[Senate Hearing 108-506]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 108-506
 
                  IMPACT OF ENVIRONMENTAL REGULATIONS
                            ON OIL REFINING

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

                                HEARING

                               before the

               COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                                   ON

   THE ENVIRONMENTAL REGULATORY FRAMEWORK AFFECTING OIL REFINING AND 
                            GASOLINE POLICY

                               ----------                              

                              MAY 12, 2004

                               ----------                              

  Printed for the use of the Committee on Environment and Public Works


                                                        S. Hrg. 108-506

                  IMPACT OF ENVIRONMENTAL REGULATIONS
                            ON OIL REFINING

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

                                HEARING

                               before the

               COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                                   ON

   THE ENVIRONMENTAL REGULATORY FRAMEWORK AFFECTING OIL REFINING AND 
                            GASOLINE POLICY

                               __________

                              MAY 12, 2004

                               __________

  Printed for the use of the Committee on Environment and Public Works




                    U.S. GOVERNMENT PRINTING OFFICE
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               COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS

                      ONE HUNDRED EIGHTH CONGRESS
                             SECOND SESSION

                  JAMES M. INHOFE, Oklahoma, Chairman
JOHN W. WARNER, Virginia             JAMES M. JEFFORDS, Vermont
CHRISTOPHER S. BOND, Missouri        MAX BAUCUS, Montana
GEORGE V. VOINOVICH, Ohio            HARRY REID, Nevada
MICHAEL D. CRAPO, Idaho              BOB GRAHAM, Florida
LINCOLN CHAFEE, Rhode Island         JOSEPH I. LIEBERMAN, Connecticut
JOHN CORNYN, Texas                   BARBARA BOXER, California
LISA MURKOWSKI, Alaska               RON WYDEN, Oregon
CRAIG THOMAS, Wyoming                THOMAS R. CARPER, Delaware
WAYNE ALLARD, Colorado               HILLARY RODHAM CLINTON, New York
                Andrew Wheeler, Majority Staff Director
                 Ken Connolly, Minority Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page

                              MAY 12, 2004
                           OPENING STATEMENTS

Allard, Hon. Wayne, U.S. Senator from the State of Colorado......     7
Boxer, Hon. Barbara, U.S. Senator from the State of California...    13
Carper, Hon. Thomas R., U.S. Senator from the State of Delaware..    31
Cornyn, Hon. John, U.S. Senator from the State of Texas..........    41
Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma...     1
Jeffords, Hon. James M., U.S. Senator from the State of Vermont..     5
Lieberman, Hon. Joseph I., U.S. Senator from the State of 
  Connecticut, prepared statement................................    33
Reid, Hon. Harry, U.S. Senator from the State of Nevada, prepared 
  statement......................................................    26
Thomas, Hon. Craig, U.S. Senator from the State of Wyoming.......    39
Voinovich, Hon. George V., U.S. Senator from the State of Ohio...     9
Wyden, Hon. Ron, U.S. Senator from the State of Oregon...........     9

                               WITNESSES

Cooper, Mark, director of Research, Consumer Federation of 
  America........................................................    21
    Prepared statement...........................................    75
Dosher, John, director, Jacobs Consultancy.......................    23
    Prepared statement...........................................   242
    Responses to additional questions from Senator Jeffords......   243
Early, A. Blakeman ``Blake,'' American Lung Association..........    17
    Prepared statement...........................................    64
    Response to additional question from Senator Jeffords........    68
Ports, Michael, president, Ports Petroleum Company, Inc., on 
  behalf of the Society of Independent Gasoline Marketers of 
  America and the National Association of Convenience Stores.....    19
    Prepared statement...........................................    69
    Responses to additional questions from:
        Senator Inhofe...........................................    71
        Senator Jeffords.........................................    73
Slaughter, Bob, president, National Petrochemical and Refiners 
  Association, Appearing on behalf of the American Petroleum 
  Institute......................................................    15
    Prepared statement...........................................    44
    Responses to additional questions from:
        Senator Inhofe...........................................    61
        Senator Jeffords.........................................    62

                          ADDITIONAL MATERIAL

Articles:
    Bhat, Vasanthakumar N., Ectoxicology, Does Environmental 
      Compliance Pay?...........................................344-348
    Situation Analysis..........................................304-307
    USA Today, Oil Firms Reap Benefits of High Gas Prices........    15
Charts:
    A New Refinery from Concept to Operation.....................   3-4
    Cumulative Regulatory Impacts on Refineries, 2002-2010.......    53
    Diesel Prices in California and Surrounding States...........   303
    Gasoline Price in California and Surrounding States..........   302
    Gasoline Price Outlook.......................................    52
    Petroleum Demand & Number of Refineries......................     2
    Petroleum Refining: Applicable Regulations................... 55-60
    Recent California Gasoline Prices, California Energy 
      Commission................................................280-301
    Total Capacity Grew Since Mid-1990's.........................     5
    Weekly Diesel Rack Prices...................................250-252
    Weekly Gasoline Rack Prices.................................247-249
    What We Pay for in a Gallon of Regular Gasoline (March 2004).    51
Letters from:
    Arizona Clean Fuels to Senator Inhofe........................   304
    California Environmental Protection Agency to Senator Boxer..   244
Reports:
    Consumer Federation of America:
        Ending the Gasoline Price Spiral, July 2001..............80-133
        Fueling Profits: Industry Consolidation, Excess Profits & 
          Federal Neglect Domestic Causes of Recent Gasoline and 
          Natural Gas Price Shocks, May 2004....................178-241
        Spring Break in the U.S. Oil Industry: Price Spikes, 
          Excess Profits and Excuses, October 2003..............134-177
    Gasoline Pricing in California, May 2002, Attorney General 
      Bill Lockyer..............................................264-279
    NBER Working Paper No. 6776, Environmental Regulation and 
      Productivity: Evidence from Oil Refineries, Berman, Eli and 
      Bui, Linda T.M............................................308-343
    2003 California Gasoline Price Study Final Report, Energy 
      Information Administration, Department of Energy, November 
      2003......................................................253-263


          IMPACT OF ENVIRONMENTAL REGULATIONS ON OIL REFINING

                              ----------                              


                        WEDNESDAY, MAY 12, 2004

                                       U.S. Senate,
                 Committee on Environment and Public Works,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:30 a.m. in room 
406, Senate Dirksen Building, the Hon. James M. Inhofe 
(chairman of the committee) presiding.
    Present: Senators Inhofe, Jeffords, Wyden, Boxer, Carper, 
Allard, Voinovich, Thomas, and Cornyn.

 OPENING STATEMENT OF HON. JAMES M. INHOFE, U.S. SENATOR FROM 
                     THE STATE OF OKLAHOMA

    Senator Inhofe. The hearing will come to order.
    Consistent with the Inhofe-Jeffords policy of starting on 
time, we will start on time. The purpose of today's hearing is 
to examine the environmental regulatory framework affecting 
gasoline refining. It seems every time gasoline prices rise, 
some Member of Congress calls for an FTC investigation for 
price fixing. The FTC spends several months investigating, and 
by the time they issue their conclusion, which is always no 
conclusion, prices have dropped and the public loses interest. 
Unfortunately, those Members of Congress never point out that 
many of the reasons for the high gasoline prices start right 
here in Congress with the laws that we pass and with the 
Federal Agencies who implement those regulations.
    In the past decades, our laws and regulations have improved 
the environment. However, we have picked the low hanging fruit. 
Today is critical. It is critical that American people realize 
that our environmental regulations are not free but have a very 
real price. It should not come as a surprise that gasoline 
prices are high. In May 2001, President Bush's National Energy 
Plan identified the significant fuels related issues that are 
the subject of much rhetoric today. Crude oil costs control by 
OPEC represents half the cost of gasoline. We have very little 
impact on OPEC and cause the cartel to a little more than lip 
service.
    Historically, two factors lifted us out of the oil crisis 
of the 1970's. First, we ban producing domestic oil from 
Alaska, and second, President Reagan lifted price controls that 
the Carter administration had imposed and allowed the market to 
work better. Today we again have two possibilities. First, we 
could look at our domestic sources in Alaska, ANWR, the 
National Petroleum Reserve. The loudest message we could send 
to OPEC would be to their pocketbook, which means domestic 
production.
    In fact, the International Energy Agency released a study 
on the impact of high oil prices on the global economy just 
this month. In analyzing the effects of sustained high prices, 
the IEA concluded that the United States would suffer the least 
because we still produce 40 percent of our own oil. Second, 
realizing that increasing domestic production is not realistic, 
then we must look to the market, as President Reagan did.
    We have a chart here that I think is self-explanatory.

    [GRAPHIC] [TIFF OMITTED] T4606.001
    

    It talks about what has happened to the refineries and our 
capacity in America. The refiners have dropped and yet the 
production and the petroleum demand is up so production is 
down. Demand is up. This is a simple product the market--supply 
and demand.
    But the market supply/demand balance is extremely tight.
    This chart shows that while demand for gasoline--that is 
the blue line--continues to grow. Our number of refineries--
that is the yellow--have dropped significantly. In 1981 we had 
324 refineries. Today we have only 149, less than half.
    With demand for gasoline continuing to increase, one would 
think that the market would move to meet that demand, and that 
companies would be pleased to produce more gasoline. However, 
the last time a new refinery was built in this country was 
1976.
    The second chart is a three-part chart. This chart depicts 
the best case scenario to scope, site, and construct a new 
250,000 barrel-a-day refinery. Again, in the best case, 
assuming no opposition from special interests and environmental 
groups. Without wrangling with ``Not In My Back Yard'' issues, 
it would take 5 to 7 years at a cost of $2.5 billion. However, 
this best case scenario, as costly and time-intensive as it is, 
is far from reality.

[GRAPHIC] [TIFF OMITTED] T4606.002


[GRAPHIC] [TIFF OMITTED] T4606.003


[GRAPHIC] [TIFF OMITTED] T4606.004


    A new project would face a maze of environmentally related 
permits from hazardous waste to water and air emissions. I have 
in my hand a five-page single-spaced list of the environmental 
laws that apply to refineries, which I will submit for the 
record.
    Without objection, so ordered.
    [The referenced document follows on page 55.]
    Senator Inhofe. Since industry is constrained from building 
new refineries, then it seems reasonable to expand existing 
ones to meet consumer demand. Unfortunately, special interests 
led opposition to the New Source Review, and has prevented 
industry from any meaningful expansions. Many disagree over New 
Source Review policies, but that disagreement underlies the 
problem. New Source Review adds uncertainty to the market. That 
uncertainty prevents the market from working effectively. 
People are not going to be readily investing their resources if 
that uncertainty is there.
    Uncertainty as a constrained and tight market leads to 
significant price volatility. Recently, the distinguished 
ranking member of the Energy and Natural Resources Committee 
suggested that EPA rollback its Tier II sulfur rules to 
importers, even though our domestic refiners have spent 
billions of dollars to meet the more stringent specifications.
    I applaud the Bush EPA for putting environmental quality 
first. However, the effect of even the thought of a rollback 
created more volatility in the market, temporarily sending 
crude oil futures up $1 a barrel.
    In hopes to appear responsive to constituents, some Members 
of Congress have suggested that we drastically alter the 
situation with respect to ``boutique'' fuels, or gasoline 
blends produced to meet a particular need of a particular 
geographic area. Price volatility is a very real problem when 
there is a supply disruption. Neighboring areas do not make 
these special blends, so they are unable to meet the supply 
shortfall.
    However, given the experience of the proposed sulfur 
regulation rollback, sweeping changes to our fuel policies 
without careful consideration and study can have detrimental 
price impacts for consumers. That is why I worked to conclude a 
carefully crafted study in H.R. 6, the House-Senate Conference 
Report of the Energy bill, to consider environmental and 
economic impacts of new fuels policy.
    In this constrained market, we must consider the economy 
and the environment. More stringent environmental regulations 
means that refiners must make environmental upgrades rather 
than increased capacity to meet consumer demand.
    The third chart is self-explanatory. You do not just have 
to take my word for it. The Energy Information Agency concluded 
that tighter product specifications will result in the 
increasing likelihood of outrageous outages, diminishing 
yields, and prime fuels.

[GRAPHIC] [TIFF OMITTED] T4606.005


    Speaking of H.R. 6, in the absence of an energy policy, 
something that we have been trying to establish in America 
since the Reagan days, this is a very serious problem.
    Domestic production would be the answer to a lot of these 
problems. It is not just in ANWR. Our Energy bill that was not 
passed had incentives for domestic production. In my State of 
Oklahoma, for example, is one of the largest of the marginal 
wells. Those are wells of 15 barrels or less. It would have put 
it back in.
    This is a statistic that I can stand behind. If we had all 
of the plugged marginal wells flowing today that have been 
plugged over the last 10 years, it would equal more than we are 
importing from Saudi Arabia today.
    These are problems that we are dealing with that are very 
serious problems. I look forward to our witnesses' testimony on 
this subject.
    Senator Inhofe. Senator Jeffords.

OPENING STATEMENT OF HON. JAMES M. JEFFORDS, U.S. SENATOR FROM 
                      THE STATE OF VERMONT

    Senator Jeffords. Thank you, Mr. Chairman.
    The committee will be examining several very important 
issues today as we take testimony on the environmental 
regulatory framework affecting oil refining and gasoline 
policy. Since late 2002, gasoline prices have been extremely 
volatile, with the national average spiking above $1.70 three 
times. But gasoline prices have been recording record breaking 
in recent days and so have the calls for quick Federal action.
    I am certain that every member of the committee has heard 
from their constituents about gas prices. The nationwide pump 
price for regular gasoline has set a new record, exceeding 
$1.75 per gallon. Inflated gasoline pricing harms our 
constituents in several ways. It takes dollars from their 
pocketbooks and it raises the prices of other goods and 
services needed by families in Vermont and across the country 
due to increased transportation costs.
    I am concerned, Mr. Chairman, that other harm to our 
constituents due to these high prices may be in the form of 
premature calls to repeal or revise our Federal environmental 
laws. This hearing, its very title, makes an unfounded 
assumption that our Nation's environmental laws are to blame 
for the current price of gasoline. These are important laws, 
important for the health of our citizens and our environment.
    These laws, and their regulations, have dramatically 
reduced harmful emissions from motor vehicles by removing lead 
and sulfur, adding catalytic converters, and specifying 
specific performance requirements for both vehicles and fuels. 
They are also requiring refineries to modernizing their 
pollution control equipment at certain times so they do not 
worsen local air quality.
    While compliance with these laws has imposed some financial 
costs, it also has achieved real benefits, well in excess of 
the costs to refineries or at the pump. In fact, according to 
EPA's announcement yesterday, they indicate that the public 
health benefits of the new rule to reduce sulfur in diesel for 
non-road heavy-duty engines, will be 40 times the cost of 
implementing the rule.
    This same pattern exists for many of the fuel and pollution 
controls that the Nation adopted so far. Whatever 
contributions, the cost of environmental compliance in the 
manufacturing of fuels meet the requirements of the Clean Air 
Act to the overall price of gasoline. I am very skeptical that 
these costs are a primary driver behind the current recent 
price fluctuations we have seen.
    We routinely implement our environmental laws in a 
deliberate and measured way. In the case of the Clean Air Act, 
the compliant motor fuels, all of them have been phased in over 
long timeframes in consultation with the industry.
    We have done this specifically to try to avoid market 
shocks and price spikes. These are not new requirements. They 
are not a surprised, and the costs associated with meeting them 
are known.
    Mr. Chairman, it also appears that the financial resources 
to meet these requirements are available. Major newspapers 
across the country have reported very high first quarter 
profits for the oil industry. For example, USA Today reported 
on April 29, 2004, that ConocoPhillips, the third largest U.S. 
oil company, reported first quarter earnings of $1.6 billion, 
or up 33 percent from $1.2 billion in the first quarter of last 
year. BP reported similar profits.
    Both companies cited higher prices for their products and 
higher profits on refining as one of the reasons for this 
increase. These are very high profits, much higher than those 
in other sectors of our economy. These profits have been made 
with the current environmental regulations in place.
    During this hearing, I will be listening closely for any 
documented real-world evidence that witnesses may have to show 
that environmental regulations are actually contributing to 
increases in the gasoline prices, and in a significant way.
    There is one thing that we do know with certainty. Our 
country's voracious appetite for petroleum is continuing to 
cause environmental and national security problems.
    We cannot ignore the health and environmental consequences 
of growing consumption. We owe it to our children to reduce our 
appetite now and find new, cleaner, and if possible, renewable 
fuels to help our transportation be strong.
    Thank you, Mr. Chairman.
    Senator Inhofe. Thank you, Senator Jeffords.
    Senator Allard.

 OPENING STATEMENT OF HON. WAYNE ALLARD, U.S. SENATOR FROM THE 
                       STATE OF COLORADO

    Senator Allard. Thank you, Mr. Chairman. I appreciate the 
fact that you are willing to step forward and hold this 
hearing. I think it is very important in light of the fact of 
many of the challenges that we are facing today with the 
supplies of fuel and the high cost of gasoline. In my State of 
Colorado, I think the average price is around $1.92 a gallon 
and in isolated areas like Vail, Colorado, for example,
    I think it is running around $2.30 a gallon. Somebody said, 
``What is the difference?'' The answer is: ``Well, communities 
like Vail pass a lot of laws that makes it difficult and 
expensive to do business in that community.''
    We are seeing that same event happening. We have other 
places in Colorado, for example, Durango, which is $2.03 per 
gallon. But again, it is a fairly remote area. It costs to get 
things supplied there, but then also there are communities that 
have done a lot to raise the cost of doing business in the very 
locale.
    There are many factors that affect the price of gasoline, 
but we must ask ourselves if Congress is doing anything to lift 
some of the burden, or if we are adding on, particularly if it 
is unnecessary rules and regulations where there is 
duplication.
    One factor is that of the overall price of crude oil and 
the numerous costs required to convert crude to gasoline, 
approximately 46 percent of the cost of gas comes directly from 
the price of crude oil. Nearly 60 percent of our crude oil is 
imported from foreign countries. Our reliance on imported 
sources mean we have little or no control over crude oil 
prices.
    Other problems are worldwide unrest and OPEC's ability to 
raise and lower the supply of oil through quotas which 
manipulates prices. One of the biggest factors, however, is 
just simply supply and demand. In States like Colorado, 
summertime brings increased travel which brings about an 
increased demand for gasoline. When the demand for gas rises 
but supply remains essentially the same, prices increase.
    Some ask, ``Why do not refiners simply increase their 
output?'' The answer is quite simple--because they cannot.
    There have been no new refineries built since 1976.
    Restrictions and requirements instituted by Congress make 
it so difficult and extremely expensive to build new capacity.
    It would likely take 5 to 7 years to get a project through 
design, permitting, and construction. Few companies can afford 
to do this.
    We must be aware of the effects of the myriad of laws we 
pass each year. We must not throw up so many regulatory 
roadblocks that we are forced to turn to other countries for 
all of our gasoline supply. We must not make the production or 
use of our domestic sources so expensive that costs forces us 
to continues to increase our reliance on foreign sources.
    Mr. Chairman, I am looking forward to hearing the comments 
from our panel and their view of the industry and where we are 
heading. Thank you very much.
    Senator Inhofe. Thank you, Senator Allard.
Statement of Hon. Wayne Allard, U.S. Senator from the State of Colorado
    Mr. Chairman, I want to thank you for holding this very important 
hearing. Gas prices are up all over the country. Colorado has not been 
hit as hard as some states, but is certainly feeling the pinch. In 
Pueblo and Grand Junction people are paying about $1.96 per gallon, in 
Fort Collins they're paying about $1.90 a gallon.
    And there are areas like Vail, where they are out of the way, so it 
costs more to get products there. But, they also cause price increases 
by instituting a lot of regulations that business and products have to 
comply with. They are paying $2.30 per gallon. Another area that's out 
of the way, but has brought some of this about through regulations, is 
Durango, where it's $2.03.
    Those of us who have run our own businesses know what it's like to 
get hit by all of these regulations. It runs up the cost of doing 
business, which runs up the cost of your products.
    We are all aware that there are many factors that affect the price 
of gasoline. But we must ask ourselves if we, in Congress, are doing 
anything to lift some of the burden of these elevated costs, or if 
we're adding to the burden.
    One factor that must be taken into account is that of the overall 
price of crude oil and the numerous costs required to convert crude to 
its useable form of gasoline. As Mr. Slaughter mentions in his 
testimony, approximately 46 percent of the cost of gas comes directly 
from the price of crude oil. We must remember that nearly 60 percent of 
our crude oil is imported from foreign countries.
    Our reliance on imported sources means that our country has little 
to no control over crude oil prices. Unrest in many of the countries 
that provide oil to the world causes uncertainty in the supply. This 
uncertainty can drive up prices. Additionally, the Organization of the 
Petroleum Exporting Countries (OPEC) is able to raise and lower their 
supply of oil through a calculated system of quotas, which manipulates 
prices.
    Another important factor is obviously the impact of supply and 
demand. In states like Colorado, summertime brings increased travel; 
this in turn brings about an increased demand for gasoline. When the 
demand for gas rises, but supply remains essentially the same, prices 
increase.
    Some ask, ``why don't refiners simply increase their output?'' The 
answer to that question is quite simply, because they can't. There have 
been no new refineries built since 1976. Restrictions and requirements 
instituted by Congress make it so difficult and extremely expensive to 
build new capacity. In addition to the cost factor, it would likely 
take 5 to 7 years to get a project through design, permitting and 
construction. Few companies can afford to do this. We must not throw up 
so many regulatory roadblocks that we end up turning to other countries 
for all of our gasoline supply.
    I am supportive of an energy policy that calls for greater 
dependence on domestic energy sources, including oil, natural gas, 
clean coal, nuclear, and renewable resources. But, we must also be 
aware of the effects of the myriad of laws we pass each year. We must 
not make the production or use of our domestic sources so expensive 
that costs force us to again increase our reliance on foreign sources.

    Senator Inhofe. Senator Wyden.

  OPENING STATEMENT OF HON. RON WYDEN, U.S. SENATOR FROM THE 
                        STATE OF OREGON

    Senator Wyden. Thank you very much, Mr. Chairman.
    I believe, Mr. Chairman and colleagues, the claim that 
environmental rules are driving up gasoline prices at the pump 
is a smoke screen to hide the fact that anti-competitive 
practices are a much bigger force in driving up these huge gas 
price hikes our citizens have seen.
    I point to three examples, Mr. Chairman. First, I have on 
my website now internal oil industry documents that demonstrate 
that in the past oil companies have reduced refinery capacity 
to boost profits. Now these are oil industry documents and they 
are available for review.
    Second, Senator Boxer and I are intimately familiar with 
what is going on on the West Coast where Shell is now looking 
at closing a very profitable refinery without even looking for 
a buyer aggressively. It is incredible as it sounds. You 
actually get tax breaks for doing something like this. I think 
it is also worth noting that Shell has never tried to claim 
that environmental rules had anything to do with the 
Bakersfield refinery shut down.
    But I also think--and this just strikes me as incredible, 
Mr. Chairman--that this committee ought to be investigating the 
fact that oil companies are now exporting petroleum products 
out of the United States, even as domestic prices continue to 
skyrocket. Last week an industry publication, the Oil Price 
Information Service, reported that April 2004 was the busiest 
month ever for exports of diesel.
    So at a time when our citizens are getting shellacked, the 
oil industry is saying that we are seeing a record amount of 
diesel actually being exported with cargoes going from the 
Pacific Northwest, to Japan, to the Gulf of Mexico, and to 
other areas. I think we will hear also the way the refineries 
work, of course, is if a refinery produced more diesel and 
export larger amounts, that tightens not just the diesel 
supply, but also the gas supply because it will allow the 
refineries that these are fungible.
    So I think if we are talking about an investigation, we 
ought to be investigating record amounts of diesel being 
exported at a time when our consumers are getting shellacked.
    Mr. Chairman, you have always been very gracious to me.
    I am anxious to work with you on these matters in a 
bipartisan way.
    Senator Inhofe. Thank you, Senator Wyden.
    Senator Voinovich.

  OPENING STATEMENT OF HON. GEORGE V. VOINOVICH, U.S. SENATOR 
                     FROM THE STATE OF OHIO

    Senator Voinovich. Thank you, Mr. Chairman. I really 
appreciate your responding to my request to have this hearing.
    Senator Inhofe. I meant to mention that. That was your 
request. We did have a hearing on natural gas prices that are 
creating a serious problem, too. Senator Voinovich said, ``You 
know, we have the same problem in the field.'' I appreciate 
your calling this to our attention.
    Senator Voinovich. It is interesting because the hearings 
that we had in the past were in the Governmental Affairs 
Committee under my subcommittee, and it is now where it should 
be in the Environment and Public Works Committee.
    This is the fourth hearing I have attended on the high cost 
of gasoline since I have been in the Senate. At these hearings 
that we have in the past, we were assured that we would see 
more price stability. Unfortunately, gas prices are still not 
stable. I was amazed at the statistic that Senator Allard gave 
us about the price of gasoline out in Colorado.
    Consumers are paying the highest price ever per gallon of 
self-serve regular gasoline. Prices continue to increase.
    The Energy Information Administration on Monday said the 
national average price was $1.94 a gallon. I have seen 
estimates that prices could reach as high as $3 per gallon in 
the coming months. This kind of increase does raise eyebrows 
and raises lots of questions.
    The American people are getting fed up with paying these 
high gas prices and everyone is busy pointing to a whole host 
of reasons for price hikes over the past several years--lack of 
domestic production, lack of new refinery construction since 
1976, and I think the Chairman did a wonderful job of outlining 
how difficult it is to build a refinery--reformulated gasoline, 
alleged price gouging, and collusion by oil companies, the law 
of supply and demand, pipeline and other transportation 
problems, and you name it.
    Frankly, most people do not care what the reason is.
    They want results. They want to know what we will do in the 
short term to bring down prices. They want to know what our 
long-term plan is as well.
    One of the problems that we are facing is that for far too 
long our country has not had a comprehensive energy policy. It 
is moved ahead with environmental laws and regulations with 
little consideration of how it would affect our economic well 
being. Our country has the responsibility to develop a policy 
that harmonizes the needs of our economy and our environment. 
They are not competing needs. A sustainable environment is 
critical to a strong economy and a sustainable economy is 
critical to providing the funding necessary to improve our 
environment.
    In my State we have lots of just-in-time manufacturers who 
transport components and finished products to far and wide. 
They rely on low gas prices, or at least stable gas prices for 
their survival.
    Mr. Chairman, I think that one of the most positive things 
that we can do in this session of the Congress is to pass the 
Energy bill. It is long overdue. We have been debating it since 
2002, back and forth. We need to pass that Energy bill. I have 
to congratulate my colleagues on the fact that we passed the 
energy tax provisions in the Frist ETI bill. I think that was 
very positive. It was a bipartisan piece of legislation.
    The last thing I want to say today is this. I think we are 
living in a dream world, folks. We are living in a dream world. 
We are living in a dream world because we have the most 
unstable situation, in my memory and in our history, in the 
Middle East. I remember 1973. We had the 1973 war.
    Syria and Egypt attacked Israel and Israel won the war. The 
OPEC nations got together and decided to teach us a lesson.
    They were not real happy with us because they thought we 
sided with the Israelites in that war. They put on an embargo.
    Does anybody remember it?
    I remember it well. And at that time we were relying on 35 
percent of our oil on foreign sources. Today it is up to 63 
percent, and it is projected that by 2018 it could go to 73 
percent.
    I want to tell you something. Saudi Arabia is the third 
largest producer of oil for this country. They are third--1.4 
million barrels a day--the third largest supplier to the United 
States of America.
    I have read a lot about what is going on in Saudi Arabia.
    The fact of the matter is, folks, that 95 percent of the 
people in Saudi Arabia are supporters of Osama bin Ladin. If 
they have a chance to overthrow that government, they will.
    You can bet your bottom dollar that if they do, they will 
cutoff our oil supply like that. All we have to do is think 
about 9/11 and what they did. They went to our financial heart 
and did a job on us.
    I think we need to get moving. We are dealing with the 
world the way it was 15 years ago. All of us--Republicans and 
Democrats--have to get together and figure out how we can be 
less reliant on foreign oil. That means more supply and more 
efforts at conservation. It has to be a major aggressive 
action. We cannot have business as usual.
    Thank you, Mr. Chairman.
    Senator Inhofe. Thank you, Senator Voinovich.
     Statement of Hon. George V. Voinovich, U.S. Senator from the 
                             State of Ohio
    Thank you, Mr. Chairman.
    Last month, I asked the committee Chairman, Senator Inhofe, to 
conduct a hearing on the impact of environmental laws on gasoline 
prices. I am pleased that he responded positively.
    Today's hearing is the fourth hearing I've attended on the high 
cost of gasoline in our Nation. Since 2000, the Committee on Government 
Affairs, of which I am also a member, has held a series of hearing on 
this issue. At these hearings, we were assured that we would have more 
stability of prices. Unfortunately, prices are still not stable. Today, 
consumers are paying the highest price ever per gallon of self-serve 
regular gasoline, and that price continues to increase. I am very 
concerned that this is just the beginning of a summer of record-
breaking gas prices since there are still 4 months of high gasoline 
demand to come.
    You cannot pick up a newspaper or turn on a television without 
reading or hearing about the high price of gasoline in our Nation 
today. I have to tell you it's not possible for me to visit a gas 
station these days without coming across people who are downright 
angry. When people pumping their gas start talking to each other across 
the islands about the ``blankety-blank'' price of gasoline, you know 
they are mad. I don't blame them. They are angry because the increase 
is affecting them where it hurts, right in the pocketbook. It's 
affecting people who have to drive long distances to make a living. 
It's affecting vacation plans for those families who have planned to 
take long trips this summer. It's particularly affecting people who 
live on the financial edge those of whom we sometimes forget how much 
high gas prices can impact on their ability to pay for food and other 
essentials. This problem is compounded because these same people see an 
increased burden on their income because of high natural gas and 
electricity costs.
    According to the Energy Information Administration, on Monday the 
national average price of regular grade gasoline was $1.94 per gallon. 
I've seen estimates that gasoline prices could reach as high as $3.00 
per gallon in some parts of the country in the coming months.
    The kind of gas price increases we are seeing do more than raise 
eyebrows, they raise questions.
    The American people are getting fed up with paying these high gas 
prices. Politicians, analysts and business owners are busy pointing to 
a whole host of reasons for price hikes over the past several years:--
Lack of domestic production;--Lack of new refinery construction since 
1976;--Reformulated gasoline;--Alleged price gouging and collusion by 
oil companies;--Economics and the law of supply and demand;--Pipeline 
and other transportation problems; and--You name it. Frankly, most 
people don't care what the reason is and they are getting tired of the 
finger pointing.
    Four years ago, at a hearing in the Government Affairs Committee, I 
asked what we were going to do now to bring down gasoline prices, and 
what were we going to do at that time to make sure that we don't end up 
in this predicament 5 years down the road. It's important to remember 
that gasoline prices at that time were an average of $1.65 per gallon.
    All too often in government, when a problem comes up, we have a 
tendency to treat it as if we would a barking dog: give it a bone and a 
little attention to make it stop barking, and when it stops barking, 
ignore it until it starts barking again.
    Such neglectful treatment of such a vital component of our nation's 
economy is unconscionable and reflects the inability of this Congress 
and the Administration to adopt a comprehensive energy policy. In spite 
of the efforts of some of us since 2002 to adopt such a policy and it 
was disheartening that our attempt last fall was frustrated because we 
were unable to get cloture on the bill. The American people need to 
understand that the passage of a comprehensive energy bill is key to 
our economic prosperity and dealing responsibly with our reliance on 
foreign oil.
    The American people want results. They want to know what we will do 
in the short term to bring down prices, and they want to know what our 
long term plan is as well. No one wants to see a lengthy continuation 
of what we're going through at this time and, no one wants to see this 
situation repeat itself years from now.
    One of the problems we are facing is that, for far too long, our 
country has not had a comprehensive energy policy and has moved ahead 
with environmental laws and regulations with little consideration of 
how it would affect our economic well-being.
    The U.S. Senate has a responsibility to develop a policy that 
harmonizes the needs of our economy and our environment. These are not 
competing needs. A sustainable environment is critical to a strong 
economy, and a sustainable economy is critical to providing the funding 
necessary to improve our environment.
    We need to enact a policy that broadens our base of energy 
resources to create stability, guarantee reasonable prices, and protect 
America's security. It has to be a policy that will keep energy 
affordable. Finally, it has to be a policy that won't cripple the 
engines of commerce that fund the research that will yield 
environmental protection technologies for the future.
    The Energy bill is also important to my home state. Ohio has many 
just-in-time manufacturers who transport components and finished 
products far and wide. They rely on low gas prices or at least stable 
gas prices for their economic survival. Passing the Energy bill will 
help provide that stability by allowing us to increase domestic 
production and reduce our reliance on volatile foreign sources of oil.
    Yesterday's overwhelming vote in favor of the energy tax provisions 
in the FSC bill is a step in the right direction. I'm pleased that my 
colleagues avoided the demagoguery and voted in favor of this 
provision. For example, the provision will provide certainty for our 
marginal oil producers by creating counter-cyclical incentives that 
only take effect when the price is low. Five years ago, we lost the 
production of many marginal wells when crude prices dipped below $13 
per barrel and many of the small producers couldn't break even. These 
incentives will guarantee a minimum price for these producers, 
protecting our domestic supply of oil from future low prices.
    In order to continue to meet our domestic petroleum needs, we must 
pass an energy policy that will increase production and provide 
certainty to our producers. We also must consider conservation and 
energy efficiency measures that will help us use less oil. We must 
consider common-sense CAFE standards that will help decrease our 
reliance on fossil fuels. Unfortunately, we were unable to consider 
exploring for oil in the Arctic National Wildlife Refuge (ANWR). ANWR 
would be a step in the right direction toward increasing our domestic 
energy supply. nationwide, our pipelines are operating at capacity, 
and, if a break or other problem is experienced, then the gasoline 
being distributed to the gas stations will be interrupted, which will 
be reflected in the price at the pump as we saw in the Midwest in 2000. 
The best way to alleviate this problem with our distribution system is 
to improve our infrastructure.
    We also must deal with our refining capacity. New Source Review has 
placed America's refiners in limbo. Permitting requirements have made 
it difficult for refineries to expand capacity or to construct new 
refineries. There have been no new refineries built in this country 
since 1976.
    Today, there are 149 refineries in the United State. They are 
stretched to the limit because they are operating at 94 percent 
capacity. In 1981, when there were over 300 refineries in this country, 
just over 68 percent of the capacity was being utilized.
    Our problem with our reliance on foreign oil is frightening. Thirty 
years ago, we relied on 35 percent foreign oil to meet our energy 
needs. Today our reliance averages 60 percent and it is expected to 
increase to 73 percent by the year 2025 according to the Energy 
Information Administration. This problem will be exacerbated because of 
China's growing demand for oil.
    Many people forget what led to the oil embargo of 1973. The Arab 
states believed that their complaints against Israel were going 
unheeded. In order to punish the United States, they cutoff our access 
to the oil supply we were relying on in the Middle East. I believe we 
are more vulnerable than we have ever been. Political unrest continues 
in the Middle East, and I am concerned that many of the foreign oil 
supplies we rely on are vulnerable to potential terrorist attacks. Can 
you imagine what al Qaeda would do if they were able to get control of 
Saudi Arabia and the oil fields there?
    If the Congress is serious about dealing with our current oil 
supply crisis, we must pass the energy bill now. Band-aids will no 
longer work the patient is hemorrhaging. We can't continue with our 
head in the sand any longer.
    Thank you and I look forward to hearing the testimony of today's 
witnesses.

    Senator Inhofe. Senator Boxer.

OPENING STATEMENT OF HON. BARBARA BOXER, U.S. SENATOR FROM THE 
                      STATE OF CALIFORNIA

    Senator Boxer. Thank you, Mr. Chairman.
    We are living in a dream world. You are right. I do 
remember those long lines in the 1970's. I also remember how 
the Japanese automobile companies came in and stole our market 
share. They make cars that had fuel economy. Now we cannot even 
get a vote in the U.S. Senate to increase fuel economy by a few 
gallons. Let us tell us straight. Let us tell all the sides of 
the story.
    Senator Voinovich, I would like to associate myself with 
your anger and your fear about where we are going without an 
energy policy. But I think we see things a little differently. 
When we tried on our side of the aisle--and some on your side 
of the aisle--to stop the export of Alaskan oil. We need it in 
this country. We could not even win that vote.
    There is a lot of things that we could put on the table 
here today, but one thing I want to put on the table, Mr. 
Chairman, is this. You and I are really good friends. We just 
do not see the world the same way when it comes to the issue of 
the environment versus the economy. This is an old fight. 
Shifting the blame from the oil industry and our own inaction 
to environmental laws simply does not fly.
    I come from California which leads the Nation in 
controlling pollution from refineries and motor vehicles. I 
have heard this false argument for years. The people want clean 
air. They want to have their gas. You do not have to make this 
false choice. According to the California Environmental 
Protection Agency, the regulations we have on the books add 
five cents per gallon for gasoline and three cents per gallon 
for diesel for the cost of our gasoline. If you ask people in 
California if they have been hit by huge increases in the cost 
of their gasoline, they will say that three cents to five cents 
is worth it.
    I would like to insert into the record a letter from the 
California EPA on California's Cleaner Fuels.
    Senator Inhofe. Without objection, so ordered.
    [The referenced document follows on page 244.]
    Senator Boxer. These are the facts. Environmental 
regulations are not the reason gas prices have skyrocketed.
    But they are the reason that we have cleaner air and better 
public health. California's regulations reduce ozone-forming 
emissions by 15 percent, toxic air pollution emissions by 50 
percent, nitrogen oxides by 7 percent, and diesel particulate 
matter by 25 percent.
    That is all Greek to a lot of us. But what does it mean?
    It means reduced incidents of asthma, fewer premature 
deaths from heart disease, and fewer cases of cancer. Mr. 
Chairman, I asked my staff to find out what cancer costs us a 
year in our society. Not all of this could be attributed to 
dirty air. But all of cancer is $189 billion a year in direct 
medical costs, lost productivity, and lost productivity due to 
premature death.
    So when we clean the air and we lengthen life, and we spare 
families the agony of these diseases, it is a far greater cost 
than three to five cents a gallon. According to U.S. EPA, low 
sulfur gas requirements will have a public health benefit equal 
to more than $24 billion a year. Low sulfur on road diesel fuel 
will provide health benefits to the tune of $51 billion per 
year.
    This is from our U.S. EPA. A new non-road diesel rule will 
result in $80 billion per year in public health benefits 
outweighing costs by 40-to-1. These measures have been 
bipartisan. It would break my heart to see if in the 
Environment Committee we started to dismantle these things.
    I hope we would not rehash this. I hope we would do 
something positive about high gas prices. For what it is worth 
to you, Mr. Chairman, I have put out a plan on that. I have 
worked with Senator Wyden on this. I think it makes sense.
    First, for our State, we need an oxygenate waiver because 
we meet the Clean Air Act without that oxygenate requirement.
    We should stop filling and exchange oil in the strategic 
petroleum reserve, which is 96 percent full; encourage FTC to 
turn their information investigation of gas prices into a 
formal investigation, encourage them to that; and have 
automatic investigations when you have these rapid price 
increases.
    By the way, the FTC Chairman, in a meeting with me said he 
cannot explain why the prices on the West Coast are so high. It 
is an anomaly, he says. He is not pointing to any refineries. 
He is saying that there is absolutely no reason.
    My light is on, but I would like 20 seconds to finish; if 
that is all right?
    Senator Inhofe. We will make it up next time.
    Senator Boxer. Thank you so much. I think we should subject 
OPEC to U.S. antitrust laws--that is a Mike DeWine bill--and 
cease and desist orders in highly concentrated areas--that is a 
Ron Wyden bill, and I am proud to be a cosponsor. When you see 
Shell Oil wanting to shut down their refinery in Bakersfield, 
which is so profitable, that is going to hurt us. It is going 
to hurt our consumers. We should have GAO assess whether we can 
maintain the same air quality while decreasing the number of 
these ``boutique'' fuels.
    I would like to put into the record an article in USA 
Today, ``The high prices that consumers are paying for gas and 
natural gas are fattening oil companies' profits 
dramatically.''
    Senator Inhofe. Without objection, so ordered.
    [The referenced document follows:]

                    [From USA Today, April 29, 2004]

               Oil firms reap benefits of high gas prices

                          (By James R. Healey)
    The high prices that consumers are paying for gasoline and natural 
gas are fattening oil companies' profits dramatically.
    ConocoPhillips, the No. 3 U.S. oil company, reported first-quarter 
earnings Wednesday of $1.6 billion, up 33 percent from $1.2 billion in 
the first quarter last year and about 17 percent more than Wall Street 
had forecast. It cited higher prices for its products and cost savings 
from merging Conoco and Phillips.
    BP reported Tuesday that first-quarter profit was $4.2 billion, up 
24 percent over a year earlier, boosted by a gain on the sale of stakes 
in two Chinese companies. Higher profit margins on refining also were 
cited. Smaller and independent refiners reported earnings increases of 
45 percent to more than 100 percent vs. the first quarter a year ago.
    Average gasoline prices have set daily records this month, finally 
easing this week. The nationwide average for unleaded regular is 
$1.807, AAA reported Wednesday, slightly less than the record $1.81 
reported Saturday.
    Rather than being exploitive of consumers, industry analysts 
agreed, oil companies are either making money off high crude-oil prices 
caused by speculators or are reaping the benefits of investing in 
lower-cost refining.
    ``I'm not defending the oil companies, but almost every one 
reported losses'' in the late 1990's, said A.F. Alhajji, oil expert at 
the Ohio Northern University's College of Business Administration.
    ``The only thing that could rain on the parade is if the economy 
would crash. As long as demand outpaces supply, your margins are 
good,'' said Mary Rose Brown, spokeswoman for Valero, the largest 
independent U.S. refiner. Valero's first-quarter earnings were $248 
million, vs. $170 million a year ago.
    Gasoline demand is up 3.4 percent this year, she said, despite high 
prices.
    Valero does not produce oil and must buy it. However, it has 
invested in technology allowing it to use so-called sour crude. That's 
much cheaper than the sweet crude other refiners must use to meet 
tightening Federal standards for low-sulfur, clean-air gasoline.
    Kerr-McGee and Unocal said first-quarter results were twice as good 
as they were a year ago. Amerada Hess was up 60 percent.

    Senator Boxer. I do not think we should shed too many tears 
for the oil companies, but I would shed a lot of tears for our 
families if we start to unravel environmental laws.
    I thank you.
    Senator Inhofe. Thank you, Senator Boxer.
    We will cutoff opening statements at this time.
    We are very pleased to have the distinguished panel before 
us today. Their names and identifications are printed.
    We will start with opening statements. I will ask you to 
adhere to our 5-minute rule. We will start with you, Mr. 
Slaughter, president of the National Petrochemical and Refiners 
Association.

 STATEMENT OF BOB SLAUGHTER, PRESIDENT, NATIONAL PETROCHEMICAL 
 AND REFINERS ASSOCIATION, ON BEHALF OF THE AMERICAN PETROLEUM 
                           INSTITUTE

    Mr. Slaughter. Thank you, Mr. Chairman. I am also appearing 
today on behalf of the American Petroleum Institute, as well as 
our home association, the National Petrochemical and Refiners 
Association. Together those associations represent virtually 
all refiners in the United States.
    We have already had discussions about the factors that 
affect the delivered cost of gasoline. Forty-five to fifty 
percent of the cost of making gasoline reflects the cost of the 
crude oil. As we all know, our feed stock price has gone up 60 
percent in the last year.
    This chart shows you that roughly 70 percent of the 
delivered cost of gasoline reflects the cost of crude oil, plus 
the cost of State and Federal taxes. Only about 20 percent of 
the cost represents the cost of refining, including profit. Of 
course, crude oil prices have been propped up by a very strong 
international demand, as well as the activities of OPEC.
    The other major influence is that there is a very strong 
demand for gasoline in the United States. API estimates that we 
will again hit the 9.4 million barrel per day demand figure 
that we reached last summer.
    Senator Inhofe. Mr. Slaughter, do you have copies of these 
to enter into the record? I think it would be very important 
that we have these charts in the record?
    Mr. Slaughter. Yes, sir; they are attached to our 
statement.
    Senator Inhofe. Thank you.
    Mr. Slaughter. By the way, this particular chart shows the 
very strong correlation between crude prices and gasoline 
prices. Since crude prices are the major factor for gasoline 
manufacturing costs, it makes sense that the crude and gasoline 
price curves are essentially very similar.
    As I said, we are also facing a very strong demand, really 
a record demand, again this summer for gasoline because of the 
rapidly improving U.S. economy. With demand this strong and 
feedstock prices so high, it is fortunate that refineries have 
been able to run at record rates of utilization and produce 
record amounts of gasoline for this time of the year. 
Refineries have been operating at very high utilization rates, 
94.5 percent, and we think even higher as we speak even before 
the start of the summer driving season and producing record 
volumes.
    But there are factors that adversely affect how much 
gasoline is actually available to consumers. One is the amount 
of refining capacity. There are problems in increasing domestic 
refining capacity, Mr. Chairman, which you explored in your 
opening statement.
    The other factor is environmental regulations which play a 
role in limiting the amount of gasoline available to consumers. 
The situation like today when high demand means that every 
gallon counts, shortcomings are serious indeed.
    I want to point to Chart Number 3. One reason why 
refineries are not building and capacity increases have slowed 
is the fact that most of the refining industry's investment 
capital for the last two decades has been used to comply with 
regulatory initiatives, pursuant to the Clean Air Act.
    Because this committee has jurisdiction over the act, it is 
fitting that we are here today to discuss aspects of energy 
policy. The Clean Air Act amendments of 1990 have actually set 
national fuels policy for the last 15 years.
    In short, energy and fuels policy is a byproduct of 
environmental legislation that this committee approved in 1990. 
Unfortunately, regulatory activities under the Act pay little 
attention to the impact on fuel supply. So it is fitting to 
review what you have asked us to do and where we are in 
implementation of this Clean Air Act schedule.
    We are midway in the total redesign of gasoline and diesel 
that you have asked us to do. There are many other 
requirements. This blizzard of regulatory requirements 
affecting refiners in this decade will cost $20 billion of 
investment capital to implement, this group of uncoordinated 
and often overlapping programs.
    In the 1990's, the industry spent roughly the same amount 
of money on the first wave of fuel and facility changes 
mandated by the Act. API estimates that since 1993 about $89 
billion has been spent to protect the environment. More than 
half was spent in the refining sector. As you will notice on 
the time line, we are just halfway through implementation of 
the substantial redesign of the American fuel slate and 
facility regulation.
    Both NPRA and API support requirements for the orderly 
production and use of cleaner burning fuels to address health 
and environmental concerns. We have been leaders in that area. 
We also support continuing environmental improvements at 
refineries and other facilities.
    But given the magnitude of the investments involved, we 
believe the program should be crafted to help industry maintain 
the flow of adequate and affordable energy supplies to 
consumers. What happens in the real world is that supply 
considerations take a far back seat to the pursuit of 
environmental goals, preferably the greatest reduction in 
emissions at the earliest possible date. Supply considerations 
raised by industry are marginalized or dismissed.
    It has been pointed out today that these environmental 
programs have very significant benefits. We do not argue with 
the very significant benefits they have, but they also have 
very significant costs, Mr. Chairman.
    We think that Congress should join with the industry and 
other stakeholders in doing a better job of matching supply 
costs, supply impacts of environmental legislation. We would 
urge Congress as a first step to find the additional two votes 
to pass the Conference Report on H.R. 6, Comprehensive Energy 
legislation, and get the United States started to move toward 
the real 21st century energy policy.
    Thank you for you time. I would ask that my full statement 
be placed in the record in its entirety.
    Senator Inhofe. Without objection, so ordered.
    Thank you, Mr. Slaughter.
    Mr. Early.

    STATEMENT OF A. BLAKEMAN ``BLAKE'' EARLY, AMERICAN LUNG 
                          ASSOCIATION

    Mr. Early. Good morning, Mr. Chairman. I am Blakeman Early. 
I am happy to appear today on behalf of the American Lung 
Association. The Lung Association is celebrating its 100th 
anniversary this year.
    I am going to focus my testimony on the fuels issues which 
we think most affect the refining industry. Obviously, there 
are important requirements of the Clean Air Act, such as NSR, 
and I will touch on NSR, but there are other requirements that 
affect the industry. We think the fuel requirements are the 
most important.
    The reformulated gas program has been proven to be cost 
effective at reducing both evaporate and tail pipe emissions 
from today's vehicles, and is routinely reducing toxic air 
pollutants by 30 percent. This translates into a relative 
cancer risk reduction of 18 to 23 percent in the areas that are 
using reformulated gasoline. This success of this program is 
why some States have adopted either RFG or formulas that are 
cousins to RFG, commonly referred to as ``boutique'' fuels.
    The low sulfur gasoline on-road and non-road diesel fuel 
programs, and their associated emissions control requirements, 
unlike RFG, are part of the package that cleanup both the fuel 
and require very sophisticated new tail pipe emissions 
equipment, to reduce engine emissions by 90 percent or more.
    The cleaner fuel reduces emissions modestly from the 
vehicles and engines that are used today, but the new 
technology engines will provide large emissions reductions when 
they replace today's dirty ones. The health benefits are 
enormous.
    Senator Boxer has already gone through this--$24 billion 
for the gasoline sulfur rule, $51 billion for the non-road or 
the on-road diesel road, and $83 billion in health benefit 
savings each year, which translates into few early deaths, 
fewer hospitalizations, fewer cancers, fewer asthma attacks, 
and fewer lost days at work and school, as a result of the 
reduction of smog and fine particles attributable to these 
programs.
    Each of these regulations implementing these clean fuel 
programs were the product of a broad, lengthy, and public 
process that reached a delicate political and substantive 
compromise. No party got everything it wanted. Each rule 
provides large and critical emission reductions.
    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 changes bear a heavy 
burden of showing the need and demonstrating the benefit.
    Air pollution still threatens millions of people. The Lung 
Association's state-of-the-air report just released found that 
55 percent of the U.S. population lives in areas with monitored 
unhealthy levels of smog and particle pollution.
    Vulnerable peoples subject to this pollution include 29 
million children, 10 million adults, and children with asthma, 
and 17 million people with cardiovascular disease.
    We believe that many of these areas may want to adopt a 
clean fuels program using either RFG, low volatility 
alternatives, or low sulfur diesel. We believe that should 
Congress choose to change the law or otherwise influence 
gasoline policy, it should do so in a way that makes it easier 
for areas that exceed air pollution standards to adopt clean 
fuels programs and not lock in the use of dirtier conventional 
fuels. We need clean fuel programs to be broadly adopted to 
obtain clean air and to protect the public health as soon as 
possible.
    There is no evidence that the current clean fuels program 
significantly influences current gasoline price increases. As 
is customary when gasoline price spikes occur, some have 
suggested that the clean fuels program, often referred to as 
``boutique'' fuels are responsible. While it appears that clean 
gasoline programs in both California and the Chicago/Milwaukee 
area have contributed temporary price spikes in the past.
    There is little evidence presented publicly demonstrating 
that clean fuel programs across the country are contributing in 
any significant way to today's high gasoline prices. Both 
convention and clean fuels have risen in price 30 cents or more 
over the last year. This increase has occurred in virtually all 
parts of the country, regardless of where the gasoline comes 
from or who makes it.
    More significantly, the increases in price for conventional 
gasoline and clean gasoline have pretty much been the same. 
Attached to my testimony I have prepared an unscientific chart 
that illustrates my point. If producing clean gasoline were a 
major factor, the prices of these fuels would be rising at a 
faster rate. As my chart shows, this does not appear to be 
happening.
    The point is that many other factors that impacted gasoline 
price, led by unsustainable growth and demand, and the price of 
crude oil currently topping $40 a barrel have historically 
driven prices, and do so today. Clean fuel requirements have an 
insignificant impact in comparison.
    With respect to the New Source Review rules adopted by the 
Bush administration, I would like to point out that unlike the 
process to adopt fuels rules, the so-called NSR reforms adopted 
were not changes long considered by the Clinton administration, 
and were not carefully analyzed and adopted through a 
collaborative public process.
    They would make the refiners' ability to expand or change 
their process easier. They will not lower gasoline prices much, 
if any, but it will increase air pollution by a significant 
amount. We urge you to oppose those NSR changes.
    Thank you, Mr. Chairman. I would ask that my full statement 
be placed in the record in its entirety.
    Senator Inhofe. Without objection, so ordered.
    Thank you, Mr. Early.
    Mr. Ports.

STATEMENT OF MICHAEL PORTS, PRESIDENT, PORTS PETROLEUM COMPANY, 
INCORPORATED, ON BEHALF OF THE SOCIETY OF INDEPENDENT GASOLINE 
     MARKETERS OF AMERICA AND THE NATIONAL ASSOCIATION OF 
                       CONVENIENCE STORES

    Mr. Ports. Good morning, Mr. Chairman, and Senator 
Voinovich from my State of Ohio.
    Senator Voinovich. Welcome, Mr. Ports. We are very happy to 
have you here today.
    Mr. Ports. My name is Mike Ports. I am president of Ports 
Petroleum Company, Incorporated, an independent motor fuels 
marketer headquartered in Wooster, OH. I appear before the 
committee today representing the Society of Independent 
Gasoline Marketers of America, and the National Association of 
Convenience Stores.
    Today SIGMA and NACS members sell approximately 80 percent 
of the gasoline and diesel fuel purchased by motorists each 
year. While my company does not retail gasoline and diesel fuel 
in Oklahoma, many SIGMA and NACS members, including Love's 
Country Stores of Oklahoma City and QuikTrip of Tulsa, are 
major Oklahoma marketers. Mr. Chairman, Tom Love and Chester 
Cadieux ask that I extend their personal greetings to you at 
this hearing.
    Thank you for inviting me to testify today on the 
environmental regulatory framework affecting oil refining and 
gasoline policy. Today retail gasoline prices across the Nation 
are at some of the highest levels in history. Diesel fuel 
prices are not far behind.
    Fortunately, the congressional reaction to, and the media 
coverage of, the motor fuel price volatility we have 
experienced in 2004 has taken on an educated tone. In general, 
with a few notable exceptions, allegations of price gouging and 
collusion have been replaced by a discussion of high crude oil 
prices, increases in demand, supply constraints, or dislocation 
caused by refinery problems and ``boutique'' fuels, stringent 
environmental regulations, and lack of growth in domestic 
refining capacity.
    Simply stated, the environmental compliance burdens placed 
on the Nation's domestic motor fuel refining industry over the 
past 20 years have effectively destroyed the world's most 
efficient commodity, manufacturing, and distribution system. To 
enhance the quality of our air, an objective 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 fuel distribution system into islands of 
``boutique'' fuels.
    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. Congress has a choice to make with 
respect to motor fuel refining policy. It could continue down 
the path followed for the past two decades. This path, as we 
have witnessed, results in static or reduced domestic refining 
capacity, balkanization of the motor fuel markets, increased 
imports, increased volatility, and wholesale and retail prices, 
and rising costs for consumers.
    Right now on our current path there is disincentive for 
refiners to increase capacity due to the costs involved and the 
lack of opportunity to achieve a reasonable return on 
investment.
    Alternatively, we can embark on a different path, one that 
continues to encourage clean fuels; one that restores 
fungibility to the gasoline and diesel fuel supply system; one 
that encourages rather than discourages expansion of domestic 
refining capacity; or one that changes the fundamental economic 
calculus that a refiner makes when it decides whether to spend 
the huge sums necessary to make the upgrades required to 
produce clean fuels or to close to refinery.
    SIGMA and NACS urge Congress to examine closely this 
alternative path. If we do not like the current situation, then 
we collectively need to chart a new course in order to change 
the future. It is time for Congress to enact a set of Federal 
motor fuel refining policies to preserve and, if possible, to 
increase domestic refining capacity, restore fungibility to the 
motor fuels supply and distribution system, and enhance 
available supplies of gasoline and diesel fuel.
    These goals should not be viewed as an either/or situation. 
Our Nation can have a clean environment and still enjoy 
affordable, plentiful supplies of gasoline and diesel fuel. But 
we must embark on a new path together.
    As an initial matter, several provisions in the fuels title 
of the Conference Report on H.R. 6, the Comprehensive Energy 
Policy Bill under consideration by Congress, will be important 
first steps toward achieving these goals. However, SIGMA and 
NACS suggest that the enactment of H.R. 6 is only the first 
step. To build on the provisions in H.R. 6, at a minimum, the 
following steps must be considered.
    Prevent the spread of new ``boutique'' fuels during the 
implementation of the new ozone air quality standard, if 
necessary through a Federal preemption of fuels regulations, or 
the introduction of a basket of Federal fuels that a State may 
adopt, and restore fungibility without loosening environmental 
protections to the Nation's gasoline and diesel fuel supplies 
by reducing the number of fuels permitted.
    Restoring fungibility to the refining and distribution 
system, while maintaining environmental protections, will 
require the simultaneous adoption of policies to promote the 
preservation and expansion of domestic refining capacity.
    In summary, SIGMA and NACS asks that you always keep in 
mind that every time the government changes fuels 
specifications, manufacturers are faced with the decision to 
allocate capital to a refinery or stop making specification 
fuels. In every such instance, some manufacturers will 
determine that the additional investment is unjustified and the 
relevant facility's production will be lost to the market.
    Consequently, the choice is clear. Continue our current 
domestic motor fuel refining policies, or perhaps it is better 
described as a lack of a policy, or choose a new path that 
encourages the production by domestic refiners of plentiful 
supplies of clean gasoline and diesel fuel.
    Thank you for inviting me again to testify today. I would 
be pleased to answer any questions my testimony may have 
raised. I would ask that my full statement be placed in the 
record in its entirety.
    Senator Inhofe. Without objection, so ordered.
    Thank you, Mr. Ports.
    Dr. Cooper.

   STATEMENT OF MARK COOPER, DIRECTOR OF RESEARCH, CONSUMER 
                     FEDERATION OF AMERICA

    Mr. Cooper. Thank you, Mr. Chairman, and members of the 
committee. I greatly appreciate the opportunity to appear today 
and applaud the committee for inviting consumers to present 
their view of the current situation in the gasoline markets. 
Ultimately it is the consumers who pay the bill.
    The current records cap a wild 4-year ride, a roller 
coaster on gasoline prices.
    When the first signs of trouble began 3 or 4 years ago, CFA 
began to look and do research into the question. We do not lose 
interest. We stick with it when the prices are low as well as 
when they are high. In three reports, we have testified at 
least three or four times--I testified before Senator 
Voinovich--we have offered an examination that looks at the 
complex interaction of all the factors that are affecting our 
prices.
    We believe that increasing demand here in America and 
around the world has tightened markets every place. This 
reinforces the pricing power of dominant international 
producers. Domestic markets are tight, too, because refining 
capacity in stocks have not kept up with demand.
    In our view, consolidation in the industry has interacted 
with environmental regulations to reduce capacity. Given 
today's hearing, I want to focus on that point of our 
comprehensive analysis.
    A 2003 study for Rand Corporation underscored the 
behavioral change that took place in the industry in the 
1990's. ``Relying on . . . existing plants and equipment to the 
greatest possible extent, even if that ultimately meant 
curtailing output of certain refined product . . . was the 
industry policy. They were openingly questioning the once 
universal imperative of a refinery not `going short,' that is, 
not having enough product to meet demand. Rather than investing 
in operating refineries to ensure that markets will fully 
supply all the time, refiners suggested that they were focusing 
first on ensuring their branded retailers are adequately 
supplied by curtailing sales to the wholesale markets, if 
needed.''
    So business decisions interact with environmental 
decisions, as was underscored in the Federal Trade Commission 
report about the 2002 price spikes in the Midwest. A 
significant part of the reduction in the supply of RFG was 
caused by the investment decisions of three firms. When they 
determined how they would comply with the stricter EPA 
regulations for summer grade RFG, that took effect in the 
spring of 2000.
    Each independently concluded that it was profitable to 
limit capital expenditure to upgrade their refineries only to 
the extent necessary to supply their branded gas stations and 
contractual obligations. As a result of these decisions, these 
three firms produced in the aggregate 23 percent less summer 
grade RFG.
    Business decisions respond to the investment incentives 
that public policy sets for them. That is the way our economy 
works. So 3 years ago we began advocating a balanced policy to 
reduce pressures on domestic gasoline markets. The three prongs 
of that policy include efficiency, flexibility, and 
transparency.
    Given the subject of today's hearing, I will focus on 
flexibility since that involves refinery capacity. I wrote this 
3 years ago, and we have reiterated it in every piece of 
testimony and every report we have written. ``Expanding 
refinery capacity by 10 percent equals approximately 1.5 
million barrels a day.''
    This would require 15 new refineries if the average size is 
the current example the Chairman gave and involved a much 
larger refinery. This is less than one-third the number shut 
down in the past 10 years and less than one-quarter of the 
number shut down in the past 15 years.
    Placed in the context of redeveloping recently abandoned 
facilities or expansion of existing facilities, the task of 
adding refinery capacity does not appear to be daunting. Such 
an expansion of capacity has not been in the economic interest 
of the businesses making those decisions.
    Therefore, public policies to identify sites study why many 
facilities have been shut down and establish programs to expand 
capacity should be pursued. Consumers need more capacity to 
loosen this market. That approach has not been adopted, but we 
remain convinced that such a balanced approach can expand 
refining capacity in a pro-competitive and consumer-friendly 
manner.
    Ironically, 25 years ago when I came to Washington to work 
on energy policy, consumers were supporting what was known then 
as the small refiner bias. This was a policy that was intended 
to keep those hundreds of refineries that have disappeared in 
business. It cost money, and we knew it cost money. But the 
answer was the presence of independent refiners was a 
significant pro-competitive, pro-consumer, force in the 
industry. We supported it because this is an industry that 
needs competition.
    What we recommended 3 years ago, and repeatedly over the 
course of 3 years, is that we update that policy to get more 
capacity and more competition into this industry.
    Thank you, Mr. Chairman. I would ask that my full statement 
be placed in the record in its entirety.
    Senator Inhofe. Without objection, so ordered.
    Thank you, Dr. Cooper.
    Mr. Dosher.

              STATEMENT OF JOHN DOSHER, DIRECTOR, 
                       JACOBS CONSULTANCY

    Mr. Dosher. Mr. Chairman and members of the committee, my 
name is John Dosher. I am the director of Jacobs Consultancy, 
formerly known as Pace Consultants. I would like to thank the 
committee for the opportunity to testify at this hearing and to 
provide you my independent views on the refining industry.
    Much of my work for Jacobs during my 40-plus years with the 
firm has been heavily focused on helping financial institutions 
and refiners to develop financing for major asset acquisitions 
and expansion projects. Due to the poor health and uncertain 
climate for investments in the refining industry, gasoline 
supply in the United States is now tight and is expected to get 
even tighter.
    It may be helpful to the committee for me to review 
historical as well as expected clean fuels regulations 
impacting the refining industry. The exhibits I refer to are 
attached to my written testimony.
    The first regulation shown in Exhibit 1 initiated in 1973 
was the removal of lead from gasoline. This was required for 
catalytic converters in cars and was phased in over a 10-year 
period. In 1989, the EPA instituted vapor-pressure controls to 
reduce hydrocarbon emissions. These vapor-pressure controls 
were further tightened in 1992.
    Based on the Clean Air Act Amendments of 1990, many large 
refiners had to use reformulated gasoline which by law required 
additional emission reductions. These reductions continued to 
become more stringent, even through today, with the use of more 
stringent and complex emission models. The RFG regulations also 
required the addition of oxygenates, such as MTBE or ethanol.
    Under the amendments, conventional gasoline, which is used 
in non-RFG areas, could not be more polluting than a baseline 
set for each refinery as determined by 1990 production 
qualities. The amendments also allowed for second round 
emission reductions. This resulted in the creation of low 
sulphur gasoline regulations that began this year, and ultra-
low sulfur diesel regulations requirements in 2006 that are 
also accompanied by an addition of new catalytic converters and 
other changes to large trucks.
    I should also note that California has already implemented 
much more stringent standards for gasoline and diesel compared 
to the Federal standards. Possible further Federal clean fuels 
initiatives pending would be the removal of MTBE from gasoline, 
renewable fuel standards, and additional ultra-low sulfur 
standards for non-road diesel and other transport fuels. 
Several States have already implemented MTBE bans.
    All of this has lead to uncertainty in the refining 
industry, particularly when it comes to the financial aspects 
of the business. Let me present the following charts to 
illustrate this. Uncertainty of required investment leads to 
lower asset value. This is illustrated for the refining 
industry by Exhibit 2 which shows recent transactions. The 
market for buying and selling refineries has ranged from 5 
percent to 35 percent of replacement costs over the last few 
years.
    Replacement costs is the cost to build a new refinery of 
the same size and configuration. The most recent transaction 
has been approximately 15 percent of replacement costs and 
occurred earlier year. It is also indicative that if an 
existing refinery sells for 20 percent of replacement costs, it 
becomes difficult to justify building a new facility at 100 
percent of replacement costs.
    Exhibit 3 outlines the landscape of financing for the 
refining industry. A refiner can typically borrow anywhere from 
30 percent to 50 percent of their market value. The refinery 
value is the collateral for the loan. We look at this market 
value as a percent of replacement costs. A refinery which is 
valued at 20 percent of replacement cost can then expect to get 
financing in the range of 7 percent to 10 percent of 
replacement costs.
    The clean fuels program for low sulfur gasoline and ultra 
low sulfur diesel are costing 8 percent to 12 percent of 
replacement cost. This means that a refiner's available credit 
is more than totally tied up with the clean fuels project and 
is not available for expansions.
    Other requirements will put reasonable refiners in a more 
serious bind. A good example is the NOx reduction required for 
ozone in the Houston-Galveston area. Our analysis of capital 
costs to meet substantial reductions of NOx adds another 3 
percent to 6 percent of replacement cost for refiners' needs.
    You can quickly see that in today's market there is not a 
great deal of room for independent refiners to raise the funds 
needed for clean fuels and expansion. Some refiners could shut 
down. To meet our demand for gasoline and products, two goals 
must be met.
    Uncertainty and future regulations must be resolved 
quickly. Regulations must be made and implemented in a manner 
to minimize the economic impact of the refining industry.
    Thank you, Mr. Chairman. I would ask that my full statement 
be placed in the record in its entirety.
    Senator Inhofe. Without objection, so ordered.
    Thank you very much, Mr. Dosher.
    We will start our round of questions at this time.
    Either Mr. Dosher or Mr. Slaughter, in the opening 
statement by Senator Jeffords he talked about the first quarter 
profits--I think he said ConocoPhillips, but he is also 
referring, I think, to the industry as a whole.
    Would either one of you have any knowledge of what happened 
during the year 2002 or 2003 in terms of the profits?
    Mr. Dosher?
    Mr. Dosher. A general measure of profits is what is called 
the ``crack spread'' which is the weighted average difference 
of gasoline in diesel over crude oil. We would say the average 
of that number was about $4.90 for 2003. Year-to-date, as of 
last week, it was somewhat over $6. So profits have increased.
    Senator Inhofe. Any comments, Mr. Slaughter?
    Mr. Slaughter. Just, Mr. Chairman, that the first quarter 
2004 profits for major integrated companies declined roughly 3 
percent in the first quarter. Shell was down 16 percent. Exxon 
was down 23 percent. Marathon was down 16 percent. Total 
industry profits were down 0.3 of a percent.
    Senator Inhofe. Thank you. Dr. Cooper, I would agree with 
you. We need to expand capacity. I have a letter here from Mr. 
R.G. McGuiness from Arizona where they have been working on 
starting a new refinery now for 10 years. He is only right now 
getting to the initial permitting phase. Do you have any 
comments about that? I would agree with you on expanding the 
capacity. How do you do it?
    Mr. Cooper. Well, the reason we focused on the closed 
sites--and your graph shows that in the last 10 years we have 
closed an awful lot of sites. The question that we raised was 
those are the places where refineries had existed.
    They were closed as a result of business decisions, we were 
told. They seemed to us to be the prime targets of 
possibilities for restarting the facilities in many cases that 
may still be there, or expansion of other facilities that had 
been chosen.
    That is why we wanted a public process to identify those 
locations. We think that makes it easier for those communities 
involved--since that is where they live; they are living with a 
refinery, or they recently did--to deal with that. That is why 
we focused on those places. We knew there was capacity there. 
It was taken out of businesses, Senator Wyden suggested, for 
economic reasons.
    What we wanted to know was what would it take to get those 
places restarted. In a certain sense that is the low-hanging 
fruit for capacity expansion in the industry. We stuck with 
that.
    Senator Inhofe. Any responses to that line of reasoning?
    Mr. Slaughter. What I would just say, Mr. Chairman, is that 
you cannot ignore the economics of the industry. There are 
tremendous costs that go into the refining business. We are 
talking about $20 billion of costs for investments, just for 
environmental programs in this decade, and $40 billion if you 
take the last two decades together.
    You cannot ignore the fact that you have to have massive 
amounts of capital in order to be in this business and make 
these changes and produce products.
    Senator Inhofe. Let me interrupt you, then. In his opening 
remarks, Senator Wyden said that the regulations are not 
costly. You hear this on both sides. How can you quantify the 
cost of regulations, or have you done that?
    Mr. Slaughter. It is difficult to do so, other than, as I 
said, the API has a figure that $89 billion has been spent for 
environmental improvements over the last two decades, over half 
of which was spent in refining. It seems very strange.
    The industry certainly admits that it is very important to 
have an aggressive clean fuels program. The only question is 
whether you can obtain the same benefits in a way that does 
less damage to supply. The industry is a major investor in 
clean fuels, but can we do it in a better way?
    Senator Inhofe. I see. Dr. Cooper's testimony, I think it 
was in your written testimony, almost brings you to the 
conclusion that the refiners are purposely not expanding and 
not building. I would like to have you respond to that.
    Mr. Dosher. As illustrated by my testimony, in terms of 
quantifying the costs to meet environmental requirements, it 
turns out to be 8 percent to 12 percent in an existing 
refinery, what it costs to build a new refinery, the 
replacement cost is very high.
    What I found is that certain people cannot raise the money 
to do this. Therefore, they may not do that. They may shut 
down. People are not deliberately withholding production. They 
are putting these facilities in where they can afford to and 
where they can get the financing to do so.
    Senator Inhofe. Well, something is there because as I said 
in my opening statement, we have less than one-half the 
refineries today that we had 20 years ago.
    Senator Boxer.
    Senator Boxer. Thank you, so much. Mr. Chairman, I think 
this has been a really fine panel. Thank you for putting it 
together.
    Senator Harry Reid has asked, because he was delayed on the 
floor, that I put his statement in the record.
    Senator Inhofe. Without objection, so ordered.
    [The prepared statement of Senator Reid follows:]
  Statement of Hon. Harry Reid, U.S. Senator from the State of Nevada
    Mr. Chairman, I want to thank you for calling this hearing today on 
gasoline prices. As you know, gasoline prices are at a record high 
across the Nation and have reached alarming levels in Nevada and 
California.
    A regular, unleaded gallon of gasoline this morning costs $2.21 in 
Las Vegas, $2.26 in Reno, while higher blend fuels are approaching 
$2.50 per gallon.
    Since the first of the year, the price of gasoline has increased 
more than 57 cents in Las Vegas and Reno.
    There is no doubt that the price of crude oil has contributed to 
higher gasoline prices in Nevada and throughout the country in the last 
few years. However, this outrageous 57-cent increase in Nevada since 
January has not been driven by the rising cost of crude oil, but by 
corporate greed and profit.
    Big oil companies and refiners are getting rich and middle class 
families are getting gouged.
    This is not speculation on my part.
    It's clearly documented by the California Energy Commission and the 
DOE Energy Information Administration that refiner margins (i.e., 
refiner's cost plus profits) have doubled and tripled. The oil 
companies weren't content to make 25 cents on every gallon of gasoline. 
They now make 50 to 75 cents for every gallon of gasoline.
    Some say this is an example of the law of supply and demand. That 
it is . . . the refiners have the supply and they'll demand your 
pocketbook.
    I have received hundreds of letters from Nevadans whose budgets are 
being stretched by these skyrocketing prices. Gasoline isn't a luxury 
for families . . . it is a necessity. Families have to put gas in their 
vehicles so they can drive to work, take their children to school, and 
go to the grocery store.
    The big oil companies control the supply, and they know that 
families really have little choice in the matter . . . they literally 
have consumers over a barrel.
    While consumers were paying record prices, the oil companies were 
reaping record profits.
    The first quarter profits for the big oil companies were recently 
released. What a shock--the refining and marketing profits of the big 
four oil companies have increased by a staggering amount over 1 year 
ago!
    BP up 165 percent
    Chevron-Texaco--up 294 percent
    Conoco-Phillips--up 44 percent
    ExxonMobil--up 125 percent
    And major California refineries owned by Valero and Tesoro that 
supply the Las Vegas and Reno area have reported ``record'' profits and 
project even bigger gains in the months ahead.
    Not ``good'' profits, not ``great'' profits, but ``record'' 
profits.

    Senator Boxer. Mr. Chairman, it is an interesting 
statement. I want to read some of the parts of it here.
    ``The outrageous 50 cent increase in Nevada since 
January''--that is per gallon--``has not been driven by the 
rising cost of crude oil but by corporate greed and profit. Big 
oil companies and refiners are getting rich and middle class 
families are getting gouged. The refiners have the supply and 
they will demand your pocketbook.''
    He goes on to show--and Mr. Slaughter I am going to ask you 
a question on this--some of the increases in profit. BP is up 
165 percent in their profit. Chevron-Texaco up 294 percent. 
ConocoPhillips up 44 percent. Exxon-Mobile up 125 percent. He 
says, ``Not good profits, or great profits, but record 
profits.''
    So here you have an industry that is having a banner year. 
There are all sorts of articles. As a matter of fact, Senator 
Jeffords gave me, ``High gas prices at pump mean profits for 
oil companies.'' That is NBC a month ago. ``Chevron-Texaco 
parlays high gas prices into higher profits.'' AP, May 1st. 
``Oil firms reap benefits of high gas prices.'' USA Today, 
April 29th. ``Exxon's profits best in 13 years.'' Dallas 
Morning News.
    That is good news. So what is your problem?
    Mr. Slaughter. Well, the fact of the matter is that the 
companies that you are talking about are international concerns 
that are engaged in all aspects of the oil business.
    If you look specifically at refining, the return on 
investment in refining generally reverts to about 5 percent, 
normally.
    There are good years and bad years, and many more bad years 
than good years, Senator Boxer. It reverts to 5 percent, which 
is about what you can get in an investment return.
    Senator Boxer. But some of these companies have their own 
refineries.
    Mr. Slaughter. They have their own refineries, but they are 
a separate part of the business. If you look at the refinery 
performance, it is far below the numbers you have mentioned.
    Senator Boxer. OK. Thank you. That is a really important 
point. They keep their records separate. But at the end of the 
day, it is all about the oil company. It owns these refineries.
    I want to make a point to you which I think is important.
    I am going to direct it to Mr. Ports and Dr. Cooper. A lot 
of you who represent the oil industry are sympathetic to it, 
and are basically saying, ``Woe is us. We are just doing really 
badly.'' As I said, I want to point out that you are here, Mr. 
Slaughter, begging us to take action when the oil companies are 
doing just fine.
    Yes, some of the things that they do are only doing 5 
percent. I know a lot of small people that would love that, 
too, but let us set that aside. The bottom line is that at the 
end of the day the oil companies are doing fine, and we have 
clean air regulations here since the 1970's, and an attempt by 
some--not all of us obviously--to repeal a lot of these laws.
    Mr. Ports, I want to talk about your comment on these 
refineries. You are decrying laws that discourage the building 
of refineries. I am with Dr. Cooper here in his testimony who 
is representing the consumers. I would like for you to show me 
how the oil companies are trying to build new refineries.
    We have a Bakersfield situation where Shell Oil wants to 
shut down their refinery now. You know what they said, Mr. 
Slaughter, to us, to the people? ``We are losing money. It is a 
disaster.'' Guess what? We found that through a lot of hard 
work by groups through the Freedom of Information Act that they 
were the most absolutely profitable refinery, and one of the 
best in the country, doing really well. So then they backed off 
and said, ``Oh, I guess we were wrong.'' Then they said, ``No 
one wants to buy it.'' We said, ``Really?'' Then we found out 
that was not true.
    So here you have a situation where I believe something is 
rotten here because they are saying they did not make money.
    Dr. Cooper, do you think maybe they are trying to not 
expand the supply, but keep the supply tight?
    It reminds me of our electricity crisis, Mr. Chairman, when 
we had this false shortage of electricity. People are going to 
jail for it, thank goodness. I praise the AG's office for 
moving on it. But people created a shortage in other ways. This 
is the way that is at least to me a little more evident. Here 
is a situation where you have a refinery making money. The oil 
companies are doing just great, thank you, and they are going 
to shut it down.
    Dr. Cooper, do you sense that there is not this great 
desire to build these refineries?
    Mr. Cooper. Well, the evidence to which Senator Wyden 
points looks back at the key period of the major mergers in the 
late 1990's. There were corporate documents which discuss the 
way to increase the profitability of the industry and the 
refining sector. These are all vertically integrated companies. 
The role of the majors in refining has expanded dramatically, 
the FRS companies that the Energy Information Administration 
tracks.
    So there was a policy documented in those corporate 
documents discovered in the Rand study. Gaining control of that 
sector, making business decisions, and even the Energy Policy 
Development Group pointed out that there were business 
decisions made about the reduction of capacity.
    The situation today is that we have refineries running at 
levels of utilization that strain those refineries. They are 
running at too high a capacity because we do not have enough 
capacity and we need more spare capacity. But there is not a 
big inclination to expand it. That is why we have advocated 
public policies that create the incentives to expand capacity.
    Senator Boxer. Thank you.
    Senator Inhofe. Thank you, Dr. Cooper.
    Senator Allard.
    Senator Allard. Thank you, Mr. Chairman. I want to thank 
the panel for their comments.
    I guess those of us who have been in business for ourselves 
recognize that there are always a few bad actors and whatever. 
It is unfortunate that just a few can, I think, create a 
problem for the rest of the industry.
    But what I have noted with time is that many times when 
there are accusations of the oil companies or refineries taking 
excess profits, they go ahead and then take it to the court. 
They process it and find out it is null. There was not an 
excess. This is the majority of cases. I am not denying that 
there are not a few now and then. But certainly this is by far 
the majority of the cases. Our challenge, of course, is to 
catch those that perhaps do that.
    But I think it's unfair to paint the entire industry as 
someway or another as profiteers. The fact is that over time 
this country has proven that free enterprise works, free 
markets work. There are those who want to shut that down.
    I have to remind myself of the latter part of the Carter 
years when we had cars in line around blocks and blocks waiting 
to get fuel because they thought it was such a great idea to 
fix prices. We ended up with the loss of supply and not enough 
gasoline to go around.
    So I do think the regulatory burden does have some impact 
on supply and demand. As we look at the regulatory burden, my 
question to you is: Are any of these regulations that are 
creating a problem now for your industry, are they duplicative? 
Where they somehow or the other tend to stack on one another 
but when you look at the total benefit of those regulations, 
they tend to keep addressing the same thing over again.
    I think this is something that can be helpful if you can 
identify for this committee those that are duplicated and get 
those. I think then it gives us some concept or some form or 
perhaps maybe we can address the burden of rules and 
regulations on your industry.
    Mr. Slaughter.
    Mr. Slaughter. Senator Allard, if I could, I would just say 
a word on that. It not exactly duplicative but all of the 
things on this chart, particularly the fuels regulations, 
require facility changes in order to be implemented so we can 
make all these clean fuels for consumers, both gasoline and 
diesel over the next few years.
    There are difficulties in making changes at facilities.
    I do need to mention that forward movement on the reform of 
the New Source Review program is absolutely essential to 
allowing the industry even to do this work. So that is an area 
where there is great interaction because we need New Source 
Review reform so we can make changes at facilities to make 
these cleaner fuels, and also so that we can add capacity in 
some situations as well where it is warranted and justified by 
the economics.
    So I would say that there is a definite link between the 
New Source Review program and all the other programs we have 
talked about today.
    Senator Allard. Well, I think you make a good comment on 
the fact that it is the various levels of government that keep 
stacking on. You have local and you have zoning regulations and 
everything right on up to the Federal.
    Are there any rules and regulations at the Federal level?
    Could you make a list for us that we can look at?
    Mr. Slaughter. Yes, we would be glad to do that, sir.
    But the most helpful thing that could be done on the 
Federal level is to pass the Comprehensive Energy Bill 
Conference Report, and to particularly remove the 2 percent 
oxygenization requirement for reformulated gasoline, which has 
caused problems over the last decade, and is causing problems 
today.
    We would be glad to make a more detailed list for you.
    Senator Allard. Thank you.
    Senator Inhofe. Without objection, so ordered.
    Senator Allard. The problem we have again is this. When I 
served in the State legislature, we had a debate between using 
as oxygenated products--whether you use alcohol, which is 
ethanol, or whether go ahead and use MTBE.
    The thing that is holding up that bill is this conflict 
about MTBE. In the State legislature the environmental 
community says, ``Well, we do not want to use the oxygenated 
product with alcohol. We want to use MTBE.''
    Now the oil and gas companies are being sued because there 
are problems with MTBE. Now maybe there is a supplier problem, 
the way the initial retailer was storing it and it was 
unfortunate the way it got into the ground, and then the whole 
industry gets slapped.
    The other thing is that policymakers, certainly the 
environmental community, were arguing that they wanted MTBE.
    Now the are starting to blame the oil industry for that. I 
sympathize with you in getting caught in that dilemma. That is 
one of the things that happens with these sort of mandates.
    Mr. Slaughter.
    Mr. Slaughter. Senator, if I could, I would just say that 
the industry did not support the mandate in reformulated 
gasoline of 2 percent. Congress essentially, in passing that 
program, required us to develop a whole industry to supply 
oxygenate into gasoline which, as you pointed out, now people 
are trying to penalize the industry.
    Senator Allard. I see my time has run out. Thank you, Mr. 
Chairman.
    Senator Inhofe. Thank you, Senator Allard.
    Senator Carper.

 OPENING STATEMENT OF HON. THOMAS R. CARPER, U.S. SENATOR FROM 
                     THE STATE OF DELAWARE

    Senator Carper. Thanks, Mr. Chairman. And to our witnesses, 
thank you for joining us and for your testimony today.
    I understand your comments, Mr. Early, you spoke to the 
health care costs that are associated with not regulating, at 
least to some extent, the refinery of oil into gasoline.
    One of my colleagues said earlier that there are costs to 
regulations. I think that was echoed by some at the witness 
table. There are also costs to not regulating. There are costs 
that are measured in human lives. There are costs that are 
measured in health care that we spend for folks who are 
afflicted and who need to be cared for, hospitalized, and in 
some cases, die.
    Could you help us quantify that a little bit, Mr. Early, 
please?
    Mr. Early. Senator, obviously that is why I am here. I have 
already quoted the EPA estimates that are estimates of 
monetizable health benefits. There are many non-monetizable 
adverse health effects that occur as a result of exposure to 
excess levels of air pollution, particularly cancer-causing 
pollution.
    None of these numbers well reflect the impact of rushing a 
child to the hospital because he or she is having an asthma 
attack. This truly reflects the impact that that experience has 
on that family. Reducing these air pollutants can reduce the 
number of emergency hospital visitations for kids with asthma, 
for adults with asthma, and for some of our elderly.
    One of the things that is very interesting about the new 
research on air pollution is that fine particle pollution is 
triggering heart attacks at a rate that we did not previously 
understand. So reducing heart attacks is an example.
    You cannot put a number of avoiding a heart attack that is 
truly meaningful. You have the numbers before you there.
    They are massive in terms of the benefits that are 
measurable or monetizable using EPA's methodology. It truly is 
stunning.
    I wanted to make one comment about how these rules have 
been developed. It would be interesting to have Mr. Slaughter 
respond to them. These rules that EPA developed, from my 
perspective, do not get any better than this. By that I mean 
they were developed with a very comprehensive and collaborative 
process. They gave the industry, on average, a 4-year lead time 
before the sulfur rules went into effect.
    The sulfur rules were phased in over 3 years for large 
refiners and 5 years for small refiners. There is a special 
small refinery hardship waiver. There is banking and trading of 
sulfur credits.
    It just does not get any better this if you are going to 
address environmental requirements while softening the impact 
of the requirement on the industry. There is a lot of talk 
about these different requirements.
    But I think that the Agency really has done a masterful job 
at trying to reach a balance. We did not get the health 
benefits as quickly from these regulations as we would have 
liked to have seen, but they are being phased in a way that 
does provide the industry with the ability to adjust in a way 
that we do not believe would be a major adverse impact on their 
ability to do business.
    Senator Carper. It is not every day that folks from the 
environmental community or the medical community, the health 
community, praise EPA for much that they have done. I think 
this is especially noteworthy.
    Mr. Early. In yesterday's Washington Post there was an 
article on the new non-road diesel role. I thought it was very 
illustrative because it had complimentary remarks from the Lung 
Association and the National Association of Manufacturers. This 
does not happen very often.
    Senator Carper. That is for sure.
    Mr. Slaughter, you have been given an opening here to make 
a comment. Do you want to?
    Mr. Slaughter. Thank you, Senator Carper. I will just say 
that it is a collaborative process but most of the industry 
recommendations that affected supply were not taken.
    Essentially some relief was given to subsets of the 
refining industry. But the major part of the industry that has 
to go ahead and make these large investments really was still 
given a Herculean task in not only gasoline sulfur rules, but 
right on top in the same timeframe, are the diesel sulfur rules 
which are extremely challenging which have to be implemented in 
2006.
    Now on top of that is the program that was announced 
yesterday, which is marginally better. Some of the industry 
recommendations were taken. But that is in comparison to the 
previous two when really very few of the industry's more 
serious recommendations on supply were taken. So everyone can 
participate, but only a few are listened to.
    Senator Carper. Thank you. Yesterday we voted on the so-
called Frist ETI bill. As we all know, it included substantial 
energy provisions that provide incentives to the production of 
solar energy, greater production of wind energy, and 
geothermal. There are incentives there to encourage us to use 
ethanol more--soy diesel, bi-diesel fuels. There are incentives 
there to encourage us as consumers to purchase, and for 
manufacturers to manufacture hybrid-powered vehicles, a 
combination of internal combustion and electric-powered 
vehicles, clean-burn diesel vehicles.
    That is the kind of thing that we need to be doing a whole 
more of. Quite frankly I am pleased with what we did yesterday. 
I think it has a substantial long-term salutary effect here.
    Mr. Chairman, I would like to ask for unanimous consent to 
do two things. One is to enter my own statement into the 
record.
    Senator Inhofe. Without objection, so ordered.
    Senator Carper. Also, Senator Lieberman, who is not here, 
has asked that his statement and attachments be entered as 
well. I would appreciate that.
    Senator Inhofe. Without objection, so ordered.
    [The prepared statement of Senator Carper follows:]

  Statement of Hon. Thomas R. Carper, U.S. Senator from the State of 
                                 Idaho

    Mr. Chairman--Over the years since Congress enacted the Clean Air 
Act, we have made significant strides in protecting human health and 
the environment. Statistics show that air quality has improved 
significantly, even as our economy has expanded at an unprecedented 
pace.
    Recent clean air regulations affecting passenger cars, trucks, and 
buses are an essential part of this success story, and promise even 
further progress as they are fully implemented in coming years. The 
bottom line is that we can expect producers to make gasoline that is 
clean-burning, to operate refineries without emitting tons of harmful 
pollution, and to be able to do so without sending the price of 
gasoline skyrocketing.
    These regulations improve the quality of the air thousands breathe, 
result in fewer premature deaths, and provide billions of dollars in 
public health benefits. For example:
     The Tier 2/Gasoline Sulfur Rule will prevent 4,300 
premature deaths and result in $25 billion in public health benefits 
each year;
     The Heavy Duty Diesel Rule will result in 8,300 fewer 
premature deaths and $51 billion in public health benefits each year;
     The Off-Road Diesel Engine Rule announced yesterday will 
result in 12,000 fewer premature deaths and 15,000 fewer heart attacks 
each year, resulting in $80 billion in public health benefits each 
year.
    Regulating emissions from industrial facilities such as refineries 
are an important part of this success story. In Delaware, the story of 
the Motiva refinery provides an example of hard work that has yielded 
progress and results. Once the largest emitter of sulfur dioxide in the 
country, Motiva has agreed to install scrubbers significantly reducing 
their emissions. It is important to note that this regional air quality 
victory did not detract from Motiva's attractiveness as an acquisition 
target last week Motiva was purchased by Premcor, Inc.
    In general, the overall financial success of oil companies does not 
seem to be negatively impacted by environmental regulations. In fact, 
profits for many companies have grown as gasoline prices have climbed. 
According to Bloomberg, current margins on processing crude oil into 
gasoline are 69 percent above the 10-year average and the second-widest 
since at least 1990.
    The statements from today's witnesses largely focus on oil and 
gasoline supplies under the current circumstances, this is not only an 
economic issue, but a critical national security issue as well. Mr. 
Slaughter's testimony states that an important component of recent gas 
price increases is the strong demand for gasoline. Today, passenger 
cars and light trucks account for approximately 40 percent of the oil 
consumed by Americans. If we are looking for the long-term fix that 
several of the witnesses advocate, shouldn't we be trying to also 
decrease demand, rather than just increase supply? Under the 
circumstances, I believe that it makes sense to pursue conservation and 
energy efficiency initiatives. For example, by raising the fuel 
efficiency of American-made cars, trucks, and SUVs, we could 
significantly decrease the amount of foreign oil that we import. And, 
we might be able to have a faster impact by including conservation 
efforts in an overall policy mix, rather than just relying on increased 
production.
    Another important aspect of supply and demand involves alternative 
fuels. I believe that we should be devoting more research and 
development resources to developing fuels that can reduce our reliance 
on imported petroleum. Yesterday, the Senate approved some of the tax 
provisions of the long-delayed energy bill. Included was support for 
the production and use of biodiesel and ethanol. Last week, the Senate 
failed to adopt a Renewable Fuels Standard when it was offered. The 
point here is that there are several things we can do, besides 
increasing production of traditional gasoline and diesel.
    With past progress, the promise of even better air quality in our 
future, tremendous public health benefits, and little financial 
downside for companies, there is no reason to take backward steps. 
Environmental policy must be based on, and adhere to, a long-term 
vision dedicated to protecting public health and the environment. Above 
all, environmental policy should not be geared to the ebb and flow of 
short-term events such as the vagaries of gasoline pump prices.
    Mr. Chairman, thank you.

    [The prepared statement of Senator Lieberman follows:]

     Statement of Hon. Joseph I. Lieberman, U.S. Senator from the 
                          State of Connecticut

    Thank you, Mr. Chairman, for calling this important hearing today. 
With gas prices rising to their highest level in decades, I appreciate 
this forum to focus on the causes. However, I do not believe that the 
environmental regulatory framework the focus of today's hearing is 
truly to blame for these problems.
    Any claims that environmental regulations at oil refineries are to 
blame for recent gas price spikes should fall upon deaf ears the two 
are not related. For the refineries that we will hear about today, 
environmental regulations are not a new or different expense. They are 
known costs of doing business, and any well-run business would have 
accounted for these costs in their plans long before it would have to 
spike gas prices or run short of production.
    Widely accepted academic reviews of the oil and gas industry 
bolster this argument. For example, one paper by Eli Berman of Boston 
University from 1998 analyzed the effect of environmental regulations 
on the oil refineries in the Los Angeles Air Basin and found that 
despite regulatory obligations, productivity in the Los Angeles Basin 
rose sharply, at a time when other regions were experiencing decreased 
refinery capacity. I believe this example casts doubt on the veracity 
of claims that environmental regulations are strangling the refining 
capacity of this country. Mr. Chairman, I ask that this paper be 
submitted for the record.
    [See referenced document follows on page 308.]
    Another paper by Vasanthakumar Bhat of Pace University from 1998 
analyzed an oil refinery with a good environmental compliance record 
and found that compliance actually had a positive effect on the firm's 
bottom line. The paper concluded that in order to comply with 
environmental regulations companies had to become innovative and 
efficient. Because they found ways to create a more cost-effective 
processes to reduce emissions they ended up with a higher profit 
margin. Mr. Chairman, I also ask that this paper be submitted for the 
record.
    [See referenced document follows on page 344.]
    In fact, in recent history, the refining capacity of the United 
States has expanded, not shrunk. According to EIA data, total U.S. 
refinery capacity has been growing all through the 1990's, despite 
environmental regulations. Mr. Chairman, I ask that a chart from the 
Energy Information Administration's March 2004 presentation on refining 
capacity be placed in the record.
    Now, the provisions of the Clean Air Act that apply regulation to 
the refineries' products admittedly may result in a patchwork quilt of 
varying gasoline requirements throughout the Nation, which could make 
it more difficult for refiners to provide a secured supply to all 
areas. But we tried to address that problem, Mr. Chairman, in S. 791 
that passed unanimously through this committee. Unfortunately, the 
delicate compromise that S. 791 represented a compromise between 
American Petroleum Institute, the corngrowers, and environmental 
interests was decimated by the energy bill conference and the 
insistence of MTBE producers on liability protection, a delayed 
phaseout of MTBE, noxious legislative findings, and several other 
poisonous provisions. I fear that the greed displayed in that 
conference may have set back our attempts to fix the gasoline 
requirements through the Nation for a while to come.
    But none of this would be so much of a problem if our Nation did 
not have an ever-expanding appetite for petroleum products. How can we 
act surprised that oil prices are on the rise give the laws of supply 
and demand when Congress continues to refuse to raise the nation's fuel 
economy standards even the slightest bit? In a time when we do not wish 
to be dependant on the Middle East for reasons of national security, 
and in a time when the OPEC cartel is turning off the spigots to our 
economy, our Nation must come to grips with our addiction to oil and 
begin to wean ourselves away from it. Finally, as we look for a culprit 
for the gas price spikes, I think it is important not to overlook the 
most obvious possibility. In the first quarter of this year, we all 
know that gas prices were abnormally high. In the first quarter of this 
year, we also know that the oil industry reported record profits 
according to one company, as a result of ``higher prices for its 
products.'' Wouldn't it be a reasonable assumption to make that the oil 
industry's high profits were financed by high prices at the pump? I 
recognize there are more complexities involved here, and OPEC is 
driving up the prices of oil throughout the world, but if one were to 
take a step back and view the larger picture, it just may be that 
simple.
    The bottom line is that the rise in oil and gas prices is indeed a 
serious problem for my constituents and for our Nation and deserves 
investigation and hopefully a solution. But, to make the unsupported 
conclusion that the prices are somehow caused by environmental 
regulations, while ignoring the more obvious causes and effects, is not 
a productive way to get prices down. It is merely a convenient way to 
use a very real and immediate problem to chip away at environmental 
protections designed to protect our health and environment.

    Senator Carper. Thank you, Mr. Chairman.
    Senator Inhofe. Senator Voinovich.
    Senator Voinovich. Mr. Chairman, I would request that my 
entire statement be inserted in the record.
    Senator Inhofe. Without objection, so ordered.
    Senator Voinovich. Mr. Slaughter, it has been alleged by 
some people that there is collusion among the oil companies and 
the refiners. I have participated now in three previous 
hearings. We asked the FTC to look into the situation. In no 
case did they come back and say that they found collusion.
    I have also again asked to the FTC to look into whether or 
not there has been collusion. I think that is something that is 
always out there. People say, ``Well, that is the reason for 
it.'' I think it is a smoke screen to avoid relooking at the 
problem that we are confronted with.
    We have changed the New Source Review rules. I am 
interested in your comment on that. Will that lead to more 
refineries being built or will it make it easier for refineries 
to do a better job?
    Then we have Mr. Ports talking about ``boutique'' 
reformulated gas, which I know in several instances have been 
the cause of problems in terms of the price going up because 
there are so many ``boutique'' gasolines out there. The 
question really is: Is there a way that we could control the 
number of ``boutique'' gas products on the market in order to 
try to make that more sensible?
    Then the last thing is: What is it going to take to build 
more refineries? We are focusing on refineries today.
    There is a lot more to it.
    I guess the first question I want to ask all of you is:
    Do you support the Energy bill?
    Mr. Slaughter. Yes.
    Mr. Early. Absolutely not.
    Mr. Ports. Yes, we have.
    Mr. Cooper. We oppose it.
    Mr. Dosher. Some parts. With respect to the refining 
industry, I support.
    Senator Voinovich. So here it is. We have that one out of 
the way.
    Senator Inhofe. For clarification, is that H.R. 6 that you 
are referring to?
    Senator Voinovich. Yes, the Conference Report.
    Senator Boxer. That is two-and-a-half votes out of five, 
which is our country today; is it not?
    Senator Voinovich. What is it going to take to get more 
refineries? Do we all agree that more refineries would help 
increase the supply and reduce the price?
    Mr. Ports. Yes. More supply is always good for marketers.
    Senator Voinovich. Does anyone disagree with that?
    Mr. Cooper. Especially when they are independents.
    Senator Voinovich. All right. But the fact is that you 
agree, Dr. Cooper, if you had more refineries things would be 
better and the price would be done and we would have more 
gasoline available; is that right?
    Mr. Cooper. Yes; absolutely.
    Senator Voinovich. What is it going to take to get the 
refineries?
    Mr. Slaughter. Well, basically, it is going to take some 
admission that there are significant costs imposed in the 
industry for environmental sources.
    Senator Voinovich. But the New Source Review, the new rules 
by the Administration that have been taken----
    Mr. Slaughter. They will be helpful, Senator Voinovich, 
because they will allow the industry to install new technology 
without fear of triggering extensive New Source Review 
requirements as long as the emissions do not go up at the 
facility. Actual emissions do not go up. You can go ahead and 
make the changes in the refineries that we need to, to try to 
keep up with the growing demand for supply here.
    It will help upgrade refineries. It should help to add some 
capacity to existing refineries. Hopefully, it would also 
encourage people to take another look at siting new ones.
    Senator Voinovich. I support those new ambient air 
standards, the ozone for particulate matter. They are here and 
we need to comply with it. We need to get on with it.
    But with the new standards, will there be more demand for 
``boutique'' fuel?
    Mr. Early. Senator, I would like to jump into this 
conversation. Many of the ``boutique'' fuel requirements that 
are on the books today were, in fact, encouraged by regional 
oil refiners as an alternative to the reformulated gasoline 
program. I am quite certain that Mr. Slaughter will confirm 
this.
    This is not a thing that State regulators just sort of made 
up. They collaborated with local refiners to try to get a clean 
fuel that was affordable, but also emissions reductions.
    Senator Voinovich. But the fact is that you have Chicago. 
You have other areas. When I was Governor, I had a choice. I 
could have gone with reformulated gasoline in the Cincinnati 
area. I decided against it because of what it added to it. We 
put in an alternative and got credit in terms of emissions 
testing.
    But do you think we ought to look at this whole issue of 
``boutique'' fuel?
    Mr. Early. If you do that, given the fact that Ohio, for 
example, has something like 29 new non-attainment counties, we 
would argue that if you are going to consolidate different 
kinds of fuels, that you would want to consolidate them to make 
them cleaner rather than something else.
    Now, I think it is important from the get-go to understand 
that EPA's 30-part-per-million sulfur cap on gasoline--which is 
phasing in this year and will be fully phased in in 2006--will, 
for the sulfur requirement of gasoline, do exactly what you are 
talking about. All the reformulated gas, as well as 
conventional gas, will have the same sulfur level. So you will 
not have any conflicting requirements from State-to-State.
    You could do that for some of the other components that 
contribute to smog, most notably the volatility, the RVP, and 
have a uniform--but we would argue--low RVP for both 
conventional and reformulated gas so that these fuels would be 
more fungible. But they would also be cleaning up the air where 
they are needed.
    Senator Voinovich. But you would agree that it would be 
worthy for the EPA to look at this whole area of reformatted 
gas, or ``boutique'' gasoline to see if we can get the same 
environmental benefits that we have, but do it in a more 
orderly fashion?
    Mr. Early. The Agency has already done that. They issued a 
report in October 2002 that reflects some of the things that I 
am saying.
    Senator Voinovich. Do you have any comments on that?
    Mr. Cooper. Senator, let me take two points. To the extent 
that the cost of compliance can be demonstrated to be 
significant, then we think underwriting compliance rather than 
relaxing existing standards, is a good idea.
    I read that sentence from our 1991 report. We understand 
this costs money. We want the refinery capacity. We want to 
find out a way to get it built. To the extent that Mr. Dosher 
has a problem, we think Congress ought to step up and say 
``Here is the way we balanced the two interests,'' and that is 
by supporting underwriting the costs of compliance if he 
demonstrates it significantly.
    Second of all, Mr. Early has made exactly the point that as 
a consumer advocate we like big markets. The bigger the market, 
the better off the consumer is. So what we need is a public 
policy that looks very carefully at how to get those markets as 
big as they can be without significantly reducing air quality. 
We can do that.
    Senator Voinovich. My time is expired. Thank you.
    Thank you, Mr. Chairman.
    Senator Inhofe. Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman.
    I have a question for you, Mr. Slaughter. You said that 
refineries are not particularly profitable. I just find that 
very puzzling because if you look at the companies' own 
quarterly reports, it contradicts what you have said.
    For example, Exxon's quarterly report--this is their 
document--``Exxon-Mobile's refining profit rose 39 percent to 
$1 billion.'' They are not just the most profitable oil 
company. Last year they were the most profitable American 
company in history.
    How do you reconcile what you said that they are not making 
money? By the way, it is in everybody else's quarterly reports 
as well--Chevron, Texaco, the same reason. They are citing the 
primary reason of the average refined product margins go up.
    What is behind the fact that these quarterly reports of the 
companies contradict what you have told the committee this 
morning?
    Mr. Slaughter. Senator, the quarterly reports and annual 
reports are just that. They are snapshots in time. The fact of 
the matter is that over the last couple of decades, and 
particularly in the last decade, refinery profitability has 
been 5 percent, which is basically below the norm.
    One of the questions that we always have to ask is: What is 
the basis of comparison? Which quarter are you comparing it to? 
The refining industry has had some very bad quarters.
    If you compare a current snapshot with that particular 
quarter, you come up with numbers like you have.
    All I can say is that for instance the U.S. Department of 
Energy found that the return on investment in the refining 
industry in 2002 was negative 2.7 percent. It was 10.5 percent 
in the entire oil and gas production business, Senator but 
negative 2.7 percent in refining.
    It is a very tough business, refining. Some years there are 
good years, but there are many more anemic or poor ones.
    Senator Wyden. Certainly for the last 6 months at a time 
when our consumers are getting hosed, all of the information 
indicates that these refinery margins are a big driver and, in 
fact, certainly refinery margins using again the Government's 
own data from the Energy Information Agency.
    Refinery margin increases are something like three times 
the crude oil price increase, which is what you cited.
    I just find it hard to reconcile what you have told us 
today with what the Government documents and the companies' own 
quarterly statements are getting into.
    But I want to ask you about something that I just learned 
about recently. I just find this shocking. This is the question 
of the huge amount of diesel that is now being exported. I 
cited earlier again oil industry publications, the Oil Price 
Information publication for April 2004 which indicated that 
this is one of the busiest months ever for exporting, actually 
taking diesel that serves all of the communities we represent 
out of the United States and exported. Traders are saying that 
it may be twice or triple the usual spring rate.
    What is behind that? Does that again tighten the market for 
our consumers at a time when they need this fuel?
    Mr. Slaughter. Senator, according to EIA export data, we 
understand that the OPEC's figures are incomplete data. The EIA 
data through March on distillate exports, show that those 
exports have declined in the period from January to March of 
this year from what they were in 2003 or 2002.
    I think a lot of times, particularly in the trade press, 
when people talk about increases or decreases, they compare 
apples and oranges, or the actual numbers are minuscule. We 
have really not a very large foreign trade, particular in 
exports, of our products. We have a net dependency on product 
imports in this country now.
    So the trade is really coming the other way because we have 
been unable to build new refining capacity to keep up with our 
demand. We actually now are having to import 10 percent of our 
gasoline, and to import 10 percent of other petroleum products.
    So this number is an aberration and evidently does not even 
reflect the numbers for this year, as evidenced by the Energy 
Information Administration.
    Senator Wyden. But you are citing the older data. I am 
talking about now. I will just read it to you. ``Action was 
particularly brisk in the first half of April with plenty of 
cargoes exported out of the Gulf Coast to the Northwest. The 
buyers included refiners, traders, and users based essentially 
all over the world. The international traders say that it is 
going to be twice or triple the usual spring rate.''
    You are not troubled by any of this?
    Mr. Slaughter. Senator, I would be surprised if there are 
many industries in the United States that retain a larger 
percentage of their production in the United States than the 
refining industry does. The demand is so strong for fuels in 
the United States that our industry can barely keep up with it.
    Most of those products go right here in the United States. 
There is minimal trade externally. Frankly, regardless of what 
the trade press says, it is just an asterisk when it comes to 
the output of America's refineries for the domestic market.
    Senator Wyden. I will tell you. People in my State do not 
see an asterisk when they get clobbered at the pump, sir.
    These people are getting pounded. I will tell you. I think 
if people in my part of the world hear about something like 
this, they are going to be asking for action a lot more 
aggressive than anything I have proposed in the past.
    What all of you have said today contradicts Government 
figures. It contradicts the oil industry quarter reports, and 
to say that it is an asterisk to have diesel exported from the 
United States I think is a very regrettable statement, given 
the kind of hurt that we are seeing in our communities around 
the country.
    Thank you, Mr. Chairman.
    Senator Inhofe. Thank you, Senator Wyden.
    Senator Thomas.

 OPENING STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR FROM THE 
                        STATE OF WYOMING

    Senator Thomas. Thank you, Mr. Chairman.
    This is very technical stuff, obviously. Let me go back 
just a little bit and talk about the costs, as I understand it, 
for gas, about 46 percent of it is the oil, and about 25 
percent is taxes. Are we focusing on the high price of gas 
because of refining?
    Mr. Slaughter. Well, if you are asking me, Senator, I 
thought that this committee hearing was to analyze the cost 
factors in making gasoline. We have pointed out that the 
refining costs themselves, which include all these billions of 
dollars for these programs, is only 20 percent of the delivery 
price. But it is extremely important because that is one of the 
portions of the price that actually is within our control here 
in the United States with appropriate policy.
    I do not understand why some people want to talk about the 
tremendous benefit coming from some of these expenditures, but 
do not want to recognize that there are any costs associated 
with them. It does affect some of the costs of making gasoline 
that actually public policy in the United States can affect if 
it is done appropriately.
    Senator Thomas. I am sure, but I guess we need to know 
where to focus. We are used to oil prices that run from $23 a 
barrel to $28 a barrel. Now they are $40 a barrel.
    I guess another curiosity is this. Maybe none of you maybe 
are involved. But why is it when you drive 100 miles around 
different places, there is a 15 cents to 20 cents difference 
per gallon in the gas?
    Mr. Ports. Motor fuel marketing is a very competitive 
business. Everybody responds to the competition within their 
area. In some instances, there may be different tax rates.
    Certainly you get into some local tax rates. You get into 
some differences in competitiveness. Again, they will 
fluctuate.
    Truly a lot of it, particularly between the States, is tax.
    Senator Thomas. I am not talking about different States.
    I am talking about just 20 miles apart.
    Mr. Early. Senator, I would observe that RFG is supposed to 
cost roughly a nickel more per gallon. We are not denying that 
there is not a cost for producing cleaner gasoline. But as you 
drive in a particular area, as you just observed, you can see 
gasoline prices in a local area fluctuating by as much as 20 
cents.
    We come back to the discussion and say, ``Well, is this 
nickel a gallon really having a major impact on what is going 
on here when the prices in a given area might change by 20 
cents?''
    Senator Thomas. Let me ask you, Mr. Early. You said you are 
opposed to the energy policy for the future. We can talk about 
alternatives and talk about hydrogen and whatever. What do you 
propose to do if you do not like an energy policy that causes 
us to look into the future?
    Mr. Early. Well, the Lung Association primary opposes the 
Energy bill because of the fuels title which is dramatically 
different from what this committee reported, which we did 
report. The reformulated gasoline in RFG programs were very 
different reported from this committee than what was adopted in 
H.R. 6. It makes some very bad changes.
    Senator Thomas. Bad changes might reduce the cost from $40 
a barrel down to $25 a barrel.
    Mr. Early. It is a question of cost to whom.
    Senator Thomas. OK. You do not need to go any further. You 
are just opposed to doing anything further with fuel.
    Mr. Early. The other thing I would observe is that in my 
opinion H.R. 6 did not sufficiently address the demand side.
    There has been so much talk about the demand side.
    Senator Thomas. That is exactly what it is doing. It is 
doing research on the demand side. Exactly. My God.
    Mr. Cooper, most industries would be fairly happy with 90 
percent of their capacity being used.
    Mr. Cooper. On average American industries probably run in 
the mid-80's.
    Senator Thomas. We are not having a shortage of gas; are 
we? Is there anyone that cannot buy a gallon of gas?
    Mr. Cooper. On a momentary basis, as has happened in 
Phoenix, the price ran way up because capacity is at the limit. 
The fundamental difference between----
    Senator Thomas. What about the oil costs? Does that have 
anything to do with it?
    Mr. Cooper. We did a report and there are clearly three 
factors that have driven the price of oil up. They have 
converged at this moment. They are all at very high levels.
    No. 1, the international price of crude. No. 2, the price 
following in this country. No. 3, a very clear shift in the 
domestic spread, the refining and marketing spread is up.
    Natural gas tracks crude oil much closer than it did in the 
1990's.
    So all three of those things have contributed to the 
increase in price. The difference with energy is that when that 
system runs at very high levels of utilization, there is no 
elasticity of demand. We cannot cut back in our demand very 
quickly without feeling the pain. We cannot increase supply 
because it is a pipeline-type of industry, and a refinery fixed 
capital investment industry.
    So in the short term, there is very little elasticity of 
demand. That is why you get these price spikes. That is why you 
need a significant amount of spare capacity around, 
particularly stocks on hand to meet the demand.
    Senator Thomas. Well, if is the case, why is oil the only 
thing that has doubled in cost?
    Mr. Cooper. It is the convergence of the three things that 
I mentioned over the past 3 years.
    Senator Thomas. I do not think so. I do not agree with you. 
I do not think that is the case. The clear cost increase has 
been in the cost of oil.
    Mr. Cooper. Well, it depends over what period you look.
    We compared 5 years in the 1990's to the first 4 years of 
this century.
    Senator Thomas. It seems like it is pretty confusing what 
all of you have been talking about.
    Thank you, Mr. Chairman.
    Senator Inhofe. Thank you, Senator Thomas.
    Senator Cornyn.
    Senator Cornyn. Thank you, Mr. Chairman.
    Senator Boxer. Mr. Chairman, are we not having discussions 
on turns?
    Senator Inhofe. Senator Boxer, you have not had a chance? 
Oh, I am sorry. Please suspend, Senator Cornyn. Oh, you did.
    Senator Boxer. I thought we were going to back and forth. 
That is OK.
    Senator Inhofe. We do not go back and forth until everyone 
has had a round. Then that is going to be the end of it.
    Senator Boxer. Well, I need to stay for another round.
    I have a----
    Senator Inhofe. Well, you can stay, but you will be alone.
    Senator Boxer. I will be alone. That is fine. I do not mind 
if you leave because I do not think that----
    Senator Inhofe. Senator Cornyn.

 OPENING STATEMENT OF HON. JOHN CORNYN, U.S. SENATOR FROM THE 
                         STATE OF TEXAS

    Senator Cornyn. Thank you, Mr. Chairman. Thank you for 
holding this hearing. I appreciate all the witnesses being here 
today.
    This must be enormously confusing for the American people 
to figure out how to get to the bottom of this, but I want to 
ask about some things that even I think I understand, and ask 
for your reaction.
    One is, of course, is that we understand the basic law of 
supply and demand. Not even Congress can repeal that one.
    This relates to what Senator Wyden alluded to. Perhaps we 
are dealing now with global markets. We cannot expect that 
people who are in the business of selling a product for a 
profit are not going to take advantage of the opportunity to 
sell it in an open market at a higher price or, for that 
matter, to do business in places where the cost of doing 
business is cheaper.
    We have been talking a lot about the creation of jobs, and 
indeed the loss of jobs, in this country due to our lack of 
competitiveness in this country in a number of areas, whether 
it is in terms of the cost of health care that discourage 
employers from creating new jobs because they know that 
additional health care costs could well put them in a 
competitive disadvantage.
    We have talked about the regulatory scheme, or lack of one 
in this country leading to what mainly I think is a huge 
problem and that is regulation by litigation which I want to 
talk about for a minute. Obviously there are taxes. There is 
our failure to enact a national energy policy. And, of course, 
there is the lawsuit lottery.
    I would like to ask Mr. Cooper a question. In my previous 
life, I was attorney general of Texas. Of course, we were 
engaged in consumer protection. We had a common cause with the 
people in your line of business to the extent that we were 
trying to make sure that consumers got the information and what 
they deserved in terms of what they paid for, a fair price for 
a service or a product.
    You appear to agree that decreasing domestic refining 
capacity has been hurtful to consumers and that you think that 
one of the things we need to do is to increase production 
capacity. I would just ask you this.
    What public policies could Congress enact which would 
increase domestic refining capacity, in your opinion?
    Mr. Cooper. Well specific public policies that we have 
advocated for 3 years now is doing an inventory of sites, to 
identify those places where refiners were closed recently, as 
the best places to shorten that timeframe and find an 
environment in which you have the least resistance to the 
expansion of capacity.
    We thought that was an interesting idea. Again, there are 
20 or 50 refineries, depending on how far you go back, that had 
been closed. That was a critical issue to us--to find the place 
where it is easiest to balance the consumer interests and the 
environmental interests.
    Senator Cornyn. Let me ask you a little bit about that.
    I know the confusion about New Source Review and the 
litigation that has spawned from that lack of certainty that 
the industry could have because of Congress' failure to act, 
that has discouraged the increase of capacity of refineries; 
has it not?
    Mr. Cooper. Uncertainty raises the cost of capital. We 
would also support, as I read from our first report on this, 
identifying the specific compliance costs and underwriting 
those. I have been doing this since we had it back in the 
1980's. It kept refineries in business. We can have the number 
of refineries we want. We think we can do it within the 
confines of a responsible environmental policy.
    Senator Cornyn. Well, my other objection to this regulation 
by litigation and Congress' failure to act is that even though 
I am sure that we would agree that people who are injured as a 
result of the fault of some other person are entitled to fair 
compensation is that this regulation by litigation scheme, in 
addition to discouraging the creation of new capacity, 
increasing supply and lowering price, deliveries so 
inefficiently any compensation to the person who is actually 
harmed. I think it is imperative that Congress step in.
    In closing, I just want to mention MTBE. Maybe I 
misunderstood Senator Allard. I think he indicated that the 
MTBE safe harbor provision has somehow held up the Energy bill. 
But I would just note for the record, and I think I am correct 
on this, Mr. Chairman, that actually when the MTBE safe harbor 
was taken out of the Energy bill, it actually got less votes on 
the floor than it did when it was in.
    My only point here in talking about the regulatory 
confusion and in talking about the Federal Government being so 
schizophrenic when on one hand it mandates the industry, in 
essence, the creation of a product like MTBE, which has caused 
cleaner burning fuels, and then comes along later on and cuts 
the legs out from under that very same industry by saying that 
you can no longer sell that product even though it has made the 
air cleaner for millions of Americans.
    I know my time has expired. Thank you for your indulgence, 
Mr. Chairman.
    Senator Inhofe. Thank you, Senator Cornyn.
    Let me just make a comment because it has been implied that 
perhaps I am not being fair, we had one round of questions. My 
staff informs me that we allowed you to go 2 minutes over, 
which I was happy to do.
    I think this might be something that would encourage better 
attendance. Yes, we do have more Republicans than Democrats 
attending this. Perhaps that will be helpful in encouraging 
more participation from your side.
    We did made the announcement, though, that we would have 
one extended round and that would be it. Things are getting 
redundant right now. With that, I am going to adjourn and 
dismiss the panel.
    However, if you want to stay and visit, certainly you would 
be welcomed.
    Senator Boxer. Mr. Chairman, I would just have to say I 
have been here for 12 years. I have never ever seen a situation 
where a Senator would like to have another round of questions. 
Right now I have heard reports that in my State there is some 
gasoline selling for $3. I just have a couple of comments. I 
just feel you are being unfair.
    Senator Inhofe. Senator, let me say this. What you have 
said is not true. This happens all the time. You announce that 
you are going to have just one round. You have one round, and 
to say that you have never heard of that is----
    Senator Boxer. Could I ask unanimous consent that I be 
allowed to----
    Senator Inhofe. We are adjourned.
    Senator Boxer. You have not heard my UC. Could you wait?
    I would ask unanimous consent that I be allowed to place 
some documents into the record and explain very briefly what 
they are.
    Senator Allard. I object, Mr. Chairman. I do not object to 
her putting the documents in the record. But I object to you 
taking the time of this committee after it has been agreed that 
both sides, each individual, would have an opportunity, a 
certain amount of time, to make their case.
    Now if you want to redo your unanimous consent and ask that 
just the documents be put in the record, I would not object. 
But to ask that you make a statement in regard to that, is 
beyond me.
    Senator Boxer. Are you so fearful of words, Senator Allard? 
I asked unanimous consent that I may place into the record two 
articles that show oil company executives directly 
contradicting Mr. Slaughter and saying that future is bright 
for the refining industry. I thank you.
    Senator Allard. Mr. Chairman, I object.
    Senator Inhofe. This meeting is adjourned. The panel is 
dismissed.
    I appreciate very much your attendance here today. It was a 
well-balanced panel. I believe it was very helpful.
    [Whereupon, at 11:23 a.m., the committee was adjourned, to 
reconvene at the call of the chair.]

    Statement of Bob Slaughter, President, National Petrochemical & 
       Refiners Association and the American Petroleum Institute

                                OVERVIEW

    Mr. Chairman and members of the committee, thank you for the 
opportunity to appear today to discuss the impact of environmental 
regulations on fuel supply. My name is Bob Slaughter, and I am 
President of NPRA, the National Petrochemical & Refiners Association. I 
am also appearing today on behalf of the American Petroleum Institute 
(API).
    NPRA is a national trade association with 450 members, including 
those who own or operate virtually all U.S. refining capacity, and most 
U.S. petrochemical manufacturers. API is a national trade association 
representing more than 400 companies engaged in all sectors of the U.S. 
oil and natural gas industry.
    To summarize our message today, we urge policymakers in Congress 
and the Administration to encourage the production of an abundant 
supply of petroleum products for U.S. consumers. By the end of my 
testimony, I will outline and discuss key factors that will provide 
perspective about the current, as well as the anticipated future 
situation the Nation confronts regarding gasoline supply and demand.
    Before addressing these topics in detail, however, I want to state 
emphatically that NPRA and API support requirements for the orderly 
production and use of cleaner-burning fuels to address health and 
environmental concerns, while at the same time maintaining the flow of 
adequate and affordable gasoline and diesel supplies to the consuming 
public.
    For example, according to EPA, the new Tier II low sulfur gasoline 
program, initiated in January, will have the same effect as removing 
164 million cars from the road when fully implemented.
    Since 1970, clean fuels and clean vehicles account for about 70 
percent of all U.S. emission reductions from all sources, according to 
EPA. Over the past 10 years, U.S. refiners have invested about $47 
billion in environmental improvements, much of that to make cleaner 
fuels.
    Unfortunately, however, Federal environmental policies have often 
neglected the impact of environmental regulations on fuel supply, and 
policymakers have often taken supply for granted, except in times of 
obvious market instability. This attitude must end. A healthy and 
growing U.S. economy requires a steady, secure, and predictable supply 
of petroleum products.
    Although there is much finger pointing regarding current gasoline 
market conditions, there are no silver bullet solutions for balancing 
supply and demand. Indeed most of the problems in today's gasoline 
market result from the high price of crude oil and strong demand for 
gasoline due to the improving U.S. economy. U.S. refineries have 
produced increased amounts of gasoline and distillates so far this year 
compared to last year.
    Instead of engaging in a fruitless search for dubious quick-fix 
``solutions'', or, even worse, taking action that could be harmful, we 
urge Congress, the Administration, and the motoring public to exercise 
continued patience with the free market system. The nation's refiners 
are working hard to meet rising demand while complying with extensive 
regulatory controls that affect both our facilities and the products we 
manufacture.
    To summarize our policy recommendations, we urge the committee 
first to find the necessary two additional Senate votes to pass the 
Conference Report on H.R. 6. This is the most important action that can 
be taken to improve U.S. energy security. Putting the conference report 
on the President's desk is the best way to move energy policy forward 
into the 21st century. Congress should also support the New Source 
Review (NSR) reforms which have spanned two Administrations, which will 
encourage capacity expansions and efficient operation of existing 
refineries; it should resist any new ``Federal fuel recipes'' or hasty 
action on the subject of boutique fuels; and act to repeal the 2 
percent RFG oxygenation requirement.

 UNDERSTANDING GASOLINE MARKET FUNDAMENTALS: HIGH CRUDE PRICES; STRONG 
                         GASOLINE DEMAND GROWTH

    In order to fully appreciate the impact of environmental 
regulations on fuel supply, we should first consider the dynamics of 
current gasoline markets. It is important to begin with the most 
significant factor affecting gasoline prices: crude oil. The cost of 
crude oil represents about 45 percent of the total cost of a finished 
gallon of gasoline. Crude oil prices have increased 60 percent since 
April 2003, recently crossing the $40 per barrel threshold. High demand 
for crude from Asia and the United States, plus OPEC activities to 
restrain crude production in recent years, are the most important 
factors affecting crude prices.
    The other key factor underlying current gasoline market conditions 
is the tight supply/demand balance. This is due to steadily increasing 
gasoline demand (growing population, Americans drive larger vehicles 
greater distances) and the meager growth in refining capacity in the 
United States. Due to U.S. economic recovery, the U.S. Energy 
Information Administration (EIA) estimates that growth in our gasoline 
demand is averaging 4.5 percent. Gasoline demand currently averages 
approximately 9 million barrels per day. Domestic refineries produce 
about 90 percent of U.S. gasoline supply, while 10 percent is imported. 
Therefore, growing demand can only be met by either increasing domestic 
refinery production or by relying on more foreign gasoline imports. 
Unfortunately, our rising gasoline demand and the need for more 
domestic gasoline production capacity collide with public policies, 
local opposition, and regulatory obstacles that deter increased 
domestic refining capacity.

   IT IS IMPORTANT TO ENCOURAGE ADDITIONAL DOMESTIC REFINING CAPACITY

    Domestic refining capacity is a scarce asset. There are currently 
149 U.S. refineries owned by almost 60 companies in 33 states. Their 
capacity is roughly 16.8 million barrels per day. In 1981, there were 
321 refineries in the United States with a capacity of 18.6 million 
barrels per day. No new refinery has been built in the United States 
since 1976, and it is unlikely that one will be built here in the 
foreseeable future, due to economic, public policy and political 
considerations, including siting costs, environmental requirements, 
industry profitability and, most importantly, ``not in my backyard'' 
(NIMBY) public attitudes.
    U.S. refining capacity has increased slightly in recent years, but 
it has become increasingly difficult to keep pace with the growth in 
demand for petroleum products. Because new refineries have not been 
built, refiners have increased capacity at existing sites to offset the 
impact of capacity lost elsewhere due to refinery closures. But it is 
now becoming harder to add capacity at existing sites due in part to 
more stringent environmental regulations. Proposed capacity expansions 
can often become difficult and contentious at the state and local 
level, even when necessary to produce cleaner fuels pursuant to 
regulatory requirements. We hope that policymakers will recognize the 
importance of domestic refining capacity expansions to success of the 
nation's environmental policies, and help inform the public of the need 
for these facility improvements. New Source Review reform will also 
provide an important tool to help add new U.S. refining capacity.
    For this reason, we urge policymakers to recognize the importance 
of sustaining the Administration's NSR reforms so that domestic 
refiners can continue to meet the growing public demand for gasoline 
and comply with new environmental programs. These reforms have been 
under consideration since 1996 and reflect significant public review 
and comment. The NSR reforms should facilitate new domestic refining 
capacity expansions. Those reforms will also encourage the installation 
of more technologically advanced equipment and provide greater 
operational flexibility while maintaining a facility's environmental 
performance.
    Common sense dictates that it is in our nation's best interest to 
manufacture the lion's share of the petroleum products required for 
U.S. consumption in domestic refineries and petrochemical plants. 
Nevertheless, we currently import more than 62 percent of the crude oil 
and oil products we consume. Reduced U.S. refining capacity clearly 
affects our supply of refined petroleum products and the flexibility of 
the supply system, particularly in times of unforeseen disruption or 
other stress. Unfortunately, EIA predicts ``substantial growth'' in 
refining capacity only in the Middle East, Central and South America, 
and the Asia/Pacific region, not in the United States.

   INDUSTRY IS WORKING HARD TO KEEP PACE WITH GROWING DEMAND FOR FUEL

    Tight gasoline market conditions often lead to calls for industry 
investigations. More than two dozen Federal and state investigations 
over the last several decades have found no evidence of wrongdoing or 
illegal activity. For example, after a 9-month FTC investigation into 
the causes of price spikes in local markets in the Midwest during the 
spring and summer of 2000, former FTC Chairman Robert Pitofsky stated, 
``There were many causes for the extraordinary price spikes in Midwest 
markets. Importantly, there is no evidence that the price increases 
were a result of conspiracy or any other antitrust violation. Indeed, 
most of the causes were beyond the immediate control of the oil 
companies.'' Similar investigations before and since have reached the 
same conclusion.
    As this statement is written, product prices and supply are again a 
hot topic in the media and in political debates. In addition to the 
usual tight supply/demand balance for gasoline and other petroleum 
products, critical external factors are contributing to high gasoline 
costs this year:
     Higher crude oil costs (Crude oil recently crossed the $40 
threshold.);
     Increased consumer demand (EIA calculates current gasoline 
demand at 8.9-9 mm b/d and predicts it could rise to equal a record 9.4 
mm b/d this summer);
     Implementation of state MTBE bans and an ethanol mandate 
in California, Connecticut, & New York (These states represent one-
sixth of U.S. gasoline sales.);
     Rollout of Tier II gasoline with reduced sulfur, a new 
standard which may have affected imports temporarily; and
     Changeover to summer fuel formulations.
    We would like to discuss some of these factors in more detail.
    The most significant cost factor in gasoline manufacture is the 
cost of the feedstock, crude oil. This currently represents slightly 
less than half of the cost of a gallon of gasoline (45 percent), while 
taxes add another 25 percent to the price. Thus, over 70 percent of the 
retail cost of gallon of gasoline is attributable to these two 
components, crude oil costs and tax, which are beyond the control of 
refiners. (See Attachment 1.) Most significantly, crude oil and 
gasoline costs closely track each other. (See Attachment 2.)
    Since April of 2003, crude oil prices have escalated nearly 60 
percent, and recently breached the $40 benchmark. Factors driving crude 
prices include: (1) high demand, spurred by significant economic growth 
in Asia (with Chinese demand for oil up 30 percent this year), (2) 
decisions by OPEC to reduce output, including a 10 percent output cut 
not yet totally implemented, and (3) continued uncertainties about 
crude and product production capabilities in the Middle East.
    Despite these powerful influences on gasoline manufacturing, cost 
and demand, refiners are addressing supply challenges and working hard 
to supply sufficient volumes of gasoline and other petroleum products 
to the public. During the 4-week period ending April 30, 2004, EIA 
reported that refiners produced 8.7 million barrels per day of 
gasoline, a 5-percent increase over the same period last year.
    Refineries are running at record levels, producing record amounts 
of gasoline and distillate for this time of year. Refiners have been 
operating at an average utilization rate of 93 percent even before the 
start of the summer driving season. To put this in perspective, peak 
utilization rates for other manufacturers average about 82 percent. At 
times, during the summer, refiners have operated at rates close to 98 
percent. However, these high rates cannot be sustained for long 
periods.
    In addition to coping with the higher fuel costs and growing 
demand, refiners are implementing significant transitions in major 
gasoline markets. Nationwide, the amount of sulfur in gasoline was 
reduced from 300 parts per million (ppm) to a corporate average of 120 
ppm effective January 1, 2004, giving refiners an additional challenge 
in both the manufacture and distribution of fuel. Equally significant, 
California, New York and Connecticut bans on use of MTBE went into 
effect January 1. This is a major change affecting one-sixth of the 
nation's gasoline market. Where MTBE was used as an oxygenate in 
reformulated gasoline it accounted for as much as 11 percent of RFG 
supply at its peak, and substitution of ethanol for MTBE does not 
replace all of the volume lost by removing MTBE. (Ethanol's properties 
generally cause it to replace only about 50 percent of the volume lost 
when MTBE is removed.) The missing volume must be supplied by 
additional gasoline or gasoline blendstocks.
    Due to these changes in U.S. gasoline specifications, the volume of 
gasoline imports declined roughly 10 percent earlier this year, 
although volumes have recently increased somewhat. As U.S. fuel 
specifications change, foreign refiners may not be able to supply the 
U.S. market without making expensive upgrades at their facilities. They 
may eventually elect to do so, but a time lag may occur.
    Refiners are also just completing the annual switch to summer 
gasoline blends, a process which is complicated by the ethanol mandate 
in markets like New York, Connecticut and California that previously 
experienced little ethanol use. This is because of the need to adjust 
the gasoline blend for increased ozone precursor emissions in warm 
weather.
    Obviously, refiners face a daunting task in rationalizing all these 
changes in order to deliver the fuels that consumers and the nation's 
economy need. But they are succeeding. And regardless of current press 
stories, we need to remember that American gasoline and other petroleum 
products remain a bargain when compared to the price consumers in other 
large industrialized nations pay for those products.

  REFINERS FACE A BLIZZARD OF REGULATORY REQUIREMENTS AFFECTING BOTH 
                        FACILITIES AND PRODUCTS

    Refiners currently face the massive task of complying with fourteen 
new environmental regulatory programs with significant investment 
requirements, all in the same 2002--2010 timeframe. (See Attachment 3.) 
For the most part, these regulations are undertaken pursuant to the 
Clean Air Act. Some will require additional emission reductions at 
facilities and plants, while others will require further changes in 
clean fuel specifications. NPRA estimates that refiners are in the 
process of investing about $20 billion to sharply reduce the sulfur 
content of gasoline and both highway and off-road diesel. Refiners may 
face additional investment requirements to deal with limitations on 
ether use, as well as compliance costs for controls on Mobile Source 
Air Toxics and other limitations. These costs do not include 
additional, significant investments needed to comply with stationary 
source regulations affecting refineries.
    On the horizon are other potential environmental regulations which 
could force additional large investment requirements. They are: the 
challenges posed by increased ethanol use, possible additional changes 
in diesel fuel content involving cetane, and the potential for a 
proliferation of new fuel specifications driven by the need for states 
to comply with the new 8-hour ozone NAAQS standard. The industry must 
also supply two new mandatory RFG areas (Atlanta and Baton Rouge) under 
the ``bump up'' policy of the current 1-hour ozone NAAQS.
    These are just some of the pending and potential air quality 
challenges that the industry faces. Refineries are also subject to 
extensive regulations under the Clean Water Act, Toxic Substances 
Control Act, Safe Drinking Water Act, Oil Pollution Act of 1990, 
Resource Conservation and Recovery Act, Emergency Planning and 
Community Right-To-Know (EPCRA), Comprehensive Environmental Response, 
Compensation, and Liability Act (CERCLA), and other Federal statutes. 
The industry also complies with OSHA standards and many state statutes. 
A complete list of Federal regulations impacting refineries is included 
with this statement. (See Attachment 4.)
    API estimates that, since 1993, about $89 billion (an average of $9 
billion per year) has been spent to protect the environment. This 
amounts to $308 for every person in the United States. More than half 
of the $89 billion was spent in the refining sector.

     A KEY GOVERNMENT ADVISORY PANEL HAS JOINED INDUSTRY IN URGING 
               REGULATORY SENSITIVITY TO SUPPLY CONCERNS

    The National Petroleum Council (NPC) issued a landmark report on 
the state of the refining industry in 2000. Given the limited return on 
investment in the industry and the capital requirements of 
environmental regulations, the NPC urged policymakers to pay special 
attention to the timing and sequencing of any changes in product 
specifications. Failing such action, the report cautioned that adverse 
fuel supply ramifications may result. Unfortunately, this warning has 
been widely disregarded.
    We would point to the public rulemaking record illustrating 
recommendations industry has made on environmental regulations over the 
past 8 years. Industry has consistently supported continued 
environmental progress, but cautioned regulators to balance 
environmental and energy goals by considering the supply implications 
of multiple new regulatory requirements. Industry has commented on many 
new stationary source and fuel proposals, urging adoption of more 
reasonable standards with adequate lead-time to make the necessary 
facility changes in order to mitigate potential supply shortfalls. Many 
times, if not most, industry recommendations have been rejected, as 
regulators opted to promulgate more stringent standards without leaving 
a margin of safety for energy supply security. We are now beginning to 
experience the impact of these decisions.
    Continuing America's environmental progress through increased 
supply of cleaner fuels is a crucial part of U.S. policy, but 
environmental improvements are not free. There are sizable costs. All 
too often this reality is underestimated or ignored. Heavy investment 
requirements affect U.S. production capabilities. And again, as we are 
beginning to experience, imported products may be harder to come by at 
least initially, since U.S. gasoline (and soon diesel) specifications 
may be too strict for foreign refineries to manufacture without making 
significant investments to upgrade facilities. This means that product 
imports may decline at the outset of a new regulatory program while 
foreign suppliers decide whether to invest or to sell in non-U.S. 
markets.
    At the same time, when the domestic industry has made the 
significant capital expenditures required by the regulations, it is 
important that final regulations not be changed except in cases of 
absolute necessity. Stability and certainty in regulatory 
implementation is needed to encourage and recognize the investment of 
the regulated industry in the new regulations. A far better approach 
than granting waivers is to develop regulations that reflect the need 
for caution regarding continued fuel supply at the very beginning when 
regulations are finalized, not during the implementation period when 
investments have been made.
    This year as gasoline markets began to reflect the implementation 
of Tier II gasoline sulfur reduction, policymakers were perceived to be 
considering easing the new gasoline sulfur specifications for some 
gasoline importers as a ``relief valve'' for the market, despite 
conflicting indications whether or not any real problems existed. This 
action would have adversely affected the refining industry, which has 
already made substantial investments in gasoline sulfur reductions and 
is in the process of making equally large investments in diesel sulfur 
reductions. Perhaps even more importantly, a program change would have 
eliminated part of the environmental benefits of the Tier II program, 
all for the benefit of foreign suppliers. Fortunately, no action was 
taken to waive gasoline sulfur requirements at this early date.
    As a general rule, when any party suggests that regulatory relief 
is needed, it is important that EPA consult with and work closely with 
EIA, which has expertise in gasoline supply and demand analysis.
    Waivers may merit consideration on rare occasions, and they are a 
tool available to regulators. But there should be a high burden of 
proof for waiver proponents. Waivers by their very nature can cause 
uncertainty and unfair loss of investment in the affected market. 
However, where there is universal agreement that a particular rule or 
policy no longer is valid or better options exist for reaching desired 
objectives, then certainly that policy should be reconsidered. An 
example is the 2 percent oxygenate requirement for reformulated 
gasoline (RFG).

    REFINERS WILL DO THEIR BEST TO MEET SUPPLY CHALLENGES, BUT SOME 
                          FACILITIES MAY CLOSE

    Domestic refiners will rise to meet the supply challenges in the 
short and the long term with the support of policymakers and the 
public. They have demonstrated the ability to adapt to new challenges 
and maintain the supply of products needed by consumers across the 
nation. But certain economic realities cannot be ignored and they will 
impact the industry. Refiners will, in most cases, make the investments 
necessary to comply with the environmental programs outlined above. In 
some cases, however, where refiners are unable to justify the costs of 
investment at some facilities, facilities may close or the refiner may 
exit certain petroleum product markets. These are economic decisions 
based on facility profitability relative to the size of the required 
investment needed to stay in business either across the board or in one 
product line, such as U.S. highway diesel fuel.
    EIA summarizes the impact of past and future refinery closures: 
``Since 1987, about 1.6 million barrels per day of capacity has been 
closed. This represents almost 10 percent of today's capacity of 16.8 
million barrels per calendar day . . . The United States still has 1.8 
million barrels of capacity under 70 MB/CD (million barrels per 
calendar day) in place, and closures are expected to continue in future 
years. Our estimate is that closures will occur between now and 2007 at 
a rate of about 50-70 MB/CD per year.'' (EIA, J. Shore, ``Supply Impact 
of Losing MTBE & Using Ethanol,'' October 2002, p. 4.)
    Refining industry profitability is also not well understood. The 
10-year average return on investment in the industry is about 5.4 
percent; this is about what investors could receive by investing in 
government bonds, with little or no risk. It is also less than half of 
the S&P Industrials figure of a 12.7 percent return. This relatively 
low level of refiners' return, which incorporates the cost of capital 
expenditures required to meet environmental regulations, is another 
reason why domestic refinery capacity additions have been modest and 
also one reason why new refineries are unlikely to be constructed here. 
(Last year was a relatively good year for the refining industry with 
average rates of return at 6.4 percent, above the rate of return for 
previous years; however, in the industry's long experience, rates of 
return over time revert to the mean of about 5 percent.)
    Data compiled by DOE (Performance Profiles of Major Energy 
Producers) show that over the 10 year period from 1993-2002, the return 
on investment (net income/investment in place) for the refining sector 
averaged 5.5 percent, compared to an average return of 12.7 percent for 
the S&P Industrials. In 2002, the return was a negative 2.7 percent for 
refining, compared to 6.6 percent for the S&P Industrials.

THERE ARE NO ``QUICK FIXES'' TO CURRENT MARKET CONDITIONS. POLICYMAKERS 
         AND THE PUBLIC SHOULDN'T LOSE FAITH IN THE FREE MARKET

    Modern energy policy relies upon an important tool which encourages 
market participants to meet consumer demand in the most cost-efficient 
way: market pricing. The free market swiftly provides buyers and 
sellers with price and supply information to which they can quickly 
respond. Refiners need maximum flexibility to react to this market 
information as they make decisions about product manufacture and 
distribution. Mandates and other command-and-control policy mechanisms 
reduce this needed flexibility and add unnecessary cost to gasoline 
manufacture.
    Industry appreciates the patience and restraint that the public and 
policymakers have shown in responding to current market conditions and 
the higher cost of gasoline. Consumers clearly want and need abundant 
supplies of clean fuels at market-based prices. Fuel manufacturers do 
their best to meet this demand and will continue to work with 
policymakers to support policies that increase the supply of clean 
fuels while maintaining adequate supplies. In the short term, there are 
no ``silver bullets'' to alleviate the high costs of gasoline for 
consumers this summer. Putting the current situation in a broader, more 
positive perspective, however, the United States has some of the 
cleanest and most cost-effective fuels in the world.
    We ask that policymakers take particular care in considering the 
impact of so-called ``boutique fuel'' gasolines. In many cases, these 
programs represent a local area's attempt to address its own air 
quality needs in a more cost-effective way than with RFG, which is 
burdened by an overly prescriptive recipe and an oxygenation mandate. 
Industry supports further study of the ``boutique fuels'' phenomenon, 
but urges members of the committee to resist imposition of any 
additional fuel specification changes. Further changes in fuel 
specifications in the 2004--2010 timeframe could add greater 
uncertainty to a situation which already provides significant 
challenges to all market participants.

                               CONCLUSION

    There is a very close connection between Federal energy and 
environmental policies. Unfortunately, these policies are often debated 
and decided separately and thus in a vacuum. As a result, positive 
impacts for one policy area sometimes conflict with or even undermine 
goals and objectives in the other.
    Industry therefore requests that an updated energy policy be 
adopted incorporating the principle that, in the case of new 
environmental initiatives affecting fuels, environmental objectives 
must be balanced with energy supply requirements. As explained above, 
the refining industry is in the process of redesigning much of the 
current fuel slate to obtain desirable improvements in environmental 
performance. This task will continue because consumers desire higher-
quality and cleaner-burning fuels. And our members want to satisfy 
their customers. They ask only that the programs be well-designed, 
coordinated, appropriately timed and cost-effective. The committee can 
advance both the cause of cleaner fuels and preserve the domestic 
refining industry by adopting this principle as part of the nation's 
energy and environmental policies.
    A healthy and diverse U.S. refining industry serves the nation's 
interest in maintaining a secure supply of energy products. 
Rationalizing and balancing our nation's energy and environmental 
policies will protect this key American resource. Given the challenges 
of the current and future refining environment, the Nation is fortunate 
to retain a refining industry with many diverse and specialized 
participants. Refining is a tough business, but the continuing 
diversity and commitment to performance within the industry demonstrate 
that it has the vitality needed to continue its important work, 
especially with the help of a supply oriented national energy policy.

                            RECOMMENDATIONS

    We make the following recommendations to address concerns regarding 
fuel supplies, environmental regulations, and market issues.
     The Senate should redouble its efforts to obtain the two 
votes needed to pass the Conference Report on H.R. 6, a balanced and 
fair energy bill that brings energy policy into the 21st century. This 
is the most important step needed to encourage new energy supply and 
streamline regulations.
     Public policymakers should balance environmental policy 
objectives and energy supply concerns in formulating new regulations 
and legislation.
     EPA should grant the California and New York requests to 
waive the 2 percent oxygen requirement for Federal RFG. This will give 
refiners increased flexibility to deal with changing market conditions. 
It will also allow them to blend gasoline to meet the standards for 
reformulated gasoline most efficiently and economically, without a 
mandate.
     Congress should support the New Source Review reforms and 
encourage capacity expansions at existing refineries.
     Congress should be cautious in making any policy changes 
affecting ``boutique fuels.''
     Policymakers must resist turning the clock backward to the 
failed policies of the past. Experience with price constraints and 
allocation controls in the 1970's and 1980's demonstrates the failure 
of price regulation, which adversely impacted both fuel supplies and 
consumers.
    The industry looks forward to continuing to work with this 
committee, and thanks the Chairman for holding this important hearing. 
I would be glad to answer any questions raised by our testimony today.

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 Responses by Bob Slaughter to Additional Questions from Senator Inhofe
    Question 1a. Is the New Source Review reform a rollback of 
regulatory obligations for refineries?
    Response. No. Refiners are currently complying with over 50 
regulations under the Clean Air Act and many more under other statutes. 
(See attached list.) There are more new regulations in the pipeline. 
Historically, the New Source Review program was intended as a 
regulatory tool to keep areas in attainment with the NAAQS. The NSR 
program itself was not intended as an emissions reduction program. 
Instead, it was contemplated as a program to limit the air quality 
impacts from siting new facilities or undertaking major changes at 
existing facilities, provided that the actions resulted in significant 
emissions increases. Over time, and through retroactive 
reinterpretations, NSR evolved into a regulatory program controlling 
virtually all changes to manufacturing facilities, including those that 
increase efficiency and even some that decrease emissions, thus 
discouraging energy supply and efficiency. This is why the NSR reforms 
are necessary. The reforms have been under consideration since 1996, 
through two administrations, and reflect significant public review and 
comment as well as bipartisan support.

    Question 1b. Assuming that New Source Review reforms were put into 
effect, would they have an impact on refining capacity and fuel supply?
    Response. The New Source Review reforms will provide an important 
tool to help add new U.S. refining capacity, while continuing 
environmental progress, including the production of cleaner fuels. For 
this reason, we urge policymakers to recognize the importance of 
sustaining the Administration's NSR reforms so that domestic refiners 
can continue to meet the growing public demand for gasoline and comply 
with new environmental programs. The NSR reforms should facilitate new 
domestic refining capacity expansions because they will allow facility 
owners to make more efficient use of capital with greater regulatory 
certainty. The reforms will also encourage the installation of more 
technologically advanced equipment and provide greater operational 
flexibility while maintaining a facility's environmental performance.

    Question 2. What new regulatory programs are planned for gasoline 
and diesel fuel for the next few years? Has the supply impacts of these 
programs been adequately studied? Has someone reviewed the cumulative 
impacts of fuel requirements on supply?
    Response. The phase-in for EPA's Tier 2 gasoline sulfur reduction 
program began on January 1, 2004. The final regulations will be 
effective for most gasoline on January 1, 2006. However, the phase-in 
period is longer for refineries in the Rocky Mountains area and for 
small refineries.
    There may be local or regional changes in gasoline formulations in 
new 8-hour ozone nonattainment areas. In addition, a few state MTBE 
bans will be effective in the next few years (i.e., Arizona, Maine, 
Missouri, Kentucky, and New Hampshire) and this could affect fuel 
specifications in those areas.
    EPA's limited phase-in for the highway diesel sulfur reduction 
program will begin on June 1, 2006 and will last for 4 years (Actually 
80 percent of volume must meet the 15 ppm specification on the first 
day). The phase-in for the Agency's sulfur reduction program for 
nonroad diesel will begin on June 1, 2007 and extend for at least 3 
years.
    Low emissions diesel standards will be effective in 110 counties in 
eastern and central Texas on April 1, 2005; these state regulations are 
different from Federal standards. Highway and nonroad diesel will be 
subject to a state 15 ppm sulfur cap on June 1, 2006 in California and 
in the 110 counties in eastern and central Texas. There is no 4-year 
phase-in or small refiner extensions in these state programs.
    NPRA and API support the orderly evolution and use of cleaner-
burning fuels to reflect health and environmental concerns and to 
provide adequate gasoline supplies to the motoring public. However, 
this can only be achieved if energy and environmental policymaking is 
integrated and the costs and benefits of new regulatory requirements 
are carefully weighed in the context of their impact on energy 
supplies. We continue to urge policymakers and stakeholders to focus on 
the supply side of the energy equation and not to take adequate energy 
supply for granted, as we believe has been the case in recent years.
    We would point to the public rulemaking record illustrating 
recommendations industry has made on environmental regulations over the 
past 8 years. Industry has consistently supported continued 
environmental progress, but cautioned regulators to balance 
environmental and energy goals by considering the supply implications 
of multiple new regulatory requirements. Industry has commented on many 
new stationary source and fuel proposals, urging adoption of more 
reasonable standards with adequate lead-time to make the necessary 
facility changes in order to mitigate potential supply shortfalls. Many 
times, if not most, these industry recommendations have been rejected, 
as regulators opted to promulgate more stringent standards without 
leaving a margin of safety for energy supply security. We are now 
beginning to experience the impact of these decisions.
    The National Petroleum Council (NPC) issued a landmark report on 
the state of the refining industry in 2000. Given the limited return on 
investment in the industry and the capital requirements of 
environmental regulations, the NPC urged policymakers to pay special 
attention to the timing and sequencing of any changes in product 
specifications. Failing such action, the report cautioned that adverse 
fuel supply ramifications may result. Unfortunately, this warning has 
been widely disregarded.

    Question 3. In my statement, I referred to the difficulties 
industry faces in building a new refinery actually. Actually according 
to Dr. Cooper's testimony, it would seem that refiners purposefully do 
not build new refineries or upgrade existing ones in order to force up 
prices. I was sent a letter from the CEO of Arizona Clean Fuels 
addressed to me about his company's experience in trying to build a new 
refinery. He states that his company has been trying to build a new 
refinery for over 10 years, and is only now reaching the initial 
permitting phase. Why do some many critics of your industry focus on 
market manipulation while ignoring the very real challenges businesses 
must face in order to meet consumer demand?
    Response. We believe the media and industry experts and analysts 
have communicated the right information to the public about factors 
affecting current market conditions and petroleum supplies and costs. 
Consumers are informed that high crude oil costs and growing demand for 
transportation fuels are the primary drivers in today's fuel markets. 
There are some opponents of fossil fuels who will always ignore the 
facts and make misrepresentations about the refining business and its 
products. Our industry stays focused on our obligation to produce 
reliable supplies of petroleum products to fuel the Nation and meet the 
needs of our customers. At the hearing, NPRA and API were encouraged by 
Dr. Cooper's remarks, on behalf of the Consumer Federation of America, 
focusing on the need for more domestic refining capacity and his 
organization's support for the NSR reforms.

    Question 4. We hear about polls that the public is very willing to 
pay for environmental improvements. What is your organization's 
experience with motorists? Are they supportive of clean fuels programs? 
Are they aware of the higher manufacturing costs?
    Response. Generally, the public is very supportive of clean fuels 
programs; however, they often reject any increased costs that result 
from those programs. This may indicate inadequate consumer education by 
EPA and others concerning the real costs of environmental progress. 
Policymakers have overwhelming emphasized the environmental benefits of 
regulations while understating and underestimating the actual costs to 
consumers, states, and industry and the impacts on energy supply. 
Energy and environmental goals should be more balanced in setting 
policy.
                                 ______
                                 
    Responses by Bob Slaughter to Additional Questions from Senator 
                                Jeffords

    Question 1. In your testimony, you have also encouraged Congress to 
resist any new Federal fuel blends and further study the boutique fuels 
problem. Wouldn't adopting the provisions of the Senate-passed Energy 
bill that standardize the north-south requirements for Federal 
reformulated gasoline be a step that we could take without really 
imposing a ``new'' requirement?
    Response. The Conference Report on H.R. 6 standardizes the Volatile 
Organic Compound (VOC) standard for Federal reformulated gasoline (RFG) 
in the summer for the north and south. This would impose a new 
requirement in northern RFG markets by requiring a more severe 
reformulation of the summer fuel. As an example, Chicago and Milwaukee 
currently have a ``special'' VOC waiver to allow for increased use of 
ethanol in RFG in the summer. The Conference Report language would 
nullify the waiver and require a lower RVP fuel in these cities which 
means additional changes to the base gasoline blendstock known as RBOB 
which could have supply implications. The Conference Report also 
contains provision for a comprehensive study of the boutique fuels 
issue which is the appropriate approach. NPRA and API strongly 
encourage the Senate to pass the Conference Report on H.R. 6.
    Would NPRA support requiring summertime ``floor'' for RVP for all 
gasoline the same as for reformulated gasoline?
    An existing EPA regulation specifies a summertime floor for RVP for 
conventional gasoline; see 40 CFR 80.45(f) (1) (ii): 6.4 psi. This 
value (6.4 psi) for conventional gasoline is the same as the regulation 
for Federal RFG at 40 CFR 80.45(f) (1)(i).

    Question 2. You indicated that the New Source Review reforms should 
facilitate new domestic refining capacity expansions. The NSR reforms 
most applicable to the refining business became effective on March 3, 
2003. What new refinery capacity expansions have occurred or been 
planned since then?
    Response. The New Source Review reforms, both the equipment 
replacement rule and the December 31, 2002, rule are currently subject 
to litigation which has created uncertainty in the states and in 
industry. Refining capacity expansions will continue to be subject to 
significant permitting and stakeholder processes. A clear and concise 
NSR program, however, should help expedite the review process. Other 
obstacles to new or expanded refining capacity remain and will also 
play a part in refiners' decisions about investing in new capacity.

    Question 3. As I understand, no automobile manufacturer recommends 
that any of its new vehicles use a gasoline grade with higher than 91 
octane. Why do most major retailers carry gasoline with 93 octane?
    Response. Refiners market three grades of gasoline as a service to 
their customers, which allows the public to make informed choices about 
the appropriate fuels for their vehicles based on personal preference, 
cost and/or vehicle performance. Perhaps the best answer is to provide 
an analogy by asking a similar question: Why do most major grocery 
stores carry multiple brands of peanut butter, all at different prices? 
And the answer is consumers want a choice of products, as do motorists.
    Question 4a. Throughout your testimony, you have suggested that 
environmental requirements still present difficulties for refiners.
    Hasn't EPA done a lot with phasing-in requirements, banking and 
trading, and other changes to make compliance easier, especially small 
refiners?
    Response. EPA has included some ``flexibilities'' in the final 
gasoline and diesel desulfurization rules by phasing in requirements, 
and allowing for banking and trading. These are positive actions; 
however, the economy, national security, energy supply and consumers 
would be better served by adopting policies and regulations that better 
balance energy supply needs with environmental progress. These policy 
discussions and decisions should occur early in the rulemaking process 
before formulating the regulations. The ``bells and whistles'' features 
referred to in your question cannot offset the negative impact on 
supply of a program that is fundamentally flawed in its approach or 
timing.

    Question 4b. Doesn't the cost of crude and gasoline demand 
overwhelm environmental requirements as the cause of high fuel prices?
    Response. While it is correct that the crude oil costs and growing 
gasoline demand are the key factors impacting today's gasoline markets, 
environmental policies and regulations have been adopted without 
adequate attention to energy supply and impacts on industry, and 
consumers. The petroleum industry has been spending roughly $9 billion 
per year on environmental compliance for some time. For U.S. refiners, 
environmental regulations have forced resources to be directed to 
regulatory mandates, rather than allowing facilities to have 
flexibility in making decisions on how to make their facilities and 
products cleaner and more efficient. These regulatory mandates are 
substantial and also divert resources from other capital projects for 
upgrades and energy efficiency.

    Question 5. Congress explicitly exempted petroleum from Superfund 
liability in 1980. Instead, petroleum companies were subject to a 
polluter pays fee to fund the clean up of toxic waste dumps. The Bush 
administration has opposed reauthorizing this fee, which expired in 
1995. This is about a $500 million annual exemption.
    Response. Is it correct petroleum companies today are neither 
subject to Superfund liability for cleaning up toxic waste spills nor 
do they pay into the ``Superfund Trust Fund,'' which has gone bankrupt 
except for annual congressional appropriations?
    The Comprehensive Environmental Response, Compensation and 
Liability Act (Superfund) is a Federal program created to pay for the 
cleanup of ``orphan'' waste disposal sites. Prior to 1996, the 
Superfund was funded from three separate taxes on industry: the 
petroleum tax, the chemical tax, and the corporate environmental tax. 
The petroleum industry paid $7.5 billion, or almost 60 percent, of all 
Superfund taxes prior to their expiration, yet its share of the 
liability for cleaning up Superfund sites was less than 10 percent, 
according to EPA. More than 70 percent of all non-Federal facility 
Superfund cleanups are paid for by responsible parties, including the 
vast majority of those sites for which the petroleum industry is 
responsible. Moreover, the 1990 Oil Pollution Act separately holds 
petroleum companies liable for cleaning up potential oil spills, and a 
five-cent-per-barrel tax on crude oil has created a $787 million trust 
fund to ensure that any such cleanups occur. In addition, a separate 
0.1 cent-per-gallon excise tax on gasoline has been used to ensure the 
cleanup of leaking underground storage tanks. Hazardous waste site 
cleanups are also required under the Resource Conservation and Recovery 
Act (RCRA) and the potential for new future Superfund sites is greatly 
reduced by RCRA regulations on waste handling. These laws ensure that 
even the relatively few petroleum cleanup sites not voluntarily cleaned 
up by the industry are in fact cleaned up.
    As an ``on-budget'' trust fund, expenditures from the Superfund 
trust fund are subject to the Federal budget rules and the annual 
appropriations process, regardless of whether the taxes are reinstated. 
Annual budget authority for the Superfund program has remained stable. 
Congress has again fully funded the program for 2004, and the 
Administration has requested more than $100 million in additional 
funding for 2005. Future cleanups are not in jeopardy, and responsible 
parties will continue to pay for cleaning up the sites for which they 
are responsible, thereby ensuring the continued application of the 
``polluter pays'' principle.

    Question 6. In your testimony, you argue in favor of the passage of 
the H.R. 6 Conference Report. At the request of Senator Sununu, the 
Energy Information Administration did an analysis of the effect of the 
H.R. 6 Conference Report would have on gasoline prices. EIA found the 
effect would be ``negligible.''
    Response. NPRA believes that EIA's analysis missed several changes 
that will improve gasoline supply and cost. Elimination of the 2 
percent oxygenate mandate for RFG demonstrates just one provision which 
will result in significant flexibility and cost efficiency in gasoline 
manufacture.
    Passage of the Conference Report on H.R. 6 is the most important 
action that can be taken to improve U.S. energy security. Putting the 
conference report on the President's desk is the best way to move 
energy policy forward into the 21st century and maintain a healthy, 
viable U.S. refining industry which is in the best interests of the 
nation.
                               __________
  Statement of A. Blakeman ``Blake'' Early, American Lung Association

    Mr. Chairman and members of the committee, my name is A. Blakeman 
Early. I am pleased to appear 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. I am here today to 
discuss elements of the Clean Air Act that impact the oil refining 
industry and gasoline policy.

           CLEAN FUELS ARE A CORNERSTONE OF THE CLEAN AIR ACT

    The Clean Air Act programs that we believe most affect the refining 
industry are the Reformulated Gasoline Program (RFG) and the low-sulfur 
requirements for gasoline, on-road diesel, and very soon we hope off-
road diesel fuel. We recognize that there are important stationary 
source requirements of the Clean Air Act that impact the refining 
industry. However, because of their importance, I will limit my 
comments to the most significant fuel requirements of the law.

                         REFORMULATED GASOLINE

    As has been demonstrated in California and across the Nation, 
reformulated gasoline can be an effective tool in reducing both 
evaporative and tailpipe emissions from cars and trucks that contribute 
to smog. Based on separate cost effectiveness analyses by both EPA and 
California, when compared to all available emissions control options, 
reformulated gasoline (RFG) is a cost-effective approach to reducing 
the pollutants that contribute to smog.\1\ Compared to conventional 
gasoline, RFG has also been shown to reduce toxic air emissions from 
vehicles by approximately 30 percent.\2\ A study done by the Northeast 
States for Coordinated Air Use Management, an organization of state air 
quality regulators, estimated that ambient reduction of toxic air 
pollutants achieved by RFG translates into a reduction in the relative 
cancer risk associated with conventional gasoline by a range of 18 to 
23 percent in many areas of the country where RFG is used.\3\
---------------------------------------------------------------------------
    \1\ U.S. Environmental Protection Agency, Regulatory Impact 
Analysis, 59 FR 7716, docket No. A-92-12, 1993.
    \2\ Report of the Blue Ribbon Panel on Oxygenates, September 1999, 
pp. 28-29.
    \3\ Relative Cancer Risk of Reformulated Gasoline and Conventional 
Gasoline Sold in the Northeast, August 1998, p. ES-6, found at 
www.Nescaum.org
---------------------------------------------------------------------------
    The benefits from RFG accrue from evaporative and tailpipe 
emissions reductions from vehicles on the road today, as well as from 
non-road gasoline powered engines, such as lawn mowers. They begin as 
soon as the fuel is used in an area. As with most Clean Air Act 
programs, the RFG program has cost less than estimated and the 
emissions benefits have been greater than expected or required by law. 
It is no wonder that RFG or other clean gasoline programs are in use in 
15 states, according to EPA.

                    LOW SULFUR CONVENTIONAL GASOLINE

    This year begins the phase in of sulfur reduction requirements for 
all gasoline, which will be fully implemented by the end of 2006. These 
requirements derive from the Tier 2/Gasoline Sulfur rule issued during 
the Clinton administration. This program is even more significant than 
the RFG program because the lower sulfur levels required in 
conventional gasoline will reduce tailpipe emissions from vehicles and 
other engines used today not just in RFG areas, but virtually across 
the Nation. More importantly, the limit on sulfur in gasoline enables 
the use of very sophisticated technology on a new generation of 
gasoline-powered vehicles (including SUVs) that will generate very low 
rates of tailpipe emissions. These emissions reductions will grow as 
the new cleaner vehicles replace older dirtier ones. This program is so 
important to offset the growth in vehicle emission attributable to the 
fact that each year more people are driving more vehicles more miles 
than ever before.
    The estimated benefits from the Tier2/Gasoline Sulfur rule will be 
enormous. EPA estimates that when fully implemented, the program will 
reduce premature mortality, hospital admissions from respiratory causes 
and a range of other health benefits that have a monetized benefit of 
over $24 billion each year.\4\ The actual benefits will likely be 
higher if history is any guide in these matters.
---------------------------------------------------------------------------
    \4\ Tier 2/Sulfur Regulatory Impact Analysis, December 1999, p. 
VII-54.
---------------------------------------------------------------------------
    At this point I am going to say something unexpected. It is 
important to note that with respect to the RFG program and the Tier 2 
sulfur reduction program the refining industry is getting the job done 
and at a cost below what it and others predicted. Moreover, refiners 
are reducing toxic emissions from RFG by a significantly larger 
percentage than the minimum required by the Clean Air Act Some 
refiners, such as BP have met low sulfur goals ahead of legal 
requirements and are using their success as a marketing tool and even 
have received public recognition from American Lung Association state 
affiliates. We at the American Lung Association want to give credit 
where credit is due.

                     LOW SULFUR ON-ROAD DIESEL FUEL

    While the Tier 2 rule was issued by the Clinton administration, the 
value of clean fuels has not been lost on the Bush administration. The 
Heavy Duty Diesel Engine/Diesel Fuel rule was first issued in the 
Clinton administration reaffirmed by the Bush administration in January 
2000. Like the Tier 2 rule, this rule will provide immediate benefits 
from reductions of both NOx and particulate emissions from diesel 
fueled vehicles on the road today but also enable the application of 
new technology to a new generation of heavy duty diesel engines used in 
trucks and buses in the future that will reduce particle and NOx 
emissions from the vehicles by 90 percent. The sulfur reduction 
requirements for on-road diesel fuel are phased in beginning in 2007.
    Diesel emissions are an important contributor of NOx, a precursor 
of smog. More importantly, heavy-duty diesel emissions generate a large 
amount of fine particle air pollution that is associated with premature 
mortality and cancer. The EPA estimates that when fully implemented, 
the HD Diesel Engine/Diesel Fuel rule will provide health benefits that 
approximately double the Tier 2 rule at a monetized calculation of 
nearly $51 billion each year.\5\
---------------------------------------------------------------------------
    \5\ HD Engine/Diesel Fuel Regulatory Impact Analysis, January 18, 
2001, p. VII-64.
---------------------------------------------------------------------------
    Finally, in further recognition of the importance diesel emissions 
play as a contributor to both smog and fine particle pollution, the 
Bush administration issued just yesterday a new Off-Road Diesel Engine/
Diesel Fuel rule Through phased reductions of sulfur in off-road diesel 
fuel this rule will achieve immediate emissions reductions from a 
diverse group of diesel engines used in construction, electricity 
generation and even trains and marine vessels. The clean fuel 
requirements of this rule, too, will enable a new generation of much 
cleaner off-road diesel engines which will result in lower diesel 
emissions far into the future as older engines are replaced.
    My understanding is that the estimate of health benefits from this 
rule will be even greater than the HD Engine/Diesel Fuel rule in large 
part because this category of engines and their fuel have been under 
regulated in comparison to other engine sectors. EPA projects that, 
when fully implemented, health benefits to include: 12,o00 fewer 
premature deaths, 15,000 fewer heart attacks, 6,000 fewer emergency 
room visits by children with asthma, and 8,900 fewer respiratory-
related hospital admissions each year.\6\
---------------------------------------------------------------------------
    \6\ EPA Regulatory Announcement: Low-Emission Nonroad Diesel 
Engines and Fuel. May 11, 2003.
---------------------------------------------------------------------------
    WE OPPOSE CHANGES TO CLEAN FUELS PROGRAMS THAT WEAKEN OR DELAY 
                          EMISSIONS REDUCTIONS

    Each of the regulations implementing the clean fuels programs and 
requirements were the product of a broad, lengthy and public process 
that ultimately reached a delicate political and substantive 
compromise. No party got everything it wanted. Each rule provides large 
and critical emissions reductions needed to protect public health. Any 
attempt to modify these rules at this juncture without thorough 
evaluation risks disrupting these programs in ways to could reduce or 
delay the large public health benefits we need them to deliver. Such 
changes also risk penalizing those refiners who have made the 
commitment to meet the requirements of these programs, some times 
earlier than required. Those who propose changes bear a heavy burden of 
showing the need and demonstrating the benefit.

          AIR POLLUTION STILL THREATENS MILLIONS OF AMERICANS

    Although we have made important progress in reducing air pollution, 
the battle is far from being won. This is true in part due to improved 
research in recent years which indicates that exposure to lower levels 
of smog over longer periods can have adverse health effects. The 
adverse impact of smog is being magnified also by the increase in the 
number of people with asthma. Smog is an important trigger of asthma 
attacks. New research has also revealed the lethality of so-called fine 
particle air pollution not only among those previously known as 
vulnerable such as people with asthma or chronic lung disease, but also 
among those with cardiovascular disease. This research is the 
foundation of the establishment of the 8-hour NAAQS for ozone and the 
NAAQS for PM 2.5 promulgated in 1997. Additional research since then 
has reinforced the need for these standards.\7\
---------------------------------------------------------------------------
    \7\ See Annotated Bibliography of Ozone Health Studies, January 27, 
2003 and Fact Sheet on Fine Particles, May 2003 at 
www.cleanairstandards.org a website of the American Lung Association.
---------------------------------------------------------------------------
    This committee received testimony from Dr. George Thurston just a 
few weeks ago demonstrating that the progress in reducing 8-hour levels 
of ozone has stalled in recent years. A graph in his testimony, based 
on EPA monitoring data shows the decline in 8-hour ozone levels to be 
essentially flat between 1996 and 2002.\8\
---------------------------------------------------------------------------
    \8\ Statement of George D. Thurston, Sc.D., before the Senate 
Environment and Public Works Committee, April 1, 2004, p.6.
---------------------------------------------------------------------------
    At the end of April, the American Lung Association released its 
State of the Air 2004 report identifying all the counties nation-wide 
with air pollution monitors that monitored unhealthy levels of smog and 
fine particles over the 2000-2002-time period. The report found that 
counties that are home to nearly half the U.S. population, 136 million 
people, experienced multiple days of unhealthy ozone each year. The 
report further found that over 81 million Americans live in areas where 
they are exposed to unhealthful short-term levels of fine particle air 
pollution. In all, the report found that 441 counties, home to 55 
percent of the U.S. population have monitored unhealthy levels of 
either ozone or particle pollution. Among those vulnerable to the 
effects of air pollution living in these counties include 29 million 
children, 10 million adults and children with asthma and nearly 17 
million people with cardiovascular disease.\9\ As impressive as these 
numbers may seem, it is undoubtedly an under estimate of the nature of 
the air pollution problem in this country because far from every county 
has a monitor for either smog or particle pollution.
---------------------------------------------------------------------------
    \9\ State of the Air: 2004, pp. 5-11 at www.lungusa.org
---------------------------------------------------------------------------
 WE NEED GREATER USE OF CLEAN FUELS IN AREAS WITH UNHEALTHY LEVELS OF 
                   SMOG AND PARTICULATE AIR POLLUTION

    As you know, on April 15 EPA designated all or part of 474 counties 
in non-attainment with the 8-hour National Ambient Air Quality Standard 
for Ozone. EPA has committed to designate counties in non-attainment 
for the fine particle or PM2.5 air quality standard in 
December. These areas will be required to evaluate and select emissions 
reduction strategies that, in combination with the Federal programs 
aimed at air pollution transported over long distances, will enable 
them to achieve the 8-hour standard and fine particle standards. The 
American Lung Association believes that many new non-attainment areas 
may want to adopt a clean fuels program using either RFG or a low 
volatility alternative or obtaining low sulfur diesel sooner than 
required by the regulations previously described. We believe that 
should Congress choose to change the law or otherwise influence 
gasoline policy, it should do so in a way that makes it easier for 
areas that exceed air pollution standards to adopt clean fuels programs 
and not ``lock in'' the use of dirtier conventional fuels. We need 
clean fuels programs to be broadly adopted to obtain clean air and 
protect the public health as soon as possible.

 THERE IS NO EVIDENCE THAT CURRENT CLEAN FUELS PROGRAMS SIGNIFICANTLY 
               INFLUENCE CURRENT GASOLINE PRICE INCREASES

    As is customary when gasoline prices spike, some have recently 
suggested that the clean fuels programs, often referred to as 
``boutique fuels'' are responsible. While it appears that clean 
gasoline programs in both California and the Chicago/Milwaukee area 
have contributed to temporary price spikes in the past, we believe 
there has been little evidence presented publicly demonstrating that 
clean fuels programs across the country are contributing in any 
significant way to today's high gasoline prices. Indeed, the evidence 
would suggest that systemic influences in gasoline production and 
marketing are the reason gasoline prices are as high as they are today. 
We believe this to be the case because: (1) gasoline prices have 
increased nation-wide, (2) conventional and clean gasoline prices are 
rising at the same rate, (3) in some areas, conventional gasoline is 
priced at or near the price of clean gasolines, (4) refiners are 
posting higher profits than they did a year ago when prices were lower.
    Both conventional and clean fuels have risen in price $.30 cents a 
gallon or more from a year ago. This increase has occurred in virtually 
all parts of the country regardless of where their gasoline comes from 
or who makes it. More significantly, the increases in price for 
conventional gasoline and clean gasolines have pretty much been the 
same. Attached to the end of my testimony I have prepared an 
unscientific chart that illustrates my point. I believe a more 
comprehensive examination of the data will support my conclusions. I 
encourage the committee to ask DOE or EPA to conduct such an 
examination.
    If the cost of producing clean gasoline were a major factor, the 
prices of these fuels would be rising at a faster rate. As my chart 
shows, this does not appear to be happening. What is noteworthy is that 
in the West, the ``rack'' or wholesale cost of conventional gasoline in 
the states that border California, which has the most stringent fuel 
requirements in the country, has risen more than in California. In Las 
Vegas conventional gasoline is actually more expensive than the average 
rack price in California and Reno is almost the same. When I first 
began to research the explanation for this counter-intuitive alignment 
of prices I was shocked, shocked to learn that there is gambling in Las 
Vegas and Reno! Could it be that refiners were callously over-charging 
for gasoline in Las Vegas and Reno because of the proliferation of so 
many high rolling gamblers in these two cities? Then I noticed Portland 
also had the same expensive conventional gasoline and was forced to 
abandon my theory. In New York the RFG sold in the New York City/
Connecticut area will for the first time use the same low volatility 
blend-stock used in the Chicago/Milwaukee market because of new state 
MTBE bans. Yet the price of conventional gasoline in Albany has risen 
at the same rate and maintains the same price spread as a year ago. 
Note also that Atlanta, which has required the use of a low volatility; 
low sulfur ``boutique'' for several years has experienced a price 
increase no greater than Macon, which uses conventional gasoline. 
Atlanta's fuel prices have consistently been below the national average 
price for conventional gasoline for reasons that remain a mystery.
    The point is that the many other factors that impact gasoline 
price, lead by unsustainable growth in demand and the price of crude 
oil which is currently at or near $40 per barrel, have historically 
driven price and do so today. Clean fuel requirements have an 
insignificant impact in comparison.
    Finally, I must note that across the board, refiners are making 
more money this year than a year ago. The attached USA Today story 
pretty much tells the story. The cost of gasoline is high because 
demand continues to grow at an unsupportable pace. Refiners could make 
money by producing more gasoline, but selling it at a lower price. It 
is pretty obvious that they are not choosing this strategy. It is 
apparently easier and more profitable to maintain a larger gap between 
demand and supply and earn higher profits on a lower level of 
production.
                                 ______
                                 

                RETAIL PRICE RISE COMPARISON OF CG & RFG
                           (Cents per gallon)
------------------------------------------------------------------------
                                   5/6/03        5/6/04        Change
------------------------------------------------------------------------
Chicago (RFG).................       158.10        201.30        +43.20
Champaign (CG)................       141.70        186.00        +44.30
St. Louis (RFG)...............       137.80        183.60        +45.80
Milwaukee (RFG)...............       156.40        196.40        +40.00
Madison (CG)..................       150.20        192.00        +41.80
Allentown (CG)................       147.80        179.30        +31.50
Philadelphia (RFG)............       160.30        182.60        +22.30
Atlanta (GG-low S, Low RVP)...       133.10        173.70        +40.60
Macon (CG)....................       129.80        169.50        +39.70
Denver/Boulder (CG-low RVP)...       144.70        182.30        +37.60
Colorado Springs (CG).........       145.60        185.10        +39.50
Albany (CG)...................       162.60        186.10        +23.50
New York (RFG)................       174.80        200.10        +25.30
------------------------------------------------------------------------


                          GASOLINE RACK PRICES
                           (Cents per gallon)
------------------------------------------------------------------------
                                   5/1/03        4/29/04       Change
------------------------------------------------------------------------
Portland......................        97.22        152.05        +54.83
Reno..........................        95.95        148.25        +52.30
Las Vegas.....................        98.83        153.03        +54.20
California Average............       100.73        151.27        +50.54
------------------------------------------------------------------------

                                 ______
                                 
       Response by A. Blakeman Early to Additional Question from 
                            Senator Jeffords

    Question. Mr. Port's testimonies suggested that the Federal 
Government pre-empt state fuel regulation or prepare a basked of 
``Federal fuels'' that a state might adopt. The latter already seems to 
exist in the form of California's clean fuels. Could we be assured that 
the result of preemption or a choice of only one or two fuels would be 
equal or better in terms of public health protection
    Response. Under Section 211 (c) of the Clean Air Act, EPA has 
authority to control or prohibit a fuel or fuel additive that 
contributes to air pollution that may reasonably be anticipated to 
endanger public health or welfare or impair the performance of an 
emission control device in general use. A state is only allowed to 
control or prohibit a fuel or fuel additive under the Clean Air Act if 
it can show, and EPA agrees, such measure is needed to achieve a 
national primary or secondary ambient air quality standard.
    States have historically adopted controls on fuels and fuel 
additives that were more stringent, in terms of public health 
protection, than the federally permissible fuels (typically 
conventional gasoline with a summertime RVP limit). Given this history, 
we see little reason to believe that a full pre-emption of state 
authority to adopt fuel additive or fuel controls, as Mr. Ports 
advocates, would lead to greater public health protection. Indeed, this 
history is a clear demonstration why the American Lung Association has 
long advocated retention of state authority to adopt air pollution 
control measures that are more stringent than Federal measures in order 
to better protect public health.
                                 ______
                                 
 Statement of Michael Ports, President, Ports Petroleum Company, Inc., 
 on behalf of The Society of Independent Gasoline Marketers of America 
           and the National Association of Convenience Stores

                            I. INTRODUCTION

    Good morning, Mr. Chairman, Senator Jeffords, and members of the 
committee. My name is Mike Ports. I am President of Ports Petroleum 
Company, an independent motor fuels marketer headquartered in Wooster, 
Ohio. Ports Petroleum owns and operates 60 high volume unbranded retail 
motor fuels outlets. Our company operates these stores under the ``Fuel 
Mart'' name in 11 states from Ohio to Nebraska, south to Mississippi, 
and east to Georgia.
    I appear before the committee today representing the Society of 
Independent Gasoline Marketers of America and the National Association 
of Convenience Stores. While my company does not retail gasoline and 
diesel fuel in Oklahoma, many SIGMA and NACS members, including Love's 
Country Stores of Oklahoma City and QuikTrip of Tulsa, are major 
Oklahoma marketers. I speak in part on their behalf today. Mr. 
Chairman, Tom Love and Chester Cadieux asked that I extend their 
personal greetings to you at this hearing.

                          II. THE ASSOCIATIONS

    SIGMA is an association of more than 250 independent motor fuel 
marketers operating in all 50 states. Last year, SIGMA members sold 
more than 48 billion gallons of motor fuel, representing more than 30 
percent of all motor fuels sold in the United States in 2003. SIGMA 
members supply more than 28,000 retail outlets across the Nation and 
employ more than 270,000 workers nationwide.
    NACS is an international trade association comprised of more than 
1,700 retail member companies operating more than 100,000 stores. The 
convenience store industry as a whole sold 124.4 billion gallons of 
motor fuel in 2003 and employs 1.4 million workers across the Nation.
    Together, SIGMA and NACS members sell approximately 80 percent of 
the gasoline and diesel fuel purchased by motorists each year.

         III. GENERAL COMMENTS ON REFINING AND GASOLINE POLICY

    Thank you for inviting me to testify today on the environmental 
regulatory framework affecting oil refining and gasoline policy. My 
company does not refine gasoline or diesel fuel, but we do sell it to 
thousands of consumers every day. Consequently, the environmental 
regulations that govern refining of crude oil into gasoline and diesel 
fuel do not apply to my company directly. But it would be a mistake to 
conclude that my company, all SIGMA and NACS members, and all American 
citizens have not been negatively affected both by the economic burdens 
imposed on refiners by environmental protection regulations and by the 
lack of a Federal policy to insure that these burdens do not lead to 
motor fuel supply shortages and retail price volatility.
    Unfortunately, extreme wholesale and retail price volatility has 
become the norm, rather than the exception. NACS and SIGMA have been 
called to testify before congressional committees regularly since 1996 
as these committees investigate the underlying causes for periodic 
price spikes in the gasoline and diesel fuel markets. Our message has 
remained consistent with what you will hear from me today.
    Today, retail gasoline prices across the Nation are at some of the 
highest levels in history and diesel fuel prices are not far behind. 
Despite a common misperception, rising retail gasoline and diesel fuel 
prices generally do not benefit motor fuel retailers. In fact, rising 
wholesale prices have the opposite effect--retailer margins are 
compressed and marketers record lower in-store sales.
    Historically, negative public reaction to rising retail gasoline 
prices led the media and some legislators to allege ``price gouging'' 
by retailers and to launch investigations into retailer pricing 
practices. Such investigations have uniformly found that rising retail 
prices are caused by fully justified market forces, particularly 
product supply shortages or unusual demand increases, rather than 
collusion or price gouging.
    The congressional reaction to, and the media coverage of, the price 
volatility we have experienced in 2004, however, has taken on a much 
less strident and more reasonable and educated tone. In general, with a 
few notable exceptions, allegations of price gouging and collusion have 
been replaced by a discussion of high crude oil prices, increases in 
demand, supply constraints or dislocations caused by refinery problems 
and ``boutique'' fuels, stringent environmental regulations, and lack 
of growth in domestic refining capacity. SIGMA and NACS welcome this 
more responsible dialog regarding the underlying causes for the price 
volatility we are experiencing thus far in 2004. We hope that this 
dialog will result in meaningful, systemic reforms of the nation's 
motor fuel refining and distribution policies--reforms SIGMA and NACS 
have called for every year since 1996.
    Simply stated, the environmental compliance burdens placed on the 
nation's domestic motor fuel refining industry over the past 20 years 
have 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 fuels. 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.
    As long as the motor fuels refining and distribution system works 
perfectly, supplies are adequate and retail prices remain relatively 
stable. However, if there are any new stresses placed on the system, 
such as a pipeline disruption or an increase in world oil prices, the 
industry no longer has the flexibility to react and counterbalance 
these forces.
    Currently, our Nation does not have a rational or comprehensive 
motor fuel refining policy. Instead, environmental protection 
policies--well-intentioned, but poorly implemented from the perspective 
of motor fuel supplies--have compromised the ability of the domestic 
motor fuel refining and marketing industries to meet consumer demand.
    Congress has a choice to make with respect to motor fuel refining 
policy. It can continue down the path followed for the past two 
decades. This path, as we have witnessed, results in static or reduced 
domestic refining capacity, balkanization of the motor fuel markets, 
increased imports, increased volatility in wholesale and retail prices, 
and rising costs for consumers. Right now, on our current path, there 
is a disincentive for refiners to increase capacity due to the costs 
involved and the lack of opportunity to achieve a reasonable return on 
that investment.
    Alternatively, we can embark on a different path. One that 
continues to encourage clean fuels. One that restores fungibility to 
the gasoline and diesel fuel supply system. One that encourages, rather 
than discourages, expansion of domestic refining capacity. One that 
changes the fundamental economic calculus that a refiner makes when it 
decides whether to spend the huge sums necessary to make the upgrades 
required to produce clean fuels or to close the refinery.
    SIGMA and NACS urge Congress to examine closely this alternative 
path. If we don't like the current situation, then we collectively need 
to chart a new course in order to change the future.

        IV. RECOMMENDATIONS FOR COMPREHENSIVE MOTOR FUELS POLICY

    I must stress that there are no short-term solutions to the 
challenges facing the nation's refining and marketing industry. The 
challenges have been building for 20 years. In fact, we have more 
challenges in the near future in the form of the new ultra low sulfur 
on-road diesel fuel program, scheduled to be implemented in 2006. Our 
nation's fuels distribution system is even now not certain this product 
can be moved from the refinery to the consumer without significant 
contamination. As a result, in addition to the challenges we are facing 
with gasoline supplies, SIGMA and NACS are concerned about on-road 
diesel fuel supply shortages, and significant price volatility, in 2006 
and beyond.
    It is time for Congress to enact a set of Federal motor fuel 
refining policies to:
     Preserve and, if possible, increase domestic refining 
capacity;
     Restore fungibility to the motor fuel supply and 
distribution system; and,
     Enhance the available supplies of gasoline and diesel 
fuel.
    These goals should not be viewed as an ``either/or'' situation. Our 
Nation can have a clean environment and still enjoy affordable, 
plentiful supplies of gasoline and diesel fuel. But we must embark on a 
new path together.
    As an initial matter, several provisions in the fuels title of the 
Conference Report on H.R. 6, the comprehensive energy policy bill under 
consideration by Congress, will be important first steps toward 
achieving these goals. In particular, the repeal of the Federal 
reformulated gasoline oxygen mandate, the blending of compliant RFGs, 
and the study on the negative supply impact of boutique fuels promise 
some relief to the refining and marketing industries. SIGMA and NACS 
urge Congress to pass H.R. 6 as soon as possible.
    However, NACS and SIGMA suggest that the enactment of H.R. 6 is 
only the first step. To build on the provisions in H.R. 6, at a 
minimum, the following steps must be considered:
     Prevent the spread of new boutique fuels during the 
implementation of the new ozone air quality standard, if necessary 
through a Federal pre-emption of fuels regulation or the introduction 
of a basket of ``Federal fuels'' that a state may adopt; and,
     Restore fungibility, without loosening environmental 
protections, to the nation's gasoline and diesel fuel supplies by 
reducing the number of fuels permitted.
    Restoring fungibility to the refining and distribution system while 
maintaining environmental protections will require the simultaneous 
adoption of policies to promote the preservation and expansion of 
domestic refining capacity. Congress, at a minimum, also must consider 
the following:
     Assist domestic refiners through the Federal tax code to 
enable them to produce uniform clean fuels;
     Streamline siting and permitting procedures to permit the 
expansion of existing refineries and, eventually, the construction of 
new domestic refineries; and,
     Finalize New Source Review regulations to remove 
uncertainty from refinery routine maintenance and expansion plans.
    None of the policies listed above are without controversy. However, 
NACS and SIGMA urge this committee to end the gridlock that has stifled 
meaningful action on any of these policies for the past decade. 
Consumers across the nation--your constituents--are paying for this 
gridlock every day when they buy gasoline and diesel fuel. Our members 
remain ready and willing to assist the committee in its efforts to 
achieve these goals.
    In summary, SIGMA and NACS ask you to always keep in mind that 
every time the government changes fuel specifications manufacturers are 
faced with a decision to allocate capital to a refinery or to stop 
making specification fuels. In every such instance, some manufacturers 
will determine than additional investment is unjustified and the 
relevant facilities' production will be lost to the market. 
Consequently, the choice is clear. Continue our current domestic motor 
fuel refining policies--or perhaps it is better described as a lack of 
a policy--or choose a new path that encourages the production by 
domestic refiners of plentiful supplies of clean gasoline and diesel 
fuel.
    Thank you again for inviting me to testify today. I would be 
pleased to answer any questions my testimony may have raised.
                                 ______
                                 
 Responses by Michael Ports to Additional Questions from Senator Inhofe

    Question 1. In his testimony before the committee, Mr. Early, 
representing the American Lung Association, stated that no evidence 
existed that environmental protection programs are the cause, even in 
part, of the increases in retail gasoline prices. Do you agree with 
this statement, or is evidence available that environmental protection 
programs have, at least in part, contributed to increased retail price 
volatility?
    Response. As SIGMA and NACS stated in its formal testimony before 
the committee at the hearing, we are supportive of reasonable and 
scientifically supported clean fuels programs and do not support any 
effort to ``roll back'' existing environmental protection programs.
    Despite this position, it is disingenuous to state categorically 
that environmental protection programs have not contributed to 
increased retail gasoline price volatility. Environmental protection 
programs impact retail gasoline prices, directly and indirectly, in at 
least three ways--each of which leads to upward pressure on retail 
prices.
    First, as has been noted in numerous statements from the 
Environmental Protection Agency (``EPA'') in its rulemakings covering 
both emissions from petroleum refineries and clean fuel programs, there 
are direct costs to these environmental protection programs. Simply 
stated, the nation's domestic refiners must expend billions of dollars 
to upgrade refining processes to reduce emissions and to produce 
cleaner fuels for the nation's consumers to use in their cars and 
trucks. EPA has variously estimated these costs as adding between 1 and 
8 cents per gallon for each of the environmental protection programs 
covering the refining industry over the past decade, including the 
refinery MACT standards, the reformulated gasoline program, and the 
gasoline and diesel fuel sulfur reduction programs. In addition, EPA 
has predicted in each of these rulemaking proceedings that some 
refineries will not be able to make the investments necessary to 
achieve the new regulatory standards and will close. When the ``cost'' 
of environmental upgrades is added to the reduction in gasoline and 
diesel fuel supplies, the direct cost of environmental programs 
covering the domestic refining industry is easy to calculate.
    Second, apart from direct costs of environment protection programs, 
there are substantial indirect costs that flow directly from the 
programs. As stated above, EPA repeatedly has estimated the ``cost,'' 
on a cents per gallon basis, of numerous environmental protection 
programs. What these estimates ignore is that the direct ``cost'' of 
environmental upgrades constitutes only a small portion of the upward 
``price'' pressure that these upgrades exert on gasoline and diesel 
fuel prices.
    This disconnect between cost and price is a common economic 
principle. Diamonds have a high price not because the cost of 
production is high, but because diamonds are rare, demand for diamonds 
is high, and supplies of diamonds are limited.
    The same analysis applies to gasoline and diesel fuel prices. While 
the cost of producing a gallon of gasoline or diesel fuel is relevant 
in terms of determining these products' wholesale and retail prices, it 
is the economic axiom of supply and demand that dictates the price 
consumers pay for gasoline and diesel fuel. Thus, while the direct cost 
increases associated with environmental protection programs may be 
measured in a few cents per gallon for each program, the analysis of 
the impact of these programs on the price of a gallon of gasoline or 
diesel fuel cannot cease once direct costs are considered.
    Such an analysis also must consider indirect costs imposed by the 
combined impact of these environmental programs--in terms of reducing 
the number of refineries producing these products, decreased outputs 
from operating refineries to produce these clean fuels, and the 
destruction of the fungibility of the domestic gasoline and diesel fuel 
markets--to determine the true ``cost'' of these environmental 
programs. This complete analysis of ``costs,'' direct and indirect, 
leads to the conclusion that the direct ``costs'' of environmental 
protection programs have little or no relationship to the ``price'' 
that these programs exact from consumers. In recent months, 
policymakers have come to understand that the indirect costs of these 
programs may in fact be substantially higher than the direct costs.
    Third, as noted above, environmental protection programs--most 
notably the reformulated gasoline oxygenate mandate--have been 
responsible for the severe balkanization of the nation's gasoline (and, 
to a lesser extent to date, diesel fuel) markets into islands of unique 
``boutique'' fuels. This reduction in gasoline fungibility, and the 
prohibition against moving an alternative blend of gasoline from an 
area with ample supplies to an area experiencing supply shortages, is 
directly responsible for the majority of the retail gasoline price 
spikes the Nation has experienced over the past decade.
    Again, the law of supply and demand operates effectively in the 
gasoline markets. If gasoline supplies in a region are low because of a 
natural disaster, a refinery or pipeline outage, or other distribution 
system problems, it generally is not lawful to supply that area with 
gasoline blends from surrounding areas because of environmental program 
restrictions. These artificial supply barriers impose a direct price 
penalty on consumers each time a supply shortage occurs.
    To date, EPA has addressed severe supply shortages in various 
markets by granting temporary ``enforcement discretion'' letters for 
specific geographic areas. These temporary ``waivers'' permit non-
compliant fuel to be sold in these areas for the duration of the supply 
crisis. SIGMA and NACS generally do not support such ``waivers'' of 
fuel specifications because they disadvantage stakeholders that have 
secured adequate supplies of compliant product in the covered market. 
More importantly, however, waivers are a short-term, ad-hoc solution to 
a longer term problem--the gasoline and diesel fuel markets have been 
balkanized and supply crises will continue to occur periodically unless 
some rationality and fungibility is returned to the nation's motor fuel 
distribution system.
    In sum, the assertion that no evidence exists that environmental 
protection programs have caused, in whole or in part, directly or 
indirectly, increased gasoline price volatility is simply wrong. Ample 
evidence exists of such a causal relationship to anyone who understands 
the fundamental rules of supply and demand or who drives a car or 
truck.

    Question 2. All of the witnesses at the hearing state their support 
for continuing environmental protection programs to reduce emissions 
and clean the air. Are there portions of existing EPA fuels programs 
that, if reviewed and/or discarded, can improve gasoline supplies 
without causing a reduction in environmental protection?
    Response. Yes. SIGMA and NACS strongly posit that the following 
steps would improve gasoline supplies without a reduction in 
environmental protection:
     Repeal the oxygenate mandate of the Federal reformulated 
gasoline (``RFG'') program under Section 211(k) of the Clean Air Act. 
Refiners can produce gasoline to meet Federal clean air standards 
without the addition of ethanol or MTBE. The oxygenate mandate only 
serves to boost the ethanol and MTBE production industries and to 
encourage the balkanization of gasoline markets as states seek to adopt 
a cleaner fuel without joining the Federal RFG program with its 
oxygenate mandate.
     Either repeal Section 21 1(c)(4)(C) of the Clean Air Act, 
which permits states to adopt boutique fuels, or place significant 
additional restrictions on the approval of these unique fuel blends. 
All fuels would continue to be required to meet Federal clean fuel 
standards and such Federal pre-emption would help to restore 
fungibility to the nation's gasoline and diesel fuel markets. Such a 
step would succeed in halting further balkanization of the motor fuel 
markets. However, any attempt to reduce the number of boutique fuels 
currently in the marketplace must be undertaken very carefully in order 
to minimize the negative impact that such step could have on overall 
supplies.
     Finalize changes to the New Source Review regulations 
under which the nation's refineries operate to return certainty to the 
regulatory system. Currently, uncertainty with respect to the repairs 
or equipment replacement that will trigger NSR has led refiners to 
delay indefinitely capacity expansions.

    Question 3. Recently, some Senators attempted to add a Renewable 
Fuels Standard to completely unrelated legislation as an amendment. 
What do you think was the motivation of doing that, and what are NACS' 
and SIGMA's positions to breaking--apart provisions in piecemeal 
fashion?
    Response. SIGMA and NACS do not support the adoption of a renewable 
fuel standard (``RFS''). However, SIGMA and NACS have urged Congress to 
enact the conference report on H.R. 6, despite the fact that H.R. 6 
contains an RFS. We have supported the conference report because it 
also contains provisions to repeal the RFG oxygenate mandate, reform 
the Federal underground storage tank program, permit the blending of 
compliant RFGs at retail, and declares that gasoline containing MTBE 
should not be considered a ``defective product.''
    SIGMA and NACS continue to support the enactment of the conference 
report on H.R. 6 as reported by the House and Senate conferees and do 
not support breaking the legislation up into separate parts.
                                 ______
                                 
    Responses by Michael Ports to Additional Questions from Senator 
                                Jeffords

    Question 1. In your testimony, you suggest that Congress should 
create incentives for refiners to invest in new capacity without 
sacrificing environmental goals. Can you provide the committee with one 
very specific example of something Congress could do that would not 
jeopardize public health protections but would lower the price that 
consumers see at the pump?
    Response. The single most effective step that Congress could take 
to reduce the upward pressure on gasoline prices without sacrificing 
environmental standards would be to repeal the RFG oxygenate mandate 
under Section 211(k) of the Clean Air Act.

    Question 2. In your testimony, you argue in favor of the passage of 
the H.R. 6 Conference Report. At the request of Senator Sununu, the 
Energy Information Administration did an analysis of the effect that 
the H.R. 6 Conference Report would have on gasoline prices. The EIA 
found the effect would be ``negligible.'' I am interested in your 
views. Which of this bill's provisions do you believe would expand 
supplies of gasoline and lower prices?
    Response. As an initial matter, let me state that SIGMA and NACS 
believe that there were additional, significant steps that Congress 
could have taken--but did not take--to expand gasoline supplies and 
lower prices as it considered the various bills leading up to the 
conference report on H.R. 6. These steps include tax incentives for 
refiners to expand existing refineries and construct new facilities and 
meaningful restrictions on the continued balkanization of the motor 
fuels markets through the creation of new boutique fuels.
    However, for various reasons, Congress did not include those 
provisions in the conference report. Nonetheless, SIGMA and NACS 
support the even limited measures to increase supplies and lower prices 
contained in the conference report on H.R. 6 and remain hopeful that 
Congress will consider additional steps to increase supplies, restrict 
boutique fuels, and lower prices to consumers in the near future.
    The following provisions of the conference report on H.R. 6 will 
expand supplies of gasoline, reduce the incidence of product shortages 
and price spikes, and should exert a downward pressure on gasoline 
prices:
     The reasonable phase-out of MTBE as a gasoline additive 
under Section 1504 of the conference report;
     The repeal of the RFG oxygenate mandate under Section 1506 
of the conference report immediately upon enactment in California and 
270 days after enactment in the rest of the nation;
     The ``boutique fuels'' provision in Section 1509 of the 
conference report prohibiting EPA from approving a new boutique fuel 
unless EPA concludes that the new fuel will not cause fuel supply 
problems; and,
     The blending of compliant gasolines provision in Section 
1514 of the conference report that permits marketers to blend batches 
of compliant RFG for a maximum of two separate ``blending periods'' of 
ten consecutive days each summer starting in 2005.

    Question 3. More than a year ago, the Environment and Public Works 
committee reported S. 791 favorably. That's the Federal Reformulated 
Fuels Act, which would slightly reduce the demand for gasoline by 
increasing the use of ethanol, ban MTBE and eliminate the oxygenate 
requirement. That bill also include some detailed studies on the matter 
of boutique fuels. Do you support this legislation?
    Response. SIGMA and NACS did not indicate its support for S. 791 as 
it was approved by the committee in June 2003. Our concerns with this 
bill were numerous, including:
     The inclusion of an RFS, which we do not support;
     The rapid implementation of a ban on the use of MTBE as a 
gasoline additive, which could have caused gasoline shortages with the 
removal of MTBE over a short timeframe (MTBE represented approximately 
6 percent of overall gasoline supplies in the nation);
     The lack of comprehensive Federal underground storage tank 
reform in the bill;
     The lack of authorization for retailers to blend compliant 
RFG in their storage tanks; and,
     The lack of a provision on defective product liability for 
MTBE.
    SIGMA and NACS continued to express these concerns to legislators 
in both chambers between the approval of S. 791 by the committee and 
the conference on H.R. 6. When the conference report on H.R. 6 was 
published, sufficient changes had been made to the fuels title of the 
conference report that SIGMA and NACS expressed publicly their support 
for the conference report.

    Question 4. In the spring of 2002, at hearings before the Permanent 
Subcommittee on Investigations, Senators Voinovich and Levin asked 
executives from some of the major oil companies whether the U.S. needed 
more refineries. Of the 5 companies, including ExxonMobil, BP, 
ChevronTexaco, and Shell, only Marathon said we could use more refining 
capacity. The others said we had enough and, considering the economics, 
referred to rely on imports. Has anything changed in the last 2 years 
to suggest that we need more refining capacity?
    Response. As an initial matter, SIGMA and NACS would agree with 
Marathon's statement that the Nation needs additional domestic refining 
capacity. The gasoline price spike we have witnessed over the past 6 
months provides ample evidence of that need. According to the U.S. 
Energy Information Administration, while crude oil prices have risen 
dramatically this year, the percentage of the price of a gallon of 
gasoline attributed to crude oil prices has actually fallen this year 
as gasoline price increases have risen faster than crude oil prices. 
The percentage of the price of a gallon of gasoline attributed to 
refining costs has expanded significantly (increasing by 92 percent 
between January and May) in 2004.
    The primary reasons why these refining margins, or ``crack 
spreads,'' have been able to increase so precipitously is the tightness 
of overall gasoline supplies and the lack of supply relief from foreign 
sources (due at least in part to EPA's new gasoline sulfur standards) 
we have witnessed in 2004. If our Nation were to add a mere 5 percent 
to the existing domestic refining capacity, gasoline supplies would 
increase significantly, competition between refiners to sell that 
additional gasoline would escalate, and wholesale and retail gasoline 
prices should decline as a result.
    SIGMA and NACS agree with the comments of the other refiners before 
the Subcommittee that the current economics of petroleum refining 
generally do not support, over the long term, significant capital 
investments to expand domestic refining capacity. However, as we have 
noted above, SIGMA and NACS urge Congress to examine strategies to 
alter these economics in the future to encourage domestic refiners to 
expand gasoline and diesel fuel refining capacity.
    As a final comment, in the future, SIGMA and NACS suggest that 
Congress also consult with consumers and their motor fuel distribution 
industry proxy, the independent motor fuel marketers, as to whether 
additional domestic refining capacity is needed, not solely the 
refining companies that benefit financially from tight gasoline 
supplies.

    Question 5. Would you support a tax or tariff on oil and gas coming 
into this country from countries with lower environmental standards 
than ours to level the international trade playing field?
    Response. SIGMA does not support taxes or tariffs on imported oil 
and or finished crude products, such as gasoline and diesel fuel. NACS 
has not taken a position on this issue.

    Question 6. The U.S. transportation sector emits about 10 percent 
of the world's carbon dioxide emissions. Several of the world's largest 
petroleum companies, like BP and ChevronTexaco, are taking significant 
steps to diversify into other energy sources and reduce their 
greenhouse gas emissions. Do you agree that we need to take greater 
steps to reduce the threat of global warming by reducing emissions from 
mobile sources?
    Response. Neither SIGMA nor NACS has the technical expertise to 
answer this question and thus we respectfully decline to speculate 
through an answer.

    Question 7. Do you support efforts to reduce gasoline demand in the 
U.S., which would relieve the strain on refining capacity--measures 
such as a gas tax, increases in corporate average fuel economy, or 
other demand side measures?
    Response. Again, neither SIGMA nor NACS has the technical expertise 
to answer this question. We are gasoline and diesel fuel marketers that 
sell these motor fuels to consumers. Demand for these products 
continues to rise, despite existing conservation and other demand side 
measures. Reports by the Energy Information Administration indicate 
that demand for refined petroleum products will continue to grow 
significantly over the next several decades. Regardless of the impact 
conservation or renewable fuels programs may have on reducing the rate 
of growth in the demand for petroleum, measures to increase domestic 
refining capacity will be necessary to keep pace with demand.
    In general, SIGMA and NACS do not support increases in Federal 
motor fuel excise taxes, particularly if those increases result in a 
further disparity between tax rates for hydrocarbon-based fuels and 
certain alternative fuels. In addition, excise taxes are regressive and 
impose the greatest financial burden on those in our society least able 
to shoulder that burden. SIGMA and NACS, however, have listened with 
interest to the discussions on Capitol Hill regarding potential 
increases to the Federal motor fuels excise taxes and have not 
historically opposed modest increases provided that the revenue is 
dedicated to preserving and expanding our nation's transportation 
infrastructure.

                               __________

 Statement of Mark Cooper, Director of Research Consumer Federation of 
America on behalf of Consumer Federation of America and Consumers Union

    Mr. Chairman and Members of the committee, my name is Dr. Mark 
Cooper. I am Director of Research of the Consumer Federation of 
America. The Consumer Federation of America (CFA) is a non-profit 
association of 300 groups, which was founded in 1968 to advance the 
consumer interest through research, advocacy and education. I am also 
testifying on behalf of Consumers Union, the independent, non-profit 
publisher of Consumer Reports.
    I greatly appreciate the opportunity to appear before you today to 
discuss the problem of rising gasoline prices and gasoline price 
spikes, and the impact that environmental regulations may have on these 
increases. Over the past 2 years, our organizations have looked in 
detail at the oil industry and the broad range of factors that have 
affected rising oil and gasoline prices. We submit two major studies 
conducted by the Consumer Federation of America on this topic for the 
record.\1\
---------------------------------------------------------------------------
    \1\ Cooper, Mark, Ending the Gasoline Price Spiral (Washington 
D.C.: Consumer Federation of America July 2001). Cooper, Mark, Spring 
Break in the Oil Industry: Price Spikes, Excess Profits and Excuses 
(Washington D.C.: Consumer Federation of America, October 2003.
---------------------------------------------------------------------------
    Three years ago, the analysis we provided in one of these reports, 
Ending the Gasoline Price Spiral, showed that the explanation given by 
the oil industry and the Administration for the high and volatile price 
of gasoline is oversimplified and incomplete. This explanation points 
to policies that do not address important underlying causes of the 
problem and, therefore, will not provide a solution.
     Blaming high gasoline prices on high crude oil prices 
ignores the fact that over the past few years, the domestic refining 
and marketing sector has imposed larger increases on consumers at the 
pump than crude price increases would warrant.
     Blaming tight refinery markets on Clean Air Act 
requirements to reformulate gasoline ignores the fact that in the mid-
1990's the industry adopted a business strategy of mergers and 
acquisitions to increase profits that was intended to tighten refinery 
markets and reduce competition at the pump.
     Claiming that the antitrust laws have not been violated in 
recent price spikes ignores the fact that forces of supply and demand 
are weak in energy markets and that local gasoline markets have become 
sufficiently concentrated to allow unilateral actions by oil companies 
to push prices up faster and keep them higher longer than they would be 
in vigorously competitive markets.
     Eliminating the small gasoline markets that result from 
efforts to tailor gasoline to the micro-environments of individual 
cities will not increase refinery capacity or improve stockpile policy 
to ensure lower and less volatile prices, if the same handful of 
companies dominate the regional markets.
    Thus, the causes of record energy prices involve a complex mix of 
domestic and international factors. The solution must recognize both 
sets of factors, but the domestic factors must play an especially large 
part in the solution, not only because they are directly within the 
control of public policy, but also because careful consideration of 
what can and cannot be done leads to a very different set of policy 
recommendations than the Administration and the industry have been 
pushing, or the Congress is considering in the pending energy 
legislation.
    Because domestic resources represent a very small share of the 
global resources base and are relatively expensive to develop, it is 
folly to exclusively pursue a supply side solution to the energy 
problem. The increase in the amount of oil and gas produced in America 
will not be sufficient to put downward pressure on world prices; it 
will only increase oil company profits, especially if large subsidies 
are provided, as contemplated in pending energy legislation. Moreover, 
even if the United States could affect the market price of basic energy 
resources, which is very unlikely, that would not solve the larger 
structural problem in domestic markets.

    THE UNDERLYING STRUCTURAL PROBLEM IN DOMESTIC PETROLEUM MARKETS

    Our analysis shows that energy markets have become tight in America 
because supply has become concentrated and demand growth has put 
pressure on energy markets. This gave a handful of large companies 
pricing power and rendered the energy markets vulnerable to price 
shocks. While the operation of the domestic energy market is complex 
and many factors contribute to pricing problems, one central 
characteristic of the industry stands out it has become so concentrated 
in several parts of the country that competitive market forces are 
weak. Long-term strategic decisions by the industry about production 
capacity interact with short-term (mis)management of stocks to create a 
tight supply situation that provides ample opportunities to push prices 
up quickly. Because there are few firms in the market and because 
consumers cannot easily cut back on energy consumption, prices hold 
above competitive levels for significant periods of time.
    The problem is not a conspiracy, but the rational action of large 
companies with market power. With weak competitive market forces, 
individual companies have flexibility for strategic actions that raise 
prices and profits. Individual companies can let supplies become tight 
in their area and keep stocks low, since there are few competitors who 
might counter this strategy. Companies can simply push prices up when 
demand increases because they have no fear that competitors will not 
raise prices to steal customers. Individual companies do not feel 
compelled to quickly increase supplies with imports, because their 
control of refining and distribution ensures that competitors will not 
be able to deliver supplies to the market in their area. Because there 
are so few suppliers and capacity is so tight, it is easy to keep track 
of potential threats to this profit maximizing strategy. Every accident 
or blip in the market triggers a price shock and profits mount. 
Moreover, operating the complex system at very high levels of capacity 
places strains on the physical infrastructure and renders it 
susceptible to accidents.
    It has become evident that stocks of product are the key variables 
that determine price shocks. In other words, stocks are not only the 
key variable; they are also a strategic variable. The industry does a 
miserable job of managing stocks and supplying product from the 
consumer point of view. Policymakers have done nothing to force them to 
do a better job. If the industry were vigorously competitive, each firm 
would have to worry a great deal more about being caught with short 
supplies or inadequate capacity and they would hesitate to raise prices 
for fear of losing sales to competitors. Oil companies do not behave 
this way because they have power over price and can control supply. 
Mergers and acquisitions have created a concentrated industry in 
several sections of the country and segments of the industry. The 
amount of capacity and stocks and product on hand are no longer 
dictated by market forces, they can be manipulated by the oil industry 
oligopoly to maximize profits.
    Much of this increase in industry profits, of course, has been 
caused by an intentional withholding of gasoline supplies by the oil 
industry. In a March 2001 report, the Federal Trade Commission (FTC) 
noted that by withholding supply, industry was able to drive prices up, 
and thereby maximize profits.\2\ The FTC identified the complex factors 
in the spike and issued a warning.
---------------------------------------------------------------------------
    \2\ Federal Trade Commission, Midwest Gasoline Price Investigation, 
March 29, 2001.

          The spike appears to have been caused by a mixture of 
        structural and operating decisions made previously (high 
        capacity utilization, low inventory levels, the choice of 
        ethanol as an oxygenate), unexpected occurrences (pipeline 
        breaks, production difficulties), errors by refiners in 
        forecasting industry supply (misestimating supply, slow 
        reactions), and decisions by firms to maximize their profits 
        (curtailing production, keeping available supply off the 
        market). The damage was ultimately limited by the ability of 
        the industry to respond to the price spike within three or 4 
        weeks with increased supply of products. However, if the 
        problem was short-term, so too was the resolution, and similar 
        price spikes are capable of replication. Unless gasoline demand 
        abates or refining capacity grows, price spikes are likely to 
        occur in the future in the Midwest and other areas of the 
        country.\3\
---------------------------------------------------------------------------
    \3\ Federal Trade Commission, Midwest Gasoline Price Investigation, 
March 29, 2001, pp. i. . . 4.

    A 2003 Rand study of the refinery sector reaffirmed the importance 
of the decisions to restrict supply. It pointed out a change in 
attitude in the industry, wherein ``[i]ncreasing capacity and output to 
gain market share or to offset the cost of regulatory upgrades is now 
frowned upon.''\4\ 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 product output 
or market share.''\5\ The central tactic is to allow markets to become 
tight.
---------------------------------------------------------------------------
    \4\ Peterson, D.J. and Serej Mahnovski, New Forces at Work in 
Refining: Industry Views of Critical Business and Operations Trends 
(Santa Monica, CA: RAND Corporation, 2003), p. 16.
    \5\ Peterson and Mahnovski, p. 42.

          Relying on existing plants and equipment to the greatest 
        possible extent, even if that ultimately meant curtailing 
        output of certain refined product openly questioned the once-
        universal imperative of a refinery not ``going short'' that is 
        not having enough product to meet market demand. Rather than 
        investing in and operating refineries to ensure that markets 
        are fully supplied all the time, refiners suggested that they 
        were focusing first on ensuring that their branded retailers 
        are adequately supply by curtaining sales to wholesale market 
        if needed.\6\
---------------------------------------------------------------------------
    \6\ Peterson and Mahnovski, p. 17.

    The Rand study drew a direct link between long-term structural 
changes and the behavioral changes in the industry, drawing the 
connection between the business strategies to increase profitability 
and the pricing volatility. It issued the same warning that the FTC had 
---------------------------------------------------------------------------
offered 2 years earlier.

          For operating companies, the elimination of excess capacity 
        represents a significant business accomplishment: low profits 
        in the 1980's and 1990's were blamed in part on overcapacity in 
        the sector. Since the mid-1990's, economic performance 
        industry-wide has recovered and reached record levels in 2001. 
        On the other hand, for consumers, the elimination of spare 
        capacity generates upward pressure on prices at the pump and 
        produces short-term market vulnerabilities. Disruptions in 
        refinery operations resulting from scheduled maintenance and 
        overhauls or unscheduled breakdowns are more likely to lead to 
        acute (i.e., measured in weeks) supply shortfalls and price 
        spikes.\7\
---------------------------------------------------------------------------
    \7\ Peterson and Mahnovski, p. xvi.

    The spikes in the refiner and marketer take at the pump in 2002, 
2003, and early 2004, were larger than the 2000 spike that was studied 
by the FTC. The weeks of elevated prices now stretch into months. The 
market does not correct itself. The roller coaster has become a 
ratchet. The combination of structural changes and business strategies 
has ended up costing consumers billions of dollars. Until the Federal 
Government is willing to step in to stop oil companies from employing 
this anti-consumer strategy, there is no reason to believe that they 
will abandon this practice on their own.

                   A COMPREHENSIVE DOMESTIC SOLUTION

    As we demonstrated in a report last year, Spring Break In the U.S. 
Oil Industry: Price Spikes, Excess Profits and Excuses,\8\ the 
structural conditions in the domestic gasoline industry have only 
gotten worse as demand continues to grow and mergers have been 
consummated. The increases in prices and industry profits should come 
as no surprise.
---------------------------------------------------------------------------
    \8\ Cooper, Mark, Spring Break in the Oil Industry: Price Spikes, 
Excess Profits and Excuses (Washington D.C.: Consumer Federation of 
America, October 2003.
---------------------------------------------------------------------------
    We all would like immediate, short-term relief from the current 
high prices, but what we need is an end to the roller coaster and the 
ratchet of energy prices. That demands a balanced, long-term solution. 
Breaking OPEC's pricing power would relieve a great deal of pressure 
from consumers' energy bills, but the short-term prospects are not 
promising in that regard either. There, too, we need a long-term 
strategy that works on market fundamentals.
    Three years ago, we outlined a comprehensive policy to implement 
permanent institutional changes that would reduce the chances that 
markets will be tight and reduce the exposure of consumers to the 
opportunistic exploitation of markets when they become tight. Those 
policies made sense then; they make even more sense today. The Federal 
Government has done little to move policy in that direction since it 
declared an energy crisis in early 2001.
    To achieve this reduction of risk, public policy should be focused 
on achieving four primary goals:
     Restore reserve margins by increasing both fuel efficiency 
(demand-side) and production capacity (supply side).
     Increase market flexibility through stock and storage 
policy.
     Discourage private actions that make markets tight and/or 
exploit market disruptions by countering the tendency to profiteer by 
withholding of supply.
     Promote a more competitive industry.

 EXPAND RESERVE MARGINS BY STRIKING A BALANCE BETWEEN DEMAND REDUCTION 
                          AND SUPPLY INCREASES

    Improving vehicle efficiency (reduction in fleet average miles per 
gallon) equal to economy wide productivity over the past decade (when 
the fleet failed to progress) would have a major impact on demand. It 
would require the fleet average to improve at the same rate it did in 
the 1980's. It would raise average fuel efficiency by five miles per 
gallon, or 20 percent over a decade. This is a mid-term target. This 
rate of improvement should be sustainable for several decades. This 
would reduce demand by 1.5 million barrels per day and return 
consumption to the level of the mid-1980's.
    Expanding refinery capacity by 10 percent equals approximately 1.5 
million barrels per day. This would require 15 new refineries, if the 
average size equals the refineries currently in use. This is less than 
one-third the number shut down in the past 10 years and less than one-
quarter of the number shut down in the past 15 years. Alternatively, a 
10 percent increase in the size of existing refineries, which is the 
rate at which they increased over the 1990's, would do the trick, as 
long as no additional refineries were shut down.
    Placed in the context of redevelopment of recently abandoned 
facilities or expansion of existing facilities, the task of adding 
refinery capacity does not appear daunting. Such an expansion of 
capacity has not been in the interest of the businesses making the 
capacity decisions. Therefore, public policies to identify sites, study 
why so many facilities have been shut down, and establish programs to 
expand capacity should be pursued.

                      EXPANDING STORAGE AND STOCKS

    It has become more and more evident that private decisions on the 
holding of crude and product in storage will maximize short-term 
private profits to the detriment of the public. Increasing 
concentration and inadequate competition allows stocks to be drawn down 
to levels that send markets into price spirals.
    The Strategic Petroleum Reserve is a crude oil stockpile that has 
been developed as a strategic developed for dire emergencies that would 
result in severe shortfalls of crude.\9\ It could be viewed and used 
differently, but it has never been used as an economic reserve to 
respond to price increases. Given its history, draw-down of the SPR is 
at best a short-term response.
---------------------------------------------------------------------------
    \9\ Gove, Philip Babcock, Webster's Third New International 
Dictionary (Springfield MA: 1986), p. 2247, ``a reserve supply of 
something essential as processed food or a raw material) accumulated 
within a country for use during a shortage caused by emergency 
conditions (as war).''
---------------------------------------------------------------------------
    Private oil companies generally take care of storage of crude oil 
and product to meet the ebb and flow of demand.\10\ The experience of 
the past 4 years indicates that the marketplace is not attending to 
economic stockpiles. Companies do not willingly hold excess capacity 
for the express purpose of preventing price increases. They will only 
do so if they fear that a lack of supply or an increase in brand price 
would cause them to lose business to competitors who have available 
stocks. Regional gasoline markets appear to lack sufficient competition 
to discipline anti-consumer private storage policies.
---------------------------------------------------------------------------
    \10\ Gove, Webster's Third International, p. 2252, ``The holding 
and housing of goods from the time they are produced until their 
sale.''
---------------------------------------------------------------------------
    Public policy must expand economic stocks of crude and product. 
Gasoline distributors (wholesale and/retail) can be required to hold 
stocks as a percentage of retail sales. Public policy could also either 
directly support or give incentives for private parties to have 
sufficient storage of product. It could lower the cost of storage 
through tax incentives when drawing down stocks during seasonal peaks. 
Finally, public policy could directly underwrite stockpiles. We now 
have a small Northeast heating oil reserve. It should be continued and 
sized to discipline price shocks, not just prevent shortages. 
Similarly, a Midwest gasoline stockpile should be considered.

              REDUCING INCENTIVES FOR MARKET MANIPULATION

    In the short term, government must turn the spotlight on business 
decisions that make markets tight or exploit them. Withholding of 
supply should draw immediate and intense public scrutiny, backed up 
with investigations. Since the Federal Government is likely to be 
subject to political pressures not to take action, state government 
should be authorized and supported in market monitoring efforts. A 
joint task force of Federal and state attorneys general could be 
established on a continuing basis. The task force should develop data 
bases and information to analyze the structure, conduct and performance 
of gasoline and natural gas markets.
    As long as huge windfall profits can be made, private sector market 
participants will have a strong incentive to keep markets tight. The 
pattern of repeated price spikes and volatility has now become an 
enduring problem. Because the elasticity of demand is so low--because 
gasoline and natural gas are so important to economic and social life--
this type of profiteering should be discouraged. A windfall profits tax 
that kicks in under specific circumstances would take the fun and 
profit out of market manipulation.
    Ultimately, market manipulation, including the deliberate 
withholding of supply, should be made illegal. This is particularly 
important for commodity and derivative markets.

                PROMOTING A WORKABLY COMPETITIVE MARKET

    Further concentration of these industries is quite problematic. The 
Department of Justice Merger Guidelines should be rigorously enforced. 
Moreover, the efficiency defense of consolidation should be viewed 
skeptically, since inadequate capacity is a problem in these markets. 
The low elasticity of supply and demand should be considered in 
antitrust analysis.
    Restrictive marketing practices, such as zonal pricing and 
franchise restrictions on supply acquisition, should be examined and 
discouraged. These practices restrict flows of product into markets at 
key moments.
    Consideration of expanding markets with more uniform reformulation 
requirements should not involve a relaxation of clean air requirements. 
Any expansion of markets should ensure that total refinery capacity is 
not reduced.
    Every time energy prices spike, policymakers scramble for quick 
fixes. Distracted by short-term approaches and focused on placing blame 
on foreign energy producers and environmental laws, policymakers have 
failed to address the fundamental causes of the problem. In the 4 years 
since the energy markets in the United States began to spin out of 
control we have done nothing to increase competition, ensure expansion 
of capacity, require economically and socially responsible management 
of crude and product stocks, or slow the growth of demand by promoting 
energy efficiency. We have wasted 4 years and consumers are paying the 
price with record highs at the pump.

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       Statement of John R. Dosher, Director, Jacobs Consultancy

    Mr. Chairman, and members of the committee, my name is John Dosher. 
I am a Director of Jacobs Consultancy, formerly known as Pace 
Consultants.
    I would like to thank the committee for the opportunity to testify 
at this hearing and provide you my independent views on the refining 
industry.
    Much of my work for Jacobs during my 40+ years with the firm has 
been heavily focused on helping financial institutions and refiners 
develop financing for major asset acquisitions and expansion projects.
    Due to the poor and uncertain climate for investments in the 
refining industry, gasoline supply in the United States is now tight 
and is expected to get even tighter.
    It may be helpful to the committee for me to review historical as 
well as expected clean fuels regulations impacting the refining 
industry. The first regulation, as shown on Exhibit 1, initiated in 
1973, was the removal of lead from gasoline. This was required for the 
catalytic converters in cars and was phased in over a 10-year period. 
In 1989, the Environmental Protection Agency (EPA) instituted vapor 
pressure control to reduce hydrocarbon (volatile organic compounds--
VOC) emissions. These vapor pressure standards were further tightened 
in 1992.
    Based on the Clean Air Act Amendments (CAAA) of 1990, many large 
cities had to use Reformulated Gasoline (RFG) which by law required 
additional emission reductions. These reductions continue to become 
more stringent, even through today, with the use of more stringent and 
complex emission models. The RFG regulations also required the addition 
of oxygenates, such as MTBE or ethanol.
    Under the CAAA, conventional gasoline, which is used in non-RFG 
areas, could not be more polluting than a baseline set for each 
refinery as determined by 1990 production qualities. The CAAA also 
allowed for second round emissions reduction. This resulted in the 
creation of Low Sulfur Gasoline regulations that began this year, and 
Ultra Low Sulfur Diesel requirements in 2006 that also are accompanied 
by the addition of new catalytic converters and other changes to large 
trucks. I should also note that California has already implemented much 
more stringent standards for gasoline and diesel compared to the 
Federal standards.
    Possible further Federal clean fuels initiatives pending would be 
the removal of MTBE from gasoline, renewable fuels (ethanol) standard, 
and additional ultra low sulfur standards for non-road diesel and other 
transport fuels. Several states have already implemented MTBE bans.
    All of this has led to uncertainty in the refining industry, 
particularly when it comes to the financial aspects of the business. 
Let me present the following charts to illustrate this.
    Uncertainty of required investment leads to lower asset values. 
This is illustrated for the refining industry by Exhibit 2, which shows 
recent transactions. The market for buying and selling refineries has 
ranged from 5 percent to 35 percent of replacement cost over the last 
few years. Replacement cost is the cost to build a new refinery. Recent 
transactions have been approximately 15 percent of replacement cost. It 
is also indicative that if an existing refinery sells for 20 percent of 
replacement cost, it becomes difficult to justify building a new 
facility at 100 percent of replacement costs.
    Exhibit 3 outlines the landscape of financing for the refining 
industry. A refiner can typically borrow anywhere from 35 percent to 50 
percent of their market value. The refinery value is the collateral for 
the loan. We look at this market value as percentage of the refinery's 
replacement cost.
    A refinery which is valued at 20 percent of replacement can then 
expect to get financing in the range of 7 percent-10 percent of 
replacement cost. The clean fuels programs for low sulfur gasoline and 
Ultra Low Sulfur diesel are costing 8 percent-12 percent of replacement 
cost. This means that the refiner's available credit is more than 
totally tied up with these clean fuels projects and is not available 
for expansion projects.
    Other requirements will put regional refiners in a more serious 
bind. A good example is the NOx reduction requirement for ozone in the 
Houston Galveston area. Our analysis of the capital costs to meet a 
substantial reduction in NOx emissions adds another 3 percent-6 percent 
of replacement cost to the refiners' investment needs. You can quickly 
see that at today's market for refining, there is not a great deal of 
room for the independent refiner to raise the funds needed for clean 
fuels and expansions. Some smaller refiners could shut down.
    To meet our demand for gasoline and other refined products, as well 
as continue to improve the environment, three goals must be met:
    1. Uncertainty in future regulations must be resolved quickly;
    2. Regulations must be made and implemented in a manner to minimize 
the economic impact to the refining industry

     Exhibit 1.--Clean Fuels Requirements and  Implementation Dates
------------------------------------------------------------------------

------------------------------------------------------------------------
Leaded Gasoline...........................................         1973
Phase I--VOC..............................................         1989
Phase II--VOC.............................................         1992
RFG Phase I--Simple.......................................         1995
RFG--Complex Model 1......................................         1998
RFG--Complex Model 2......................................         2000
MSAT (``Anti-Backsliding'')...............................         2002
Low Sulfur Gasoline.......................................         2004
Ultra-Low Sulfur Diesel...................................         2006
Non-Road Diesel...........................................            ?
------------------------------------------------------------------------


                                           Exhibit 2.--Refinery Market
----------------------------------------------------------------------------------------------------------------
                                                                                                     Percentage
                    Refinery                          Date                     Buyer                 Replacement
----------------------------------------------------------------------------------------------------------------
Equilon Enterprises--El Dorado KS...............         1999   Frontier..........................           17
Eon--Benecia CA.................................         1999   Valero............................           37
Equilon Enterprises--Woodriver IL...............         2000   Tosco.............................           22
BP Amoco-Alliance LA............................         2000   Tosco.............................           36
BP Amoco-Mandan SD/Salt Lake City UT............         2001   Tesoro............................           46
El Paso Energy-Corpus Christi TX................         2001   Valero............................           24
BP--Yorktown VA.................................         2002   Giant.............................           16
Williams--Memphis TN............................         2002   Premcor...........................           26
ConocoPhillips-Woods Cross UT...................         2002   Holly.............................            6
ConocoPhillips-Commerce City CO.................         2003   Suncor............................           12
Premcor-Hartford IL.............................         2003   ConocoPhillips....................            4
El Paso Energy-Eagle Point TX...................         2003   Sunoco............................            8
Orion Refining Company-Good Hope LA.............         2003   Valero............................           27
Farmland-Coffeyville KS.........................         2003   Pegasus...........................         22.7
Motiva--Delaware City DE........................         2004   Premcor...........................           16
----------------------------------------------------------------------------------------------------------------


             Exhibit 3.--Who Can Play New High Stakes Games?
------------------------------------------------------------------------

------------------------------------------------------------------------
                         Percent of Replacement
Refinery Market..................           20           40           50
Loan Amount......................      7 to 10     14 to 20     18 to 25
Need
  Tier 2.........................      8 to 12      8 to 12      8 to 12
  Houston Total..................     11 to 18     11 to 18     11 to 18
                       Percent of Available Credit
Utilized
  Tier 2.........................        100%+     57 to 60     44 to 48
  Houston Total..................        100%+     80 to 90     61 to 72
------------------------------------------------------------------------

                                 ______
                                 
 Responses by John Dosher to Additional Questions from Senator Jeffords

    Question 1. Why have so many refineries been closed over the last 
decade?
    Response. Due to earlier overbuilding, fuel efficiency standards, 
improved technology and other factors there was excess refining 
capacity in the early to mid-nineties. This lead to low profit margins 
leading to many shutdowns of smaller and less efficient refineries. 
Also, during this period California adopted stringent clean fuels 
standard leading to several refinery shutdowns in that state due to the 
high costs involved. By the late nineties margins were better but the 
need for large environmental investments in the rest of the country 
lead to another round of shutdowns.

    Question 2. In the spring of 2002, at hearings before the Permanent 
Subcommittee on Investigations, Senators Voinovich and Levin asked 
executives from some of the major oil companies whether the U.S. needed 
more refineries. Of the 5 companies, including ExxonMobil, BP, 
ChevronTexaco, and Shell, only Marathon said we could use more refining 
capacity. The others said we had enough and, considering the economics, 
preferred to rely on imports.
    Has anything changed in the last 2 years to suggest that we need 
more refining capacity?
    Response. We need more domestic refining capacity. In the last 2 
years the new specifications on gasoline and diesel have become defined 
and they are quite tough and expensive to meet. In the past exporters 
could supply gasoline and diesel to the U.S. opportunistically with no 
need to invest specially for the U.S. market. With the new 
specifications this no longer exists and they must install facilities 
comparable to those required in the U.S. to supply our markets. This 
may or may not occur and I doubt that imports will grow in line with 
demand.

    Question 3. Would you support a tax or tariff on oil and gas coming 
into this country from countries with lower environmental standards 
than ours to level the international trade playing field?
    Response. We need imports and a tariff would be counterproductive. 
With the new specifications in the U.S., foreign refiners no longer 
have an advantage in supplying our markets.

    Question 4. The U.S. transportation sector emits about 10 percent 
of the world's annual carbon dioxide emissions. Several of the world's 
largest petroleum companies, like BP and ChevronTexaco, are taking 
significant steps to diversify into other energy sources and reduce 
their greenhouse gas emissions. Do you agree that we need to take 
greater steps to reduce the threat of global warming by reducing 
emissions from mobile sources?
    Response. I am skeptical on global warming but believe we need to 
reduce emissions from mobile sources. The initiatives already underway 
will lead to big improvements as new cars and trucks designed to take 
advantage of the cleaner fuels come onto the road. Also, see comments 
about the hybrid car below.

    Question 5. Do you support efforts to reduce gasoline demand in the 
United States, which would relieve the strain on refining capacity--
measures such as a gas tax, increases in corporate average fuel 
economy, or other demand side measures?
    Response. The hybrid car represents a consumer friendly, free 
market way to reduce demand and emissions. Although dealers' supplies 
are sold out, I support extension of the hybrid tax rebate to 
accelerate market penetration of these high efficiency, high 
performance vehicles.

                               __________

                California Environmental Protection Agency,
                                      Sacramento, CA, May 11, 2004.
Hon. Barbara Boxer,
U.S. Senate,
Washington DC.
    Dear Senator Boxer: Thank you for the opportunity to provide 
comments that may be helpful to you and others in the upcoming May 12, 
2004 hearing of Senator James F. Inhofe's Environmental and Public 
Works Committee ``--to examine the environmental and regulatory 
framework affecting oil refining and gasoline policy.''
    One expected subject of interest in the hearing is the issue of 
regional and local variations in fuel specifications, sometimes 
referred to as ``boutique'' fuels, and the impacts that these 
specifications have on fuel supplies and prices. At times, some parties 
assert that California has a `boutique' motor vehicle fuels program, 
and that this program is responsible for much of the price disparity 
between transportation fuels in California and the average price in the 
rest of the nation.
    However, as I will explain below, we do not believe that any of 
these assertions are an accurate characterization of California's fuel 
requirements.
    California does have the most stringent gasoline and diesel fuel 
specifications in the country. In California, over 65 percent of all 
ozone forming emissions and 80 percent of the cancer risk posed by 
toxic air contaminants come from motor vehicles. Due to California's 
unique air quality needs, the state has been a leader in requiring the 
cleanest fuels and vehicles in the world.
    The air quality benefits from California's fuels programs are 
significant. California reformulated gasoline reduces ozone forming 
emissions by 15 percent and emissions of toxic air contaminants by 
almost 50 percent. Both of these are significantly higher than benefits 
from Federal reformulated gasolines. Similarly, California diesel 
results in reductions of nitrogen oxides and diesel particulate matter, 
considered by California to be a toxic air contaminant, by 7 and 25 
percent, respectively. Governor Arnold Schwarzenegger has pledged to 
reduce air pollution by up to 50 percent by 2010 to meet Federal 
attainment standards and reduce health impacts. Clean fuels are 
essential to delivering on that promise. Federal diesel fuel provides 
no reduction in oxides of nitrogen and only about one-fourth the 
reduction in particulate matter. It is not sufficient, therefore, to 
meet our needs.
    While statements that California specifications are more stringent 
than the rest of the Nation are true, California's fuel market is 
hardly a boutique. California is one of the largest gasoline markets in 
the world, behind only the United States and roughly equal in size to 
Japan. Also, California is the fourth largest oil producing state, 
closely following Alaska, and has the third largest oil refining 
capability of any state.
    Not only is California a very large fuels market, within our state 
there is a much higher degree of fuel fungibility (the ability to mix 
one fuel with any other similar grade fuel across a large geographic 
region) than anywhere else in the nation. California's motor vehicle 
fuel specifications are applied statewide. As a result, generally any 
fuel that meets our standards can be sold anywhere in the state. The 
only exceptions are due to a small variation in the dates for the 
implementation of summer and winter gasoline volatility specifications, 
or due to Federal requirements for oxygenates in gasoline that are not 
applied uniformly statewide. As you know, California has been 
requesting relief from the Federal oxygenate requirements since 1999. 
Granting this relief is a simple step that the Federal Government could 
take to improve both air quality and fuel supply options within 
California.
    Most of California's fuel is produced within the state by 13 
refineries that often operate at their capacity. Fuel is distributed 
within the State through an integrated pipeline network. Demand for 
transportation fuels has grown steadily in the last 10 years, and now 
exceeds in-state refining capacity. California receives regular 
supplies of fuel from other refineries worldwide, and these fuels 
either meet our standards, or are blended at California refineries into 
complying products.
    However, the West Coast, including California, is isolated from the 
rest of the United States and has no ability to receive fuel via a 
pipeline connection to the Gulf Coast. Marine imports serve as the 
primary external source of petroleum supplies, with the nearest major 
supply of fuel outside of the West Coast nearly 4 weeks away via ship.
    It is true that production of California cleaner burning gasoline 
and diesel fuel comes at a cost. Both require more processing than 
either conventional or Federal reformulated fuels. However, the 
production costs are moderate in comparison to the environmental 
benefits. The increased cost to produce California reformulated 
gasoline is estimated to be about five cents per gallon compared to 
conventional gasoline and less than five cents more than Federal 
reformulated gasoline. The cost to produce California diesel fuel is 
estimated at less than three cents per gallon compared to Federal on-
road diesel fuel.
    These costs account for part of the differences in fuel costs 
between California and the rest of the country, but are only a small 
part. It is the combination of high demand, operation of refineries at 
capacity, and remoteness from additional supplies that lead to the 
conditions of higher fuel prices in California and in other West Coast 
states.
    The Pacific Northwest, Nevada, and Arizona allow conventional 
gasoline, Federal reformulated gasoline (in Arizona only), and Federal 
diesel fuel. Yet these states consistently experience gasoline prices 
similar to California's when the differences in state and local taxes 
and the above mentioned costs for California's fuel specifications are 
considered.
    For example, gasoline prices in all of the western states are at or 
near record highs. When the prices are adjusted to reflect equal state 
and local taxes, California's prices are less than three cents per 
gallon greater than the average of the other states based on data 
available from the AAA Web site (see enclosed data). The current fuel 
prices and historical price increases cannot be attributed to 
differences in fuel specifications. This is supported by the results of 
investigations conducted by the United States Department of Energy--
Energy Information Administration (2003) and the California Attorney 
General (1999, 2004).
    While solutions continue to be needed to address the high motor 
vehicle fuel prices in California and on the West Coast, it is clear 
that California's cleaner fuels are not a major cause of the problem. 
Eliminating California's fuel specifications would not significantly 
lower prices, but would harm the health of our citizens and make it 
impossible to meet our obligations under the Federal Clean Air Act.
    With ever increasing numbers of Americans breathing unhealthy air, 
it is imperative that citizens be supplied with the lowest emitting 
vehicles feasible and that motor vehicles use the cleanest burning 
fuels possible. That is precisely the course we are on in California.
    Again, thank you for this opportunity. If you have any questions, 
please feel free to contact me, at (916) 323-2514 or Alan C. Lloyd, 
Ph.D., Chairman, California Air Resources Board, at (916) 322-5840.
            Best regards,
                                            Terry Tamminen,
                                                  Agency Secretary.
Enclosures

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                                       Arizona Clean Fuels,
                                         Phoenix, AZ, May 11, 2004.
Senator James M. Inhofe,
U.S. Senate,
Chairman Committee on Environment & Public Works,
Washington, DC.
    Dear Sir: After learning of the committee's upcoming hearing on 
refining issues, I have prepared the attached brief Situation Analysis 
to address the issue of why a new oil refinery has not been built in 
the United States in over 20 years. I have been involved in the oil 
refining industry for over thirty years. In the late 1990's I was CEO 
of Orion Refining Corporation who spent over $1 billion to refurbish 
and upgrade a refinery near New Orleans that had been idled since the 
early 1980's. This was the closest thing to a new refinery project 
during the 1990's. I am currently the CEO of Arizona Clean Fuels, a 
company that has been developing a new oil refinery project for Arizona 
for over 10 years. This project is nearing the completion of the 
initial permitting stage and is a unique example of the key issues that 
must be addressed to build a new refinery in this country. I hope the 
attached paper helps the committee to understand the magnitude of a 
project such as this and the long lead times that add uncertainty to 
the overall business decisions involved.
            Yours truly,
                                             R.G. McGinnis,
                                     CEO, Arizona Clean Fuels, LLC.
                                 ______
                                 
                           Situation Analysis
            New United States Refinery Project Development 
                       Considerations and Issues

    The objective of this paper is to briefly highlight the key 
considerations and issues involved in the corporate, government and 
public decisions that must be made prior to the implementation of a new 
oil refinery project in the United States.
    The refining industry has successfully gone through a major effort 
over the past decade to respond to changes in product fuel quality 
mandated by Clean Fuels requirements. During this time, the industry 
has met the growing domestic demand for petroleum products by limited 
capacity expansions of existing refineries, and by imports. No new 
refineries have been built in the United States in over 20 years and 
product imports have reached over 2 million barrels per day. Economic 
growth in other countries has reduced the availability of products to 
U.S. consumers and increased competition for imports. Recent petroleum 
product prices have reached and sustained record highs, driven by a 
growing shortfall in supply. There are a number of reasons that this 
shortfall is a major concern for the United States, most of which have 
been documented in abundance recently in the press. It is perhaps 
sufficient to state that shortfalls create economic hardship and slow 
the economy. It is also a strategic issue for the United States to grow 
imports and increase the threat of shortages and embargos.
    One of the major solutions to this growing shortfall is to provide 
additional domestic refining capacity.
    The problems and impediments preventing the growth and investment 
for new refining capacity in the United States are significant. Despite 
this, a new refinery project, the Arizona Clean Fuels (ACF) project, 
has been proposed and will be completing engineering design consistent 
with the final Air Permit expected to be issued later this year. This 
project will be used below to highlight specific costs and permitting 
requirements.

                NEW REFINERY CONSTRUCTION CONSIDERATIONS

    There are four general areas of consideration that drive the 
feasibility and timing of new refining projects:
    1. Overall Project economics driven by product values, feedstock 
costs, and operating costs,
    2. Technology choices driven by crude slate, target product mix, 
legislated and target product quality requirements (and projected 
changes)--a lengthy process of project development, engineering and 
construction,
    3. Public Acceptance--significant reluctance in most areas of the 
United States to allow a new refinery ``in my back yard''. Public 
communication and hearings processes are lengthy and often 
confrontational,
    4. Permitting processes for environmental permits, access permits, 
construction permits and zoning, etc.--driven by Federal, state, and 
local legislation and zoning.

                           REFINING ECONOMICS

    Historical refining margins in the United States have, on average 
and in general, not been adequate to support new refinery construction. 
Returns on Capital Employed have been in the 5 percent to 7 percent 
range. Capacity expansions and modifications have been economic due to 
leverage on base infrastructure and facility investments.
    Refinery sales transactions over the past 10 years have, on 
average, been at about 25 percent of the cost of new-build facilities. 
Condition of the plants, local markets, and a company's perspective on 
future cash-flows drive the valuation process. These facilities often 
require significant additional investment to ensure reliable operation 
and compliance with regulatory requirements.
    Refineries are by their nature very costly facilities. The proposed 
ACF refinery which will produce about 150,000 barrels per day of 
gasoline, diesel, and jet fuel products, will cost over $2 billion with 
an additional $500 million required for crude oil and product 
pipelines. Rapidly growing demand for petroleum products in the 
southwestern United States makes this project economic.

                           TECHNOLOGY CHOICES

    The refining industry is not traditionally viewed as ``high tech''. 
However, the need for high quality products and significant flexibility 
to process wide ranges of crude oils, and the need to implement state-
of-the-art environmental controls, has led to the development of very 
sophisticated processes. There are several process licensors and 
choices for each type of facility that a refiner needs. Also, due to 
the high cost of each process facility, extensive studies and 
comparisons are required to match a refiner's products and processing 
objectives.
    One area where the industry has led in major technology 
developments is in the ``Best Available Control Technology'' for 
emissions as defined in and required by the Clean Air Act. Every 
refinery modification and new process unit has required the development 
and application of specific control technology.
    The development of the Arizona Clean Fuels project included an 
extensive analysis of emission sources and inclusion of the Best 
Available Control Technology. This will be the first refinery where all 
sources will be addressed at the same time in this manner.

                           PUBLIC ACCEPTANCE

    A major hurdle to the construction of a new oil refinery is to 
overcome the historic public perceptions of oil refineries and to 
obtain public acceptance. Generally, the public has a ``not in my back 
yard'' attitude to oil refineries. Certainly, refineries of the past 
have, to some extent, earned this reaction from the public. Modern 
facilities have overcome the shortcomings of these previous refineries. 
The refining industry has developed and implemented emissions controls, 
operating practices, and outreach programs to address the concerns of 
both government agencies and the public. Certainly these programs and 
projects have increased costs, but have been viewed by the industry as 
necessary.
    Refineries have significant benefit to the public by generation of 
both direct and indirect jobs and economic activity. Local communities 
can benefit significantly from the operation of a refinery.
    Anew refinery, such as the Arizona Clean Fuels project, with the 
control and monitoring required by current regulations will have 
minimal impact on the surrounding environment. The proposed locations 
in Yuma County, Arizona, are remote from population concentrations. The 
project has gained support from local politicians and business leaders.

                          PERMITTING PROCESSES

    Certainly the most-often noted issue in new refinery construction 
is that of the extensive permitting that is required. Generally, 
permits are required from multiple agencies at the Federal, state and 
local levels. Also permits are required not only for the refinery but 
also for pipeline and utility services to and from the site. The 
permitting processes are lengthy and costly. Project developers are 
also not in control of the pace and timing of permit review and issue 
and this uncertainty can lead to project delays and cost escalation.
    The most extensive and important permit is often the ``Air Permit'' 
that is usually issued by the relevant state agency and outlines all 
requirements for compliance to the Clean Air Act and New Source 
Performance Standards with emission levels, reporting and Best 
Available Control Technology requirements. The extensive scope of this 
permit requires detailed air modeling, technical review of all 
facilities, and agreement on the Best Available Control Technology. For 
example, the Arizona Clean Fuels permit application was submitted to 
the Arizona Department of Environmental Quality on December 22, 1999, 
and a Draft Permit issued on October 10, 2003--a time period of almost 
4 years. In response to the declaration of large portions of Maricopa 
County as a ``NonAttainment Zone'' for Federal Ozone standards in the 
summer of 2003, the proposed refinery was moved to a site in Yuma 
County and a revision to this Draft Permit is still pending. Following 
its issue, reviews, public hearings, and final permit drafting will 
take many months.
    Fortunately, some other Federal and state agencies review and 
comment on the permit and project coincident with the preparation of 
the Air Permit. For example the EPA, the U.S. Forest Service and the 
National Park Service will be consulted by ADEQ. However, all of these 
agencies have seen increased demands on their time and reviews don't 
always meet the expected timeframes thereby extending the permitting 
schedule. In the western United States, for example, EPA Region IX 
encompasses the most dramatic growth seen anywhere in the country. 
However, large projects that would support and provide jobs for that 
growing population can be held up for years by the air permitting 
process alone. This Regional EPA office has a limited number of 
technical staff members who must review and approve the air permits for 
every project in California, Nevada, Arizona, Hawaii, and Guam. 
Similarly, the National Park Service, Bureau of Land Management, and 
U.S. Forest Service must compete for the services of only a few Federal 
staff members who have the technical expertise and responsibility to 
review all proposed major source air permits for projects across the 
entire western half of the country. This coupled with the lack of 
regulated or recommended timing requirements for permit issue leads to 
significant delays. Finally, although industry recognizes the statutory 
requirement for these agencies to ensure compliance with all 
regulations, there often appears to be more attention paid to the 
concerns of a small minority of constituents rather than a balanced 
review.
    Although the Air Permit is one of the most important permits for 
any project, there are many other rigorous permits that must be 
obtained for both refinery and pipeline projects from a multitude of 
agencies. For example:
     NEPA Compliance from a controlling agency such as the 
Bureau of Land Management
     Land Use Permits from controlling agencies and 
jurisdictions
     National Historic Preservation Act Compliance
     Access permits from Bureau of Land Management, U.S. Army 
Corps of Engineers, and State Land Commissions as well as private land 
owners.
     Military Agency approvals if military facilities involved.
    A listing of permits required by the Arizona Clean Fuels refinery 
and pipeline projects shows about thirty permits required excluding 
local zoning, access and construction permits. The majority of these 
permits are not initiated until the Air Permit is issued, since it 
finalizes the basis for the project. The timing of these can be 
extensive and is estimated to be about eighteen to twenty-four months. 
Although design engineering can be done in parallel to these permitting 
activities, no significant construction can begin until they are in 
place. Construction of a large refinery such as ACF proposes takes 
about 3 years. This sequential process results in long lead times for 
project development and completion.

                              CONCLUSIONS

    The refining industry in the United States has not constructed a 
new grass roots refinery for over twenty years. Refining economics have 
generally not supported new refinery costs and the industry has focused 
on expansions of existing refineries. Major investments in Clean Fuels 
production and regulatory programs have also absorbed much of the 
industry capital. The total capital cost of an economically sized 
facility of about 150,000 barrels per day is approaching $3 billion.
    The complexity of the refining processes and technology choices 
results in lengthy project development times which can be one to 2 
years. Following this project definition, corporate strategic 
decisions, public reviews, local government discussions, and multi-
level permitting process typically take four to 5 years before a final 
``godecision'' can be made. Engineering and construction on a 
significant project is a major undertaking and takes three to 4 years. 
Total project time from inception to startup is in the order of 10 
years.
    The massive investments required for development of a new refinery 
project coupled with uncertainty on timing and final approval of 
permits, issues of public acceptance and market uncertainty in the 
future, have deterred the refining industry from new projects.
    Some efficiencies may be possible in the overall development 
timing. Internal corporate engineering and construction efficiencies 
may reduce overall project timing. Reducing the number of agencies 
involved in major project permitting through the ``lead agency'' 
approach and ensuring internal accountability for permit issue timing 
could reduce time and workload on all agencies involved.

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