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



    GASOLINE PRICES, OIL COMPANY PROFITS, AND THE AMERICAN CONSUMER

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

                                HEARING

                               BEFORE THE

              SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 22, 2007

                               __________

                           Serial No. 1100951


      Printed for the use of the Committee on Energy and Commerce

                        energycommerce.house.gov


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                    COMMITTEE ON ENERGY AND COMMERCE

                  JOHN D. DINGELL, Michigan, Chairman

HENRY A. WAXMAN, California          JOE BARTON, Texas
EDWARD J. MARKEY, Massachusetts          Ranking Member
RICK BOUCHER, Virginia               RALPH M. HALL, Texas
EDOLPHUS TOWNS, New York             J. DENNIS HASTERT, Illinois
FRANK PALLONE, Jr., New Jersey       FRED UPTON, Michigan
BART GORDON, Tennessee               CLIFF STEARNS, Florida
BOBBY L. RUSH, Illinois              NATHAN DEAL, Georgia
ANNA G. ESHOO, California            ED WHITFIELD, Kentucky
BART STUPAK, Michigan                BARBARA CUBIN, Wyoming
ELIOT L. ENGEL, New York             JOHN SHIMKUS, Illinois
ALBERT R. WYNN, Maryland             HEATHER WILSON, New Mexico
GENE GREEN, Texas                    JOHN B. SHADEGG, Arizona
DIANA DeGETTE, ColoradorMD23--       CHARLES W. ``CHIP'' PICKERING, 
    Vice Chairman                    Mississippi
LOIS CAPPS, California               VITO FOSSELLA, New York
MICHAEL F. DOYLE, Pennsylvania       STEVE BUYER, Indiana
JANE HARMAN, California              GEORGE RADANOVICH, California
TOM ALLEN, Maine                     JOSEPH R. PITTS, Pennsylvania
JAN SCHAKOWSKY, Illinois             MARY BONO, California
HILDA L. SOLIS, California           GREG WALDEN, Oregon
CHARLES A. GONZALEZ, Texas           LEE TERRY, Nebraska
JAY INSLEE, Washington               MIKE FERGUSON, New Jersey
TAMMY BALDWIN, Wisconsin             MIKE ROGERS, Michigan
MIKE ROSS, Arkansas                  SUE WILKINS MYRICK, North Carolina
DARLENE HOOLEY, Oregon               JOHN SULLIVAN, Oklahoma
ANTHONY D. WEINER, New York          TIM MURPHY, Pennsylvania
JIM MATHESON, Utah                   MICHAEL C. BURGESS, Texas
G.K. BUTTERFIELD, North Carolina     MARSHA BLACKBURN, Tennessee
CHARLIE MELANCON, Louisiana
JOHN BARROW, Georgia
BARON P. HILL, Indiana

                                 ______

                           Professional Staff
                 Dennis B. Fitzgibbons, Chief of Staff
                   Gregg A. Rothschild, Chief Counsel
                      Sharon E. Davis, Chief Clerk
                 Bud Albright, Minority Staff Director

                                 ______

              Subcommittee on Oversight and Investigations

                    BART STUPAK, Michigan, Chairman

DIANA DeGETTE, Colorado              ED WHITFIELD, Kentucky
CHARLIE MELANCON, LouisianarMD23--       Ranking Member
    Vice Chairman                    GREG WALDEN, Oregon
HENRY A. WAXMAN, California          MIKE FERGUSON, New Jersey
GENE GREEN, Texas                    TIM MURPHY, Pennsylvania
MIKE DOYLE, Pennsylvania             MICHAEL C. BURGESS, Texas
JAN SCHAKOWSKY, Illinois             MARSHA BLACKBURN, Tennessee
JAY INSLEE, Washington               JOE BARTON, Texas (ex officio)
JOHN D. DINGELL, Michigan (ex 
officio)

                                  (ii)
























                             C O N T E N T S

                              ----------                              
                                                                   Page
Hon. Bart Stupak, a Representative in Congress from the State of 
  Michigan, opening statement....................................     1
Hon. Ed Whitfield, a Representative in Congress from the 
  Commonwealth of Kentucky, opening statement....................     4
Hon. Gene Green, a Representative in Congress from the State of 
  Texas, prepared statement......................................     6
Hon. Jay Inslee, a Representative in Congress from the State of 
  Washington, opening statement..................................     7
Hon. Joe Barton, a Representative in Congress from the State of 
  Texas, opening statement.......................................     8
    Prepared statement...........................................    10
Hon. John D. Dingell, a Representative in Congress from the State 
  of Michigan, opening statement.................................    12
Hon. Charlie Melancon, a Representative in Congress from the 
  State of Louisiana, opening statement..........................    14
Hon. Tim Murphy, a Representative in Congress from the 
  Commonwealth of Pennsylvania, opening statement................    15
Hon. Marsha Blackburn, a Representative in Congress from the 
  State of Tennessee, opening statement..........................    17

                               Witnesses

William E. Kovacic, Commissioner, Federal Trade Commission.......    19
    Prepared statement...........................................    22
    Answers to submitted questions...............................    46
Guy F. Caruso, Administrator, Energy Information Administration..    53
    Prepared statement...........................................    56
    Answers to submitted questions...............................    67
Stanley F. Pruss, deputy director, Michigan Department of 
  Environmental Quality..........................................    70
    Prepared statement...........................................    72
Thomas J. McCool, director, Center for Economics, Applied 
  Research and Methods, U.S. Government Accountability Office....    73
    Prepared statement...........................................    75
Tyson Slocum, director, Public Citizen's Energy Program..........   105
    Prepared statement...........................................   108
    Answers to submitted questions...............................   134
W. David Montgomery, vice president, CRA International...........   136
    Prepared statement...........................................   139
    Answers to submitted questions...............................   149

                           Submitted Material

Geoff Sundstrom, director, public affairs, AAA, Heathrow, FL, 
  submitted statement............................................   102
Briefing memorandum to Subcommittee on Oversight and 
  Investigations members and staff...............................   160
``Oil Industry Profit Review 2005'' CRS Report for Congress, 
  updated January 12, 2007.......................................   172
``Refiners Cash in on High Gasoline Prices'', Ana Campoy, the 
  Wall Street Journal, May 18, 2007..............................   187
``Gas Prices: How are they Really Set?''Permanent Subcommittee on 
  Investigations, Committee on Governmental Affairs, United 
  States Senate..................................................   190
Hon. Jennifer M. Granholm, Governor, State of Michigan, submitted 
  testimony......................................................   207
``Energy Markets: Effects of Mergers and Market Concentration in 
  the U.S. Petroleum Industry'' May 2004, U.S. General Accounting 
  Office, May 2004, is on file in the subcommittee's office.
``Investigation of Gasoline Price Manipulation and Post-Katrina 
  Gasoline Price Increases'' Federal Trade Commission, spring 
  2006, is on file in the subcommittee's office.
















 
    GASOLINE PRICES, OIL COMPANY PROFITS, AND THE AMERICAN CONSUMER

                              ----------                              


                         TUESDAY, MAY 22, 2007

                House of Representatives,  
                  Subcommittee on Oversight
                                and Investigations,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 12:59 p.m., in 
room 2123, Rayburn House Office Building, Hon. Bart Stupak 
(chairman) presiding.
    Present: Representatives Melancon, Green, Inslee, Dingell, 
Whitfield, Walden, Murphy, Blackburn, and Barton.
    Staff present: John Arlington, Kyle Chapman, Alan Slobodin, 
Peter Spencer, Shannon Weinberg, Brian McCullough, Will Carty, 
Matthew Johnson, and John Stone.

  OPENING STATEMENT OF HON. BART STUPAK, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MICHIGAN

    Mr. Stupak. This hearing will come to order. Today we have 
a hearing on gasoline profits. Each Member will be recognized 
for 5 minutes
    The American public is paying record high gas prices while 
Big Oil companies are reaping record profits. Across our 
Nation, people are struggling to pay to fill their gas tanks 
and their frustration with gas prices is boiling over. In my 
vast rural district, my constituents have to travel the longest 
distances to and from work, and there are little or no public 
transportation options. Many people can't afford higher gas, so 
they are putting it on credit cards and digging deeper and 
deeper into debt.
    I was at a funeral last Saturday, and when the monsignor 
greeted me, he said, ``My God, Bart, you have to do something 
about these gas prices.'' The monsignor explained how gas was 
$3.28 per gallon when he drove to the rectory in the morning 
and it jumped 21 cents by the time he left that night. In 10 
hours, a gas station had raised its prices 21 cents to $3.49 
per gallon. That was on Saturday. Our collective prayers must 
have worked, because on Sunday gas prices dropped 10 cents to 
$3.39 per gallon. In 4 days, gas prices went up 21 cents, then 
dropped 10 cents, and remain at $3.39 today in northern 
Michigan.
    I received a call from a constituent who owns several gas 
stations throughout northern Michigan and Wisconsin. The 
station owner told me how he had to raise gas prices 15 cents 
overnight, and his competitor in the same town raised his 
prices 16 cents. He added that there is no excuse for his 
supplier to raise prices other than the fact that refineries 
continue to raise their prices dramatically.
    Today's hearing will explore why gas prices have continued 
to be at record high levels, even as the price for a barrel of 
crude oil is lower than last year. We will be investigating the 
factors that go into the price of a gallon of gas and whether 
or not gouging is occurring in the oil and gas industry.
    According to the Energy Information Administration, EIA, 
the average price of gasoline from 2002 through 2007 has more 
than doubled, while the consumer price index has risen only 
13.6 percent. According to EIA's Web site, the nationwide 
average for gasoline is now $3.22 per gallon. This is higher 
than any time in our history, and we have yet to reach the peak 
driving season for 2007.
    The Government Accounting Office has estimated that each 
additional 10 cents per gallon of gas adds $14 billion to 
Americans' annual gas bill. In effect, this is an enormous 
transfer of wealth, billions of dollars from consumers to the 
oil industry.
    Many people wonder just what factors make up the price of a 
gallon of gasoline and what is reasonable profit for each 
company along the supply and distribution chain. Why do we have 
wild fluctuation in the price of gas from day to day, week to 
week?
    In answer to some of these questions, we know that the 
price of crude oil and refinement of oil into gasoline make up 
75 percent of the price of gasoline.
    Big Oil is often quick to blame world crude prices, but 
that argument doesn't appear to be the full story. In April 
2007, a barrel of oil cost $63. In April 2006, a barrel of oil 
was $70.
    Despite the fact that crude oil was $7 cheaper per barrel 
than last year, gas prices are approximately 50 percent higher. 
Clearly, this year's run-up in gas prices has not been the 
result of crude oil prices but some other factor or factors.
    Many have pointed to the oil refineries as the most recent 
cause for high gas prices. Since 1980, more than 200 U.S. 
refineries have been closed, and a new refinery has not been 
built since 1976. In 1981, U.S. refineries were operated by 189 
different companies. Today, the remaining refineries are 
operated by about 60 companies. For the past 25 years, more 
than 50 percent of the refineries have been closed, and the 
number of companies owning refineries is less than one-third of 
what it was.
    We will hear today from the GAO, Government Accounting 
Office, about their 2004 study, which confirmed that these 
mergers have caused higher gas prices.
    Historically, the average profit margin between a barrel of 
crude oil and a barrel of refined gas, known as the crack 
spread, has been around $8 to $9 per barrel, or 20 cents profit 
per gallon of refined gasoline.
    Today, the profit margin is $30 a barrel, as reported in a 
May 18, 2007 Wall Street Journal article.
    Based on a $3 gallon of gas, that is roughly 70 cents in 
refinery profits for every gallon of gas. In fact, according to 
the oil industry publication Platts, the crack spread on the 
June futures market is nearly $36 a barrel.
    Unfortunately, $4 a gallon of gas is right around the 
corner for America's consumers.
    As a result of these enormous profit margins, in the first 
3 months of 2007, Valero, the Nation's largest refinery 
company, announced profits of $1.1 billion, up 30 percent over 
last year.
    ExxonMobil refineries made $1.9 billion in the first 
quarter of 2007. Chevron reported over $1.6 billion in refining 
profits.
    These high refining margins have led to record profits 
throughout the oil industry. During the first three months of 
2007, Royal Dutch Shell's profits were $7.3 billion. Chevron 
made $4.7 billion. ConocoPhillips reported more than $3.5 
billion. And ExxonMobil's total profits for the first quarter 
were more than $9.2 billion.
    In order to crack down on price gouging, the Federal Trade 
Commission needs to define when the oil industry is gouging the 
American consumers.
    I have introduced legislation, the Federal Price Gouging 
Prevention Act, H.R. 1252, to protect American consumers from 
being gouged at the pump.
    Similar to my legislation last year, H.R. 1252 would give 
the Federal Trade Commission 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.
    Over 120 members have already co-sponsored this 
legislation, and I look forward to moving it soon.
    In its spring 2006 study on gas prices after Hurricane 
Katrina, the FTC found that 23 percent of the refineries, 9 
percent of the wholesalers and 25 percent of the retailers 
studied had price increases that ``were not substantially 
attributable to increased cost'' and ``could not attributed to 
national market trends.''
    In his concurring statement, FTC Commissioner Jon Leibowitz 
admitted that, ``The behavior of many market participants, on 
balance, leaves much to be desired.''
    According to the Washington Post, after Hurricane Katrina, 
refinery profits were 255 percent higher than they were the 
year before, as we show in our chart over there.
    While 29 States and the District of Columbia currently have 
State price gouging laws, these States typically do not have 
the resources to go after refineries and oil companies.
    Last week, however, Kentucky Attorney General Greg Stumbo 
announced that after an 18-month investigation, he has filed 
suit against three oil companies he believes gouged Kentucky 
residents after Hurricanes Katrina and Rita.
    Citing the absence of a Federal price gouging statute, 
Stumbo is the first attorney general to file suit against major 
oil refiners.
    While consumers pay record prices, oil companies make 
record profits. Unfortunately, the big oil companies are not 
reinvesting these record profits into the safety and 
infrastructure of their refineries.
    When I asked British Petroleum's chairman in a hearing last 
week whether cost-cutting pressures could have led to a culture 
that discouraged preventative maintenance, his response was, 
``It not only could have, we believe it did.''
    Even with record profits, BP cut preventative maintenance 
to save money, which as of yesterday led to another oil 
pipeline shutdown in Alaska.
    This reduced preventative maintenance to cut costs so they 
can increase profits and corporate executive pay and bonuses 
jeopardizes the Nation's most strategic oil supply and risks 
the health and safety of workers.
    This was most apparent in BP's Texas City refinery disaster 
that killed 15 workers and injured 180 others.
    By investigating the factors that go into a gallon of gas, 
Congress must work to protect consumers from price gouging and 
market manipulation.
    I wish to thank all the witnesses today, especially Mr. 
Pruss, who will be testifying on behalf of Michigan's governor, 
Jennifer Granholm.
    And I look to each and everyone's testimony.
    Last, I will note that we invited four of the major oil 
companies to testify, but all of them declined our invitation.
    In addition, the head of the President's Council on 
Economic Advisors expressed interest in testifying. They were 
invited, too. But later, they declined as well.
    With that, I would yield to my friend, Mr. Whitfield of 
Kentucky, for an opening statement.
    We have 8\1/2\minutes on votes, to let members know. Let's 
get through Mr. Whitfield's opening statement. We will go vote. 
After that, we have 2-minute votes, so I don't think it will be 
that long. We will probably need about a half hour.
    Mr. Whitfield, please?

 OPENING STATEMENT OF HON. ED WHITFIELD , A REPRESENTATIVE IN 
           CONGRESS FROM THE COMMONWEALTH OF KENTUCKY

    Mr. Whitfield. Mr. Chairman, thank you very much, and we 
certainly look forward to this hearing today on gasoline 
prices.
    I must say that many of us on this side--and like all 
politicians, there is not any issue of greater interest to us 
than gasoline prices and the impact that it is having on the 
American public. But we also are quite frustrated by the 
process involved in this particular legislation.
    I know that, Chairman Stupak, you have been a leader on 
this issue for some time, but your bill has been introduced for 
some time, and it is our understanding that your bill, with 
some changes to it, will be coming to the floor this week for a 
vote before the Memorial Day recess, and that we have certainly 
not had any opportunity to see that legislation and do not 
really have any idea what the final bill is going to look like.
    And I think it is imperative that the American people 
also--while they are focused on the profits of major oil 
companies, that they also focus on the fact that in 2006, for 
example, 387 million gallons of gasoline were consumed each day 
in America.
    In 1970, that figure was 243 million gallons a day were 
consumed, so that is a 59 percent increase. So the demand for 
gasoline continues to escalate in America, and we are consuming 
more gasoline than any other country in the world.
    I would also note that in May 2006, the Federal Trade 
Commission completed an extensive congressionally mandated 
investigation to determine whether gasoline prices were being 
manipulated and to determine whether price gouging actually 
followed the events of Hurricane Katrina.
    The investigation was extensive. It involved lawyers, 
economists, pricing experts and many others, and it went on for 
many months.
    The investigation did not uncover any evidence of 
manipulation to increase prices or to manipulate prices but did 
find limited instances of price gouging by retailers, price 
gouging as defined by the statute mandating the investigation. 
I might say that in that statute, price gouging was basically 
looking at prices a month or so after Katrina and compared it 
to a month or so before Katrina, so it was a relatively 
simplified formula for determining price gouging. Evidence did 
show that the price of crude oil is the largest cost component 
of gasoline and that that certainly contributes to gasoline 
price spikes.
    Also, refinery production problems--and we have had four or 
five refineries right now that are not at full capacity because 
of fires and other production problems. And then we have some 
low inventories right now.
    Now, in your opening statement, Mr. Stupak, you mentioned 
that Attorney General Stumbo has filed complaints in Kentucky 
against Marathon Oil Company and some others, which is true. 
Kentucky does have a State price gouging statute.
    But I would also note that these State laws prohibiting 
price gouging--none of them have adopted a common definition or 
standard for price gouging. Every one of them is different. And 
of course, we do not have a Federal price gouging statute, and 
that is, I know, what your bill is about, and that is what is 
being considered.
    But I would also point out that the Federal Trade 
Commission in their report to the Congress advised Congress 
that if it enacts a price gouging statute, it is essential that 
the language be clear and easy to enforce and included 
mitigating factors such as market factors for supply and 
demand.
    And that is why I genuinely believe that the legislation we 
passed last year on price gouging--I think Heather Wilson's 
language--in which we allowed the Federal Trade Commission and 
its experts to define the definition of price gouging and 
unconscionable pricing, is actually better than the language of 
H.R. 1252, which uses language like unconscionable pricing will 
include pricing that is unconscionably excessive, which is 
pretty vague, pretty broad, and I think it is going to invite a 
lot of legal lawsuits.
    In addition to that, it indicates that the seller is taking 
unfair advantage, unusual market condition. So at least those 
of us--and I think every Member of Congress is concerned about 
price gouging, but we want a bill that gives us the best 
opportunity to address this problem.
    And I think that is why many of us are quite concerned that 
when this bill goes to the floor, it is going to be on the 
suspension calendar, there will not be an opportunity to amend 
it on the floor, and we actually are not going to have an 
opportunity at full committee to deal with it, either.
    But I once again want to thank you for your leadership on 
this issue, and we certainly look forward to the witnesses 
today as we explore this important topic.
    Mr. Stupak. Well, I thank the gentleman from Kentucky.
    We have up to 10 votes on the floor. The good news is some 
of them are 2-minute votes. I would expect we would be back by 
2 o'clock.
    I hate to inconvenience our witnesses, but we are going to 
have to recess until 2 o'clock. Thank you.
    Yes, Mr. Green?
    Mr. Green. Can I do my 5 minutes first?
    Mr. Stupak. You have 2 minutes and 14 seconds left.
    OK. We will go do our votes, and we will come back. Thank 
you.
    [The prepared statement of Mr. Green follows:]

  Prepared Statement of Hon. Gene Green, a Representative in Congress 
                        from the State of Texas

    Mr. Chairman, thank you for holding this hearing today on 
gasoline prices, oil company profits, and the American 
consumer.
    Few issues we debate here in Congress are as personally 
felt by every consumer and business in the U.S. as energy 
prices. Over the past 2 weeks, the average price of self-serve 
gasoline rose more than 11 cents for an all-time record of 
$3.18. Rising as fast as gas prices is the anger and confusion 
of the American public who are asking themselves, why am I 
paying so much for a tank of gas?
    I hope today's panel will help shed some light on this very 
complex issue so Congress can address the root cause of high 
energy prices and not move in a direction that, however well-
intentioned, may hurt American consumers.
    No one here in Congress likes to see American families 
struggle to pay higher prices at the pumps. Families are 
digging deeper and deeper into their pocket books for gas, and 
when prices increase, less money is available for other 
critical needs like medicine, groceries, or savings. 
Unfortunately, driving less sometimes isn't an option when moms 
and dads must drive to work, take kids to school, or go buy 
groceries. These families must make tough choices, and so too 
must Congress when facing different policy proposals meant to 
address our energy security.
    Fortunately, we can use history as a guide to tell us what 
worked and what didn't when the U.S. faced rising energy costs.
    OPEC nations in the 1970's placed an embargo on oil 
shipments to the U.S. which caused the price of oil to 
skyrocket here at home. In response, President Nixon instituted 
a program to control prices and allocate supplies through 
Government intervention. This program was an abysmal failure. 
Long lines at the pump and an inefficient gas supply system 
proved Government interference in free-market processes only 
compound--not help--the problem.
    Most recently, after Hurricanes Katrina and Rita hit the 
Gulf Coast region in 2005, average gasoline prices rose close 
to 50 cents per gallon. Fearing potential price gouging, 
Congress directed the Federal Trade Commission (FTC) to conduct 
an investigation into nationwide gasoline prices and possible 
price gouging in the aftermath of Hurricane Katrina. The FTC 
concluded that ``the price increases were predicted by the 
standard supply and demand paradigm of a competitive market.'' 
In fact, the FTC found that wholesale prices ``increased by 
less than what one would expect given the losses in production 
capacity due to the hurricanes.'' Time after time, government 
investigations into price spikes by the FTC and the Department 
of Energy have all come to the same conclusion: increases in 
gasoline prices were generally explained by market forces of 
supply and demand, not by market manipulation.
    Current petroleum and gasoline prices are set by a complex 
mix of factors, including global crude prices, increased world 
and U.S. demand, refinery capacity and maintenance schedules, 
gasoline imports, prescriptive fuel mandates, and geopolitical 
events. Most of these factors are out of industry's and 
retailer's control. For those that aren't, I believe the FTC 
should continue to aggressively pursue anti-competitive conduct 
or evidence of market manipulation to the fullest extent of the 
law.
    We here in Congress should do all we can to protect 
consumers, but we should do so in a way that helps remedy the 
actual versus the perceived problem.
    While there is no quick fix for gasoline prices, we need to 
evaluate proposals to promote energy conservation, new 
alternative and renewable sources of energy, encourage 
increased refinery capacity, and increase domestic supplies of 
oil and natural gas resources.
    Thank you Mr. Chairman, and I look forward to working with 
you and other Members on improving the energy security of the 
U.S. I yield back.

    [Recess.]
    Mr. Stupak. We are just waiting for a Member to come back 
who has not given their opening statement. There is a couple of 
them who will be coming.
    When I said 2 o'clock, I should have told you I meant 
central time. My district actually has two time zones.
    The subcommittee will come to order. We will continue with 
opening statements. We will start with Mr. Inslee from 
Washington for an opening statement.

   OPENING STATEMENT OF HON. JAY INSLEE, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF WASHINGTON

    Mr. Inslee. Thank you. I look forward to this testimony 
today. Just a couple of things to say.
    I just hope this week the U.S. Congress, while gas prices 
are going up, will also rise the Federal Government's ability 
to deal with this issue and pass a bill to give the FTC 
authority to clearly and concisively deal with predatory 
pricing.
    If gas prices go up, so should the ability of the Federal 
Government to deal with predatory pricing to the extent that it 
exists. And I am hopeful this week that will be added to the 
tool box of our ability to deal with these issues.
    But second, I hope that we will look ultimately at some of 
the markets that could add to the volatility of gas prices. We 
have seen a 60-cent increase just in the last year in the State 
of Washington. We now average about $3.44 a gallon when you 
included taxes.
    And when you have volatility, I believe that itself is a 
problem for consumers. And I hope that we can take, at the 
appropriate moment, a look at the markets, the speculative 
markets, that may be a cause for this volatility.
    But third--and this is an important point that I hope we 
will make at some point today--we are going to do some short-
term things to deal with potential predatory pricing issues.
    But ultimately, we have got to add competitors to oil and 
gas in our transportation sector in order to get a handle on 
prices.
    Long term, we have to give consumers a choice in fuels, 
because when we get a choice in fuels, the consumers will be 
the king, not just the oil and gas industry, when they pull up 
to the pump.
    Consumers in the next decade ought to have the ability to 
make a choice whether they are going to have cellulosic 
ethanol, not just corn ethanol, but the second-generation 
cellulosic ethanol, with flex fuel vehicles, and a requirement, 
if necessary, to get the pumps put in with E\0985 pumps.
    When that happens, Americans will be king of the pumps, not 
just the oil and gas company, because you can pull up to the 
pump and make people bid for your service just like people get 
that right in Brazil.
    And that is why I will be introducing my new Apollo energy 
project later. I think it is a significant way to move forward 
to give people a choice in fuels.
    Second, we ought to have a right to use electricity to fuel 
our cars. I drove a car that gets 150 miles a gallon when you 
use the first 40 miles to use electricity.
    When Americans have the ability to use electricity, or 
cellulosic ethanol or biodiesel in their cars, they will 
finally be able to deal with these increasing prices associated 
with oil and gas.
    And we have to have a comprehensive, aggressive, visionary 
energy policy in this country to truly break the addiction to 
oil and gas in this country. And so I am looking forward to a 
chance to do that.
    And I will rest at this point.
    Mr. Stupak. I thank the gentleman.
    Mr. Barton of Texas for an opening statement, please?

   OPENING STATEMENT OF HON. JOE BARTON, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF TEXAS

    Mr. Barton. Thank you, Mr. Chairman.
    Let me say something positive before I say some things that 
are not quite so positive. I think it is important that the 
Congress establish a record on why gasoline prices are where 
they are.
    And I think it is important that the Energy and Commerce 
Committee and this subcommittee, the Oversight and 
Investigations Subcommittee, lead that effort.
    So as the ranking member on the minority side, I am not at 
all opposed to this hearing. I am not opposed to this subject. 
I am opposed to what is going to happen tomorrow on the floor, 
however and I am opposed to the way the witnesses for this 
hearing have been obtained.
    We are not going to hear anybody today who actually goes 
out and tries to find oil in this country. We are not going to 
hear from anybody who tries to refine oil into the various 
petroleum products, including gasoline.
    We are not going to hear from anybody who transports those 
products to market either by pipeline or truck. We are not 
going to hear from anybody who operates terminals at the 
wholesale level.
    And apparently, we are not going to hear from anybody who 
owns a gasoline station. Now, I say apparently, because there 
may be one witness that is involved in that.
    So what we are going to do is have a hearing about gasoline 
prices without actually hearing from any of the people who find 
the oil, who make the products, who distribute the products, 
who transport the products, and who sell it to us.
    Now, I think that is wrong. In the last Congress, we had 
hearings similar to this, and we had all those people here. 
Plus, we had all the people that then the minority, the 
Democrats, wanted on some of the consumer side.
    We had a fair and balanced hearing or set of hearings. That 
is the way it should be.
    We, the Republicans, asked the majority, the Democrats, on 
the committee to invite some of the trade associations who 
represent some of the folks that I have just talked about. We 
were turned down.
    And as I pointed out, when we held these same hearings in 
the last Congress, we invited all those people plus more.
    It would be nice to hear from the American Petroleum 
Institute, the National Petrochemical and Refiners Association, 
the National Association of Convenience Stores, maybe even the 
Society of Independent Gasoline Marketers of America.
    Those folks were all available. They were willing to 
testify--at least they told the minority staff that they were 
willing to testify. And they are not here today. And I think 
that is a shame.
    In addition to gasoline prices and oil company profits, at 
issue in this hearing is anti-price gouging legislation. 
Nothing wrong with that.
    Again, in the last Congress, we passed anti-price gouging 
legislation twice on the floor of the House of Representatives. 
It did not ever pass the Senate, but it passed the House on two 
different occasions.
    Apparently, the Energy and Commerce Committee, which had a 
legislative markup at least once in the last Congress, is not 
going to be afforded an opportunity to hold a legislative 
hearing or to mark up any of the legislation that, again, is 
supposedly going to be on the floor tomorrow.
    Now, I just got a bill somewhere that, I am told, is the 
bill that is actually going to be on the floor tomorrow, H.R. 
1252 as amended. I am going to study it very carefully this 
evening.
    It would have been nice to have had a legislative hearing 
about it. It would have been nice to have been invited by the 
majority to participate in some negotiations, perhaps to offer 
some amendments, perhaps to have a markup. That is not going to 
happen.
    Now, I understand that gasoline prices are higher than we 
wish they were. Apparently, the Democratic staff has put out a 
handout that shows that when President Bush became President, 
it was $1.47, and today it is $3.22. I am not going to argue 
with that.
    I will point out that when the Democrats took control of 
the House of Representatives on January of this year, it was 
$2.33. And today, I filled up in Arlington, VA, it was $3.19. 
That is 86 cents in 4 months.
    We keep up that rate, and it will be close to $5 by the end 
of the year. So if I were a Democrat and talking about the 
price when Bush took over, I wouldn't crow too much, because on 
a percentage basis, since they have taken over, it has gone up 
almost 33 percent, and it is heading north a lot faster.
    We feel the pain at the pump--we, the Republicans. And our 
constituents feel it. Our staffs feel it. As I said, I paid 
$3.19 a gallon this morning, and I felt it then.
    But I did get to fill up. I didn't have to wait in line. I 
wasn't limited to 10 gallons. And if I didn't want to pay 
$3.19, I didn't have to pay it. I could have just not gotten 
gasoline.
    I did notice on the way to work that there was one station 
selling it for $3.17, and I could have saved 2 cents a gallon 
if I had gone to a different gas station.
    One thing that we don't need is price controls. And I am 
afraid that if we head down the road that this H.R. 1252 
appears to be heading down that that is what we are going to 
get.
    Now, I have a number of other things I would like to say, 
Mr. Chairman, but my time is already expired, and I do 
appreciate the process of 5-minute opening statements, so I am 
going to limit that.
    But I am very upset that we are not having a real 
legislative hearing. I am very upset that we are not having a 
markup. I am very upset that we are putting a bill on the 
suspension calendar that no Republican has been given any input 
into. And I just think that is flat wrong.
    With that, I yield back.
    [The prepared statement of Mr. Barton follows:]

  Prepared Statement of Hon. Joe Barton, a Representative in Congress 
                        from the State of Texas

     Our hearing opens this morning with some remarkable 
absences. We will not hear from anyone who drills for oil. Nor 
will we hear from anyone who refines oil into gasoline. And we 
won't get to hear from anybody who transports oil or gasoline 
by pipeline or by truck. How about a terminal operator? No. And 
what about a gasoline station? No. So we're going to have a 
hearing about gasoline prices without actually hearing from the 
people who find the oil, who make the gasoline, who transport 
it, and who sell it to us. This is unfortunate.
     The Republican members of this committee requested that 
the Democrats invite the industry associations representing 
everyone in the gasoline ``food chain''--from oil well to gas 
pump--but our request was denied. The American Petroleum 
Institute, the National Petrochemical and Refiners Association, 
the National Association of Convenience Stores, and the Society 
of Independent Gasoline Marketers of America were available to 
testify. It is a pity the record will not reflect their 
insights.
     In addition to gas prices and oil company profits, at 
issue in this hearing is anti-price gouging legislation. It is 
unfortunate that the Energy and Commerce Committee will not be 
afforded an opportunity to hold a legislative hearing or a 
markup on a piece of legislation that is so important to 
consumers and that could have a broad and deep impact on our 
Nation's economy. Mr. Stupak's bill would benefit from 
committee consideration. At the very least, it should have a 
trigger, which comes into force after the Secretary of Energy 
has determined that there is a bona fide problem with supply. 
There should be mitigation factors, especially a clear 
definition of what constitutes price gouging so that those 
subject to the Act will have some idea of what they are being 
ordered not to do.
     Everyone feels the pain at the pump--our constituents feel 
it, our staff feels it, I feel it. We all want to do something 
about high gas prices, but effectively instituting price 
controls on gasoline--which is what H.R. 1252 as written would 
do--is the worst possible solution. If you like spot shortages 
and lining up to buy your gasoline, you're going to love this 
bill.
     Price controls didn't work in the early 1970's. They 
didn't work in the late 1970's. And they won't work now.
     Instead, price controls will further constrict an already 
tight supply and result in greater demand, which results in 
higher prices. This is not an emotional debate where one's 
personal beliefs and moral code dictate their stance on a 
solution. This is economics. There is a finite and known result 
to price controls. Simple supply-and-demand economics explains 
the result--as supply tightens while demand grows, there is 
less product available on the market, which drives price 
increases. Supply will decrease if Congress institutes price 
controls. Oil companies and independent gas stations alike will 
turn off their pumps rather than face 10 years in jail because 
they had to raise their prices in order to cover the inevitable 
cost increase of obtaining gas after a natural or a man-made 
disaster. And for the record, let's be clear on one thing--the 
FTC has conducted numerous studies on this topic and has 
never--I repeat, never--found a single instance of widespread, 
collusive price gouging.
     Anti-gouging legislation is based on the faulty assumption 
that price increases are due to the greed of Big Oil and 
refineries (whose industry groups, again, were not afforded an 
opportunity to speak today). In fact, what is driving up the 
price of gasoline is not these companies, but rather record 
high consumer demand, both domestic and international. 
Compounding the problem is the anomaly that domestic demand did 
not fall off this spring as it historically has during the 
period in which refineries must go offline in order to perform 
the required annual maintenance and switch to summer blends. 
Further driving up the cost of gasoline, we are importing 
historically low levels of refined product due to anomalies in 
the European market. When we have a restricted supply with 
increased demand--or even static demand--prices go up.
     The only way to drive down the price of gas is to increase 
supply and decrease demand: we must increase domestic crude 
inventory. We must increase refinery capacity. We must 
streamline refinery permitting. Oil companies are not sitting 
idly by, merely reaping the benefits of high prices driven by 
the world crude market. Industry has added the equivalent of 10 
new refineries over the last 10 years. Publicly announced plans 
indicate the addition of the equivalent of eight more 
refineries over the next 4 years. At the same time, we must 
decrease demand. We must continue research into the use of 
alternative fuels. We must adopt higher efficiency standards 
for vehicles. We must also educate consumers with proven fuel 
saving tips.
     Mr. Chairman, I thank you for holding this hearing because 
it affords the public an opportunity to see the difference 
between Republicans and Democrats. Fuel prices are important to 
all of our constituents and if we follow your solution, our 
people are going to pay more and get less--when they can find 
any gasoline at all. I hope the next time we take up this 
matter, it will be for the purpose of increasing the supply of 
gasoline and decreasing the price instead of grandstanding for 
the reporters in the audience.

    Mr. Stupak. Let me just respond briefly, if I may, to the 
gentleman's request or statements there.
    We have accepted on the hearing we have here today--there 
are four witnesses invited by the majority, three that are 
invited by the minority. We accepted your request to have EIA 
here. They are here. We accepted your request to have Mr. 
Montgomery, an oil industry analyst on the second panel. He is 
here.
    The National Petroleum Refiners Association have advised us 
they did not wish to be part of any panel.
    As far as American Petroleum Institute, instead of having a 
lobbying group, we would rather hear from Big Oil. We invited 
ExxonMobil, Shell Oil, Chevron, Valero, the largest oil refiner 
in the United States. They turned us down.
    You know, we sought testimony from the Department of 
Energy's policy office but were told that no one was available 
on the date of our hearing due to the Chinese trade conference.
    On Monday, we were contacted by the White House. The chair 
of the Council of Economic Advisors asked to testify. We 
graciously extended that to him. It would have been four 
minority witnesses, four majority witnesses.
    A few hours later, they called us back, said because of 
scheduling conflicts they could not testify.
    So I think we have been more than generous with providing 
minority, the administration and industry with an opportunity 
to be heard here today.
    I hope that the minority would work with us to bring 
ExxonMobil, Shell Oil, Chevron Oil, Valero and the rest of them 
to come testify before the American people. They never 
testified when you were in the majority, and we would like to 
hear from them.
    We will be having other hearings. We have an unfair 
manipulation of prices that I would like to have hearings on. 
We have to do something with natural gas and FERC regulation 
yet. So I look forward to it.
    As far as the legislation coming to the floor, when you 
were in the majority, Mr. Barton, I learned some things bad and 
some things good.
    One of the things I learned from you is take a piece of 
legislation and bring it right to the floor, just like you did 
last year with the Wilson legislation.
    It was introduced on Tuesday, May 2. We never saw it. On 
Wednesday, May 3, we had a vote on it--no hearing on it, no 
markups, no nothing. So I learned from you.
    Mr. Barton. Would the gentleman yield on that point?
    Mr. Stupak. Sure.
    Mr. Barton. What you just said, as you said it, is 
literally true. The second time we brought the price gouging 
bill up, we did it just like you said. And I wasn't too happy 
about that, but I had to do it.
    But the first time we brought it up, we had a full 
committee markup. You had an amendment in committee that 
failed. You were given the right to offer that same amendment 
on the floor. And then I think you offered a version of it as a 
motion to recommit.
    Are we going to have a legislative hearing or a committee 
markup of this legislation any time in the near future?
    Mr. Stupak. As the chairman said, sometimes some of these 
scheduling issues and how legislation comes to the floor--it is 
out of our control.
    And you are right, my legislation was a substitute to the 
Barton amendment, which never came to the floor, but I did 
offer it as a substitute.
    So that means H.R. 1252, as you see it before you, has been 
around for well over a year. It is not like it is a brand new 
piece of legislation like the Wilson legislation was on the 
floor.
    We all wish we would get things the way we want. Sometimes 
the process moves a little quicker than what we would like. We 
actually had a hearing last week on parts of H.R. 1252 before 
the Judiciary Committee.
    We are having this hearing today not on H.R. 1252 but on 
gas prices and the impact on the American people. And I hope we 
can have further hearings on that subject, as the ranking 
member suggested.
    With that, I would turn to Mr. Dingell of Michigan for an 
opening statement.

OPENING STATEMENT OF HON. JOHN D. DINGELL , A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MICHIGAN

    Chairman Dingell. Mr. Chairman, thank you. I commend you 
for conducting this hearing into the pressing matter of 
gasoline prices. American consumers today face the highest 
gasoline prices in history, and apparently the worst is not yet 
over.
    The American Automobile Association and others forecast 
that prices are likely to go even higher. For many, high energy 
prices are an economic crisis.
    At today's prices, the average American family will spend 
$2,413 more than they did in 2001, more than double what was 
spent then. This is, no doubt, going to be very difficult for 
most, as family incomes have not kept pace with the rapid rise 
in gasoline prices.
    Similarly, those businesses, large and small, that do not 
enjoy the comfort of high profit margins are experiencing 
severe pain. Trucking companies, taxi drivers and other 
businesses that depend on gasoline and petroleum products are 
feeling the pinch.
    Rising gas prices, in turn, increase the price of goods and 
services throughout the economy. The results could be 
disastrous for both individuals and for the economy as a whole.
    At the same time this is taking place, the current 
administration seems to be unable or perhaps unwilling to do 
anything about the problem.
    Today, we will hear testimony from the Government 
Accountability Office, which, after conducting an exhaustive 
study, concluded that mergers and consolidations in the oil 
industry have contributed to an increase in the price of 
gasoline.
    Yet the Federal Trade Commission will disagree and cite a 
list of things that they have done to preserve competition 
amongst oil companies and refineries.
    Most of us would like to see the results of that 
competition, if such there be.
    There will no doubt be a debate over the fine points of the 
various economic models to explain each side's conclusions.
    But in the end, we are left with one irrefutable 
conclusion. Gas prices have risen dramatically following 10 
years of increasing concentration in the oil industry.
    We also will hear testimony that the current rise in 
gasoline prices is not due to skullduggery on the part of OPEC, 
but rather to a lack of refining capacity.
    Perhaps it is time for the FTC to investigate this matter 
more closely and determine whether the lack of refining 
capacity is a coincidence of unplanned facility outages at 
multiple locations, or whether, as some argue, it is a 
manufactured shortage.
    Finally, I am concerned that some of the less scrupulous in 
our society may seek to take advantage of those shortages by 
raising prices to unconscionable levels unrelated to the cost 
of providing the product.
    It is essential that we have tools in place to address this 
kind of behavior.
    Mr. Chairman, I congratulate you for pursing this issue, 
and I look forward to reviewing today's testimony.
    I particularly want to welcome Mr. Stanley Pruss, who 
appears here today on behalf of Governor Granholm, who has 
successfully dealt with gasoline price gouging in Michigan.
    I would like to say just one thing, and I say this with 
affection and the utmost respect for my dear friend Mr. Barton.
    During the brief time that I have been chairman since the 
1st of January, I have sought with all diligence to approach 
the high quality of leadership and the extraordinary capacity 
and ability with which he ran this committee during the time 
when he was chairman.
    And I say this, again, with the utmost respect. We are 
here, I note, to bring to the House floor a bill, and we are 
trying to do it as well as he did. But as the record will show, 
last year, about this time of year, we had the same bill. It 
was taken to the floor. It was introduced 1 day on behalf of 
one member of this committee--a very outstanding member, by the 
way--and was put on the floor the next day, and it was 
proceeded on under suspension.
    I could think of nothing better on my part than replicating 
the extraordinary leadership which has been demonstrated by my 
dear friend Mr. Barton, and I look forward to hearing further 
comments about the way that we are following his extraordinary 
leadership and competence in these matters.
    I thank you.
    Mr. Stupak. I thank the chairman.
    Next, we will hear from Mr. Walden of Oregon, please, for 
an opening statement.
    Mr. Walden. Well, thank you, Mr. Chairman. I am going to 
actually waive my opening statement in lieu of additional time 
for our witnesses. I am very concerned about this issue and 
hope to probe deeply.
    Mr. Stupak. Mr. Melancon, please, for an opening statement.

 OPENING STATEMENT OF HON. CHARLIE MELANCON , A REPRESENTATIVE 
            IN CONGRESS FROM THE STATE OF LOUISIANA

    Mr. Melancon. Thank you, Mr. Chairman.
    First, I would like to thank you for holding this hearing 
today. My constituents, as everyone else's, have dealt with the 
rising price at the pump for some time. With the change over to 
summer blends of gasoline, the late spring tends to be when 
consumers experience the first major price spikes of the year. 
And of course, hurricane season presents its own unique set of 
problems, like the potential for prolonged closure of 
refineries and shutting production.
    Mr. Chairman, the farmers, fisherman and other businessmen 
and women who depend on reasonable transportation costs to turn 
a profit, along with the working people of my district and of 
this country, long for affordable fuel.
    The high cost of gasoline adds up for working people who 
are trying to make ends meet.
    America has a crisis of supply and demand on its hands. The 
good news is that this Congress has a lot of political will to 
help solve this crisis.
    I believe that we can help reduce prices at the pump, but 
our ability to reduce those prices depends on responsible 
conservation, increasing production, growing refining capacity 
and incubating new energy technologies to help take demand 
pressure off our overburdened market.
    I hope this committee and Congress will pursue a 
responsible conservation agenda, and I look forward to working 
toward that goal. It is only right that we should try to be 
good stewards of the earth's God-given resources. A responsible 
conservation policy will help take pressures off of gasoline 
supplies.
    I was happy to work with Senator Landrieu and other members 
of the Congress in the last session to pass legislation that 
would encourage an increase in oil and gas production in the 
Gulf of Mexico.
    While fossil fuels present many problems in terms of their 
carbon emissions and environmental impact, it is clear that 
they will be the primary component of our Nation's energy 
supply for the foreseeable future and possibly longer.
    Given that reality, I strongly believe that now is not the 
time to discourage exploration and production of oil and 
natural gas. Now is not the time to place additional 
restrictions on companies that produce and supply this 
country's energy needs.
    We are also committed to incubating new technologies like 
coal gasification and carbon sequestration, and investing in 
the time-tested non-carbon emitting energy sources like 
nuclear.
    But those do not solve the immediate needs of consumers 
during this summer's driving season. My observation is that we 
have a bottleneck in the supply chain.
    We can't pump oil out of the ground quick enough, and we 
can't seem to refine it fast enough to meet the demands of this 
Nation.
    Oil is traded on the world market, and its price is set 
there, not at the retail level. All prices can be volatile, and 
they often correlate with the retail gasoline prices.
    However, retail gasoline prices are heavily dependent on 
refining capacity and on inventories of gasoline. The refining 
bottleneck causes American consumers to pay premium at the pump 
for policy makers' failures to plan for increased demand.
    I hope this hearing helps us understand that we must work 
through conservation, increasing production, investigating 
alternate sources of energy and increasing refining capacity in 
order to reduce the pressure on this market.
    Thank you, Mr. Chairman, and I thank you for the witnesses 
today.
    Mr. Stupak. I thank the gentleman.
    When does the hurricane season start? Right around now, I 
know. June 1, OK. We had snow this weekend up in my district in 
some parts, so you are a little ahead of us in the weather.
    Mr. Murphy, for an opening statement, please?

   OPENING STATEMENT OF HON. TIM MURPHY, A REPRESENTATIVE IN 
         CONGRESS FROM THE COMMONWEALTH OF PENNSYLVANIA

    Mr. Murphy. Thank you, Mr. Chairman and Ranking Member 
Whitfield, today.
    We meet to discuss some of the issues involving rising 
gasoline prices, or at least one part of the issue.
    But I am concerned, and I hope we look at the real reasons 
why prices are rising and some of the roles that Congress has 
played in contributing to that so that we may make some 
changes.
    And it has to do with the simple laws of supply and demand. 
Until we find ways to increase supplies and reduce consumer 
demand for gasoline, we will continue to be susceptible to 
price spikes such as those we are now experiencing. And that 
places a real burden on families.
    Let's keep in mind what contributes to the cost of gasoline 
at the pump. Crude oil is about 56 percent of the cost. Taxes, 
about 18 percent of the cost. Refining, nearly 17 percent of 
the cost. Distribution and marketing, about 9 percent of the 
cost.
    And overall, what we have seen is that oil costs have 
doubled since 2004, tripled since 2001, and have gone up some 
600 percent since the 1980's. Back then, it was $11, and it has 
gone up above $70.
    One thing we should not do about high gasoline prices is to 
adopt legislation that would establish artificial controls over 
prices in the name of protecting the consumer.
    I believe we did that before in the Nixon administration. 
We also did some things in the Carter administration. And I 
remember vividly long gas lines, frustrated motorists, and that 
did not solve our problem.
    Our gasoline imports have risen from 10 percent to 30 
percent at times after Hurricane Katrina because we did not 
have the oil refining capacity. It costs much more to refine 
oil overseas and bring it over here.
    It is sort of like if you are in Pittsburgh and you decide 
to go out and buy a pack of gum, and you drive to Chicago to do 
it instead of finding a way you can buy at a local store.
    The U.S. will grow in its demand over the next 20 years to 
use oil. When demands increase and supplies do not, prices go 
up. And Congress has added to this problem.
    We have continued to grow in our dependence on other 
nations and oil. Many countries like OPEC have manipulated 
production to increase our costs dramatically, and they make 
massive profits.
    They also use the money to purchase weapons and to fund 
terrorism directly. What a terrible, terrible thing it is, that 
we find that whenever we put gasoline in the tanks of our cars, 
we are funding both sides in the war on terror.
    But when we refuse to allow drilling of our own oil on our 
Atlantic coast, on our Pacific coast, on our Gulf coast, in our 
western States, on Federal lands in Alaska, despite abundant 
supplies of oil, or when we look at ways that we are not 
increasing our supplies, et cetera, all of this has been some 
things that have contributed to cost, including what this 
Congress has done in the last couple months in increasing taxes 
on domestic oil explored in our own Gulf of Mexico.
    While Cuba and other nations are exploring within those 
boundaries, we still say no.
    When we refuse to build support for building more 
refineries, we contribute to shortages. And we end up 
increasing the price by importing the gasoline, as I said 
before.
    When we do not develop new sources of energy, and we refuse 
to look at such things as coal, and nuclear, and hydrogen fuel 
cell, and fund the research on this, we are contributing to 
higher costs.
    When we don't emphasize conservation on every level, we are 
contributing to increased costs.
    When we hear people preach about global warming and 
conservation while they fly about the Nation in their private 
jets, we are contributing to those costs.
    When everything is as simple as leaving your cell phone 
plugged in after it is charged, to leaving computers on, to 
leaving lights on, and all the things that America does to 
waste energy, isn't it time that we began to look at the real 
sources of the cost of high gasoline, instead of just looking 
at price gouging concepts at the pump, which we cannot even 
define?
    Every time this Congress has had an opportunity to increase 
supply, we have continued to say no. And yet we continue to 
import more and more from other nations--as I said, nations who 
fund the weapons used against our soldiers. And this is over 
half the cost of oil.
    When are we going to learn that we have supplies? And if we 
want to reduce costs, we need to start looking for our oil. We 
need to start using coal. We need to have clean coal 
technology. We need to fund hydrogen fuel cell research.
    We need to demand more conservation in our vehicles. We 
need to look more at how our cars can be more efficient, how 
our highways can be more efficient, how our public transit 
systems can be funded.
    This is the cause of our problems of high gasoline prices. 
Isn't it time that Congress really looked at this? And instead, 
it is pointing a finger here and there and said we ought to 
deal with this more comprehensively.
    Mr. Chairman, I know your commitment to work toward energy 
independence and working these issues, and I hope that these 
are some things we can all agree on to work on in the future to 
really reduce gasoline costs. Thank you.
    Mr. Stupak. I thank the gentleman.
    Mrs. Blackburn for an opening statement.

OPENING STATEMENT OF HON. MARSHA BLACKBURN, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF TENNESSEE

    Mrs. Blackburn. Thank you, Mr. Chairman. I want to thank 
you and Ranking Member Whitfield for holding the hearing today.
    And to our witnesses, welcome. We appreciate that you are 
here. And I think that as you have heard from the opening 
statements, it is no secret that the increasing cost of 
gasoline is a pertinent issue. It is on the mind of every 
single American.
    And in west Tennessee in my district, it will cost the 
average family nearly $60 to drive from one end to the other. 
It is a trip of 428 miles.
    And that is enough to give you heartburn as you are talking 
about maybe going from Memphis to Nashville, or up to 
Clarksville, or out to the river for our Memorial Day holiday.
    And yet the news reports announcing record profits for the 
large integrated oil companies provide our constituents little 
pain relief.
    I have said a couple of times over the weekend that it is 
more like a three-alarm barbecue sauce at Memphis in May, which 
is something that has been taking place in our district.
    Our constituents, therefore, have a right to ask questions 
about the rising cost of gasoline, and Congress has the 
responsibility to provide them with some answers that are free 
of political talking points and rhetoric.
    They want to know why this is taking place, and they want 
to know if there is anything that we can do about it, and what 
the cause of it is.
    However, it does concern me that some Members of Congress 
appear to be falling into the trap of political rhetoric.
    It is too easy to simply try to do a connect-the-dots 
between, and I will quote from today's hearing, gas prices, oil 
company profits and the American consumer, and immediately 
point toward alleged marketplace manipulation and price 
gouging. It is a bit unfair to travel that route.
    Strong laws already exist to prevent this immoral and 
illicit corporate behavior, and I support rigorous enforcement 
of those laws to protect the interest of our American consumers 
and of our constituents.
    What I cannot support, on the other hand, is a politically 
motivated legislative approach that will demonize America's 
small business owners who operate convenience stores, filling 
stations and neighborhood truck stops.
    And let's make no mistake about this. Those are precisely 
the individuals who wear a target on the back, or they feel as 
if they wear a target on their back, not the large, integrated 
oil companies.
    And that is how they feel if we advance legislation to 
crack down on price gouging that adopts vague language, employs 
heavy-handed criminal penalties and unenforceable civil 
penalties that no small business owner can afford.
    It would not only be legislative overkill, one might even 
call it unconscionable excessiveness.
    Mr. Chairman, here are a few inconvenient facts that are 
missing from this debate today, as I see it. Convenience stores 
and filling station owners supply gasoline to the American 
consumer in every single congressional district, city and 
neighborhood across this country.
    Ninety-five percent of these are independent small business 
owners who operate between one and three stores. The average 
convenience store owner earns a $33,000 profit per year. Many 
of these are the local community meeting place.
    That is what we find in our district. They are the local 
gathering spot. And they are not people who are going to go and 
gouge their neighbors, their fellow church members and their 
friends.
    And, Mr. Chairman, I have a statement from National 
Association of Convenience Stores, and I would ask unanimous 
consent to enter that for the record.
    Mr. Stupak. It is not appropriate. We would object to it. 
We will not have outside groups enter statements through 
Members. That has always been the policy of this subcommittee. 
So we cannot accept it.
    Mrs. Blackburn. OK. Thank you, Mr. Chairman.
    Mr. Stupak. I thank the gentlewoman. Do you have any 
further on your----
    Mrs. Blackburn. Yes, I do.
    Mr. Stupak. OK.
    Mrs. Blackburn. Yes, I certainly do. And I thank the 
chairman for yielding back and do reclaim my time.
    And I would just mention these small stores are not the 
portrait of a manipulating marketplace villain. They are small 
business owners.
    And I certainly hope that throughout the course of this 
debate that my colleagues and I can move beyond a short-sighted 
temptation to engage in price gouging finger-pointing.
    Instead, what we need to do is talk about what it really 
will take to reduce the cost of gasoline. And that is a common-
sense, balanced approach to address the dwindling energy 
production capacity and the future of renewable energy for this 
country.
    Many on this side of the aisle are working on just that 
very issue, and I invite my colleagues in the majority to join 
us, and let's address the real need for reform.
    I thank the witnesses.
    I yield the balance of my time.
    Mr. Stupak. I thank the gentlelady.
    In this legislation, priority is given, if we are going to 
look for price gouging, at those who sell $500 million worth of 
sales. In my neck of the woods, that is not mom-and-pop grocers 
or gas stations. That is a pretty good size, just for the 
record on that.
    If there are no other members seeking to be recognized for 
opening statements, I will now call our first panel of 
witnesses to come forward.
    On our first panel, we have the honorable William E. 
Kovacic, Commissioner of the Federal Trade Commission. We have 
Mr. Guy Caruso, Administrator, Energy Information 
Administration. Mr. Stanley Pruss, deputy director, Michigan 
Department of Environmental Quality. And Mr. Thomas J. McCool, 
Director, Center of Economics, Applied Research and Methods, 
U.S. Government Accounting Office, GAO.
    It is the policy of this subcommittee to take all testimony 
under oath. Please be advised that witnesses have a right to 
have counsel under the rules of the House to be present during 
their testimony.
    Do any of you four witnesses wish to be represented by 
counsel? Mr. Kovacic, Mr. Caruso, Mr. Pruss, Mr. McCool? OK.
    Please rise, raise your right hand and take the oath.
    [Witnesses sworn.]
    You are now under oath.
    Mr. Kovacic, we will start with you, sir. Opening 
statement.

 TESTIMONY OF WILLIAM E. KOVACIC, COMMISSIONER, FEDERAL TRADE 
                           COMMISSION

    Mr. Kovacic. Chairman Stupak, members of the subcommittee, 
thank you for the opportunity to review the Federal Trade 
Commission's competition policy program concerning the 
petroleum sector.
    To provide a perspective on what we do, I would like to 
focus on activities from the past few years. The foundation of 
our program is law enforcement. In the past year alone, we have 
pursued several matters of note.
    In April, the commission filed a lawsuit to block the 
proposed purchase by Western Refining of Giant Industries. The 
FTC alleged that the transaction would raise the price of 
gasoline in northern New Mexico.
    We are presently awaiting a decision from the Federal 
district court on our motion for a preliminary injunction.
    In January, the commission opposed the $22 billion deal by 
which Kinder Morgan would have been taken private by its 
management and a group of investment firms. The commission 
obtained adjustments to protect competition in the 
transportation and temporary storage of gasoline and other 
petroleum products in the southeastern United States.
    Last November, Chevron and USA Petroleum abandoned a 
transaction by which Chevron would have bought most of USA 
Petroleum's retail gasoline stations in California.
    The FTC had been conducting an investigation into that 
proposed deal, and USA Petroleum's president said that 
resistance from the commission induced the parties to abandon 
the deal. In addition, in late 2005, the commission opposed the 
Aloha's purchase of terminal facilities in the Hawaiian 
islands.
    Earlier in the same year, the FTC settled a monopolization 
case challenging Unical's behavior in the process by which the 
California Air Resources Board set standards for gasoline sold 
in that State. The settlement has generated savings of roughly 
$500 million per year to consumers of gasoline in California.
    These and other FTC law enforcement initiatives draw 
heavily upon the second element of our program: Namely, 
research and studies involving the petroleum sector.
    These investments guide our pursuit of cases and inform our 
use of non-litigation policy tools.
    In May 2006, as this committee's members have discussed, 
the commission presented to Congress its report on the 
investigation of gasoline price manipulation and post-Katrina 
gasoline price increases.
    The report examined whether energy firms had manipulated 
gasoline prices and described how energy markets responded to 
the destruction caused by Hurricanes Katrina and Rita.
    In December 2006, the FTC also issued a report on the 
current state of ethanol production in this country.
    In May 2002, the FTC began a project to monitor wholesale 
and retail gasoline prices and the prices of diesel fuel to 
identify possible anticompetitive practices.
    That project continues today. We track prices in 360 cities 
across the country and in 20 major wholesale markets.
    The third element of our program is cooperation with other 
public bodies. The FTC is not the only public body with 
competition policy duties in the energy sector.
    Improved cooperation with other public authorities at the 
national, State and local levels can help each institution 
spend its competition resources more effectively. I view more 
effective cooperation as vital to future policy success in this 
area.
    To this end, last September, the FTC and representatives of 
various State attorneys general, including the State of 
Michigan, held a day-long workshop to discuss competition and 
consumer protection issues involving gasoline pricing.
    The participants regarded this event as a useful step 
toward improving Federal and State efforts to address 
developments of common concern.
    The fourth element of our program is public consultation in 
the form of public hearings, seminars and workshops.
    Public consultations have enabled us to gain deeper insight 
into developments, many of the type that this committee has 
discussed, affecting industry and consumers, to identify major 
emerging trends and to help build a consensus about appropriate 
policy responses.
    One month ago, the commission convened 3 days of hearings 
on Energy Markets in the 21st Century: Competition Policy and 
Perspective.
    The hearings studied old and new fuel cycles, demand side 
issues involving transportation, lessons from past regulatory 
strategies, and the vulnerability of the United States to 
supply and demand shock.
    The proceedings featured an extraordinary group of 
participants, at least one additional person you will hear on 
the next panel of this session. Energy companies, think tanks 
and universities participated, as well as government agencies 
and consumer groups.
    This improved our understanding of how we can best use our 
policy tools and suggested paths that the Nation's energy 
policy might usefully take in the future.
    I welcome your comments and questions.
    [The prepared testimony of Mr. Kovacic follows:]



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    Mr. Stupak. Thank you, Commissioner.
    Mr. Caruso, please, for an opening statement, sir? Five 
minutes. If you want to submit a longer statement, it will be 
for the record.

  TESTIMONY OF GUY CARUSO, ADMINISTRATOR, ENERGY INFORMATION 
                         ADMINISTRATION

    Mr. Caruso. Thank you, Mr. Chairman. I appreciate the 
opportunity to represent the Energy Information Administration 
today.
    EIA is an independent statistical and analytical agency 
within the Department of Energy.
    Because we have an element of statutory independence with 
respect to our activities, our views are strictly those of EIA 
and should not be construed as representing those of the 
Department of Energy or the administration.
    And today, I will focus on EIA's most recent short-term 
outlook for crude oil and gasoline markets and discuss the 
factors contributing to high prices and continued uncertainty 
in these markets.
    Global oil markets have tightened for crude oil and light 
petroleum products, especially gasoline, with commercial 
inventories dropping sharply since the end of September, 
reflecting strong demand in the U.S. and globally, production 
cuts by the Organization of Petroleum Exporting Countries, 
OPEC, and only moderate increases in non-OPEC production.
    Increasing global demand for light products has put 
pressure on refining capacity worldwide, and we project crude 
oil prices to average in the mid $60 per barrel this summer.
    Retail prices for regular gasoline have increased from 
$2.17 per gallon at the end of January to $3.22 per gallon as 
of yesterday. This compares with a $2.84-per-gallon average 
last summer.
    Against the background of already tight world oil markets, 
global geopolitical uncertainties continue to affect global oil 
supply and transportation.
    Geopolitical uncertainty in a number of countries in the 
Middle East and Africa will continue to keep markets on edge.
    For example, Nigeria's problems have aggravated the 
gasoline situation both internally and globally because this 
country produces largely light and sweet crude oil, which is 
used by the world's refineries to maximize production of 
gasoline.
    Turning to gasoline markets, we expect gasoline markets 
will likely remain fairly tight, although we do anticipate some 
improvements over the next several months.
    Gasoline inventories, which typically build slightly in 
April, sharply declined last month because of refinery outages, 
both planned and unplanned, and lower than normal imports.
    Gasoline supply has been affected more than usual by 
refinery outages this spring, as U.S. refineries typically have 
higher outages during the first quarter as they reduce 
production of gasoline and other products to prepare for the 
maximum production season of the spring and summer.
    This year, outages have extended into May and, along with 
lower imports and seasonally rising gasoline demand, 
contributed to a steep inventory decline and upward price 
pressures in April and May.
    Refinery throughputs have just begun to show the seasonal 
increase typical at this time, and are expected to increase 
over the next several months, which should ease pressure on 
gasoline prices.
    Gasoline imports, critical to meeting U.S. summer 
consumption needs, are lagging last year's levels and thus have 
been affecting prices.
    Low gasoline inventories in Europe have resulted in limited 
volumes available for export to the United States thus far in 
2007.
    Total U.S. gasoline imports have recently returned to about 
1.2 million barrels per day, and imports at or above that level 
are likely to be needed to avoid persistent upward pressure on 
gasoline prices.
    In conclusion, Mr. Chairman, the combination of tight crude 
oil and refined product markets, along with ongoing 
geopolitical concerns, leave crude oil and gasoline markets 
poised for continued volatility this summer.
    If gasoline production increases during the rest of May and 
imports increase, gasoline markets may ease somewhat, causing 
prices to recede from their current high levels.
    However, with the hurricane season approaching and 
continued tight refinery conditions, low gasoline inventories 
and increased demand for summer travel, upward pressure for 
gasoline prices remains a concern.
    In sum, Mr. Chairman, most of the risks point to upward 
pressure on prices because of limited refinery capacity, low 
inventories and relatively low imports.
    With that, Mr. Chairman, that concludes my oral remarks. I 
would be happy to answer questions at the appropriate time.
    [The prepared testimony of Mr. Caruso follows:]


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    Mr. Stupak. Thank you.
    Mr. Pruss, for an opening statement, please.

     TESTIMONY OF STANLEY PRUSS, DEPUTY DIRECTOR, MICHIGAN 
              DEPARTMENT OF ENVIRONMENTAL QUALITY

    Mr. Pruss. Thank you, Mr. Chairman, members of the 
committee.
    My name is Stanley Pruss, and I appreciate the opportunity 
to address the issues of high gasoline prices, oil company 
profits and the effects on the American consumer.
    I am appearing on behalf of Michigan Governor Jennifer 
Granholm, and she has submitted written testimony to this 
committee which reflects her active engagement on issues 
relating to the high price of fuel for more than eight years.
    As Michigan's attorney general, Governor Granholm was 
engaged in a 3-year investigation in part with the Federal 
Trade Commission to examine and understand the price spikes 
that occurred in the Midwest, particularly in the summer of 
2000.
    That FTC study, reported on March 29, 2001, indicated that 
at least one petroleum company had deliberately withheld 
supplies and inventories because they were concerned that the 
release of those supplies would result in lower prices.
    Governor Granholm testified May 2, 2002 before the Senate 
on gas pricing issues, and she has continued to be, as I said, 
very actively involved in these issues.
    Her testimony today is broader than mine. Mine is limited 
to the events that occurred in association with September 11th, 
2001.
    At that time, I was the assistant attorney general in 
charge of the Michigan Consumer Protection and Antitrust 
Division.
    We had long been involved in the investigation of high 
gasoline prices, but on that tragic day--shortly thereafter, we 
began to receive a number of calls at our complaint intake 
section of sharply spiking prices.
    This trickle of information soon became a deluge. And after 
a short time, all of our intake lines were jammed with 
consumers calling in reporting prices that were, on September 
11, ranging statewide between $1.60 and $1.80 a gallon, but in 
a very short period of time, hours, reached as high as $5 a 
gallon.
    Attorney General Granholm came down to the division. We 
engaged our staff attorneys, our investigators and our 
complaint intake staff, and we mapped out a strategy to deal 
with this phenomenon.
    We instantly entered this information that we received from 
consumers into our database in real time. We tried to be 
precise. We tried to capture the price of petroleum. We asked 
the consumer what they thought it was prior to the escalation 
in price. We recorded the location.
    And our protocol was that if we received two or more 
consumer complaints about a single gasoline retailer, we then 
routed an investigator to do a visual verification. With that 
confirming evidence, we felt we had sufficient information to 
move under Michigan's consumer protection act.
    Like many other States, Michigan has a price gouging 
statute that is an analogue to H.R. 1252, at least as 
introduced.
    The Michigan consumer protection act prohibits charging a 
consumer a price that is grossly in excess of the price at 
which similar property or services are sold.
    Unlike most States, but like H.R. 1252, this standard is 
not tied to a declaration of an emergency or a national 
emergency. The attorney general is free to use this any time 
the attorney general encounters unusual market conditions, as 
in H.R. 1252.
    To address what was clearly price gouging activity, as I 
said, we mobilized our staff. We collected this information. 
And ultimately, we issued notices of intended action against 46 
gasoline retailers in the State of Michigan.
    This notice of intended action required by statute recited 
the violation, the factual basis for the violation, the 
violation of the statute, demanded that the retailer cease and 
desist in the escalated prices, demanded restitution, and 
outlined the consequences of non-compliance with the notice of 
intended action.
    The statute allows the recipients of this notice to have an 
opportunity to confer, and the long and short of this 
enforcement initiative was that almost all of these stations 
entered into what is called an assurance of discontinuance, or 
a settlement agreement, whereby they promised, covenanted, to 
provide restitution to all consumers who were overcharged on 
that day and the days following as well as pay civil penalties.
    Two stations chose not to settle consensually, and we did 
file suit against those gas stations. They interposed defenses 
that were both factual and legal.
    As you heard today, their factual defense suggested that 
there is no such thing as price gouging in the marketplace, and 
that retailers have to purchase their next load of fuel based 
upon the sale of their present inventory, and that they have to 
be anticipatory, and when events like this occur, it was 
reasonable for them to escalate prices in anticipation of price 
hikes at the wholesale level.
    We asked for proof in that regard: Did you receive notices 
of imminent price hikes? To the best of my recollection, no 
such proofs were forthcoming.
    The legal defenses interposed were again, like what you 
have heard today, particularly from Representative Whitfield, 
that the term ``grossly excessive'' or ``unconscionable'' is 
inherently indefinite.
    And this defense was interposed as being unconstitutionally 
vague, so vague as not to allow a party to understand what 
kinds of behavior are prohibited by law.
    Although our initiative didn't result in an appellate 
decision in this regard, a judge did opine that the Michigan 
consumer protection act, which prohibits grossly excessive 
pricing, was not unconstitutionally vague.
    And to the best of my understanding, although I have not 
been engaged in this area for a while, no court has found 
standards of unconscionability and standards that prohibit 
gross disparities in pricing as being unconstitutionally vague.
    [The testimony of Mr. Pruss follows:]

                     Testimony of Stanley F. Pruss

     Good afternoon. My name is Stanley Pruss and I appreciate 
the opportunity to address the issues of high gasoline prices, 
oil company profits and impacts on the American consumer.
     I am appearing on behalf of Michigan Governor Jennifer 
Granholm. The Governor has submitted written testimony to this 
committee which reflects her active engagement on the issue of 
high petroleum prices for more than 8 years. As the attorney 
general of the State of Michigan, Governor Granholm 
investigated petroleum industry pricing and participated, with 
the Federal Trade Commission, in an investigation in Midwest 
price spikes that occurred in the summer of 2000. In her 
capacity as Governor, she has continued to have a leadership 
role in urging Congress to enact legislation in several key 
areas--all directed at alleviating the pain American consumers 
experience at the pump.
     Governor Granholm's testimony goes beyond mine in that it 
constitutes a broader assessment of the situation facing 
consumers. Governor Granholm's testimony outlines the causes of 
high gasoline prices and price volatility and offers specific 
remedies, including support for H.R. 1252, as introduced.
     My statement will be limited to price-gouging with respect 
to retail sale of gasoline and Michigan's experience in that 
regard.
     I served as the assistant attorney general in-charge of 
the Consumer Protection and Antitrust Division under Michigan 
Attorney General Granholm. While we were long focused on the 
causes of high gasoline prices and the effect on Michigan 
consumers, the tragic events of September 11, 2001 precipitated 
occurrences that profoundly affected consumers around the 
country with immediate and harsh consequences beyond their 
grief and sympathy. I speak, of course, of price-gouging.
     Like many other States, the Consumer Protection and 
Antitrust Division of the Michigan Department of Attorney 
General administers a Consumer Complaint Section that receives 
and records consumer complaints. Within minutes of the 
terrorist attack on the Trade Center, we began to receive 
complaints from consumers around the State of sharply elevated 
prices at the pump. This stream of complaints quickly became a 
deluge, literally tying up all our intake lines.
     The complaints had a common theme: Gasoline prices that 
were generally between $1.6009$1.80 per gallon prior to the 
attack were being increased precipitously by some, but not all 
gasoline retailers, to as high as $5 per gallon. The complaints 
were coming in from all over the State. Attorney General 
Granholm came down to the Division to meet with staff 
attorneys, investigators and intake staff to assess the 
situation and to identify and direct our course of action.
     Price gouging falls under Michigan Consumer Protection Act 
(MCPA). The MCPA prohibits unfair, deceptive or unconscionable 
methods, acts of practices in trade or commerce, and these 
prohibited methods, acts or practices are specifically 
enumerated and defined.
     They include ``charging a consumer a price that is grossly 
in excess of the price and which similar property or services 
are sold.''
    Unlike most State laws that address price gouging (and like 
H.R. 1252, as introduced), the Michigan price-gouging 
prohibition is not effectuated or triggered by a declaration of 
emergency. Of the at least 28 States that have price-gouging 
provisions, I believe only the Michigan and Maine statutes are 
not dependent on emergency declarations.
     To address what was clearly price-gouging activity, our 
Division established a protocol to identify, evaluate and 
confirm price-gouging occurrences. Attorney General Granholm 
assigned additional support staff to the Division. Complaint 
information and details were carefully recorded into a database 
as they were received. When we received two or more complaints 
from consumers concerning a single gasoline retailer, an 
investigator was routed to location of the retailer to confirm 
the price. From this universe of putative violators we selected 
the most egregious for legal action under the MCPA.
     Under the MCPA, the enforcement process was initiated by 
the issuance of a ``Notice of Intended Action'' that recited 
the factual basis for the violation, the statutory provisions 
that were violated, and the consequences that would ensue. The 
``Notice of Intended Action'' demanded that the unlawful 
activity cease and desist, indicated that restitution to 
consumers would be required, and civil penalties would be 
exacted. It also explained that the recipient would have an 
``opportunity to confer'' to offer explanations or defenses to 
the action. Finally, it set forth a process through which the 
recipient could consensually resolve the violations through 
execution of an ``Assurance of Discontinuance'' that 
incorporated these elements.
     Ultimately, we issued ``Notices of Intended Action'' to 46 
gasoline retailers. The vast majority of these retailers 
entered into Assurances of Discontinuances that required full 
restitution to any consumers who could prove through receipts 
or credit card statements that they were over charged. Some 
retailers chose to make refunds even to those consumers who did 
not have proof of purchases. In addition to restitution, 
approximately, $30,000 in civil penalties were collected. We 
filed lawsuits against two gasoline retailers. These were 
ultimately resolved prior to trial.
     The defenses interposed by the gasoline retailers were 
both factual and legal. Some retailers maintained that their 
price escalations were justified under the circumstances. This 
explanation typically was based upon the assertion that the 
retailer must pay for the next load of petroleum from the 
wholesaler with the receipts derived from the existing 
inventory. They asserted it was not unreasonable to anticipate 
immediate price increases at the wholesale level. Some 
indicated that they were put on ``notice'' by wholesalers that 
sharp increases should be anticipated and that they should 
raise prices. However, no one, to the best of my recollection, 
could substantiate such claims.
     Others asserted that there can be no such thing as a 
``grossly excessive'' price or ``price-gouging'' in the 
marketplace and that such price spikes are not actionable. In 
legal terms they assert that statutes like the MCPA and H.R. 
1252 are unconstitutionally vague because terms like 
``unconscionable'' and ``grossly excessive'' are too indefinite 
to provide effective notice of behaviors that sanctionable. 
While the Michigan price-gouging effort did not result in any 
appellate decisions, a lower court judge did opine that he did 
not find the ``void for vagueness'' defense compelling.
     In conclusion, as someone who has supervised the 
enforcement of price-gouging actions, I believe that a Federal 
statute like H.R.1252 can be an effective, indeed essential, 
legal mechanism to not only combat price-gouging activity but 
to deter such occurrences from happening. It is a certainty 
that there will be future public emergencies and unusual market 
conditions that result in economic hardship, if not actual 
harm, to American consumers. It is imperative that both Federal 
and State law enforcement authorities be equipped with the 
appropriate means of protecting consumers.
     Thank you.

    Mr. Stupak. Thank you, Mr. Pruss.
    Mr. McCool, opening statement, please, sir?

  TESTIMONY OF THOMAS MCCOOL, DIRECTOR, CENTER FOR ECONOMICS, 
 APPLIED RESEARCH AND METHODS, U.S. GOVERNMENT ACCOUNTABILITY 
                             OFFICE

    Mr. McCool. Mr. Chairman and members of the subcommittee, 
we are pleased to participate in today's hearing to discuss the 
factors that influence the price of gasoline.
    Few issues generate more attention and anxiety among 
American consumers than the price of gasoline. Periods of price 
increases are accompanied by high levels of media attention and 
consumers questioning the causes of higher prices.
    The most current upsurge is no exception. For the average 
person, understanding the complex interactions of the oil 
industry, consumers and the government can be daunting.
    Given the importance of gasoline for our economy, it is 
essential to understand the market for gasoline and what 
factors influence the prices that consumers pay.
    In this context, my testimony today addresses the following 
questions: What key factors affect the price of gasoline? And 
what effects have mergers had on market concentration and 
wholesale gasoline prices?
    Let me sum up by making the following observations. Over 
the long term, the price of crude oil is a major determinant of 
gasoline prices.
    Crude oil and gasoline prices have generally followed a 
similar path over the past three decades and have risen 
considerably over the past few years.
    A number of other factors also affect gasoline prices, 
including increasing demand for gasoline. Now, while demand has 
fluctuated over the long term, it has increased pretty steadily 
over that period by about 1.6 percent a year over the past 35 
years.
    At the same time, refinery capacity in the United States 
has not expanded at the same pace as demand for gasoline in 
recent years, which, coupled with high refinery capacity 
utilization rates, reduces refiners' ability to sufficiently 
respond to supply disruptions.
    Gasoline inventories maintained by refiners or marketers of 
gasoline have also seen a downward trend in recent years.
    Now, this follows similar trends in many other industries 
moving to just-in-time delivery processes, but it is true that 
the average inventory held by U.S. oil companies went from 
about 40 days of consumption in the early 1980's to about 23 
days in 2006.
    Also, regulatory factors such as national air quality 
standards that have induced some States to switch to special 
gasoline blends have also been linked to high gasoline prices.
    Finally, consolidation of the industry can also play a role 
in determining gasoline prices. For example, mergers raise 
concerns about potential anticompetitive effects because 
mergers could result in greater market power for the merged 
companies.
    At the same time, these mergers could lead to efficiency 
gains, enabling the merged companies to lower prices.
    To that particular topic, the 1990's saw a wave of merger 
activity in which over 2,600 mergers occurred in all segments 
of the U.S. petroleum industry.
    This wave of mergers contributed to increases in market 
concentration in the refining and marketing segments of the 
U.S. petroleum industry.
    Qualitative evidence suggests that mergers may also have 
affected other factors that can impact competition, such as 
vertical integration and barriers to entry.
    Econometric modeling that we performed of eight mergers 
involving major integrated oil companies that occurred in the 
1990's showed that after controlling for other factors, 
including crude oil prices and refinery capacity utilization, 
supply disruptions, and also inventories, the majority of these 
mergers resulted in wholesale gasoline price increases, 
generally in the range of 1 cent to 2 cents a gallon, though 
one particular case went up 7 cents per gallon.
    Additional mergers since 2000 are likely to increase the 
level of industry concentration. However, because we have not 
performed modeling on these mergers, we cannot comment on any 
potential effect on gasoline prices at this time.
    We are, however, in the process of updating our previous 
study and plan to look at more recent mergers.
    Mr. Chairman, this completes my prepared statement. I would 
be happy to respond to any questions you or other members of 
the subcommittee may have.
    [The prepared testimony of Mr. McCool follows:]A


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    Mr. Stupak. Thank you, Mr. McCool.
    And thank you, all witnesses.
    Unfortunately, we have six votes on the floor--this one 
currently, and then we have five that will take at least 5 
minutes each, so we are probably at least a good half hour. We 
are going to have to recess.
    And I hate to do this to you gentlemen, but it is one of 
these days. The good news is that these will be the last votes 
of the day and we can continue to go.
    Commissioner Kovacic, you said we might be here till 8 
o'clock tonight. I guess you had better insight onto the House 
floor schedule than I did.
    Mr. Kovacic. That wasn't a request, by the way, Mr. 
Chairman. [Laughter.]
    Feel free to depart from the request if you want.
    Mr. Stupak. Well, let's get these votes out of the way, and 
we will be back, and we will finish up. And we have another 
panel after that.
    OK, we are in recess until 45 minutes. Thank you.
    [Recess.]
    Mr. Stupak. OK, the committee will be back in order. 
Unfortunately, Mr. Pruss had to grab an airplane and get back 
to Michigan, and I understand Mr. Sundstrom from AAA on our 
next panel also had to do the same.
    I just hope that during all these many delays we had today 
gas prices haven't gone up. But you never know.
    We are going to start with the questioning.
    Mr. Whitfield, if it is OK with you, we will go 10 minutes.
    Mr. Whitfield. Sure.
    Mr. Stupak. And maybe we can get a little order going, 
except Mr. Walden has 13 minutes since he waived his opening. 
OK.
    Mr. Caruso, if I may start with you, please, sir. Remember, 
all witnesses are still under oath.
    Looking at this USA Today article that was in the paper, 
``Gas Prices Approach 1981 Record'', it quotes your 
organization, EIA, that the nationwide average of gasoline is 
$3.218, up 11.5 cents in the past week, and just a half penny 
shy of the inflation-adjusted record.
    When will we see the record, the next day or two?
    Mr. Caruso. What we do look at is wholesale prices, and 
that normally is a precursor of what retail prices will do.
    Mr. Stupak. Sure.
    Mr. Caruso. And as of today, our models indicate there 
still is some pass-through that has not reached the retail 
level.
    It is always difficult to be precise about that, because--
--
    Mr. Stupak. But chances are we will probably break the 
record tomorrow.
    Mr. Caruso. Well, in our case, we put them out every 
Monday.
    Mr. Stupak. Right. Well, let me ask you this. The record 
price for gas, and even when adjusted for inflation--but there 
is not the scope or magnitude of the reasons why we normally 
see for gas prices to go up.
    In March 1981, Iran-Contra war had started about that time, 
I believe. Crude oil inventories are being maintained in this 
country. Refineries have some unplanned disruptions, but 
nothing like the disruptions we saw after Hurricane Katrina.
    Yet gas prices at the pump will set a new record, probably 
this week, while big oil profits are the most ever of any 
company. Other than profit-taking, is there any other event 
that would explain what is driving these prices?
    Mr. Caruso. Well, as I mentioned, every component of the 
supply stream, which is the refinery outages that are keeping 
production up to now lower than we would have expected for this 
time of the year, inventories are low, and imports up to now 
have been lower than normal--so what that all means is that the 
system is stretched very thin, and therefore there is no 
cushion to respond to any unexpected either outages or----
    Mr. Stupak. But we haven't seen those outages to drive the 
prices we are paying now. I guess that is the point I am trying 
to make. There is no major event to drive these kinds of prices 
other than probably profit-taking.
    Mr. Caruso. It is the total system that is stretched thin, 
and when there is no other cushion except price, it takes a 
large price increase in a commodity that has very low 
responsiveness in the short term, so it takes very high prices 
to rebalance the market once it gets out of balance.
    Mr. Stupak. And you cited those things in your testimony. 
In fact, on page 7 of your testimony I am looking--and the end 
of the first paragraph says as a result, the average price of 
gasoline for the summer driving season, April through 
September, is projected to be $2.95 at the pump, up 11 cents 
from last summer.
    Well, right now, today, we are off by about 27 cents. So 
all those factors you just mentioned--you used that to make 
your prediction that it would be 11 cents higher than last 
year, but we are already 27 cents--so we are about 38 cents 
higher than last year.
    Do you wish to revise those numbers? Can we expect prices 
to go down?
    Mr. Caruso. Well, we are still thinking that if imports do 
reach the levels that we hope they will, which is 1.2 million 
barrels a day or even higher, on average, this summer, and some 
of these refineries that are out come back on as planned, we 
can boost domestic production.
    The combination of those things should lead to some easing 
of gasoline prices.
    Now, as I pointed out in the testimony, this assumes a lot 
of things going right, and that the risks that we still face 
out there, both geopolitically and with industrial accidents, 
still indicate that there is likely to be upward pressure on 
prices.
    Mr. Stupak. OK.
    Mr. Caruso. And the hurricanes that you mentioned in your--
--
    Mr. Stupak. Right, but they are not here yet.
    Mr. Caruso. Exactly. It is a risk.
    Mr. Stupak. And usually in April we would start restocking, 
and we usually have excess gasoline. We don't this year.
    Mr. Caruso. That is exactly right.
    Mr. Stupak. OK.
    Commissioner Kovacic, if I may ask you a couple questions, 
in GAO's testimony they say that in the 1990's the mergers 
resulted in a 1-cent to 7-cent increase, depending on how you 
are looking at it, in the wholesale gasoline price, and a 1 
percent increase FTC considers significant.
    Is that a true statement?
    Mr. Kovacic. We do, indeed, consider that percentage 
increase to be significant.
    Mr. Stupak. And that is when you are looking at the 
mergers, right?
    Mr. Kovacic. Exactly. And though we greatly admire and 
applaud the efforts that GAO did to do the study, as you are 
aware, Mr. Chairman, we do have serious quarrels with the 
methodology and the results, but we do, indeed, use exactly the 
threshold you mentioned in looking at mergers.
    Mr. Stupak. OK. And when we are talking about mergers, you 
indicated--and you testified to some of the mergers you were 
doing, and I believe your testimony shows there were about 21 
complaints you filed on mergers in the 1990's.
    Mr. Kovacic. That is correct, sir.
    Mr. Stupak. OK. But my concern was, in looking at the GAO 
report and some of the others that were documented, there were 
2,600 mergers in the 1990's. That is about less than 1 percent 
of the total mergers.
    Especially if you take a look at like when Exxon and 
Mobil--that was the largest supplier with the second. You 
didn't file any objections on that one.
    Mr. Kovacic. We actually did challenge that. It produced 
the largest package of divestitures that the commission has 
ever obtained as a remedy to a merger.
    Mr. Stupak. OK. How come you didn't mention that one in 
your testimony, then?
    Mr. Kovacic. I believe it is. In my spoken remarks, I was 
covering more recent events, but I believe in the prepared 
statement it is included.
    And though I have never seen the entire data set of the 
2,600 transactions--but my intuition, Mr. Chairman, is that the 
vast majority of those involved comparatively small 
transactions involving production operations.
    Mr. Stupak. Would you look at page 12 of your testimony?
    Mr. Kovacic. Yes, sir.
    Mr. Stupak. And I am looking at footnote No. 24. And you 
are talking about the Federal statute when we are trying to 
look at price gouging after Katrina.
    Mr. Kovacic. Yes, indeed.
    Mr. Stupak. And the statute mandated how you do your 
investigation--effectively defined price gouging.
    Now, so would you say that is the definition of price 
gouging, as an average price of gasoline available for sale to 
the public following the hurricane that exceeded its average 
price in the area for the month before the hurricane, unless 
the increase was substantially attributable to additional costs 
in connection with production, transportation, delivery and 
sale of gasoline?
    Mr. Kovacic. I think if I were picking a composite of all 
of the approaches that have been used in the State legislation 
and tested by Congress, that is the best approximation to a 
synthesis that I would suggest.
    Mr. Stupak. OK. And then after Hurricane Katrina, I said in 
my opening statement that we found 23 percent, you didn't study 
all of them, but 23 percent of the refineries that were 
studied, 9 percent of the wholesalers and 25 percent of the 
retailers had price increases that were not substantially 
attributable to increased costs and ``could not be attributable 
to national market trends.''
    In other words, there was some gouging going on, price 
gouging going on.
    Mr. Kovacic. The one footnote I would add to that, Mr. 
Chairman, is that one of the screens we were asked to use was 
not simply to consider the effective national trends but also 
local and regional market trends.
    And when we took those into account, most of the 
transactions--the activity that was caught by our initial 
screen tended to fall by the wayside, so that when we look at 
adjustments related to local and regional circumstances, not 
simply national or international conditions, those tended to 
fall by the wayside.
    Mr. Stupak. But those that fall at the wayside, you would 
agree with me, 23 percent of refineries and 9 percent of 
wholesalers and 25 percent of the retailers studied had price 
increases that would equate to price gouging using this 
definition found in footnote number 24.
    Mr. Kovacic. Except that when you take the clause, Mr. 
Chairman, that talks about the sale of gasoline in an area or 
to national or international market trends, and if you took 
account of regional, local trends, that percentage would drop 
considerably.
    Mr. Stupak. OK. So there was some, and we don't know what 
the amount is. Is that fair to say?
    Mr. Kovacic. Yes. I would be happy to provide a more 
specific number to you for the record, sir.
    Mr. Stupak. OK. On page 2, you talk about the average 
refining margin was about 10 cents to 15 cents per gallon in 
January and February.
    Mr. Kovacic. Yes, sir.
    Mr. Stupak. And now we are up to 70 percent to 80 percent, 
you say in your testimony.
    Mr. Kovacic. Yes, sir.
    Mr. Stupak. So that is a 55-cent to 65-cent increase in 
price per gallon just for refinery, and that is all profit, 
right?
    Mr. Kovacic. I would suspect that a substantial amount of 
it is, yes, sir.
    Mr. Stupak. OK. Where do you draw the line here? When do we 
start hitting the excessive profit? We already have testimony 
that the crack spread is going to be 36 cents. That is based on 
$30 a barrel.
    Now we are going to hit 36 cents here in June. That is what 
the futures are already trading for. So that is probably going 
to get up closer to about 80 cents per gallon of all profit.
    Where are we hitting the excessive profit here, profit-
taking?
    Mr. Kovacic. We don't have a good functional definition for 
that. In our experience, that is not an amount we have ever 
sought to calculate or have been pressed to calculate for both 
our consumer protection and competition work.
    What we have also noticed is an enormous degree of 
volatility just in the past six months of what those margins 
have been.
    Mr. Stupak. OK, but if you look at it--and, Mr. Caruso, 
correct me if I am wrong. But in September and October 2006, 
gas prices actually dropped 60 cents.
    Mr. Kovacic. Indeed, they did.
    Mr. Stupak. And then now we are up, I think Mr. Barton 
said, 94 cents or 86 cents, since the first of the year. So 
that is about $1.50, $1.54 spread there, in about 6 months.
    You might call it volatility, but I think there is a lot of 
room for profits in these where you can play with these margins 
all you want. At what point do we pass where it is gouging?
    I mean, if you are at $3, and you have got a $1.50 spread 
you are playing within 6 months, where are you at this point 
where you are taking excessive profit, especially when 10 cents 
increase is a $14 billion transfer from the consumer to the Big 
Oil companies?
    Mr. Kovacic. In our experience, we have never had an 
occasion in applying our authority to provide a definition for 
what the ceiling or the excessive amount is.
    Mr. Stupak. Well, that is because you have no law on price 
gouging, right? You have always had to look at antitrust and 
competitive natures like that, not a price gouging----
    Mr. Kovacic. That is correct.
    Mr. Stupak. So would a price gouging law then help you 
answer these questions?
    Mr. Kovacic. I think that were the Congress to adopt one--
and I do want to emphasize to you that were the Congress to 
adopt one, we would faithfully execute it--that would press us 
to develop the kind of functional definition that we have been 
talking about.
    Mr. Stupak. OK. Thank you. My time is up.
    But, Mr. Caruso, one more, if I may. What percentage of the 
price of a gallon of gas is risk premium associated based on 
fear and speculation?
    Mr. Caruso. Well, there is no good agreement on what that 
is. You can hear analysts--anywhere from $5 to $20 per barrel, 
which means 10 cents to 40 cents.
    Our view is when there is fear of supply loss in the 
marketplace for example, there could be a natural disaster, 
like hurricanes, or you are worried about Nigeria or Iran, and 
you as a refiner were to go out and add inventories to prepare 
yourself for those eventualities, that adds to the price of, in 
this case, crude oil, in our view, that is part of the market 
functioning.
    If you are fearful of a supply loss, and you respond to 
that by adding inventories, that certainly puts upward pressure 
on price. That is one type of fear.
    There is another part of it which you don't--there has been 
financial speculation, and again, it is in some views that that 
adds liquidity to the market, which is good. Others say that is 
pure risk premium.
    Mr. Stupak. Well, that is another piece of legislation I 
have.
    My time has expired. I turn to Mr. Whitfield of Kentucky 
for questions, please.
    Mr. Whitfield. Thank you, Chairman Stupak.
    And I also want to thank you all for your patience. I mean, 
how frequent is it that you get to come to a hearing room and 
stay for 4 hours or 5 hours in the afternoon, and particularly 
with such personalities as us, right?
    Mr. Caruso, let me ask you a question. We hear about these 
record profits in the oil companies, and we have a lot of 
constituents who are paying these high prices.
    But I will note that it doesn't seem to be affecting many 
of them in their willingness to stop driving. A lot of them 
have to drive for work, and so they are still paying the 
prices.
    But as administrator of the Energy Information 
Administration, you certainly have reviewed and looked at a lot 
of statistics.
    Now, how would you explain that the oil profits are so high 
at this particular time of high prices in the oil and gas 
business, retail gas particularly--if you are speaking to a 
Rotary Club, how would you explain that to the Rotary Club 
members?
    Mr. Caruso. Well, I think perhaps to get to that level, I 
would use an analogy of other markets, such as real estate, 
where we have seen hot markets for real estate and prices of 
homes double and triple. Therefore, individuals who own those 
homes don't--take their house off the market because they think 
that is a----
    Mr. Whitfield. So the demand is so high that you can just 
make more profit. You can just charge a little bit more and 
make more profit.
    Mr. Caruso. I think that is the bottom line, and this 
particular case--is that the demand is high and supply is 
limited.
    But more important than a lot of products, there is this 
what economists call very low price elasticity, so that you 
need a very high price increase for small changes in supply or 
demand to rebalance the market.
    And for example, we use about a 0.05 short-term elasticity, 
which, to put that in, something that is maybe understandable, 
is it would take a 100 percent increase in the price to change 
the demand by 5 percent.
    Mr. Whitfield. I think for the average citizen, they 
understand our free market system, the way it works, and that 
high demand, prices go up, and so forth.
    And so as long as they are convinced that there is not 
price gouging going on, or advantage being taken of them, then 
they feel pretty good about things.
    Now, Mr. Pruss in his testimony talked about how the 
present governor, when she was attorney general in Michigan, 
brought 46 claims against retail outlets and accused or charged 
all of them with price gouging.
    Now, I know enough about just the practical aspects of the 
legal system that if you take a couple of retail outlets, and 
they may be individually owned or a mom-and-pop operation, and 
the attorney general comes in and says, ``I am accusing you of 
price gouging, and if you will sign this consent agreement and 
agree to do this and this, then we will forget it and we will 
move on,'' and I can understand how a lot of people would just 
sign those and move on.
    But he also said, Mr. Kovacic, that they worked very 
closely with the Federal Trade Commission on those cases. Now, 
were you there at that time?
    Mr. Kovacic. I was, Congressman, but we did not work with 
them in the formulation of their cases.
    Mr. Whitfield. OK.
    Mr. Kovacic. We have had extensive discussions over time 
about the types of cases they brought and how they have 
developed them, but we were not their partner.
    Mr. Whitfield. Well, was it your all's impression that 
price gouging was going on by those individual retailers, or do 
you have an opinion of that?
    Mr. Kovacic. Well, I think, as suggested in Mr. Pruss' 
comments, these matters don't generate records.
    Mr. Whitfield. OK. So there are no records.
    Mr. Kovacic. There is nothing really to take a look at.
    Mr. Whitfield. So they simply signed these agreements to 
get out of it.
    Mr. Kovacic. I believe in most instances--and you will 
recall his closing comment that these tend not to generate 
published opinions that are easily accessible to outsiders.
    Mr. Whitfield. I would also note that, I guess, 29 States 
and the District of Columbia do have price gouging statutes, 
and it is very seldom, at least from my knowledge--and if I am 
incorrect, you all can tell me. It is very seldom, from my 
knowledge, that charges are brought against large oil 
companies, or refiners or anything else under these price 
gouging statutes. It seems, generally speaking, that the small 
independent retailer is the one that gets hit with it.
    Would that be accurate or not accurate?
    Mr. Kovacic. I think that is an accurate characterization 
of experience with the States, yes.
    Mr. Whitfield. OK. Now, we are going to have on the floor 
of the House one day this week, as we did last year, a price 
gouging bill, and one of the definitions is if the price is 
unconscionably excessive.
    Now, Mr. Pruss indicated that the highest court in Michigan 
ruled that phrase was not unduly vague, and so therefore was 
certainly legal.
    But it is my understanding that the Federal Trade 
Commission is on record in opposing a Federal price gouging 
law. Is that correct?
    Mr. Kovacic. That is correct, sir.
    Mr. Whitfield. And you say because it would actually do 
more harm to consumers than good. Now, could you explain that 
position?
    Mr. Kovacic. Again, addressing this in the capacity of 
someone who is giving you my professional judgment about what 
would take place, and not speaking to whether or not we would 
apply a law that you would adopt, but as an adviser to you on 
this issue, one of our concerns is that a measure of this type 
that is coupled with powerful criminal penalties--and I know 
some of the proposals have maximum sentences for individuals of 
up to 10 years.
    You take the comparatively ambiguous definition, you couple 
it with the possibility of a 10-year maximum prison sentence 
for the individual who transgresses--that is likely to induce a 
great deal of caution, I believe, in how one behaves.
    So to simply give one example of the concerns I have, that 
mixture of features, I think, could be very discouraging, 
certainly to the small retailer, but to the larger refiners who 
would also be subject to the operation of the law itself.
    That is, a definition that is comparatively ambiguous and 
has not been well defined in the course of implementation in 
the States, plus a 10-year sentence for individuals, I believe 
is going to induce a great deal of caution in providing supply 
responses.
    Mr. Whitfield. Right. Now, if the House passes this bill, 
and the Senate passes this bill and the President happened to 
sign it, the Federal Trade Commission would be vested with the 
authority to prosecute under this price gouging bill.
    Mr. Kovacic. Exactly right, and in the case of the criminal 
matters, to refer them to the Department of Justice.
    Mr. Whitfield. How difficult would it be to bring a case 
against a Shell Oil Company or a ExxonMobil using this kind of 
language?
    Mr. Kovacic. I think these would be very demanding matters. 
They are certainly not impossible. We are accustomed to dealing 
with complex, difficult matters at our agency.
    But being familiar with the very firms we would face, 
because we do face them as opponents in other settings, these 
would be particularly challenging matters, because I think as 
the committee realizes, in order to come up with a sensible 
definition, it has to be sensitive to cost justification 
arguments and to the national, regional and local market 
circumstances standard that we were talking about before. Yet 
it is the application of those very standards that tends to 
involve, I would expect, a very elaborate and fact-intensive 
inquiry into the actual operations of the firm.
    So impossible by no means. We do lots of difficult things, 
and we do the difficult things very well. Yet these would be 
very demanding matters to pursue.
    Mr. Whitfield. But even if the definition remains 
relatively vague, and we do not give you the opportunity to 
define price gouging, I am assuming that despite the complexity 
of it that the American people would still be better off having 
a Federal price gouging statute than not.
    But is it the commission's position that you are opposed to 
a Federal price gouging statute?
    Mr. Kovacic. As to your last question, yes. My concern is 
that the uncertainty it would create would have a tendency--and 
I can't prove this to you by any rigorous calculus, but my 
intuition is that it would create hesitation in the response to 
shortages, and that might tend to exacerbate rather than to 
mitigate shortages.
    Mr. Whitfield. Thank you, Mr. Chairman. My time has 
expired.
    Mr. Stupak. Mr. Inslee for questions.
    Mr. Inslee. Thank you.
    I think I saw in Mr. McCool's testimony discussions of 
geopolitical uncertainty in a number of different countries in 
the Middle East has kept and will continue to keep the market 
on edge.
    Mr. McCool, is there any way to put any parameters at all 
what those uncertainties translate to in the prices at the 
pump?
    Mr. McCool. Congressman, I really don't know that we would 
be able to answer that. I mean, earlier, Mr. Caruso actually 
suggested that this idea of uncertainty certainly has an effect 
on supply, and inventories and things like that.
    But it is, I think, very difficult to put any kind of 
meaningful quantitative measure on that, except to know that 
geopolitical uncertainties clearly have some effect.
    Mr. Inslee. Has the Iraq war translated into increased 
prices that consumers are now paying in America for gasoline to 
drive their cars?
    Mr. McCool. I don't know the answer to that, sir.
    Mr. Inslee. Is it uncertainty of the type that may have an 
impact on----
    Mr. McCool. It would increase the level of uncertainty, 
yes, sir.
    Mr. Inslee. Could you describe part of the amount that 
Americans are paying at the pump today as a tax associated with 
the war started by this President?
    Mr. McCool. Again, I think the level of uncertainty in the 
world--it may or may not be greater. I can't quantify it.
    Mr. Inslee. Well, did the Iraq war make it drive prices 
down?
    Mr. McCool. I don't know. We don't know what the 
counterfactual is, Congressman, so it is hard to really answer 
that question.
    Mr. Inslee. Well, most of the people who have any 
understanding of the impact of war in my district believe that 
it had some impact on oil prices, and it is not been 
beneficial, and my constituents are now paying at the pump for 
a misguided war. I will just tell you that is their belief, for 
whatever that is worth.
    I want to ask about the consolidation in the industry. I 
was looking at the GAO report of May 2004, and I assume this 
has been discussed. I had been in another hearing about energy 
issues.
    During the period of 1991 to 2000, there were over 2,600 
merger transactions within the various segments of the U.S. 
petroleum industry. That is what the GAO report found.
    They found that concentration in the wholesale gasoline 
market increased substantially from the mid 1990's so that 46 
States had either moderately or highly concentrated wholesale 
gasoline markets.
    They found that the availability of less expensive 
unbranded gasoline decreased substantially.
    And even though this took place, there has not been, as far 
as I know, an instance where the Federal agencies, at least 
during this administration, have challenged any of the mergers 
that have led to higher concentration.
    Is that all of yours' understanding?
    Mr. Kovacic. Congressman, all of the transactions you are 
talking about took place through the year 2000.
    They were reviewed by our predecessors, and whatever relief 
was achieved was achieved well before George Bush came to 
Washington in January 2001.
    Mr. Inslee. I appreciate that, and has this administration 
taken any action involved in any of the mergers to prevent them 
and prevent further consolidation?
    Mr. Kovacic. Indeed, we have, sir. As my spoken remarks and 
my written text point out, I review a number of transactions 
where we have challenged specific mergers.
    And indeed, at this moment, we are before one of our 
Federal courts awaiting a decision on the latest, a combination 
of the Western Refining Company and Giant Industries.
    Mr. Inslee. And what percentage of the mergers have you 
challenged?
    Mr. Kovacic. I don't have a precise number, although the 
best data I have seen--that is, when you take the rate of 
merger challenges by the Federal Trade Commission in this 
decade, I believe it is almost identical to the rate of 
challenges during the previous decade.
    Mr. Inslee. During your tenure, have you actually come out 
against mergers, or you just have asked for some divestiture 
after the merger?
    Mr. Kovacic. I believe in at least four of the 
transactions, we have gone to court to block them outright. And 
in at least one of those instances, the parties then proposed a 
settlement that we found acceptable.
    But I can give you the precise numbers on that as well, 
Congressman.
    Mr. Inslee. I would appreciate that. That would be helpful.
    Mr. Kovacic. Yes, sir.
    Mr. Inslee. While I have got you on the line here, do you 
believe that consolidation has resulted as a partial reason for 
some of the price hikes Americans have experienced?
    Mr. Kovacic. As I mentioned a moment ago, we deeply respect 
the work of the GAO that you referred to before. That is, it is 
an absolutely sensible and necessary element of good public 
policy that agencies take steps to evaluate the effects of what 
they have done.
    We do have a serious dispute with the GAO about the 
soundness of the results that they have identified.
    But notwithstanding that dispute--that is, we disagree 
fundamentally with their findings--we are devoting additional 
efforts to do our own assessments of whether or not we have 
erred in those earlier judgments, and to incorporate that into 
the formulation of policy looking ahead.
    Mr. Inslee. One of my concerns is that it is my belief that 
unless we break this addiction to oil, we are all going to be 
exposed to increasing prices.
    Even if we do some of the things we need to do, which is to 
pass this antipredatory pricing bill, and even if we do slow 
down the rate of consolidation and hopefully can then increase 
refinery capacity--even if we do do some of these common-sense 
things--that unless we develop whole new revolutionary systems 
of fueling our transportation system, we are still going to be 
behind the eight-ball because of the huge increase in demand 
from China and other developing nations, because of the 
relative limited refining--or, excuse me, pumping capacity of 
the world, and that we really need to develop whole new systems 
of powering our transportation system.
    Mr. Kovacic. Congressman, I think you would find many of 
your concerns echoed in the 3 days of proceedings we had a 
month ago at our agency on energy policy, where a recurring 
theme of many speakers, I think, echoes your own remarks.
    Namely, what we need is a far more fundamental reassessment 
of energy supply and demand patterns, perhaps a more basic 
examination of how we live, where we get supplies, what 
supplies are available to us, demand side considerations.
    I think you would find that many of the themes you have 
identified were addressed again and again by our speakers who 
would agree with you emphatically.
    Mr. Inslee. Well, there is a bill, and perhaps I can ask 
your comment, I will be introducing. It is called the New 
Apollo Energy Act.
    And we call it the New Apollo Energy Act because many of us 
believe that we need a revolution that is as ambitious and 
visionary in transportation fuels as Kennedy led the country to 
be in 1061 to go to the moon.
    And in this bill, we will take measures such as assisting 
our domestic industry for retooling costs. We have a bill 
called the Health Care for Hybrids bill that will help the 
development of hybrid technology distribution.
    We will be proposing a bill for plug-in hybrids that can 
get 150 miles a gallon, that go 40 miles on your electricity.
    You plug it in at night and you go 40 miles, and then if 
you want to go more than 40 miles you use either ethanol or 
gasoline. You get 150 miles per gallon of your fuel.
    We have bills that will include efforts to increase 
efficiency of battery technology to try to fulfill the 
remaining steps for battery technology.
    And we will have a bill to substantially increase 
cellulosic ethanol, the second generation of biofuels. Of 
course, everyone talks about corn ethanol now, but we need a 
second generation.
    So I would just ask for your comments from the panel as to 
whether those steps make sense and whether or not, long term, 
they might be beneficial to really break the back of this 
slippery slope of eternally rising gas prices that we are 
having.
    Mr. Kovacic. I think that there are any number of ways that 
this country can tap what is an unsurpassed degree of technical 
capacity, and that a variety of approaches along the lines you 
mention are quite worthwhile.
    The one footnote I would add to it--and I think of my 
father's experience, who worked in the nuclear power sector, 
when we lived in southeastern Michigan for 13 years, indeed, in 
Chairman Dingell's district, where I first met him in 1959.
    I think part of what we discovered with that experience 
with the fission fuel cycle is that it invariably turns out to 
be somewhat harder than we think it might be, that the mere 
fact of technical feasibility does not always dictate 
successful implementation.
    So I would endorse efforts to use the remarkable technical 
capacity we have to explore alternatives.
    My only thought would be that given the humbling experience 
we have had in closing the gap between the excellent concept 
and the successful implementation that we realize that it turns 
out often to be harder than we thought.
    Mr. Inslee. Right. Well, it is hard, and that is why we 
need to get started, and that is why we need to be aggressive. 
And today, we are spending less than one-half on developing 
these technologies than we were in 1979.
    We spend less on energy research in the entire United 
States budget than we spend in three weeks in the Iraq war. And 
that is a pathetic comment on our refusal to date to really try 
to break the oil addiction habit.
    And I hope that this hearing helps promote the New Apollo 
bill so that we can move forward and really get a new 
revolutionary transportation fueling system, which this country 
deserves. Thank you.
    Mr. Stupak. I thank the gentleman.
    A couple questions, if I may.
    Mr. Kovacic, if I may, in the legislation that is being 
proposed and we will take up later this week, it basically says 
it is unlawful for a person to sell crude oil gasoline, natural 
gas or petroleum distillates at a price and we go 
unconscionable and things like that.
    You would agree with me, the FTC has pretty much sort of 
identified price gouging. I mean, you have a working definition 
of it, do you not?
    Mr. Kovacic. We have certainly developed proposals that we 
think are the best things we have seen.
    And as the committee goes forward in developing its work, 
as the House works on this, notwithstanding any reservations I 
mentioned, we are at your disposal to work with you, your 
colleagues, your staffs on suggesting specific adjustments that 
we think are----
    Mr. Stupak. So those cases that the FTC saw after Hurricane 
Katrina, where they say they were ``not substantially 
attributable to increased costs'' and ``could not be attributed 
to national market trends,'' that is a price gouging definition 
in a way.
    Mr. Kovacic. It is, and I would simply add the gloss that I 
mentioned before that also takes account of regional and local 
market trends, too, sir.
    Mr. Stupak. And that is what the legislation says. And 
actually, we give you 180 days to develop that definition, so 
it is not an impossible task.
    And then you already have some guidelines that the FTC has 
relied upon in the past, as your footnote No. 24 in your 
testimony has indicated.
    Mr. Kovacic. It is, and my request to the committee is that 
to the extent that you can make the specific policy choices--
because in many ways, this is uncharted territory for us.
    I don't know outside the field of public utility regulation 
that we have used approaches of this kind on a national scale.
    It is enormously helpful to us that you and your 
colleagues, to the extent you can, be as specific as you can 
about the appropriate standard.
    Mr. Stupak. And you indicated that these dealings you have 
with oil companies, especially on some of these mergers--they 
are pretty complex litigation, correct?
    Mr. Kovacic. Some of the most complex that we have, yes, 
sir.
    Mr. Stupak. So if we are going to bring price gouging 
against multinational corporations, we probably want the 
expertise of the FTC to do it, then, because you deal with 
these folks from time to time.
    Mr. Kovacic. Without undue boastfulness, I would say that 
the Federal Trade Commission has the best complement of 
competition policy analysts in the field of petroleum in the 
world.
    Mr. Stupak. So you are willing to do your price gouging if 
the legislation becomes law.
    Mr. Kovacic. I would say if the legislation becomes law, we 
have the greatest expertise to apply it.
    Mr. Stupak. We mentioned--I did, at least, in my opening--
Attorney General Stumbo from Kentucky, Mr. Whitfield's home 
State, bringing this case--I think he brought 70 cases of price 
gouging after Hurricane Katrina.
    Mr. Kovacic. Yes.
    Mr. Stupak. Did the FTC work with him as you indicated you 
worked with Governor Granholm in Michigan?
    Mr. Kovacic. We did not work with them on the formulation 
of those cases, though when we did the Katrina report, we asked 
our colleagues in the States to share with us as much as they 
could their actual experience in bringing cases under their own 
laws.
    And I do think, Mr. Chairman, that a fuller and deeper 
collaboration on our part with our State counterparts, even in 
the absence of new legislation--a fuller discussion about how 
local markets work would be an enormously valuable addition to 
the oversight of the sector.
    Mr. Stupak. Well, let me ask you this. The chart we point 
out earlier, from the ground to the pump, over there--it is the 
Washington Post looking at the price from September 2004 to 
September 2005.
    And the cost of refinery went up 255 percent, as documented 
by that article, and it is part of our reference we have used 
many times on this committee.
    Now, that is a national average. Now, wouldn't that 
constitute price gouging, 255 percent over a 12-month period?
    Mr. Kovacic. It would matter a lot to me how long it 
persisted, and part of that is the concern that, as my 
colleagues have mentioned, our system is so fragile.
    There is so little room for error that comparatively small 
disruptions tend to have an enormous effect.
    Mr. Stupak. But those small disruptions affect the folks, 
our constituents, in that area, right?
    Mr. Kovacic. Unmistakably.
    Mr. Stupak. So like in 2005 when gas prices shot up in the 
Saginaw area, right outside my district, 74 cents in 1 day, 
while that is a small disruption to the FTC, that is real loss 
to consumers in that area.
    Mr. Kovacic. It is a powerful impact on local consumers, 
and there is no question that that causes enormous distress.
    What we have seen in other industries is that it is the 
signal--and it is a bitter signal, to be sure, but it is the 
signal that draws more supplies into the area. So the reason 
concern of us is how long does it persist.
    Mr. Stupak. And the penalties here, in answer to Mr. 
Whitfield, you indicated may produce a great deal of caution 
amongst oil companies to move around supplies.
    But you would also have to agree with me that the caution 
could be not to engage in these actions where you see 74 cents 
increase in 24 hours, or 255 percent increase in refining, 
could it not?
    Mr. Kovacic. It certainly could in some instances 
discourage what we might define as inappropriate behavior, and 
in particular I am thinking of instances in which people are 
not engaged in a repeated interaction with their customers.
    That is, in most instances, and your constituents far 
better than I do, of course. All of you do. But my intuition is 
that the local gasoline dealer--and this is perhaps what 
Congresswoman Blackburn was mentioning. The local retailer 
encounters her customers again and again and again and in many 
ways is making investments in the community in goodwill. That 
person has no incentive to behave badly for short-term gain.
    They might panic. They might make bad judgments. But they 
are not likely to be acting out of malice. It is the person who 
is engaged in one off transactions.
    Mr. Stupak. Now, I don't disagree with you. That is why the 
legislation says you have got to have $500 million in sales 
before we look twice at you. That is not mom and pop that Mrs. 
Blackburn was talking about.
    But they are sort of captive, are they not? If I am 
handling ExxonMobil's gasoline, and they decide to run up the 
price, as my gas station owner told me over the weekend, 15 
cents in one night, I don't have that much choice but to jack 
it up 15 cents or I eat the cost, right?
    Mr. Kovacic. That is right.
    Mr. Stupak. So mom and pop and the gas station owners are 
really at the mercy of the supplier or the refiner, are they 
not?
    Mr. Kovacic. The reason I mentioned mom and--they do depend 
on their existing supplier base. The reason I mentioned mom and 
pop is that--and perhaps I am misreading the text. The text 
that I have is that mom and pop may not be the priority, but 
they are covered.
    Mr. Stupak. Yes. Mom and pop are covered for those 
circumstances where you go--as Mr. Pruss indicated, when gas is 
running about $1.60--you go to $5 because you are afraid you 
may not have some supply tomorrow.
    I think we would all agree that is price gouging, unless, 
in fact, you run out of gas tomorrow and there is none for you.
    But the concern we have, as I indicated in our opening--
that you know, we have seen, because of these mergers, over 200 
refineries closed in the 1980's.
    Today, the remaining refineries are operated by about 60 
companies, where at one time it was 189 different companies 
running the refineries.
    And we have all indicated today the more you merge, the 
more you merge, the greater chance there is not only to 
increase price because of the merger but also to influence and 
manipulate the price in the market, is there not?
    If less people control the market, the greater the ability 
to manipulate the price.
    Mr. Kovacic. In general terms, at a specific point, that is 
true. Why I am hesitating a bit and stumbling a bit about is 
that that level of concentration nationwide is so dramatically 
small compared to so many of our other sectors that is a 
comparatively unconcentrated market.
    That is, to have the bulk of the Nation's refinery capacity 
in the hands of 60 companies compares very favorably, if we are 
just looking at concentration, to the vast swath of American 
commerce for major goods and services.
    Mr. Stupak. So that is about 30 percent, what we had not 
even 20 years ago.
    Mr. Kovacic. Yes. Many of the disappearances were 
comparatively small companies that built artificially small 
refineries during the 1970's when we created a subsidy scheme 
that encouraged them to do it.
    But in many sectors--imagine airlines. Imagine 
semiconductors. Imagine software. To think that there would be 
60 companies instead of the number we have--that is, just 
looking at the numbers and taking that on its own terms, that 
is a big number in our economy.
    Mr. Stupak. We did that. We had those kind of numbers 
before we deregulated in the 1980's, and we are sort of all 
paying for it now.
    Mr. Kovacic. Not across the board. In many areas, that 
experience----
    Mr. Stupak. Take airlines. OK? I will tell you, come try to 
fly to my district some time.
    Mr. Kovacic. I have had many experiences, I think, flying 
that very same carrier to that very same airport in Romulus, 
and going onward, as you have, in many instances.
    Mr. Stupak. No, no, Romulus is easy. That is Detroit. Try 
to come to the Upper Peninsula of Michigan. Before 
deregulation, we could do it. Now we cannot.
    Mr. Kovacic. I would say the studies I am familiar with 
that look at the experience with the greater number of people 
who fly now, compared to where we were in 1978 when the reforms 
took place, airline deregulation, with lots of stickiness in 
places, has been a great success.
    Although a certain merger that I think generated many of 
the circumstances we are talking about--Republic Northwest--the 
Department of Justice in the 1980's tried to stop it, and the 
Department of Transportation said go ahead. That unmistakably 
was a competition policy failure.
    Mr. Stupak. Well, the American people aren't seeing it in 
the studies. We are seeing it in our wallets in the lack of 
service.
    Mr. Whitfield has a couple questions he would like to ask.
    Mr. Whitfield. Yes, I would just make the comment that all 
of us, obviously, are interested in protecting the American 
consumer, and wrapping up this panel--the testimony that I have 
heard is that widespread price gouging has not been detected by 
any formal examination.
    There has been sporadic retail price gouging at the retail 
level that may have occurred simply because small retailers did 
not have enough money to defend themselves and entered into 
some consent agreement.
    The large oil companies, refiners--no one has gone after 
them, even though 29 States and the District of Columbia have 
laws in effect.
    And I know that the attorney general of Kentucky has filed 
some complaints, and we will see how that works out.
    But the testimony I heard today talked about basically 
these price increases that have hit recently have been the 
result of, one, refinery outages, the capacity--some of them 
are down; two, inventory is low; three, imports are low; and 
four, the demand is up.
    And all of those--and I do look forward to Mr. Slocum's 
testimony, because he is with the Public Citizen's Energy 
Program, and I would be anxious to hear what he has to say as 
well.
    But thank you all very much for your testimony, and this 
bill on price gouging will be on the House floor this week. It 
will be on suspension, so there won't be an opportunity to 
amend it.
    But hopefully we can move forward and continue to address 
this issue. Thank you.
    Mr. Stupak. I want to thank this panel, and thanks for your 
patience. It has been a long day. And thanks for helping us 
with this issue. Thank you. This panel is excused.
    We will call up our second panel of witnesses.
    Next we have Mr. Tyson Slocum. He is the director of Public 
Citizen's Energy Program. And also, Mr. David Montgomery, vice 
president, CRA International here in Washington, DC.
    And Mr. Sundstrom had to leave, but his written testimony 
will be part of our record.
    [The prepared statement of Mr. Sundstrom follows:]

Testimony of Geoff Sundstrom, director, public affairs, AAA, Heathrow, 
                                   FL

    Chairman Stupak, Ranking Member Whitfield, and members of 
the subcommittee, my name is Geoff Sundstrom, and I am AAA's 
director of Public Affairs. I am the association's primary 
spokesperson on motor fuel issues and have oversight 
responsibility for AAA's widely-sourced Fuel Gauge Report Web 
site which tracks national, State and local fuel prices each 
day. I also work with local AAA clubs on fuel price inquiries 
from members and the media in your home states.
    AAA appreciates your invitation to appear before the Energy 
and Commerce Subcommittee on Oversight and Investigations to 
discuss the current escalation in gasoline prices. AAA's 
concern revolves around the impact rising prices have on 
consumers.
    As you may know, AAA is the largest paid-membership 
organization in North America. Earlier this year we achieved 
the milestone of having 50 million members in the United States 
and Canada. Our members drive approximately 25 percent of all 
the motor vehicles in operation in the U.S. Using figures from 
the U.S. Department of Transportation, we estimate AAA members 
will purchase approximately 33 billion gallons of gasoline this 
year and at current prices will spend more than $100 billion on 
gasoline.
    The important question is: With prices having risen more 
than 80 cents a gallon this year, are Americans driving less? 
The fact is that consumers at different income levels are 
affected differently by higher prices. There are affluent 
people in America for whom spending an additional $100 per 
month on gas is not an issue. Some people have other 
transportation options and flexibility and can reduce their 
consumption of higher-priced fuel. But the vast majority of 
Americans have no choice but to absorb the extra $50, $100, or 
$150 a month in gas prices. They have to go to work, take 
children to daycare, and go to the grocery store. This is not 
discretionary travel that can be limited.
    Like it or not, gasoline is a significant part of many 
Americans' budgets. When gas prices increase, there is less 
money to save, invest or spend on goods and services. The extra 
expense results in a sacrifice elsewhere in a family's budget--
groceries, healthcare, college savings, retirement planning.
    Part of what we do at AAA is help motorists understand what 
they can do to reduce the burden of high gas prices, from 
vehicle maintenance to trip-chaining, to purchasing more 
efficient vehicles, there are things that Americans can do to 
mitigate the impacts of high fuel prices. We also work to help 
motorists understand what is going on in the fuel markets, and 
in times of crises, like after the hurricanes of 2005, to help 
them understand how their decisions can impact what happens in 
the market.
    Unlike others that frequently comment on gasoline pricing, 
AAA has no involvement in the regulation, refining, shipping, 
blending or sale of gasoline. We do not trade oil and gasoline 
futures, operate hedge funds, sell mutual funds, distribute 
investment newsletters or make commissions on the sale of 
energy stocks.
    AAA has increasingly found itself involved in the great 
national debate on America's energy future and has filled an 
important niche in objectively monitoring the price of fuel, 
advising consumers about fuel conservation and, to a limited 
degree, helping motorists anticipate what they might expect to 
pay to fuel their personal vehicles in coming months and years.
    The summer travel season--which is important to our quality 
of life and crucial to the financial success of tens of 
thousands of tourism-related businesses across the country--is 
around the corner. On Memorial Day weekend we forecast that 
38.3 million Americans will travel 50 miles or more, an 
increase of 1.7 percent from last year. Also, roughly 32.1 
million travelers, or 84 percent of the total, will drive, up 
1.8 percent from last year. During this time, American 
consumers will experience the highest average prices they have 
ever paid for gasoline. On Sunday, May 13, AAA's daily, online 
Fuel Gauge Report Web site recorded a highest-ever nationwide 
average price for self-serve regular gasoline of $3.073 per 
gallon. Since that time, the average price of self-serve 
regular has increased an additional 13 cents per gallon.
    We have crossed the $3 per gallon threshold twice before. 
Prices topped out at $3.036 per gallon on August 7 of last 
year, after Israel invaded Lebanon. That price nearly reached 
the then-record average price of $3.057 per gallon paid by 
Americans on Labor Day Monday of 2005, after Hurricane Katrina 
temporarily closed or damaged critical oil and gasoline 
infrastructure along much of the Gulf Coast.
    As frustrating and unpleasant as our two previous national 
experiences with $3 gasoline have been, both were accompanied 
by an oil price at or exceeding $75 per barrel and a natural or 
man-made disaster with the real or perceived ability to block 
the flow of petroleum for some period of time.
    This summer is clearly different, however. This year, $75 
oil prices and dramatic news about hurricane damage or a 
possible war throughout the Middle East are absent. Instead, we 
have high gasoline prices even though oil prices have rested 
comfortably near the $60 per barrel target set by OPEC for most 
of this year, amidst crude inventories that are routinely 
described as plentiful. Without OPEC, Mother Nature, or an 
imminent man-made catastrophe to blame for the high price of 
gasoline, it's fair to wonder : why?
    I am certainly not appearing before this committee today to 
say that AAA has the answer. But as near as we can tell, there 
are strong indications the problem lies at least in part with 
the fact that the domestic refineries that supply gasoline to 
America's network of filling stations, as well as the companies 
that import gasoline from abroad for sale here, have been slow 
to supply the wholesale distribution network as consumer demand 
for their product has continued to rise.AAA leaves it to the 
experts at the U.S. Department of Energy to cite the specific 
numbers behind this situation. But we are concerned about the 
number and frequency of refinery outages this year and the 
impact that it has had on the system. There is clearly little 
margin for error. The fact that America is somehow losing 
ground in its ability to supply enough gasoline to our 
economy--not oil, which this committee knows is a different 
problem--is troubling. With the vast quantities of data 
generated and analyzed by public and private institutions and 
industry economists and statisticians, Americans should be able 
to expect that those who refine oil into gasoline can 
anticipate demand growth, plan to meet that growth, and then 
make the necessary investments in plants, equipment and labor 
to provide the fuel at a cost that has some semblance of 
stability.
    AAA would like to say that no one can know with certainty 
the price of gasoline this summer. For example, it was our 
belief the national average price of self-serve regular would 
not exceed $3 per gallon this Spring, but this was before 
anyone knew gasoline inventories would drop for 12 consecutive 
weeks as refiners continued to report equipment problems. 
Instead, what AAA tries to do is identify and describe a trend 
that points to a top or bottom for fuel pricing. We do this to 
help consumers anticipate what their monthly fuel expenses will 
be.
    With that said, let's look at what we know right now: We 
know that gasoline inventories are critically low especially on 
the west coast; our refining and distribution infrastructure 
are stressed due to maintenance/investment issues, but also due 
to the introduction of ethanol into the blending process and 
our boutique fuel requirements; increased imports of gasoline, 
which have been growing, are hoped for but not assured; 
hurricane season is on the way; and much of the world's oil 
production shipping still takes place in a dangerous part of 
the world. We also know the stock market has just had a record 
run, demand for gasoline remains strong, and the summer travel 
season--which is important to our quality of life and crucial 
to the financial success of tens of thousands of tourism-
related business across this country--is around the corner.
    Knowing these things, and using our experience watching 
gasoline prices, the wholesale and retail gasoline prices 
generated for AAA by Oil Price Information Service, and the 
production, inventory and import numbers produced by DOE, AAA 
thinks prices are likely to move somewhat higher. But the much- 
predicted $4 per gallon gasoline will not materialize as a 
national average price unless the oil price marches into the 
$75 per barrel or higher range--a scenario that is only likely 
if an unknowable event such as a hurricane or geo-political 
conflict were to seriously threaten or disrupt energy flows. In 
making the projection to media that a $4 per gallon average 
gasoline price was not probable, AAA has been described in the 
last few weeks by some analysts as ``conservative'' and ``not 
wanting to panic'' consumers. In fact, our views simply reflect 
our interpretation of the best available data and analysis.
    In closing, AAA would like to address the notion that if 
the price of gasoline goes high enough Americans will 
significantly reduce their gasoline consumption and help solve 
our energy problem. Again, though we do advocate that motorists 
conserve fuel and choose fuel efficient vehicles, AAA does not 
believe that Americans are frivolously driving around wasting 
either gasoline or money. According to AAA's most recent study 
of driving expenses, it costs 52.2 cents per mile to own and 
operate a typical new vehicle in the United States. That's 
$52.20 to drive 100 miles--and this number was calculated using 
an average fuel price from the fourth quarter of last year of 
just $2.26 per gallon. What we have seen based on many years of 
watching Americans' driving habits is that motorists reduce 
their discretionary driving only based on a significant 
slowdown in the economy and the possibility of job loss, or in 
response to gasoline shortages. While no one wants to pay high 
gasoline prices--and those prices do not inflict pain equally 
since those at the lower end of the economic scale are 
disproportionately burdened by rising prices - much of our 
driving is essential and at this point is not easily traded for 
other modes of transportation. Whether the result of 
geopolitical, refining, or distribution factors, the 
fluctuations in fuel prices underscore the Nation's 
vulnerability and the need to take a broad approach to securing 
a more diverse and sustainable supply of energy into the 
future. AAA acknowledges that fossil fuels will play a critical 
role in our Nation's economy for the foreseeable future, but we 
strongly believe steps must be taken to decrease our reliance 
on oil and refined gasoline to ensure the strength of our 
economy, the security of the Nation, and our way of life.Thank 
you again Mr. Chairman for allowing me to testify here today, 
and I look forward to answering any questions that you may 
have.

    Mr. Stupak. And as Members know, they can submit written 
questions, and we will leave the record open for 30 days, as is 
customary, for written records for any member who would like to 
be here.
    Gentlemen, as you know, it is the policy of the 
subcommittee to take all testimony under oath. Please be 
advised that witnesses have a right under the rules of the 
House to be advised by counsel during testimony.
    Do any of you wish to be represented by counsel? Mr. 
Slocum?
    Mr. Slocum. No.
    Mr. Stupak. Mr. Montgomery?
    Mr. Montgomery. No.
    Mr. Stupak. OK. Would you rise and raise your right hand 
and take the oath?
    [Witnesses sworn.]
    The record should reflect both witnesses have replied in 
the affirmative.
    Let me again extend my thank you to you for staying around. 
I know it has been a long afternoon. We have been in and out on 
the floor.
    But, Mr. Slocum, if you would, your opening statement, 
please.

 TESTIMONY OF TYSON SLOCUM, DIRECTOR, PUBLIC CITIZEN'S ENERGY 
                            PROGRAM

    Mr. Slocum. Sure. Mr. Chairman and Mr. Whitfield, thank you 
very much.
    My name, again, is Tyson Slocum. I am director of the 
Energy Program with Public Citizen. My organization represents 
over 100,000 consumers across the United States, and so I am 
testifying on behalf of them, as our constituents.
    So the hearing is on gasoline prices and oil company 
profits, and what are some of the policy descriptions. And one 
thing that we have focused on at Public Citizen is some of the 
dynamic changes within the oil industry over just the last 
several years.
    There is no doubt that there are several key variables that 
influence the price of oil and consequently the price of 
gasoline.
    I think that one of the most important variables that often 
gets overlooked is what has been happening in the dynamics of 
the oil industry.
    And one thing that is undeniable is that the number of 
mergers that have been approved over the last several years has 
dramatically changed the industry.
    The industry is sometimes explained as a cyclical industry. 
These mergers, I would argue, are a direct response to that 
history of cycles of boom and bust. And these mergers were 
designed to put an end or to significantly limit that cyclical 
nature of the industry.
    And I think that the proof is in the numbers. Public 
Citizen, compiling data obtained from the Energy Information 
Administration, shows that in 1993, for example, the largest 
five oil companies controlled roughly one-third of the national 
refining market share.
    By 2005, the largest five controlled over 55 percent of the 
market. And the largest 10 controlled over 80 percent. That is 
a huge shift in the level of consolidation.
    And that consolidation has resulted in higher prices at the 
pump. The GAO showed that in their 2004 study. And it is 
important to note that the GAO study stops in the year 2000.
    Since 2000, of course, the mergers of Chevron Texaco, 
ConocoPhillips--Valero has been allowed to acquire several of 
its competitors. So since GAO's report ended, there have been a 
number of additional mergers.
    And so Public Citizen is eager in seeing what the GAO comes 
up with as they are finishing the tabulations for that report.
    So what is this consolidation translated into? The GAO 
concluded that it did result in higher gasoline prices. And 
again, all you have to do is look at the statistics.
    The EIA, again, provides data on refining margins. And 
there, it is very clear. In the year that Exxon and Mobil were 
allowed to merge, in 1999, the average refining margin in the 
United States was 18.9 cents.
    By 2005, it had jumped 158 percent to 48.8 cents. That is 
in 2005. 2006 was another record-breaking year for the 
industry, so I think we can expect those refining margins to be 
far higher.
    I took a look in BP's financial statements, for example, 
and saw that the refining margins at its U.S. operations--
specifically, on the west coast--were almost triple that of 
their refining margins in their European operations.
    And again, this is played out in ExxonMobil's financial 
statements. In their 10(k) annual report filed with the 
Securities and Exchange Commission, they reported a return on 
capital investment on their U.S. refining operations to be 66 
percent. Compare that with their non-U.S. refining margin of 
24.5 percent.
    So again, international global oil companies are reporting 
the biggest profits, the biggest profit margins, on their 
American operations. And that, to me, is troubling.
    A lot of the discussion has been on the merits of price 
gouging legislation. I think that it is clear that oil 
companies have been engaging in price gouging.
    No doubt, oil companies work very hard to produce a 
critical commodity for the U.S. consumer and for the U.S. 
economy. And the are entitled to a fair and reasonable return 
on their hard work and ingenuity.
    And the question is are these latest profit numbers--not 
just for 2006, not just for the first quarter of 2007, but over 
the last several years, they have demonstrated a pattern, a 
pattern of substantially high profits historically, and profits 
that will continue because of the dynamic changes within the 
industry resulting from industry consolidation.
    Now, it would be one thing if the industry was using these 
record profits to then reinvest back into their aging 
infrastructure to help, long term, alleviate some of these 
pressures for consumers.
    Again, the numbers tell a different story. For example, in 
ExxonMobil's 10(k) report, they show that they spent $824 
million in capital investment on their U.S. downstream sector.
    Compare that with $37.2 billion that ExxonMobil spent 
buying back its own stock and paying dividends to shareholders.
    This shows that the high prices that consumers are paying 
at the pump are not being adequately reinvested into the aging 
infrastructure, but are simply going into the pockets of oil 
company executives and shareholders.
    Granted, there are many lucky motorists out there who also 
happen to be shareholders of these companies. But the vast 
majority are not.
    And so the issue here is why are consumers paying these 
record high prices when the oil companies are not adequately 
reinvesting their record earnings back into the aging 
infrastructure.
    And Public Citizen would argue that this is a major 
contributing factor to a lot of the outages that we are seeing. 
Some of the witnesses in the previous panel testified to the 
fact that a number of the outages are unplanned.
    And you have to wonder, would these have been avoided had 
the oil industry been more responsible with its record earnings 
and reinvested more of their record profits back into the type 
of investments that consumers need to have access to an 
adequately competitive market.
    So one of the solutions that Public Citizen supports is, I 
think, some sort of price gouging legislation. I think that 
right now, there isn't an adequate cop on the beat.
    I think that the Federal Trade Commission hasn't had enough 
tools at their disposal to enforce the types of activities that 
we are seeing, particularly unilateral withholding and other 
things that fall between the cracks of our antitrust statutes.
    And I think that a price gouging law would help fill in 
those cracks and provide the kind of enforcement that consumers 
need.
    Public Citizen also believes that it is time to stop 
subsidizing mature, profitable oil companies. The taxpayer 
provides between $5 billion and $8 billion in subsidies a year.
    That is between tax breaks, royalty relief and various 
Department of Energy spending programs to profitable oil 
companies. We think that those days of providing subsidies to 
big oil is no longer necessary.
    And we would rather shift that money into the kind of 
investments that will help American families, things like 
expanding access to mass transit, giving bigger financial 
incentives for fuel-efficient and alternative fuel vehicles.
    So I appreciate your time, and I look forward to any 
questions you may have. Thank you very much.
    [The prepared testimony of Mr. Slocum follows:]


    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Stupak. Thank you, Mr. Slocum.
    Mr. Montgomery, please, your opening statement?

      TESTIMONY OF DAVID MONTGOMERY, VICE PRESIDENT, CRA 
                         INTERNATIONAL

    Mr. Montgomery. Thank you, Mr. Chairman, Mr. Whitfield. I 
was pleased to accept your invitation to testify today. I 
realized, in looking at some of my footnotes, that I have been 
working on this subject for something like 30 years.
    I am vice president of CRA International. I am co-head of 
our global energy environment practice. And I am an economist 
by profession and by training. I mention this as background.
    My statements today are my own conclusions and do not 
necessarily represent the positions of either CRA International 
or any of our clients.
    I have submitted a longer statement for the record, and I 
would like to make just four points in my remarks now.
    The first is that prices set by a competitive market serve 
a useful purpose. They provide the incentives for new supplies 
to meet rising demand, and they allocate available supplies 
more efficiently among competing uses than any alternative 
method of rationing that we have devised.
    When supply is limited, prices can be expected to rise high 
enough to keep demand from exceeding available supply. This can 
temporarily raise prices above cost, without any wrongdoing on 
anyone's part, as the normal result of competition for 
supplies.
    Over time, high prices provide a signal for additional 
investment, and that supply competes away any difference 
between price and cost.But sometimes prices rise to 
extraordinary levels for the reasons that Mr. Caruso in 
particular mentioned, that when there is a supply interruption, 
it takes a very high price in order to bring demand down to 
those available supplies.
    I think the experience of Hurricanes Rita and Katrina 
actually teaches the beneficial effects of rising prices. 
Prices rose not only in the region where the hurricanes made 
landfall, but throughout the eastern United States.
    Those price increases caused drivers in areas not affected 
by the hurricanes to reduce their use of gasoline, which 
actually freed up more supplies to flow south to serve those 
who were in need.
    At the same time, suppliers who were able to work in the 
Gulf region drew down their inventories. They purchased more 
costly supplies from overseas markets to serve the needs of the 
Gulf.
    Refiners actually rushed repairs on damaged facilities, 
increased their utilization of operable refineries to what were 
extraordinarily high levels. They incurred additional cost in 
doing all of this.
    All of these actions were in response to the incentives 
created by higher prices in the market.
    Ironically, if you think about the flow of gasoline from 
north to south, it was consumers in the north who would have 
benefited if gasoline prices had not risen after Rita and 
Katrina, at the expense of those who were hit by the storms, 
who would have remained without fuel.
    In all our experience with gasoline price increases, and I 
have been studying this since the 1970's, there has never been 
evidence that those increases were caused by anything but the 
normal operation of a competitive gasoline market.
    The regional gasoline price spikes that occurred in the 
past decade were investigated extensively by EIA and the 
Federal Trade Commission, and their conclusions in every case 
that I have found have been that gasoline price increases were 
due to the operation of supply and demand, in light of an 
interruption of supply, and the magnitude of price increases 
was consistent with the magnitude of the loss of supply, not 
consistent with cost, but consistent with what it took in a 
competitive market to bring demand down to equal available 
supply.
    I don't have any finding in a competent analysis that 
widespread gasoline prices were due to any other explanation.
    My third point would be that price increases are far from 
the worst thing that can happen to consumers when there is a 
shortage. Consumers don't win when prices aren't allowed to 
rise. Shortages are made worse, and those who need fuel most 
are often least likely to get it.
    It seems paradoxical, but consumers would not be better off 
when prices are kept low by some form of government 
intervention.
    But when supplies aren't available, something has to bring 
demand down to equal available supply. If it is not prices, 
then something else has to raise the cost of obtaining a gallon 
of gasoline.
    In previous shortage situations in which we did have price 
controls, waiting caused the higher cost. And we have actually 
had sufficient experience with price controls to conclude with 
pretty good confidence that the lost value of time spent in 
lines is comparable to the out-of-pocket savings from lower 
costs.
    For example, California, as it frequently does, created an 
experiment in what will happen when prices are kept 
artificially low. The State of California ordered Chevron to 
refund alleged overcharges by reducing the price of gasoline at 
the pump.
    Long lines developed at the Chevron stations during the 
period of this refund program. There were lines at the Chevron 
station. There were no lines at other Chevron stations.
    Economists who studied this event found through a series of 
interviews and statistical analyses that the value of time lost 
by motorists who chose to sit in gasoline lines was larger than 
the monetary saving provided by price control, which is pretty 
much what we would expect.
    But something has to ration that supply of gasoline whose 
price is under controls.
    My fourth point would be about the refining industry. The 
refining industry has swung from glut, to shortage, to glut 
over the past 30 years that I have been looking at it, 
certainly since the beginning of the 1980's.
    Overall, that industry has had pretty low returns until 
this decade. And it is not just the level of returns for the 
industry up through the beginning of this decade. It is that in 
a volatile market like gasoline, it is only during the peaks 
that returns are adequate to motivate investment are earned.
    It is a cyclical industry, and the incentive for expansion 
in a cyclical industry like refining comes from the profits 
earned during the periods of tight capacity which provide 
almost all of the return on capital that justifies investment.
    When we are in a period of excess capacity with depressed 
prices, which has always followed surges of investment in the 
industry, refiners' margins are only sufficient to cover their 
variable costs. They contribute little or nothing to the 
investments they made earlier.
    Overall investment in refining can only recover if margins 
during the isolated periods of profitability rise above the 
level that would be required on a sustained basis.
    The best explanation I have seen for current tight capacity 
is the fact that through the 1980's and 1990's, refiners were 
consistently losing money. And even after margins recover, it 
takes some time for expectations to adjust and for new capacity 
to be planned and built.
    I would add a couple of other factors that are out of the 
control of refiners that haven't been talked about yet that I 
think have also served to tighten capacity.
    One of them is regulations on fuel quality and sulfur 
content that have been put in effect in the past couple of 
years that have required additional processing and eat up 
capacity.
    In the last couple of years, we have also eliminated, due 
to product liability and bans in some States, use of an 
additive, MTBE, that helped to stretch capacity.
    And right now, our restrictions on ethanol imports are 
preventing access to economic supplies that could alleviate 
some of the tightness.
    I also think that expectations of future developments may 
be diminishing the incentives for expansion of U.S. refineries.
    We see in this Congress and from this administration 
proposed policies that would reduce gasoline demand, including 
tighter CAFE standards and a 20 percent goal for non-petroleum 
fuels. That signals a lack of need for refining capacity in the 
long run. That is a long-run investment that has to be made.
    There are large capacity expansions now under way in the 
Middle East that will increase the supply of gasoline imports.
    And finally, it strikes me that policies toward the 
refining industry that would eliminate the upside potential 
from refining margins are themselves a disincentive for 
investment.
    Nevertheless, I see that EIA still expects a net addition 
of about a million barrels a day to capacity over the next 5 
years.
    To sum up, it is my opinion that since gasoline price 
controls were eliminated in the early 1980's, the market system 
has worked extremely well to move gasoline supplies to where 
they were needed, to avoid gasoline lines and serious economic 
disruptions.
    Thank you for your tolerance of my time, and I would be 
happy to answer your questions.
    [The prepared testimony of Mr. Montgomery follows:]


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    Mr. Stupak. Thank you.
    We will start our questioning.
    Mr. Slocum, you indicated that U.S. refineries versus non-
U.S. refineries for ExxonMobil--66 percent return on their 
investment in the U.S. but 24.5 percent return outside the U.S.
    Have you look at like Shell, which is Dutch-owned, and BP, 
British Petroleum? Is that a trend with them also?
    Mr. Slocum. Sometimes the availability of data is 
inconsistent. ExxonMobil, to is credit, is extraordinarily 
detailed in providing details of its financial operations by 
segment and by geographic area.
    BP does have some information, and I had talked about it 
earlier, and it is in my written remarks that I submitted with 
you.
    And BP gave specific operating margins for its west coast 
operations, for its U.S. Gulf Coast operations, and then 
Singapore and Great Britain. And their refining margins were 
almost triple in the west coast.
    They were almost three times as high as what they were in 
the United Kingdom, and a similar increase versus their 
operations in Singapore.
    BP and Exxon are two industry leaders, but I would imagine 
that their experiences in terms of high refining profit margins 
in the United States versus their overseas operations is 
probably consistent.
    Mr. Stupak. Well, we have talked a little bit today about 
the crack spread, the difference between a barrel of crude oil 
and what it costs to refine it into gasoline.
    And the spread right now is estimated to be $30, where 
traditionally it is $8 to $9. And for June trading, it is at 
$36. What is the crack spread, let's say, in Europe, if they 
break it down that detailed?
    Mr. Slocum. That is a great question, and I do not know 
offhand.
    Mr. Stupak. OK. Do you think you can get back with us on 
that?
    Mr. Slocum. Absolutely. I would be very happy to.
    Mr. Stupak. You also indicated, Mr. Slocum, that no one 
would begrudge anyone making a profit, even though a lot of us 
think some of these profits lately have been obscene.
    But what is a reasonable return of investment? You said you 
don't begrudge them a reasonable return. What would a 
reasonable return, let's say, on a crack spread, let's say----
    Mr. Slocum. In a capital-intensive industry, I think that 
if you are earning a 20 percent return on your capital 
investment, you are doing very, very well.
    And you know, Chevron Texaco, I think their total global 
operations was between 24 percent and 26 percent return on 
capital investment.
    I break out Exxon's total capital investment, return on 
their capital investment, on the very last page of my written 
testimony, and their global operations in 2006 returned them 
over 32 percent.
    And then when you break it down by segment and by 
geography, they earned much bigger profit margins on their U.S. 
operations, particularly downstream, at almost 66 percent.
    So I think when you are looking at around a 30 percent 
return, a 60 percent return, I think that that is far beyond 
what would be considered a fair and reasonable profit.
    Mr. Stupak. Thank you.
    Mr. Montgomery, I take it CRA is opposed to H.R. 1252, the 
price gouging legislation we have been mentioning a little bit 
today.
    Mr. Montgomery. We take no position on legislation. First, 
I should be clear. I am not speaking for CRA International, my 
employer, at all. I am discussing my own opinions.
    And my intention in my work and in being here is to try to 
discuss, as an economist who is familiar with the field, what 
the potential consequences of legislation might be. It is not 
to say I am for or against it.
    Mr. Stupak. Well, the reason why I asked the question--I am 
looking at your January 10, 2007 testimony. I believe that was 
before the Senate. And in there, you mention H.R. 1252 and a 
couple of Senate bills.
    And my distinct impression, reading the testimony--you are 
not in favor of H.R. 1252.
    Mr. Montgomery. I am sorry, January 10, 2007? My memory may 
be failing me.
    Mr. Stupak. April 10, 2007. This was a report on the 
potential effects of proposed price gouging legislation, cost 
and severity of supply disruptions.
    Mr. Montgomery. Yes, I am looking at this report----
    Mr. Stupak. And on page seven, yes, you talked about S. 94, 
S. 1735 and H.R. 1252.
    Mr. Montgomery. I am sorry, this is a report. It is not 
testimony. I just wasn't connecting with what you were 
discussing.
    Yes, have listed in this report three examples of price 
gouging legislation that were before the Congress at the time 
that I was writing it.
    I was trying to write the report, as I said, to try to 
elucidate some of the economic consequences of this type of 
legislation.
    Mr. Stupak. OK. I noticed that the bill that was passed 
last year by Ms. Wilson wasn't mentioned in your remarks. Any 
reason for that? Because you do mention--S. 1735 was in the 
109th Congress, same as the Wilson bill, which actually passed 
the House and went on to the Senate.
    Has CRA taken any position on the Wilson bill, whether that 
was a good bill last year or a bad bill?
    Mr. Montgomery. No, and I think what happened was as I was 
producing the final draft of this report, since they really 
were intended as examples, because I wanted to discuss concepts 
of price gouging legislation, and kind of implications of price 
controls in broader markets.
    They were the three examples that I was aware of that were 
under consideration. There was no intention to either exclude 
anything on purpose or include anything on purpose. They were 
the three examples I was aware of.
    Mr. Stupak. OK. I am looking at your testimony here today. 
And you mention the--let's make sure I get the right one here. 
I have read quite a bit of your--yes, you mention on page three 
the FTC's Midwest gasoline price investigation.
    And I think we had testimony earlier today that there 
actually was some--a refinery was found to withhold their 
product to the Midwest, and therefore that would constitute a 
price gouging by withholding the product, is that correct?
    Mr. Montgomery. No, not necessarily. To explain my 
reference to it here, what I have referred to in my testimony 
and what I discussed at more length in the report was my 
reading of that report--I am just simply telling you how I read 
it--was that it concluded that overall, the magnitude of the 
price increases investigated there were consistent with the 
operation of supply and demand.
    They mentioned a few other factors such as some mistakes, 
some lack of preparation, but did not mention price gouging or 
market manipulation as responsible for the broad price 
increases observed in that market.
    Mr. Stupak. Well, let me ask you this question. There is an 
internal BP memo from 1999 that confirms the interest at least 
one oil company has had in limiting the supply of gasoline to 
the Midwest.
    The memo identifies a number of options for consideration 
in order to reduce supply of gas in the Midwest. Among the 
options are shutting down capacity, exporting to Canada, 
lobbying for environmental regulations that would slow down the 
movement of gasoline in pipelines, shipping product other than 
gasoline in the pipelines, and providing incentives to others 
not to provide gasoline to Chicago and the Midwest.
    That was what they found happened in the Midwest in some of 
these areas. Is that a legal practice underneath the oil and 
gas industry?
    Mr. Montgomery. I am not myself an antitrust lawyer, and I 
hate to--and I hesitate to offer an opinion about whether any 
particular act is legal or not legal.
    My understanding under the antitrust laws is that an action 
which is taken unilaterally by a company purely for its own 
internal purposes without collusion or other cooperation is not 
contrary to the antitrust laws.
    That is as far as I could go. I certainly don't know enough 
about the circumstances of this particular one to offer an 
opinion.
    Mr. Stupak. Well, but that would be contrary to your free 
market approach that you have sort of advocated here today, 
right?
    Mr. Montgomery. It could be. And we certainly are concerned 
about markets where there is one or such a small number of 
sellers that they are able to not only influence the price by 
their actions but they are able to do so profitably.
    That is why the FTC and others apply their structural and 
other tests to ask whether the oil market or the refined 
product market is sufficiently competitive structurally that it 
would not be in the interest of an individual company to 
withhold supplies in order to raise prices, because the 
withholding would cost them more on the lost sales than their 
gain on the price on the remaining.
    So it is, again, a matter of market structure and how that 
market structure is managed.
    Mr. Stupak. Well, you said you would like to make four 
points. Your second point was in all our experience--and I am 
reading now from your testimony on page one, your second point.
    In all our experience with gasoline price increases, there 
has never been evidence that those increases were caused by 
anything but normal operations of a competitive market.
    Now, we talked a lot about the crack spread used to be 
about 10 cents to 15 cents per gallon. Now we are up to 70 
cents to 70 cents price per gallon.
    Now, do you think that is normal operating? And actually, 
that is based on $30 a barrel, but now we are going to go up to 
$36 a barrel, so that crack spread is going to be even higher.
    Now, why won't you provide more? Do you think that is 
anything but normal operations in a competitive market?
    Mr. Montgomery. I think it is the operation of a 
competitive market. I think we are not seeing that market 
subject to normal stresses at this point.
    Mr. Stupak. Well, if you are not seeing normal stresses, 
then why do prices keep going up?
    Mr. Montgomery. Because we are seeing abnormal stresses.
    Mr. Stupak. What are the abnormal stresses that--I mean, 
there is no Hurricane Katrina out there. There is no OPEC oil 
embargo. Our oil, as the first panel said, has been maintained 
relatively stable in this country.
    Mr. Montgomery. You are right. It is a combination of 
events. First, crude oil is high. Second, we are seeing 
extraordinary volatility in gasoline prices.
    I was struck, and I mentioned it in my prepared statement 
because it was so remarkable, by an article in the Wall Street 
Journal a couple of days ago that was updating, if you like, 
data that I had looked at only through 2005 that indicated, 
actually, in early fall and late winter of this year, we were 
seeing essentially the refiners' margins drop back down to zero 
again.
    They are bouncing around in an extraordinary way, and I 
think it is a combination of uncertainty in the market. There 
is no question about that.
    It is very tight capacity, the tight capacity due to the 
reasons that I mentioned and others have mentioned, that have 
kind of not only prevented the expansion of capacity but have 
actually taken capacity away compared to a couple of years ago, 
many of them driven by policy events.
    And we have had an extraordinary growth in demand for 
gasoline for driving which hasn't been knocked down completely 
by these price increases.
    And we are having a very hard time getting gasoline 
supplies from the rest of the world, which normally supplements 
our refineries.
    Adding all these things together are a market-based 
explanation of why we are seeing what we are seeing.
    Mr. Stupak. You certainly don't disagree with what was 
testified the last panel, and what I have alluded to and I have 
said before, and that you mentioned last fall, basically, 
running gasoline at a loss--that is because in September and 
October, they are trying to influence the outcome of the 
November election.
    There was a 60-cent drop in gasoline in September and 
October, run up to the election--60-cent drop in gasoline 
prices. They took a loss.
    Mr. Montgomery. I find it extraordinary that an industry, 
with the number of players that Mr. Kovacic was describing, 
with--as I know from talking to the quite different political 
interests, were actually able to collude on doing something 
like that to influence an election.
    Mr. Stupak. Do you have any other explanation why it went 
down 60 cents in September and October of 2006 before the run-
up of the election?
    Mr. Montgomery. Why it went down in September and October? 
Yes. We came off the RFG season. It is usually the reason why 
we see something there. Refining capacity is very tight.
    Mr. Stupak. So we can expect a 60-cent drop this year? That 
is the first time it has ever happened in the Nation's history 
in September and October, to have such a huge drop.
    Mr. Montgomery. Nothing is ever repeatable. And it was 
dropping from a very high level.
    But the point is that when we come off the RFG season, the 
two big constraints that I was talking about--the problem with 
MTBE and the problem with fuel sulfur standards--become an 
awful lot less.
    The cost of producing the very expensive fuel we have to 
blend with ethanol, because ethanol is not a particularly good 
blend stock--all of those costs start to drop at that time of 
year.
    And if that is combined with other events, which I have not 
looked at, in terms of the amount of driving, coming down from 
a big----
    Mr. Stupak. That is the first explanation--RFGs--because it 
is usually, ``Geez, we have got to raise gas prices, because we 
have got to limit our gas manufacturing, because we have got to 
move the home heating oil, because we are in the cold part of 
the season coming on up,'' so it is usually just the opposite.
    Gas prices go up in the fall of the year, not down, because 
you are switching over from making gasoline for summer driving 
to home heating oil in the winter, for places like me that had 
snow last weekend.
    Mr. Montgomery. Actually, it works the other way around. 
Gasoline prices go up during the summer in order to induce the 
stockpiling of gasoline during the winter.
    They drop during the fall and winter in order to induce the 
shift toward heating oil and away from gasoline.
    Mr. Stupak. Thank you.
    Mr. Whitfield for questions, please.
    Mr. Whitfield. Thank you, Mr. Chairman.
    And thank you all for being with us today.
    And, Mr. Slocum, you had mentioned that the large oil 
companies were not reinvesting in refineries, and I mean, that 
was what I had always understood, too. We have a lot less 
refineries today than we had a number of years ago.
    But then I was reading this report by the Federal Trade 
Commission, and it says that while the number of refineries has 
fallen, the average size of existing refineries has increased, 
so that overall industry distillation capacity increased from 
15.3 million barrels per day in 1996 to 17.1 million barrels 
per day in 2005, or about 11.7 percent, and that this increase 
is equivalent to the addition of over 15 average-sized 
refineries at the average size of 115,700 barrels per day.
    So it appears that we have actually more refinery capacity 
today than we did in 1996. Would you agree with that?
    Mr. Slocum. I actually would agree with that. And I did not 
imply that oil companies are not reinvesting back in their 
infrastructure.
    I did give a figure of $824 million that ExxonMobil alone 
spent on capital investment in the domestic downstream sector, 
which for them predominantly is refining. So they have been 
spending money.
    The question is has it been adequate for an aging 
infrastructure, and has it been adequate in the growth of 
demand. Yes, indeed, refining capacity nationally has increased 
since 1996.
    Mr. Whitfield. I am glad you pointed that out, because when 
we talk about it up on the Hill, we are always saying, ``Oh, 
well, we haven't had any new refineries built,'' and yet we do 
have more capacity.
    So I really appreciate your pointing that out.
    Mr. Slocum. And I think the issue is has the capacity 
increase in refineries kept up with demand.
    Mr. Whitfield. It has not.
    Mr. Slocum. And that, it has not.
    Mr. Whitfield. Yes, because we are approaching 400 million 
gallons of gasoline every day that we are using in America 
alone.
    Now, I want to just touch on briefly these refinery margins 
that you referred to, and you were talking about a 64 percent 
or a 66 percent return in the U.S. operations and a 24.5 
percent return in Europe. I believe it was somewhere in that 
neighborhood.
    Mr. Slocum. Yes, sir. That is exactly correct, for 
ExxonMobil only.
    Mr. Whitfield. Yes, and they say their refinery margins are 
calculated by taking the spot market price on gasoline and 
subtracting the spot market price on crude.
    And so the spot market price on gasoline right now is going 
up because of the demand, and you would think, with the demand 
going up the way it is in the U.S., that actually our gasoline 
prices would be higher than in Europe.
    And I know that Europe has a much higher tax rate on 
gasoline than we do, but if you remove their rate on the 
gasoline taxes and remove our rates, the actual price per 
gallon is rather comparable, if you remove the tax portion.
    And so you would think that because the refinery margins 
here are so much greater because of the gasoline--the spot 
market prices being higher, that our prices would be higher 
here than in Europe, and yet it appears to be the reverse.
    And just from your understanding of the market, why would 
the European prices be higher than in the United States?
    Mr. Slocum. First, a clarification on those numbers for 
ExxonMobil. Those are not referencing a crack spread or 
refining margins from a crack spread.
    Those are return on capital investment for their different 
segments. So it is a slightly different number, but telling a 
similar story.
    And in terms of what is the comparable crack spread or 
gasoline price in Europe, I am not an expert on European 
gasoline markets, and so I actually do not know, and I cannot 
confirm whether or not, if you removed the very high levels of 
taxation, I do outline in my report what the exact levels of 
taxation are in various European countries and Japan.
    I actually don't know whether or not--if you remove those 
high taxes, whether or not European prices are higher or not.
    The crack spreads that I saw for BP and the crack spreads 
or the return on capital investment for ExxonMobil seemed to 
imply that prices would be lower, but again, I would have to 
investigate that. And I can get that data for you tomorrow, 
actually.
    Mr. Whitfield. You would think that the European demand not 
being as great as in the United States, and they certainly are 
more accustomed to scooters and smaller cars and more public 
transportation than we are in America.
    And the fact that they are closer to the Middle East and 
Russia than we are, so transportation costs should be less. But 
yet their prices are so much higher.
    So in some ways, we are getting off easy in the U.S. even 
though it is against our culture to be able to accept gasoline 
prices approaching $4 a gallon.
    Mr. Slocum. And actually, I mean, transportation costs for 
crude oil to this country aren't that high. I mean, the largest 
suppliers are the United States itself--I mean, we are the 
third-biggest producer of crude.
    Canada is the single largest importer of crude, and Mexico 
isn't far behind, and so the United States also has fairly easy 
access to pipeline shipments of crude oil that help keep costs 
down.
    Mr. Whitfield. But I was reading an article the other day, 
and it said that out of the 85 million barrels of oil being 
produced worldwide, the largest company in the U.S., 
ExxonMobil, is only producing 4.5 million.
    So our largest oil company is only producing 4.5 million 
out of 85 million barrels being produced every day.
    Mr. Slocum. And that number happens to be more than the 
Kingdom of Kuwait produces.
    Mr. Whitfield. What is Saudi Arabia producing per day now, 
do you know?
    Mr. Slocum. I think around 10 million barrels of oil a day. 
And they remain, I believe, the largest exporter. It is close 
with Saudi Arabia and Russia.
    Mr. Whitfield. Right. One other point that I would just 
touch on, because you had mentioned this GAO report about the 
mergers and acquisitions contributing to increased prices, 
which may very well be the case.
    But the Federal Trade Commission, who has responsibility 
for policing this--Mr. Kovacic testified that they disagreed 
with that GAO report.
    And have you had the opportunity to look at why they 
disagreed with the GAO report in very much detail or not?
    Mr. Slocum. I believe that they disagreed with some of the 
econometric methodology that GAO employed.
    And it is Public Citizen's understanding that the 
econometric methodology that GAO used is pretty standard. And 
we didn't disagree with the methodology that the GAO employed.
    And especially when you look at the other evidence, just 
the fact that consolidation has occurred, that margins in the 
downstream operations have mushroomed, we think it is a fair 
conclusion to make that consolidation has directly led to 
higher prices at the pump.
    Mr. Whitfield. Mr. Chairman, I have no further questions.
    Mr. Stupak. Just one or two for me.
    Mr. Montgomery, did you do a report for the American 
Council for Capital Formation regarding price gouging 
legislation?
    Mr. Montgomery. Yes. That is the one we were just 
discussing.
    Mr. Stupak. OK. Did you assist the American Council for 
Capital Formation, then, in writing its editorials to be placed 
in newspapers around the Nation?
    Mr. Montgomery. No. I haven't even read them.
    Mr. Stupak. OK.
    Mr. Whitfield, any further questions?
    Mr. Whitfield. No, sir.
    Mr. Stupak. Well, that concludes our questioning.
    I want to thank our witnesses for coming today and your 
patience. Your testimony is part of the record.
    I ask for unanimous consent that the hearing remain open 
for 30 days for additional questions. And if those Members who 
could not be here want additional time for questions, they will 
have 30 days.
    And also, those witnesses who could not stay with us, we 
would submit those to them.
    So without objection, the record will remain open for 30 
days.
    I ask unanimous consent the contents of our document binder 
be entered into the record.
    Without objection, documents will be entered into the 
record.
    This concludes our hearing. This meeting of the 
subcommittee is adjourned.
    [Whereupon, at 6:36 p.m., the subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]





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