[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
THE IMPACTS OF HIGH ENERGY COSTS TO THE AMERICAN CONSUMER
=======================================================================
OVERSIGHT HEARING
before the
SUBCOMMITTEE ON ENERGY AND
MINERAL RESOURCES
of the
COMMITTEE ON RESOURCES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
Thursday, May 19, 2005
__________
Serial No. 109-13
__________
Printed for the use of the Committee on Resources
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
or
Committee address: http://resourcescommittee.house.gov
______
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COMMITTEE ON RESOURCES
RICHARD W. POMBO, California, Chairman
NICK J. RAHALL II, West Virginia, Ranking Democrat Member
Don Young, Alaska Dale E. Kildee, Michigan
Jim Saxton, New Jersey Eni F.H. Faleomavaega, American
Elton Gallegly, California Samoa
John J. Duncan, Jr., Tennessee Neil Abercrombie, Hawaii
Wayne T. Gilchrest, Maryland Solomon P. Ortiz, Texas
Ken Calvert, California Frank Pallone, Jr., New Jersey
Barbara Cubin, Wyoming Donna M. Christensen, Virgin
Vice Chair Islands
George P. Radanovich, California Ron Kind, Wisconsin
Walter B. Jones, Jr., North Grace F. Napolitano, California
Carolina Tom Udall, New Mexico
Chris Cannon, Utah Raul M. Grijalva, Arizona
John E. Peterson, Pennsylvania Madeleine Z. Bordallo, Guam
Jim Gibbons, Nevada Jim Costa, California
Greg Walden, Oregon Charlie Melancon, Louisiana
Thomas G. Tancredo, Colorado Dan Boren, Oklahoma
J.D. Hayworth, Arizona George Miller, California
Jeff Flake, Arizona Edward J. Markey, Massachusetts
Rick Renzi, Arizona Peter A. DeFazio, Oregon
Stevan Pearce, New Mexico Jay Inslee, Washington
Henry Brown, Jr., South Carolina Mark Udall, Colorado
Thelma Drake, Virginia Dennis Cardoza, California
Luis G. Fortuno, Puerto Rico Stephanie Herseth, South Dakota
Cathy McMorris, Washington
Bobby Jindal, Louisiana
Louie Gohmert, Texas
Marilyn N. Musgrave, Colorado
Vacancy
Steven J. Ding, Chief of Staff
Lisa Pittman, Chief Counsel
James H. Zoia, Democrat Staff Director
Jeffrey P. Petrich, Democrat Chief Counsel
------
SUBCOMMITTEE ON ENERGY AND MINERAL RESOURCES
JIM GIBBONS, Nevada, Chairman
RAUL M. GRIJALVA, Arizona, Ranking Democrat Member
Don Young, Alaska Eni F.H. Faleomavaega, American
Barbara Cubin, Wyoming Samoa
Chris Cannon, Utah Solomon P. Ortiz, Texas
John E. Peterson, Pennsylvania Jim Costa, California
Stevan Pearce, New Mexico Charlie Melancon, Louisiana
Thelma Drake, Virginia Dan Boren, Oklahoma
Bobby Jindal, Louisiana Edward J. Markey, Massachusetts
Louie Gohmert, Texas Nick J. Rahall II, West Virginia,
Richard W. Pombo, California, ex ex officio
officio
------
C O N T E N T S
----------
Page
Hearing held on Thursday, May 19, 2005........................... 1
Statement of Members:
Drake, Hon. Thelma, a Representative in Congress from the
State of Virginia, Prepared statement of................... 5
Gibbons, Hon. Jim, a Representative in Congress from the
State of Nevada............................................ 1
Prepared statement of.................................... 2
Grijalva, Hon. Raul M., a Representative in Congress from the
State of Arizona........................................... 3
Prepared statement of.................................... 4
Statement of Witnesses:
Bessette, Robert D., President, Council of Industrial Boiler
Owners..................................................... 20
Prepared statement of.................................... 21
Cicio, Paul N., Executive Director, Industrial Energy
Consumers of America....................................... 11
Prepared statement of.................................... 12
Clements, Carol, Chairperson of the Board of Directors, The
National Fuel Funds Network................................ 40
Prepared statement of.................................... 41
Hyde, Robbie M., President and CEO, Mill Hall Clay Products,
Inc........................................................ 37
Prepared statement of.................................... 38
May, James C., President and CEO, Air Transport Association
of America, Inc............................................ 7
Prepared statement of.................................... 8
Morrison, Katherine, Staff Attorney, U.S. Public Interest
Research Group............................................. 45
Prepared statement of.................................... 47
Schmalshof, Theresa, Corn Board Member, National Corn Growers
Association................................................ 14
Prepared statement of.................................... 17
Additional materials supplied:
American Chemistry Council, Statement submitted for the
record..................................................... 60
The 60 Plus Association, Statement submitted for the record.. 67
OVERSIGHT HEARING ON ``THE IMPACTS OF HIGH ENERGY COSTS TO THE AMERICAN
CONSUMER''
----------
Thursday, May 19, 2005
U.S. House of Representatives
Subcommittee on Energy and Mineral Resources
Committee on Resources
Washington, D.C.
----------
The Subcommittee met, pursuant to notice, at 10:05 a.m., in
Room 1324 Longworth House Office Building, Hon. Jim Gibbons
[Chairman of the Subcommittee] presiding.
Present: Representatives Grijalva, Peterson, Drake, Ortiz,
and Melancon.
Mr. Gibbons. The oversight hearing of the Subcommittee on
Energy and Mineral Resources will come to order.
The Subcommittee is meeting today to hold an oversight
hearing on ``The Impacts of High Energy Costs to the American
Consumer.'' Under Committee Rule 4(g), the Chairman and the
Ranking Minority Member may make opening statements. If any
Members have opening statements that they wish to submit, they
can be included in the hearing record under unanimous consent.
STATEMENT OF HON. JIM GIBBONS, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF NEVADA
Mr. Gibbons. This Subcommittee meets today to hear
testimony on the adverse impacts that high energy prices are
having on a broad range of Americans, including agriculture,
manufacturing, transportation, and low-income consumers. High
energy prices are an unlegislated tax on every aspect of daily
life in the United States. All American consumers are impacted
by the increased costs to produce and deliver goods and
services.
Increased energy prices make things like groceries to feed
our families, steel to build our schools and roads, and
fertilizer to grow stable crops for our food supplies much more
expensive. And when it costs more to deliver a product or a
service to the consumer, the consumer will inevitably pay the
price.
Consumer needs that previously were met by a family's
disposable income are now going unmet, in order to pay
excessive heating bills and high-priced gasoline. Seniors on a
fixed income and low-income families are particularly hard hit.
But the assault of high energy prices on the American people
does not stop with increased costs of consumption. The United
States has the unfortunate distinction of having the world's
highest natural gas prices. These excessively high prices have
persisted for a number of years, and have resulted in the
closing or severe downsizing of important segments of our
economy.
This downsizing has resulted in the loss of tens of
thousands of high-paying jobs in the industrial and commercial
sectors; particularly in the chemicals, fertilizer, steel,
glass, and paper industries. This trend must, and can, be
stopped. And this decline is totally unnecessary, given that
natural gas prices are set on a regional market basis, and the
North American region is virtually awash in natural gas
resources.
Sadly, current domestic energy policies restrict access to
geologically prospective areas and discourage investment in the
production of larger energy supplies here at home.
Consequently, jobs are being sent overseas, while our nation
retains high natural gas prices.
Similarly, high oil prices also impact every aspect of our
economy. From truckers and airline pilots getting goods to
market throughout the country, to mothers and fathers loading
up the car for a trip to grandmother's house, the rising cost
of oil has increased the economic burden on everyone.
Unlike natural gas prices, oil prices are set on a world
market basis. And to the contrary, each nation has a duty to
produce as much oil as it can in an environmentally acceptable
manner, in order to keep world prices from escalating further.
Hopefully, with significantly increased oil production by all
capable nations, we will see oil prices lowered, and the
adverse impacts to America's consumers lowered as a result.
Lowering the price of energy is one of the reasons it is so
important that we produce the vast quantities of oil contained
in the Arctic National Wildlife Refuge. The House has developed
a sound, realistic, and responsible energy policy that
encourages utilization of domestic natural resources for the
future that will ensure affordable and reliable supplies of
energy for the American consumer.
We need to get this energy bill to the President for his
signature, so we can get on the path to lowering energy costs,
increasing capital investments and jobs right here at home, and
ensuring energy and economic security for the future of all
Americans.
I welcome our witnesses here today. I look forward to their
testimony. I now would like to recognize my friend, and the
Ranking Member of the Committee, Mr. Grijalva, for any opening
remarks that he may wish to give at this time.
Mr. Grijalva.
[The prepared statement of Mr. Gibbons follows:]
Statement of The Honorable Jim Gibbons, a Representative in Congress
from the State of Nevada
The Subcommittee meets today to hear testimony on the adverse
impacts that high energy prices are having on a broad range of
Americans, including agricultural, manufacturing, transportation, and
low-income consumers. High energy prices are an unlegislated tax on
every aspect of daily life in the United States.
All American consumers are impacted by the increased costs to
produce and deliver goods and services. Increased energy prices make
things like groceries to feed our families, steel to build schools and
roads, and fertilizer to grow staple crops for our food supply more
expensive. And when it costs more to deliver a product or a service to
the consumer, the consumer will inevitably pay the price.
Consumer needs that previously were met by a family's disposable
income are now going unmet in order to pay excessive heating bills and
high-priced gasoline. Seniors on fixed incomes and low-income families
are particularly hard hit. But the assault of high energy prices on the
American people does not stop with increased costs of consumption.
The United States has the unfortunate distinction of having the
world's highest natural gas prices. These excessively high prices have
persisted for a number of years and have resulted in the closing or
severe downsizing of important segments of the economy. This downsizing
has resulted in the loss of tens of thousands of high-paying jobs in
the industrial and commercial sectors, particularly in the chemicals,
fertilizer, steel, glass and paper industries. This trend must and can
be stopped. And this decline is totally unnecessary given that natural
gas prices are set on a regional market basis, and the North American
region is virtually awash in natural gas resources.
Sadly, current domestic energy policies restrict access to
geologically prospective areas and discourage investment in the
production of larger energy supplies here at home. Consequently, jobs
are being sent overseas while our Nation retains high natural gas
prices. Similarly high oil prices also impact every aspect of our
economy. From truckers and airline pilots getting goods to markets
throughout the country to mothers and fathers loading up the car for a
trip to grandma's house, the rising cost of oil has increased the
economic burden for everyone. Unlike natural gas prices, oil prices are
set on a world market basis. To the contrary, each nation has a duty to
produce as much oil as it can in an environmentally acceptable manner
in order to keep world oil prices from escalating further.
Hopefully, with significantly increased oil production by all
capable nations, we will see oil prices lowered and the adverse impacts
to America's consumers lowered as a result. Lowering the price of
energy is one of the reasons it is so important that we produce the
vast quantities of oil contained in the Arctic National Wildlife
Refuge.
The House has developed a sound, realistic, and responsible energy
policy that encourages utilization of domestic natural resources for
the future that will ensure affordable and reliable supplies of energy
for the American consumer. We need to get this energy bill to the
President for his signature so we can get on the path to lowering
energy costs, increasing capital investment and jobs here at home, and
ensuring energy and economic security for the future.
I welcome our witnesses today and look forward to their testimony.
I now recognize our Ranking member, Mr. Grijalva, for any opening
remarks that he may wish to give at this time.
______
STATEMENT OF HON. RAUL M. GRIJALVA, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ARIZONA
Mr. Grijalva. Thank you, Mr. Chairman. And I'm pleased to
join with you today in welcoming our witnesses to discuss the
impact of high energy costs on the American consumer; something
which the American public is keenly aware of and is requiring
Congress to begin to do something about.
Clearly, Americans of all economic strata and sectors are
feeling the effects of skyrocketing gasoline prices. As
President Bush stated on Tuesday, our dependence on foreign oil
is like a foreign tax on the American dream, and that tax is
growing every year.
The President also repeated his statement that the energy
bill before Congress would have little effect on energy prices
and demand in the short term. Instead, the President outlined a
four-point energy strategy: increasing conservation through
better fuel efficiency; expanding U.S. production and refining
capacity; helping developing countries to conserve energy; and
developing new fuels as alternatives to diesel and gasoline.
Quite frankly, the President's plan bears little
resemblance to the energy bill passed by the House last month;
a bill he has nevertheless indicated he would sign if the
Senate passes the bill. We can only hope that the Senate, which
is marking up its own version in the Energy and Natural
Resources Committee this week, will produce a plan that comes
closer to meeting the definition of a ``comprehensive energy
plan,'' and does not provide costly and unnecessary subsidies
to oil and gas industries--I would suggest, a further insult to
the American taxpayer and consumer.
Americans deserve an energy plan from Congress that will
confront our problems now and not pass them on to future
generations. As the President noted, the first step toward
making America less dependent on foreign oil is to improve fuel
conservation and efficiency. That means research into new
technologies that reduce gas consumption while maintaining
performance, such as light-weight auto parts and more efficient
batteries. It also means raising fuel economy standards for
sport utility vehicles, vans, and pickup trucks.
A report released on Tuesday by U.S. Public Interest
Research Group shows that Americans will spend upwards of $5
billion extra on gasoline this year, due to poor automobile
fuel economy policies. According to the report, which we will
hear more on today from one of our witnesses, if the Bush
Administration tightened fuel economy standards four years ago,
mandating that cars and light trucks get a minimum of 40 miles
to the gallon, the U.S. would be consuming 350,000 fewer
barrels of oil per day. And that's more than half of the
current U.S. import from Iraq.
As we approach Memorial Day and summer vacations, we in
Congress should remember that the American people do not have
infinite patience. Indeed, a recent Gallup poll shows that
while President Bush claims he can do little to address gas
prices in the short run, two in three Americans say there are
reasonable steps that should be taken right now that would
significantly lower U.S. gas prices.
We need a comprehensive energy plan that actually will
reduce our dependency on non-renewable fuel and foreign sources
of energy through conservation, innovation, and efficiency.
Only in that way will Americans see lower prices at the pump
and in their home heating bills.
Those are my comments. Thank you, Mr. Chairman.
[The prepared statement of Mr. Grijalva follows:]
Statement of The Honorable Raul M. Grijalva, Ranking Democrat,
Subcommittee on Energy and Minerals
Mr. Chairman, I am pleased to join you today in welcoming our
witnesses to discuss the impacts of high energy costs on the American
Consumer.
Clearly, Americans of all economic strata and sectors are feeling
the effects of skyrocketing gasoline prices. As President Bush stated
on Tuesday, ``Our dependence on foreign oil is like a foreign tax on
the American dream, and that tax is growing every year.''
The President also repeated his statement that the energy bill
before Congress would have little effect on energy prices and demand in
the short term. Instead, the President outlined a four-point energy
strategy: increasing conservation through better fuel efficiency;
expanding U.S. production and refining capacity; helping developing
countries to conserve energy; and developing new fuels ``as
alternatives to diesel and gasoline.''
Quite frankly, the President's plan bears little resemblance to the
energy bill passed by the House last month, a bill he has nevertheless
indicated that he would sign if the Senate passes the bill.
We can only hope that the Senate, which is marking up its own
version in the Energy and Natural Resources Committee this week, will
produce a plan that comes closer to meeting the definition of a
``comprehensive energy plan'' and does not provide costly and
unnecessary subsidies to the oil and gas industry--a further insult to
the American taxpayer.
Americans deserve an energy plan from Congress that will confront
our problems now, and not pass them on to future generations. As the
President noted, ``The first step toward making America less dependent
on foreign oil is to improve fuel conservation and efficiency.'' That
means research into new technologies that reduce gas consumption while
maintaining performance, such as lightweight auto parts and more
efficient batteries. It also means raising fuel economy standards for
sport utility vehicles and vans and pickup trucks.
A report released on Tuesday by the U.S. Public Interest Research
Group shows that Americans will spend upwards of $5 billion extra on
gasoline this year due to poor automobile fuel economy policies.
According to the report, which we will hear more about from one of our
witnesses today, if the Bush Administration tightened fuel economy
standards four years ago--mandating that cars and light trucks get 40
miles to the gallon, the U.S. would be consuming 350,000 fewer barrels
of oil per day. That's more than half of current U.S. imports from
Iraq.
As we approach Memorial Day and summer vacations, we in Congress
should remember that the American people do not have infinite patience.
Indeed, a recent Gallup poll shows that while President Bush claims
``he can do little to address gas prices in the short run,'' two in
three Americans say there are reasonable steps that he should take
right now that would significantly lower U.S. gas prices.
We need a comprehensive energy plan that actually will reduce our
dependence on nonrenewable fuels and foreign sources of energy through
conservation, innovation and efficiency. Only in that way will
Americans see lower prices at the pump and on their home heating
meters.
______
Mr. Gibbons. Thank you very much, Mr. Grijalva.
And now, I'd like to introduce our first panel. And may I
say that, as a former airline pilot, it's my pleasure to
welcome Mr. James C. May here, President and CEO of the Air
Transport Association of America. Mr. Paul--is it Cicio
[pronounced SEEK-io]?
Mr. Cicio. Cicio [pronounced SIS-io].
Mr. Gibbons. Cicio [pronounced SIS-io]. My apology. And Mr.
Cicio is the Executive Director, Industrial Energy Consumers of
America; and Theresa Schmalshof, NCGA Corn Board Member; and
Robert Bessette, President, Council of Industrial Boiler Owners
of America.
We have a requirement here in the Committee of standing and
taking the oath for the testimony. So if you would, all stand
and raise your right hand and repeat after me.
[Witnesses sworn.]
Mr. Gibbons. Let the record reflect that each of the
witnesses answered in the affirmative.
And before we turn to the testimony of each of the
witnesses before us, I notice we have additional members here.
Any opening statements, Mr. Peterson or Mrs. Drake?
[The prepared statement of Mrs. Drake follows:]
Statement of The Honorable Thelma Drake, a Representative in Congress
from the State of Virginia
Mr. Chairman, I would like to thank you for holding this oversight
hearing. As was presented during the debate of the House comprehensive
energy policy, our nation's economic and national security is at stake.
The United States' continued dependence on foreign sources of oil will
further strain our economy. In addition, we are jeopardizing our
nation's security by depending on and doing business with nations that
are ruled by dictators and support terrorist actions. American
consumers are being hit hard at the pump, but these high energy prices
are affecting our nation much deeper than that. Increased energy prices
are making it more expensive to run our nation's military and straining
the tourism industry, two very important sectors in the Second District
of Virginia.
The Second District is home to 8 military installations and
includes the U.S. Navy's Atlantic Fleet, the U.S. Fleet Forces Command,
the U.S. Joint Forces Command, the Air Combat Command of the U.S. Air
Force, the Training and Doctrine Command of the U.S. Army, and NATO's
Allied Command for Transformation. High energy costs are affecting the
way the military conducts its missions and places our nation in grave
danger.
The Navy Region Mid-Atlantic, headquartered at Naval Station
Norfolk, Virginia, spends approximately 29% of the total Base Operating
Support Budget on energy and utility costs which include the use of
electricity, sewage, water, natural gas, and steam. These costs
represent the single largest line item in the Navy's operating budget
in Norfolk. Because these costs cannot be neglected, rising energy
prices have a direct impact on the quality of life for our military
personnel, civilian employees and dependents. While the Department of
Defense and the U.S. Navy are constantly pursing efforts to conserve
energy and become more fuel efficient, it is a matter of fact that
every dollar spent on energy, especially those not previously budgeted
for based on the recent unexpectedly high fuel costs, takes a dollar
away from critical training and operational budgets as well as the
funds available to promote valuable quality of life programs and
critical infrastructure recapitalization. During this time of war, we
cannot afford to minimize our training capabilities and our military
readiness.
I am equally concerned about the effects of high energy costs on
tourism. The Commonwealth of Virginia depends on tourism dollars. In
2003, the tourism industry was the fifth largest private sector
employer in Virginia and contributed over $2 billion in state and local
revenues. The Hampton Roads area and Eastern Shore of Virginia, which I
represent, are popular destinations for out-of-towners because of the
beaches, museums, historical landmarks, amusement parks, bird-watching
and wilderness areas. In fact, more than 2.7 million people traveled to
Virginia Beach, the largest city in my District, in 2003. During their
stay, these visitors stay in local hotels, eat in family-owned
restaurants, attend regional festivals, buy souvenirs, charter fishing
tours and rent watercraft and bicycles from our small business owners.
The Second District has a lot to gain from a vibrant tourism industry.
Since the average distance traveled by tourists of Virginia Beach
is 400 miles, I don't anticipate the cost of gasoline to dramatically
decrease the number of visitors to our area this year. However, the
price of high energy costs will likely change the pattern of these
tourists. A recent poll conducted by the Travel Industry Association of
America indicated that one-third of Americans expect travel costs to be
higher than last summer and two in five of those individuals who have
planned a summer vacation say that high energy costs will affect their
spending behavior. Many of these people will plan shorter trips, travel
shorter distances, eat out and shop less, and visit fewer attractions.
Our local economy depends on fully occupied hotels and restaurants, in
addition to tourists who are willing to spend extra money on activities
and attractions. If visitors to my District curb their spending and
elect to see fewer attractions and participate in fewer activities, not
only will they miss out on some of the treasures of the Hampton Roads
region and the Eastern Shore, but the locals will miss out on their
business.
Mr. Chairman, our nation's high energy costs are surely putting a
burden on Americans filling up their car at the gas pump. However,
important sectors like the U.S. military and the tourism industry are
feeling the pressure of these fuel costs as well. Thousands of jobs are
tied to these sectors, not to mention the defense of this nation. Mr.
Chairman, this nation can no longer afford inaction--we are in grave
need for a comprehensive energy policy. I have highlighted how rising
energy costs affect just two of the important industries in the Second
District. I thank you for your continued advocacy for an energy policy
and I look forward to hearing the testimony on how high energy costs
are affecting agriculture, manufacturing, and transportation.
______
Mr. Peterson. Nobody came here to hear me. I have come to
hear the panelists.
Mr. Gibbons. All right. Let's turn now to those individuals
sitting before us. Again, welcome. We will start on your right,
our left. Mr. May, welcome. The floor is yours. We look forward
to your testimony.
Mr. May. Thank you, Mr. Chairman.
Mr. Gibbons. And Mr. May, may I make an educational
statement. We have a little light here that is in front of you.
It is in this little box, and it is just a five-minute timer
light. We try to have you speak for five minutes. If your
testimony is going to be much longer than that, please try to
summarize that.
We will, for the record, have your complete written
testimony entered into the record. And this will allow us to
get to both panels today and get questions from the members of
the Committee, if we can stay within a reasonable timeframe. So
Mr. May, I again apologize. The floor is yours. Welcome to the
Committee.
STATEMENT OF JAMES C. MAY, PRESIDENT AND CEO,
AIR TRANSPORT ASSOCIATION OF AMERICA, INC.
Mr. May. Thank you, Mr. Chairman, and I will be brief. You
have my written statement, and I will ask that that be
submitted for purposes of the record.
By way of background, the airline industry began to
experience a significant downturn in the economy around the
year 2000. We were then hit with the tragedy of 9/11. We had
what we have called the perfect storm, which was the Iraq war,
and SARS, and then the beginning of the peak of--or the spiking
of oil prices, that hit almost simultaneously.
The net result is that this industry has been staggered by
all of these unnatural kinds of occurrences, to the point where
we have lost some $32 billion over the past four years--that's
32 ``B''-with-a-``boy''-billion dollars, over the past four
years.
If we are unfortunate enough to maintain our record of last
year--we've already reported $3.1 billion in losses for the
first quarter of this year. We are losing money at a sustained
rate of around $17,000 a minute. And that's for 24-7; and
obviously, we don't have all of our carriers running 24-7. So
the impact of oil is having an extraordinary effect on our
overall business plan.
I would point out to you that in the year 2000, our
industry paid roughly $14.8 billion for jet fuel. In 2005, we
project paying $28 billion for fuel. That's a 91 percent
increase. For every penny increase in the price of a gallon of
jet fuel, we have to pay an additional $186 million.
And I think the most direct impact of those high prices of
energy for us is on our employees. A $1 increase in the price
of oil puts another 5,500 airline jobs at risk. And I am in a
business where we have been aggressively cost cutting for the
past number of years. We have eliminated over 137,000 jobs in
just the past four years in this business. That's one in every
six employees.
Now, we also are doing almost everything we can to counter
the impact of high prices of oil. We are replacing less
efficient planes. Not far from your district, Mr. Chairman,
we've got probably 500 less fuel-efficient planes that have
been laid down out in the desert. We're using single-engine
taxi, as opposed to dual-engine taxi. We're cruising at lower
speeds.
We're doing everything we can to reduce onboard weight.
Removing meal service was a function of cost, but it was also a
function of weight. And you'll notice that even if you're
sitting in the front of the bus these days, it's rare that you
see real silverware. You'll see plastic silverware, because
that is a weight reduction for that aircraft and makes a big
difference when fuel is trading at 47 to 52 dollars a barrel
right now.
We are working hard to press for the modernization of the
FAA air traffic control system, because the more we can do to
make more efficient routings, the less money it's going to cost
us. We want to shorten our taxi times; reduce ground delays.
We are, as I have indicated, eliminating a lot of
employees. We've put plans down in the desert. We've cut some
$10 billion in capital expenditures over the last four years,
and we're literally trying to economize in every area we can.
But all of the impact of fuel on all of those changes has
led Gary Chase, who is with Lehman Brothers and probably one of
the top airline analysts in the country, to say, and I quote
him, ``Unfortunately, high fuel prices are consuming what would
otherwise be an up cycle for the industry.'' And I think that
is very much the case.
Let me close with a couple of thoughts. Number one, I think
it's important that we have this committee encourage their
colleagues to do as much as we can on production. Obviously,
it's going to be critical.
Two, I think we need to do what we can in increasing
refining capacity.
Three, we have to do a better job working with the FAA, to
make sure that we streamline the air traffic control system.
And four, quite frankly, I would hope you would take a very
hard look, even though it may not be in your direct
jurisdiction, at the impact that speculators are having on the
price of oil. My economists tell me it could be anywhere from
five to eight dollars a barrel impact, and I think that is
driving those prices up to an unconscionable degree.
Thank you for the opportunity to appear. I'll be happy to
answer questions.
[The prepared statement of Mr. May follows:]
Statement of James C. May, President and CEO,
Air Transport Association of America, Inc.
Thank you, Mr. Chairman for inviting me to talk about the
incredibly harmful effect of high oil prices on U.S. air carriers and
their employees. Clearly, air carriers are among the sectors of the
economy most affected by the soaring price of oil and while our members
and the manufactures of their aircraft have made remarkable gains in
energy efficiency it has proven impossible for technology to outpace
the growth in the price of a barrel of oil. And unlike many industries,
we have no alternative fuel source.
The Air Transport Association is the trade association for the
leading U.S. airlines. ATA members transport more than 90 percent of
all passengers and cargo traffic in the United States.
Anyone who follows the news these days knows that all U.S. airlines
are facing an extremely challenging commercial and policy environment,
with few signs of material improvement anytime soon. Over the last four
years, the industry--in total--has recorded over $32 billion in losses
(including federal reimbursements for the shutdown and a portion of our
security costs). We are projecting additional losses of at least $5
billion in 2005.
These losses have led us to borrow huge sums to survive, with few
assets left to pledge as collateral. For the nine largest airlines,
including Southwest Airlines, net debt stood at $81.3 billion at the
end of 2004, resulting in a staggering net debt to capital ratio of
110.1%. Compare this to $64.2 billion and 71.7% at the end of 2000.
Eleven of the 12 passenger airlines rated by Standard & Poor's are
considered ``speculative'' investments, also known as ``junk bond''
quality. Only Southwest Airlines is considered investment grade.
Meanwhile, fares are running at late 1980s levels--a fourth of all
domestic passengers now pay $200 or less including taxes for a
roundtrip ticket; two-thirds pay $300 or less. Airline passenger
revenue has plummeted from its historical average of 0.95% to 0.70% of
U.S. GDP--a gap of $29.3 billion based on today's $11.7 trillion
economy.
It couldn't get any worse, could it? Yet it has. In January 2001,
the price of jet fuel on the spot markets averaged 85.8 cents per
gallon. For the first 2 weeks of May, we faced an average of $1.60--an
87 percent increase. In 2004, the industry paid $21.4 billion for jet
fuel. That tab would have been $5.5 billion lower at 2003 jet fuel
prices and a whopping $8.0 billion lower at 2002 jet fuel prices. It is
not unreasonable to argue that without the doubling of oil prices over
the past three years the industry would not be in the economic crisis
we find ourselves. But the future doesn't look any brighter. Our
forecast shows that we will pay $6.8 billion more for fuel in 2005 than
in 2004. If these projections prove accurate the industry will have
faced a 91 percent increase in its fuel costs from 2001 ($14.8 billion)
to 2005 ($28.2 billion). When you understand that the industry has been
hit with more than $28 billion in additional fuel costs and $15 billion
in taxes, fees and unfunded mandates for security since 9/11, and
compare those uncontrollable costs to the $32 billion the industry has
lost over that period, it easy to see where the problems lie.
Earlier this week, the 12-month forward curve of future prices
averaged $51 a barrel. The corresponding price of Gulf Coast jet fuel--
a conservative benchmark ``showed $1.55 per gallon. Now keep in mind
that this industry consumed 18.6 billions gallons of jet fuel last
year. That means that every penny increase in the price of a gallon
increases our annual operating expenses by $186 million. Viewed from an
employee perspective, every $1 increase in the price of a barrel of
crude puts another 5,500 airline jobs at risk. Indeed, the airlines
have shed 137,000 jobs from the payrolls since August 2001. That's a
loss of 1 out of 6 employees and more cuts are on the way.
When people say to me, ``But every time I fly the plane is full.''
I respond, ``They're full, alright. Full of cheap fares and expensive
fuel.'' At today's fares and jet fuel prices, the average breakeven
load factor for the industry--including all the low-cost carriers, is
estimated at 80%. Compare that to 65% in the mid-90s. That means that
every single flight on average must be at least 80% full of paying
passengers to avoid losing money--not to make a fortune!
So how are we coping? First, we are obviously taking all possible
steps to reduce or mitigate fuel consumption. From 2001 to 2004 alone,
thanks to newer fleets, single-engine taxi, lower cruise speeds,
onboard weight reduction, access to more ATC lanes in the sky, and a
host of other measures, our fuel efficiency jumped 18% to 45 passenger
miles per gallon.
Meanwhile, we are using our human capital more effectively. Airline
productivity has risen 17% since 2000, up to 2.2 million available seat
miles per full-time employee. And we are parking airplanes. The ``Big
6'' passenger airlines have reduced their operating fleets by 502
airplanes from December 2000 to December 2004.
For this same group capital expenditures fell from $13.1 billion in
2000 to $3.1 billion in 2004 (up slightly from $2.7 billion in 2003),
while unit operating costs excluding fuel fell 6.2% from 10.36 cents
per available seat mile (ASM) in 2002 to 9.72 cents per ASM in 2004.
I think that's pretty impressive. But you don't have to believe me.
As Gary Chase of Lehman Brothers observed on March 15:
``The airline industry has moved aggressively to reduce costs
in the face of unprecedented challenges.... On a non-fuel
basis, operating profitability...is as good as it was in the
late 1990s. While these facts are exciting...they may also be
totally moot if oil prices do not return to [historical
norms].... [W]e see a materially greater chance for oil prices
above $50 than below $40 over the next several years.
Unfortunately, high fuel prices are consuming what would
otherwise be an upcycle for the industry.''
I'm often asked, ``Why don't your members just raise fares and pass
through high oil prices?'' Well, it's this simple--if we could we
would. To cover the costs of fuel increases from 2003 to 2004 passenger
would have to pay, on average, an additional $21 per ticket. Yet prices
during this period continued to fall because of the intensely
competitive nature of the industry. Indeed, only recently have carriers
had even modest successes in raising fares in certain markets, but this
is hardly enough to cover the cost of crude oil rising from $26 a
barrel in 2002 to over $50 in 2005. And as Standard & Poor's Phil
Baggaley testified before the House Aviation Subcommittee this past
June:
``Fuel represents a roughly comparable proportion of expenses
for railroads and many trucking companies...but they have not
been hurt by higher fuel prices to nearly the same degree....
Part of the difference is due to more active hedging programs
by these freight transportation companies, but most is due to
the fact that many of their contracts with corporate customers
allow them to pass through higher fuel costs in the form of
surcharges. Airlines have tried repeatedly to raise fares in
response to high fuel costs, but with little success. [T]he
problem comes back to a lack of pricing power in a very
competitive market.''
The unfortunate truth for most airlines today is that the economic
principles of supply and demand still apply. If we could raise prices
to cover the soaring cost of jet fuel or the many new taxes and fees
that have been placed on the industry in recent years we would. But
what many of our customers discovered in the post-9/11 world is that
they don't have to fly. Business travelers chose teleconferences or e-
mail instead of a face-to-face meeting if they aren't able to find a
rock-bottom fare. Families will vacation near home as opposed to flying
to Florida's beaches, Colorado's ski slopes or grandma's house. For
short-haul flights the addition of the TSA ``hassle factor'' has made
taking the car a more viable option. It's important to remember,
airlines don't just compete against each other. They compete against
movie theaters, e-mail, video conferencing, automobiles, trains,
corporate jets and even the local amusement park--anything that can
substitute for a vacation or a face-to-face sales call.
So where does that leave U.S. air carriers? Frankly, we will remain
at the mercy of OPEC and the federal government. If oil stays high and
our taxes with it I expect more jobs lost, more flights cut and more
airlines in crisis. And in the international arena, our global
competitiveness will continue to suffer because our airlines are paying
disproportionately more than their foreign flag competitors due to the
relative weakness of the dollar. My CEO's will continue to find ways to
wring costs from those areas they can, and that includes further fuel
conservation. But you can only be so efficient. As I said when I
started, my industry is one of the most severely hurt by the soaring
price of oil. And airplanes will be burning refined oil long after
other modes of transportation have moved beyond it. Not because we want
to but because the principles of aircraft design rule out our
alternatives.
So, will oil stay above $50? For business planning purposes it is
prudent to assume that it will. There appear to be no short term
solutions. This is a problem of our own creation that's been some time
in the making.
My solution to the problem is to do more--more of everything. And
by more I mean more conservation and more production, including here at
home. I am proud of the efficiency gains that the aviation sector has
made over the past 30 years. If other industries throughout the world
had kept pace we would not face nearly the crisis we face today. Yet
conservation and efficiency are only half the equation. We must find
and produce more oil in the U.S. and overseas. The rapid economic
expansion in countries like China and India will demand more and more
oil and keep pushing prices higher. The ``more of everything'' approach
can work there, too. The United States should encourage those nations
to find and produce more of their own energy as well as help them use
it more efficiently by providing them with technologies to reduce
waste.
More of everything also means that as a nation we must be willing
to produce more of our own energy and be willing to refine it here,
too. I know that this issue is outside of this Committee's
jurisdiction, but our nation's stagnant refining capacity is creating a
bottleneck in the distribution chain that further increases prices.
More and more jet fuel, gasoline and other refined products are being
imported because of limited production capacity in the U.S. and this is
further exacerbating the price run up. Steps must be taken to expand
refining capacity so we do not become as dependent on foreign refined
oil as we are foreign crude oil.
Also, I encourage Congress and the Administration to ensure that
forces are not working within western energy markets to unnaturally
inflate prices. There are simply too many unnatural influences in
global oil markets to allow market speculators to contribute to the
problem. I encourage Congress and the appropriate federal regulatory
bodies to exercise their oversight responsibilities to ensure that
markets are driven by consumers demand and not speculation. The other
day Representatives Walden and Rothman called on the Government
Accountability Office (GAO) to examine the CFTC's oversight of domestic
petroleum trading. I would echo this call.
Some have attacked the airline industry for not being fast enough
to adapt to market changes. I strongly disagree with this view and
point the past three years of aggressive cost saving moves taken by all
airlines to stay competitive. I also point to the past 30 years of
aggressive efforts by the industry to save fuel and improve efficiency.
We have been and will continue to be leaders in each of these areas.
To conclude, in order for my ``more of everything'' approach to
have prevented the crisis that the airlines and their employees now
face I would have had to have made this appeal to the 89th or 99th
Congress, not the 109th. Since I can't roll back the clock I challenge
the world to follow the example of my industry in improving fuel
efficiency and I challenge this Congress to avoid the mistakes of the
past and recognize that more efficiency must be matched with more
production. Let's do more.
Thank you.
______
Mr. Gibbons. Thank you very much, Mr. May. It's stunning to
hear those sort of figures that you have just testified to
before us.
We turn now to Mr. Cicio. Again, Mr. Cicio, welcome. The
floor is yours. We look forward to your testimony.
STATEMENT OF PAUL N. CICIO, EXECUTIVE DIRECTOR,
INDUSTRIAL ENERGY CONSUMERS OF AMERICA
Mr. Cicio. Thank you, Mr. Chairman and committee members.
Thank you for the opportunity to provide comment on this very
timely subject.
Globally competitive natural gas prices are essential for
the manufacturing sector and jobs. We have a serious natural
gas crisis, and we urge the Congress to pass comprehensive
energy legislation this year. We especially request that
Congress and the Administration take action to increase
supplies of natural gas by removing areas from moratoria, to
allow for greater access to an abundant supply of domestic
natural gas.
Eighty-five percent of the Lower 48 states' offshore
acreage has been placed under congressional and executive
moratoria. We have the most restrictive offshore policies in
the world and the most stringent environmental regulations to
ensure that production of natural gas can occur without
environmental concern.
Mr. Chairman, this June will be the five-year anniversary
of the beginning of the natural gas crisis. It was in June of
2000 that natural gas prices averaged about $4 per million Btu,
a price level that immediately began to impact the
competitiveness of U.S. manufacturing. One by one,
manufacturing plants were permanently shut down; were idled.
Production was shifted overseas, and resulted in the loss of
three million relatively high-paying jobs.
Unfortunately, this is not--this is not the end of the
story. Even though 274,000 new jobs were created across the
economy last month, manufacturing lost 6,000 new jobs. Factory
jobs have fallen in nine of the past 11 months, and in the last
quarter output grew at its slowest pace in nearly two years.
The U.S. natural gas price is the highest and the most
volatile in the world. The natural gas crisis has cost
consumers nearly $200 billion more for their natural gas. In
November 2004, prices reached levels of just under $10 per
million Btu.
U.S. production has--fell by 4.9 percent from the year 2001
to 2004. This is despite record well completions by the
exploration and production industry. U.S. first-quarter
production fell by 1.3 percent from a year ago. And Canadian--
and the Canadian national energy board reports they will be
hard-pressed to maintain its current level of exports to the
United States.
Electricity prices rose 5.2 percent between April 2004 and
April 2005. And it is likely to increase further, primarily as
a result of higher natural gas prices. This year's increase of
5.2 percent is one of the highest recorded for the U.S.
We have--if we have a hot summer, we can expect natural gas
fired peaking capacity to turn on, consuming significant
amounts of natural gas that is needed to balance supply and
demand and all other end uses, including next winter's heating
supply.
The point is, the U.S. has a serious, serious natural gas
crisis that has the potential to get much worse before it gets
better. Our members are not confident that the U.S. is taking
actions necessary to create needed domestic supply. In our
view, sound energy policy is not praying for a cool summer and
a warm winter.
The United States has the most restrictive offshore
policies in the world. Starting 23 years ago, when natural gas
was plentiful and low cost, Congress and most of our Presidents
proceeded to place various areas of the country, both onshore
and offshore, in moratoria.
The offshore areas encompass a large part of the Gulf of
Mexico, and essentially all of the Atlantic and Pacific Oceans.
These areas have enormous amounts of natural gas, and could
easily supply our increasing demand through most of this
century. But given our supply crisis, we no longer have the
luxury of keeping all of these areas in moratoria. Improvements
in regulation and technology have negated the original
environmental basis for initiating this moratoria.
Mr. Chairman, thank you so much for the opportunity to be
here, and I look forward to the questions and answers. Thank
you.
[The prepared statement of Mr. Cicio follows:]
Statement of Paul N. Cicio, on behalf of
Industrial Energy Consumers of America
Chairman Gibbons and Ranking Member Grijalva, thank you for the
opportunity to provide comment on this very timely issue of the impact
of high energy costs to consumers.
The Industrial Energy Consumers of America (IECA) is a 501 (C) (6)
nonprofit organization created to promote the interests of
manufacturing companies for which the availability, use and cost of
energy, power or feedstock play a significant role in their ability to
compete in domestic and world markets.
We urge the Congress to pass comprehensive energy legislation this
year. We especially request that Congress and the Administration take
action to increase supplies of natural gas this decade by removing
areas from moratoria to allow for greater access to an abundant supply
of domestic natural gas.
Eighty five percent of the lower 48 states offshore acreage has
been place under congressional and executive moratoria. We have the
most restrictive offshore policies in the world and the most stringent
environmental regulations to ensure that production of natural gas can
occur without environmental concern.
This June will be the five year anniversary of the beginning of the
natural gas crisis. It was in June of 2000 that natural gas prices
averaged above $4.00 per million Btu, a price level that immediately
began to impact the competitiveness of U.S. manufacturing. One by one
manufacturing plants were permanently shut down or idled, production
was shifted overseas and resulted in a loss of 3.0 million relatively
high paying jobs. Today, with a brisk economic recovery manufacturing
is still down 2.5 million jobs.
Natural gas prices continue to remain very high. Prices on the New
York Mercantile Exchange (NYMEX) for the natural gas futures contract
is currently at the $6.00 per million Btu level. In November, 2004
prices reached levels of just under $10.00 per million Btu.
Had it not been for industrial ``demand destruction'' as a result
of high natural gas prices, and the resulting decline in consumption by
the manufacturing sector, together with a cool summer and a mild
winter, we would potentially be facing rationing of natural gas.
It is important to elaborate on that point. Since the natural gas
crisis began in 2000, industrial natural gas demand, according to the
Energy Information Administration, fell by 9 percent because of high
natural gas prices, freeing up about .8 TCF of natural gas. This
``demand destruction'' increased the availability of natural gas for
all other consumers by 3.5 percent of total U.S. consumption.
At the same time, U.S. production fell by 4.92 percent from year
2001 to 2004 or .97 TCF. This is despite record well completions by the
exploration and production industry.
EIA's 2005 Annual Energy Outlook shows U.S. demand for natural gas
of 25.4 TCF in 2010. This is an increase of 3.3 TCF over 2004 levels.
Supply of this increment is dependent on increased domestic production
(+1.5 TCF) and a quadrupling of LNG imports (+1.87 TCF) and imports
from Canada decline. Our members are not confident that the U.S. is
taking the actions necessary to create this supply and anticipate that
continued industrial demand destruction will result. Industrial natural
gas usage in 2004 was just over 7 TCF so a shortfall of this scale will
be very significant and manufacturers will not be able to wait another
5 years for supplies to catch up.
The point is the U.S. has a serious natural gas crisis that has the
potential to get much worse before it gets better. And, sound energy
policy is not ``praying for a cool summer and a warm winter.'' In the
mean time, we will continue to witness the ``dismantling of U.S.
manufacturing'' that built facilities based on globally competitive
natural gas prices for fuel and feedstock.
Five Years After the Natural Gas Crisis Started
The wholesale price of natural gas that manufacturers pay
has increased from $2.11 per million Btu in 1998 to $6.05 per million
Btu in year 2004, a nearly 300 percent increase.
The U.S. is the only country in the world that does not
fully utilize its natural resources. A significant amount of natural
gas resources remain in moratoria and cannot be touched. Meanwhile,
countries like the UK, Norway and Australia continue to expand offshore
drilling.
The NYMEX natural gas futures contract has the
distinction as the most volatile commodity in the world.
The U.S. has the highest sustained price of any
industrialized country in the world.
The natural gas crisis has cost consumers nearly $200
billion. The amount does not include the cost of lost jobs or the
increased cost of electricity.
As U.S. manufacturing shut down facilities, imports of
energy intensive products that had been produced here have increased
exponentially, increasing the trade deficit.
The ``supply gap,'' the amount of natural gas that the
United States depends upon from Canada and LNG imports has increased 42
% from 2.6 TCF in 2001 to 3.7 TCF in 2004, a increase of 1.1 TCF. This
is significant given total U.S. demand in 2004 was 22.2 TCF. Canadian
exports to the U.S. have decreased and LNG has shown only modest
increases.
As a result, manufacturing is not spending their ``growth
capital'' in the U.S. in large part because of the high and volatile
price of natural gas and energy in general relative to other places in
the world.
The U.S. has the most restrictive offshore policies in the world
Every major country that has natural gas reserves is increasing its
production. While countries like the United Kingdom, Norway and
Australia are actively increasing their offshore production, the United
States has the most restrictive offshore policies in the world. The
U.S. Department of the Interior reports approximately 85 percent of the
lower 48 state offshore acreage has been placed under congressional and
executive moratoria.
Starting in 1982, 23 years ago, when natural gas was plentiful and
low cost, Congress and most of our Presidents proceeded to place
various areas of the country both on-shore and off-shore in moratoria.
The offshore areas encompass a large part of the Gulf of Mexico and
essentially all of the Atlantic and Pacific Oceans. These areas have
enormous amounts of natural gas that could easily supply our increasing
demand for this environmentally friendly clean fuel source through most
of this century. But given our supply crisis, we no longer have the
luxury of keeping ``all'' of these areas in moratoria. Improvements in
technology have negated the original environmental basis for initiating
the moratoria.
Producing more natural gas helps the environment
It is difficult to continue to make environmental progress without
greater amounts of natural gas until newer commercially available
alternatives are created. Technologies like that are decades away.
Natural gas is our cleanest burning and less polluting fuel. The only
commercial energy sources that are cleaner are renewable energy which
cannot be produced in significant quantities and is not reliable or
cost competitive and nuclear energy which has its own set of issues.
For that reason, increasing natural gas supply is imperative for
environmental improvement.
For example, natural gas is being used in homes and buildings to
replace using heating oil. It is used to displace coal in electricity
generation. It is used to make hydrogen that is then used as a fuel
and/or used to produce low-sulfur gasoline for cars and trucks. Low
sulfur gasoline cleans the air. In each case, natural gas replaces a
fuel with higher emissions.
While both are needed, domestic supply is preferred over imported LNG
In the next five years, which will be critical to many
manufacturers, significant expansion of both domestic production and
imported LNG is essential. As consumers, we welcome all supply
alternatives but increasing our dependence on imported LNG has major
disadvantages.
Almost all LNG supply will come from the same countries that we are
dependent upon for crude oil. These are the same countries that formed
the OPEC oil cartel that is controlling the supply of oil to the world
and thus the price. A news story dated April 27, 2005 reports that
these same countries are meeting to form a LNG cartel. Beyond the
immediate crisis, we need to determine our domestic production
capabilities and then balance our needs with imported LNG.
Producing offshore natural gas has a tremendous environmental record
Producing offshore natural gas has a tremendous environmental
record. There are over 4000 offshore production platforms. Annually
this production equals approximately 4.7 trillion cubic feet per year
or about 23 percent of U.S. domestic consumption. As a result of a well
blow-out 36 years ago, the environmental regulations they operate under
are the most stringent in the world. And, as a testament to regulation
and improved technology, there was no environmental damage this past
summer when two hurricanes hit the Gulf of Mexico production platforms
with full force.
A government report dated April 19, 2005 by the Mineral Management
Service (MMS) of the U.S. Department of Interior ``estimates that from
1985--2001, offshore facilities and pipelines accounted for two percent
of the volume of oil released into U.S. waters. Furthermore, according
to the MMS, ninety-seven percent of offshore spills are one barrel or
less in volume. A much larger amount of oil enters American waters
through either land-based human activity or natural seepage emanating
from the seafloor.'' In conclusion, producing offshore natural gas can
and has been done with environmental safeguards.
Thank you.
______
Mr. Gibbons. Mr. Cicio, thank you very much for your
enlightening testimony. It helps us to better understand what
the real problems are in your part of the world. And certainly,
we appreciate the fact that you've testified the way you have.
Ms. Schmalshof, welcome. The floor is yours. We look
forward to your testimony.
STATEMENT OF THERESA SCHMALSHOF,
NCGA CORN BOARD MEMBER
Ms. Schmalshof. Thank you. Good morning, Chairman Gibbons
and members of the Subcommittee. Thank you for the opportunity
to testify on the impact of high natural gas on farmers.
My name is Theresa Schmalshof, and I am a member of the
National Corn Growers Association's Corn Board. I am from
Adair, Illinois, where my husband Gary and I and our two sons
grow corn and soybeans.
NCGA was founded in 1957, and represents more than 33,000
dues-paying members from 48 states. NCGA also represents the
interests of more than 300,000 farmers who contribute to corn
checkoff programs in 19 states. NCGA's mission is to create and
increase opportunities for corn growers, and to enhance corn's
profitability and use.
My purpose today is to provide insight to the Subcommittee
on how high natural gas prices affect the cost of producing
important fertilizers that farmers rely on for their crops.
Growers rely on affordable natural gas as feedstock for
fertilizer; but also, energy for irrigation, powering farm
equipment, and drying grain and producing ethanol.
Whether used directly as a feedstock or for heat and power
generation, reasonably priced natural gas is essential to
grower profitability. Increased natural gas prices are having
an adverse effect on farmers.
Today's high natural gas prices translate into a huge 40 to
50 dollar cost increase per acre for a typical farmer.
According to the recent--to a recent University of Illinois
study, across the State of Illinois, the total costs per acre
to produce corn in 2004 increased 6 to 9 percent, due to
increased prices for fertilizer, seed, and fuel. And there is
no relief in sight.
Fertilizers account for more than 40 percent of the total
energy input per acre of corn harvested. Most of that energy is
consumed in the production of nitrogen fertilizer. Retail
prices for fertilizer--the prices paid by the farmers--rise
sharply when natural gas prices increase. According to the U.S.
Department of Agriculture, farm gate prices for fertilizer have
jumped to near record high levels. The largest cost component
of making all basic fertilizer products is natural gas,
according for more--accounting for more than 90 percent of the
cash cost of production.
Nitrogen fertilizer is a key input for the bountiful crops
achieved by the U.S. corn farmers. Rising natural gas prices in
the U.S. have caused domestic nitrogen fertilizer producers to
severely curtail production, as Mr. Cicio mentioned.
Of the 16 and a half million tons of nitrogen capacity that
existed in the U.S. prior to 2000, almost 20 percent has been
closed permanently. Another 25 percent is at risk of closing
within the next two years. Farmers face higher nitrogen
fertilizer prices and the prospect that there might be
inadequate supply of nitrogen fertilizer to satisfy the
farmers' demands at any price.
Nitrogen fertilizer producers have no way of curtailing or
reducing their demand for natural gas, other than shutting down
the production process itself. This not only destroys their
businesses, but it drives up fertilizer prices to the American
farmer and food prices to the American consumer.
Natural gas accounts for 70 to 90 percent of the cost of
producing anhydrous ammonia, a key source of nitrogen
fertilizer. In the Midwest, at the beginning of 2000, anhydrous
ammonia was selling at 160 to 170 dollars per ton. By the end
of that year, the price had climbed to $210 per ton. Last year,
anhydrous ammonia was selling at $360 per ton. And this year,
we paid over $400 per ton. Unfortunately, these high and
volatile prices are expected to continue into the foreseeable
future.
High natural gas prices will also negatively impact this
country's growing ethanol industry. The second biggest cost in
ethanol production is the cost of energy; generally, natural
gas. Energy costs typically make up about 15 percent of a dry
mill plant's total costs. The corn industry becomes more energy
efficient every year, but we still must have adequate,
reliable, and affordable natural gas to fuel the industry.
Government policy is creating a supply squeeze for natural
gas. On one hand, electric utilities and other industries are
moving away from using our plentiful supplies of coal and
toward use of natural gas. Natural gas has been the fuel of
choice for more than 90 percent of the new electric generation
to come on line in the last decade. In addition, as that
happens, our access to natural gas is limited, due to the
environmental policy. Clearly, we can't have it both ways.
Our ability to be efficient and environmentally friendly
corn producers will face huge obstacles if our nation cannot
come to grips with its desire to have limitless resources like
natural gas for production, and not realize that these
resources have to come from somewhere. I am sure that the
members of the Subcommittee, as individuals, know this well;
however, Congress seems unaware of this fact. We can produce
corn, but we need you to produce the kind of policy that
enables us to use the needed resources to do the job.
Our nation's current natural gas crisis has two solutions:
increase supply, and reduce demand. The 109th Congress is
facing a daunting task of finding ways to balance our nation's
dwindling supply and rising demand for natural gas. Additional
supply is available from three primary sources: onshore and
offshore production; liquefied natural gas. While there is
considerable activity underway in each of these areas, Congress
can do more to facilitate the timely development of these
critical supply sources.
Congress must also adopt measures to ensure the new coal
facilities are constructed. Congress should provide Federal
loan guarantees and other incentives for the retrofitting of
existing natural gas-fired facilities with the new integrated
gasification combined-cycle technologies.
It is vitally important that these forms of power
generation be developed and deployed. Without them, the demand
for gas-fired power plants will continue to grow and place an
ever increasing burden on the nation's supply base. Support
through long-term extension of tax credits and other incentives
for other emerging technologies, including wind and biomass, is
also an important element to diversify our nation's energy
resource portfolio.
Converting agricultural and industrial plants to
environmentally friendly coal gasification technology can
significantly reduce demand for natural gas. This is of
particular interest for coal-rich states like Illinois.
The conversion of an East Dubuque, Illinois, fertilizer
plant, substituting coal gasification technology for natural
gas, will displace 11.6 billion cubic feet of natural gas for
residential use each year; enough to supply over 157,000 homes.
This project also will produce 1,800 barrels per day of ultra
clean, low-sulfur diesel fuel that will help reduce vehicle
emissions and improve Illinois' air quality.
By reducing [sic] coal gasification technology, fertilizer
costs will be reduced and, at the same time, more natural gas
will be available to the electric generation industry. Without
enactment of the incentives package to jumpstart the deployment
of coal gasification technologies, damage to American
industries will continue, and farmers will be left paying
skyrocketing prices for fertilizer.
We urge Congress to act expeditiously to promote the
development of domestic energy resources to help secure future
economic growth for our nation. Congress needs to enact a
comprehensive energy policy now that provides an enhanced role
for renewable energy sources, further development of all energy
sources for a more diverse portfolio, and environmentally
sensitive production of adequate domestic supplies for natural
gas.
Mr. Gibbons. Ms. Schmalshof, could you wrap up?
Ms. Schmalshof. I have one----
Mr. Gibbons. We're at the nine-minute point.
Ms. Schmalshof. Oh, I'm sorry.
Mr. Gibbons. And I just want to give fair and equal
opportunity to everybody.
Ms. Schmalshof. Thank you. I have one paragraph left.
Mr. Gibbons. Please, go ahead.
Ms. Schmalshof. I encourage the Subcommittee to continue to
address energy and natural gas issues and make it a--make it a
national priority. Simply, farmers need access to reliable
sources of energy and raw materials, so that they can use the
fertilizers necessary to produce an abundant, affordable, and
healthy food supply.
Your decisions directly impact my farming operations. Thank
you for this opportunity to relate my farm experiences to you.
[The prepared statement of Ms. Schmalshof follows:]
Statement of Theresa Schmalshof,
National Corn Growers Association
Good morning, Chairman Gibbons and members of the subcommittee.
Thank you for the opportunity to testify on the impact of high natural
gas prices on farmers.
My name is Theresa Schmalshof. I am a member of the National Corn
Growers Association's (NCGA) Corn Board. I am from Adair, Illinois
where my husband, Gary, and I--along with our sons--grow corn and
soybeans.
NCGA was founded in 1957 and represents more than 33,000 dues-
paying members from 48 states. NCGA also represents the interests of
the more than 300,000 farmers who contribute to corn checkoff programs
in 19 states. NCGA's mission is to create and increase opportunities
for corn growers and to enhance corn's profitability and use.
My purpose today is to provide insight to the subcommittee on how
high natural gas prices affect the cost of producing important
fertilizers that farmers rely on for their crops. Growers rely on
affordable natural gas as feedstock for fertilizer, but also energy for
irrigation, powering farm equipment, drying grain and producing
ethanol. Increased natural gas prices have already had an adverse
effect on farmers due to higher production costs, and will continue to
do so in the future. Whether used directly as a feedstock or for heat
and power generation, reasonably priced natural gas is essential to
grower profitability. Today's high natural gas prices translate into a
huge cost increase per acre for a typical farmer. According to a recent
University of Illinois study, across the State of Illinois, the total
costs per acre to produce corn in 2004 increased 6 to 9 percent due to
increased prices for fertilizer, seed and fuel. And there is no relief
in sight.
Role of Fertilizer
Fertilizers account for more than 40 percent of the total energy
input per acre of corn harvested. Most of that energy is consumed in
the production of nitrogen fertilizer. Retail prices for fertilizer--
the prices paid by farmers--rise sharply when natural gas prices
increase. According to the U.S. Department of Agriculture (USDA), farm
gate prices for fertilizer have jumped to near record-high levels. The
largest cost component of making all basic fertilizer products is
natural gas, accounting for more than 90 percent of the cash cost of
production.
Nitrogen Fertilizer
Nitrogen fertilizer is a key input for the bountiful yields
achieved by U.S. corn farmers. Rising natural gas prices in the U.S.
have caused domestic nitrogen fertilizer producers to severely curtail
production. Of the 16.5 million tons of nitrogen capacity that existed
in the U.S. prior to 2000, almost 20 percent has been closed
permanently. Another 25 percent is at risk of closing within the next
two years. Farmers face higher nitrogen fertilizer prices and the
prospect that there might not be an adequate supply of nitrogen
fertilizer to satisfy farmers' demands at any price.
Nitrogen fertilizer producers have no way of curtailing or reducing
their demand for natural gas other than shutting down the production
process itself. This not only destroys their businesses, but it drives
up fertilizer prices to the American farmer and food prices to the
American consumer. These production curtailments and higher nitrogen
prices are largely the cause of the current surge in nitrogen imports.
Imports currently account for approximately 40 percent of the total
U.S. nitrogen fertilizer supply. Lower natural gas prices in the Middle
East, Asia and South America make it difficult for U.S. nitrogen
fertilizer producers to compete with these countries with much lower
natural gas prices to take their excess natural gas, turn it into
fertilizer and undersell U.S. producers, a practice that will only
become more common in the future. Supplies of nitrogen fertilizer have
been adequate during periods of high natural gas prices in the past
primarily because of increased imports.
Anhydrous Ammonia
Natural gas accounts for 70 to 90 percent of the cost of producing
anhydrous ammonia, a key source of nitrogen fertilizer. In the Midwest
at the beginning of 2000, anhydrous ammonia was selling for $160 to
$170 per ton. By the end of that year, the price had climbed to $210
per ton. Last spring, anhydrous ammonia was selling for $360 per ton.
The price of anhydrous ammonia this spring is now over $400 per ton.
Unfortunately, these high and volatile prices are expected to continue
into the foreseeable future. Tight supplies and increasing demand will
continue to pressure producers' margins and profitability, as farmers
do not have the ability to pass on these increased costs.
Ethanol Production
Higher natural gas prices will also negatively impact this
country's growing ethanol industry. The second biggest cost in ethanol
production--second to feedstock--is the cost of energy, generally
natural gas. Energy costs typically make up about 15 percent of a dry-
mill plant's total costs. The corn industry becomes more energy
efficient every year, but we still must have adequate, reliable and
affordable natural gas to fuel the industry.
Market Watch and Impact
Government policy is creating a supply squeeze for natural gas. On
one hand, electric utilities and other industries are moving away from
using our plentiful supplies of coal and towards use of natural gas.
Natural gas has been the fuel of choice for more than 90 percent of the
new electric generation to come online in the last decade. In addition,
as that happens, our access to natural gas is limited due to
environmental policy. Clearly, we can't have it both ways.
Our ability to be efficient and environmentally friendly corn
producers will face huge obstacles if our nation cannot come to grips
with its desire to have limitless resources, like natural gas, for
production and not realize that these resources have to come from
somewhere. I am sure the members of the subcommittee as individuals
know this well. However, Congress seems unaware of this fact. We can
produce corn, but we need you to produce the kind of policy that
enables us to use the needed resources to do so.
Congressional Action Needed
Our nation's current natural gas crisis has two solutions: increase
supply and reduce demand. The 109th Congress is facing the daunting
task of finding ways to balance our nation's dwindling supply of and
rising demand for natural gas. Additional supply is available from
three primary sources: onshore and offshore production, and liquefied
natural gas. While there is considerable activity underway in each of
these areas, Congress can do more to facilitate the timely development
of these critical supply sources. To promote additional production, for
example, Congress can adopt measures to ensure that potential federal
lands and Outer Continental Shelf areas are open for leasing, that
leases and permits are issued promptly, that the appropriate tax and
royalty policies are in place, and that the necessary pipeline
infrastructure is available to bring supplies to market, while leaving
behind as small an environmental footprint as possible.
Alaska's North Slope is one area with significant potential
reserves that can be unlocked in this way. Alaska's North Slope is
believed to hold as much as 100 trillion cubic feet of natural gas,
making it the largest reserve in North America. The natural gas
industry anticipates the need for more than $60 billion of
infrastructure investment over the next fifteen years just to keep pace
with demand, including liquefied natural gas terminals, pipelines and
storage facilities. The construction of new pipelines, such as a
pipeline to bring Alaska's North Slope natural gas to domestic markets,
cannot be further delayed.
Congress must also adopt measures to ensure that new coal and
nuclear facilities are constructed. Congress should provide federal
loan guarantees and other incentives for the retrofitting of existing
natural gas-fired facilities with the new integrated gasification
combined-cycle and next-generation nuclear technologies. It is vitally
important that these forms of power generation be developed and
deployed. Without them, the demand for gas-fired power plants will
continue to grow and place an ever-increasing burden on the nation's
supply base. Support, through long-term extension of tax credits and
other incentives, for other emerging technologies, including wind and
biomass, is also an important element to diversifying our nation's
energy resource portfolio.
Converting agricultural and industrial plants to environmentally
friendly coal gasification technology can significantly reduce demand
for natural gas. This is of particular interest for coal-rich states
like Illinois. The conversion of an East Dubuque, Illinois fertilizer
plant, substituting coal gasification technology for natural gas, will
displace 11.6 billion cubic feet of natural gas for residential use
each year, enough to supply over 157,000 homes. This project also will
produce 1,800 barrels per day of ultra clean low-sulfur diesel fuel
that will help reduce vehicle emissions and improve Illinois' air
quality. By utilizing coal gasification technology, fertilizer costs
will be reduced, and--at the same time--more natural gas will be
available to the electric generation industry. Without enactment of an
incentives package to jumpstart the deployment of coal gasification
technologies for polygeneration of products, damage to American
industries will continue and farmers will be left paying skyrocketing
prices for fertilizer.
We urge Congress to act expeditiously to promote the development of
domestic energy resources to help secure future economic growth for our
nation. Congress needs to enact a comprehensive energy policy now that
provides an enhanced role for renewable energy sources, further
development of all energy resources for a more diverse portfolio, and
environmentally sensitive production of adequate domestic supplies of
natural gas.
Conclusion
There are many indications that our nation's economy and energy
security will be seriously impacted should we not take action to expand
all sources of domestic, energy to feed our country's growing demand. A
renewable fuels standard as part of a comprehensive energy policy would
result in the expansion of ethanol production--directly contributing to
domestic fuel supply and reduction in our dependence on imported oil.
Our ability to produce food and fuel for our nation and the world
depends on a sound energy policy.
I encourage this subcommittee to continue to address energy and
natural gas issues. Your decisions impact my farming operation. Simply,
farmers need access to reliable sources of energy and raw materials so
they can use the fertilizers necessary to produce an abundant,
affordable and healthy food supply.
______
Mr. Gibbons. Thank you very much, Ms. Schmalshof. And I
would agree with you, as with many people, that the use of
natural gas for electrical generation is probably not the
wisest use for that resource. And we do have a lot of coal in
this country, and perhaps we need to advance clean coal
technology.
But with that said, let me also turn now to Mr. Bessette.
Ms. Schmalshof. Thank you.
Mr. Gibbons. Thank you for your patience. Thank you for
waiting. And the floor is yours. We look forward to your
testimony.
STATEMENT OF ROBERT D. BESSETTE, PRESIDENT,
COUNCIL OF INDUSTRIAL BOILER OWNERS
Mr. Bessette. Mr. Chairman and members of the Subcommittee,
thank you for the opportunity to appear before you today to
discuss the concerns over rising energy costs. My name is
Robert Bessette, and I'm President of the Council of Industrial
Boiler Owners, better known as CIBO, representing the energy
and environmental interests of the industrial energy users and
producers since 1978.
CIBO members include industrial boiler owners, architect-
engineers, related equipment suppliers and manufacturers,
service suppliers, university affiliates, consisting of over 80
members representing 20 different major industrial sectors. And
I've provided a written statement, but I'll try to summarize
here.
America has been blessed with abundant, readily available,
and inexpensive energy; so much so, it has spurred our
ingenuity and imagination, to make us the greatest country in
the world today. The increased product diversity and
profitability generated by inexpensive energy has [sic] fueled
this accomplishment. Without energy, there are no products,
there are no jobs, and there is no country as we know it.
The United States has led global development. However, over
the last ten to 15 years, we have seen a change. Developing
countries are producing products we want, and they also want,
with inexpensive labor and benefits, at prices they can afford.
As the cycle progresses, they become global suppliers, and the
U.S. becomes a prime marketplace.
Today, product competition is global. The cost of energy
versus inexpensive foreign labor and benefits has helped shift
the U.S. from the supplier of the world to the prime consumer
of the world.
For the last ten years or so, American corporations have
been building plants in developing countries, to be able to
take advantage of the growth in the developing markets. These
plants were designed for future growth, with excess capacity;
designed with the state-of-the-art, high-efficiency energy and
production equipment, to produce products that those local
markets could afford.
As energy costs increase in the U.S., due to availability
constraints, demand, or other factors, the capital spending
decisions must be based in part on the cost of producing
products by using the excess capacity in new plants around the
world.
In the era when our environmental policies have promoted a
shift to high-cost natural gas or unaffordable environmental
controls, we are seeing companies move production capacity to
countries where the balance of energy costs and costs of labor
and benefits is better.
With these new plants, the marginal cost of production from
excess capacity allows for the production and selling of those
products competitively here in the United States. When this
happens, we lose jobs. If they do anything other than that, it
may not be in the best interests of the global corporation.
We are at a critical time, when the environmental policy
has favored natural gas as a solution of choice, at the expense
of our other energy resources, and without the commensurate
expansion of domestic supplies.
A national energy policy is absolutely needed, one, to
increase the supplies of natural gas; two, to promote the cost-
competitive use of our diverse energy resources, including
renewable energy, with a broad definition of ``renewable'' to
include biomass, waste fuel, and other potential energy
resources--wood was our original forefathers' energy resource--
three, to promote the increase of all domestic coal reserves
and other potential fuels, through research and development and
demonstration at the industrial scale; four, to promote energy
efficiency, especially through combined heat and power, at our
industrial facilities.
All of these will improve the efficient and effective use
of our valuable energy resources, while improving the global
competitiveness of our U.S. facilities. We need a national
energy policy that addresses the concerns of industrial,
commercial, and institutional sectors.
The national energy base of our country and the powerhouses
at our industrial, commercial, and institutional facilities are
lumped with the utility sector in many cases; so that there's
only one energy source. That seems to be electricity. We are
more than just electricity. We use steam for heating, cooling,
and manufacturing processes. We are different. Our boilers are
smaller and different. Our fuel range application is different.
And because we must compete in a global marketplace with our
products, increasing energy costs directly impact where
products are produced.
For those entities like universities and others that cannot
relocate, the cost is passed on to the consumer, or services
are cut, or the company closes its doors. Americans feel the
direct impact of rising energy costs in the products they buy,
the tuition they pay and, sadly, even whether they continue to
have a job.
Thank you. I look forward to your questions.
[The prepared statement of Mr. Bessette follows:]
Statement of Robert D. Bessette, President,
Council of Industrial Boiler Owners
INTRODUCTION
Mr. Chairman and Members of the Subcommittee, thank you for the
opportunity to appear before you today to discuss the concern over
rising energy costs. My name is Robert Bessette, and I am the President
of the Council of Industrial Boiler Owners, better known as CIBO.
CIBO is a broad-based association of industrial boiler owners,
architect-engineers, related equipment manufacturers, and university
affiliates consisting of over 80 members representing 20 major
industrial sectors. CIBO members have facilities located in every
region and state of the country and have a representative distribution
of almost every type boiler and fuel combination currently in
operation. CIBO was formed in 1978 to promote the exchange of
information within industry and between industry and government
relating to energy and environmental equipment, technology, operations,
policies, laws and regulations affecting industrial boilers. Since its
formation, CIBO has taken an active interest and been very successful
in the development of technically sound, reasonable, cost-effective
energy and environmental regulations for industrial boilers.
RISING ENERGY COSTS
The cost of energy continues to make headlines, as the rising cost
continues to negatively affect the U.S. economy and the American
public. Recent economic data show that rising energy prices have slowed
U.S. economic growth to a two-year low and there are signs that this
will continue in the coming months. 1
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\1\ Wall Street Journal, ``Energy Costs are Taking Their Toll''
(April 29, 2005).
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Most of the public's attention is focused on the most direct
impacts to the downstream consumer, such as the price of gasoline at
the pump, home-heating costs and the cost of electricity. Less
apparent--but equally as important--is the impact of rising energy
costs on the industrial sector, which powers the nation's manufacturing
plants. Some segments of industry such as chemicals and fertilizer
suffer disproportionately because they rely on natural gas as both a
feedstock and fuel. The industrial sector consumes 29% of natural gas
consumed in the U.S. The cost of natural gas, measured in cost per
million British thermal units (MMBtu), has increased to levels that are
testing the economic capacity of industry to absorb and continue to do
business in the U.S.
In the early to mid-1990's the average price of natural gas in the
U.S. was $2/MMBtu. In 2000, with new gas-fired utilities online, demand
and cost grew. Today the average price hovers around $7/MMBtu, the
highest in the world. Prices in Europe are near $5.50; in Japan and
China near $4.50; in Indonesia less than $3.00; and in North Africa,
Russia and the Middle East less than $1.00, making it increasingly
difficult for U.S. businesses to compete in the global marketplace.
Once short-term cost factors are accounted for, CIBO companies report
costs of $10-12 MMBtu, or as high as $27 MMBtu. For industrial sources
the cost of energy has increased dramatically as a percentage of
overall costs of production. For one CIBO member company, energy costs
in 2002 were 29% of its total production costs. By 2004, its energy
costs had risen to 43% of production costs.
Other fuels are showing the same cost trend. The cost of coal has
more than doubled in the last two years. Oil prices are around $50.00 a
barrel and are expected to remain at that level for the near future.
2 As U.S. Treasury Secretary John Snow noted a couple of
weeks ago, the high cost of energy is ``taking some wind out of the
sails of the American economy.'' 3
---------------------------------------------------------------------------
\2\ Id.
\3\ Wall Street Journal, ``U.S. Snow: Higher Energy Prices Slowing
U.S. Economy'' (May 2, 2005).
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In addition to companies with boilers serving industrial processes
or generating steam for electricity production, CIBO members include
public and private universities, which operate boilers to run campus
facilities. The boiler on a college campus is what heats the dorm rooms
and keeps the lights on in the classrooms. Universities are also
directly impacted by rising energy costs, with students (or their
parents) bearing the ultimate burden of the increase in the form of
either program cuts or increased tuition. The experience of CIBO
members reflects similar budget shortfalls at colleges across the
nation.
Data from CIBO university members tell a more precise story. One
coal-burning member that has recently bid its coal contract for FY 05/
06 will experience an 86% increase in fuel costs--an additional $3.3
million--over FY 04/05, due to increased cost of coal.
Similarly, another university member burning coal and natural gas
had a 60% increase in coal costs between April 2004 and April 2005. The
school's older, cheaper pricing coal contracts expired in January 2005,
resulting in a $3 million increase in FY 04/05 costs and a $6 million
increase in the FY 05/06 cost of coal. Natural gas price increases have
also affected this member. When its current natural gas contract
expires on June 30, it expects a 33% increase with a $1 million dollar
impact.
Yet another university member is currently finishing re-
negotiations on a new coal contract that indicates an increase of
nearly 25% in coal costs. The school is also moving towards indexed
pricing in case of market changes either up or down, which could be
much less favorable to the school as compared to its earlier fixed
priced contracts. In addition to the fuel cost, it also faces higher
transportation costs in the form of fuel surcharges from the railroad
and the trucking firms. At this campus, natural gas and fuel oil are
being avoided as long as possible, due to an increased cost for #2 fuel
oil of 30% over last year and for natural gas an increased cost of 20%
over last year. In aggregate, fuel expenses increased nearly 20% year-
to-date over last fiscal year, amounting to over $1.1M in additional
expense. Overall, its energy costs (fuel and purchased electricity)
typically run about two thirds of the entire budget of just over $18M.
Administrators at this university decided to forego a tuition increase
and turned instead to program cuts to meet budget.
This same hardship is experienced by yet another university member,
whose overall purchased utilities budget expenses increased by 12% from
FY03/04 to FY04/05, and will increase by another projected 26% for
FY05/06. This is a 41% increase in two years.
Double-digit energy price increases and significant budget
shortfalls are the norm for CIBO university members, and is indicative
of what is happening around the country. Coupled with rising demand
growth on many campuses, may colleges and universities are faced with
the unfortunate decision to cut student programs or raise tuition.
Analysts attribute the cause of rising energy costs to many long-
term and short-term factors. Often overlooked as a significant
contributing factor to rising demand and costs is the failure of our
national energy policy to account for environmental initiatives. This
lack of coordination of policies directly affects the decisions of
manufacturers regarding where to expand capacity and where to produce
goods.
NEED FOR A COORDINATED ENERGY/ENVIRONMENTAL POLICY
The lack of an effective national energy policy that is coordinated
with environmental policy results in environmental decisions that
exacerbate the energy supply/demand imbalance. For example, a good
national energy policy would promote the use of diverse energy sources,
which would moderate interruptions and spikes in individual fuel supply
availability and price. Such a policy would also provide a framework
and incentives to promote the use of diverse energy sources and the
full use of intrinsic U.S. energy resources, including our large
reserves of coal. Because we do not have an effective national energy
policy, individual fuel decisions are necessarily based on local short-
term economics that exacerbate long-term problems.
In the Clean Air Act (CAA), Congress provided ways to ensure
environmental protection and at the same time to meet energy demand by
allowing dependence on the full range of the nation's diverse energy
sources. And for the first 25 years of its implementation, the Clean
Air Act was interpreted, as intended, to allow industry to rely on all
energy resources. However, beginning in the mid-to-late 1990's,
environmental policy makers began to favor natural gas over other
fossil fuels for its cleaner burning properties. All new power
generation was built for natural gas. This policy of favoring natural
gas over other fuels was incorporated into Clean Air Act rules
applicable to the industrial sector as well. These rules are framed in
terms of ``fuel neutrality,'' meaning that all sources would have to
meet the same Clean Air Act emission standards regardless of the type
of fuel they burn.
At first blush, this ``fuel-neutral'' approach looks appealing,
because it accomplishes an environmental benefit and appears to level
the playing field for all fuel sources. In reality, however, the
approach is not at all neutral, because it severely punishes the use of
energy sources other than natural gas. Under this approach, standards
are set at a point that makes emissions reductions cost-effective for
sources burning natural gas, but cost-prohibitive, or even in some
cases, technically infeasible for sources burning other fuels. Under
those circumstances, sources under pressure to comply with Clean Air
Act standards will (if they can) switch to natural gas. Through these
strong incentives for sources to switch fuel, environmental standard-
setting has contributed to the increasing dependence on natural gas and
the abandonment of coal and other fuels as reliable alternatives.
CIBO has raised these concerns often, before Congress, during
various environmental rulemakings and through the courts. But because
EPA has broad discretionary authority under the Clean Air Act, CIBO's
concerns for the most part had gone unaddressed. More recently, in
light of soaring energy prices and an effort to address the need for a
diverse energy supply, CIBO can report that policy makers appear to be
taking into account the negative energy implications of this ``fuel-
neutral'' approach.
Yet, our environmental policies still do not ensure that we can
meet the growing energy demand. Some programs outright prohibit
expanding the domestic supply of natural gas. Others more subtly
discourage use of fuels other than natural gas. To the extent that any
environmental program or policy undermines the nation's parallel goal
of using a variety of energy resources, this creates an unsustainable
situation for the energy-dependent manufacturing base in an era of
global competition.
Congress is asking the industrial base to increase production
without additional energy. Industry has met this challenge to a large
extent, by increasing efficiency. One of our members improved energy
efficiency from 1994-2004 by 21%, and plans to achieve an additional
25% efficiency over the next 10 years. Similar efficiencies are being
achieved and planned for the future by all our members.
But Congress must know that there is a limit to the ability of U.S.
industry to absorb the energy price shock and still remain competitive.
Once energy costs can no longer be absorbed through energy intensity
adjustments, companies will seek to meet production demand in parts of
the world where energy is cheaper. In a word, our inability to address
this issue translates into jobs.
To take one example, in the plastics industry, the cost of natural
gas tripled from 2000-2002, 130,000 jobs were eliminated and plastic
product shipments declined by $14.7 billion. Similarly in the chemicals
industry, the global chemical industry is expected to grow annually by
4% but the U.S. will not see any of that growth under present energy
cost projections. 4 Rather, U.S. companies now plan to meet
export demand by developing capacity oversees. One CIBO member has
already closed down non-competitive production facilities in 11 U.S.
cities in NY, NJ, NH, MI, WV and TX. Overall, chemical companies closed
70 U.S. facilities in 2004 and plan closure of another 40. Over 120,000
jobs in the industry have been eliminated since 2002. 5 For
80 years the U.S. maintained a trade surplus in chemicals, with a $20
billion surplus in 1997. Today the U.S. has a trade deficit in
chemicals. As demonstrated by just these two sectors, the crash course
our policies are now on is eroding the manufacturing base in the U.S.
---------------------------------------------------------------------------
\4\ By contrast, 120 new chemical plants are under construction or
planned around the world, with only one of these being built in the
U.S. ``No Longer the Lab of the World, U.S. Chemical Plants Closing in
Droves as Production Heads Abroad,--Business Week (May 2, 2005).
\5\ Id.
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It should be noted that CIBO is not suggesting that we sacrifice
environmental protection for energy security. Rather, these can and
should be parallel goals, building on the remarkable environmental
improvements over the last three decades. In the last 30 years since
the adoption in 1972 of the Clean Air Act, emissions of the six
criteria pollutants declined by 54%, even though there was a 187%
increase in the gross domestic product, a 40% increase in the
population and a 171% increase in miles traveled by vehicles. Air toxic
emissions declined 30% from the years 1990 to 1999 alone. 6
---------------------------------------------------------------------------
\6\ EPA, Air Emissions Trends, http://www.epa.gov/airtrends/econ-
emissions.html.
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As Congress considers options for addressing the impact of rising
energy costs, environmental policies should be closely examined for
opportunities to ensure that these policies support rather than hinder
efforts to address energy cost concerns.
ENERGY EFFICIENCY & INDUSTRIAL BOILER EFFICIENCY
The average industrial boiler produces 100,000 pounds of steam per
hour, with most boilers ranging in size from 10,000 to 1,200,000 pounds
of steam per hour. Industrial boilers are tailored to meet the unique
needs and constraints of widely varying industrial processes. The
70,000 industrial boilers in use today are as varied as the products
and processes they serve. 7
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\7\ For further explanation, see Attachment, ``Energy Efficiency
and Industrial Boiler Efficiency.''
---------------------------------------------------------------------------
Overall process or operational efficiency of a boiler is determined
by the needs of the operation and the design of the powerhouse used to
meet those needs. Likewise, energy efficiency for industrial boilers is
a highly boiler-specific characteristic. Four factors are critical for
assessing energy efficiency in the industrial powerhouse supplying
energy to make products: (1) fuel type, (2) combustion system
limitations, (3) equipment design, and (4) steam system operation
requirements. The industrial facility's complexity, location, and
objective are additional complicating factors.
Fuel characteristics determine the design of a particular unit.
When fuels are switched, the interaction of the new fuel and the boiler
often produces negative impacts on either the load or the boiler
efficiency. These effects often are amplified because of limitations
encountered in specific areas of the boiler where these adverse
interactions occur. Changes in fuel, load, and operation can easily
impact overall efficiency.
Unlike utility boilers, which operate solely to produce
electricity, industrial boilers are more complex and designed for
diverse facilities dedicated to a variety of different objectives. A
boiler that serves a pulp and paper facility is very different from one
that serves a university campus. Even at a single installation,
application of steam from an industrial boiler can change dramatically
with the seasons, when steam or hot water is used for heating, as well
as from day-to-day and hour-to-hour, depending upon industrial
activities and processes underway at a given moment and their demand
for steam. The possibility of such widely fluctuating demand for steam
in most industrial processes means that the industrial boiler in the
great majority of cases, does not operate steadily at maximum capacity.
In general, the industrial boiler will have a much lower annual
operating load or capacity factor than a typical utility boiler. This
results in a lower efficiency.
In addition, because industrial boilers are smaller, operate at low
capacity factors, and operate with a widely fluctuating load,
environmental controls are less efficient, and less cost-effective than
the same controls used on utility boilers. Further, some controls that
can be applied effectively to utility units, which operate at steady
state, cannot be readily applied to industrial boilers, which operate
at a wide variety of loads. 8 Importantly, combustion and
add-on control technologies often negatively impact boiler system
efficiency as well as system reliability.
---------------------------------------------------------------------------
\8\ For example, the control technology Selective Catalytic
Reduction (SCR) requires placement of a catalyst grid and injection of
ammonia at a specific operating temperature for effective reduction of
nitrogen oxides (NOx). This design requirement cannot be met in
industrial applications where load and temperature at a fixed point in
the system varies.
---------------------------------------------------------------------------
These different requirements naturally create optimal efficiencies
that vary widely from industry to industry and from facility to
facility. The ``one size fits all'' approach often used by regulators
to encourage increased energy efficiency and to maximize emission
reductions of a given pollutant simply does not work because this
approach does not consider the many specific factors that affect
emissions reduction and energy efficiency at a given industrial
facility. Nevertheless, consideration of energy efficiency for
industrial boilers often is simplified and categorized to a one-size-
fits-all approach.
A sound energy/environmental policy would account for this wide
variation in industrial boilers while encouraging these sources to
utilize all available fuel sources and develop potential efficiencies.
Two opportunities to achieve these goals are discussed below.
COMBINED HEAT AND POWER EFFICIENCY
Starting with fuels, industry accomplishes conversion by burning
the fuel and releasing heat. An engine then converts heat energy into
mechanical or electrical energy. If combustion occurs inside an engine,
it converts heat energy to mechanical energy that can be used to drive
a pump, fan, compressor, or electrical generator. Exhaust leaving the
engine is hot. This exhaust contains over half of the BTUs released
during initial combustion of the fuel and it can exceed 1000 degrees F.
If none of the exhaust heat is used, the device is known as a simple
cycle. If heat is recovered from the exhaust for the additional
utilization, the combination of the engine and other devices is known
as a cogeneration system or a combined cycle system.
The concept of combined heat and power provides further efficiency
improvements over producing only electricity by using exhaust heat
directly in the manufacturing process. Many manufacturing processes
require heat at temperatures between 250oF and 700oF. The BTUs provided
by the exhaust are at temperatures that match these temperature
requirements well. Hence, by converting high temperature, high quality
BTUs to mechanical or electrical energy and taking the lower
temperature, lower quality BTUs to meet process temperature needs, the
energy in fuel can be used most effectively and efficiently. With this
combination, from 60% to 85% of the BTUs in the fuel can be recovered
and used effectively. 9
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\9\ For further explanation, see Attachment, ``Combined Heat and
Power.''
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Given that the use of CHP routinely achieves twice the efficiency
of conventional boiler steam and electric utility generation, our
national policies should encourage its use. Unfortunately, the
diversity and complexity of industrial CHP facilities is not
understood, and environmental regulation can discourage its use. For
example, how the useful energy value of process steam is calculated
will either encourage or discourage an industrial source to make the
capital investment to use CHP. If the value of the steam is calculated
at less than the cost to produce it, few sources would invest in the
technology. In the past, EPA has assigned sources a uniform useful
value of steam thermal energy due to difficulty in measuring output of
thermal energy at an industrial source. This uniform valuation may not
represent the true value to an industrial facility of the thermal
energy produced. More recently EPA has indicated it is considering
allowing a more precise calculation of the value of thermal energy
facility-by-facility.
CIBO strongly advocates a more accurate measure of thermal output
because it will provide a significant incentive for investment in CHP
units that use a very high percentage of their steam for useful thermal
purposes. If Congress is truly committed to the investment in high-
quality CHP installations, our environmental regulations should allow
facilities that make that capital investment to accurately account,
whenever possible, for the full value of the thermal energy they
produce.
USE OF ALTERNATIVE FUELS SUCH AS BIOMASS AND WASTE COAL
Other environmental policies that can undermine energy policy
involve criteria pollutant standards. Under the Clean Air Act,
industrial sources must meet emissions standards for particulate
matter. Depending on the emission reduction required by the standard,
but also on the type of boiler, fuel, available control technology and
other complex factors discussed above, a given unit may or may not be
able to achieve the emission reduction cost-effectively. Some
industrial boilers, particularly smaller units, may be able to fire
non-fossil fuels such as biomass and other opportunity fuels, which
tend to have higher particulate matter concentrations than other fuels.
Those non-traditional fuels will likely provide an opportunity for
marginal industrial facilities to remain in operation when compared to
the current extremely high fossil fuel costs. In addition, use of non-
traditional fuels can help alleviate the current energy supply/demand
imbalance and help lower fuel costs.
Clean Air Act particulate matter standards should not be set
without accounting for the potential economic impact on smaller
industrial units using opportunity fuels. Standards should not
foreclose the continued operation of these small sources that provide
economic stability for communities, assist in balancing the energy
demand/supply imbalance, and provide other environmental benefits by
fully utilizing waste products for energy production.
Another example involves the Clean Air Act standard for sulfur
dioxide (SO2). In some geographic regions of the country, some units
have found it possible to extract the valuable energy from waste coal
from abandoned refuse piles. This provides a significant net benefit to
the environment. Burning coal refuse not only prevents potential acid
mine drainage and reclaims abandoned mine land for productive use, it
also makes beneficial use of the remaining energy value of the refuse
through the production of electricity. These environmental benefits
contribute to achieving national environmental goals set forth in the
Resource Conservation and Recovery Act and other federal and state
laws. Nevertheless, because of the complexities of the units having
this capability, the units have a limited ability to reduce SO2
emissions beyond their inherent SO2 reduction capabilities compared to
units burning traditional fuels.
CIBO believes that the environmental and energy supply benefits
from burning coal refuse far outweigh the slight incremental SO2
emission reduction that would be achieved by imposing an infeasible SO2
standard on these sources. In fact, under these circumstances, the net
environmental impact would be harm, because units that cannot feasibly
meet a standard will switch fuels or close down rather than recovering
the coal refuse resources, once again abandoning the coal refuse piles
to create an environmental hazard.
SUMMARY AND CONCLUSION
To fully address the issue of rising fuel costs, Congress must take
into account the impacts on the industrial sector. A substantial
portion of the total energy budget in the nation is produced and
consumed by industrial users. Operators of industrial boilers are major
users of utility-generated power and are extremely vulnerable to energy
price spikes and differentials against our global competitors. If our
facilities become less efficient and less productive, then our ability
to compete in the domestic and international arenas sharply declines.
Congress has the ability to adopt a course of action to address the
energy supply/demand imbalance and devastating energy prices. Broad
efforts including energy efficiency, fuel diversity, infrastructure
improvements, and improved supply need to all be included in a
comprehensive approach. As part of that effort, Congress should include
measures to ensure that environmental policy coincides with energy
policy. Clean Air Act standards, for example, should encourage
industrial sources to invest in technologies that maximize energy
efficiency and to use alternative energy resources including biomass
and waste coal.
CIBO recommends that Congress adopt coordinated energy/
environmental legislation that (1) addresses energy supply concerns by
increasing the domestic supply of natural gas, facilitating the
permitting of energy-related facilities within the U.S., and ensuring
continued reliance on nuclear, renewables, coal and all other energy
resources; (2) maintains and preserves fuel diversity including not
only coal, but diversity within coal types; (3) supports the use of all
alternate fuels including biomass, waste coal and other similar energy
resources; (4) abandons ``fuel neutrality'' as a basis for setting
environmental standards, which pushes sources to use natural gas to the
exclusion of other available fuels; and (5) insists on consistency in
energy and environmental policy, recognizing the distinctions between
utility and industrial boilers and ensuring industrial sources are able
to maximize energy efficiency and use the full range of energy
resources.
______
Mr. Gibbons. Very nice, Mr. Bessette. And I apologize for
pronouncing the ``E'' part of your name. It is not pronounced,
and I apologize for mispronouncing your name. And thank you
very much for your testimony and for the summary you provided,
as well.
We are going to turn now, ladies and gentlemen, to
questions from the panel here. And they are under the same time
restriction that I gave you. Each one will have five minutes
within which to ask a question. And I will turn now to Mr.
Peterson of Pennsylvania for his five minutes. Mr. Peterson.
Mr. Peterson. Thank you very much. And I appreciate the
testimony today. I found it interesting three of you talked
about natural gas, which anybody knows is my issue; an issue
that I have been concerned about for five or six years, and at
times here in Congress felt like I was a lonely, sole voice
arguing with leaders of the energy committees that gas was
going to be a problem, and they were saying, ``Oh, no, it's
just cyclical. It will be back down.''
But they are connected. The first gentleman we heard from
talked about the airline industry; which is petroleum directly.
But I just want to share something that has not been spoken
and, I don't think, often thought about. All of my school
districts, all of my hospitals, and all those kinds of
institutions, have dual use. They have dual fuel capacity. They
have to have.
And unfortunately, with natural gas prices the last two
years, many of them have been burning fuel oil; which competes
with the airline industry. And I mean, none of this is being
thought about. Because it was cheaper to burn fuel oil than it
was to burn natural gas with these spiking prices.
So it is all related. And in my view, I have a transit
system in State College, Pennsylvania, that is now all natural
gas. That was a winner in the beginning. It is not a winner
today. It actually costs them more. So the unnatural natural
gas prices.
The question I want to ask you in a minute is, I guess,
what have you done to alert the public. I spoke this morning to
CEOs of steel companies. I had a man who said he spends $10
million a year for natural gas. He did not know it wasn't a
world price. And I found that a little hard to believe.
Most of the CEOs of those companies were not aware of world
gas prices; that they are as low as 80 and 90 cents in
countries like Russia; that right in South America it's just a
little over a buck; Europe, we are $7, they're $5; China is
$4--giving them another 65 to 70 percent advantage on
everything they make that uses natural gas.
And I have spoken to just scores of groups. I haven't
talked to any group of leaders that had any idea that natural
gas is an island to itself in this country, and that we pay the
world's premium prices.
I guess all of you, have any of you spoken out on this
issue about natural gas until recently? I mean, it has sort of
been like nobody knows it. Most Members of Congress don't know
it.
Mr. May. Congressman, not specific, obviously, to natural
gas; which is your direct issue. We haven't figured out how to
fly a plane on natural gas yet.
Mr. Peterson. Yes.
Mr. May. I recall testifying before the Senate Energy
Committee, making public statements on the overall price of
energy, broadly. And we understand that in the pricing scheme
there is a fungible nature of natural gas and fuel. And that
was two and a half years ago. It was one of the first things I
did when I assumed my new position.
I think you could come to any meeting of any airline
anywhere, annual meeting or group of--my board meeting, which
consists of, exclusively, CEOs, and fuel prices are the
principal topic of conversation for part of that meeting, at
least.
It is critical. I think we ought to be looking at policies
relative to the Strategic Petroleum Reserve. I think we ought
to not necessarily release from that, but we're looking at
record high reserves today; you know, 690-some million barrels
of oil in the ground right now. I think we can't be filling
that at extraordinarily high prices, and then down the road
releasing it at low price.
So I think there are a lot of things that need to be done.
But I think, also, it's a delight to see members of your
committee take a visible position on it because, quite frankly,
too few in the Congress have.
Mr. Cicio. Representative Peterson, thank you so much. And
I want to thank you, personally, for all your leadership,
consistently, in hammering home this issue of the challenges of
natural gas. Quite frankly, I am surprised, and shocked, as you
are, that the steel company executives didn't get it.
I will assure you that the CEOs of the member companies of
the Industrial Energy Consumers of America do understand, and
they are actively engaged. But at the same time, I have to
acknowledge to you that across the country, in general, CEOs do
know what impact costs of energy--not just gas, but also coal
has doubled, crude oil prices, electricity prices have gone--
they do know what that has had.
And it has become in many cases their largest variable
cost, and has had a significant impact of CEOs making decisions
not to invest their growth capital here in this country. It's a
very serious problem.
Yes, they are spending their capital associated with
maintaining these existing plants, but the growth is not here.
Because when they look at the price of natural gas, for
example, on the New York Mercantile, and they see high, high,
high sustained natural gas prices as far as you can see, they
say, ``The U.S. is no longer a place that has a competitive
advantage that it once had through energy costs.''
Communications and education have been a real challenge for
us. We're an organization that was formed three years ago as a
result of the natural gas crisis. And there is just simply not
enough dollars to communicate as sufficiently as we need to.
Mr. Peterson. Any other type of comment?
Ms. Schmalshof. Mr. Peterson, I know that NCGA and our
members have been aware of the natural gas crisis, as you know
because of my comments. It does hit our bottom line. And we
have been working in that endeavor. However, as Mr. Cicio said,
monies are tight, and we don't have an expeditious amount of
dollars. But we certainly would be glad to work with you.
I think it's certainly a need for all of us to get the
other congressional people onboard and let them certainly
understand what this is about. It's not a farmer issue, alone.
It's also across all sectors, as you said. And that's hard for
us to get into some doors, when they see that we are a farm--a
farm group. So we'll do what we can, and certainly keep working
toward that entity.
Mr. Bessette. Thank you, Congressman Peterson. We've been
working for years, because environmental policy has been going
at a different direction than national energy policy. We
haven't had a linked energy and environmental policy.
Fifteen years ago, the industrial sector was probably
burning 60 percent of its energy for process use using coal.
Today, we're burning 60 percent natural gas, because the
environmental constraints have forced us into that direction.
It's either that, shut down, or move. The costs of controls are
inextricably high. We can't get them to those levels.
That process is extremely important. We've put all of our
resource eggs in the natural gas basket to solve our
environmental problems. We need an energy policy that promotes
fuel diversity, that promotes fuel flexibility.
Thanks for the question. You're doing a remarkably good
job. Thank you.
Mr. Gibbons. Thank you, Mr. Peterson.
We'll turn now to Mr. Grijalva. Mr. Grijalva, you have five
minutes.
Mr. Grijalva. Mr. Chairman, just a couple of questions. Let
me begin with Mr. Cicio. In you testimony, you seem to be
saying that the members that you represent are almost entirely
reliant, or over-reliant, on one source of energy, which is
natural gas--some of the members, like Bayer Corporation, Coors
Brewing Company, Dow Chemical, Tysons Foods. Yet most industry
and consumer groups are strongly in favor of a diversified
portfolio.
The Institute for Analysis of Global Security, a
Washington-based think tank whose members include a spectrum of
conservative, liberal, centrist, they've been advocating the
transitioning away from traditional energy sources; having a
diversified portfolio. Former Secretary James Baker is making
similar proposals.
So while opening up the moratorium areas seems a quick fix
and an easy solution, I would suggest it's probably short-term
at best. And that's assuming you overcome what will be the
political objections to opening up those areas.
Therefore, my question is, why would you focus so heavily
on one energy source, and not look to the future with new
technologies and alternative fuels?
Mr. Cicio. Congressman, I couldn't agree more with you. The
fact is, our organization in its many reports and
communications supports a broad diversity--as we call it, a
robust, diverse supply of energy. We know as a country we need
all of the energy alternatives in the mix. We need nuclear, we
need coal, we need gas, we need renewable energy, we need--and
we agree, technology is the real solution to all of these
challenges long-term. So we agree 100 percent.
The reason that I am here today is--and why my testimony is
focused as it is, is that there has been insufficient focus on
the real way forward in increasing supply of natural gas. We
cannot conserve ourselves out of this major dilemma.
And oil and gas producers, the exploration and production
industry, are drilling three wells to get the same amount of
gas that they used to get out of one. Today, one of those wells
will be produced out in a period of three years or so. They
used to produce a well, and it would provide production for
eight to ten years. This is a--we're putting special emphasis
on solving the natural gas crisis.
Mr. Grijalva. Thank you. And just to follow up on that, the
movement toward natural gas--and my colleague is much more an
expert on that than I am--the movement was also because the
commodity was priced so low at the time.
And I think also, as we try to mesh environmental policy
and energy policy, as Mr. Bessette said, we are also in a
position as you strike a balance to realize that we need to be
looking to the future, as well.
Mr. Bessette, the question I have for you is, in both your
oral and written statement you advocate a good national energy
policy that would promote the use of diverse energy sources,
which would moderate those interruptions and spikes in
individual fuel supply and price. And you made the point that
there has not been that linkage between environmental policy
and energy policy.
Speaking to that linkage, what is your opinion, then, of an
energy bill passed by the House last month that provides $3.2
billion in new tax breaks for oil and gas industry, while
dropping more than $3 billion for incentives for renewable
energy and efficiency? There is a linkage question if I ever
saw one.
Mr. Bessette. When you start looking at the linkage of
energy policy and environmental policy, when it comes down to
where is the crux, the crux is in the dollars per million Btu.
When we start looking at natural gas prices that have gone
from, five years ago, two dollars a million Btu or less, and
we're now up, for some of our industrial facilities, to seven
to ten dollars and twelve dollars, and spot prices as high as
27----
Mr. Grijalva. I think the contradiction I'm pointing to,
the producers right now are enjoying record profit years, in
terms of oil and energy pricing in this country. And we are
also, consumers, painfully aware of the price of gas. And the
folks that all of you represent, your industries are painfully
aware of the energy cost. And so the contradiction I'm pointing
out is that, while that is occurring, the investment that we
have to make in renewable alternatives research, that even
Greenspan and others have been advocating, that isn't being
done in conjunction.
Mr. Bessette. A lot of the research and the renewable sides
of what's been talked about have been aiming at wind, solar,
photovoltaics--very, very high cost. Anything that's high cost
is very, very difficult to apply in the industrial setting,
because our costs are based on low-cost, inexpensive, available
energy.
If we raised the cost of energy, it's not solving my
problem of where is that final product going to be produced. So
we have to look at inexpensive energy. The renewables that are
being----
Mr. Grijalva. Well, as we subsidize traditional--oil, gas--
all I'm suggesting is that that same philosophy of providing
that kind of assistance to alternatives would be a wise
investment at this point.
Mr. Bessette. Absolutely.
Mr. Grijalva. OK. Thank you. No more questions.
Mr. Gibbons. Thank you, Mr. Grijalva.
Mrs. Drake.
Mrs. Drake. Thank you, Mr. Chairman. I would like to thank
you for calling this panel together. And I would like to thank
our panelists for being here. I know you have come from all
across America to deal with such a critical issue for us.
I would like to ask one more thing of you, though, if you
would do it for us. From your own perspective, if you don't
mind sending us a letter back that just details what you think
we do right, and what you think we can do much better. And I
just think that would be very helpful for us as we deliberate.
I represent the Second District of Virginia, which is the
southeast corner--Norfolk, Virginia Beach area. And two of our
real economic drivers, of course, are the military and tourism.
Largest naval base in the world: 29 percent of their budget is
spent on energy and utility costs. And I don't think we think
about that when we talk about the war on terror.
Mr. Bessette, you represent educational institutions. And
one thing we're struggling with in another committee I am on is
reauthorization of the Higher Education Act. And we talk all
the time about costs, but never have we talked about the cost
of energy. Have you seen with your members that that alone is
enough to drive some of the tuition costs that we are dealing
with?
Mr. Bessette. One of our--one of our affiliated
universities had a 5 percent tuition increase that they
directly allocated from energy and environmental impacts,
having to meet the boiler max standards that are coming up, and
increasing coal costs.
One of the--another one of our universities, they had coal
prices last year at $60 a ton. This year, they're paying $123 a
ton for coal, in the central part of the country. Primarily
because it's not available; the utilities are burning more; the
price has gone up for low sulfur.
Industrial facilities need very special quality fuels. They
just can't burn anything. So because they have a very tight
quality requirement, sizing, it's not readily available. Price
goes up and they're being struggled [sic]. Of course, the
alternative is natural gas, at seven to ten dollars a million
Btu's, so I'm going to spend $5 a million, $7--$6 a million for
coal at my facility. It's hurting our universities. They can't
pack up and move out.
Mrs. Drake. Right. Well, and what I have heard from all of
you is, I think, within your industries you are trying very
diligently to reduce demand yourself; to be much more
efficient. And I think you would agree with me that we have
absolutely got to increase supply within our country, or within
the North American continent, working with Mexico and Canada.
Mr. Cicio, I don't know if you heard, but Virginia has had
a very interesting debate about offshore drilling, because of a
bill in the General Assembly this year. So I wondered within
your industry if you are working with local governments.
Because interestingly, in the Second District, part of the
district is all for it, the other part of the district is very
concerned about it. So, whether you are working in your
industry to explain to local governments what this would really
mean to them. Or have they started that kind of effort? Because
we need that.
Mr. Cicio. Yes. And in fact, we're working with a broad
coalition of trade associations who are exclusively consumers,
working together to work on a state-by-state basis. At this
time, we're not working on all states. But it's an effort to
provide education and talk about these desperate--the desperate
need for sound energy policy and increased supply, particularly
of natural gas domestically. We don't have, in our view, a very
good solution to that educational process, but we are starting
Mrs. Drake. Thank you very much for that, because I think
that will be very helpful.
So Mr. Chairman, I am going to yield back my time. But
thank you for being here. I look forward to getting your
response.
Mr. Gibbons. Thank you very much.
Mr. Melancon.
Mr. Melancon. Thank you, Mr. Chairman. I appreciate the
opportunity to visit with these people. I'm sorry I was running
late.
Mr Cicio, I am on the Mississippi River corridor, which is
high industrial, petrochemical. And the life blood is natural
gas. I guess what I would ask you, just as Mrs. Drake asked, is
tell us what we are doing right; tell us what we are doing
wrong; and if you have got suggestions of things that we can
do.
I am concerned with the job loss as they shut these plants
down because of the price of natural gas. And it is happening.
I am losing people weekly, I guess, if you want to go that way.
But do you have any thoughts on that?
Mr. Cicio. Yes, sir, I do. Thank you for that question. It
is, in our view, almost shameful that we have so much natural
gas in this country, yet we do not let the energy companies
have access to produce that gas. We don't need--we should not
have prices of natural gas as we have today, and the resulting
loss of jobs. We have plenty of gas.
As I pointed out earlier, the energy companies are drilling
three wells just to get the same amount of gas that they used
to get out of one. And that is because they are drilling in
areas that have less gas in the ground, rather than larger
amounts of gas. We need to give them access to those areas that
have abundant reservoirs of gas, rather than small pockets. And
that's what we've relegated this to.
There are a lot of companies who used to spend billions of
dollars of increased monies to drill for gas and oil in this
country, that no longer do that. This has happened over time.
And they have moved away from the United States because the
United States is no longer an attractive place to invest their
dollars. There's other places around the world.
Well, to us, this doesn't make sense. We have a country
with a very stable and growing demand. We have a country that
desperately needs clean fuels like natural gas. And the demand
is increasing. We can't really continue to improve our
environment as easily as we can without increased supplies of
natural gas.
We have all these things going for us, yet we still just
don't take that extra step to deal with this issue of, for
example, the moratoria. You know, we're not asking, in fact,
that we need everything, but we do need to address this issue;
establish a process to open up and deal with this moratoria.
States, for example, have little incentive to allow for
drilling of natural gas. That needs to change. States should
have greater control of their coast lines so that they have--
they can control whether there's drilling, you know, three
miles, ten miles, 50 miles. They should have a say in that, and
that's not the law of the land.
These are basic principles that need to change the dynamics
of producing energy in this country, so that we can have an
attractive place for these companies to invest their dollars.
So states need incentives. States need more control over their
coastal waters. And that would make a huge, huge difference, we
think, in these dynamics.
Mr. Melancon. Thank you on that. Mr. May, if you could, I
had a conversation with a friend of mine that is, I guess, in
the airport business. And he was telling me that the problem
for commercial airlines these days is they had good strategies
and plans for getting themselves out of the problems they faced
after 9/11; but now with the fuel costs, that is probably the
most crippling portion, or the largest portion of what their
costs are. Is that so?
Mr. May. Yes, sir, it is. Next to labor, it is our most
expensive component of our cost structure. We've dropped our
cost for available seat-mile down significantly since 9/11, but
we've nearly doubled the amount of money we're spending on
fuel. We're now projecting in 2005 to spend somewhere in the
range of $28 billion just on fuel; which will be about 91
percent higher than we did back in 2001.
Mr. Melancon. Thank you, sir. I apologize; he was just
telling me I had another meeting.
Mrs. Drake and Mr. Chairman, because I have to run, I would
like to offer, as I did back in the 1970s, we had a group from
the Delmarva Peninsula. So that you know how far back that was,
Governor DuPont was still your Governor in Delaware. But to
bring this Subcommittee, or the entire whole Committee if it is
possible, to south Louisiana. Now, in the early part of this
century, a lot was done wrong in exploration. But we have
learned. The technology is there. The ability to get to these
natural resources is phenomenal.
And I think from a standpoint of whether it is you who had
those questions and want to understand it, to even those of us
that think we understand it, I would like to offer, Mr.
Chairman, that we would be happy to try and set that up,
because I think it would be an eye-opener for anybody that
wants to understand.
And I totally agree, we need to find out what is right and
what is wrong with what is going on, so that we can try and
direct it. Mr. Chairman, I yield back my time, and I apologize
for having to leave.
Mr. Gibbons. Thank you,
Mr. Melancon. And let me assure you that this committee is
indeed interested in visiting that area of our nation's energy
production in the region. And we have been talking about it,
and would certainly take great pride in the fact that Louisiana
is one of the centers of the oil and gas industry for this
country, and all the great work that you do for a lot of
people. But we will certainly be in touch with you with regard
to any plans in that regard.
I am the final questioner here today, so that we can get to
our next panel. Let me begin my time by saying that in our
economy in this world in the United States, the mineral
industry is the foundation of our economy. The energy industry,
oil and gas, is the keystone that keeps the door of our economy
able to open when we need to be able to open that arch. So the
two are critically tied.
Now, Mr. May, you paint a rather dire picture for one of
the very, very significant parts of our economy; which is the
transportation industry. And we in the 21st century have become
so dependent on air travel, air transportation, whether it is
for our own personal transportation or for goods and services
that we move about this country. We are a high-speed society,
and of course the airline industry is critically dependent on
that keystone oil and gas energy supply. And you have,
literally, a captive audience. We have nowhere to go, unless we
want to revert back to the horse-and-buggy days in that.
But let me ask, do you believe that with the price both of
labor and oil and gas today, that your industry can meet the
demands for rapid air transportation for tomorrow?
Mr. May. Mr. Chairman, we're going to have a very difficult
time doing that if oil stays in the $50 range or north of $50.
This industry, airlines--not transportation broadly, but
airlines--used to contribute just under 1 percent of the
overall GDP of this country. Last year, we contributed 0.7
percent of GDP. To translate that into real money, what it says
is that there's somewhere on the order of $30 billion less
being spent on air transportation today than there was just a
few short years ago.
That is principally a function--good news for the
consumer--of lower prices on tickets; bad news for the
industry, because price competition is so tough, so severe. And
that competition prevents us from passing through. You talked
about the cargo side of our business. Just-in-time economy
depends on cargo. We've been able to price through the increase
in oil on the cargo side; not on the passenger side.
Regrettably, I can fly to Florida today for less money than
it takes me to fill my SUV out in Bethesda, Maryland. That's a
sad commentary, I think, on what's going on in this business.
We've got a number of carriers that are in Chapter 11
today. We have a number of other carriers that are on the
precipice. We are at 110 percent of borrowing ratio right now.
In other words, our asset-to-debt ratio is 110 percent; which
is awful. And if oil prices stay where they are today, I think
we can come very close to guaranteeing you that there are going
to be other carriers that go into Chapter 11.
Mr. Gibbons. Well, it seems unique to our economy, I think,
that we are so disinterested, I think, right now in trying to
find short answers--in other words, increasing supply for some
of these critical resources--to stabilize the economy and
actually reverse the increase in cost that you are
experiencing. In the end, does the airline transportation
industry care where their oil comes from?
Mr. May. The one answer is ``No,'' because we recognize
that the price of oil is a function of a world economy. We
understand that the value of the dollar is having an impact. We
understand that demand in China and India is having a dramatic
impact. We understand, I think it was referenced here today,
about dual fuel.
A big part of the demand in both China and India has
nothing to do with anything other than a lack of ability to
rely upon the infrastructure. There is no electricity, so small
business after small business after small business are buying
generators and running generators on fossil fuel, because they
can't rely on their own country's infrastructure for energy.
And that is creating a big part of that demand.
So it's a world market. It doesn't make any difference to
us where it comes from, in the abstract. As a practical matter,
we're as supportive of increasing domestic supply as anyone is.
And the better job you do on natural gas, the less pressure you
put on fossil fuels. And we can have a greater supply, and the
price ought to come down on that.
But remember, also, Mr. Chairman and other members of the
Committee, we need some short-term relief. Most of the projects
that are being talked about today are significantly longer-
term, ten-year horizons. And I've got to keep my guys in
business, you know, this year and next; or ten years from now
it's not going to make a difference.
Mr. Gibbons. Well, I hear what you say; but I also believe
that your industry, like all industries in this country who are
an integral part of the economy, should care, should care
mightily, about where the source of their oil comes from.
It wasn't long ago that you and I can actively remember
1976 and a crisis caused by OPEC: foreign countries controlling
30 percent of the oil supply that we used in this country.
Today, it is over 60. If we increase that dependence on foreign
sources of oil, rather than our own domestic sources, then we
are actually asking for a greater economic impact, if OPEC
decides to do what it did in 1976.
And so, like you say, we should be concerned about where we
are getting our oil. Yes, in the short term you want lower
prices and it doesn't matter as long as you get lower prices,
obviously, because you have got to answer to your shareholders;
you have got to answer to the traveling public; you have got to
make sure your companies stay in business.
We are here to do policy decisions that help you make those
decisions and help you--all industries, all small farmers,
everyone--stay in business. We have got long-term and short-
term decisions to make. The energy policy that we passed in
this committee, I think, helps address short-term by going
after those supplies.
And you are right, Mr. Cicio. We do need to address the
moratorium areas. Today, Cuba is drilling for gas closer to
Florida than we are allowed to drill in the area; which makes
no sense to us.
And we have so many issues here that we are trying to get
to. We need to do research and technology, greater investment,
environmentally sound energy production, clean coal technology,
coal gasification, exploration in areas that heretofore were
off limits because of their expensive cost in breaking that--a
lot of things. And those are decisions that we have to make.
Your testimony has been very, very helpful, very, very
insightful, in allowing us to make better decisions for that.
Mr. Peterson. Just one thing?
Mr. Gibbons. And Mr. Peterson, yes, real quickly.
Mr. Peterson. Just real quick. I was a retailer for 26
years, local government, state government, Federal Government,
business, for 26. Let me tell you what we haven't talked about
today. I appreciate everything you have come here to say, but I
will be looking forward to the day when I get on the airline--
and I fly all the time--and the stewardess has a button on that
says, ``When are we going to have an energy policy in this
country?'' I mean, I am serious.
If the four of you would get back to your associations and
get back to your employers and you engage your employees and
say, ``Your job is on the line because of energy prices in
America,'' you will help us change this here.
When CEOs of steel companies don't understand it, what do
you think the general public knows about this issue? And so you
need to go back to your employers with a simple message that
says, ``Your job is in jeopardy if we don't get fair energy
prices and have an energy policy in this country.'' I think you
can really help us.
Mr. Gibbons. Thank you, Mr. Peterson. Let me summarize by
saying, had we been able to pass and get to the President an
energy policy in 2001, which this committee and the House of
Representatives passed four years ago, today we would be four
years closer to a permanent solution than we are right now.
Because some of the provisions we passed in that Act then are
the same provisions we have today.
So each year we find some excuse, some way to make the
energy policies of this country not applicable to our problems,
is a delay which causes the economic burdens of this country
and the American worker to go right out the ceiling.
And it is intolerable, and I am one that is definitely
committed to finding answers to the problems that each of you
have raised here today. Because I live in this country like
everyone else. I love this country; I love clean air; I love
clean water. And I also want to live in this country in the
future with a job that I can depend upon.
Thank you very much. We are going to excuse this panel and
call up our second panel. And our second panel is going to
consist of Robbie Hyde, President and CEO of Mill Hall Clay
Product, Incorporated; Carol Clements, Chairperson, National
Fuel Funds Network; and Katherine Morrison, staff attorney for
U.S. PIRG.
It might be better if you, before you sit, would continue
to stand, because I do have to swear you in.
[Witnesses sworn.]
Mr. Gibbons. Let the record reflect that each of the
witnesses answered in the affirmative to the oath.
We would like to welcome now our second panel to our
hearing. And I will turn to Mr. Peterson to introduce Mr. Hyde.
Mr. Peterson. We want to thank all of you and welcome all
of you today. I want to especially welcome Robbie Hyde.
When was it you contacted me on this issue? How many years
ago?
Mr. Hyde. Probably, in the latter part of 2000, or 2001.
Mr. Peterson. Yes. If every user of natural gas had done
what he did--he was one of the ones that got me involved in
this issue. Now, there were some other issues that I was
working on, that I was aware of the potential future problem
with natural gas. But Robbie Hyde of Mill Hall Clay Products, a
company who has been there for all this century, and he has
been there 35 years, making clay products which use a huge
amount of energy, natural gas--and suddenly finding that prices
were making it unprofitable for him and he had to close his
plant from time to time when prices reached certain peaks.
Robbie, you helped me really get engaged in this issue, and
I want to thank you and welcome you for coming here today and
sharing. Hopefully, you can inspire Congress. Thank you.
STATEMENT OF ROBBIE M. HYDE, PRESIDENT AND CEO,
MILL HALL CLAY PRODUCTS, INC.
Mr. Hyde. Thank you, Mr. Peterson. It's been a pleasure
working with you on this, and I appreciate all you've done for
us.
Mr. Chairman, we're a very small manufacturer, compared to
my fellow witnesses that have spoken here today. But as you'll
see in our testimony, even though we're small, we're enjoying
the same economic problems that they all seem to be.
We manufacture clay chimney flue liners and decorative
chimney tops that are tied into home building. And as
Congressman Peterson says, we've been at our plant since it was
built in 1890. It's continuously produced the masonry products.
In 1947, it was incorporated under the laws of the Commonwealth
of Pennsylvania. And it's still represented by family members
of the original shareholders.
We bought our company in 1947 from a company called the
Mill Hall Brick Works. The Mill Hall Brick Works was one of 32
brick yards located in Clinton County, Pennsylvania, at that
time. Presently, we're the only one left manufacturing clay.
We're the only flue liner manufacturer in the State of
Pennsylvania, and there's only, I think, seven of us in the
United States.
We operate our plant on what we call beehive kilns, which
we bake our product in, and it's baked with natural gas. We
changed over to natural gas in 1965. Prior to that, we fired
our kilns manually with coal. Our kilns are fired 24 hours a
day, seven days a week.
We have 31 employees, manufacturing employees, and seven
management and clerical personnel. And we're represented by the
United Steelworkers of America. And our plant has 38
manufacturing slots recognized by our contract; but over the
last few years, we've not replaced seven men that have left our
company, due to the decline in demand for our product. So we're
presently meeting all of our production needs with 31 men
instead of 38.
Our products are sold all throughout the New England
States. And at the present time, our largest expense, after
plant labor, is the cost of natural gas. We are presently
paying gas bills that are three to four times greater than
we've paid in the past. And to compensate for this, we've
passed on fluctuating surcharges to our consumers, price
increases. And it seems that we're just pricing ourselves right
out of the market with our competitors in the chimney business,
as far as steel chimneys, ventless stoves. There's a lot of
things working against us. Outside burners, as our Congressman
has at his home. We have a lot of things working against us,
and we just can't keep pace with them.
And I'm sure that there's no one out there that uses
natural gas that enjoys these high prices we're experiencing,
and I feel that we must do something. And I feel that every day
I hear excuses for the cost, the increases for the price of
natural gas. But I feel two of the main reasons are the
regulations and the environmental issues that we spoke here
about this morning.
We have tons and tons of gas out there. I have some charts
attached to my testimony--I thought we were going to have some
in here--but as we spoke, of all the gas available in the
United States. And we can't drill it, due to the environmental
people and their regulations.
And I know that we as American people are smart enough to
drill this gas and do it right, and not disturb the
environment. I believe, you know, strongly in a productive
environment for my grandchildren to grow up in and enjoy like
I've been able to. I believe strongly in a safe workplace for
my employees.
But it's got to the point where we just can't continue to
do business with the regulations and the environmental issues
at hand. It's really--as far as production of natural gas, it's
holding back. Like Mr. Cicio said, they're drilling three wells
to get what they used to get out of one well.
Congressman Peterson talked about some of the things I was
going to talk about, all the gas available in the United
States. His chart states that there's--with the natural gas we
have in the United States we could supply 100 million homes for
157 years, but you know--there it is; I'm sorry--it's all
locked out of production.
Somebody spoke about gas being drilled--but anyway, if I'm
correct, Congressman Peterson, in the State of Michigan there's
a gas field that's off limits to us, due to environmental
issues. And across the lake, Canada is drilling under it and
getting that gas, and then selling it to the United States.
There's something wrong there.
At our little plant, again, I looked at the numbers, if we
go down, which is a possibility. We have 38 employees; their
families, they total 90; 11 retirees. It's going to affect a
lot of lives.
And two other charts that I've had on here that you can
look over. In the past, we paid $3.58--that's an average--per
decatherm for our natural gas to bake our product. In 2004, it
was $7.68.
It cost us $25.11 to manufacture one ton of natural gas in
the past. In 2004, it cost us $72 for natural gas to
manufacture that same ton of goods.
And finally--the chart is not up there, but if I had a
manufacturing company in the United States, and I was spending
$500 million a year for my natural gas, I would definitely
consider moving my plant to Bolivia, where they would be paying
$118 million; saving $382 million in natural gas cost, alone.
And that's noted on one of the charts there, also, that
Congressman Peterson has.
That's all I have. I thank you for your time. And I'll look
forward to your questions later. Thank you.
[The prepared statement of Mr. Hyde follows:]
Statement of Robbie M. Hyde, President and CEO,
Mill Hall Clay Products, Inc., Mill Hall, Pennsylvania
Mill Hall Clay Products, Inc. is a manufacturer of clay chimney
flue liners and decorative clay chimney tops located in Mill Hall, PA
at a plant site that has continuously produced clay products since 1890
when the manufacturing plant was built. In 1947 a small group of
individuals purchased what was then the Mill Hall Brick Works Company,
incorporated the business under the laws of the Commonwealth of
Pennsylvania and continued production. All ownership of the corporation
is still represented by family members of the original shareholders.
The Mill Hall Brick Works Company was one of thirty-two brick yards
located in Clinton County, Pennsylvania at one time. The present day
facility, Mill Hall Clay Products, Inc. is the only clay manufacturing
company still in operation in the county. It is the only manufacturer
of clay chimney flue liners in the state and one of about only seven
manufacturers of clay chimney flue liners in the United States.
The plant operates with thirteen bee-hive kilns to bake its
product, some of which have been standing and in use since the plant
started in 1890. The kilns have been fired with natural gas since 1965.
Before the transition to natural gas, the kilns were manually fired
with coal. The plant works one daylight shift, 8 hours per shift, while
the kilns are fired continuously, 24 hours a day, seven days a week.
There are presently 31 manufacturing employees and 7 management and
clerical personnel. We are a union shop represented by the United
Steelworkers of America. We have 38 manufacturing slots recognized by
our union contract, but, due to the decline in demand for our product,
we have not replaced the last seven employees who have left us.
Presently these 31 employees have been able to meet all of our
manufacturing needs.
Our products are sold all along the East Coast with our heaviest
market in the New England states.
At the present time, our largest expense, after plant labor, is the
cost of natural gas. We are presently paying gas bills that are three
to four times greater than we were paying in the past. We have been
passing these extra costs on to our customers in the form of
fluctuating sur-charges as well as price increases. It is getting to
the point where many alternative chimney methods are much cheaper to
put into new homes, when in the past they were much more costly than
the old fashion masonry chimney. Our sales for the last three years
have been the lowest sales years in the history of the company.
I am sure there is not a person out there that uses natural gas
that enjoys these high prices we are experiencing for the cost of
natural gas. We must do something to correct this problem or our
country will continue to ride this economic downturn we are
experiencing and we will continue to lose our manufacturing jobs. Along
with all the excuses I hear every day as to why the natural gas prices
are staying high, I feel the two main reasons we are in the situation
we are in is due to regulations and environmental issues. How can we
continue to meet the ever increasing supply and demand for natural gas
when regulations and environmental issues stand in the way of
production.
We have tons and tons of natural gas all over this United States
and we cannot drill for it due to regulations and environment issues.
We Americans are smart enough people that we can drill for this gas
anywhere in the United States and do it according to regulations and
not ruin the environment. I believe strongly in a protected environment
for my grandchildren to enjoy all their lives. I believe strongly in
operating a safe work place for my employees. But we must consider
opening up some of these regulations and environmental issues so this
country can get along with business and make sure our grandchildren can
enjoy their freedom in this country for years to come and enjoy all the
country has to offer them. We must do this to get back all of the
manufacturing jobs we have lost in the last three years due to plant
closings.
We fear for our jobs at Mill Hall Clay Products, Inc. and these
regulations and environmental issues are governing our fate. I have
been at Mill Hall Clay Products, Inc. for 35 years. I was hired seven
months after my honorable discharge from the United States Army. This
is the only job I have ever had. In my 35 years I have negotiated
eleven labor contracts with our local union. We have never experienced
a labor strike since I have been there. Our labor negotiations always
took six, eight, ten weeks with maybe two meetings a week lasting on
the average of four to six hours per meeting. We settled our latest
three year contract in June 2003. We met one time for two and one half
hours and the contract was settled. Two and one half hours, our men are
scared to death for their jobs.
Look at the numbers if our plant goes down, 38 employees total
whose families total 90 lives, 11 retirees that would be affected, 20
shareholders with families. One hundred thirty-one lives plus retirees
and shareholders families. Also, all the businesses and their employees
and families that depend on our product. Now consider this same
situation with a plant that employs 1000 people, a plant with 3000
employees. Think about the numbers and the consequences. How many
manufacturing jobs have been lost in the past three years in this
United States? We cannot sit still and let this continue to happen.
Please look over my attached charts and notice where we paid $3.58
average per Dth for natural gas in the past and $7.68 average per Dth
this past year. Also, on these charts, please notice in the past where
we paid $25.11 for natural gas to manufacture one ton of goods and this
past year we paid $72.00 for that same natural gas to manufacture that
ton of goods.
And finally, if I were spending $500,000,000 per year for natural
gas to run my plant here in the United States that employees 5,000
people, I would definitely consider moving my plant to Bolivia where
the same amount of natural gas would cost me $117,857,142, saving me
$382,142,858 in natural gas costs alone. This information is also noted
on one of the attached charts.
______
Mr. Gibbons. Thank you very much, Mr. Hyde. We appreciate
your testimony and the stark realization you have brought to
this committee from your experience with all of this.
We turn now to Carol Clements, the Chairperson for the
National Fuel Funds Network. Carol, welcome. We look forward to
your testimony. And again, the clock there indicates the five
minutes to sum it up. Your full and written complete testimony
will be admitted for the record. Carol, welcome.
STATEMENT OF CAROL CLEMENTS, CHAIRPERSON,
NATIONAL FUEL FUNDS NETWORK
Ms. Clements. Thank you. Mr. Chairman and other
Subcommittee members, I'm Carol Clements, Chairperson of the
Board of Directors of the National Fuel Funds Network, and
Executive Director of the Victorine Q. Adams Fuel Fund in
Baltimore. On behalf of NFFN, I thank you for the opportunity
to testify in today's hearing on the impacts of high energy
costs for the American consumer.
The national organization I chair and the local agency that
I direct are well qualified to speak on the impacts of high
home energy costs on consumers with low income. Last year, the
Victorine Q. Adams Fuel Fund in Baltimore provided direct
assistance to 1,108 households. The assistance totaled
$320,595. Our average grant was $289.
The National Fuel Funds Network consists of 290 members,
called fuel funds or charitable energy assistance programs.
They raise and distribute about $100 million annually in
private charitable contributions from their local communities
or states, to assist people with low incomes pay their home
heating bills. Our members include not only non-profit
organizations, but also utility companies, local and state and
tribal government agencies who administer these programs.
The fuel funds often supplement LIHEAP, and they are the
providers of last resort. Some of our members also manage the
Low Income Home Energy Assistance Program, or LIHEAP. Since we
operate at the boundary of Federal and private energy
assistance, NFFN members inevitably discover the sum of the
charitable resources they manage and the resources provided by
LIHEAP is inadequate. Therefore, the National Fuel Funds
Network supports increasing the appropriation of LIHEAP from
the current $2.2 billion to $3.4 billion for Fiscal Year 2006.
These are very dramatic times for those of us involved in
energy assistance. Today's Subcommittee hearing is in the wake
of continuing volatility and the steady rise in the cost of
home energy over the last five years.
Home energy burdens likewise continue to rise. And while
more families receive LIHEAP assistance, the percentage of
eligible families is declining. LIHEAP and its fuel fund
partners are effective programs, but the national home energy
assistance system is severely stressed, due to the lack of
funds.
We are now six to eight weeks into a compounding crisis
that occurs every spring. In mid-March or early April,
moratoria on utilities cutoffs end, and in many states, despite
the warmer weather, thousands of households face the prospect
of losing utilities, due to several months accrued bills.
Moreover, the human impacts of the gap between affordable home
energy and the home energy bills of people with low income are
persistent, and very troubling.
In my home State of Maryland, the study showed that
households with incomes of below 50 percent of the Federal
poverty level pay 47 percent or more of their annual income
simply for their home energy bills. More than 85,000 Maryland
households live with an income at or below 50 percent of the
poverty level. The study breaks down each state, and I
recommend you look at Roger Colton's analysis of the
affordability gap for every state in the United States.
More important than stressed social service agencies is the
impact of affordable home energy on people's health and
personal choices. The National Energy Assistance Directors
Association also did a study on the choice of heating or
eating.
The National Fuel Funds Network also strongly supports
including advanced appropriations for LIHEAP for 2007 at the
level of 3.4 billion, plus 300 million emergency funds.
An important question before the Subcommittee today is what
other measures, besides augmenting LIHEAP funding, can be taken
to help people with low income deal with increasing home energy
costs. NFFN recognizes how important it is to keep energy costs
reasonable. The increase in demand for LIHEAP can be directly
related to the rise in energy prices for the last few years.
Natural gas prices, in particular, have a direct impact on
energy affordability for low-income customers.
NFFN recognizes there must be adequate supplies of natural
gas and home heating oil to meet the demand and keep prices
reasonable and avoid price volatility. While it is not NFFN's
mission to determine where natural gas and oil supplies come
from, the network does recognize that steps must be taken to
increase natural gas supplies. This may come in the form of
energy legislation, or regulatory and administrative actions.
We commend the Resources Committee for exploring
alternative ways to supplement the LIHEAP program as part of
national energy legislation. The provision allowing the
Secretary of Interior to provide a preference to low-income
individuals under the Royalty-in-Kind program also has merit,
sir.
We thank you for the opportunity.
[The prepared statement of Ms. Clements follows:]
Statement of Carol Clements, Chairperson of the Board of Directors,
The National Fuel Funds Network
Mr. Chairman and other Subcommittee members, I am Carol Clements,
Chairperson of the Board of Directors of the National Fuel Funds
Network (NFFN) and Executive Director of the Victorine Q. Adams Fuel
Fund in Baltimore. On behalf of the NFFN, I thank you for the
opportunity to testify in today's hearing on ``The Impacts of High
Energy Costs on the American Consumer.''
The national organization that I chair and the local agency that I
direct are well-qualified to speak on the impacts of high home energy
costs on consumers with low income. Last year, the Victorine Q. Adams
Fuel Fund provided direct assistance to 1,108 households in Baltimore
City. This assistance totaled $320,595. Our average grant was $289. The
National Fuel Funds Network consist of 290 members--called fuel funds,
charitable energy assistance programs, fuel or energy banks--that raise
and distribute about $100 million annually in private, charitable
contributions from their local communities or states to assist people
with low incomes pay home energy bills. Our members include not only
nonprofit organizations, but also utility companies and local, state
and Tribal government agencies, who administer charitable energy
assistance programs.
The fuel funds often supplement LIHEAP assistance, and often they
are providers of last resort. Some of our members also manage federal
Low Income Home Energy Assistance Program (LIHEAP) funds. Since they
operate at the boundary of federal and private energy assistance, NFFN
members inevitably, discover that the sum of the charitable resources
they manage and the resources provided by LIHEAP is inadequate.
Therefore, the National Fuel Funds Network supports increasing the
appropriation for LIHEAP from the current $2.2 billion to $3.4 billion
for FY 2006.
These are very dramatic times for those of us involved in energy
assistance. Today's Subcommittee hearing is in the wake of continuing
volatility and steady rise in the cost of home energy over the last
five years. Home energy burdens likewise continue to rise, and, while
more families receive LIHEAP assistance, the percentage of eligible
families served is declining. LIHEAP and its fuel fund partners are
effective programs, but the national home energy assistance system is
severely stressed, due to lack of funds. We are now six to eight weeks
into a compounding crisis that occurs every spring. In mid-March or
early April, moratoria on utility service cut-offs end in many states,
and despite the warmer weather, thousand of households face the
prospect of losing their utilities due to several months accrued bills.
Moreover, the human impacts of the gap between affordable home energy
and the home energy bills of people with low income are persistent and
very troubling.
Let me address each of these factors in turn.
Home energy costs continue to rise
In April 1, 2005 testimony to the House Labor, Health and Human
Services, Education and Related Agencies Appropriations Subcommittees,
the National Energy Assistance Directors Association (NEADA) said:
``According to the Energy Information Administration, between
the 2002 and 2005 winter heating seasons, average home heating
expenditures for natural gas increased by 55 percent, from $602
to $935, while home heating costs rose by 93 percent, from $635
to $1226 and propane increased by 52 percent from $888 to
$1345.''
The Energy Information Agency just released its short-term outlook
for May, which predicts that natural gas spot market prices are likely
to remain in the range of $6.50 to $7.00 per mcf through the summer.
EIA also projects that average natural gas spot market prices will rise
above $7.00 per mcf through the rest of 2005 and 2006.
High energy burdens are persistent; the home energy affordability gap
is increasing
Families receiving LIHEAP assistance, reflecting families with low
income, in general, spend about 15% of their income on home energy,
compared with about 3% for all other families, according to the
National Energy Assistance Directors Association.
Exemplifying high energy burdens in the extreme is emergence of
several Baltimore families to whom I have provided energy assistance
recently. These families have home energy bills that rival or exceed
their rent or mortgage bills.
A recent analysis by Roger Colton of Fisher, Sheehan & Colton
(http://www.fsconline.com/work/heag/heag.htm, 2004) found that ``the
annual [national] `affordability gap' for 2002 reached roughly $18.2
billion'' for households with income at 185 % of the federal poverty
level. The study defines affordable home energy as an allocation of 6%
of household costs for home energy. In addition to LIHEAP funds, the
gap is partially covered by $100 million from fuel funds, some $225
million from the federal Weatherization Assistance Program, and
probably several billion dollars in state public benefit funds and in
discounts, arrearage forgiveness and other utility programs for
customers with low income.
In my home State of Maryland, the study showed that households with
incomes of below 50 percent of the federal poverty level pay 47 percent
or more of their annual income simply for their home energy bills. More
than 85,000 Maryland households live with income at or below 50 percent
of the poverty level. The study breaks down data for each state, and I
commend it to your attention.
While the cost of adequate home energy plagues people with the
least income the most, it is also touches the working poor and the
middle class. For example, 13% of the clients helped by the Victorine
Q. Adams Fuel Fund in the past year have incomes of more than 200% of
the federal poverty level.
More people are applying for LIHEAP, but the percentage of eligible
families served is declining
The above-cited NEADA testimony noted that the number of households
receiving LIHEAP assistance has been steadily increasing over the past
few years to a projected total of 5 million in the current fiscal year.
Yet, LIHEAP serves only about 15% of eligible families, a percentage
that has declined over the past few years, due to more families being
eligible.
Home energy assistance system stressed; cannot meet demand
The weather is now warmer than the winter, and summer's heat waves
have yet to hit. LIHEAP remains a very effective program, serving five
million households with a very small administrative cost. Charitable
energy assistance programs are increasing the amount of funds they
raise to supplement LIHEAP, and many utilities are innovating new
programs to serve payment ``challenged customers better. Nevertheless,
the home energy assistance system across the nation is highly stressed.
Low-income consumers need more assistance.
Examples recently provided to NFFN by members and in the news
portray our strained energy assistance system, where families in need
are turned away daily.
Let me start with our own experience in Baltimore. Completed
applications for LIHEAP assistance in Baltimore City have risen from
24,900 last year to 26,777, as of May 17, 2005, the day before the
program closed. According to 2000 Census data, over 84,000 households
in Baltimore are eligible for LIHEAP. For charitable assistance to
supplement LIHEAP in Baltimore City, there is a five week waiting list
to be seen by a staff worker. This week, we are seeing 30-40 new
appointments daily and 100-150 telephone calls daily to apply for
assistance.
In Michigan, Kim Nystrom, Administrative Services Manager for the
Inter-Tribal Council, said ``I find that this year we have been hit the
hardest. Usually our program runs all year long. This year, to date, we
are almost out of funds because of the increase in heating bills this
past winter.... Although this winter has been more mild than most, the
increase in costs to heat homes has not been so mild.''
In Wisconsin, where the moratorium on utility cut-offs expires on
April 15, LIHEAP agencies reported in the first week of April ``an
increase of 800 households over the previous week'' and said ``the case
load is expected to continue larger than average through the end of
May.'' The May 1 Oshkosh Northwestern reports that ``about 20,000 of
the utility's estimated half a million residential customers in a 20
county area in Northeastern Wisconsin owed at least four months on
their utility bills when the moratorium was lifted on April 15.''
Western Arizona Council of Governments (WACOG), the Arizona Region
IV Community Action Agency reports ``turning away thousands of clients
in any given year as a result of limited LIHEAP resources. From July 1,
2004 to February 28, 2005, WACOG assisted 1, 633 Families (5,625
people) in La Paz, Mohave and Yuma Counties from having their utilities
disconnected or needing their utilities re-connected. The LIHEAP funds
WACOG does have are stretched to help as many families as possible but
the sad truth is that our agency is only able to assist a portion of
the people walking in our door. In Region IV, housing stock for low-
income people could be classified as `Poor,' at best. Thus an average
monthly utility payment in warm weather areas is $297 in the summer
months and in cold weather areas an average monthly utility payment is
$265 in the winter months.''
WACOG offers that ``...these are very high fuel costs for families
living at the poverty level. For a family of three the cost of
utilities is approximately 22% of the families' gross income and for a
single person those costs are equivalent to 37% of the person's gross
income.''
The Pima County Community Action Agency in Arizona similarly
reports to NFFN that from July 2004--May 16, 2005, it provided LIHEAP
assistance to 4,223 individuals in 1,365 households, but that ``We were
unable to serve more clients with LIHEAP as the funds ran out in mid-
February, 2005.'' Fortunately, the agency was able to serve another
1,003 households with 3155 individuals by packaging various state and
local funds during the same period. Still, Norma Gallegos of the Agency
comments that ``...we would use additional LIHEAP funds if we had
them.''
In Washington, the Multi-Service Center in South King County
reported receiving 18,392 calls for assistance in January, far above
their monthly average. The Pierce County Community Action Agency is
seeing about 30 households a week whose service has been discontinued
and receiving 3,000 calls a month for aid.
In Garrett County, Maryland, Linda Green, the administrator of
three public and charitable energy assistance programs for the local
community action agency told NFFN that there has recently been a ``32
percent increase over last year of requests from low income households
needing assistance.''
In Florida, where many areas were devastated by hurricanes, our
members report the demand for assistance remained high over the winter.
In many cases agencies have run out of funds but are still receiving
calls for aid.
The Scranton-Lackawanna Human Development Agency in Pennsylvania
reports how a local LIHEAP program has had no choice but to turn away
thousand of eligible parties in one community as of April 8, 2005, when
LIHEAP Crisis Component funds ran out.
``The problem is the number of applicants who are ineligible
due to having received the allowable maximum benefit and yet
are still in need. We have a large number of ineligible
households because of this. We turn away approximately 60
households per day (300 per week) who are in need and meet
eligibility requirements. We have nowhere to refer them at this
time since all local private fuel funds are exhausted
At the rate we [have been] turning people away since the end of
December, it is probable that as many as 4,000 additional
grants were needed by otherwise eligible households who did not
receive them due to lack of funds.''
The home energy affordability crisis has a demonstrable human impact.
More important than stressed social service agencies is the impact
of affordable home energy on people's health and personal choices.
There are many studies documenting the lack of home energy decreasing
educational achievement, leading to homelessness and compromising
health. One example is the April 2004 National Energy Assistance
Director Association study (www.neada.org/comm/surveys/NEADA--Survey--
2004.pdf) of LIHEAP recipients, which found that:
``over 25% of families in the survey sacrificed medical care,
failed to make a rent or mortgage payment--and 22% went without
food for at least a day.''
The report illustrates that LIHEAP works: ``the number of
recipients spending over 25% of their income on energy declined by 2/3
with LIHEAP help.'' But the report noted that LIHEAP serves only 13% of
those eligible for it.
Increased Funding for LIHEAP Needed
The National Fuel Funds Network recently requested the House Labor,
Health and Human Services, Education and Related Agencies
Appropriations Subcommittees Subcommittee add more funds to LIHEAP
appropriations. Specifically, the Network believes that an FY 2006
appropriation of $3.4 billion in regular funds, plus $300 million in
emergency funds, is necessary. We asked for this level of funding for
this vital program because the current LIHEAP funding level is
virtually the same as it was when the program began in 1981, while the
Consumer Price Index inflation calculator shows that the cost of living
went up 107 percent over the same time period. The Network also
supports the recent reauthorization of LIHEAP in the House Energy bill
at the level of $5.1 Billion. I ask that each Subcommittee member
support these higher LIHEAP levels, which truly relieve the negative
impact of high energy costs on American families of limited means.
Advance Appropriations Need to be Restored
The National Fuel Funds Network also strongly supports including
advance appropriations for LIHEAP for FY 2007, at the level of $3.4
billion, plus $300 million emergency funds. The concept of advanced
appropriations helps programs to better plan for the impending winter
and summer months. Due to the uncertainty of the weather, advanced
appropriations would allow programs to disseminate assistance to those
in need in case of unforeseen harsh weather conditions. Advanced
appropriations would also help public and private energy assistance
programs work together more efficiently to assist those in need.
Advance knowledge of a state's LIHEAP funding also facilitates
charitable energy assistance fundraising campaigns in the state.
Other measures to address the home energy needs of families with low
income
An important question before the Subcommittee today is what other
measures besides augmenting LIHEAP funding can be taken to help people
with low income deal with increasing home energy costs.
NFFN recognizes how important it is to keep energy costs
reasonable. The increase in demand for LIHEAP can be directly related
to the rise in energy prices over the last few years. Natural gas
prices, in particular, have a direct impact on energy affordability for
low-income consumers.
NFFN recognizes that there must be adequate supplies of natural gas
and home heating oil to meet demand and keep prices reasonable and
avoid price volatility. While it is not NFFN's mission to determine
where natural gas and oil supplies should come from, the Network does
recognize that steps must be taken to increase natural gas supplies.
This may come in the form of energy legislation or regulatory and
administrative actions.
We commend the Resources Committee for exploring alternative ways
to supplement the LIHEAP program as part of national energy
legislation. The provision allowing the Secretary of Interior to
provide a ``preference'' to low-income individuals under the Royalty-
In-Kind program has merit.
Other measures that the Network recommends include:
The formation of a joint working group among the
Departments of Energy, Housing and Urban Development and the Department
of Health and Human Services to increase energy efficiency and
conservation in public and Section 8 housing.
Strengthening the federal Weatherization Assistance
Program, with special attention to the summer repair or replacement of
gas furnaces. In addition there should be more emphasis on education in
energy efficiency and conservation for those receiving aid through the
weatherization program.
A more concerted public-private effort to promote energy
conservation and efficiency. For example, the National Fuel Funds
Network, Alliance to Save Energy, Energy Outreach Colorado and other
partners, with funding from the Department of Energy, is engaged in a
three-year Ad Council home energy efficiency campaign targeted at
children (www.energyhog.org). Another example is the partnership of
NFFN, the National Endowment for Financial Education and the Department
of Housing and Urban Development that has distributed 90,000 copies of
Owning is Just the Beginning: Learning to Budget the Utility Costs of
Your New Home. Both partnerships have proven very successful and serve
as models for other public-private educational projects.
Other steps that should be taken include increased employment of
energy efficiency and conservation measures by city and state
governments; establishment of fuel blind public benefit funds in states
which have undergone utility restructuring; and creative use of the
Earned Income Tax Credit to reduce utility arrearages.
I again thank the Subcommittee for the invitation to appear before
you and am pleased to discuss any of the testimony with you.
______
Mr. Gibbons. Thank you very much Ms. Clements. And we
appreciate, certainly, the information you have brought to this
community about the Low Income Home Energy Assistance Program
for people that need that help and that assistance, low-income
families in this country who are also suffering dramatically
from the high cost of fuel today because of short supplies.
We turn now to Katherine Morrison, staff attorney for U.S.
Public Information [sic] Research Group. Ms. Morrison.
STATEMENT OF KATHERINE MORRISON, STAFF ATTORNEY,
U.S. PUBLIC INTEREST RESEARCH GROUP
Ms. Morrison. Good morning. My name is Katherine Morrison,
and I'm a staff attorney working on energy and global warming
issues for the U.S. Public Interest Research Group, or U.S.
PIRG.
U.S. PIRG is the national lobbying office for the state
PIRGs, which are environmental, good government, and consumer
advocacy groups active around the country. Thank you, Mr.
Chairman and members of the Subcommittee, for the opportunity
to speak today.
The state PIRGs have a long history of working for a clean,
affordable energy future. Our goal is to shift from polluting
and dangerous sources of energy, such as nuclear and fossil
energy, to increased energy efficiency and renewable energy
sources.
Today, I will be addressing the issue of our dependence on
oil and the impact of high gasoline prices, especially focusing
on policies that should and shouldn't be included in energy
legislation. Overall, we are dismayed that the energy bill,
H.R. 6, passed by the House, takes us in the wrong direction.
Retail gasoline prices have hit over $2 a gallon across the
country, and yet the U.S. remains dangerously dependent on oil.
The United States has only 3 percent of the world's oil
reserves, and uses 25 percent of the world's produced oil. As a
result, consumers pay prices at the pump that reflect the
instability of overseas oil supplies, as well as the often
dubious market behavior of domestic oil corporations.
Congress and the Bush Administration proposals will not
solve these problems. In May 2001, the Bush Administration
released its national energy policy, which outlined a plan that
continues to rely heavily on oil, other fossil fuels, and
nuclear power to meet the country's needs.
Just this past April, the House passed an energy bill that
does nothing to make cars go farther on a gallon of gas. The
bill also does nothing to protect consumers from price
manipulations by large oil and gas corporations, and in fact
provides these corporations with new tax breaks and subsidies.
The Energy Information Administration concluded that the
policies outlined in last year's virtually identical bill would
actually increase U.S. imports of foreign oil by 85 percent by
2025, and do nothing to lower gasoline prices. In fact, the
President recently acknowledged that the bill wouldn't change
the price at the pump today.
Similarly, the proposal to drill in the Arctic National
Wildlife Refuge would do nothing to solve our energy problems.
EIA has reported that drilling in the Arctic Refuge would not
have any impact on world oil prices. The U.S. Geological Survey
estimates that the oil found in the Arctic Refuge would meet
the energy needs of the U.S. for less than one year.
Increasing the fuel economy of our cars to 40 miles per
gallon, in contrast, would save at least four times as much oil
each day by 2020 as the Arctic Refuge would produce each day at
its peak. The best way to reduce our dependence on oil and save
consumers money at the pump is to make cars go farther on a
gallon of gasoline. Today, fuel economy is at a 24-year low of
20.8 miles per gallon.
The National Academy of Sciences has stated that we already
have the technology to make our cars get 40 miles per gallon.
In May 2001, if instead of pushing for the President's energy
policy and the House energy bill, we had instead taken the bold
step forward and increased the fuel economy of our cars and
SUVs to 40 miles per gallon, over ten years consumers and the
U.S. economy would already be reaping the benefits.
In 2005, just this year alone, the U.S. would be consuming
350,000 barrels of oil less per day. This is more than half of
our current imports from Iraq. Consumers would be saving more
than $5 billion at the gas pump this year, or about $300 per
new vehicle on the road. And the U.S. would be offsetting about
23.9 million tons of carbon dioxide, the primary global warming
gas. This is the equivalent of removing more than four million
average vehicles from the road. After 2005, as more cars
meeting the new standards replaced older, less efficient cars,
the benefits would have grown even larger.
Over the last decade, with little resistance by Federal
regulators, the oil companies have merged into mega
corporations with the ability to manipulate supply. These mega
corporations are the first to benefit from high gas prices, and
are reaping huge profits while consumers pay more at the pump.
In 2004, the top ten oil companies enjoyed net profits of $100
billion, an increase of more than 30 percent from 2003.
Congress has wasted four years on an energy policy that
won't help consumers or reduce our dependence on oil. We should
reject this energy bill, and instead focus on increasing
corporate average fuel economy standards to 40 miles per
gallon.
In addition, we should be focusing on strengthening Federal
antitrust laws, to give the Federal Trade Commission greater
market enforcement capabilities and to specifically prohibit
companies from intentionally withholding supplies to drive up
prices. The FTC should block mergers that make it easier for
oil companies to manipulate gasoline supplies, and take steps,
such as forcing companies to sell assets, to remedy the
situation.
Finally, the Administration and Congress should conduct a
study of the reasons for the closure of more than 50 refineries
in the past ten years, and assess how to expand refinery
capacity.
Thank you again for the opportunity to testify.
[The prepared statement of Ms. Morrison follows:]
Statement of Katherine Morrison, Staff Attorney,
U.S. Public Interest Research Group
Introduction
Good morning, my name is Katherine Morrison and I'm Staff Attorney
working on energy and global warming issues for the U.S. Public
Interest Research Group, or U.S. PIRG. U.S. PIRG is the national office
for the State PIRGs, which are environmental, good government and
consumer advocacy groups active around the country. Thank you for the
opportunity to speak today.
The state PIRGs have a long history of working for a clean
affordable energy future. Our goal is shift from polluting and
dangerous sources of energy such as nuclear and fossil energy to
increased energy efficiency and clean renewable energy sources.
Today I will be addressing the issue of our dependence on oil and
gasoline prices, especially focusing on policies that should and
shouldn't be included in energy legislation. Overall we are dismayed
that the energy bill, H.R. 6, passed by the House takes us in the wrong
direction.
Summary
Retail gasoline prices have hit over $2.00 a gallon across the
country, and the U.S. remains dangerously dependent on oil. The United
States holds only 3 percent of the world's oil reserves and uses 25
percent of the world's produced oil. As a result, consumers pay prices
at the pump that reflect the stability of overseas oil supplies as well
as the often-dubious market behavior of domestic oil corporations.
Congress and the Bush Administration proposals will not solve these
problems. In May 2001, the Bush Administration released its national
energy policy, the product of Vice President Cheney's energy task
force, which outlined a plan that continues to rely heavily on oil,
other fossil fuels, and nuclear power to meet the country's energy
needs. In April 2005, the House passed an energy bill does nothing to
make cars go farther on a gallon of gas. The bill also does nothing to
protect consumers from price manipulations by large oil and gas
corporations and, in fact, provides these corporations with new tax
breaks and subsidies. The Energy Information Administration (EIA)
concluded that the policies outlined in outlined in last year's
virtually identical bill would increase U.S. imports of foreign oil by
85 percent by 2025 and do nothing to lower gasoline prices in the short
or long-term. In fact, the president recently acknowledged that the
bill ``wouldn't change the price at the pump today.''
Similarly, the Bush Administration's proposal to drill in the
Arctic National Wildlife Refuge would do nothing to solve our energy
problems. EIA has reported that drilling in the Arctic Refuge would not
have any impact on world oil prices; the U.S. Geological Survey
estimates that the oil found in the Arctic Refuge would meet the energy
needs of the U.S. for less than one year. Increasing the fuel economy
of our cars to 40 mpg, however, would save at least four times as much
oil each day by 2020 as the Arctic Refuge would produce each day at its
peak.
The best way to reduce our dependence on oil and save consumers
money at the pump is to make cars go farther on a gallon of gas. Today,
fuel economy is at a 24-year low of 20.8 miles per gallon (mpg). The
National Academy of Sciences has stated that we already have the
technology to make cars get 40 mpg. In May 2001, when announcing his
national energy strategy, President Bush had the opportunity to take a
bold step forward and increase the fuel economy of cars and SUVs to 40
mpg by 2012. If he had, consumers and the U.S. economy already would be
reaping the benefits as more efficient cars entered the market. In 2005
alone:
The U.S. would be consuming 350,000 barrels of oil less
per day. This is more than half of our current imports from Iraq.
Consumers would be saving more than $5 billion at the gas
pump, about $300 per new vehicle on the road.
The U.S. would be offsetting 23.9 million tons of carbon
dioxide, the primary global warming gas. This is the equivalent of
removing four million average vehicles from the road.
After 2005, as more cars meeting the new standards replaced older,
less efficient cars, the benefits would have grown even larger. The big
oil companies and automakers continue to fight this progress; in fact,
while consumers are paying more at the pump, oil companies are
recording huge profits. Over the last decade, with little resistance by
federal regulators, oil companies have merged into mega corporations
with the ability to manipulate supply. These mega corporations, the
first to benefit from high gas prices, are reaping huge profits while
consumers pay more at the pump. In 2004, the top ten oil companies
enjoyed net profits of $100 billion, an increase of more than 30
percent from 2003.
Congress has wasted four years on an energy policy that won't help
consumers or reduce our dependence on oil. Congress should reject the
reject the energy bill. Instead, the Bush Administration should ask the
Secretary of Transportation to use his authority to increase Corporate
Average Fuel Economy standards to 40 miles per gallon. His authority
enables any increase that represents the ``maximum feasible'' standard
consistent with technological feasibility, economic practicability, the
effect of other government regulations on fuel economy, and the
nation's need to conserve energy. A 40 mpg fleet wide standard is
consistent with the criteria. In addition, policy-makers should
strengthen federal anti-trust laws to give the Federal Trade Commission
(FTC) greater market enforcement capabilities and to specifically
prohibit companies from intentionally withholding supplies to drive up
prices. The FTC should block mergers that make it easier for oil
companies to manipulate gasoline supplies and take steps, such as
forcing companies to sell assets, to remedy the situation. Finally, the
Bush Administration should conduct a study of the reasons for the
closure of more than 50 refineries in the past ten years and assess how
to expand refinery capacity.
The Problem
The United States is simply too dependent on oil. The United States
holds only two percent of the world's oil reserves. It produces 10.4
percent of the world's petroleum but consumes 25.5 percent of the
world's total petroleum production. 1 Our heavy reliance on
oil products to fuel transportation vehicles takes a heavy toll on the
environment. Oil pollutes the environment from the point of extraction
to combustion, leaving a trail of oil spills, smog-forming air
pollution, and global warming in its wake.
---------------------------------------------------------------------------
\1\ Light truck fuel economy standards have since been increased to
21 mpg.
---------------------------------------------------------------------------
Consumers pay a price too in the form of unpredictably high
gasoline prices at the pump. Gasoline prices are sensitive to crude oil
supply disruptions; moreover, as oil demand increases, so does the
price of a gallon of gasoline. Gasoline averaged more than $2.00 per
gallon during the first four months of 2005. 2 Rising gas
prices are cutting into consumer and business confidence, as well as
spending power, which helped slow the U.S. economy in the first quarter
of 2005. 3
The Solution
The best way to reduce our dependence on oil and save consumers
money at the pump is to make cars go farther on a gallon of gas. In
response to the Arab oil embargo of the early 1970s, Congress
implemented the first miles per gallon (mpg) standards in 1975 to
protect consumers from high gasoline prices and supply vulnerability
resulting from U.S. dependence on foreign oil. The drafters of the
successful oil savings law recognized that the only way to reduce
dependence on foreign oil was to reduce oil demand, requiring cars and
light trucks to nearly double miles per gallon averages to 27.5 and
20.7 miles, respectively. 1 As a result, consumers were able
to go farther on a gallon of gas; these standards also had the benefit
of reducing tailpipe emissions, including emissions of global warming
gases. Cars today use 2.8 million barrels of oil per day less than they
would have under the old fuel economy standards. 4
The 1975 oil savings law also requires that the National Highway
Traffic Safety Administration (NHTSA) continuously review and increase
miles per gallon standards as technologically feasible. 5
A 1996 Department of Transportation appropriations bill rider
prevented NHTSA from even studying the need and the technological
feasibility of new fuel economy standards. In 2001, the Senate
retracted this rider and agreed to study fuel economy standards.
Congress ordered the National Academy of Sciences (NAS) to determine
the effectiveness of the Corporate Average Fuel Economy (CAFE) program
and make recommendations for moving forward with new standards.
In 2001, NAS identified ranges of fuel economy improvements for
both cars and trucks while holding acceleration, performance, size,
accessories, amenities, mix of vehicle types, makes, and models sold
constant. The result was a 2002 NAS report, Effectiveness and Impact of
Corporate Average Fuel Economy (CAFE) Standards, which concluded that
automakers could use existing technology to increase the fuel economy
of their fleets to 40 mpg over the next decade while improving safety
and maintaining performance. 6
The technology is available today to make cars and light trucks go
farther on a gallon of gas. The Toyota Prius, which gets an estimated
60 mpg in the city, and the Ford SUV Escape, which gets about 35 mpg in
the city, demonstrate that foreign and domestic manufacturers can
produce smarter engines, more efficient transmissions, and other design
improvements to make substantial gains in fuel economy.
Despite the advances in technology, average fuel economy is at a
24-year low of 20.8 mpg for model year 2004 cars and light trucks--six
percent lower than the peak value of 22.1 mpg achieved in 1987 and 1988
(Figure A). 7
The overall declining trend in new light-vehicle fuel economy is
due to the recent light truck and SUV boom. ``Light trucks'' (minivans,
pickups, and SUVs) are defined as weighing less than 8,500 pounds.
Because fuel economy standards separate light trucks as a class and
subject them to different fuel economy standards, automakers often add
weight to their trucks to exempt them from the miles per gallon
standards altogether. The number of SUVs registered in the U.S. during
2002 increased 56 percent from 1997. 8
High gas prices, however, have slowed SUV sales. General Motors'
sales fell almost eight percent in April 2005 from the same month a
year earlier, primarily because of weak demand for SUVs. This drop in
demand also hurt Ford, which sold five percent fewer vehicles in April
compared with a year ago. At the same time, demand for hybrids and
other more fuel-efficient foreign sedans is surging. 9
[GRAPHIC] [TIFF OMITTED] T1446.001
The Current Proposals
In May 2001, the Bush Administration released its national energy
policy, the product of Vice President Cheney's energy task force, which
outlined a plan heavily focused on oil, other fossil fuels, and nuclear
power to meet our energy needs. Moreover, the Bush-Cheney energy policy
offered no plan for increasing the fuel economy of America's cars and
trucks to reduce oil demand. For four years, the Bush Administration
has tried to push its energy plan through Congress while actively
opposing proposals to significantly increase the fuel economy of cars
and light trucks. 10
In April 2005, the House once again passed an energy bill, H.R. 6,
which does not include any provisions to increase fuel economy or
otherwise reduce oil demand. Instead, the 2005 House energy bill
provides the oil and gas industry with $3.2 billion in new tax breaks,
or more than 40 percent of the total package. Meanwhile, the House
dropped more than $3 billion in incentives for renewable energy and
energy efficiency in this version of the bill. 11 According
to a recent analysis by the Energy Information Administration (EIA), by
2025, U.S. imports of petroleum would increase by 85 percent under the
Bush Administration's preferred energy policy, encapsulated in the 2003
federal energy bill, which is nearly identical to the version passed by
the House in April. EIA also found that the energy bill would actually
slightly increase gas prices by 2010 compared with business as usual.
12 The president himself admitted that the bill ``wouldn't
change the price at the pump today.'' 13 Regardless, the
president continues to push Congress to pass this energy bill.
14
Similarly, the Bush Administration's proposal to drill in the
Arctic National Wildlife Refuge would do nothing to lower gas prices or
reduce our dependence on foreign oil. The U.S. Geological Survey
assessment of the coastal plain estimates that the oil found in the
Arctic Refuge would meet the energy needs of the United States for less
than a year. Even if we started drilling today, that oil would not
reach American consumers for at least 10 years. 15 EIA
recently reported that drilling in the Arctic National Wildlife Refuge
would not have any impact on world oil prices, noting that ``[a]ssuming
that world oil markets continue to work as they do today, the
Organization of Petroleum Exporting Countries could countermand any
potential price impact of ANWR coastal plain production by reducing its
exports by an equal amount.'' 16 Opening up the coastal
plain of the Arctic Refuge would not solve our energy problems.
Increasing the fuel economy of our cars to 40 mpg, however, would save
at least four times as much oil each day by 2020 as the Arctic Refuge
would produce each day at its peak. 17
Our Recent Findings
The Bush Administration has failed to apply our technological know-
how to improve the fuel economy of America's cars and SUVs, which has
lead to higher prices at the pump, increased dependence on foreign oil,
and a host of environmental problems stemming from oil exploration and
combustion.
On Tuesday, on the anniversary of the release of the Bush-Cheney
plan, we are released a new report, America Idles: President Bush's
Inaction Costs Americans $5 Billion at the Pump in 2005. We examined
what would be happening if four years ago, the President had picked up
a pen and taken a bold step forward by increasing the fuel economy of
cars and SUVs to 40 miles per gallon by 2012. Even though we would
still be phasing in the fuel economy standards, more efficient cars
would already be entering the market. By 2005, new fleets of cars and
light trucks would have averaged almost 30 mpg, or nearly 10 mpg more
than they average today. 18
If President Bush had raised fuel economy standards in May 2001 to
40 mpg by 2012, in 2005 alone we would see the following benefits:
The U.S. would be consuming 350,000 barrels of oil less
per day. This is more than half of our current imports from Iraq.
19
Consumers would be saving more than $5 billion at the gas
pump, or about $300 per new vehicle. 20
The U.S. would be offsetting 23.9 million tons of carbon
dioxide, the primary gas responsible for global warming. This is the
equivalent of removing four million average vehicles from the roads.
After 2005, as more cars meeting the new standards replaced older,
less efficient cars, the benefits would have grown even larger.
The Oil Companies
Politicians at the federal level and oil industry representatives
are putting the blame for rising gas prices on everything from the
Organization of Petroleum Exporting Countries (OPEC) to fuel additive
requirements. While OPEC plays a role in determining gas prices, this
finger pointing overlooks the fundamental problem: America is too
dependent on oil. As long as demand for oil continues to climb,
consumers will remain vulnerable to price spikes at the gas pump--
whatever their cause.
It is instructive, however, to examine some of the other market
factors that drive gasoline price spikes, in addition to growing
demand. Over the last decade, with little resistance by federal
regulators, oil companies have merged into mega corporations with the
ability to manipulate supply. These mega corporations, the first to
benefit from high gas prices, are reaping huge profits while consumers
pay more at the pump.
Although consumers continue to suffer at the pump, oil companies
are enjoying huge profits. In 2004, the top ten oil companies enjoyed
net profits of $100 billion, an increase of more than 30 percent from
2003. 21 According to its 2004 annual report, ExxonMobil
earned a record-breaking $25.3 billion in net income in 2004, a $3.8
billion increase over 2003 and a $13.9 billion increase over 2002. Cash
flow from operations and asset sales was $43.3 billion, also a record.
In addition, the company handed out nearly $15 billion to shareholders
in dividends and share buybacks. 22 During the year ending
December 31, 2003, CEO Lee Raymond earned $27.8 million in salary and
bonuses and exercised $15.9 million in options. In 2004, Raymond
received a 37 percent pay increase to $38 million--about half a day's
profits at the company. 23
The world's four largest oil companies, Shell, BP, ExxonMobil and
ChevronTexaco, have earned a combined $23.8 billion during the first
three months of 2005 alone. 24
Federal regulators have allowed multiple large, vertically
integrated oil companies to merge into even larger entities, enabling
them to exploit supply and demand to increase profits. Because people
use gasoline to get to work, the grocery store, and school, the demand
for gasoline is inelastic, meaning that demand does not change despite
increases in price. Americans' reliance on oil products in their daily
lives places them in the hands of the small number of multinational
corporations that now control the bulk of the refineries and market for
oil and gas in the United States.
In 1981, 189 companies operating in the United States owned 324
refineries; by 2001, 65 firms owned 155 refineries. The market share of
the top ten largest refiners grew from 55 percent to 62 percent over
the same period of time. 25 Today, the top ten refineries
control 78.5 percent of domestic refinery capacity while the five
largest oil companies (ExxonMobil, ChevronTexaco, ConocoPhillips, BP
and Royal Dutch Shell) control half of all domestic refinery capacity.
26 In addition, together they own 48 percent of domestic oil
production and 61.8 percent of the retail gasoline market.
27
The mergers in the oil industry have forced the closing of many
refineries, creating highly concentrated or ``tight'' markets in many
states. The Federal Trade Commission (FTC) and the Department of
Justice (DOJ) guidelines state that ``mergers should not be able to
enhance market power or facilitate its exercise. Market power to a
seller is the ability to profitably maintain prices above competitive
levels for a significant period of time.'' Sellers may also lessen
competition on dimensions other than price, such as product. ``The
result of the exercise of market power is a transfer of wealth from
buyers to sellers or a misallocation of resources.'' 28
The government gains its authority to review mergers and
acquisitions under Section 7 of the Clayton Act. 29 Section
7 prohibits mergers and acquisitions that may substantially lessen
competition or tend to create a monopoly (ownership of one). The FTC
and DOJ measure market concentration with the Herfindahl-Hirschman
Index (HHI).
Under the HHI, market concentration is equal to the sum of the
squares of the individual market shares of every firm in the
market. For example, if there were only four firms in a
particular market, each with 25% of the market, the HHI would
be 2,500 (252 x 4). Any market with an HHI over 1,800 is
considered highly concentrated by the enforcement agencies and
viewed with some suspicion; between 1,800 and 1,000 the market
is considered moderately concentrated; and below 1,000, the
enforcement agencies consider such markets to be
unconcentrated. 30
Where products are relatively undifferentiated, the FTC and DOJ
guidelines also find that a merged firm may lessen competition through
unilaterally raising prices and suppressing output where the merged
firm owns a combined market share of at least 35 percent. The merger
provides the merged firm a larger base of sales on which to enjoy the
resulting price rise and also eliminates a competitor to which
customers otherwise would have diverted their sales. 31
If a merger does not pose a serious threat to competition, it is
unlikely to be challenged. If a substantial threat is present, however,
the enforcement agencies may exercise discretion to prosecute.
32
A recent investigation by the FTC into 2000 Midwest price spikes
disclosed unilateral actions by firms to manipulate the market to
increase prices. An executive of one of the companies made clear that
he ``would rather sell less gasoline and earn a higher margin on each
gallon sold than sell more gasoline and earn a lower margin.''
33 This evidences the business practice of lessening
competition through the suppression of a product to increase price. But
despite the oil executive's blatant admission that he was responsible
for withholding supply to drive up price, the FTC found that ``a
decision to limit supply does not violate antitrust laws...Firms that
withheld or delayed shipping additional supply in the face of a price
spike did not violate antitrust laws.'' 34
In 2000, 28 states were considered moderately concentrated, and
nine states had an index above 1800 and were thus considered ``highly
concentrated.'' 35 As a point of comparison, in 1994, as
measured by the HHI, the gasoline wholesale market was ``moderately
concentrated'' in 22 states (see Appendix B).
A few mega firms are gaining an exceedingly larger market share,
enabling them to control the flow of gasoline in the U.S. This provides
the opportunity to manipulate the market to turn a quick profit,
because no standards govern selective pricing or withholding of supply.
These firms individually own such a large percentage of the industry as
a whole that collusion is not needed to manipulate the market. If they
so chose, individual actions would be sufficient to upset the supply in
any given sector. As long as there is no collusion involved, firms are
free to set prices and withhold supply to increase gasoline prices and
turn higher profits.
Conclusion
Congress has wasted four years on an energy policy that won't help
consumers or reduce our dependence on oil. Congress should reject the
reject the energy bill. Instead, the Bush Administration should ask the
Secretary of Transportation to use his authority to increase Corporate
Average Fuel Economy standards to 40 miles per gallon. His authority
enables any increase that represents the ``maximum feasible'' standard
consistent with technological feasibility, economic practicability, the
effect of other government regulations on fuel economy, and the
nation's need to conserve energy. A 40 mpg fleet wide standard is
consistent with the criteria. 36 In addition, policy-makers
should strengthen federal anti-trust laws to give the FTC greater
market enforcement capabilities and to specifically prohibit companies
from intentionally withholding supplies to drive up prices. The FTC
should block mergers that make it easier for oil companies to
manipulate gasoline supplies and take steps, such as forcing companies
to sell assets, to remedy the situation. Finally, the Bush
Administration should conduct a study of the reasons for the closure of
more than 50 refineries in the past ten years and assess how to expand
refinery capacity.
BIOGRAPHY--Katherine Morrison
Katherine Morrison is a staff attorney working on energy and global
warming issues with the U.S. Public Interest Research Group (U.S.
PIRG). She is responsible for policy development, research and advocacy
on energy issues ranging from electric utility restructuring to
gasoline prices and renewable energy. She is on the on the Steering
Committee of the U.S. Climate Action Network.
Before joining the U.S. PIRG staff in 2001, she worked with the
Natural Resources Defense Council as the Communications Coordinator for
the Clean Air Network and with the Center for International
Environmental Law. She is 1994 graduate of American University, and a
2001 graduate of the William and Mary School of Law, where she won the
Thurgood Marshall Award for distinguished public service.
endnotes
1 Stacey C. Davis, Transportation Energy Data Book: Edition
23, Oak Ridge National Laboratory, October 2003, citing U.S.
Department of Energy, Energy Information Administration, Annual
Energy Review 2002, Washington, DC, July 2003, Table 11.9 and
updates from the International Petroleum Monthly, July 2003.
2 Energy Information Administration, ``Retail Gasoline
Historical Prices,'' available at http://tonto.eia.doe.gov/oog/
ftparea/wogirs/xls/pswrgvwnus.xls. Average for regular gasoline
for January 3, 2005 through May 2, 2005.
3 Jeannine Aversa, ``Experts keep close eye on energy
prices,'' Associated Press, May 2, 2005; Michael J. Martinez,
``Wall St. uncertainty outweighs good news,'' Associated Press,
May 9, 2005; ``Crude Oil Prices Rise Above $51 Mark,''
Associated Press, May 9, 2005; Alexandra Marks and Robert
Tuttle, ``Oil prices spread to grapes, TVs, pizza,'' Christian
Science Monitor, March 29, 2005; ``High gas prices make
consumers gloomy,'' Reuters, April 26, 2005, available at
http://money.cnn.com/2005/04/26/news/economy/consumer--
confidence.reut/.
4 National Research Council, Effectiveness and Impact of
Corporate Average Fuel Economy (CAFE) Standards, 2002.
5 The CAFE law recognizes that the only way to reduce our
dependence on foreign oil is to reduce oil demand. Thus it
mandates that NHTSA continually review and increase CAFE
standards to the maximum level technologically feasible:
At least 18 months before the beginning of each model year, the
Secretary shall prescribe by regulation average fuel economy
standards for automobiles (except passenger automobiles)
manufactured by a manufacturer in the model year (emphasis
added). Each standard shall be the maximum feasible average
fuel economy level that the Secretary decides the manufacturers
can achieve in that model year (emphasis added). (49 U.S.C.
32902)
The statute also permits the Secretary to increase CAFE standards
for passenger automobiles above 27.5 miles per gallon subject
to disapproval by either House of Congress (49 U.S.C.
32902(2)). The United States Supreme Court has since held that
legislative action by one House is invalid. (Immigration and
Naturalization Service v. Chadha, 103 S.Ct. 2764 (1983)). Any
legislative action must be passed by both Houses of Congress
and presented to the President for signature in order to be
legitimate (Immigration and Naturalization Service v. Chadha,
103 S.Ct. 2764 (1983)). Therefore, the section of the statute
subjecting an increase in passenger automobile CAFE standards
to approval by one House of Congress is invalid. Because the
remaining portions of the statute are fully operative, NHTSA
can honor the intent and purpose of the law by increasing CAFE
to 40 mpg.
6 National Research Council, Effectiveness and Impact of
Corporate Average Fuel Economy (CAFE) Standards, 2002.
7 Karl H. Hellman and Robert M. Heavenrich, U.S.
Environmental Protection Agency, ``Light-Duty Automotive
Technology and Fuel Economy Trends: 1975 Through 2004,''
Executive Summary at 2, April 2004.
8 U.S. Census Bureau, ``2002 Fast Facts for the United
States.'' Available at www.census.gov/prod/ec02/viusff/
ec02tvff-us.pdf.
9 Jeremy W. Peters, ``Ford and G.M. Suffer as Buyers Shun
S.U.V.s,'' New York Times, May 4, 2005; Amey Stone, ``Detroit's
Woe, America's Worry,'' Business Week, April 26, 2005.
10 Statement of Administration Policy, Energy Policy Act of
2002 (S. 517), March 5, 2002, http://www.whitehouse.gov/omb/
legislative/sap/107-2/S517-s.html.
11 Based on Joint Committee On Taxation's April 12, 2005
estimates.
12 Energy Information Administration, Summary Impacts of
Modeled Provisions of the 2003 Conference Energy Bill, SR/OIAF/
2004-02, February 2004. (See Table B3, Energy Prices by Sector
and Source.) Available at www.eia.doe.gov/oiaf/servicerpt/pceb/
pdf/sroiaf(2004)02.pdf.
13 ``Bush Concedes Energy Bill Offers No Help on Gas
Prices,'' New York Times, April 21, 2005.
14 ``I applaud the House for passing a good energy bill. Now
the Senate needs to act on this urgent priority. American
consumers have waited long enough. To help reduce our
dependence on foreign sources of energy, Congress needs to get
an energy bill to my desk by this summer so I can sign it into
law.'' Transcript of April 28, 2005 White House Press
Conference, available at http://www.whitehouse.gov/news/
releases/2005/04/20050428-9.html.
15 U.S. Geological Survey, Arctic National Wildlife Refuge,
1002 Area, Petroleum Assessment, 1998, Fact Sheet 0028-01,
available at http://pubs.usgs.gov/fs/fs-0028-01/.
16 Energy Information Administration, Analysis of Oil and
Gas Production in the Arctic National Wildlife Refuge, March
2004.
17 Estimates of the peak yield of the Arctic Refuge (between
639,000 to 1,595,000 barrels per day, with a mean estimate of
876,000 barrels per day) found in Energy Information
Administration, Analysis of Oil and Gas Production in the
Arctic National Wildlife Refuge, March 2004. Available at
http://www.eia.doe.gov/oiaf/servicerpt/ogp/index.html.
Estimates of savings from a phased-in 40 mpg standard over ten
years (5.4 million barrels per day by 2020) found in Union of
Concerned Scientists, Drilling in Detroit, June 2001. Available
at http://www.ucsusa.org/publication.cfm?publicationID=99.
18 Based on estimates by Therese Langer from the American
Council for and Energy Efficient Economy. The calculations are
based on a 40 miles per gallon fleet average by 2012 with 2002
as the first year the standards begin to take effect.
19 EIA states we imported 651,000 barrels per day on average
from Iraq in 2004. Available at http://www.eia.doe.gov/emeu/
mer/pdf/pages/sec3--8.pdf
20 The Bureau of National Transportation Statistics
estimates that there were 16,865,000 new vehicles sold or
leased in 2004. Bureau of National Transportation Statistics,
National Transportation Statistics 2004, January 2005.
Available at http://www.bts.gov/publications/national--
transportation--statistics/2004/html/table--01--17.html.
Assuming sales in 2005 are about the same, this translates into
$306 per new vehicle.
21 Jad Mouawad, ``Big Oil's Burden of Too Much Cash,'' New
York Times, February 12, 2005.
22 ExxonMobil, 2004 Annual Report, available at http://
www.exxonmobil.com/corporate/files/corporate/AR--2004.pdf.
23 Dan Roberts, ``ExxonMobil chief's pay hits $38m,''
Financial Times, April 13, 2005.
24 Michael Liedtke, ``Oil Industry Boom Likely to
Continue,'' Associated Press, April 29, 2005.
25 United States Senate, Committee on Government Affairs,
Gas Prices, How Are They Really Set?, April 30, 2002, p. 28.
26 Public Citizen, Mergers, Manipulation and Mirages: How
Oil Companies Keep Gasoline Prices High, and Why the Energy
Bill Doesn't Help, March 2004.
27 Public Citizen, Mergers, Manipulation and Mirages: How
Oil Companies Keep Gasoline Prices High, and Why the Energy
Bill Doesn't Help, March 2004.
28 DOJ and FTC 1992 Horizontal Merger Guidelines, p. 3; See
http://www.ftc.gov/bc/docs/horizmer.htm.
29 15 U.S.C. Sec. 18.
30 Findlaw, Mergers and Acquisitions Primer, by Robert W.
Doyle, Jr., Powell, Goldstein, Frazer & Murphy LLP; See http://
profs.lp.findlaw.com/mergers/mergers--6.html.
31 DOJ and FTC 1992 Horizontal Merger Guidelines, p. 18; See
http://www.ftc.gov/bc/docs/horizmer.htm.
32 Findlaw, Mergers and Acquisitions Primer, by Robert W.
Doyle, Jr., Powell, Goldstein, Frazer & Murphy LLP; See http://
profs.lp.findlaw.com/mergers/mergers--6.html.
33 Public Citizen, Mergers, Manipulation and Mirages: How
Oil Companies Keep Gasoline Prices High and Why the Energy Bill
Doesn't Help, March 2004, Citing Midwest Gasoline Price
Investigation, www.ftc.gov/os/2001/03/mwgasrpt.htm.
34 Federal Trade Commission, Midwest Gasoline Prices
Investigation, March 2001, p. 21.
35 Gas Prices: How Are They Really Set? Report prepared by
the Majority Staff of the Permanent Subcommittee on
Investigations, Released in Conjunction with the Permanent
Subcommittee on Investigations' Hearings on April 30 and May 2,
2002.
36 49 CFR Sec. 32902.
______
Mr. Gibbons. Thank you very much, Ms. Morrison. We
appreciate your testimony that you brought here before the
Committee today. And let me say, from someone from the Second
District of Nevada whose district contains Yucca Mountain, we
have worked with you in the past with regard to the
transportation and storage of nuclear waste at Yucca Mountain,
and you have been very helpful to us.
We will turn now to the questions from our panel here. And
I will begin with Mrs. Drake, for five minutes. Mrs. Drake.
Mrs. Drake. Thank you, Mr. Chairman. I would certainly like
to thank each and every one of you for being here. And I do
have several questions, but I would like to start with Ms.
Clements because you talked very eloquently about the people
that you are serving. And I think all of us experience that in
our districts, that there are groups that are helping with
energy costs for families.
One question that I have is, you mentioned a decline in
funds. Is it really a decline in available funds, or is it an
increase in the amount of funds that is given to each family
because of the dramatic increase in their fuel costs in the
last five years?
Ms. Clements. With LIHEAP, the buying power of LIHEAP is
still at 1982 prices. With the increase in the amount of people
we're seeing right now, the numbers just don't jibe. So we
really need LIHEAP increased. As far as Fuel Fund, Fuel Fund
does not have enough money to meet the demand of the people who
need more above the LIHEAP program.
Mrs. Drake. Well, I am also thinking, after hearing Mr.
Hyde speak, that there is probably a number of people you are
serving today who have been pushed out of their jobs, just as
we heard in the last panel and we have heard from Mr. Hyde. He
personally has lost seven employees, and so those are seven
more people. Hopefully, they have found other jobs.
But I also wondered, is there an educational component to
what your group does, to educate people on things like keeping
the thermostat lower, or how much the cost of energy is
impacting on what they are doing, just for a more educational
component, that type of education to them, so they understand?
They should be wearing those buttons, too, ``We need a national
energy policy,'' because they are dramatically impacted by it.
Ms. Clements. We did bring a LIHEAP recipient over here in
January, when we had our LIHEAP advocacy day. So the customers
are aware of the prices. The consumers know about energy
conservation. We do talk to them about that. But when you're
dealing with a housing stock that in Baltimore City is very old
in most areas--and the weatherization program, which is
federally funded, does not do a full rehab of a house to keep
it energy conserving. So there are gaps in a lot of the
programs, and they all mesh together.
And when you're dealing with a low-income consumer with
energy, it's education, it's LIHEAP, it WAP, it's fuel funds,
it's a massive situation. And in the last three or four weeks,
we've seen the number of telephone calls for our service jump
from 100 to 150 a day. And we have a five-week waiting time to
see a customer, and they could be turned off before we even get
to see them.
Mrs. Drake. Thank you. Ms. Morrison, you started early in
your remarks talking about nuclear energy and your group's
opposition to it. Even in light of where we are today with the
energy crisis and the fact that we have not built a nuclear
power plant in probably over 20 years, your group would
adamantly oppose an increase in nuclear power plants today to
deal with this crisis?
Ms. Morrison. We believe that we should be focusing instead
on efficiency and diversifying into clean, renewable resources.
We're very concerned about nuclear power, that we still don't
have a solution as to how to deal with the waste, and that we
still have a lot of questions about the security and risks
posed by nuclear power plants.
Mrs. Drake. And your information is you could provide that
type of energy for us in a timely manner to deal with the
crisis that we are in?
Ms. Morrison. Energy efficiency is the quickest, cleanest,
cheapest way to start getting our way out of this energy
crisis. And we think that with you increasing energy efficiency
and adding in a diversified, clean, renewable energy, that we
could indeed help--start helping this problem.
Mrs. Drake. But I think we would hear from Mr. Hyde, and we
heard from the last panel, that they were doing everything they
could do to increase energy efficiency; and that reduction in
demand would certainly not come anywhere near close to meeting
their supply needs.
Ms. Morrison. Well, certainly, energy efficiency alone
isn't going to do it right at this moment. But energy
efficiency can certainly put us on the path to where we should
be. Increasing energy efficiency is--there are improvements
available in the electricity system of up to a third, easily,
and those are conservative estimates of increasing efficiency
in our electricity system.
In terms of cars and automobiles, as I said, we've been
stagnated for the past 24 years on fuel economy in this
country. Seventy-seven percent of oil is used in the
transportation sector, and we need to start addressing that
problem.
Mrs. Drake. And don't you think part of the issue--because
I was going to ask about the car issue and the 40-mile-a-
gallon--there, again, is personal choice. I was a realtor
before I came into Congress. And one of the most important
things to me is that if I was driving people and their
children, that I wanted to be sure they were as safe as
possible. And I bought a car that I think is pretty good--
certainly not 40 miles a gallon, but that would be very safe to
drive other people around; and now, of course, to go up and
down the road to go home from Congress.
And I have just come back from a trip to Europe. And in
Italy, they have these little, tiny smart cars. I guess I need
to stop. OK. So I don't even want you to answer me, but I think
that is a key factor in the 40-mile-a-gallon thing; that it is
just not something Americans would want to drive, for various
reasons.
Mr. Gibbons. Thank you very much, Mrs. Drake. The reason I
am trying to get everybody to expedite their questions here is
because we do have a series of votes that has just been called.
We are down to about the ten-minute level.
So what I am going to ask, for those that have questions,
Mr. Grijalva and Mr. Peterson and myself, to certainly expedite
it into the minimum fashion, because the series of votes will
take us beyond the time of the end of this hearing, and we
would like to excuse the panel before we go vote. Mr. Grijalva.
Mr. Grijalva. Thank you, Mr. Chairman. And Ms. Clements, I
had questions, but let me just thank you. I am very impressed
with what your organization does. I am familiar with the work
of Pima County Community Action, the Western Arizona Council of
Governments. And in the information from them that you pointed
out, they are turning people away.
And I think your point about it as a policy issue is worked
out in the long term. In the short term, for the people that
you serve and the consumers that you take care of, that $3.4
billion threshold is absolutely necessary. And thank you very
much for that testimony.
Ms. Clements. Thank you, sir.
Mr. Grijalva. Ms. Morrison, in part of your testimony you
made a point, I think, that doesn't get discussed enough. I had
other questions, but let me just concentrate on that one--the
issue of transparency, as we talk about an energy policy and we
talk about how to craft it and the tough choices that are going
to have to be made, etcetera.
There seems to be almost no discussion on the corporate
side of the responsibility in this issue, as well: the
transparency issues in terms of mergers, the speculation that
occurs, the variations in prices that occur. I just want you to
maybe just elaborate for a minute or so on that transparency
point that you were making.
Ms. Morrison. Certainly. There's a couple of different
things going on. There's a--natural gas and oil both are
suffering from some lack of transparency. In fact, when we had
seen all the high prices in the California price spike, they
did an investigation of the natural gas companies, the Federal
Energy Regulatory Commission, and found that there was such an
engagement of false reporting that they called it an epidemic
of false reporting of prices at that time.
And certainly, there needs to be more investigation, to
make sure that what we are charging in this country, and what
people are reporting as the price of natural gas, and what
these companies are saying, is in fact a reality.
And in addition, the General Accounting Office also
acknowledged that gas prices that cannot be independently
validated and incorrect reporting of the information could
impact on the volatility of the natural gas market.
The oil companies, in addition, have been consolidating
over time and have, as they have consolidated, merged into
larger and larger corporations that have controlled a larger
proportion of the market. It used to be you had to have more
companies in play in order to affect the price of gasoline; but
when you have so few companies controlling such a large
proportion of the market share, the temptation is there to
start having problems.
Mr. Grijalva. Just in closing, I think, as part of your
point, with the two top CEOs of some of these merged
corporations, the bonus, I think, this year for one was 38
million, and the other one was 10 million. And so, I think
transparency as part of this energy policy discussion is
critical.
Mr. Gibbons. Thank you, Mr. Grijalva. And don't you get a
$10 million bonus for being on this committee? Oh, you don't?
Mr. Grijalva. I don't even get a free car.
Mr. Gibbons. Oh, no.
[Laughter.]
Mr. Gibbons. Unfortunately, some of these issues are
outside the jurisdiction of this committee. So we are going to
turn to Mr. Peterson for his questions.
Mr. Peterson. Yes. I want to thank all the panelists;
especially you, Robbie, for coming down from my district, and
your good testimony, and for involving me a long time ago in
this issue.
Ms. Morrison, you have heard a lot about natural gas today
and the problems it is causing. Does your organization in any
way support the interim expansion of availability of natural
gas, which is our cleanest-burning--no SOX, no NOX, a fourth of
the CO2; it is the cleanest-burning fossil fuel we have--does
your organization support any expanded use of it to get us to
the future?
Ms. Morrison. We feel that it's unnecessary, since the
majority of gas reserves on public lands are in fact actually
already open to exploration and drilling. According to the MMS,
or the Minerals Management Services, more than 88 percent of
the natural gas resources on public lands in the West are
already available for development, and more than 80 percent of
the nation's undiscovered economically recoverable Outer
Continental Shelf gas is located in the central and western
Gulf of Mexico, which is not currently subject to the
moratorium.
Mr. Peterson. The facts given to us this morning: 85
percent of the natural gas reserves in America are on
moratorium on public land--85 percent of the natural gas
reserves. So I think your data is very well thought.
Let me ask a question. You talk about electric efficiency.
What kind of electric light bulbs do you use?
Ms. Morrison. In my home?
Mr. Peterson. Yes.
Ms. Morrison. I use compact fluorescent light bulbs.
Mr. Peterson. Good. I commend you. I do, too, and I think
it is 23 percent of the normal usage. My wife laughed at me
when I started putting them in, but she likes them because they
don't burn out so quick. But I commend you for that. You are
living proof that you are doing it, too.
But I would urge your organization to take a very hard look
at their natural gas policy because, I want to tell you, we are
shipping the chemical business, the polymer business, all
melting and smelting businesses, out of this country who use
natural gas as heat. And we can't conserve our way out of that.
With natural gas, we are an entity to ourselves. When we buy
$50 oil, which is damaging, the whole world buys it. But when
we buy $7 gas, we are an island to ourselves, and we cannot
compete.
And the person who is going to take it in the neck is the
person who is trying to heat their home next winter, because
they are going to be looking at another 30-percent increase in
home heating. And Robbie's people may lose a job, but you are
going to find millions of Americans not maintaining their homes
if we don't solve this crisis.
And conservation cannot get us through this problem. I just
think you folks need to understand that. As much as I support
conservation and better use, it is an appropriate thing; but it
doesn't get us where we need to be.
And when you look at the renewables, here is the energy
used today: 39 percent is petroleum; 23 percent is coal; 23
percent is natural gas--these are two years old; gas is bigger
than that now--nuclear, 8; wood alcohol waste, 3;
hydroelectric, 3. Not even a percentage: geothermal, solar, and
wind, and combination.
And I do note, last year that data was, 80 percent of those
three was geothermal. So wind and solar, as much as we see a
lot about them, are not even a percentage. So if we double them
and we triple them--and we may try, and we should try--it does
not make an immediate impact.
In the interim, if we don't deal with natural gas prices, I
think we're kissing our economy goodbye. And I mean that
sincerely.
Mr. Gibbons. Thank you very much, Mr. Peterson. And
unfortunately, the time of the clock is not controlled by me
today. It is now controlled by the people down on the Floor who
are scheduling us for a vote.
I want to thank each of you as witnesses, both panel one
and panel two, for your testimony today. We will be submitting
written questions to you, to supplement what we didn't get to
ask. And of course, we would ask that you would return those
questions and answers to us within, say, about ten days, so
that we can get them into the record.
Let me submit for the record, just to add information that
the Committee can find useful, five documents. One is a
Department of Defense document dealing with clean fuels
initiatives; Alberta Energy and Utilities Board, number two
document, regarding oil sand production; document number three,
Department of Energy report for increased oil production
through enhanced oil recovery techniques; document number four,
Department of Energy report for strategic significance of the
American oil shale resource; and number five, finally, Energy
Information's annual energy outlook for 2005.
NOTE: The following information was submitted for the
record and has been retained in the Committee's official files:
Alberta Energy and Utilities Board document
regarding oil sands production and potential;
Department of Defense presentation on the Office
of the Secretary of Defense's Clean Fuel Initiative to promote
domestic liquid fuels production from oil shale, oil sands, and
heavy oils;
Department of Energy Report of the potential for
increased American oil production through enhanced oil recovery
techniques;
Department of Energy Report on the ``Strategic
Significance of America's Oil Shale Resource''; and
Energy Information Administration's Annual Energy
Outlook 2005.
Mr. Gibbons. Ladies and gentlemen, again, thank you so much
for your time, your patience, and your testimony here today.
The information is very helpful.
With that, we will excuse our second panel. And this
hearing is adjourned.
[Whereupon, at 11:54 a.m., the Subcommittee was adjourned.]
[Additional material submitted for the record follows:]
[A statement submitted for the record by the American
Chemistry Council, follows:]
Statement submitted for the record by The American Chemistry Council
The American Chemistry Council is pleased to submit this testimony
on the impact of high energy costs--especially natural gas--on
consumers and the public. ACC represents the leading companies engaged
in the business of chemistry. ACC members apply the science of
chemistry to make innovative products and services that make people's
lives better, healthier and safer. ACC members are committed to
improved environmental, health and safety performance through
Responsible Care, common sense advocacy designed to address major
public policy issues, and health and environmental research and product
testing. The business of chemistry is a $504 billion enterprise and a
key element of the nation's economy. It is one of the nation's largest
exporters, accounting for ten cents out of every dollar in U.S.
exports. Chemistry companies are among the biggest investors in
research and development. Safety and security have always been primary
concerns of ACC members, and they have intensified their efforts,
working closely with government agencies to improve security and to
defend against any threat to the nation's critical infrastructure.
The unbalanced and volatile U.S. natural gas market has had a
severe impact on the chemical industry. Today, U.S. natural gas prices
are the highest in the world--over $7 per million BTUs, versus $5.25 in
Europe, $4.50 in China and Japan and $1.25 or less in the Middle East
and Russia.
The chemical industry is the backbone of our nation's manufacturing
sector. It is the largest industrial user of natural gas. The chemical
industry uses natural gas for heat and power, but also as a raw
material, a key ingredient, used to make thousands of products that
consumers use every day.
The chemical industry has been especially hard hit--its natural gas
costs increased by $10 billion over the past two years, it has lost
more than $50 billion in business to overseas operations, and watched
more than 100,000 jobs (1/10th of the U.S. chemical workforce)
disappear since 2000.
Business Week magazine published a story in its May 2, 2005 edition
entitled, ``No Longer the Lab of the World, U.S. Chemical Plants
Closing in Droves as Production Heads Abroad.'' This carefully
researched article provides ample evidence of the severe damage
historically high natural gas prices have had on the U.S. chemical
industry, and by extension the entire U.S. manufacturing sector. The
following excerpts from the Business Week article graphically
illustrate the quandary the chemical industry is in:
``Only a decade ago the U.S. was the world's top spot for
making chemicals...Today none of that is true...And in a crippling
reversal, U.S. natural gas prices are the highest in the world.''
``Chemical companies closed 70 facilities in the U.S. in
2004 and already have tagged 40 more for shutdown''.Industry employment
is now below 880,000, down from over 1 million as recently as 2002.''
''..of 120 chemical plans being built around the world
with price tags of $1 billion or more, just one ... is in the U.S. ...
China, by comparison, has 50. The U.S. has gone from a privileged
position to where it's hard to find a rationale to put anything here.
``As recently as 1997, the U.S. posted a trade surplus in
chemicals of almost $20 billion...(now) the nation's balance of trade
in chemicals, a rock-steady surplus for 80 years, has become a
deficit.''
``For the U.S., the likely results are less investment,
fewer jobs, and fewer scientific discoveries...Innovation may be the
nation's next casualty. Production facilities need engineers to run
them and scientists to do workaday research. So as capital investment
migrates, these tasks will too.''
``Across the industry, capital investment is being herded
away from the U.S. toward the Middle East and Asia''.while U.S. plants
are being turned over to salvagers.''
According to figures published by the U.S. Commerce Department on
April 12, 2005 the U.S. trade deficit has risen to an all-time monthly
high of $61 billion--lending further evidence to the exodus of
manufacturing from the U.S. The chemical industry once had the nation's
most favorable balance of trade--nearly $20 billion in the 1990's, but
now posts a $4 billion deficit.
As bad as the natural gas crisis is today, it is expected to
deepen, further widening the gap between supply and demand. Experts
predict demand will far outpace supply by nearly 10 trillion cubic feet
(TCF) in the future. Today the U.S. consumes roughly 22 TCF, and
predictions are by 2010 demand will be over 25 TCF and by 2025 will top
30 TCF. What actions are being taken today to prevent this decade's
growth in demand for natural gas from requiring further demand
destruction from the industrial sector?
Higher Natural Gas Prices Shift Chemical Industry Investment Overseas
The May 2, 2005 edition of Business Week magazine article
succinctly provided ample evidence of the severe damage historically
high natural gas prices have had on the U.S. chemical industry and how
it has promoted a shift in production overseas.
With a mature market and the movement of customer industries
overseas, companies are shifting investments toward regions offering
lower feedstock costs (and cost of production) as well as in markets
experiencing a higher degree of dynamism. The absence of a
comprehensive U.S. energy policy ensuring adequate and diverse supplies
will retard investment (and subsequent job creation) in the United
States. This is equivalent to ``capital flight.''
This on-going geographical shift in spending by American chemical
companies is evidenced by the allocation of capital budgets among
American Chemistry Council member companies. Every few years, The
American Chemistry Council conducts a survey of long-term geographic
investment intentions (US vs. foreign locations) and results from the
latest reveal significant changes in distribution patterns.
[GRAPHIC] [TIFF OMITTED] T1446.002
American chemical companies are planning to significantly boost
their investments in the Asia/Pacific regions. This region's share of
the capital budget will nearly triple during the five-year period from
2004 to 2009. Investments in China in particular will increase
(threefold) as a share of capital budgets. Strong expansion of the
share going to the Asian NICs and other Asian nations will gain as a
share of total capital budgets. Even Japan will witness slightly higher
investment. U.S. chemical companies plan to allocate greater capital
investment in Africa & the Middle East, Central & Eastern Europe,
Mexico and Latin America. Canada (with abundant hydrocarbon resources)
and Western Europe will receive a larger share of capital. All of the
aforementioned expansions of share will occur at the expense of
projects in the United States.
How did we get in this predicament? Concerns with the nation's
overall air quality led the federal government to encourage use of
cleaner burning fuels in the 1990's. Electric utilities switched from
burning coal to natural gas, and today electricity generation consumes
25% of all domestic natural gas.
Ironically, at the same time the federal government policies
encouraged greater use of natural gas, it also imposed moratoria on
large sources of domestic natural gas supplies out of environmental
concerns. Today much of our nation's sizeable natural gas reserves are
off-limits to exploration and production, despite the fact that today's
technology can safely remove natural gas with minimal disruption to the
surrounding environment.
The situation the chemical industry faces today is reversible--if
Congress takes action to restore natural gas to globally competitive
prices. Thankfully, it appears that some in the U.S. Congress are
starting to realize that our nation is in the depths of an energy
crisis and are taking steps to address the crisis so that our nation's
eroding chemical and manufacturing base is revitalized and returned to
being the robust engine that drives our economy.
In early April 2005, Senators Lamar Alexander (R-TN) and Tim
Johnson (D-SD) introduced bipartisan legislation, S. 726, The Natural
Gas Price Reduction Act which recognizes the enormity of the nation's
natural gas crisis and provides the keys to bringing the problem under
control.
Senator Alexander and Johnson demonstrate a thorough understanding
of the steps needed to address the natural gas crisis. The bill
proposes to:
Curb consumption of natural gas by aggressively
implementing a number of energy efficiency measures;
Invest in development and implementation of new
technologies, such as coal gasification;
Improve the system for storing and transporting natural
gas; and
Create greater access to our own domestic sources of
natural gas.
The American Chemistry Council applauds the introduction of S. 726.
It is an important step towards enacting a sorely needed balanced
national energy plan. ACC has urged the Senate Energy & Natural
Resources Committee to fully adopt S. 726 as it writes its
comprehensive energy legislation.
Every day that Congress fails to confront and address this crisis,
more jobs are lost to foreign operations and more residential consumers
must choose between heat or food. Only Congress can solve these
problems and put the long-term economic future of the nation back on
track.
[GRAPHIC] [TIFF OMITTED] T1446.003
Since late-2000, there have been two major spikes in natural gas
prices and recently, prices have settled in the range of about $7.00
per million BTUs. This is triple historical levels. The figure to the
right illustrates how prices have generally trended upwards since 2000.
More recently, high oil prices have affected natural gas prices as
well and prices have generally been above $7.00 per million BTUs. The
United States now has the highest natural gas costs in the world, as
the accompanying figure titled ``Natural Gas Costs around the World''
illustrates. The data in the figure are for mid-March.
Fundamentally, the problem is one of demand for natural gas
exceeding available supply. This has resulted in record natural gas
prices in the United States and the highest natural gas prices in the
world. During the last decade various environmental and other
government policies have promoted the use of natural gas. At the same
time, little was done to foster supply of natural gas. Natural gas
demand is growing in all sectors but underlying economics suggest a
fundamental imbalance in natural gas supply and demand that is unlikely
to recede in the short-term. However, growing demand by electric
utilities is resulting in demand destruction in the industrial sector.
Utilities are generally allowed by state regulators to fully pass on
their additional fuel costs to customers. Industrial companies,
however, face international competition and have generally not been
able to pass on these costs. This results in utilities' gas demand
being somewhat price insensitive and has resulted in plant closures and
job losses among the industrial sector. This demand destruction is
illustrated in the above figure titled ``Natural Gas Consumption Trends
by Sector''. The source is the March 2005 Short-Term Energy Outlook
prepared by the Energy Information Administration (EIA) of the U.S.
Department of Energy. Moreover, the EIA projects even further increases
in natural gas prices. Actions of ACC member companies would question
the availability of natural gas needed to increase industrial demand as
projected by the EIA. We have member companies that use natural gas as
a raw material with plans to shut down U.S. production facilities and
import these products across this period. The gravity of the current
natural gas imbalance is so pronounced that Federal Reserve Chairman
Alan Greenspan has raised concerns about the issue.
[GRAPHIC] [TIFF OMITTED] T1446.004
The Effects of Higher Natural Gas Prices Quantified
To better understand the role of natural gas price shocks on the
economy, the American Chemistry Council used the Oxford Economic
Forecasting (OEF) Global Model to examine the effects of large run-ups
in natural gas prices on the U.S. economy. The OEF Global Model is a
quarterly linked international econometric model that provides an
analyst with the ability to examine how economies react to shocks to
the economic environment, perform scenario analyses and produce
forecasts. The model contains independent price, production and
consumption variables for oil and natural gas, which can be changed to
produce customized simulations. The model is linked to the OEF
international industrial model.
[GRAPHIC] [TIFF OMITTED] T1446.005
Changing the natural gas price assumptions and then comparing the
results of the model solution with a baseline simulates the effects of
higher natural gas prices. The current analysis examines the effects of
a sustained natural gas price rise of roughly $3.50 per million BTUs
over prior levels. This is roughly what has occurred since the first
spike in natural gas costs.
The results of economic modeling suggest that the effects of
sustained higher natural gas prices have a negative effect on the U.S.
economy. The following table presents the deviation from the base case
that occurs with these sustained higher prices. Unless noted otherwise,
the data are presented as a deviation from the baseline expressed as
percentage points.
[GRAPHIC] [TIFF OMITTED] T1446.006
Higher natural gas prices act much like a tax on consumers,
depressing disposable personal incomes and savings, and ultimately
consumer spending, which accounts for two-thirds of the economy. The
results of the analysis indicate a decline in aggregate demand in
combination with the shock to the supply side. This results in a lower
economic growth rate, about 0.3% less per year. With a $12 trillion
economy, that's about $36 billion in reduced GDP.
Econometric evidence indicates that lower economic growth results
in lessened job creation (about 325,000 fewer jobs on average during
the first three years) and a higher unemployment rate. At the same
time, inflation as measured by the consumer price index would
accelerate and interest rates would rise.
Rapidly rising U.S. natural gas prices adversely affect the
industrial sector, resulting in less production and lower capacity
utilization. In turn, this affects profits and corporate cash flow and
coupled with higher interest rates, would lead to lower business
investment (or capital spending). The most recent recession was led by
a severe downturn in capital spending. Higher natural gas prices have
the effect of hampering capital spending so needed for a sustained
economic expansion. It is capital spending that is critical to
fostering long-term productivity growth and rising incomes and wealth.
In addition, the current account balance deteriorates, as would the
federal deficit and deficits run by state and local governments. The
deterioration in government balances occurs as tax receipts fall short
of expectations and as higher unemployment increases benefit claims.
Most state and local governments are currently facing fiscal
difficulties and the Federal government is running record deficits. The
analysis suggests that the current account balance deteriorates by over
$35 billion after three years as does the Federal deficit (by about $28
billion) as tax receipts fall short of expectations because of lower
economic growth and as higher unemployment increases benefit claims.
For energy-intensive sectors such as farming, cement, aluminum,
steel and chemicals, the effects would be even more severe. For the
business of chemistry, the effects would be felt across all segments.
Basic chemicals would face severe competitive disadvantages as over 70%
of feedstocks are derived from natural gas. Exports would falter and
imports would rise. In addition, lessened industrial activity would
result in lower demand. Over the extended period, the basic chemicals
segment suffers the most.
Effects on Industry
Higher natural gas prices in particular affect the competitiveness
of industries using natural gas as input for fuel and power and as raw
material. This occurs because natural gas markets are generally
national (or regional) in nature. As a result, exporting industries in
the United States and Canada face higher costs vis-a-vis competing
nations, as the latter do not incur these costs. Natural gas is
generally a regional market (e.g., North America) as it is not widely
traded globally. Thus, natural gas markets outside of North America are
largely unaffected. For energy-intensive sectors such as farming,
cement, aluminum, steel and chemicals, the effects are quite severe.
Rising natural gas costs have been one factor in the exploding
manufactured goods deficit, which increased from $330.2 billion in 1999
to a record $612.1 billion deficit in 2004. During the period from 1999
to 2004, manufacturing sector payrolls declined 17%, about 3.0 million
people.
Effects on the Chemical Industry
The U.S. chemical industry is the largest industrial user of
natural gas, consuming one-eighth of total natural gas demand. Higher
natural gas prices in particular severely diminish the competitiveness
of the industry as it uses natural gas not only as inputs for fuel and
power, but also as a raw material (feedstocks).
[GRAPHIC] [TIFF OMITTED] T1446.007
Worldwide the feedstocks for most petrochemicals are ultimately
derived from either oil or natural gas. Oil includes heavy liquids such
as naphtha and gas oil. Natural gas includes natural gas liquids such
as ethane, propane, and butane. The price of a feedstock is largely
determined by the price of oil or natural gas. Unlike oil and naphtha,
which can be imported or exported in large quantities, natural gas
markets are generally regionally constrained because of physical
limitations in moving natural gas over long distances. Oil and naphtha
prices are determined in a global market.
Rising natural gas prices directly affect the natural gas liquids
market. Both ethane and propane, widely used in the United States as
feedstock, have fuel value and can be left in the gas stream along with
methane, to sell as natural gas. Methane is another constituent of
natural gas. Besides its thermal value, it's directly used to produce
methanol as well. As an alternative to fuel, ethane, propane and butane
can be processed into liquids to be sold as feedstock. Because prices
of these feedstocks rise in proportion with natural gas prices, a
petrochemical producer has to offer more than the equivalent fuel value
plus processing cost to induce a gas processor to remove the liquids
and shrink the natural gas stream.
Rising natural gas prices directly affect the natural gas liquids
market. Higher natural gas liquid (ethane, propane, etc.) feedstock
costs can place much of the Gulf Coast-based petrochemical production
in a position of diminished competitiveness relative to other major
producing regions. In the US, 70% of ethylene, for example, is derived
from natural gas liquids while in Western Europe, 70% is derived from
naphtha, gas oil and other light distillate oil-based products. These
competing nations face raw materials costs that reflect global, not the
regional markets affecting natural gas prices in North America. U.S.
petrochemical facilities are based on converting natural gas liquids
and cannot be economically converted to use other feedstocks. This is a
significant driver for new investment capital being spent in other
regions and reducing exports from the U.S.
The U.S. net trade position in chemicals swung from an $8.3 billion
surplus in 1999 (before the first natural gas price spike) to a deficit
of $9.6 billion in 2003. In 2004, rising global demand improved the
trade deficit to $3.6 billion. We anticipate further erosion in the net
trade position as new petrochemical facilities are built in regions of
the world with lower raw material costs.
Not only do high natural gas prices affect the chemical industry
directly, but to the extent that these prices contribute to the
deterioration of competitiveness in downstream end-use customer
industries (rising imports and movement overseas), the chemical
industry is also negatively affected. The chemistry content of this is
measurable and during the period since the first natural gas price hike
(1999-2004), the business lost from these end-use customers totaled
$25.8 billion. Combined with the $11.9 billion swing in the trade
position, this represents $37.7 billion in lost sales.
During this period, chemical industry employment fell by 96,000,
about 10%. Losses occurred in virtually every state. The decline has
continued and based on data from the Bureau of Labor Statistics now
exceeds 105,000 jobs.
As a provider of raw materials to other manufacturers, the chemical
industry is often looked on as a harbinger of what lies ahead for those
companies. Unfortunately, it's only a matter of time until the plant
closings, job losses, vanishing trade surplus and capital investment
flight experienced in chemicals spreads to all of its downstream
customers.
______
[A statement submitted for the record by The 60 Plus
Association follows:]
The 60 Plus Association
1600 Wilson Blvd.--Suite 960--Arlington, VA 22209
Phone (703) 807-2070--Fax (703) 807-2073 www.60Plus.org
Statement by 60 Plus Association President Jim Martin
submitted to the House Energy and Minerals Subcommittee
I submit this testimony on behalf of the 60 Plus Association, an
11-year-old senior citizen's advocacy group. 60 Plus calls on some 4.5
million seniors nationally for support. Our seniors are concerned about
their needs as well as that of their children, their grandchildren, and
their great-grandchildren.
60 Plus commends you for convening this important hearing focusing
on the lack of adequate energy supplies and resulting high energy
costs. 60 Plus respects the law of supply and demand. We know that if
energy supplies are tight, seniors pay disproportionately more for
everything: heating, cooling, transportation, drugs, food, hospital
costs, etc. Any increase in the cost of energy is a regressive tax on
seniors living on fixed incomes. The same is true for the urban poor.
60 Plus strongly supports the President's repeated call for a
comprehensive energy strategy. If Congress wants to help bring the cost
of energy under our control, it should swiftly enact an energy bill
that provides more incentives for production. The President recently
proposed that we use abandoned military bases to build new refineries.
There has been a recent announcement of the issuance of a permit for a
new refinery in Yuma, Arizona. These efforts to help solve the problem
of the availability of gas for our transportation needs deserve your
strong support.
We need all forms of domestic energy that we can produce and this
includes coal, natural gas, nuclear and renewables such as wind and
hydroelectric power. But the real test is to do this at an economically
affordable cost.
More than half of our electricity comes from coal and we've come a
long, long way from the days of strip mining and abandoned sites that
were not only eyesores but environmental disasters to where sound
technology allows for energy exploration and production with minimal
risk now to the ecology.
And you know, about the ecology: I was struck by the fact that
President Bush's energy recommendations in 2001, some 120 overall,
contained more than 40 proposals dealing specifically with the
environment.
You see, any limits to domestic exploration (whether offshore
Florida, drilling in the Arctic National Wildlife Refuge, or the
mountain West) at a time when international supplies are so uncertain
is not good for this country. We must wean ourselves from our
dependence on foreign energy supplies.
Back in 1973 during the Arab oil embargo, then Minority Leader John
J. Rhodes (R-AZ) appointed Congressman Roger Zion of Indiana, Chairman
of the House Republican Task Force on Energy. Roger is Chairman of the
60 Plus Association at a hale and hearty 83 years young. Roger is a
driving force at 60 Plus for keeping us on track with this problem of
dependence on foreign sources of energy.
Back in his Presidency, Jimmy Carter once remarked that with oil
imports at 37%, he stipulated that his goal was to see that this
percentage did not rise another point. Well, 25 years later, it's more
than 57% and still rising. When does it stop?
With well over 80% of 60 Plus' supporters being veterans of
military service, I assure you many of them now consider a sound energy
policy a matter of national security, especially following September
11, 2001 and the resultant war against terrorism our great country is
presently engaged in.
Now, let me say something about those who would impede the
important work of this Committee and this Nation. They go under the
names of groups like the Natural Resources Defense Council, and the
Friends of The Earth with the help of organizations like MoveOn.org.
These feel-good activists, both nationally and internationally, have
done a simply marvelous job at swaying public opinion and building
walls and roadblocks that stymie the vitality of the energy industry.
And by and large, they've done it all with smoke and mirrors! Under the
guise of something called ``global warming'', these anti-growth, anti-
energy activists have placed an economic straight jacket and political
handcuffs upon any country--but notably, the United States--that dares
plan for tomorrow, dares plan for the well-being of our children and
grandchildren with much needed domestic energy supply. They were
effective in killing the future of nuclear power and are trying to do
the same to coal. And for the most part, it's not only my observation
but the consideration of many in the scientific community far more
intelligent than I, that it's all being done by myth and unsupportable
theory. The author Michael Crichton makes this case extremely well in
his book ``State of Fear''. I would commend this book to you because it
is based on Dr. Crichton's extensive bibliography and footnotes.
I'm convinced we can explore for fossil fuels like gas, coal and
oil and do so as responsible stewards of the air that we all breathe,
the water we drink and the land that we cherish.
I am convinced we can expand hydro and do so responsibly.
I am convinced we can expand nuclear energy and do so safely. As a
matter of fact, I believe nuclear is key to the health of our planet.
Nuclear has proven to be safe, reliable and abundant and yet we haven't
constructed a new facility in 30 years. You'd think an energy source
such as nuclear would be embraced by the environmental activist
community as it effectively replaces fossil fuels to satisfy energy
demand--but no. There is a growing awareness even in Europe that there
must be another generation of nuclear power.
For that matter, wouldn't you think something as readily available
as wind--admittedly less productive on a cost versus output basis--but
everywhere around us and plentifully available--that commercially
feasible wind power would pass the enviro's test for suitable energy
creation? Nope. Wind turbines kill birds and are rather unsightly so
no, wind power must go, also. Some of the major proponents of wind
power in the Congress come from the Northeast, yet we see staunch
opposition in the MA delegation to the Cape Wind Farm off Cape Cod.
This is not rational.
This sort of anti-supply bias has to stop for the good of seniors
and consumers of all ages. This wonderful country of ours has abundant
energy wherewithal, much of it renewable, some of it biodegradable.
Ladies and gentlemen, we can do something about higher residential
energy bills, about higher gasoline costs, about the higher cost of
food and the difficult choices that have to be made every day around
our kitchen tables. Looking upstream, we can do something about lost
manufacturing jobs, about farmers whose yields are lessened, companies
that shutter their operations, about lost capital enterprise,
diminished competitiveness and declining profitability here at home and
all around the globe. But we must abandon sensationalism in favor of
reasoned, informed energy progress predicated upon that which our
country does best: market-driven solutions to solve problems and meet
needs.
Our economy can run better, create more jobs, provide more revenue
to meet social security needs and afford a better tomorrow for all of
us--but we must pass comprehensive pro-supply energy legislation now.
The time for action is now. Our children, grandchildren, and great-
grandchildren deserve nothing less.
Thank you for the opportunity to have my say on these important
matters.
* * *
60 Plus is an 11-year-old nonpartisan group with a less government,
less taxes approach to seniors' issues. 60 Plus has become one of the
fastest growing seniors groups in the country, doubling then tripling
its support in the past year. 60 Plus can now call on support from
nearly 4.5 million citizen lobbyists to print and mail millions of
letters and petitions. 60 Plus publishes a newsletter, SENIOR VOICE,
and a SCORECARD, bestowing a GUARDIAN OF SENIORS' RIGHTS award on
lawmakers in both parties who vote ``pro-senior.'' 60 Plus has been
called ``an increasingly influential lobbying group for the elderly.''