[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

                              ----------                              
                                                                   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

                              ----------                              


                         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≶=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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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.
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                                 ______
                                 
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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
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    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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