[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]




 
          GASOLINE: WHAT'S CAUSING RECORD PRICES AT THE PUMP?

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

                                HEARING

                               before the

                  SUBCOMMITTEE ON ENERGY AND RESOURCES

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 9, 2005

                               __________

                           Serial No. 109-44

                               __________

       Printed for the use of the Committee on Government Reform


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


                                 ______

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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut       HENRY A. WAXMAN, California
DAN BURTON, Indiana                  TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota             CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana              ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania    DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee       DIANE E. WATSON, California
CANDICE S. MILLER, Michigan          STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio              CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California          LINDA T. SANCHEZ, California
GINNY BROWN-WAITE, Florida           C.A. DUTCH RUPPERSBERGER, Maryland
JON C. PORTER, Nevada                BRIAN HIGGINS, New York
KENNY MARCHANT, Texas                ELEANOR HOLMES NORTON, District of 
LYNN A. WESTMORELAND, Georgia            Columbia
PATRICK T. McHENRY, North Carolina               ------
CHARLES W. DENT, Pennsylvania        BERNARD SANDERS, Vermont 
VIRGINIA FOXX, North Carolina            (Independent)
------ ------

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

                  Subcommittee on Energy and Resources

                 DARRELL E. ISSA, California, Chairman
LYNN A. WESTMORELAND, Georgia        DIANE E. WATSON, California
ILEANA ROS-LEHTINEN, Florida         BRIAN HIGGINS, New York
JOHN M. McHUGH, New York             TOM LANTOS, California
PATRICK T. McHENRY, North Carolina   DENNIS J. KUCINICH, Ohio
KENNY MARCHANT, Texas

                               Ex Officio

TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                   Lawrence J. Brady, Staff Director
                 Steve Cima, Professional Staff Member
                          Lori Gavaghan, Clerk


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 9, 2005......................................     1
Statement of:
    Cook, John, Director of Petroleum Division, Office of Oil and 
      Gas, Energy Information Administration, U.S. Department of 
      Energy; Jim Wells, Director, National Resources and 
      Environment, U.S. Government Accountability Office; Pat 
      Perez, transportation energy division, California Energy 
      Commission; and Rayola Dougher, manager, energy market 
      issues, American Petroleum Institute.......................     4
        Cook, John...............................................     4
        Dougher, Rayola..........................................    85
        Perez, Pat...............................................    62
        Wells, Jim...............................................    29
Letters, statements, etc., submitted for the record by:
    Cook, John, Director of Petroleum Division, Office of Oil and 
      Gas, Energy Information Administration, U.S. Department of 
      Energy, prepared statement of..............................     8
    Dougher, Rayola, manager, energy market issues, American 
      Petroleum Institute, prepared statement of.................    88
    Perez, Pat, transportation energy division, California Energy 
      Commission, prepared statement of..........................    67
    Watson, Hon. Diane E., a Representative in Congress from the 
      State of California, minority report.......................   124
    Wells, Jim, Director, National Resources and Environment, 
      U.S. Government Accountability Office, prepared statement 
      of.........................................................    33


          GASOLINE: WHAT'S CAUSING RECORD PRICES AT THE PUMP?

                              ----------                              


                          MONDAY, MAY 9, 2005

                  House of Representatives,
              Subcommittee on Energy and Resources,
                            Committee on Government Reform,
                                                    Long Beach, CA.
    The subcommittee met, pursuant to notice, at 1:30 p.m., in 
City Council Chambers City Hall, 333 West Ocean Boulevard, Long 
Beach, CA, Hon. Darrell E. Issa (chairman of the subcommittee) 
presiding.
    Present: Representatives Issa and Watson.
    Staff present: Larry Brady, staff director; Steve Cima, 
Dave Solan, and Chase Huntley, professional staff members.
    Mr. Issa. Good afternoon. A quorum being present, the 
Government Reform Subcommittee on Energy and Resources will now 
come to order.
    Today our high energy prices are affecting everyone's cost 
of living, America's economy, from consumers and businesses to 
public and private agencies. For Californians filling up the 
gas tank is not a luxury; it's a necessity. They have to fill 
up to get to work, take the kids to school, and go to the 
grocery store.
    In recent weeks President Bush has shown leadership by 
calling for action on his energy development and conservation 
programs. He pledged to address the root causes that are 
driving up gasoline prices and encourage oil-producing nations 
to maximize their production, as well as vowing that consumers 
will not be gouged at the pumps.
    Since coming to Washington the President has stressed the 
need for a comprehensive energy policy. Last month the House 
passed an Energy Policy Act of 2005, and now it is time for the 
Senate to enact this or similar legislation so that we could 
work out differences and more toward a national energy strategy 
to reduce consumer cost.
    The President has also stressed the need to promote greater 
energy independence by harnessing the power of technology to 
create new sources of energy and make more efficient use of 
existing sources.
    Since 2001 I have driven a Toyota Prius and it is here with 
me today. New technologies like hybrid vehicles have played and 
will play an absolutely essential role in lowering overall 
energy costs for consumers, and it is important that Congress 
continue to reward the development and use of these energy 
savings innovations and others to come.
    I understand that people are frustrated and outraged with 
the soaring gasoline prices. As consumers struggle with 
increased prices, we hear about oil companies with enormous 
profits increasing global oil demand and of limited plans for 
investing in refineries and petroleum infrastructure.
    I believe it is important that this subcommittee hear from 
consumers and address your questions regarding gasoline prices. 
For the past week I have allowed the public to submit 
questions, some of which we will be asking the panel this 
afternoon in addition to--if time allows--questions from the 
audience.
    The issues we will address today are serious and go to the 
core of our economic well-being and standard of living.
    Hopefully the witnesses today can enlighten us on these 
issues and possibly point out some solutions. I look forward to 
the testimony of the witnesses today. The witnesses include: 
Mr. John Cook, Director of Petroleum Division, Office of Oil 
and Gas, Energy Information Administration, U.S. Department of 
Energy; Mr. Jim Wells, Director, National Resources and 
Environment, U.S. Government Accountability Office; Mr. Pat 
Perez, Transportation Energy Division, California Energy 
Commission; Ms. Rayola--how do I pronounce it properly?
    Ms. Dougher. Rayola Dougher.
    Mr. Issa. Rayola Dougher. Thank you. I'll strive to get it 
right.
    Ms. Dougher. Thanks.
    Mr. Issa. Ms. Dougher is manager, Energy Market Issues, 
American Petroleum Institute.
    I want to thank the audience for attending this hearing. I 
will now yield to the ranking member, the gentlewoman from 
California, Ms. Diane Watson, for her opening statement.
    Ms. Watson. Thank you so much, Mr. Chairman. I appreciate 
you having this hearing in Long Beach, and I want to thank the 
city council here in Long Beach for hosting this field hearing. 
It's close to my home and we came down through the rain in 
almost 20 minutes, so I appreciate that.
    As you know, commuting is a necessity here in southern 
California and record gasoline prices are taking their toll on 
my constituents. My district starts, I would say, roughly at 
the 405 and goes over to the University of Southern California, 
up to that Hollywood sign, and down to South Los Angeles. It's 
really in the heart of the freeway area. It is from about 3 
a.m., Monday to 3 o'clock Tuesday the congestion starts and 
continues. It is in the congested area of the city.
    So gas prices on the average throughout the United States 
rose above $2.20 a gallon in April of this year, creating 
record highs. And unbelievably on March 5th of the year the 
average price of a gallon of regular gas in California was 
$2.61.
    Darrell, I've even seen signs around greater Los Angeles of 
$2.93.
    Mr. Issa. It was $2.79 at the closest gas station here 
today.
    Ms. Watson. So the cost of gas is rising at an astronomical 
rate and the gasoline market's uneven for different sections of 
the country. And, you know, they like to look at us out here on 
the West Coast and say, ``You've got those high gasoline prices 
and you've got all those cars, what are you going to do?'' But 
I see the signs back in the Washington, DC, area, Virginia area 
also showing the record rise in cost.
    Mr. Chairman, the global thirst for oil has placed both 
foreign and domestic oil companies in a very powerful position. 
American consumers are caught in the squeeze of unregulated gas 
pricing.
    The American dream is to create successful businesses and 
contribute to the free market system of this great nation, but 
there is some concern that the recent mergers in the United 
States oil industry has made it easier for companies to control 
gas pricing. Indeed the gas and oil industry is recording the 
largest revenues in history. ExxonMobil has disclosed the 
largest annual revenue in the history of the business.
    It is important for American Government to understand the 
dynamics of an industry in which the top 10 companies control 
80 percent of the domestic oil refinery capacity. It's 
important for us in Congress to listen to the studies done by 
oversight agencies.
    The U.S. General Accounting Office released a report in May 
2004 on the effects of mergers and market concentration on the 
petroleum industry. And GAO found that the oil company mergers 
and an increase in market concentration led to higher wholesale 
gas prices. It is critical to note that the GAO reached their 
findings in mergers that occurred between 1991 and 2000. Since 
2001 the largest five oil companies operating in the United 
States, ExxonMobil, Chevron/Texaco, ConocoPhillips, BP, and 
Shell, have enjoyed after-tax profits of $230 billion. Yes, 
even through an economic downturn and an unreasonably high 
jobless rate five companies have cleared an astronomical sum of 
money, $230 billion.
    The Federal Trade Commission is the agency responsible for 
preserving competition in the market place in order to protect 
consumers. A number of experts have concluded that the increase 
in market concentration allows individual companies to engage 
in strategic decisions such as withholding supplies to increase 
prices and thereby increase the bottom line, their profits.
    In March 2001, FTC reports found that oil companies were 
making decisions to withhold formulated gas blends supply in 
order to maximize profits.
    Californians have suffered outrageous petroleum pricing 
through no fault of their own, with dishonest market 
manipulation such as the Enron scandal.
    Mr. Chairman, I want to commend you, again, on this timely 
field hearing. It's important. And it's critical that we 
investigate the reasons for higher prices at the gas pumps and 
report back to not only our constituents but those across this 
country.
    Moreover, the President has indicated that the recently 
passed majority energy bill will not provide any short-term 
relief on gas prices. So Americans need to know whether they 
fill their tank or whether they use the money to buy food and 
other things that they need on a day-to-day basis.
    So I look forward to this informational session with the 
GAO, the EIA, and the California Energy Commission. And I 
understand that we have a representative of the petroleum 
industry and I look forward to listening. Thank you.
    Mr. Issa. Yes and, I apologize if I'm giving you my froggy 
throat. Thank you.
    According to the rules of the Government Reform Committee I 
would request that each witness raise their right hand to take 
the oath.
    [Witnesses sworn.]
    Mr. Issa. And let the record show that each answered in the 
affirmative.
    Thank you all for being here today--both the audience and 
our distinguished panel. As Congresswoman Watson said and made 
very clear, although we may differ in party, we don't differ in 
a belief that gas prices have gotten too high and that they 
need to be brought down. I think on a bipartisan basis we also 
agree that the energy bill, if passed and signed into law, will 
not be an overnight panacea for all of our problems. And 
certainly that's one of the questions we're going to have for 
this panel today is long-term/short-term.
    The normal custom for any hearing is a 10-minute opening 
statement by each of the panelists. We have your written 
testimonies in their entirety. They will be available both to 
this committee and to the people here in the audience, and as 
well as on our Web site. So if you'd like to abbreviate, add in 
material that's not available there, or summarize in any way, 
feel free to. We'll not keep you to an exactly 10-minute 
schedule, but Mr. Cima will be banging on me to bang on you at 
some point.
    And with that I would like to introduce--here we go--Mr. 
Cook, Director of Petroleum Division, Energy Information 
Administration, the U.S. Department of Energy. And I'm looking 
for the gentleman's biography. Well, I apologize, your title is 
more than enough, and I will have the biography by the next 
introduction. But, Mr. Cook, I appreciate your being here 
today. I would ask, again, that your entire testimony be put in 
the record and to summarize it in about 10 minutes.

STATEMENTS OF JOHN COOK, DIRECTOR OF PETROLEUM DIVISION, OFFICE 
    OF OIL AND GAS, ENERGY INFORMATION ADMINISTRATION, U.S. 
 DEPARTMENT OF ENERGY; JIM WELLS, DIRECTOR, NATIONAL RESOURCES 
  AND ENVIRONMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE; PAT 
   PEREZ, TRANSPORTATION ENERGY DIVISION, CALIFORNIA ENERGY 
COMMISSION; AND RAYOLA DOUGHER, MANAGER, ENERGY MARKET ISSUES, 
                  AMERICAN PETROLEUM INSTITUTE

                     STATEMENT OF JOHN COOK

    Mr. Cook. Thank you, Mr. Chairman and subcommittee members. 
On behalf of EIA I'd like to thank you for the opportunity to 
testify today on the factors behind recent gasoline price 
movements. As the first speaker indicated and all U.S. drivers 
are all too aware, gasoline prices have risen sharply since the 
beginning of the year. As of last Monday the national average 
retail price stood at $2.24, up 42 cents from a year ago and 
nearly 46 cents from January. While relatively high in 
historical terms, retail prices have been dropping recently. 
And barring unforeseen developments, we look for them to drop 
much further by Memorial Day. In addition, adjusting for 
inflation, gasoline prices were much higher in the early 1980's 
at a little over $3 a gallon. Nonetheless, gasoline like oil 
prices in general are currently high throughout the United 
States, and especially in southern California.
    California prices typically run higher than the U.S. 
average and often exhibit more volatility. This year's no 
exception with the retail price running up about 58 cents since 
the beginning of year, some 33 cents higher than the national 
average.
    My statement today summarizes major changes seen in oil 
markets since 2000 impacting gasoline.
    High prices, at least in our view, are primarily the result 
of an unusual tightening and global crude markets. This 
tightness was brought about primarily by an unexpected 
acceleration in demand growth, stretching global crude 
production capacity nearly to its limits. As a result crude 
prices almost doubled last year, and that lack of spare 
capacity is expected to keep crude markets tight and prices 
high for the foreseeable future. Other factors adding to this 
pressure, of course, include tight refining capacity and 
tightening product specifications worldwide.
    To look more closely at the causes underlying recent 
gasoline price pressure it may be helpful to take a look at the 
components underlying retail costs. This figure shows that 
typically crude oil accounts for the largest amount of retail 
cost and usually the lion's share of any increase.
    Here we see that April-over-April comparison show about 32 
cents of the overall 44-cent run-up accruing to the crude 
sector. Refining costs added about 7 cents and marketing costs 
about 5. Since taxes vary little in the short-term, sufficient 
insight into the drivers here behind high retail prices may be 
obtained if we simply focus on the crude and refining sector.
    Figure 3 shows the crude prices have shifted upwards a 
couple of times in the last several years. After averaging 
around $20 for most of the 1990's, crude slumped almost to $10 
as a result of the Asian financial crisis and extra supply from 
Iraq re-entering the market. OPEC responded to this by sharply 
cutting production, driving prices not only back to the $20 
level, but to what seemed a new level of about $30 in the face 
of declining global inventories.
    Then last year the crude oil prices shifted to a second 
higher level, well over $40, almost doubling and rising from 
$30 early in the year to a peak of over $56 by late October. 
Though prices fell back toward $40 by the end of the year, they 
recently rebounded over $57, and once again have fallen to 
about $50. We expect prices for the remainder of this year to 
range between the low $50's and the mid-$50's.
    There are a number of factors that underlie this tightening 
in the global crude balance pushing prices to $50. And probably 
the biggest one is the huge increase in global demand. Probably 
the biggest surprise was China with a demand increase of over a 
million barrels a day last year compared to growth rates of 
less than half that amount in prior years. China and the United 
States alone accounted for almost 60 percent of the increase 
last year, and we expect that growth to remain strong this 
year.
    On the supply side, growth in non-OPEC production fell well 
short of meeting increasing world needs, and we expect that to 
remain short of those requirements.
    We will continue to see growth in Russian and the Caspian 
regions, but there are no large new areas adding potentially a 
million to $2 million per day as needed such as that seen from 
the North Sea and the Alaskan North Slope regions in the 1970's 
and 1980's. Therefore, if demand continues to grow strongly, 
OPEC must increase its capacity significantly.
    The next figure shows that inventories in the developed 
nations of the OECD moved to more comfortable levels at the mid 
point of last year. On the other hand, if we take into account 
strong global demand growth, if we put inventories in today's 
supply terms or in terms of expected consumption covered, the 
blue line at the top shows that they were low most of last year 
and fell to 2000-like lows of about 50 days by the end of the 
year. We expect supply to remain low this year and again fall 
toward 50 days by the end of the year, but perhaps the most 
important change last year was the drop in the world's ability 
to search crude production to offset unanticipated supply 
losses.
    The next figure shows that global spare capacity which 
primarily resides in OPEC, in fact, primarily in just one 
country, Saudi Arabia, has ranged--is currently ranging between 
a million to a million and a half barrels per day and stands at 
the lowest point since the first Gulf war. As global oil demand 
rises seasonally to its peak in the fourth quarter, we expect 
that spare capacity to drop even further.
    In our view it is this lack of supply cushions, low 
inventories on a day supply basis, and very little, if any, 
usable spare capacity that is responsible for the price 
pressure that we see in today's markets. The difference between 
what we see in today's markets and that from the last 20 years 
is that these drivers, low spare capacity and low day supply, 
are not short-term in their nature.
    Turning to gasoline. We saw in figure 2 that crude oil 
explained most, but not all of the rise in retail prices. While 
crude oil accounted for about 32 cents, relatively tight 
conditions in wholesale markets added another 7. This chart if 
you look at it closely indicates that while crude oil and 
gasoline generally move together, at times spot gasoline 
increases at a much faster pace than crude oil widening the 
spread between them. The spread or the difference between spot 
gasoline and spot crude oil depends upon the gasoline supply/
demand, balanced relative to that of crude oil. These spreads 
tend to rise when gasoline market conditions tighten; that is, 
factors in the gasoline market tighten the balance over and 
above any tightness originating from crude markets. The figure 
shows that tight crude oil and gasoline market conditions last 
year lifted spreads throughout the Nation to very high levels. 
By the beginning of this year, though, some regions began to 
experience some softening, especially in the Gulf Coast where 
spreads in February dropped almost to zero. Unfortunately in 
April they bounced back to relatively high levels.
    Turning to California. For the most part spreads this year 
have run to--have been in at the relatively high end of 
California's range. Spreads in California generally are higher 
than other regions and more volatile. Hence, the retail prices 
are higher and more volatile. In fact, it's not unusual for 
California spreads to run 20 to 30 cents on average higher than 
the Gulf Coast, and at times they can even range up to 50 or 60 
cents higher.
    The primary reasons for this are that the California system 
supplies most of the region's needs, but the system runs near 
its capacity limits, meaning there's little spare capacity to 
meet shortfalls. California's also isolated, primarily from the 
Gulf Coast, which prevents any rapid resolution to imbalances.
    The region uses a unique gasoline that's difficult and 
expensive to make, which limits the number of suppliers that 
can provide extra amounts. And finally, as California turned to 
ethanol banning MTBE, it lost production capability, which in 
the face of growing gasoline demand further tightened its 
balance, heightening its already high spreads.
    The last figure shows that following the ban California 
retail prices rose relative to U.S. prices by another 10 cents 
or so. In short, California's unique fuel situation is likely 
to keep markets tight on the West Coast for some time, meaning 
their prices are to remain higher and more volatile.
    As we look ahead, we don't see much relief. Crude oil is 
likely to remain 50 day supply and keeps pressure on OPEC spare 
capacity. Tight refining capacity is also likely to add to this 
pressure. At this point little is certain. If crude oil remains 
around $50 and gasoline markets remain relatively soft, we may 
see some further decreases in the weeks ahead as we move toward 
Memorial Day. If crude oil rises, which is possible as we move 
to the fourth quarter, we have a strong surge and demand during 
the peak summer, or if there is a rash of refinery outages, 
then of course that would put gasoline prices back up.
    That concludes my testimony. I would be happy to answer any 
questions.
    [The prepared statement of Mr. Cook follows:]

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    Mr. Issa. Thank you. We'll hold our questions till the end.
    Mr. Jim Wells is Director of the National Resources and 
Environment Team at the Government Accountability Office. Mr. 
Wells joined the GAO in 1969, that is a long and distinguished 
career, and has worked extensively in both energy and 
environmental issues.
    Again, Mr. Wells, thank you for being here. Your entire 
statement will be put in the record.

                     STATEMENT OF JIM WELLS

    Mr. Wells. I truly am pleased to participate in the 
subcommittee's hearing today to discuss today's gasoline 
prices.
    Holding this hearing today in Long Beach, CA, is clearly 
very appropriate because just last week you set a record. You 
for the first time had the highest gasoline prices in the 
Nation surpassing Hawaii. I don't know whether that's a good 
thing or a bad thing, but there is a lot of pain.
    Mr. Issa. It's a good thing if we pass them in tourism. 
It's a bad thing if we pass them in gas prices.
    Mr. Wells. Fair enough. There truly is a lot of pain as 
retail gasoline prices are soaring. Each additional 10 cents 
per gallon of gasoline adds about $14 billion to the American's 
annual gasoline bill. Consumers have a lot of questions as they 
fill up their tanks with 380 million gallons a day, or they 
read in the newspapers, as Congresswoman Watson talked about, 
high oil company profits. Will prices get higher? Any chance 
they'll go down? What can the Federal Government do?
    Mr. Chairman, you asked us to be here today based on our 
work to talk about three questions. So let me just quickly 
summarize the first question.
    How are gasoline prices determined? First, you start with 
crude oil prices. If gasoline were the meal that you went into 
a restaurant to buy, clearly the main entree would be crude 
oil, which represents about 50 percent of the cost of that 
meal. If crude oil goes up, gasoline prices will follow.
    Another general fact is the price of crude is not a U.S. 
determined commodity price. Crude oil is a worldwide commodity 
and its price at any single point in time has little to do with 
the cost that it takes to get it out of the ground. The price 
is what the market will bear, and how much is demanded, and it 
depends on how much oil is brought to the market.
    When OPEC cuts back on production, prices rise. When demand 
increases faster than supply, prices rise. That's what we have 
today. In a sense, the last tanker of oil that's out there in 
the ocean at the end of the day as its steering toward, it will 
steer and turn toward that country, whether that might be the 
United States or whether it might be China, that's willing to 
pay the highest price for that last barrel of oil. That's how 
world crude oil price is determined.
    In the last 15 months crude oil is up 60 percent to over 
$50 a barrel. We're going to hear a lot of explanations today 
about this large increase, and clearly it is being attributed 
to surging world demand, and particularly as it relates to 
China and the rest of Asia, instability in the Persian Gulf 
region, and actions by OPEC to restrict the production of oil 
and thereby increasing the price on the world market.
    I want to look a moment to--John Cook had a chart on the 
board that talked about what is involved in the cost of a 
gallon of gasoline. On page 8 of my statement we have a chart 
there that talks about the components, the crude oil, the 
taxes, the refining, and the marketing and distribution.
    These are the main prices and pieces of a gallon of 
gasoline. You're paying for these ingredients, the cost to make 
it, and then you have to move it to your local filling 
stations, but clearly this also includes the amount of the 
profit, and in the marketplace and perhaps API will talk about 
that today--that will allow the industry to earn on delivering 
that gallon of gasoline as well as the Federal and State and 
local taxes that are imposed on a gallon of gasoline.
    As John mentioned, a number of other factors also play a 
role. Refining capacity, you'll hear that today, in the United 
States is very tight. Meaning that we're already producing 
about as much as our existing 149 refineries can. Our refinery 
numbers are down over 300 refineries that were in existence in 
the 1980's, and we've now dropped to 149 refineries. We're 
importing about 42 million gallons of gasoline per day to help 
meet this demand.
    The volume of inventories is another issue. What's 
maintained by refineries in today's environment is typically 
low, 23 days' worth of supply as compared to 40 days of supply 
in the 1980's.
    The regulatory factors that are imposed on the industry are 
also playing a fairly significant role. For example, in order 
to meet the National Air Quality Standards under the Clean Air 
Act, many States have adopted the use of special gasoline 
blends, so-called ``Boutique Fuels,'' which cost more to make, 
and they are clearly putting stress on the gasoline supply 
system in existence today.
    Finally, the structure of the gasoline market that we have 
in this country has changed. It's different than it used to be. 
For example, a wave of mergers of the oil companies. We had a 
report last year that Congressman Watson talked about, 2600 
mergers occurred in a 10-year period. We have a lot of loss of 
mom-and-pop dealers that have changed the gasoline market. And 
many of this could possibly lead to higher gasoline prices at 
the pump.
    If I can, turning to question 2, why are prices so high in 
California? For example, at the end of April when the national 
average price was $2.20, California's price was $2.57. 
Explanation for why California prices have been high include 
California's unique gasoline blend, which I might add is the 
cleanest burning in the Nation, and it is also the most 
expensive. Some studies have estimated it as much as 5 to 15 
cents more to contribute to that clean gasoline.
    There's a tight balance between supply and demand here on 
the West Coast. There's a long distance to replace any gasoline 
in the event of supply disruptions. The term used many times is 
that California is an island of itself in terms of the ability 
to bring in supply.
    California also has a high level of gasoline taxes. 
California currently taxes gasoline at--a gallon of gasoline at 
57 cents, 30 cents per gallon more than the State with the 
lowest, which is Alaska.
    I don't want to imply that anything is wrong with these 
factors. They just represent choices, choices that are made and 
agreed to.
    Internationally, taxes, the United Kingdom, Germany have 
imposed $4 taxes on gasoline. Canada's a dollar. Throughout the 
world the U.S.' taxing structure is the lowest for gasoline 
products.
    The third question was: What does the future look like? In 
one way it's simple. Future gasoline prices will reflect the 
world's supply and demand. Demand is expected to rise. For 
example, instead of using 20 million barrels per day, EIA has 
estimated that we'll need approximately 28 million barrels in 
the future.
    Demand in the rest of the world is also rising even faster 
than what it is in the United States. A big question is: Do we 
have the world capacity to expand to keep up? GAO really 
doesn't know. A lot of studies and a lot of people need to look 
at that. Are we, in fact, running out of oil? We have been 
asked by the House to do another investigation to look at where 
the status is on world oil reserves, and we will begin that 
shortly.
    However, I don't want to leave the impression that it's all 
gloom and doom for the future. In the past oil companies have 
always managed to find enough oil to meet demand, and we 
clearly have technology improvements. We're getting smarter. We 
have better equipment, and this may continue to be the case in 
the future.
    Further, consumers can choose to be more energy efficient 
and use different kinds of products, and otherwise they can 
make a choice to conserve more energy. For example, in 1980 
many consumers, when prices rose, chose to switch to smaller 
and more fuel-efficient vehicles. That was in the 1980's.
    Mr. Chairman, if I could refer to a picture that appeared 
in the USA Today newspaper today, you have a picture of the 
President of the United States and the President of Russia, 
President Putin, carpooling. They're in their car carpooling. 
This is an example of walking the talk, perhaps, in terms of 
things that can be done immediately in fixes.
    Mr. Issa. I wouldn't do it with a 1950 Volvo. That was not 
a sterling example of a fuel efficient automobile, nor 
environmentally sensitive.
    Mr. Wells. Would you agree with me it's an example of 
carpooling, perhaps?
    Mr. Issa. I just wonder how many SUVs are following those 
two heads of state.
    Mr. Wells. Today, Mr. Chairman, we have 200 million 
vehicles in some mix of SUVs and newer hybrids. Maybe that mix 
will change. I notice you're driving a hybrid. Ford, Honda, 
Toyota sold 16,000 hybrids in March 2005, this year. 83,000 new 
hybrids were registered in the year 2004. That is small, but it 
is making a dent.
    Although not in the short-term, clearly there are some 
other things that will impact the future--where will the price 
of gasoline be in the future? The pace of the developing 
alternative energy supplies such as the hydrogen fuel cell 
technology clearly does hold promise.
    There are additional unpredictable factors on the downside 
that may include geopolitical issues such as the stability in 
the Middle East, Venezuela, and the valuation of the U.S. 
dollar in world currencies. Because of the price paid for oil 
that we buy is denominated in U.S. dollars, the U.S. buying 
power can be a major factor for the future. If the dollar 
falls, the oil-producing countries that are collecting these 
dollars will demand more dollars in return for their oil, which 
will have some impact, potentially major impact, on the price 
in the future.
    Mr. Chairman, in closing, it is possible that low energy 
prices may be gone forever. Some think that the $50 barrel of 
oil may be here to stay, which you heard from the EIA today 
that at least through 2005. While there's even some predictions 
in the financial community that have predicted a $100 barrel of 
oil, but this is far from a sure thing. Holding this hearing is 
a great first step in getting a better understanding of what 
paths may be available to help steer the energy policy that 
you, Mr. Chairman, have talked about in the Congress. Clearly 
striking that balance between efforts to boost supplies on the 
one hand, to improve efficiencies and to conserve energy on the 
other hand are going to present challenges as well as 
opportunities to make a difference on what prices we pay for 
gasoline in the future. How we choose to meet those challenges 
is an opportunity that perhaps we need to seize and to help 
determine the quality of life and the economic prosperity of 
the United States in the future.
    Finally, I think most of us here today would agree, and 
clearly in the audience behind me that what is true for the 
Nation as a whole is even more dramatically so here in 
California. California needs a lot of gasoline to grow.
    Mr. Chairman, this completes my prepared statement and I 
look forward to responding to questions.
    [The prepared statement of Mr. Wells follows:]

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    Mr. Issa. Thank you, Mr. Wells.
    And next we go to Mr. Pat Perez, manager, Transportation 
Fuel Office, California Energy Commission. Pat's been involved 
in energy technology and transportation fuel issues for more 
than 24 years. As a technical and policy expert Pat has managed 
and directed numerous technical reports, helped developed 
policies for addressing fuel issues, and provided expertise to 
the Governor's office on California's most pertinent and 
obviously difficult subjects as they face us here today. We 
look forward to your testimony.

                     STATEMENT OF PAT PEREZ

    Mr. Perez. Thank you, Congressman Issa and Congresswoman 
Watson, for the invitation to be here this afternoon.
    What I'd like to do is just briefly summarize what has 
taken place in the California petroleum markets this past year, 
what factors have contributed to our fuel price increases, and 
what measures the California Energy Commission believes would 
help mitigate those impacts certainly over the long run.
    First, talking a little bit about the fuel price trends and 
causes. The price of crude oil, of course, on world markets to 
a very large degree determines the price of transportation of 
fuels, even though California receives 42 percent of its crude 
oil supply from in-state oil fields. The price of the Kern 
River crude oil, a benchmark California heavy oil, has risen 49 
percent since the beginning of the year. And Alaskan North 
Slope which you see up on this screen, a very important 
feedstock for making products in California, has also increased 
roughly 36 percent since the beginning of the year.
    Among the world oil market factors affecting crude oil 
prices are the following: Certainly cautious investment 
strategies in petroleum exploration and production by oil 
companies and OPEC are contributing to the higher prices. 
Second, the slow return of Iraqi oil production to pre-war 
levels is also hindering oil output. And high demand that we've 
heard from the two previous speakers relative to our world oil 
production capacity is leading to a very tight market.
    And I might also add that 20 to 30 percent reduction, or 
the devaluation of the dollar relative to other foreign 
currencies is also adding upward pressure to oil because that's 
when OPEC trades barrels in.
    The operations of California refineries and related 
infrastructure also impact State fuel prices. In early 2005 
California refineries underwent intensive planned maintenance 
as described in the graphic behind you. In anticipation of this 
downtime, inventories of gasoline were built up to very high 
levels early in the year. However, unplanned outages at two 
refineries in California and at facilities elsewhere on the 
Pacific Coast caused the depletion of those inventories as 
reflected on the figure behind you.
    As companies sought to cover their obligations and 
purchases on-the-spot market, wholesale prices increased and, 
as you can see, retail prices soon followed. The cost 
components of a gallon of gasoline at this price include $1.22 
for crude oil, 52 cents for taxes; refining costs and profits 
add another 71 cents, and then finally 12 cents for 
distribution, marketing costs, and profits.
    As seen in this figure the cost of crude oil and refining 
costs as well as profits have increased significantly since the 
beginning of the year while distribution, marketing cost, and 
profits have actually declined since January.
    California drivers consume about 43 million gallons of 
gasoline per day. With prices increasing almost 60 cents per 
gallon since the beginning of the year, the State's consumers 
are paying over $25 million per day more for just gasoline. Or 
expressed in another way, motorists are paying over $9 a day 
more each time they fill their tanks at the service station.
    California petroleum markets and neighboring States are 
very much interconnected and interrelated. Although 
California's considered to be somewhat of an island as far as 
its gasoline and diesel markets, it's still affected by 
conditions in other regions. In addition to imports of crude 
oil and other refinery feedstocks, California also routinely 
imports finished fuels and essential blendstocks for making our 
fuels. Since only a limited number of supply sources can 
provide fuels meeting California's clean burning fuel 
specifications, we must compete with other areas for these 
products. Our distance from many of these supply sources 
further constrains our ability to attract cargoes during 
unexpected refinery outages.
    California's petroleum trade relations with other States 
however are much more complex than just simple import 
dependents. As described in figure 5 behind you, Nevada is an 
integral part of our fuel markets since it relies almost 
entirely on California refineries and pipelines for fuels. 
Arizona receives most of its fuels from California with the 
rest coming from Texas. And in Oregon, they also receive 
significant amounts of fuel from California. As a consequence, 
situations that affect one Pacific region State typically 
affect neighboring States as well.
    Now, I'd like to just turn my attention a little bit to 
ethanol and the California gasoline production cost that we 
heard just a few minutes ago.
    Certainly the shift away from methyl tertiary butyl ether 
or MTBE in gasoline has necessitated the use of ethanol here in 
California because the U.S. Environmental Protection Agency has 
not granted California a waiver from the minimum oxygen 
requirement. Ethanol is the only type of oxygenate that can be 
used in California; the Nation's largest consumer of ethanol. 
In fact in 2004 California refiners blended about 900 million 
gallons of ethanol.
    The cost of ethanol relative to other gasoline blendstocks 
has not been a direct cause, however, of the higher gasoline 
prices seen in the State. There have been--blending economics 
of higher ethanol concentrations are much more favorable than 
they were last year as seen in the figure. There have been no 
shortages of ethanol or significant difficulties of blending 
the new gasoline.
    The oxygenate requirement has, however, reduced refinery 
flexibility to produce and blend gasoline that meets 
California's Air Quality rules. This is particularly true 
during the low-volatility summer gasoline season that we're now 
in because the use of ethanol requires backing out some of the 
cheaper or less expensive gasoline components such as butanes 
and pentanes while replacing those with higher cost blendstocks 
such as alkylate that you can see on the figure behind you.
    Turning our attention a little bit, price gouging and anti-
trust issues, that certainly commands a lot of attention, not 
only in California, but throughout the country is that 
investigating price gouging or anti-trust issues in California 
is really the responsibility of the Federal Trade Commission 
and the California Attorney General's Office.
    Two types of investigations have been initiated by the 
Attorney General's Office. Those looking at gasoline prices and 
at oil company mergers, in the case of gasoline pricing, the 
Attorney General's Office concluded that a lack of competition 
in gasoline markets in the State has played a significant role 
in past price spikes. However, the ability of Government to 
quickly remedy high fuel prices is somewhat limited.
    Several measures are proposed about Attorney General's 
Office have been studied by the California Energy Commission, 
including the creation of a State fuel reserve. And also a 
pipeline connecting refineries in the U.S. Gulf Coast to 
California, that would increase and provide us opportunities 
for getting more supplies, but we've also undertaken very 
comprehensive studies on expanding the use of alternative fuels 
and conservation.
    What we found in those studies was one that the State fuel 
reserve was not found to be a viable measure because it could 
potentially displace private inventories of fuel, offer 
profitmaking opportunities that might reduce its effectiveness, 
and could actually reduce the total supply of gasoline in our 
State.
    A pipeline to the Gulf Coast also does not look feasible at 
this time because we do not believe there is sufficient product 
to move in that pipeline to California to make it economically 
feasible.
    Several oil company mergers have also been investigated by 
the Attorney General's Office since 1999. And in several cases 
these investigations have led to refinery asset divestments or 
other concessions aimed at preserving competition by reducing 
the concentration of important segments of California's 
refining and marketing industry in too few hands.
    Now, I'd like to talk a little bit about the impact of the 
well-publicized Chevron/Texaco/Unocal merger. We see no impacts 
on refined product supplies for California from ChevronTexaco's 
acquisition of Unocal, since Unocal does not possess any 
refineries or service stations in California, but there could 
be a major change to an important gasoline blending constraint, 
which is the patenting by Unocal of the phase 3 gasoline 
formulations that were negotiated by both the oil industry and 
the California Air Resources Board.
    If ChevronTexaco's acquisition includes all five sets of 
these patents and ChevronTexaco decides to discontinue the 
enforcement of said patents, this would remove a significant 
cost to producing gasoline in this State. Non-major refiners 
would benefit because their license agreements could be 
eliminated, thus reducing a cost component for their own 
overall operations. Major refiners who are currently blending 
around some of the patents could eliminate this practice, also 
reducing operating expenses.
    The final benefit would be the removal of a constraint for 
importers, some of whom are unwilling to send cargos to 
California for fear of infringing on Unocal's patent rights. 
All of those benefits would probably amount to between 1 and 3 
cents per gallon for the cost of making California-compliant 
gasoline.
    Now, talking a little bit about refinery expansions. Big 
West is considering an expansion project at their Bakersfield 
refinery that could increase gasoline and diesel production by 
another 10,000 to 12,000 barrels per day over the next 2 to 4 
years. Likewise, here in the South Basin, Paramount Petroleum 
should begin production of California-compliant gasoline for 
the first time within the next several days. And this will 
certainly add to the much-needed capacity to satisfy our 
growing appetite for not only gasoline but diesel.
    No new refineries are planned for California; however, one 
150,000-barrel-per-day refinery is planned for Arizona, which 
if they obtain all their permits and secure some tenure supply 
contracts for crude oil, could be up and operating by 2010. 
Some of the responses to high and rising fuel prices. The long-
term demand for gasoline in California is expected to continue 
growing. Refinery capacity is only expected in California to 
average less than a half a percent per year growth creating a 
growing gap between supply and demand in our State. I think 
this figure here kind of shows the dilemma that we are faced 
here in California with slight expansion of refinery capacity 
and growing demand. And as you can see from that figure, the 
gap is widening, not narrowing over time.
    Two other general approaches can be applied to address this 
growing shortfall between what we consume and what we produce. 
That is, one, the increase in importation of products. And I'm 
not just talking about gasoline, but also diesel and jet fuel. 
And, second, strategies to reduce demand.
    The Energy Commission recently sponsored a study that has 
identified current and future constraints with the system of 
wharves, storage tanks, and pipelines that could impair our 
ability of importers to deliver cargoes of petroleum products 
to this State, especially during a disruption. The potential 
problems are most serious here in our backyard in southern 
California, and particularly at the Port of Los Angeles and 
Long Beach where most of the growing quantities of imported 
crude oil and finished products would have to be received.
    Long lead-times and the complexity of acquiring permits to 
construct facilities were identified in our study as leading to 
a shortage of storage capacity and higher storage tank lease 
rates, which you as a consumer, those higher costs ultimately 
get passed on to the consumer as reflected in higher product 
prices.
    Finally, on reducing demand for petroleum, the Energy 
Commission and the California Air Resources Board in a joint 
study found that improving fuel efficiency using existing and 
emerging technologies would most dramatically reduce petroleum 
demand. And specifically we recommend a doubling of fuel 
efficiency for cars, pick-ups, sport utility vehicles to 40 
miles per gallon.
    The proposed energy bill Legislation that is emerging in 
Washington, DC, represents a significant opportunity to alter 
these vehicles fuel efficiency standards for the first time in 
many years.
    The Energy Commission encourages the U.S. Senate to make 
revisions to their version of the energy bill that would 
advance this strategy, particularly increases in Corporate 
Average Fuel Economy standards.
    The Energy Commission and ARB have also concluded that 
California must also increase the use of alternative fuels, 
including natural gas, ethanol, liquid petroleum gas, gas-to-
liquid, diesel, biodiesel, electricity, and hydrogen. We 
recommend that the State increase the use of alternative fuels 
to 20 percent of on-road fuel use by 2020, and 30 percent by 
2030.
    The Energy Commission has also recommended several near-
term options certainly that is assisted by people moving to 
hybrid vehicles. And I'm very pleased to see Congressman Issa 
driving one of those vehicles, but there's also other things 
that consumers can do, such as greater use of public mass 
transit, carpooling, telecommuting, minimizing idling, and 
maintaining a vehicle property. And certainly we have a host of 
other near-term means for reducing the impact of the high 
prices we have on the Energy Commission's Web site.
    And with that I'd like to conclude my testimony.
    [The prepared statement of Mr. Perez follows:]

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    Mr. Issa. Thank you very much. Very helpful.
    Rayola Dougher is manager of energy market issues, American 
Petroleum Institute. She has more than 20 years' experience in 
economic analysis of energy-related topics. Since 1985 her work 
has focused on public policy issues impacting the U.S. 
petroleum industry. And we look forward to your testimony. 
Thank you.

                  STATEMENT OF RAYOLA DOUGHER

    Ms. Dougher. Thank you, Mr. Chairman, Congresswoman Watson. 
API welcomes this opportunity to discuss why gasoline prices 
are so high and what can be done about it. Obviously your 
constituents, like Americans everywhere, are concerned about 
the continuing rise in prices and the impacts on their wallets 
and on the U.S. economy.
    I believe America's oil and natural gas industry shares 
common values and concerns with you. We share your commitment 
to finding workable solutions to our Nation's energy problems. 
We are committed to providing consumers with reliable energy 
supplies. We work hard to support economic growth. We believe 
our domestic oil and natural gas resources can be developed in 
a responsible way.
    Technological advances enable us to produce energy while 
protecting the land and the environment. And we want to work 
with you in building support in Congress for urgently needed, 
comprehensive energy legislation.
    Now, I'll leave the rest of my testimony, which you have, 
and I just thought I'd run through a few slides. Some of them 
might be redundant, so I'll be a little--I'll gloss over those 
points that we've already covered; OK? So here it goes.
    Why we're facing higher cost, and I'm going to discuss a 
little bit about how we got here, supply and demand, and what 
we can do about it.
    As we heard earlier it's really the forces of supply and 
demand on the international marketplace for crude oil. Those 
prices are set by the world's demand and the world's supply. 
And right now we have very limited spare capacity, and under 
these circumstances small changes have a big impact on prices. 
And what we've seen over the past year, especially if you look 
at the highest bar, 2004, you'll see a big bump-up in the 
world's demand. And the current high prices we're experiencing 
are in large measure due to this surge in demand.
    And if you look at 2005 and 2006, the forecasts by EIA are 
for an additional 2 million barrels a day. This is twice as 
much as what we had been growing in the 1990's and early 
2000's. And under these circumstances there's a lot of factors 
then that will affect the price in addition to the fact that 
capacity is very limited on the world's market. We used to have 
6 million barrels a day extra capacity a few years ago, and now 
we're down to about 1. And this is in a world that's consuming 
84\1/2\.
    So under these circumstances any one or more of these 
factors--and we saw all of these last year--will have an impact 
on prices and continue to affect the marketplace as we move 
forward.
    Well, if I can move the next slide forward, we'll be OK.
    OK. This you've already seen, but I've put an extra line 
here with crude oil prices. And it just shows fundamentally how 
the gasoline prices are mirroring what's happening in the crude 
oil marketplace. And again, more volatility and higher prices 
in California are for some of the reasons already discussed.
    This is just a simple chart. It was a moment in time, I 
think it was April 25th, and those prices do change somewhat, 
but I wanted to show you between April of last year and April 
of this year the price of crude oil is really what's moving the 
price at the pump more than anything else.
    And I wanted to turn a little bit to earnings because 
there's a lot of frustration and misunderstanding about 
earnings in the oil industry.
    It's a big industry, maybe the biggest in the world. This 
industry earns billions of dollars, but they spend hundreds of 
billions, even trillions bringing their product to market. So 
when you put it in the context of how much money is the 
industry making on every dollar of sales, last year they made 7 
cents on every dollar of sales. The rest of U.S. industry--and 
this is just from a survey that Business Week does--earned 7.2 
cents. Over the past 5 years the industry earned 5.6 cents on 
the dollar and the rest of U.S. industry 5.4.
    This quarter, we only have preliminary figures for this 
quarter, but I think the oil and gas segment of what I'm 
showing above is pretty good. It's about 8.4 percent right now, 
8.4 cents on every dollar of sales. And these others are just 
from a flash survey from Business Week and it's usually the 
early reporters with the higher results will report first, so 
that the U.S. oil industry average is high and ought to come 
down when Business Week publishes their corporate scoreboard in 
a couple of weeks. And we keep this data on our Internet and on 
our Web site.
    Turning to the refining sector. The rate of return in the 
refining and marketing industry has been disappointing for a 
long time now. The bars show what the refining and marketing 
have earned in relationship to that backdrop, which is the S&P 
industrials. And they've been earning about, oh, half or less 
than half of what the S&P has earned. And beginning in 1990 
with the Clean Air Act Amendment required massive investments 
in environmental expenditures to bring cleaner burning 
gasolines to market. Those investments were made, but smaller, 
less efficient refineries had a tough time keeping up, and a 
lot of them closed down.
    You do hear a lot about no new refinery in the United 
States since 1976; that's true. Back in 1980 we had over 300 
refineries. Today we have 148 operating refineries. But over 
this timeframe we have continued to produce even greater 
amounts of gasoline. We produce about 90 percent of what we use 
in the United States, and this is--we've been able to do this 
because of efficiency improvements and also because we're 
expanding the capacity and the utilization of that capacity. 
We're at 93 to 95 percent right now.
    And there's a lot of misunderstanding, too, about the 
mergers that took place in the late 1990's. Part of the reason 
for these mergers really was to realize efficiencies and 
economies of scale. And this is just a simple figure that 
shows--that's calculated by subtracting taxes and refiner's 
composite price for crude oil from the retail price of 
gasoline. And it shows back in 1980 a cost of 95 cents to 
refine and market and distribute gasoline. By 1990 on average 
it came down to 61 cents. By 2000 it was at 52 cents. And it 
has varied quite a bit since then, in the 40's, up to over 50, 
60 right now, but on average for a 5-year period it's been at 
52 cents. These are real savings.
    So in the near term the market outlook is for continued 
strong world oil demand. OPEC remains near capacity. There's 
spare capacity in Saudi Arabia and limited ability for non-OPEC 
to bring new product to market quickly. And geopolitical 
concerns remain, a lot of political instability in oil-rich 
nations and that continues to affect us. However, the market 
does work. It does respond to price. It does stimulate demand 
and it does dampen supply.
    What do we need? We need a lot. We need additional 
exploration and development of production of fossil fuels. We 
need to increase our energy efficiency. We need greater 
penetration of hybrid vehicles, for example. We need a lot of 
R&D and alternative fuels, including fuels like tar sands, and 
shale and renewables, hydrogen.
    And I don't need to tell you, the American Petroleum 
Institute is very gratified by passage of H.R. 6, and we do 
look forward to working with you to see comprehensive national 
energy legislation passed this year.
    Thank you very much.
    [The prepared statement of Ms. Dougher follows:]

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    Mr. Issa. Thank you. And now the part you've all been 
waiting for. And I'll start the questioning, but because the 
two of us will be the only panelists or only questioners of the 
panelists today, I might ask my ranking member if we alternate 
questions rather than worry about time. That will give you a 
variety of questions.
    Mr. Cook, I'd like to start with you. You testified that 
there's been about a 12-cent per gallon increase between the 
cost of crude oil and retail gasoline prices over the past 
year: 7 cents due to increased refinery costs and profits, 5 
cents due to increased distribution costs and/or marketing 
costs and profits.
    Are you saying that you can't explain this by cost alone 
and that at least a portion of this increase is greater than 
can be justified by cost and commensurate percentage profits?
    And I'll make it simple for an old businessman, it looks 
like gouging of some portion of that, doesn't it?
    Mr. Cook. With all due respect, I think what I was trying 
to illustrate--and I think it was figure 6 that did a little 
better job--as the refining industry and the distribution, the 
retail segment, operates at higher and higher levels on less 
and less spare capacity, that tends to raise the marginal costs 
in producing those last barrels of gasoline, and that turns out 
to--in fact, is reflected in higher retail prices.
    So, no, I would not refer to it as gouging. It's a symptom 
of an industry that is seeing supplies tighten further and 
further with a need to have clean fuels, but it does come with 
a price tag. It does tend to raise marginal costs.
    Mr. Issa. I appreciate that, and on the same question with 
Ms. Dougher. If I understand, you were showing us percentages, 
and if I understood correctly, percentage return--and I'm very 
appreciative that percent of return has been low for this 
industry--but percent of return over the last year has been 
significantly higher, about 33 percent higher than they were 
running. In other words, you go from 5 percent to 8 percent. 
That's a 30 to 50 percent increase in your return.
    Ms. Dougher. I'd like to clarify that. I think you were 
just talking about the profits themselves. And what my chart 
was showing was profits divided by the revenue. So how much 
money are you making on every dollar that you get? So that was 
showing--for example, the most recent quarter was 8\1/2\ cents. 
Last year was 7 cents on the dollar. Now that's a big 
improvement over a nickel or nickel and a half. So that's a big 
bump up. I think what happens often is people just look at the 
profits, not as what's being spent to bring the product to 
market. You're spending ever greater amounts, and it takes a 
long lead time and huge investments that this industry has to 
make to continue to produce more and to bring more product to 
market.
    Mr. Issa. I wanted to respect that back-and-forth 
questioning, but in my next round I'd like us to all think in 
terms of where I came from, the electronics industry. If my 
costs were rising, everybody after that cost comes in generally 
found themselves squeezed to try to get to the retail consumer. 
If you were bringing in something to market that Circuit City 
was going to sell and they've been paying $2 but your costs 
went up from $1 to $1.50, you generally try to figure out how 
you could still deliver it at $2, which meant you compressed 
your profit margins.
    What I heard here today is that at a time which the raw 
product price is rising, profit margins are expanding. And no 
matter how you look at that, that's the opposite of what one 
would expect. If the beef in a restaurant is going up in price, 
the restaurant is generally trying to find ways to hold their 
top price as close as possible to what it was, which means it's 
compressing somewhere. But we're having just the opposite. 
We're having an expansion of those margins after the cost of 
the product.
    Ms. Dougher. Remember the one slide did show how the 
refining and marketing and distribution costs in America have 
been coming down for quite a long time now as efficiency 
improvements and economies of scale were realized. But on the 
other end of it the cost that we can't control that's set on 
the world marketplace is the cost of the crude oil. And that is 
determined upon hundreds upon--well, millions of decisions each 
and every single day on that marketplace. So if you're a 
producer right now in America and the price of crude has gone 
from $35 a barrel to $50 or $55, than you're realizing good 
rate to return and searching for new places to explore and 
develop and bring ever more product to market. You have every 
incentive to do that, especially at these prices. It's happened 
quickly and these projects take long lead times to develop.
    Mr. Issa. Sure. And I'm going to respect our back-and-
fourth agreement. So, Ms. Watson?
    Ms. Watson. I want to thank you very much, Mr. Chairman. 
When I look at the list of witnesses and I refer back to the 
question for the hearing, what's causing record prices at the 
pump, I hear from our U.S. Department of Energy and I hear from 
the American Petroleum Institute, and maybe only a couple of 
the witnesses that really would be more leaning toward the 
consumer side.
    So with that said, I had to--I requested a report, Mr. 
Chairman, ``The Impact of Increased Oil Prices in the Los 
Angeles Area,'' and I seek permission to include this in the 
record.
    Mr. Issa. Without objection.
    [The information referred to follows:]

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    Ms. Watson. All right. So let me address my question now to 
the GAO, probably the only one on this panel that might see the 
problem differently from the consumer side.
    Your May 2004 report found the link between the recent wave 
of mergers and high gas prices. There is, I think, a 
relationship there, regardless of what's been said by this 
panel. But your price analysis ended in the year 2000. Was 
there another one since then?
    Mr. Wells. There has not been.
    Ms. Watson. OK. So long before the approval at least of the 
last two large mergers, which was ChevronTexaco and 
ConocoPhillips, and would it be safe to say that your report 
understates the price impact of mergers on gasoline?
    Mr. Wells. Congresswoman, we took extensive effort in 
designing a methodology that had never been used before. We 
tried to consult with experts and got peer review expertise to 
look at the type of design model that we were putting together. 
And I would say that we erred on the side of conservative 
estimates wherever possible. So I would not say underestimated.
    Ms. Watson. This is 2005. Your report was done in 2000.
    Mr. Wells. That's correct. It looked at mergers that 
occurred over a 10-year period from 1990 to 2000.
    Ms. Watson. OK. But look at the gasoline prices. And from 
what I've seen on your charts the prices have gone up within 
the last 5 years. And we've had mergers since then. So I would 
say that your data end results are stale. Would you agree?
    Mr. Wells. I'm sorry, our data was what?
    Ms. Watson. Stale.
    Mr. Wells. Stale?
    Ms. Watson. Yes.
    Mr. Wells. I would have to agree.
    Ms. Watson. OK.
    Mr. Issa. Time to ask for your new study.
    Ms. Watson. That's where I'm going. Because I did ask my 
staff to go out and do a little research. Because we get the 
complaints. You're getting the complaints. And what I've heard 
today does not answer the question for me.
    Now, capacity has been mentioned, but it seems to me, and 
this one goes to Ms. Dougher, if you are merging, then you 
ought to plan for a larger capacity. Why aren't the--why aren't 
there new refineries being built? Why aren't you anticipating 
the capacity? California is a State where one person on the 
average has six automobiles. And people love their SUVs and all 
these--I mean, you can do the math, and I don't think we're 
going to get Californians out of their automobiles because 
we're not building the metrorail systems, and I've been trying 
in my district since the early 1980's to connect up the basin. 
And we've tried everything. And we can't get people out of 
their cars.
    We have a Governor that has six--what do you call those 
things, those armored-looking things?
    Mr. Issa. He's called for hybrid Humvees.
    Ms. Watson. He's got six of these he owns himself.
    Mr. Issa. Actually, he has a dozen.
    Ms. Watson. It's more than I knew.
    So we're not going to realistically get them out of those 
cars. You can only drive one car at a time. So, Ms. Dougher, 
what is this institute recommending that we do for the future? 
Apparently, we're not having enough influence on OPEC and--
because they keep raising their prices. And, I mean, the fossil 
fuel is there and we know it's there. We just came back from 
Qatar a couple weeks ago, and they told us we have enough 
natural gas and enough crude to service, No. 1, with natural 
gas, any home for the next hundred years, and to service your 
need for your automobiles ad infinitum. So it's there.
    Now, why is it that we are not building for that capacity?
    Ms. Dougher. We have been building for that. Capacity has 
increased and the utilization of that capacity has increased, 
but it's as an industry as I showed you that it's realizing 
very poor rates of return for a long time now. It's producing 
18 different formulations of gasoline, two different seasons, 
three different octane levels. It gets complicated fast.
    Ms. Watson. I know.
    Ms. Dougher. So it's economic and it's also political. 
There's a lot of ``not in my backyard'' that goes on. And it's 
been very, very difficult to expand existing capacity. Never 
mind building a refinery. The one in Arizona, I think the 
permitting in there, has been going on for 10 years now, and as 
we just heard it might get done in another 5.
    So it has been difficult economically. It's been difficult 
politically. And the remainder of what we need we've been 
importing because it's just been so difficult to get anything 
done here.
    Ms. Watson. I understand--and then I'm going to throw it 
back to Mr. Chairman--that the United States is the third 
largest producer of oil in the world after Saudi Arabia No. 1, 
Russian No. 2. We're No. 3.
    We're producing that oil and you're merging. The oil 
industry is merging and we're paying the price, these high 
prices. Something is missing. Maybe we can get to it; maybe we 
can't. Something is missing in this equation. OK, Mr. Chairman.
    Mr. Issa. And perhaps I can get to it. Following up on my 
earlier line of questioning, and this, by the way, is very 
consistent with a lot of the questions that we got from our e-
mails. ConocoPhillips has increased profits this first quarter 
of 2004 versus the first quarter of 2005, by 80 percent. Shell 
42 percent. British Petroleum 36 percent. ExxonMobil 44 
percent, and so on.
    I hate to say this because it was my generation, but a 
generation ago we had a sudden rise in profits of this sort and 
Congress passed the Windfall Profits Tax. I looked through the 
record of how that worked and there's considerable debate, but 
it appears as though the tax did not go toward new production, 
new capacity, new--a new direction that prevented us from 
coming back right where we are again, although the price of the 
oil went down, and it was phased out and eventually eliminated.
    If these kinds of increases--and to be honest, I have a 
hard time believing that domestically they're not even better 
than this. Because if I look at $15, $16 a barrel of actual 
cost to remove something from the ground and you went from 
getting--and it could be lower in some cases--Bakersfield 
happens to be a high-cost area. So we in California know that 
we have oil wells that require steam. They're a little more 
expensive to get out, but even if you're spending $17 or $18 a 
barrel to get it out, when the price gets to $20, you're just 
breaking even. When it gets to $40, you're printing money. And 
we're well above printing money. We are now minting gold coins.
    This is somewhat of a panel question, but I think it's 
essential that we ask the question. How are we going to ensure 
that those dollars, if allowed to be retained by the oil-
producing and refining facilities, or for that matter even by 
the final distributor, that if those funds are allowed to be 
retained that they're going to be invested and not simply 
windfalled to the stockholders because obviously the United 
States, at least in this Member's opinions, has a vested 
interest in seeing that if it costs $9 to $18 a barrel to take 
even old oil out of the ground, that would not pay $50 a 
barrel, and $2.79 a gallon for gasoline. That does not compute.
    And, Ms. Dougher, I'll start with you because I want to be 
very supportive of your position, but all those efficiencies 
you put on the board still don't change the fact that an oil 
well sitting in Bakersfield that's been producing for a very 
long time suddenly has a run up and, if I remember right, Shell 
announced that they wanted to close the refinery out there. 
You're talking about an increased refinery, and I personally 
wrote a letter and weighed in that a profitable refinery was 
going to be closed in an oil-producing area of the State, and 
anecdotally for Congresswoman Watson we were also the third 
largest oil-producing State in the Union. Unfortunately 50 
percent of what we consume, we import it.
    But I'd like you to respond to that in light of these clear 
profits. What should we be doing to ensure that those profits 
are invested so that this long, short, medium term problem 
comes to an end?
    Ms. Dougher. Well, if they're not invested, then these 
companies go out of business. They have to invest for the 
future or they won't have a product to sell. And they're always 
looking for opportunities to do just that, and this is a great 
opportunity for us with these earnings over the past year or 
more. And what we need now is access to some of the more 
promising sites so that we can develop them here in the United 
States, so to that we can keep the jobs and keep the money here 
instead of flowing abroad.
    But we're in a good point in terms of an opportunity and in 
terms of policy to match the two together.
    Mr. Issa. OK. And I appreciate your input on that and that 
new site certainly is a point for, again, Congressman Watson, 
and I, and perhaps certainly Pat, we're a little tainted here 
in California by the history of our deregulation of 
electricity.
    We do know that is not always in a company's best interest 
to produce more of something. It may be in their best interest 
to make more money on what they produce. And to a certain 
extent that's been the history, certainly, of electricity post 
deregulation in California. It is also a clear sign of what 
we're seeing over the last 20, 25 years. We are not producing 
more in the United States and--nearly as we should. We are--
were--not a gasoline importing nation a generation ago. So we 
have slipped from being gasoline self-reliant. We may not be 
oil self-reliant, but we were gasoline self-reliant until 
today. I think, what is it, Norway that we have to get our 
gasoline from if we run short in California.
    Ms. Dougher. We continue to produce about 90 percent of 
what we use, but each year we use more and we are importing 
about 10 percent and we are getting to a point that these 
refineries really are strained to keep up with the extra 
demand. And we need to simplify some of the refinery fuel 
specifications which is addressed in H.R. 6, as you know, and 
that could help add some flexibility to the system, repeal the 
oxygenate mandate and have a national phase-out of MTBE. All 
these things would help the refining segment of the industry to 
move forward in a better fashion.
    Mr. Issa. Excellent. Mr. Perez, you don't have to weigh in, 
but it's your opportunity.
    Mr. Perez. Certainly the investment in this State would be 
something we would desire to see, but through all these 
consolidations, acquisitions, and mergers over the last 10 to 
20 years you're dealing with essentially global giants where 
decisions are made on a worldwide basis. And when it comes down 
to investing that money from these profits, they look at the 
issue from a global perspective. If it's less expensive to 
build a refinery, process crude oil, and make a variety of 
products abroad, whether it be in India or another Asian 
country, they're going to pursue that option, and that's why at 
the Energy Commission, one of the things that we're most 
concerned about right now is our import infrastructure, our 
ability to import, not only more crude oil, but petroleum 
products as well as the blendstocks to make finished gasoline 
in this State, and that is the reason we just issued a study, I 
guess it was about 10 days ago.
    We'll be holding hearings next Monday in Sacramento to 
highlight what some of the challenges are because as we see it, 
we don't see any significant investments being made in this 
State beyond what we've seen Paramount is going to do, and 
certainly Big West in Bakersfield is now pursuing plans to 
expand their capability, but when you look at overall demand 
growth in this State, it's only a small portion of that demand 
growth.
    Mr. Issa. Mr. Wells.
    Mr. Wells. Yes, Mr. Chairman. Clearly the Government 
Accountability Office has legal access to Federal records and 
data. When we deal with private sector industry, we rely on a 
lot of cooperation of the industry to discuss things with us. 
In the course of doing our work related to gasoline and 
mergers, we did have the opportunity to talk to some of the 
industry. Not all the industry would agree to talk with us. But 
I can tell you sitting in those meetings there's a lot of 
issues with proprietary information. When we sit in the 
meetings and any discussion of profit or prices comes up, we 
have legal people in the room that basically shut the 
conversation down. But we hear a lot of explanation from the 
industry as they explain what's going on and we listen, but for 
me, a country boy, some of the things that I understood would 
be some issues relating to a discussion that when times are 
good, you bank the money and you use that money to help in lean 
times. I sort of understood that conversation.
    Anecdotally we're looking at data to look at whether or not 
the industry is reinvesting right now. And we're not 
necessarily seeing that, reinvestment dollars, but we are 
seeing a lot of dollars being returned to the shareholders. And 
that's not to say it's anything bad. The industry still has to 
stay in business and earn a living and produce the product.
    Mr. Issa. So what you're saying is the stockholder gets the 
money so we can go buy Intel stock. I just want to make sure 
that's--you know, I would imagine if you're returning dollars, 
it's not going to be likely to be going into new refineries 
with one of the competitors.
    Mr. Wells. They're buying back their stocks. There's a lot 
of rebuying of some shares.
    Mr. Issa. Mr. Cook and then back to you.
    Mr. Cook. I'd like to point out that the root of that 
problem to me appears to be a lack of spare capacity both in 
crude production and in refining. What that means is that 
demand growth has accelerated in the last year or two, 
surprising the industry. Capacity expansions haven't kept up 
with that. So why haven't they? No. 1, they didn't anticipate 
the spur in demand growth. And, No. 2, as the API person tried 
to point out, returns on investment until the last year or so 
have been half of the levels achieved in other industries.
    So this is a situation where even today we think these 
forces to high prices are permanent until that spare capacity 
problem is solved, but there's no consensus. You talk to a lot 
of experts, they're going to tell you it's temporary. What does 
that mean to the industry investor? This is an industry that's 
been through cycles of boom and bust time after time after 
time. So if there are a lot of so-called experts telling these 
guys, ``OK, times are good today, but they won't be 2 years 
from now,'' what does that do to the investment signal? The 
root of the problem is to get more investment out there. It 
seems to me that if, in fact, this continues over the next few 
years and the market works, there won't be any problem about 
that investment flowing back into the industry.
    Normal market forces are going to plow that back in. That's 
what we need now, a period of sustained, reasonable returns on 
investment. Certainly 8 cents on the dollar is not unreasonable 
and that's what we're going to have to overcome--the various 
problems the industry faces in permitting and environmental 
costs to have that capacity.
    Mr. Issa. Ms. Watson.
    Ms. Watson. I've heard it said that the industry is saying 
that the reason for rising costs is the demand in China and in 
India. All of us have known and observed the growth in China. 
And you can look at the population in India and, you know, I 
don't understand how the industry has not projected for the 
future. I mean, I'm baffled. I mean, you guys work with numbers 
all the time. And OPEC does not set the price. They give you 
the price for their oil, but they don't set the prices at the 
pump. And we have plenty of crude oil. Wait till we go into 
Africa. They've got enough natural resources to serve this 
planet on into the future beyond our lifetimes.
    Now, what I'm seeing and I'm listening very intently, that 
it's the energy traders in New York who are using their rising 
demand as an excuse to drive the prices of crude up to return 
more to their investors. And we have been the victim of that 
here in California. We've seen what the middle guy has done to 
us. They drive the prices up and we don't get our fair share 
here in California, so we're triply victimized.
    Is there anyone at this table that's brave enough to really 
kind of look deep and give us an answer to these rising costs 
and the fact that they're going to continue to stay high? I 
feel they're going to continue to stay high. And somebody said 
we probably will be around $3.15 a gallon in a couple of weeks. 
I feel that it is projecting for increased profits rather than 
the demand. It seems to me that if more people are using crude, 
that means more money. And, you know, with China and India now 
having more demands, I don't know why our price is going up 
when they are putting more money into the oil companies who 
then can give large--and, we're going to always have that need 
for oil. We're going to have that need for oil.
    And so will anyone want to respond to where you think the 
real problems are? And don't give me the answer that it's the 
blends, it's the boutique fuels. I hope that we have greater 
usage, greater development because we certainly need an 
alternative, but something is missing in all of your testimony.
    Mr. Cook. Again, the bulk of the increase since 2000 is in 
crude oil. Prices on one of the charts that we showed you are 
$20 in 1999. Now they're $50. That's $30 a barrel increase 
because of the lack of spare capacity in global crude markets. 
$30 a barrel is 75 cents a gallon. Right there is 75 cents off 
of $1.50. The prices used to run just $2.25.
    There's been some additional elevation because of the 
tightness in refining capacity. I think that would ease if 
these profits stayed up, but nobody believes they're going to 
stay up, and that tends to dampen the investment that's 
necessary.
    Ms. Watson. What do you mean by the prices are not going to 
stay--the profits are not going to stay up. Can you explain 
that?
    Mr. Cook. I'm saying that I think crude prices and retail 
prices will stay up, but this lack of spare capacity, this key 
driver, is going to sustain that. But there are a lot of 
experts out there that refer to geopolitical risk, speculation 
on the NYMEX, things that could be temporary that may ease and 
bring prices back down and take away the extra profits 
necessary to do the investment that's needed here.
    Ms. Watson. Well, if you're saying that it's capacity, with 
these mergers why aren't we going after new refineries or 
increased capacity at the refineries we do have?
    Mr. Cook. I think that will happen. It's just all too new. 
It's only been in the last year or so, and it has been a 
surprise. Yes, I think the industry forecasts----
    Ms. Watson. What is a surprise?
    Mr. Cook. That one chart that showed you the big jump in 
demand in 2004, over doubled what had been going on the 
previous year, in the last 15 years----
    Ms. Watson. Why is it a surprise?
    Mr. Cook. Who knows exactly when demand is going to spurt 
because of Asia and China? It's going to grow, but did we see--
no one saw that it was going to double overnight.
    Ms. Watson. It started in the 1980's?
    Mr. Cook. Pardon.
    Ms. Watson. It started in the 1980's.
    Mr. Cook. They started growing, yes, but the increase 
didn't double and triple until 2004.
    Ms. Watson. They put those bicycles aside and now they're 
all driving automobiles.
    Mr. Cook. I think----
    Ms. Watson. 1.2 billion people in China and 1.3 billion in 
India. OK.
    Mr. Issa. Thank you. I want to be consistent with the 
promise to address constituent questions. I've been ticking off 
a lot of the questions we got on the e-mail as they were 
answered here without even being asked, but one of them that I 
don't think has been fairly addressed comes from Martin Reyes 
in Los Angeles.
    It says, ``I have noticed that gasoline prices vary from 
city to city or even block to block. It sometimes varies as 
much as 10 to 20 cents a gallon at the same name brand 
stations. Why?''
    Ms. Dougher. Well, there's lots of different reasons and it 
depends on where you are, and even myself traveling to work in 
the morning I'll see different prices on my way into town. Part 
of it's competition. Part of it's supply. Who's your supplier? 
Part of it's the contract that you have with that supplier. So 
it can vary for a whole host of reasons. That's the best I can 
give you on that.
    And within a State, depending on which State you're in, you 
can have different taxes. For example, Florida has 60 different 
counties----
    Mr. Issa. No, no. We're only talking a Los Angeles person 
who drives and at the off ramp it's $2.97, then you go a little 
further in and it's a dime cheaper. And you go around the 
corner--and it's all the same brand in some cases. I laughed at 
this one because I understand somewhat how it happens, but it's 
got to be the hardest thing for the consumer to believe that if 
there's really competition, why is there--on four corners 
they're always the same price, but they're not the same price 
two blocks away.
    Ms. Dougher. It's what the consumer's willing to pay, and 
also the competition, the cost of doing business in the area. 
It's all those things. If you have a better location, you can 
probably mark down a little bit or maybe even mark up more. It 
depends on who your competition is.
    Mr. Issa. Are there any other answers for Mr. Reyes because 
I'm sure if he reads this one in the newspaper, he's going to 
say, ``And what does that mean?'' With all due respect, I don't 
disagree with your point, but I hope there's another point.
    Mr. Wells. Mr. Chairman, we're preparing a gasoline primer 
study that we're looking at trying to help explain to that 
consumer the types of things that cause gasoline to be what it 
is. We too have been asking the industry this question and the 
most frequently mentioned answer we get is a corporate industry 
decision that allows them to do things like zone pricing. We're 
still attempting to understand zone pricing, but it involves 
the industry making conscious decisions about selling at the 
wholesale level to retailers at different prices that will 
allow certain individual stations to charge a lower price. And 
that is a market competition decision that the industry makes 
to remain competitive in the marketplace and what the market 
will bear, but there is practices known as zone pricing.
    Mr. Issa. OK. So, I guess, the short answer for Mr. Reyes 
is zone pricing, and since this is the wrong panel I won't ask 
why is it that I'm always paying $500 when the person next to 
me on the United flight is paying $199? That also is a question 
I'd like to have answered.
    Mr. Perez, real quickly, there were two things that you--
quite a few things you touched on that sparked my interest. One 
is you talked about ethanol as a fuel. You may be aware that 53 
members out of 53 members of the California congressional 
delegation signed on repeatedly to an ethanol waiver so that we 
wouldn't have to put that high cost oxygen into our fuel in 
hopes that it will lower our cost of gasoline, which we've been 
assured that it would have an impact, and you can respond to 
that.
    So in that case why would we use ethanol as a fuel if it's 
a more expensive fuel?
    Mr. Perez. Right now it's not more expensive, but----
    Mr. Issa. Without subsidies. Yeah, let's forget the fact 
that's putting a lot of money into sugar.
    Mr. Perez. One of the things that we feel consumers would 
benefit out here in California is if we had a waiver. Certainly 
right now it's very attractive to blend as much ethanol as 
possible. In fact, the way the air quality requirements work is 
basically we've got to use oxygenated gasoline with ethanol in 
about 80 percent of our market, but right now we're using it in 
roughly 97 percent of the market because ethanol prices are 
significantly depressed right now. And one of the reasons for 
that is there is tremendous production that has come on line 
here in the past year.
    There's also another major market in Atlanta that decided 
not to go down that road right now, rather litigate it. So 
they're not using ethanol. That frees up about 250 million 
gallons of ethanol. You got 17 major ethanol production 
facilities under construction right now that will be adding a 
lot more capacity.
    So there's a great deal of ethanol out there right now. And 
as a result California refiners are blending a great deal of 
it. The concern we have is that is not likely to continue 
forever, that huge surplus that we have right now. Rather, we 
would like to have the flexibility to let the refiners decide 
what's the best blend of components to make gasoline. And if 
you did that--let's say ethanol went up significantly higher 
than where it is today, then they could decide to use other 
blending components that might be cheaper to make gasoline. 
Furthermore, if we have that flexibility, essentially, rather 
than having a Federal Government mandate, refiners would be in 
a better position to bargain for those 6 to 9-month ethanol 
contracts down the road. So it puts them in a stronger driver's 
seat to negotiate future contracts which we believe would 
contribute to lower prices and not higher prices for the long-
term.
    Mr. Issa. OK. And then just a followup on Unocal, and I 
didn't come here to pick on any one company. As I understand it 
you're talking about Unocal's patents?
    Mr. Perez. Yes.
    Mr. Issa. As I understand the history of the Unocal patents 
were that the oil companies came together, they talked about 
the next generation of gasoline, and then Unocal ran back and 
patented, basically, what the discussions told them we were 
going toward. Is that correct?
    Mr. Perez. Pretty much the way I understand--I wasn't part 
of those discussions, but they were able to reach agreement on 
these unique patents for California base gasoline that would be 
blended with ethanol.
    Mr. Issa. And those patents, if I heard you right, are 3 to 
6 cents of cost.
    Mr. Perez. We believe 1 to 3 cents per gallon.
    Mr. Issa. OK. And, finally, why would this acquisition 
cause somebody not to keep collecting royalties from their 
competitors?
    Mr. Perez. That's a good question. We hope as part of these 
investigations that question will be raised and discussed at 
the Federal level.
    Mr. Issa. OK. That's--obviously a good Federal question for 
us to take home because we'd all love to see opportunistic 
patents to be kind, not continue to drive up the cost.
    Anyone else want to answer on that?
    Mr. Dougher. No. Mr. Perez did a good job.
    Mr. Issa. Thank you. Ms. Watson.
    Ms. Watson. Mr. Chairman, it appears that we're winding 
down, and I think this----
    Mr. Issa. I thought we were just warming up.
    Ms. Watson. I think this question from Stephanie Lawrence 
of Laguna Hills sums up my questions and it may be a 
recommendation to our subcommittee. And Stephanie says, ``What 
is and what should be the Government's role in gasoline 
pricing? Should it be regulated?'' You know, we do not 
regulate. And should it be regulated. And that's something I 
think this committee has to grapple with. ``Information only?'' 
She says. ``Is that our role?'' Or pressure on oil producing 
countries and companies?
    And these are the issues that I think we, as a 
subcommittee, have to grapple with. I mean, next time we do one 
of these hearings, I'd like a group on the consumer research 
side that's not connected to our Government agencies to be at 
the table so we don't have the pressure, our various 
departments saying to those that represent them that let's not 
deal with this. It's political.
    I would like to have another voice from the Institute to 
speak, and I'd like to have another voice from the Commission, 
in addition, to speak--because Americans want to know what's 
behind this. Our constituents want to know. And I'm so glad you 
have these questions here because I think the public sees that 
there's an issue out there and they want answers.
    So with that--and I think we have asked the probing 
questions already--I feel not completely satisfied that I've 
gotten the answers, but I think this is just the beginning. And 
with that I want to say thank you so much more for having the 
subcommittee here in Long Beach.
    Mr. Issa. Thank you. And the committee there take note and 
plan on expanding even if it means a second panel for more 
consumer-oriented. I think it's important that we look toward 
our Government and quasi-government agencies. But then as you 
pointed out very rightfully, we have to spread out the 
witnesses we hear.
    I might note that--Congresswoman, I know, remembers--that 
when we had the founder of Green Peace just a couple of weeks 
ago, Mr. Moore made an interesting observation. One of them was 
that if we had built all the nuclear power plants that were 
planned in 1978 today, we would be Kyoto compliant, but he also 
noted that we would not be using natural gas at a rate that 
would allow every vehicle in America to run on natural gas, 
which was sort of an interesting theory of what fuel should be 
used where, although he wasn't recommending that. If you 
remember, he was recommending that we go to electricity.
    Ms. Watson. Yes. Which, apparently, comes out to be 10 
cents a gallon of gasoline equivalent if you produce the 
electricity the way he proposed.
    Having said that, I think the committee has opened 
Pandora's Box, and I don't expect we'll be closing it any time 
soon. We only touched on tar sands and other domestic 
production. We only touched on ways in which we could conserve 
gasoline. We did certainly belabor the point of my hybrid 
vehicle and the Governor's proposal for a hybrid Humvee.
    And with that I want to thank our panel and our audience 
that came here to see this today. And I want to assure all of 
you that the record will remain open for at least 5 days. If 
you look through what you've said or have been asked here today 
and you want to revise or extend, please feel free to. We can 
keep the record open for up to 30 days.
    And with that I thank you and this hearing is adjourned.
    [Whereupon, at 3:16 p.m., the subcommittee was adjourned.]

                                 
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