[Senate Hearing 109-1156]
[From the U.S. Government Publishing Office]
S. Hrg. 109-1156
PRICE GOUGING
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
MAY 23, 2006
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
_____
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
TED STEVENS, Alaska, Chairman
JOHN McCAIN, Arizona DANIEL K. INOUYE, Hawaii, Co-
CONRAD BURNS, Montana Chairman
TRENT LOTT, Mississippi JOHN D. ROCKEFELLER IV, West
KAY BAILEY HUTCHISON, Texas Virginia
OLYMPIA J. SNOWE, Maine JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada BARBARA BOXER, California
GEORGE ALLEN, Virginia BILL NELSON, Florida
JOHN E. SUNUNU, New Hampshire MARIA CANTWELL, Washington
JIM DeMINT, South Carolina FRANK R. LAUTENBERG, New Jersey
DAVID VITTER, Louisiana E. BENJAMIN NELSON, Nebraska
MARK PRYOR, Arkansas
Lisa J. Sutherland, Republican Staff Director
Christine Drager Kurth, Republican Deputy Staff Director
Kenneth R. Nahigian, Republican Chief Counsel
Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Samuel E. Whitehorn, Democratic Deputy Staff Director and General
Counsel
Lila Harper Helms, Democratic Policy Director
C O N T E N T S
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Page
Hearing held on May 23, 2006..................................... 1
Statement of Senator Boxer....................................... 58
Additional information....................................... 79
Statement of Senator Cantwell.................................... 68
Statement of Senator Dorgan...................................... 43
Statement of Senator Inouye...................................... 1
Statement of Senator Lautenberg.................................. 65
Statement of Senator Lott........................................ 46
Statement of Senator Pryor....................................... 50
Prepared statement........................................... 50
Statement of Senator Smith....................................... 54
Statement of Senator Snowe....................................... 62
Statement of Senator Stevens..................................... 58
Prepared statement........................................... 71
Witnesses
Behravesh, Dr. Nariman, Chief Economist/Executive Vice President,
Global Insight................................................. 15
Prepared statement........................................... 18
Cooper, Dr. Mark, Research Director, Consumer Federation of
America (CFA).................................................. 38
Prepared statement........................................... 40
Majoras, Hon. Deborah Platt, Chairman, Federal Trade Commission.. 2
Prepared statement........................................... 5
Slaughter, Bob, President, National Petrochemical & Refiners
Association (NPRA)............................................. 23
Prepared statement........................................... 25
Appendix
Response to written questions submitted by Hon. Daniel K. Inouye
to:
Dr. Nariman Behravesh........................................ 97
Dr. Mark Cooper.............................................. 100
Hon. Deborah Platt Majoras................................... 93
Bob Slaughter................................................ 98
Response to written questions submitted by Hon. Frank R.
Lautenberg to:
All Witnesses................................................ 101
Dr. Nariman Behravesh........................................ 97
Hon. Deborah Platt Majoras................................... 95
PRICE GOUGING
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TUESDAY, MAY 23, 2006
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 10 a.m. in room
SD-562, Dirksen Senate Office Building, Hon. Daniel K. Inouye,
presiding.
OPENING STATEMENT OF HON. DANIEL K. INOUYE,
U.S. SENATOR FROM HAWAII
Senator Inouye [presiding]. Pursuant to the direction of
the Chairman of the Committee, I call the meeting to order. The
Federal Trade Commission's expedient work on this price gouging
report is most gratefully received by this Committee. However,
we find the findings do not explain what many consumers
experienced in the aftermath of the hurricane. This report, for
example, does not convince the Committee that consumers were
treated fairly.
No doubt, gasoline prices were bound to rise after Katrina.
However, consumers in Atlanta were asked to pay $6 dollars a
gallon, more than twice the national average at that time, and
anecdotal evidence suggests that they were not alone. And
nothing in this report helps us to understand how such pricing
could be considered lawful and legitimate.
The FTC initially refused to investigate price gouging. In
fact, at our last hearing, Chairman Majoras suggested that,
contrary to consumers' experiences, pressure and a compromise
in the Congress forced the FTC to produce this report. It was
noted at that time that the 180-day timeline was too short to
fully understand what happened. The oil and gasoline markets
are very complex, and frankly, the FTC chose to base a lot of
its work for this report on previous work and evidence
collected from other investigations in order to meet the
deadline. Ironically, the FTC found an important piece of
evidence, steep increases in profit margin, directly related to
Katrina, yet it declined to examine this in the report.
Both the abbreviated timeline and the FTC's unmistakable
reluctance to investigate leave the Committee questioning the
report's findings. From what I've read and observed thus far, I
am not convinced that the FTC was able to thoroughly analyze
what happened in the Gulf Coast or its subsequent impact to the
East Coast markets. If the FTC needed more time to understand
the post-Katrina price variations, it should have requested an
extension.
I am inclined to support legislation that provides the FTC
with clear and effective authority to prosecute incidences of
price gouging, despite FTC Chairman Majoras' opposition. This
authority would allow the FTC to continue to investigate
incidents, such as the post-Katrina fluctuations, without
waiting for the Congress to compromise on reporting
requirements.
We have heard testimony from several attorneys general that
have utilized this kind of authority to the benefit of
consumers, and I believe it makes little sense not to grant the
Federal Government's consumer watchdog similar power.
With that, I would like to call the first witness. And the
first witness is the Honorable Deborah Platt Majoras, Chairman
of the Federal Trade Commission.
STATEMENT OF HON. DEBORAH PLATT MAJORAS, CHAIRMAN, FEDERAL
TRADE COMMISSION
Ms. Majoras. Thank you, Mr. Co-Chairman, Members of the
Committee. I'm Deborah Platt Majoras, Chairman of the Federal
Trade Commission. I appreciate having the opportunity to
present the Commission's testimony on the findings of our
investigation which we conducted pursuant to Section 1809 of
the Energy Policy Act of 2005 and Section 632 of the
Commission's Appropriations Legislation for Fiscal Year 2006.
The Commission conducted a single investigation in response to
these two directives and yesterday, we issued our final report.
While I will briefly explain the Commission's findings, my
brief remarks cannot do justice to this lengthy and thorough
investigation. I urge all interested parties to read the
complete report which is on our website, ftc.gov.
The written testimony represents the views of the
Commission entity. And I would like to recognize my fellow
Commissioners who are here with me today, Commissioner Pamela
Jones Harbour, Commissioner Jon Leibowitz, Commissioner William
Kovacic, and Commissioner Thomas Rosch. All of whom are sitting
with me today.
My oral presentation and responses to questions are my own
and do not necessarily represent the views of any individual
Commissioner. The FTC conducted this investigation against a
backdrop of increasing gasoline prices over the past few years
which reached new highs late last summer when two significant
hurricanes, less than 1 month apart, ravaged our Gulf Coast.
Even as prices have increased, demand has remained high as ours
is a society on the go and Americans depend heavily on their
cars for mobility.
Even before Hurricanes Katrina and Rita hit in succession,
consumers and Members of Congress were raising questions about
why the price of gasoline had been increasing. And then
following Hurricane Katrina, the price rose quickly by about 45
cents on average, causing financial hardships for many
consumers. By the end of November, prices had fallen to pre-
hurricane levels, only then to increase significantly again
this spring.
Americans are concerned, and they depend on us to provide
answers. This report provides them as well as Members of
Congress and other policymakers with useful information that
can be used to make decisions about energy usage and energy
policy.
Since August 2005, the Commission has expended substantial
resources on this investigation, including the full-time
commitment of a significant number of attorneys, economists,
financial analysts, paralegals, research analysts, and other
support personnel with specialized expertise in the petroleum
industry. We issued hundreds of CIDs, subpoenas, and 6(b)
orders in an effort to obtain documents and testimony from
firms at all levels of the oil industry.
The first part of the report presents the Commission's
findings and analysis on whether refiners or firms at other
levels of the industry manipulated or tried to manipulate
gasoline prices. Staff investigated whether refiners
manipulated prices in the short run by running the refineries
at less than full capacity, by altering their product output to
produce less gasoline, or by diverting gasoline from markets in
the United States to less lucrative foreign markets.
The staff also investigated allegations that companies
refused to invest sufficiently in new refineries for the
purpose of tightening the supply and raising prices in the long
run. Staff investigations revealed no evidence to suggest that
refiners manipulated prices through any of these means.
Instead, the evidence indicated that refiners responded to
higher gasoline prices by producing as much of this now, higher
valued product as possible, taking into account crude oil costs
and other physical characteristics.
Moreover, the pace of capacity growth resulted from market
forces. While it is true that no new refineries have been built
in this country since 1976, refining capacity, nonetheless, has
increased as refiners have made significant expansions to
existing refineries that since 1996, would equal 15 average
sized new refineries.
The Commission also examined the extent to which
infrastructure constraints give pipelines the ability or
incentive to manipulate gasoline prices, and we found no
evidence of that. Similarly, we found no anti-competitive
activity in terminal markets. Although inventory levels have
declined since at least the early 1980s, our investigation did
not produce evidence that oil companies reduced inventory in
order to manipulate prices or exacerbate the effects of price
spikes. Instead, like so many other major industries that have
been changing over time, these lower inventory holdings allowed
oil companies to become more efficient and lower their cost.
The second part of the report focuses on the effects of
Hurricanes Katrina and Rita on our gasoline markets. Hurricanes
Katrina and Rita caused substantial damage to the Nation's
petroleum infrastructure. In the week after Katrina, which
caused the immediate loss of 27 percent of our Nation's
refining capacity--I'm sorry, of our Nation's crude oil
production, and 13 percent of national refining capacity, the
average price across six representative cities increased by 50
cents.
About 35 cents per gallon of that post-Katrina price
increase had dissipated by the time Hurricane Rita hit. Rita
then damaged another 8 percent of crude oil production and even
accounting for the refineries affected by Katrina that were by
that point back on line, 14 percent of domestic refining
capacity was lost as a result of Rita.
We looked at what happened and compared it to the sizes of
the post-hurricane price increases that we might have predicted
there to be in a competitive market, and they were
approximately what we would expect to find. For example, the
regions of the country that experienced the largest price
increases were those that normally receive supply from the
areas that were affected by the hurricanes. Further, the
conduct of firms in response to the supply shocks caused by the
hurricanes was consistent with competition.
After both hurricanes, companies with unaffected assets
increased their output and diverted supplies to these high
priced areas that needed the supply. Refiners deferred
scheduled maintenance in order to keep the refineries
operating. Imports increased and companies drew down their
existing inventories to help meet the shortfall. And this is
what we would expect to see in a competitive market.
The assessment of potential price gouging, as defined in
Section 632, revealed that the average gasoline price charged
by eight of 30 refiners analyzed increased five or more cents
more per gallon than the national average. And using the
Section 632 definition, we concluded that those eight met the
definition of price gouging. But, they wouldn't necessarily
have met the other definitions that Members of Congress have
put forth, so we went further and looked to see whether any
other market conditions could explain the increases and found,
that, in fact, regional or local market conditions did appear
to explain the conditions in almost every instance.
Then, we looked at retail pricing data and performed the
same analysis, concluding that six individual retailers engaged
in price gouging, as defined by Section 632. There again,
however, local or regional market trends seemed to explain the
price increases in all but one case. In sum, we did not find
that any of this activity violated the federal antitrust laws,
and that the market was working according to the laws of supply
and demand.
The conclusion of our investigation does not end our
examination of the petroleum industry. We will, of course,
continue to enforce the antitrust laws to prohibit business
behavior and mergers that may have anti-competitive effects.
And in addition, on April 25th, the President directed us to
work with the Department of Justice and the Department of
Energy to conduct a new inquiry into current gasoline prices
and the reasons for the increases.
We will do that and we are looking to see what other issues
we might explore, including recent increases in profitability.
We understand that consumers have been frustrated as they work
to factor significant price increases into their budgets. It is
important that we have an understanding of these markets.
A fresh examination of the cost and benefits of all
regulation at the Federal, state, and local levels that impacts
supply and demand is probably warranted and we stand ready to
participate on a going forward basis in any constructive debate
among policymakers and to add our expertise where appropriate.
Thank you very much, Mr. Co-Chairman.
[The prepared statement of Ms. Majoras follows:]
Prepared Statement of Hon. Deborah Platt Majoras, Chairman,
Federal Trade Commission
Introduction
Chairman Stevens, Co-Chairman Inouye, and Members of the Committee,
I am Deborah Platt Majoras, the Chairman of the Federal Trade
Commission. I am pleased to appear before you to present the
Commission's testimony on the findings of our investigation pursuant to
two separate directives from Congress. \1\ Section 1809 of the Energy
Policy Act of 2005 requires the Federal Trade Commission
(``Commission'' or ``FTC'') to ``conduct an investigation to determine
if the price of gasoline is being artificially manipulated by reducing
refinery capacity or by any other form of market manipulation or price
gouging practices.'' \2\ In addition, Section 632 of the Commission's
appropriations legislation for Fiscal Year 2006 directs the Commission
to conduct an investigation into nationwide gasoline prices and
possible price gouging in the aftermath of Hurricane Katrina. \3\
Because the issues raised by these two statutory commands are closely
related, the Commission conducted a single investigation in response to
these directives. Our investigation is now complete, and yesterday we
issued our final Report.
In my testimony today, I will describe the major issues addressed
in our Report and present the Commission's evidentiary findings. I will
conclude by discussing the policy implications of the Commission's
findings, and by offering some recommendations for Congress's
consideration in its ongoing efforts to protect consumers in petroleum
markets.
Since August 2005, the Commission has expended substantial
resources on this investigation, including the full-time commitment of
a significant number of attorneys, economists, financial analysts,
paralegals, research analysts, and other personnel with specialized
expertise in the petroleum industry. Even with this commitment of
resources, it was not possible to study every pricing and output
decision in this very complex industry. Thus, based on our knowledge
and expertise from previous investigations and studies--and the
concerns raised by knowledgeable observers and market participants
about competition in this industry--the Commission and its staff
focused substantially on levels of the industry and parts of the
country where problematic behavior was most likely to have occurred and
to have had an effect on consumers. \4\
``Price manipulation'' and ``price gouging'' are not defined legal
or economic terms and therefore must be defined for purposes of the
Report. Neither antitrust law nor economics defines ``price
manipulation'' precisely, \5\ and Section 1809 does not provide a
definition for the Commission to apply. As used in the Report, the term
``price manipulation'' includes (1) all transactions and practices that
are prohibited by the antitrust laws, including the Federal Trade
Commission Act, and (2) all other transactions and practices,
irrespective of their legality under the antitrust laws, that tend to
increase prices relative to costs and to reduce output. \6\
Transactions and practices that violate the antitrust laws include
anticompetitive mergers, acquisitions, and joint ventures, collusion
among competitors to fix prices or output, and monopolization or
attempts to monopolize.
Although widely understood to refer to significant price increases
(typically during periods of unusual market conditions), the term
``price gouging'' similarly lacks an accepted definition. It is not a
well-defined term of art in economics, nor does any Federal statute
identify price gouging as a legal violation. States that prohibit price
gouging have not adopted a common definition or standard to describe
the practice. For example, the statutes do not describe the extent to
which cost or other considerations (such as whether a declared
emergency is pending) play a role in determining whether a price
increase is ``price gouging.'' In Section 632, Congress directed the
Commission to treat as evidence of price gouging any finding that ``the
average price of gasoline available for sale to the public in September
2005, or thereafter . . . exceeded the average price of such gasoline
in that area for the month of August 2005, unless the Commission finds
substantial evidence that the increase is substantially attributable to
additional costs in connection with the production, transportation,
delivery, and sale of gasoline in that area or to national or
international market trends.'' Accordingly, we analyzed whether
specific post-Katrina price increases were attributable either to
increased costs or to national or international trends.
I. The Expertise of the Commission on Petroleum Industry Matters
The Commission's Bureau of Competition and Bureau of Economics have
significant petroleum industry experience, both from enforcing the
antitrust laws and from conducting research and industry analyses. The
Commission has investigated every major merger in the petroleum
industry over the past 25 years. The Commission also has conducted
major investigations of petroleum marketing and pricing practices on
the West Coast and in the Midwest. During each investigation, the
Commission obtained documents, economic data, and testimony from
merging parties and other industry participants and used this evidence
to determine whether to take law enforcement action to prevent
potential anticompetitive effects.
Since 1981, the Commission has identified 20 large petroleum
mergers that it believed would have reduced competition and harmed
consumers. \7\ The agency obtained relief that resolved the competitive
issues in 16 of these transactions, and the parties abandoned the other
four after the Commission formally challenged the transactions. The
Commission conducted a careful evaluation of each transaction to ensure
that the agency obtained adequate remedies where necessary.
In addition to merger enforcement, the Commission's economists have
researched pricing and other competition issues in the petroleum
industry. \8\ Since 2002, the Commission's economists also have
monitored wholesale and retail prices of gasoline to identify potential
anticompetitive activities that might require greater investigation.
Today, this project tracks retail prices of gasoline and diesel in some
360 cities and wholesale (terminal rack) prices in 20 major urban
areas. Over the past several decades, the Commission has gained an
understanding of the domestic petroleum industry, how participants in
the industry compete, and how prices of gasoline and other refined
petroleum products are set.
II. The History of the Investigation
In August and September of 2005, the Commission, through its staff,
began planning and organizing the investigation mandated by Section
1809 of the Energy Policy Act and the anticipated legislation that
became Section 632. The planning process focused in part on how to seek
the best and most complete information in the time permitted. Staff
identified issues requiring analysis, information necessary to analyze
those issues, and strategies to obtain that information. Staff then
identified the targets of the investigation, including all gasoline and
petroleum distillate wholesalers with $500 million or more in annual
sales, as well as appropriate retailers. Staff began conducting
voluntary interviews with a number of firms and also consulted with
various Federal agencies, including the Department of Energy, the
Department of Commerce, the Commodity Futures Trading Commission, the
Department of the Treasury, and the Internal Revenue Service.
The Commission's staff conducted more than 65 voluntary interviews
with industry participants and state and Federal agencies. Staff
interviewed petroleum refiners, wholesalers, retailers, terminal
companies, pipeline owners and operators, traders, price reporting
services, and representatives from various state agencies, including
the National Association of Attorneys General and individual
representatives from state attorney general offices and state consumer
protection agencies.
In early November 2005, the Commission issued the first of 139
Civil Investigative Demands (CIDs)--similar to subpoenas--to a wide
spectrum of petroleum industry firms in order to obtain information
relevant to the investigation. CID recipients included integrated and
unintegrated refiners, pipeline owners and operators, terminal owners,
and petroleum marketers. \9\ One set of CIDs sought information
directly relevant to Section 632. Another set of CIDs directed
individual terminal owners to provide information relevant to aspects
of petroleum futures markets. The Commission also issued 99 orders
pursuant to Section 6(b) of the Federal Trade Commission Act, \10\
seeking profitability and tax expenditure information required by
Section 632 from retailers that were investigated by state attorneys
general for post-Katrina price gouging, \11\ as well as follow-up CIDs
seeking from refiners certain additional data necessary to conclude our
profitability analysis under Section 632. In February 2006, staff
conducted sworn investigational hearings (similar to depositions) of
industry officials regarding various issues in the investigation. The
Commission also purchased a large volume of wholesale and retail
pricing data from the Oil Price Information Service (OPIS), a private
data-collection company, to complement information secured directly
from market participants and from firm-level EIA data.
III. Summary of Key Findings and Recommendations
A. Part I of the Report
1. Refining
Evidence indicated that the price of crude oil, the largest cost
component of gasoline, contributed to most of the gasoline price
increases that occurred from early 2002 until just before Hurricane
Katrina struck the United States. Higher refining margins caused some
of the remaining increase, although margins in any competitive market
can be expected to increase, at least in the short run, during periods
of strong demand. \12\
The Commission analyzed various aspects of refinery operations to
determine whether refiners manipulated, or tried to manipulate,
gasoline prices. Staff investigated whether refiners manipulate prices
in the short run by running their refineries below full productive
capacity in order to restrict supply, by altering their product output
to produce less gasoline, or by diverting gasoline from markets in the
United States to less lucrative foreign markets. Staff also
investigated allegations that companies refused to invest sufficiently
in new refineries for the purpose of tightening supply and raising
prices in the long run. Staff's investigation revealed no evidence to
suggest that refiners manipulated prices through any of these means.
The best evidence available through our investigation indicated
that companies operated their refineries at full sustainable
utilization rates. Companies scheduled maintenance downtime in periods
when demand was lowest in order to minimize the costs they incur in
lost production. Internal company documents suggested that refinery
downtime is costly, particularly when demand and prices are high.
Companies track these costs, and their documents reflected efforts to
minimize unplanned downtime resulting from weather or other unforeseen
calamities.
The evidence also showed that companies operated their refineries--
and determined the product quantities they would produce--with the goal
of maximizing their profits, taking market prices as a given factor.
Our investigation uncovered no evidence indicating that refiners make
product output decisions to affect the market price of gasoline.
Instead, the evidence indicated that refiners responded to market
prices by trying to produce as much higher-valued products as possible,
taking into account crude oil costs and other physical characteristics.
The evidence collected in this investigation indicated that firms
behaved competitively. Firms employ computer models that rely on
simplified assumptions in order to make decisions about production and
capacity. These models allow refineries to determine the most
profitable slate of products, given refinery input costs and market-
based price forecasts. To the extent that these models take price as a
given, refiners' use of such models does not signify an ability to
influence prices through short-run production decisions. Refiners may
occasionally modify or override the computer models to take into
account market factors, such as limited product demand for some fuel
specifications, but such departures appeared limited during our
investigation.
Our investigation revealed no evidence that companies export
product from the United States in order to raise domestic prices.
Export levels are relatively low, compared to the level of imports
entering the United States. Pre-existing supply commitments and product
that is unacceptable for use in the United States constitute the bulk
of exported refined products. Further, our investigation indicated that
an attempt to manipulate gasoline prices by exporting products from the
United States likely would result in more imports into the domestic
market, as indicated by the increased imports that arrived in response
to the hurricanes.
Refining capacity has increased over the past 20 years, even as the
number of refineries has declined. The industry added capacity by
expanding existing refineries, which appears to be more economical than
building new refineries. Domestic refinery expansions have been
significant, but they have not kept pace with rising demand over the
same period. Nevertheless, our investigation did not uncover evidence
suggesting that expansion decisions resulted from attempts by
refineries, acting either unilaterally or in concert, to acquire or
exercise market power. Rather, the evidence suggested that the rate of
capacity growth was a response to competitive market forces that made
further investment in refining capacity unprofitable.
2. Bulk Distribution Infrastructure
The bulk supply distribution infrastructure, consisting of
pipelines, marine vessels and terminals, adds very little to the
delivered cost of gasoline. The Commission examined the extent to which
infrastructure constraints gave firms the ability or incentive to
manipulate gasoline prices, or limited the ability of marketers to move
additional supply to specific markets when an unexpected need arose.
Pipelines generally are the most cost-effective way to transport
refined petroleum products. In the short run, pipelines can affect the
flow of supply into markets through the rates they charge for
transporting product. In the long run, decisions whether to expand play
an important role in the ability of pipelines to respond to increasing
demand. The evidence we obtained during our investigation did not
suggest that pipeline companies made rate or expansion decisions to
manipulate gasoline prices. First, FERC generally regulates the rates
that interstate pipelines charge, and pipeline companies generally
charge the FERC maximum rate unless competition from other pipelines
compels them to offer discounted rates to win business. Second,
pipeline companies appear to make expansion decisions for reasons
unrelated to gasoline prices, except to the extent that rising gasoline
prices may signal a need for more pipeline capacity to serve a given
market. Pipeline companies generally expand only when they are assured
of having a sufficient volume of product committed to the new pipeline,
because expansion involves significant sunk costs, regulatory barriers,
and the risk of idle pipeline capacity.
Gasoline also moves to markets within the United States on marine
vessels--tankers and barges--along the Nation's waterways and coasts.
Two Federal laws, the Jones Act and the Oil Pollution Act, apply to
marine vessels and have had the effect of reducing the supply of ships
qualified to move gasoline within the United States. The evidence
indicated that refiners have reacted to this by increasingly entering
into long-term charter arrangements with shipping companies to ensure a
supply of vessels to transport their product during normal market
conditions. This, however, has reduced the number of ships available on
the spot market to traders seeking to move fuel in response to supply
shortages.
Terminals are essential to the bulk supply infrastructure because
they provide storage for marine vessel and pipeline deliveries. Many
refiners that also sell gasoline (``refiner/marketers'') own terminals
in various markets, and use those terminals primarily--if not
exclusively--to store product for their own needs. Public terminals
(i.e., terminals owned by companies that do not refine or market
gasoline) exist in many markets and provide access to any bulk seller
willing to pay to use the terminal. The presence of public terminals
minimizes the ability of refiner/marketers to use their terminals to
restrict supply into specific markets. In recent years, refiner/
marketers have sold terminals to public terminal companies, reducing
even further any ability to manipulate prices by restricting terminal
access. As a result, competition appears sufficient in most areas to
limit the potential for price manipulation.
3. Product Inventory Practices
Inventory levels have declined since at least the early 1980s,
covering periods when the real price of gasoline was declining and
increasing. In more concrete terms, inventory levels have declined
since 1993 from a level sufficient to meet consumption for a full month
to a level sufficient to meet consumption for less than 80 percent of a
month. Our investigation did not produce evidence, however, that oil
companies reduced inventory in order to manipulate prices or exacerbate
the effects of price spikes due to supply disruptions. Instead, the
decline in inventory levels reflects a trend that is not limited to the
petroleum industry. As in many other major industries, lower inventory
holdings allowed oil companies to become more efficient and to lower
costs. The evidence indicated that oil companies attempt to use
historical experience to determine what inventory levels would be
sufficient to meet unanticipated changes in demand or supply.
Inventories were a significant factor in enabling the markets to
recover from the shocks stemming from Hurricanes Katrina and Rita, as
discussed more fully below.
4. Other Issues Involving Potential Gasoline Price Manipulation
The evidence did not reveal a situation that might allow one firm
(or a small collusive group) to manipulate gasoline futures prices by
using storage assets to restrict gasoline movements into New York
Harbor, the key delivery point for gasoline futures contracts. In
addition, the evidence did not support a theory that firms used
published bulk spot prices to manipulate prices, either (a) by falsely
reporting trades to the major price publishing services, or (b) by
affecting published prices in thinly traded markets by reporting
actual, legitimate, small-volume trades opportunistically priced above
or below competitive levels. \13\
B. Part II of the Report
In the week after Hurricane Katrina--which caused the immediate
loss of 27 percent of the Nation's crude oil production and 13 percent
of national refining capacity--the average price of gasoline increased
by about 50 cents per gallon in 6 representative cities analyzed in
this part of the Report. About 35 cents per gallon of the post-Katrina
price increase dissipated by the time Hurricane Rita hit. Rita damaged
another 8 percent of crude production and, even accounting for the
refineries affected by Katrina and back online, 14 percent of domestic
refining capacity was lost. In the 6 selected cities, during the first
week after it hit, Rita caused an increase of 25 cents per gallon in
the average price of gasoline. Four weeks after Rita, these prices
returned to pre-Katrina levels. By the beginning of December 2005,
these prices had returned to the levels prevalent at the start of
summer 2005, showing that most of the price effects of the hurricanes
had dissipated by that time.
The price increases after the hurricanes varied substantially by
region. For example, the average price in Baltimore increased by 65
cents per gallon after Katrina, while the average price in Los Angeles
increased by 20 cents per gallon. In addition, the range (or
``dispersion'') of both wholesale and retail prices within particular
cities far exceeded typical levels immediately after the hurricanes.
For example, the typical range of prices within a band encompassing the
middle 50 percent of prices in a given urban area, on average, spans
from 3 to 10 cents per gallon. After Katrina, prices in that middle 50
percent range rose by a factor of 2 to 3, or 12 to 18 cents per gallon.
High dispersion is evidence that some firms increased prices more than
most other firms--evidence that should be considered in a search for
price gouging as defined in Section 632.
In light of the amount of crude oil production and refining
capacity knocked out by Katrina and Rita, the sizes of the post-
hurricane price increases were approximately what would be predicted by
the standard supply-and-demand paradigm that presumes a market is
performing competitively. The regions of the country that experienced
the largest price increases were those that normally receive supply
from areas affected by the hurricanes. In the cities with the largest
price increases, the sizes of the increases were consistent with the
standard supply-and-demand competitive paradigm. Moreover, in general,
the wholesalers and retailers that raised prices the most within
particular cities in the weeks following the hurricanes were not firms
that experienced increases in market power (stemming, for example, from
the closing of rivals). Rather, they were firms that experienced the
largest reductions in their own supplies and the greatest increases in
their own costs.
Evidence gathered during our investigation indicated that the
conduct of firms in response to the supply shocks caused by the
hurricanes was consistent with competition. After both hurricanes,
companies with unaffected assets increased output and diverted supplies
to high-priced areas. This is what we would expect in competitive
markets. Refiners deferred scheduled maintenance in order to keep
refineries operating. Imports increased and companies drew down
existing inventories to help meet the shortfall in supply.
In its assessment of potential gasoline price gouging as defined in
Section 632, the FTC examined price, cost, and profit margin data for
large sellers of petroleum products--refiners and wholesalers--and for
retailers that were targets of state price gouging enforcement actions
in the aftermath of Katrina. Financial data for 30 refiners were
analyzed. Although there were exceptions, refiners generally saw
increased profit margins in September 2005 compared to August 2005.
Between August and September 2005, the average gasoline price charged
by 8 of the 30 refiners analyzed increased five or more cents per
gallon more than the national average price trend for this period.
Seven of these eight refiners also had increased profit margins during
the same period, indicating that average cost increases did not
substantially explain the firms' higher average prices. Accordingly,
the findings that individual refiners' prices increased substantially
more than the national average trend, accompanied by increased profit
margins, meet Section 632's definition of price gouging.
Further investigation and analysis revealed evidence that may
explain the price increases of these refiners and their profit uplifts.
Refiners vary significantly in terms of where, and through which
channels, they distribute product. Hurricane Katrina's impact on prices
differed significantly across geographic regions, and refiners that
sold relatively more of their gasoline in higher-priced regions had
average price increases greater than the increase in the national
average. In addition, refiners varied significantly in the extent to
which they sold gasoline through their owned-and-operated retail
outlets, through franchised dealers supplied on a delivered price
basis, through branded jobbers supplied on a branded rack price basis,
through unbranded jobbers supplied on an unbranded rack price basis,
and through bulk sales to other refiners or other major resellers on a
bulk spot price basis. Because of time lags and differing contractual
relationships between sellers and buyers, the relative prices for sales
through these various distribution channels changed significantly in
response to changing market conditions, such as those associated with
the major supply disruptions from last year's hurricanes. Once
geographic locations of sales and channels of distribution were taken
into account, individual refiners' price increases appeared comparable
to local market trends, except in one case. In that case, which
involved a very small refiner, further inquiry indicated that the
refiner's acquisition costs for the gasoline it was obligated to supply
increased significantly beyond the level suggested by the aggregated
accounting data because of hurricane damage.
Staff also evaluated financial operating data for 23 large
wholesalers that had no refinery operations (8 of which also had some
retail operations). Staff found that the operating margins of these
wholesalers generally did not increase, suggesting that higher costs
primarily caused their price increases. A few non-refining wholesalers,
however, did enjoy significantly higher operating margins, and their
price increases constitute price gouging under the Section 632
definition. Nevertheless, a further analysis of the evidence reveals
that they derived these gains from either (1) retail operations in
areas that experienced the largest post-Katrina price increases, or (2)
activities such as futures market trading or distillate sales.
The Commission also examined margin and price data for 24
individual retailers that had been the targets of state price gouging
actions. Although one might have expected these retailers generally to
satisfy the criteria for price gouging set forth in Section 632, this
proved not to be the case. As a group, these retailers did not have
significantly increased operating margins in September 2005, nor were
their average price increases much different from the change in the
national average retail price from August to September 2005.
Nevertheless, in September, six of these retailers (1) earned
significantly higher monthly average gross margins, and (2) increased
their average prices at least five cents per gallon more than the
national average price increase in September compared to August 2005.
Accounting for regional price differences associated with the
hurricanes' impact, one retailer of the six significantly exceeded the
benchmark average price increase.
Based on these findings and other analyses of retail pricing data
and retailer interviews, the Commission concludes that some price
gouging by individual retailers, as defined by Section 632 (which is
premised on a comparison to national average prices), did occur to a
limited extent. Local or regional market trends, however, seemed to
explain the price increases in all but one case. Exceptionally high
prices on the part of individual retailers generally were very short-
lived. Interviews with retailers that charged exceptionally high prices
indicated that at least some were responding to station-level supply
shortages and to imprecise and changing perceptions of market
conditions.
C. Part III of the Report--Policy & Recommendations
At the heart of the Congressional mandates is an inquiry into the
prices for gasoline and all other refined petroleum products, which
have risen substantially in the past 2 years. Higher gasoline prices
cause substantial economic hardship for consumers. Sharing a profound
interest in protecting consumers, both Congress and the Commission
naturally are focused on this issue.
Section 632 of the Science, State, Justice, Commerce, and Related
Agencies Appropriations Act of 2006 directs the Commission to
investigate price gouging in the aftermath of Hurricane Katrina and,
based on the agency findings, to recommend possible legislation that
might be needed to protect consumers from price gouging. Section 1809
of the Energy Policy Act of 2005 also requires that the Commission
submit any recommendations along with its investigational findings. The
Commission investigated the higher prices that occurred after the
hurricanes and has considered the experience of several states that
sought to enforce their price gouging statutes during this emergency
period. The states' enforcement experience provides some insight into
the enforcement process under price gouging statutes.
The challenge in crafting a price gouging statute is to be able to
distinguish gougers from those who are reacting in an economically
rational manner to the temporary shortages resulting from the
emergency. This is more than just a problem for legislators and
prosecutors. Gasoline suppliers may react to this difficulty in
distinguishing gougers by keeping their prices lower than they
rationally would. Consumers, in turn, may have no incentive to curb
their demand as they would in response to a higher price. Other
suppliers may have no incentive to send new supplies to the affected
area, as they would if the price increased. The possible result may be
long gasoline lines and shortages. In short, any decision to enact
Federal price gouging legislation should be made with full awareness of
both sides of the possible tradeoff.
1. The Critical Role of Prices
Consumers might be better off in the short run if they did not have
to pay higher prices for the same quantity of goods; in the long run,
however, distortions caused by controls on prices would be harmful to
consumers' economic well-being. Prices serve a crucial function in
market-based economies. They are signals to producers and consumers
that tell how to value one commodity against another, and where to put
scarce resources in order to produce or purchase more or fewer goods.
If these price signals are distorted by price controls, consumers
ultimately might be worse off because producers may manufacture and
distribute an inefficient amount of goods and services, and consumers
may lack the information necessary to properly value one product
against another. Moreover, even in periods of severe supply shock, such
as a major reduction in production or distribution caused by a natural
disaster like the 2005 hurricanes, higher prices signal consumers to
conserve and producers to reconfigure operations to better prepare for
the next supply shock. Thus, if there is a ``right'' price for a
commodity, it is not necessarily the low price; rather, it is the
competitively determined market price. Relative to past prices, a
competitive market price may sometimes be low, and it may sometimes be
high; but it will send an accurate signal to producers to manufacture a
sufficient amount of goods and services that consumers want to buy at
that price, and an accurate signal to consumers to reallocate purchase
decisions.
If prices are constrained at an artificial level for any reason,
then the economy will work inefficiently and consumers will suffer.
Economists have known for years that price controls are bad for
consumers, and the deleterious effect extends far beyond strictly fixed
prices. \14\ The constraint need not be total or permanent to have
adverse effects. ``Soft'' price caps that allow for some recovery of
price increases, or a price gouging statute that temporarily constrains
prices during periods of emergency, still may have the effect of
misallocating resources by reducing the incentives to produce more and
consume less. \15\ Thus, any type of price cap, including a constraint
on raising prices in any emergency, risks discouraging the kind of
behavior necessary to alleviate the imbalance of supply and demand in
the marketplace that led to the higher prices in the first place. A
temporary price cap may have an especially adverse effect on incentives
as producers withhold supply in order to wait out the capped period.
An artificially low price may cause producers to shift their
fungible resources (of which capital is the most fungible) to other
markets. Sooner or later, the result may be shortages, and the
relatively scarce goods may be allocated by some method other than a
market-clearing price. Experience with past markets in which prices
have been held artificially low through price controls has included
such results as consumers waiting in lines (and often burning scarce
fuel while waiting), a politically designed allocation system, or an
illegal ``black market'' in which the market price is charged.
2. The Important Role of the Antitrust Laws
The antitrust laws are designed to protect consumers by ensuring
that they are offered competitive market prices. The antitrust laws
seek to protect consumers against high prices that result from price
fixing and from other market distortions that almost inevitably lead to
higher prices. The Commission, along with the U.S. Department of
Justice, is charged with protecting consumers by maintaining
competitive markets, to make sure that the prices charged in markets
are not artificially fixed or manipulated by private interests. The
Commission's work in the petroleum industry over many years conforms to
this mandate. The agency protects consumers by ensuring that markets
remain competitive, and that the price charged in each market is free
from collusion or the exercise of market power.
Congress determined long ago that the Nation's economy should
largely be free from government regulation and that the national common
market should be governed by the principles of competition. \16\ In
enacting the antitrust laws, however, Congress also recognized that
markets can be distorted by concentrations of market power. The
antitrust laws are not designed to prevent prices from increasing;
rather, they are designed to prevent firms from using market power to
raise prices artificially.
The antitrust laws cover three primary areas--collusion among
competitors (including price fixing), anticompetitive mergers, and
monopolistic and other exclusionary unilateral practices. The
Commission has been active in each area in the petroleum industry.
3. Price Gouging--State and Federal Perspectives
There is no Federal statute that prohibits price gouging. Twenty-
nine states and the District of Columbia, however, have laws that
prohibit the excessive pricing of motor fuels and other commodities
during periods of abnormal supply disruption (normally triggered by a
declaration of emergency by the President, the Governor, or local
officials). \17\ These laws provide for civil penalties, criminal
penalties, or both. Commission staff looked at the experience of the
states in enforcing their price gouging statutes as information
relevant to the enactment and enforcement of a possible Federal
statute. \18\
4. Federal Price Gouging Legislation
Consumers understandably are upset when they face dramatic price
increases within very short periods of time, especially during a
disaster. In a period of shortage, however--particularly with a
product, like gasoline, that can be sold in many markets around the
world--higher prices create incentives for suppliers to send more
product into the market, while also creating incentives for consumers
to use less of the product. Higher gasoline prices in the United States
after Hurricanes Katrina and Rita resulted in the shipment of
substantial additional supplies of gasoline to the United States from
foreign locations. \19\
If pricing signals are not present or are distorted by legislative
or regulatory command, markets may not function efficiently and
consumers may be worse off. Accordingly, our competition-based economy
generally allows a seller, acting independently in its own business
interests, to set prices as it chooses, and relies on market forces--
rather than government intervention--to determine the prices a seller
can seek.
In addition, it can be very difficult to determine the extent to
which price increases are greater than ``necessary.'' Our examination
of the Federal gasoline price gouging legislation that has been
introduced and of state price gouging statutes and enforcement efforts
indicates that the offense of price gouging is difficult to define.
Moreover, throughout antitrust jurisprudence, one area into which the
courts have refused to tread is the question of what constitutes a
``reasonable price.'' Ultimately, the lack of consensus on which
conduct should be prohibited could yield a Federal statute that would
leave businesses with little guidance on how to comply and would run
counter to consumers' best interest.
For all of these reasons, the Commission cannot say that Federal
price gouging legislation would produce a net benefit for consumers. If
Congress nevertheless proceeds with passing Federal price gouging
legislation, several factors should be considered in order to enact a
statute that will be most likely to attack gouging while having the
smallest adverse impact on rational price incentives. First, any price
gouging statute should define the offense clearly. A primary goal of a
statute should be for businesses to know what is prohibited. An
ambiguous standard would only confuse consumers and businesses and
would make enforcement difficult and arbitrary.
A price gouging bill also should account for increased costs,
including anticipated costs, that businesses face in the marketplace.
Enterprises that do not recover their costs cannot long remain in
business, and exiting businesses would only exacerbate the supply
problem. Furthermore, cost increases should not be limited to historic
costs, because such a limitation could make retailers unable to
purchase new product at the higher wholesale prices.
The statute also should provide for consideration of local,
national, and international market conditions that may be a factor in
the tight supply situation. International conditions that increase the
price of crude oil naturally will have a downstream effect on retail
gasoline prices. Local businesses should not be penalized for factors
beyond their control.
Finally, any price gouging statute should attempt to account for
the market-clearing price. Holding prices too low for too long in the
face of temporary supply problems risks distorting the price signal
that ultimately will ameliorate the problem. If supply responses and
the market-clearing price are not considered, wholesalers and retailers
will run out of gasoline and consumers will be worse off.
IV. Conclusion
Under existing antitrust laws, the Commission has a strong role to
play in this area. As noted above, enforcing the antitrust laws
strictly to prohibit business behavior that has anticompetitive effects
will have a major impact in keeping markets free so that prices are set
by competitive forces, not by manipulation or ``gouging.'' Beyond that,
the Commission will remain vigilant about any distortions that may harm
competition and consumers in petroleum markets. Moreover, the
Commission will vigorously implement and enforce any additional
legislation that is enacted.
On April 25, 2006, the President directed the Department of Justice
to work with the Commission and the Department of Energy to conduct an
inquiry into current gasoline prices and the reasons for their more
recent increases. \20\ The makeup of this investigating group presents
the opportunity to examine a range of issues and conduct by market
participants potentially affecting the underlying supply and demand
factors that ultimately shape prices in the long run. In the context of
this directive, the Commission also is considering whether to conduct
further inquiry into other topics--for example, oil company
profitability--and is working to identify any other aspects of the
petroleum industry that may warrant further economic examination. The
Commission also will continue to evaluate and upgrade its gasoline and
diesel price monitoring project. This is an ongoing process to ensure
that our detection efforts are as robust as possible. In addition, we
will continue with consumer education projects to help consumers make
informed decisions in the energy marketplace.
The legal and industry enforcement expertise of the Commission,
bolstered by the Justice Department's long history of aggressive
enforcement against criminal cartels, should enable this investigation
to determine whether any petroleum companies have engaged in conduct
that would violate the antitrust laws to the detriment of consumers. If
any illegal activity is uncovered, it will be prosecuted by the
appropriate agency.
The addition of the Department of Energy to the investigating group
brings an added level of expertise in energy markets. The Department's
long experience in data collection across all energy markets will
provide the information necessary to study and make recommendations
about macroeconomic trends in energy use, imports, alternative fuels,
and other issues that go far beyond traditional law enforcement.
The Commission also is working with many state attorneys general to
add to our understanding of their laws, to continue to refine our
analysis of petroleum industry issues, and to improve our working
relationships. We will conduct a seminar on petroleum matters with
state attorneys general and their staffs in September 2006.
Past Commission law enforcement investigations in the petroleum
industry have concluded that supply and demand forces are the ultimate
drivers of prices to consumers. The Commission, however, will continue
to monitor this industry closely and investigate any potential illegal
activity.
Further, that does not, and should not, end the debate about
appropriate government energy policy. Consumers understandably are
frustrated to be told that no laws are being broken even as prices
increase substantially. It is important that they gain a better
understanding of the working of energy markets. Gasoline prices--and
energy prices in general--depend on the actions of all consumers and
producers, and those actions can be changed. They can be modified over
time by policies designed to make supply more responsive to high prices
or to shift demand toward alternative energy sources. There are
numerous initiatives that would have the effect of holding down future
increases in gasoline prices. These actions do not relate directly to
antitrust enforcement, but any policy that increases the supply of
products at competitive prices may increase consumer welfare, as long
as the costs of that policy decision do not outweigh the benefits.
A fresh examination of the costs and benefits of all forms of
regulation--Federal, state, and local--that impact the supply of
gasoline may be warranted. Policies that influence demand also should
be considered. A constructive debate among policymakers is what is
needed, and the FTC stands ready to participate and add our expertise
where appropriate.
ENDNOTES
\1\ This written statement presents the views of the Federal Trade
Commission. My oral presentation and responses to questions are my own
and do not necessarily represent the views of the Commission or any
other Commissioner.
\2\ Energy Policy Act of 2005, Pub. L. No. 109-58 Sec. 1809, 119
Stat. 594 (2005) (Energy Policy Act).
\3\ Science, State, Justice, Commerce, and Related Agencies
Appropriations Act, 2006, Pub. L. No. 109-108 Sec. 632, 119 Stat. 2290
(2005) (Section 632).
\4\ The Commission's investigation examined the subjects that
Congress directed the Commission to study in the Energy Policy Act and
Section 632, but the Report does not address certain other issues of
public interest in the petroleum industry that are beyond the purview
of the investigation. For example, the Report does not examine crude
oil production and exploration, in which--as recent Commission reports
have shown--U.S. refiners compete with refiners around the world to
obtain crude oil (and currently rely on foreign crude oil for more than
65 percent of their needs). Even the largest private oil companies
control only a very small fraction of world crude oil production, and
significant price manipulation through control of crude oil by private
oil companies therefore appears highly unlikely. The Organization of
Petroleum Exporting Countries (OPEC), however, plays a significant role
in the pricing of crude oil and, accordingly, in the pricing of
gasoline. For a discussion of OPEC's effect on crude oil prices, see
Federal Trade Comm'n, Gasoline Price Changes: the Dynamic of Supply,
Demand and Competition 22-23 (2005) (Gasoline Price Changes Report).
\5\ ``Price manipulation'' is a term that appears in areas of the
law other than antitrust, however. For example, although the Commodity
Exchange Act bans price manipulation in futures markets, see 7 U.S.C.
Sec. 13(a)(2), the statute does not define manipulation, and courts and
others have struggled to define the term. See, e.g., In re Soy Bean
Futures Litig., 892 F. Supp. 1025, 1043 (N.D. Ill. 1995) (``[T]here is
a `dearth of settled caselaw' on price manipulation; as a result the
courts and the CFTC are still struggling to define the basic elements
of the claim and to differentiate between fair means and foul in
futures trading.''). In addition, the Federal Energy Regulatory
Commission (FERC) recently imposed a condition on all current and
future market-based tariffs that prohibits ``[a]ctions or transactions
that are without a legitimate business purpose and that are intended to
or foreseeably could manipulate market prices, market conditions, or
market rules for electric energy or electricity products.'' See Order
Amending Market-Based Rate Tariffs and Authorizations, 105 FERC para.
61,218 (2003).
\6\ Under this definition, ``price manipulation'' includes
instances in which one or more firms temporarily may each have an
increased incentive and ability to raise prices relative to costs and
reduce output because markets have been disrupted by supply problems
arising from natural disasters or by sudden and unanticipated changes
in demand. In our view, this type of conduct should not be illegal
because it entails each individual firm's independent decisions about
how to allocate sales of its products among markets.
\7\ Investigations in which the Commission determined that the
merger presented a problem, and significant structural relief was
obtained, include Valero L.P., Valero Energy Corp., et al., FTC Dkt.
No. C-4141 (July 22, 2005) (divestiture of Kaneb terminal and pipeline
assets in northern California, eastern Colorado, and greater
Philadelphia area); Phillips Petroleum Co., FTC Dkt. No. C-4058 (Feb.
7, 2003) (divestiture of Conoco refinery in Denver, Phillips marketing
assets in eastern Colorado, Phillips refinery in Salt Lake City,
Phillips marketing assets in northern Utah, Phillips terminal in
Spokane, Phillips propane business at Jefferson City and East St.
Louis); Valero Energy Corp., FTC Dkt. No. C-4031 (Feb. 19, 2002)
(divestiture of UDS refinery in Avon, California, and 70 retail
outlets); Chevron Corp., FTC Dkt. No. C-4023 (Jan. 2, 2002)
(divestiture of Texaco's interests in the Equilon and Motiva joint
ventures, including Equilonms interests in the Explorer and Delta
pipelines); Exxon Corp., FTC Dkt. No. C-3907 (Jan. 26, 2001)
(divestiture of all Northeast and Mid-Atlantic marketing operations of
the two parties and Exxon's Benicia, California, refinery); British
Petroleum Co. p.l.c., 127 F.T.C. 515 (1999) (divestiture of terminals
in nine markets, and divestiture of BP's or Amoco's retail outlets in
eight geographic areas); and Shell Oil Co., 125 F.T.C. 769 (1998)
(resulting in divestitures of Shell's refinery in Anacortes,
Washington, pipeline interests in the Southeast, and retail outlets in
San Diego County, California).
\8\ Representative research includes Jeremy I. Bulow, et al., U.S.
Midwest Gasoline Pricing and the Spring 2000 Price Spike, 24 Energy J.
121 (2003); Christopher T. Taylor & Jeffrey H. Fischer, A Review of
West Coast Gasoline Pricing and the Impact of Regulations, 10 Int'l J.
Econ. Bus. 225 (2003); David W. Meyer & Jeffrey H. Fischer, the
Economics of Price Zones and Territorial Restrictions in Gasoline
Marketing (Bureau of Econ., Fed. Trade Comm'n, Working Paper 271,
2004); John Simpson & Christopher T. Taylor, Michigan Gasoline Pricing
and the Marathon-Ashland and Ultramar Diamond Shamrock Transaction
(Bureau of Econ., Fed. Trade Comm'n, Working Paper 278, 2005);
Christopher T. Taylor & Daniel S. Hosken, the Economic Effects of the
Marathon-Ashland Joint Venture: the Importance of Industry Supply
Shocks and Vertical Market Structure (Bureau of Econ., Fed. Trade
Comm'n, Working Paper 270, 2004) (forthcoming in Journal of Industrial
Economics).
\9\ The Commission based its request for profitability data on a
form used by the Energy Information Administration (EIA) of the U.S.
Department of Energy. The EIA uses this form to collect revenue, cost,
and profit information from major energy-producing firms operating in
the United States. Each company submitted its response to the FTC's
data request. The companies also granted waivers that allowed the EIA
to provide other company-specific information that that agency
routinely collects from the industry, including data on production,
capacity, shipments, and inventory.
\10\ Section 6(b), 15 U.S.C. Sec. 46(b), empowers the Commission to
require the filing of annual or special reports or answers in writing
to specific questions for the purpose of obtaining information about
``the organization, business, conduct, practices, management, and
relation to other corporations, partnerships, and individuals'' of the
entities to which the inquiry is addressed.
\11\ Staff identified more than 105 retailers accused of price
gouging by state law enforcement authorities. Due to the late timing of
identification and previous data requests sent to retailers identified
in state actions, the Commission issued the 99 orders pursuant to
Section 6(b) of the Federal Trade Commission Act.
\12\ One measure of ``refining margin'' is the price at which the
refiner sells finished product minus the refiner's acquisition cost of
crude oil.
\13\ Any evidence of this form of manipulation more likely would
exist in individual company trader files--a massive volume of documents
that staff did not seek and could not have reviewed within the given
time. Such a detailed investigation would be appropriate when a Federal
agency becomes aware of specific allegations or suspicions that such
conduct is occurring.
\14\ See William J. Baumol & Alan S. Blinder, Economics: Principles
and Policy 53 (2d ed. 1982) (``The consequences [of price controls]
usually are quite unfortunate, exacting heavy costs from the general
public and often aggravating the problem the legislation was intended
to cure.'')
\15\ Office of Governor Linda Lingle, Governor Approves Gas Cap
Repeal, May 5, 2006, available at http://www.hawaii.gov/gov/news/
releases/2006/News_
Item.2006-05-05.5815.
\16\ Over the years, Congress has passed a number of industry-
specific statutes imposing regulation, including price regulation.
Prices have been fixed through regulation in airlines, trucking, and
other industries originally deemed ill-suited for market-based price
competition. Regulations also have been passed to meet goals other than
competition, and although these regulations have price impacts, a
policy decision has been made that control of prices can be tolerated
in order to achieve other goals such as health care and safety. At
certain times, Congress has even placed general price controls on all
industries. The price of gasoline was strictly regulated during World
War II, and the market was cleared through a system of ration coupons.
A general consensus has emerged, however, that in most markets
competition is more effective than any form of price control in
ensuring that consumers get the full benefits of innovation and
productive and distributive efficiencies. Numerous formerly regulated
industries have been substantially deregulated. Consumers are best
protected when markets are kept free and open. These benefits to
consumers depend, of course, on law enforcement agencies that can keep
markets competitive and free from distortion and manipulation. This is
the role of the Federal Trade Commission.
\17\ See National Conf. of State Legislatures, State Laws and
Regulations: Price Gouging (Oct. 8, 2004), available at http://
www.ncsl.org/programs/energy/lawsgouging.htm.
\18\ Several states and the Canadian Competition Bureau
investigated post-hurricane high gasoline prices and potential price
gouging and concluded, largely consistent with the Commission's Report,
that market forces were for the most part responsible for the higher
prices. See David R. Baker, Anti-Gouging Laws Don't Cut Gas Prices:
State Probed 50 Potential Cases; No Charges, San Fran. Chronicle, May
6, 2006, at A1, available at http://www.sfgate.com/cgi-bin/
article.cgi?file=/c/a/2006/05/10/MNGQHIOUJP1.DTL (California Attorney
General investigates 50 of more than 1,150 complaints, finds no
evidence of price gouging); Press Release, Attorney General Rob
McKenna, McKenna Encourages Conservation, Reports No Evidence of Price-
Fixing So Far, Apr. 26, 2006, available at http://www.atg.wa.gov/
releases/2006/rel_No_evidence_Of_Price_Fixing_042606.html; Office of
the Attorney General, State of Arizona, Consumer Protection Section,
2005 Gasoline Report Hurricane Katrina, Apr. 26, 2006 (Arizona
``investigation did not uncover any illegal conduct''), available at
http://www.azag.gov/consumer/gasoline/PublicGas
Report2005.pdf; Canadian Competition Bureau, Competition Bureau
Concludes Gasoline Pricing Examinations, Mar. 30, 2006 (finding ``no
evidence of a national conspiracy to fix gasoline prices''), at http://
www.competitionbureau.gc.ca/internet/index.cfm?itemid=2046&lg=e.
\19\ Total gasoline imports into the United States for September
and the first 3 weeks of October 2005 were approximately 34 percent
higher than imports over this period in 2004. See Energy Info. Admin.,
U.S. Dep't of Energy, Petroleum Navigator: Weekly Imports & Exports
(shows receipts of crude oil and petroleum products into the 50 states
and the District of Columbia from foreign countries, Puerto Rico, the
Virgin Islands, and other U.S. possessions and territories), available
at http://tonto.eia.doe.gov/dnav/pet/
pet_move_wkly_dc_NUSZ00_mbblpd_w.htm (last updated May 3, 2006).
\20\ A number of Members of Congress also have requested that the
Commission investigate recent increases in gasoline prices. See, e.g.,
letter of April 24, 2006, from Speaker of the House Dennis Hastert and
Senate Majority Leader Bill Frist to President Bush; letter of April
28, 2006, from Senators Mike DeWine and Herb Kohl to FTC Chairman
Majoras and Attorney General Gonzales.
Senator Inouye. Thank you. Our next witness is Dr.
Behravesh.
STATEMENT OF DR. NARIMAN BEHRAVESH, CHIEF ECONOMIST/EXECUTIVE
VICE PRESIDENT, GLOBAL INSIGHT
Dr. Behravesh. Thank you, Mr. Co-Chairman. I appreciate the
opportunity to speak on this important issue. In my comments
this morning, I will endeavor to answer four questions. First,
what is behind the recent rise in oil and gasoline prices?
Second, how much of the rise in gasoline prices is due to
gouging? Third, how much are high gasoline prices hurting
consumers? This is very important, obviously. And then finally,
what should Congress do?
On the first question as to what has happened, and why are
oil and gasoline prices so high, the answer is really very
mundane. Simply, demand has been growing faster than supply.
There's a long history here, but even for those attempting
to look for evidence of market manipulation, the overwhelming
evidence is that the recent rise has been due to market
fundamentals. Part of this goes back to the 1990s when oil
prices were very low. With low oil prices, there was very
little incentive for consumers to conserve. There was very
little incentive for oil producers, whether it be oil companies
or oil exporting countries, to invest in exploration and
drilling. And so basically, supply fell way behind demand. You
can see that in the chart pack. If I could beg your indulgence
and refer to it from time to time?
Chart 1 shows the reduction in OPEC spare capacity. We are
running on very, very thin capacity margins right now. This, in
large part, explains why oil prices are so high. Now, there are
a variety of other factors as well that have been alluded to,
namely on the refining side. Certainly, no new refineries have
been built in 30 years. Any investment in refineries was
discouraged by the low oil and gasoline prices in the 1990s,
and also by a variety of environmental restrictions.
This is not just a story about oil, but it's a story about
all commodities. If you look at Chart 2, you can see that oil
prices have been rising in tandem with other commodities. We're
in the midst of a commodities boom, although the markets have
corrected a little bit recently. The reason for this is very
strong global growth and a reluctance on the part of all
commodity extracting companies and countries to make major
investment for fear that the next commodity crash would burn
them.
So, we've seen across the board in many commodities
markets, a reluctance to make major investments in new mines or
new facilities. So, we are in the midst of a very sharp and
sudden rise in commodities prices. This has been going on for
about three years now.
Now from our perspective, both supply and demand for oil
and gasoline will respond in time. Unfortunately in the
meantime, oil prices will remain high. The oil markets are
going to remain very tight because of the capacity constraints
I alluded to earlier. So, it will take some time for oil prices
to come down.
Our forecast, for the next 2 to 3 years, is for oil prices
to stay above $60 a barrel. Given that markets are so tight,
they're extremely vulnerable to any kind of disruption, whether
it be another hurricane or some geopolitical event in the
Middle East. Markets are extremely vulnerable right now to any
event which would cause a supply disruption.
On the gasoline side, some of the recent rise has been due
to the so called ``ethanol problem,'' where the mandated use of
ethanol has created some bottle necks in the distribution
system and that has created a bit of a spike in prices.
Already, this is beginning to ease. So, we could see gasoline
prices staying around $3 dollars a gallon through the summer,
but we expect them to come down to about $2.50 by the end of
the year and probably stay there for a couple of years.
Question number two, how much of the rise in gasoline
prices is due to price gouging? And here, I refer you to Charts
3 and 4, which look at the components that make up gasoline
prices. There are four components: number one, oil prices.
Number two, refiners margins. Those are the profit margins of
refineries. Number three, taxes. And number four, dealer
margins.
If you look at what happened in the Katrina period and
recently, you do see two spikes in refiners margins. You don't
really see much movement in the dealer margins.
What happened? In the post-Katrina situation there was a
scare. Basically, with the refineries down, as was mentioned
earlier by the Chairman of the FTC, we had a scare and a severe
shortage. And that showed up basically, in a bidding up, in the
marketplace, of gasoline prices. This is apparent in the higher
margins. These then came down very dramatically as the
refineries came back on stream, as the fear factor subsided,
and as it became apparent that there would indeed be enough
gasoline supplies, after about a month of these disruptions.
More recently, we've had another spike. Almost all of this
is due to, again, the ethanol problem. This largely has to do
with the fact that ethanol is produced in the middle of the
country. It has to get to the coast, and the railway, and
pipeline distribution systems just aren't yet set up to handle
the flow, and this has created some crunches in the refineries.
So, you put all this together and ask, what's the bottom
line here? The bottom line is there is very little evidence so
far, of systematic--I underlined the word systematic--anti-
competitive behavior by either refiners or dealers. Now that
does not rule out individual cases of price gouging by some
dealers. I'm not suggesting there's none of that. But, there's
no evidence of systematic price gouging.
Third question, how much are gasoline prices hurting?
Clearly, there is hurt, but let's put it into some perspective.
If you look at gasoline prices in Chart 5, you can see that
relative to other prices--relative to inflation, relative to
the CPI--gasoline prices for two decades, actually fell behind
inflation. Basically, they fell in inflation adjusted terms.
Recently, they've risen for the reasons we talked about. So
finally, after a three decade period, gasoline prices have
caught up with inflation.
If you look at the bottom of Chart 6, you can see that even
with the recent rises, inflation adjusted after tax income has
far outpaced gasoline prices. Gasoline prices, after you adjust
for inflation, they haven't really changed relative to the 1980
levels. Whereas inflation adjusted income, has doubled during
that period. So basically, gasoline spending and energy
spending by the typical U.S. household, has fallen during this
period.
My last slide, on the last page, shows you both energy
spending by households and gasoline spending by households as a
percent of take home pay. And you see that after a long period,
these shares have risen recently. But if you accept our
forecast that oil prices will stay high but come down a little
bit, we actually expect these burdens to ease. So, there is
some relief in sight for the typical household in the U.S.
Finally, what should Congress do? Here, I think I have some
concerns. While it may be tempting to consider regulatory
fixes, it's unclear how new regulation is going to fix the
fundamental supply and demand problem that we have in oil and
gasoline markets.
I certainly understand the concern about possible price
gouging, but it's unclear to me how new regulation will help.
In fact, there's always the risk that increasing regulations
will discourage new supplies from coming on the market.
I think there are a number of things Congress can do. One
is, to streamline the gasoline market. One obvious thing is to
reduce the number of gasoline grades. The proliferation of
gasoline grades has made the gasoline distribution system a
nightmare. I think simplifying that will ease some of the
production bottlenecks that we have out there.
Another thing Congress can do as a medium to long term fix,
is through the tax code or in other ways, to encourage both the
production and the purchase of fuel efficient cars. That will
go a long way toward reducing our dependance on imported
gasoline, and imported oil.
And finally, again, to acknowledge that high gasoline
prices do hurt, especially low income people. Their share of
gasoline expenditures is higher than average and they are being
hurt disproportionately. So, there is scope for Congress to
provide some relief for low income families.
Thank you very much, Mr. Co-Chairman.
[The prepared statement of Dr. Behravesh follows:]
Prepared Statement of Dr. Nariman Behravesh, Chief Economist/
Executive Vice President, Global Insight
Mr. Chairman,
Thank you for inviting me to speak before the Senate Committee on
Commerce, Science, and Transportation on the very important topic of
the recent rise in gasoline prices. In a series of brief questions and
answers below, I will endeavor to address some of the key issues behind
recent trends in oil and gasoline prices, and their consequences for
U.S. households and U.S. policymakers.
What Is Behind the Recent Rise in Oil and Gasoline Prices?
The reason for the recent rise in oil and gasoline prices is
quite mundane--demand has been rising faster than supply. While
it may be tempting to look for market manipulation by energy
suppliers, the evidence so far points overwhelmingly to market
fundamentals as being the principal drivers of price.
Low energy prices in the 1990s provided little incentive for
energy consumers around the world to conserve, or for energy
producers to invest in exploration and drilling (let alone
alternative fuels and technologies). Thus we have seen a very
troubling decline in OPEC spare capacity (see Chart 1).
Moreover, low refining margins in the 1990s, combined with
significant expenditures to comply with environmental
regulations, held down investment in new refineries.
The rise in energy prices is part of a broader global
commodities boom (see Chart 2). Since 2003 global growth has
been very strong, with the United States and China being the
principal locomotives. In the meantime, most suppliers of
commodities (including OPEC) have been reluctant to increase
capacity, fearing that as soon as the new supplies hit the
markets, prices would collapse. This has been the experience of
the oil industry for much of the last 25 years.
Both supply and demand will respond--in time--to high
prices. However, this adjustment is likely to take a few years,
and prices are likely to remain at elevated levels. Global
Insight predicts that oil prices will average above $60 a
barrel through 2008.
Some of the recent spike in gasoline prices can be
attributed to distribution problems with ethanol, which Global
Insight expects will be resolved in the near term. We expect
gasoline prices to maintain a level near $3.00/gallon
nationwide average for the summer driving season and then fall
to around $2.50 per gallon and remain at roughly that level for
much of 2007.
How Much of the Rise in Gasoline Prices Is Due to Price Gouging?
Since 2002, oil prices have tripled and gasoline prices have
more than doubled (see Charts 3 and 4). With two exceptions,
almost all the rise in gasoline prices has been the result of
the rise in oil prices.
In the immediate aftermath of Hurricane Katrina, gasoline
prices did spike. Almost all of this was due to the disruption
of refining capacity in the Gulf of Mexico. This can be seen in
Chart 4 as a rise in the refiners' margins, and was due to
markets bidding up prices in a panic reaction to the refinery
damage. The high prices were required to attract new supplies
from overseas and to send a signal to consumers to reduce
demand. The refiners' margin dropped sharply by late fall, as
refineries were brought back on line, imports responded, and
market fears subsided.
The recent rise in refiners' margins is the result of new
mandates on the use of ethanol in gasoline and the inadequacy
of the current distribution system to keep up with the current
demand. Global Insight expects that margins will fall again as
the system adjusts through improved supplies and moderating
demand. In fact, over the past couple of weeks, refiners'
margins have already begun to come down as gasoline inventories
have risen since late April.
The movement of dealers' margins over the past couple of
years shows no evidence of a systematic rise.
Bottom line: there is very little evidence of systematic
anti-competitive behavior either by refiners or dealers,
despite anecdotes about price gouging right after Hurricane
Katrina.
How Much Are High Gasoline Prices Hurting?
Since 2002, gasoline prices have moved up sharply. However,
between the early 1980s and the late 1990s, gasoline prices
fell on an inflation-adjusted basis (see Chart 5). In fact, gas
prices have only recently reached their 1980 levels, adjusted
for inflation.
More important, if you compare gasoline prices with after-
tax household income, gasoline prices have continued to lag,
even after the recent sharp rises (see Chart 6). Another way of
looking at this is to measure the change in gasoline purchases
as a percent of take-home pay. Here again, while this share has
risen from its average of around 2.0 percent in the late 1980s
and 1990s to around 3.5 percent now, it is still below the
early-1980s share of 4.5 percent.
However, it is important to acknowledge that for low-income
families, the share of take-home pay used for gasoline is
higher than average (possibly twice as high). This means that
the recent rise in gas prices is more of a hardship for these
families.
What Should Congress Do?
While it may be tempting to consider regulatory fixes to
address the current high oil and gasoline prices, additional
regulations will do nothing to solve the fundamental supply-
demand problems in energy markets. On the contrary, there is a
risk that additional regulations could discourage more supplies
of both crude and refined products from being brought to the
market.
Congress could act to reduce the number of grades of
gasoline in the United States market. Over the last 10 years
the number of grades has proliferated. This has resulted in
reduced capacity to manufacture and distribute gasoline, raised
the cost, and reduced industry flexibility.
Congress can ease the medium- to long-term crunch in
gasoline and energy markets by encouraging both the production
and use of fuel-efficient vehicles.
Finally, there is a need for some short-term relief for low-
income families, who have borne a disproportionate burden of
higher gasoline taxes.
Senator Inouye. Thank you very much, Dr. Behravesh. Our
next witness is the President of the National Petrochemical &
Refiners Association, Mr. Bob Slaughter.
STATEMENT OF BOB SLAUGHTER, PRESIDENT, NATIONAL PETROCHEMICAL &
REFINERS ASSOCIATION (NPRA)
Mr. Slaughter. Thank you, Mr. Co-Chairman and other members
of the Panel. I want to thank you for the opportunity to
present NPRA's view on the current gasoline market including
the subject of price gouging.
Our formal statement is an exhaustive treatment of the
refining industry's commitment to serving American consumers.
It talks of such things as the fact that the industry has added
the equivalent of one new refinery a year--in capacity
additions at existing sites over the last 10 years and that the
industry already has announced additions to U.S. refining
capacity between 1.4 million barrels a day, an 8-percent
increase, or even 2 million barrels a day over the next 4
years, which also demonstrates the continuing commitment of the
industry.
Senator Lott. What was the percent?
Mr. Slaughter. It's 8 percent, Mr. Lott. That is a 1.4
million barrel increase. A 2 million barrel increase would be
about 12 percent.
The gasoline market today reflects supply and demand. The
arithmetic is not complicated. What is happening is what the
textbooks say should happen. With domestic demand for refined
products accelerating, outpacing the ability to meet U.S. needs
with domestic supplies, together with ever-increasing global
demand for the same products, market volatility will continue,
at least for the near future. The situation is unsatisfactory,
but it can only be addressed by increased supply. In the
meantime, policymakers must resist turning the clock backward
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.
I want to make very clear to the panel today, that refiners
reject and condemn improper pricing policies. Current gasoline
prices have adversely affected some consumers and the industry
understands their concerns. In an attempt to respond to
consumer dissatisfaction, some policymakers have questioned the
industry's pricing and investment policies. NPRA offers the
following response: Price gouging is a term that by its very
nature is imprecise and extremely subjective. It is extremely
difficult, if not impossible, to define or reduce to statutory
language. Author Thomas Sowell had this to say about defining
price gouging: it means prices higher than what observers are
used to. In other words, prices under normal conditions are
supposed to prevail under abnormal conditions. This completely
misunderstands the role of prices, Mr. Sowell says.
If Federal price gouging legislation is enacted, the term's
inherent ambiguity will inevitably lead to interpretations that
Congress intended to impose price controls. The result will be
that consumers will relive the supply shortages, long lines at
gas stations, and other added costs and inconveniences of the
1970s. NPRA hopes that Congress will continue to reflect on
this history and change its mind about the wisdom of any
policies that result in additional government intervention in
the fuels market.
NPRA and its members understand public and congressional
concern about high gasoline prices. But policymakers should be
cautious about taking any action that suggests that price
controls are the answer to today's gasoline market conditions.
The Nation's 10 year experiment with government intervention
into fuel markets during the 1970s led to many problems.
Consumers were even prohibited from purchasing gasoline on
certain days of the week. That history does not suggest that
price controls are an acceptable template for Congressional or
Administration action this year.
The most effective way to maintain adequate gasoline
supplies at reasonable prices is continued reliance on market
mechanisms, not price regulation or other actions that
interfere with and distort market realities that both refiners
and consumers must face.
Many factors drive the transportation fuels market. Among
these are: geopolitical uncertainties which affect the price of
crude oil, refiners' primary feedstock; increasing global
demand for crude oil; the challenge of complying with
significant specification changes for both reformulated
gasoline and highway diesel; and the rising cost of other
materials and inputs such as natural gas, construction
materials, and labor.
The Nation's refiners operate in an environment in which
all these factors, together with strong demand for gasoline and
other products, cannot be ignored. As always, NPRA members must
continue to concentrate on the very serious business of
providing secure supplies of refined products to consumers even
under the current difficult and challenging market conditions.
The tight gasoline markets of the past several years have
led to dozens of investigations of the 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.
Just to talk about one report in particular, after a 9-
month FTC investigation into the cause of price spikes in local
markets in the Midwest during the spring and summer of 2000,
FTC Chairman Robert Pitofsky, who is a recognized expert in
antitrust law and a Clinton appointee 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.'' We've heard a very similar result from all
of these studies that have been conducted.
To summarize, allegations of refiner price-fixing, gouging,
or other illegal practices are patently false, as repeatedly
shown by the FTC and other Federal and state investigations.
NPRA regrets that the definitive results of these
investigations are rarely announced with the same enthusiasm
and media attention given to news of their initiation.
Thank you, again, for the invitation to appear today. We
look forward to your questions.
[The prepared statement of Mr. Slaughter follows:]
Prepared Statement of Bob Slaughter, President,
National Petrochemical & Refiners Association (NPRA)
Chairman Stevens, Co-Chairman Inouye, and other members of the
Senate Commerce, Science, and Transportation Committee, NPRA, the
National Petrochemical & Refiners Association, appreciates this
opportunity to present its views on the current gasoline market
including the subject of ``price gouging.'' My name is Bob Slaughter,
and I serve as NPRA's President. As you know, NPRA is a national trade
association with over 450 members, including those who own or operate
virtually all U.S. refining capacity, as well as most of the Nation's
petrochemical manufacturers, who use processes similar to those of
refiners. Our testimony today will concentrate on factors directly
impacting the current gasoline market and allegations of ``price
gouging'' which, although almost totally unsubstantiated, have been the
subject of continuing concerns expressed by policymakers and the
public.
Introduction
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, outpacing the ability to meet U.S. needs with domestic
supplies, together with ever-increasing global demand for the same
products, market volatility will continue, at least for the near
future. This situation is unsatisfactory, but it can only be addressed
by increased supply. In the meantime, policymakers must resist turning
the clock backward 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 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 supply and
demand outlook for petroleum products. We will begin with a discussion
of characteristics of the current gasoline market and allegations of
``price gouging.''
Refined Product Market Fundamentals
A discussion of the domestic refining industry must begin with a
description of three fundamental facts that guide refined product
markets. These fundamentals are: (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.
As the chart below clearly demonstrates, the price of crude oil
leads the price of wholesale and retail gasoline.
In addition to the cost of crude oil, the tight balance between
refining capacity and refined product demand must be taken into account
in order to understand price changes. Refiners have been steadily
expanding capacity at facilities in order to keep pace with ever-
growing demand. Over the past 12 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 percent 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 most importantly,
price signals provided by the free market. Increased prices, which
averaged over $3.00/gallon nationwide for a brief period, moderated
demand and attracted both a record amount of refined product imports
and ramped up production from U.S. refineries not damaged by the
storms. 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.
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 percent of the cost of a gallon of gasoline, refining 22
percent, taxes 19 percent and distribution and marketing 4 percent.
Second, 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 percent of the Nation's total capacity,
and large integrated companies own and operate only about 10 percent of
retail outlets. (For comparison, Archer Daniel Midland, the largest
producer of fuel ethanol in the U.S., controls nearly 25 percent of the
U.S. ethanol market.) No one company, or group of companies, sets
gasoline prices. Rather, in the U.S. refining industry, the laws of
supply and demand drive competitive behavior and determine pricing.
Refiners Reject and Condemn Improper Pricing Practices
Current gasoline prices have adversely affected some consumers and
the industry understands their concerns. In an attempt to respond to
consumer dissatisfaction, some policymakers have questioned the
industry's pricing and investment policies. NPRA offers the following
response to these allegations:
``Price Gouging''
``Price gouging'' is a term that is by its very nature imprecise
and extremely subjective. It is extremely difficult, if not impossible,
to define or reduce to statutory language. Author Thomas Sowell had
this to say about defining ``price gouging'': ``. . . prices higher
than what observers are used to are called `gouging.' In other words,
prices under normal conditions are supposed to prevail under abnormal
conditions. This completely misunderstands the role of prices.''
If Federal ``price gouging'' legislation is enacted, the term's
inherent ambiguity will inevitably lead to interpretations that
Congress intended to impose price controls. The result will be that
consumers will relive the supply shortages, long lines at gas stations
and other added costs and inconveniences of the 1970s. NPRA hopes that
Congress will continue to reflect on these facts and change its mind
about the wisdom of any policies that result in additional government
intervention in the fuels market.
NPRA and its members understand public and Congressional concern
about high gasoline prices. But policymakers should be cautious about
taking any action that suggests that price controls are the answer to
today's gasoline market conditions. The Nation's ten-year experiment
with government intervention into the fuel market during the seventies
led to gasoline shortages and long lines at gas stations. Consumers
were prohibited from purchasing gasoline on certain days of the week.
That history does not suggest that price controls would be an
acceptable template for Congressional or Administration action this
year.
The most effective way to maintain adequate gasoline supplies at
reasonable prices is continued reliance on market mechanisms, not price
regulation or other actions that interfere with and distort market
realities that both refiners and consumers must face.
Many factors drive the transportation fuels market. Among these
are: geopolitical uncertainties which affect the price of crude oil,
refiners' primary feedstock; increasing global demand for crude oil;
the challenge of complying with significant specification changes for
both reformulated gasoline and highway diesel; and the rising cost of
other materials and inputs such as natural gas, construction materials
and labor.
The Nation's refiners operate in an environment in which all these
factors, together with strong demand for gasoline and other products,
cannot be ignored. As always, NPRA members must continue to concentrate
on the serious business of providing secure supplies of refined
petroleum products to consumers even under the current difficult and
challenging market conditions.
Federal and State Gasoline Market Investigations
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.
The Attorney General of Nebraska recently 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.''
To summarize, allegations of refiner price-fixing, ``gouging,'' or
other illegal practices are patently false, as repeatedly shown by the
FTC and other Federal and state investigations. NPRA regrets that the
definitive results of these investigations are never announced with the
same enthusiasm and media attention given to news of their initiation.
Domestic Refining Capacity: Working To Meet Demand and Improve the
Environment
One-hundred-forty-eight 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 17.335 million barrels per day (b/d) and, as
previously stated, often operate at extremely high utilization rates,
which approach 98 percent during the peak driving season. These figures
are far above the 82 percent average utilization rate of other
manufacturers. Despite these significant efforts, U.S. product demand
continues to outstrip domestic supply. Imports now account for more
than 10 percent 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 percent 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
10 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. Secretary of Energy Bodman recently stated that he expects 2
million barrels/day of new U.S. refinery capacity will be added over
the next 3 years. With these expansions, total domestic capacity will
reach an all time high as shown in Attachment I. It remains doubtful,
however, that even these expansions will be sufficient to meet expected
U.S. demand growth; that means that the Nation will continue to depend
on imports of finished product and gasoline blendstocks.
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
difficulty of attracting sufficient investment in one of the world's
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, and congratulates Congress on efforts
to encourage capacity additions.
The Refining Industry Is Making Large Investments To Expand Capacity
and Output; Mergers and Acquisitions Have Resulted in Increased
Capacity and More 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 10 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. 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.
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.
Without mergers and acquisitions, some of the individual refineries
now operating might not have remained economically viable and capacity
expansions and other improvements 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 nationwide 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.
Replacing MTBE With Ethanol Has Affected Gasoline Markets this Year
Recently, refiners undertook and completed annual turnarounds to
prepare for the changeover from wintertime to summertime fuel blends. A
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
increase 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 this year.
Although The Energy Policy Act of 2005 eliminated the 2 percent
oxygenate requirement for Federal RFG, the Act did not provide
defective product limited liability relief for MTBE which the industry
urged Congress to enact. Further, the rules implementing the removal of
the 2 percent oxygenate requirement were published by EPA just this
month, leaving refiners in regulatory limbo regarding RFG and the 2
percent 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 time frame. 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
percent 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 would impact supply.
The result was considerable (but clearly anticipated) pressure on
ethanol supply and fuel distribution infrastructure. Unfortunately,
many who ignored industry's call for help on MTBE liability are now
questioning the actions of the refining industry as it attempts an as
smooth as possible transition to summertime RFG while complying with
the renewable fuels (ethanol) mandate also enacted in the Energy Policy
Act of 2005.
A substantial increase in demand for ethanol due to MTBE
replacement and the mandate have 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 as 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 be fully embedded in the
policymaking 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
impact of these multiple fuel and stationary source requirements.
Taking Fuel Supply for Granted
NPRA 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 percent 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 (Attachment III) and
Fuels Timeline (Attachment II) 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 nationwide may be counter-productive, and certainly no such
change would have a positive impact now or during this summer. Boutique
fuel 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 economies is a net positive when compared to the
alternative--a 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) the use of MTBE and/or ethanol, or
both. Areas that needed 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 which have not yet been fully implemented. Clean Air Act
Section 211(c)(4)(C) was amended by the Energy Policy Act of 2005 and
requires a joint effort by 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 Pub.
L. 109-58). Also, before granting a waiver of Federal preemption, the
Administrator of EPA is now required, after consultation with the
Secretary of Energy and after notice and comment, to determine 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 before approving
the new fuel. 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 also includes another provision
addressing boutique fuels. Under this provision, EPA may not approve a
motor fuel in a new State Implementation Plan 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 State
Implementation Plans 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 also 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 time frame could very well result in additional,
unwarranted supply constraints. Existing requirements already provide
significant challenges due to the impact 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 that result 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 percent. 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 boutique fuels legislation that
changes existing specifications. Any new legislative menu of motor fuel
choices (which NPRA does not support) must 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 and Suspend the Tariff on
Imported
Ethanol
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.
NPRA urges Congress to consider at least a temporary suspension of
the 54 cent per gallon protective tariff imposed on most imports of
ethanol into the United States. Ethanol prices have more than doubled
over the past year, and the President of ethanol's trade association
testified 2 weeks ago that the ethanol price was $2.90 per gallon,
compared to only $2.38 per gallon for gasoline. Amazingly, on Friday,
May 19th the ethanol prices were even higher: $3.30-3.40 in New York
Harbor. Greater openness to ethanol imports should be adopted as U.S.
policy because those imports could act to restrain runaway price
inflation of ethanol such as that we are currently seeing.
The ethanol lobby argues that there is no reason to suspend the
tariff because additional imports are not available. If so, no damage
will be done to ethanol if a suspension is approved. But NPRA believes
that imports will materialize if it is clear that the prohibitive
tariff is suspended. Ethanol currently enjoys a 52 cent per gallon
Federal subsidy, numerous state subsidies, a mandate that all or nearly
all of the ethanol produced in the U.S. be purchased by refiners
regardless of its price, and a prohibitive tariff to block imports.
Clearly, tariff suspension should be tried as one way to reduce fuel
prices paid by U.S. consumers.
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
backward 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 canceled 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 5 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 get a
permit for 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
June 1. 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 almost gone.
-- 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.
Senator Inouye. Thank you very much, Mr. Slaughter. And
now, Dr. Mark Cooper, Director of Research, Consumer Federation
of America.
STATEMENT OF DR. MARK COOPER, RESEARCH DIRECTOR, CONSUMER
FEDERATION OF AMERICA (CFA)
Dr. Cooper. Thank you, Mr. Co-Chairman, Members of the
Committee. Same facts, different story. I do not think all is
well in the oil industry, but today let me start by pointing
out that taken at face value, the FTC has produced an analysis
that makes it clear no American consumer in his or her right
mind would want to rely on the oil industry to deliver a vital
commodity like this.
Its routine business practices cannot and will not deliver
sufficient refinery capacity and adequate inventories to
protect the American consumer from these vicious price spikes,
which also just happen to be associated with sky rocketing oil
company profits. They run their refineries at 90 plus percent
capacity, and keep very slim inventories even though the
ability of demand and supply to respond to disruptions in
prices are virtually nonexistent in this industry. The average
American manufacturing sector has four times as much spare
capacity and inventory for commodities with infinitely higher
supply and demand responses.
The oil companies do not have to manipulate or collude.
They just have to exploit the tight market condition that is
the result of their profit, maximizing business decisions.
According to the FTC, last July the refining industry had some
bad days before Katrina and Rita struck. Little hurricanes,
heat, lightening, fire, power failures, water cooling system
failures, and other mysterious maladies reduced refining
capacity. The industry reacted vigorously by raising prices.
The domestic spread only went up a dime in July and August.
That only cost American consumers $3.3 billion dollars. Then
big hurricanes hit and they reacted even more swiftly, raising
prices even higher.
Supply eventually responded. The cost to American
consumers--another $7 billion dollars. And of course, almost
all of that increase went to profits. Domestic refining profits
for the year were up by $10 billion dollars. Exactly those
price increases. The market worked. The consumers paid more and
the companies made more.
This spring, the industry was visited by another plague:
spring cleaning. It could not handle the switch over because it
had insufficient spare capacity and it mismanaged
reformulation. The industry reacted swiftly, increasing the
domestic spread even higher than at the worst of Katrina, as
far as I can tell, costing consumers another $12 billion. This
is the oil industry at its best, according to the FTC.
Responding to a tough situation on every point: inventory
capacity, cost, profit, refinery sales, and concentration, the
FTC has presented a positive picture that misleads. At its
worst, I suggest the business strategy of consolidation and
reduction of excess capacity has fundamentally altered the
structure and behavior pattern of this industry, eliminating
competition from market share based on price. They don't
collude or manipulate, they just exploit.
Things have gotten so bad in the largest gasoline market in
the world by far, ours, that even the EIA recently pointed out
that tight U.S. gasoline markets may be pulling up the price of
crude oil. In the New York Times, recently noted in an article
headline, ``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 crude oil. That works out to 30 cents a gallon. When
the domestic spread goes from 30 cents--up 30 cents a gallon,
then 50 cents a gallon, when refining profits go up $10 billion
in a year, when the trading premium is 30 cents a gallon, it
signals that there's more consumer surplus, more rent to be
extracted from the American consumer by the global cartel.
And by the way, when the cartel raises its price, the oil
companies profit too. Rich American consumers have disposable
incomes that the oil companies and OPEC can tax. That is what
you heard looking at those real disposable incomes. Now the
real rub comes when Wall Street Journal reported a conversation
with the CEO of Exxon. Exxon, quote, ExxonMobil Corp says, ``it
believes that by 2030, hybrid gasoline, and electric cars, and
light trucks will account for nearly 30 percent of the newer
vehicle sales in the U.S. and Canada. That surge is part of a
broader shift toward fuel efficiency that Exxon thinks will
cause fuel consumption by North American cars and light trucks
to peak around 2020 and then start to fall.''
``For that reason, we wouldn't build a grass root refinery
in the U.S.,'' Rex Tillerson, Exxon's Chairman and Chief
Executive said. Exxon has continued to expand the capacity of
its existing refineries. But a new refinery from scratch, Exxon
believes would be bad for long term business. I would add, good
for consumers.
Tillerson, in his annual report and the other companies
call it capital discipline and with $50 billion of new money in
his pocket, cash, and Treasury stock garnered in the last 5
years, over $50 billion, he can afford to wait. I call it, not
capital discipline, but exploitation and suggest that consumers
cannot wait for 14 years or 24 years for relief.
It's time to stop looking for collusion and manipulation
and start reducing exploitation. The $20 plus billion extracted
from consumers in increased domestic spread, over the last 11
months, could have built two million barrels per day of
refinery capacity. That would eliminate the tightness in the
refining sector. It could put billions of gallons of gasoline
into a strategic product reserve that could provide the cushion
we need to absorb these shocks. The industry won't do it. But
there is legislation in Congress that would.
In the long run, the only way for the American consumer to
escape from this miserable state is if we double the fuel
efficiency of our vehicle fleet much more quickly than the oil
industry anticipates, and back out a couple of million barrels
of oil with alternatives.
A bill requiring reduction of 10 million barrels per day
has been introduced in the Senate. It does not rely in any way,
on the oil companies. Smart move. They're part of the problem,
not the solution. There is one way that they might contribute,
however. If you need some money to fund these programs, you can
find it in the $100 billion of excess profit sitting in oil
company treasuries, which their capital discipline does not
allow them to put into expanding refinery capacity or
increasing inventories. You have the means to fix this problem.
You can find the resources. It's time, after 6 years of a
roller coaster and a rachet, for Congress to take some
aggressive serious steps to serve the American gasoline
consumer.
Thank you.
[The prepared statement of Dr. Cooper follows:]
Prepared Statement of Dr. Mark Cooper, Research Director,
Consumer Federation of America (CFA)
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 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 5
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 5-years
between 1995 and 1999. More importantly, 4 of the 5 highest years for
profit in the oil industry since the Arab oil embargo of 1973 have
occurred in the past 6 years. I have submitted for the record our study
of oil industry profits over the past two decades, which demonstrates
over $100 billion 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.
---------------------------------------------------------------------------
\*\ The information referred to is retained in Committee files and
is available online at www.consumersunion.org/profitscover.pdf.
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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 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.
The most obvious indicator that market forces are working against
consumers can be seen in the ``Domestic Spread'' over the past 6 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.
---------------------------------------------------------------------------
\*\ This report is retained in the Committee's files and is
available at http://illinoisattorney
general.gov/consumers/natural_gas_report.pdf.
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Recommendations
There are no short-term solutions, but I must remind you that the
American gasoline consumer has been afflicted by this market for 6
years. If we had started working on effective solutions 6 years ago, we
could be well into the mid-term of a long-term policy shift.
Policymakers 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
Attorneys General to monitor the structure, conduct and
performance of gasoline markets, with an emphasis on unilateral
actions that raise price.
To address long-term fundamental change to 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
policymakers to take steps to build a better future for American
consumers by addressing market who has 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.
Senator Inouye. Thank you very much, Dr. Cooper. And I will
arbitrarily set aside 10 minutes per Senator. Senator Dorgan?
STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. Mr. Chairman, thank you. I came intending
to ask a lot of questions. I think I'll use a portion of my
time, perhaps a major portion of it, responding and making a
statement if I might.
Last evening, I read the Federal Trade Commission report
and I don't even know where to begin. Obviously, I'm
disappointed. I think this is an Agency that has lost its
teeth--a toothless Federal Agency. It reminded me of the
hearings that I chaired when I was chairing the Subcommittee in
Commerce dealing with Enron and we were told, don't worry, be
happy. This is the market system. The market system will
correct all of this.
It turns out, the more we unzipped the innards of what was
going on, we discovered it was the market system plus criminal
behavior. And that criminal behavior bilked folks on the
western part of this country out of perhaps $10 billion or
more. And so, the market system--we keep hearing the market
system. The fact is, the market system isn't working very well.
Chairman Majoras and the Federal Trade Commission took a
look at this stream of energy issues and only looked
downstream. Started at the refinery, looked downstream, forgot
to look upstream, didn't look at the oil industry, you only
looked at half of the body of water here. You looked at
refinery and downstream, you didn't look upstream.
And let me just describe how this all starts. One, OPEC
Ministers sit in a room with the door closed and decide how
much they're going to produce and how they want to affect
price. Two, the oil companies, now with multiple names--you
know they've all merged. The oil companies are bigger and
stronger from blockbuster mergers and have more raw muscle in
the marketplace. And three, the future's market has become an
orgy of speculation. And those are the three elements that have
a profound influence on the price of oil and gasoline.
And I would just commit again, that the Federal Trade
Commission missed the entire upstream portion of it. Exxon has
been mentioned here. Dr. Cooper, you mentioned ExxonMobil.
Again, two names. Exxon and Mobil decided to get married and
so, it's ExxonMobil. Exxon Mobil--$36.1 billion in profits last
year. It was announced recently that their departed CEO has a
retirement package of about $400 million. People say, well
that's justifiable. Look at how well the company has done. Yes,
well the company has done that well because of these enormous
profits. The question is, did anybody do anything, for example,
when in 2004 the average price of a barrel of oil was $40 and
it's now $70, did anybody who was running Exxon do anything to
affect that? No. They just rode the wave and got lots of money.
Exxon--$36.1 billion. What's it doing with that money?
About a third of it is being used to buy back their stock.
That's not finding additional energy supplies. Another portion
of it is being used to, as Business Week described in the
Business Week magazine: Drill For Oil on Wall Street. There are
no seismic crews looking for oil on Wall Street. There's no oil
on Wall Street. Drilling for oil on Wall Street is simply
trying to search for additional opportunities for mergers and
greater concentration, which is antithetical to the interest of
the American consumer.
So people say, well the oil industry is justified with its
income, because it's going to use it to sink back into the
ground to find additional supplies. Expand supply and
therefore, reduce price or build additional refineries.
Take a look at what the major companies are doing with
these profits. Just take a good hard look and then ask yourself
whether it's in their interest to do things that bring down the
price of a barrel of oil? It is not in their interest, at this
point, they're making out just fine, thanks. But all the gain
is on the side of the major oil companies. All of the pain is
on the side of the American consumers and so, we will have
people come to our tables again and say, do nothing. Be happy,
the market system will work just fine. Well the fact is, the
arteries of the free market system are plugged. When the
arteries are clogged and plugged, the system doesn't work.
Now, I want to ask just two questions in the time I have
remaining and then make a couple of other comments. Number one,
Chairman Majoras, why did you not look upstream? You indicated
that the price of oil has a significant impact on the price of
gasoline. You also talked about Hurricane Katrina having some
impact and I agree, it did. But that impact was relatively
short lived and the price of gasoline is now around $3. And the
price of gasoline before Katrina even formed in the Gulf, was
very high. So, if oil had a significant part of this, why did
you not look upstream rather than just prefer to look
downstream?
Ms. Majoras. Thank you, Senator Dorgan. The reason that we
decided to look from the refinery level down, is because we
were asked to look at manipulation and we were asked to look at
gouging. We know a lot about this industry and it's currently
structured today. As you put it, the crude oil production is
heavily, heavily influenced by OPEC and OPEC setting the price
of a barrel of oil, and we already know that.
But what we also know is, that the crude oil production
side of this is highly unconcentrated. The HHI, which is the
measure we use for concentrated markets, is in the 100s. It is
really. And even the large companies of the U.S. combined, have
a very small percentage of crude oil production. Countries like
Russia, countries in the Middle East, and so forth control much
more, even individually, of the supply than do the large oil
companies. So having 6 months to look at an entire industry and
looking at where we thought manipulation would be most likely
to be found would be where supply is tighter, we started with
refinery level and went down.
Senator Dorgan. Let me ask a question about the crude oil
stocks if I might. It's interesting to me, we have all of this
discussion about the market system, you know the markets. And I
use to teach economics, I think the free market system is the
best allocator of goods and services, by far, that I'm aware
of. But it needs a referee. Occasionally the free market system
doesn't work.
Judge Judy on TV, a somewhat out of sorts television judge,
makes $25 million and the Chief Justice of the Supreme Court
makes what--$180,000? The market system? I guess, but sometimes
there are bizarre results from the market system. Or, a third
baseman in baseball makes the equivalent of 1,000 high school
teachers. You know the market system. But, you need a referee.
Especially with something that is as important to all
Americans, like the price of gasoline and the price of oil,
that you need a market system that works with a referee that's
looking over their shoulders.
My feeling is we have completely toothless tigers these
days in terms of regulation. But crude oil stocks a year ago,
May of 2005, 334 million barrels, this is the crude oil stocks
that are referenced week by week, 334 million barrels a year
ago, 346 million barrels now. That is May 12, 2006. And as you
look at the pattern of crude oil stocks increasing, if the
market system works, why would you not see a decrease in the
price of gasoline?
Dr. Behravesh. Would you like me to answer that question?
Senator Dorgan. That would be fine, Doctor.
Dr. Behravesh. I think there are a couple of factors going
on here. One is, that even with those stocks, demand has been
growing very strongly in the U.S. and China. But in addition to
that, so you've got the market fundamentals----
Senator Dorgan. But there's no shortage.
Dr. Behravesh. I understand that, Senator. The market
still, is quite tight. If you look at those stocks as a percent
of overall demand, they're very small. And on top of that,
you've had what some people refer to as the fear factor, mainly
concerns about not just hurricanes, but the events in Iran, the
events in Iraq, and Nigeria, and Venezuela, a variety of
factors that have created uncertainty and jitters in the
market.
So in that sense, you're right that the inventory situation
isn't being fully priced in. But I think it's being offset to
some extent, by some of these worries in the marketplace.
Senator Dorgan. So you see? But you understand what I'm
saying, I look at carryover stocks or rather, the crude oil
stocks and I say, they're up almost 10 million barrels from a
year ago and the price of gasoline goes up, up, up. You know,
we went down to $2 a gallon post-Katrina. Now, we're up around
$3 a gallon, continuing to go up and the crude oil stocks are
up. It seems to me, the market doesn't work for the American
people very well in this circumstance. Would you agree?
Mr. Raymond was before us some while ago and he told us how
wonderful things were. I guess from his vantage point, things
were going pretty well. Would you agree that it's in his
interest and his company's interest to continue to see robust
pricing?
Dr. Behravesh. I won't pass judgment on that, Senator.
Senator Dorgan. Well, let me agree with my own assertion
then. The fact is, his compensation depended on it. His
company's stock price depended on it. And so, they don't have
any interest in making this work. Dr. Cooper?
Dr. Cooper. I wanted to add one point, because you heard
about the boom in commodities starting about 3 years ago. And
you heard about the fear factor. Now, fear--that fear factor
plays out in those commodity markets, right? If you look at
that commodity market, the regulated exchanges, we don't know
what goes on in the unregulated over the counter market. We
don't have authority to oversee that. There's legislation
before this body that might do that.
The increase in the number of dollars chasing the same
amount of crude oil has been phenomenal. Almost a tenfold
increase every month, $7 or $8 billion or more comes into that
commodity market, chasing the same quantity of physical goods.
If you're an economics professor, you know the definition
of inflation. The first one you teach, is too much money
chasing too few goods. There's a lot of cash that is constantly
swung into that market that constantly extends the long
positions and drives up the price, creates volatility which
makes it harder, as you heard, for people to part with those
commodities. They might as well sell it tomorrow and when
you're sitting on $50 billion in cash, there's no hurry to sell
it. You have that process going on.
Senator Dorgan. Mr. Chairman, one observation, I don't want
this fear factor thing to get around. Fear Factor is sort of a
questionable television show that pays people to eat maggots
and that sort of thing. You've all seen that television program
``Fear Factor'' here, cannot be explained, it seems to me to
short circuit a market system that hurts consumers and helps
the oil industry. That is not a satisfactory explanation for
me.
Dr. Behravesh. Mr. Chairman, can I just respond? I
completely agree with you, Senator Dorgan. My only response was
that they're offsetting factors here. I don't use the Fear
Factor to explain what's gone on in the last 3 years. It plays
a role on a temporary basis in markets. But, it does play a
role. That's really the only point I'm making.
In terms of the commodities markets, I think certainly
there has been some speculation. Speculators may have played a
role, not just in oil markets, but in copper markets, in steel
markets, etc. But again, sustained price rises are driven by
the fundamentals of demand and supply, where demand worldwide
for oil and other commodities has been rising very rapidly in
the last 3 years.
Senator Inouye. Thank you. Senator Lott?
STATEMENT OF HON. TRENT LOTT,
U.S. SENATOR FROM MISSISSIPPI
Senator Lott. Thank you very much. I appreciate you
allowing me to go next, even though under the pure early bird
procedure, I'd be a little bit later on. But just on behalf of
Senator Stevens, who did have to go to an urgent meeting at the
White House, thank you all for being here.
I found your testimony certainly, very interesting. Let me
ask a few questions, first. Madam Chairman, I'm interested in
the FTC's role in monitoring pricing and I'd be specifically
interested in how you think Federal laws on price gouging would
affect the marketplace?
Ms. Majoras. OK. Thank you, Senator Lott. A couple of years
ago, the FTC began a system in which we monitor weekly prices,
weekly average retail prices in 360 cities across the United
States and also, I think it's about 30 wholesale markets across
the United States. So, we are monitoring prices on an ongoing
basis. And if we see something anomalous, something that's a
price spike, or something that's not seeming to stay with the
average, we take a look to find out what has happened. And that
might give us an indicator whether there might be anti-
competitive conduct going on, which we could then further
investigate under an antitrust investigation. So, that's one
way that we're monitoring prices.
In terms of your question on price gauging, Senator, I can
assure that we have been very concerned about consumers who are
suffering great hardship from these prices, certainly who did
after an emergency like the hurricanes last fall, without
question.
Our concern about price gouging legislation though, has
been the following, if--and this was confirmed by our
investigation, where we actually went out and we talked to
retailers. If we have such a thing in place, and it is enforced
vigorously, and by that I mean so that all retailers or
refiners and the like, would really have to take this into
account in their pricing. And they can't--they would then be
very worried about raising the price in response to an
emergency when supply is very, very low. And we often talk
about price----
Senator Lott. That's bad?
Ms. Majoras. It's bad for the following reason and we
learned this in the 1970s, because price is not just a factor
of cost. It's also a regulator of supply and demand. And when
supply is tight, if you don't raise the price, you just simply
run out of gasoline. And that is exactly what these retailers
told us.
Many of them did not know when their next supply was coming
in, did not know if they were going to run out of gasoline.
What they knew, was that consumers were coming in and topping
off their tanks and worrying about this. And so, they raised
the price in an effort to try to temper that demand, so that
they wouldn't run out of gasoline.
Senator Lott. I don't believe that was always the
motivation. Let me go to a second question here, 26 states I
believe or thereabouts, have price gouging laws. Sixteen have
taken some sort of action in this regard. Do you know, or have
any statistics on that? What has been the number and the
success rate, and has it really been aimed at oil companies,
service station owners, distributors? Where are they seeming to
indicate that maybe there is concern, if not a real problem?
Ms. Majoras. Well, we talked to state attorneys general
over time, they have applied them, as I understand it, to other
products. For example, I think recently, generators. But what
we looked at for purposes of this study, was we looked at what
they did in reaction to the prices after the hurricanes last
fall. And what we found was that 9 states brought a total of 99
cases against price gouging.
Senator Lott. I presume a lot of them are still pending?
Ms. Majoras. Some of them are still pending.
Senator Lott. Were they across the board in terms of was it
against the service station owners, or operators, or
distributors, oil companies? Against whom?
Ms. Majoras. These were primarily against retailers and I
believe a few against wholesalers. Most of them have been
settled, as I understand it. None have been litigated to a
result. Some are still pending.
Senator Lott. Doctor, thank you very much for being here.
You mentioned something there, in the last part of your
comments about the speculators. There is a feeling in the
industry that a lot of this price increase has been by
outrageous speculators just driving up the price for their own
financial benefit. Is there something--there is no reason to
ask you if that's true. I'm convinced it is. So, you couldn't
affect my thinking one way or the other.
The question is, is there something we should do in that
area? Should we have greater oversight? You know, the stock
market when they have some kind of a blowout, they have some
ceiling. They stop it. Is there something we should do there?
Dr. Behravesh. That's a very good question, Senator Lott. I
think what happens is, that often in these situations--it
happened in the stock market, to some extent it's happened in
the housing market, now it's happening in the commodities
markets--toward the end of that boom, speculators jump onboard
and push prices up even more. We saw it, as I said, in the
stock market, the housing market, we've seen it recently in the
commodities market.
How do you regulate that? I think it's very tough.
Senator Lott. Does somebody in the government oversee that?
Dr. Behravesh. As far as I know, the CFTC has some
regulations.
Senator Lott. Do they have some jurisdiction? I would like
to get some information about, do we need to strengthen their
hand in this area?
Dr. Behravesh. That's certainly something worth looking at.
But I think that this froth, in the market for commodities has
been a factor. It's very important to say, that it's not just
oil. But the commodities markets in general.
Senator Lott. Anything that you could provide to me later,
in maybe looking at how we could maybe have oversight, a little
more action in that area. I'd be interested in your
professional opinion.
Dr. Behravesh. We'd be happy to do that.
Senator Lott. Mr. Slaughter, I recently was meeting with a
representative of a major oil producing company, giving him a
hard time for not putting more oil into the market and sending
it to the United States. He said, it wouldn't do any good. You
couldn't refine it anyway. Now when I talked to refining
people, I said, why would we build more refineries?
Well you know, we ought to be having a hearing at some
point on what Congress has not done, or what Congress has done
wrong over the last 30 years, that's gotten us into the fix we
are in. Because I think we are a huge part of the problem. Now
these statistics, you give 8 percent increase to maybe--
baloney. We need more modern refining capacity. But we haven't
had it. Why?
Well first of all, they say, well you can't make enough
money in refining. But I think a lot of it's us, the law. I
mean, there were taxes, permitting, processes, paperwork,
environmental considerations, 25 percent of the cost of a new
refinery is caused by all the crap you have to go through to
build one. Now I think we need additional refining capacity. Do
we?
Mr. Slaughter. Yes. We do, Senator.
Senator Lott. Well, what can we do to get it?
Mr. Slaughter. Well, you've made a number of the important
points. We would welcome the hearing that you're talking about,
because we do believe that significant costs have been added to
the building of new refineries or even expansion of existing
capacity by Federal law, environmental requirements, zoning
requirements, and in many instances NIMBY reactions. And we
think Congress should focus on encouraging expansion in the
refinery industry.
As part of the EPACT bill, there is one provision that does
encourage expansion of refineries through some expensing
provisions of the cost of the expansion for few years. But
there's an endemic problem here. Now, the industry has been
adding capacity. You know, the industry has added the
equivalent of one refinery a year, for the last 10 years.
ExxonMobil itself, has added the equivalent of 1 every 3 years.
Senator Lott. When was the last time we had a new refinery
built in America?
Mr. Slaughter. No new refineries have been built in the
U.S. since 1976. But the capacity has been increased several
times, Senator. There's no difference between the capacity in
an extension, and a capacity in a new refinery, except you get
it faster and you get product out of it faster.
Senator Lott. I just get so fired up about this whole area.
Maybe there are not a lot of cases of price gouging. I think
maybe Dr. Cooper's word exploitation is more accurate. Clearly,
some of the things that have happened after the hurricane are
absolutely outrageous and indefensible.
I believe the collective judgment of American people and in
my state included, was much wiser than the collective judgment
of the people in this room. They know when something is not
quite right. They get an instinctive feeling and the
justification for what has gone on in gasoline prices and
staying up there, is very hard to explain.
I don't know if I've got enough time, but I've been very
curious about the rise in the price of diesel fuel, for
instance. Why is that? It used to be a lot cheaper than
gasoline. Now all of a sudden, it's right up there and that
also isn't moving, they say. Is it because we're refining a lot
of it in the Gulf Region and some of the refiners have not
gotten back online? There's something really fishy here. And
when diesel prices go up in 1 week, after the hurricane, 50
cents a gallon. And what's curious to me, is how?
You know market systems. I know all about supply and
demand. I took Basic 101 Economics when I was in college. It's
used as a cover to defend bad conduct, in my opinion, in a lot
of instances. When they jump up instantly, the price of a
barrel of oil goes up $5 dollars in a day and boom--the price
of gasoline at the pump goes up five cents a gallon that day.
Now, I know it takes time to work through the market here and
how about the companies just taking a little less profit while
these anomalies work themselves out? Instead, there's been
explosion right across the board.
My message to all of you, and to the oil companies in
particular, I don't want to do something crazy. I voted against
every regulatory effort in this area for 30 years. But the
American people are agitated about this and there better be
some restraint shown, or the consequences are not going to be
pretty.
Do you want to respond Mr. Slaughter?
Mr. Slaughter. I just want to say particularly on diesel,
there's a worldwide explosion in diesel demand. All over the
world, there are no imports available. Largely, no imports
available of diesel after Katrina or any other time. The higher
prices after Katrina brought in a record number of gasoline
imports. That took care of the supply problem on the gasoline
side. In diesel, that's a much harder equation, because the
imports are just largely not available, sir.
Senator Inouye. Thank you very much. Senator Pryor?
STATEMENT OF HON. MARK PRYOR,
U.S. SENATOR FROM ARKANSAS
Senator Pryor. Thank you, Mr. Chairman. I ask that my
statement be placed in the record.
[The prepared statement of Senator Pryor follows:]
Prepared Statement of Hon. Mark Pryor, U.S. Senator from Arkansas
Throughout my career in public service, I have always believed that
a lot of consumer protection has been about protecting the little guy--
the person who doesn't have the resources to stand up to large
companies who would try to take advantage of him.
There is undoubtedly a large consumer protection aspect to the job
of the FTC--price gouging is a good example of the little guy versus
the big corporation.
There is nothing a person can do to take reasonable steps to
protect himself from abuses by members of the oil and gas industry,
should they choose to abuse the market. The government has to do it for
them. We have to look out for the little guy in this case.
From what I can read in the recommendations of the FTC's price
gouging report, the Commissioners don't necessarily believe in this
same type of consumer protection philosophy. It seems they don't
believe that the government has any role in protecting consumers from
massive run ups at the pump, even during times of emergency.
You can probably imagine how this notion that consumers should
react to massive price spikes in gas markets by buying less gas doesn't
sit well with my constituents.
We have all been working very hard on the demand side of this
equation--I, Senator Cantwell, and other Members of this Committee have
worked very hard to find ways to conserve and find alternative sources
of energy to provide some relief from high gas prices. Just last week I
introduced bipartisan legislation with Senator Lott that would raise
and reform CAFE standards.
But that doesn't mean we absolve ourselves of all responsibility to
make sure consumers are treated fairly now.
In Washington, D.C., you can take the Metro or ride the bus, but if
you've ever been to Arkansas, you would know that we don't have a
metro. Outside of the larger cities, we don't have many buses.
Consumers don't have a choice. They have to buy gas. They have to
buy gas to get to work. They have to buy gas to pick up their kids
after work. They have to buy gas to run their farms. They have to buy
gas to get their products to market. They can't wait for prices to go
down and drive less in the meantime.
They don't feel like they are getting a fair shake, and I tend to
agree with them.
The oil and gas industry is very different than other manufacturing
industries, and I don't feel that competition in the oil and gas
industry has the same pricing effects as competition in other
industries.
In most other industries, consumers have many choices. They can
choose between many brands based on quality, price, looks, etc. Or they
can choose not to purchase a product if the price is too high or the
product is not a necessity.
In the oil industry, consumers do not have these choices. The
distinctions between buying gas at Exxon and the Corner Pantry are
little and often not distinguishable. Similarly, consumers do not have
the choice to not buy gas.
Competition within the industry does not appear to put the same
downward pressure on prices as in other industries. In other
industries, consumers can choose not to buy the product. In doing so,
they force companies to bring down their prices.
In this case, the only recourse consumers have is government
action--they cannot choose to not buy the product, and are forced to
buy the product at whatever price the industry determines.
This is unacceptable, and I am committed to finding both short term
and long term solutions to this problem.
I thank the witnesses for appearing this morning and look forward
to hearing their testimony. Thank you, Mr. Chairman.
Senator Pryor. Let me first say a huge thank you to the
Federal Trade Commission's professional staff. I know there are
3 or 4 of them here in the room and I know they worked a lot of
hours on this and had about 6 months to do this. And I know
they were very diligent. And so, I appreciate them. And I know
even last night, around midnight, we got an email from one of
them. So, I know they've been burning the midnight oil to try
to get this report to us. And so, I want to thank them for
that.
Chairwoman Majoras, let me start with you if I may. And I
want to just ask about competition in the oil industry. The way
I perceive the oil industry is it's different than most other
industries. Oil, gasoline for consumers is a necessity. We
don't have a choice on whether we're going to buy it or not. We
pretty much have to buy it. And I think that our consumers in
Arkansas really feel the pinch, just like Senator Lott said a
few moments ago.
It's very, very hard for people to fill up their tank and
pay about $3 a gallon and then open the business page and see
the extraordinary profits the industry is making, what they're
paying existing CEOs, et cetera, et cetera. It's very, very
hard for people to swallow that.
The other thing about the oil industry, which is very
unusual in my view, is that what we've seen in the last year or
two, is that as the cost of the raw materials have increased,
we've seen the industry's profits multiply. And that's very
unusual. I'm not aware of any other industry where you see
that. In most industries I'm aware of, when you see the raw
materials increase, you see their profit margins decrease
because it's a competitive marketplace and they're all feeling
the competition.
So, what other industry behaves like the oil industry? Is
there a similar industry out there, that you are aware of, that
where the raw materials cost increases, that their profits
multiply?
Ms. Majoras. Well I think, Senator Pryor, that it depends.
There are some industries that do act like the oil industry at
various parts of the chain. So for example, right now while
we're seeing increased global prices for barrels of oil, which
of course is a commodity, we're similarly seeing it in things
like timber. Because the same countries like China and India,
who are developing so quickly and using more oil, are also
using more timber. So in some ways, it's reacting that way.
But there's no question, Senator, that particularly given
that we have the OPEC cartel at the production end and they're
setting the price, not necessarily based on the cost of
extracting that oil out of the earth, they're setting it based
on a lot of other factors. Nobody knows everything they do. So
if their costs aren't going up, but they're going up to $72 or
$73 a barrel, then yes. You will see a profit increase without
question.
Senator Pryor. Well there again, you mentioned timber. And
if you follow the timber industry and I don't know if you do,
we have quite a bit of timber in Arkansas. What you're seeing
is a lot of timber companies having to sell off their lands.
For example, I think Weyerhaeuser just went through a
divestiture of their lands around the country and again, there
are a lot of economic reasons for that. But nonetheless, you
don't see as timber costs increased, again of raw material, you
don't see their profits just going through the roof.
And here again, it is very puzzling to me and to most
Americans of why this phenomenon is happening. Why are they so
incredibly profitable right now? I mean, I think we know. We
are paying $3 a gallon. But we feel that because we're paying
so much at the pump, they're just basically profiteering off a
bad situation.
Ms. Majoras. I certainly do understand that, very much so.
And I, too, have talked to a lot of consumers, sir, and
understand what everyone is feeling. Most of the profit is
being made at the crude oil production end. And as I said,
that's OPEC setting the price and that's what a price----
Senator Pryor. But that's not--I don't know if that's true.
Maybe it is, you know. Are you saying that for--not to pick on
one company. I mean, everybody wants to pick on Exxon. I'll
just use it as an example, just because they've been in the
news recently, but their profits are more than any company in
the history of the world. Are you saying they profit there, as
the crude oil comes out of the ground? Exxon profits right
there?
Ms. Majoras. Sure. Because they charge the same price for a
barrel of oil.
Senator Pryor. OK.
Ms. Majoras. So, yes. They do. Most of their profit is
coming from that end.
Senator Pryor. OK.
Ms. Majoras. There are refining profits that have gone up
over the last year, or so. And so, they are now making more
profit also at the refining end than they have made in the
past.
Senator Pryor. All right. Well I have a concern that
competition in the oil industry does not provide a sufficient
price regulator like it does in most industries. In most
industries where there is a competitive market price, the
competition serves to keep the price low. And my sense is, it's
not doing that in the oil industry.
Let me ask you a question now on a phrase that's in the
report, throughout the report, and it is an ``economically
rational manner.'' You used that phrase basically to say, that
these companies are acting in an economically rational manner.
In your view, is that phrase--is that a synonym for you saying
that the companies are doing nothing wrong?
Ms. Majoras. Well, it is not a legal term. It is not a
legal phrase, sir. It is more of an economic term. But when
we're looking to see whether the antitrust laws have been
violated and to see whether there has been anti-competitive
conduct going on, we do look at anti-competitive as the
opposite of competitive, so we do look at what we would expect
to see in a competitive market. And that's where this economic
phrase comes from and why we use it.
Senator Pryor. Because I think you and I may be on the same
page now that I hear that economically rational manner, that's
one thing you look at. But certainly, there have been many,
many instances in years past, where the Federal Government has
stepped in to make sure that this economically rational
behavior by companies doesn't hurt the public. For example,
child labor laws, safety and health regulations, environmental
protection regulations. So I think there is room there. Even if
in your view, they are working in an economically rational
manner, there may still be room there for the Federal
Government to step in and do some good for the American public.
The other thing that I would ask you about, is in your
report here and in your recommendations section, it really
comes through that when you talk about price gouging statutes,
you almost equate that with price controls. And I'm not aware
of anybody that I know of, who's talking really about price
controls. I think when people talk about price gouging
statutes, what they're talking about is they mention some other
state laws. Arkansas has a law right now on the books, where
once an emergency is declared by the Governor and by the
President, our statute kicks in. And basically, you can't
increase certain things. You mentioned generators a few moments
ago. That's one thing. But gasoline prices, et cetera are
included and I used that when I was the Attorney General of my
state on 9/11. And quite frankly, I think we used it very
effectively and what it did, is overnight, it created a
deterrent effect. It wasn't price controls.
In fact, we went after a number of gas stations in the
state and with the vast majority of them, we looked at them and
they could justify what they did and we said, fine. You can
justify it. There was a small number. I've forgotten, 10-12, I
don't remember how many that we felt like were price gouging by
the definition of our statute.
So, are you just philosophically opposed to a price gouging
statute? I guess that's what I'm hearing from you. You
testified in the Committee a few months ago, you said you
didn't like price gouging statutes. Here, you pretty much say
that. Where are you on price gouging statutes?
Ms. Majoras. Well it's not just me, it's the career staff
which I appreciate you applauding, Senator. Because, they have
done a superb job on this, and it's just about every
commentator who's written on this subject too, I've seen in the
last several months.
The reason it can act as a price control, is because folks
can't necessarily say how much they can raise the price.
Senator Pryor----
Senator Pryor. But you may want a price control in some
circumstances, maybe.
Ms. Majoras. You might. Although, if you look at what
happened in Hurricane Katrina, the fact that the price went up
meant that supply was suddenly brought into the United States
in droves. Supply from Europe and from other places, that meant
the price came down faster than it probably would have.
But in addition, sir, we're talking at the retail level.
And we went out and we saw this. We're talking about people in
little glass booths who sell gum and candy and don't have an
accountant or an economist. The folks that we found who met the
price gouging definition were all independents--were all
independent stations. Many of them didn't even speak good
English. They didn't have records. They kept their records
handwritten. So to say that we're going to say to them, you've
got to get this price exactly right, or you might go to jail
for it. That's where I'm worried about such a thing.
Senator Pryor. Well, I understand. Let me say this about
the retailer, by the way, the local retailer in gasoline is
kind of like the local pharmacist. He has a huge amount of cost
that he has to pay to get his product to market and we
certainly want them to make a fair profit when they sell
things. So I think here, like in pharmaceuticals, the problem
is up the chain. It is not with the local retailer.
Senator Inouye. Thank you very much. I wish to advise the
audience here, that there's a vote at this moment. However,
Senator Smith would like to conduct his questioning.
STATEMENT OF HON. GORDON H. SMITH,
U.S. SENATOR FROM OREGON
Senator Smith. Thank you, Mr. Chairman. I would be happy to
stay if you want to go vote and I'll just vote later. And as
others come back, they can take over.
Senator Inouye. The hearing will be resumed in 15 minutes,
but go ahead.
Senator Smith. Deborah, thank you for being here. Thank you
for your work. In your report, which I have here, it states
that the Commission cannot say--and I quote here, ``the
Commission cannot say that the Federal price gouging
legislation would produce a net benefit for consumers.'' And
yet, as I understand it, almost 100 price gouging cases have
been settled by the states. It's hard for me to reconcile those
two things: what the states have found and what this report
asserts.
Ms. Majoras. Well, the states obviously applied their
statutes, which have been passed and those legislatures have
made a policy decision about what they would like to do. But
the concerns that we have expressed about a Federal price
gouging statute are as follows: if retailers believe that
this--that a statute is passed in which they could go to prison
for raising their price too high during a time when they don't
even know when they're getting their next tank of supply, they
don't know what it's going to cost them, and therefore, how
much money they're going to need to pay for it, consumers are
coming in droves to fill up their tanks. So, demand is still
high. They take into account all of these factors.
So what they might decide to do instead and which some of
them did after Katrina, is just let the gas run out at the
current price, not raise the price at all, and just shutdown
for a week when the gasoline runs out.
The other thing we're concerned about is, and if you read
chapter 5, Senator Smith, which shows what happened after
Katrina, the price went up and that signaled to the rest of the
market to do a couple of things. It signaled to refiners who
had any excess capacity whatsoever, to produce more gasoline,
get it to the places that needed it, and that also signaled to
imports outside the United States. Suddenly, imports were all
coming in from Europe, because the price was high. We don't
want that effect to be taken away, because that actually turned
out to be the best for consumers in the long run.
Senator Smith. But do the states have a different standard
for price gouging? Is it collusion or is it something
different?
Ms. Majoras. The standards vary. Most of them require a
state of emergency to be declared. Some of them have a system
above some measure of cost. Some, I believe, some allow market
conditions to be taken into account and that, above all else,
is what I would advise you, Senator. If this body moves forward
with legislation and that is to make sure that we can take into
account the market factors.
Senator Smith. Independent gasoline retailers in Oregon
right now, are paying 30 to 40 cents a gallon more for
unbranded gasoline than others are paying for branded gasoline.
They're also having trouble getting enough supply, even with
those increased prices. Is the FTC investigating whether large
oil companies are using current market conditions to drive
independents out of business?
Ms. Majoras. Well, we certainly are starting to now take a
look at what's been going on in the last few months with prices
and why they're so high. One of the reasons that we've seen the
independents basically--and we saw it after Katrina, Senator
Smith. Normally, the independents can charge lower prices than
the brands, but after Katrina it was flipped and they had
higher prices. And we looked to see why that was the case.
And the reason that was the case, is because when supply is
tight, it's true that the branded companies supply their own
stations first. And the independents who rely more on the sort
of spot market, they had to wait for theirs. And their supply
is not as assured and they don't have the same type of long
term contracts.
So obviously, in this current investigation, if we see
evidence of anti-competitive conduct just to push competitors
out of the market place, we absolutely will take a very close
examination of that.
Senator Smith. I think that is very important. At least it
is in the State of Oregon. So, I would appreciate it, if you
looked at that. Can you tell me, are there regions of the
country that the FTC found to be the most problematic? Are some
more difficult than others?
Ms. Majoras. Do you mean after the hurricane, Senator
Smith?
Senator Smith. Just in this current cycle we're in.
Ms. Majoras. Basically gasoline, as you may know the
country, for purposes of gasoline is divided into Petroleum
Administration for Defense Districts (PADDs) and there are five
and gasoline in PAD District IV, which is the Rocky Mountain
Region and V, which is the West Coast, tend to have higher
prices than the rest of the country. After Katrina, we saw very
high prices in the Northeast because of how heavily dependent
the Northeast is on crude oil and refined gasoline coming from
the Gulf and because pipelines were damaged, that couldn't get
to the Northeast. And demand in Northeast is very high. So
during the hurricane, we saw it. But, yes, there are--different
regions have different constraints, different taxes, different
types of gasoline they have to use. So, there is variance in
the regions.
Senator Smith. Mr. Slaughter, I found it very distressing,
the quote that Dr. Cooper used about the Chairman of
ExxonMobil, as recorded in the Wall Street Journal, that not
withstanding all the money they're making, that it is still
insufficient to invest in refineries. That is clearly a
bottleneck that is creating much of the distress that is going
on now.
And Senator Lott talked about many of the regulatory
impediments to putting up refineries, but this quote astounded
me. Can you comment on that?
Mr. Slaughter. Thank you, Senator, for giving me the
opportunity to correct the record on that. ExxonMobil is the
largest refiner in the world. They have more refining capacity
throughout the world than any other refiner. That company
itself, has added the equivalent of one new refinery every 3
years for the past 10 years.
The comment was simply that that particular company feels
that it is less economic to build a new refinery than to add
the same amount of capacity at an existing refinery site, which
makes a lot of sense because you need a lower rate of return at
an existing refinery site. You can have that capacity up in 3
years and consumers can be benefiting from the additional
product.
If you try to build a new refinery in this environment--we
discussed a little bit of this with Senator Lott--it could take
at least 10 years. And at that point, you don't even know that
you can perhaps, not even break ground. That's happened to the
one refinery project that exists now in the U.S. for a new
refinery in Arizona. So why should consumers have to wait 15
years, when expansions at existing sites can provide consumers
with new product in 3 or 4?
Senator Smith. And are they expanding existing sites?
Mr. Slaughter. Yes, sir. They are expanding existing sites.
Secretary Bodman the other day, said the total expansions in
the U.S., he thinks are going to be 2 million barrels a day.
That's a 12 percent increase in U.S. refining capacity in the
next 3 to 4 years. Those are capacity extensions at existing
sites.
Senator Smith. So, he was not saying he wouldn't do
anything?
Mr. Slaughter. No, sir. They're major investors in
refining.
Senator Smith. Dr. Cooper, do you have a comment on that?
Dr. Cooper. This is not a zero sum choice. You can actually
do both things if you felt pressed by competition to keep the
customers. So over the last 5 years, while they have had this
massive increase in profits, the net investment in domestic
U.S. refining for ExxonMobil has been almost dead flat. If you
look at the balance sheet of their net investment in plant, and
refineries, it has been dead flat. They spent less than 1
percent of their net income expanding refinery capacity in the
U.S. If they felt pressed by competition to have excess
capacity so they wouldn't run short, they would actually spend
a lot more on refineries. The zero sum came between building a
new one and expanding an old one and is destined to keep us in
a very, very tight situation.
Senator Smith. Dr. Cooper, have we seen a significant
margin spread between the price of crude and the fine product
in the last year?
Dr. Cooper. Absolutely. We sit here today, the spread is
probably 20 or 30 cents a gallon more than it was last year.
Senator Smith. Is that driven by speculators or just by
corporate decisions?
Dr. Cooper. That's the difference between the pump price
and the refiner acquisition cost. The domestic spread, it's
called, has been increasing steadily for the last 3 years. So
certainly, crude prices have gone up, but that domestic spread
has increased dramatically.
Senator Smith. Mr. Slaughter, do you have a comment?
Mr. Slaughter. Senator Smith, I just would point out the
fact that over the last 15 years, there have been roughly two
to three good years for refining return on investment in the
United States. Two of them happened to have been the last two.
The return on refining investment for the previous decade was 5
percent to 6 percent, which is only slightly better than you
can get on a Treasury Note, with a lot of risk, and billions of
dollars each year in new investment requirements, and
environmental improvements.
The Congress and EPA have basically told the industry, that
it should be spending money over the last 10 years in
environmental improvements and that has somewhat crowded out
money that might otherwise have been spent on capacity
additions. We've spent billions of dollars in this decade. The
refining industry will spend $20 billion on environmental
projects. And at the same time, the good news is, they will add
significant capacity this time.
Senator Smith. Mr. Slaughter or Dr. Slaughter?
Mr. Slaughter. Mister.
Senator Smith. How many gallons of gasoline do refiners get
out of a barrel?
Mr. Slaughter. Forty-two. Well actually, of gasoline it's
about half. There are 42 gallons in a barrel and the usual
gasoline yield is between 47 and 50 percent at the average
refinery.
Senator Smith. Are there other products extracted from
that?
Mr. Slaughter. Yes, sir. About 23 percent is diesel and
middle distillates.
Senator Smith. What is the value, per barrel, of these
other products? Have they gone up disproportionately to
gasoline? How do they track that? That is what I want to know.
Mr. Slaughter. The greatest indicator of product prices is
always crude price, because the demand for our products is
inelastic. That was the answer to Senator Pryor's question. The
demand for our products is inelastic. So when the cost of our
raw materials go up, people buy the products anyway and the
profits go up. But, diesel has become a very popular product
worldwide and diesel prices, for a lot of the last year, were
running higher than gasoline prices. Europe has gone to diesel
essentially, to drive light duty vehicles and passenger cars
and they have tremendous demand for diesel there, as do many
developing economies. One of the problems in the diesel market
in the U.S., is that we're changing our specs to very
aggressive environmental specs, which will make it even more
difficult to get imports of diesel into this country. So you've
got to remember, sir, that return on all these products----
Senator Smith. Are all the products that come from a barrel
of crude tracking together or are some spiking more than
others?
Mr. Slaughter. Each has its own curve that it follows.
Diesel and gasoline have had the highest return recently.
Senator Smith. Deborah, if the price of crude is the reason
why this is all happening, I believe you testified today that
your report specifically did not consider collusion or price
fixing upstream, because you said that is so uncontrollable.
It's international issues, it is Russia, it's the Middle East,
it's Africa, it's all over the place. You don't even have the
authority to track that, do you?
Ms. Majoras. Well first of all, but for the fact that there
is a cartel at that level, called OPEC, which, no, I can't do
anything about. We certainly can take action against any
private company at any place in the chain who is behaving
anticompetitively if they do business in the United States and
are harming our consumers. And we have in the past and we will
continue to do it if that's the case. It's just that when we
were looking at manipulation and gouging and we needed to look
at where to put the resources in the 6 months we had, it seemed
to us, given how little of the upstream supply chain--the big
companies in the U.S., Congress was interested in control, that
that was not the place to start.
Senator Smith. And they have no control over the price of
crude abroad, or they may be drilling and producing?
Ms. Majoras. Well, they have some control over it. But by
comparison to the state-owned companies that are owned by the
places I mentioned, it is much, much less.
Senator Smith. I could talk to you all day, but I have to
go vote. So, as the Chairman indicated, we will stand in a
brief recess and I suspect soon, other colleagues will return.
And thank you very much.
Ms. Majoras. Thank you, Senator Smith.
[Recess.]
STATEMENT OF HON. TED STEVENS,
U.S. SENATOR FROM ALASKA
The Chairman [presiding]. My apologies, I was in a meeting
at the White House. We'll be pleased to continue the hearing.
Senator Boxer will be next for 10 minutes.
STATEMENT OF HON. BARBARA BOXER,
U.S. SENATOR FROM CALIFORNIA
Senator Boxer. Thank you so much, Mr. Chairman. Well, I
find this to be a very interesting hearing and I'm a little
more than frustrated at this report.
Ms. Majoras, when you were nominated for this position, you
and I had some very long talks and remember, you had
represented Chevron in your former capacity in the private
sector. And we talked a lot about whether that would color your
views. Oh, no. It wouldn't. And I said, would you recuse
yourself when it comes to Chevron? Well, you would follow the
legal opinions, but I have to say, that in my opinion, after
looking at this and I'm very disappointed in the entire
Commission in this report, that I just have to feel the
consumers are left out.
And Dr. Cooper, I think you are right on target when you
talk about exploitation. The collusion question is sort of a
red herring in many ways, when you have basically five
companies and they're vertically integrated, they don't have to
collude with one another. They have got to just talk to
themselves when they control everything except the price from
OPEC. Which leaves me to question, Ms. Majoras, would you
support, since you say you can't control the prices that OPEC
puts out there, would you support legislation to put OPEC under
the antitrust laws?
Ms. Majoras. Well there's no question that OPEC is a cartel
and if the antitrust laws today were applied to OPEC, they
would violate the antitrust laws.
Senator Boxer. Would you support legislation to put them
under the American antitrust laws?
Ms. Majoras. I would not, because OPEC is made up of
countries, of nations and that becomes a foreign policy
decision for the executive branch, Senator Boxer. And I can't
even imagine that a member of OPEC would show up for my
lawsuit, which would make a mockery of our authority.
Senator Boxer. Well you ought to talk to Senator DeWine,
because Senator DeWine, a Republican, has written this
legislation. It has garnered bipartisan support, including from
Mr. Grassley, from Senator Snowe, myself, and others who have
looked at this very carefully. So, I'm going to send you this
legislation. Maybe you can send it by your lawyers and see if
they can take another look at it. Because, you know, there is a
way we can solve some of our problems. But if we keep thinking
the same way we thought for all these years, we're not going to
do it.
Let me just say, if the oil companies were simply passing
along the costs that they have faced and you've outlined some
of their costs, we wouldn't see profits jumping the way they're
jumping. The fact is, none--I certainly don't oppose them
passing along their cost of doing business. That's what I
learned when I was an economics major a way long time ago, that
you take your costs and you add in a reasonable profit, and
that's your price. OK? That doesn't take an advanced degree in
economics.
So when here, we look at this. What do we see? In the first
quarter, Chevron had profits up almost 50 percent and all the
rest of them had profits up, so they didn't simply pass along
their costs. And you look for collusion. And as I said, there
is no reason to look for collusion, if you simply look at the
way these oil companies are structured.
Now, I'm going to talk to you about a situation in
California, where Shell Oil claimed that they were going to
have to shut down their refinery in Bakersfield, because there
were no buyers and because it was losing money. It was a
terrible thing on their back. They had to get it off their
back. It was losing money, they told me and they told the
Congressional Delegation, and they told the Attorney General,
and they told everybody: well bottom line is we realize that
was 2 percent of the gasoline on the marketplace in my state
and we couldn't afford to have a refinery close. They're not
building any new refineries. They don't want to build them.
We've changed our laws in California. They like it this
way, because they're vertical monopolies. It works beautifully.
They're making more money now off refineries than ever before.
It's a whole change. Just read Fortune magazine. It lays it
out.
So Shell Oil tells us this. I take this to you. You do
zero, nothing. As a matter of fact in this report, you
gratuitously take them off the hook. You did nothing. It took
the Attorney General of my state, a bipartisan delegation in my
state to step up to Shell Oil and say, you're not telling the
truth and we're going to prove it. We're going to find a buyer.
And guess what? The Attorney General forced it. They found a
buyer. And guess what? They didn't tell the truth. It was a
huge moneymaker and that's why it was sold. And you can't even,
in this report, tell the truth to the American people about
that? You just brushed the whole thing off and swept it under
the rug.
I'll tell you, we don't need an FTC like this. And I'm not
just saying, your FTC. I'm saying, you go back and you see. You
know, if the oil companies wanted to pay for a whitewash, they
couldn't have gotten a better one. It's shocking. And that's
why you hear Senator Lott ask the kind of questions he asks and
why Senator Dorgan asked the kind of questions that he asked.
And I am asking you, Ms. Majoras, why is it that you
couldn't look at the record and see that when Shell Oil
testified here, they talked about how happy they were that we
helped them find a buyer, and how wonderful this was. And you
never even questioned them. And I wonder why? You knew. I've
read what you wrote in the report. You read me part of the
report that says that they didn't tell the truth before the
Committee.
Ms. Majoras. It's not in the report. It's in the statement.
We believe that we spent thousands of hours investigating the
Bakersfield situation.
Senator Boxer. What's in your release? What did you do to
help us? Give me one thing you did to help us.
Ms. Majoras. We've spent thousands of hours investigating
whether they were violating the antitrust laws by not selling
the refinery, which by the way, was tough. Because it's not
illegal to not sell a refinery, unless you're colluding with
someone.
Senator Boxer. Let me just tell you something, you did
nothing to help. If it wasn't for my Attorney General, that
refinery would have been shut down and you're supposed to care
about consumers. This is what you wrote. There was no evidence
that Shell possessed market power and no evidence of collusion
amongst Shell and other refiners.
That wasn't the question. The question was, why did they
lie and tell us that that refinery was a money-loser? Why did
they lie and tell us there were no buyers? And you avoided it
and I took you into my confidence, and you knew all of these
details. Let me just say to you, this is an outrage. This is a
complete outrage.
Newspapers in my state did better than you did by digging
up the facts. The Attorney General of my state is a hero to me
because of what he did. And if you had your way, with all of
your thousands of hours of turning and shuffling paper, that
refinery would have been closed down and we would've had 2
percent less gas on the market, which maybe would have made you
happy if you like the oil companies. Because then, they
could've jacked up the prices even more.
And my colleague here, Senator Cantwell, has shown me a
map, which I trust that you'll show. Here, she's holding it, in
the red is where you've got the worst prices and guess what? In
the places where we are in fact, producing oil, refining oil,
and all the supply and demand talk aside, supply and demand
works when you don't manipulate the supply.
And just ask Senator Cantwell, and myself, and others,
Senator Wyden, Senator Smith, what happened when they said,
it's just supply and demand, and the electricity crisis. Oh, it
was just supply and demand. When they took those plants off for
more maintenance, 10, 20, 30 times more maintenance than they
ever did before when they played games. And luckily, luckily,
we found out what they were doing. They were making jokes about
old people who had to go without air conditioning. They made
jokes about grandmas and grandpas. And you know what? Spend a
little time with me when I go home and talk to the working
people. Maybe you don't talk to the working people?
Ms. Majoras. I do talk to the working people.
Senator Boxer. I'm talking to you now. And I'll ask you a
question and they will tell you that everyone knew what Shell
was doing in Bakersfield and the fact that you gratuitously got
them off the hook in this report, is something that we in
California will never forget about this FTC. So when you talk
to working people, what is it they tell you, Ms. Majoras, about
the price of gas at the pump?
Ms. Majoras. They tell me a number of things. They tell me
that they are concerned about gasoline prices and what it's
doing to their budgets. They also tell me though, such things
as well, it doesn't make them happy to see the big profits that
our oil companies are making, nonetheless, they've sold houses
in the past and they understand that when a certain product,
sometimes it's scarce or the value of a product goes up, they
don't give back money, even if the value of their house has
gone up and they can sell it for more than which they bought
it.
Senator Boxer. Wait a minute. Working people, when they
talk to you about gas prices, talk to you about selling their
house?
Ms. Majoras. Absolutely. Because it just happened last
week, as a matter of fact.
Senator Boxer. How many people have done that and come up
to you and said, oh, I understand the oil companies, by doing
these profits. Because if I sold my house, I wouldn't get back
my profit. Is that what you're saying they tell you about gas
prices?
Ms. Majoras. A number of people have used that analogy,
because it's been in--it's an analogy that they've seen in many
of the major newspapers in this country where the analogy is
made. And as a seller, this is the one place where consumers
really relate to buying and selling. So, yes. They have said
this. They have said this to me.
Senator Boxer. Let me say, I'm interested in this, Mr.
Chairman.
The Chairman. Your time has expired.
Senator Boxer. I will go home and see if anyone brings up
their house when they are talking about gas prices.
The Chairman. Thank you very much, Senator. Senator Snowe?
STATEMENT OF HON. OLYMPIA J. SNOWE,
U.S. SENATOR FROM MAINE
Senator Snowe. Thank you, Mr. Chairman. Chairman Majoras,
obviously there's a lot of frustration because the report
appears to be limited in terms of its scope of examination and
definition of price gouging analysis of the problem and
certainly in terms of proposed solutions. I don't think it's
enough to say that those states that have price gouging laws,
can fill in the gap. Quite frankly, that is why it does require
a national examination and requires a national law. This issue
and how it impacts the American people is of national interest.
Most certainly, at a time when the oil and gas industry has
experienced historic profits and for those trading on the New
York Stock Exchange. So rightfully, we would like to have a
much more thorough, in-depth report. Frankly, it is a good idea
to have national price gouging legislation so we don't leave it
to the states. Thankfully, some of the states have taken up and
filled the statutory vacuum that exists in the Federal
Government with respect to this issue. Certainly, the Federal
Government and your agency in particular, has the resources to
examine these questions in-depth to ensure that the American
people aren't ripped off, particularly at times like we saw
last fall.
I was disturbed to even see in the report where it
indicated that there were seven refineries, two wholesalers,
and six retailers that had higher average gasoline prices in
September 2005, compared to August of 2005. And that these
higher prices were not attributable to either higher cost or to
national or international trends. So there was evidence of
price gouging. It was unclear what developed last fall with
respect to your agency in terms of further pursuing this.
The analysis showed other factors such as regional and
local trends that appear to explain the pricing of these firms.
So what was the basis of that analysis? Was it based on what
the states determined?
Ms. Majoras. No, Senator Snowe. It was based on our own
analysis of local conditions when we compared. When we compared
the various prices, we did it against the national average,
because that is what Senator Pryor's piece asked us to do. But
most of the pieces of legislation that have been proposed, have
a different definition of price gouging, as do a lot of the
states. So then, we went and we looked at well, what if you
compared for these 15 people, what if you compared their prices
to what people were charging locally. And there, we found that
the five cents above the national average, which is what we
used to define price gouging under 632, went away.
So in fact, you might be--what I wanted to make sure--we
wanted to make sure you understand, was that you might be, if
you just use national trends, you might be calling this guy a
price gouger even though the guy across from him could be
charging a price that is only a few cents less, and we didn't
think that was really what the American people were so worried
about and what Congress was getting at. So we were just giving
you another piece of information. So if you do decide to pass a
price gouging statute, you have all the information in front of
you.
Senator Snowe. But you understand that there is not the
entirety of the picture in terms of the entire issue of
transparency and the futures market because other than those
who trade on the New York Mercantile, those who trade
electronically, trade over the counter, are not considered in
this study, as I understand it.
So when this report said they were considering all the
future's trading, this is not exactly accurate.
Ms. Majoras. Well no, ma'am. And we didn't imply that we
had. We know that the futures issue is very important to
Members of Congress and consumers. We're not experts in this,
the CFTC is. We tried to look at one small piece of it and that
is all we did.
Senator Snowe. But that is my point. It's a narrow
examination and doesn't that contribute a lot to the volatility
of gas prices? I've heard this over and over again. And I think
we need to get to the bottom of it and that is why I am
supporting Senator Feinstein's legislation on the transparency
question. There is so much of this futures trading that really
is excluded. There's no way to know. There's no accountability.
There's no reporting. Therefore, there's no way to account for
what is happening. It can be done on the foreign exchange. It
can be done on the intercontinental exchange, as I understand
it, and these electronic trades are exempted. And about a third
of the trades in the U.S. crude oil future's are conducted on
this London exchange.
So, shouldn't we know exactly what's transpiring that could
be contributing to the ratcheting up and skyrocketing of these
prices. Wouldn't you agree?
Ms. Majoras. Well certainly, consumers deserve to know, no
question, what is contributing to these prices going up. As to
the futures aspect of it, we're just not experts. And I'm
afraid, I can't comment further on that. Some experts have
concluded this is contributing to the volatility. Some say, no,
that's really not it. But I think a further examination of that
would make some sense.
Senator Snowe. But your investigative report indicated
there was enough transparency for you to study the futures
market. So obviously, it was a part of your study.
Ms. Majoras. Just a piece. We were asked to look at
manipulation throughout the market and we looked to see whether
because futures traders take delivery at the Port of New York,
whether control over that Port of New York could be used to
manipulate prices. That is what we looked at.
Senator Snowe. Would you then agree that the FTC report is
a very narrow examination?
Ms. Majoras. Absolutely. On that piece of it, it was. Yes.
Senator Snowe. And that's exactly why I think that there
shouldn't be an indication in your report that you've studied
the futures market when in fact, it was a very limited portion
of what was being done. And frankly, you could take a much more
aggressive approach in recommending what needs to be done. I
just don't think you ought to give an impression to the
American people that you've done an in-depth, broad view
investigation of what constitutes price gouging when in fact,
you did not.
As described by your report, I think it gives a very
inadequate and subpar approach to the whole issue of price
gouging.
Ms. Majoras. Well, I'm sorry about that. We really--our
people worked night and day. And we did the best we could.
Senator Snowe. But the point is, that the FTC has enormous
resources available in order to do a very thorough examination
and that's the issue. And the fact is, to say that somehow,
well, it's a limited view on the futures market. Yes, you can
also make suggestions as to this is what we had to do, but this
is what we could do. And you would have a very different
picture if you had a requirement under the Federal law for
national price gouging, would you not?
Ms. Majoras. I'm sorry. I don't understand your question.
Senator Snowe. Would your report be very different today,
if you had a national price gouging law?
Ms. Majoras. I'm sorry. I'm afraid I----
Senator Snowe. Would you have a different picture if there
was a requirement for a Federal law for price gouging? Would it
be very different from the report you're giving today?
Ms. Majoras. I don't know whether the report would be
different. I know if we had a Federal price gouging law, the
FTC would enforce it. So sure, we would probably have different
things to report, no question.
Senator Snowe. Would you have more cases to examine?
Ms. Majoras. We very well may, yes. Depending upon what the
standard is and how many cases we found, sure.
Senator Snowe. If you expanded the transparency for our
futures market, would you have a very different report?
Ms. Majoras. I don't think so, Senator Snowe. Because we
didn't try to look at the entire futures market. Because as you
pointed out, we're not experts and the CFTC is.
Senator Snowe. It is a huge dimension. What about OPEC? You
indicated that's a foreign policy issue. But again, they
represent 66 percent of the world's oil production. So would
that have a very different impact if we had a requirement under
the law?
Ms. Majoras. I don't think OPEC would respond to a lawsuit
in the United States.
Senator Snowe. That's not the issue, right now. Let us
worry about that. The point is, why not have a price gouging
law on the books?
Ms. Majoras. Well, you could.
Senator Snowe. Would it change the dynamic? Would it change
the report?
Ms. Majoras. I don't think it would change the report, no.
Senator Snowe. You don't?
Ms. Majoras. I don't think so. For what I tried to say, I
don't think OPEC is going to respond to a lawsuit from the
United States. I think they're going to laugh at it.
Senator Snowe. Well I think, in the final analysis, I think
it is whether or not these prices are in fact, price gouging at
very difficult moments in time. I do not find credibility or
have confidence in the outcome of the report. Granted, some of
the shortcoming is because we have not passed a national law.
But on the other hand, it's also indicates, from your
prospective, that this is a very limited version of what
constitutes price gouging. Therefore, the report does not give
a real and true picture. Thank you, Mr. Chairman.
The Chairman. Thank you. The next person on my list is
Senator Lautenberg.
STATEMENT OF HON. FRANK R. LAUTENBERG,
U.S. SENATOR FROM NEW JERSEY
Senator Lautenberg. Thank you very much. And I thank
Senator Cantwell for permitting the order to go this way. You
know, I sit here. I come out of the corporate world and ran a
fairly big company, one that today, employs 44,000 people that
I founded with two other fellows. And I look at the statistical
analysis that is abundantly produced at the table and it
reminds me of an old song, Say It Ain't So, if you say it isn't
so, because I find cause and effect fairly well separated in
many instances.
Ms. Majoras, what's the mission of OPEC? In crystalized
form, what is their mission?
Ms. Majoras. Their mission is to set the global price of a
barrel of crude oil, as I understand it.
Senator Lautenberg. And the WTO, says that if you attempt
to fix prices--control exports--it's illegal under WTO auspices
or controls and therefore, should not be allowed. Should OPEC,
the members of OPEC be permitted to be members of the WTO as a
consequence of the restrictions that WTO asserts are a
requirement for membership?
Ms. Majoras. Gosh, Senator Lautenberg, I'm certainly not a
trade expert and I don't know exactly how one----
Senator Lautenberg. Well, if you put one and one, and make
two, it sounds like it, right?
Ms. Majoras. I'm sorry?
Senator Lautenberg. If you put one and one together and it
comes out two, it sounds like it ought to be.
Ms. Majoras. Well there are countries that have belonged to
WTO that violate the WTO rules and are sanctioned as a result
of it.
Senator Lautenberg. Because while we search for reasons why
the price of gasoline has gone like it has and we don't ascribe
direct responsibility to the oil companies, I find--well, lack
of refining capacity. But refining capacity has been restricted
over the years. It's in fewer hands, even though the production
is about the same capacity.
And I wonder why it is that the brilliant leadership in
this oil industry hasn't decided some time ago, that hey, with
a growth in population, et cetera just within our own country,
why wouldn't it be necessary to prepare for the future?
Companies do it all the time. They buy a product for inventory.
They buy commodities to make their product. It's standard fare.
And here, nothing happened over a whole bunch of years.
I look back at Exxon profits and if their behavior wasn't
manipulative, it was unconscionable. Absolutely, unconscionable
when the Chairman of Exxon walked away, leaving a trail of
$145,000 daily in earnings, when 97 percent of the Americans
don't make that in a year, and blithely going on taking a
crushing termination bonus, makes me look back when I came to
the Senate and left my company, I really short-changed myself.
But the fact of the matter is, that when you look at that kind
of an income, when it's being paid for by citizens seeking out
a living across this country, it just doesn't make sense. And
certainly, is no way to win favor for an industry that is as
critical--and we come to the conclusion, that there is a
monopoly available, that as Dr. Cooper said, leads to, I think,
exploitation was probably the best way to describe it. Because
then, it's not so excusatory, but it does say what happened
here.
And when we talk about market mechanisms being a factor,
the market mechanism theory doesn't work when you control a
commodity in monopolistic form. There's too few people
producing too little product for an essential commodity in the
living of our society.
And Dr. Cooper, you said it. You were fairly clear and
vigorous about it. We should be vigorous about it, instead of
trying to defend what's going on. We should be looking for ways
to change this. And I don't know whether ultimately legislation
is called for maybe, reviewing the size of companies and making
the market a more competitive place, taking on the actions
against OPEC by asking, putting a lot of force in our request
to the WTO, that they exclude them from membership because
they're not following the rules. What do you think we ought to
be able to do here to make a difference that has an effect on
what it costs people?
Dr. Behravesh--I'm mixing questions here, but one thing
leads to another and we see that the rise in take home pay has
far exceeded the rise in gasoline prices. Well, I don't know
where you get that statistic or whether you chop off the ends,
the ups and the downs, because there is no way--no way that a
family in America today can support themselves on the kind of
purchasing power they now earn. And as compared to what happens
with oil prices or gasoline prices, somehow or another, it is
misguided or manipulated in terms of the information flow that
we get to justify this outrageous price gouging. And I use the
term, not in the purest definition, but in what the effect is.
What do you think we can do, Dr. Cooper?
Dr. Cooper. Well, my point of view in the long term, the
most important thing we can do is take that 10 million barrels
a day of demand out of the global market and out of the
domestic market. We can do that on the demand side by improving
the fuel efficiency of our fleet. We can do that on the supply
side with alternatives.
We like alternatives, because alternatives have three
characteristics that are really interesting. One, we get
different raw materials. That is, corn competes with crude.
Two, ethanol plants compete with refineries. And three, the
farmers are not members of this global oil cartel. They tend to
behave a little differently. And farmer cooperatives have moved
very aggressively into this area, many of them members of CFA.
So if you take that 10 million barrels a day out of demand,
you take it out of the control of the oil companies. Let's be
clear, that is the key here, is you have a small number of
players who actually have--every four of the five refining
markets in this country are concentrated. Every state
virtually, every state wholesale market is concentrated by the
antitrust definition and the commodity that's concentrated with
no elasticity of supply or demand, very little. There is market
power and much lower levels of concentration than in other
industries. I think we also ought to build for the transition
of having a strategic product reserve, a strategic refinery
reserve, because the industry will not build that sufficient
capacity to hold prices down. And above all, that we simply
cannot define the definition of price gouging that emerges from
this report it is simple and stunning.
I didn't realize it until I heard just now. If everybody
raises prices, nobody's gouging. That was the local condition
that excused the people who had raised their prices above the
national average. And so, if you have that definition, you can
never find gouging in a concentrated industry with very little
elasticity of demand.
Senator Lautenberg. You know, Dr. Behravesh, the price of
gasoline at the end of 2001 was close to about $1.06-$1.10 per
gallon. Now if we look at the growth in cost or price rather--
price, since that time, how does that square having gone up
almost 300 percent, 280 percent, or whatever? How does that
square with what was happening with wages in that period--
purchasing power?
The Chairman. This is your last question, Senator.
Dr. Behravesh. It's a very good question, Senator
Lautenberg.
Senator Lautenberg. I have a warning that my timing is
going to run out.
The Chairman. I'm warning him.
Dr. Behravesh. I am allowed to answer?
Senator Lautenberg. You're allowed to run over. Talk as
long as you want, but give me the right explanation.
[Laughter.]
Dr. Behravesh. I'm happy to. A couple of points to be made,
Senator. One is, you made the comment about where is the data
coming from for inflation adjusted gasoline prices and take
home pay. It's straight out of the Bureau of Labor statistics
and numbers that I used here, which are basically both adjusted
for the Consumer Price Index. I chose a long enough period so
nobody could say, well you manipulated the data by picking the
wrong sample period.
In terms of oil and gasoline prices, you're right. Again, a
lot depends on what your starting point is. This is a market
that goes through booms and bust. And we went through, to our
benefit, a bust in the 1990s when oil and gasoline prices were
very low. So when you start at that point, rather than say in
the 1980s when they were higher--in the 1970s when they were
even higher--then certainly the rise we've seen recently looks
very dramatic and very troubling. I'll come back to this issue
of who it's hurting, because it is hurting people.
But you have to understand that we had a decade of very low
gasoline and oil prices. So if you use that as a basis of
comparison, these numbers look outrageous. No question about
it. But the question, the issue that I'm raising, is if you
look at a long enough period of time, you look at how much take
home pay has risen (after you adjust for inflation) and how
much gasoline prices have risen, it turns out they haven't
risen anywhere near as much. That's really a very simple basic
point.
The other point that I think we have danced around a little
bit is, where's the problem? The problem is oil prices, not so
much gasoline prices. Oil prices tripled since 2002. Gasoline
prices have gone up about 225 percent. So gasoline prices
actually have risen less than oil prices. So the problem is oil
prices.
It's important to keep that in perspective. Thank you.
The Chairman. Thank you very much. Senator Cantwell?
STATEMENT OF HON. MARIA CANTWELL,
U.S. SENATOR FROM WASHINGTON
Senator Cantwell. Thank you, Mr. Chairman. And thanks for
holding this hearing. And we've covered a lot of information so
far, but I would like to cover three points if I could. And Dr.
Cooper, thank you for your longer range vision on this issue,
as well as your comments on protecting consumers in the short
run. I think that you have hit the mark, as it relates to
getting true competition for this product so that consumers
really do have choice, both on higher fuel efficiency standards
and on alternative fuel. So I thank you for that testimony.
I'm going to get back to you in a second. But I was showing
this map earlier about West Coast prices and clearly, the
higher prices in red, and orange, and yellow. And as we can see
on the West Coast, we have some of the highest prices and we've
consistently had some of the highest prices. So it's a
particular point of concern for my constituents and it has been
for a long time.
Now what I think is really interesting, something you can't
detect from this map, you can see Seattle here. But one of the
very--on the very top of the state, at the more red color, is a
county that has access to basically three refineries. So we're
talking about an area that has three refineries nearby. I
think, two right in the county and one close by. And yet, they
have some of the highest gas prices. So, my constituents from
that particular county don't understand when it comes to this,
just simple market economics and supply and demand. Because
according to them, they should have some of the cheapest
product.
So first of all, Chairman Majoras, I'm interested in this
inventory issue because I think we've seen a very big shift in
inventory. We've seen a tremendous transformation that I don't
think you can just say, well it's happened in every industry.
In other industries in manufacturing, there's a lot different
competition. There's a lot of different competition for
products and you can go choose something else, but there's not
true competition for fossil fuel. And you're stuck with ``just
in time'' inventory and the change to this system, consumers
are in a totally different boat. I think that's exactly what
Dr. Cooper was saying. But I'm curious, you don't even use the
phrase ``just in time'' inventory in your comments. And we've
had testimony before this Committee, from two other
individuals. One was the Attorney General of Arizona, who
basically raised this issue about the ``just in time''
inventory system. And said, ``the effect is a constant and
precarious supply and demand balancing act, which is
exceedingly beneficial to the industry in lower operating cost,
but very harmful to consumers as supply vulnerability has set
the stage for price spikes.'' So that was an Attorney General's
comment on that.
The Attorney General from California has also weighed in on
that point. Basically talking about West Coast refineries and
the fact that when there is a limited ability to augment that
refinery production, just in time inventory is a phenomenon
that exacerbates the supply problem. And as a result, during
outages prices can rise dramatically.
So we've had two attorneys general, who have basically
said, this is a pretty big problem. Your report basically
concludes, in your section on inventory--I mean, I found it
very elementary actually, condescending too. I think the
intelligence of members who've been tracking this and have to
be responsive to those people who are screaming about those
prices. Your conclusion, juxatposed to those attorneys general
was, your investigation found no evidence that firms have been
making inventory decisions in order to manipulate prices. So
drastically, two different conclusions.
First of all, I didn't see the words ``just in time''
inventory and I don't know if--I guess, my first question is,
do you believe that low inventories help set the stage for
price spikes?
Ms. Majoras. I do believe the lower the inventory, the
greater the chance of price spikes. I do believe that, yes.
Senator Cantwell. So why not be more aggressive in
investigating the causes of those low inventories and what the
United States could do about it? Dr. Cooper has recommended a
couple of things to do about that.
Ms. Majoras. In this report, we were asked very
specifically by Congress to see whether companies were
manipulating the price in some way. And this is one of the ways
we identified by which they might be able to manipulate the
price. I didn't hear the attorneys general saying that it was
used to manipulate the price, just that they were worried that
there wouldn't be enough supply to mitigate price spikes. And
there's no question that inventories have dropped.
Senator Cantwell. I'll be happy to get you the Attorneys
General from Arizona full testimony. Because I asked him about
this specifically. And he said, that we don't have all the
investigative power to investigate it and this is what we're
concerned about. So the fact that you did have all the
investigative power and didn't investigate, is a very big
problem.
Ms. Majoras. But we did investigate it. That's the point.
Senator Cantwell. Dr. Cooper?
Dr. Cooper. I would like to make a comment on the inventory
and capacity discussion in that report, because it really is
thoroughly misleading. And you put your finger on it, it's
really important. When they talked about inventories, they made
this comparison with other industries. But they didn't--they
noted in a footnote, but didn't show on the graph that there's
a substantial amount of that inventory that can't be drawn
down. Because this system needs a minimal operating inventory
and that has a dramatic impact on the picture you would see,
and it would make the inventories look much smaller in the
gasoline industry.
But the interesting thing is when they talked about
capacity, they didn't bother to make a comparison with other
industries. Why not? Well if you look at the spare capacity in
the oil industry, it's about 5 percent. Most other industries
have four or five times that much. And so what you end up with
here is this picture in a commodity with no elasticity of
demand and supply so other industries can much more quickly,
expand their capacity, consumers can cut back, and they need,
actually probably five times as much on supply and demand,
right?
And here's an industry, with one quarter the inventory and
one quarter the capacity compared to other sectors. So those
two conversations--discussions, really give you a completely
misleading picture of why those two factors are so important.
One more point----
Senator Cantwell. I have two more things I want to get to.
Dr. Cooper. The Government Accountability Office, when they
studied this capacity utilization and storage were absolutely
critical. Now, they didn't see it as a policy variable, but
that should've been a policy variable here.
Senator Cantwell. My second point of investigation has to
do with exports and we tried to get some of the industry
officials to provide us with documentation about this. At first
at a hearing, they said they would and then afterwards, they
decided that they didn't want to provide us with that. But I
find in one of the--really, it's a footnote here in the report.
It's not even a major part of the report. But it's a case that
we're familiar with. Well, on the West Coast, because it had to
do with BP shipping product outside of the country. Basically,
to lower supply in the United States and drive up the cost.
So why not do a more thorough investigation of the export
market and the fact that the export of product for cheaper
prices than could be gotten in the United States, is another
way to suppress the supply. So why not more details on that?
Ms. Majoras. Well we did what we could in the time we had.
We looked at this very specifically and we found absolutely not
a shred of evidence that anyone was shipping this offshore in
order to keep the price high here.
Senator Cantwell. Well you have a footnote here that it was
a Commission case. It says, such a concern is also underpinned
in the Commission's investigation of the BP Arco merger which
involved a major producer and seller of, in this case, Alaska
North Slope crude oil by BP, which sought to price discriminate
between West Coast refineries and companies in the Far East.
So, that's not in your report?
Ms. Majoras. That's what the concern was.
Senator Cantwell. But, it's somebody else's report. At
least somebody put a footnote in from somebody else's report,
then that has happened.
Ms. Majoras. That was the concern that it would happen if
we let the merger go forward without some divestitures and we
took care of the divestitures. In this investigation, we found
no evidence that it was in fact occurring and very little
exports were going away from the United States.
Senator Cantwell. So, do you think that that's a problem
and you should investigate more, or you don't think that's a
problem?
Ms. Majoras. We didn't find any evidence that it's a
problem.
Senator Cantwell. I'm asking, do you think you should
investigate that more?
Ms. Majoras. No, but if you think otherwise, we'll do it.
Senator Cantwell. OK. The last question, because I only
have a minute or so left, you did find in eight cases that
eight firms showed price increases for gasoline that exceeded
the 32 cent per gallon, or 5 cent per gallon above the national
average benchmark that was established for this report. And
seven of those eight refineries showed higher operating
margins. So they were making money and obviously, you concluded
that there couldn't be--those profit margins couldn't be
explained. That's very telling and I would think that that
would be a lead to investigate.
Now, when you look at the footnotes for all of that
information, it has been redacted. It's all redacted
information. Will you provide that information to the
Committee, so that the Committee can understand? In these
cases, where price manipulation has happened, exactly what has
transpired? How did the price manipulation happen and how can
we, as an oversight body, make sure that this isn't happening
on a larger scale if we can't get access to the redacted
information?
Ms. Majoras. I was required by law to redact the
information. That's what the statute says I have to do, Senator
Cantwell. So, I will work with the General Counsel's office to
see whether that information could be provided to the Members
of the Committee.
Senator Cantwell. I thank the Chairman.
The Chairman. Thank you very much. I do regret that I
didn't hear your testimony. I have had summaries of it from my
staff. So I'd like to go into a few things on my time and I
want to put my opening statement in the record without
objection; I will assume there will be no objection.
[The prepared statement of Senator Stevens follows:]
Prepared Statement of Hon. Ted Stevens, U.S. Senator from Alaska
We welcome the witnesses who appear before the Committee
today, and thank you for your willingness to participate in
this hearing.
The purpose of today's hearing is to examine the results of
the Federal Trade Commission's (FTC) Congressionally-mandated
investigation into whether the price of gasoline is being
artificially manipulated, and if price gouging occurred in the
aftermath of Hurricane Katrina. We look forward to hearing the
results of the FTC's investigation and thank the Commission for
its work.
The Committee will also hear testimony concerning factors
that dictate the price of gasoline as it passes along the
custodial supply chain, including the international and
domestic supply of crude oil, refinery capacity, the cost of
delivery to consumers, and state and Federal taxes. Those
testifying will explain which among these factors has most
contributed to the current levels of gasoline prices, and
whether consumers are being exploited by any party along the
supply chain.
It is not unusual for domestic retail gasoline prices to
rise sharply immediately following an abnormal market
disruption as retailers seek to hedge on unknown replacement
costs. As many of you know, this rise in price often triggers
consumer protests that gasoline suppliers are taking advantage
of these disruptions as profiteers.
In the aftermath of any major market disruption, such as a
natural disaster, terrorist attack, or geo-political
instability in oil producing countries, allegations of
exploitation by providers of essential goods and services often
become more prevalent. The aftermath of last season's
hurricanes and its long-term effect on the petroleum market has
proven no different. Some call this ``price gouging,'' while
others consider it to be a product of simple economic market
forces at work.
The Committee will seek answers from the witnesses today
regarding the FTC's findings in its report, the economic impact
of regulating oil and gasoline prices during abnormal market
disruptions, and the need for enhanced Federal regulatory
consumer protection authority to combat unconscionable price
increases during such disruptions.
I look forward to a constructive dialogue with the
witnesses.
The Chairman. But, Dr. Behravhesh, I'm a little confused
about the problem of pricing in terms of, we've been told that
the crude oil accounts were over half the costs of gasoline and
there are other factors that cause it to rise.
Now I've been throughout the country this last month and
I've paid as high as $3.75 to $2.60 for gasoline within this
month in different parts of the country. So what really causes
the price of gasoline to rise over the price of oil, in such a
specter of change? It's much higher in portions of the country.
Dr. Behravesh. A lot. Very much depends on geography,
basically how close a particular market is to the refinery or
to the distribution system. That can make a huge difference in
terms of the local price of gasoline. Whether it's in
Washington State, or in Alaska, or in Maine, or wherever, the
distance and the cost of getting the gasoline from the refinery
to that particular market, can make a huge difference. So
transportation costs make a big difference in local markets.
They wash out of the national average, of course. But in terms
of local markets, most of these differences are due to
transportation costs.
The Chairman. We've been told the speculative trading in
terms of spot and futurist markets have a lot to do with this.
Now, does that affect places like California and Arizona? I was
in California, it was very high. Arizona was very high compared
to other portions of the country. As a matter of fact, even
higher than some places in my state and we have a
transportation problem, as you know. We send our fuel, our
crude oil, down to Washington or somewhere and then it comes
back up as refined product. What about that? Is a portion of
these increased costs due to speculation for spot and futures?
Dr. Behravesh. Mr. Chairman, I think there has been some
influence of speculation, certainly in recent months. As I said
in my statement earlier, that has happened not just in oil
markets, but in other commodities markets, and it often happens
in the late stages of a boom. How big is it? We hear lots of
different estimates. It's $5 a barrel in oil, tt's $10. I don't
think it's $10--probably more like $5 is somehow or another
related to speculation. Although, as I said, there's a lot of
disagreement about that. Speculation affects the global and
national prices much more than the local prices.
Speculation is a much bigger factor in global markets.
The Chairman. Well, I read in the material I was reading
last night that Japan now has entered into buying as a
government, buying futures, as India and China has. How much is
that affecting our price system here?
Dr. Behravesh. Well again, I think in the very near term it
could have an impact, but yet in the longer horizon, I doubt if
it's going to have a huge impact. The underlying trend is a
huge and growing demand in India and China. That's really
what's driving prices up globally.
The Chairman. Well, that's what I'm saying.
Dr. Behravesh. Yes.
The Chairman. But this article said, they are actually, as
a government, buying. Buying the oil, putting their money down
for it for delivery two and 3 years out. Do you know about
that?
Dr. Behravesh. I'm aware of that, certainly to the extent
they're buying forward--buying now for later--I'm sure it has
pushed up the price, but eventually you would expect the price
would come down as these governments take deliveries. And
they've already bought the oil. So somewhere down the pike, you
would expect prices to drop.
The Chairman. How much of it is affected by the domestic
supply, the price of gasoline?
Dr. Behravesh. In the U.S.?
The Chairman. How much does domestic oil production affect
supply?
Dr. Behravesh. Again, Mr. Chairman, this is a global market
and as Chairman Majoras was saying earlier, one of the
responses after Katrina was we actually imported a lot more oil
and especially gasoline. We do import as the need arises. I
don't see domestic production or refining being a major
constraint at this point, because it is a global market.
The Chairman. But does it affect prices of gasoline?
Dr. Behravesh. No question, in the near term.
The Chairman. If we had more domestic supply, would prices
be less?
Dr. Behravesh. I think in a crunch, as in Katrina, I think
definitely. Our limited ability in a very short time horizon to
import, did push the price up. That was definitely one of the
things that was going on.
The Chairman. Mr. Slaughter, do you have any comments to my
questions?
Mr. Slaughter. Yes, Mr. Chairman. I would say about
domestic production--increased domestic production of oil would
be helpful. There is an international market for oil, but as
you know, a number of areas in the United States, we have a
possible access, in a relatively short period of time, to
significant reserves that would be helpful both in the global
market and in the domestic market.
And also, I would make the point that the Doctor is very
right in what he is saying about international competition from
India, China, and Japan. We're seeing that now in crude and
that's affecting the crude prices. We're also going to see that
in refined product prices like gasoline and diesel in future
years. And the U.S. doesn't pay enough attention to the fact
that we're going to have great competition for imports of
gasoline and diesel in coming years, just as we are now for
crude oil. And we don't pay enough attention to the impact on
supply, of much of what we do on energy legislation and
environmental legislation, because we are unable to keep up
with growing demand in this country with domestic refinery
additions, even though we're making them. And we're going to be
out on the market in this increasingly competitive environment,
looking for foreign sourced products and crude oil in a number
of years, with some very strong competition against us. And I
think we need to pay more attention to domestic production of
oil, and gasoline, and diesel, and other products than we have
in the past.
The Chairman. Some have called on Congress to cap gasoline
prices. We did cap the price of crude oil once, in recent
years. Do you believe it's possible for us to have a retail cap
on gasoline prices?
Mr. Slaughter. I think it would be counterproductive,
Senator. The experiences with price controls on gasoline in the
1970s were fairly disastrous. The idea of a retail cap is
basically going to make it so that demand cannot respond to
market sources. We're going to end up with shortages and
gasoline lines if we try to do something like that again. It
worked out that way in the 1970s and I think that was an object
lesson on what can happen.
I think, frankly, the answer to this high gasoline price
experience and perception is increased oversight hearings and
more information. But if you go the direction of price
controls, consumers are going to lose in the end. They always
have, sir.
The Chairman. Thank you, Ms. Majoras. We're in the process
of drafting a price gouging bill that deals with this situation
of multi-state operations. We have individual states with price
gouging legislation, but in some instances, the Attorney
General has indicated that they were unable to control the
situation or even deal with the situation because there was a
regional zone that covered more than one state. Have you looked
at that? Shouldn't the FTC have jurisdiction there, where
there's an allegation of price gouging that affects multi-state
operations?
Ms. Majoras. Well certainly, if Congress wants a price
gouging statute that can cover more than one state at a time,
then certainly. Yes, the FTC would be the place and we would
look at it on a multi-regional basis, certainly.
The Chairman. You found, as I understand it, 15 cases of
price gouging, as it was defined in the report, and 14 were
attributed to local or regional market trends. Do you think
that we should have legislation that would define price gouging
in another way?
Ms. Majoras. Well, I would expand the definition of price
gouging beyond where it was in Section 632, so that all market
conditions could be taken into account before someone is
accused of price gouging. Most certainly, if we're going to
slap criminal sanctions on these individuals, who--many of whom
we found, Senator, when we went out and we talked to them, and
we gathered the evidence about what happened, particularly at
the retail level are relatively unsophisticated, running their
business out of the glass booth, where they sell the gasoline
doing the best they can.
The Chairman. I want you to see if you will give us the
definition of price gouging. We've asked the attorneys general
to give us one and they agreed on one. We would like to see how
you would define price gouging in a Federal statute.
Ms. Majoras. Very well.
The Chairman. Thank you very much. Senator Pryor, you have
come back for a second round?
Senator Pryor. Yes, I have.
The Chairman. Senator Boxer wants 3 minutes before you, I
believe.
Senator Boxer. That's OK.
The Chairman. You have the floor.
Senator Pryor. How long is this round, Mr. Chairman?
The Chairman. I'd like to finish by 12:30, if we could. So,
5 or 6 minutes.
Senator Pryor. I will try to be brief and I would
appreciate if the panel could be brief in answers, because we
are time constrained here. Dr. Behravesh, I am confused on
something, because you gave out these charts earlier, chart 3
and 4, where you have these charts about how much cost is in a
gallon of gasoline. And his dealers margin taxes are fine, it's
margin crude oil prices. But a few moments ago, in response to
one of Chairman Stevens questions you said a big factor in
price differences is geography. I don't see geography listed in
your chart here. Could you explain that?
Dr. Behravesh. I think we were talking about regional
differences. These wash out of the national level. But easily,
I can imagine some regions and some markets below this average
and some regions and markets above. I think that was the
question I was answering.
Senator Pryor. I just want to be certain on the usefulness
of the chart, because it seems somewhat limited now that I've
heard your questions. Let me ask this, a few moments ago, you
probably heard Chairwoman Majoras say, that low inventories
make the market prone to price spikes. Do you agree with that?
Dr. Behravesh. I completely agree with that.
Senator Pryor. You also said in your testimony, you talked
about thin capacity and also we talked about tight markets
today. Is that all the same thing?
Dr. Behravesh. Very much so.
Senator Pryor. And in your view--and it sounds like you
understand the oil industry. In your view, are those low
inventories, or tight markets, or thin capacity, are those the
result of decisions made by the oil industry?
Dr. Behravesh. Senator, I think it is more decisions made
by OPEC frankly, than the oil industry itself. I think one
thing that hasn't been said so clearly is the oil companies are
largely marginalized these days. We can use whatever term we
want to use, exploitation or whatever, but, they've very much
gone along for the ride. But in the end, they're not in the
driver's seat. This is very much a story about OPEC.
Senator Pryor. I guess what I'm asking you is, what
incentive do they have to increase their capacity, to increase
their inventories, et cetera if as we've learned today, when
markets are tight, their profits go up. It seems like they have
every incentive in the world to keep the market tight and to
create their price spike. Am I wrong on that?
Dr. Behravesh. I think we have to be a little bit careful.
First of all, the question is what room to maneuver do they
have in terms of exploration and drilling? And the reality is,
in the global markets they don't, because they don't have
access to a lot of fields that they did before, because they
are getting frozen out by the national governments.
On the refinery side, I think you've got your answer in
terms of existing refining capacity being expanded. We can
debate about is this capacity enough, or isn't enough, but it
is being expanded. My sense is--again I'm no big expert in
terms of the oil companies themselves--they're doing what they
can under very tight constraints. That's the sense I'm getting.
Senator Pryor. Chairwoman Majoras, let me ask you if I can,
we just have a few minutes left here and that is maybe a
sensitive subject. I don't mean it to be sensitive, but as I
understand it before you came to the Federal Trade Commission,
you were a counsel for Chevron?
Ms. Majoras. I did 70 hours worth of work for them in 2004.
Senator Pryor. Tell me about that. You mean, you were a
lawyer and you just represented them on something?
Ms. Majoras. I was their lawyer at a law firm and worked on
a piece of litigation for them, for a total of 70 hours.
Senator Pryor. Did you represent other oil interest when
you were in private practice?
Ms. Majoras. No. I never have.
Senator Pryor. That clears up something in my mind. I
didn't understand the nature of that. Is there anything,
Chairwoman Majoras, in this investigation that you've given us
today, that troubles you? Is there anything that gives you
heartburn or gives you concern about the oil industry, as it
exists today?
Ms. Majoras. I didn't find any law violation. We didn't
find any law violations.
Senator Pryor. I'm not just talking about law violations.
Ms. Majoras. But I wanted to make that point clear. The one
thing that we don't--we can't totally explain, although I'm not
sure it would be in the report if we could because it relates
to what's going on right now is some of the basis for refining
profit today, which when we do our investigation that we're
about to start, that the President and the leadership of
Congress have asked us to do, we're going to take a closer look
at that and see where all of that is coming from.
We certainly understand why profits are high in some sense.
But we want to be sure we have a full understanding, so we can
explain it to consumers.
The Chairman. Senator, can you make this your last
question?
Senator Pryor. I would be glad to. So a last question for
the panel, if Congress does pass a price gouging statute and I
know there are some on the Committee and elsewhere that are
working on one, what should that look like? I know you've
talked before about how you don't like some price gouging
statutes, but what are the elements of that, that you think
would be beneficial to the marketplace?
Ms. Majoras. Obviously, we'd make sure you take into
account cost. And I also would make sure you take into account
supply and demand conditions that the retailers, wholesalers,
and refiners are facing. Because that is going to be how they
set their prices and we'd be happy to work with you, Senator
Pryor, and anyone on the Committee on that.
Senator Pryor. Anybody else?
The Chairman. I'm going to stop this soon. I have to leave
at 12:30 and Senator Boxer wants a few minutes.
Senator Pryor. I'll tell you what, we can talk about--why
don't I talk to them after the hearing. How does that sound?
The Chairman. Senator Boxer?
Senator Boxer. Mr. Chairman, I think the FTC needs a
reality check. You talk about independently-owned gas stations,
do you know that there are hardly any left in this country?
That is not what this Committee is upset about. We're on the
side of the independent gas station. We're talking about the
big guys here. And to be honest with you, Chairwoman Majoras, I
think you're on their side. That is your right. But I think--I
just want to tell you, in California we caught Shell Oil with
their gas pump down.
They wanted to close a refinery that they owned. In your
report, you call it a small refinery. How about this? It's 12th
out of 21 in California in terms of refiners. I would ask
unanimous consent to put this in the record?
You're editorializing here. You let them off the hook. The
people in my state knew exactly what they were doing, because
they are smart. The investigative reporters from republican
newspapers and democratic newspapers knew what they were doing.
The bipartisan congressional delegation knew exactly what they
were doing. The attorney general of my state knew exactly what
they were doing. You're the only entity in the country that
didn't see what they were doing and you gave them a whitewash.
They lied to us in front of the Committee and I would ask
unanimous consent to put into the record the letter that they
wrote, in which they said they were absolutely looking for a
buyer. When in truth, they were not.
I would ask unanimous consent to place in the record other
documents that said, that they maintained that this refinery
made no money. At the end of the day, it was a big profit
maker.
And you let them off the hook. Why do I come back to this?
Because we know the facts here. And when you say, you do a
price gouging legislation, you tell Senator Pryor, I hope you
will take into consideration cost, and supply and demand. Well
as my kids would say, that's a ridiculous answer.
If you are just exhibiting the outgrowth of supply and
demand, that's not any antitrust violation. That is not an
anti-gouging situation. It is when you try to manipulate the
supply if you're just passing on cost, so why would you even
say that? Of course it's----
Ms. Majoras. It's in Senator Cantwell's legislation.
Senator Boxer. Of course, anti-gouging legislation doesn't
deal with supply and demand. It deals with bad actors who are
manipulating.
Ms. Majoras. Of course and it's in Senator Cantwell's
legislation.
Senator Boxer. I'm just saying, your answer doesn't help us
very much because obviously, we're not going after a raw supply
and demand circumstance. We're not going after a circumstance
where the cost is greater and it's passed on. We're going after
a circumstance where the cost is greater and they pass that on
plus billions of dollars. And you can shake your head all you
want, Mr. Slaughter and I appreciate that you do a great job
for the oil companies. The American people don't get it.
And last, in conclusion, in the favorite words my Chairman
wants to hear, when you say you're with real people and you're
asking them about prices at the pump, and they go into a
dissertation about their home, that doesn't pass the smell
test. And I would invite you--and I don't know if you want to
do this, but I would invite you to come out to California with
me and talk to the real people who are working people.
Whether they own a home or they don't own a home, they're
not going to sell the home to pay for the higher gas prices. So
that answer shows your true colors in terms of your lack of
empathy, understanding with your basic mission.
So, Mr. Chairman, I'm very disappointed in this report. I
think it's a whitewash and worse. And we're going to keep
working, even if it doesn't involve the FTC. Maybe we need to
investigate the FTC.
Ms. Majoras. Do you want my response, Senator?
Senator Boxer. Anything you want.
Ms. Majoras. First of all, 60 percent of gasoline is still
sold by independents. Just so you know.
Senator Boxer. In my state, it's 15 percent.
The Chairman. Senator, sometime we have to get to the end
of this.
Ms. Majoras. The number is less in California, but
throughout the country and those that we found that met the
definition of price gouging who were retailers, Senator, were
all independent, unbranded. And that's why I raised that
earlier with some of the other Senators.
With respect to whitewashing on Shell Oil, our authority is
to determine, Senator, whether someone is violating the laws we
enforce. And that is what we did with respect to Shell in the
Bakersfield situation. We didn't whitewash anything. We did an
investigation and we determined whether the antitrust laws had
been violated, and we found that they had not.
And finally, I guess I would give you the same invitation,
Senator Boxer. I'm sorry you're displeased with the FTC, but
I've never wanted to make this personal, but if you have any
doubt whatsoever about my caring, and my empathy, and my
background of working class for the people of American, then I
would like to spend--suggest you spend some time with me.
Because nobody who works with me, doubts that for one second.
Senator Boxer. That's fine. I'll be happy to spend as much
time as you want. That's fine.
The Chairman. Thank you, Senator. Mr. Slaughter, Senator
Boxer indicates that she believes that the majority of the gas
stations are owned by the major oil companies and refiners, is
that correct?
Mr. Slaughter. Only about 10 percent of the service
stations are owned and operated by major refiners, Mr.
Chairman. The rest are operated by independent businessmen.
The Chairman. I do thank you and this is a very contentious
issue. I think all Americans are concerned about gasoline
prices. There's no question about that. But it's something we
have to continue to explore. And I do thank all of you for your
time, and patience, and your answers.
Senator Pryor would like to have each of you answer his
last question in writing. If you would do that for him, we
would appreciate it. He may give it to you in writing himself.
Senator Boxer. Before you put a--close the record, can I
put a statement in the record about this 15 percent?
The Chairman. You can put whatever you want in the record,
but the hearing is over.
Senator Boxer. Whether it's over or not, I'll put it in the
record. Fifteen percent are independently owned in California.
[The information referred to follows:]
2004
------------------------------------------------------------------------
Taxpayer 2004 Gallons
------------------------------------------------------------------------
BP West Coast Products LLC 3,079,832,017
Chevron U.S.A., Inc. 2,910,858,984
Equilon Enterprises, LLC 2,310,094,796
ConocoPhillips Company 2,235,896,981
Valero Marketing & Supply Company 1,693,335,340
ExxonMobil Corporation 1,050,894,058
Tesoro Refining and Marketing Co. 915,684,803
Tower Energy Group 379,335,149
Petro-Diamond Incorporated 301,175,310
New West Petroleum, Inc. 248,176,975
All Others 816,448,499
------------------------------------------------------------------------
Total 15,941,732,912
------------------------------------------------------------------------
2001
------------------------------------------------------------------------
Market Share
Taxpayer (in percent)
------------------------------------------------------------------------
ARCO/BP-Amoco 22.60
ChevronTexaco (Chevron and Texaco from Equilon merged 10/ 19.91
9/01)
Equilon: Shell 15.80
ExxonMobil (merged 12/98) 9.96
Tosco/Unocal 17.66
Valero (Ultramar, Beacon) 6.99
Unbranded & Others 7.08
------------------------------------------------------------------------
1995
------------------------------------------------------------------------
Market Share
Taxpayer (in percent)
------------------------------------------------------------------------
ARCO 18.5
Chevron 16.9
Exxon 6.8
Mobil 8.9
Shell 13.2
Texaco 5.1
Unocal 11.0
Independents & Others 19.7
Tosco 6.4
Ultramar 6.5
Unbranded 6.8
------------------------------------------------------------------------
1990
------------------------------------------------------------------------
Market Share
Taxpayer (in percent)
------------------------------------------------------------------------
ARCO 19.0
Chevron 16.2
Exxon 7.8
Mobil 6.1
Shell 14.4
Texaco 5.1
Unocal 11.5
Independents & Others 20.1
------------------------------------------------------------------------
1980
------------------------------------------------------------------------
Market Share
Taxpayer (in percent)
------------------------------------------------------------------------
ARCO 11.6
Chevron 18.5
Exxon 5.4
Mobil 8.3
Shell 14.9
Texaco 8.5
Unocal 11.5
Independents & Others 22.3
------------------------------------------------------------------------
1965
------------------------------------------------------------------------
In 1,000
Taxpayer gallons of Market Share
gasoline (in percent)
------------------------------------------------------------------------
Caminol 57,309 0.80
Coastal 13,493 0.19
Douglas 145,096 2.02
Fletcher 43,442 0.60
Gold. Eagle 97,284 1.35
Gulf 314,005 4.37
Humble 77,445 1.08
Mohawk 52,140 0.73
Newhall 7,546 0.11
Powerine 155,322 2.16
Richfield 648,771 9.03
Seaside 63,338 0.88
Shell 1,143,160 15.91
Signal Oil-Gas 281,005 3.91
Soc.-Mobil 609,964 8.49
Standard Oil of Calif. 1,684,072 23.44
Sunland 25,813 0.36
Texaco 589,515 8.21
Tidewater 406,341 5.66
Time 67,063 0.93
Union 706,345 9.83
Total Calif. 7,183,161
------------------------------------------------------------------------
Information from 1965 Pacific States Gasoline Sales Tax Report. For more
information, see: http://home.pacbell.net/lcobb/gas65rpt.htm
Sources: 1965, Pacific States Gasoline Sales Tax Report. For more
information, see: http://home.pacbell.net/lcobb/gas65rpt.htm.
1980 and 1990, The Sacramento Bee, April 14, 1991, chart based on
information supplied by the Lundberg Survey.
1995, California Energy Commission Fuels Office based on Fuel Taxes Paid
compiled by California Board of Equalization.
2001, California Board of Equalization, 2000-2001 Annual Report,
Statistical Appendix Tables, Table 25 (http://www.boe.ca.gov/annual/
table25_01.doc).
Notes: Distributors are companies or individuals who make the first
distribution of gasoline in California, and are responsible for
payment of the tax. (Aircraft manufacturers and certificated or
licensed carriers by air may be included within the definition of
distributor.) ``Broker'' includes every person, other than a
distributor or a retailer, who deals in lots of 200 or more gallons of
gasoline.
Adjustments include temperature-corrected gallonage from broker returns,
late returns, audits, interest, and penalties.
______
California's Oil Refineries
California's refineries are located in the San Francisco Bay area,
Los Angeles area and the Central Valley. Statewide in 2004, refiners
relied on Alaska for 21.7 percent of their petroleum supply, California
for about 41.9 percent, with foreign sources providing the balance of
36.4 percent. Each day approximately two million barrels (a barrel is
equal to 42 U.S. gallons) of petroleum are processed into a variety of
products, with gasoline representing about half of the total product
volume. (A list of refineries, their location and capacity is shown in
the table below.)
Refineries can be classified as topping, hydroskimming or complex.
Topping refineries are the least sophisticated and contain only the
atmospheric distillation tower and possibly a vacuum distillation
tower. The topping refiner's ability to produce finished products
depends on the quality of the petroleum being processed. A
hydroskimming refinery has reforming and desulfurization process units
in addition to basic topping units. This allows the refiner to increase
the octane levels of motor gasoline and reduce the sulfur content of
diesel fuel. Complex refineries are the most sophisticated refinery
type and have additional process units to ``crack'' the heavy gas oils
and distillate oils into lighter, more valuable products.
Using a variety of processes including distillation, reforming,
hydrocracking, catalytic cracking, coking, alkylation and blending, the
refinery produces many different products. The four basic groups are
motor gasolines, aviation fuel, distillate fuel and residual fuel. On a
statewide average, about 12 percent of the product from California's
refineries is aviation fuel, 13 percent is distillate fuel and 9
percent is residual fuel.
Complex refineries have the highest utilization rate at
approximately 95 percent. Utilization rate is the ratio of barrels
input to the refinery to the operating capacity of the refinery.
Complex refineries are able to produce a greater proportion of light
products, such as gasoline, and operate near capacity because of
California's large demand for gasoline. Permitting Issues. It is
unlikely that new refineries will be built in California. In fact, from
1985 to 1995, 10 California refineries closed, resulting in a 20
percent reduction in refining capacity. Further refinery closures are
expected for small refineries with capacities of less than 50,000
barrels per day. The cost of complying with environmental regulations
and low product prices will continue to make it difficult to continue
operating older, less efficient refineries.
To comply with Federal and state regulations, California refiners
invested approximately $5.8 billion to upgrade their facilities to
produce cleaner fuels, including reformulated gasoline and low-sulfur
diesel fuel. These upgrades received permits since low-sulfur diesel
fuel regulations went into effect in 1993. Requirements to produce
Federal reformulated gasoline took effect at the beginning of 1995, and
more stringent state requirements for CARB reformulated gasoline went
into effect statewide on April 1, 1996. That requirement was removed by
Governor Gray Davis when it was found that the oxygenate, methyl
tertiary butyl-ether or MTBE, was leaking from some underground storage
tanks and polluting water supplies. MTBE was phased out and removed as
of December 31, 2003, and replaced by ethanol.
Refineries Outside of California That Can Produce California Gasoline
Domestic sources include refineries located in Washington State and
the U.S. Gulf Coast. Foreign sources include Eastern Canada, Finland,
Germany, U.S. Virgin Islands, Middle East, and Asia.
California Oil Refinery Locations and Capacities
Classification of refiners based on crude oil capacity (barrels per day)
------------------------------------------------------------------------
Barrels
Refinery Name Per Day CARB Diesel CARB Gasoline
------------------------------------------------------------------------
BP West Coast Products LLC, 260,000 Yes Yes
Carson Refinery
Chevron U.S.A. Inc., El 260,000 Yes Yes
Segundo Refinery
Chevron U.S.A. Inc., 242,901 Yes Yes
Richmond Refinery
Tesoro Refining & Marketing 166,000 Yes Yes
Company, Golden Eagle (Avon/
Rodeo) Refinery
Shell Oil Products US, 154,900 Yes Yes
Martinez Refinery
ExxonMobil Refining & Supply 149,000 Yes Yes
Company, Torrance Refinery
Valero Benicia Refinery 144,000 Yes Yes
ConocoPhillips, Wilmington 133,100 Yes Yes
Refinery
Shell Oil Products US, 98,500 Yes Yes
Wilmington Refinery
Valero (Ultramar) Wilmington 80,887 Yes Yes
Refinery
ConocoPhillips, Rodeo San 73,200 Yes Yes
Francisco Refinery
Big West of California LLC, 66,000 Yes Yes
Bakersfield Refinery
Paramount Petroleum 50,000 Yes Yes
Corporation, Paramount
Refinery
ConocoPhillips, Santa Maria 41,800 No No
Refinery
Edgington Oil Company, Long 26,000 No No
Beach Refinery
Kern Oil & Refining Company, 25,000 Yes Yes
Bakersfield Refinery
San Joaquin Refining Company 24,300 Yes No
Inc., Bakersfield Refinery
Greka Energy, Santa Maria 9,500 No No
Refinery
Lunday Thagard, South Gate 8,500 No No
Refinery
Valero Wilmington Asphalt 5,900 No No
Refinery
Tenby Inc., Oxnard Refinery 2,800 No No
------------------------------------------------------------------------
Note: Data on this table represents total crude oil capacity not
gasoline, distillate production, diesel fuel production or production
of other products. Production potential varies depending on time of
year and status of the refinery. A rule of thumb is that roughly 55
percent of total capacity is gasoline production (about 1.1-1.2
million barrels of gasoline--46 to 50 million gallons--is produced per
day).
Source: California Energy Commission Fuels Office Staff.
Terminal Facilities
California's nearly 100 terminals receive petroleum and petroleum
products by tanker, barge, pipeline, rail or truck. Most of
California's terminals are marine terminals. At these facilities
petroleum or product is transferred from or to tankers or barges.
Tankers loaded with Alaska North Slope petroleum, for example, enter
marine terminals in northern and southern California, where the crude
oil is then sent to refineries by pipeline for processing. An example
of pipeline receipts of petroleum at a terminal is heavy California
petroleum produced in the Bakersfield area that is sent by pipeline to
a refinery at Martinez.
Terminals also serve as refiner's wholesale distribution points for
products. Product, such as gasoline, is sold to distributors (jobbers)
who then sell to consumers through the distributors' own retail
stations. The distributor may also resell the gasoline to other station
dealers. Gasoline can also be sold directly to station dealers from the
terminal. The marketing structure differs depending on the type of
product being sold.
A terminal can be linked with several refineries and storage
facilities and be supplied by privately-owned pipelines or a common
carrier line. Total capacity at a terminal can range from a few
thousand barrels to a few million barrels. The most apparent equipment
at a terminal are the tanks used for storage and separation of
different product grades. The number of tanks can range from a few to
more than 70. Other equipment found includes piping, pumps, valves, and
meters needed for bulk receipts and for loading racks used for small
deliveries to trucks. Marine terminals have vessel length and water
depth limits that dictate the size of tankers that can off-load at the
facility.
Permitting Issues. Some of the environmental and safety issues
associated with permitting petroleum and petroleum product terminals
include:
Changes in visual quality.
Disturbances to vegetation and wildlife.
Emissions from floating roof tanks.
Potential water and soil contamination from earthquake-
damaged tanks.
Increased tanker traffic and potential for spills at marine
facilities.
References
1. U.S. Petroleum Refining, Meeting Requirements for Cleaner Fuels
and Refineries, Volume I, National Petroleum Council, August, 1993.
This document is a comprehensive assessment of how environmental
regulations impact the petroleum refining industry and U.S. consumers.
2. Fuels Report, California Energy Commission, December, 1995,
Publication No. P300-95-017. The Fuels Report describes emerging trends
and long range forecasts of the demand, supply and price of petroleum,
petroleum products, natural gas, coal and synthetic and other fuels. It
is the state's principal fuels policy document.
3. Petroleum Industry Information Reporting Act submittals from the
petroleum industry to the California Energy Commission.
4. Quarterly Oil Report, Fourth Quarter 1993, April 1994,
California Energy Commission, Publication No. P300-94-003. This report
describes petroleum fuels market trends, price trends, refinery
activity, oil production trends and petroleum company financial
performance. It contains aggregated petroleum statistics for California
based on industry submittals to the Commission including refinery
utilization rates.
5. 1994 Annual Report, Western States Petroleum Association.
Source: Energy Aware Planning Guide II: Energy Facilities,
California Energy Commission, Publication No. 700-96-006, December
1996, Appendices B-24 and B-25.
______
Sacramento News and Review, May 8, 2003
Agasination
oil giants are tightening their grip on the california gas market,
squeezing small retailers out of business--and charging you more at the
pump
By Jeff Kearns
Just off the freeway in North Sacramento, the various strata of the
retail gasoline business are laid out along a busy road like the layers
of a geological core sample.
Exit I-80 at Northgate Boulevard, head south, and the first gas
station just past the sweeping curve of the offramp is a Shell station.
For gas stations, this is prime, high-volume real estate. The bright
yellow shape of the station's clam-inspired logo beckons exiting
motorists. Below that, the station is clean and neat with new-looking
pumps ready to take your credit or ATM card. On a day in mid-March,
when gas prices were at their peak, unleaded self-serve gas at this
station was at $2.159.
A few blocks south, there are two more stations across the street
from one another. On the same day, a Chevron with a high price posted
on the curb sat nearly empty on one side of the street, but the Arco
AM/PM station across the street was packed, nearly every pump
dispensing fuel at about a dime a gallon less than at the Chevron.
Arco, a cash- or ATM-card-only operation, is the only discounter among
the major brands. Farther south, there is a 76 station and then, as the
neighborhood starts to look just a little rougher, a Tesoro. It's
nearly a mile from the freeway and is the last recognizable gas logo on
the boulevard.
After that, there are more stations, but they are all independents,
the kind that sell cheap gas and don't display corporate logos. The
first one, on the left a few blocks past the Tesoro, is Northgate
Liquor and Food. The two small islands under the canopy out front have
old-style pumps without card readers. The station's small mini-mart is
a modest building with faded advertisements taped in the windows. The
store sells the usual items: liquor, cigarettes, candy and snacks. But
the sign out front on that mid-March day listed one of the lowest gas
prices in town: $2.039.
Inside, a steady stream of customers walked in and slid crumpled
bills across the counter for gas. Navjot Singh, who runs the station
for his uncle, put the bills in the register and thanked everyone.
Propped up in the corner behind him, within easy reach but hidden from
view, was an old wooden baseball bat.
Running a small, independent gas station is a tough business, but
during price spikes like the one that sent fuel prices to record highs
all over California this year, it becomes all but impossible for
independents to make money selling gas.
Tony Riar, Singh's uncle, is one of the two co-owners of Northgate
Liquor and Food. Every morning, he's up around dawn and off to open the
gas station. He drives that same stretch of Northgate Boulevard that's
lined by gas stations, and he checks the price at each station as he
drives. The prices climbed at an incredible rate during the first
months of the year.
After he gets to work, Riar calls his suppliers to find out who's
cheapest. But on this day, the price for regular unleaded had jumped by
another 2 cents a gallon since the last time he'd ordered gas, a couple
days earlier. So, he picked the least expensive one and placed an order
for a tanker to replenish the supply in the tanks buried underneath the
station. Then Singh walked out to the street, where the sign read
$2.019 for regular, and raised it by 2 cents. Singh then entered the
change in the computer that runs and monitors the pumps.
But, although Riar's price had gone up by 2 cents, and he'd covered
it by upping his own price 2 cents, he wasn't making money. By selling
gas for less than what he paid for it, Riar was losing 2 cents for
every gallon his customers pumped into their tanks, about 2,000 gallons
on an average day.
What happens to a few independent gas stations doesn't usually
concern anyone beyond the regulars who stop there. But increasingly,
independents are being squeezed out of the California market. That's
significant because independents play an essential role in keeping
retail prices down, by providing competition. Without independents, oil
companies that own refineries and control retail stations have much
less incentive to compete by keeping their own prices low. In a state
that guzzles 40 million gallons a day, that's something that could have
serious implications for an economy that lives and dies by the gas
flowing through its veins. For the most part, gas isn't really
something consumers have much of a choice about buying, and even if
they go cold turkey, fuel is a commodity that, either directly or
indirectly, is part of the price of almost every product and service.
For small gasoline retailers like Riar, taking a loss when prices
spike is now part of doing business. As an independent, Riar can buy
gas from whichever local supplier has the best price. Branded stations,
on the other hand, pay fixed prices set by supply contracts signed with
major refiners. But when supplies tighten, those branded stations have
priority over wholesale dealers that sell to independents like Riar,
and the increased demand drives up wholesale prices. It's called an
inversion. That kind of situation arises because refiners can produce
more gas than the market needs, and the surplus is what usually goes to
independents.
Branded stations make up about 70 percent of retail gas stations,
according to a state estimate from 2000. Independent, unbranded
stations and refinery-owned and -operated stations each make up about
15 percent.
Back in December, when gas prices were at relatively low levels,
wholesale prices were at the lowest in a year. Riar could shop around
and buy gas cheaper than the major-brand stations up the road. He could
keep prices low and still make about 10 cents a gallon.
Part of the problem for independents is that California is an
island, isolated from the supply networks that connect much of the rest
of the country. Also, state clean-air laws mandate some of the cleanest
burning gas in the world, and almost no out-of-state refineries are set
up to produce it. On top of that, there are just 11 refineries in
California, down from more than 30 in the mid-1980s, and those
remaining refineries are in fewer hands. Five years ago, the world's
biggest oil companies started a wave of consolidation that left the
world energy market in the hands of about a half-dozen major players.
In one of the largest consolidations, 2 years ago, San Ramon-based
Chevron swallowed up Texaco in a $45 billion merger.
The question of how much profit refiners make comes up every time
gas prices spike, when politicians, helpless to respond to the
complaints of outraged constituents, start calling for investigations
into allegations that oil companies are gouging consumers by keeping
supplies low, which increases prices. Governor Gray Davis did it in
March, when he asked the state energy and utilities commissions to
probe gas prices. So did Senator Barbara Boxer, who requested a Federal
inquiry.
At times like those, oil companies never want to talk about price
spikes. They refer press calls to the Washington, D.C.-based American
Petroleum Institute (API), the industry's lobbying group. API's
standard response is that none of the price-gouging charges has ever
stuck.
``We've had 25 requests by politicians to look into price
gouging,'' said API spokesman Bill Hickman. ``And we were exonerated
every time.''
And Chris Walker, a Sacramento lobbyist for an association of
branded gas stations, said gouging allegations are a red herring.
California's refiners aren't doing anything more than making money, he
said, which gets easier as competition slackens. ``It's not a grand
conspiracy.''
Though the state tracks oil-refiner margins (the difference between
what a refinery pays for crude and how much it charges for gas), that
number doesn't show how much the refiner profited for each gallon of
gas produced.
The California Energy Commission breaks down the costs of a gallon
of gas on its website. The figures break down how much goes to crude-
oil costs, wholesaler costs and profits, refinery costs and profits,
and taxes. The refiner cost-and-profit margin usually accounts for
around 30 cents per gallon of gas sold at retail.
This year, according to state figures, refiner margins more than
tripled in less than 3 months. On January 1, unbranded gas averaged
$1.58 at the pump, with refiner margins of 21 cents per gallon. When
prices peaked 10 weeks later, the same gallon of gas went for $2.14,
but the refiner margin had shot up to 76 cents per gallon.
It may sound like refiners are holding consumers hostage, but state
investigations have never found anything resembling a smoking gun. The
most comprehensive study of the California market was issued by state
Attorney General Bill Lockyer in 2000. The report, produced by a task
force as part of an investigation that continues today, found no
wrongdoing but also concluded that there's just not much competition in
the state anymore. The main reasons are that refining capacity is tight
and that the refiners who produce the state's gas also have a lot of
the retail outlets locked up.
``Although similarly structured as other markets, the gasoline
industry in California is more concentrated and vertically integrated
than gasoline industries in other key refining areas of the United
States,'' the report concluded. ``In California in 1990, the refinery
market share of the largest seven branded refiners was less than 80
percent. Today, just six refiners control 92 percent of the state's
gasoline-refining capacity. These same six refiners account for more
than 90 percent of the gasoline consumed in the state.''
With a business partner, Riar bought his gas station in 1989 after
giving up a Silicon Valley tech job to move to Sacramento. He was tired
of living in the Bay Area, and Sacramento put him closer to the places
where he hunts bear and deer. The switch meant hard work: Riar's
workdays can stretch up to 10 or 12 hours, starting at 6 a.m. when he
opens the gas station. Running the station himself and hiring family
members to help is a way to keep costs down. ``We are surviving because
we don't count our hours,'' he said one morning. A lot of
independents--the ones that are left, anyway--do the same, he said.
Five years ago, environmental laws mandated new underground storage
tanks for all gas stations. Riar kept the mini-mart part of the gas
station open while the old tanks were dug up and replaced. The work
alone cost $165,000, but Riar weathered the disruption--something a lot
of independents couldn't do.
Mini-market items like the food and drinks sold inside can be a
saving grace because they usually have a much bigger margin than gas
does (a soda, for example, might cost pennies but sell for dollars).
But that's complicated by the fact that high gas prices mean customers
have less money for other items, so they buy fewer sodas and candy
bars. The challenge is to keep gas prices low enough to keep a steady
stream of customers coming in the door.
``We're selling gas well because we're independent, but we're
getting no profit,'' he said. ``We have to sell the gas as cheaply as
we can to keep going.''
Adding insult to injury, Singh said, customers complained about the
high prices and blamed him. The irony, of course, is that as he said
this, the profits were being taken far up the supply stream, before one
drop of gas went out the refinery gate.
Since the region's first refinery went up a century ago, Northern
California has been getting almost all of its gas from refineries
clustered around the Carquinez Strait, in places like Martinez, Rodeo
and Benicia. Today, there are five major refineries in the area, all
taking oil from ships and pipelines and then pumping it through tubes
inside a high-pressure furnace that breaks down crude oil's
hydrocarbons into different compounds.
These refineries pump the finished fuel products through a network
of underground pipelines to regional distribution centers. Sacramento's
fuel comes to two terminals, one on Bradshaw Road and the other where
Broadway meets the Sacramento River. At these distribution centers, or
racks, gas is stored in tanks and then trucked to gas stations.
Most of the gas at the racks is already spoken for by branded
stations that have supply contracts with refiners, but there's also
surplus gas. The leftovers are what wholesalers buy and then sell to
independent stations.
The system works until a hiccup--from minor things like bad
mixtures of gas to big things like explosions--disrupts refinery
output. When there's a shortfall, prices jump, and independent
stations, which don't have supply contracts, end up paying much higher
prices. If there's a severe shortage, independents also are the first
to be refused.
That decline of independent retailers eliminates a key downward
force on prices, said Severin Borenstein, director of the University of
California Energy Institute at the University of California, Berkeley.
``It's potentially quite serious because independents seem to be the
real competitive force in retail. They're the ones that keep some check
on the branded prices.''
With just a handful of refiners left, Borenstein said, ``the market
has gotten pretty tight over the last few years. They're not running
with a lot of excess capacity, so it has gotten a lot harder for the
no-brand retailers to buy gasoline at the rack.''
Will Woods, Executive Director of the Laguna Hills-based Automotive
Trade Organizations of California, a group made up mostly of branded
dealers, pinpoints Arco's 1997 acquisition of independent gas retailer
Thrifty as the moment things started to get really hard for
independent, unbranded stations. Thrifty was the last major supplier to
independent retailers, and its disappearance eliminated a force that
brought all gas prices down.
``When Arco and Thrifty merged, the trucks were lined up at the
gate, and Arco was saying, `Sorry. We don't have anything for you. We
need it all for Arco.' In that time period, all but the 10 percent that
are left have either gone out of business or branded up to become a
branded dealer.''
That made it even harder on gas stations that remained independent.
Today, Woods said, unbranded independents make up about 10 percent of
the state's gas stations, which helps keep California gas prices among
the highest in the country. In Texas, where gas is cheap, half of all
stations are independent.
Tom Dwelle, Chief Executive Officer of Auburn-based Nella Oil, is
on the opposite end of the spectrum of independent retailers. His
company owns 70 gas stations in California. Some stations are the
company's own brand, Flyers, and others have contracts with major oil
companies to sell gas at branded stations. Nella is also a fuel
wholesaler, running 30 tanker trucks 24 hours a day.
Dwelle grew up south of Fresno, in Hanford, where his grandfather,
Walter Allen, founded Beacon Oil in 1931. In 1979, he and his three
brothers formed a sister company called Nella, starting with one gas
station (the name ``Nella'' is ``Allen'' spelled backward). Beacon was
later snapped up by Canadian oil giant Ultramar. (In an example of how
mergers and acquisitions have brought some industry assets full circle,
some of the 23 gas stations that Nella recently bought from Tesoro last
year were Beacon stations first opened by Walter Allen.)
Nella does millions of dollars worth of business every year, but
it's still a relatively small company, and it got hit hard during the
price spikes.
When prices leap quickly, Dwelle said, he can't keep up by charging
his customers more. ``We're at their mercy,'' he said. ``I can't go up
and raise the street [price] up immediately by 5 cents, because Arco
will eat my lunch.''
In mid-March, Dwelle said he and a lot of other independent
wholesalers and retailers were caught in the same bind, unable to cover
high costs. That same trend, throughout the years, has been the factor
that pushed many independents out of business when they couldn't keep
up.
``There aren't any more moms and pops around'' anymore, Dwelle
said.
Dwelle knows firsthand about independents going under because his
company bought some of the failed stations. In a hangar next to his
office just off the tarmac at Auburn Municipal Airport, the Dwelle
brothers keep some of the relics of the business, from old-fashioned
gas pumps with clear glass tanks on top to old signs advertising long-
forgotten brand names such as Big Dummy Gas, a station the Dwelles
acquired more than two decades ago after the gas shortages of the late
1970s.
International supply disruptions, such as the labor unrest that
shuttered Venezuela's state-run oil company this year, can cause some
headaches, Dwelle said, but most problems are due to the tight supply
in California.
When prices shot up, Dwelle said, the 10 to 12 cent margin he
needed to make money selling gas vanished, leaving his stations to sell
at a loss, just 5 cents profit per gallon. ``We need 7 or 8 cents'
margin to be profitable. That's the cost of opening the doors.''
At the same time as factors like that force stations to close their
doors every year, the consolidation among big refiners means there are
fewer refineries competing with one another, so prices increase.
``In the old days, we had a lot of refiners, but 23 of them in
California have closed in the last 15 years,'' Dwelle said. ``I had
great fun playing the suppliers off of each other, but we can't do that
anymore because they're all joining forces.''
Dwelle said his company was getting squeezed by high prices, but it
wasn't something that would put him out of business. But it's different
for some of the small stations his company supplies, some of which are
coming close to closing--especially after having to pay for pricey
underground tank upgrades a few years ago. Dwelle wouldn't name names,
but he said he sees the signs when stations sell their trucks, pay
employees poorly, don't provide benefits and don't invest in upgrades.
``If everything works right, then we can make a little profit. And
in the end, fortunately, most years, it's more up than down. It's never
really good, but you know, we're not dead yet.''
With this year's price spikes, relief came not long after prices
peaked. Crude oil, which had hit a 12-year high of $40 a barrel in
February, dropped by $12 a barrel on the international market at the
onset of the war in Iraq. By early April, wholesale gas prices in
California had plummeted 40 cents from the highs they'd hit 2 weeks
earlier.
Retail prices, however, dropped by only a couple cents. To make up
for high wholesale prices, stations hike prices quickly and drop them
very slowly.
On April 2, California Energy Commission (CEC) Chairman Bill Keese
briefed reporters at the Capitol about the gas-price report requested
by the Governor. But the answer to the question everyone wanted to know
was ``no.'' Just like all the other studies, this one found no smoking
gun proving that refiners had done anything wrong. Instead, the report
confirmed what oil companies have been saying all along: It's the
market at work. As Lockyer had reported 3 years earlier, Keese also
noted that a small group of refiners control 92 percent of the market.
Keese also noted that consumption in California is increasing by 3
percent a year. The resulting increase in demand helps push up gas
prices.
``We seek to reduce consumption and reduce exposure to the spot
market,'' Keese said.
But in addressing the reasons for the price spikes, the CEC staff
report also included a couple lines saying, in effect, that nobody
knows how much refiners are pocketing when prices spike because there's
no way to separate costs and profits. It was frustrating for oil
watchdogs when refiner margins, usually about 30 cents, ranged from 19
cents to 76 cents.
Though there's no evidence that refiners are gouging consumers,
Keese is predicting that prices will continue to be erratic for years.
To fix that, the CEC is considering another strategy. Because tight
supplies are the primary reason for the price spikes, one CEC proposal
would create a gasoline reserve to be tapped when refiners get behind.
The reserve originally was recommended by the attorney general's report
in 2000 but was never pursued.
At Riar's station on Northgate, business has been up since the mid-
March price spikes. On a weekday morning in the first week in April,
Riar was the only one working at the store, and he was trying to keep
up with a nonstop stream of customers.
The sign posted on the street was $1.979 for regular unleaded.
Between customers, Riar said his delivery the day before had been at
$1.79 and that he'd been back in the black since the week before.
Still, as his prices came down, so did the price at the Arco up the
street. Even though Riar's lower wholesale prices made it possible to
make a profit, it was still hard to compete. ``We can't. We can't.
There's no way. We try our best, but Arco's a big company. The price
[our suppliers] are giving us is a good price, so sometimes we can beat
Arco, but Arco usually beats us.''
Riar greeted customers with a ``How ya doin', boss?'' He knows most
of them by face, if not name. ``You're late today,'' he said to one.
``Are you working at that new store?'', he asked another. Every
transaction was punctuated by the constant electronic ding-dong of the
door sensor. Customers came and went, buying a pack of menthols, a
bottle of malt liquor, lottery tickets and, of course, a lot of
gasoline, which is invariably ordered the same way, by dollar value and
pump number: ``5 on five'' and ``10 on two.''
Though it's a hard business, Riar said he wouldn't consider
branding up with one of the majors--not that they'd be interested in a
small station in an out-of-the-way area anyway.
The picture doesn't look rosy for independent gas retailers like
Riar, and by extension their impact on prices, but consumers ultimately
have more control over gas prices and supplies than they think. The
answer, according to the CEC, is simpler than it seems: Shop around and
don't guzzle so much gas.
______
Fellow Bakersfield Refinery Employee,
My best wishes to you and your loved ones this holiday season. May
you experience the joy and promise this time of year represents.
As we have discussed before, we turned in excellent operational
performance this year. We are the most reliable Shell U.S. refinery in
2003, and achieved world-class performance 2 years in row now. We have
made quantum step improvements in our environmental compliance,
finishing well under our target again for the second straight year. We
have reduced the expenses we control 15+ percent year over year, and
have been one of the few Shell U.S. refineries to turn a profit. And,
while we struggled with our attention to safety in a difficult first
quarter, we've stepped forward and created a new culture and attitude
for protecting ourselves and our coworkers; reducing injuries over
threefold in the last half of the year.
We've done all this with the lowest personnel index in Shell
refining in the country, making us comparatively the most productive
and effective workforce in the system. All in all, an outstanding year
by an exceptional group of people. Great, great job and I thank you for
your contributions to this success.
As you well know, 2004 will bring its fair share of challenge and
life change for us. Yet despite the level of difficulty, I am convinced
there is no better group of people to face it with. I look forward to
positive outcomes for all of us as we navigate the new year.
Sincerely,
Jeff Krafue.
______
Shell Oil Products U.S.
Houston TX, April 13, 2004
Hon. Barbara Boxer,
Senate Committee on Commerce, Science, and Transportation,
Washington, DC.
Dear Senator Boxer:
Thank you for your letter of April 9 regarding Shell's decision to
close the Bakersfield refinery by October of this year. We appreciate
your seeking information from Shell on this matter.
Shell has always been and remains willing to entertain any credible
offers for the Bakersfield refinery. Shell has received nine inquiries
from prospective buyers, but none of them has resulted in a credible
offer to date. One inquiry came from an oil company, but they have
indicated that they will not pursue further. Seven inquiries came from
energy-related companies or other concerns, and another inquiry came
from a company that was not interested in running the refinery as an
ongoing concern. Out of all the inquiries, we have received only one
written expression of interest thus far. In our view, a credible offer
would begin with a written expression of interest and information
showing adequate financial capability. While we are sharing information
with this one party, it has not resulted in a credible offer to date.
As Shell representatives informed your staff during a briefing in
Washington, D.C. last month, the decision to close the refinery is
based on the fact that the refinery is not economically viable due to
the continual decline of the crude which supplies this land-locked
facility. And we believe potential buyers would reach the same
conclusion that we have about its economic viability. For this reason,
we have not expended time or resources in an attempt to find a buyer
and do not intend to do so. We will, however, continue to respond
diligently to all inquiries and are prepared to negotiate with any
credible potential buyers.
To give you a better understanding of how we reached our decision,
let me share with you some facts. The Bakersfield refinery is
configured to process San Joaquin Valley heavy crude, which it only
gets from the Kern River Field, upon which the refinery has sat since
1932. Production from the Kern River Field declined by 6.4 percent in
2002 alone, according to production reports published by the California
Department of Conservation. Transmission pipelines take San Joaquin
Valley heavy crude away from the Kern River Field to several other
refineries, including Shell's larger Martinez refinery near San
Francisco, but there are no transmission pipelines or other economical
means to bring crude to the Bakersfield refinery from other San Joaquin
Valley fields.
Declining access to economic crude for this facility is a financial
drain. The Bakersfield refinery lost $24 million in 2001 and lost $33
million in 2002. It made only $4.7 million in 2003, which is an
inadequate return on investment given Shell's investment of over $200
million in the refinery. The refinery was projected to lose $5.7
million in 2004. Even if the refinery is slightly profitable in 2004,
we will not achieve an acceptable rate of return to justify continued
investment in the facility. Furthermore, in February of this year, even
with rising margins, we could utilize only 64 percent of the refinery's
capacity largely due to our limited access to crude. Thus, with the low
utilization rates projected to continue due to lack of access to enough
crude, Shell cannot justify continuing to make investments in this
facility.
Shell announced this closure decision eleven months in advance in
order to give its employees, customers, the city of Bakersfield, the
market, and other concerned parties as much time as possible to plan
for the closure. As noted above, we remain receptive to any credible
offers that we may receive over the next several months. But given what
we believe to be the inevitable--the closing of the refinery based on
economic reality--it would be a disservice to now introduce uncertainty
into this process by delaying or indefinitely postponing the closing of
the facility. Therefore, we do not intend to postpone closing the
refinery.
I thank you again for your correspondence. Please feel free to
contact me if you have any additional questions.
Sincerely,
Lynn L. Elsenhans,
President and CEO.
______
Shell OP U.S. and Motiva Refining Update--5 April 2004 *
---------------------------------------------------------------------------
* Compiled from latest information available at mid-day on April 5,
2004.
Safety and Environmental
------------------------------------------------------------------------
Safety Performance 2004 Environmental
------------------------------------------------------------------------
Recordable Lost-Time Environmental Environmental
Location Incidents Incidents Incidents YTD Incident Plan
YTD 2004 YTD 2004 2004 (Incidents/Yr)
------------------------------------------------------------------------
Bay Valley
Bakersfiel 1 0 17 44
d
Martinez 0 0 5 44
Los Angeles 1 0 9 38
Puget Sound 4 2 4 17
Louisiana
Complex
Convent 2 1 5 40
Norco 6 0 6 35
Delaware City 7 1 70 65
Port Arthur 3 1 8 62
Deer Park 3 0 12 41
------------------------------------------------------------------------
Totals 27 5 136 386
------------------------------------------------------------------------
Note: OSHA recordables combine employee and contractor incidents
Safety--newly reported incidents: Convent (OSHA recordable and lost
time incident: employee scalded from hot sewer water); Delaware City
(OSHA recordable--employee treated for inhalation of butane vapors);
Los Angeles (OSHA recordable--contractor performing asbestos removal
required stitches following a foot injury due to a scraper); Puget
Sound (OSHA recordable--turnaround contractor cut his hand while
reattaching a loose hose, requiring stitches); Norco (OSHA recordable--
instrument inspector cut his finger using a pocket knife, requiring
stitches).
Environmental--newly reported incidents: Martinez (NOx
exceedence at the cogeneration unit); Los Angeles (NOX
exceedence and flaring stemming from a shutdown of a gas compressor at
the hydrogen generation unit); Delaware City (two new incidents, the
latest a CO exceedence during cat CO boiler startup); Puget Sound
(noise complaint during startup of the cat cracker).
Operations--Crude Rates
------------------------------------------------------------------------
Plan Actual
Location ------------------------ MTD % of Key Drivers
CM Latest MTD Delta Plan
------------------------------------------------------------------------
Bakersfield 67 66 67 0 100
Martinez 157 139 143 -14 91
Los Angeles 91 55 51 -40 56 Coker fire Mar.
23
Puget Sound 135 135 125 -10 92 CCU & Alky 2
Turnaround
Convent 234 250 247 13 105
Delaware City 175 180 177 1 101
Norco 230 231 231 1 101
Port Arthur 260 290 287 27 110 VPS-4, CRU-4
turnaround
Deer Park 293 310 312 19 106
Bay Valley 224 205 210 -15 93
Complex
Louisiana 464 481 478 14 103
Complex
------------------------------------------------------------------------
West Coast Refining
Martinez
Operations are running well.
Bakersfield
Operations are running well. Some planned maintenance work has been
deferred in order to take advantage of very high margins.
Los Angeles
The coker remains down from the fire on March 23. Asbestos
abatement completed last Wednesday (Mar. 31); work continues to
dismantle damaged eletrical equipment. An estimate of outage time will
not be available until Wednesday (Apr. 7). Other units run at reduced
rates due to the coker outage.
Puget Sound
Operations are running well. The cat cracker has returned from the
turnaround, on schedule. As its rates increase today, startups of the
alkylation unit #2 and polymerization unit will follow in turn.
Catalyst regeneration on reformer CRU1 is complete.
East/Gulf Coast Refining
Convent
Operations are running well.
Norco
Operations are running well.
Delaware City
Operations are running well. The cat cracker CO boiler is back
online; cat rates are now increasing past 70 MB/d. The refinery is
running down inventory to meet targets for the upcoming close.
Port Arthur
Rates at the reformer will increase back to normal today following
completion of a blackburn process to remove excess coke. Otherwise
operations are running well.
Deer Park
Operations are running well.
Base Oils Manufacturing
Port Arthur
Operations are running well.
Refining Margins
Wow.
Refining Margins (as of April 2)
----------------------------------------------------------------------------------------------------------------
Difference from Plan
------------------------------------------------------
Location Margin Last
Latest 7-Day MTD Month Last Qtr
----------------------------------------------------------------------------------------------------------------
Norco 9.18 4.75 5.88 4.90 3.97 4.90
Port Arthur 7.85 3.81 4.46 3.92 3.15 3.92
Convent 10.19 5.41 6.08 5.49 4.56 5.49
Delaware City 7.19 2.82 3.56 2.98 2.77 2.98
Bakersfield 23.01 16.78 10.79 16.45 3.54 16.45
Los Angeles 22.93 17.54 11.06 16.91 3.81 16.91
Martinez 21.82 15.95 10.04 15.75 2.11 15.75
Puget Sound 14.96 10.94 5.73 10.47 0.92 10.47
----------------------------------------------------------------------------------------------------------------
The Chairman. Senator, the hearing is over.
[Whereupon, at 12:35 p.m., the hearing was adjourned.]
A P P E N D I X
Response to Written Questions Submitted by Hon. Daniel K. Inouye to
Hon. Deborah Platt Majoras
Question 1. At the hearing held in November 2005 on price gouging,
you stated that you thought an anti-price gouging statute is not the
appropriate ``tool'' for enforcement and consumer protection. What do
you believe to be the appropriate ``tool'' when it comes to keeping
consumers from being taken advantage of, especially during a disaster?
Answer. In periods of shortages, higher prices encourage producers
to increase supply to a market and encourage consumers to decrease
demand. If prices are constrained at an artificial level for any
reason, including in response to a price gouging statute, then the
economy will work inefficiently by bringing in less supply and doing
less to curb demand. Because a flexible price system is so important, I
continue to believe that a Federal price gouging statute would do more
harm than good for consumers, and for the economy in general.\1\
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\1\ In any effort to craft and enforce a price gouging statute that
would protect consumers during an emergency without leading to even
greater shortages, the primary difficulty is to distinguish gougers
from firms that are reacting appropriately to the situation. This also
is a problem for gasoline merchants who face uncertainties of supply
and lack sophisticated means of price-setting, for wholesalers who may
choose not to supply the affected area because of artificially low
prices, and for consumers who lack the incentive to curb demand.
---------------------------------------------------------------------------
The FTC's enforcement of existing antitrust and consumer protection
laws plays a key role in protecting consumers, both in normal
circumstances and during emergencies.\2\ Pursuant to the antitrust
laws, the FTC and the Antitrust Division of the Department of Justice
(DOJ) prosecute unlawful collusive behavior, monopolization, and
anticompetitive mergers and acquisitions. We can best protect consumers
from market disruptions, whether caused by natural disasters or by
abuses of market power, by protecting competitive market forces and
allowing them to restore the efficient supply of goods and services as
quickly as possible. Controlling prices--through a price gouging law or
otherwise--will distort those forces and delay recovery.
---------------------------------------------------------------------------
\2\ In addition, Congress has enacted--and the executive branch
enforces--statutes designed to protect the health and safety of persons
affected by a natural disaster. These laws cover evacuation from unsafe
areas, emergency food supplies, housing, medical care, search and
rescue services, and law enforcement.
---------------------------------------------------------------------------
As described in the FTC Gasoline Report, during the months after
Hurricane Katrina made landfall, the normal forces of supply and demand
mitigated the dramatic post-hurricane price spike. Not only did the
sudden rise in gasoline prices curb consumer demand--and thus
immediately relieve the upward price pressure experienced in the
aftermath of last year's Gulf Coast hurricanes--but higher gasoline
prices also signaled suppliers to bring more product to the most
severely affected areas of the country, further blunting the price
increases. For example, imports of large quantities of gasoline to U.S.
ports from Europe and other locations dampened the price increases.\3\
In addition, because of increased refinery utilization and a shift in
output from other products to gasoline, the production of gasoline
increased at U.S. refineries outside the hurricane zone.\4\ This
increase in gasoline production--which became profitable for these
refineries precisely because of the post-hurricane gasoline price
increase--ultimately led gasoline prices back down following the
initial shock of the hurricanes. Prices returned to pre-Katrina levels
within 4 weeks after Rita and to pre-summer levels by the end of
November.\5\
---------------------------------------------------------------------------
\3\ See FTC Gasoline Report at 79.
\4\ See id. at 75.
\5\ See id. at 61.
---------------------------------------------------------------------------
In addition to our antitrust investigative and enforcement work,
last year the Commission committed its consumer protection expertise
and resources to assist victims of the hurricanes to regain control of
their financial lives and avoid scams, and to ensure that Americans'
generous charitable donations were not siphoned off by bogus
fundraisers. The FTC's Division of Consumer and Business Education
(DCBE) acted quickly to educate consumers about the specific risks
posed by the hurricanes. When the hurricanes hit, DCBE quickly prepared
new materials to address the many financial challenges faced by those
displaced by the storms and separated from their financial and other
records, to combat the heightened risk of identity theft, and to
underscore the need for consumers to be on the alert for scams.
The FTC also participated in the Hurricane Katrina Fraud Task
Force, which included members from the DOJ, the Federal Bureau of
Investigation, the Postal Inspector's Office, and the Executive Office
for United States Attorneys. The Task Force's work included tracking
referrals of potential cases and complaints, coordinating with state
and Federal law enforcement agencies to initiate investigations,
matching referrals with the appropriate U.S. Attorney's offices, and
ensuring timely and effective prosecution of Katrina fraud cases.
Question 2. The consolidation in the oil markets, which the Federal
Trade Commission (FTC) allowed, has contributed to increased gas
prices. Some believe this consolidation made it easier for the oil
companies to charge what it wants in times of duress. Does the
Commission have the tools to detect gouging at the wholesale level if
the Congress gave you the necessary authority?
Answer. Pursuant to its authority under Section 7 of the Clayton
Act, \6\ the Commission has thoroughly investigated every significant
petroleum industry merger over the past 20 years and, when it has
concluded that a merger is likely to reduce competition, the agency has
required divestitures or sought preliminary injunctions. Many of the
mergers the FTC challenged would have lessened competition
significantly if they had proceeded as originally planned. Our
antitrust remedies prevented those increases: through carefully crafted
divestitures, the Commission mandated the elimination of competitively
problematic overlaps between the merging parties while allowing the
competitively unobjectionable--or even efficiency-enhancing--portions
of the transactions to proceed.
---------------------------------------------------------------------------
\6\ Section 7 of the Clayton Act prohibits acquisitions that may
have anticompetitive effects ``in any line of commerce or in any
activity affecting commerce in any section of the country.'' 15 U.S.C.
Sec. 18.
---------------------------------------------------------------------------
Although merger analysis begins with concentration data, that
analysis must place substantial emphasis on the qualitative factors
that indicate whether a merger will increase the ability of the merging
parties to exercise market power by curbing output unilaterally or by
coordinating their behavior with rival suppliers. The Commission's
application of these principles to petroleum mergers has served to
maintain competition in properly defined relevant antitrust markets.
Indeed, there simply is no credible evidence that increases in oil
industry consolidation have led to higher gasoline prices.
Moreover, despite increases in concentration at some production
levels over the last two decades, particularly since the mid-1990s,
most sectors of the petroleum industry at the national, regional, or
state level generally remain unconcentrated or moderately concentrated.
As measured by the Herfindahl-Hirschman Index,\7\ refining
concentration in PADDs II through V \8\ remains moderate. Although the
concentration for refining in PADD I had increased to 2,713 by January
of this year, significant additional competition in this area is
provided by Gulf Coast shipments and imports. Wholesale and brand-level
retail concentration at the state level remains unconcentrated or
moderate (that is, below 1,800) in most cases.\9\ In addition, the
growth of independent (nonintegrated) marketers and hypermarkets has
increased competition at the wholesale and retail levels in many areas.
---------------------------------------------------------------------------
\7\ The Commission and the Department of Justice measure market
concentration by means of the Herfindahl-Hirschman Index (HHI), which
is calculated by summing the squares of the market shares of all firms
in the market. Under the DOJ/FTC Horizontal Merger Guidelines, markets
with HHIs between 1,000 and 1,800 are deemed ``moderately
concentrated,'' while markets with HHIs exceeding 1,800 are deemed
``highly concentrated.''
\8\ ``PADD'' stands for ``Petroleum Administration for Defense
District.'' PADD I consists of the East Coast. PADD II consists of the
Midwest. PADD III includes the Gulf Coast. PADD IV consists of the
Rocky Mountain region. PADD V is made up of the far Western states and
includes Alaska and Hawaii.
\9\ The correct definition of a market in an antitrust case is a
detailed, fact-intensive inquiry that involves both product and
geographic components. We must ascertain for which product (or
products) the transaction may harm competition, and we also must
determine the geographic area over which any anticompetitive effects
will be felt. In our analysis of petroleum mergers, national, state, or
PADD-wide ``markets'' rarely correspond to properly defined geographic
markets.
---------------------------------------------------------------------------
The challenge in crafting, and therefore enforcing, a price gouging
statute is the ability to distinguish ``gougers'' from those who are
reacting in an economically rational manner to temporary shortages
resulting from an emergency. FTC staff has looked at the experience of
several states in enforcing their price gouging statutes as information
relevant to the enactment and enforcement of a possible Federal
statute. Our analysis found that terms characterizing price increases
as ``exorbitant,'' ``unreasonable,'' or ``unconscionable'' require
subjective interpretation that increases the difficulty of both
compliance and enforcement. In addition, efforts to lend greater
specificity by defining price gouging in terms of a specific percentage
increase above pre-emergency prices may have the undesirable
consequence of instituting a cap on prices with a pass-through for out-
of-pocket costs.
Despite the inherent challenges associated with enforcing a
potential Federal price gouging statute, I can assure you that the
Commission will do its utmost to implement and enforce any additional
legislation that is enacted. The Commission does not require additional
tools to detect price gouging or any violations of current antitrust
laws--whether at the wholesale level or at any other level of the
petroleum industry. The Hart-Scott-Rodino Act requires merging parties
to file information concerning all competitive aspects of the
transaction with the Commission and DOJ and to wait a specified period
before consummating the merger. In the context of the petroleum
industry, this enables the FTC to conduct a thorough investigation and
take action, if necessary, to block an anticompetitive merger or reach
agreement with the parties concerning appropriate remedies. In
addition, the Commission spends considerable resources searching all
industries for violations of the nonmerger laws it enforces, and it has
an active price monitoring program unique to the petroleum industry
that is used to detect pricing anomalies. Once a violation is found,
the Commission can employ strong measures to collect any additional
information necessary to bring an effective case. The Commission can
enforce subpoenas and civil investigative demands against investigative
targets and third parties in merger and nonmerger investigations. These
tools have proven--and should continue to be--sufficient to detect and
investigate violations of the antitrust laws and price gouging, as that
offense has been defined in various legislative proposals.
Question 3. Do you see this as something your agency will pay more
attention to in the future and possibly take more stringent action to
aid American consumers?
Answer. The Commission is acutely aware of the petroleum industry's
importance to consumers and the economy as a whole, and vigorously
seeks to identify, prosecute, and prevent any unlawful anticompetitive
practices in the petroleum industry. We collect real-time gasoline
price data through our price monitoring project and have brought merger
cases at lower HHI levels in the petroleum industry than in other
industries.\10\ We will continue this aggressive approach to
maintaining competition in this vital industry. Moreover, we search
constantly for ways to use our resources most effectively to protect
consumers from unwarranted uses of market power and the harm they
cause.
---------------------------------------------------------------------------
\10\ See Federal Trade Commission Horizontal Merger Investigation
Data, Fiscal Years 1996-2003 (Feb. 2, 2004), Table 3.1 et seq.; FTC
Horizontal Merger Investigations Post-Merger HHI and Change in HHI for
Oil Markets, FY 1996 through FY 2003 (May 27, 2004), available at
http://www.ftc.gov/opa/2004/05/040527petrolactionsHHIdeltachart.pdf.
---------------------------------------------------------------------------
______
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to
Hon. Deborah Platt Majoras
Question 1. How much would you say speculation alone is raising the
price of oil?
Answer. I note, of course, that the Commodity Futures Trading
Commission is responsible for the regulatory oversight of futures and
derivatives trading--a subject that is therefore outside the FTC's
primary area of expertise. Although it is impossible to say how much
speculation alone affects the current price of oil, I can offer some
observations about the impact of speculation on futures markets and on
commodity markets and prices.
Two types of futures traders are at issue here. Commercial traders
use futures or options markets to offset--or ``hedge''--possible price
changes in physical commodities, thereby attempting to lock in a cost
or a profit margin. For instance, an airline may contract for future
deliveries of jet fuel at a set price. By contrast, non-commercial
futures traders, sometimes referred to as ``speculators,'' have no need
or desire to acquire physical commodities. They seek to benefit only
from fluctuations in prices over time. It is clear that investments in
oil futures and derivatives by non-commercial traders have increased
dramatically recently. These investors have made bets that oil prices
will increase in the future. Because of the relationship between
futures prices and current prices, bidding up the prices for oil
futures in financial markets contributes to an increase in spot prices
for oil in commodity markets.
Speculative activity in futures markets appears more likely to
affect price volatility than to change average price levels over any
sustained period. Former Federal Reserve Board Chairman Alan Greenspan
recently testified that such investors ``are hastening the adjustment
process'' in response to changes in oil supply and demand fundamentals,
with the result in recent times that ``oil prices have moved up sooner
than they would have otherwise.'' \1\ It is difficult, however, to
quantify the extent to which non-commercial futures trading affects
price volatility.
---------------------------------------------------------------------------
\1\ Statement of Alan Greenspan, President, Greenspan Associates
LLC, before the Committee on Foreign Relations, U.S. Senate, at 4 (June
7, 2006), available at http://foreign.senate.gov/testimony/2006/
GreenspanTestimony060607.pdf.
---------------------------------------------------------------------------
Some believe that non-commercial investments contribute to the
appropriate allocation of oil supplies over time. Then-Governor
Bernanke of the Federal Reserve Board explained in 2004 that ``[s]ocial
welfare is likely increased by informed speculation in oil markets
because speculative activities make oil relatively more available at
the times when it is most needed.'' \2\ When futures prices increase
because of speculation that oil prices are on the rise, such activity
encourages producers to preserve additional oil inventories to meet
future demand. To the extent that current prices also rise as a result,
producers see immediate profit opportunities to increase output and, at
the same time, consumers are encouraged to conserve. In effect, well-
functioning futures markets and informed investments by non-commercial
traders may facilitate the shifting of output from the present (when
prices are relatively low) to the future (when they are expected to be
higher), thereby increasing supplies in tight markets. Therefore, any
government initiatives that would impede the price system in dealing
with changes or disruptions in market conditions should be considered
cautiously.
---------------------------------------------------------------------------
\2\ Remarks by then-Governor Ben S. Bernanke, ``Oil and the
Economy,'' at the Distinguished Lecture Series, Darton College, Albany,
Georgia (Oct. 21, 2004), available at http://www.Federalreserve.gov/
boarddocs/speeches/2004/20041021/default.htm.
Question 2. Do you agree with Commissioner Leibowitz's concurring
opinion--that OPEC is a--QUOTE--``villain'' that has caused massive
transfers of wealth from the United States to oil-exporting nations?
Answer. There is no question that OPEC, if composed of private
companies instead of sovereign nations, would constitute a hard-core
price-fixing cartel, subject to criminal prosecution under U.S.
antitrust laws. OPEC systematically attempts to restrict output in
order to keep world petroleum prices above levels that would prevail in
a competitive market. OPEC's activities undoubtedly have caused wealth
transfers from oil-consuming nations like the United States to oil-
producing nations.
Sovereign nations enjoy several jurisdictional and substantive
defenses to the antitrust laws that are not available to domestic or
foreign private companies.\3\ The sovereign immunity doctrine,
substantially codified by Congress in the Foreign Sovereign Immunities
Act of 1976 (FSIA),\4\ holds that each independent sovereign is equal
in sovereignty to all other states.\5\ Thus, the courts of one nation
generally have no jurisdiction to entertain suits against another
nation.
---------------------------------------------------------------------------
\3\ See United States Department of Justice and Federal Trade
Commission, Antitrust Enforcement Guidelines for International
Operations, Sec. Sec. 3.31 (Foreign Sovereign Immunity) & 3.33 (Acts of
State) (Apr. 5, 1995), reprinted at 4 Trade Reg. Rep. (CCH) para.
13,107.
\4\ 28 U.S.C. Sec. Sec. 1330, 1602-11.
\5\ Pursuant to an exception to the FSIA for an ``action. . . .
based upon a commercial activity,'' 28 U.S.C. Sec. 1605(a)(2), a
foreign nation is deemed to have waived its immunity when it engages in
``commercial activity.'' One U.S. district court, however, has held
that the agreement among OPEC member nations was not commercial
activity under the statute because it related to sovereign nations'
choices about how to exploit natural resources within their control. As
the court stated, ``it is clear that the nature of the activity engaged
in by each of these OPEC member countries is the establishment by a
sovereign state of the terms and conditions for the removal of a prime
natural resource--to wit, crude oil--from its territory.'' Int'l Ass'n
of Machinists v. OPEC, 477 F. Supp. 553, 567 (C.D. Cal. 1979), aff'd,
649 F.2d 1354 (9th Cir. 1981), cert. denied, 454 U.S. 1163 (1982). See
also American Law Inst., Restatement (Third) of the Law: The Foreign
Relations Law of the United States, Sec. 443, Comment i (1986) (``An
official pronouncement by a foreign government describing a certain act
as governmental is ordinarily conclusive evidence of its official
character.''). Other courts have agreed that a nation's decisions
concerning its natural resources are not subject to the jurisdiction of
other nations. MOL, Inc. V. Peoples Republic of Bangladesh, 736 F.2d
1326, 1329 (9th Cir.) (abrogating a contract to export native fauna was
within ``Bangladesh's right to regulate its natural resources, . . . a
uniquely sovereign function''), cert. denied, 469 U.S. 1037 (1984);
Rios v. Marshall, 530 F. Supp. 351, 372 (S.D.N.Y. 1981) (``temporary
removal of manpower resources'' is not a commercial activity under the
FSIA).
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Under the act of state doctrine, U.S. courts ordinarily will not
decide a dispute involving the legality of the sovereign act of a
foreign state. This doctrine deems a judicial remedy inappropriate in
such cases for international comity reasons and also in light of
separation of powers considerations.\6\ OPEC has successfully invoked
both the foreign sovereign immunity and the act of state doctrines in
defense against antitrust lawsuits brought in U.S. courts.\7\
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\6\ The Supreme Court described the act of state doctrine as ``a
consequence of domestic separation of powers, reflecting `the strong
sense of the Judicial Branch that its engagement in the task of passing
on the validity of foreign acts of state may hinder' the conduct of
foreign affairs.'' W.S. Kirkpatrick & Co. v. Environmental Tectonics
Corp., 493 U.S. 400, 404 (1990) (quoting Banco Nacional de Cuba v.
Sabbatino, 376 U.S. 398, 423 (1964)).
\7\ See supra note 28.
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Thus, although I agree that OPEC's activities have caused wealth
transfers to oil-exporting nations, and that those activities would be
naked antitrust violations if perpetrated by private firms,
I do not see a clear way to hold OPEC accountable in U.S. courts
under current law. U.S. enforcement policy toward OPEC actions should
be set at the highest levels of the executive branch, based on careful
consideration by the Department of State, DOJ, and other appropriate
agencies.
______
Response to Written Questions Submitted by Hon. Daniel K. Inouye to
Dr. Nariman Behravesh
Question 1. Dr. Behravesh directs Global Insight's entire
forecasting process and is responsible for developing the economic
outlook and risk analysis for the United States, Japan, Europe, and
emerging markets.
Two rising powers, China and India, share the United States'
affinity for automobiles and will surely put upward pressure on oil
prices and increased competition for oil resources. With five million
car sales in 2004, China became the world's third-largest car market,
after the United States (17 million) and Japan (5.9 million). Within
the next 2 or 3 years, according to David Thomas, head of China
distribution for Ford Motor Company, China is going to become number
two. By 2030, the Indian market is expected to reach 20 million, just
behind the United States at 23 million and up from the one million sold
in 2004.
Dr. Behravesh, with the exponential growth we are seeing in China
and India's economies, particularly their automobile fleet, what is the
economic outlook regarding petroleum products in the United States?
Answer. China's increasing demand for energy has already had a big
impact on oil and gasoline prices over the past 4 years. In the next
decade, India will join China as one of the largest markets for cars
and gasoline. This will inevitably put further upward pressure on both
oil and gasoline prices. Global Insight estimates that during the past
4 years, rapid energy demand growth in China and India has added about
$15 per barrel to the price of oil. This price wedge is likely to
increase to between $25 and $30 per barrel by 2030.
Question 2. With the increased international competition for oil
supplies, do you see a greater chance of companies limiting their
supplies to get a higher profit margin or just the opposite?
Answer. With strong demand growth in the next few decades, the
profit margins of oil suppliers will increase, at least temporarily.
Most of this will go to the oil exporting countries of the Persian
Gulf, where a very large share of the proven oil reserves are to be
found. While oil companies will benefit from sustained high oil prices,
they are increasingly becoming marginalized in oil markets (e.g., by
being excluded from drilling in many of the lucrative oil fields). The
longer oil prices remain high, the greater the likelihood that new
supplies of traditional and alternative fuels will flood the market,
eventually bringing prices back down to earth. History has shown, again
and again, that markets do work, albeit sometimes very slowly.
______
Response to Written Questions Submitted by Hon. Frank R. Lautenberg to
Dr. Nariman Behravesh
Question 1. Increasingly, prices are being guided by a continuing
rush of investor funds into oil markets. Institutional money managers
are holding between $100 billion and $120 billion in commodities
investments, at least double the amount 3 years ago and up from $6
billion in 1999.
The flow of money into oil has been prompted by a spreading belief
that demand for oil will continue to rise with global economic activity
as supply tightens under the influence of several factors--among them:
the West's escalating nuclear standoff with Iran; growing political
violence in oil-rich Nigeria; and more broadly, steadily growing global
economic activity. The three-year bull run in oil has been underpinned
by strong global demand for fuel coupled with a prolonged shortage of
spare capacity to pump crude. OPEC's spare capacity, for example, has
fallen from six million barrels per day (mbd) in 2002 to just two
million barrels per day this year, while production has risen from as
low as 24 million barrels per day in 2002 to 29-30 million barrels per
day today.
Since early 2005, the crude-oil market is in what traders call
``contango,'' meaning futures contracts for a given product are priced
higher than that same good for near-term delivery. The price of oil to
be delivered 4 months from now is about $3 more than oil to be
delivered next month.
Indeed, OPEC fears a return to ``backwardation''--the opposite of
contango--with near-term prices higher than long-term contracts. Such a
flip-flop could prompt speculative buyers to dump inventories; prices
could quickly drop $20 a barrel or more.
If OPEC had more spare capacity, how would that affect speculators'
assessments of oil futures?
Answer. During the summer months, refineries normally run at about
96 percent of capacity. The lower utilization rate this summer is
almost entirely due to the conversion to ethanol. Both the refinery and
transportation bottlenecks created by this conversion process also
explain why refiners' margins are abnormally high. Global Insight
expects that as the problems associated with the switch to ethanol are
worked out, capacity utilization will increase and margins will fall--
most likely in the next two to 3 months.
Question 2. OPEC uses production quotas to keep the price of oil
high by restricting supply. Because of the production quotas, OPEC
nations have not had an incentive to expand their production capacity,
leading to tight oil supplies. Non-OPEC nations, meanwhile, have
increased their production significantly.
If OPEC had been expanding its capacity over the past decade or so,
like non-OPEC countries have, would oil prices likely be lower today?
Answer. Based on recent research, Global Insight believes that if
OPEC capacity were 1.5 million barrels a day higher than it is today
(for a total of 3 million barrels per day), oil prices would be $10
lower because of market forces alone. Factoring in the speculative
``premium'' discussed above, the overall decline in prices would be $17
to $20 per barrel.
______
Response to Written Questions Submitted by Hon. Daniel K. Inouye to
Bob Slaughter
Question 1. The National Petrochemical & Refiners Association
(NPRA) speaks for the petrochemical and refining industries on issues
important to their business. Their members include more than 450
companies, including virtually all U.S. refiners and petrochemical
manufacturers. A fact sheet on the NPRA website states that domestic
supply has not kept pace with demand. There are only 148 U.S.
refineries today with a combined capacity of 17 million barrels per
day, compared to 324 in 1981 with a combined capacity of 18.6 million
barrels per day. The NPRA claims that it is becoming more difficult to
build new refineries because of economic, environmental and political
considerations, including site costs, environmental requirements, rates
of return on investments, and the ``not-in-my-backyard'' (NIMBY)
factor. The NPRA also contends that significant increases in U.S.
capacity have been achieved through additions at existing sites, but
not through new facilities.
A fact sheet on your website notes that there are currently 148
U.S. refineries with a capacity of 17 million barrels a day, down from
a high in 1981 of 324 refineries with a capacity of 18.6 million
barrels per day. You say that more refineries are not being built due
to the environmental restrictions put on the companies. However, is it
not true that the primary reason for downsizing of the refineries is
mostly due to the mergers of large companies and not the requirements
of environmental laws?
Answer. To the contrary, the mergers and acquisitions of refineries
and assets have actually improved the stability and capability of the
domestic refining industry. This progress occurred and continues to
escalate despite the massive expenditures required to meet
environmental goals, both at the facility and in the vital
transportation and other fuels they produce.
The ``downsizing'' of the industry referred to in the question must
be placed in the proper historic and economic context. While there were
approximately 324 refineries with nearly 18.6 million barrels per day
(b/d) of crude oil capacity in 1981 (equating to an average 57,000 b/d
per facility), many of these facilities were solely dependent upon
crude oil allocation controls for their economic survival. Once these
government-imposed, and inefficient policies were abandoned, the
refineries in question simply did not have the economic strength needed
to make the required capital expenditures for environmental controls
and in necessary processing unit updates to keep them viable in a
highly competitive marketplace.
Currently there are 148 refineries operating in the United States,
with a combined capacity of over 17 million (b/d). This translates to
an average crude oil capacity of 115,000 b/d. Without the recent
mergers and acquisitions witnessed in the domestic refining industry,
many of these facilities would most likely have suffered the same fate
of other less efficient operations and closed. One example in which
acquisitions were key to increased production is Sunoco's refinery
complex in the metropolitan Philadelphia area which now has over
550,000 b/d of capacity. If Sunoco were unable to operate these
facilities as a synergistic unit, this production might not be
available for consumers. Similar examples are prevalent throughout the
industry.
Question 2. The mergers and downsizing of refineries has decreased
the amount of competition and has helped lead to historic profits for
these companies. If refining capacity is considered a significant
problem, how are companies using these historic profits to address it?
Answer. In light of the strong demand for gasoline and other
petroleum products, domestic refiners have worked hard to expand
existing facilities. Over the past 10 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 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 2 million
b/d of capacity over the same time frame. With these expansions, total
domestic capacity will reach an all time high.
Most, if not all of these capacity additions will occur at existing
refinery sites. The cost to construct a new grassroots refinery would
require an investment averaging $17,000 per daily barrel of capacity
and, at a minimum, take 10 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 any
hypothetical new U.S. refinery could provide.
Significantly, although 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.
It remains doubtful, however, that these expansions will be
sufficient to meet expected U.S. demand growth, which means that the
Nation's continued dependence on imports of finished product and
blendstocks will continue.
Refining capacity has already expanded and will continue to do so
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.
Question 3. In your previous testimony, before the Committee at the
last hearing on price gouging on September 21, 2005, you stated,
``Critics of mergers sometimes suggest that industry is able to affect
prices because it has become much more concentrated, with a handful of
companies controlling most of the market. This is untrue. According to
data compiled by the U.S. Department of Commerce and by Public Citizen,
in 2003 the four largest U.S. refining companies controlled a little
more than 40 percent of the Nation's refining capacity.'' However, this
is in contrast with the Federal Trade Commission's (FTC) March 2001
report on the Midwest Gasoline Price Investigation, which found no
collusion or violations of antitrust laws, but said an executive of a
company they investigated made it clear that he would rather sell less
gasoline and earn a higher margin on each gallon sold than sell more
gasoline and earn a lower margin. The FTC said that a decision to limit
supply does not violate antitrust laws, unless there was agreement
among firms.
In the Federal Trade Commission's (FTC) Midwest gas investigation
report, the Commission noted that an executive at a refinery company
stated he would rather sell less gasoline at a higher margin on each
gallon sold than sell more gasoline and earn a lower margin. If this is
the natural preference, it suggests that a consolidated refinery
industry has the natural drive to limit supply to obtain a better
margin. Is this how it works? Please explain.
Answer. A petroleum refiner is subject to two distinct markets.
These are the raw materials he needs to purchase and the finished
products he offers for sale. The prices of crude oil and the principal
refined products, gasoline, diesel fuel and other distillates including
home heating oil, are independently subject to variables of supply,
demand, production economics, environmental regulations, and other
factors. As such, refiners and non-integrated marketers can be at
enormous risk when the prices of crude oil rise but the prices of the
finished products remain static, or even decline.
Such a situation can severely narrow the crack and spread the
margin a refiner realizes when he procures crude oil while
simultaneously selling the products into an increasingly competitive
market. Because refiners are on both sides of the market at once, their
exposure to market risk can be greater than that incurred by companies
who simply sell crude oil at the wellhead, or sell products to the
wholesale and retail markets.
Given this situation, it is virtually impossible for a single
refinery or refinery to manipulate margins. No matter which commodity
is involved, any manufacturer might theoretically prefer to keep his
acquisition costs low (by purchasing less raw materials) while selling
less product at higher margins. The marketplace, however, is driven by
supply and demand and the ability of producers to capture market share,
while maintaining a satisfactory return on investment. Therefore, what
any manufacturer of any product may ``prefer to do'' will not occur in
a highly competitive and diverse market as exemplified in the U.S.
domestic refining industry.
Question 4. In your testimony before the Committee, you argued that
four refineries controlling 40 percent of the refining capacity does
not constitute a dominant market position with the ability to control
prices. We have seen multiple instances and industries with lower
market concentration that had the ability to control prices. Why is the
refinery industry different?
Answer. As we stated in our written statement, 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 and has been found to be so in
many studies conducted before the FTC and others. 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 percent of the Nation's total capacity,
and large integrated companies own and operate only about 10 percent of
retail outlets. (For comparison, Archer Daniel Midland, the largest
producer of fuel ethanol in the U.S., controls nearly 25 percent of the
U.S. ethanol market.) No one company, or group of companies, sets
gasoline prices. Rather, in the U.S. refining industry, the laws of
supply and demand drive competitive behavior and determine pricing.
______
Response to Written Questions Submitted by Hon. Daniel K. Inouye to
Dr. Mark Cooper
Question 1. After prices stabilized in the months after Hurricane
Katrina, consumers suffered another drastic increase in gasoline prices
in the spring of 2006. Oil prices topped $75 per barrel in the third
week of April and currently have decreased to approximately $72 per
barrel. These oil prices have translated to unleaded gasoline costs
averaging more than $3 per gallon across the country. According to the
Department of Energy, the price of gasoline is almost 70 cents higher
than this time last year. Due to the high prices and outcry from
constituents, some states are trimming or cutting the gas tax to try
and ease the pain at the pumps. Governors and State Legislatures in
Maryland, South Carolina, Connecticut, Georgia, New York, and Nevada
are currently pushing measures on the tax, while Texas, Minnesota,
Delaware, and Idaho are considering the idea.
Some states are trying to deal with higher gas prices by suspending
taxes on gasoline. Do you think this is a good short term solution or
does it cause more of a problem in the future?
Answer. While I understand the desire to ease the pain of rising
gasoline prices, cutting taxes is just a shell game. Current taxes do
not cover the cost of maintaining roads, and to the extent that tax
revenues must be replaced or services cut, consumers will feel the pain
in another way.
Question 2. In your testimony, you state that collusion is not
occurring between the big oil companies, and you note that they do not
have to because so few of them control the market and they know if one
raises the prices, the others will follow suit. The Federal Trade
Commission (FTC) says that withholding supply does not violate anti-
trust laws, so they cannot do anything about it. However, more than
2,600 mergers have been approved in the U.S. petroleum industry since
the 1990s, creating non-competitive markets. Do you think this is the
number one cause of gas price spikes or do other factors have a similar
effect?
Answer. The mergers are the number one cause of the increase in
refiner margins and the domestic spread. The domestic spread has
increased by $.60 per gallon since July 2003, for example. With a tight
oligopoly, the industry restricts capacity and lets a tight supply
demand balance put upward pressures on prices. Over that period, the
price of crude has increased by about $.90 per gallon.
Question 3. You contend there is not enough competition on the
supply-side to make producers expand their capacity, thereby lowering
prices. In addition, you note that consumers cannot cut back on
consumption sufficiently to reduce prices either, which leads to large
profit margins for the big oil companies. What do you think the
government needs to do to help prevent the industry from further
downsizing and exerting even greater control over prices?
Answer. As outlined in my testimony, I believe we need a strategic
product reserve, a strategic refinery reserve, and tougher antitrust
laws that allow antitrust authorities to go after unilateral actions
that raise prices in an area.
______
Response to Written Question Submitted by Hon. Frank R. Lautenberg to
All Witnesses
Question. Gross refining margins--the difference between wholesale
gasoline prices and crude oil prices--have skyrocketed recently, from a
low of 14.3 cents per gallon in 2001 to 76 cents per gallon last week.
This is a separate phenomenon than rising crude prices.
It is also more of a puzzle, because refiners are currently running
at about 90 percent capacity, which is well in line with historic
norms. Indeed, during 1998 refiners were briefly running at full
capacity, 99.9 percent according to the Energy Information
Administration. The chart below shows that refining output relative to
capacity has little to do with refining margins, which have skyrocketed
recently.
It is difficult to understand why refining margins should suddenly
shoot up when capacity utilization is not out of line with historic
levels.
According to the Energy Information Administration, refiners are
currently operating at about 90 percent capacity, which is in line with
historic norms. If refiners have the same amount of spare capacity as
they have in the past, why have refining margins suddenly skyrocketed?
Answer from Dr. Nariman Behravesh. Global Insight estimates that
approximately $7 to $10 of the current price per barrel of oil can be
attributed to speculators' bet that oil markets will remain tight and
that OPEC spare capacity will remain at around 1.5 million barrels per
day. Thus, if OPEC had more spare capacity, this speculative
``premium'' would disappear.
Answer from Bob Slaughter. There is little or no relationship
between the refining margin (crack spreads), which are the dollar-per-
barrel value of a product or group of products compared with the
acquisition cost of crude oil, and refining capacity utilization. Crack
spreads are used as a proxy to estimate the gross margin obtained by
processing a barrel of crude oil in a refinery. Historically, refining
has been significantly less profitable than other industries during the
1990s. Gross refinery margins were squeezed at the same time that
operating costs and the need for additional investment to meet
environmental mandates had increased, further reducing the net refining
margin. In addition, some of the investment made during the 1980s was
designed to take advantage of the differential between the limited
supply of higher quality crude oils and the increasing supply of
heavier and higher sulfur crudes. When that differential narrowed,
however, the financial return on those investments declined
significantly. Thus, various trends in the 1990s led to a situation in
which refining margins were relatively small or even nonexistent.
Refining margins have increased substantially in the recent past
because the state of the gasoline market reflects a much different
supply and demand situation than that of the 1990s. In essence, what is
occurring in the current transportation fuels market is what the laws
of economics suggest should be expected to happen. Domestic demand for
refined products has accelerated, outpacing industry's ability to meet
total demand with domestic supplies. This tight supply/demand balance,
together with significant increases in global demand for these same
products,(contrary to the situation that characterized the 1990s), has
caused prices to rise in order to match the growth in consumer demand
with available supplies.
Answer from Dr. Mark Cooper. Capacity utilization increased
steadily over the late 1980s and 1990s, so the ``historic norm'' is
only in comparison to recent years, not the long term situation.
Refinery capacity has not kept up with the growth in demand,
resulting in tigher domestic markets and increasing imports. Imports
provide less discipline for domestic pricing, especially in response to
short term changes.
Stocks of gasoline, relative to demand, have also declined. These
provide the initial response to any supply disruption or sudden
increase in demand. Thus, the short term response has been more
volatile.
Both the amount of refinery capacity and the quantity of product in
storage are strategic variables within the control of the oil industry.
There has been a dramatic increase in the concentration of the
refining sector, so the smaller number of players could exercise market
power. They have exercised their market power by keeping capacity tight
and supplies low, because they do not fear running out of supply. They
know they can simply increase the price and not worry about losing
their customers since the small number of companies will act in
parallel fashion.
Answer from Hon. Deborah Platt Majoras. This is a complex and
important issue that lacks easy answers. As you know, the President and
the leadership of Congress recently directed the FTC, DOJ, and
Department of Energy to analyze recent gasoline price increases and
determine whether gasoline markets may be subject to illegal
manipulation in any form. That work is underway, including an
examination of issues relating to refinery margins and capacity
utilization. The Commission will take swift and decisive action if our
investigation or our gasoline price monitoring work reveals the use of
illegal anticompetitive practices. At this time, I can offer the
following general observations about refinery margins and capacity
utilization.
Refinery margins have increased over the last several years and
remain at high levels relative to the last 20 years. The average annual
gross margin for conventional gasoline increased from about 10 cents
per gallon in 2002 to 21.7 cents per gallon in 2005, while the
corresponding gross margin for reformulated gasoline (RFG) increased
from 12.8 cents per gallon in 2002 to 29.2 cents per gallon in 2005.\1\
Meanwhile, refiners' net margins--which reflect other operating and
direct product costs across all refined products--are much lower than
gross margins, but they are still higher this year than in recent
years. For the leading petroleum companies tracked by EIA's Financial
Reporting System, refiners' net margins in 2004 (the most recent year
for which data are available) averaged about 7.1 cents per gallon of
refined product.\2\ Like gross margins, however, refiners' net margins
have increased since 2002, when they averaged only 0.4 cents per
refined gallon.
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\1\ Gross refinery margins based on spot prices also have reached
very high levels this year. The figure of 76 cents per gallon cited in
the background to your question apparently refers to the margin between
the Gulf spot price of reformulated gasoline blendstock for oxygenate
blending (RBOB) and the spot price of crude oil in mid-May 2006. It is
advisable, however, to be cautious in placing reliance on such margin
data. For example, in the first 4 months of 2006, the RBOB margin was
less than 28 cents per gallon. Refinery margins measured over a few
days or a week may differ significantly from margins averaged over a
longer period. Because longer time periods are more relevant to
refiners' decisions to increase or decrease output, it is appropriate
to take a longer-term perspective in responding to your question about
the relationship between high refinery margins and underutilized
refinery capacity.
\2\ U.S. Dep't of Energy, Energy Information Admin., Performance
Profiles of Major Energy Producers, at 92, Table B32 (Mar. 2006). Net
margins do not include certain other costs incurred by refiners,
including fixed costs associated with general and administrative
expenses, research and development costs, and depreciation expenses.
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Recent annual average refinery capacity utilization rates have been
below the record annual level of 95.6 percent set in 1998--a level
that, as you point out, was even higher during the summer of 1998.\3\
By 2002, industry capacity utilization had fallen to 90.7 percent.
Utilization rates increased modestly in the two following years,
reaching 92.6 percent in 2003 and 93.0 percent in 2004.\4\ Until the
arrival of Hurricane Katrina last August, monthly industry capacity
utilization rates in 2005 generally were close to those in the
corresponding months of the previous several years.
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\3\ Capacity utilization rates typically are used to measure a
refinery's ability to distill crude oil, the first step in the refining
process. A refinery's capacity to produce gasoline and other refined
products, however, also depends on other processing units at the
facility. See FTC Gasoline Report at 5.
\4\ Id. at 22, Table 1-1.
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As the FTC Gasoline Report explains, industry capacity utilization
rates primarily are a function of planned or unplanned refinery
downtimes, not of current profit margins.\5\ Refinery downtimes reduce
reported industry utilization rates, because the capacity affected by
the downtimes typically is still considered operable--that is, it is
included as available capacity--even when crude oil processing is
suspended because of damage, repairs, or maintenance work. Unlike idle
capacity in other industries, which may be switched on quickly and
easily in response to higher prices--for example, ``peaking plants'' in
electricity generation--operable refinery capacity affected by a
downtime may not be available to respond to increased profit
opportunities for a significant period.\6\
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\5\ Id. at 6-7. There is, however, a seasonal relationship between
utilization rates and margins because refiners schedule as many
downtimes as possible during the non-summer months, when refining
margins are generally lowest because of the weaker demand for gasoline.
In addition, industry capacity utilization is affected by the extent to
which alternatives such as imports yield cost savings compared to more
intensive use of domestic refineries. Even if refining margins are
high, refiners may have economic incentives to satisfy gasoline demand
with cheaper imports rather than through additional crude runs. In this
regard, it is notable that imports of finished gasoline and of
blendstocks have been significantly higher in recent years than in the
late 1990s.
\6\ As the text implies, downtimes can be planned or unplanned.
When refineries are running, they usually operate at maximum
sustainable capacity when gross margins are as high as they have been
in recent years. Refineries cannot run at such rates indefinitely,
however, and must take downtimes for necessary maintenance or other
improvements. Such planned downtimes may be scheduled months or even
years in advance. The primary factor in arranging for planned downtimes
is the regular maintenance schedule required to assure the safety and
physical integrity of the refinery. Another factor that must be
considered is the availability of specialized contract labor. Notably,
such considerations as maintenance schedules and the availability of
labor are independent of current or anticipated profit margins.
Unplanned downtimes, which involve capacity closure due to refinery
accidents or natural disasters, similarly affect industry capacity
utilization rates in ways unrelated to profit margins.
---------------------------------------------------------------------------
The relatively low reported capacity utilization rates since the
beginning of 2006 reflect the lingering effects of Hurricanes Katrina
and Rita. For example, the BP refinery in Texas City, Texas, which
accounts for 2.6 percent of the Nation's refinery capacity, did not
resume limited operations until April of this year.\7\ The Murphy Oil
refinery in Meraux, Louisiana, which accounts for 0.7 percent of
national capacity, was still closed in late May.\8\ Even though these
refineries were closed for repairs, they still were counted in the
EIA's measure of operable capacity, with the result that reduced
industry utilization rates were reported this year. Other refineries
deferred maintenance scheduled for last fall and early winter to later
months in order to make up for lost heating oil production following
the hurricanes.\9\ Following the completion of some maintenance and
repairs, utilization rates have been increasing over the last couple of
months, although they still fall somewhat short of the normal levels
for this time of year.
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\7\ See http://www.marketwatch.com/News/Story/
Story.aspx?guid=%7B5C662A88%2D1C09%2
D4664%2DBB71%2D4DE0B2CC84E6%7D&siteid=mktw; http://
www.cattlenetwork.com/content
.asp?contentid=40339.
\8\ See http://www.bloomberg.com/apps/
news?pid=10000100&sid=aNKO71oIVhwY&refer=ger
many.
\9\ U.S. Dep't of Energy, Energy Information Admin., ``This Week in
Petroleum'' (May 24, 2006).
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The elimination of methyl tertiary-butyl ether (MTBE) from gasoline
this spring also tended to reduce supply.\10\ MTBE production in 2005
averaged 128,000 barrels per day, or 1.4 percent of the volume of
gasoline supplied last year. Although ethanol use has increased, the
increase in ethanol production from March 2005 to March 2006 (the last
month for which data are available) was only 58,000 barrels per day, or
0.6 percent of gasoline supplied in 2005. Simply by reducing gasoline
supply by 0.8 percent, the replacement of MTBE with ethanol has
directly raised gasoline prices by between 10 and 15 cents per gallon.
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\10\ To comply with EPA requirements imposed by the 1990 Clean Air
Act amendments, many refineries initially used MTBE as an oxygenate to
boost octane and make gasoline burn more cleanly. Concerns were raised,
however, that MTBE contaminates groundwater. In reaction, over the past
6 years, refineries in various areas of the country have been switching
to ethanol-blended RFG. As refineries switch from MTBE to ethanol, they
produce less gasoline, and in the summer months they must make even
higher-quality gasoline blends than they made with MTBE. In addition,
foreign suppliers that cannot deliver MTBE-free gasoline are unable to
import gasoline into the United States to make up for this temporary
shortfall. As a result, switching to ethanol-based RFG leads to higher
prices, at least during the conversion process.
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The pace of refiners' conversions from MTBE to ethanol quickened
during spring 2006 in response to last year's Energy Policy Act, which
(1) required that gasoline contain on average 2.78 percent of renewable
fuels (such as ethanol); (2) eliminated the fuel oxygenate requirement
for RFG effective May 5, 2006; and (3) omitted any liability protection
for refiners' use of MTBE.
In its recently concluded investigation of gasoline prices, the
Commission specifically examined whether the decline from the peak
utilization rates of the late 1990s might be evidence of market
manipulation. Our investigation, however, uncovered no evidence of
manipulation.\11\ As stated previously, the FTC is continuing to devote
attention to this important issue.
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\11\ FTC Gasoline Report at 6-7.
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