[Senate Hearing 108-604]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 108-604

              CRUDE OIL: THE SOURCE OF HIGHER GAS PRICES?

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON ANTITRUST,
                 COMPETITION POLICY AND CONSUMER RIGHTS

                                 of the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 7, 2004

                               __________

                          Serial No. J-108-65

                               __________

         Printed for the use of the Committee on the Judiciary



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                       COMMITTEE ON THE JUDICIARY

                     ORRIN G. HATCH, Utah, Chairman
CHARLES E. GRASSLEY, Iowa            PATRICK J. LEAHY, Vermont
ARLEN SPECTER, Pennsylvania          EDWARD M. KENNEDY, Massachusetts
JON KYL, Arizona                     JOSEPH R. BIDEN, Jr., Delaware
MIKE DeWINE, Ohio                    HERBERT KOHL, Wisconsin
JEFF SESSIONS, Alabama               DIANNE FEINSTEIN, California
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
LARRY E. CRAIG, Idaho                CHARLES E. SCHUMER, New York
SAXBY CHAMBLISS, Georgia             RICHARD J. DURBIN, Illinois
JOHN CORNYN, Texas                   JOHN EDWARDS, North Carolina
             Bruce Artim, Chief Counsel and Staff Director
      Bruce A. Cohen, Democratic Chief Counsel and Staff Director
                                 ------                                

   Subcommittee on Antitrust, Competition Policy and Consumer Rights

                      MIKE DeWINE, Ohio, Chairman
ORRIN G. HATCH, Utah                 HERBERT KOHL, Wisconsin
ARLEN SPECTER, Pennsylvania          PATRICK J. LEAHY, Vermont
LINDSEY O. GRAHAM, South Carolina    RUSSELL D. FEINGOLD, Wisconsin
SAXBY CHAMBLISS, Georgia             JOHN EDWARDS, North Carolina
        Peter Levitas, Majority Chief Counsel and Staff Director
                Jeffrey Miller, Democratic Chief Counsel



                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page
Craig, Hon. Larry E., a U.S. Senator from the State of Idaho.....     9
DeWine, Hon. Mike, a U.S. Senator from the State of Ohio.........     1
    prepared statement...........................................   118
Feingold, Hon. Russell D., a U.S. Senator from the State of 
  Wisconsin, prepared statement..................................   121
Kohl, Hon. Herbert, a U.S. Senator from the State of Wisconsin...     3
    prepared statement...........................................   138
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.     6
    prepared statement...........................................   169
Schumer, Hon. Charles E., a U.S. Senator from the State of New 
  York...........................................................     7
Specter, Hon. Arlen, a U.S. Senator from the State of 
  Pennsylvania...................................................     5

                               WITNESSES

Bermann, George A., Walter Gelhorn Professor of Law and Jean 
  Monnet Professor of European Union Law, Columbia University 
  School of Law, New York, New York..............................    20
Cooper, Mark, Director of Research, Consumer Federation of 
  America on behalf of Consumer Federation of America and 
  Consumers Union, Washington, D.C...............................    21
Felmy, John, Chief Economist and Director of Policy Analysis and 
  Statistics, American Petroleum Institute, Washington, D.C......    16
Hastings, Justine S., Assistant Professor of Economics, Yale 
  University, prepared statement.................................    18
Kovacic, William E., General Counsel, Federal Trade Commission, 
  Washington, D.C., prepared statement...........................    14
Wyden, Hon. Ron, a U.S. Senator from the State of Oregon.........    10

                         QUESTIONS AND ANSWERS

Responses of George Bermann to questions submitted by Senators 
  DeWine, Kohl, and Craig........................................    40
Responses of Mark Cooper to questions submitted by Senators Craig 
  and Leahy......................................................    43
Responses of John Felmy to questions submitted by Senators 
  DeWine, Leahy, Kohl, and Craig.................................    45
Responses of Justine Hastings to questions submitted by Senators 
  DeWine, Kohl, Leahy, and Craig.................................    50
Responses of William Kovacic to questions submitted by Senators 
  Kohl, Leahy, DeWine, and Craig.................................    58

                       SUBMISSIONS FOR THE RECORD

Bermann, George A., Walter Gelhorn Professor of Law and Jean 
  Monnet Professor of European Union Law, Columbia University 
  School of Law, New York, New York..............................    84
Bingaman, Jeff, Ranking Member, letter to President, March 24, 
  2004...........................................................    87
Cicio, Paul N., Executive Director, Industrial Energy Consumers 
  of America, Washington, D.C., prepared statement...............    95
Cooper, Mark, Director of Research, Consumer Federation of 
  America on behalf of Consumer Federation of America and 
  Consumers Union, Washington, D.C., prepared statement..........   101
Felmy, John, Chief Economist and Director of Policy Analysis and 
  Statistics, American Petroleum Institute, Washington, D.C., 
  prepared statement.............................................   123
Hastings, Justine S., Assistant Professor of Economics, Yale 
  University, prepared statement.................................   129
Kovacic, William E., General Counsel, Federal Trade Commission, 
  Washington, D.C., prepared statement...........................   140
Sloan, James B., Antitrust Attorney, Chicago, Illinois, statement   172

 
              CRUDE OIL: THE SOURCE OF HIGHER GAS PRICES?

                              ----------                              


                        WEDNESDAY, APRIL 7, 2004

                              United States Senate,
Subcommittee on Antitrust, Competition Policy and Consumer 
                        Rights, Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:53 p.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Mike DeWine, 
Chairman of the Subcommittee, presiding.
    Present: Senators DeWine, Specter, Craig, Kohl, Leahy, and 
Schumer.

OPENING STATEMENT OF HON. MIKE DEWINE, A U.S. SENATOR FROM THE 
                         STATE OF OHIO

    Chairman DeWine. Good afternoon. Let me welcome all of you 
to the Antitrust Subcommittee hearing on the causes of higher 
gas prices in the United States.
    As most Americans know, we are in the middle of another 
round of painful increases in gasoline prices. The national 
average has reached a new record high for self-serve unleaded 
gas, and that is about $1.80 per gallon. Recently, in my home 
State of Ohio, gas prices have been even higher. In Marietta, 
Ohio, for example, gas was $1.84 per gallon recently. In 
Cleveland, it was $1.86, and in Columbus it topped out at $1.88 
at some stations. Many analysts predict that prices could break 
the important psychological barrier of $2.00 per gallon this 
summer.
    Although the prices this time around seem particularly 
high, the American consumer has unfortunately been here before. 
Since the 1970's, when we first experienced the so-called oil 
shocks, periodic price spikes seem to have become as 
predictable as the seasons changing. Though these spikes no 
longer surprise us, they continue to harm consumers, weaken the 
economy and leave us with an important question: What, if 
anything, should lawmakers be doing to address this recurring 
problem?
    Today, we hope to address that question in a setting where 
we can explore the reasons for high-price gasoline and consider 
possible policy steps. We do have excellent panelists and we 
will hear from a number of experts who will offer their 
perspectives on the root causes for higher gasoline prices.
    But I want to stress one thing upon which I think there 
will be universal agreement. The single most important factor 
affecting gas prices in the United States is the price of crude 
oil. We have a chart over there which indicates that.
    As we can see from our chart, as of March 2004, crude oil 
is the largest single component of the gasoline price, making 
up nearly half of the overall price that consumers pay at the 
pump. Beyond that, the Federal Trade Commission has said that 
changes in crude oil prices account for approximately 85 
percent of the variability of gasoline prices. In other words, 
the changes in crude oil prices lead directly to the gasoline 
price spikes that cause so much economic distress.
    Of U.S. imported crude oil, more than 40 percent comes from 
OPEC member nations. Last week, OPEC met in Austria and decided 
to cut production by 4 percent, down about 1 million barrels to 
23.5 million barrels per day. The price of a barrel of oil is 
already very high, between $35 to $38 per barrel. And according 
to some analysts, the price is likely to break the $40-per-
barrel ceiling.
    Of course, OPEC's decision to decrease supply likely will 
increase U.S. gasoline prices further, causing American 
consumers to suffer more. That is why last week Senator Kohl 
and I reintroduced our No Oil Producing and Exporting Cartels 
Act of 2004, or our NOPEC bill.
    The purpose of the bill is to end OPEC's flagrant violation 
of our antitrust laws. This is hard-core cartel behavior and 
should not be tolerated. If OPEC were a group of international 
oil companies getting together to set prices and cut output, it 
could be prosecuted under U.S. antitrust laws. But to this day, 
OPEC continues to receive special treatment under U.S. 
antitrust law. Our bill would remove the legal obstacles that 
have protected OPEC until now and gives our antitrust 
enforcement agencies the tools they need to prosecute OPEC.
    First, NOPEC, this bill, responds to a 1979 Federal 
district court opinion that found that OPEC's activities were, 
and I quote, ``governmental,'' not ``commercial,'' and 
therefore protected from prosecution under the Foreign 
Sovereign Immunities Act.
    Second, our bill responds to a 1981 Federal court of 
appeals decision where the court refused to hear that same case 
against OPEC based on the so-called ``act of state doctrine,'' 
which states that a court will not judge the legality of the 
sovereign acts of a foreign country.
    Finally, our bill gives the Department of Justice and the 
Federal Trade Commission explicit authority to prosecute OPEC. 
In short, our bill says to OPEC, no more special treatment 
under U.S. antitrust law. One of our expert witnesses today 
will offer his legal analysis of our proposed law and we look 
forward to his testimony.
    We are going to try to move the NOPEC bill and are hopeful 
that if it becomes law, it will help restore market discipline 
to crude oil prices. But even if we do manage to get crude oil 
prices back in line with the laws of supply and demand, there 
is a range of other factors that affect gasoline prices, and we 
will consider those today as well.
    For example, the proliferation of specialty gases creates a 
particularly complex part of the supply problem, as our chart 
over there indicates, as well. In the United States, as we can 
see from this chart, a number of State and local governments 
have different gasoline grades that they use to achieve EPA 
mandates for cleaner air. There are currently 18 different 
grades sold in the United States. This creates two supply 
problems. First, it reduces the availability of substitutes to 
cushion supply and price shocks. Second, it makes importing gas 
harder because many foreign refiners do not provide non-
conventional gas grades.
    Refining capacity is another part of the gasoline supply 
problem and a number of people believe it is the key problem we 
are facing today. There are about 145 refineries currently 
operating in the United States. In the last 15 to 20 years, no 
new refineries have been built and about 75 have been closed.
    Although the efficiency of the remaining refineries has 
been improved, refinery capacity is still strained. In fact, 
refinery capacity utilization rates are running at about 90 to 
95 percent today. This leaves the system with very little 
margin for error, because a fire or other accident that 
temporarily shuts down a refinery cannot be easily accommodated 
by increased output from another refinery. Even worse, there is 
no solution on the horizon. Despite the high demand for 
gasoline, refiners are unwilling to build new refineries 
because of cost, environmental issues and expected local 
opposition.
    Another controversial aspect of the gasoline pricing 
problem is the issue of concentration within the refining 
industry. Those who have followed the work of this Subcommittee 
are well aware of the merger wave that rolled through the U.S. 
economy in the 1990's. That wave engulfed the petroleum 
industry as well.
    Mergers such as Exxon-Mobil, BP-Amoco and Conoco-Phillips 
clearly increased concentration levels both upstream, in 
exploration and production, and downstream, in refining and 
retailing. Now, whether or not this concentration has reached a 
level high enough to raise competition concerns is a matter of 
some dispute.
    For example, in 1983 the top five refiners controlled 
approximately 35 percent of the U.S. domestic refining market. 
In 2003, that number increased to over 50 percent. From a pure 
antitrust merger analysis point of view, I question whether 
these concentration levels are high enough to merit serious 
concern, but we will consider this issue during the course of 
today's hearing.
    In addition, we will examine a number of other secondary 
factors contributing to the recent increase in gas prices, such 
as strong growth in the U.S. and China's demand for oil. 
Finally, we will touch today on the state of competition in the 
market for natural gas, which is also selling at prices 
approaching historic highs.
    Let me now turn to my friend and colleague, the Ranking 
Member of the Subcommittee, Senator Kohl.

 STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE STATE OF 
                           WISCONSIN

    Senator Kohl. Thank you, Mr. Chairman.
    Mr. Chairman, we are reminded everyday when we drive by a 
gas station that Americans are paying record levels for a 
gallon of gas. Gas prices now average $1.78 a gallon nationally 
and $1.80 in my State of Wisconsin. Prices over $2.00 a gallon 
are now common throughout our country.
    These rising gas prices are felt throughout the economy. 
They are a silent tax that takes hard-earned money away from 
Americans every time they visit the gas pump. Higher gas prices 
drive up the cost of transportation, harming every sector of 
the economy from aviation to trucking. Those costs are passed 
on to consumers in the form of higher prices for manufactured 
goods. Higher oil prices also mean higher heating and 
electricity costs.
    So let's examine the cause of these rising prices. First, 
we need to look at the price of crude oil. Indeed, the FTC 
states that 85 percent of the variability in the cost of 
gasoline can be accounted for by the price of crude oil. Simply 
put, the cost of crude oil moves the price of a gallon of gas. 
And as we all know, OPEC sets the price of oil.
    OPEC's actions to manipulate the oil market cost Americans 
billions of dollars every year. If the members of OPEC were 
private companies and not nations, they long ago would have 
been prosecuted for engaging in illegal price-fixing.
    The bill that Senator DeWine and I introduced last week, 
and which passed the Judiciary Committee unanimously in 2000, 
would end this injustice by subjecting OPEC to antitrust suits 
in U.S. courts. While NOPEC is not a panacea, a lawsuit or 
threat of a lawsuit will give our Government the first real 
weapon it has ever had to deter OPEC from its seemingly endless 
cycle of price increases.
    But restraining OPEC is not the entire answer. There are 
other factors that lead to higher gas prices. In the face of 
ever-increasing demand and higher prices, the domestic oil 
industry has not responded as we would have expected by 
increasing refinery capacity. Instead, numerous refineries have 
been closed--about 75 over the past 15 years--and none have 
been opened for many years, but it must also be said that 
existing refineries have also increased their capacity.
    Refinery capacity, now operating at 95 percent, has become 
a bottleneck, limiting supply and causing price spikes whenever 
an accident occurs. Indeed, critics argue that oil companies 
have chosen not to expand refining capacity in order to gain 
market power in order to keep prices high. While there are 
clearly barriers to expanding refinery capacity, at the same 
time the antitrust authorities must not permit oil companies 
with market power to deliberately withhold supply to raise 
prices.
    In addition, mergers in the oil industry have left a 
dangerous level of consolidation in their wake. The oil 
companies not only drill the oil, but they also refine it and 
they also own the gas pumps as well. The five largest oil 
companies now control more than half of our domestic refining 
capacity and more than 60 percent of the national retail 
gasoline market. This level of concentration, magnified in some 
areas, permits just a few competitors to control prices. Just 
as importantly, this consolidation has virtually eliminated 
independent retailers and refiners and the competition that 
they provide. Where there has been a high degree of integration 
between refiners and retailers, consumers pay higher prices.
    For the last 4 years, Senator DeWine and I have repeatedly 
called upon the FTC to study the cause for high prices. The FTC 
should remain vigilant in monitoring gas price increases, but 
it must do more. Antitrust authorities must scrutinize future 
oil industry mergers with a keen eye toward preserving the 
competitive benefits of independent retailers and refiners.
    So, Mr. Chairman, it is time for action to end the ever-
escalating pattern of gas price increases that are regularly 
inflicted on our Nation's consumers. Our NOPEC bill is one 
place to start, but we must also do more to ensure that the 
conditions exist to lower gas prices for all Americans.
    Thank you, Mr. Chairman.
    Chairman DeWine. Senator Kohl, thank you very much.
    Senator Specter.

STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM THE STATE 
                        OF PENNSYLVANIA

    Senator Specter. Thank you, Mr. Chairman. At the outset, 
Mr. Chairman, I thank you for convening this very timely 
hearing. There is no doubt that the actions by OPEC are 
drastically increasing the cost of gasoline and oil in the 
United States.
    On February 10, OPEC curtailed oil production by 1.5 
million barrels a day, and then on March 31 an additional 1 
million barrels a day. Oil has now reached the staggering price 
of $38 a barrel, which is the highest it has been since the 
Gulf War, in 1991.
    I believe that our Department of Justice and our Federal 
Trade Commission have been lax in not acting against the clear-
cut violation of U.S. law, conspiracy and restraint of trade, 
which is clear-cut on what OPEC has been doing for years. I 
have studied this issue in some detail, and on April 11, 1998, 
I wrote to President Clinton outlining a course of action for 
lawsuits to hold OPEC responsible. I wrote the same letter to 
President Bush on April 25, 2001.
    Mr. Chairman, I would ask unanimous consent that both of 
those letters be made a part of the record.
    Chairman DeWine. Without objection, they will be made part 
of the record.
    Senator Specter. The essential points which I made in these 
letters--they really are, in effect, a legal brief--are that a 
suit in Federal court would be appropriate under U.S. antitrust 
laws, and there is not immunity under act of state or sovereign 
immunity. When they are engaged in a commercial transaction, 
there is no doubt they are subject to the antitrust laws. There 
has been an evolving recognition of international law that they 
are bound by the antitrust laws, which was a possible defense 
early in the interpretation of the antitrust laws.
    The letter which I sent to President Clinton was cosigned 
by you, Mr. Chairman; the ranking member, Senator Kohl; Senator 
Thurmond; Senator Schumer; and Senator Biden. It is high time 
that that action was taken. I believe the action can be taken 
under existing law, but I do believe, Mr. Chairman, that the 
legislation which you have reintroduced, Senate bill 2270, is a 
very good bill. It removes it from a common law interpretation 
so that there is specific legislation which provides that 
sovereign immunity does not bar an action or that the act of 
state does not bar an action.
    So it is really time to get on with it, and the American 
people are clamoring for relief. It is just really outrageous 
that we are being gouged by OPEC at the gas pump. We have had a 
very heavy winter. We are now about to provide for LIHEAP, low-
income energy assistance, $2 billion-plus.
    It is high time we focused on the fact that the Saudis are 
not our friends on so many lines. On terrorism, which they are 
sponsoring under the guise of helping charitable organizations, 
15 of the hijackers on 9/11 were from Saudi Arabia. And they 
are continuing to gouge the American consumers and it is time 
we acted to stop them. So I hope this hearing will provide an 
impetus to do just that.
    Thank you, Mr. Chairman.
    Chairman DeWine. Senator Leahy.

  STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE 
                        STATE OF VERMONT

    Senator Leahy. Thank you, Mr. Chairman.
    I am going to be home this weekend and when I go to the 
gasoline pump and I am pumping gasoline in my car, my neighbors 
in Middlesex, Vermont, are going to say, Pat, what is going on? 
Why are we paying so much? If we have a Vermont farm, why are 
our profit margins, which are historically thin anyway, being 
cut out entirely by this?
    Frankly, I have to say that not enough is being done by our 
Government or by others to cut down the price of fuel. I hope 
that today's hearing tells both the administration and foreign 
governments that the American people and the Congress demand 
that we use the tools we have available to keep gasoline prices 
affordable. I feel as one Vermonter that if we don't have 
enough legal tools, then let's find some more and pass those.
    We know, and most Americans do, why high prices are at the 
pump. The OPEC cartel sets production quotas for member 
countries and prevents the free market from setting crude oil 
prices. I agree very much with the Senator from Pennsylvania 
when he says we ought to realize that the Saudis are not the 
great friends that they say they are. I think they have 
demonstrated that in one thing after another.
    As of April 5, the U.S. Department of Energy reports the 
nationwide average price of a gallon of gasoline is $1.78. Now, 
on this chart, just to give you an idea, that is an increase of 
$.60 since the year 2001. Some are saying it may go up to $3.00 
this summer. That is going to be like what we saw in real 
dollars during the shortages of the early 1980's. And that 
seems likely, since OPEC met on March 31 and they decided to 
cut the output of oil even further, not only cutting it by a 
million barrels a day, but they wanted to increase that.
    A Nigerian petroleum advisory says that they are 
considering raising prices $3.00 a barrel. That is going to 
increase costs to consumers, small businesses and, in my State, 
the dairy industry, among others. Vermont dairies are 
experiencing 40-percent higher fuel prices.
    In a normal time, we ask the famous question ``Got milk?'' 
Today, we ask ``Got enough money for gas?'' To give you an 
idea, in a typical dairy operation in the Northeast it adds 
$5,000 to their costs. This shouldn't be falling on all of us.
    I think Senator DeWine and Senator Kohl deserve thanks for 
their leadership on the NOPEC bill. It is obvious that we are 
not going to get help otherwise to deal with the gas crisis 
that is a threat to our families, our farmers, our truck 
drivers. If the administration can't say no OPEC, then we ought 
to try to do it.
    OPEC has tried to dismiss criticism about the high price of 
gasoline through disingenuous arguments. Actually, the 
consumption of oil has remained relatively level over the past 
few years, and nobody could say with a straight face that a 60-
percent increase per gallon in price is because of tough 
environmental rules by the Bush administration. Give me a 
break. This is not right. In fact, there is a letter by Senator 
Bingaman to the President, and I would ask that that be made 
part of the record.
    I am glad to see this hearing. I wrote to Senator Hatch 
urging such a hearing a couple of weeks ago. I have praised 
both Senator DeWine and Senator Kohl so many times in these 
hearings that I am afraid it may hurt them back home, but I 
just want to praise you two one more time. This is an important 
hearing.
    I will put the rest of the statement in the record.
    [The prepared statement of Senator Leahy appears as a 
submission for the record.]
    Chairman DeWine. Thank you very much.
    Senator Schumer.

 STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR FROM THE 
                       STATE OF NEW YORK

    Senator Schumer. I want to thank you, Mr. Chairman, for 
holding this hearing. I want to thank you and Senator Kohl for 
being leaders on this issue, as you are on so many other 
antitrust issues. I want to thank our witnesses today, as well, 
and appreciate the opportunity to talk about natural gas as 
well as oil, although obviously I want to talk about both.
    Let me say, Mr. Chairman, that I believe that the Federal 
Government has an obligation to take decisive, aggressive and 
immediate action to curtail energy price spikes and make sure 
that energy costs stop creating hardships for working families 
throughout the United States.
    I am sure everyone here is familiar with the legend of the 
Bermuda Triangle, where planes and ships mysteriously disappear 
and are never heard from again. Well, over the past few months, 
American consumers feel like the same thing has happened to 
their energy dollar. But this triangle is the Saudi triangle, 
composed of OPEC, big oil companies and a lack of action by the 
administration to stem the tide of increasing prices.
    At one point in this triangle we have OPEC, which just last 
week announced its continued commitment to reducing production 
by a million barrels a day, despite the fact that crude oil was 
already approaching record prices. The decision is motivated 
purely by greed and a desire to bolster budgets and increase 
profits for OPEC's largest producers, like Saudi Arabia, by 
taking money out of the wallets of average American families.
    There are also indications that more OPEC action to pinch 
us at the pump may be on the way. They have sort out thrown out 
the window the $28 ceiling and they are now maximizing their 
profitability because basically no one is stopping them and 
they have been getting a green light.
    At the second point in the triangle is the trend of 
consolidation in the oil industry. Over the past 5 years, 
mergers between the biggest players in the market and 
increasing vertical integration have made consumers more 
vulnerable to exploitation at the pump. Currently, the top five 
oil companies in the U.S. control 14 percent of global 
production--almost as much as the Middle Eastern members of 
OPEC--over half of domestic refiner capacity and 60 percent of 
the retail gasoline market.
    This lack of competition has made the oil and gasoline 
markets vulnerable to market manipulation through the 
withholding of supply and other means, leading to longer, 
increasingly frequent price spikes and weakening any downward 
pressure on prices that exists in healthy and competitive 
markets.
    To make matters worse, these highly concentrated companies 
are sometimes directly tied to OPEC producers, as in the case 
of Motiva, a 50-50 venture between Shell and Saudi Aramco. The 
companies do nothing but benefit from high prices by reaping 
windfall profits and creating a win-win scenario for big oil at 
the expense of the American consumer. As prices go up and as 
OPEC raises prices, oil company profitability goes up. So they 
are on board for the ride.
    At the third point of the triangle, I regret to say, Mr. 
Chairman, lies the administration, which has a ``hear no evil, 
see no evil, do no evil'' attitude. They have not taken any 
aggressive action to provide needed relief to the American 
driver. It is bad enough that it hasn't happened so far, but if 
they don't do anything soon, gas prices are going to be sky-
high as we go into the summer months.
    OPEC's ability to brazenly raise prices and fill its 
coffers is in part as a result of the administration's 
inability to engage and influence oil-producing nations to 
cooperate with U.S. needs and as a consequence of hostility 
that the administration's foreign policy has engendered toward 
America throughout the world.
    The President says he is close to the Saudi royal family, 
but time and time again when dealing with the Saudis, it is 
America that gets the short end of the stick. They tolerate 
Wahabbi extremists who preach hate and terror against the U.S., 
they refuse to allow our law enforcement the access it needs to 
investigate crimes, and now they are holding us hostage to high 
gas prices.
    What Uncle Sam gave us with the tax cuts, the $400 rebate 
every family got, he is now allowing the Saudis to take away 
with exorbitant prices at the pump. The President has the power 
to weigh in against the Saudis, but he is not using it. It is 
time he did. So we have this new Bermuda triangle--OPEC, 
consolidated big oil and a do-nothing policy from the 
administration.
    Let me say we have some weapons. First, we should stop 
adding 100,000 barrels of oil a day to the SPR. A majority of 
Senators voted for that amendment. The administration has also 
missed an opportunity to prevent gasoline price spikes by 
failing to approve oxygenate waiver requests from States like 
New York and California, which are being forced to use ethanol 
this summer, raising prices. Most importantly, they refuse to 
use the SPR as our ace in the hole against the Saudis and 
against big oil and bring prices down.
    As you know, Mr. Chairman, I have been advocating this for 
a long time. It took me about a year to get the Clinton 
administration to use it. When they did, prices went down; they 
stayed down. And the amount of oil in the SPR went up because 
the swap enabled us to get more oil for what we put into the 
market several months later.
    So we need a long-term solution--that is not what we are 
here to talk about today--that involves both new exploration 
and conservation. But we need a short-term solution, lest our 
economy go down the drain. I hope that we can break the 
influence of this triangle, get to work and do something good 
to reduce prices.
    Thank you, Mr. Chairman.
    Chairman DeWine. Senator Craig.

STATEMENT OF HON. LARRY CRAIG, A U.S. SENATOR FROM THE STATE OF 
                             IDAHO

    Senator Craig. Well, Mr. Chairman, I largely came to listen 
today to our colleagues, and certainly to those who are experts 
in this field.
    All of us are concerned about high prices at the pump, but 
why should we be surprised? This Congress has refused to act in 
any progressive manner to increase production in this country 
for the last decade. So the blame game is now underway and we 
will hold hearings, as we should.
    At the same time, a decade and 39 States' investigations 
have not yet pointed to effective wrongdoing on the part of any 
producer in large part. What we have is a dysfunctional market 
today because we no longer control our destiny. We can bite 
around the edges, if we wish to, and we will, and we will try 
to find someone else to accuse.
    I have given in the last two weeks three speeches on the 
floor of the U.S. Senate on this issue. I am certainly no 
expert in it, but I have studied it closely as a member of the 
Energy Committee for the last 7 years. The problem is the U.S. 
Congress today, and the consumers of America ought to know it.
    We are no longer allowing this Nation to produce in any and 
every way we should. We should be encouraging the production of 
domestic oil, we should be encouraging the development of 
natural gas, we should be encouraging the building of necessary 
infrastructure like the Alaska natural gas pipeline, we should 
be encouraging the use of renewable fuels like ethanol, we 
should be encouraging more renewable energy. We should be 
encouraging the construction of new nuclear plants, clean coal 
technology, new hydrogen production, promoting energy 
efficiency and increasing the R and D on a variety of 
technologies.
    The Senator from New York and I differ a little, but at the 
same time there are many things on this issue we tend to agree 
on. The manipulation of SPR during the Clinton years 
effectively changed the price at the pump by one cent. Those 
are the facts on the books.
    So I am here to listen. It is obvious I have strong 
opinions on this issue. I think the consumers are gaining 
strong opinions on this issue, as they should. I hope they 
reflect on Congress' unwillingness or inability to act on this 
issue in any progressive and comprehensive form for well over a 
decade.
    Thank you, Mr. Chairman.
    Chairman DeWine. We will turn now to our colleague and 
friend, Senator Ron Wyden.

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

    Senator Wyden. Thank you very much, Mr. Chairman. I very 
much appreciate your giving me the chance to come. I would ask, 
with your indulgence, if my full remarks could be made part of 
the record.
    Chairman DeWine. They will certainly be made part of the 
record.
    Senator Wyden. I thank you.
    First, it is obvious if you want to get anything important 
done in this town, it has got to be bipartisan, and I 
congratulate you and Senator Kohl for doing that. That is what 
it is going to take to really make some changes in this area. 
And that is what the public is asking. The public is saying, 
are you all in Washington going to do anything or are you just 
going to talk about it?
    What I would like to do is just outline briefly what I 
think would be an effective bipartisan package in this area. 
Let me start by saying that I think the gasoline consumer is 
about to be hit by a perfect storm, and there are really three 
factors behind this storm that is coming.
    The first is what we have all talked about today, the OPEC 
shenanigans. The second involves refinery cutbacks, and the 
third involves the Federal Trade Commission sitting on its 
hands in the face of documented anticompetitive practices.
    I would just say, Mr. Chairman, that I think if we took 
your bill which deals with OPEC and my legislation, which is S. 
1737, the Gasoline Free Market Competition Act, we could 
systemically tackle those three factors that come together to 
create what I call the perfect storm.
    First, with respect to OPEC, put me down as a cosponsor of 
your legislation.
    Chairman DeWine. We will add your name. We appreciate it. 
Thank you.
    Senator Wyden. Look, I have been saying all week OPEC 
stands up for OPEC. Anybody who thinks OPEC stands up for the 
American consumer thinks Colonel Sanders stands up for the 
chickens. I mean, it is just a preposterous idea that OPEC is 
going to do anything for the consumer. So I am very glad that 
you and Senator Kohl have teamed up in that area, and I want to 
be a cosponsor of your legislation.
    But I think we ought to be clear, and the Consumer 
Federation has offered an interesting report in this area that, 
for example, oil company refinery margins are taking an even 
bigger bite out of the consumer's pocket, as is the OPEC 
cartel. That is why I would very much like to merge my bill 
with the fine bill that you and Senator Kohl have because while 
taking action against OPEC will be very constructive, it won't 
provide full relief if Congress looks the other way when it 
comes to anticompetitive practices right here in our markets 
here at home.
    So just as you, Chairman DeWine and Senator Kohl, seek to 
provide new tools with respect to dealing with OPEC, that is 
what I am seeking to do with respect to making sure we have 
competition in our markets in this country. And to illustrate 
the need for my bill, I would like to talk about what is going 
on in Bakersfield, California, right now with the refinery 
cutbacks because I think it provides a textbook case of how 
these anticompetitive practices are perpetrated in our country.
    Obviously, when you ask about what is going on on the West 
Coast, they are saying what does that mean for us in Ohio and 
Wisconsin and other parts of the country? But what I offer up 
is inaction by the Federal Trade Commission on the growing 
problem of refinery shutdowns, which is clobbering my 
constituents now and is going to hurt people all over this 
country.
    What has happened in Bakersfield exemplifies how these 
refinery shutdowns are going to hurt people across the Nation. 
Suffice it to say there were 24 refineries that closed between 
1995 and 2001. So you are talking about a combined capacity of 
more than 800,000 barrels per day, including many on the West 
Coast of the United States.
    I got involved in this issue with respect to refinery 
cutbacks, Mr. Chairman and colleagues, in 2001 when we came 
upon some internal oil company memos involving the closed 
Powerine refinery in southern California. One of the company 
documents then revealed that if the Powerine refinery was 
restarted, the additional gasoline supply on the market could 
bring down gas prices by two to three cents a gallon. And it 
called for, and I quote, ``a full-court press to keep the 
refinery down.'' So you have oil company documents that called 
for keeping a refinery down while they are saying that it could 
increase profit margins.
    That refinery was about 20,000 barrels per day. The one we 
are talking about in Bakersfield, which services the whole West 
Coast, about a third of my constituents, involves 70,000 
barrels per day. So if Bakersfield goes down, this is going to 
be very, very harmful to the entire West Coast of the United 
States.
    I will tell you, Mr. Chairman and colleagues, this 
Bakersfield deal smells. First, we know that Shell has made no 
significant effort to try to find a buyer in that area. Second, 
a number of independent experts have documented that there is a 
substantial amount of oil in that area in the San Joaquin 
Valley. Recent news articles have reported both Chevron-Texaco 
and the State of California estimate that the San Joaquin 
Valley, where the Bakersfield refinery is located, has a 20- to 
25-year supply of crude oil remaining.
    The Bakersfield paper indicated that there are 300 more new 
wells now being pursued this year than last year. And Texaco, 
Shell's former partner in the Bakersfield area, is actually 
increasing its drilling. So this certainly calls into question 
Shell's claim that a lack of available oil supply is the real 
reason for closing the refinery. Another reason to question 
Shell's claim about the availability of crude oil is the fact 
that Shell is currently the subject of an inquiry that we know 
about for misstating its crude oil reserves.
    So I have repeatedly asked the Federal Trade Commission to 
look into this and other anticompetitive practices, and they 
have just been AWOL. I know you are going to have them testify 
today. They have talked in the past about being concerned. They 
have talked in the past about doing sort of informal surveys, 
when our constituents are getting mugged at the pump. They have 
abdicated their responsibilities.
    By the way, Mr. Chairman, just so it is clear that my 
concern here is bipartisan, I don't think the Clinton 
administration covered itself with glory over at the Federal 
Trade Commission either. I think this is a systemic problem and 
it needs to be dealt with in a bipartisan fashion.
    So let me wrap up, if I might, by saying exactly the three 
areas that my legislation would change that I think would give 
us some tools to deal with the refinery cutbacks, the 
anticompetitive practices, and I think could complement the 
kind of work that you and Senator Kohl are trying to do with 
respect to OPEC.
    First, under my legislation the Federal Trade Commission 
would be empowered to issue cease and desist orders to prevent 
individual companies from gouging consumers. This is not 
allowed under current law, so we would give them cease and 
desist powers to prevent gouging of consumers when it is 
perpetrated by an individual company.
    Second, we would stipulate that the Federal Trade 
Commission would have the authority to put the burden on the 
oil companies to show that certain practices, such as the 
Bakersfield refinery shutdown or red-lining and zone pricing 
which has been found in the past--that the company has got to 
show that this doesn't reduce supply or drive up prices when we 
are talking about concentrated markets.
    This would apply, Mr. Chairman and colleagues, in the just 
over 25 States where there are concentrated markets. Senator 
Craig and I represent such an area. I hardly ever disagree with 
my friend from Idaho on these kinds of things. I would just say 
in response to my colleague's comments that the Federal Trade 
Commission has said in the past that there has been zone 
pricing and red-lining. They said they can't do anything about 
it and that is why I think this legislation is needed, Mr. 
Chairman.
    What we have seen in the past is the Federal Trade 
Commission sets out a bar that is absolutely unachievable with 
respect to showing that there are anticompetitive practices in 
the marketplace. The Federal Trade Commission has been arguing 
that they can only prosecute if they find out and out, blatant 
collusion, which savvy oil companies are not going to be 
involved in. They don't have to do that. They are not going to 
go to a smoke-filled room; they are not going to show up at a 
steakhouse and decide, well, let's set gasoline prices tonight. 
They are way too savvy for something like that.
    So that is why I would like to give the Federal Trade 
Commission these additional tools in S. 1737--the question of 
cease and desist powers, and the authority in markets where 
there is concentration to shift the burden of proof, such as we 
find with the Bakersfield refinery or red-lining and zone 
pricing.
    In a case like Shell's Bakersfield refinery, the Federal 
Trade Commission could issue under my legislation, Mr. 
Chairman, a cease and desist order to halt shutdown of the 
refinery. Because California is a highly concentrated market, 
Shell would be required to show that closure of the refinery 
would not have an anticompetitive impact by reducing supply or 
increasing the price of gas.
    If Shell can show that it would be increasing its 
production at the company's other West Coast refineries to make 
up for lost production at Bakersfield, the closure under my 
legislation could still be allowed to go forward. But my 
legislation would protect the consumer where an oil company was 
closing its refinery as part of a deliberate effort to reduce 
supply and to drive up prices.
    Suffice it to say, Mr. Chairman and colleagues, the 
problems that we are seeing we are going to have for some time 
to come. The Energy Information Administration came to the 
Committee that Senator Craig and I serve on saying that there 
will be continued vulnerability of future gasoline price 
spikes.
    Mr. Chairman, I would wrap up by way of saying I don't 
think there is a silver bullet here. I am supporting your bill 
because I think it is a significant step forward for the 
reasons that you have outlined, and particularly important 
today because the Saudi foreign minister said last week he 
wasn't even contacted with respect to this most recent 
production cut.
    But I would only say that I think we need to complement 
your fine legislation with the kind of measure that I am 
advocating that will get the Federal Trade Commission off its 
hands. You ask this commission what single thing have they done 
to help the gasoline consumer. I can't find one step that they 
have taken. By the way, it goes back a few years and we haven't 
seen any action that they have taken to help the gasoline 
consumer.
    I don't think that is acceptable. I want it understood, as 
you and I have in so many other instances, and I want to work 
with you in a bipartisan way. Senator Craig and I have talked 
about these issues a number of times over the years on the 
Senate Energy Committee, and I will look forward to working 
with you, colleagues, to try to deal with making sure the 
consumer gets a fair shake in the gas market.
    Chairman DeWine. Senator Wyden, thank you very much for a 
very provocative statement. It certainly gives the Subcommittee 
a lot of things to think about, and we will use some of your 
statements as questions when the next panel comes up.
    Thank you very much.
    Senator Kohl. Mr. Chairman?
    Chairman DeWine. Senator Kohl.
    Senator Kohl. I would like to ask consent that Senator 
Feingold's statement be placed in the record.
    Chairman DeWine. Without objection.
    Let me invite our next panel to come up right now and I 
will begin to introduce the panel as they come up.
    Mr. William Kovacic is a recognized expert in both 
antitrust law and government contracts law, and has published 
extensively in both fields, most notably as coauthor of 
Antitrust Law and Economics in a Nutshell. He presently serves 
as general counsel at the Federal Trade Commission.
    Mr. John Felmy is the chief economist at the American 
Petroleum Institute. He also serves as the Chairman of the 
Policy Committee of the Alliance for Energy and Economic 
Growth.
    Dr. Justine Hastings is an assistant professor in the Yale 
Department of Economics. Her current research interests lie in 
vertical integration, competition and product differentiation, 
and she has written extensively on the petroleum industry.
    Professor George Bermann is professor of law at Columbia 
University, where he has taught since 1975. He is recognized as 
an expert on European Union law and has written many articles 
and several books.
    Dr. Mark Cooper is the Director of Research at the Consumer 
Federation of America, where he works on economic policy, among 
other issues. Dr. Cooper has testified before the Subcommittee 
in the past and we welcome him back.
    Let me just say to all of our witnesses we are going to 
have 5 minutes. We have your written testimony and it will be 
made a part of the record. But we are going to limit you to 5 
minutes, if you could just summarize, please, and then we will 
have the opportunity for questions.
    Mr. Kovacic, you can start, please.

STATEMENT OF WILLIAM E. KOVACIC, GENERAL COUNSEL, FEDERAL TRADE 
                           COMMISSION

    Mr. Kovacic. Thank you, Mr. Chairman and members of the 
Subcommittee. I am pleased to appear before you today to 
discuss the FTC's initiatives to promote competition in the 
supply of gasoline. My written statement presents the views of 
the Federal Trade Commission, and my spoken comments today are 
my views and not necessarily those of the commission or its 
members.
    The FTC's energy program reflects the agency's acute 
awareness of the vital role that competition policy in the 
petroleum industry plays in safeguarding consumer interests. 
Today, I will first describe the FTC's competition program in 
petroleum, and then I will identify lessons that the agency's 
work concerning gasoline prices has yielded.
    The FTC's competition program in petroleum has four 
elements. The first is to challenge mergers that are likely to 
reduce competition and injure consumers. Since 1981, the 
commission has taken enforcement action against 15 major 
petroleum mergers. Four transactions were either abandoned or 
blocked as a result of commission or court action. In the other 
11 cases, the FTC required the parties to divest substantial 
assets in markets where competitive harm was likely to occur.
    From data the FTC recently released concerning enforcement 
programs from 1996 through 2003, it is evident that the FTC's 
remedial requirements have been more demanding in petroleum 
markets than for any other area of commerce in which the 
commission is active.
    The second activity at the FTC is to detect and prosecute 
antitrust violations that do not involve mergers. For example, 
in March of 2003 the FTC issued an administrative complaint 
alleging that Unocal violated the FTC Act by deceiving the 
California Air Resources Board in connection with regulatory 
proceedings to develop standards for reformulated gasoline.
    Unocal, the commission alleges, misrepresented that certain 
technology was non-proprietary and in the public domain at the 
same time that Unocal was seeking patents that would enable it 
to charge substantial royalties if CARB mandated Unocal's 
technology in the refining of summer reformulated gasoline. The 
commission has charged here that Unocal's conduct, unless 
enjoined, could cost California consumers hundreds of millions 
of dollars per year.
    The third activity is to monitor petroleum industry 
behavior to detect possible instances of anticompetitive 
conduct. Nearly 2 years, the FTC launched an initiative to 
monitor gasoline prices to identify unusual movements in prices 
and examine whether apparent anomalies might result from 
anticompetitive conduct.
    The FTC's economists have developed a statistical model for 
identifying such price movements. They look at price movements 
in over 20 wholesale and over 350 retail markets across the 
country. If our staff detects unusual price movements in an 
area, it studies the possible causes, and follow-up efforts 
typically have involved extensive cooperation with State 
attorneys general, State energy officials, and the Department 
of Energy.
    If our staff concludes that the unusual price movement 
likely results from a natural cause--that is, a cause unrelated 
to anticompetitive conduct--it investigates no further. Our 
experience to date indicates that unusual movements in gasoline 
prices typically have what we consider to be a natural cause. 
If there are competitive problems, the monitoring project and 
our expanded cooperation with Federal and State agencies have 
put us in a better position to identify and address these 
problems than at any time in recent memory.
    In recent years, the commission has also conducted 
intensive non-merger investigations involving refining and 
distribution practices in the western and midwestern United 
States. I would like to acknowledge the role that Chairman 
DeWine and Senator Kohl have played in inspiring the agency to 
undertake the midwest gasoline pricing investigation, even 
though the two investigations I have mentioned uncovered no 
basis to find an antitrust violation.
    The last activity of the FTC is to collect data and perform 
research to develop a better understanding of what affects 
gasoline prices and to improve our knowledge base about the 
consequences of our enforcement decisions. In 2001 and 2002, 
the commission held conferences on these topics and is 
currently updating a comprehensive report on merger enforcement 
in the petroleum sector since 1989.
    Let me finish by turning to the lessons that we derived 
from our program so far. First, the paramount factor affecting 
both the level and movement of gasoline prices in the United 
States indeed is the price of crude oil. Changes in crude oil 
prices account, as Senator Kohl's introductory remarks and 
yours, Mr. Chairman, mentioned, for approximately 85 percent of 
the variability of gasoline prices.
    Second, crude oil and refined products inventories 
significantly affect gasoline prices at retail. At one of our 
conferences, the Energy Information Administration reported 
that high crude oil prices indeed not only affect gasoline 
prices directly, but indirectly as well, by reducing 
inventories.
    There are indeed tighter inventory situations, but what we 
found, in general, is that by adopting just-in-time techniques, 
on average, there is the possibility that gasoline prices over 
time are lower than they would be if just-in-time techniques 
were not used widely.
    Third, our conferences and investigations have highlighted 
the generally high levels of utilization in the refining and 
transportation segments of the industry--conditions that do 
make interruptions attributable to fires and other breakdowns a 
possible cause of price spikes.
    Last, the interaction of environmental quality requirements 
and gasoline does supply a fourth important factor. There is no 
question in this country that pollution control has yielded 
massive benefits. At the same time, we have identified in our 
hearings and proceedings that such controls have added at times 
to the cost of refining crude oil, and thus to the price of 
gasoline. Finally, our research and conferences indicate that 
other Federal and State laws sometimes tend to increase 
gasoline prices.
    Let me finish by saying that competition policy 
unquestionably helps assure that the petroleum industry is and 
remains competitive. The commission has devoted substantial 
effort and resources to enforce the antitrust laws and to 
scrutinize behavior in this sector. We will continue to do so 
in the future. Higher prices for petroleum products deeply 
affect the quality of life in this country, and we are keenly 
aware of that. We will also seek to attack conduct that 
disturbs the proper functioning of the market where antitrust 
violations can be shown.
    I look forward to the opportunity to address your 
questions.
    [The prepared statement of Mr. Kovacic appears as a 
submission for the record.]
    Chairman DeWine. Thank you very much.
    Dr. Felmy.

STATEMENT OF JOHN FELMY, CHIEF ECONOMIST AND DIRECTOR OF POLICY 
     ANALYSIS AND STATISTICS, AMERICAN PETROLEUM INSTITUTE

    Mr. Felmy. Thank you, Mr. Chairman and members of the 
Subcommittee. I am John Felmy, Chief Economist and Director of 
Policy Analysis and Statistics of the American Petroleum 
Institute. API is a national trade association representing 
more than 400 companies engaged in all sectors of the U.S. oil 
and natural gas industry. API is pleased to have the 
opportunity to present a statement on gasoline and natural gas, 
and urge Congress to enact national energy policy legislation.
    The recent spikes in gasoline prices are primarily due to 
fundamentals in the supply and demand for crude oil. Demand for 
crude oil has risen due to a cold winter and strengthening 
economies. Unrest in key supplying countries such as Venezuela 
and Nigeria, and lower Iraqi production have kept world 
supplies tight.
    OPEC continues to operate under production quotas and has 
recently confirmed its intent to cut production by a million 
barrels per day, to 23.5 million barrels a day, potentially 
worsening the current situation. However, there is no guarantee 
member nations will reduce output sufficient to comply.
    The United States continues to import more than 60 percent 
of the crude oil and petroleum products used each day to 
provide Americans the products they need. While 20 percent of 
current imports are from the Middle East, the U.S. Energy 
Information Administration, EIA, expects that figure to climb 
substantially as the gap between U.S. oil production and 
consumption widens.
    In addition to higher crude prices, several other factors 
have affected gasoline prices. We have experienced refinery 
problems; a Mississippi River accident that shut down traffic 
for several days; the difficulty of switching from winter to 
summer fuel in California; the introduction of new low-sulfur 
gasoline, Tier II; the bans of MTB in gasoline in New York, 
Connecticut and California; and sharply higher demand.
    I have attached two papers that elaborate on these points, 
and I have a chart here that shows the complex nature of the 
crude oil and gasoline markets. I don't have time in my verbal 
statement to elaborate, but I will be happy to answer questions 
later.
    As a consequence of all these factors, gasoline prices have 
reached a record level, unadjusted for inflation, of over $1.76 
per gallon, while, adjusted for inflation, the real price of 
gasoline has fallen over 40 percent from a peak of $2.77 in 
1981. The real cost of crude oil and manufacturing, delivering 
and marketing gasoline has fallen over the past 20 years, while 
the real cost of Federal and State taxes has risen.
    Demand for gasoline continues to be strong as our economy 
grows. Gasoline production is running at record levels this 
year to date. However, inventories are low because of strong 
demand and lower imports. Imports play an important role even 
though 90 percent of the gasoline we use is refined in this 
country. High tanker freight rates, low European inventories 
and increasingly more restrictive U.S. fuel specifications have 
contributed to the curtailing of gasoline imports.
    What then can be done about the situation? Some want to 
suspend filling the Strategic Petroleum Reserve and releasing 
the 150,000 barrels a day currently going into the reserve onto 
the marketplace. That would have negligible effect on supply 
because the amount made available is equivalent to only about 
two-tenths of 1 percent of world supply.
    The SPR was established as a back-up in the event of a real 
supply emergency shortfall, not a non-market mechanism aimed at 
influencing prices. Turning to the reserve when prices go up 
sends precisely the wrong message to the marketplace at exactly 
the wrong time. Unintended consequences may include foreign 
nations curtailing production.
    Let me also briefly discuss the situation in natural gas 
markets. Like gasoline, natural gas has increased substantially 
in price over the past 2 years. We have seen three price spikes 
in 3 years, and prices remain high due to high demand and low 
supply growth. Weather, economic growth and continued increases 
in demand for gas by electricity generators have kept prices 
over $5 per million Btus. The industry has responded to the 
higher prices by operating more drilling rigs searching for 
natural gas. We have also continued our efforts to obtain 
access to lands that are currently off limits to exploration 
for natural gas.
    API has argued for several years that we need a national 
energy policy that increases supplies, streamlines regulation, 
fosters energy efficiency and growth in renewables, and allows 
for increased infrastructure to get supplies to consumers. The 
Senate was only two votes short of passing an energy bill that 
contains provisions that would have helped consumers. A 
comprehensive energy bill needs to be passed and sent to the 
President for his signature. Failure to pass meaningful energy 
legislation will increase the risk that we will stay on the 
energy price treadmill.
    Thank you, Mr. Chairman. I am prepared to answer some 
questions.
    [The prepared statement of Mr. Felmy appears as a 
submission for the record.]
    Chairman DeWine. Dr. Felmy, thank you very much.
    Dr. Hastings.

   STATEMENT OF JUSTINE S. HASTINGS, ASSISTANT PROFESSOR OF 
                   ECONOMICS, YALE UNIVERSITY

    Ms. Hastings. Mr. Chairman, members of the Subcommittee, my 
name is Justine Hastings. I am an Assistant Professor of 
Economics at Yale University and a faculty research fellow at 
the National Bureau of Economic Research Program on Industrial 
Organization. I hold a Ph.D. in economics from the University 
of California at Berkeley and I have previously testified at 
the United States Senate Governmental Affairs Committee, 
Permanent Subcommittee on Investigations, hearings into 
Gasoline Prices: How Are They Set?
    The focus of my research over the past few years has been 
primarily on firm conduct, competition and consumer behavior, 
and much of my work has been applied to the gasoline industry. 
Through my research projects, I have analyzed extensive data on 
retail market structure, wholesale market structure and retail 
and wholesale gasoline prices for a diverse group of 
metropolitan areas for a time covering about the past decade.
    I have used this data to examine, among other things, 
vertical and horizontal market structure, vertical meaning 
relationships between upstream firms or producing firms, such 
as refiners, and retail firms, such as gasoline stations, and 
horizontal market structure, meaning kind of the structure of 
the market within either retail or at the refinery level, and 
the effects of these types of market structures on prices and 
competition through firm incentives.
    I have also examined the effects of consumer demand and 
consumer behavior and preferences on gasoline competition, and 
I am currently completing a study funded through the National 
Science Foundation on the determinants of wholesale price 
discrimination, which you may have heard referred to as zone 
pricing, and what are the effects of this pricing policy on 
gasoline retail prices and wholesale prices.
    I am also currently working on a project with colleagues at 
Yale and at the University of California at Berkeley examining 
the effects of environmental regulations that we are discussing 
today on market structure, arbitrage rates between markets, and 
gasoline price levels and volatility.
    Through my research, I have gained substantial knowledge 
about the gasoline industry, and my independent academic 
research and acquired knowledge will form the basis of my 
comments and answers before this Subcommittee today. I would 
like to make a few quick points or broad points and then I 
would be happy to answer questions related to them during the 
questioning session.
    First, crude oil prices explain a substantial amount of 
retail gasoline prices in most parts of the country. We have 
heard a figure of .85, 85 percent, a couple times so far today, 
and I put a quick table in my written statement that shows that 
if you went even State by State, with very limited data that I 
just had someone pull off the Web for me, that varies actually 
by State from 69 percent to 91 percent. So the question is, 
yes, it is a big fraction, but what is making the difference 
between 69 percent in some States and 91 percent in other 
States? Market structure, both vertical and horizontal, and 
environmental regulations are also going to be contributing to 
gasoline price levels, that 69-percent to 81-percent 
difference.
    My second point is that in markets where supply is very 
tight, inelastic demand for gasoline is going to lead to large 
price changes in response to small supply disruptions. In very 
tight markets, every firm actually may have market power to 
unilaterally increase market price. It is not anticompetitive. 
It is a factor of inelastic demand and a tight supply.
    Increasing the number of refineries in key markets may ease 
this tightness. And it is something we may not want to discuss, 
given environmental regulations and concerns, but it is 
something we are going to have to bring to the table. If new 
refineries are also new competitors in the market and, in 
addition, if they are relatively unintegrated, have a smaller 
downstream component, they may act to increase competition even 
further after entry.
    My third point touches on environmental policy. 
Environmental policy needs to be designed to incorporate the 
secondary effects of market structure, not just the effects on 
pollution. Smart environmental policy looks at market structure 
when looking at how to achieve an ultimate goal of pollution 
standards.
    Fourth, governmental regulations such as minimum mark-up 
laws, divorcement legislation, fair wholesale pricing or, as 
you have heard it referred to today, zone price elimination, 
and government-owned refineries or strategic gasoline reserves 
in most cases will actually make consumers worse off. I will be 
happy to address each of these issues during the questioning 
session.
    Finally, any policy that comes out of this or any other 
legislation session must really be founded in credible and 
sound statistical analysis, guided by economic principles, in 
order to ensure that the welfare of American consumers and 
taxpayers is maximized through efficient and competitive 
markets.
    Thank you.
    [The prepared statement of Ms. Hastings appears as a 
submission for the record.]
    Chairman DeWine. Mr. Bermann.

STATEMENT OF GEORGE A. BERMANN, WALTER GELHORN PROFESSOR OF LAW 
   AND JEAN MONNET PROFESSOR OF EUROPEAN UNION LAW, COLUMBIA 
                    UNIVERSITY SCHOOL OF LAW

    Mr. Bermann. Thank you, Mr. Chairman and the other members 
of the Subcommittee. In the few minutes that I do have, I would 
like to address three questions very briefly and they have to 
do with the three dimensions that I see in the bill that is 
before me and before yourselves, and those three dimensions are 
the substance of the Sherman Act, the Foreign Sovereign 
Immunities Act as the source of sovereign immunity defense that 
OPEC countries might assert, and last, and most complicated, 
the act of state doctrine, to which reference has been made. 
Because I want to discuss three subjects and I have 5 minutes, 
the math suggests that I need to move quickly.
    With respect to the Sherman Act, the bill before me and 
before yourselves seem to me to make it very plain, and perhaps 
desirably so, that foreign states are indeed subject to the 
Sherman Act. I say that because at least one district court has 
expressed the view that foreign states are not subjects of the 
Sherman Act. The bill makes that clear.
    Secondly, the court of appeals in that same case expressed 
doubt that international cartels constituted violations of the 
Sherman Act, saying that there was an insufficient consensus to 
that effect, and I think the bill would address that problem, 
as well, arising under the Sherman Act.
    With respect to the Sherman Act, I have simply one question 
that I would raise and one doubt I entertain, and that is why 
the absence of the Clayton Act from the legislation. In the two 
pieces of litigation that have been brought, both the Sherman 
Act and the Clayton Act have been evoked, the latter primarily 
because it gives rise to claims for injunctive relief.
    Turning to the Foreign Sovereign Immunities Act, there was, 
and there is to this day debate over whether the activity of 
the OPEC countries and OPEC itself, were it a proper defendant, 
constituted a commercial activity. As you well know, the 
Federal courts are divided as to whether they do or do not 
constitute commercial rather than governmental activity.
    The creation of a new, independent exception to the 
principle of sovereign immunity in the FSIA which this bill 
would also do would obviate the necessity of characterizing 
price collusion, output collusion, as commercial or 
governmental by creating an independent, self-standing 
statutory exception.
    A final word of cautionary note with respect to the Foreign 
Sovereign Immunities Act, and indeed with respect to the 
Sherman Act, is the bill requires direct, substantial and 
reasonably foreseeable effect on U.S. markets. And there is at 
least one Federal court that has found that the OPEC activity 
was not proximately causally related to the price effects 
reported in the U.S. market. I think that difficulty that one 
might encounter is endemic to any statute that contains the 
formula of direct, substantial and reasonably foreseeable 
effect on U.S. markets.
    The act of state doctrine is my last subject. On this, I 
need to be a little more complex, but there are some clear 
lines to be drawn. The act of state doctrine was the reason why 
in the one suit that has been brought to the level of the court 
of appeals that that suit could not proceed. The act of state 
doctrine was characterized as preventing that cause of action 
from being pursued.
    There is no question in my mind, as my written testimony 
indicates, that Congress has the authority to override the act 
of state doctrine to whatever extent it wishes to do so. 
Congress has done so in the past in a small number of very 
isolated instances, but there is no doubt in my mind, under 
international and constitutional law alike, that Congress has 
the authority to do so, even though you will hear and you will 
read that the act of state doctrine has constitutional 
underpinnings, and I quote the United States Supreme Court.
    Those constitutional underpinnings are separation of powers 
scruples, and it seems to me quite clear that Congress has the 
right to tell the courts that the courts do not need to defer 
to Congress. That does not strike me as a disturbance of the 
separation of powers.
    Finally, mention should be made of the possibility that 
other doctrines besides the act of state doctrine might get in 
the way of successful prosecution of a claim under the amended 
legislation. The political question doctrine, general 
principles of international comity, the forum non conveniens 
doctrine and foreign government compulsion strike me as the 
four most likely candidates, for reasons I don't have time to 
go into because I see a red light. I would simply say that I 
think none of those is a serious problem, and I would be glad 
to answer questions to that effect.
    I would simply add that I believe, however, that we should 
pay some attention to the fact that the Supreme Court, to the 
extent that it has spoken, has suggested that the Sherman Act 
itself in its own content incorporates considerations of 
international comity, and that those considerations might lead 
a court to decline to enforce the Sherman Act in certain 
international scenarios.
    Thank you.
    [The prepared statement of Mr. Bermann appears as a 
submission for the record.]
    Chairman DeWine. Dr. Cooper.

   STATEMENT OF MARK COOPER, DIRECTOR OF RESEARCH, CONSUMER 
  FEDERATION OF AMERICA, ON BEHALF OF CONSUMER FEDERATION OF 
                  AMERICA AND CONSUMERS UNION

    Mr. Cooper. Mr. Chairman, members of the Subcommittee, the 
headlines in the energy news that are never written are about 
the domestic petroleum industry. They include the fact that 
domestic gasoline refining and marketing operations have 
increased pump prices by about $50 billion in the past 4 years, 
and domestic natural gas well head prices have increased by 
over $80 billion, separate and apart from anything that OPEC 
has done.
    The bottom line that is overlooked is an increase in the 
after-tax profits of domestic petroleum companies of well over 
$50 billion in the same 4 years. The story behind those 
headlines that doesn't get coverage is how a merger wave in the 
mid-1990's dramatically increased the concentration of the 
petroleum industry and enabled it to make business decisions 
that restricted capacity, eliminated competition from 
independents and rendered many markets uncompetitive and 
vulnerable to manipulation.
    When markets are tight, there are not a lot of suppliers 
around and prices get sticky. Individual companies can put them 
up quickly and don't feel pressures to lower them. This is 
especially true for energy products because large investments 
in physical facilities are necessary to deliver product, and 
that means that the flow can't be increased in the short term.
    On the demand side, these are necessities consumers can't 
cut back. So market power is augmented when supply and demand 
elasticities are low. It takes less of a market share to gain 
power over price, but the antitrust authorities don't adjust 
their thinking.
    Storage and economic stockpiles are critical here, but the 
industry has done a miserable job of ensuring that enough 
product is available to meet demand without dramatic increases 
in price. Just-in-time in the oil industry means never there 
when you really need it. Every accident or blip in the market 
becomes an excuse to trigger a price increase, and people wring 
their hands, oh, we didn't have supplies, we didn't have 
storage. Who chose not to have storage? Business decisions.
    Moreover, by failing to expand capacity, they are operating 
their facilities at very high rates of utilization, which makes 
accidents more likely to happen. If there were more 
competition, if there were the threat of losing your customers 
when the shelves go bear, they would have more facilities and 
they would keep more in storage and we would not have these 
wild price swings.
    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 do become tight. Those recommendations made sense then; 
they make even more sense today.
    We would all want a quick fix, immediate relaxation of 
prices, but what consumers need is the end of the roller 
coaster and the ratchet of constant volatility with ever-
mounting prices. We would love to break the pricing power of 
OPEC, which would relieve a great deal of the pricing problem, 
but the short-term prospects are not promising there either.
    There, too, we need long-term solutions that address 
fundamentals. We must restore reserve margins by increasing 
energy efficiency that takes demand out of the world market, 
but also reduces demand in tight domestic markets, which also 
suffer from the abuse of market power.
    In the 1990's, we built two fleets of gas-guzzlers--SUVs on 
the roads and natural gas-fired power plants, particularly that 
fire up in the summer to run our air conditioners. They have 
kept domestic markets tight. Efficiency can produce a 
tremendous saving that has the double impact of relaxing the 
tightness of both international and domestic markets.
    We must increase the flexibility of downstream capacity in 
the gasoline industry. We closed those refineries--that is, the 
oil industry closed those refineries after mergers as a 
function of their business decisions to consciously tighten 
markets and increase profits. We are suffering from that today. 
We have to have policies that promote economically-and 
socially-responsible storage. There is no excuse for repeatedly 
being short. Those are business decisions. Public policy can 
influence those business decisions.
    The pending energy legislation does not substantially 
advance the four key elements of a national energy policy. We 
must expand domestic refining capacity by studying who closed 
what, why, and where are the sites that we could redevelop, 
instead of simply complaining about unidentified environmental 
obstacles. Those refineries were there; they can be reopened. 
We need a more competitive domestic sector. We need rules that 
dictate when you have to have storage and how you should use 
it. We have to take the fun and profit out of market 
manipulation.
    It may very well be that none of the behaviors I have 
mentioned violate the antitrust laws. That doesn't make them 
right. It simply tells us that we need a new set of laws that 
get at this behavior which is actually imposing immense pain on 
the American consumer and our economy.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Cooper appears as a 
submission for the record.]
    Chairman DeWine. Senator Specter.
    Senator Specter. Mr. Kovacic, has the FTC ever considered 
antitrust action against OPEC?
    Mr. Kovacic. I don't know, Senator. I know the commission 
has certainly for a period going back over decades had an 
active hand in studying crude oil markets. Indeed, in the--
    Senator Specter. I am interested in OPEC. If you don't 
know, you don't know. I would suggest the FTC ought to consider 
that, and I would also suggest that the FTC ought to send 
somebody today who could give us an FTC policy about OPEC. That 
is the central thrust of the hearing and that is the statute 
which we are looking at.
    Professor Bermann, isn't there at least a prime facie case 
to get to a jury on OPEC being in violation of the antitrust 
laws on conspiring to restrain trade when they are working with 
other countries to limit production and in a context where 
there is a rising cost of gasoline?
    Where you have a couple of doctrines on sovereign immunity 
and that turns on whether it is a commercial activity or a 
governmental activity, it seems to me that it is clearly a 
commercial activity when they are selling oil to us. And you 
have the act of state doctrine where the courts have said there 
is flexibility and it depends upon the evolution of 
international legal principles. A great deal has happened in 
the intervening time since the International Association of 
Machinists case was decided.
    Just to cut through it, without taking them up one by one, 
couldn't an aggressive prosecutor make a case that would get to 
the jury or the fact-finder if it is a bench trial?
    Mr. Bermann. Well, certainly, as to the merits--that is to 
say you asked whether the activity in question would represent 
anticompetitive behavior within the meaning of the Sherman Act. 
I think the answer is most certainly yes, and one court has so 
held in an action brought in the year 2001 that hasn't yet been 
mentioned against OPEC.
    Senator Specter. The one in Alabama?
    Mr. Bermann. Yes, the suit in Alabama that actually 
rendered a judgment adverse to OPEC and issued an injunction to 
OPEC, but which was vacated, and which vacatur was sustained on 
appeal on the ground of inadequate service of OPEC in Vienna, 
Austria, on technical grounds.
    Senator Specter. Well, I am glad you brought that case up 
because at least there is a Federal court determination that 
there was a violation of the U.S. antitrust laws. The judgment 
was vacated because OPEC didn't defend. They were disdainful of 
coming into the Federal court, and they later raised technical 
objections and came in after a judgment had been entered 
against them. But at least that is authority for the 
proposition that U.S. antitrust laws were violated by OPEC.
    Mr. Bermann. Well, the district court actually found that 
the violation was per se. The district court actually found it 
was a per se violation of the antitrust laws.
    Senator Specter. I know what per se means, but somebody who 
may be watching on C-SPAN may not.
    Mr. Bermann. A per se violation is an act that in itself, 
without more, constitutes a violation.
    Senator Specter. That means it is a pretty clear-cut 
situation?
    Mr. Bermann. A clear-cut case of a violation. It was 
vacated only on grounds that service was technically 
inadequate, and it was technically inadequate because OPEC 
refused to accept service of process in Vienna, Austria, where 
it was located.
    Senator Specter. Certainly, they had notice. They knew they 
were being sued. That wasn't any surprise to them, but we all 
understand that service and jurisdiction are matters to be 
decided under technical rules.
    Mr. Bermann. They conceded notice.
    Senator Specter. They conceded notice?
    Mr. Bermann. OPEC conceded notice, yes.
    Senator Specter. Well, we have got too much to discuss to 
get into the issue as to whether the court inappropriately 
dismissed the case on technical grounds.
    When you talk about causation, that is a fact question. 
Where you have OPEC limiting production by 2.5 million barrels, 
and doing so at a time when gasoline prices are rising, that 
would depend upon the skill of the prosecutor in putting on the 
evidence as to whether the evidence was sufficient to establish 
a causal connection.
    Mr. Bermann. You are entirely right about that. It is a 
matter of a combination of basic factual showing and a skillful 
and convincing characterization of the facts.
    Senator Specter. Well, I am a little at a loss to know why 
our law enforcement agencies have not pursued the matter. It is 
a matter of great concern to the American people. It is a 
matter of enormous financial cost on gasoline going up--we have 
already seen all the fancy charts and heard the statistics--and 
heating oil going up.
    In your judgment, an action could be maintained under 
existing law which would get to the fact-finder or get to a 
jury?
    Mr. Bermann. It could be maintained under existing law. My 
remarks about the bill were oriented toward the fact that the 
bill removed doubts. Any doubts about the principal matters are 
subject to one or two lingering doubts that I alluded to.
    Senator Specter. Well, I am glad you took up the bill 
because I think it is a good bill. I have already complimented 
Senator DeWine on it for initiating it. The legislation is 
good, so that we don't have to get into the intricacies as to 
whether you have a commercial activity or a governmental 
activity, or the flexibility of the act of state doctrine. So I 
think we ought to pass it.
    Mr. Bermann. You are right in those respects.
    Senator Specter. It is pretty hard to pass something in 
Congress these days. So my hope would be that the FTC would 
take a look at this matter, or that the Justice Department 
would take a look at it.
    Mr. Kovacic, the FTC ordinarily exercises jurisdiction on 
gasoline matters, but there is nothing to stop the Department 
of Justice from initiating an antitrust violation, is there?
    Mr. Kovacic. There would not be. Any matter involving a 
criminal allegation would be handled by the Department of 
Justice, and we do have a process between us by which, if the 
Justice Department said they had better capability to pursue a 
matter, they could.
    Senator Specter. Professor Bermann, there could also be a 
private action under the antitrust laws for treble damages, 
could there not?
    Mr. Bermann. That is correct, and both lawsuits to which 
reference has been made--the one from 1979, on appeal in 1981, 
and 2001, on appeal in 2003--were private lawsuits seeking 
damages and/or injunctive relief.
    Senator Specter. Do you have any idea why some aggressive 
private lawyer--there are lots of antitrust suits brought as 
private prosecutors--why such an action has not been initiated?
    Mr. Bermann. Well, those two were initiated.
    Senator Specter. Beyond that, something more recently.
    Mr. Bermann. Why there haven't been more? Well, I think the 
act of state doctrine and the Foreign Sovereign Immunities Act 
have operated as some sort of brakes on that process. I didn't 
mention this in my oral testimony, nor, in fact, in my written 
testimony, but I think that, as I read the bill--and I sought 
clarification on this question--the Federal Trade Commission 
and the Attorney General would have exclusive authority to 
enforce these provisions.
    Now, I stand to be corrected in my understanding of the 
bill, but I understand the bill to so state. That would seem to 
me, while it would prevent any future private parties from 
bringing antitrust suits against the OPEC countries, it would 
go a very long way to defeating any arguments that might be 
based on the act of state doctrine, because after all the act 
of state doctrine is intended to protect the political 
prerogatives of the legislative and executive branches. And if 
those actions are authorized by Congress and decided upon to be 
brought by the Federal Trade Commission or the Department of 
Justice, then there is no reason left for anybody to even think 
about the act of state doctrine.
    Senator Specter. Professor Bermann, do you think that the 
provision as to enforcement being with the Attorney General or 
the Federal Trade Commission would raise any question as to the 
right of a private litigant under the treble damage provisions 
to initiate a private lawsuit?
    Mr. Bermann. Well, I think it would raise that question 
because I believe that the bill is ambiguous on that point and 
it is more than arguable that a recital that enforcement shall 
be--the exact language is ``The Attorney General of the United 
States and the Federal Trade Commission may bring an action to 
enforce this section.''
    That is ambiguous as to whether that is exclusive or not 
exclusive of the existing rights of private parties to do so, 
and I would recommend that any such legislation clarify that 
point. The consequences of clarifying that one way or another 
are quite significant.
    Senator Specter. Well, I think we ought to make that 
modification. My judgment would be that there could be private 
enforcement. When you say ``may,'' I think that leaves the 
leeway, but there is no reason to have any doubt about it.
    Taking up the issue of a legal action under existing law, 
is there any real basis, where you have the sovereign immunity 
question which turns on whether it is commercial activity or 
governmental activity, to conclude that this is a clear-cut 
commercial activity?
    Mr. Bermann. Well, courts have differed over that, and one 
reason they differ over that is because sometimes the judgment 
as to whether an activity is commercial is based upon the 
nature of the activity and sometimes it is based upon the 
purposes or policies underlying the activity.
    Senator Specter. Where it is to make money, is there any 
doubt?
    Mr. Bermann. No doubt, no doubt. But where natural 
resources are involved, a good many courts, including in cases 
outside this sector altogether, have held that the management 
of a country's natural resources--even if dealt with in ways 
that are commercially familiar to us, the very fact that they 
are natural resources renders it governmental.
    The courts have a bit of a problem with characterizing 
foreign countries' control of their natural resources as purely 
commercial. Some have and some have not. The virtue of this 
bill is that it would make it no longer necessary for the 
exception to sovereign immunity to depend upon whether we 
accentuate or don't accentuate the natural resources character 
of oil and petroleum.
    Senator Specter. Okay, that is fine. I think we ought to 
get the bill, but in the interim I would like to see the 
Justice Department do something about it. I think your opinion 
is a solid that there is a basis to pursue, notwithstanding the 
sovereign immunity doctrine, on the ground that this is really 
a commercial activity.
    May the record show that there was a nod in the 
affirmative.
    Mr. Bermann. Yes, sir.
    Senator Specter. On the act of state doctrine, the 
International Association of Machinists case talked about the 
flexibility of it and on the availability of internationally-
accepted legal principles. Since the Ninth Circuit opinion in 
1981, there has been in the 1990's a significant increase in 
efforts to seek compliance with basic international norms 
through international courts and tribunals, and an emerging 
consensus in international law that price-fixing by cartels 
violates such international norms.
    Would you agree with that?
    Mr. Bermann. Yes, I would.
    Senator Specter. Well, then I think the stage has been set 
for an aggressive prosecution here, Professor Bermann. I 
appreciate your background and your insights and your research. 
I think an aggressive prosecution would be well received.
    The worst that could happen, Mr. Kovacic, would be to lose, 
and that is not such a dire consequence when the stakes are as 
important as they are.
    Mr. Bermann. Mr. Senator, if I may, in the case that began 
in Alabama and went up to the Eleventh Circuit, the act of 
state doctrine was found to be inapplicable to the action 
against OPEC. It was found to be inapplicable because OPEC's 
activity was commercial, and, secondly, because OPEC's activity 
was taking place in Vienna, Austria, which is not on the 
territory of the states in question.
    So the most recent decision that we have been referring to 
is a decision that addressed the act of state doctrine and 
found it to be inapplicable to these circumstances. That is a 
decision of 2001 and not in any respect weakened in the 
appellate ruling of 2003.
    Senator Specter. Well, that is an important observation to 
show that some of these legal hurdles have already been 
overcome and that there is precedent.
    Senator DeWine and I used to be prosecuting attorneys, and 
a prosecuting attorney ought not to take a case that doesn't 
have a sound policy and that he doesn't have sufficient 
evidence to get to a jury. But when you weigh the importance of 
the matter, as I would weigh the importance of going after OPEC 
in their collusive practices and the consequences at least 
sequentially of rising gasoline and rising oil prices in the 
United States, we are dealing with very substantial financial 
matters for the American consumer.
    Dr. Cooper, would you like to see a test case brought 
representing consumers?
    Mr. Cooper. We are big fans of test cases. Frankly, 
clearly, one of our problems is that, in my opinion, OPEC has 
fought an economic war against the American consumer and we 
have not responded at that level.
    Senator Specter. That is not the only war they have fought 
against us.
    Mr. Cooper. I understand, but the point is that we 
definitely think that we support this legislation to remove any 
doubts. There is absolutely no reason why we can't defend 
ourselves from this sort of attack.
    Senator Specter. Mr. Kovacic, would you think it 
appropriate for the FTC to consider an enforcement action 
against OPEC under the antitrust laws?
    Mr. Kovacic. Senator, I don't have instructions from the 
commission to address this, so I answer in my own capacity.
    Senator Specter. Sure.
    Mr. Kovacic. I see this as involving a number of extremely 
complicated issues. I agree completely with the suggestion that 
the behavior would be unmistakably illegal. By any of our 
standards, if these were private enterprises, our Department of 
Justice would highly likely prosecute them criminally and seek 
to imprison the individuals involved. So the culpability of the 
behavior under our legal standards is unmistakable.
    If I could mention for a moment the things that might make 
us hesitate, one is that obtaining discovery in such a matter 
might be relatively difficult. Enforcing a judgment might be 
relatively difficult.
    Senator Specter. Offending the sovereign, you say?
    Mr. Kovacic. Obtaining discovery and enforcing a judgment 
would be complex. If I think of the practical steps that would 
be taken, these would likely be fairly elaborate and long-
running as we dealt with those issues.
    Senator Specter. If you can't get discovery, if they don't 
submit to discovery, you get a default judgment. If you go 
after assets, OPEC has plenty of assets within the long arm of 
U.S. law.
    Mr. Kovacic. If I could offer another possibility, in the 
international work we do a number of countries raise objections 
to policies that the United States follows which they allege to 
be matters of cartelization. I wonder if they would pass their 
own accord collateral legislation to bring their laws to bear 
upon our own policies, and I think of the matter of 
agricultural commodities as being one.
    Senator Specter. Supply for the record--I don't want to go 
on too much longer--where the United States might be exposed.
    Dr. Felmy, do you think an aggressive prosecution here 
might be warranted?
    Mr. Felmy. Senator, I am not an attorney. I am not 
qualified to make a statement on that particular issue.
    Senator Specter. Well, because you are not an attorney may 
make you well qualified, Dr. Felmy.
    Senator Specter. Dr. Hastings, you are a Ph.D. That 
certainly gives you qualifications.
    Ms. Hastings. Yes, but in economics, unfortunately, not in 
law. So I joint have a joint J.D.-Ph.D. I am an economist and I 
examine industrial organization, so market structure and firm 
behavior. So I am really not able to speak to the extent to 
which we could successfully litigate antitrust laws against 
OPEC.
    Senator Specter. Okay, thank you. This transcript ought to 
be sent over to both the commission and the Attorney General, 
at least with my thinking, and I will discuss it with my 
colleagues beyond. Both Senator DeWine and I, as a I said 
before, were prosecutors, and I initiated many actions which 
were original actions, sued under the nuisance laws people who 
were spraying asbestos and closed down commercial buildings; 
prosecuted for first-degree murder a defendant who did not 
touch the victim, made new law on first-degree murder without 
contact. The law is an evolving body which responds to 
aggressive prosecutions when you have a good factual basis and 
you have a policy to be enforced.
    Senator DeWine, thank you very much for convening the 
hearing and thank you very much for the latitude on my 
questioning.
    Chairman DeWine. Well, Senator Specter, thank you very 
much. I think you all can see why we brought my senior partner 
here to prosecute the case for the DeWine-Kohl bill here today.
    Thank you, Senator, very much.
    Senator Specter. Thank you.
    Chairman DeWine. I will reserve my questions.
    Senator Schumer.
    Senator Schumer. Thank you, Mr. Chairman. I want to thank 
the witnesses. I apologize for missing a few of you. We had a 
Banking hearing at the same time.
    First, I want to ask a little bit about natural gas to 
Kovacic and the others. We had a dramatic price spike in 
natural gas last year. This last winter, it was much higher 
than it had been before. Yet, if you looked at supply and 
demand, it wasn't terribly different. In fact, it was a little 
less stringent this past winter than it was in the previous 
winter.
    Has the FTC investigated last winter's price spikes? If so, 
what is the status of the investigation? If not, since you 
can't speak for the commission, what are your thoughts? Gas 
just went through the roof. Obviously, it is a different type 
of market than oil, with pipelines and everything else. Tell me 
what you think.
    Mr. Kovacic. Senator, our work to date has basically been 
focused on looking at mergers involving natural gas companies, 
seven in the past two-and-a-half years. In the course of those 
investigations, we have had some occasion to look at behavioral 
issues in the industry. But to my knowledge, we don't have a 
current investigation simply looking at conduct, but I would be 
happy to check that and to report to you.
    Senator Schumer. Would it be within the purview of the FTC?
    Mr. Kovacic. Yes, it would, sir.
    Senator Schumer. And would it be in the purview to see if 
the mergers that have occurred have helped contribute--one of 
my premises is we have had less and less competition in the 
energy industry, and that has in part increased the price, 
whether it be overseas with Senator DeWine's bill, with OPEC, 
or domestically with the mergers that we have seen throughout 
the 1990's, by the way many of them under Democratic 
administrations. This is hardly a partisan-type issue.
    Mr. Kovacic. We have several projects underway to look at 
the consequences of past petroleum mergers. Again, speaking for 
myself, I think it is a wise policy for the commission to 
expand its efforts to assess the effects both of past decisions 
to prosecute and not to prosecute. In one area not involving 
petroleum or natural gas, the commission has begun to do this 
in health care.
    Without being able to predict how the agency will act in 
the future, I see a growing interest in looking in the rear 
view mirror to see the actual consequences of what we have 
done. So my view is that is wise policy.
    Senator Schumer. Good. That would be very helpful. I hope 
you will do it. Tell the commissioners about that.
    Mr. Kovacic. I will, sir.
    Senator Schumer. Dr. Hastings, as the economist with only a 
Ph.D. and not a J.D. who has maybe studied these markets a 
little bit--
    Ms. Hastings. I am not an expert in natural gas markets. I 
am an expert in gasoline markets, and they are very different.
    Senator Schumer. But just using your knowledge as an 
economist, given the fact that we have pipelines from gas 
fields connected and they are generally monopolies--that is, 
you can't go to two different natural gas producers and the 
natural gas companies have a limit in terms of who they can get 
the gas from. I have asked lots of people and no one has come 
up with a good explanation as to why natural gas spiked so in 
price last year, this past winter.
    Ms. Hastings. I am not an expert to speak to that.
    Senator Schumer. Do you, Dr. Cooper, have anything to say 
about it?
    Mr. Cooper. Well, in my testimony we look at natural gas 
and we observe that over the past four or 5 years, natural gas 
has risen much more rapidly than crude oil.
    Senator Schumer. Correct.
    Mr. Cooper. The domestic market has changed in the last 5 
years to close that gap. What changed was the majors, the same 
folks who are concentrating the refinery industry, moved into 
the natural gas market in a big way. They invest differently, 
they behave differently, they manage their assets differently. 
So the same attitudinal factors that look at the way they 
maximize their profit as opposed to compete for market share 
afflict the natural gas market, in my opinion, as they do the 
domestic gasoline market.
    The other point is that the natural gas price is now set in 
the spot markets, the hubs. Well, it turns out that most of 
those hubs didn't even exist 10 years ago and we are now 
discovering that all of them have been afflicted by 
manipulation. Almost daily, you read press accounts from the 
Federal Energy Regulatory Commission discovering that people 
were mis-reporting gas, et cetera. So these are very thin 
markets.
    There is a court case going forward. Just a couple of weeks 
ago, I believe a Federal district court judge allowed the case 
to go forward and he pointed out that on any given day in 2001, 
Enron accounted for 40 percent of the gas being transacted at 
the Henry hub. Now, the Henry hub is the key referent price. 
The Department of Energy has discovered that that is setting 
the price of natural gas, and it is tracking crude much more 
closely than it used to do.
    Enron controlled 40 percent of the transactions in that 
market. When Enron went away, for clearly very, very nasty 
reasons, these markets got to be very thin and they have been 
laboring along. They are not transparent, and the Federal 
Energy Regulatory Commission is struggling to figure out how to 
get real clear price signals out of the gas market and still 
doesn't have a program.
    Again, the fundamentals in this industry are exactly like 
the gasoline industry--inelasticity of supply in the short 
term, inelasticity of demand in the short term. So last spring, 
with a natural gas crisis, the prices popped up and everyone 
was wringing their hands about how storage wasn't adequate 
again. How did that happen? It is a business decision.
    When the stocks finally moved up over the course of the 
summer, by the end of the winter people pointed out there was 
more in storage than there was in the previous 2 years and the 
price is still too high. So this is market that is not setting 
prices in a competitive, pro-consumer manner.
    Senator Schumer. So you would recommend the FTC do what Mr. 
Kovacic said maybe they should do?
    Mr. Cooper. But they have to begin to look at these markets 
given what we know about the inelasticity of supply and demand. 
If we just do routine antitrust analysis, as Senator DeWine, if 
you look at their market shares, they don't look very 
concentrated, although certainly some of the gasoline markets 
have gotten very concentrated.
    But knowing the economic fundamentals, knowing about how 
inelastic are supply and demand, that magnifies market power. 
And maybe we can't do that under the antitrust laws. Maybe we 
need different laws that are on different premises, but that is 
a fundamental problem.
    Senator Schumer. Like I mentioned before, my great concern 
is this sort of triangle I mentioned--OPEC, a small number of 
large oil companies and administration friendliness to that.
    In your testimony, Dr. Cooper--and I am going to ask Mr. 
Kovacic and Dr. Felmy this--you made a point that when OPEC 
raises its international price, American oil companies greatly 
profit even more from their domestic production, where their 
cost of production stays the same or is on the same curve as it 
was before. But because the international price has gone way 
up, they make much more in profit. Certainly, the profits of 
the oil companies seem to be quite in sync with the increase in 
price, not exactly, but pretty close.
    Just give me a yes or no on that. Is that true, Dr. Cooper?
    Mr. Cooper. There is price-following behavior in both the 
domestic oil market and the natural gas market. The interesting 
thing is that one of the reasons the large industrial gas users 
in this country are screaming is because in the rest of the 
world gas is not exhibiting that price-following behavior. They 
are losing their jobs to other markets where the price of 
natural gas doesn't run up every time the price of crude runs 
up. Now, we can have a debate about why those foreign markets 
behave differently.
    Senator Schumer. It means it is not inexorable. That is 
what it means.
    Mr. Cooper. That is right. It is not inexorable.
    Senator Schumer. The big oil companies sort of like it when 
OPEC raises prices because then the world price goes up and 
their domestic production is more profitable.
    Do you agree with that, Mr. Kovacic? Again, you can speak 
for yourself, not for the commission.
    Mr. Kovacic. Yes, sir. I know that we have done work 
looking at trends in profitability and attempting to explain 
them. I don't have a good sense of exactly what our research 
has shown on the point you ask, but I would be happy to check 
that and submit that in writing to you.
    Senator Schumer. You could submit that in writing.
    Do you have any thoughts on that, Dr. Hastings?
    Ms. Hastings. On the profitability of oil companies 
coinciding with the profitability--
    Senator Schumer. The price that OPEC sets, yes.
    Ms. Hastings. No, I have not looked into that issue.
    Senator Schumer. Okay, and I will bet Dr. Felmy doesn't 
quite agree with what I said, so let's give him a chance.
    Mr. Felmy. Well, actually, Senator, because domestic prices 
move with world prices, because oil is an international 
commodity, you will see for that roughly, I guess, 35 percent 
of the crude oil that we actually produce here to use, higher 
margins for that crude as world prices go up.
    Senator Schumer. So if an oil company were interested, at 
least in the short term, in maximizing their profits, they 
would be happy, at least--let's not get into collusion, but 
they would be happy to see OPEC raise its price?
    Mr. Felmy. Well, it depends on whether or not you are a 
refiner or a producer. If you are refiner, the answer is a 
decided no. If you are a producer, it tends to benefit you.
    Senator Schumer. Overall, let's take Exxon Mobil--something 
that never should have existed, in my opinion; it should be 
Exxon and it should be Mobil. Those were the two biggest in my 
area and they were allowed to merge.
    Doesn't Exxon Mobil do better profitability-wise when OPEC 
raises its price, because at least the domestic share--
    Mr. Felmy. I am not an expert, sir, on the split between 
the refining, production, chemicals and all the other 
businesses that large corporations such as Exxon Mobil have 
ongoing. So I can't speak to that, sir.
    Senator Schumer. Do you want to say something, Dr. 
Hastings?
    Ms. Hastings. Well, I don't know Exxon Mobil's exact ratio 
of production to consumption of crude oil. If they are a net 
producer of crude oil, then they benefit from it. If they are a 
net consumer of crude oil, they don't benefit from it. It 
depends on the balance of their--
    Senator Schumer. Assuming that there is pure competition at 
the selling end, which there isn't.
    Ms. Hastings. I am sorry. I didn't quite understand.
    Senator Schumer. Even if they are a consumer, if they can 
pass all of that along in an inelastic way to the person who 
buys gasoline, home heating oil or whatever else, it is not 
going to hurt them even on their consuming side. They gain on 
the production side. Because of these mergers, they have an 
inelastic demand curve on the consumption side and it is a win-
win.
    Ms. Hastings. Not necessarily.
    Senator Schumer. Go ahead and explain to me why.
    Ms. Hastings. Well, it depends. Imagine the opposite 
happening, the opposite being, as Mr. Felmy pointed out, 
suppose that Exxon was actually not a producer, but only a 
refiner. Before Tosco merged with Conoco Phillips, Tosco would 
have been in this category. So they are only going to be 
purchasing crude oil. Then your assumption is actually that 
they are going to pass a hundred percent of that crude oil 
price on to retail.
    Senator Schumer. But Tosco is not a fair example because 
they didn't own gasoline stations.
    Ms. Hastings. They did own gasoline stations before they 
merged with Conoco Phillips. They owned the West Coast refining 
and marketing assets of Unocal Corporation. They owned the 
Circle K chain since 1996.
    Senator Schumer. Did they have the same kind of market 
dominance that, say, Exxon Mobil has at the pump in my area or 
any part of the country?
    Ms. Hastings. Most definitely, in Arizona.
    Senator Schumer. In Arizona?
    Ms. Hastings. Most definitely, in Arizona.
    Senator Schumer. So Tosco would have made money in Arizona.
    Ms. Hastings. And they most definitely had a large market 
share. And I am not agreeing that they would have made money in 
Arizona. They also had a large market share in California.
    Senator Schumer. Do you know what percent?
    Ms. Hastings. It depends on the metropolitan area. So I am 
thinking somewhere between 12--no, probably about 10 percent, 
12 percent. I could be off on that.
    Senator Schumer. I think that is a lot less than Exxon 
Mobil has in my area. True?
    Ms. Hastings. Perhaps.
    Senator Schumer. Oh, yes, more than perhaps.
    Ms. Hastings. I actually just looked at the percent that 
Exxon Mobil has in the New York metropolitan area.
    Senator Schumer. Good. What is it?
    Ms. Hastings. I am just not remembering off the top of my 
head, but I think it is probably closer to 20 percent. So, yes, 
they have a large market share in your area.
    Senator Schumer. What do you say to this, Dr. Cooper?
    Mr. Cooper. Well, the point is that they are integrated, 
and that has been one of the trends is that you have got more 
integrated refiners. So it is more and more difficult to talk 
about the refining sector because this is an integrated 
operation.
    Senator Schumer. Right. That is what I was trying to say.
    Mr. Cooper. So the point is that if you look at the bottom 
line of Exxon Mobil this year, folks, it is through the roof, 
and it is driven significantly by crude oil prices, but also by 
the ability to keep--if there were price resistance at the 
point of sale, the rise in crude prices would have squeezed 
down the domestic spread, and it did not.
    If you look at our testimony, the reason we are having so 
much shouting today is that both domestic spread and crude oil 
prices, the input prices, are at historic highs for an April, 
and it is the combination of that. I understand you could 
hypothesize other reasons, but the simple fact of the matter is 
that there is no elasticity of demand at the point of sale.
    Senator Schumer. Right, and Dr. Hastings made the point 
because she had to go to something that doesn't exist now, a 
large refiner that didn't have production. That was Tosco, and 
who bought Tosco? I don't even know. Who bought them?
    Ms. Hastings. Conoco Phillips.
    Senator Schumer. Conoco Phillips, a seller and a producer.
    Ms. Hastings. By the way, Tosco was just the first thing 
that came to my head.
    Senator Schumer. I understand, I understand, but I don't 
think Tosco was the biggest sort of refiner qua refiner.
    Ms. Hastings. It might have actually been the largest 
independent refiner at the time of the purchase.
    Senator Schumer. That is what I am saying. The point I am 
making is the greater consolidation, vertical and horizontal, 
in this industry over the last several years has created less 
competition and has created not only higher prices, but a 
greater incentive, either implicitly or even explicitly, for 
OPEC and the oil companies, the big ones, not everybody, to 
cooperate.
    I just have one more question here, and the Chairman has 
been very generous. This is about ethanol. Last week, there 
were rumors that the administration might have granted both New 
York and California a waiver from the ethanol mandate, and 
prices dropped for energy futures on the NYMEX. I think they 
went down 5.2 percent for gasoline and 4.2 percent for crude 
oil.
    Anyone can answer this. Isn't this empirical evidence that 
the waivers, if we were to allow New York, California and 
whatever other States wanted to that are far away from the 
corn-growing ethanol-producing centers--if we were to allow 
those States to meet the clean air standards by cracking 
gasoline somewhat differently, prices would come down some.
    Does anyone want to agree or disagree? Yes, Mr. Kovacic.
    Mr. Kovacic. We haven't tried to measure the exact effects 
of the substitution you mention, Senator, but an unmistakable 
finding that we have made is that measures that can be taken to 
preserve general levels of air quality while introducing more 
flexibility into the supply system, have possibilities in many 
areas to put greater downward pressure on prices. A more 
flexible supply and distribution system consistent with broad 
air quality goals is better for the competitive process.
    Senator Schumer. Dr. Felmy.
    Mr. Felmy. I would agree, Senator, that any measure that 
allows you to be able to increase the flexibility so that 
refiners can meet clean air without prescriptive solutions for 
that introduces flexibility. It also introduces the possibility 
of additional imports. So we would agree with that position and 
we support waivers for everyone.
    Senator Schumer. Does anyone disagree with that?
    Mr. Cooper. I agree with it, with a caveat. Bigger markets 
are better for consumers as long as the players in the markets 
are more. If it is the same players in the same big markets, I 
am not sure you diminish their market power. So when we look at 
making these bigger markets, we have to also make sure we 
increase the competitiveness of those markets or we may end up 
on a treadmill.
    Senator Schumer. One final question. This is for Mr. 
Bermann. We left the legal questions to the former prosecutors, 
Senator DeWine and Senator Specter. But as a cosponsor of 
Senator DeWine's legislation, given that OPEC is a cartel 
specifically designed to manipulate price, does the involvement 
of U.S. companies with OPEC raise any domestic antitrust 
issues?
    In other words, does the fact that some of the oil 
companies also own some of the production in the OPEC nations, 
such as whatever the name of that company is that I mentioned 
in my opening--Motiva, the old Aramco--does that raise any 
antitrust issues independent of the good legislation that 
Senator DeWine has offered?
    Mr. Bermann. Well, the fact that those companies might be 
dealing with foreign governments would not immunize them in any 
respect. The law has never gone any further than to say only 
the compulsion of a foreign government would operate as a 
defense.
    So if you had the kinds of predicate acts that you are 
thinking of, there is no question that I think the Sherman Act 
could apply to them. And the fact that they are dealing with or 
consorting with foreign governments will not immunize them.
    Indeed, if I can revert to the act of state doctrine, the 
courts have held routinely that the act of state doctrine only 
applies when the legality of what a foreign government does is 
in question and not when, if you will, the good faith or bad 
motivation of the foreign government is indirectly implicated.
    Senator Schumer. Do you agree with that, Mr. Kovacic, and 
does the FTC agree with that?
    Mr. Kovacic. Again, speaking in my own capacity, I think 
Professor Bermann has accurately described the requirement that 
there be compulsion. So the issue of fact would be, in the 
concession arrangements that govern their activities in these 
countries, are there measures in those arrangements that 
provide the requisite compulsion. I think his technical 
assessment is correct.
    Senator Schumer. So would that mean that, say, Shell, which 
has ownership in Saudi Arabia and is part of this Aramco, which 
is part of OPEC, is susceptible to FTC action for what they do 
here because of their big network and operations here?
    Mr. Kovacic. In any instance in which we would look at 
foreign behavior in these circumstances, we would generally 
take the view that without compulsion, for example, the 
behavior in question is fair game. So that would be the crucial 
factual issue.
    Senator Schumer. Thank you, Mr. Chairman. I appreciate your 
having this hearing.
    Chairman DeWine. Senator, thank you very much.
    Mr. Bermann, you have made some good suggestions on how we 
can improve this bill and we are certainly going to take a look 
at that. I want to thank you for that. That is one of the 
reasons we have these hearings.
    You made the point about the state of the law and told us a 
little bit about that, and we appreciate that.
    I might say there has been some editorial comment about 
this proposed bill that we couldn't do this because there are 
legal impediments. And I would just say your testimony has 
pointed out, I think, the fact that this bill would remove any 
legal impediments. Whatever legal impediments are out there--
and that is an open question--but whatever legal impediments 
are out there, this bill eliminates them. That is why we 
introduced the bill.
    It is problematic whether or not suits could be brought now 
or not. I think they could be, but the whole purpose today of 
this bill is to make it so that prosecution can move forward, 
and make it clear that the antitrust laws of this country do, 
in fact, apply.
    The idea of the Department of Justice enforcing the 
antitrust laws against cartels is something that happens all 
the time, and they do it against not just domestic companies; 
they do it against foreign companies. It wasn't too many years 
ago there was a lawsuit brought by the Department of Justice. 
It was an international cartel case against, I believe, German 
and Swiss firms for a vitamins cartel. That case was 
successful. Foreign executives, I believe, were sent to jail. 
Two firms paid a fine of over $700 million.
    So the United States can reach the assets; the Justice 
Department can reach those assets. We can attach those assets. 
We can bring those people into court. I have faith in the 
ability of the lawyers at the Justice Department to get the job 
done, and that is why we have this bill to remove the 
impediments and let them go about their business and do their 
job and enforce our antitrust laws. This is the only major area 
that I know of where we say they can't do it, and we think they 
should be able to do it.
    Mr. Kovacic, we have heard testimony today complaining 
about the FTC's efforts to investigate the petroleum industry. 
In your testimony, you talked about a number of actions and 
investigations that the FTC has conducted in this area, but it 
seems clear to me that consumers still believe that they are 
looking at a very dysfunctional market.
    What else can the FTC do?
    Mr. Kovacic. I think one of the most important things, Mr. 
Chairman, is to bring to a complete conclusion a great deal of 
the research that we have been doing that comes both from the 
active, almost real-time monitoring of price changes, the 
consequences of our retrospective assessments of completed 
transactions, the continued work that we are doing to enlist 
expert outsiders to tell us more about the industry--to bring 
that to a successful conclusion so that our understanding of 
the precise phenomena in question is more complete, to have a 
better sense, for example, of precisely how specific 
transactions or activities have affected market outcomes.
    I have heard on a number of occasions Senator Wyden express 
his frustration, his disappointment with the inquiries. But our 
view has been in this and other areas that are terribly complex 
that the sound empirical foundation is the indispensable basis 
for making good policy. One of the first and most important 
things we can do is to bring those efforts to a close as a 
foundation for doing more work.
    Second, I think bringing to a successful close cases such 
as the Unocal case that I mentioned before, which we allege--
our opponents in this case would strongly dispute my 
characterization--literally involves hundreds of millions of 
dollars for California consumers, direct pass-through effects, 
to establish the principle that the regulatory process which is 
so important to the operation of this industry--clean air and 
clean water controls, other controls that govern the behavior 
of the industry--cannot be gamed, that firms subject to them 
cannot lie or misrepresent their behavior.
    And again I must emphasize I am offering the allegations in 
the commission's complaint. These aren't proven facts. To 
demonstrate that principle successfully would be, I think, a 
critical addition to our competition policy about what it says 
in petroleum and elsewhere about the manipulation of regulatory 
schemes that do affect competitive outcomes.
    I think we have the humility, Senator, in listening to all 
of the representations here about additional avenues for 
research and analysis, to continue to pursue those paths. I am 
quite at peace with the process that continues to bring upon us 
possibilities for additional analysis, new research, new areas 
for examination. Our process of policymaking takes those into 
account, so most certainly we would carefully consider and 
reflect upon the results of this proceeding as well.
    Chairman DeWine. Let me ask you, do you agree with Dr. 
Cooper's assessment that refining is excessively concentrated, 
and if so, does that mean that the FTC got it wrong when it 
reviewed the big mergers of the 1990's in the petroleum 
industry?
    Mr. Kovacic. When we look carefully at the contributions 
that the mergers in question made to concentration in refining, 
we find that those adjustments were modest, at most. Indeed, it 
is very difficult to detect, I believe, direct, convincing 
links between the mergers we permitted, with conditions, with 
large divestitures, and notable increases in concentration in 
these markets. So I think that we and Dr. Cooper would have 
quite a debate about exactly how those mergers influenced 
refining concentration in those markets.
    Chairman DeWine. Well, let me move to another area. There 
seems to be widespread agreement that petroleum companies run 
their refineries at a very high capacity, yet don't build up 
new capacity to meet potential demand increases.
    We know that there are some difficulties in increasing 
refining capacity. We have talked about this a little bit 
today; environmental permitting, for example. But on balance, 
it seems as though there ought to be some way the industry 
could boost refining capacity.
    Why don't we see more refining capacity come on line? Is 
there any other industry that comes to mind where producers run 
at this very high capacity year after year and don't take any 
steps to increase capacity? What is the difficulty here?
    Mr. Kovacic. I think part of what we have observed, Mr. 
Chairman, is that utilization rates, at least in the past 
couple of years, to some extent have been falling a bit, so 
that we don't have the level of tightness that prevailed 
before.
    I would have to check, Mr. Chairman, to look at exactly 
what our experience base tells us about actual improvements in 
the capacity of specific facilities that do remain on line. And 
if you will permit me to do so, I would like to supplement my 
answer with a fuller response.
    Chairman DeWine. That would be fine. You can submit that.
    Mr. Kovacic. But our impression is that certainly in some 
areas with respect to some facilities, we are seeing 
enhancements that do increase the capacity of existing 
facilities.
    Chairman DeWine. Dr. Felmy, have you ever done a study 
estimating what price we would pay for crude oil if it were 
subject to the free market instead of being fixed by OPEC?
    Mr. Felmy. I have really not, Mr. Chairman. An economist 
looks at cartels and has an academic view of how things go, but 
then when you transfer that analysis to the real world, there 
are many other things that happen. Cartel behavior is very 
complex. Behavior of non-cartel members is also very complex. 
You also have dramatic changes in demand over time which can 
also affect the prices. So I don't have an analysis of that.
    Chairman DeWine. Dr. Hastings, do you?
    Ms. Hastings. I do not have an analysis of that.
    Chairman DeWine. Dr. Hastings, your testimony mentions that 
the Energy Information Administration of the Department of 
Energy collects data, but does not let academics have access to 
detailed data for research purposes. You also note that the 
Department of Energy does not have grant programs for 
economists to do research on energy policy, and as a result the 
economic research into energy policy suffers.
    Can you explain your thoughts about these two points maybe 
in more detail to us?
    Ms. Hastings. Sure. In order to examine many of the 
questions that we have been discussing here, an applied 
economist needs to be able to get access to detailed data that 
would allow them to understand better issues. For example, 
suppose I wanted to look at the following question: Was there 
strategic capacity entry into markets that were regulated by 
reformulated gasoline requirements? How did firm choose 
capacities to enter into these markets? Are we going to be 
ready to supply Milwaukee's market when they introduced a 
specific type of gasoline only for that market?
    Price volatility went up substantially there, so did mark-
ups, and the number of firms supplying unbranded gasoline 
decreased substantially after that introduction. So suppose you 
might want to ask the question, how tight are markets? Did 
firms anticipate this tightness when setting capacities when 
they went into the market?
    In order to look at something like that, you would actually 
need to look at refinery-level production decisions, and there 
is no way to actually get that information even though the 
Energy Information Administration has such information. 
Typically, the only thing that one can get access to is very 
average data across the whole country or perhaps across a large 
part of the country on an aggregated basis, kind of monthly or 
yearly information.
    One of the things that maybe Mr. Kovacic might agree with 
me on is that there is a real need for sound empirical work in 
industrial organization to look at a lot of these questions. 
What is going on in natural gas? What is the effect of having 
these micro markets for different reformulated gasoline on 
prices, on competition, on who decides to enter and who 
doesn't? Those questions could be answered with good data.
    Currently, for the projects that I have done, it is 
incredibly difficult to get such detailed data and it takes a 
long time for an academic to get a hold of this data. Labor 
economists were in a similar position before the Census Bureau 
introduced a program that allowed labor economists to look at 
detailed data at the Census Bureau, confidential data on firm 
production decisions, for example, in manufacturing, on 
consumer behavior at the consumer level.
    What they did is introduce a program by which academic 
could apply to get access to the confidential data. It is a 
very stringent application process. Once they are granted this 
application, they actually have to go to the Census Bureau to 
use the data. They can't take confidential data off-site. But 
having this access, this program set-up, led to a huge boom in 
the sound empirical knowledge base of labor-related policies 
such as minimum wage laws, et cetera.
    Before that time, labor economists and labor issue 
policymakers were in the same position that many regulatory 
policymakers find themselves in today. Having a program modeled 
after what the Census Bureau did perhaps at the Energy 
Information Administration may lead to the same boom in 
knowledge and understanding of what is affecting these energy 
markets.
    Chairman DeWine. Dr. Cooper, we have heard testimony that 
it is too hard to open a new refinery due to such reasons as 
huge costs, environmental issues and local opposition.
    Do you disagree with these reasons? I mean, is that what 
the problem is?
    Mr. Cooper. It is not that I disagree with the reasons. It 
is that we have observed the closure of refineries, which were 
clearly industrial sites that supported those refineries. They 
were permitted to exist in those locations. They were closed, 
we know, as part of a business strategy to diminish capacity. 
So what we asked for several years ago was a study of those 
sites, a detailed analysis of why were they closed, what would 
it take to get them open, would there be people who are 
interested in reopening them.
    I think Dr. Hastings has sort of raised the interesting 
question, because the really interesting thing is that the 
Federal Trade Commission which studied the first price spike in 
2000 actually asked exactly that question, the question she 
asked about: How do strategic decisions in the reconfiguration 
of refineries to meet the reformulation requirements affect 
supply in that market.
    The FTC asked that question not with the detailed data that 
she would like to have, but by interviewing all of the 
behaviors and the actors in those markets. And they concluded 
that, based on those interviews, strategic decisions had been 
made about how much capacity to have in a market that tightened 
them and cut off independents.
    Two years ago, the RAND Corporation did another study, 
based again not on the detailed data that she would like, but 
on the same sets of interviews, and they concluded exactly the 
same thing. So now we have the qualitative evidence on business 
decisions. Senator Wyden repeats his internal memos almost on a 
daily basis that those decisions were made.
    So the answer is you hear the excuse that it is too hard to 
locate, it is too expensive, but you look at the people who 
have studied it and you discover that this was intended to 
increase the profitability of refineries, that it was intended 
to accomplish certain sets of things. The definitive answer 
comes in a backward look around each of those price spikes with 
the data that Dr. Hastings has mentioned.
    But I submit that there is another explanation. Now, we are 
through 4 years of unhinging in the gasoline market and nobody 
has looked at this issue in detail repeatedly, aggressively. 
What we get is excuses rather than explanations and analysis.
    Chairman DeWine. Well, I want to thank you all very much 
for your testimony. It has been very, very helpful and it has 
been a very instructive hearing. We have had a lot of interest 
in this hearing and we do appreciate your testimony. This 
Subcommittee will continue to monitor this issue and we are 
going to continue to push forward and move forward on our bill.
    Thank you very much.
    [Whereupon, at 5:08 p.m., the Subcommittee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]

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