[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                  PRICES AT THE PUMP: MARKET FAILURE 
                          AND THE OIL INDUSTRY

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

                                HEARING

                               BEFORE THE

                          ANTITRUST TASK FORCE

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 16, 2007

                               __________

                           Serial No. 110-84

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov


                     U.S. GOVERNMENT PRINTING OFFICE
35-451 PDF                 WASHINGTON DC:  2008
---------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092104 Mail: Stop IDCC, Washington, DC 20402ï¿½090001

                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas            STEVE CHABOT, Ohio
MAXINE WATERS, California            DANIEL E. LUNGREN, California
MARTIN T. MEEHAN, Massachusetts      CHRIS CANNON, Utah
WILLIAM D. DELAHUNT, Massachusetts   RIC KELLER, Florida
ROBERT WEXLER, Florida               DARRELL ISSA, California
LINDA T. SANCHEZ, California         MIKE PENCE, Indiana
STEVE COHEN, Tennessee               J. RANDY FORBES, Virginia
HANK JOHNSON, Georgia                STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois          TOM FEENEY, Florida
BRAD SHERMAN, California             TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin             LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York          JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota

            Perry Apelbaum, Staff Director and Chief Counsel
                 Joseph Gibson, Minority Chief Counsel
                                 ------                                

                          Antitrust Task Force

                 JOHN CONYERS, Jr., Michigan, Chairman

HOWARD L. BERMAN, California         STEVE CHABOT, Ohio
RICK BOUCHER, Virginia               RIC KELLER, Florida
ZOE LOFGREN, California              F. JAMES SENSENBRENNER, Jr., 
SHEILA JACKSON LEE, Texas            Wisconsin
MAXINE WATERS, California            BOB GOODLATTE, Virginia
STEVE COHEN, Tennessee               CHRIS CANNON, Utah
ANTHONY D. WEINER, New York          DARRELL ISSA, California
ARTUR DAVIS, Alabama                 J. RANDY FORBES, Virginia
DEBBIE WASSERMAN SCHULTZ, Florida    STEVE KING, Iowa
                                     LAMAR SMITH, Texas, Ex Officio


            Perry Apelbaum, Staff Director and Chief Counsel

                 Joseph Gibson, Minority Chief Counsel


                            C O N T E N T S

                              ----------                              

                              MAY 16, 2007

                                                                   Page

                           OPENING STATEMENT

The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, and Chairman, Antitrust Task Force.     1

                               WITNESSES

The Honorable Bart Stupak, a Representative in Congress from the 
  State of Michigan
  Oral Testimony.................................................     2
  Prepared Statement.............................................     4
Dr. Mark N. Cooper, Director of Research, Consumer Federation of 
  America
  Oral Testimony.................................................     6
  Prepared Statement.............................................     8
The Honorable Richard Blumenthal, Attorney General for the State 
  of Connecticut
  Oral Testimony.................................................    28
  Prepared Statement.............................................    30
The Honorable Heather Wilson, a Representative in Congress from 
  the State of New Mexico
  Oral Testimony.................................................    39
  Prepared Statement.............................................    40
Dr. John Felmy, Chief Economist, American Petroleum Institute
  Oral Testimony.................................................    42
  Prepared Statement.............................................    59

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Executive Summary entitled ``What Goes Down Must Come Up: A 
  Review of the Factors Behind Increasing Gasoline Prices, 1999-
  2006,'' Carol Dahl, Ph.D., Professor of Economics, Colorado 
  School of Mines, April 2007, 
  submitted by Dr. John Felmy, Chief Economist, American 
  Petroleum Institute............................................    44

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Sheila Jackson Lee, a 
  Representative in Congress from the State of Texas, and Member, 
  Antitrust Task Force...........................................    76


        PRICES AT THE PUMP: MARKET FAILURE AND THE OIL INDUSTRY

                              ----------                              


                        WEDNESDAY, MAY 16, 2007

                  House of Representatives,
                               Antitrust Task Force
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Task Force met, pursuant to notice, at 1:13 p.m., in 
Room 2141, Rayburn House Office Building, the Honorable John 
Conyers, Jr. (Chairman of the Task Force) presiding.
    Present: Representatives Conyers, Davis, Smith, Chabot, and 
Keller.
    Staff present: Stacey Dansky, Majority Counsel; Mark 
Dubester, Majority Counsel; Stewart Jeffries, Minority Counsel; 
and Brandon Johns, Majority Staff Assistant.
    Mr. Conyers. The hearing of the Antitrust Task Force will 
come to order.
    Good afternoon.
    As summer approaches, consumers are panicking over the 
price of gasoline at the pump. Prices have skyrocketed. Today's 
average U.S. price of a gallon of gas is $3.03, short just 
barely of the record high reached in September of 2005 after 
Hurricane Katrina hit.
    In Michigan, gas prices have reached their highest levels 
ever, at $3.27 a gallon. My State is now the third most 
expensive State for gasoline in the country, behind only 
California and Illinois.
    Now, how did we get to this crisis, and what are the 
solutions?
    Cartels, the OPEC cartel, to be specific, which accounts 
for the two-thirds of the world's oil reserves and over 40 
percent of the world's oil production. Most significantly, 
OPEC's oil exports represent about 70 percent of the oil traded 
internationally. This affords them considerable control over 
the global market.
    Its net oil export revenues should reach nearly $395 
billion this year, and its influence on the oil market is 
predictably dominant, especially when it decides to reduce or 
increase its levels of production. For years, this conspiracy 
has unfairly driven up the cost of imported crude oil to 
satisfy the greed of oil exporters.
    We have long decried OPEC but, sadly, no one in the 
Government has tried to take any action. Because the 
Subcommittee Chairman, Bart Stupak, of Michigan is here and I 
happen to know that he is also chairing his own hearing in 
another room around the corner, I will suspend my statement, 
invite our colleague, Mr. Stupak, to join us here, and with the 
approval of the rest of the Members of the Task Force and the 
Ranking Chairman----
    Mr. Chabot. We have no objection.
    Mr. Conyers. Thank you.
    We would invite Bart Stupak to begin.
    He has been a Member of this body since 1992, has served on 
the Energy and Commerce Committee as Chairman of the Oversight 
and Investigation Subcommittee and will be holding hearings 
looking into the causes behind rising gas prices.
    He is also a leader in the Democratic Caucus on Energy 
Issues and is the author of the Federal Price Gouging 
Prevention Act, which would give the Federal Trade Commission 
the authority to investigate and punish those who unreasonably 
inflate the price of energy.
    Without objection, his statement will be entered into the 
record.
    And we welcome you to the Judiciary Committee, the Task 
Force on Antitrust. Welcome, Bart.

  TESTIMONY OF THE HONORABLE BART STUPAK, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MICHIGAN

    Mr. Stupak. Thank you, Mr. Chairman, Mr. Chabot, thank you, 
and thank you for the courtesy.
    I am in a hearing with British Petroleum. We are looking at 
the Texas City explosion that occurred in 2005 in which 15 
people were killed, another 180 people injured and also what 
has happened up at Prudhoe Bay where we shut down our oil 
fields, America's most strategic oil field, last summer because 
of leaks.
    And it looks like it is, testimony is showing us, through 
lack of maintenance while they had record profits. In fact, 
during that period of time, they received $106 billion in 
profits from 1999 to 2005 but yet they cannot maintain their 
maintenance which led to explosions and deaths and things like 
that.
    But today we are here to talk about gas prices.
    You are right, Mr. Chairman, on the 22nd of this month, we 
will hold hearings on the price gouging legislation and other 
legislation we have.
    Today, on the news, you heard that nationwide average price 
for gasoline hit $3.10 a gallon. This is higher than any time 
last year, and we haven't even begun the summer driving season. 
While consumers pay record prices, oil companies make record 
profits.
    For years, big oil has told us that the cost of a gallon of 
gas is directly related to the price of crude on the world 
market. However, in April of this year, a barrel of crude oil 
was $63. A year before, last year, a barrel of crude was $70. 
Despite the fact that crude is $7 a barrel cheaper than last 
year, gas prices are almost 50 cents higher per gallon. 
Clearly, there is more at play than simply the price of crude 
oil.
    Since 1980, more than 200 refineries in the U.S. have been 
closed. Only one new major refinery has been requested and 
environmental permits were permitted within a year for that 
refinery. It was chosen, though, the oil companies chose never 
to build it.
    Oil companies complain there is too much environmental red 
tape, but as I said, since 1976, only one application for a new 
refinery has occurred, and those permits were approved 
forthwith.
    In fact, there is evidence that the oil companies have 
intentionally reduced refinery capacity to drive up gas prices. 
The Oversight Investigations Committee--I will leave you the 
internal documents from Mobil, Chevron and Texaco--in 1995 and 
1996, specifically, advocated that these companies limit 
domestic refining capacity to drive up prices.
    Today, there are fewer independent refineries in the United 
States, according to the May 2004 GAO study. The four or five 
largest oil companies now own the majority of the refineries, 
giving these companies a significant amount of control over the 
entire distribution process, from exploration for oil to the 
gas that goes in your tank. Shrinking refinery capacity and a 
reluctance to invest in new infrastructure have significantly 
restrained gasoline supplies, driving refinery profits to 
record highs.
    Take, for example, after Hurricane Katrina. Refinery 
profits were 255 percent higher than they were the same time 
the previous year. The average profit margin between a barrel 
of crude oil and a barrel of gasoline now, today, is $30, as 
reported in the May 3 BusinessWeek article.
    That is about 70 cents in refinery profits based on a $3 
per gallon of gas. So according to experts, the spread or the 
profit should be $8 or $9 a barrel, not the $30 we see today. 
At $8 or $9 a barrel for a refinery, they earn about 20 cents a 
gallon, which is a reasonable profit margin.
    As a result of these enormous profits, in the first 3 
months of 2007, Valero, the Nation's largest refinery, 
announced $1.1 billion in profit. That is up 30 percent over 
last year. ExxonMobil's refineries alone made $1.9 billion in 
the first quarter.
    I have introduced legislation, the Federal Price Gouging 
Prevention Act, to protect American consumers from being gouged 
at the pump. It is H.R. 1252. It would give the FTC, Federal 
Trade Commission, the authority to investigate and punish those 
who artificially inflate the price of energy. The FTC would be 
empowered to exercise its authority at each stage of energy 
production and distribution supply chain. The legislation 
applies to gasoline, diesel fuel, crude oil, natural gas, home 
heating oil and propane.
    Over 100 Members of Congress have already co-sponsored this 
legislation.
    I have also introduced the Prevent Unfair Manipulation of 
Prices, the PUMP Act, H.R. 594. the PUMP Act would increase the 
oversight by the Commodity Futures Trade Commission of over-
the-counter energy trading. According to the April 30 Financial 
Times, the CFTC, Commodity Futures Trading Commission, has 
taken the rare step of having to issue subpoenas to McGraw-
Hill, which produces trade publications on energy trading.
    Because the CFTC does not have the authority to ask traders 
for this information, it is instead forced to take legal action 
against third party publications. Without proper oversight, 
energy prices can be driven up by fear, greed and speculation.
    Economists have estimated that improving oversight of these 
markets would eliminate the fear premium on crude oil and lower 
the price by as much as $20 a barrel, or almost 50 cents per 
gallon.
    By passing these two bills, Congress can reign in the 
excessive profits made by the oil companies and the speculation 
of unregulated energy markets. Just counting the 50 cents per 
gallon of excess profit on refineries and 50 cents per gallon 
of fear premium--we call it fear premium--these two bills could 
save consumers $1 per gallon at the pump.
    In addition, I encourage this Committee to continue to 
investigate the influence that big oil has on the price of 
gasoline, including a May 2004 GAO report, because they do talk 
about is there collusion between the companies, why have they 
failed to invest in refinery infrastructure?
    So I want to thank this Committee for allowing me to 
testify. I look forward to take any questions you may have.
    [The prepared statement of Mr. Stupak follows:]

 Prepared Statement of the Honorable Bart Stupak, a Representative in 
                  Congress from the State of Michigan

    Chairman Conyers and Members of the Committee, gas prices are 
causing Americans significant financial hardship, and I appreciate the 
work this Committee is doing to address this problem. Thank you for 
allowing me to appear before you today.
    Last week, the nationwide average price for gasoline hit $3.07 a 
gallon. This is higher than any time last year, and we have yet to 
reach the peak driving season for 2007. As we approach Memorial Day and 
increased summer driving, gas prices are expected to be even higher. 
While consumers pay record prices, oil companies make record profits.
    For years, Big Oil has told us that they have no control over gas 
prices because it is dependent on world crude oil prices.
    However, in April, a barrel of oil cost $63. A year before, a 
barrel of crude oil was $70. Despite the fact that crude oil was $7 a 
barrel cheaper than last year, gas prices were almost 50 cents per 
gallon higher. Clearly, there is more at play than simply the world 
crude oil market.
    Since 1980, more than 200 refineries in the United States have been 
closed. Demand for gasoline continues to grow every year, but a new 
refinery has not been built since 1976. Only one new major refinery has 
requested environmental permits in the past 30 years. While the permits 
were granted, the refinery was never built.
    The oil companies complain that there is too much environmental red 
tape. The truth is that very few companies have even tried to build new 
refineries, instead opting to upgrade existing facilities and run them 
as close to capacity as possible.
    In fact, there is evidence that oil companies have intentionally 
reduced refining capacity to drive up gas prices.
    Internal documents from Mobil, Chevron, and Texaco in 1995 and 1996 
specifically advocated that these companies limit domestic refining 
capacity to drive up prices.
    Today, there are fewer independent refineries in the United States, 
according to a May 2004 Government Accountability Office (GAO) study. 
The 4 or 5 largest oil companies now own the majority of refineries, 
giving these companies a significant amount of control over the entire 
distribution process, from exploration to your gas tank.
    Shrinking refinery capacity and a reluctance to invest in new 
infrastructure have significantly restrained gasoline supplies, driving 
refinery profits to record highs.
    For example, after Hurricane Katrina, refinery profits were 255 
percent higher than they were at the same time a year before, according 
to the The Washington Post.
    The average profit margin between a barrel of crude oil and a 
barrel of refined gasoline is now $30, as reported in a May 3, 2007 
Business Week article. That's about 70 cents in refinery profits for 
every $3 gallon of gas. According to experts, $8 or $9 a barrel, or 
about 20 cents a gallon, is a more reasonable profit margin.
    As a result of these enormous profit margins, in the first three 
months of 2007, Valero, the nation's largest refinery company, 
announced profits of $1.1 billion, up 30% over last year. ExxonMobil's 
refineries alone made $1.9 billion in the first quarter of 2007.
    Other oil companies have enjoyed similar profits. During the first 
3 months of 2007, Royal Dutch Shell's profit was $7.3 billion. Chevron 
reported $4.7 billion, up 18 percent from last year. ConocoPhilips made 
more than $3.5 billion. And ExxonMobil's profits were more than $9.2 
billion.
    I have introduced legislation, the Federal Price Gouging Prevention 
Act (HR 1252) to protect American consumers from being gouged at the 
pump.
    H.R. 1252 would give the Federal Trade Commission (FTC) the 
authority to investigate and punish those who artificially inflate the 
price of energy. The FTC would be empowered to exercise this authority 
at each stage of the energy production and distribution supply chain.
    The legislation applies to gasoline, diesel fuel, crude oil, 
natural gas, home heating oil, and propane.
    Over 100 Members of Congress have already co-sponsored this 
legislation, and I look forward to moving it soon.
    I have also introduced the Prevent Unfair Manipulation of Prices 
(PUMP) Act, HR 594. The PUMP Act would increase oversight by the 
Commodity Futures Trading Commission of over-the-counter energy 
trading.
    According to an April 30 Financial Times story, the CFTC has taken 
the rare step of issuing a subpoena to McGraw-Hill, which produces 
trade publications on energy trading. Because the CFTC does not have 
the authority to ask traders for this information, it is instead forced 
to take legal action against third-party trade publications.
    Without proper oversight, energy prices can be driven by fear, 
greed, and speculation. Economists have estimated that improving 
oversight of these markets would eliminate the ``fear premium'' on 
crude oil and lower the price by as much as $20 a barrel, or almost 50 
cents per gallon of gasoline.
    By passing my two bills, Congress can reign in the excessive 
profits made by the oil companies and the speculation on unregulated 
energy markets.
    Just counting the 50 cents a gallon of excess profit by the 
refineries, and the 50 cents per gallon of fear premium, these two 
bills could save consumers up to $1 a gallon at the pump!
    In addition to my legislation, I encourage this Committee to 
investigate the influence the Big Oil has on the price of gasoline. Is 
there any collusion between these companies? Why have they failed to 
invest in refinery infrastructure?
    As Chairman of the Oversight and Investigations Subcommittee in 
Energy and Commerce, I have scheduled a hearing on gas price gouging 
and the factors that go into the price of gasoline.
    I thank the Committee for allowing me to testify, and I look 
forward to your questions.

    Mr. Conyers. Well, we have decided that we will send you 
the questions in writing and then incorporate them into the 
hearing, Bart Stupak, but thank you for getting us started.
    Mr. Stupak. Thank you, Mr. Chairman.
    Mr. Conyers. Not only do you have one piece of legislation 
for us to examine, but two, and we want to get further 
descriptions of them to include in the record. I don't want to 
take up anybody's time here.
    Mr. Stupak. Well, take a look at the PUMP Act, Mr. 
Chairman. About half the trades on the oil market are not being 
subject to any kind of Government oversight, and that is when 
you do get the fear, speculation and greed. Everything we have 
looked at we can save $20 a barrel if we just put oversight. I 
am not saying regulation, I am just saying oversight. Why are 
some of the trades on the oil market subject to oversight and 
the others are not?
    Mr. Conyers. I thank my colleagues.
    And I thank you.
    And we will now recess for two votes that are pending. And 
we stand in recess.
    Mr. Smith. Mr. Chairman, may I----
    Mr. Conyers. Yes?
    Mr. Smith. Just a point of personal privilege, if I may.
    Mr. Conyers. Absolutely.
    Mr. Smith. I want, while we are here and before we get 
interrupted by the votes, want to congratulate you on a happy 
birthday today.
    Now, there are a couple ways to look at this. We could 
maybe look at it, Jack Benny said he was 39 forever. I won't 
ask whether you have doubled Jack Benny or not, but it is a 
credit to you that you are as active and vibrant and alert and 
take the initiative you do. There is no sign of any age 
whatsoever, and we appreciate that in our Chairman.
    On a more partisan note, the fact that you are so hale and 
hearty should be reassuring to John McCain, I would assume. 
[Laughter.]
    Mr. Conyers. Well, thank you very much, Ranking Member 
Lamar Smith. I am just so happy you didn't ask for my age, 
because I have lied and misrepresented it for so many years, I 
am not sure what it really is at this point. [Laughter.]
    So the Committee stands in recess, and thank you so very 
much.
    [Recess.]
    Mr. Conyers. The Committee will come to order. The 
Antitrust Task Force continues its hearing intermittently 
between our responsibilities on the floor.
    Our next witness is not a stranger to the Committee. Mark 
Cooper is Director of Research at Consumer Federation of 
America. He is responsible for analysis and advocacy in the 
area of telecommunications, media, digital rights, economic and 
energy policy. He has provided expert testimony in more than 
250 cases for public interest clients, including attorneys 
general, people's council and citizen interveners before State 
and Federal agencies, courts and legislators in almost four 
dozen jurisdictions in the United States and Canada. A Yale 
University Ph.D., a Fulbright fellow and author of numerous 
books and articles.
    Welcome, Mr. Mark Cooper, and you may begin.

  TESTIMONY OF MARK N. COOPER, DIRECTOR OF RESEARCH, CONSUMER 
                     FEDERATION OF AMERICA

    Mr. Cooper. Thank you, Mr. Chairman and Members of the 
Committee. I appreciate the opportunity to offer the consumer 
perspective on rising gasoline prices.
    American gasoline consumers are fed up, mad as hell, and 
they have good reason to be. Over the past 5 years, the average 
household expenditure for gasoline has increased by over 
$1,000. A major cause of this immense increase is the failure 
of Federal antitrust authorities to prevent the abuse of market 
power by oil companies and the failure of the Administration 
and Congress to enact policies to address the problems that 
plague the gasoline market.
    Between January of this year and the first week in May, 
gasoline prices increased about 80 cents per gallon. Over 60 
cents was the result of an increase in the amount taken by 
domestic refining and marketing. In the past 5 years, the 
increase in price paid to domestic refining and marketing has 
cost consumers over $130 billion.
    Consumers believe that gasoline prices are unreasonable and 
that there is something the Administration and Congress can do 
about it, and our analysis shows they are right. The domestic 
refining sector has become so concentrated that these price 
increases represent the abuse of market power in the industry.
    The merger wave of the past decade dramatically reduced the 
number of refineries and companies in the wholesale market. As 
a result, the vast majority of markets in the U.S. are 
concentrated. Lacking competitive pressures, the industry has 
failed to expand refinery capacity adequately and dramatically 
reduced the amount of gasoline in storage. This makes markets 
vulnerable to price surges, even when routine maintenance is 
conducted, not to mention unexpected events. The companies put 
up prices, blame supply and demand, but they are the cause of 
the supply side problem.
    With prices rising faster than cost, net income in U.S. 
refining has increased sharply, far faster than in foreign 
refining. Oil companies' profits have increased far more than 
profits at comparable U.S. non-oil companies, setting records 
in 3 of the last 4 years. Excess profits in the past 4 years 
exceed $200 billion.
    The increase in cash flow is so great that the industry 
cannot absorb it, so it is throwing huge quantities of cash--
stock buybacks, debt reduction, dividends and huge piles of 
cash. Net new investment has been paltry compared to the growth 
of net income, especially in domestic refining.
    This is great for their Wall Street performance, but it is 
bad news for Main Street America.
    This industry has all of the characteristics of market 
failure: Basic structural conditions of low elasticity of 
demand and supply; concentration and barriers to entry; 
conduct, including lockstep pricing, conscious parallelism in 
which each of the individuals mutually reinforces the other; 
bad management, so bad that they can't even handle routine 
maintenance without interrupting supply and putting prices up; 
and, finally, performance, high prices, excess profit, 
underinvestment and in the inability to absorb cash flow. This 
is a picture of fundamental market failure.
    The pain felt by consumers is ultimately the result of a 
policy failure at every level. Antitrust officials approve too 
many mergers and imposed weak conditions on those that went 
through so that they could not discipline market power. 
Congress and the Administration have stood idly by and done 
nothing to help consumers.
    We believe that to address the short-term problem of price 
spikes, 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.
    We need antitrust authorities that really do their job and 
look very closely at unilateral actions that raise prices. We 
need authority to make sure they can look at those kinds of 
behaviors.
    We need commodity market regulators who look at all the 
market, and we need joint Federal-State task forces to oversee 
both the physical and financial markets, so we have more 
eyeballs with different perspectives overseeing this vital 
energy commodity.
    To address long-term problems, we need fundamental changes 
in supply and demand. We have to accelerate the day when we 
will use less oil by setting aggressive, concrete targets for 
reducing American oil consumption, above all, increasing CAFE 
standards.
    We need a national policy that promotes the research, 
production and use of biofuels in a socially and 
environmentally responsible manner.
    Now is the time to act. Six years ago was the time to act. 
Hopefully, the current round of spikes, which has gotten 
everybody's attention, will finally convince policymakers to 
take some measures that alleviate the pain that Americans have 
been suffering at the pump.
    Thank you.
    [The prepared statement of Mr. Cooper follows:]

                  Prepared Statement of Mark N. Cooper









































    Mr. Conyers. Thank you, Mr. Cooper.
    Because of time constraints, we are going to call on 
Attorney General Richard Blumenthal from Connecticut as the 
next witness.
    He has advocated reforms in the health insurance industry, 
has fought unfair utility rate charges, has led the fight 
against big tobacco in terms of their deceptive marketing aimed 
at children, has investigated insurance industry abuses. In 
other previous public services he was administrative assistant 
to United States Senator Abe Ribicoff, aide to former United 
States Senator Daniel Moynihan and was a law clerk to the 
Supreme Court Justice Harry Blackmun. He has also worked with 
the NAACP Legal Defense Fund, has served in the Connecticut 
House of Representatives, and we are delighted that his 
schedule would permit him to join us for this important hearing 
before the Antitrust Task Force today.
    We welcome you, Mr. Attorney General.

TESTIMONY OF THE HONORABLE RICHARD BLUMENTHAL, ATTORNEY GENERAL 
                  FOR THE STATE OF CONNECTICUT

    Mr. Blumenthal. Thank you so much, Mr. Chairman. I am 
honored to be before you and have long admired the great work 
that you have done in the consumer area and so many other areas 
where I have observed the many contributions that you have 
made. And so I am particularly honored to be here before you.
    Mr. Conyers. Thank you.
    Mr. Blumenthal. And particularly so on this subject, which 
concerns consumers as much or more than any. I have found that 
there is none that angers and outrages the consumers of the 
country more, and with great reason, than this one precisely 
because of the statistics that you have just heard from Mr. 
Cooper, which are so compelling and persuasive as to the need 
for fundamental change.
    This market is not just failed, it is dysfunctional, and it 
overpowers consumers and causes abuses, enables those abuses in 
a way that virtually none other in the country today.
    As I was driving here from the airport, I thought back to a 
meeting that I had with the United States Attorney General less 
than a year ago involving a number of my colleagues from all 
around the country, both Republican and Democrat attorneys 
general, who met with him and the chairman of the FTC with the 
single purpose of persuading them to begin a Federal 
investigation. And, unfortunately, our plea went unheeded then. 
There has been no effective Federal investigation.
    We pleaded with Attorney General Gonzalez and FTC Chairman 
Majoras Platt to begin an investigation of the oil industry, 
and we offered our partnership in that work. All 50 attorneys 
general have a task force investigating monopolistic abuses on 
the part of the oil industry, but we lack the authority and 
expertise and resources of the Federal Government, and so we 
invited, we beseeched the Federal Government to join with us in 
that investigation, and so far they have declined to do so.
    There is a need to provide greater authority but also to 
use that authority effectively to enforce the law. The law 
without enforcement is dead letter.
    And so as we review what can be done to change the law, I 
think at the top of the priorities ought to be the kinds of 
demands that you have made, Mr. Chairman, other Members of the 
Committee and Congress that the Justice Department be more 
aggressive and vigorous in enforcing these laws that protect 
against antitrust and consumer abuses.
    I am here to strongly support the legislation that you have 
proposed that would enable antitrust enforcement against OPEC. 
By an accident of interpretation in the Federal courts, we lack 
that authority now, but there is no clearer instance of 
monopolistic pricing than on the part of those OPEC countries. 
And if they were entities in any way within the reach of law, 
there would be no question that they were breaking laws and 
doing business in the United States. And so I strongly support 
that measure.
    I also believe that we ought to have, as a remedy under the 
antitrust laws, the potential to break up the big oil companies 
if they abuse their market power. Clearly, there is a 
concentration of power.
    I know my colleague, Mr. Felmy, differs on that point. He 
says that there is robust competition, no concentration of 
power. I think there is virtual unanimity among economists that 
there is a concentration of power. Indeed, I have fought it. 
For example, the ExxonMobil merger, and the statistics, support 
that view overwhelmingly.
    The question really is what to do about it--whether they 
are capable of using that power wisely or whether they need to 
be policed and stopped from abusing it--and I think they have 
clearly demonstrated that they will abuse it unless antitrust 
authorities apply the laws with the potential remedy of 
breaking up some of the concentration.
    I also support in my testimony--and I won't go through 
every detail, because it is in the testimony, and I would 
simply ask for permission to make it a part of the record--a 1-
year moratorium on any future mergers; a prohibition against 
any oil company merger in a highly concentrated market unless 
there is a showing by the FTC that there is a benefit to 
consumers; a series of steps to expand refinery capacity and 
product inventory levels, which are a vital weak point in the 
system now; a series of measures, including banning zone 
pricing, which divides geographic turf. Big oil companies 
divide that turf, deciding what consumers can pay in different 
geographic areas and through their agreements with franchisees 
enforce those kinds of rules on them.
    And, finally, I strongly support measures relating to 
conservation, alternative fuels, essentially, to reduce the 
dependency and, as it is called, addiction to big oil.
    And I think that, again, to close where Mr. Cooper did, 
there is a need, as Mr. Felmy says, to avoid doing harm, first 
do no harm, but the point here is that there can be no more 
egregious harm than to watch prices rise at the pump, 50 cents 
higher than last year at this time, when crude is lower, $7 a 
barrel lower.
    That is an outrage, and consumers are rightly angry about 
it, and I hope that the Congress will give States and State 
attorneys general some of the measure that I think can help us 
overcome it.
    Thank you.
    [The prepared statement of Mr. Blumenthal follows:]

         Prepared Statement of the Honorable Richard Blumenthal



















    Mr. Conyers. Thank you so much. The documents you referred 
to will be incorporated into the record. There is so much that 
we can talk about and so little time to do it. So we will stay 
in touch.
    Mr. Blumenthal. Thank you.
    Mr. Conyers. The Chair wants to recognize the gentlelady 
from New Mexico, Heather Wilson, a senior Member of the Energy 
and Commerce Committee in the House, a leader in efforts to 
protect consumers from price gouging and who has led a 
bipartisan effort after Hurricanes Katrina and Rita to prevent 
price gouging during emergencies. We passed one of her pieces 
of legislation overwhelmingly just recently.
    She serves also on the Environment and Hazardous Materials 
Subcommittee, Health Subcommittee and Telecommunications and 
Internet Subcommittee of the Energy and Commerce Committee. She 
is also on the Intelligence Committee and has been active, very 
active, in the subject matter that brings us here today.
    And we will incorporate your full statement into the record 
and invite you to begin.

TESTIMONY OF THE HONORABLE HEATHER WILSON, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF NEW MEXICO

    Mrs. Wilson. Thank you, Mr. Chairman, and happy birthday.
    Mr. Conyers. Oh, thank you, just as long as you don't ask 
me how old I am.
    Mrs. Wilson. I won't, sir.
    Mr. Conyers. Thank you so much.
    Mrs. Wilson. Thank you, Mr. Chairman, and thank you for 
holding this hearing.
    I believe very strongly that we need a balanced long-term 
energy policy for the country that makes America more energy 
independent, and there are a variety of ways to do that, but I 
think that everybody concerns when the price at the pump goes 
up to $3.10 a gallon, which is what it is, on average, and was 
$3.06 when I last filled up my car at I-25 and Alameda in 
Albuquerque. Drivers across the Nation are feeling the pinch in 
their pocketbook, and it is uncomfortably high.
    There are a number of pieces to this puzzle, and part of 
addressing energy independence is to understand the factors 
driving prices and to mitigate those factors. That certainly 
means reducing demand and moving toward alternative fuels and 
E85 ethanol. The country of Brazil is almost completely energy 
independent. They import almost no oil, because they depend on 
E85, which is ethanol that they make from sugarcane, hydrogen 
and biofuels.
    I would note that the Senate, with the leadership, in a 
bipartisan way, of Senator Bingaman and Senator Domenici, has 
passed the Senate Energy Savings Act, and that is now pending 
here in the House.
    Whether it is hybrid vehicles or conservation or changing 
the way in which we calculate fuel savings for trucks, these 
are the kinds of things that can reduce demand.
    At the same time, we have to diversify supply. We have got 
worldwide volatility and worldwide increases in demands in oil. 
We import over 60 percent of our oil from countries that 
generally don't like us, and we don't want to be in that 
situation, whether it is violence in Nigeria and dealing with 
that or the fact that we are making some advances here in 
domestic exploration, including the passage of the Gulf of 
Mexico Security Act of 2006, so we diversify our sources of 
supply.
    We have got supply chain bottlenecks, and some have 
mentioned also refinery capacity already. We have very little 
margin of error in our refinery capacity. We have got about 
800,000 barrels per day in the United States of crude oil 
refining capacity that is currently offline, and that 
translates to about 400,000 barrels a day in lost gasoline 
production. In a normal season, about 100,000 barrels are 
offline.
    One of the pieces, though, I think is to look at the issue 
of price gouging, and I have reintroduced my legislation that 
passed overwhelmingly in the House in the last Congress. I 
don't think Federal law adequately addresses price gouging. 
Currently, under the FTC, Federal Trade Commission, rules, they 
can investigate collusion, but they cannot investigate price 
gouging; they don't have the legal authority.
    My bill would prohibit price gouging at any time for 
gasoline or diesel fuel, crude oil, home heating oil and 
biofuels. It would direct the Federal Trade Commission to come 
up with a definition of price gouging for both retail and 
wholesale.
    One of the difficulties is that we have 30 States with 
price gouging laws and very different definitions of what that 
means. I think we need an extensive rulemaking in order to come 
up with a very good definition so everybody knows the rules of 
the road.
    The bill provides for both criminal and civil sanctions as 
well as civil enforcement by the Federal Trade Commission as 
well as the State attorney generals if the FTC does not act.
    I thank the Committee for its consideration of this 
legislation, and I look forward to working it through in this 
Congress.
    Thank you, Mr. Chairman.
    [The prepared statement of Mrs. Wilson follows:]

Prepared Statement of the Honorable Heather Wilson, a Representative in 
                 Congress from the State of New Mexico

    Chairman Conyers and Ranking Member Smith, thank you for providing 
me the opportunity to testify before the House Committee on the 
Judiciary.
    We need to make America more energy independent and that is going 
to take a long-term, balanced approach that deals with supply, demand 
and protecting consumers.
    Americans are again seeing gasoline price spikes at the pump with 
prices reaching over $3 a gallon all over the country. Back home in 
Albuquerque, New Mexico, prices for unleaded gas range from $3.09 to 
$3.25. A month ago prices in New Mexico hovered around $2.80 and a year 
ago prices were around $2.90.
    While price fixing, collusion and other anti-competitive practices 
are currently illegal on the federal level, there is no federal 
statutory prohibition against price gouging.
    Following the Hurricane Katrina disaster, gasoline prices 
fluctuated up to $6 per gallon in some communities. I was concerned 
that current law does not adequately address price gouging that does 
not rise to the level of antitrust prohibitions.
    Last Congress I introduced HR. 5253, the Federal Energy Price 
Protection Act of 2006. A little more than a year ago, on May 3, 2006 
the House passed H.R. 5253 by a vote of 389-34. Unfortunately, the 
Federal Price Protection Act of 2006 stalled in the Senate.
    I have reintroduced the Federal Energy Price Protection Act.
    The Federal Energy Price Protection Act prohibits price gouging--at 
any time--in the market for gasoline, diesel fuel, crude oil, home 
heating oil, and biofuels.
    The Federal Energy Price Protection Act directs the Federal Trade 
Commission to define by rule the terms ``price gouging'', ``wholesale 
sale'', and ``retail sale''. The existing state statutes in this area 
have vastly different definitions and interpretations. Under a 
rulemaking, the FTC would have the benefit of receiving, and the 
obligation to consider, comment from interested parties on the 
definition of price gouging. The Act directs the FTC to define price 
gouging within 6 months of enactment.
    The Federal Energy Price Protection Act provides for strong civil 
enforcement by the FTC, by States' Attorneys General, and criminal 
enforcement by the U.S. Attorney General and the Department of Justice.
    The Federal Energy Price Protection Act provides for civil 
penalties for price gouging. For ``wholesale sale'' violations, the 
penalties are 3 times the ill-gotten gains of the seller, plus an 
amount not to exceed $3 million, per day of a continuing violation. For 
``retail sale'' violations, the penalties are simply 3 times the ill-
gotten gains of the seller.
    The Federal Energy Price Protection Act provides for criminal 
penalties. ``Whole sale'' violations will be punishable by a fine of no 
more than $150 million, imprisonment for not more than 2 years, or 
both. ``Retail sale'' violations will be punishable by a fine of no 
more than $2 million, imprisonment for not more than 2 years, or both.
    At least 30 states have laws that prohibit price gouging or 
excessive price increases. Most states have laws that are triggered in 
the event of a declared emergency, with a few having laws that may be 
applicable at other times as well. Other states may also exercise 
authority under general deceptive trade practice laws depending on the 
nature of the state law and the specific circumstances in which price 
increases occur.
    When defining ``price gouging'', the devil is in the details. Under 
the provisions of The Federal Energy Price Protection Act, the Federal 
Trade Commission would consider public comment in defining exactly what 
wholesale pricing is, what retail pricing is, and it gives them some 
regulatory authority to come up with definitions. The truth is, there 
are about 30 State laws. Some of those laws are very, very different, 
and it makes sense to allow the States and those involved to come up 
with a national definition that will work best for consumers in the 
marketplace.
    The government doesn't set prices, but we do have a responsibility 
to prohibit price gouging and unfair manipulation of the markets. 
Opportunists should not be able to reap ill-gotten windfall profits on 
the backs of America's families, particularly when disaster strikes.
    A federal statutory prohibition against price gouging is one piece 
of the puzzle. We also need to deal with other pieces of the puzzle as 
we move along, everything from building refinery capacity, encouraging 
more hydrogen-powered cars, using ethanol in our gas tanks, exploring 
for energy in America and in American waters and conservation so that 
America becomes more energy independent.
    We need a balanced, long term energy plan for the country that 
makes us more energy independent.
    Again, thank you for allowing me the opportunity to testify before 
the Committee on the Judiciary.

    Mr. Conyers. My congratulations to you for your past 
efforts, and we look forward to you continuing in this 
Congress.
    I would like now to introduce our last witness, the Chief 
Economist and Director of the Statistics Department at the 
American Petroleum Institute, Dr. John Felmy. Twenty years' 
experience in energy economic and environmental analysis, 
Bachelor's and Master's in Economics from the Pennsylvania 
State University and a Ph.D. in the same area from the 
University of Maryland, a member of several professional 
associations, including the American Economics Association, 
International Association for Energy Economics, and is serving 
as the chairman of the Policy Committee of the Alliance for 
Energy and Economic Growth.
    We welcome you and look forward to your contribution to 
this hearing.
    Mr. Chabot. Mr. Chairman, before the doctor gets started, 
if I could just ask a question. We have got a vote on the 
floor, so we are going to head over for that, I guess, and 
there is a markup in this room at 4 o'clock, and I was just 
wondering what the Chair was thinking relative to panel Members 
asking questions and that sort of thing.
    Mr. Conyers. We will go till 3:59.
    Mr. Chabot. Okay. Because we may not be back here for 
another----
    Mr. Conyers. Yes.
    Mr. Chabot. We have got two 20-minutes votes, they are 
saying.
    Mr. Conyers. That is life in the Congress.
    Mr. Chabot. Excellent. I just wanted to make sure we 
understood where we were at. Thank you, Mr. Chairman.
    Mr. Conyers. You are welcome.
    Dr. Felmy, welcome to the Committee.

           TESTIMONY OF JOHN FELMY, CHIEF ECONOMIST, 
                  AMERICAN PETROLEUM INSTITUTE

    Mr. Felmy. Thank you, Mr. Chairman and Members of the 
Committee. We appreciate the invitation to present API's view 
on gasoline prices.
    We recognize that consumers are frustrated with today's 
higher prices. However, the cause of the higher prices is an 
imbalance between supply and demand, worsened, at least, in 
part, by policy failures, which the current price control 
proposals could make worse.
    Price control legislation fails to address this cause and 
is premised on this about how fuel is marketed. Our companies 
have been producing record amounts of fuel to supply their 
customers in highly competitive markets. The industry has 
supplied about 8.85 million barrels per day to date this year. 
However, because of maintenance at European refineries and a 
French port workers strike, less imported gasoline has been 
available. Gasoline imports typically make up about 12 percent 
of our supply.
    As a result, total U.S. gasoline supplies have struggled to 
keep up with demand, which has been extremely strong. During 
the first quarter of 2007, total U.S. gasoline demand set a 
record, increasing almost 2 percent over the same period in 
2006.
    Besides record-breaking demand and sluggish imports, other 
factors have been contributing to higher gasoline prices. They 
include crude oil prices, which account for more than half the 
cost of gasoline and are set on international markets, the 
annual switchover to more expensive to produce summer blend 
gasoline required by EPA and regularly scheduled refinery 
maintenance and on-plan problems that have prevented refiners 
from making even more gasoline.
    In short, the price increases reflect supply and demand, 
and the same is true for past price increases that have been 
thoroughly investigated by Government agencies who would not 
have hesitated to take the industry to task if illegal or 
improper activity had been discovered. Invariably, these 
agencies have explained price spikes by supply-demand 
conditions that had nothing to do with the manipulation of 
supplies or illegal agreements among companies.
    A 2006 investigation by the U.S. Federal Trade Commission 
found ``no evidence indicating that refiners make product 
output decisions to affect the market price of gasoline. 
Instead, the evidence indicates that refiners responded to 
market prices by trying to produce as much high-value products 
as possible. The evidence collected in this investigation 
indicated that firms behave competitively.''
    Those who persist in suspecting that the industry is 
holding back supplies often cite the lack of new refinery 
construction. However, over the past 10 years, existing 
refineries have expanded capacity equivalent to building 10 new 
refineries, and based on public announcements of refinery 
expansions are projected to add capacity equivalent to an 
additional eight new refineries by 2011.
    Another explanation advanced to explain high prices is 
industry mergers. Industry mergers have occurred only after 
careful FTC scrutiny to ensure competitiveness of all markets. 
There is no shortage of competitors today. The eight biggest 
refiners account for about 66 percent of the market at the 
beginning of 2006--a level of concentration that is comparable 
to other consumer products industries. There is nothing we are 
aware of in a professional peer-reviewed literature tying 
higher prices to mergers. In that category, I exclude a 2004 
GAO report dismissed by the FTC as badly flawed.
    In short, the justifications advanced in support of price 
control legislation are without merit. Price control laws could 
prevent the operation of laws of supply and demand, hamstring 
efforts to secure ample supplies of fuel to consumers. Such 
proposals are cousins of the disastrous price and allocation 
controls of the 1970's which led to gasoline lines, odd or even 
days and millions of angry motorists.
    If price controls are enacted, the 12 percent of our daily 
gasoline consumption met by imports could be jeopardized. 
Because of artificially low prices, exporters would have less 
incentive to ship to U.S. markets. Also, they may prefer to 
ship to other markets rather than risk jail time or exorbitant 
fines supplying the U.S.
    Finally, after a natural disaster in the U.S., the same 
disincentives could affect domestic suppliers, making it harder 
to end regional shortages that typically follow national 
disasters.
    The U.S. oil and natural gas industry is doing everything 
it can to produce the fuels consumers demand. Markets work and 
have done more for consumers than price controls could ever 
hope to, but we also need policies that focus on increasing 
supplies, encouraging energy efficiency and conservation in all 
sectors of the economy, including transportation and reporting 
and promoting responsible development of alternative and non-
conventional sources of energy.
    At a minimum, we must do no harm. Price control laws 
threaten consumers and the Nation's energy security. We can do 
much, much better.
    Finally, Mr. Chairman, I would like to submit for inclusion 
in the record the executive summary of a recent study by 
Professor Carol Dahl. Professor Carol Dahl is an economist at 
the Colorado School of Mines who has studied, at our request, 
many of the issues he discussed today.
    Mr. Conyers. Without objection, so ordered. We will include 
it.
    [The information referred to follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mr. Felmy. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Felmy follows:]

                    Prepared Statement of John Felmy

    I am John Felmy, chief economist of API, the national trade 
association of the U.S. oil and natural gas industry. API represents 
nearly 400 companies involved in all aspects of the oil and natural gas 
industry, including exploration and production, refining, marketing and 
transportation, as well as the service companies that support our 
industry.
    The oil and natural gas industry understands America's frustrations 
about gasoline prices. Higher prices are a burden to households and 
potentially threaten the economy.
    However, the evidence overwhelmingly demonstrates that higher 
prices reflect an imbalance between supply and demand, worsened at 
least in part by policy failures, which the current price-control 
proposals will make still worse. The contention that higher prices are 
driven by market failure or market manipulation, including the holding 
back of supplies, is not credible. The prices are a symptom of larger 
energy challenges facing the nation and must be addressed in other 
ways.
    U.S. oil companies are working extremely hard to provide Americans 
with the fuels they need and demand.
    U.S. refineries have been making record amounts of gasoline, about 
8.85 million barrels per day to date this year (see Figure 1). However, 
less imported gasoline has been available. Typically, imports make up 
about 12 percent of gasoline supply. Less foreign gasoline has been 
available in part because of spring refinery maintenance in Europe and 
an 18-day French port-workers' strike in March, which led some European 
refiners to reduce production. As a result, total U.S. gasoline 
supplies have struggled to keep up with demand, which has been 
extremely strong. During the first quarter of 2007, total U.S. gasoline 
demand set a record, increasing almost 2 percent over the same period 
in 2006.
    The most important factor in higher gasoline prices has been higher 
crude oil prices. More than half the cost of gasoline is attributable 
to the cost of crude oil. Crude oil prices have fluctuated 
significantly, driven by lingering geopolitical tensions, OPEC's 
continuing production controls, and worldwide demand growth. Oil 
companies do not set the price of crude. It is bought and sold in 
international markets, with the price for a barrel of crude reflecting 
the market conditions at the time of purchase. It is well recognized 
that the market for crude oil has tightened. World oil demand reached 
unprecedented levels in 2006 and continues to grow due to strong 
economic growth, particularly in China and the United States. World oil 
spare production capacity--crude that can be brought online quickly 
during a supply emergency or during surges in demand--is near its 
lowest level in 30 years.
    In addition, the annual switchover to ``summer blend'' gasoline 
required by EPA has occurred, and this warm-weather gasoline is more 
expensive to produce. The switchover lowers yields per barrel of oil 
and requires a large supply drawdown to meet regulations, which reduces 
inventories.
    Finally, despite record U.S. gasoline production, regularly 
scheduled refinery maintenance and unexpected problems relating to 
extreme weather, external power outages and other incidents have 
prevented refiners from making even more gasoline. Maintenance is a 
normal procedure, though it has been delayed, in some cases, by damage 
suffered from the catastrophic hurricanes in 2005. While maintenance 
curtails refining operations temporarily, it helps ensure the long-term 
viability of the refinery and protects the health and safety of 
workers.
    In short, the recent price increases reflect the forces of supply 
and demand. And the same is true for past price increases that have 
been thoroughly investigated by government agencies who would not have 
hesitated to take the industry to task if illegal or improper activity 
had been discovered. Invariably, these agencies have explained price 
spikes by supply/demand conditions. The evidence is overwhelming that 
refiners are not withholding supplies or otherwise manipulating the 
market.
    Here, for example, is what the U.S. Federal Trade Commission said 
in May 2006 as a result of an investigation: \1\
---------------------------------------------------------------------------
    \1\ ``Investigation of Gasoline Price Manipulation and Post-Katrina 
Gasoline Price Increases,'' U.S. Federal Trade Commission, May 22, 
2006.

        ``. . .  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. 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 
---------------------------------------------------------------------------
        behave competitively.''

    Those who persist in suspecting, despite the massive evidence to 
the contrary, that the industry is holding back supplies often cite the 
lack of new refinery construction. While it is true that no new 
refinery has been built since the 1970s, companies have steadily 
increased the capacity of existing refineries and continue to do so. 
Over the past ten years, existing refineries have expanded capacity 
equivalent to building 10 new refineries and, based on public 
announcements of refinery expansions, are projected to add capacity 
equivalent to an additional eight new refineries by 2011.
    Another explanation advanced to explain higher prices is industry 
mergers. As with all industries, mergers have occurred only after 
careful FTC scrutiny to ensure the competitiveness of markets. There is 
no shortage of competitors today, and market power is not heavily 
concentrated. The eight biggest refiners account for 66 percent of the 
market, a level of concentration that compares favorably to other 
consumer product industries. There are close to 60 refining companies, 
about 142 refineries, and about 165,000 retail outlets, all but a small 
percentage of these outlets owned by small businessmen and women. A 
2004 report by the FTC said that the share of U.S. refining capacity 
owned by independent refiners with no production operations rose from 8 
percent in 1990 to over 25 percent in 2006.
    A 2003 GAO report says that mergers affected prices by less than 
one half of one cent per gallon at the wholesale level, but the FTC 
dismissed the report as ``fundamentally flawed'' and full of ``major 
methodological mistakes.'' It says the report's conclusion ``lack any 
quantitative foundation.'' Beyond this suspect GAO report, we are 
unaware of anything in the professional literature tying higher prices 
to mergers. Indeed, in part as a result of the mergers, the industry 
has become more efficient, which has reduced costs to consumers, though 
this benefit has been masked by sharp increases in crude oil prices.
    None of the arguments advanced to justify the price-control 
proposals has a strong factual and analytical basis, yet even if all 
did, price-control legislation would be a supremely bad idea. The 
proposals could interfere with the operation of the law of supply and 
demand, hamstringing efforts to secure and deliver ample supplies of 
fuel to consumers.
    Today's proposals are cousins of the disastrous price and 
allocation controls of the 1970s. Those policies established price 
ceilings on domestically produced crude oil and refined products, 
keeping them artificially low compared to world prices. This resulted 
in decreased domestic crude oil production while domestic demand for 
crude oil and refined products increased, leading to a worsening of 
shortages and increased oil imports. It was the era of gasoline lines, 
odd or even days, and millions of angry motorists, victims of the 
misguided policies of their own government, which should have known 
better.
    If price controls are enacted, the 12 percent of our daily gasoline 
consumption met by imports could be jeopardized. Overseas suppliers 
would not have an incentive to ship to U.S. markets if the price were 
kept artificially low. Also, they might prefer to ship to other markets 
rather than risk jail time or exorbitant fines in the U.S.
    In addition, today's proposals contain vague pricing requirements 
that make it virtually impossible for marketers to know in advance if 
their actions will be found to be in or out of compliance and, 
therefore, will be extremely difficult to enforce fairly. For example, 
under these bills, how is a gas station operator to know whether a 
price increase of five, ten or fifteen cents a gallon will be 
considered ``unconscionable?'' This legal uncertainty, especially when 
coupled with the serious risk of jail time or exorbitant fines, could 
discourage a supplier from doing business in areas affected by a 
natural disaster when supplies have been substantially reduced, thus 
delaying a return to normal conditions.
    Price-control laws will not solve today's problems. The U.S. oil 
and natural gas industry is doing everything it can to produce the fuel 
supply needed to meet consumer energy needs. Congress needs to allow 
the oil and gas industry to invest today's earnings in meeting 
tomorrow's energy needs and continue to operate within a market system, 
which has done far more for consumers than price controls could ever 
hope to. However, the industry cannot meet U.S. energy challenges 
alone. Our nation's energy policy needs to focus on increasing 
supplies; encouraging energy efficiency and conservation in all sectors 
of the economy, including transportation; and promoting responsible 
development of alternative and non-conventional sources of energy.
    At a minimum, we must do no harm. Price control laws threaten 
consumers and the nation's energy security. We can do much, much 
better.
                               __________

           APPENDIX 1: OIL AND NATURAL GAS INDUSTRY EARNINGS

    Proponents of ``price-gouging'' proposals say they are partly 
justified by the oil and natural gas industry's large earnings. There 
is considerable misunderstanding about this. Companies' earnings are 
typically in line with other industries and often lower. For 2006, the 
industry's annual earnings averaged 9.5 cents on each dollar of sales. 
The average for all manufacturing industries was 8.2 cents or about a 
penny lower. From 2002 to 2006, average earnings for the industry stood 
at approximately 7.4 cents on each dollar of sales--a penny above the 
five-year average for all U.S. manufacturing industries.
    It should not be forgotten that the energy Americans consume today 
is brought to us by investments made years or even decades ago. Today's 
oil and natural gas industry earnings are invested in new technology, 
new production, and environmental and product quality improvements to 
meet tomorrow's energy needs. Between 1992 and 2005, the industry 
invested more than $1 trillion--on six continents--in a range of long-
term energy initiatives: from new exploration and expanding production 
and refining capacity to applying industry leading technology. In fact, 
over this period, our cumulative capital and exploration expenditures 
exceeded our cumulative earnings.
    Furthermore, the industry's future investments are not focused 
solely on oil and natural gas projects. For example, one oil company is 
among the world's largest producers of photovoltaic solar cells; 
another oil company is the world's largest developer of geothermal 
energy; and the oil and gas industry is the largest producer and user 
of hydrogen. Over the last five years in North America alone, we have 
invested $12 billion in renewable, alternative and advanced non-
hydrocarbon technologies. In fact, when you add up all of the various 
types of emerging energy technologies, our industry, over the five 
years, has invested almost $100 billion--more than two and half times 
as much as the federal government and all other U.S. companies 
combined.
    It also requires billions more dollars to maintain the delivery 
system necessary to ensure a reliable supply of energy and to make sure 
it gets where it needs to go: to industry customers. According to the 
EIA, Americans will need 28 percent more oil and 19 percent more 
natural gas in 2030 than in 2005. The industry is committed to making 
the reinvestments that are critical to ensuring our nation has a stable 
and reliable supply of energy today and tomorrow.
    It is also important to understand that those benefiting from 
healthy oil and natural gas industry earnings include numerous private 
and government pension plans, including 401K plans, as well as many 
millions of individual American investors. While shares are owned by 
individual investors; firms, and mutual funds, pension plans own 41 
percent of oil and natural gas company stock. To protect the interest 
of their shareholders and help meet future energy demand, companies are 
investing heavily in finding and producing new supplies.


                                

    Mr. Conyers. Before we go to vote, just tell me, Dr. Felmy, 
how did Mr. Blumenthal and Mr. Cooper get it so wrong? Is there 
some way we can explain their understanding of the dimensions 
of the problem?
    Mr. Felmy. Mr. Chairman, I am an economist. I fundamentally 
believe in markets, markets at work, and as I look at the data 
carefully, what I see is an industry that has, true, a shortage 
of refinery capacity through a whole host of reasons leading up 
over years. We faced enormous challenges this year in terms of 
what was actually happening with markets. Their perception of 
what is going on is simply different than my own. As an 
economist, I believe in markets.
    Mr. Blumenthal. And I believe in markets too, Mr. Chairman. 
This one simply isn't working because it has become so 
concentrated and power is in so few hands that have failed to 
expand refinery capacity when it is desperately needed, failed 
to maintain proper levels of inventory and thereby exposed the 
system to the shocks of pipelines bursting and other temporary 
phenomena and failed to be responsive to consumers. And the 
Federal Government bears a share of the responsibility, the 
Department of Justice and FTC, in failing to enforce the law.
    So I think there is concentration of market power, clearly. 
The question is what to do about it, how to remedy it.
    Mr. Conyers. Mark Cooper?
    Mr. Cooper. It is wonderful to believe in markets, but you 
also have to accept the proposition that sometimes they fail. 
And in this case, this year we have got an excuse about some 
refineries out here and there. For the last 7 years, we have 
had a different excuse each year. And the simple fact of the 
matter is that once is an accident, twice is a surprise, six 
times means there is a fundamental flaw in the structure that 
has failed to build an industry that can actually deliver a 
stream of product at reasonable prices.
    You can't look at oil company profits in the last 4 years 
and say they are not extreme, excessive. Last year, they were 
twice the average for the manufacturing sector, and they have 
averaged about seven or eight points over the last 4 years.
    So if you look at the structural characteristics of the 
market, not just pray to it and believe in it, but analyze it, 
you have to conclude that there is a market failure here of 
immense proportions.
    Mr. Conyers. Heather Wilson, last word.
    Mrs. Wilson. I am not an economist, Mr. Chairman, but I am 
a mom with a Subaru, and I think people are upset about how 
high their gas prices are, and it puts a real crimp in their 
pocketbook.
    But we are not going to get out of this overnight. We need 
a balanced long-term energy plan for this country that makes us 
more energy independent and helps to keep the prices down. I am 
a big believer in competition.
    Mr. Conyers. Mr. Keller?
    Mr. Keller. Thank you.
    Mr. Attorney General Blumenthal, I don't disagree with you 
on this NOPEC issue at all. I may even co-sponsor it.
    But just for the sake of argument--you are a good 
attorney--do you believe, in your legal opinion, that if we 
pass this, that we will have jurisdiction over these OPEC 
nations in Federal court and that we would be in a position to 
enforce a judgment against them if we are able to acquire a 
judgment?
    Mr. Blumenthal. The answer to that question, a very central 
and obviously excellent question is unequivocally yes.
    This measure would, very simply, have the effect of 
removing from the Federal Sovereign Immunities Act of 1976 the 
flawed interpretation, in my view flawed interpretation, given 
by the Ninth Circuit in the OEM case--I can give you the exact 
citation, IAM v. OPEC, 644 F. 2d 1354. It is a 1981 case and, 
essentially, in my view, extends immunity to the OPEC nations, 
wrongly interprets their commercial activities as acts of state 
rather than, in fact, economic and commercial activities.
    But the Congress has the authority to apply jurisdiction--
that is the key concept here--and it can through this measure.
    Mr. Keller. Time is running out.
    Dr. Felmy, let me just get you the central question here to 
kind of sum up what the other side has said. There is no doubt 
that the majority of the cost in a gallon of gasoline is crude 
oil, and there is no doubt that crude oil is a commodity 
governed by the law of supply and demand, and there is nothing 
we can do in Congress to pass a law changing the law of supply 
and demand.
    But it has been pointed out, both by Mr. Blumenthal and by 
Congressman Stupak, that in fact gas prices are 50 percent 
higher this year despite the fact that crude oil is $7 a barrel 
lower. And they say that something else is at play here, and, 
specifically, what they are alleging, just to be frank, is that 
oil companies are intentionally not building any new refineries 
in the past 30 years because they want to drive prices up.
    And to support that, they say three things: One, the idea 
that it is difficult to get environmental permits is false, 
they say, because only once in the last 30 years, they say, was 
a permit requested and it was granted; two, they say there are 
certain internal documents from the big oil companies that say 
that they want to limit refinery capacity to drive up prices; 
and, third, they point out that big oil companies like Exxon 
had $400 million to pay CEO Lee Raymond last year, why don't 
they use the money to build a new refinery.
    So you tell me what your side is to those arguments.
    Mr. Felmy. Thank you, Congressman.
    The fact is the industry is expanding refinery capacity. As 
my testimony indicated, while we have not built a new refinery 
for 30 years, and I would say it is an enormous challenge to 
build a new refinery and to articulate that, I testified last 
week before Chairman Markey's Committee, and I would propose to 
submit the same letter that was provided by Arizona Clean Fuels 
in terms all the difficulties they have faced in terms of 
actually developing a new refinery.
    Second, we have expanded existing capacity because it is 
easier to do so within the walls of the existing refineries. 
But even that is a challenge because you have complex 
permitting problems. You have also got local folks who don't 
want you there. When refineries were developed originally, they 
were out in the middle of nowhere. Now, communities have built 
up or they were on desirable waterfronts. People just simply 
don't want an industrial facility. So even expanding an 
existing one is.
    And, finally, the industry produced record amounts of 
output this year, and that is a key factor that we are 
explaining, that it is a combination of both crude oil costs, 
which I mentioned, but also supply and demand fundamentals in 
terms of increased demand, a decline in imports and it was more 
than even a record production of output of gasoline could show.
    Mr. Keller. I don't have a Ph.D. in economics from Harvard 
or MIT, and you are an economist, so just explain it to me as 
if I am in 6th grade to help me out.
    This is what they are saying, and I want your response. 
They are saying, a year ago crude oil was $70. This year, a 
barrel of crude oil is $63. Despite the fact that crude oil was 
$7 a barrel cheaper last year, gas prices are now $7 cheaper 
than they were last year, gas prices are 50 percent higher.
    Why? I mean, what is the explanation for that?
    Mr. Felmy. Well, first, I just looked at the AAA data from 
last year and a year ago gasoline prices were $2.93 and now 
they are $3.10, so I am not quite sure where 50 cents----
    Mr. Keller. So you take issue with the 50-cent issue to 
start with. Okay.
    Mr. Felmy. In any case, there is no question it is not just 
crude oil. We have seen crude oil increase from earlier this 
year, and that is where you are talking about an increase from 
$50 a barrel to $66 they peaked out. But it is clearly a tight 
market, that it is an increased demand, it is a limitation of 
imports, which we have traditionally been able to increase from 
Europe, and so it is a combination of supply and demand 
factors. With less supply and more demand, you have a tighter 
market. That yields price increases.
    Mr. Keller. Mr. Blumenthal, you are one of the ones who 
made that argument. I would ask Congressman Stupak but he is 
gone. Why is it that gas is higher this year despite the fact 
that crude oil is $7 a barrel lower. What is your explanation?
    Mr. Blumenthal. Well, there are a number of explanations. 
Partly, he has given them. We have all repeated them. Lack of 
refinery capacity, concentration in the market, which gives 
power to the oil companies that impose, for example, zone 
pricing, geographic divisions of economic turf that are 
inherently anticompetitive, essentially a collection of 
anticompetitive practices, beginning with shortages of supply, 
lack of refinery capacity. There has been no new refinery 
built, albeit expansion of existing refineries but still not 
enough.
    And I think credit, if I may use that term, has to be given 
where it also should lie to the OPEC cartel. They have failed 
to provide the supply that would enable lower prices, but with 
a lack of refining capacity, the question is whether the United 
States industry could really do anything productive with it.
    Mr. Keller. Let me follow up with that. Let's assume that 
the four or five largest oil companies own most of the 
refineries, and for sake of argument, they don't want to expand 
capacity.
    Isn't it true that if I don't like the prices at my local 
ExxonMobil gas station, I can just go across the street to 
Chevron and BP? I mean, doesn't Chevron and BP keep Exxon 
honest, so to speak?
    Mr. Blumenthal. The simple answer is no.
    Mr. Keller. Why is that?
    Mr. Blumenthal. Well, talk to your constituents. They tend 
to rise together. Prices tend to go up----
    Mr. Keller. I talked to them all today, and everybody wants 
me to do something about it, and if I could change the law of 
supply and demand, I would do it. But I want you to tell me, I 
mean, you are the expert testifying, why is it that competition 
isn't sufficient in order to keep one group from price gouging 
the other?
    Mr. Blumenthal. Because there has been consolidation. In 
our part of the State--I know you are from Florida----
    Mr. Keller. I mean, are you alleging collusion, I guess, 
between these big companies?
    Mr. Blumenthal. We don't know, is the most honest answer. 
Certainly, conscious parallelism, at a minimum, exists, which 
is not collusion.
    Mr. Keller. If I talk to my constituents, do you think they 
would tell me the problem is conscious parallelism?
    Mr. Blumenthal. You won't get very far with your 
constituents talking about conscious parallelism, nor would I 
in court in an antitrust case, but we have more than enough 
evidence to begin a national investigation, which I have urged 
the Department of Justice to do, meeting with the United States 
Attorney General and the chairman of the FTC. There should be a 
Federal joint investigation. There should be not one but a 
series of investigations focusing at different levels of the 
industry.
    Mr. Keller. All right. And let me follow up, because I have 
just got to wrap up. I have got to go vote too.
    Are you concerned if we pass the NOPEC law that you are 
advocating that these OPEC nations could possibly embargo oil 
to the United States like they did in 1973 as a response to 
such a lawsuit?
    Mr. Blumenthal. No, I am not concerned about that fact, 
because--or about that possibility, I should emphasize. All we 
are doing is require they submit to the jurisdiction of our 
courts, abide by our rules, play by those rules fairly and 
compete so as to be on a level playing field. And in my view, 
they have to do business with the United States.
    Mr. Keller. Okay.
    Mr. Cooper, I know you want to respond, but since you are 
out there for the consumers and want the lowest possible 
prices, I assume you would be supportive of efforts to drill in 
ANWR, which would give us 16 billion barrels of oil, which is 
the equivalent of 58 years worth of oil from Iraq?
    Mr. Cooper. It is our belief that drilling will do nothing 
to lower the price of oil.
    Mr. Keller. You don't think 16 billion barrels of oil----
    Mr. Cooper. Absolutely not. It is a miniscule addition to 
supply, first of all. Second of all----
    Mr. Keller. Fifty-eight years' worth of oil from Iraq is 
miniscule?
    Mr. Cooper. From Iraq?
    Mr. Keller. Fifty-eight years' worth of----
    Mr. Cooper. In terms of the world supply, there is almost 
no difference. You add almost nothing in terms of the global 
supply from crude.
    Second of all, it will do nothing to build any refineries.
    Mr. Keller. Let me just stop you. Do you oppose the ANWR 
drilling?
    Mr. Cooper. We absolutely oppose ANWR drilling.
    Mr. Keller. And let me give you a follow-up question. What 
do you believe is the cause of the spike in gas prices? Do you 
believe it is lack of refinery capacity, or what is the nub of 
what you are trying to say?
    Mr. Cooper. Since January, the overwhelming increase has 
come from domestic refining, up 65 cents a gallon that is taken 
by refiners. That is an uncontrovertible fact from the EIA's 
numbers. Sixty-five-cent increase in what is known as the 
domestic spread, that is the amount that domestic refining 
takes. This year, there is no doubt about that. After Katrina, 
there was no doubt about it.
    Mr. Keller. All right, Mr. Cooper.
    Let me give you a chance, Dr. Felmy, because you are kind 
of outnumbered here. Do you want to respond to just the 
allegation as, ``Hey, don't blame supply and demand. It is 
really the failure to increase your capacity and conscious 
parallelism on the part of the oil companies to let the prices 
go up.''
    What is your response on behalf of the Petroleum Institute 
to those allegations?
    Mr. Felmy. Well, I don't know what conscious parallelism 
is, and I have heard that term in the past, but my 
interpretation is prices move together because markets are at 
work. You have one price, the market-clearing price. So this 
notion of parallelism I have never understood from an economic 
context.
    But the industry is working very hard. We have plans to 
expand existing refinery capacity even more. We have expanded 
it the equivalent of a new refinery every year for the last 10 
years.
    But we do face fundamental challenges. We have an import 
challenge this year, and we have continuing demand growth, and 
that has resulted in the higher prices.
    Mr. Keller. Why not build the new refineries? What is the 
short answer?
    Mr. Felmy. Well, the short answer is, there are a whole 
series of hurdles you have to go through in terms of 
permitting, in terms of NSR conflicts, and you have to 
financially look at it, is it wise to build a new refinery to 
return a return to your shareholders, given the uncertainties 
going forward.
    Mr. Keller. Is it true that you all have only asked for one 
permit in the past 30 years and it was granted or is that a 
misstatement by Mr. Stupak?
    Mr. Felmy. I don't know the answer to that, because it is 
such a large industry. I don't know that that is the case. I 
don't know yes or no.
    Mr. Keller. Let me ask you--and I hate to cut you off, but 
I have got to vote, I am already in trouble here--to wrap it 
up, you are an economist, is that correct?
    Mr. Felmy. Yes, sir.
    Mr. Keller. Do you believe that someone who understands the 
law of supply and demand, that having 16 billion barrels of oil 
extra is irrelevant to the issue of price as a determinant of 
crude oil for supply and demand?
    Mr. Felmy. There is no question to me that expanding 
production from anywhere in the world by the equivalent of 16 
billion barrels is an increase in supply, and that will help a 
market in terms of whenever you have increased supply or 
reduced demand, it results, generally, in lower price.
    Mr. Keller [presiding]. Gentlemen, I want to thank you all. 
I have tried to be fair to all sides and get all your testimony 
out. I am going to have to recess this hearing at this point to 
go vote, but I very much appreciate you staying and answering 
the questions.
    Mr. Blumenthal. Thank you, sir.
    Mr. Keller. You bet.
    [Recess.]
    Mr. Conyers [presiding]. The Chair recognizes the gentleman 
from Alabama, Mr. Artur Davis.
    Mr. Davis. Thank you, Mr. Chairman.
    Mr. Cooper, Dr. Felmy, let me get your attention back. I 
apologize to you, as I know the Chairman has, that, 
unfortunately, we have had a number of procedural votes, and we 
are none happier about it than you are, so I apologize that it 
has depleted your audience.
    But I want to do is, frankly, use my time to ask you some 
of the questions people ask me when I go back home to see if 
you can make my answers better informed.
    First question, a lot of people ask me, why are prices at 
the pump going up when there has not been a disruption in 
supply in the Middle East? I suppose we can argue about the 
level of production capacity we are getting in the Middle East, 
but I think it is hard to make the case there has been a major 
disruption in supply either.
    So can either one of you quickly speak to that point: 
Prices going up, no disruption in supply. Why?
    Mr. Cooper. This season, there is no doubt that it is a 
domestic problem, and, actually, Katrina was the thing that 
woke people up. Crude didn't go up, we didn't need crude, and 
we learned that there is a domestic problem. And the lack of 
refinery capacity; the inability of the industry to change over 
from winter fuels to summer fuels, which happens every year, 
that is no surprise, they have to do that every year; the fact 
that demand is growing--yes, that has happened every year for 
an awfully long time. There are no surprises here. So this is 
an industry that has mismanaged the simple basics of switching 
fuels and meeting demand which they know is increasing.
    We believe that the underlying cause is a lack of 
sufficient competition, the competitive discipline that makes 
each individual company worry about running short and therefore 
adding more capacity so that they never have to tell their 
customers, ``We are out'' or that they have to raise their 
price. The fact that there are only two or three companies that 
they can look across the street, they see the price, they know 
no one else is going to come along, and so they both put the 
price up immediately. Most Americans think that that is not the 
way it is supposed to happen.
    Mr. Davis. Let me ask a second question related to that, 
and, Dr. Felmy, perhaps you can chime in on this one.
    The industry often says that, well, even if we had a 
stimulus and delivery from the Middle East, even if Saudi 
Arabia, for example, dramatically stepped up their production, 
even if we somehow had a surge in production in Iraq and Iraq 
returned to the oil market, that it wouldn't matter, because we 
haven't had a refinery built in a while.
    A lot of people in your industry say, ``Well, we haven't 
had refineries built for 25 years because of regulation, 
environmental standards.'' Can both of you weigh in on why the 
industry has not had more refinery development?
    Mr. Felmy. There is the question of building a new 
refinery, but, as I have pointed out in my testimony, we have 
expanded the existing capacity the equivalent of a new refinery 
for every year for the last 10 years, and the public 
announcements are for an additional expansion of, I believe, an 
additional 1.6 million barrels a day of capacity going forward. 
So the industry is looking forward to increasing that capacity.
    In terms of the Middle East and crude, there is no question 
if you look at the increases this year so far, you saw crude 
oil prices go from $50 a barrel to over $66 a barrel. So, 
clearly, part of it was cost; clearly, part of it is the 
turnover to the new summer price gasoline, which is an enormous 
challenge for the industry, because we effectively have to draw 
down inventory to very low levels so that you are able to bring 
in the new summer-based gasoline and still be compliant with 
EPA standards. So it is a challenge.
    Mr. Davis. Let me make sure I understand that. You are 
saying that the industry has stepped up the existing refinery 
capacity to the equivalent of building a new refinery.
    Mr. Felmy. The equivalent of building a new refinery every 
year for the past 10 years.
    Mr. Davis. Okay. Well, that is helpful to know, because 
every now and then we hear from some in industry that the 
environmental standards are just too heavy and we can't get new 
refineries.
    Let me ask you one last set of questions. If you would jump 
in on this, Mr. Cooper. Instituting or reinstituting a windfall 
profit tax, would it have an impact on prices at the pump short 
or medium term?
    Mr. Cooper. It would not have an impact on prices at the 
pump. What it would is tax away the windfall, the cash that has 
been piling up. The American majors have bought back over $60 
billion in stock. Now, that is great for their stock 
performance on Wall Street, no doubt about it, but that is 
money that is not being put to productive use. The cash has 
piled up. They have increased their dividends, they have 
reduced their debt, they haven't put it back into the sector in 
a productive way.
    So if you taxed away a windfall, you will have no effect on 
the efficient operation of that market. It is truly, in the 
last 4 years, a windfall that the industry could not absorb.
    Mr. Davis. Well, let me ask you both one last question 
before I have to take my leave.
    Both of you, is there anything that could be done from a 
regulatory standpoint by this Congress that would impact 
contemporary prices at the pump?
    Mr. Felmy. In terms of contemporary prices, there is very 
little that can be done instantly to change supplies or demand. 
There is no question to encourage consumers to use gasoline 
wisely, to encourage them to properly tune their cars, to their 
inflate their tires, to drive sensibly. A softening of the 
demand is the one option that could help, and so advising 
consumers of what they can do is a potential hopeful aspect.
    Mr. Davis. Mr. Cooper, would you like to weigh in?
    Mr. Cooper. In the short term, the industry won't help us, 
we know that. The authority in the Congress to look at the 
market will not help us in the very short term. So, yes, 
consumers can try to cut back.
    But let's be clear: We have spent a decade digging this 
hole. We have built over several decades a society that drives 
a lot. I would like to remind people, it is interesting, in 
many suburban communities in this country, it is illegal to 
walk to the grocery store. Now, I say it that way to get your 
attention. Because zoning laws have said we don't want 
commercial establishments in those neighborhoods, and we don't 
even want sidewalks in those neighborhoods. That is the way we 
have chosen to live, and it has increased demand, and the 
industry knows it.
    So we are not going to change that in the short term. This 
is a long-term problem, but there are immediate things that can 
be done that can start and send a signal in addition to some 
oversight. We think there is plenty of abuse that could be 
found if we had laws that let people look at unilateral action.
    But your answer is, I think, to tell your constituents, 
``It took a long time to get in this hole, and it is going to 
take a long time to get out, but now is the time to start.''
    Mr. Davis. That is actually about what I tell them.
    I yield back, Mr. Chairman.
    Mr. Conyers. Thank you very much.
    Is there anything here, with two distinguished witnesses, 
at the end of a few minutes only left in this hearing, that we 
could attest to on the record that you do agree on?
    Mr. Cooper. We agree that people ought to adjust their 
behaviors as best they can to lower their demand. That is 
something we always tell people, to think about the extra trip, 
to get your car tuned, to clean your air filter, to inflate 
your tires, to take the bags of sand that you threw in the 
trunk in the winter for traction, take them out in the summer, 
because you are burning gas.
    We do agree on that. That is an important set of short-term 
things to do. But I suspect that is about as far as we go on 
our agreement.
    Mr. Felmy. Mr. Chairman, I would agree with Mr. Cooper 
that----
    Mr. Conyers. Amazing.
    Mr. Felmy [continuing]. Using energy wisely is something we 
agree on.
    But I think we both share the interest in seeing expanding 
refinery capacity. It is a question of how you get there. And 
we feel that there are policies that the Congress can enact 
that would help us expand capacity. We feel we are already 
doing quite a bit. But I think that that is something that 
remains that could help consumers.
    Mr. Conyers. Could you take back to the industry, Dr. 
Felmy, that more and more of us want more refineries built, and 
quickly?
    Mr. Felmy. Well, the industry very carefully looks at what 
expanded capacity has happened, what going forward is 
potentially possible, but it is an economic calculation that 
they have to look at very carefully in terms of returns to 
their owners. And there are large uncertainties out there that 
have just begun to come around, such as the proposals in the 
Senate for alternative fuels of 35 billion gallons, reducing 
gasoline demand that makes a further challenge in terms of 
doing the calculations on building that new capacity.
    But, certainly, we understand the position, and I will 
communicate that to my management.
    Mr. Conyers. What do we tell the people, Cooper, that we 
are being put on hold here? I guess there is no way I can be 
optimistic about refineries. You tell me, on the other hand, 
that taxing the profits is not a real solution. So where are 
both of you leaving a concerned Member of Congress?
    Mr. Cooper. Well, frankly, if you taxed away the profits, 
it depends what you did with them. I mean, if you took that 
$200 billion--I will just give you an example--which I see as 
excess profit, and you directed that to the auto industry, that 
is about half of what the Transportation Department said it 
would cost to get us to 35 miles per gallon. Boy, that would be 
a real good use of those excess profits, and that kind of 
policy is something that we may have to look at. We may have to 
look at ways to incentivize the alternative solutions.
    I think you heard an answer here about refineries that is 
really, really troubling. The chairman of Exxon earlier this 
year said, ``We think gasoline demand will decline starting out 
in 2020 or so, and therefore we are not going to consider 
building new refineries. Well, that is 12 more years of pain. 
So they are not going to give you the solution to the refinery 
problem.
    There was legislation introduced in the last Congress about 
a strategic refinery reserve. If the industry is not going to 
give us more refinery capacity because 16 years is a time 
horizon that they want to keep making all this money past 15 
years, then this Congress is going to have to step in with a 
social return on capital that fits the needs of the people. We 
cannot wait for 15 years before they think the marketplace will 
start to create a balance or even your policy. Imagine what 
they said, ``If you pass laws which reduce the demand for 
gasoline, we are not going to build refineries to reduce and 
improve the supply-demand balance.'' I think that is an 
outrage.
    Mr. Felmy. Well, Mr. Chairman, there are several comments I 
could give to that, but the first is the discussion of the 
windfall profits tax. Our history with that tax when it was 
imposed in the eighties was a disaster. It increased the cost 
of the industry, it reduced production, as documented by the 
Congressional Research Service, and largely increased imports. 
I fail to see how that can help consumers.
    Secondly, the companies are owned by millions of Americans. 
Taking money away from the industry is equivalent to taking 
away from millions of Americans who have invested their hard-
earned savings in that. Fully, 41 percent of the equity of 
companies is owned by retirement plans of some type. So one has 
to be cautious in terms of where you are taking money from and 
what the impact is.
    But the bottom line is it potentially raises cost, and that 
I fail to see how it can help consumers.
    Mr. Cooper. Mr. Conyers, let me respond to the question 
about stock ownership. I suggest that if you go to your 
constituents and say, ``Look, use your dividends from the oil 
companies to pay your gasoline bills,'' they will fall down 
laughing, and they might not send you back here.
    That is not an answer to that question. Sure, there are 
investors here and there, but those investments are highly 
concentrated among richer people, yes, there are some pension 
funds in there, but, by and large, the average American is 
paying through the nose at the pump, and they are not getting 
it back in their dividends from oil company stock.
    Mr. Felmy. Well, just as a point, Mr. Chairman, 485,000 
folks in the State of Michigan are members of State and local 
pension funds that are invested in oil companies. And 
approximately 18 million Americans have similar types of 
investments. So one has to be cautious that our companies are 
owned by millions of Americans.
    But going forward, there are things that I believe we can 
do in terms of streamlining the regulation process, resolving 
questions about new source review for refineries, and it could 
help expand the existing plans already announced for an 
additional 1.6 million barrels a day of capacity.
    Mr. Conyers. I would like now to recognize the 
distinguished Ranking Member, Steve Chabot, of Ohio for 
concluding remarks.
    Mr. Chabot. Thank you very much, Mr. Chairman, and my 
opening statement and concluding remarks will all be contained 
in the same couple of minutes here.
    I want to thank you for holding this important hearing 
today. There is not an issue that comes up more often when I am 
talking with my constituents back in Cincinnati than the high 
cost of gasoline at the pump. Every day, people raise questions 
about price fixing, questions about oil companies or service 
stations taking advantage of their market power to stick it to 
the consumer, and these concerns won't diminish until this 
Congress is willing to take steps to make energy more 
affordable to consumers.
    The national average, as we have said, is anywhere from 
$3.10--last weekend, when I got gas back home, it was between 
$3.13 and $3.19 in my district, back in Cincinnati, and we 
haven't even entered the traditional summer driving season. 
That peak driving season starts around Memorial Day and ends 
around Labor Day.
    Up 90 cents since January, and forecasters expect prices to 
continue surging through the summer months, and I don't have to 
tell anyone how these price hikes have and will continue to 
impact consumers and their families and ultimately weigh down 
the economy.
    Over the last decade, it has become alarmingly clear that 
America is far too dependent on foreign oil to meet our energy 
needs. Disservingly, we import more than a third of the oil we 
consume and much of it from OPEC nations. At the same time, the 
number of refineries operating in the U.S. has decreased from 
over 300 to fewer than 150, with the last domestic oil refinery 
being built, as we know, back in 1976.
    Various efforts have been announced by the current and 
previous Administrations, and bills have been introduced in 
Congress to address this ongoing problem, including exploring 
new sites in both ANWR and the Outer Continental Shelf in order 
to replenish domestic oil reserves. Yesterday, the president 
ordered stricter rules for automobile fuel efficiency and the 
use of alternative fuels.
    There is no doubt that we need to focus on both short-and 
long-term strategies to address these issues. We need increased 
domestic production and refinery capabilities, and we need to 
put a stronger emphasis on alternative energy and conservation 
efforts.
    The hearing today is important, although, obviously, it got 
very divided up, and we want to, I think, apologize to the 
witnesses. There were a whole series of votes that took place 
on the floor that sort of broke this hearing up, but we are all 
making the best use of it that we obviously can.
    And it gives us the opportunity to examine these seasonal, 
if not daily, price surges from another perspective, through 
the antitrust lens. And, in particular, we have had the 
opportunity this afternoon to examine whether OPEC's cartel 
structure plays a substantial role in this roller coaster ride 
and examined whether the oil industry consolidation that has 
taken place in this country has resulted in limited oil 
supplies and higher fixed gas prices and examined the 
effectiveness of measures that have been introduced to respond 
to this situation, such as H.R. 2264, the Conyers-Chabot-
Lofgren NOPEC bill, which we reintroduced last week and also 
introduced it in the last Congress.
    And also H.R. 1252, the Federal Price Gouging Prevention 
Act and the Federal Energy Price Protection Act of 2007, which 
have been introduced by two of our witnesses that we had here, 
the distinguished gentleman, Mr. Stupak, from Michigan and the 
distinguished gentlewoman, Mrs. Wilson, from New Mexico.
    And, again, I appreciate the Chairman holding this hearing. 
I apologize for running out of time here, and I know that 
another Committee is coming in that is going to kick us out, 
and that is a Committee that we are all on also, so thank you 
again, Mr. Chairman.
    Again, we apologize to the witnesses for any difficulty you 
might have had testifying and responding. It has been one of 
those days up here.
    Mr. Conyers. Well said.
    We will keep the record open for 5 days for questions and 
answers that may come from both of you.
    Thank you for this initial hearing. There is much more 
inquiry that is required here. This is not a simple subject, 
but you have gotten us off to a great start.
    Dr. John Felmy, Mr. Mark Cooper, we thank you so much.
    The hearing is adjourned.
    [Whereupon, at 3:58 p.m., the Task Force was adjourned.]

                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

       Prepared Statement of the Honorable Sheila Jackson Lee, a 
 Representative in Congress from the State of Texas, and Member, Task 
                           Force on Antitrust












                                 
