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


 
                  GASOLINE:  SUPPLY, PRICE, AND 
                          SPECIFICATIONS


                            HEARINGS

                           BEFORE THE


                    COMMITTEE ON ENERGY AND 
                           COMMERCE

                   HOUSE OF REPRESENTATIVES


                  ONE HUNDRED NINTH CONGRESS

                         SECOND SESSION


                   MAY 10 AND MAY 11, 2006

                       Serial No. 109-94

     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,  Mississippi ALBERT R. WYNN, Maryland
  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, General Counsel
      REID P. F. STUNTZ, Minority Staff Director and Chief Counsel




                                CONTENTS


                                                                      Page
Hearings held:
   May 10, 2006	                                                         1
   May 11, 2006	                                                       127
Testimony of:
   Gruenspecht, Howard K., Deputy Administrator, Energy Information 
      Administration, U.S. Department of Energy	                        31
   Wehrum, William, Acting-Assistant Administrator, Office of Air 
      and Radiation, U.S. Environmental Protection Agency	        40
   Sundstrom, Geoff, Director of Public Affairs, American Automobile 
      Association	                                                87
   Cooper, Dr. Mark, Research Director, Consumer Federation of 
      America	                                                        93
   Wilkins, John R., Executive Vice President & CIO, Delaware Valley 
      Wholesale Florists, on behalf of Society of American Florists	99
   Cavaney, Red, President, American Petroleum Institute	       131
   Dinneen, Bob, President and CEO, Renewable Fuels Association	       146
   Slaughter, Bob, President, National Petrochemical & Refiners 
      Association	                                               153
   Becker, S. William, Executive Director, State and Territorial Air 
      Pollution Program Administrators/Association of Local Air 
      Pollution Control Officials	                               169
   Reid, Paul D., President, Reid Petroleum Corporation, on behalf of 
      National Association of Convenience Stores and Society of 
      Independent Gasoline Marketers of America	                       174
   Shea, William H., President & CEO, Buckeye Partners, LP, on behalf 
      of Association of Oil Pipelines	                               182
   Conley, John, President, National Tank Truck Carriers, Inc.	       192
Additional material submitted for the record:
   Cooper, Dr. Mark, Research Director, Consumer Federation of 
      America, response for the record	                               119
   Sundstrom, Geoff, Director of Public Affairs, American Automobile 
      Association, response for the record	                       120
   Wehrum, William, Acting-Assistant Administrator, Office of Air 
      and Radiation, U.S. Environmental Protection Agency, response 
      for the record	                                               121
   Becker, S. William, Executive Director, State and Territorial Air 
      Pollution Program Administrators/Association of Local Air 
      Pollution Control Officials, response for the record	       261
   Cavaney, Red, President, American Petroleum Institute, response 
      for the record	                                               264
   Slaughter, Bob, President, National Petrochemical & Refiners 
      Association, response for the record	                       268
   Reid, Paul D., President, Reid Petroleum Corporation, on behalf of 
      National Association of Convenience Stores and Society of 
      Independent Gasoline Marketers of America, response for the 
      record	                                                       271
   Dinneen, Bob, President and CEO, Renewable Fuels Association, 
      response for the record	                                       275



                        GASOLINE:  SUPPLY, PRICE, AND 
                                SPECIFICATIONS


                           WEDNESDAY, MAY 10, 2006

                          HOUSE OF REPRESENTATIVES,
                      COMMITTEE ON ENERGY AND COMMERCE,
                                                    Washington, DC.


        The committee met, pursuant to notice, at 10:00 a.m., in Room 2123 
of the Rayburn House Office Building, Hon. Joe Barton (chairman) 
presiding.

        Members present: Representatives Barton, Hall, Gillmor, Norwood, 
Cubin, Shimkus, Wilson, Shadegg, Buyer, Radanovich, Bass, Pitts, 
Bono, Walden, Terry, Rogers, Otter, Myrick, Sullivan, Burgess, 
Blackburn, Dingell, Waxman, Markey, Boucher, Brown, Eshoo, Stupak, 
Wynn, Green, Capps, Schakowsky, Solis, Gonzalez, Inslee, Baldwin, and 
Ross.
        Staff present: David McCarthy, Chief Counsel for Energy and 
Environment; Margaret Caravelli, Counsel; Maryam Sabbaghian, 
Counsel; Sue Sheridan, Minority Senior Counsel; Bruce Harris, Minority 
Professional Staff Member; Lorie Schmidt, Minority Counsel; and Peter 
Kielty, Legislative Clerk.
        CHAIRMAN BARTON.  The committee will come to order.  The Chair 
recognizes himself for an opening statement.  Today the committee 
begins two days of examining gasoline supply, price, and specifications.  
Just last week we completed another painful seasonal transition from 
winter gasoline to summer gasoline production at our Nation's refineries.  
Early May is always a tough time for drivers, but this year has been 
especially difficult.  As storage tanks have gone down with the old 
gasoline, prices have shot up, in some cases to all-time records.  If that 
wasn't enough, some people couldn't buy gasoline at any price in their 
neighborhood.  I know that because I was one of them up here in my 
condo in Arlington, Virginia.
        Gasoline markets are complicated.  The price is driven by many 
factors, but mostly it is the old standby of supply and demand.  We 
consume about 12 million barrels of fuel in the United States every day.  
We have invited the experts today; the regulators, the producers, the 
suppliers, the transporters, the retailers, and the consumers of gasoline to 
explain what goes on from the time a barrel of oil is brought into a 
refinery to the point where you and I put it in our cars and trucks at our 
Nation's gas pumps.  The world crude oil pricing hearing last week that 
this committee held reminds everyone that the U.S. government cannot 
dictate worldwide crude oil prices.  Developments in other parts of the 
world have brought the price of crude to $75 a barrel and when that 
happens, there is an inevitable increase in the price of gasoline that we 
pay at the pump.
	When the price of one changes, i.e., crude oil in the world market, 
the price of the other, i.e., retail price of gasoline follows.  More than 
half of the price of a gallon of gasoline is determined by the price of 
crude oil.  Domestically, our gasoline production supply and delivery 
system is still recovering from the devastating effects of Hurricanes 
Katrina and Rita and is undergoing a major transition in gasoline 
formulation as we have taken MTBE off the market and are trying to 
replace it with either ethanol or reformulated gasoline.  Coupled with this 
is the annual transition that I have already talked about.
	Most fuels move across the country inside pipelines, but ethanol and 
the fuels blended with ethanol can't do that.  They move in rail cars and 
tanker trucks.  Increasing our domestic ability to produce and deliver the 
finished product of ethanol enhanced gasoline, America is trying to find 
a new way to do something that it hasn't done, as a Nation, across the 
continental United States.  In the energy bill that we passed last year, we 
did many things on, what I call, the non-mobile energy side to help our 
Nation's energy future in areas like clean coal and nuclear power and 
LNG siting facilities for new natural gas supplies.
	We need to do things on the mobile supply side that will help the 
drivers of our cars and trucks.  These include, in my opinion, opening up 
some of our domestic areas when we still have potential for large 
amounts of oil and gas to be discovered, including ANWR and OCS, and 
I believe we also need to streamline the requirements to permit new 
refineries or to expand existing refineries in our country.  So today we 
are going to begin the process of determining exactly how to do that.  We 
are going to, while we try to integrate ethanol into our Nation's fuel 
supply, as we move from MTBE to ethanol.  So I am going to look 
forward to hearing the testimony of our witnesses and today will be one 
of many hearings we have in the next month to get the facts on the table 
to the American people.
	With that, I would be happy to recognize the Ranking Member of the 
Energy and Air Quality Subcommittee, Mr. Boucher of Virginia, for an 
opening statement.
	[The prepared statement of Hon. Joe Barton follows:]



PREPARED STATEMENT OF THE HON. JOE BARTON, CHAIRMAN, 
COMMITTEE ON ENERGY AND COMMERCE

        Good morning.  Today the Committee begins two days of examining 
gasoline supply, price and specifications.  Just last week, we completed 
another painful transition from winter gasoline to summer gasoline. Early 
May is always a tough time for drivers, but it was downright painful this 
year.  As storage tanks were drained, prices shot up.   If that weren't 
enough, some people couldn't buy gasoline at any price in their 
neighborhood stations.  I know because was one of them.  
        Gasoline markets are complicated. The price is driven by many 
factors, but mostly the old standby of supply and demand.  We consume 
about 10 million barrels of fuel in the United States every day.  In the 
course of this hearing, America will use about 20 million barrels.  We 
have invited the experts: the regulator, the producer, the supplier, the 
transporter, the retailer and the consumer of gasoline to this hearing to 
explain exactly what goes on from the time a barrel of oil is brought into 
a refinery to the point where you and I pump fuel into our cars and 
trucks.  
        The World Crude Oil Pricing hearing last week reminded everyone 
that the U.S. government cannot dictate crude oil prices. With major 
developments in other parts of the world bringing the price of crude to 
$75 a barrel, there is an inevitable and corresponding increase in the 
price of gasoline at the pump.  When the price of one changes, the price 
of the other follows.  More than half of the price of a gallon of gasoline 
is determined by the price of crude oil. Domestically, our gasoline 
production, supply, and delivery system is still recovering from the 
devastating effects of hurricane Katrina and undergoing a major 
transition in gasoline formulation by moving from MTBE to ethanol.  
Coupled with this is the annual transition from winter to summer grade 
gasoline.
        Most fuels move across the country inside pipelines. But ethanol and 
fuels blended with ethanol move in railcars and tanker trucks.  Increasing 
our domestic ability to produce and deliver finished product, whether it 
be gasoline or diesel fuel, is America taking control of its energy future. 
The bipartisan Energy Policy Act passed last year was a critical step in 
the right direction.  However, many of us in the Republican Party 
continue to pursue policies that would expand our energy supply and 
capacity. Unfortunately some of the most important, including ANWR, 
OCS, and the streamlined permitting of refineries, continue to be blocked 
by those who believe families can fill their tanks with excuses instead of 
affordable gasoline.
        They say there a no easy fix, but while we integrate ethanol into the 
nation's fuel supply, any transitional measure that may alleviate the 
pressure on price should be welcomed and seriously considered.  
Congressman Shadegg's bill, the Ethanol Tax Relief Act of 2006, which 
I cosponsored, would suspend until January 1, 2007 the 2.5 percent tariff 
and 54 cent per gallon duty on imported ethanol.
        Another logistical hurdle to the delivery of the nation's fuel supply 
is the existence of a number of specialty fuels, commonly known as 
"boutique fuels." The passage of the Clean Air Act Amendments of 1990 
established the Reformulated Gasoline Program (RFG) for areas with 
severe air pollution. Areas not required to participate in the RFG 
program saw the environmental value of using a cleaner fuel, but were 
concerned with the higher cost associated with RFG.  Another provision 
included in the Clean Air Act Amendments of 1990 permitted states to 
seek EPA approval for boutique fuels that would bring benefits similar to 
RFG, but for less cost.  Twelve states have taken advantage of this 
provision. 
	In the Energy Policy Act of 2005 we capped the number of boutique 
fuels to those approved as of September 1, 2004 and required the EPA, in 
consultation with DOE, to determine and publish a list of those boutique 
fuels. I look forward to hearing from EPA today as to the status of that 
list. However, we need to learn from this hearing what this balkanization 
is doing to the delivery and price of fuel. 
        Understanding how fuel supply and specifications affect price may shed 
light on steps Congress can take against price spikes while also 
advancing the cause of clean air.  I expect to hear more today on the 
recent transitions our fuel supply chain has undertaken and a complete 
description of boutique fuels.
We invited today's witnesses to help us understand gasoline price, 
supply and specifications.  Again, I would like to thank the witnesses for 
coming.

	MR. BOUCHER.  Well, thank you very much, Mr. Chairman.  I 
commend your decision to conduct a series of hearings, today and 
tomorrow, on gasoline supply and pricing, a major concern of all 
Americans.  A thorough understanding of a variety of factors affecting 
the gasoline market is the key to our ability to act thoughtfully, to 
address the national concern over gasoline prices.  These hearings can 
lead to that understanding.  Frequently mentioned among the factors 
leading to high crude oil prices are the dramatic growth of the economies 
of both China and India and political instability in certain oil producing 
regions.  The price of crude oil carries an Iran risk component and a 
lesser Nigerian risk component; and I am interested this morning in 
learning to what extent prices are affected by these and perhaps other 
political risks.
	But beyond crude oil pricing, another major contributor to high 
prices at the pump is our restrained refining capacity.  Globally, the 
refinery utilization rate exceeds 90 percent of capacity and we have 
constrained refining capacity domestically.  We are currently importing 
refined gasoline from other countries.  We don't have enough capacity in 
the U.S. to refine the gasoline that we consume in this country.  Under 
current global and domestic refining restraints, any disruption in refinery 
operations drives up gasoline prices dramatically.  We are operating on a 
truly thin margin.
	I think, Mr. Chairman, you would agree that there is a consensus in 
this committee that more domestic refining capacity is needed and that 
we should diversify refinery locations throughout the country so that 
another major hurricane along the Gulf Coast does not dramatically 
reduce the flow of refined product to market and dramatically escalate at-
the-pump prices.  While we agree on the need for more refineries, I think 
we do differ on the method needed to obtain them.  The bill that was 
debated on the floor last week would have overridden State 
environmental permitting processes based upon the assumption that 
environmental permitting obstacles have prevented new refinery 
construction.
	The record before this committee, however, is devoid of any 
evidence that supports the assumption, that the reason that we don't have 
more refinery construction is State permitting processes.  In fact, the 
CEOs of major refining companies have testified to the Congress that 
State permitting is not a barrier to new refinery construction or to the 
expansion of existing refineries.  The bill which the House put aside last 
week was not the answer.  A more thoughtful approach is needed.  This 
week, Mr. Dingell and I are introducing legislation which will make a 
genuine difference in relieving our restrained refinery capacity.
	We seek to build upon the well-established and highly successful 
strategic petroleum reserve by creating a strategic refinery reserve for use 
in terms of times of emergency.  Just as the strategic petroleum reserve 
has been an excellent shock absorber in times of crude oil supply 
disruption, we propose a national refinery reserve for use when a 
hurricane or other extraordinary event disrupts the supply of gasoline to 
markets in the United States.  During normal times, the strategic 
refineries would produce gasoline for governmental use; during times of 
emergency, they would supply gasoline to the commercial market.
	At a time when the public is looking to the Congress for answers, 
Mr. Dingell and I are offering a measure based upon a proven model that 
will make, I suggest, a genuine difference.  I would welcome comments 
from our witnesses today and tomorrow on this proposal.  And Mr. 
Chairman, I invite your careful review of it as we move forward.  We 
would welcome a bipartisan effort to employ the same means through 
which we solved the problem of crude oil disruptions to solve the 
problems which will arise from future disruptions in the flow of refined 
gasoline.
	Mr. Chairman, I appreciate your scheduling these hearings, and I 
very much look forward to what our witnesses will say to enlighten us on 
the problems relating to gasoline supply and pricing both today and 
tomorrow.  Thank you.  I yield back.
	CHAIRMAN BARTON.  We thank the distinguished Member from 
Virginia for that statement.  Mr. Norwood.
	MR. NORWOOD.  Thank you very much, Mr. Chairman, for having 
this hearing on gas supply and how critically important that is.  Gas 
prices are critical to our constituents and they are paying amounts.  But 
just as important, gas and energy prices are critical to our economy and 
job creation.  We all know the stories and the statistics of record 
increases and record prices.  True also is that we know about record 
profits and record severance packages, but that really isn't the reason we 
are here today.  Today we are here to examine probably the single most 
important source of the problem and that is supply.  
	The debt-based U.S. economy has grown and demanded more fuel 
for the jobs we all say we want to see created and sustained.  
Increasingly, however, that demand was met by OPEC and other 
international oil producers.  Sixty percent of our energy is now imported.  
Our energy future remains in the clutches of the OPEC cartel, at the 
whims of an Iranian radical, at the mercy of political unrest and civil 
wars in Africa, and at the beck and call of dictators in South America.  It 
is no wonder the American people are upset.  Neither they nor I accept 
the answer that oh, nothing can be done.
	I think we all have a right to be frustrated, frustrated that some 
folks oppose a reasonable and balanced energy bill and still find time to 
decry energy prices.  These same folks oppose any new domestic exploration 
and development time and time again.  They oppose the development of 
nuclear and other sources of energy.  They oppose the ability of 
refineries to expand and eliminate a bottleneck in our fuel supply, and 
they oppose even renewable energy off the coast.  It seems to me having 
a United States refinery run by FEMA is not the answer.  Energy prices 
skyrocketed because someone's favorite vacation or wind surfing site 
might have a renewable wind energy project offshore.
	But apparently, we can tax, which is a usual solution.  Speaking of 
taxes, the Congressional Research Service noted that opening ANWR to 
just limited development would result in somewhere between $111 and 
$178 billion in new taxes and royalties.  So we can't drill, we can't 
diversify, we can't expand, and we can't compete, and now we can't 
afford the gas to go to the store or the baseball game or to the school.  
These positions are simply unsustainable.  We, as a Congress, simply 
have to accept that every energy bill that comes out can't be written 
individually by each of us.  And you may not like exactly the energy bills 
that have been coming out, but the majority do and they need to get 
passed.
	Mr. Chairman, with that, I yield back my time.
	CHAIRMAN BARTON.  We thank the gentleman.  The Ranking 
Member of the full committee, Mr. Dingell, is recognized for 5 minutes.
	MR. DINGELL.  Mr. Chairman, I thank you for your courtesy and I 
thank you for holding this important hearing.  Less than one year after 
Hurricanes Katrina and Rita caused some of the highest gasoline prices 
the country has seen, we are still in the midst of a struggle to understand 
the cause of high prices and determine what, if anything, the 
Administration or the Congress can do to remedy the problem.  The 
Administration has been laggard in implementing the important 
provisions in the Energy Policy Act of 2005.  Prices have now risen to a 
nationwide level of $2.95 per gallon, our highest level since the 
hurricanes struck, and Americans are feeling the pain.
	The American Automobile Association estimates that current prices 
will lead an average American family to spend an additional $1,260 more 
for gasoline than they would have at January's price levels.  For many 
families, this is not an insignificant amount, especially following a winter 
of high heating costs.  For some families, the costs of energy puts them 
in dire financial straits.  I do believe it would have been far better if the 
House had taken up Representative Stupak's price gouging bill last fall 
instead of waiting until last week to tackle this issue.  It would also have 
been better if the Administration's 2007 fiscal year budget request had 
been funded fully with regard to energy conservation, efficiency, and the 
renewable provisions of the Energy Policy Act of 2005.  At this late date, 
the ability of Congress to have an immediate impact upon gas prices is 
extremely limited.
	I think it is important to have hearings so that we can understand the 
facts and fully decide whether and how to legislate, and for that reason I 
commend you, Mr. Chairman.  In fact, before we have a vote on refinery 
legislation on the House floor again, I hope that this committee will hold 
hearings and respond to the requests of State and local governments to 
testify about their permitting processes because this is an extremely 
important part of the questions before us with regard to price and supply.  
We know that the cost of crude oil has a significant impact on the price 
of gasoline and we have explored this aspect to pricing in last week's 
hearings.
	I look forward to the testimony from the witnesses today about 
whether the reforms adopted in the Energy Policy Act of 2005 have been 
implemented and whether they are working.  I am particularly interested 
in hearing about the boutique fuel provisions of the Energy Policy Act of 
2005, which I support, that limited the number of boutique fuels, 
required the Environmental Protection Agency, EPA, and the 
Department of Energy to publish a list of current fuels, and required a 
study as to whether further legislative action is necessary.  The law 
required the EPA to meet with interested parties to study this matter and 
to report to the Congress by this August, but just last week, EPA 
announced that it was taking a belated "first step" to engage the States in 
a dialogue over the issue.  I think they have to explain why they have 
been so dilatory in this matter.
	I want to know what EPA is doing and when it will do it to meet its 
statutory obligations, and I hope that the witnesses today can help 
illuminate this point.  The Congress has wrestled with this difficult issue 
once, and we need to know why the Administration has failed to meet its 
statutory obligations.  And I hope our witnesses will shed some light on 
other pricing issues that have received attention from energy analysts in 
the press and I would refer specifically to the phase-out of MTBE and 
the effects of this transition on supply and price and ethanol from a 
production and transportation standpoint; the role of refined products in 
meeting our daily gasoline demand and the effect of market 
concentration in the petroleum industry.
	Mr. Chairman, again, I thank you for holding this hearing.  I 
appreciate your courtesy in recognizing me and I look forward to the 
testimony of the witnesses.  I yield back the balance of my time.
	CHAIRMAN BARTON.  I thank the distinguished gentleman from 
Michigan and recognize the gentleman from Illinois, Mr. Shimkus, if he 
wishes to make an opening statement?  Does the gentlelady from New 
Mexico wish to make an opening statement?
	MRS. WILSON.  Thank you, Mr. Chairman, I do.  Everyone is being 
affected by the high gas prices both in their daily lives and also in their 
small businesses as they try to get their products to where they can sell 
them.  And the cost is always passed through to the consumer, so I am 
glad that you are holding these hearings, Mr. Chairman, and I thank you 
for doing so, so that we can look at ways that we can make America 
more energy independent.
	I think we took some positive steps last August, but now we get a 
clean sheet of paper to look at the problems, to understand the factors 
driving prices, and mitigate those factors.  That includes reducing 
demand for refined product and that means alternative fuels, like E85 or 
hydrogen fuels, getting America beyond its exclusive reliance on the 
gasoline powered engine; hybrids that are more efficient and can reduce 
the overall demand for gasoline, and conservation and fuel efficiency so 
that we reduce the demand for imported oil.
	The second thing we need to do is look at diversifying supply and 
that means worldwide diversification of supply so that we are not as 
dependent upon single points where, or single countries where there is a 
great deal of volatility and political uncertainty and risk.  And also 
supply within the United States so that we can use the energy resources 
that we have to get that marginal barrel of oil into the market.
	And finally, I am glad that we are looking at the whole supply chain 
and looking at the bottlenecks between getting a barrel of oil and turning 
it into gasoline that can be used in someone's car.  Whether that is 
boutique fuels or the impact of regulations or expanding our refining 
capacity, I am glad we are looking at understanding each of these factors 
driving prices and mitigating them so that we make America more 
energy independent.  And over the summer I look forward to continuing 
to work on these problems.  Thank you, Mr. Chairman.
	CHAIRMAN BARTON.  I thank the gentlelady.  The gentleman from 
California, Mr. Waxman.
	MR. WAXMAN.  Mr. Chairman, every American knows that gasoline 
prices are skyrocketing; at $3 a gallon, prices have doubled since 2000.  
But not every American knows what has gone on in Washington in that 
time.  For the last 5 years we have lacked an effective energy policy.  
Instead, the White House, with the support of the Republican leadership 
in Congress, has showered the oil industry with subsidies, environmental 
exemptions, loopholes, and tax breaks.  This has vastly enriched the oil 
companies and their CEOs, but it has not reduced America's dependence 
on foreign oil and it has allowed prices to skyrocket.
	This chart illustrates what has happened.  It superimposes the 
implementation of the Administration's energy policies on a graph of 
gasoline prices.  As you can see, on May 16, the White House energy 
plan was announced.  The Administration set out to implement their 
energy policy using existing authority to the greatest extent possible.  By 
the end of the President's first term, the Administration had implemented 
75 percent of its energy policy.
	By March 2005, Energy Secretary Bodman announced that 95 
percent of the energy plan had been implemented and throughout this 
whole period of time, gasoline prices have increased.  There is a direct 
correlation between the Administration's policies and gasoline prices.  
The more success the President and the Vice President have had in 
implementing their energy policies, the higher gasoline prices go and the 
richer the oil companies become.
	Mr. Chairman, this committee has a dismal track record on energy 
issues.  In 2001, California and the West Coast were being gouged by 
Enron, Reliant, and other energy producers who were manipulating 
electricity prices and they were doing this to enrich themselves, yet our 
committee never conducted a serious investigation.  Instead, our 
committee made up excuses.  Now it appears we are about to repeat the 
same mistakes.  I am disappointed we haven't yet scheduled a hearing 
with the oil company executives.  Members have been seeking a hearing 
with these witnesses since last fall, yet instead of investigating the oil 
industry, there appears to be a concerted effort here in Congress to blame 
gasoline prices on everyone but the oil companies.
	Last week there was legislation on the floor designed to blame State 
and local governments for high gasoline prices.  Next week there may be 
legislation brought up that seeks to blame environmental protection.  Mr. 
Chairman, this committee should call the executives to testify and if 
necessary, subpoena them and their internal records so we can 
understand why prices are so high, what has happened to the refining 
capacity.  We should stop defending the oil industry and start protecting 
the consumers, the American people.
	CHAIRMAN BARTON.  I thank the gentleman.  Let us see.  Dr. 
Burgess.
	MR. BURGESS.  Mr. Chairman, I will submit for the record and save 
for questions.
	[The prepared statement of Hon. Michael Burgess follows:]

PREPARED STATEMENT OF THE HON. MICHAEL BURGESS, A 
REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS

        Mr. Chairman, thank you for convening this hearing this morning.  
And thanks to our panelists for coming before us today.  
        As we are hearing from our constituents on this topic, I think the 
information provided by the panelists today will help this committee get 
beyond the rhetoric to the facts. 
        There are a number of factors that contribute to high gasoline prices, 
including: crude oil prices, refinery capacity, environmental regulations, 
and consumer demand.  As we learned during our hearing on World 
Crude Supply last week, approximately 55 percent of the cost of a gallon 
of gasoline is the crude oil.  
        The geography of oil and gas has led our country to place our energy 
assurance in the hands of leaders such as Venezuelan President Hugo 
Chavez and inflexible or unstable dictators of the Middle East.  Last 
week, several panelists, including Dr. Daniel Yergin, referenced the "risk 
premium" associated with ongoing concerns about the stability of supply 
from Russia and the Nigeria Delta Region, as well as the impact of Iran's 
nuclear posturing and the recent nationalization of energy infrastructure 
in Bolivia.
        All of these geopolitical uncertainties make foreign oil unpredictable 
and unaffordable.  The best way to bring down prices is to increase 
supply while decreasing this risk premium.  That means we need to 
increase not only production, but domestic production.  Today, we 
import nearly 60% of our oil, but we've prohibited exploration in the 
OCS, in ANWR, and on other federal land.  
        I believe we should allow, and in fact, encourage exploration and 
production here at home.  A barrel of oil coming from the Gulf Coast or 
the oil shale in Utah is significantly safer than a barrel of oil coming 
from Iran.  That is the surest way to bring down gasoline prices in the 
short run.  
        However, there is another phenomenon affecting the price of 
gasoline, especially in the Dallas-Fort Worth Metroplex, and that is the 
transition from methyl tertiary butyl ether (MTBE) and ethanol.  Areas, 
such as the Dallas-Fort Worth Metroplex, which use RFG to meet Clean 
Air Act requirements during the summer driving season, have been more 
heavily impacted by this fuel switching.  
        Not only has there been an inadequate supply of ethanol to meet the 
demand, there have been logistical problems due to the different physical 
characteristics of the two substances.  
        Unlike gasoline containing MTBE, gasoline containing ethanol is not 
able to be transported via pipeline, which means that the ethanol must 
travel via truck and rail and mixed once it arrives to the area in which it 
will be used.  All of these factors further push up the price at the pump.  
        Another factor, affecting the price of gasoline is the patchwork of 
different "boutique" fuels in use across the country.  Non-federal fuel 
specification requirements reduce the fungibility of gasoline.  That 
means that gasoline that can be used in Lubbock cannot be used in Fort 
Worth.  Gasoline used in Utah cannot be used in Chicago.  This limited 
inability to move gasoline across the country in response to local demand 
results in increased prices at the pump.  
        I am looking forward to hearing from our panelists today about how 
gasoline prices are set in general, and specifically how they are impacted 
by the transition from MTBE to ethanol and by the use of "boutique" 
fuels.
        I'd like to thank our panelists again for giving up their time to 
testify before us this morning.  And with that, Mr. Chairman, I yield back.  

	CHAIRMAN BARTON.  Okay, Mr. Pitts.
	MR. PITTS.  Thank you, Mr. Chairman.  Few issues are of more 
concern to Americans these days than gasoline prices and while we have 
addressed the issue with a number of legislative proposals in recent days, 
the truth is that there is no quick fix to this problem.  Arriving at real 
solutions will require us to take a long-term approach to the basic 
principle at work here, supply and demand.  Windfall taxes, price 
controls, and new regulations are exactly the sorts of things we don't 
need.  You could eliminate all of the profit of the oil companies and you 
would only reduce the price of gasoline by nine cents a gallon, I am told.  
In fact, one of the best things Congress can do is just get out of the way.  
In a free market economy, prices will always be high when demand rises, 
and supply is tight and that is what we are seeing right now.
	The fact is that America is not making full use of its own oil supply.  
Allowing access to the billions of barrels of oil in ANWR and off our 
coast is a common sense start.  We should make that a reality this year.  
Removing the red tape required to build new refineries in America is 
another step in the right direction.  Streamlining fuel regulations, 
reducing the number of blends required would also help.  No amount of 
quick fix political posturing will help Americans at the pump.  We need 
real energy solutions and real energy solutions must include forward-
looking supply improvements like these.  We need to be less dependent 
on foreign sources of oil; that is a matter of national security.
	I look forward to hearing the testimony of our witnesses today.  I 
thank them for coming to share their expertise and I yield back.
	CHAIRMAN BARTON.  I thank the gentleman.  The gentlelady from 
California, Ms. Eshoo.
	MS. ESHOO.  I will wait for the questions, Mr. Chairman.
	CHAIRMAN BARTON.  Okay.  Mr. Stupak.
	MR. STUPAK.  Thank you, Mr. Chairman.  I am pleased we are 
having committee hearings on the burden that high gas prices places on 
American consumers.  As Ranking Member of the Energy and 
Commerce Subcommittee on Oversight and Investigations, I have asked 
for eight months for hearings on the cause of high gasoline and natural 
gas prices.  I am pleased that the chairman has finally realized that these 
hearings are needed and I hope we will continue these discussions about 
what Congress can do to ease energy prices.
	At this time last year gasoline was selling at an average of $2.18 per 
gallon.  Currently, gas is at $2.90.  This is a 72 cent increase.  While 
switching from winter to summer seasonal blends can have some affect 
on prices, a 72 cent increase over last year, when we were also 
undergoing summer blend changes, is not acceptable.  This excuse is 
getting old.  Obviously, other factors need to be addressed.  With regard 
to MTBE, oil companies have known for years that MTBE is a bad 
product.  Oil companies knew they would be unable to continue to use 
MTBE and should have planned accordingly.
	As for boutique fuels, as part of the energy bill approved last 
summer, Congress has already capped the number of boutique fuels and 
has directed the EPA to study whether boutique fuels need additional 
regulation.  The EPA estimates that boutique fuels currently add only 
three cents per gallon, sometimes less.  While there is a potential for 
shortages and increased costs should a production or a supply disruption 
take place, Congress has already granted the EPA the authority to issue 
boutique fuel waivers should such a situation arise.  Unfortunately, this 
committee seems to be searching and continuing to rely on the oil 
companies for their excuses and scapegoats rather than investigating 
problems and finding serious solutions.
	Instead of focusing on things like transition to summer fuel blends, a 
phase-out of MTBE, and the use of boutique fuels which either have a 
minimal effect on gas prices or have already been addressed by 
Congress, we should be holding hearings on factors that have so far been 
unaddressed.  This committee should be investigating whether the 
substantial profits currently made by the oil and gas companies are 
warranted, or whether these profits are the result of unfair predatory 
pricing and market manipulation, and pass a real price gouging bill.
	We should be holding hearings on my legislation the, Prevent Unfair 
Manipulation of Prices, or PUMP Act, to bring oversight and 
transparency to over-the-counter trading of energy commodities which 
are currently unregulated by the Federal government.  We should have 
the foresight to investigate natural gas prices.  High natural gas prices are 
already affecting farmers, manufacturing and electrical utilities, along 
with other industries.  The EIA has projected that natural gas prices will 
be significantly higher again this winter.  Rather than wait until this 
winter, we should address the issue now.  As the EIA has told us since 
before Hurricane Katrina, gasoline and natural gas prices are going to 
stay high under the current climate.
	Our constituents are waiting for Congress to take action to address 
these high energy prices, like my PUMP legislation.  I welcome the 
witnesses and I look forward to their testimony and I yield back, Mr. 
Chairman.
	CHAIRMAN BARTON.  We thank the gentleman.  Mr. Gillmor.
	MR. GILLMOR.  Thank you, Mr. Chairman, and I commend you on 
your swift action to address the recent rising energy prices.  The matter 
of rising energy prices is an issue that impacts real lives and has real 
consequences and often we hear our gas prices affect urban commuters, 
vacationers and the transportation industry, while little is said about the 
growing hardship that rural Americans face on a daily basis.  Farmers, in 
particular, are faced with the prospects of a difficult future as a 
continuing rise in energy prices makes it harder for them to gas up their 
tractors and combines and purchase necessary fertilizer.
	Additionally, in an already hyper-competitive rural economy, the 
manufacturing community faces the realization that it will be necessary 
to raise prices on their products as their structural costs continue to 
skyrocket.  Mr. Chairman, rural communities are already at an inherent 
disadvantage due to the proximity to suppliers and to the limited choice 
of suppliers.  As the committee continues to address this matter of 
national importance, I would urge all my colleagues to not forget the 
challenges of rural areas like my district in northwest Ohio face as a 
growing threat to our manufacturing preeminence posed by rising 
gasoline prices.  Thank you for yielding time and I yield back.
	[The prepared statement of Hon. Paul Gillmor follows:]

PREPARED STATEMENT OF THE HON. PAUL GILLMOR, A 
REPRESENTATIVE IN CONGRESS FROM THE STATE OF OHIO

        I first would like to commend the swift action you have taken to 
address the growing problem of rising energy prices. 
        The matter of rising energy prices is not the latest public policy 
trend, nor is it an issue to be politicized.  Rather, this is an issue that 
impacts real lives and has real consequences.  
        Often we hear about how gas prices affect urban commuters, 
vacationers, and the transportation industry.  However, little is said about 
the growing hardships that rural Americans face on a daily basis.  
Farmers, in particular, are faced with the prospects of a difficult future as 
the continuing rise in energy prices makes it harder for them to gas-up 
their tractors and combines and purchase necessary fertilizer.  
Additionally, in an already hyper-competitive global economy, the 
manufacturing community faces the realization that it will be necessary 
to raise prices on their products as their structural costs continue to 
skyrocket.  
        Mr. Chairman, rural communities are already at an inherent 
disadvantage because of proximity to available supplies and limited 
choice of suppliers.  As this committee continues to address this matter 
of national importance, I would urge all of my colleagues to not forget 
the challenges that rural areas, like my district in Ohio, face as well as 
the growing threat to our manufacturing preeminence posed by rising 
gasoline prices.
        Thank you Mr. Chairman for yielding me this time and I look 
forward to the testimony from our invited witnesses and to working with 
you to ensure that the needs of rural communities are properly addressed.  

	CHAIRMAN BARTON.  The gentleman yields back.  The gentleman 
from Texas, Mr. Green.
	MR. GREEN.  Thank you, Mr. Chairman.  Mr. Chairman, I want to 
thank you for holding this extensive hearing today and tomorrow on fuel 
supplies.  Americans are upset about the gasoline prices that are the 
highest since the oil embargo in the 1970s.  And then I come from Texas, 
a border State, and we hear a lot about immigration in our office, but gas 
prices are the biggest concern.  Even though we produce and refine and 
pipeline a lot of it, we still pay the same prices as everyone else.  In fact, 
it bothers me when stations in my own district where we produce and 
refine are very much higher than some other parts of the country.  I know 
the reasons for it, though.  
	Unfortunately, we have been hit by a perfect storm on gas prices in 
the last few years.  One, major instability in producing countries in the 
Middle East, Africa, Latin America; increasing consumption from new 
drivers in China and India; powerful hurricanes in the Gulf of Mexico; 
longstanding Congressional bans on domestic drilling, and a difficult 
switch from MTBE to ethanol.  Some of these factors are beyond our 
control, such as demand in China and India or even the hurricanes in the 
Gulf, and some of the factors are the result of Congress, such as the bans 
on drilling.  And some of them are actually the fault of the 
Administration when we see that our energy bill passed last year and just 
in the last few days, as the EPA started to work on ways that they can 
streamline it.
	During the debate on the energy bill last year when we eliminated 
MTBE, there were some of us who kept saying there is going to be a 
problem and all of a sudden we do have the problem; when you add it to 
the time of year and the other things that we have no control over, then it 
becomes a big problem.  I support faster permitting in expanding the 
refineries and building new ones, but permits aren't the reason we have 
high prices.  It makes a good sound bite to say we haven't built a refinery 
in 25 years, but what matters is the barrels per day.  Refining capacity 
has steadily increased for the last 10 years and it will increase further in 
the new couple of years.
	If we could streamline some of the red tape without altering our 
environmental standards, I am for it.  Boutique fuel legislation is much 
complicated because the tradeoffs are with clean air and prices are 
impossible to avoid.  Some folks are trying to take advantage of the high 
prices to push their favorite cause, whether it is CAFE standards, 
investigating oil companies, ethanol, regulation, or so on.  But I see we 
have three options.  The status quo is a variety of State and Federal fuels 
that give us the best mix of price and quality when times are good.  
However, the system is vulnerable to disruptions.
	If we want flexibility during disruptions, we could go to fuel that is 
still clean fuel, but prices will likely go up since clean gasoline is more 
expensive to produce.  We could also go to fuel but less clean fuels to 
keep prices level, but then manufacturing industries will be required to 
make up the difference to meet our clean air standards in our urban areas.  
I know our constituents are calling for a quick fix, but I am afraid that we 
are not going to see that silver bullet today or tomorrow, but there are a 
lot of things we can do to help alleviate it over a period of months.  
Thank you, Mr. Chairman.
	CHAIRMAN BARTON.  Thank you.  Ms. Bono.
	MS. BONO.  Thank you, Mr. Chairman, and thank you for holding 
this hearing today.  I realize the entire Nation is suffering from this crisis.  
I know that the people of the 45th Congressional District in California are 
paying more for gas than the rest of the country.  That, coupled with the 
high summer cooling costs in the desert Southwest make for a very 
difficult time ahead.  But those of us in Congress and our constituents at 
home are smart enough to realize that there is no single solution to this 
problem we face today.
	Last week we examined world oil prices and how a thirsty Chinese 
economy, a brash Russian march on the energy market, and a very 
unstable Iran impact the price we pay for oil.  Today one aspect of the 
problem that deserves our attention is how we can use the very oil which 
lies under American soil.  Currently, there seem to be some problems in 
tapping this resource.  For instance, if you talk to many domestic 
producers, they might comment on how the prices they are getting for 
their oil is too low and how that threatens to put them out of business.  
We are not talking about $70 a barrel, but rather $22 to $35 a barrel for 
domestic oil.  Imagine creating incentives to encourage our small 
independent producers to bring their oil to market.
	While we have many dimensions to the supply side of the problem, 
we also need to turn our focus and American ingenuity on the demand 
side of the equation.  Let us face it.  We have an addiction to oil.  It is 
here, where not just government, but private business and even the 
American consumer need to take action.  Whether it be hydrogen or 
some other form of green power, our country must make a concerted 
effort to expand these clean, alternative fuels.
	We need to eliminate redundancy in government programs, 
encourage the private sector to invest in new technologies, and make it 
affordable and simple for Americans to make the jump to another form 
of fuel.  Oil will always have a role in our economy, but like any good 
financial plan, we need to diversify.  I realize this is some time off yet, 
but if we do not take this challenge head on, we risk oil not serving as a 
bridge to the future, but rather the burden to stay in the past.
	Again, Mr. Chairman, thank you for holding this hearing.  I look 
forward to hearing from our witnesses and I thank them for being here.  
Thank you, Mr. Chairman.
	[The prepared statement of Hon. Mary Bono follows:]

PREPARED STATEMENT OF THE HON. MARY BONO, A REPRESENTATIVE 
IN CONGRESS FROM THE STATE OF CALIFORNIA

        Mr. Chairman, I rise in support of the Markey amendment.  I know 
the Gentleman from Massachusetts as well as Mr. Boehlert have done a 
great deal of work on this matter and I thank them for it.
        I think it is time that we challenge the auto industry to do better. 
We should not underestimate America's ingenuity to get our cars to this 
standard in a safe manner.
        This is a country that put a man on the moon so to think the smartest 
engineers in the world can't get us to this goal sorely undervalues the 
intelligence and sheer "know how" our country is known for. 
        Henry Ford was a man before his time, so I think he would be the 
first one to roll up his sleeves and go to work in solving this problem.
        A challenge is a good thing. It gives us something to strive for. 
        So Congress must challenge the auto industry to rise above the 
doubts associated with our ability to do this.  Our country not only needs 
it, but must demand it.
        Thank you and I yield back.

	CHAIRMAN BARTON.  I thank the gentlelady.  Ms. Capps.
	MS. CAPPS.  Thank you, Mr. Chairman, for holding this hearing 
today and welcome to our witnesses.  The high price of energy is indeed 
a serious problem facing our country today.  My colleague, Mary Bono, 
and I have gasoline prices in our districts that are probably some of the 
highest in the Nation, with $3 per gallon prices now a distant site in the 
rearview mirror.  I hope this hearing today will explore some of the 
reasons behind this problem.  Having read through some of the 
testimony, I find myself most in line with the emphasis on industry 
consolidation that we will hear more of from Dr. Cooper with Consumers 
Union.
	The industry has consolidated to a remarkable degree and this has 
affected competition, I believe, in a very negative way.  One need only 
look at the refinery situation with the closing of dozens of refineries over 
the years, and virtually no attempt to build new ones.  I know the 
Majority will continue to push its refineries legislation, but I believe that 
is completely missing the mark.  The issue really isn't local and State 
permitting, the issue is that the industry hasn't wanted to build more 
refineries and that leads to a very tight supply.  And almost any time 
anything happens--a natural disaster, seasonal changeover--gas prices 
spike and industry profits swell even more.
	I don't think it is a big surprise that the continued record profits 
of the industry are causing outrage among the consumers and stomach 
churning among some of our Republican friends.  Headlines like this 
from the Wall Street Journal yesterday, "Exxon's Pile of Cash Keeps 
Growing; Adding Fuel to the Ire Over Oil Prices," go straight to the 
point.  Finally, I would note that earlier this year there was a lot of talk 
about how the high price of gasoline was being driven by MTBE issues.  It is 
my understanding that the Energy Information Administration, EIA, has 
refuted this notion and reported that the transition away from MTBE to 
ethanol might be adding a few cents a gallon at most, that this transition 
period would be short term and by next year there would be ample 
ethanol to meet demand.
	Furthermore, it is important to note that it is the industry that is 
choosing to stop using MTBE, just like it was the industry that chose to 
start using MTBE in order to meet the oxygenate requirement.  The 
industry has been abandoning MTBE faster than big gas prices increase 
at the pump because MTBE is a problem.  The contamination MTBE has 
caused to groundwater systems and the fact that the industry will be 
forced to clean up that damage is what is driving the move away from 
MTBE.
	My hope is that the problems associated with MTBE use can be 
worked out among the various parties in order that cleanup happens and 
we don't just see endless litigation.  I look forward to the testimony 
today and yield back.
	CHAIRMAN BARTON.  I thank the gentlelady.  The gentleman from 
Arizona, Mr. Shadegg.
	MR. SHADEGG.  Thank you, Mr. Chairman.  I want to express my 
appreciation for you holding this hearing today.  I will be brief.  We will 
hear many reasons for the high price of gas over the next few days in 
these hearings; boutique fuels, transitioning to summertime gasoline, 
refinery maintenance, lack of refining capacity, and though I would 
associate my remarks to the comments of the gentlelady on the other 
side, it appears that the problem there is a lack of a will to build 
additional refining capacity.  
	The conversion from MTBE to ethanol and indeed, on that point, I 
would disagree with the gentlelady from the other side; we knew that 
MTBE was going to go away as a result of a litigation brought by the 
trial bar if we were not willing to extend any kind of protection to that 
industry.  Now that has come to pass; MTBE is being withdrawn from 
the market.  MTBE made up about 1.4 percent of our entire fuel supply 
prior to now and that now has to be fully replaced by ethanol.  The list is 
long, but we shouldn't forget that the main reason we have high gasoline 
prices is that the world price for crude oil has skyrocketed.
	There are a variety of reasons for that, no doubt.  In part, political 
and economic uncertainties in oil producing countries have squeezed the 
world market.  But in part, speculators, I believe, are also running up the 
cost.  We need to be doing everything we can to increase domestic 
production of our own energy supply, including oil, so that we can 
alleviate these shortages on the oil market.  For one thing, we need to be 
pursuing alternatives to oil, but in addition to that, there are many places, 
as was referred to just a moment ago on the other side of the aisle, where 
we have locked up known supplies in the United States, on the outer 
continental shelf, in ANWR, in the interior west, where indeed there is 
ample fuel and oil that we could be going after and natural gas that we 
could be going after, but for political reasons we are not doing that.
	I want to focus my remarks today on at least one possible short-term 
solution.  The withdrawal of MTBE from the market as a result of the 
litigation brought against MTBE producers makes the current MTBE to 
be a defective product, has resulted, as I indicated, in a drop in the 
market of MTBE, which accounted for 1.4 percent of our gasoline 
supply.  The only acceptable alternative is ethanol, yet today's domestic 
market cannot produce sufficient ethanol to supply the demand.  We 
have, over time, as a Congress, chosen to tax imports of ethanol in order 
to encourage domestic production of ethanol.  We impose a tax of 2.5 
percent on the cost of the ethanol and then we impose an additional tax 
of 54 cents per gallon.
	I would suggest that it is time to suspend, at least temporarily, 
those taxes.  The reality is we cannot produce sufficient quantities of 
ethanol in the next 12 to 18 months to satisfy our demand.  The EIA and others 
have confirmed this.  We will be at least 130 thousand barrels per day 
short of the necessary supply of ethanol to replace the MTBE that has 
been withdrawn from the market.  There is no reason to continue to 
require American consumers to pay the tax of 2.5 percent plus 54 cents 
per gallon on imported ethanol.  If we were to lift those tariffs, at least 
temporarily, we would be able to bring in additional ethanol from outside 
of the country; we would deal both with the lack of supply, but also with 
the distribution problems that ethanol is currently experiencing.
	There are many coastal areas where if we could import ethanol at an 
economic price, the cost of gasoline would go down and we would not 
suffer shortages as we have recently in Pennsylvania and in Texas as a 
result of the shortage of ethanol.  This is an idea that is quickly catching 
on and gaining supporters.  I have introduced legislation which now has 
over 30 sponsors; President Bush expressed his support for the idea last 
week on CNBC.  Yesterday Majority Leader Boehner expressed his 
support for the idea and this morning's paper reveals that Speaker 
Hastert has also suggested a temporary suspension of the ethanol tariff 
would be a good idea.
	This would give immediate relief to American fuel purchasers of at 
least a portion of the cost of gasoline, and I would urge that it would be 
in the interest of the ethanol industry because it will allow them time to 
build out the ethanol infrastructure that we need.  Mr. Chairman, again I 
thank you for holding this hearing and look forward to the testimony of 
the witnesses.
	CHAIRMAN BARTON.  We thank the gentleman from Arizona.  Ms. 
Schakowsky of Illinois.
	MS. SCHAKOWSKY.  Thank you, Mr. Chairman, for holding today's 
hearing on gasoline prices.  Seven in 10 American families believe that 
gas prices will cause them financial hardship this year.  I hope that we 
can use this hearing to develop immediate plans to bring prices down as 
the summer driving season begins.  Talk is cheap and gasoline isn't.  In 
Chicago we are paying $3 plus for a gallon of gasoline.  Secretary 
Bodman has called this an energy crisis, but let us be clear; this is not a 
crisis for everyone.  Not everyone in America is suffering.  For oil 
companies, friends of the two oil men in the White House, President 
Bush and Vice President Cheney, this crisis is a bonanza and the 
American people know it.
	At over $25 billion, ExxonMobil reported the highest profit of any 
company in any year in history in 2004, and then beat its own record in 
2005 with a $36 billion profit, and this quarter ExxonMobil reported a 7 
percent increase in profits over last quarter.  It is certainly not a crisis 
for ExxonMobil's CEO, who is retiring with a $400 million retirement 
package.  The overall U.S. economy, however, is suffering.  A recent 
Wall Street Journal headline declared fuel prices keep economic growth 
in limbo, reducing our total GDP by 7 percent.
	Last Friday I met with small business owners in Chicago to discuss 
how a rise in gasoline prices was crippling their business.  I spoke with a 
restaurant owner who has been forced to charge more for delivery, cut 
his distribution area at the same time as his food suppliers have added a 
transportation cost for their services and he has had to hike menu prices, 
he has lost business and upset some loyal customers.  So those people are 
feeling the pain, they are making the sacrifices.  The only ones from 
whom nothing has been asked at all are the oil companies.  And instead, 
the oil companies are being lavished with benefits and environmental 
exemptions.  In the last big energy bill we gave them about $11 billion in 
tax breaks, a bill that even the Energy Information Administration at the 
time said could raise gas prices and it has.
	Talk about increasing refinery capacity, we know that between 2004 
and 2005 refineries marked up their prices 255 percent while gasoline 
retailers only marked theirs up about 5 percent.  More refinery capacity?  
In the 1990s the American Petroleum Industry sent letters, memos to the 
oil companies saying if you want to increase your profit, you know what 
you have to do?  You have to decrease your refining capacity and that is 
exactly what has happened.
	We have legislation proposed by Mr. Boucher and Mr. Dingell that 
would actually do something by creating a national refinery reserve.  
That has been rejected.  There are things we could do.  Senator Durbin, 
my Senator in the Senate, is the sponsor of the Windfall Profits Tax Act, 
which would enact a 50 percent windfall profits tax on profits earned 
above the base price of $40 a barrel of oil, adjusted for inflation.  The 
revenue collected would be rebated to consumers.  We could do it now.  
Invest it in energy efficient vehicles and in a low-income energy 
assistance trust fund.
	And so we need to perhaps have these hearings, but what we really 
need to do is answer what consumers are asking for, some relief at the 
pumps.  Thank you, Mr. Chairman.
	CHAIRMAN BARTON.  Thank you.  Mrs. Blackburn.
	MRS. BLACKBURN.  Thank you, Mr. Chairman.  I will welcome our 
witnesses and waive my statement and look forward to extra time for 
questions.  Thank you.
	CHAIRMAN BARTON.  Chairman Buyer.
	MR. BUYER.  I waive my time, Mr. Chairman.
	CHAIRMAN BARTON.  Okay.  Ms. Baldwin.
	MS. BALDWIN.  Thank you, Mr. Chairman.  Every year around 
Memorial Day, Wisconsinites start to notice a change in the price at the 
pumps and this year is different only that we have felt that pinch well 
before the holiday.  We have urged the President and this Congress to act 
on gas prices.  Instead, Congress last year passed an energy bill that did 
nothing to relieve the pain at the pump.  Even the Department of Energy 
acknowledged at the time that the Energy Policy Act of 2005 would do 
next to nothing to lower gas prices or reduce America's demand for 
foreign oil.
	Now, a year later, we could continue down the road that encourages 
reliance on finite natural resources and simply assumes that we can 
reduce our dependence on foreign oil without any strategy to get there.  
This, of course, means creating policies and incentives that inspire no 
one except the CEOs at the big oil companies.  Or we could change 
course and encourage our Nation to think big and make important 
decisions about where we want to see our Nation in the coming years.
	Included among our options are lowering the number of boutique 
fuels or establishing a regional gas reserve so that the next time there is a 
massive hurricane or other disaster, our gasoline supply can reach the 
stations without interruptions.  Independently, these proposals will not 
resolve the problem of high gas prices around Memorial Day or any time 
of year, but through a collective and coordinated effort, we will be able 
to lower gas prices and reduce our dependence on foreign oil.
	Our efforts must begin with more encouragement for the production 
of renewable fuels.  I am proud to report that Wisconsin is doing its part 
in the production of alternative fuels.  Ethanol production in Wisconsin is 
up from 90 million gallons in 2004 to over 200 million gallons today and 
as more plants become operational, Wisconsin will be producing an 
estimated 500 million gallons annually.  Wisconsin is clearly not fighting 
this battle alone and I hope that our witnesses today and tomorrow will 
bring big thoughts around real steps our Nation can take to improve our 
energy policy, changes that bring relief to the pocketbooks of Americans 
and not just the special interests.
	I look forward to the testimony at this hearing today and tomorrow 
and I yield back my remaining time, Mr. Chairman.
	CHAIRMAN BARTON.  We thank the gentlelady.  Ms. Solis.
	MS. SOLIS.  Thank you, Mr. Chairman, and Ranking Member 
Dingell, for holding this very important hearing.  We are here today to 
discuss the relation between gas prices, supply, and distribution, and I 
would like to point out, out of curiosity, why we don't have any oil 
company executives here to testify.  Oil companies are an integral part of 
the supply and pricing and distribution chain for gasoline.  These 
companies raked in $110 billion in profits in 2005 and $16 billion in the 
first three months of 2006.  Mr. Chairman, I encourage you to bring the 
oil company executives before this committee for a frank discussion 
about their role in the supply, price, and distribution of gasoline.
	I would also like to insert into the record a letter from the 
Environmental Council of States which is relevant to the discussion.  
According to the Environmental Council of States, "It is unaware of any 
credible report that concludes that the time States take to review 
environmental permits has been or is a significant impediment to the 
issuance of refinery permits.  We do not believe that such documentation 
exists."  The Los Angeles Business Journal reported that the average 
price per gallon of gasoline at self service stations in Los Angeles rose 
16 cents this week, to nearly $3.50 a gallon.
	The price of gasoline in Los Angeles is 91 cents higher than it was a 
year ago and statewide prices are 81 cents higher than a year ago, yet our 
Nation's energy policy has missed the mark.  The Bush Administration's 
energy policy, which was developed in secrecy and more than 95 percent 
has been implemented, yet has done nothing to reduce gas prices for 
consumers.  Despite President Bush's statement upon signing H.R. 6, and 
I quote, "Americans will look back on the energy bill as a vital step 
toward a more secure and more prosperous Nation."
	 The price of energy and the lack of reliability hurts all working 
families.  Transportation costs have increased by more than $1,400 per 
family, an increase of 75 percent since 2001.  School districts in my 
district, for example, have to pay more costs for fueling of school buses 
than they are for paying teachers and construction of vital services that 
we need at schools.  Yet President Bush's budget significantly under-
funds programs which would help working families and is failing to 
implement provisions included in H.R. 6 which would be helpful.
	I believe that energy security, jobs and health, workplace and family 
can coexist, but the approaches traditionally taken by this committee try 
to make us choose between these priorities.  This is a choice I don't want 
to make.  I believe we need a plan to create American jobs, technology, 
boost competitiveness and improve our national and economic security.  
I hope soon we will be able to have a real discussion, real debate and 
have witnesses that can actually answer some of our questions.  Yield 
back the balance of my time.
	[The information follows:]



	CHAIRMAN BARTON.  I thank the gentlelady.  The gentleman from 
Washington State, Mr. Inslee.
	MR. INSLEE.  I will reserve my time.  Thank you, Mr. Chair.
	CHAIRMAN BARTON.  The gentleman from San Antonio, Texas, Mr. 
Gonzalez.  Is there any Member who has not given an opening statement 
that wishes to make an opening statement?  Mr. Ross of Arkansas.
	MR. ROSS.  Thank you, Mr. Chairman.  I would like to thank you for 
holding this important hearing regarding rising gasoline prices and the 
adverse impact they are having on all Americans; Americans who are 
being forced to change their way of life, being forced to choose between 
paying their rent or putting gasoline in their vehicles.  Mr. Chairman, I 
represent a very large and rural district in the State of Arkansas.  My 
district spans 21,000 square miles, 150 towns, 29 counties and most of 
my constituents don't even live in those towns; they live down this 
gravel road or that gravel road.  They live in rural America.  
	And it is not uncommon for my constituents to drive 50 miles or 
more each way to and from work and in most cases they commute these 
distances for a job that pays well below the national average and in rural 
America where mass transit is not an option.  Hard working Arkansans 
who are trying to do the right thing by working to put food on the table, 
to keep the lights on, and to provide for their families are being 
devastated by these record gas prices.  In order to see true reductions in 
prices, we will have to either increase supply or decrease demand; 
ideally, both.  I strongly support the continued development and use of 
ethanol and biodiesel as a way to reduce the demand on costly fossil 
fuels.
	And as we continue working to increase the use of biofuels, we must 
make the necessary investments to develop our Nation's infrastructure to 
support an increased use of ethanol and biodiesel.  I am committed to 
working with my colleagues to make these investments to advance 
alternative fuels which will provide Americans with a choice when they 
go to the pump, reduce our dependence on foreign oil, and save working 
Arkansans and working Americans money at the gas pump.  The reality 
is this: the energy bill authorizes $632 million for the next fiscal year for 
renewable energy research, development, demonstration, and 
commercial application activities by the Department of Energy, $213 
million of which is for bio energy purposes, including $100 million for 
bio refinery demonstration projects.
	This funding is authorized but not yet appropriated.  My point is 
this, Mr. Chairman, there is a lot of talk about investing in alternative 
renewable energy sources and yet we send $1.9 billion to Iraq every 
week.  I want to make sure the American people understand that while 
there is a lot of talk these days about alternative and renewable fuels, 
over the next fiscal year we are going to spend less than half as much 
money toward research and development of alternative and renewable 
energy as we will spend this week alone in Iraq.
	I recognize that as we develop alternative fuels and flex fuel 
vehicles, our Nation will continue to rely on fossil fuels as a primary 
source of energy, therefore I believe we must promote further 
exploration and development of domestic oil and gas production.  Mr. 
Chairman, I look forward to hearing from our panel and working with 
this committee to bring down the high cost of gas and diesel fuel and 
with that, I yield back the--well, I guess I am out of time.  But I yield 
back the balance of my time, anyway.  Thank you, Mr. Chairman.
	CHAIRMAN BARTON.  The gentleman yields back.  We thank the 
gentleman for that statement.  All Members not present have the requisite 
number of days to put their statement in the record, without objection, so 
ordered.
	[The statements follow:]

PREPARED STATEMENT OF THE HON. ROY BLUNT, A REPRESENTATIVE 
IN CONGRESS FROM THE STATE OF MISSOURI

        Mr. Chairman, thank you for holding this vitally important hearing 
today.  As we know, the high price of gasoline is one of the major issues 
facing our constituents as they drive to work every day.  According to the 
Energy Information Agency, the average price of gasoline last week was 
$2.92 per gallon - that is $0.68 more than it was just last year.  Gas prices 
in some cities, like here in Washington, are well above $3 per gallon.  
        It is my hope this hearing will provide us with an opportunity to 
discuss not only what led to this present situation but also to develop 
viable solutions.  Mr. Chairman, I think this is a step in the right 
direction and I appreciate the effort you and other colleagues on the 
Committee have given this problem.
        As you know, one of the issues I am very concerned about is the 
proliferation of boutique fuels.  The number of fuels has expanded over 
the years, and we now have an uncoordinated and overly complex set of 
fuel rules that I believe is leading to increased costs and price spikes.  
We need to restore fungibility to the market.  An editorial in Monday's 
edition of USA Today equated boutique fuels to coffee at Starbucks - 
unnecessarily complex and pricy. 
        Last year during debate of the Energy Policy Act of 2005 we worked 
very hard to secure a cap on existing boutique fuels to ensure this 
problem could not worsen.  This was a great first step toward solving the 
problem.  We also gave the EPA the authority to temporarily waive 
certain fuel specifications during unforeseeable fuel supply emergencies.  
As we saw, that was extremely important during the aftermath of 
Hurricane Katrina.  Without that authority emergency responders would 
not have even had the ability to bring needed supplies and buses would 
not have been able to evacuate victims.
        I believe we need to take the next step in simplifying our fuel 
system.  We need to also look at the ability of EPA to deal with 
temporary waivers and even at enhancing that authority. 
        Mr. Chairman, once again thank you for opportunity to offer this 
opening statement and I look forward to working with you and the 
Committee on these complex issues.
        I yield back.

PREPARED STATEMENT OF THE HON. SHERROD BROWN, A 
REPRESENTATIVE IN CONGRESS FROM THE STATE OF OHIO

        Thank you, Mr. Chairman.
        Today's hearing is something of an exercise in frustration for me.  
Because it reminds me yet again that a White House and a congressional 
leadership so intimately tied to Big Oil is more than happy to talk about 
policies to protect consumers from gas price spikes.  But steadfast in its 
opposition to actually acting on common-sense ideas.
        Dr. Mark Cooper, of the Consumer Federation of America, will 
testify before us today.
        And he will tell us that regional gasoline price spikes - like the 
ones that hit the Midwest in 2000 and 2001 and the one that hit the Southwest 
in 2003 - are symptomatic of Big Oil's historic business practice of 
maintaining low reserves.
        By maintaining low reserves, Big Oil can create a situation where 
consumers have no cushion against price spikes - if a refinery fire, a 
pipeline outage, or some other regional supply disruption occurs.
        And Dr. Cooper will testify that one common-sense policy response 
is for the government to provide that cushion for consumers - in the form 
of a government-run gasoline reserves system.
        That should be a familiar message to us in Congress.  Dr. Cooper has 
delivered that same message to us before - in this committee and in 
others.
        And I have offered legislation to implement that idea myself:
         I offered a gasoline reserves amendment in this committee in 
2003 - it was opposed by the Chairman and defeated
         I offered that amendment on the House floor - it was opposed 
by Republican leadership and defeated
         I offered it again as an amendment in 2005 - twice - and it 
was opposed by the Chairman and defeated both times
        Several other industrialized nations maintain gasoline reserves - and 
they used them last year to ship us gasoline after Hurricane Katrina.  
That embarrassed the Bush Administration into at least recognizing the 
idea.
        Last October, Energy Secretary Bodman testified before the U.S. 
Senate that the gas reserves idea was being "looked at" by the White 
House, "quite closely."  Welcome news, I'm sure, to Senator Dick 
Durbin - who's sponsored a bill similar to mine.
        But that was 6 months ago - and though the price of a gallon of gas 
has increased about 45> since then, the White House is still studying an 
idea we've known about for years and that our allies have already used 
successfully to bail us out.
        The facts are clear and simple.  American consumers are hurting at 
the pump today, because Republican leadership rejected common-sense 
reforms that could have protected consumers and strengthened our 
economy - in favor of an energy policy written by - and for the benefit 
of - Big Oil.
        I am glad President Bush has at least begun to talk about reform.  
And I am glad we are here talking about it again here today.
        But talk is cheap, and gas is not.  The American people need action.

PREPARED STATEMENT OF THE HON. BARBARA CUBIN, A 
REPRESENTATIVE IN CONGRESS FROM THE STATE OF WYOMING

        Thank you, Mr. Chairman.
        My home state of Wyoming, like the rest of the country, has faced 
record breaking prices at the gas pump for much of the last year.  In our 
state, where driving is a necessity due to an essentially nonexistent mass 
transit system, these exorbitant fuel costs create a real problem 
commuting to work or even planning a family vacation.  
        Pinpointing the reasons why gasoline prices are currently so high is 
not the problem.  Domestic production and refining capacity simply 
haven't kept pace with our nation's ever-increasing demand for oil.  
Other short term factors, such as the fact that refining capacity in the gulf 
coast region is still not fully operational, has only added to the problem.  
However, the biggest challenge I believe we face is the continuing 
obstructionism here in Washington that prevents the enactment of 
common-sense reforms to encourage increased domestic production. 
        It took almost five full years to get a comprehensive energy policy 
signed into law.  We are still fighting to get much needed legislation 
enacted that would streamline the overly-bureaucratic process for citing 
new refineries in our nation.  Several other well-intentioned federal laws 
that have unfortunately created regulatory roadblocks to increasing 
domestic production - such as the National Environmental Policy Act 
(NEPA) - are in significant need of reform.  If we would have enacted all 
these reforms five years ago, we would not be in the situation we are in 
today.  
 	I believe Congress needs to act aggressively and creatively to lower 
the cost of gas American consumers are being forced to stomach.  From 
increasing our nation's refining capacity to limiting the number of 
"boutique fuels" that have propped up gasoline prices through artificially 
supply limits, there are additional long-term solutions we can and must 
pursue.  In the short term, I have supported - and will continue to support 
- temporarily suspending the federal gas tax and ensuring that price 
gouging is not occurring at any level of the wholesale or retail gas 
markets.
        I am hopeful that this hearing will continue to shed additional light 
on those steps Congress should be taking to help stabilize the price of 
gas.  However, until our colleagues in the minority agree to place policy 
above politics, we will likely be unable to have the effect American 
consumers deserve.
        I thank the Chairman for holding this important and timely hearing 
today and I yield back the balance of my time.

PREPARED STATEMENT OF THE HON. CLIFF STEARNS, A 
REPRESENTATIVE IN CONGRESS FROM THE STATE OF FLORIDA

        Mr. Chairman, thank you for turning this Committee's focus to 
gasoline issues.  While last week's look at crude oil markets was 
illuminating, we now get back to more familiar issues on which we have 
legislated in the past and which have a serious impact on the price of gas 
at the pump.  In particular, I expect that the use of reformulated gasoline 
in the supply chain will dominate our discussions. 
        The physical properties of ethanol, for instance, make it somewhat 
daunting to work with. We cannot ship gasoline mixed with ethanol via 
pipeline, because there tends to be residual water in the pipes, and 
ethanol is water-soluble. So, we must send the gasoline through the 
pipes, and the ethanol separately on trucks or rails, to be blended at 
terminals in what is called "splash blending." This adds to the burden on 
the infrastructure for transportation and storage of gasoline, ethanol, and 
their blends, as well as raising the overall price tag.
        Of course, even with a sufficient supply of ethanol, sources are not 
always located in close proximity to where we need the ethanol.  That is 
one reason why I have supported research into biofuels at the University 
of Florida, in hopes of developing cost-efficient and environmentally-
suitable agricultural alternatives for creating ethanol.
        Meanwhile, government mandates for specially reformulated 
gasoline across the country have led to a proliferation of boutique fuel 
requirements - each region or metro area demanding a different blend in 
order to meet certain air pollution goals under the Clean Air Act's 
National Ambient Air Quality Standards, particularly for ozone.  The 
USA Today, finding at least 15 different fuel blend categories, declared 
yesterday that, "Gasoline is becoming like coffee at Starbucks - 
unnecessarily complex and pricey." I look forward to hearing from 
Acting Assistant Administrator Wehrum about the Environmental 
Protection Agency's implementation of provisions we passed in last 
year's Energy Policy Act, and their efforts to reduce the number of 
boutique fuel requirements.
        Mr. Chairman, thank you again for holding these two days of 
hearings.

	CHAIRMAN BARTON.  We now want to hear from our first panel of 
expert witnesses on our hearing on Gasoline: Supply, Price, and 
Specifications.  We are going to hear first from Dr. Howard Gruenspecht, 
the Deputy Administrator of the Energy Information Administration, and 
then after him, Mr. William Wehrum who is the Acting-Assistant 
Administrator for Air and Radiation at the Environmental Protection 
Agency.  Gentlemen, welcome.  Dr. Gruenspecht, we will recognize you 
for let us see here.  Let us say about 8 minutes and if you need a little 
more time, that is fine.
	MR. GRUENSPECHT.  I will try to give back some time, if I can.
	CHAIRMAN BARTON.  We are glad to have you before the committee.  
You are recognized.

STATEMENTS OF HOWARD K. GRUENSPECHT, DEPUTY ADMINISTRATOR, ENERGY INFORMATION 
ADMINISTRATION, U.S. DEPARTMENT OF ENERGY; AND WILLIAM WEHRUM, 
ACTING-ASSISTANT ADMINISTRATOR OFFICE OF AIR AND RADIATION, U.S. 
ENVIRONMENTAL PROTECTION AGENCY

	MR. GRUENSPECHT.  Thank you very much, Mr. Chairman and 
members of the committee.  I appreciate the opportunity to appear before 
you today to discuss gasoline supply, prices, and specifications.  EIA is 
the independent statistical and analytical agency within the DOE.  We 
don't promote, formulate, or take positions on policy issues and our 
views should not be construed as representing those of the Department or 
the Administration.
	Retail gasoline prices more than doubled from the beginning of 2004 
through early September 2005 in the aftermath of Hurricane Katrina.  
Though gasoline prices declined last fall following the hurricanes, U.S. 
average regular gasoline price is once again near $3 a gallon with many 
areas above that mark, as we have heard, particularly California.  Several 
different factors have contributed to the sharp increase in the price of 
gasoline seen in recent years.  First and foremost, as many of the opening 
statements recognize, the price of crude oil, from which gasoline and 
other petroleum products are refined, has risen dramatically.
	The price of West Texas intermediate crude rose from roughly $40 a 
barrel at the end of 2003 to between $70 and $75 per barrel on the spot 
market during the first week of May.  Futures prices are also close to this 
level and even the long-term futures contracts are pretty high, well above 
$65.  All else equal, each $1 increase in the price of crude adds about 2.4 
cents per gallon to the price of gasoline.  The increase in crude oil prices 
accounts for roughly two-thirds of the increase in retail gasoline prices 
since the end of 2003.
	Second, gasoline prices are directly affected by the balance between 
supply and demand for gasoline, itself.  Both long-run forces and short-
term circumstances since last fall have contributed to a tight gasoline 
market.  This has led to an increased crack spread between the price of 
gasoline at the refinery level and crude oil prices, reflecting changes in 
both the cost and profitability of refining gasoline.  
Starting with the longer run forces, U.S. gasoline demand has grown 
1 to 3 percent per year since the late 1980s, driven by growth in 
population, the number of vehicles, and the economy.  Average fuel 
economy of new light duty vehicles has been relatively flat.  Gasoline 
prices do have an impact on consumption, reflecting both travel and 
vehicle purchase decisions, but some of those decisions take a long time 
to take effect.
	That influence is difficult to isolate from other influences.  Rising 
income causes demand to grow at the same time that rising prices would 
tend to pull back demand, but the impact of prices on demand appears to 
be growing in an era of sustained higher prices.  Currently available data 
suggest that the Nation's gasoline consumption was flat in 2005.  On the 
supply side, refinery capacity growth and refinery capacity has grown, 
but it has lagged behind demand growth over the past 5 years.  The 
situation may be changing, however.
	Significantly higher financial returns to refining over the past several 
years provide a strong incentive for refinery expansion.  With attractive 
returns and available resources, we are now seeing significant capacity 
expansion announcements totaling approximately 1.5 million barrels a 
day of new distillation capacity planned over the next several years.  And 
there is probably some additional capacity creep beyond that that we 
would expect.
	The role of imports has grown in the past several years.  About 10 
percent of our gasoline supply comes from imports, most of which go to 
the East Coast.  Much of the recent growth has been from Europe, which 
has excess gasoline supply capacity, in large part because of their major 
move towards use of more diesel-fueled cars, and they produce gasoline 
that is very similar to our own and meets our standards.  At the same 
time, imports from Latin America have been dropping a little bit as 
supply from Brazil and other parts of Latin America have not moved as 
rapidly to the low-sulfur, very clean fuels that we are moving toward.  
We may see a further falloff over time.
	In terms of the shorter run activities, since last fall, several 
events have exacerbated the current tightness in the markets.  Many of the 
opening statements referred to the elimination of MTBE from 
reformulated gasoline and the resulting increase in the use of ethanol.  
Again, a lot of that transition has taken place by the first week of May.  
This decision was driven both by State policy, due to water 
contamination concerns, and potential for or a perceived potential for 
increased liability exposure because of the elimination of the oxygen 
content requirement for reformulated gasoline in the Energy Policy Act 
of last year.
	As discussed in my written testimony, the switch from MTBE to 
ethanol has several supply impacts.  The transition on the East Coast 
resulted in some temporary terminal outages in the winter-grade to 
summer-grade transition and also the MTBE-to-alcohol transition.  The 
outages definitely raised some concerns and EIA had talked about that in 
some reports in February and earlier, but no major shortages have 
occurred.  The largest problems, unfortunately, Mr. Chairman, have been 
in Texas where rail bottlenecks are making ethanol delivery difficult.  
The problem is not yet fully resolved, yet much of the initial transition is 
behind us and we are going to continue to monitor the situation closely.
	The other important short-term circumstance has been the lingering 
effects of Hurricanes Katrina and Rita, which caused significant damage 
to several refineries.  In addition, while those refineries are coming back, 
some refineries had delayed their maintenance schedules last fall when 
much more refinery capacity was out and thus there has been a lot of 
capacity in maintenance, really, for longer than usual this spring.  We 
estimate that about one million barrels per day of refinery capacity was 
off line during April, which is about 6 percent of U.S. capacity.  Again, 
we expect these refineries to return.  Hurricane-damaged refineries--the 
last of those are still returning, so the situation should improve 
somewhat.
	On fuel specifications, cleaner-burning motor fuels generally require 
more processing; they are harder to produce, and they use a narrower 
range of fuel components, which all work to increase their production 
cost.  Some requirements are imposed at the Federal level, but in many 
cases, the States and regions set them as part of their clean air strategies, 
as I am sure Mr. Wehrum will discuss.  As the number of distinct fuel 
types has increased, there is an increase or a reduction in the fungibility 
of fuels across locations.
	But there is really no simple fix because actions to ease distribution 
problems by reducing the number of gasoline formulations enhance 
fungibility, but they could also impact the U.S. refiners' ability to 
produce enough gasoline to meet overall demand.  Considerable 
investments that might otherwise be devoted to capacity expansion could 
be diverted to building the systems needed for more intensive processing 
and there would be more limited opportunity to divert some of the 
components that are harder to use to make the clean gasoline.
	So you have sort of a tough tradeoff between the potential for short-
term regional disruptions that cause price spikes and increasing 
production challenges to make more clean gasoline.  Let me end by 
turning a little bit to the outlook.  We think the world oil market is tight; 
as we have been saying for some time, we think crude oil prices will 
remain high.  Our current projection for WTI crude prices averages $68 
per barrel in both 2006 and 2007.  We expect this year's summer 
gasoline prices to average $2.71 per gallon, 34 cents higher than last 
summer's average.  We expect prices to fall over the summer.  The key 
uncertainties are, not surprisingly, the potential for hurricanes that could 
impact refining and production in the Gulf region, and geopolitical 
factors affecting crude oil prices.  And with that, I am done and I guess I 
didn't meet my goal.  Thank you.
	[The prepared statement of Howard Gruenspecht follows:]

PREPARED STATEMENT OF HOWARD GRUENSPECHT, DEPUTY 
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.   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, analyses, and projections 
for the use of the Congress, the Administration, and the public. While we 
do not take positions on policy issues, our work can assist energy 
policymakers in their deliberations. Because we have an element of 
statutory independence with respect to our activities, our views are 
strictly those of EIA and should not be construed as representing those of 
the Department of Energy or the Administration.
        Gasoline is an essential commodity to most Americans.  Not only is 
our country the world's biggest petroleum consumer, but to a far greater 
extent than the world in general, we consume that petroleum in the form 
of gasoline.  Gasoline accounts for about 45 percent of U.S. petroleum 
consumption, or about 18 percent of our total energy demand.  Retail 
gasoline prices more than doubled from the beginning of 2004 through 
early September 2005, in the aftermath of Hurricane Katrina.  Though 
gasoline prices fell back sharply last fall following initial recovery from 
the hurricanes, the U.S. average regular gasoline price is once again 
around $3 per gallon, with many areas already over that mark.  
        Several different factors have contributed to the sharp increase in 
the price of gasoline seen in recent years.  First and foremost, the price of 
crude oil, from which gasoline and other petroleum products are refined, 
has risen dramatically.   Second, the balance between the supply and 
demand for gasoline has tightened.  As discussed below, both long-run 
forces, such as demand for gasoline growing faster over the past 5 years 
than the capacity to supply it, and shorter-run circumstances, such as the 
elimination of methyl tertiary butyl ether (MTBE) from reformulated 
gasoline (RFG) on a nationwide basis and the lingering effects of 
hurricanes Katrina and Rita on refinery availability and maintenance 
schedules, are contributing to this tightness.  These factors combined to 
increase the "spread" between the average spot gasoline price and the 
spot price of crude oil from about 15 cents per gallon at the beginning of 
March to a peak of about 60 cents per gallon in the middle of April.  This 
gasoline price spread has since fallen back somewhat, but through March 
and April the spread averaged about 40 cents per gallon, about 20 cents 
per gallon higher than seen during more typical market situations during 
these months.  
        As requested in your invitation, my testimony discusses the factors 
affecting gasoline supply and prices, including the effects of fuel 
specifications and the increased use of ethanol on the market, and 
reviews EIA's gasoline market outlook.

              Factors Affecting Gasoline Supply and Prices

Crude Oil Prices
        The price of West Texas Intermediate (WTI) crude rose from 
roughly $40 per barrel at the end of 2003 to between $70 and $75 per 
barrel on the spot market during the first week of May 2006.  Futures 
prices are also close to this level.  All else being equal, each $1 increase 
in the price of crude oil adds about 2.4 cents per gallon to the price of 
gasoline.  As shown in Figure 1, the increase in crude oil prices accounts 
for roughly two-thirds of the increase in the average retail gasoline price 
since the end of 2003.  

                                 Figure 1
             CRUDE OIL, SPOT GASOLINE AND RETAIL GASOLINE 
                         PRICES, 2003 to Present
 


        At this Committee's hearing May 4th  on crude oil markets, EIA 
Administrator Caruso outlined our perspective on the forces driving 
crude oil prices in today's marketplace.  To summarize briefly, crude oil 
prices are set in the global marketplace and largely reflect the 
fundamentals that determine supply and demand.  In recent years, 
increases in global oil production capacity have struggled to keep pace 
with rapidly growing demand, particularly in China, the other emerging 
economies in Asia, and the United States.  This slower growth in 
productive capacity relative to growth in demand has resulted in a 
decline in global surplus capacity to produce crude oil.  At the same 
time, perceived risks to supply posed by geopolitical instability and other 
uncertainties have grown.  In the present environment, with a minimal 
cushion of surplus upstream and downstream capacity to meet 
disruptions in supply and with futures markets in contango (i.e., a market 
in which prices for commodities delivered in future months are higher 
than for those delivered in months closer to the present), market 
participants have a strong demand for inventories, so the traditional 
inverse relationship between inventory and price levels does not apply.  
Absent an unexpected downturn in global economic activity, neither 
demand-side nor supply-side corrections will come quickly; thus, crude 
oil prices are expected to remain at relatively high levels, supporting high 
gasoline prices for the foreseeable future.

The Supply-Demand Balance in Gasoline Markets 
        Beyond the cost of crude oil to refiners, gasoline prices are directly 
affected by the balance between supply and demand for gasoline itself.  
The difference between gasoline prices at the refinery level and crude oil 
prices, often referred to as the "crack spread," reflects both the cost and 
profitability of refining gasoline and depends directly on market 
conditions.  Historically, the price differential between crude oil and 
gasoline has varied significantly over time due both to seasonality and 
factors affecting market tightness.  As with any commodity, when 
available production capacity is strained relative to demand, the price 
rises to keep the market in balance by attracting additional supply and/or 
discouraging consumption.  As discussed below, both long-run forces 
and short-run circumstances have contributed to a tighter gasoline 
market, which has led to increased gasoline crack spreads.  


Long-run forces affecting the gasoline market balance
        U.S. gasoline demand has generally grown at the rate of about 1 to 3 
percent per year since the late 1980s, driven by growth in population, the 
number of vehicles, and the economy.  Gasoline demand growth can also 
be affected by changes in vehicle fuel economy and changes in gasoline 
prices.  After rising from the mid-1970s to the late 1980s, the average 
fuel economy of new light-duty vehicles has been relatively flat over the 
past decade, in part due the growing share of light trucks (including 
pickup trucks, sport utility vehicles, and minivans) in total sales of light-
duty vehicles.  The impact of gasoline prices on consumption, which 
reflects both travel decisions and, over time, vehicle purchase decisions, 
is difficult to isolate from other influences, but appears to be growing in 
an era of sustained higher prices.  Based on available data, U.S. motor 
gasoline consumption exhibited almost no growth in 2005. 
        U.S. gasoline supply comes mainly from domestic refineries, though 
with a significant contribution from imports.  In the late 1970s, the 
United States had significant excess refining capacity, but a combination 
of growing demand and the closure of some refineries significantly 
raised average U.S. refinery utilization rates by the early 1990s.  Since 
the mid-1990s, both demand and refinery capacity have grown, but 
demand has grown more than capacity over the past 5 years.  This 
situation may be changing.  Significantly higher financial returns to 
refining over the past several years have provided a strong incentive for 
refinery expansion.  The refining industry is also completing a set of 
major process investments needed to meet low-sulfur fuel specifications 
that absorbed significant resources.  With attractive returns and available 
resources, we are now seeing major capacity expansion announcements, 
totaling approximately 1.5 million barrels per day of new distillation 
capacity by 2010.   However, much of this capacity will not be ready for 
several years, which leaves the U.S. market quite tight in the very near 
term.
        In recent years, product imports have met about half of U.S. growth 
in gasoline demand. Product imports will remain important to the United 
States.  About 10 percent of our gasoline supply comes from imports, 
most of which go to the East Coast where they supply about 25 percent 
of that region's demand.  Much of the growth in U.S. gasoline imports 
during the past few years has come from European sources.  An excess 
of gasoline supply in Europe, which derives from that region's move to 
diesel-fueled light-duty vehicles, has found a market on the U.S. East 
Coast.   Furthermore, European gasoline quality is similar to U.S. 
quality, so European refiners can produce gasoline that meets U.S. 
standards.  Since 2003, European gasoline import volumes increased by 
over 200 thousand barrels per day (almost 80 percent), notwithstanding 
implementation of reduced sulfur content standards in the United States.  
        At the same time, the United States saw a drop in gasoline import 
volumes of 27 thousand barrels per day from Brazil, as that country and 
other areas have not moved as rapidly to low-sulfur fuels.  In 2006, we 
may see further falloff from areas in Latin America and other regions as 
the United States has moved to the final phase of the Tier 2 gasoline 
program and the industry moves away from MTBE.  In general, fewer 
sources of supply will be able to provide U.S.-quality imports.  However, 
those remaining appear to have the potential to send increased volumes 
to the United States. 

Short-run circumstances affecting the gasoline market balance
        Since last fall, several events have exacerbated tightness in gasoline 
markets.  One of these is the elimination of MTBE from RFG and the 
resulting increase in the use of RFG made with ethanol.  The petroleum 
industry has moved to eliminate MTBE in gasoline by the first week in 
May 2006.  Companies' decisions have been driven by State bans due to 
water contamination concerns, continuing liability exposure from adding 
MTBE to gasoline, and perceived potential for increased liability 
exposure due to the elimination of the oxygen content requirement for 
RFG as part of the Energy Policy Act of 2005. 
        Until recently, the largest use of MTBE was in RFG consumed on 
the East Coast, excluding New York and Connecticut, and in Texas.  The 
other RFG areas in the Midwest, California, New York, and Connecticut 
had already moved from MTBE to ethanol.  Most companies eliminating 
MTBE in the short run are blending ethanol into the gasoline to help 
replace the octane and clean-burning properties of MTBE.  The switch 
from MTBE to ethanol in these RFG areas has several supply impacts:
         Net loss of gasoline production capacity.  During the summer 
months, replacing MTBE with ethanol in reformulated gasoline 
results in about a 5-to-6-percent loss of production capability in 
order to accommodate ethanol's emission properties.
         Shift in East Coast supply sources.  Without the use of MTBE, 
East Coast refiners are expected to produce less RFG, which 
will result in more RFG supply for this region coming from the 
Gulf Coast and from imports.
         Loss of import supply sources that cannot deliver MTBE-free 
product or that cannot produce the high-quality blendstock 
needed to combine with ethanol.
         Installation of blending equipment at terminals.  Ethanol 
must be delivered separately to terminals near the retail market, 
where it is blended with base gasoline blending components 
before delivery to retail stations.
         A very tight ethanol market, limited in the short-run by 
ethanol-production capacity.  Until ethanol capacity catches up, ethanol 
is being repositioned from discretionary blending into 
conventional gasoline in the Midwest to the RFG areas, and 
EIA expects some increase in imports.

        Refiners, blenders, pipelines and ethanol suppliers have been 
working hard to accomplish the changeover.  As shown in Figure 2, 
recent EIA weekly data show a steady decline in stocks of RFG with 
MTBE and a steady increase in stocks of summer-grade reformulated 
blendstock for oxygenate blending (RBOB with alcohol), the base 
gasoline into which ethanol is blended.  The transition on the East Coast 
resulted in some temporary terminal outages as terminal tanks were 
emptied of winter-grade reformulated gasoline in preparation to receive 
the first batches of RBOB with alcohol.  While the outages raised some 
concerns, no major shortage occurred.  The largest problems have been 
in Texas, where rail bottlenecks are making ethanol delivery difficult.  
This problem is not yet resolved.  Still, much of the initial transition is 
behind us, and EIA will continue to monitor the situation this summer.  


                                Figure 2
                    RECENT GASOLINE STOCK LEVELS:
      FINISHED RFG (w/MTBE) and RBOB (for Blending with Ethanol)
 


        The other short-run circumstance affecting the current market is the 
lingering effect of hurricanes Katrina and Rita.  The hurricanes resulted 
in significant damage to several refineries, and one large refinery 
suffered an explosion that has kept it off line through April.  In addition 
major refinery maintenance has occurred this year as a result of, among 
other things, delayed maintenance during the fall following the 
hurricanes, and final preparations for the ultra-low-sulfur diesel program 
that begins this June.  EIA estimated that about 1 million barrels per day 
of capacity was offline during April, which is almost 6 percent of U.S. 
capacity.  These refineries represent about 500,000 barrels per day of 
gasoline production.  Maintenance outages are expected to extend only 
into the middle of May, and the hurricane-damaged refineries are 
continuing to come back online, which should help to ease prices.    

                      Impacts of Fuel Specifications

        Apart from the current move away from MTBE as a blending 
component in RFG, the longer-term trend towards requirements for 
cleaner-burning gasoline and diesel fuel, while contributing to air quality 
improvement, has had several fuel supply consequences.  In general, 
cleaner-burning motor fuels require more processing, are harder to 
produce, and restrict flexibility in using fuel components, which all work 
to increase their production cost.  Some clean fuel requirements are 
imposed at the Federal level, but in many cases States and regions that 
are charged with developing plans to reduce emissions of air pollutants 
and pollution precursors in areas that do not meet ambient air quality 
standards adopt changes in fuel specification as one of their strategies.  
Such States and regions typically work with refiners to tailor gasoline 
specifications to meet their specific needs at minimum production cost.  
For example, some regions that are not required to use RFG have been 
able to reduce emissions of volatile organic compounds (VOCs), a smog 
precursor, by lowering the Reid Vapor Pressure (RVP) of gasoline used 
in their area to reduce evaporation.   Such low-RVP fuel is cheaper to 
produce than gasoline that meets the complete RFG specification.    
        As the number of fuel types has increased, the pipeline distribution 
and storage system, which has a limited number of pipelines and storage 
tanks, is facing growing challenges to deliver many distinct fuel types in 
smaller batches.  The reduction in the fungibility of fuels across locations 
has tended to slow the ability of the supply system to respond to 
unexpected shortfalls.  If a region runs out of its specific fuel 
unexpectedly, it can take some time for new supply to be sent to the area.  
Different fuels available in the nearby surrounding areas could not be 
used.  Delays in responding to such unexpected shortfalls add to price 
volatility.  So far, this problem has not resulted in major problems in 
most regions.  The two notable exceptions are California, which requires 
the cleanest-burning gasoline in the world, and the Chicago/Milwaukee 
area, which was the only region using ethanol-blended RFG during the 
change from Phase I to Phase II of the RFG program in 2000.  
        Looking ahead, unchecked fuel-type proliferation has the potential to 
make the distribution system even more complex and further reduce fuel 
fungibility, causing more regional supply and price volatility than we 
have experienced historically.  Yet, there is no simple solution.  In 
addition to the difficulty of balancing of environmental and fuel supply 
concerns, actions to ease distribution problems by reducing the number 
of gasoline formulations could increase average gasoline production 
costs and reduce overall gasoline supply capacity.  For example, moving 
the entire country to a single very clean gasoline standard would 
certainly enhance fungibility, but it would also impact U.S. refineries' 
ability to produce enough gasoline to meet overall demand.  
Considerable investment in what might otherwise be devoted to capacity 
expansion would be diverted to building the systems needed for more 
intensive processing.  A single product standard for gasoline, if set at 
very stringent levels, could also choke off imports of gasoline from some 
sources.   Even though greater fungibility would reduce the potential for 
short-term regional supply shortages and price spikes, consumers could 
end up facing a higher national average price for gasoline than they 
would under the present regime.  Timing, balance between supply and 
distribution, and potential future fuel specification and vehicle changes 
all need to be considered when trying to address this issue.

                               Ethanol

        The United States is moving towards using more renewable fuels, in 
particular ethanol.  Most renewable fuel use historically and over the 
next decade is expected to be as additives to traditional petroleum fuels, 
rather than as stand-alone fuels.  Use of ethanol has been increasing in 
recent years as States have banned the use of MTBE, and gasoline 
suppliers have replaced that MTBE with ethanol, which helps to replace 
the octane and clean-burning properties lost with MTBE.  In 2005, 
ethanol use in gasoline (263 thousand barrels per day) represented almost 
3 percent of gasoline consumption by volume.  The recent Energy Policy 
Act of 2005 added a renewable fuel standard (RFS) that requires the 
increased use of renewable fuels over time and includes provisions to 
encourage biodiesel and cellulose ethanol.  
        Given EIA's short-term outlook for crude oil prices and the reference 
case oil price projections included in our Annual Energy Outlook 2006 
(AEO2006), we believe that there are strong prospects for growing 
ethanol use.  Our reference case projection for renewable fuel use 
significantly exceeds the requirements of the RFS program, reaching 
roughly 10 billion gallons annually in 2012, assuming the extension of 
the existing ethanol tax credit beyond its currently scheduled expiration 
at the end of 2010.  Even without extension of the tax credit, projected 
ethanol use exceeds the RFS-mandated level through 2012 in our 
reference case.   We are projecting that nearly all of the ethanol will be 
derived from corn, with cellulose ethanol limited to the penetration levels 
mandated in the recent legislation.  While cellulose ethanol has potential 
feedstock cost advantages compared to corn ethanol and tremendous 
progress has been made in the performance and cost of enzymes used in 
the conversion of cellulose material to ethanol, the high capital cost of 
cellulose ethanol plants remains a significant barrier to their economic 
competitiveness. 

                          The Near-Term Outlook

        Looking ahead, the prospects for significant near-term improvement 
in the world petroleum supply and demand balance appear to be fading.  
While U.S. crude oil production will grow with recovery from the 
hurricanes, only small increases in Organization of Petroleum Exporting 
Countries (OPEC) and other non-OPEC production and capacity are 
expected in the near future. Expected steady world oil demand growth, 
combined with only modest increases in world surplus oil production 
capacity and the continuing risks of geopolitical instability, are expected 
to keep crude oil prices high through 2007.   The WTI crude oil price in 
EIA's most recent short-term forecast is projected to average $68 per 
barrel in both 2006 and 2007.  Retail regular gasoline prices are 
projected to average about $2.57 per gallon in 2006 and 2007.   Gasoline 
demand is projected to grow 0.9 percent in 2006 and 1.5 percent in 2007.  
The projected growth in demand reflects continued economic growth and 
the leveling off of motor gasoline prices.  
        During this year's summer driving season (April 1 to September 30) 
the national average retail price of regular gasoline is expected to be 
$2.71 per gallon, 34 cents per gallon higher than last summer's average 
of $2.37 per gallon.   By September 2006, fuel prices are expected to be 
lower than last year.  With another active hurricane season possible this 
year, news of any developing hurricanes and tropical storms with a 
potential to cause significant new outages could add to volatility in near-
term prices.  The projections outlined above do not reflect a scenario 
with significant new production or refinery outages.
        This concludes my testimony, Mr. Chairman and members of the 
Committee. I will be happy to answer any questions you may have.

	CHAIRMAN BARTON.  We knew you wouldn't.  Anyway, good effort.  
Thank you for your testimony.  We now want to hear from Mr. William 
Wehrum with the EPA.
        MR. WEHRUM.  Thank you, Mr. Chairman, members of the 
committee.  I appreciate the opportunity to speak with you today about 
fuel quality specifications and supply concerns.  I am pleased to be here 
on behalf of my colleagues at EPA, some of whom are here right behind 
me, who have been instrumental in developing our Nation's strategy to 
reduce air pollution from motor vehicles and the fuels that run them.  
Today our focus is on existing Federal clean fuel programs and to 
provide EPA's perspective on State clean fuel programs, often called 
boutique fuels.  Reports of fuel supply shortages have led to increased 
attention to the use of boutique fuels.
	Just two weeks ago, President Bush called on EPA to confront the 
problem of too many localized fuel blends, yet there is much confusion 
over what a boutique fuel is.  Quite simply, a boutique fuel is any unique 
fuel specification developed by a State or local air pollution agency and 
approved by EPA as part of a State plan to meet our national air quality 
standards.  Currently, 12 States have approved boutique fuel programs; 
eight States limit the volatility of gasoline during the summertime.  Four 
other States control other parameters of fuels, such as aromatics and 
sulfur in gasoline or diesel.
	These controls reduce evaporation of gasoline, which helps reduce 
smog in urban areas.  We prepared a map showing the areas where these 
boutique fuels currently are required to be used.  For some time there has 
been concern about potential adverse effects of boutique fuels on fuel 
pricing, supply, and distribution.  Importantly, the cost of producing 
boutique fuels does not translate into retail consumer prices at the pump.  
As part of the President's 2001 National Energy Policy Report, EPA was 
directed to conduct a study to determine whether boutique fuels were 
contributing to fuel pricing and supply problems.
	EPA worked with DOE to issue a report to the President, concluding 
that under normal conditions, the fuel production and distribution system 
works well and is able to provide adequate supplies of boutique fuels.  
However, because boutique fuels vary from conventional fuel, if 
production or distribution disruptions occur, such as hurricanes, pipeline 
breaks, or refinery fires, boutique fuel requirements can limit the 
availability of supply and therefore contribute to potential supply 
problems and short-term price spikes.
	In response to the report's findings, EPA took several steps to ease 
the regulations governing the transition from winter to summer gasoline.  
For example, EPA revised its regulations to allow refiners to upgrade 
conventional gasoline to RFG, if it meets the RFG performance 
standards, thereby allowing for greater flexibility and providing RFG 
when supply is tight.  Last year's Energy Policy Act also addressed the 
issue of boutique fuels.  First, the Act established a fixed limit on the 
number of boutique fuels that EPA can approve.  The list will limit 
further expansion of State clean fuel programs.
	Second, the Act instructed EPA and DOE to perform a study on the 
effects of State boutique fuel programs on air quality, fuel blends, fuel 
availability, fungibility, and costs.  EPA and DOE are currently 
coordinating efforts and will work closely in preparing this report for 
Congress.  Third, the Act requires the agency to prepare another report 
by June 1st, 2008, concerning variations in regional, State, and local 
motor vehicle fuel requirements.  The Act also required removal of the 
Federal oxygen content requirement for RFG.  Removal of the RFG 
oxygen standard will allow refiners additional flexibility in how they 
make reformulated gasoline and when and where they blend oxygenates.  
EPA completed a rulemaking, as directed by Congress, on May 3rd, 2006, 
which took effect on May 8th.
	Finally, the Act requires EPA to develop and implement a renewable 
fuel standard or RFS.  This program will require increasing amounts of 
renewable fuels, such as ethanol and biodiesel to be blended into the 
Nation's fuel supply.  While EPA's regulatory improvements in the new 
Energy Policy Act provisions have significantly improved key aspects of 
the boutique fuels issue, concerns about potential adverse effects of 
boutique fuels have persisted.  Hurricane Katrina provided a stark 
demonstration that when the Nation's fuel supply is drastically reduced, 
multiple fuel regulations can complicate the recovery effort.
	Moreover, persistently high crude oil prices and the resulting high 
gas prices have led to renewed effort to look for innovative ways to 
simplify the fuel distribution system.  As a result, President Bush has 
directed Administrator Johnson to convene a Governors Boutique Fuels 
Task Force.  All 50 Governors have been invited to participate.  The task 
force will assess various State and local clean fuel requirements and the 
effect the requirements have on supply, quality, price and air quality.
	Last Thursday, Administrator Johnson held a conference call 
initiating this process.  Over the coming weeks we are inviting the input 
of outside experts from industry, public health organizations, and other 
interested parties.  We also expect to hold a number of technical staff 
meetings to help EPA prepare a draft report for the task force's review in 
mid-June.  The options in the report will be designed to help the 
President meet his overall goal of simplifying and unifying the fuel 
regulatory system and increasing cooperation among States on gasoline 
supply decisions.
	The current fuel situation has had some unique influencing factors 
beyond the normal winter to summer gasoline transition practices.  For 
example, the market underwent withdrawal of MTBE from RFG market 
areas.  This MTBE-to-ethanol transition led to some additional tank 
management practices to prepare for the new products.  Crude oil prices 
also hit historic highs.  These factors, among others, provided for unusual 
market conditions.  Despite these conditions, the market has managed the 
transition effectively and maintained the integrity of important 
environmental programs.
	It is also important to note that although a number of States have 
banned the use of MTBE, there is no Federal ban.  Refiners of RFG who 
have phased out the use of MTBE have done so through their own 
decisions.  Of course, now that the RFG oxygenate requirement has been 
eliminated, refiners are free to produce RFG with or without an 
oxygenate.
	Again, thank you, Mr. Chairman and members of the committee, for 
the opportunity to testify before the committee on these important issues.  
I would be pleased to answer any questions you may have.
	[The prepared statement of William Wehrum follows:]

PREPARED STATEMENT OF WILLIAM WEHRUM, ACTING-ASSISTANT 
ADMINISTRATOR, OFFICE OF AIR AND RADIATION, U.S. 
ENVIRONMENTAL PROTECTION AGENCY

        Mr. Chairman, and members of the Committee, I appreciate the 
opportunity to come before you today to testify on gasoline fuel quality 
specifications and supply.  As the Acting Assistant Administrator for the 
Office of Air and Radiation, my responsibilities include overseeing all 
air-related activities of the Environmental Protection Agency (EPA or 
Agency).   I am pleased to be here on behalf of my colleagues at EPA 
who have developed and worked closely with states to implement the 
highly successful programs that reduce harmful emissions from highway 
and off-road vehicles, engines and fuels. 
        My testimony will first provide an overview of existing federal 
regulatory clean fuel programs, followed by more discussion of state 
clean fuel quality programs, often referred to as "Boutique" Fuels.  

Overview of Clean Fuel Programs
        Fuel controls for emission reductions is often one of the most cost-
effective methods to help reduce emissions.  In the Clean Air Act 
Amendments of 1990, Congress directed EPA to develop and implement 
several important new clean fuel programs to improve air quality to 
reduce emissions that cause or contribute to the formation of ozone and 
air toxics.  Many of these programs are national in scope, such as 
summertime controls on gasoline volatility and year round controls on 
gasoline sulfur.  Congress set specific cities, performance standards and 
an oxygenate requirement for the reformulated gasoline (RFG) program 
which began in 1995.  Provisions such as banking, averaging and credit 
trading have also been built into many of these regulatory programs and 
are designed to provide greater flexibility and reduce production costs. 
        Clean fuel programs have been an integral part of the nation's 
strategy to reduce air pollution and they have been successful.  They 
provide significant, cost-effective and timely reductions in motor vehicle 
emissions.  

State Boutique Fuel Programs
	There is much confusion over what a boutique fuel is.  The Clean Air 
Act (CAA) allows states to implement their own clean fuel programs.  
Quite simply, a boutique fuel is a unique fuel specification that is 
developed by a state or local air pollution agency and approved by EPA 
as part of the State Implementation Plan (SIP) for the affected area.
Most states that do not use RFG to address their air quality issues have 
elected to use gasoline with lower volatility than federal conventional 
gasoline standards.  Sometimes states adopt these low Reid vapor 
pressure (RVP) fuels because the CAA does not allow them to join the 
federal RFG program.  In other cases where states could have opted-in to 
the federal RFG program, local fuel providers worked with states to 
develop an alternative fuel specification that can be produced at a lower 
cost and still support their air quality needs.  What this has typically 
meant in practice is the avoidance of the oxygen mandate in the RFG 
program because it is more expensive in some areas.  It is worth noting 
that boutique fuels do not include other clean fuel requirements, such as 
Federal fuel controls (e.g., reformulated gas, winter oxygenated fuels), 
California clean fuel requirements, and area-specific fuels required by 
state law for purposes other than air quality (e.g., Minnesota's ethanol 
mandate).
        Currently 12 states have approved boutique fuel programs. Eight 
states limit the volatility of gasoline and are in effect only during the 
summer months.  Four other states control other parameters of fuels, 
such as aromatics and sulfur in gasoline or diesel fuel, or allow 
California's cleaner burning gasoline to be sold within their boundaries.  
[See attached map.]  This reduces evaporation of gasoline which helps 
reduce smog in urban areas. [See attached chart of boutique fuel 
programs.]  The state plans are required to estimate the additional cost.  
Those state estimates range from 0.3 to 3 cents per gallon above the cost 
of conventional gasoline.  It is important to note that the cost of 
producing boutique fuels does not translate into retail consumer prices at 
the pump.  Since many economic factors influence the retail price of 
gasoline, I will defer to experts from the Energy Information Agency to 
describe the difficulty of translating fuel production costs to impacts on 
retail prices.
        The Clean Air Act imposes strict limitations on EPA's approval of 
boutique fuels.  Specifically, a State may prescribe and enforce a fuel 
quality control if, after review and approval of the SIP, the Administrator 
finds that the State control or prohibition is necessary to achieve the 
national primary or secondary ambient air quality standard and no other 
measures are available to bring about timely attainment.  Where 
implemented, these fuels are an important and powerful tool for 
combating local air pollution problems.  

EPA's 2001 Evaluation of Boutique Fuels
        For sometime there has been concern about potential adverse effects 
of boutique fuels on fuel pricing, supply and distribution.  As part of the 
President's 2001 National Energy Policy Report, EPA was directed to 
conduct a study to determine whether boutique fuels were contributing to 
such problems and if so to recommend solutions.  EPA conducted an 
extensive review that included close cooperation with the Department of 
Energy (DOE) and extensive outreach to the fuels industry and other 
interested stakeholders.  EPA issued a report to the President in October 
2001.  EPA's report focused on two primary issues.   First, we assessed 
the possible need for greater flexibility in the process that fuel marketers 
used to make the transition from winter to summer grade gasoline.  
Second, we investigated the growing number of state and local boutique 
fuel programs and the challenges this growth presented to the gasoline 
distribution system.
        The report concluded that during times of normal conditions, the fuel 
production and distribution system works well and is able to provide 
adequate supplies of boutique fuels to the required areas.  However, 
because the specification of the fuel varies from the conventional fuel 
used in surrounding areas, if production or distribution disruptions occur, 
such as hurricanes, pipeline breaks or refinery fires, boutique fuel 
requirements can limit the availability of supply to the area and therefore 
contribute to potential supply problems and short term price spikes. 
        The Agency also evaluated the costs and benefits of several different 
approaches to limit the number of fuels available for adoption by states.  
        In response to the report's findings, EPA took several steps to ease 
the regulations governing the transition from winter to summer gasoline.  
For example, EPA increased the compliance testing tolerance from 1% to 
2% for a limited transition time to allow for a smoother switch to 
summer-controlled gasoline.  The Agency also revised the regulations to 
allow refiners to upgrade conventional gasoline to RFG, if it meets the 
RFG performance standards, thereby allowing for greater flexibility in 
providing additional RFG when supply is tight.  

Boutique Fuel Provisions of the Energy Policy Act
        First, the Energy Policy Act of 2005 (EPAct) established a fixed 
limit on the number of boutique fuels that EPA can approve.  The list 
will limit further expansion of the state clean fuel programs.  EPA is 
preparing to publish this list for comment in a Federal Register notice 
which is expected before the end of this month.  
 	EPA and DOE are also instructed by EPAct to perform a joint study 
on the effects of state boutique fuel programs on air quality, fuel blends, 
fuel availability, fungibility and costs, with a focus on making 
recommendations to Congress for legislative changes supporting 
developing a federal fuels system that maximizes fungibility and supply 
and addresses air quality requirements and reduces price volatility.  The 
Agency and DOE are currently coordinating efforts and will work 
closely in preparing this report.  
	Further, EPAct requires the Agency to prepare another report by 
June 1, 2008, concerning variations in regional, state and local motor 
vehicle fuel requirements.  Both reports will build off the EPA 2001 
Boutique Fuels Report, accounting for recent and upcoming changes in 
the U.S. gasoline and diesel markets.
        EPAct also authorized removal of the federal oxygen content 
requirement for RFG. Removal of the RFG oxygenate standard will 
allow refiners additional flexibility in how they make reformulated 
gasoline and when and where they blend oxygenates.  EPA completed a 
rulemaking, as directed by Congress, on May 3, 2006 which took effect 
on May 8, 2006.  California is treated differently under the Clean Air 
Act, this as directed by Congress.  EPA removed the oxygen content 
requirement in California RFG in April, prior to its removal in other 
states.
	Perhaps of greater importance, EPAct also requires EPA to develop 
and implement a renewable fuels standard, or RFS.  This program will 
require increasing amounts of renewable fuels, such as ethanol and 
biodiesel, to be blended into the nation's gasoline supply.  We currently 
are developing the program.  A comprehensive proposal will be issued 
later this year.

Governors Task Force on Boutique Fuels
        While EPA's regulatory improvements and the new EPAct 
provisions have significantly improved key aspects of the boutique fuels 
issue, concerns about potential adverse effect of boutique fuels have 
persisted.  Hurricane Katrina provided a stark demonstration that when 
the nation's fuel supply is drastically reduced as it was last year, multiple 
and differing fuel regulations can complicate the recovery effort.  
Moreover, persistently high crude oil prices and the resulting high gas 
prices have caused a renewed effort to look for innovative ways to 
simplify the fuel distribution system.  
        Consequently, on April 25th, President Bush directed Administrator 
Johnson to convene a Governors Boutique Fuels Task Force.  All 50 
Governors have been invited to participate.  The task force will look to 
assess various state and local clean fuel requirements and the effect the 
requirements have on supply, quality, price, and air quality.   
        Last Thursday, Administrator Johnson held a conference call 
initiating this process.  Weekly meetings will be held, with our next 
meeting scheduled with the task force May 12, where EPA staff will 
present background information on fuel regulations, the different 
boutique fuels in use in this country, the results of a 2001 review which 
the Agency conducted on boutique fuels and other related information.  
Over the coming weeks we are inviting the input of outside experts from 
industry, public health organizations, and other interested parties.  We 
also expect to hold a number of technical staff meetings to help EPA 
prepare a draft report for the task force's review in mid-June.
This ambitious schedule will put us on track to provide the President 
with our final report within 8 weeks. The key elements of the report 
should include, a summary of the process we utilized to review boutique 
fuels; information on actions that have already been undertaken, 
including EPA's 2001 boutique fuel report and provisions required by 
the Energy Act; our current understanding of the use and utility of 
boutique fuels; stakeholder opinion and feedback; and options, 
recommendations and additional information needs. 
        The options in the report will be designed to help the President meet 
his overall goal of simplifying and unifying the fuel regulation system 
and increasing cooperation among states on gasoline supply decisions. 

Conclusion
        In closing, this year's gasoline situation has had some unique 
influencing factors beyond the normal winter-to-summer gasoline 
transition practices.  For example, the market underwent withdrawal of 
MTBE from RFG market areas, and the addition of ethanol into those 
RFG areas that had previously used MTBE.  This MTBE-to-ethanol 
transition lead to some additional tank management practices to prepare 
for the new products. Crude oil prices also hit historic highs.  These 
factors, among others, provided for unusual market conditions.  Despite 
these conditions, the market has managed the transition effectively and 
maintained the integrity and benefits of important environmental 
programs.
        It is important to note that although a number of states have banned 
the use of MTBE, there is no federal ban.  Refiners of RFG who have 
phased out the use of MTBE have done so through their own decisions.  
Of course, now that the RFG oxygenate requirement has been eliminated, 
refiners are free to produce RFG with or without an oxygenate.
        Again, I want to thank you, Mr. Chairman and the members of the 
Committee for the opportunity to testify before the Committee on these 
important issues.  This concludes my prepared statement.  I would be 
pleased to answer any questions that you may have.



	CHAIRMAN BARTON.  Thank you, sir.  The Chair recognizes himself 
for the first 5 minutes of questions.  The first question to you, Dr. 
Gruenspecht.  I have seen different numbers about what U.S. domestic 
refinery capacity actually is.  I have seen a number as low as 15 million 
barrels per day and I have seen a number as high as about 17-1/2 million 
barrels per day.  According to the EIA, what is U.S. domestic refinery 
capacity right now?
	MR. GRUENSPECHT.  Our current number is about 17.3 million 
barrels.
	CHAIRMAN BARTON.  Push that button there.
	MR. GRUENSPECHT.  Our number is 17.3 million barrels of 
distillation capacity.  As you well know, there are all different types of 
units at refineries, but typically, you measure at the distillation level.
	CHAIRMAN BARTON.  So the official number is 17.3?
	MR. GRUENSPECHT.  That is our current number.
	CHAIRMAN BARTON.  All right.  What is the demand for refined 
products per day in the United States?  We have got capacity for 17.3.  
What is our demand for the products that the refineries produce?
	MR. GRUENSPECHT.  That is a good one.  I am trying to think 
through that because our total petroleum demand is, you know, about 20-
1/2 million barrels a day, but that includes some of the liquid petroleum 
gasses and other things that don't come through the refinery.  My 
colleague here tells me 18.5 would be a good number, 18.5 million 
barrels.
	CHAIRMAN BARTON.  Why wouldn't it be 20 or 21?
	MR. GRUENSPECHT.  Because again, petroleum includes things like 
some propane and other liquid petroleum gasses, some of which come 
out of natural gas production facilities and never go into a refinery.
	CHAIRMAN BARTON.  Well, what I am trying to get at, one of your 
statements was the crack spread, which I am going to give you an 
opportunity to define, because that is not what most Americans think it 
is.
	MR. GRUENSPECHT.  Okay.
	CHAIRMAN BARTON.  But before we get there, I want to determine 
what the refinery production demand spread is and according to you or 
EIA, it would seem to be about a million and a half barrels per day, as 
opposed to three or four million barrels per day.
	MR. GRUENSPECHT.  We import some products, if that is what you 
are trying to say, what we have to import in the way of petroleum 
products.  We import, I think, about 10 percent of our gasoline, which is 
close to a million barrels a day of gasoline.  I think we are also maybe 
importing some small amounts of distillate heating fuel and diesel.
	CHAIRMAN BARTON.  And would it be fair to say if we could 
increase domestic refinery capacity by two million barrels per day, we 
would be self-sufficient in refined product capacity in this country?
	MR. GRUENSPECHT.  Two million barrels per day of capacity, again, 
assuming the utilization maintained at the current level, I think would 
allow us to refine the products that we consume.  But again, we would 
not then be taking advantage of some of the things, like in Europe, the 
shift over to diesel cars, which has given them more gasoline.
	CHAIRMAN BARTON.  Than it is as a--
	MR. GRUENSPECHT.  Yes, if you wanted to do that.
	CHAIRMAN BARTON.  If you were me and you were setting a goal to 
be self-sufficient in refinery capacity for our domestic demand in this 
country, the goal would be an increase of around two million barrels per 
day?
	MR. GRUENSPECHT.  That sounds about right to me.
	CHAIRMAN BARTON.  Okay.  Now, let us go to the crack spread.
	MR. GRUENSPECHT.  Okay.
	CHAIRMAN BARTON.  Would you explain in layman's terms what 
that is when you relate it to refinery?
	MR. GRUENSPECHT.  If you take the value of a barrel of gasoline on 
the wholesale market and compare that to the value of a barrel of crude 
oil on the wholesale market, the spread between those two prices is the 
crack spread.
	CHAIRMAN BARTON.  And what has it been historically?  What 
would be considered an adequate spread to make a reasonable profit?  I 
know the answer, at least I think I do.
	MR. GRUENSPECHT.  Well, it varies by time of year, first of all, but I 
think for this time of year, a 20 cent per gallon gasoline crack spread 
would be considered right.
	CHAIRMAN BARTON.  Convert that to barrels.
	MR. GRUENSPECHT.  Times 42 would be $9.
	CHAIRMAN BARTON.  $8 or $9.
	MR. GRUENSPECHT.  $8 or $9.
	CHAIRMAN BARTON.  What is it now?
	MR. GRUENSPECHT.  Significantly higher than that.
	CHAIRMAN BARTON.  How much significantly higher?
	MR. GRUENSPECHT.  It is probably a good $8 or $9 higher than that.
	CHAIRMAN BARTON.  All right.
	MR. GRUENSPECHT.  I mean, $10 higher than that, perhaps.
	CHAIRMAN BARTON.  Wouldn't it be even higher than that?
	MR. GRUENSPECHT.  Well, I haven't looked today, but--
	CHAIRMAN BARTON.  Well, look.  Have your staff look today.  If I 
were to tell you that it was around $30 a barrel, what would you say?
	MR. GRUENSPECHT.  $30 a barrel, I think, would be a little high.
	CHAIRMAN BARTON.  Well, find out.
	MR. GRUENSPECHT.  Probably $18; 45 times 42 is $20, maybe $21 a 
barrel.
	CHAIRMAN BARTON.  There is no question then.
	MR. GRUENSPECHT.  It is a lot higher than--
	CHAIRMAN BARTON.  If you have a refinery that is operating today, 
you are doing okay.
	MR. GRUENSPECHT.  You are making good money.  Doing very 
well.
	CHAIRMAN BARTON.  You are paying the rent with a little extra for 
contingencies.
	MR. GRUENSPECHT.  And indeed, you know, as I indicated in my 
testimony, the financial incentives for expanding--
	CHAIRMAN BARTON.  My time has expired, but my last question, is 
there any other part of the distribution chain today, in the American 
domestic market, that has a spread as large as the crack spread at the 
refinery output level?
	MR. GRUENSPECHT.  Not to my knowledge.
	CHAIRMAN BARTON.  Not at the crude oil.
	MR. GRUENSPECHT.  No.
	CHAIRMAN BARTON.  Not at the retail.
	MR. GRUENSPECHT.  You are talking about the distribution margin.
	CHAIRMAN BARTON.  So when we look at the--
	MR. GRUENSPECHT.  The people who own gas stations are not 
making that kind of margin.  If you are looking at the distribution 
margin, no, they are not.
	CHAIRMAN BARTON.  My time has expired.  I recognize Mr. 
Boucher.
	MR. BOUCHER.  Well, thank you very much, Mr. Chairman, and 
thank you in particular for that interesting set of questions.  I intend to 
pursue some of the answers to those questions, as well.  Before I do that, 
though, Mr. Gruenspecht, let me direct your attention to another matter 
and one that also might serve our country usefully in order to reduce the 
price at the pump for gasoline, and that is the potential to have coal to 
liquid fuels.  Mr. Shimkus and I both have a very strong interest in 
utilizing to a far greater extent our Nation's plentiful reserves of coal.
	We are beginning to see ways that that is happening already in the 
generation of electricity with new technologies for coal gasification.  But 
my understanding is that a great opportunity also exists to utilize coal to 
manufacture a liquid fuel that can displace petroleum and be used 
directly to power transportation.  Can you tell us, is such a technology, 
given the price of oil in the United States today, would it be economic?  
Can such a technology be employed in an economically feasible way 
given today's petroleum prices?
	MR. GRUENSPECHT.  Yes, I can.  We do a long-term outlook, as you 
know, and this year we have raised substantially our oil price projections 
and in this year's long-term outlook for the first time we have coal-to-
liquids coming in, so coal-to-liquids, we believe, at the reference case oil 
price path that we envision, would be economically competitive.  There 
are many issues involved with siting the plants.
	MR. BOUCHER.  That is all understood, but at what price per barrel of 
oil do coal-to-liquid fuels become price competitive?
	MR. GRUENSPECHT.  I believe that investors would want to know 
that prices would be $40 per barrel or higher for a sustained period of 
time.
	MR. BOUCHER.  And do you see prices being at $40 per barrel or 
higher here for a sustained period of time?
	MR. GRUENSPECHT.  Our long-term reference projection is for prices 
at that level or higher.
	MR. BOUCHER.  And so given that economic reality, what interests 
are the companies that have expertise in converting coal to liquid fuel is 
now showing in developing that technology in the United States, that has 
a long experience in South Africa with that technology and with that 
market, might be a case in point.
	MR. GRUENSPECHT.  I have not been following the individual 
companies closely, but I do know that some projects are under 
consideration.  I know there is a project in Wyoming that is under 
consideration.  I know there are some projects, I believe, in Pennsylvania 
that are under consideration.
	MR. BOUCHER.  And the private sector is showing some genuine 
interest in this?
	MR. GRUENSPECHT.  I think there is some interest.
	MR. BOUCHER.  I would like to invite your attention to specific 
company activity and if you could become apprised of that and report to 
us, that would be extremely helpful.  Let me move to another subject.  
Can you tell us today how much the political risk for instability in Iran 
contributes to the price of petroleum?
	MR. GRUENSPECHT.  As you probably heard at the hearing last week, 
there are really a whole set of factors that are driving oil prices.  
Geopolitical risk is one of them.  Iran is one of those geopolitical risks.
	MR. BOUCHER.  I am asking you to quantify that to some extent.  
Can you do that?
	MR. GRUENSPECHT.  I am really not able to separate out Iran from 
the--
	MR. BOUCHER.  Can you quantify the general geopolitical risk?
	MR. GRUENSPECHT.  Again, there is also the issue of low surplus 
capacity to produce oil, so at other times when there has been more 
surplus capacity, geopolitical risk would be less of a concern, so again, it 
is hard to separate out.
	MR. BOUCHER.  Well, give me the circumstance we confront today.  
Given the capacity that is available today, given the price of petroleum 
that we have today, can you give us a range of the percent of that price 
that is attributable to political risk generally?
	MR. GRUENSPECHT.  I would actually have a hard time doing that.
	MR. BOUCHER.  All right, let me move to another question.
	MR. GRUENSPECHT.  Um-hum.
	MR. BOUCHER.  We have already heard, in response to your answers 
to Chairman Barton, that we are importing today about 2 million barrels 
of refined product, gasoline coming into the U.S. to meet our 20 million 
barrel per day demand.  Is that number correct?  If not, please give us the 
correct number.
	MR. GRUENSPECHT.  I think we are probably importing a little bit 
less than two million barrels of refined product--between one and two is 
the right number.
	MR. BOUCHER.  All right, between one and two.  Is there a 
difference in price for imported product as compared to domestically 
produced product and if so, what is that number?
	MR. GRUENSPECHT.  There does need to be an arbitrage spread 
between the U.S. market and the European market to bring product in, 
but the U.S. market clears that at one price.
	MR. BOUCHER.  Well, so you are saying the refined product that 
comes in from abroad comes in at the American domestic price, is that 
correct?
	MR. GRUENSPECHT.  I am saying if we need refined product from 
abroad to meet our demand, then the U.S. market price is going to be 
equal to the price that we pay for that overseas plus the cost of 
transportation.
	MR. BOUCHER.  If there is really no difference in price, then why 
would an outage of American refining capacity result as it did last 
August in a dramatic one-up in gasoline prices?
	MR. GRUENSPECHT.  Well, first of all, there is a time lag in the 
process.  In fact, last fall, as I recall, tremendous amounts of imports did 
come in from Europe and that was one of the reasons why prices fell 
dramatically following Hurricanes Katrina and Rita after they initially 
rose.  So I do think that in some places the world market does help us, 
but needing to go out to the world market does mean that, you know, we 
need to have prices high enough to attract those imports of product.
	MR. BOUCHER.  My presumption here is that there is a difference in 
price between the refined product imported from overseas and the refined 
product created domestically here, if for no other reason, then because of 
transportation.  Any information that you have concerning that difference 
in price would be extremely helpful to us.  And Mr. Chairman, I detect 
that my time has expired and I thank you for your indulgence.
	MR. SHIMKUS.  [Presiding]  It is always educational to listen to my 
colleague, Mr. Boucher's, questions and I do appreciate them.  But he 
didn't allow you to answer one of the dilemmas on coal-to-liquid, which 
is the siting of a refinery and the cost to do that, Dr. Gruenspecht, and as 
we debated on the floor last week, that was part of that debate.  I mean, 
the capital investment for coal-to-liquid, you are correct.  It is about $40 
a barrel.  Someone says $35 to $45.  The projection of the return over the 
advertised amount over whatever the return would be 10 to 20 years plus 
the capital risk, that is why the refinery bill is so important, because there 
is a coal-to-liquid refinery provision as part of the overall refinery debate 
and I guess we will get a chance to debate that again.
	And I understand your inability to quantify risk because that is what 
the futures market does.  I mean, that is where the futures markets really, 
they are the ones that are taking capital in a transparent process and 
trying to make an assumption of what the risk is and that is not in your 
arena, nor are you risking your own capital to do that.  But let me go to 
in your testimony in the debate and discussion on transition from MTBE 
to ethanol and you specifically mentioned a very tight ethanol market 
limited by short-run ethanol production capacity.  Can you elaborate on 
this statement specifically where we are now in terms of supply and what 
the market is demanding?
	MR. GRUENSPECHT.  Okay, let me try to do that.  In 2005 the 
demand for ethanol ran about 263,000 barrels a day.  Replacing MTBE 
in the reformulated gasoline that it was used in would require about 
130,000 barrels a day of ethanol.  So if, and this is an important if, if you 
kept all the ethanol that was used in 2005 where it was used in 2005, and 
tried to use that 130,000 barrels a day, you would need about 390,000 
barrels a day.  That is not what has happened.  In February, ethanol 
supply was up around 302,000 barrels a day.
	What is being done is ethanol is being moved out of conventional 
gasoline blends in the Midwest, so called E10 or gasohol, I think was the 
old term, and some of that ethanol is being taken and moved to the 
reformulated gasoline areas.  So in fact, the ethanol is getting to where it 
is needed to substitute for MTBE, but the amount of ethanol being used 
in conventional areas is being reduced.  So again, like all these questions, 
the answer ends up being somewhat more complicated.
	MR. SHIMKUS.  What kind of capacity increases are we looking at 
within the next six months?  I mean, there is a lot of planned facilities, 
built and on line, so what is your projection?
	MR. GRUENSPECHT.  I had thought we were at a number like 50,000 
barrels a day over the next six months, I think, is in the ball park and I 
think there is even more coming on line by the beginning of 2007, so yes, 
I think there were 33 plants under construction as of the beginning of this 
year.
	MR. SHIMKUS.  I think that number is close.  Let us talk about the 
imports, then.  That is going to be a debatable issue, so what about, how 
much are we importing today?
	MR. GRUENSPECHT.  I think we had, I always go barrels and gallons.  
I think we imported something like 80 million gallons so far this year 
from the Caribbean basin countries.  I think altogether, putting it on the 
same terms I have been talking to before, from the Caribbean and from 
Brazil, it is about 22,000 barrels a day.
	MR. SHIMKUS.  And what do you think this will increase to based 
upon demand and the changing markets?
	MR. GRUENSPECHT.  My understanding is that the world ethanol 
market is pretty tight this year and while there could be some increases, 
we are not expecting very large increases.
	CHAIRMAN BARTON.  Would the gentleman yield?
	MR. SHIMKUS.  If I have to.
	CHAIRMAN BARTON.  Well, you don't have to.
	MR. SHIMKUS.  Yes, I will.
	CHAIRMAN BARTON.  What would the impact be if we suspended the 
tariff on imported ethanol temporarily, say, for 12 months or 24 months?  
What would that impact be on amounts imported and the domestic price 
of ethanol?
	MR. GRUENSPECHT.  When the market is in balance, the domestic 
price of ethanol, if you look, is pretty much the price of gasoline plus the 
value of the tax credit.  That is what the price of ethanol has been 
running when the market is in balance.  That is what the price of ethanol 
is right now.  That makes sense because in the Midwest areas of 
conventional gasoline, someone is deciding whether to mix ethanol in or 
not, and what they are going to look at is can I make my fuel cheaper by 
adding this or not adding this?  My guess would be that in the short run, 
you might get some more ethanol imports, but it is not a tremendous 
quantity, maybe 10,000 barrels a day, 20,000 barrels a day more, and 
what you would find is that ethanol would go back in to the Midwest 
gasoline that it has been taken out of to use in reformulated gasoline 
blending and that the price probably wouldn't change all that much.
	MR. SHIMKUS.  And I would concur with that analysis.
	MR. GRUENSPECHT.  Well, you know, sometimes what we have to 
say is good news for people and sometimes it is not.  In the longer run 
suspending the tariff could make a bigger difference.
	MR. SHIMKUS.  The tariff is not impacting the ability of people who 
want to import ethanol into this country to do that.  The demand is there.
	MR. GRUENSPECHT.  I am an economist but I wouldn't go that far.  I 
think right now the market is pretty tight and the potential for the 
quantity to go up I think is limited in the short run.  I think the price is 
driven by this blending of conventional gasoline in the Midwest and the 
price wouldn't change much.  I think over time it could make a 
significant difference.
	MR. SHIMKUS.  Let me follow up on this line of questioning, as far 
as the transportation issue and the transportation and the blending 
infrastructure.  What is your projection as far as the time needed to 
switch in these two arenas to ensure that ethanol is getting where it needs 
to get to?  Or is there a problem?
	MR. GRUENSPECHT.  My sense is that there have been some 
problems.  In our February paper, we talked about the lower East Coast 
and Texas as being the two places likely to have problems.  Those I think 
turned out to be the case and I think Texas is still having some difficulty.
	MR. SHIMKUS.  Currently, how is ethanol being transported?
	MR. GRUENSPECHT.  I think by railcar, barge, and some tanker truck, 
where you have real bottlenecks.
	MR. SHIMKUS.  So you don't believe that some of the alternative to 
pipelines is not meeting up with the demand?
	MR. GRUENSPECHT.  I think there have been some transitional 
issues.  I think most of the transition is behind us.  There are still some 
stumbling blocks.  It still needs to be watched closely.
	MR. SHIMKUS.  Let me quickly, I still have a minute left, go to Mr. 
Wehrum from the EPA.  As I understand your written testimony, on page 
two, EPA does not view alternative fuels that may be required as part of 
an energy strategy, such as ethanol or biodiesel, to be boutique fuel.  Is 
that correct?
	MR. WEHRUM.  Mr. Chairman, we define a boutique, or at least we 
use that term in EPA, to mean a particular kind of fuel and it is one that 
is adopted by a State or a local area for purposes of improving air 
quality, and that is approved into the State Implementation Plan for 
which we require States to have to show how they are going to meet our 
air quality standards.
	MR. SHIMKUS.  Through the SIP call, through the State 
Implementation Plan.
	MR. WEHRUM.  That is correct.  A boutique, as we define it, is a fuel 
that is approved as a control measure in the State Implementation Plan.
	MR. SHIMKUS.  If a State or locality has a requirement in place 
related to ethanol and biodiesel and that requirement has positive benefits 
for reducing air pollution in the Clean Air Act nonattainment areas like 
St. Louis or Chicago, I assume the EPA would consider the benefits of 
those fuels in evaluating the SIP plan, is that correct?
	MR. WEHRUM.  Well, I would answer that question in two ways.  In 
nonattainment areas, those that don't meet our air quality standards, 
measures that are adopted into the implementation plan are the measures 
that are considered for purposes of judging whether the plan is sufficient 
to bring the area into compliance.  So if an ethanol-blended fuel, for 
instance, were not a part of the SIP, then it would not be considered in 
that way.  Having said that, if an ethanol blend is being used, whatever 
effect it is having on air quality would be manifested in the values that 
are measured by the monitors in the area and would be reflected in that 
way.
	MR. SHIMKUS.  Yes, and I will end on this.  Like biodiesel, the 20/80 
mix, it is a 50 percent reduction in emittants and so we talk about 
renewable fuels, we talk about ethanol, but really biodiesel is another 
great renewable fuel that has some positive benefits.  Let me now turn to 
my colleague from California, Ms. Eshoo, for 8 minutes.
	MS. ESHOO.  Thank you, Mr. Chairman.  It is nice to see you in the 
Chairman's chair.
	MR. SHIMKUS.  Thanks.  It is good to be here.
	MS. ESHOO.  Yes.  Welcome to the witnesses.  This is a very 
important hearing and I appreciate the fact that the Chairman of our 
committee has begun the examination and we need to have a very good 
one, not only to examine the issues, but to understand them better, 
because there are many complexities.  So I am going to try to get into 
some of the complexities.  One of the issues that many constituents have 
raised with me, and I can't help but notice we go driving through the 
areas at home and you see the gas stations.  They are really only a 
handful of companies and I can't help but think that there is fierce 
competition in my district in terms of high technology, but I don't see the 
kind of competition amongst the oil companies.  In your examination of 
things over at the EIA, have you examined the whole issue of 
competition or the lack thereof, and the impact that that has overall, or do 
you not examine that?
	MR. GRUENSPECHT.  That is generally not within our purview.  The 
Federal Trade Commission, Department of Justice, I know the President 
has--
	MS. ESHOO.  No, I am not talking about potential violations of 
antitrust.
	MR. GRUENSPECHT.  Yes.
	MS. ESHOO.  In fact, I don't really think that matters.
	MR. GRUENSPECHT.  Okay.
	MS. ESHOO.  I don't think they have to collude.  I think that there 
are so few and that there has been such a consolidation in the industry, that, 
amongst a few, if one is going to raise the price, they know their brother 
friend across the street that represents that oil company are going to raise 
their prices too, but since that is not something under your purview, 
maybe it will be with people that come in to testify.  But I think it is 
something that the committee should examine, because I do think that it 
is part of this overall challenge that we are facing.
	I would like to read something in to the record and I will obviously 
be calling it to your attention at the same time.  One of the issues, and it 
has come up today and it is a legitimate one to examine, is the whole 
issue of capacity at our U.S. refineries.  This is a Reuters article that was 
published January 25 of this year, and I am just going to, if I can, Mr. 
Chairman, submit the entire article for the record, but I would like to 
read part of it to you, "An ExxonMobil Corporation official told 
congressional aides this week" now remember, this was dated January 25 
"that flat North American demand for gasoline forecast through 2030 
means there is no need to build new U.S. refineries, a congressional 
source told Reuters on Wednesday.  Scott Melman, manager of Exxon's 
economics and energy division, on Tuesday briefed aides with the U.S. 
House Energy and Commerce Committee" and I understand it was 
bipartisan staff "on the company's oil demand outlook.  According to a 
committee staff member who attended.  'Exxon said they don't want to 
build any new refineries in North America because of flat demand for 
petroleum products by 2030,' the staff member said, speaking on a 
condition of anonymity."
	So would you comment on this?  I mean, because this is something 
that is constantly brought up in the debate in the Congress when we talk 
about energy, that we need to drill our way to energy independence, that 
we have environmental laws that obstruct refineries from being built in 
the country, which have an effect on our overall energy scene.  Would 
you comment on this?
	MR. GRUENSPECHT.  Sure.  Our view is that there will be growth in 
demand for refined products in the United States, in the long run.  It is 
also our understanding that there is a significant interest in the industry in 
adding to refinery capacity, if not necessarily building entirely new 
greenfield refineries.  And I mentioned earlier in my testimony that there 
is by our count, at least one and a half million barrels per day of 
announced projects, and that is not to 2030, that is between now and 
2009, 2010.
	CHAIRMAN BARTON.  Well, would the gentlelady yield?
	MS. ESHOO.  I would be glad to, Mr. Chairman.
	CHAIRMAN BARTON.  What is the demand projection increase?  Can 
you give us specific numbers and within a timeline?
	MR. GRUENSPECHT.  Sure.  We have petroleum demand growing to 
about 26 million barrels a day by 2030.
	CHAIRMAN BARTON.  From the current 20?
	MR. GRUENSPECHT.  From the current 20.
	CHAIRMAN BARTON.  Is it a straight-line increase of 1 to 2 percent a 
year, approximately?
	MR. GRUENSPECHT.  I would have to look that up and check for the 
record.
	CHAIRMAN BARTON.  Well, that is important.
	MR. GRUENSPECHT.  Absolutely.
	CHAIRMAN BARTON.  Because if Exxon is saying, in the year 2030 
which is 24 years from now, demand will finally flatten out, that may be 
true.
	MR. GRUENSPECHT.  Right.
	CHAIRMAN BARTON.  Historically in the United States demand has 
gone up at least 1 percent and in some years as high as 3 percent, we are 
going to be using a lot more refined products in this country in 2030.
	MR. GRUENSPECHT.  Right.
	CHAIRMAN BARTON.  I thank the gentlelady for yielding.
	MR. GRUENSPECHT.  Yes.
	MS. ESHOO.  Glad to, Mr. Chairman.  In this article, a spokesman for 
ExxonMobil, Mark Budrow, said that the fact that the company is not 
seeking to build new refineries is "very consistent with what we have 
been saying for quite some time.  We think the most cost-efficient and 
effective way, the fastest way to add capacity in the United States is to 
refine our own refineries," Budrow said.  Do you know what refine our 
own refineries means?  Refine our own refineries.  I mean, is that--
	MR. GRUENSPECHT.  I take it that means improve and round out the 
refineries.  And again, companies do differ among themselves.  I mean, 
you have some companies that are very aggressive in refining--
	MS. ESHOO.  Mr. Chairman, on this point of the whole issue of 
refineries, capacity in our country, we really should have representatives 
from the oil companies here to answer these questions.  I mean, there are 
only a handful of them, but it is--
	CHAIRMAN BARTON.  They will be here tomorrow.
	MS. ESHOO.  But I think the institute is going to be, a trade 
association is going to be here.
	CHAIRMAN BARTON.  We have got API and both big national groups 
are having their Washington head of their office here tomorrow.
	MS. ESHOO.  The CEOs will be here?
	CHAIRMAN BARTON.  Well, I haven't said that yet.
	MS. ESHOO.  Well, that is what I am suggesting.
	CHAIRMAN BARTON.  But I mean Red Cavaney and Bob Slaughter, 
who both head the National Refiners Institute and the American 
Petroleum Institute, will be here tomorrow sitting right where those two 
gentlemen are.
	MS. ESHOO.  Are those trade associations?
	CHAIRMAN BARTON.  Yes.
	MS. ESHOO.  All right.  To Mr.--is it Wehrum?
	MR. WEHRUM.  That is correct.
	MS. ESHOO.  On the whole issue of boutique fuels, we had a very, 
very good debate and discussion when we were drawing up legislation 
here at the committee.  That was passed.  Can you tell us, as representing 
the EPA, how that is working today, how effective our legislation was, 
relative to boutique fuels?
	MR. WEHRUM.  Congresswoman, you are referring to the Energy 
Policy Act of 2005?
	MS. ESHOO.  Right.  Yes.
	MR. WEHRUM.  We are aggressively implementing several aspects of 
the Energy Policy Act that are relevant to the fuels program.  I think first 
and foremost the renewable fuel standard, EPAct as we call it, Energy 
Policy Act, required EPA to develop and implement a program that 
would require specified amounts of renewable fuels to be blended in to 
the gasoline supply on an annual basis, beginning with the year 2006.
	MS. ESHOO.  Yes.
	MR. WEHRUM.  We have adopted a rule, just for the year 2006, 
which we believe assures compliance with the mandate and right now are 
moving quickly to adopt or propose to publish a proposed regulation and 
as soon as we can after that promulgate that action that will set out the 
comprehensive program that would be effective from 2006 and beyond.
	MS. ESHOO.  So we are still in the process of developing how it is 
going to be administered?
	MR. WEHRUM.  As I said, Congresswoman, we moved in a step-wise 
fashion and--
	MS. ESHOO.  I want to understand where it is.
	MR. WEHRUM.  Certainly.  And the first step that we took was to 
adopt a rule that applied specifically for calendar year 2006.  The 
mandate began to apply in--
	MS. ESHOO.  Yes.
	MR. WEHRUM.  --calendar year 2006, and that rule was published 
and is effective and establishes a nationwide compliance mechanism for--
	MS. ESHOO.  Is this on boutique fuels, though, the question that I 
asked?
	MR. WEHRUM.  This is the renewable fuels standard.
	MS. ESHOO.  No, on boutique fuels.
	MR. WEHRUM.  It is not specific to boutiques, but it is--
	MS. ESHOO.  But that was my question.
	MR. WEHRUM.  Okay.
	MS. ESHOO.  That was my question.  So if you could address my 
question?
	MR. WEHRUM.  Sure.
	MS. ESHOO.  I appreciate the other information, but I would like to 
know about boutique fuels, because it is an area that has been raised in 
terms of cost.
	MR. WEHRUM.  Sure.
	MS. ESHOO.  And we are talking about gasoline prices, so I would 
like to know where the Administration is with this.
	MR. WEHRUM.  Sure.  The provision most specific to boutique fuels 
in the Energy Policy Act of 2005 was a requirement for EPA to develop 
and publish a list of the boutique fuels that currently exist in the various 
State and local programs, and the effect of that listing would be to limit 
the number of boutiques that could be approved after that point.
	MS. ESHOO.  Actually, you were supposed to come up with that list 
nine days after the legislation was enacting.  It is now May of 2006.  This 
is a long time ago.  So, Mr. Chairman, I see that I have gone over my 
time.
	MR. HALL.  [Presiding]  We used some of your time, though.  I will 
allow you another 30 seconds.
	MS. ESHOO.  Well, I think that I am just as frustrated as my 
constituents.  It is very difficult, I think, for anyone that is listening to 
this hearing today to extract from it why we are where we are in our 
country.  I mean, just a very simple question about boutique fuels which 
is going to come up in the debate, and there may even be legislative 
directives about this, we addressed here some time ago, and for me to 
hear that the EPA is working on coming up with a list, really falls far 
short.  So it really is not encouraging.  And so I am just going to stop and 
thank you, Mr. Chairman, for holding the hearing.  We have got a lot of 
work to do.
	MR. HALL.  I thank you.  The Chair recognizes the gentlelady from 
California, Mrs. Bono.
	MS. BONO.  Thank you, Mr. Hall.  Dr. Gruenspecht, could you help 
me understand a little bit about the way in which domestic oils come to 
market?  A mom and pop well gets their oil out.  Then what happens?  
Who is the person that comes to the mom and pop wellhead and picks up 
that oil?  What is that person called?  What is that company called?  
They come and they bring their truck.  It is not a wholesaler, is it just a 
transportation company?  Is that all they are, generally speaking?
	MR. GRUENSPECHT.  I would assume it is something like that.
	MS. BONO.  So for example, Marathon Oil.  So does the mom and 
pop domestic producer, is there competition with who might come?  Can 
they sell their oil to multiple buyers, or is there some that it is almost a 
monopoly, they can only sell, generally speaking, to one company?  And 
the reason I ask this is I don't quite understand the domestic producer, 
the spread in which they are paid has changed dramatically.
	MR. GRUENSPECHT.  In some cases that does apply.  Sometimes that 
has to do with demand for a particular grade of oil.  If a particular 
refinery that uses a particular grade of oil, say, is down for maintenance, 
it can affect what a particular producer can get for that oil.
	MS. BONO.  But you know, then you would think it would be a spike 
or a certain thing.  In my opening statement, I mentioned giving 
incentives to independent producers.  Right now the rising spread 
between West Texas intermediate and other domestic oil is different.  In 
Illinois, it is about $8.  In Wyoming, it can get to $25 to $20.  So I am 
trying to figure out what justifies that spread, and the spread has 
changed.  It hasn't been spiking.  The spread has changed continuously 
up and the domestic producers are saying it is hard to get sympathy right 
now in this business, but they are saying they are finally making money, 
they are able to reinvest that money in aging equipment, that they 
couldn't do--
	MR. GRUENSPECHT.  Right.
	MS. BONO.  --when the price of oil was too low.  So now they are 
reinvesting the profits they are having, but the spread keeps changing and 
the domestic producer is seeing less and less, compared to what the 
Chairman was saying about the refineries, and clearly the transportation 
people, or whatever they are called--
	MR. GRUENSPECHT.  Right.
	MS. BONO.  --are taking it from the wellhead to the refineries.
	MR. GRUENSPECHT.  Again, I am not sure it is necessarily the 
transportation issue.  I mean, the same thing is observed on the market, 
the spread between light oil and heavy oil, say, which is maybe a 
different spread than the one you are talking about.  That had been as 
narrow as $2 to $3 a barrel and now it is up to very high levels.  The 
spread has opened up because the higher quality, most in demand oils 
that produce the most light products, given the type of refining capacity, 
their value has skyrocketed relative to the heavier oils, less desirable oils 
that are more difficult to process.  This is not just something 
domestically; this is something in the worldwide market.
	MS. BONO.  But the gravity of the west Texas oil might be better 
than, say, Illinois crude.
	MR. GRUENSPECHT.  Right.
	MS. BONO.  Yet Illinois has less sulfur, and that has not changed.  
That was the same way before--
	MR. GRUENSPECHT.  No.
	MS. BONO.  --this market, so why now is the spread--and I think this-
-like the Chairman's finding, money from the refineries and the spread 
has gone irrationally high and the same thing here, it is money.  It is 
again added into the price to the consumer, that people don't even realize 
it is happening and I think somebody ought to look at these spreads, that 
the domestic producers--it is not their fault.  Oftentimes, they are seeing 
lower and lower profits.  I mean, yes, they are increasing, but compared 
to everybody else in the supply chain.
	MR. GRUENSPECHT.  Well, this is something we have been asked to 
look into in the past and we do look into.  But again, we find that there 
really is an extra high premium on the very high quality oil right now, 
and that is maybe part of what these producers are seeing.  Again, we 
will look into it for you.
	MS. BONO.  I would appreciate that very much, and if you could 
respond in writing, that would be very helpful to me.  Thank you and I 
yield back my time, Mr. Chairman.
	MR. HALL.  I thank the gentlelady.  The chair recognizes the 
gentleman from California, Mr. Waxman, for 5 minutes.
	MR. WAXMAN.  Thank you, Mr. Chairman.  Mr. Wehrum, in your 
written testimony, you and Mr. Gruenspecht both discussed how States 
and localities benefit from adopting area-specific clean fuel blends.  As 
you both noted, these cleaner fuels improve air quality and are often far 
less costly than other pollution control options, including opting into 
Federal reformulated gas requirements.  Yet Section 1541 of the energy 
bill passed last August sharply limits States' ability to adopt clean fuels 
requirements.  It does this in two ways.  First it freezes the total number 
of unique State fuels.  This will prevent States from requiring any new 
clean fuel blend unless an existing blend is dropped.  Second, the energy 
law bars States from requiring even an existing clean fuel blend to be 
used in new areas of the country.  The only exception is for one specified 
low volatility fuel type.  Do you agree that together these existing 
provisions will substantially limit any additional State clean fuel 
requirements?
	MR. WEHRUM.  Congressman, we, as I noted a moment ago, are still 
in the process of developing the list of boutique fuels that is required by 
the Energy Policy Act.  Clearly the Energy Policy Act limited the 
number of boutiques that are available to be approved in the future.
	MR. WAXMAN.  That is the question I had.  So these two provisions 
in the energy bill in August will limit the number of boutiques.  You 
haven't finalized the answer.
	MR. WEHRUM.  Yes, they will, Congressman.
	MR. WAXMAN.  Now, do you believe it is important to involve the 
States which rely on benefits from these fuels in any discussion of 
whether and how to further limit State fuels?  That is the President's 
approach under the Governors Task Force, right?
	MR. WEHRUM.  That is correct, Congressman.
	MR. WAXMAN.  Now the majority of Republicans here are talking 
about adopting a new bill to further limit States' authority to require 
clean burning gasoline.  It appears they want to pass this bill by late May 
or early June.  Your process with the Governors won't be completed by 
then, will it?
	MR. WEHRUM.  We intend to complete our process by the end of 
June, Congressman.
	MR. WAXMAN.  By the end of June.  Now, if the majority wants to 
further limit clean fuels, about all that is left to do is to block any State 
from ever adopting a clean fuel blend that--in the future, or to force 
States to eliminate their existing requirements.  The States have asked to 
testify on any such proposal but have never been permitted to do so.  
Now the Majority wants to short circuit the President's process to 
involve the States, and today we have learned EIA is testifying that 
restricting the number of fuel blends too much could actually raise gas 
prices.  Seizing State authorities and circumventing the States' 
involvement is contrary to the principles of cooperative federalism, on 
which the Clean Air Act is based; thus in itself is objectionable.  But 
doing this in the name of high gas prices is simply foolish.  State fuels 
requirements were never the problem.  Even if they had been, Congress 
just passed a bill to strictly limit such requirements, and limiting them 
further may raise, not lower, gas prices.  I put that out for my colleagues 
and for the two of you to listen to, because I think we are moving this 
thing in this legislation so quickly that I don't think we are really going 
to get a full input from the States, and I fear that if we make the wrong 
decision, we are going to get the exact contrary of the result of what we 
are trying to achieve.  I thank you, Mr. Chairman, and I appreciate both 
of your testimony, and I did want to point out what you had put in your 
written statements to us.  I yield back the balance of my time.
	MR. HALL.  I thank the gentleman.  The Chairman recognizes the 
gentlelady from North Carolina, Ms. Myrick, for 5 minutes.
	MS. MYRICK.  Since I had to leave the room, Mr. Chairman, I will 
pass on this round.
	MR. HALL.  I will recognize myself for a quick question of Mr. 
Wehrum, if I might ask you.  Federal law, a certain part of the Energy 
Policy Act, requires the Government to examine, and I guess that means 
a study before they examine it and examine it as they study it, options to 
enhance flexibility in the fuel distribution infrastructure, reduce price 
volatility and cost to consumers, provide increased liquidity to the 
gasoline market, and enhance fuel quality consistency and supply.  How 
far along is the Administration in their completion of this study?
	MR. WEHRUM.  Congressman, we are currently consulting with DOE 
and preparing to implement that study and fully intend to complete it by 
August, which is the statutory deadline.
	MR. HALL.  August of this year?
	MR. WEHRUM.  That is correct, Congressman.
	MR. HALL.  And would it be possible to accelerate the work, get it a 
little earlier for us?  Some of us are rushing toward November.
	MR. WEHRUM.  We will move as expeditiously as we can manage, 
Congressman.
	MR. HALL.  That is what I am asking.  One other question to--I guess 
also to you.  Will any of the boutique fuels currently approved and used 
today become functionally identical to the Federal fuels requirements, 
and would they then no longer be considered boutique?
	MR. WEHRUM.  Congressman, the answer to the first question is we 
believe the answer is yes, and Atlanta is a good case in point, which has 
a combination of volatility standards and sulfur standards in place for 
gasoline, and we believe, once our Federal programs have been fully 
implemented, that the Atlanta program and the Federal program will be 
very consistent as it applies to those requirements.  In answer to the 
second question, the boutique standard would remain part of the State 
Implementation Plan unless and until the State requested that it be 
removed and EPA approved that request.  So there is not an automatic 
mechanism that would make it go away.
	MR. HALL.  I thank you very much.  The Chair recognizes the 
gentleman from Texas, Mr. Green, for 5 minutes.
	MR. GREEN.  Thank you, Mr. Chairman.  Mr. Wehrum, the President 
made a televised speech address in response to the public outrage on 
gasoline prices and he was going to direct the EPA to take a number of 
actions, like waivers, to try and reduce the prices.  The State of Texas 
asked for a waiver from the RFG requirements due to the ethanol supply 
problems mentioned by the EIA in their testimony.  A number of States 
like Virginia didn't ask for the waiver, since EPA staff said they 
wouldn't get one.  Other States don't think they will get a waiver, since 
they haven't heard back, despite the President's speech.  Do you know a 
timeframe for Texas to get a response, when you consider the fact that 
the EIA says the ethanol transition in Texas is the most difficult in the 
entire Nation?
	MR. WEHRUM.  Congressman, the President has asked Administrator 
Johnson and ourselves to act quickly and aggressively on requests for 
waivers of fuel standards under the Energy Policy Act provision.  To my 
knowledge, we actually have not received an official request from the 
State of Texas.  Having said that, there has been a tremendous amount of 
dialogue between folks on my staff and various officials in the State of 
Texas, as well as the fuel producers and suppliers and distributors, to 
understand the situation and make a judgment as to whether a waiver is 
appropriate under the standards set by the Energy Policy Act.  And to 
date, the information we have received indicates that, at least to this 
point, it doesn't appear that a waiver is necessary.
	MR. GREEN.  Okay.  But do you know you haven't received a 
request from the State of Texas?
	MR. WEHRUM.  That is correct, Congressman.
	MR. GREEN.  Okay, I will follow up on that.  Mr. Gruenspecht, your 
testimony notes that we have a very tight ethanol market due to limited 
ethanol production capacity and that this is causing some Midwest 
ethanol to be shifted to RFG areas, which many are major urban areas 
outside the Corn Belt, and again, Houston, Texas, and we benefited from 
reformulated gas, although it is all MTBE up until recently.  Many States 
in the Midwest have state-level ethanol mandates.  Do these mandates 
have the potential to limit the flexibility to move ethanol around where it 
is needed?
	MR. GRUENSPECHT.  It is our view that there is enough flexibility.  
There is enough ethanol that can be moved, that would be moved, but 
there definitely are logistical challenges in moving it.  It is less the State 
policies that are the logistical challenges of moving the ethanol out of the 
Midwest.
	MR. GREEN.  So logistical is a bigger problem than a State--
	MR. GRUENSPECHT.  I think logistical is the big problem this year.
	MR. GREEN.  You know, I have information, for example, that in 
Dallas, Texas, that there are railcars waiting to unload ethanol, but not 
enough distribution facilities available.  Do you have any knowledge of 
that?  Or any other urban areas like Dallas, Texas, that we have heard.
	MR. GRUENSPECHT.  I understand that there are rail bottlenecks in 
Dallas and that they need to use some tanker trucks to get the ethanol 
around rather than directly off the train.  So there are some difficulties, 
but again, that is more the logistics category than the State mandates for 
ethanol.  
	MR. GREEN.  Yes.  That was what I was following up on, because 
our committee understood when we eliminated or didn't provide the 
protection for MTBE, that you can't pipeline ethanol and that is what 
you have when you can't pipeline it.  Would you elaborate and discuss 
on whether we can expect any increase in the ethanol production 
capacity here along the Gulf Coast so we don't have to ship it from the 
Midwest by rail or even tanker truck?
	MR. GRUENSPECHT.  This is really just out of news reports, but I 
thought there was some discussion of ethanol production capacity, I 
believe, in Louisiana, as I recall, but I am not sure what the timing is.  
But I know that in the short run there is a lot of capacity planned, mostly 
in the Midwest, and I think that the bulk of it would still come from the 
Midwest.
	MR. GREEN.  Okay.  So we still have problems with distribution 
because I don't know if we are laying a lot of new rail lines, although I 
know some distribution facilities are trying to ramp up, but you know, 
the law--the energy bill was signed last August and here we are in the 
middle of May almost and we are seeing those problems come to a head.  
Could you give us some information on how the elimination of the 
oxygenate mandate and the widespread use of MTBE is leading to an 
increased reliance on gasoline imports, on the imports of both gasoline 
but also the potential for importing ethanol?  The question, I guess, is the 
elimination of the oxygenate mandate and the elimination of--because we 
use MTBE in so many areas in the country outside of the Midwest.  Is 
there any estimation of what would help us--what the percentage would 
be for gasoline imports or ethanol imports?
	MR. GRUENSPECHT.  Again, it is my understanding that there may be 
some short-term increase in ethanol imports under current law, but the 
bulk of the ethanol will be taken out of the Midwest, moved to the RFG 
areas, and again, two-thirds of the RFG had already gone over to ethanol 
before this year, in California, New York, Connecticut.  The Midwest 
was already ethanol-based RFG.  It was really the East Coast, outside of 
New York and Connecticut, and Texas that will still be MTBE areas.  I 
think there will probably be some extra conventional gasoline used in the 
Midwest as the ethanol comes out of there and goes to the RFG areas in 
Texas and the East Coast, outside of New York and Connecticut.
	CHAIRMAN BARTON.  The gentleman's time has expired.
	MR. GREEN.  Thank you, Mr. Chairman.
	CHAIRMAN BARTON.  Yes.  The gentleman from Arizona, Mr. 
Shadegg.
	MR. SHADEGG.  Thank you.  Mr. Gruenspecht, I want to clarify some 
points in your testimony.  Earlier this year, you issued a report, EIA did, 
entitled, "Eliminating MTBE in Gasoline," in which you estimated that 
U.S. domestic ethanol production would fall 130,000 barrels per day 
short on average this year.  Later in March, Administrator Caruso 
testified before the Senate and reaffirmed that estimate.  As I understand 
your testimony today, you are reaffirming that estimate again.  You are 
saying that if we were to leave the current ethanol where it is currently 
being consumed, we would fall 130,000 barrels per day short in the 
remainder of the country.  But as you explained in your testimony, what 
is in fact happening is we are reducing the amount of ethanol used in the 
Midwest and trying to ship it now, I guess, with logistic problems, to the 
other areas of the country, is that correct?
	MR. GRUENSPECHT.  We need to replace the MTBE.  We need 
130,000 barrels of ethanol.  Ethanol production capacity is growing, but 
it has not grown 130,000 barrels, so I wouldn't say, you know--
	MR. SHADEGG.  Just by your estimate, is that correct?
	MR. GRUENSPECHT.  That you need 130,000 barrels of ethanol to 
replace the MTBE where it had been used, yes.
	MR. SHADEGG.  And I that I thought was based on your testimony, it 
was 263,000 barrels per day produced in 2005.  The need is 390,000 
barrels per day, absent MTBE and that is where the 130,000 barrels per 
day comes from, is that correct?
	MR. GRUENSPECHT.  That is adding up last year's supply and this 
extra 130,000.
	MR. SHADEGG.  Right.
	MR. GRUENSPECHT.  And I mentioned that production capacity, or 
production in February was about 302,000.
	MR. SHADEGG.  And in response to the Chairman's question, I 
believe you indicated that--and I am not sure, he thought it was 10,000--I 
thought I heard 20,000 barrels per day currently imported.  Which was it 
or do you know?
	MR. GRUENSPECHT.  It's 22,000 barrels per day.  I was doing it in 
gallons and making the translation.
	MR. SHADEGG.  Yes, I heard that little discussion of 80 million 
gallons.
	MR. GRUENSPECHT.  Twenty-two thousand barrels a day total 
ethanol imports.
	MR. SHADEGG.  Imports now?
	MR. GRUENSPECHT.  Imports now.
	MR. SHADEGG.  And your belief was that that could climb by an 
additional 10,000 to 20,000?
	MR. GRUENSPECHT.  Yes, in that neighborhood.
	MR. SHADEGG.  Which means it would nearly double?
	MR. GRUENSPECHT.  If it was 20,000, it would double.
	MR. SHADEGG.  It would in fact double.  One of the issues is, well, 
where would we get this additional ethanol, and I believe one of your 
responses was, well, you understand the ethanol market worldwide is 
tight right now.  A fair amount of that ethanol is produced and consumed 
in Brazil and as I understand it, Brazil recently reduced their ethanol 
quotient or proportion from 25 percent to 20 percent, I believe, in 
response to the tight market, is that correct?
	MR. GRUENSPECHT.  I understand that to be the case.
	MR. SHADEGG.  And that is like what you are talking about in the 
Midwest right now, we are reducing the proportion of ethanol in gasoline 
in the Midwest because of the demand for that ethanol elsewhere around 
the country, is that correct?
	MR. GRUENSPECHT.  On average, that is correct.
	MR. SHADEGG.  On average.
	MR. GRUENSPECHT.  It is not like it is reduced from 10 percent to a 9 
percent blend.  It is that there is less of the 10 percent blend being used.
	MR. SHADEGG.  Okay.  My understanding would be that--two points 
I want to make from that.  One is, to the extent that ethanol helps clean 
the air, wherever we reduce the use of ethanol in the Midwest, we are 
losing the advantage that ethanol has for cleaner air, is that correct?  
Maybe I would ask your colleague.  I am sorry.
	MR. GRUENSPECHT.  Yes, I think he knows more about clean air 
than I do.
	MR. SHADEGG.  You would agree with that, wouldn't you?
	MR. WEHRUM.  Could you repeat your question, please, 
Congressman?
	MR. SHADEGG.  The point is that under the current situation, because 
we do not produce enough ethanol domestically to meet domestic 
demand, we are in some locations reducing the amount of ethanol in the 
country that is in the gasoline because it is being placed somewhere else.  
That is going to lose the air cleaning advantages in those portions of the 
country where we reduce reliance on ethanol, correct?
	MR. WEHRUM.  That is correct, Congressman.
	MR. SHADEGG.  The other question I had, back from you, Mr. 
Gruenspecht, if Brazil, for example, were the import tariff to be lifted 
temporarily on ethanol, that tariff that I spoke of, 2.5 percent plus 54 
cents a gallon, there is at least a prospect that the market would cause 
Brazil to say, well, it doesn't even need 20 percent ethanol in its 
gasoline, it could go to 15 percent if the market price, world market price 
for that ethanol made it more economical to sell it in the United States 
than to consume it in Brazil.
	MR. GRUENSPECHT.  I hate to speculate on U.S. policy, I really 
hesitate to speculate on Brazilian policy, but I do follow your logic.
	MR. SHADEGG.  You follow the point.  The point is, some people 
say, well, there is no point in reducing the tariff because we are already 
importing virtually all that is bring produced.  My point is, the market 
will decide that.  With the tariff gone, the cost of selling that ethanol in 
the United States would go down and the incentives to import it would 
go up, which is why some of us are advocating that we ought to 
eliminate that tariff at least temporarily.  I don't advocate its permanent 
elimination, but I believe, if we are looking for immediate solutions for 
American consumers for this year, everything we can do we should be 
doing and that is one of the things that is an option open to us.  And at 
least the President last week discussed the issue with several members in 
Congress, isn't that correct?
	MR. GRUENSPECHT.  Yes, and I believe Secretary Bodman did as 
well.
	MR. SHADEGG.  I don't have any further questions, Mr. Chairman.
	CHAIRMAN BARTON.  Before we yield to Mr. Stupak, if we were to 
eliminate the tariff, what is the estimate of the amount of ethanol that 
could be expected to immediately be imported per day?  In other words, 
if we eliminate the tariff next week, when would you get a supply 
response in the U.S. market and how big would it be?
	MR. GRUENSPECHT.  Again, our review of the supply response is on 
the order of 10,000 to 20,000 barrels a day and--
	CHAIRMAN BARTON.  And how soon?
	MR. GRUENSPECHT.  Relatively soon.
	CHAIRMAN BARTON.  Within two weeks after the tariff was reduced?  
I mean, it takes a certain amount of time.
	MR. GRUENSPECHT.  Yes, a certain amount of time to transit, but 
Brazil is not that far.
	CHAIRMAN BARTON.  And it wouldn't be next January?
	MR. GRUENSPECHT.  No, it could before that.
	CHAIRMAN BARTON.  It could be this summer?
	MR. GRUENSPECHT.  It could be before then, yes.
	CHAIRMAN BARTON.  Okay.  And I thought, in Brazil, the ethanol 
used was 100 percent ethanol in their vehicles.  Is it a blend?  I thought 
that they actually were an ethanol economy, but I am a little confused.  Is 
it like a 90/10 or an 80/20 blend and it is gasoline and ethanol?
	MR. GRUENSPECHT.  I thought they have flex fuel vehicles, I believe, 
to a significant extent.
	CHAIRMAN BARTON.  See, maybe I could just be wrong, but I 
thought you could actually drive a vehicle in Brazil that used pure 
ethanol, it is 100 percent ethanol.
	MR. GRUENSPECHT.  They use something like our E-85, I think.
	CHAIRMAN BARTON.  So it is a gasoline/ethanol blend.
	MR. GRUENSPECHT.  I think they use a lot of gasoline/ethanol blend.
	CHAIRMAN BARTON.  Okay.  Mr. Stupak.
	MR. STUPAK.  Thank you, Mr. Chairman.  Just to follow up on that 
question, even if we looked at the import of the E-85, is there a shortage 
in America of the E-85 fuel?  I mean, from where I live, it was not 
around, I mean, if even you want to use it.
	MR. GRUENSPECHT.  I think what is being suggested is that if Brazil 
would lower its proportion of ethanol use, they would not ship E-85 here, 
they would ship ethanol here.
	MR. STUPAK.  Okay.  So it would be the ethanol.  It is about 10 
percent in a regular gallon of gas?
	MR. GRUENSPECHT.  It is about 10 percent in gasohol and 
reformulated gasoline, and there is lots of gasoline in this country that 
doesn't use any ethanol at all.
	MR. STUPAK.  Correct, correct.  Okay.  Let me ask you another 
question, Mr. Gruenspecht.  Another question the Chairman had asked 
earlier.  In your testimony, you referred to the crack spread, the 
difference between the value of a barrel of crude oil and an equal amount 
of refined gas.  The Chairman asked you about the spread and you 
replied that the spread is currently about $20 per barrel but should be 
closer to $8 to $9 a barrel, I thought you said.  Where does the extra 
money go?  If it's $8--use $8 so it is easy math for me.  $8, if it should be 
$8, it is $20.  Where does that extra $12 go?
	MR. GRUENSPECHT.  Well, it is cost and profit of the refining sector 
together.  That is what the crack spread represents.
	MR. STUPAK.  So the 12 bucks would go to refiners?
	MR. GRUENSPECHT.  Profitability in the refining sector is much 
better than it has been historically.  And indeed that is again why we are 
seeing more interest in refinery capacity additions.
	MR. STUPAK.  So when you speak about September 2004 until 
September 2005, there is evidence that the refinery costs went up 255 
percent in this country.  Would part of that be because of this crack 
spread?
	MR. GRUENSPECHT.  Again, I think that is a discussion I believe you 
had with Secretary Bodman.
	MR. STUPAK.  Yes.
	MR. GRUENSPECHT.  Yes, this is a Washington Post number.
	MR. STUPAK.  Article, correct.
	MR. GRUENSPECHT.  Article.  I am trying to get a handle on that.  
Let us see where we are on this.
	MR. STUPAK.  Yes, when the Secretary testified, he said he would 
get back with us.  We are still awaiting the answers to our questions.
	MR. GRUENSPECHT.  Yes.  Again, it is the crack spread.  It was 
clearly heavily influenced since September 2005 by the effects of 
Hurricane Katrina.  As I recall, the pipelines--including the Plantation 
pipeline--were down.  U.S. refiners lost about four million barrels a day 
of capacity, so, yes, the value of a barrel of gasoline, with a loss of 25 
percent of U.S. refining capacity, shot up dramatically.
	MR. STUPAK.  We had hoped that 255 percent just wouldn't be from 
Hurricane Katrina, which hit on August 31 and the 1st of 2005.  I am 
talking about September 2004 until September 2005.  So Katrina, if it 
had that dramatic of an effect, would have to make that effect in 30 days 
or 31 days and we are talking about a whole year's spread.
	MR. GRUENSPECHT.  Well, actually, it is my understanding that the 
calculation that you are describing, I realize it is not yours, it is a 
Washington Post calculation, was comparing the average crack spread in 
September 2004 to a single day crack spread of September 5, which was 
Labor Day in 2005.
	MR. STUPAK.  Sure.  So if you are using this crack spread and if you 
are using Hurricane Katrina--
	MR. GRUENSPECHT.  Yes.
	MR. STUPAK.  --and if it represents a 255 percent increase, when it 
should be $8 a barrel, probably, as opposed to--it had to be more than 20 
bucks a barrel then, and you did take advantage of Hurricane Katrina as 
an excuse to jack up those prices, or to increase the spread, as we would 
say.
	MR. GRUENSPECHT.  Again, given the tremendous loss in the 
capability to produce gasoline, it is not surprising that the price of 
gasoline rose dramatically.
	MR. STUPAK.  Sure.
	MR. GRUENSPECHT.  And to the extent that the price of crude oil did 
not rise that dramatically, in part because of policy to release or make oil 
available from the strategic petroleum reserve--
	MR. STUPAK.  Sure.
	MR. GRUENSPECHT.  --that spread would naturally open up.  
Unfortunately, there was less of an opportunity to offset the effect of 
Katrina on refined product prices than on crude oil prices.
	MR. STUPAK.  Sure.  Let us go to the transition of winter fuels to the 
summer fuels.  We are seeing more significant increases, compared to 
this time last year, based on what factors?  We are up at least 70 cents, 72 
cents I think I said in my opening.
	MR. GRUENSPECHT.  I agree.
	MR. STUPAK.  So what would be the difference?
	MR. GRUENSPECHT.  I think crude oil is first and foremost the main 
factor that has been driving gasoline prices.  That, plus, as the testimony 
also points out, there were two sort of special or shorter term 
circumstances, one being the fact that our winter-to-summer transition 
also included a transition, in certain parts of the country, from 
reformulated gasoline with MTBE to reformulated gasoline with alcohol, 
and the other being that we have still significant refinery problems.  It is 
really not just the hurricanes, there was one large refinery in Texas that 
had a couple of explosions, I think, last year and that was still slow 
coming back.  There are still a couple of refineries that are not fully back 
from Katrina, and there was a lot of refinery maintenance this April, a 
larger than usual amount, some of that being deferred maintenance, so 
you could attribute some of that to the hurricane.  Some of that may be 
having to do with some of the specifications, like ultra-low sulfur diesel 
coming up later this year.
	MR. STUPAK.  So should we, then, if we are concerned about these 
transition periods, we can't seem to get them leveled off, shouldn't we be 
concerned then about--
	CHAIRMAN BARTON.  This will be the gentleman's last question.
	MR. STUPAK.  Thank you, Mr. Chairman--about the expected high 
cost of heating our homes this winter, home heating oil?  Shouldn't we 
really be addressing that now, then, so we can try to resolve that, so that 
transition, an increase or a spike or a spread, whatever you want to call it, 
won't be so great this winter?
	MR. GRUENSPECHT.  The transition to the winter is a lot less 
complicated than the transition from winter to summer.  Summer to 
winter is a lot easier because you are not worried about the mixing of 
fuels.  I think the big effect, in terms of diesel fuel, will be the ultra-low 
sulfur diesel switch-over this year, and also the price of crude oil.  Again, 
that is going to drive home heating oil prices this year.
	MR. STUPAK.  Thank you.
	CHAIRMAN BARTON.  Thank you, Congressman Stupak.  
Congresswoman Blackburn.  And are you 5 minutes or 8 minutes?
	MRS. BLACKBURN.  I hope I am 8.
	CHAIRMAN BARTON.  Okay, I couldn't--
	MRS. BLACKBURN.  I waived my opening statement--
	CHAIRMAN BARTON.  You are 8.
	MRS. BLACKBURN.  --because I have three questions for Dr. 
Gruenspecht that I would like to ask.
	CHAIRMAN BARTON.  The gentlelady is recognized for 8 minutes.
	MRS. BLACKBURN.  Thank you.  And then one for Mr. Wehrum.  Dr. 
Gruenspecht, I want to talk about refinery capacity utilization, and we 
had Administrator Caruso with us last week--
	MR. GRUENSPECHT.  Yes.
	MRS. BLACKBURN.  --and talked with him a little bit about this and 
that we are at 95 percent capacity, and that is so high, especially when 
you look at world capacity as high as it is, and we have heard a lot about 
India and China and you all have mentioned repeatedly the impact that 
that has on a worldwide market.  So are they building refineries or are 
they just serving as end users of the product?
	MR. GRUENSPECHT.  I believe there is refinery expansion underway 
in Asia, but my understanding is it is also having a hard time keeping up 
with demand growth, so this is a worldwide--
	MRS. BLACKBURN.  But they are building new refineries.
	MR. GRUENSPECHT.  I believe they are, yes.
	MRS. BLACKBURN.  Okay.  And then, how long does it take them to 
get one stood up over there, do you know?
	MR. GRUENSPECHT.  I think a refinery takes, as it takes here, several 
years to build.
	MRS. BLACKBURN.  It does?
	MR. GRUENSPECHT.  It does.
	MRS. BLACKBURN.  Okay.  And the regulatory environment in the 
United States, have we just made it too difficult to build a new refinery?
	MR. GRUENSPECHT.  It is my understanding that the most cost-
effective way to add refinery capacity is, in many cases, to add to 
existing refineries and that is what many of the projects that I mentioned-
-I mentioned the total of 1.5 million barrels.  I think nearly all of those 
are add-ons to existing refineries.
	MRS. BLACKBURN.  And do you think the permit process and 
everything is just--the add-on is much easier than trying to go the new 
route?
	MR. GRUENSPECHT.  I think the add-on is cheaper--
	MRS. BLACKBURN.  Okay.
	MR. GRUENSPECHT.  --than going the new route.
	MRS. BLACKBURN.  It is cheaper?
	MR. GRUENSPECHT.  I believe it is cheaper.
	MRS. BLACKBURN.  Okay.
	MR. GRUENSPECHT.  Because you have a lot of the infrastructure 
already there that you can use.
	MRS. BLACKBURN.  Okay.  All right.  Let us talk about windfall 
profits tax, because we hear folks bringing that back around and they are 
saying that that is possibly something that they would advocate for, or 
changing the way that we measure inventory, in order to be able to 
increase taxes on oil company profits.  So looking at that windfall profits 
or changing the inventory structure, the measurement--
	MR. GRUENSPECHT.  Yes.
	MRS. BLACKBURN.  --so that you could tax more, would that have a 
positive or a negative effect on investment in the new crude oil resources 
or the refining process?
	MR. GRUENSPECHT.  Well, speaking to the crude oil resources, I can 
say that internationally, where most of the crude oil is one of the 
problems that I think has been impeding investment has been the 
tendency of some governments--I think, Venezuela, perhaps to some 
extent Russia--to sort of renegotiate deals as the market price changes to 
try to extract more.  At the time a deal is put together, if there is a 
perception that the upside will be taken away--if there is an upside, but 
that if there is a downside, say, world crude oil prices turn down, then 
tough luck on the investor--that does have an effect and I think we have 
seen that internationally in the development of crude oil markets.  One 
could draw an analogy, perhaps, to that type of effect domestically.  In 
other words, returns from refining from 1990 to 1999 were extremely 
low and nobody was offering much in the way of added returns during 
those years.  So there is a perception that if you take a risk and if things 
turn out well, you will be subject to large taxation.
	MRS. BLACKBURN.  Right.
	MR. GRUENSPECHT.  But if things turn out poorly, you are on your 
own.  That does tend to have a somewhat discouraging effect.
	MRS. BLACKBURN.  Both in the near end and the long term.  So you 
mentioned Contango and Administrator Caruso had talked about that last 
week.
	MR. GRUENSPECHT.  Yes.
	MRS. BLACKBURN.  That was one of the reasons the current market 
is in Cantango's because of the feared disruption of the supplies, and in 
the future, either events from overseas or from the hurricanes we know 
are going to affect that, so we--going back to the refinery issue and being 
near capacity and needing expansion and needing more capacity on new-
-here, new refining capacity in the United States, one would think that 
that should be an encouragement for building refineries or getting some 
of these out of the Gulf Coast area, and also for opening up some more 
domestic supplies.  Do you have any further comment on that?
	MR. GRUENSPECHT.  Again, I think we are seeing an environment 
where lots of new refinery projects are being announced.  Lots of them 
are on the Gulf Coast because that is where a lot of the existing refining 
capacity is.  And again, there are some economic advantages in adding 
on to that.  It does create some of the risks that you have described.  In 
terms of crude oil, most of the attractive prospects are elsewhere in the 
world and some of the problems that we have discussed I think are 
affecting the pace of the development of those.
	MRS. BLACKBURN.  Thank you.  I appreciate that.  Mr. Wehrum, I 
have got just really one thing for you, dealing with New Source Review 
primarily.  I would like to get your thoughts on this, because we know in 
1998 the EPA came out with the Petroleum Refinery Initiative and we 
had actions that were taken under New Source Review, and it seemed at 
that time that--and going forward it seemed that several projects and 
things that formerly had been called routine maintenance were now 
considered to be major repairs and changes.  And what I would like to 
know from you, just a point of a clarification, do you think that there is 
in the industry confusion about New Source Review and what that 
requires?
	MR. WEHRUM.  Congresswoman, we took a very close look at this 
question a couple years ago.  When the President published his National 
Energy Policy, he asked EPA to investigate the impact of New Source 
Review on the energy sector, including the refinery part of that sector.  In 
our conclusions, we did decide that uncertainty was one aspect.  Well, 
we concluded that NSR was in fact having an impact on the energy 
sector, at least as it applied to the existing facilities, and we also said that 
uncertainty was one aspect of the program that was causing an impact.  
And I will say, we have gone to great lengths during this Administration 
to try to reform the NSR program to try to make it easier, simpler, faster 
and just a better program all the way around, and I feel like we have had 
some great--some good success at that.
	MRS. BLACKBURN.  Great.  Thank you for that.  And I think that is 
important.  We just heard Dr. Gruenspecht use the word cheaper in 
talking about expanding and reforming existing space, rather than trying 
to get new refineries into the ground and of course we know that that 
means individuals are going to end up paying less when they actually go 
to the pump and make that purchase.  So I appreciate your comments and 
I appreciate your testimony and being able to look at those New Source 
Review regulations and look at the effect that they are having on the 
expansion and on the building of new refineries with the expansion of 
existing ones.
	CHAIRMAN BARTON.  The gentlelady's time has expired.
	MRS. BLACKBURN.  Thank you.
	CHAIRMAN BARTON.  The gentleman from Washington State, Mr. 
Inslee.
	MR. INSLEE.  Thank you.  Gentlemen, I represent a district in 
Washington.
	CHAIRMAN BARTON.  Did you give an opening statement?
	MR. INSLEE.  I did not.
	CHAIRMAN BARTON.  So you are an 8 minute guy.
	MR. INSLEE.  Thank you very much.  Well, some would say even 10, 
Mr. Chairman.  We in Washington have been hit twice now with the 
second energy costs anomaly.  The first was in the Enron debacle, when 
some of the raiders took over a billion dollars out of our economy, and 
now we are having sort of the second shock wave hitting, so this is of 
single moment to my constituents.  And what they are telling me is what 
I think is common sense, is that Congress needs to rather than tinker 
around the edges and offer gimmicks like a hundred buck check to make 
everybody sort of have a happy meal and go away and leave Congress 
alone; it just isn't going to cut the muster.  We need to do some 
significant things to restructure the energy markets to provide 
alternatives to the existing fuels that can be, in effect, an alternative and 
can keep prices down.
	Now, I was just reading the Wall Street Journal this morning, an 
article published some time ago about Brazil, and in Brazil the Ford 
Motor Company has an advertisement running right now that has a guy 
pull up to the pump and he can't decide between whether he likes 
chocolate or vanilla, and he can't decide whether he likes blondes or 
brunettes, and he can't decide whether he likes gasoline or ethanol, but 
he can burn both, so he decides on whatever is cheapest, because in 
Brazil, unlike this country, several years ago they decided to have a real 
energy policy that would create real alternatives to gas and oil and give 
real consumers real choices.  So cars in Brazil now, when you--you are 
free.  You are not addicted to oil.  You have got freedom because you 
drive a car that can burn either ethanol or gasoline.  The Ford Motor 
Company is making them, General Motors is making, they work and as a 
result, I believe they have kept down some of the gasoline prices in 
Brazil, because now you have an alternative competitor with the existing 
markets.
	So we are going to be talking.  Just right after this hearing there 
will be some amendments to try to inspire the creation of a flex-fuel car 
industry here so that Americans can have that choice.  So I guess the 
question I have, a long question, what are the salutary benefits of 
developing an alternative fuel to gas and oil and truly make it available 
to Americans, as far as the price, once you get a competitor fuel source in 
this economy?
	MR. GRUENSPECHT.  I will try to be brief.  My understanding is that 
there are about five to six million vehicles in the United States that are 
flex-fuel vehicles that can burn E-85, which is 85 percent ethanol and 15 
percent gasoline, so we have those vehicles.  The people who own those 
vehicles are not filling them up in this country with ethanol, with E-85, 
and there are some issues with the availability of it and it is my 
understanding that it is available in only 600 stations.  There are also 
issues with the price of it, I would imagine, because as we discussed, 
right now the price of a gallon of ethanol, when the market is in balance 
in this country, is the wholesale price of gasoline plus about 50 cents, 
which is the tax credit that we give.  A gallon of ethanol has about two-
thirds the energy content of a gallon of gasoline, so right now, if you 
bought ethanol at the market price and put it in your flex-fuel vehicle, 
you wouldn't be very happy--that is my understanding.
	MR. INSLEE.  Right.  But 15 years ago, those exact conditions existed 
in Brazil and they said we can't do this because ethanol costs a little 
more than gasoline and we have only got 10 percent of our cars that are 
flex-fuel and therefore let us just go and call it a day and go home.  But 
the people in Brazil said, no, we are going to develop a policy that is 
going to take care of both the chicken and the egg.  It is going to drive 
the production of more flex-fuel vehicles, which creates demand for 
ethanol, which gives confidence to the investors to develop the 
distribution system for ethanol, and we are going to help the 
development of the distribution system with some tax incentives and 
otherwise to help the distributors make those investments, and they took 
care of both the chicken and the egg and now 40 percent of all their 
transportation fuels are in fact ethanol, which are as cheap or cheaper 
than gasoline under market conditions in Brazil.  And the way they did 
that is that once they started to do this, they increased their sugar cane 
production by a factor of three.  They now get three times as much 
alcohol per acre in Brazil as they did 20 years ago because they didn't 
have the status quo mentality, and they got 20 times more flex-fuel cars 
on the roads because they said there is going to be a market or pumps 
available to them.  I guess what I am saying is that if we look forward 
like we did in the space race, other than saying we don't have computers, 
so we will never get to the moon, Brazil adopted some visionary policies.  
Now, if you assume that we are at least as smart as the Brazilians and can 
have at least the efficiency of Brazilians in cellulosic ethanol some day, 
we may not have it right now, but if you make the assumption that we 
will, and we do develop the policies that have most if not all of our new 
cars coming out as flex-fuel vehicles, will not that have a salutary benefit 
by creating a competitive fuel competitive with gasoline and at least try 
to dampen some of these price increases?  And I will just tell you, that 
has been the Brazilian experience, which, by the way, last week 
celebrated national independence.  They are totally self-sufficient in 
energy right now.
	MR. GRUENSPECHT.  Well, they are.
	MR. INSLEE.  So I was just wondering, if you make those 
assumptions, would it have that benefit?
	MR. GRUENSPECHT.  Well, if you make those--if you can get ethanol 
that is competitive on a fuel-value basis, there is a tremendous potential 
to displace petroleum-based fuels.  Clearly Brazil has some advantages.  
They are the world's low-cost producer of sugar.  You know, that has 
been the case for a long time.  I think American farmers are very smart, 
but on the other hand, there are some natural conditions in Brazil that 
make the equatorial countries more suited for cheap production of sugar.  
But again, American ingenuity is a good thing.  The other thing that 
Brazil does is, of course, it allows significant offshore development, so 
part of their independence, I think, has related to their increasing oil 
production as well as, again, their very--
	MR. INSLEE.  Right.
	MR. GRUENSPECHT.  --strong program in ethanol.
	MR. INSLEE.  We intend to have our first commercial cellulosic 
ethanol plant out of the Northwest, in Southeastern Idaho.  It is ready to 
go, just waiting for the loan guarantees to get consummated.  I will just 
tell you, there is an asset I think Americans have that at least equals 
Brazilians, which is technological innovation capabilities.  What we have 
lacked is the Brazilian vision to make this happen and I am just hoping, 
this afternoon, we can take some modest steps in that direction to unleash 
Americans' inventiveness, together with our top soil.  I think it would 
both be a marriage.  I want to ask you this quick question.  If you prepare 
gasoline on a price volatility basis, many of us are concerned about the 
lack of oversight over the speculative markets that really don't have 
much transparency or openness right now, unlike other regulated markets 
in commodities.  What comments would you give us about the volatility 
of gasoline relative to other commodities that in fact are subject to the 
Commodities Futures Trading Program, which gives transparency and 
some degree of regulation to those speculative markets?
	MR. GRUENSPECHT.  Well, I do believe that the gasoline contracts 
that are traded on the organized exchanges are subject to the same rules 
as other exchange-traded futures contracts, so again, I am not 
representing the financial regulators.  As I said in my testimony, I think 
most of what is going on is really driven by fundamental market forces.  
It is certainly true that the volume of nonphysical trade has increased in 
recent years, but I have a feeling that the speculation is more an effect of 
the real market conditions than the cause of them, than the cause of high 
prices in this setting.  I think the rise in world oil prices has maybe 
attracted some types of investors who don't have a physical interest in 
the market, but I have not seen anything that suggests that speculative 
activity is behind the trend in gasoline prices, and I think it is more, 
again, the crude oil prices, the transitions, the tight refining situation.  
The fundamentals can explain, I think, most of what is going on.
	MR. INSLEE.  Thank you.
	MR. BOUCHER.  [Presiding]  Thank you very much, the gentleman 
from Washington, and the Chair recognizes the gentlewoman from 
Wyoming, Ms. Cubin.
	MRS. CUBIN.  Thank you, Mr. Chairman.  Excuse me.  My first 
question will to go Mr. Gruenspecht.  I recently sent a letter of inquiry to 
your boss, Administrator Caruso.  This goes along with what 
Congresswoman Bono was asking you.  And my letter asked why the 
cost of gasoline and other refined products at the pump in Wyoming are 
not reflective of the low prices crude oil has been trading for in my home 
State, and this is not a new phenomenon with this energy crunch.  This 
has been going on for a long time.  I wonder if you can provide any 
insight into that matter.  And as you may know, during the first week of 
March of this year, crude oil was trading for $61 a barrel nationally, but 
for roughly half of that in Wyoming.  And so it isn't exactly the same 
issue that we have been discussing here, but if Wyoming crude is selling 
so much cheaper, why are those savings not being passed on to 
Wyoming consumers?  But first of all, why is Wyoming making about 
half on their crude oil that other States are?
	MR. GRUENSPECHT.  Well, again, I think, in terms of your letter, we 
are in the process of working on that, so you will have that shortly.  Let 
me begin with that.  But in the earlier discussion with Representative 
Bono, we discussed the different qualities of crude oil.
	MRS. CUBIN.  Right.  But that doesn't fit my situation, because I am 
talking about the qualities of the oil being the same.
	MR. GRUENSPECHT.  Right.
	MRS. CUBIN.  And we are getting half, at any given time--
	MR. GRUENSPECHT.  Right.
	MRS. CUBIN.  --half to significantly less for the exact same quality of 
oil that places in Oklahoma, Louisiana or so on--
	MR. GRUENSPECHT.  right.
	MRS. CUBIN.  --are getting and I wondered if you can explain why.
	MR. GRUENSPECHT.  Well, I want to take the time to get it right and 
again, we will answer by letter.  I also understand that certain oilfields 
tend to be tied economically to certain refineries, through certain 
pipelines, and it is my understanding that changes if a particular refinery 
or buyer of a particular source of crude oil is down for maintenance, that 
can have a significant effect on the price of oil.  I am not saying that that 
is the case.  I am trying to be responsive at the table, but I will get back 
to you with--
	MRS. CUBIN.  Good.
	MR. GRUENSPECHT.  --a full answer.
	MRS. CUBIN.  Good.  Because, you know, just to help you avoid 
some of those--
	MR. GRUENSPECHT.  Right.
	MRS. CUBIN.  --pitfalls that lapses in discussion that we are having 
right now, this isn't a particular instance.  This has been an extremely 
long time that this has been going on, and so that is the question I would 
like to have answered.  And any possible fixes you might be able to 
suggest, as well, would be appreciated and I am willing to wait for that 
letter.  I understand this isn't an easy question because it has a long 
history.  I have another question for you.  What rate of growth is 
necessary, do you think, in our domestic refining capacity to keep up 
with demand?  You mentioned in your testimony that "we are now 
seeing major capacity expansion announcements," which I agree is 
encouraging.  However, what level of expansion will it take to get back 
to the comfort level of excess refining capacity that we had 30 years ago?
	MR. GRUENSPECHT.  I think 30 years ago we had a comfort level 
from one side of the market, maybe not too comfortable from the other 
side of the market, in the sense that there was a lot of refining capacity--
	MRS. CUBIN.  Yes.
	MR. GRUENSPECHT.  --in this country in the late 1970s, early 1980s, 
and then refining capacity generally declined until the, say, the early 
1990s.
	MRS. CUBIN.  Right.  Wyoming shut down--
	MR. GRUENSPECHT.  Right.
	MRS. CUBIN.  --many refineries during that period.
	MR. GRUENSPECHT.  Many I think would have been called in front 
of your committee "tea kettle" refineries.
	MRS. CUBIN.  Yes.
	MR. GRUENSPECHT.  I would not want to insult any refinery.
	MRS. CUBIN.  I wouldn't find that insulting.
	MR. GRUENSPECHT.  I think that term has been used.  And then, 
since about 1993, refinery capacity has been growing.  But again, over 
the last 5 years, I think refinery capacity has been growing a lot slower 
than demand.  The 1.5 million barrels, maybe 1.7 million barrels of--
	MRS. CUBIN.  Million or billion?
	MR. GRUENSPECHT.  Million barrels a day--
	MRS. CUBIN.  Yes.
	MR. GRUENSPECHT.  --that we think would come on board.  Right 
now, we are doing about--we have about 17.3 million barrels a day, so 
that would be about a 10 percent increase in capacity.  That is what we 
think is likely possible before 2010.  That would be pretty healthy.  That 
would be faster than demand growth.
	MRS. CUBIN.  Okay, that was my next question.  I know that--
	MR. GRUENSPECHT.  So that would be a 10 percent increase over 
about a 4 year period.  That would be more than 2 percent a year on 
average.  Again, a lot of that is sort of back-loaded, but refinery capacity 
between now and 2010 would have grown faster than demand, if in fact 
we get 1.7 additional refinery capacity by 2010.
	MRS. CUBIN.  And we don't have announcements for that many at 
this time, right?
	MR. GRUENSPECHT.  I think we have announcements for about 1.5.
	MRS. CUBIN.  Okay.
	MR. GRUENSPECHT.  That is the way we count it.  There is also a lot 
of what is called capacity creep--
	MRS. CUBIN.  Right, right.
	MR. GRUENSPECHT.  --the very small adjustments that people don't 
announce.  And looking at the historical trends in capacity, we think it is 
reasonable to think of capacity creep adding another 200,000 barrels a 
day.
	MRS. CUBIN.  And so you are estimating future demand and future 
hopeful capacity, and by 2010, you think--
	MR. GRUENSPECHT.  I guess, from the point of view of the 
consumer, a more comfortable situation than today.
	MRS. CUBIN.  Thank you.
	CHAIRMAN BARTON.  The gentlelady's time has expired.  The 
gentleman from Oregon, Mr. Walden.
	MR. WALDEN.  Thank you very much, Mr. Chairman.  I appreciate 
having this series of hearings that you have scheduled.  Dr. Gruenspecht, 
I read through your testimony and I walked away sort of depressed.  
Although it is very helpful, it is--
	MR. GRUENSPECHT.  Only the messenger.
	MR. WALDEN.  I know, I know.  And as I read through this, we are 
trying to figure out solutions here that will have both short-term and 
long-term benefit.  We recognize with the passage of the energy bill, a 
lot of what we were investing in wasn't going to produce immediate 
results, but would set the country finally on a path towards long-term 
improvements in making America more energy independent.  And as I 
read through your testimony here, when we are trying to figure out what 
is the right number of blends for boutique fuels, if you will, there is a 
downside to going to say one blend, because the refining capacity 
changes, or the changes in refineries would have to be made.  It wouldn't 
be investments in new capacity.  Is there a magic number of blends?  I 
mean, are there certain blends that are made in enormous quantities 
versus others that are made in small amounts that do drive up the costs?
	MR. GRUENSPECHT.  I really don't have that off hand.  I would say 
there is, again, this trade off between the ease of distribution and the ease 
of production and that is a tough--and there is also the air quality issue, 
which I don't mention because it is out of my jurisdiction, but--
	MR. WALDEN.  You see where I am going with that, though.
	MR. GRUENSPECHT.  Yes.
	MR. WALDEN.  I mean--
	MR. GRUENSPECHT.  But it is not just the number of blends.  I mean, 
there is one thing to keep in mind--
	MR. WALDEN.  The volumes.
	MR. GRUENSPECHT.  If you would have, let us say, whatever number 
of blends you have and you had it in more geographically distinct--
	MR. WALDEN.  Right.
	MR. GRUENSPECHT.  --areas, you still have a distribution issue 
associated with getting whatever number of blends you have to a larger 
number of distinct areas.  The other thing is there are differences--it is 
really the distinct fuels that matter and there are some fuels that are 
distinct, not because of State Implementation Plans, but because of other 
State requirements.  Some of this relates to what has been done under the 
Clean Air Act.  Some of it relates to really the number of geographic 
areas served with a fuel rather than simply the number of fuels.
	MR. WALDEN.  Well, that is, I guess, what I am trying to get at.
	MR. GRUENSPECHT.  And that is another--right.
	MR. WALDEN.  Somewhere in there you all that do this full-time 
must be able to give us some counsel about, if you eliminated these three 
or merged these two or these eight, there would be an efficiency gained 
that would help with the fungibility and not drive up price, I guess.  And 
so to the extent you can get us that information, that would be helpful.  
Since I have only got like 2 minutes, I want to just fire off a couple 
others.  I heard a report at some point that China and India today 
consume more gasoline than the world consumed 10 years ago.  Is that 
an accurate--
	MR. GRUENSPECHT.  That doesn't--
	MR. WALDEN.  By all--I am assuming.
	MR. GRUENSPECHT.  That doesn't sound right to me.
	MR. WALDEN.  That is why I like to ask these questions, so we don't 
repeat inaccuracies.  But there has been an enormous growth.
	MR. GRUENSPECHT.  A tremendous growth in demand.
	MR. WALDEN.  Can you quantify that?
	MR. GRUENSPECHT.  I know that China's demand in 2004 grew by 
over a million barrels a day.
	MR. WALDEN.  And what is our consumption?
	MR. GRUENSPECHT.  Our consumption is about 20.  Theirs is, I 
think, on the order of six and a half to seven million barrels a day.  So I 
think they have become the number two consumer.
	MR. WALDEN.  Is that--
	MR. GRUENSPECHT.  And they are on an upward track.  In our short-
run projections, it is growing like half a million barrels a day per year.
	MR. WALDEN.  We are sort of flat, though.  I mean, it is nine-tenths 
of a percent growth is what you are seeing or what you testified to today.
	MR. GRUENSPECHT.  Yes, we are certainly not growing at the pace 
that China is growing.  They are going to be a larger and larger share of 
the world oil consumption, and India as well.
	MR. WALDEN.  Okay.
	MR. GRUENSPECHT.  And we are going to grow in absolute terms, 
but our role as a share of world consumption is, in our view, likely to 
decline.  We are the biggest consumer now.
	MR. WALDEN.  And now we are going to debate fuel efficiency--
	MR. GRUENSPECHT.  Right.
	MR. WALDEN.  --standards for vehicles, which, even if we were to 
pass something today, is out several years.  You made the comment 
about Brazil, that one of their keys to energy independence, in addition to 
development of ethanol through using sugar, is also their ability to access 
their own reserves.  When it comes to America's energy independence, 
how important are all these other changes we are looking at versus 
accessing our own reserves?  I mean, there would have been incredible 
quantities in Alaska and offshore.
	MR. GRUENSPECHT.  I mean, I don't think it is one--again, taking 
this longer term view--
	MR. WALDEN.  Right.
	MR. GRUENSPECHT.  --on both the demand side and the supply side, 
I think the Minerals Management Service has recently looked at our 
continental shelf reserves or potential technically recoverable oil, and 
they think, in the moratorium areas, there would be, I think, 19 billion 
barrels of technically recoverable oil.  ANWR, the mean estimate is 10 
billion barrels of technically recoverable oil.  So to put that in 
perspective, I think total proved U.S. reserves now are about 20, 21 
billion barrels.  So there is substantial amounts, I mean, relative to 
proved reserves.
	MR. WALDEN.  So it is nearly double?
	MR. GRUENSPECHT.  The proved reserves.  I don't think you would 
double production.
	MR. WALDEN.  Right.
	MR. GRUENSPECHT.  I think production--Alaska, looking at maybe 
up to one million barrels a day production at full utilization, but again, 
that is a long way off in time.
	MR. WALDEN.  Right.  If we were to get that million barrels a day 
production increase, what effect would that have on price?  Do you have 
a ratio in your testimony?
	MR. GRUENSPECHT.  If you got it today, it would be very helpful, I 
think, because in the short run it has a bigger difference than in the long 
run.  In the long run, our feeling is the price impact would probably be 
modest, but again, the energy independence impact could be significant.
	MR. WALDEN.  Thank you.
	CHAIRMAN BARTON.  The gentleman's time has expired.  We have a 
series of three votes on the floor.  We are going to recognize Dr. Burgess 
for the last 5 minutes of questions for this panel, then we are going to 
recess.  When we come back at approximately 1:45, we will bring the 
second panel up.  So, Dr. Burgess, are you ready to ask your questions?  
Dr. Burgess?
	MR. BURGESS.  Thank you, Mr. Chairman.
	CHAIRMAN BARTON.  This will be our last questions for this panel.
	MR. BURGESS.  I was just going to get some clarification on the 
crack spread that the chairman had brought up earlier.  It was a term I 
was not familiar with.
	MR. GRUENSPECHT.  Yes.
	MR. BURGESS.  If you could perhaps go through that in simple 
declaratory sentences for me?
	MR. GRUENSPECHT.  Okay.  You have a barrel of crude oil and that 
has a market value on the wholesale market.  You have a barrel of 
gasoline and that has a value on the market.  And the difference between 
the value of a barrel of gasoline is worth more than a barrel of crude oil 
and that difference is called the gasoline crack spread.
	MR. BURGESS.  And I missed the line of questioning from the other 
side, but is it fair for us to assume that that represents the built-in profit 
to that product?
	MR. GRUENSPECHT.  It is both the cost and the profit.
	MR. BURGESS.  Okay.
	MR. GRUENSPECHT.  Obviously refining is an activity that involves a 
lot of capital equipment, a lot of investment, so the crack spread 
encompasses both the cost and the profitability of refining.
	MR. BURGESS.  Is the cost of refining a fixed cost that would have 
existed at $50 a barrel oil that will now be the same for $75 a barrel oil?  
Does the cost of refining go up as the cost of crude goes up if you 
subtract the cost of the crude?
	MR. GRUENSPECHT.  There is some impact from the cost of crude 
because energy is used in refining, but there is also the impact of changes 
in specification.  So, for instance, making the blendstock to blend with 
ethanol is more difficult than making the blendstock to blend with 
MTBE.  So there are costs related to the specifications.  They are costs 
related to the cost of energy used in the refinery, just like other producers 
who use energy in their production process, you know, their costs go up 
when energy costs go up.  So the crack spread is not just a measure of 
profitability, it is a measure of cost and profitability together.
	MR. BURGESS.  Well, both of you obviously--and I appreciate your 
indulgence for being with us so long, but do either of you have an 
opinion as to what you would like to see this committee do as we go 
forward with this discussion?
	MR. WEHRUM.  I will just say, Congressman, that we stand ready to 
provide assistance.  On the boutique fuels questions, there are a number 
of important questions in play right now, including, should we further 
limit beyond what the Energy Policy Act required, and should we take 
other steps directed at some of the other fuels programs that we 
implement?  And those are hard questions that we are all taking a hard 
look at and we stand ready to help out with that.
	MR. GRUENSPECHT.  And we also stand ready to provide any data 
analyses that are requested by the committee and others.  We both 
successfully avoided answering that.
	MR. BURGESS.  As the cost goes up--and you talked about this, 
doctor, about the utilization that--the utilization of fuel obviously goes 
down with the price spike.  Has that impacted the product in the 
pipeline?  Pardon the phrase.  I mean, do we have more reserve available 
now because the price has gone up?  Or, how has the price affected 
utilization?  Is it evident enough to see that in the marketplace?
	MR. GRUENSPECHT.  Well, in 2005, we think, where previous 
gasoline demand had been growing steadily, data that we have suggests 
that it leveled off.  In 2006, we are expecting some growth in demand 
again, but I think that over time, we would expect, if people believed that 
prices are going to be sustained at a high level, we think you will start to 
see changes in behavior and changes in vehicle purchase decisions and 
that will be reflected in the level of demand.
	MR. BURGESS.  Very well.  Thank you, Mr. Chairman.  I will yield 
back so we can go vote.
	CHAIRMAN BARTON.  We thank you, Congressman.  I had just one 
final clarification question for our witness from EPA.  Congressman 
Waxman was asking about the requirements in the Energy Policy Act 
that restrict over time the number of boutique fuels that are available 
nationwide.  I was one of the co-authors of that and the intention was to 
restrict the number of boutique fuels.  There is no secret about that.  My 
question to you is, does anything in the act lower the standards for air 
quality on a parts per billion basis or any kind of an 8 hour standard, or 
in any way did anything in the Act do anything to lower the requirement 
of air quality?
	MR. WEHRUM.  No, Congressman, it did not.
	CHAIRMAN BARTON.  Not a bit?
	MR. WEHRUM.  Mr. Chairman, it did not.
	CHAIRMAN BARTON.  Okay.  I thank each of you.  We will have 
follow-up written questions on both sides of the aisle.  We are going to 
recess until after these series of votes.  We will have the second panel 
and we will reconvene at approximately 1:45.
	[Recess]
	CHAIRMAN BARTON.  We want to welcome our second panel.  And 
we have with us Mr. Geoff Sundstrom, who is the Director of Public 
Relations for the American Automobile Association; we have Mr. Mark 
Cooper, who is the Research Director for the Consumer Federation of 
America and a frequent testifier.  We are glad to have you back again.  
And we have Mr. John R. Wilkins, who is the Executive Vice President 
and CIO of the Delaware Valley Wholesale Florists Association, and he 
is here on behalf of the Society of American Florists.  We welcome each 
of you gentlemen to the committee.  Your statements are in the record in 
their entirety.  We are going to recognize each of you for approximately 
8 minutes to elaborate on that testimony and we will start with Mr. 
Sundstrom.  Welcome to the committee.

STATEMENTS OF GEOFF SUNDSTROM, DIRECTOR OF PUBLIC RELATIONS, AMERICAN 
AUTOMOBILE ASSOCIATION; MARK COOPER, RESEARCH DIRECTOR, CONSUMER FEDERATION 
OF AMERICA; AND JOHN R. WILKINS, EXECUTIVE VICE PRESIDENT AND CIO, 
DELAWARE VALLEY WHOLESALE FLORISTS, ON BEHALF OF SOCIETY OF AMERICAN 
FLORISTS

	MR. SUNDSTROM.  Thank you, Mr. Chairman.  My name is Geoff 
Sundstrom and I am the American Automobile Association's Director of 
Public Affairs.  I am AAA's primary spokesman on motor fuel issues.
	As you may know, AAA is the largest motorist organization in North 
American, with nearly 50 million members in the United States and 
Canada.  Our members drive approximately 25 percent of all the motor 
vehicles in operation in this country.  Using figures from the U.S. 
Department of Transportation, we estimate that they will purchase 
approximately 33 billion gallons of gasoline this year, and at current 
prices will spend an estimated $96.4 billion on gasoline.  Unlike others 
that testify on this issue, AAA has no involvement in the regulation, 
refining, shipping, blending, or sale of gasoline.  We represent the end 
users of this increasingly contentious, yet completely indispensable 
product.
	Our members are very concerned about whether gasoline is going to 
remain readily available at a reasonable cost in the United States, or if we 
are slowing moving toward an era of much higher prices with even less 
reliable supplies of fuel?  After Hurricane Katrina, Americans paid the 
highest prices ever for gasoline, an average of $3.05 per gallon on Labor 
Day weekend of last year.  As unpleasant as that experience was, the 
public clearly understood that the storm had harmed vital components of 
our energy infrastructure, and while fuel prices were exceptionally high, 
it was a common belief at that time that the situation would be temporary 
and that gas prices would come back down.  Since the beginning of 
2006, however, the national average price of self-serve gasoline has 
jumped from $1.78 per gallon to $2.92 per gallon, a whopping increase 
of $1.14 per gallon in just a few months.
	Many motorists are now alarmed that the rising gas prices have 
become a permanent part of our lives in this country.  They are 
concerned because this year's price increase will cost a typical family 
about $1,260 more per year in gasoline expenditures at current prices, or 
about $100 more each time the monthly gasoline credit card statement 
arrives in the mail.  AAA calculates this increase on the assumption that 
the average vehicle consumes 550 gallons of gasoline each year, as 
reported by the Federal Highway Administration, and the average 
household owns more than two vehicles--actually about 2.1 vehicles per 
household.  An extra $100 per month may not sound much like much to 
some people, but it is helpful to remember that an estimated 50 percent 
of American families say they always or frequently live pay check to pay 
check, according to my colleagues here from the Consumer Federation of 
America.  And the median household income in the United States is only 
$45,000 per year.  So with these realities in mind, it is easy to understand 
why a sharp unexpected hike in fuel prices can be a threatening financial 
setback for many citizens.
	Part of the focus of today's hearing is to discuss what else the 
Federal government might do to help rein in the price of gasoline or help 
offset its impact on motorists, and AAA has a few ideas that we would 
like to share with you.  America's energy woes are complex and far 
reaching.  The gasoline price volatility consumers are experiencing at the 
pump is a result of the escalating price of world crude oil; rapidly 
increasing worldwide demand for energy; America's growing insecurity 
as the world's largest importer of oil and gasoline.  Experts say the 
weakening of the dollar in response to our large trade and budget deficits 
may also be playing a role in the price of oil.
	On the domestic side and clearly of our own doing, there is price 
volatility spawned by the reliance in some markets on a variety of fuel 
blends to serve clean air or local economic goals.  America may not be 
able to control the world price of crude oil or influence demand in other 
countries, but we can clearly exercise more influence over our own 
destiny.  But to do so will require leadership and action by the Federal 
government, as well as active participation by consumers and business 
leaders.
	In the area of energy demand and especially demand for gasoline, 
more can and must be done to encourage conservation.  Motorists must 
reduce consumption by using the most fuel-efficient cars, avoiding 
unnecessary trips, maintaining their vehicles, driving gently, car pooling, 
and using public transportation when necessary.  And these are all tactics 
and techniques that we have been talking to our members about for many 
years.
	As previously stated, all consumers do not have the same economic 
incentives to do more with less, and actually rising prices hit hardest at 
those at the lowest end of the income scale, and do not therefore 
constitute a workable fuel conservation or air quality improvement 
program, in our opinion.  In fact, fuel economy of the total fleet in the 
United States has been stuck at about 24 miles per gallon for at least the 
last 10 years.  So clearly, even though prices are going up, consumers 
have not made a major switch in the choice of vehicle selection when 
they enter the new car showroom.
	AAA believes the Nation, industry, and government must commit to 
achieving higher fuel economy standards on all vehicles.  Congress 
should clearly clarify that the Administration has the authority to raise 
fuel economy standards for passenger vehicles.  Once that authority is 
granted, the Administration should exercise the authority so that real 
gains are achieved in fuel efficiency without compromising safety.
	In the area of energy security, a previous generation of Americans 
was wise to invest in a Strategic Petroleum Reserve of the United States.  
It has somewhat lessened the dangers of an abrupt disruption of oil 
imports.  Unfortunately, the same cannot be said with regard to gasoline.
	Hurricanes Katrina and Rita have taught us that the United States 
needs a cushion of available fuel in times of emergency, especially now 
that the Nation imports more than 10 percent of its refined products from 
offshore.  AAA believes Congress and the Administration should explore 
measures that would enable a minimum level of mandatory refined 
product inventories to be available in an emergency.  Such a system 
exists in Europe and actually was able to provide critical gasoline to the 
United States during production shortfalls that occurred following last 
year's hurricanes.  Should similar or worse disasters occur in the future, 
our ability to immediately move gasoline to areas that need it will again 
prove critical to people and the economy.  And actually, I am with 
AAA's national office, which is in Florida, and the situation hits close to 
home.  Both last year and the year before, we had local gasoline stations 
without fuel in the neighborhood of our national office.
	In the area of boutique and biofuels, a much more coordinated 
approach is needed between the Federal and State governments and all 
the many industries affected by changes in the way we make gasoline.  
Industries that are forced to frequently change the composition of their 
products, or make specialty products for small markets, lose efficiency 
and incur costs from a variety of causes.  These costs are understandably 
passed to consumers, a process that becomes especially easy when the 
industry involved is operating with a minimum of spare capacity and 
very low inventories.  In our opinion, such a situation invites speculation 
of the price of that commodity, further driving up costs to consumers.
	While this is an extremely complex problem, AAA encourages 
Federal and State officials to reach agreement on the use of a smaller 
number of fuel blends that will meet or exceed our clear air goals and be 
used as widely as possible.  As these transitions are made, more careful 
attention must be paid to the implementation process by Federal and 
State agencies.  For example, the transition between MTBE and ethanol 
seems to have resulted in temporary fuel shortages here on the East Coast 
and appears to be one of the contributing factors to today's high fuel 
prices.  That type of experience should not be repeated.
	As for the value of the dollar and its implications for the global 
price of oil, AAA leaves that to others that are more qualified to comment.  
However, we think it is important that Congress and the White House 
resist measures to excessively subsidize fuels to make it cheaper for 
Americans while driving up the Nation's indebtedness.
	Thank you again, Mr. Chairman, for allowing AAA to address the 
distinguished committee.
	[The prepared statement of Geoff Sundstrom follows:]

     PREPARED STATEMENT OF GEOFF SUNDSTROM, DIRECTOR OF PUBLIC 
             RELATIONS, AMERICAN AUTOMOBILE ASSOCIATION

Introduction
        AAA is the largest motorist organization in North America with 
almost 50 million members in the U.S. and Canada.  AAA members 
drive approximately 25 percent of all the motor vehicles in operation in 
this country.  We estimate they will purchase approximately 33 billion 
gallons of gasoline this year and at current prices will spend an estimated 
$96.4 billion on gasoline.

Impact on Consumer
        Since the beginning of 2006, the national average price of self-serve 
regular unleaded gasoline has jumped from $1.78 per gallon to $2.92 per 
gallon:  a whopping increase of $1.14 per gallon.  This year's price 
increase will cost a typical family about $1,260 more per year in gasoline 
expenditures, or about $100 more each time the monthly gasoline credit 
card statement arrives in the mail.

Time to exercise more control over our own destiny

1.  Motorists must reduce consumption.  AAA will continue to educate 
the public on steps they can take to drive more efficiently.

2.  AAA believes the nation - industry and government - must commit to 
achieving higher fuel economy standards on all vehicles.

3.  Government should work with the private sector to develop 
alternative fuel and vehicle programs.

4.  AAA believes that Congress and the Administration should explore 
measures that would enable a minimum level of mandatory refined 
product of gasoline inventories.  Such a system exists in Europe and was 
able to provide critical gasoline to the U.S. during production shortfalls 
that occurred following last year's hurricanes.  Should similar or worse 
disasters occur in the future, our ability to immediately move gasoline to 
areas that need it will again be critical.

5.  More planning must be done to ensure fuel is available during 
evacuations, in the immediate aftermath of storms or from other 
widespread damage, and in areas far-removed from a disaster site that 
might lose access to energy resources.

6.  AAA encourages federal and state officials to reach agreement on the 
use of a smaller number of fuel blends that will meet or exceed our clean 
air goals and be as widely used as possible.
        Mr. Chairman:  My name is Geoff Sundstrom, and I am the 
American Automobile Association's Director of Public Affairs.   I am 
AAA's primary spokesperson on motor fuel issues and have oversight 
responsibility for AAA's widely-sourced Fuel Gauge Report Web site 
which tracks national, state and local fuel prices each day.  I also work 
with local AAA clubs on fuel price inquiries from members and the 
media in your home districts. 
        AAA appreciates your invitation to appear before the Energy and 
Commerce Committee to discuss the rising price of gasoline.   As you 
may know, AAA is the largest motorist organization in North America 
with nearly 50 million members in the United States and Canada.  Our 
members drive approximately 25 percent of all the motor vehicles in 
operation in this country.  Using figures from the U.S. Department of 
Transportation, we estimate they will purchase approximately 33 billion 
gallons of gasoline this year and at current prices will spend an estimated 
$96.4 billion on gasoline.  
        Unlike others that testify on this issue, AAA has no involvement in 
the regulation, refining, shipping, blending or sale of gasoline.  We 
represent the end-users of this increasingly contentious, yet completely 
indispensable product.  Our members are your constituents and as you 
know, they are very concerned about whether gasoline is going to remain 
readily available at a reasonable cost in the United States, or if we are 
slowly moving toward an era of much higher prices with even less 
reliable supplies of fuel.
        After Hurricane Katrina ravaged New Orleans and the Gulf Coast, 
Americans paid the highest prices ever for a gallon of gasoline in this 
country:  an average of $3.05 per gallon on Labor Day Monday of last 
year.
        As frustrating and unpleasant as that experience was, the public 
clearly understood that a dramatic natural disaster had befallen the 
southeastern United States.  They heard and read that the storm harmed 
vital components of our energy infrastructure.   And while fuel prices 
were exceptionally high, it was a common belief that the situation would 
be temporary and that gas prices would come back down.
        Since the beginning of 2006, however, the national average price of 
self-serve regular unleaded gasoline has jumped from $1.78 per gallon to 
$2.92 per gallon; a whopping increase of $1.14 per gallon.   With 
hurricane season around the corner, and because fuel prices now seem to 
be rising significantly higher with each passing year, many motorists are 
alarmed that rising gas prices have become a permanent part of our lives 
in this country.
        They are concerned because this year's price increase will cost a 
typical family about $1,260 more per year in gasoline expenditures, or 
about $100 more each time the monthly gasoline credit card statement 
arrives in the mail.   AAA calculates this increase on the assumption that 
the average vehicle consumes 550 gallons of gasoline each year as 
reported by the Federal Highway Administration and the average 
household owns more than two vehicles.   
        An extra hundred dollars per month may not sound like much to 
some people, but it is helpful to remember that an estimated 50 percent 
of American families say they always or frequently live paycheck to 
paycheck, according to research by the Consumer Federation of 
America, and the median household income in the United States is 
$45,000 per year, according to the U.S. Census Bureau.   With these 
realities in mind, it is easier understand why a sharp, unexpected hike in 
fuel prices can be a threatening financial setback for many citizens.
        Of course, pain at the pump is not felt equally. It depends on where 
you are on the economic ladder.  If you are among the sizeable group 
that can readily afford a large, luxury vehicle that may not be especially 
fuel-efficient, the high price of fuel is mostly an annoyance.    
        Or, if you are an urban dweller with access to mass transit, and one 
who rarely if ever drives a car, gas prices may be little more than an 
abstraction.  But for most of America's 200 million licensed drivers, high 
gas prices are a real problem.
        Part of the focus of today's hearing is to discuss what else the 
Federal government might do to help reign in the price of gasoline or 
help offset its impact on motorists.  AAA has a few ideas to share with 
you.
        The energy problems consumers are experiencing today will not be 
solved overnight.  Although our association has worked for many years 
to encourage fuel conservation by motorists and has provided members 
and the public with helpful advice for doing so, the magnitude of the 
issues before us require an increase in thoughtful leadership from federal 
and state lawmakers.
        America's energy woes are complex and far reaching. The gasoline 
price volatility consumers are experiencing at the pump is the result of 
the escalating price of world crude oil, rapidly increasing world-wide 
demand for energy and America's growing insecurity as the world's 
largest importer of oil and gasoline.  Experts say the weakening of the 
dollar in response to our large trade and budget deficits may also be 
playing a significant role.  On the domestic side - and clearly of our own 
doing - there is price volatility spawned by the reliance in some markets 
on a variety of fuel blends to serve clean air or economic goals.
        America may not be able to control the world price of crude oil or 
influence demand in other countries.  But, we can exercise more 
influence over our own destiny.  But, to do so, will require leadership 
and action by the federal government, as well as active participation by 
consumers and business leaders.
        In the area of energy demand and especially demand for gasoline, 
more can and must be done to encourage conservation.  Motorists must 
reduce consumption by using their most fuel efficient car, avoiding 
unnecessary trips, maintaining their vehicles, driving "gently" and 
carpooling or using public transportation whenever possible.  We should 
avoid the impulse to horde gas or constantly top off tanks.  Even in the 
best of times there is not enough fuel in the system to fill every car and 
truck to the top of their fuel gauge.
        As previously stated, all consumers do not have the same economic 
incentives to do more with less.  Inexorably, rising prices hit hardest 
those at the lowest end of the income scale, and do not therefore 
constitute a workable fuel conservation or air quality improvement 
program.  AAA believes the nation - industry and government - must 
commit to achieving higher fuel economy standards on all vehicles.  
Congress should clarify that the Administration has the authority to raise 
fuel economy standards for passenger vehicles.  Once that authority is 
granted, the Administration should exercise the authority so that real 
gains are achieved in fuel efficiency without compromising safety. 
        Likewise, government should continue to work with the private 
sector in developing alternative fuel and vehicle programs. 
        In the area of energy security, a previous generation of Americans 
were wise to invest in a strategic petroleum reserve for the United States 
that has somewhat lessened the dangers of an abrupt disruption of oil 
imports.  Unfortunately the same can not be said with regard to gasoline.  
Hurricanes Katrina and Rita have taught us the United States needs a 
cushion of available gasoline in times of emergency, especially now that 
the nation imports more than 10 percent of its refined products from 
offshore.  AAA believes Congress and the Administration should explore 
measures that would enable a minimum level of mandatory refined 
product inventories. Such a system exists in Europe and was able to 
provide critical gasoline to the United States during production shortfalls 
that occurred following last year's hurricanes.  Should similar or worse 
disasters occur in the future, our ability to immediately move gasoline to 
areas that need it will again prove critical to people and the economy.  
        At present, AAA is concerned that the level of preparedness based 
on experiences from last summer's hurricane season have not resulted in 
meaningful short- and long-term action to address fuel availability.   
More planning must be done to ensure fuel is available during 
evacuations, in the immediate aftermath of storms or from other 
widespread damage, and in areas far-removed from a disaster site that 
might lose access to energy resources as a consequence.  Electricity 
generating equipment needs to be available at gas stations, for example, 
so fuel can be dispensed when power lines are down.
        In the area of boutique and bio-fuels, a much more coordinated 
approach is needed between the federal and state governments, and all of 
the many industries affected by changes in the way we make gasoline.  
Industries that are forced to frequently change the composition of their 
products, or make specialty products for small markets, lose efficiency 
and incur increased costs from a variety of causes that include raw 
materials, labor, maintenance, storage, transportation, research  and 
regulatory compliance.  Those costs are understandably passed to 
consumers, a process that becomes especially easy when the industry 
involved is operating with a minimum of spare capacity and low 
inventories.  Such a situation also invites speculation in the price of the 
commodity, further driving up costs to consumers.
        While this is an extremely complex problem and there are no simple 
solutions, AAA encourages federal and state officials to reach agreement 
on the use of a smaller number of fuel blends that will meet or exceed 
our clean air goals and be as widely used as possible. As these transitions 
are made, more careful attention must be paid to the implementation 
process by federal and state agencies.  Significant investments have 
already been made in boutique fuels, and untangling this apparatus will 
require careful oversight.  For example, the transition between MTBE 
and ethanol seems to have resulted in temporary fuel shortages in some 
locations and appears to be one of the contributors to today's high fuel 
prices.  That type of experience must not be repeated.
        As for the value of the dollar and its implications for the global 
price of oil, AAA leaves that topic to others who are much more qualified to 
comment.  It is important for Congress and the White House to resist 
measures that would excessively subsidize energy to make it cheaper for 
Americans while driving up the nation's indebtedness. 
        Thank you again Mr. Chairman for allowing AAA to address this 
distinguished Committee.

	CHAIRMAN BARTON.  We thank you.  We now welcome Dr. Cooper, 
and your testimony is in the record and you are recognized for 8 minutes 
to elaborate on it.
        DR. COOPER.  Thank you, Mr. Chairman.  I appreciate the 
opportunity to testify, particularly after this morning, since I will address 
specifically many of the questions that were raised.  I would like to say 
the same facts, different story.  I believe the lack of competition, 
capacity, and mismanagement of short-term supplies are at the core of 
increasing gasoline prices, and this is true of the global crude market and 
the domestic refining market.
	In recent years a frenzy of trading in energy commodity markets has 
added to the upward spiral.  If this were a free market, if this were just 
supply and demand, there would be 15 million barrels a day more of 
production capacity in the crude market and at least three to five million 
barrels a day more for refining capacity in the domestic market.  These 
are not decisions that are made according to simple economic supply and 
demand forces.  The gasoline market is rigged.  It is rigged against the 
consumer and we simply cannot allow political and strategic behaviors to 
run the price up.  It would be a buck 50 if this were really a supply and 
demand market.  We simply cannot allow these decisions to run the price 
up and then tell consumers to pay the price.
	In the past 15 years the petroleum products supplied in the U.S. 
market has increased twice as fast as refining capacity.  Gasoline 
consumption has increased over two and a half times as fast as refining 
capacity, and while gasoline consumption was increasing by about 20 
percent, the amount of gasoline and blending components in storage 
decreased by 6 percent.  Self-sufficiency requires substantial spare 
capacity.  We are not short one to two million barrels a day of capacity, 
we are short five to six million barrels a day, if you look at the spare 
capacity in truly competitive industries.
	The tightening of the domestic gasoline market was a natural result 
and the intended purpose of the merger wave that took place in the 1992.  
ExxonMobil, Chevron Texaco, ConocoPhilips Tosco Unocal, BP Amoco 
Arco.  There are four where there used to be eleven.  As a result of that 
merger wave, four out of five regional refining markets and 47 out of 50 
wholesale gasoline markets in the United States are concentrated by the 
Department of Justice's guidelines for measuring markets.
	With market power overpriced, oil companies have raised the 
domestic spread; that is a little bit bigger than the crack spread we heard 
about this morning, mostly made up of the crack spread.  They have 
raised that domestic spread by over 30 cents per gallon since the late 
1990s.  Five years running, the return on equity earned by the major oil 
companies has exceeded the Standard and Poor's industrials.  That had 
not happened in the previous 30 years.  The last two years have set new 
records.  Using the S and P industrials as a base, we estimate that in the 
past 6years they have generated excess profits of over $100 billion.
	The cash flow in the industry for the large companies exceeds the 
growth in capital expenditures by more than $100 billion.  The industry 
is piling up cash at unprecedented rates.  The three American majors 
alone increased their cash on hand by $30 billion, their total current 
assets by $67 billion and bought back $35 billion of their outstanding 
stock.  We know where the excess profits have gone.  They are sitting in 
the bank accounts of the major oil companies.  The domestic refining net 
income has increased by $23 billion since 2002.  That is why the crack 
spread has increased.  Yes, there are some costs there, but unequivocally, 
it has become a profit center for the oil companies.
	Now, things have gotten so bad in the domestic market that even the 
DOE has recently recognized that the upward pressure placed on the 
gasoline market by tight conditions here may, in fact, be pulling up the 
world price of crude.  Let us be clear.  The U.S. is by far the largest 
gasoline market in the world.  When we watch when a political entity 
like OPEC watches the domestic spread go up and up, when they watch 
the profits of oil companies go up and up, they understand that there is 
more consumer surplus, more rent to be extracted from consumers.  And 
so the price of crude may, in fact, be chasing the price of gasoline up in 
the United States.
	And to make matters worse, the financial markets have experienced a 
massive increase in volume;  $10 billion a month for the last 40 months.  
A massive increase in volatility, a massive increase in risk.  Some people 
estimate that as much as 20 percent of the price of oil traded in that 
market, it has to do with the risk volume hedge premium.  That works 
out to 30 cents a gallon.  Interestingly, we have the question raised about 
West Texas Intermediate and why that price seems to have increased 
much more than the price of crude.  In point of fact, refiners don't pay 
West Texas Intermediate spot price for the crude they acquire, they pay a 
refiner acquisition cost and the EIA should not use West Texas 
Intermediate to calculate the crack spread.  They ought to use the actual 
refiner acquisition cost of crude.
	I would urge you to tell them to do that and show you what has 
happened to the spread, because in the last 5 or 6 years West Texas 
Intermediate has lost touch with the physical fundamentals in the market.  
That difference has increased, a study we did last year and we put in 
earlier this year on natural gas, suggests how that can operate.  More 
money, ten, hundreds of billions of dollars are chasing the same amount 
of physical commodities in these markets.  And frankly, when I went to 
college, they used to tell me too much money chasing too few goods is a 
prescription for inflation.  That is what is happening in these financial 
markets.
	There are obviously no short-term solutions.  We wish you would 
have started a real long-term solution 5 years ago, 6 years ago when we 
first testified.  In fact, we would be in the mid-term, by economic 
standards, if we had started.  So we think that policymakers really have 
to look at the fundamental structure of this industry.  You cannot be 
distracted by the excuse du jour that you get each spring as these prices 
go up.  We have been through boutique fuels, through ethanol switch, 
through low storage to a refinery fire here, a pipeline outage there, there 
is always an excuse to explain why prices run up, but the underlying 
problem is an infrastructure, an industry that is not resilient, has no 
excess capacity, and frankly, as you heard today, the oil industry will not 
build sufficient excess capacity to put down pressure on price.
	You are going to have to adopt public policies that get that job done.  
They have made it clear; they have shown for 10 years they won't.  In 
the short term, we think we need a strategic refinery reserve.  We think 
we need a strategic product reserve.  Last fall when the President 
announced that our European allies were going to send us more product, 
where were they getting it?  They were getting it from their strategic 
product reserves.  We don't have one.  We need anti-trust authorities that 
worry about unilateral actions that increase prices.  Market forces are so 
weak in this sector that you don't have to collude to raise prices.  You 
raise your price, you look over your shoulder, you know what your 
fellow members of the industry are going to do.  There are so few of 
them, they are easy to monitor and you can raise prices by unilateral 
action.
	We need commodity market regulators who look at all markets.  Yes, 
contracts are traded.  The over-the-counter market is not regulated; it 
needs to be regulated.  More changes hands there than on the regulated 
exchanges.  We need joint Federal-State task forces that look at this 
industry.  We need more eyeballs from different perspectives working 
together to look at these industries.  The Feds alone have not done the 
job that needs to be done.  
        In the long term, we really do have to address fundamentals and in 
fact, we have to rapidly increase our fuel efficiency.  Yesterday we put 
out a report entitled "50 by 2030."  The idea was simple.  We need to get 
to 50 MPG by 2030 and the analysis is straightforward.  A family that 
walks into an auto dealership today typically takes out a 5 year auto loan.  
They can buy a 40 plus mile per gallon car, spend $4,000 more and that 
will increase their auto loan payment.  But in fact, the gasoline savings at 
$3 a gallon will offset that entirely.  It is cash flow neutral.
	Now is the time to dramatically increase the target we have for fuel 
efficiency.  And finally, we need to expand our research, development, 
production, and distribution of biofuels.  We will need liquid fuels, no 
matter how efficient our cars get and that is where we need to find them.  
Thank you, Mr. Chairman.
	[The prepared statement of Dr. Mark Cooper follows:]

       PREPARED STATEMENT OF DR. MARK COOPER, RESEARCH DIRECTOR, 
                   CONSUMER FEDERATION OF AMERICA

        Mr. Chairman and Members of the Committee,
        My name is Dr. Mark Cooper.  I am Director of Research at the 
Consumer Federation of America (CFA).  I appear today on behalf of 
CFA and Consumers Union.  The Consumer Federation of America 
(CFA) is a non-profit association of 300 pro-consumer groups, which 
was founded in 1968 to advance the consumer interest through advocacy 
and education.  Consumers Union is the independent, non-profit 
publisher of Consumer Reports.  
        I greatly appreciate the opportunity to appear before you today to 
discuss the problem of rising gasoline prices and supply conditions.  

The Impact of Rising Gasoline Prices
        The American consumer is reacting to $3.00 per gallon gasoline 
prices differently now than they did last fall when I testified before the 
Committee about record high prices.   At that time, the immediate cause 
was obvious, the hurricanes in the Gulf.  Although, I raised concerns that 
price increases were unjustified and reflected fundamental problems in 
the industry. Profits soared last year, affirming the suspicions by many 
that oil the companies were exploiting severe market conditions. 
        Today's gasoline prices highlight fundamental problems in the 
industry - a lack of competition that enables oil companies to exploit a 
tight market that they have created and preserved through strategic 
underinvestment and mismanagement.  The prospect of sustained high 
prices at these levels is alarming to the average American household.  If 
gas prices average $2.75 per gallon over the course of this year, the 
typical family household will experience an increase of well over $1,000 
to their annual gasoline bill compared to the late 1990s.

Fundamental Flaws in Market Structure
        We have been pointing out what is wrong with this market for five 
years.  Record high prices and profits today reflect a six-year trend in 
rising gas prices for consumers.  The oil industry attributes this trend to 
rising crude oil prices and a string of supply disruptions in the market.  A 
closer look at the structure and function of the oil industry and the 
economic forces at work, reveals a market in which the forces of supply 
and demand are too weak to prevent abuse of consumers.  I submit for 
the record our study from 2004, which discussed this history in great 
detail.
        There is not sufficient competition on the supply-side to force 
producers to expand capacity and alleviate pressures on prices.  Demand 
is so inelastic that, when prices are increased, consumers cannot cut back 
sufficiently.   Having kept markets tight and eliminated competition, the 
oil companies can exploit any excuse to drive prices and profits up.  
        To better understand what is going on with gas prices, we must look 
back over the last decade and chronicle the mergers that swept through 
the industry eliminating competition and resulting in refinery closings 
and reductions in storage of product, coupled with the long term refusals 
to build new refineries.  I need only read the names of the major oil 
companies to remind you of the results - ExxonMobil, Chevron Texaco, 
ConocoPhilips Tosco Unocal, BP Amoco Arco.  There are four, where 
there used to be eleven.   As a result of that merger wave, four out of the 
five regional refining markets and 47 out of 50 state wholesale gasoline 
markets are concentrated.  
        The antitrust authorities will say they have not colluded.  They don't 
have to.  The industry has become so concentrated, the capacity has 
become so restricted, the barriers to entry so large, and it is so difficult 
for Americans to cut back on demand (economists say demand is 
inelastic), in short market forces in this industry are so weak, that they do 
not have to collude to raise the price level.  Each company acts 
individually and knows full well that its brethren will act in a parallel 
way.  
        The industry will tell you that existing refineries have expanded, but 
clearly not enough to build the spare capacity to put downward pressures 
on price.  They choose to keep so little spare capacities that they cannot 
even do spring cleaning without price run ups.  They do not fear running 
on short supply because there is little competition to steal their 
customers.  The industry has gained market power over price by strategic 
underinvestment in refinery capacity, just as OPEC has set the conditions 
for increases in the global cost of crude by restricting the addition of 
production capacity.

Excess Profits
        Last year the oil companies earned more income than in the five 
years between 1995 and 1999.  More importantly, four of the five highest 
years for profit in the oil industry since the Arab oil embargo of 1973 
have occurred in the past six years.  I have submitted for the record our 
study of oil industry profits over the past two decades, which 
demonstrates over $100 billion dollars of excess profits in the 2000 to 
2005 period.  We arrived at that estimate by comparing the return on 
equity of the oil companies to the Standard and Poor's industrials.  We 
corroborated it with an examination of the huge cash flow that they 
enjoyed, which is not being reinvested in the industry, since net new 
investment was a small fraction of net income over the 2000-2005 
period.  Free cash flow is piling up in huge masses of current assets and 
stock repurchases.   
 	Crude prices have gone up and so has the domestic spread and 
refiner margins.  Interestingly, the net income the large oil companies 
earn on their downstream operations - predominately refining but also 
marketing - in the U.S. has increased by almost 23 billion dollars since 
2002 compared to the increase in net income by the oil company's 
foreign downstream operations, which have gone up by only about 7 
billion dollars.  
        The most obvious indicator that market forces are working against 
consumers can be seen in the "Domestic Spread" over the past six years. 
The domestic spread is the difference between the refiner acquisition cost 
of crude oil and the pump price, net of taxes.  When we subtract taxes 
and crude costs from the pump price, we isolate the share that domestic 
refining and marketing take in the final price.  The bulk of this is for 
refining.  In the first quarter of 2006, it was over 30 cents per gallon 
above the historic average.  In April 2006, even before the dramatic price 
increases of April, it was about 40 cents per gallon higher than the 
average.  
        The evidence is quite clear that rapid consolidation within the 
industry has changed the market fundamentals and behavior patterns.  
They simply do not compete on price to increase market share.  They do 
not worry about running out of product, because they know they can 
simply raise the price of gas.   They closed refineries for business reasons 
and refuse to build new ones for business reasons.   

Pulling Up the Price of Crude
        This huge increase in domestic spread and refiner margins may have 
another effect.  Things have gotten so bad in the U.S. gasoline market 
that even the Energy Information Administration, in its most recent 
report This Week in Petroleum, recognizes that the tight U.S. gasoline 
market may be "pulling up" the price of crude.   After all, the U.S. is the 
largest single oil consumer in the world and the largest gasoline market 
by far, accounting for over a quarter of the world-wide total.  When the 
domestic spread and refining profits go up, it signals that there is more 
consumer surplus - more rent - to be extracted from the American 
consumer.  
        In recent years the upward pressure on prices and the demonstration 
of more rent to be extracted has been reinforced by commodity markets.  
The New York Times recently (April 29, 2006) noted in an article 
headlined, "Trading Frenzy Adds to Jump in Price of Oil," that some 
analysts believe a huge increase in trading volume, volatility and risk are 
adding as much as 20 percent to the price of oil.   That works out to 
about 30 cents per gallon.  I have submitted for the record a report I 
prepared earlier this spring for four Mid-West Attorneys General on the 
impact of commodity market trading on natural gas prices.  Therein I 
describe in detail the same factors - a continual increase in volume, 
volatility and risk - that are affecting both the crude oil and natural gas 
markets.

Recommendations  
        There are no short-term solutions, but I must remind you that the 
American gasoline consumer has been afflicted by this market for six 
years.  If we had started working on effective solutions six years ago, we 
could be well into the mid-term of a long-term policy shift.  Policy 
makers are going to have to reform the fundamental structure of this 
industry and change the underlying dynamics.  
        To address short-term spikes in prices, we recommend:

         Increased oil industry revenue funneled back into expanding 
our refining capacity.  
         We need a strategic refinery reserve and a strategic product 
reserve that are dedicated to ensuring we have excess capacity 
sufficient to discipline pricing abuse.  
         Setting requirements that guarantee an increase in refining 
and storage capacity to deal with the industry's failure to build 
capacity and keep adequate stocks on hand by creating strategic 
refinery and product reserves.
         Mechanisms that prevent pricing abuse in the energy markets 
including formation of a joint task force of federal and state 
Attorney Generals to monitor the structure, conduct and 
performance of gasoline markets, with an emphasis on unilateral 
actions that raise price.  

        To address long term fundamentals change the supply-demand 
balance in this sector, we recommend: 

         Accelerating the day when we will use less oil by setting 
aggressive, concrete targets for reducing America's oil 
consumption.  Specifically, we need concrete steps for reducing 
fuel consumption through aggressive, targeted improvements to 
vehicle fuel efficiency standards.  
         A national policy that promotes the research, production and 
use of biofuels.  

        Hopefully, the current round of price spikes will convince policy 
makers to take steps to build a better future for American consumers by 
addressing  market who's forces that are working against the American 
people and for the interests of a few. 
        Again, thank you for the opportunity to appear before you today.  I 
look forward to working with the committee on policies that can solve 
the nation's oil problem.  

	CHAIRMAN BARTON.  Thank you, Mr. Cooper.  We now want to hear 
from Mr. Wilkins on behalf of the florists and given that it is Mothers 
Day coming up, thank you for taking time to come talk to us.
        MR. WILKINS.  Thank you.  Mr. Chairman and members of the 
committee, the Society of American Florists and I greatly appreciate the 
opportunity to present testimony today on behalf of the floral industry.  
Gasoline prices, as well as all fuel prices are very important to our 
industry, maybe even more so than some of the other smaller businesses, 
as I will try to describe here today.  And with your permission, I will 
submit my written statement for the hearing record and just summarize it 
here.
	As a way of an introduction, I am the Executive Vice President and 
one of the second generation family owners of the Delaware Valley 
Floral Group, which is a floral distribution, logistics, and transportation 
provider which was founded by my father in 1959.  We work hard to 
remain a family business and we have an active third generation in the 
business today.  We employ over 500 people.  One of our divisions is 
Delaware Wholesale Florist.  We purchase and import floral products, 
including fresh cut flowers, cut greens, potted plants, and hard goods, 
which are florist supplies, from growers, manufacturers, and importers 
both domestically as well as worldwide.
	We then sell these products to retail florists, mass marketers, and 
other retail outlets.  They, in turn, resell them as is or convert them to a 
finished product for the end consumer.  It is important to note that other 
than labor cost, perhaps no single factor plays a bigger role in the bottom 
line of the floral businesses than does the cost of fuel.  Fuel costs impact 
every step in the market chain, as I would like to briefly describe.
	It is appropriate, though, to mention that, as you actually just said, 
that this week is, for the wholesale florists or really for the florist 
industry, one of the busiest weeks of the year.  And I would be really 
remiss if I didn't remind you all to buy flowers for your mother and your 
wives and your daughters, if they happen to be mothers, as well.  But 
when you do that, let us stop and think about something.  We estimate 
that up to 50 percent of the cost of those flowers could be attributed to 
transportation cost.  Our industry has very little ability to pass through 
added cost to our customers.
	Quickly, here is how the market chain works.  A large percentage of 
cut flowers sold in the U.S. are grown in South America, Europe, Africa, 
or Asia.  Our domestic production, which is also important to us, comes 
primarily from California, Florida, Washington, Hawaii, and Oregon.  
Obviously, all fuel costs, including gasoline, will play a big role in 
getting flowers from those places to you, the end consumer.  As an 
example, 32,500 boxes of flowers come in by air through the Port of 
Miami every day.  They are unloaded from planes and go through 
customs.  Then brokers move them again by motorized transport and 
they are reloaded onto other planes or trucks for shipments to importers' 
and wholesalers' warehouses.  	In our case, they are sent usually by one 
of our own refrigerated tractor trailers from Miami to New Jersey.  And 
if they are grown in the U.S., they would come from say, California all 
the way to New Jersey, usually by tractor trailer, sometimes by air, but 
when by truck it is a 36 hour, nonstop run by a team of tractor trailer 
drivers.  From our warehouses in New Jersey, the flowers are shipped via 
our fleet of 101 delivery trucks to our retail customers.  And we are not 
done yet.  From the retailer, they are usually delivered right to the 
customer's door, be it their homes, offices, to churches for weddings or 
other special events.
	The point is there are a lot of planes, trucks, and delivery vehicles 
involved in getting flowers from the grower to you and of course, they all 
use fuel: jet fuel, diesel fuel, and gasoline--all refined from oil.  You will 
also notice that I said refrigerated trucks.  Flowers are perishable 
products and we have to keep them cool.  At Delaware Valley, our policy 
is to keep them at 30 to 35 degrees and to make sure that they have been 
kept in that range from the time they are cut at the grower until they 
reach the retail florist.  This is what we call the cool chain.  As we all 
know, however, running refrigeration increases fuel cost and energy cost.
	How is our industry coping with all of this?  Well, back in 2004, the 
Society of American Florists did a survey of retail florists.  At that time 
gasoline was $2 per gallon.  About 50 percent of the florists said gas 
prices were hitting their profits harder than heating prices or healthcare 
costs.  Only 11 percent of the florists reported that they were able to 
increase product prices.  About half said they were increasing delivery 
fees.  Now gas is close to $3 a gallon.  These small businesses just can't 
cope with the continued rise in gas prices.  Keep in mind that they are 
also facing double digit inflation in healthcare costs, rising labor costs 
and even things like estate tax planning costs, just to mention a few other 
concerns.  Small businesses simply can't keep absorbing all these costs, 
especially when they can't fully pass them along to their customers.
	At our company, we use lots of diesel fuel.  In fact, we buy it in 
10,000 gallon tank loads, so we do get a discount.  However, we are 
coping with increases and unpredictability in prices which makes it not 
only expensive, but hard to plan ahead.  Two years ago we were buying 
diesel fuel for a $1.57 a gallon.  Today it is $2.74 a gallon, almost twice 
as much.  To cope with these prices, our company is experimenting with 
different kinds of fuel efficient trucks, but for us that means more capital 
investment.  We are encouraging our customers to place bigger orders 
less often.  We are using computer routing software to make deliveries 
more efficient.  Although we try to be as efficient as possible, we still 
have to impose higher delivery charges on our retail customers and our 
trucking division currently imposes a 22 percent fuel surcharge on its 
customers.
	I mentioned the floral industry has a limited ability to pay us 
through additional costs to our customers and why is that?  Flowers are a 
discretionary purchase.  We compete with wine and chocolate and teddy 
bears and jewelry and even dinners at restaurants.  Almost any kind of 
gift that you can think of is a competitor of flowers.  So if the price of 
flowers goes up too much, we lose market share to one of the competing 
gift items or industries.  The floral industry is working together to try and 
establish the kind of joint advertising that will help us to sell more 
flowers, but we don't want to see our efforts increase our market share 
only to be eaten away by higher prices at the pump.
	In closing, I applaud you for holding this hearing and for having the 
courage to ask the questions you are asking.  The U.S. needs a coherent 
national energy policy, but as a businessman, I am not here to 
recommend price controls or arbitrary government intervention.  As 
business people, we want to keep expanding our businesses and hiring 
more employees.  We very much appreciate the opportunity to be here 
and we look forward to continuing to work with you.  I would be pleased 
to answer questions.  Thank you.
	[The prepared statement of John Wilkins follows:]

      PREPARED STATEMENT OF JOHN WILKINS, EXECUTIVE VICE-PRESIDENT 
         & CIO, DELAWARE VALLEY WHOLESALE FLORISTS, ON BEHALF OF 
                      SOCIETY OF AMERICAN FLORISTS

                          SUMMARY OF TESTIMONY
                      SOCIETY OF AMERICAN FLORISTS

         The floral industry - growers, wholesalers, transporters, 
importers, distributors, and retail florists - represents a major component 
of the U.S. economy:  $19.5 billion, at retail.
         All of the businesses in that market chain are significantly 
impacted by the price of fuel.  Other than labor costs, perhaps no single 
factor has more power to impact the bottom line of floral businesses than 
the cost of fuel.
         The increases, and the unpredictability of changes, in fuel 
costs combines with other uncertainties and changes impacting the 
industry (increasing globalization of trade, growth of e-commerce 
and the Internet, other economic changes) to challenge the floral 
industry, just as those changes impact other small businesses in our 
economy.
         Up to an estimated 50 percent of the cost of flowers is 
attributable to transportation costs.
         Fuel costs impact every step of the market chain.  Imported 
flowers travel by air transport, which is significantly affected by the price 
of jet fuel.  At the port, motor transport moves flowers through 
Customs and then back onto planes, or onto refrigerated trucks, for 
shipment to wholesalers.  Domestic growers also must ship flowers 
either by truck or by air.  Wholesalers then must ship flowers to 
retail floral shops, supermarkets, and other customers.  Finally, 
florists usually deliver floral arrangements directly to the 
consumer's home, office, or event location.  Each step in the market 
chain incurs transportation costs, which are significantly impacted 
by fuel prices.
         Adding to transportation and storage costs, flowers are a 
perishable product, and must be shipped and stored under refrigeration.  
Growers and importers precool their products before shipping and 
require that trucks be precooled and stay cooled during transport.  
Wholesale and retail florists also must maintain and ship product 
under refrigeration.  Running trucks and delivery vans under 
refrigeration adds to fuel consumption and, therefore, to cost of 
transportation.
         The industry is assessing fuel surcharges, working to 
achieve better efficiency in delivery, and trying in other ways to counter 
increases in fuel prices.  However, there is a limit to which fuel costs can 
increase without driving profits to zero - or into losses.
         Flowers are a discretionary purchase, competing for the 
consumer's dollar against other gift items (wine, chocolate, etc.).  
Therefore, increases in the cost of fuel cannot be fully passed through to the 
consumer without decreasing overall sales.
         The U.S. needs a coherent energy policy, that will help our 
economy and our businesses, large and small, be able to survive and deal with 
energy costs as a predictable cost of doing business.

        Mr. Chairman and distinguished members of the Committee, the 
Society of American Florists appreciates the opportunity to present this 
testimony, discussing a topic very important to the floral industry, as it is 
to other segments of our economy:  the price of fuel.
        I am John Wilkins, the Executive Vice President, and one of the 
second-generation family owners of the Delaware Valley Floral Group.  I 
have served on the Board of Directors of the Society of American 
Florists, and I am also a past president of the Wholesale Florist and 
Florist Supplier Association.
        The Delaware Valley Floral Group is now in its third generation.  
One of our divisions is Delaware Valley Wholesale Florist, which was 
founded by my father in 1959.  Our headquarters is in Sewell, New 
Jersey, and we have locations in Edison, New Jersey; Baltimore, 
Maryland; and Miami, Florida.  Another one of our divisions, Flower 
Transfer, provides transportation and logistical services to the floral 
industry, and operates a fleet of tractor-trailers.  
        The Society of American Florists (SAF) is the national trade 
association representing the entire floral industry, a $19.5 billion 
component, at retail, of the U.S. economy.  SAF membership includes 
some 10,000 small businesses:  growers, wholesalers, retailers, 
importers, suppliers, educators, and related organizations, located in 
communities nationwide and abroad.  It encompasses a market chain 
including growers, wholesalers, transporters, importers, distributors, and 
retail stores - all of whom are impacted by the price of fuel.  The 
industry produces and sells cut flowers and foliage, potted foliage plants, 
potted flowering plants, bedding plants, and florist supplies.
 	U.S. Department of Commerce and Department of Agriculture 
figures show that there are over 10,000 floriculture growers in the U.S., 
over 1,000 wholesalers, and over 22,000 retail florists.  More than 
350,000 people are employed in commercial greenhouses, wholesale 
florists and retail florists.  Despite the industry's large size and economic 
strength, it is made up largely of small, family-owned businesses.  Many 
floriculture growers, wholesalers and retailers own businesses which 
have been in their families for several generations.
        As a wholesale distributor and logistics provider, Delaware Valley 
purchases floral products - fresh-cut flowers, greens, flowering and 
foliage plants and hard goods -- from growers, manufacturers and 
importers, and sells them to retail florists, supermarkets, mass marketers, 
and other retail outlets of flowers, greens, and floral products, who in 
turn resell them to the end consumer.  As a result of the increasing 
globalization of trade, the growth of e-commerce and the Internet, and 
changes in the U.S. and global economy, the flower industry, just like 
many other small businesses across America, continues to experience 
challenges.

              FUEL COSTS IMPACT EVERY STEP IN THE MARKET CHAIN
                          OF THE FLORAL INDUSTRY

        Other than labor costs, perhaps no single factor has more power to 
impact the bottom line of floral businesses than the cost of fuel.  From 
growers to wholesalers to retailers, an increase in fuel prices can 
dramatically impact the bottom line.  I want to talk with you more about 
how our industry works - the various points at which gasoline and diesel 
fuel, as well as jet fuel, impact the industry.  I think it will help you move 
from the impact of fuel prices on consumers and consumer spending to 
the impact on businesses, employment, and our economy more generally.  
        As I discuss the various parts of the market chain, I will talk about 
jet fuel, diesel fuel, and gasoline prices - all of which factor into the 
prices of floral product as it moves from grower to importer or wholesaler to 
retailer to consumer.
        As you buy flowers for your mothers, or wives, or daughters, this 
coming weekend in celebration of Mother's Day, I am estimating 
that up to 50 percent of the cost of the flowers is attributable to 
transportation costs.  That's not counting the percentage that might be 
attributable to other fuel prices -heat for greenhouses and electricity for 
refrigeration, for example.  Transportation costs alone, at a very rough 
estimate, account for up to 50 percent of the cost of flowers you buy.
        First of all, a large percentage of the most popular cut flowers sold 
in the U.S. are grown overseas - in South America or in Europe - even in 
Africa and Asia.  And our domestic production of cut flowers - which 
remains a very important part of the industry as well - takes place 
primarily in California, Florida, Washington, Hawaii and Oregon.  
Obviously, fuel costs to transport those flowers through the market chain 
to consumers are going to play a big role.  
        If produced in, say, Colombia, the flowers must come by air carrier, 
to one of the major U.S. ports - usually Miami.  Depending on the 
country of origin, flights could come also through JFK in New York, 
through Los Angeles and San Francisco, through Chicago, through 
Houston.  The cost of air transportation, obviously, is significantly 
affected by the price of jet fuel.
        When the flowers reach the port - say, of Miami - they are unloaded 
from the plane and taken through U.S. Customs.  After they have cleared 
customs, the broker then moves them -- again by truck or other 
motorized transport - and they are loaded either onto another plane or to 
refrigerated trucks, for shipment, usually to importer's warehouses or to 
wholesalers. From the port, the flowers are again stored under 
refrigeration until they are shipped to the retail florist or other outlet for 
sale to consumers.  Taking my example, the Port of Miami alone handles 
32,500 boxes of flowers every day - so these operations are large, 
complex - and when an increase in the price of fuel is added into each 
step, it has a big impact on the industry's ability to plan and to survive.
        Flowers will not perform well for the consumer unless they are 
maintained at a cool temperature.  Extreme heat can destroy flowers 
quickly.  At the very least, it will result in a greatly reduced vase life for 
the consumer.  Research in our industry has found that roses, for 
example, will last much longer if they are kept at something between 30 
and 35 degrees F. during the entire time from cutting until they reach the 
ultimate consumer.  Delaware Valley's policy is to require that all trucks 
maintain refrigeration within that range.  Refrigeration makes truck 
transportation more expensive.
        The process described above is also true for flowers coming from 
U.S. growers into the market.  From California, Florida, or wherever they 
are grown, the product must be carried quickly, with proper refrigeration, 
to the wholesale and the retail customer - and finally, of course, to the 
ultimate consumer.  Again, refrigeration is required and contributes to 
the fuel costs.  Growers and importers precool their products before 
shipping.  They also require that the tractor-trailer rig which carries 
flowers from the farm or warehouse to the wholesaler be precooled.  The 
truck may have to sit in the yard with its engine and refrigeration 
running, while the trailer gets cool enough to load the flowers safely.
        Next, the product moves again to one of the U.S. wholesale 
operations like Delaware Valley.  It must be carried in refrigerated 
tractor-trailer rigs or by air, for example, from Miami to Philadelphia.  
Time is of the essence in floral transportation, so we want to get the 
flowers into our refrigerated warehouses and back out to our florist or 
other customers as quickly and safely as we can. 
        For our operations, once the product gets to Delaware Valley, we 
have a fleet of 101 refrigerated chassis-cab delivery trucks, which move 
floral product from our facilities to those of the retailers, supermarkets, 
and other customers all over the U.S.  
        All of the Delaware Valley trucks - the tractor-trailer rigs and the 
chassis-cab delivery trucks -- use diesel fuel, although the trucks of many 
wholesalers may be using gasoline.  Either way, the unpredictability of 
fuel prices makes business planning difficult.  Two years ago, our price 
of diesel fuel was $1.57/gallon.  Today, it's $2.74/gallon - that's an 
increase of $1.25 over two years.  (It should be noted that Delaware 
Valley buys diesel fuel in 10,000-gallon lots.  At the pump, the price 
would be significantly higher.)  But even though we can achieve 
economies of scale, the price increases will impact our business 
planning, and, ultimately, our ability to make a profit.  And it's more 
complex than that:  the average diesel fuel price in 2005 was 
$2.26/gallon -- but in January of 2005, the price was $1.85.  The yearly 
average price in 2003 was $1.29/gallon.  For the business owner, you can 
see how difficult it is to predict what the costs are going to be and 
incorporate that into realistic business planning. 
        Once the flowers reach the florist shop, we still aren't finished with 
transportation costs.  As you well know, florists usually deliver floral 
arrangements directly to your home or office - so we have yet another 
incremental, fuel-cost addition:  here, the price of gasoline for the 
florist's delivery truck.  The great majority of floral purchases are 
delivered directly to the consumer - to the home, the office, or the 
location of a special event.

           HOW ARE FLORAL BUSINESSES COPING WITH INCREASED COSTS?

        At the end of 2004, SAF did a survey of retail florists which showed 
some of the following results:

        "With gasoline prices still hovering around the $2-per-gallon mark 
. almost 40 percent of recent retail florists responding say they're 
absorbing higher gasoline prices so far - compared to the 50 percent 
who reported absorbing higher prices in May.  Eleven percent of 
recent respondents reported they've increased product prices, versus 
7 percent earlier in 2004.  About half of respondents reported that 
they have raised delivery fees to compensate for higher costs.  Fee 
increases (per delivery) range from 50 cents to $4.  Florists reported 
other ways of compensating - including redesigning delivery routes, 
calling customers to make sure they're home before deliveries, and 
urging drivers to fill tanks whenever they see lower gasoline prices.  
About 50 percent of these respondents say gasoline prices are 
affecting profits more than heating prices and health-care costs.  
In December, 2004, at the time of this survey, the national average 
price per gallon of regular gas was $1.95, about 31 percent higher 
than the same time the year before.  The West Coast reported 
averages of $2.16 per gallon and the Gulf Coast reported a lower 
average of $1.84 per gallon."  [SAF Press Release, December 9, 
2004]

        That survey was taken a year and a half ago - with prices around the 
$2/gallon mark.  The average retail price of a gallon of gasoline rose 
almost four cents across the nation during the past two weeks, according 
to a Lundburg Survey released last Sunday.  Self-serve regular averaged 
about $2.94 a gallon, and the average price of mid-grade was 
$3.04/gallon.  Premium hit $3.14 a gallon, compared with $3.10 two 
weeks ago.  SAF is again surveying retailers to see how they are 
responding, in this very busy period right before Mother's Day.
        I haven't touched, in this testimony, on the cost of natural gas, 
because it's not a topic of this hearing.  Natural gas is used to heat the 
greenhouses in which flowers and plants must be grown in most parts of 
the U.S. - and natural gas prices, as you know, have also increased 
dramatically.  Grower after grower has mentioned to us how the situation 
is reaching crisis proportions.  Growers in the U.S. are closing or sealing 
off portions of their facilities, letting greenhouses lie vacant, because it's 
too expensive to heat them.
        Our industry can't continue to absorb those price increases - which 
impact every step of the chain, from grower to consumer.  All of the 
costs of transportation must get pushed along and reflected in the price of 
the product, if our market system is to work.
Yet there is a limit to which they can be passed along to the ultimate 
consumer.
        We in the floral industry have an added wrinkle.  Flowers are not a 
necessary purchase - they are a discretionary purchase.  We compete for 
the consumer's dollar against things like wine, chocolate, or other gifts, 
even in good times - and in tighter times, we have to compete against 
other choices the consumer might have for available spending - movies, 
college educations, vacations, and so on.  The point is, there is a limit - 
and not a very high one - to how many costs we, as businesspeople, can 
pass through to the consumer.  So the increases in fuel costs are tending 
to come out of our own profits - at every step along the chain:  brokers 
and importers in Miami, trucking companies, airlines, growers, 
wholesalers and, of course, the retailer who finally sells the product to 
you.
        Even though Americans think of flowers as an integral part of 
holidays - Valentine's Day, Mother's Day, Thanksgiving, Christmas - 
and as an integral part of formal occasions - like weddings, funerals, 
christenings, business banquets, and high-school proms - Americans are 
not high per-capita consumers of flowers when compared with our 
European counterparts.  We in the U.S. spend about $31 on cut flowers 
per capita per year, compared with $55 in Denmark or Belgium, $72 in 
Holland, or $112 per capita in Switzerland.  Our industry continues to 
work together on joint marketing and promotion efforts for flowers, to 
increase the demand.  But to make those efforts work well, we have to 
supply good-quality, long-lasting product to the consumer when and 
where the consumer wants to buy it.  Fuel costs are a major 
consideration.
        To make matters worse, the traditional retailers in our industry - 
made up by far for the most part of small business owners, often family-
owned businesses, sometimes owned by a family for three or four 
generations - are now under extreme pressure from the supermarkets and 
mass marketers.  Retail flower shops are a difficult business, and retailers 
go out of business at a relatively high rate.
        All of these incremental fuel cost increases from each segment of the 
market chain - fuel for air transportation, truck fuel, gas to deliver to 
consumers' homes and offices - add together to compound the final cost 
of the product, and to make business-planning very challenging.  And of 
course the real question is whether those additional, sometimes very 
unpredictable costs can be passed along to the consumer or absorbed by 
the business without harming the business and ultimately, our economy.
        What are we doing at Delaware Valley to help counter these 
increased costs and avoid laying off employees or downsizing our 
business?  We have had to increase our delivery charges to our retail 
customers.  We are imposing a 22 percent fuel surcharge over our normal 
rate to our transportation customers (product that, for example, we might 
carry for other wholesalers, product carried to mass marketers, or product 
carried on "back-hauls," (the return-run of an otherwise-empty tractor-
trailer).  At this point, most of the transportation companies are also 
assessing fuel surcharges.
        We are a large company, and our transportation is efficient.  We 
utilize computer tracking.  We are experimenting with different types of 
fuel-efficient trucks.  We are encouraging our customers to place fewer, 
but larger orders to save on transportation costs.  We're doing everything 
we can to counter the increases in gas and other fuel prices.  But we, as a 
company, would not be able to continue operations without imposing 
these fuel surcharges at this point in time.  As rising fuel costs cut further 
and further into businesses' already low margins, the additional costs 
added will quickly drive profits to zero - or into losses.  

                               CONCLUSION

        The U.S. needs a coherent energy policy:  not price controls, not 
arbitrary government intervention - but an energy policy that will help 
our economy, and its businesses, large and small, be able to survive and 
deal with energy costs as a predictable cost of doing business.  
        As a business owner, we would encourage Congress and the 
Administration to work toward a more coherent national energy policy:  
for example, encouraging alternate fuel sources, encouraging more U.S. 
domestic production under environmentally safe practices.  Government 
interference in the marketplace itself is usually viewed negatively by 
business, of course.  The law of unintended consequences often seems to 
follow direct government intervention.  But for business owners, like me 
and my family, to continue to employ and provide benefits for our 
employees, and plan ahead for our business operations, we must be able 
to buy fuel at reasonable, and reasonably predictable, costs.
        I very much appreciate your giving the floral industry the 
opportunity to present some examples of the impact of fuel costs on our 
industry, and our employees, nationwide.

	CHAIRMAN BARTON.  Thank you, Mr. Wilkins.  The Chair 
recognizes himself for the first 5 minute question round.  Mr. Cooper, 
your testimony is always thoughtful and on the point.  I appreciate that.  I 
have found out that crude futures on the New York Mercantile, the 
margin rate is set by the traders themselves; it is not a regulated rate.  
And currently it is somewhere between 3 and 6 cents per dollar per 
contract, which means for about $300 to $400 you can control a thousand 
barrel contract that is worth in today's prices, $74,000.  On the other 
hand, the margin requirement on a refined gasoline futures contract is 
over $10,000.  Would it be a good idea for the Congress or the regulators 
at the CFTC or the SEC to set a minimum margin requirement on crude 
futures by statute or regulation?
	DR. COOPER.  Well, I frankly think that we need to get a much better 
understanding of what those markets are doing to us.  I mean, if you look 
at the growth of trading in that market, and obviously low margin 
requirements, there was a popular phrase way back when in a Texas 
company called "asset-light", "asset-light" gets you in trouble, as we 
have learned.  So what you allow here is you allow people to commit to 
huge sums of financial obligations, counter party risk, with very little 
assets behind it and that encourages more and more trading.  If you look 
back at these markets, the dollar value of trading for energies, they 
include wood there, but I don't think it is wood that is driving those 
numbers, has been increasing by something like $10 billion a month 
every month for 40 months.
	CHAIRMAN BARTON.  But my question is--
	DR. COOPER.  Yes, and that helps.  So the answer is that if you 
discipline people by forcing them to back their promises up with more 
cash, you will reduce the number of people who are--
	CHAIRMAN BARTON.  I had the President of IMEX in my office 
yesterday and he thinks it is a bad idea, obviously.  He doesn't want 
anybody telling him how to set the margin requirement.  But he does 
state that if the market rate requirement were to go up, there would be 
less speculation in the market.  Now, he doesn't necessarily think that 
would be a good thing.  His opinion is the speculators provide the 
crediting and they take the opposite side of every trade and that if we 
took the speculators out of the market, the price of gasoline would 
probably go up because you would have a less liquid market.  But it 
seems to me, to the extent there is a speculative aspect to the crude price, 
that making it more difficult to speculate would tend to cool off the 
market, which would tend to bring prices down.
	DR. COOPER.  The quick fee is not free, and that is the point they 
miss.  Every time that a transaction takes place, if it is more volatile, if 
there is more risk, there are transaction costs, right?  So every time those 
transactions take place, you are increasing the risk premiums.  You have 
to pay more to get someone to actually part with a barrel of oil and over 
the last two or three years folks have looked at this liquidity, the 
increasing volatility and risk have added dramatically to the traded price 
of oil and we think that sets a target.  The people who own the physical 
commodity then start to shoot at--that is one step.  There are lots of other 
things we would like to see.  I think that resides in a different committee.  
I may be wrong.
	CHAIRMAN BARTON.  We can always try.
	DR. COOPER.  But, you know, the over-the-counter market is 
unregulated.  Traders don't have to report.  They are less regulated than 
bankers, for sure.  With bankers we require them to register reports, have 
a clean criminal record, for instance, and then we set their margin 
requirements.  And frankly, in a certain sense, energies are more 
important than money to this economy and they ought to be better 
regulated.
	CHAIRMAN BARTON.  I need to ask a question of Mr. Sundstrom.  I 
think in your testimony you indicated that you supported the creation in 
the United States of a refined product reserve, is that correct?
	MR. SUNDSTROM.  Yes, that is correct.
	CHAIRMAN BARTON.  Who would pay for that?
	MR. SUNDSTROM.  Well, ultimately, the consumer would pay for it 
through taxes or through increased price in the fuel, but you were just 
talking about volatility in the futures market.  Really, our concern for a 
long period of time, many years, has not been so much the price of 
gasoline, although we are mortified that it is as high as it is now.  Our 
concern has been the stability of the price and we think that by having a 
cushion of reserve gasoline in this market, particularly with the smaller 
number of refiners that are operating in the United States, that ought to 
help stabilize prices, particularly when we are faced with situations such 
as we have had in the last few years, the hurricanes in Florida.
	CHAIRMAN BARTON.  Mr. Cooper mentioned this, too.  Would you 
just tell the domestic distributors or refiners to maintain a higher than 
normal inventory, like they do in Europe, or would you like to see the 
Government create a stockpile?
	MR. SUNDSTROM.  I think the most direct way to do it would be to 
require it of those that produce the fuel.
	DR. COOPER.  You have either or both.  Those are the two ways to 
get it.  You could require a percentage of your expected sales to be in 
storage and/or you could have a Federal stockpile to be used for other 
purposes or similar purposes.
	CHAIRMAN BARTON.  I have got about six more questions, but it is 
not fair to the other Members.  My last question is to you, Dr. Cooper.  
You always give great potential solutions and I am serious.  I have never 
heard you say anything that didn't make some sense, at least to think 
about doing and I am sincere, but as smart as you are, not once today did 
you mention any kind of a supply side component to your solution.  You 
didn't mention drilling in ANWR, you didn't mention drilling in the 
OCS.  Is it just anathema to the consumer groups to have a supply 
component to your solution matrix?
	DR. COOPER.  Well, I actually did mention a supply component.  I 
talked about biofuels and alternative fuels.
	CHAIRMAN BARTON.  Well, I guess so.  What percent of the market 
do you think--
	DR. COOPER.  Well, but the problem with that supply side solution is 
one, it would not have a significant impact on the price of oil.  It is a 
mature resource base, it is not going to change the balance in the world 
in the long term, and above all, the same entities will control that 
resource that have underinvested in their capacity, that are still not 
treating oil, if it is worth $50 or $60 a barrel, so when we look at supply 
side, biofuels have three characteristics that we find very interesting.  
One, it is a different raw material.  It can be corn, it can be switch grass, 
it may be coal.  I am sure I might get a question about that.  Okay, it is a 
different raw material.
	Two, those ethanol plants compete with refineries.  They expand the 
capacity about our ability to produce liquid fuels.  And three, for most of 
these, it is a different set of actors, actors who are not part of the club or 
the game, okay?  And so in the scheme of things, we think that is where 
we get a much bigger bang for the buck is looking at those alternatives.
	CHAIRMAN BARTON.  Well, thank you, sir.  Mr. Boucher.
	MR. BOUCHER.  Well, thank you very much, Mr. Chairman.  First, 
let me say, Dr. Cooper, that I share the Chairman's view of the quality of 
your testimony.  I am continually impressed with your thoroughness and 
the fact that you research the subject completely and then make a 
comprehensive presentation.  You have certainly done that again here 
this afternoon.  And you have just answered my first question, which was 
the potential contribution on the supply side, that coal to liquid fuels can 
make.  We heard from the Energy Information Administration this 
morning that at a time when oil is priced at about $40 per barrel, the coal 
conversion to liquid fuels becomes economic and EIA is projecting well 
above $40 per barrel for the long term.  That is bad news, generally, for 
gasoline consumers, but it does point to the appropriateness of making 
some investments now and taking such steps as to further encourage the 
advent of coal to liquid fuels in this market.  I have some other questions 
for you, but let me just ask, would you like to make a brief comment 
about that potential?
	DR. COOPER.  Well, again, I have just sort of given you the reasons 
why we look for the alternatives and I would rather not get into picking 
and choosing which of those alternatives will be best.
	MR. BOUCHER.  That is fair enough.
	DR. COOPER.  I do think what we need to look at is whether there are 
structural impediments and critical decisions that can be made to 
promote the transition.  So we heard a lot today about the lack of 
infrastructure for the ethanol fuels.  The question is will the industry 
provide the infrastructure?  If not, how do we goose that?  What is the 
automobile industry doing about it.  So I think given that these 
alternatives are out there, we also need to look at the balance of 
subsidization.  There are some people who say the oil industry is heavily 
subsidized; some people will say it reflects a certain set of characteristics 
about the industry in terms of depletion allowances and so forth.  So we 
need to think about the balance so we are not tipping the scale one way 
or the other.
	MR. BOUCHER.  Let me move to a different area.  I believe you 
indicated that the domestic spread in the United States, the difference 
between what crude oil markets for and what the price at the pump is, is 
something on the order of 40 cents per gallon above the average.  Is that 
number essentially correct?
	DR. COOPER.  Above the historic average.
	MR. BOUCHER.  Above the historic average.  What is the historic 
average?
	DR. COOPER.  Well, if you look over the course of a year, it is about 
30-35 cents and that is the difference between the crack spread was only 
about 20, historically.  I am using the domestic spread which includes 
retailing.  So it is about 30 or 35 cents.  It has gotten a lot higher than 
that in the last 6 years.
	MR. BOUCHER.  And so that added component of 30 to 35 cents 
above the historic average, they would be 40 cents above the historic 
average.  It is attributable, I am sure, to a variety of factors, but if you 
had to target one, what would you nominate as the most prominent factor 
that leads to that and to what extent does the shortage of an adequate 
refinery capacity in the United States contribute to it?
	DR. COOPER.  Well, in the report we submitted for the record, we 
looked at an interesting contrast.  We look at the large American oil 
companies.  They have U.S. refineries and foreign refineries.  The rate of 
profit on the U.S. refineries has increased twice as fast as the foreign 
refineries in the last 5 or 6 years.  The explanation for that has to be a 
difference in the market structure.  Our market is much tighter and you 
heard Mr. Gruenspecht this morning talk about the fact that the European 
market had excess capacity because of the switch to diesel.  We didn't 
have that capacity and so the ability to raise the profit margin here faster 
than abroad is a function of market structure.
	MR. BOUCHER.  Some have suggested that because of the restrained 
refinery capacity in the United States we are seeing record profits for the 
refiners and the fact they are realizing those record profits is largely the 
reason that we are not seeing the construction now of adequate refinery 
capacity in the United States.  Maybe that is of necessity a subjective 
conclusion that one must reach, but my question to you would be is there 
any evidence that would point to that conclusion?
	DR. COOPER.  Well, there was evidence in the mid-90s discovered in 
the merger proceedings where, and you heard mention of that this 
morning, the corporate memo said we've got to tighten this market up, 
and after the mergers, refineries were closed.  The market was tightened 
in that respect.  Studies were done of the behavior of the players in that 
market.  The Iran study I cite in my testimony, in which they discovered 
that refiners used to compete for market share.  They would cut their 
prices.  They used to worry about going short, but now they don't.  Why?  
Because they know they can put the price up.  So in a certain sense, the 
relationship between the price and the structure is always conjectural.  
Occasionally you will find a smoking gun in a corporate memo.  Well, 
we got those.  So at every level we have the evidence that this has hurt 
us.  GAO did a study, as well, which said it also hurt us.
	CHAIRMAN BARTON.  Will the gentleman yield?
	MR. BOUCHER.  I will be pleased to yield.
	CHAIRMAN BARTON.  I think, to be fair to the refineries, and I am not 
defending their margins today, but in some of those time periods they 
were loss leaders.  The refinery business, at one time in the United 
States, was not a profit center.  It is now, that is not necessarily a bad 
thing that we can argue.  I think your testimony about the concentration 
by region is worth further investigation.  So I am not attacking your main 
point, but we need to be fair to the refiners.  There was a time in this 
country that they were losing money and that is one of the reasons some 
of those mergers happened, because some of the major oil companies 
wanted to get out of the refinery business because they didn't think they 
could make any money.
	DR. COOPER.  And at the same time, we have to remember that a 
great deal of the refining capacity in this country is integrated and so 
where the profits are taken is a function of the transfer price.  And so 
when the price of crude oil on the market goes to $65, I am self-
supplying 50 percent of my capacity with oil I own.  My cost of binding 
that crude didn't go up to $65.  I could transfer that oil to my refinery at 
the old price because my cost didn't go up and my refinery profits would 
go way up.  In the alternative, I could take the world oil price and then 
transfer that to my refineries; my profits would look smaller.  So it is 
correct, I think, that we also need to look at these integrated companies 
and their overall profit.
	CHAIRMAN BARTON.  But isn't it true that the big, big integrated 
companies tended to shed their refinery systems as opposed to acquire 
more?
	DR. COOPER.  Certainly, through the 1990s and after the mergers, we 
closed about 50 refineries.  They were a function of those mergers.  
Earlier we heard about the tea kettles, that was a small refiner bias.  We 
had decided in the 1980s we wanted to have these things.  We can debate 
whether that was a good idea, although we look back on that excess 
capacity industry, it cost us money.  We look back on that excess 
capacity industry and say hey, that turned out to be a pretty consumer 
friendly environment, even though it raised the cost a little bit.  So in 
fact, we can have the refining industry we want by setting the public 
policy and you are right, it was a thin margin business for a while in an 
average margin integrated company.  Now it has become a pretty fat 
margin business in a very fat margin integrated company.
	MR. BOUCHER.  Mr. Chairman, if you would indulge one further 
question, this will be brief.  Dr. Cooper, you have referenced the need for 
reserves.  You mentioned both the need for a product reserve and the 
need for a refinery reserve.  Mr. Dingell and I are introducing a bill 
tomorrow that would call for a national refinery reserve modeled on the 
very successful strategic petroleum reserve.  My question to you is if we 
had a product reserve, which we don't have today, but there has been 
commentary from several witnesses about the appropriateness of it; if we 
had the product reserve, why would we also need a refinery reserve?  Do 
we, in fact, need both?
	DR. COOPER.  Well, I would rather attack the problem at the refinery 
level.  That has become the bottleneck.  I think the product reserve also 
helps, because it is a very short term.  Let us be clear.  We have a really 
short-term problem in this industry.  Americans can't stop driving.  We 
built our country around the assumption that we are going to get in our 
cars and go places and so in the short term, you have got a really 
significant spike problem.  And so it just struck me that the approach that 
was taken to a strategic refinery reserve, and I use the word strategic.  
Let us be clear.  The Strategic Petroleum Reserve is not used to 
discipline price, has never been used to discipline price.  We envision the 
strategic refinery reserve and the strategic product reserve being used in 
that fashion and so I used to say about the Strategic Petroleum Reserve 
make it so big that no politician would dare not to use it when things got 
bad.  It is clearly not big enough yet, by that standard.  But the strategic 
refinery reserve gives you a 60, 90-day and out flexibility; a product 
reserve is that really short-term response in a very volatile market.
	MR. BOUCHER.  Thank you, Doctor.
	CHAIRMAN BARTON.  The gentleman's time is up.  Mr. Terry of 
Nebraska.
	MR. TERRY.  Thank you, Mr. Chairman.  Continuing on this 
dialogue, you started your opening statement talking about how the oil 
companies are not expending their profits on infrastructure, but rather 
hoarding the cash for a variety of different reasons, but what should they 
be using by the dollars by way of infrastructure?  Should they be 
building up refining infrastructure with those dollars, pipelines, 
exploration?  What other areas should they be using their dollars?
	DR. COOPER.  Well, clearly they have underinvested in refining 
capacity and the statements by Exxon about not wanting to build new 
refineries has sort of reminded people that this was a business decision.  
So clearly, we are, by the standard of comparison to other sectors, 
manufacturing sectors, we are a good five million barrels a day short of 
refining capacity.  They should have built it, they haven't built it.  That is 
one place to spend it and it is not that expensive compared to $100 
billion of excess cash flow, free cash flow, that you can build an awful 
lot of refineries.  The numbers I have heard is $2.5 billion, so there is 
plenty of money there to build those refineries.
	MR. TERRY.  Are they just not building it here, or are they building 
it overseas?
	DR. COOPER.  In fact, looking at the Exxon spreadsheet financials, I 
didn't look at all of them, they weren't building any place, but overseas 
you had, you heard this morning, you had the shift in Europe to diesel, 
which created excess capacity for gasoline.
	MR. TERRY.  We had just heard, or I have been told that they are 
using money to build up the infrastructure, including refining, but it is so 
difficult to do within the United States, that they would rather set up 
refineries overseas and just bring in the refined product.  That is why I 
was curious about whether it is just U.S. investment in infrastructure, or 
whether the investment is overseas and you are saying that is not even 
happening overseas.
	DR. COOPER.  Again, I looked at the Exxon sheet.  Ask me a 
question and I will go through the financials of the American majors.  
Now, BP and Shell, they behave differently because they are not 
domiciled here.
	MR. TERRY.  Yes.  You had answered the Chairman's question and 
actually, that was leading into mine, about whether ethanol plants and 
some of the biofuel plants that are coming up, either on line now or being 
built now, are going to come on line, whether that could provide some 
relief on the supply side.  And I really like that model because what I see 
is a bunch of corn growers banding together in a co-op and building an 
ethanol plant, so if you could expand on how that can and what capacity 
we need to build up with biofuels to provide some relief in the future.  
Then also, is there a way that these co-ops that are building the 50 
million gallon plants for ethanol, whatever their feedstock would be, 
whether or not they could team up and in essence become a co-op for a 
refinery and combine the two processes?
	DR. COOPER.  Well, let me give you, we have looked very hard, 
because we went out on a limb with this, with our "50 by 2030," which is 
a 50 MPG car in a quarter of a century.  I estimate that would reduce our 
oil consumption below what it otherwise would have been, by about five 
and a half million barrels a day, which is very substantial.  I mean, if you 
think about the oil market today, we are told there is one million barrels a 
day of excess capacity in the whole world oil market; five million barrels 
a day is a big number in that context.
	But the interesting thing is that there is a bill in the Senate, 
bipartisan, shooting for 10 million barrels a day reduction by 2030, 
which is my end date.  Ten million barrels a day is a very big number 
and I can only get half of that out of the vehicle fleet by getting to 50 
miles per gallon.  This will tell you how deep a hole we have gotten 
ourselves into here, okay?  So if you look out there, I can see two and a 
half million barrels a day of biofuels, as liquid fuels coming into that 
market.  You have heard the numbers today.  There are hundreds of 
thousands today, right?  That is a massive increase.  That is a huge 
challenge.  I understand the farmers say we can do it, we can do it, but 
when you look, right?  So that is a real challenge and I am only three 
quarters of the way to that 10 million barrel a day goal.  We have a lot of 
work to do in order to get, to use the President's word, end our oil 
addiction.
	MR. TERRY.  Yes.
	DR. COOPER.  That is a tremendously difficult task and so two and a 
half million barrels a day of biofuels will keep a lot of farmers busy and 
it is a big job.
	MR. TERRY.  I think you have done a good job of showing how we 
need to have a more comprehensive approach in this.  In my last few 
seconds, Mr. Sundstrom, E-85.
	MR. SUNDSTROM.  Yes.
	MR. TERRY.  Nebraska.  Omaha, Nebraska.  One pump for 600,000 
people.  Even if I wanted to buy a flex fuel vehicle, I am not driving 186 
blocks to get to the one.  One of the biggest blocks is that the gas station 
chains are not allowed to put an E-85 pump under the canopy.  What are 
you all doing to see if we can't put more flex fuel vehicles out on the 
road and that they actually have a place to fuel up?
	MR. SUNDSTROM.  Well, I am not certain that it is up to us to put the 
pumps in.  Clearly, our members are interested in the alternative fuel 
vehicles and we encourage their purchase, but the reality is there a very 
small percentage of those vehicles on the road right now and I guess we 
would have some sympathy for the gasoline station owner who might put 
in one of these pumps only to have the occasional drive by and fill up 
once a week, so you know, clearly something more needs to be done to 
stimulate investment in the infrastructure.  I am not sure it is going to 
come strictly from the private sector.
	CHAIRMAN BARTON.  The gentleman's time has expired.  The 
gentleman from Michigan, Mr. Stupak.
	MR. STUPAK.  Thank you, Mr. Chairman, and thank you to the 
witnesses for appearing.  Mr. Sundstrom, thank you for speaking about 
the affect that high gas prices have on the American family, on the 
average American family because, you know, the price increase will cost 
the family an average about $1,200 a year.  My district in northern 
Michigan, it is very dependent upon tourism.  We have the Great Lakes, 
we have national forests, outdoor recreation.  We drive long distances.  
Can you please address the effect of this $1,260, I believe you said in 
your testimony, would have on tourism in places like northern Michigan?
	MR. SUNDSTROM.  Well, AAA is also one of the largest travel 
agencies in the United States, so we are clearly very concerned about 
that, as well.  Our members disproportionately travel at a greater rate 
than just about any other segment of the population.  We do a summer 
travel survey every spring.  We will actually release that on the 18th of 
this month.  Frankly, we are not exactly sure what we are going to hear 
from the American public about their travel intentions this year.
	We hope that because the economy overall is doing relatively well 
that people will feel secure enough in their jobs and their income that 
they will hit the road, but we are in uncharted territory.  As I said earlier, 
the national office of AAA's in Florida, in Orlando, which is the largest 
tourism destination in the United States.  There are areas in this country 
that are extremely dependent on Americans getting in their vehicles and 
traveling for recreation, so you know, that is another element to the 
gasoline price situation that causes us a lot of anxiety.
	MR. STUPAK.  Thanks.  Mr. Cooper, in your testimony you 
mentioned potential for energy commodity traders to take advantage of 
increased volume and validity.  In fact, you specifically cite the New 
York Times article, "Trading Frenzy Adds to Jump in Price of Oil."  
Knowing that some of us believe this adds as much as 20 percent to the 
price of crude oil in the market.  As I mentioned in my opening 
statement, I have introduced legislation, the PUMP Act, H.R. 5248, that 
would extend the oversight of the Commodities Future Trading 
Commission to off-market trades, which are currently unregulated.  
Legislation such as PUMP, which would provide increased oversight and 
transparency to these markets, would that be something your 
organization could support and secondly and specifically, on the New 
York Times price of oil, that article you mentioned, what are some of the 
recommendations short term and long term?  You cite some in your 
testimony, but what are some of the short term/long terms we should do, 
if not the PUMP Act, but what else should we do?
	DR. COOPER.  I submitted for the record a study I did earlier this 
year for Attorneys General in the Midwest on natural gas supply and futures 
markets, and therein we had a series of recommendations and the 
fundamentals are almost exactly the same.  The regulatory structure is a 
little different at the burner tip as opposed to the pump, but the physical 
and financial markets are essentially the same.  And we emphatically 
supported extending oversight to the off exchange or the over-the-
counter markets.  They are entirely unregulated, with vital commodities 
that--
	MR. STUPAK.  So you would be supportive of the PUMP Act?
	DR. COOPER.  Oh, absolutely.  And there is a graph in there which 
shows what happened when the Federal Energy Regulatory Commission 
said they were going to ask people to document their trades.  The traders 
just, they stopped reporting.  I mean, it was amazing.  Effective oversight 
will scare people out of the market and frankly, as far as I can tell, the 
liquidity, the volatility, the risk premium, the volume is hurting us, not 
helping us at this stage and so oversight over those markets is critical; 
reporting requirements for large traders are critical, which has been in 
legislation that has moved around in both parties.  We would also like to 
see better trading limits and position limits.
	Chairman Barton talked about one in the gasoline oil market.  We 
think there are others in the natural gas market; the positions are even 
larger and the settlement window is even smaller, so it is remarkable how 
few people can own how much gas and set that contract price.  It just 
doesn't make any sense.  We regulate onions and soybeans and pork 
bellies better than we do natural gas and gasoline and it is a mistake we 
just made are we just modernized the act a few years ago, regulatory 
decisions were made and so I think these are decisions that need to be 
revisited.
	MR. STUPAK.  Commodity Future Trade Commission, that aspect of 
it, we actually have passed a House bill earlier this year, I believe it is 
before the Senate, and then they sort of object to any more oversight of 
this but yet, we know at least three-fourths of all the future oil trades are 
unregulated.  There is no transparency to it.
	CHAIRMAN BARTON.  The gentleman's time has expired.
	MR. STUPAK.  Thank you.
	CHAIRMAN BARTON.  Dr. Burgess.
	MR. BURGESS.  Thank you, Mr. Chairman.  Mr. Sundstrom, several 
times it has been mentioned now about the mandatory refined product 
reserve in Europe.  Can you tell us how much gasoline is currently in the 
reserve?
	MR. SUNDSTROM.  No, I cannot.  Let me also say that AAA was 
caught unaware that Europe had gasoline reserves that they could assist 
us with and we were quite pleased to find out that they had that available.  
We had spoken with members of the industry over a number of years 
about that and we were told that it was completely unworkable, not 
feasible, and too expensive.  But we were certainly gratified to find that 
Europe had that product available to us.
	MR. BURGESS.  Well, the fact that they use more diesel than 
gasoline, does it make it easier for them to have the refined product 
reserve of gasoline there?
	MR. SUNDSTROM.  Well, in recent years, yes, that is my 
understanding.
	MR. BURGESS.  And what about, would you have to rotate the stock 
so that it didn't become stale or old?
	MR. SUNDSTROM.  That is actually one of the reasons that we were 
told it was unworkable in the United States, but again, it sounds like they 
figured out a way to do that in Europe.
	MR. BURGESS.  Do you know how they have done that?
	MR. SUNDSTROM.  No, I do not.
	MR. BURGESS.  What would be the minimum level of mandatory 
reserve for refined product, in your mind?
	MR. SUNDSTROM.  Well, to begin with, I think the citizens of 
Florida, in the Gulf Coast, would like to see a product available that 
would meet their needs for a week or two, if they were to lose their 
capacity to receive gasoline or move gasoline in the wake of a major 
hurricane.
	MR. BURGESS.  Dr. Cooper, you referenced a memo, and I am going 
to assume that is a memo that we have seen in the past that Mr. Markey 
has had in the committee.  I don't suppose you have a copy of that memo 
today?
	DR. COOPER.  I don't have it today, no.
	MR. BURGESS.  If it is the same one that Mr. Markey has shown us in 
the past, the second line on that was concern about the increasing 
problem with liability and with siting new refineries.  Is that still an 
issue?
	DR. COOPER.  Well, as far as I can tell, it is not an issue in the 
sense that they haven't tried.  I mean, if you think about the first time I 
testified here on this issue in 2001, they could have gotten refineries sited 
by now and you have heard, we don't have evidence of the specific refineries 
that have been prevented.  They simply haven't tried and that was a 
business decision and now we have fairly strong affirmation of that from 
the Chairman of Exxon who says he is not going to build any new 
greenfield refineries because he sees demand easing up in 2020.
	MR. BURGESS.  Mr. Chairman, could I ask unanimous consent that a 
copy of that memo be made available to the members of the committee?
	CHAIRMAN BARTON.  Without objection, so ordered.
	MR. BURGESS.  With the bill that we passed last fall that would 
accelerate siting of refineries, is that the type of thing that you think will 
help in this regard?
	DR. COOPER.  I don't think the industry is interested in building new 
refineries and that is the fundamental problem.  They do not see it as in 
their business interests and we put the quotes from the Chairman of 
Exxon in, it is in the document we submitted.  Having gained market 
power over price, it is not in their interest to lose that market power by 
building and there are so few of them that there is not a competitive 
market that forces them to make those decisions, so I don't think that the 
impediment was, though, the siting problem.  I think the problem was a 
business decision and the economics of that business decision haven't 
changed all that much.
	MR. BURGESS.  But indeed, there are other companies that are 
smaller companies and, if the siting of refineries was not problematic and 
if they were perhaps some liability relief, might that not go toward 
creating more refinery locations?
	DR. COOPER.  There is precious entry in this business and the list of 
companies I have read you is a massive exit and so there is very little 
entry in this business.  The barriers to entries are very great.
	MR. BURGESS.  But still, small start-up energy companies are not 
unheard of.  Down in my district, there is a gas company which started 
poking holes in the Barnett Shale a few years ago and now they are a big 
player, so it does happen.
	DR. COOPER.  That is right.
	MR. BURGESS.  They started up with some of the research and 
development that this Congress, not this Congress, but Congress 
provided them, some Federal money that was provided, so it is not 
necessarily a bad thing to increase energy supply.
	DR. COOPER.  No, I just said there is precious little, not enough to 
discipline the price.
	MR. BURGESS.  Mr. Wilkins, I was grateful to hear you say that you 
didn't favor price controls, though I will have to admit, I am not a big 
purchaser of flowers, but my district office bought Starbucks coffee for 
an academy event not too long ago and I asked them how much it cost 
and it was a 2.8 liter container and it cost $12, that is $16.29 if I 
remember my metric conversions, per gallon, if I remember my metric 
conversions.  I was just going to ask if you thought we needed a price 
control on Starbucks because the price seems to be out of hand and our 
constituents can't afford it.  With that, Mr. Chairman, I will yield back.
	CHAIRMAN BARTON.  I never knew my metric conversion.  The fact 
that you can remember yours is a testimony.  Let us see.  Does Mrs. 
Cubin want to ask questions of this panel?
	MRS. CUBIN.  Mr. Chairman, I would like to move on.  I will submit 
my questions to them in writing.
	CHAIRMAN BARTON.  All right.  Does Mr. Radanovich wish to ask 
questions of this panel?
	MR. RADANOVICH.  Thank you, Mr. Chairman.  I will submit them 
in writing, as well.
	CHAIRMAN BARTON.  Okay.  Does Mr. Bass?  Mr. Bass.
	MR. BASS.  Yes, Mr. Chairman, I do not have any questions to ask 
these fine witnesses here today and I want to get on to the markup that is 
happening, but I do want to welcome a dozen or so constituents of mine 
from the Vesta Roy Excellence in Public Service who are visiting me 
right now and they are in the crowd here today and I yield back, Mr. 
Chairman.
	CHAIRMAN BARTON.  Well, if they will stand up.
	MR. BASS.  Thank you, Mr. Chairman, and I yield back.
	CHAIRMAN BARTON.  Does Ms. Bono wish to ask questions?
	MS. BONO.  Thank you, Mr. Chairman.  I just have a brief one, 
actually, I think.  I apologize.  I have been out of the room for almost the 
entire questioning, so I hate to be redundant, but I believe that one 
question that hasn't been asked is something communities can do, is 
synchronizing traffic lights something that we have looked at or has that 
question been asked?  I apologize again, but synchronizing traffic lights, 
it seems like we could make a great dent in efficiency.
	CHAIRMAN BARTON.  That question has not been asked.
	MS. BONO.  Thank you, Mr. Chairman.
	CHAIRMAN BARTON.  It is a good question.
	DR. COOPER.  Well, I think there is a very broad array of things that 
we can do and anyone who can show a local government that a change in 
rules or regulations will, in fact, lower the oil consumption of their 
citizens owes it to those citizens.  The example I like to use is 
remarkable; in many communities in America, it is illegal to put a 
grocery store in a neighborhood.  Because of zoning laws, we have 
separated it.  So people have to get in their car to go to the grocery store, 
and so there is a large array of things that we could do to save oil and 
gasoline and I think we ought to have programs to stimulate that.
	MS. BONO.  But your group hasn't looked at specifically 
synchronizing traffic lights?
	DR. COOPER.  We haven't.  We have been focused on the automobile 
because increasing the efficiency of the automobile is the grand slam in 
this equation.
	MS. BONO.  Thank you.  In my district, actually, we have a lot of 
lanes specifically designed for electric vehicles, not hybrids, but the little 
tiny electric vehicles.  People do take those to the grocery store, so we 
are working on it.  But also, for Mr. Wilkins, where are we here?  Within 
your industry, have you witnessed more concern over fuel costs and 
impacts in certain geographic areas?  I would assume the desert, 
California, southwest region would be among the higher regions and if 
so, do those of us who are mothers in the southwest region expect six 
flowers instead of a dozen on Mothers Day?
	MR. WILKINS.  Well, certainly for Mothers Day, the cost of flowers 
will vary depending upon supply and demand, and I don't think that we 
have really heard a lot about costs being higher in certain regional areas 
of the country, although that may be.  Certainly, fuel costs are higher in 
California and on the West Coast than they are on the East Coast and so I 
wouldn't expect that you would see a cut back one way or another.  
When there are temporary price increases, you will generally see it being 
passed along in the form of the delivery charge or something like that or 
the retail florist.  The provider will be absorbing at least part of that cost.
	MS. BONO.  So in your industry are you looking for more efficient 
vehicles or alternative fueled vehicles as a whole?
	MR. WILKINS.  Yes, I think a number of industry partners are doing 
that.  In our particular case, we are right now looking at more fuel 
efficient vehicles and it is kind of a sort of a conundrum between picking 
the types of vehicles because what we find is that the vehicles that we 
have been using, always diesel fuel based powered vehicles, the vehicles 
that tend to be able to carry the most weight and to be the most reliable 
are also the less fuel efficient and we are looking at trucks like the 
Sprinters, that a lot of folks have heard of.  But they are a lighter weight 
truck.  They have a lot better fuel mileage, but they can't carry as much 
load.  In some cases, you are forced to have two trucks of that type to 
replace one truck that is less fuel efficient.
	MS. BONO.  All right.
	MR. WILKINS.  And so there are some of the things that we are 
involved in, but you know, we have even gone the route of consolidating 
routes using computer routing software that has allowed us to take trucks 
off the road, but it also means laying off some people at the same time 
because of that consolidation.
	MS. BONO.  Thank you.  I thank you all.  Mr. Chairman, I know you 
want to get on to the markup, so thank you for holding this hearing and I 
yield back.  Thank you all very much.
	CHAIRMAN BARTON.  Thank you.  Seeing no other Members present 
who haven't been given a chance, we are going to adjourn this hearing.  
Thank you to you gentlemen and we will probably have written 
questions for you.  This hearing is adjourned.  We are going to reconvene 
the markup at 3:30, so we will change the room and reconvene for the 
markup at 3:30.
	[Whereupon, at 3:12 p.m., the committee was adjourned.]



         RESPONSE FOR THE RECORD BY DR. MARK COOPER, RESEARCH 
               DIRECTOR, CONSUMER FEDERATION OF AMERICA

The Honorable Barbara Cubin

1.  In regards to the currently volatile energy markets, you state in 
your testimony that "if we had started working on effective solutions 
six years ago, we could be well into the mid-term of a long-term 
policy shift."  Would you then agree that American consumers 
would not be in this situation had the energy bill first passed by this 
committee and the larger House of Representatives in the summer of 
2001 been enacted into law?

No.  The policies that will actually address the problem have never been 
included in legislation passed by either house.  The key to a long-term 
solution is a substantial increase in the  fuel efficiency of the vehicle 
fleet.  The House has voted this down.  In the mid-term, a strategic 
refinery reserve provides capacity to cushion supply shocks.  The House 
voted that down.  

2. You also stated in your testimony that the refining industry 
have historically "closed refineries for business reasons and refuse to 
build new ones for business reasons."  I agree.  Would it then not 
make sense for this Congress to pass the Refinery Permit Process 
Schedule Act (HR 5254) - a bill that would encourage new refining 
capacity by streamlining the current facility citing process?   

As I pointed out in my testimony, the industry has no desire to build new 
refineries.  It does not see the business value of doing so, as surplus 
capacity puts downward pressures on prices.  The solution is a strategic 
petroleum reserve, which can easily be built within the existing 
requirements.  



         RESPONSE FOR THE RECORD BY GEOFF SUNDSTROM, DIRECTOR OF 
            PUBLIC RELATIONS, AMERICAN AUTOMOBILE ASSOCIATION

The Honorable Barbara Cubin

Q1. Are there regions in the country where your members are 
disproportionately affected by rising gas prices?  In your testimony, 
you astutely pointed out that skyrocketing fuel prices do not present 
the same economic challenge to urban dwellers -with access to mass 
transit - as they do for regular drivers.  As public transportation is 
relatively nonexistent in Wyoming and much of the rural west, 
driving is simply a necessity.  What conservation measures do you 
recommend to your rural members in today's climate of high fuel 
costs?

A1. AAA has for many years published a free brochure on conserving 
energy and saving money at the gas pump called "AAA Gas 
Watcher's Guide."  This publication offers tips and advice that can 
be useful to all motorists and is available at many AAA offices and 
on the Web at www.aaaexchange.com.  

With regard to the special fuel-use situation encountered by those 
who must travel long distances in rural areas, AAA suggests the 
purchase or lease of the most fuel-efficient vehicles available that 
also meet the sometimes special needs of rural households.  For 
some motorists this may mean a switch within the same family of 
vehicles, from a larger truck to a smaller truck for example, or from 
a SUV model with a large engine to the same model equipped with a 
more fuel-efficient motor.  Other consumers may be able to move 
from a large car, truck or SUV into a more fuel-conserving car, 
minivan or station wagon.  AAA makes this recommendation 
because many of the vehicles consumers choose to drive are much 
heavier and have a lot more power than what is truly needed to 
safely transport them and their belongings from place to place.  This 
combination of excess weight and horsepower consumes more fuel 
than is necessary and adds expense to household budgets regardless 
of whether a consumer lives in the city or country.

Rural motorists who frequently drive on roads with high speed limits 
should also be aware that driving safely at lower speeds generally 
increases fuel economy.  Long-distance drivers also need to pay 
special attention to the importance of regular maintenance on 
vehicles that quickly accumulate miles on their odometers.  
Establishing a maintenance routine on the basis of miles-driven, 
rather than on months or years of ownership, is a best practice in this 
circumstance.  Maintaining proper inflation of tires also contributes 
to improved fuel economy.

Combining errands into a single continuous trip -- a technique 
sometimes called trip-chaining -- can be an effective way of limiting 
miles driven and fuel consumed, and car pooling with others who 
must make regular long-distance trips to similar destinations can be 
helpful for some households.  Another tip that may be useful is to 
consider driving a more fuel-efficient vehicle from day-to-day, and 
occasionally renting a larger vehicle if extra carrying capacity is 
necessary.  Using cargo trailers to haul materials to the destination 
and then unhitching them, can allow the use of a smaller vehicle for 
everyday transportation needs.  Continuously driving a large car, 
truck, van or SUV that is equipped with rarely-used excess carrying 
capacity, generally uses more fuel and costs more money at the gas 
pump than is necessary for many households.



      RESPONSE FOR THE RECORD BY WILLIAM WEHRUM, ACTING- 
   ASSISTANT ADMINISTRATOR, OFFICE OF AIR AND RADIATION, U.S. 
              ENVIRONMENTAL PROTECTION AGENCY



          GASOLINE:  SUPPLY, PRICE, AND SPECIFICATIONS


                   THURSDAY, MAY 11, 2006

                  HOUSE OF REPRESENTATIVES,
             COMMITTEE ON ENERGY AND COMMERCE,
                                                   Washington, DC.


        The committee met, pursuant to notice, at 10:10 a.m., in Room 2123, 
Rayburn House Office Building, Hon. Joe Barton [chairman] presiding.
        Present:  Representatives Barton, Hall, Bilirakis, Stearns, Deal, 
Norwood, Cubin, Shimkus, Wilson, Fossella, Bass, Pitts, Bono, Walden, 
Sullivan, Burgess, Blackburn, Waxman, Markey, Boucher, Eshoo, 
Stupak, Green, Inslee, and Ross. 
        Staff Present:  Margaret Caravelli, Counsel; Maryam Sabbaghian, 
Counsel; David McCarthy, Chief Counsel for Energy and Environment; 
Sue Sheridan, Minority Senior Counsel; Lorie Schmidt, Minority 
Counsel; and Bruce Harris, Minority Professional Staff Member. 
        CHAIRMAN BARTON.  The committee will come to order.  Since this 
is a continuation of a series of hearings we have had on our gasoline 
supply situation and, more generically, the energy situation for this 
country with respect to oil and gas, we are not doing opening statements.  
        Today, our witness list includes a wide range of experts:  We have 
Mr. Red Cavaney, who is the President of the American Petroleum 
Institute; we have Mr. Bob Dinneen, who is the President and Chief 
Executive Officer of the Renewable Fuels Association; Mr. Bob 
Slaughter, who is President of the National Petrochemical and Refiners 
Association; Mr. William S. Becker, who is the Executive Director, State 
and Territorial Air Pollution Program Administrators of the Association 
of Local Air Pollution Control Officials; we have Mr. Paul Reid, who is 
the President of Reid Petroleum in Lockport, New York, on behalf of the 
National Association of Convenience Stores and Society of Independent 
Gasoline Marketers of America; Mr. William H. Shea, who is the 
President and CEO of Buckeye Partners, and he is here on behalf of the 
Association of Oil Pipelines; and last, but not least, we have Mr. John 
Conley, who is President of the National Tank Truck Carriers, 
Incorporated.

           STATEMENTS OF RED CAVANEY, PRESIDENT, AMERICAN 
             PETROLEUM INSTITUTE; BOB DINNEEN, PRESIDENT 
              AND CEO, RENEWABLE FUELS ASSOCIATION; BOB 
                    SLAUGHTER, PRESIDENT, NATIONAL 
               PETROCHEMICAL & REFINERS ASSOCIATION; S. 
            WILLIAM BECKER, EXECUTIVE DIRECTOR, STATE AND 
                  TERRITORIAL AIR POLLUTION PROGRAM 
               ADMINISTRATORS/ASSOCIATION OF LOCAL AIR 
                POLLUTION CONTROL OFFICIALS; PAUL REID, 
              PRESIDENT, REID PETROLEUM CORPORATION, ON 
                BEHALF OF THE NATIONAL ASSOCIATION OF 
                  CONVENIENCE STORES AND SOCIETY OF 
             INDEPENDENT GASOLINE MARKETERS OF AMERICA; 
            WILLIAM H. SHEA, PRESIDENT AND CEO, BUCKEYE 
           PARTNERS, LP, ON BEHALF OF THE ASSOCIATION OF 
             OIL PIPELINES; AND JOHN CONLEY, PRESIDENT, 
                  NATIONAL TANK TRUCK CARRIERS, INC.  

        CHAIRMAN BARTON.  Gentlemen, welcome.  Your statements are in 
the record in their entirety.  We will start with you, Mr. Cavaney.  We 
have got seven witnesses on the first panel.  We will give each of you, 
let's say 7 minutes to explain your testimony, and then we will have 
obviously some questions.  
        Welcome, Mr. Cavaney.
        MR. CAVENEY.  Thank you very much, Mr. Chairman, honored 
members of the committee.  
        U.S. oil and natural gas companies understand the frustration that 
consumers have expressed about energy prices.  We recognize that high 
energy prices are adversely impacting individuals, households, 
businesses, and potentially our economy itself.  Our members are 
working very hard to provide additional supplies.  
        Crude oil inventories have been building and are at record levels.  At 
the same time, we are meeting some of the world's most stringent new 
environmental requirements.  During the week ending April 21st, 
refineries were operating above 90 percent of capacity, and for the month 
of March utilization was 90.8 percent, which is higher than from March 
of a year ago.  
        To address refining capacity concerns, we have spent billions of 
dollars to recover from last year's hurricanes and we anticipate bringing 
an additional 1.3 million barrels of new refining capacity per day 
onstream between now and 2011.  
        The industry has also undertaken major investments to meet the 
4 billion gallon renewable fuels standard for 2006, while also delivering 
new gasoline with 90 percent less sulfur and new onboard diesel fuel 
with 97 percent less sulfur.  
        Oil and gas is a long lead time business, and we are making the 
necessary reinvestments.  Since 1992, oil companies in the United States 
have reinvested more than $1 trillion compared to their cumulative 
earnings over the same period of almost $700 billion.  Our industry is 
also looking to the future.  Since 2000, we have reinvested $98 billion in 
emerging energy technologies, including alternatives, an amount that 
represents 73 percent of the total U.S. investment in this area by the 
Federal government and all U.S. companies.  
        Congress should not impede the industry's efforts focused on 
reinvesting today's earnings to meet tomorrow's energy needs.  Oil 
companies do not set the price of crude.  It is bought and sold in 
international markets, and the price paid for a barrel of crude oil reflects 
the market conditions of that day.  Importantly, more than half of the 
price of a gallon of gasoline is attributable to the cost of crude.  
        As noted in a June 2005 Federal Trade Commission report, and I 
quote, "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 United 
States."  As evidenced by more than 30 Federal Trade Commission and 
other government investigations over several decades, our industry has 
been exonerated of any anti-competitive behaviors.  And let me again 
make clear to the committee, we condemn price gouging.  
        Today's energy situation is shaped by past government policy 
decisions made over the previous two decades.  These policies have 
resulted in decreased domestic oil and natural gas production, modest 
improvements in energy conservation and efficiency, and increased 
imports as industry was left with little access to U.S. resources, and had 
no choice but to source supply from abroad in order to meet growing 
U.S. consumer demand.  
        In recent years, growing demand for oil from China, India, and the 
United States, has come at a time of diminishing spare worldwide 
production capacity, and rising geopolitical tensions have placed great 
stress on the available global supply of crude oil.  The solution to the 
energy challenges before us is to increase and diversify sources of 
supply, including alternatives, reduce demand, and expand infrastructure.  
        We have sufficient domestic oil and gas resources remaining to be 
discovered in the U.S., enough oil to power more than 60 million cars 
and heat more than 25 million homes for 60 years, and enough natural 
gas to heat 60 million homes for 160 years.  Only government policies 
stand in the way of increasing access to these resources, facilitating 
refinery capacity and pipeline expansions, and increasing energy 
security.  Congress recognized the harmful effects of localized boutique 
fuels in last year's Energy Policy Act, limiting the number of fuels that 
States may adopt and requiring studies of the effects of boutique fuels.  
        Our industry strongly supports the use of ethanol as a valued 
gasoline additive.  However, the expansion of the patchwork quilt of 
boutique fuels by States mandating ethanol use at different 
concentrations and/or under differing terms is counterproductive to 
growing ethanol presence in the gasoline supply.  
        To maximize success with ethanol, we need to concentrate on its 
integration into the national gasoline pool while permitting E-85 to grow 
in those locations where it meets the test of the marketplace, not the 
reverse.  
        I conclude with some additional thoughts that could further increase 
refining capacity and add additional flexibility to the distribution system: 
Streamline the permitting process to ensure timely reviews of capacity 
expansion requests and provide decisional certainty.  Reform new source 
review requirements to clarify what triggers these reviews, and further 
explore former U.S. military bases as potential sites for refineries and 
related infrastructure opportunities.  
        I look forward during the questions and answers to providing other 
insight, and I thank you, Mr. Chairman.  
        CHAIRMAN BARTON.  Thank you, Mr. Caveney. 
        [The prepared statement of Red Cavaney follows:] 


         PREPARED STATEMENT OF RED CAVANEY, PRESIDENT, AMERICAN 
                          PETROLEUM INSTITUTE



        I am Red Cavaney, President and CEO of API, the national trade 
association of the U.S. oil and natural gas industry. API represents more 
than 400 companies involved in all aspects of the oil and natural gas 
industry, including exploration and production, refining, marketing and 
transportation, as well as the service companies that support our industry. 

Introduction
        The oil and natural gas industry understands the frustrations that 
consumers have expressed about energy prices. We recognize that high 
energy prices are adversely impacting individual households and 
potentially our economy.  The industry is also cognizant of the criticism 
for what may appear to some as unreasonable or unjustified prices and 
high earnings. I will attempt to address those concerns and to offer the 
proper context in which to view both prices and earnings.

Factors in the cost of gasoline
        In order to understand the higher costs of gasoline and other motor 
fuels, we need to consider them in the context of the world energy supply 
and demand situation.
We currently 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. It is important to understand that oil companies do not set the 
price of crude oil. Crude oil is bought and sold in international markets, 
and the price paid for a barrel of crude oil reflects the market conditions 
of the day. Whether a barrel is produced in Texas or Saudi Arabia or 
elsewhere, 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. 
        There is a fragile balance between the world's supply and demand 
for crude oil. Because of this tight market, any disruption of oil supply - 
or even the threat of a disruption - can push prices upward as buyers and 
sellers in the worldwide marketplace look to secure supplies for their 
customers. 
        It is well recognized that the market for crude oil has tightened. 
World oil demand reached unprecedented levels in 2005 and continues to 
grow due to strong economic growth, particularly in China and the 
United States. EIA reports that global oil demand in 2004 grew by 3.2 
percent - the strongest growth since 1978 - and grew 1.4 percent in 2005 
to nearly 83.6 million barrels a day. EIA projects growth for 2006 at 1.8 
percent. By comparison, world demand between 1993 and 2003 grew at 
an average rate of 1.6 percent. EIA, in its Annual Energy Outlook (April 
2006) estimates world oil consumption to be 85.2 million barrels per day, 
which is about 100,000 barrels a day less than estimated average 2006 
production. 
        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 and is a critical factor to observe. 
Current spare capacity is equal to only about 1 percent of world demand. 
Accordingly, 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 
several years, we have seen how the market has reacted to such diverse 
developments as dollar depreciation, cold winters, the post-war 
insurgency in Iraq, hurricanes in the Gulf of Mexico, the Venezuelan oil 
workers' strike in 2002-2003, uncertainty in the Russian oil patch, 
ongoing ethnic and civil strife in Nigeria's key oil producing region, and 
decisions taken by OPEC, as well as here in Washington, D.C.. 
        This year has been described by some as the "worst political-risk 
year" for energy supplies since 1973, the year of the oil embargo. Recent 
weeks have seen increasing concern about potential supply interruptions 
from political turmoil, conflicts, and uncertainty in such countries as 
Bolivia, Iran, Iraq, Nigeria, and Venezuela. 
        Additional factors in the increased fuel prices include the end of the 
reformulated gasoline (RFG) oxygen requirement on May 5, and the 
phase-out by some refiners of the gasoline additive MTBE. According to 
the U.S. Energy Information Administration (EIA), refiners are 
maximizing their effort to switch to ethanol, but they must deal with 
logistical challenges in its transport. Unlike MTBE, ethanol cannot be 
shipped through pipelines and must be carried by barge, railcar or tanker 
truck.  As the market is currently structured, ethanol is considerably 
more expensive than gasoline, and imports face a 54 cent per gallon 
tariff. The oil and gas industry, however, is the largest consumer of 
ethanol and will continue to play a key role in facilitating and expanding 
our nation's use of ethanol as a key component of our nation's 
transportation fuels mix. 

How U.S. oil and natural gas companies are responding to current energy 
challenges 
        U.S. oil and natural gas companies have been working hard to 
provide additional supplies to the marketplace, while, at the same time, 
meeting stringent new environmental requirements: 
         Domestic oil production from the Gulf of Mexico continues to 
recover from the damage incurred by Hurricanes Katrina and 
Rita. According to the U.S. Minerals Management Service, 22 
percent of the oil production and 13 percent of the natural gas 
production from the Gulf remains shut in. Nevertheless, drilling 
activity remains at a high level and has helped offset this 
reduction. As of May 5, 1,624 drilling rigs were at work in the 
U.S., the highest level in 20 years. 
	 Crude oil inventories have been building and are at record 
levels. For the week ending April 28, crude stocks were 346.9 million 
barrels, or 12 million barrels above the level of a year ago. 
Inventories must be built ahead of heavy summer demand.
	 Refineries were operating at 86.7 percent of capacity during 
March. Some refineries are undergoing routine maintenance that 
had to be delayed because of the hurricanes. Moreover, the 
industry is still recovering from the hurricanes' extensive 
damage.  Through March, roughly 5 percent of refining capacity 
was not yet fully operational. When this is taken into 
consideration, the refinery utilization rate was actually higher 
than in March 2005, at 90.8 percent versus 90.2 percent. One 
refinery returned to normal operations of more than 400,000 
barrels per day in late April after seven months of repairs 
following Hurricane Katrina. Two others are not yet fully 
operational and represent a combined capacity of 247,000 barrels 
per day or 3.3 percent of total U.S. refinery capacity.  As of the 
week ending April 21, refineries were operating at 90.1 percent 
of capacity, only the fourth time that refineries were operating 
above 90 percent since Hurricane Rita.  
	 Despite the logistical challenges in blending ethanol in 
gasoline, the industry anticipates no problems in meeting the 4 billion 
gallon Renewable Fuels Standard for 2006. In fact, in many 
regions of the country, consumers are already driving on a 
mixture of gasoline and 5.7 percent to 10 percent ethanol. 
	 Refiners are completing the third year of a three-year 
schedule to eliminate 90 percent of the sulfur in gasoline. This already has 
enabled automobile manufacturers to begin equipping new 
passenger cars and light trucks with the advanced technology 
necessary to comply with the stringent Tier 2 emissions 
standards promulgated by the Environmental Protection Agency. 
As a result, it now takes 33 vehicles running on low-sulfur 
gasoline today to equal the pollution emissions of just a single 
1970 vehicle.
	 Finally, refiners are reducing the maximum amount of sulfur 
allowed in on-road diesel fuel by 97 percent to enable the 
production of substantially cleaner new diesel engines. When the 
current on-road heavy-duty vehicle fleet has been fully replaced 
by 2030, the combination of the new fuel and new diesel engines 
should have eliminated 90 percent of the pollution that today's 
trucks and buses produce.

Importance of increased energy efficiency
        API supports increased energy efficiency in all sectors of the 
economy, including transportation, as an essential part of efforts to meet 
U.S. energy challenges. 
        An important reason why hydrocarbons have been the choice of 
consumers worldwide is due to the fact that they contain nearly twice the 
energy per gallon as many other energy sources. Thanks to advances in 
technology and market forces, our hydrocarbon-based economy is 
getting more and more energy efficient. In 1970, the United States used 
about 1.4 barrels of oil for each thousand dollars of real GDP. By 2000, 
that had fallen almost in half to about seven-tenths of a barrel. And, by 
2025, our nation is projected to consume only about one-half a barrel of 
oil for each thousand dollars of GDP. 
        An example of how technology increases energy efficiency is the use 
of cogeneration to save energy in refineries and other industrial facilities. 
Cogeneration is the simultaneous generation of heat and electricity, can 
be more than twice as efficient as conventional generation, and is 
increasingly being implemented by refiners to help power their facilities.  
In some instances, excess electricity is generated at the refinery, which 
can be sold off-site for use by schools, hospitals and many other 
facilities. 
        Cogeneration is an important tool helping oil companies become 
more energy efficient. To demonstrate their commitment to continued 
improvement in aggregate energy efficiency, API member refiners have 
voluntarily agreed to a 10 percent improvement between 2002 and 2012 
as part of API's Climate Challenge Program. That program is 
contributing to a national goal of reducing greenhouse gas emissions by 
18 percent by 2012.  The most recent reporting cycle indicates that API 
members are on track to achieve their 10 percent improvement goal.  
These efforts have already produced ongoing daily energy savings equal 
to that needed to power 475,000 cars or heat 450,000 homes with natural 
gas.
        However, while increased energy efficiency is a critical component 
of a meaningful U.S. energy policy, it is not, and can not be, the only 
component.  The U.S. energy Information Administration projects that 
by 2030, total U.S. energy demand will increase by 41 percent - even 
with a 39 percent increase in energy efficiency.  

Anti-competitive pricing
        Some are again accusing the industry of "price gouging." Our 
industry has been repeatedly investigated over many decades by the 
Federal Trade Commission, other federal agencies, and state attorneys-
general. Of the more than 30 investigations, none have ever found our 
companies to have engaged in anti-competitive behavior to drive up fuel 
prices, and we are confident current reviews will arrive at the same 
conclusion.
        Some allege that recent oil company mergers have caused higher 
crude oil and gasoline prices. But the price of crude oil is the 
consequence of thousands upon thousands of transactional decisions 
made on the world market every day. No one company or group of 
companies has control over that price. In terms of market power, large 
international oil companies own less than 10 percent of the world's oil 
resources. According to the Federal Trade Commission's August 2004 
report, The Petroleum Industry: Mergers, Structural Change, and 
Antitrust Enforcement, "recent large mergers among major oil companies 
have had little impact on concentration in world crude oil production and 
reserves." And, as noted by the FTC in its June 2005 report, Gasoline 
Price Changes: The Dynamic of Supply, Demand, and Competition, "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."  
        We are concerned about the adverse impact of the proposed Oil and 
Gas Industry Act of 2006 (S. 2557) recently introduced by Senator 
Specter.   Section 2 of that proposed act would amend the Clayton Act to 
make it illegal to refuse to sell or to export or divert petroleum products 
or natural gas supplies with the intention of increasing prices or creating 
a shortage in a geographic market. In evaluating whether a marketer has 
illegal intent, a court must consider whether the cost of the products has 
increased, and if the defendant has obtained a higher price in the market 
to which the product has been exported or diverted.
        The bill has the potential of interfering with legitimate business 
decisions that are made by individuals in the oil and natural gas industry.  
Unilateral decisions to move supplies from one area to another based on 
supply and demand issues could be challenged under this provision. 
Moreover, the bill makes it illegal to "intend" to take certain actions even 
if the entity does not have the ability to impact supplies or prices and 
there is no showing of an actual or likely anticompetitive effect. This is 
contrary to traditional antitrust analysis. In addition, Section 2 is 
ambiguous and contains a variety of key terms such as "divert" that have 
not been defined.  As a result, there could be significant questions related 
to compliance and enforcement.  This uncertainty could adversely affect 
legitimate business decisions related to supply and ultimately have an 
adverse impact on consumers. Finally, the bill does not identify who has 
standing to enforce the provisions of the bill. 
        If enacted, Section 2 could have a chilling affect on the oil and gas 
industry, make it more difficult for the industry to meet the fuel needs of 
U.S. consumers, and prevent the industry from responding quickly to 
emergencies such as those that occurred with Hurricanes Katrina and 
Rita.

Fuel transitions
        Complicating the overall U.S. fuel supply/demand situation are 
numerous contributing factors. The Energy Policy Act of 2005 
eliminated the reformulated gasoline (RFG) oxygen requirement, and 
also set a new renewable fuel standard, requiring that the industry use 4 
billion gallons of renewable fuel in 2006 - increasing to 7.5 billion 
gallons in 2012 and increased amounts thereafter. In addition, ultra-low 
sulfur diesel (15 ppm sulfur) will be introduced starting June 1. 
        Eliminating the RFG oxygen requirement is a change in the law that 
the industry has long supported as one that will add to refiners' flexibility 
to produce gasoline and allow those who so choose to eliminate the use 
of MTBE in gasoline. Similarly, the introduction of ultra-low sulfur 
diesel, despite the $8 billion in costs incurred by the nation's refiners, 
will have major benefits and is strongly supported by the U.S. oil and 
natural gas industry. However, both of these are major fuels changes and 
present significant challenges to fuel providers. Our companies are 
dedicated to ensuring that these transitions go smoothly as possible and 
are making the substantial investments required to complete these 
transitions. 
        API believes that, to be successful, fuel transitions should be based 
on the free and unfettered functioning of fuel markets. Market 
mechanisms are most effective in providing companies with appropriate 
indicators and in ensuring a rapid response to changes in market 
conditions or transitional problems that may occur. Changes to these 
market indicators by government - such as calling for waivers from 
clean fuel regulations in light of concerns about possible volatility in fuel 
prices - will only cause market uncertainty and send confusing 
information to markets in transition. There are already mechanisms in 
place to deal with true market supply disruptions, and we urge the 
government to use appropriate caution in exercising this existing 
authority. 
        Operating in a free marketplace, the U.S. oil and natural gas industry 
has the technical expertise and decades of experience in successfully 
handling fuel specification transitions. Our companies have repeatedly 
demonstrated their capability for making these transitions on the national 
level in dealing with RFG, low-sulfur gasoline and diesel fuel and in 
meeting so-called "boutique fuels" requirements at the state level. 
        Since the Energy Policy Act of 2005 did not provide for a national, 
ordered phase-out of MTBE, individual companies made individual 
decisions on how best to deal with the end of the RFG oxygen mandate 
and the use of oxygenates. Companies took into account various factors 
such as customer preference, state laws, pipeline decisions, distribution 
system capabilities, and information from government agencies such as 
EIA.  
        U.S. oil and natural gas companies have the expertise, experience, 
and resources required to make the fuel transitions that are required - 
provided fuel markets are allowed to function freely. We think a valuable 
role for the government is to help create as clear and transparent a picture 
as possible of what is occurring in the marketplace during this summer's 
upcoming transitions. In this vein, we strongly support continued efforts 
by EIA to monitor the supply and demand dynamics of the market, and 
provide timely updates to their initial study. API and its members are 
very willing to cooperate in any such effort.        

Boutique Fuels
        While the patchwork of localized "boutique fuels" is not principally 
responsible for the recent higher gasoline prices, the proliferation of 
these fuels in recent years has presented significant challenges to U.S. 
refiners and resulted in an inflexible fuel system. (See the attached map 
of boutique fuels.)   
        Boutique fuels contribute to the tight supplies and price volatility so 
decried by consumers. A classic example of the disadvantage of boutique 
fuels is in the Atlanta area, which has a one-of-a-kind gasoline blend in 
the summer. Most gasoline on the major pipelines that service Atlanta 
cannot be used to address any supply shortage in that market. Refiners 
and suppliers have made the refinery and distribution system investments 
to handle the Atlanta gasoline. However, if a serious infrastructure 
problem occurs in the refineries, the pipelines, or the terminals that 
supply this area with gasoline, the boutique fuel involved could lead to 
serious supply disruptions.  
        Of utmost importance in our business is the reliability of supply. 
Fuel providers need the flexibility to get fuel to where it is most needed 
and to quickly adjust to changes in demand. Additionally, marketers need 
some assurance that, if they do not have access to a particular supplier or 
terminal, they will be able to go elsewhere for product. However, a rigid 
system of state-specific boutique fuels reduces the reliability of supply 
and increases the risk of spot shortages and price volatility.  
        Our industry has worked long and hard to discourage the spread of 
boutique fuels.  Some success was realized when the Energy Policy Act of 2005 
included a provision requiring EPA to publish a list of fuels identified in state implementation plans, with states barred from adopting new formulations 
unless they were to replace one fuel on the list with another on the list.  
These provisions clearly indicated that policy-makers were finally 
recognizing the harmful effects of widespread adoption of boutique fuels. 
        API supports the boutique fuels provisions in the Energy Policy Act 
as they should help address the issue by limiting the number of fuels that 
states may adopt.  In addition, EPA and DOE are directed to undertake 
two studies.  The first is due to Congress August 8, 2006 and is a study 
about the effects of SIP-adopted fuels programs on air quality, the 
number of fuel blends, fuel availability, fungibility and cost.   
        The second study on "Fuel System Harmonization" is due June 1, 
2008. This report is to contain recommendations for legislative and 
administrative actions that may be taken to improve air quality, reduce 
costs to consumers and producers and increase supply liquidity.  DOE 
and EPA are directed to consult with Governors, automobile 
manufacturers, state and local air pollution regulators, public health 
officials, motor fuel producers and distributors, and the public.  Last 
week, EPA announced that it has begun a dialogue with Governors to 
discuss boutique fuels, and we believe this is an important step in 
Congress's desired consultation process.  API looks forward to providing 
input to this process.  
        The results of these required studies should provide guidance to 
Congress as to whether further steps should be taken regarding boutique 
fuels.

Ethanol and Boutique Fuels
        Some are erroneously claiming that our industry is "opposed to 
ethanol" and is doing all it can to discourage its use. We believe that 
America needs all the energy resources it can obtain, and that ethanol is 
one of those resources. Our industry supports the use of ethanol as a 
valued gasoline additive. In our view, ethanol is here to stay, and it is a 
very important part of the nation's gasoline pool. In fact, in many regions 
of the country, consumers are already driving on a mixture of gasoline 
with 5.7 percent to 10 percent ethanol. 
        However, we need to keep in mind that no energy alternative is a 
panacea. Each has its plusses and minuses, but they can each play an 
important role. For example, based on various studies, the energy savings 
from corn-based ethanol are moderate - 3 to 20 percent - because 
production from corn requires significant energy input. And, Dow Jones 
News Service reported on May 1  that Warren Staley, Chairman and 
Chief Executive Officer of Cargill, Inc., estimated that, even if 100 
percent of the U.S. corn crop were used to produce ethanol, it would only 
replace about 20 percent of motor fuel.
        Some ethanol proponents are focused almost exclusively on E-85 
fuel, which consists of 85 percent ethanol and 15 percent gasoline. While 
the industry does not object to E-85, so long as it meets technical 
specifications and is of reliable quality, a sole national focus on growing 
ethanol volumes through E-85 is a risk-laden approach to achieving 
significant growth in ethanol. 
        A couple of points are worth noting in that regard:
	 Of the 169,000 retail gasoline marketing outlets, only 600 
are currently equipped to distribute E-85, and these are concentrated 
principally in the upper Midwest where the corn crop grows; and
	 Currently, there are about 6 million flex-fuel vehicles 
(FFVs) on the road (3 percent of the fleet) and, even if that number 
increases by 1 million per year over the next several years, the 
percent share of the fleet would still be small. For example, 10 
million FFVs in 2010 would be 4 percent of the fleet; 15 million 
in 2015 would be between 5 and 6 percent.  It is important to 
understand that the 97 percent of the fleet today not designed to 
operate on fuels containing more than 10 percent ethanol could 
well incur damage by using higher ethanol blends - a fact rarely 
mentioned by "E-85 only" proponents.

        Industry is concerned that, were government and key opinion leaders 
to place the entire focus for success in introducing ethanol on the number 
of new E-85 outlets, it will be the football equivalent of throwing a Hail 
Mary pass as the last play of the game -- and the odds for success will be 
equally as long.
        Our industry's prescription for success with ethanol is to concentrate 
on ethanol integration into the full gasoline pool and to permit E-85 to 
grow in those locations where it meets the test of the commercial and 
regulatory marketplace.
        We also think that individual states should not force the use of 
ethanol by devising their own blend of gasoline/ethanol mandates. The 
last thing our nation needs now is an expansion of the boutique fuels 
patchwork of state-by-state laws by mandating ethanol use at different 
concentrations and/or under different terms.  Integrating ethanol into the 
gasoline marketplace is too important - and presents too many 
challenges - to be approached in an individual, state-by-state manner. In 
order to meet consumer fuel needs, we want to produce more, refine 
more, and distribute more - but state ethanol mandates would make this 
difficult. Ethanol cannot be moved by common carrier pipeline, as is 
more than 70 percent of U.S. oil products, and requires a long supply 
chain to serve consumers. That means a longer reaction time when 
problems occur. State ethanol mandates would significantly add to that 
reaction time. We oppose this patchwork approach, whose adverse 
impacts are felt most by individual gasoline consumers. 
        What we do support is the uniform national plan enacted last year 
that will integrate more ethanol into the nation's gasoline pool at 
concentrations of up to the maximum permissible 10 percent per gallon, 
which can be utilized in the entire U.S. automotive fleet without vehicle 
modifications.  

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. 
        It should not be forgotten that the energy Americans consume today 
is brought to us 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. Oil & Gas Journal estimates that the 
industry's total U.S. reinvestment in 2006 will reach $124.1 billion, 
compared with $115 billion in 2005 and $102.4 billion in 2004. This 
represents an increase of 21 percent in just two years. Oil & Gas Journal 
also estimates that exploration and production spending in the U.S. will 
grow 11.8 percent this year and that total upstream oil and gas spending 
will reach nearly $88.9 billion. A single deepwater production platform 
can cost more than $1 billion.
        Moreover, since 1992, the five largest U.S. oil and natural gas 
companies have reinvested more than their total net income. Between 
1992 and 2005, the industry invested more than $1 trillion - on six 
continents - in a range of long-term energy initiatives: from new 
exploration and expanding production and refining capacity to applying 
industry leading technology. In fact, over this period, our cumulative 
capital and exploration expenditures exceeded our cumulative earnings. 
        Figures on earnings from investment show clearly that the oil and 
natural gas industry is in line with other industries. The U.S. Energy 
Information Administration reports that in 2004 (the latest available 
data), the return on investment - specifically, the net income divided by 
net investment in place - was 18.9 percent for the oil and gas industry 
and 17.4 percent for the S&P Industrials. From 2000 to 2004, the average 
was 13 percent for the oil and gas industry and 12.5 for the S&P 
Industrials. And from 1995 to 2004, oil and gas realized 10 percent 
compared to 13.9 for the S&P Industrials.
        Furthermore, the industry's future investments are not focused solely 
on traditional hydrocarbon projects. It is important to note that - from 
2000 to 2005 - the oil and natural gas industry invested $98 billion in 
emerging energy technologies, including renewables, in North America 
alone - this investment represents 73 percent of the total $135 billion 
spent by all U.S. companies and the federal government.  For example, 
one oil company is among the world's largest producers of photovoltaic 
solar cells; another oil company is the world's largest developer of 
geothermal energy; and the oil and gas industry is the largest producer 
and user of hydrogen. 
        It also requires billions more dollars to maintain the delivery system 
necessary to ensure a reliable supply of energy and to make sure it gets 
where it needs to go: to industry customers. Americans' energy use is 
expected to grow by one-third in the next 25 years. The industry is 
committed to making the reinvestments that are critical to ensuring our 
nation has a stable and reliable supply of energy today and tomorrow.
        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 good 
way to measure how industries perform compared to other industries. It 
is a figure that is the most widely understood and relevant to consumers 
interested in knowing how much companies earn for every gallon of 
gasoline sold. 
        Last year, the oil and natural gas industry earned 8.5 cents for every 
dollar of sales compared to an average of 7.7 cents for all U.S. industry. 
Over the last five years (2001-2005), the oil and gas industry's earnings 
averaged 5.9 cents compared to an average for all U.S. industry of 5.6 
cents. 
        It is also important to understand that those benefiting from healthy 
oil and natural gas industry earnings include numerous private and 
government pension plans, including 401K plans, as well as many 
thousands of individual American investors.  While shares are owned by 
individual investors; firms, and mutual funds, pension plans own 41 
percent of oil and natural gas company stock.  To protect the interest of 
their shareholders and help meet future energy demand, companies are 
investing heavily in finding and producing new supplies and in new 
refinery capacity.  

Windfall profits tax
        The U.S. oil and natural gas industry is not earning "windfall 
profits."  As explained in the previous section, the industry's earnings 
have been very much in line with those of other industries, and often are 
lower.  
        A "windfall profits" tax (WPT) discourages new domestic oil 
production, and makes it more attractive to produce foreign energy 
resources - thereby increasing our dependence on imported oil.  The 
Congressional Research Service (CRS) concluded that, between 1980 
and 1986, the WPT reduced domestic oil production by as much as 1.26 
billion barrels. In all, the CRS estimated that the WPT caused domestic 
oil production to fall between 1 percent and 5 percent, and caused oil 
imports to rise between 3 percent and 13 percent (1980-86).
        Adopting such a tax, even one that exempts new domestic 
investment, would set a precedent that could have a chilling effect on 
investment in U.S. energy development, since investors would be 
concerned that the tax eventually could be imposed on revenues from 
new domestic production as well.
        The WPT in the 1980s, combined with subsequent low oil prices, led 
to 20 years in which the domestic oil and gas industry was not able to 
attract sufficient capital for investment, which is contributing to the tight 
supply markets of today. According to the CRS, before the WPT was 
repealed in 1988, it generated about $38 billion in net revenues ($80 
billion in gross revenues)-money that could have been used by the 
industry to invest in new energy production and infrastructure.  The 
National Petroleum Council projects that producers will have to invest 
nearly $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.
        The Congressional Budget Office (CBO) estimated that the energy 
sector sustained between $18 billion and $31 billion in capital losses 
from Hurricanes Katrina and Rita.  These costs will be in addition to the 
new capital investments that will be required of the oil and gas industry 
to meet future U.S. energy demand.
        The recent increase in crude oil prices should encourage greater 
production from existing U.S. resources and promising new, but costly, 
alternative sources of energy.  Those increased supplies could help to 
reduce energy costs in the long run. A WPT could reverse that trend 
toward expanded production of new resources, by making many of those 
high-cost alternatives non-economic to produce in the United States.  For 
example, a company that invests in the development of oil from shale 
could make little or no profit, and still pay a significant windfall profit 
tax.
        Domestic oil and gas companies, which are already heavily taxed 
relative to their foreign competitors, must compete for foreign 
investment opportunities with those competitors.  The WPT would 
increase this already substantial tax burden and reduce the ability of 
domestic companies to compete for those foreign investment 
opportunities needed to diversify our nation's energy supply and, in turn, 
support the employment of U.S. personnel in jobs related to those 
activities both here and abroad.
        Almost all large oil and gas companies are publicly-traded entities, 
whose shares are owned by millions of investors through their 401(k)s, 
retirement plans and pension funds.  Taxing away the earnings of those 
companies negatively impacts the ability of hard-working Americans to 
achieve a more financially secure future. Moreover, taxes, not unlike 
amounts paid for raw materials and employee salaries, are a cost of doing 
business and are ultimately reflected either in the price paid by 
consumers for a company's products (e.g., gasoline and heating oil) or in 
reduced returns to shareholders.

Fuel prices: what can be done?
        In attempting to meet the fuels challenges we face, it is important to 
do no harm. The worst thing Congress could do now would be to repeat 
the mistakes of the past by overriding the structures of the free 
marketplace. Imposing new controls, allocation schemes, new taxes on 
industry, or other obstacles will only serve to make the situation much 
worse. 
        Because the market remains healthy and competitive, it is imperative 
that it be permitted to continue functioning as freely of artificial 
restraints as possible. As we have consistently maintained, the answer to 
our energy situation is to increase supply, reduce demand, and expand 
and diversify infrastructure.  The nation also needs to increase energy 
efficiency in all sectors of the economy, including transportation.
        The Energy Policy Act of 2005 signals a first step in a much-needed 
effort to enhance energy security and ensure the reliable delivery of 
affordable energy to consumers. Nevertheless, much remains to be done.
        We can no longer afford to place off limits vast areas of the Eastern 
Gulf of Mexico, off the Atlantic and Pacific coasts, and offshore Alaska. 
Similarly, we cannot afford to deny Americans consumers the benefits 
that will come from opening the Arctic National Wildlife Refuge and 
from improving and expediting approval processes for developing the 
substantial resources on federal lands in the Mountain West.
        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 112 billion barrels of oil and  656 trillion cubic feet (Tcf) of 
natural gas remaining to be discovered in the United States. Consider that 
112 billion barrels are enough oil to power more than 60 million cars for 
60 years and heat more than 25 million homes for 60 years. And 656 Tcf 
is enough natural gas to heat 60 million homes for 160 years. 
        Much of these oil and gas resources - 78 percent of the remaining to 
be discovered oil and 62 percent of the 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. Addressing these restrictions is 
critical.
        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 this country 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.
        Ten of the 12 largest oil companies in the world are controlled by 
foreign governments, and only one of the two investor-owned companies 
in the top 12 - ExxonMobil - is American. Based on potential oil and 
gas reserves - resources essential for future operations - only one of the 
16 largest oil companies in the world is headquartered in the U.S.  Most 
of the others are national oil companies owned by foreign governments. 
Nearly 80 percent of the world's reserves are owned by these national oil 
companies, and a mere 6 percent are owned by investor-owned 
companies.
While our nation is going through challenging times at the gasoline 
pump right now, it is important to understand how we operate in a global 
commodity business, and that these same problems are being 
experienced worldwide. It is critically important to note that the oil and 
gas price changes over the last two decades are in line with, and in some 
cases lag behind, other commodities. Thus, oil and gas price trends are 
not anomalies. 

Refineries
        In considering the U.S. refining situation, it is also important to 
remember that the oil and natural gas industry operates in a global 
marketplace. Many oil and gas companies are global companies, whose 
U.S. investment decisions compete not only with decisions as to how to 
allocate capital investments in the U.S. among various sectors of the 
industry, but also with competing demands and investment needs 
overseas. In a global marketplace, companies will make the best 
economic investment decisions in order to bring affordable petroleum 
products to consumers. Imports may be the more economical option than 
new U.S. refineries, but that is a decision to be left to the global 
marketplace. Government policies should encourage, not interfere with, 
the global marketplace.
        While domestic refiners have strived to increase the efficiency, 
utilization and capacity of existing refineries, these efforts have not 
enabled the U.S. refining industry to keep up with growing demand. 
Imports have been helping to meet the growing U.S. demand, although 
announced capacity additions through 2011 will exceed historic demand 
increases. We have been importing an average of about 10 percent of our 
gasoline nationally for the past three years into PADD 1 (East Coast) 
where the harbors have facilitated imports.
        During the 1990s, the oil and natural gas industry earned relatively 
poor rates of return on its 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, as well as 
additional emissions control technology on the refineries themselves, to 
meet clean air standards set by the Clean Air Act of 1990. This Act had a 
major impact on the operation of refineries in the United States and the 
return on investment realized at the time.
        Technological advancements have helped refineries produce more 
from existing facilities than they did in the past. In addition, the 
elimination of subsidies under government regulations after 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.
        The last two years have been extremely challenging for consumers 
and refiners. The industry has been working very hard to meet the needs 
of consumers. In 2004, the refinery system set records for production of 
gasoline and diesel fuel. In 2005, about 30 percent of the U.S. refining 
industry was shut down at one point as a result of Hurricanes Katrina and 
Rita. The industry is resourceful and quickly imported record amounts of 
gasoline and diesel fuel to augment this production to meet all-time high 
consumer demand and limit supply disruptions.
        Massive investments at refineries will be required in the next 10 
years to expand refinery capacity to meet growing demand and to 
comply with environmental regulations. Domestic refining capacity has 
increased over the last decade to about 17 million barrels per day and 
several capacity expansion projects are currently underway. Though the 
actual number of refineries has decreased, actual refining capacity has 
been growing.
        While no new refineries have been built in the U.S. since 1976, 
expanding and upgrading existing refineries is an ongoing process. The 
U.S. refining industry has been expanding a little more than 1 percent per 
year over the past decade - the equivalent of 12 new 200,000-barrels-
per-day refineries. And it continues to grow. 
        Based on publicly available data on announced refinery capacity 
expansion plans, over 1.3 million barrels per day of additional refinery 
capacity projects are either planned or under strong consideration for the 
years 2006 to 2011.  Such expansions will boost domestic refining 
capacity to nearly 18.5 million barrels per day - near the all-time high for 
U.S. operable refinery capacity. (This aforementioned information covers 
only expansion plans announced to the public; additional plans may be 
under initial consideration or kept confidential.)
        Some recent examples of refinery capacity expansion plans 
mentioned in publicly available information and individual company 
press releases include:
	 ConocoPhillips plans to invest $4 billion to $5 billion by 
2011 for expansion and upgrade projects in nine refineries to increase 
its U.S. refining capacity and improve utilization. An overall 
capacity increase of 230,000 barrels per day is planned, with 
40,000 barrels per day of added crude capacity to its Los Angeles 
refinery.
	 Marathon Petroleum Company is evaluating a $2.2 billion 
investment to increase the capacity of its Garyville, Louisiana 
refinery by 180,000 barrels per day to a total of 425,000 barrels 
per day. 
	 Sunoco plans to invest $1.8 billion over the next three years 
in its refineries, with an emphasis on increasing capacity by 11 percent 
to one million barrels per day. 
	 Valero plans to increase its North American refining capacity 
by 400,000 barrels per day - the equivalent of two mid-sized 
refineries - by 2009 at a cost of $5 billion. 
	 Motiva (a Shell and Saudi Refining joint venture) completed 
initial project scoping and process design for a potential 325,000 
barrels-per-day/ $3.5 billion expansion project being considered 
at its Port Arthur, Texas refinery.

        Increasing capacity at existing refineries can be a challenge for a 
number of reasons. These challenges are typically even more difficult 
when building new refineries. A new refinery location must have access 
to crude and product pipelines and other utilities to obtain the multitude 
of required permits, gain community acceptance, and attract the 
significant capital investments to design, permit, and construct. Take the 
effort to build a new refinery in Arizona, for example: the project has 
been under development for more than a decade, the site for its location 
was moved, and, while EPA issued its air permit last year, the project has 
not been able to attract the financial capital necessary to start 
construction.
        Some obstacles to additional capacity expansion or new refineries 
include:
	 Huge capital investments, often running into the tens to 
hundreds of millions of dollars for existing refineries ($9,000-$12,000 per 
daily barrel to expand), and $2 billion to $3 billion or more for a 
new refinery ($17,000 per daily barrel to build new);
	 The return on capital investment for petroleum refining and 
marketing was 7.7 percent between 1995 and 2004, which is 
below the average return of 13.9 percent for the S&P Industrials, 
according to the U.S. Department of Energy. In addition, it takes 
several years to realize a return on a refinery investment.
	 The permitting process required to construct new refineries 
or modify existing facilities is very complex and time-consuming, 
involving federal, state, and local permitting authorities;
	 The combination of regulations to reformulate fuels and those 
aimed at reducing emissions from refinery operations make the 
refining industry one of the most heavily regulated industries in 
the U.S.;
	 The refining industry has spent more than $47 billion over 
the last decade to comply with environmental and fuels regulations - 
nondiscretionary expenditures that generally yield little or no 
return on investment. Moreover, by 2010, the U.S. refining 
industry will have invested upwards of $20 billion to comply 
with new clean fuel regulations. All this investment results in 
severely reduced funding available for discretionary capacity 
expansion projects.
	 Public opposition to siting a new refinery in almost any 
community in the U.S. is highly likely, an obstacle difficult to 
overcome.
        In order to further increase U.S. refining capacity, government 
policies are needed to create a climate more conducive to investments in 
refining capacity. 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." 
        The 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. 
For example, new-source review (NSR) requirements of the Clean Air 
Act need to be reformed to clarify what triggers these reviews. Some 
refineries may be able to increase capacity with relatively minor 
adjustments, but are unsure if the entire facility's permit review would be 
triggered - a burdensome and time-consuming process.
        The best long-term solution is investment toward finding new 
supplies and continuing to improve efficiency when producing and using 
energy. Decisions about how much capacity is needed and where it is 
needed are best left to the marketplace. There is spare global refining 
capacity, and it is important to remember that the oil and natural gas 
industry operates in a global market.  It is important that government 
policies not interfere with the global market.

Conclusion
        The U.S. oil and natural gas industry is doing all it can to produce 
the fuel supply needed to meet consumer energy needs. However, the 
industry cannot meet U.S. energy challenges alone. Our nation's energy 
policy needs to focus on increasing supplies; encouraging energy 
efficiency in all sectors of the economy, including transportation; and 
promoting responsible development of alternative and non-conventional 
sources of energy. 
        Congress needs to allow the oil and gas industry to invest today's 
earnings in meeting tomorrow's energy needs. To do otherwise will 
threaten our energy future. Congress can help by opening up more of the 
resource-intensive areas in our nation that are off-limits to new 
production. Because the market remains healthy and competitive, it is 
imperative that it be permitted to continue functioning as freely of 
artificial restraints as possible. That is the most efficient way to provide 
affordable fuel to meet U.S. consumer needs.  



        CHAIRMAN BARTON.  We now want to hear from you, Mr. Dinneen.  
Your statement is in the record, and you are recognized for 7 minutes.
        MR. DINNEEN.  Thank you, Mr. Chairman, and good morning.  This 
is indeed an important and timely hearing, and I am pleased to be here to 
discuss the unprecedented growth in the domestic ethanol industry and 
the role that ethanol has played in helping refiners cost effectively 
replace MTBE in those areas where it is still being used.  
        Today's ethanol industry consists of 97 biorefineries located in 19 
different States with the capacity to process more than 1.7 billion bushels 
of grain into nearly 4.5 billion gallons of high-octane, clean-burning 
motor fuel and 9 million metric tons of livestock and poultry feed.  It is a 
dynamic and growing industry that is revitalizing rural America, 
reducing emissions in our Nation's cities, and lowering our dependence 
on imported petroleum.  
        Mr. Chairman, in large part because of the Energy Policy Act of 
2005, the U.S. ethanol industry is today the fastest growing energy 
resource in the world.  With your leadership and the tremendous support 
of members of the committee like Mr. Shimkus, the Congress last year 
enacted an historic renewable fuels standard requiring the use of at least 
7 1/2 billion gallons of renewable fuels by 2012.  That provision signaled 
a clarion call to the ethanol industry and the financial community.  The 
demand for ethanol and biodiesel was no longer uncertain, allowing the 
renewable fuels industry to grow with confidence.  And grow we have.
        There are currently 35 plants under construction.  Twenty-one of 
those have broken ground just since last August, when President Bush 
signed EPAct into law.  With existing biorefineries that are expanding, 
the industry expects more than 2.2 billion gallons of new production 
capacity to be in operation within the next 12 to 18 months, 500 million 
gallons by July 4th, another 900 million gallons by Christmas, and it will 
just continue to grow after that.  
        As the industry grows, it is changing as well.  We are embracing new 
technologies.  Each new plant that opens up is using the newest most cost 
effective and energy efficient technologies, and that will continue to be 
the case as well.  Because we are expanding at such an unprecedented 
rate, we are actually exceeding the RFS requirement of 2006 by 
25 percent.  The RFS requires just 4 billion gallons of ethanol to be used 
this year, but we will produce and sell more than 5 billion gallons this 
year.  
        Ethanol supply is not a problem.  Because we have grown so rapidly, 
we have been able to meet even higher demand for ethanol than required 
by the RFS, as refiners have chosen to remove MTBE from gasoline.  
With increased productions, increased imports, and some market 
reallocation of ethanol, refiners have now largely succeeded in 
transitioning away from MTBE to ethanol.  Again, ethanol supply has 
not been a problem in meeting the increased demand from MTBE 
replacement.  
        Getting ethanol to where it needs to be has also not been a problem.  
While ethanol is not shipped today on pipelines, the industry has created 
a virtual pipeline through aggressive use of rail, barge, and trucks to 
move ethanol quickly anywhere it needs to go.  Indeed, by not moving 
our product on the pipeline, and adding to gasoline supplies at the 
terminal gate, consumers may ultimately benefit because the pipelines 
will have more capacity to move more gasoline to those areas.  
        Refineries made the decision to remove MTBE from gasoline.  No 
provision of the Clean Air Act or the energy bill compelled them to do it.  
But having made that decision, I give them great credit for working with 
our industry and the gasoline distribution system to assure that adequate 
infrastructure exists to make the transition successful.  While there were 
very temporary challenges in a few locations, created by EPA regulations 
prohibiting commingling of RFG and RBOB, those minor transitional 
issues were addressed and the switch from MTBE to ethanol is now 
largely complete.  The system works.  
        Some have suggested that repealing the secondary tariff on imported 
ethanol is necessary to increase supplies and reduce gasoline prices.  But, 
as noted, there is no shortage of ethanol.  In part, because imports are 
already coming into the market.  The U.S. imported 130 million gallons 
last year and looks to import even more this year.  The secondary tariff is 
not a barrier to entry.  
        In fact, most ethanol does come into the country today duty free 
under preferential trade agreements such as the Caribbean Basin 
Initiative.  Moreover, incremental increases in ethanol supply would 
have no impact on gasoline prices.  Removing the tariff would have an 
impact on the investment community, however, sending a mixed and 
chilling signal to the financial community just as ethanol, including 
cellulosic ethanol, is beginning to take flight.  
        Mr. Chairman, I appreciate the opportunity to be here today, I 
appreciate your leadership on last year's energy bill, and I look forward 
to continuing to work with you and our refiner and gasoline marketing 
customers to continue to provide high-quality, cost-effective motor fuels 
across the Nation.  
        Thank you.  
        CHAIRMAN BARTON.  Thank you.
        [The prepared statement of Bob Dinneen follows:] 

           PREPARED STATEMENT OF BOB DINNEEN, PRESIDENT AND CEO, 
                      RENEWABLE FUELS ASSOCIATION

        Good morning, Mr. Chairman and Members of the Committee.  My 
name is Bob Dinneen and I am president of the Renewable Fuels 
Association, the national trade association representing the U.S. ethanol 
industry.  
        This is an important and timely hearing, and I am pleased to be here 
to discuss the unprecedented growth in the domestic ethanol industry, 
and the attendant economic, energy and environmental benefits resulting 
from that growth.  
        Ethanol has become a ubiquitous component of the U.S. motor fuel 
market.  Ethanol is blended in more than 40% of the nation's fuel, and is 
sold virtually from coast to coast and border to border.  As refiners have 
made the decision to remove MTBE from gasoline, ethanol has been 
there to replace the lost octane and volume of MTBE, without sacrificing 
the air quality benefits of the RFG program or increasing consumer costs.  
The transition from MTBE to ethanol is now largely complete, and is a 
testament to what can be accomplished when oil refiners, gasoline 
marketers and ethanol producers work together for the benefit of 
consumers.

Background
        Today's ethanol industry consists of 97 biorefineries located in 19 
different states with the capacity to process more than 1.7 billion bushels 
of grain into nearly 4.5 billion gallons of high octane, clean burning 
motor fuel and 9 million metric tons of livestock and poultry feed.  It is a 
dynamic and growing industry that is revitalizing rural America, 
reducing emissions in our nation's cities, and lowering our dependence 
on imported petroleum.  



        The 4 billion gallons of ethanol produced and sold in the U.S. last 
year contributed significantly to the nation's economic, environmental 
and energy security.  According to an analysis completed for the RFA , 
the 4 billion gallons of ethanol produced in 2005 resulted in the 
following impacts:
         Added $32 Billion to gross output;
	 Created 153,725 jobs in all sectors of the economy;
	 Increased economic activity and new jobs from ethanol 
increased household income by $5.7 Billion, money that flows directly into 
consumers' pockets;
	 Contributed $1.9 Billion of tax revenue for the Federal 
government and $1.6 Billion for State and Local governments; 
and,
	 Reduced oil imports by 170 million barrels of oil, valued at 
$8.7 Billion.

        In addition, because the crops used in the production of ethanol 
absorb carbon dioxide, the 4 billion gallons of ethanol produced in 2005 
reduced greenhouse gas emissions by nearly 8 million tons.   That's the 
equivalent of taking well over a million vehicles off the road.

Energy Policy Act Has Stimulated Significant New Ethanol 
Production
        Mr. Chairman, in large part because of the Energy Policy Act of 
2005 (EPAct), the U.S. ethanol industry is today the fastest growing 
energy resource in the world.  With your leadership, and the tremendous 
support of members of the Committee, the Congress last year enacted an 
historic Renewable Fuel Standard (RFS) requiring the use of at least 7.5 
billion gallons of renewable fuels by 2012.  That provision signaled a 
clarion call to the ethanol industry and the financial community that 
demand for ethanol and biodiesel was no longer uncertain, allowing the 
renewable fuels industry to grow with confidence.
        Indeed, there are currently 35 plants under construction.  Twenty-one 
of those have broken ground just since last August when President Bush 
signed EPAct into law.  With existing biorefineries that are expanding, 
the industry expects more than 2.2 billion gallons of new production 
capacity to be in operation within the next 12 to 18 months.  The 
following is our best estimate of when this new production will come on 
stream.



        This preceding chart reflects eight plants and three expansions we 
believe will be complete before July, representing more than 500 million 
gallons of production capacity; and another 16 plants and 2 expansion 
that will be complete before the end of the year, adding about 900 
million gallons more.  This new 1.4 billion gallons of new capacity 
represents a 32% increase in production, a phenomenal rate of growth, 
particularly when viewed in light of the 20-plus percent growth the 
industry has already achieved in each of the past several years.

Rapidly Increasing Demand
        While ethanol supply is growing exponentially, ethanol demand is 
increasing as well.  Indeed, ethanol demand in 2006 is significantly 
higher than that required by EPAct.  The reason for that is refiners have 
chosen to eliminate the use of MTBE in many of the reformulated 
gasoline areas where it has not already been removed.   Those areas 
include the Mid-Atlantic, New England and Texas.  The Energy 
Information Administration believes as much as 130,000 barrels per day 
of ethanol will be needed to meet the demand created by refiner 
decisions to replace MTBE.  
        Some have questioned the ability of the ethanol industry to meet 
such rapidly increased demand.  But given the tremendous growth in 
ethanol production capacity cited above, most analysts now agree there 
will be sufficient ethanol supplies.  For example, Valero Energy CEO 
William Klesse recently stated, "[t]he US will have enough ethanol to 
blend into gasoline during the current spike in demand as companies 
transition away from the oxygenate MTBE." 
        In addition to increased production, ethanol supplies will flow from 
existing conventional gasoline markets to MTBE replacement markets 
where it is needed more.  
        The market will also encourage increased imports in the short-term.  
Approximately 130 million gallons of ethanol were imported in 2005, 
and even higher imports are expected this year.  Twenty-five million 
gallons of ethanol were imported in February alone.   
        Approximately 115 million gallons of ethanol per month are required 
to meet mid-Atlantic and Northeast ethanol demand as MTBE is 
removed from gasoline.  Currently, there is about 95 million gallons of 
ethanol in working inventory at terminals in this area.  That equates to 25 
days of demand on hand in the Northeast and mid-Atlantic region.  
Ethanol supply is NOT a problem.
        Some have suggested repealing the secondary tariff on imported 
ethanol is necessary to increase supplies.  But, as noted above, there is no 
shortage of ethanol.  Moreover, the secondary tariff is not a barrier to 
entry.  The secondary tariff merely offsets the tax incentive oil 
companies receive for blending ethanol, regardless of its source.  
Eliminating the secondary tariff would only result in U.S. taxpayers 
subsidizing already subsidized foreign ethanol.   At a time when 
Congress is contemplating reduced domestic farm programs, it is neither 
wise nor necessary to begin subsidizing foreign ethanol and foreign sugar 
growers.  Finally, eliminating the tariff now, as the financial markets are 
contemplating significant investments in U.S. ethanol, including 
cellulosic ethanol, would send a chilling signal to those markets at a 
critical time and potentially discourage further investment in this 
promising technology.

The Transportation, Distribution and Blending Infrastructure will 
be Ready.
        The ethanol industry has worked diligently with our refiner 
customers, gasoline marketers, terminal operators and the fuel 
distribution network to assure a successful transition from MTBE to 
ethanol in these areas.
        Over the past several years, the ethanol industry has worked to 
expand a "Virtual Pipeline" through aggressive use of the rail system, 
barge and truck traffic.  As a result, we can move product quickly to 
those areas where it is needed.  Many ethanol plants have the capability 
to load unit trains of ethanol for shipment to ethanol terminals in key 
markets.  We are also working closely with terminal operators and 
refiners to identify ethanol storage facilities and install blending 
equipment.  
        Sewaren, NJ is expected to be the primary gathering point for 
ethanol for East Coast markets in 2006 because it has both unit rail car 
capacity and marine access.  Ethanol will be trucked to serve New York 
and New Jersey, and product will flow out by barge to Providence, 
Boston and Baltimore.  Additional terminal capacity exists in Albany, 
Philadelphia, Newark, Paulsboro, Carteret, Perth Amboy, Norfolk, and 
Richmond.
        Great credit must be given to the petroleum industry for the effort 
that is being made to assure success.  Examples of some of the 
investments being made to accommodate the switch from MTBE to 
ethanol in key markets include the following:
	 Unit Train unloading facilities are either being built or 
planned for Providence, RI, Linden, NJ, Baltimore, MD, and Dallas, TX.  
Already, a unit train breakout facility is in operation in Albany, 
NY.
	 Barge receiving capability is either in place or being built 
in Philadelphia, Baltimore and Houston.  
	 Transloading (rail to truck) capability is being developed 
as a transitional step for Richmond, Washington and Dallas.  More 
permanent rail terminals are being developed for these areas.

        There is no question that the dramatically accelerated removal of 
MTBE challenged the marketplace.  The EPA requirement to completely 
drain MTBE-RFG tanks and clean them before loading Reformulated 
Blendstock for Oxygenate Blending (RBOB) created some difficulties in 
a few locations.  But the problems were very short-lived and the 
transition is now largely complete.  As one industry analyst observed 
recently, "The very fact that these companies are on the record as 
discontinuing MTBE and replacing it with ethanol tells us one very 
important fact - they are prepared." 

New Technologies
        The only thing more astonishing than the growth in the ethanol 
industry is the technological revolution happening at every biorefinery 
and every ethanol construction site across the country.  Plants today are 
using such innovations as no-heat fermentation, corn fractionization and 
corn oil extraction.  With today's natural gas prices, plants are also 
looking toward new energy sources, including methane digesters and 
biomass gasification.  In short, the ethanol industry is unrecognizable 
from what it was just five years ago, and it will be unrecognizable again 
five years from now.  
        To continue this technological revolution, however, continued 
government support will be critically important.  DOE's biomass and 
biorefinery systems research and development program has been 
essential to developing new technologies.  Competitively awarded grants 
provided by this program have played a very important role in 
developing new technology. 
        Recently, DOE informed the renewable fuels industry that it was 
canceling research contracts.  Many of the grants provide technologically 
promising projects that would help move the industry forward.  The RFA 
encourages Congress to continue to provide additional funds for 
competitive solicitations.

New Feedstocks
        To date, the ethanol industry has grown almost exclusively from 
grain processing.  In the future, ethanol will be produced from other 
feedstocks, such as cellulose.  Cellulose is the main component of plant 
cell walls and is the most common organic compound on earth. 
However, it is more difficult to break down cellulose and convert it into 
usable sugars for ethanol. Yet, making ethanol from cellulose 
dramatically expands the types and amount of available material for 
ethanol production. This includes many materials now regarded as 
wastes requiring disposal, as well as corn stalks, rice straw and wood 
chips or "energy crops" of fast-growing trees and grasses.  Cellulosic 
ethanol production will augment, not replace, grain-based ethanol, but 
ultimately exponentially expand potential ethanol supplies.  
        Many companies are working to commercialize cellulosic ethanol 
production.  Indeed, there is not an ethanol biorefinery in production 
today that does not have a very aggressive cellulose ethanol research 
program.  The reason for this is that they all have cellulose already 
coming into the plant.  If they can process that material into ethanol, they 
will have a significant marketplace advantage.  
        Many companies are working to commercialize cellulosic ethanol.  
Iogen, Inc., a Canadian enzyme company, has been producing cellulosic 
ethanol from wheat straw since 2004 at a one million gallon plant in 
Ontario.  The company is planning to begin construction of a commercial 
facility in the U.S. during the summer of 2007.  Abengoa Bioenergy 
Corp., which operates four biorefineries in the U.S. today, has begun 
construction of a grain and cellulose ethanol plant in Spain.  The 
company plans to bring that technology to the U.S. as soon as the 
technology is proven successful.  Numerous other companies are moving 
toward commercialization and I am confident cellulosic ethanol will be a 
reality quite soon.

Conclusion
        In his State of the Union Address, President Bush acknowledged the 
nation "is addicted to oil" and pledged to greatly reduce our oil imports 
by increasing the production and use of domestic renewable fuels such as 
ethanol and biodiesel.  The Energy Policy Act of 2005 clearly put this 
nation on a new path toward greater energy diversity and national 
security through the RFS.  And as the ethanol industry continues to grow, 
through new technologies and new feedstocks, we will move even closer 
to realizing the President's vision of a more sustainable energy future for 
all Americans.  Thank you.

        CHAIRMAN BARTON.  We now want to hear from Mr. Slaughter, who 
is representing the refiners.  
        MR. SLAUGHTER.  Thank you, Mr. Chairman.  Thank you again for 
the invitation to appear.  
        The state of the gasoline market today reflects supply and demand, 
and the arithmetic is not complicated.  What is happening is what the 
textbooks say should happen.  With domestic demand for refined 
products continuing to accelerate, outpacing our ability to meet those 
needs with domestic supplies, coupled with the ever-increasing global 
demand for these same products, market volatility will continue.  
        Although this situation is unsatisfactory, it can only be alleviated 
and addressed with increased supply.  Recent EIA data do suggest 
improvements in the gasoline supply picture.  Gasoline inventories are 
up for the second straight week, while demand is down.  Refinery 
utilization rose to 90.2 percent due to the end of widespread maintenance 
resulting from last year's hurricane aftermath.  Refiners have also 
completed both the seasonal product turnaround, and among some, the 
transition from MTBE to ethanol use and RFG.  This should eliminate 
some of the causes for uncertainty in the market place going forward.  
        We continue to be concerned, however, about crude price levels, our 
feedstock, which have increased the cost of refiners' raw material by 
40 percent over last year.  Regardless of the 2006 demand growth rate, 
which EIA now puts at 8.9 percent, total demand for gasoline and other 
products is strong, reflecting continued U.S. economic growth.  In short, 
economic growth in the U.S. and around the world is the major culprit 
behind today's energy prices and the market situation.  
        The only things that could significantly affect this strong demand 
situation are things we don't wish to invite:  recession, depression, or a 
strong shock to the U.S. or world economy due to a calamity like last 
year's hurricanes or 9/11.  These facts lead NPRA to the conclusion that 
government and industry should act to prepare for continued strong 
economic growth, both nationally and globally, leading to increasing 
demand for energy, particularly transportation fuels.  
        This means continued vigorous competition for available 
international crude and oil product supplies, particularly gasoline and 
diesel.  U.S. demand for both crude and product will continue to 
increase, but demand in other countries, especially Asia, will increase at 
a faster rate.  This means that the United States will face strong 
competition for available supplies from lean and hungry new players in 
the marketplace.  
        The U.S. refining industry is committed to continued heavy 
investments in projects to increase domestic refining capacity, increase 
the yield of most desirable products, like gasoline and diesel, per barrel 
of crude refined, increase the ability of domestic refineries to handle a 
broader range of crudes, including heavier and sour crudes, as well as 
crude from oil sands and other nonconventional sources, and continue 
and expand environmental improvement through production of cleaner 
fuels and facility improvements and the development and 
implementation of new technologies.  
        The U.S. industry has increased domestic refining capacity by 
2 million barrels per day in the past 12 years.  This is the equivalent of 
adding almost one moderate-sized refinery each year.  This capacity 
increase was achieved at the same time the industry was also investing 
billions of dollars to comply with new environmental requirements in the 
Clean Air Act Amendments of 1990.  
        I would also point out that mergers and acquisitions in the industry 
have increased refining capacity.  Without such consolidation, some of 
the individual refineries involved might not have been economically 
viable.  A close examination of mergers and acquisitions indicates that 
purchased or merged refineries continue to operate and have often been 
expanded, in Valero's case, adding almost 400,000 barrels a day to the 
Nation's refining capacity.  
        Refiners have announced new plans for about 1.4 million barrels per 
day of additional U.S. refining capacity, most of which will come on line 
towards the end of this decade.  That is an 8 percent increase in U.S. 
refining capacity.  Some analysts believe that that 1.4 million barrel a 
day figure is a conservative estimate.  
        Mr. Chairman, I would like to end today by talking about some 
suggestions we have for policy changes that might be advantageous to 
the U.S. energy situation.  
        One, we think it is wise to move ahead with permit streamlining and 
other ways to eliminate barriers to refinery additions and new refineries.  
Congress, as part of the Energy Policy Act of 2005, passed an expensive 
provision for refinery investments.  We would recommend that Congress 
take a look at that approach, perhaps extending the current effect of it to 
apply it to the needs of new refineries as a way to stimulate new refining 
investment.  
        We are in favor of passage, and we hope House passage will come as 
soon as possible, of this committee's refinery bill, which has already 
been considered once, and I understand will be brought back shortly.  
        We do believe you should look at CAFE and tariffs for potential 
benefits.  We think that all tariffs should be looked at, and we think that 
the ethanol tariff should be looked at.  I would say that my good friend, 
Mr. Dinneen, has just painted a picture of an industry that to me doesn't 
really seem to need a mandate and a tax credit, State tax incentives, and a 
tariff barrier, and I welcome your investigation of that need.  
        We hope that Congress will pay more attention to the supply impacts 
of new environmental requirements.  In the past, Congress has not done 
that.  The impact is that I think we have less refining capacity in the U.S. 
because we have not been able to make capacity increases, because the 
investments for environmental measures have crowded out capital that 
otherwise might have been put into capacity increases.  
        You have got to remember that every barrel of gasoline that is not 
produced in the United States, diesel too, is going to have to be replaced 
by imports because we require more than we can refine here.  The 
competition for those imports of refined products, like gasoline and 
diesel, is going to heat up just the way the competition for crude has 
heated up in recent years.  You need to remember that when Congress is 
considering new environmental legislation.  
        And in closing, I would say that we would hope that everyone would 
look at the importance of keeping refining an attractive business to invest 
in.  We have a broad community of companies in the refining industry 
today, some of the biggest in the world, small regional refiners, and big 
independents.  We need to keep the refining industry an attractive 
investment for companies so we can keep this healthy, vibrant, and 
competitive industry that we have today.  
        Thank you, Mr. Chairman. 
        CHAIRMAN BARTON.  Thank you, Mr. Slaughter. 
        [The prepared statement of Bob Slaughter follows:] 

       PREPARED STATEMENT OF BOB SLAUGHTER, PRESIDENT, NATIONAL 
                 PETROCHEMICAL & REFINERS ASSOCIATION

        Chairman Barton, Ranking Member Dingell, and members of the 
Energy & Commerce Committee, NPRA, the National Petrochemical & 
Refiners Association, appreciates the opportunity to present its views on 
the current gasoline market and the role of the domestic refining 
industry.  I am Bob Slaughter, NPRA's President.  Our testimony today 
will concentrate on factors directly impacting the current and projected 
gasoline supply and the specifications which refiners have been or are 
obligated to achieve.  As you know, NPRA is a national trade association 
with 450 members, including those who own or operate virtually all U.S. 
refining capacity, as well as most of the nation's petrochemical 
manufacturers with processes similar to those of refiners. 

INTRODUCTION
        We may have reached a point in history at which the future welfare 
of our nation depends on maintaining a stable supply of transportation 
fuels and other forms of energy at reasonable prices.  It very well could 
also depend upon achieving better mutual understanding between the 
domestic energy industry (petroleum, natural gas, and refined products) 
and the public-a community greatly influenced by the deeds and words 
of Congress.  
        The state of the gasoline market today reflects supply and demand, 
and the arithmetic is not complicated.  What is happening is what the 
textbooks say should happen.  With domestic demand for refined 
products accelerating and outpacing our ability to meet those needs with 
domestic supplies, coupled with the ever-increasing global demand for 
these same products, market volatility will continue.  Although this 
situation is unsatisfactory, it can only be alleviated with increased 
supply.  In the meantime, policy makers must resist turning the clock 
backwards to the failed policies of the past.  Experience with market 
interference in the 1970s and 1980s such as price constraints, allocation 
controls, and punitive taxes demonstrate not only the failure of these 
programs, but also their adverse impact on both fuel supplies and 
consumers.
        To summarize our message, NPRA urges policymakers in Congress 
and the Administration to encourage domestic production of an abundant 
supply of petroleum, oil products, and natural gas for U.S. consumers.  
Rather than engaging in a fruitless search for questionable quick-fix 
solutions, or even worse, taking actions that could be harmful, we urge 
Congress, the Administration, and the public to exercise continued 
patience with the free market system as the nation adjusts to a volatile 
global energy market.  The nation's refiners are working hard to meet 
rising demand while complying with extensive regulatory controls that 
affect both our facilities and the products we manufacture.  
        Throughout this statement, NPRA will outline and discuss key 
factors that provide perspective on the current and future situation the 
nation confronts regarding the supply of and demand for refined 
petroleum products. 

REFINED PRODUCT MARKET FUNDAMENTALS
        Any discussion of the domestic refining industry must begin with a 
description of three fundamental facts that guide refined product markets.  
These fundamentals are that: 1) the cost of crude oil is the primary driver 
of the cost of refined product; 2) the balance between supply of and 
demand for refined products is extremely tight, and; 3) free-market 
pricing balances the system to the maximum benefit of consumers.
        In June of 2005 the U.S. Federal Trade Commission released a 
landmark study titled: "Gasoline Price Changes: The Dynamic of Supply, 
Demand and Competition."  This study determined that "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."  
As the chart below clearly demonstrates, the price of crude oil leads the 
price of wholesale and retail gasoline.
 


Source: EIA

        In addition to the cost of crude oil, the tight balance between 
refining capacity and refined product demand must be taken into account 
when to understand price changes.  Refiners have been steadily expanding 
capacity at facilities in order to keep pace with ever-growing demand.  
Over the past twelve years U.S. refining capacity has increased by over 2 
million barrels/day (b/d), the rough equivalent of a new average-size 
refinery every year.   In spite of this growth, refinery utilization rates 
remain extraordinarily high, often approaching 98% during the summer 
months.  These high rates of utilization reflect the thin margin between 
supply and demand, which causes even moderate disruptions in the 
system to be reflected in significant price changes.  In addition, the major 
event of 2005, Hurricanes Rita and Katrina's disruption of key U.S. 
refined product pipeline service and the destruction of significant 
portions of Gulf Coast refining assets, caused a temporary but 
considerable spike in transportation fuel prices.  
        In spite of the serious damage these storms inflicted on the domestic 
refining industry, no significant, long-lived transportation fuel shortage 
occurred during this period.  The rapid return to service of significant 
portions of the transportation fuels industry may be attributed to several 
factors: quick action by the federal government to waive temporarily 
regulatory requirements and release crude oil from the Strategic 
Petroleum Reserve; the efforts of the dedicated employees of the 
industry, as well as their employers, who managed to return significant 
assets to service in a short time; and importantly, higher prices.  
Increased prices, which averaged over $3.00/gallon nationwide for a 
brief period, moderated demand and attracted a record amount of refined 
product imports.  As demand declined, imports entered the fuel system, 
while facilities in areas unaffected by the disaster ramped-up production 
to provide products for the affected areas.  Subsequently, prices 
moderated and returned to pre-storm levels by the end of November.  
        Without an increase in price, there would have been little incentive 
to attract increased amounts of refined products to the United States, or 
to run refining facilities outside of the affected area at higher utilization 
rates.  Without an increase in prices, long-lived and wide-spread fuel 
shortages may have occurred.  In short, the market worked, to the benefit 
of consumers and the national economy.

DOMESTIC REFINING CAPACITY: WORKING TO MEET 
DEMAND AND IMPROVE THE ENVIRONMENT
        148 refineries currently operate in the United States, producing 
record volumes of some of the cleanest transportation fuels in the world.  
These refineries, located in 33 states, have a combined capacity of over 
17 million barrels per day (b/d) and, as previously stated, often operate at 
extremely high utilization rates, which approach 98% during the peak 
driving season.  These figures are far above the 82% average utilization 
rate of other manufacturers.  Despite these significant efforts, U.S. 
product demand continues to outstrip domestic supply.  Imports now 
account for 10% of the gasoline used by U.S. consumers.  Regionally, 
this figure is higher, as in the case of the Northeast, where imported 
products account for over 20% of total supply.  In light of the strong 
demand for gasoline and other petroleum products, domestic refiners 
have worked hard to expand existing facilities.  Over the past ten years, 
domestic refining capacity has increased substantially, by an average of 
177,000 barrels per day (b/d) of production each year.  In simpler terms, 
this means that the U.S. refining industry has added the equivalent of one 
new, larger than average refinery, each year for the past decade.  
        Looking forward, the industry has announced publicly that over 1.4 
million b/d in new capacity is slated to come online in the next few 
years.  Some estimates project a possible increase of nearly 1.7 million 
b/d of capacity over the same time frame.  With these expansions, total 
domestic capacity will reach an all time high as shown in Attachment I.
It remains doubtful, however, that these expansions will be sufficient to 
meet expected U.S. demand growth, and the nation's continued 
dependence on imports of finished product and blendstocks will 
continue.  
        Capacity expansions have occurred and will continue despite 
difficult and time-consuming obstacles, including complex permitting 
requirements and reviews, uncertainties involving the New Source 
Review program, increasingly stringent environmental requirements, and 
the difficulties of attracting sufficient investment in one of the most 
capital-intensive industries.  NPRA continues to believe that encouraging 
the growth of domestic refining capacity is a vital component of U.S. 
energy policy. 

MERGERS AND ACQUISITIONS HAVE RESULTED IN 
INCREASED CAPACITY AND COMPETITION
        Much has been made of the fact that a new grassroots refinery has 
not been built in the United States in over thirty years.  There are 
compelling reasons why: obstacles to permitting and constructing such a 
facility include enormous start-up capital requirements, environmental 
regulations, a history of low refining industry profitability, and the "Not 
In My Backyard" (NIMBY) public attitude.  Equally important, costs to 
construct a new grassroots refinery would require an investment 
averaging $17,000 per daily barrel of capacity and, at a minimum, would 
take ten years to complete.  On the other hand, capacity expansions at 
existing facilities cost in the range of $9,000 to $12,000 per daily barrel 
and can be completed in 3 to 4 years.  In short, expansions can help meet 
demand more quickly and cost effectively than construction of a new, 
green-field refinery complex.  This means more fuel for consumers in a 
shorter time period than a hypothetical new refinery could provide.  
        Significantly, while the industry has not constructed new grassroots 
facilities, improved management techniques and technological advances 
allow existing facilities to produce ever greater amounts of refined 
product.  As previously mentioned, refiners have added significant 
capacity at existing sites.  In 1981, the average refinery in the United 
States had approximately 57,000 b/d of crude oil distillation capacity.  
Today, the average refinery has a capacity of over 110,000 b/d.  Due to 
high capital requirements and increasing environmental restrictions, the 
industry closed small, inefficient facilities and has relied on economies 
of scale to save on construction costs and bring new capacity on line 
more quickly through expansion at existing sites. 
 	In addition, refiners have also made substantial investments in 
technologically advanced process units that have increased the yield of 
gasoline and other valuable "light end" products from the same amount 
of raw crude input.  Further, similar investments have been made in units 
designed to process a wider slate of crude oil, enabling the production of 
light products from heavier and sour crude oil feedstocks.  Lacking these 
mergers and acquisitions, some of the individual refineries now operating 
might not have remained economically viable and the capacity 
expansions simply could not have been accomplished.  One such 
example is Sunoco's refinery complex in the metropolitan Philadelphia 
area which now has over 550,000 barrels/day of capacity.  If Sunoco 
were unable to operate these facilities as a synergistic unit, this 
production might not be available for consumers. Phillips Petroleum's 
(now ConocoPhillips) acquisition of the Tosco refinery system increased 
capacity and maintained refinery viability on a nation-wide basis, as did 
Tosco's initial purchase of underperforming facilities.  Additionally, 
Valero Energy Corporation has increased the productive capacity of the 
refineries it has acquired by an aggregate of nearly 400,000 barrels per 
day over the past several years and plans more extensive expansions in 
the future.  An examination of other mergers and acquisitions tells the 
same story: refineries have been kept operating and have often been 
expanded as the result of mergers and acquisitions.

REFINED PRODUCT PRICING: CRUDE OIL & COMPETITION
        Two important factors must be kept in mind when examining the 
price of refined products.  First, the cost of crude oil is the single greatest 
driver of petroleum product prices.  In June of 2005 the U.S. Federal 
Trade Commission released a landmark study titled: "Gasoline Price 
Changes: The Dynamic of Supply, Demand and Competition."  This 
study determined that "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."  According to EIA data, crude oil constitutes 
55% of the cost of a gallon of gasoline, refining 22%, taxes 19% and 
distribution and marketing 4%.  Secondly, the refining industry is 
robustly competitive.  Some critics of the industry argue that recent 
mergers have reduced competitiveness and led to an increase in fuel 
prices.  This assertion is simply wrong.  The U.S. refining industry is 
highly competitive.  Fifty-four refining companies, hundreds of 
wholesale and marketing companies, and more than 165,000 retail 
outlets compete in the U.S. market.  The largest U.S. refiner accounts for 
just 13% of the nation's total capacity, and large integrated companies 
own and operate only about 10% of retail outlets.  (For comparison, 
Archer Daniel Midland, the largest producer of fuel ethanol in the U.S., 
controls nearly 25% of the U.S. ethanol market.)  No one company, or 
group of companies, sets gasoline prices.  Rather, the laws of supply and 
demand drive competitive behavior and determine pricing in the U.S. 
refining industry.  

REFINERS REJECT AND CONDEMN IMPROPER PRICING 
PRACTICES
        The tight gasoline markets of the past several years have led to 
dozens of investigations of the refining industry at the state and federal 
levels.  In each case, the industry has been cleared of wrongdoing.  
Today, as then, allegations of refiner price-fixing, price-gouging, and 
other illegal pricing practices are patently false.  
        Most recently, the Attorney General of Nebraska appointed a task 
force to investigate prices in that state.  In a report issued in January 
2006, the task force found that "hurricanes in fall 2005 functioned 
similarly to OPEC supply restrictions, producing higher prices, lower 
output, and elevated profits."  Referencing price movements in recent 
years the report notes that, "increases in the price of a barrel of oil 
accounted for 62.5 percent of the rise in gasoline prices between June 
2004 and October 2005.  Declines in refinery capacity utilization and 
increases in the share of oil imported accounted for the rest of the 
difference."  Additionally, the task force concluded that similar studies at 
the federal and state level, "have not found violations of law, and they 
generally have found competitive markets affected by worldwide 
conditions."
        Another study, conducted by the Office of the Attorney General of 
Florida, examined price increases in that state in 2004 and found that the 
major factors affecting prices in that state were: "consumer demand for 
gasoline," "refinery capacity," "refinery utilization," "inventories," 
"supply issues," and "lagged response in gasoline imports."  Importantly, 
the study found no evidence of anticompetitive behavior.  
        These reports repeat the findings of numerous others, including a 9-
month FTC investigation into the causes of price spikes in local markets 
in the Midwest during the spring and summer of 2000.  At the conclusion 
of that investigation FTC Chairman Robert Pitofsky (a recognized expert 
in antitrust law) 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."  
        NPRA regrets that the results of these investigations, and the 
findings of those now being requested, have not been and most likely 
will not be announced with the same enthusiasm and media attention 
given to news of their initiation.  

ETHANOL & MTBE: A CASE STUDY IN POLICY IMPACTS
        Recently, refiners undertook and completed annual turnarounds to 
prepare for the changeover from wintertime to summertime fuel blends.  
An unexpected complication for this year's efforts was the need for 
additional maintenance at facilities damaged by Hurricanes Katrina and 
Rita, or in the case of one major facility, an accident.  In addition, there 
was a need for deferred maintenance at those facilities originally 
scheduled for repair work during late summer/early fall of 2005, but 
which operated at higher rates of utilization and continued to produce 
fuel for consumers in the aftermath of these storms, while other refineries 
were shut for storm-related repairs.
        While these events could not have been predicted and both industry 
and government worked diligently to minimize their impacts, the fact 
remains that both direct actions and overt inaction by the federal 
government can impact and complicate the supply picture.  The results of 
these policy decisions can and do influence marketplace conditions and 
volatility.  For example, select provisions from the Energy Policy Act of 
2005 created marketplace conditions that placed increased strain on the 
nation's transportation fuels supply.
        Although The Energy Policy Act of 2005 eliminated the 2% 
oxygenate requirement for federal RFG, the act did not provide defective 
product limited liability relief for MTBE.  Further, the rules 
implementing the removal of the 2% oxygenate requirement were 
published by EPA just this week, leaving refiners in regulatory limbo 
regarding RFG and the 2% oxygenate requirement.  Refiners were 
thereby forced to make decisions regarding the transition from the 
production of wintertime to summertime fuels (required by federal 
environmental law) in the February/March 2006 timeframe.  This 
situation evidently encouraged many refiners to move ahead quickly to 
remove MTBE from the fuel supply, to ensure that summertime 2006 
RFG would still contain 2% oxygenate to ensure compliance with EPA 
regulations.  This rapid MTBE removal/ethanol switch had been 
predicted by many industry observers, and Congress was informed on 
multiple occasions that the failure to adopt MTBE limited liability could 
impact supply.  The result was considerable (but clearly anticipated) 
pressure on ethanol supply and fuel distribution infrastructure.  It is with 
some irony that we note that those who demanded that MTBE be banned 
and removed from gasoline as soon as possible are now questioning the 
actions of the refining industry as it attempts as smooth as possible a 
transition to summertime RFG while complying with the renewable fuels 
(ethanol) mandate also enacted in the Energy Policy Act of 2006.    
        This substantial increase in demand for ethanol due to MTBE 
replacement and the mandate caused prices for the blendstock to rise 
rapidly.  At the same time, the logistical challenges of changing from 
gasoline blended with MTBE to gasoline blended with ethanol (as well 
as transporting the ethanol to areas for the first time) resulted in unique 
challenges for a few wholesalers and retailers.  Refiners, as well other 
participants in the transportation fuels industry, worked very hard to 
minimize these impacts, but they occurred nonetheless.  The recent 
market disruptions were very limited and addressed in short order, and 
the system is currently adjusting to significantly reduced MTBE use.  
The experience demonstrates, however, that Congress, in spite of being 
informed by industry and outside experts and observers, often fails to 
consider fully the fuel supply impacts of legislation and implementing 
regulations.  

OTHER SUPPLY IMPACTS OF REGULATIONS
        Other significant government intervention and regulations, especially 
environmental requirements, have had a major impact on fuel supplies.  
Unlike most industries, refiners comply with regulations for both their 
product fuels and for their facilities.  In essence, the industry is impacted 
doubly by many environmental programs and faces numerous other 
regulatory burdens simultaneously as illustrated by the attached Fuels 
Timeline (see Attachment II).  While refiners support and encourage 
continued environmental progress, NPRA believes that policymakers 
have tended to overlook and take for granted the supply side of the 
environmental-energy equation.  It is imperative, in our opinion, that 
determining the impact on supply must be fully embedded in the policy-
making process.  In working with policymakers on improvements to 
fuels and facilities, NPRA has often commented that industry needs time, 
flexibility or more realistic standards to minimize negative impacts on 
fuel supply.  Policymakers, however, often opt to promulgate regulations 
that are "technology forcing," constructed with limited and often 
theoretical "margins of safety," and requiring implementation in the 
shortest time possible-all without adequate attention to fuel supply 
impacts.   
        NPRA characterizes this current environmental agenda as a 
"regulatory blizzard," consisting of about a dozen new federal programs 
from 2006 - 2012 (see Attachment III).  The majority of these 
regulations will have a direct impact on supply.  Unfortunately, 
regulators have not properly sequenced or coordinated the 
implementation of these requirements, literally stacking them one on top 
of the other.  Current fuel markets reflect, in many aspects, the 
confluence and impacts of these multiple fuel and stationary source 
requirements.  

TAKING FUEL SUPPLY FOR GRANTED
	NPRA had developed several supply-oriented recommendations to 
increase supply as the Energy Policy Act of 2005 was debated.  
Specifically, the Association recommended that Congress repeal the 2% 
oxygenation requirement for federal RFG; avoid a federal ban or 
mandatory phase-out of MTBE; resist calls for an ethanol mandate; 
extend limited product liability protection to MTBE; avoid unnecessary 
changes in fuel specifications; and take steps to increase natural gas 
production and supply.  Unfortunately, political considerations resulted 
in the exclusion of most recommendations as part of the Energy Policy 
Act of 2005.  
        Our recommendations were supported by two landmark refining 
studies issued by the National Petroleum Council (NPC), an advisory 
group to the Department of Energy.  The NPC issued a report on the state 
of the refining industry in 2000, urging 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 could result.  Unfortunately, this warning has been 
almost totally ignored, resulting in the market volatility we have 
experienced over the past few years.  
        On June 22, 2004, former Energy Secretary Abraham asked the NPC 
to update and expand its refining study and a report was released 
December 2004.  The June 22, 2004 NPC report included the following 
recommendations:  immediate implementation of comprehensive New 
Source Review reform; revision of the NAAQS compliance deadlines 
and procedures to take full advantage of emission reduction benefits 
from current clean fuels and engine programs; caution in implementation 
of the ultra low sulfur diesel regulations; limited liability protection 
against defective product claims for MTBE; further study of the boutique 
fuels issue and approval of new fuels only when cost effective relative to 
other emission reduction options; regulations based on sound science, 
cost effectiveness, and energy impacts; streamlined permitting; and 
several other proposals.  Few of the NPC recommendations have been 
implemented; frankly speaking, policymakers and opinion leaders have 
almost totally ignored the findings of these important reports.  

CONGRESS SHOULD RESIST CHANGES IN CURRENT FUEL 
SPECIFICATIONS
        As illustrated by the NPRA Regulatory Blizzard and Fuels Timeline 
cited previously, refiners face numerous challenges and fuel specification 
deadlines.  Further complicating this picture by adding new programs, or 
even eliminating existing ones, will not benefit consumers.  Last minute 
changes will increase uncertainty and upset expectations based on 
current law.   

NPRA OPPOSES FURTHER REDUCTIONS OF BOUTIQUE 
FUELS
        Current calls for the reduction of "boutique fuels," for example, may 
not provide the supply-relief that many advocates think.  NPRA believes 
that any attempt to limit the number of viable fuels in regions or nation-
wide may be counter-productive, and certainly no such change would 
have a positive impact now or during this summer. Boutique fuels 
programs in many cases represent a local area's attempt to address its 
own air quality needs in a more cost-effective way than with RFG.  
While boutique fuels are often blamed for episodic price variations 
during limited supply disruptions in specific regions, their overall impact 
on local economics is a net positive when compared to a constant 
requirement for RFG.
        Historically, the primary driver that led local areas to create 
boutique fuels was to attain the 1-hour ozone NAAQS.  When considering fuel 
controls, such areas often sought to avoid RFG, either due to concerns 
about 1) cost, or 2) use MTBE and/or ethanol, or both.  Areas that may 
need VOC (hydrocarbon) emissions reductions to achieve ozone 
attainment have been likely to favor lower RVP controlled conventional 
gasoline (CG) vs. RFG since low RVP CG is more cost effective.  Areas 
that require NOx emissions reductions to achieve ozone attainment are 
likely to favor CG as well because both CG and RFG will return similar 
NOx emission reduction benefits with the implementation of the federal 
Tier 2 gasoline sulfur program.  
        Congress passed significant provisions affecting boutique fuels just 
last year.  They have not yet been fully implemented.  Clean Air Act 
section 211(c)(4)(C) was amended by the Energy Policy Act of 2005 
requiring a joint effort of EPA and DOE to review motor fuel control 
choices by states, and further requiring both agencies consider the 
regional supply implications of such requests (see section 1541 of P.L. 
109-58).  Before granting a waiver of federal preemption, the 
Administrator of EPA is required, after consultation with the Secretary of 
Energy and after notice and comment, to find that the fuel control choice 
will not cause fuel supply or distribution interruptions, or have a 
significant adverse impact on fuel producibility in the affected area or 
contiguous areas.  NPRA strongly supports this important focus on 
supply-side impacts.  Congress should allow time for implementation of 
this new system before contemplating any changes.  
        The Energy Policy Act of 2005 includes another provision 
addressing boutique fuels.  Under this provision, EPA may not approve a 
motor fuel in a new SIP if it increases the number of approved fuels as of 
September 1, 2004, and unless EPA finds, after review and comment, 
that the new fuel will not cause supply or distribution disruptions or have 
an adverse impact on fuel producibility in the affected area or in 
contiguous areas, and unless the fuel was already in use in the same 
PADD (with the single exception of summer 7.0 psi RVP conventional 
gasoline).  By November 2005, EPA was to publish a list in the Federal 
Register of motor fuels in all SIPs as of September 1, 2004, by state and 
PADD for public review and comment.  Additionally, the Act requires a 
report by August 2006 of a joint EPA/DOE study on boutique fuels, 
including effects on air quality, fuel availability and fungibility.  These 
provisions have not yet been implemented.  
        Congress should avoid further confusion and potential disruption in 
the fuels market and rely on the scheduled joint EPA/DOE study on 
boutique fuels as a basis for any future legislative initiatives on this 
subject.  In short, NPRA supports further study of the boutique fuels 
phenomenon as outlined in last year's energy bill, and urges Congress to 
resist imposition of any additional motor fuel specification changes.  
Further changes in motor fuel specifications in the 2004 - 2010 
timeframe may very well result in additional, unwarranted supply 
constraints to a situation which already provides significant challenges 
due to the import of, Tier 2 gasoline sulfur regulations, ultra-low sulfur 
diesel regulations, revised mobile source air toxic rules, and the impact 
of revised ozone and particulate matter National Ambient Air Quality 
Standards, and others (see Attachment III).
        Certain actions could be taken by Congress to address the 
proliferation of fuel formulas without mandating specification changes.  
Key drivers for future boutique fuel proliferation are the 8-hour ozone 
NAAQS and PM 2.5 NAAQS.  Some areas will doubtless seek to add 
fuel controls as they develop State Implementation Plans to demonstrate 
attainment.  Many are looking at additional unique requirements for local 
areas, especially where stationary source options are limited or can't be 
implemented quickly.  Thus, states look to short-term, localized fuel 
controls to meet excessively compressed NAAQS attainment deadlines.   
These deadlines are not aligned with federal controls, either existing or in 
the early stages of implementation (Tier 2 Gasoline & Vehicle standards, 
Heavy Duty Highway and Non-road Diesel Sulfur standards, etc.).  This 
situation not only prevents states from counting real and significant 
emission reductions in the time required for compliance, but also adds 
considerable and unnecessary cost to the overall NAAQS program.  
        States and local areas need more time to demonstrate attainment or 
credit for existing regulatory requirements that will deliver emission 
reductions over time.  Congress should direct that states be allowed 
credit for emission reductions through 2020 resulting from federal fuel 
control programs already in place.  If this is done, much of the interest in 
and perceived need for states to enact new motor fuel controls will be 
alleviated.  
        Further, it is evident that variations in motor fuels may be reduced 
with implementation of current regulatory programs.  For example, EPA 
published the Mobile Source Air Toxics Phase 2 proposal (71 FR 15804; 
3/29/06).  The primary feature is a proposed reduction in the average 
annual benzene content in all gasoline (conventional gasoline plus RFG) 
to 0.62 vol%.  This would eliminate a current toxics control distinction 
between RFG and CG.  Furthermore, the recent removal of the oxygen 
content requirement for federal RFG reduces the difference between 
winter RFG and winter CG and between summer RFG and summer 7.0 
psi RVP CG.  In addition, the average sulfur content of RFG and CG is 
identical because of the federal Tier 2 Gasoline Sulfur program.  
Therefore, differences between RFG and CG are diminishing, which 
should reduce the attractiveness of new boutique fuels as alternatives to 
RFG.
        In sum, NPRA does not support legislation to address boutique fuels 
that changes existing specifications.  A new legislative menu of motor 
fuel choices, which NPRA does not support, should in any case 
recognize investments already made by the petroleum industry to 
produce boutique fuels and comply with existing mandates.  Failure to 
consider and balance supply implications, as well as air quality impacts, 
risks making the current supply situation worse.  

EPA SHOULD PROMULGATE RFS STANDARDS THIS YEAR/ 
CONGRESS SHOULD PREEMPT STATE ETHANOL 
MANDATES
        The Energy Policy Act of 2005 includes a renewable content 
requirement for motor vehicle fuels, the Renewable Fuels Standard 
(RFS) provision.  The RFS will be administered by EPA and require the 
increased use of ethanol, biodiesel or other renewable fuels in motor 
fuels.  It is an obligation for gasoline refiners, blenders, and importers.  
EPA published a Direct Final Rule with a limited set of RFS standards 
for 2006 that included collective compliance, not individual refinery 
compliance.  This Direct Final Rule was effective on February 28, 2006.  
        NPRA advocates a program that is understandable, allows 
unambiguous enforcement, promotes adequate flexibility for refiners and 
gasoline importers, and is developed with full recognition of its impact 
on energy supplies.  The comprehensive RFS final rule, effective in 
2007, should be in place as early as possible before January 1, 2007.  
Meeting this timetable may be difficult because the Agency has not yet 
released a proposal for public comment. 
        Congress set limits on the proliferation of new fuels in the 2005 
Energy Policy Act.  Unfortunately, new state ethanol, biodiesel or 
renewable fuel mandates can evade Congressional efforts to limit the 
number of fuels.  These programs should be preempted by the federal 
Renewable Fuel Standard pending the same energy supply impact 
analysis required for changes in local gasoline and diesel standards.  
Congress and the Administration should not grant a free pass to new 
ethanol and biodiesel mandates that proliferate fuel requirements and 
negatively impact supply. 

OTHER RECOMMENDED POLICY ACTIONS
        Congress can and should take appropriate action to help refiners meet 
the transportation fuel needs of the American public.  Regardless of 
industry profitability, the simple fact remains that supply and demand for 
refined products are in an extremely tight balance.  The refining industry 
is still working to recover fully from the impact of Hurricanes Rita and 
Katrina.  Additionally, several upcoming regulatory requirements should 
be carefully monitored for adverse supply impacts.  Necessary and 
prudent actions include the following:
	 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 only a secondary concern of policymakers.  Oil and gas 
supply concerns have played second fiddle to whatever policy goal 
seemed politically popular at the time.  As discussed above, the 
2000 NPC study of the refining industry 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.  We repeat that 
this warning has been widely disregarded.  
	 Resist tinkering with market forces, including imposition of 
"windfall profits" taxes, LIFO repeal or elimination of foreign 
tax provisions.  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.  The state of Hawaii has just cancelled its less than 
one-year old gasoline price regulation because it led to higher 
prices and supply uncertainty.  A windfall profits tax would 
discourage investment in refineries, which is needed to expand 
domestic production capacity and produce cleaner fuels.
	 Remove barriers to increased supplies of domestic oil and gas 
resources.  Refineries and other important onshore facilities have 
been welcome in limited areas throughout the country, including 
the Gulf Coast.  However, policymakers have 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 their energy resources with the rest of the nation.  This 
additional supply is sorely needed.
	 Expand the refining tax incentive provision in the Energy 
Act.  Reduce the depreciation period for refining investments from 10 to 
five years in order to remove a current disincentive for refining 
investment.  Consider allowing expensing under the current 
language to take place as the investment is made rather than when 
the equipment is actually placed in service.  Alternatively, 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 increased domestic 
refining capacity by reducing the time needed to permit expansions 
and other refinery projects.
	 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 ensure 
smooth implementation without adverse effects on 
gasoline supply. Refiners have been working closely with 
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 in June.  We remain concerned about 
industry's ability to produce the necessary volumes and 
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 closely with EPA on this 
issue, but time left to solve this problem is growing very 
short.
        	 Phase II of the MSAT (mobile source air toxics) rule for 
gasoline.  Many refiners are concerned that the 
proposed regulation could be overly stringent and 
impact gasoline supply.  We hope that EPA will finalize 
a rule that protects the environment and avoids reducing 
gasoline supply while protecting the environment.
        	 Implementation of the new 8-hour ozone NAAQS 
standard.  The current implementation schedule set by 
EPA has established ozone attainment deadlines for 
parts of the country that will be impossible to meet.  EPA 
has not made needed changes that would provide 
realistic attainment dates.  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 deadlines.  The CAIR rule and ULSD 
diesel program will provide significant reductions to 
emissions within these areas when implemented.  These 
reductions 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 adversely affect U.S. refining capacity.  
This issue needs immediate attention.

        NPRA's members are dedicated to working cooperatively with 
government at all levels to ensure an adequate supply of transportation 
fuels at reasonable prices.  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.


 
        CHAIRMAN BARTON.  And since I was the only one here, I was about 
ready to move several bills.  But I am going to run and vote and come 
back, and Mr. Shimkus will continue the hearing.  I apologize there are 
not more Members here, but many are watching on TV, and I am sure 
they will be here for the question period.  
        Mr. Becker, welcome to the committee and you are recognized for 7 
minutes.
        MR. BECKER.  Good morning, Mr. Chairman, and members of the 
committee.  I am Bill Becker, Executive Director of STAPPA and 
ALAPCO, the two national associations of State and local clean air 
agencies.  We commend you for convening this hearing.  
        I am going to focus my testimony on State and local clean fuel 
programs, often referred to as boutique fuels.  According to EPA, areas 
in 12 States currently use a total of 7 distinct fuels for boutique purposes.  
We do not dispute the serious nature of today's high fuel prices, or the 
potential supply disruptions that could occur as a result of a natural 
disaster or other extraordinary circumstance.  However, we are very 
concerned that boutique fuels have been wrongly targeted as the cause, 
especially given last summer's changes under the Energy Policy Act.  
And we disagree with assertions that these programs are responsible for 
the significant fuel price increases and could potentially compound fuel 
supply disruptions.  
        We believe that any further curtailment of State and local authorities 
to pursue such programs could unnecessarily jeopardize public health 
and clean air.  We therefore urge that Congress not further limit our 
ability to adopt boutique fuel programs.  
        Just to put this issue in context, air pollution poses a very serious 
public health problem.  Notwithstanding decades of diligent efforts, at 
least 160 million people, more than half of our population, still live in 
areas of the Nation with unhealthful levels of ozone, fine particulate 
matter, or both.  
        So why do States and localities adopt boutique fuel programs?  The 
simple answer is to achieve air pollution emissions reductions beyond 
those provided by conventional fuels.  According to GAO, for example, 
State boutique fuel programs have reduced smog forming emissions by 
up to 25 percent over conventional gasoline.  
        EPA has acknowledged the importance of fuel programs to States, 
concluding, "Fuel controls can provide significant, cost-effective 
emission reductions of VOCs and NOx.  Further, such fuel controls can 
often be implemented quickly and once implemented produce benefits 
immediately." 
        We believe States and localities have used their boutique fuels 
authority sparingly.  In fact, most areas that have adopted boutique fuel 
programs did so at the urging of the fuel suppliers, because the industry 
preferred the less expensive boutique fuel programs over the uniform 
Federal Reformulated Gasoline program.  
        According to EPA, boutique fuels deliver substantial air quality and 
public health benefits at minimal cost, ranging from three-tenths of a 
penny to three cents per gallon.  When compared to today's average 
national price for a typical gallon of regular gasoline, around $2.90 per 
gallon, boutique fuels cost literally a fraction of 1 percent of the cost of 
gasoline.  
        What is clear is that gas prices are escalating for reasons unrelated 
to clean air protection.  Moreover, gas prices have increased at the same 
rate nationwide, not just in areas with cleaner fuel.  Even within the same 
neighborhood, the price of a gallon of gas can vary by an amount far 
greater than the cost attributed to boutique fuel.  
        To the extent there is concern over the potential for boutique fuels 
to exacerbate a future fuel supply disruption, Congress addressed this issue 
just last summer under EPAct by providing the EPA with statutory 
authority to temporarily waive fuel requirements during supply 
emergencies.  This authority was used almost immediately thereafter 
following the devastation of Hurricanes Katrina and Rita.  
        Congress and the President have also taken other recent actions to 
further address any remaining concerns related to boutique fuels.  
Congress included in EPAct a provision rescinding their RFG oxygenate 
requirement that various States had expressed an interest in avoiding.  In 
addition, EPAct included a provision eliminating the possibility of any 
future increase in the number of boutique fuel types.  EPAct further 
called upon the EPA and DOE to undertake a study of the effects of State 
and local boutique fuels.  And, finally, just last week, the EPA 
Administrator launched a Presidential Task Force comprised of the 
Nation's Governors to review boutique fuels across the country and 
make recommendations.  
        In summary, we believe the ability of States and localities to adopt 
boutique fuel programs is an essential regulatory tool for controlling air 
pollution.  There is no evidence that boutique fuels contribute to high 
gasoline prices, and there are safeguards in place that allow EPA to 
respond swiftly and effectively should fuel supply disruption ever 
become an issue.  In addition, several of the key reasons areas have 
pursued boutique fuels in the past have been otherwise addressed, and in 
no case can the number of types of boutique fuels expand.  
        Add to this the fact that EPA has yet to report to Congress on the 
results of its boutique fuel study under EPAct, and further, that the 
President's boutique fuel task force has just convened, in light of all of 
this, we urge the Congress not to further limit the ability of States and 
localities to adopt boutique fuel programs.  
        Thank you.  
        [The prepared statement of S. William Becker follows:] 

       PREPARED STATEMENT OF S. WILLIAM BECKER, EXECUTIVE DIRECTOR, 
                STATE AND TERRITORIAL AIR POLLUTION PROGRAM 
        ADMINISTRATORS/ASSOCIATION OF LOCAL AIR POLLUTION CONTROL 
                               OFFICIALS

        Good morning, Mr. Chairman and members of the Committee.  I am 
Bill Becker, Executive Director of STAPPA - the State and Territorial 
Air Pollution Program Administrators - and ALAPCO - the Association 
of Local Air Pollution Control Officials - the two national associations 
of clean air agencies in 54 states and territories and over 165 major 
metropolitan areas across the United States.  The members of STAPPA 
and ALAPCO have primary responsibility under the Clean Air Act for 
implementing our nation's air pollution control laws and regulations and, 
even more importantly, for achieving and sustaining clean, healthful air 
throughout the country.  
        Our associations commend you for convening this hearing to explore 
fuel supply problems and escalating fuel prices.  These are certainly very 
important and timely issues and we understand the desire of this 
Committee, and that of your colleagues, to take swift action to address 
them.  We are pleased to have this opportunity to provide our 
perspectives, particularly regarding state and local clean fuel programs, 
often referred to as "boutique fuels."  To be clear, a boutique fuel is one 
developed and included by a state or local area in an EPA-approved State 
Implementation Plan to reduce motor vehicle emissions and improve air 
quality.  Authority for these programs is provided under Section 
211(c)(4) of the Clean Air Act.  According to EPA, areas in 12 states 
currently use a total of seven distinct types of boutique fuels.
        We are especially concerned by assertions that there has been a 
"proliferation" of boutique fuel programs and that these programs are 
responsible for fuel price increases and could potentially compound fuel 
supply disruptions should they occur.  Although we do not dispute the 
serious nature of today's high fuel prices and potential supply 
disruptions, we believe boutique fuels have been wrongly targeted as the 
cause, and that further curtailment of state and local authorities to pursue 
such programs could unnecessarily jeopardize public health and clean 
air.  Accordingly, we strongly urge that Congress not further limit the 
ability of states and localities to adopt boutique fuel programs.
        It is important to consider this in the appropriate context.  Perhaps 
the most complex air quality problem our nation faces is achievement 
and maintenance of the health-based National Ambient Air Quality 
Standards.  Notwithstanding decades of diligent effort, at least 160 
million Americans - more than half our population - still live in areas 
with unhealthful levels of 8-hour ozone, fine particulate matter or both.
        The health and environmental impacts associated with elevated 
levels of ozone are serious, including aggravation of asthma and chronic 
lung disease, permanent lung damage, reduced lung function, irritation of 
the respiratory system and cardiovascular symptoms.  Although even 
healthy individuals can be at risk from exposure to elevated levels of 
ozone, children, seniors and those with compromised respiratory systems 
are especially vulnerable.
        Pollution from airborne particulate matter also plagues our nation.  
In fact, fine particles pose the greatest health risk of any air pollutant, 
resulting in thousands of premature deaths each year.  These fine 
particles are also responsible for a variety of other adverse health 
impacts, including aggravation of existing respiratory and cardiovascular 
disease, damage to lung tissue, impaired breathing and respiratory 
symptoms, irregular heart beat, heart attacks and lung cancer. 
        There is widespread agreement that cleaner fuels have been, and will 
continue to be, critical to reducing air pollution and protecting public 
health.  The U.S. Environmental Protection Agency (EPA) has stated, 
"Fuel controls can provide significant, cost effective emission reductions 
of VOCs and NOx.  Further, such fuel controls can often be implemented 
quickly and, once implemented, produce benefits immediately, typically 
reducing emissions from each vehicle in the fleet with no need for 
vehicle fleet turnover.  This fleet-wide impact distinguishes fuels control 
from most other mobile source emission control options available to state 
and local areas."  In a June 2005 report, the Government Accountability 
Office reported that state boutique fuel programs have reduced smog-
forming emissions by up to 25 percent over conventional gasoline.
        The Clean Air Act gives primary authority for regulating the 
environmental impacts of fuels to EPA, preempting states and localities 
from controlling or prohibiting any characteristic component of a motor 
vehicle fuel or fuel additive.  However, recognizing that there may be 
extenuating circumstances warranting a state or local fuel program, in 
Section 211(c)(4) of the Clean Air Act, Congress provides two specific 
exceptions to the otherwise general preemption - if the EPA 
Administrator finds that a special state or local fuel standard is necessary 
to attain the NAAQS because 1) no other measures exist to bring about 
timely attainment or 2) other measures exist, but are unreasonable or 
impracticable.  It is important to note that in either case, EPA approval is 
required.
        Also noteworthy is the fact that over the years states have availed 
themselves of these limited exceptions very judiciously to address 
specific local air quality problems, resulting in just seven distinct types 
of boutique fuels nationwide.  States pursue boutique fuels for various 
reasons.  For instance, some are not eligible to opt into the federal 
reformulated gasoline (RFG) program and, therefore, adopt a boutique 
fuel in order to obtain cleaner-than-conventional gasoline in a particular 
area.  Others, who are eligible to voluntarily opt into federal RFG, have 
elected to pursue a low-volatility boutique fuel instead, as a less 
expensive alternative to RFG.  It is especially significant that in a 
number of instances, a state or local area seeking to reduce smog-
forming emissions pursued a boutique fuel over opting into the federal 
RFG program at the urging of the fuel suppliers.  Although federal RFG 
would have reduced not only ozone precursors, but toxic air pollutants as 
well, fuel suppliers argued instead for a low-volatility boutique fuel (i.e., 
one with a low Reid Vapor Pressure, or RVP) with more limited air 
quality benefits and a lower price tag.  Thus, fuel suppliers were "willing 
partners" in advancing boutique fuel programs over the uniform federal 
RFG program.
        According to EPA, "boutique fuels deliver substantial air quality and 
public health benefits at minimal costs - ranging from 0.3 to 3 cents per 
gallon."  When compared to today's average national price for a typical 
gallon of regular gasoline - $2.90 per gallon - boutique fuels cost 
literally a fraction of 1 percent of the cost of gasoline.  So what does 
account for a typical gallon of gasoline?  According to the U.S. 
Department of Energy's (DOE's) Energy Information Administration, 
over half (55 percent) is for domestic and foreign crude oil.  About 22 
percent is for refining (processing the crude to make gasoline, diesel fuel 
and other products for sale to refiners).  Almost 20 percent goes for taxes 
or fees that are paid to the federal, state or local governments, while 4 
percent is for distribution and marketing, including shipping by pipeline, 
storage at terminals and delivery by trucks to retail stations.
        There is no question that gasoline prices are high and climbing.  
However, gas prices are escalating for reasons unrelated to clean air 
protections.  Moreover, gas prices have increased at the same rate 
nationwide, not just in areas with cleaner fuel.  In fact, even within the 
same neighborhood, the price of a gallon of gas can vary by an amount 
far greater than the cost attributed to a boutique fuel.   For example, this 
week, for a gallon of regular gas, the price differential between two gas 
stations supplied by the same fuel company, located just blocks away 
from each other in Arlington, Virginia, was  20 cents.
        To the extent there is concern over the potential for boutique fuels to 
exacerbate a future fuel supply disruption caused by a natural disaster or 
unexpected circumstance, such as a pipeline break or refinery shutdown, 
this concern should be allayed by EPA's statutory authority to grant 
waivers.  Last summer, Congress added to this authority by including a 
provision in the Energy Policy Act of 2005 (EPAct) specifically 
authorizing the EPA Administrator to temporarily waive fuel 
requirements during supply emergencies.  This authority was used almost 
immediately thereafter, following the devastation of Hurricanes Katrina 
and Rita.
        Congress and the President have also taken other recent actions to 
further address any remaining concerns related to boutique fuels.
        Congress included in EPAct a provision rescinding the RFG 
oxygenate requirement that various states had expressed interest in 
avoiding.  Prior to EPAct, RFG was required to contain 2 percent oxygen 
by weight - a requirement that was often fulfilled by blending in the 
controversial fuel additive methyl tertiary butyl ether, or MTBE.  The 
elimination of this requirement will likely obviate the need for states to 
develop special fuel blends to avoid MTBE.
        Also included in EPAct is a provision restricting the number of 
boutique fuels to the total number of fuels approved by EPA as part of a 
State Implementation Plan as of September 1, 2004, thus eliminating the 
possibility of any future increase in fuel types.
        EPAct further calls upon EPA and DOE to undertake a study of the 
effects of state and local boutique fuels on air quality, the number of fuel 
blends, fuel availability, fuel fungibility and fuel costs.  The results of 
this study are to be reported to Congress later this year, together with any 
recommended regulatory and legislative changes.
        Some boutique fuel programs require a lower fuel sulfur content.  
However, recent implementation of EPA's landmark national low-sulfur 
gasoline regulation, as well as implementation by the agency later this 
year of national low-sulfur diesel fuel, should allow for local low-sulfur 
boutique fuel requirements to be phased out.
        And, finally, just last week, the EPA Administrator launched a 
Presidential Task Force, comprised of the nation's Governors, to review 
boutique fuels across the country.  EPA has established an ambitious 
schedule to provide the President with a final report within six to eight 
weeks.
        As states and localities work toward achieving the goal of clean, 
healthful air nationwide, it is critical that they preserve key regulatory 
tools for consideration and possible implementation in the future.  The 
ability to adopt a boutique fuel program as part of a comprehensive clean 
air plan is one such tool.  There is no evidence that boutique fuels 
contribute to high gasoline prices and there are safeguards in place that 
allow EPA to respond swiftly and effectively should fuel supply 
disruption ever become an issue.  In addition, several of the key reasons 
areas have pursued boutique fuels in the past have been otherwise 
addressed and, in no case can the number of types of boutique fuels 
expand.  Add to this the fact that EPA has yet to report to Congress on 
the results of its boutique fuels study under EPAct and, further, that the 
President has convened a special task force to study this issue and make 
recommendations.  In light of all this, STAPPA and ALAPCO urge that 
Congress not further limit the ability of states and localities to adopt 
boutique fuel programs.
        Thank you again, Mr. Chairman and members of the Committee.  I 
appreciate this opportunity to present STAPPA and ALAPCO's views 
and would be pleased to answer your questions.

        MR. SHIMKUS.  [Presiding.]  Thank you.  
        Now I would like to recognize Mr. Paul Reid, President of Reid 
Petroleum Corporation.  Sir, your full statement is in the record and you 
have 7 minutes.  
        MR. REID.  Good morning, Mr. Chairman, members of the 
committee.  My name is Paul Reid, I serve as President of Reid 
Petroleum Corporation based in Lockport, New York, near Buffalo.  I 
appear before the committee representing SIGMA and NACS.  
        We have one primary message to deliver today; that is, there are no 
short-term fixes to dramatically reduce gasoline prices or significantly 
increase gasoline supplies.  Therefore, we urge Congress and this 
committee to focus attention on options that we think will benefit 
consumers in the long term.  In addition, we feel it is important for this 
committee to understand that the overwhelming majority of retail motor 
fuel outlets are owned and/or operated by independent marketers like 
myself.  Independent marketers do not refine gasoline or diesel fuel.  
Therefore, we have long supported policies that expand supplies and 
promote a competitive market.  
        Gasoline supplies are currently tight, but adequate to meet consumer 
demand, in our opinion.  To significantly increase gasoline supplies, 
given steadily increasing demand, either domestic producers must refine 
more or the Nation must import more.  In that regard, SIGMA and 
NACS believe that Federal regulatory reforms will be necessary to assure 
that additional domestic refining capacity comes on line as quickly as 
possible.  
        In the spring of 2006, the upward pressure on gasoline prices has 
been exacerbated by several factors.  Chief among those are higher crude 
oil prices, but also EPA's Tier 2 gasoline specs became effective, the 
phase out of MTBE occurred, and the increased price of ethanol.  In fact, 
the price of ethanol has more than doubled in the past year.  
Historically, ethanol prices tracked gasoline prices rather closely.  
Currently, however, spot ethanol prices are approximately 50 cents per 
gallon over regular gasoline, currently contributing to rising gasoline 
prices.  
        I feel compelled to point out there is one factor that has not 
contributed to higher gasoline prices; that is increased retailer margins.  
Rising wholesale and retail gasoline prices generally do not translate into 
higher profit margins for gasoline retailers.  In fact, the opposite is true.  
My company's recent experience provides a perfect example of what 
may be a counterintuitive fact.  
        In February 2006, our average wholesale price for 87 grade regular 
unleaded gasoline cost $2.40 cents per gallon, including taxes, and our 
average retail price for this same grade was $2.52 cents per gallon, 
providing our company a gross margin of 12 cents per gallon.  Compare 
that gross margin to April 24, 2006, when our wholesale cost was $2.97 
per gallon, including taxes, and our retail price was $3.03 per gallon, 
providing us a 6 cents per gallon gross profit.  
        As you can see, my company was doing better; we were better off 
when the price was lower in February at $2.52 per gallon than we were 
in late April, when the price was $3.03 per gallon.  
        The only near-term step SIGMA and NACS recommends that 
Congress undertake to exert downward pressure on retail gasoline prices 
is to temporarily suspend duty on imported ethanol.  Such a tariff 
suspension will attract additional ethanol supplies to those markets where 
it is most needed, such as the East Coast, the Gulf Coast, and California.  
We believe such actions will put downward pressure on ethanol prices.  
        We want to thank this committee, particularly Chairman Barton and 
Mr. Blunt, for authoring the boutique fuels and fuel waiver amendment 
that ultimately became Section 1651 of EPAct.  The enactment of your 
amendment has slowed the balkanization of the gasoline and diesel fuel 
markets and, hopefully, has started us on a path towards a better 
harmonization of fuel specifications.  
        SIGMA and NACS recommends this committee consider 
improvements to Section 1541 of EPAct.  First, we urge Congress to 
adopt an amendment to the EPAct boutique fuels cap to gradually reduce 
the number of boutique fuels in use across the Nation.  
        Second, we encourage Congress to address the proliferation of State 
alternative boutique fuel mandates, such as ethanol and biodiesel 
mandates.  
        Third, we urge Congress to consider amending the fuel specification 
emergency supply waiver authority granted to EPA to include a hold 
harmless provision for States.  
        As a final comment, SIGMA and NACS are very concerned about 
recent legislative proposals to mandate the use of E-85.  Some 
independent marketers already sell E-85, and I expect many more will do 
so in the future.  We recommend that Congress rely on market-based 
mechanisms to encourage the use of E-85, rather than a command and 
control mandate that requires retailers to sell this fuel.  
        SIGMA and NACS appreciates the opportunity to present this 
testimony, and I am pleased to answer any questions you may have.  
Thank you.  
        MR. SHIMKUS.  Thank you very much.
        [The prepared statement of Paul D. Reid follows:] 

  PREPARED STATEMENT OF PAUL D. REID, PRESIDENT, REID PETROLEUM 
        CORPORATION, ON BEHALF OF NATIONAL ASSOCIATION OF 
    CONVENIENCE STORES AND SOCIETY OF INDEPENDENT GASOLINE 
                   MARKETERS OF AMERICA

        Good morning, Mr. Chairman, Ranking Minority Member Dingell, 
and members of the Committee.  Thank you for holding this important 
hearing.  My name is Paul Reid.  I am the President of Reid Petroleum 
Corporation in Lockport, New York.  My company owns 65 motor fuel 
outlets in Upstate New York and Northwest Pennsylvania and supplies 
gasoline and diesel fuel to 85 additional retail outlets in that area under 
long-term supply contracts.
	I appear before the Committee representing the Society of 
Independent Gasoline Marketers of America (SIGMA) and the National 
Association of Convenience Stores (NACS).  I serve as Chairman of 
SIGMA's Legislative Committee and my company also is an active 
member of NACS.  Together, SIGMA and NACS members sell 
approximately 80 percent of the gasoline and diesel fuel purchased by 
motorists in the United States each year.
        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 2005.  SIGMA 
members supply more than 35,000 retail outlets across the nation and 
employ more than 350,000 workers nationwide.
        NACS is an international trade association composed of more than 
2,200 retail member companies operating more than 100,000 stores.  The 
convenience store industry as a whole sold 143.5 billion gallons of motor 
fuel in 2005 and employs 1.5 million workers across the nation.
	In the United States, there are more than 160,000 retail outlets that 
sell motor fuel.  Of these, less than 5 percent are owned and operated by 
a major integrated oil company.  The overwhelming majority are 
independent marketers like me.  As such, we do not refine gasoline or 
diesel fuel.  Rather, we purchase fuels from producers and importers and 
sell these fuels to consumers.  Because of our dependence on others in 
the supply chain, SIGMA and NACS members always seek policies that 
maximize both the overall amount of gasoline and diesel fuel supplies 
and the number of competing suppliers of these fuels.  Independent 
marketers survive as the most cost-competitive segment of the motor 
fuels marketing industry because of ample supplies and diverse sources 
of supply.  Without either, we would cease to be a competitive force in 
the market.
	Gasoline supplies across the United States are tight, prices have been 
high, and the Energy Information Administration named 2006 the "Year 
of the Fuel Spec."  My testimony today will focus on each of these issues 
in turn and recommend policy solutions.  It is very important to note, 
however, that there are no short-term fixes to any of these issues.  The 
gasoline issues we collectively face are complex, have been building for 
at least two decades, and will not be resolved overnight.  Therefore, we 
urge Congress and this Committee to focus your attention on options that 
will benefit consumers in the long-term.

Gasoline Supply
	You have heard ample testimony from other witnesses at this hearing 
on the current state of gasoline supply.  Gasoline supplies currently are 
tight, but adequate to meet consumer demand.  There is not, in SIGMA's 
and NACS' opinion, a significant current shortfall in gasoline supplies.  
As a result, we have not supported recent calls for EPA to use the fuel 
specification waiver authority granted to the Agency under the Energy 
Policy Act of 2005 (EPAct).  EPAct authorized such waivers to respond 
to "extreme and unusual fuel supply circumstances."  Such 
circumstances existed after Hurricanes Katrina and Rita, but they do not 
exist today.
	This year, overall gasoline supplies have been constrained by several 
factors.  First, the final phase-in of EPA's Tier 2 gasoline sulfur 
standards took effect at the first of the year.  It is more difficult for 
producers to make low sulfur gasoline and the gasoline yield from a 
barrel of oil is reduced when sulfur is removed.  In addition, European 
refiners do not typically produce gasoline with the U.S. sulfur level, 
cutting off a possible source of supply relief.  Second, in significant part 
because Congress did not enact MTBE liability protection as part of the 
Energy Policy Act last year, MTBE is being phased out as a gasoline 
additive this Spring.  The removal of MTBE from the gasoline pool 
alone reduces overall supplies by approximately two percent.  At the 
same time, many producers are replacing MTBE with ethanol to gain 
octane.  In those areas of the country where reformulated gasoline (RFG) 
is required, the addition of ethanol to RFG requires a gasoline blendstock 
with lower volatility, further reducing a producer's gasoline yield from a 
barrel of crude.
	Thus, at a time when the public and many in Congress are calling for 
policies to increase domestic refining capacity and gasoline production, 
in reality the nation's existing statutes and regulations are working 
against supply maximization.  	
        SIGMA and NACS believe that the unfortunate reality is that little 
can be done in the short-term to increase gasoline supplies.  The existing 
domestic refineries are running at or near full capacity.  To significantly 
increase gasoline supplies, either domestic producers must make more or 
the nation must import more.  Some of the major domestic refiners have, 
over the past six months, announced close to 2 million barrels per day of 
capacity expansion at existing refineries.  SIGMA and NACS welcome 
these announcements, but believe that federal regulatory reforms -- such 
as streamlined refinery permitting and new source review reform, as 
advanced by Chairman Barton and Senator Inhofe -- will be necessary to 
assure that this additional capacity comes on line as quickly as possible.  
Otherwise, we will have no choice but to continue to look overseas for 
our gasoline to meet increasing demand.

Gasoline Prices
	Gasoline prices across the nation have approached or surpassed 
$3.00 per gallon over the past several weeks.  It is important to 
remember that increased gasoline prices in the Spring of each year are 
not a new phenomenon.  Since 2000, each Spring gasoline prices have 
risen an average of more than 30 cents per gallon because of the 
transition to more expensive "Summer" blends with enhanced ozone 
controls and in anticipation of the higher gasoline demand of the 
Summer driving season.
	In the Spring of 2006, the upward pressure on gasoline prices has 
been exacerbated by several additional factors.  First, crude oil prices 
have reached and stayed above $70 per barrel for an extended period of 
time.  This time last year, crude oil was trading for about $50 per barrel.  
Currently, more than 50 percent of the price of a gallon of gasoline flows 
directly from the price of the crude used to make the gasoline.  Second, 
as noted above, gasoline supplies have been tight because of new sulfur 
regulations and the phase-out of MTBE, coupled with its replacement by 
ethanol.
	Third, the price of ethanol has more than doubled over the past year.  
This would be inexplicable but for the fact that Congress itself created 
this market last year with a mandate requiring its use in ever-increasing 
quantities, tax credits to encourage its use, and import tariffs to protect 
domestic producers.  Historically, ethanol prices tracked gasoline prices 
fairly closely.  Currently, however, spot ethanol prices are approximately 
50 cents per gallon over regular gasoline.  While ethanol typically 
comprises 10 percent or less of a gallon of gasoline (more for E85 
blends), rising ethanol prices clearly have contributed to rising gasoline 
prices.
	Finally, there is one factor that SIGMA and NACS assert has not 
been a predominate factor in increasing gasoline prices -- increased 
retailer margins.  As former NACS Chairman Bill Douglass testified 
before this Committee during your post-Katrina hearings last year, 
increasing wholesale and retail gasoline prices do not translate into 
higher margins for gasoline retailers.  In fact, the opposite is true.  As 
wholesale gasoline prices rise, as they have for most of the past two 
months, retailer margins are reduced.  In some cases, wholesale prices 
rise so rapidly that retailers actually have a negative margin on every 
gallon of gasoline they sell.
	My company's experience over the past two months has been 
consistent with Mr. Douglass' testimony last year.  On February 1, 2006, 
my average wholesale 87 octane regular gasoline cost was $2.40, 
including taxes, and my average retail price for this same grade was 
$2.52.  As a result, my gross margin -- from which I must pay my 
employees, my rent, my utilities, my credit card fees, and all other 
operating costs -- was 12 cents per gallon.  Compare that gross margin to 
April 24, 2006, when my wholesale cost was $2.97 per gallon, including 
taxes, and my retail price was $3.03 per gallon, giving me a 6 cents per 
gallon gross profit.  Once my expenses are deducted, my company was 
actually making more money on gasoline sales in February at $2.52 per 
gallon than we were in late April at $3.03 per gallon.  I strongly suspect 
that my experience over the past two months is reflective of the 
experiences of nearly every gasoline retailer across the nation.
	Again, there are no immediate public policy measures that this 
Committee and this Congress can take to reduce retail gasoline prices.  
The only near-term step SIGMA and NACS recommend that Congress 
undertake to exert downward pressure on retail gasoline prices would be 
to suspend temporarily the duty on imported ethanol.  Ethanol prices 
have doubled over the past year.  The market clearly is signaling high 
demand and a shortage in supply.  Such a tariff suspension will attract 
additional ethanol supplies to those markets where it is most needed -- 
the East Coast, the Gulf Coast, and California.  Such developments will 
put downward pressure on ethanol prices.

Gasoline Specifications
	SIGMA and NACS want to thank this Committee, particularly 
Chairman Barton and Mr. Blunt, for authoring the boutique fuels and 
fuel waiver amendment that ultimately became Section 1541 of EPAct.  
For several years, we have appeared before this Committee and others in 
Congress warning of the negative supply, fungibility, and price impacts 
of boutique fuels.  The enactment of your amendment has slowed the 
balkanization of the gasoline and diesel fuel markets and, hopefully, has 
started us on a path toward more harmonized fuel specifications.  In 
addition, we congratulate you for your foresight in pushing for statutory 
authority for EPA to waive temporarily certain fuel specifications during 
unforeseeable supply emergencies -- authority that EPA exercised 
judiciously in response to Hurricanes Katrina and Rita.
	As noted, the Energy Information Administration dubbed 2006 "The 
Year of the Fuel Specification."  In addition to the Federal gasoline 
sulfur program and the phase out of MTBE I mentioned earlier, there are 
several different new fuel programs that will hit the industry, and 
consumers, in 2006.  First, EPAct's renewable fuel standard takes effect 
this year and mandates that at least 4 billion gallons of ethanol and 
biodiesel be used by the nation's refiners and importers.  Second, EPA's 
ultra low sulfur diesel fuel program will begin in June of this year.  
Finally, EPA has proposed a new mobile source air toxics regulation to 
reduce the benzene content of gasoline.  Together, all of these programs 
have combined to produce a year in which fuel specifications will change 
dramatically -- posing challenges for refiners, the motor fuel distribution 
system, retailers, and consumers.  These environmental controls do 
impose costs on industry -- costs that industry will inevitably seek to add 
to our selling price if competition permits us to do so.
	The EPAct boutique fuel restrictions were a common-sense approach 
to the proliferation of boutique fuels.  These provisions preserve 
environmental protections by providing states with ample authority to 
adopt cleaner fuels if a state's air quality concerns warrant these fuels.  
But EPAct also seeks to impose order on this process by directing states 
towards existing fuels already in use in their region to restore fungibility, 
avert supply shortages, and reduce wholesale and retail price spikes.  
Federal coordination of, and guidance to the states on, gasoline and 
diesel fuel specifications was long overdue.
	SIGMA and NACS do recommend that this Committee consider 
improvements to Section 1541 of EPAct.  First, we urge Congress to 
adopt an amendment to the EPAct boutique fuels cap to gradually reduce 
the number of boutique fuels in use across the nation.  The current cap 
does not reduce the number of boutique fuels -- it merely freezes their 
number at 2004 levels.  The adoption of a mechanism to gradually lower 
this cap over time would complete the work started by Congress in 
EPAct.
	Second, we encourage Congress to address the proliferation of state 
alternative boutique fuel mandates, such as ethanol and biodiesel 
mandates.  These alternative fuel mandates are not covered by EPAct's 
boutique fuels cap, but they should be.  The same policy goals that led 
Congress to adopt the EPAct boutique fuels cap -- increased supply, 
increased fungibility, and decreased price volatility -- are being 
undermined by a new set of state fuel mandates.  The ethanol and 
biodiesel industries have been granted by Congress a guaranteed demand 
for their product through EPAct's Renewable Fuels Standard (RFS).  
SIGMA and NACS urge Congress to expand the EPAct boutique fuel 
cap to cover these new state mandates.
	Third, we urge Congress to consider amending the fuel specification 
emergency supply waiver authority granted to EPA to include a "hold 
harmless" provision for states.  After Katrina, we learned from several 
marketers that states were hesitant to waive state fuel specifications out 
of concern that at some point in the future EPA might force the states to 
offset the modest emissions increases that might occur during the short 
emergency waiver periods with further emissions controls on other 
sources.  While the states' concerns may seem unnecessary -- why would 
EPA grant flexibility in response to a natural disaster with one hand 
while taking it away with the other? -- such situations are not 
uncommon.  Such a "hold harmless" provision would prevent state 
hesitation in following EPA's emergency supply waivers and hasten the 
recovery of adequate fuel supplies after events like Katrina and Rita.
	Finally, SIGMA and NACS are concerned about proposals on both 
sides of Capitol Hill to mandate a quick reduction in the number of fuels 
in use across the nation.  Such so-called "fuel slate" proposals are, in our 
opinion, premature.  EPAct directed DOE and EPA to study whether 
such a reduction in the number of fuels can be accomplished without 
reducing gasoline and diesel fuel supplies significantly.  A report on this 
study is due to be delivered to Congress by mid-August 2006.  SIGMA 
and NACS believe that enacting a fuel slate before the conclusions of 
this report are received is unwise and, perhaps, unnecessary.  Everyone's 
aim is to increase supplies and reduce price volatility.  If EPA and DOE 
conclude that a fuel slate will have the opposite effect in their study, then 
it clearly is not a step that many in Congress will want to take.  As a 
result, we suggest that Congress consider carefully whether the adoption 
of a fuel slate is appropriate at the current time.  Once the study's 
recommendations have been received, if the increased supply, 
environmental benefits, and product fungibility merits of a fuel slate are 
evident, then Congress can act at a future date.

Alternative Fuels
	In recent months, both the President and Congress have increased 
their focus on the alternative fuels market as a way to reduce our 
dependence on petroleum products. Currently, discussions have centered 
on the product E85, comprised of 85 percent ethanol and 15 percent 
gasoline.  Members of SIGMA and NACS follow closely the 
development of new fuels because we operate a major portion of the 
refueling infrastructure for the American motorist. However, we are very 
concerned about proposals that would establish an alternative fuels 
mandate and caution Congress against such action.
	In general, it would be premature for Congress to consider yet 
another alternative fuels mandate when the regulations to implement the 
renewable fuels standard of EPAct have not yet been written. We urge 
Congress to give the industry and the market the necessary time to adjust 
to new regulatory requirements and to take time to assess the market 
effects of such requirements before moving forward with additional 
mandates. Taking action without fully understanding the potential market 
effects of those actions would be irresponsible.
        With regard to E85 specifically, there are many facts that must be 
understood about the market viability of this product.  First, E85 is truly 
an alternative fuel that can only be used in specially designed, flexible-
fuel vehicles and less than five percent of the current motor vehicle fleet 
is comprised of these vehicles. While this percentage may rise in the 
future based on long-term plans of motor vehicle manufacturers and 
motorists' behavior, there is no guarantee that consumer demand for 
these vehicles will remain constant or increase in the future. If demand 
does increase, the number of retailers offering E85 will likewise increase, 
consistent with market demand and without a government mandate.
        Second, the costs of infrastructure development for widespread 
marketing of E85 will be significant.  Because of E85's corrosive 
properties, retailers selling E85 must dedicate a separate underground 
storage tank (UST) and dispenser system to the product. The most cost-
effective option is to install a new UST and dispenser system, which can 
cost between $50,000 and $200,000 per location, depending upon the 
market in question. Since the majority (approximately 70 percent) of 
motor fuels retailers are small businesses with 10 or fewer stores, such 
costs cannot be easily absorbed.  Furthermore, many facilities do not 
have the physical space/real estate to install an additional UST system.  
Since many facilities have only two gasoline USTs, one for regular 
unleaded and one for premium (mid-grade is provided by blending the 
two), a retailer would have to replace an existing UST system to 
accommodate E85, thereby greatly reducing the availability of gasoline. 
Such conversions will make economic sense to retailers once demand 
reaches a critical level, but forced conversions will serve only to penalize 
retailers who netted only 1-2 cents per gallon in pretax net profit in 2005.
        Third, while the domestic ethanol industry is increasing its 
production to satisfy both the renewable fuels standard (RFS) established 
in the EPAct and to replace the fuel additive MTBE, it is uncertain if this 
increase will be sufficient to meet current or future demand.  In fact, the 
industry is already diverting supplies traditionally used in conventional 
gasoline markets to satisfy the demand in reformulated gasoline markets, 
an indication that supplies are not sufficiently plentiful to completely 
satisfy national demand. These distribution efforts are further 
complicated by the state renewable fuel mandates mentioned above, 
which lock supplies within geographic borders. In addition, EPA has not 
yet finalized rules to implement the RFS and the market effects of this 
program will not be known for years to come. Therefore, given the 
supply and distribution difficulties currently being experienced, as well 
as the uncertainty surrounding the newly enacted RFS, it would be 
irresponsible to enact yet another requirement for the use of ethanol, 
especially for a fuel that is not in strong demand, such as E85.
        Fourth, according to the Renewable Fuels Association, E85 contains 
approximately 75 percent of the energy provided by regular unleaded 
gasoline. As a result, E85 offers motorists lower fuel economy and fewer 
"miles per dollar." For marketers to offer E85 at a price competitive with 
regular gasoline, E85 must be priced at a level that reflects this decreased 
energy content. Given that recent wholesale ethanol prices have matched 
or exceeded those for gasoline, it has not been practical for E85 retailers 
in most markets to price their E85 below regular unleaded without losing 
substantial money on every gallon sold. Consequently, marketers of E85 
have reported 70-80 percent reductions in sales volumes when E85 is 
priced equal to or above regular unleaded.
        Consequently, rather than pushing E85 to market via federal 
mandate, SIGMA and NACS would encourage Congress to consider 
alternative policy directions that would increase the production of E85 
fuel and flexible fuel vehicles, reduce infrastructure enhancement costs 
to accommodate the product, improve consumer awareness and 
acceptance of E85, and increase consumer demand. This would be a 
much more market-oriented and consumer-friendly approach towards an 
alternative fuels market.
                     *           *          *
	SIGMA and NACS appreciate the opportunity to present this 
testimony.  I am pleased to answer any questions you may have.

        MR. SHIMKUS.  I would now like to recognize Mr. Shea, President 
and CEO of Buckeye Partners.  Sir, your full statement is in the record 
and you have 7 minutes.
        MR. SHEA.  Good morning, Mr. Chairman.  My name is Bill Shea, I 
am President and CEO of Buckeye Partners, LP, one of the largest 
independent refined petroleum product pipeline systems in the U.S.  I am 
appearing today on behalf of the Association of Oil Pipelines and the Oil 
Pipeline Members of API.  I will summarize my testimony, and thank 
you for including my full statement in the committee's hearing record.  
        Over the coming months, a combination of trends will affect the 
functioning of oil pipelines in fulfilling their role in petroleum supply.  
First, long-term growth continues in the diversity of fuel types shippers 
seek to transport by pipeline.  Growth in so-called boutique fuels.  
        Second, this summer, the transition to ultra-low sulfur diesel fuels 
begins.  
        Third, almost simultaneously, the Nation is entering a period of 
phaseout in the use of the oxygenate MTBE and the rapid growth in the 
use of ethanol as a gasoline fuel additive.  
        Finally, we shouldn't forget that experts predict a continuation of a 
trend in stronger and more frequent hurricanes, which could knock out 
the electric power on which key oil pipelines depend for operation.  
        These elements in combination present a challenge to the petroleum 
supply system that the committee should monitor closely.  
Before discussing these trends, let me briefly describe the role of oil 
pipelines in the supply of petroleum fuels.  Oil pipelines provide about 
two-thirds of the petroleum transportation in the U.S.  Pipelines are the 
primary method of bulk transportation of petroleum over medium to long 
distances.  
        Pipeline transportation has the dual advantages of efficiency and 
safety.  About 17 percent of the annual ton-miles of our Nation's freight 
are carried by petroleum pipelines at a cost of about 2 percent of the total 
U.S. freight bill.  Deaths and injuries from petroleum pipeline 
transportation are rare, and the environmental impact of pipeline 
transportation is less than any of its alternatives.  
        The Federal government regulates the rates charged by interstate oil 
pipelines.  In fact, oil pipelines are the only part of the petroleum supply 
system that is under Federal rates regulation.  The Federal Energy 
Regulatory Commission administers the Interstate Commerce Act to 
ensure that interstate oil pipelines function as common carriers and 
charge no more than the rates filed with FERC, which are typically 
limited to a few cents per gallon.  
        Oil pipelines provide transportation services to their customers.  
These customers determine what to ship, where to ship and when to ship.  
The decision on how much to ship of each commodity and which 
destination is made by our shipper customers, not by the pipeline 
operator.  
        Now, I would like to discuss the trends the committee should 
monitor over the coming months that could affect the role of oil pipelines 
in petroleum supply.  
        First is boutique fuels.  The proliferation of the types and grades of 
petroleum products pipelines must carry continues.  Capacity of long 
haul pipelines as well as many regional pipelines actually declines as the 
number of products handled increases.  These unique products need more 
system space in both the pipeline and in tanks, so a combination of 
increased total volume moved and the operational effects of grade 
proliferation have used up what was excess capacity for product in the 
early 1990s. 
        Federal policies and State and local bans on the use of MTBE have 
led shippers to phase out MTBE as a fuel additive.  As a result, the 
transition is underway to ethanol as a gasoline additive to meet local air 
quality specifications.  Ethanol is not easily transported via pipelines, and 
as a result, nonpipeline transportation modes are being called upon to 
supply significantly larger amounts of ethanol than previously required.  
Solutions that will address or could address what pipelines carry ethanol 
are under active study by the industry and others, but at the present time, 
modes of transportation other than pipelines will carry this still relatively 
small but growing volume of ethanol in the U.S. fuel mix.  
        Another transition that will take place this summer will bring 15 
parts per million sulfur diesel fuel, ULSD, into the U.S. fuel distribution 
infrastructure under rules adopted by the Environmental Protection 
Agency.  Pipeline operators will continue to carry ULSD in pipeline 
systems in batch mode with higher sulfur fuels, including heating oil and 
high sulfur diesel up to 5,000 ppm and jet fuel up to 3,000 ppm sulfur.  
        Experience shows that sulfur contamination of ULSD increases at 
successively distant points in the pipeline system and especially after 
transfers through tankage into other pipelines.  Recognizing these 
problems, EPA has agreed to a transition period and an extension until 
October 15, 2006, the time by which fuels sold at the retail station must 
meet the 15 ppm requirement.  
        AOPL and API welcome the EPA's decision.  Affected oil pipeline 
operators are now making the investments and preparing for the 
transition period that will begin in June.  We will use this period to gain 
actual experience in transporting ULSD and use that experience to solve 
problems that may arise.  
        Experts tell us that we are in a period of significant risk of major 
hurricanes affecting the U.S. Gulf Coast, where refining centers and 
pipelines are vulnerable to storm damage and loss of electric power.  In 
2005, we all had plenty of experience with the disruption such hurricanes 
can cause.  
        Lessons of that experience are, first, restoration of the 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 harden facilities to overcome 
threats and recover rapidly when power is lost.  
        Secondly, the decision by the EPA to act quickly to waive 
temporarily area-specific fuel requirements under the Clean Air Act 
allowed the petroleum distribution system to make the most effective use 
of existing supplies.  
        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 will be required to ensure that oil 
pipeline expansions are made when needed.  Elements of such a policy 
should include coordinated Federal, State, and local permitting to allow 
operators to comply with environmental regulations and requirements in 
a timely way.  
        The Federal Energy Regulatory Commission should continue the 
recent trend to market based and adequately indexed oil pipeline rate 
treatment and needs to act promptly on requests for rates that support 
specific expansion projects.
        AOPL looks forward to working closely with this committee, the 
FERC, and the DOT to ensure that the oil pipeline industry is able to 
meet the challenges of the future.  
        Thank you, Mr. Chairman.  
        CHAIRMAN BARTON.  [Presiding.]  Thank you, Mr. Shea. 
        [The prepared statement of William H. Shea follows:] 

        PREPARED STATEMENT OF WILLIAM H. SHEA, PRESIDENT & CEO, 
         BUCKEYE PARTNERS, LP, ON BEHALF OF ASSOCIATION OF OIL 
                                 PIPELINES

        The principal points in this testimony are as follows: 
        Over the coming months, a combination of trends will affect the 
functioning of oil pipelines in fulfilling their role in petroleum supply.
	 First, a long-term growth continues in the diversity of fuel 
types shippers seek to transport by pipeline -so-called "boutique" 
fuels.  Proliferation of boutique fuels tends to reduce available 
pipeline capacity.  
	 Second, this summer, the nation is entering a period of phase 
out in use of the oxygenate MTBE and rapid growth in the use of 
ethanol as a gasoline fuel additive.  Properties of ethanol sharply 
limit the ability of the current pipeline system to carry ethanol 
fuel mixtures, so other modes of petroleum transportation must 
be relied on to deliver the growing volumes of ethanol that will 
be needed.  
	 Third, almost simultaneously, an historic transition to ultra 
low sulfur diesel (ULSD) fuels begins. EPA has agreed to a transition 
period and an extension until October 15, 2006, the time by 
which fuel sold at retail must meet the 15 ppm ULSD 
requirement.  AOPL and API welcome EPA's decision.  The 
transition is needed to allow operators to gain needed experience 
with ULSD in their systems. Operators are now making the 
investments and preparing for the transition period that will 
begin in June.
	 And finally, we should not forget that experts predict a 
continuation of a trend in stronger and more frequent hurricanes, 
which can knock out the electric power on which key oil 
pipelines and oil refineries depend for operation.  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 recover rapidly where 
power is lost despite all best efforts.

        These elements in combination present a challenge to the petroleum 
supply system that the Committee should monitor closely.  
        Oil pipelines are another component of the U.S. energy infrastructure 
that will require expansion in coming years to meet the needs of 
consumers.  Needed expansions would be facilitated by coordinated 
federal, state and local permitting to allow operators to comply with 
environmental requirements in a timely way.  FERC continue market-
based and adequately-indexed oil pipeline rate treatment ands needs to 
act promptly on oil pipeline rate requests made to support specific 
expansion projects. 

Introduction
        My name is Bill Shea.  I am President and CEO of Buckeye Partners, 
LP, one of the largest independent refined petroleum products pipeline 
systems in the United States in terms of volumes delivered, with 
approximately 5,350 miles of pipeline.  Buckeye also owns and operates 
44 refined petroleum products terminals with an aggregate storage 
capacity of approximately 17.2 million barrels in Illinois, Indiana, 
Massachusetts, Michigan, Missouri, New York, Ohio and Pennsylvania, 
and operates and maintains approximately 2,000 miles of pipeline under 
agreements with major oil and chemical companies.
        I am appearing today on behalf of the Association of Oil Pipe Lines 
and the oil pipeline members of API.  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 49 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 
Canadian oil pipeline companies. API represents over 400 companies 
involved in all aspects of the oil and natural gas industry, including 
exploration, production, transportation, refining and marketing.  
Together, these two organizations represent the vast majority of the U.S. 
pipeline transporters of petroleum products.
        My testimony 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 for our nation's petroleum 
transportation needs, with emphasis on the coming months.

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.  The environmental impact of 
pipeline transportation is less than any of its alternatives.  Oil pipelines 
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 lower consumption levels.   Even 
when an oil pipeline is an affiliate of a major integrated oil company, the 
Interstate Commerce Act and FERC oversight establish a wall between 
the pipeline portion of the firm and the owners' other operations.  

Oil Pipeline 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 the same 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 are 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 change frequently and, unlike commodity 
prices, are not adjusted as a result of short-term market circumstances.  
Because 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 reducing rate 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 must 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.  Normal 
practice is to provide transportation for all products to all destinations on 
a regular cycle. 
 
Oil Pipeline Revenues
        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 2005 in the aftermath of hurricanes Katrina and Rita provide ample 
evidence of the pipeline industry's motivation and commitment to 
business continuity 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 2004 (the most recent data available) the entire 
FERC-regulated oil pipeline industry received gross revenue of $8.0 
billion to deliver 13.4 billion barrels of crude oil and refined petroleum 
products for 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.
 
Oil pipeline industry structure
        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.

Current pipeline-related issues in petroleum supply
        Over the coming months, a combination of trends will affect the 
functioning of oil pipelines in fulfilling their role in petroleum supply.
	 First, a long-term growth continues in the diversity of fuel 
types shippers seek to transport by pipeline - growth in so-called 
boutique fuels.  
	 Second, the nation is entering a period of phase out in use 
of the oxygenate methyl tertiary butyl ether and rapid growth in the use 
of ethanol as a gasoline fuel additive.  
	 Third, this summer, an historic transition to ultra low 
sulfur diesel fuels begins 
	 And finally, we should not forget that experts predict a 
continuation of a trend in stronger and more frequent hurricanes, 
which can knock out the electric power on which key oil 
pipelines and oil refineries depend for operation.  

        These elements in combination present a challenge to the petroleum 
supply system that the Committee should monitor closely.  I'd like to 
briefly discuss each in turn.

Boutique fuels
        The proliferation of types and grades of refined petroleum products 
shippers ask pipelines to carry continues.  This growth in so-called " 
boutique" fuels puts increasing pressure on pipeline operations and by 
itself has absorbed storage and transmission capacity.  Pipeline 
companies ship petroleum products in batches, with each batch distinct.  
Before 1970, when most of the US pipeline system was designed, a 
pipeline operator typically moved of the order of 10 distinct products. 
The Clean Air Act of 1990, as implemented by EPA and various states, 
ultimately led to the numerous kinds of gasoline in demand today. 
Gasoline is only part of the story.  Fuels oils must also be segregated 
based on sulfur content (an EPA requirement) and dyed for specific 
markets (tax collection and EPA requirements).  Jet fuel also requires 
segregated batches to meet different military and domestic aviation 
specifications.  Typical large refined products pipelines today have of the 
order of 50 products regularly moving on each system over a shipping 
cycle.   However, those same pipelines also have as many as a total of 
100 - 120 product grades for which they may occasionally provide 
transportation services.  Overall, the federal government requirements 
drive the majority of segregated batches, followed by customer 
specifications, and individual state or city requirements.
        Capacity in long-haul pipelines, as well as many regional pipelines, 
declines as the number of products handled increases.  The unique 
products need more system space in both the pipeline and in tanks, so a 
combination of increased total volume moved and the operational effects 
of boutique fuels proliferation have used up what was excess capacity for 
product in the early 1990s.  For example, some tanks must be completely 
emptied of one seasonal product before the next seasonal product can be 
stored, or specialized products may only use a portion of a tank, taking 
that tank out of service while that segregated product is moving through 
or temporarily stored.  These factors reduce overall capacity.
        Capacity is also reduced from the mixing that occurs at the interface 
of adjacent product grade batches during any transportation.  This 
volume can sometimes be mixed into one or both of the adjacent batches 
and still meet the product specifications.  At other times this trans-mix 
must be removed from the pipeline system prior to delivery to the 
customer.  Thus, less than 100% of some products reach their 
destination.  If the product is unique and is transported in a large 
pipeline, this downgrade can be significant.  

Ethanol and MTBE
        Federal policies and state and local bans on the use in gasoline of 
the oxygenate methyl tertiary butyl ether have led shippers to phase out 
MTBE as a fuel additive.  As a result, a transition is underway to the use 
of ethanol as a gasoline additive to meet local air quality specifications. 
This transition produces complications for gasoline supply by pipeline.  
The U.S. industry has blended ethanol in gasoline for decades.  However, 
a significant challenge to use of ethanol is that it is not easily 
transportable through existing pipeline systems.  As a result, ethanol is 
commonly transported by means other than pipeline (truck, barge or rail) 
to terminals at the end of a pipeline and mixed with gasoline before final 
delivery for consumption.  These non-pipeline transportation modes are 
being called upon to supply significantly larger amounts of ethanol than 
previously required.  Ethanol is not easily transported via pipelines for 
several reasons. First, ethanol has a tremendous affinity to absorb water.  
Water accumulation in pipelines is a normal occurrence.  In most cases 
water enters the system through terminal and refinery tank roofs or can 
be dissolved in fuels during refinery processes.  Transportation by 
pipeline may result in sufficient water absorption to render ethanol 
unusable as a transportation fuel. If a gasoline-ethanol mixture is shipped 
in a pipeline, the water may strip some of the ethanol out, resulting in 
sub-octane fuel.  Once an ethanol blend phase-separates it is extremely 
difficult and usually impossible to re-blend. In many cases the ethanol-
water bottoms must be disposed of in accordance with hazardous waste 
regulations.
        Second, ethanol can dissolve and carry impurities that are present 
inside multi-product pipeline systems, making it harmful to motor 
vehicle engines when blended in gasoline. 
        Finally, ethanol is corrosive and may adversely affect pipeline parts. 
There is some evidence that ethanol in high concentrations can lead to 
internal stress corrosion cracking of the pipeline walls, which is hard to 
detect and manage. This may be accelerated at weld joints or "hard 
spots" where the steel metallurgy has been altered.
        Solutions that will address problems with pipelines carrying ethanol 
are under active study by the industry and others, but at the present time, 
modes of transportation other than pipelines will carry the still relatively 
small but growing volumes of ethanol in the US fuel mix.

Ultra low sulfur diesel
        Another transition that will take place this summer will bring 
significant volumes of 15 parts per million (ppm) sulfur -- ultra low 
sulfur -- diesel fuel (ULSD) into the US fuel distribution infrastructure 
under rules adopted by the Environmental Protection Agency.  Products 
pipeline operators will continue to carry ULSD in pipeline systems in 
batch mode with higher sulfur fuels, including heating oil and exempted 
high sulfur diesel up to 5000 ppm sulfur and jet fuel up to 3000 ppm 
sulfur.  The potential for contamination of ULSD during pipeline 
transportation requires attention and has been the subject of much study 
and investment in the oil pipeline industry.  Inability to deliver on-
specification ULSD product could lead to significant supply issues in 
some markets when EPA requirements go into effect.  Diesel fuel is the 
nation's primary commercial fuel for getting goods to market -- trucks, 
trains and coastal marine vessels all rely on diesel fuel to operate.  The 
ability of specific pipelines to deliver ULSD is impacted by the sulfur 
level of tendered product, system configuration, and the difficulty, given 
the lack of operating experience, of preventing ULSD contamination.  
The experience we have shows that sulfur contamination of ULSD 
increases at successively distant points in the pipeline system, and 
especially after transfers through tankage and to other pipelines.
        The oil pipeline industry is aligned with the rest of the petroleum 
industry in supporting the 15 ppm maximum sulfur standard for motor 
fuels that the President has recommended and the EPA has promulgated.  
We have no doubt that this standard is achievable. Petroleum products 
pipeline operators will ultimately be able to handle and deliver on-
specification ULSD in routine operations.  
        However, currently operators lack sufficient experience moving 
ULSD to guarantee that ULSD can be delivered to all markets on 
specification in the time frames contemplated by the EPA.  Limited 
experience by pipeline operators to date with ULSD shows that it will 
require significant effort and investment to prevent sulfur contamination 
of ULSD in pipeline systems that of necessity must transport other high 
sulfur products as well.  Moreover, this experience is currently not 
extensive enough to allow the causes of such contamination to be 
sufficiently characterized to be able to effectively eliminate it in the short 
term. 
        The oil pipeline industry is confident that the problems we currently 
see with sulfur contamination can be solved, given real experience 
transporting ULSD in our systems and adequate time to implement the 
indicated changes to our systems.  However, without the benefit of the 
knowledge that comes from actual experience with ULSD, we can not 
know what actions are needed to solve these problems.  
        Accordingly, AOPL asked EPA to allow flexibility in the supply and 
distribution system early in the program.  Early flexibility will enable 
product to be supplied while the system resolves technical and 
operational difficulties that are likely to arise.  For instance, at a 
minimum, storage tanks and other system assets must be flushed.  
Beyond that, the new fuel regulations will require new operating 
protocols throughout the system that cannot be perfected in advance of 
real world experience with 15 ppm diesel.  Flexibility is reasonable when 
the nation is implementing an unprecedented and substantial change in 
its fuels regulations.  It is essential when the nation's fuel supply is at 
issue.
        In response, EPA agreed, to establish a transition period and during 
the transition period, to raise to 22 ppm the specification for compliant 
ULSD at retail.  EPA also extended for 6 weeks, until October 15, 2006, 
the time by which fuel sold at retail must meet the 15 ppm requirement to 
within the agreed testing tolerance.  AOPL welcomes EPA's decision to 
implement a six-week extension to the time period for the distribution 
system to transition to 15 ppm fuel. 
        Affected oil pipeline operators are now making the investments and 
preparing for the transition period that will begin in June.  We are 
preparing to react quickly to experience during the transition period with 
transportation of actual volumes of ULSD.  

More Hurricanes like Katrina and Rita
        Finally, experts tell us that we are in a period of significant risk 
of major hurricanes affecting the US Gulf Coast where refining centers and 
pipelines are vulnerable to storm damage and loss of electric power. In 
2005 we all had plenty of experience with the disruptions such 
hurricanes can cause. In the aftermath of the disruptions caused by 
hurricanes Katrina and Rita, the following conclusions about petroleum 
supply that are relevant are fairly clear:
	 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.
	 EPA needs to act quickly and decisively to waive area 
specific 
fuel requirements under the Clean Air Act in the widest possible 
area during emergencies.  This allows the petroleum distribution 
system to make the most effective use of existing supplies.  
Following EPA's decisions in 2005, several refined petroleum 
product 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.
	 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. 

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 the aftermath of hurricanes 
Katrina and Rita demonstrated, when adequate pipeline capacity is not 
available, shortages, price increases and price volatility for petroleum 
consumers is the result. Even before hurricanes Katrina and Rita, we saw 
what happens when pipelines are not available, for example, in Arizona 
in 2003 and in the Midwest in 2002 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 
seeking a pipeline can sometimes also increase or decrease 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, boutique fuels and to 
seasonal fuel switches that put additional strain on the system.  
        Recently, demand for petroleum products has been increasing, and 
that trend is expected to continue. In recent years, capacity for some 
pipelines has become constrained, particularly during the summer 
driving and winter heating seasons.  These constraints, which affect both 
gasoline and distillates, will become more protracted as consumer 
demand continues to grow.  Although alternative transportation such as 
long-distance trucking is an option for shippers in certain markets, those 
alternatives are typically less attractive than reliable, efficient, cost-
effective pipeline service.  Apart from the benefits to shippers and 
refiners, expansion of pipelines would provide increased stability and 
reliability to the nation's overall energy supply.  As demonstrated by the 
effects of Hurricanes Katrina and Rita, it has become increasingly clear 
that the nation's energy supplies are subject to disruptions that can pose 
serious upsets to the national economy and security.  The availability of 
additional pipeline capacity would provide healthy redundancy to the 
system and thus an additional measure of protection from disruptions that 
could otherwise lead to product price spikes and spot outages similar to 
those witnessed during and after the hurricanes.  Pipeline expansion will 
involve right-of-way acquisition, permitting and capital investment 
issues, all of which could be affected by federal actions.
        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 will be required to ensure that oil 
pipeline expansions are made when needed.  Elements of such a policy 
should include coordinated federal, state and local permitting to allow 
operators to comply with environmental requirements in a timely way.  
The Federal Energy Regulatory Commission should continue the recent 
trend to market-based and adequately-indexed oil pipeline rate treatment.  
Finally, FERC needs to act promptly on oil pipeline rate requests made 
to support specific expansion projects.

Summary
        To summarize, the amount charged to transport oil by pipeline is 
limited 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 of 
petroleum products.  In coming months, a number of factors affecting oil 
pipeline operations and related to fuel specifications deserve the attention 
of public policymakers.  These include the continuing growth in boutique 
fuels and the transition to ethanol and ultra low sulfur diesel, as well as 
the need to prepare for more hurricanes in the US Gulf Coast.  The oil 
pipeline industry is focused on these issues and is preparing to address 
them appropriately.  
        We appreciate the opportunity to share our plans and views on these 
important issues with you.  I will be glad to try to answer any of your 
questions, and AOPL and API would be pleased to work with the 
Committee on any follow up from this hearing.

        CHAIRMAN BARTON.  We now want to hear from Mr. Conley, with 
the truckers.
        MR. CONLEY.  Good morning, Mr. Chairman, and members of the 
committee.  My name is John Conley, and I am President of National 
Tank Truck Carriers.  I want to begin by thanking you, Mr. Chairman, 
for holding this hearing and for your kind invitation to my association to 
attend.  
        National Tank Truck Carriers is a trade association comprised of 
approximately 200 trucking companies, the majority of which specialize 
in bulk transportation of hazardous products, such as gasoline, diesel 
fuel, and ethanol throughout continental North America.  The interest of 
our membership in this matter is substantial.  The National Tank Truck 
Carriers is affiliated with the American Trucking Associations.  
        The Nation's tank truck industry is a key link in the distribution 
chain that provides our economy and our citizens the petroleum products 
that allow us to maintain and improve our mobile quality of life.  To 
borrow from a well-known saying, "If your car has gasoline, your farm 
tractor has diesel fuel, and your home is warmed by fuel oil, a tank truck 
brought it."  
        NTTC was asked to discuss what impact increased use of ethanol is 
having on my industry's availability to continue providing gasoline and 
other products to service stations.  The short answer is that it has 
presented additional distribution challenges, but the tank truck industry 
does have the capacity and the management skills to meet those 
challenges.  
        The increased movement of ethanol has added to the logistical 
balancing act our fleets already have to do to meet the almost irrational 
petroleum smorgasbord of what products can be delivered to any 
political jurisdiction on any given day.  These changes often take place 
during periods when seasonal peaks are in demand.  A consistent 
national fuel policy for the country would make the distribution of these 
products less cumbersome and less costly.  
        The increased demand for the transportation of ethanol at a time 
when our trucks are operating at capacity has exasperated the situation.  
However, I am again stating with confidence that our drivers and fleets 
will meet the demand.  As Mr. Shea observed, ethanol does not move by 
pipeline.  Our trucks are picking up ethanol directly from suppliers or 
transloading the product from railcars or barges.  We are able to load 
much faster from barges, contrary to those instances where we have 
found our drivers sometimes have to wait in long lines to transfer from 
railcars.  
        In trucking, time is money, and time waiting is money not well spent.  
I am sure we will be able to work with our rail partners to devise quicker 
ethanol transfer procedures.  Obviously, as rivers freeze and the 
inevitable rail dislocations occur, more demand will exist for tank truck 
transportation from ethanol producers to our blending facilities.  
At this point, I would like to anticipate two questions and state that 
National Tank Truck Carriers would not support increasing hours of 
service or raising weight limits in existing trailers as short-term solutions 
to gasoline delivery disruptions.  In our industry, everything takes a 
second seat to safety.  
        As tank truck carriers, we do not set the price of fuel or determine 
what fuels will be produced.  However, we are impacted by the almost 
daily changes in these two key factors.  It is not uncommon for our 
drivers to be sitting in line at one terminal only to be contacted by 
dispatch and told to travel to another location because price at the 
terminal has dropped.  This shopping for gas is another unproductive use 
of tank truck industry manpower and equipment, but it is a fact of life.  It 
is controlled by our customers.  
        As supplies of various blends ebb and flow from one site to another, 
our trucks also chase supply.  We are finding that those trucks often have 
to go longer distances to load ethanol or other products because of supply 
and demand changes by producers and retailers.  
        While ultra low sulfur diesel is not a subject of this hearing, 
widespread introduction of that latest new fuel will further restrict 
driving equipment capacity, especially if ULSD shippers or retailers 
decide we will have to provide dedicated equipment.  
        I want to briefly describe how we transport ethanol gasoline and 
other petroleum products.  Trailers for these products are built to 
specifications developed by the Department of Transportation.  Our 
drivers must hold a commercial driver's license with a hazardous 
material endorsement and a cargo tank endorsement.  To qualify for the 
HM endorsement, the drivers must undergo a background check, 
including fingerprinting.  Rethinking the whole approach to HM 
endorsements would enable us to hire drivers and put them to work more 
quickly.  I know that is an issue for another day, yet I feel it is worthy of 
your attention.  
        Tank trailers used to haul gasoline also can and are being used to 
transport ethanol.  In the most productive situation, a carrier can haul 
ethanol into a petroleum trailer terminal and haul gasoline back from the 
terminal to a retailer.  Hopefully, we will get to the point where we can 
see a more efficient utilization of our fleets in this way.  
        In other cases, carriers are diverting trailers and drivers from 
gasoline service to handle ethanol transportation.  But, again, we are 
meeting that demand as well.  
        We even have some carriers who do not transport gasoline, but have 
become involved in ethanol.  This potential additional capacity is one 
factor that makes me confident in saying we will meet the distribution 
challenges we face today.  
        Thank you for your attention and, for me, the personal honor of 
appearing before you.  Thank you.  
        CHAIRMAN BARTON.  Thank you, Mr. Conley. 
[The prepared statement of John Conley follows:] 

       PREPARED STATEMENT OF JOHN CONLEY, PRESIDENT, NATIONAL TANK 
                        TRUCK CARRIERS, INC.

        Mr. Chairman and members of the Committee.
        Good morning.  My name is John Conley, and I am the president of 
the National Tank Truck Carriers (NTTC).   I want to begin by thanking 
you, Mr. Chairman, for holding this hearing and for your kind invitation 
to my association to participate. 
        National Tank Truck Carriers is a trade association comprised of 
approximately 200 trucking companies, the majority of which specialize 
in bulk transportation of hazardous products, such as gasoline, diesel 
fuel, and ethanol throughout continental North America.  The interest of 
our membership in this matter is substantial. In addition to the common 
carriers NTTC represents, petroleum products also are hauled by private 
truck fleets operated by the major oil companies and by petroleum 
marketers. NTTC is affiliated with the American Trucking Associations.
        The Nation's tank truck industry is a key link in the distribution 
chain that provides our economy and our citizens the petroleum products 
that allow us to maintain and improve our mobile quality of life. To 
borrow from a well knowing saying, "If your car has gasoline, your farm 
tractor has diesel fuel, and your home is warmed by fuel oil, a tank truck 
brought it."
        NTTC was asked to discuss what impact increased use of ethanol is 
having on my industry's ability to continue providing gasoline and other 
products to service stations.  The short answer is that it has presented 
additional distribution challenges but that the tank truck industry does 
have the capacity and management skills to meet those challenges. 
        The increased movement of ethanol has added to the logistical 
balancing act our fleets already have to do to try to meet the almost 
irrational  petroleum smorgasbord of  what products can be delivered to 
what political jurisdiction on what day. These changes often take place 
during periods of seasonal peaks in demand. Our entire petroleum 
distribution system would be less cumbersome and less costly if this 
county had a realistic and consistent national fuel policy. The addition of 
increased demand for ethanol transportation at a time when our trucks 
are being used to capacity has exacerbated the situation. However, I 
again state with confidence that our drivers and fleets will meet the 
demand.
        As this committee is aware, ethanol does not move by pipeline. Our 
trucks are picking ethanol up directly from suppliers or are transloading 
the product from railcars or barges. We are able to load quicker from 
barges and have found that our drivers do sometimes have to wait in long 
lines to transfer from railcars.  In trucking, time is money and time 
waiting is money not well spent.  I am sure we will be able to work with 
our rail partners to devise quicker ethanol transfer procedures.  
Obviously, as rivers freeze and the inevitable rail dislocations occur, 
more demand will exist for tank truck transportation from ethanol 
producer to blending facilities.
        At this point I would like to anticipate two questions and state that 
National Tank Truck Carriers would not support increasing hours of 
service or raising weight limits in existing trailers as short-term solutions 
to gasoline delivery disruptions.  In our industry, everything takes a 
second seat to safety.
        As tank truck carriers, we do not set the price of fuel or determine 
what fuels will be produced.  However, we are impacted by the almost 
daily changes in these two key factors.  It is not uncommon for our 
drivers to be sitting in line at one terminal only to be contacted by 
dispatch and told to travel to another location because price at that 
terminal has dropped.  This "shopping for gas" is another unproductive 
use of tank truck industry manpower and equipment, but it is a fact of 
life.  
        As supplies of various blends ebb and flow from one site to another, 
our trucks also chase supply.  We are finding that those trucks often have 
to go longer distances to load ethanol or other products because of supply 
and demand changes by producers and retailers.  While Ultra Low Sulfur 
Diesel (ULSD) is not a subject of this hearing, widespread introduction 
of that latest new fuel will further restrict driver and equipment capacity, 
especially if ULSD shippers or retailers decide that we will have to 
provide "dedicated" equipment.
        I would like to briefly describe how we transport ethanol, gasoline 
and other petroleum products.  Trailers for these products are built to 
specifications developed by the Department of Transportation. Our 
drivers must hold a Commercial Driver's License with a hazardous 
materials endorsement and a cargo tank endorsement.  To qualify for the 
HM endorsement, the drivers must undergo a background check and 
fingerprinting.  Rethinking the whole approach to HM endorsements 
would enable us to hire drivers and put them to work more quickly.  I 
know that is an issue for another day. 
        Tank trailers used to haul gasoline also can and are being used to 
transport ethanol.  In the most productive situation, a carrier can haul 
ethanol into a petroleum terminal and haul gasoline back from that 
terminal to a retailer.  Hopefully, we will get to the point where we will 
see more efficient utilization of our fleets in this way.  In other cases, 
carriers are diverting trailers and drivers from gasoline service to handle 
ethanol transportation.
        We even have some carriers who do not transport gasoline that have 
become involved in hauling ethanol.  This potential additional capacity is 
one factor that makes me confident in saying we will meet the 
distribution challenges we face today.
        Thank you for your attention and the personal honor of appearing 
before you. I would be pleased to answer any questions.

        CHAIRMAN BARTON.  The Chair is going to recognize himself for the 
first 5 minutes of questions.  
        Mr. Dinneen, it is obvious that you have got a success story on your 
hands in your industry, which is a good thing for America and a good 
thing for the many people that work in the ethanol industry.  I am 
supportive of ethanol, but I am somewhat puzzled, and I share some of 
Mr. Slaughter's concerns.  
        Given that the United States is now the world's largest producer of 
ethanol, we have a mandate for, I think, 7.8 billion gallons over time, 
why do we still have to have the tariff protection on imports and the 
subsidy on domestic production?  
        MR. DINNEEN.  Well, Mr. Chairman, I think we still have a long way 
to go before we can have the kind of domestic renewable energy that we 
want to have.  We want to have continued investment in this industry.  I 
think the notion about the tariff, as I indicated, is sort of built upon a 
series of false premises.  It is a solution in search of a problem.  Because 
the tariff today is not a barrier to entry.  You have ethanol coming into 
this country through various preferential trade agreements, NAFTA, the 
Andean Free Trade Agreement, and most assuredly the CBI.  A lot of 
ethanol comes in duty free already.  If the marketplace needed additional 
imports, it could come in duty free through the CBI today.  You don't see 
a real ramp up in CBI demand.  
        Even in Brazil, however, we are importing directly from Brazil, and 
they have built a heck of a program down there through 35 years of tax 
credits, of production mandates, of requirements for use, infrastructure 
development, debt forgiveness, export enhancement, all of which makes 
sense because that country today is pretty much energy independent.  
They don't need our incentives as well.  
        All the tariff does is offset the benefit that refiners get when they 
blend ethanol to the source, in effect, asking Brazilians to pay the benefit 
of the tax incentive up front.  
        CHAIRMAN BARTON.  Well, I am still puzzled.  Now, I may not have 
the latest numbers, but I show that imports last year from the CBI in 
thousands of barrels was 1,882,000 barrels, and the allowed importation 
for the CBI this year is 6,507, which would be 6.5 million, and that there 
were no tariffs paid on those last year because they are under the ceiling, 
and that the only country that actually paid the tariff was Brazil, which 
we imported 688,000 barrels from Brazil, and they paid almost 
$16 million.  
        It would seem to me when you look at the price for ethanol, and 
again, this is 3 months old, so it may have changed, but in March of this 
year, March the 5th, the spot price for ethanol on the New York market 
was a little over $2.50 a gallon.  That same day the price for gasoline on 
that same market was about $1.90.  
        If gasoline prices are higher than ethanol prices, and only one nation 
was paying the tariff last year, and the ceiling from the Caribbean Basin 
Initiative is over 6 million barrels this year, why would it not be 
acceptable, if for nothing else, as a symbolic gesture, to reduce the tariff 
or suspend it for a year or 2 years?  I just don't understand that.  
        MR. DINNEEN.  A couple of points.  First of all, the spot market 
pricing, I mean it has gone up because demand has been rising. 
        CHAIRMAN BARTON.  What is the price for ethanol?  
        MR. DINNEEN.  Today, the spot market price is $2.90. 
        CHAIRMAN BARTON.  And what is gasoline price?  
        MR. DINNEEN.  $2.38. 
        CHAIRMAN BARTON.  So it is over the gasoline price?  
        MR. DINNEEN.  But, Mr. Chairman, that is without the incentive.  
Remember, gasoline companies are going to get a 51 cent tax incentive 
when they blend that ethanol.  So net the tax incentive, the price is 
comparable.  It is $2.39 versus $2.38.  
        But the important point, Mr. Chairman, is the spot market price is 
almost irrelevant to how ethanol is sold in this country.  Ninety percent 
of the ethanol that is sold across the country is sold under long-term 
contracts, which are generally--
        CHAIRMAN BARTON.  What are those prices?  
        MR. DINNEEN.  About 40 or 50 cents below the spot market 
generally.  Some are even lower than that.  So even on the spot market 
today, ethanol is trading at parity to gasoline, net the incentive.  And as 
90 percent of the ethanol sold in this country is sold much below that, 
ethanol is absolutely saving consumers money and helping to reduce 
gasoline costs.  
        The point about the tariff, however, is if we are going to start 
subsidizing Brazilian ethanol, and that country has already subsidized it 
to a great extent, you are sending a tremendously negative signal to our 
marketplace as we are trying to develop.  We have plants being built 
today even in Texas. 
        CHAIRMAN BARTON.  I am very aware of that.
        MR. DINNEEN.  It is a great thing. 
        CHAIRMAN BARTON.  I am for ethanol, I am just not sure with prices 
where they are at the pump, this seems to be a no-brainer that you reduce 
or suspend it.  You have tariffs and subsidies and mandates when you 
have either an industry that is in an infant start-up stage, or it is 
struggling to stay in business.  By your own testimony neither of those 
conditions apply to the ethanol industry.
        Again, I hope ethanol is the second coming. I would love for ethanol 
to be the alternative fuel that if you mix it with gasoline or biodiesel, and 
Mr. Shimkus, when we get to him is going to be glowing in his support 
for ethanol, as he should be, but it just doesn't make sense to me in the 
current economic situation we face.  
        The price is higher than the price for gasoline, business is booming, 
life is good.  I'm getting on the oil guys on the other side of you.  
Mr. Cavaney knows well.  I'm firing off letters to the CEOs of the big oil 
companies, and once a week I am talking to somebody in Mr. Slaughter's 
shop about building more refineries.  I can't just tell the ethanol guys, 
that is fine.  
        I mean it just is an amazing situation.  I would think that reducing 
the 
tariff would be, if nothing else, an act of faith in America to show--
        MR. DINNEEN.  The act of faith in America would be making sure 
we continue to develop domestic ethanol production capacity.  
        CHAIRMAN BARTON.  Which would you rather have?  
        MR. DINNEEN.  The signal that is going to go to the financial 
community is we are going to subsidize Brazilian ethanol at the expense 
of domestic production.  You are not going to get the construction of 
ethanol plants across this country that I think we need to do. 
        CHAIRMAN BARTON.  With prices like they are and the mandate, 
well, I will make you a deal.  Pick one of three:  Suspend the tariff for 2 
years, eliminate the mandate, or cut the domestic subsidy in half.  Which 
of those would you pick?  
        MR. DINNEEN.  Mr. Chairman, you are asking me to pick amongst 
my children, and I love them all.  I want them all to grow and develop. 
        CHAIRMAN BARTON.  Well, we have to do that every day on this 
committee.  
        My time has expired.  Mr. Shimkus for 5 minutes.  
        MR. SHIMKUS.  Thank you, Mr. Chairman.  
        CHAIRMAN BARTON.  We will do more than one round if we don't 
have more Members show up.
        MR. SHIMKUS.  Obviously, we have a full panel, and you may have 
encouraged me to just focus on the ethanol debate, which I would not shy 
away from, but I also want to obviously ask questions in other areas.  
But the basic premise of this whole debate on ethanol, as you recall, 
was how to decrease our reliance of foreign imported crude oil.  It is a 
basic energy security debate.  We moved from the clean air issues of the 
oxygen standard, which was the first market entry provision, and the 
public is in total agreement with us that we can't be reliant on imported 
crude oil.  So this is a curious debate on Brazil because just like we do 
not want to be reliant on imported crude oil, we do not want to be reliant 
on imported ethanol.  We don't want to be held hostage to other foreign 
interests for our energy needs.  
        So the ethanol industry has shown great growth, and we are excited, 
and the numbers are stupendous.  And I want to applaud the independent 
retailers, who, in my State, have stepped up to the plate, and they are the 
ones who are providing retail locations.  To those who sit in these 
hearings all the time, you know I sound like a broken record, but I drive 
the E-85 flexible fuel vehicle.  On average, at the pump, it is 10 to 15 
cents cheaper per gallon.  Two years ago, I didn't have a single retail 
location in my district.  A single one.  And I represent 30 counties in the 
southern part of the State of Illinois.  Now I have 30 retail locations.  
        By my act of driving around and doing my job in my Congressional 
district, I am displacing the need for imported crude oil refined into 
gasoline by my use of ethanol.  And that is what the public is crying out 
for us to do in a lot of different ways, and this is one of them.  
        The ethanol industry is still a new industry.  If you look, total 
demand in this country and the available ethanol to displace that is still 
less than 10 percent, and probably 1 percent.  So to say that ethanol is a 
mature industry ready to compete against the petroleum industry is not a 
correct statement.  It is still in the infant cycle.  
        The Brazilian ethanol industry was developed by the Brazilian 
government.  They are the ones who pushed this to meet their demands.  
And the last thing we want to do is to subsidize the Brazilian ethanol 
industry.  
        So having said that, the basic premise is that we have had great 
success and we want to work together with all our industry partners to 
move to address these concerns, and we are willing to do that.  
        With the panel present, I would like to go to Bob for a second, and 
we will hear about the reduction in the number of refineries.  We have 
tried to address that in the refinery bill.  One, tell me how that bill could 
be helpful; and, two, just for the record, the great thing about southern 
Illinois is that we are an energy rich State.  So as much as I love ethanol, 
I love marginal oil wells, because we have them in southern Illinois.  We 
have coal.  Illinois is a big nuke State.  So I love especially Illinois crude 
oil. 
        The ConocoPhillips' refinery in Wood River, Illinois, used to be four 
separate small refineries that over the years, through consolidation, now 
is one major refinery; and that major one refinery now produces more 
refined product than those four small independent refineries.  
Bob, can you talk about the refinery bill that we are going to bring 
back up on the floor and how that would be helpful?  
        MR. SLAUGHTER.  Yes, Mr. Shimkus, I would be glad to do that.  
        The refining bill really emphasizes the importance of the domestic 
refining industry in an additional capacity for the domestic industry.  In 
essence, it is safe to say that the United States values refining capacity 
and that that capacity should increase.  It would offer opportunities for 
permanent streamlining, and it would offer opportunities for new sites to 
be recommended for refinery construction.  We think it is a very positive 
step forward, and we are hopeful that the House will adopt it.
        MR. SHIMKUS.  Thank you, Mr. Chairman.  I yield back.  My time is 
up.  
        CHAIRMAN BARTON.  I thank the gentleman.  
        I think Mr. Stearns is next.  
        MR. STEARNS.  Thank you, Mr. Chairman.  
        Mr. Cavaney, in your testimony you described a few domestic 
refinery expansions; and I guess the question is, why are those overseas 
refineries economical and domestic refineries aren't?  Because we 
always say that there has been nothing done in the United States.  Why 
are they so much more economical overseas than they are in the United 
States?  
        MR. CAVENEY.  They are not necessarily.  It is very hard to 
generalize in that regard.  
        What you sometimes find is there are, as happens in the United 
States, major shifts in the plate of products that are produced.  For 
example, if you look into Europe right now, Europe is on a major 
program to shift its emphasis for fuel over to dieselization.  In other 
words, significantly increasing the number of cars that use diesel, and 
therefore their refining capacity is moving in that direction.  That leaves 
some refineries who produce gasoline choose not to produce diesel, and 
so they become opportunists in terms of looking for markets where they 
can go ahead and sell into.  
        We just imported this past month the largest amount of gasoline we 
have ever imported.  A good portion of that incremental increase came 
from Europe because they were able to swing gasoline here --
        MR. STEARNS.  How many different firms were refining oil in 1990?  
        MR. CAVENEY.  I couldn't be exactly precise, but I can get you that 
number.  I can tell you in 1981, it was about 350.  It is about half that 
now.
        MR. STEARNS.  So today half as many are doing it. 
        CHAIRMAN BARTON.  That is refineries.  That doesn't mean owners 
of refineries.  I don't think you have 300 owners of refineries.
        MR. CAVENEY.  No, they were the properties themselves. 
        CHAIRMAN BARTON.  We probably have 40 owners of refineries?  
        MR. CAVENEY.  It is a few more than that. 
        MR. STEARNS.  So from the year 1990 to today, half of them are 
gone; is that true?  
        MR. CAVENEY.  I would have to check and find out.
        MR. STEARNS.  Just approximately speaking.  Because they went out 
of business?  Mergers?  Just why did so many leave?  
        MR. CAVENEY.  There were, let's say, 350 in 1981.  That is when we 
left the period of time when we had price controls, and there were huge 
subsidies that went to what we call the kettle refineries.  A large portion, 
50 or so, of those refineries could no longer exist without the government 
subsidy.  They just went down between 1981 and 1985.
        MR. STEARNS.  We are talking about from 1990 to 2000 --
        MR. CAVENEY.  Please bear with me.  
        Then what happened is, in 1995, the Clean Air Act started to kick in.  
A lot of refineries elected to not make the financial investment to stay in 
business and put in those new environmental controls, and they closed 
down for reasons that was known only by their shareholders or their 
investors.  So that period of time then, from 1985 onward, took the other 
portion, less 50 of the half, and they have gradually either been, as Bob 
Slaughter mentioned in his testimony, those other refineries have been 
acquired.  Those that weren't sufficiently acquired couldn't find a 
market, and they have been closed by their owners.
        MR. STEARNS.  So, in one sentence, the reason why half the 
refineries are gone is because of government incentives?  
        MR. CAVENEY.  No, no.  Fifty of the, let's say--
        MR. STEARNS.  We are talking general here.  I am just talking 
general.  Give me one sentence why half the refineries are gone.
        MR. CAVENEY.  Because they were not economically able to sustain 
themselves going into the future and made those decisions.
        MR. STEARNS.  Okay.  Mr. Slaughter, you state that refiners have 
made substantial investment in technological advance process units that 
have increased the yield of gasoline.
        MR. SLAUGHTER.  That is correct.  
        MR. STEARNS.  Do you have any ballpark figures or percentages that 
represent this industry as a whole in how these amounts have increased 
in recent years in terms of investment?  And talk a little bit about this 
technologically--because if Mr. Cavaney is saying these things 
essentially, since the year 1990 to 2006, half of them are gone, yet the 
refiners have substantial investment in technological advances, that 
should make them much more efficient.  So if you could give me a little 
bit of--
        MR. SLAUGHTER.  Yes, sir.  The refining industry today is very state 
of the art.  There have been significant investments in the industry.  The 
average refinery now is considerably larger than it was in 1990.  By the 
way, it really was halved between 1980 and the current day.  We 
currently have about 54 refineries in operation.
        MR. STEARNS.  Maybe you can answer the question, then:  What do 
you think from 1990 to 2006 the number is?
        MR. SLAUGHTER.  Well, currently, we have 54 companies operating 
about 149 refineries.  Many of those companies are small.
        MR. STEARNS.  And how many did we have in 1990?  
        MR. SLAUGHTER.  Well, we would have had considerably more, sir.  
I know there was double the amount of refineries in 1980 than we have 
now.
        MR. STEARNS.  Three hundred companies?  
        MR. SLAUGHTER.  Yes.  And refineries used to get mandatory 
allocations.  A lot of them went to small, inefficient refineries.  When we 
left the price control regime in 1980 under President Reagan, they were 
no longer economic; and they basically went out of existence in the 
period that we are talking about.  The problem was they weren't 
competitive anymore, sir; they didn't justify the tremendous investment 
that you have to put in to be in this business.
        MR. STEARNS.  Thank you, Mr. Chairman. 
        CHAIRMAN BARTON.  The gentleman's time has expired.  
It is Mr. Bass's turn if he wishes to, or you can go vote, and I will go 
to Mr. Boucher.  Which do you wish to do?  
        MR. BASS.  I will go vote. 
        CHAIRMAN BARTON.  He looks calm and collected.  You know he is 
not worried about making the vote.  He is smiling and all comfortable 
here.  So Mr. Boucher for 5 minutes.  
        MR. BOUCHER.  Well, thank you very much, Mr. Chairman. 
        Mr. Slaughter, let me propound some questions to you, if I may.
        MR. SLAUGHTER.  Yes, sir.
        MR. BOUCHER.  Do you believe that we have a shortage of refining 
capacity in the United States today?  
        MR. SLAUGHTER.  I think that we need additional refining capacity, 
yes.  I don't think that we need to necessarily produce 100 percent of 
what we consume here domestically, but I think there is a need for 
additional capacity.  That is why I think the industry is announcing 1.4 
million in refinery expansions in barrels per day, and that will come on in 
the next 3 to 4 years.
        MR. BOUCHER.  Are any of those investments taking place on 
greenfield sites, or is that just a proposal for expanding existing 
refineries?  
        MR. SLAUGHTER.  The only greenfield site that is looking to build a 
completely new refinery would be the Clean Fuels Project in Arizona, 
which is having some difficulty.  They have been trying to put that 
together for most of the last decade.  They have not been able to break 
ground yet.  
        The economics strongly favor adding capacity at an existent site.  
You have the economies of scale.  For instance, Motiva has just 
announced a 325 barrel-a-day expansion at the Port Arthur, Texas, 
facility.  That is larger than many refineries are.  According to their press 
announcement, they will be able to bring that on line in 3 to 4 years.  If 
you tried to do that through a new refinery, sir, it probably would take 
you at least 10 years, and you wouldn't even be certain that you could 
break ground then.
        MR. BOUCHER.  Many of the individuals who have commented about 
the need for new refineries not only point to the need for a capacity 
increase but also point to the need for some diversification of the places 
where refineries are located.  
        It has become a modern fact of life, unfortunately, that we are having 
more frequent and more severe hurricanes than we have had historically; 
and I think the concern is driven largely by that fact.  If another hurricane 
of major consequence were to affect the Gulf Coast--as it may very well 
happen even this year--the refinery capacity that we have would be 
placed at risk, some large portion of it could be taken off line, just as it 
was during the case of Hurricane Katrina.  
        So if the expansions that are planned are largely at existing sites 
and the only greenfield site is the one you mentioned in Arizona, which is for 
clean fuels--and I gather that is not necessarily refining gasoline into--or 
refining crude oil into petroleum, although perhaps it is.  You can clarify 
that.  But let me just say, if most of the investment is taking place at 
existing sites, does that not give rise to concern that we are not engaging 
in an appropriate diversification of the location of these facilities so that 
they will not be subjected to disruption in the event of natural disaster?  
        MR. SLAUGHTER.  To answer your question about Arizona, that 
would be a modern refinery.  It would be about 150,000 barrels a day and 
would cost about $2 billion.  It would produce up-to-date gasoline, 
diesel, and other products, but it has been having trouble.  They have got 
an air permit, but they are having trouble getting financing, actually 
getting that built. 
        Your question is a good one.  Yes, they have the air permit.  We 
believe that it would be very good to incentivize refinery construction.  
Congress did this in the EPAct bill.  There is an expensing provision 
which allows people who are expanding existing refineries or building 
new ones to expense 50 percent of the cost.  Now that is a very 
significant provision.  I think it is reflected in the plans for additions 
that companies have mentioned.  I suggested that might be looked at again, 
and you might be able to retool that in a way that would give incentives 
for new refineries, which probably will be in other locations.  There is a 
large capacity in the Gulf.  
        But the problem has been the country needs more capacity, and there 
is a strong feeling that it is not only not economical, but functionally 
impossible to build those now in other parts of the country that could 
actually use them.  The Northeast has no refineries.  There are certainly 
other places.  
        But the fact of the matter is that the alternative, if you tried to 
move the part of the industry that is in the Gulf Coast now because of the 
hurricane damage, our fear is that you would end up moving most of it 
abroad, and you couldn't replicate it here.
        MR. BOUCHER.  Please don't misunderstand the question.  I wasn't 
suggesting moving anything.  I was simply suggesting that, as the 
investments in new refinery capacity occur, perhaps it might be the better 
part of wisdom to locate some of that new investment in areas other than 
the Gulf Coast, which is where the bulk of our refineries are at the 
present time, so as to avoid the potential of a supply disruption from 
refineries to the market in the event that we have another major disaster.  
Let me move to another subject, if I may.  It has been widely 
reported that between September 2004, and September 2005, on average 
the increase in profits for the refining industry was about 255 percent, a 
truly startling number.  Is that number accurate?  
        MR. SLAUGHTER.  I find it hard to believe that it is that large an 
increase in that period of time--
        MR. BOUCHER.  Do you have another number?  
        MR. SLAUGHTER.  I will get them for you, sir, but I believe that one 
is inflated. 
        You know the history--I know you do because we have talked about 
it before here--of low profitability in this industry.
        MR. BOUCHER.  Well, I know historically you have had some lean 
years; and that is not to be denied.  However, if the increase of 255 
percent in a 1 year period is accurate, I think it obviously urges the next 
question, which is, what happened that was so extraordinary within that 
year?  And if the number wasn't 255 percent, obviously, some high 
number was the reality.  So why such a major increase in that 1 year 
period?  
        I am trespassing on the committee's time, but let me give you an 
opportunity to answer that, if you would.
        MR. SLAUGHTER.  All right.  We have been in a period of, of course, 
higher prices driven by a lot by higher crude prices and increased 
demand in the U.S.  You know, we also had the hurricane situation last 
year, which the industry responded extremely well to.  We are about to 
get back into commission and produce the products that people needed.  
        I do not believe the figure that you are using is correct, but, 
undoubtedly, profitability in the industry is up and certainly from what it 
has been historically, when the refining industry is known for actually 
being an area of negligible profitability that requires billions of dollars in 
investment every year.  
        I will get you the figures for that last year, but the fact that we 
have had 2 good years in the industry has encouraged people to think that 
maybe the years ahead will look a little more like the last few years and 
not like the 1990s, with no profitability, so they are adding capacity.  
They are putting a lot of that money back into the business, sir.
        MR. BOUCHER.  Mr. Slaughter, thank you very much. 
        MR. BOUCHER.  Thank you, Mr. Chairman. 
        MR. SHIMKUS. [Presiding.]  Thank you.  
        The Chair recognizes my colleague from Florida, Mr. Bilirakis, for 5 
minutes.  
        MR. BILIRAKIS.  Gentlemen, we heard yesterday a claim that OPEC 
sets its oil price based on the price signals from the United States 
gasoline market, so I ask--I have to limit this because I want to go on to 
another area--Mr. Cavaney and Mr. Slaughter, is there any truth to this 
claim?  Can OPEC set the world price of oil all by itself?  
        MR. CAVENEY.  Mr. Bilirakis, it is a little bit the opposite right 
now.  One of the frustrations OPEC is experiencing at the present time is they 
have an inability to impact, under the current environment, the price of 
oil, so it is a little bit the reverse right now.  I would have no reason to 
know whether or not it was true.  It is just not something that we would 
be involved in.
        MR. BILIRAKIS.  Mr. Slaughter, what is your comment on that?  
        MR. SLAUGHTER.  Mr. Bilirakis, I doubt that that is true.  Essentially, 
the only significant additional capacity for crude production in the world 
is in Saudi Arabia.  It is roughly only one billion barrels per day now, the 
lowest safety margin that the world has ever had, and that corresponds to 
a significant reduction in their ability or anyone's ability to drive this 
market.  
        The international crude price is set by the competitive circumstances 
of that market, and the ability at this point of anyone to control that is at 
its lowest point because of that very small margin of safety.  That means 
almost all the oil that can be produced in the world is being produced and 
sold right now.  That is a strong market.
        MR. BILIRAKIS.  Well, somebody makes these decisions.  I know we 
talked about supply and demand and the market doing it and that sort of 
thing--
        MR. SLAUGHTER.  Well, if I could respond.  If you look at what 
OPEC has said, OPEC for years has been trying to talk about the benefits 
of a $30 or a $40 environment.  Recently, the Saudi Arabia Energy 
Minister was talking about a low $50 environment, which indicates that 
they have concerns over the price levels that crude has reached right 
now.
        MR. BILIRAKIS.  Why has it gone all the way up to $70 then?  I 
mean, if they have concerns that $50 may be a little high--and I read the 
same article--then why is it $70 at this point?  
        MR. SLAUGHTER.  There are a lot of guesses as to that, but nobody 
really knows why.  I mean, there is a feeling that there is a risk premium 
in the crude price which reflects people's concern that something is 
going to happen to crude supplies because of problems in Iran or 
difficulties in Nigeria and other places potentially.  
        The analysts that I have talked to have a hard time explaining the 
current price level for crude.  It seems to be driven by favor of adverse 
events, geopolitical events--
        MR. BILIRAKIS.  With all due respect, sir, that is what we keep 
reading and that is what we keep hearing.  I think it is probably more 
rationale than anything else, so-- 
        Well, just getting away from that for a moment, let's go to energy 
independence.  To both of you, how strongly do you all feel that the 
United States should be independent from foreign oil?  Mr. Caveney.
        MR. SLAUGHTER.  I will just say that I think that is an admirable 
goal.  I think it will be very difficult to achieve.  I came to town and 
started to work for a member of this committee in the early 1970s, and 
President Nixon had that as his goal at the time.  It was impossible to 
achieve.  It is going to be difficult now.  But it should be our goal to be 
as independent as possible.  We are always going to be relying on some 
imports of fuel, but we should try to be as independent as possible.
        MR. BILIRAKIS.  How would it affect your--Exxon, et cetera, if we 
had energy independence, Mr. Cavaney?  
        MR. CAVENEY.  First of all, energy independence is a noble goal, as 
Bob said, to work towards.  It would be virtually impossible to do here in 
the short term--
        MR. BILIRAKIS.  Short term.
        MR. CAVENEY. In the short term because of the amount of imports 
we need.  
        The more appropriate response to increase our energy security in the 
near term, let's say in the next couple of decades and so forth, would be 
to focus on interdependence, which is to try and diversify the supplies in 
the international community where we get our sources of imported oil 
and also to increase our domestic production here at home.  That gives us 
more options, and if some area has upsets where we can't take advantage 
of it, it gives us more opportunity to swing and keep a stable amount of 
imported oil coming into the system.
        MR. BILIRAKIS.  But, I guess my question is, if we ever were to reach 
it, and we talk about a goal and that sort of thing.  We don't really try 
very hard to reach that goal, so I am not really sure of what the definitive 
goal is.  But if we ever reached it, how would it affect your member 
companies, your producing companies?  
        MR. CAVENEY.  It is virtually impossible to say because we don't 
currently have the kinds of energy sources particularly that would 
support the transportation sector that you can predict there.  I believe that 
we have an open trade, free-trade system in the world and that system is 
always going to provide opportunities to bring in some products at 
reduced prices.  So that could happen even with the goal of energy 
independence.
        MR. BILIRAKIS.  My time is up, sir, but that is really, with all due 
respect, I guess maybe I didn't ask the question correctly.  I am just kind 
of curious how that would affect the bottom line, the profit line, if you 
will, of these companies. 
        Thank you, Mr. Chairman. 
        MR. SHIMKUS.  Thank you.  
        The Chair recognizes the gentleman from Michigan, Mr. Stupak, for 
5 minutes. 
        MR. STUPAK.  Thank you, Mr. Chairman.
        Mr. Cavaney, you indicated that in the 30 investigations put on price 
gouging there has been no finding of price gouging on gas prices or 
energy prices, but the FTC has used terms like gaming the system and 
maximizing prices by the industry.  But with no real Federal law on price 
gouging, it is impossible for them to find price gouging by the FTC, isn't 
it?
        MR. CAVENEY.  Well, the FTC Chairman currently has said that, 
even if Congress were to outlaw price gouging, the law would be very, 
very difficult to enforce fairly.
        MR. STUPAK.  But you have got to have a law first.
        MR. CAVENEY.  Well, we do have laws in the majority of the States 
right now, and a number of other States are putting in laws.  The FTC 
has also spoken about the fact that these are very situational 
circumstances, and being closest to where the violation may have 
occurred is going to put someone in the best position to determine it.  
What you need to be careful of here is, if you look at a Federal law, you 
want to make sure that, if such comes to pass, that it doesn't de facto 
create a circumstance where you have price gaps and you are back into 
the whole situation of price controls.  We have been there before, and we 
know that doesn't work.
        MR. STUPAK.  But your statement in your testimony that there hasn't 
been any price gouging, you can't find price gouging if there is not a 
Federal law; isn't that correct?  
        MR. CAVENEY.  No, there are laws in--
        MR. STUPAK.  Well, explain how this price gouging works then.
        MR. CAVENEY.  Well, the problem is defining price gouging, and 
that is one of the difficulties why it is best left to the States to look at 
that.  They can look at the circumstances where they are and make their 
best guess at the definition.
        MR. STUPAK.  Well, if gas went up 90 cents in one day in Michigan 
in one of our cities, is that price gouging?  
        MR. CAVENEY.  You would have to know the circumstances of what 
that person paid for that.
        MR. STUPAK.  Can you give me a scenario where 90 cents in one day 
would be justified?  
        MR. CAVENEY.  Well, the individual could have had to purchase 
gasoline and it was that much more expensive.  You just can't look at the 
surface, and that is what makes these things so difficult.
        MR. STUPAK.  Let me ask you this question then.  You said the world 
price of crude is the most important factor dealing with gasoline, right?  
        MR. CAVENEY.  Yes, that is what the Federal Trade Commission 
said in June of--
        MR. STUPAK.  Do you agree with that statement?  
        MR. CAVENEY.  Yes, I do.
        MR. STUPAK.  So if we reduce the price of crude by $20 per barrel, 
would that be reflected then in the price of gasoline?  
        MR. CAVENEY.  Yes, it would.  If you look historically over decades, 
you will find there is a very close correlation between gasoline and--
        MR. STUPAK.  So if it is $60, let's say, to make easy math here, and 
it was reduced by $20, there should be one-third off at the gas pump.
        MR. CAVENEY.  Generally, you can say that, but each circumstance 
would be--
        MR. STUPAK.  So then would you support our legislation, the PUMP 
Act, which would actually take the speculation, fear, and greed out of the 
price of oil and make sll trades in oil subject to the Commodities Future 
Trade Commission?  Would you support that?  
        MR. CAVENEY.  I would have to look into it.  I don't know enough, 
but I will get back to you.
        MR. STUPAK.  Well, the experts tell us that it would reduce the price 
of gas by $20, because three-fourths of the oil futures are traded without 
any oversight by the Commodities Future Trade Commission.  So if we 
are interested in reducing the price of gasoline, I would think that that 
would be one good way to start. 
        Let me ask you this one.  We had testimony yesterday from our 
panels of witnesses about the crack spread.  Are you familiar with the 
crack spread?  
        MR. CAVENEY.  Yes.
        MR. STUPAK.  They told us yesterday that the crack spread should 
probably be about $8.  But, right now, it is $20; and Chairman Barton 
thought it might be as high as $30.  If we reduce that crack spread, would 
that bring down the price of gas?
        MR. CAVENEY.  Well, the crack spread has a number of factors in it.  
It has all of the costs as well as whatever the margin of profit is at the 
end of the day.
        MR. STUPAK.  Sure.
        MR. CAVENEY.  And it is difficult to know each individual refinery, 
what their spread is at any given moment.
        MR. STUPAK.  So each refinery could have a different crack spread?  
        MR. CAVENEY.  Yes, that is correct.  But at the end of the day --
        MR. STUPAK.  But isn't $20 too high?  Would you agree it is too 
high?  
        MR. CAVENEY.  You can't make that statement.  You don't know 
what his or her cost is.  That is what the difficulty is.  You have to look at 
each individual--
        MR. STUPAK.  I mean, that is why we ought to have a Federal price 
gouging law that takes these factors into consideration, shouldn't we?  
        MR. CAVENEY.  At the end of the day, you should find out what the 
profit is, the earnings that that person makes.  The earnings historically 
from the industry have been pretty much in line with all industries, so 
that would indicate that the cost factors in that spread are reasonably 
high.
        MR. STUPAK.  Sure, reasonably high.  
        Okay, let me ask you this.  I have internal memos here from 
Chevron, Texaco, and Mobil in which they actually quote the American 
Petroleum Institute; and basically they say we have to reduce the number 
of refineries in this country.  
        The Chevron memo states, if the U.S. petroleum industry doesn't 
reduce its refining capacity, it will never see any substantial increase in 
profits; the Texaco memo complains that supplies significantly exceed 
demand, leading to very poor refinery margins and very poor refinery 
financial results; and the Mobil memo advocates keeping a smaller 
refinery, Powerline, from reopening, stating that a full court press is 
warranted in this case.  
        Has API encouraged refineries in the past to shut down to increase 
the price of gasoline?  
        MR. CAVENEY.  Absolutely not, that would be a restraint of trade.  
        MR. STUPAK.  So if you are quoted in these memos--not you yourself 
but API--these memos would be incorrect then, is that your position?  
        MR. CAVENEY.  I haven't seen any of those memos and can't 
comment on them.
        MR. STUPAK.  I will be happy to show them to you.  Thank you.
        MR. HALL. [Presiding.]  The gentleman yields back.
        Mr. Cavaney, I have the right and I have got the gavel, so I am going 
to ask a question of you that I have really wondered about.  You have 
recommended and others recommended more areas for energy 
exploration; and, of course, we are all interested in that.  We passed all 
kinds of bills.  We had to leave ANWR out to get anything through the 
Senate, and we go through all these gymnastics to try to get more energy 
to lower the gasoline price and to keep us out of a war.  
        Leaving aside all the politics, if all oil limit tracks were opened to 
exploration today, what would be the most economically compelling 
tracks to develop?  Kind of rank them for me, if you would.  
        I have heard John McKetta from Austin, Texas, say we have enough 
coal in the midsection of this country to almost double the output of the 
OPEC nations all combined if we could just mine it.  But tell me about 
the energy and the drilling and the off-shore drilling and ultra-deep 
drilling in the shut-in areas.  Just kind of rank them for me, if you can do 
so.
        MR. CAVENEY.  We are going through a migration, as we have 
historically done in the oil and gas business, which is  we are moving 
now to increasing more of what we call unconventional oil and gas into 
the system, rather than conventional.  Conventional, if you will permit 
me to exaggerate a bit, is the easier to refine and easier to produce.  The 
unconventional is things like deep gas clays, which require very 
extended and expensive technology in the Gulf, up in parts of Alaska, 
and the like.  
        So what we had about 2 years ago was 10 percent of our production 
here was of that unconventional amount.  EIA has predicted that by 2025 
that will be about 30 percent of our mix of production here in the U.S. 
        There are other important things that are now becoming a larger 
play, which is the next generation that follows thereafter.  For example, 
we have already seen the development of the tar sands up in Alaska.  We 
have a situation in the western States, some shale, where the Government 
indicates that we have the potential for a trillion barrels of reserves in 
shale, which would be four times all the oil and gas that Saudi Arabia has 
right now.  
        One of the things that needs to be brought to bear there is technology 
to get the cost down to produce to be able to put that forward.  So there 
are also things like methane hydrate.  
        So in the industry, huge amounts in technology--because not only do 
we have to serve today, but we need to be ready to serve the customers of 
tomorrow.  That is why we are so capital intensive, because that money 
continually gets reinvested.
        MR. HALL.  Is the quantity and quality of shale well known and can 
be documented?  
        MR. CAVENEY.  Reasonably well known.  
        The industry with the help of the Government, and the involvement 
during the 1970s was very active out there.  What happened was, as you 
recall, after the second oil shock in the 1980s, the industry underwent 
windfall profits and a number of other controls, and the price just 
collapsed.  So most people abandoned their efforts out there at that time 
because it just wasn't economic and the Government shut down their 
involvement.  A couple of companies have stayed active in the research 
areas and think they have made some gains, and that is why we are now 
seeing more interest there.  DOE has a couple of grants to look at it, and 
it may be one of those things that eventually may find a home in our mix.
        MR. HALL.  How would you rank them, then?  Briefly.
        MR. CAVENEY.  Well, I think there are some technologies that are 
very attractive.
        MR. HALL.  And assuming they are available and can be done, it is 
just a matter of money, and put R&D into the program as much as you do 
the energy program. 
        MR. CAVENEY.  One of the ones we are already seeing is, looking at 
the biofuels, you would have thought, 10, 20 years ago, the addition of 
ethanol into the fuel mix was seen as basically an octane enhancer.  
Increasingly now it is finding a larger and larger role.  That is why we 
worked on the historic removal of the fuel standard, to be able to build 
that industry up so that it can produce more.  We also have the biodiesel 
parts that are coming in.  
        So the technology is doing very well there.  We need cellulosic 
ethanol to be able to continue the growth of ethanol.  So that one, I 
would say, is really the next one up on the platter. 
        Just behind that are things like the technologies that we have heard 
about for a number of years which are a coal-to-liquid gasification, these 
kinds of technologies, which there are sample projects that are along, and 
that is probably a step ahead of looking at.  Let's say shale, which might 
be the next one beyond that.  And I might also add, we don't have much 
of an opportunity for utilization of the tar sands and the coal sands, but a 
lot of the stuff that comes from up there is now being piped down into 
the U.S., which has been very helpful to us.  So technology is applied 
there in terms of pipelines reversing their historic flow. 
        So those would be the areas of the largest anticipated growth as we 
go forward, the deep water, the exploration--and that is why looking at 
Lease Sale 181 and looking at the OCS are important areas for us to be 
able to define the extent of the resource there.  Because it may well be 
that we can get things there more quickly and at more commercially 
available terms, which ultimately will translate to more affordable fuels 
to the consumer. 
        But important among all of these things is, if we want to enhance our 
energy security, if we want to have more flexibility, looking at these 
domestic supplies makes a lot of sense.
        MR. HALL.  Chairman Barton has ushered through for the first time 
in 10 years an energy bill.  It is not everything we wanted, but it is an 
energy bill and signed and ready to go and working toward it.  I think 
you have given him a good wish list there to get after, and we are going 
to be very supportive of him as we pursue those.  Because those are 
things that can save a generation from having to cross the ocean and fight 
a war, and that is the goal.  
        Ms. Eshoo, I am sorry.  I went over a little bit.  I recognize you at 
this time.
        MS. ESHOO.  Good morning to all the witnesses.  
        My question--I want to direct my question to Mr. Caveney.  In your 
testimony, you noted that there are announced refinery capacity plans 
that will add 1.3 million barrels per day of additional refinery capacity 
between 2006 and 2011.  These expansions, as you have stated, will 
boost capacity to 18 and a half million barrels per day.  Current demand 
for petroleum is more than 20 million barrels per day and projected to 
continue to grow, and we make up the difference by importing product 
from overseas.  
        In its 2006 annual energy report, the EIA projects that the gap 
between demand and domestic refinery capacity will grow, which means 
that, in addition to crude, we are going to import more gasoline and other 
refined products.  Now if it makes us vulnerable to be increasingly 
dependent on crude imports, it seems to me that becoming increasingly 
dependent on imports of refined products carries similar dangers.  Can 
you tell the committee if you believe domestic refining capacity will ever 
catch up with demand or is the gap going to continue to grow?  
        MR. CAVENEY.  I would like to associate myself with Bob 
Slaughter's comments earlier.  It is not necessary and probably not likely 
that we would have to have 100 percent of our usage satisfied by 
domestic production, but it is certainly healthy for us to have a strong, 
vibrant national refining network.  So we feel that the additions that are 
announced, there may well be other ones under consideration.  Some 
companies have a policy--
        MS. ESHOO.  So you don't believe that it would be prudent policy to 
become dependent on refining capacity or crude--you know, the refined 
products being imported?  Are you agreeing, is that what you are saying?  
        MR. CAVENEY.  It is not--
        MS. ESHOO.  I can't tell by what you have said.
        MR. CAVENEY.  Okay.  It is not necessary that we have to produce, I 
feel, 100 percent of the product we use in U.S.-based refineries.  We 
have reliable supplies from Canada coming in.
        MS. ESHOO.  I think we are disagreeing with one another.  
Can you explain then--is ExxonMobil part of your trade association?  
        MR. CAVENEY.  Yes, they are.
        MS. ESHOO. --why ExxonMobil says it doesn't plan to build any new 
refineries in the United States?  Do you know if they are revising this, if 
they have moved in another direction, if they have any other plans?  
I mean, we have gas now at--well, in California, it is well over $3 a 
gallon.  Are they looking for new ways to invest their record profits?  
        MR. CAVENEY.  Those kinds of discussions are privy to individual 
companies, and under those kind of circumstances we are--
        MS. ESHOO.  Are you aware of the comments of ExxonMobil?  
        MR. CAVENEY.  I am aware of those comments, yes.
        MS. ESHOO.  And do you want to comment on those comments?  I 
mean, they run contrary to what, the committee is basing many of its--or 
at least some of its decisions on.  
        I see that the distinguished Chairman of the full committee is 
laughing, except it was our staff here at the committee--
        CHAIRMAN BARTON.  Will the gentlelady yield?  
        MS. ESHOO.  I would be glad to.
        CHAIRMAN BARTON.  I am not laughing at you.  I am just saying 
how--
        MS. ESHOO.  The subject matter.
        CHAIRMAN BARTON.  I am just thinking how unfair it is of you to 
quote their own words.  It is a low blow to use what ExxonMobil has 
actually said against them.  I mean, that is kind of a cheap shot, don't you 
think?  
        MS. ESHOO.  Well, I think that is what my constituents would want 
me to do.  It is their quote. 
        CHAIRMAN BARTON.  I agree.  I have had to defend their right to say 
what they say, but if I had just reported--
        MS. ESHOO.  Well, of course they can say what they say--
        CHAIRMAN BARTON.  I think they reported a $9 billion quarterly 
profit, and if that is true, I believe they could find the money, if they 
wanted to, to at least expand one of their existing refineries.
        MR. CAVENEY.  I don't know the exact nature of the quote, but they 
have a history--
        MS. ESHOO.  I will have my staff bring this to you.  Do you want me 
to read it to you?  
        MR. CAVENEY.  Fine.
        MS. ESHOO.  Exxon--this is a January 25 Reuters report, "An 
ExxonMobil corporation official told congressional aides this week," this 
is the week of the 25th of January, "that flat North American demand for 
gasoline forecast through 2030 means there is no need to build new U.S. 
refineries, a congressional source sold Reuters on Wednesday."  
"Scott Newman, manager of Exxon's Economics and Energy 
Division, on Tuesday briefed aides with the U.S. House Energy and 
Commerce Committee on the company's oil demand outlook, according 
to the committee staff member who attended."  
        "Exxon said they don't want to build any new refineries in North 
America because of flat demand for petroleum products by 2030.  
Spokesman for Irving, Texas, based ExxonMobil, the world's largest 
publicly traded oil company, declined to give specifics of the meeting.  
We think the most cost-effective and efficient and effective way, the 
fastest way to add capacity in the U.S. is to refine our own refineries."  
        Do you know what "refine our own refineries" means?  
        MR. CAVENEY.  I think what was meant there was to add capacity to 
existing refineries, which is, as Mr. Slaughter had said earlier, the 
quicker and more cost-effective way to add capacity in the U.S.  And his 
statement about not doing anything was a new refinery, not additional 
capacity.  ExxonMobil has a history of continuing to add capacity to 
their existing refineries.
        MS. ESHOO.  Well, this runs contrary to what you are saying, but I 
appreciate your response. 
        The reason why I raised the issue of demand is because Exxon 
contradicts EIA's official projections for demand.  So there is a disparity 
there, and I think it is something that the committee needs to recognize. 
        I think my time has--
        MR. HALL.  The time has expired.
        MS. ESHOO.  Even though the Chairman used up some of my time.  
        Thank you.
        MR. HALL.  And we weren't laughing at you.  We were laughing 
with you.  We were thinking about the lady who came over --
        MS. ESHOO.  This is strictly business, Mr. Chairman; and I 
understand that. 
        MR. HALL.  We were thinking of the lady who came over yesterday 
trying to defend the Administration's cutting Children's Hospital's 
teaching fund.  She didn't really want to be here, probably didn't really 
want to answer that question.  I wouldn't have if I had been her.  But you 
ask good questions.  We admire you.  
        MS. ESHOO.  Thank you.
        MR. HALL.  We weren't laughing at you.
        MS. ESHOO.  Thank you, Mr. Chairman.
        MR. HALL.  Okay.  The Chair recognizes Mr. Bass.  
        MR. BASS.  Thank you, Mr. Chairman.  I want to thank the Chair for 
holding these hearings.  They really are very informative and helpful. 
        If we are looking for ways that we can deal with stabilizing and 
reducing energy costs over the short term, medium term, and long term; 
and as gas prices have risen, we have heard about a lot of things that we 
can do right now that would make a difference tomorrow or next week or 
the week after.  Do any of you have--let me communicate a couple of 
these things that, or ideas that I have heard.  
        One of them was that if every American consumed one less gallon of 
gasoline a week, the cost of gasoline would go down by 60 cents a 
gallon.  One myth.  Maybe it is a myth; maybe it isn't.  But if we were to 
use more diesel in America, we could use CAFE standards by anybody's 
predictions almost immediately.  If we could increase the use of hybrids 
significantly, immediately this would occur.  
        My question is, could any of you make recommendations or 
suggestions to the committee of efforts that we could undertake that 
would make an immediate impact or have an immediate impact on the 
price of gasoline in America?  I mean between now and the end of the 
year.  
        Go ahead, sir, Mr. Caveney.  
        MR. CAVENEY.  Mr. Bass, it is hard to project anything that would 
immediately, let's say on a 24-hour period, have an impact.  
        One of the things that people can individually do without sacrificing 
anything, and we have located on our Web site, is you can actually use 
energy a bit more wisely, particularly in motor transportation.  You can 
gain 4, 5, 6, 7 miles per gallon by doing some of the very simple things 
like eliminating jackrabbit starts, making sure your tires are properly 
filled with the level, having your car tuned, driving at 10 miles per hour 
less.  That done broadly would not be anyone sacrificing anything, and in 
a reasonably short period of time that would show up in the data, and you 
would notice that there was less demand.  Obviously, that is what you are 
hoping to do, to create a wider gap between supply and demand.
        MR. BASS.  Does anybody have any comments on diesel utilization, 
use of more diesel in America?  
        MR. SLAUGHTER.  I would like to say something, if I could, on that, 
Mr. Bass.  
        The diesel market in the United States is pretty well already 
subscribed.  We are introducing a new 15 parts per million sulfur diesel 
product on June 1st, and we are putting that program into operation this 
year.  We are going to see how that goes.  We have been working very 
hard for a smooth transition.  
        But, as has been mentioned earlier by Mr. Cavaney, Europe has gone 
to diesel for light duty vehicles, including passenger cars.  It has freed up 
gasoline to be exported to the United States, particularly to the Northeast, 
which is 25 percent dependent upon imports.  If the United States tried to 
switch in a big way to diesel, we might have more difficulty finding 
imports of diesel than we currently are having imports of gasoline.  
        So the refining industry in the U.S. is built towards the current mix 
of about 49 percent gasoline output, less output of diesel.  There is going 
to be an increase, all analysts say, in the number of diesel cars in the 
United States over the next few years, but it still will be significantly 
below the figure for gasoline-driven vehicles.
        MR. BASS.  How practical is it for refiners to switch to diesel and 
provide more diesel in North America for a short period of time?  
        MR. SLAUGHTER.  Well, for a short period of time there are some 
things you can do.  Refiners do respond to shifts in the market where 
there is a need for more diesel product than gasoline.  There are some 
things you can do, within limits, to produce more diesel and less 
gasoline.  But the kind of program you are talking about, that would be 
significant.  It would take much longer and we are already having 
significant problems.  We are producing a cleaner diesel product that 
already is going to require more crude to produce than the old product 
did.  So it is going to be particularly difficult to do that this year.
        MR. BASS.  But you do have clean diesel in Europe, right?  
        MR. SLAUGHTER.  There is a cleaner diesel in Europe.  We are going 
to have a cleaner diesel in the United States in less than a month.
        MR. REID.  Mr. Bass, in the immediate term, in terms of lowering 
gasoline prices for consumers at the pump, my testimony reflected that 
the only thing that SIGMA and NACS could recommend is temporarily 
suspending the tariff on imported ethanol, maybe worth a few cents a 
gallon. 
        Beyond that, a few of us have testified that crude oil accounts for 
the 
largest percentage in the cost of a gallon of gasoline.  The second largest 
contributor to the cost of gasoline at retail is local, State, and Federal 
taxes.  So we are not advocating it.  We are not recommending it, but if 
you wanted an immediate impact, a Federal excise tax would be another 
place to look.
        MR. BASS.  Mr. Chairman, my short 5 minutes has expired.  I yield 
back.
        MR. HALL.  I thank the gentleman.  
        The Chair recognizes the gentleman from Texas, Mr. Green.  
        MR. GREEN.  Thank you, Mr. Chairman, for the knowledge of the 
committee. 
        There have been an expansion--in fact, I think our testimony 
yesterday from Dr. Yergin said that, since 1994, existing refineries added 
more than 2.1 billion barrels of capacity, the equivalent of adding a large 
average refinery each year.  I will ask, is that an accurate statement we 
heard yesterday from Dr. Yergin?  
        Thank you.  
        And, Mr. Slaughter, you testified that refineries will be adding 1.3 
million barrels in capacity in the next few years, and that is online.
        MR. SLAUGHTER.  We can currently count 1.4, and a lot of folks 
think it will be more than that.  That is over 8 percent increase in the U.S. 
crude capacity.
        MR. GREEN.  I wasn't aware of the quote from an Exxon staff 
member to congressional staff members, but, just historically, I have 
represented now the largest refinery in the country in the Baytown, 
Texas, an ExxonMobil facility.  When I was a State senator--before they 
changed our lines, and I got it back--it wasn't the largest.  
        So I am assuming, without documentation, that refineries--and I can 
say that typically up and down the Houston ship channel the refineries 
have expanded capacity over the last 10-year period, whether it is shale, 
whether it is any of our refineries, that they have expanded capacity.  
And we can find out the numbers.  I think we will just have to do it 
individually.  But I also understand that Exxon particularly adds about 
200,000 barrels a day, every 3 years, to five refineries that they have.  So 
there is expanding refining capacity.  
        There is still some space available in the Gulf Coast, although a 
question in a minute will be, we need some ethanol facilities here to 
serve our Houston markets since we no longer produce MTBE. 
        The Energy Information Administration's testimony yesterday said 
that if we reduced the number of so-called boutique fuels to improve the 
liquidity of the gasoline market we would have to sacrifice either price or 
air quality.  Can you respond to that, Mr. Slaughter?  
        MR. SLAUGHTER.  Well, there is a balancing act that has to be done 
with boutique fuels, Mr. Green.  Because, as has been pointed out earlier, 
the Energy Policy Act passed in 2005, already started the process of 
looking at boutique fuel reduction.  EPA's testimony yesterday indicates 
that there is only a handful, really, of boutique fuels in the U.S.  If you 
change things right now, right away, some refiners would have to change 
specifications and invest more money than they had planned for, for the 
summer.  
        So it doesn't seem productive to go ahead with something like that 
now, although it is a good exercise; and the EPA shouldn be completing 
that exercise in just 8 weeks, is my understanding.
        MR. BECKER.  Mr. Green, may I comment, too?  
This is probably one of the first times in the past 15 years where 
Mr. Slaughter's association and our association agree on a point.  
        Boutique fuels are an extremely important tool for State air pollution 
control agencies.  As I mention in my testimony, they have reduced 
smog-forming emissions up to 25 percent.  They have been prompted not 
so much by State and local permitting authorities but often times by the 
industry as a cheaper alternative to a uniformed Federal reformulated 
gasoline.  So we agree with NPRA's position on that.
        MR. GREEN.  Let me get to another question, because I have run out 
of time.  
        Folks, Mr. Cavaney and Mr. Slaughter, last year, there was a refining 
bill passed after the energy bill; and since the Chairman is still here I 
want to make sure he hears this.  Do your members--because during Rita 
and my experience in later September last year, and we saw what 
happened in the New Orleans area and along the Mississippi River, do 
your members work with the State emergency supplies to ensure we have 
enough fuel during an evacuation?  In Hurricane Rita, we tried to 
evacuate at least 2 million people in the Houston area.  Do State fuel 
supplies--do they work with members of your associations?  
        MR. CAVENEY.  The industry, as well as local government and the 
Federal government, had post-hurricane conferences to actually go over 
the checklist of all the things that needed to be addressed, with a 
particular eye towards the human feature and then also the point you just 
raised, and they are working on that.  It brought to light a number of 
things that people have taken for granted that would be done, but 
weren't, and they are getting addressed this time.  So I think we will see 
a better response.
        MR. GREEN.  That is on the back end of it.  
        The front end of it, we had refineries, when we thought Hurricane 
Rita was going up to the Galveston Bay, that had to shut down.  To get 
those refineries back on line, you don't just turn on a switch.  It takes a 
lot of effort.  And we did have some problems with power and things like 
that from other locations.  
        One of the interests I have, and if this committee does another bill, 
is to have the Department of Energy directly involved with both front end, 
if there is a problem with the big picture of getting refinery capacity back 
up, whether it is in my neighborhood or anywhere else, but instead of 
having to go through FEMA, who really doesn't understand--I mean, we 
saw what happened again from experience.  Do you feel comfortable that 
the Department of Energy would be a partner that could be a problem 
solver in both getting the refining capacity back up but also looking at 
supplies for the evacuations?  
        MR. CAVENEY.  I think, and Bob can speak from his perspective, that 
the cooperation was incredible.  When you consider that we lost 30 
percent of our refining capacity, and it came back as quickly as it did, 
some of the problems we had down there were equipment problems and 
things needed to be replaced and just couldn't speed up.  But the 
government at the State and local and Federal level in almost every 
instance was just unbelievable.  
        MR. SLAUGHTER.  I certainly agree with that, Congressman.  It was a 
tremendous cooperative effort.  
        And one thing, there have been meetings, we had a large conference, 
for instance, in which to share all the lessons from our members with 
their experiences with the hurricanes, and I know they have worked with 
people in their localities and States to make sure that problems don't 
happen again.  A lot of work has been done.  
        We are going back into hurricane season now, but I think people 
need to know that the industry has learned a lot from what happened last 
year about working with people, how important that was, the importance 
of electricity; and all those lessons are going to be applied this year.  We 
have our fingers crossed that something like that won't happen again, but 
we have tried to be more prepared.  And we were ready last year, but the 
faster you can respond, the better.
        MR. GREEN.  Thank you, Mr. Chairman.  I have one more question.  
I don't know if we will have a second round.
        MR. WALDEN. [Presiding.]  We will have another round, I have been 
told. 
        The Chairman now recognizes the gentleman from Texas, Dr. 
Burgess.
        MR. BURGESS.  Thank you.  
        Mr. Slaughter, just continuing on Mr. Green's last thought, do you 
have a distributive network in mind for people getting caught in traffic 
jams if that happens again?  Are we going to use the National Guard or 
State Guard?  How are we going to get the gas to the people that need it?  
        MR. SLAUGHTER.  Well, the industry has been working together and 
also with other folks to try to make sure that this distribution system 
works better this time than last time.  What was a particular problem, as 
you know, and Congressman Green mentioned earlier, is that people 
didn't know where that hurricane was going to hit.  It takes as much as a 
month to get a refinery started and back online.
        MR. BURGESS.  I was thinking specifically of the people who were 
caught in the contra flow freeway lanes, eight lanes coming out of 
Houston, Texas, when traffic wasn't moving and they ran out of gas.  
Are we going to have a way to get gas to their tanks if we have another 
evacuation ordered?  Mr. Conley?  
        MR. CONLEY.  If I just make one comment, I was in San Antonio last 
week for our annual conference and talked with a Mr. Jake Bailey from 
Bolero.  One of his questions to me was, can we get more Texas carriers 
from other States, if need be, to help next time get the petroleum, the 
gasoline, down quicker?  
        One of the things I asked him is, what can we do to get the trucks 
going this way when everybody else is swimming upstream, and he said 
that they do have information from the State that they will provide patrol 
cars, State troopers and all.  There is going to be a meeting I believe 
Thursday, which would be today, in Houston with Bolero and some of 
the other carriers, as to how to do that better next time.
        MR. BURGESS.  If you wouldn't mind just sharing that with this 
committee--I know it is a little bit off point, but if you get the 
information from that meeting. 
        Let me ask you, since we are already talking, you talk in your 
testimony about the tank trailers being used to transport ethanol; and in 
an ideal situation you would have them full both coming and going with 
ethanol to the plant and then reformulated gasoline leaving the plant.  
What are the barriers to doing that right now?  
        MR. CONLEY.  Well, right now, it is a time type of thing.  Again, you 
don't have as much demand certainly for ethanol as we do for the 
gasoline.  
        Take as an example, what we have been doing, one of our carriers, 
either by barge or by rail, a product comes into the harbor of Baltimore.  
They will pick it up and bring it into Newington.  So, in the ideal 
situation, a Baltimore or a Virginia-based carrier can pick it up, bring it 
over here, a full load of ethanol, and then load gasoline on top and go out 
and make their delivery.
        MR. BURGESS.  I appreciate that.  
In the interest of time, again, if you wouldn't mind providing us a 
written response of what we might to do make that happen with greater 
facility for your industry.
        MR. CONLEY.  I would be pleased to. 
        MR. BURGESS.  Mr. Shea, in your testimony, you talk about 
renewable fuels.  The E-85 has about 75 percent of the actual power--I 
assume E-85 means it is 85 percent ethanol--but you lose 10 percent of 
your actual power in a gallon of E-85.  Do I read that in your testimony 
correctly there?  
        MR. SHEA.  I am not sure you read that in my testimony, but maybe 
it is in my full written statement.  Yes, I think there is power loss.  There 
is no question.
        MR. BURGESS.  Actually, I guess it was Mr. Reid's testimony that I 
was reading here, on page 12 of your testimony.  
        MR. REID.  There are fewer BTUs in the E-85 than in a regular 
gallon of gasoline.
        MR. BURGESS.  And yet the price is the same.  We have heard 
testimony on that various times during the week.  In fact, you have that 
in your testimony, that the price is not priced at a level that matches the 
energy content of a gallon of E-85.  I am just concerned.  Are we getting 
some ethanol price gouging here?  
        MR. REID.  I am not in the ethanol business myself.  I can't really 
comment on that.
        MR. BURGESS.  Okay.  
        MR. DINNEEN.  Congressman, just on the E-85 question, it is true 
that in the flexible fuel vehicles that are being produced by Ford, GM, 
Chrysler today, there is a reduction in mileage because of the reduced 
BTU content of the ethanol.  I mean, that is just a fact of science.
        MR. BURGESS.  But it is priced the same as a gallon of petroleum 
product?  
        MR. DINNEEN.  Not in all markets.  In most markets where E-85 is 
sold, it is sold at a significant discount to--
        MR. BURGESS.  Yet we have heard testimony to that effect during the 
week.  I am concerned about the price of E-85, whether it is reflective of 
the actual energy that you are buying.  
        MR. DINNEEN.  In today's market, though, most ethanol is being sold 
as a blend component with gasoline. 
        MR. BURGESS.  Let me ask Mr. Becker a question before I run out of 
time.  
        On the current air quality, the reformulated gasoline and the boutique 
fuels that we have been discussing all morning, is there any difference in 
the engines that are sold today and the rules made for reformulated 
gasoline 10 or 15 years ago?  Are we keeping pace with the changes in 
engine technology?  We have heard a lot from Mr. Markey about how 
engine technology has changed.  Are we keeping pace with that with our 
design of boutique fuels and reformulated gasoline?  
        MR. BECKER.  Yes.  The fuels have gotten cleaner, and the cars have 
gotten cleaner, and a lot of that is the credit of EPA and the stakeholders 
who have worked with EPA to make those--
        MR. BURGESS.  Does the design of our gasoline continually evolve 
then during that time?  
        MR. BECKER.  Yes.  There is lower sulfur fuel that is taking effect 
this summer.  There is lower sulfur diesel fuel, and both those fuels will 
not only clean up the air directly, but cleaner sulfur, lower sulfur fuel 
will enable advanced technologies to work more efficiently than they 
otherwise would.
        MR. BURGESS.  Mr. Slaughter, you wanted very much to say 
something about the discussion of the memo earlier.  Did you get a 
chance to cover your concerns, the refinery memo?  
        MR. SLAUGHTER.  Well, actually, it was on the question about the 
ExxonMobil comment.  You know, it is true that we have been adding a 
lot of capacity domestically at existing sites.  You have them on tap 
quicker than you would with a new refinery, so the product then is 
available.  ExxonMobil has added the equivalent of one new 
medium-size refinery itself in recent years, and that is by adding on to 
existing refineries, the output of those additions were available for 
consumers much more quickly. 
        So all of our companies have made substantial  investments.  Bolero 
has increased the capacity of their refineries.  They have purchased about 
400,000 barrels a day already and are planning an additional 400,000 
barrels a day of investment across the rest of its system in the years to 
come.  So the refining industry made significant investments.  That 
includes ExxonMobil and the rest of our members.
        MR. BURGESS.  I would point out that the profits for that don't just 
go to executives, but they also go to teachers, policemen, and retired 
people all over the country, the stockholders of those companies.  
I yield back.  
        MR. WALDEN.  The gentleman's time has expired.
        The Chair recognizes the gentleman from California Mr. Waxman. 
        MR. WAXMAN.  Thank you very much, Mr. Chairman.  
        Mr. Cavaney and Mr. Slaughter, I want to bring to your attention an 
article in the Associated Press dated April 10, 2006, entitled "Yuma 
Refinery Project Still Seeks Investors."  As I am sure you are aware, a 
proposal to build a new refinery has twice received permits for 
construction.  The first time was on January 16, 1992.  Although a permit 
was in hand, the refinery was never built because the project didn't get 
financing.  
        The same thing appears to be happening today.  On April 14, 2005, 
the Arizona Department of Environmental Quality issued another permit 
to Arizona Clean Fuels allowing installation and operation of the facility.  
        Do either of you have any information as to whether Arizona Clean 
Fuels has found investors for their new permitted refinery?  
        MR. SLAUGHTER.  Mr. Waxman, they are members of our 
association.  I don't have that information on financing.  But let me say 
that there are difficulties with that facility, for instance as to crude 
supply 
for that facility, that have not yet completely been resolved.  There have 
been changes in there that I think have affected people's ability or 
willingness to finance.  
        Now, supposedly they have some financing, but that's particular to 
the company and proprietary information, and I don't have it.  
        MR. WAXMAN.  Mr. Cavaney, do you have any information on that?  
        MR. CAVENEY.  Not a member of ours.  
MR. WAXMAN.  Okay.  Well, a year after receiving their permits, 
with gasoline prices at a record high and refineries reaping record profits, 
Arizona Clean Fuels is having a problem, and the article seems to 
indicate their biggest problem is finding financing.  
        The other point I would raise is that the Wall Street Journal pointed 
out that ExxonMobil now has $32 billion in cash.  ExxonMobil has 
enough money to invest in the Yuma refinery if it wanted to, doesn't it, 
Mr. Slaughter?  
        MR. SLAUGHTER.  Thank you.  You know, people put their capital in 
the best investments.  There is a lot of disagreement as to whether a new 
refinery is the best investment.  
        For instance, you know, ExxonMobil also has returned $55 billion in 
the last 3 years to its shareholders.  So a lot has been done with 
investment money and other money that ExxonMobil has.  I mean, they 
look at refineries.  They can look at exploration and production 
investments. 
        MR. WAXMAN.  Would it be unfair if someone said that ExxonMobil 
didn't want to build any new refineries because new refineries might 
reduce their justification for higher prices?  
        MR. SLAUGHTER.  Yes, it would be very unfair. 
        MR. WAXMAN.  Okay, thanks.  
        Now, Mr. Caveney.
        MR. CAVENEY.  Yes, sir. 
        MR. WAXMAN.  In your written testimony you said API supports 
increased energy efficiency in all sectors of the economy, including 
transportation, as an essential part of efforts to meet U.S. energy 
challenges.  And Mr. Slaughter emphasized the importance of CAFE in 
his oral testimony today.  
        Mr. Cavaney, is it your position that if we are going to get energy 
efficiency in the transportation sectors, that if fuel economy standards are 
revised, we should, in fact, have efficiency increased and not decreased, 
and a guarantee to that effect?  
        MR. CAVENEY.  We feel it should be increased in all sectors, and that 
does include transportation, because there is less flexibility in the 
transportation sector than any other for the use of energy, and it would be 
very helpful. 
        MR. WAXMAN.  You didn't mention that last year when you 
testified.  Any reason why not last year but this year you have come out 
with this position?  
        MR. CAVENEY.  Well, the one thing that we have seen is that it is 
very clear the global pressure on supplies is great, and it is going to be a 
little while before that relief comes, and we think it just makes good 
sense over time to go ahead and take this particular approach. 
        MR. WAXMAN.  Okay.  Mr. Slaughter, you indicated that NPRA 
characterizes a current environmental agenda as a regulatory blizzard, 
and you seem to be blaming a tight gasoline market and high prices on 
environmental protections.  You gave us a chart listing the burdensome 
requirements on refineries that drive high gas prices, and one of them 
was boutique fuels cap.  This is something Congress adopted last 
summer to limit States' clean fuels.  
        Isn't it correct that your colleagues in the oil industry had been 
calling for a boutique fuels cap for years while environmental advocates 
opposed it?  
        MR. SLAUGHTER.  There is some disagreement in the industry on the 
boutique fuels issue.  You know, we basically feel that the boutique fuels 
issue is not as serious as some people have suggested.  A lot has already 
been done through EPAct.  It is being looked at.  We feel the tremendous 
improvements that have been made, for instance, in largely desulfurizing 
regular gasoline, is going to mean that regular gasoline and reformulated 
gasoline in the future is going to look relatively similar.  We think fewer 
people will have a desire to go to boutique fuels because of that, and we 
don't really see a need for a limitation. 
        MR. WAXMAN.  You also cite a renewable fuels standard, which was 
imposed by this Republican Congress, as another environmental problem 
that is driving up costs.  If anything, ethanol makes smog worse, not 
better, and corn-based ethanol provides only marginal global warming 
benefits.  To the extent that new ethanol plants are fueled with coal, 
ethanol doesn't provide any environmental benefits at all and likely 
would make things worse.  
        And I point that out just to challenge your assertion that Congress 
adopted the renewable fuels standard as part of an environmental agenda.  
These are not part of an environmental agenda.  And I think that the 
charge that it is the environmental laws that are driving up the costs for 
gasoline is an unfounded one, and I certainly take issue with it.  
        My time has expired.  Thank you, Mr. Chairman.  
        MR. WALDEN.  The Chair recognizes the gentlewoman from 
Tennessee Mrs. Blackburn for questions. 
        MRS. BLACKBURN.  Thank you, Mr. Chairman, and thank you to 
each of you for your time and your patience with us this morning.  
Mr. Reid, I want to come back to you and Mr. Slaughter on the 
ultra-low diesel fuel for the summer.  I am one of those, back in the late 
1970s, when I had little kids, and we had the situation with the gas lines, 
I bought a diesel vehicle and loved it, used it, and found that to be a great 
way to work around the situation.  
        I know that as our constituents are looking for options, some of them 
are going to be looking at light trucks and diesel vehicles, and so I have 
talked to some of my oil marketers about the transition; the fact that you 
are going to have to have the fuel to the terminals in mid-July, and they 
have got to have it to the retailers in September.  And I have listened to 
this discussion, as we are now in our third hearing on this issue, and we 
continue to come back to refinery capacity.  We are at about 95 percent 
refinery capacity, and during the summer we can go as high as 
98 percent.  
        I am looking at this adding another requirement, and you all have 
talked about the different blends and getting things to the customers.  So, 
Mr. Reid, I think you are probably--looking at the panel, and listening to 
you, you are the one that lives most in the real world.  You are not here 
on the Beltway, and you are dealing with people that have got to deal 
with the customer who is putting that money on the table.  
        So, looking at what is considerably a high refinery utilization rate, 
and then adding on this requirement with the ultra-low diesel fuels, 
should we expect a price spike in diesel this summer?  
        MR. REID.  I understand your concerns.  I am really unsure as to how 
the markets will respond to the roll-out of the ultra-low sulfur diesel fuel.  
We have concerns it could create a price spike, but it is really uncertain.  
Refiners tell us that supplies will be ample.  There are still some issues 
with respect to how it is going to come through the distribution system. 
        MRS. BLACKBURN.  You are confident that the supplies will be 
ample?  
        MR. REID.  Yes.
        MRS. BLACKBURN.  Okay.  And you were just talking about your 
distribution system.  Go ahead and finish that. 
        MR. REID.  Well, there are still challenges associated with getting 
the ultra-low sulfur diesel fuel from point A, where it is manufactured, to 
point B, where it is stored, distributed, and then down to the retail level --
        MRS. BLACKBURN.  Sure. 
        MR. REID. --and maintaining the specification.  It is an open question 
how that is going to work out at this point. 
        MRS. BLACKBURN.  Do you feel like you have enough lead time?  
        MR. REID.  We have as much lead time as we have. 
        MRS. BLACKBURN.  You have got what you got.  Well, the good 
thing is you all were looking at this as kind of being the year of fuel 
specification anyway. 
        MR. REID.  Welcome to the party. 
        MRS. BLACKBURN.  Yeah.  Exactly.  
        Okay, Mr. Slaughter, do you want to add anything to that?  
        MR. SLAUGHTER.  Well, I would like to say that industry has been 
working closely with all of their stakeholders to try to make this 
transition as smooth as possible.  It is a daunting challenge.  We have 
never made a product this low in sulfur.  The 15 ppm is measured at 
retail.  At the refinery, we are going to have to put out 5 to 7 ppm sulfur.  
And the difficulty is that it is extremely difficult to make.  
        Now, a lot of work has gone into trying to make this a successful 
transition, and our fingers will be crossed.  We think we have done 
everything we can.  
        MR. BECKER.  May I?  
        MRS. BLACKBURN.  Yes, Mr. Becker, go ahead.
        MR. BECKER.  Thank you.  I just want to echo what Mr. Slaughter 
said.  This was a rule that was developed based upon compromises from 
the environmental health groups, the States, and the oil industry.  It is a 
rule that is going to result in several thousands of saved lives.  It is going 
to have a huge air quality benefit.  It is going to have a huge economic 
benefit to this country.  And it is one of the success stories that all of us 
collectively can brag about.  
        We would have preferred to see the rule implemented earlier, but as 
part of the compromise, we thought EPA did a fair job of bringing in the 
stakeholders and coming up with the deadlines that it did. 
        MRS. BLACKBURN.  Okay.  Mr. Slaughter, go ahead. 
        MR. SLAUGHTER.  I wanted to add one additional point, since we 
have talked a little bit about numbers and profits today.  The cost of this 
program is $8 billion.  That is on top of the $8 billion the industry spent 
to reduce sulfur in gasoline.  
        So I just want to point out that it is a very significant commitment 
of this industry to new investment for environmental reasons to make this 
product for the U.S. 
        MRS. BLACKBURN.  I appreciate that.  
        Mr. Slaughter, I am going to run out of time, and I had really wanted 
to talk with you about New Source Review.  We have done some things 
on that and have had some things included in the GAS Act that we 
passed in the House.  It didn't pass in the Senate.  And the more I hear 
and read, and the more I look at New Source Review, I think we were 
right in the actions that we took on the GAS Act.  
        I will submit this to you in writing, but I think it is an important 
part of the record in looking at New Source Review and those requirements 
and how it may either enhance or stifle and prevent investment in 
refineries here.  
        I think Mr. Cavaney was trying to recall that number of refineries 
that we had had, and our committee work shows that we have not had a 
new refinery since 1976, and in 1981 we had 324 total.  Today we have 
148.  That is of concern to us, and I would appreciate your response in 
writing, and I will submit the question to you in writing. 
        MR. SLAUGHTER.  Thank you, I will. 
        MRS. BLACKBURN.  Thank you.  I know my time has expired.  
Thank you, Mr. Chairman.
        MR. WALDEN.  The Chair recognizes the gentleman from 
Washington State Mr. Inslee for questions.  
        MR. INSLEE.  Thank you.  Really appreciate you all being here.  
        Just to let you know, there are some sort of bold ideas floating 
around in Congress now.  One is called the New Apollo Energy Project, 
something I am cosponsoring with a bunch of folks who really believe 
that we need to take some very bold steps in energy, not just little baby 
steps.  We call it the New Apollo Project because we think we need 
something of the same scale as Kennedy challenged us to in 1961.  We 
don't need that little small step for man, we need a giant leap for 
mankind in here.  So I appreciate your being here to talk about it.  
        I want to talk to you about ethanol and flex fuels and how we 
develop infrastructure in that regard.  Some of us have been looking at 
the experience of Brazil, where they have had considerable success.  We 
are told about 40 percent of their transportation infrastructure is now 
fueled by ethanol, principally from sugar cane in Brazil.  That resulted 
from pretty aggressive, pretty assertive, pretty visionary actions by 
Brazilian leaders over the last couple of decades actually to develop both 
a demand on the demand side for ethanol, which, as we know, is a great 
product because it reduces CO2 emissions, and we have a global 
warming issue we have to deal with, but also on the supply side to help 
development of the infrastructure so that that E-85 is available at the 
pumps for their consumers.  
        Now, what the Brazilians tell me is that they sort of felt both was 
necessary; that it was necessary to help the supply side to provide some 
incentives, some assistance to the suppliers to help the infrastructure 
development to put in those E-85 pumps, and to develop the refineries 
and the transportation infrastructure, but it was also necessary to help on 
the demand side when they have helped Brazilians get these flex-fuel 
vehicles that can burn either gasoline or ethanol.  
        So I guess what I would just ask for your thoughts on are, is that the 
right strategy?  Do we need to do both?  And if so, what are the most 
effective things on either approach to try to inspire that progress?  
        MR. DINNEEN.  Congressman, Brazil has done a tremendous job 
building an ethanol industry through tax incentives and mandates for use.  
And actually, they built their ethanol industry largely first, initially, 
through a blend market, requiring ethanol to be used and blended with 
gasoline.  They had blended as much as 25 percent with gasoline in 
vehicles that were on the road.  It has only recently been that Brazil also 
required the availability of E-85 and provided additional incentives for 
E-85 vehicles.  That program has indeed proven to be extraordinarily 
successful.  
        In this country, we are still working through ethanol as a blend 
component with gasoline, and there is tremendous room for growth as 
ethanol becomes a more ubiquitous component of the motor fuel market 
as a blend.  
        For ethanol in this country to be more widely used as an E-85, 
several things need to happen.  You need to have more vehicles.  We 
have 5 million E-85 vehicles on the road today.  That is a good start, and 
I give great credit to Ford, General Motors, and Chrysler for the 
commitment that they have made toward those vehicles, but it is not 
nearly enough.  It is not enough vehicles to attract a gasoline marketer to 
put in an E-85 fuel pump.  
        You need more pumps.  We only have 650 E-85 pumps across the 
country, out of something like 130,000 gasoline stations across the 
country.  You need to have more infrastructure.  That will come as the 
vehicles come.  
        But there is one other very important component.  You need more 
ethanol.  I mean, to really replace gasoline, you are going to have to be 
talking about ethanol from cellulose.  You are going to be talking about 
30 billion, 40 billion, 50 billion, 60 billion gallons of ethanol.  
Congressman, you can't do that from grain. 
        MR. INSLEE.  And I am very happy to report that the first commercial 
cellulosic ethanol plant is going to go in in my neck of the woods in 
northwest Idaho and is ready to go; construction is ready to start as soon 
as the loan guarantees are perfected.  And I think that is a very exciting 
development, because cellulosic ethanol, of course, is going to have a 
production per acre severalfold what existing crops have.  And when we 
do that, then we really are talking about a meaningful alternative to 
gasoline in this country.  
        I just want to let you know of some efforts going on here is that 
many of us think that while Brazil has provided some good vision, we 
don't have the luxury of time that they had, of decades, to start this 
transition.  Our security needs in the Mideast, the science of global 
warming indicates that we have to get meaningful transition in the next 
decade or we are going to be eaten alive.  We are going to be in areas of 
CO2 emissions that are so high that these changes are going to be 
irreversible.  
        And I, and I don't think I am alone, believe we have to act more 
quickly than Brazil did, perhaps in the same direction, but with much 
more dispatch.  We just don't have this luxury of time.  So one of the 
things we are talking about is trying to inspire more flex-fuel vehicles to 
be sold so that it will increase that demand so that the person can then 
afford to put up the pump because they know the demand is there.  
        In Brazil Ford is running commercials that has a young man pull up 
to a pump, and it shows him being indecisive.  He can't decide between a 
blond or a brunette, between one diet pop and another, or gasoline and 
ethanol.  He finally punches ethanol, which is the cheapest one at the 
moment.  So that is Ford's marketing strategy in Brazil, and we want to 
have the same strategy here.  
        Did you want to make one comment?  I have brief time.
        MR. SLAUGHTER.  Yes, Mr. Inslee.  I would just say that the 
Brazilian project is very interesting, but apparently with a $2.90 price for 
crudes for gasoline and for the $2.90 price for ethanol here, and the $2.38 
price for gasoline he wouldn't be punching the cheaper option in the 
United States.
        MR. INSLEE.  That may be true today.  And I will just tell you what 
my bet is on.  My bet is on that there is not going to be a whole lot of 
new dinosaurs found to dramatically increase our fossil fuel production.  
My bet is we're going to find a lot more Chinese demanding 
automobiles, and that the price of fossil fuels is going to--over a long 
term is going to go up, and the price of ethanol, when we develop 
cellulosic ethanol, is going to go down.  
        So I think we should be putting our money in part on an alternative 
that is coming down rather than a horse that is going up.  That is just one 
person's view. 
        MR. SLAUGHTER.  Hasn't gone down yet.
        MR. WALDEN.  The Chair recognizes the gentlewoman from 
Wyoming. 
        MRS. CUBIN.  Thank you, Mr. Chairman.  I will be brief because 
most of my questions have already been asked and answered, and I 
appreciate that.  
        I would like to start with Mr. Shea.  What insight can you offer as to 
what net effect the capping of boutique fuels, as mandated by Section 
1541(b) of the Energy Policy Act, will have on national pipeline storage 
and transmission capacity?  
        As we continue to work to reduce the number of boutique fuels in the 
system, do you think publishing the list will be of any help in the 
management of our Nation's pipeline system?  
        MR. SHEA.  I believe currently we are able to handle the 
transportation of the boutique fuels that exist.  Our concern is if there is 
continued proliferation of boutique fuels and what impact that may have 
as it relates to pipeline capacity, through-put capacity, and also tank farm 
storage capacity.  
        We are in a position today, I think, in the pipeline industry, with 
the advent of the growth of boutique fuels, adding to that the phase-out of 
MTBE for ethanol, the phase-in of ULSD and such low parts-per-million 
requirements, that the pipeline system is getting stretched to capacity in 
certain segments.  So I guess my view would be that the capping of 
boutique fuels would be helpful at this point. 
        MRS. CUBIN.  Mr. Waxman, I think, stated in one of his questions as 
he went along that ethanol was not cleaner, or it was less pollutant, I 
should say, than oil products.  Can any of you respond to that?  
        MR. SLAUGHTER.  I would be glad to say something.
        MR. DINNEEN.  And I will probably have to say something after that, 
but go ahead.
        MR. BECKER.  And then I will change his view. 
        MR. SLAUGHTER.  The fact of the matter is there are differences.  If 
you use ethanol, you produce aldehydes, which is a form of pollutant.  If 
you use ethanol in the summer in gasoline, it increases the volatility of 
the mixture, and you basically lose about 5 to 6 percent of the volume. 
        MRS. CUBIN.  Of the gasoline or the ethanol?  
        MR. SLAUGHTER.  Of the gasoline.  Because you have to back out 
some of the high energy content, but more volatile parts of the gasoline 
to accommodate the ethanol volatility number.  
        So there are new investments that have been made by the industry 
this year to accommodate that and to use ethanol in those areas.  It is just 
that it presents different challenges, and the industry this year is learning 
how to deal with those.  
        MR. DINNEEN.  Surprisingly, I actually agree with much of that.  
Ethanol has tremendous exhaust emissions benefits, reducing carbon 
monoxide and exhaust VOCs.  As Bob indicated, it does have a higher 
volatility when blended with gasoline, so evaporative emissions increase.  
When used in clean-burning gasoline programs, however, refiners have 
to accommodate for that increased volatility by producing a 
lower-volatility blend stock.  The refiners have made the investments to 
make sure that is possible.  
        So from an air quality standpoint, using ethanol in clean-fuel 
programs is going to have the same air quality benefits as any other fuel.  
        MR. BECKER.  And if I may add to that?  
        MRS. CUBIN.  Please.
        MR. BECKER.  I am going to say the same thing in different words.  
        In a few areas of the country, several areas of the country, where 
there is Federal reformulated gasoline and ethanol is being used, there 
shall not be any additional increase in volatility because of the specific 
cap in the Federal reformulated gasoline program.  
        In Wyoming and most other areas of the country that are using 
conventional gasoline that is going to have ethanol in it possibly.  
Ethanol is allowed a waiver to the volatility limits that gasoline had to 
meet in the past.  And so by regulation, by waiver, ethanol will be 
allowed to be more smog-forming than gasoline.  
        MRS. CUBIN.  More what?  
        MR. BECKER.  More smog-forming, more volatile than gasoline in 
the other Federal reformulated gasoline areas.  
        MRS. CUBIN.  And at high altitudes, of course, that volatility problem 
is worse than it is at lower altitudes.
        MR. BECKER.  And this could be a problem.
        MR. DINNEEN.  But if it is a problem, the States have the authority to 
petition EPA to have that volatility waiver lifted.
        MR. BECKER.  And Mr. Dinneen is correct, but this is not an easy 
step, to overcome this obstacle that we face.  And we are a fuel-neutral 
association.  We don't have a dog in this fight about whether it is ethanol 
or any other additive.  But you raised the question.  
        This is going to make it more difficult for States who want to meet 
their smog, their ozone standards to meet, because by regulation, by 
waiver we will see more emissions in conventional gasoline areas from 
ethanol.  And to bring them down, we will have to convince EPA and 
seek that waiver, which is not an automatic waiver.
        MR. DINNEEN.  But EPA has never not approved such a waiver, and 
I guess I just have more faith in State air quality officials than Mr. 
Becker.
        MR. BECKER.  Excuse me a second. 
        MRS. CUBIN.  So it depends on what chemical it is that you want to 
decrease.  I mean, if you are talking about the hole in the ozone, we are 
talking about carbon dioxide.  So that isn't an aldehyde.  
        MR. BECKER.  The Congress has, in the Energy Policy Act, 
expanded the amount of ethanol, have codified the expansion of the 
amount of ethanol throughout the country.  You raised the issue as to 
whether or not this is going to exacerbate air pollution, or Mr. Waxman 
raised it and you are responding as to whether it is going to exacerbate 
air pollution levels in some areas of the country. 
        MRS. CUBIN.  So it will just be different pollution.
        MR. BECKER.  Unless EPA accepts the waiver request that the State 
offers, there will be increases in smog-forming emissions in those areas 
of the country that use ethanol where there is not Federal reformulated 
gasoline.  I think that is a fact.
        MR. WALDEN.  The gentlewoman's time has expired. 
        MRS. CUBIN.  Thank you, Mr. Chairman.  
        MR. WALDEN.  For the record, we have a vote on the floor with 
about 7 minutes left.  So I am going to ask a couple of brief questions, 
but before I do, I want to make one statement.  
        We have heard a lot over the last couple of days about the success in 
Brazil based and attributed to their increase in ethanol production, which 
is remarkable.  But as I have looked into this, it appears that Brazil's 
energy independence really in large measure has come about because of 
its increase in crude oil production, which I am told is nine times larger 
than its increase in ethanol production between 2004 and 2005 and four 
times larger than the 2000 to 2005 period.  And they are on track to 
increase their crude oil production even more, and ethanol plays a very 
small piece.  
        Now, I am an ethanol advocate, and I think we need to look at these 
alternative fuels.  I think there is a lot of opportunity out there, but am I 
missing something here?  
        MR. CAVENEY.  No, that is absolutely correct.  Another thing 
happened back in the early 1970s.  Brazil was faced with this problem of 
wanting to try to become energy independent.  On the one hand, they 
went down the ethanol track, which we have heard a great deal about, but 
they also formed their national oil company, Petrobras.  Petrobars has 
been very, very successful offshore of Brazil, making some very 
successful finds in the deep water and using that.  
        So, yes, their independence is in large part a combination of both of 
those things and not attributable to one or the other.  
        MR. WALDEN.  But if the amount of crude oil production is up nine 
times over that of ethanol, how can you say it is not attributable one over 
the other?  I mean, ethanol represents like .25 million barrels per day, 
and crude oil is 1.65 or something.
        MR. CAVENEY.  The point I was trying to make was that when it 
became clear that they were having these successes with their offshore 
production and all, they didn't feel they had to rely exclusively on 
ethanol to carry the weight of their goal of becoming energy 
independent.  
        MR. WALDEN.  I guess that is what I am trying to figure out here.  In 
my district we produce geothermal heat, we produce solar electricity, we 
produce wind power in copious quantities, and not just because I am 
upwind.  You know, politicians.  Never mind.  
        But we produce a lot of alternatives, and I am a big advocate for 
that.  But I am also a realist to know that you can't rely on that totally.  
And it seems to me in America part of our energy independence has to also rely 
on increased crude oil production out of our own resources.  Am I 
missing something here?  
        What rate of growth are we seeing on production of crude oil in 
America?  Who can address that?  
        MR. CAVENEY.  I can address that.  
        MR. WALDEN.  All right.
        MR. CAVENEY.  You are absolutely right.  One of the things people 
do is selectively take information out of the Brazilian experience and 
bring it out to serve their own interests.  And as Bob mentioned earlier, 
the success of getting ethanol going in the early years was mixing it with 
alcohol, alcohol and gasoline together.  That is the same approach we 
recommend here, because what you want to do is to get the ethanol 
industry up as big and as strong and as flexible as it can be to withstand 
the huge swings that the fuels industry goes through.  
        And other people say, no, the Brazilian experience is you have to go 
to E-85.  Well, there are 222 million automobiles and SUVs on the road 
right now, only 5 million of which--
        MR. WALDEN.  Where, here or Brazil?  
        MR. CAVENEY.  Here in the U.S., only 5 million of which are 
flexible fuel.  So you will have a very long wait if you focus on that.  
        So what we would like to see is continued U.S. production of crude 
oil here and conversion in our refineries, blending it with ethanol.  We 
produce per gasoline 140 billion gallons.  
        MR. WALDEN.  But I want to get back, because I am out of time, and 
I have to go vote on the floor.  
        How much is the crude oil production?  
        One comment to ethanol and alcohol.  I didn't think you were 
supposed to drink and drive.  
        But, Mr. Slaughter, you indicated you might be able to answer that 
question.  What is the crude oil production in the United States; the rate 
of growth?  
        MR. SLAUGHTER.  Crude oil, well, it is small.  Actually it has been 
negative in many years, but it has recently turned around a bit.  There are 
several new projects, particularly offshore, that are very large that are 
going to increase domestic production slightly over the next few years.  
And, of course, ANWR would help a lot more.  
        But the fact of the matter is U.S. crude production has been on the 
decline more often than on the incline over the past decade. 
        MR. WALDEN.  I am going to have to leave it at that because we are 
under 3 minutes now for the vote on the floor.
        The Committee will stand in recess until about 1 o'clock or 
thereabouts, or a few minutes after the last vote.  
        Thank you.  
        [Recess.]
        CHAIRMAN BARTON.  [Presiding.]  The committee will come to 
order.  I thank you all for staying.  I know it has been a long day.  
        We are going to start our second round.  I know Mr. Boucher has 
asked questions the first time, Mr. Hall, and I think Mr. Bass.  So the 
Chair will recognize himself for the second round of questions.  
        In my first round, I picked on Mr. Dinneen, so I am not going to pick 
on you this round.
        MR. DINNEEN.  Can I go?  
        CHAIRMAN BARTON.  No, you can't go.  
        I want to ask Mr. Slaughter some questions.  
        We are beginning to increase refinery capacity again in this country.  
That is a true statement, isn't it?  
        MR. SLAUGHTER.  Yes, it is. 
        CHAIRMAN BARTON.  I think you said that about a million and a half 
barrels of projects have been announced.  Most of those are expansion of 
existing refineries; is that correct?  
        MR. SLAUGHTER.  I think they all are expansions of existing 
refineries.  
        CHAIRMAN BARTON.  Okay.  I also think you said that your trade 
group does support the refinery permitting reform bill that passed the 
House and is scheduled to come back up again next week. 
        MR. SLAUGHTER.  That is right, we do. 
        CHAIRMAN BARTON.  Now, my good friends, Mr. Boucher and Mr. 
Dingell, and I have many good friends, but those two good friends have 
announced, and may have introduced, a refinery bill.  Has it been 
introduced yet?  
        MR. BOUCHER.  [Nodding in the affirmative.] 
        CHAIRMAN BARTON.  I haven't studied the bill in its totality, so if I 
misrepresent it, Mr. Boucher can correct me, but my understanding is 
that they would require the construction of brand new refineries for 
military purposes.  And do you all have a per barrel per day requirement, 
Mr. Boucher?  
        MR. BOUCHER.  Mr. Chairman, it would be 5 percent of the existing 
refinery capacity. 
        CHAIRMAN BARTON.  So that is about 850,000 barrels, somewhere in 
that range.  What would the industry position be on the Boucher-Dingell 
bill?  
        MR. SLAUGHTER.  Well, I hesitate to say because I am not familiar 
with everything that is in the bill.  I think if you are particularly talking 
about the idea of government-run refineries, you know, one of the 
questions would be what kind of role that it would play.  
        We believe that the domestic industry has shown, by significant 
investment in the domestic market, that we are very committed to it.  The 
problem with new refineries, I will have to say, Mr. Chairman,--
        CHAIRMAN BARTON.  Look, this is no time to be reticent. 
        MR. SLAUGHTER.  Well, with new refineries, just one question.  We 
have always said that people who want to build new refineries should be 
encouraged to do so.  One of our members is Arizona Clean Fuels, and 
we have worked with them.
        One of the things I don't understand is what is the difference 
between the steel that goes into a new refinery and the steel that goes into 
an existing refinery?  Because the existing refinery can produce more out 
of that steel in 3 or 4 years, when you don't know what you are going to 
get out of the new refinery. 
        CHAIRMAN BARTON.  It is unusual for a witness to ask a question of 
Congress, but in the spirit of an open dialogue, to get to the bottom, I 
mean, this is a hearing about truth.  So my answer to that would be that 
my understanding is that a brand-new-from-scratch refinery could use 
the best available technology, would tend to be built in a way that could 
refine any kind of crude oil and would probably be more efficient.  So 
that would be the technical answer.  
        The political answer would be to show that we can.  To show the 
American people and the world that we can still do things in America.  
        MR. BASS.  Mr. Chairman, if you would yield.  I am over here, Mr. 
Chairman, in front of you. 
        CHAIRMAN BARTON.  Oh, Mr. Bass.  I am looking down here. 
        MR. BASS.  It is also the issue of geographical diversity which we 
need, and which you don't get when you expand an existing facility. 
        CHAIRMAN BARTON.  Yes.  But I would rather have existing 
refineries expanded than no capacity increase at all.  But if we could do 
some diversification and take advantage of some of the newer 
technology, I think that would be a good thing.  
        One of the witnesses yesterday, Mr. Cooper of a consumer group, 
indicated that according to the Department of Justice, Antitrust Division, 
or maybe it was the Federal Trade Commission, they do a generic test for 
market concentration, and that in four of the five regions of the country, 
there is market power concentration in the refinery sector--in fact, in 
every part of the country except the Southwest.  
        What would your response be to that, Mr. Slaughter?  
        MR. SLAUGHTER.  Frankly, I find that difficult to believe, because 
the refining and distribution system, for instance, in the Gulf, the Gulf 
supplies a great many products up the East Coast and into the Northeast.  
So I don't know exactly what they have decided the perimeters are.  
        Now, in the case of California, there are a limited number of 
refineries out there because most of the independents out there have gone 
out of business, with the exception of Valero and Tesoro.  That is a 
separate case.  And the problem is sometimes they are unable to permit 
an ethanol tank in California, let alone a refinery. 
        CHAIRMAN BARTON.  I understand.  My time has expired.  My last 
question before I turn to--I think Mr. Stupak is the first Democrat.  He 
was actually here at the opening bell this morning.  
        For both Mr. Slaughter and Mr. Cavaney, would your group be 
willing to engage in a series of off-camera discussions with myself, Mr. 
Boucher, Mr. Dingell, and Mr. Hall on perfecting the refinery permitting 
bill that we have got up to see if we could come to an agreement that 
would be bipartisan, that the industry would support, if we wanted to 
bring a little different refinery bill up in the next 2 to 3 weeks?  Would 
you all be interested in doing that?  
        MR. SLAUGHTER.  We would, certainly.
        MR. CAVENEY.  Yes. 
        CHAIRMAN BARTON.  Would you?  Okay.  
        I will yield then to Mr. Stupak.  
        MR. STUPAK.  Mr. Chairman, before you have that discussion, is 
there any willingness in the industry, Mr. Slaughter, to even increase 
refining capacity?  
        MR. SLAUGHTER.  Well, the industry has been increasing refining 
capacity every year.  For instance, we were at 16.5 million barrels per 
day about 3 years ago.  We went to 17.1.  We are at 17.3 this year, and as 
I said, we are adding 1.4 million over the next 3 to 4.  
        MR. STUPAK.  Sure, but since 1981, you have gone from 325 
refineries down to 149 refineries.  
        MR. SLAUGHTER.  But the refineries we have now are larger and 
more sophisticated and produce more product than those refineries did.  
        MR. STUPAK.  Well, what is the one issue that would reduce the 
price of gasoline for the American consumer?  If there is one thing you 
would say, what would it be?  More refining capacity?  
        MR. SLAUGHTER.  Well, the difficulty is the market situation has led 
to the prices we are seeing today, both for crude and gasoline.  And I 
think the good news, as I talked about in my testimony, is that additional 
supply is coming on the way because refining--
        MR. STUPAK.  But that is in crude, right, not in refining? 
        MR. SLAUGHTER.  Sorry? 
        MR. STUPAK.  That is in crude, not refining. 
        MR. SLAUGHTER.  Oh, no.  But you need to recognize there are 
refineries that have just been in a very heavy maintenance season 
because of the hurricane last year.  Those are coming back on line now, 
and there will be additional production of gasoline out of those refineries.  
And that should be very good news for this market.  We can't offer you 
new capacity by a snap of the finger.
        MR. STUPAK.  No, I know that, but it seems to me we go through this 
every year about this time where we have an increase in prices, and it is 
switching over from winter fuel to summer fuel, you say.  I would think 
by now we would have that figured out, after all these years. 
        MR. SLAUGHTER.  Well, this year we had to switch over from MTBE 
to ethanol on top of it, sir, and that has greatly complicated the process.
        MR. STUPAK.  But MTBE has been on sort of the hit list for some 
time.  You knew that was coming, right?  
        MR. SLAUGHTER.  Well, it was 4 percent of U.S. gasoline supply.  
Last year it was still 1.5 percent, so it is not an easy matter to replace it.
        MR. STUPAK.  So if it is 4 percent, why then have prices gone up 70 
some cents, or 72 cents?  
        MR. SLAUGHTER.  It used to be 4 percent.  It is now far less even 
than the 1.5 percent last year.  But the prices have gone up because of the 
market situation and the tight supply/demand balance.
        MR. STUPAK.  How about the crack price we talked about earlier; 
that crack premium?  You understand that?  That is up, as the Chairman 
estimated yesterday, about $30 when it should be about $8. 
        MR. SLAUGHTER.  The crack spread essentially represents market 
conditions.  That determines what it is, and what goes in --
        MR. STUPAK.  Who determines the crack spread?  
        MR. SLAUGHTER.  I am sorry?  
        MR. STUPAK.  Who determines the crack spread?  
        MR. SLAUGHTER.  The market does.
        MR. STUPAK.  Who is the market?  
        MR. SLAUGHTER.  The market is basically what people are willing to 
buy our products, at which price and in what quantities. 
        CHAIRMAN BARTON.  Would the gentleman yield on that?
        MR. STUPAK.  Sure.
        CHAIRMAN BARTON.  Mr. Slaughter, if you tell us what it is today, 
the EIA witness was a little unclear.  He estimated it was about $20, and 
my information was it was as high as $30.  If you could tell us, without 
being proprietary, generically, in general where it is today. 
        MR. SLAUGHTER.  The charts that I have seen recently are usually 
between 30 and 20, and closer to 20 now.  I will give you a new number.  
I haven't looked in the last couple of days. 
        CHAIRMAN BARTON.  And what historically has been considered a 
fair spread, that at that level refineries can make a reasonable profit and 
stay in business?  My number is it has been around $3 to $4 a barrel.  Is 
that a good number or bad number?  
        MR. SLAUGHTER.  That number I can't give you because I think it 
would vary from refinery to refinery.  And, again, I would say today's 
situation, everyone agrees, is an extraordinary situation in terms of crude 
price, demand, and gasoline supply because of coming off the hurricanes.  
That is affecting that crack spread. 
        CHAIRMAN BARTON.  I understand that.
        We will give Mr. Stupak a little more time because I took some of 
his time, and I thank the gentleman for yielding.
        MR. STUPAK.  Well, between September 2004 and September 2005, 
according to charts we have seen, the refinery costs have gone up 
255 percent.  How do you justify that kind of increase?  
        MR. SLAUGHTER.  I think you meant to say refinery profits, because 
that was the figure used earlier by the Chairman.  I think that is a 
suspicious figure.  I have not looked at that.  I have promised to look into 
it and get back to you on the number.  
        There is no doubt that in the last 2 years refiners have been making 
more money than they have in the last decade.  That is because it has 
traditionally been the least profitable sector in the refining industry.
        MR. STUPAK.  Sure, and that is why we have those closed refineries 
and the increase in price. 
        MR. SLAUGHTER.  The fact of the matter is there has been significant 
investment in the refining industry in this country, and basically the 
industry is more competitive now than it was in the past.
        MR. STUPAK.  Well, how much has the refining industry reinvested 
into refineries?  There has been no new ones.  I mean, Valero had a 
60 percent increase in the first quarter of this year. 
        MR. SLAUGHTER.  And they have put 400,000 barrels of new 
capacity into the refineries they have purchased over the last few years, 
and are putting 400,000 new barrels of capacity into those refineries in 
years to come.
        MR. STUPAK.  And they had--6 months, ending in June of 2005, they 
also had a 60 percent increase.  So even while they are increasing supply, 
if you believe that, they are still making 60 percent.  So they are keeping 
their margins where they want their profits. 
        MR. SLAUGHTER.  The margins are a product of market situation and 
what buyers will pay for gasoline and what crude oil costs us to make the 
gasoline.
        MR. STUPAK.  So bottom line is, basically, let the buyer beware as to 
the price. 
        MR. SLAUGHTER.  No.  The bottom line is, let the market work.  It 
always provides the consumer with adequate supplies at the best possible 
price.
        MR. STUPAK.  Do you agree the risk premium is probably $20 on a 
barrel of oil?  
        MR. SLAUGHTER.  There is considerable disagreement on that.  Some 
analysts feel there isn't any risk premium.  I feel, just by reading the 
news, it looks like there probably is one, but I can't tell you how big it is.
        MR. STUPAK.  Do you think the trading of oil should be regulated by 
the New York Mercantile Exchange, as one-fourth of it already is?
        MR. SLAUGHTER.  I have to confess that I am unfamiliar with that 
bill, and I am going to have to look at it.
        MR. STUPAK.  I am not asking about the bill, I am just asking about 
the theory.  If 25 percent of the oil traded on the market is regulated, why 
shouldn't the other 75 percent of the oil trades on the market be 
regulated?  
        MR. SLAUGHTER.  I will tell you, I am not an expert on crude 
trading, and I just can't answer that.  
        MR. STUPAK.  Mr. Cavaney, your industry is going to spend 
$30 million on educating people on the reason gas prices are so high.  
How are you going to educate them?  What is the message you are trying 
to give to the American people there?  
        MR. CAVENEY.  What we came across was the fact that the public 
did not understand the energy industry whatsoever, particularly in oil and 
gas.  And in order to help them understand, and hopefully be able to help 
guide all of us toward better solutions, we decided to have an educational 
advocacy effort, which was to explain to people where their dollar goes 
when they buy a gallon of gas and how it is distributed.  We talk about 
our investment, how much it takes to put in, how long an investment you 
need to do, what the returns on the industry were.  We talked about the 
commitment to reinvestment and our involvement with alternative fuels 
and the like.  
        So we are just in the process of trying to bring a level of education 
that frankly the industry had not really undertaken broadly over the past 
several decades.  
        CHAIRMAN BARTON.  The gentleman's time has expired.
        MR. STUPAK.  Thank you, Mr. Chairman. 
        CHAIRMAN BARTON.  The Subcommittee Chairman for Energy and 
Air Quality, Mr. Hall of Texas.  
        MR. HALL.  Thank you, Mr. Chairman.  
        Mr. Conley, I suppose you would be the one I would want to inquire 
about truck carriers.  In a day and time when airlines are flying full and 
going broke, and everybody knows the reason, what is the situation with 
the trucking companies?  What effect do higher fuel prices--what impact 
is that having on them, as on other consumers?  
        And if there is a problem with truckers who may haul ethanol going 
out of business because of higher fuel costs, thereby reducing the number 
of ethanol shippers, what is the situation there?  
        MR. CONLEY.  I don't think it would be fair to say there is a danger 
of the people that I represent going out of business because of fuel costs.  
They are absorbing some of them and passing some of them on.  So I 
don't see that as a real concern.  
        There certainly are some challenges, as we talked about in the 
testimony, in trying to adjust to the different types of fuels.  And with 
ULSD coming in, that is going to be another one.  But the fuel prices, 
obviously, we are paying them.  Some of them we are passing on, and 
some we are absorbing.  
        MR. HALL.  Is that partially because some haulers are switching to 
hauling ethanol, and that is one way you are confident about the ethanol 
hauling capacity?  
        MR. CONLEY.  It is kind of an interesting thing, and it is fortunate 
we were just down in San Antonio for our annual conference most of this 
week, as I mentioned.  I was talking to people who are petroleum 
haulers, and, of course, they are hauling the ethanol.  But you don't have 
to be a petroleum hauler to haul ethanol.
        MR. HALL.  Are the petroleum haulers the ones switching to ethanol?  
        MR. CONLEY.  Well, they are hauling it.  Yes, they are.  Some of 
them are using their trailers to haul ethanol.  And, like I said, they can 
maybe haul gasoline back out in an ideal situation.  There is just not that 
much demand right now for ethanol that that can be done in every case.  
        But the other side of it is, even for a gasoline hauler, whether it is 
a private fleet or one of ours, you don't have to have a petroleum trailer to 
haul ethanol.  So people who don't haul anything in the petroleum 
industry, or have not, are now hauling some ethanol.  So that is why I am 
confident that the capacity is there.
        MR. HALL.  Well, your testimony doesn't say it, but it kind of 
implies that there is or there may be some shortage of qualified personnel 
to haul ethanol. 
        MR. CONLEY.  That is another issue, and I will be glad to talk about 
that.
        MR. HALL.  Tell us about that.
        MR. CONLEY.  Well, the biggest challenge facing the trucking 
industry today, whether it is the tank truck industry or any part of it, is 
drivers, finding the drivers we want out there, recruiting people to come 
into the industry.  It is a very tough job.  So that is an issue.  
        Now, in the area that I talked about in my testimony, it is the whole 
HAZMAT endorsement portion, to haul gasoline or ethanol, or any of 
these, you need your HAZMAT endorsement, which requires a 
fingerprinting procedure.  I talked to one of our members this week who 
lost two good drivers because they just got tired of waiting in their State 
for the stuff to come back, and they went and got another job.  So that is 
kind of an artificial pressure that has been imposed.  That is why I 
suggested if we could maybe take another look at how that whole process 
works.  
        But the bottom line is, the biggest challenge we have right now is 
finding the kind of drivers that we are confident will do the job.  And 
there are a lot of reasons for that we could talk about.  
        MR. HALL.  There is another argument going on here in Congress 
about immigration.  The House has passed a bill that protects the border, 
and the Senate has done practically nothing.  Will our actions on 
immigration affect your acquisition of haulers?  
        MR. CONLEY.  Over time it could.  Again, a lot of our people are in 
the HAZMAT business, so it is almost another hurdle to get a HAZMAT 
driver.  But, on balance, we have got many carriers that have immigrant 
drivers that are doing very well.  
        CHAIRMAN BARTON.  Would the gentleman yield?  
        MR. HALL.  Sure.  I have sense enough to yield to the Chairman. 
        CHAIRMAN BARTON.  You don't have to.  
        While we are on this, I just want to ask Mr. Shea a question, with our 
friend here from the trucking industry.  I am told in Brazil that they can 
actually transport ethanol by pipeline, but in the United States we don't.  
What does Brazil know that we don't know about ethanol 
transportation by pipeline?  It would, obviously, be much easier to move 
around the country, especially to my part of the country, if we didn't 
have to use Mr. Conley's trucks or the railroad's tank cars.  Not that we 
don't love our truckers or train guys, but we were able to transport 
MTBE gasoline by pipelines.  What is the problem in the United States 
about pipeline transportation for ethanol?  
        MR. SHEA.  First, let me say I am not sure why Brazil has been able 
to transport ethanol.  I am not familiar enough with that.  But the 
problem that we have is that, first, as you probably know, ethanol has a 
great affinity to absorb water, and most of our refined petroleum product 
pipelines are multiproduct systems hauling diesel fuel, jet fuel, gasolines, 
all different flavors and brands of gasolines, and there is inherently water 
in the pipeline system.  
        So to blend ethanol with gasoline and try and transport it is 
virtually 
impossible.  The ethanol absorbs the water, drops out, and is out of 
specification at that point. 
        CHAIRMAN BARTON.  What if we put ETBE in gasoline?  Could you 
transport that in a pipeline?  
        MR. SHEA.  I am not a chemist or an engineer.  I am not sure of that.  
        Now, what I can say is that there have been tests; in fact, Buckeye 
has conducted one quite a few years ago where we stopped shipping 
refined products in a system up in Connecticut and Massachusetts, 
cleaned it out, because ethanol, of course, also is a solvent.  So we have 
had to run a lot of ethanol through the pipeline to clean the pipeline out, 
and we were successful in transporting on a dedicated basis a batch or 
two of ethanol.  
        But it takes large quantities of ethanol to make that economical.  In 
our view, at this point, it takes a dedicated pipeline system to be able to 
transport ethanol and make it economical. 
        CHAIRMAN BARTON.  It is Mr. Hall's time, but that question, Mr. 
Dinneen, and I think Mr. Slaughter wanted to comment on it.
        MR. DINNEEN.  I will be brief, Mr. Chairman, if I could, on this 
subject.  
        You are correct, Brazil does ship ethanol via pipeline.  They ship it 
in a common carrier pipeline with a shipment of ethanol, and then a 
divider, and then a shipment of gasoline.  One of the big differences is 
Brazil built its pipeline system to accommodate ethanol.  So the pipeline 
system actually originates in the sugar-growing regions of the country 
and then flows to the population centers.  
        Our pipeline system was built to accommodate gasoline, as it should, 
and so it originates in the Gulf Coast and flows out to the East Coast, and 
north to the Midwest, and west to the West Coast.  For us to even 
participate in that at all, we would first have to ship our ethanol from the 
Midwest down to Houston.  Well, we can ship it via train or barge 
directly to the market it needs to go.  
        The other issue, of course, is just one of volume, and we are such a 
small component still of the U.S. motor fuel market that you would be 
hard-pressed to make it work on our pipeline system as it is structured 
today. 
        CHAIRMAN BARTON.  Bob, did you want to say something?  
        MR. SLAUGHTER.  Mr. Chairman, I was just going to give you an 
affirmative on whether ETBE could be shipped in pipelines with 
gasoline.  Like MTBE, it could. 
        CHAIRMAN BARTON.  It could?  
        MR. SLAUGHTER.  Yes.
        CHAIRMAN BARTON.  Okay.
        MR. HALL.  I yield back my time and thank the Chair. 
        CHAIRMAN BARTON.  Yeah, I took 4 minutes.  
Mr. Boucher.  
        MR. BOUCHER.  Well, thank you very much, Mr. Chairman, and I 
particularly want to thank you for the suggestion that we undertake a 
bipartisan conversation on a role for the Federal government in making 
sure that our Nation has an adequate supply of refinery capacity, and I 
look forward to that conversation.  And I am particularly pleased to hear 
that Mr. Slaughter and Mr. Cavaney have also agreed to take part.  
        As we begin those discussions, there is some sort of baseline 
information that might be very helpful to have.  So Mr. Slaughter, let me 
ask you this:  Can you tell me how many refineries have been closed in 
the U.S. over the last, say, two decades; or what the capacity of those 
closed refineries is?  And then compare that refinery closure to the 
expected capacity that will come from the new investments that you have 
indicated in the expansion of current refineries now in operation.  
        MR. SLAUGHTER.  Let me respond to that, to the extent I can.  As I 
remember, the peak year for U.S. refining, number of refineries, was 
1981.  We were well over 300.  In terms of capacity, we were at 
18.6 million barrels a day, if I remember correctly.  If you add the 1.4- or 
1.5 billion in extra capacity to our probably 7.3 million barrels a day 
now, you would come up with 18.7.  So we will be slightly above.  
        But, of course, that will be modern capacity with a lot more 
sophisticated technology than those old tea kettle refineries were.  They 
were really very small refineries, and they were called tea kettle 
refineries because they couldn't really produce sophisticated products 
like gasoline in any sufficient supply. 
        MR. BOUCHER.  So as the consumption of gasoline has continued to 
rise in the United States, we are going to find ourselves at the end of the 
expansions that your industry is currently projecting with essentially the 
same capacity we had in the 1980s.  Do I interpret that correctly?  
        MR. SLAUGHTER.  Well, actually, yes, 18.7 versus 18.6.  But this is 
modernized capacity.  You know, gasoline demand was down for most 
of the 1980s and started to come back up in the 1990s.  And I don't know 
whether you are leading to the question whether we need to refine 
100 percent of our product here in the United States or not.  
        MR. BOUCHER.  I will be happy to ask that question, if you care to 
answer it.  I think it might be a useful illumination of the record, in fact, 
to have your position with regard to whether it would be economically 
useful to do that. 
        MR. SLAUGHTER.  Looking at the current situation, you would have 
to say that the market has not led to that result, which means that imports 
have optimized the system over additional refining capacity in the United 
States.  It was easier to bring in the imports, cheaper, than to build the 
capacity in the United States and produce it here because of the myriad 
of difficulties, the additional costs that we have talked about all the time.  
        We believe that you should encourage the construction and use of 
domestic refining capacity, but if you go to 100, and that is not the most 
economical thing to do, you are adding additional costs to the industry 
and its products.  That is the trade-off.  You are going something where 
economics has not taken you, so you are adding additional cost.  
        Refining doesn't really work very well with the surge capacity idea 
because it takes a considerable time to start up refineries.  You can't have 
extra refining capacity just sitting around. 
        MR. BOUCHER.  Let me ask you this.  Back in the 1980s, when we 
had 18.6 million barrels of refining capacity, what was the demand for 
refined product in the U.S.?  Was it that number or a higher number?  
        MR. SLAUGHTER.  No, sir.  There was a considerable delta between 
gasoline demand in the United States and that capacity figure. 
        MR. BOUCHER.  Well, a delta in which direction?  
        MR. SLAUGHTER.  Oh, demand for gasoline at the time was 
substantially less than 18.6. 
        MR. BOUCHER.  So you had an excess of refining capacity?  
        MR. SLAUGHTER.  Yes, but-- 
        MR. BOUCHER.  So you have gone from a situation where you had an 
excess of refining capacity in the 1980s to a situation now where there is 
a capacity deficit, given the fact that the demand for refined product has 
increased in the U.S.; is that correct?  
        MR. SLAUGHTER.  There is a deficit now, that is true.  It reflects 
pretty much the situation in the world refining industry as well. 
        MR. BOUCHER.  I think there might be some difference of opinion as 
to the economic utility of being able to refine 100 percent of the product 
here in the United States.  We have heard your view.  I am sure other 
contrary views would be expressed.  
        Let me turn, if I may, to another topic, and that is the potential for 
fuels created from other sources to help address the need for 
transportation fuels in the U.S. 
        Coal to liquids, we were told yesterday, is economic when the price 
of oil is $40 per barrel.  It is obviously well above that today.  EIA 
projects that it will remain above that for the foreseeable future.  And so 
one would assume that profit could be made in creating coal-to-liquid 
refineries in the United States at the present time.  
        So, Mr. Slaughter and Mr. Cavaney, perhaps, let me ask you if any 
of your member companies are demonstrating interest in building 
coal-to-liquids facilities?  If any are, perhaps you could tell us who they 
are and where they are.  And if there are barriers that are preventing that 
examination from taking place, perhaps you could tell us what those 
barriers are.
        MR. CAVENEY.  There are a number of companies, particularly the 
large integrateds, who are looking at coal to liquids, gasification, and a 
number of these sort of next-generation things.  And the extent to which 
they have made commitments, they haven't made any commitments 
publicly about going full scale with a new refinery based on that.  
        But we would be glad to, if it is public information, make available 
to you the list and the information we have on who is active in each of 
these areas, and you can speak with them directly because they are in a 
position where they would be able to talk to you directly about what they 
are doing and things like that.  They just haven't probably reached the 
point where they have their board approvals or anything like that to allow 
them to go public. 
        MR. BOUCHER.  I would personally appreciate that sort of 
information, and others on the committee would as well.  So if you could 
perhaps facilitate that discussion, I would appreciate it.  
        MR. BOUCHER.  Mr. Chairman, if I could just indulge your 
cooperation for one more question, I would like to ask what our 
witnesses think the most likely source of a cellulosic feedstock for the 
United States might be.  Corn is not economically efficient.  According 
to many studies, you wind up spending as much petroleum to cultivate 
annually the corn and then harvest and process it as you get in ethanol on 
the other side.  But with grasses and other kinds of biomass that 
regenerate naturally, that problem is not present, and perhaps those are 
economic.  
        So, Mr. Cavaney, what are your members, if any, looking at?  Mr. 
Dinneen, you may want to comment.
        MR. CAVENEY.  Some of our members are invested heavily in 
cellulosic experimentation, and there is still some additional work that 
needs to be done on the enzyme packages.  The difference is with both 
sugar cane and with corn, you can design one enzyme that will take care 
of converting the process, where, when you look at cellulosic, you have 
to be prepared to take a whole series of different materials in.  
        I think one of the most attractive ones would appear to be the issue 
of wood chips.  If you think about that, the processing of trees that are 
harvested for lumber or paper, in order for them to do that, they tend to 
take something with a wide geographic spread and deliver them to one 
spot.  So you would be able to centralize and get your raw materials 
fairly quickly, and I know that is one of the ones everybody is looking at 
a great deal.  I am sure there are others, but I am familiar with that 
industry. 
        MR. BOUCHER.  Mr. Dinneen.
        MR. DINNEEN.  Congressman, I know it will probably not surprise 
you that I disagree with some of the premise of your question with regard 
to the energy efficiency of corn.  We have had that discussion before, but 
nonetheless, there is not an ethanol company that I represent that doesn't 
have a very aggressive cellulosic resource program going on now, in part 
because they all have cellulose already coming into the plant.  There is 
cellulose in the corn itself that is not processed.  So they are looking at 
that.  
        But there are other companies looking at other cellulosic materials 
right now.  There is a company in Canada looking to build a plant in the 
United States that is looking at wheat straw.  There are companies 
looking to finance plants to British Ethanol from municipal solid waste.  
Certainly there has been ethanol production from waste wood, wood 
chips in the past and certainly can be again, people looking at research on 
switchgrass and other energy crops.  
        I think the marketplace ultimately will decide which of these makes 
the most sense, and probably all of them will at some point, because you 
can get alcohol from virtually any starch or cellulose-based material. 
        MR. BOUCHER.  So you foresee a variety of refineries using various 
feedstocks placed around the country?  
        MR. DINNEEN.  Absolutely. 
        MR. BOUCHER.  Thank you, Mr. Chairman.  
        MR. HALL.  [Presiding.]  The Chair recognizes the gentleman from 
Texas, Dr. Burgess.  
        MR. BURGESS.  Thank you, Mr. Chairman.  
        If I could ask Mr. Cavaney and Mr. Slaughter, over the past several 
days of testimony, it seems that the revapor pressure controls on fuels 
that States use to gain emissions productions when they choose not to 
participate in the reformulated gasoline program--how many levels of 
RVP control are there in use, and could any be eliminated?  
        MR. SLAUGHTER.  Well, I have that here somewhere.  
        MR. CAVENEY.  I don't have it, but I would like to make a comment.  
It has been said earlier several times, and I want to make a point, that the 
idea of trying to look at boutique fuels and reduce the number is going to 
cause some environmental degradation.  
        We have never, ever said that that is our interest.  We think if you 
work together carefully--and we agree it shouldn't be done quickly, 
because there is a study under way--we think you can reduce the number 
of boutique fuels and do so without degrading the environment and 
harming the emissions.  So both of those, especially when you look at the 
new generation of automobiles and the new cleaner fuels that are out, we 
think there is a great opportunity.  
        And I would disagree a little about the fact that it does make our 
system much, much more flexible, both the pipeline and the capacity to 
distribute it there, and also the slates that the refinery produces.  If you 
are going to run one or two fuels all the way around instead of four or 
five during a day, you are, by definition, going to be more efficient and 
get more output.  So we think this is a goal worth pursuing.  
        Bob. 
        MR. SLAUGHTER.  Dr. Burgess, unfortunately I have to say first that 
we have a different position on boutique fuels limitations.  But we have 
currently RVP of 7.8, 7.2, 7.0, and 7.0 with sulfur provisions.  So there 
are essentially four.  Most of them are at 7.8 and almost an equal number 
at 7.0.  
        We believe that the impression is wrong that there are a great deal of 
boutique fuels out there now.  We are concerned about a situation in 
which there would be a whole lot of new fuels in the future.  That would 
add some difficulty, but we haven't seen that with the current slate.  We 
optimize delivery of these fuels every day, Dr. Burgess.  
        MR. BURGESS.  Has the EPA's waiver authority been useful in 
increasing the fungibility of the gasoline supply in times of shortages?  
        MR. SLAUGHTER.  Very, particularly after the hurricanes last year.  
There was a cooperative effort among everybody concerned, including 
EPA.  They moved very quickly to grant waivers in that emergency 
situation.  They were very helpful.
        MR. BURGESS.  How long did that last, that waiver?  
        MR. SLAUGHTER.  It lasted a month.  
        MR. CAVENEY.  I think they put it in for 15 days, and I believe they 
extended a second time for 15 days, short-interval waiver.  
        MR. BURGESS.  We have heard a good deal on the ethanol, and I 
appreciate you all have worked so hard to improve the infrastructure 
issues, but still the delivery of ethanol in my market, in the Dallas/Fort 
Worth market, seem to lag behind.  Is there a reason for that?  
        MR. DINNEEN.  Congressman, I think when the refiners made the 
decision to get out of MTBE and all those markets, they realized--we 
certainly did--that Dallas would be among the most difficult markets in 
which to make that turnover because the terminal servicing that area did 
not have rail access.  
        The market has responded.  I think our industry has worked awfully 
hard.  The oil industry certainly has as well, and we are servicing that 
market today.  We are using transloading, where railcars are unloading 
directly to trucks, as was noted earlier, to service that market.  Our 
industry is bringing product up from Houston, bringing product down 
from Kansas by truck as well.  There is a terminal that is being permitted 
that will ease that situation significantly.  It may be open now.  If not 
now, it will be within days or weeks.  But I think, by and large, while 
there were some initial hiccups down there, and the transitional issues 
were not ideal by anybody's standard, we are doing our best.  
        MR. BURGESS.  May I ask when you were aware that there would be 
a problem?  Can I ask when the industry become aware that there would 
be a problem?  Do you recall?  
        MR. DINNEEN.  I think when the oil industry decided we will get out 
of MTBE, and they evaluated the markets, I think everybody looked at 
Dallas and decided they would be a tough market.  
        MR. BURGESS.  Was that with the passage of our energy act in 
August?  Was that with the hurricanes in September?  Was that later in 
the fall?  When did this sort of come, percolate to the top of the 
consciousness of the industry?  
        MR. DINNEEN.  Are you talking my industry or the oil industry?  
        MR. BURGESS.  Let us stick with yours since we shouldn't speculate-
-
        MR. DINNEEN.  Our industry obviously became aware of the fact that 
they were going to make this transition when their member companies 
came to our member companies and said, we need product.  
        MR. BURGESS.  I guess just looking at it as a consumer, we wake up 
May 1 and we have high prices and some stations running out of gas, and 
some people ask me, legitimately, how come you couldn't see this 
coming?  And apparently you did see it coming.  Why we are not able to 
act fast enough to prevent or--
        MR. DINNEEN.  We have ethanol in that area.  In fact, the trains are 
backing up, we have so much ethanol in that area.  The terminals haven't 
necessarily been as ready as I think they could have been, but we have 
been working around those transitional issues as well.  
        MR. BURGESS.  You go, but I guess it is the anticipation of the 
problem that bothers me.  There will be other things that happen this 
summer.  There will be other things that happen this fall.  Are we looking 
out for those consumers in those markets and maybe negatively 
impacted?  
        MR. DINNEEN.  I think both of our industries are clearly looking for 
whatever speed bumps might be in the road in the future, but I think the 
transition has been made.  It has been successful, and it is a testament to 
the effort on the part of the oil industry and to ours that we have been 
successful in addressing some of those things.  
        MR. BURGESS.  Mr. Chairman, may I have one additional question?  
It maybe controversial, but I would just like to follow up from some we 
have had, some of our hearings last year.  Is it still necessary to have a 
subsidy for the ethanol industry?  
        MR. DINNEEN.  Congressman, if you can tell me what the price of oil 
is going to be down the road, I think it would be a lot easier to answer 
that question.  Certainly, in the past it has been difficult to get refiners 
to 
utilize ethanol in very strong economic conditions.  But the incentive has 
been extremely successful in helping to build the industry and build the 
infrastructure, and done so in a way that is cost-effective for the Federal 
government because it reduces farm program costs.  It increases 
economic activity in the rural areas where the plants are produced, and 
the analyses are that the Government actually saves money as a result of 
this program.
        MR. BURGESS.  But with oil at $75 a barrel, the question has been 
legitimately asked in Mr. Cavaney and Mr. Slaughter's industry why 
they continue to need subsidies, and, I guess, has the ethanol industry 
asked the same question of itself?  
        MR. DINNEEN.  Certainly, it is an issue that we will work with the 
Congress on, with our member companies or with our customers on, to 
get to a day that we don't need to have government incentives.  But in 
the climate that we have seen in the past, government incentives to 
encourage oil refiners to blend some carbohydrates as opposed to 
hydrocarbons has been incredibly important.  
        MR. BURGESS.  What about the relaxation of the Federal motor fuels 
tax, is that still in place?  The Federal excise tax on gasoline, is ethanol 
still exempted from that? 
        MR. DINNEEN.  It is the same; the way ethanol is incentivized is by 
providing a tax incentive to oil companies for blended.  
        MR. BURGESS.  Thank you, Mr. Chairman.  
        MR. HALL.  You have done so good, I hated to stop you.  
The Chairman recognizes Mrs. Cubin, gentlelady from Wyoming.  
        MR. GREEN.  Mr. Chairman--
        MR. HALL.  The Chair reluctantly recognizes Mr. Green from Texas 
for a third shot at this group.  
        MR. GREEN.  No.  Second shot.  This is only my second time.  I 
think you will like what I am going to ask.  
        Let me follow up on Dr. Burgess.  And I know there one time was 
incentivized for using ethanol, but today since there is no MTBE in 
competition, why do we need the subsidy for ethanol?  I mean, the 
refiners I know are all trying to figure out how they are going to get 
ethanol, and since there is no competition-- 
        MR. SLAUGHTER.  Congressman, the incentive is going to be 
incredibly important down the road to encourage additional investment 
in this industry.  If you are going to have cellulose ethanol production, 
which I think everybody certainly wants to see, having economic 
incentives for that is going to be necessary.  
        MR. GREEN.  Okay.  Let me--because I only have 5 minutes, and I 
am lucky to have that, Mr. Chairman, I guess.  The concern I have in the 
Houston area, because we have used and benefited from reformulated 
gas that has been MTBE, I assume it is being barged in from the 
Midwest, not railcars.  
        MR. SLAUGHTER.  I believe that is true for Houston, yes.  
        MR. GREEN.  Those on the panel mention railcarring it or tankering it 
up from Houston to Dallas, because we checked yesterday and we were 
told that the maximum delivery of ethanol in Dallas is 23 cars a day.  
And I assume it is Union Pacific, maybe Burlington, that serves those 
areas--200 railcars, backed up waiting to unload ethanol in the 
Dallas/Fort Worth market.  I am just glad that we can barge it in because, 
one, it is much cheaper, which gets to my next question.  
        There was some discussion about pipelining ethanol in Brazil, and, 
you know, I have just taken it as a fact that you could not pipeline 
ethanol, but someone did mention that ETBE is possible to pipeline 
because of the properties that it has.  
        Mr. Chairman, I don't know if the panel knows, and I know as a 
business major and a lawyer I don't have any idea about that, but I think 
it would be great for the subcommittee or the full committee to see if that 
is something we want to find out, maybe have another hearing with 
experts from the chemical side and people from the pipeline companies, 
see if that is a possibility, because we actually made 70 percent of the 
MTBE in my district, and back in the energy bill we talked about, well, 
we will have the option to do ETBE.  And I want to see if that really is 
an option, now that we are not quite a year away from when the 
President signed the bill, that we would still have ethanol compound 
contents, but it would also be something that could be blended again in a 
chemical facility that at one time was able to do MTBE.  
        Let me ask Mr. Dinneen about the testimony yesterday from the 
Energy Information Administration.  Ethanol supplies are tight now, and 
they singled out Texas, and we know Dallas/Fort Worth, because 
Dr. Burgess represents Fort Worth and Denton.  What about the Houston 
market?  Is there a problem in getting the barges in, or is there enough 
product in the Midwest to be barged out the Mississippi and intercoastal 
to us?  
        MR. DINNEEN.  Absolutely, my understanding is we can't get much 
more ethanol into Houston, and there are barges in the canal waiting to 
be unloaded there as well.  Houston has not been a difficult market for 
any of us at all.  As I noted in response to Dr. Burgess, some of the 
ethanol for the Dallas/Fort Worth area is coming from Houston because 
we have so much there.  
        MR. GREEN.  Okay.  Again, Mr. Chairman.  I would like to maybe--
if you could teach the Members of Congress some science on the 
possibility of pipelining either ethanol and seeing how they do it or, 
looking at the properties of ETBE, if that would make it easier to 
pipeline.  Not that I want to take any business away from the railroads 
and the trucks, because, don't worry, there will be plenty of trucks on my 
Interstate 610 in Houston even if they don't haul ethanol.  
        MR. HALL.  The gentleman yields back.  Is it okay now if I recognize 
the gentlelady from Wyoming?  
        MRS. CUBIN.  Mr. Slaughter, in your testimony you mentioned a 
number of fuels regulations coming into existence will serve to reduce 
the necessity for boutique fuels.  Can you provide any examples of any 
of those boutique fuels?  
        MR. HALL.  Excuse me just a moment.  Would you let me interfere?  
We have a gentleman at the table that needs to leave at this time, I am 
told.  And we give you the right to go.  Mr. Reid is it?  
        MR. SCOTT.  He has already left.  I can enter to replace him, 
Mr. Chairman.  
        MR. HALL.  Well, you are a very good replacement.  We will ask you 
about convenience stores in a little bit.  Yield back.  
        MR. DINNEEN.  Yes.  I think I got the question.  If you look at the 
EIA testimony and EPA's testimony from yesterday, a reason why 
people have gone to the boutique fuels that exist now is that they were a 
better fit for them than reformulated gasoline.  They saved money.  
They had a supply of them, and they were just more economical.  
        In the future, reformulated gasoline and conventional gasoline is 
going to look a lot more alike, because the sulfur level has gone from a 
500 to 30 ppm and with considerable environmental benefits, and as well 
there is going to be a limitation on benzene content.  So they will look 
much more alike.  
        So we think there will be a natural confluence where people are 
going to an RFG that doesn't have a 2 percent requirement anymore.  
The oxygen requirement was removed by the EPAct.  That really is what 
was driving people to other fuels.  So that is going away.  Conventional 
fuel is much cleaner.  So we think that just naturally will mean most 
people will pick from one of those two.  We can't prove it, but, it makes 
sense because the 2 percent was just lifted, so there isn't an example 
right now.  
        MRS. CUBIN.  Okay.  Good.  Is it easier for a major integrated refiner 
like ExxonMobil to adjust to Federal and State fuels requirements, 
changes versus a small regional refiner like I would have at Wyoming?  
And if so, why is that the case?  
        MR. DINNEEN.  Well, one might argue ExxonMobil is larger, has 
more investment capital, can make changes, but everybody basically 
wants to do that in an economical way.  People who are writing 
regulations usually give special consideration to areas and types of 
facilities that might have different problems.  Under the gasoline sulfur 
program and the diesel sulfur program, there was some special notice 
taken of the needs of smaller refiners.  
        MRS. CUBIN.  Right.  
        MR. DINNEEN.  So I guess the short answer is yes, there, are special 
difficulties that they have.  I think regulators have tried to smooth it out 
as much as they could.  
        MRS. CUBIN.  Thank you.  That is all, Mr. Chairman.  
        MR. HALL.  All right.  Thank you.  
This time we recognize Mr. Greg Scott and identify you as a 
representative of the National Association of Convenience Stores and the 
Society of Independent Gasoline Marketers of America.  Thank you for 
joining the panel.  
        Chair recognizes Mr. Bass.  
        MR. BASS.  Thank you very much, Mr. Chairman.  
Mr. Dinneen, I have never been a big fan of the ethanol subsidy, but 
I was just wondering if you or anybody else has ever calculated the total 
incentives in royalty discounts that have been offered to the oil producers 
over the years and how that might compare with what is being offered in 
the area of ethanol.  
        MR. DINNEEN.  Well, certainly that has been calculated.  There are 
reports that I could submit for the record that I don't recall off the top of 
my head, but obviously the oil industry has been highly incentivized over 
the years and probably for all very good reasons.  
        MR. BASS.  Would you be willing to supply my office and perhaps 
the committee with a copy of the report that you think is the most 
accurate in this respect?  
        MR. DINNEEN.  Certainly.  
        MR. BASS.  And if Mr. Cavaney wants to do the same thing, that 
would be great.  I would appreciate it. 
        MR. BASS.  Mr. Dinneen, I believe there are 166,000 gas stations in 
America, and probably--how many E-85 stations, 150, 160?  
        MR. DINNEEN.  Six hundred fifty, most of them in Minnesota.  
        MR. BASS.  Most of them in Minnesota.  So how are we going to get 
beyond that problem?  Is it not more expensive to have vehicles work on 
both versus just one, and what is going to happen with it, delivery issue?  
        MR. DINNEEN.  We discussed earlier several things need to happen 
for E-85 to become a more meaningful component of the U.S. motor 
fuel.  Clearly you need to have more vehicles; 5 million vehicles is just 
not enough to attract the kind of investment you need at the gas stations 
for refueling infrastructure.  You need to have more pumps.  A lot of that 
is happening.  You see a lot more investment today in the E-85 refueling 
infrastructure.  
        MR. BASS.  Is E-85 going to be any different in cost from gasoline?  
Car works on both, why would you bother, especially if it is more 
expensive?  
        MR. DINNEEN.  In those areas where E-85 is widely used in 
Minnesota, for example, E-85 typically sells at a 40-cent or 50-cent 
discount to gasoline.  Importantly, that is with the technology that is 
being used today with flexible-fueled vehicles, which, quite frankly, 
while very good, does not optimize those vehicles for the use of E-85.  
General Motors has a new vehicle, a Saab 9-5, that is turbocharged, that 
has no mileage deduction when E-85 is used, and I think as you move 
down the road in the future, you are quite likely to see changes in 
technology on the vehicle side that make all of this a more economic 
option for consumers.  The important thing is that they have that option, 
that they have the flexibility.  I was able to drive here today in an E-85 
vehicle.  
        So you are going to see a lot more of that on the road, but, look, it is 
going to take time, and the fact of the matter is the ethanol industry will 
need to grow as a blend component in gasoline significantly, and you 
need to have a heck of a lot more ethanol out there before E-85 can really 
take off.  
        MR. BASS.  Is the Renewable Fuels Association promoting ethanol 
development and production from sources other than corn?  
        MR. DINNEEN.  Absolutely.  We are not the grain-based ethanol trade 
association.  We have member companies that are looking at cellulose 
ethanol production today.  One of my member companies is actually 
building a cellulose and grain ethanol production facility in Spain with 
the intention of bringing that technology to the United States very soon.  
Another member company has a cellulose plant in Canada right now that 
is looking to site a commercial facility here.  
        MR. BASS.  Thank you.  
Mr. Cavaney, are you aware of that bill that Senator Craig introduced 
recently that would allow us to drill or to bid in the Cuban Basin for oil--
I think it is oil and gas.  What effect would that have on U.S. energy 
security if it were permitted?  
        MR. CAVENEY.  Well, I think it looks at the broader issue of the 
eastern Gulf of Mexico and the southern part of the tip of Florida.  We 
have demonstrated, we think, through the hurricane season last time 
where we could have no production spills of any significance as a result 
of two Category 5 hurricanes.  That has been the principal concern 
expressed by the State of Florida in keeping exploration and production 
so far off shore.  
        We would like to be able to look at circumstances where we are now 
disadvantaged by allowing national oil companies from China, from 
Venezuela and elsewhere to get within 50 miles and be able to explore 
and produce while the U.S. companies are being held off hundreds of 
miles off of the coast.  It just doesn't seem to be a fair and equitable 
reason, so we would like to work with the Congress to try and see if we 
can't allow more of that Eastern Gulf to be made available for bid.  
        MR. BASS.  Good enough.  
        I have one other quick question.  Mr. Chairman.  What is the 
turnover in gasoline inventory in the United States?  I have been told that 
17 days is a glut, and 10 days is a shortage.  Is it that fast?  Anybody 
know?  
        While you are talking to each other, I will pontificate here.  I 
always 
thought that gas stations, they filled up the tank, and they came every 
other week or so.  It turns out they come every other day.  If you have a 
17-day supply of gasoline nationally, you have a glut, and prices start to 
fall.  And if you have a 10- or 11-day supply, you start having shortages.  
I want to know if you could correct that or tell me if it is accurate, if 
anybody knows; and if not, submit the answer for the record. 
        MR. SCOTT.  Mr. Bass, from a retailer's point of view, it all depends 
on the volume of the retail outlet.  A retail outlet might get a delivery of 
gasoline, say, once every 7 days perhaps if they are a fairly low-volume 
neighborhood store.  A truckstop, on the other hand, may get five 
deliveries a day of diesel fuel.  So it really depends on the type of the 
store.  
        I also believe you are referring to wholesale stocks, and those 
gentlemen are better able to answer that question.  
        MR. CAVENEY.  If you take total inventory and divide it by demand, 
you are going to end up--historically would be about 22 days would be 
the inventory turn.  
        MR. BASS.  What would you consider to be a shortage, how many 
days?  Would it be 2 weeks?  
        MR. CAVENEY.  Typically the Federal government, EIA, has listed 
what they considered to be a sort of a benchmark of minimum inventory 
before they start to worry, and that is 185, and that would be how many--
185.  And what do we do today?  About 200 plus.  As we have said in 
my testimony, we have ample --
        MR. BASS.  What does 200 plus mean?  
        MR. CAVENEY.  Two hundred million barrels plus in inventory right 
now.  
        MR. BASS.  Twenty days is the average inventory time in the United 
States.
        MR. CAVENEY.  Twenty-two.  
        MR. BASS.  Twenty-two days.  But what is the flexibility?  I am 
sorry, Mr. Chairman.
        CHAIRMAN BARTON.  [Presiding.]  We have so many other Members 
that need to ask questions.
        MR. BASS.  If you would be good enough to drop me a note and tell 
me that information.  
        MR. CAVENEY.  We will give you some historical data as well.  
        CHAIRMAN BARTON.  The gentlelady from Tennessee is recognized 
for 5 minutes.  
        MRS. BLACKBURN.  Wonderful.  You know us women, we are 
always talking.  
        CHAIRMAN BARTON.  Take your time.  I have plenty of questions.  If 
you want me to go while you get ready.  
        MRS. BLACKBURN.  No, sir, Mr. Chairman.  I am ready, and I thank 
our committee Chairman for working this, and for our panelists for 
allowing us to jump in and out of this.  
Mr. Cavaney, I want to come to you.  With my first round of 
testimony, I had talked with Mr. Reid and Mr. Slaughter about some of 
the diesel requirements, but I wanted to come to you, Mr. Cavaney, 
because of the group that you head.  And, of course, I understand why 
we have the prices at the pump where they are.  You know, we have 
talked about refinery capacity, we have talked about supply and demand, 
but there is an incredible amount of frustration that is out there.  
        And I did a radio show this morning in my district in Tennessee, and 
one of the first things that came up was the retirement package from 
ExxonMobil, and this is something that gets people really angry.  And I 
mentioned to the folks that were listening to the radio show today that we 
were going to have another hearing today, and that you all had consented 
to come in and to talk with us on this.  
        So I went to your Website, and for your trade association--and for 
the record, it is the American Petroleum Institute--and I looked on your 
Website where it says "About Us," and it says, and I am quoting from 
your Website, "Our association draws on the experience and expertise of 
our members and staff to support a strong and viable oil and natural gas 
industry."  
        And you also mentioned in your testimony today that the oil and 
natural gas industry understands the frustrations of consumers.  And I 
just would like for you to explain for the record how in the world giving 
a $400 million retirement package during a time where we have tight 
supply lines, where we have high prices at the pump, where we have 
high market pricing on a barrel of crude, where we have lots of questions 
that are being asked by consumers, how in the world does giving that 
kind of retirement package in this environment support a strong and 
viable oil and natural gas industry?  
        MR. CAVENEY.  First of all, the area being discussed here, which is 
compensation, incentives, retirements, and so forth, is an area not within 
the jurisdiction of the trade association, so we do not deal in those 
specifics, so I have no basis.  Typically though, as a matter of practice, 
public companies are held by shareholders who elect a board, and it is 
board and management who work out each individual company's 
specific pathway.  And so I am just not in a position to pass judgment.
        MRS. BLACKBURN.  Well, I understand that, and we talked about that 
on the radio this morning, that it is the shareholders that are responsible 
for raising these questions, and I certainly hope that they do when you all 
have a shareholders meeting and this has the opportunity to be discussed 
with your shareholders.  But I would just commend to you that that type 
action during this type environment seems to show very little 
understanding of what the consumers are thinking, which is supposed to 
be one of the missions, one of the things that you all are about.  So I just-
-as a point of reflection and as a point where I commiserate with my 
constituents, that is something that is very difficult.  
        Mr. Slaughter, I wanted to come back to you.  Going back, and as we 
have looked at the utilization, the refinery utilization, and where we are 
on those levels, we know we have got some pressures with the boutique 
fuels, with the diesel fuel that we discussed earlier, and we thank  
everyone for the work they are doing on those.  But if we are running at a 
98 percent capacity this summer, and we know at this point in time most 
of our refineries are in the Gulf, and what we are beginning to hear is it is 
going to probably be a very difficult weather season once again and 
could be for a few years to come.  So going back to what we were 
discussing earlier with pricing, and looking at a price spike for diesel, if 
we have another hurricane, a Category 3 or Category 4 in August, and 
that knocks out, again, as it did last year, a large part of our refinery 
capacity, I think 25 percent of our refinery capacity was down for most 
of the month of September, then what kind of increase do you think that 
we are looking at for gasoline?  
        MR. SLAUGHTER.  Mrs. Blackburn, one of the things I never do is 
predict prices.  I will just say that last year, of course, after Katrina hit 
and the situation that you are talking about unfolded, prices for gasoline 
went above, slightly above, $3.  Those prices sufficed to bring in a record 
amount of imported gasoline into the country, as well as it encouraging 
other refiners that had any additional capacity at that time to run full out 
to try to make up for the gasoline that was not being produced in the 
affected refineries.  
        The only answer I can give to you, it would depend, and we hope 
that doesn't happen again, on the size of the outage, on the location of 
the refineries, but that the free market and market pricing will be the best 
way to get the product to consumers in that area.  
        MRS. BLACKBURN.  Okay.  Let me ask you something, and I 
understand and appreciate your answer.  If we talked a little bit about the 
New Source Review and, of course, our original version of the GAS Act, 
what we would have liked to have done there, if we could go in and 
streamline the permitting process and--as the House had passed last year, 
and if there is a commitment from the industry to build refineries outside 
the Gulf Coast, do you think that we will actually see refineries in other 
areas of the country, you all?  
        And through our hearings we have heard expansion is the better way 
to do this.  It costs less, more cost-effective, they can get it stood up more 
quickly; but then on the other hand, one of the things that frustrates our 
constituents is they turn around and they hear, well, with everything 
down in the coastal area, we are looking at the same problem.  So if the 
permitting is streamlined, and if some of the regulatory burden is 
streamlined, then do you think that it is feasible that people will actually 
look at other parts of the country for refineries?  
        CHAIRMAN BARTON.  This will have to be the gentlelady's last 
question.  
        MR. SLAUGHTER.  I suspect that would be very helpful.  It would 
have to improve the economics.  Right now someone looking to build a 
new refinery is looking at 10 years or more of delay.  So it would have to 
be helpful.  
        I would also say some of the capacity improvements we are making 
are being made in refinement centers that are outside of the Gulf.  So 
some of this additional capacity will come on in areas other than the 
Gulf.  
        MRS. BLACKBURN.  Okay.  Thank you very much.  
Thank you, Mr. Chairman.  
        CHAIRMAN BARTON.  And Mr. Becker wanted to respond to your 
question, too.
        MR. BECKER.  Thank you, Mr. Barton.  
Mrs. Blackburn, thank you for asking that question because I would 
have liked to have responded when you asked it the first time.  
        One of the reasons that our associations representing State and local 
air pollution control agencies opposed last year's bill was because of the 
New Source Review provisions.  We support the New Source Review.  
This bill would have codified into law a proposal by EPA that the courts 
have rejected, and I am going to give you an example of what it would 
do.  
        To build a new refinery today would cost in excess of $1 billion.  
The EPA's rule would allow up to 20 percent of the capital cost of that to 
be spent for capital expenditures, and not misstating how much 
additional air pollution would go into the region, the source would not be 
required to meet the New Source Review requirements.  
        CHAIRMAN BARTON.  That is not true.  That is not true.  It is required 
to expand up to 20 percent so long as the emission didn't exceed the old 
emission cap.  That is true.  That is true.  
        MR. BECKER.  Where States have a State emissions cap, that is true, 
but many areas do not have an emissions cap.  
        CHAIRMAN BARTON.  I was one of the authors of that section.  We 
very carefully crafted it so that total emissions did not increase.  If they 
tried to increase above what they already were emitting, they would have 
to go through the permitting process.  But as long as they were 
expanding an existing facility, and they didn't increase emissions, they 
were constant or declined, they could do it.  That is what it said.  I don't 
want to get in a fight with you, but that is what it said.  
        MR. BECKER.  I am not viewing this as a fight, Mr. Chairman.  If a 
source makes capital expenditures without your bill or without EPA's 
rules and doesn't increase its emissions, then it, by law--by law you 
adopted in 1977--the source is not required to comply with the New 
Source Review.  New Source Review is not triggered unless there is a 
substantial increase in emissions.  
        What EPA's rule does, and what the bill codified, is a program that 
was rejected by the courts because emissions were allowed to increase 
without triggering the New Source Review.  I am happy to provide more 
information for the record so we don't--
        CHAIRMAN BARTON.  We can hold a hearing under Ralph just on 
New Source Review.  I mean, that subject is worthy of a full-day hearing 
itself.  
        MR. BECKER.  And I would agree with that.  
        CHAIRMAN BARTON.  I am not being argumentive with you.  I was 
very involved in that bill and that particular section, and we do not, under 
my stewardship of this committee, want to do anything that allows 
anybody in this country to increase their emissions above the current 
baseline.  We are trying to be environmentally friendly.  We don't get 
much credit from the environmental groups, but we have not done 
anything to allow industry to willy-nilly increase pollution and 
emissions.  I am not going to do that during my chairmanship.  Not going 
to happen.  
        MR. BECKER.  That is good to hear.  And if I may, just along those 
lines, I think you made a very nice gesture to my colleagues in the 
refining industry to bring them in on discussions with regard to refinery 
revitalization.  And I would respectfully ask that, to the extent that you 
are trying to make improvements in the air pollution permitting 
provisions of that bill, that you also consider inviting State and local air 
pollution officials into those discussions, because we will all learn 
together what the industry needs and maybe what they don't need.  
        CHAIRMAN BARTON.  Well, I am willing to do that if on the 
condition that the participants engage in a positive dialogue with the 
understanding that everybody wants the product to be the possibility of 
actually building or expanding new refineries or existing refinery 
capacity in this country.  I am not interested in a dialogue where one 
party is in there simply to sabotage, sandbag, prevent a positive outcome.  
But if your group wants to help us figure a way to do that, I would 
welcome you.  
        MR. BECKER.  Well, I appreciate that.  We are a group of State and 
local governmental officials.  We never sabotage processes.  
        CHAIRMAN BARTON.  I am not saying you do.  I have been in 
negotiations where one party, the outcome that they wanted was nothing, 
they wanted to stop it.  I would love to have the environmental groups 
participate in a positive way.  That would be a refreshing change.  I 
would just absolutely endorse that.  
        MR. BECKER.  And just to make clear, we are not an environmental 
group.  We are a group of State and local governmental officials, and we 
do--
        CHAIRMAN BARTON.  And maybe I should say this.  My sister is an 
enforcement attorney for EPA in Dallas, so I know very clearly what 
group you personally represent.  
        MR. BECKER.  I think what would be instructive is for the industry to 
challenge the premise that we bring into this debate that New Source 
Review and air pollution regulations have not interfered with the 
permitting of new facilities or delayed them.  
        In fact, I had a discussion before the hearing with Mr. Cavaney that 
what is most important to industry--we know, and I think they will 
admit--is certainty and the ability to plan.  The stringency of regulation is 
subordinated by certainty and the ability to plan.  
        CHAIRMAN BARTON.  Let me stop the clock.  I want to ask a few 
wrap-up questions.  Do you have one final question before I turn it over 
to myself?  
        MRS. BLACKBURN.  No, Mr. Chairman.  I will just say--again, say 
thank you to you for your leniency on the time, and thank you to our 
panelists for being here and working with us on this.  And we do want to 
find an answer to some of the questions, and we appreciate the dialogue.  
        CHAIRMAN BARTON.  I am going to recognize myself for the final 
question.  We have a hearing on Social Security numbers in the 
Consumer Trade Protection Subcommittee that was supposed to start 20 
minutes ago.  So you will be happy to know this will be the final 
question.  
        I want to start with you, Mr. Becker.  We have really kind of skated 
around the issue of MTBE.  Would there be any interest by local and 
State air control pollution officials to find a way to bring MTBE or 
ETBE back for a period of time while we have all these gasoline supply 
problems?  Because you were pretty adamant that ethanol, by itself, 
might not solve some of the air quality problems that we face.  So would 
you think the group that you represent would be supportive of an effort 
to resuscitate the MTBE industry for some period of time until we get 
ethanol distribution up and running and some of those issues settled?  
        MR. BECKER.  Let me answer a couple ways.  We are totally fuel 
neutral.  We don't mind ethanol so long as it meets performance 
standards on a national basis.  
        With respect to MTBE, we don't have a position on MTBE.  I know 
individual States do, and some of those individual States may object.  
Our national association doesn't have a specific favorite fuel.
        CHAIRMAN BARTON.  Well, there's no question MTBE not being in 
the fuel chain is causing price problems, and in some parts of the 
country, including the part I represent, supply availability, period.  I am 
under no illusions that the MTBE industry is going to become a 
permanent part of the process, and I am not even sure it would be 
technically possible to do, but if the MTBE refiners haven't changed 
their systems in the short term it would definitely help the supply and the 
price to have MTBE available for this summer and perhaps through next 
summer.  I am just asking if the air control people would be interested in 
being supportive of that.  If you want to say no, say no.  You seem to 
indicate you didn't think ethanol was going to be able to handle the air 
quality issue at least in the short term because they don't have enough 
capacity.  
        MR. BECKER.  I don't think I said that.  I think somebody else said 
that.  But I think there is nothing that--
        CHAIRMAN BARTON.  No.  I may misrepresent what you said, but 
you are the only one that raised it earlier in the hearing.  
        MR. BECKER.  Well, I think I raised the issue about whether or not 
ethanol used in conventional fuels enjoyed increased flexibility, a one 
pound waiver to the volatility limits that will allow air pollution to 
increase.  That is as far as I went on ethanol other than to say we are 
pretty fuel-neutral.  With regard to MTBE, I don't know anything that 
Congress has done that precludes MTBE being used now other than--
        CHAIRMAN BARTON.  It is what we didn't do.  Had we given a 
limited liability waiver for product liability--safe harbor simply is a 
defective product--the pipelines wouldn't have chosen to stop 
transporting it, and the refiners in the area where it is available would 
have continued to use it because there is no ban against it at the Federal 
level.  It is a State ban, and that is fine.  But when they didn't get the 
liability protection, primarily some of the pipelines decided they didn't 
want to continue to transport it because they might be subject to some 
sort of a liability lawsuit, and they just said, we are not interested, and if 
you can't transport it through the market, then that is that.  No, but there 
is no Federal ban on it.  
        MR. BECKER.  And others have weighed in on that issue.  We 
haven't.  
        CHAIRMAN BARTON.  Okay.  I want everybody to answer this 
question.  We will start with you, Mr. Conley.  Would you support a 
suspension of the ethanol tariff for a defined period of time, no longer 
than 2 years, yes or no?  
        MR. CONLEY.  We really don't have a position.  We will haul 
whatever everybody gives us to haul.  So we just don't have a dog in 
that.  
        CHAIRMAN BARTON.  If you don't say yes, I am going to assume you 
are a no.  
        MR. CONLEY.  Then you are saying no.  
        CHAIRMAN BARTON.  Mr. Shea.  
        MR. SHEA.  I would be in the same boat.  I guess I would say no.
        CHAIRMAN BARTON.  Mr. Reid. 
Mr. Reid.  Yes.  
        CHAIRMAN BARTON.  Mr. Becker.
        MR. BECKER.  No position.  
        CHAIRMAN BARTON.  Then you are a no.  
Mr. Slaughter.  
        MR. SLAUGHTER.  Yes.  
        CHAIRMAN BARTON.  I know you are a no.  
        MR. DINNEEN.  Can I just get it on the record?  No.
        CHAIRMAN BARTON.  Mr. Caveney.  
        MR. CAVENEY.  No.  
        CHAIRMAN BARTON.  You would say no?  Why would you say no?  
That is a surprise.  
        MR. CAVENEY.  I mentioned earlier, if you look at the CBI, 
Caribbean Basin Initiative, in other venues where ethanol can be brought 
into the United States, that is not necessarily even full up.  It is only 
about half utilized, which would indicate that we don't have a problem of 
getting that stuff in here without having to pay any tariff.  So that is the 
basis for ours.  
        CHAIRMAN BARTON.  The Caribbean Basin Initiative hadn't used 
their quota?
        MR. CAVENEY.  Correct.  There is quite a bit of room left in that.  
That comes in without the tariff.  
        CHAIRMAN BARTON.  I guess I have a number of other questions, but 
we will ask them for the record.  Thank you to each of you gentlemen. 
        MR. HALL.  Mr. Chairman?  
        CHAIRMAN BARTON.  Mr. Hall.  
        MR. HALL.  Could I maybe have 30 minutes to summarize?  I yield 
back my time.  
        CHAIRMAN BARTON.  Well, this is an important hearing.  Every poll 
I have seen show gasoline prices are one of the top three issues that the 
constituency of this country is worried about, and some of those polls it 
is the number one issue.  
        MR. HALL.  Great issue.  
        CHAIRMAN BARTON.  I am a little surprised we didn't have more 
Members here today, because when they go home, this is the question 
they have got to answer.  
Anyway, thank you to each of you.  We are going to adjourn this 
hearing and in approximately 15 minutes, reconvene at the subcommittee 
level to have a hearing on the Social Security numbers.  
[Whereupon, at 2:25 p.m., the committee was adjourned.] 




RESPONSE FOR THE RECORD BY S. WILLIAM BECKER, EXECUTIVE 
DIRECTOR, STATE AND TERRITORIAL AIR POLLUTION PROGRAM 
ADMINISTRATORS/ASSOCIATION OF LOCAL AIR POLLUTION CONTROL 
OFFICIALS

                          Response of the
   State and Territorial Air Pollution Program Administrators
                              and the
      Association of Local Air Pollution Control Officials
              to Questions Posed on May 26, 2006
                by Congressman John D. Dingell
                          Ranking Member,
     U. S. House of Representatives Committee on Energy and 
                             Commerce
        Regarding the New Source Review Permitting Process
 and Boutique Fuels Provisions in the Energy Policy Act of 2005

                           June 14, 2006

Question 1:  Section 106 of the Gasoline for America's Security Act of 
2005, as introduced in the House, amended the New Source Review 
provisions of the Clean Air Act.  You testified in the hearing that this 
provision, if enacted, would allow sources to increase emissions 
significantly without going through the New Source Review permitting 
process.  Please explain why you believe this to be the case.

Response:  Section 106 states that the term `modification' as used in both 
the New Source Review (NSR) program and the New Source 
Performance Standards (NSPS) program should be consistent. Section 
106 would codify the NSPS definition of modification and apply the 
NSPS definition of modification in 40 C.F.R. 60.14(h) to all industrial 
sources. Finally, section 106 codifies the EPA's previously issued 
Equipment Replacement Provision rule.

1.  Codification of the NSPS Definition of Modification   As defined in 
the Clean Air Act, a modification is "any physical change in, or change 
in the method of operation of, a stationary source which increases the 
amount of any air pollutant emitted by such source or which increases 
the amount of any air pollutant not previously emitted" (Section 
111(a)(4)).  In promulgating regulations for the prevention of significant 
deterioration (PSD) and nonattainment NSR programs, EPA defined 
"significant" increases in emissions in terms of tons per year emitted by a 
major source. Under the NSPS definition, however, NSR is triggered 
only in the extremely rare  event that a modification results in an 
increase in the capacity, or maximum achievable hourly rate of 
emissions, of an emissions unit (40 C.F.R. 60.14(h)).  Thus, codification 
of the NSPS "hourly" test would allow the reconstruction of process 
units and boilers across the nation without NSR, allowing all sources to 
make major changes to their operations and operate their equipment 
longer hours-thereby increasing their emissions thousands of tons per 
year-without pollution controls or analysis of the impacts on air quality. 

By way of contrast, when a facility currently plans a modification of its 
equipment at a given process unit, it makes a projection of the increased 
emissions following the change.  Normally, sources making 
modifications increase their hours of operation afterward to benefit from 
the resulting increased efficiency of the upgraded unit-and 
correspondingly increase their emissions. Sources planning to increase 
their emissions potentially more than de minimis amounts (for example, 
40 tons per year for SOx and NOx) currently trigger NSR requirements to 
install pollution control equipment.  In enacting NSR provisions, 
Congress refused to "grandfather" dirty plants indefinitely. Codification 
of the "hourly" test, however, would have the effect of allowing sources 
to increase their emissions significantly, as frequently as they desired, 
and for an indefinite time period.

2.  Codification of the Equipment Replacement Rule   The Equipment 
Replacement Rule (ERP) was vacated in its entirety by the D.C. Circuit 
Court of Appeals on March 17, 2006.  The Court's opinion in State of 
New York, et al., v. Environmental Protection Agency was based in part 
on the fact that the rule allows sources to significantly increase their 
emissions without triggering NSR requirements.  Specifically, the Court 
stated, "...Congress defined "modification" in terms of emission 
increases, but the ERP would allow equipment replacements resulting in 
non-de minimis emission increases to avoid NSR."  In fact, equipment 
replacements valued at 20 per cent or less than the value of the total 
process unit were exempted by the ERP from NSR under the "routine 
maintenance" exception-even though actual emissions would increase 
beyond de minimis levels.

In order to understand how emissions could increase significantly if the 
now-illegal ERP were enacted into law by Congress, it is crucial to 
distinguish between allowable and actual levels of emissions:  The 
allowable, or permitted levels of emissions for major sources are 
generally expressed in a permit in terms of the operating capacity of a 
unit based on 24 hours per day, 7 days per week operation.  The fact that 
the ERP requires facilities to remain under their permitted levels of 
emissions has little significance because sources can vastly increase their 
actual emissions without approaching their permitted, allowable levels.  
Thus, the ERP provides no protection from increases in actual emissions. 

Modifications made by the Ohio Edison utility provide an example.  The 
enforcement case brought against the company's coal-burning power 
plants resulted in the utility being held liable for making 11 
modifications of process equipment without complying with NSR 
requirements. Ohio Edison subsequently entered into a settlement with 
EPA that will result in reductions of 212,500 tons per year of harmful 
emissions. However, all except one of the 11 projects would have been 
exempt from NSR requirements under the 20 per cent cost level of the 
ERP.  Thus, the significant increases in actual emissions caused by the 
utility's modifications would have been completely legal under the ERP. 

Question 2:  Please explain whether, under the current New Source 
Review clean air permitting program, sources can modify their facilities 
without going through the major New Source Review permitting process.

Response:  Under the current NSR permitting program, sources making 
modifications that result in increased emissions beyond de minimis levels 
must apply for NSR permits, install pollution control equipment (either 
best available control technology in PSD areas, or lowest achievable 
control technology in nonattainment areas), and, in attainment areas, 
must analyze the air quality impacts of their projects in order not to 
violate the clean air increments.  One exception to the NSR requirement 
exists for facilities whose changes are considered "routine maintenance," 
which has been evaluated historically by assessing four factors: the 
nature and extent of the change; the purpose of the change; its cost (i.e., 
whether it involves capital expenditures); and the frequency of the 
change.  However, facilities making modifications that are located in 
states within the Fourth Circuit Court of Appeals are not currently 
subject to NSR unless their hourly rate of emissions increases after the 
change-which would be an extremely unusual occurrence. The question 
of which test was intended by Congress to measure increases in 
emissions resulting from a modification-annual actual or hourly-is 
now before the United States Supreme Court in the Duke Energy case.

Question 3: The Energy Policy Act of 2005 included a number of 
provisions addressing potential issues related to boutique fuels.

        a. Do you believe that this Congress needs to pass additional 
legislation further limiting the number of boutique fuels adopted 
by states to address air quality issues.  If yes, please explain what 
legislative changes you support and why.  If no, please explain 
why.

Response: STAPPA and ALAPCO oppose additional legislation further 
limiting the number of boutique fuels adopted by states to address air 
quality issues.  We are concerned by assertions that there has been a 
"proliferation" of state clean air fuel programs and that these programs 
are responsible for fuel price increases and could potentially compound 
fuel supply disruptions should they occur.  State clean air fuel programs 
have been wrongly targeted as the cause, and further curtailment of state 
and local authorities to pursue such programs - beyond the limitations 
already placed by the Clean Air Act and the Energy Policy Act of 2005 
(EPAct) - could unnecessarily jeopardize public health and clean air.

If Congress is interested in taking legislative action with respect to state 
clean air fuel programs, rather than limit the number of fuels, it should 
expand states' authorities by allowing increased flexibility to adopt clean 
air fuel programs that will meet public health needs in the future.  
STAPPA and ALAPCO recommend that Congress consider 1) 
expanding the list of clean air fuels available under EPAct to include 
California Clean Burning Gasoline, 2) allowing all areas of the country - 
attainment and nonattainment - to opt into the federal Reformulated 
Gasoline program and 3) facilitating the ability of states and localities to 
adopt cleaner regional fuels, including allowing attainment areas to 
participate in such regional programs.

        b. If this Congress decides to enact legislation imposing further 
limitations on State fuel programs, do you believe that such 
legislation should address only State fuel programs adopted for 
air quality reasons?  Or should it also address State fuel 
programs adopted for local economic or other reasons.  Please 
explain why.

Response:  STAPPA and ALAPCO oppose any legislation that would 
impose any further limitations on state and local authorities to control air 
pollution, including state clean air fuel programs; we also oppose 
limitations on fuel programs adopted for local economic or other reasons.  
If, however, Congress is intent on responding to generic fuel supply and 
distribution concerns by enacting legislation to impose further 
restrictions on state and local fuel programs, we do not believe there is 
any justification for limiting such action only to state clean air fuel 
programs and not also to other specialty fuel programs.


RESPONSE FOR THE RECORD BY RED CAVANEY, PRESIDENT, AMERICAN 
PETROLEUM INSTITUTE


June 16, 2006


The Honorable John D. Dingell 
U.S. House of Representatives
Washington, DC 20515-2215

Dear Mr. Dingell:

I appreciated the opportunity to testify before the May 11, 2006 House 
Energy and Commerce Committee hearing entitled "Gasoline: Supply, 
Price, and Specifications".

Attached are my responses to your additional questions.  As always, 
please don't hesitate to contact me if you have any questions or if you are 
in need of additional information.

Sincerely,

 


Attachment
cc:   Chairman Barton




Attachment
Red Cavaney, API Response to Congressman Dingell

1. The Energy Policy Act of 2005 included a number of provisions 
addressing potential issues related to boutique fuels. 

        a) Do you believe that this Congress needs to pass additional 
legislation further limiting the number of boutique fuels 
adopted by States to address air quality issues?  If yes, please 
explain what legislative changes you support and why?  If no, 
please explain why?

Response
        The Energy Policy Act of 2005 (EPACT05) included a provision 
setting some restrictions on EPA for approval of states' fuels intended 
for reducing air pollution.  In addition, Congress required that EPA and 
the DOE complete two studies regarding boutique fuels (one this year 
and one in 2008). We look forward to the results of this study and its 
recommendation regarding how the number of boutique fuels may be 
reduced while balancing environmental needs and supply capability. In 
particular, we need such a careful study to weigh the impact of increased 
fuel fungibility from a reduced number of fuels with the reduction in 
production capability that will occur if the overall fuel specifications are 
made more stringent in the process of insuring continued environmental 
performance.

        b) If this Congress decides to enact legislation imposing further 
limitations on State fuels programs, do you believe that such 
legislation should address only State fuel programs adopted for 
local economic or other reasons?  Please explain why?

Response
        The bigger challenge now facing us is the recent proliferation of bio-
fuel boutiques that are just as disruptive to supply but lack a basis in 
improving air quality. We feel strongly that the addition of provisions 
restricting state bio-fuel mandates would substantially strengthen what 
has been proposed.  More state bio-fuel mandates could undo or offset 
much of the benefit your legislation as well as EPACT05 promises to 
provide.
 	Also, the legislation should be strengthened to further limit diesel 
boutiques (except for the existing Texas program) by preempting all state 
diesel programs, including those that address non-road fuels.
        At a minimum, we strongly recommend that this legislation amend 
EPACT05 to require study of the supply and distribution impacts of state 
bio-fuels mandates.   Also, EPA should be required to review potential 
supply impacts of any fuel under consideration for approval.  Simply 
reducing the number of fuels is not sufficient especially if it means 
moving to more stringent formulations that reduce producibility which, 
in turn, could also have adverse supply impacts.   

2. Please describe the potential impacts, if any, of State ethanol or 
biodiesel mandates on the potential to affect gasoline supply, 
fungibility, and price spikes.  Please describe the ways in which 
these potential impacts are similar to, and different from, the 
potential impacts of State fuel programs adopted for air quality 
reasons. 
 
Response
        The federal Renewable Fuel Standard will ensure continued growth 
in renewables, especially ethanol.  Unlike potential state mandates, the 
RFS builds in flexibility.  Its credit banking and trading component, 
when established through regulations by EPA, should allow refiners to 
use renewables where they are most efficient.  This is critical for the 
reliable supply of fuels.  
        State mandates undermine that flexibility and create obstacles to the 
achievement of Congress' goals.  Individual states should not be 
permitted to force the use of ethanol or biodiesel by devising and 
mandating their own gasoline/ethanol and/or diesel/biodiesel blends. The 
last thing our nation needs now is an expansion of the boutique fuels 
patchwork of state-by-state laws mandating ethanol and/or biodiesel use 
at different concentrations and/or under different terms.  
        Here are examples of the kind of problems that state bio-fuels 
mandates could create: 
        - A per gallon mandate requires that E10 be available at all 
times. Thus, a shortage of ethanol for any reason means that 
gasoline could not be sold. 
        - If the governor has chosen to eliminate the 1 pound waiver 
or if the state has a low rvp fuel requirement, refiners may 
need to produce a low RVP blendstock (BOB) for 
conventional gasoline. 
        - For areas requiring RFG, refiners would be required to 
produce a lower RVP blend of RFG, i.e. a reformulated 
BOB, for blending with ethanol.  While most are choosing to 
do this now, it is possible that in the future some will choose 
to produce RFG with no oxygenates.  This would not be 
possible in a mandate state. 

        Integrating ethanol and other biofuels into the gasoline marketplace 
is too important - and presents too many challenges - to be approached 
in an individual, state-by-state manner.  In order to meet consumer fuel 
needs, we want to produce more, refine more, and distribute more - but 
state bio-fuel mandates would make this difficult. For example, ethanol 
cannot be moved by common carrier pipeline, unlike more than 70 
percent of U.S. fuel production, and requires a long supply chain to serve 
consumers.  That means a longer reaction time when problems occur.  
State ethanol mandates would significantly add to that reaction time.

3. In section 1541 of the Energy Policy Act of 2005, Congress gave the 
EPA authority to issue waivers of state boutique fuel requirements in 
case of extreme and unusual circumstances.  Last fall, EPA used this 
authority to address extreme and unusual circumstances related to 
Hurricane Katrina and Rita.  Please comment on whether, from your 
perspective, this authority was helpful in addressing potential 
hurricane-related supply disruptions.

Response
        The Section 1541 fuels waivers issued by EPA were critically 
important in enabling industry to respond to the devastation of Hurricane 
Katrina and Rita.  However, because of the extensive nature of the 
damage done by these hurricanes to U.S. refining capacity, the 20-day 
limitation in Section 1541 was problematic as it created uncertainty for 
making supply and distribution decisions.  In fact, some waivers had to 
be reissued three times.
        Another problem was when there was a need for not only an EPA 
waiver but also State waivers of environmental and product quality 
regulations.  What usually occurred was that EPA acted quickly to waive 
certain federal fuel requirements to increase fuel supplies but the needed 
state responses were not prompt.  This resulted in unnecessary delays in 
increasing fuel supplies.  To remedy this, during events of national 
significance or extreme supply emergencies, EPA should have authority 
to waive both federal and state environmental and product quality 
(situations where state adopts its own product quality regulations and 
situations where states adopt ASTM specifications) fuel requirements.


RESPONSE FOR THE RECORD BY BOB SLAUGHTER, PRESIDENT, 
NATIONAL PETROCHEMICAL & REFINERS ASSOCIATION


June 16, 2006

The Honorable Joe Barton
Chairman
Committee on Energy & Commerce
U.S. House of Representatives
Washington, DC 20515

Dear Chairman Barton:

Thank you for the opportunity to appear before the Committee on Energy 
and Commerce at the May 11, 2006 hearing entitled, "Gasoline: Supply, 
Price, and Specifications."  I appreciate the continuing interest that you 
and your colleagues give to the nation's transportation fuel supplies.  As 
you know, NPRA, the National Petrochemical & Refiners Association, 
members includes more than 450 companies, including virtually all U.S. 
refiners and petrochemical manufacturers.  

NPRA has prepared responses to questions for inclusion in the official 
hearing record.  Please find NPRA's responses attached to this letter.

Again, I thank you for your interest in the critical issue of supplying the 
nation with the refined products that it needs.  NPRA appreciates your 
close and cautious consideration of issues affecting the refining industry.

Sincerely,  




Bob Slaughter 


Attached: Responses to Ranking Member John Dingell's Questions for 
the Record





Responses to Ranking Member John Dingell's Questions for the 
Record

1. The Energy Policy Act of 2005 included a number of provisions 
addressing potential issues related to boutique fuels.  

        a. Do you believe that this Congress needs to pass 
additional legislation further limiting the number of 
boutique fuels adopted by States to address air quality 
issues?  If yes, please explain what legislative changes 
you support and why.  If no, please explain why.   

        NPRA believes that the Committee draft is a reasonable and 
modest approach to the boutique fuels issue, representing the 
absolute limit that policymakers should consider this year.  We do 
suggest that it would be wise to add four additional items: 1) to 
include in the definition of boutique fuels all state ethanol and 
biodiesel mandates, as well as CARB fuel; 2) to require EPA to make 
a finding on the impact of state biodiesel mandates and CARB fuel 
on fuel supply fungibility and air quality; 3) to require a study of the 
impact of a 1-3 fuel national fuel slate on concentration and 
competition in the U.S. refining industry; and 4) to determine the 
impact of this bill on the average consumer costs for gasoline, 
compared to the current system. 

        b. If this Congress decides to enact legislation imposing 
further limitations on State fuel programs, do you 
believe that such legislation should address only State 
fuel programs adopted for air quality reasons?  Or 
should it address State fuel programs adopted for local 
economic or other reasons?  Please explain why. 

        See recommended additional items 1 and 2 above.  


2. Please describe the potential impacts, if any, of State ethanol or 
biodiesel mandates on the potential to affect gasoline supply, 
fungibility, and price spikes.  Please describe the ways in which 
these potential impacts are similar to, and different from, the 
potential impacts of State fuel programs adopted for air quality 
reasons.  

        The Committee draft attempts to control the total number of 
boutique fuels as defined in section 211(c)(4)(C) of the Clean Air Act 
in an effort to minimize fuel marketplace volatility and maintain air 
quality gains.  However, while the draft legislation focuses on the 
purely legal definition of boutique fuels, it expressly allows the 
proliferation of state mandated fuels using renewable additives such 
as ethanol and biodiesel.  
        The federal preemption provisions in the Clean Air Act preserve 
a rational motor fuel supply because states are precluded from 
unilateral adoption of unique specifications unless EPA grants a 
waiver.  EPA explains the merits of federal preemption in the 
preamble for the federal RFG and anti-dumping final rules, which 
includes the following statements: 

        "The regulations proposed here will affect virtually all of the 
gasoline in the United States.  As opposed to commodities that are 
produced and sold in the same area of the country, gasoline produced 
in one area is often distributed to other areas.  The national scope of 
gasoline production and distribution suggests that federal rules should 
preempt State action to avoid an inefficient patchwork of potentially 
conflicting regulations." 

        Because the draft legislation intends to improve fuel fungibility 
and alleviate adverse air quality impacts, it should also cover other 
fuels, such as state ethanol and biodiesel mandates-whether or not 
these fuels fall under the requirements of section 211(c)(4)(C) of the 
Clean Air Act.  At the very least this legislation should require EPA 
to make findings regarding the impact of these mandated fuels upon 
fuel supply and fungibility and air quality. 


3. In Section 1541 of the Energy Policy Act, Congress gave the 
Environmental Protection Agency (EPA) the authority to issue 
waivers of State boutique fuel requirements in case of extreme 
and unusual fuel and fuel additive supply circumstances.  Last 
fall, EPA used this authority to address extreme and unusual 
circumstances related to Hurricanes Katrina and Rita.  Please 
comment on whether, from your perspective, this authority was 
helpful in addressing potential hurricane-related supply 
disruptions.  

        NPRA commends the federal government for acting quickly and 
decisively in the face of supply outages.  Several steps taken in the 
days and weeks following these storms helped refiners provide 
consumers with the products they need.  EPA provided temporary 
fuel waivers that made it easier to supply fuels to affected areas.  The 
waivers pertained to both gasoline and diesel specifications.  NPRA 
appreciates the efforts of EPA and commends the agency for its 
diligence in gathering the necessary information to protect both fuel 
supply and environmental concerns.



RESPONSE FOR THE RECORD BY PAUL D. REID, PRESIDENT, REID 
PETROLEUM CORPORATION, ON BEHALF OF NATIONAL ASSOCIATION OF 
CONVENIENCE STORES AND SOCIETY OF INDEPENDENT GASOLINE 
MARKETERS OF AMERICA


NATIONAL ASSOCIATION OF CONVENIENCE STORES
1600 Duke Street
Alexandria, VA   22314

SOCIETY OF INDEPENDENT GASOLINE MARKETERS OF 
AMERICA
11495 Sunset Hills Road
Reston, VA   22090

June 16, 2006


The Honorable Joe Barton
Chairman
Committee on Energy and Commerce
U.S. House of Representatives
Washington, D.C.   20515

Re:  Responses to Written Questions Submitted in Connection with 
the May 11, 2006 Committee Hearing on "Gasoline:  Supply, Price, 
and Specifications"			

Dear Mr. Chairman:

	This letter responds to your letter of May 26, 2006 posing written 
questions to me that were submitted by members of the Committee in 
connection with the May 11, 2006 Committee hearing on "Gasoline:  
Supply, Price, and Specifications."  My answers to these questions, on 
behalf of the National Association of Convenience Stores ("NACS") and 
the Society of Independent Gasoline Marketers of America ("SIGMA"), 
are attached.

	NACS and SIGMA are pleased to submit these answers to the 
Committee.  If the Committee has additional questions, please do not 
hesitate to contact us.

						Sincerely yours,

						Signed
						Paul D. Reid
						President
						Reid Petroleum Corporation
						On behalf of 
						NACS and SIGMA

Attachment
cc:  The Honorable John D. Dingell


Responses to Questions from the Honorable John D Dingell

Question 1.  The Energy Policy Act of 2005 included a number of 
provisions addressing potential issues related to boutique fuels.

        (a) Do you believe that this Congress needs to pass additional 
legislation further limiting the number of boutique fuels adopted by 
States to address air quality issues?  If yes, please explain the 
legislative changes you support and why.  If no, please explain why.

        Ms. Sonja Hubbard, Chief Executive Officer of E-Z Mart Stores, 
Inc., provided the following testimony to the Committee at its June 
7, 2006 hearing on boutique fuels.  This testimony speaks to this 
question directly:

        "NACS and SIGMA have for many years warned Congress 
about the fragmentation of the fuels markets which has resulted 
from various jurisdictions requiring their own boutique fuel 
blends.  Nevertheless, it is our straightforward message to this 
Committee today that we are more concerned than reassured by 
the prospect of new fuels legislation this year.  Our industry, 
and the entire motor fuels manufacturing and distribution 
industries, are still working very hard to implement the 
significant changes in the motor fuels markets that have been 
the result of the legislative mandates contained in the Energy 
Policy Act of 2006 (EPAct).  Over the next six months, we also 
face significant challenges with the introduction of ultra low 
sulfur diesel fuel (ULSD). . . .

	We welcome the Committee's focus on the continued 
proliferation of boutique fuels and believe that there should be a 
healthy debate on any additional measures that may need to be 
undertaken to build on the boutique fuels restrictions in EPAct
. . . .
  
        However, we urge the Committee to be very careful when 
considering additional legislation on boutique fuels in light of 
the impact such legislation could have on an already volatile 
gasoline and diesel fuel market."

        Ms. Hubbard's testimony continues by recommending that, if the 
Committee does consider new boutique fuels legislation in 2006, it 
adhere to the following limitations:  (1) avoid the adoption of a fuel 
slate until the joint Environmental Protection Agency and 
Department of Energy ("DOE") report on the effects of such a slate 
is received by Congress in August 2006; (2) adopt a mechanism to 
gradually reduce the number of boutique fuels (a so-called 
"ratchet"); and, (3) condition the implementation of state alternative 
fuel mandates on findings by DOE and the Department of 
Transportation that sufficient alternative fuel supplies and 
infrastructure exist to support such a state mandate.

        (b) If this Congress decides to enact legislation imposing further 
limitations on State fuel programs, do you believe that such 
legislation should address only State fuel programs adopted for air 
quality reasons?  Or should it also address State fuel programs 
adopted for local economic or other reasons?  Please explain why.

        As noted in the answer to Question 1(a) above, NACS and SIGMA 
support congressional action on state alternative fuel mandates.  
Drawing again from Ms. Hubbard's June 7th testimony before the 
Committee:

	"If state biofuels mandates continue to proliferate, the 
current situation will only grow worse.  Our industry will be 
required to move ethanol from one market to another, based not 
on market forces but rather on artificial demand created through 
state mandates.  Even worse, our industry will be prohibited 
from supplying markets in need, like those reformulated 
gasoline markets transitioning away from MTBE, because 
supplies will be held hostage by individual states. Clearly, these 
state mandates interfere with the efficient flow of interstate 
commerce of a very important commodity. We urge you to 
stand by the national renewable fuel standard adopted in EPAct 
and condition the implementation of any state mandate upon 
findings by the relevant federal authorities that adequate 
supplies and logistics exist to support the demands created by 
these state mandates."

Question #2.  Please describe the potential impacts, if any, of State 
ethanol or biodiesel mandates on the potential to affect gasoline supply, 
fungibility, and price spikes.  Please describe the ways in which these 
potential impacts are similar to, and different from, the potential impacts 
of State fuel programs for air quality reasons.

        NACS' and SIGMA's answer to Question 1(b) responds to the first 
part of this question.  With respect to the second part of the question, 
we posit that state alternative fuel mandates have much the same 
effect on supply, volatility and price spikes as state boutique fuels 
adopted for air quality purposes.  Either boutique fuel -- an 
alternative boutique fuel or a boutique fuel adopted for air quality 
purposes -- creates an island of unique fuel specifications that is both 
difficult to resupply in the event of supply shortages and acts as an 
artificial and arbitrary barrier to the smooth movement of fuels and 
fuel additives based on market forces.  State biofuels mandates have 
the added potential effect of inhibiting the smooth implementation of 
the Renewable Fuel Standard established by the Energy Policy Act 
of 2005.  That program envisioned a flexible system that would 
enable the petroleum industry to comply with the requirements in 
the most efficient manner possible.  State biofuel mandates eliminate 
that flexibility.

        It also is important to note that this week ethanol is selling at 
world 
record levels in spot trading -- over $5.00 per gallon, or over $200 
per barrel.  Because ethanol is a commodity, these prices reflect the 
same pressures on the domestic ethanol market that high prices 
reflect on other commodities markets -- namely, high demand and 
questionable supply.  In the context of an examination of state 
ethanol mandates, these historically high prices reflect both the 
questionable public policy of such mandates and the constraints that 
such mandates place on the movement of ethanol from one market to 
another based on actual demand, rather than artificial governmental 
mandates.  Ethanol currently being used to meet state ethanol 
mandates could have a moderating effect on these ethanol prices if it 
is allowed to move to alternative markets.

Question #3.  In Section 1541 of the Energy Policy Act, Congress gave 
the Environmental Protection Agency (EPA) authority to issue waivers 
of State boutique fuel requirements in case of extreme and unusual fuel 
and fuel additive supply circumstances.  Last fall, EPA used this 
authority to address extreme and unusual circumstances related to 
Hurricanes Katrina and Rita.  Please comment on whether, from your 
perspective, this authority was helpful in addressing potential hurricane-
related supply disruptions.

        NACS and SIGMA believe that EPA exercised the emergency fuel 
waiver authority grant by Congress in EPAct wisely and judiciously 
in the wake of Katrina and Rita.  The temporary waivers granted by 
EPA were credited by NACS and SIGMA members -- and by many 
others -- with increasing motor fuel supplies across the nation and 
moderating the wholesale and retail price volatility that followed the 
hurricanes.

        NACS and SIGMA generally do not support a substantially wider 
grant of waiver authority to EPA.  However, we have urged 
Congress to consider two narrow expansions of EPA authority under 
the EPAct emergency waiver provisions:  (1) the adoption of a "hold 
harmless" provision so that states will not hesitate to follow an EPA 
emergency waiver out of concern that the state will be forced to 
offset any increased emissions during the waiver period; and, (2) 
consider a grant of authority to EPA to issue an emergency waiver if 
transitions from one fuel to another are significantly constrained by 
infrastructure or transportation limitations.  We would not oppose a 
proposal to grant the President authority to pre-empt state boutique 
fuel mandates in the context of a supply emergency to assure that a 
national determination of an emergency is not undercut by a state's 
failure to act quickly to suspend temporarily local fuel 
specifications.



RESPONSE FOR THE RECORD BY BOB DINNEEN, PRESIDENT AND CEO, 
RENEWABLE FUELS ASSOCIATION

 


June 16, 2006

The Honorable John D. Dingell
House of Representatives
Committee on Energy & Commerce
Washington, DC 20515

Re:  	Additional Questions to Witnesses.  
Hearing on May 11, 2006, entitled "Gasoline: Supply, Price, and 
Specifications,"

Dear Congressman Dingell: 

Attached are responses to the additional questions you submitted from 
the above-referenced hearing.   

1.  You testified that 35 ethanol plants are currently under construction. 

        (a) How many of these facilities have obtained a major New Source 
Review air permit? 

        Response:  I am not specifically aware how many of the plants 
under construction have obtained a New Source Review air 
permit. 

        (b) For those facilities that do not have a major New Source Review 
air permit, please explain why such a permit was not required. 

        Response:  A New Source Review permit would not be required if 
a plant meets the definition of a synthetic minor, i.e., emits less 
than 100 tons per year.  Generally, plants larger than 50 million 
gallons must be permitted under New Source Review.  Of the 
plants under construction today, 24 plants are 50 million gallons 
or less.  

        (c) For those facilities that do have major New Source Review air 
permits, how long, on average, did it take to obtain the permit 
once the permitting agency had a complete permit application?

        Response:  In general, plants having to obtain a New Source 
Review air permit can expect 12 - 18 months to finalize the 
process.  There have been cases where it has taken longer. 

2.  The Energy Policy Act of 2005 included a number of provisions 
addressing potential issues related to boutique fuels. 

        (a) Do you believe that this Congress needs to pass additional 
legislation further limiting the number of boutique fuels adopted 
by States to address air quality issues?  If yes, please explain 
what legislative changes you support and why.  In no, please 
explain why. 

	Response:  If the Energy and Commerce Committee concludes 
"boutique fuels" are a contributing factor to rising consumer 
gasoline prices, then the RFA would support legislation to 
reduce the number of fuels refiners must produce and improve 
overall gasoline fungibility.  

        (b) If Congress decides to enact legislation imposing further 
limitations on State fuel programs, do you believe that such 
legislation should address only State fuel programs adopted for 
air quality reasons?   Or should it address State fuel programs 
adopted for local economic or other reasons?  Please explain 
why. 

	Response:  States are contemplating biofuels programs to 
stimulate ethanol and biodiesel production in their respective 
states.  They are attempting to capture the tremendous economic 
benefits local ethanol and biodiesel production will provide.  
Consider the local economic impact of just one 100 million 
gallon ethanol plant:

         Generate $406 million for the local community;
         Increase the state's Gross Output by $223 million;
         Increase household income by more than $50 million; and
         Create nearly 1,600 local jobs. 

	Congress should not impinge on a state's ability to pursue 
biofuels programs intended to promote such significant economic 
development in their states.  

3. Please describe the potential impacts, if any, of State ethanol or 
biodiesel mandates on the potential to affect gasoline supply, 
fungibility, and price spikes.  Please describe the ways in which these 
potential impacts are similar to and different from the potential 
impacts of State fuel programs adopted for air quality reasons. 

	Response: State Biofuels Programs will not affect gasoline supply, 
fungibility or price.  Simply adding ethanol to gasoline does not 
constitute a "boutique fuel."  Indeed, ethanol is blended in 40% of the 
nation's fuel.  Ethanol is either blended with a fully fungible RBOB 
(reformulated gasoline blendstock for oxygenate blending) in federal 
RFG areas to meet appropriate emissions standards or with a fungible 
conventional gasoline, which adds volume and octane to the motor fuel 
supply.  Blending ethanol with conventional gasoline requires no 
unique blend from refiners and does not add to the complexity of the 
fuel distribution system.  That is fundamentally different from a State 
fuel program adopted for air quality reasons that requires significant 
refinery modifications and a separate and distinct fuel distribution and 
storage infrastructure.

        Congressman, I appreciate your interest in renewable fuels, 
specifically ethanol, and look forward to the ongoing development of 
ethanol biorefineries in Michigan.  Already, Michigan Ethanol, LLC in 
Caro, MI is producing more than 50 million gallons of ethanol in your 
state.  However, since Congress passed the Energy Policy Act of 2005, 
Michigan has begun construction on three additional ethanol refineries.  
In my view, Michigan's ethanol industry is a remarkable reflection of the 
ongoing domestic biofuels energy infrastructure.  If you have additional 
questions or comments please do not hesitate to contact me. 

Sincerely, 
 

Bob Dinneen
President & CEO

cc:  Peter Kielty, Legislative Clerk, Committee on Energy and 
Commerce



 


June 16, 2006

The Honorable Ed Whitfield
Member of Congress 
House of Representatives
Committee on Energy & Commerce
Washington, DC 20515

Re:  	Additional Questions to Witnesses.  
Hearing on May 11, 2006, entitled "Gasoline: Supply, Price, and 
Specifications,"

Dear Congressman Whitfield: 

Attached are responses to the additional questions you submitted from 
the above-referenced hearing.   

1. The biofuels industry has received immense support from the 
agriculture industry and from my colleagues in the House and 
Senate.  There are a number of new technologies and advancements 
in the biofuels industry taking place across the country.  I believe it 
is in the interest of the American consumer to support the 
development of these alternative fuels.  Do you support a more 
expedited approach to marketplace introduction of new, alternative 
biofuels? Why, why not? 

        Response:  Absolutely, the Renewable Fuels Standard (RFS) as 
contained in the Energy Policy Act of 2005 is not limited to ethanol and 
biodiesel and was intended to expand the national usage of renewable 
fuels.  Additionally, although not in production today, new sources of 
feedstock for ethanol are being created.  In a few short years, I believe 
cellulosic ethanol production will dramatically expand the types and 
amount of available feedstocks used to make ethanol, including materials 
now regarded as wastes, corn stalks, rice straw, wood chips and "energy 
crops" such as fast-growing trees and grasses.  Cellulose ethanol 
production will create new jobs and economic growth outside the 
traditional "grain belt" from locally available resources, and provide 
significant greenhouse gas emissions reductions.

2. If new technologies are able to produce a renewable fuel from 
agriculturally-based feed stocks, albeit with different physical 
characteristics from conventional biofuels, but remain acceptable 
substitutes for petroleum based products, they should be treated 
equally.  Unfortunately, they are all too often faced with enormous 
barriers to entry into the marketplace.  The exact situation is 
happening in my District with a biodiesel producer.  A farmer is 
using a new technology which produces a new horsepower, is more 
efficient, and cost less to produce.  However, because of a turf battle 
between new and old technologies and the adoption of an 
international standard, production in my district has been shut down 
and forced to convert back to old technologies.  My constituent has 
one of the best technologies around and prior to the explosion of this 
issue, he did not receive one complaint.  However, because of 
inconsistencies in the biodiesel industry he was forced to revert back 
to a more expensive and less efficient product.  Do you believe 
additional regulations slow the influx of new alternatives into the 
marketplace? (i.e. ASTM International Standards).

        Response:  Any new fuels, even derivatives from current biofuels, must 
be approved by the Environmental Protection Agency (EPA), due to 
environmental and health regulations.  Additionally, ASTM is the 
national standard setting body for fuels and biofuels.  The ASTM process 
is a science-based entity that develops standards through consensus of 
all stakeholders, including engine manufacturers, fuel producers and 
consumers.  ASTM evaluates current and new standards for fuels on an 
ongoing basis and standards can be changed with sound technical 
support.

        The regulatory and specification process is necessary for creating new 
fuels in today's marketplace.  It ensures transportation fuels products 
used by consumers are rigorously tested and approved.  The ethanol 
industry has worked with ASTM throughout its history, and standards 
have changed many times.  The process assures the highest quality fuels 
are being introduced to the marketplace, which is absolutely essential to 
the long-term viability of the alternative fuels industry.

        I am unfamiliar with the specific circumstance facing the company in 
your district, and have no expertise on biodiesel ASTM standards 
generally.  But from the ethanol industry's experience, I can absolutely 
affirm the efficacy of ASTM's standard setting process.  It has not been a 
barrier to entry for ethanol companies.

3. Similar technologies are popping up all over the country.  I was 
reading not long ago of a company that is producing a renewable fuel 
from stale beer.  Some critics argue that international standards 
ensure quality.  I understand the need for quality assurances in the 
marketplace.  But it is the marketplace that should make the ultimate 
determination of the product so long as the environmental protection 
agency determines the product's viability.  Do you support all 
technologies that provide a variety of choices among alternative 
biofuels in the marketplace?

        Response:  Today ethanol is produced from corn, grain sorghum, wheat, 
barley, sugar cane, cheese whey, beverage waste, including stale beer 
and unused or wasted soda, sugar beets, the cassava root, potatoes and 
wheat straw.  Each of these feedstocks yield a fuel that meets ASTM 
specifications.  Fuel marketers will simply not purchase product that 
does not meet ASTM specifications.

        Congressman, I appreciate your interest in renewable fuels, 
specifically 
ethanol, and look forward to the ongoing development of ethanol 
biorefineries in Kentucky.  Already, Commonwealth Agri-Energy, LLC 
in Hopkington, and Parallel Products in Louisville are producing nearly 
40 million gallons of ethanol in your state.  If you have additional 
questions or comments please do not hesitate to contact me. 

Sincerely, 
 

Bob Dinneen
President & CEO


cc:  Peter Kielty, Legislative Clerk, Committee on Energy and 
Commerce

	

  	Contribution of the Ethanol Industry to the Economy of the United States, 
Dr. John Urbanchuk, 
Director, LECG, LLC, February, 2006.
  	Argonne National Laboratory, U.S. Department of Energy, GREET Model, 
February, 2006.
  	It is important to note that no provision of the Energy Policy Act or the 
Clean Air Act requires 
refiners to eliminate MTBE, nor are they required to use ethanol.  This is a 
decision refiners are 
making because replacing MTBE with ethanol is the most cost-effective means of 
meeting Clean Air 
Act standards while maintaining the octane and performance consumers expect.
  	Brazil is the world's largest exporter of ethanol, and significant volumes 
of ethanol come from 
Brazil directly.  Other Brazilian product is imported through the Caribbean 
Basin Initiative, which 
allows up to 7% of the U.S. market (~270 million gallons in 2006) to enter duty 
free.  Ethanol 
produced in Canada and Mexico is also duty-free today.
  	The Ethanol Monitor, published by Oil Intelligence Inc., Oceanport, NJ, 
Volume 2, No. 11, 
March 27, 2006.
  We know of only one modification in the last 15 years that has triggered NSR 
requirements.
