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


 
        HURRICANE KATRINA'S EFFECT ON GASOLINE SUPPLY AND PRICES

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

                                HEARING

                               before the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 7, 2005

                               __________

                           Serial No. 109-32

                               __________

      Printed for the use of the Committee on Energy and Commerce


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


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                               __________
                    COMMITTEE ON ENERGY AND COMMERCE

                      JOE BARTON, Texas, Chairman

RALPH M. HALL, Texas                 JOHN D. DINGELL, Michigan
MICHAEL BILIRAKIS, Florida             Ranking Member
  Vice Chairman                      HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio                EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia                 FRANK PALLONE, Jr., New Jersey
ED WHITFIELD, Kentucky               SHERROD BROWN, Ohio
CHARLIE NORWOOD, Georgia             BART GORDON, Tennessee
BARBARA CUBIN, Wyoming               BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois               ANNA G. ESHOO, California
HEATHER WILSON, New Mexico           BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona             ELIOT L. ENGEL, New York
CHARLES W. ``CHIP'' PICKERING,       ALBERT R. WYNN, Maryland
Mississippi, Vice Chairman           GENE GREEN, Texas
VITO FOSSELLA, New York              TED STRICKLAND, Ohio
ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
STEVE BUYER, Indiana                 LOIS CAPPS, California
GEORGE RADANOVICH, California        MIKE DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire       TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania        JIM DAVIS, Florida
MARY BONO, California                JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon                  HILDA L. SOLIS, California
LEE TERRY, Nebraska                  CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey            JAY INSLEE, Washington
MIKE ROGERS, Michigan                TAMMY BALDWIN, Wisconsin
C.L. ``BUTCH'' OTTER, Idaho          MIKE ROSS, Arkansas
SUE MYRICK, North Carolina
JOHN SULLIVAN, Oklahoma
TIM MURPHY, Pennsylvania
MICHAEL C. BURGESS, Texas
MARSHA BLACKBURN, Tennessee

                      Bud Albright, Staff Director

        David Cavicke, Deputy Staff Director and General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                  (ii)

  
?



                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Angelle, Scott A., Secretary, Louisiana Department of Natural 
      Resources..................................................   124
    Barbour, Hon. Haley, Governor, State of Mississippi..........    18
    Caruso, Hon. Guy F., Administrator, Energy Information 
      Administration.............................................    48
    Cavaney, Red, President, American Petroleum Institute........   136
    Cooper, Benjamin S., Executive Director, Association of Oil 
      Pipelines..................................................   175
    Cooper, Mark N., Research Director, Consumer Federation of 
      America....................................................   206
    Douglass, Bill, CEO, Douglass Distributing Company, on behalf 
      of the National Association of Convenience Stores and the 
      Society of Independent Gasoline Marketers of America.......   181
    Garman, Hon. David K., Under Secretary for Energy, Science 
      and Environment, Department of Energy;.....................    44
    Lashof, Daniel A., Science Director, Climate Center, National 
      Resources Defense Council..................................   199
    Moran, Kenneth P., Acting Director, Office of Homeland 
      Security, Enforcement Bureau, Federal Communications 
      Commission.................................................    68
    Newsome, James, President, New York Mercantile Exchange, 
      World Financial Center.....................................   170
    Seesel, John H., Associate General Counsel for Energy, 
      Federal Trade Commission...................................    56
    Slaughter, Bob, President, National Petrochemical and 
      Refiners Association.......................................   146
    Smith, William L., Chief Technology Officer, Bellsouth 
      Corporation................................................   193
Additional material received for the record:
    Dingell, Hon. John D., a Representative in Congress from the 
      State of Michigan, letter dated March 3, 2005, enclosing 
      questions for the record, and responses to same............   248
    Newsome, James, President, New York Mercantile Exchange, 
      World Financial Center, letter dated October 6, 2005, 
      enclosing response for the record..........................   242
    Slaughter, Bob, President, National Petrochemical and 
      Refiners Association, response for the record..............   246

                                 (iii)

  


        HURRICANE KATRINA'S EFFECT ON GASOLINE SUPPLY AND PRICES

                              ----------                              


                      WEDNESDAY, SEPTEMBER 7, 2005

                          House of Representatives,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 11:05 a.m., in 
room 2123, Rayburn House Office Building, Hon. Joe Barton 
(chairman) presiding.
    Members present: Representatives Barton, Hall, Upton, 
Stearns, Gillmor, Deal, Whitfield, Norwood, Shimkus, Wilson, 
Shadegg, Fossella, Radanovich, Bass, Pitts, Bono, Walden, 
Terry, Ferguson, Rogers, Otter, Myrick, Sullivan, Murphy, 
Burgess, Blackburn, Dingell, Waxman, Markey, Pallone, Brown, 
Rush, Eshoo, Stupak, Engel, Wynn, Green, Strickland, DeGette, 
Capps, Doyle, Allen, Davis, Schakowsky, Solis, Gonzalez, 
Inslee, Baldwin, and Ross.
    Staff present: Bud Albright, staff director; Andy Black, 
deputy staff director/policy coordinator; Mark Menezes, chief 
counsel for energy and the environment; Margaret Caravelli, 
majority counsel; Maryam Sabbaghian, majority counsel; Tom 
Hassenboehler, majority counsel; Kelly Cole, majority counsel; 
Peter Kielty, legislative clerk; David Schooler, minority 
general counsel; Sue Sheridan, minority senior counsel; Michael 
Goo, minority counsel; Bruce Harris, minority professional 
staff; and Reed Stuntz, minority staff director.
    Chairman Barton. The committee will come to order. We are 
going to have a very important hearing this morning and this 
afternoon but also a very long hearing.
    The Chair should not have to announce this, but the Chair 
is going to announce it: There will be regular order.
    All members that wish to will be allowed to give their 
opening statements. Those members that wish to defer the 
opening statements will be given extra time in the Q and A 
period.
    At noon today, approximately, we are going to have a video 
presentation by the Governor of Mississippi, Mr. Barbour.
    We asked the Governor of Louisiana if she would also like 
to participate by video conference. She is not able to do so, 
but she is going to ask one of her assistants, who I believe is 
in the room, to read her statement into the record.
    So whenever Governor Barbour is able to teleconference with 
us, we will suspend what we are doing at that moment for that 
to happen. Then we will give the Governor of Louisiana's 
representative an opportunity to read a statement into the 
record, and then we will resume.
    I also want to make a point of personal privilege before 
beginning our opening statements to announce that Baby Barton 
has not yet joined us in the world. He is due any day now. And 
I know the airline schedule back to Texas. I have it memorized. 
So if you see me hopping out and running out of here, it means 
that I have received a phone call that I need to get home. But 
we expect Baby Barton to be here any time between today and 
next Friday.
    Mr. Hall. Will the chairman yield?
    Chairman Barton. Briefly.
    Mr. Hall. Did you ever know where the term ``son of a gun'' 
came from?
    Chairman Barton. I hesitate to ask.
    Mr. Hall. Sailors used to take their wives to sea with 
them. And when they were enceintes and they could not deliver, 
they would walk them past the big guns, shoot the big guns off. 
That is a son of a gun.
    Chairman Barton. Okay. That is one theory.
    Now we are going to resume regular order, and the Chair 
recognizes himself for an opening statement.
    I want to begin by expressing the deep sorrow that 
everybody on this committee, on both sides of the aisle, has 
for the families and friends who have lost loved ones and who 
are experiencing, as we speak, the tragedy and loss as a result 
of Hurricane Katrina.
    This is one of the worst natural catastrophes to ever hit 
our country, and I would remind us that we are the United 
States of America, so our hearts reach out to those citizens in 
Louisiana, Alabama, and Mississippi. Our thoughts and prayers 
go out to them.
    Many of the constituents hurt by Katrina are represented 
directly on this committee. Vice-Chairman Chip Pickering of 
Mississippi has had the benefits of representing his 
constituents in Mississippi for a number of years.
    Our former chairman, Billy Tauzin of Louisiana, represented 
his constituents on this committee for years and years.
    This storm is not a burden on any one State, it is a burden 
for the entire Nation, and we will deal with it as a united 
Nation.
    Some States have come forward already to give aid and 
comfort. To name a few: Texas, Arizona, Alabama, Tennessee, 
Arkansas, Georgia, Florida, Kansas, Utah, and Ohio have all 
opened their doors to Katrina refugees; we thank them for that.
    In my congressional district in Texas, I know of at least 
2,000 refugees in shelters as of the day before yesterday. The 
Energy and Commerce Committee is going to do the very best it 
can to help and alleviate pain and suffering and hopefully 
prevent future events of this type from having the kind of 
impact that it has had.
    This hearing is the first of several hearings that we hope 
to hold on the impact that Katrina has had on our energy 
policy, our health care policy, and our telecommunications 
policy.
    Unlike hurricanes of the recent past, Katrina has been 
destructive and disruptive. The disruptions have had an impact 
on energy, telecommunications, health, interstate commerce, and 
all sectors of our Nation's economy. These are all areas that 
are within the purview of the Energy and Commerce Committee.
    This is not a hearing today to engage in a blame game, or 
to pose recriminations against anybody at any level. This is a 
hearing to begin to understand the effect Katrina has had on 
our committee's area of responsibility. There will be numerous 
opportunities to determine where the blame should be placed. I 
hope that we can spend time learning from our mistakes and 
taking positive actions, if possible, to correct those 
mistakes.
    I want to thank the witnesses that are here today for their 
time and their preparation to appear before the committee. Many 
of you are here to discuss energy security. As we confront the 
human tragedy from Katrina, the consequences force us to think 
more expansively about energy security and to focus harder on 
matters that the recently passed energy bill have already 
emphasized.
    If there is a silver lining, and I am not saying there is, 
but if there is, it may be that our country is beginning to 
realize how fragile our energy sector is and how easy it is to 
disrupt it. It is my opinion that we have an energy 
infrastructure based on a 1970's population and a 1970's 
demand, and obviously we are in the 21st century and we have 
not kept pace.
    The U.S. oil infrastructure is operating at maximum 
capacity. It has done so for the past 2 to 3 years. It was 
stressed before Katrina. We have just signed the most 
comprehensive energy bill I think that the Congress has ever 
passed. We did that on a bipartisan basis. A majority of the 
Democrats on this committee voted for that bill, and I wish to 
thank them. I wish to thank the ranking member, Mr. Dingell, 
for his support in that effort. So this committee should not 
have to have a wake-up call, but Hurricane Katrina is 
definitely a reminder that there is more to be done. It is 
always easier to say after the fact what we should have done 
before the fact.
    Katrina reminds us of the need to protect and expand 
resources and infrastructure not just in the Gulf-producing 
States but in all areas of our Nation. I am pleased that our 
recently passed energy bill did include a $500 million 
provision directed at coastal restoration. So we have already 
made a start in helping that region.
    My time has expired, so I am going to put the rest of my 
statement in the record.
    [The prepared statement of Hon. Joe Barton follows:]

 Prepared Statement of Hon. Joe Barton, Chairman, Committee on Energy 
                              and Commerce

    I want to begin by expressing my deep sorrow to the families and 
friends who are experiencing such unimaginable loss from Hurricane 
Katrina. I honestly can't imagine the terrible feeling of loss and 
displacement that so many fellow Americans are being forced to face 
right now. People have lost their loved ones, their friends, their 
homes and their livelihoods. My thoughts and prayers and the thoughts 
and prayers of America go out to the many.
    Many of the constituents hurt by Katrina's wrath are represented 
directly on this Committee by Vice Chairman Pickering, and the 
Committee for years has had the benefit of representation from 
Louisiana, including its former Chairman, Chairman Tauzin. But this 
storm is not the burden of any one state, it has damaged a nation and 
if the nation is going to survive, we must turn to one another for 
support. To name a few, the States of Texas, Arizona, Alabama, 
Tennessee, Arkansas, Georgia, Florida, Kansas, Utah and Ohio have all 
opened their doors to Katrina refugees and we thank them for that.
    The Committee too will do its part to help. This hearing will be 
the first of several hearings that the Committee plans to hold on the 
impact that Katrina had on energy, health and telecommunications. 
Unlike hurricanes of the recent past, Katrina has been both destructive 
and disruptive. The disruptions have had an impact on the energy, 
telecommunications, health and commerce sectors of the nation's 
economy--all areas within the purview of this Committee's broad 
jurisdiction. Let me say at the very beginning today that this is not a 
hearing to engage in a blame game or to pose recriminations against one 
another. This is a hearing to begin to understand the effect Katrina 
had on our committee's areas of responsibility. There will be plenty of 
time to determine where blame should be placed. I hope we spend more 
time learning from our mistakes, and taking positive action to correct 
our mistakes, than we do in finger pointing. The American people 
deserve no less.
    I want to thank our witnesses for their time and preparation to 
appear before the Committee today. Many of you are here today to 
discuss energy security. As we confront the human tragedy from Katrina, 
the consequences force us to think more expansively about energy 
security, and to focus harder on matters that the recently passed 
Energy Bill already emphasized.
    If there is a silver lining in this tragic situation, it is that it 
may finally bring home to the American people how fragile our energy 
sector is and our energy infrastructure is.
    The U.S. oil infrastructure is operating at maximum capacity and 
has done so for the past 2-3 years. It's stressed. We just signed the 
most comprehensive energy bill in the last 15 years. There are lots of 
things in that bill to help and we're fortunate to have it. This 
hurricane is a wake up call that we need to do things across-the-board 
on infrastructure and to also expand the base.
    It's always easier to say after the fact what should have been done 
before the fact. Katrina reminds us of the need to protect and expand 
resources and infrastructure in the Gulf producing states to encourage 
continued operations. For example, the recently passed Energy Bill 
included a $500 million provision directed at Coastal Restoration, but 
we should and will need to do more.
    Katrina also reminds of how centralized our nation's energy 
infrastructure is and the need to encourage investment and 
diversification. For a sense of the numbers, 29% of our oil production 
and 20% of the natural gas is in the Gulf of Mexico. It doesn't have to 
be that way. We could be drilling in Alaska right now; we could be 
drilling off the coasts of several other states. It would make a 
difference today if we were not as restrictive as we've been the last 
20 years in where we drill. We can't just get our oil and gas from 
Texas, Louisiana, Mississippi and the Gulf of Mexico. We need to 
diversify our domestic oil resources.
    We have not built a new refinery in the U.S.A. in over 30 years and 
Katrina has shown us that our refinery capacity is inadequate. Last 
week Katrina forced a shutdown of approximately 25% of our refining 
capacity. Relief efforts have brought much of this capacity back on 
line, but my understanding from recent Department of Energy reports is 
that 10% of our gasoline refining capacity will nevertheless be out of 
commission for some time. To encourage new refineries the Energy Bill 
has a provision that allows a governor of a state to petition the 
Environmental Protection Agency for technical and financial assistance 
in the refinery permitting process.
    We need to encourage states outside of the Gulf to take advantage 
of Energy Bill provisions like this.
    Also today I expect to hear more about gasoline pricing. I think a 
good case can be made today that some retailers may have taken 
advantage of the Katrina emergency. If that's true, that is something 
that needs to be investigated and, in all probability, prosecuted. 
Among other issues, we're going to investigate the price increase at 
retail today. I believe in a market economy and there is no need for 
price controls and price freezes at any level, but I think there may be 
a need at the retail level to make sure we have adequate enforcement 
tools to prevent pure price gouging
    Also today we welcome witnesses that will help us begin developing 
an understanding of Hurricane Katrina's effect on the communications 
systems in the region and begin understanding the road to rebuilding 
critical infrastructure that has been damaged or lost.
    Again, this hearing will be the first of several hearings that the 
Committee plans to hold on Katrina. We will have further hearings in 
other areas of Committee jurisdiction. I thank you all for your time in 
appearing today and look forward to hearing what you have to say. And 
without objection, the Committee will proceed pursuant to Committee 
Rule 4(e), allowing Members the opportunity to defer opening statements 
for extra questioning time.

    Chairman Barton. As I said at the beginning, we are 
proceeding pursuant to Committee Rule 4(e), which will allow 
members that wish to defer opening statements additional time 
on their question-and-answer period.
    I would now like to recognize the distinguished ranking 
member of the committee, Mr. Dingell of Michigan.
    Mr. Rush. Mr. Chairman, I have a unanimous consent request.
    Chairman Barton. If it is in order. I am going to assume it 
is. What is the gentleman's unanimous consent request?
    Mr. Rush. Mr. Chairman, I would just ask for unanimous 
consent that all members of this committee please join with the 
President in refraining from calling American citizens who are 
distressed refugees. They are not refugees. They are American 
citizens. They pay taxes. They have been involved in helping to 
build this country, and they are not refugees, and I think it 
is a disservice to them.
    Chairman Barton. I am not sure that is a unanimous consent. 
The Chair would encourage members to use the appropriate 
terminology.
    Mr. Rush. I just ask, Mr. Chairman, if they would just join 
the President and others in refraining from using the word 
refugee.
    Chairman Barton. I support the gentleman of Illinois' 
intention.
    Mr. Rush. Thank you.
    Chairman Barton. I am going to recognize the distinguished 
ranking member from Michigan for an opening statement. Mr. 
Dingell.
    Mr. Dingell. Mr. Chairman, thank you; and I commend you for 
holding this hearing. It is very important that it should be 
held at this time. The committee has many matters of interest 
here related to the events that have followed Katrina; and 
under your leadership, as under your leadership on the recent 
energy bill, I am satisfied that we will address them well.
    The hearing today takes place while vital rescue relief 
efforts are still under way in New Orleans and our Gulf State 
communities devastated by Hurricane Katrina. As we continue to 
consider how this Nation will recover, we must also be mindful 
of the scale and severity of the destruction in the Gulf and 
the challenge of caring for those whose homes have been 
destroyed and whose lives will not soon return to anything 
resembling normal.
    Our first efforts must be to take care of those who are 
suffering, their families, and the families of those who have 
been killed or seriously injured in these events. In the coming 
months, the effects of this disaster will continue to ripple 
through the economy. Several critical sectors are affected by 
Katrina: health, energy and telecommunications. All of these 
fall within this committee's responsibilities; and, again, Mr. 
Chairman, I commend you for holding this hearing to help our 
members focus on the work that lies ahead.
    We know that the Federal response to Hurricane Katrina, 
particularly that of the Federal Emergency Management Agency, 
FEMA, has been just plainly disgraceful. But we must now focus 
our attention on the tasks ahead. As a preliminary but very 
important matter, I have introduced legislation to restore FEMA 
to an independent agency with Cabinet-level status reporting 
directly to the President.
    With respect to gasoline, which was part of the original 
focus of this hearing, it is important that the committee 
provide strong oversight to ensure that consumers are not 
subject to price gouging for gasoline and other energy supplies 
and that recovering energy markets are not manipulated.
    While local gas stations are usually the easiest target, we 
learned in the 1970's--and again this is a little bit like deja 
vu--that the major violators were elsewhere. They were the oil 
price controls that were in effect then, and they were also the 
persons who were compelled to disgorge billions of dollars in 
overcharges. Those were people who--largely who were traders in 
the industry, and people at the different major oil companies 
and in major institutions inside that industry. Any examination 
of price gouging must begin with a review of practices by 
persons like this.
    Already, a number of States have acted to stem gasoline 
price increases, from suspension of State gas taxes to invoking 
State emergency authorities limiting price increases; and it 
appears that the announcements of release from the Strategic 
Petroleum Reserve, the ``SPR,'' and from the International 
Energy Agency Stockpile will temper escalating prices to some 
degree.
    But we cannot focus solely on gasoline. Natural gas and 
heating oil prices could very well pose an even greater 
challenge for our constituents as winter approaches. I applaud 
Saturday's release of $27.25 million in LIHEAP funds to the 
affected States, but we should recognize that we will need a 
significant increase in LIHEAP funding in the coming months.
    While the Nation's energy needs are critically important, 
we cannot forget the real human need that exists in the Gulf 
States right now.
    First, how has our public health infrastructure met the 
challenge? I hope that we can have hearings focusing on this 
vital question.
    Second, what do we do to provide for ongoing care of those 
who were suffering in this area, for the industries and for the 
institutions and for the States in the area and for hundreds of 
thousands of displaced families? I note Medicaid is going to be 
a lifeline in the coming months.
    Earlier this year, Democrats strongly opposed the budget 
plan that included $106 billion in new tax cuts benefiting 
mostly wealthy people while requiring our committee to cut a 
likely $10 billion in Medicaid. That budget must be scraped and 
instead immediately replaced with a package of assistance to 
assure that the health care needs of families and children do 
not go unmet.
    Hurricane Katrina has created an environmental catastrophe 
for the Gulf region that will require significant Federal 
assistance. This committee should monitor the environmental 
issues that are arising, from Clean Air Act waivers to the 
rebuilding of the safe water drinking water infrastructure, and 
we must pay careful attention to the environmental consequences 
as we consider best how to make the needed improvements in our 
refining capacity.
    Finally, the committee must also look closely at how the 
communications and media sectors responded to Katrina and what 
steps should be taken to better prepare for and to warn people 
about and how to respond to emergencies. Functioning 
communications networks are critical for first responders to do 
their jobs efficiently and safely as possible and for victims 
to call for help or communicate with loved ones.
    I look forward to hearing from today's witnesses about the 
response of the Federal Government and industry to the current 
disruptions in these and all of the other vital sectors which 
are affected and their plans for the coming months as we try to 
help the Gulf region and its people to recover.
    I thank you, Mr. Chairman.
    Chairman Barton. I thank the gentleman for the opening 
statement.
    We want to recognize the distinguished chairman of the 
Energy and Air Quality Subcommittee, Mr. Hall, for an opening 
statement.
    Mr. Hall. I thank you, Mr. Chairman, for holding this 
hearing.
    Just as a foreigner attacked New York on 9/11 and 
devastated a great city and a great State, another foreigner 
called Katrina hit New Orleans, Louisiana, and sister cities in 
various States. I think we have a lot of work to do to meet the 
challenges that are posed by the devastation that Katrina 
inflicted on thousands of families and communities along the 
Gulf; and we look for answers, not accusations. I think we must 
also address the disruption to our Nation's infrastructure in 
the wake of Katrina, particularly the impact on our energy 
supply and delivery system.
    Gasoline prices were already too high in August as a result 
of increased worldwide demand and limited spare capacity. The 
disruption of our energy infrastructure from Katrina compounded 
the program. Actually, Americans are alarmed at the raising 
cost of gasoline and the projected higher cost of natural gas, 
and they are looking to Congress to address their concerns. The 
Energy Policy Act of 2005 is certainly a step in the right 
direction, and Katrina lends a sense of urgency to provisions 
in that Act that need to be expedited.
    A diversification of energy supplies is an important 
component. Diversification could help ensure energy security 
and thereby national security from disruption due to natural 
disasters or terrorist acts.
    Too much of our national gas supply comes from one region, 
the Gulf of Mexico. By ultra deep provisions--the amendment 
that we passed, we passed it two sessions ago, it got by, the 
conference committee had accepted it, we passed it this time--
drilling deeper in the Gulf is going to make drilling 
operations less susceptible to hurricane damage, for one thing.
    Another thrust for diversification would be to streamline 
the permit process for new refineries in each of the 50 States 
as outlined in Section 392 of the Energy Act, and Governors 
have been alerted and are alerted and are looking at that at 
this time because that will allow them to seek at least a 
refinery per State with a lot of encouragement from the Act 
itself.
    Drilling off the other coast is another option that would 
us far less susceptible to disruption.
    So these and other policies will help us achieve energy 
security in the long term, but we also need to consider what 
actions will give us immediate relief. Our citizens are paying 
the price for our dependance on foreign sources for too many 
years, and we need to stop that. The margins are just too thin 
in our energy market to absorb the fluctuation in supplies and 
prices due to catastrophic occurrences such as Hurricane 
Katrina.
    The hearing gives us opportunity to hear from experts in 
the Government and industry about the magnitude of the problems 
we face and suggestions for corrective action.
    Mr. Chairman, thank you again for scheduling this hearing; 
and I thank the panelists for giving us their time, their time 
for preparation, their time for attending.
    I thank you very much. I yield back my time.
    Chairman Barton. We thank the gentleman.
    The Chair recognizes the gentleman from California, Mr. 
Waxman, for an opening statement.
    Mr. Waxman. Thank you, Mr. Chairman.
    The Federal response to Hurricane Katrina has been woefully 
inadequate. Hurricane Katrina was an unstoppable force of 
nature, but it is plain that the Federal Government could have 
done much more far sooner to respond to the immediate survival 
needs of the residents of Louisiana and Mississippi.
    Congress has a responsibility to understand what went wrong 
and why, and unless Congress conducts thorough oversight 
investigations to examine the preparation for and response to 
Hurricane Katrina, few lessons will be learned and the Nation 
will remain vulnerable to future natural disasters.
    The administration has told us that they were prepared for 
this kind of disaster. Two years ago, FEMA Director Michael 
Brown testified before Congress that FEMA would be able to 
respond to disasters within 12 hours. Well, FEMA failed 
miserably. Relief and supplies took days, not hours, to arrive; 
and the toll on those affected was terrible.
    Today's hearing focuses on the energy implications of 
Katrina, but the pattern is the same. The administration 
policies that we were told would protect Americans from 
skyrocketing fuel prices and price gouging have failed. The 
administration's energy policy is based on a trickle-down 
theory: If we give the big energy companies enough subsidies, 
tax cuts, and regulatory relief, then they will keep gasoline 
prices low. This policy is great for the oil companies, but it 
simply does not work. For the past few years, long before 
Katrina, gasoline prices have been on a steady march upwards; 
and the oil company profits tripled between 2002 and 2004 to 
$87 billion.
    Since last month, gasoline prices have shot up another 30 
percent. Oil companies appear to have taken advantage of this 
crisis to earn even higher profits, and now some Republicans 
are saying that the answer is to give the industry even more 
subsidies and breaks.
    Our energy policy is fundamentally broken. As the hurricane 
proved, we are exactly on the wrong track. To keep gas prices 
down and to protect our energy security, we need conservation, 
increased fuel efficiency, new technologies and not another 
round of industry handouts.
    Hurricane Katrina showed the bankruptcy of our policies. It 
is not enough to look after the interests of the special 
interests. We need to be focused on providing good government 
and life-saving services to all Americans.
    Thank you, Mr. Chairman.
    Chairman Barton. We thank the gentleman.
    The gentleman from Michigan, Mr. Upton.
    Mr. Upton. I am going to take the extra time and defer.
    Chairman Barton. The gentleman defers.
    The gentleman from Florida, Mr. Stearns.
    Mr. Stearns. Thank you, Mr. Chairman; and I want to thank 
you for holding this hearing.
    As chairman of Commerce, Consumer Protection and Trade, I 
have jurisdiction over the Federal Trade Commission; and I want 
to welcome their counsel this morning for coming here.
    Maybe in the near future we can also have a hearing out of 
my subcommittee where we talk about the study that you did 
recently. I hope that Cecil will mention a little bit about the 
study, and I compliment the Federal Trade Commission, because 
that study was done well before Katrina.
    I have to tell my colleagues that the Federal Trade 
Commission looks at the price of gasoline in a continuous 
operation mode with a modeling, a simulator; and I think a lot 
of Americans do not realize that they have this jurisdiction in 
which they can stop price gouging and can stop collusion 
between oil companies. Some of the actions that they have done, 
the American people should realize, have been beneficial in 
stopping some of this monopoly practices. So I went to commend 
them this morning.
    But I think Katrina, the hurricane, has highlighted a very 
serious problem that we have in this Nation with crude oil and 
gasoline supply and demand that is out of balance. Before 
Katrina, this balance was already very tight and prices were 
already at record highs. Thus, by removing nearly a third of 
the United States' crude oil production and 10 percent of the 
Nation's refining capacity at a time of very high demand, we 
caused gas prices to spike even further. This confluence of 
events is precisely the situation the United States faced 
during the Labor Day holiday.
    The future is not bleak, though. We have new technologies 
that are being developed in this country. As Chairman Barton 
has mentioned, we tried to give incentives, we tried to give 
alternative ways for Americans to view the problem.
    For example, in Alberta, Canada, for example, a method of 
producing oil out of deposits of Bitzium buried in the ground--
this is called oil shale--oil sands--is now finally becoming 
very profitable and a viable alternative for crude oil 
production. So I think the United States should realize right 
there, close by in Canada, with oil sands we have a possibility 
of a viable alternative for crude oil. Alberta's oil sands 
deposits are second only to Saudi Arabia's reserves, and 
estimates have shown it could satisfy the world's demand for 
petroleum for the next hundred years. So there is some light at 
the end of the tunnel.
    In closing, Mr. Chairman, even under the best 
circumstances, a storm like Hurricane Katrina would have had a 
noticeable impact on gas prices no matter what we did. However, 
at a time of extremely high demand and tight supplies 
practically shutting down the United States largest oil 
refining region, obviously gas prices are going to spike even 
higher.
    So I look forward to our witnesses today, and again I 
commend the Federal Trade Commission for the study that they 
did much before the hurricane.
    Thank you, Mr. Chairman.
    Chairman Barton. We thank the gentleman.
    The gentleman from New Jersey.
    Mr. Pallone. Thank you, Mr. Chairman.
    Mr. Chairman, I have to say that I am kind of torn today. 
Because, on the one hand, I admire the fact that this 
committee, under your chairmanship, is holding this hearing 
today and is trying to take quick action to address the crisis 
from Hurricane Katrina. On the other hand, I feel that the Bush 
administration has been totally incompetent in handling this 
situation and the emergency response in particular; and I do--
I, amongst others, have called for the FEMA director to resign, 
because I think that he has acted in a totally unconscionable 
way.
    I also agree with Mr. Dingell's comments about how we need 
to change FEMA because of it. But, in addition to that, I must 
say that my constituents are outraged and actually shameful 
about the way our government reacted in terms of the emergency 
response but also feel that the oil companies are taking 
advantage of the situation to gouge and to increase prices in a 
way that is also unconscionable.
    So I appreciate the fact that you are having the hearing 
today. I think it shows leadership on your part. But as far as 
the Bush administration, they have acted in a shameful way, and 
my constituents are absolutely outraged by what this 
administration has done in response to the hurricane and by 
what they think the oil companies are doing to gouge prices.
    Now, in our committee, of course, we deal with the energy 
issues; and I think that the devastation in the Gulf region and 
the spike in prices is a wake-up call for our Nation, which is 
accustomed to cheap oil, and raises several important 
questions.
    First, why were gas prices rising even before the hurricane 
while oil companies were seeing record profits? Second, how can 
a country that consumes 25 percent of the world's oil but 
produces only 3 percent continue to use as much oil as we do 
without being left vulnerable to severe price volatility? And, 
third, how much price gouging occurred in the wake of the 
hurricane? Do we need to consider implementing Federal anti-
gouging authority?
    I introduced a bill on Friday which tries to deal with some 
of these things because of the gouging and because of the high 
prices. The bill would specifically limit the profits of big 
oil companies that sell on the wholesale market to their 
average over the past 5 years so profits do not continue to 
skyrocket as consumers struggle in the wake of the hurricane. 
The bill would also reduce gas price volatility by limiting 
companies that sell on the wholesale gasoline market to only 
one price increase per day. It also directs the FTC to 
investigate whether there has been gas price gouging in the 
wake of the hurricane. But, most important, the bill requires 
the President to find ways to reduce our national oil 
consumption.
    The truth of the matter is that, over the long term, the 
only way we will be able to keep gas prices down will be to 
reduce our consumption of oil. That means increased fuel 
efficiency of our cars and trucks. It does not mean the 
administration's recently announced new rules concerning light 
truck fuel efficiency, which will do little to solve the 
problem. Indeed, it may encourage manufactures to make existing 
models even bigger.
    Again, I want to thank you, Mr. Chairman, for having this 
hearing, but your response is so different from that of the 
Bush administration.
    Chairman Barton. Does Mr. Deal wish to make an opening 
statement?
    Mr. Deal. I would reserve my time for questions, Mr. 
Chairman.
    Chairman Barton. Does Mr. Whitfield wish to make an opening 
statement?
    Mr. Whitfield. I do, Mr. Chairman.
    Chairman Barton. The gentleman from Kentucky is recognized 
for 3 minutes.
    Mr. Whitfield. Thank you, Mr. Chairman.
    Today's hearing is vitally important. Despite the 
widespread destruction and personal tragedy inflicted by 
Katrina, it does raise an issue of utmost importance not only 
for our country but I think for the world, and that relates to 
this whole question of energy.
    Gasoline prices are skyrocketing. There is no question 
about it. There are examples of price gouging. We know that. 
But I think that Katrina has demonstrated that we have a more 
systemic problem relating to energy.
    First, worldwide consumption of oil is presently at a 
staggering 83 million barrels a day; and worldwide production 
is around 84 to 85 million barrels a day. Worldwide demand has 
been increasing at a faster rate than at any time in history. 
As a matter of fact, in China alone last year demand increased 
by 16 percent.
    A new refinery has not been built in the United States 
since 1976, but half of the refineries in the U.S. since that 
time have been closed. In the U.S. alone, consumers are using 
right around 21 million barrels of oil a day.
    We use six times as much fuel per day as people in Europe. 
Their gasoline taxes are much higher in Europe than they are in 
the U.S., so we have become accustomed to low prices compared 
to the rest of the world, and all of a sudden we find ourselves 
in a situation that we do not particularly like.
    I might also add that contributing to the situation today 
we have speculators in oil futures more than at any other time. 
That is putting a burden on higher prices.
    We see other countries nationalizing oil reserves more than 
at any other time in our Nation's history. Reserves available 
to U.S. companies are not being produced the way and located 
the way that they have in the past. We are, for the first time 
in a long time, being forced to use reserves from our Strategic 
Petroleum Reserve. Even the European reserve is going to be 
providing the U.S. 2 million barrels a day for the next 30 
days.
    So we have some significant issues affecting this country 
in the area of energy. It is going to require us as a Nation to 
reexamine the way that we need to go. I think the energy bill 
that we passed is going to help answer some of those questions.
    But I want to commend the chairman for having this hearing 
and allowing us to focus on an issue of utmost importance not 
only for us but for the world. I think that is the only bright 
spot that I have seen from Katrina, is it is going to require 
us to focus on this issue.
    Chairman Barton. We thank the gentleman.
    Does the gentleman from Ohio wish to make an opening 
statement?
    Mr. Brown. Yes, I do.
    Chairman Barton. The gentleman is recognized.
    Mr. Brown. Thank you, Mr. Chairman.
    As I wrote to you yesterday, I believe the committee staff 
should be begin a jurisdiction-wide review to identify policy 
areas where our committee can act; and particularly it is 
important to examine the public health consequences of this 
disaster, again with an eye toward identifying unmet needs. I 
hope these questions will be the subject of another hearing in 
the near future, especially Medicaid, hospital funding, long-
term health consequences to those victims of the hurricane, and 
especially in New Orleans.
    This hearing was originally focused on gas price 
consequences of the disaster. I want to talk for a moment about 
that.
    One of our witnesses today, Dr. Mark Cooper of the Consumer 
Federation of America,reminds us that Congress has missed 
opportunities to provide a cushion to protect consumers when 
supply disruptions cause price spikes. His testimony attaches a 
2001 report calling for a regional reserve of gasoline similar 
in concept to the Strategic Petroleum Reserve. Twice in our 
committee, once on the House floor, we failed to take that 
commonsense step.
    It is also indefensible that, as gas prices break record 
after record after record, that we continue to pump oil into 
the ground without regard to price. Before 2002, the Energy 
Department took price into account before deciding whether to 
take oil off the market, but, since then, price has literally 
been no object.
    Congresswoman Baldwin and I offered an amendment during 
this year's energy bill debate to correct that. Our amendment 
would have required the Department to consider price before 
making SPR acquisitions. It would have allowed the agency to 
weigh the further energy security merits of acquiring oil at 
times of high price against the cost to consumers. That 
proposal was also rejected by this committee.
    This committee and this Congress have not taken the lead 
from States that have already acted to protect their consumers. 
My State of Ohio and other States have enacted quote, unquote, 
unconscionable sales practices laws that have been used to 
enforce gasoline price gouging. But many States have no such 
protections; and even for those States like mine that do, the 
absence of a Federal standard contributes to a confusing and 
chaotic environment that, frankly, provides ample cover for 
those who would take advantage of national tragedy to abuse 
consumers and pad their profit margins.
    Our first priority should be to find unmet needs and act to 
meet them, but we also must look at the lessons learned from 
this tragedy. As we do so, we ought to begin by looking at the 
opportunities that we ourselves have missed.
    Thank you again, Mr. Chairman, for scheduling today's 
hearing.
    Chairman Barton. I thank the gentleman.
    Does the gentleman from Georgia wish to make an opening 
statement?
    Mr. Norwood. I do, Mr. Chairman.
    Thank you, Mr. Chairman, for having this hearing; and I do 
want to thank all of our witnesses for their time and their 
willingness to help analyze this dire situation. We know that 
all of you are working overtime and your staffs have been 
working overtime and probably will have to continue to do so 
for days and weeks to come.
    I would like to join all of my colleagues in expressing my 
deepest and most heartfelt sorrow for those struggling along 
the gulf coast. The devastation and the scope of the tragedy 
there is beyond anything we have recently or ever seen in this 
country. Our thoughts and our prayers have been with our fellow 
Americans. Our assistance in just about anything that Congress 
can do is coming and will continue. Hopefully, this panel can 
help us identify exactly how to provide that assistance and the 
best way to deliver it.
    At some point in time, I hope that we have an opportunity 
to examine how to better deal with situations like this 
regarding energy and telecommunications, if and when there is 
another time.
    First, the short term. What is needed now and in the near 
future to help deal with this tragedy, is dealing with the 
human suffering. Of course, all of us recognize that dealing 
with the human side of this will take longer than a few days. 
Lives, not just homes, need to be rebuilt in so many cases.
    The effects of this tragedy also reach beyond the Gulf. As 
many of you know, the original scope of this hearing was high 
gas prices, but, smartly, the chairman changed it and expanded 
it to be much more than that.
    I am very interested in this important issue because so 
much of our Nation's infrastructure, energy infrastructure, is 
in the Gulf.
    Second, long term. We have had the reports of what went 
wrong already. But I think many want to know what we can do to 
prevent those same problems in the future. By the very nature 
of a disaster like this, unexpected things happen. We need to 
expect the unexpected and be prepared with a comprehensive plan 
B, C and even D. A future tragedy maybe averted or at least our 
response improved by learning lessons. I value your insight, 
gentlemen, on this point.
    Thank you, Mr. Chairman. I yield back.
    Chairman Barton. Does Mr. Rush wish to make an opening 
statement?
    Mr. Rush. I would, Mr. Chairman.
    Thank you, Mr. Chairman. I also want to join with my 
colleagues in thanking you for holding this on-time hearing.
    Mr. Chairman, when I think of the devastating effects of 
Hurricane Katrina, I cannot help but wonder at the value of 
some human life in this country, along with the rest of the 
world, outraged by the slow response to take action and provide 
aid to the thousands of individuals who were left to die and 
fend for themselves in the aftermath of the worst national 
disaster in American history.
    Those who did not die were subject to the most dehumanizing 
conditions imaginable. The demoralizing squalor in the 
Superdome and other relief centers in New Orleans has been 
compared to the conditions in the hulls of slave ships, and 
this is not an exaggeration. This is an example of how 
government failed, a complete breakdown when responding to the 
needs of those who needed help in critical times. In times of 
national crisis, the cries from Louisiana, Mississippi, and 
Alabama went unheard.
    Mr. Chairman, I am concerned about price gouging at 
America's pumps, but at the same time I am more concerned about 
the price of human suffering being paid by the most vulnerable 
segment of our society. I fully realize this committee does not 
have jurisdiction over FEMA or the National Guard, but this 
committee has jurisdiction over multiple areas of immediate and 
emergency concerns including water, the purification of 
drinking water, the abatement of dreaded diseases, including e-
coli, Hepatitis A, cholera, salmonella, West Nile and other 
mosquito and other waterborne diseases.
    Clearly, the public health concerns of this Nation and 
particularly the devastated Gulf region are of paramount 
importance. That said, I want the record to reflect that we 
will be quite intentional regarding conducting hearings to 
determine what is the appropriate Federal response to this 
acute and critical crisis.
    Additionally, Mr. Chairman, I join with the ranking member, 
Mr. Dingell, and I share the opinion that we as an authorizing 
committee of jurisdiction has the authority to increase our 
commitment to the LIHEAP program.
    Mr. Chairman, with that, I yield back the balance of my 
time.
    Chairman Barton. The gentleman yields back.
    Does Mr. Shimkus wish to make an opening statement?
    Mr. Shimkus. Yes, sir, thank you. Just a couple comments.
    I want to thank the panelists for being here.
    When we passed the energy bill, we set out on a process so 
that we could have a diversified energy portfolio; and I think 
the Chairman was correct in that, in saying that what this 
tragedy highlights is how fragile our infrastructure has been 
for many, many years. Obviously, we hope that with a new look 
at energy we can start reclaiming some independence and 
diversifying our portfolio.
    That is not just electricity generation but also in the 
fuel arena. I, like everybody else, travel around our districts 
numerous times, and there are parts of our policies on the 
energy issues that there is some optimism out there.
    I drive a Ford Explorer flexible-fuel vehicle. It runs on 
85 permanent ethanol. Years ago, I had a flexible-fuel Ford 
Taurus. Two years ago, I could not fill up this Taurus at a 
single retail location in my district. Now I can fill it up all 
throughout my district, probably 30 retail sites. In fact, I 
have a picture of one.
    Now the prices are still pretty scary: unleaded, $3.69; 
E85, $3.09. That is a 60 cent price deferential for a vehicle 
that runs on 85 permanent ethanol. Now this is an example of 
public policy moving in the right direction.
    I also have another article from a stop in Nashville, 
Illinois, at a--this is a State and Federal addressing of our 
reliance on imported crude oil; and the State has also pushed 
and helped the rollout of biodiesel. Now most of--a lot of the 
fleets in Illinois are moving to 11 percent bio, soy diesel, or 
another formulation; and this article says trucking firm 
embraces biodiesel. So this--over the long haul a truck company 
of 150 tractor trailers runs his operations across the Nation 
with 11 percent. Now you might say 11 percent is not much. 
Well, just add that 11 percent back into the petroleum-based 
diesel fuel and see what happens to prices.
    So we have great challenges to deal with. The energy bill 
talks about a hydrogen economy and moving to hydrogen fuels. So 
we need to diversify our energy fuel.
    The infrastructure is weak. The hurricane showed that. 
Let's go about the job of diversifying our fuel portfolio.
    Thank you, Mr. Chairman. I yield back.
    Chairman Barton. The gentleman yields back.
    The gentlewoman from California.
    Ms. Eshoo. Thank you, Mr. Chairman, for your leadership in 
calling this hearing. It is an important one and I think 
underscores the very broad and powerful jurisdictions of the 
House Energy and Commerce Committee. We are the oldest 
committee in the Congress, and we are one of the most powerful. 
Today and I think in subsequent hearings and the action that 
this committee can take are going to flow from the power that 
this committee has.
    I want to express my sympathy and the sympathy of my 
constituents very directly to members of this committee whose 
congressional districts have been hardest hit.
    Now, having said that, Mr. Chairman, there are two things 
that I want to highlight today.
    First of all, is there a commitment of the participants, 
the leaders of the energy industry, most specifically the oil 
industry, to go on record that they will not tolerate price 
gouging? The answer has to come from them. If we try to do this 
and address it legislatively through the various agencies of 
the Federal Government, we are going to get hung up on the 
ropes. I would like to hear very directly from the leadership 
of the oil industry in our country that they will not engage or 
tolerate price gouging. It is the simplest, most eloquent way 
for this to be handled. So, No. 1, I think we need to have an 
answer from them.
    No. 2, Mr. Chairman, I think the next answer needs to come 
from the leadership here, certainly yourself and the leadership 
in the House, that the cuts to Medicaid will be suspended.
    Front and center, we heard from more than one Secretary 
last night as they came to the floor of the House to address 
the Congress of what the safety net is in this country, how it 
will be used and put out there effectively for tens of 
thousands of our follow citizens, that they need this program, 
wherever they are, whether they have been moved to different 
cities in Texas, your home State, to California, to the 
District of Columbia, to other places in our Nation.
    This is not the time, this is not the time to be moving 
forward with the cuts that the committee took up and that the 
Congress is considering. This is wrong, it is hurtful, and it 
is not the message to send to the victims. So when we speak 
about compassion, when we speak about being effective, when we 
speak about standing next to our colleagues whose districts 
have been wiped out, whose constituents are seen floating in 
contaminated waters, this committee has to respond and respond 
effectively.
    So those are the two things that I would highlight today. 
We have our work cut out for us.
    Now when the words ``blame game'' are used, I really resent 
that; and I think that we all should. This is not a game. This 
is not a game. People are dying, have died, people have been 
displaced, taken away from their communities. We have long-term 
and short-term work to do.
    One of the great hallmarks of our Nation is that the 
American Congress, that the Congress of the United States of 
America, has been able to take up both a critical role of being 
critical so that we learn from the mistakes that have been 
made.
    So this is not a game, Mr. Chairman. This is sobering work 
as we try to adjust to the horrific catastrophe that has 
happened to our country.
    So, with that, I do not have time to yield back, but I 
believe that these two issues need to be taken up front and 
center. Thank you.
    Chairman Barton. We thank the gentlelady.
    We encourage members to try to stay within their 3-minute 
limit, if possible.
    The gentlewoman, Mrs. Wilson, is recognized for 3 minutes. 
We are trying to get the Governor of Mississippi up on the live 
video. So I think we can get you in before that happens.
    Mrs. Wilson. Thank you, Mr. Chairman.
    We have had a devastating storm, and it is not over. We are 
still in the middle of the process of saving life and 
sustaining life and recovering and rebuilding, and that will go 
on for a long time. Nothing should distract us from those 
priorities.
    Sometimes, you know, my husband is kind of--he has got a 
great sense of humor. And sometimes when he watches people 
often criticizing with only partial information, he just kind 
of laughs and says, you know, they should shut up and start 
bailing. I think that is good advice, and a lot of ordinary 
Americans have taken it.
    I think we have seen across this country people opening 
their homes and their wallets and their churches, our wonderful 
National Guard and medical doctors embracing the displaced and 
doing what they can from where they are with what they have 
got. One of the great lessons of this disaster is that the real 
strength of America is in the goodness of ordinary Americans, 
and we have seen that again and again and again across this 
country.
    We also need here to continue to pursue policies that 
create jobs and keep our economy on track. A disaster and a 
tragedy should not be windfall, a windfall for opportunists. 
All of us have seen prices go up at the gas pump and in some 
communities exorbitantly. Most gouging laws are State laws, but 
only 23 States have anti-gouging laws, and the standards and 
definitions vary widely. I think we need to take a serious look 
at how we dissuade and deter and punish those who would gouge 
people in a time of tragedy.
    We also have an opportunity here to put politics aside and 
to look at our energy policy anew, with conservation, 
exploration, production and refining, things that we look at 
routinely here, but also to look at our own perhaps failures of 
imagination. What are we going to do as a Nation to get beyond 
the gasoline engine? We are here at a historic turning point to 
make some serious decisions and have a serious debate about the 
follow-on to the gasoline engine.
    Because world oil supplies are not increasing, and we need 
to make those decisions and investments now so that we change 
the way in which we get things and people across the country 
and back and forth to work.
    Mr. Chairman, thank you for this hearing. I am sure it is 
going to be the first of many. And God bless the people of the 
gulf coast.
    Chairman Barton. Does the gentleman from Michigan wish to 
make an opening statement?
    Mr. Stupak. No, Mr. Chairman, I will waive.
    Chairman Barton. Does Mr. Green wish to make an opening 
statement?
    Mr. Green. Yes, sir, Mr. Chairman.
    Chairman Barton. The gentleman is going to start, 
understanding that we are trying to get this thing set up.
    Mr. Green. I would like to have the full statement placed 
in the record.
    One, I want to thank you for having this timely hearing on 
the second day we are actually back. I am glad we broadened the 
scope to beyond just energy impacts, which is quite severe; and 
I respectfully suggest a further hearing on the serious public 
health impacts and our response in the near future.
    Our pressing need in the Houston area, where we are home 
now to about 140,000 plus residents from Louisiana, is health 
care. With thousands in tight quarters, infectious disease a 
real threat, we need to provide the necessary assurances to our 
States who are the recipients that the health care providers, 
that they will be reimbursed.
    I asked Secretary Levitt last night at our briefing to 
agree to provide a 100 percent Medicare/Medicaid reimbursement 
rate when caring for out-of-State Medicaid beneficiaries. I 
hope the administration will ease the Medicaid eligibility 
requirements for Hurricane Katrina evacuees.
    Again, the State of Texas is the biggest recipient; and our 
Medicaid budgets are already stretched with our own 
constituents, much less adding rolls from Louisiana and the 
neighboring States. We want to be welcome neighbors, and we 
are. In fact, I am so proud of what Houston has done and the 
State of Texas.
    The neighboring States of this disaster need massive 
Federal assistance to care for these victims. When a neighbor 
is in need, our neighboring States have opened--again, Texas 
has 250,000 out-of-State evacuees. That is unprecedented.
    I have been first hand every day we have been home by both 
the Reliant Astrodome and the George R. Brown to see the 
massive shelters. Again, we need to be able to eliminate red 
tape now and get those folks out of those shelters into some 
reasonable living conditions, both for health reasons but also 
to try to return them to normalcy.
    I am glad that, just today, we were notified that yesterday 
at our dealing meeting that the Houston area leaders, the mayor 
and the county judge and the business community, we found out 
that people are having their cell phone service disconnected 
from Louisiana. That is the only number most of the time their 
relatives know how to reach them. The FCC this morning 
announced, in working with CTIA, that those numbers and in 
compelling businesses and companies, not to disconnect those 
cell phones. One, that is a great declaration. The Federal 
Government should interpret our ability broadly and flexibly to 
make sure that we can handle the disaster and the relief that 
we need.
    Turning to energy, gasoline prices are already high due to 
tight global supply and stretched energy infrastructure. Now 
that has gotten pounded by a hurricane. Gas, oil and natural 
gas will even be higher after most of the Gulf's production is 
halted; and, thank goodness, a lot of those platforms are 
trying to get back in use and even some of the refineries.
    All of the pieces are connected when there is huge action 
on the market like Hurricane Katrina and a huge reaction 
throughout the system, and can we help without doing more harm 
than good? I gather from the Senate hearing yesterday that the 
FTC has no authority to investigate price gouging. We need to 
know who does, if anyone; and if there is some stations taking 
advantage, we need to stop them.
    Even my Texas constituents want price caps, but if the 
Government tries caps for any length of time, supply will 
literally disappear. Let us not repeat the mistakes of 
President Richard Nixon. Large companies typically don't set 
the price at the pump, which is up to the individual station 
owner.
    Chairman Barton. Mr. Green, will you suspend so we can hear 
from the Governor?
    Mr. Green. Mr. Chairman, I would be glad to yield to the 
Governor of Mississippi.
    Chairman Barton. We are going to suspend our opening 
statements. We do have video contact and, apparently, audio 
contact with the Honorable Governor of the great State of 
Mississippi, Governor Haley Barbour.
    Governor, if you can hear me, you have got the full panoply 
of the Energy and Commerce Committee waiting for your 
statement; and then, once you have spoken, we are going to have 
a written statement read in the record by a representative of 
your companion Governor, Governor Blanco of Louisiana.
    So, Governor Barbour, our hearts and our prayers are with 
you; and you have our undivided attention.

STATEMENT OF HON. HALEY BARBOUR, GOVERNOR, STATE OF MISSISSIPPI

    Governor Barbour. [Via teleconference.] Mr. Chairman, thank 
you very much; and to all of the members of the committee, I 
appreciate the chance to try to share with you what has been 
going on in Mississippi for the last 9 days.
    I do not have to tell you that this was the worst hurricane 
to ever hit the United States, and it struck us a grievous blow 
in Mississippi. The devastation is genuinely unimaginable and 
indescribable. Total obliteration of many things, some of which 
are the things that your committee is interested in.
    I want to say to you that we appreciate you and the Federal 
Government. Nothing is perfect when you have an epic disaster 
like this. I told my wife as the week went on, every day we 
made progress. But there was not any day that we made as much 
progress as I wanted to.
    Our Federal partners were great help, but there were days 
when we wished they would have been faster. There were days 
when we wished they would have done more. But when you consider 
the way all of our systems were overwhelmed, we are very 
grateful, and so thank you all.
    Let me just say on the terms of energy, our energy 
situation the first few days was cataclysmic. This disaster is 
not just a coastal calamity. It goes 150 miles north. We had 
130-mile gusts 90 miles inland. We had 90-mile an hour winds 
150 miles inland. There is tremendous damage way, way north of 
the coast. But the 80 miles across the Mississippi gulf coast 
is largely destroyed. A town like Waveland, Mississippi has no 
inhabitable structures. None. The fire, the 26 policemen on 
Monday of last week went to the second floor, then got on the 
roof of their headquarters, and then all 26 of them swam off. 
Some of them hung in trees holding on until the storm was over. 
The destruction is unbelievable, and it overwhelmed our 
infrastructure.
    Our utility that serves the coast in the southeastern part 
of the State lost every transmission line, had two power plants 
put out of commission, and virtually 100 percent of their 
customers lost power. The company that serves the southwestern 
part of the State, which is well inland, 75 percent of their 
customers lost electricity. Our rural electric power 
associations had similar percentages based on the geography. 
Even the Tennessee Valley Authority, as far north as it is, had 
tens of thousands of customers lose power.
    When you lose power, the telecommunications systems falls 
down because of the need for electricity, not to mention the 
fact that virtually all the towers are blown down. We lost 
water because the water systems run and the sewer systems run 
on electricity. So we had a huge need, and one of our first 
goals was to try to get fuel, particularly diesel fuel, to run 
the generators that were powering our hospitals, our emergency 
operations centers, the ones that weren't destroyed, our 
sheriff departments, police departments, fire departments. So 
from an energy standpoint, for about 5 days we were hustling to 
keep people from running out.
    Ultimately, the Federal Government started on Friday by the 
activities of the U.S. Department of Transportation, the U.S. 
Coast Guard, and FEMA was able to provide us with enough fuel 
for all of our emergency vehicles, and since Friday we have had 
an assured source of fuel for all our emergency vehicles, 
whether it is fire trucks, police cars, National Guard trucks, 
et cetera, and we are appreciative of that.
    Today, we have about 288,000 customers who still don't have 
power. The peak was about 1 million, on the report Tuesday was 
about 1 million customers; we are down to 288,000. Mississippi 
Power Company, which is the southeastern coastal industrial 
utility, reports that they will have power to every customer 
who can receive power by Saturday, which is incredibly 
remarkable that in less than 2 weeks they can have restored 
power, because every one of their customers had just about lost 
power and their power plants are out.
    They have about 7,000 people on the ground, pole climbers 
and tree cutters, and Entergy Mississippi is making the same 
kind of effort. And we are grateful. We have power, we have 
linemen and tree people from all over the United States and 
Canada who are down here helping our people getting electricity 
back on.
    As I say, we are about 75 percent recovered, and because of 
their response. Except for the rural electric power 
associations who don't have as much equipment, they are further 
apart, you know, you may have to put back up 10 poles to serve 
one customer. We are getting over the hump, and by the end of 
the week should be over the hump on electrical power.
    For telecom, the phone companies have really humped it to 
get service back. The first few days, there was as close to 
literally no communications, as you can believe. We couldn't in 
Jackson get people on the phone, even the emergency operations 
centers on the coast. And where there was particularly bad is 
that people in the affected areas and near the affected areas, 
they had no phone service, they didn't know what was going on, 
they had no television so they didn't have that as a source of 
information. A few of them had done like we asked people, and 
that is to have battery powered radios, but most people had no 
way to communicate and they were utterly isolated after living 
a life with our information-rich environment. It was a huge 
problem. It also led to some of the worst rumor mongering that 
you ever can imagine. But the phone companies have restored at 
least cellular telephone service to most of the populated 
areas, and they are getting it better out into the countryside.
    But Cellular South, which is our home-owned cellular 
company, and BellSouth, which is our biggest provider and also 
is a partner in Cingular, again, their people have worked 
untold hours just like the electric utility people and made 
huge sacrifices.
    And, Mr. Chairman, we have got a lot of people here who are 
first responders or utility people whose homes are blown down, 
and they are out getting the other people's electricity back 
on, or they are out digging through debris, firemen and search 
and rescue, while their wives and children are having to stay 
somewhere inland because their house isn't there anymore. The 
stories of sacrifice and selflessness that come out of this are 
pretty remarkable. In fact, they are not pretty remarkable, 
they are mighty remarkable.
    The U.S. Coast Guard helicopter team, starting Monday night 
when the wind was still howling, have taken 1,700 
Mississippians off of roofs or out of isolated places where 
people couldn't get out because of the debris and wreckage, 
1,700 by the Coast Guard alone. Over 5,000 when you include the 
other first responders like firemen and policemen and National 
Guardsmen. We appreciate all the States that have let us have 
National Guard. We have more than 11,000 National Guard here. 
And they were particularly critical last week when our law 
enforcement people who had worked 18-hour and 20-hour days, 120 
patrolmen, narcotics officers, and investigators from the State 
law enforcement down on the coast who slept in cars for 5 
nights but worked 18-hour days to help people. It has been an 
incredible effort, and lots of people deserve credit.
    I know that health is one of your issues. And I want to 
report to you that we in the last 24 hours had four deaths in 
Mississippi from a Vibrio type diarrheal disease, but the CDC 
and the Health Department report to us that this is not 
contagious, that this is the kind of disease that we common 
folks think and get from eating bad oysters; and, that people 
that have diminished immune capacity because of some other 
disease like HIV or cirrhosis or something, that all four of 
these people died of that disease. Because of HIPPA, we can't 
tell, we are not allowed to know any more about who those 
people were and what their conditions are. But the CDC tells us 
it is not contagious, and the disease is normally gotten by 
somebody that eats bad food, drinks bad water, or perhaps gets 
an open wound. But, again, we have had that in the last 4 days, 
which is I know a significant health thing that you would want 
to know about.
    The search and rescue wasn't as fast as we wanted, but if 
you could come down here and see the devastation. We have 
areas, tens of square blocks in a row, that have debris waist 
high, head high, and search and rescue means people walking 
through there and moving all that stuff out and looking to see 
what is under it. As late as Friday we were finding people 
alive buried in the debris, but unfortunately we are finding 
people buried in the debris that are not alive. The official 
fatality as reported is about 148--that is not right, 154. The 
news reports, which we consider credible and relative and 
reliable, are closer to 200, and the likelihood is that the 
number will go up.
    Let me just close by saying I am old enough to remember 
Camille. As a college boy I drove a dump truck full of blankets 
and pillows and baby clothes down to Gulfport in the wake of 
Camille. Down here, we have always thought Camille was the 
benchmark for what a hurricane could do. Katrina was worse than 
Camille. The devastation is wider spread in terms of breadth. 
Where Senator Lott's home was totally wiped off the beach in 
Pascagoula that is about 75 miles east of the eye of the storm. 
This storm's breadth was unbelievable, but its power was, too. 
You know, I am not a meteorologist or a scientist. For some 
reason, this storm's storm surge was much, much worse than 
Camille. Places where people thought it was safe because 
Camille didn't do any damage got 10 feet of water, and we had 
some people that died because they thought it can't be worse 
than Camille.
    Again, in all of these things that we have talked about, 
the Federal agencies have worked very hard to help us, and 
their people have been down here busting it just like I talked 
about, the Coast Guard and others, and we appreciate that. We 
are going to need a lot more help. We are kind of turning the 
corner to where we are starting recovery, we are starting 
cleanup in most of our towns, we are going to start rebuilding.
    Our attitude is on the future, and we are going to rebuild. 
We are going to rebuild the gulf coast bigger and better than 
ever it was, and all of the south part of Mississippi is going 
to be improved when we get finished, but we are going to need a 
lot of help and it is going to take a lot of time.
    Thank you for letting me have a chance to tell you what is 
going on, Mr. Chairman.
    Chairman Barton. Well, Governor, we first of all want to 
commend you for what you have done for the citizens of 
Mississippi the last week or so. Your leadership has been 
invaluable. We are not going to take questions because we still 
have about 20 members that need to give an opening statement 
and we have five witnesses that have waited patiently for the 
last hour to give their statements. But we do want to commend 
you for what you have done. You have got two United States 
Senators and a United States Congressman who is a member of 
this committee, plus several other Congressmen in the House. 
Whatever you need from the Federal Government, if you will work 
through them or directly with us if it is within this 
committee's jurisdiction, we are going to do everything we can 
to make it happen sooner rather than later and bigger rather 
than smaller. And God bless you and God bless the great State 
of Mississippi.
    Governor Barbour. Thank you, Mr. Chairman.
    Chairman Barton. We have as a representative of the 
Governor of Louisiana, Governor Blanco, we have Mr. Scott 
Angelle, who is the Secretary for the Louisiana Department of 
Natural Resources. We would now recognize you, Mr. Angelle, to 
read the Governor's statement. And Governor Barbour, you are 
welcome to leave. Mr. Angelle.
    Mr. Angelle. Thank you, Chairman Barton, and committee 
members. Governor Blanco sends her greetings and her thanks for 
all the prayers and support that are flowing into the gulf 
coast and southeast Louisiana.
    I am pleased to be here as a member of the second panel to 
give you Louisiana's views on energy policies post Katrina, but 
in her absence Governor Blanco has asked me to share this brief 
statement with you.
    Katrina dealt southeast Louisiana a devastating blow, but I 
also know that this storm did not and will not destroy the 
spirits or the hope of our citizens. I wish I could join you 
today, but we, all of us here, are working hard and working 
together to finish the rescues and begin the reconstruction.
    The people of southeast Louisiana are already making plans 
to rebuild their lives and their communities, and we will help 
them do it. Our people, our most valuable asset, have been 
forced to take shelter all across the country. We know 
Louisiana will not fully recover until those displaced by this 
storm rejoin their families and rebuild their communities. Part 
of rebuilding Louisiana will be rebuilding our oil and gas 
infrastructure. In the wake of all of this, we still understand 
that America counts on Louisiana to produce the energy to fuel 
this great Nation. We will focus on restoring and repairing the 
offshore and onshore assets that are so vital to this region's 
economy and so vital to America's economy. At this moment, 
while we are focusing on the immediate needs of our people, we 
also are looking forward to the rebuilding.
    Thank you again for your prayers and your aid, and thank 
you for also looking forward to the future of Louisiana and the 
future of America's energy economy. Thank you, sir.
    Chairman Barton. Mr. Angelle, I know you are going to be on 
the second panel. But in response to the Governor's statement, 
if you talk to her later today, you tell her that our prayers 
are with the great State of Louisiana and with her, and that we 
make the same offer to your Governor that I just made by 
teleconference to the Governor of Mississippi: Whatever we can 
do to help, if it is within our jurisdiction, we are going to 
try to do it sooner rather than later and larger rather than 
smaller.
    Mr. Angelle. Thank you, sir.
    Chairman Barton. We are now going to go back to our opening 
statements. And I believe Mr. Green had finished his, so it 
would be Mr. Shadegg's opportunity if he wishes to make his 
opening statement.
    Mr. Shadegg. Thank you, Mr. Chairman, for holding this 
important hearing on the devastating impact of Hurricane 
Katrina. My heart and my prayers go out to those whose lives 
have been impacted and devastated by this disaster.
    In 1969, I was stationed at Keesler Air Force Base in 
Biloxi, Mississippi, and I arrived there literally days after 
Hurricane Camille struck. It is tragic to see this kind of 
devastation again to the gulf coast, and as the Governor 
pointed out, to see that it is even worse.
    I wholeheartedly agree with my colleague Mrs. Wilson 
regarding the importance of moving beyond the gasoline engine 
in the long run. But today, whether we like it or not, America 
runs on refined oil products, and our transportation sector, 
airlines, trucking industry, and railroads, require a steady 
supply of fuel to keep our economy moving. In addition, 
families across our Nation require that fuel to heat their 
homes, and they will need it this winter and for winters to 
come.
    The damage that Hurricane Katrina has done to this energy 
infrastructure, which has rippled from coast to coast, raises 
many important policy questions for this Congress and this 
committee to address, not the least of which are: Do we have 
the facilities that we need to meet America's demands? And, is 
our energy infrastructure too heavily concentrated along the 
gulf coast?
    Hurricane Katrina's impact on an already strained refining 
industry has had a dramatic impact, most notably on the recent 
stunning price spikes seen by Americans at their local gas 
stations.
    While I am encouraged that some refineries closed by 
Katrina have already opened or are close to reopening, reports 
indicate that several large refineries have experienced 
significant flood damage and will not reopen for some time to 
come. This is especially troubling because U.S. refineries were 
already operating at over 97 percent capacity before Hurricane 
Katrina hit.
    As has already been noted here this morning, we have not 
built a new refinery in the United States since 1976, a span of 
29 years. Currently, we import roughly 12 percent of the 
gasoline and diesel fuel we consume in this country from 
foreign refineries. Yet, not long ago we refined all of the 
gasoline and diesel fuel used in the U.S. from refineries here 
in the U.S.
    We should not be outsourcing the refining of the fuels we 
need to run this country's economy. We must do more to bring 
our refining capacity in line with all of our domestic demands.
    Currently, this critical portion of our industry is 
operating with no margin for error. Whenever a U.S. refinery 
needs to interrupt production for any reason, including just 
routine maintenance, Americans pay an unnecessary price because 
we have insufficient domestic refining capacity. When a 
disaster like Katrina strikes, we are in much worse shape. This 
problem is exacerbated by the fact that there is a worldwide 
shortage of refining capacity.
    It is preposterous to argue that we do not need to fix this 
system or that we can continue down a path of reliance on 
foreign refining capacity. As America grows, total miles driven 
each year go up. Demand for refined petroleum products also 
goes up. The price of a barrel of oil is ever increasing, yet 
just last year this committee heard testimony that investors 
would frown on any decision by an energy firm to meet the 
rising demand here in the U.S. for refined product by building 
new refineries.
    Let me illustrate how this point impacts us directly and 
why it is more than a crude oil problem. Crude oil futures have 
gone up over 60 percent over the last year, but refined 
gasoline futures have more than doubled. We must address this 
critical problem. Mr. Chairman, I thank you for holding this 
hearing.
    Mr. Whitfield [presiding]. Thank you. At this time I 
recognize the gentleman from New York, Mr. Engel, for his 
opening statement.
    Mr. Engel. Thank you, Mr. Chairman. Let me first of all say 
that my heart and prayers go to the brave people of Louisiana, 
Mississippi, and Alabama, and anything that we can do to help 
them, we should and we will.
    Mr. Chairman, in the 1970's there was a movie where the 
lead character gets up and he says: I am mad as hell, and I am 
not going to take it anymore.
    Well, I think the American people are rightfully mad as 
hell, and we are not going to take it anymore. We are mad as 
hell about rising gas prices, price gouging, and all things 
that we have seen disgracefully over the past week. We have 
seen on TV many pictures of people looting stores. Well, I 
would say that the biggest looters have been the big oil 
companies. They are looting the American public. There is no 
way that increased gas prices at the pump could have been 
reflected in 2 days after the hurricane with spikes of 30 to 50 
cents per gallon. It is absolutely shameful and unconscionable 
that big oil companies are making profits off people's misery 
with this hurricane. There is no other way to say it. Because 
when the cost of oil drops a barrel--a gallon drops, it takes 
several weeks for it to be reflected at the pumps. So how could 
this be reflected in a matter of 2 days? These increases in 
gasoline prices are unconscionable and should not stand. The 
oil companies own the means of cost and production. They have 
long-term contracts on the oil fields. They own their drilling 
equipment, they own their tankers. These haven't changed. Their 
costs haven't changed. That is why their profits are soaring to 
record levels. Why make profit off people's misery and cause 
the entire American public to suffer? Gasoline over $3 a 
gallon? Unconscionable. Now, they are saying that prices will 
drop, and it will only be $2 and change a gallon what was 
before. We are supposed to be grateful that it is going to drop 
to $2 and some odd cents a gallon. There is no way that this 
should continue.
    Now, it is not a matter of the blame game. I ask unanimous 
consent for an editorial of the New York Times today called 
``It is not a blame game.'' I ask unanimous consent for it to 
be inserted into the record.
    Mr. Whitfield. Without objection, so ordered.
    [The article follows:]

           [Wednesday, September 7, 2005--The New York Times]

                       It's Not a ``Blame Game''

    With the size and difficulty of the task of rescuing and rebuilding 
New Orleans and other Gulf Coast areas still unfolding, it seemed early 
to talk about investigating how this predicted cataclysm had been 
allowed to occur and why the government's response was so slow and 
inept. Until yesterday, that is, when President Bush blithely announced 
at a photo-op cabinet meeting that he, personally, was going to ``find 
out what went right and what went wrong.'' We can't imagine a worse 
idea.
    No administration could credibly investigate such an immense 
failure on its own watch. And we have learned through bitter 
experience--the Abu Ghraib nightmare is just one example--that when 
this administration begins an internal investigation, it means a 
whitewash in which no one important is held accountable and no real 
change occurs.
    Mr. Bush signaled yesterday that we are in for more of the same 
when he sneered and said, ``One of the things that people want us to do 
here is to play a blame game.'' This is not a game. It is critical to 
know what ``things went wrong,'' as Mr. Bush put it. But we also need 
to know which officials failed--not to humiliate them, but to replace 
them with competent people.
    It's obvious, for instance, that Michael Brown has met the 
expectations of those who warned that he would be a terrible director 
of the Federal Emergency Management Agency. This is no time to be 
engaging in a wholesale change of leadership, but in Mr. Brown's case 
there seems to be precious little leadership to lose. He should be 
replaced with someone who can do the huge job that remains to be done.
    But the questions go way beyond Mr. Brown--starting with why 
federal officials ignored predictions of a disastrous flood in New 
Orleans--and the answers can come only from an independent commission. 
We agree with the Senate minority leader, Harry Reid, Senator Hillary 
Clinton and others who say that such a panel should follow the 
successful formula of the 9/11 commission: bipartisan leadership and 
members chosen by the White House and both parties in Congress on the 
basis of real expertise. It should have subpoena power and a staff 
expert enough to find answers and offer remedies.
    Mrs. Clinton has also proposed pulling FEMA out of the Homeland 
Security Department and restoring its cabinet-level status. That is 
premature. The current setup makes sense, at least in theory. The 
nation should not have to support two different bureaucracies for 
dealing with sudden disasters.
    Before throwing the system into chaos again, an investigation 
should determine whether the problem lies in the structure or in 
execution. Yesterday, The Wall Street Journal showed how the Bush 
administration had systematically stripped power and money from FEMA, 
which had been painfully rebuilt under President Bill Clinton but had 
long been a target of Republican ``small government'' ideologues. The 
Journal said state officials had been warning Washington--as recently 
as July 27--that the homeland secretary, Michael Chertoff, was planning 
further disastrous cuts.
    This page supported the creation of Mr. Chertoff's department. But 
it was poorly run by the first secretary, Tom Ridge, with his maddening 
color-wheel alerts.
    It is clearly in need of a hard look and perhaps serious 
reorganization. Senators Susan Collins, Republican of Maine, and Joseph 
Lieberman, Democrat of Connecticut, have plans for hearings, which is 
fine. But they created the department in the first place and may have 
more of a stake in the outcome than a panel of impartial experts.
    The panel should also look at the shortcomings of local officials 
and governments. It was chilling, to put it mildly, to read Mayor Ray 
Nagin's comment in The Journal that New Orleans's hurricane plan was 
``get people to higher ground and have the feds and the state airlift 
supplies to them.''
    But disasters like this are not a city or a state issue. They 
concern the entire nation and demand a national response--certainly a 
better one than the White House comments that ``tremendous progress'' 
had been made in Louisiana. We're used to that dismissive formula when 
questions are raised about Iraq. Americans deserve better about a 
disaster of this magnitude in their own country.

    Mr. Engel. Thank you. One of the things that we ought to 
have is we ought to have an independent commission to 
investigate what happened. The panel should follow the 
successful formula, as the New York Times says today, of a 
September 11 Commission, bipartisan leadership, members chosen 
by the White House and both parties in Congress on the basis of 
real expertise. It should have subpoena power and a staff 
expert enough to find answers and offer remedies. We cannot 
allow the administration to investigate itself to have a 
whitewash and a coverup.
    Now, as soon as the enormity of the approaching storm 
became clear, obviously preparations should have been 
immediately ramped up. It wasn't. FEMA failed miserably. 
Provisions and assistance should have been ready so that, hours 
after the storm moved on, food, water, medical supplies would 
be on their way. We must not ignore the mistakes that have been 
made. We must fix them immediately and learn from them for the 
future. And I want to add my voice to the other members who 
have said that it is now again unconscionable to have these 
huge Medicaid cuts. As hundreds of thousands of people have 
lost their jobs and net worth, it is more clear than ever how 
much our citizens need Medicare and to be flexible and 
responsive in times of crisis.
    Now, we need to look to the future. For years I have been 
talking about the need to wean ourselves off of oil because we 
have to rely on sheikdoms that are either unstable, unfriendly 
to the U.S., or even supporters of terrorism. We need to 
improve the fuel economy of passenger cars and SUVs to a level 
of our advanced technology that makes it possible, not issue 
CAFE standards as the administration did last month, which do 
nothing to improve fuel efficiency.
    I hope that this committee will continue to hold hearings, 
and I hope that we will get to the bottom, again, not because 
of the blame game, but the people of the United States 
particularly in those three States affected deserve nothing 
less, and I thank you.
    Mr. Whitfield. Thank you. And I would remind the members 
that these opening statements are 3 minutes. And we do have a 
number of witnesses today and we have a lot of other people. So 
I would urge you to try to confine yourself to 3 minutes.
    At this time I would recognize the gentleman from 
Pennsylvania, Mr. Pitts.
    Mr. Pitts. Thank you, Mr. Chairman. Thank you for holding 
this hearing. I would like to thank the panelists for coming. 
And first, again, our thoughts and prayers are with those 
undergoing this disaster.
    Mr. Chairman, we need to look at price gouging today, and 
we need to encourage fuel efficiency and new technology and 
conservation. But we also need to look at refining capacity in 
our deliberations. And I would like to make a few comments on 
that issue.
    There are 149 oil refineries in the United States. And 
before the disruption of Hurricane Katrina, the tragedy that 
occurred in the gulf coast, they were all running at full 
capacity. But we have yet to build any new refineries, despite 
the fact that our aging system--none has been built in 30 
years--cannot handle the increasing demand that we are placing 
on them. ABC News reported last month that, ``analysts say just 
a few new big refineries could produce enough extra gasoline to 
make a dent in prices.''
    The problem, according to ABC's report, is that building 
even the smallest refinery is an uphill task. Faced with a 
complicated morass of local and State and Federal regulations, 
as well as residents who do not want a refinery in my back 
yard, companies simply are not willing to shoulder the cost of 
complying with regulations or fighting protracted legal battles 
over land use, and so the problem remains.
    Rising gas prices are the result of supply problems. And 
supply problems are the result of refining capacity that cannot 
keep pace with demand. And this is most apparent during times 
of crisis, such as we face now. Hurricane Katrina knocked out a 
significant portion of our refining capacity. Because we have 
been unable to build refineries in other areas of the country, 
our economy must wait until these refineries come back on line.
    We need only to look as far as Arizona to see the obstacles 
that the government has placed in front of those trying to 
build new refineries. The Maricopa Refining Company received a 
permit to build a 50,000 BPD refinery on January 16, 1992. MRC, 
operating under the name of Arizona Clean Fuels, continued to 
develop its refinery project through the 1990's, and because of 
delays presented by the government, lost a significant 
investor; in 1999 the project scope was changed, and ACF 
applied for a new permit. That permit, however, was lost in red 
tape as the EPA and other agencies squabbled about whether a 
refinery could be built on the originally proposed site. The 
permit application is still under review as ACF attempts to hit 
the moving target presented by bureaucrats, EPA, and Federal 
regulations.
    This story is not unusual. It is not an anomaly. It is 
common. And it is one reason we are facing these shortages. No 
one is suggesting that we sacrifice environmental stewardship 
to power SUVs. However, we must face the reality that our 
economy, whether we have SUVs or not, needs oil to run. And 
while there might come a day, and I hope this day comes, when 
we find a suitable alternative to oil and gas, we are still far 
away from discovering or developing a source of energy as 
potent or reliable as oil. So we must find an environmentally 
responsible way to increase our refining capacity. We simply 
cannot go any longer without expanding our capacity to refine 
oil.
    Since my time is up, I will submit the rest of my statement 
for the record. I look forward to the hearing today, and thank 
the witnesses for sharing their expertise.
    [The prepared statement of Hon. Joseph R. Pitts follows:]

Prepared Statement of Hon. Joe Pitts, a Representative in Congress from 
                       the State of Pennsylvania

    Mr. Chairman, thank you for holding this hearing and thank you to 
the panelists for coming.
    Our thoughts and prayers are will those enduring this disaster.
    We need to look at price gouging today, and we need to encourage 
fuel efficiency, new technology, and conservation.
    But we also need to look at refining capacity in our deliberations.
    I'd like to make a few comments on that issue.
    Today, there are 149 oil refineries in the United States.
    Before the disruption of Hurricane Katrina and the tragedy that 
occurred on the Gulf Coast, they were running at full capacity.
    But we have yet to build any new refineries despite the fact that 
our aging fleet--none have been built in thirty years--cannot handle 
the increasing demand we are placing on them.
    ABC News reported that last month that ``analysts say just a few 
new big refineries could produce enough extra gasoline to make a dent 
in prices.''
    The problem according to ABC's report is that building even the 
smallest refinery is an uphill task.
    Faced with a complicated morass of local, state, and federal 
regulations as well as residents who do not want a refinery ``in my 
back yard,'' companies simply are not willing to shoulder the costs of 
complying with regulations or fighting protracted legal battles over 
land use.
    So, the problem remains.
    Rising gas prices are the result of supply problems.
    Supply problems are the result of refining capacity that cannot 
keep pace with demand.
    This is most apparent during times of crisis such as we face now.
    Hurricane Katrina knocked out a significant portion of our refining 
capacity.
    Because we have been unable to build refineries in other areas of 
the country, our economy must wait until these refineries come back on 
line.
    We need only look as far as Arizona to see the obstacles the 
government has placed in front of those trying to build new refineries.
    The Maricopa Refining Company received a permit to build a 50,000 
BPD refinery on January 16, 1992.
    MRC, operating under the name Arizona Clean Fuels continued to 
develop its refinery project through the nineties.
    However, because of delays presented by the government, it lost 
nificant investor.
    In 1999, the project's scope was changed and ACF applied for a new 
permit.
    That permit however was lost in red tape as the EPA and other 
agencies squabbled about whether the refinery could be built on the 
originally proposed site.
    The permit application is still under review as ACF attempts to hit 
the moving target presented by bureaucrats at the EPA and federal 
regulations.
    This story is not unusual.
    It's not an anomaly.
    It's quite common.
    And it's one reason why we're facing these shortages.
    No one is suggesting that we sacrifice environmental stewardship to 
power SUVs.
    However, we must face the reality that our economy, whether we have 
SUVs or not, needs oil to run.
    And while there might come a day--and I hope this day comes--when 
we find a suitable alternative to oil and gas, we are still far away 
from discovering or developing a source of energy as potent or reliable 
as oil.
    So, we must find an environmentally-responsible way to increase our 
refining capacity.
    We simply cannot go any longer without expanding our capacity to 
refine oil.
    Even if we wanted to import more oil or produce more, it wouldn't 
matter.
    This harms our ability to respond to increased demand or deal with 
crises that disrupt oil refining.
    Our economy depends on a reliable and affordable source of energy.
    Frivolous and costly regulations make it impossible to build new 
refineries.
    Whatever their intent, these regulations harm the economy and drive 
up the price of gas more than they protect the environment.
    There must be a middle-ground between no regulation and so many 
regulations that consumers suffer.
    We can find that middle ground and build new refineries while still 
protecting the environment.
    I look to hearing today.
    Thank you again to the witnesses for sharing their expertise.

    Mr. Whitfield. I thank you very much, and at this time 
recognize the gentlelady from Colorado, Ms. DeGette, for her 
opening statement.
    Ms. DeGette. I believe Mr. Strickland----
    Mr. Whitfield. Well, I was told at the time the gavel went 
down that Mr. Strickland was not here at that time, and that we 
are going down the order of appearance.
    Ms. DeGette. All right. Thank you, Mr. Chairman. Thank you, 
Mr. Strickland.
    I have been sitting here listening to everybody, and I 
agree with a lot of what everyone has said. We are angry and 
sickened by what happened on the gulf coast, and we all hope 
that we can get as much help as we can. It looks like maybe a 
million people have either lost their homes or their loved ones 
or both, and their lives will be changed forever. But as we 
assess the damage and we bury the dead and we begin to rebuild, 
we also really do have to have a full accounting of the 
actions. And it would frankly be political malfeasance of us 
not to do that, which is why it is good we are having the 
hearing today.
    I think what we are seeing in Louisiana, Mississippi, and 
Alabama is an echo of the Federal Government's failings on 
September 11. We have seen an appalling lack of imagination, 
planning, or preparation for a mass casualty disaster, and an 
inept response to the disaster once it occurred that cost 
people their lives. Now, all of this was supposed to be solved 
when we created the Department of Homeland Security. And 
instead, it seems to me like things just got worse. My 
constituents are flooding my office with calls saying that the 
Federal Government failed Americans in their time of need. And 
I know that this is common to all of us in this room.
    So what we need to talk about in this hearing is within 
this committee's jurisdiction: What can we do to fix the 
problems and make sure we can minimize disasters in the future. 
And I don't mean the disaster of the hurricane. I mean the 
disaster of the response.
    Just talking about energy for a minute, because that is 
what this hearing is about, the Nation faced a surge in gas 
prices in the hours and days after Hurricane Katrina. In my 
district of Denver, Colorado, far from the eye of the 
hurricane, we saw gas prices going up almost hourly at some of 
these pumps. And I know that there were some disruptions in 
service in the Southeast and mid-Atlantic, expectedly so, 
prices expected to jump everywhere in the country without 
reason.
    I went to the briefing, as many of us did last night. The 
members of the cabinet briefed the Members of Congress about 
what happened. And it was all very Pollyannish and everything 
was going well. What really struck me about energy was when 
Secretary Bodman said there were no real long-term disruptions 
in supply. So what I want to know is why were prices of gas 
skyrocketing in Colorado even though there was ample supply at 
that time and frankly no connection to the distribution network 
in the gulf? To us, this looks like price gouging, not disaster 
impact, and it is frankly immoral and it is illegal in a lot of 
places, too.
    Now, we have been struggling for months with rising costs, 
and it has been fueled by surging worldwide demand for oil, 
infrastructure operating at near capacity, and also the 
increasing profits of oil companies. So why did we have to add 
to this price gouging as a result of a naturally occurring 
disaster? I think it is wrong. I am glad we are having this 
hearing. And I am very interested in hearing the testimony.
    Mr. Whitfield. The gentleman Mr. Otter is recognized for an 
opening statement.
    Mr. Otter. I will pass.
    Mr. Whitfield. Ms. Myrick.
    Mrs. Myrick. Thank you, Mr. Chairman. And thank you for the 
hearing today. All of us of course send all of our prayers and 
lots of other things that we can send to help to the Katrina 
victims. And we have been doing that, we will continue doing 
so, and I want to thank all the volunteers as well who have 
pitched in to help. Thank you to all the panelists who are 
sitting here patiently waiting. I will be brief. I just have 
two things I want to touch on today.
    One of them is what I call price gouging, because in my own 
area of Charlotte, North Carolina, it was mind boggling how 
fast the prices rose at the pump. They no more than posted the 
high premium price and they were right back upping the regular. 
It was just a continual circle over and over again. And it is 
not that I don't want people to make a fair profit. Of course, 
that is what we are all about in America. That is not the 
point. I just want to make sure that people aren't arbitrarily 
raising their prices. And it is a serious issue that we need to 
examine.
    Second is the oil and gas futures market. I have been 
concerned about this for some time because I think we can reel 
this in in a way that is going to have an effect on prices in 
the near future, not like the long-term remedies of building 
refineries which we also need to look at. But I have had 
concerns for many months that some speculators have been 
driving prices of gas higher than the factors of supply and 
demand really warrant. And I am particularly concerned about 
the over-the-counter market for energy derivatives which is 
subject to very limited oversight under the Commodities Future 
Trading Commission, the way I understand it.
    I know there are many factors involved in the final price 
of gas in our neighborhood stations, such as the taxes and the 
refinery costs and the distribution costs and the profits, 
which I said before need to happen. But we need to examine what 
is going on here, because it appears to me that it is abusive 
and manipulative trading in some cases.
    And so I thank you again, Mr. Chairman, for this hearing. I 
truly believe this gives us an opportunity to look closely at 
what we need to be doing for the future, because the global 
situation is not going to change and, as was stated before, our 
committee has jurisdiction over a lot of the health issues that 
are going to be coming up and we need to be doing those, too. 
And I yield my time.
    Chairman Barton. The gentlelady yields back. The gentlelady 
from California, Ms. Capps.
    Mrs. Capps. Thank you, Mr. Chairman, and to our witnesses 
for being here today. We have all been moved by the tragedy on 
the gulf coast and our thoughts and prayers are with the 
thousands of Americans, fellow citizens of ours so painfully 
and personally affected. We also are thankful and need to keep 
thanking folks for the countless acts of heroism and 
selflessness, from both the area's residents and from people 
across the country responding to this tragedy. And now Congress 
has a critical role to play here in the aftermath of Katrina. I 
believe there are two significant areas in which Congress has 
major responsibility.
    First, we have to provide the financial support for the 
people affected by Katrina. I am glad we have moved the 
emergency funding bill last week to start this process and 
there will be more funding requests coming. We are going to 
have to do a lot more to help these folks put their lives back 
together, and I hope we will work in a bipartisan fashion to do 
so.
    And the second thing we must do is to figure out what went 
wrong with the Federal response and why so that it never 
happens in this way again. And I believe we need to do this in 
a bipartisan way as well. The Federal response, as has been 
said over and over again, was late and it was ineffective. This 
administration utterly failed in its responsibility to help 
prepare for the disaster ahead of time and to help in its 
aftermath. There are disasters waiting to come, so we must do 
this work. Hundreds of thousands of gulf coast residents have 
paid a very high price for our failure. The administration's 
actions or inactions were an insult to all Americans and simply 
inexcusable. I believe that Congress has an important job in 
investigating these shortcomings, and I hope this committee 
will be vigilant in pursuing this inquiry, and I am thankful 
that this hearing will start this process. The lives of 
Americans will be affected by how well we do our job and by how 
well the administration does its job and the private sector as 
well, this time and the next time. There will be a next time.
    So I hope, Mr. Chairman, that this hearing is only the 
first of many that we can be holding, because studying the 
lessons of Katrina should help us to avoid similar problems in 
the future.
    Finally, Mr. Chairman, I know there are many calls now for 
congressional action to address the high gas prices. There are 
things we should do and things we shouldn't do. For example, 
resuscitating the ill-conceived refinery legislation is one we 
shouldn't do. We do need more refineries. But as has been 
noted, environmental regulations aren't the problem here. So 
you don't need to waive them to get a refinery bill. The 
problem is that the refining industry makes a lot more money 
with a tight refining capacity. The industry doesn't want to 
build more refineries because it makes too much money the way 
things are. On the other hand, if we had cut down on some of 
our demand over the last decade or so, we wouldn't be in such a 
predicament right now. Demand reduction works, even as the 
President now belatedly recognized, evidenced by his call last 
week for conservation.
    Mr. Chairman, you scheduled this hearing long before 
Katrina, and I would remind committee members that record gas 
prices were here long before Katrina hit and they will be here 
long after the effects of Katrina are dealt with. If we don't 
do something about our insatiable appetite for fossil fuel, 
shoving more tax breaks to industries making record profits and 
gutting the laws that protect our environment are simply 
uncalled for. It should be rejected. And I do yield back.
    Chairman Barton. The gentlelady yields back. Mr. Sullivan 
to make an opening statement?
    Mr. Sullivan. Saving my time.
    Chairman Barton. The gentleman defers. Does Dr. Burgess 
wish to make an opening statement?
    Mr. Burgess. I will defer.
    Chairman Barton. All right. Mr. Walden?
    Mr. Walden. Mr. Chairman, I will defer as well and save my 
time for the witnesses.
    Chairman Barton. All right. Mr. Otter? He defers. I think 
we have deferred on the Republican side, so we go to the 
gentleman from Pennsylvania.
    Mr. Doyle. And I will also defer.
    Chairman Barton. We have got a string going here. Mr. 
Allen.
    Mr. Allen. I am afraid I am going to break the string, Mr. 
Chairman.
    Chairman Barton. The gentleman is recognized for 3 minutes.
    Mr. Allen. Thank you, Mr. Chairman, for convening this 
hearing. The victims of Hurricane Katrina remain in our 
thoughts and prayers. When the 1998 ice storm crippled Maine, 
the Nation rallied to our aid. Maine is prepared to do the same 
for the people of the gulf coast in their hour of need. We are 
a nation that draws strength from shared adversity, and I hope 
that, working together, we will emerge from this terrible 
tragedy a stronger and more united people.
    The Federal Government's response to this crisis has been, 
in a word, pathetic. But that response should be the subject of 
another hearing. Today we will be focusing on Hurricane 
Katrina's effect on energy prices, but let us not deceive 
ourselves or our constituents: Gas prices, heating oil futures, 
and oil company profits were at record highs before Katrina 
struck. We cannot blame high gas prices on Katrina alone.
    From 1977 through 2002, the number of refineries in the 
U.S. decreased from 282 to 153. During this period of time, 
gasoline demand rose 27 percent. Refiners in the last decade 
have spent $47 billion to expand existing capacity by 13 
percent, but demand has grown even faster.
    Why not more refineries? The answer is profit margin. Fewer 
refineries mean higher profits. The strategy has worked; oil 
profits have soared into the billions. That may be all well and 
good for ExxonMobil, and for others, but what about everyone 
else? The increased profit margins for the oil companies are 
driving my constituents out of business. Small businesses in 
Maine are being crushed by increased gas prices, not to mention 
the spike that is coming in their heating oil bills.
    Maine's large fleet of independent truckers are suffering 
and at grave risk of going out of business. Maine's fishing 
fleet is suffering as well.
    In 1962, facing a similar threat to the Nation's economy 
due to the pricing practices of the Nation's steel 
manufacturers, President Kennedy summoned steel barons to the 
White House and demanded that they reduce prices. They backed 
down. This President, President Bush, needs to call oil company 
CEOs to the White House and demand sacrifice on their part. 
That may seem like fantasy, but it is the kind of leadership 
that we need today.
    I would just add one other point. On Thursday, Valero's 
chief executive Bill Greehey, commenting on the FTC's decision 
last week to authorize Valero's $8 billion purchase of Premcor, 
said that: We are in a new era for refining where I believe you 
will continue to see higher highs and higher lows, among other 
things, for product margins.
    That is what has been going on in that industry, and Mr. 
Chairman, that is what we need to investigate here. I yield 
back.
    Chairman Barton. The gentleman yields back. The gentlelady 
Ms. Schakowsky wish to make an opening statement?
    Ms. Schakowsky. Yes, Mr. Chairman. And thank you for 
calling this timely hearing. Americans have been riveted to 
their televisions watching with shock and shame, not shock and 
awe, as the Federal Government failed in its primary mission, 
providing for the safety and security of its citizens. As 
reporters and camera crews brought images that look like they 
came from another country instead of the superpower of the 
world. As they were able to make it to the Superdome and 
convention center, Americans watched and waited in disbelief 
for help to arrive. For many, help came too late. This 
predictable and predicted catastrophe, as the Sun Times 
editorialized, exposed the plight of the Nation's have nots, 
all those Americans, not refugees from another country, but the 
millions of American citizens who are not part of the ownership 
society. Now we know what that means. If you own a car, you can 
escape disaster. If you own a tank of gasoline or enough money 
to buy a hotel room, you might survive in this ownership 
society.
    Make no mistake, millions of Americans are angry, millions 
of Americans are ashamed. And, yes, no matter how they and we 
may be scolded for doing so, they blame the Federal Government, 
they blame this administration for failing to do its job, 
failing to prepare for this crisis, and failing promptly to 
deal with it. Many Americans shook their heads and asked: Is 
this my country? Newt Gingrich said, quote: As a test of 
Homeland Security, this was a failure. He said this is not a 
moment to defend inadequacy. End quote.
    Other crises and potential crises are now looming, and we 
in Congress have responsibility as well to face up to that fact 
and deal with it. One of those is an energy crisis. The 
question is, are we going to act now to prevent a catastrophic 
energy crisis, or will we wait to scramble to pick up the 
pieces in the aftermath? This time, the President and the 
Congress have to anticipate a breach in the levees. In my view, 
we already squandered an opportunity to look ahead and mitigate 
an energy crisis that leaves our country at the mercy of 
hurricanes and vulnerable oil rigs and oil refineries and 
foreign countries when this committee and this Congress passed 
an energy bill that the President's own experts said could 
increase prices at the pump.
    Days before Katrina struck, the price of a barrel of crude 
was $66, double what it was in January 2004. In Chicago the 
price was already nearly $3 a gallon, the highest in the 
country. Katrina exacerbated a preexisting condition. Now we 
must assure that immediate needs are met and that we look ahead 
at the cost and availability not only of gasoline, but, as the 
cold weather approaches, heating oil and natural gas. How are 
the poor, several of whom because of Katrina now have to face, 
going to stay warm. And what about middle-class families, small 
businesses, and farmers? Our constituents can't afford $1,000 
monthly heating bills.
    Can we look that far ahead and plan? In the aftershocks of 
Katrina, can we leave Americans out in the cold while energy 
companies are left with money to burn?
    I hope that no member has the audacity to suggest that 
weakening environmental standards or drilling in the Arctic 
wilderness or any other transparent political fix will 
alleviate this energy crisis. The only way to mitigate this 
pending catastrophe is for Congress, with this great committee 
taking the lead, to be bold enough to enact laws that will hold 
down costs, prevent profiteering off the backs of the American 
people, and protect those who are hit hardest by increases in 
energy costs.
    Thank you, Mr. Chairman.
    Chairman Barton. We thank the gentlelady. Mr. Radanovich, 
would you like a statement?
    Mr. Radanovich. Waive.
    Chairman Barton. Okay. The gentlelady from California, Ms. 
Solis.
    Ms. Solis. Thank you, Mr. Chairman. Yes, I have a 
statement.
    As we sort through the issues surrounding recovering from 
Katrina, it is important for us to remember many of the 
communities that are still suffering right at this moment. 
First responders and other emergency personnel volunteers and 
even firemen from the local D.C. Area are training and working 
to continue finding survivors and evacuating the rest.
    I am glad that we are here today to begin to address this 
issue. As we begin to learn, these evacuees and emergency 
responders are at increased risk for disease and infection 
caused by the mix of contaminants in the water they are wading 
through, particularly to those engaging in rescue and recovery 
missions, but also to those who lived in the Superdome and 
struggled through the water to escape the city. All, regardless 
of race, income, ethnicity, and country of origin, must receive 
adequate health care and treatment and counseling, mental 
counseling. I hope, Chairman Barton, that we will have a 
hearing to better understand the health implications of this 
hurricane. And I am also extremely concerned about the 
environmental and drinking water infrastructure implications of 
Hurricane Katrina.
    On Sunday, on Meet the Press, Secretary Chertoff commented: 
We are going to have to clean probably the greatest 
environmental mess we have ever seen in this country.
    Today's Washington Post identified just the beginning of 
the environmental problems the gulf coast will be facing. These 
include contaminated water which will likely be undrinkable for 
many years to come, unknown damage to the drinking water 
infrastructure, toxic fumes from fires which continue to burn. 
State authorities announced a litany of contaminants which are 
likely to be found in the flood waters, including tens of 
millions of pounds of concrete, lumber, cars, and animal 
carcasses. Sewage treatment plants were destroyed. Two major 
spills sent 78,000 barrels of oil into a local lake there, and 
fuel from 2,000 fuel tanks and leaking gasoline from flooded 
cars and boats also coated the city.
    As ranking Democrat on the subcommittee with jurisdiction 
over these environmental hazards, I call on the Chair of the 
subcommittee, Mr. Gillmor, and Chairman Barton to begin 
hearings on the environmental implications of Hurricane 
Katrina. It is critical that as we move forward to clean up we 
rebuild New Orleans, that it be done in a manner which will 
protect the health and safety of our communities. So I 
encourage our colleagues not to disregard public health and 
environmental regulations.
    And, last, with respect to the gasoline prices, we do have 
to have a thorough investigation here. In California for the 
last 3 months we have experienced high rates of gasoline prices 
far beyond the $3 mark. We need to do something now. We need to 
call in all, all resources that we can to look at what kind of 
price gouging has gone on.
    I also would like to submit that there are several 
refineries that are dormant right now in our country. We should 
probably be going back and looking at those current refineries 
and trying to provide assistance there so we can startup and 
provide the kind of assistance that our consumers are waiting 
for.
    Thank you very much, Mr. Chairman.
    Chairman Barton. We thank the gentlelady.
    Does Mr. Fossella wish to make an opening statement? The 
gentleman defers. Does Mr. Gonzalez wish to make an opening 
statement?
    Mr. Gonzalez. Yes, Mr. Chairman. And I will be quick. I 
think what we see today as far as any shortages, price 
increases, and such, and the crisis that we face truly are just 
symptoms of underlying policies that have been inadequate and 
unrealistic. I think we need to start off with a firm 
understanding, if we are going to do something that is 
realistic and substantive, that there are no quick fixes, first 
of all; that there should not be any sacred cows. All of us 
represent a sacred cow or two. And, of course, it is not going 
to be pain-free. And that means for the industry and for the 
consumer. And if we believe we can get away with any kind of 
substantive policy changes that will address these problems 
without what I have just said, and that is the sacred cows and 
foregoing some of those interests, and that there is not going 
to be some pain felt by every American, then we will not 
accomplish what needs to be accomplished.
    I think the American public will grasp certain concepts 
that we will discuss here today and that witnesses will touch 
on, such as production capacity on the domestic side. The 
location of where we have our facilities, they will understand 
that. And, again, just on the capacity side. But will they 
really understand other things that really come into this mix 
and I think have already been referred to by Congressman 
Shadegg? And we are talking about the futures market. How many 
Americans understand the futures market, the oil futures 
market? Or hedging? What does all that mean to them? What it 
means is exactly what is happening to them today when it comes 
to the volatility of the marketplace.
    And with that in, Mr. Chairman, I hope that we will 
realistically promote policies that take all of this into 
account. Thank you.
    Chairman Barton. Does the gentlelady from Wisconsin wish to 
make an opening statement? The gentlelady is recognized for 3 
minutes.
    Ms. Baldwin. Yes. Thank you, Mr. Chairman. My thoughts are 
with all of those who are suffering the effects of Katrina and 
also with those who are suffering the consequences of a 
painfully slow and uncoordinated response to Katrina.
    I keep asking myself how a country that has spent the last 
4 years planning for catastrophe found itself so ill-prepared 
for this catastrophe. There is a huge public call to assign 
blame to the planners and to name the stunning vacuum of 
leadership from this President and his FEMA Director 
immediately following this disaster. I know there is also an 
effort to subdue congressional critique and inquiry at least 
while the rescue and relief operation is still ongoing.
    We have been urged to focus on the present and the future. 
But how can we do that properly without understanding the past? 
Our history? And which decisions, both recent and in the more 
distant past, have exacerbated and intensified last week's 
natural disaster?
    Last week showed us and all of America, and in fact the 
world, many things, among them that our social safety net has 
been badly neglected. It showed us that we have been inadequate 
stewards of the environment, whether it is our failure to fight 
poverty and provide health care to all in America or our 
failure to protect the natural buffers, the coastal wetlands, 
the barrier islands which serve as Mother Nature's shock 
absorbers, the failure to make proper and adequate investments 
in infrastructure, including our emergency communication 
infrastructure, our failure to listen to scientists long 
warning us of climate change, or our failure to embark upon a 
path that decreases rather than increases our dependence on 
finite resources so that future generations won't experience 
the fear and anxiety that grips all of our constituents when 
fuel becomes unaffordable. All of this was stunningly revealed 
last week.
    Let us not ignore what was exposed. I have talked about the 
public calls for blaming the planners. In a real way, we on 
this committee and in this Congress are planners, planners for 
the future. This time, let us seize the opportunity to work for 
the common good, to help those with the least, not just those 
with the most, and to make good upon the social compact.
    Mr. Chairman, I look forward to working with you on these 
very big challenges.
    Chairman Barton. I thank the gentlelady.
    Does Mr. Ross wish to make an opening statement?
    Mr. Ross. Yes, sir, Mr. Chairman. In fact, I just left a 
conference call which I will soon be joining again with our 
Governor of Arkansas, who is housing about 60,000 of our 
neighbors from Mississippi and Louisiana. As you can imagine, 
we have a lot of challenges that we want to meet, and we want 
to be there for them and lend a helping hand.
    I have grave concerns about the response time in the 
aftermath of this hurricane and subsequent flooding and levee 
failures as it relates to FEMA, and I believe that we need to 
make FEMA a cabinet level position and remove it from Homeland 
Security. We have some short- and long-term needs that are 
going to have to be met for the people of Mississippi, 
Louisiana, and Alabama. I believe that we must have a 
bipartisan commission, much like the 9/11 Commission, to figure 
out what went wrong and how to avoid this from happening in the 
future. But there is time for those things. Right now is the 
time I believe to try and restore order in New Orleans, to help 
the people of these three States get their lives back together, 
and obviously the challenge of recovering the bodies that 
remain in the devastation of this hurricane.
    But today, this hearing before the Energy and Commerce 
Committee is, quite frankly, about dealing with the aftermath 
of Katrina as it relates to energy, to gasoline supply and 
prices, and so let me say this: That over the August district 
work period I traveled the fourth district, in fact about 8,000 
miles worth of traveling in my district, listening to the 
concerns of constituents about rising gas and diesel prices. I 
heard this before the hurricane. Obviously, it was compounded 
by the hurricane. I witnessed firsthand already inflated gas 
prices jump from $2.45 a gallon to $3.25 a gallon in 
communities throughout Arkansas. These are the very towns and 
communities our neighbors from Mississippi and Louisiana and 
Alabama have traveled to seeking shelter. Many citizens in my 
rural congressional district commute over 100 miles round trip 
for work each day. Many farmers in my district face hardships 
in operating the necessary equipment, especially in this 
drought, to harvest their crops due to high diesel prices.
    These citizens, as well as those impacted by the hurricane 
in Mississippi and Louisiana and Alabama, simply cannot afford 
these drastic increases in fuel prices.
    We need to ensure the people of this country that oil 
market manipulation and price gouging are not occurring; and, 
if the Federal Trade Commission's ongoing investigations do 
find manipulations, we need to move swiftly and effectively to 
punish those taking advantage of this situation. Oil production 
platforms, import terminals, pipelines, and refineries were all 
affected as a result of Hurricane Katrina. The full impact that 
Hurricane Katrina will have on oil markets will depend on how 
quickly these facilities will be able to recover to pre-
hurricane status.
    And, Mr. Chairman, finally let me just encourage this 
committee to work to do all it can in a bipartisan way to bring 
down the high cost of gasoline, to maintain an adequate supply 
while also meeting the needs and challenges of the people that 
have been directly impacted by this horrible natural disaster. 
And, with that, I yield back the balance of my time.
    Chairman Barton. We thank the gentleman.
    Does the gentleman from Massachusetts, Mr. Markey, wish to 
make an opening statement?
    Mr. Markey. I do, Mr. Chairman.
    Chairman Barton. The gentleman is recognized.
    Mr. Markey. Thank you, Mr. Chairman. When the price of 
gasoline is $2.50 at the pump and 3 days later $3.50 is what is 
being charged to consumers as they are tipped upside down in 
gas stations across America and having money shaken out of 
their pockets, then there is profiteering, there is price 
gouging which happens.
    The President should have announced that he was deploying 
the Strategic Petroleum Reserve on the first day of the crisis 
last week, at the very beginning, not 5 days later after the 
oil speculators were able to take advantage of consumers all 
across our country. The President was at least 5 days late in 
deploying the Strategic Petroleum Reserve and asking for help 
from our allies around the world. We only have 3 percent of the 
oil reserves in the world. God put most of the reserves under 
certain Middle Eastern countries, but we put 70 percent of that 
oil into our gasoline tanks.
    The Republican energy bill which was passed and signed by a 
Republican President was an historic failure. It did not deal 
with the issue of fuel economy standards for SUVs and 
automobiles, it did not have a renewable portfolio standard so 
that all utilities in America increased dramatically their use 
of renewables. I believe that what we should be doing right now 
is suspending all royalty relief for oil and gas companies 
across America, and giving that relief to the victims of 
Hurricane Katrina.
    Here is the oil company profits over the last 3 years. It 
has just skyrocketed. And there are estimates that ExxonMobil 
can make upwards of $40 billion this year. We just gave $10 
billion for relief down in the gulf area. $40 billion for one 
company. And the prices, the prices at the pump have just 
skyrocketed over the last very brief period of time. And no 
relief, no answer from this administration. In fact, they admit 
that their bill does nothing.
    So we continue to pollute our air, we continue to have 
increases in climate change, we continue to see our wetlands 
disappear, we continue to turn a blind eye to human rights 
abuses by our OPEC suppliers, we continue to not really 
complain about these incubators of terrorism over in the Middle 
East, and we continue to argue--this administration continues 
to argue that we need to give more royalty relief to oil and 
gas companies.
    This hearing is a very important first step. But what we 
need is every CEO of every oil company, and I would also 
recommend OPEC ministers, come in here and that they be 
requested--we can't make them, but we request them to testify 
as to what they are going to do in order to ensure that there 
is an adequate supply of oil for our country.
    Chairman Barton. The gentleman's time has expired. We thank 
the gentleman. Does the gentleman from New Hampshire wish to 
make an opening statement?
    Mr. Bass. I will be brief.
    I want to thank you for holding the hearing. I understand 
that subject matter has been broadened from just talking about 
gasoline and energy to talking about elements relating to the 
latest catastrophe that has beset our Nation.
    I just want to say that it is obvious that our Nation has 
been lulled into complacency with respect to the availability 
of cheap gasoline in the past; and we really haven't planned 
for a perfect storm like that which we are experiencing today 
with tight supplies, massive global demand and political unrest 
and then, of course, Katrina. Maybe we could never have been 
prepared for this kind of an event.
    But I just want to say that last week I set up a special 
Web site that would allow constituents in the Granite State to 
fill out a form if they--which would be e-mailed to me directly 
which would outline instances of--specifically about price 
changes: the date, the reason, the period of time it occurred 
between one price and another price. And I have notified these 
citizens--I would say there have been well over 100 responses 
in the last 7 days--that I will turn all of this information 
over to the Department of Energy and the Federal Trade 
Commission so that the appropriate action be taken, if it is 
justified.
    You know, I think it is appropriate to look into the 
processes whereby oil is extracted from the ground, 
transported, marketed, delivered and so forth and see if there 
are areas that require policy attention. But I personally find 
it difficult to define the term ``price gouging,'' and I will 
be interested to hear what our witnesses have to say about 
that.
    Mr. Chairman, I will stop my statement here so that we can 
get on with the important testimony that we are about to hear 
from the people who are here today. Thank you.
    Chairman Barton. Does the gentleman from Ohio wish to make 
an opening statement?
    Mr. Strickland. Yes, sir.
    Mr. Chairman, I was reading in the New York Times comments 
from an engineering professor at the State University of 
Louisiana who had served as a consultant on the Louisiana State 
evacuation plan. He said that little attention has been paid to 
the evacuation of New Orleans's low mobility population: the 
elderly, the infirm and the poor without cars or other means of 
fleeing the city, about 100,000 people.
    Mr. Chairman, we knew this disaster was upon us days before 
it reached our shore. In fact, the President went on television 
and urged people to evacuate the city. We saw the TV pictures 
of cars lining the freeways as they were heading northward out 
of harm's way. But apparently there were many in New Orleans 
and elsewhere along the Hurricane's path that did not have 
cars, that did not have credit cards. They had no means of 
renting an automobile for transportation. They could not afford 
a bus ticket. They simply were left behind. They were the 
poorest among the region's population.
    Then the flooding came; and these--the sickest, the 
poorest, the oldest, along with children--have died. And the 
sad truth is that many have died unnecessarily. Many have died 
simply because they lacked for water, for food; they lacked for 
timely medical attention.
    Mr. Chairman, we are the greatest and most advanced Nation 
on the face of the earth. We have at our disposal every 
resource that is known to mankind. Yet when disaster hit our 
own country, when our own citizens were without food, water and 
medical care, we did not respond in a timely manner. So many 
were lost. And those who lost their lives were primarily black, 
and they were primarily poor, and that should strike at the 
conscience of every one of us.
    Mr. Chairman, one of the things that must be done is for us 
to examine ourselves as a Federal Government and as a people 
why is it, why is it that it is the poor, the minority, the 
child, the elderly and the infirm who are most likely to suffer 
in times of disaster?
    But we are here today to talk about our Nation's energy. I 
noticed that the President said a few days ago he had zero 
tolerance for looters. This Nation is waiting for the President 
to speak so strongly about gougers. Will he tell us and will he 
tell the oil company executives that he has zero tolerance for 
gouging at the gas pumps?
    I yield back the remainder of my time.
    Chairman Barton. The gentleman yields back 3 seconds. We 
appreciate it.
    Does Mr. Terry wish to make an opening statement?
    Mr. Terry. No.
    Chairman Barton. Does Mrs. Blackburn wish to make an 
opening statement.
    Mrs. Blackburn. Mr. Chairman, having been in Mississippi 
with my family in the middle of this for the last few weeks I 
will submit my statement and look forward to hearing from our 
panel.
    [The prepared statement of Hon. Marsha Blackburn follows:]

   Prepared Statement of Hon. Marsha Blackburn, a Representative in 
                  Congress from the State of Tennessee

    Mr. Chairman, during the past decade Congress waged debate over 
whether to increase domestic oil exploration and encourage construction 
of new refineries.
    Hurricane Katrina made it abundantly clear that this nation can no 
longer engage in seemingly endless debate, but must actively work to 
discover and harvest American oil. We must encourage construction of 
new refineries. This is not to say that we should end our alternative 
fuel research and development efforts, but that we must have a 
realistic view of our current consumption needs.
    Over the past few decades, environmental groups and some of my 
colleagues across the aisle have been very successful in their efforts 
to stymie domestic exploration. The National Energy Policy Act which we 
passed this July after several years of effort took steps to ease the 
regulatory red tape that has prevented us from accessing domestic oil 
supplies and constructing refineries. In light of what we've learned 
from Hurricane Katrina, I'd suggest we build on that legislation and 
taking immediate steps to open ANWR.
    Today we know that had we been able to pass that legislation years 
ago we'd very likely be less reliant on the gulf region's oil 
industries and the current price increases and periodic supply 
shortages would not be nearly as painful.
    This is not as complicated a problem as some would have us believe. 
We need more domestic oil and we must increase our refining capacity. 
Both of those needs are within our power to address. Our energy 
security absolutely cannot remain so vulnerable to a single although 
significant natural disaster like Hurricane Katrina.
    Mr. Chairman, I thank you for holding this important hearing today 
and I look forward to taking the steps necessary to strengthen our 
energy infrastructure.

    Chairman Barton. Seeing no other member present who wishes 
to make an opening statement, the Chair asks unanimous consent 
to put into the record at this point in time the statement from 
the distinguished chairman of the Small Business Committee, 
Congressman Manzullo.
    Hearing no objection, so ordered.
    [The prepared statement of Hon. Donald A. Manzullo 
follows:]

    Prepared Statement of Hon. Donald A. Manzullo, Chairman, House 
                      Committee on Small Business

    As the Chairman of the Small Business Committee, I hear everyday 
how the price of energy affects entrepreneurs. It costs more everyday 
to simply turn on the lights of a business when it opens its doors. It 
costs more to ship merchandise, both raw material and finished 
products. Every consumer sees prices rising on the most basic products. 
Every time people add gasoline to their car, there is less money in 
their pocket for other purchases.
    In the northern Illinois Congressional district I am proud to 
represent, many of my constituents have already been hurt by the 
increase in energy prices. Richard Beuth is a farmer in Seward, 
Illinois and he has told me how every facet of his operation rising 
fuel prices has impacted. He explains that the cost of fertilizer has 
doubled over the past year. A year ago at this time, fertilizer cost 
$250 a ton and when it increased to $350 a ton he wondered how he would 
absorb this increase. Now, in the span of a year, it has increased to 
$500. Also, he tells me there is a scarcity of fertilizer on the market 
for purchase.
    Additionally shipping costs are hurting his farming operation. It 
costs more to buy seeds, fertilizer and other products have increased 
because of shipping costs. Farmers also get hit with shipping costs as 
they send their crops to market. Richard explained to me that the cost 
to farm an acre has increased between 15 and 20 percent. He explains 
that because the price of corn is down, he is operating at a loss.
    Richard Todd runs Todd Transfer Trucking of Rockford, Illinois. 
Richard tells me that the cost of fuel is tipping the balance of the 
scales to where he is operating without any profits. His company 
normally runs on a margin of two to three percent and fuel increases 
are eating into that margin. He says that his fuel prices are up 
$90,000 in the last six months, with all other factors remaining the 
same.
    Additionally, his company is forced to absorb more of the costs 
because their biggest customers will not accept a fuel surcharge. He is 
only able to pass on his additional fuels costs or surcharges to his 
smaller customers, who themselves are struggling.
    Another example is Bob Trojan of Rockford Linear Actuation, a 
hydraulic cylinder manufacturer. Bob explains that the cost to run his 
plant has increased between 20 and 30 percent because of soaring fuel 
prices. He says that he fully expects to the price of steel to rise, 
because of production costs, which will again increases his input 
costs.
    Because he is a small manufacturer, trucking companies have passed 
surcharges on to his shipments. He ships his products all over the 
United States and Europe. Bob says that customers and vendors are more 
cautious in taking trips to see products because travel costs are so 
expensive.
    Rising energy costs hurt every aspect of business. These costs are 
spiraling out of control. It is imperative that we find ways to curtail 
energy prices before businesses are forced to close their doors. The 
economic aftershocks of Hurricane Katrina affected communities all 
across this nation. Mr. Chairman, I trust that as oil refineries come 
back on-line in Louisiana and production is restored to pre-storm 
levels, we will see a decrease in energy costs so that our small 
businesses and small manufacturers will remain open. Any change in U.S. 
government policy to address the high cost of energy should keep in 
mind the perspective of small business because this sector of our 
economy generates most of the new jobs and economic growth in this 
country. Thank you, Mr. Chairman, for allowing me this opportunity.

    [Additional statements submitted for the record follow:]

  Prepared Statement of Hon. Michael C. Burgess, a Representative in 
                    Congress from the State of Texas

    First, I want to thank Chairman Barton for convening this hearing 
today. The Chairman has indicated that this will be the first of a 
series of hearings to examine impact of Hurricane Katrina.
    In the wake of Hurricane Katrina, many of my constituents have 
contacted me with concerns about price gouging by gasoline retailers.
    It is tempting to be led by emotion and make quick decisions in 
order to show that we are ``doing something.'' But I believe that the 
best thing to do in this situation is to study the issue as 
deliberately as possible.
    In the Dallas-Fort Worth area gasoline prices increased by anywhere 
between 30-50 cents per gallon in the last week alone. I know Chairman 
Upton indicated that he received reports that one point that gasoline 
increased by a dollar per gallon overnight in Michigan.
    At the same time, we know that Hurricane Katrina resulted in the 
suspension of 25 percent of U.S. oil production and took 25 percent of 
U.S. refining capacity offline. Since domestic oil and gas refineries 
have operated at nearly 100 percent capacity over the last few years, 
the loss of even one U.S. refinery would have reduced supply and 
increased prices at the pump.
    We need to determine if the problem is inappropriate pricing or a 
problem with supply.
    We need to make sure to fix the right problem. Trying to fix the 
wrong problem can only make things worse--we all remember the long 
lines at the gas pump in the 1970s.
    If it is determined that illegal pricing has occurred, I will 
support prosecution of wrongdoers to the utmost of my ability. I think 
it is unconscionable that opportunists would take advantage of this 
national tragedy for financial gain.
    But, it is important that we, as policy makers, avoid single 
synapse reactions which can translate into untenable public policy. We 
should examine the strategy in place for dealing with this type of 
emergency situation; and if no such strategy exists, we should work to 
develop one. We need to learn from this experience and determine how we 
can prevent this loss of supply in the future.
    In conclusion, I'd like to again thank the Chairman for holding 
this hearing. I look forward to hearing from the witnesses who are 
appearing before us.
                                 ______
                                 
 Prepared Statement of Hon. Bart Stupak, a Representative in Congress 
                       from the State of Michigan

    Thank you Chairman Barton and Ranking Member Dingell for calling 
this hearing today and welcome to the witnesses. This hearing comes at 
a time when our southern states are struggling with the ramifications 
of a devastating natural disaster and the rest of our Nation is being 
hit with gas and oil prices that are the highest this Country has ever 
seen.
    I hope that the witnesses here today will provide information that 
will help this Committee understand why these high prices are occurring 
and when the American people can expect a reprieve.
    As every member of the Committee knows first hand, our constituents 
are angry about high gas prices--and they have a right to be!
    More than 5,000 complaints have been logged in at the Energy 
Department's gas-price gouging hotline, and there have been reports of 
pump prices hitting $6 per gallon in some parts of the country where 
gas prices were in the range of $2.50 per gallon. Furthermore, oil 
prices have reached as high as $70 per barrel.
    My home state has been hit particularly hard by these prices, 
especially in my Northern Michigan district. With tourism as the 
largest industry in the region during the summer months, gas prices 
have taken a toll on small businesses this year even before Katrina.
    Many Northern Michigan residents who must commute to distant 
communities for work find themselves putting in the first hour or two 
just to pay for the gas to and from their job.
    The fact is we rely on oil to fuel our cars, homes and economy, so 
we're forced to pay the price. Like my constituents, I find myself at 
the pump feeling completely helpless to stop the seemingly endless rise 
in cost.
    Many weeks prior to Hurricane Katrina's wrath, gas prices had been 
increasing at an alarming rate. These prices have been pinching the 
pockets of the middle class for well over a year.
    During this time, the Administration did nothing to curb these 
rising prices despite the urging of myself and other Members of 
Congress to defer shipments of oil and tap into the Strategic Petroleum 
Reserve.
    Instead, the Administration chose to wait until Hurricane Katrina 
put the country in dire straights before releasing this desperately 
needed oil. Had they immediately released this oil, the situation after 
Katrina might not have been so grim.
    However, supply of oil is not the only factor that is affecting gas 
prices. The United States refining capacity is concentrated in the 
southern states and some of those states have unfortunately been 
devastated by Katrina.
    While many existing refineries have expanded operations, it has 
barely kept pace with demand. Most U.S. refineries are operating at or 
near 94 percent capacity, and the United States now has to import 10 
percent of already refined gasoline.
    For the current refiners, this limited capacity keeps gasoline 
prices high and profits up. But for the consumer, and the overall 
health of the American economy, it's a potential disaster.
    Hurricane Katrina is not the only cause of these independent gas 
prices. This Administration's foreign policy has also directly 
influenced the price of gas we are paying today. Poorly planned foreign 
policy and mismanaged international diplomacy have created major 
instability in the oil rich regions of the world, including Venezuela 
which has been one of our largest suppliers.
    This pervasive instability in the Middle East and the Iraq war has 
lead to a commodity futures market where an additional $10 to $15 
``risk premium'' is added to each crude oil contract sold on the 
market. This directly correlates to higher prices at the pump for 
consumers and only increases with concerns over natural disasters such 
as Hurricane Katrina.
    I hope the witnesses here today will address these issues. Thank 
you.
                                 ______
                                 
Prepared Statement of Hon. Albert R. Wynn, a Representative in Congress 
                       from the State of Maryland

    Chairman Barton and Ranking Member Dingell, thank you for holding 
this hearing at such a critical point during this state of national 
crisis. Hurricane Katrina has ravaged the Gulf Coast region, leaving 
thousands without a place to call home, crippling and separating 
families, and the death toll continues to rise as we press forward with 
relief efforts.
    The Administration, state, and local officials' sluggish response 
and incompetence in addressing this catastrophic natural disaster are 
unacceptable. The lack of coordination, limited military presence, and 
insufficient supplies reveal a shocking ineptitude in planning for 
emergency situations, such as witnessed along the Gulf Coast.
    In addition to the human tragedy, in the context of this 
committee's jurisdiction, Hurricane Katrina resulted in a significant 
loss of refining capacity, intensifying already high gas prices. At 
least 20 percent of the nation's refining capacity ceased operations or 
reduced runs as a direct result of the disaster. No new refineries have 
been built in this country since 1976, yet over the past 20 years U.S. 
demand for gasoline has increased over 20 percent. Correspondingly, 
refining capacity has decreased by ten percent over the same time 
period. This is an unsustainable situation and we must work towards 
increasing domestic refining capacity.
    The current price of gasoline, when adjusted for inflation, is as 
high as gas prices during the 1979 crisis! What makes matters worse is 
that even before the hurricane, crude oil and gas prices were inching 
towards unprecedented heights.
    Unfortunately, in the aftermath of Hurricane Katrina, the issue of 
price gouging has been illuminated. In the witnesses' testimony they do 
not address the jurisdiction of the federal government over price 
gouging; nor do they specify what specifically defines price gouging. 
These are matters that must be addressed given the current crisis. We 
need federal authority over price gouging; the American people should 
not be subjected to artificially high prices without an effective means 
of recourse.
    We should also remember that the reduced refining capacity and 
supply will impact the price of home heating oil this winter. While it 
is currently a warm day in D.C., in a couple of months the weather will 
cool significantly. For low-income residents, this could mean the 
difference between putting food on the table and surviving the cold 
winter. Given the high prices in energy, we should ensure that our low 
income heating assistance is sufficient to support the inflated prices.
    Adjustments in international supply and demand of oil, continually 
increasing refining capacity, speeding up our energy independence from 
foreign sources of oil, and ultimately shifting towards a hydrogen 
economy are necessary to address America's energy crisis.
    I look forward to hearing the testimony of those present today and 
I thank you all for speaking with my colleagues and I about the 
aftermath of Hurricane Katrina and her impact on oil and gas 
production.
                                 ______
                                 
Prepared Statement of Hon. Jim Davis, a Representative in Congress from 
                          the State of Florida

    Mr. Chairman and Members of the Committee, thank you for holding 
this hearing on the effect that Hurricane Katrina has had on the supply 
and prices of gasoline in the United States. Last month, Congress 
passed a massive energy bill that did nothing to address the price of 
gas at the pump. It is unfortunate that it took this natural disaster 
to finally get Congress to act on addressing the price consumers pay at 
the pump.
    Today, we are here to specifically look at the economy of 
gasoline--a system that has proven to be fundamentally flawed, even 
before Katrina devastated our coasts.
    It is my hope that we will uncover long term solutions to address 
the supply and pricing of gasoline in this process of Congressional 
hearings and investigations that are sure to come.
    We have all heard the stories of price gauging at the pump--I urge 
the witnesses at this hearing today to heed the call of this Congress 
and keep in mind that America is watching your actions closely to 
ensure that suppliers of gasoline are not unfairly profiting in this 
time of national crisis.
    Gasoline is unlike any other US commodity. The fuel that every 
American relies on in one way or another is impacted by a global market 
of supply and demand which alters the prices of products from 
Tupperware to jet fuel. The refining process is one of the steps in the 
pricing of gasoline. Some Members of the House of Representatives argue 
that relaxing the laws that protect consumers will assist in easing 
this severely bottlenecked market. I don't believe that approach will 
really address the problem or tell us why the years of bottlenecks and 
tight supplies have allowed the refineries to maintain and increase 
their profit margins. The Members of this Committee must be aware that 
opportunistic exploitation of consumer protections will not be 
tolerated by the American people.
    Today, it is as clear as it has ever been that we are unable to 
drill our way out of oil and gas dependence. While solutions to short 
term disruption solutions are needed at this time to help address the 
impact of Hurricane Katrina, we must look to solutions that will affect 
the long term energy markets and keep in our minds the economic, 
environmental and homeland security of our children's and 
grandchildren's futures. I am eager to work with the Members of this 
committee towards the goal of finding real solutions to obstacles that 
will be outlined in the witness's testimonies.
    I also look forward to hearing from the courageous Governors of 
Louisiana and Mississippi. All of America appreciates their leadership 
through these difficult and trying times for their state and our 
nation. Floridians are said to have PhD's in hurricane preparedness, 
and it is with this knowledge that we will help in the recovery process 
for Hurricane Katrina in any way we can.
    Mr. Chairman, I urge the Committee to put partisan politics aside; 
we Floridians cannot wait through a year of hearings and investigations 
to find out what failures occurred in the preparation and response to 
Katrina as hurricane season is not yet over for us. We must get to the 
bottom of this as no state stands to gain or loose from learning the 
lessons of Katrina and the aftermath quickly.
    Mr. Chairman, again, I thank you and the Members of this Committee 
for the opportunity to discuss gas prices today and look forward to 
working with you on this and many other issues in the future.

    Chairman Barton. The Chair now is going to recognize its 
first panel. We appreciate your patience, gentlemen.
    I think it shows the importance of this hearing that, of 
the 56 members of the Energy and Commerce Committee, 45 have 
made an appearance and, of those 45, over 30 have made opening 
statements. That shows the concern the country has about what 
has happened and is worried and concerned about the response of 
the Federal Government to the catastrophe. So I do thank you 
again for your patience.
    We are going to recognize David Garman, who is the Under 
Secretary for Energy, Science and Environment at the Department 
of Energy for 7 minutes; and then we will go to Mr. Caruso, Mr. 
Seesel and Mr. Moran. Thank you, gentlemen, for waiting.
    Secretary Garman, you are recognized for 7 minutes.

STATEMENTS OF HON. DAVID K. GARMAN, UNDER SECRETARY FOR ENERGY, 
  SCIENCE AND ENVIRONMENT, DEPARTMENT OF ENERGY; HON. GUY F. 
CARUSO, ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION; JOHN 
H. SEESEL, ASSOCIATE GENERAL COUNSEL FOR ENERGY, FEDERAL TRADE 
 COMMISSION; AND KENNETH P. MORAN, ACTING DIRECTOR, OFFICE OF 
 HOMELAND SECURITY, ENFORCEMENT BUREAU, FEDERAL COMMUNICATIONS 
                           COMMISSION

    Mr. Garman. Mr. Chairman and members of the committee, 
apart from the human dimension, which weighs heavily on all of 
our minds, Hurricane Katrina had a devastating impact on energy 
infrastructure, prices and markets.
    For example, Katrina shut in roughly 1.4 million barrels of 
crude oil production, roughly 95 percent of all U.S. Gulf 
production. Katrina halted 25 percent of all gulf coast 
refining, or approximately 2 million barrels per day. Ten 
refineries were totally shut down, and six were reduced in 
their runs. Some undamaged refineries suffered from crude oil 
supply shortfalls.
    Approximately 2.7 million households were without 
electricity at one point, in addition to the loss of 
electricity to refineries and pipelines. Three major pipelines 
carrying crude and petroleum products to large portions of the 
Nation were out of service, with estimates of repairs ranging 
from days to weeks.
    Mindful of these impacts, we did the following:
    First, the Department of Energy, within 48 hours of 
receiving the first requests, approved loans of crude oil from 
the Strategic Petroleum Reserve to refineries, 12.6 million 
barrels as of yesterday afternoon. Some of that oil is being 
delivered as we speak.
    Second, the President has authorized the release and sale 
of oil from the Strategic Petroleum Reserve. The Department has 
issued the formal notice of sale of an initial 30 million 
barrels of oil yesterday. Bids will be opened on Friday, 
assessed over the weekend, and we should be in a position to 
issue a notice of apparently successful offerers by Monday, 
September 12. Oil will flow from that release and sale as soon 
as the winning bidders provide for the oil's transportation.
    Third, the Department has worked with the International 
Energy Agency to coordinate the release of an additional 33 
million barrels of crude oil and refined product from reserves 
of our nations to provide additional supply to global markets.
    Fourth, DOE's Office of Electricity Delivery and Energy 
Reliability began working with other Federal, State and local 
officials, utilities, municipalities, power marketing 
administrations and cooperatives even before the storm struck 
to accelerate the restoration of power. This was important not 
only to the affected populations but the Nation as a whole 
since the refineries and the product pipelines depend on this 
power to deliver gasoline, diesel and other petroleum products 
to demand.
    Fifth, the Environmental Protection Agency issued a 
nationwide waiver to allow the use of winter blend reformulated 
gasoline in stock to increase the flow of refined products to 
consumers. EPA is also allowing the use of diesel fuel with 
sulfur content exceeding the 500 parts per million limitation.
    Sixth, the Department of Homeland Security temporarily 
waived Jones Act restrictions on transportation fuel supplies 
by tanker.
    Seventh, the Treasury Department announced that off-road 
diesel would be permitted for road use to bring more diesel 
into the market during this emergency.
    Eighth, the Department of Transportation waived the 
restriction on hours that can be driven by truckers to keep 
goods and services and products, including energy, moving.
    Ninth, the President and the Secretary have repeated their 
calls for all Americans to use energy wisely. Energy efficient 
practices, exercised by millions of American consumers, can 
have a substantial impact.
    Tenth, the Navy and Coast Guard are surveying and, as 
necessary, clearing shipping channels of sunken obstructions 
that would affect gasoline or crude shipments.
    While we still face a difficult situation, there are 
encouraging developments. Four hundred thousand barrels of the 
lost production in the gulf have already been restored. The 
latest assessments from the Department of the Interior suggest 
that 99 percent of prior platform production will eventually be 
restored.
    Of the 10 refineries that were completely shut down, we 
expect four to be operational within the next week or so. Of 
the six that went to reduced runs, all are expected to be fully 
operational by tomorrow. I am informed that five more that were 
undamaged are now receiving supplies of oil from the Strategic 
Petroleum Reserve. Of the 2 million barrel a day of refining 
capacity lost, roughly half that capacity is now back on line.
    Meanwhile, we understand that over 20 tankers carrying 
gasoline are currently en route to the United States from 
Europe. I am also informed that, as of this morning, power has 
been restored to over 1.8 million households of the 2.7 million 
households without power at peak impact. We are most grateful 
for the work of thousands of utility crews working nearly 
nonstop, many of whom who have been sleeping in their trucks 
while they have not been working to restore power.
    Also of good news for all consumers around the Nation is 
the fact that all three of the major pipelines are back in 
service at full or nearly full capacity far sooner than most 
observers had predicted. In the near term, we need to get these 
production and refining facilities back on line while 
encouraging Americans to use energy wisely.
    Again, millions of American consumers can have an impact by 
doing simple things such as consolidating trips, keeping their 
vehicles in tune, keeping tires at their proper inflation and 
by driving more slowly and smoothly.
    In the longer term, new supplies of petroleum and 
alternatives to petroleum, including hydrogen fuel as the 
President proposed back in January, 2003, along with provisions 
of the just-passed energy bill can help us overcome these 
challenges.
    I would be pleased to answer any questions the committee 
might have either today or in the future. Thank you, Mr. 
Chairman.
    [The prepared statement of Hon. David Garman follows:]

Prepared Statement of Hon. David Garman, Undersecretary, Department of 
                                 Energy

    Mr. Chairman and Members of the Committee, thank you for the 
invitation to appear this morning on the subject of Hurricane Katrina 
and its effect on energy supply and prices.
    Let me start by saying this is a tragedy of monumental proportions. 
Hurricane Katrina is one of the worst national disasters in our 
nation's history.
    It has been responsible for an unknown number of deaths--possibly 
in the many thousands.
    And for those who survived, it has utterly destroyed homes, 
schools, businesses and livelihoods. For them, it will be years before 
life returns to normal--if it ever can.
    It is also the largest single disaster impacting the energy 
infrastructure of this country.
    At the Department of Energy, our focus is on two aspects of the 
events in the Gulf of Mexico.
    First, obviously, we are concerned about the direct impact of the 
storm on the residents of Louisiana, Mississippi, Alabama, Florida and 
other affected states.
    And because the Gulf Coast plays such a critical role in supplying 
much of the nation's energy needs, we are also concerned about the 
hurricane's broader effect on the country as a who le and on 
international markets.
    I want you to know at the outset that Secretary Bodman has 
committed the Department of Energy to doing everything in its power to 
meet the immediate needs of those affected by Hurricane Katrina--both 
on the Gulf Coast and throughout the rest of the country--and we have 
marshaled all of our resources to fulfill that commitment.
    Within the last week, the Department of Energy dispatched employees 
to emergency response centers throughout the southeastern United States 
to coordinate power restoration efforts. DOE staff are working closely 
with state and local officials, first responders, and power companies 
to begin restoring power and fuel supplies as quickly as possible, 
wherever possible.
    In the immediate aftermath of Katrina, upwards of 2.7 million 
customers were without electric power in Louisiana, Mississippi, 
Alabama, Florida, Georgia, and Tennessee. One week ago, for instance, 
more than 90 percent of the residents in the state of Mississippi had 
no electricity--including those hundreds of miles from where the 
hurricane made landfall.
    Power has been restored in many of these areas. As of 11 a.m. 
yesterday, fewer than a million customers remained without electric 
power due to Hurricane Katrina. In Louisiana and Mississippi, 971,360 
were without power. Alabama has essentially restored all customers 
without electric power.
    In some places--and not just New Orleans--it may be weeks, perhaps 
months, before power can be restored. In Biloxi, Gulfport, and 
elsewhere on the Coast, the electricity infrastructure of transmission, 
substations, and distribution has been damaged or destroyed. Those 
capabilities must be restored and rebuilt, and this cannot be done 
overnight. The publicly owned municipal and cooperative utilities in 
these states, with the help of other utilities and contractors from 
many states, are undertaking the massive job of restoring the system. 
But it will take time.
    A number of challenges are hindering this effort. One is just the 
massive scope of the destruction, as we have all seen on television. 
Not to minimize the suffering caused by the hurricanes that battered 
Florida last year, but Hurricane Katrina's devastation is in an 
entirely different category. Upon seeing what Katrina had wrought on 
the Mississippi coast, Governor Barbour remarked that it is what 
Hiroshima must have looked like 60 years ago. I don't think anyone 
could accuse the Governor of hyperbole.
    On top of the sheer devastation caused by the storm as it passed 
through, the subsequent flooding in New Orleans, Mobile, and elsewhere 
adds further huge complications.
    Well over 10,000 crews have arrived throughout the affected region 
to work on electricity restoration. As they finish their work in 
certain places, they move on to the next ones. As Florida utilities 
have completed their work, crews from these companies and their 
contractors have moved to the Gulf Coast to support restoration work. 
Crews have come from many states and Canada to support utility 
restoration.
    But this is a massive area we are talking about, and a number of 
factors are slowing progress. At this point inaccessibility and the 
extensive damage from flooding and saltwater are the biggest 
challenges. We have heard from Entergy that its single biggest problem 
to restoring power in the greater New Orleans area is the lack of food 
and water for its repair crews, who have literally been sleeping in 
their trucks.
    The affected states face a massive challenge, but we will work with 
state and local leaders, with utilities and power companies, and with 
anyone else to try to restore power wherever possible as quickly as 
possible.
    While the Department works with people on the ground to restore 
power, we are also monitoring the effects of the storm on the nation's 
energy markets.
    Nine refineries that supply nearly 10 percent of the nation's 
gasoline were shuttered by the storm.
    Thousands of energy industry workers in the Gulf Coast had to be 
evacuated.
    Oil and Gas production rigs and other infrastructure were damaged.
    The pipelines supplying Gulf Coast gasoline and natural gas to the 
Midwest and Eastern part of the country were affected, as well. 
However, damage was not as severe as we at first had feared.
    One week after the storm, these are back at full or near full 
capacity. Meanwhile, 95 percent of the nation's refining capacity 
should be operating by mid-September.
    Despite this news, it is not clear how long it will be before 
energy production and distribution in the Gulf is back to normal.
    The Department of Energy and the Bush Administration are very 
concerned about the effects of this disaster on already tight markets.
    And we are concerned about the impact of higher gasoline prices on 
the average American.
    Accordingly, we have taken a number of steps to try to alleviate 
the situation. Last week, the Department of Energy entered into 
separate agreements with several energy companies to loan more than 12 
million barrels of oil from the Strategic Petroleum Reserve in order to 
limit disruptions in crude supplies for refineries.
    The crude oil will be loaned from the SPR under short-term 
contractual agreements and returned to the Reserve once supply 
conditions return to normal.
    I want to point out we have taken very quick action in this regard. 
Oil was on the way to refineries within 48 hours of loan requests being 
made.
    Further, in the aftermath of the storm, we outlined the impact on 
our energy sector for the members of the International Energy Agency to 
determine whether it was necessary to supply additional crude oil and 
gasoline products to the market. On Friday, the members of the IEA made 
a historic decision to provide crude oil from each member's strategic 
reserves.
    Under this agreement, IEA member countries have agreed to make 
available 60 million barrels, or an average of 2 million barrels per 
day, for 30 days beginning immediately. This will consist of both oil 
and gasoline, with an emphasis on refined product.
    The United States is a member of the International Energy Agency, 
of course, so to meet our obligations as a member of the IEA, we will 
be releasing 30 million barrels of crude oil from the United States 
Strategic Petroleum Reserve.
    In addition to these efforts, I want to add that the Environmental 
Protection Agency has granted a nationwide waiver for fuel blends to 
make more gasoline and diesel fuel available throughout the country. 
The EPA action will permit the early use of wintertime gasoline blends 
and, we expect, will take some pressure off the price of gas.
    On top of this, I want to point out that the President has made an 
appeal to the American people to conserve gasoline during this time of 
tightened supply. There are a number of things that people can do to 
reduce their use of gasoline, such as carpooling, driving slower, 
bundling errands together to make fewer trips, and telecommuting.
    One final point I want to make concerns the anecdotal reports all 
of us have heard about price gouging in various parts of the country in 
the days after Katrina hit. Our Department and our Administration take 
the subject of excessive pricing very seriously. It is unconscionable 
that Americans would seek to exploit a tragedy for profit.
    DOE has established a web site where Americans can report gasoline 
price gouging. All complaints registered with the Department of Energy 
will be collected and transmitted to the Federal Trade Commission, U.S. 
Department of Justice, and individual State Attorneys General for 
investigation and prosecution where appropriate.
    Chairman Barton--members of the Committee--I want to thank you for 
the opportunity to come before you this morning to apprise you of our 
Department's efforts in the wake of Hurricane Katrina.
    I would be happy to respond to any questions you and the other 
members may have.

    Chairman Barton. We thank you, Mr. Secretary.
    We now want to hear from the Honorable Guy Caruso, who is 
the Administrator of the Energy Information Administration.
    Welcome, Administrator Caruso. You are recognized for 7 
minutes, also.

                 STATEMENT OF HON. GUY F. CARUSO

    Mr. Caruso. Thank you very much, Mr. Chairman, for this 
opportunity to present the Energy Information Administration's 
views and analysis of energy markets in the aftermath of 
Katrina.
    As you know, EIA is the independent statistical and 
analytical agency in the Department of Energy; and we do not 
promote, formulate or take positions on policy issues.
    As the Chairman has mentioned, even before the tragic 
hurricane, crude oil and gasoline prices were already at high 
levels. On August 29, average gasoline prices were $2.61 per 
gallon, and diesel prices were $2.59 per gallon. Crude oil 
prices on the futures market had increased by nearly 60 percent 
over the same period compared with last year, due in large part 
to substantial growth in world oil demand, which has used up 
much of the world's productive capacity. Refineries have been 
running at high levels of utilization in many parts of the 
world, including the United States; and the high production of 
distillate fuels and higher-than-average refinery outages this 
summer added to the tight gasoline markets. Natural gas markets 
were also tight on the eve of the hurricane and futures prices 
were $10.85 per million Btus or more than double year earlier 
levels.
    Hurricane Katrina has had a significant impact, 
particularly on gasoline, diesel fuel and natural gas prices. 
For example, EIA's survey data released yesterday showed that 
the national average price of regular gasoline prices rose 46 
cents per gallon, to $3.07, between August 29 and Labor Day, 
while diesel prices rose 31 cents, to $2.90 per gallon. While 
prices rose throughout the country, the East Coast experienced 
the largest price increase in both fuels.
    The near-term outlook for the oil and gas markets will 
depend on a number of factors, most importantly the timing and 
pace of the recovery of the infrastructure and operations in 
the Gulf.
    Production of both oil and natural gas in the Gulf of 
Mexico has already recovered substantially from the peak 
impacts, as Mr. Garman has pointed out in his statement.
    The infrastructure has been coming back more quickly than 
many had expected, as Mr. Garman has mentioned, and, 
fortunately for natural gas markets, we are in the shoulder 
season, between the period of high demand for electricity 
generation for air conditioning and the high demand for heating 
fuel.
    The level of natural gas in storage remains above the 5-
year average, but the disruption in operations due to Katrina 
is likely to reduce the amount put in storage during the 
remainder of the injection season.
    Today, we released our September Short-Term Energy Outlook; 
and, as you can imagine, the uncertainty in this outlook, which 
goes out to the remainder of 2006, is greater than ever. 
Nevertheless, we consider three cases in this current outlook 
based on the speed of recovery from the effects of Hurricane 
Katrina. We include in that report a slow, a medium, and a fast 
recovery case. The fast recovery case assumes a very favorable 
set of circumstances for returning operations to normal, while 
the slow recovery case assumes that significant impacts on oil 
and natural gas production and delivery continue at least into 
November. In all cases, normal operations are achieved or 
nearly achieved by December. We assume that the loans and 
releases of crude oil and products from Government stocks will 
help to offset the price increases due to Katrina.
    The WTI crude oil price averaged $65 per barrel in August 
and reached $70 in peak trading last week. Crude oil prices 
have retreated from those heights in recent days, and we expect 
they will trend downward in the fourth quarter of 2005, 
although staying above $60 for the remainder of the year and 
into 2006.
    The national average price of unleaded gasoline was $2.49 
per gallon in August, with prices generally rising throughout 
the month. Projected gasoline prices in the near term are very 
sensitive to the assumptions that I have mentioned in the three 
cases. Gasoline prices, however, should ease in the coming 
weeks as supply improves. We project $2.60 per gallon gasoline 
in the fourth quarter and an average price for 2006 of $2.40.
    The heating oil prices, however, will show a substantial 
increase this winter compared with last year. Assuming normal 
winter weather, heating oil prices are expected to be about 30 
percent higher this winter compared with last winter in the 
medium recovery case. Of course, this assumes a normal winter.
    Natural gas prices probably will be impacted even more than 
heating oil and are likely to stay tight over the next couple 
of months as the heating season begins. We anticipate the 
September spot price for natural gas to average about $13 
dollars per million Btus and about $11.50 per million Btus in 
the fourth quarter. Based on the present trends, natural gas 
price this winter are expected to be significantly higher than 
last winter.
    In sum, Mr. Chairman, the impact of Katrina on energy 
prices has been to make a tight market situation for oil and 
natural gas even more challenging for the industry and for 
consumers.
    This concludes my statement. I would be happy to answer any 
questions now or at any time that you deem appropriate, sir.
    [The prepared statement of Hon. Guy Caruso follows:]

     Prepared Statement of Hon. Guy Caruso, Administrator, Energy 
         Information Administration, U.S. Department of Energy

    Mr. Chairman and Members of the Committee: I appreciate the 
opportunity to appear before you today to discuss gasoline prices in 
the United States and recent developments in world oil markets.
    The Energy Information Administration (EIA) is the independent 
statistical and analytical agency within the Department of Energy. We 
are charged with providing objective, timely, and relevant data, 
analysis, and projections for the Department of Energy, other 
government agencies, the U.S. Congress, and the public. We do not take 
positions on policy issues, but we do produce data and analysis reports 
that are meant to assist policymakers determine energy policy. Because 
the Department of Energy Organization Act gives EIA an element of 
independence with respect to the analyses that we conduct and publish, 
our views should not be construed as representing those of the 
Department of Energy or the Administration.
    The devastation of Hurricane Katrina included offshore production, 
refineries, and loss of power to run pipelines and otherwise-working 
refineries. Damage assessments are ongoing but still incomplete. With 
the current tight global petroleum market, gasoline and distillate 
prices have risen sharply. How far and how long they remain elevated 
will depend on the severity of damage to petroleum facilities. Our 
understanding of the situation is rapidly evolving, and I will discuss 
this in my oral remarks. This written testimony focuses on events prior 
to the hurricane and challenges to gasoline markets following the 
recovery.
    Even prior to Hurricane Katrina, petroleum prices, including 
gasoline, were setting new records as crude oil prices climbed. 
Gasoline prices as of August 29 were $2.61, which was 73 cents per 
gallon higher than a year ago, and, on average for the month, were 58 
cents per gallon higher. Yesterday's prices, which will be released 
late this afternoon, will undoubtedly be--much higher given the 
significant disruptions experienced due to Hurricane Katrina. A 
consumer who drives about 1,000 miles per month in a car that gets 
about 20 miles per gallon paid almost $30 more for that car's fuel 
during August this year than last August. Businesses and government 
budgets are also affected, as it costs more to fill their vehicle 
fleets.
    The remainder of this testimony describes the fundamentals 
affecting petroleum prices, focusing on crude oil and gasoline. The 
underlying market situation today, even before Katrina, is one in which 
the spare crude oil production, refinery, and tanker capacities that 
existed for more than a decade prior to 2003 were reduced more quickly 
than EIA or other analysts anticipated. Little spare capacity, both 
upstream and downstream, not only supports higher prices, but they also 
add to price volatility, since any upset to supply/demand balances 
regionally cannot be resolved quickly. Restoring spare capacity will 
not be easy or rapid, because an increase in capacity takes time and 
investment, and growing demand will require capacity increases just to 
maintain current cushions, which suggests that high prices and 
potential volatility will be with us for some time.
    Changes in the gasoline price at the pump are driven mainly by 
changes in crude oil prices and changes in wholesale gasoline prices. 
Crude oil cost represented nearly 60 percent of the gasoline price this 
summer and explains much of the variation in gasoline price. Crude oil 
prices are driven and set by international markets. The wholesale price 
of gasoline or its spot price is influenced first by crude oil but also 
by seasonal demand variations and by regional refinery and distribution 
supply and demand balances. Retail price changes generally lag behind 
wholesale price changes.

                    INTERNATIONAL CRUDE OIL MARKETS

    Turning to crude oil prices first, Figure 1 shows that the current 
crude price increase began in 2004, when crude oil prices almost 
doubled from 2003 levels, rising from about $30 per barrel at the end 
of 2003 to peak at $56.37 on October 26, 2004. After falling back 
briefly, prices then continued to rise in 2005.
    This is a significant change from what we experienced during much 
of the 1980s and 1990s. For most of the time since the early 1980s, we 
have lived in a market in which spare crude oil production, refining, 
and delivery system capacity existed. Crude oil suppliers outside of 
the Organization of Petroleum Exporting Countries (OPEC) produce at 
maximum rates (i.e., no surplus production capacity) for economic 
reasons, thus, the world's surplus crude oil production capacity 
resides in OPEC (mainly Saudi Arabia). The large growth in non-OPEC 
capacity and production in areas like the North Sea and Alaskan North 
Slope, along with softening demand from high prices, led to major cuts 
in OPEC production in the 1980s, creating large capacity surpluses. As 
demand grew through the 1990s, OPEC production increased, but new 
productive capacity was not added. Short-term imbalances between supply 
and demand occurred and we experienced some price swings, but those 
imbalances did not last long, as capacity generally existed to remedy 
the situation within a year.
    During most of the 1990s, the West Texas Intermediate (WTI) crude 
oil price averaged close to $20 per barrel, but plunged to almost $10 
per barrel in late 1998 as a result of the Asian financial crisis 
slowing demand growth, at the same time as extra supply from Iraq was 
entering the market for the first time since the Gulf War. OPEC 
producers reacted by reducing production, and crude oil prices not only 
recovered, but increased to about $30 per barrel as demand grew in the 
face of OPEC production discipline.
    Beginning in 2004, world oil demand growth accelerated 
significantly. For the 10 years prior to 2004, world oil demand growth 
had averaged 1.2 million barrels per day. But in 2004, world demand 
jumped by 2.6 million barrels per day, led by an unprecedented increase 
in demand from China of about 1 million barrels per day, compared to 
that country's increase of 0.4 million barrels from 2002 to 2003. This 
unusually rapid demand growth along with growth in the United States 
and the rest of the world, quickly used up much of OPEC's available 
surplus crude oil production capacity (Figure 2). As the world balance 
between supply and demand tightened considerably, ongoing supply 
uncertainties associated with Russia, Iraq, and Nigeria added to market 
concerns over the availability of crude oil, and prices rose. In 2005, 
Iran, Ecuador, and Venezuela added new uncertainties.
    Global oil demand is expected to grow more slowly during 2005 and 
2006, increasing by about 1.7 to 1.8 million barrels per day. China's 
demand is projected to increase by 0.5 million barrels per day and U.S. 
demand by 0.4 million barrels per day in 2006. Together, these two 
areas are projected to account for about 50 percent of the world's 
petroleum demand growth next year.
    Crude oil production capacity increases are expected to keep up 
with these demand increases. Production increases from OPEC members are 
projected to represent almost one-third of the world production growth 
next year, and the former Soviet Union is expected to provide an 
additional 40 percent of the increase. Other areas such as the United 
States and other non-OPEC countries will provide additional production 
volumes. However, EIA is not projecting much increase in the surplus 
capacity cushion any time soon. Spare capacity is projected to remain 
at or below 1.2 million barrels per day in 2005.
    We are facing tight crude oil markets for a number of years. EIA's 
Short-Term Energy Outlook is projecting WTI crude oil prices to remain 
above $55 through 2006. Even if demand softens or capacity is developed 
faster than anticipated, statements from OPEC members indicate an 
intention to keep prices from falling below $50 per barrel. While high 
relative to recent years, the price of crude oil, adjusted for 
inflation, is still below the levels seen in the early 1980s.
    This tight balance results in different behavior and price 
implications than exhibited by the short-term market imbalances seen 
for the past 20 years. Instead of high prices being accompanied by low 
inventories and expectations for prices to be falling quickly in the 
future, today, in both crude oil and product markets, we see high 
prices with high inventories. Consumers exhibit similar behavior when 
they expect to experience higher prices in the near future. For 
example, consumers top off their gasoline tanks before a bad storm that 
could limit supplies and drive prices up in their region.
    Prior to Hurricane Katrina, crude oil prices increased about 39 
cents per gallon in summer 2005 over summer 2004, while gasoline prices 
only increased 34 cents per gallon (Figure 3). Although refinery and 
distribution and marketing contributions to gasoline prices were on 
average lower this summer on average than last summer, seasonal and 
local supply conditions affected these refinery contributions to price 
gasoline more strongly at the end of the summer, as described next.

                          U.S. PRODUCT MARKETS

    Tightening in other parts of the supply chain beyond crude oil 
exacerbated product price increases in the United States and in the 
rest of the world. World refining capacity utilization increased from 
85 percent to 87 percent from 2003 to 2004, driven in large part by 
increases in demand and utilization in areas like China and India. 
While adequate refining capacity is available to meet demand today, the 
refining system cannot shift quickly to meet unexpected needs. With 
refinery capacity running at high utilization levels in many parts of 
the world, including the United States, product balancing is frequently 
done through international trade, which means products must travel long 
distances, stretching out the time it takes to resolve imbalances. This 
sluggish response puts additional pressure on product prices beyond the 
effect of high crude oil prices and can result in price spikes if a 
regional shortage evolves.
    Product markets in the United States provide an example of various 
supply and demand balancing effects on price. In the United States, the 
spread between wholesale product prices and crude oil prices is often 
higher in spring and summer than during the rest of the year. Gasoline 
is the highest volume product refineries produce, and spring and summer 
are when gasoline demand is typically the highest. Gasoline spreads 
typically increase at this time of year, lifting overall refinery 
margins to their highest seasonal level. Distillate product (diesel and 
heating oil) spreads are usually lower in spring and summer, but they 
represent only about half as much volume as gasoline production.
    U.S. petroleum product price spreads were very unusual in spring 
and summer 2005. Wholesale gasoline price spreads through July were 
slightly above the average for the past 5 years, but lower than spreads 
seen in 2004. Heating oil and diesel spreads were unprecedented, 
exceeding gasoline spreads from April through July. This unusual 
distillate market was seen throughout the world as distillate demand 
grew rapidly and ultra-low sulfur diesel demand in Europe pulled on 
tight supplies. Distillate prices remained above gasoline prices in 
Europe as well as Asia. This unusual distillate market ultimately 
affected gasoline.
    Gasoline and distillate products are produced together at the same 
refineries. In the spring, the U.S. inventories for gasoline were high 
and prices were lower than for distillates. Distillate inventories were 
low, and the price incentives caused refiners to respond by producing 
unusually high yields of distillate, which resulted in reduced gasoline 
yields. The consequence was that U.S. distillate inventories rose from 
below normal to above normal, and gasoline inventories fell from above 
normal to normal into July.
    In addition to the switch in yield patterns, unplanned refinery 
outages in July and August added to the tightening gasoline market. The 
high demand summer season is when U.S refiners run close to or at full 
utilization rates, but outages always occur. The degree of outages 
varies, and preliminary data indicate a higher level than average 
occurred in July and August of this year. Had refineries been able to 
run at the same utilizations as last year, they would have run about 
200 thousand barrels per day more crude oil, and the gasoline 
inventories in the July/August period would now be in the middle of 
their seasonal range, even with the higher-than-usual distillate 
yields.
    The loss of supply and rapid decline in gasoline inventories 
starting in July resulted in an increase in gasoline price spreads 
(Figure 4). Higher gasoline spreads encourage more gasoline imports, 
and some refiners may have shifted yields to produce more gasoline, but 
with the peak summer driving season at an end, and winter heating needs 
ahead, we would expect a continued focus on maximizing production of 
distillates.
    The high level of refinery outages in July and August increased 
pressure on gasoline prices, adding possibly 8 to 15 cents per gallon. 
Wholesale prices were poised to decline as some of the refinery 
problems were being resolved, but then the Gulf Coast was hit by 
Hurricane Katrina. Both spot market prices and near-month futures 
prices for gasoline and distillate products have risen dramatically in 
the days following the hurricane. Retail prices, which follow wholesale 
prices with a lag, are also rising. We expect that prices will begin to 
fall back as production and refining capacity are restored, although 
the pace of restoration is at present highly uncertain. While the 
gasoline price and supply situation will also be helped by the seasonal 
decline in U.S. gasoline demand after Labor Day, seasonal trends in 
crude oil markets will work in the opposite direction as world crude 
oil demand begins to increase in the fall with the onset of the 
Northern Hemisphere heating season.
    Looking ahead to next summer, high crude oil prices are expected to 
continue to support high prices for all petroleum products, including 
gasoline. In addition, gasoline prices may see some additional pressure 
since the industry is moving quickly to eliminate methyl tertiary butyl 
ether (MTBE). While the removal of the oxygen content requirement in 
the recently-enacted Energy Policy Act of 2005, without some 
accompanying liability protection, may have hastened companies' 
decisions to remove MTBE, companies were moving in that direction 
anyway. Removing the oxygen content requirement will help consumers in 
the long run by providing more supply options for refiners and 
blenders. In the short run, however, the loss of gasoline production 
capability and some potential sources of gasoline imports that will 
occur when phasing out MTBE cannot be made up easily. The distribution 
system will also have to adjust, depending on how the industry shifts. 
The result is that we may see increased volatility during the 
transition, as we have seen with other fuel specification transitions.
    In addition to potential supply problems due to removal of MTBE, 
the United States will begin the ultra-low sulfur diesel program. In 
June 2006, suppliers will begin providing diesel fuel to the on-road 
market that contains less than 15 parts per million sulfur. Following a 
full recovery from Katrina, production capability to produce ultra-low 
sulfur diesel is felt to be adequate, but the industry is still 
struggling to determine how to deliver the product through its pipeline 
and storage tank system without contamination. Many issues remain to be 
resolved, implying this transition may also add pressure to the system, 
and can be expected to affect gasoline as well as distillate prices.
    Next year is also the first year of the renewable fuel standard 
established under the new energy bill, and while meeting the total 
volumes of ethanol required under this standard should not be 
difficult, a credit trading program must be in place and operating 
smoothly to enable each gasoline supplier to meet its obligation. It is 
our understanding that Environmental Protection Agency (EPA) and the 
industry are working towards this goal, but little time exists for EPA 
and the industry to get everything prepared.
    One more specification change slated for 2006 is the final phase of 
the Tier 2 low-sulfur gasoline program for refiners and importers, who 
will be providing gasoline with an average sulfur content of 30 parts 
per million or less, which is less than one-tenth the average sulfur 
content before the program began. With many refiners already producing 
gasoline at 30 parts per million, this last phase may be less 
challenging than the removal of MTBE and the start of ultra-low sulfur 
diesel. It is one more additional strain on the supply system, however. 
For example, if a refinery loses a desulfurization unit, the stricter 
specifications may result in no production of gasoline, whereas, in the 
past, the refinery might have been able to produce more volumes at 
higher sulfur levels for a longer time.

                               CONCLUSION

    In conclusion, the world is experiencing an underlying change in 
petroleum markets with the development of tight supplies that will not 
likely change quickly. Hurricane Katrina has significantly exacerbated 
the near-term supply tightness, especially in the U.S. market for 
gasoline and diesel fuel. Even after production and refinery operations 
fully recover from the effects of Katrina, capacity increases will be 
needed throughout the supply chain to keep up with demand. Until the 
world returns to more spare capacity, particularly in crude oil supply, 
crude oil and petroleum product prices will remain high. Even if the 
balance should relax unexpectedly, OPEC members have expressed an 
interest to maintain prices well above their prior target range. While 
the system currently can meet demand, it cannot respond quickly to 
unexpected changes. We will see shifts in imbalances from one region of 
the world to another and from one product to another, as we saw with 
gasoline and distillate in the United States. The gasoline market in 
the United States is subject not only to the higher crude oil prices 
and generally tight market conditions, but also to volatility from 
continuing specification changes down the road, with next summer 
presenting a number of such specification challenges.
    This completes my testimony, Mr. Chairman. I would be glad to 
respond to any questions you and the other Committee members may have.

[GRAPHIC] [TIFF OMITTED] T4246.001

[GRAPHIC] [TIFF OMITTED] T4246.002

    Chairman Barton. Thank you, Mr. Director.
    We now want to hear Mr. John Seesel, who is the Associate 
General Counsel for Energy at the Federal Trade Commission.
    Welcome, Mr. Seesel; and you are recognized for 7 minutes.

                   STATEMENT OF JOHN H. SEESEL

    Mr. Seesel. Thank you, Mr. Chairman.
    Good afternoon, Mr. Chairman and members of the committee. 
I am John Seesel, the Associate General Counsel for Energy at 
the Federal Trade Commission. I am pleased to have this 
opportunity to discuss the FTC's actions to promote competition 
in the petroleum industry and to protect consumers who use 
gasoline, diesel fuel and the other petroleum products so vital 
to our Nation's economy.
    The Nation, indeed the world, continues to witness the 
heart-rending destruction and misery that Hurricane Katrina 
left in its wake. The Commission mourns the loss of life and 
the many other tragedies that have unfolded in the past 10 days 
in the States along the gulf coast.
    Today's hearing focuses on one of Katrina's most important 
economic consequences, the storm's impact on the Nation's 
gasoline supply and on gasoline prices. I want to assure this 
committee that the FTC is acutely aware of the pain that high 
gasoline prices that we have experienced recently has caused 
American families and businesses, and we are continuing our 
intense scrutiny of conduct in the petroleum industry in the 
aftermath of Katrina.
    The FTC will proceed aggressively against any violations of 
the antitrust and consumer protection laws that it enforces. We 
are on high alert.
    The Commission is committed to maintaining competitive 
markets in refined petroleum products. We achieve this 
objective through a three-pronged approach: vigorous law 
enforcement against anti-competitive mergers and business 
behavior, careful study of various developments with 
competitive implications for the petroleum industry, and an 
ongoing project to monitor gasoline and diesel prices in order 
to detect unusual price movements.
    A significant recent development in the FTC's law 
enforcement program is the issuance of dual consent orders in 
late July designed to remedy the anti-competitive effects of 
Unocal's allegedly deceptive conduct in connection with the 
development of reformulated gasoline in California, as well as 
the alleged anti-competitive effects that were anticipated from 
Chevron's acquisition of Unocal.
    The Commission's first complaint alleged that Unocal had 
deceived the California Air Resources Board, CARB for short, in 
developing standards for reformulated gasoline. The Commission 
challenged Unocal's misrepresentation that certain technology 
was in the public domain while it pursued patents on that 
technology to enable it to charge substantial royalties. The 
proposed merger between Chevron and Unocal raised the concern 
that if Chevron had acquired Unocal's patents, Chevron could 
have obtained sensitive information and thus could have used 
this information and power to facilitate coordination among 
competitors to raise gasoline prices.
    The two consent orders embodying Chevron's commitment not 
to enforce the Unocal patents provided a significant victory 
for consumers. The Commission has estimated that the main 
relief provided by these orders could save California gasoline 
consumers around $500 million dollars per year. The FTC will 
continue its energetic enforcement of the antitrust laws 
against collusive and monopolistic practices in this country.
    In aid of its extensive law enforcement work, the FTC also 
conducts careful research on key competitive issues in the 
petroleum industry. I especially commend our recent report on 
gasoline price changes to the committee's attention. The report 
sets forth in detail the numerous supply, demand and 
competitive factors that influence gasoline prices or cause 
gasoline price spikes.
    The report shows that the market for gasoline functions as 
any other market is expected to when supply is significantly 
constrained and demand keeps rising. As important, the report 
also shows that market forces in the form of changes in how 
much gasoline can producers supply and consumers demand can 
ameliorate price increases.
    A related FTC study issued last year was our staff report 
on mergers, structural change and antitrust enforcement in the 
petroleum industry over the last 20 years.
    The third prong of our approach is a continuous effort by 
our staff to identify unusual gasoline and diesel price 
movements. Our economists monitor daily pricing data from 20 
wholesale and approximately 360 retail areas across the Nation. 
If the statistical model that they apply detects any unusual 
price movement that cannot be explained by refinery outage, a 
pipeline break or another business related cause, the FTC 
staff, in consultation with other Federal and State officials, 
will examine whether a law violation has occurred.
    The Commission is acutely aware of the escalating prices 
that consumers pay for gasoline, and we will examine any 
information that we receive about pricing to determine whether 
there is a basis for legal action under the anti-collusion and 
anti-monopoly statutes that the FTC enforces. For those 
complaints that are not a violation of Federal law, the State 
attorneys general appear to have begun major multi-State 
initiatives to pursue any such complaint under State statutes.
    The energy industry, especially the petroleum sector, has 
been a centerpiece of FTC antitrust enforcement for decades, 
and the Commission expects to devote substantial resources to 
policing the competitiveness of the industry in this time of 
economic duress for many of our fellow citizens. Moreover, as 
it always does, the Commission will give State and local 
officials as much assistance as it can as those authorities 
carry out their responsibilities.
    Thank you again for the opportunity to present the FTC's 
views, Mr. Chairman. I will be happy to answer any questions.
    [The prepared statement of John H. Seesel follows:]

  Prepared Statement of John H. Seesel, Associate General Counsel for 
                    Energy, Federal Trade Commission

                            I. INTRODUCTION

    Mr. Chairman and members of the Committee, I am John Seesel, the 
Federal Trade Commission's Associate General Counsel for Energy. I am 
pleased to appear before you to present the Commission's testimony on 
FTC initiatives to protect competitive markets in the production, 
distribution, and sale of gasoline, and to discuss an important recent 
Commission study on the factors that affect gasoline prices. 
1
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    \1\ This written statement represents the views of the Federal 
Trade Commission. My oral presentation and responses to questions are 
my own and do not necessarily represent the views of the Commission or 
any Commissioner.
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    The petroleum industry plays a crucial role in our economy. Not 
only do changes in gasoline prices affect consumers directly, but the 
price and availability of gasoline also influence many other economic 
sectors. No other industry's performance is more deeply felt or 
carefully scrutinized.
    Gasoline prices are among the most visible prices in our complex 
economy. Consumers closely follow gasoline prices, and in recent months 
these prices have experienced dramatic increases. In recent weeks, 
prices of gasoline have exceeded $3.00 a gallon in some markets. 
Despite higher prices, demand for gasoline continues to grow, 
increasing at a 1.6 percent rate over the most recent four-week period 
for which data are available (August 19), over that same period for 
last year. Gasoline inventories remain at the lower end of the average 
range. These rising prices command our attention.
    On top of this tight market, Hurricane Katrina has temporarily 
disrupted an important source of crude oil and gasoline supply. At one 
point, over 95 percent of Gulf Coast crude oil production was shut in, 
and numerous refineries and pipelines were either damaged or without 
electricity.2 Because of this massive supply disruption, 
price relief has been and will be delayed.
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    \2\ See Minerals Mgmt. Serv., U.S. Dep't of the Interior, Release 
No. 3328, Hurricane Katrina Evacuation and Production Shut-in 
Statistics Report as of Tuesday, August 30, 2005 (2005), at http://
www.mms.gov/ooc/press/2005/press0830.htm.
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    The FTC has been and remains vigilant regarding anticompetitive 
conduct in this industry. Recent activity includes, on June 10, 2005, 
the acceptance of two consent orders that resolved the competitive 
concerns relating to Chevron's acquisition of Unocal and settled the 
FTC's 2003 monopolization complaint against Unocal. The Unocal 
settlement alone has the potential of saving billions of dollars for 
consumers nationwide in future years. In addition, in early July 2005, 
the Commission published its study of the factors that affect gasoline 
prices.3 This study grew out of conferences of industry, 
consumer, academic, and government participants held by the Commission 
over the past four years, as well as years of research and experience, 
and sheds light on how gasoline prices are set.
---------------------------------------------------------------------------
    \3\ Federal Trade Commission, Gasoline Price Changes: The Dynamic 
of Supply, Demand, and Competition (2005) [hereinafter Gasoline Price 
Changes], available at http://www.ftc.gov/reports/gasprices05/
050705gaspricesrpt.pdf.
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    In 2004, the FTC staff published a study reviewing the petroleum 
industry's mergers and structural changes as well as the antitrust 
enforcement actions the FTC has taken.4 Commission 
enforcement statistics show that the agency has taken action against 
proposed mergers in this industry at concentration levels lower than in 
other industries. Since 1981, the FTC has filed complaints against 19 
large petroleum mergers. In 13 of these cases, the FTC obtained 
significant divestitures. Of the six other matters, the parties in four 
cases abandoned the transactions altogether after our respective 
antitrust challenges; one case resulted in a remedy requiring the 
acquiring firm to provide the Commission with advance notice of its 
intent to acquire or merge with another entity; and the sixth case is 
ongoing.
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    \4\ Bureau of Economics, Federal Trade Commission, The Petroleum 
Industry: Mergers, Structural Change, and Antitrust Enforcement (2004) 
[hereinafter Petroleum Merger Report], available at http://www.ftc.gov/
os/2004/08/040813mergersinpetrolberpt.pdf.
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    In addition to litigation and industry studies, the Commission also 
protects consumers through other initiatives. The Commission actively 
monitors wholesale and retail prices of gasoline.5 Three 
years ago, the FTC launched an initiative to monitor gasoline prices to 
identify ``unusual'' movements in prices 6 and then examine 
whether any such movements might result from anticompetitive conduct 
that violates Section 5 of the FTC Act. FTC economists developed a 
statistical model for identifying such movements. The agency's 
economists daily scrutinize price movements in 20 wholesale and 
approximately 360 retail markets across the country. In no other 
industry does the Commission so closely monitor prices.
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    \5\ See FTC, Oil and Gas Industry Initiatives, at http://
www.ftc.gov/ftc/oilgas/index.html.
    \6\ An ``unusual'' price movement in a given area is a price that 
is significantly out of line with the historical relationship between 
the price of gasoline in that area and the gasoline prices prevailing 
in other areas.
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    This gasoline monitoring and investigation initiative focuses on 
the timely identification of unusual movements in gasoline prices 
(compared to historical trends) to determine if a law enforcement 
investigation is warranted. If the FTC staff detects unusual price 
movements in an area, it researches the possible causes, including 
consultation, if appropriate, with the state Attorneys General, state 
energy agencies, and the Department of Energy's (``DOE'') Energy 
Information Administration. The FTC staff also monitors DOE's gasoline 
price ``hotline'' complaints. If the staff concludes that the unusual 
price movement likely results from a ``natural'' cause (i.e., a cause 
unrelated to anticompetitive conduct), absent other evidence of 
potential anticompetitive conduct, it does not investigate further 
(although it continues to monitor).7 The Commission's 
experience from its past investigations and the current monitoring 
initiative indicate that unusual movements in gasoline prices typically 
have a natural cause. FTC staff further investigates unusual price 
movements that do not appear to be explained by ``natural'' causes to 
determine whether anticompetitive conduct may be a cause. Cooperation 
with state law enforcement officials is an important element of such 
investigations.
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    \7\ Natural causes include movements in crude oil prices, supply 
outages (e.g., from refinery fires or pipeline disruptions), or changes 
in and/or transitions to new fuel requirements imposed by air quality 
standards.
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    The Commission's testimony today addresses the Committee's 
inquiries in two parts. It first reviews the basic tools that the 
Commission uses to promote competition in the petroleum industry: 
challenging potentially anticompetitive mergers, prosecuting nonmerger 
antitrust violations, monitoring industry behavior to detect possible 
anticompetitive conduct, and researching petroleum sector developments. 
This review of the Commission's petroleum industry agenda highlights 
the FTC's contributions to promoting and maintaining competition in the 
industry. The Commission places a premium on careful research, industry 
monitoring, and investigations to understand current petroleum industry 
developments and to identify accurately obstacles to competition, 
whether arising from private behavior or from public policies. The 
petroleum industry's performance is shaped by the interaction of 
extraordinarily complex, fast-changing commercial arrangements and an 
elaborate set of public regulatory commands. A well-informed 
understanding of these factors is essential if FTC actions are to 
benefit consumers.
    The second part of this testimony reviews the learning the 
Commission has derived from its conferences and research and its review 
of recent gasoline price changes. Among other findings, this discussion 
highlights the paramount role that crude oil prices play in determining 
both the levels and the volatility of gasoline prices in the United 
States. Changes in crude oil prices account for approximately 85 
percent of the variability of gasoline prices.8 When crude 
oil prices rise, so do gasoline prices. Crude oil prices are determined 
by supply and demand conditions worldwide. The supply of crude is 
strongly influenced by production levels set by members of the 
Organization of Petroleum Exporting Countries (``OPEC''). Demand has 
increased substantially over the past few years, both in the United 
States and in the developing economies of China and India. When 
worldwide supply and demand conditions result in crude oil prices in 
the range of $70 per barrel, it is not surprising that we see higher 
gasoline prices nationwide.
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    \8\ See Gasoline Price Changes, supra note 3, at 13.
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II. FTC ACTIVITIES TO MAINTAIN AND PROMOTE COMPETITION IN THE PETROLEUM 
                                INDUSTRY

A. Merger Enforcement in the Petroleum Industry
    The Commission has gained much of its antitrust enforcement 
experience in the petroleum industry by analyzing proposed mergers and 
challenging transactions that likely would reduce competition, thus 
resulting in higher prices.9 In 2004, the Commission 
released data on all horizontal merger investigations and enforcement 
actions from 1996 to 2003.10 These data show that the 
Commission has brought more merger cases at lower levels of 
concentration in the petroleum industry than in other industries. 
Unlike in other industries, the Commission has obtained merger relief 
in moderately concentrated petroleum markets.
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    \9\ Section 7 of the Clayton Act prohibits acquisitions where the 
anticompetitive effects may occur ``in any line of commerce or in any 
activity affecting commerce in any section of the country.'' 15 U.S.C. 
 18.
    \10\ Federal Trade Commission Horizontal Merger Investigation Data, 
Fiscal Years 1996-2003 (Feb. 2, 2004), Table 3.1, et seq.; FTC 
Horizontal Merger Investigations Post-Merger HHI and Change in HHI for 
Oil Markets, FY 1996 through FY 2003 (May 27, 2004), available at 
http://www.ftc.gov/opa/2004/05/040527petrolactionsHHIdeltachart.pdf.
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    Several recent merger investigations illustrate the FTC's approach 
to merger analysis in the petroleum industry. The most recently 
completed case involved Chevron's acquisition of the Union Oil Company 
of California (``Unocal''). When the merger investigation began, the 
Commission was in the middle of an ongoing monopolization case against 
Unocal that would have been affected by the merger. Thus, the 
Commission settled both the merger and the monopolization matters with 
separate consent orders that preserved competition in all relevant 
merger markets and obtained complete relief on the monopolization 
claim.11 The nonmerger case is discussed below.
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    \11\ Chevron Corp., FTC Docket No. C-4144 (July 27, 2005) (consent 
order), at http://www.ftc.gov/os/caselist/0510125/050802do0510125.pdf; 
Union Oil Co. of California, FTC Docket No. 9305 (July 27, 2005) 
(consent order), at http://www.ftc.gov/os/adjpro/d9305/050802do.pdf.
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    Another recent merger case that resulted in a divestiture order 
resolved a complaint concerning the acquisition of Kaneb Services and 
Kaneb Pipe Line Partners, companies that engaged in petroleum 
transportation and terminaling in a number of markets, by Valero L.P., 
the largest petroleum terminal operator and second largest operator of 
liquid petroleum pipelines in the United States.12 The 
complaint alleged that the acquisition had the potential to increase 
prices in bulk gasoline and diesel markets.13
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    \12\ Valero L.P., FTC Docket No. C-4141 (June 14, 2005) 
(complaint), at http://www.ftc.gov/os/caselist/0510022/
050615comp0510022.pdf.
    \13\ Id.
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    The FTC's consent order requires the parties to divest assets 
sufficient to maintain premerger competition, including certain Kaneb 
Philadelphia-area terminals, Kaneb's West pipeline system in Colorado's 
Front Range, and Kaneb's Martinez and Richmond terminals in Northern 
California.14 In addition, the order forbids Valero L.P. 
from discriminating in favor of or otherwise preferring its Valero 
Energy affiliate in bulk ethanol terminaling services, and requires 
Valero to maintain customer confidentiality at the Selby and Stockton 
terminals in Northern California. The order succeeds in maintaining 
import possibilities for wholesale customers in Northern California, 
Denver, and greater Philadelphia and precludes the merging parties from 
undertaking an anticompetitive price increase.
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    \14\ Valero L. P., FTC Docket No. C-4141 (July 22, 2005) (consent 
order), at http://www.ftc.gov/os/caselist/0510022/050726do0510022.pdf.
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    Most recently, the Commission filed a complaint on July 27, 2005, 
in federal district court in Hawaii, alleging that Aloha Petroleum's 
proposed acquisition of Trustreet Properties' half interest in an 
import-capable terminal and retail gasoline assets on the island of 
Oahu would reduce the number of gasoline marketers and could lead to 
higher gasoline prices for Hawaii consumers.15 Because this 
matter is currently in litigation, this testimony will not discuss it 
in any more detail.
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    \15\ Aloha Petroleum Ltd., FTC File No. 051 0131 (July 27, 2005) 
(complaint), at http://www.ftc.gov/os/caselist/1510131/
050728comp1510131.pdf .
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    In the past few years, the Commission has brought a number of other 
important merger cases. One of these involved the merger of Chevron and 
Texaco, 16 which combined assets located throughout the 
United States. Following an investigation in which 12 states 
participated, the Commission issued a consent order against the merging 
parties requiring numerous divestitures to maintain competition in 
particular relevant markets, primarily in the western and southern 
United States.17 Among other requirements, the consent order 
compelled Texaco to (a) divest to Shell and/or Saudi Refining, Inc., 
all of its interests in two joint ventures--Equilon 18 and 
Motiva 19--through which Texaco had been competing with 
Chevron in gasoline marketing in the western and southern United 
States; (b) divest all assets relating to the refining, bulk supply, 
and marketing of gasoline satisfying California's environmental quality 
standards; (c) divest assets relating to the refining and bulk supply 
of gasoline and jet fuel in the Pacific Northwest; and (d) divest 
various pipelines used to transport petroleum products.
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    \16\ Chevron Corp., FTC Docket No. C-4023 (Jan. 2, 2002) (consent 
order), at http://www.ftc.gov/os/2002/01/chevronorder.pdf.
    \17\ Id.
    \18\ Shell and Texaco jointly controlled the Equilon venture, whose 
major assets included full or partial ownership in four refineries, 
about 65 terminals, and various pipelines. Equilon marketed gasoline 
through approximately 9,700 branded gas stations nationwide.
    \19\ Motiva, jointly controlled by Texaco, Shell, and Saudi 
Refining, consisted of their eastern and Gulf Coast refining and 
marketing businesses. Its major assets included full or partial 
ownership in four refineries and about 50 terminals, with the 
companies' products marketed through about 14,000 branded gas stations 
nationwide.
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    Another petroleum industry transaction that the Commission 
challenged successfully was the $6 billion merger between Valero Energy 
Corp. (``Valero'') and Ultramar Diamond Shamrock Corp. 
(``Ultramar'').20 Both Valero and Ultramar were leading 
refiners and marketers of gasoline that met the specifications of the 
California Air Resources Board (``CARB'') and were the only significant 
suppliers to independent stations in California. The Commission's 
complaint alleged competitive concerns in both the refining and bulk 
supply of CARB gasoline in two separate geographic markets, the state 
of California and Northern California, and the Commission contended 
that the merger could raise the cost to California consumers by at 
least $150 million annually for every one-cent-per-gallon price 
increase at retail.21 To remedy the alleged violations, the 
consent order settling the case required Valero to divest: (a) an 
Ultramar refinery in Avon, California; (b) all bulk gasoline supply 
contracts associated with that refinery; and (c) 70 Ultramar retail 
stations in Northern California.22
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    \20\ Valero Energy Corp., FTC Docket No. C-4031 (Feb. 19, 2002) 
(consent order), at http://www.ftc.gov/os/2002/02/valerodo.pdf.
    \21\ Valero Energy Corp, FTC. Docket No. C-4031 (Dec. 18, 2001), at 
http://www.ftc.gov/os/2001/12/valerocmp.pdf.
    \22\ Valero Energy Corp., supra note 20.
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    A final example is the Commission's 2002 challenge to the merger of 
Phillips Petroleum Company and Conoco Inc., alleging that the 
transaction would harm competition in the Midwest and Rocky Mountain 
regions of the United States. To resolve that challenge, the Commission 
required the divestiture of: (a) the Phillips refinery in Woods Cross, 
Utah, and all of the Phillips-related marketing assets served by that 
refinery; (b) Conoco's refinery in Commerce City, Colorado (near 
Denver), and all of the Phillips marketing assets in Eastern Colorado; 
and (c) the Phillips light petroleum products terminal in Spokane, 
Washington.23 The Commission's order ensured that 
competition would not be lost and that gasoline prices would not 
increase as a result of the merger.
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    \23\ Conoco Inc. and Phillips Petroleum Corp., FTC Docket No. C-
4058 (Aug. 30, 2002) (Analysis of Proposed Consent Order to Aid Public 
Comment), at http://www.ftc.gov/os/2002/08/conocophillipsan.htm. Not 
all oil industry merger activity raises competitive concerns. For 
example, in 2003, the Commission closed its investigation of Sunoco's 
acquisition of the Coastal Eagle Point refinery in the Philadelphia 
area without requiring relief. The Commission noted that the 
acquisition would have no anticompetitive effects and seemed likely to 
yield substantial efficiencies that would benefit consumers. Sunoco 
Inc./Coastal Eagle Point Oil Co., FTC File No. 031 0139 (Dec. 29, 2003) 
(Statement of the Commission), at http://www.ftc.gov/os/caselist/
0310139/031229stmt0310139.pdf. The FTC also considered the likely 
competitive effects of Phillips Petroleum's proposed acquisition of 
Tosco. After careful scrutiny, the Commission declined to challenge the 
acquisition. A statement issued in connection with the closing of the 
investigation set forth the FTC's reasoning in detail. Phillips 
Petroleum Corp., FTC File No. 011 0095 (Sept. 17, 2001) (Statement of 
the Commission), at http://www.ftc.gov/os/2001/09/phillips
toscostmt.htm.
    Acquisitions of firms operating mainly in oil or natural gas 
exploration and production are unlikely to raise antitrust concerns, 
because that segment of the industry is generally unconcentrated. 
Acquisitions involving firms with de minimis market shares, or with 
production capacity or operations that do not overlap geographically, 
are also unlikely to raise antitrust concerns.
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B. Nonmerger Investigations into Gasoline Pricing
    In addition to scrutinizing mergers, the Commission aggressively 
polices anticompetitive conduct. When it appears that higher prices 
might result from collusive activity or from anticompetitive unilateral 
activity by a firm with market power, the agency investigates to 
determine whether unfair methods of competition have been used. If the 
facts warrant, the Commission challenges the anticompetitive behavior, 
usually by issuing an administrative complaint.
    Several recent petroleum investigations are illustrative. On March 
4, 2003, the Commission issued the administrative complaint referred to 
above, stating that it had reason to believe that Unocal had violated 
Section 5 of the FTC Act.24 The Commission alleged that 
Unocal deceived the California Air Resources Board (``CARB'') in 
connection with regulatory proceedings to develop the reformulated 
gasoline (``RFG'') standards that CARB adopted. Unocal allegedly 
misrepresented that certain technology was non-proprietary and in the 
public domain, while at the same time it pursued patents that would 
enable it to charge substantial royalties if CARB mandated the use of 
Unocal's technology in the refining of CARB-compliant summertime RFG. 
The Commission alleged that, as a result of these activities, Unocal 
illegally acquired monopoly power in the technology market for 
producing the new CARB-compliant summertime RFG, thus undermining 
competition and harming consumers in the downstream product market for 
CARB-compliant summertime RFG in California. The Commission estimated 
that Unocal's enforcement of its patents could potentially result in 
over $500 million of additional consumer costs each year.
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    \24\ Union Oil Co. of California, FTC Docket No. 9305 (Mar. 4, 
2003) (complaint), at http://www.ftc.gov/os/2003/03/unocalcmp.htm.
---------------------------------------------------------------------------
    The proposed merger between Chevron and Unocal raised additional 
concerns. Although Unocal had no horizontal refining or retailing 
overlaps with Chevron, it had claimed the right to collect patent 
royalties from companies that had refining and retailing assets 
(including Chevron). If Chevron had unconditionally inherited these 
patents by acquisition, it would have been in a position to obtain 
sensitive information and to claim royalties from its own horizontal 
downstream competitors. Chevron, the Commission alleged, could have 
used this information and this power to facilitate coordinated 
interaction and detect any deviations.
    The Commission resolved both the Chevron/Unocal merger 
investigation and the monopolization case against Unocal with consent 
orders. The key element in these settlements is Chevron's agreement not 
to enforce the Unocal patents.25 The FTC's settlement of 
these two matters is thus a double victory for California consumers. 
The Commission's monopolization case against Unocal was complex and, 
with possible appeals, could have taken years to resolve, with 
substantial royalties to Unocal--and higher consumer prices--in the 
interim. The settlement provides the full relief sought in the 
monopolization case and also resolves the only competitive issue raised 
by the proposed merger. With the settlement, consumers will benefit 
immediately from the elimination of royalty payments on the Unocal 
patents, and potential merger efficiencies could result in additional 
savings at the pump.
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    \25\ Union Oil Co. of California, supra note 11.
---------------------------------------------------------------------------
    The FTC undertook another major nonmerger investigation during 
1998-2001, examining the major oil refiners' marketing and distribution 
practices in Arizona, California, Nevada, Oregon, and Washington (the 
``Western States'' investigation).26 The agency initiated 
the Western States investigation out of concern that differences in 
gasoline prices in Los Angeles, San Francisco, and San Diego might be 
due partly to anticompetitive activities. The Commission's staff 
examined over 300 boxes of documents, conducted 100 interviews, held 
over 30 investigational hearings, and analyzed a substantial amount of 
pricing data. The investigation uncovered no basis to allege an 
antitrust violation. Specifically, the investigation detected no 
evidence of a horizontal agreement on price or output or the adoption 
of any illegal vertical distribution practice at any level of supply. 
The investigation also found no evidence that any refiner had the 
unilateral ability to raise prices profitably in any market or reduce 
output at the wholesale level. Accordingly, the Commission closed the 
investigation in May 2001.
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    \26\ FTC Press Release, FTC Closes Western States Gasoline 
Investigation (May 7, 2001), available at http://www.ftc.gov/opa/2001/
05/westerngas.htm. In part, this investigation focused on ``zone 
pricing'' and ``redlining.'' See Statement of Commissioners Sheila F. 
Anthony, Orson Swindle and Thomas B. Leary, available at http://
www.ftc.gov/os/2001/05/wsgpiswindle.htm, and Statement of Commissioner 
Mozelle W. Thompson, available at http://www.ftc.gov/os/2001/05/
wsgpithompson.htm, for a more detailed discussion of these practices 
and the Commission's findings. See also Cary A. Deck & Bart J. Wilson, 
Experimental Gasoline Markets, Federal Trade Commission, Bureau of 
Economics Working Paper (Aug. 2003), available at http://www.ftc.gov/
be/workpapers/wp263.pdf, and David W. Meyer & Jeffrey H. Fischer, The 
Economics of Price Zones and Territorial Restrictions in Gasoline 
Marketing, Federal Trade Commission, Bureau of Economics Working Paper 
(Mar. 2004), available at http://www.ftc.gov/be/workpapers/wp271.pdf.
---------------------------------------------------------------------------
    In conducting these and other inquiries, the Commission makes the 
important distinction between short-term and long-term effects. While a 
refinery outage on the West Coast could significantly affect short-term 
prices, the FTC did not find that it would be profitable in the long 
run for a refiner to restrict its output to raise the level of prices 
in the market. For example, absent planned maintenance or unplanned 
outages, refineries on the West Coast (and in the rest of the country) 
generally run at full (or nearly full) capacity. If gasoline is in 
short supply in a locality due to refinery or pipeline outages, and 
there are no immediate alternatives, a market participant may find that 
it can profitably increase prices by reducing its refinery output--
generally only for a short time, until the outage is fixed or 
alternative supply becomes available. This transient power over price--
which occurs infrequently and lasts only as long as the shortage--
should not be confused with the durable power over price that is the 
hallmark of market power in antitrust law.
    In addition to the Unocal and West Coast pricing investigations, 
the Commission conducted a nine-month investigation into the causes of 
gasoline price spikes in local markets in the Midwest in the spring and 
early summer of 2000.27 As explained in a 2001 report, the 
Commission found that a variety of factors contributed in different 
degrees to the price spikes. Primary factors included refinery 
production problems (e.g., refinery breakdowns and unexpected 
difficulties in producing the new summer-grade RFG gasoline required 
for use in Chicago and Milwaukee), pipeline disruptions, and low 
inventories. Secondary factors included high crude oil prices that 
contributed to low inventory levels, the unavailability of substitutes 
for certain environmentally required gasoline formulations, increased 
demand for gasoline in the Midwest, and ad valorem taxes in certain 
states. The industry responded quickly to the price spike. Within three 
or four weeks, an increased supply of product had been delivered to the 
Midwest areas suffering from the supply disruption. By mid-July 2000, 
prices had receded to pre-spike or even lower levels.
---------------------------------------------------------------------------
    \27\ Midwest Gasoline Price Investigation, Final Report of the 
Federal Trade Commission (Mar. 29, 2001), available at http://
www.ftc.gov/os/2001/03/mwgasrpt.htm; see also Remarks of Jeremy Bulow, 
Director, Bureau of Economics, The Midwest Gasoline Investigation, 
available at http://www.ftc.gov/speeches/other/midwestgas.htm.
---------------------------------------------------------------------------
    The Commission's merger investigations also are relevant to the 
detection of nonmerger antitrust violations. FTC oil and gas merger 
investigations during the past decade uniformly have been major 
undertakings that have reviewed all pertinent facets of the relevant 
petroleum markets. These investigations have involved the review of 
thousands of boxes of documents in discovery, examination of witnesses 
under oath, and exhaustive questioning of outside experts. The FTC 
staff, therefore, have learned information that also could assist in 
detecting and investigating potentially anticompetitive conduct.

  III. COMMISSION REPORT ON FACTORS THAT AFFECT THE PRICE OF GASOLINE

    What are the causes of high gasoline prices and gasoline price 
spikes? These important questions require a thorough and accurate 
analysis of the factors--supply, demand, and competition, as well as 
federal, state, and local regulations--that drive gasoline prices, so 
that policymakers can evaluate and choose strategies likely to succeed 
in addressing high gasoline prices.
    The Commission addressed these issues by conducting extensive 
research concerning gasoline price fluctuations, analyzing specific 
instances of apparent gasoline price anomalies, and holding a series of 
conferences 28 on the factors that affect gasoline prices, 
leading to the publication of a report 29 that draws on what 
the Commission has learned about the factors that can influence 
gasoline prices or cause gasoline price spikes. We discuss the findings 
of our study, but first set out three basic lessons that emerge from 
our collective work.
---------------------------------------------------------------------------
    \28\ FTC Press Release, FTC to Hold Second Public Conference on the 
U.S. Oil and Gasoline Industry in May 2002 (Dec. 21, 2001), available 
at http://www.ftc.gov/opa/2001/12/gasconf.htm.
    \29\ Gasoline Price Changes, supra note 3.
---------------------------------------------------------------------------
    First, in general, the price of gasoline reflects producers' costs 
and consumers' willingness to pay. Gasoline prices rise if it costs 
more to produce and supply gasoline, or if people wish to buy more 
gasoline at the current price--that is, when demand is greater than 
supply. Gasoline prices fall if it costs less to produce and supply 
gasoline, or if people wish to buy less gasoline at the current price--
that is, when supply is greater than demand. Gasoline prices will stop 
rising or falling when they reach the level at which the quantity 
consumers demand matches the quantity that producers will supply.
    Second, how consumers respond to price changes will affect how high 
prices rise and how low they fall. Limited substitutes for gasoline 
restrict the options available to consumers to respond to price 
increases in the short run. Because gasoline consumers typically do not 
reduce their purchases substantially in response to price increases, 
they are vulnerable to substantial price increases.
    Third, producers' responses to price changes will affect how high 
prices rise, and how low they fall. In general, when there is not 
enough gasoline to meet consumers' demands at current prices, higher 
prices will signal a potential profit opportunity and may bring 
additional supply into the market. Additional supply will be available 
to the extent that an increase in price exceeds the producers' cost of 
expanding output.
    The vast majority of the Commission's investigations and studies 
have revealed market factors as the primary drivers of both price 
increases and price spikes. There is a complex landscape of market 
forces that affect gasoline prices in the United States.
A. Worldwide Supply, Demand, and Competition for Crude Oil Are the Most 
        Important Factors in the National Average Price of Gasoline in 
        the United States
    Crude oil is a commodity that is traded on world markets, and the 
world price of crude oil is the most important factor in the price of 
gasoline in the United States and all other markets. Over the past 20 
years, changes in crude oil prices have explained approximately 85 
percent of the changes in the price of gasoline.30 United 
States refiners compete with refiners all around the world to obtain 
crude, and the United States now imports more than 60 percent of its 
crude from foreign sources.
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    \30\ A simple regression of the monthly average national price of 
gasoline on the monthly average price of West Texas Intermediate crude 
oil shows that the variation in the price of crude oil--based on data 
for the period January 1984 to October 2003--explains approximately 85 
percent of the variation in the price of gasoline. This is similar to 
the range of effects given in United States Department of Energy/Energy 
Information Administration, Price Changes in the Gasoline Market: Are 
Midwestern Gasoline Prices Downward Sticky?, DOE/EIA-0626 (Feb. 1999). 
More complex regression analysis and more disaggregated data may give 
somewhat different estimates, but the latter estimates are likely to be 
of the same general magnitude.
    This percentage may vary across states or regions. See Prepared 
Statement of Justine Hastings before the Committee on the Judiciary, 
Subcommittee on Antitrust, Competition Policy and Consumer Rights, 
United States Senate, Crude Oil: The Source of Higher Gas Prices (Apr. 
7, 2004). Dr. Hastings found a range from approximately 70 percent for 
California to 91 percent for South Carolina. South Carolina uses only 
conventional gasoline and is supplied largely by major product 
pipelines that pass through the state on their way north from the large 
refinery centers on the Gulf Coast. California, with its unique fuel 
specifications and its relative isolation from refinery centers in 
other parts of the United States, historically has been more 
susceptible to supply disruptions that can cause major gasoline price 
changes, independent of crude oil price changes.
---------------------------------------------------------------------------
    If world crude prices rise, then U.S. refiners must pay higher 
prices for the crude they buy. Facing higher input costs from crude, 
refiners charge more for the gasoline they sell at wholesale. This 
requires retail stations to pay more for their gasoline. In turn, 
retail stations, facing higher input costs, charge consumers more at 
the pump. In short, when crude oil prices rise, gasoline prices rise 
because gasoline becomes more costly to produce.
    Crude oil prices are not wholly market-determined. Since 1973, 
decisions by OPEC have been a significant factor in the prices that 
refiners pay for crude oil. Over time, OPEC has met with varying 
degrees of success in raising crude oil prices. (For example, OPEC 
members can be tempted to ``cheat'' and sometimes sell more crude oil 
than specified by OPEC limits.) Higher world crude prices due to OPEC's 
actions, however, increased the incentives to search for oil in other 
areas, and crude supplies from non-OPEC members such as Canada, the 
United Kingdom, and Norway have increased significantly. Nonetheless, 
OPEC still produces a large enough share of world crude oil to exert 
market power and strongly influence the price of crude oil when its 
members adhere to their assigned production quotas. Especially when 
demand surges unexpectedly, as in 2004, OPEC decisions on whether to 
increase supply to meet demand can have a significant impact on world 
crude oil prices.
    Crude oil consumption has fallen during some periods over the past 
30 years, partially in reaction to higher prices and partially in 
response to federal laws, such as requirements to increase the fuel 
efficiency of cars. Gasoline consumption in the United States fell 
significantly between 1978 and 1982, and remained lower during the 
1980s than it had been at the beginning of 1978.31 Overall, 
however, the long-run trend is toward significantly increased demand 
for crude oil. Over the last 20 years, United States consumption of all 
refined petroleum products increased on average by 1.4 percent per 
year, leading to a total increase of nearly 30 percent.32
---------------------------------------------------------------------------
    \31\ Gasoline Price Changes, supra note 3, at 43-45.
    \32\ Id. at 19.
---------------------------------------------------------------------------
    Crude oil prices have been increasing rapidly in recent months. 
Demand has remained high in the United States, and large demand 
increases from rapidly industrializing countries, particularly China 
and India, have made supplies much tighter than expected.33
---------------------------------------------------------------------------
    \33\ This phenomenon was not limited to crude oil: other 
commodities that form the basis for expanded growth in developing 
economies, such as steel and lumber, also saw unexpectedly rapid growth 
in demand, along with higher prices. Id. at 27.
---------------------------------------------------------------------------
B. Gasoline Supply, Demand, and Competition Produced Relatively Low and 
        Stable Prices From 1984 Until 2004, Despite Substantial 
        Increases in United States Gasoline Consumption
    Consumer demand for gasoline in the United States has risen 
substantially, especially since 1990.34 In 1978, U.S. 
gasoline consumption was about 7.4 million barrels per day. By 1981, in 
the face of sharply escalating crude oil and gasoline prices and a 
recession, U.S. gasoline consumption had fallen to approximately 6.5 
million barrels per day.35 As gasoline prices began to fall 
in the 1980s, U.S. consumption of gasoline began to rise once again. By 
1993, consumption rose above 1978 levels, and it has continued to 
increase at a fairly steady rate since then. In 2004, U.S. gasoline 
consumption averaged about 9 million barrels per day, and the EIA's 
forecast is for 9.2 million barrels per day this year.36
---------------------------------------------------------------------------
    \34\ Id. at 48.
    \35\ Id.
    \36\ See id. at 49; EIA, DOE/EIA-0202, Short-term Energy Outlook, 
Apr. 2005, app. at 5 tbl.A5, at http://www.eia.doe.gov/pub/forecasting/
steo/oldsteos/apr05.pdf.
---------------------------------------------------------------------------
    Despite high gasoline prices across the nation, demand has not 
fallen off in 2005. Gasoline demand this summer driving season has been 
above last year's record driving-season demand and well above the 
average for the previous four years. Average daily demand of finished 
gasoline for May was 9.3 millions barrels per day, an increase of 1.2 
percent over May of 2004, and 5.5 percent higher than the average 
demand for the previous four summers. Similarly, June's demand was up 
2.8 percent over last June (up 5.4 percent from the average of the 
previous four years) and July's demand increase was up 3.2 percent over 
July of 2004 (up 4.6 percent from average of the last four years). 
Gasoline demand for the last four weeks ending August 26 was level with 
the demand for the same period last year, despite much higher 
prices.37
---------------------------------------------------------------------------
    \37\ EIA, DOE/EIA-0208(2005-34), Weekly Petroleum Status Report, 
August 31, 2005, at 17, tbl.11, at http://www.eia.doe.gov/pub/oil_gas/
petroleum/data_publications/weekly_petroleum
_status_report/historical/2005/2005_08_31/pdf/wpsrall.pdf.
---------------------------------------------------------------------------
    In spite of these substantial demand increases, increased supply 
from U.S. refineries and imports have kept gasoline prices relatively 
steady until 2004. A comparison of ``real'' average annual retail 
gasoline prices and average annual retail gasoline consumption in the 
United States from 1978 through 2004 shows that, in general, gasoline 
prices remained relatively stable despite significantly increased 
demand.38 Indeed, over the very long run in the 84-year 
period between 1919 and 2003, real annual average retail gasoline 
prices in the United States did not increase at all. The data show 
that, from 1986 through 2003, real national average retail prices for 
gasoline, including taxes, generally were below $2.00 per gallon (in 
2004 dollars). By contrast, between 1919 and 1985, real national 
average retail gasoline prices were above $2.00 per gallon (in 2004 
dollars) more often than not.39
---------------------------------------------------------------------------
    \38\ ``Real'' prices are adjusted for inflation and therefore 
reflect the different values of a dollar at different times; they 
provide more accurate comparisons of prices in different time periods. 
``Nominal'' prices are the literal prices shown at the time of 
purchase.
    \39\ See Gasoline Price Changes, supra note 3, at 43-47.
---------------------------------------------------------------------------
    Average U.S. retail prices have been increasing since 2003, 
however, from an average of $1.56 in 2003 to an average of $2.04 in the 
first five months of 2005.40 In the last two months, the 
prices have moved even higher. It is difficult to predict whether these 
increases represent the beginning of a longer-term trend or are merely 
normal market fluctuations caused by unexpectedly strong short-term 
worldwide demand for crude oil, as well as reflecting the effects of 
instability in such producing areas as the Middle East and Venezuela.
---------------------------------------------------------------------------
    \40\ The higher prices in 2005 appear to be the result of market 
factors that have uniformly affected the entire country. At least for 
the part of this year that preceded Hurricane Katrina, the FTC's 
Gasoline Price Monitoring Project has detected no evidence of 
significant unusual local or regional gasoline pricing anywhere in the 
United States during this summer driving season. This contrasts with 
the past two summers, during which various regional supply shocks, such 
as the Arizona pipeline shutdown and Northeast blackouts of August 
2003, and the several unanticipated regional refinery outages and late 
summer hurricanes during the summer of 2004, significantly increased 
prices in some areas above levels that might be expected based on 
historical price patterns.
---------------------------------------------------------------------------
    One of the reasons why long-term real prices have been relatively 
contained is that United States refiners have taken advantage of 
economies of scale and adopted more efficient technologies and business 
strategies. Between 1985 and 2005, U.S. refineries increased their 
total capacity to refine crude oil into various refined petroleum 
products by 8.9 percent, moving from 15.7 million barrels per day in 
1985 to 17.133 million barrels per day as of August 2005.41 
This increase--approximately 1.4 million barrels per day--is roughly 
equivalent to adding approximately 10 to 12 average-sized refineries to 
industry supply. Yet U.S. refiners did not build any new refineries 
during this time. Rather, they added this capacity through the 
expansion of existing refineries. They also have adopted processing 
methods that broaden the range of crude oils that they can process and 
allow them to produce more refined product for each barrel of crude 
processed. In addition, they have lowered inventory holdings, thereby 
lowering inventory costs (although lower inventory holdings may also 
make an area more susceptible to short-term price spikes when there is 
a disruption in supply).
---------------------------------------------------------------------------
    \41\ Petroleum Merger Report, supra note 4, at 196, tbl.7-1; EIA, 
DOE/EIA-0340(04)/1, 1 Petroleum Supply Annual 2004, at 78, tbl.36 
(2005), at http://www.eia.doe.gov/pub/oil_gas/petroleum/
data_publications/petroleum_supply_annual/psa_volume1/current/pdf/
volume1_all.pdf. EIA, DOE/EIA-0208(2005-33), Weekly Petroleum Status 
Report, August 24, 2005, at http://www.eia.doe.gov/pub/oil_gas/
petroleum/data_publications/weekly_petrole
um_status_report/historical/2005/2005_08_24/pdf/wpsrall.pdf.
---------------------------------------------------------------------------
    Offsetting some of the observed efficiency gains, increased 
environmental requirements since 1992 have likely raised the retail 
price of gasoline by a few cents per gallon in some areas. Because 
gasoline use is a major factor in air pollution in the United States, 
the U.S. Environmental Protection Agency--under the Clean Air Act 
42--requires various gasoline blends for particular 
geographic areas that have not met certain air quality standards. While 
available information shows that the air quality in the United States 
has improved due to the Clean Air Act, 43 as with any 
regulatory program, costs come with the benefits. Environmental laws 
and regulations have required substantial and expensive refinery 
upgrades, particularly over the past 15 years. It costs more to produce 
cleaner gasoline than to produce conventional gasoline. Estimates of 
the increased costs of environmentally mandated gasoline range from 
$0.03 to $0.11 per gallon.44
---------------------------------------------------------------------------
    \42\ Beginning with the Clean Air Act Amendments of 1970 (Pub. L. 
No. 91-604, 84 Stat. 1698) and continuing with further amendments in 
1990 (Pub. L. No. 101-549, 104 Stat. 2468) and the Energy Policy Act of 
1992 (Pub. L. No. 102-486, 106 Stat. 2776), Congress has mandated 
substantial changes in the quality of gasoline, as well as diesel, that 
can be sold in the United States.
    \43\ Robert Larson, Acting Director of the Transportation and 
Regional Programs, Environmental Protection Agency, Remarks at the FTC 
Conference on Factors that Affect Prices of Refined Petroleum Products 
79-80 (May 8, 2002).
    \44\ See EIA, 1995 Reformulated Gasoline Market Affected Refiners 
Differently, in DOE/EIA-0380(1996/01), Petroleum Marketing Monthly 
(1996), and studies cited therein. Environmental mandates are not the 
same in all areas of the country. The EPA requires particular gasoline 
blends for certain geographic areas, but it sometimes allows variations 
on those blends. Differing fuel specifications in different areas can 
limit the ability of gasoline wholesalers to find adequate substitutes 
in the event of a supply shortage. Thus, boutique fuels may exacerbate 
price variability in areas, such as California, that are not 
interconnected with large refining centers in other areas.
---------------------------------------------------------------------------
    Our studies indicate that higher retail prices are not caused by 
excess oil company profits. Although recent oil company profits may be 
high in absolute terms, industry profits have varied widely over time, 
as well as over industry segments and among firms.
    EIA's Financial Reporting System (``FRS'') tracks the financial 
performance of the 28 major energy producers currently operating in the 
United States. In 2003, these firms did have a return on capital 
employed of 12.8 percent, as compared to the 10 percent return on 
capital employed for the overall Standard & Poors (``S&P'') 
Industrials. Between 1973 and 2003, however, the annual average return 
on equity for FRS companies was 12.6 percent, while it was 13.1 percent 
for the S&P Industrials.45 High absolute profits do not 
contradict numbers showing that oil companies may at times earn less 
(as a percentage of capital or equity) than other industrial firms. 
This simply reflects the large amount of capital necessary to find, 
refine, and distribute petroleum products.
---------------------------------------------------------------------------
    \45\ See Gasoline Price Changes, supra note 3, at 61.
---------------------------------------------------------------------------
    The rates of return on equity for FRS companies have varied widely 
over the years, ranging from as low as 1.1 percent to as high as 21.1 
percent during the period from 1974 to 2003.46 Returns on 
equity vary across firms as well. Crude oil exploration and production 
operations typically generate much higher and more volatile returns 
than refining and marketing. In essence, companies with exploration and 
production operations now find themselves in a position analogous to 
that of a homeowner who bought a house in a popular area just before 
increased demand for housing caused real estate prices to escalate. 
Like the homeowner, crude oil producers can charge higher prices due to 
increased demand. If high prices and high profits are expected to 
continue, they may draw greater investments over time into the oil 
industry--in particular, to crude exploration and production. Over the 
long run, these investments are likely to elicit more crude supply, 
which would exert a downward pressure on prices.
---------------------------------------------------------------------------
    \46\ Id.
---------------------------------------------------------------------------
C. Other Factors, Such as Retail Station Density, New Retail Formats, 
        and State and Local Regulations, Also Can Affect Retail 
        Gasoline Prices
    The interaction of supply and demand and industry efficiency are 
not the only factors that impact retail gasoline prices. State and 
local taxes can be a significant component of the final price of 
gasoline. In 2004, the average state sales tax was $0.225 per gallon, 
with the highest state tax at $0.334 per gallon (New 
York).47 Some local governments also impose gasoline 
taxes.48
---------------------------------------------------------------------------
    \47\ See Gasoline Price Changes, supra note 3, at 111--(noting that 
the other four states with the highest average taxes on gasoline in 
2004 were Wisconsin ($0.33 per gallon), Connecticut ($0.325 per 
gallon), Rhode Island ($0.306 per gallon), and California ($0.301 per 
gallon)).
    \48\ Id. For example, all areas in Florida also have a local tax 
between $0.099 and $0.178 per gallon. Similarly, Honolulu has a local 
tax of $0.165 per gallon.
---------------------------------------------------------------------------
    Local regulations may also have an impact on retail gasoline 
prices. For example, bans on self-service sales or below-cost sales 
appear to raise gasoline prices. New Jersey and Oregon ban self-service 
sales, thus requiring consumers to buy gasoline bundled with services 
that increase costs--that is, having staff available to pump the 
gasoline.49 Some experts have estimated that self-service 
bans cost consumers between $0.02 to $0.05 per gallon.50 In 
addition, some 11 states have laws banning below-cost sales, so that a 
gas station is required to charge a minimum amount above its wholesale 
gasoline price.51 These laws harm consumers by depriving 
them of the lower prices that more efficient (e.g., high-volume) 
stations can charge.
---------------------------------------------------------------------------
    \49\ See, e.g., Oregon Rev. Stat., ch. 480,  480.315.
    \50\ See Michael G. Vita, Regulatory Restrictions on Vertical 
Integration and Control: The Competitive Impact of Gasoline Divorcement 
Policies, 18 J. Reg. Econ. 217 (2000); see also Ronald N. Johnson & 
Charles J. Romeo, The Impact of Self-Service Bans in the Retail 
Gasoline Market, 82 Rev. Econ. & Stat. 625 (2000); Donald Vandegrift & 
Joseph A. Bisti, The Economic Effect of New Jersey's Self-Service 
Operations Ban on Retail Gasoline Markets, 24 J. Consumer Pol'y 63 
(2001).
    \51\ See Gasoline Price Changes, supra note 3, at 113.
---------------------------------------------------------------------------
    Not surprisingly, retail gasoline prices are likely to be lower 
when consumers can choose--and can switch their purchases--among a 
greater number of retail stations. A small number of empirical studies 
have examined gasoline station density in relation to prices. One study 
found that stations in Southern California that imposed a 1 percent 
price increase lost different amounts of sales, depending on how many 
competitors were close by.52 Those with a large number of 
nearby competitors (27 or more within 2 miles) lost 4.4 percent of 
sales in response to a 1 percent price increase; those with a smaller 
number of nearby competitors (fewer than 19 within 2 miles) lost only 
1.5 percent of sales.53 With all else equal, stations that 
face greater lost sales from raising prices will likely have lower 
retail prices than stations that lose fewer sales from raising prices.
---------------------------------------------------------------------------
    \52\ John M. Barron et al., Consumer and Competitor Reactions: 
Evidence from a Retail-Gasoline Field Experiment (Mar. 2004), at http:/
/ssrn.com/abstract'616761.
    \53\ Id. at 13, 15, 30-31.
---------------------------------------------------------------------------
    Station density depends on cost conditions in an area. For example, 
the size and density of a market will influence how many stations can 
operate and cover their fixed costs. Fixed costs will depend on the 
costs of land and of building a station. Zoning regulations also may 
limit the number of stations in an area below what market conditions 
indicate the area could profitably sustain. Studies suggest that entry 
by new gasoline competitors tends to be more difficult in areas with 
high land prices and strict zoning regulations.54
---------------------------------------------------------------------------
    \54\ See id. at 30-31; Gov't Accountability Office (GAO), GAO/RCED-
00-121, Motorfuels: California Gasoline Price Behavior 20 (2000), 
available at http://www.gao.gov/new/items/rc00121.pdf.
---------------------------------------------------------------------------
    One of the biggest changes in retail sales of gasoline in the past 
three decades has been the development of such new formats as 
convenience stores and high-volume operations. These new formats appear 
to lower retail gasoline prices. The number of traditional gasoline-
pump-and-repair-bay outlets has dwindled for a number of years, as 
brand-name gasoline retailers have moved toward a convenience store 
format. Independent gasoline/convenience stores--such as RaceTrac, 
Sheetz, QuikTrip, and Wawa--typically feature large convenience stores 
with multiple fuel islands and multi-product dispensers. They are 
sometimes called ``pumpers'' because of their large-volume fuel sales. 
By 1999, the latest year for which data are available, brand-name and 
independent convenience store and pumper stations accounted for almost 
67 percent of the volume of U.S. retail gasoline sales.55
---------------------------------------------------------------------------
    \55\ Petroleum Merger Report, supra note 4, at 246 tbl.9-5.
---------------------------------------------------------------------------
    Another change to the retail gasoline market that appears to have 
helped keep gasoline prices lower is the entry of hypermarkets. 
Hypermarkets are large retailers of general merchandise and grocery 
items, such as Wal-Mart and Safeway, that have begun to sell gasoline. 
Hypermarket sites typically sell even larger volumes of gasoline than 
pumper stations--sometimes 4 to 8 times larger.56 
Hypermarkets' substantial economies of scale generally enable them to 
sell significantly greater volumes of gasoline at lower prices.
---------------------------------------------------------------------------
    \56\ Id. at 239.
---------------------------------------------------------------------------
    The list of factors that have an impact on retail gasoline prices 
is not exhaustive, but it shows that prices are set by a complex array 
of market and regulatory forces working throughout the economy. In the 
long run, these forces have combined to produce remarkably stable 
prices in the face of consistently growing demand. Short-run 
variations, while sometimes painful to consumers, are unavoidable in an 
industry that depends on the demand and supply decisions of literally 
billions of people.

                             IV. CONCLUSION

    The Federal Trade Commission has an aggressive program to enforce 
the antitrust laws in the petroleum industry. The Commission has taken 
action whenever a merger or nonmerger conduct has violated the law and 
threatened the welfare of consumers or competition in the industry. The 
Commission continues to study this industry in detail, to monitor 
wholesale and retail gasoline prices, and to search for instances of 
illegal mergers or anticompetitive conduct.
    Thank you for this opportunity to present the FTC's views on this 
important topic. I would be glad to answer any questions that the 
Committee may have.

    Chairman Barton. Thank you, Mr. Seesel.
    We now want to hear from Mr. Kenneth Moran, who is the 
Acting Director of the Office of Homeland Security Enforcement 
Bureau at the Federal Communications Commission.
    Welcome, Mr. Moran, and you are recognized for 7 minutes.

                 STATEMENT OF KENNETH P. MORAN

    Mr. Moran. Thank you, Mr. Chairman.
    Good afternoon, Mr. Chairman and distinguished members of 
the committee. My name is Ken Moran, and I serve as the 
Director of the Federal Communication's Commissions Office of 
Homeland Security. In that role, I am primarily responsible for 
coordinating the Commission's support of the Hurricane Katrina 
disaster relief efforts.
    In my written testimony, I describe some of the damage to 
the communications industry resulting from Hurricane Katrina 
and the Commission's efforts to assist consumers, the 
industries that the agency regulates, and other Federal 
agencies during this difficult crisis. I ask that my written 
testimony be submitted into the record, and I will summarize 
those comments now.
    Hurricane Katrina caused catastrophic damage and massive 
flooding in areas of Louisiana, Mississippi and Alabama. The 
loss of life and damage to property is astounding, and our 
thoughts and prayers go out to those affected by the disaster. 
Most of the communications industry sustained tremendous damage 
to their facilitates in the affected area, hampering rescue 
operations or emergency responders and affecting the 
communications of those still struggling with the affects of 
the hurricane.
    Hurricane Katrina knocked out more than 3 million customer 
phone lines. Wireline communications networks sustained 
enormous damage both to the switching centers that route the 
calls and the lines that connect the buildings and the 
customers to the network.
    Local wireless networks also sustained considerable damage. 
More than 1,000 cell sites were knocked out of service by the 
hurricane. During this disaster, millions of telephone calls 
simply have not been able to get through.
    Also, of the 41 broadcast radio stations located in New 
Orleans and the surrounding area, only two AM and two FM 
stations remained on the air in the wake of the hurricane.
    We know that extraordinary efforts are being made to 
maintain and restore service in the disaster zone. Broadcasters 
are getting some stations on the air, albeit at significantly 
reduced power, to provide survivors with important information. 
Wireline and wireless carriers have crews working around the 
clock to repair switching centers, customer lines and cell 
towers. Satellite service providers have helped bridge some of 
the gaps left by the outages by, for example, providing 
satellite phones and video links to law enforcement officials 
and medical personnel, emergency relief personnel and news 
outlets. Even with these efforts, though, many of the 
communications services in the affected areas remain down.
    Today, we estimate that 1 million customer lines remain out 
of service. Six 911 centers still remain out of service, and 
approximately 30 percent of wireless telecom cell sites are not 
operational. Also, more than 50 radio and TV stations remain 
off the air. Many of these sites that are operational are 
dependent on the back-up energy supplies.
    On August 30, the Commission established an internal task 
force consisting of senior executives and management from 
within the Commission. Chairman Martin directed the task force 
to coordinate the FCC's hurricane response activities which 
fall into two categories: regulatory relief; and industry 
outreach and coordination with other Federal agencies. The task 
force has been working on these assignments continuously since 
August 30, and the Commission was open throughout the Labor Day 
weekend to continue the work. To date, nearly 200 FCC employees 
have assisted in this effort.
    The Commission has taken a number of steps to facilitate 
resumption of communication services in the affected areas and 
to authorize use of temporary communication services for use by 
disaster relief personnel and evacuees in shelters.
    At the start of this disaster, the Commission notified 
communications providers that it would provide streamlined 
treatment for requests for special temporary authority in order 
to aid them in resuming and maintaining operations in the areas 
impacted by Hurricane Katrina. The FCC has received 22 special 
temporary authority requests and 77 requests for temporary 
frequency assignments. The Commission has also received a 
number of requests for temporary waiver of its rules. The 
Commission has granted most of these requests within 4 hours of 
their receipt and all requests within 24 hours. In addition, 
the Commission has released several public notices and quickly 
adopted orders to provide temporary relief.
    My written testimony provides many examples of the 
Commission action to date.
    The Commission has been working closely with industry as 
well as FEMA and the National Communications System consistent 
with procedures established in the National Response Plan. The 
Commission continues to reach out to the communications 
companies serving the affected areas to assess their 
operational status and determine the resources that they need 
to resume full operations.
    The FCC provides the critical information about resources 
that communications providers need to restore and maintain 
service in the area to both FEMA and the NCS, who are 
responsible for ensuring that priority needs are met. The 
agency updates FEMA and NCS daily on the evolving needs.
    The Commission is also responsible for providing the 
National Coordinating Center for Telecommunications with 
information on communications companies' operational status for 
incorporation into the governmentwide situation reports. Again, 
the agency gathers and submits this data daily.
    In addition, the Commission has worked closely with the 
communications industry to help identify resources for use by 
disaster response personnel. The agency both transmits this 
information to the NCS and facilitates the industry's 
communication with other Federal officials.
    Finally, the Commission has been coordinating with the 
Interagency Coordination Council on Individuals with 
Disabilities to ensure that the needs of the disability 
community are addressed in the coordinated Federal relief 
efforts.
    In conclusion, the Commission is continuing to work with 
key Federal agencies and the communications industry to 
determine what additional actions can be taken to assist in the 
disaster relief and restoration effort. More information about 
these efforts is available on our Web site.
    The Commission stands ready to work with the Congress, our 
colleagues at the State, Federal and local agencies and the 
American public to do whatever we can to help with disaster 
relief and restoration efforts. I would be pleased to respond 
to your comments. Thank you.
    [The prepared statement of Kenneth P. Moran follows:]

 Prepared Statement of Kenneth P. Moran, Director, Office of Homeland 
    Security, Enforcement Bureau, Federal Communications Commission

    Good morning, Mr. Chairman and distinguished members of the 
Committee. My name is Ken Moran and I serve as the Director of the 
Federal Communications Commission's Office of Homeland Security. In 
that role, I am primarily responsible for coordinating the Commission's 
support of the Hurricane Katrina disaster relief efforts.
    In my testimony today, I will describe some of the damage wrought 
by Hurricane Katrina to the communications industry and the 
Commission's efforts to assist consumers, the industries the agency 
regulates, and other Federal Agencies during this difficult crisis.
    Hurricane Katrina caused catastrophic damage and massive flooding 
in areas of Louisiana, Mississippi, and Alabama. The loss of life and 
damage to property is astounding, and our thoughts and prayers go out 
to those people affected by this disaster. As I am sure you are aware, 
most of the communications industry sustained tremendous damage to 
their facilities in the affected area, and the damage has had a 
significant impact. The damage to the communications infrastructure 
hampered the rescue operations of emergency responders. Relief efforts 
and survivors are still struggling with the effects of the hurricane. 
Survivors lack information about relief efforts. People displaced from 
their homes do not have the means to contact their loved ones to let 
them know they are safe. And of course, survivors remaining in the 
affected area lack a reliable means of contacting the authorities and 
getting help in life threatening situations.

                   STATUS OF COMMUNICATIONS NETWORKS

    Hurricane Katrina knocked out more than 3 million customer phone 
lines in the Louisiana, Mississippi, and Alabama area. The wireline 
telecommunications network sustained enormous damage both to the 
switching centers that route calls and to the lines used to connect 
buildings and customers to the network. Local wireless networks also 
sustained considerable damage--more than a thousand cell sites were 
knocked out of service by the hurricane. During this disaster, millions 
of telephone calls simply have not been able to get through. Of the 41 
broadcast radio stations located in New Orleans and the surrounding 
area, only two AM and two FM stations remained on the air in the wake 
of the hurricane.
    Through network outage reports filed in accordance with the 
Commission's rules, and through data given to us voluntary by the 
industry, we understand that an extreme effort is being made to 
maintain and restore service in the disaster zone. Broadcasters are 
making every effort to get stations on-the-air, even at significantly 
reduced power, to provide survivors with important information. 
Wireline and wireless carriers have crews working to repair switching 
centers, customer lines, and cell towers. Satellite service providers 
have helped bridge some of the gaps left by the outages by, for 
instance, providing satellite phones and video links to law enforcement 
officials, medical personnel, emergency relief personnel, and news 
outlets.
    Even with these efforts, given the enormity of the disaster, many 
of the communications services in the affected areas remain down. 
Today, we understand that more than one million customer lines and over 
20 switching centers remain out of service. Approximately 1700 DS-3 
interoffice facilities remain down. Six public safety answering points 
remain out of service. Approximately thirty percent of cell sites are 
not operational. Fifty to 100 radio and television stations remain off 
the air. Many of the sites that are operational are dependent on back-
up energy supplies.

                           COMMISSION ACTIONS

    On August 30th, Chairman Martin established an internal Task Force 
consisting of senior executives and management from within the 
Commission. Chairman Martin directed the Task Force to coordinate the 
FCC's hurricane response efforts, which fall into two categories: (1) 
regulatory relief; and (2) industry outreach and coordination with 
other federal agencies. The Task Force has been working on these 
assignments continuously since August 30th, and the Commission was open 
throughout the Labor Day weekend to continue the work. To date, nearly 
200 FCC employees have assisted in this effort.

Regulatory Relief
    The Commission has taken a number of steps to facilitate the 
resumption of communications services in the affected areas and to 
authorize the use of temporary communications services for use by 
disaster relief personnel and evacuees in shelters.
    At the start of the disaster, the Commission notified 
communications providers that it would provide streamlined treatment 
for requests for special temporary authority (STA) in order to aid them 
in resuming and maintaining operations in areas impacted by Hurricane 
Katrina. The FCC has received at least 22 STA requests and 77 requests 
for temporary frequency assignments. The Commission also has received a 
number of requests for temporary waiver of its rules. The Commission 
has granted each of these requests within 4 hours of receipt of all 
necessary information from the requestor, except in instances requiring 
coordination with other government agencies. Even in those cases, 
requests have been granted within 24 hours. In addition, the Commission 
has released several public notices and quickly adopted orders to 
provide temporary relief.
    Examples of the many steps the Commission has taken to assist 
disaster relief efforts and affected providers are listed in the 
attached appendix.

Industry Outreach and Coordination with Other Federal Agencies
    The Commission has been working closely with industry as well as 
the Federal Emergency Management Agency (FEMA) and the National 
Communications System (NCS) pursuant to the procedures established in 
the National Response Plan. The Commission is continuously reaching out 
to communications companies serving the affected area--wireline and 
wireless network providers, broadcasters, cable providers, satellite 
providers--and to trade associations for these providers to assess the 
companies' status and determine what they need to resume operations. 
These efforts include Commission staff contacting each of the 
approximately 160 broadcast stations in the affected region.
    The FCC provides the critical information about resources that 
communications providers need to restore and maintain service in the 
affected area to FEMA and NCS, who are responsible for ensuring that 
priority needs are met. For instance, the Commission identified 
wireline central offices and radio and television broadcasters that 
could be operational if provided fuel to power on-site generators. The 
agency updates FEMA and NCS daily on evolving needs.
    The Commission also is responsible for providing the National 
Coordinating Center (NCC) with information on communications companies' 
operational status for incorporation into the government-wide situation 
reports. Again, the agency gathers and submits this data daily.
    In addition, the FCC has worked closely with the communications 
industry to help identify resources for use by disaster response 
personnel. The agency both transmits this information to NCC and 
facilitates industry's communication with other federal officials. For 
example, Commission staff coordinated discussions between FEMA and a 
major Direct Broadcast Satellite (DBS) provider to set up free 
televisions at disaster relief facilities and to provide a nationwide 
channel for disaster emergency services programming. Staff also worked 
with a wide range of providers--including those offering competitive 
facilities-based telecommunications, satellite, wireless, wireless 
internet access and WI FI services--to identify those providers capable 
of offering facilities and services that can assist those in the 
affected area.
    Finally, the Commission has been coordinating with the Interagency 
Coordinating Council on Individuals with Disabilities, organized by the 
Department of Homeland Security, to ensure that the needs of the 
disability community are addressed in the coordinated federal relief 
efforts.

                               CONCLUSION

    FCC Chairman Kevin Martin, Commissioners Kathleen Abernathy, 
Michael Copps and Jonathan Adelstein, along with the FCC staff, commend 
the industry and the tremendous efforts it has made to begin to repair 
the infrastructure and restore communications service to the Gulf 
Coast. These extraordinary efforts to restore communications services 
are being performed by employees of the communications industry--many 
of whom may be personally impacted by this tragedy.
    The Commission is continuing to work with other Federal agencies 
and the communications industry to determine what additional actions 
can be taken to assist in the disaster relief and restoration effort. 
More information about these efforts is--and will continue to be--
available on the Commission's web site: http://www.fcc.gov/cgb/
katrina/.
    The Commission also will continue its important work in reaching 
out, and responding to, consumers affected by this tragedy. Since the 
hurricane struck, including over the Labor Day weekend, the Commission 
manned its toll-free consumer line to help individuals get access to 
critical information about telecommunications and broadcast services in 
the affected area. The agency will continue these and other efforts to 
address consumer concerns, in coordination with other government 
agencies, relief organizations, consumer groups and industry.
    The damage wrought by Hurricane Katrina is tremendous and its 
effects will be felt for months and possibly years to come. The 
Commission stands ready to work with Congress, our colleagues at 
federal, state, and local agencies, and the American public to do 
whatever we can to help with the disaster relief and restoration 
efforts. I would be pleased to respond to your questions.

                                Appendix

    Since Hurricane Katrina struck the Gulf Coast, the Commission has 
taken a number of steps to help the industry resume service and to 
assist the communications needs of disaster relief personnel and 
evacuees in shelters. Following are some examples of Commission 
actions:

 On September 2nd, the Commission granted STAs to operate ultra-wide 
        band services ``through-the-wall'' imaging systems to locate 
        survivors.
 On September 5th, the Commission temporarily authorized the 
        Department of Defense to conduct ship-to-ship, ground, and air-
        to-ground operations in the affected area.
 Over the past week, the Commission granted STAs and temporary 
        frequency authorizations to parties working to support relief 
        efforts and to utilities working to restore phone and electric 
        service in the affected area.
 Over the Labor Day weekend, the Commission granted a temporary waiver 
        of its ``slamming rules,'' which require carriers to ensure 
        subscribers are notified before their long distance service is 
        switched. This temporary waiver will permit carriers to 
        temporarily transfer customers to long distance carriers with 
        working facilities while restoration efforts are under way.
 On September 2nd, the Commission acted upon the request of the 
        American Red Cross and temporarily reassigned the toll free 800 
        number ``1-800-RED-CROSS'' to the National Chapter of the 
        American Red Cross. This action will facilitate the disaster 
        relief operations and fundraising efforts of the American Red 
        Cross--the only non-governmental agency with a specified lead 
        role in the National Response Plan--by providing an easily-
        recognizable centralized telephonic point of contact for this 
        important organization.
 Also on September 2nd, the Commission suspended its rules in order to 
        permit noncommercial educational (NCE) radio and television 
        stations in New Orleans to rebroadcast programming, including 
        commercial matter, received from commercial broadcast stations. 
        This special relief is designed to bring immediate life saving 
        and other important program information to the residents of New 
        Orleans in the most expeditious manner possible.
 Between September 2nd and September 4th, the Commission granted STAs 
        to provide Internet connectivity to more than 200 shelters 
        operated by the American Red Cross.
 On September 1st and 2nd, the Commission temporarily waived certain 
        rules applicable to NCE television and radio stations, allowing 
        those stations to air fundraising programming to aid disaster 
        relief efforts.
 On September 5th, the Commission granted experimental authorizations 
        to permit the use of 3 FM signals to broadcast emergency 
        information to the approximately 24,000 evacuees in the Houston 
        Astrodome.
 Over the Labor Day weekend, the Commission granted a waiver of its 
        numbering rules that require carriers to return certain unused 
        telephone numbers. This action will permit carriers in the 
        affected area to retain telephone numbers that are not in use 
        for longer than 90 days in order to allow consumers returning 
        to the affected area continued use of their telephone numbers.
 On September 1st, the Commission waived its rules in order to permit 
        wireline and wireless carriers to port telephone numbers 
        geographically outside of rate centers during this period of 
        service disruption. This action is intended to help consumers 
        keep using their telephone numbers during the crisis, to the 
        extent facilities are available.
 Also on September 1st, the Commission granted an equipment 
        authorization for a new digital microwave radio system. One of 
        the major wireless carriers will use this equipment to replace 
        equipment in Baton Rouge and southern Louisiana that was 
        destroyed by the hurricane.
 On September 2nd, the Commission granted a request from the 800 MHz 
        Transition Administrator to move Louisiana from Wave 2, which 
        begins relocation negotiations in October 2005, to Wave 3. This 
        action enables public safety entities in Louisiana to focus on 
        more immediate public safety needs.
 On September 1st, the Commission issued informal guidance to amateur 
        radio operators that they have authority to make transmissions 
        necessary to meet essential communication needs and facilitate 
        relief actions, and that prior Commission approval is not 
        required for such transmissions.
    FCC granted STA to the California Highway Patrol to operate 
portable and mobile radios in support of other law enforcement and 
relief agencies in Louisiana and Mississippi (9/6/05).
    FCC granted STA to LifeCom/Air Methods to set up a control center 
with mobile radio communications in the 460 MHz band in the New Orleans 
area for disaster relief (9/6/05).
    FCC granted an STA for stations licensed to American Family 
Association in Mississippi and Louisiana that ceased operations on 
August 28, 2005 to remain silent (9/6/05).
    FCC granted an STA for WFMM(FM), Telesouth Communications, Inc., 
Sumrall, Mississippi, to remain silent after it went silent on 8/29/05 
(9/6/05).

    Chairman Barton. Thank you, Mr. Moran.
    The Chair now recognizes himself for the first 5 minutes of 
questions.
    Secretary Garman, I want to commend you, the Deputy 
Secretary, and the full Secretary for your expeditious work on 
the SPR. I made a phone call to Secretary Bodman on Monday. I 
sent him a letter Monday afternoon asking that the SPR be 
utilized, and oil was released from the SPR on Thursday.
    Crude prices on world markets have actually--they went up 
to over $70 a barrel briefly, but as of late yesterday they 
were down in the $65 to $66 range, and I do not know what the 
market is today. But one thing that the President and the 
Secretary of Energy have done right in the last week is use the 
SPR, and I want to publicly commend the Secretary and you for 
that decision.
    I do have a question for you on refinery needs and this may 
be Mr. Caruso, also. Do you, Mr. Garman, and you--especially 
Mr. Garman as a policymaker--think that we should have 100 
percent refining capacity for our demand in this country?
    Mr. Garman. Clearly, the margins that we have suffered 
under with inadequate refinery capacity in this country has had 
consumer impacts; and if we want to address that consumer 
impact, if we do not want to be dependent on foreign sources 
for petroleum product as we are on foreign sources for crude, 
then, yes, we ought to have sufficient refining capacity in 
this country to serve our needs, in my view.
    Chairman Barton. Okay. Mr. Caruso, as the director at EIA, 
my information is that we are consuming around 21 million 
barrels of refined products per day in this country, but our 
refinery capacity before Katrina was less than 17 million 
barrels per day. Do those numbers conform with your official 
numbers?
    Mr. Caruso. Yes, Mr. Chairman. The consumption for 2005, we 
are estimating, is 20.8, so very close to 21; and primary 
distillation capacity is 17.1 million barrels per day as we 
speak, prior to Katrina.
    Chairman Barton. Now the information that our staff has 
prepared in the aftermath of Katrina, even given the amazing 
efforts to bring refinery capacity back on line, showed about a 
million barrels per day of refinery capacity is out 
indefinitely because of water damage or power damage or 
hurricane damage. That is primarily a big refinery in 
Pascagoula and two refineries that are in or near New Orleans. 
Does that million barrels per day again conform with what you 
officially think is going to be long term out of order, either 
Mr. Caruso or Mr. Garman?
    Mr. Garman. Roughly, yes. Those refineries, with minor 
damage, minor flooding or lack of power, have largely been 
brought back on line.
    Those refineries--by my count, there are currently six of 
them that are off line--will probably take a bit longer to 
bring on line. I do not have a good damage assessment to be 
able to estimate. Perhaps some of the witnesses later in the 
day do.
    Chairman Barton. Mr. Caruso, do you want to do add anything 
to that?
    Mr. Caruso. The only thing that I would add is that those 
four that appear to have suffered major damage will be off line 
for a matter of months. So I probably would not use the word 
``indefinitely,'' depending on what you----
    Chairman Barton. I understand.
    Now this is for Mr. Garman. We are seriously thinking about 
preparing a refinery revitalization bill. In the current law 
that the President just signed, we give Governors of the 50 
States the authority to request the EPA to appoint a 
facilitator to help facilitate and coordinate the various 
permit applications for refineries in this country. The House 
had passed a more comprehensive Refinery Revitalization Act, 
but the Senate would not agree to that in conference. So, Mr. 
Garman, if it is the will of this committee to expeditiously 
move on a Refinery Revitalization Act, do you believe that the 
Bush Administration, the Secretary would be supportive of that?
    Mr. Garman. Without knowing the specific provisions, of 
course, we could make no commitments. But, clearly, refinery 
capacity is an issue. I am not certain why investment dollars 
and capital flows are not going into this opportunity. I would 
imagine, as is the case with many very large capital projects, 
people do not want to put their money at risk for a long period 
of time awaiting return in the face of regulatory uncertainty. 
We have seen that in the nuclear plant business where utility 
executives do not want to make that commitment and that large 
capital up-front commitment. A refinery is very much the same 
story, with a very uncertain regulatory path and very uncertain 
timing associated with that permitting process.
    We have watched with some amazement as a potential refinery 
project in Arizona has been attempted to be built for the 
better part of a decade, if I am not mistaken; and investors 
have come and gone, somewhat frustrated by the inability to get 
the project under way.
    Clearly, something needs to be done; and we would take a 
look at whatever the committee--and would be happy to work with 
the committee in brainstorming some of the ideas that might be 
employed.
    Chairman Barton. Thank you.
    My time has expired, but I want to ask Mr. Seesel one 
question. It is my understanding that, under current law, there 
is no specific Federal legislation directly on point against 
price gouging. That is primarily a State issue, not a Federal 
issue. My question to you, Mr. Seesel, is there a standard 
definition of just exactly what price gouging is?
    Mr. Seesel. Mr. Chairman, I think there probably is a wide 
variety of definitions for that term. As far as I have been 
able to determine, for example, the States that have various 
laws against price gouging or similar terminology such as 
unconscionably high prices apply a lot of different criteria 
for measuring it either quantitatively in terms of a percentage 
over the usual price level before a certain event occurred or 
just more general language in terms of unconscionability or 
shockingly high. There is a lot of variations just among the 23 
or so States that have those statutes on the book; and I think 
they are probably--it would be hard to find a consensus among 
just people in their normal everyday parlance on what they mean 
by gouging. I think there is a sort of ``I know it when I see 
it'' sort of sense among a lot of people about very high 
prices, but I think there is no real thing close to uniformity.
    Chairman Barton. Well, is it your view or the Federal Trade 
Commission's view that the State laws are adequate to handle 
price gouging, however one defines it, or would it be the FTC's 
view that we need specific Federal legislation on price gouging 
preempting State law? Do you have a position one way or the 
other on that?
    Mr. Seesel. Mr. Chairman, I don't think I can give you what 
the official FTC position on that would be. That would really 
require a determination by the Commission. But I can tell you 
that the issue of a Federal law about price gouging really 
has--sort of, it raises several issues, and I will try to do 
this quickly.
    But one, obviously, is this difficulty of ascertaining how 
to measure what price gouging is and the fact that a lot of 
people have very different views on what that is.
    In addition, I think any kind of effort to establish a 
Federal prohibition of price gouging, given the sort of 
uncertainty about what the term means, could also possibly 
create a replication of the experience this country went 
through in the 1970's. Essentially a well-intentioned effort to 
sort of stop what many might consider unconscionable pricing 
could essentially turn into an effort to control prices and 
profits, which certainly in the 1970's' experience led to a lot 
of unhappy experiences for this country in terms of gas lines 
and rationing and stations running out of gasoline entirely.
    I think there is generally a sense, though--and, again, I 
am not speaking for the Commission officially--that the States 
have adequate firepower in their statutes to deal with this 
issue; and, as I said in my statement, I think a lot of 
Governors and attorneys general around the country are 
vigorously addressing that issue in the last few days.
    Chairman Barton. Thank you. I apologize to the committee 
for extending my time. I do not normally do that.
    The Chair is trying to see who is the senior Democrat in 
attendance at the gavel, and I think it is Mr. Green. Mr. Green 
is the senior member. Mr. Gonzalez is closest to the Chair, but 
he just kind of cheated and moved up. So we are going to go to 
Mr. Green.
    Mr. Green. Thank you, Mr. Chairman.
    I know that we need to have a separate health hearing. I 
would hope we would, because I have some concern, like I said 
in my opening, about States' responsibility for their portion 
of Medicaid for people who are guests and not necessarily 
residents of that State. Ultimately, they may be, though.
    Let me ask a question about high prices. It seems to me 
that high prices were caused originally, before we even had 
Katrina, by the global demand, the tight global supply, the 
limited domestic production and infrastructure. If it were 
possible in this--I guess the AEI. If it were possible to 
produce off shore on the east and west coast and site more 
energy infrastructure there, would a tricoastal energy 
infrastructure mean strategic stability for our energy section 
and wouldn't we also be more resistant to shocks like this one? 
Because I have lived on the gulf coast my whole life in Houston 
and, sure as you know, July comes around--to the end of 
October, in some cases--we are going to have a hurricane or 
tropical storm, and we will have a problem. But if we actually 
had a tricoastal energy production, instead of just the Gulf of 
Mexico and Alaska?
    Mr. Caruso. Well, it certainly would be my opinion that 
that would help the situation. Obviously, it is not a silver 
bullet, but it definitely would be a movement in the right 
direction.
    Mr. Green. Any other response from anyone?
    Mr. Garman. I would agree with that. Clearly, why is this 
energy infrastructure located on the gulf coast? And the answer 
is that is where it has been allowed to develop. That is where 
refineries have been allowed to be built. It is a lesson for 
all of us as we consider the location of new LNG terminals, as 
we become more dependent on natural gas. If we once again 
concentrate all of our LNG facilities on the gulf coast, as we 
have concentrated--and thank goodness for Point Cove in 
Maryland--but if we continue to do that, then we will be 
vulnerable by putting all of our energy eggs in one basket, so 
to speak.
    Mr. Green. That leads to my next question. If your 
strategic energy situation is vulnerable and energy shocks 
travel so fast in our economy, I believe a national oversight 
is proper to ensure a national policy is made. You mentioned 
the example in the energy bill that just passed FERC will do 
the siting now on LNG terminals, and that was in the energy 
bill that the President signed over the break. Beyond the 
limited steps we can take in these situations with current 
authority, what else can be done to improve our ability to 
generate the most robust energy sector in the medium term? 
Should we have a Federal coordinating of these permits so we 
have a really a tricoast strategy? Are there solutions on that? 
Should we use the example of the energy bill on LNG for other 
production?
    Mr. Garman. My own view is that it is prudent for us to 
allow the States to undertake their regulatory authority but to 
have back-stop capability in those key areas where it is 
needed, and that back-stop capability was provided in the 
energy bill for both electricity transmission and LNG siting.
    But I think it is probably prudent, and I think the States 
would object, understandably, if we were to seize the powers 
and authorities that have been vested in them from them 
inordinately. But clearly it is something that, if the 
infrastructure is not being built, we have to ask the tough 
questions, why is that the case?
    Mr. Green. So in the energy bill we did electricity and 
LNG. Now because of the production predominately in the Gulf of 
Mexico--and maybe instead of--you know, maybe we need to look 
at it and our committee needs to look at, like you said, a 
back-stop, some type of frame frames, maybe, that if you lease 
off of California or Florida that, you know, the States would 
have a certain period of time to approve, disapprove or 
whatever.
    But, again, because we are not just talking about States' 
issues, we are talking about a national policy and actually 
international, which is the reason the energy bill dealt with 
the LNG terminal sitings.
    So, Mr. Chairman, I guess I have only 30 seconds. But I 
know the issue of price gouging--what have past price gouging 
investigations found? Is it usually the large or small scale 
and is it usually large or small operators? Is the problem with 
oil companies or with retailers and distributors? And has that 
been--what has the history been? Because this is something--we 
have repeated this, I guess, for the last 30 years or more.
    Mr. Seesel. Representative Green, I guess the Commission's 
activity in the pricing area has largely involved receiving 
complaints about pricing behavior that violates one of the 
statutes that we enforce. So, generally, the investigations we 
have undertaken have looked at pricing that might have been 
collusive pricing and other activities.
    For example, we had investigations in both the Midwest 
after the price spike about 5 years ago and in the Western 
States, an investigation that really lasted several years, 
between 1998 and 2001. And those were both really designed to 
look at whether pricing going on there was the result of 
collusive and coordinated activity among--at firms at various 
levels of the industry. There were long, arduous, detailed 
investigations that resulted in public reports and so forth, 
but they didn't turn up evidence of collusive behavior. There 
hasn't really been an effort to look at individual firm pricing 
behavior because of the problem that the Commission runs up 
against, that essentially it is dealing with a statute that 
primarily goes after collusive behavior, not individual firm 
behavior.
    Mr. Green. Thank you.
    Mr. Hall [presiding]. Thank you, Mr. Green.
    I will recognize myself for my time, and I will not use the 
full amount, paying back some that the Chairman took on his own 
to extract questions and answers from you.
    Mr. Garman, you were asked about the provisions in the 
Energy Policy Act. As we search for these policies that will 
relieve some pressure on the energy sector, both short term and 
then long term, I guess I want to focus on that Energy Policy 
Act. You spoke of the reticence or the lack of any indication 
of investors. It is a problem because, I guess, of the length 
of the return of their capital; and there are some incentives, 
though, that the EPA can make certain concessions or give 
certain instructions.
    I guess what I want to know is whether or not--I know the 
Governors of the States have read the Energy Act, and I know 
that you all have gone over it and back and forth and 
everything. But everybody is aware of the provision in there 
and the number of the provision. I do not have to list that 
even for the policy. But have any of the States moved forward 
on this? Have you had any correspondence with them or any 
discussions with them for the use of this particular section of 
this Act?
    Mr. Garman. I have not personally, nor am I aware that any 
States have focused on this provision yet. We are just at the 
interagency level. In fact, there is another meeting tomorrow 
at the White House, if I am not mistaken, where we are 
gathering to ensure that we have all of the implementation 
bases covered on the Act, that we are meeting, that assignments 
are made, that timeframes are being laid out, that we are 
making sure that the interagency cooperation that is needed to 
implement this Act is indeed under way.
    Mr. Hall. Mr. Caruso, do you have any suggestions or any--
have you had any contact or any inquiries from any of the 
States?
    Mr. Caruso. I have not, Mr. Chairman.
    Mr. Hall. I am optimistic that one of the States other than 
one of the producing States might move forward with this 
policy. It is available to all of them.
    What are the drawbacks, other than lack of expectation of 
early return on investment?
    Mr. Garman. I think history has shown us that anyone trying 
to put a new energy facility of almost any kind--generation, 
transmission, LNG facility--faces a lot of local opposition. 
And NIMBYism rears its head, issues of environmental justice 
are brought to bear, and so investors tread lightly into that 
realm.
    Mr. Hall. Well, I think one of the reasons that Joe Barton 
was able to pass an energy act when no one has been able to in 
the last 10 years is that he couched it with a lot of 
research--R&D, really mostly an R&D act, rather than an energy 
act.
    But with the additional provisions and additional 
incentives in there and the situation we find ourselves in, 
there is increasing on an increasing ratio the difficulty of 
dealing with the people who are selling us energy that we have 
to rely on, that we do not really trust, and they do not really 
trust us.
    With that ability to fall back on that new technology, it 
looks like we could shorten the time and make it a little more 
appealing to the investing public. They want a return, but they 
also want to see us solve a problem that might keep our kids 
out of the war, and that is to solve the energy problems of 
this country.
    Mr. Garman. Yes, sir; and I think it is very important that 
we score a quick success on this. I think if the first new 
refinery gets built in 30 years, that will be a message to 
investors that this is an area that is ripe for new investment 
and new capital flow, and we can hopefully buildup the thin 
margins of capacity that we have suffered under for some time 
and have more cushion there to protect consumers.
    Mr. Hall. All right. If I yield back 33 seconds, I have 
kept the faith with the chairman. I yield back.
    The Chair at this time recognizes Ms. DeGette from Colorado 
for 5 minutes.
    Ms. DeGette. Thank you, Mr. Chairman.
    Mr. Garman, I wanted to ask you, as I mentioned in my 
opening statement, last night at the members briefing, 
Secretary Bodman told us that, aside from some short-term 
disruptions in the natural gas and also gasoline supplies in 
the southeastern United States, pretty much there were minimal 
disruptions in fuel supply. So I guess I am wondering, if that 
was the case, why did prices jump so significantly? For 
example, in Denver, Colorado, where my district is, not even in 
the supply chain of the gulf, the prices were going up as early 
as Tuesday of last week. I am wondering if the Department has 
some sense of why that happened?
    Mr. Garman. I will provide an answer and then turn to my 
colleague from the EIA who actually is closer to the price 
situation.
    But let me first make the comment that I believe Secretary 
Bodman, in making the comment that he made last night, was 
referring to permanent damage.
    Ms. DeGette. Actually, I do not think that was true. I was 
there. But if you want to clarify his remark that way.
    Mr. Garman. Because--I do. As I point out, Katrina, had a 
devastating impact on energy.
    Ms. DeGette. But did it have a devastating impact as early 
as Monday and Tuesday in areas of the country that aren't even 
supplied by that region?
    Mr. Garman. Yes. Refineries were shut down prior to the 
storm striking on Monday, and petroleum product and crude oil 
is a fungible material that affects prices outside a direct 
supply chain. Guy might have more to say on that.
    Mr. Caruso. Yes, there are two comments I could add. One, 
the market impact started on the weekend, actually, because 
some refineries were shut as early as Saturday.
    And the second thing is that markets react to uncertainty. 
When there was uncertainty as early as Monday as to how much 
damage there would be, and how long it would last, the NYMEX 
futures market already started to rise. In fact, European 
markets rose, too so there are people in Paris and London today 
paying more for gas.
    Ms. DeGette. And I guess it is a fine line between market 
uncertainty and price gouging, in many of our minds, because 
people price gouge because consumers are uncertain, and they 
know gas costs are rising, correct?
    Mr. Caruso. Well, as Mr. Seesel pointed out, the definition 
of price gouging is very nebulous. But, nevertheless, collusive 
and anticompetitive behavior is certainly----
    Ms. DeGette. Well, and I want to ask both of you gentlemen 
just briefly, with respect to the Department's registration of 
consumer complaints about gasoline price gouging through its 
Web site and telephone hotline, how many complaints have been 
registered with the DOE?
    Mr. Garman. The last time that I had checked, as of 
yesterday morning, I believe we had received on the order of 
7,000 calls, which we were distributing to appropriate 
authorities at the Federal Trade Commission and States' 
attorneys generals.
    Ms. DeGette. And what is the DOE going to do with this 
information after they distribute it to those appropriate 
agencies?
    Mr. Garman. We do not have any regulatory or enforcement 
authority. They are the parties that do. So we are a collector 
of information, and we provide it----
    Ms. DeGette. You are just going to pass that on.
    Mr. Garman. We provide that information to the appropriate 
parties with the enforcement authority.
    Ms. DeGette. Are you going to provide it also to the 
Department of Justice?
    Mr. Garman. Yes, we are. And, yes, we have.
    Ms. DeGette. Mr. Seesel, I would like to ask you, I was 
intrigued by your testimony, and we all know about half of the 
States currently have antigouging authority on their books, 
correct?
    Mr. Seesel. That is my understanding.
    Ms. DeGette. And I think you were saying is that it is your 
view of the Federal statutes that if there is no proof of 
anticompetitive practices, then the Federal Government does not 
have the authority to prevent and punish price gouging. Would 
that be accurate?
    Mr. Seesel. I believe that would be accurate.
    Ms. DeGette. So if one oil company is not colluding with 
another one, they just decide to price gouge on their own, it 
is your agency's view that, really, the Federal Government 
can't take any role in prosecuting that action, right?
    Mr. Seesel. Well, Representative DeGette, the antitrust 
laws that we enforce have historically consistently been 
interpreted not to give us the power to second-guess or sit in 
judgment on an individual firm's selection of a price.
    Ms. DeGette. Exactly. So, really, State laws would be the 
only recourse for that kind of anticompetitive behavior, right?
    Mr. Seesel. That is correct.
    Ms. DeGette. And for the half of the States that don't have 
that law on their books, there wouldn't be any recourse at all.
    Mr. Seesel. Well, I think there are a number of States have 
actually said they have more general consumer protection 
statutes that they are interpreting to deal with the gouging 
issue. Not the States, the 23 or so States, that have explicit 
gouging prohibitions, but there are some other States that are 
starting to invoke their more general consumer protection laws.
    Ms. DeGette. Just one last question. Do you think that it 
would be useful to give additional Federal authority to an 
agency like the FTC to be able to prosecute anticompetitive 
behavior in gas pricing?
    Mr. Seesel. Well, I certainly think that the FTC needs to 
deal with anticompetitive conduct in the sense that I have been 
talking about it, as the antitrust laws are historically 
interpreted.
    Ms. DeGette. Right. But there is anticompetitive behavior 
that is not necessarily collusive behavior, Correct?
    Mr. Seesel. That is correct.
    Ms. DeGette. And would you require additional Federal 
authority to do that?
    Mr. Seesel. I think in order for the FTC to deal with a 
unilateral price selection by a firm, we would need additional 
authority.
    Ms. DeGette. Thank you, Mr. Chairman.
    Mr. Upton [presiding]. If I had known I was going to be 
chairman when it was time for my question, I might not have 
deferred on my opening statement but just stolen my 3 minutes. 
But I will now recognize myself for 8 minutes.
    My first question has to deal with interoperability and 
public safety radio. As you know, this committee is poised to 
process a transition to digital bill, which would set a hard 
date for the broadcasters' return of their analog spectrum so 
it could be used for, among other things, public safety radio 
interoperability. And the tragic events of 9/11 underscored 
that dire need for a hard date so that we can clear the 
spectrum for public safety interoperability.
    My understanding is that, in the wake of Katrina, public 
safety entities at all levels were not able to effectively 
communicate with each other, and I am hearing that there may 
have been a host of reasons for that, including the fact that 
police radio towers were knocked down, police radio batteries 
could not be recharged, no electricity. But can you tell me, 
Mr. Moran, about what, if anything, you have learned so far 
about the situation on the ground with respect to the lack of 
interoperability as a contributing factor to that situation?
    Mr. Moran. Yes, certainly. In the wake of the events in the 
gulf, the FCC works very closely with the National 
Communications System and other Federal agencies, so we do a 
lot of coordination, and we attempt to determine the status of 
the communications networks, which ones are working, which ones 
are not working. Also in those discussions there are--certain 
aspects of them, industry is directly involved. And the 
Commission, initially we went in there to see what we could do 
to expedite matters. And we would talk to the industry to see 
what their problems were, what systems were down, what could be 
done about it to quickly effect a good result there.
    And I will tell you, the primary things that we were 
dealing with in the initial days were that the commercial power 
was out. Once it is out for a long period of time, backup 
batteries in the telecom and the communications systems will 
run down. Of course, many of the big installations have 
emergency generators; however, you have to get fuel to those 
generators to keep them running. And so what we were seeing in 
the first days after this was most of the infrastructure in the 
worst-hit areas were--communication infrastructure was not 
working because of power. But the biggest problems were as the 
carriers, as the communications carriers, were getting assets 
ready to get in there to see what they could fix, see what they 
could keep up, and try to assess the situation, the biggest 
problems we heard were they did not have security that would 
enable them to get their assets into the areas, and also 
transportation was really a serious problem trying to get fuel 
into these areas.
    So the initial thing was it was a commercial power--it was 
a power issue, starting with commercial power and getting worse 
because facilities could not get in there.
    Now, we dealt extensively with industry, and those were big 
issues that we were seeing and that we were dealing with FEMA 
and the NCS. We, of course, have all--we were watching this 
carefully, and we see the same videos that people around here 
are seeing where an emergency responder is using a couple of 
different communications devices because of an interoperability 
issue. And, of course, the underlying issue is that if some of 
the systems aren't even working, they might need more than one 
piece of equipment.
    Clearly that is not an acceptable situation. The 
Commission--the effective communications for emergency 
responders is a priority for the Commission. We are looking 
into it; we will be working with the industry. And we have 
actually done a number of things in recent years to try to 
provide additional spectrum, for example, for the emergency 
service providers.
    And so the initial problems we saw, we did see 
interoperability problems, but the biggest problems we saw 
initially were things that were needed to do to get the 
networks up. And that tended to be security issues, staging of 
personnel, to get them in there and have them secure, and also 
trying to get fuel into the areas until the power would come 
up.
    Mr. Upton. Mr. Caruso, in your statement you talked about 
the future particularly with home heating oil as well as 
natural gas. Now, you said that there were going to be 
significant increases in natural gas beginning this winter. Did 
Katrina seriously impact our natural gas supplies coming into 
the United States?
    Mr. Caruso. Yes.
    Mr. Upton. Tell me precisely what it was.
    Mr. Caruso. Yes. Initially--the Gulf of Mexico production 
of natural gas is about 21 percent of our national total.
    Mr. Upton. And where is that in terms of ramping back up to 
where it was?
    Mr. Caruso. It was 8.8 MMBtu per day shut in initially. As 
of yesterday, it was down to about 5 million Btu still shut in.
    Mr. Upton. And so it has come back to about 55 percent?
    Mr. Caruso. It is about 50 percent. And in addition to 
that, there are natural gas processing units onshore which were 
damaged, and that will affect the ability to----
    Mr. Upton. And do you think that will be a long-term 
problem, then, to get that back up to 100 percent where it was 
in natural gas?
    Mr. Caruso. In our preliminary assessment, we have it all 
back by end November. But certainly, until the investigators 
are able to get on the platforms and to actually test some of 
the pipeline infrastructure, we really don't know.
    Mr. Upton. I want Mr. Garman and Mr. Caruso and Mr. Seesel 
to respond to this question. Last week I drove probably every 
day a couple hundred miles in my district. And on Tuesday the 
gas price on average in our district in southwest Michigan went 
from 2.61 a gallon to some stations that day to 3.58, almost $1 
increase within a couple of hours. When you talked about the 
price of oil per barrel going from $65 to $70, that is about a 
7 percent increase. I think there are a lot of us that thought 
maybe gasoline would go up 7 to 10 percent, not literally $1 a 
gallon. Would you consider that type of an increase, knowing 
that we did have the supply--none of my stations in my district 
were out of gas. Would you consider that price gouging? Mr. 
Garman.
    Mr. Garman. With that information alone, I couldn't make a 
judgment.
    Mr. Upton. Yes. The answer is yes. Mr. Caruso. I know you 
too well. Mr. Caruso.
    Mr. Caruso. I would have to say the same, but make the 
comment that the gasoline markets often times behave 
differently than crude markets, and vice versa, and it very 
much depends on the individual markets. For example, the NYMEX 
gasoline market, as I mentioned, went up sharply between Monday 
and Wednesday, much more sharply than crude, and many contracts 
are indexed to the NYMEX futures market. So part of that is 
explained by the wholesale and futures market rate.
    Mr. Upton. I look forward and I know we are going to have 
the witness from NYMEX in the second panel.
    Mr. Seesel.
    Mr. Seesel. Again, Mr. Chairman, with the understanding of 
the sort of squishiness of the definition of the term 
``gouging,'' I would say that, again, I can't answer that, as 
Mr. Garman said, without information, but what you might be 
observing is a couple of things going on. One is a gasoline 
retailer hiking its price significantly because it expects to 
be paying a whole lot more for supplies that will be coming in 
the next day or the day after that, and generally an effort by 
the retailer sometimes to stay in business, at least to stay 
open and not put out a ``no gas'' sign, and essentially raising 
the price significantly in order to ration demand to accomplish 
that. It is--whether one calls it gouging, I don't know. It 
could be very well just fairly reasonable and expectable 
demand-and-supply responses to a situation of great shortage.
    Mr. Upton. Even though I am chairman for the moment, 
temporarily, my time has now expired. I yield to the gentleman 
from the great State of Michigan Mr. Stupak for 8 minutes, who 
also deferred.
    Mr. Stupak. Thank you.
    Mr. Caruso, you are familiar with the term called ``risk 
premium''; are you not?
    Mr. Caruso. Yes, Congressman.
    Mr. Stupak. And in layman's terms, risk premium is 
essentially the amount of money that is built into the future 
price of a good, in this case oil, that is above and beyond the 
amount of the normal price based on a number of factors that 
may impact the price of a good, such as terrorism, natural 
disasters, refinery problems, et cetera, right?
    Mr. Caruso. That is correct.
    Mr. Stupak. I have seen a number of articles that said that 
prior to the war in Iraq and prior to Hurricane Katrina, the 
risk premium on a barrel of oil, of crude, was in the 
neighborhood of about $2 to $4. Is that about right?
    Mr. Caruso. That is what a number of trade journals have 
said. It is not the position of EIA.
    Mr. Stupak. Right. Now, today, in the last couple of weeks 
here, the last couple of months, that terrorist premium risk, 
if you will, has gone up to $15 to $30 a barrel; is that 
correct?
    Mr. Caruso. I have not seen that large a number.
    Mr. Stupak. What would you think it is at right now, then, 
the risk premium on a barrel?
    Mr. Caruso. I think our models for crude oil indicate that 
you can explain most of the run-up in prices based on the lack 
of spare productive capacity for crude oil.
    Mr. Stupak. But to get back to the risk premium, though, As 
Kiplinger forecasts here, they say 15 to $20 a barrel, right? 
Would you disagree with that?
    Mr. Caruso. Yes.
    Mr. Stupak. What do you think it is then?
    Mr. Caruso. I think the risk premium for crude oil is very 
low. I think it----
    Mr. Stupak. Give me a number. What do you think it is?
    Mr. Caruso. I think it is probably only a few dollars.
    Mr. Stupak. You think it is still $2 to $4?
    Mr. Caruso. In that range. It hasn't changed that much for 
crude oil as a result of the recent event.
    Mr. Stupak. Here is another article that is within the last 
year, MSNBC, and this actually shows it about 15 to $30. And 
they talk about terrorism. Here is a--from Bloomberg.com which 
shows that the risk premium has substantially gone up, and this 
is actually from August 30, 2005, about $15 a barrel. So you 
are not familiar with any of these articles?
    Mr. Caruso. I am familiar with them. Yes. I disagree with 
them.
    Mr. Stupak. You disagree with them?
    Mr. Caruso. Yes, sir.
    Mr. Stupak. Well, let us assume that they are right and you 
are wrong. Okay? Apparently these authors in these articles 
disagree with you. So the price of oil right now per barrel is 
probably about 25 percent more, if we believe this risk premium 
is at $15, than what it should be, Right?
    Mr. Caruso. If you believe that, yes, sir.
    Mr. Stupak. How do you get your hands on this risk premium? 
I know you don't agree with us that it is $15 a barrel. You 
think it is much less than that. If it is not the risk premium, 
then what is making these prices fluctuate so much? And, 
really, the issue is $35, right? Now we are paying around $70, 
roughly.
    Mr. Caruso. That is right. It is 65 or----
    Mr. Stupak. Okay. So it has almost doubled in a year. If it 
is not a risk premium, then what is the factor that is causing 
it?
    Mr. Caruso. There are a number of factors. The first one is 
that world oil demand has grown rapidly in the last several 
years, putting upward pressure on price. There has not been 
sufficient productive capacity to meet that demand in the short 
term, there has been a lack of inventory to meet short-term 
demand, all of which means that we are operating an industry of 
83 million barrels a day, on a global basis, at about 98 
percent of capacity. So any short-term perturbations in either 
supply or demand, because of the low short-term elasticity of 
price or income, mean volatility and sharp price rises. And 
Katrina is a perfect example of that.
    Mr. Stupak. But actually once the administration finally 
heeded the advice of myself and others who have been for months 
saying release the SPR, didn't the price of oil go down after 
the barrels of oil were released from the SPR?
    Mr. Caruso. Yes, it did. As the Chairman mentioned, it had 
reached the peak of 70 in interday trading 1 day last week. It 
is now between 65 and 66 as of this morning.
    Mr. Stupak. So it has actually gone down. So isn't really 
the price that keeps it up is like instability in the world, 
such as like in Venezuela, one of our larger suppliers that we 
had some disagreements with, Iran that we have disagreements 
with over nuclear issues, Gulf, the war going on in Iraq, 
things like that?
    Mr. Caruso. Part of the reason that there is so much 
uncertainty and that refiners are willing to pay those prices 
is they don't know what is going to happen in places like those 
you have just mentioned.
    Mr. Stupak. Well, as these prices go up like this, whether 
it is risk premium or not, it has gone from 35 earlier this 
year to--peaked at 70. And who benefits? And take the case of 
Saudi Arabia; Aramco, right?
    Mr. Caruso. Yes, sir.
    Mr. Stupak. The people who purchased the oil from Saudi or 
Aramco, they would benefit, right? The refineries would 
benefit, Correct?
    Mr. Caruso. If they are able to sell it with enough of a 
profit margin, they benefit, yes, sir.
    Mr. Stupak. Sure. But the Saudis, if it takes $10 to get it 
out of the ground, and they sell it at whatever they sell it 
at, 40, there is a profit there. And they turn around and sell 
it somewhere else. And these futures are up to, what, 65 right 
now? So we have got some pretty good profits going right now, 
Right?
    Mr. Caruso. Absolutely. And----
    Mr. Stupak. In fact, every article I have seen, we have got 
record profits in parts of the industry, right?
    Mr. Caruso. That is correct.
    Mr. Stupak. Has the administration given any consideration 
to a windfall profits tax then? Mr. Garman, do you want to 
answer that?
    Mr. Garman. I will, and say that, to my knowledge, no.
    Mr. Stupak. Is there--there is actually more--less 
refineries in the United States, but we are refining more oil 
into gas than ever before in the Nation's history, correct?
    Mr. Garman. That is correct.
    Mr. Stupak. So everyone is making a pretty good profit 
here, and yet we are not doing anything to try and get control 
of the price of this oil other than release oil from this SPR, 
correct, trying to get your hands on this price's volatility. 
If it is not a risk premium, then, Mr. Caruso, if it is just 
supply and demand, but we have more, we are refining more, how 
do you account for those high prices then?
    Mr. Caruso. We don't have enough refining capacity. We 
are--as Mr. Garman mentioned, we are having to import more and 
more refined products from abroad.
    Mr. Stupak. We are importing about, what, 10 percent?
    Mr. Caruso. In refined products, a little over 2 million 
barrels a day on a net basis out of our 20-. So that is about 
right.
    Mr. Stupak. So what is the answer then to get control of 
these prices? More refineries?
    Mr. Garman. There is a multitude of answers, and I don't 
think we should depend on any one answer. First, we should 
encourage new supply. In fact, let me make that second.
    First, we should encourage conservation and efficient use 
of the supplies that we have. That is the quickest, cheapest, 
most dramatic effect that one can have in the short term, 
because it takes time to bring new production on line. New 
production is very important.
    And then I think these two thin-capacity margins that Mr. 
Caruso have talked about are very, very important, both the 
thin-capacity margin on the production side. You know, for many 
years we had a production capacity margin of 3- to 5 million 
barrels a day. Now we are down to 1 million barrels a day, and 
most of that capacity margin exists in Saudi Arabia. It is in 
our interest to see capacity margins increased on the supply 
side upstream. It is also in our interest to see capacity 
margins increase down, on the downstream side, at the refinery 
side.
    I think all of these are components, and I don't think we 
should hitch our wagon to any single effort. I think we have to 
take a comprehensive effort approach and urge Americans to 
conserve, urge producers to produce, urge refiners to invest in 
new refinery capability and capacity. We have to do all of 
those things if we expect to have a long-term impact on price.
    Mr. Stupak. So, in summation, when the President said in 
2000 that he would just jawbone the Saudis into producing more 
crude, that really wasn't an answer or a correct answer to a 
complex problem.
    Mr. Garman. The President, in my view, had a very 
comprehensive answer in his May 2001 energy plan that depended 
on both supply options and demand options. Roughly half, if I 
recollect correctly, of the recommendations in the President's 
original plan had to do with energy efficiency, renewable 
energy, and other alternatives to the status quo.
    Mr. Hall [presiding]. The gentleman's time has expired.
    The Chair recognizes the gentleman from Florida Mr. Stearns 
for 5 minutes.
    Mr. Stearns. Yes. Thank you, Mr. Chairman.
    My colleague from Michigan, Mr. Upton, asked each of you a 
question about his experience driving around his district, and 
it appeared to me that we couldn't have a definition among you 
on what price gouging is. It seemed to me there is lots of 
factors. So when he tried to present you a case example, you 
really couldn't agree with him because you said there is other 
factors.
    Now, if I describe cheating to you, I think we can all 
agree what cheating is. If I describe stealing, I think we 
could all agree what stealing is. It seems to me we just have 
to understand that gouging is something that we can discern and 
involves several components. I looked up the definition of it, 
and it comes from old Middle English which comes to sting. Now, 
following that definition is to basically--to cut or force out 
a rough cut of something.
    I submit that gouging involves a couple things: It has a 
moral component; that is, it is a necessity that we need to 
have, so we are forced to buy it. Just before Valentine's Day, 
I notice that roses go up. But I don't necessarily have to have 
those roses, I can get carnations or something else. But if I 
have to get to work, I am going to need gasoline. So I think 
gouging involves a moral component.
    Second, I think it involves a time factor, generally 1 or 2 
days. If the price goes up, as Mr. Upton indicated, almost 
doubled in a period of 1 day, that is obviously price gouging.
    And, last, I submit that the buyer is coerced and 
intimidated.
    So I don't think--if you throw those three components in, 
it is not hard to discern and to see what is gouging.
    Now, as I understand it, on the Federal level we do not 
directly have laws on gouging. Is that right, Mr. Seesel?
    Mr. Seesel. That is my understanding, Congressman.
    Mr. Stearns. But we do in the event of collusion. So, if 
companies work together, then we can step in and say there is 
collusion, but also price gouging; is that correct?
    Mr. Seesel. Well, collusion may take a number of forms. 
Traditionally, classically it would take the form of conspiracy 
to raise prices or reduce output. And so it might not take the 
form of gouging in the sense that you may be thinking of it 
going from 2.50 to 3.50 a gallon.
    Mr. Stearns. Do you think we should have Federal laws 
dealing with price gouging separate from the idea that you have 
to have collusion first?
    Mr. Seesel. As I said before, I think the Congress needs to 
tread quite carefully in this area because----
    Mr. Stearns. What about the idea that, even in the States 
where they have laws dealing with price gouging, it only 
generally applies in state of emergencies? So in this case we 
had four States declare a state of emergency. What about the 
other 46 States? How do you handle price gouging in those 
States?
    Mr. Seesel. I have seen quite a few media reports in the 
last few days, Congressman Stearns, of attorneys general and 
Governors in States quite far away from the gulf region that 
are applying either their specific price-gouging statutes or 
their more general consumer-protection statutes to deal with 
the gasoline pricing situation. And I think their sense is 
there is an economic emergency going on in their States. I 
think that is one of the rationales I have read. So that 
irrespective of the physical emergency of the hurricane, a lot 
of States have been able to proceed, begin investigations under 
the rubric of their general statutes.
    Mr. Stearns. In the State of Georgia, there was an example 
where gasoline was selling for $6.38 a gallon, yet that was not 
one of the States where there is an emergency. Texas, South 
Carolina, there was huge increases. Surely I would think from 
your standpoint that those would be areas you would 
investigate, because they are not in a state of emergency, yet 
it appears that the States are almost helpless to stop price 
gouging.
    Mr. Seesel. Well, Congressman, my understanding--and I may 
be wrong about one or two of the States you mentioned, but I 
think the attorneys general actually have announced they are 
looking at pricing issues for gasoline in those States. Even 
though--again, even though they are outside the Louisiana, 
Mississippi, Alabama, Texas area, they are still invoking their 
price-gouging or general consumer statutes to look at what has 
been going on.
    Mr. Stearns. Let me conclude before my time is out that you 
had a report that you issued, and this report came out before 
Katrina, before the hurricane, entitled: Commission Report on 
Factors that Affect the Price of Gasoline.
    How has this report affected your ability to scrutinize the 
marketplace for collusion, for price gouging, for any things, 
even such things as State and local regulations that affect it? 
Maybe you can give me just a summary of what your report 
provided so that you could help us in the future on this 
matter.
    Mr. Seesel. Well, the report really--we have a fairly broad 
panoply of statutes that we enforce that we use in our law 
enforcement program. The report was really an attempt to set 
out in a very concise way all of the learning we have 
accomplished over the last 20 or 25 years in the petroleum 
industry on analyzing the various factors that will go into 
driving the price of gasoline, whether you are talking about 
supply factors, demand factors, competition for the various 
resources that go into the product such as crude oil and 
refining capacity and so forth. So what we attempted to set out 
here was a--I am sorry.
    Mr. Stearns. Mr. Chairman, could we allow him to finish his 
answer?
    Mr. Hall. The gentleman will be allowed to finish his 
answer, if he wants.
    Mr. Stearns. Thank you, Mr. Chairman.
    Mr. Seesel. We essentially try to set out the entire 
spectrum of supply, demand, regulatory, and other factors that 
result in prices and volatility in gasoline.
    Mr. Stearns. Thank you, Mr. Chairman.
    Mr. Hall. I thank you.
    The Chair recognizes the gentleman New York, Mr. Engel, for 
5 minutes.
    Mr. Engel. Thank you, Mr. Chairman.
    Gentlemen, with all due respect, and I think you have heard 
the frustrations of all of us, you know, if it looks like a rat 
and smells like a rat, it is a rat. The American people aren't 
stupid. And I remain totally unconvinced that 2 days after 
Hurricane Katrina happened, gasoline prices went sky high as a 
result of the catastrophe of that hurricane. It would certainly 
take much longer to have the hurricane's catastrophe translated 
into higher gas prices at the pump. There is no way other than 
price gouging that it could happen within 2 days. And, again, 
we all have seen that, when the price of oil drops, it takes 
several weeks, if not months, for that to be reflected at the 
pump with prices of gasoline dropping. So I just think that 
there is no way we can excuse it.
    The American people aren't stupid. The Representatives on 
both sides of the aisle aren't stupid. We know that there was 
price gouging. And I just think it is absolutely 
unconscionable.
    Last week I went to get gasoline right here on South 
Capitol Street, and there were two gasoline stations within a 
block from each other, and there was a 40-cent difference in 
the price of gasoline between those two stations. I have spoken 
with gasoline owners, owners of gas stations, who said that 
they were told by the companies to increase the prices.
    I don't think this is something we can kind of talk away or 
just kind of have business as usual. The American people are 
sick and tired of it and want an explanation and don't want it 
to happen again. And, again, when prices sink next week or in a 
month or whenever it is to below $3 a gallon, we are not going 
to jump for joy, because as far as I am concerned, $2 and 
change is too much to pay.
    I want to ask Mr. Garman, yesterday Senator Domenici said: 
We are too dependent on this part of the country. Congress must 
do something on offshore drilling because we need more 
diversity than what is out there.
    I agree that we need to diversify our energy sources, but I 
respectfully disagree with the Senate chairman about how. To 
me, Hurricane Katrina has shown again that our Nation is overly 
dependent on oil itself, not gulf coast oil. If we are going to 
create a stable energy future for our country, we need to 
diversify away from our oil. The answer, in my opinion, is not 
opening drilling in Alaska or all along our Nation's coasts to 
increase oil supplies on the mere margins, but to aggressively 
promote technology such as advanced hybrid automobiles which 
will substantially reduce our demand for oil. If we were 
serious about energy policy in the wake of Katrina, we would 
significantly increase CAFE standards for passenger vehicles, 
not propose insignificant adjustments as the Bush 
administration recently did.
    Next week I and a bipartisan group of Members will announce 
the founding of a new Oil and National Security Caucus. The 
purpose of our group will be to highlight bipartisan, common-
sense ways to reduce our dangerous overreliance on oil. We will 
work with members of the committee and the administration to 
offer serious practical proposals to provide more balance in 
our energy mix.
    Now, Mr. Secretary, in the wake of Hurricane Katrina, what 
policy adjustments are you and the administration proposing to 
diversify our Nation away from oil?
    Mr. Garman. As you know--and admittedly this is a long-term 
approach--back in January 2003, the President in his State of 
the Union Address announced his hydrogen fuel initiative, which 
is a long-term effort to totally take our personal 
transportation off of petroleum, completely, through the use of 
hydrogen and fuel cell vehicles fueled by hydrogen fuel that 
can be produced here domestically from a variety of different 
energy, primary energy inputs. That is a long-term goal, 
admittedly, and we do not expect to see affordable hydrogen 
fuel cell vehicles that need no petroleum and emit no 
pollutants in an affordable fashion available to consumers 
prior to 2020. They are on the road today, but neither you nor 
I can probably afford them. So we have to bring down the cost.
    In the energy bill that was just passed, a proposal that 
the President made back in January 2001, production tax--I am 
sorry, a consumer tax credit for hybrid vehicles to get more of 
these vehicles on the road is another very, very important 
component. We want to encourage that.
    There are a lot of things in the energy bill that have not 
yet been implemented.
    Mr. Engel. Let me just say, because I know my time is over, 
I am told that the FTC maintains a gasoline price monitoring 
project, and the DOE has a Web site for filing gasoline price-
gouging complaints. What do you do with the Web site which 
permits the filing of complaints? Is it just for people to let 
off steam and feel good? What practical substance can we tell 
the American people that, if they feel they have been ripped 
off at the pump, that they can effectively do something and 
that government will move to make sure that it doesn't happen 
again?
    Mr. Seesel. Congressman, the Commission receives complaints 
from all kinds of sources. If we get a complaint that deals 
with gasoline pricing, to the extent the complaint spells out a 
law violation of the kind that we can go after, we will proceed 
vigorously against that. If it spells out an issue that the FTC 
really does not have authority to go after, that is the kind of 
thing we would refer to State attorneys general. It is not just 
a mechanism for people to let off steam; it is a way for us to 
learn information from consumers, some of which will be turned 
into law enforcement investigations that we can pursue.
    Mr. Whitfield [presiding]. The gentleman's time has 
expired. It is my time to ask questions, so thank you.
    You know, as elected representatives, and as people who 
depend upon being reelected to their position, obviously all of 
us are very much concerned and want to do everything we can to 
defend against higher gas prices. And our ability to do that 
will oftentimes depend upon whether or not we are reelected. 
But I was reading an article recently, on August 26, that 
indicated that in Amsterdam the price of gasoline was $7.13 per 
gallon. The price in Great Britain was $6.43 per gallon. The 
price in France was $6.90-some cents per gallon. The price in 
Belgium was in the $6 range. And the price in Greece was about 
$4.80 per gallon. And in the U.S., on August 26, it said the 
price was about $2.61 per gallon.
    So the question I would ask: Is it realistic for the 
American people to expect low gas prices, maybe the lowest gas 
price in the world, when we have--is that not? What is the 
lowest gas price in the world?
    Mr. Caruso. The lowest is in places like Saudi Arabia and 
Iraq.
    Mr. Whitfield. And how much are they paying per gallon?
    Mr. Caruso. Saudi Arabia, when I was there in May, they 
were paying about $1.50 a gallon. But they are much lower in 
Iran.
    Mr. Whitfield. And how much are they paying in Iran?
    Mr. Caruso. Less than $1; 50 cents probably.
    Mr. Whitfield. But is it realistic for a country like 
America where we have such a small amount of reserve. We do 
consume more than any other country in the world. Out of the 84 
million barrels being consumed each day, we are consuming 
around 21 million barrels a day. Is it unrealistic for the 
American people to expect prices below $3 a gallon?
    Mr. Caruso. I mentioned that in our short-term outlook, 
prices are likely to come down below $3 in the coming days and 
weeks and to be back to about $2.60 in the fourth quarter. In 
the long run, the main difference between the European prices 
and the U.S. is taxes. They are a large component of the high 
price in the U.K.
    Mr. Whitfield. It is my understanding that in Europe, I 
mean, the taxes might reflect 60 percent of the overall price 
of the gas, which might ask the question: Should we--I am not 
advocating this, but should we increase price on the gas for 
taxes?
    There has been a lot of comments today about refineries and 
the lack of investment in refineries. And I read an article 
recently that said major oil companies are keeping a tight rein 
on their capital expenditures, and that they typically for any 
project will do a stress test for profitability at $20 a barrel 
or below; that they are making their decisions based on a price 
of $20 a barrel and below. Have you heard any comments about 
that, or do you think that is true? Or does that explain why we 
have not had a new refinery since 1976?
    Mr. Garman. I am not familiar with the specific article 
that you read, but I am surmising that that $20 figure may 
relate to exploration and production investments by oil 
companies. They have been burned before when they have made 
their exploration and production investments in new finds 
expecting to find 25 or $30 a barrel oil, and then it fell to 
18 or 19, and have been--had an unprofitable investment. So I 
have heard anecdotally that oil companies are now looking for 
25 or even $30 investment, which is up from the past, in 
analyzing whether a new exploration and production investment 
is worthy of a payoff.
    Mr. Whitfield. And I would be willing to stipulate that 
there has probably been some price gouging going on. My 
understanding, that at the retail level, that major oil 
companies own, what, like 10 percent of the retail outlets? Or 
is it more than that, or do you all have any idea?
    Mr. Caruso. I don't have that number off the top of my 
head, but I would certainly be able to provide it for the 
record.
    Mr. Whitfield. Mr. Seesel, when was the last time a major 
oil company was successfully prosecuted for collusion or for 
monopolistic pricing of gasoline in the U.S.?
    Mr. Seesel. Mr. Chairman, I don't recall the last time. If 
what you are talking about was a criminal prosecution, which, 
of course, would be handled by the Justice Department, I don't 
recall the last instance of that, I am afraid.
    Mr. Whitfield. What about from a civil standpoint?
    Mr. Seesel. From a civil standpoint? Could you hold on 1 
second, sir? I am reminded, and I should have remembered, that 
the Federal Trade Commission's own administrative complaint 
against Unocal was essentially a monopolization complaint. So 
the allegation that Unocal had deceived the California Air 
Resources Board with regard to its patents on CARB gasoline was 
a monopolization case. That is the one that I mentioned in my 
opening statement.
    Mr. Whitfield. What year was that?
    Mr. Seesel. The complaint was issued in 2003; the case was 
just settled about a month or so ago, about a month and a half 
ago.
    Mr. Whitfield. And wasn't there some $20 million fine 
against some companies in Hawaii recently? Or was that a couple 
years ago? Or are you familiar with that?
    Mr. Seesel. I am not that familiar with that, Mr. Chairman.
    Mr. Whitfield. Okay. Thank you.
    My time has expired. I recognize the gentlelady from 
California Mrs. Capps for 5 minutes.
    Mrs. Capps. Thank you, Mr. Chairman.
    And I want to turn again to Mr. Moran, the FCC's topic. It 
is now 4 years after the tragic events of September 11 when 
this country made many promises and pledges to look carefully 
at what needed to be improved at that time. I want to ask you 
if you consider today's emergency alert system to be the most 
robust and effective mechanism for warning the American public 
of an emergency? And, if not, what steps has the FCC taken in 
the past 4 years to make the EAS more effective?
    Mr. Moran. Well, the EAS system is designed really to 
deliver the Presidential message to all Americans through the 
broadcast process when the Nation's security is at risk. It is 
available for use on a voluntary basis for State and local 
emergencies, and it can be used for that purpose, too.
    The Commission--it is an operational system. It is tested 
all the time. We work with FEMA to ensure that this thing is 
operational. There haven't really been any changes in the EAS 
system over the last 4 years, if that is your question.
    Mrs. Capps. Well, there have been no steps, no rulemaking?
    Mr. Moran. Yes. The Commission has a rulemaking--the 
Commission began a rulemaking a year ago. That rulemaking is in 
process. We are looking at a number of things. Among the things 
we are looking at, to see if we should make the use of the 
system by State and locals mandatory. Right now broadcasters 
have to agree to accept the State and local messages in order 
for it to work. We also are looking to make sure--the current 
system actually does not require digital broadcasters to be in 
the system, and we are looking at that----
    Mrs. Capps. But I want to ask, when does the FCC plan to 
conclude this proceeding? And why is it taking so long?
    Mr. Moran. Well, we have an open proceeding. I really 
couldn't give you a timeframe as to exactly when it is going to 
happen, but the record has closed, and we are looking at--we 
are working on it actually right now. There is also, you may be 
aware that there is an executive branch--the executive branch 
began an overall review of all the emergency alert processes in 
recent months.
    Mrs. Capps. In addition? That is a separate action from the 
FCC's action?
    Mr. Moran. Yes. There is a committee that has been 
established.
    Mrs. Capps. So another committee. Another way of--- Mr. 
Moran. By the executive branch. But it is actually much broader 
than just EAS system. It is to look at such things as should we 
involve cellular phone systems in the system.
    Mrs. Capps. Yes, I want to get to that, too. Was the 
emergency alert system activated with respect to Katrina and 
the breach of the levees?
    Mr. Moran. My understanding, it was not used in this 
instance.
    Mrs. Capps. It wasn't used at all. And it has been 4 years. 
So nothing----
    Mr. Moran. Well, but the issue of is it used, that is an 
issue--the FCC, we have responsibilities to make sure we have 
an operational system, and we do, and we have testing rules, 
and we are involved in that.
    Mrs. Capps. But you don't even know if it works because it 
wasn't used for Katrina.
    Mr. Moran. We do know that it works because there is a lot 
of testing procedures that we do to make sure that----
    Mrs. Capps. Why wasn't it used?
    Mr. Moran. The decision as to if it is used or not even on 
the national message, that is a decision by the executive 
branch; but on the State and local side, it is the State and 
local government's decision as to whether or not to use it.
    Mrs. Capps. Okay. Can I ask you how many times the Federal 
authorities have activated it since it has been put in place?
    Mr. Moran. The current EAS, I believe, was put in place in 
1994, and it has not been used for the Presidential message; 
however, it has been used hundreds of times for State and local 
messages, for hurricane and tornadoes----
    Mrs. Capps. But in this case, when the President activated 
the Federal Government's involvement after the hurricane, it 
still wasn't----
    Mr. Moran. It was not used by the Federal, and it is my 
understanding that State and local authorities have not used it 
either.
    Mrs. Capps. They didn't use it either in this case?
    Mr. Moran. In this instance. I think the warning that the 
hurricanes were coming were so broadly known by everyone, it 
didn't probably need to be activated at that point.
    Mrs. Capps. Well, that is a different question, isn't it, 
sir?
    And then you started to--if I could just use the last few 
seconds. And, by the way, many States now have Amber Alerts. My 
State has one that works very well for child abductions all the 
time. So this technology is there.
    But let me ask you finally to talk about the digital 
broadcasting. More and more people are watching digital 
television. That is a subject of concern to this committee as 
well. Does the FCC plan to institute that part of this? Will 
digital requirement become part of whatever is done?
    Mr. Moran. That is an issue in this proceeding, but I can't 
speak to the proceeding until the Commission decides how it is 
going to act in that. That is an issue before the Commission in 
this proceeding that I told you about. That is before the 
Commission, should we direct the digital broadcasters also to 
participate. That is before the proceeding, but it is an open 
proceeding.
    Mrs. Capps. One final, because I have a lot more questions 
to ask. Who in the executive branch triggers the alert, if I 
could ask you that?
    Mr. Moran. It is in the White House. I think it might be 
the Office of Science and Technology Policy.
    Mrs. Capps. But you don't know?
    Mr. Moran. I don't know for a fact.
    Mr. Shadegg [Presiding]. The gentlewoman's time has 
expired.
    The Chair recognizes the gentleman from Georgia for 5 
minutes.
    Mr. Norwood. Thank you very much, Mr. Chairman.
    Mr. Garman, can you tell me once again how many refineries 
in this country are in operation?
    Mr. Garman. There are a total of 10 refineries that are out 
of operation, that are shut down at this moment. However, we 
expect four of those to come back up relatively quickly, maybe 
one of them as soon as today.
    Mr. Hall. But the total in the Nation?
    Mr. Garman. We are hearing 136 from the folks behind us.
    Mr. Norwood. And the percent of those in the gulf coast, 
Whether they are working or not?
    Mr. Garman. There was 8 million barrels a day of refining 
capacity in the gulf coast; 2 million barrels a day were down 
at the height of the storm, and we have got about 1- of those 
back.
    Mr. Norwood. But the percent at full production out of the 
Gulf of Mexico is what for the Nation?
    Mr. Garman. Roughly 50 percent.
    Mr. Norwood. That is what I thought.
    Now, why is it all there? Why did so much accumulate in the 
gulf coast?
    Mr. Garman. My theory is that, No. 1, that is where the 
production, most of the offshore production, virtually all of 
Nation's offshore production, is located there. That is where 
investors have been successful in building refineries.
    Mr. Norwood. Because of why? Why were they successful 
there?
    Mr. Garman. For a reason they found that closer to product, 
and they possibly found a more willing and obliging State 
regulatory regime.
    Mr. Norwood. We haven't had a refinery in 30 years because 
of State regulation?
    Mr. Garman. It is not solely State regulation.
    Mr. Norwood. Okay. A good bit of it?
    Mr. Garman. It is the willingness of the community to host 
a refinery.
    Mr. Norwood. That is where I am sort of going. Are there 
many refineries in California?
    Mr. Garman. I am told there are 21 refineries in 
California.
    Mr. Norwood. And how about Massachusetts?
    Mr. Garman. I am not aware of a refinery in Massachusetts.
    Mr. Norwood. The problem is we don't have our refineries 
distributed around the country appropriately, I guess, and I 
think that is something that we significantly need to deal 
with, and I hope the energy bill does. And Chairman Barton says 
perhaps we go back and look at that again, but I view that as a 
major part of the problem, not just because of the hurricane 
which knocked out so much of our capacity but because it was in 
one spot.
    One of you have said that the price of crude oil is the 
single largest factor in the price of gas. Am I correct in 
thinking that?
    Mr. Caruso. That is correct. It accounts for about 60 
percent right now.
    Mr. Norwood. And the price of crude oil then is determined 
by supply and demand?
    Mr. Seesel. Yes, sir.
    Mr. Norwood. And a great deal of the supply today is from 
India--I mean, the demand is from India and China?
    Mr. Caruso. China is second largest.
    Mr. Norwood. Are they making gasoline?
    Mr. Caruso. Not enough.
    Mr. Norwood. Do they demand that much gasoline in China 
that the amount of crude that they are buying is going to 
gasoline?
    Mr. Caruso. In China there is a much smaller percentage of 
the total barrel going into gasoline because of their small 
passenger car fleet.
    Mr. Norwood. So what do they do with that crude if they are 
not making gasoline?
    Mr. Caruso. Diesel fuel for generators and trucks and jet 
fuel, of course, and also diesel for railroads. And they do 
burn some for electric power, but not a lot.
    Mr. Norwood. Well, the crude oil we purchase, what percent 
of it goes toward fuels, gasoline, diesel?
    Mr. Caruso. Approximately 70 percent of our oil.
    Mr. Norwood. That is what I thought.
    Is China anywhere near that?
    Mr. Caruso. No, sir. They are much lower. I would say 
probably about 25 percent.
    Mr. Norwood. Let me just make one last comment, Mr. 
Chairman, to these gentlemen. And we thank you so much for your 
time. Mr. Upton made a point earlier asking, ``was an increase 
of almost $1 or 75 cents over a period of 24 hours or 48 hours, 
is that called gouging?'' And none of you could answer that or 
would answer that. And I think you are doing a disservice to 
your boss. The fact is it is gouging, and the reason it is 
gouging is because the American public perceive it as gouging.
    I know there are other factors out there, there are other 
things, but the fact is most Americans don't understand and are 
not willing to understand why gas could go up 75 cents in 2 
days. And we need to deal with that as we speak, I think, in an 
appropriate manner, and we, too, should agree that something is 
bad, wrong for that to go up 75 percent. Many people think that 
individual service stations are trying to make an extra buck--
maybe they are, maybe they aren't--but I don't want you to deal 
with it, I don't want the Feds to deal with it. In my State of 
Georgia, as was pointed out by Mr. Stearns, some of them went 
up $6 a gallon. Our Governor took care of it: He sent the State 
Patrol over and arrested them. Now, that is who I want to deal 
with that. He called it gouging. Most of us thought it was 
gouging. And he put a stop to it in Georgia very quickly.
    And that is how I think we need to do it. We really don't 
need the Feds to help us with that. But I wish you would be 
careful of how you speak of the increased price of gasoline 
that has sometimes gone up in a most unreasonable manner.
    With that, Mr. Chairman, I am happy to yield back.
    Mr. Hall [presiding]. I thank the gentleman. I thank him 
for being so plainspoken. Did they torture that guy before they 
put him in jail?
    Mr. Norwood. No. They even fed him, too. It stopped it, Mr. 
Chairman, I promise you.
    Mr. Hall. I thank you.
    The Chair recognizes the gentleman from Texas Mr. Gonzalez 
for 5 minutes.
    Mr. Gonzalez. Thank you very much, Mr. Chairman. I always 
wanted to be on this committee, got my wish, and of course the 
first thing we were dealing with was whether people's TVs would 
go dark after we converted to a digital system. It appears now 
we have to make a decision about gasoline, whether people are 
going to be able to afford gas to leave their homes; and, if 
they can't, they are going to stay home, and then when they 
turn their TVs on, they won't be able to get a picture once we 
convert over to digital.
    But on the serious side, I had a question for Mr. Caruso. I 
think you are going to be the most quoted guy on Capitol Hill 
after today. What you are saying, in the fourth quarter 
gasoline prices will recede somewhere around to $2.60; is that 
correct?
    Mr. Caruso. That is correct.
    Mr. Gonzalez. And then next year, 2006, it will be around 
$2.40 nationwide average?
    Mr. Caruso. Yes, sir.
    Mr. Gonzalez. Because, believe me, our constituents are 
waiting for some sort of word about what they are going to be 
paying, and the fact that it is going to be coming down. For 
the first time, I think we have heard some discussion regarding 
efficiency and conservation.
    And I am going to ask Mr. Caruso, and, of course, Mr. 
Garman, you can have your own opinion on this, this is from an 
article that appeared in the Wall Street Journal, And it said: 
Last month, the administration proposed a sweeping 
restructuring of the light truck fuel economy rules, claiming 
the new policy would save the country 10 billion gallons of 
gasoline over the lives of vehicles bought from 2008 to 2011. 
Critics say the administration's move wasn't enough. David 
Friedman of the Union of Concerned Scientists, environmental 
advocacy group, noted that 10 billion gallons of gasoline is 
the amount that the United States uses approximately every 25 
days. Quote: It is meaningless, he said, of the 
administration's new fuel economy proposal. The administration 
is bragging about saving less than a month's worth of oil over 
two decades.
    Would you agree with I guess it is Dr. Friedman's analysis 
of the administration's proposal, Mr. Caruso, as its real 
effectiveness?
    Mr. Caruso. I would not agree. I think that any savings is 
better than no savings. So the statistics that you have quoted 
I believe are accurate, but I would disagree with the 
characterization.
    Mr. Gonzalez. Well, something is better than nothing. I 
guess we can all agree on that. But sometimes something is not 
meaningful, and that is what I am getting at is we could do 
something that is more meaningful, or people will be staying 
home a lot longer. And if we don't do the digital conversion, 
right, then they won't even have a television either.
    Mr. Garman, do you agree with David Friedman's analysis 
that it really isn't meaningful or substantive?
    Mr. Garman. I would make a couple of observations. First, 
the administration previously raised CAFE standards on light-
duty trucks in the 2005 to 2007 frame. I mean, we have raised--
the administration has raised CAFE standards now twice, 
standards that had not been raised at all prior to or since the 
1996 model year.
    And I think it is also important to point out that 
consumers have the opportunity to choose high-mileage vehicles 
today. They don't. It is not a requirement that the government 
require manufacturers to make these vehicles. I drive a vehicle 
today, and have since 2001, that gets more than 50 miles per 
gallon, and that is a choice that I as a consumer can make and 
have made that choice.
    So I think the question is consumers can buy vehicles today 
that deliver great efficiency, and we should encourage them to 
do so. The question is do we force markets and mandate consumer 
behavior and look to that as the answer? It is certainly an 
approach, and it is a tool that we have used in the 
administration, but we also want to encourage consumers to buy 
fuel-efficient vehicles not because the government is telling 
them they must, but because they realize that it is in their 
own self-interests.
    Mr. Gonzalez. And I understand the big argument about 
choice; consumers should be given choice. But, you know, policy 
and regulation and such is guidance so that you avoid a 
situation where maybe our oil industries and others aren't 
really prepared for suddenly a drastic shift in consumer 
choice. And that is what I am talking about. When you are 
talking about the price of gasoline reaching $3, $4, and $5, it 
definitely will cause a tremendous shift in the way the 
consumers will choose. And I do think we need responsible 
policies that will point us in the right direction. You are 
talking about hydrogen, we are talking about hybrids, we are 
talking about greater efficiencies. Those are realistic goals 
and policies that we should be instituting. And I think to 
simply say, well, we are going to deprive people of choice if 
we don't do these things, I don't think that that is really 
what is going on.
    I have a real quick question for Mr. Moran, and my time is 
up, and I am hoping that they will allow you, and that is voice 
over Internet protocol. We know that you have policies, 
programs, regulations, and coordination of what is going on out 
there. But what about this new method or manner of providing 
phone service to households? That is not incorporated in any of 
your plans, is it?
    Mr. Moran. It is incorporated. We have done some things to 
allow voice over Internet to work and also to allow 911--to 
make it mandatory, actually, for voice over Internet providers 
to provide 911 services. But do you mean in the emergency 
alert?
    Mr. Gonzalez. In the emergency alert system, sure, Because 
I am just thinking that traditional providers come under the 
scheme. But I don't think voice over Internet protocol would.
    Mr. Moran. I think we may have had some questions in our 
proceeding. I would have to check, though. We cast a pretty 
wide net in our proceeding that is ongoing right now. I would 
have to ask to see if we asked questions about voice over 
Internet, and I don't recall if we did.
    Mr. Gonzalez. If you could get back to me on that.
    Mr. Moran. Sure.
    Mr. Gonzalez. Thank you very much, Mr. Chairman.
    Mr. Hall. The gentleman's time has expired. Don't worry 
about us over in my area; we are still watching radio over 
there.
    Mr. Shimkus, the gentleman from Illinois, is recognized for 
5 minutes.
    Mr. Shimkus. Thank you, Mr. Chairman. We have already 
mentioned about the inability to build a crude oil refinery, 
but it is not true that we haven't built refineries in this 
country; is that correct? I don't care who wants to jump up 
there. How about Mr. Garman?
    Mr. Garman. Are you speaking of ethanol production?
    Mr. Shimkus. Any.
    Mr. Garman. Yes, sir. We have built--there are in excess of 
70 ethanol production facilities in operation today, and that 
number is growing as the weeks go by.
    Mr. Shimkus. And so I have always chided my friends that, 
for us in the Midwest, they don't want to move and build 
petroleum-based refineries; we will continue to build 
renewable-fuel refineries. In fact, I have got 90 ethanol 
plants that are on line today. There are 17 plants that are 
under construction as we speak. There are seven in Illinois, 
and 17 are planned for Illinois as we speak. That kind of talks 
to some of the benefits of what we did in the energy bill. We 
have to decrease our reliance on foreign oil, we did make great 
progress on this issue, and I would encourage other feedstocks 
to look at this as an alternative.
    I also wanted to direct my colleagues, I do a lot of energy 
debates and discussions back in my district because of the 
expertise or lack thereof that you develop over the years. And 
one of the slides I had was China crude imports. In 1996, China 
demanded--and this is from the International Energy Agency, it 
is out of the National Journal--22,828 million tons of crude 
imports in 1996--that is a billion; 122--then there is 122,699 
million tons in 2004, which is a sixfold increase in 6 years.
    So for people to--so when I am asked by my public how--what 
is going on, I have to talk about that fuel tanker that is 
loaded with crude oil that is going to go to some port, it is 
either going to go to India or it is going to go to the United 
States, or it is going to go to China, what is going to 
determine where that tanker of crude oil is going to go, to 
what port? And, Mr. Garman, what would you say?
    Mr. Garman. The willing buyer that will pay the highest 
price.
    Mr. Shimkus. And that is what the public has to understand.
    Now, I would like--Mr. Caruso, how much crude oil reserves 
do we have within the continental United States or off our 
Outer Continental Shelf?
    Mr. Caruso. We had proven reserves at the beginning of this 
year of about 28 billion barrels total, and that is in those 
areas that have been drilled.
    Mr. Shimkus. How much do we not have access to?
    Mr. Caruso. I don't have that precise number, but there is 
a significant amount of resources that haven't been drilled and 
proven, but that the USGS believes are available to be 
discovered. And I could provide that number for you. But it is 
a significant--it will be a significant increment to the proved 
number I just gave you.
    Mr. Shimkus. And so many of us are very frustrated by this 
debate. It is incomprehensible that we in this country are 
importing refined product. Just think of it from the job 
creation aspect. We allow someone else to get the crude oil in 
some other refinery, so they have got the tax base, they have 
the jobs, and we get the refined product? My constituents don't 
really understand that.
    In 1998, my first term as a Member of Congress, myself and 
a colleague of mine, Karen McCarthy from the great State of 
Missouri, worked on changing Federal law under EPAct on which 
we were able to give biodiesel credit, which changed the debate 
from just vehicles purchased to fuel usage. And we have got a 
50 percent credit now for fleets, and many fleets are moving to 
biodiesel, decreasing reliance on foreign oil. In fact, it has 
really hit now. Willie Nelson and all these stars are into soy 
diesel, and we are glad to have them on board.
    Has the administration thought about working with us to 
move that credit to 100 percent?
    Mr. Garman. We will certainly engage with the Treasury 
Department and have those discussions. To my knowledge, I have 
not been part of any such discussions.
    Mr. Shimkus. If you can get back to me, I would appreciate 
it. And if we can be helpful, I would like to be.
    Mr. Chairman, thank you. I yield back my time.
    Mr. Hall. I think the gentleman's time has expired.
    The Chair recognizes Mr. Inslee from the State of 
Washington for 5 minutes.
    Mr. Inslee. Thank you.
    Last weekend I went down to the Astrodome to work with the 
evacuees, and I can tell you, I was so inspired talking to 
these people. The resilience, the graciousness, the 
appreciation of these people for what the country is doing for 
them, it was really inspiring.
    On our way back, we were flying back from Houston to D.C., 
halfway through the flight one of the evacuees who was heading 
from Florida took out a razor blade and slashed his wrist to 
cut it and take his life. He had just simply had it. And the 
reason I mentioned, that we diverted our flight plan to 
Nashville to rescue him, and he is okay; we had two EMTs on the 
flight, and it was a happy ending of sorts. But we changed our 
flight plan to accommodate that.
    And it is clear to me that we need to have some major 
flight plan changes in this country. We need a flight plan 
change on our fiscal policy to pay for this what is going to be 
close to a $100 billion disaster by the time we are done. We 
need a flight plan change to deal with global warming, which 
has the capacity to make these hurricanes more intense. And it 
is clear to me listening to you today we need a flight plan 
change on dealing with gouging and those who take advantage of 
these poor, not just evacuees, but all of us.
    Now, what I would like to make real clear on, we have heard 
that the Federal Government does not have the ability to force 
these antigouging laws in the absence of collusion. I would 
like to know whether your administration is here asking the 
U.S. Congress to take action to give the administration more 
authority to prevent gouging from taking place. And the reason 
I ask you that is that this administration sat on its hands and 
let Enron abuse us to the tune of $1 billion and did nothing in 
the State of Washington. We don't want that to reoccur. So the 
question to you gentlemen: Are you asking us to do something to 
prevent gouging?
    Mr. Garman. No, sir, I am not here today for that purpose.
    Mr. Inslee. Anyone else?
    Mr. Seesel. Congressman, as I said to some of your 
colleagues, I would need to check with the full Federal Trade 
Commission on what it is asking for, but I don't believe the 
Commission----
    Mr. Inslee. Well, I have to tell you, that is extremely 
disappointing. You know, when we heard the President say that 
no one could have anticipated that these levees would have been 
breached, and as a result we had a pathetically indifferent 
Federal response to this terrible tragedy, and those people 
ended up on the Astrodome floor, to see another pathetically 
indifferent response to gouging is very, very disappointing. We 
on this side will be introducing legislation which will call 
for giving you authority to prevent gouging in the case of 
natural disaster, taking into consideration the real prices, 
taking into consideration the amount of ramp-up. And when that 
happens, I hope you will come back to us and support that 
legislation to show a little more aggression dealing with this 
problem.
    I want to go to the second issue. Mr. Garman, have you read 
the National Oceanographic and Atmospheric Agency report on 
global warming and its impact on hurricanes?
    Mr. Garman. No, sir I have not.
    Mr. Ross. Let me help you out. The National Geographic 
Pollution Dynamics Agency of the administration--not a bunch of 
granola eaters in Berkeley--the administration says, and I 
quote, ``the strongest hurricane in the present climate may be 
upstaged by even more intense hurricanes over the next century 
as the earth's climate is warmed by increasing levels of 
greenhouse gases in the atmosphere. Although we cannot say at 
present whether more or fewer hurricanes will occur in the 
future due to global warming, the hurricanes that do occur near 
the end of the 21st century are expected to be stronger, more 
intense, significantly more intense rainfall than the present 
day climate.'' No one is saying this is caused by global 
warming, but some have suggested before you spend $20 billion 
in rebuilding New Orleans and Mississippi, we should do so with 
a national policy that pays attention to science and that your 
administration, says the hurricanes will become more intense in 
the next several decades, and you are encouraging a policy 
which occurs in the development to reduce the barrier island 
protection, you cut the budget dealing with levees, we have now 
had the most horrendous hurricane in American history. Do you 
think the administration should rethink its refusal to consider 
global warming?
    Mr. Garman. I think the president has said in February 
2003, with regards to global warming, it is a serious issue. I 
think the President repeated that at the G-8 meetings in 
Gleneagles most recently this year. We believe that we have a 
response. And I think if you actually look at actual carbon 
emissions performance of the U.S. Versus the EU and other 
nations, you will see that we have a very, very good record. 
Our rhetoric may not be as forward leading as some of our EU 
partners, but the performance in actually avoiding greenhouse 
gas emissions is actually among the very best among the 
signatories to the framework convention on climate change.
    Mr. Ross. Let me suggest a different viewpoint. If the 
administration policy on global warming is similar to the 
policy on levees in New Orleans, which is not listening to 
science that specifically refused to adopt a elimination of 
this issue which occurred, which many of us here want to 
propose, you refuse to block efforts to increase and reduce oil 
consumption in the energy bill just passed. You refused.
    Mr. Chairman, I think I have 8 minutes. I waived my opening 
statements. I probably have a couple more minutes. Am I right 
on that?
    Mr. Hall. I don't recollect that, but if that is your 
recollection, I will honor it.
    Mr. Ross. You refuse to embrace something meaningful and 
that has to do with price with global warming. We have a CAFE 
standards that are so abysmal. China has better corporate 
standards than we. In the past years they had improved their 
output. If you want to talk about the way to reduce prices, let 
me ask you this, don't we have to find a way to reduce demand 
in the most effective way? We have advanced in the last few 
decades what we demonstrated in 1975 and 1973 when we almost 
doubled a 60 percent increase at least in our fuel economy 
standards which this administration refuses to take action.
    Mr. Garman. Sir, again, this administration has raised or 
proposed increases in corporate average fuel economy standards 
twice--the first increases since the 1996 model year. I can 
understand that we can have disagreements about the scope of 
that increase and whether that increase should be more or less, 
and that is what we propose.
    Mr. Ross. Perhaps there will be a reconsideration, I don't 
know, but we hope you will reconsider. And I will tell one 
would think after the hurricane, after we have seen these 
prices, outrageous prices at the pump, after we have seen the 
destruction or diminishing of our refineries on the southern 
coast, which has always been vulnerable to hurricanes, one 
would think that we would have administration policy to 
increase CAFE standards enough to at least reduce our 
dependence on foreign oil.
    Now, according to the energy information office, I am told 
that the policy that the administration has proposed, what they 
want to do with CAFE, which was almost nothing, would result in 
our foreign fuel energy policy actually rising in next decade.
    Is that true that under the policy that your administration 
proposed, our dependence on SaudiArabian and Mid East oil--in 
part because of your refusal to adopt fuel efficiency 
standards--will actually go up?
    Mr. Garman. Again, if one were to look at that single 
policy in isolation, I wouldn't dispute the contention that 
that single policy in isolation will not reverse our petroleum 
dependence. But I would submit to you that were we to do that 
and a good deal more, including opening the Arctic National 
Wildlife refuge to production and increasing CAFE standards, 
even beyond that, we would still looking at a situation of 
increasing dependence on foreign petroleum.
    Looking at these policies in isolation will not give us the 
result that we need. There is no silver bullet. We need 
comprehensive policies of a variety of different things.
    Mr. Ross. We just feel that we are not doomed if we start 
to embrace the new technologies. Thank you, Mr. Chairman.
    Mr. Hall. Thank you, and the gentleman's time has expired. 
Let's see. Chair recognizes Mr. Bass, gentleman from New 
Hampshire, for 5 minutes.
    Mr. Bass. Thank you, Mr. Chairman. Mr. Caruso, I was 
wondering if you could help me understand why retail gasoline 
prices moved up so rapidly in my neck of the woods in New 
England, since New England sources a significant amount of its 
gasoline, finished gasoline supplies from Canada, I believe 
some of it from the Virgin Islands, but virtually none of it 
from the gulf. Shouldn't there have been some more protection 
in our region than there have been in others?
    Mr. Caruso. Well, not all States' prices did rise. The main 
reason prices rose is that the market's fungible, and, 
therefore, when gasoline goes up at the NYMEX futures market, 
often wholesale prices and contracts that retails are indexed 
to that, so that is part of the reason. I can't really speak 
specifically to New Hampshire.
    Mr. Bass. I guess the fact is that prices for all fuel went 
up because of the gulf crisis, even though the actual cost to 
the manufacturer didn't go up, because there was no impact, the 
refineries, all the fuel, most of the fuels in New England came 
from--had nothing to do with the gulf.
    Mr. Caruso. That is correct. As I mentioned earlier, it is 
a global market and prices went up in Europe as well for 
example.
    Mr. Bass. Different subject. You testified earlier that 
home heating oil would be 30 percent more expensive than last 
year as a result of Katrina and the market disruptions caused 
by it. So for low income Americans, do you believe the 
government's low, major fuel assistance program, LIHEAP, would 
be need to be funded at a level 30 percent or so higher than 
last year's just to keep the purchasing power the same. 
Forgetting the weather issues and how this winter may come, if 
fuel prices are up 30 percent, should low income energy be up 
30 percent?
    Mr. Caruso. Just a clarification, the 30 percent increase 
includes the fact that prices had already risen before Katrina, 
so that they would have--it would have been up year on year 
regardless----
    Mr. Bass. So it might be more than 30 percent.
    Mr. Caruso. No. 30 percent includes our latest assessment, 
including the impact----
    Mr. Bass. Fair enough. So you think it is going to take, is 
it fair to say you think it will take 30 percent more money to 
fund LIHEAP?
    Mr. Caruso. I am not really familiar with the relationship 
between the LIHEAP budget and the current price. I would have 
to----
    Mr. Bass. But if any panelist--it is intuitive if price of 
heating oil goes from 150 to 250 a gallon, that is a third 
increase, it will take more money to fund LIHEAP?
    Mr. Caruso. Absolutely: whether it is 30 percent or not, I 
have no idea.
    Mr. Bass. I have one further question because I am running 
out of time.
    Mr. Garman, it would be fair to describe some elements of 
the energy infrastructure as being a total loss. I am not 
talking about production capacity, but on the consumption side. 
And are going to go through a period spending a lot of money on 
rebuilding that infrastructure.
    Is there not an opportunity here to implement other kinds 
of outer energy consumption patterns, distributed energy, 
distributed--other ideas, if you will, that would lead to a 
somewhat different infrastructure, a 21st century 
infrastructure, rather than an early 20th century, or is it 
going to be the Agency's position, if it has a position, that 
we are just going to try to duplicate what was there before?
    Mr. Garman. I would hope that any rebuilding effort that 
results as a consequence of Katrina will encourage folks to 
look at new technologies, distributed generation, micro grids, 
solar, very highly energy efficient housing. I would like to 
think that as houses are rebuilt, they are rebuilt at a much 
higher level of energy efficiency. And I would hope that 
consumers, who are in a position to make those choices, would 
ask their builders for these new technologies and a higher 
energy efficiency than the house that they lost.
    Mr. Bass. One last question for Mr. Caruso.
    Are you aware that there might have been any gasoline 
stocks that were diverted from, originally designated for the 
Port of Portsmouth, which is in New Hampshire, or elsewhere in 
New England, were they diverted to any other region of the 
country after Katrina?
    Are you aware of any? And I don't have a follow-up. If you 
don't know, would you be willing to look into the possibility 
that one of the problems of fuel prices was that supplies were 
diverted away from the northeast for one reason or another?
    Mr. Caruso. I am not aware of any such diversions, but I 
can certainly check our sources.
    Mr. Bass. Thank you. I yield back, Mr. Chairman.
    Mr. Hall. Thank the gentleman. The Chair recognizes the 
gentlelady from Wisconsin, Ms. Baldwin, 5 minutes.
    Ms. Baldwin. Thank you, Mr. Chairman. I wanted to follow a 
little along the lines of earlier questions by Mr. Upton and 
Ms. Capps. Mr. Moran, you are the director of the Federal 
Communications Commission's Office of Homeland Security?
    Mr. Moran. Yes I am.
    Ms. Baldwin. And in addition to the disaster response that 
you have been describing, what the commission has been up to 
over the last week, does your office also engage in planning 
ahead for threats and other disasters that could impact our 
homeland security?
    Mr. Moran. We--I have responsibilities in that area.
    Ms. Baldwin. And does your office also work with other 
agencies across the Federal Government in order to come up with 
such plans and recommendations for----
    Mr. Moran. Yes. We work very closely, especially with 
national communication systems and the Department of Homeland 
Security.
    Ms. Baldwin. So, in that role of planning ahead and 
interagency planning, have plans been developed for emergency 
communications in the event of a hurricane or other disaster 
that can be expected to topple power lines, phone lines and 
wireless towers as we have seen in the past week?
    Mr. Moran. Well, the Federal Government's role primarily in 
the communication, emergency communications you are talking 
about, are really to make sure that the carriers' processes and 
systems can work. And the carriers themselves have--all the 
major carriers have detailed emergency plans. There is a lot of 
dialog between the carriers and the FCC and the NCS on these 
plans, and many----
    Ms. Baldwin. So is what you are saying is you try to prompt 
the private sector and the regulated sector to do the right 
thing, but the Government itself does not have its own set of 
detailed plans on how to have communication occur in the event 
of a catastrophe like this one?
    Mr. Moran. I would say the biggest role we have is perhaps 
as a catalyst. We have a number of advisory committees. We have 
two major advisory committees that look at these things, and we 
set the direction for the advisory committee. They run for 2 
years. One of them is called the National Reliability and 
Interoperability Council. It is all major carriers, 
manufacturers participated in this advisory panel, committee. 
And the Commission establishes the agenda basically for it. 
Right now, it is primarily focused on actually public safety 
communications.
    Ms. Baldwin. I am pleased to hear that emphasis. It seems 
in your testimony you point to, I guess, sort of four issues of 
communication challenges, problems, things that were hampered 
during this last week. One was the ability to communicate 
between first responders within an entity or department. A 
second was that communication between first responders in 
various levels and jurisdictions. A third was problems with 
communication between first responders, government officials 
and hurricane survivors and telling them about the availability 
of and where the relief effort was going. And then last, you 
pointed out too the challenges in assisting survivors to figure 
out how to communicate with and where are their loved ones, et 
cetera.
    Do Federal plans or recommendations to localities and 
States exist with regard to all four of these critical areas so 
that in the future, we have backups and redundancies, perhaps 
not relying totally on the private and regulated sector, but 
that we can step in and make sure that this type of lack of 
communication never happens again to Americans.
    Mr. Moran. Well, approximately 90 percent of all the 
communications assets that we are talking about that are 
relevant here, that infrastructure is really a privately owned 
infrastructure. Our primary focus is to make sure that that is 
as robust as it can be and that we know that the major--we know 
that they all have emergency plans. We discussed their plans 
with them.
    I would say that the primary parties who are responsible 
for the Federal Communications assets that we put to bear on 
these functions are really not with the FCC.
    Ms. Baldwin. But it does sound like you are saying that 
this could happen again.
    Mr. Hall. Gentlelady's time has expired.
    Chair recognizes Mrs. Myrick, the gentlelady from North 
Carolina, 5 minutes.
    Mrs. Myrick. Thank you, Mr. Chairman. Thank you all for 
your patience. Next time you need to bring your lunch.
    I had a question for Mr. Caruso. Can you tell me if there 
was any pressure taken off the gasoline prices by the easing of 
the restrictions on the Clean Air Act probiotic fuels?
    Mr. Caruso. We saw a fairly rapid response to the waiver by 
the EPA and the other regulatory relief that was granted last 
week. Within 24 hours of that, NYMEX gasoline prices started to 
fall.
    Mrs. Myrick. So it was helpful?
    Mr. Caruso. Yes.
    Mrs. Myrick. I appreciate that. We talked a lot about not 
having a refining capacity cushion in this country. What would 
you say does our country need? What type or what would you need 
to do to create that? How much do we need? That kind of thing.
    Mr. Caruso. I think the two most important things are 
regulatory certainty,, which Mr. Garman mentioned in his 
comments, and the other one is really not something that we 
think can be legislated. The return on investment had been so 
poor in the 1980's and 1990's that that inhibited investment 
during those 2 decades. And now we have had 3 years or so of 
pretty high refinery margins.
    Whether that is sufficient to attract upstream investment 
is unclear; so far we haven't seen much. There is one case in 
Arizona, a project that has continued to languish, I think, 
partly through regulatory problems, permitting, as well as 
financing. So I think at least from a Government perspective, 
the most important thing would be regulatory certainty.
    Mrs. Myrick. I know in our area we have a couple of 
companies that are looking at nuclear power again very 
seriously because of what was done in the energy bill, 
something I feel strongly about, too.
    I appreciate your time. Again, I yield back, Mr. Chairman.
    Mr. Hall. I thank you for yielding back, and the Chair at 
this time recognizes a fine member of this committee, Mr. 
Albert Wynn. Gentleman has 5 minutes.
    Mr. Wynn. Thank you, Mr. Chairman. Thank you for your 
flattery as well.
    Mr. Garman and Mr. Seesel today cited the need for 
increased refining capacity. There is a very significant 
criticism being leveled at the FTC, Mr. Seesel, that the FTC is 
not taking a hard enough look at this issue as it reviews 
acquisitions, according to an article in the Washington Post 
entitled Refiners Mergers Good For Business Not Consumers. It 
indicates that the Commission last week approved a purchase of 
Premcor by Valero making the latter the Nation's largest oil 
refinery.
    Are you familiar with the article?
    Mr. Seesel. Yes, Congressman, I am.
    Mr. Wynn. The article States that the FTC and its staff 
never seem to make the link between industry consolidation, 
rising energy prices and record profits and suggested there is 
a gentlemen's agreement against investing too heavily in new 
capacity that the FTC's analytical approach does not seem to 
take into account. The article goes on to cite the fact that 
the rate of return on shareholder equity is 23.9 percent last 
year and 16 percent over the past decade. I think this is a 
pretty serious criticism in light of what everyone seems to be 
saying is the need for more refining capacity. It appears there 
is no incentive for expanding refinery capacity because of 
profits being made through mergers and basically maintaining 
the status quo.
    How do you respond to this criticism?
    Mr. Seesel. As Mr. Caruso has pointed out, I think one of 
the primary reasons refining capacity has really been sort of 
stalled in recent years is that until the last couple of years, 
it has fairly low return on investment. So the idea of 
investing in new refining capacity has been quite unattractive.
    Mr. Wynn. 16 percent over the last decade.
    Mr. Seesel. Well, I think it probably reflects the uptick 
of the last several years because over the last 10 years or so, 
and Mr. Caruso probably has better figures on that, I think, 
for example, several years ago I think the return on investment 
was abysmal. And I don't know exactly what the number was----
    Mr. Wynn. Can you get us that information about the return 
of investment over the past few years because it seems to me 
that the return actually has been pretty good.
    Mr. Seesel. I will be glad to, Congressman.
    Mr. Wynn. So your bottom line response is you don't accept 
the criticism.
    Mr. Seesel. Well, the author of that article is entitled to 
have any thoughts he wants about gentlemen's agreements and so 
forth. We have looked at many, many, many mergers and millions 
of pages of documents in this industry over the 25 years we 
have been looking at this and have come up with virtually no 
evidence of anything like that.
    Mr. Wynn. Did you find it interesting that the article says 
that when President Bush sited the availability of inactive 
military basis as possible locations for expanded refinery 
capacity, that the spokesman for the Valero said they weren't 
interested in that?
    Mr. Seesel. I hadn't really focused that much on that part 
of the article. I am aware, Congressman, that some refining 
executives found the proposal about military bases to be 
interesting, although some had some concerns about how close 
they were or not to crude oil supplies. So that the idea of 
siting a refinery on certain military bases didn't have much 
appeal to them.
    Mr. Wynn. Let me move on to another question that has been 
talked about at some length today, and has to do with price 
gouging. And I think you, in fact, testified it was very 
complicated and depended upon circumstances, et cetera. Has FTC 
ever studied this issue?
    Mr. Seesel. The Commission has looked at pricing issues in 
the context of claims and allegations that there is collusive 
activity going on.
    Mr. Wynn. Is there a report?
    Mr. Seesel. The Commission did some investigations of 
petroleum and gasoline prices.
    Mr. Wynn. Is there a report on price gouging?
    Mr. Seesel. On price gouging per se, no, sir.
    Mr. Wynn. In view of the complaints that you received, 
don't you think that is an appropriate role for the Agency?
    Mr. Seesel. I certainly think, Congressman, that to the 
extent we get complaints that are phrased in terms of price 
gouging, it is appropriate for the FTC to look at whether or 
not there is any violation of any law.
    Mr. Wynn. So can we expect that you will, in fact, conduct 
a study because you have already testified that you got the 
complaints and that you forwarded to them to the States' 
attorneys general. So presumably you think they have some 
credibility.
    Mr. Seesel. As you know, under the new Energy Act, we are 
under section 1809, the Commission is going to conduct a study 
starting right now of manipulation of gasoline prices in this 
country.
    Mr. Wynn. So you are telling us, the committee, that you 
will be studying and reporting back on price gouging?
    Mr. Seesel. Really, all aspects of possible manipulation of 
gasoline supply and prices.
    Mr. Wynn. I appreciate that. Mr. Garman, you talked about 
hydrogen. You said 2020 would be the year we would have 
hydrogen cars. What is the administration doing to speed that 
up?
    Mr. Garman. We think that the--frankly because we are 
dependent on certain technological breakthroughs that aren't 
necessarily mindful of a timeframe, we have to have some 
success in the lab. As you and I have talked about before, 
hydrogen storage is a technical barrier that we are 
confronting.
    We don't know what the answer is. So we are putting more 
money into that effort to find, you know, to research different 
and new compounds, halides and chemical and metal hydrides that 
might be good storage media, but you know what we need in 
addition to the funding is time--it is a learning process. So I 
am not certain that there is a lot that can be done to speed 
that up.
    It has been suggested in the past we put more money in it 
and that would be an approach because it might enable us to 
study two pathways at once or three pathways or multiple 
pathways. But what we really need is time.
    Right now, we have several--we have a number of hydrogen 
vehicles on the road. We are collecting data, performance data. 
And what we need to do is take that data back to the laboratory 
and then come up with the next iteration. So it is not--there 
is not a whole lot that we can do to speed that up if the 
ultimate goal is a product that consumers will choose and 
consumers will buy.
    We can produce a car tomorrow that has performance 
characteristics that we want but not at a price that consumers 
can afford. That is going to take some time.
    Mr. Wynn. Thank you. I yield back the balance of my time.
    Mr. Hall. Thank the gentleman. Chair recognizes Mr. 
Sullivan, gentleman from Oklahoma, 5 minutes.
    Mr. Sullivan. Thank you, Mr. Chairman. And you know, this 
was a horrible tragedy, Katrina.
    Mr. Hall. Sir, you get 8 minutes in all.
    Mr. Sullivan. 8 minutes. It is horrific the things that 
happened and it disrupted our energy sector, it has affected 
this country in many ways. I was in the State legislature when 
the Oklahoma city bombing occurred, too, and that was horrific 
as well. And one thing that, you know, does come out of these 
horrific tragedies is sometimes something good. And I think 
that we do need to look at our--examine our energy 
infrastructure, energy needs in general, even better than we 
did on the last energy bill. I don't think that went far 
enough. And we need to look at the long-term overall strategy 
of energy looking at nuclear power, all the alternative energy 
sources, because I do believe that some day, and it won't be in 
our lifetimes or our kids' lifetimes or even our grandkids' 
lifetimes, but we will run out of oil and gas or it will become 
too expensive to produce. And one thing I do want to bring to 
peoples' attention is, I guess, Mr. Garman, I will focus this 
to you.
    Right now in this country if we were to find, let's say you 
and I found a billion barrel reserve today somewhere here in 
this country, would we be able to refine it?
    Mr. Garman. We would be competing with many other--with 
others.
    Mr. Sullivan. Outside the country?
    Mr. Garman. Probably what would happen is we would displace 
foreign oil into that--domestically produced crude would 
displace foreign oil that was coming into those refineries is 
what most likely would happen, is my estimation.
    Mr. Sullivan. But we are at maximum capacity with our 
existing refineries; now, would you agree?
    Mr. Garman. That is correct. We actually do not have 
refining capacity to refine all of our needs today.
    Mr. Sullivan. And there is a place, I don't know if you are 
familiar with Cushing, Oklahoma, it is just outside my 
district, but there are 23-some odd pipelines go through that 
area, and there have been refineries there in the 1920's and I 
think up to the 1970's. Kerr-McGee had a refinery there. They 
had like Citgo, Conoco Philips refinery, Embridge, Shell 
Sunoco, Texas Eastern Pipeline Partners, Magellan, Plains All 
American, just to name a few. Many pipelines intersect in that 
area in Oklahoma. And also it is the delivery point for NYMEX 
crude oil futures contracts.
    Would this be a good idea? And I have always said since I 
got elected, wouldn't it be a great idea to build a super mega 
refinery in that area? We have the supply coming in. We are not 
next to an ocean. We do have a great infrastructure of 
pipelines there, as you know.
    But could you see that becoming a reality if maybe we 
lessened some of the burdensome government regulations and the 
permitting, kind of like what we did in the House version of 
the energy bill, maybe we can go back and revisit that and make 
it even better, but to build a megs refinery there, maybe 
making let's say 2 million barrels a day. I don't know. But 
would that be a reality?
    Mr. Garman. The Nation needs more refineries. And if 
Oklahoma is willing to host a refinery, then I hope investors 
are listening, and if there is anything we can do to help make 
that come to pass, we would be happy to do that.
    Mr. Sullivan. Well, if Oklahoma decides that is something 
we want to do, I think that is something Oklahomans want to do, 
would you be willing to help us along the EPA and all of that 
as well?
    Mr. Garman. Yes, sir.
    Mr. Sullivan. Are you committed to doing that? Thank you 
very much.
    Mr. Hall. Gentleman yield back.
    Mr. Sullivan. I will yield back, yes.
    Mr. Hall. Chair recognizes Mr. Markey, 5 minutes.
    Mr. Markey. Thank you, Mr. Chairman. Over the course of the 
last few years, the oil companies have earned record profits as 
this chart indicates. Exxon-Mobil's profits have risen from $11 
billion to a projected $31 billion this year. Chevron-Texaco's 
profits have risen from $1 billion to $13 billion; BP's from $8 
billion to $21 billion; Shell's profits have risen from $10 
billion to $20 billion.
    These are huge numbers. And they are the direct result of 
soaring oil and natural gas costs. Gasoline has risen from 
$1.85 to $3.04 on the average.
    In the last year, heating oil has risen from $1.36 a gallon 
in 2003 to a projected $2.22 a gallon this winter. Natural gas 
has risen from $9.85 per thousand cubic feet a few years ago to 
a projected $12.81 this winter. We need to know why. This is 
all before Katrina. This is just what has been going on in the 
market.
    Mr. Garman, in the last 10 years, at least 30 refineries 
have closed.In the last 10 years, at least 30 refineries have 
closed. These refineries were all fully permitted and were 
producing gasoline for the American public.
    Do you know of a single refinery the oil industry is 
seeking to reopen to produce gasoline in the U.S. Market?
    Mr. Garman. I am not aware of one, no, sir.
    Mr. Markey. No. Mr. Caruso, last year, Business Week 
reported that refineries are running near capacity because they 
have little incentive to build more. For starters, they make 
more money when supplies are tight, says Business Week.
    Do you agree that reduced refining capacity means higher 
profits for oil companies?
    Mr. Caruso. Well, profitability really has more to do with 
the demand, the competitiveness in the world market than that 
single data point that you just mentioned. But that is one of 
the components.
    Mr. Markey. Haven't refinery margins increased, that is, 
refinery profits increased?
    Mr. Caruso. They have increased.
    Mr. Markey. The less refining capacity, that is, the more 
refining capacity that American oil companies have closed is 
the more money refiners are making. Their profits are going up. 
Is that correct?
    Mr. Caruso. That is accurate and it is also accurate on a 
global basis, not just in the United States.
    Mr. Markey. You are saying the whole world is shutting down 
refineries?
    Mr. Caruso. The refining capacity on a global basis is 
tight. Yes.
    Mr. Markey. Is tight. So this is a global pattern where the 
largest oil companies, not only here, but across the world, 
have been shutting down refining capacity, without a government 
mandate to do so over the last 10 years.
    Now Mr. Garman, in the past, oil industry has suggested 
that somehow environmental permitting requirements were to 
blame for the industries failure to build new refineries. 
However, let me read to you from an internal Chevron document 
in 1995, ``If the U.S. Petroleum industry doesn't reduce its 
refining capacity, it will never see any substantial increase 
in refining margins.''
    So Mr. Garman, by closing 30 refineries since 1995, not 
building new ones, but closing 30 already existing operating 
refineries, the oil industry seems to have achieved their goal 
of 1995 of higher refining profits, have they not?
    Mr. Garman. My understanding is that smaller, less 
efficient refineries have shut while existing refineries have 
expanded capacity. And the strategy--and I am not the right 
person to ask. You should ask--you will have a witness in the 
next panel to ask specifically what is their motivation, but my 
observation has been there is a component of the environmental 
standards to comply with environmental standards and maintain 
an update refineries to----
    Mr. Markey. But this was not building--these are not 
building new ones. These were the old ones. And instead of 
continuing to maintain them, they just decided to shut them 
down. But they could have, with their profits, maintained them 
and kept them going.
    Mr. Garman. Actually many times--and Mr. Caruso has better 
data--but many times, refinery margins have been quite small 
and not been conducive to new invest and expansion.
    Mr. Markey. Exactly. Chevron said that in its document in 
1995, they said, we will never see any substantial increase in 
refining margins if we don't reduce--if we don't reduce, that 
is, Chevron doesn't reduce its refining capacity.
    And Mr. Seesel, the FTC is supposed to be in charge of 
monitoring the oil and gas industry for evidence of anti 
competitive or manipulative activities.
    Has the FTC examined whether current situations that now 
have, with respect to refining capacity, may be the result of a 
deliberate strategy by the oil industry to reduce capacity in 
order to drive up the profit margins and prices to consumers? 
Have you ever had an investigation?
    Chairman Barton. If you can answer that please answer that 
and that will be his last question.
    Mr. Seesel. Congressman, I don't think the Commission is 
aware there is any evidence, there is any collusive or anti 
competitive scheme among oil companies to reduce refining 
capacity.
    Mr. Markey. Have you ever investigated it?
    Mr. Seesel. The Commission looked at the Shell Bakersfield 
refinery situation in California. The situations we are aware 
of are individual unilateral decisions by refineries.
    Mr. Markey. Did you ever look at what--30 refineries all 
shut down?
    Chairman Barton. Gentleman's time has expired. The 
gentleman is obviously entitled to provide written questions to 
this panel in addition to the questions he has already asked.
    Mr. Murphy of Pennsylvania has 8 minutes, if you chose to 
use them.
    Mr. Murphy. Thank you, Mr. Chairman. I am trying to 
summarize what I have learned so far in the last 5 hours.
    It comes to this, that I think what you are saying is when 
it comes to defining these price jumps, price gouging, it is 
much like the Supreme Court's definition of obscenity. You 
can't tell us what it is, but you know it when you see it.
    Which doesn't leave us, our constituents, or Americans in 
general, with a lot of comfort, although I say that tongue in 
cheek.
    I just want to review a few things, and whoever is best to 
answer this, I appreciate that. We do not have enough oil to 
meet the needs of our citizens. Therefore, we have to import. 
When we do produce more oil to meet our needs, other areas like 
OPEC reduce their production in order to keep prices high. When 
we have catastrophes such as what we just experienced in the 
Gulf Coast, we have to raise prices to pay for future costs, 
increased costs of gasoline and also anticipated costs. If we 
are importing more, other countries can also raise that price. 
Am I correct so far, anybody, Mr. Caruso?
    Mr. Caruso. I think that is generally accurate.
    Mr. Murphy. Now on this, I have a question. I want to know 
what the Department of Energy has done on this particular 
issue. I want to read a couple of quotes from something, and I 
would like to ask unanimous consent an article from the October 
2004 National Geographic be entered into the record. This 
article made a chilling prediction of this whole event. I will 
read a couple quotes from this.
    It says the ``Federal Emergency Management Agency lists a 
hurricane strike on New Orleans as one of the most dire threats 
to the Nation, up there with a large earthquake in California 
or terrorist attack in New York City. Even the Red Cross no 
longer opens hurricane shelters in the city claiming the risk 
to its workers is too great.'' It goes on to say, ``the most 
startling impact has only recently come to light. From concerns 
about tidal surges, the effect of oil and gas and petroleum 
subsidence rates--there is another aspect there. For decades 
geologists believed that the petroleum deposits were too deep 
and the geology of the coast too complex for drilling to have 
any impact on the surface. But 2 years ago, petroleum geologist 
Bob Morton, now with the U.S. Geological Survey, noticed the 
highest rates of wetland loss occurred during or just after the 
periods of peak oil and gas production in the 1970's and 1980's 
and concluded that that had an impact on reducing some of the 
areas of the wetlands.''
    We knew before then that this area was prime for huge 
devastation from tidal surges, and we knew we had huge loss of 
wetlands, and some of this might have been gue to oil 
exploration. Was there something the Department of Energy did 
or should have done with regard to alerting the oil companies 
and saying we can't have 25 percent of our oil production or 
refinery production situated in an area which is considered by 
FEMA to be at extremely high risk for devastation.
    Did we know it was coming? And did we do anything about it?
    Mr. Garman. No, sir. I cannot say that we made a connection 
between oil production and subsidence. I would note that I 
haven't seen the scientific literature behind that National 
Geographic article. My observation would be the old warning of 
every statistics professor that correlation does not 
necessarily mean causation. But that is a very interesting 
possibility----
    Mr. Murphy. But still we knew there was a large loss of the 
marshlands which were the natural buffer for storm surges, and 
we did know that with all the oil refineries clustered around 
there that there would be trouble for category 3, 4, especially 
5 hurricanes. I am curious if anybody from the Department of 
Energy began to raise questions and say we need to put some 
pressure on oil companies to change this and not wait 30 years.
    Mr. Garman. My understanding is that refinery siting--and 
we had a discussion I think about some of this while you were 
out of the room, but refineries are sited where they can be 
based on market conditions and the willingness of local 
population to accept them.
    Yes. In a perfect world, it would be better to have 
refineries distributed geographically around the country. And I 
think that recognition is well understood. I am not sure that 
we have the tools or the capability to force anyone to do that 
distribution. I dare say that the market and the insurance 
market and the reinsurance market might as a consequence of 
these losses. It would probably be more difficult in the future 
to site a refinery or some of this infrastructure that close to 
the coast. And I think the market will respond, and folks 
looking to site a new refinery will site their new refinery 
elsewhere.
    Mr. Murphy. So what you are saying is perhaps our minds 
will change, at least the minds' of those who are otherwise 
opposed to siting refineries and distributing them around the 
country. Otherwise we could remain extremely vulnerable to a 
natural disaster or terrorist attack.
    Mr. Garman. I think it would be a mistake for us to ignore 
a lesson that has been so devastatingly made clear to us in 
this instance, yes.
    Mr. Murphy. Does anybody else on the panel have a comment 
on those issues? Mr. Chairman, it comes down to this: A lot of 
our constituents are enraged about fuel prices. And seems 
sometimes the best we can offer them is what people have said, 
is either there is some intentional price gouging, or it is the 
marketplace and a shortage and we don't have the refinery 
capacity.
    What the American people look upon in times like this is 
that we have to show them that we are working together in a 
bipartisan way to come up with some solid solutions on this. 
And that is why I am really hoping we can move vigorously 
forward in a couple of areas, and that is that we have to 
explore for more oil in this country, we have to move more 
vigorously toward clean coal technology and nuclear energy, and 
we have to build more refineries because to wait longer is 
going to have a more devastating and far-reaching effects on 
our economy. And with that, I will yield back the balance of my 
time.
    Chairman Barton. Gentleman yields back. The gentlelady from 
California, long, patient Mrs. Solis is recognized.
    Ms. Solis. Thank you, Mr. Chairman. I appreciate that.
    My question is for Mr. Caruso. I wanted to bring to your 
attention report that I came across. The investment firm, 
Friedman, Billings, Ramsey & Co. noted that in early August 
2005, refinery margins rose 54 percent, and that these profit 
margins were responsible for 60 percent of increased cost of 
fuel at the pump. Other estimates say as much as two thirds of 
the increased cost of gas at the pump is a direct result of 
profit margins of refiners.
    Murphy Oil, a company with refineries impacted by the gulf 
coast, yesterday lamented the fact that it has refineries 
offline and is missing out on record margins. It seems from 
these reports that the refinery business is quite profitable, 
more profitable than any other sectors of our economy.
    Do you agree with this assessment of these reports which 
identify a link between the increase of refinery profits and 
the cost of gasoline at the pump?
    Mr. Caruso. I haven't seen those specific reports, but 
clearly, even before Katrina, particularly in July and August, 
there was a significant run-up in refinery margins as a result 
of the very tight gasoline supply situation during the time of 
peak driving. So while I can't subscribe to those numbers 
because I haven't seen them, they are consistent with the 
general trend in prices and margins. But I would also caution 
that this was a very short term situation. Over a long-term 
period, the refinery sector has not had the kind of margins 
that you have just referred to.
    Ms. Solis. It is unusually high, though? Do you agree? And 
just a comment, of the 95 percent of the Bush administration 
energy plan which has been implemented, what specific parts, in 
your opinion, would address the costs to consumers at the pump 
from the high profit margin of refiners?
    Mr. Garman. I would point out that, you know, this 
legislation that has just passed, while we are proud of it, and 
the President signed it, was a product of this Congress and 
this committee and other committees of the Congress, developed 
as a compromise. And I think the Secretary has said, clearly, 
that the bill is not expected--we cannot reasonably expect the 
bill in the short term to do much to deliver relief at the 
pump. It is a long-term bill. It is primarily a research and 
development bill focused on the opportunity to move us toward 
new alternatives. But that will not happen overnight.
    Ms. Solis. One of my other questions that I wanted to raise 
was with respect to where some of these refineries are sited. 
And this is for Mr. Garman.
    It appears that the Chevron Texaco refinery in Pascagoula--
excuse my pronunciation--Mississippi and Conoco Phillips 
refinery in Belle Chasse may have suffered the most significant 
damage from Hurricane Katrina. No. 1, does the Department of 
Energy or any other Federal agency have regulations which 
require refineries, such as these, which are constructed in 
areas of high risk, such as a ``hurricane,'' is there any 
standards that would prevent a refinery from being placed in an 
area that we know could possibly be affected by a disaster of 
this magnitude?
    Mr. Garman. The two refineries you mentioned are very 
important refineries, with a combined capacity exceeding 
500,000 barrels a day between those two. They represent a 
substantial investment by the private sector investors.
    It is also our understanding that both of those refineries 
have suffered major damage, and that they will take some time 
bringing back.
    Ms. Solis. We currently know there are standards in place 
to protect nuclear power plants. I am wondering is there any 
discussion in the administration to look at potential safety 
standards for refineries.
    Mr. Garman. There are safety standards in place for 
refineries, to be sure, to protect public health and safety 
but----
    Ms. Solis. But to anticipate a hurricane at the force of 
category 4, is that something that the administration may look 
at in the future if, given what you just said, that these are 
two very important refineries?
    Mr. Garman. We are willing to look at any variety of ideas 
and to work with the Congress on any variety of ideas and 
thoughts that you all may have. But my threshold observation 
would be someone spent a tremendous amount of money building 
this refinery.
    It is a potential hundreds of millions or billion-dollar 
investments. And I think that, you know, perhaps they bet 
wrong, putting such a high investment, high value investment 
right there at the coast. And they weighed that when they made 
that investment. I am not sure this is something that is right 
for some kind of Federal intrusion into the market. But as I 
said, we are willing to take and consider any ideas and discuss 
them with this Congress and this committee that you might deem 
appropriate.
    Chairman Barton. The gentlelady's time has expired. Dr. 
Burgess has 8 minutes.
    Mr. Burgess. Thank you, Mr. Chairman. Mr. Garman, 
continuing on that same line, I can't help but observe, we are 
just a day or two away from the 105th anniversary of the big 
storm, the Galveston. Galveston, at the time, was the largest 
city in Texas and after that storm, they never totally 
recovered. In fact, it was 50 years before they got back to the 
population they enjoyed in 1900. I don't think there is any 
question that we will see the location of things change as a 
result of this storm, regardless of our intention here in 
Congress. I think insurance companies--just people's behavior 
would have to question whether or not it is reasonable to live 
or develop infrastructure in an area that has been proven to be 
unsafe.
    Let's talk--Mr. Seesel, let's talk about price caps because 
it seems like that is what is on everyone' mind. Now, Hawaii 
did price caps about a month ago. What has been the experience 
with Hawaiian price cap? Do they work?
    Mr. Seesel. Actually, Congressman, I believe the price caps 
in Hawaii went in effect September 1. So it has been a little 
bit early to tell. The Hawaii price caps, as you know, are 
geared toward prices on the west coast, the east coast and the 
gulf coast.
    So probably contrary to the expectations in Hawaii, some of 
the price there may have gone up, along with what has happened 
to the prices on the gulf coast, which is obviously lower than 
other parts of the country. But I think it is something that 
time will tell what will happen with Hawaii's situation. It is 
hard to tell. As you know, there is cap on the wholesale level 
not retail level.
    Mr. Burgess. Do you think it is good policy, one that 
should be practiced in other areas of the country?
    Mr. Seesel. I don't think--in fact, the FTC has testified 
against price caps, including Hawaii price caps a couple of 
years ago. And I think efforts to cap prices like that are 
probably going to result in--a reasonable prediction is that 
they could result in shortages and decisions by businesses in 
the market to leave the market and other unintended 
consequences of that.
    Mr. Burgess. Is there any thought to perhaps allowing 
States to have price caps if they have a refinery within their 
borders? I will withdraw the question. I was just wondering 
about Massachusetts not having any refineries? I am shocked 
that they do not. Let's talk about the----
    Chairman Barton. You are easily shocked.
    Mr. Burgess. I understand. Round up the usual suspects. I 
had my staff, a couple of weeks ago when I was getting 
bombarded with questions by constituents about why not do 
something about gas prices, and I asked them to just break down 
for me, when gas was $2.29 a gallon for regular, give me a 
breakdown on what the--what were the components, what made up 
that $2.29.
    And I was given these figures. Tell me if they are correct 
or not: $1.25 for crude; 43.9 cents for taxes, State and 
Federal, I am in Texas; 40 cents for refining; 18.3 cents for 
distribution and marketing; and total profit of about 17 cents. 
Is that--would you agree with that breakdown? Is that an 
accurate representation?
    Mr. Seesel. Congressman, those numbers are fairly 
consistent with what I am familiar with, but I might defer to 
my more expert colleagues on that, too, and see what they say.
    Mr. Caruso. I believe those are accurate.
    Mr. Burgess. So just going back to a couple of weeks ago, 
in pre-hurricane terms, 17 cents a gallon profit, that is okay, 
but that is not exorbitant. So the high profits that Mr. Markey 
showed us on his graph, which was before the hurricane, it 
seems to me those high profits would indicate that companies 
are selling a lot of gas. Is that right? If they are only 
making 17.4 cents a gallon, when it is selling for $2.29, the 
profit is because there is a lot of those 17-cent gallons that 
are sold. Is that correct?
    Mr. Seesel. I presume the 17-cent profit is at the retail 
level?
    Mr. Burgess. Well, even if it was 19 or 22 cents, it is a 
smidgen of what the total cost of a gallon of gasoline is. The 
profits are not coming from the $2.29; they are coming from 
that very narrow bit that is the gasoline or the oil company's 
profit.
    I guess I would be interested to know, and if I could ask 
one of you to follow up with my office, what would that 
breakdown be now with gas at $3.10 or whatever it is, again, 
remembering that I am in Texas, and our State taxes are about a 
quarter a gallon? I would be very interested to know what that 
breakdown is now, and perhaps then we could make a judgment if 
that 17 cents has jumped and is now 34 cents or 50 cents profit 
per gallon, then perhaps people have a case to be made for 
excess profits. Otherwise, it is an argument that we should 
probably abandon.
    I could not help but think the day--the Wednesday when you 
realized that all of the water was in New Orleans--and with all 
due respect to my colleague here, the wetlands would not have 
stopped that, the hurricane remember, the puff of dry air that 
somehow Bush managed to push the hurricane over a little bit so 
he could do maximum damage to New Orleans, the hurricane did 
not come across the wetlands, it went in in Biloxi.
    But the day that all of the water came into New Orleans, I 
found myself asking, where is the contingency plan that we have 
for this type of disaster? Mr. Garman, is there a contingency 
plan for an energy emergency that you can pull off the shelf in 
the Department of Energy? And if so, what is the plan, and why 
wasn't it enacted?
    Mr. Garman. Well, we do have--our major contingency plan 
and our major asset for a supply disruption is the Strategic 
Petroleum Reserve. And as I indicated in the testimony, within 
48 hours of the time that we had a request for a loan or a 
diversion of oil from the Strategic Petroleum Reserve, we 
approved that loan, and that oil was flowing very, very 
quickly.
    So I would submit that that is our primary method of 
responding to a severe petroleum supply disruption. And in this 
instance, it was used, and it was used quickly.
    Mr. Burgess. Are there any other levers that we can pull to 
manage an emergency? Is that the only tool in our tool box?
    Mr. Garman. With respect to crude oil and product, the 
Strategic Petroleum Reserve is the primary tool that we have 
got. We do not have, as some our Nations have, for example, a 
refined product or requiring refiners to keep a certain amount 
of refined product in stock as a reserve. We do not do that.
    Mr. Burgess. Do you think that is policy worth pursuing?
    Mr. Garman. It is something that I think that--within a 
full range of things that we ought to be thinking about it. It 
is hard to dismiss anything out of hand.
    Mr. Burgess. My time is drawing short. There are four 
locations for the Strategic Petroleum Reserve, two in 
Louisiana, two in my State of Texas. Do we need to think about 
locating other areas in the country for the Strategic Petroleum 
Reserve, since both of these States share the gulf coast and 
the inherent vulnerability of this type of storm.
    Mr. Garman. Well, I think it is again instructive, and we 
will continue to learn from--but we are offering strategic--we 
are offering oil from terminals that were hit directly by the 
storm. So it shows that the reserve is quite robust, and the 
infrastructure that we have around the reserve is robust, and 
we have the capability to respond, even in this seemly worst-
case scenario. So I think that speaks well of the planning that 
went into the reserve itself.
    Mr. Burgess. Very well. I yield back.
    Chairman Barton. I thank the gentleman. The gentlelady from 
Tennessee, Mrs. Blackburn.
    Mrs. Blackburn. Thank you, Mr. Chairman. Thank you all for 
your patience. We appreciate that very much. It has been so 
interesting sitting here listening to this today. I think this 
is an industry when you talk about the petroleum industry, it 
is an industry we have all got a love-hate relationship with.
    And I think you all have shown that today, and you have 
probably heard it from the questions. I also sit here, and I 
realize that much of what we are asking and saying today 
probably to many of our constituents appears to be Monday 
morning quarter-backing.
    And to our friends in Mississippi and Louisiana, we extend 
our condolences and hopefully understanding hearts that this is 
a really rough, rough time for you all. I have been in 
Mississippi, as I said, when I waived my opening statement. And 
I have been there where there was no cell service; nothing was 
working. I have stood in gas lines with people that have driven 
150 miles to get to an open tank so that they could fill up 
their drums, 55-gallon drums to go run a generator.
    I have been at a shelter trying to run down somebody from a 
Federal agency who could help somebody with something else. And 
there are plenty of lessons learned. And there is plenty of 
education and character-building that has probably taken place 
through this for everyone involved.
    And I thank you all for taking the time to come here and 
spend a good part of your day with us. And I hope that those 
who have watched this hearing today understand that we do this 
in the spirit of trying to be certain that everybody functions 
well, and that we learn how we responded, we learn what 
problems were with communication, that we learned a lot about 
leadership and different leadership styles, and how we handled 
a team effort from the local, State and Federal agencies that 
are to be involved with this.
    I hope also that we are going to see some changes come out 
of this. I hope that we will see some changes when it comes to 
looking at burdensome regulation that makes it very difficult 
for the petroleum industry to operate in this country.
    I have a father who is 80-years old who sells oil field 
production equipment and goes to work every single day, every 
single day, and has for many years. I hope that we will see the 
need to address taxes. I hope that we will see the need to 
address rules. And I hope we will apply some common sense to 
this, that we do use it as an opportunity to learn and that we 
as Members of Congress accept our part of the responsibility in 
making the appropriate changes.
    Transportation permitting, environment, how those 
regulations affect every bit of this is going to be important. 
But rather than spending a lot of time on questions, and I have 
already used a good bit of my time, I want to pose some 
questions for you all to answer, not now, but in the next 30 
days.
    And for those of you who are on the next panel, these 
questions also go to you. I am not going to keep you here that 
long. Let us look at this, looking at it long range. I want to 
know what your people in the field say. I want to know what 
your people that are out there are going to tell you that they 
learned from this. I would like to know how many States removed 
or reduced their tax on gas and diesel?
    How many are going to move forward and do that? In 
Tennessee, we have got 21.4 cents on a gallon of gas and 18.4 
on diesel. How many are going to step up to the plate and work 
with us on this? How many are going to report daily price 
fluctuations in their district? You know, seeing a dollar 
change, a 50-cent change in a day, that is something that 
infuriates my constituents. We saw that in Tennessee. We saw 
that in Tennessee. And it is something that people are not 
happy about. Our Governor is working on that issue now, so are 
some of our State legislators.
    Mr. Moran, this one would really come through your plan, 
and the folks in the telecommunication agencies that are going 
to speak next. How many local governments have a communications 
plan when everything fails? When you do not have cell phones, 
when you do not have hardwired phone service, how many have a 
back-up plan with satellite or with radios or some other 
frequency?
    How many companies have emergency disaster communications 
plans? How many local governments have a plan for getting those 
first-responder vehicles filled so that the tanks are full, so 
that they are able to carry on with the work that they have to 
do? How many of them were just planning on people having gas in 
the pickup to get fuel out to the areas where it was needed? I 
would also like to know how many of our State governments use 
all of The Homeland Security funds that are allocated to them? 
How much are they drawing down, and then how much are they 
sending on to those local governments? And are those State 
governments working with those local governments on these 
energy distribution plans, on these communication plans?
    Are they working with their major employers to be certain 
that there is some kind of back-up system there? And also from 
the communication and who is taking the responsibility? Is it 
going to be Red Cross, is it someone else, to be certain that 
there is a way for individuals to communicate?
    It is so difficult standing in one of those shelters when 
you have got people who desperately, desperately want to find 
their relatives, and there is no gas within 150 miles, and they 
drove out on Sunday to come to a shelter, and they ended up 
there with about an eighth of a tank of gas left. That is a 
pretty tough spot, pretty tough spot to be in.
    In my minute that is left, Mr. Caruso, I did have some 
questions, I think are most appropriately directed to you, in 
having listened to your testimony. When we talk about refining 
capacity here in the U.S., we know we have pretty much been at 
capacity, we have been at about 94 percent of capacity for 
refining, and people wonder why we do not have refineries all 
over the country.
    One reason is transporting the fuel. You know, we have got 
a refinery in Memphis right at the edge of my district, and 
sometimes you have to go dredge the river in order to get 
enough depth to be able to unload those barges. So you get a 
whole other set of problems when you move away from the coast. 
But we talked about refinery capacity.
    Are we higher or lower than the worldwide average on 
refinery capacity when we talk about other nations and their 
capacity? How are we measuring up there? And I am going to run 
out of time, so I will just let you answer at a later time.
    And then if we had opened ANWR in 2001, when there was a 
debate about opening it in 2001, and oil was currently being 
produced, what effect would that have on the cost of crude 
today? I would like answers to those, too. And, Mr. Chairman, I 
am over, so I will yield back.
    Chairman Barton. We thank the gentlelady. The gentlelady 
from Illinois, Ms. Schakowsky, is recognized for 5 minutes.
    Ms. Schakowsky. Thank you, Mr. Chairman. I just wanted to 
say that before we start seeing as the main solution to the 
high gasoline cost the eliminating of gasoline taxes, money 
that right now is desperately needed by States and communities, 
not only those that are affected by Katrina but many others who 
have been affected by budget cuts, health care needs, 
education, environmental protection, housing, many of which are 
also being called upon to address other problems, I think we 
ought to look first at the record profits of the oil companies 
and start asking our companies to share sacrifice.
    You know, we have seen now a million people displaced, and 
we have seen lots of families, now that we have sort of lifted 
the veil on poverty in this country, who are barely making ends 
meet and who are suffering in cities and rural areas all around 
our country, that maybe those taxes, we have seen tax cuts at 
the Federal level, for those who have the most, maybe we ought 
to first look at some of the companies who are profiting most, 
and maybe we ought to even consider rolling back some of the 
tax cuts that have already been given.
    But, what I am concerned about now and wanted to look ahead 
a little, in addition to the cost of gasoline, in Chicago 
before Katrina was paying the highest prices for gasoline, what 
about the winter heating season? And what about natural gas, 
and heating oil, and what can we expect in the way of price 
increases? I just feel so strongly that we need to be planning 
for that potential eventuality, and I would like to hear what 
you think the odds are in order of magnitude if we are going to 
see price increases? Anyone can answer for whom it is 
appropriate.
    Mr. Caruso. We released our latest short term energy 
outlook this morning. It indicates that heating oil will be up 
about 30 percent this winter compared with last winter. Unless 
there is a significant improvement in the natural gas 
situation, we think the natural gas prices for heating this 
winter will have an even higher percentage increase than that. 
The details are in our report released this morning. I would be 
happy to make that available directly to you.
    But, the bottom line is, heating oil, natural gas and 
propane will all have significant year-on-year increases this 
winter compared with last winter.
    Ms. Schakowsky. Well, and I think that that ought to be, 
sound the alarm for this committee and for this Congress to, 
you know, we do not want anybody saying we did not expect the 
levees to break. In many ways, for many families, these kinds 
of increases in heating bills are--I do not want to say, get 
equivalency, but is a serious crisis that could put poor 
families particularly over the edge, but not just, you know, my 
constituents really cannot afford to pay, middle-class 
constituents, $1,000 a month to heat their homes in Chicago 
where we rely mostly on natural gas and have already seen major 
increases in the price of natural gas.
    Small businesses that are, you know, struggling right now 
and could potentially go under and farmers who rely on natural 
gas, and you know, so we need to start planning now about what 
we are going to do. And it is not just about LIHEAP, I want 
that to go on the record as well. It is not just about LIHEAP. 
That is needed to expand the funding for LIHEAP, but it goes 
way beyond that, and we need to have better planning.
    I want to--Mr. Caruso, your agency had predicted that as a 
result of the energy bill that was passed, that at least 
potentially, gas prices could go up. As I understood, not just 
understood, we had quotes from the report that gas prices--this 
is before Katrina--that you know there was a lot of talk about 
how great the energy bill was, but when it comes to prices at 
the pump, my understanding was that you thought that that bill 
could actually raise prices?
    Mr. Caruso. There was an analysis done of the House version 
of the bill that indicated that there might be some--I think 
there was a little bit of mischaracterization of that, in that 
one component of the gasoline mix could actually increase in 
order to meet the requirements in the bill. Overall, we did not 
expect the bill to increase gasoline prices. But, I will 
provide that specifically.
    Chairman Barton. The gentlewoman's time has expired.
    We are going to recognize Mr. Walden. I believe he is the 
last questioner for this panel, and I will announce to the 
audience our next panel at the conclusion of this panel. We are 
going to take a very short 5-minute break, just to give people 
a chance to do personal conveniences and things like that. But 
we will reconvene very quickly.
    So Mr. Walden is recognized for 8 minutes.
    Mr. Walden. Thank you very much, Mr. Chairman.
    First of all, along with my other colleagues on both sides 
of the aisle, we express our deep sorrow for those who have 
suffered so much in the South, and we will do everything we can 
to help them.
    In fact, my own State of Oregon is opening its door to 
1,000 evacuees, coming all of the way up to Oregon. We are 
sending about as many as 1,700 National Guard troops down to 
the Gulf States to lend a hand and do what we can.
    Mr. Caruso, I want to follow up real briefly on the tail 
end of Ms. Schakowsky's question. So your analysis never showed 
that the congressionally passed energy bill was going to drive 
up the price of gasoline overall?
    Mr. Caruso. As I understand it, there were certain types of 
gasoline for which the price would go up; I believe the 
reformulated component. But, as I mentioned to----
    Mr. Walden. Is that like the ethanol version?
    Mr. Caruso. I believe it was either the ethanol or the 
MTBE, the combination of the MTBE ban being replaced by----
    Mr. Walden. So the MTBE ban and replacement fuel might 
drive up the cost of gasoline?
    Mr. Caruso. Yes. But I would like to provide the actual----
    Mr. Walden. That would be good. I want to move onto a 
couple of other issues, because these are certainly ones that I 
am concerned about. They relate to the markets, both CFTC and 
NYMEX and I want to--I do not know who is best to address this, 
maybe Mr. Seesel.
    But in the September 2 issue of Dow Jones Newswire, a Mr. 
Addison Armstrong, manager of the exchange traded markets TPS 
Energy Futures LLC in Stanford, Connecticut, said, and I quote, 
there are, and in parens, oil commodities, quote, traders who 
made so much money this week following Hurricane Katrina, they 
will not have to punch a ticket for the rest of the year.
    Is anybody here concerned about this whole trading issue? 
I, along with Ms. Baldwin and about 18 other Members of the 
House have initiated a letter to the Government Accountability 
Office asking for a full investigation. We did that back in May 
of the trading market. Is this something you all have looked at 
at FTC, the volatility? Does the hedging affect the volatility 
of the spot market?
    Mr. Seesel. Congressman, that is really not an area that 
the Federal Trade Commission has looked at very much. I know, 
obviously, that the CFTC has the great bulk of expertise on 
that. And perhaps some of my colleagues here do, too. But we 
have really not focused on the NYMEX markets.
    Mr. Walden. Is that something that you have the authority 
to focus on?
    Mr. Seesel. I think the regulatory authority is in the CFTC 
commission.
    Mr. Walden. All right. Mr. Garman, Mr. Caruso. Mr. Moran.
    Mr. Moran, I want to follow up on the question my colleague 
from California asked about the emergency alert system and the 
national notification system. By way of record, I am a 
broadcaster, so I am intimately familiar, even wired them in 
and run the test.
    It would be highly unusual for the President to trigger a 
national emergency alert notification on a regional problem, 
wouldn't it?
    Mr. Moran. Well, that is up to the President. That has not 
happened. I guess that would be unusual. It has not happened.
    Mr. Walden. It would be very unusual, wouldn't it, 
announcing a hurricane off the gulf coast, in Oregon or in New 
Hampshire, there wouldn't be much relevance to trigger a 
national EAS, would there?
    Mr. Moran. It would be totally up to the President. 
However----
    Mr. Walden. But no president has never done that on a 
regional event, have they?
    Mr. Moran. That is correct.
    Mr. Walden. Isn't there a hierarchy of who does notify? 
Aren't there emergency plans in every community, and generally, 
they are triggered by whoever the emergency coordinator is in 
that community?
    Mr. Moran. There are State--local and State plans. The 
State plans, most of them are filed with the FCC. We are aware 
of the plans. There is a whole hierarchy of how the various 
broadcast stations----
    Mr. Walden. It is built from the grass roots up. I have to 
have one in each of my studios. You all--you require that. So 
you know that that has to be the case, that they are triggered 
from bottom up, unless there is some national emergency.
    Mr. Moran. But if there is a national emergency, the 
President could--it is automatic.
    Mr. Walden. What was the status of the broadcast facilities 
at the time the levees broke? Were any of them on the air? If 
power was out and towers were down, didn't you testify there 
may be two AM stations?
    Mr. Moran. There were two on the air. They had--they were 
on emergency power. And we got word--the FCC mobilized. We had 
people there 24/7. We had our watch center there. We were 
working with the NCS and the FEMA. We were notified early on 
that one of the AM stations, actually I believe several AM--
several stations got together and were operating off the same 
tower.
    And they said early on that they were nearly running out of 
fuel. Getting fuel in there was very, very difficult. It wasn't 
a matter of getting pickup trucks. It was a matter of getting 
tankers in there. And it was extremely difficult. I believe 
that--that that last station in downtown New Orleans, it stayed 
up the whole time because within I believe hours of when it was 
going to run out of fuel, it got a tanker in there.
    Mr. Walden. They were broadcasting full time?
    Mr. Moran. Yes, they were.
    Mr. Walden. It was all focused on the hurricane? They 
weren't playing music?
    Mr. Moran. Absolutely. As I recall, ultimately, they had to 
relocate their studio, I believe up to Baton Rouge, I believe. 
And they actually were provided special housing in the dorm up 
there, I believe.
    Mr. Walden. Were they given notification that the levee 
might fail, and did they broadcast that, do you know?
    Mr. Moran. I really don't know the answer to that.
    Mr. Walden. I assume if they would have been given 
notification----
    Mr. Moran. We have actually--one of the things we did when 
this happened was, we didn't know who was up and who was down. 
And we actually have some equipment at the FCC where we can 
actually sort of scan the air to figure out what is up and what 
is down.
    And after that, by the way, we made calls to every single 
station in the area. When I last checked here this morning, we 
hadn't actually contacted all of them. We believe in some cases 
the phone systems are out, so we could not get to them. But we 
have contacted most of them, and we have a pretty good idea of 
the status. And actually if you--we would perhaps be able to 
ask what it was they knew.
    Mr. Walden. My experience--and in Oregon, we do not have 
many hurricanes thankfully, but we do get ice storms, and we 
get some floods and things like that--is that most stations 
just go immediately 24/7 doing whatever the emergency report 
is.
    And, I mean, we went through a flood, and we did, you know, 
trigger an EAS occasionally. But that is generally triggered by 
the local sheriff or the State police.
    Mr. Moran. Right. So a lot of those sorts of things, the 
message is getting--if the message is getting out, it does not 
necessarily have to come from the EAS.
    Mr. Walden. I remember in our post-9/11 hearing here that 
the then-chairman of the Commission, Mr. Powell, suggested that 
in New York, that they actually told the broadcasters to stop 
using the EAS, because it was scaring people. They actually 
shut down, asked broadcasters not to do that, not to use EAS, 
because they were all reporting everything anyway.
    So I just wanted to clarify, and you have helped me clarify 
in terms of how the emergency alert system works. We have to do 
tests every week. We have to record certain monthly tests. It 
is--and you rigorously enforced all of that, don't you?
    Mr. Moran. That is absolutely right. And we work with FEMA 
on that.
    Mr. Walden. Mr. Chairman, my time has expired. Thank you. 
And thank you, Mr. Moran.
    Chairman Barton. Thank you. I think that is all for the 
first panel. I have to commend you, gentlemen. I did not see 
any of you take a bathroom break in almost 6 hours. That has 
got to be a record. So go to it.
    We are going to take a recess until 5 p.m. So we are going 
to reconvene with our second panel at 5 p.m.
    [Brief recess.]
    Chairman Barton. The committee will come to order. We are 
now going to begin our second panel. I think we have nine 
distinguished witnesses, which is not a record, we have had 10 
distinguished witnesses on one panel. So you are one away from 
the record, but you may be the record for distinguished-ness.
    We are going to start with Mr. Angelle, who is representing 
the Louisiana Department of Natural Resources. We will give 
each of you 7 minutes. And we will just go right down the 
aisle. There are going to be a series of votes beginning in the 
next 10 to 20 minutes, but we will attempt to keep the hearing 
going.
    So we thank you folks for your patience and recognize Mr. 
Angelle for 7 minutes.

STATEMENTS OF SCOTT A. ANGELLE, SECRETARY, LOUISIANA DEPARTMENT 
    OF NATURAL RESOURCES; RED CAVANEY, PRESIDENT, AMERICAN 
    PETROLEUM INSTITUTE; BOB SLAUGHTER, PRESIDENT, NATIONAL 
    PETROCHEMICAL AND REFINERS ASSOCIATION; JAMES NEWSOME, 
   PRESIDENT, NEW YORK MERCANTILE EXCHANGE, WORLD FINANCIAL 
CENTER; BENJAMIN S. COOPER, EXECUTIVE DIRECTOR, ASSOCIATION OF 
   OIL PIPELINES; BILL DOUGLASS, CEO, DOUGLASS DISTRIBUTING 
 COMPANY, ON BEHALF OF THE NATIONAL ASSOCIATION OF CONVENIENCE 
  STORES AND THE SOCIETY OF INDEPENDENT GASOLINE MARKETERS OF 
AMERICA; WILLIAM L. SMITH, CHIEF TECHNOLOGY OFFICER, BELLSOUTH 
   CORPORATION; DANIEL A. LASHOF, SCIENCE DIRECTOR, CLIMATE 
CENTER, NATIONAL RESOURCES DEFENSE COUNCIL; AND MARK N. COOPER, 
       RESEARCH DIRECTOR, CONSUMER FEDERATION OF AMERICA

    Mr. Angelle. Thank you, Mr. Chairman. It is with a heavy 
heart that I come to our Nation's capital today. Although we 
are here to discuss the effects of Hurricane Katrina on our 
national energy supply, let us all be reminded of the human 
tragedy on the gulf coast.
    A special thanks to you, Mr. Chairman, and to the ranking 
member for your fight to help coastal producing States in the 
recent energy bill. Both of you were stand-up guys for 
Louisiana. Over strong objections of the administration, you 
gave us hope by providing resources for coastal restoration. 
And it is only fitting that we return and thank you and now ask 
your assistance for what is now our very survival.
    The citizens of my State are still in the eye of Hurricane 
Katrina's wake, and many are experiencing the tragedy that is 
still unfolding; 899,000 people were without power and, 
currently, 503,000 now. On behalf of our great people, I thank 
you for your assistance in our rescue and recovery operations. 
Together, we know we can rebuild a strong and great Louisiana. 
So I come here today seeking help, bipartisan help, not 
assessing blame.
    It was a wise Thomas Jefferson some 200 years ago who 
sought what would become the most valuable acquisition in the 
history of this country, the Louisiana Purchase, including the 
Orleans Territory. He understood the strategic importance of 
New Orleans and the Mississippi River for navigation interests 
and economic prosperity, but he had no way of knowing then the 
additional resources this Nation would acquire from Louisiana's 
rich delta land and the bounty off its shore. When it comes to 
energy production, energy refining, energy distribution and, 
indeed, America's energy security, this is the most important 
piece of real estate from sea to shining sea, and every 
American is connected to it through the gas pump and family 
energy costs.
    We must do everything we can to protect it because most of 
America has resisted energy development. In fact, it has been 
over 25 years since America has built a new refinery in the 
continental United States. On the other hand, Louisiana has a 
strong and distinguished history of oil and gas production.
    Let me tell you a little bit about my Louisiana. We host 
more than 80 percent of America's offshore oil and gas 
production and distribution, 34 percent, of the Nation's 
natural gas supply, and almost 30 percent of the Nation's crude 
oil supply is either produced in Louisiana, produced offshore 
Louisiana, or moves through the State and its coastal wetlands.
    This production is connected to nearly 50 percent of the 
country's refining capacity, and Louisiana alone hosts more 
than 16 percent of the total U.S. refining capacity, second 
only to the great State of Texas. We host the Strategic 
Petroleum Reserve. Port Fourchon alone services 16 percent of 
the Nation's oil supply.
    The Louisiana offshore oil port is the only port in the 
Nation that can handle the large super tankers from the Persian 
Gulf. This port alone is responsible for some 13 percent of 
America's foreign oil supply. We are home to America's most 
recently permitted LNG facility, as well as America's largest 
LNG facility, and we do all of this at the same time we produce 
30 percent of our Nation's fisheries; catch and drain 41 
percent of the Continental United States.
    We have embraced the concept that we can improve the 
quality of life for all Americans with the responsible 
management of our natural resources, and we do all of this when 
most coastal States continue to say no, and not in my back 
yard.
    We all know good relationships are like bank accounts, and 
it takes a few deposits to make a few withdrawals. When it 
comes to energy production, the 18th State of this Great Union 
has made its share of deposits, and it is in desperate need of 
a major withdrawal.
    Louisiana Governors and Congressmen and DNR secretaries 
before me, along with Federal agency heads, scientists, 
economists, business and industry leaders, environmental 
representatives, have together sounded the alarm for years and 
respectfully, Mr. Chairman, neither Congress nor the White 
House, past or present, have answered the call.
    We have continuously asked for the Federal commitment to 
restore our wetlands that protect this Nation's strategic 
energy infrastructure off the coast of Louisiana, that protect 
its No. 1 port system, the great city of New Orleans, and our 
coastal residents from storm surge.
    But we have been told that we should scale back our plans 
and be satisfied with business as usual, that our Nation simply 
cannot afford it right now. Yet Louisiana State University 
research indicates that every 2.7 miles of healthy marsh can 
reduce storm surge by a critical 12 inches.
    We have the science and technology to make a difference. We 
simply need the financial resources. We have asked for the 
Federal commitment it would take to raise our levees and build 
and upgrade flood and hurricane protection for our citizens and 
for the most strategic of American real estate, but so far, we 
have been shortchanged.
    We have continuously asked, pleaded and begged for a true 
sharing of OCS revenues for the coastal producing States. We 
were on a course to adopt a constitutional amendment next fall 
in Louisiana that would dedicate any future OCS funds the State 
receives to rebuilding our wetlands.
    Simply put, unless we invest in protecting the huge 
concentration of energy assets in Louisiana by restoring our 
wetlands and building levees, America's energy supply remains 
exposed.
    Gratefully, because of your help, Mr. Chairman, we received 
the first step in that sharing through coastal impact 
assistance for 4 years in the recently passed energy bill.
    But even that is woefully inadequate for such a challenge. 
We need true permanent revenue sharing like that with States 
that produce oil and gas on Federal lands on shore so that we 
may have the resources to protect our infrastructure.
    You can imagine how amazed we were in July when our 
Nation's Energy Secretary wrote a letter to the House and 
Senate leaders opposing the sharing of OCS revenues through 
direct spending and authorized appropriations for coastal 
States.
    What more must Louisiana do when it comes to energy 
leadership and development to get a share of these resources so 
that they can be used to help protect the energy infrastructure 
of our Nation? I think every American would agree that it just 
makes good common sense to take a portion of the OCS revenues 
to protect the infrastructure that makes this production 
possible.
    In his letter dated July 15, 2005, the Energy Secretary 
said, ``We can't afford to share revenues with the coastal 
producing States that host our Nation's energy production.'' It 
is right here in writing.
    Well, let me share with you what we can't afford: A 50 cent 
increase in the average cost per gallon of gasoline because 
infrastructure was exposed. That equates to nearly $1.3 billion 
a week in increased fuel costs based on the daily consumption 
of America.
    That says nothing of the increased cost of plastics, 
building materials, home energy costs, and transportation of 
products. When the Department of Energy doesn't think it is 
important to share OCS revenues to allow Louisiana to protect a 
high concentration of energy assets, Washington, we have a 
problem.
    I hear a lot about SPR. That will do nothing to reduce the 
price of natural gas, and old man winter is just around the 
corner. Concerted voices, both Republicans and Democrats, have 
sounded the alarm: If the commitment wasn't made, the Nation 
would pay a far greater price. But the Office of Management and 
Budget continued to demand we justify the cost of our project 
through years of feasibility studies. We have had studies to 
study studies.
    We do not have the luxury of time, especially now, and we 
ask OMB: Is the cost now justified? We branded Louisiana's 
coast America's wetland, and sounded the alarm that it is of 
great significance to the world ecology and that it impacts the 
Nation's economy and economic security. Restoration must be 
treated as a special circumstance because there is no 
comparison with how this coastline benefits the Nation or how 
it impacts the Nation if it is lost.
    We sounded the alarm that what would happen if the big one 
ever hit New Orleans both in human cost and in energy 
infrastructure cost. And we are seeing those results firsthand. 
Our wounds are still gaping, and if these words sound strident, 
I'm sure you agree that this is not rhetoric.
    It is just amazing just how accurate the October 2004 
edition of the National Geographic was in laying out the tragic 
predictions that actually played out this week. Yet the 
opposition for revenue sharing for coastal producing States 
continues in Washington. It is no wonder many other States 
won't allow drilling offshore.
    The worst case scenario the experts have long predicted is 
now reality. But yet in the midst of an ongoing crisis, 
Louisiana remains committed to the fueling of this great Nation 
as a world energy leader. Energy companies are working to 
reestablish families, so that the work to rebuild may begin.
    I hear a lot of things about ExxonMobil on the screen up 
here, but keep in mind that 91 percent of the wells that were 
drilled last year in Louisiana were by independents who, along 
with the majors, will need Federal assistance to repair 
infrastructure, low- or no-interest loans, permit streamlining 
and immunity from outside litigation during this rebuilding 
process.
    What sits off Louisiana's coast cannot be compromised. 
Estimated depreciated investment in offshore production 
facilities is more than $85 billion; pipeline infrastructure, 
more than $10 billion; and public coastal port facilities, $2 
billion.
    Production off Louisiana's shore alone contributes an 
average of $5 billion a year to the Federal Treasury, and that 
was when oil was less than the $68-a-barrel-plus today. A week 
after Katrina's landfall, a whopping 58 percent of oil 
production and 42 percent of natural gas from the OCSs remains 
shut in.
    As of yesterday, we still have six refineries in Louisiana 
shut down from storm damage or lack of electric power. And a 
huge unknown in all of this is the condition of the pipeline 
infrastructure. When Hurricane Ivan made landfall two States 
away last year, pipeline infrastructure took months and months 
to rebuild.
    As more of the protection from Louisiana's barrier islands 
and coastal wetlands wash away, more onshore and offshore 
production will be damaged or destroyed by storms. And 
according to scientists, the increase in frequency and strength 
of gulf hurricanes will be with us for years to come.
    Louisiana needs America more than any State has ever needed 
her mother country. And yet, America needs Louisiana more than 
ever. It is vital to the Nation's security and economic future 
that Louisiana is not only restored, both its infrastructure 
and its wetlands, but that it is strengthened in the process.
    Thank you for inviting me here to be with you. And to the 
American people for the outpouring of your generosity, we say 
thank you in this time of need.
    May God continue to bless America and may God restore 
Louisiana. Thank you.
    [The prepared statement of Scott A. Angelle follows:]

Prepared Statement of Scott A. Angelle, Secretary, Louisiana Department 
                          of Natural Resources

                              INTRODUCTION

    Mr. Chairman, Mr. Ranking Member, and distinguished members of the 
House Committee on Energy and Commerce, thank you for your gracious 
invitation to address your Committee. Unfortunately, as you know, I 
come to you today with a somber heart from the frontlines of the worst 
natural disaster in our nation's history.
    My home state will never be the same again, nor will America. 
Almost no enemy of this nation, or terrorist of any kind, could have 
wrought the terror and devastation to my state and to this nation as 
the fury of nature with the name of Katrina did on August 29 and the 
ensuing days. Overnight, upwards of a hundred thousand citizens of my 
state and our neighbors in Mississippi and Alabama lost everything they 
had--homes, jobs, businesses, cars, and for some, their very lives. 
Hundreds of thousands of others were dramatically affected to a lesser, 
but significant degree. Suddenly, we find ourselves in the midst of an 
ongoing crisis, faced with restoring the basic elements of 
civilization--food, safe drinking water, shelter, clothing, fuel, and 
sanitation.
    I want you to know that the people of Louisiana are deeply touched 
by the outpouring of concern, prayers, help, and generosity from 
Americans from every walk of life from all over the country. To all of 
you, we give you our heartfelt thanks.
    Now, I will focus on the subject of this hearing--the impact of 
Hurricane Katrina on gasoline and petroleum supplies.

       SUPPLYING THE NATION: LOUISIANA--AMERICA'S ENERGY CORRIDOR

    Louisiana has a long and distinguished history of oil and gas 
production, both onshore and offshore. Currently, approximately 34% of 
the nation's natural gas supply and almost 30% of the nation's crude 
oil supply is either produced in Louisiana, produced offshore 
Louisiana, or moves through the state and its coastal wetlands. 
Together with the infrastructure in the rest of the state, this 
production is connected to nearly 50% of the total refining capacity in 
the United States. Based on its energy producing value to the nation, 
acre for acre, Louisiana is the most valuable real-estate in the 
nation.
    Louisiana has 17 petroleum refineries, most of them large, world 
scale facilities, with a combined crude oil distillation capacity of 
approximately 2.77 million barrels per calendar day, which is 16.2% of 
total U.S. refinery capacity of 17.1 million barrels per day, the 
second highest in the nation after our sister Gulf Coast state, Texas. 
Louisiana produces approximately 42.1 million gallons of gasoline per 
day and 29.9 million gallons of distillate fuel (that is, jet fuel and 
diesel fuel) per day. Two of the four Strategic Petroleum Reserve 
storage facilities are also in Louisiana. The other two are in Texas.
    Louisiana is not some far off energy producing colony. Louisiana 
and its citizens are fundamental elements from which this great nation 
was forged. Dating back to Thomas Jefferson's signing of the Louisiana 
Purchase in 1803, Louisiana has indelibly stamped its mark on this 
country, becoming the 18th state in the Union in 1812. Even today, 
Louisiana has provided more national guardsmen to the war against 
terrorism in Afghanistan and Iraq than any other state, though we rank 
only 22nd in population. Approximately 41% of the continental land mass 
of the U.S. drains through Louisiana via the Mississippi River. The 
Port of greater New Orleans is the largest port in total tonnage the 
U.S., and the port of Baton Rouge is 10th.
    When it comes to developing the nation's offshore petroleum 
resources, there simply would not be much if it were not for 
Louisiana's leadership and participation. The offshore territory off 
Louisiana's coast is the most extensively developed offshore territory 
in the entire world. As most of you know, the offshore area beyond 3 
miles from Louisiana's coast is federal territory called the Outer 
Continental Shelf, or OCS. Other than in a 3-mile transition zone, the 
federal government receives ALL of the mineral revenue from production 
in the OCS. Based on 2004 data, OCS production off Louisiana's coast 
constitutes 91% of oil and 75% of natural gas production from all U.S. 
OCS areas combined. Additionally, Louisiana OCS territory has produced 
88.8% of the 14.9 billion barrels of crude oil and condensate and 82.3% 
of the 150 trillion cubic feet of natural gas ever extracted from all 
federal OCS territories since the beginning of time.

Offshore Energy Development and Economic Prosperity
    This service that Louisiana provides to the nation is one of the 
largest contributing factors to America's strategic security and 
economic prosperity, which make possible the high standard of living 
that we all enjoy in this country. Let's look at just one example of 
how this translates to you. Prior to Hurricane Katrina, the pump price 
of gasoline was already hitting the $2.50 per gallon range in many 
parts of the country. If it were not for Louisiana's role in the 
petroleum supply of the nation, you and your constituents would likely 
have been paying in the range of $4.00 per gallon for gasoline pre-
Katrina, and more than that post-Katrina. And, that does not address 
how sky-high prices would be for electricity, food, and all of the 
other things fueled by, or made from, oil and natural gas.
    Offshore petroleum production is not only good for the country, but 
it is essential to the well-being of the USA. Offshore production is 
also good for coastal producing states, and there are not many of us--
coastal states, that is, that allow new production off our coasts. The 
list currently consists of only Alabama, Alaska, Mississippi, 
Louisiana, and Texas. Even without being able to share in the mineral 
revenue produced for the federal treasury off our coasts, offshore 
production produces economic prosperity for coastal states in the form 
of jobs for the service industries providing the logistics support for 
the offshore industry. This includes, among others: equipment and 
materials suppliers; food service; helicopter and boat transportation; 
communications services; engineers, geologists, boat and rig crews; 
other industry staff and employees; and many others. The offshore 
industry also supports many jobs far removed from the coastal states, 
including a multitude of employees who, because of the week on, week 
off type of schedules, commute up to 500 miles or more from places like 
Arkansas, Tennessee, and Georgia to work offshore in the Gulf.

Offshore Development Includes LNG
    Stepping up to the plate to help the nation obtain new supplies of 
energy including LNG (liquefied natural gas), Louisiana is the home of 
the largest throughput facility (Southern Union in Lake Charles) of the 
four existing LNG import terminals in the U.S., and it is undergoing 
more than a doubling of capacity from 1 billion cubic feet per day to 
2.5 billion cubic feet per day. While almost every state in the nation 
is trying to prevent the siting of any new LNG facilities, Louisiana is 
the site of the largest permitted LNG import terminal in the nation 
(Cheniere Energy's 2.6 billion cubic feet per day facility in Sabine 
Parish).

Offshore Development and Preserving the Environment Are Compatible
    I am also here to tell you, that oil and gas production is 
compatible with protecting and preserving the environment. Louisiana 
can look at experience and footnote that offshore development and the 
associated onshore infrastructure construction and operations are done 
in an environmentally responsible way today and are done so under the 
oversight of several state and federal regulatory agencies.
    Louisiana has suffered some negative impacts in the past from 
offshore production. And, yes, we still have to deal with some of those 
legacies of the past, but that is because Louisiana pioneered offshore 
production in the days before modern technology, before the awakening 
of America's environmental consciousness, and before the advent of 
environmental regulatory agencies and regulations.
    Louisiana's first well (a dry hole) was drilled in 1868. Our first 
oil well was drilled in 1901. The first oil well over water in the 
world was in Louisiana in 1910 in Caddo Lake. The first well drilled 
off the coast of Louisiana was in 1938 near Creole, Louisiana. 
Louisiana was the site of the first well drilled out of sight of land 
in 1947. Things have changed dramatically since 1910, 1938, 1947, or 
even 1960, 1970, or 1980. Simply put, it was like the old Wild West out 
there. Just as in other industries in other parts of the country in 
other times, there was once a time, long ago, when almost anything in 
the name of progress was accepted. Everything is different now. That 
era and those practices have nothing more in common with modern 
exploration, production, and environmental techniques than 
transportation by horse and buggy in 1800's has in common with jet 
airliners flying overhead today.

  THE CONSEQUENCES OF CONCENTRATING OIL & GAS DEVELOPMENT IN ONE AREA

    This country now faces an energy disaster of both short-term and 
long-term causes, implications, and solutions. Our present energy 
crisis is caused by the immediate effects of Hurricane Katrina, 
compounded by the long term consequence of decades of having had no 
meaningful energy policy, concentrating energy production and 
processing in the Gulf Coast area, the aversion to energy development 
in most other areas of the country, and this country's insatiable 
appetite for energy. The Energy Policy Act of 2005 (EPAct 2005) that 
was just enacted is a good step in the right direction, but it is not 
soon enough and not enough. For the foreseeable future, EPAct 2005 will 
not meaningfully reduce this country's increasing energy appetite. It 
will not reduce this country's increasing dependence on unreliable 
foreign sources of crude oil AND, NOW, liquefied natural gas. It will 
not significantly increase domestic energy supply or diversity. And it 
will not protect, much less rebuild, the Louisiana energy production 
infrastructure and the eroding and decimated coastal wetlands that 
protected and made the offshore production possible off Louisiana.
    We are all familiar with the old adage, ``Don't put all of your 
eggs in one basket.'' We all also know the reason for that: If you drop 
that basket, what are you going to do? Well, ladies and gentlemen, this 
nation's oil and gas offshore production, foreign import capability, 
refining, and basic petrochemical eggs have been placed in one basket 
called the Louisiana and the Gulf Coast, and that basket has not only 
been dropped, it has been run over by Hurricane Katrina.
    I am not here to chastise anyone from those states that will not 
allow drilling off their coasts, or drilling rigs, petroleum 
refineries, or petrochemical plants in their states. What I am here to 
say is that since Louisiana has welcomed those facilities and 
operations and has become America's Energy Corridor, help us. And, by 
helping us, you are helping yourselves and all Americans.
    Energy is the lifeblood of an industrialized nation and a 
prosperous society, and none is more of both than this country. The 
mainline artery supplying that sustaining life blood of oil, natural 
gas, petroleum products such as gasoline, jet fuel, and diesel fuel, is 
Louisiana. Louisiana has over 40,000 miles of pipelines just within our 
state as part of the infrastructure that receives offshore and foreign 
oil and gas, and feeds it through processing facilities, refineries, 
and petrochemical plants that then distribute it to the rest of the 
nation.

                   A PLAN NEEDED TO REBUILD LOUISIANA

    Most of this offshore and onshore production is shutdown, and much 
of the onshore infrastructure is either shutdown, damaged, destroyed, 
or underwater. We will not know the full extent of either the short-
term or long-term damage for some time. Until that information is 
available, a reasonable assessment of the cost and time to repair or 
replace it and to restore energy flow to the pre-storm level will not 
be known.
    Here are just a few of the challenges we face in even determining 
the damage:

The communications infrastructure is in ruins.
Telephone lines, cell phone towers, radio towers, repeaters and remote 
        data telemetry are either destroyed or have no power.
Advance rescue and assessment teams have to resort to carrying in 
        satellite phones just to communicate from sites they are able 
        to reach.
Accessibility to wells, pipeline pumping stations, and processing 
        facilities is limited by flood waters, downed trees, washed out 
        roads, lack of vehicle fuel and other impediments.
Complicating this even further, hundreds of thousands of people have 
        been dislocated to other cities throughout Louisiana and other 
        states.
The people who are most familiar with the damaged areas and who operate 
        the affected oil and gas facilities are among the hundreds of 
        thousands of displaced citizens.
    Untold tens of thousands, or even hundreds of thousands of these 
evacuees cannot return to homes for months, if they still have homes to 
return to. Even the facilities that can be restarted and operated soon, 
need the people who operate them, and those people need food, water, 
and a place to live. The people and their needs cannot be separated 
from the infrastructure.
    Refineries are shut down, wells are shut in, and bodies are 
floating in the streets. As the floodwaters recede, fires are burning 
uncontrolled in New Orleans because there are no firefighters to put 
them out. Businesses have been destroyed. Most of the oil and gas 
exploration and development onshore in Louisiana, and a large portion 
in the shallow waters offshore are done by independent companies. These 
are small operations, many with only a half dozen to a couple of dozen 
employees. These people would be your typical neighbors, not large 
corporations with extensive resources. Without help, many of them will 
never drill another well, because their employees are dislocated, their 
equipment ruined, their offices and workshops destroyed, and their 
financial resources gone.
    It is expected that unemployment in Louisiana has almost overnight, 
jumped to about 25%. Tens of thousands of people who once had jobs, 
many in the oil and gas industry, have now lost homes, jobs, or both.
    These are extraordinary times, and extraordinary times call for 
extraordinary measures. Louisiana needs the rest of America more now 
than ever before, and America needs Louisiana and its lifeblood energy 
supply more now than ever before. The U.S. had a Marshall Plan to 
rebuild Germany, the defeated enemy, after World War II; the U.S. now 
needs to institute a massive rebuilding plan for its own people in 
Louisiana, Mississippi, and Alabama.

A Rebuild Program from the Past to Inspire Us Today
    In 1932, there was a cry for help from a desperate people near 
panic. The nation turned to its leaders searching for an end to the 
rampant unemployment and economic chaos that gripped the country. They 
were not disappointed. A plan was needed to fight soil erosion and 
declining timber resources, utilizing the unemployed of large urban 
areas. Congress and the President initiated several actions, one of 
which was the Emergency Conservation Work (ECW) Act, more commonly 
known as the Civilian Conservation Corps. With this action, two wasted 
resources were brought to bear, the young men and the land, in an 
effort to save both.
    President Roosevelt called the 73rd Congress into Emergency Session 
on March 9, 1933, to hear and authorize the program. It included 
recruiting thousands of unemployed young men, enrolling them in a 
peacetime army, and sending them into battle against destruction and 
erosion of the nation's natural resources. Before it was over, over 
three million young men engaged in a massive salvage and public works 
operation. We are all familiar with the public works facilities these 
hard working men built throughout the country. These facilities--post 
offices, other public buildings, roads, parks, fire towers, telephone 
lines and many other facilities that Americans still use today.
    A massive rebuilding program is needed to replace and restore all 
that Katrina destroyed. This includes the whole infrastructure of a 
modern civilization such as housing, public buildings, communications, 
energy production facilities, offices, etc. As the infrastructure is 
rebuilt and financial assistance is provided, more businesses can be 
reopened, creating more jobs, reducing unemployment, and restarting the 
decimated economy of the area. Today, skilled, hard-working men and 
women of Louisiana, who until a few days ago, were going to their jobs 
and returning home each day, need America's help, not charity, to 
restore those jobs, homes, and lives.
    Maybe the legacies of the Marshall Plan and the Civilian 
Conservation Corps can serve as an inspiration for developing the 
rebuild program direly needed today for Louisiana, Mississippi, and 
Alabama.

          LOUISIANA'S ROLE AS A PRODUCING AND CONSUMING STATE

    A reliable and affordable supply of energy is necessary for 
economic development, prosperity, and expansion. Although technological 
improvements and investments in energy efficiency have reduced this 
country's energy consumption per unit of Gross Domestic Product over 
the past 20 years, increased economic prosperity is still dependent on 
increased energy consumption. In the U.S., the availability of energy 
has generally been taken for granted, but recent blackouts in 
California and other parts of the country, the emergence of 70 plus 
dollar per barrel oil and $11 to $12 per million BTU natural gas, and 
the drive to build terminals to import foreign natural gas in the form 
of a cryogenic liquid, have highlighted the need for addressing energy 
supply.
    I come to you representing a state to which energy is its middle 
name. The words Louisiana and energy are almost synonymous. Among the 
50 states, Louisiana ranks (2004 Energy Information Administration--EIA 
data):

1st in crude oil production
2nd in natural gas production
2nd in total energy production from all sources
    The importance of energy to Louisiana is further highlighted in the 
following rankings in which Louisiana is (2003 EIA data latest 
available):

2nd in petroleum refining capacity
2nd in primary petrochemical production
3rd in industrial energy consumption
3rd in natural gas consumption
5th in petroleum consumption
8th in total energy consumption
But, only 22nd in residential energy consumption
    Usually, when national energy issues are discussed, Louisiana is 
cast in the image of a rich producing state floating in a sea of oil 
and gas that is being inequitably shared with the consuming states. 
Often misunderstood or overlooked, is the fact that about two thirds of 
the production from the state is in the Louisiana federal OCS territory 
and, hence, produces no revenue for the state, while at the same time 
incurring significant infrastructure support costs to the state, which 
I will discuss in more detail later.
    Also often overlooked or not explained, is the fact that, though 
Louisiana is the 2nd highest energy producing state in the nation, 
Louisiana is also 8th highest in total energy consumption. Therefore, 
Louisiana is more of a consuming state than 42 other states! This story 
is never told, nor are Louisiana's difficulties as a key consuming 
state given much concern at the federal energy policy level. Thus, when 
Louisiana, the energy producing state speaks, it is also Louisiana, the 
energy consuming state speaking. Louisiana is inexorably tied into the 
issues of all states in the nation, whether considered producing states 
or consuming states. However goes the energy situation in Louisiana, so 
goes the energy situation in the United States of America, and things 
are not going well for Louisiana today.

Louisiana's Role as a Through-Processor of Hydrocarbons for the Nation
    All of the preceding represents only the direct supply line of oil 
and natural gas. Additionally, Louisiana's 8th highest ranking among 
the states in energy consumption is attributable to the fact that 
Louisiana is consuming most of this energy as a through-processor of 
energy supplies for the rest of the nation, consuming colossal amounts 
of energy for their benefit.
    An example of how Louisiana is consuming energy resources for the 
primary benefit of other states is petroleum refining. The energy 
equivalent of 10% of Louisiana's entire petroleum product consumption 
is required just to fuel the processes that refine crude oil into 
gasoline, diesel fuel, jet fuel, heating oil and other products 
consumed out of state. The oil refining industry employs only about 
10,400 workers in the state; whereas tens of millions of jobs 
throughout the country are dependent on the affordability and 
availability of the products from the continued operation of these 
refineries and associated petrochemical facilities in Louisiana.
    Many other examples could be cited of the numerous energy intensive 
natural gas and oil derived chemical products Louisiana (and also 
Texas, Oklahoma, and California) through-processes for the rest of the 
U.S. Per unit of output, these industrial processes in Louisiana are 
characterized as capital (equipment), energy, raw material, and 
pollution discharge intensive, and low in labor requirements and dollar 
value added, essentially the opposite of the downstream industries in 
other states that upgrade these chemicals into ultimate end products. 
Much of the energy Louisiana technically consumes is really the 
transformation of oil and gas into primary chemical building blocks 
that are shipped to other states where the final products are made, 
whether it be plastic toys, pharmaceuticals, automobile dash boards, 
bumpers and upholstery, electronic components and cabinets, synthetic 
fibers, or thousands of other products dependent on this flow of energy 
and high energy content materials out of Louisiana.

              OCS INFRASTRUCTURE AND ITS IMPACTS AND NEEDS

    It is important to understand that there is no free lunch. 
Louisiana, like other coastal producing states, sustains impacts on 
coastal communities and bears the costs of onshore infrastructure 
required to support this production activity.

Saving Louisiana's Wetlands that Protect Offshore and Onshore 
        Production Infrastructure
    Louisiana's unique and fragile coastal wetlands introduce yet an 
additional issue: land loss. Prior to Hurricane Katrina, Louisiana was 
losing more than 24 square miles of our coastal land each year. In 
fact, if what is happening today in coastal Louisiana were happening in 
our nation's capital, the Potomac River would be washing away the steps 
of the Capitol today, the White House next year, and the Pentagon soon 
after that. In fact, during the course of this morning alone, Louisiana 
will lose a football field wide area from the Capitol Building to the 
Washington Monument. It is feared that the ferocity of Hurricane 
Katrina may have accelerated the land loss by several years.
    There are many causes of this coastal erosion in Louisiana, 
including what may be the most significant factor: building levees and 
channeling the Mississippi River. Whatever the cause of its demise, the 
health and restoration of Louisiana's coastal wetlands are vital to 
protecting the offshore and onshore infrastructure that is essential 
for the continuation, as well as the expansion, of offshore energy 
production in the Gulf of Mexico.
    Once the State realized the magnitude of the coastal erosion 
problem, we got serious about doing something about it. In 1980, the 
coastal restoration permitting program was moved to the Department of 
Natural Resources (DNR). In 1981, $40 million of state oil and gas 
revenue was set aside in a legislative trust fund for coastal 
restoration projects. The State has a dedicated revenue stream of up to 
$25 million per year, depending on the level of revenue collections 
from oil and gas production within the state, to replenish the fund. In 
the past few years, that replenishment stream has been at the $25 
million level. In 1989, the Office of Coastal Restoration and 
Management was created in DNR, and the magnitude of the program was 
greatly expanded.

The War against the Elements
    Let me emphasize something extremely important to this nation's 
energy supply. Here along the coast, WE ARE AT WAR. It is a war in 
which the enemy is nature. It is an enemy with names like Andrew, Ivan, 
Dennis, and Katrina--hurricanes. It is an enemy with names like wave 
erosion, storm surges, sedimentary subsidence, soil consolidation, salt 
water intrusion, and leveeing of the Mississippi River. As Hurricane 
Katrina demonstrated last week, it is a war we are losing in Louisiana.
    Prior to Hurricane Katrina, Louisiana needed a minimum of $14 
billion (in today's dollars) over the next 20 to 30 years for coastal 
restoration projects. Louisiana has quite a unique geology relative to 
the rest of the country. The Louisiana coast is geologically the 
youngest part of the U.S. and, prior to manmade interference from 
leveeing and channeling the Mississippi River and other activities, was 
still accreting land mass faster than it was losing it to subsidence, 
erosion, salt water intrusion, sea level rise from global warming, and 
other causes. The science of coastal geology and the expertise of 
coastal engineering to counter these forces is in its infancy, as it 
has never in the history of civilization, been attempted on the scale 
it must be implemented in South Louisiana. Also, we are dealing with a 
situation that is continuously subject to changing dynamics, such as 
more frequent and more powerful hurricanes, the apparently increasing 
effects of global warming, etc.

Extent of Louisiana Infrastructure Supporting OCS Production
    The total value of the Louisiana OCS infrastructure and the onshore 
infrastructure supporting it is difficult to ascertain. The estimated 
depreciated investment in offshore production facilities is over $85 
billion, depreciated offshore pipeline infrastructure is over $10 
billion, and public coastal port facilities is $2 billion, for a total 
of approximately $100 billion, depreciated, and not counting highways, 
sewer, water, fire and police protection, schools, and other public 
works structures that also have ongoing operation and maintenance 
costs. The replacement of all of this would be several times the $100 
billion depreciated figure. It also does not count the onshore coastal 
infrastructure of pipelines, storage facilities, pumping stations, 
processing facilities, etc.
    This infrastructure is vulnerable if not protected by the State's 
barrier islands and marshes. As these erode and disappear, 
infrastructure is exposed to the open sea and all of its fury. As the 
coast recedes, near shore facilities become further offshore and 
subject to greater forces of nature, including subsidence, currents, 
and mudslides. Erosion in the coastal zone is already beginning to 
expose pipelines that were once buried.

A Wake-up Call from Hurricane Ivan
    To bring home the point of infrastructure vulnerability, we need 
only look back to this past Summer. Hurricane Ivan was not even a 
direct hit on Louisiana's offshore and coastal oil and gas 
infrastructure, striking two states away; yet, its effects on the 
nation's supply of oil and gas were significant, even many months after 
it hit. Most of the damage occurred along pipeline routes rather than 
actual structural damage to the producing platforms. As of February 14, 
2005, when the Minerals Management Service (MMS) released its final 
impact report on Ivan, 7.42% of daily oil production and 1.19% of daily 
gas production in the Gulf of Mexico was still shut-in. The cumulative 
shut-in production through February 14 was 43.8 million barrels or 
7.25% of annual Gulf of Mexico OCS production and 172.3 billion cubic 
feet of natural gas or 3.9% of annual Gulf of Mexico OCS gas 
production.
    With Katrina, that infrastructure has sustained a direct hit. As of 
Saturday, September 3, the Minerals Management Service (MMS) reported 
that 70% of manned platforms and 71% of the drilling rigs in the Gulf 
were not operating. Saturday's shut-in oil production was 1.2 million 
barrels per day, or 79% of Gulf production. Shut-in gas production in 
the Gulf was 5.8 billion cubic feet per day, or 58% of daily gas 
production in the Gulf.
    Also, as of noon Sunday, 7 refineries in Louisiana and 1 in 
Mississippi were still shutdown from storm damage and/or lack of 
electric power. An additional 4 refineries in Louisiana were operating 
at reduced rates due to storm damage or lack of crude supply.
    As more of the protection from Louisiana's barrier islands and 
coastal wetlands wash away, increasingly more onshore and offshore 
production will be damaged or destroyed by even less powerful storms 
than Ivan and Katrina, and particularly by storms whose paths more 
directly pass through the producing areas off of Louisiana's coast, as 
did Katrina. Direct hits to the prime production area by hurricanes and 
tropical storms will cause incalculable damage to this production 
infrastructure, as well as to the onshore support infrastructure, as 
Katrina is proving.

               HOW TO INCREASE OFFSHORE ENERGY PRODUCTION

Share Offshore Revenue with the States that Allow Offshore Production
    The most effective way to help is to assist those states that make 
offshore energy production possible off their coasts. This can be 
accomplished by sharing with those coastal producing states some of the 
offshore revenues generated off their coasts. This would encourage 
those states to pursue more development, and it would help offset 
infrastructure costs those states incur that is associated with that 
development. Louisiana, like other coastal producing states, sustains 
impacts on coastal communities and bears the costs of onshore 
infrastructure to support this production activity.
    When states like Wyoming, New Mexico, Colorado, and others host 
drilling on federal lands onshore, they receive 50% of those revenues 
in direct payments, and consequently have the financial resources to 
support that infrastructure. In Fiscal Year 2004, Wyoming and New 
Mexico together received about $928 million from those revenues, which 
IS an appropriate revenue sharing procedure.
    In contrast, for example in 2001, of the $7.5 BILLION in revenues 
produced in the federal OCS area, only a fraction of one percent came 
back to those coastal states. The inequity is truly profound.
    We are pleased this committee is investigating gasoline supply and 
pricing. The need to sustain the existing supply that Louisiana 
provides must simultaneously be addressed. The most effective answer to 
both issues is to share offshore revenues with the coastal producing 
states that make that production possible. It is critical that coastal 
producing states receive a fair share of revenues to build and maintain 
onshore infrastructure and, in Louisiana's case, to help stem our 
dramatic land loss, which is occurring at a rate believed to be the 
fastest on the planet.
    Production off Louisiana shores alone contributes an average of $5 
BILLION dollars a year to the federal treasury, its second largest 
source of revenue. And, that was when oil was less than half of the $60 
plus per barrel price it is selling for today.
    Does it not make sense to encourage the coastal producing states 
which provide that revenue for the benefit of the rest of the nation? 
Does it not make sense, that when so many, like the U.S. Ocean 
Commission, are targeting offshore OCS revenues to pay for worthwhile 
preservation of natural resources, that this nation first protect those 
who make these resources possible?
    Prior to Katrina, in Louisiana's coastal zone, many of the 
pipelines and other infrastructure that our wetlands have historically 
protected had become exposed to open Gulf of Mexico conditions. I 
shudder to think of the extent of production infrastructure damage that 
we will learn that Katrina caused once we are able to get a full damage 
assessment.
    To maintain, much less increase, production from off our coasts, we 
must reinvest in the infrastructure that makes all of the activity 
possible, whether it be port facilities, roads to transport equipment 
and supplies, erosion control, or barrier island and wetlands storm 
protection.

Assistance from the Energy Policy Act of 2005
    The Coastal Impact Assistance Money provided in the Energy Policy 
Act of 2005 that you just helped pass is tremendously good news for the 
state's coastal restoration efforts. Yet, the $540 million provided 
over four years for coastal restoration is only a drop in the bucket 
compared to the total of $14 billion needed, prior to Katrina, over 20 
to 30 years for Louisiana's unique coastal restoration needs.

Enact Legislation to Extend Section 29 Tax Credits to Deep and Ultra-
        Deep Production in States Allowing Offshore Production
    Section 29 of the Internal Revenue Service (IRS) Code granted a tax 
credit for the production of natural gas from unconventional resources 
(coal bed methane and tight sands gas). The effect of the application 
to coal bed methane gas production was astounding in those areas of the 
country that have significant deposits of this kind, which is not along 
the Gulf Coast. Natural gas reserves from coal bed methane rose from 
6.3% of U. S. reserves at the end of 1993 to 9.9% at the end of 2003. 
Annual natural gas production from coal bed methane rose from 4.2% of 
U. S. dry gas production in 1993 to 8.2% by the end of 2003.
    Deep natural gas reserves (15,000-24,999 feet sub-surface) and 
ultra-deep gas reserves (greater than 25,000 feet sub-surface) are the 
most immediately available resources capable of providing a substantial 
increase in domestic production of natural gas. Substantial deep gas 
reserves are known to exist, and a deep gas well can have the 
productive capacity many fold over that of coal seam wells and as much 
as five to ten times that of conventional shallower wells. For example, 
a typical coal seam gas well may produce 100,000 cubic feet (CF) per 
day, a good conventional 15,000 foot well could produce 1 to 2 million 
CF per day, and a deep gas well could produce in excess of 50 million 
CF per day. The richest deep gas domain known in the U.S. underlies the 
onshore area and adjacent offshore shallow water shelf of the Gulf of 
Mexico. A 1998 study of the Potential Gas Committee put estimates of 
the U.S. deep gas resource base at possibly 170 Trillion Cubic Feet. 
The deep gas domain along the Gulf Coast underlies the existing surface 
infrastructure of pipelines, gas processing plants, and other drilling/
production support infrastructure to move this gas into the U.S. gas 
supply immediately.
    One problem is that, while productivity increases with depth in 
elevated reservoir pressure wells, drilling costs rise exponentially 
with well depth, and the drilling of one deep well takes a year or 
more. For example, conventional wells less than 15,000 feet normally 
cost between $100,000 and $2 million to drill. The deeper 15,000, plus 
foot range wells average around $6 million, 20,000 foot wells about $16 
million, and 25,000 to 30,000 foot wells are in the range of $25 
million, plus. Hence, the capital at risk for a dry hole is 
substantial, which makes the ability to fund such ventures difficult. 
Additionally, deep wells require leading edge drilling technology. Due 
to the limited amount of deep drilling done, few companies have the 
experience, technological capabilities, and financial resources to 
undertake this high return, but high risk activity. Of the few 
companies that have the ability to drill in this domain, most are the 
major oil companies, who have focused their financial resources on the 
more lucrative oil reserves of the deep water Gulf and drilling in 
foreign countries. Substantial new financial incentives could 
significantly reduce the entry hurtle, increase the reward to risk 
ratio, and reduce barriers to capital access, particularly for the 
independent companies who now do most of the onshore drilling in this 
country.

Immediately Share with the States A Percentage of Royalties from Deep 
        Drilling in the Shallow Waters of the Gulf:
    Another thing that is needed immediately, is to share with coastal 
producing states 50% of the royalties from new deep drilling in the 
shallow federal waters on the shelf. The MMS royalty deep shelf 
suspension program is a good program, but it is draining investment 
from our parishes by shifting drilling across the boundary line into 
federal waters, causing loss of investment and tax revenue from lost 
drilling in state territory. Louisiana should receive a substantive 
percentage of royalties from deep drilling on the shelf immediately.

Encourage New Energy Sources and Technology
    Recent studies show that the Gulf of Mexico has a significant wind 
energy potential. Although wind power does not have the energy density 
of petroleum, it is an inexhaustible, renewable source of clean energy. 
Again, much to my consternation, it appears that there are many parts 
of the country that use a lot of energy and want it at low prices, but 
do not want production of any kind, anywhere near them, including wind 
energy. Again, Louisiana is stepping up to help encourage this clean 
energy source. The State of Louisiana is currently working with private 
sector investors who are interested in developing wind farms in state 
and federal waters off Louisiana's coasts. My office submitted wind 
power legislation which the Louisiana Legislature passed earlier this 
year to facilitate offshore wind power development in Louisiana's State 
offshore waters.
    Natural gas hydrates probably offer the greatest untapped energy 
resource the nation has. The Oil and Gas Journal recently reported that 
the U.S. Geological Survey estimates that methane hydrate deposits are 
greater than all other forms of fossil fuels combined. Large deposits 
of gas hydrates are believed to lie below the offshore waters of the 
U.S. Unfortunately, technology to tap these resources needs to be 
developed. Once the technology is available, the first areas to be 
developed will be the areas adjacent to the existing offshore producing 
areas where the infrastructure is in place to get it to shore and into 
the nation's pipeline distribution system. The federal government needs 
to fund meaningful research into developing the technology to produce 
gas hydrates, assessing the resource base, and delivering it.

                             IN CONCLUSION

    It is vital to the nation's security and prosperity that new energy 
sources be developed. The federal government has proven that it has the 
ability to steer investment, as in the case of deep water drilling in 
the Gulf and coal seam gas. In addition to its significance in 
producing 30% of oil and 23% of natural gas produced domestically, 
which is mostly off Louisiana, the OCS is probably the single most 
promising area for the U.S. to obtain significant new energy supplies. 
These supplies, whether conventional oil and gas, imported oil, 
imported LNG, wind and ocean energy, or gas hydrates, need the support 
of coastal states to cooperate and to supply and maintain critical 
production and support infrastructure.
    LNG facilities are being built where the existing U.S. pipeline 
infrastructure exists (essentially Louisiana and Texas) in order to get 
the gas from the coast into the delivery system to supply the nation. 
The same will be true when the technology is developed to commercialize 
methane hydrate production off the coasts. This Louisiana and Texas 
infrastructure will also be used when deep and ultra-deep shelf 
production comes on stream. This is another reason why offshore revenue 
should be shared with the coastal producing states and why the 
extension of Section 29 tax credits should be extended to deep gas 
exploration at least in the states that are allowing onshore and 
offshore drilling and allowing the siting of LNG facilities to make 
energy available to the rest of the country.
    With effective policies and incentives, the federal government can 
steer investment into the offshore areas, and by receiving an equitable 
share of revenue generated offshore, the coastal producing states can 
be in a position to ensure that this production will be made available 
to the rest of the nation. Louisiana desperately needs immediate 
revenue sharing financial assistance from a source not subject to 
annual appropriations, to continue to maintain existing, and to develop 
future energy supplies for the nation.
    Although the Congress enacted national energy legislation that 
included direct payments to the coastal producing states for four years 
for coastal impact assistance, it did not enact true sharing of OCS 
revenues on a permanent basis that would be similar to the automatic 
payments for drilling on federal lands onshore. This must be addressed.
    Now that Hurricane Katrina has laid waste to Louisiana's largest 
city, the entire southeastern portion of the state, the state's coastal 
oil and gas infrastructure and its protective wetlands, a massive 
national rescue and rebuilding program is imperative to bring the state 
back from this crisis and to enable us to continue to supply a 
critically needed portion of this nations energy needs.
    Thank you for this opportunity to appear before you.

    Mr. Hall [presiding]. We thank you, Mr. Angelle. And thank 
you for your patience today, and thank you for the things you 
have seen and witnessed and suffered through the last several 
days.
    All right. The Chair recognizes Mr. Red Cavaney. Thank you, 
too. And thank you for the courtesy you extended to the 
President of the United States out in New Mexico 2 weeks ago. 
Appreciate that very much.
    I recognize you for--we are not going to blow the whistle 
on you. You have been so patient. You are really valuable 
people. You have expended a lot of time and money to get here, 
and you still got to go home sometime tonight, maybe. The Chair 
is willing to recognize you for as long as it takes, but roll 
around, if you can, pretty quick.

                    STATEMENT OF RED CAVANEY

    Mr. Cavaney. Mr. Chairman, we will give you some time back.
    The gulf coast is the very heartland of our industry, and 
our prayers and support go out to each and everyone there. We 
are not just responding to this disaster; we are living it.
    Thousands of our husband and wives, sons and daughters and 
friends and neighbors are suffering the hardships of others 
living in this devastated region. They are the ones restoring 
the production, bringing the refineries back on line and 
restarting the pipelines. Facilities are coming back on line. 
And we are grateful to the administration for access to the 
Strategic Petroleum Reserve and for waivers to expedite the 
flow of fuels, particularly to emergency responders.
    The gulf coast region includes some 4,000 offshore 
platforms in Federal waters, a dozen refineries, and hundreds 
of production, transportation and marketing facilities. There 
is a reason for this geographic concentration in the high-risk 
hurricane area. Government policies have largely limited 
offshore exploration and production to the central and western 
gulf, and our on-shore facilities have been welcomed in the 
communities in the region.
    Unfortunately, offshore oil and natural gas development has 
been barred elsewhere, including the eastern half of the gulf 
and the entire Atlantic and Pacific coasts. On-shore 
construction has been held back by Government restrictions, 
permitting delays and the not-in-my-back-yard or NIMBY 
sentiments.
    It is ironic that we talk so much about diversifying the 
sources of our energy supplies from abroad; yet we have done so 
little to geographically diversify our oil and natural gas 
presence here at home.
    In an area of much recent concern has been the need to 
bring additional clean-burning natural gas to industries and 
consumers nationwide. Yet, efforts to increase domestic natural 
gas production, both in the Rocky Mountain west and offshore, 
have largely been stymied. And efforts to build more terminals 
outside the gulf region to permit increased imports of 
liquified natural gas or LNG have also been largely blocked.
    Oil companies recognize the urgent need to expand refining 
capacity. But they cannot do it alone. Chairman Barton, and the 
rest of you, are particularly appreciated for your leadership 
in this area. Government policies are needed to create a 
climate conducive to investments to expand refining capacity.
    For example, the Federal Government should take steps to 
streamline the permitting process, to expand capacity at both 
existing refineries and possibly even to build a new refinery 
or two. We know that Hurricane Katrina's effects on our 
industry are having a nationwide impact through skyrocketing 
prices for gasoline and other fuels.
    Our fuels are sold at more than 168,000 retail outlets 
nationwide, and less than 10 percent of those outlets are 
actually owned by the large oil companies. The remaining 
150,000 outlets are owned by independent small businessmen and 
women. They are making business judgments each and every day, 
as is their right.
    However, for any of us that break the law, prosecution must 
follow. Let me be very clear. API and its member companies 
condemn price gouging. History provides an important guide 
here. Our industry has repeatedly been investigated over many 
decades by the Federal Trade Commission, other Federal 
enforcement agencies and States attorneys general, among a few.
    In each and every instance, our companies have been 
exonerated of price gouging or other anticompetitive behavior. 
In conclusion, let us all not be diverted from the serious work 
needed to ensure Americans continue to get the fuel they 
deserve. We look forward to working with the committee in that 
regard. Thank you, Mr. Chairman.
    [The prepared statement of Red Cavaney follows:]

    Prepared Statement of Red Cavaney, President and CEO, American 
                          Petroleum Institute

    I am Red Cavaney, President and CEO of the American Petroleum 
Institute--the national trade association for the U.S. oil and natural 
gas industry, representing all sectors of the industry, including 
companies that make and market gasoline.
    The Gulf Coast is the very heartland of our industry. We are not 
just responding to this disaster. We are living it. Thousands of our 
husbands and wives, sons and daughters, and friends and neighbors are 
suffering the hardships of those living in this devastated region. 
Fitch Ratings, a leading global ratings agency, reports that Hurricane 
Katrina has caused the largest insured loss in U.S. history--more than 
9/11 and more than any previous natural disaster.
    Facilities are starting to come back online, and we are grateful to 
the Administration for access to the Strategic Petroleum Reserve and 
for waivers to expedite the flow of fuels, particularly to emergency 
responders.
    The Gulf Coast region includes some 4,000 offshore platforms in 
federal waters, major refineries, and hundreds of production, 
transportation and marketing facilities. There is a reason for this 
geographic concentration in a high-risk weather area. Government 
policies have largely limited offshore exploration and production to 
the Central and Western Gulf--and our onshore facilities, including 
refineries, have been welcomed in communities in the region. 
Unfortunately, offshore oil and natural gas development has been barred 
elsewhere--including the eastern half of the Gulf and the entire 
Atlantic and Pacific Coasts. Onshore construction has been held back by 
government restrictions, permitting delays, and not-in-my-backyard 
NIMBY sentiments.
    It is ironic that we talk so much about diversifying the sources of 
our energy supplies from abroad, yet we have done so little to 
geographically diversify our oil and natural gas industry here at home.
    An area of much recent concern has been the need to bring 
additional clean-burning natural gas to industries and consumers 
nationwide. Yet, efforts to increase domestic natural gas production, 
both in the Rocky Mountain West and offshore, have been stymied--and 
efforts to build more terminals outside the Gulf region to permit 
increased imports of LNG have also been largely blocked.

Impact of Hurricane Katrina
    While it is still too soon to know the full effects of Hurricane 
Katrina on production and refinery facilities in and along the Gulf of 
Mexico, it is clear that the impact of this devastating storm on oil 
and natural gas operations will be significant and protracted.
    I know that I speak for every one of our member companies when I 
say that our first concern--from the moment it becomes evident that a 
hurricane is approaching the Gulf--is for the wellbeing and safety of 
the thousands of men and women from across the country who work on 
offshore facilities, on the vessels that serve them, in the refineries, 
distribution networks, and retail outlets around the Gulf coast.
    Equally as important is the welfare and recovery of the communities 
in the Gulf region. Millions of people in the area are experiencing 
firsthand the physical and emotional hardship of the death and 
devastation caused by Katrina, and our hearts and our prayers are with 
them.
    API is working with the American Red Cross to facilitate U.S. oil 
and natural gas industry efforts to help people throughout the Gulf 
region. We have informed our companies that the Red Cross has described 
how they can help relief efforts through corporate contributions and by 
encouraging customer and employee contributions.

Effects of Hurricane Katrina on Industry Facilities
    We are concerned, also, about our facilities in the area. While 
they are designed to withstand the forces of the most severe storms, 
extraordinary circumstances do occur. Therefore, one of our industry's 
top goals is always to ensure minimal impact on the Gulf of Mexico and 
coastal environments. The industry takes pride in its outstanding 
record for safety and environmental protection in the Gulf region, and 
we intend to live up to that record. Let me review the latest 
information (as of September 4) we have from the Department of Energy 
(DOE) and the Minerals Management Service (MMS) on the status of our 
facilities:
    Offshore Production Facilities. According to the latest MMS 
reports, 30 percent of the 819 manned platforms and 29 percent of the 
137 rigs are currently operating in the Gulf of Mexico. Shut-in oil 
production is at 1,184,747 barrels of oil per day, which is equivalent 
to 78.9 percent of the daily oil production in the Gulf. Shut-in gas 
production is 5.779 billion cubic feet per day, which is equivalent to 
57.8 percent of the daily gas production in the Gulf.
    Refineries. A significant volume of refining capacity in the Gulf 
Coast and Midwest remains impacted by Katrina. According to DOE, 11 
percent of U.S. refinery capacity is shut-in, and refineries 
representing another 14 percent of U.S. capacity are operating at 
reduced levels because of a lack of crude supplies. Lack of electricity 
has also been an issue in restarting refineries. Much progress has been 
made and Entergy reports that it has restored electricity to all but 
three refineries in the New Orleans area.
    Pipelines. DOE reports that the Colonial and Plantation pipelines, 
critical for distributing petroleum products from the Gulf Coast to the 
Southeast and Mid-Atlantic regions, have resumed operations, albeit at 
reduced rates. Colonial is operating at 66 percent of normal operating 
capacity. Both gasoline and distillates are currently being transported 
and delivered. Colonial's capacity is about 2.4 million barrels per 
day. Plantation announced it would be 100 percent operational by late 
on September 2. Plantation moves about 620,000 barrels of gasoline, 
diesel, and jet fuel per day. The Capline pipeline is also now 
operational at reduced rates, according to DOE. Capline will operate at 
reduced rates until the Louisiana Offshore Oil Port (LOOP) is fully 
operational. Capline runs roughly 1.2 million barrels a day of crude 
oil to the Midwest.
    LOOP. LOOP is operational at the Clovelly terminal. Entergy 
energized a line to Clovelly and the terminal is now capable of 
operating at approximately 75 percent of capacity. The Fourchon 
terminal remains shut down.

Katrina Impact on Jet Fuel Supply
    The Committee has expressed interest in the impact of Hurricane 
Katrina on jet fuel supply. It is too soon to assess that impact, but 
we are hopeful that restoration of refineries and pipelines to at least 
partial operation will increasingly alleviate whatever supply 
shortfalls are caused by the hurricane.
    The Louisiana Gulf Coast District, the region hit by Katrina, 
accounts for about 23 percent of U.S. jet fuel production. In 2004, the 
region's refineries produced 355,000 barrels per day of the national 
output of 1.547 million barrels per day. The Gulf Coast region as a 
whole accounts for about half of U.S. jet fuel production, or 779,000 
barrels per day in 2004.
    The Gulf Coast region ships about two-thirds of what it produces to 
the East Coast (about 500,000 barrels per day), and more than 80 
percent of those shipments are by pipeline. Some jet fuel is also 
shipped by tanker and barge to the East Coast, mainly to the South 
Atlantic states. The Gulf Coast region ships approximately another 
135,000 barrels per day to the Midwest, mostly by pipeline. The United 
States also imports about 125,000 barrels per day of jet fuel.

Responding to Hurricane Katrina
    In the coming days and weeks, we are committed doing our best to 
minimize the impact of Hurricane Katrina on the flow of fuels to 
consumers.
    Even before the hurricane's devastating impact, American consumers 
were concerned over the rising cost of gasoline, diesel and other 
fuels. Katrina's aftermath, however, underscores the need for all 
drivers to take seriously common-sense energy conservation 
recommendations--found on API's website and elsewhere--for reducing the 
amount of fuel they consume.
    We also want to thank President Bush for making available crude oil 
from the Strategic Petroleum Reserve to address circumstances for which 
it was intended and appreciate the IEA member nations' contributions as 
well. We are also grateful that EPA and the Department of 
Transportation have granted waivers to expedite the flow of fuels, 
particularly to emergency responders--an action that is very helpful at 
a time when logistics and distribution of fuels are extremely difficult 
and critical. The Departments of Energy and Homeland Security have also 
been helpful in many ways.
    We believe Congress can take action to help alleviate the hardships 
Americans are suffering from Hurricane Katrina. One action involves 
LNG. I earlier mentioned the importance of siting LNG receiving 
terminals in areas beyond the Gulf region. This diversification is 
helpful, and your support in facilitating it would be much appreciated.
    These and other positive steps by government can be most helpful in 
dealing with this catastrophe. We believe it is particularly important 
for government officials at the federal, state and local levels to urge 
citizens nationwide to use energy wisely, particularly in terms of not 
hoarding gasoline and not ``topping off'' their vehicle tanks. 
Effective conservation measures are vital in helping meet the fuel 
needs of U.S. consumers in this difficult situation.
    In attempting to meet the challenges we face, it is also most 
important to do no harm. The worst thing Congress could do in these 
challenging times would be to repeat the mistakes of some past energy 
policies by trampling the structures of the free marketplace. Imposing 
new controls, allocation schemes, or other obstacles will only serve to 
make a bad situation much worse. (See the attachment, ``Hurricane 
Katrina and U.S. Energy Policy: Do No Harm.'')

Why Have Gasoline Prices Risen?
    We know that Hurricane Katrina's effects on our industry are having 
a nationwide impact. We understand how Americans throughout the country 
are facing skyrocketing prices for gasoline and other fuels. What 
follows is background on two key components of the price of gasoline: 
crude oil price and taxes.
    Crude Oil Price. Before Hurricane Katrina struck, the price of 
gasoline was rising primarily because U.S. refiners are paying more for 
crude oil, the principal cost component of a gallon of gasoline. In 
fact, the Federal Trade Commission noted this exact point in a report 
this July: ``To understand U.S. gasoline prices over the past three 
decades, including why gasoline prices rose so high and sharply in 2004 
and 2005, we must begin with crude oil. The world price of crude oil is 
the most important factor in the price of gasoline. Over the last 20 
years, changes in crude oil prices have explained 85 percent of the 
changes in the price of gasoline in the U.S.'' The crude oil price is 
set in the international oil marketplace by the forces of supply and 
demand for oil worldwide.
    Tax Component. While more than half the cost of gasoline is for 
crude oil, every time a motorist pulls up at the pump, he or she pays 
46 cents in federal and state taxes per gallon of gasoline. The 
remainder is the cost to refine and market the gasoline. The average 
price of a gallon of regular gasoline reached $2.85 on September 2, 
according to AAA. When the price of a barrel of crude oil is $67, as it 
was at the end of last week, a refiner paid about $1.61 per gallon for 
the crude oil in order to make a single gallon of gasoline. As noted 
above, taxes average 46 cents per gallon nationwide. The remaining 78 
cents per gallon includes the cost of running refineries, transporting 
the finished gasoline to markets via pipelines and tank trucks, and 
operating retail outlets. The cost to refine, market and distribute 
gasoline has been trending downward for many years. The recent price 
spikes are a direct consequence of disruptions in crude oil and 
gasoline supplies. (Attached is a chart showing combined federal, state 
and local gasoline taxes for each state.)
    How Fuels Are Marketed. It is important to recognize that our fuels 
are sold at more than 168,000 retail outlets nationwide--and less than 
10 percent of those outlets are actually owned by refiners. The 
remaining 150,000 outlets are owned by independent small businessmen 
and women, who are your neighbors. They are making business judgments 
every day, as is their right. However, if any of us breaks the law, 
prosecution should follow.
    History provides an important guide here. Our industry has been 
repeatedly investigated over many decades by the Federal Trade 
Commission, other federal agencies, and state attorneys-general. None 
has ever found evidence that our companies have engaged in price 
gouging or other anti-competitive behavior to drive up fuel prices.
    The gasoline marketing system has the complexity and flexibility 
required to meet the varying needs of both companies and consumers. 
Companies have three basic types of outlet options and may employ any 
and all in their marketing strategies to maximize efficiencies and 
compete in the marketplace. First, they can own and operate the retail 
outlets themselves (company owned and operated outlets). The second 
option is to franchise the outlet to an independent dealer and directly 
supply it with gasoline. This option may have three different forms of 
property ownership: The operator can lease from the refiner, lease from 
a third party, or own the outlet outright. The third option is to 
utilize a ``jobber,'' who gains the right to franchise the brand in a 
particular area. Jobbers can choose to operate some of their outlets 
with their own employees and franchise other outlets to dealers. The 
mix of distribution methods varies widely across firms. Different 
refiners, depending on which type is perceived as most efficient, use 
different types of outlets.
    Supply and Demand in the World Market. Prices are rising because of 
the forces of supply and demand in the global crude oil market. Supply 
and demand is in a razor-thin balance in the global market. Small 
changes in this market have a big impact.
    World oil demand reached unprecedented levels in 2004 and continues 
to grow. Strong economic growth, particularly in China and the United 
States, is fueling a surge in oil demand. The U.S. Energy Information 
Administration (EIA) reports that global oil demand in 2004 grew by 3.2 
percent--the strongest growth since 1978--and projects growth to 
increase by about 2.1 percent this year and next. By comparison, world 
demand between 1993 and 2003 grew at an average rate of 1.6 percent.
    At the same time, world oil spare production capacity--crude that 
can be brought online quickly during a supply emergency or during 
surges in demand--is at its lowest level in 30 years. Current spare 
capacity is equal to about 1 percent of world demand. EIA projects 
spare capacity for 2005 at just over 1.0 million barrels a day. Thus, 
the world's oil production has lagged, forcing suppliers to struggle to 
keep up with the strong growth in demand.
    The delicate supply/demand balance in the global crude oil market 
makes this market extremely sensitive to political and economic 
uncertainty, unusual weather conditions, and other factors. Over the 
past year, we have seen how the market has reacted to such diverse 
developments as dollar depreciation, an unusually cold winter, the 
post-war insurgency in Iraq, hurricanes in the Gulf of Mexico, the 
continued impact on the Venezuelan sector from the oil workers' strike 
in 2002-03, uncertainty in the Russian oil patch, ongoing ethnic and 
civil strife in Nigeria's key oil producing region, recent mass 
protests targeting Ecuador's oil infrastructure, and decisions by OPEC.

Gasoline Prices Mirror Crude Oil Prices
    While consumer concern about high gasoline prices is very 
understandable, we must recognize that gasoline prices mirror crude oil 
prices. Crude oil costs make up more than 50 percent of the cost of 
gasoline. Retail gasoline prices and crude oil prices have historically 
tracked, rising and falling together. We import more than 60 percent of 
the crude oil and petroleum products we consume. American refiners pay 
the world price for crude and distributors pay the world price for 
imported petroleum products. U.S. oil companies don't set crude oil 
prices. The world market does. Whether a barrel is produced in Texas or 
Saudi Arabia, it is sold on the world market, which is comprised of 
hundreds of thousands of buyers and sellers of crude oil from around 
the world.

Earnings
    There is considerable misunderstanding about the oil and natural 
gas industry's earnings and how they compare with other industries. The 
oil and natural gas industry is among the world's largest industries. 
Its revenues are large, but so are its costs of providing consumers 
with the energy they need. Included are the costs of finding and 
producing oil and natural gas and the costs of refining, distributing 
and marketing it. The energy Americans consume today is brought to them 
by investments made years or even decades ago. Today's oil and natural 
gas industry earnings are invested in new technology, new production, 
and environmental and product quality improvements to meet tomorrow's 
energy needs.
    The industry's earnings are very much in line with other industries 
and often they are lower. This fact is not well understood, in part, 
because the reports typically focus on only half the story--the total 
earnings reported. Earnings reflect the size of an industry, but 
they're not necessarily a good reflection of financial performance. 
Earnings per dollar of sales (measured as net income divided by sales) 
provide a more relevant and accurate measure of a company's or an 
industry's health, and also provide a useful way of comparing financial 
performance between industries, large and small.
    For the second quarter of 2005, the oil and natural gas industry 
earned 7.6 cents for every dollar of sales compared to an average of 
7.9 cents for all U.S. industry.1 Many industries earned 
better returns in the second quarter than the oil and natural gas 
industry. For example, banks realized earnings of 19.6 cents on the 
dollar. Pharmaceuticals reached 18.6 cents, software and services 
averaged 17 cents, consumer services earned 10.9 cents and insurance 
saw 10.7 cents for every dollar of sales. Last year, the oil and 
natural gas industry realized earnings of 7 percent compared to an 
average of 7.2 percent for all U.S. industry. Over the last five years, 
the oil and natural gas industry's earnings averaged 5.7 cents compared 
to an average for all U.S. industry of 5.5 cents for every dollar of 
sales.
---------------------------------------------------------------------------
    \1\ Earnings equal profits divided by sales calculated from 
``Corporate Scorecard,'' Business Week, August 22/29, 2005; and from 
company financial reports for oil and natural gas figures.
---------------------------------------------------------------------------
    Some are calling for reinstatement of a windfall profits tax as a 
response to the nation's energy challenges. As the figures I just cited 
demonstrate, our industry's earnings are hardly a ``windfall.'' Strong 
earnings enable our industry to remain competitive globally, benefit 
millions of shareholders--your constituents--and enable the industry to 
invest in innovative technologies that improve our environment and 
increase energy production to provide for America's future energy 
needs. Levying new taxes would likely end up harming consumers. As The 
Wall Street Journal editorialized recently, (``China Does 
Carternomics,'' August 19), ``A windfall profits tax only discourages 
increases in supply by disincentivizing further production.'' According 
to the Congressional Research Service, the windfall profits tax drained 
$79 billion in industry revenues during the 1980s that could have been 
used to invest in new oil and natural gas production. In fact, 1.6 
billion fewer barrels of oil were produced domestically due to the 
windfall profits tax--barrels that instead had to be secured from 
foreign sources.

Perspective: The Role of Oil and Natural Gas
    High gasoline prices have caused some to call for us to decrease, 
if not eliminate, our nation's reliance on oil and natural gas. 
However, if we are to understand and address the causes of the high 
prices, we need to recognize the energy realities that our nation 
faces.
    These realities could not be clearer: We live in a global economy, 
and there is a strong link between energy and economic growth. If we 
are to continue to grow economically, we must be cost-competitive in 
our use of energy. We need all sources of energy. We do not have the 
luxury of limiting ourselves to one source to the exclusion of others. 
Nor can we afford to write off our leading source of energy before we 
have found a cost-competitive and readily available alternative.
    Consider how oil and natural gas enhance our quality of life--
fueling growth and jobs in industry and commerce, cooling and warming 
our homes, and getting us where we need to go. Oil provides about 97 
percent of U.S. transportation fuels, which power nearly all of the 
cars and trucks traveling on our nation's highways. More than 60 
million American households are heated and/or cooled by natural gas. 
And plastics, medicines, fertilizers, and countless other products that 
extend and enhance our quality of life are derived from oil and natural 
gas.
    The U.S. Energy Information Administration has projected that 
fossil fuels will continue to dominate U.S. energy consumption, with 
oil and natural gas providing nearly two-thirds of that consumption in 
the year 2025, even though energy efficiency and renewables will grow 
faster than their historical rates. However, renewables, in particular, 
start from a very small base; and the major shares provided by oil, 
natural gas, and coal in 2025 are projected to be nearly identical to 
those in 2003.
    Our nation cannot afford to leave the Age of Oil before a realistic 
substitute is fully in place. We will leave the Age of Oil, not because 
we will run out of oil. Yes, someday oil will be replaced, but clearly 
not until a substitute is found--a substitute that is proven more 
reliable, more versatile, and more cost-competitive than oil.
    There is a misperception by some about the time and costs involved 
in any such transition. Consider what would be involved in replacing 
the dominant role of oil with a substitute like ethanol, hydrogen, or 
solar power. Most experts agree that finding and transitioning to a 
substitute for oil will require dramatic advances in technology and 
massive capital investments--and that such a displacement will take 
many years to accomplish.
    In the early 1970s, many energy policymakers were ``sure'' that oil 
and natural gas would soon be exhausted, and government policy was 
explicitly aimed at ``guiding'' the market in a smooth transition away 
from these fuels to new, more sustainable alternatives. Price controls, 
allocation schemes, limitations on natural gas, massive subsidies to 
synthetic fuels, and other measures were funded heavily and 
implemented.
    Unfortunately, the key premises on which these programs were based, 
namely that oil and gas were nearing exhaustion, and that government 
``guidance'' was desirable to safely transition to new energy sources, 
are now recognized as having been clearly wrong--and to have resulted 
in enormously expensive mistakes.
    The leading role that oil and natural gas will continue to play 
makes it all the more important for our government to adopt policies 
that do not prevent or delay oil and gas development before substitutes 
are ready to satisfy consumer needs and to meet the economic investment 
demands.
    In considering future U.S. energy needs, we need also to understand 
that gasoline-powered automobiles have been the dominant mode of 
transport for the past century. Regardless of fuel, the automobile--
likely to be configured far differently from today--will remain the 
consumer's choice for personal transport for decades to come. The 
freedom of mobility and the independence it affords consumers are 
highly valued.
    Moreover, we expect that the dominant transport fuels will remain 
gasoline and diesel for decades--the minimum amount of time required to 
fully retire any existing and still growing fleet of automobiles and 
trucks powered by these fuels and to deploy any replacement fuel source 
throughout our nation. We cannot afford to prematurely retire a 
century-old champion. And, sulfur-free diesel and sulfur-free gasoline 
could well live on as the preferred sources for fuel cells well into 
the future.

Gasoline Prices: What Can Be Done?
    The solution to high gasoline prices is more supply of crude oil 
and gasoline and less demand, but there is no simple strategy to make 
that happen. Now that the long Congressional debate over energy 
legislation has come to an end, the United States is at a critical 
turning point in shaping its future energy policy. The legislation 
signed by the President signals a first step in a much-needed effort to 
enhance energy security and ensure the reliable delivery of affordable 
energy to consumers. But much remains to be done.
    The problems we face are very real: growing world demand for energy 
at a time when many oil-producing countries around the world are 
increasingly limiting or restricting our industry's access to new 
resources; a lack of national commitment to develop our abundant 
domestic energy resources and critical infrastructure; and scant 
attention to energy efficiency. These factors have resulted in a tight 
supply/demand balance for U.S. consumers, causing recurring price 
spikes, greater market volatility, and overall strain on the nation's 
energy production and delivery systems.
    Energy demand continues to grow. The Energy Information 
Administration (EIA) forecast that by 2025, U.S. energy consumption 
will increase by 35 percent, with petroleum demand up by 39 percent and 
natural gas up by 34 percent. These demand increases occur despite 
expected energy efficiency improvements of 33 percent and renewable 
energy supply increases of 41 percent.
    Additional EIA forecasts point out our basic problem: Domestic 
energy supplies are not keeping up with increased demand; and we are 
relying more and more heavily on imports to meet our energy needs. EIA 
projects that U.S. crude oil production will fall by 17 percent by 2025 
(assuming no production from ANWR), while crude oil imports will 
increase by 67 percent, and net petroleum product imports increase by 
90 percent. Given these trends, it comes as no surprise that EIA 
forecasts that our nation's dependency on foreign sources of petroleum 
will rise from 59 percent today to 68 percent in 2025.
    This increase, to the extent that it reflects import costs lower 
than domestic supply costs, would represent a gain from trade which 
should be encouraged. However, when we have resources that can be 
developed at prices competitive to imports, and we choose not to do so, 
we place a wasteful and unnecessary burden on our own consumers,
    In fact, we do have an abundance of competitive domestic oil and 
gas resources in the U.S. According to the latest published estimates, 
there are more than 131 billion barrels of oil and more than 1000 TCF 
of natural gas remaining to be discovered in the US.
    However, 78 percent of this oil and 62 percent of this gas are 
expected to be found beneath federal lands and coastal waters.
    Federal restrictions on leasing put significant volumes of these 
resources off limits, while post-lease restrictions on operations 
effectively preclude development of both federal and non-federal 
resources. The most comprehensive study of the effects of such 
constraints was the 2003 National Petroleum Council study of natural 
gas, which included an analysis of federal constraints on U.S. gas 
supply in two key areas--the Outer Continental Shelf (OCS) and the 
Rockies. The study found that in key areas of greatest supply 
potential, federal policy precludes or seriously constrains 
development. For instance, of the 209 TCF of estimated undiscovered gas 
in the Rockies, 69 TCF is completely off limits, while another 56 TCF 
is seriously constrained by federal policy. On the OCS, the entire 
Atlantic, Pacific, and most of the Eastern Gulf of Mexico are off 
limits to development. Furthermore, the study found that sustaining 
these constraints over the next 20 years would cost U.S. consumers more 
than $300 billion in increased energy costs.
    We are aware that opponents of oil and natural gas development 
still raise environmental concerns. However, we would point out that 
history provides overwhelming evidence that our industry can find and 
develop oil and natural gas resources safely and with full protection 
of the environment, both on land and offshore. For example, according 
to the U.S. Coast Guard, for the 1980-1999 period, 7.4 billion barrels 
of oil were produced in federal offshore waters, with less than 0.001 
percent spilled. That's a 99.999 percent record for clean operations--a 
statistic few others can likely match or best, and far less than the 
volumes of natural seeps that occur on ocean and gulf floors.
    Using advanced technology and sound operational practices, our 
industry has steadily reduced the impact of oil and gas development, 
both onshore and offshore. The surface presence for exploration and 
development wells has shrunk significantly. For example, a drilling pad 
the size of Capitol Hill is all that is needed to access any oil 
reserves that might exist in the entire 68.2 square mile District of 
Columbia. Horizontal and directional drilling now enables our industry 
to drill multiple underground wells from a single pad, sometimes 
reaching sites as far away as 10 miles from the drilling pad.
    Additionally, the U.S. oil and natural gas industry is among the 
most heavily regulated industries in our country. Every lease contains 
a standard stipulation to protect air, water, wildlife and historic and 
cultural resources, but leases may also include any number of a 
additional stipulations to further protect resources.
    The recently enacted energy legislation takes a positive step by 
requiring an inventory of OCS oil and natural gas resources. It will 
not, by itself, result in new energy supplies.
    We need to build on the energy legislation by encouraging the flow 
of more natural gas and oil to the marketplace. And, while we must 
focus on producing more energy here at home, we do not have the luxury 
of ignoring the global energy situation. In the world of energy, the 
U.S. operates in a global marketplace. What others do in that market 
matters greatly.
    For the U.S. to secure energy for our economy, government policies 
must create a level playing field for U.S. companies to ensure 
international supply competitiveness. With the net effect of current 
U.S. policy serving to decrease U.S. oil and gas production and to 
increase our reliance on imports, this international competitiveness 
point is vital. In fact, it is a matter of national security.
    We can no longer wait 15 years, as we have, to address our nation's 
energy policy. The energy legislation is a foundation, but it must be 
built upon. More needs to be done and more quickly, particularly 
increasing access to offshore resources. We have the ingenuity, the 
technology, and environmental protections. If enactment of the energy 
legislation means we have a commitment to continued action, then it 
will truly be a turning point in reshaping U.S. energy policy.

Refineries
    We cannot understand or deal with high gasoline prices if we do not 
consider the state of refineries in the United States. During the 
1990s, the oil industry earned relatively poor rates of return on their 
investments. This was especially true in the refining sector, which was 
hard hit with the need for new investment in technology and equipment 
to produce cleaner burning fuels to meet clean air standards set by the 
Clean Air Act of 1990. The act had a major impact on the operation of 
refineries in the U.S. and the return on investment realized at the 
time.
    From 1994 to 2003, the industry spent $47.4 billion to bring 
refineries into compliance with environmental regulations. That 
included $15.9 billion in capital costs and $31.4 billion in operations 
and maintenance costs to comply with regulations covering air, water 
and waste rules. Moreover, by 2010, the U.S. refining industry will 
have invested upwards of $20 billion to comply with new clean fuel 
regulations. This is in addition to the cost of compliance with many 
dozens of other environmental, health, safety and security regulations. 
All this investment severely reduces the funds available for 
discretionary capacity expansion projects.
    Technological advancements have helped refineries produce more from 
existing facilities than they did in the past. In addition, the 
elimination of subsidies under the government price and allocation 
controls in 1981 led to the closure of many smaller, less-efficient 
refineries throughout the 1980s and 1990s. Those refineries left 
standing did a better job of bringing product to market for less.
    This consolidation benefited consumers. We can see this in the 
decline in the refiner/market margin (measured as the difference 
between the retail price of gasoline minus taxes and minus the 
refiner's composite crude oil price). Back in 1980, the cost to refine 
and market and distribute gasoline averaged about 95 cents per gallon 
(in inflation-adjusted terms). By 1990, it averaged more than 61 cents 
per gallon, and, by 2000, it was 52 cents per gallon, which is about 
where it has averaged over the last five years. Multiplying these 
reductions by the 330 billion gallons of petroleum products consumed 
translates into billions of dollars of savings for consumers. We all 
benefit every day from these improvements and efficiency gains.

The Need to Expand Refinery Capacity
    The expansion of refinery capacity must be a national priority. The 
record-high gasoline prices, while primarily caused by increased crude 
oil prices and exacerbated by Hurricane Katrina, have underscored the 
fact that U.S. demand for petroleum products has been growing faster 
than--and now exceeds--domestic refining capacity. While refiners have 
increased the efficiency, utilization and capacity of existing 
refineries, these efforts have not enabled the refining industry to 
keep up with growing demand. Even with a projected expansion of product 
imports of 90 percent, the Energy Information Administration (EIA) 
forecasts a need for 5.5 million barrels a day of additional refining 
capacity by 2025 beyond today's 16.9 million barrels a day of capacity, 
even with higher utilization rates.
    The fact is that--faced with increasingly more challenging fuels 
regulations--only major refineries have the resources needed to expand 
their capacity. Smaller refineries are increasingly unable to afford to 
expand. Moreover, local opposition and not in my backyard (NIMBY) 
attitudes persist and prevent new refineries from being constructed. 
The steady growth in U.S. fuels demand must increasingly be met by 
foreign product imports. Thus, in addition to blocking or delaying 
refinery expansion, the extensive federal regulatory burden is 
contributing to increased reliance on foreign product imports. This is 
a result that neither serves the best interests of U.S. consumers nor 
bolsters the U.S. economy and American jobs.
    Oil companies recognize the urgent need to expand refining 
capacity, but they cannot do it alone. Government policies are needed 
to create a climate conducive to investments to expand refining 
capacity. The President's innovative proposal earlier this year to 
build new refineries on closed military bases deserves serious 
consideration. In addition, many of the steps the federal government 
could take to help the refinery capacity situation are covered in the 
December 2004 National Petroleum Council (NPC) study, Observations on 
Petroleum Product Supply--A Supplement to the NPC Reports ``U.S. 
Petroleum Product Supply--Inventory Dynamics, 1998'' and ``U.S. 
Petroleum Refining--Assuring the Adequacy and Affordability of Cleaner 
Fuels, 2000.'' For example, that NPC study suggested that the federal 
government should take steps to streamline the permitting process to 
ensure the timely review of federal, state and local permits to expand 
capacity at existing refineries and possibly even build a new refinery.
    In addition to the myriad of permitting issues deterring new 
refining capacity investments, there are financial constraints as well. 
Attracting capital for new refinery capacity has been difficult with 
refining rates of return historically averaging well below the average 
for S&P Industrials. Over the 10-year 1994-2003 period, the return on 
investment for the refining sector was 6.2 percent or less than half as 
much as the 13.5 percent for S&P Industrials.
    U.S. tax policy has also hindered the refining industry's ability 
to attract new investment capital. New refinery investments are 
depreciated over 10 years, while comparable assets in other industries 
are recovered over five or seven years. The recently enacted energy 
legislation takes a small, but positive, step in addressing this 
inequity by allowing 50 percent of those investments to be currently 
expensed through 2011. However, much more needs to be done to make U.S. 
refinery investments more economically attractive, and, thus, better 
able to compete for limited available capital.

Conclusion
    The U.S. oil and natural gas industry recognizes the catastrophic 
impact that Hurricane Katrina has had on millions of Americans and our 
industry is working with government and others in the private sector to 
do all we can to alleviate their suffering.
    If we all do our part--industry providing supplies and repairs as 
expeditiously as possible, government facilitating needed approvals, 
and consumers adjusting their driving habits to consume less fuel--
Americans can overcome this challenge as we have others in our nation's 
history.
    Attachment: Hurricane Katrina and U.S. Energy Policy: Do No Harm
    Hurricane Katrina has brought devastation to much of the Gulf 
Coast, interrupting operation of significant parts of the nation's oil 
and natural gas production facilities, refineries and pipelines. In 
addressing this catastrophe, energy policymakers should do no harm. 
They should avoid repeating past energy policy mistakes which could 
make a bad situation much worse. The following are examples of actions 
that should be avoided:

 Windfall Profits Tax: This was tried before. Backers of the 1980 tax 
        claimed it would raise revenue and prevent oil companies from 
        benefiting from higher crude oil prices and the removal of 
        price controls. The tax drained $79 billion in industry 
        revenues that could have been used to invest in new oil 
        production--leading to 1.6 billion fewer barrels of oil being 
        produced domestically. The industry uses profits to invest in 
        new technology, new production, and environmental and product 
        quality improvements. The National Petroleum Council projects 
        that producers will have to invest a total of almost $1.2 
        trillion through 2025 to fund U.S. and Canadian natural gas 
        exploration and production activities. Investments of this 
        magnitude require long-term fiscal stability.
 Price Controls: As seen the 1970s, price controls further reduce 
        product availability as suppliers are unable or unwilling to 
        bring product to market if they cannot recover the cost of 
        doing so. The result is less product available, potential 
        outages, and long lines at service stations.
 Rationing/Product Allocation: Rationing results in too much product 
        being sent to some areas and too little product being sent to 
        other areas. The reason is that rationing ignores the market 
        price signal that producers use to decide which areas are in 
        greatest need of product. The result would be an inefficient 
        distribution of product with some areas of the country having 
        too much motor fuel while shortages develop in other areas.
 Moratorium on Mergers: As noted by the Federal Trade Commission in 
        its August 2004 report, The Petroleum Industry: Mergers, 
        Structural Change, and Antitrust Enforcement, merger activity 
        in the U.S. refining sector over the last several years has not 
        adversely affected competition in the sector, and has resulted 
        in greater operational efficiencies in the refining sector and 
        lower costs to consumers. Government policy prohibiting mergers 
        would slow or reverse this positive trend and ultimately result 
        in higher fuel costs to the motoring public.
 Regional Strategic Reserves of Refined Products: While the concept 
        behind the Strategic Petroleum Reserve (SPR) has merit, the 
        same cannot be said of regional strategic reserves of refined 
        products. Holding and managing refined products is much more 
        complex and impractical than holding and managing crude. The 
        large number of boutique fuels (17) would require a diverse 
        number of storage facilities for each chosen location. 
        Additionally, product degradation means that the product in the 
        reserves would have to be continuously rotated. Because of this 
        it is unlikely that there would be sufficient product of the 
        right specification in the right location to be helpful during 
        a supply disruption. 2
---------------------------------------------------------------------------
    \2\ National Petroleum Council, Observations on Petroleum Product 
Supply, December, 2004 p. II-4
---------------------------------------------------------------------------
 Mandatory Minimum Inventory Levels: Since fuel producers have 
        considerable incentive to maintain sufficient inventories so as 
        to not forfeit sales, a minimum inventory mandate could result 
        in an inefficient level of inventory being held. Inventory is 
        considered working capital and as such is a cost of doing 
        business. Inefficient levels of inventory arising from 
        mandatory minimum inventory levels would unnecessarily raise 
        the cost of providing fuel to consumers.
 Price Trigger for the SPR: Industry has long supported government 
        holdings of strategic stocks in the SPR, under one condition: 
        that it be used only to replace volumes of oil lost in an 
        emergency, not as an instrument for government price tinkering. 
        The current mechanism allows the President a wide range of 
        discretion to determine what constitutes an emergency. Some 
        argue that this essentially makes the SPR a political 
        instrument, subject to the President's whim. Setting a price 
        trigger, some argue, would leave the trigger decision to the 
        market. However, setting the price for the trigger is no less 
        arbitrary than the existing trigger, and puts the government 
        directly in the role of manipulating price.
 Oil Import Tariff: Oil import tariffs have been proposed, and used, 
        in the past as an instrument of energy policy. The key motive 
        of such an approach stems from a belief that reducing imports 
        is unambiguously beneficial. However, when we look carefully at 
        each of the claimed benefits, we find them all to be dubious at 
        best, not to mention illegal under existing trade agreements 
        with many of our trading partners.

    Chairman Barton. We thank you, Mr. Cavaney.
    We now would like to hear from Mr. Bob Slaughter, who is 
president, and is representing the National Petroleum and 
Refiners Association.
    Welcome, Mr. Slaughter. You are recognized for 7 minutes.

                   STATEMENT OF BOB SLAUGHTER

    Ms. Slaughter. Thank you, Mr. Chairman. I wanted to 
associate NPRA with the comments that API has just made, 
particularly, especially mentioning no toleration of 
profiteering or price gouging. And I think that is a very 
important matter. Also, I think it is very important to take 
note of the statement that the industry has been intensively 
investigated many times, and a monitoring project is ongoing at 
FTC for gasoline prices in 360 cities, and the industry has 
never--there has never been any evidence of gouging or any kind 
of price manipulative behavior on the part of our members.
    I particularly want to focus, however, on the refining 
questions that were raised earlier, and I want to actually show 
a couple of charts. The first chart just shows the very strong 
relationship between crude price and the price of gasoline. You 
will see the curves are essentially the same. And the FTC, in 
its publication a couple of months ago, it was a very large 
study on gasoline, said that 85 percent of the price movements 
in gasoline over the last 20 years were attributable to changes 
in the price of crude.
    The second chart, if we can show it, points out--and this 
is an EIA chart--it shows the extent to which gasoline prices 
are determined mostly by crude but, second, by taxes.
    And if you put your crude price, which is the price of our 
raw material, together with taxes on gasoline, when the 
gasoline gets to the pump, 80 percent of it is out of our 
control. The cost of actually refining and then the cost of 
distributing and marketing is quite small. And those numbers 
hold over considerable time.
    The third chart, if I could. I would like to hold there for 
a second. One thing I would like to say and I wouldn't like to 
forget is, my first summer in Washington was 1971, and that was 
the summer in which President Nixon imposed wage and price 
controls. And it was 10 years before the wage and the price 
controls on energy could be removed, 1981.
    Gas price controls were put on in 1952, and they weren't 
removed until 1983. So I just want to caution the committee in 
everything that it does that we do not want to take a giant 
step backward into the world of price control or other 
government intervention in this market. It takes a great deal 
to get rid of the shortages, lines and other negatives that 
result from that policy.
    This particular chart shows the many programs that refiners 
have to comply with over this decade. The red ones are fuel 
controls. The blue ones are stationary source controls. There 
is well over $20 billion worth of investment on that chart. And 
frankly, most of it did not get a very good review for impact 
on supply.
    One of our strong recommendations is supply, particularly 
oil and gas supply, needs to be job No. 1. Those are the fuels 
we depend on, and frankly, they always end up being the second 
priority, behind whatever people wanted to really do at that 
time.
    Environmental regulations should go forward. We spend a 
great deal of money on them. And the industry has contributed 
greatly to environmental clean-up. But we should also look 
seriously at the impact on supply of these regulations. And 
these have not even been well sequenced, so we get many, many 
expensive regulations, one on top of another.
    I asked a gentleman who has been in the refining industry 
for many years just a couple of years ago, why he found it 
difficult. He has been involved in transactions involving 
refineries. To get why it has been difficult to get new people 
into the refining business, he said, Well, because--he said--
they know that it will take millions, maybe up to a billion 
dollars to get in the industry. And then they have the fear 
that Government at some level, whether it be legislative or 
regulatory, will come along and suddenly impose additional 
hundreds of millions of investment on them.
    And if you will see that chart, that is pretty much what 
happens. That is one of the deterrents to more investment in 
the refining industry. A lot of people have jumped to the 
conclusion that there hasn't been a lot of investment in the 
industry. Mr. Chairman, there has been a great deal, billions 
and billions of dollars.
    Over the 1990's, the industry invested billions of dollars 
to comply with the requirements of the Clean Air Act. You see 
what it is going to have to comply with this decade. On top of 
this, these are environmental programs, you have got to 
basically spend billions of dollars to stay in business and 
hopefully increase capacity. So there has been a lot of money 
spent on the business.
    Someone mentioned mergers earlier, and said that that might 
be anticompetitive and lead to less capacity. But, I can just 
mention one case, I know Valero, and this was quoted in the 
Post this morning. That part of the article previously read 
wasn't mentioned. Valero has added 380,000 barrels of oil a day 
capacity to the refineries that it has purchased over the last 
8 or 9 years. So often times mergers, you know, someone gets an 
asset who sees new possibilities in it and will put additional 
investment in it.
    I would like to see that next chart if we could for just a 
minute. That really shows what has to be done in 2006 and 2007. 
It includes also the few programs that were imposed by the 
Energy Act. And there are a couple of things there that the 
industry has to do, but that is the agenda just for the next 
couple of years. You can see that refineries have a lot on 
their plate.
    I know it is not in your jurisdiction, Mr. Chairman, but 
the recent Energy Bill also included some tax treatment for 
refinery investments. And it basically would allow expensing 50 
percent of the cost of increasing refinery capacity by more 
than 5 percent. It would be very useful also to have a look at 
the depreciation rate for refining investments where 10-year 
property now, and all of their businesses like ours are 5-year 
property.
    That would basically allow more investment in the industry. 
And the other thing would be, you know, there is going to have 
to be a lot of reconstruction done in these areas that have 
been affected by the flood and the hurricane. It would 
certainly be helpful to have assistance in getting the 
necessary permits to rebuild, and perhaps harden those 
facilities.
    You know, we have heard several times today comments that 
it is bad that the industry is centered in this area of the 
country, as if we could pick it up and put it anywhere else in 
the country. The fact of the matter is that we have got to keep 
those assets there, hope they keep operating, which I believe 
they will, and help them harden themselves against hurricanes, 
because they are either there or they are nowhere is the 
history that we have seen.
    Although, we would hope that other areas of the U.S. would 
take refineries, we have not found them willing to do that. So 
thank you, Mr. Chairman.
    [The prepared statement of Bob Slaughter follows:]

Prepared Statement of Bob Slaughter, President, National Petrochemical 
                         & Refiners Association

    Mr. Chairman and members of the Committee, thank you for the 
opportunity to appear today to discuss the impact of the wide-spread 
devastation caused by Hurricane Katrina on transportation fuels 
markets. While I will focus on that urgent matter, I will also discuss 
the many other factors impacting current transportation fuels markets. 
My name is Bob Slaughter and I am President of NPRA, the National 
Petrochemical & Refiners Association. NPRA is a national trade 
association with 450 members, including those who own or operate 
virtually all U.S. refining capacity, and most U.S. petrochemical 
manufacturers.

                PART I. RESPONDING TO HURRICANE KATRINA

    In the aftermath of Hurricane Katrina our nation confronts death, 
injuries and devastation of staggering proportions. The images of the 
tragedy displayed in the last several days on television and other 
media underscore the human toll and seeming hopelessness in ways more 
eloquent and compelling than could ever be captured in testimony. We 
share both the sense of dismay and increased humility felt by all 
Americans before this latest reminder of nature's power to devastate 
and confound the best efforts of human beings. NPRA offers our sympathy 
and prayers to those who have suffered the loss of loved ones among 
family members, or their neighbors and colleagues, as well as to those 
who have lost much or all of their personal assets and livelihood in 
this worst U.S. natural disaster.
    Today's hearing has been called to inquire into the impact of 
Hurricane Katrina on the nation's energy supply. It is appropriate that 
Congress turn immediately to such questions because of the huge impact 
of that storm on the Gulf Coast, the energy heartland of the United 
States. This is a time when national attention is and should be focused 
on human needs. Many industry employees and their families have been 
victims as you will hear. Nevertheless, NPRA appreciates the 
committee's immediate attention to the issue of energy supply, which 
was the subject of considerable debate and attention even before the 
hurricane disaster occurred. We also appreciate the opportunity to 
respond to the committee's questions in person on this matter of 
critical national importance. Because our expertise lies in the area of 
refining and petrochemicals, we will focus on those areas, but will try 
to provide other available information insofar as is possible.
    Thus, on behalf of our refining and petrochemical industry members 
we have attempted to respond to the questions most asked about 
Hurricane Katrina's impact on the industry and energy supply, as 
follows:
1. How much of the nation's oil and gas supplies come from this region?
    According to the U.S. Energy Information Administration (EIA), the 
Gulf of Mexico produces 1.582 million barrels per day (mmb/d) of 
federal crude production, which is 28.5% of the U.S. total crude 
production (5.488 million barrels per day).
    Again according to EIA, the region contains 8.068 million barrels 
per day of refining capacity, 47.4% of the nation's total refining 
capacity (17 million barrels per day).
    The Gulf Coast region receives 6.490 mmb/d of crude oil imports, 
60.4% of the nation's total crude oil imports (10.753 mmb/d). (23.5% of 
the nation's total comes into ports in Louisiana, Mississippi and 
Alabama, and 8.5% of the nation's total crude imports come into the 
LOOP.)
    The Gulf Coast region produces 10.4 billion cubic feet (bcf/d) of 
natural gas per day, 19.2% of the nation's total natural gas production 
(54.1 bcf/d).
2. How extensive was the damage?
Crude Oil, Natural Gas Production
    According to the U.S. Minerals Management Service (MMS), as of 
September 2, 88.53% (1.328 mmb/d) of Gulf crude oil production was 
shut-in, and 72.48% (7.248 bcf/d) of Gulf natural gas production was 
shut-in. This amounts to 25% of total federal crude production and 14% 
of the nation's natural gas production.
Crude Oil Import Facilities
    The storm resulted in temporary closure of LOOP, the Louisiana 
Offshore Oil Port. More than 10% (900,000 b/d) of the nation's crude 
oil imports enter through LOOP. Roughly 500,000 b/d of crude produced 
offshore is also unloaded at LOOP, which ceased operations on Sunday, 
August 28 as the storm approached.
Refineries
    The following refineries were directly affected by Hurricane 
Katrina:

Belle Chasse, Louisiana (ConocoPhillips) 247,000 b/d; shut
Chalmette, Louisiana (ExxonMobil/PDVSA) 190,000 b/d; shut
Convent, Louisiana (Motiva) 235,000 b/d; shut
Garyville, Louisiana (Marathon) 245,000 b/d; shut
Meraux, Louisiana (Murphy) 125,000 b/d; shut
Norco, Louisiana (Motiva) 227,000 b/d; shut
Pascagoula, Mississippi (Chevron) 325,000 b/d; shut
Port Allen, Louisiana (Placid) 48,500 b/d; shut
St. Charles, Louisiana (Valero) 260,000 b/d; shut
Vicksburg, Mississippi (Ergon) 23000; shut
    Together, these facilities constitute about 2 mm/b/d, 12% of the 
nation's total refining capacity (17 mmb/d).
    In addition, the following refineries were forced to reduce 
operations because of the impact of Hurricane Kristina:

Baton Rouge, Louisiana (ExxonMobil) 488,000 b/d; reduced runs
Krotz Springs, Louisiana (Valero) 85,000 b/d; reduced runs
Memphis, Tennessee (Valero) 180,000; reduced runs
Port Arthur, Texas (Total) 285,000 b/d; reduced runs
Tuscaloosa, Alabama (Hunt Refining Co.), 35,000 b/d; reduced runs
    In addition, several Midwestern refineries were affected by 
shutdown of the Capline Pipeline, which supplies crude oil from the 
Gulf region to refineries in the Midwest (16% of the nation's refining 
capacity is in the Midwest). For example, Marathon's refineries at 
Catlettsburg, West Virginia (222,000) and Robinson, Illinois (192,000) 
were affected by Capline's closure, as were other Midwestern 
facilities.
    In total, we believe that at least 20% of the nation's refining 
capacity (3.4 mmb/d) ceased operations or reduced runs at some time due 
to the direct impact of Hurricane Katrina and the loss of crude 
supplies from pipelines affected by the storm. This is probably a 
conservative estimate.
    Recent reports indicate that many of these refineries are either up 
and running or anticipate start-up as early as this week. But, 
unfortunately, there are some refineries representing a significant 
amount of capacity that will remain shut for an undetermined period.
    The Gulf refineries were first impacted by the need to protect the 
personal and family safety of employees, as well as the high likelihood 
of wind and flood damage as a result of the hurricane. After the 
hurricane passed, many of these facilities remained totally off-line as 
damages were assessed. In some instances companies could not physically 
enter the facilities to conduct an assessment for several days, and had 
to first depend on flyovers to study the plant. Damages included 
flooding, wind damage, and lack of electricity.

Pipelines
    In addition, the widespread damage caused by the storm disrupted 
the electricity supply, which affected all industry operations. From a 
refiner's point of view, among the most serious was closure of three 
pipelines:
    The Colonial Pipeline, 5,500 miles of pipeline originating in 
Houston and ending in New York Harbor, carries a daily average of 100 
million gallons of gasoline, diesel and other petroleum products from 
refineries in the Gulf to customers in the South and Eastern United 
States.
    The Plantation Pipe Line, 3,100 miles of pipeline, performs a 
similar function along a slightly different route, delivering a total 
of 620,000 barrels (26 million gallons) of refined petroleum products 
per day to Birmingham, Alabama; Atlanta, Georgia; Charlotte, North 
Carolina; and Washington, D.C., among other cities.
    The Capline Pipeline (previously mentioned), which carries 1.1 
million b/d of crude oil to refineries in the Midwest where it is 
refined to produce gasoline, diesel and other petroleum products for 
distribution primarily in the Midwest.
    All three of these pipelines were totally or partially out of 
service due to disruption of electricity supplies as a result of 
Hurricane Katrina. As a result, the major supply lines of refined 
products to the Southern and Eastern states were unavailable for 
shipment in whole or in part, during the initial period after the 
storm. Midwestern gasoline and diesel production was affected by lack 
of supply from the Capline Pipeline. This led to reduced supplies of 
gasoline, diesel, and other products in parts of the country often far 
removed from the Gulf area.

Petrochemical Facilities
    The Gulf region is home to many of America's petrochemical plants, 
which manufacture plastics and other products made from oil and natural 
gas feedstocks, and which rely on these energy sources for fuel and 
electricity for power. The impact of Hurricane Katrina on these 
facilities is not currently known but is potentially quite serious, 
both in terms of facility damage due to water or wind damage and 
temporary closure or reduced operations due to feedstock shortages, 
lack of fuel or electricity and transportation problems.
    Petrochemical products serve as the building blocks for many 
ultimate products such as computers, medicines and other medical 
products, plastic packaging for food, and also automobile components, 
to name just a few. Disruption of petrochemical production due to the 
storm, if it continues, could affect the economy considerably due to 
the economic importance of petrochemical-based products.

Other Facilities
    In addition to the major impacts outlined above, company pipelines 
and shore facilities and other operations were impacted by the 
hurricane, but information on these matters is less readily available 
to us. Company and government statements indicate that many of these 
facilities were not operating due to lack of electricity or because 
other related facilities (e.g. refineries) were down. Some natural gas 
processing plants were affected but NPRA does not have more information 
on this sector of the industry.
3. What is the current state of repairs?
    The many different sectors of the energy industry, working around 
the clock together with core service providers and with important help 
from local, state and federal government agencies, have made 
considerable progress in restoring some of the operations affected by 
the storm.
    The magnitude of the impact outlined above clearly dictates caution 
in any assessment of when the energy production, refining, distribution 
and related facilities will be back in service and industry conditions 
will return to normal. Clearly, our national energy infrastructure has 
suffered a setback from which it will take some time to emerge 
completely.

Crude Oil, Natural Gas
    According to the MMS as of Saturday, September 3, 78.98% of Gulf of 
Mexico crude oil offshore production remained shut-in, an improvement 
of 10% over Friday. Shut-in Gulf natural gas production stood at 57.80% 
of total Gulf gas marketed production, an improvement of 21% over 
Friday's figure. The number of manned offshore platforms that are 
evacuated declined by 25% over the same period. Thus, important but 
limited progress has been made both in restoring the flow of crude and 
natural gas necessary for refiners to manufacture gasoline, diesel, jet 
fuel and other petroleum products and to meet the needs of 
petrochemical manufacturers. In addition, it is reported that LOOP is 
operating at 75% of capacity.
    These figures still leave significant amounts of offshore Gulf 
crude oil and natural gas shut-in, and oil and gas volumes not produced 
in the past several days are large. During the period 8/26-9/3 9.8 
million barrels were shut-in, totaling 1.8% of yearly crude oil 
production in the Gulf. During the same period 53.2 billion cubic feet 
of natural gas were shut-in, roughly 1.45% of annual gas marketed 
production from offshore.
    There are indications of progress as well regarding refineries. 
Marathon announced this weekend that, barring unforeseen problems, all 
seven of its refineries would be operating at capacity on Monday. This 
includes the Midwestern refineries impacted by the Capline Pipeline 
closure as well as the Garyville, Louisiana refinery impacted directly 
by the hurricane. Valero has announced that its St Charles refinery 
will probably return to operation in the next two weeks. Shell has 
stated that the Convent refinery may be restarted Sunday and the Norco 
refinery midweek. Those refineries will be returned to full production 
gradually and safely as soon as start-ups take place. Assessments of 
physical damage to the Chalmette and Meraux refineries last week helped 
ascertain the extent of damage was limited; no start-up date has been 
set.
    The Colonial Pipe Line expected to return to 86% capacity service 
by the end of the Labor Day weekend. Plantation Pipe Line has returned 
to 100% operation as has the Capline crude oil pipeline. This means 
that major pipeline links to the Midwest, South and East have been 
gradually restored. Serious problems remain, however, due to the 
significant loss of product and crude volumes which would have been 
shipped on these lines last week.
    In addition, it remains unclear when many, if not most, of the 
refineries impacted directly by Hurricane Katrina in the Gulf can 
return to service. Problems with wind and water damage, electricity 
supply and other infrastructure remain to be addressed despite the best 
efforts of facility owners and operators. Thus, although some of the 
affected refineries may restart and return to capacity or near-capacity 
levels this week, there are indications that several facilities may be 
out of service for a longer period.
    The industry is committed to operation of these facilities as soon 
as possible, but employee safety and overall safe start-up and 
operation concerns are paramount. Significant flooding and damage still 
affects some facilities. However, some refiners with operating 
facilities have indicated that they will be able to ramp-up production 
from currently reduced levels at refineries near the affected areas 
which should have a positive impact on product supplies.
4. What else is industry doing to improve the situation?
    As indicated above, the industry has moved with considerable speed 
to restart the nation's energy infrastructure so severely damaged by 
Hurricane Katrina. Even more important than assessing and repairing 
physical damage however, was the need to locate and assist employees, 
many of whom experienced significant personal losses of family or 
friends in the tragedy as well as loss of or severe damage to their 
homes. (All industry companies throughout this region have been deeply 
involved in locating and providing for the needs of their employees at 
the same time they were attempting to assess and respond to facility 
damages and restore energy production).
    Many companies are offering varying types of assistance to 
personnel and their families who were impacted by the hurricane. These 
include interest free loans; temporary living supplements for housing 
and food; pay continuation while facilities are closed; transportation 
assistance; paid time off; medical and prescription drug assistance; 
temporary housing, including trailers, tents, and other available 
housing.
    The oil, gas and petrochemical industries have already contributed 
millions of dollars to the American Red Cross and other relief agencies 
involved in assisting all residents of the affected communities. They 
are also matching employee contributions. Companies are also supplying 
in-kind assistance, often including fuel, for relief efforts as well. 
The industry will doubtless maintain its deep commitment to help end 
the suffering in the affected communities and to begin planning for the 
future.
5. What has the federal government done to address these emergency 
        conditions?
    Federal authorities have taken several decisive actions to help 
relieve the many energy-related problems left in the wake of Hurricane 
Katrina.

SPR Release
    The Administration has released 9 million barrels of crude oil from 
the Strategic Petroleum Reserve (SPR) to assist refiners who are short 
crude supplies as a result of hurricane damage. The recipients will use 
this crude to manufacture more gasoline, diesel, jet fuel and home 
heating oil to be supplied to consumers across the nation. This is a 
dynamic process, and additional volumes may be needed as more 
refineries restart.
    The current situation is precisely the type of event meant to 
trigger SPR release. It demonstrates the importance of careful SPR 
management.

Waivers to Increase Fuel Flexibility
    EPA has provided temporary fuel waivers that will make it easier to 
provide fuels to affected areas. This action pertains to both gasoline 
and diesel specifications, and will help alleviate some of the supply 
problems in these areas by increasing the available supply of both 
domestic production and imports. Affected states participated in the 
EPA's decision process on this action.

Jones Act Waiver
    DOT has temporarily lifted Jones Act requirements to allow non-U.S. 
flag vessels to transport much needed refined products from one U.S 
port to another.

IEA (International Energy Agency) Exchange
    The Secretary of Energy has announced that the IEA will make 
available 60 million barrels of petroleum. This will provide relief in 
the form of refined products (gasoline, diesel, jet fuel, home heating 
oil) which are much needed due to disrupted supplies from several 
refineries. These products should begin to reach the U.S in one to two 
weeks. The agreement with the IEA also requires the U.S. to release an 
additional 30 million barrels of SPR crude.
    Industry appreciates these actions, which were taken by the 
Administration with bipartisan support from the Congress. They will be 
very helpful in dealing with the serious supply problems that have 
resulted from Hurricane Katrina.
6. What is the impact on fuel supply? When will the situation return to 
        normal?
    As indicated above, Hurricane Katrina's direct hit on the energy 
heartland of America resulted in significant damage to offshore energy 
production in the Gulf, to facilities that are critically important to 
imported oil supplies, to refineries in the affected states and beyond, 
and to pipelines that serve as the major providers of refined products 
and crude to large parts of the East, South and Midwest.
    All segments of the industry are working together in an intensive 
effort to repair as much of the damage as is possible at this time in 
order to increase the flow of crude oil to refineries and refined 
products to consumers throughout the country. Safety considerations and 
the immediate needs of the industry's workforce are of course taken 
into account at all times.
    Industry and government are working together to provide available 
supplies of product to areas that are experiencing supply concerns. The 
fuel and Jones Act waivers mentioned above will be of immediate and 
near-term assistance. Increased product imports through the IEA should 
also help when they arrive. Refiners who have the ability to do so will 
attempt to increase production to help meet the needs of the affected 
areas. The release of oil from the SPR will be helpful in supplying 
them with some of the crude needed to make these products.
    Despite this hopeful news, our nation faces a disruption of the 
fuel supply system that should not be understated. The hurricane 
temporarily affected more than 90% of the Gulf's oil production and 80% 
of its gas production. It effectively removed 10% of the nation's 
gasoline supply by its impact on U.S. refining capacity located near 
the Gulf. It also impacted refineries hundreds of miles away that lost 
access to crude oil supplies. Although important progress has been made 
through the efforts of government and industry, and with some help from 
abroad, full recovery will take time. Hard work and cooperation 
throughout this difficult period will certainly help speed the return 
to normal conditions. The direct and indirect impact of the hurricane 
on energy demand, which cannot yet be determined, will also be a major 
factor during this period.
7. Should we continue to rely on free market forces during this period?
    Absolutely. Continued reliance on market forces provides 
appropriate market signals to help balance supply and demand even 
during difficult times. President Reagan eliminated price controls on 
oil products immediately upon taking office in 1981. He was outspoken 
about the inefficiencies and added costs to consumers as a result of 
America's ten-year experiment with energy price controls.
    The energy price and allocation controls of the 1970s resulted in 
supply shortages in the form of long gas lines. Studies have shown 
that, although intended to reduce costs, they actually resulted in 
increased costs and greater inconvenience for consumers. The benefits 
of market pricing became clear soon after their elimination. The U.S. 
Federal Trade Commission stated in an extensive study published this 
June that ``Gasoline supply, demand and competition produced relatively 
low and stable annual average real U.S gasoline prices from 1984 until 
2004, despite substantial increases in U.S. gasoline consumption'' and 
``. . . For most of the past 20 years, real annual average retail 
gasoline process in the U.S., including taxes, have been lower than at 
any time since 1919.'' Price caps and other forms of price regulation 
are no more effective in the 21st century than they turned out to be in 
the 1970s. Interference in market forces always creates inefficiencies 
in the marketplace and extra costs for consumers.
    The same holds true for ``windfall profit taxes.'' The U.S. had a 
``windfall profit tax'' on crude oil from 1980 until 1988. That tax, 
which was actually an ad valorem tax imposed on crude oil, discouraged 
crude oil production in the United States and resulted in other market 
distortions. It was repealed in 1988.
    Calls for re-imposition of a windfall profits tax on refiners 
reflect a misunderstanding of refining industry economics. In the ten-
year period 1993-2002, average return on investment in the refining 
industry was only about 5.5%. This is less than half of the S&P 
industrials average return of 12.7% for the same period. Refining 
industry profits as a percentage of operating capital are not 
excessive. In dollars, they seem large due to the massive scale needed 
to compete in a large, capital-intensive industry. For example, a new 
medium scale refinery (100,000 to 200,000 b/d) would cost $2 to $3 
billion. In short, company revenues can be in the billions, but so, too 
are the costs of operations.
    The FTC June 2005 study cited above had the following comments on 
industry profits: ``Profits play necessary and important roles in a 
well-functioning market economy. Recent oil company profits are high 
but have varied widely over time, over industry segments and among 
firms . . . Profits also compensate firms for taking risks, such as the 
risks in the oil industry that war or terrorism may destroy crude 
production assets or, that new environmental requirements may require 
substantial new refinery capital investments.''
    Many other industries enjoy higher earnings than the oil industry. 
Among these are telecommunication services, software, semiconductors, 
banking, pharmaceuticals, coal and real estate, to name just a few. 
Imposition of a windfall profits tax on the industry would discourage 
investment at a time when significant capital commitments to all parts 
of the industry, including refining, will be needed.
    Tight gasoline market conditions have often led to calls for 
industry investigations. More than two dozen federal and state 
investigations over the last several decades have found no evidence of 
wrongdoing or illegal activity on our industry's part. For example, 
after a 9-month FTC investigation into the causes of price spikes in 
local markets in the Midwest during the spring and summer of 2000, 
former FTC Chairman Robert Pitofsky stated, ``There were many causes 
for the extraordinary price spikes in Midwest markets. Importantly, 
there is no evidence that the price increases were a result of 
conspiracy or any other antitrust violation. Indeed, most of the causes 
were beyond the immediate control of the oil companies.'' Similar 
investigations before and since have reached the same conclusion.
    There have been, however, reports of price gouging by unscrupulous 
individuals who seek to profit during this time of national emergency 
and crisis. Federal and state laws prohibit actions of this kind in 
emergency situations like the present. Each alleged situation should be 
thoroughly investigated by the appropriate state and federal 
authorities and prosecuted when the law has been broken.

   PART II. A SHORT DISCUSSION OF OIL AND OIL PRODUCT SUPPLY DRIVERS

1. INTRODUCTION
    This hearing was originally intended to inquire into the factors 
affecting the gasoline market. The natural disaster resulting from 
Hurricane Katrina required an understandable shift in emphasis to the 
human needs damages resulting from that storm and only then to supply 
impacts. But it is important to remember that the effect of Hurricane 
Katrina is an overlay on a pre-existing condition. That was and is a 
situation characterized by high crude prices, strong demand for 
gasoline, diesel and other petroleum products, and a challenged energy 
infrastructure, especially in refining. In the interest of space and 
time, NPRA has shortened the following discussion of these conditions 
and policy recommendations for improving them. We urge members of the 
committee to consider the need for policy changes to increase the 
nation's supply of oil, oil products and natural gas as soon as 
possible.
    As the nation moves forward in its resolve to address and overcome 
the effects of Katrina and the transportation fuels production and 
distribution systems regain much-needed pre-storm productivity levels, 
an underlying domestic fuel supply problem remains that requires 
immediate, bold, and perhaps politically unpopular actions. NPRA 
believes that policy changes must be put in place to enhance 
domestically-produced supplies of oil, oil products and natural gas. 
NPRA has consistently urged policy makers in Congress and the 
Administration to support environmentally sound, economically 
justifiable policies that encourage the production of an abundant 
supply of petroleum and natural gas products for U.S. consumers.
    NPRA supports requirements for the orderly production and use of 
cleaner-burning fuels to address health and environmental concerns, 
while at the same time maintaining the flow of adequate and affordable 
gasoline and diesel supplies to the consuming public. Since 1970, clean 
fuels and clean vehicles have accounted for about 70% of all U.S. 
emission reductions from all sources, according to EPA. Over the past 
10 years, U.S. refiners have invested about $47 billion in 
environmental improvements, much of that to make cleaner fuels. For 
example, according to EPA, the new Tier 2 low sulfur gasoline program, 
initiated in January 2004, will have the same effect as removing 164 
million cars from the road when fully implemented.
    Unfortunately, however, federal environmental policies have often 
neglected to consider fully the impact of environmental regulations on 
fuel supply. Frankly, policy makers have often taken supply for 
granted, except in times of obvious market instability. This attitude 
must end. A healthy and growing U.S. economy requires a steady, secure, 
and predictable supply of petroleum products.
    Unfortunately, there are no silver bullet solutions for balancing 
supply and demand. Indeed most of the problems in today's gasoline 
market--without factoring the market disruptions caused by Katrina--
result from the high price of crude oil due to economic recovery abroad 
together with strong U.S. demand for gasoline and diesel due to the 
improving U.S. economy.

2. UNDERSTANDING GASOLINE MARKET FUNDAMENTALS: HIGH CRUDE PRICES; 
        STRONG GASOLINE DEMAND GROWTH
    It is important to recognize the overwhelming factor affecting 
gasoline prices: crude oil. In June of this year the U.S. Federal Trade 
Commission released a landmark study titled: ``Gasoline Price Changes: 
The Dynamic of Supply, Demand and Competition.'' To quote from the 
FTC's findings: ``Worldwide supply, demand, and competition for crude 
oil are the most important factors in the national average price of 
gasoline in the U.S.'' and ``The world price of crude oil is the most 
important factor in the price of gasoline. Over the last 20 years, 
changes in crude oil prices have explained 85 percent of the changes in 
the price of gasoline in the U.S.''
    Crude prices have been steadily increasing since 2004, largely 
because of surprising levels of growth in oil demand in countries such 
as China and India, and in the United States as well. Actual demand 
growth for oil and oil products in these countries in 2004 exceeded the 
experts'' predictions and has remained strong this year. As a result, 
world demand for crude is bumping up against the worldwide ability to 
produce crude.
    Strong demand for crude has dissipated the cushion of excess 
available worldwide oil supply, just as strong U.S. demand for refined 
products has eliminated excess refining capacity in the United States. 
The good news is that producing countries will probably be able to add 
crude production capacity in the years to come. The bad news is that 
the United States has thus far shown only limited willingness to face 
up to its own energy supply problems.
    As shown in Attachment I, gasoline costs closely track the cost of 
crude oil. Before hurricane Katrina, gasoline price increases lagged 
crude oil price increases on a gallon for gallon basis. This means that 
refiners did not pass through all of the increased costs in their raw 
material, crude oil. Crude oil accounts for 55-60% of the price of 
gasoline seen at the service station.
    The cost of federal and state taxes adds another 19% to the cost of 
a finished gallon of gasoline. Therefore under current conditions, 74-
79% of the total cost of a gallon of gasoline is pre-determined before 
the crude is delivered to the refiner for manufacture into gasoline. 
(See Attachment 2)
    Another contributor to gasoline costs is tightness in our nation's 
gasoline markets. While U.S. refiners are producing huge volumes of 
products, strong demand has tightened supply. Gasoline demand currently 
averages approximately 9 million barrels per day. Domestic refineries 
produce about 90 percent of U.S. gasoline supply, while about 10 
percent is imported.
    Thus, strong and increasing demand can only be met by either adding 
new domestic refinery capacity or by relying on more foreign gasoline 
imports. Unfortunately, the desire for more domestic gasoline 
production capacity is often thwarted by other public priorities.

3. U. S. POLICY SHOULD ENCOURAGE ADDITIONAL DOMESTIC REFINING CAPACITY.
    Domestic refining capacity is a scarce asset. There are currently 
148 U.S. refineries owned by 55 companies in 33 states, with total 
crude oil processing capacity at roughly 17 million barrels per day. In 
1981, there were 325 refineries in the U.S. with a capacity of 18.6 
million barrels per day. Thus, while U.S. demand for gasoline has 
increased over 20% in the last twenty years, U.S. refining capacity has 
decreased by 10%. No new refinery has been built in the United States 
since 1976, and it will be difficult to change this situation. This is 
due to economic, public policy and political considerations, including 
siting costs, environmental requirements, a history of low refining 
industry profitability and, significantly, ``not in my backyard'' 
(NIMBY) public attitudes.
    Nevertheless, existing refineries have been extensively updated to 
incorporate the technology needed to produce a large and predictable 
supply of clean fuels with significantly improved environmental 
performance. Capacity additions have taken place at some facilities as 
well; several of these projects implemented over several years can 
actually increase product output as much as a new refinery. But this 
increase in capacity at existing sites has not kept pace with the 
growth in U.S. demand for products, meaning that the nation is 
increasing its reliance on imports of gasoline and other petroleum 
products each year.
    Proposed capacity expansions can often become controversial and 
contentious at the state and local level, even when necessary to 
produce cleaner fuels pursuant to regulatory requirements. We hope that 
policymakers will recognize the importance of domestic refining 
capacity expansion to the successful implementation of the nation's 
environmental policies, especially clean fuels programs. The 
Administration's New Source Review reform program will also provide one 
tool to help add and update capacity.
    NPRA wants to recognize a provision in the recently enacted energy 
legislation that will help encourage additional refining investment. 
The provision allows 50% expensing of the costs associated with 
expanding a refinery's output by more than 5%. The refiner must have a 
signed contract for the work by 1/1/08, and the equipment must be put 
in service by 1/1/12.
    Common sense dictates that it is in our nation's best interest to 
manufacture the lion's share of the petroleum products required for 
U.S. consumption in domestic refineries and petrochemical plants. 
Nevertheless, we currently import more than 62% of the crude oil and 
oil products we consume. Reduced U.S. refining capacity clearly affects 
our supply of refined petroleum products and the flexibility of the 
supply system, particularly in times of unforeseen disruption or other 
stress. Unfortunately, EIA currently predicts ``substantial growth'' in 
refining capacity only in the Middle East, Central and South America, 
and the Asia/Pacific region, not in the U.S.

4. THE U.S. REFINING INDUSTRY IS DIVERSE AND COMPETITIVE.
    Today's U.S. refining industry is highly competitive. Some suggest 
past mergers are responsible for higher prices. The data do not support 
such claims. In fact, companies have become more efficient and continue 
to compete fiercely. There are 55 refining companies in the U.S., 
hundreds of wholesale and marketing companies, and more than 165,000 
retail outlets. The biggest refiner accounts for only about 13 % of the 
nation's total refining capacity; and the large integrated companies 
own and operate only about 10 % of the retail outlets. The Federal 
Trade Commission (FTC) thoroughly evaluates every merger proposal, 
holds industry mergers to the highest standards of review, and subjects 
normal industry operations to a higher level of ongoing scrutiny.
    Critics of mergers sometimes suggest that industry is able to 
affect prices because it has become much more concentrated, with a 
handful of companies controlling most of the market. This is untrue. 
According to data compiled by the U.S. Department of Commerce and by 
Public Citizen, in 2003 the four largest U.S. refining companies 
controlled a little more than 40 % of the nation's refining capacity. 
In contrast, the top four companies in the auto manufacturing, brewing, 
tobacco, floor coverings and breakfast cereals industries controlled 
between 80% and 90% of the market.

5. INDUSTRY IS WORKING HARD TO KEEP PACE WITH GROWING DEMAND FOR FUEL.
    Despite the powerful factors that influence gasoline manufacturing, 
cost and demand, refiners are addressing current supply challenges and 
working hard to supply sufficient volumes of gasoline and other 
petroleum products to the public. Refineries have been running at very 
high levels, producing gasoline and distillate. Refiners operated at 
high utilization rates--even before the start of the summer driving 
season. To put this in perspective, peak utilization rates for other 
manufacturers average about 82 %. At times during summer, refiners 
often operate at rates close to 98 %. However, such high rates cannot 
be sustained for long periods.
    In addition to coping with higher fuel costs and growing demand, 
refiners are implementing significant transitions in major gasoline 
markets. Nationwide, the amount of sulfur in gasoline will be reduced 
to an average of 30 parts per million (ppm) effective January 1, 2006, 
giving refiners an additional challenge in both the manufacture and 
distribution of fuel. Equally significant, California, New York and 
Connecticut bans on use of MTBE are in effect. This is a major change 
affecting one-sixth of the nation's gasoline market. MTBE use as an 
oxygenate in reformulated gasoline accounted for as much as 11% of RFG 
supply at its peak; substitution of ethanol for MTBE does not replace 
all of the volume lost by removing MTBE. (Ethanol's properties 
generally cause it to replace only about 50% of the volume lost when 
MTBE is removed.) This lost volume must be supplied by additional 
gasoline or gasoline blendstocks. Especially during a period of supply 
concerns it is in the nation's interest to be prudent in taking any 
action that affects MTBE use. That product still accounts for 1.6% of 
the nation's gasoline supply on average, but it provides a larger 
portion of gasoline supplies in areas with RFG requirements that are 
not subject to an MTBE ban.
    Obviously, refiners face a daunting task in completing many changes 
to deliver the fuels that consumers and the nation's economy require. 
But they are succeeding. And regardless of recent press stories, we 
need to remember that American gasoline and other petroleum product 
prices have long been low when compared to the price consumers in other 
large industrialized nations pay for those products. The Federal Trade 
Commission recently found that ``Gasoline supply, demand and 
competition produced relatively low and stable annual average real U.S. 
gasoline prices from 1984 until 2004, despite substantial increases in 
U.S. gasoline consumption.''

6. REFINERS FACE A BLIZZARD OF REGULATORY REQUIREMENTS AFFECTING BOTH 
        FACILITIES AND PRODUCTS.
    Refiners currently face the massive task of complying with fourteen 
new environmental regulatory programs with significant investment 
requirements, all in the same 2006-2012 timeframe. (See Attachment 3.) 
In addition, many programs start soon. (See Attachment 4.) For the most 
part, these regulations are required by the Clean Air Act. Some will 
require additional emission reductions at facilities and plants, while 
others will require further changes in clean fuel specifications. NPRA 
estimates that refiners are in the process of investing about $20 
billion to sharply reduce the sulfur content of gasoline and both 
highway and off-road diesel. Refiners will face additional investment 
requirements to deal with limitations on ether use, as well as 
compliance costs for controls on Mobile Source Air Toxics and other 
limitations. These costs do not include the significant additional 
investments needed to comply with stationary source regulations that 
affect refineries.
    Other potential environmental regulations on the horizon could 
force additional large investment requirements. They are: the 
challenges posed by increased ethanol use, possible additional changes 
in diesel fuel content involving cetane, and potential proliferation of 
new fuel specifications driven by the need for states to comply with 
the new eight-hour ozone NAAQS standard. The 8-hour standard could also 
result in more regulations affecting facilities such as refiners and 
petrochemical plants.
    These are just some of the pending and potential air quality 
challenges that the industry faces. Refineries are also subject to 
extensive regulations under the Clean Water Act, Toxic Substances 
Control Act, Safe Drinking Water Act, Oil Pollution Act of 1990, 
Resource Conservation and Recovery Act, Emergency Planning and 
Community Right-To-Know (EPCRA), Comprehensive Environmental Response, 
Compensation, and Liability Act (CERCLA), and other federal statutes. 
The industry also complies with OSHA standards and many state statutes. 
A complete list of federal regulations impacting refineries is included 
with this statement. (See Attachment 5.)
    API estimates that, since 1993, about $89 billion (an average of $9 
billion per year) has been spent by the oil and gas industry to protect 
the environment. This amounts to $308 for each person in the United 
States. More than half of the $89 billion was spent in the refining 
sector.
    Obviously, refiners face a daunting task in completing many changes 
to deliver the fuels that consumers and the nation's economy require. 
But they are succeeding. And regardless of recent press stories, we 
need to remember that American gasoline and other petroleum products 
have long been low when compared to the price consumers in other large 
industrialized nations pay for those products. The Federal Trade 
Commission recently found that ``Gasoline supply, demand and 
competition produced relatively low and stable annual average real U.S. 
gasoline prices from 1984 until 2004, despite substantial increases in 
U.S. gasoline consumption.''

7. A KEY GOVERNMENT ADVISORY PANEL HAS URGED MORE SENSITIVITY TO SUPPLY 
        CONCERNS.
    The National Petroleum Council (NPC) issued a landmark report on 
the state of the refining industry in 2000. Given the limited return on 
investment in the industry and the capital requirements of 
environmental regulations, the NPC urged policymakers to pay special 
attention to the timing and sequencing of any changes in product 
specifications. Failing such action, the report cautioned that adverse 
fuel supply ramifications may result. Unfortunately, this warning has 
been widely disregarded. On June 22, 2004 Energy Secretary Abraham 
asked NPC to update and expand its refining study and a report was 
released last December. NPRA again urges policymakers to take action to 
implement NPC's study recommendations in order to deal with U.S. 
refining problems.

8. NPRA RECOMMENDATIONS TO ADD REFINING CAPACITY AND INCREASE FUTURE 
        PRODUCT SUPPLY
     Make increasing the nation's supply of oil, oil products and 
natural gas a number one public policy priority. Now, and for many 
years in the past, increasing oil and gas supply has often been a 
number 2 priority. Thus, oil and gas supply concerns have been 
secondary and subjugated to whatever policy goal was more politically 
popular at the time. Enactment of the recent Energy Bill is a first 
step to making a first priority the supply of energy sources the nation 
depends upon.
     Remove barriers to increased supplies of domestic oil and gas 
resources. Recent criticism about the concentration of America's energy 
infrastructure in the western Gulf is misplaced. Refineries and other 
important onshore facilities have been welcome in this area but not in 
many other parts of the country. Policymakers have also restricted 
access to much-needed offshore oil and natural gas supplies in the 
eastern Gulf and off the shores of California and the East Coast. These 
areas must follow the example of Louisiana and many other states in 
sharing these energy resources with the rest of the nation because they 
are sorely needed.
     Resist tinkering with market forces when the supply/demand 
balance is tight. Market interference that may initially be politically 
popular leads to market inefficiencies and unnecessary costs. 
Policymakers must resist turning the clock backwards to the failed 
policies of the past. Experience with price constraints and allocation 
controls in the 1970s demonstrates the failure of price regulation, 
which adversely impacted both fuel supply and consumer cost.
     Expand the refining tax incentive provision in the Energy Act. 
Reduce the depreciation period for refining investments from 10 to 
seven or five years in order to remove a current disincentive for 
refining investment. Allow expensing under the current language to take 
place as the investment is made rather than when the equipment is 
actually placed in service. Or the percentage expensed could be 
increased as per the original legislation introduced by Senator Hatch.
     Review permitting procedures for new refinery construction and 
refinery capacity additions. Seek ways to encourage state authorities 
to recognize the national interest in more domestic capacity.
     Keep a close eye on several upcoming regulatory programs that 
could have significant impacts on gasoline and diesel supply. They are:

--Design and implementation of the credit trading program for the 
        ethanol mandate (RFS) contained in the recent Energy Act. This 
        mechanism is vital to increase the chance that this program can 
        be implemented next year without additional gasoline supply 
        disruption. Additional resources are needed within EPA to 
        accomplish this key task.
--Implementation of the ultra low sulfur diesel highway diesel 
        regulation. The refining industry has made large investments to 
        meet the severe reductions in diesel sulfur that take effect 
        next June. We remain concerned about the distribution system's 
        ability to deliver this material at the required 15 ppm level 
        at retail. If not resolved, these problems could affect 
        America's critical diesel supply. Industry is working with EPA 
        on this issue, but time left to solve this problem is growing 
        short.
--Phase II of the MSAT (mobile source air toxics) rule for gasoline. 
        Many refiners are concerned that this new regulation, which we 
        expect next year, will be overly stringent and impact gasoline 
        supply. We are working with EPA to help develop a rule that 
        protects the environment and avoids a reduction in gasoline 
        supply.
--Implementation of the new 8-hour ozone NAAQS standard. The current 
        implementation schedule determined by EPA has established ozone 
        attainment deadlines for parts of the country that will be 
        impossible to meet. EPA has to date not made changes that would 
        provide realistic attainment dates for the areas. The result is 
        that areas will be required to place sweeping new controls on 
        both stationary and mobile sources, in a vain effort to attain 
        the unattainable. The new lower-sulfur gasoline and ULSD diesel 
        programs will provide significant reductions to emissions 
        within these areas once implemented. But they will not come 
        soon enough to be considered unless the current unrealistic 
        schedule is revised. If not, the result will be additional fuel 
        and stationary source controls which will have an adverse 
        impact on fuel supply and could actually reduce U.S. refining 
        capacity. This issue needs immediate attention.
    NPRA's members are dedicated to working cooperatively with 
government at all levels to resolve the current emergency conditions 
that result from Hurricane Kristina. But we feel obliged to remind 
policymakers that action must also be taken to improve energy policy in 
order to increase supply and strengthen the nation's refining 
infrastructure. We look forward to answering the Committee's questions.

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    Chairman Barton. We thank you. Your time has expired.
    We now want to hear from Mr. James Newsome, who is the 
President of the New York Mercantile Exchange.
    You are recognized for 7 minutes, sir.

                   STATEMENT OF JAMES NEWSOME

    Mr. Newsome. Thank you, Mr. Chairman. And as a native 
Mississippian, I want to thank you for holding this committee 
meeting, for having our Governor Haley Barbour on earlier, and 
for the leadership that you are providing through what may come 
from this hearing.
    NYMEX is the world's largest forum for trading and clearing 
physical commodity-based futures contracts, including energy 
and metals. NYMEX provides an important economic benefit to the 
public by facilitating competitive price discovery and hedging.
    As the benchmark for energy prices around the world, 
trading on NYMEX is transparent, open, competitive and heavily 
regulated.
    Contrary to some beliefs, NYMEX does not set prices for 
commodities trading on the exchange. NYMEX does not trade in 
the market, and, being price neutral, does not influence price 
movement. NYMEX provides a forum for traders to come together 
and execute trades at prices which best represent what market 
participants think prices should be in the future, given 
today's information.
    Periods of market uncertainty and volatility often result 
from extreme supply disruptions, as we saw with the numerous 
refineries shut down due to Hurricane Katrina. Price volatility 
following Hurricane Katrina drove many to the futures markets, 
as is reflected by the record volumes traded on NYMEX since the 
hurricane.
    Futures markets fulfill two primary functions. They permit 
hedging, giving market participants the ability to shift risk. 
And, two, they facilitate price discovery and market 
transparency.
    Transparency involves many factors, including continuous 
price reporting during the trading session, daily reporting of 
trading volumes and open interest, and monthly reporting of 
deliveries against the futures contracts.
    NYMEX energy futures markets are highly liquid and 
transparent, representing the views and expectations of a wide 
variety of participants from every sector of the energy 
marketplace. The price agreed upon for sale of any futures 
contract trade is immediately transmitted to the exchange's 
electronic price reporting system and to the news wires and 
information vendors who inform the world of accurate futures 
prices.
    Gasoline is the largest single volume refined product sold 
in the United States and accounts for almost one-half of 
national oil consumption. It is a highly diverse market with 
hundreds of wholesale distributors and thousands of retail 
outlets, making it subject to intense competition and 
occasionally price volatility. Average daily volume in these 
contracts has hit record levels in recent months, and prices 
have been volatile. These market conditions reflect the basic 
market fundamentals where there is an imbalance of supply and 
demand. Tight gasoline supplies due to the lack of refinery 
capacity compounded by the impact of Hurricane Katrina drove 
prices upward dramatically in the cash and in the futures 
markets.
    The importance of the gulf coast refineries as a key supply 
source for the New York Harbor via Colonial Pipeline directly 
impacts the physical and the futures gasoline markets. During 
the 1-week period prior to Hurricane Katrina, the cash market 
price for gulf coast gasoline averaged $1.82 per gallon, which 
was 8 cents per gallon lower than the weekly average NYMEX 
futures settlement price. After the supply disruption, the gulf 
coast gasoline cash market rose more than $1, to $2.84 per 
gallon for the daily average on August 30, 37 cents higher than 
the NYMEX futures settlement price on August 30.
    A number of refineries in the Gulf of Mexico were damaged 
beyond immediate repair and critical petroleum supplies were 
lost. Prior to Hurricane Katrina, the U.S. refineries had 
already begun running at maximum capacities struggling to keep 
up with gasoline demand. This disaster in a key refining region 
only further exasperated an already growing problem.
    It is widely theorized, Mr. Chairman, that speculators can 
drive up prices. Placing blame on speculators may grab the 
attention of the media but does not accurately reflect the 
realities of how markets work. With hundreds of commercial 
participants and instantaneous price dissemination, any 
speculative price would be met with an equally strong 
commercial reaction. If markets move in a direction 
inconsistent with actual market factors, there are a vast 
number of participants, including energy producers, 
wholesalers, retailers, and government agencies, that have 
comparable access to information.
    During the August 30 trading session, NYMEX set daily 
volume records for overall exchange volume and for gasoline and 
crude oil futures. These volume numbers clearly reflect NYMEX's 
importance as a transparent trading forum where customers can 
effectively manage their price risk. It is precisely during 
such times of market volatility uncertainty that the Exchange's 
vital role in facilitating price discovery and risk management 
is most crucial to our customers.
    At all times during this period of extreme uncertainty in 
the market, NYMEX has been the source for transparent prices in 
the energy markets. Our trading systems and price reporting 
systems to the world's vendors worked flawlessly and without 
delay. Even though as consumers we may not necessarily like the 
result, the NYMEX marketplace performed its responsibility to 
create open, competitive, and transparent pricing. We can only 
imagine the market uncertainty and further devastation to 
consumers if NYMEX were unable to perform its duty and prices 
were determined behind closed doors.
    Thank you, Mr. Chairman, for the chance to be here.
    [The prepared statement of James Newsome follows:]

  Prepared Statement of James Newsome, President, New York Mercantile 
                             Exchange, Inc.

    Mr. Chairman and members of the Committee, my name is Jim Newsome 
and I am the President of the New York Mercantile Exchange (NYMEX or 
Exchange). NYMEX is the world's largest forum for trading and clearing 
physical-commodity based futures contracts, including energy and metals 
products. We have been in the business for 135 years and are a 
federally chartered marketplace, fully regulated by the Commodity 
Futures Trading Commission. On behalf of the Exchange, its Board of 
Directors and shareholders, I thank you and the members of the 
Committee for the opportunity to participate in today's hearing on 
Hurricane Katrina's devastating effect on gasoline supply and prices.
    First and foremost, we would like to acknowledge that not only has 
the nation's energy supply been severely affected, but lives have been 
lost, homes have been destroyed, and entire cities are in ruins. Our 
thoughts and prayers are with all the families that have suffered from 
the destruction of Katrina.

                              INTRODUCTION

    NYMEX provides an important economic benefit to the public by 
facilitating competitive price discovery and hedging. As the benchmark 
for energy prices around the world, trading on NYMEX is transparent, 
open and competitive and heavily regulated. Contrary to some beliefs, 
NYMEX does not set prices for commodities trading on the exchange. 
NYMEX does not trade in the market and, being price neutral, does not 
influence price movement. NYMEX provides the forum for traders to come 
together and execute trades at prices which best represent what market 
participants think prices should be in the future, given today's 
information.
    Periods of market uncertainty and volatility often result from 
extreme supply disruptions as we see with the numerous refineries shut 
down due to Hurricane Katrina, which brings me to the reason I was 
asked to testify today. There is a strong beneficial and interdependent 
relationship between the futures and cash markets. The primary 
motivation for using the futures market is to hedge against price risk 
in the cash market. Prudent business managers rely on the futures 
market to protect their business against price swings in the cash 
market. Price volatility following Hurricane Katrina drove many into 
the futures markets, as is reflected by the record volumes traded on 
NYMEX since the hurricane.
    Futures markets provide a reference point for use in arranging 
trades at competitively determined prices. An understanding of the 
NYMEX market, its pricing mechanism and the relationship between the 
futures price and the cash price will provide useful instruction and 
clarity to what is often perceived as an esoteric area of financial 
dealings.

                                OVERVIEW

    Futures markets fulfill two primary functions: (1) They permit 
hedging, giving market participants the ability to shift price risk to 
others who have inverse risk profiles or are willing to assume that 
risk for profit; and (2) They facilitate price discovery and market 
transparency. Transparency involves many factors, including: (1) 
Continuous price reporting during the trading session; (2) Daily 
reporting of trading volume and open interest; and (3) Monthly 
reporting of deliveries against the futures contract.
    NYMEX futures contracts trade by open outcry on the Exchange floor 
during the day and during the evening on NYMEX ACCESS ', our 
after-hours electronic trading platform. Transactions are executed in a 
transparent and competitive environment between NYMEX members who are 
registered futures industry professionals. The daily settlement price 
for each contract is calculated pursuant to Exchange rules, which 
generally is the average price for all outright transactions during the 
closing range.
    NYMEX energy futures markets are highly liquid and transparent, 
representing the views and expectations of a wide variety of 
participants from every sector of the energy marketplace. Customers 
from around the globe can call into a broker on the NYMEX trading floor 
to place buy and sell orders. On behalf of the customers, buyers 
announce their bids and sellers announce offers. The price agreed upon 
for sale of any futures contract trade is immediately transmitted to 
the Exchange's electronic price reporting system and to the news wires 
and information vendors who inform the world of accurate futures 
prices.
    Price signals are the most efficient transmitters of economic 
information, telling us when supplies are short or in surplus, when 
demand is robust or wanting, or when we should take notice of longer-
term trends. NYMEX futures markets are the messengers carrying this 
information from the energy industry to the public. The wide 
dissemination of futures prices generates competition in the 
establishment of current cash values for commodities.

                                GASOLINE

    Gasoline is the largest single volume refined product by volume 
sold in the United States and accounts for almost half of national oil 
consumption. It is a highly diverse market, with hundreds of wholesale 
distributors and thousands of retail outlets, often making it subject 
to intense competition and price volatility.
    NYMEX trades, among other things, New York Harbor leaded and 
unleaded regular gasoline futures contracts. The New York harbor 
gasoline futures contract trades in units of 42,000 gallons (1,000 
barrels). It is based on delivery of petroleum products to terminals in 
the New York harbor, the major East Coast trading center for imports 
and domestic shipments, from refineries in the New York harbor area or 
from the Gulf Coast refining centers.
    Average daily trading volume in these contracts has hit record 
levels in recent months and prices have been volatile. These market 
conditions reflect the basic market fundamentals where there is an 
imbalance of supply and demand. Tight gasoline supplies due to lack of 
refinery capacity, compounded by the impact of hurricane Katrina, which 
resulted in the closing of 9 refineries, has driven prices upward 
dramatically in the cash and futures market.
    The importance of the Gulf Coast refineries as a key supply source 
for the New York Harbor via Colonial Pipeline directly impacts the 
physical gasoline market and the futures gasoline market. During the 
one-week period prior to hurricane Katrina, the cash market price for 
Gulf Coast gasoline averaged $1.82 per gallon (using the Platts 
wholesale assessment at the Colonial Pipeline), which was $.08 per 
gallon lower than the weekly average NYMEX futures settlement price. 
After the supply disruption due to hurricane Katrina, the Gulf Coast 
gasoline cash market rose more than one dollar to $2.84 per gallon for 
the daily average on August 30 (one day after the storm), $.37 higher 
than the NYMEX futures settlement price on August 30. This differential 
between the cash and futures prices represents the free market price 
that is derived in light of the extreme supply disruption and reflects 
a new equilibrium in the marketplace in response to the shock to the 
demand and supply balance.
    NYMEX has closely monitored the gasoline futures market during this 
recent period of price increases in the aftermath of hurricane Katrina 
and has initially concluded that the market behaved rationally and the 
market participants acted responsibly in their futures and options 
trading.

                              SURVEILLANCE

    Hurricane Katrina has had a devastating economic impact. Nine 
refineries in the Gulf of Mexico have been damaged beyond immediate 
repair and critical petroleum supplies have been lost. Prior to 
Hurricane Katrina, the U.S refineries had already been running at 
maximum capacity for years, struggling to keep up with rising gasoline 
demand. This huge natural disaster in a key refining region only 
further exacerbated an already growing problem.
    The NYMEX Market Surveillance staff routinely follows trends in the 
cash markets, focusing on whether the futures markets are converging 
with the spot physical market as the NYMEX contract nears expiration. 
In light of the market uncertainties that resulted from hurricane 
Katrina, the NYMEX staff also monitored the supply and demand 
fundamentals in the underlying cash market to ensure that NYMEX prices 
reflect cash market price movements, that there are no price 
distortions and no market manipulation.
    After analyzing events and developments over the past week, NYMEX 
staff believes that price increases experienced were due to fundamental 
market factors tied to supply disruptions in the wake of hurricane 
Katrina. The NYMEX system worked according to design, and added a level 
of economic stability to the situation by providing a viable price 
discovery and risk management forum.

                              SPECULATORS

    It is widely, yet inaccurately, theorized that speculators can 
drive prices up. Placing blame on speculators may grab the attention of 
the media, but does not accurately reflect the realities of how markets 
work. With hundreds of commercial participants and instantaneous price 
dissemination, any "speculative" price would be met with an equally 
strong "commercial" reaction. If markets move in a direction 
inconsistent with actual market factors, there is a vast number of 
participants including energy producers, wholesalers, retailers, and 
government agencies that have comparable access to information. These 
participants will respond to ensure that prices rapidly return to where 
the industry consensus believes they should be.
    Speculators do exist and they actually play a valuable, even 
necessary role in the market. They add liquidity to the market and 
enable commercial traders to get in and out of the market when 
necessary. By the nature of their role, speculative traders seek to 
take advantage of price trends, but because they lack the real product 
to back up their investment, they cannot control the price. They create 
virtually no impact on daily settlement prices, the primary benchmark 
used by the marketplace.
    The Exchange has been scrutinized in the past on the role of hedge 
fund participation in causing market volatility. The effects of 
hurricane Katrina further emphasize the minimal impact hedge funds and 
speculators have on futures prices when compared to the real impacts of 
true market factors. hurricane Katrina is a natural disaster that 
severely disrupted the U.S. supply system and in effect drove prices 
higher.
    Hedge funds do not account for anywhere near enough volume to 
affect prices.
    According to a NYMEX study on the participation of hedge funds in 
the energy markets over a one year period beginning in January 2004, 
hedge funds only accounted for 4.6% of overall futures volume. Of this 
total, the crude oil futures market had 3.07% hedge fund participation 
and, its products, heating oil and unleaded gasoline, had 3.62% and 
3.26% hedge fund participation, respectively.

                        MARKET IMPACT OF KATRINA

    NYMEX directly felt the disruptive effects of Katrina in our energy 
futures markets. The Exchange experienced several unprecedented market 
events in the aftermath of Katrina. Significant price moves occurred in 
the energy complex on Sunday evening during the NYMEX ACCESS 
' trading session which commenced at 7:00 PM. During this 
session (which is effectively the commencement of the Monday business 
day) gasoline moved upward due to severe concerns around the immediate 
and longer term effect to refineries in Louisiana, as well as pipeline 
distribution systems in the region.
    During regular trading hours on Tuesday, August 30, the September 
2005 unleaded gasoline contract traded to its maximum upward price 
limit, resulting in a temporary trading halt. Exchange rules impose a 
price fluctuation limit of $0.25 per gallon of unleaded gasoline above 
or below the previous day's settlement price. When that limit is hit, a 
five minute temporary trading halt is triggered. This limit was reached 
last Tuesday when the September 2005 contract traded at $2.31. In 
accordance with NYMEX Rules, the market was halted at 11:15 AM and re-
opened after 5-minutes with an expanded limit of $0.50 cents above the 
previous day's settlement.
    In response to the price volatility, NYMEX increased margins on 
several occasions for a variety of the energy futures contracts, 
including gasoline and crude oil. Margin is the money or collateral 
deposited with the clearinghouse to protect the clearinghouse against 
loss on open futures or options positions. In all cases, NYMEX required 
additional margin to maintain the integrity of the clearinghouse. 
Margin is vital to ensuring the financial integrity of the Exchange and 
provides the clearinghouse with the ability to protect customers 
against counterparty credit risk. On August 30, 2005, NYMEX managed and 
cleared the greatest single intra-day variation margin call scenario, 
when it moved nearly $2 Billion.
    During the August 30 trading session, NYMEX set daily volume 
records for overall Exchange volume and for gasoline and crude oil 
futures, as well as for the Exchanges electronic clearing platform 
NYMEX Clearportsm. The following day, August 31, Exchange-wide options, 
NYMEX Division options, and NYMEX ClearPortsm clearing once again 
reached record volumes. These record volume numbers, clearly reflect 
NYMEX's importance as a transparent trading forum where customers can 
effectively manage their price risk. It is precisely during such times 
of market volatility and uncertainty that the Exchange's vital role in 
facilitating price discovery and risk management is most crucial to our 
customers.
    During the entire week following hurricane Katrina, NYMEX 
Compliance and CFTC officials have had a heightened presence on the 
trading floor overseeing all markets. All activity has been thoroughly 
reviewed utilizing all available electronic tools to detect any abusive 
activities.

                               CONCLUSION

    At all times during this period of extreme uncertainty in the 
market, NYMEX has been the source for transparent prices in the energy 
markets. Our price reporting systems to the world's vendors have worked 
flawlessly and without delay. Our trading systems during regular 
trading hours and during after hours trading on our electronic 
platforms have performed flawlessly.
    Even though as consumers we may not like the result, the NYMEX 
marketplace performed its responsibility to create open, competitive 
and transparent energy pricing. We can only imagine the market 
uncertainty and further devastation to consumers if NYMEX were unable 
to perform its duty and prices were determined behind closed doors.
    I thank you for the opportunity to share the viewpoint of the New 
York Mercantile Exchange with you today.

    Chairman Barton. Thank you, Mr. Newsome.
    We now want to hear from Mr. Cooper. And Mr. Cooper is the 
Executive Director of the Association of Oil Pipelines. You are 
recognized for 7 minutes, sir.

                 STATEMENT OF BENJAMIN S. COOPER

    Mr. Benjamin Cooper. Thank you, Mr. Chairman. I am Ben 
Cooper with the Association of Oil Pipelines, a nonprofit trade 
association of oil pipelines. We very much appreciate the 
opportunity to be here today. I filed a full statement with the 
committee and will summarize here, and I will give you the 
short summary first.
    Oil pipelines affected by Hurricane Katrina were rapidly 
restored to service, are now in service, and are able to carry 
oil from imports, offshore platforms, and refineries that 
provide supply. Second, oil pipeline transportation rates are a 
few cents per gallon and have not changed during the hurricane, 
so oil pipeline rates have had no role in the recent petroleum 
price increases.
    Hurricane Katrina affected the operations of several major 
oil pipelines and facilities in the gulf coast. Today, the 
capacity of these pipelines has been substantially restored. 
The good news is that all of these pipelines weathered the 
hurricane with little damage and no spills. However, in the 
aftermath of the hurricane they were taken out of service, 
among other things, by the loss of grid electric power. Oil 
pipelines operate using large electric pumps. The electricity 
needed to run even one pump is enough to supply a small town.
    After the hurricane, transmission and generation in south 
Louisiana and Mississippi were shut down, yet 3 days later our 
pipelines began to come back on line. Within 6 days, most were 
at or could anticipate full operation. The extraordinary 
efforts of pipeline employees, of the employees of the electric 
utility companies that supply power to these pipelines, and of 
some very dedicated public servants has restored the capacity 
of these pipelines. One pipeline operator, for example, located 
several large, many large portable generators all over the 
country, and with the help of the Department of 
Transportation's Pipeline and Hazardous Materials Safety 
Administration, moved them to the affected areas to enable key 
pumps to restart. Another operator actually rewelded bypass 
lines to allow pumps on either side of a shut-in facility to 
operate to restore partial service.
    Pipelines are motivated to get their systems operating as 
soon as possible. The interests of the public and the pipelines 
are aligned in this. Of course, the shutoff of major offshore 
platforms and refining capacity in the storm's wake means that 
supply may still be affected even after the pipeline 
transportation system is fully restored. But when the supply 
does become available, oil pipelines will be ready to transport 
it.
    Let me talk about oil pipeline rates, because we have been 
asked to address whether oil pipeline companies have 
contributed to the sudden increase in gasoline prices by 
raising the rates charged for transportation. The facts are 
that pipeline rates did not change during the past week. The 
Federal Government regulates the rates of interstate oil 
pipelines. We are the only part of the petroleum supply system 
that is under Federal regulation.
    Our member companies deliver petroleum safely to nearly 
every region in the United States for a few cents a gallon. A 
typical rate for transport of petroleum product from the gulf 
coast to the Southeast is about 2 cents a gallon, to the 
Northeast about 3 cents a gallon, and to Chicago for about 2\1/
2\ cents a gallon. Oil pipelines provide transportation 
services to customers. The customers are the ones who decide 
what to ship, where to ship, and when to ship. The decision of 
how much to ship of each commodity and to which destination is 
made by our shipper customers, not by pipeline operators.
    I would like to share a couple of lessons at least for our 
industry from this experience. Federal policy should assign a 
leadership role from within the Federal family to address oil 
pipeline problems during these events. In the wake of Hurricane 
Katrina, DOT's Pipeline and Hazardous Materials Safety 
Administration performed highly useful services in coordinating 
and addressing bottlenecks as oil pipeline operators sought to 
locate and deliver emergency equipment and specialized 
generators to particular pump stations.
    The Pipeline and Hazardous Material Safety Administration 
is the Federal agency most knowledgeable about oil pipelines 
and is an excellent choice for the role of assisting oil 
pipelines during emergencies. Legislation may be required to 
authorize this.
    Second, restoration of grid electric power is absolutely 
critical to the resumption of pipeline service and needs to 
receive the highest priority during these events. We have a new 
appreciation of the interdependency of pipelines with electric 
power. The Federal Government should be doing everything in its 
power to assist the electric utility industry generally and 
utilities individually to harden facilities to overcome threats 
and to rapidly recover when power is lost despite all efforts.
    A final note. Today oil pipeline capacity is near full 
under normal conditions. Oil pipeline infrastructure will soon 
require expansion to meet the needs of consumers, to 
accommodate changing supply patterns, for example, such as the 
growth of Canadian tar sands production, to meet stricter 
requirements for product quality such as ultra load sulfur 
diesel fuel, to meet stricter requirements for product 
composition such as boutique fuels, and to provide 
infrastructure security.
    A support of public policy, including continuation of 
flexible rate treatment, permitting assistance, and creative 
approaches to acquiring pipeline rights-of-way will be required 
to ensure that oil pipeline expansions are made when needed, 
are there to meet expectations that the committee may have 
about refinery capacity.
    AOPL looks forward to working closely with the Department 
of Transportation, the Federal Energy Regulatory Commission, 
this committee, and the rest of Congress to ensure that the oil 
pipeline industry is able to meet the challenges in the future, 
and we thank you for our opportunity to appear today.
    [The prepared statement of Benjamin S. Cooper follows:]

     Prepared Statement of Benjamin S. Cooper, Executive Director, 
                     Association of Oil Pipe Lines

                              INTRODUCTION

    My name is Benjamin S. Cooper. I am the Executive Director of the 
Association of Oil Pipe Lines. AOPL is a 501 (c) (6) non-profit trade 
association of interstate oil pipelines, which includes pipeline 
transporters of crude oil, refined petroleum products, liquefied gases 
and anhydrous ammonia. Our Association's 53 members transport about 85 
percent of the crude oil and refined petroleum products delivered by 
pipelines. AOPL members include pipelines that transport crude oil from 
production and import points to refineries and pipelines that transport 
the refined products produced in those refineries to end users and 
distributors (retailers, wholesalers, airports, railroads, etc.). 
AOPL's membership is comprised of domestic U.S. oil pipeline companies 
and two Canadian oil pipeline companies.
    My testimony will first discuss the impact that hurricane Katrina 
has had on oil pipeline operations and lessons learned during the past 
week. I then will cover the role played by oil pipelines in petroleum 
supply, describe government oversight of that role and sketch the 
challenges faced by the industry in providing sufficient capacity to 
meet our nation's current and future petroleum transportation needs.
Impact of Hurricane Katrina
    As the Committee knows, the major impact of the hurricane was felt 
in Louisiana and Mississippi. Four effects of the storm have been 
important to oil pipelines with operations in these states:

 The lives of local pipeline personnel have been severely disrupted;
 Key pipeline facilities have been flooded;
 Electric power has not been available; and
 The supply of crude oil and products to ship in pipelines has been 
        disrupted
    The major affected pipelines have been Colonial and Plantation, 
which together account for a major share of the refined petroleum 
products transported along the eastern seaboard, as much as 60% of the 
supply in some areas of the southeast. Both pipelines were shut down in 
an orderly way to maintain product quality and pipeline integrity in 
anticipation of the storm. They then were prevented from restarting by 
the severity of the storm's impact, in particular, by the loss of 
electric power. Both companies were able to resume limited service on 
Wednesday, August 31, when they were able to arrange for alternative 
power sources. As of September 3, both were receiving some utility 
electric power. Colonial was running at 80% of capacity, and Plantation 
was running at 95% of capacity.
    Capline, a crude oil pipeline that transports crude oil from the 
Gulf of Mexico to refineries in the mid west, and one of the pipelines 
that would carry oil from the Louisiana Strategic Petroleum Reserve 
sites, was also shut down. As of September 3, service on Capline was 
restored to 80% of capacity after the integrity of the pipeline was 
established and utility electric supply to some pumps was re-
established.
    Dixie, a propane pipeline serving markets in the Southeast could 
not reopen after the storm due to loss of power. Dixie has also 
partially resumed service with the restoration of some utility electric 
power, and as of September 3 was operating at 50% of capacity.
    Finally, Louisiana Offshore Oil Pipeline, which operates facilities 
for receipt and transport of crude oil imported in large tankers was 
also shut down, but as has since resumed operation at 75% of capacity.
    The common denominator in these shut downs is the location of key 
facilities in areas in the direct path of the storm where flooding was 
extensive and electric power was out for considerable periods of time. 
All have substantially recovered as facilities formerly isolated by 
flooding are reactivated and electric power comes on line. The impact 
of the shut down of Colonial and Plantation continues to be felt in 
areas where alternative supply, for example, from imports or waterborne 
carriers, is not feasible. Of course, the massive shut down of refining 
capacity in the storm's wake meant and will mean for some time that 
quantities of supply from these sources will be limited, even after the 
transportation system is fully restored.
    Some questions have arisen regarding whether these pipeline 
companies were economically advantaged by the hurricane and contributed 
to the sudden increase in gasoline prices by raising the rates charged 
for transportation. The facts are that pipeline rates did not change 
during the past week. For example, Colonial Pipeline's tariff from 
Pasadena, Texas to Atlanta Georgia (82.82 cents/barrel--less than 2 
cents/gallon) was set on July 1st and remains unchanged. In fact, 
several pipeline companies were negatively impacted by the loss of 
revenue and extraordinary costs incurred to bring their operations back 
in service as soon as possible.

Lessons Learned from Hurricane Katrina
 The decision by the EPA to act quickly to waive temporarily area 
        specific fuel requirements under the Clean Air Act in the 
        widest possible area allows the petroleum distribution system 
        to make the most effective use of existing supplies. Several 
        pipelines serving the Midwest immediately began receiving 
        nominations of alternative gasolines to move north and east. 
        This was an important action that was taken in a timely manner.
 Federal policy should assign a leadership role from within the 
        federal family to address oil pipeline problems during these 
        events. In the wake of hurricane Katrina, DOT's Pipeline and 
        Hazardous Materials Safety Administration performed highly 
        useful services in coordinating with the Federal Emergency 
        Management Agency and addressing bottlenecks as oil pipeline 
        operators sought to locate and deliver emergency equipment and 
        specialized generators to particular pump stations. PHMSA is 
        the federal agency most knowledgeable about oil pipelines, and 
        is an excellent choice for the role of assisting oil pipelines 
        during emergencies.
 Hoarding and panic buying exacerbate petroleum fuel shortages. 
        Officials need to be active early and continuously to 
        discourage, to the extent possible, these reactions. In 
        addition, dissemination of false information by the media can 
        make hoarding and panic buying worse and generally has a 
        negative impact on markets.
 Restoration of grid electric power is critical to the resumption of 
        pipeline service and should receive the highest priority during 
        these events. The federal government should be doing everything 
        in its power to assist the electric utility industry generally 
        and utilities individually to enhance the ability of utilities 
        to overcome threats and recover rapidly where power is lost 
        despite all best efforts.
 Finally, hurricane Katrina provides a sobering data point in the 
        nation's understanding of the interdependency of the energy 
        supply system and a highly painful real world experience with 
        the impact of a loss of key energy services and infrastructure 
        that approximates many homeland security emergency scenarios.

The Role of Oil Pipelines in the U.S.
    Oil pipelines provide about \2/3\ of the petroleum transportation 
in the U.S., measured in barrel miles. Unlike natural gas, which can 
only be transported by pipeline, alternatives to petroleum pipeline 
transportation exist and include tankers, barges, rail and trucks. 
However, each of these alternatives has significant limitations, and, 
as a result, pipelines are the primary method of bulk transportation of 
petroleum over medium to long distances. It is difficult to imagine how 
our transportation network, which is 95% powered by petroleum, could 
operate without oil pipelines.
    Pipeline transportation has dual advantages of efficiency and 
safety. About 17% of the annual ton-miles of our nation's freight are 
carried by petroleum pipelines, at a cost of about 2% of the total U.S. 
freight bill. Pipelines share with tanker vessels the safest record in 
petroleum transportation, safer than barge, rail or truck. Deaths and 
injuries from petroleum pipeline transportation are rare and the 
environmental impact of pipeline transportation is less than any of its 
alternatives. Oil pipelines are able to deliver petroleum safely to 
nearly every region of the U.S. for a few pennies per gallon. A typical 
rate to transport petroleum product from the Gulf Coast to the 
Southeast is about 2 cents per gallon, to the Northeast is about 3 
cents per gallon and to Chicago is about 2.5 cents per gallon.

Economic Regulation of Oil Pipelines
    The federal government regulates the economics of interstate oil 
pipelines--in fact oil pipelines are the only part of the petroleum 
supply system that is under federal economic regulation.
    The Federal Energy Regulatory Commission administers the provisions 
of the Interstate Commerce Act to ensure that interstate oil pipelines:

 Function as common carrier providers of transportation to any 
        qualified shipper;
 Charge no more than publicly available rates filed in advance with 
        the FERC, which are typically limited to a few cents per 
        gallon;
 Assign space on the pipeline based on monthly nominations from all 
        interested shippers and prorate access to that space among all 
        applicants in a posted, non-discriminatory way when the line is 
        full;
 Exercise no undue discrimination among shippers;
 Maintain confidentiality of shipper records and not share information 
        of any shipper with any other shipper; and
 File annual reports on pipeline company income and cost data with the 
        FERC that are available to the public.
    Oil pipelines provide transportation services and charge fees that 
do not fluctuate with the price of the products that are transported. 
Because oil pipelines do not own the products that they transport, they 
do not benefit from any product price increases. In fact, refined 
products pipelines are generally adversely impacted by high commodity 
prices, as higher prices increase power costs and marginally result in 
lower consumption levels. Even when an oil pipeline is an affiliate of 
a major integrated oil company, the Interstate Commerce Act and FERC 
oversight establishes a wall between the pipeline portion of the firm 
and the owners' transportation operations.

Oil Pipeline Transportation Rates
    Typical oil pipeline rates range from 1 to 5 cents per gallon and 
are independent of the value of the oil being transported. Thus the 
revenue received by the oil pipeline is a few cents per gallon, 
regardless of the sale price of that gallon, whether that sale price is 
$1.00, $2.00, $3.00 or more.
    Oil pipeline rates are posted in FERC-filed tariffs that normally 
take effect after 30 days and are subject to protest during that 
period. Oil pipeline rate changes must be justified using one of four 
rate mechanisms: indexation, a settlement rate agreed to by all 
affected shippers, market-basis or cost-of-service. In calendar years 
2003 and 2004, there were 1096 oil pipeline tariff rate filings. Of 
those, 937 (88%) were index-based, and 159 were justified on another 
basis. Of the 159 others, roughly 49% were market-based, 30% were 
settlement rates, 14% resulted from pervious settlements and 7% were 
cost of service based.
    Most oil pipeline tariffs cover a specific group of products. For 
instance, a ``Products Tariff'' would apply the same tariff rate to 
gasoline, diesel, jet fuel and kerosene product shipments between the 
same points. For instance, Colonial's tariff defines ``Petroleum 
Products'' to mean ``gasolines and petroleum oil distillates'', which 
would include jet fuel, diesel fuel and heating oil. There are also 
crude oil tariffs, propane tariffs, etc.
    Pipeline tariffs do not tend to change frequently and, unlike 
commodity prices, are not adjusted as a result of short-term market 
circumstances. Since nearly 90% of tariffs are indexed, most 
adjustments are done on an annual basis and occur on July 1 of each 
year when the new FERC index takes effect. Even market based rate 
changes occur infrequently, with some changes actually rate decreases 
to meet competitive market conditions.
    Pipelines also file rules and regulations tariffs that set forth 
the pipeline's conditions of service. These filings explain such things 
as the pipeline's tendering process, minimum batch size, allocation 
policy and product specifications. Such rules and regulations are 
required to be administered in a non-discriminatory manner. A system of 
checks and balances on oil pipeline behavior operates through the 
ability of any shipper to protest any alleged deviation from FERC 
requirements.
    Oil pipelines are providers of transportation services for 
generally fixed fees for our customers, who determine what to ship, 
where to ship or when to ship. The decision on how much to ship of each 
commodity and to which destination is made by our shipper customers. 
Pipelines then ship multiple products on a regular cycle of products. 
On a normal basis, we provide transportation for all products to all 
destinations on a regular cycle.
    The oil pipeline business is volume driven, and the incentive for 
pipelines from both a revenue and customer relations standpoint is to 
transport as much product as possible. Any inference that oil pipeline 
operators are purposely contributing to product shortages by reducing 
or shutting down capacity to cause higher product prices is simply 
false. In fact, the oil pipeline industry's drive to transport more 
volumes contributes to market liquidity, which on the margin should 
contribute to more competition and lower prices. The extraordinary 
efforts of our member companies to return their systems to service as 
fast as possible in the aftermath of hurricane Katrina provides ample 
evidence of the pipeline industry's motivation and commitment to resume 
business and recognition of the critically important role played by 
pipelines in enabling adequate supplies of petroleum products to reach 
destination markets..
    The oil pipeline industry is not a large generator of revenue by 
comparison with other sectors of U.S. industry, including other sectors 
of the energy industry. For 2003 (the most recent data available) the 
entire FERC-regulated oil pipeline industry received gross revenue of 
$7.7 billion to deliver 13.2 billion barrels of crude oil and refined 
petroleum products to its various customers. A single company's revenue 
in many other sectors of the economy would far exceed the oil pipeline 
industry's revenue as a whole
    Pipeline ownership is diverse, with several forms of ownership as 
detailed below:

 Major integrated oil companies (for example: ExxonMobil Pipeline 
        Company, Marathon Pipe Line LLC, Chevron Pipeline Company, 
        Shell Pipeline Company);
 Joint venture pipelines owned by shippers and other pipeline 
        companies (for example: Colonial, Explorer, Trans-Alaska 
        Pipeline, Capline); and
 Independents engaged primarily in oil pipeline transportation 
        (Buckeye, TEPPCO, KinderMorgan, Enbridge, Plains All American).
    A substantial percentage of the pipelines are independently owned 
and operated, with the current trend towards increased independent 
ownership of oil pipeline assets. Major integrated oil company 
ownership of oil pipelines has been steadily decreasing in recent 
years, with major oil companies now representing a minority of oil 
pipeline asset ownership.
    In sum, the amount charged to transport oil by pipeline is 
controlled by either regulation or market forces and is quite small in 
relation to the value of oil itself. The cost of transporting oil and 
petroleum products by pipeline has a minimal, if any, impact on 
consumer prices.

Oil Pipeline Capacity
    While the cost of transporting oil by pipeline has a minimal impact 
on consumer prices, access to adequate pipeline capacity can make a 
substantial difference in consumer prices. As we have seen following 
hurricane Katrina, when adequate pipeline capacity is not available, 
shortages, price increases and price volatility for petroleum consumers 
are the result. Even before hurricane Katrina, we saw this, for 
example, in Arizona in 2004 and in the Midwest in 2003 when key 
pipelines were out of service.
    The U.S. oil pipeline infrastructure is a large system created over 
many years. Volumes moving on those pipelines grow only in response to 
increases in oil demand, that is, a few percent a year. Volumes can 
sometimes also increase or decrease dramatically due to changes in 
supply patterns such as refinery closures, new crude supplies and other 
significant changes. Additions to capacity often present large hurdles 
to individual companies in terms of capital requirements and perhaps 
more importantly, acquisition of right of way and required permitting. 
The current system, constructed principally in the 1950s and 1960s with 
excess capacity for that time, is quite close to full capacity at 
today's levels of domestic petroleum consumption, and pipelines have 
had to adjust to a just-in-time inventory mentality and to seasonal 
fuel switches that put additional strain on the system.
    Oil pipelines are another component of the U.S. energy 
infrastructure that will require expansion in coming years to meet the 
needs of consumers. A supportive public policy, including continuation 
of the recent trend to market based and indexed rate treatment, 
permitting assistance and creative approaches to rights of way, will be 
required to ensure that oil pipeline expansions are made when needed.

Key Aspects of Oil Pipeline Operations
    Oil is moved through pipelines by large pumps powered by 
electricity. Oil pipeline companies are large consumers of base-load 
electricity. Pumps are located at the origin point of the pipeline and 
at intervals typically 30 to 50 miles apart, depending on terrain and 
the location of major facilities for pickup or delivery of oil. For a 
pipeline of significant size, pumps at these stations of 3,000-5,000 
horsepower are typically used, requiring megawatt quantities of 
electric power. The only feasible method for delivery of electricity in 
these quantities is through connection to the utility grid.
    Oil pipelines maintain tanks at points along the line to facilitate 
the scheduling of pipeline transportation. For refined product 
pipelines, the need for tankage is a significant issue as the number of 
distinct products shipped increases. Pipeline transportation tanks hold 
oil that is owned and controlled by shippers. The volume in these tanks 
typically only represents a limited supply in relation to overall 
petroleum demand.
    I will be glad to try to answer any of your questions, and our 
Association would be pleased to work with the Committee on any follow 
up from this hearing.

    Chairman Barton. We thank you, sir. We now want to hear 
from Mr. Bill Douglass, who is here representing the National 
Association of Convenience Stores and the Society of 
Independent Gasoline Marketers of America. You are recognized 
for 7 minutes. Welcome.

                   STATEMENT OF BILL DOUGLASS

    Mr. Douglass. Good evening, Mr. Chairman, and members of 
the committee. As you said, my name is Bill Douglass. I am 
Chief Executive Officer of Douglass Distributing Company 
headquartered in Sherman, Texas. Thank you for inviting me to 
testify before you today on behalf of NACS and SIGMA
    On the impact of Hurricane Katrina on the Nation's 
wholesale and retail fuel supply and prices. I will concentrate 
my testimony on my personal experiences over the past 10 days 
as a marketer in Texas and on the experiences of fellow 
marketers and other areas during the past 10 days. In the 
interest of time, I will have to move through the charts I 
brought with me this afternoon fairly quickly.
    The first chart depicts the daily movements of wholesale 
prices in the Dallas-Fort Worth market last week. These 
wholesale prices jumped an average of over 11 cents per day, 
for a total increase between Monday August 29 and Friday 
September 2 of 44 cents a gallon.
    The second chart shows how my company reacted to these rack 
price increases in terms of our retail outlet prices. As you 
can see, our retail prices in general rose by a similar and in 
some cases lower amount than our wholesale costs.
    Chart 3 provides a broader look at wholesale prices in the 
Dallas-Fort Worth market last week. My company's experience was 
not unique. These prices happen to be on branded racks, and 
they went all the way to $3.10 when you add the tax.
    Chart 4 summarizes the changes in rack pricing in each 
region of the country broken down by pad.
    Chart 5 provides a look at wholesale prices, that is, rack 
prices, last week in five randomly chosen cities: Atlanta, 
Boston, Dallas-Fort Worth, Detroit, and Philadelphia. All of 
these cities witnessed substantial increases in rack gasoline 
prices last week, and these figures do not include the taxes or 
fees or freight.
    There has been widespread media reports and even some 
comments by congressional leaders of gasoline price gouging by 
gasoline marketers in the wake of Katrina. I cannot assure the 
committee that isolated incidents of profiteering for personal 
gain in the midst of this crisis did not occur last week. It is 
important for this committee to understand, however, before you 
rush to judgment on whether my or other retailers actions were 
proper, how I and other retailers establish our retail prices 
in a market with escalating wholesale prices.
    Simply stated, I try to set my retail prices on the basis 
of the replacement costs of the gallons I have at my outlets. 
When the wholesale prices are rising, I know the next load of 
gasoline I purchase from my supplier will cost me substantially 
more than my last load. My sales must generate sufficient cash 
for me to make the next purchase and pay my supplier.
    If the only thing you knew about my company was that I 
raised retail gasoline prices by over 40 cents per gallon last 
week, would you suspect that I was attempting to profit from 
this crisis? Maybe. But based on the information I have given 
you today, I trust that you would reach a different conclusion 
after you have investigated the facts. I urge this committee 
and your colleagues to gather the facts on last week's gasoline 
supply and retail pricing situation before reaching conclusions 
about my actions or the actions of other motor fuel marketers.
    The enactment of the Energy Policy Act of 2005 is a good 
first step toward addressing the Nation's problems of shrinking 
refining capacity and a trend toward higher gasoline prices. I 
commend you, Mr. Chairman, and your colleagues for taking the 
lead in making this important legislation a reality after 5 
long years. Specifically, your provisions gave the 
Environmental Protection Agency the statutory authority to 
waive certain gasoline and diesel fuel controls last week, 
providing the market with much needed flexibility to move 
product between markets to mitigate the supply disruptions. 
This is an immediate example of the positive impact this energy 
bill has had on the market. There are other important 
provisions in the 2005 energy bill that will assist in 
expanding domestic refining capacity and in mitigating gasoline 
supply dislocations and price spikes.
    NACS and SIGMA urge this committee and this Congress to 
build on the progress made through the Energy Act of 2005 in 
the following ways: Assure prompt implementation of EPAC's 2005 
provisions, including the joint Environmental Protection Agency 
and Department of Energy study on increasing gasoline and 
diesel fuel supplies while protecting the environment. 
Streamline permitting and siting procedures for expanding 
existing domestic refining capacity, and for the construction 
of new grassroots refineries. Adopt additional incentives to 
expand our domestic refining capacity. And, investigate the 
pricing policies of credit card companies, whose charges make 
up an ever increasing portion of the price of gasoline at 
retail outlets, particularly when gasoline prices are high.
    Thank you for inviting me to testify here today on this 
important topic, and I would be pleased to answer any questions 
my testimony may have introduced.
    [The prepared statement of Bill Douglass follows:]

Prepared Statement of Bill Douglass, Chief Executive Officer, Douglass 
     Distributing Company Representing The National Association of 
Convenience Stores and The Society of Independent Gasoline Marketers of 
                                America

                            I. INTRODUCTION

    Good afternoon, Mr. Chairman and members of the Committee. My name 
is Bill Douglass. I am Chief Executive Officer of Douglass Distributing 
Company, headquartered in Sherman, Texas. My company operates 14 
convenience stores and supplies gasoline and diesel fuel to 165 retail 
locations throughout the Dallas-Fort Worth area.
    I appear before the Committee today representing the National 
Association of Convenience Stores (``NACS'') and the Society of 
Independent Gasoline Marketers of America (``SIGMA'').

                          II. THE ASSOCIATIONS

    NACS is an international trade association comprised of more than 
2,200 retail member companies operating more than 100,000 stores. The 
convenience store industry as a whole sold 142.1 billion gallons of 
motor fuel in 2004 and employs 1.4 million workers across the nation.
    SIGMA is an association of more than 240 independent motor fuel 
marketers operating in all 50 states. Last year, SIGMA members sold 
more than 58 billion gallons of motor fuel, representing more than 30 
percent of all motor fuels sold in the United States in 2004. SIGMA 
members supply more than 35,000 retail outlets across the nation and 
employ more than 350,000 workers nationwide.
    Together, NACS and SIGMA members sell approximately 80 percent of 
the motor fuel retailed in the United States each year.

                       III. SUMMARY OF TESTIMONY

    Thank you for inviting me to testify before you today on the impact 
of Hurricane Katrina on the nation's wholesale and retail motor fuel 
supply and prices. The past ten days have been some of the most 
challenging in my thirty years as a motor fuel marketer and I welcome 
this opportunity to share my personal experiences, and the experiences 
and impressions of other NACS and SIGMA members with whom I have 
talked, with you.
    As an initial matter, I would like to express my personal sympathy, 
and the sympathy of our entire industry, for the victims of Hurricane 
Katrina. Individually and collectively, our industry shares the 
suffering of our fellow citizens and will do all in our power to 
alleviate this suffering at the earliest possible date.
    My testimony will touch on three broad topics today. First, I will 
provide the committee with as much information as I have available on 
the impact of Hurricane Katrina on gasoline supplies and prices. 
Specifically, I will share with you my personal experiences over the 
past ten days and summarize, to the extent possible, the information I 
have received from my fellow retailers.
    Second, I am here to respond to allegations that I, and my 
industry, have taken advantage of this tragedy by ``gouging'' our 
customers by raising retail motor fuel prices. Such allegations are 
personally offensive to me, and in general reflect a lack of 
understanding of the market events that have led to the gasoline and 
diesel fuel price spikes of the last ten days. While it is certainly 
possible that some ``bad actors'' have sought to exploit this crisis 
for personal gain, I can assure you that their actions are not the 
actions of the vast majority of our industry.
    Third, my testimony contains recommendations to the committee on 
steps that should be taken to lessen the likelihood that such supply 
disruptions and wholesale and retail price spikes will occur in the 
future. Unfortunately, these recommendations are remarkably similar to 
the steps NACS and SIGMA have been urging public policymakers to take 
for the last ten years. While the enactment of the ``Energy Policy Act 
of 2005'' earlier this summer was a good first step towards 
implementing some of these recommendations, much remains to be done.

IV. IMPACT OF HURRICANE KATRINA ON WHOLESALE AND RETAIL GASOLINE PRICES

    For much of the eastern two-thirds of the nation, the impact of 
Katrina on wholesale and retail gasoline prices could not have been 
more immediate and profound. I will leave it to other witnesses here 
today to discuss the impact Katrina had on crude oil production and 
imports, crude oil movements from production to refineries, domestic 
refining capacity, and the movement of finished gasoline and diesel 
fuel throughout the country via pipeline, barge, and truck. That is not 
my area of expertise. Instead, I will concentrate my testimony on my 
personal experiences over the past ten days as a marketer in Texas, and 
on the experiences of fellow marketers in other areas over the past ten 
days.
    It will be helpful for me to use several charts to graphically make 
these points. This first chart (Chart 1) depicts the daily movements of 
wholesale prices in the Dallas/Fort Worth market last week. This is the 
``rack,'' or wholesale price--the price at which my suppliers are 
willing to sell me, and other marketers, truckloads of 87 octane 
conventional gasoline. As you can see, these wholesale prices increased 
daily, and dramatically, last week. On August 28th, before Katrina 
struck, my wholesale gasoline cost was $2.36 per gallon including 
federal, state, and local taxes. Early last week, as Katrina struck the 
Gulf Coast, these wholesale prices jumped an average of over eleven 
cents per day, for a total increase between Monday, August 29th and 
Friday, September 2nd of 44 cents per gallon.
    I must point out that I am a branded marketer--the stations I own 
and supply fly the flag of a major refiner. The wholesale prices in 
this chart reflect branded rack prices, not unbranded, or independent, 
rack prices. During this same five day period, wholesale prices for 
these unbranded stores rose 73 cents per gallon, or over 18 cents per 
day.
    This second chart (Chart 2) shows how my company reacted to these 
rack price increases in terms of our retail outlet prices. As you can 
see, our retail prices in general rose by a similar, and in some cases, 
lower amount than our wholesale costs. In short, my company reacted 
primarily to changes in wholesale price increases when determining 
where to set our retail prices. In some cases, because of competition 
from other retailers in our market area, we did not pass the entire 
increase in rack prices through to retail. On these days, virtually 
every gallon we sold from our stations resulted in no or negative 
profit margins for our company, once our operating costs are taken into 
account.
    My personal experience is similar to the experiences of other 
retailers across the nation. NACS and SIGMA obtained rack pricing data 
from the Lundberg Survey, an independent report on wholesale motor fuel 
prices, for several major metropolitan areas for the past two weeks. 
This chart (Chart 3) provides a broader look at wholesale gasoline 
prices in the Dallas-Fort Worth market last week.
    The next two charts (Charts 4 & 5) indicate that my experience in 
Texas was not unique. Chart 4 summarizes the changes in rack pricing in 
each region of the country, broken down by PADD. As you can see, 
wholesale prices were up significantly last week in all areas of the 
country. Chart 5 provides a look at wholesale rack prices last week in 
five randomly chosen cities--Atlanta, Boston, Dallas/Fort Worth, 
Detroit and Philadelphia. All of these cities witnessed substantial 
increases in rack gasoline prices last week.
    I have used these charts to provide you with detailed evidence that 
Katrina had a widespread impact on gasoline prices in much of the 
country over the past two weeks--not just in the areas devastated by 
the storm itself. Because crude production was reduced, refineries 
crippled, and gasoline pipelines were taken out of service, gasoline 
supply shortages began to occur, first in areas close to the areas hit 
by Katrina and rapidly moving outwards to areas of the country served 
directly or indirectly by the production, refining and transportation 
hub of the nation's Gulf Coast.
    These statistics confirm that retail gasoline price increases last 
week were justified by movements in the wholesale cost of gasoline. 
While two months from now hindsight may provide us with additional 
facts that will indicate that the markets could have responded to this 
supply crisis differently, as we are going through this crisis, the 
fundamental laws of economics tend to apply forcefully--if demand 
remains the same or increases and supply is reduced, prices will rise. 
This is the situation we have experienced for the last ten days.

                  V. ALLEGATIONS OF PRICE ``GOUGING''

    Last week, there were widespread media reports, and even some 
comments by congressional leaders, of gasoline price ``gouging'' by 
gasoline marketers in the wake of Katrina. I can not assure the 
committee that all of these reports are false or that isolated 
instances of profiteering for personal gain in the midst of this crisis 
did not occur last week. I wish I could.
    However, I can tell you that such actions were not the norm in our 
industry. The vast majority of gasoline marketers are fair and 
scrupulous businesses. As my testimony has shown, I personally 
responded to wholesale price hikes in my area in setting my retail 
prices. I am not aware of any credible instance in which retail price 
increases were not justified by the supply crisis faced by a retailer.
    It is important for this committee to understand how I and other 
gasoline retailers establish our retail prices in a market with 
escalating wholesale prices. Simply stated, I try to set my prices on 
the basis of the replacement cost of the gallons I have at my outlets. 
This is an important concept which may not be readily grasped. When 
wholesale prices are rising, and I know that the next load of gasoline 
I purchase from my supplier will cost me substantially more than my 
last load, my sales must generate sufficient cash for me to make that 
next purchase and to pay my supplier.
    For example, assume the gasoline at one of my retail stations cost 
me $2.00 per gallon yesterday. I know that the next gasoline truckload 
from my supplier, to be purchased tomorrow, will cost me $2.25 per 
gallon. I will, if I can based on competition in my area, set a retail 
price at my outlet today that will cover the higher price I will have 
to pay tomorrow. If I don't, I will be forced to borrow money from my 
company's banks to pay for tomorrow's gasoline. Such debt only 
increases my cost of staying in business and adds to the upward 
pressure on retail gasoline prices. It is a sound business practice for 
a retailer to price today on the replacement cost of gasoline at the 
outlet, not the cost of product actually at the outlet.
    If instances of profiteering on this tragedy have occurred, federal 
and state officials have ample legal recourse for dealing with those 
bad actors, including Section 5 of the Federal Trade Commission Act. 
Such behavior must not be tolerated now or in the future in our 
industry or any industry.
    However, just as such behavior must not be tolerated in our 
industry, neither should the media or opinion leaders react to such 
anecdotal reports by issuing blanket indictments of all motor fuel 
marketers. Such generalizations may make for good ``sound bites,'' but 
they do not reflect what is actually happening across the country and 
unfairly damage the reputations of many companies that are struggling 
to meet the challenges of the current crisis.
    If the only thing you knew about my company was that I raised by 
retail gasoline prices by over 50 cents per gallon last week, would you 
suspect that I was attempting to profit from this crisis? Maybe. But 
based on the information I have given you today, I trust that you would 
reach a different conclusion after you had investigated the facts. I 
urged this committee and your colleagues to gather the facts on last 
week's gasoline supply and retail pricing situation before reaching 
conclusions about my actions or the actions of other motor fuel 
marketers.
    As a final point with respect to retail pricing, I have one more 
chart to share with you (Chart 6). This chart outlines the approximate 
gross revenues that several different parties in the petroleum 
exploration, refining, and distribution system realize from each barrel 
of crude oil. Simply stated:

 In August 2003, the royalty owner of the crude oil received 
        approximately $4 per barrel; in August 2005, the royalty owner 
        received about $8 per barrel;
 In August 2003, the crude exploration and extraction company was 
        receiving approximately $28 per barrel of oil; in August 2005, 
        this company received about $67 per barrel;
 In August 2003, a refiner was receiving around $11 per barrel; in 
        August 2005, this company received about $27 per barrel;
 In August 2003, a gasoline retailer was receiving approximately $6 
        per barrel; in 2005, that retailer still received about $6 per 
        barrel; and,
 In August 2003, a credit card company was receiving approximately 
        $1.50 per barrel; in 2005, that company is receiving 
        approximately $3 per barrel.1
---------------------------------------------------------------------------
    \1\ All information based on publicly available sources.
---------------------------------------------------------------------------
    Based on this information, I question whether it is appropriate to 
single retailers out for pricing scrutiny.

                   VI. RECOMMENDATIONS FOR THE FUTURE

    In 1996, Tom Robinson, a former president of SIGMA, offered the 
following testimony before the Senate Energy Committee as part of a 
hearing on ``Recent Increases in Gasoline Prices.'' ``The federal and 
state governments regulate the gasoline refining and marketing industry 
with little or no thought given to costs, distribution difficulties, or 
market efficiencies. Congress must acknowledge that . . . the present 
course will lead to further market disruptions and higher gasoline 
prices at the pump.'' Mr. Robinson made that statement over nine years 
ago.
    Last year, I testified on behalf of NACS and SIGMA at a 
subcommittee hearing of this committee and stated:
          ``Our nation's gasoline and diesel refining industry is 
        shrinking at a time when consumer demand continues to rise. 
        Unless we collectively change course, domestic refining 
        capacity will be unable to keep pace with demand, gasoline and 
        diesel fuel price spikes such as the one we have experienced 
        this year will become the norm rather than the exception, and 
        our nation will become more reliant on imports of gasoline and 
        diesel fuel to meet increased consumer demand in the coming 
        years. Congress has a choice, it can either pursue policies 
        that will encourage the expansion of domestic refining 
        capacity, or it can turn its gaze overseas for our nation's 
        future gasoline and diesel fuel needs.''
    Unfortunately, both Mr. Robinson's and my predictions have come 
true. Domestic refining capacity continues to shrink, wholesale and 
retail motor fuel price spikes have become the norm rather than the 
exception, and more of our nation's gasoline needs are being met by 
foreign sources. NACS and SIGMA assert that it is time to stop talking 
about these problems and do something about them.
    In my opinion, the enactment of the ``Energy Policy Act of 2005'' 
(EPAct 2005) is a good first step towards addressing these problems. I 
commend you, Mr. Chairman, and your colleagues for taking the lead in 
making this important legislation a reality after five long years. 
Specifically, your provisions gave the Environmental Protection Agency 
the statutory authority to waive certain gasoline and diesel fuel 
controls last week, providing the market with much needed flexibility 
to move product between markets to mitigate supply disruptions. This is 
an immediate example of the positive impact this energy bill had had on 
the market.
    There are other important provisions in the 2005 energy bill that 
will assist in expanding domestic refining capacity and in mitigating 
gasoline supply dislocations and price spikes, including:

 Repeal of the reformulated gasoline program's oxygenate mandate;
 Restrictions on creation of new ``boutique fuels'' which strain 
        refining capacity and the distribution system;
 Authority for retailers to blend compliant RFGs for limited periods 
        each summer; and,
 Federal tax incentives to encourage the expansion of domestic 
        refining capacity.
    NACS and SIGMA urge this committee and this Congress to build on 
the progress made through EPAct 2005 in the following ways:

 Assure prompt implementation of the EPAct 2005 provisions outlined 
        above, including the joint Environmental Protection Agency and 
        Department of Energy Study on increasing gasoline and diesel 
        fuel supplies while protecting the environment;
 Streamline permitting and siting procedures for expanding existing 
        domestic refining capacity and for the construction of new 
        grassroots refineries;
 Adopt additional tax incentives to expand our domestic refining 
        capacity, or a federal government-led effort to site and build 
        three new 500,000 barrels per day refineries on federal lands 
        to augment domestic production;
 Encourage increased price transparency and lower price volatility in 
        the nation's gasoline futures markets by increasing the number 
        of delivery points and product types under such contracts; and,
 Investigate the pricing policies of credit card companies, whose 
        charges make up an ever-increasing portion of the price of 
        gasoline at retail outlets, particularly when gasoline prices 
        are high.
    None of these recommendations will result in a substantial short-
term increase in gasoline supplies or retail price decreases. However, 
if we do not undertake these initiatives now, we will be sure to repeat 
the experiences of the past two weeks in the future.
                            vii. conclusion
    Thank you for inviting me to testify today on this important topic. 
I would be pleased to answer any questions my testimony may have 
raised.

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    Mrs. Myrick [presiding]. Thank you, Mr. Douglass. Thank you 
very much. Mr. Smith. Welcome.

                  STATEMENT OF WILLIAM L. SMITH

    Mr. Smith. Thank you. My name is Bill Smith, and I am the 
Chief Technology Officer for BellSouth. The purpose of my 
testimony today is to address the impact of Hurricane Katrina 
on BellSouth's people and our network. I will describe the 
damage that Hurricane Katrina has caused, which has been unlike 
any other hurricane we have experienced, and I will give you a 
status of the restoration efforts.
    Given the area that we serve, BellSouth has dealt with 
hurricanes for years; however, we rarely lost operational 
status of an entire central office. Katrina has been very 
different. We have lost service at some point during the storm 
in 24 BellSouth central offices in the impacted area. The 
majority of these central offices were in the New Orleans area 
that was flooded. These central offices failed due to flooding 
and logistical problems presented by the security in the area 
and the ability to get fuel to the emergency generators.
    Our operations in Florida, Alabama, Mississippi, and 
Louisiana have all been impacted by Hurricane Katrina. In 
places like Gulfport and Biloxi and New Orleans, the impact on 
our customers, our employees, and our network have been 
catastrophic, and restoration efforts are still encumbered by 
flooding, debris, and security issues. In other areas of 
Louisiana and coastal Mississippi and Alabama, we are well 
under way in our restoration efforts and are progressing well. 
In Florida, we are actually wrapping up our restoration efforts 
and freeing up resources like generators and technicians to 
move into the areas that are still impacted.
    Let me move to the impact on our people. BellSouth has 
approximately 13,000 employees in the States of Alabama, 
Mississippi, and Louisiana, and approximately 6,500 of those 
were in the impacted area. I am pleased to say that as of today 
we have located all but 65 of those employees and we are 
working very hard to find the others.
    Immediately prior to Katrina, we took steps to ensure that 
supplies and services would be on hand. We knew that employees 
would be called upon to work around the clock, and, as Governor 
Barbour said this morning, many of our employees actually lost 
their own homes. So we established what we call BellSouth tent 
cities that we can actually house, shelter, feed our employees 
and their family, because we knew that we would be counting on 
them to operate to help us restore our network. And, in fact, 
we are currently operating six of these tent cities in the 
impacted area and serving over 8,000 meals a day to provide 
assistance for our employees and their families.
    Let me move to the impact on our network. Our network 
operations team actually started tracking Hurricane Katrina as 
early as August 23. We began making preparations for landfall 
in south Florida as a Category 1 hurricane. That actually 
occurred on Thursday evening, August 25. Then we tracked 
Katrina as she became a Category 4, 5, and then made landfall 
as a Category 4 storm in New Orleans or just east of New 
Orleans at approximately 2 p.m. on Monday, August 29. There 
were reported wind speeds of over 145 miles an hour and the 
storm surge was reported as high as 25 feet.
    I have this chart you can see that we have used to assess 
the impact on our network. We have categorized the damage in 
geographic areas as catastrophic indicated by red, severe 
indicated by yellow, or moderate indicated by green. We have 
restoration efforts well under way in the green areas and are 
moving into the yellow areas and the red areas as well. The 
unique problem that we have experienced with Katrina has been 
the severe flooding, particularly in New Orleans. It is not 
unusual in these situations for a central office to lose its 
commercial power and for BellSouth to continue to provide power 
using generators. These generators, however, require fuel and 
they require technician access to maintain them. With Katrina, 
the continued flooding and security issues severely hampered 
our ability to maintain our network as we would normally do.
    Now, I will spare you a lot of the details, but suffice it 
to say that our experience in New Orleans' main central office 
at 840 Poydras Avenue was an example of what we saw. We 
actually had 82 people in that office working to man our 
equipment and our emergency operations center. And everything 
was fine until the flooding started after the hurricane. At 
that point and subsequently, we were advised that there was 
gunfire in the area, it was not safe to keep our employees 
there, so we actually made arrangements to evacuate those 
employees with heavily armed State police. We later got FBI and 
Federal Marshal protection back into the area to secure the 
central office, and had heavily armed convoys taking fuel and 
water back into the location. Obviously, that is not something 
that we normally see in normal hurricane restoration 
activities. I am happy to say, however, that office has 
maintained operational status throughout this period.
    Nevertheless, with all these difficulties, we have made 
huge strides to restoring our network. As of yesterday morning 
we actually had 506,000 lines remained out of service, and that 
is less than one-fourth of the original number. We have 
restored service to all but 18 of those central offices that 
were impacted.
    Now, let me move to what we can ask from the government for 
help. Overall, the cooperation and assistance from state, 
local, and Federal agencies has been very good. The FCC led by 
Chairman Martin has been extraordinarily helpful. They have 
reached out to offer assistance in many areas, in particular, 
waiving rules that would have hampered our ability to restore 
service in a quick manner. We will continue to need this kind 
of assistance. The Louisiana and Mississippi Public Service 
Commissions have also stepped up to provide assistance, as well 
as the Department of Homeland Security, the White House, and 
the Department of Defense, Northern Command. We have also had 
great cooperation from the FAA, the Bureau of Alcohol, Tobacco, 
and Firearms as well as the U.S. Marshal Service.
    Right now we need three things. First, we need safe access 
to our facilities and adequate security for our personnel. 
Second, it will take many months for us to complete our repair 
work even though we will be working around the clock. We have 
engaged and restored 22 hurricanes since 1992, including storms 
such as Hugo, Andrew, and now Katrina. Congress and the private 
sector alike should be cautious about building unrealistic 
expectations about how quickly we can fully recover from the 
impact of this storm.
    Third, the government needs to recognize that the cost to 
BellSouth to restore these communications infrastructure items 
will be significant. We have estimated those costs to be 
between $400 and $600 million. Now, to put this in perspective, 
the storms that we experienced last year, the four hurricanes, 
cost $200 million, and we are still in the middle of the 
hurricane season. So restoration of this infrastructure will 
require that we deploy capital not as a cost plus utility but 
in a very competitive industry. We will deploy this with other 
companies, depending on our facilities, despite the fact that 
we don't share the burden of this restoration between those 
companies.
    Thank you.
    [The prepared statement of William L. Smith follows:]

   Prepared Statement of William L. Smith, Chief Technology Officer, 
                               BellSouth

                            I. INTRODUCTION

    My name is Bill Smith, and I am the Chief Technology Officer for 
BellSouth. BellSouth is a full-service communications company providing 
service to customers in the nine southeastern states of Alabama, 
Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, 
South Carolina, and Tennessee. I have worked for BellSouth for 26 
years, and in my current position I am responsible for overseeing the 
planning of our overall network, integrating new technology into our 
network, and ensuring the interoperability between our networks and 
those of other carriers.
    The purpose of my testimony is to address the impact of hurricane 
Katrina on BellSouth's people and our network. I will describe for you 
the damage that Katrina has caused, which is unlike any hurricane 
BellSouth has experienced, and to give you the current status of our 
restoration efforts. What I will give you today is a snapshot--the 
situation changes literally every few minutes, as power is restored, 
flood waters recede, field surveys occur, and repairs are made. 
Furthermore, because we are still assessing the full impact of the 
storm on our network and our customers, our damage estimates are 
preliminary. It will take some time for us to know with certainty the 
total magnitude of the destruction caused by hurricane Katrina.
    Given where our network is located, BellSouth has dealt with 
hurricanes for years. However, with most hurricanes, from Camille to 
Andrew, we rarely lost operational status for an entire central office. 
A central office is a building that houses the switching and 
transmission equipment for a geographic area; it is usually the first 
``building'' that all of the wires coming from houses and offices go in 
connecting to BellSouth's regional network.
    But Katrina was different. Based on what we know today, we lost 
service in 24 of BellSouth's central offices in the impacted area. Some 
of these offices were located in coastal Mississippi and were destroyed 
by the storm surge when Katrina came ashore. The vast majority of 
BellSouth's central offices that are currently out of service are 
located in greater New Orleans. These central offices failed due to 
flooding and logistical problems presented by security on the street. 
The flooding and security issues that BellSouth has had to confront is 
what makes Katrina different from other hurricanes--both in terms of 
impact to the network and on our ability to restore service.
    Operations in Florida, Alabama, Mississippi and Louisiana, all have 
been impacted by hurricane Katrina. As I will describe in more detail 
below, we have 3 different types of restoration efforts underway. In 
places like Gulfport and Biloxi, Mississippi and New Orleans, the 
impact on our customers, our employees and our network have been 
catastrophic and basic restoration is still encumbered by flooding, 
debris and security issues. In other parts of Louisiana, coastal 
Mississippi and Alabama, we are well into our restoration efforts and 
progressing well. In Florida, we are wrapping up our restoration 
efforts, and freeing up resources like generators, and of course 
technicians, to move to the other areas where they are needed.
    As is standard operating procedure for us during hurricane season, 
on August 23, BellSouth's network operations team began tracking 
Tropical Depression 12, then located over the southeastern Bahamas with 
35mph winds, moving northwest at 10 mph. This is business as usual for 
us, but none could have imagined what was to follow. There are two 
integral pieces to this story: the network, and the people. I plan to 
first walk you through the people side of this story, because without 
our people, we would have no company and no network. It is our 
employees who make BellSouth what it is.

                     II. KATRINA'S IMPACT ON PEOPLE

    BellSouth has about 13,000 employees in the states of Alabama, 
Mississippi, and Louisiana, approximately 6500 of whom were in the 
hardest hit areas affected by the storm. As of now, we have located or 
made contact with all but about 110 of those employees, and we are 
making every effort to locate these employees. Prior to Katrina, 
BellSouth already had in place an 800 number for BellSouth employees to 
call to report their status in the event of an emergency and a separate 
number employees could call to get emergency information. Immediately 
prior to Katrina, we also took steps to ensure adequate supplies and 
services were on hand, sending non-perishable food to strategic areas 
where employees could be stationed, setting up structural materials 
including tents, showers, toilets, tables, and chairs, and engaging 
janitorial and guard services. Our experience with prior hurricanes has 
taught us that our employees will be called upon to work round the 
clock, and they can best perform the extraordinary tasks expected of 
them if their basic needs for food, shelter and the safety of their 
family are addressed.
    As Katrina hit the Gulf Coast on August 29th, we assessed potential 
locations for what we call BellSouth tent cities--stations where 
employees in affected areas could seek shelter, receive food, ice, 
water, showers, laundry services, air mattresses, linens and clothing, 
medical care and financial loans. In addition, we had on hand access to 
our employee assistance program to provide counseling services as 
needed. The first tent city was set up in Gulfport, Mississippi on 
August 30th, a second opened in Baton Rouge on September 1st, and a 
third on September 2nd in Covington, Louisiana. With the addition of 
tent cities in Hattiesburg and Jackson, Mississippi, and Kenner, 
Louisiana by the end of this week, BellSouth will be operating six tent 
cities that will serve over eight thousand meals daily, and provide 
assistance for our employees and their families, including medical 
care.

   III. KATRINA'S IMPACT ON BELLSOUTH'S NETWORK--RESTORATION EFFORTS 
                              1
---------------------------------------------------------------------------
    \1\ Because restoration efforts in Florida are mostly complete, the 
network impacts in section III will focus on operations in Alabama, 
Mississippi, and Louisiana.
---------------------------------------------------------------------------
    BellSouth has 1591 central office buildings across its region. 578 
of these central office buildings are located in Alabama, Louisiana and 
Mississippi. As we do with every storm, our network operations team was 
tracking Katrina as early as August 23, and began making preparations 
for potential landfall in the Florida Gulf Coast area. Because our 
network equipment requires power to operate, our standard hurricane 
procedures include ensuring that generators are in working order and 
fuel tanks filled for our central offices and our key administration 
offices, closing shutters and sealing windows, sandbagging critical 
facilities, and making arrangements for additional generators where 
needed.
     Despite these precautions, Katrina brought considerable damage to 
BellSouth's network. Katrina first made landfall in South Florida as a 
Category 1 hurricane on Thursday evening, August 25, and caused 
considerable damage to the area. Katrina, a Category 5 hurricane that 
dropped to a Category 4 just before landfall, made landfall in our 
operating area for the second time at approximately 2 p.m. on Monday, 
August 29, just east of New Orleans. In some areas, winds exceeded 145 
miles per hour and the storm surge was reported as high as 25 feet. In 
assessing the impact on our network, we have categorized damage to 
geographic areas caused by Katrina as ``catastrophic'', ``severe'' or 
``moderate''. The ``catastrophic'' areas are red on the map attached as 
Appendix 1; severe areas are yellow; and moderate areas are green. Much 
progress has already been made restoring service in the ``moderate'' 
areas of the region.
    In the Gulf region of Mississippi, Alabama, and Louisiana, we had 
4.9 million access lines prior to the storm. Of those 4.9 million 
lines, 1.6 million were in the red zone, 782,000 were yellow and 2.6 
million were green. A snapshot on August 30 after the storm estimated 
that 2.475 million lines were actually affected. All 1.6 million lines 
in red zones were affected; 500,000 of the 782,000 lines in yellow 
zones were affected; and 440,000 of the 2.6 million lines in green 
zones were affected. Details on a state by state basis are attached as 
Appendix 2.
    The unique problem that BellSouth has experienced with Katrina is 
that the severe flooding, particularly in New Orleans, has made it 
difficult to get a clear assessment of the extent of the damage. Normal 
hurricanes have an initial surge, the water recedes, power begins 
restoration, and we follow power with sweeping telecom restoration 
resources. When the levees broke in New Orleans, the water did not 
recede. The flooding has greatly complicated our restoration efforts. 
In most hurricanes, it is not unusual for a central office to lose 
commercial power and for BellSouth to continue providing service using 
generators. Those generators require fuel, and we have to be able to 
get our network technicians to those central offices in order to ensure 
that the generators are fully fueled and operating correctly. With 
Katrina, we have 24 central offices that are without commercial power 
and are operating under generators. However, because of the continued 
flooding we have not been able to access or support many of these 
central offices in New Orleans as we would in normal hurricane 
restorations.
    Our experience in the New Orleans Main Central Office at 840 
Poydras Street gives a sense of the situation on the ground. BellSouth 
employees began staffing an Emergency Operations Center (EOC) on the 
12th Floor of the building on Sunday, August 28. The office lost power 
and engaged generators when the storm hit on Monday, but occupants 
breathed a sigh of relief that there was no flooding. Then, the levy 
broke and conditions rapidly deteriorated on Tuesday. Technicians and 
engineers in the office were trying to re-establish service and 
maintain power by keeping the generators fueled and running. As the 
situation in New Orleans deteriorated with violence and looting, the 
New Orleans police and the Louisiana State Police told us to evacuate 
the building. There was gunfire in the area and it was therefore unsafe 
for our employees to remain in the area. At 3:00 p.m. CST, the 
Louisiana State Police arrived and provided us with an armed escort so 
we could leave the building. We moved to Baton Rouge and, concerned for 
the security of the building, we arranged for FBI agents to take 
occupancy of the building at approximately 9:00 that evening. By Friday 
morning, the Louisiana State Policy and the FBI occupied the building. 
At that time, we began armed and escorted caravans to the building to 
bring fuel for the generator, water for the coolers, and BellSouth 
personnel to maintain the equipment. We are not yet back to full 
support but have managed to keep this key switch operations despite the 
flooding and security concerns.
    And another example heroic story rises out of the coastal town of 
Gulfport, MS. On September 3, a brick wall protecting the main 
generator keeping the central office alive started to give way. Nine 
workers from that central office ran from the basement, where they had 
been working while riding out the storm, to the rooftop room and 
fortified the walls with whatever they could find--plastic tarps, 
plywood and even the cardboard from a science project of one worker's 
son.
    Nevertheless, we have made huge strides towards restoration of 
communications capabilities. As of the morning of Tuesday, September 6, 
506,000, less than one-fourth of the original 2.475 million lines, 
remained impacted. Only 4,900 of the 440,000 lines remained impacted in 
the green areas; 23,200 of the 500,000 lines in the yellow zone 
remained impacted; and 478,500 of the 1.6 million lines in the red 
zones remained impacted.
    As of September 6, we have restored service to all but 20 central 
offices. This restoration is due to the tireless efforts of our 
employees on the ground who are working around the clock with a single 
minded mission of restoring communications to these hard hit areas, and 
to the efforts of our wireless and wireline industry colleagues who 
have partnered with us with an unwavering commitment to enable 
communications.
    Of course, other carriers rely upon BellSouth's network in order to 
provide service to their customers. We have an Emergency Control Center 
in Atlanta, which is the control center from which we are coordinating 
our hurricane response, overseeing network restoration efforts, and 
working with other carriers to restore communications. We are 
coordinating a contingent of impacted carriers with one mission--to 
make communications work. We collaborated with other carriers, without 
regard to ownership or jurisdiction, and brokered capacity and worked 
through technical issues. We conduct two daily calls--one with wireless 
carriers and one with wireline carriers. Using our network data and 
resources we assisted in developing a joint wireless restoration plan, 
now underway, bringing competitive service providers together to serve 
a single goal of restoring communications. A joint industry team has 
agreed on a list of prioritized sites and are working together to 
restore wireless service to these sites in the New Orleans area. This 
has included traveling by boat to several of the sites in order to 
survey what equipment is needed to restore service. They traveled by 
boat to survey sites on Sunday and Monday, and may have already enabled 
communications from some of these towers while I am speaking with you. 
This has been a remarkable collaborative effort.
    In terms of restoration priority, we have been and continue to 
focus our support on public safety concerns, including hospitals, E-911 
centers and law enforcement. Following the storm, in Florida and 
Alabama, there were no E-911 centers that incurred outages. For 
Mississippi, service was impacted to 43 E-911 centers, and service to 
all 43 centers has been restored on site or by re-routing the calls to 
other centers. In Louisiana, 35 E-911 centers were impacted, and 28 of 
these are back in service, either partially on site or through re-
routing of calls to other centers. Seven of the centers are out of 
service. Of the 7 E 911 centers that remain out of service, all are 
located in the New Orleans area and are served by the Franklin tandem, 
which is flooded. Four of the centers are located in Plaquemine and St. 
Bernard parishes, low lying parishes along the Mississippi River below 
New Orleans which were in the eye of the storm as it came inland.
    We are continuing to work around the clock to restore service. Our 
restoration efforts involve surveying the damaged area. That activity 
is approximately 80% complete. Next we concentrate on restoration of 
highest priority circuits, specifically those which support public 
safety including hospitals, E911 centers and law enforcement. Then we 
focus on supporting other carriers, including the wireless industry.

                       IV. NEEDS FROM GOVERNMENT

    What can the government do to help? The cooperation and assistance 
from local, state and federal agencies overall has been good. The FCC, 
led by Chairman Martin, has been extraordinarily helpful. The FCC has 
reached out to offer assistance in many areas: waiving rules that will 
help customers who are without service; taking actions that have and 
will allow for the quick restoration of network facilities (including 
the emergency routing of traffic over whatever facilities are available 
for use); and helping with the publication of ``find me'' numbers to 
help locate BellSouth employees. We will continue to need this type of 
help, particularly related to the efforts to restore communications in 
Louisiana and the Mississippi Gulf Coast areas. The magnitude of the 
damage will present unique issues that will need to be resolved quickly 
and efficiently in order to restore service.
    The Louisiana and Mississippi Public Service Commissions have also 
stepped up to provide assistance to the industry in efforts to assess 
damage, maintain the operation of the remaining network, and restore 
service to impacted areas.
    BellSouth has been extremely engaged with the Department of 
Homeland Security's Infrastructure Protection Directorate, headed by 
Bob Stephan, and most specifically, DHS's National Coordinating Center 
(NCC). The NCC, which is a division of the National Communications 
System of DHS, provides a focal point for industry and the Federal 
government to share operational information and coordinate needs to 
respond to crises just like this. BellSouth maintains an office at the 
NCC headquarters, along with many other major wireline, wireless, and 
satellite providers.
    Our representatives there work around the clock to facilitate 
response efforts for FEMA, DHS, the National Guard, State Emergency 
Management Agencies and Operations Centers, NORTHCOM, and many other 
organizations. On industry's behalf, the NCC works through a myriad of 
concerns, with security and fuel at the top of the list, along with 
abatement of the flood waters. Industry has also worked together to 
coordinate fuel convoys, search and rescue, network impacts, and 
logistics. It's been an outstanding example of the public-private 
partnership in action.
    Through the NCC, and through direct sources, BellSouth has been in 
communication with the Department of Energy and the Nuclear Energy 
Regulatory Commission (NERC), which has provided status information on 
power and electricity. The White House Executive Office of the 
President has also been strongly supportive in responding to specific 
issues that required support. We have had good coordination and 
information from the FAA and DHS on aviation needs. The Department of 
Defense's Northern Command has also been very helpful, providing 
information, support, and logistics as well. BellSouth has also had 
outstanding security support from the Bureau of Alcohol, Tobacco and 
Firearms, as well as the US Marshal Service, which were coordinated 
through FEMA. Keith Hennessey--Deputy Director of national Economic 
Council at the White House Executive Office of the President, helped 
BellSouth get the employee hotline number that I described earlier 
publicized on Fox, CNN, and MSNBC Cable networks, as well as Direct TV 
satellite network.
    Right now, we need several things. First, we need safe access to 
our network facilities. This will require the abatement of the flooding 
in New Orleans, which I understand is underway. Once the flood waters 
have receded, we need adequate security measures to ensure the safety 
of our technicians trying to assess and conduct repairs.
    Second, it will take many months for BellSouth to completely repair 
the damage caused by Katrina. We will continue to work around the clock 
to restore service to our customers as they have rebuilt and are ready 
to be served. BellSouth has engaged and restored 22 hurricanes since 
1992, storms such as Andrew, Hugo and now Katrina. Congress and the 
private sector alike should be cautious about building unrealistic 
expectations about how long it takes to fully recover from a storm 
packing the furor of a Katrina.
    Third, the government needs to recognize that the cost to BellSouth 
to restore the communications infrastructure will be significant. 
BellSouth has estimated that the cost to restore our network as a 
result of hurricane Katrina will be between $400 and $600 million. By 
comparison, the cost to BellSouth of the damage caused by the four 
hurricanes that hit Florida last year was approximately $200 million. 
And, of course, we're still in the middle of the hurricane season, and 
the long term impacts of the flooding in New Orleans are hard to 
estimate.
    Restoration of our near ubiquitous infrastructure will demand that 
we deploy capital, not as a cost plus utility, but as a company in a 
very competitive industry. We will be expected to rebuild without 
knowing what our ultimate demand will be. And, we will rebuild this 
network in an environment where many companies depend on our network 
for providing service to their customers, but policy doesn't equally 
distribute the burden of restoration among all players. The FCC has 
been very helpful in waiving rules that hamper restoration. We will 
need continued focus from the policy community on rules and regulations 
that hamper access to capital. Timely restoration requires that we 
spend this money now, well in advance of knowing what people and 
businesses will actually return to affected areas, and when.

    Mrs. Myrick. Well, thank you for what you have done. And 
also, please thank your employees for their commitment as well. 
It is important to all of us, and I know it means a great deal.
    Mr. Lashof.

                  STATEMENT OF DANIEL A. LASHOF

    Mr. Lashof. Thank you very much, Madam Chairwoman, and 
members of the committee, I appreciate the opportunity to 
participate in today's hearing. And first let me add my voice 
to those of the other witnesses and members of the committee in 
expressing deep sympathy for the victims of Hurricane Katrina 
and great appreciation for the emergency responders who are on 
the ground struggling to restore service and provide emergency 
services.
    While Katrina has produced a horrendous catastrophe along 
the gulf coast, its impact has also rippled across the country. 
And, for many Americans, that has been most evident in the 
price of gasoline. Both immediate and long-term responses are 
needed to address the fundamental vulnerability that Hurricane 
Katrina has revealed. But let me start with the Hippocratic 
Oath: In searching for the right responses, let us first do no 
harm. Let us be sure that we avoid counterproductive actions 
that don't actually address the real problems, and would 
needlessly expose people to higher pollution levels and harm to 
the environment.
    First let me address fuel standards which we have discussed 
here. Certainly EPA's prompt action to temporarily waive 
certain fuel requirements has ensured that these standards are 
not responsible for the increases in gasoline prices that 
consumers have seen during the last week. It also shows that 
EPA has the statutory authority that it needs to respond to 
supply disruptions and other emergencies. No permanent changes 
in the Clean Air Act can be justified based on the aftermath of 
Katrina, and responsible policy and law require the clean air 
waivers should not be extended any longer than necessary to 
respond to the immediate supply disruptions. If Congress does 
wish to reduce the number of fuel specifications to provide 
additional flexibility in the market, it should harmonize these 
standards upwards by making it easier for States and regions to 
opt in to Federal formulated gasoline programs and protect 
their citizens with clean air.
    Turning to refinery capacity, similarly, while it may be 
desirable to increase refinery capacity, particularly outside 
the gulf region, there is no justification for relaxing 
environmental requirements in order to site new refineries. 
There simply is no credible evidence that environmental 
requirements have played a significant role in the economic 
decisions that refiners have made to consolidate and to reduce 
spare capacity. We have heard other testimony that it is 
primarily an economic driver with respect to margins. In fact, 
in response to an inquiry from the ranking member of this 
committee, EPA has said that there are no pending applications 
to restart any of the refineries that have closed since 1980. 
And with respect to new refineries, the only application that I 
am aware of, which is the Yuma facility which has been 
mentioned here in Arizona, it has actually already received an 
air permit which was granted less than 1 year after a complete 
application was submitted.
    Now, let me turn to the Arctic Refuge, where we have heard, 
since Katrina, renewed cause to open the Arctic National 
Wildlife Refuge to oil exploration and production. And these 
are also impossible to justify based on the short-term supply 
disruption caused by Katrina. Even if you take EIA's optimistic 
estimates of potential annual production from the Arctic 
Refuge, drilling would affect by their estimate gasoline prices 
by less than 1.5 cents per gallon and then not until 2025. As 
shown in my exhibit, oil from the Arctic Refuge would be a drop 
in the bucket--it is the red curve there just hugging the 
bottom--compared with the oil demand reduction we could achieve 
with a national commitment to oil savings which I will address 
in a minute.
    We need a national commitment to reduce our dependence on 
oil because currently our dependence is very dangerous to our 
security and economy. With only 3 percent of the world's oil 
reserves and 25 percent of the world's oil demand, there is no 
way for the United States to drill its way into energy 
security. The only effective way to reduce our vulnerability to 
oil price shocks is to significantly reduce our dependence on 
oil.
    This is true for family budgets as well as for the national 
energy security. For example, for an average family driving 
2,500 miles a month, a $1 gallon run-up in gasoline prices as 
we have seen in recent weeks takes $120 out of their monthly 
budget if they are driving vehicles that average 21 miles per 
gallon; but it would only take $60 out of their budget if those 
vehicles average 42 miles per gallon, which is within our 
technical capability.
    Turning to short-term action, to respond to the short-term 
disruption in oil, I believe the President should call on the 
Nation to conserve gasoline. And I don't think it is enough for 
him to simply say people shouldn't buy gasoline if they don't 
need it. The President should specifically ask for consumers to 
pitch in by taking five immediate and relatively simple steps 
that would save 7 percent of our gasoline demand: First, by 
keeping tires inflated; second, by sticking to the speed limit; 
third, by reducing engine idling; fourth, by using car pools, 
transit, and telecommuting; and, fifth, by keeping cars tuned 
and using efficient engine oils. These are sensible steps that 
all Americans can take that can help us all through this short-
term problem.
    To reduce our vulnerability and increase our security in 
the future, a broad coalition called Set America Free, which 
involves national security organizations, religious leaders, 
and energy experts, calls on Congress to establish a minimum 
national commitment to reduce our oil commitments by saving 2.5 
million barrels of oil a day within a decade and 10 million 
barrels of oil a day by 2025. We can achieve that with a 
combination of diversifying our supplies away from petroleum, 
using biofuels that Mr. Shimkus has mentioned earlier in the 
hearing, as well as American know-how and technology to make 
sure that every gallon of fuel that we use is used with the 
utmost efficiency. By doing that, we could save more than 15 
times as much as the production from the Arctic Refuge could 
potentially deliver cumulatively over the next 20 years.
    Equally important, in contrast to oil savings, Arctic 
Refuge drilling would do nothing to insulate our economy from 
the effects of future oil supply disruptions, because those 
would ripple through the economy and affect the price that 
everyone pays regardless of how much crude oil we import or how 
much comes from domestically because we have national and 
global markets.
    So, in conclusion, Mr. Chairman, I believe that there are 
short-term measures that we should call on all Americans to 
take to pitch in to help us through the immediate supply 
disruption. In the longer term, we need a real commitment to 
oil savings, and we should move forward with approaches that 
really respond to the problems we have and not use the short-
term crisis to justify permanent changes that are 
inappropriate.
    Thank you.
    [The prepared statement of Daniel A. Lashof follows:]

   Prepared Statement of Daniel A. Lashof, Senior Scientist, Natural 
                       Resources Defense Council

                              INTRODUCTION

    Thank you Mr. Chairman. My name is Daniel Lashof and I am a senior 
scientist at the Natural Resources Defense Council. I appreciate the 
invitation to participate in today's hearing.
    Mr. Chairman, it is now clear that hurricane Katrina is among the 
worst natural disasters in American history. My deepest sympathy goes 
to the victims and their families and my deepest respect goes to the 
emergency workers who are struggling to provide relief in almost 
unimaginable conditions.
    While Katrina produced a horrendous catastrophe along the Gulf 
Coast its impact has also rippled across the country. For many 
Americans this is most evident in the price of gasoline. For some of us 
this is an annoyance that means that our Labor Day trip to the beach 
was a little more expensive than we had anticipated. But for millions 
of low-income Americans higher energy costs have thrown carefully 
balanced family budgets out of whack, creating real hardship.
    With tempers running short as some motorists have watched the price 
of gasoline increase as they were waiting in line to fill up, it is 
natural to look for someone to blame. I urge that we resist the 
temptation to offer simplistic explanations or simplistic solutions. 
Where there is evidence of price gouging it should be investigated and 
prosecuted to the full extent of the law. But we also need both 
immediate and long-term responses that address the fundamental 
vulnerability that hurricane Katrina revealed.

                           FIRST, DO NO HARM

    Some argue that America should open its wild lands for oil 
exploration and drilling or relax environmental safeguards to reduce 
gasoline prices and U.S. dependence on imported oil. But these are 
inappropriate, wasteful, and ineffective responses to the aftermath of 
Katrina.
    EPA's prompt action to temporarily waive certain clean fuels 
requirements has ensured that these standards are playing no role in 
the gasoline price increases that consumers have seen during the last 
week. EPA's action also demonstrates that current law already provides 
the necessary authority to respond to short-term supply disruptions. No 
permanent changes to clean air laws can be justified based on the 
aftermath of Katrina, and responsible policy and the law require that 
clean air wavers should be extended no longer than necessary to respond 
to the actual supply disruption. If Congress wants to reduce the number 
of different fuel specifications it should make it easier for states 
and regions to adopt the federal reformulated gasoline program, and not 
lock in the use of dirtier conventional fuels.
    Some have cited a decline in the number of refineries operating in 
the United States as evidence that environmental regulations have 
discouraged investment in new capacity, driving up gasoline prices. The 
facts do not support this claim, however. While the total number of 
refineries has declined, total capacity has increased as refiners have 
found it to be more cost effective to expand capacity at existing 
facilities than to operate small refineries or build new green field 
plants. Refiners have also consciously sought to reduce excess capacity 
to improve refinery margins. Environmental permitting has not played a 
significant role in these decisions. In response to an inquiry from the 
Ranking Member of the Committee, EPA has said that there are no pending 
environmental permit applications from any of the U.S. refineries that 
closed since 1980.1 With regard to new refiners, the record 
shows that in the case of the proposed facility in Yuma, Arizona, an 
air quality installation and operating permit was granted by the 
Arizona Department of Environmental Quality less than a year after a 
complete application was received.2
---------------------------------------------------------------------------
    \1\ Letter from Charles Ingebretson, EPA Associate Administrator, 
to Congressman Dingell, dated September 29, 2004.
    \2\ The permit was granted on April 14, 2005. Letter from Nancy 
Wrona, Director Air Quality Devision, Arizona Department of 
Environmental Quality, to Jeff Donofrio, Committee on Energy and 
Commerce Democratic Staff, dated July 29, 2004 shows that the complete 
application was received on July 14, 2004.
---------------------------------------------------------------------------
    Similarly, renewed calls to open the Arctic National Wildlife 
Refuge to oil exploration and production are also impossible to justify 
based on the short-term supply disruption caused by Katrina. Although 
drilling advocates claim there is potentially 16 billion barrels of oil 
in the Arctic National Wildlife Refuge, this figure is an upper bound 
estimate (one-in-twenty chance) for the amount of oil that is 
potentially recoverable, regardless of extraction costs. Using a price-
adjusted mean estimate (which better represents the basis for 
production decisions regarding potential future discoveries), the 
actual amount of oil that is economically extractable would be far 
less. Investment decisions would be made based on expectations of long-
term average prices, which are far lower than current peaks. For 
example, at $40 per barrel the economically recoverable total would be 
about 6.7 billion barrels. Moreover, it would take 10 years for any oil 
from the Arctic Refuge to reach the market. Even during the predicted 
production peak in 2027, the coastal plain would produce about 3 
percent of America's daily oil demand.3 Even with EIA's 
optimistic estimate of potential annual production from the Arctic 
Refuge, which is much higher than can be justified by actual experience 
with North Slope fields, drilling would affect gasoline prices by less 
than 1.5 cents per gallon in 2025.4
---------------------------------------------------------------------------
    \3\ Arctic National Wildlife Refuge production analysis conducted 
by Richard A. Fineberg (Principal Investigator, Research Associates), 
January 2005.
    \4\ U.S.DOE/EIA. Impacts of Modeled Provisions of H.R.6 EH. h. EIA 
estimates that allowing drilling in the Arctic Refuge will reduce world 
oil prices by $0.57 per barrel in 2025. Assuming a one-to-one impact on 
gasoline prices, this translates into $0.57/42 = $0.014 per gallon.
---------------------------------------------------------------------------
    A national commitment to oil savings could yield more than 15 times 
as much as production from the Arctic Refuge cumulatively over the next 
20 years (see exhibit). Equally important, in contrast to oil savings, 
Arctic Refuge drilling would do nothing to insulate our economy from 
the effects of future oil supply disruptions, which would ripple 
through the oil market and affect the price of domestic and imported 
crude equally.

                          DANGEROUS DEPENDENCE

    Our fundamental vulnerability is rooted in America's dangerous 
dependence on oil. Thirty years after the first Arab Oil Embargo our 
transportation sector remains 97 percent dependent on oil; imports 
account for over half of our supply; and our vehicle fleet remains 
woefully inefficient. In fact, after increasing from 13.1 to 22.1 miles 
per gallon between 1975 and 1987 the average fuel efficiency of new 
personal vehicles has actually declined to 21 miles per gallon in 2005, 
according to the latest government report.5
---------------------------------------------------------------------------
    \5\ Light-Duty Automotive Technology and Fuel Economy Trends: 1975 
Through 2005. EPA420-R-05-001. July 2005.
---------------------------------------------------------------------------
    As a result of rising global demand, particularly in the United 
States and China, and unrest in the Middle East and other major oil 
producing areas, oil markets were already tight before Katrina struck. 
Refinery acquisition costs for crude oil had more than doubled from $24 
per barrel in 2002 to almost $53 per barrel in July 2005.6 
China's 32 percent, or 1.6 million barrel per day, increase in oil 
consumption between 2001 and 2004 was the largest single factor 
increasing global demand, but the United States was not far behind. 
Although U.S. consumption grew by only 5.5 percent over this period, 
that represented more than a 1 million barrel per day increase due to 
our much larger consumption base.7
---------------------------------------------------------------------------
    \6\  U.S. Department of Energy, Energy Information Administration. 
http://www.eia.doe/pub/oil_gas/petroleum/data_publications/
petroleum_marketing_monthly/current/txt/tables01.txt Accessed September 
2, 2005.
    \7\  U.S. Department of Energy, Energy Information Administration. 
http://www.eia.doe.gov/emeu/ipsr/t24.xls Accessed September 2, 2005.
---------------------------------------------------------------------------
    With only 3 percent of the world's oil reserves and 25 percent of 
the world's oil demand, there is no way for the United States to drill 
its way to energy security. The only effective way to reduce our 
vulnerability to oil price shocks is to significantly reduce our 
dependence on oil. For example, if the fuel efficiency of our personal 
vehicle fleet was 42 miles per gallon today, rather than 21 miles per 
gallon, U.S. oil demand would be lower by 4 million barrels per day, 
oil markets would have spare capacity, and the impact of any gasoline 
price spike would be far smaller. For an average family driving 2500 
miles in a month, a $1/gallon run up in gasoline prices takes $120 out 
of their monthly budget at 21 miles per gallon, but only $60 at 42 
miles per gallon.
    Unfortunately, neither the energy bill enacted last month nor the 
fuel economy standards proposed on August 23rd will achieve substantial 
oil savings.
    The United States needs to make a national commitment to reduce our 
oil dependence, through both immediate conservation measures and 
through investments that increase our efficiency and diversify our 
sources of fuel.

                    IMMEDIATE CONSERVATION MEASURES

    During the Second World War, Americans met our nation's energy 
challenges with an unprecedented spirit of conservation, using every 
gallon of gasoline wisely. Californians showed again during the 
electricity crisis in 2001 that the conservation spirit is alive and 
well today, responding by cutting their power demand by 10 percent 
without any draconian measures.
    The President should announce a ``National Emergency Gasoline 
Conservation Program'' to respond to the short-term supply disruption 
caused by Katrina. There are five simple steps American consumers and 
businesses could begin taking immediately to reduce gasoline 
consumption. These steps could cut gasoline consumption by several 
percent, helping to relieve gasoline shortages, save money, and cut 
pollution at the same time.
    In contrast to drilling in the Arctic National Wildlife Refuge, 
which would not begin to produce oil for many years, these measures 
would yield immediate benefits.
1. Check tire pressure.
 More than a quarter of all cars and nearly one-third of all SUVs, 
        vans, and pickups are driven with tires at least 8 pounds below 
        their proper levels, according to a new survey by the 
        Department of Transportation.
 If all Americans kept their tires properly inflated, our nation would 
        cut its gasoline use by 2 percent.
 Maintaining the correct tire pressure also would save lives. Under-
        inflated tires are more prone to tread separation and blowouts, 
        which can cause fatal accidents.
 Congress should help by authorizing the president to require all 
        service stations to offer free air and to post prominent signs 
        and stickers that say, ``Check your tire pressure every time 
        you fill up--For your safety and America's energy security.''
2. Obey the speed limit.
 Slowing down from 75 to 65 miles per hour would reduce highway 
        gasoline consumption by about 10 percent.
 If Americans followed the speed limit on our nation's highways, we 
        would cut total national gasoline use by about 2 percent.
 Slowing down also would save lives.
 Congress should provide extra funding for states that strictly 
        enforce speed limits and post signs that encourage slower 
        driving: ``Drive 65--for your safety and America's energy 
        security''
3. Turn off the car engine while waiting in line.
 Americans who run their engines while they are parked or waiting in 
        line waste as much as 4 million gallons of gasoline every day, 
        according to the U.S. Department of Energy.
 Drivers cannot avoid idling in traffic jams, but they should turn off 
        their engines while parked or waiting at drive-in windows. If 
        the wait is longer than 30 seconds, starting up a car again 
        uses less gasoline than leaving it running.
 If drivers turned off their engines while parked or waiting in line, 
        we would cut national gasoline use by about 1 percent.
 Congress should help by authorizing the president to require parking 
        lots, banks, fast-food restaurants, and other drive-through 
        stores to post signs stating: ``Turn off your engine while you 
        wait--for cleaner air and America's energy security''
4. Use car pools and public transit, and telecommute.
 If each commuter car carried just one more passenger once a week, we 
        would cut gasoline consumption by about 2 percent. That would 
        translate into big savings for the average American worker. 
        Someone with a daily commute of 10 miles each way and a 20- mpg 
        vehicle would save 236 gallons of fuel per year by opting to 
        carpool, telecommute or use transit, according to the American 
        Public Transportation Association.
 A study in Minneapolis-St. Paul found that more than one in 10 
        employees shifted from driving to some other way of commuting 
        when offered tax-free commuter benefits equal to those provided 
        in the form of free parking.
 Congress should promote commuter choice with a tax-free benefit for 
        employees who car-pool, use transit, bike to work, or 
        telecommute (currently limited to $100) equal to that provided 
        in the form of free parking (currently limited to $175). The 
        federal government also should support and promote Web sites 
        that help commuters find drivers traveling similar routes at 
        similar times. Posters at workplaces could say: ``Car pool or 
        ride the bus--for America's energy security'''
5. Keep cars tuned and use fuel-efficient engine oil.
 A poorly tuned or poorly maintained engine can increase gasoline 
        consumption by as much as 10 to 20 percent.
 Following the recommended maintenance schedule in your owner's manual 
        will save drivers fuel and cars will run better and last 
        longer.
 Motor oils with additives that reduce friction may increase a 
        vehicle's fuel economy by 3 percent or more. Fuel-efficient 
        oils are marked with an ``Energy Conserving'' label by the 
        American Petroleum Institute (API).
 Congress should authorize the president to require service stations 
        to post prominent signs trumpeting the benefits of keeping cars 
        tuned and using fuel-efficient oil. Signs could say: ``Keep 
        your car tuned to save gas for America's energy security'' and 
        ``Use fuel-efficient motor oil to save gas for America's energy 
        security''

             A NATIONAL COMMITMENT TO REDUCE OIL DEPENDENCE

    To reduce America's vulnerability to future oil supply disruptions, 
whether from natural disasters, war, or terrorist attacks, we need to 
make a national commitment to invest in reducing our dependence on oil.
    While there are many views of the energy bill enacted last month, 
everyone agrees that it does not represent such a commitment. In fact, 
the administration strongly opposed the Senate-passed measure that 
would have required the president to develop and implement a plan save 
at least 1 million barrels per day of oil and this critical proposal 
was not included in the final bill. Yet the conference report retained 
a provision that effectively lowers fuel economy standards by extending 
a loophole that allows automakers to claim credit for producing ``dual 
fuel'' vehicles, boosting their fuel economy numbers on paper by as 
much as 1.2 miles per gallon, even though these vehicles use gasoline 
more than 99% of the time.8 While biofuels have great 
potential to reduce our oil dependence, rather than promote use of 
alternative fuels this provision will increases gasoline consumption by 
15 billion gallons over the life of its 10-year extension. Wasting 5 
billion gallons of gasoline more than the estimated fuel savings from 
the administration's proposed light truck fuel economy standards.
---------------------------------------------------------------------------
    \8\ Department of Transportation. Effects of the Alternative Motor 
Fuels Act CAFE Incentives Policy. Report to Congress. March 2002.
---------------------------------------------------------------------------
    The fuel economy standards proposed by the administration on August 
23rd miss a critical opportunity to seriously address America's oil 
dependence. Despite record oil prices and mounting instability in oil 
producing countries such as Iraq and Iran, the new administration plan 
actually calls for a slower increase in light truck standards than the 
modest 1.5 mpg increase adopted by the administration in 2003 when oil 
was selling for less than $30 a barrel. The proposal also exempts the 
heaviest SUVs and pickup trucks that weigh over 8500 pounds, such as 
the Hummer H2 and Ford Excursion, and does not address the car 
standard, which hasn't been updated in nearly 20 years. As an example 
of how out of touch this proposal is, its benefits were calculated 
assuming that the average price of gasoline over the next 25 years 
would be less than $1.60 per gallon.
    Technologies and fuels exist today that can reduce wasteful use of 
oil in vehicles, industry, aviation, and buildings, delivering savings 
of at least 3.2 million barrels of oil per day (mbd) by 2015. By 2025 
we could save at least 11.2 mbd, cutting our demand in half. We can 
reach these goals while enhancing the competitiveness of U.S. 
automakers and farmers by combining efficiency standards with 
incentives to retool factories, accelerate the production of gasoline-
efficient vehicles, and deliver alternative fuels to consumers. Because 
our economy and national security are tied to America's dependence on 
oil, smart energy policies that deliver near term results would reduce 
America's vulnerability, stimulate our domestic economy, and help keep 
our nation safe
    The Set America Free coalition has brought together national 
security and religious leaders, as well as energy experts, in calling 
on Congress to take immediate action and establish a national 
commitment to save 2.5 million barrels per day by 2015--as much as we 
currently import from the Persian Gulf--and at least 10 million barrels 
per day by 2025.
    Saving oil requires mobilizing American ingenuity, factories, and 
farms around a clear goal. The first, most critical, step is for 
Congress to establish a national commitment to cut oil expenses and 
reinvest the resources--otherwise sent to oil producing countries--in 
American factories and farms. During World War II, American factories 
converted in just months from building cars to building tankers and 
bombers that became the arsenal of democracy. And after the first oil 
crisis in the early 1970s, America cut its oil demand to keep our 
economy strong. Although some may doubt the ability to turn this ship 
around, history shows us that American efficiency and ingenuity can 
meet the challenge. Given technologies and fuel available today we know 
that saving 2.5 mbd by 2015 and at least 10 mbd by 2025 is an 
achievable, practical goal that would deliver near term benefits in the 
next 5 to 15 years, while also starting the United States on a new path 
toward significantly greater energy independence and security 
thereafter. An analysis of how these savings can be achieved is 
attached to my testimony.9
---------------------------------------------------------------------------
    \9\ Bordetsky, A. et al., Securing America: Solving Our Oil 
Dependence Through Innovation. NRDC and IAGS, 2005. http://
www.nrdc.org/air/transportation/oilsecurity/plan.pdf
---------------------------------------------------------------------------
    Failure to take these steps would perpetuate unacceptable risks for 
our economic and national security, American jobs, and consumers. 
Rising oil prices have placed a devastating and disproportionate burden 
on U.S. automakers, according to a report released last month by NRDC 
and the University of Michigan. Without serious action to improve fuel 
economy performance, Detroit automakers will continue to lose thousands 
of jobs and millions in earnings, leaving them at a sharp disadvantage 
to their Japanese competitors. This report is also attached to my 
testimony.10 Rather than exporting billions of dollars more 
to oil regimes with every rise in the prices of oil, the United Sates 
should be investing those dollars at home to support domestic 
industries and jobs, and leading the world in reducing global demand 
for oil.
---------------------------------------------------------------------------
    \10\  McManus, W. et al., In the Tank: How Oil Prices Threaten 
Automakers' Profits and Job. NRDC and OSAT, July 2005. http://
www.nrdc.org/air/transportation/inthetank/contents.asp
---------------------------------------------------------------------------
                               CONCLUSION

    Katrina has highlighted the vulnerability of our energy system due 
to our dangerous dependence on petroleum to fuel our transportation 
system. The best way to reduce our vulnerability--both immediately and 
in the longer term--is to reduce demand by becoming more efficient with 
every barrel of oil we use and to diversify our supply by relying more 
on homegrown biofuels. A national commitment to saving oil is long 
overdue. If we make the commitment now America's oil dependence could 
be reduced by 2.5 million barrels per day by 2015 and by at least 10 
million barrels per day by 2025. Meeting such a commitment will reduce 
our vulnerability to catastrophes like Katrina, protect the 
environment, and make us more secure.

    Chairman Barton. We thank you. Last but not least, a good 
friend to the committee who has testified numerous times, Mr. 
Mark Cooper, the Research Director for the Consumer Federation 
of America. You are recognized for 7 minutes, sir.

                   STATEMENT OF MARK N. COOPER

    Mr. Mark Cooper. Thank you, Mr. Chairman. There is a real 
benefit to going last today, and you will see why.
    Chairman Barton. You know what everyone said, for one 
thing.
    Mr. Mark Cooper. That is right, and I have gotten some 
interesting numbers today. Again, let me stress as all of us 
have, we have had a catastrophe of immense proportions, human 
proportions, physical proportions, economic proportions. And it 
is extremely important I think to act very, very quickly and 
seize this moment to reorient the way we address these 
fundamental problems. And as my testimony points out, we have 
been saying the same thing for 4 years. Maybe folks will start 
listening.
    Public policy cannot prevent accidents or catastrophic acts 
of nature, but it can build systems that are resilient, robust, 
and flexible to minimize the impact of those inevitable 
accidents on our society. We believe it is quite clear that the 
business practices and public policy in the oil industry have 
combined to create a gasoline sector that has difficulty coping 
with even minor events, not to mention the disaster that struck 
the gulf coast. If the measure of performance of an economic 
sector is adequate supplies at stable prices, then this 
industry and the public policy under which it operates has 
failed, not just in the wake of Katrina, but also repeatedly 
over the past 5 years.
    The bulk of my testimony today presents word for word the 
policy conclusions that we reached in a report over 4 years 
ago. There is no Monday morning quarterbacking here. After 
analyzing the industry structure conduct and performance, we 
urged policymakers to move aggressively in five areas. And we 
gave specifics. We said: Restore reserve margins by developing 
efficiency. The first and most important thing is to get the 
fuel efficiency of our fleet increased. The pitiful proposal of 
increase that we got last month was based on a price of 
gasoline of $1.80 a gallon, including taxes, in 2012. That 
number is economically irresponsible and socially irrational. 
They should have done the analysis with a much higher price, 
with the social value of gasoline, and we would have asked for 
much more efficiency.
    Second, we ask for expansion of refinery capacity by 
redeveloping the 50 sites that had been closed. And as you have 
heard today, not one of them has applied for reopening. They 
were closed for business reasons, not environmental reasons. 
They should have been reopened. We wanted a list, we wanted a 
study. Those are sites that you can't hide behind the 
environmental laws for.
    Second, we call for increasing flexibility in storage and 
stock policy. We talked about strategic product reserves. Mr. 
Chairman, our friends in the IEA who are giving us product are 
drawing down their own strategic product reserves to help us. 
We don't have a strategic product reserve. We should have one. 
We should also have a policy requiring storage. This is not an 
industry that can function without storage. In the electric 
utility industry we have reserve margin requirements of 15 to 
20 percent above peak precisely because they are high capital, 
high intensity, inflexible industries. We need to think about 
that here as well.
    I said discourage private actions that make markets tight 
or exploit markets. And you have the numbers before you today. 
I have done this quickly, but here are the numbers you heard 
today about gouging.
    Mr. Caruso told us that the price of gasoline went up the 
equivalent of $19 a barrel. Mr. Douglass told us that his rack 
price went up $18 a barrel. That is the wholesale price he 
pays. Mr. Cooper told us that there were no increases in 
transportation costs because they are regulated. Mr. Caruso 
also told us that the WTI price went up $5. The difference 
between that WTI price and the rack price is $13. That is the 
refiner margin. And if you look over at the charts that were 
taken down, unbranded went up $26 equivalent per barrel. That 
is the refiner margin against unbranded gasoline. If you want 
to look for gouging, take a hard look at those numbers. Get the 
record, find out what happened. There is a good case there that 
it wasn't crude and it wasn't the retailer and it wasn't the 
transport; it was the refining sector that sets the wholesale 
price of gasoline.
    Finally, we said promote a competitive industry. Almost 
every wholesale market in this country is concentrated, every 
regional retail market is concentrated, every regional refining 
market is concentrated. They got that way over the past 15 
years as a result of mergers. Now, the FTC says they are not 
highly concentrated. In this industry, you get a lot of market 
power with a little bit of market share, and these firms have a 
sufficient market share to affect the price. The GAO discovered 
that, found that, showed that, and the FTC attacked them for 
showing us the facts.
    I have attached to my testimony three graphs, one which 
shows the growth of gasoline since I last testified or since we 
did our report of 6 percent, one which shows an elimination of 
oil spare capacity and refineries, and one which shows no 
increase in our stocks.
    Essentially, we were living on the razor's edge, and 
Katrina pushed us off. But Katrina is only the last in a series 
of accidents and interruptions that have hit this industry. It 
was the worst possible single event that we could have 
suffered, yet its impact is only an extrapolation of what has 
been going on. Four times in the last 5 years we have had these 
price spikes, and everyone said: Stocks were low, refinery 
capacity was stretched to the limit, and we had an incident, a 
pipeline broke, a refinery had a fire, a storm. Once is a 
surprise, twice is bad luck, but three times is a systematic 
pattern, and it is incumbent upon this Congress and our 
government officials to take action to insulate us against 
these kinds of events because they do happen and they will 
happen.
    So it is time for a dramatic change in our approach to 
policies. I offer the same advice I gave 4 years ago but only 
with greater urgency. We should pursue each of these options 
twice as fast, aim twice as high, because we have wasted a 
critical 4 years in providing the American consumer with the 
gasoline sector that they need and deserve.
    Thank you.
    [The prepared statement of Mark N. Cooper follows:]

 Prepared Statement of Mark N. Cooper, Director of Research, Consumer 
                         Federation of America

    Mr. Chairman and Members of the Committee, my name is Mark Cooper. 
I am Director of Research at the Consumer Federation of America (CFA). 
CFA is a non-partisan, non-profit association of 300 pro-consumer 
groups, which was founded in 1968 to advance the consumer interest 
through advocacy and education. We have been analyzing the petroleum 
industry for decades and have issued numerous reports in the past five 
years, as the seeds of the underlying conditions for the current crisis 
became apparent.\1\ I greatly appreciate the opportunity to share our 
views with the Committee today.
---------------------------------------------------------------------------
    \1\ I have submitted for the record four reports on the oil and gas 
industry that we have prepared over the past four yours. Our policy 
discussion from the first of these in July 2001 are included as part of 
this statement.
---------------------------------------------------------------------------
    Public policy cannot prevent accidents or catastrophic acts of 
nature, but it can build systems that are resilient, robust and 
flexible to minimize the impact of the inevitable accidents on our 
society. It is evident that the business practices of the oil industry 
and public policy in this country have combined to allow a gasoline 
industry that cannot respond to even minor incidents, not to mention 
the disaster that struck the Gulf Coast last week. If the measure of 
performance of an economic sector is adequate supplies at stable 
prices, then this industry has failed the consumer, not just in the 
wake o Katrina, but also repeatedly over the past five years.
    The bulk of my testimony today presents word-for-word the policy 
conclusions that we reached in a report released over four years ago. 
After analyzing the structure, conduct and performance of the oil 
industry, we urged policymakers to move aggressively in five areas.

 Restore reserve margins by developing both efficiency (demand-side) 
        and production (supply-side).
 Increase market flexibility through stock and storage policy.
 Discourage private actions that make markets tight/or exploit market 
        disruptions by countering the tendency to profiteer by 
        withholding of supply.
 Promote a more competitive industry.
 Address the disproportionate burden that rising energy price place on 
        lower income households.
    Unfortunately, these policy recommendations were not included in 
any significant way in the recent energy legislation and actions by 
Federal agencies. For example, the single most important mid- and long-
term policy we advocated, improving the fuel efficiency of the vehicle 
fleet, could have taken significant pressure off of gasoline markets, 
if it had been embraced four years ago. In the past four years, 
gasoline consumption in America increased by about 6 percent.
    Regrettably, just last month the Department of Transportation 
proposed timid improvement in fuel efficiency standards, gerrymandered 
the calculation to let more gas guzzlers escape scrutiny, and exempted 
some of the worst gas guzzler from fuel consumption standards 
altogether. Simultaneously, it threatened to preempt states like 
California from imposing stricter standards. That proposal, which would 
take ten years to lower consumption by the equivalent of less than what 
we use in one month, does not address the problem in any meaningful 
sense.
    Similarly, the key short-term policy we recommended of increasing 
reserve margins and stocks has been neglected. I have attached to my 
testimony three updated graphs from our July 2001 analysis. The first 
shows gasoline consumption. The second shows refinery capacity compared 
to demand and the second shows gasoline stocks above minimum operating 
levels. Together these show that we were living on the razor's edge, 
with rising demand, little excess capacity and small stockpiles. 
Katrina pushed us off the edge.
    Hurricane Katrina is just the latest in a series of accidents and 
interruptions that have hit the oil industry and consumers hard. It is 
the worst possible single event one could imagine from the point of 
view of the domestic gasoline sector. Yet, its impact reflects the same 
underlying problems that have afflicted the industry for the past half-
decade. At the start of each price spike in the past few years we hear 
the same refrain. ``Stocks were low, refinery capacity was stretched to 
the limit.'' A refinery fire here, a pipeline breach there, or a storm 
triggers a spike.
    Once may be a surprise; twice may be bad luck; but by the third 
time, it is a pattern that demands a systematic response, not hand 
wringing. Moreover, if many different accidents keep happening, if many 
different things can go wrong, and if running an overtaxed system makes 
outages more likely, it is incumbent upon policy makers to do something 
about it. The industry and public policy have failed to create a system 
that can meet the needs of the American consumer and America as a 
nation is paying the price for that inaction.
    It is time for a dramatic change in the approach to policy. I offer 
the same advice we gave four years ago. The only thing I would change 
is the urgency in the recommendations. We should move twice as fast and 
set our goals twice as high because past inaction has made the problem 
we face even more critical.

                    Ending the Gasoline Price Spiral

  MARKET FUNDAMENTALS FOR CONSUMER-FRIENDLY POLICIES TO STOP THE WILD 
                                  RIDE

                               July 2001

                          V. POLICY RESPONSES

A. ECONOMIC FUNDAMENTALS AND POLICY PRINCIPLES
    Public policy responses must reflect physical and economic reality. 
Since the laws of physics cannot be repealed, public policy must be 
cognizant of the increased likelihood and severe impact of accidents in 
energy industries, like refineries and pipelines. Physical and 
institutional structures must be prepared to deal with accidents in 
this industry.
    The low short run elasticity plays a critical role in price 
volatility and the exercise of market power. The extremely low 
elasticity of demand is one of the key characteristics of the gasoline 
market. Suppliers are well aware of the rigidities in the market and 
can take advantage of them under the right circumstances. Because the 
gasoline market is so large, even small and short term pricing abuse 
imposes substantial costs on the public.
    Under these circumstances, firms with relatively small market 
shares can increase profits by withholding supplies, unless the 
elasticity of supply is high. Unfortunately, petroleum product markets 
do not exhibit very elastic supply. Reserve margins and stocks are 
crucial.

1. Supply
    Avenues for increasing supply are available, but they may not be 
pursued, if left to industry business decisions. Since short-term 
elasticities are quite low, a variety of resources that can be called 
upon to meet demand quickly are necessary to prevent price volatility. 
Having reserve margins of production and transport capacity would 
dampen price volatility. Stockpiles and storage are the best option 
when demand shifts or supply is interrupted. Import of product is an 
important option when refinery capacity is not available or, depending 
on geographic location, when pipeline capacity is not available.
    The recent closure of refineries also suggests an avenue for 
expanding capacity. The most readily available path to expanding 
capacity may be to identify existing facilities that have been 
shuttered, or sites that have been recently abandoned to expand 
capacity while minimizing environmental impact should be explored. Each 
of these options should be considered, particularly in markets where 
capacity is tight and ownership is concentrated.
    The behavior of small refiners in response to the elimination of 
programs that supported their existence makes it clear that public 
policy can affect the number and geographic distribution of refinery 
capacity. If we want geographically dispersed refinery capacity to 
promote local responses to supply problems, we just have to pay for it.

2. Demand
    In the long run, reducing the size of the market, without imposing 
deprivation on consumers, is the major policy challenge.
    The consumption patterns deeply embedded in spatial relationships 
lead us to conclude that increased fuel economy is the more readily 
achievable approach to reducing gasoline consumption than changing 
living patterns. Reducing fuel use per vehicle allows existing mobility 
patterns to be preserved, while consumption is reduced.
    Shifting preferences for vehicles (toward higher efficiency vehicle 
types) requires greater change in social behaviors. It is also 
vulnerable to changes in taste. Moreover, it requires a change in the 
stock over a substantial period of time, perhaps a decade. While 
policies to affect these behaviors should be pursued, their 
complexities and difficulties should be recognized.
    Attempting to overlay mass transit on existing living patterns may 
be pursued as a long-term strategy. However, given consumer preferences 
and the spatial distribution of activity, this is a substantial task. 
The increasing suburbanization of living patterns frequently results in 
relatively low densities and high costs for mass transit. Changing the 
geographic distribution of work, home and play, requires the greatest 
amount of social change.

3. Distributional Effects
    Equity impacts of rising energy prices, particularly as they affect 
low and lower middle income households, must be dealt with directly. 
Neither general tax cuts nor existing energy assistance programs, such 
as the Low Income Home Energy Assistance Program (LIHEAP), address the 
problem of rising or volatile transportation energy costs. Even if it 
could be argued that LIHEAP addresses the general energy needs of 
groups, ad hoc efforts to increase programs like LIHEAP tend to fall 
short and come long after the impacts of rising energy prices have been 
felt.
B. POLICY TARGETS
    It is time for public policy to seek permanent institutional 
changes that both reduce the chances that markets will be tight and 
reduce the exposure of consumers to the opportunistic exploitation of 
markets when they become tight. To achieve this reduction of risk 
public policy should be focused on achieving five primary goals.

 Restore reserve margins by developing both efficiency (demand-side) 
        and production (supply-side).
 Increase market flexibility through stock and storage policy.
 Discourage private actions that make markets tight/or exploit market 
        disruptions by countering the tendency to profiteer by 
        withholding of supply.
 Promote a more competitive industry.
 Address the disproportionate burden that rising energy price place on 
        lower income households.

1. Expand Reserve Margins By Striking A Balance Between Demand 
        Reduction and Supply Increases
    We have earlier identified the hierarchy of policies to reduce 
demand. Increasing the fuel efficiency of the fleet through increased 
standards for mileage and use of hybrid vehicles should be given top 
priority. Shifting preferences for vehicle types and modes of 
transportation through taxes and incentives are a second category to be 
considered.
    A goal of achieving an improvement of vehicle efficiency (reduction 
in fleet average miles per gallon) equal to economy wide productivity 
over the past decade (when the fleet failed to progress) would have a 
major impact on demand. It would require the fleet average to improve 
at the same rate it did in the 1980s. It would raise average fuel 
efficiency by five miles per gallon, or 20 percent. This is a mid-term 
target. This rate of improvement should be sustainable for several 
decades. This would reduce demand by 1.5 million barrels per day. This 
would return consumption to the level of the mid-1980s.
    Expanding refinery capacity by 10 percent equals approximately 1.5 
million barrels per day. This would require 15 refineries, if the 
average size equals the refineries currently in use. This is less than 
one-third the number shut down in the past ten years and less than one 
quarter of the number shut down in the past fifteen years. 
Alternatively, a ten percent increase in the size of existing 
refineries, which is the rate at which they increased over the 1990s, 
would do the trick, as long as no additional refineries were shut down.
    Placed in the context of redevelopment of recently abandoned 
facilities or expansion of existing facilities, the task of adding 
refinery capacity does not appear to be daunting. Such an expansion of 
capacity has not been in the interest of the businesses making the 
capacity decisions. Therefore, public policies to identify sites, study 
why so many facilities have been shut down, and establish programs to 
expand capacity should be pursued.
    Once the magnitude of the task on the supply-side is placed in 
perspective, and given the objective analysis of the environmental 
costs involved, the call to overturn environmental laws loses its 
force. It seems that expansion of supply-side capacity can be 
accomplished within the current confines of environmental laws. To the 
extent that the costs of compliance can be demonstrated to be a 
significant problem, then underwriting compliance (directly through 
financial subsidies or indirectly through research) rather than 
relaxing standards should be pursued.
    This combination of demand-side and supply-side policies to improve 
the long run market balance would restore the supply/demand balance to 
levels that typified the mid-1980s.

2. Expanding Storage And Stocks
    It has become more and more evident that private decisions on the 
holding of stocks will maximize short term private profits to the 
detriment of the public. Increasing concentration and inadequate 
competition allows stocks to be drawn down to levels that send markets 
into price spirals. While the strategic petroleum reserve has been 
developed as a strategic stockpile and companies generally take care of 
operating stocks, the marketplace is clearly not attending to economic 
stockpiles. Companies will not willingly hold excess capacity for the 
express purpose of preventing price increases. They will only do so if 
they fear that a lack of supply or an increase in brand price would 
cause them to lose business to competitors who have available stocks. 
Regional gasoline markets appear to lack sufficient competition to 
discipline anti-consumer private stock policies.
    Public policy must expand stocks. Participants in the distribution 
of gasoline can be required to hold stocks as a percentage of retail 
sales. Public policy could also either directly support or give 
incentives for private parties to keep storage. It could lower cost of 
storage through tax incentives by draw down stocks during seasonal 
peaks. Finally, public policy could directly underwrite stockpiles. We 
now have a small Northeast heating oil reserve. It should be continued 
and sized to discipline price shocks, not just prevent shortages. 
Similarly, a Midwest gasoline stockpile should be considered.

3. Taking The Fun And Profit Out Of Market Manipulation
    In the short term, government must turn the spotlight on business 
decisions that make markets tight or exploit them.
    Withholding of supply should draw immediate and intense public 
scrutiny. It needs to be backed up with investigations. Since the 
federal government is likely to be subject to political pressures not 
to take action, state government should be authorized and supported in 
market monitoring efforts. A joint task force of federal and state 
attorney's general could be established on a continuing basis. The task 
force should develop databases and information to analyze the 
structure, conduct and performance of gasoline markets.
    As long as huge windfall profits can be made, private sector market 
participants will have a strong incentive to keep markets tight. The 
pattern of repeated price spikes and volatility has now become an 
enduring problem. Because the elasticity of demand is so low--because 
gasoline is so important to economic and social life--this type of 
profiteering should be discouraged. A windfall profits tax that kicks 
in under specific circumstances will take the fun and profit out of 
market manipulation.
    Ultimately, market manipulation could be made illegal.

4. Promoting A Workably Competitive Market
    Further concentration of these industries is quite problematic. The 
Department of Justice Merger Guidelines should be rigorously enforced. 
Moreover, the efficiency defense of consolidation should be looked on 
skeptically, since inadequate capacity is a market problem.
    Restrictive marketing practices, such as zonal pricing and 
franchise restrictions on supply acquisition should be examined and 
discouraged. These practices restrict flows of product into markets at 
key moments.
    Markets should be expanded by creating more uniform product 
requirements. These should not result in a relaxation of clean air 
requirements.

5. Low-income assistance
    Rather than fight repeated battles over supplemental 
appropriations, it would be more effective to index assistance payments 
to energy prices. It may be time to consider new programs that deal 
directly with transportation fuel costs. Transportation energy is a 
necessity in the 21st century.

    Chairman Barton. Well, thank you, Mr. Cooper.
    The Chair is going to recognize himself for the first 5 
minutes of questions. I want to ask Mr. Cavaney--and you may 
have said this in your testimony; I was having to go to vote 
and come back--is there evidence that any of the oil production 
or distribution gathering or transportation pipelines or 
production platforms in the Gulf of Mexico have not performed 
as desired in terms of preventing spills during the hurricane? 
In other words, I have not seen in the popular press any story 
about a rupture or a spill, so I am assuming that part of the 
system has performed as designed. Is that your understanding 
also?
    Mr. Cavaney. It is. Daily, Mr. Chairman, the MMS reports 
all the activity that they have done through their overflights 
and the searches in the area. There have been no spills related 
to production.
    Chairman Barton. So we have had a Category 5 hurricane take 
a huge swath out of three of our coastal States, but in terms 
of the offshore oil and gas production and delivery system, 
while it has been shut down, it has not spewed any 
environmental damage into the gulf coast?
    Mr. Cavaney. No, Mr. Chairman. Another point, too, is these 
platforms out there, particularly those in the deep water, are 
designed to withstand the roughest of conditions, conditions 
like what they experienced. There are over 4,000 total 
operating platforms out in the Federal section of the OCS area, 
and of those we have had reports of 41 of them which were all 
very close inshore and basically first generation platforms 
with very little production receive damage or were effectively 
destroyed. But of all the rest in deep water, only four 
platforms have experienced damage. We learn lessons when we go 
through these things, and those will help us going forward. So 
I think fairly much, if you look at 95 percent of the 
production was shut in because we abandoned all those and shut 
them down properly, now we are at a stage back where only 57 
percent is shut in within a week after the storm went through 
there. So I think the design parameters and the safeguards 
performed as expected and as anticipated, but we do learn some 
new things each time and we will from this one.
    Chairman Barton. Now, we have before us on my far right two 
of the watchdogs for the consumer, and to the left, with the 
exception of the telephone gentleman and the Governor of 
Louisiana's representative, I have got the full panoply of the 
oil and gas industry from Mr. Cavaney of API who goes out and 
finds and hopefully produces the oil, to the gentleman on the 
New York Mercantile who helps create a market for the crude, to 
Mr. Slaughter who helps purchase and refine the crude, and Mr. 
Cooper who helps transmit both the crude and the refined 
products, to Mr. Douglass who actually sells them at retail--
not you individually, but the groups that you represent.
    My first question: Do any of you gentlemen have any 
knowledge of any attempt to collude, to set a price because of 
this shortage? Do you have any personal knowledge of attempting 
to coordinate an orchestrated increase in the price that has 
resulted in the gasoline prices being as high as they are right 
now across the country?
    Mr. Cavaney. Mr. Chairman, I can speak for API and its 
members. We have no knowledge. We have cooperated, as I 
mentioned in my testimony, for decades and decades on dozens of 
investigations by the FTC, and we are daily monitored, as Bob 
Slaughter had mentioned, by the FTC in 360 different cities. 
This industry operates, because it is incredibly, incredibly 
efficient and it is highly diverse particularly as you get 
closer to the retailer. And I think that is our protection.
    Chairman Barton. Now, Mr. Cooper has pointed out in his 
testimony that if you have consolidation and if you have a 
concentration, even at what would normally be considered a low 
level, 10 to 15 percent of a given market, that in and of 
itself can result in prices going up disproportionately. I am 
going to ask the indulgence of the full committee. I want to 
start with Mr. Cavaney and then work my way through the system 
and have each of you try to explain how your segment sets the 
price or how it is created. In other words, I want Mr. Cavaney 
to explain to the best of his ability where this world price, 
the raw material price comes from, and Mr. Newsome to explain 
if there is any group of people like the Hunt brothers or 
somebody who could create a position to move the market 
artificially, and just work our way down. Because I am like 
everybody else, I don't like going from 2.47 a gallon Tuesday 
morning to 2.79 a gallon Tuesday night, which I had to do down 
in Texas, and I just thought I was getting ripped off big time 
until I heard from Mr. Upton in Michigan that the price went to 
3.50, and then when I watched on TV and saw it Georgia it was 
at $6. So I felt a little bit better about only having to pay 
40 cents a gallon more when I found out about the rest of the 
country. But I think it is a fair question that the American 
people ask, is why, when we have such a little--and 2 million 
barrels a day in terms of production and 4 million barrels a 
day in terms of refinery capacity and two major pipelines being 
shut down is not little, but in the overall scheme of things 
why that would cause prices to go up everywhere in this 
country.
    So, Mr. Cavaney, can you briefly explain to the best of 
your knowledge how the market price is set for crude that your 
people produce?
    Mr. Cavaney. Yes. Mr. Chairman, I might just comment, we 
share the same concern; we don't like the prices, either. But 
we just went through an experience down in the gulf that is a 
once in a generation or once in every several generation 
experience.
    Directly to your point, the products that we produce, 
natural gas and crude oil, those are set and traded in 
worldwide markets. Crude oil is the world's largest commodity, 
it is highly transparent, and the prices are established off of 
what are called benchmarks, which are certain quality 
parameters, certain viscosity, certain amounts of sulfur. And 
then those that are considered to be more attractive have an 
established differential that floats around. The more 
attractive lighter grades, which are more efficient, you can 
get higher yield, trade a little higher. The lower ones trade a 
little lower.
    Chairman Barton. But can any company----
    Mr. Cavaney. Everyone pays the same price.
    Chairman Barton. Can any producer, ExxonMobil, the biggest 
in the world, can they or the Saudis last week, could they have 
moved the market, the crude price higher by something that they 
did or colluded with other producers?
    Mr. Cavaney. Not in that short period of time. Nobody could 
do any of that, because the market is so transparent and so 
large.
    Chairman Barton. Do you agree or disagree with that, Mr. 
Cooper? I am going to use you as my referee here.
    Mr. Mark Cooper. Well, collusion is not the issue. And 
you----
    Chairman Barton. Well, I am trying to get to----
    Mr. Mark Cooper. But you posed the question properly. It is 
that, it is not the crude market. I mean, the crude price is 
set by a cartel primarily, and it is a political price, it is 
not an economic price. The refinery market----
    Chairman Barton. If you have a surplus, I agree with that. 
But we don't have a surplus of production.
    Mr. Mark Cooper. But the quantity of supply, the amount of 
production capacity is a strategic variable. When you have a 
small number of people who decide what to do, then supply is 
not out. It doesn't happen in nature, it comes out of political 
decisions.
    Chairman Barton. I am just asking, do you have any--I am 
going to give you a chance after each person speaks, because 
you are a smart guy. Okay? But on the crude price, do you 
stipulate that any producer in the world tried to raise the 
price above a market level in the last 2 weeks?
    Mr. Mark Cooper. Certainly not in the last 2 weeks. The 
conditions were set over a period of time by political 
decisions among the people.
    Chairman Barton. Now, Mr. Newsome, is there anybody on the 
New York Mercantile Exchange or any other commodity exchange 
that, in a market this big, has the ability to move the price 
higher on a purely speculative play?
    Mr. Newsome. No, sir. As you know, I come from the 
regulatory side of the equation, not as a trader or anything 
else, and so monitoring markets, market surveillance is 
something that is very near and dear to me. That is one of the 
reasons that NYMEX is considered the benchmark in many energy 
products is because you have hundreds of companies, 
representatives that all come together to compete in a very 
open, transparent environment to come up with a price.
    Chairman Barton. So there is nobody out there that could 
try to corner the oil market or the natural gas market and move 
the price higher for purely speculative purposes in the last 2 
weeks?
    Mr. Newsome. No.
    Chairman Barton. Do you agree or disagree with that, Mr. 
Cooper?
    Mr. Mark Cooper. I would like people to look at that one 
very carefully. You would have gotten the same answers, and you 
probably did, about the electricity market in California 4 
years ago. There are a lot of people chasing a lot of oil out 
there, a lot of financial transactions, but very little 
physical product changing hands. That is a concern to me. He 
has got the data, you can take a look at it.
    Chairman Barton. In your opinion, how big of a position 
would you want or a group colluding have to take to move the 
market?
    Mr. Mark Cooper. In a market that is this tight, you know, 
the tighter the market, the smaller the position you need to 
have that influence. But I am not asserting that. But that is a 
good question and there is data that you can look at these 
transactions, ask how many times this oil, this single barrel 
of oil changed hands, just like we asked how many times the 
electrons changed hands.
    Chairman Barton. You believe, while on the crude--the 
producers, while you think there are political considerations 
over time that have tightened the market or prevented 
production coming on line, on the commodity exchanges do you 
think it is possible somebody could have moved the market 
differently than pure market pressures moved it?
    Mr. Mark Cooper. The amount of speculation going on is a 
source of concern. We have seen it in the Wall Street Journal 
and a number of other places. It is an objective study. 
Absolutely.
    Chairman Barton. We will put a question mark there. Now we 
go to Mr. Slaughter, who takes the products that have been 
produced and purchased, and it is your job now to refine those 
products. You take the price coming in that is set on the 
exchanges. The refined products that are coming out, your 
refiners have the ability to set a price. How is that going out 
price set?
    Mr. Slaughter. It is basically set from market conditions. 
There are two factors: One is the cost of production, and the 
second is the market that it is being sold in.
    Chairman Barton. Well, when Mr. Douglass, I think he had 
the chart showing the rack price going up everywhere in the 
country over a period of I think 3 days. It went up faster in 
some regions than it did in others, but that is a refinery 
setting that price. Why did it? Your crude input didn't really 
go up that much. It went from about $65 a barrel to $70, and 
then when the President announced the release of the SPR the 
crude price went back down. Unless it went up big time today, 
it is $65, $66, $67. But the price that Mr. Douglass is paying 
went up and it stayed up. Now, what happened there?
    Mr. Slaughter. First of all, there are 48 refining 
companies and 149 refineries. Each sets prices, of course, 
individually. But what happened was that with what happened in 
the gulf last week, as Mr. Cavaney pointed out, was a once in a 
lifetime event. It knocked out 20 percent plus of the Nation's 
refining capacity, and it also knocked out the major supply 
pipelines for about one-third of the country to a half of the 
country, as well as the Midwest as well as the East and the 
South. When that happens, basically prices go up. Prices went 
up. If you look at what happened to gasoline on the exchanges, 
gasoline prices went way up because people were anticipating 
that there would be a supply shortage as a result of what had 
happened with Hurricane Katrina.
    Chairman Barton. I am not being argumentative, Mr. 
Slaughter, but I am trying to understand. Your input price did 
not go up. There is obviously some supply disruption to these 
pipelines that got shut down, and we know that overall there is 
going to be a shortage because we have less refined product 
because the refineries themselves are down. But I am still 
trying to understand why the refiners' posted prices went up 
everywhere as quickly as they did. I understand raising a price 
to alleviate a shortage. If I don't have any gasoline coming 
into Atlanta, I know why that price is going up: Because you 
are not getting any more gasoline. I don't quite understand why 
it is going up in Texas and California where the refineries are 
still operating, the distribution systems are still operating; 
you just have to allocate across the 21 million barrel a day 
market, you have got to allocate a shortage overall of 
somewhere between 2 and 3 million barrels once you go through 
your inventory.
    Mr. Slaughter. What happens in the event of a supply 
disruption is that basically, you know, prices throughout the 
country will basically go up to try to allocate the product 
through market forces. And----
    Chairman Barton. So is there a marketing manager at each 
refinery who takes it upon himself or herself to set the price? 
Does it come down from the corporate office? I mean, how do you 
get to that price?
    Mr. Slaughter. Basically, the companies have their own 
pricing strategies and they respond to market conditions and 
what they also perceive as replacement cost and what the 
marketplace is basically going through in terms of general 
supply problems.
    Chairman Barton. Mr. Cooper, do you want to comment on 
that?
    Mr. Mark Cooper. They have market power. There is a line in 
the movie, A Beautiful Mind, about John Nash. And the key line 
he says is: Adam Smith was wrong. When he realizes that nine 
people can cooperate, a small group of people, maximize their 
profits by observing each other's behavior. Right? It is called 
the Nash equilibrium. He won the Nobel Prize for it and he 
spent 25 years learning how noncollusive games, noncooperative 
games--every refinery market in this country is concentrated. 
Several of them are highly concentrated. So he told you the 
right answer; he says: We will charge whatever the market will 
bear. And in this particular market, there is only a small 
number of other players out there to observe. So they all put 
their prices up at the same time. And people call me all the 
time and say they all did 15 cents overnight. How can that 
happen? Because most experience is that someone in that market 
would say, hey, I will eat a little bit of that to expand my 
market share.
    The refinery industry doesn't behave that way. The RAND 
study showed that coming out of the mergers of the 1990's. You 
put your finger on it. They have the market power to charge 
whatever the market will bear.
    Chairman Barton. I am not stipulating they have the market 
power. I am trying to find out what they are really doing.
    Mr. Mark Cooper. Well, his answer is that is where the 
wholesale price is set. And the numbers you see today are 
damning numbers, that $18 a barrel and $13 a barrel.
    Chairman Barton. Well, it is not automatically a damning 
number if it prevents a shortage. If you raise the price to 
prevent a shortage so that willing buyers have an opportunity 
to purchase, that is not damning. If it is artificially created 
for whatever reason, that is damning.
    Mr. Mark Cooper. It is damning if there are not enough 
willing sellers to prevent excess profits.
    Chairman Barton. Well, do you know of any refinery that 
held refined product off of any given market?
    Mr. Mark Cooper. Well, they created a market in which there 
was no surplus. That is the long-term problem of letting those 
50 refineries get closed.
    Chairman Barton. We are going to encourage cooperation to 
get some of them reopened and build some new ones.
    Mr. Mark Cooper. But it would be real important to get some 
other players, some independents in those markets. If those 
same folks own those refineries, you are at the same point.
    Chairman Barton. Let us go to Mr. Cooper. I am going to 
stipulate, since you are regulated and you testified that the 
pipelines didn't change their price.
    Mr. Benjamin Cooper. That is described on page 4 and 5 of 
my testimony.
    Chairman Barton. So we are going to pass you over. Now we 
go to Mr. Douglass. You are getting these higher prices from 
Mr. Slaughter's group, but you didn't just pass those through. 
The retail price went up too.
    Mr. Douglass. Correct.
    Chairman Barton. Okay. Do you want to explain how that 
happened?
    Mr. Douglass. Yes. May I be allowed to put up chart 2?
    Chairman Barton. You may.
    Mr. Douglass. If we can put up the second chart that we 
have that was an attachment to our statement that was filed, 
you will see that refiners--in this particular case I am a 
branded marketer and this is a branded supplier, my biggest 
supplier. They raised the price 13 cents the first day. By the 
way, they lagged the market. I had other suppliers who raised 
it 37 for their branded stores and 70 cents for the unbranded 
business that I use commercially. So this is a very restrained 
marketing company.
    And for the benefit of those who have called them names 
today, it is ExxonMobil. So they were dragging. They were 
actually being very conservative in their price moves compared 
to the others. However, they did raise my price 13 cents a 
gallon. And the way it works in our business is you have to 
pay--the next truckload, you have to pay that extra 13 cents. 
So you immediately identify that as part of your inventory. So 
we price on the basis that what is in the inventory at the time 
of an escalating market, we better move consistent with that, 
or if we sell that other inventory and don't get back the 13 
cent increase, we will end up losing money.
    Chairman Barton. You fast-forward to replace your 
inventory.
    Mr. Douglass. Correct. We are definitely trying to put a 
replacement cost----
    Chairman Barton. And you are stipulating that the retail 
price just went up whatever the wholesale price you had to pay 
went up.
    Mr. Douglass. Actually, we lost 5 cents in the transaction 
over time.
    Mr. Mark Cooper. He lost because the credit card companies 
charge him a percentage of the sale, and that went up as well 
even though the cost of that transaction didn't go up at all, 
and that is 3 percent. So if you went from $2 to $3, he lost 3 
cents out of that. They took a bigger bite out of it.
    So those are the numbers that suggest where the price 
increase came from. That doesn't mean there weren't individual 
stations who may have gone hog wild.
    Chairman Barton. You think the retail guys are okay?
    Mr. Mark Cooper. As far as I can tell, and these numbers 
nailed it, and I have been talking with people, and the rack 
price was just going up. And this gentleman had to come here 
and put it on the screen.
    Chairman Barton. If we had any black hats in the room--and 
I am going to stipulate that everybody here has at least a gray 
hat on, and I want to say everybody has a white hat on, but if 
we had to go from white to shades of gray, you are going to say 
the speculators on the commodity markets and the refiners are 
the ones that are not lily white?
    Mr. Mark Cooper. The latter I have seen some numbers; the 
former I would like to see some analysis.
    Chairman Barton. I am going to give those two guys a chance 
to rebut, and then I am going to deal the next person.
    Mr. Slaughter or Mr. Newsome.
    Mr. Slaughter. Yes, Mr. Chairman. The point that Mr. 
Douglass raised, the antitrust laws prevent collusion in our 
industry, as you know.
    Chairman Barton. I don't think anybody is alleging 
collusion based on what I have heard today.
    Mr. Slaughter. The spot price, because of the anticipation 
of supply shortages for products, went up considerably during 
this period of time when there was the greatest disruption. A 
number of our companies froze prices or were selling prices 
well below spot price during that period of time. So, I mean, 
there is different behavior by each individual company.
    The point I had before, the tremendous amount of our cost 
of our product is involved with a cost accrued, plus the cost 
of taxes. Different people behave differently, but everybody 
could see that that situation that we had this week was a 
cataclysmic event threatening so much of the market for our 
products. The people responded accordingly. And, you know, 
basically it is a market situation. It was a cataclysmic event. 
It knocked out 20 percent of the refining supply, and everyone 
responded accordingly. A number of them took the steps that Mr. 
Douglass has suggested and froze prices or actually sold below 
spot.
    Chairman Barton. Mr. Newsome.
    Mr. Newsome. Thank you, Mr. Chairman.
    As I commented in my testimony, speculators have become 
easy fodder to pick on by the media, but they play an important 
role in the market.
    Chairman Barton. I am not picking on them. I am trying to 
give an explanation to the average citizen, if they are lucky 
enough or bored enough to watch this entire hearing, about what 
the best experts in the country explained is our pricing. We 
will politicize it, but I at least want to try to get on the 
record what it is.
    Mr. Newsome. The reality of how the marketplace operates 
keeps speculators from pushing the price. It is a very open, 
competitive marketplace. And in one pit you have got 
commercials, you have got the banks and brokers, you have got 
the locals or the speculators that are all bidding and 
competing one for another.
    The markets move based upon fundamentals. If a speculator 
tries to take the market in a direction that is not 
fundamentally sound, there is someone always there ready to 
make him pay, saying, yeah, do it, and we will turn around, and 
it will cost you a lot of money. The reality of the market is 
that everyone can't move in one direction whether that is high 
or whether it is low. The futures markets are a zero sum game. 
For every winner, there is a loser. So, that, just the way that 
the markets operate don't allow it to get away from the 
fundamentals.
    Chairman Barton. I want to thank the committee for 
indulging me. I don't normally take that much time, but this is 
such an important issue that I wanted to try to get on the 
record at least how the pricing system works or doesn't work 
depending on your point of view. And I want to again thank the 
committee for letting me do that.
    Mr. Rush is recognized for 5 minutes.
    Mr. Rush. Thank you, Mr. Chairman. Mr. Chairman, I don't 
expect to take my 4 or 5 minutes. I just have a question that 
is not in line with your line of questioning.
    I want to ask Mr. Angelle, I had occasion this morning to 
be at a meeting with the president of the American Red Cross as 
it relates to the problem that we are experiencing in the gulf 
coastal region, and I asked her a specific question. And I 
asked her, why didn't the Red Cross go into New Orleans 
earlier? And her response to me startled me really. And she 
said that the Governor did not--ordered her not to go into New 
Orleans to conduct rescue and recovery or relief work, for her 
to conduct relief efforts in New Orleans. And that astounded 
me. And I expected to--I wanted to ask the Governor. I thought 
that maybe she would be here, but you are a representative. Are 
you aware of that?
    Mr. Angelle. No, sir. In my role as secretary of the 
Department of Natural Resources, I obviously have primary 
jurisdiction over managing our energy resources in Louisiana, 
and I am not qualified to answer that question.
    Mr. Rush. Thank you.
    Mr. Chairman, I yield back.
    Chairman Barton. Did you yield back? Wow, thank you.
    Mr. Hall, 5 minutes.
    Mr. Hall. Thank you, Mr. Chairman.
    All of you probably sat through the first session and heard 
our questions and answers, and I guess, Mr. Cavaney, I will 
start with you. And I thank you for being here and sharing your 
knowledge with us.
    What is needed--what we need to do is to bring some 
stability to the energy market, and that is easy to say and 
hard to do. It is going to require long-term investments and 
strategies.
    What, in your opinion, will be the most effective strategy 
for dealing with the spiraling cost in the short term first? We 
got an idea on the long term, but what can we do tonight or 
before milking time tomorrow, or within the reasonable 
foreseeable future?
    Mr. Cavaney. I think the steps that were undertaken by the 
administration and by the IEA in terms of making available some 
finished product, which is being brought over from their 
reserves, did about as much as one could expect. We have seen 
over the last several days both drops, pretty significant, in 
the futures markets of both crude oil and finished product. I 
am not forecasting here, but we may well look back and see that 
the peak here occurred the last several days ago, because with 
the passage of time, what we are finding is both the refineries 
are, in fact, coming back; the pipelines are up, as we 
mentioned; and the refined product that is coming over is 
helping fill a void. So we are on the right track in the near 
term.
    What we ought to focus on is trying to help work together 
instead of actually working against one another. And by that I 
mean we in the industry as we are, we ought to be out there 
getting supplies we need, getting the repairs, getting our 
people down there and cooperating with the other entities which 
are so important.
    Utilities have done a terrific job of getting power down 
there. Government ought to be in place to be able to provide 
help when needed, and that is quick approval on permits, 
helping to expedite things that need to go through the process 
of getting approval, and in some cases possibly even helping 
coordinate closely the various different entities within the 
government itself.
    And finally, consumers, and I think this is the part where 
the biggest savings can be made. And I don't think we as a 
country have done anywhere near the job we can, and that is in 
energy conservation. We can give you on our Web site api.org a 
whole litany of things that a driver can do in his or her 
automobile that can actually improve the miles per gallon by as 
much as 10 or 12. That is fairly significant if you are driving 
a car that gets about 25 miles per gallon. And there is also, 
very obviously, that if you have two cars, one gets good 
mileage and other gets less so, try and plan your longer trips 
for the other. That is the equivalent of actually adding 
product instantaneously.
    The problem is most people think, I am just an individual, 
and my little contribution won't mean much. But if you do a few 
simple things and multiply that by several million, you are 
adding more production than we can ever find overnight.
    So the answer to your question is individuals can look at 
this and begin to create, I think, an approach that won't only 
serve us well during this immediate postrestoration period, but 
can serve us well going forward, and that is energy 
conservation not only in transportation sector, but in all 
sectors.
    Mr. Hall. Would you repeat that?
    Mr. Cavaney. I will do it a little more passionately next 
time.
    Mr. Hall. Seriously, I know you are a little disgusted that 
you don't have a better audience. Everything is being taken 
down by the reporter, every Member of Congress, and we will 
read and reread it. That is the way we make decisions. I was 
kidding you. I don't expect you to repeat it.
    But Mr. Cooper made a great case for more refineries, and 
the chairman, and the chairman's committee, those that work 
with him and support him and advise him, worked with him, and 
in his--I guess in his good judgment, he put subtitle H, 
sections 391, 392, their aim toward the Governors of this State 
to make it more possible and more likely that they could pursue 
the construction of a refinery. And I am not sure, I don't 
think we had any report language or anything telling him 
exactly how to do it, because probably it will be done slowly 
and by people that are more knowledgeable about the business 
certainly than I am. But if we have the support of the EPA, and 
we set that out in the bill itself, there is a lot of ``thou 
shalts'' in there that ought to make the acquisition of a 
refinery a little more attainable for the people, Governors of 
the State, with a lot of their finances; that they have to 
reduce the time that it takes to build one and might make it 
more attractive for investors to shorten the time for them to 
have some expectation of their payback.
    But what are the--do you know--I asked someone who 
represented the Federal Government if they had any anybody from 
any of the 50 Governors tie into them on this, and I think 
maybe, Mr. Chairman, our Governor has discussed it with you, 
and you discussed it with several other Governors.  Chairman 
Barton. I asked the President to send a letter to all 50 
Governors asking them if they want to consider using this 
particular provision, and I talked directly with Governor Perry 
of Texas, who is considering strongly doing just that.
    Mr. Hall. Maybe I am talking to the wrong bunch, Mr. 
Chairman. When did you send that letter?
    Chairman Barton. I haven't sent the letter yet. I just made 
a phone call. I asked the President of the United States----
    Mr. Hall. I will follow up and I will send Red a copy so he 
can help me answer that and help us work that out. But it is up 
to--how much more time do I have?
    Chairman Barton. You have been out about a minute and a 
half.
    Mr. Hall. Could I ask one real quick question of Mr. 
Douglass? He is my constituent and my good friend. He has been 
an effective witness before this committee before.
    Bill, would you clarify how individual stations make 
adjustments in pricing in times of market fluctuations; do 
suppliers give you anticipated prices?
    Mr. Douglass. When you say anticipated, we get our price 
changes every day. But in a volatile market like we are 
presently in, they may be twice a day, anticipated in the sense 
that if they told us at noon, they would raise the price at 6; 
if they told us at 6, they would raise it at 12.
    Mr. Hall. Who is they?
    Mr. Douglass. The oil companies.
    Mr. Hall. Do you deal with the same one all the time?
    Mr. Douglass. We have eight different suppliers, but we 
have one principal supplier, a branded company. But what you 
have to do is look at your replacement costs, because they 
draft you as soon as they load the truck. They literally have 
you on the computer, and when that truck is loaded, they draft 
your account. So you have to pay when you buy, and if you don't 
pay, obviously they don't let you buy.
    Mr. Hall. What are the prices based on?
    Mr. Douglass. The price that we pay?
    Mr. Hall. Yes.
    Mr. Douglass. Or the price that we charge?
    Mr. Hall. The price that you set. You set a price to sell.
    Mr. Douglass. Essentially we try to recover our costs, 
because when I used my chart, one, I had a 14-cent margin at 
that point, which is a gross margin before any expenses are 
taken out. And when the truck picks up that fuel, and it is 10 
cents, in this case, 13 cents higher on the next day, we have 
to raise our price because our costs remain. And as they 
pointed out, the credit card costs alone range from 5 to 7 
cents a gallon of that 14 that I had. But if you will notice on 
that chart, my margin went down to 10, so I had a net margin, 
if you will, of 3 cents to pay all the expenses associated with 
it.
    So you must move forward. You must take your inventory.
    Mr. Hall. My time is really up. I will write you a letter 
and ask you to give some more answers, really to follow your 
invoice right from the time you got it and the time you pay it, 
and how much you raised your prices compared to how much the 
people that sold to you raised theirs.
    Did you ever raise yours in excess of what----
    Mr. Douglass. No, sir. No, sir. In fact, we lost margin, if 
you look on this transaction. We lost margin as it went up, and 
our expenses went up, as I indicated, through credit card 
expense and so on.
    Mr. Hall. The only way you could have kept from losing that 
was to arbitrarily raise yours above what you were paying 
directly for it?
    Mr. Douglass. That is correct.
    Mr. Hall. You didn't do that?
    Mr. Douglass. I did not do that.
    Chairman Barton. Before I recognize Mr. Stupak, I want to 
understand something. You just said if I come into one of your 
stations, and I use my Visa credit card, and I buy 1 gallon of 
gasoline, you are charged 7 cents?
    Mr. Douglass. Yes, sir.
    Chairman Barton. But if I buy two gallons, you are charged 
14 cents? And----
    Mr. Douglass. Yes, sir.
    Chairman Barton. And if I charge 10 gallons, you are 
charged 70 cents?
    Mr. Douglass. Yes, sir.
    Chairman Barton. So the more I buy, the more you are 
charged?
    Mr. Douglass. Absolutely.
    Chairman Barton. Even though it doesn't cost any more for a 
transaction if I buy 10 gallons than if I buy 1.
    Mr. Douglass. That's correct.
    Chairman Barton. That doesn't make a whole lot of sense.
    Mr. Douglass. In my testimony I asked that we investigate 
the pricing of the credit card companies.
    Chairman Barton. Interesting.
    Mr. Stupak.
    Mr. Stupak. Thank you, Mr. Chairman.
    Mr. Newman--I am sorry, Newsome--the risk premium, what is 
it right now on a barrel of oil?
    Mr. Newsome. I think it would vary depending upon what 
analyst you talk to.
    Mr. Stupak. All right. Most papers are saying 15 to 20 
dollars; is that correct?
    Mr. Newsome. I am not an oil analyst, so it would be 
difficult for me to say, but my opinion would be that is very 
high.
    Mr. Stupak. What do you think it is?
    Mr. Newsome. I would say it is much lower than that, below 
$5.
    Mr. Stupak. So Bloomberg, Kiplinger, all these people are 
just wrong?
    Mr. Newsome. Well, they all have their opinions.
    Mr. Stupak. Okay. Thank you.
    Mr. Douglass, certainly I enjoyed your testimony. I really 
found your charts quite interesting. The chairman was just 
asking you about if you take a look at your chart number 6 
about the credit card companies, as you can see right there, 
they went up twice, or 200 percent; average 2003 revenue was a 
buck 50. They are up to $3 now, 200 percent increase, royalty 
owners. They have doubled, if you will, their cost to a 
retailer?
    Mr. Douglass. Sure.
    Mr. Stupak. Royalty owners, they doubled, crude exploration 
and extraction, two and a half times, if my math is correct; 
refiner, two and a half times; and retailer stayed the same.
    Mr. Douglass. Correct.
    Mr. Stupak. Is that a set margin you work off?
    Mr. Douglass. Well, actually, I was reflecting incidentally 
on this chart. It says average 2003 revenue. My staff didn't 
understand my cursive. It was August 2003 revenue and August 
2005. And, in fact, what I did, in the event I got challenged, 
I brought invoices with me.
    Mr. Stupak. So everybody in the industry has gone up at 
least 200 percent in the last 2 years except the retailer?
    Mr. Douglass. That is correct.
    Mr. Stupak. If you look at your chart, go to chart number 
4, if you will. You start on August 26 and go to close of 
September 2. That is a week's time. Katrina hit land on August 
29. Shortly thereafter the President released an SPR, or oil 
out of SPR, as I and others have been advocating for some time 
to try to bring some stability here. And Mr. Caruso testified 
earlier that once the oil was reduced from the SPR, the cost of 
a barrel of oil actually went down.
    Mr. Douglass. Yes, sir.
    Mr. Stupak. But the price keeps going up.
    Mr. Douglass. Well, we have a chart, chart 3 here, which 
does not reflect taxes or, if you will, freight, but it is the 
price for unbranded fuel, and you will see that it did drop off 
from its high of 831 for unbranded fuel. What happened with the 
branded companies, they were lagging that particular pricing 
strategy, so they were still catching up. They were still 
passing through the----
    Mr. Stupak. But then the next day on September 2, it is 
going back up again.
    Mr. Douglass. Yes, sir.
    Mr. Stupak. Where would it be on the 3rd, 4th? Has it gone 
up, stabilized? I am just asking you to guess. It is just on 
your chart.
    Mr. Douglass. It has actually dropped.
    Mr. Stupak. Dropped again?
    Mr. Douglass. Yes, sir.
    Mr. Stupak. We appreciate your charts and appreciate the 
suggestions you have.
    Mr. Slaughter, I got a number of questions for you. And the 
chairman is turning on the clock, so I am going to have to move 
quickly, so my time is limited. If you answer yes or no, I 
certainly would appreciate it.
    Allow me to begin by quoting a 1995 industry document in 
which the oil industry noted that--I am quoting now--that if 
the U.S. Refining industry does not reduce its refining 
capacity, it will never see any substantial increase in 
refining margins.
    And that is an internal Chevron document dated November 30, 
1995. That suggests to me that the industry itself has played 
an important role in the lack of refining capacity in the U.S. 
So my question is in your testimony, you indicated that in 19--
you indicated that 177 refineries have shut down since 1977. Is 
it true that there are no requests for environmental permits to 
reopen any of these facilities, yes or no?
    Mr. Slaughter. To my knowledge, there are not. Many of them 
have been sold or moved, or many of them could not get another 
permit.
    Mr. Stupak. But there is no request to reopen these 177 
refineries; the answer is no?
    Mr. Slaughter. There may not even be a refinery on that 
site any more, Congressman.
    Mr. Stupak. Isn't italso true that since 1995--I should say 
in 1995 alone, 30 refineries have shut down, right?
    Mr. Slaughter. Many of them shut down because of the cost 
of the Federal programs that I displayed on my third chart, 
Congressman.
    Mr. Stupak. Sure. So 30 of them shut down. So now we are up 
to 207. Of the 30 that have shut down, are any of them seeking 
permits to reopen?
    Mr. Slaughter. It is funny you had mentioned that. There 
was a refinery in California, the Powerine refinery, two 
summers ago when there were supply problems in California 
applied to reopen, and the application was denied.
    Mr. Stupak. Denied by California?
    Mr. Slaughter. Denied by the local authorities.
    Mr. Stupak. Well, there have been no new refineries built 
since 1976, and over the past 13 years only one refinery, the 
Arizona clean fuels facility, has sought a permit to rebuild a 
new refinery; isn't that correct?
    Mr. Slaughter. That is correct.
    Mr. Stupak. Isn't it also true that in 1992, the State of 
Arizona granted a permit to the Arizona facility for 
construction and operation, and the company sat on the permit 
for nearly 8 years without actually building a refinery?
    Mr. Slaughter. Not to my knowledge, no. They had to remove 
the refining site----
    Mr. Stupak. They didn't move the refinery site until 2003 
from Maricopa County to Yuma, Arizona. So from 1992, after it 
was approved, it sat 8 years without actually building a 
refinery.
    Mr. Slaughter. There was a lot of activity on that in the 
meantime, Congressman.
    Mr. Stupak. They got the permit, and they still to this day 
have not built a refinery.
    Mr. Slaughter. It is more than just one permit, 
Congressman. They did just get an air permit, which is a good 
sign, but you know there is a problem because it costs $3 
billion to build a refinery of that size today. There is a lot 
of upfront money you have to pay, and you may have to wait 15 
years until you know whether you will ever get a drop out of 
that refinery. There is a lot of uncertainty in making an 
application to build a new refinery.
    Mr. Stupak. They have all the permits they needed. What 
permit did they not have after 1992?
    Mr. Slaughter. They need air permits, and they need other 
permits.
    Mr. Stupak. Tell me the ones specifically they did not 
receive for this one. I don't want general answers. I am 
talking about a very specific refinery, because I found--and 
today's Washington Post backs up the stories here. You claim 
you can't get permits because of environmental reasons, yet 
everything we have examined finds just the opposite. And when 
you started off with the first quote I gave you, which was 
1995, in which the refining industry says, if you don't reduce 
your refining capacity, you will never see any substantial 
increase in refining margins.
    Mr. Douglass' chart here, which shows just in the last 2 
years you were able to increase your revenue by decreasing 
refining capacity by 2\1/2\ percent, from $11 in August 2003 to 
$27 per barrel in 2005.
    Mr. Douglass' charts sort of indicate what we are driving 
at here. The issue isn't environmental laws. The issue is there 
is no need to take refinery capacity because if you do, your 
margins are going to go down.
    Are you familiar with the Government Accounting Office 
report of May of this year which says exactly the same thing?
    Mr. Slaughter. I am aware of that GAO report. I am also 
aware of a FTC report that rebuts it. You keep citing a 1995 
document by one person in one company which I have not seen, 
and there is no evidence at all that anyone ever acted on 
whatever suggestion is there.
    Mr. Stupak. Really, since that time you have closed 203 
refineries. I think that is quite a bit of action; 177 and 30, 
unless my math--you are right, it is 207.
    Mr. Slaughter. That is right.
    Mr. Stupak. One hundred seventy-seven----
    Mr. Slaughter. Actually refining capacity has increased 
over that period.
    Mr. Stupak. In refineries that are left.
    Mr. Slaughter. It is still capacity.
    Mr. Stupak. Actually it is increased by 13 percent only 
since change is made. I keep hearing this, and even the 
questions of the chairman and Mr. Hall was if we would build 
more refineries, and even in the energy bill, which I 
supported, there was movement to waive environmental laws to 
make the Department of Energy, the Secretary, the head person 
who would decide the environmental laws of this Nation. I think 
it is a lame excuse for putting forth when you see prices and 
profits like this by the refineries.
    Mr. Slaughter. Crude price remains the biggest determinant 
of product prices, Congressman. The EIA testimony today 
demonstrated that, what happens in the marketplace demonstrates 
it. The industry has been adding capacity at existing sites 
consistently over the time period that you have mentioned, and 
we have increased the actual refining capacity in the United 
States over the last 10 years. A number of the refineries that 
are cited in the larger number were inefficient, small 
refineries that were basically supported by the price control 
system of the 1970's----
    Mr. Stupak. Or, as Mr. Cooper says, the bigger ones bought 
up these little refineries, put them out of business; 
therefore, it is easier to control the price when very few are 
controlling the process. That is what Valero and others have 
done.
    Mr. Slaughter. Valero has bought a number of refineries in 
the last several years and they have added 400,000 barrels of 
capacity to them, Congressman.
    Mr. Hall [presiding]. Mr. Stupak, have you got the answers 
you want?
    Mr. Stupak. No. Mr. Chairman, can we be allowed to follow 
those up, though, with more written questions?
    Mr. Hall. I will allow you an additional 2 minutes. I will 
allow you an additional 2 minutes if you are trying to close up 
because we are not going to have a second round.
    Our chairman took 20 minutes, and we will yield you 2 or 4 
of those. I am not mad at him about it. Let the record show 
that.
    Mr. Stupak. Mr. Cooper, I brought up about the refineries 
being closed, more people control it, and therefore they can 
control also the price or the profit margin. Would you care to 
comment on my question to Mr. Slaughter on that line?
    Mr. Mark Cooper. It is a simple proposition that we have 
understood for quite some time that when the number of actors 
in the market gets small, they can exercise market power.
    In this industry, because supply and demand are so weak, 
market forces are weak, people can't come back, you can't 
increase supply, you get more market power at a lower level of 
concentration. And we submitted for the record a very detailed 
analysis of this debate between the FTC and the GAO. The FTC 
has a theory that mergers that don't increase the market 
power--the concentration ratios above a certain level don't 
hurt. The GAO analysis shows they do.
    And let me be clear. The FTC and the GAO do not treat 
capacity as a strategic variable. If you look at the GAO's 
analysis, as capacity utilization goes up, price goes up. If 
you cut back on capacity, you can expect the price increase. As 
stocks go down, price goes up.
    The GAO considers those to be exogenous; that is, they are 
not part of the market power problem.
    Your memo, the behavior over the past 4 years shows--or 10 
years--shows quite clearly an industry that has got 
concentrated, and as a result of concentration at the refinery 
level, they have power over price. That is what we call market 
power.
    I think the numbers you have seen today suggest that they 
set the price at what the market will bear--you can put it that 
way--but there is not enough supply side competition, which is 
what we like in our markets, to protect consumers from the 
abuse of market power. I think that is a good case, and you 
have good empirical evidence of that today during this crisis.
    Mr. Stupak. Then what should the Congress do to take--if I 
use the word we have heard a lot today--the U.S. Off the 
razor's edge of tight refining capacity? What should we do?
    Mr. Mark Cooper. Well, we tried to emphasize the demand 
side. So Mr. Hall's question, what can I do before I have to 
milk the cows tomorrow, I talk about three Ts. Two of them I 
can do before tomorrow; that is, trips and tires.
    You heard the suggestion. You inflate your tires, and you 
think about your trips. And it is not deprivation. I think 
about how many times I am going to the store and which car I am 
going to drive to the store. I agree on something with Mr. 
Cavaney--I hope this place doesn't get struck by lightning--and 
then the third one is tune-ups. Those are near-term things. In 
the long term, we have to get the efficiency of our fleet 
increased.
    Because reducing our consumption affects the world market--
Mr. Lashof showed you why it is a big impact on the world 
market. It affects the domestic market. It alleviates the 
refinery problem. Producing more domestic oil will not 
alleviate the pressure on the refineries.
    Those are the things to do. I think the Government agencies 
that worry about gouging should stop saying there is no 
collusion and start saying consumers aren't being treated 
fairly. We should worry more about the unilateral exercise of 
market power.
    Mr. Hall. All right. Mr. Cooper took the 2 minutes. Now, 
you want to----
    Mr. Stupak. I thank you for the extra time.
    Mr. Hall. You yield back?
    Mr. Stupak. Yield back.
    Mr. Hall. Thank you, Bart.
    Chair recognizes Mr. Shimkus for 5 minutes, which will 
probably be 7, 8 or 9 or 10 minutes.
    Mr. Shimkus. Thank you, Mr. Chairman.
    First of all, I want to thank Chairman Barton for actually 
using a lot of time, because going through the chain process is 
really helpful because the average consumer just gets lost, and 
it is a great educational process.
    We used to have on this committee jurisdiction over 
financial services. We lost that with Gramm-Leach-Bliley, and I 
think we have lost some of our financial service expertise on 
markets and futures in the issue.
    So, Mr. Newsome, could you briefly explain and answer this 
question: If futures causes us to hedge risk, by looking at the 
futures market, should we have been able to predict the high 
prices we saw this summer? I am not talking about the 
hurricane, but the escalation. By looking at the futures 
market, should that have told us where we were headed?
    Mr. Newsome. Well, certainly futures markets are no crystal 
ball, but high energy prices are not new. I mean, the market 
has been reacting to market fundamentals for over a year, and 
if you start looking at those fundamentals of record high usage 
from China, India and the U.S., China is still considered 
potentially the 800-pound gorilla because most of their usage 
is industrial. And as they move to normal usage as in the U.S. 
Is the middle class, I think their demand for energy is going 
to blow through the roof.
    You combine that with a political unrest in the Middle 
East, political unrest in Venezuela, and you get in the 
situation that Mr. Cooper has talked about where you have got 
such a tight margin that anything that happens around the 
globe--because these market are global--anything that happens 
has an impact. A refinery goes down in Venezuela, it has an 
impact on our market. I mean, that is how thin the margin is.
    So certainly the markets have been moving in that direction 
over time.
    Unfortunately, the hurricane became a market fundamental 
very quickly, and the markets reacted to that fundamental.
    Mr. Shimkus. Thank you.
    Mr. Douglass, I really appreciate this chart because I have 
gone to a lot of retailers, and they have talked to me about 
price inversion in this issue, and I think it is really 
helpful.
    The other thing, based upon financial services aspects, 
they also raised the credit card issue. And I have heard that 
in my district, and that is part of the financial services 
background that we have kind--of our expertise on this 
committee we have kind of lost. But there are some savings. The 
consumers choose to use credit cards; you choose to accept 
credit cards instead of cash transactions. No one is being 
forced to either use a credit card or pay for their gas by 
credit card; is that correct?
    Mr. Douglass. That's correct, Congressman.
    Mr. Shimkus. There are benefits to that because you get 
immediate payment versus if someone comes in to the quick mart 
and wants to write a check that may clear or may not, and you 
have to decide whether--at what level are you going to accept 
the check, $20 or $50 or--use of the credit card hedges some of 
your risk.
    Mr. Douglass. The credit card does take some of the risk, 
but the obvious costs of the credit card have accelerated.
    Mr. Shimkus. And I think that--one of the issues here is 
that we need more competition across the board in the markets. 
We need more competition in the refinery industry. We need more 
competition for you to have selected credit cards that would 
have a different type of standard by which to, in essence, loan 
money to individuals and then pay the retailers. But how do 
you--government, how does government intervene to get involved 
in the market? And that is a huge challenge.
    I was asked by my friend Vito Fossella to ask this 
question, and I looked at it, and I did think it is a pretty 
good question. It is you, Mr. Douglass, from August 29 to 
September 2, your testimony says that prices jumped 44 cents 
for branded stations--those flying the flag of the major 
refiners--but for unbranded, independent folks like the one I--
the picture I showed earlier, Rock stations in my district, it 
went up 73 cents per gallon. Can you explain the difference?
    Mr. Douglass. I think essentially the suppliers started to 
be concerned that they couldn't meet their contractual 
obligations. And the branded stores, we are contractually 
obligated to our supplier, and they to us, to supply us at the 
historical average, and they have us on allocation currently. 
We are restricted in ourselves. We can't buy more each day than 
we bought the same day last year. So they look at that and they 
say, this is going out of control; I am going to be able to 
supply the branded people. So then they take the unbranded, if 
you will, or the surplus sale and take it off the market by 
virtually pricing it so high, it squashes the transaction.
    Mr. Shimkus. Thank you. And this has been a long day, and I 
appreciate you all being here. I think we have learned a lot. 
We have a lot of work to do. I am for more competition across 
the board, and that is what makes America best. And we have to 
move somehow incentively to get more refineries, more 
independence. Of course, as I said earlier, and I was going to 
try to go without saying anything, ethanol and biorefineries 
are growing, and I encourage that also.
    Thank you. I yield back, Mr. Chairman.
    Mr. Hall. I thank you.
    Chair recognizes the gentlelady from California Mrs. Capps 
for what we hope will be 5 minutes.
    Mrs. Capps. Thank you, Mr. Hall. And I was going to offer 
my thanks to the person whose chair you succeeded here, Mr. 
Barton, because I thought the exchange that he had early in the 
hearing was very instructive, especially, from my point of 
view, that Mr. Cooper, Dr. Cooper, was allowed to respond each 
time, and that gave me the opportunity to learn.
    Mr. Cavaney, I want to congratulate the people you 
represent for the lack of any accidents in this massive assault 
on the oil platforms. I come from California. We have a lot of 
oil platforms on our coast. It is not hurricanes we are 
terrified of, it is earthquakes. And I have several in my 
district--off my district--that sit on earthquake faults. And I 
want to say a word about taking advantage of technology that is 
the very best there is, and this is an example. I hope you will 
carry back to the industry that this happens.
    Now, at the same time, I want to say, I believe--and I am 
going to say it to you folks in the industry--that these high 
gas prices and these disruptions in the oil market that we have 
been talking about all afternoon--all day bring home the point 
that we are too dependent on oil as a Nation. I believe that 
America needs to diversify our energy portfolio. I have 
actually heard more about conservation and diversification 
today than I heard during our preparations for our energy 
policy. I wish we had had more of this language that I have 
heard today in this hearing in that markup.
    I also want to say that I think it is really unfortunate 
that some Members of--colleagues of mine, and some in the 
industry, may use this tragedy to push unpopular plans for new 
drilling in protected areas, and that they say we need to drill 
in these areas in order to deal with the high gasoline prices. 
And I understand there is a number of businesses and trade 
groups that are planning to send a letter to the Republican 
House leadership asking them to allow new drilling in protected 
areas. Their letter specifically cites Lease 181 in the eastern 
gulf as a priority area.
    This is nothing new. Many of us have experienced this 
before in this body. These businesses and groups have been 
asking for this for years, and for years the House has rejected 
these drilling plans, most recently during House consideration 
of the Interior bill.
    What is new, however, is the desire to use Hurricane 
Katrina as a motivating factor. And I think this goes right to 
the heart of profiteering motivation in the face of human 
tragedy, and I hope we can avoid it.
    We know MMS does an inventory every 5 years. We have within 
our area, or confines, something like 3 percent of the known 
oil and gas reserves, while we are responsible for 25 percent 
of the world's demand.
    So my question to you, Dr. Lashof, I want to ask from your 
perspective and your studies, would drilling off the west 
coast, off the east coast or in the eastern Gulf of Mexico, 
where there are prohibitions currently, do anything for gas 
prices now, or would it do also anything to lower oil prices in 
the future?
    Mr. Lashof. No, I don't believe it would.
    Mrs. Capps. Maybe you could include ANWR in the same.
    Mr. Lashof. The chart I had specifically related to the 
Arctic National Wildlife Refuge, but it is much the same story 
with regard to protected areas off the coast.
    In fact, if you look at the areas that are already 
available for oil and gas development, they contain 80 percent 
of the estimated resources. So the areas that are protected are 
a small fraction of the total resource base offshore, and, you 
know, overall, as you mentioned, the United States only has 3 
percent of the world's reserves. Two-thirds of the world's 
reserves are in the Middle East. So any supply side strategy 
that we might adopt that involves petroleum simply can't change 
the balance in a significant way. And the EIA analysis 
estimating the effects of the energy bill, for example, even 
including the Arctic Refuge, which wasn't in the final bill, 
suggested that its maximum impact would be less than 1.5 cents 
in 2025. This is a trivial number compared with the kind of 
price movements we have seen.
    Another point, as we have heard, the price movements that 
we have seen in the short term are mostly related to the price 
coming from the refineries rather than crude oil. So any 
drilling for crude oil has no impact on that. The price impacts 
we are seeing are at the refinery gate rather than due to 
increases in crude prices.
    As Mr. Cooper said, and as I said in my testimony, 
improvement in efficiency, both the short-term conservation 
effort and the long-term commitment to real efficiency 
improvement and diversifying supply away from petroleum itself, 
can have a big impact, and it affects both the crude supply and 
the refinery supply, whereas a drilling response will not do 
that.
    Mrs. Capps. And diversifying our energy portfolio is 
something we could be emphasizing more in our energy policy?
    Maybe I will use my last minute to ask Dr. Cooper, last 
month the administration proposed a restructuring of light 
truck fuel economy rules claiming the new policy would save the 
country 10 billions of gallons of gasoline over the lives of 
vehicles bought from 2008 to 2011. I know there is not much 
time, but could you comment on this? Was this move enough? 
Would you recommend we de lower? And this--I am talking about 
regulations from the administration or from Congress.
    Mr. Mark Cooper. Well, as I mentioned, you might not have 
been in the room, the price of gasoline used in that cost-
benefit analysis was $1.80 a gallon in 2012, including taxes. 
So they have undervalued gasoline dramatically.
    Mrs. Capps. What should we do instead?
    Mr. Mark Cooper. Well, the answer is you should adopt a 
much higher standard. And we called for that last week at a 
press conference, and, you know, the off-the-shelf technologies 
can dramatically improve efficiency. People calculate to double 
it in new cars, and then over the course of the life of the 
cars, we will have a dramatic increase in efficiency.
    And if we take a leadership position, the question comes 
up, the automobile industry says, it will kill us. That is what 
they told us about airbags, which is in the purview of this 
committee. They said, airbags is the end of the industry, and 
all these safety measures. And, of course, they adopted it. 
They adjusted to it.
    So from our point of view, the most important thing we can 
do for our automobile industry is reorient their thinking. 
Instead of giving people discounts to keep them hooked on fuel-
inefficient automobiles--I mean, they have lowered the private 
cost of the automobile sufficiently to make it economic for 
individuals to buy it on a private basis. There is no doubt 
about that. I think that is clear.
    But as a society, this is suicidal, because those vehicles 
will be in this fleet guzzling gasoline for a decade. So there 
is a big gap. And Mr. Garman really all day he does not 
understand the gap between the private costs of gasoline and 
the social costs of gasoline.
    The price at the pump does not reflect the economic 
slowdown, the trade deficit, the currency instability, the 
political vulnerability, all of the environmental harm. There 
is a social cost to gasoline. These guys couldn't even get the 
economic cost right.
    We have to start viewing gasoline as a critical public 
problem. The example I use, the analogy I use, is cigarettes. 
And maybe there are some people from tobacco-growing States. 
Forty years ago this room would have been filled with people 
who were smoking. Half the people in this room would have been 
smoking. They all kind of knew it was bad for them, and they 
couldn't kick the habit. We as a society, through a combination 
of education and regulation, changed that behavior.
    Gasoline is a bigger threat to our national health and 
welfare, and we need that same sort of commitment to education 
and regulation to change behaviors. And that is where I think 
we have to go as a society. It can make a big difference for 
our industry and our Nation.
    Mr. Hall. A little relief now.
    Mr. Cavaney. Mr. Chairman, I would like to just take 
exception to that comment about comparing some of the dangerous 
health effects that come from smoking with our products. Most 
of the various pharmaceutical company inputs come from 
hydrocarbons that we produce and make the various drugs that 
save people's lives in an immense amount. So to equate one with 
the other is really not a fair comparison in that same sense.
    Our products save lives. The plastics that come from our 
products that are found throughout hospitals, the drugs that we 
use are incredibly valuable, and so it is just not a fair 
comparison to equate us with some of the problems that were 
associated with the other industry.
    Mr. Hall. Gentlelady has the right to close. I will give 
you a minute to close, Mrs. Capps. Is that enough?
    Mrs. Capps. Less than that. And I want to wear another hat 
now as someone who has worked in health care all my life and to 
say I think the industry that you represent has enormous 
products that benefit our health very much, and the use that 
Mr. Cooper--I know I am putting words in his mouth when I say 
this, but you gave the time to me, Mr. Hall--the uses that he 
is talking about are very different uses of gasoline and oil.
    I think actually you could make the case if we saved the 
product--because it is fossil fuel, it is limited--over a 
lifetime if we saved it for its more beneficial therapeutic 
uses and life-enhancing uses and did that by--you know, we are 
not going to stop using gasoline in our cars anytime soon, but 
over the long haul, I have heard advertisements from the oil 
industry on television talking about diversification as part of 
their portfolio, and that is what we are talking about here.
    Mr. Hall. All right. I thank you. Does gentlelady yield 
back the balance of her time?
    Mrs. Capps. I do yield back, finally.
    Mr. Hall. I recognize the gentleman from Oregon.
    Mr. Walden. Thank you very much, Mr. Chairman. I have got a 
number of questions I would like to work through here, so I 
appreciate your indulgence today and your testimony. It has 
been most helpful.
    Mr. Slaughter, you made a comment about the spot price and 
how prices get adjusted because the spot price goes up. What 
percent, though, of the market is traded in the spot market? 
You know, we saw with energy pricing a spot market that went to 
$1,900 a kilowatt hour at one point.
    Mr. Slaughter. I can't give you a number on that. Mr. 
Walden. It is essentially a wholesale price at the rack. It 
generally is a higher price because it is something that 
someone basically is going out in the marketplace and buying, 
who doesn't have a contractual relationship.
    Mr. Walden. Is there anyone on the panel that can tell me 
how much is contracted out and how much is bought on the spot 
market? Don't you maintain portfolios of different----
    Mr. Newsome. If you look at, Congressman, the way the 
market is set up, you have the futures, which is a slice, and 
then you have got cash, which is the bulk of the marketplace.
    In futures, it varies by contract. And natural gas, most of 
our trading is in the back months; less of it is in the spot. 
Gasoline and crude oil, it tends to be a little more even 
between spot and back months, but it depends very much on which 
markets you are talking about and whether it is futures or 
cash.
    Mr. Walden. So in gasoline, am I correct, then, hearing 
what you have said, about half of it would be in the spot 
market? Is that a daily or hourly----
    Mr. Newsome. No. It is not going to be half of it. But 
again, it depends if you are just talking spot market or cash 
market.
    Mr. Walden. One of the things we heard was that the price 
went up at the rack--I don't know all your terminology--based 
on the spot market going up, and you were somewhat under the 
spot market. And I guess my question is if you have already got 
a reserve of gas or crude oil or whatever part of the business 
you are in already purchased and handled, then what percent, 
how big an impact does the spot market really have on your 
actual cost?
    Mr. Cavaney. In our testimony that we submitted in a 
written form, there is a little explanation. As the oil 
companies utilize different arrangements with their 
distribution chains--there are company-owned stores, and there 
are stores that are leased, and there are three different ways 
you can work under those, and then there is the independent. 
Under each of those scenarios, there can be arrangements to 
either go under a contract, which was mentioned here, or if 
someone has a financial difficulty or somebody has a new rip-
roaring contract, you might say, let's work on the spot market. 
Let's go for a while and see if we can develop a credible 
history. It is changing all the time. There isn't one place you 
can go to get a data point that would tell you that.
    Mr. Walden. I am trying to get a handle on this. I sat 
through here as my colleague from Washington--we heard 
virtually the same sort of panels telling us why the energy 
market and electricity was all fine, and there was no problem 
out there. And then we hear the tapes of the traders. And I 
will tell you what, I am not from Missouri, but a lot of 
companies lost a lot of credibility with this Republican 
business member because I had to sit here and listen to the 
testimony, and I believed it. And then I found out the truth. 
And I will tell you as vice chairman of the Oversight 
Investigation Subcommittee, if we find that traders have been 
manipulating the market, we are going to go after them, because 
we found that to be the case long after the fact, and it cost 
ratepayers in my State an enormous sum of money.
    And I have already asked the Government Accountability 
Office to look into the trading issues. I am sure you know, Mr. 
Newsome, to make sure that isn't happening because consumers 
deserve that right to know if these markets are being operated 
in an honest, above-board, direct way. And I am not casting 
aspersions, but, you know, it is like Mr. Cooper said, you 
know, first time or second time, you learn from it. Third time, 
I am not taking any prisoners.
    Mr. Newsome. But only thing I would say when you talk about 
traders, again, there are traders on future markets, traders on 
over-the-counter market. I was chairman of the CFTC during the 
whole Enron situation, brought multiple charges against energy 
companies. Attempted manipulation did not take place in the 
regulated futures market. It was an attempt through the false 
reporting of prices to move those prices and then take 
advantage through the positions they had in the over-the-
counter----
    Mr. Walden. They did the round-tripping.
    Mr. Newsome. Round-tripping, the false reporting of prices 
to the indexes. But just to say traders are manipulating, I 
want to clarify that it wasn't traders on the regulated 
exchanges.
    Mr. Walden. All right. But then I read this quote, as you 
probably heard me read earlier today, on the Dow Jones news 
wire from Mr. Addison Armstrong, manager of the exchange trade 
markets, TFS Energy Futures, LLC, in Stamford, Connecticut, and 
I quote the wire here: There are oil commodities traders who 
made so much money this week following Hurricane Katrina, they 
will not have to punch a ticket for the rest of the year.
    What does that mean?
    Mr. Newsome. Traders on the floor can make money from two 
different methods; one through brokerage fees, they are trading 
the accounts of customers. Obviously we had record volume last 
week, so brokerage fees were the highest they have ever been.
    The second component would be the position that the traders 
had coming into the trading week. Typically on a Friday, 
traders try to get flat their positions so they don't have to 
take that risk over the weekend. But all traders cannot get 
flat. Some are long. Some are short coming into Monday. 
Obviously conditions changed drastically from the end of the 
trading day Friday.
    Mr. Walden. But they knew the hurricane was coming.
    Mr. Newsome. Well, they knew it was coming, but they didn't 
know the path it was going to take, they didn't know how hard 
it would hit the oil refinery section, and certainly had no 
idea it was going to be as strong as it ended up being. So 
depending on what your positions were on Monday, some were big 
winners, but some were big losers.
    It is a net zero sum game. So for every guy that made it, 
there was an equal and offsetting person who lost it.
    Mr. Walden. So as the regulator--you do, NYMX, right?
    Mr. Newsome. Yes.
    Mr. Walden. And do you regulate that? What is your role?
    Mr. Newsome. I am the president of NYMX.
    Mr. Walden. Who is your regulator?
    Mr. Newsome. The CFTC.
    Mr. Walden. I will follow up with them.
    Mr. Newsome. They have been on the floor every morning with 
physical surveillance. They look at our large trader reports 
every day. They also have analytical programs that look at how 
traders trade, how they handle their customers' accounts, 
whether they are trading their own accounts, et cetera, et 
cetera.
    Mr. Walden. I want to go to just a couple other quick 
points here. One is we have talked about a lot of--about the 
lack of supply because of the shutdown of the refineries and 
the pipelines and everything else. I haven't heard anything 
today about a drop in demand in that region.
    I am curious about that, because if we had half a million 
or a million people displaced that aren't driving, that aren't 
moving--did anybody see a demand reduction?
    Mr. Cavaney. Yes. There is demand reduction. We can't 
really quantify because we collect data, and weekly data, and 
put it out. Tomorrow morning we will be putting out a report, 
and we will be glad to send you something on that.
    But we have already seen in the previous month before the 
hurricane was coming up that higher prices were having an 
impact, and, typically, demand had flattened out year-over-year 
basis. So trading nationally was already down, and when you see 
something like this, you can fully expect that it is going to 
be down pretty significantly.
    Mr. Walden. One final question for Mr. B. Cooper--it says 
B. Cooper and M. Cooper. This is a question I get a lot. I was 
out 851 miles around part of my district. My district is bigger 
than any State this side of the Mississippi. A question I would 
ask is the gas station set this price in the afternoon, and 
that price--I can find 2.79 gas today--when you talk about 
forward pricing and how when they call and tell you at noon it 
is going to go up 13 cents or whatever, and you immediately 
then raise prices, right? No.
    Mr. Benjamin Cooper. You got the wrong guy.
    Mr. Walden. I am sorry. Mr. Douglass, I am sorry, because 
you just do the pipelines, and you are not party to any side of 
this because you didn't do anything.
    Mr. Douglass, I apologize. The question that comes in is, 
okay, you move your prices up immediately. Do they go down 
immediately when they call and say tomorrow it is going to be 
13 cents less? Does it take the same time to go down as it is 
to go up?
    Mr. Douglass. Actually it is driven by several factors. 
First obviously is the cost. When the cost went up 13 cents, we 
attempted to erase 10 cents; you know, the next day we 
attempted to go up 10 cents. The market then determines whether 
you get to keep that 10 cents or whether you have to roll it 
back to zero. You may have no margin.
    Mr. Walden. Market being competitors and the community?
    Mr. Douglass. Correct.
    Mr. Walden. So when the supplier comes to you and says, I 
am going up 13 cents, you automatically go up. But it is the 
community that decides how soon you go down?
    Mr. Douglass. Absolutely. They will discipline you in a 
hurry. If you are overpriced, your business will drop in half.
    Mr. Walden. All right. Mr. Chairman, thanks for your 
indulgence. Gentlemen, thank you for your testimony.
    Mr. Hall. We recognize Mr. Inslee, the gentleman from 
Washington, for 5 minutes.
    Mr. Inslee. Thank you.
    I am assuming, in talking to the gentlemen from the 
petroleum industry, that anything that reduces demand or 
reduces the rate of increase of demand has the capacity to 
reduce the price. We have been talking to you about supply, but 
it is a supply and demand they taught me in economics at UW.
    I want to ask you about what the Federal Government has 
done or not done to reduce demand, which could have the 
capacity of reducing the price you charge; and I want to refer 
you to a chart over here to your left. This chart shows what 
has happened with average fuel economy since 1975 to 2005. You 
will see the middle line there--the top line are cars, the 
bottom line are trucks. The middle line is the average of both.
    You will see that the average in 1975 was about 14 miles 
per gallon. The Congress moved at that time to increase the 
CAFE, the Corporate Average Fuel Economy standards, to 
significantly increase it. As a result of that action by the 
U.S. Congress, that went up in about 1986 to about 23 miles a 
gallon, a very, very significant increase; and that had the 
result of reducing demand or reducing the rate of increase in 
demand, which had a capacity to reduce the price.
    Since then, Congress fell off the wagon of fuel efficiency 
in about 1985; and, in fact, the fuel efficiency of our cars 
and trucks have gone done on average since 1985, have actually 
been reduced in 2005 now to about 21 or 22.
    So while we have created the Internet, we have mapped the 
human genome, because the U.S. Congress has been asleep at the 
switch, we have gone down on our efficiency of cars. As a 
result, the demand has skyrocketed and one of the reasons our 
price has skyrocketed.
    If the U.S. Congress wants to be serious about reducing the 
price of fuel, would you not suggest to us to get back on the 
wagon of increasing the efficiency of the cars and trucks we 
drive by increasing the CAFE standards? I ask Mr. Cavaney and 
Mr. Slaughter that question.
    Mr. Cavaney. I think your initial point is exactly correct, 
and that is where I differ from my colleague from the NRDC, is 
extra supply, whether it comes from drilling or from 
conservation, is beneficial to the consumer. It is going to 
help. And if you believe it in one area, then you have to 
believe in another.
    Now the answer to your question is we feel very strongly 
that not only individuals but industries and companies ought to 
practice conservation and energy efficiency, and our record as 
an industry is very strong in that regard. We do not know--it 
is not our business--how to make cars and how to make trucks. 
But the idea that everybody ought to become more efficient, as 
efficient as they can, consistent with safety and the like, is 
something that we can support.
    So I can speak to it on only the most general of terms. But 
you are absolutely right on in terms of reduced conservation 
helps people.
    Mr. Slaughter. I would concur in that, Mr. Inslee. We are 
definitely in favor of anything that creates additional supply. 
The Association has always advocated trying to maximize supply 
of fuels. We have always advocated that we do need additional 
refineries in the United States; and conservation will 
definitely help that, too.
    Mr. Inslee. Now let me move to the supply side as far as 
price for a minute. We went through the Enron and other energy 
debacle. We saw an administration that was callously 
indifferent, did nothing while Enron and other companies took 
over a billion dollars out of the Pacific Northwest in their 
rapacious behavior. So we are a little sensitive to supply 
pricing issues up in the Northwest and on the West Coast.
    We have heard discussions today that the Federal Government 
really is very impotent in dealing with gouging issues in the 
absence of collaborative behavior by various suppliers, that if 
there is gouging done unilaterally or by one, we really do not 
have a tool in our tool box federally to enforce this, and 
there is 23 states that have anti-gouging laws specifically in 
emergency context, but only 23 States.
    Some of us think that we need a Federal tool to deal with 
gouging, and we have proposed--today, I have introduced a bill 
with a bunch of Members that would essentially give the Federal 
Government an anti-gouging tool which--and it is just very 
summary fashion--would amend the Clayton Act to bar charging 
prices that are unconscionable in comparison to recent prices.
    It would take into account the upstream components that you 
all have to pay for the people ahead of you in the stream. It 
would apply to necessary goods, which include gasoline, and 
would apply during times of natural or man-made disasters, 
pretty tightly woven bill, fairly consistent with some of the 
State approaches.
    Now assuming that you all want to demonstrate the effort to 
show good corporate citizenship, which I believe--I hope that 
you do, is this something that you think Congress ought to at 
least consider, to have some type of anti-gouging regulation to 
give us the authority to deal with this type of issue?
    Mr. Cavaney. Well, first of all, we feel very strongly and 
condemn any kind of gouging. I think just the discussion of it 
and the fact that people are aware of it is going to have a 
quiescent effect on it. Besides the 23 States that actually 
have regulations that the Governor can enact, also any time a 
Governor typically declares a state of emergency he can also 
include gouging in there and do it. So the States do have some 
authority if they choose to exercise it.
    One of the challenges, I think, in approaching this from a 
Federal level is going to be, like what we heard earlier today, 
is really what is the definition of gouging? If it is a one-
person behavior? Does it mean, if you sell above a suggested 
retail price, is that gouging one industry, or do you sell 
within a range? And who determines it?
    One of the things you need to sort of, I think, keep in 
mind as you look at these things is the people who are closest 
to where the occurrence may have happened are probably in the 
best position to really get all of the facts and decide what is 
there. So that would say at least there ought to be, in any 
discussion, some consideration of making sure that you work 
closely with the States and look at them as you go forward.
    I cannot speak to whether Federal law is good or bad, but I 
think the discussion certainly can inform people.
    Mr. Hall. The gentlewoman from North Carolina, Mrs. Myrick.
    Mrs. Myrick. Mr. Smith, you made comment that it was going 
to cost between $400 and $600 million for getting service back 
up again. But that is a cost that BellSouth absorbs as part of 
what you do.
    Mr. Slaughter, with the refineries--it is the same thing 
with the refineries. You absorb the cost of whatever it costs 
you to rebuild, et cetera? Am I correct? Because we have been 
talking a lot today of what is the Federal responsibility and 
all, but I am in my own mind clarifying that is your cost of 
doing business, correct?
    Mr. Slaughter. To rebuild the facilities that have been 
damaged?
    Mrs. Myrick. Yes.
    Mr. Slaughter. That is what usually happens. Yes.
    Mrs. Myrick. We appreciate that. Thank you.
    And thank you all again for your patience in staying this 
long and giving us a day of your time. We did not mean it to 
end up this way. But I do have just two things.
    Mr. Newsome, this is not at all--I wanted to ask you, 
because this is not at all adversarial, so please help me. 
Explain two things. First one was about the hedging and short-
selling that goes on and has gone on over the last, say, 4-year 
period. Does that have anything to do with exacerbating the 
price of oil by the barrel?
    Mr. Newsome. No. Hedging is used by the market participants 
who actually own the product that are trying to set a price or 
a floor on what they think that product may be worth in the 
future.
    Mrs. Myrick. So that is produce moving? They would then be 
moving product?
    Mr. Newsome. Well, our contracts are deliverable. Most do 
not go to delivery. They trade out of the contract at a moment 
that is advantageous. But we maintain delivery of the contract, 
so it gives the commercial participants an advantage over a 
speculator or somebody who does not own the physical product 
that they could be forced to make or take delivery. So unless 
you have the ability to make or take delivery, you are not 
going to go to expiration with a contract.
    Mrs. Myrick. Then you said that there are a couple of ways 
that traders get paid. One is a brokerage fee. Do they make 
more money based on sales volume?
    Mr. Newsome. Yes. Absolutely.
    Mrs. Myrick. So if the market is volatile, then they 
personally benefit from that?
    Mr. Newsome. Well, it depends. You know, for every winner 
there is going to be a loser. So, you know, some will benefit; 
and there will be an equal and offsetting loser. Because, at 
the end of the day, it is a zero sum game. But the speculators, 
which I know you mentioned earlier in your opening----
    Mrs. Myrick. That is my concern.
    Mr. Newsome. It is an inaccurate theory that speculators 
can move the market. Because if a speculator--if you look at 
them, they try to operate off price trends and to profit off of 
trends in the market, whether that price is up or whether it is 
down. But if they try to move out of a fundamental range, you 
have got hundreds of commercial participants who are in that 
competitive environment with them that pull them right back 
into the range or the speculator faces a severe financial 
penalty.
    Then, at the end of the day, the speculators do not own the 
physical product, so they cannot move the price. They won't go 
to the delivery of a product, and they create virtually no 
impact on the settlement price, which is the price used by 
commercial market participants.
    Mrs. Myrick. You feel that there is sufficient oversight on 
this trading?
    Mr. Newsome. Yes. The Exchange itself, through its self-
regulatory function, serves the front line of enforcing the 
rules. Our compliance staff is the second largest behind our 
technology staff at the Exchange. We have many, many tools, and 
we utilize all of those tools to oversee the market.
    The CFTC serves as our oversight regulator. They have 
physical bodies on the floor watching the trading. They do a 
rule enforcement review of us every year to see what kind of 
actions we have brought, what the penalties were, to make sure 
they are in line with the crime, whether that is a fine or 
suspension of trading. And they make sure that we are enforcing 
all of our rules.
    So we use a multitude of compliance and enforcement 
activity to monitor our markets. The integrity of the 
marketplace is critical to the reputation of the Exchange.
    Mrs. Myrick. Sometime I would like to talk to you further 
about that.
    Mr. Newsome. I would love to.
    Mrs. Myrick. I yield back my time, Mr. Chairman.
    Mr. Hall. All right. Thank you.
    The Chair recognizes the gentleman from Texas, Dr. Burgess.
    Mr. Burgess. I thank the chairman.
    Mr. Hall. You are going to close for us. Do a good job.
    Mr. Burgess. All right.
    Well, Mr. Chairman, we have quoted to us from the other 
side several times today what has been characterized as an 
internal Chevron document. Have you seen this?
    Mr. Hall. Not tonight.
    Mr. Burgess. Well, it is stamped ``Chevron pricing exhibit 
156.'' the date underneath there, as best as I can make out 
with my bifocals, is sometime in 1996.
    Up at the top it says: Note. This product is gathered from 
industry publications. And the rest of the line is unreadable. 
But the paragraph that has been oft quoted today--and I wanted 
to give Mr. Cavaney and Mr. Slaughter an opportunity to respond 
to the second paragraph, if they would like to, talking about 
Unocal: Unocal is exploring the sale of three refineries in 
California due to high capital expenditures required to comply 
with stringent environmental regularities.
    I would just submit that for counterbalance to what you 
were struck with earlier today.
    Mr. Slaughter. Yes. Dr. Burgess, that is fairly typical. 
Because the investments required to comply with the Clean Air 
Act particularly--Unocal was operating in California, which has 
the strictest environmental standards that require huge amounts 
of investment. The gasoline sulfur, diesel sulfur regulation 
the industry is complying with now each costs $8 billion across 
the industry; and over the last several years, several refining 
organizations or individual refineries were sold or shut down, 
in rare instances. Many of them were sold because their owners 
felt that they could not economically invest that much money in 
that particular facility.
    And you have to remember that before 2004 and 2005 return 
on investment in our industry was only 5 percent. That is very 
low, well below the median for all industries; and so it is 
understandable that companies would respond that way.
    Mr. Burgess. Mr. Cavaney, do you have any further that you 
want to add?
    Mr. Cavaney. No, that is fine.
    Mr. Burgess. One of the questions that I posed to our 
friend from the Department of Energy earlier today, as I was 
driving around in my district last Wednesday, when it really 
became apparent the extent of the trouble that was going on in 
Louisiana, did the Department of Energy have a contingency plan 
that they could pull off the shelf to deal with this type of 
emergency? And the answer that I got was, basically, the 
Strategic Petroleum Reserve, but there wasn't much of any kind 
of lever that the Government could pull.
    Does industry have a contingency plan, given the 
concentration of the refining and drilling capacity that we saw 
on the map? Does industry have a contingency plan? Because it 
is not new information that hurricanes strike the gulf coast.
    Mr. Cavaney. We do have elaborate contingency and security 
plans. And when you go into these kind of circumstances, as you 
point out, this is something that we have to deal with 
regularly, not to the level of seriousness that this was, and 
that is what differentiates it, I think, from previous 
experiences.
    Every single one of our companies at every single location 
has an action plan that goes into effect. They are drilled on 
it. They know what it is. We had abandoned all of those rigs 
out in the gulf. We had abandoned and shut down properly all 
the refineries along the coast well before the hurricane was on 
top of us.
    Part of these procedures are safety for the personnel. They 
are to put the safes or the shut-downs on the various connect 
points, which is why we did not have any spills, because they 
worked. When you think of those refineries, the fact that there 
are only three of them now that have power and are not in the 
process of soon to be brought on board speaks well for the 
systems and the safety that is done there.
    One of the concerns we had--and we have worked with the 
Department of Homeland Security who has looked at our various 
plans and the like--is the physical security of these spaces in 
that environment, which was something we had not too often had 
to deal with. So those plans were not as far along as they 
would otherwise be but will be.
    So our industry, the ones that operate worldwide, these are 
the kinds of environments, the kinds of conditions that we face 
all of the time and have throughout the many, many decades that 
we have been operating there. So it is not a totally new 
experience, which is why I think you have been able to see the 
return as fast as you have seen it, because there had been 
plans in place.
    I do want to say one thing about the Department of Energy 
and about the administration and about the Governors, even up 
here in some of the committees of jurisdiction. When this 
started to happen, everybody called us. We called them, and we 
have checklists about various things that could be done besides 
the SPR, the idea of waivers for Clean Air Act to allow us to 
have different fuels, the idea of letting the drivers stay in 
the trucks a bit longer than the Department of Transportation 
regs allow. So we all go down those, and to everyone's credit, 
nobody was in opposition to these things, and I think there was 
a lot of positive reinforcement which helped them go very fast.
    So, in the aggregate, that was a pretty good plan, the way 
it worked out, because everybody knew things need to be 
addressed. So I think the response of the Government, while in 
some areas may not have been that good, certainly in terms of 
the oil and gas industry, I think it was quite responsive.
    Mr. Hall. I am not going to cut you off. You go ahead.
    Mr. Burgess. Mr. Inslee took his chart about the CAFE 
standards. Let me stay with you, Mr. Cavaney, if I could, on 
the CAFE standards.
    I have only been here a term and a half, and I am just a 
simple country doctor. But, as I recall, back in 1980 and 1981, 
the days that we had gas lines, of course, then the price of 
gas rose to over $1 a gallon, and the industry picked up its 
production, and more gas became available. But what drove the 
mileage, increased mileage in cars, my observation, back then 
was not the U.S. Congress, but the simple country doctor back 
in Texas who was trying to save a little cash.
    Now I will just tell you, because I live in a district that 
has severe problems with air quality, that I tried to do the 
responsible thing a year and a half ago and ordered a car that 
was a hybrid car, gets 50 miles to the gallon. So now I look 
positively brilliant. It is a good feeling to drive along the 
road with a feeling of moral superiority to everyone else, and 
I do enjoy doing that.
    But I guess what I am saying is, I will trust the American 
consumer, I would trust American ingenuity before I would trust 
the U.S. Congress with increasing CAFE standards. Do you have a 
feel about that?
    Mr. Cavaney. I am inclined to agree with you to that 
extent. I mean--but what we do need is we can use leadership on 
stressing the importance of energy efficiency and conservation. 
Because I do think, all of us, we find it in our own facilities 
constantly if you go in and relook at things with new 
technology. Because it changes and thinks a different way, and 
if you can create some lighter weight and gain some, so much 
better.
    But the idea of command and control in terms of how you 
design cars, that is not our business. I can tell you that we 
have worldwide companies that operate, and we were talking 
earlier about greenhouse gas emissions reduction and the 
various records.
    We here in the United States, our company is using 
voluntary systems that they are doing, because they own the 
same kind of refineries and other places, actually can give you 
better marks of reduction here by allowing the resourcefulness 
to tackle the system than they can and this is how you do it 
precisely.
    So my comments before were because of the concept, and I 
think we ought to do more. But the idea that you draw the 
actual blueprints for people to do that I think is probably 
overreaching, and the industry ought to be the ones that make 
those decisions.
    I worked in a gas station during that period of time. It 
was consumers coming in, and they were the ones that stated the 
preference for cars. They were not going to pay those terrible 
prices.
    Mr. Burgess. And, of course, you can go on the Internet 
today onto Google and type in Prius plus under the search 
engine; and eggheads across the country have figured out ways 
of squeezing 100 miles to the gallon. I do not have enough 
confidence in my own engineering ability to do that.
    Mr. Chairman, I am going to wrap up. I just wanted to say 
to Mr. Angelle, I did not ask you a question. I did read your 
testimony. I apologize I wasn't here when you spoke. Many of 
your constituents are in my district and Tarrant and Denton and 
Cooke Counties, and I have heard their stories this past week. 
And it a cliche to say it, but I truly do feel your pain. I 
feel their pain. We have new mothers separated form new babies, 
and a real big question mark as to how we are going ever going 
to put all of these pieces back together again. You have got a 
tremendous job ahead of you in Louisiana.
    But, as your neighbor in Texas, we have been proud to help, 
and certainly wish you all of the best as you go through those 
next several weeks and months. I know it is going to be a 
challenge to you.
    Mr. Chairman, with that I will yield back.
    Mr. Hall. I thank you. And you missed a good bit of 
testimony from--Mr. Angelle's testimony. But we have a record, 
and you will have copies of it.
    Thank every one of you. You have been great. The chairman 
chose well in getting both of these groups. Thank you for 
leaving your homes. One of you missed your anniversary tonight. 
You are in trouble tomorrow.
    But God bless all of you, and thank you very much for what 
you have done for this country.
    [Whereupon, at 7:50 p.m., the committee was adjourned.]
    [Additional material submitted for the record follows:]

                               New York Mercantile Exchange
                                                    October 6, 2005
The Honorable Joe Barton
Chairman
Committee on Energy and Commerce
U.S. House of Representatives
2125 Rayburn House Office Building
Washington, D.C. 20515-6115
    Dear Mr. Chairman: Thank you again for the opportunity to testify 
before the Committee on Energy and Commerce hearing entitled 
``Recovering from Katrina'' on September 7, 2005. I am pleased to 
submit the following responses to questions from Members of the 
Committee for inclusion in the hearing record.
    Please contact me if you should have any additional questions 
regarding these responses, or any other matter.
            Sincerely,
                                           James E. Newsome
                                                          President

   RESPONSES TO FOLLOW-UP QUESTIONS FOR THE RECORD SUBMITTED BY THE 
                       HONORABLE PAUL E. GILLMOR

    Question: What oversight body currently patrols your industry for 
pricing abuses that directly affect the amount that gas stations pay 
for their products?
    Response: Gasoline futures market prices do not automatically or 
directly reflect the amount that gas stations pay for their product. As 
we understand it, gas stations receive fairly frequent deliveries of 
their product and so the prices they pay to their suppliers are closely 
tied to the near term market for delivery of the product in their 
geographic area.
    By contrast, NYMEX lists a series of separate calendar months in 
its New York Harbor Unleaded Gasoline futures contract. Each of these 
calendar months is separately traded. For market participants that stay 
in the market through the termination of trading in a particular listed 
calendar month, this gasoline contract provides physical delivery of 
tankers of gasoline during a specified delivery period of several days 
during the specified month between two commercial market participants 
in the harbor area adjacent to New York City. NYMEX does not list any 
gasoline contracts for next-day or day-ahead delivery of the physical 
``cash'' commodity. On the other hand, it is our understanding that 
there are frequent transactions in the off-exchange ``over-the-
counter'' (OTC) market for day-ahead or other near term delivery of the 
cash commodity in various geographic regions.
    Any regulatory body that polices abuses affecting the price of gas 
at the pump, such as price gouging, has no connection to futures and 
would exist outside of the framework of futures regulation. NYMEX is 
under the full and direct regulatory authority of the Commodity Futures 
Trading Commission, which has exclusive jurisdiction over futures 
trading and has broad anti-fraud and anti-manipulation authority over 
its regulated markets. In addition, manipulation of cash market prices 
that impact prices on a futures market would be subject to the CFTC's 
anti-manipulation authority.
    Question: The public debate is focused on the revenues of petroleum 
producers and retail gasoline outlets, however, little attention has 
been paid to the increasing income of oil commodities traders. What 
activities do you think can be meaningfully done to restrain the 
consistent and upward movement of gasoline futures?
    Response: This question seems to be based on two premises: (1) that 
income for oil commodity traders is uniformly increasing; and (2) that 
this rise in income is somehow responsible for ``consistent and upward 
movement'' of gasoline futures prices. Both premises need to be re-
examined carefully.
    In discussing futures trading, it is important to understand how 
futures trading works and to understand the nature of futures markets. 
Futures markets allow market participants either to buy a contract that 
requires one to receive future delivery of the product (also referred 
to as a ``long'' contract) or to sell a contract that requires the 
company to make physical delivery of the product (also referred to as a 
``short'' contract). The vast majority of open positions are not held 
through to delivery of the product. Instead, market participants close 
out or liquidate their open positions by buying a contract on the other 
side of the market that offsets their existing position (e.g., a long 
market participant buying a short contract to zero out its existing 
market exposure). For such participants who close out their positions, 
whether they make or lose money on the two transactions, i.e., the 
initial transaction and the close-out transaction, depends on the 
difference between the prices of their long and short contracts, which 
depend on where the market was at the time of those transactions.
    The critical point to note is that a futures market is a zero sum 
type of market. In other words, for every winner there is also a loser. 
We believe that this basic reality needs to be kept in mind before 
placing too much faith in a wholly speculative statement made by 
someone sitting in an office 75 or 100 miles away from our trading 
floor. Clearly, there was a significant shift in energy prices, 
including gasoline prices, in the wake of Hurricane Rita. The impact of 
this shift in prices on the broad category of oil traders was related 
to a considerable extent to which side of the market they were on when 
the market moved. Some traders made money. On the other hand, as 
gasoline futures trading is a zero sum market, other traders 
necessarily lost substantial sums of money during the same period.
    Turning specifically to NYMEX floor members, many floor members 
focus upon trading for their own personal or proprietary trading 
accounts. In general, these floor traders prefer to limit sharply their 
market risk exposure to overnight changes in market prices. Simply put, 
these traders prefer to go home at night being ``flat'' in the market 
and having neither a long or a short position. To the extent that such 
traders are successful in their trading activity, they do so by 
providing short-term liquidity to the market during the trading day and 
fluctuations in market price during a given trading session may 
increase the value of that activity. On the other hand, these floor 
traders have no incentive to gain from a consistent, upward movement in 
price that occurs over an extended period of time because, as noted, 
they close out their market positions at the end of each trading 
session.
    Even with respect to other non-floor market participants who do 
maintain open positions over a period of time, NYMEX maintains strict 
position limits on their market activity and engages in extensive 
market surveillance to restrict sharply the ability of any market 
participant to engage in prohibited manipulative activities. The CFTC 
additionally has extensive resources devoted to market surveillance and 
enforcement efforts.
    As to the broader question of possibly trying to restrict price 
movement in gasoline futures, a central role of futures markets is to 
provide a price discovery service for future prices. In this way, 
futures markets provide a neutral tool or a gauge as to these future 
prices. Futures markets are simply auction markets where buyers and 
sellers come together and as a result a market price is determined 
through open and competitive execution. This market price is derived 
through basic demand and supply fundamentals.
    In particular, the gasoline futures price of an expiring contract 
month is designed to converge with the cash market price at expiration 
of that contract month. The futures market is a derivative of the cash 
market. Futures prices, which reflect the underlying cash market, are 
closely related to cash prices and are driven by the same economic 
factors. At expiration of the contract during the spot (delivery) 
month, the futures price converges to a single price with the cash 
price, which provides transparency and an efficient hedging tool for 
the market. Any thing that artificially restricts futures prices will 
have no effect on the cash market. Instead, such artificial restraints 
would remove liquidity and price transparency from the futures market 
(and shift it to the less-regulated and less transparent OTC market), 
and the futures market consequently would no longer be a reliable 
hedging tool.
    In our view, the real key to truly meaningful attempts to address 
gasoline prices is to focus upon fundamental supply and demand issues. 
A comprehensive energy policy that focuses on rebuilding the US 
refining infrastructure is critically needed to address the supply 
issues, which are causing gasoline prices to be high. No refineries 
have been built in the US in 20 years and small ones keep going off-
line. Congress should review this trend and consider whether any 
federal policies, including increasingly stricter EPA standards, play 
any role in the shrinking supply of refineries.
    Question: Do you think that the anti-competitiveness and pricing 
protections in the petroleum marketing practices act should be extended 
to transactions involving oil commodities traders?
    Response: We understand this question as directed to NYMEX to be 
referring to oil commodity traders in our futures markets. In response, 
we do not believe that it should be extended because the goals of that 
act do not apply to trading in our markets. The stated goals of this 
act are as follows:
          ``[t]o provide for the protection of franchised distributors 
        and retailers of motor fuel and to encourage conservation of 
        automotive gasoline and competition to the marketing of such 
        gasoline by requiring that information regarding the octane 
        rating of automotive gasoline be disclosed to consumers.''
    Our gasoline futures contract is a standardized contract with 
established product specification terms that are consistent for all 
contracts. Our market participants are focused on our markets and 
generally have no awareness or interest or control over what may 
eventually happen with respect to disclosure of octane ratings at 
individual gas stations. This reflects a fairly basic instance of a 
difference between apples and oranges, and thus the goals and scope of 
that act are inapplicable to what happens on our markets.

   RESPONSES TO FOLLOW-UP QUESTIONS FOR THE RECORD SUBMITTED BY THE 
                         HONORABLE BART STUPAK

    Question 1. Do you believe ``risk premium'' plays a role in high 
oil and gas prices in our country?
    Response. It may be useful to clarify NYMEX's role in connection 
with market activity. NYMEX provides a neutral market forum for the 
open and competitive execution of trades in our listed contracts. NYMEX 
does not itself engage in any trading activity or establish any market 
positions. Furthermore, NYMEX does not provide any services as a market 
advisor or analyst, and so our comments below are necessarily somewhat 
general in nature.
    Academics have debated this issue for quite some time. The 
existence of ``risk premium'' can be neither proved or disproved 
because it is an abstract concept and cannot be observed directly and 
may be interpreted differently by different analysts or scholars. 
However, the implication is that ``risk premium'' would cause the 
expected futures spot price to be either higher or lower than the cost 
adjusted futures price. If a market participant is concerned about 
future tight supplies or concerned about the possibility of supply 
interruptions due to some type of extrinsic shock such as a political 
event or terrorist activity at some point along the supply chain and 
that participant is risk averse, then it is possible that the 
participant may be willing to pay a higher market price, than a 
participant that is risk neutral. These market decisions are based 
strictly on personal judgments and there are individuals in the market 
who are risk averse and willing to pay a premium. Alternatively, there 
may be those who are risk neutral and are indifferent to risk and may 
not be willing to pay a premium.
    Although we cannot say a risk premium absolutely exists, NYMEX is a 
liquid and transparent market and provides the most efficient and 
reliable mechanism for price discovery as to future prices. By 
providing a centralized auction market for discovery of future prices, 
our markets allow market participants both to incorporate current known 
information as to demand and supply as well as to reflect their various 
views as to future demand and supply, including the views of the risk-
averse as well as the risk-neutral.
    Question 2. I've seen several articles that have said that prior to 
the Iraq war and prior to Hurricane Katrina, the risk premium on a 
barrel of oil was in the neighborhood of $5 per barrel. Since the 
beginning of the war and since Katrina, I have seen articles stating 
that the risk premium is now anywhere from $15-$30/barrel. Is this your 
understanding?
    Response. Such an assertion (about a current risk premium of that 
size) is questionable for the reasons discussed below. As background, 
academics have argued that producers looking to hedge future production 
tend to push down futures prices by the nature of their selling 
activity. Buyers (speculators) of futures contracts incur the price 
risk and theoretically would be willing only to buy the contracts at 
below fair expected price due to the risk premium that would be 
incurred by this price risk. The result would be what is referred to in 
futures markets as a ``backwardation'' in the market where the futures 
price would decline progressively out into the future for the distant 
contact months in relation to the current or front calendar month of 
that futures contract. However, a review of recent crude oil prices at 
NYMEX reveals that this is not the case at present in the NYMEX market.
    Since the passage of time that has now occurred following Hurricane 
Katrina and Hurricane Rita, the market has had sufficient time to 
absorb currently available information regarding the impact of the 
hurricanes on possible future demand and supply of the commodity. 
Prices traded in expectation of the hurricanes have adjusted since then 
with increasingly better information about the market consequences of 
those major events in the Gulf Coast region. As noted in our response 
to the prior question, the existence of and extent of any risk premium 
is open to discussion and is not susceptible to precise measurement. 
Instead, these topics would seem to be a matter of fairly broad 
estimates and conjecture. That stated, however, from our modest vantage 
point as a neutral market forum and in light of the improving quality 
of market information regarding the actual impact of the hurricanes, an 
estimate of a $15-30 risk premium at this point in time strikes us as 
questionable at best. Such an estimate suggests that the market is 
substantially overpriced and inefficient.
    Currently, there is little difference between crude oil prices for 
2005 and prices for 2006 and 2007, i.e., futures prices are 
approximately equal to futures spot (cash) prices. On October 3, 2005, 
the November 2005 crude oil futures contract settled at $64.47/barrel. 
The December 2006 contract was virtually the same at $65.49/barrel. The 
inference to be drawn is that to any extent that risk is being shifted 
in the market, it is being equally shifted between buyers and sellers. 
If this were not the case, there would be either a backwardation or 
contango (the opposite of backwardation where the prices for distant 
contract months are progressively higher than the current contract 
month) in the market. Current price trends indicate otherwise.
    Question 3. Do you believe that the instability in the Middle East 
and Venezuela and the War in Iraq have caused the price of crude oil 
contracts on the NYMEX to increase?
    Response. NYMEX provides a neutral market forum for open and 
competitive execution of trading in our products. We do not provide 
market analysis or market advice and our response should be considered 
in this context accordingly.
    That stated, the United States now obtains a substantial amount of 
the crude oil needed for our economy from foreign imports, including 
the areas noted in the question. Specifically, the United States--
averaged total net oil (crude and products)--imports of--an estimated 
11.8 million bbl/d--during January-October 2004, representing around 
58% of total U.S. oil demand. Crude oil imports from Persian Gulf 
sources averaged 2.4 million bbl/d during that period. Overall, the top 
suppliers of crude oil to the United States during January-October 2004 
were Canada (1.6 million bbl/d), Mexico (1.6 million bbl/d), Saudi 
Arabia (1.5 million bbl/d), Venezuela (1.3 million bbl/d), and Nigeria 
(1.1 million bbl/d).
    What seems clear is that the price of crude oil and other energy 
products has risen due to both supply and demand factors. Instability 
in the Middle East, Nigeria, and Venezuela, along with rapid demand 
growth in emerging market countries such as China and India seemingly 
have both contributed to the higher price levels. More temporary 
setbacks from recent hurricanes also appear to have further exacerbated 
the trend.
    Question 4. If investors are concerned about possible terrorist 
attacks and the risk premium per barrel goes up an additionally $15-$30 
per barrel, who reaps these benefits?
    Response. As noted previously, we cannot state definitively that 
there is a risk premium and we do not have any conclusive views as to 
the size of any such premium. Indeed, stating that a risk premium is 
between $15-$30/barrel essentially translates to saying that oil is 
overpriced by that amount. Anyone who believes this is true would 
attempt to take advantage of the arbitrage opportunity available. A 
market participant would be able to sell oil now and cover his position 
later in the spot market for delivery. By the time of delivery, if the 
market participant's belief that crude was overvalued was correct, the 
price would be $15-$30 cheaper. For anyone who believes this scenario 
it would be an unprecedented opportunity to profit, however, the 
selling would in effect make the price go down more and more removing 
the premium.
    In response to the premise of the question, though, in general and 
to the extent that oil prices rise, producers gain at the expense of 
consumers. Since much of the production occurs outside of the US, the 
benefits of higher prices generally would accrue to countries and 
companies that produce oil for export.
    Question 5. To what extent do you believe that the futures prices 
for both crude and refined products supported or even advanced the 
sharp increases in crude and product prices?
    Response. This question suggests a possible connection between the 
prices for crude oil and gasoline futures contracts for future periods 
of time and the prices for current delivery of these products in the 
cash market. Futures market prices do not automatically or directly 
reflect the amounts that are paid in the cash market for near term 
deliveries. Taking gasoline as an example, as we understand it, gas 
stations receive fairly frequent deliveries of their product and the 
prices they pay to their suppliers are closely tied to the near term 
market for delivery of the product in their geographic area.
    By contrast, NYMEX lists a series of separate calendar months in 
its New York Harbor Unleaded Gasoline futures contract. Each of these 
calendar months is separately traded. For market participants that stay 
in the market through the termination of trading in a particular listed 
calendar month, this gasoline contract provides physical delivery of 
tankers of gasoline during a specified delivery period of several days 
during the specified month between two commercial market participants 
in the harbor area adjacent to New York City. NYMEX does not list any 
gasoline contracts for next-day or day-ahead delivery of the physical 
``cash'' commodity. On the other hand, it is our understanding that 
there are frequent transactions in the off-exchange ``over-the-
counter'' (OTC) market for day-ahead or other near term delivery of the 
cash commodity in various geographic regions.
    However, while futures market prices do not automatically translate 
into the price for next-day delivery in the cash market, futures 
markets do provide one stream of information that may be considered by 
market participants in the cash market. Indeed, the availability of 
NYMEX's reliable and neutral market prices for future periods of time 
may actually reduce the possibility of price shocks in the cash 
markets.
    In other words, the futures market can play an enormously 
constructive role in keeping prices in the cash market from unnecessary 
spikes. From time to time, cash markets may over react in the short 
term to breaking news about demand and supply based on the predicted 
severity of an event. As information becomes more and more available, 
as was the case after Katrina and Rita, the extent of damage was better 
understood and market prices came down very quickly. The futures 
market's role as a price discovery vehicle for future prices arguably 
prevented the prices in the cash market from going up as much as they 
may have in the absence of NYMEX's stable and neutral market forum.
    By contrast, a historical example may further illustrate how the 
cash market operates less efficiently if an effective futures market 
price discovery service is not available. During the historical 
gasoline crisis that began in 1979, there was limited price 
transparency in US energy cash markets. Between 1979 and 1981 (before 
gasoline futures prices were fully embraced and accepted by the energy 
industry as a benchmark for future prices), the Exchange was receiving 
information from price reporters for cash markets that high prices 
would be sustained for extended periods of time, months, possibly 
years. During this period, US government price allocation controls were 
in effect and prevented an easing of the imbalance between supply and 
demand by restricting the market from reacting to weakening demand. 
Market prices went up quickly and dramatically and stayed there beyond 
what the current events would have been able to explain.
                                 ______
                                 
  Questions for Bob Slaughter, President, NPRA, from Congressman Bart 
                                 Stupak

    1. During your appearance before the Committee, I asked you the 
following question:
    ``Isn't it true that in 1992, the State of Arizona granted a permit 
to the Arizona facility for construction and operation, and the company 
sat on the permit for nearly 8 years without actually building a 
refinery?''
    You responded by stating: ``Not to my knowledge, no'' and you went 
on to state that ``they had to move the refining site.''
    QUESTION: Isn't it true that in a response you provided this 
committee earlier this year, answering follow-up questions from 
congressman Dingell for the February 16, 2005 hearing entitled: ``The 
Energy Policy Act of 2005, Ensuring Jobs For Our Future With secure and 
Reliable Energy,'' you indicated that:
    ``Maricopa Refining Company (MRC) was issued an installation permit 
for a 50,000 BPD refinery by the ADEQ on January 16, 1992,'' and you 
later acknowledged in that same response to Congressman Dingell that 
``the above permit was allowed to lapse and a new permit for a larger 
facility was submitted to ADEQ on December 23, 1999''?
NPRA Response and Background
    The following is a chronology from Arizona Clean Fuels in response 
to the above questions:

1. Maricopa Refining Company (MRC) was issued an ``Installation 
        Permit'' for a 50,000 BPD refinery by the ADEQ on January 16, 
        1992.
2. MRC (under the name of Arizona Clean Fuels-ACF) continued 
        development of its refinery project in the early and mid-
        nineties. A significant financial investor left the project. 
        The project was re-scoped as to refinery capacity and 
        feedstock. The above permit was allowed to lapse and a new 
        permit for a larger facility was submitted to ADEQ on December 
        23, 1999.
3. The ADEQ hired an outside contractor to prepare the permit. This 
        contractor worked with ACF, ACF's contractor and the ADEQ to 
        perform the BACT reviews, etc. required by the Clean Air Act. 
        In September 2002, the above parties agreed that the 
        information required to perform all of the permit reviews was 
        complete and the ADEQ confirmed this on September 4, 2002.
4. During the summer of 2003, the EPA and ADEQ declared an expansion of 
        the ozone non-attainment area in Maricopa County that included 
        the site of the proposed refinery. ACF advised the ADEQ that it 
        was considering alternate sites for the refinery outside 
        Maricopa County.
5. On October 30, 2003, the ADEQ issued a proposed Draft Air Permit to 
        the company only, for the refinery based on the December 1999 
        application and the Maricopa County site. This permit was not 
        formally issued pending decision by ACF on location.
6. In October 2003, ACF advised the ADEQ that the company was proposing 
        a new site for the refinery in Yuma County and the information 
        required to revise the permit for the new location was 
        submitted during the November 2003 to March 2004 period. This 
        information was consolidated into a ``new permit application'' 
        document that was submitted to ADEQ on June 28, 2004. The 
        refinery facility was identical to that proposed in 1999 so the 
        BACT analysis remained valid. Revisions required for the new 
        site consisted primarily of new air emission impact modeling
7. The ADEQ issued the Draft Air Permit on September 14, 2004. Public 
        meetings and hearings were held during October and November 
        2004 with the public notice period closing on January 10, 2005.
8. The permit is currently in review by the EPA with a formal response 
        required by March 18, 2005

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