[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
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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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