyclical imbalance between gasoline supply and demand?
    Over the last 4 years, I have presided over four hearings 
on gasoline markets. These hearings focused on a myriad of 
issues, including the structure of fuel markets nationwide, 
regional supply and demand factors and the effect of the 
transition from MTBE to ethanol in California. We found that 
there are some very real problems facing our fuel markets. As 
gasoline prices begin to retreat from their current highs and 
headlines, it is important that these issues do not fall by the 
wayside.
    Since the cost of crude oil determines about 40 to 50 
percent of the cost of a gallon of gasoline, we must first 
consider what can be done to reduce crude oil prices which 
reached a record setting $42 in June. And I think, this 
morning, we are popping up to $40 on-the-spot market. Some have 
advocated that we cease filling the Strategic Petroleum 
Reserve. Others have gone a step further and have called on the 
President to draw down on the SPR. These proposed quick fixes 
have serious repercussions and may do little to help drive down 
prices at the pump.
    To ensure that Americans have a secure and affordable crude 
oil supply in the long term, we must either significantly 
reduce our current demand or we must boost our domestic oil 
production. Regardless of where future crude originates, to 
process it in the United States, we must expand and enhance the 
petroleum infrastructure which, at present, is stressed and at 
its operating limits. Addressing the operating constraints and 
bottlenecks within the entire infrastructure, including 
refineries, pipelines, storage tanks and port facilities, is 
important because each component of the system must function 
properly to ensure that consumers receive an adequate and 
affordable supply of gasoline.
    We must look at ways to simplify the permitting process and 
to reduce the burden of uncertainty of regulations so as to 
encourage infrastructure upgrades and expansions. Failure to do 
so could result in additional market volatility and unnecessary 
price spikes.
    Last, we must continue to consider the cumulative effect of 
Government regulation on gasoline supply and prices. Due to a 
dizzying array of Federal and State environmental regulations, 
there are approximately 60 different types of fuel spread 
across the United States. For the most part, these blends 
cannot be interchanged from one market area to another. 
Therefore, certain regions are susceptible to artificial 
shortages and price spikes.
    In California, overlapping Federal and State regulations 
have created a de facto ethanol mandate. This mandate results 
in a 10 percent reduction in gasoline supply for 8 months of 
the year and does not necessarily improve either the quality of 
our air or the quality of our water.
    At present, the EPA is considering the oxygenate waiver 
request from California. If approved, that waiver would exempt 
California refineries from the Clean Air Act's 2 percent 
oxygenate requirement, allowing them more flexibility to 
produce clean-burning gasoline. I continue to urge EPA to 
expeditiously grant this waiver, and it will be the subject of 
some questions within this hearing.
    Boutique fuels and mandates add complexity to the 
production, distribution and storage of gasoline, further 
increasing volatility in prices. Rather than continuing to 
dictate exactly what goes into a gallon of gasoline, we should 
set high environmental and performance standards and allow the 
industry to meet them by their concoction of different recipes 
of fuels.
    I look forward to the testimony of our witnesses today. 
They include: Mr. Guy Caruso, who is the Administrator for the 
Energy Information Department for the Department of Energy. 
Welcome. We have Mr. Mark Maddox, who is the Acting Assistant 
Secretary for Fossil Energy at the Department of Energy. We 
have Mr. Jeffrey Holmstead, who is the Assistant Administrator 
for Air and Radiation at the Environmental Protection Agency. 
We have Mr. Jim Wells, who is the Director of Natural Resources 
environment at the Government Accountability Office.
    We are also joined by again, after approximately a 2-year 
absence, by Mr. William Kovacic, who is the General Counsel for 
the Federal Trade Commission. That comprises our first panel.
    Our second panel of witnesses is comprised of Robert 
Slaughter, who is the president of the Natural Petrochemical 
and Refiners Association and is also speaking on behalf of the 
American Petroleum Institute; Mr. Michael Ports, who is the 
president of Ports Petroleum Co., Inc. and is speaking on 
behalf of the Society of Independent Gasoline Marketers, and 
also the National Association of Convenience Stores. Our third 
witness on the second panel is Mr. Ben Lieberman, who is a 
senior policy analyst at the Competitive Enterprise Institute. 
And our fourth witness on the second panel is Mr. Blake Early, 
an environmental consultant for the American Lung Association.
    In turn, we will welcome each of our witnesses.
    At the present, I am pleased to recognize my good friend 
from Massachusetts for the purpose of an opening statement.
    [The prepared statement of Hon. Doug Ose follows:]

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    Mr. Tierney. Thank you, Mr. Chairman.
    Thanks for holding this hearing on gasoline prices and 
continuing on this series of hearings. I think there are a 
couple of things that we can agree on. The first is that 
gasoline prices are high, and according to the Energy 
Information Administration, the average price for gas 
nationwide is about $1.89. It's decreased gradually over the 
last 5 weeks, but it's still about 40 cents more than at this 
time last year. And the EIA is not projecting the downward 
trend to last throughout the summer.
    I think we can also agree, the demand for gasoline is 
increasing, and gasoline supplies in the United States are 
tight. However, rather than blaming environmental laws and 
promoting corporate give-a-ways, I believe we should be taking 
action to address the underlying causes behind the current 
supply and demand situation. I believe that we need to enact an 
effective national energy policy, conduct an investigation into 
the business activities of oil companies and how those 
activities may be contributing to higher gas prices and take 
actions that could bring immediate relief, like not diverting 
supplies into the Strategic Petroleum Reserve.
    We also should take any necessary actions to assist 
particular regions, such as granting California's request for 
an oxygenate waiver. We need an effective national energy 
policy that promotes responsible energy consumption and reduces 
our dependence on foreign oil. We should be investing in 
renewable energy technologies and strengthening our fuel 
economy standards. If we increase fuel economy standards to 36 
miles per gallons by 2015, we are told we could save 2 million 
barrels of oil a day in just 5 years, and controlling demand 
would help control prices.
    Under the administration's energy plan, imports of foreign 
oil would actually increase 70 percent from 2002 to 2025. The 
committee staff prepared charts as part of a report for Ranking 
Member Waxman based on data from the EIA.
    [The information referred to follows:]

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    Mr. Tierney. Those charts are over to my left and the 
audience's right. Those charts show that domestic oil 
production will decline, even under the administration's energy 
bill, and that, even if we adopt the administration's energy 
bill, the need for imported oil continues to grow dramatically, 
and we will need to import a record amount of oil in coming 
decades.
    The administration's bill does nothing to lower gasoline 
prices. According to an analysis by the EIA, Energy Information 
Administration, the administration's energy bill will have a 
negligible impact on gas prices, increasing the average gas 
prices by 3 cents per gallon. The administration's energy plan 
would not lower gas prices, would not reduce our dependence on 
foreign oil, but would give $20 billion of subsidies to the oil 
industry.
    Instead of pushing give-a-ways to the oil industry, the 
administration's efforts should be focused on investigating 
whether oil companies are engaging in anti-competitive 
practices and manipulating gas prices. Oil companies engaged in 
a wave of mergers in the 1990's, and the trend continues. There 
have been literally thousands of oil company mergers that have 
left 10 companies controlling close to 79 percent of the 
market. The General Accounting Office released a report in May 
finding that there were over 2,600 merger transactions between 
1991 and 2000, leading to increased concentration in the oil 
industry's downstream market. I note that study and that report 
ended in 2000 and does not even take into account mergers since 
that date. Six of the eight specific mergers evaluated by GAO 
resulted in higher wholesale gasoline prices.
    Now, the Federal Trade Commission, who we'll hear from 
today, has severely criticized the GAO's report. Rather than 
criticizing GAO, the FTC should be focusing its energy on 
performing its own analysis. It is the Federal Trade 
Commission's responsibility to protect consumers from anti-
competitive behavior. And in light of the mounting evidence 
that market concentration is creating an environment for anti-
competitive behavior, the Federal Trade Commission and the 
Department of Justice should investigate the market structure 
and the business practices of the oil industry.
    During a recent conversation with EPA--former EPA 
Administrator Carol Browner, it was pointed out that gasoline 
prices dropped when the Clinton administration just announced 
the request for the FTC to investigate the possibility of anti-
competitive practices by oil companies. The administration 
should also send a message to the market that it's serious 
about lowering gas prices by not filling the Strategic 
Petroleum Reserve until prices are lower and more stable.
    Americans deserve action by the administration and by this 
Congress to assure immediate relief at the pump and long-term 
energy security.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. John F. Tierney follows:]

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    Mr. Ose. I thank the gentleman.
    The gentleman from Ohio.
    Mr. Tiberi. Thank you, Mr. Chairman, for scheduling this 
hearing this morning.
    Over the past several months, you have taken this 
subcommittee across the country. You've looked at why gas 
prices are so high. You've probed into what can be done to 
bring prices down. Our hearing today is a continuation of that 
effort, and on behalf of everyone who is filling up at the pump 
as we speak, I want to thank you again for your leadership and 
working so diligently on this issue.
    I won't recount the many reasons for today's prices, high 
prices at the pump. They've already been discussed this 
morning. They have been discussed in the past. What I hope we 
can learn from our witnesses today is how we can bring those 
prices down and how we can do so in a manner that will prevent 
spiraling prices at the gas pump in the future.
    Specifically, there are two areas I hope we can examine in 
detail, Mr. Chairman. First, can the Strategic Petroleum 
Reserve play a role in reducing prices at the pump? There are 
those who say they can, that the SPR should be tapped right now 
to help consumers. But, there are others who say it shouldn't 
be tapped, that the SPR is not there for that purpose and, even 
if it were, the relief consumers would see would be so light 
that it wouldn't be meaningful.
    I certainly don't know the answer to that question. I have 
heard and seen mixed answers. Hopefully, we will have some 
enlightening answers today from our panelists.
    The second area I want to hear more about is the confusing 
number of gasoline blends that are required across the country 
and across certain regions of our country. The situation is so 
confusing, Mr. Chairman, that I have had trouble finding out 
how many blends there are required in America. I have heard 
estimates ranging from several dozen to over 100. Finding out 
exactly how many is important, but more important than that and 
more crucial is knowing just how many we really need in our 
country.
    As has been noted many times, the number of blends we have 
now, no matter what the number is, has already made a difficult 
refining situation even worse. It stands to reason that fewer 
blends would make refining operations simpler and more 
efficient and thus lead to greater supplies that would bring 
prices down.
    Last month, this House spent several days on a variety of 
energy-related legislation, and while we passed several 
important measures, I was particularly pleased that one of them 
addressed the need to add badly needed domestic refining 
capacity. We can talk all we want about factors such as price 
of crude oil that we cannot control ourselves in this country, 
but the fact is that there is much that we could do right here, 
right now, to help our consumers and improve our energy 
security.
    Mr. Chairman, I again want to thank you for your leadership 
on energy-related issues. Your leadership will be missed as we 
continue our efforts in the years to come. Thank you for this 
hearing.
    Mr. Ose. Thank the gentleman.
    I am pleased to recognize the Representative from the 
country music capital of the country, Mr. Cooper.
    Mr. Cooper. Thank you, Mr. Chairman. I appreciate your 
calling this hearing.
    Certainly, gasoline prices are among the most visible and 
most painful of the consumer price increases that we face. I 
think the elephant in the room that has not been mentioned 
enough in regard to the many reasons that gas prices can go up 
or down, the elephant in the room is the terrific uncertainty 
we face in the Middle East, the region of the world that's 
blessed with the greatest reserves of oil.
    If you look at the country with the No. 1 amount of 
reserves, it would be Saudi Arabia, which is one of the most 
dangerous countries in the world today for an American to live 
and work as a result of increased terrorism in the last months 
and years. If you look at the country with the No. 2 amount of 
oil reserves, it would be Iraq, where a war is currently being 
fought. So, there are a myriad of factors that can increase or 
decrease gasoline prices, because if you look at geopolitical 
uncertainty, certainly there is a period of extreme concern in 
the region with the greatest number of oil reserves.
    Mr. Chairman, I have come to this meeting greatly 
prejudiced because one of my friends and colleagues from the 
Vanderbilt Business School faculty happens to be chief 
economist of the FTC, and while he and I don't agree on many 
issues, we do agree on the need for serious academic work done 
on issues of great national concern. So, I come to this hearing 
with some worries that the GAO report does not live up to those 
high standards. But, I'll look forward to hearing the testimony 
of the witness today and judging for myself, for example, 
whether those results can in fact be duplicated.
    But, if you take a great long list of reasons that gas 
prices can go up or down, oil company mergers, to me, don't 
seem to be at the top of that list. Perhaps, they are, but when 
I worked as a businessman a little bit in the retail gasoline 
industry, I noticed that convenience store sales of snacks have 
a lot more to do with retail success in the marketplace than do 
gasoline prices. Because the gasoline market seems to be a 
little bit more efficient than the Snickers market or the other 
junk food items that we all love to buy when we go to the 
store.
    But, I appreciate your holding this hearing, Mr. Chairman, 
and I will look forward to seeing if we can get some 
information that's useful for the American consumer.
    Thank you.
    Mr. Ose. I thank the gentleman.
    I am pleased to recognize the vice chairman of the 
subcommittee, from Virginia, Mr. Schrock.
    Mr. Schrock. Thank you, Mr. Chairman. I have no opening 
statement, which should make everybody happy.
    Mr. Ose. We will move on.
    Mr. Schrock. Oh, no, no, no. No, that doesn't mean I'm 
finished. The hearing we had last time was really amazing, and 
I think I learned a lot, and I think a lot of other folks did, 
too. And if gas prices are any indication, I can assure you 
that, in Virginia Beach where I live, I got gas last week once 
for $1.69 and once for $1.65. So it's heading in the right 
direction. That doesn't mean I want everybody moving down 
there, but I think it's heading in the right direction.
    But, I am really anxious to hear what all the panels have 
to say today and see if we can get our hands around this thing. 
Thank you very much Mr. Chairman.
    Mr. Ose. I thank the gentleman.
    I am pleased to recognize the gentleman from Ohio, Mr. 
Kucinich.
    Mr. Kucinich. Thank you very much, Mr. Chairman, for 
holding this important hearing.
    Our constituents are being gouged by high gasoline prices, 
and the administration has provided no relief. Excessive 
gasoline prices are stealing away the little discretionary 
income available to many Americans in this troubled economy. We 
must demand relief now.
    While the oil industry blames environmental regulations and 
OPEC, there is substantial evidence that anti-competitive 
practices by domestic corporations, made possible by recent 
mergers, are partly to blame for high gasoline prices. I 
believe only an increase in Government oversight can restore 
the transparency and accountability consumers need.
    In the last 6 years, mergers between BP and Amoco, 1998; 
Exxon and Mobil, 1999; BP Amoco and ARCO 2000; Chevron and 
Texaco, 2001; Valero and Ultramar Diamond Shamrock, 2001; 
Conoco and Philips, 2002, all of these mergers in the last 6 
years have created huge new oil companies that have control 
over the most significant factor impacting gasoline prices, 
control over domestic refineries.
    Today, the largest five refiners operating in America, 
Conoco Philips, Royal Dutch Shell, Exxon Mobil, BP and Valero, 
control over 52 percent of domestic refining capacity. The top 
10, which includes Chevron, Texaco, Citgo, Marathon, Sunoco and 
Tesoro, control 78.5 percent. This level of concentration is 
far greater than a decade ago when the largest five refiners 
controlled 34.5 percent of the market and the largest 10 owned 
55.6 percent.
    Armed with significant market share, these oil companies 
can more easily pursue anti-competitive activities that result 
in price gouging. The U.S. Federal Trade Commission, concluded 
in March 2001 that oil companies pursued profit-maximizing 
strategies to intentionally withhold gasoline supplies as a 
tactic to drive up prices. In addition, deregulation of energy 
trading markets, like the ones exploited by Enron, has removed 
transparency from oil and natural gas futures markets, allowing 
oil companies and Wall Street investment banks to potentially 
manipulate prices on these markets.
    While some claim the stalled energy bill will provide new 
supplies of the market and, therefore, force down prices, the 
Energy Information Administration concludes that the billion 
dollar subsidies the energy bill would provide to energy 
corporations will neither significantly increase production nor 
lower prices for consumers.
    I would like to enter into the record a letter signed by 75 
Members of Congress, including Mr. Tierney and myself.
    This letter was sent to the President asking him to take 
six actions to help reduce high gas prices. The letter was 
endorsed by the leading consumer organizations, Consumer 
Federation of America, Consumers Union and public citizen.
    The six steps outlined for the President are: First, 
require oil companies to expand gasoline storage capacities, 
require them to hold significant amounts in that storage and 
reserve the right to order those companies to release this 
stored gas to address supply and-demand fluctuations.
    Second, block mergers to make it easier for oil companies 
to manipulate gasoline supplies and take steps, such as forcing 
companies to sell assets, to remedy the current highly 
concentrated market.
    Third, re-regulate energy trading exchanges that were 
exploited by Enron and continue to be abused by other energy 
traders.
    Fourth, discontinue filling the Strategic Petroleum Reserve 
while prices are high and conduct the study of building crude 
and product reserves that can be used as economic stockpiles to 
dampen price increases.
    Fifth, reduce oil consumption by implementing strong fuel 
economy standards. Substantially improving CAFE standards over 
a 10-year period would reduce the oil used by one-third in 2020 
and save consumers $16 billion at the pump.
    Sixth, request the Federal Trade Commission to conduct a 
study of reasons why the market forced the closure of over 50 
predominantly small and independent refiners in the past 10 
years and assess how to bring fair competition back to the 
refinery market and thus expand capacity.
    Mr. Chairman, by employing all six of these strategies, 
substantial reductions in the price of gasoline are attainable. 
We are still waiting for the administration's response. I would 
like to enter this letter in the record without objection.
    [The information referred to follows:]

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    Mr. Ose. The gentleman's request is granted.
    All right. We have all completed our statements up here. We 
are going to now go to the witnesses.
    Before we go to the witnesses, we are going to swear you 
all in. So if you'd all please rise.
    [Witnesses sworn.]
    Mr. Ose. Let the record show that all of the witnesses 
answered in the affirmative.
    Our first witness today is Mr. Guy Caruso. He is the 
administrator for the Energy Information Administration at the 
Department of Energy.
    Mr. Caruso, we have received your written statement, and we 
have read it. And, we have many questions. You're recognized 
for 5 minutes for the purpose of summarizing.

 STATEMENTS OF GUY F. CARUSO, ADMINISTRATOR, EIA, DOE; MARK R. 
  MADDOX, ACTING ASSISTANT SECRETARY FOR FOSSIL ENERGY, DOE; 
   JEFFREY R. HOLMSTEAD, ASSISTANT ADMINISTRATOR FOR AIR AND 
 RADIATION, EPA; WILLIAM E. KOVACIC, GENERAL COUNSEL, FTC; AND 
 JIM WELLS, DIRECTOR, NATURAL RESOURCES AND ENVIRONMENT, GAO, 
       ACCOMPANIED BY SCOTT FARROW, CHIEF ECONOMIST, GAO

    Mr. Caruso. Thank you, Mr. Chairman, and I appreciate this 
opportunity to present to you and the Members of the 
subcommittee the Energy Information Administration's Short-Term 
Energy Outlook for crude oil and gasoline, which we released 
simultaneously with the beginning of this hearing.
    My main message is that, although we have seen some price 
relief in recent weeks, as has been mentioned, both crude oil 
and gasoline markets are very tightly balanced and subject to 
volatility. Crude oil prices reached the high point of $42 in 
June, fell to $35 and now have risen again to $39 just this 
morning with the continued uncertainty in Iraq and in some 
cases other places, such as Nigeria and Venezuela.
    Gasoline, having peaked at a national average for 1 week at 
$2.06 per gallon, yesterday was down to $1.89. The main reason 
for these high prices compared with history are global world 
market and supply and demand fundamentals which are tight. The 
world's economic growth in 2003 and 2004 has added 2.2 million 
barrels a day of demand to the world market, led by China and 
the United States. On the supply side, we are expecting non-
OPEC production to increase about 1 million barrels a day this 
year, which means OPEC will need to increase production by 1.2 
million barrels a day just to keep up with that very strong 
growth. With inventories already low going into this year, that 
growth in both non-OPEC and OPEC would just keep them at that 
low level, not building, which we believe is necessary.
    Another important factor in this tight and volatile market 
is the very small amount of spare productive capacity. 
Currently, there's only about a million barrels a day of unused 
productive capacity in the world, almost all of which is in 
Saudi Arabia, and that's a present world market of 82 million 
barrels a day, so we are operating the global crude market at 
between 98 and 99 percent of capacity. Clearly, that is little 
room for any surprises.
    Inventories are and will continue to be a key indicator to 
prices. U.S. crude inventories have been low most of this year 
and only recently have moved into the normal range, as 
published by the EIA. Gasoline, however, remains quite low and 
at the lower end of the normal range and, therefore, volatility 
and potential for price spikes remains in the gasoline market 
because of the strong demand and the tight situation in 
domestic refining, which accounts for about 90 percent of our 
domestic gasoline supplies, so that 10 percent from foreign 
refiners is critical, especially during the peak driving 
season.
    And this year, imports from Europe, the Caribbean and 
elsewhere are a bit lower than we anticipated, partly because 
of tightness around the world on refining capacity and partly 
because of the more stringent U.S. specifications that have 
gone into effect with regard to sulfur. And, therefore, we are 
watching the imports very closely on a week-to-week basis to 
see where these supplies will be headed, as well as the impact 
on inventories. So, to sum up, EIA remains prudently cautious 
of where this market is going to end up. Saudi Arabia and other 
producers have promised to increase their production, and so 
far, that seems to be holding up. And while gasoline prices 
have declined in recent weeks, consumers should not expect 
retail prices to fall back to the prices we have seen even last 
year. Our current short-term forecast projects that west Texas 
Intermediate Crude prices will likely fluctuate around $37 per 
barrel, reflecting this tightness, and that gasoline will 
average about $1.83 per gallon for the second half of the year.
    So, in conclusion, the EIA anticipates a continued tight 
market subject to volatility. Thank you very much, Mr. 
Chairman, for the opportunity to be here today.
    [The prepared statement of Mr. Caruso follows:]

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    Mr. Ose. I thank the gentleman.
    Our next witness is the Assistant Secretary for Fossil 
Energy, the Acting Assistant Secretary for Fossil Energy at the 
Department of Energy, Mr. Mark Maddox.
    Sir, welcome to our witness table. You're recognized for 5 
minutes.
    Mr. Maddox. Thank you. Mr. Chairman, members of the 
subcommittee, thank you for giving me the opportunity to 
discuss the volatility of U.S. gasoline markets.
    Gasoline price volatility should come as no surprise to 
anyone. President Bush foresaw the potential for gasoline price 
volatility when he unveiled the National Energy Policy 3 years 
ago. That potential has become a reality.
    The NEP noted energy demand was rising, and will continue 
to rise, and recommended that we take steps to meet the growing 
demand most notably by increasing domestic production of energy 
and by encouraging energy efficiency and conservation. In the 
NEP, we said that energy supplies were being limited by 
restricted access to Federal lands and that regulatory 
uncertainty and overlap, in combination with low historical 
profitability and low rates of return, were contributing to a 
lack of investment in refineries.
    The NEP also noted that our Nation's energy infrastructure, 
our network of pipelines, refineries, generators and 
transmission lines, was antiquated and would need to be updated 
to deal with an ever-expanding economy. Winston Churchill once 
spoke of finding security in diversity. Increased domestic 
production should be the cornerstone of diversity of oil supply 
for the United States.
    The United States continues to be a major oil producer. 
According to the Energy Information Administration, the U.S. is 
currently producing about 5.8 million barrels of crude oil per 
day, making us the world's third ranked producer, behind only 
Saudi Arabia and Russia.
    And, we still have considerable reserves to draw on. Today, 
377 billion barrels of currently uneconomic and unrecoverable 
oil await cost-effective technologies in addition to 22 billion 
barrels of proved reserves. To help tap that immense resource, 
we are concentrating the Office of Fossil Energy's oil research 
and development efforts on highly promising technologies with 
big potential payoffs. We're working toward prolonging the life 
of mature fields through greater use of CO2 injection, by 
finding economic ways to bring CO2 produced at fossil fuel 
power plants to oil fields. We are working on improved imaging 
and diagnostic tools, such as the recently announced new cross 
well electromagnetic imaging tool that can see through the rock 
between widely separated oil wells, distinguish the oil, water 
and gas reservoirs and measure changes over time. And, we are 
developing microhole drilling technology that could reduce 
drilling costs by as much as two-thirds compared to a 
conventional well, reduce disposal costs for drilling fluids, 
cutting them by 20 percent, significantly lowering the 
environmental impacts of drilling activities, and open access 
to 218 billion barrels of oil at mature basins less than 5,000 
feet deep. We are also working to increase access to high 
priority areas for oil and gas in our western mountain States, 
while protecting the environment.
    We are making progress on boosting domestic production, but 
more must be done. We need a comprehensive energy bill that 
will open the Arctic National Wildlife Refuge, or ANWAR, to 
domestic petroleum production. ANWAR offers us the prospect of 
secure, domestically produced oil. We have lost almost a decade 
to debating the merits of developing ANWAR. Debate continues 
even as technological advances have made arguments over the 
environmental impact of development more tenuous. And, with 
each passing year, our growing reliance on foreign sources of 
energy make it more urgent that we take advantage of these 
domestic oil resources.
    Higher gasoline prices have prompted various proposals for 
action, among them that we use the Strategic Petroleum Reserve 
to influence oil markets and reduce gasoline prices. We believe 
that abandoning our stated goal of filling the Strategic 
Petroleum Reserve is wrong from a national security point of 
view. President Bush has been very clear that the reserve is in 
place in case of major disruptions of energy supplies to the 
United States that could arise from a variety of events, such 
as natural disasters and terrorist attacks.
    We adopted a plan for filling the Reserve by a predictable 
amount and over a certain length of time in order to affect 
markets as little as possible. The current rate of fill is 
about 105,000 barrels per day, which the EIA estimates has an 
impact of, at most, 1 or 2 cents per gallon of gasoline.
    The world oil supply demand equation is largely responsible 
for higher gasoline prices. But all of the factors also play a 
part. One very important factor is our insufficient or outdated 
domestic pipeline and refinery capacity. The United States has 
not seen a new refinery built since 1976, and the expansion of 
existing refineries has slowed in recent years.
    Mr. Ose. Mr. Maddox, how much time? I have a long series of 
witnesses today and many statements to make. Can you--I'll give 
you 10 seconds to wrap up.
    Mr. Maddox. Our refineries are running at near total 
capacity of about 96 percent while the EIA projects U.S. 
gasoline demand will increase 47 percent and diesel used for 
transportation will increase 73 percent by 2025. Thank you. I 
look forward to taking questions.
    [The prepared statement of Mr. Maddox follows:]

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    Mr. Ose. Thank you.
    Our third witness, Mr. Jeffrey Holmstead, who is the 
Assistant Administrator for Air and Radiation at the 
Environmental Protection Agency.
    Mr. Holmstead, we have received your written statement for 
the record, and it's been entered therein. You're recognized 
for 5 minutes for the purpose of summarizing.
    Mr. Holmstead. Thank you, Mr. Chairman and members of the 
subcommittee. I appreciate the chance to be here today and talk 
a little bit more about the clean fuels programs and their 
impact on gasoline prices.
    As most of you probably know, EPA began to require 
improvements in the quality of motor fuels back in the 1970's 
when the agency required that lead be phased out of gasoline, 
but the focus of attention in recent years has been on two 
clean fuel programs that are a result of the 1990 amendment to 
the Clean Air Act.
    The first one is the Reformulated Gasoline Program [RFG], 
and the other is the Tier 2 Low Sulfur Gasoline Program. By 
statute, every gallon of RFG is required to obtain a minimum 
amount of an oxygenate, such as ethanol or MTBE. EPA and the 
Department of Energy have estimated that the cost of producing 
RFG is approximately 4 to 8 cents a gallon greater than the 
cost of producing conventional gasoline. About half of this 
cost increment is due to the cost of the oxygenate requirement 
itself.
    Now, I should note that the average retail price of RFG 
today, what people pay at the pumps, is actually a little less 
than 4 cents a gallon greater than the average retail price of 
conventional gasoline. That's a pretty good indication of the 
cost to consumers of this Federal mandate, about 4 cents a 
gallon.
    The second clean fuel program I mentioned, the so-called 
Tier 2 Program began on January 1st of this year. By 2006, when 
this program is fully phased in, it will reduce the sulfur 
content of most gasoline sold in the United States by about 90 
percent. This reduction in the sulfur content immediately 
reduces emissions from all gasoline powered vehicles, and it 
also enables the use of more advanced pollution controls on 
these vehicles. Thus, the Tier 2 Program not only addresses 
fuels but also includes a phase which begins this year of more 
stringent tailpipe standards for all light-duty vehicles, 
including cars, trucks, mini vans and SUVs.
    We estimate that the cost of the Tier 2 Fuel Program is 
about 1 cent per gallon today, and will still be less than 2 
pennies a gallon when the program is fully phased in in 2006. 
Now, the important thing of course is to compare the cost of 
the program to its benefits.
    On the benefit side, we estimate that the Tier 2 Program, 
including both the fuel and engine standards will prevent every 
year approximately 4,000 premature deaths, more than 10,000 
cases of chronic and acute bronchitis and tens of thousands of 
respiratory problems. As far as I know, everyone agrees that 
the public health benefits of this program far exceed the cost.
    As you all know, the retail price of gasoline is affected 
by many factors. We believe that the run-up in gasoline prices 
earlier this year was primarily the result of a steep increase 
in crude oil prices. But, what we can say with great certainty 
is that environmental regulations have had a minimal effect on 
gasoline prices.
    Let me turn now quickly to the issue of so-called boutique 
fuels. The Clean Air Act specifically authorizes States to 
regulate fuels as part of their State Air Quality Plans if they 
need this type of regulation to achieve national air quality 
standards. This authorization in the Clean Air Act has resulted 
in a number of different fuel formulations being required by 
different States. These formulations are often referred to as 
boutique fuels; 15 States have adopted their own Clean Fuel 
Programs for part or all of their State.
    In October 2001, EPA released a comprehensive white paper 
discussing a range of issues associated with boutique fuels. 
The main conclusions of this white paper were, one, that the 
current gasoline refining and distribution systems work well 
except during times of unexpected disruptions, a refinery fire, 
a pipeline outage, something like that. We also found, two, 
that fewer fuel types are likely to improve fungibility and, 
three, options exist to reduce the number of fuel types and to 
improve fungibility while maintaining or improving air quality. 
But, the fungibility benefit from taking these actions are 
likely to be modest, and there may be significant cost or 
supply implications associated with any of these options.
    Now, we are committed to working with Congress to explore 
ways to maintain or enhance the environmental benefits of these 
programs while exploring ways to increase the fungibility of 
the infrastructure and increase flexibility and improve and 
provide added gasoline market liquidity. The best way we have 
identified to accomplish these goals is to replace the current 
oxygen content requirements for RFG with the renewal fuel 
standard that includes a flexible national credit trading 
system. But, we also note that this can only be done through 
legislation such as the renewable fuel provisions in the energy 
bill which the administration strongly supports.
    Mr. Ose. Mr. Holmstead----
    Mr. Holmstead. Again, I thank you for the chance to be here 
today and look forward to answering any questions you may have.
    [The prepared statement of Mr. Holmstead follows:]

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    Mr. Ose. I thank the gentleman.
    Our fourth witness on this panel is Mr. Jim Wells. He is 
Director of the Natural Resources Environment Section at the 
Government Accountability Office.
    Sir, we have received your testimony. It's been read. It's 
part of the record. You're recognized for 5 minutes to 
summarize.
    Mr. Wells. Thank you, Mr. Chairman. We welcome the 
opportunity to contribute to the hearing.
    Accompanying me today is Mr. Scott Farrow, GAO's Chief 
Economist.
    Our presence today relates to the GAO report that we 
published in March looking at the effects of mergers in the 
U.S. petroleum industry. In 2002, we agreed to study the effect 
of the wave of mergers, that is acquisitions, joint ventures 
that were occurring across the petroleum industry in the 
1990's.
    More than 2,600 mergers have changed the landscape on how 
the sale of petroleum products occur. Large oil companies 
combined with other large oil companies who previously competed 
against each other. For example, in 1998, BP and Amoco merged 
and later acquired Arco, while Exxon acquired Mobil and 
thousands more continued.
    Can the wave of mergers reduce competition and generally 
lead to higher gasoline prices? Our study says yes. We began 
our work by talking with the FTC. We found no existing FTC 
study on a retrospective impact of oil mergers, at least none 
that was publicly available. And, we met with skepticism from 
the FTC staff as to whether this type of study was even 
impossible or possible to do. What analysis was in the 
literature and publications was on a smaller scale, and 
clearly, it was not nationwide or dealing with multiple 
mergers. Therefore, we had to construct econometric models to 
estimate the effects of mergers and market concentration on 
prices because we believe bottlenecks in the gasoline markets 
are most common at the refining and distribution levels. Also, 
price changes at wholesale generally get passed through to 
prices at the pump.
    What we found was a marketplace that has changed. There are 
fewer oil companies and refiners. There is less non-branded 
gasoline that was traditionally offered in the marketplace at 
lower prices. Distribution and availability of gasoline to the 
smaller dealers, the moms and the pops, is on the decrease. 
Market concentration, which relates to market shares and merger 
activities, increased at the refinery levels.
    Clearly, mergers potentially enable companies to gain 
synergy. No doubt about it. They can grow their assets. 
Stockholder value is important. They can reduce cost by 
achieving efficiencies that may be passed along to the 
consumers at the gas pump. We did find mergers that caused 
prices to decrease.
    However, if you do get bigger and you have fewer 
competitors, you may also gain market power, the ability to 
raise prices above competitive levels. Taken collectively, our 
models suggest that wholesale prices increased anywhere from 1 
to 7 cents for six out of the eight specific mergers, the major 
mergers that we analyzed. This specific finding is based on 
using hundreds of rack or terminal city prices for each week 
from 1994 through the year 2000, data at least 6 months before 
the merger and 6 months after the merger. And, we attempted to 
control for all other factors that varied over time and the 
economic conditions.
    Our findings would imply that overall, the effects of 
market power which tend to increase prices won out over the 
efficiency gains of mergers which would tend to decrease 
prices. We assume that these price increases will carry forward 
after the mergers and in a sense be embedded, if you will, in 
an unchanging way in today's 2004 gasoline prices.
    Clearly, in a study of this magnitude, you can expect to 
have differences of opinion. FTC, as you will hear this 
morning, weighs in with their views. We can agree to disagree, 
I hope. Although no econometric model can perfectly depict 
reality, we believe that our models are sound, and produce 
reasonable estimates. We are, in fact, very strongly supporting 
and welcoming public scrutiny and discourse on issues like 
gasoline prices. We even welcome sorting through this and these 
issues with the FTC.
    Having Bill sit to my right, we agreed to be friends today, 
and we agreed that our goal is to work together in the future 
to deal with some of the estimates and issues with the GAO 
product.
    Mr. Chairman, our hearings today will add to this debate as 
our Nation struggles with high gasoline prices. Mr. Chairman, 
in summary, we believe that the retrospective look that GAO 
did, looking back at what happened in the 1990's, it can do two 
things. One, it can help the Congress sort through today and 
other days some of the background to what's happening with 2004 
price spikes. Two, we would hope that our study could influence 
what the regulatory antitrust agencies like the FTC do in the 
future to protect the competitive process and consumers.
    I also want to thank Mr. Cooper for giving me a warning 
about the potential challenging questions that I may face. I 
thank you.
    [The prepared statement of Mr. Wells follows:]

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    Mr. Ose. I thank the gentleman.
    I am pleased to recognize the General Counsel for the 
Federal Trade Commission, Mr. William Kovacic.
    Sir, your statement, your written statement's been entered 
into the record. You're recognized for 5 minutes for the 
purpose of summarizing. I just want to clarify the record. 
You're on his left, not on his right.
    Mr. Kovacic. Mr. Chairman and members of the subcommittee, 
thank for the opportunity to present the FTC's testimony on the 
causes of and possible policy responses to gasoline price 
increases.
    I will first describe FTC measures that insure that 
consumers pay competitive prices for gasoline, then discuss the 
GAO report, and then offer my views about the causes of 
gasoline prices. My written statement gives the views of the 
commission, and my spoken comments offer my views and not 
necessarily those of the commission.
    Competition policy plays a key role in protecting the 
consumers of gasoline. FTC programs embrace this principle in 
four ways. First, the FTC does oppose mergers that promise to 
curb competition. Since 1981, the commission has challenged 15 
petroleum mergers, causing four deals to be abandoned or 
blocked and requiring major divestitures in the other 11. 
Compared to other industries, FTC petroleum merger remedies 
have been uniquely stringent.
    The FTC also prosecutes non-merger antitrust violations. 
For example, in March 2003, the FTC charged Unocal with 
violating the FTC Act by deceiving California State regulators 
in connection with proceedings to devise standards for 
reformulated gasoline. Earlier today, the commission announced 
that it unanimously has reversed the ruling of the 
administrative law judge who had dismissed the complaint at the 
end of last year.
    A third FTC activity is to monitor industry conduct to spot 
possible antitrust violations. Since 2002, the FTC has used a 
statistical model to detect unusual gasoline price movements 
across the country. The FTC examines apparent anomalies and 
works with other Government agencies to pinpoint possible 
causes, including antitrust misconduct.
    The fourth FTC activity is to inform the public and 
policymakers about petroleum competition issues. Later this 
year, the agency will issue a report on the factors that affect 
fuel price increases and will update FTC reports on petroleum 
mergers issued in the 1980's.
    The FTC's petroleum experience builds heavily on merger 
review. In May, the GAO report, as Jim Wells has just 
described, examined mergers and concentration arising from 
transactions in 1990's. Among other tasks, the GAO studied 
eight mergers completed between 1997 and 2000 and found that 
six deals caused gasoline wholesale prices to rise, while two 
caused prices to fall.
    The GAO report contains fundamental methodological errors 
that deny its results, in our view, reliability. Three crucial 
flaws stand out. First, GAO's econometric analyses did not 
properly account for many factors that affect gasoline prices. 
Second, GAO's study of how concentration affects prices did not 
use properly defined relevant markets required for sound 
analysis. Third, the GAO failed to consider critical factors 
about individual transactions that are vital to assess price 
effects.
    The FTC welcomes the rigorous analysis of past enforcement 
decisions. In the spirit of Jim Wells' comments, we invite the 
GAO to join the FTC in cohosting a conference to consider the 
GAO report's findings. To inform these proceedings, we call 
upon GAO to fully disclose its econometric methodology and all 
data used to run its models. Participants at the conference 
would include GAO and FTC experts, the agencies' advisors and 
interested observers.
    Let me turn to what the FTC has learned about factors that 
cause gasoline prices to rise. The paramount factor, as we have 
heard this morning, is the price of crude oil. Changes in crude 
oil prices account for about 85 percent of the variability of 
U.S. gasoline prices. When crude oil prices rise, so do 
gasoline prices.
    A second factor is the high level of utilization in the 
refining and transportation sector. For example, pipeline 
capacity is stretched in some regions, although expansion 
projects are underway to boost capacity. The same could be said 
for inventory levels.
    Another major factor, as we have heard this morning, is the 
design of environmental quality standards. Pollution control 
unmistakably yields great social benefits but also raises 
refining costs. The multiplicity of environmentally mandated 
brands sometimes can reduce the flexibility of the supply 
sector. ther Government policies also raise gasoline prices at 
the State and Federal level.
    To understand and publicize developments in the petroleum 
industry and to attack antitrust misconduct is a priority 
second to none for the FTC. I welcome your questions.
    [The prepared statement of Mr. Kovacic follows:]

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    Mr. Ose. I thank the gentleman.
    All right. As I indicated earlier, what we'll do is, each 
of the Members up here has an opportunity to ask questions. 
We'll move in 5-minute increments. We are scheduled for six 
votes this morning on the floor some time--it actually might 
not be this morning. Sometime between 12 and 12:30. We also 
have a second panel of witnesses. We are required to be out of 
this room by 1:30.
    Just for everybody's edification, to the extent that we 
have questions that need to be asked that we don't get to, we 
will leave the record open and submit them to the witnesses in 
writing, leaving the record open for 10 days.
    Does anybody up here have any questions on that?
    All right. I will go ahead and start.
    Mr. Maddox, I want to ask you about this Strategic 
Petroleum Reserve. I've spent a lot of time looking at the 
suggestion about drawing down the 105-odd thousand barrels a 
day that is otherwise going into the reserve. If that 105,000 
barrels a day, as some have suggested, were not going into the 
Strategic Petroleum Reserve, where would it go? What would we 
be able to do with it? I mean, how does it get to market?
    Mr. Maddox. Well, the process is pretty straight forward. 
If we were not drawing it down, or filling a reserve, I guess 
is the question, the oil would be sold on the market.
    What has traditionally happened, looking at some of the 
other examples, is, we see most of that oil simply displace 
imports. Times like right now, when you have a healthy storage 
or average storage level of over 300 million barrels, there is 
not necessarily a crude shortage at this point. So, any release 
would not necessarily impact, you know.
    Mr. Ose. Before you leave that point, I think you--did you 
just say there is not a shortage of crude?
    Mr. Maddox. Correct me if I'm wrong, but, our stocks are in 
the average range right now, and we, in fact have, right now, a 
very tight refining capacity at 96 percent, which is pretty 
close to flat out. And to go much higher, I think you could 
argue whether it was sustainable to go at a higher level.
    Mr. Ose. Well, if I read--somebody's statement here said 
that the refining capacity in the United States is something 
like 8.78 million barrels--that's the rated capacity for the 
refineries around the SPR locations--and that they are running 
at 96 percent.
    Mr. Maddox. Correct.
    Mr. Ose. Which means that 1 percent is 87,000 odd barrels.
    Mr. Maddox. Right.
    Mr. Ose. Well, 87,000 and 105,000, that's not, I mean, it 
seems to me like that's less than what would be necessary to 
take it to 100 percent. Why can't we take it from 96 percent 
operating capacity to 100 percent?
    Mr. Maddox. You could, in theory, but the reality is, there 
are breakdowns. There are, you know, these things, I don't 
think there's any model that says you can run 100 percent 
forever.
    I mean there's just always the possibility, you know, 
things happen for lack of a better description. 96 percent, I 
think most manufacturing people would tell you, is a pretty 
extraordinary rate of capacity utilization.
    So, you could nudge it up a little bit. But, the reality 
is, we have been building our stocks the last 4 or 5 weeks, and 
we are filling our stocks while we maintain a pretty steady 
level of product.
    Mr. Ose. So, the storage above ground, if I'm correct, is 
about 300 million barrels today.
    Mr. Maddox. Right.
    Mr. Ose. The Petroleum Reserve has about 660 million 
barrels in place. Are you suggesting that, if the 105,000 
barrels that's currently going daily in to the SPR was not 
going into the SPR, there'd be no place to put it?
    Mr. Maddox. Individual companies have to make economic 
decisions on how much stock they want to carry. Right now, the 
high price environment, I don't think they'd be too eager to 
build stocks and create the carrying costs involved with the 
larger stocks.
    Mr. Ose. Mr. Caruso, does the EIA concur with those 
conclusions?
    Mr. Caruso. Yes. I think Mark's point about there not being 
a shortage is different than not saying it's a tight market. 
Clearly, there are 305 million barrels of crude in stocks now.
    Mr. Ose. Explain your nomenclature. Your vernacular is very 
good. I think it's very precise. Would you please explain the 
difference between not a shortage of crude and a tight market?
    Mr. Caruso. That's crucial, actually, to the decision and 
the memo that I wrote in February. And, that is that all 
refiners who are seeking crude can buy it today at $39 WTI. So 
there is crude available to refiners. If 100,000 barrels a day 
were made available, would they add that to inventories? Our 
view is probably not.
    Mr. Ose. Is it your view that the constraint is the 
refining capacity?
    Mr. Caruso. There's two aspects of the refining capacity. 
One is primary distillation, which is running at 96 percent of 
the 16.8 million barrels per day total capacity in this 
country. Second, there are the conversion units that go beyond 
the primary distillation. We believe that those are operating 
at close to 100 percent of capacity.
    So there are two aspects. One is the primary distillation, 
and then there's the secondary conversion or treatment units 
transform distillation unit outputs into gasoline and other 
products. And, right now, they are operating these margins very 
close to full capacity.
    Mr. Ose. Thank you.
    The gentleman from Massachusetts.
    Mr. Tierney. Thank you. Just to close out on that, the 
Valero Energy Corp.'s chief executive officer, William Greehey, 
opined that if the President stop purchasing for the oil 
reserve, it would signal to the commodity traders that the 
White House is serious about oil prices and the prices would 
fall fast.
    Is there any merit to the concept that signal would be sent 
and it would have an effect on prices, Mr. Maddox?
    Mr. Maddox. We don't believe so. I mean, I think we have 
some estimates that stopping may have an effect, I think, of a 
dollar a barrel or so. But, I would note also that we saw the 
price swing $1.26, I think, yesterday. At this stage it's 
largely a supply uncertainty situation that is probably driving 
prices to a greater degree. I think the Secretary stated 
yesterday that he thought there was probably a risk premium of 
potentially as high as $10 right now for the price of oil. And, 
I think events will probably drive that issue.
    Mr. Tierney. Mr. Kovacic, you know, rather than challenging 
Mr. Wells' organization to sort of a fact and figures dual of 
some sort do you think it would be well spent time of the FTC 
to do an actual report and study about the effects of mergers?
    Mr. Kovacic. We are in the process of completing a report 
that does look at the consequences of mergers, that does update 
two other studies we have done. And, we do think it's useful to 
engage in a continuing conversation with the GAO.
    Mr. Tierney. Well, I'm sure it is. We had asked for any 
studies that you had done on that, and I don't recall getting 
them from your office. So how long ago were those studies done?
    Mr. Kovacic. One in 1987 and one in 1989, and we are in the 
process of doing a further document that updates the results of 
those studies, sir.
    Mr. Tierney. Are you familiar with the March 2001 Federal 
Trade Commission report that was authored by Chairman Robert 
Pitofsky? And he noted in that study, by withholding supply, 
the industry was able to drive prices up and thereby maximize 
profits.
    Mr. Kovacic. That's right. Are you referring to the Mid-
western States Study, Congressman?
    Mr. Tierney. That's correct.
    Mr. Kovacic. Yes. I believe that the FTC report also 
pointed out that the capacity to act in that way was for a 
comparatively short period of time as well. And I believe that 
the net assessment of the Commission is that, though it takes 
temporary disruptions quite seriously, that this was indeed a 
temporary and quite finite disruption.
    Mr. Tierney. Are you familiar with the 2003 RAND study of 
the refinery sector that reaffirmed the importance of the 
decisions to restrict supply? And, it pointed out, in a change 
in attitude in the industry, saying that increasing capacity 
and output to gain market share or to offset the cost of 
regulatory upgrades is now frowned upon. In its place, we find 
a more discriminating approach to investment and supplying the 
market that emphasized maximizing margins and returns on 
investment rather than on product output or market share. The 
central tactic is to allow markets to become tight by relying 
on existing plant and equipment to the greatest possible 
extent, even if that ultimately meant curtailing output of 
certain refined products.
    Mr. Kovacic. Yes, indeed. I'm also struck, though, in the 
very same study, toward the beginning of the study, you see the 
basic conclusion by the RAND researchers that the supply system 
in the United States operates comparatively well. Their net 
assessment was relatively positive.
    I guess another methodological point that interests me 
about the RAND study is that they report in a very aggregate 
way the results of all of their research. Something that would 
have been interesting to us is to see precisely whose views 
factored into the observation that you provided.
    Mr. Tierney. Well, I guess that's true in any study, where 
you go back and forth. So, what you are saying is, you are 
going to stick to your story no matter what it says so long as 
you can find a methodology to support it?
    Mr. Kovacic. Well, I guess maybe it's an academic's 
obsession with footnotes. But when you look at the RAND study, 
you simply notice that they tell you who they spoke with at the 
back. But, as they hit key conclusions along the way, there is 
no particular revelation of whose observations factored into 
the results.
    Mr. Tierney. So, you are not troubled at all by the fact 
that there have been a sizable number of mergers over recent 
years?
    Mr. Kovacic. We are extremely attentive to and extremely 
concerned about the impact of those mergers. I have to be 
clear, Congressman, that in addressing the GAO's work and ours, 
the GAO's instinct here--and your observation as well--about 
the usefulness of ex-post evaluations as a way of informing 
future policymaking strikes me as being right on target. It's a 
key element of responsible decisionmaking, before you take next 
steps, to go back and look at what you have actually 
accomplished. And, the effects, good or bad, ought to be well-
known. So, I emphasize, that's a crucial ingredient of good 
policymaking, and I don't want to diminish in any way the value 
of that kind of assessment.
    Mr. Tierney. I would hope not. And, I would hope that the 
FTC starts looking at your merger guidelines a little more 
actively and get on top of this, because I think it just stands 
to reason that the GAO's conclusions are right on the money in 
terms of the direction of the things that are going on. I think 
it belies commonsense to think that all these mergers haven't 
had an effect. And, particularly--and I don't have time to go 
into it now because we are going to close out--but you look 
back at Senator Wyden's committee hearings of a while back, 
when you have industry people actually quoted on there saying 
that keeping the supplies low is a good strategy for them to 
keep their prices high. Those things, I hope, ought to concern 
the FTC and ought to spark some sort of report on that and some 
concern for the mergers and consolidations. Thank you.
    Mr. Ose. The gentleman from Ohio.
    Mr. Tiberi. Thank you, Mr. Chairman.
    Mr. Holmstead, can you give me the exact number of blends 
that are required, fuel blends, in America?
    Mr. Holmstead. I believe I can. And, I can understand your 
question on this issue, because there are all kinds of numbers 
that are thrown around.
    When we talk about boutique fuels, what we talk about are 
specific State requirements that are different from those 
required under Federal law. There is RFG that I mentioned. And, 
RFG actually is different in the North and in the South because 
of different characteristics. The Federal requirements are 
major gasoline programs. But, if you look at boutique fuels, 
requirements by individual States, there are nine.
    Now, while I say there are nine, other people are saying 
100-something. Well, the difference is, as we have delved into 
this, a State sets a standard, but then different companies 
choose to sell different grades of gasoline. So, you have 
standard, premium, and ultra or whatever they are. In response 
to that State requirement, an individual refinery may actually 
produce three different grades of gasoline or more.
    And then, some States have identical standards, but we 
count those as just one. Some people may count three different 
States with the same requirements; we are going to count those 
as three or actually nine. But, we think the best way to look 
at it is there are nine different State boutique fuels 
programs. In addition to that, there are federally mandated 
programs that apply in the rest of the country.
    Mr. Tiberi. How many are those numbers?
    Mr. Holmstead. Well, again, different requirements apply 
during the summer and during the winter. But, the biggest 
number of gasoline blends is during the summertime season, and 
there are six Federal requirements. So, there would be six 
Federal programs and nine boutique State fuel programs.
    Mr. Tiberi. Mr. Caruso, would you concur with that 
analysis?
    Mr. Caruso. Yes. That concurs with our information.
    Mr. Tiberi. Thank you.
    Mr. Holmstead, in layman's terms, not in technical details, 
can you explain why Washington, DC, has a different requirement 
than Chicago, which has a different requirement than Atlanta?
    Mr. Holmstead. In large part, that's because of sort of our 
Federal system of Government, where the way Congress chose to 
enact the Clean Air Act was to require in the most highly 
polluted cities this reformulated gasoline or RFG. And I have 
to look at a map to see exactly where that's required, but that 
tends to be required in the most highly polluted areas, New 
York, Los Angeles, Houston.
    Mr. Tiberi. Excuse me, but are the pollution problems 
different in Washington than Chicago?
    Mr. Holmstead. Yes, they may be. The extent to which cars 
contribute to the problem is different in Atlanta compared to 
Baton Rouge where it's much more of a stationary source problem 
versus a mobile source problem.
    The other thing is different States, under the Clean Air 
Act, have flexibility to decide how they want to achieve 
national standards. Some States may decide that a fuels program 
is an effective way of achieving these standards. Other States 
may believe that a more effective way is to regulate factories 
and plants and things of that sort.
    Mr. Tiberi. Mr. Caruso, have the requirements from States 
and the Federal Government caused foreign refineries to stop 
producing refined or reduce the number of refined oil coming 
into the United States?
    Mr. Caruso. The only instance I'm aware of is the gasoline 
components we get from Brazil. Most of their refineries cannot 
meet the new Tier 2 RFG lower sulfur requirement--120 parts per 
million--starting this year. So perhaps--and this is quite a 
tentative number--there may have been about 75,000 barrels a 
day from Brazil that now has to be made up from other sources. 
And in fact, there have been some increases in other 
refineries, other foreign refineries, such as Canadian and 
European.
    Mr. Tiberi. OK. One final question, Mr. Holmstead. Has the 
EPA done any research to see if, technologically, we can 
produce today one type or maybe two or three types of fuels 
that can solve our pollution problem in different cities at the 
same time of reducing the number of fuels required by a 
refinery?
    Mr. Holmstead. That is something that we have looked at 
quite a bit. You won't be surprised to hear that there are 
tradeoffs. For instance, the cleanest gasoline from an 
environmental perspective is California's. California gasoline 
is a blend that exceeds the RFG requirements. If we were to 
simply mandate that fuel throughout the United States, we would 
solve our fungibility problem, so everybody would be using the 
same type of fuel. But that would dramatically increase costs.
    And so, if you are trying to reduce the number of blends 
and improve fungibility, you may actually have an adverse 
impact, that is on fuel supplies and cost to consumers. There 
is really no reason for consumers in some States that don't 
have a pollution problem to pay those kind of high prices.
    And so, it's an issue that we are aware of and that we have 
paid a lot of attention to. But, you know, common sense would 
dictate, that we have fewer versions of gasoline. There may be 
some middle ground that would love to explore with Congress. 
But, there is no one obvious easy answer because there are 
tradeoffs.
    Mr. Tiberi. Thank you.
    Mr. Ose. We will go another round here.
    Mr. Holmstead, I want to visit with you about California's 
request for a waiver. If I understand correctly, EPA is 
concerned about the impacts of air quality of granting such a 
waiver. And, I impute from that you're concerned about the 
deterioration in the air quality that might occur. Am I correct 
in that?
    Mr. Holmstead. That's correct. Yes.
    Mr. Ose. OK. The particulate matter. Are you worried about 
sulfur? What is it exactly that EPA's concerns are based on?
    Mr. Holmstead. This sounds self-aggrandizing, but all of 
these air pollution problems are very complex, especially in 
California. The air pollution problems that are of greatest 
concern are ozone, which you are well aware of, and fine 
particles. But, these pollutants aren't emitted directly into 
the air from automobiles. It's not as though you measure ozone 
or you measure fine particles. These pollutants are made up of 
many different components.
    So, for instance, if you care about ozone levels, you have 
to consider VOC emissions or hydrocarbon emissions which do 
come from automobiles. You have to consider NOx. You also 
consider CO emissions.
    And so what we need to--what we have done in the case of 
ozone is to look at what the air pollution situation would be 
in California with a waiver and without a waiver. Actually 
determining what the answer to that is somewhat uncertain 
because of a variety of factors. We know, for instance, that if 
you take out the oxygenate, you will increase VOC emissions 
from the tailpipe. I think everyone agrees with that. On the 
other hand, if you keep the oxygen in the fuel you may increase 
what are called evaporative emissions because the oxygenate 
tends to have a higher Ried Vapor Pressure, and so you get 
greater evaporative emissions. It's enormously complex to try 
to understand that, and that's just for the ozone, which is 
something we have been looking at now for a couple of years.
    On the fine particles side, again, there are some fine 
particles that are emitted directly from cars, but also fine 
particles are formed by the aromatics and NOx emissions in the 
fuel exhaust. Trying to actually understand whether the waiver 
would hurt California's air quality or help it is something 
that we are honestly struggling with right now.
    So, it's a difficult issue and especially given that the 
statute says that we can only grant the waiver if a State makes 
a showing that the oxygen requirement is interfering with their 
ability to maintain the standard. So, it's something that we 
have taken seriously, and we are really trying to get a handle 
on these issues.
    Mr. Ose. Now, under the Tier 2 program, do you have--it's 
being phased in. Obviously, you have similar concerns, in 
particular, removing the sulfur from the fuel.
    Mr. Holmstead. Right.
    Mr. Ose. The question I have is that, while we haven't been 
able to get an affirmative or definitive response on 
California's request for waiver from EPA, EPA has in fact 
granted six hardship waivers to refineries who otherwise can't 
meet the Tier 2 phase-in requirements for sulfur. It's on page 
3 of your testimony here. You have four bullet points, the last 
of which, ``Hardship provision, which allows refineries to 
apply, on a case by case basis, for additional time and 
flexibility to meet the low sulfur standards based on a showing 
of unique circumstances. Under this program thus far, EPA has 
granted hardship waivers to six refineries.''
    Where are those six refineries located?
    Mr. Holmstead. Well, I'm not sure. I would be happy to 
provide that for the record.
    Mr. Ose. Are any of them located in California?
    Mr. Holmstead. My expert tells me, probably not.
    Mr. Ose. Are any of them located in Chicago or up in the 
New York area?
    Mr. Holmstead. I don't know the answer to that.
    Mr. Ose. I would be curious. I will submit that to you in 
writing.
    Mr. Holmstead. I would be happy to provide that for the 
record.
    [The information is provided in EPA's answers to Chairman 
Ose's followup questions.]
    Mr. Ose. Well, my basic question, and it may be rhetorical 
at this point, is, how can you be so concerned about air 
quality in California to the extent that we can't get an answer 
from you one way or another, and yet here are six refineries 
that can't remove the sulfur in a manner consistent with the 
Tier 2 phase in, and you are granting them waivers? There is a 
certain inconsistency there.
    Mr. Holmstead. Well, no. It's a very different situation. 
The Tier 2 program is something that EPA created through 
regulation. The oxygen mandate is a specific statutory mandate 
from Congress. And, Congress said that we can only grant a 
waiver if a State makes a showing that the oxygenate 
requirement interferes with its ability to attain air quality.
    So, you are right. Under our Tier 2 program, if there is a 
hardship at a refinery, we can grant that, even though it would 
have a modest negative impact on air quality. We are not able 
to do that in the case of the oxygenate waiver because that's a 
statutory requirement.
    Mr. Ose. Both of them have the force of law, do they not?
    Mr. Holmstead. Well, they do. But, our regulations 
explicitly allow us to grant this hardship waiver. If the 
statute had contained a provision similar to our regulations 
that would allow us to grant hardship waivers, then we would 
consider them both in the same way. But, it's just a very 
different legal regime in the case of oxygenate requirement 
versus the sulfur reduction requirement in the Tier 2 program. 
And, I can understand your----
    Mr. Ose. It seems to me you need to resolve the chemistry 
issue here as to whether or not the evidence that California 
has put forward in fact is consistent with EPA's desire for 
protection of these different elements that you cited, whether 
it be ozone or a particulate matter or what have you. That's 
the key element here.
    Mr. Holmstead. What----
    Mr. Ose. What I'm trying to get at, is, when are you going 
to finish that?
    Mr. Holmstead. We have a group of people that are working 
on that right now. The State provided us with significant 
additional information in February. Just within the last month 
or so, we received a very detailed technical report from an 
outside stakeholder group that was concerned about these 
issues. And that's what we are looking at right now. And we 
will resolve it as quickly as we can.
    Mr. Ose. If I am correct, you are under a court order to do 
so. Is that not accurate?
    Mr. Holmstead. I don't believe we are under any specific 
court order. What the court did was they remanded--initially, 
when we had done this analysis----
    Mr. Ose. They vacated the original.
    Mr. Holmstead. They vacated the original, and they sent it 
back to us. They said, ``You have to look at this fine 
particles issue,'' which we hadn't looked at before. So, this 
is an issue that we had never really looked at, and now we are 
looking at it.
    But, the court didn't give us a specific date. They just 
said that it's--that when we come back and make the decision, 
we have to also look at fine particles as well as at ozone.
    Mr. Ose. I'm here to ask you--I understand the time 
element, and I appreciate the courtesy of my fellow Members 
here. I am asking you----
    Mr. Holmstead. I keep hoping they are going to cut you off.
    Mr. Ose. They are not going to cut me off. Trust me, they 
are not going to cut me off. So, I am here to ask you again, do 
you have a date by which this is going to be completed?
    Mr. Holmstead. We don't have a specific date. As I said, we 
received a significant new technical comment document just in 
the last month or so, and that raises a number of issues that 
we are still looking at. What my boss has said is, we are going 
to do this as quickly as we can.
    Mr. Ose. I can tell you why they are not going to cut me 
off, is because the same issues on waivers in California are 
creeping up to Massachusetts and over to Ohio.
    So, this is not something that's unique to California. This 
is timely. It needs to be done. It sounds to me like you 
actually do have a court order to at least review your 
decision, and yet we can't seem to get the thing done.
    So, back to my original question. What kind of time line 
are we working under?
    Mr. Holmstead. I can understand your concerns, and we have 
obviously heard from the Governor of your State and the members 
of the delegation. We made this decision now over a year ago, 
and the court overruled it, not because they said we were wrong 
on the technical side but because they said we also have to 
look at fine particles.
    And, honestly, we want to just make sure that we do this 
right. It's an enormously complex undertaking that we are 
committed to doing the right way, and that's what my boss has 
said, and we will do it as quickly as we can.
    Mr. Ose. What does that mean, as quickly as you can?
    Mr. Holmstead. That means as quickly as we can while 
ensuring that we actually get it right and do something that 
will be consistent with the statute that Congress has required 
and that will stand up in court as well.
    Mr. Ose. I'm just amazed to find that the courts are moving 
faster than the Federal Government. That just befuddles me. 
And, I have to tell you, I'm highly critical of the inability 
to get to an end on this.
    The gentleman from Massachusetts.
    Mr. Tierney. I feel your pain.
    Mr. Wells, let me ask you a little bit about your study, if 
I could. Why was your study focused on wholesale prices and not 
on retail prices?
    Mr. Wells. First, let me say to, Mr. Chairman, you are 100 
percent. That's why I wasn't a boxer; I didn't know the 
difference between my right and left. And I will work on that.
    Clearly, as I said earlier, we focused on the wholesale 
price because of two major factors: Wholesale prices tend to be 
passed on through to the pump at the retail level. And, second, 
in terms of our ability to look and assess what data is 
available in the Federal Government to assess, there is less 
data that's available in the retail sector. The retail sector 
is much more complex in terms of the factors that can influence 
gasoline prices. So, we thought a good proxy is to look at the 
wholesale level, which deals with the actual prices paid as the 
gasoline is moved from the refinery into the retail market.
    Mr. Tierney. Did your study differ from any previous 
studies?
    Mr. Wells. Absolutely. Clearly, we went to the FTC and 
asked: Had you done a retrospect analysis? They said, no. We 
asked for what public studies they had done. Essentially, we 
got nothing. The only study we are aware of was released in 
March just before our report came out. It was done in 
Louisville, KY. It was one city analysis.
    It's interesting to note, their analysis showed that 
wholesale prices also went up, and I believe the retail prices 
either stayed the same or might have decreased a little bit. 
But, again, it was only one study.
    The GAO study, we believe, is much more comprehensive. We 
looked at the cumulative effects of the many thousands of 
mergers. We isolated the different types of gasoline, which, in 
many studies, had not been done. We focused and isolated on 
cost margins. We basically looked at and subtracted out, if you 
will, or accounted for everything that could have affected a 
gallon of gasoline so that what remained was some sense of what 
we attribute to market power related to the actual cost of the 
factor of the merger itself.
    So, we believe our study was--nationwide, we have not found 
any study that had done what we had done.
    Mr. Tierney. Now, I take it, Mr. Kovacic, just a little bit 
here in indicating that you didn't--the FTC didn't do any 
studies or whatever, but you are quick to criticize the GAO's.
    So, Mr. Wells, they say that your study is flawed. What 
have you done to address the concerns, which I understand were 
extensive?
    Mr. Wells. They clearly gave us 30 pages of comments of why 
they didn't like our study. I think it is fair to say, they 
feel strongly.
    We feel as strongly as well that we in fact did use sound 
economic principles; we did use factors. They, lately--I mean, 
just today, we heard there is still an additional three 
criticisms of factors that we did not consider. In consulting 
with our Chief economist, we find that we did in fact use those 
variables. So, maybe it's a dialog issue that GAO would 
welcome.
    I think, more disturbing to me is sort of the impression 
the FTC has given us. It sounds as if they are spending a lot 
of time and energy criticizing everyone else that has looked at 
this marketplace. We would hope, in the spirit that we would 
want to move into, that maybe the FTC wants to move beyond our 
methodology is wrong and their methodology is right --ours is 
different, it's different than what they used. Hopefully, in 
there somewhere must be lessons learned in terms of what the 
FTC may be able to do better.
    And, again, I think the focus we have is, market power is 
extremely important and is something we as consumers want to 
ensure that someone is protecting us from market power. We 
clearly don't want another Enron situation. So, we are in favor 
of hoping that the FTC will, in fact, look at a retrospect 
study, look at how well their performance has been, could they 
do things better?
    Mr. Tierney. Well, I would agree that seems to be their 
job, and that it doesn't seem to have been done yet on this. 
But did you have a peer review done of your study? And who did 
you talk to about your study within the industry?
    Mr. Wells. Absolutely. We had at least a dozen peer 
reviewers. University of California, Yale, Texas, industry 
consultants. We talked to law firms. Four major integrated oil 
companies. In fairness, some oil companies refused to talk with 
us. We did speak with exploratory and production companies. We 
talked to four refiners, 24 independent distributors, three 
Federal agencies, two State agencies. The list goes on and on, 
16 associations. We talked to the hypermarket people, the 
unbranded retailers.
    We actually went out and bought data. There's no data--we 
didn't find data at the FTC. They gave us no data. The data 
that we bought is--some of it is data that's collected by 
private sources. We spent a lot of money buying this data. 
There is an issue about whether we should share data. There are 
a couple issues. One, there are some restrictions about these 
rack prices, wholesale prices, their information that belongs 
to the people that we bought it from. Some of the data we used, 
we only gain access to their data so that we can actually turn 
a switch on, look at the data, and the switch gets turned off. 
So that type of data is not releasable to us.
    In terms of Bill's suggestion that GAO and the FTC would be 
willing to work together, I clearly would like to run this by 
for institutional approval. I think it's a great idea. We would 
love to have a conference. We would love to put the brains in 
the room and have a conference and talk about methodology and 
talk about what data may be available. We would welcome that.
    Mr. Tierney. Look, if Mr. Kovacic wants to insist on you 
giving information and you want to give it, I recommend you 
hire Dick Cheney's attorney, and then you can keep it from him, 
you won't have to worry about giving it to him.
    Let me just wrap up here by asking Mr. Caruso a question. I 
am going to put on the record here, the EIA did an analysis of 
the administration's energy legislation. And am I correct in 
asserting that the finding of that analysis was that the impact 
of the bill on gas prices would be negligible?
    Mr. Caruso. The EIA analysis of the Conference Energy Bill 
only looked at those components which we could quantify and 
analyze use in our National Energy Modeling System. The results 
that you are referring to concerning negligible effects on 
prices--are limited to those components. With that 
clarification, you are correct.
    Mr. Tierney. Thank you.
    Mr. Chairman, I yield back. Thank you.
    Mr. Ose. The gentleman from Ohio.
    Mr. Tiberi. Thank you, Mr. Chairman.
    Mr. Holmstead, just a few more questions on the boutique 
blends. I represent a district in Columbus, OH. And, my 
understanding is that there are different requirements, blend 
requirements in Detroit, Pittsburgh, Chicago, in our region. In 
your opinion, if Columbus is experiencing a shortage of 
gasoline supply over the 4th of July weekend, what is the cost 
of providing--or is there additional cost in providing gasoline 
to Columbus because of the fact that Columbus has a different 
blend than Chicago, Detroit, or Pittsburgh if they had an extra 
supply, additional supply? I guess the question would be, is 
the price fungible or the gasoline fungible with respect to 
those different markets?
    Mr. Holmstead. I don't know enough about the requirements. 
I know specific markets. But, I can say that is an issue we are 
concerned about. Because of the different State requirements, 
if there is a supply disruption, if a refinery goes down, if 
there is a problem with a pipeline, then if all gasoline were 
the same, it would be relatively easier to shift from one 
market to the other.
    The way it works now is, if the requirements in Columbus 
are equal to or less stringent than the requirements in Chicago 
or Detroit, they can use that gasoline because that gasoline 
may well meet the requirements in Columbus. There is a degree 
of fungibility there, but it's not completely fungible. And, I 
think that is an issue that people are concerned about.
    Our studies have shown that, again, as long as everything 
works well, that the pipelines run the way they are supposed to 
and the refinery is up and running--which is the case the vast 
majority of the time--then we don't see significant problems 
with these different fuel blends. And, in fact, when there is a 
disruption, we do have the ability under our regulations to 
grant temporary waivers. And, again, this is quite different 
from the California situation.
    We have done that; where there has been a refinery fire, 
where there has been a problem, we have granted temporary 
waivers.
    Mr. Tiberi. You have granted waivers?
    Mr. Holmstead. Yes, we have granted those waivers where 
there are specific supply disruptions. So, I guess I agree that 
there are legitimate concerns about the balkanization of the 
gasoline market.
    We believe that we have done what we can now to maximize 
the flexibility we have under current law, but it is something 
that we would continue to look at.
    Mr. Tiberi. Don't those requirements--you made a statement 
in your written testimony that the--in fact, you even 
reiterated it in your oral testimony, that environmental 
regulations have had minimal effect on gasoline prices. 
Wouldn't it be true that prices have had an impact or there 
have been impacts on prices in markets where there is a 
different brand or different blend required that's not as open 
on the marketplace? Meaning, if a specific blend is required in 
Chicago, isn't that going to increase the gas since the supply 
is narrower for Chicago than the rest of the region?
    Mr. Holmstead. Typically, what our studies have shown is 
that when a State is going to adopt a requirement like that, we 
encourage them to have a collaborative process where they work 
with the refiners and the environmental community, and to try 
to understand the kind of gasoline that refiner, given its 
equipment, given its feedstock, can readily supply to that 
market. Is there a cost? The answer is, yes, but it's 
typically, you know, a pennies per gallon kind of cost.
    The real problem comes when the refineries that typically 
supply that market have a disruption, and whether, you can 
bring in fuel from another refinery that doesn't typically 
supply that market. And that's where the real concerns about 
price volatility have come up. Again, we try to address those 
where we are aware of them.
    I mean, I can tell you we go in sort of full red alert 
mode. We have a group of people who, when there is an issue, 
which happens a couple times a year, immediately assesses the 
situation. We talk with our colleagues at DOE and EIA to 
determine whether, given the circumstances, we ought to do some 
sort of a temporary waiver. And, we have done that to try to 
address those concerns.
    Mr. Tiberi. OK. Switch gears. Mr. Maddox, Secretary Maddox, 
just trying to get some clarification on this issue. When 
President Bush announced in November 2001 his goal of filling 
the SPR to capacity, the Energy Department said that ``the SPR 
is intended in the short run to smooth out price hikes.''
    That was the quote from the Energy Department. When and why 
did the policy change?
    Mr. Maddox. I think the fill policy was developed to have 
minimal impact in the markets, and that was how the schedule 
was developed. We've tried to maintain a level, with a few 
exceptions, between 100,000 and 150,000 barrels a day. And, so 
I think probably the reference was to that. I don't know the 
full quote and context. But, that's always been our goal, to 
fill it in such a manner that it did not disrupt the market or 
did not create stress on markets.
    As you said, I think it's less than 0.2 percent of 1 
percent, which is real world, kind of rounding error on an 80 
million barrel-a-day global market. I think that's generally 
been the strategy. I think that's probably what they are 
referring to, lacking other context.
    Mr. Tiberi. Under statutory language, under current law, 
just to followup, a drawdown of the SPR may occur--may not be 
made unless the President finds that a drawdown and a sale are 
required to respond, prevent, or reduce a severe energy supply 
interruption. And, I'm sure you are familiar with that.
    Mr. Maddox. Yes.
    Mr. Tiberi. Given the criteria and the current situation, 
does the President have the authority in your opinion to 
drawdown the SPR at the current time?
    Mr. Maddox. No. Right now, as we talked earlier, there is 
oil on the market out there at a price, and people are getting 
it. Our stocks are close to the average level. There is no 
disruption.
    There is a great deal of potential for disruption right now 
as there are a number of hot spots in this world right now--
that produce oil that the United States uses and the world 
market uses. But right now, there is no disruption, per se.
    Mr. Tiberi. Do you think that when President Clinton 
released oil from the reserve in September 2000 when prices 
were about $37 per barrel, that there were circumstances that 
allowed him to do that?
    Mr. Maddox. To my knowledge--and, Guy, you can correct me--
I'm not aware of any disruptions at that time.
    Mr. Tiberi. You would agree that, by Christmas of that 
year, oil prices had dropped to about $22 per gallon?
    Mr. Maddox. I will take your word on that.
    Mr. Tiberi. Mr. Caruso, are you familiar with that 
situation?
    Mr. Caruso. Yes. At the time, I wasn't in Government, and I 
was asked that same question. And my answer was, ``no.'' I 
didn't think there were the appropriate circumstances.
    Mr. Tiberi. Why do you think--what circumstances led, in 
the world or in America, prices of oil to go down to $22 per 
barrel by Christmas of that same year?
    Mr. Caruso. I think it was largely the result of demand 
being weaker and the additional supply put on the market by 
OPEC countries. My recollection of the actual data is a little 
bit sketchy. But, that's my recollection of that.
    Mr. Tiberi. Back to Mr. Maddox.
    Assume we all agree that the strategic petroleum reserves 
should not be tapped, was it prudent to say so publicly, in 
your opinion?
    Mr. Maddox. I believe so. I think one of the things we are 
trying to do is to create certainty in the market's 
decisionmaking, and I think adding more variables to market 
decisionmaking with people trying to make long-term plans on 
prices is kind of counterproductive to an efficient market.
    There are enough variables right now in trying to decide at 
what price and how much oil to buy. I don't think trying to 
outguess the Government or trying to predict what the 
Government is going to do makes that job any simpler. And, in 
fact, it will create more risk for people who are trying to 
build stocks and make prudent decisions.
    Mr. Tiberi. Mr. Maddox, would you concur that the No. 1 
issue affecting gas prices today is the cost of crude oil?
    Mr. Maddox. Yes.
    Mr. Tiberi. Mr. Caruso.
    Mr. Caruso. I would say that's the No. 1 issue, yes.
    Mr. Tiberi. Mr. Holmstead.
    Mr. Holmstead. Yes. That's our view as well..
    Mr. Tiberi. Mr. Wells?
    Mr. Wells. I agree.
    Mr. Tiberi. Last but not least?
    Mr. Kovacic. Yes, it is.
    Mr. Tiberi. Thank you. Mr. Chairman, I yield back.
    Mr. Tierney. Would the gentleman yield for just a second.
    Mr. Tiberi. I yield, Mr. Chairman.
    Mr. Tierney. I want to clarify just one part of that. I 
understand the gentleman's point with regard to the statutory 
language, that the President may not have the authority to take 
oil out of the Strategic Petroleum Reserves.
    Mr. Maddox, do you think there is any statutory prohibition 
against the President not continuing to fill it at any time, 
not adding oil to it?
    Mr. Maddox. To my knowledge, there is not.
    However, I think there are policy implications and negative 
impacts to not being consistent in your approach to filling the 
reserve.
    Mr. Tierney. That's consistent with what your comments were 
about that earlier.
    But there is no statutory prohibition about somebody making 
the decision to not keep filling oil at a particular level?
    Mr. Maddox. I don't believe so.
    Mr. Tierney. Thank you.
    Mr. Ose. I have here a copy of the GAO's study.
    Mr. Wells, I know that in these studies, at least in 
previous reports on different subjects, I have always found the 
assumptions under which the study was done, and I have looked 
through the table of contents, and I can't find them. Do you 
offhand remember where they are?
    Mr. Wells. I'm sorry, I didn't hear the question, Mr. 
Chairman.
    Mr. Ose. I'm looking through your study. And, I know, in 
previous GAO studies, there have always been sections that 
highlight the assumptions under which GAO does their work. I 
can't find those here.
    Mr. Wells. We have a scope and methodology section that 
would describe the process that we use to build the study, and 
the entire number of appendix, I believe it is No. 4 that goes 
into quite a lot of detail, the econometric assumptions that 
were used in how we built the model, page 110.
    Mr. Ose. Actually, 122, I believe.
    While we are doing that, Mr. Kovacic, what mergers has FTC 
looked at since 2000? I think Mr. Tierney asked a fair question 
earlier, that your studies or the analyses that are in front of 
us today stop at the year 2000. Have we had mergers that have 
occurred since then?
    You can take us through the complexity of the HHI analysis, 
if you wish. But my concern here is that, I know you guys are 
pretty vigilant, I just want to get on the record that you have 
in fact looked at such mergers as may have occurred. So if you 
would share that with us, I would appreciate it.
    Mr. Kovacic. Yes. Since 2001, there have been several 
significant transactions that we have examined. And if you 
could bear with me for a moment so that I have the count. A 
couple of those we have mentioned this morning already. The 
commission did examine Chevron's acquisition of Texaco in 2001 
and demanded a significant number of divestitures associated 
with that transaction. We did look at Valero/UDS which also was 
permitted to proceed on the condition that a number of 
substantial divestitures be made.
    Phillips/Conoco in 2002 also was the subject of close FTC 
review, and that transaction was permitted to proceed with 
significant divestitures, including refinery and terminal 
assets.
    And, Shell/Pennzoil Quaker State in 2002 is the last of the 
transactions in which the Commission took action.
    There have been other mergers in which the FTC did examine 
the transaction in detail and did not act. If my random access 
memory can summon them on the spot, I believe one was Phillips/
Tosco. If I could turn to my colleagues for a second. Sunoco/
Coastal is another transaction that we examined and did not 
intervene.
    If I have missed any, Mr. Chairman, I will be sure to 
complete the list for you in writing.
    In each of these transactions--and this does relate to the 
point of the Commission's work in doing studies--we do 
exhaustive, case-by-case examinations of each of these 
transactions, and we look at them in a considerable level of 
detail. Over the course of doing those reviews, our basic aim 
in most instances is to avoid net increases in concentration. 
So we look very carefully for overlaps.
    And, I would say that, even though we have not attempted 
the sweeping kind of empirical assessment that Mr. Wells 
referred to, it's the process of doing the exacting assessment 
of competitive effects in each of those markets and looking at 
the institutional arrangements that govern the way in which 
refining and distribution takes place that gives us the great 
concerns that I have expressed about the GAO study.
    Mr. Ose. I want to dwell on that particular aspect of this, 
Mr. Wells. And I need to have you be willing to chime in here. 
If I understand, the study that GAO did, you focused the 
analysis on the pads, the seven pads across the country.
    Mr. Wells. That is correct.
    Mr. Ose. If I understand what FTC does, it's not based on 
the pads but perhaps the unique markets within the seven pads.
    Mr. Kovacic. Precisely. One of our fundamental concerns 
with the GAO study is that, in many ways, they are using this 
measure of concentration, refining concentration at the PADD 
level. Based on our examination, transaction-by-transaction, 
over the past 20 years where we have been principally 
responsible for reviewing mergers, that's not an acceptable 
proxy.
    Mr. Ose. It would be of immense help to those of us charged 
with responsibility of making decisions on these issues to have 
you all resolve the difference. I mean, it would be helpful to 
us for you guys to get that methodology agreed upon.
    Now, the other question I have is that Mr. Holmstead 
indicated that the gasoline is fungible in certain directions 
but not in other directions. In other words, if your gasoline, 
say, in Chicago, the standards of that gasoline may well be 
higher than the gasoline available--I think Mr. Tiberi's 
example was Columbus, OH. So it's fungible from Chicago to 
Columbus, but it may not be fungible from Columbus to Chicago.
    And it strikes me that most of the boutique fuels we have 
in this country were designed to fit highly urbanized areas, 
which happens to be where most people live, which happens to be 
where the markets are the largest, which happens to be where 
the most fuel is sold. So it seemed to me that we need to 
resolve this issue of the impact of the fungibility of the 
fuel. I think you'd probably contend that it affects things. 
I'm not sure that would be the same position that you have at 
GAO.
    Mr. Wells. The position we found in our modeling clearly 
when you--because we tried to delineate and separate 
conventional gasoline and reformulation gasolines and boutique 
gasolines. And, I believe, in almost all cases, the 
reformulation in boutique had greater cost implication impacts. 
So, there is differences between the gasoline in terms of the 
impacts to the mergers, as the econometric model pointed out.
    Mr. Ose. I think there are differences. And, I'm trying to 
resolve whether or not one of the assumptions in your study, if 
I read one of the comments here correctly, may have been that 
the gasoline is largely fungible. I'm not sure that's the case. 
I will send you a question in writing so you can clarify that.
    I have no further questions for this panel.
    Mr. Tierney.
    Mr. Tierney. Thank you, Mr. Chairman.
    Mr. Kovacic, I want to revisit an area. Are you familiar 
with Senator Ron Wyden's report that was filed June 15, 2004?
    Mr. Kovacic. I am, sir.
    Mr. Tierney. It's entitled, ``Campaign of Inaction: The 
Federal Trade Commission's Refusal to Protect Consumers From 
Consolidation, Cutbacks, and Manipulation in America's Oil and 
Gasoline Markets.''
    Mr. Kovacic. I am familiar with it.
    Mr. Tierney. One of the points made is that, of course, the 
FTC is not taking action to stop Shell from shutting down its 
refinery in Bakersfield even though the agency had previously 
required Texaco to divest this refinery in order to remedy what 
it found to be a likely anticompetitive impact of the Chevron 
Texaco merger. The shutdown would eliminate the competitive 
benefit from the divestiture that the agency requires.
    If I read this right, Texaco wanted to merge with Chevron. 
The FTC then required that Texaco divest itself of the 
Bakersfield refinery, because if they didn't do that, it would 
be a likely anticompetitive impact. Yet, no sooner had Shell 
had that refinery in place, it now looks as if Shell is 
intending to close a 70,000 barrel-per-day refinery in 
Bakersfield even though the company records show the refinery 
is currently profitable. The Shell documents showing the 
refinery profits are attached to the report of Senator Wyden.

    Shell's announcement of its decision to close the 
Bakersfield refinery claimed that ``there is simply not enough 
crude supply to ensure continued operation would be 
economically viable.'' But recent news articles have reported 
that both Chevron and Texaco and State of California officials 
estimated that the San Joaquin Valley, where the Bakersfield 
refinery is located, has a 20 to 25-year supply of crude oil 
remaining. In fact, the Bakersfield California reported that, 
on January 8, 2004, that Chevron Texaco plans on drilling more 
than 800 new wells in that valley this year, which is 300 more 
new wells than last year. The fact that Texaco, Shell's former 
partner in the Bakersfield refinery, is increasing its drilling 
in the area calls into question Shell's claim that a lack of 
available oil supply is the real reason for closing the 
Bakersfield refinery.
    Another reason to question Shell's claim about the 
availability of crude oil is the fact that Shell is currently 
the subject of an investigation for misstating its crude oil 
reserves. Despite Shell's claims that its decision to shut the 
refinery was not made to drive up profits, the company has 
admitted that ``there will be an impact on the market.'' That 
impact will be to drive prices even higher. Oil companies 
predicted that the shutdown of the Powerine refinery would 
boost gasoline prices by 2 to 3 cents. That refinery's capacity 
was only 20,000 barrels per day. Because of the much larger 
capacity of the 70,000 barrel-per-day Bakersfield refinery, 
Shell's shutdown of this refinery would have an even larger 
impact on prices at the pump.

    Why did the FTC say that it had first required that Texaco 
divest itself of Bakersfield and then, according to Senator 
Wyden's study, do nothing as Shell announced plans to close 
down the 70,000 barrels-per-day facility?
    Mr. Kovacic. I can confirm to you, and the Commission has 
authorized me to inform the committee, that the FTC is 
conducting a formal investigation of Shell's announcement that 
it is going to close the facility. I believe the scheduled 
closing date is tentatively say for the fall of this year.
    I can confirm to you that the Commission has opened and is 
conducting a formal investigation to examine possible antitrust 
violations associated with the closure of that facility. It 
recognizes the urgency and time sensitivity of the matter. It 
is using its investigative resources at this moment to examine 
possible antitrust consequences of that event.
    Mr. Tierney. I'm certainly glad to hear that.
    But, are there other incidents like this that have occurred 
since 2000, where certain requirements of the FTC, in order to 
allow a merger or consolidation go forward, have been put in 
place and then the monitoring has not gone on from the FTC?
    Mr. Kovacic. For every transaction in which we have parties 
under order, which is the typical approach for a consent order, 
we monitor compliance with those requirements with the utmost 
urgency because it's fundamental to the legitimacy and 
effectiveness of any of our orders. We examine them carefully. 
I'm aware of no instance in which we have permitted a deviation 
from the requirements of the order to pass without challenge.
    Mr. Tierney. Given the plans of Shell to close this 
Bakersfield refinery in the fall of this year, when do you 
think that your review will be done?
    Mr. Kovacic. I can't provide a specific date. But, I can 
only emphasize, as the Commission has instructed me to do 
today, that the inquiry is proceeding with the greatest 
possible urgency in light of the announced timetable for the 
closure of the facility. And we are fully aware that completing 
that inquiry sooner is absolutely indispensable.
    Mr. Tierney. How transparent will your review be?
    Mr. Kovacic. Typically, where the Commission uses a formal 
investigation, it requires a vote of the Commission, a formal 
vote, to close the investigation. It has been the increasing 
custom of the Commission and the Department of Justice over the 
past 3 years, in closing an investigation that we regard as 
having significant policy import, to reveal the bases on which 
a decision to close the investigation was taken.
    Mr. Tierney. And, will that be done before the vote is 
taken appreciably or only at the time of the vote?
    Mr. Kovacic. It is typically at the time that the 
investigation is closed that the Commission chooses to issue a 
statement that explains the reasons for closing the 
investigation. It is at the Commission's discretion to make 
announcements prior to the point at which it takes action 
either to prosecute or not to prosecute.
    But, typically, the disclosure of the bases for not taking 
action takes place at the time the decision not to prosecute is 
made.
    Mr. Tierney. Well, I would only suggest for whatever it's 
worth that given the questions that have been raised by RAND, 
by the GAO, by others, Consumer Reports, whatever, about the 
FTC's inaction or purported inaction, of some of these 
instances and the conduct of the industry, that, hopefully, 
your commission might decide to be a little more transparent in 
advance of its decision so that the public gets to see that it 
has done a thorough scrutiny of this in a very open manner and 
thorough manner, and that we all have a little heads-up to 
offer whatever input might be necessary to make sure there is a 
full and complete record. We appreciate that----
    Mr. Kovacic. I will certainly convey that to the 
commissioners themselves. I will make sure that your 
observations on that point are known to them as promptly as 
possible.
    With the greatest respect, Congressman, I think that as our 
statement tries to lay out, to speak of the Commission's 
program as inaction is mystifying. I think that is a 
contentless description of the Commission's program here. It is 
a fair point to debate the level of activity, but is it really 
a fair approach to say that it's been one of inaction?
    Mr. Tierney. Well, we will find out as we delve further 
into this. It's certainly not been as active as some of us 
would like to see, and I think, as many of the reports 
indicate, there hasn't been all the action that would be 
necessary to protect the consumers. So that would leave us with 
at least some inaction which I base my statement upon and some 
great distress for consumers who are paying the price at the 
pump. And, hopefully, we can put some policy around that to 
make sure that, as we move forward, we will all be on the same 
page. Thank you.
    Mr. Ose. I thank the gentleman. I want to echo his comments 
regarding the Bakersfield refinery which, if I understand 
correctly, is scheduled to close November 1. I know that the 
Attorney General in California is looking at this issue, and I 
know, pursuant to Shell's announcement, I have received 
anecdotal evidence that a number of buyers or potential buyers 
have gone to look at the refinery. There is a confidentiality 
agreement required for them to see the actual operating results 
of the refinery, so I can't give you anything more. But, I do 
appreciate the gentleman from Massachusetts's interest, because 
I share it, and I hope FTC does follow through.
    Mr. Kovacic. I can assure you, Mr. Chairman, that we regard 
this as a matter of particular urgency and importance. And we 
intend to cooperate, and we have been cooperating as fully as 
possible, with our colleagues in the State of California. And I 
can assure you that this is a matter of the greatest attention 
and urgency for the Commission, sir.
    Mr. Ose. Every time I fill my tank, I will be thinking of 
you.
    The gentleman from Ohio.
    Mr. Tiberi. Speaking of refineries, Mr. Chairman.
    Mr. Caruso, we heard today that crude oil is not in short 
supply. But, we also heard that refining capacity is nearly at 
capacity in America. In your opinion, how much would we have to 
increase our refining capacity in the United States to have a 
meaningful impact on lowering pump costs, fuel costs at the 
pump?
    Mr. Caruso. Well, that's, of course, a very complex issue, 
and we haven't studied it that directly. But, clearly, the lack 
of refining capacity, particularly in the conversion capacity, 
is an exacerbating factor to the higher prices of gasoline. 
It's not the No. 1 issue, as we have all agreed here, but it's 
a contributing factor.
    An increase in refining capacity certainly would help with 
future gasoline prices, but I couldn't put a specific number on 
it at this time.
    Mr. Tiberi. Mr. Maddox, do you want a shot at that?
    Mr. Maddox. I wouldn't venture a guess. I think we referred 
to earlier comments about crude being the major driver right 
now.
    Mr. Tiberi. But you would concur--and you don't know what 
the number is, but added refining capacity at some point would 
lower fuel costs?
    Mr. Maddox. Well, I would say that, with the expected 
continued growth in refined products with economic growth over 
the next 10, 15 years, as I mentioned in my opening statement, 
we are going to need more refineries if we are going to have 
sufficient gasoline available. And, you know, a scarce 
commodity demands a higher price. I think that's basic 
economics.
    Mr. Tiberi. Thank you.
    Thank you, Mr. Chairman. You want a shot at that? I don't 
think anyone's willing to give me a number. Does the FTC have a 
number in terms of capacity, refining capacity that would have 
an impact?
    Mr. Kovacic. We don't sir. No.
    Mr. Tiberi. Would you concur with both Mr. Caruso's 
statement and Mr. Maddox's statement?
    Mr. Kovacic. I would.
    Mr. Tiberi. Thank you.
    Mr. Ose. All right. I want to thank this panel for their 
participation.
    As I said earlier, there are a number of questions that we 
have not gotten to. Given time constraints, we will be 
forwarding those to you in writing. We would appreciate timely 
responses. This record will remain open for 10 days as it 
relates to this panel and the next.
    Gentlemen, I appreciate your appearance. I look forward to 
your contributions for solutions on this. I thank you for your 
participation. We will take a 5-minute recess.
    All right. I want to welcome the second panel to our 
witness table. For today's hearing we're joined in this second 
panel by Mr. Bob Slaughter, who is the president of the 
National Petrochemical and Refiners Association and is also 
appearing on behalf of the American Petroleum Institute.
    He is joined by Mr. Michael Ports, who is the president of 
the Ports Petroleum Co., Inc., and is here on behalf of the 
Society of Independent Gasoline Marketers of America and the 
National Association of Convenience Stores; and, if I am 
correct, he is from Mr. Tiberi's district--State. Don't you 
represent the whole State?
    Mr. Tiberi. Not yet.
    Mr. Ose. Well, you should.
    We are also joined by Mr. Ben Lieberman, who is the 
director of air quality policy at the Competitive Enterprise 
Institute; and Mr. Blakeman Early, who is the environmental 
consultant for the American Lung Association.
    Gentlemen, welcome. As you saw in the first panel, we 
routinely swear everybody in. So, if you'd all please rise.
    [Witnesses sworn.]
    Mr. Ose. Let the record show the witnesses all answered in 
the affirmative.
    Now, we have received each of your written statements. They 
have been entered into the record. We have, in fact, read them, 
and we are going to give you each 5 minutes to summarize.
    As you saw in the first panel, my gavel is heavy at 5 
minutes. Please stay within that time requirement, given our 
time constraints.
    Mr. Slaughter you're recognized for 5 minutes.

      STATEMENTS OF ROBERT SLAUGHTER, PRESIDENT, NATIONAL 
    PETROCHEMICAL AND REFINERS ASSOCIATION; MICHAEL PORTS, 
  PRESIDENT, PORTS PETROLEUM CO., INC.; BEN LIEBERMAN, SENIOR 
   POLICY ANALYST, COMPETITIVE ENTERPRISE INSTITUTE; AND A. 
    BLAKEMAN EARLY, ENVIRONMENTAL CONSULTANT, AMERICAN LUNG 
                          ASSOCIATION

    Mr. Slaughter. Thank you, Mr. Chairman. I'll try to skip 
through the things even in my oral statement that have already 
been established.
    One, we did establish earlier that roughly 60 percent of 
the current costs of gasoline basically are due to taxes, and 
particularly to the cost of crude oil. So we have established 
the fact that the recent run-up in demand for crude oil has had 
a significant impact.
    The International Energy Agency has said that economic 
expansion is fueling the biggest increase in world oil demand 
in 16 years. Chart No. 2 shows the strong correlation between 
crude costs, our major feedstock and gasoline prices, again 
establishing that fact.
    We also have established the fact that fortunately 
refineries have been able to run at 95 to 96 percent of 
capacity for most of this year, which is far in excess of what 
we see in other heavy manufacturing industries.
    We also have established the fact that we no longer have 
sufficient domestic refining to match our U.S. demand, 
particularly for gasoline. We are dependent on imports for 10 
percent. There has been no increase in U.S. refining capacity 
for the past 3 years and no new refineries since 1976, although 
existing refineries have been modernized since that time. U.S. 
refining capacity in 1981 was 18.6 million barrels a day with 
325 refineries. Today, we have 149 refineries with a total 
capacity of 16.8 million barrels per day. While U.S. demand for 
petroleum products has increased by over 21 percent since that 
time, domestic refining capacity has actually decreased by 10 
percent.
    If I could see the next chart, one of the major factors, 
cost factors, for the industry is the cost of environmental 
requirements. And this is the regulatory blizzard which shows 
all the different regulatory programs the industry is subject 
to this decade. We'll spend roughly $20 billion across the 
industry to comply with these programs, and most of them 
required by the Clean Air Act. Over the last decade, 1990 to 
2000, we spent another $20 billion to comply.
    We cannot say that we agree with EPA's characterization 
that these expenditures result in minimal costs to refiners. 
There are significant costs from these programs, which are 
nevertheless very important programs, and we support programs 
like this very strongly, both associations. But, we do believe 
that we have to take into account their impact on supply and do 
a better job of that in future than we have in the past.
    In the meantime, it's unclear whether new refineries will 
be built. One company has been trying to build a new refinery 
in the American Southwest, one of the fastest growing areas in 
the United States. After 10 years, it has little to show for 
its efforts. It's hoping to get an air permit this year, but 
may or may not.
    Certainly, New Source Review reform will be of help in this 
regard and also permit streamlining. ChevronTexaco, for 
instance, had to wait over a year this year to get permits for 
an ethanol tank, which the company had to have in California in 
order to comply with the ethanol mandate that's in effect now 
for gasoline due to the MTBE ban. Fourteen months is just too 
long to comply with a mandatory requirement like that, but 
that's the time they had to wait.
    Obviously, such a significant investment for these refining 
programs over the last 20 years has taken a lot of the 
available investment capital away from the industry to meet 
these environmental requirements. Particularly with the 
reinterpretation of the new-source review program it became 
difficult even to add capacity to existing sites. And, we do 
believe that we can do a better job in the future of estimating 
the impact on supply of these regulatory requirements than we 
have been doing.
    We need to be more careful also because, being dependent on 
imports for 10 percent of our supply, we have to make sure that 
our traditional suppliers of imports are given enough time to 
comply with the new regulatory requirements, as well, so they 
can continue to supply the increment that we've become 
dependent upon.
    We believe that we need to coordinate State initiatives. 
The ban on MTBE in California, New York and Connecticut were 
not well coordinated, and we don't think that enough attention 
was paid to the impact on supply.
    We do support elimination of the 2 percent requirement in 
reformulated gasoline for oxygenation. We believe that EPA 
should grant the waivers that have been requested by both 
California and New York until that repeal can be achieved.
    We think you have heard enough in the background on the 
history of industry investigations. You will hear about 
refinery profitability and industry profitability. The numbers 
do appear large. They are large numbers in isolation, but it 
takes a great deal of money to remain in this business and to 
put back into this business to produce the products that 
consumers depend on.
    So, we believe this has been a tough year. We think the 
industry has done its very best to keep supplying adequate 
products to the American people. We intend to continue doing 
that. And we look forward to your questions.
    Mr. Ose. I thank the gentleman.
    [The prepared statement of Mr. Slaughter follows:]

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    Mr. Ose. Our next witness is Mr. Jeffrey Ports. Sir, you're 
recognized for 5 minutes.
    Mr. Ports. Good morning, Mr. Chairman and members of the 
subcommittee. My name is Mike Ports. I'm president of Ports 
Petroleum Co., an independent motor fuels marketer 
headquartered in Wooster, OH. I appear before the subcommittee 
today representing the Society of Independent Gasoline 
Marketers of America [SIGMA], and the National Association of 
Convenience Stores [NACS]. Thank you for inviting me to testify 
today.
    Collectively, the members of SIGMA and NACS sell 
approximately 80 percent of the gasoline consumed in the United 
States every year. However, the vast majority of NACS members 
and all SIGMA members do not make gasoline and diesel fuel. 
SIGMA and NACS members are just as exposed as consumers to 
fluctuations in the overall supply, to volatility in the price 
of crude oil, and to the impact that volatility has on 
wholesale and retail motor fuel prices.
    In fact, independent motor fuel marketers represent the 
closest proxy for gasoline and diesel fuel consumers that 
exists in the Nation's motor fuel refining and distribution 
industry today. Shortages in gasoline and diesel fuel supplies 
impact independent marketers first, before your offices begin 
to hear complaints from consumers and businesses about the 
retail price of gasoline and diesel fuel.
    SIGMA's and NACS's message today to this subcommittee and 
to your colleagues in the House and Senate is really very 
simple. There are two main factors contributing to the high 
gasoline prices that motorists are paying this spring and early 
summer: one, high worldwide crude oil prices, and two, a very 
tight balance between gasoline supplies and consumer demand. 
There is very little that this subcommittee or this Congress 
can do legislatively in the short term to address either of 
these factors. However, SIGMA and NACS urge you and your 
colleagues to examine longer-term solutions to these problems 
so that the gasoline and diesel fuel price spikes we witnessed 
this year do not become the norm.
    World crude oil prices rose precipitously over the first 6 
months in the year. There are myriad reasons for these 
increases which have been addressed by others and which I will 
not cover here. The point I will make is that even if crude 
prices do fall significantly in the coming months, the second 
factor leading to the 2004 price spikes, tight gasoline 
supplies, will continue to exert significant upward pressure on 
gasoline prices in the future.
    If Congress wants to prevent future gasoline price spikes, 
SIGMA and NACS suggest that it focus its legislative attention 
on three issues: the expansion of overall gasoline supplies, 
the restoration of gasoline fungibility, and the increase in 
domestic motor fuel refining capacity.
    Simply stated, the ability of our Nation's motor fuel 
refining and distribution industries to increase gasoline 
production or transfer product from market to market in times 
of tight supplies and increasing wholesale and retail prices no 
longer exists. The environmental compliance burdens placed on 
the Nation's refining industry over the past 20 years has 
effectively destroyed the world's most efficient commodity 
manufacturing and distribution system. To enhance the quality 
of our air, an objective of which SIGMA and NACS are completely 
supportive, the government has imposed on domestic refiners 
tens of billions of dollars in costs, and has fragmented the 
motor fuels distribution system into islands of boutique fuel. 
But, as for all other good things, there is a price for this 
cleaner air that ultimately must be paid by consumers of 
gasoline and diesel fuel.
    If we collectively want to prevent future national and 
regional gasoline and diesel fuel price spikes, the current 
situation must be addressed and changed. There are no short-
term fixes to the interrelated issues of increasing overall 
gasoline and diesel fuel supplies and preventing future price 
spikes. Therefore, SIGMA and NACS urge Congress to examine a 
broad slate of legislative initiatives to address these issues 
in the medium and long term.
    No. 1, address boutique fuels by repealing the formulated 
gasoline oxygenate mandate, adopting a moratorium on new 
boutique gasoline and diesel fuels and conducting a detailed 
study to determine if the number of boutique fuels across the 
country can be reduced without sacrificing environmental 
protections or significantly reducing gasoline supplies.
    Two, encourage expansion of existing domestic refining 
capacity by adopting regulatory reforms that clarify new-source 
review applicability to refinery expansions and streamlining 
the Federal and State permitting process for expanding existing 
refineries and building new refineries.
    And three, incentivize investment in new refining capacity 
by adopting Federal tax incentives that encourage rather than 
discourage domestic refiners to expand capacity at existing 
facilities and build new facilities.
    SIGMA and NACS believe that we as a nation are at a 
crossroads with respect to motor fuels. If we continue along 
our present path, balkanization will proliferate. Domestic 
refining capacity will continue to stagnate or decrease and 
increased motor fuel prices and periodic price spikes could 
become the norm rather than the exception.
    We can either chart a different course or continue with the 
status quo. For independent motor fuel marketers and for your 
constituents, SIGMA and NACS hope that Congress leads the way 
to the new course.
    Thank you again for inviting me to testify today. I would 
be pleased to answer any questions my testimony may have 
raised.
    Mr. Ose. I thank the gentleman for appearing. I apologize 
for getting the name wrong. It's Mike Ports, not Jeff Ports.
    [The prepared statement of Mr. Ports follows:]

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    Mr. Ose. Our next witness, joining us in the second panel, 
is Mr. Ben Lieberman, who's the director of air quality policy 
at the Competitive Enterprise Institute.
    Sir, you're certainly--we're pleased to have you with us 
and you're recognized for 5 minutes to summarize.
    Mr. Lieberman. Good morning, Mr. Chairman and members of 
the subcommittee, and thank you for inviting me to testify. My 
name is Ben Lieberman, and I'm the director of air quality 
policy with the Competitive Enterprise Institute, a public 
policy organization committed to advancing the principles of 
free markets and limited government.
    My comments today will focus on those measures I believe 
Congress should consider to reduce the likelihood and severity 
of future gasoline price increases, such as the one we have 
experienced in recent months.
    Of course, there are several factors that influence the 
price of gasoline. Clearly, the rising price of oil is the 
single biggest reason for the 50-cent-per-gallon jump during 
the first 5 months of the year, but I am not going to say much 
about the price of oil because that's something largely outside 
of congressional control.
    On the other hand, the complex Federal regulatory burden on 
gasoline also adds to the price of gas, and it is something 
that is very much within congressional control. So my comments 
will focus on just a few ideas for streamlining these gasoline 
regulations.
    The current confusing patchwork of motor fuels is a 
relatively new phenomenon which got its start as the provisions 
in the 1990 Clean Air Act amendments took effect. Thanks to 
these new rules, we have something called ``reformulated 
gasoline,'' which is supposed to help smog be reduced in nearly 
one-third of the Nation. We also have something called 
oxygenated gasoline to reduce carbon monoxide. Even 
conventional gasoline is subject to several requirements.
    In addition, some States have come up with their own 
blends, as well, often in order to secure the needed EPA 
approval for their smog fighting plans. Overall, there are more 
than a dozen blends in use.
    Not only do some of these blends cost more to make, but the 
logistical burden of having to separately refine, store and 
ship all of them adds at least a little to cost and also 
increases the incidence of localized shortages and price 
spikes.
    RFG has cost 10 to 20 cents per gallon more than 
conventional gas in recent months, although only part of that 
is due to the higher cost of actually producing RFG. And these 
higher prices existing in some parts of the country, 
particularly California and the upper Midwest, can be traced to 
the more stringent regulations there, as well as some of the 
seasonal fluctuations. The tricky transition from winter grade 
to summer grade gasoline has been a problem in several 
springtimes in recent years.
    Now, at the same time that we have these new rules, the 
environmental record is decidedly mixed. In fact, though air 
pollution has been declining for decades, the trends were 
really just as strong in the years before the experiment in 
boutique fuels was initiated in the 1990's as they have been 
since that time.
    While the whole system is far from perfect, there are 
certain regulatory provisions that stand out as being 
particularly problematic. Most notably, the requirement that 
RFG contain 2 percent oxygen content has added to the cost of 
this fuel, but has done little to clean the air and has 
actually led to some water contamination concerns. The National 
Research Council has concluded that this requirement does 
little or no good, and an EPA expert panel has called for its 
elimination.
    We are long overdue to streamline the unnecessarily 
complicated and costly maze of regulations that has been 
accumulating since 1990. The easiest place to start is with 
those provisions like the 2 percent oxygen content requirement 
that do far more economic harm than environmental good. Other 
provisions could be retained but modified to achieve the same 
effect in a more cost-effective manner.
    And, just as important as streamlining the existing 
requirements is holding the line against expensive new 
regulatory or statutory provisions. This includes a new bill 
soon to be voted on in the Senate that's designed to fight 
global warming. According to analysis from the Energy 
Information Administration, the Climate Stewardship Act is 
estimated to add 9 percent to the price of gasoline by 2010 and 
19 percent by 2025. Given the experience in the past few 
months, this is the last thing the driving public wants or 
needs.
    Now, most of the opposition to gasoline regulatory reform 
comes from those arguing that even modest changes will have an 
adverse affect on air quality. These concerns are unfounded. 
Not only have we seen decades of improvements in air quality 
for reasons mostly unrelated to the use of boutique fuels, but 
we will continue to see this kind of progress for decades to 
come. The new Tier 2 motor vehicles, which will be phased in 
over the next few years, will be 70 to 90 percent cleaner 
burning than existing cars and trucks regardless of the fuel 
used to run them. In fact, studies have shown that fleet turn 
over from older and dirtier vehicles to cleaner new ones makes 
more of a difference than fuel changes.
    So, as we move into the Tier 2 era in the years ahead, the 
justification for these alternatives to conventional gasoline 
will further decline. In sum, I would say there's plenty of 
room to make gasoline regulations more consumer friendly, and 
to do so within the context of continuing improvements in air 
quality.
    Thank you.
    Mr. Ose. I thank the gentleman for his testimony.
    [The prepared statement of Mr. Lieberman follows:]

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    Mr. Ose. Our fourth witness on the second panel is Mr. 
Blake Early, who has been with us before.
    Sir, it's good to see you. I see your family has joined you 
today. You're recognized for 5 minutes to summarize.
    Mr. Early. Thank you, Mr. Chairman. You can call me Blake.
    Mr. Ose. Blake, you need to turn on your mic. There you go.
    Mr. Early. Thank you, Mr. Chairman. It's fine to call me 
Blake.
    I'm pleased to be here today on behalf of the American Lung 
Association, celebrating its 100th anniversary this year. The 
American Lung Association has been working to promote lung 
health through the reduction of air pollution for over 30 
years, and I'm happy to be here to discuss the elements of the 
Clean Air Act that impact the oil refinery industry and 
gasoline prices.
    I'm going to focus on the reformulated gasoline and low 
sulfur requirements for gasoline, on road diesel, and nonroad 
diesel fuel which we believe to be--have the biggest impact on 
the oil refining industry.
    RFG has been shown by EPA in California to be a cost-
effective program to reduce vehicle emissions that contribute 
to ozone and reduce toxic air pollution from vehicles by 30 
percent. Low sulfur gasoline, low sulfur on road diesel and 
nonroad diesel requirements, issued by both the Clinton and 
Bush administrations, are key to enabling a new generation of 
emissions controls on everything from SUVs to diesel trucks, to 
earth movers. These requirements will reduce smog, reduce fine 
particulate and toxic air pollution and save tens of thousands 
of lives, heart attacks, respiratory-related hospitalizations 
and reduce thousands of asthma attacks among children each and 
every year.
    The monetized benefits from these sulfur fuel programs are 
enormous, calculated to approximate $24, $51 and $53 billion 
each year for each of these three low sulfur programs when they 
are fully implemented. The sulfur limits for these gasoline and 
diesel fuel requirements do serve to make fuel more fungible 
because they will apply to all gasoline and all diesel.
    Any attempt to modify these rules at this juncture without 
thorough evaluation risks disrupting these programs in ways 
that could reduce or delay the large public health benefits we 
need them to deliver.
    Those who propose to change these rules bear a heavy burden 
of showing the need and demonstrating the benefit. This is 
because air pollution still threatens millions of Americans. A 
recent American Lung Association study found 441 counties, home 
to 136 million people, have monitored unhealthy levels of ozone 
and fine particles.
    We believe that should Congress choose to change the law or 
gasoline policy, it should do so in ways that make it easier 
for areas with dirty air to adopt clean fuels programs and not 
lock into the use of dirtier or conventional fuels.
    There is no evidence that current clean fuel programs 
significantly influence current gasoline price increases. 
Prices for both clean fuels and conventional gasoline have 
risen at the same rate broadly across the Nation, and prices 
for clean fuels generally have not risen faster for clean fuels 
than they have for conventional fuels. In some cases, 
conventional gasoline is more expensive or the same as RFG; and 
my testimony includes a chart which demonstrates this fact. 
It's an informal chart and not intended to be very precise. We 
think that perhaps the EIA should pursue this more thoroughly.
    The one clean fuel requirement that contributes to price 
volatility is the Federal oxygen requirement. The one thing the 
Bush administration should do is grant California's request for 
an oxygenate waiver. Granting the waiver would improve the air 
quality and reduce gasoline prices in California and probably 
other parts of the country. EPA has been avoiding a decision on 
this urgent matter and treating it as a routine matter.
    I introduce for the record, Mr. Chairman, a letter sent to 
Administrator Leavitt just yesterday, endorsing and asking him 
to grant the California waiver request. It's signed by nine 
health and environmental organizations.
    [The information referred to follows:]

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    Mr. Early. This is a very urgent matter. We believe that 
the agency is dragging its feet. It has had information 
available to it on the California waiver since the year 2000, 
so when Mr. Holmstead says, gee, this is really complicated and 
we have to look at the information, he's had about 4 years. And 
we fully support it. And, of course, I would observe that every 
member of this panel supports it.
    We hope that maybe we can get this done and have a 
favorable impact both on the environment and on gasoline prices 
in California.
    Thank you, Mr. Chairman.
    Mr. Ose. I thank the gentleman. The letter he referenced 
without objection will be made a part of the record.
    [The prepared statement of Mr. Early follows:]

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    Mr. Ose. As you saw in the first panel, we will now go to 
questions of our witnesses.
    Mr. Slaughter, you had a chart up--if you could put up the 
chart that had the gasoline pump tanks. Now, in that chart you 
have taxes at the top, distribution and marketing, refining and 
crude oil. And I believe it's your testimony that the crude oil 
is market dictated, the taxes are fixed by fiat, and the 
primary variables are the two middle portions, refining in one 
case, and distribution and marketing in the other. Is that 
correct?
    Mr. Slaughter. It is. There's variation, of course, in 
crude oil price.
    Mr. Ose. But it's beyond our control.
    Mr. Slaughter. Yes; 40 percent is traditionally a low point 
for crude oil. It has been more, and the refining number at 31 
is traditionally less than that. That 31 percent is a high 
point that's been reached only twice in the last 4 years.
    Mr. Ose. OK. Within the refining portion and the 
distribution and marketing portion, there is a cost element and 
then there is a profit element. Can you break those out 
accordingly?
    For instance, a refiner, of that 31 percent, how much would 
be cost that's inescapable, and how much would be profit to the 
bottom line of the refiner?
    Mr. Slaughter. It's difficult to break it out exactly. 
There are indications that the refining profit can be in the 
neighborhood of 2 cents per dollar of capital employed. 
Traditionally, the return on investment in the refining 
industry is about 5 percent, so the piece of that that is 
actual profitability is relatively small.
    I'd be glad to get back to you with more definite 
information, but it would be difficult to be definite beyond 
that.
    Mr. Ose. Would the same factors dominate the distribution 
and marketing side, too?
    Mr. Ports, I mean, you're more on that than Mr. Slaughter.
    Mr. Ports. Yeah, absolutely. I mean, that's probably a 
pretty historically--those are pretty historic levels. While 
the refining industry has certainly done well lately, the 
marketing side has basically been in its typical rut, so to 
speak. It's a very difficult business.
    Mr. Ose. Well, Mr. Slaughter just indicated that 2 cents of 
every dollar represents profit to the refiner. Does 2 cents of 
every dollar represent--I should say ``margin to the refiner.'' 
Does 2 cents of every dollar represent the margin to the 
wholesalers and the like?
    Mr. Ports. No. It's very hard to--again it's hard to 
quantify that, and I'm not evading the answer because there are 
different areas of the country, different real estate costs in 
different areas of the country, so some folks do require, you 
know, a higher margin than other areas of the country. So, it 
is a big, big variable across the United States.
    Mr. Ose. Is it possible to break it out by geographic area 
or by pad or by market?
    Mr. Ports. If we could get back to the committee with that 
information, that would be great.
    Mr. Ose. All right. We'll send you a question in writing. 
My objective is to break down within that framework how much 
profit, how much cost is embedded in those percentages.
    Now, Mr. Slaughter, you talked a little bit about the 
variability in the price of the crude. It seems to me that 
almost every day we get a new influence on that. We've dealt 
with Venezuela strife in terms of productivity or politically. 
We're dealing with the Iraq question and the availability in 
production that gets to the ports. This thing in Russia where 
YUKOS is now under severe strain for whatever reason; 
apparently there's an issue of liquidity in terms of their 
ability to meet their contracts. Is there going to be a 
substantial impact on our availability of crude?
    Mr. Slaughter. Well, when it comes to YUKOS, I mean, there 
has been a lot of discussion on that point since it was first 
raised yesterday in some of the media. There is some feeling 
among analysts that even should YUKOS experience liquidity 
problems or go into bankruptcy that their facilities would 
still operate. This is typically what happens in the United 
States. So YUKOS could continue.
    But, there is definitely an uncertainty premium in crude 
these days because of the events in the Middle East, not just 
in the Middle East, but also concern about Venezuela, about 
Nigeria and other areas. And, that, you know, it is one of the 
costs that are inherent in being 60 percent dependent on crude 
oil imports.
    Mr. Ose. Mr. Maddox testified, if I recall, that premium, 
that risk premium, may be as high as $10 a barrel.
    Mr. Slaughter. I've seen analysts' opinions that put it 
that high. Others put it in the neighborhood of $4 to $5.
    Mr. Ose. Is that sort of like the minimum and maximum? Do 
those numbers constitute the minimum and maximum risk premiums?
    Mr. Slaughter. Well, only in the sense that they are the 
minimum and maximum figures that I've seen from analysts. But I 
have seen $10. There is no scientific determination.
    Mr. Ose. There's no scientific consensus as to what the 
risk premium is?
    Mr. Slaughter. There is not, but a number of analysts have 
said it's on the order of as much as $10. Others are about half 
that.
    Mr. Shays. I noticed in Nigeria that, I think, Mobil 
declared force majeure on their production facilities, and that 
the white collar workers for, I think, Shell, have notified 
Shell of a pending strike in 3 weeks' time.
    Mr. Slaughter. Well, I believe that's true. But there have 
been problems in Nigeria for some time. It was in the news 
about 3 weeks ago that things were cleared up there. They 
obviously have broken out again. So, as you pointed out earlier 
in your questioning--I mean, these things tend to come and go, 
and you know, a lot of areas that we are dependent on for crude 
supply have problems.
    Mr. Ose. You also testified, if I recall correctly, that at 
some point recently, in the recent past, we had about 300-plus 
refineries producing or refining capacity of 18.5 million 
barrels a day.
    Mr. Slaughter. 1981.
    Mr. Ose. OK. And then currently we have about 150 with 
refining capacity of 16.8 million barrels. So that's a decline 
of 1.7 million barrels a day of refining capacity from 18.5 to 
16.8.
    Mr. Slaughter. Yes. Right.
    Mr. Ose. And, that's since 1981.
    Can you give us any indication of what demand has done 
since 1981 in terms of what was overall demand for refined 
product in 1918 versus overall demand for refined product in 
2004?
    Mr. Slaughter. It has grown by 25 percent.
    Mr. Ose. So, what was it in 1981?
    Mr. Slaughter. Well, it was on the order--it's 16 million 
barrels per day and change, and now it's 19 to 20 million 
barrels per day.
    Mr. Ose. Just a second. Let me write that down.
    So, that leaves us short somewhere between 2--no, 3 and 4 
million barrels, 2 to 4 million barrels a day in refining 
capacity.
    Now, I understand we had been importing refined products 
somewhere on the order of 1,020,000 barrels a day, I think is 
the number. But, now it's fallen to about 980,000.
    Mr. Slaughter. There's been a decline of about 7 percent 
this year, and there are various opinions as to why that has 
occurred.
    Mr. Ose. Such as?
    Mr. Slaughter. Well, it could be that importers have been 
unwilling or unable to invest in some of the requirements 
necessary to meet the new gasoline sulfur specs. In some 
instances, it could be that foreign suppliers have been unable 
to deal with the situation on the East Coast, in New York and 
Connecticut, with the ethanol mandate that is now in place in 
RFG in those States because of the decision to ban MTBE.
    Mr. Ose. It's the oxygenate mandate. You're not required to 
use ethanol. It's a de facto mandate?
    Mr. Slaughter. It's a de facto mandate. The only two really 
available are MTBE and ethanol. If you ban MTBE and you have to 
use RFG, you've got to go to ethanol; and that creates 
uncertainty for importers.
    These are essentially opportunistic suppliers to the United 
States. And, you know, they may decide they may be unable or 
just unwilling to supply, they may have other markets where 
they won't have to make these investments, and that may be why 
the numbers are slightly down on imports this year.
    Mr. Ose. All right.
    The gentleman from Massachusetts.
    Mr. Tierney. Thank you, Mr. Chairman. I want to read the 
panel some quotes from industry individuals and documents, and 
then I want to talk a little bit about some of the first 
quarter reports from some of the companies here.
    Back in November 1995 there was an internal Chevron 
document that revealed concerns of a senior energy analyst at 
the American Petroleum Institute convention, it says, ``If the 
U.S. petroleum industry does not reduce its refining capacity, 
it will never see any substantial increase in refining margins. 
A few months later an internal Texaco document warned that `As 
observed over the last few years and as projected into the 
future, the most critical factor facing the refining industry 
on the West Coast is the surplus refining capacity and the 
surplus gasoline production capacity. The same situation exists 
for the entire U.S. refining industry.' '' That was a document 
of March 7, 1996.
    And, last, we have a Powerine Refinery document, the 
internal Mobil Corp. e-mail of February 6, 1996, that ``We 
would all like to see Powerine stay down. Full court press is 
warranted in this case.''
    I say that because it seems fairly obvious from the GAO's 
report and others that the business has made a decision to 
decrease the amount of refining capacity, and as a result, 
their margins have appreciably gone up. Refinery closure and 
tight supplies have increased refinery margins and padded the 
oil companies' bottom lines according to one investigative 
report done by Senator Wyden that you heard me refer to 
earlier.
    A prime example is ExxonMobil, which announced all-time 
record earnings for 2003 of $21.5 billion. Those are not just 
the highest earnings ever by an oil company; they are almost 
the highest ever by any company. ChevronTexaco, ExxonMobil, BP, 
Shell, ConocoPhillips and Occidental Petroleum have now all 
reported record first quarter results for 2004. ChevronTexaco 
shows a percentage increase in their first quarter 2004 results 
as compared to last year's first quarter of 33 percent. 
ExxonMobil is up 14 percent, BP is up 17 percent, Shell is up 9 
percent, ConocoPhillips up 27 percent, and Occidental is up 50 
percent. Those are the overall corporate results. But, five of 
the six companies referred to increased margins from their 
refinery operations as the significant factor in their profit 
improvements.
    ChevronTexaco in its quarterly report says U.S. refining 
marketing and transportation earnings of $276 million improved 
$2,006,000 from last year, a 300 percent increase. The primary 
reasons for the improvement were an increase in average refined 
product margins, higher sales volumes and lower operating 
expenses. In our downstream and chemical segments, increased 
demand for refined products strengthened industry margins and 
helped boost our earnings.
    From ExxonMobil, ``U.S. gasoline prices helped give the 
world's largest publicly traded oil producer its biggest first 
quarter return refining profit in 13 years.'' ``ExxonMobil's 
refining profit rose 39 percent to $1 billion.'' From Shell, 
``industry refining margins were driven primarily by strength 
in gasoline, and European margins found support from arbitrage 
opportunities to the U.S. In the first quarter, refining 
margins averaged 19.5 percent for the U.S. Gulf Coast region 
and 40 percent on the West Coast region.''
    ``Margins in the United States of America also may be 
impacted by supply versus demand balances and low storage 
levels.'' From ConocoPhillips, ``higher refining margins and 
running at 95 percent of capacity were the primary reasons for 
the improvement in performance. The realized U.S. refining 
margin increased almost 31 percent from $5.58 a barrel to $7.30 
a barrel. But if you look at the first quarter performance in 
refining and marketing, all of our earnings came essentially 
from the refining side of the business. And when you look at 
the refining side of the business worldwide, 87 percent of that 
came from domestic refining and 13 percent from international 
refining.''
    And, finally from BP, ``the refining and marketing result 
increased 13 percent compared with a year ago, reflecting 
improved refining margins particularly in the U.S.''
    Is this not pretty compelling evidence that the industry 
has been making business decisions to reduce its refining 
capacity in order to increase its margins?
    Mr. Slaughter.
    Mr. Slaughter. No, Mr. Tierney, I don't believe it is. As 
we pointed out in our testimony, it requires a great deal of 
capital to operate in our industry, and I would say that in the 
20 years I've been involved with the industry, we've seen many 
more bad refining quarters than good.
    What you're talking about in the first quarter of this year 
is the rarest of instances in which refining profits were high. 
It's a very cyclical industry.
    Mr. Tierney. Could I just interrupt you 1 second? And let's 
go back to last year when ExxonMobil announced all-time record 
earnings of $21.5 billion. So that's at least a couple of years 
in a row they've been doing pretty well, right?
    Mr. Slaughter. Well, again, I don't know what refining is 
within that $21 billion, sir, but refining oscillates between 
the top and the bottom of the scale and more times in the 
bottom than the top.
    Mr. Tierney. Well, I think if we watch a trend--and you 
correct me if I'm wrong, if you guys don't have evidence of 
this--but since the mid-90's, probably since the 1990's when 
these refineries were being shut down, the margin has improved 
substantially; and that lack of supply has had a lot to do with 
it.
    Mr. Slaughter. The supply/demand balance has been tighter 
since about 2000. But there have been bad quarters since 2000 
as well. And, again, you are overlooking the cost of being in 
the business, and the amount of dollars that have to be put in 
the business take up most of that income from the refining 
sector that you're talking about, even though the numbers----
    Mr. Tierney. These are profits we're talking about. These 
are profits, not gross numbers or anything like that, but 
profits that you're talking about in their quarterly reports. 
You know, a 300 percent increase in one aspect of it.
    Mr. Slaughter. A lot depends, sir, on what it's being 
compared to. If it's a low baseline it's being compared to, 
you'll come up with a large percentage.
    Mr. Tierney. I'm not going to go back and forth. I think 
the numbers speak for themselves.
    Let me just read into the record, if I can, the first 
quarter profit figures, as reported by the Wall Street Journal, 
or by the companies themselves, for the first quarter 2004: 
ExxonMobil, $5.4 billion; BP, $4.8 billion; Shell, $4.4 
billion; ChevronTexaco, $2.6 billion; ConocoPhillips, $1.6 
billion; Amerada Hess, $281 million; Unocal, $269 million; 
Marathon, $258 million; Valero, $48 million; Murphy, $98 
million; Sunoco, $89 million; Premcor, $50 million; Citgo, $35 
million. Overall, $20 billion in profits for the first quarter 
alone for the industry.
    I think it's a pretty compelling case, Mr. Slaughter and 
others, and I also think it's pretty damning that this industry 
fails to reinvest in its own operations in terms of maintaining 
its pipelines, maintaining enough refineries to service 
consumers.
    But, I note my time is up, and I'll yield to the chairman.
    Mr. Ose. The gentleman from Ohio.
    Mr. Tiberi. Thank you. Staying on the same line of 
questioning, Mr. Slaughter, you've heard it all. Some have 
argued that capacity has been shut down to improve your bottom 
line or refineries' bottom line. Others have argued that 
environmental regulations and industry economics have 
contributed to the number of refineries or the lack of 
reinvestment. Either way, I think everybody would agree that we 
need to do something in America to improve refining capacity.
    In your opinion, what can we do, what can Congress do, to 
help improve refining capacity in America?
    Mr. Slaughter. Well, we believe, first of all, that the 
United States does need additional refining capacity; and we 
are very strong proponents of the need for additional supply. 
We believe that the New Source Review reforms are extremely 
important. They need to be sustained. They are currently before 
the courts. They will help the industry add additional capacity 
and install modern technology when it--as soon as it becomes 
available.
    We also believe that there can be improvements made in 
permitting requirements. We can have some streamlined 
permitting--where you don't have this situation where you're 
required to make a fuel, but you've got to wait a year or more 
for permits--so you can go ahead and actually get the 
investment in the ground and the product out.
    You should be able to build refineries in this country, and 
frankly, it's because of the NIMBY situation that you can't. 
There is almost unlimited opportunity for public comment in any 
proceeding or a series of proceedings that leads to a 
significant new refining venture, and it shouldn't be that way. 
People who are trying to build a refinery in an area that's 
growing very fast shouldn't have to wait 10 years and still 
have nothing to show for their efforts.
    The other thing is, you can insist that people recognize 
the true cost of environmental regulation and try to balance 
environmental regulation and supply concerns so we come out 
with the right answer in both policy areas.
    Mr. Tiberi. How much would we have to increase refining 
capacity to impact in a meaningful way--I asked the question 
earlier--the cost of fuel at the pump?
    Mr. Slaughter. That's a question I really can't answer. It 
would be inappropriate, frankly, for me to answer it. But let 
me tell that any increase in refining capacity would be helpful 
in that direction.
    We certainly need to maintain the refining capacity that we 
have right now. And one of the ways we can do that is the 
suggestions that I just made to you for policy changes. 
Certainly, passage of the energy bill would be a good first 
step.
    Mr. Tiberi. You made note in your comment, and I asked a 
question earlier about the cost of environmental regulations to 
the cost of the pump; and it was answered two different ways: 
one in written testimony, environmental regulations have had a 
minimal effect on gasoline prices; and the other answer was a 
cent or two.
    What would be your thought on that?
    Mr. Slaughter. EPA traditionally underestimates those 
costs. They do them ex ante. They do them before the rulemaking 
takes place. They have every reason to try to minimize the cost 
estimates.
    I've often said I don't understand--we believe these are 
very important programs. They have significant health benefits. 
Isn't it reasonable to believe that being so significant, they 
do also entail significant costs? It has been pointed out 
earlier that although, the cost of reformulated gasoline is 
only a few pennies, if you look at the marketplace according to 
EIA, the market differential now is 20 cents between 
reformulated gasoline and conventional gasoline. Part of that 
is the mandates now that we are seeing in some of these States. 
There are significant costs.
    We are not asking to do away with the programs. We're not 
asking to change the programs. They are already on the books. 
But we are asking for future programs to be done with a greater 
ear toward supply.
    Mr. Tiberi. Mr. Ports, you're on the front lines, you and 
your members at the gas pump. And you mentioned in your 
testimony about this proliferation of fuels and the impact it 
has. Can you give us some examples of what you see?
    Mr. Ports. Well, I think you're obviously very familiar 
with it. You talked about the Chicago situation, Milwaukee, you 
know, some of these--Atlanta.
    You know, our real point is I think you need to move very, 
very carefully on this situation. There are certainly 
compelling arguments on both sides that we could hurt refining 
capacity when we are dealing with boutique fuels. But our point 
is, I think we can help the distribution system by dealing with 
boutique fuels. And in terms of how we refine it and what we 
make, I think that has to be done very, very carefully.
    Mr. Tiberi. How does that impact you as a marketer?
    Mr. Ports. It impacts us as a marketer very dramatically. 
We market, as an example, in St. Louis, just outside of St. 
Louis also; and the last few years, that's been, you know, a 
hotbed of problems.
    Now, it's been very smooth this year, but we have had 
numerous situations where product simply wasn't available, spec 
product to use in the St. Louis market. I mean, we had some 
times where product might have had to have been trucked 500 or 
600 miles to bring it into that market.
    Mr. Tiberi. What happens then?
    Mr. Ports. Obviously, the price goes up, I mean, 
dramatically.
    Mr. Tiberi. Thank you.
    Mr. Ose. I thank the gentleman.
    All right. We have votes we estimate that are going to 
occur around 12:45. I recommend we go over another round if you 
would like, OK?
    Mr. Lieberman--actually, I want to ask Mr. Early a 
question. It seems to me, there is this underlying theme that 
is as yet unstated--I'm going to take a stab at it--that there 
are significant barriers to entry for new refining capacity in 
this country. I mean, there is the capital necessary to produce 
the kind of income streams that Mr. Tierney read into the 
record here that must be significant; and we have had testimony 
today that the capital is driven in part by putting in place 
the processes by which the oil is refined from its crude state 
to its finished state.
    To a certain degree, it would seem to me that we are making 
a choice between significant increases in refinery capacity and 
strict adherence to an environmental safeguard. And there are 
some who advocate more so one way or the other. And, I am 
curious whether or not you might recognize that same thing, 
that the--that there's a benefit to the industry in having high 
thresholds to entry, and that it keeps competitors out.
    And, then there's a benefit to the environment in having 
high thresholds to entry because it enforces the environmental 
safeguards.
    Do you share that view?
    Mr. Early. Mr. Chairman, we're--we mostly focus on 
environmental requirements that protect people, and we're not--
you know, we're not knowledgeable enough as to whether those 
requirements operate as an effective barrier to entry in the 
marketplace.
    Personally, my instinct is, if you've got $40 million to 
invest, why would you want to go into an industry where--that's 
dominated by, like, five major refiners? I mean, this wouldn't 
seem to me to be the best place you could put your money. So, I 
mean, that would strike me as being a much more important 
factor as to whether you want to get into the oil refining 
business.
    When people start talking about streamlining requirements 
for refiners, our concerns focus on, well, do those 
requirements, those streamlined requirements, still continue to 
protect people from the emissions from that refinery? That's 
when we get nervous. The Lung Association is strongly on record 
opposing the new-source review changes that this administration 
is seeking to do, because we think the result will be more air 
pollution, and we think that will harm the public health.
    Mr. Ose. Mr. Lieberman, at the Institute, do you look at 
this barrier to entry question? And we had earlier testimony 
that there were Brazilian refiners or Venezuelan refiners or 
Curacao refiners or whoever, who had frankly had a product that 
was in the market that they are no longer shipping to the 
market because they could not comply with the sulfur issue. I 
think that was the testimony.
    Is this an issue? Is there, in effect, an unstated benefit 
to the extent refiners, from an ever-rising environmental 
requirement?
    Mr. Lieberman. That could well be. Regulations do tend to 
create winners and losers among the affected industry groups. 
Some refiners supported some of these State-level boutique 
fuels, maybe in part because they thought it would stave off 
more difficult RFG requirements, but maybe in part because they 
thought they would have that market all to themselves; and so 
there were some incentives in creating some of these State-
level boutique requirements.
    So, yes, there's refiners that don't mind or maybe actually 
like these requirements because they feel that it eliminates at 
least some competition.
    Now, with regard to foreign sources of oil, everybody knows 
that we get more than half, 60 percent of our oil--it's less 
known that we get about 10 percent of our gasoline or refined 
gasoline components from overseas, as well. And there are some 
problems with that, and we saw a little bit of that this year 
with the new low-sulfur rules. As we in the United States go 
further and further down the road of these specialized blends 
that are only used in specific markets in the United States in 
some cases, although the sulfur rule is used everywhere--but as 
we go further and further down the road of these specialized 
blends or tough requirements that apply to all fuels, it's 
unclear how many foreign refiners will make the investment to 
provide that fuel. So there's some question where we are going 
to be getting our refined products in the years ahead.
    I believe EIA has estimated that we will be seeing 1.6 
percent or so increases in gasoline demand in the United 
States, and given the constraints on domestic refiners and the 
constraints that I just mentioned on foreign refiners, there 
are some serious questions, looking ahead, whether we will have 
enough refinery capacity looking forward.
    Mr. Ose. The gentleman from Massachusetts.
    Mr. Tierney. Thank you, Mr. Chairman.
    Mr. Blake, the letter that you referred to in your 
testimony that was sent out yesterday, some people would find 
it interesting that both the environmental and the health 
community were concerned about gasoline prices.
    Would you just expand a little bit upon your comments made 
in the letter and your rationale behind it?
    Mr. Early. The principal focus of the letter is the fact 
that all the organizations that signed it, I think, believe 
that the State of California is right in asserting that the 
oxygen requirements actually results in an increase in the 
amount of air pollution that is generated by vehicles using the 
fuel, as distinct from using the fuel without the oxygen 
requirement. And, that's really what drove the participation in 
signing the letter.
    The fact that this is one of the few things that the Bush 
administration can do right now that would affect gasoline 
prices is something that obviously we wanted to point out as a 
way of trying to leverage a decision on which, quite frankly, 
we think the Bush administration is dragging their feet.
    And, I'll go further and say, we believe they are doing so 
in order to avoid offending the ethanol industry. I mean, this 
is all about ethanol, and the reason----
    Mr. Tierney. So, we can expect a decision sometime after 
November 2004?
    Mr. Early. Exactly.
    Mr. Tierney. OK.
    According to the Environmental Protection Agency, oil 
refineries are a significant source of air pollution, and in 
the year 2000, almost half of the refineries were within 3 
miles of a population center of at least 25,000 people.
    From your perspective, from a public health perspective, 
will you tell us why it's so important to implement and enforce 
the Clean Air Act and other environmental protections on oil 
refineries?
    Mr. Early. Well, the air pollution conditions around 
refineries typically are among the worst in the country. As I 
discussed in my response to the chairman's question, we're very 
concerned because there is, all too often, this convergence 
between high populations and oil refinery operations. So, it is 
very critical, particularly with respect to toxic air 
pollutants that contribute to cancer and brain damage and other 
very debilitating diseases--we think it is very critical that 
the requirements be maintained or even strengthened.
    Mr. Tierney. Now, if I'm not mistaken, the consumer 
protections or the environmental regulations were in place 
before 1990. About 1990, with the Clean Air Act, the refineries 
started to shut down before that act went into effect; and they 
continued to be shut down after the act went into effect, so 
that there would be some question about what the impact of the 
Clean Air Act itself was upon the need to close down actually 
was.
    Mr. Early. Absolutely. There has been a long history of 
concentration in the industry, and it's very unclear as to the 
impact of the environmental requirements with respect to that 
trend.
    Mr. Tierney. OK. Thank you.
    Mr. Slaughter, Mr. Ports, whose responsibility is it to 
improve refining capacity in this country? I notice that both 
of you indicated that you think there's a problem with the 
refining capacity. But in that this is a private industry, 
don't you think that the burden falls on the industry itself to 
resolve that issue?
    Mr. Slaughter. Well, the burden, if I may--the burden, some 
of the burden does fall on the industry itself. Also, it's on 
policymakers to make sure that there are policies that 
encourage that investment capital be able to invest in this 
business to build new refineries and that there not be barriers 
to entry. It just seems strange that people aren't willing to 
admit that environmental requirements do cost money and can 
constitute a barrier to entry.
    Mr. Tierney. Well, let's assume that, as mentioned before, 
these environmental regulations have been with us for some time 
now, all right?
    Mr. Slaughter. But, they've been made increasingly 
stringent all through the last decade, sir.
    Mr. Tierney. All right. And, we have regulations that 
affect almost every industry. And, this is a public policy; 
people want to breathe clean air, and they want to live 
healthily.
    Mr. Slaughter. But, most people believe the refining 
industry to be one of the most heavily regulated industries in 
the United States.
    Mr. Tierney. Well, we may be disagreed on that. But let's 
assume that it might, for a sense of that. It's still the 
industry that you're in.
    Mr. Slaughter. Yes, sir.
    Mr. Tierney. There are many people in this Congress that 
just believe in this free market stuff, even though many of us 
who think we're in a mixed economy, that--there's many that 
swear to this free market stuff. So assuming that you're in 
your free market, you have a regulation that's in place, you 
have to deal with it.
    You know, what other policy--I mean, you certainly don't 
advocate reducing the environmental protections. I think from 
our previous testimony from you that you did not advocate 
reducing environmental protections; am I right?
    Mr. Slaughter. That is correct. And then the industry, I 
would point out, invests, as I've shown, billions of dollars 
over the last 2 decades, as many as $50 billion put back into 
this business just to comply with environmental requirements, 
sir.
    Mr. Tierney. So when will the industry start putting money 
back in to increase its refining capacity and improve its 
pipeline conditions and things of that nature?
    Mr. Slaughter. The industry makes huge investments every 
year in those matters. Even when refining capacity has not been 
increased, the facilities have been modernized. Many times 
investments, like the investments in lower-sulfur gasoline and 
diesel, result in modernization of facilities, but they may not 
result in more capacity. One of the reasons is that because a 
lot of the processes necessary to make these cleaner fuels 
actually reduce the yield. So you, in essence, have reduced the 
capacity of the plants because you're increasing the severity 
of the refining process to make cleaner fuels.
    Mr. Tierney. But you talked earlier of the huge gap between 
the demand and the supply right now, the fact that you just 
don't have enough refining capacity to meet the demand for 
refined product, right?
    Mr. Slaughter. When the demand, particularly for gasoline, 
is high, as it has been this year and is particularly in the 
summer driving season, there is a very tight supply/demand 
balance, yes.
    Mr. Tierney. OK. So I guess my question comes back to, what 
does the industry propose to do? Nothing? Until when?
    Mr. Slaughter. The industry--you know, given the regulatory 
climate and the investment requirements in this industry, we 
are very lucky we have many different kinds of companies that 
continue to be committed to and invest in the domestic refinery 
industry.
    Mr. Tierney. That's your interpretation. You've already 
accepted the fact that you don't want to make the air any 
dirtier, and that you accept the Clean Air Act requirements and 
you're content to live within that.
    So given your situation, what is the industry going to do 
about increasing the refining capacity?
    Mr. Slaughter. Well, as individual players in the industry 
decide that is a good allocation of their capital and basically 
decide that's what they want to do, and if they're able to do 
it with the permitting authorities and through the long NIMBY 
process that we have to go through to make changes in our 
facility, that will happen. But those will be individual 
decisions.
    We have some of our members who are increasing capacity at 
their plants as we speak.
    Mr. Tierney. The existing ones?
    Mr. Slaughter. At existing plants.
    Mr. Tierney. Now, when's the last time that anybody filed 
for a permit to build a new refinery?
    Mr. Slaughter. Well, a group in Arizona has a permit, a 
live permit, that has been pending for 10 years now, and there 
are people in our industry who are interested in that facility. 
But the big question is whether or not they actually will be 
able to get through the process and build it, even though the 
area needs more product.
    Mr. Tierney. That's one. How many others are out there?
    Mr. Slaughter. Well, there have been others over the years, 
but actually most capacity has been added at existing sites and 
so----
    Mr. Tierney. So I can count on one hand probably the number 
of requests for permits for new refining facilities, right?
    Mr. Slaughter. Well, it doesn't--well, yes, you can because 
it doesn't take long to learn what's not doable under current 
statutes.
    Mr. Tierney. Well, it doesn't take long to make a 
decision--to make a decision that you want to invest and move 
on either. You've accepted your environmental constraints. Then 
it seems to me you're just going to make a decision: You either 
want to invest and have more capacity or you don't, or you're 
going to find some excuse not to do it.
    Mr. Slaughter. Well, one of the things that's not 
appreciated about mergers and acquisitions, sir, is that many 
of the companies that have bought these facilities from others 
in mergers or acquisitions have invested hundreds of millions 
of dollars in the plants that perhaps the former owners would 
not have done. So there's an economic rationalization process 
through the industry that has let people spend capital 
efficiently, even within the confines of not being able to 
build new refineries.
    A lot of people who are the new owners of some of these 
facilities have invested significant sums of money in it 
because they saw a different possibility there for business 
than the previous owner did. It's just part of the system.
    Mr. Tierney. What do you say about the Shell Bakersfield 
situation? Do you think that fits your category?
    Mr. Slaughter. Well, you know, Shell probably is in the 
best position to know what the relative profitability of that 
facility has been. Now we've heard today that the FTC is going 
to look into that matter. It's a relatively small refinery, as 
you know, 70,000 barrels a day.
    Mr. Tierney. But a smaller one of 20,000 was found to be 
profitable. So doesn't it make you just a little bit skeptical 
that all of a sudden this is being shut down?
    Mr. Slaughter. Well, as I said, the owner is in the best 
position to know. We have not evidently heard the last of 
what's going to happen with regard to that refinery.
    I think this situation points out the intense scrutiny that 
everything this industry does is subject to. This hearing is 
part of it as well. And I think you see today that, you know, 
things receive a great deal of attention in our industry, and 
there are regulatory authorities who even debate what the most 
effective way is to assess some of the finer points of our 
industrial operations.
    Mr. Tierney. I'll yield back. And we have some regulatory 
agencies that actually regulate, and we have some that stand by 
and watch. Thank you.
    Mr. Ose. Gentleman from Ohio.
    Mr. Tiberi. Thank you, Mr. Chairman.
    Mr. Slaughter, kind of continuing on the line of 
questioning on the refinery business, if Mr. Tierney and I 
decide to become partners and start a refinery tomorrow or 
begin that process--and that would be a joy----
    Mr. Tierney. For you maybe.
    Mr. Tiberi [continuing]. How much time and money would be 
required to construct, let's say, an average-size refinery in 
America today?
    Mr. Slaughter. Well, you know, if we go back to the Arizona 
project, they're talking about building 150,000-barrel-a-day 
refinery. That's a little bigger than the average one in the 
United States today, which is about 110,000 barrels per day. 
The estimated cost of actually building that refinery, going 
through all the process and building it for 150,000 barrels a 
day, is $3 billion.
    Mr. Tiberi. $3 billion?
    Mr. Slaughter. $3 billion, so--you know, there are large 
expenditures; and again----
    Mr. Tiberi. I guess we won't be doing that.
    Mr. Slaughter. Again, looking at the relative economic----
    Mr. Tierney. But you and I wouldn't have shut down the 100 
or so that they've already shut down either, probably because 
we would have thought about that.
    Mr. Slaughter. The economics of actually building one, of 
the things you need to look at, is that it is so difficult to 
build refineries. Existing refineries--and the business is a 
tough business, a cyclical business. Refineries that have been 
sold have been sold roughly for 25 to 33 percent of book value.
    One of our members has gone from 1 refinery to 15 
refineries by acquisitions over the last several years. As 
stated, they never paid more than $0.38 on the dollar for the 
facility.
    Mr. Tiberi. If we decided instead to build a refinery 
abroad, what would the cost be versus the cost here?
    Mr. Slaughter. It would depend on where you build it, 
Congressman.
    Mr. Tiberi. The cheapest place to build one.
    Mr. Slaughter. Well, you could build one, you know, I 
guess, in parts of Latin America or the Caribbean for a 
fraction of that price. Of course, they have different air 
quality characteristics.
    But, again, when you become dependent on foreign sources of 
supply, even for the manufactured product, you're exacerbating 
the problems we're seeing already in getting hold of crude 
supplies for the country.
    Mr. Tiberi. But if you are a refiner and you're looking to 
expand, are the incentives today there to expand abroad and to 
build abroad, rather than here, because of the cost here?
    Mr. Slaughter. I think most refiners would prefer to build 
in the United States if there is demand here, because you're 
closer to your markets. But, you know, there are significant 
costs that they face if they try to build or even expand 
capacity in the United States that they don't face elsewhere. 
And as I pointed out before in the case of ChevronTexaco and 
the ethanol tank, I mean, even when you're trying to do things 
that you're mandated to do, it's difficult to get them done 
here.
    So, you know, again I say, looking at all these situations 
with the difficulties in the investment requirements, we are 
fortunate that we have the large number of refiners we have.
    If you look at the top 12 refiners in the United States of 
America today--also I would point out, 5 of them are 
independent refiners; they are not integrated refiners. There's 
a lot of diversity left in this industry. There are regional 
refiners that are smaller. We're fortunate to have them, and we 
need to keep their capacity here.
    Mr. Tiberi. Moving forward, if something is not done to 
increase refining capacity in the United States, do you see an 
increase in this foreign refining capacity, in that market 
increasing? I think someone mentioned in the testimony, it's 10 
percent today. Do you see that increasing?
    Mr. Slaughter. Well, practically, there's almost no way 
around it because, for instance, if you look at the EIA 
numbers, they believe that the lion's share of the increase in 
demand for U.S. products will be met by imports. They believe 
we can see small increases in domestic refining capacity, but 
not significant enough ones to actually meet most of the 
increasing requirements here. They see about a 1.5 to 2 percent 
growth per year in U.S. demand for petroleum products. But they 
see very small incremental increases in U.S. refining capacity. 
And they have said that they believe most new refinery 
construction will occur in the Middle East, in Latin America 
and in the Caribbean.
    Mr. Tiberi. So if your business is so attractive, why is 
that 10 percent there in the first place and why is it going to 
increase?
    Mr. Slaughter. Well, the business is a cyclical industry 
and, you know, it is up and down. There are different kinds of 
players in the industry. The relative profitability of the 
refining sector is not that large.
    We have a few times when the refining industry does 
relatively well. The return reverts to about 5 percent on 
investment capital. Business Week a month ago ran a chart of 
the profitability of various industries. Our industry was below 
the middle, so again, the fact that existing plants are being 
sold for only a fraction of their book value suggests that it's 
a tougher business.
    Now, some people have successful business plans and do 
better than others in this business, but generally, it is a 
business with very high fixed costs and, you know, the 
profitability is episodic.
    Mr. Tiberi. Thank you, Mr. Chairman.
    Mr. Ose. Mr. Slaughter, I don't understand something. You 
comment about existing facilities being sold for 25 to 33 
percent of book value. There's a certain disconnection in my 
mind, given the numbers that Mr. Tierney referred to relative 
to the profits. Why would you sell something at 25 to 33 
percent of book value if it's profitmaking capability, at least 
in terms of the number of dollars--maybe not in terms of 
percent of return on assets, but if its profitmaking ability is 
as indicated from those numbers?
    Mr. Slaughter. Well, first of all, I'm not sure that all 
those numbers directly apply to refining profitability. And the 
fact of the matter is that, you know, there are more down 
periods than up periods when it comes to refining 
profitability.
    Analysts who know the industry well realize that there is a 
lot more profit potential in the upstream portion of the 
industry, exploration and production, than there is in the 
heavy manufacturing part, which is refining.
    Mr. Ose. Well, at $40 a barrel, I would agree.
    Mr. Slaughter. And again, that represents an input cost to 
refining. And refining is also a heavily regulated business. So 
different people, you know, in a free market, view the value of 
facilities in different ways. Obviously, sellers, you know, 
felt that they may not have been able to meet the investment 
requirements, for instance.
    Mr. Ose. Are you telling me and my colleagues up here that 
the industry is making a--for lack of a better word, an 
economically driven decision over time to keep refining 
capacity either static in the United States or allow it to 
decline in favor of moving overseas?
    Mr. Slaughter. No.
    Mr. Ose. Well, earlier you only were able to cite one 
location where refining capacity--there's an application to 
build new refining capacity. And you also indicated that such 
expansions as occur are the little tweaking of refining 
capacity around the country at existing facilities.
    Mr. Slaughter. The imported product is normally not 
supplied by the same people that are the domestic refining 
companies. There may--as Mr. Caruso indicated earlier, there 
may be suppliers from Brazil, some of them can be European 
suppliers. In a situation like we have now, some may be from 
the Caribbean. But they're essentially different people.
    I mean, we essentially have continued strong representation 
in the United States by the same companies that have been the 
major refiners in the United States for the last couple of 
decades. The largest refiners in the United States, the top 
five, are still--you know, they are ConocoPhillips, ExxonMobil, 
the Shell companies, BP and Valero. Valero is a newcomer to 
that group. But there has been a lot of stability with the 
exception of the fact of the mergers and acquisitions, which 
have combined some companies. But these companies have 
maintained very committed to U.S. refining capacity. ExxonMobil 
is the largest refiner in the world. But it is still the second 
largest refiner in the United States.
    Mr. Ose. But I also note in your earlier testimony that the 
refining capacity of domestic industry has dropped from 18.5 
million barrels a day to 16.8 million barrels a day. That's 
over 25 years. That's a clear indication to me that there--for 
whatever reason, whether it be regulatory or otherwise, that 
there is a consensus among the industry that whatever 
investments we're going to make in refining capacity--and this 
is just a matter of--I mean, this is just the way life is. 
Whatever this investment we are going to make in refining 
capacity--and the EIA concurs in this, because their 
projections are that the level of imported refined product is 
going to continue to increase--whatever this investment we are 
going to make in refining capacity, we are going to make 
offshore. I mean, I look at this information, this testimony, 
and it seems to me obvious that that's the case, for whatever 
reason, that capital is being moved offshore.
    Mr. Slaughter. Well, the companies that I have mentioned--I 
mean, basically all 149 companies have made significant capital 
commitments to the United States. And you know there may be 
companies that were formerly in the refining business, smaller 
ones that have gotten out of the refining business. There are a 
number of them that have merged or been acquired. But the 
financial commitment of the companies that are in business in 
the refining business in the United States is substantial.
    Some of them have foreign refining as well; some don't. But 
as you know, most of the product, 90 percent of the product 
that we use in the United States is still produced here.
    Mr. Ose. I'm not attacking. I'm just trying to look at the 
facts as they are lying in front of me, and figure out what's 
going on.
    Mr. Slaughter. Right. But I think you'll find, sir, that 
the real problem is what you mentioned earlier, which is the 
barriers that people face to adding----
    Mr. Ose. The barriers are lower elsewhere?
    Mr. Slaughter. Well, it's true. I mean, that's one of the 
reasons why EIA says--for instance, says that you'll see a very 
significant increase in the percentage of imported products.
    Mr. Ose. Because the barriers are lower elsewhere?
    Mr. Slaughter. Yes, but you know, again it was also said 
earlier that one of the reasons we bring this to your attention 
is that it is one of the--to the extent they are policy 
induced, it is something that we can do something about here.
    Mr. Ose. I agree. That's my point, that we're making some 
conscious decisions the net results of which are that this new, 
added, incremental refining capacity is moving offshore.
    Mr. Slaughter. Yes, sir, that is true.
    Mr. Ose. Now, I just have one other question I'd like to 
followup on, and that is, in the Clean Air Act amendment in 
1990, there were a number of requirements that were laid into 
the statute that you had to comply with. And if I understand 
correctly, you have complied with them, that you support those 
and the like.
    Mr. Slaughter. Yes, a number of things like the sulfur 
reduction in gasoline and diesel. That's where these billions 
of dollars of investment have come from.
    Mr. Ose. The oxygenate requirement?
    Mr. Slaughter. The oxygenation requirement.
    Mr. Ose. OK.
    Now, Mr. Ports, do you have any position or are you 
agnostic on these?
    Mr. Ports. I wouldn't say that we are agnostic on it. 
Rephrase for me what your question is.
    Mr. Ose. Do you or do you not support the improvements that 
were embedded statutorily in the Clean Air Act of 1990?
    Mr. Ports. Yeah. I think all our organizations from any 
standpoint, both organizations, have long ago come to the 
conclusion that, you know, you've got to move forward. Clean 
air's going to happen, and, you know, you move forward with 
those regs.
    Mr. Ose. OK.
    Mr. Lieberman.
    Mr. Lieberman. I think 14 years out we have learned what 
has worked and what hasn't worked and there is some room for 
some streamlining. There is some room for jettisoning a few of 
the problematic provisions.
    I think there's some consensus here on the 2 percent oxygen 
content requirement, and there may be a few other things that 
have out lived their usefulness. One thing might be the 
wintertime oxygenated fuels, which isn't that big a deal; but 
it is a fuel that was designed to fight carbon monoxide, which 
has really essentially disappeared as a problem.
    So there are a few things that we could do to update those 
1990 amendments. I'm not talking about a serious overhaul here, 
but there is some room for some streamlining here within the 
context of continuing cleaner air.
    Mr. Ose. Mr. Early.
    Mr. Early. Obviously, we support the amendments. If you'd 
permit me, Mr. Chairman, I wanted to address two points that 
Mr. Lieberman has raised.
    One is the wintertime oxy fuel program. The Clean Air Act 
actually has a mechanism for eliminating this program, and in 
fact, many areas have abandoned the oxy fuel program so the 
Clean Air Act isn't really broken with respect to this program. 
In fact, I am informed by California officials that they will 
meet the carbon monoxide standard, which is the reason they are 
using oxy fuels and they will probably not be using oxy fuels 
next year after they get clearance from EPA. So that piece 
isn't really broken in the Clean Air Act.
    Mr. Lieberman also said that we don't really need to adhere 
to the sulfur and gasoline requirements because air pollution 
will still go down as a result of the new emissions equipment 
in the Tier 2 program. I thought that's what you were implying. 
I just wanted to point out that if you talk to the automobile 
industry, they say that the sulfur and gasoline requirements 
that are being phased in beginning this year are absolutely 
critical for them meeting emission standards because the 
emissions control equipment on the new vehicles that will start 
being sold have to operate at 99 percent of efficiency; and if 
the sulfur levels are above an average of 30 parts per million, 
that won't happen, and if that doesn't happen, you'll lose the 
investment in that equipment and you'll also have dirtier air.
    Mr. Ose. I think Mr. Lieberman's comment on page 10 and 11 
was that whether or not the change from older fleets to newer 
fleets has a far greater impact on the quality of the air, as 
opposed to the reformulated gasoline formulas.
    If you'd like to clarify, Mr. Lieberman.
    Mr. Lieberman. Yes, I would like to clarify. The low sulfur 
rules, that wasn't on my short list of things to change.
    Mr. Early. Good.
    Mr. Lieberman. I never said it.
    Mr. Early. I'm sorry.
    Mr. Lieberman. That's one where changing it would do 
probably more harm and good.
    Even getting rid of rules involves transitional costs. And, 
here the motor vehicle manufacturers, both cars and trucks, 
both gasoline and diesel fuel, are counting on sulfur 
reductions in order to introduce new generations of emission 
controls technology. So, that's not one that ought to be on the 
chopping block.
    Mr. Ose. I do want to followup though on one that I want to 
make sure I get you all on record on, if I may interrupt; and 
that is, do you support the rollback in California of the 
oxygenate mandate?
    Mr. Slaughter. Yes.
    Mr. Ose. Do you, Mr. Ports?
    Mr. Ports. Yes, we have.
    Mr. Ose. Mr. Lieberman, do you support the rollback of the 
oxygenate mandate in California?
    Mr. Lieberman. Yes. But I think, rather than a waiver, I'd 
like to see a national law that makes it----
    Mr. Ose. Mr. Early, if I understand correctly from your 
letter, you and a number of organizations support the rollback 
of the oxygenate mandate in California.
    Mr. Early. Yes, sir.
    Mr. Ports. Actually, Mr. Chairman, we would advocate the 2 
percent oxygenate mandate nationwide on reformulated gasoline, 
and I think everybody's in agreement on that as certainly 
something that we could do away with.
    Mr. Lieberman. Better a law than just a mandate for a few 
States.
    Mr. Slaughter. And we support the New York waiver as well.
    Mr. Ose. OK.
    Mr. Tierney.
    Mr. Tierney. Thank you. And, I suspect that you're in favor 
of it, too.
    Mr. Ose. Since 1999.
    Mr. Tierney. We're getting back on a little bit of the 
ground that we covered out in Nevada on these related hearings. 
We talked about the fact that in the early 1980's there was a 
public policy that provided support for small refineries, and 
those were terminated.
    I would like each of you to give me as concise an answer as 
you can about whether or not you'd like to see those public 
policies revisited. And which specifically do you think would 
be helpful?
    Mr. Slaughter.
    Mr. Slaughter. We have been in favor of incentives and 
programs that affect everyone the same in the industry, because 
we think it's important to benefit--to give economic benefits 
that are in the national interest to all refiners. So, you 
know, we believe the thing that makes the most sense is to get 
the New Source Review reform and take another look at and a 
better look at the energy impact of regulatory actions across 
the board for all refiners.
    Mr. Tierney. So, those are the two things that you think 
were existing in the 1980's that you'd like to see revisited?
    Mr. Slaughter. No. I thought that your question, sir, was 
whether or not we would want a small refiner bias, and, you 
know, we think it's more effective to go with programs that the 
entire industry could use and improve.
    Mr. Tierney. Given your clientele, I guess that would be a 
fair assumption that's where you would be. But, I was wondering 
if there were any particular policies that existed in the 
1980's that you'd like to see revisited and resurrected again 
now.
    Mr. Slaughter. No. I think that, you know, the stringency 
on fuels and facilities really came in the 1990's, 2000's. And 
that's what's really affecting the industry, sir.
    Mr. Tierney. All right. Well, do you think that there were 
public policies in the 1980's that were later terminated that 
had an effect on this? Or do you think the termination of those 
policies didn't affect it at all?
    Mr. Slaughter. The termination of some policies that were 
of particular benefit to smaller refiners did eliminate some of 
the refining population in the United States, yes.
    Mr. Tierney. OK. But, that's not something you'd like to 
address because you want to give everybody a break somewhere?
    Mr. Slaughter. Well, if you're talking about something 
that's 20 years later and you can't undo what was done in the 
1980's, at this point, it makes sense to do things that would 
increase output across the industry rather than just part of 
it. We obviously have small refiner members who might feel 
differently about that, but as an association----
    Mr. Ports. Yeah. I would say, generally speaking, our 
associations take the position that we would love to see 
incentives for small refineries. You know, more supply is good 
for us. It really is. It helps our business. It costs more in 
simple terms on a per-barrel basis to upgrade a small refinery, 
there's no question. I mean, I don't think anybody would 
dispute that.
    Mr. Tierney. Mr. Lieberman.
    Mr. Lieberman. Well, one problem with the small refiners, 
particularly the older, smaller refineries, it's just not 
economical to make all the upgrades to meet the requirements. 
That's probably one of the reasons why you've seen some of the 
smaller refineries close down over the years. So, that really 
ties in to the high regulatory costs in upgrading plants to 
meet all the refinery regulations as well as the fuel 
regulations.
    Mr. Tierney. Mr. Early, do you have an opinion? Do you want 
to weigh in?
    Mr. Early. I don't think the Lung Association has a policy 
with respect to--if you're talking about economic incentives, 
obviously there isn't any question that some refiners chose not 
to make the investment to meet environmental requirements and 
shut down. And, we don't regret that decision. You know, if 
they can't meet the requirements, then they shouldn't operate.
    Mr. Tierney. OK. Well, I guess, you know, just revisiting 
some of the information regarding the last hearing is that in 
the 1990's alone approximately 50 refineries were closed. 
Twenty refineries have been shut down since 1995. The number of 
operating refineries has been reduced by 13 percent since 1995. 
They're getting larger, but smaller in number and owned by 
fewer and fewer entities. Over the last 2 decades of the 20th 
century, the number of firms engaged in refining in the United 
States has declined by two-thirds.
    The question we raised, and I think we might as well put on 
this record as well, last time is, the industry prepared for 
some sort of a tradeoff. If, in fact, you're asking for a 
public policy that has the taxpayers give some sort of 
incentive to increase capacity--and I'm saying ``taxpayers'' 
because we, I think, all agreed that we want the environmental 
regulations to stay in effect and to protect our health. So, is 
the industry prepared for some sort of a tradeoff if some 
incentive is given to increase the capacity?
    What's the give-back to the taxpayer? Are you going to 
share profits or have an excess profit tax as a fall-back, or, 
you know, what is the taxpayer going to get if there's some 
sort of incentive given to the industry to increase refinery 
capacity?
    Mr. Slaughter. You know, our association is not asking for 
any incentives of those kinds. We are asking only for prudent 
policymaking in terms of being more sensitive to the impact on 
fuel supply of the environmental requirements.
    Mr. Tierney. I'm sorry. You're losing me here. A minute ago 
you said that you were in favor of the environmental 
regulations, that you didn't want to have it adversely impact 
health. So, are you looking for adjustments in it, changes?
    Mr. Slaughter. The fact of the matter is that there is a 
balancing process that is a part of all this. I mean, you look 
at things like the New Source Review program; the actual truth 
is, there had been some slight increases in domestic refining 
capacity that stopped when the New Source Review program was 
reinterpreted in the late 1990's.
    Mr. Tierney. But, it was interpreted.
    Mr. Slaughter. It was reinterpreted and it was used as an 
excuse to force additional investments on the industry.
    Mr. Tierney. Sir, you are asking for a relaxation in 
environmental regulation?
    Mr. Slaughter. Not in the least. As a matter of fact, we 
are making significant investments, and as has been pointed out 
here, having made investments, it's in our interest for those 
programs to go forward. But, we can do a better job in the 
future.
    Mr. Tierney. So, now we're back to where I thought we were 
before. You have no change in the environmental landscape, and 
you're still not doing anything. So, what is it you want?
    Mr. Slaughter. But, Congressman Tierney, I just don't 
realize why you can't understand that we want the policy to be 
implemented better with some more attention paid to the impact 
on the supply. That's all we're asking.
    Mr. Tierney. Which is semantics for saying that you want to 
reduce the environmental protections.
    Let's be serious with each other. That's what I don't 
understand. I don't understand why you won't be succinct in 
saying what it is you want. If you don't want the environmental 
regulations enforced to their fullest capacity to protect the 
health of people in this country and you want some sort of 
relaxation of that, then just say so, and we'll know where we 
are and we can move forward.
    Mr. Slaughter. There are few, if any, industries in the 
country, Congressman, that have spent, invested more money in 
cleaner air and other environmental improvements in the United 
States than the refining industry and the automobile 
industries. They're responsible for most of the improvements in 
air that have occurred since 1970.
    Mr. Tierney. Well, they're also responsible for most of the 
damage in the air and most of the environmental pollution. So 
that's a good thing going.
    We had a need to put environmental regulations on them. It 
was a decision that the people of this country made. You, a 
minute ago, told me that you were understanding of that and 
agreed with it. But, what you are now telling me, although you 
won't say it directly, is that what you want in order to build 
more refining capacity is a relaxation of those environmental 
regulations and nothing else.
    Mr. Slaughter. No, that is not what we want. We are simply 
asking for recognition that investment of those sums of money 
has an impact on business and that there may be a way, going 
forward, to balance our environmental requirements with a 
little more attention to the supply impact, often with no 
impact at all to the environment, Congressman. Some of these 
things improve the environment.
    Mr. Tierney. Well, that would be certainly a matter of 
interpretation now, wouldn't it?
    Mr. Slaughter. Well, the New Source Review program reforms 
will improve the environment because they will allow the 
industry to make quicker use of new technologies.
    Mr. Tierney. Well, now we know exactly what you're saying 
and that is with as little foundation and scientific backup as 
any statement that's been made today. But, that's for another 
day.
    But, now I know exactly what you're after. You're not after 
tax breaks. You're not after anything else. You're after a 
relaxation of the environmental regulations, although you say 
in another breath that you're not.
    Mr. Slaughter. I can't agree with you, sir. I'm sorry.
    Mr. Tierney. Well, it is what it is.
    Mr. Ose. I want to thank this panel for their participation 
and for both Mr. Tierney and Mr. Tiberi's participation. I do 
appreciate your coming down here.
    I have to say, I am struck by two things. First, that the 
interests of those who are in the business today, from an 
economic standpoint, are well served by higher barriers to 
entry, notwithstanding anything else; but the ability to keep 
competitors out benefits those who are able to deliver product 
today--that's just an economic reality. And, the current 
regulatory regime, while Mr. Slaughter may testify that his 
people are interested in increasing supply, which I accept, the 
current regulatory regime and capital returns serve to restrict 
the number of producers who give us product. That's the first 
thing.
    And, the second is that everybody on this panel has now 
agreed with me, which position I took in 1999, that the 
environmental regulation on oxygenate additives needs to be 
rolled back as it relates to California.
    And, I want to thank this panel for its testimony and 
participation. I certainly appreciate the company and input and 
the education I get from my friend from Massachusetts, and I 
look forward to our next hearing.
    We are adjourned.
    [Whereupon, at 1 p.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]

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