[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
ECONOMICS OF DEPENDENCE ON FOREIGN OIL-RISING GASOLINE PRICES
=======================================================================
HEARING
before the
SELECT COMMITTEE ON
ENERGY INDEPENDENCE
AND GLOBAL WARMING
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
MAY 9, 2007
__________
Serial No. 110-4
Printed for the use of the Select Committee on
Energy Independence and Global Warming
globalwarming.house.gov
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SELECT COMMITTEE ON ENERGY INDEPENDENCE
AND GLOBAL WARMING
EDWARD J. MARKEY, Massachusetts, Chairman
EARL BLUMENAUER, Oregon F. JAMES SENSENBRENNER, Jr,
JAY INSLEE, Washington Wisconsin
JOHN B. LARSON, Connecticut Ranking Member
HILDA L. SOLIS, California JOHN B. SHADEGG, Arizona
STEPHANIE HERSETH SANDLIN, GREG WALDEN, Oregon
South Dakota CANDICE S. MILLER, Michigan
EMANUEL CLEAVER, Missouri JOHN SULLIVAN, Oklahoma
JOHN J. HALL, New York MARSHA BLACKBURN, Tennessee
JERRY McNERNEY, California
------
Professional Staff
David Moulton, Staff Director
Aliya Brodsky, Chief Clerk
Thomas Weimer, Minority Staff Director
C O N T E N T S
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Page
Hon. Edward J. Markey, a Representative in Congress from the
Commonwealth of Massachusetts, opening statement............... 1
Prepared statement........................................... 3
Hon. F. James Sensenbrenner, Jr., a Representative in Congress
from the State of Wisconsin, opening statement................. 6
Hon. Earl Blumenauer, a Representative in Congress from the State
of Oregon, opening statement................................... 7
Hon. Hilda Solis, a Representative in Congress from the State of
California, opening statement.................................. 8
Hon. John Sullivan, a Representative in Congress from the State
of Oklahoma, opening statement................................. 9
Hon. Jerry McNerney, a Representative in Congress from the State
of California, opening statement............................... 9
Hon. Marsha Blackburn, a Representative in Congress from the
State of Tennessee, opening statement.......................... 10
Hon. Jay Inslee, a Representative in Congress from the State of
Washington, opening statement.................................. 10
Witnesses
Mr. Terry Thomas, President and CEO of the Community Bus Service,
Incorporated................................................... 11
Prepared Statement........................................... 13
Answers to submitted questions............................... 103
Mr. Michael Mitternight, owner of Factory Service Agency,
Incorporated................................................... 19
Prepared Statement........................................... 21
Answers to submitted questions............................... 108
Donn Teske, Farmer and President, Kansas Farmers Union,
McPherson, KS.................................................. 26
Prepared Statement and attachments........................... 28
Answers to submitted questions............................... 38
Sylvia Estes, Pipeline and Industrial Group, Virginia Beach, VA.. 57
Prepared Statement........................................... 59
Answers to submitted questions............................... 119
John Felmy, Chief Economist, American Petroleum Institute........ 65
Prepared Statement........................................... 67
Answers to submitted questions............................... 120
Submitted Material
Hon. John Shadegg, letter of May 8, 2007, from Mr. McGinnis,
Chief Executive Officer of Arizona Clean Fuels Yuma............ 125
Hon. Nancy Pelosi and Hon. Dennis Hasert, letter of May 3, 2006
from the National Association for Pupil Transportation,
National Association of State Directors of Pupil Transportation
Services, and National School Transportation Association....... 129
HEARING ON ECONOMICS OF DEPENDENCE ON FOREIGN OIL--RISING GASOLINE
PRICES
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WEDNESDAY, MAY 9, 2007
House of Representatives,
Select Committee on Energy Independence
and Global Warming,
Washington, DC.
The Committee met, pursuant to call, at 2 p.m.., in room
2318, Rayburn House Office Building, Hon. Edward Markey
(chairman of the Committee) presiding.
Present: Representatives Markey, Blumenauer, Inslee, Solis,
Herseth, Cleaver, Hall, McNerney, Sensenbrenner, Shadegg,
Walden, Sullivan, and Blackburn.
Chairman Markey. Ladies and gentlemen, welcome. This
hearing is commenced on the economics of dependence on foreign
oil, rising gasoline prices.
In 1973 Americans were shocked by a sudden increase in
gasoline prices and supply shortage that were brought on by the
Arab OPEC member states. And the price of the gasoline rose
from 38 cents in May of '73 to .55 in June of 1974. Lines for
refueling formed as supplies were constrained. But America
responded. We largely moved away from the use of oil for
electricity generation, going from 16 percent oil fired
generation in '72 to 2.5 percent today.
We promoted energy efficiency and conservation, and most
effectively in 1975 the Congress passed and President Ford
signed a bill which doubled the fuel economy for the vehicle
fleet in the United States from 13.5 miles per gallon to 27.5
miles per gallon, a doubling of fuel economy for the vehicles
we drive in America in ten years. And what happened?
Well, the dependence on foreign oil in the United States
dropped from 46.5 percent in 1977 to 27 percent in 1985, a
precipitous drop in oil consumption in the United States. We
backed out 4.3 million barrels a day of energy consumption as
the fuel economy average for the American automotive fleet
doubled in just ten years.
Well, today we are unfortunately faced with a similar
crises. Because since 1986 what we are seeing is a dramatic
rise in oil consumption, largely related to the fact that there
has been an SUV-like truck exception that has seen the average
for fuel economy go backwards since 1986 from 27 back to 25
miles per gallon, even as the United States has pretty much
lead the way in deploying the internet around the world,
cracked the human genome, here in auto mechanics we have
actually gone backwards for the last 20 years. But with an
increase from 27 percent to 60 percent our dependence upon
imported oil.
If all we did in the United States was to improve our fuel
economy average from 25 miles per gallon to 35 miles per
gallon, we would back out all of the oil that the United States
imports from the Persian Gulf states. Just an increase in ten
miles per gallon. And we can do that.
As the price of gasoline now passes $3 and experts are
predicting are $4 a gallon gasoline, this becomes an even more
serious issue. Because not only are we spending all this money
to import the oil, but the money which is then spent is used by
many of these countries to finance the terrorism, to finance
the hate which is then redirected back at the United States of
America. It is the worst of all worlds for our country.
If you are a family only one car making $20,000 a year, $3
a gallon gasoline consumes almost 9 percent of the annual
income of that family.
For a family making $40,000 a year, $3 a gallon gasoline
costs them 4.5 percent of their annual budget.
So this issue becomes something that is very real for
ordinary Americans. This is a lot of money. Increasingly, OPEC
is able to tip consumers upside down and shake money out of
their pockets because we do not have a national policy which is
effective to protect the consumers in our country.
So this issue is something that is central to the American
well-being. We have to increase the fuel economy of our cars
and trucks. We have to increase the amounts of renewable, home
grown biofuels. We have to prevent gasoline price gouging
during times of tight supply and high demand. Gasoline prices
are at $3 a gallon right now. Experts say that $4 a gallon is
right around the corner for the American consumer.
I look forward to gaining the perspective of our witnesses
on this issue. It is an issue that effects our economy. It
effects our national security. It effects the very ability of
our country to be able to deal with issues both domestic and
international. And so I do not think there can be a more
important subject. I think that it is critical for us to
understand that the time has now arrived for the Congress and,
hopefully, for the President to begin to do something about
this outrageous high priced gasoline that consumers are forced
to purchase and as a result, make other choices that deprive
their families of what they need.
[The statement of Hon. Edward Markey follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Markey. The time for the opening comments by the
Chair has expired. I turn to recognize the Ranking Member, the
Gentleman from Wisconsin, Mr. Sensenbrenner.
Mr. Sensenbrenner. Thank you, Mr. Chairman.
Contrary to popular belief this Select Committee is not
just about global warming. Energy independence is also in this
panel's title. And I am pleased that today we will be talking
about America's dependence on foreign oil.
Nowhere do Americans feel our economy's reliance on foreign
oil more than when filling up at the pump. Everyone who drives
knows that the cost of gas has been rising. While some of us
have almost become use to gasoline price fluctuations, most of
us will never get used to the consequences of high gas prices.
Some of the reasons for these fluctuations are straight
from the economics 101 textbook. Demand for oil is rising
around the world and cartels like OPEC, which enforce
production controls, are not doing much to help keep costs
down.
Geo-political uncertainty is also doing its part to keep
the value of a barrel of oil high.
If American drivers are going to see gas prices drop, we
need to break our country's dependence on foreign oil. But we
also need to break Washington's dependency on taxes and
regulation. Lowering the cost of gas is about freeing drivers
from regulations that keep prices high and about reducing
dependency on foreign oil.
When crude oil gets to U.S. shores it must be processed
into gasoline at domestic refineries. Today the U.S. has the
ability to refine about 17 million barrels of oil a day into
gasoline. Unfortunately, the average U.S. demand for gasoline
is 21 million barrels a day. This gap is often met by importing
gasoline that has been refined in other countries, further
expanding our reliance on foreign sources of energy.
The residents of my District, which is the area surrounding
Milwaukee, often experience the hidden fee cost by limited
refinery capacity. While the national average for gasoline was
reasonably reported to be $3.07 a gallon, the Milwaukee Journal
Sentinel reported yesterday that my constituents are paying
$3.28 a gallon. And why so high? Scheduled maintenance, a power
failure and even a fire have reduced capacity at the refineries
in Indiana and Minnesota that supply the Milwaukee area.
Mr. Felmy of API says the industry is working to increase
refinery capacity, and that's very good. However, I also note
that it has been 30 years since a new gasoline refinery has
been built in the United States. An expensive and cumbersome
permitting process has contributed to this trend.
Republicans last year tried to streamline this process in a
way that will continue to protect the environment. But,
unfortunately, we met too much opposition along the way.
As we hear from the panelists today, higher gas prices are
felt nearly every corner of the economy from farmers to small
businesses to school bus operators.
Mr. Michael Mitternight says in his testimony that gas
prices are wrecking havoc on America's small businesses. Mr.
Mitternight also rightly notes that onerous government
regulations hit small businesses very hard.
As Congress looks for ways to address both global warming
and energy independence issue, I am worried that the cure may
be worse than the cough. The most recent report from the U.N.
Intergovernmental Panel on Climate Change includes a proposal
for a tax of $100 for each ton of carbon dioxide released into
the atmosphere. The Washington Post reported last Saturday that
that proposal could result in drivers paying up a $1 more for
each gallon of gas they pump.
The testimony we will hear today shows that $4 a gallon gas
would be a blow to the economy. Fortunately Mr. Mitternight
also has many positive ideas on how to address these problems.
He says that any government energy problem must focus on new
technology, should use the power of markets and protect
American jobs. And I agree. I will add that any energy or
environmental policy must also produce tangible environment
improvements and include international participation from
countries like India and China.
I am pleased this panel is talking about energy
independence. Let us hope that today's discussion helps us find
way to free American drivers from both foreign oil and
government regulators.
I thank the Chair and yield back the balance of time.
Chairman Markey. The Gentleman's time has expire.
The Chair recognizes the Gentleman from Oregon, Mr.
Blumenauer.
Mr. Blumenauer. Thank you, Mr. Chairman.
I appreciate your setting the context in terms of how we
rose to the challenge 30 years ago when we were facing this
issue. The trends that you demonstrated in terms of failure for
us to deal meaningfully with conservation, there is a very real
issue in terms of refinery capacity. But it is not a case of
tweaking, streamlining regulatory matter. I think the record
will show that there has been a conscious effort to actually
reduce the amount of refining capacity. There has been more
consolidation. I look forward to being able to deal with some
of the impacts that that has had in terms of the free market.
I know that there are other initiatives that are being
examined to make sure that there is not collusion and unfair
advantage being taken by people who are consumers. I think in
any respect it is going to require a balanced approach in terms
of dealing with supply, in terms of dealing with conservation,
making sure that a market that is becoming less and less
perfect both nationally and internationally, that we examine to
see if there are ways that we can provide the protections to
make sure that the market does in fact work.
I appreciate the breadth of opinions that are being
offered. I had a chance to skim some of the testimony. I think
it is going to be very useful for us to have as part of the
record. And look forward to a conversation with people who are
dealing with these consequences on an ongoing basis.
I know the people that I represent who are now looking at
the third highest gasoline prices in the country, this is not
an idol concern whether they are commuters, whether they are
small business people or that they are people who are just
breathing the air and wondering where we are going.
Thank you very much.
Chairman Markey. The Gentleman's time has expired.
The Chair recognizes the Gentleman from Arizona, Mr.
Shadegg.
Mr. Shadegg. Thank you, Mr. Chairman, for holding this
hearing. And I will waive my opening statement and reserve.
Chairman Markey. The Gentleman reserves his time.
The Gentleman from Oregon, Mr. Walden.
Mr. Walden. Thank you, Mr. Chairman. I, too, would rather
reserve my time and use it in questions.
Chairman Markey. The Gentlelady from California, Ms. Solis.
Ms. Solis. Thank you, Mr. Chairman.
And I am delighted to be here this afternoon to hear what
our witnesses have to say. Every time I go home, and I go home
just about every weekend here from Washington to visit my
District in Los Angeles, the number one question that people
tell me at any forum or any meeting is ``When is the gas price
going to go down, Hilda. I do not want to hear about anything
else. I want to know when the gas prices are going to go
down.''
When you have working families suffering right now with
other economic constraints on them, you hear about the price of
gasoline nationally. Well, let me tell you, folks, in
California and Los Angeles for the last two years it has been
above $3. In fact, in my District in east Los Angeles, probably
one of the poorest areas in the country, we are experiencing
levels of $3.69 a gallon and sometimes even upwards on the west
side of town, the higher income, maybe $4 and higher.
So we are talking about a real crunch on our pocketbook,
but we are also talking about the cost of people who want to
use public transportation. We are seeing proposals right now in
my District where the Metropolitan Transportation District
would like to increase their fees almost 80 percent. And the
majority of those bus riders tend to be low income folks who do
not have cars so they use alternative sources of
transportation. But again because the high cost of gasoline and
what have you, they are not going to be experiencing an
increase from what is now at a $1.25 to up to $2. That is an 87
percent increase for the ridership. And many of constituents
use those buses to get around town, to get to work, to see the
doctor and what have you.
I am equally concerned also about our schools. And I know
one of our witnesses will be talking about traveling on school
buses. Well, I tend to represent one of the largest, second
largest school district in the county, LA Unified School
District. This was a question that I raised last year during
the energy. Debate how we dealing with the high cost of fuel
and fuel efficiency in trying to make sure that our students
get to school on time and get home on time, and that they are
safe. And believe me, there was not much discussion or concern
at the time.
And, yes, I tend to agree with some of my colleagues here
that costs that are being transferred onto the consumer are not
transparent. And what I am trying to get to is that refineries
and what have you, there is not a shortage of refineries. There
is a shortage of political will.
So I look forward to hearing from our witnesses today.
Thank you, Mr. Chairman.
Chairman Markey. The Gentlelady's time has expired.
The Gentleman from Oklahoma, Mr. Sullivan.
Mr. Sullivan. Thank you, Mr. Chairman.
And thank you for holding this hearing today on an
important issue of rising gas prices. I welcome this debate.
As you remember, in 2005 the Republican Majority in the
House passed the Gasoline for America Security Act. The Gas Act
helped bring greater quantities of fuel to the market by
expanding domestic refining capacity and limiting the number of
gasoline and diesel blends refineries must product. By
increasing the quantity of fuel that makes it into American's
neighborhood gas stations, we are able to help keep the price
consumers pay per gallon from rising.
Additionally, by opening up the Outer Continental Shelf to
new energy exploration, the House allowed for oil and natural
gas exploration in an area holding 85 percent of America's
Outer Continental Shelf energy, much of which was untapped
because of a 25 year old ban on deep sea energy production.
Furthermore, if President Clinton had not vetoed ANWR
legislation in 1995, the U.S. could be domestically producing 1
million barrels of oil from that area today. Having both these
areas into play would allow the U.S. to have energy security
through a more diverse supply.
I am submitting for the record a letter from the National
School Transportation Association citing their support for past
action on gas prices. This includes H.R. 5254, legislation from
the 109th Congress which would have streamlined the permitting
process to allow for new or expanded domestic refineries to be
built. I, too, supported this legislation and was original
sponsor. This noteworthy legislation would have helped meet
America's increasing demand for gasoline by increasing domestic
refining capacity. It is a shame that this legislation was not
able to move past the Senate.
Thank you. And I yield back the balance of my time.
Chairman Markey. The Gentleman's time has expired.
The Chair recognizes the Gentleman from Missouri, Mr.
Cleaver.
Mr. Cleaver. Mr. Chairman, thank you for holding the
hearing. I would reserve my time and use it to ask questions.
Chairman Markey. The Gentleman's time will be reserved.
The Chair recognizes the Gentleman from California.
Mr. McNerney. Thank you, Mr. Chairman.
We all know that there are numerous factors impacting the
price of a gallon of gasoline: World conflict, for example;
refinery capacity as has been mentioned here earlier; weather
changes such as Katrina can all contribute to fluctuating gas
prices. However, we are now experiencing prices that are higher
in California than the post-Katrina gouge. We are paying nearly
3.50 a gallon, as my colleague from California mentioned with
reports from some stations in the Bay area just a nickel short
of $4 a gallon. This kind of price hike is very bad for
commuters and business alike.
We all know that we are going to experience even higher
prices as the summer wears on and vacationers head out. Clearly
if our cars and trucks had better fuel efficiency, lowering the
demand for gasoline, the price of gas would be lower. The
better the efficiency, the lower the price.
Moreover, wasteful consumption of gasoline does contribute
to global warming, another very bad outcome.
So I am looking forward to hearing the testimony from
today's witnesses. And I hope we can highlight just how
devastating high prices can be on our small businesses.
Thank you, Mr. Chairman.
Chairman Markey. The Gentleman from California time has
expired.
The Chair recognizes the Gentlelady from Tennessee.
Ms. Blackburn. Thank you, Mr. Chairman. Thank you for the
hearing.
And I want to thank and welcome our witnesses. We are
looking forward to the testimony today.
In many places in the U.S. energy prices for electricity
and transportation fuel are increasing significantly. You are
hearing that from us today as we are out there with our
constituents in responding to what they tell us. It has
effected many sectors of our economy and in my District we hear
a lot about this from our small businesses and our logistic
businesses in their work.
I believe that we can make America energy independent and
free from all foreign sources of energy, but it is going to
take serious actions to increase and diversify our supply of
available energy. It is not going to be easy. We did not get
here overnight and we are not going to get out of it overnight.
We realize that.
The interesting thing is we do have vast resources of oil,
gas and coal in our country that would meet our need for
hundreds of years. But there is a group of people that do not
want us to tap into these resources. Now, I have had some
interesting conversations with some from this group. And when
you ask them what they would recommend, sometimes you will get
an answer that sounds like returning to the stone age or having
a substandard quality of life and shutting down our coal plants
because there is a perceived threat of global warming. And most
often it does not include measures that incorporate
conservation, innovation, deregulation, exploration, production
or commercialism; all steps I feel are necessary to get us to
energy independence.
What Americans want is reliable and affordable energy, but
they do not want to sacrifice their way of life because of
somebody's political agenda that is based on what they consider
to be a faulty and unproven science. They want options that
will allow them a continuance of a good quality of life and an
available and affordable energy supply. And they want to
continue to benefit from a robust economy.
America would rather have us here in Congress encourage the
production of more energy right here in this country and not
rely on foreign sources of oil that could increase prices with
little notice.
Mr. Chairman, I thank you for the hearing today. I look
forward to the comments from our witnesses.
Chairman Markey. Thank the Gentlelady.
And Mr. Inslee, you are the last Member if you wish to be
recognized for an opening statement.
Mr. Inslee. I just want to say briefly that there is a
cause for optimism in this whole issue. I was walking over to
be on C-SPAN's journal this morning and ran across a car that
gets 150 miles a gallon runs 40 miles on electricity when you
plug it in, and one day we are running ethanol and we ought to
have optimism and use technology to solve this problem. And I
am glad this Committee is on the job to do it.
Chairman Markey. I thank the Gentleman very much.
I will note before we will hear from the witnesses. But for
the Members there is a clock right in the middle of Mr. Teske
right there. And that clock will move from green to yellow with
one minute remaining, and then to red if anyone is interested
in just keeping track of the time which you have.
So now we will turn to witnesses. And I would like to now
recognize our first witness, Mr. Terry Thomas, President and
CEO of the Community Bus Service, Incorporated in Youngstown,
Ohio.
Welcome, sir.
Statement of Terrence V. Thomas, President and CEO, Community Bus
Services, Incorporated
Mr. Thomas. Thank you so much, Chairman Markey, Members of
the Committee.
My name is Terry Thomas. I am President and CEO of the
Community Bus Services. My company provides school bus service
to 22 school districts and 7.000 students in northern Ohio.
I am past President of the National School Transportation
Association, which represents private school bus contractors
that operate one-third of the nation's 475,000 school buses.
I also serve on the Governing Committee of the American
School Bus Council, which is a coalition of public and private
operators, manufacturers, suppliers and State policymakers. We
represent the entire school bus industry. And my remarks today
are consistent with the entire school bus industry.
I appreciate the opportunity to share with you my concerns
about the effect of energy dependence, rising fuel costs on my
family, and I am the father of five children three of which
ride the school bus everyday, my business, the school districts
I serve and the entire school bus industry. According to the
latest statistics from the U.S. Department of Education 56
percent of public school students in the United States depend
on school bus to access their education. Twenty-five million
public school children every day on a fleet of vehicles that is
two and a half times the size of all other forms of mass
transportation; that is transit buses, intercity business,
commercial airlines and rail combined. School buses are far
safer statistically than any other mode of travel with an
average of 20 fatalities a year compared to 800 fatalities a
year for students traveling to school by any other means.
Teenagers are 44 times safer if they ride the bus rather than
riding with their friends.
But when faced with the need to cut service, school
districts are most likely to discontinue high school
transportation, thereby encouraging or even forcing teenagers
to high risk driving.
School buses play an important role in mitigating traffic
congestion. Replacing an average of 50 personal automobiles for
every school bus on the road. In addition, one school bus uses
significantly less fuel than 50 cars and SUVs.
The Federal Government provides no funding source for
routine home to school transportation or school activity
transportation. Increasingly, a larger burden falls on the
local school districts to support school transportation, and
though it represents just four percent of the total school
budget, it is the first target hit when districts need to
reduce expenditures.
From September 2004 to September 2005 the price of diesel
fuel increased an average of 58 percent, a $1 a gallon. Though
prices slipped back somewhat in 2006, they are on the rise
again and in many areas have reached or exceeded the 2005
highs. Other transportation modes are better able to either
absorb the costs or pass them on to the marketplace. The school
bus operators literally have nowhere to go.
School districts have had to find other ways to respond,
most of which now involve reduction of school bus service. For
example, Troy, Michigan eliminated sports and activity trips.
Massachusetts districts are charging parents for school bus
service. Ohio eliminated, if you can believe this, 80,000
students from school transportation over the last two years.
Tennessee and Georgia closed schools for two days last year and
Kentucky went to four-day weeks for some schools just as a
result of the cost of the fuel for the school buses.
Congestion, pollution, excessive fuel consumption,
inconvenience to parents and employers, inconsistent attendance
and interruptions in the educational progress, all of these
result from reductions in school bus service. But the number
one reason to ensure that school buses keep running is student
safety.
We know Congress is tackling this issue on many fronts, and
our industry has supported efforts to increase supply through
more refinery capacity and reasonable exploration of oil and to
protect consumers against price gouging. Additional steps that
might help with fuel costs and congestion include: The use of
Federal Highway Congestion Mitigation Funding for the purpose
of new school buses and for a national public education
campaign to encourage the greater use of school buses to cut
down on the use of personal vehicles;
Federal assistance to school districts to offset the ever
increasing cost of fuel, regardless of whether the districts
operate it themselves or if they contract out for the service;
An investment tax credit or other incentives for bus
manufacturers to encourage the production of energy efficient
and alternative power vehicles;
Managing tax credit for school bus companies to encourage
purchase of a cleaner, more energy efficient fleet, and;
Funding to assist Federal mandates to meet safety,
environmental and security standards.
As fuel costs go up due to the increased cost of energy,
everyone feels the burden including parents who pay for gas to
drive their school children. Already schools are seeing a
difference. Sixty percent of the districts reported an increase
of ridership due to fuel prices.
I want to thank the Committee for this opportunity to
provide some insight into our industry and share our concerns.
[The statement of Mr. Thomas follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Markey. Thank you, Mr. Thomas, very much.
Our second witness, Mr. Michael Mitternight, is the owner
of Factory Service Agency, Incorporated, a commercial air
conditioning, construction and service company in Metairie,
Louisiana. He has been nominated as a finalist for the 2007
Small Business Advocate of the year. After Hurricane Katrina he
helped many New Orleans area businesses recover and resume
operations.
Welcome, Mr. Mitternight.
Statement of Michael Mitternight, Owner Factory Service Agency,
Incorporated
Mr. Mitternight. Thank you, Chairman Markey and Ranking
Member Sensenbrenner, Members of the Committee.
My name is Mike Mitternight. I am the owner of Factory
Service Agency, the family owned small business established in
1975 located in the New Orleans of Metairie, Louisiana. My
company specializes in commercial air conditioning service and
installation throughout southeast Louisiana.
I am also a member of the National Small Business
Association, which the Chairman just mentioned.
I would like to thank you for inviting me to testify today
about the impact of rising gasoline prices on small businesses,
particularly mine. I am very grateful that you are cognizant of
the negative effect increasing gasoline prices are having on
small business across the country and that you are seeking to
address it. Whatever the cause, the volatile increase in price
of gasoline is wreaking havoc on America's small businesses.
The day-to-day operation of my small business, I have as
many as six service trucks and three management vehicles on the
street at any one point in time. In order to carry the load of
tools and service equipment necessary to provide the service
for the equipment upon which we work, most of my service trucks
are three quarter ton pickup trucks with a service body on the
back. Obviously, these trucks fall into the category of nonfuel
efficient vehicles. Unfortunately, there is no affordable
alternative to this choice.
Currently the cost of gasoline in the metropolitan New
Orleans area varies from $2.88 per gallon to 2.93 per gallon
from a low of 1.98 late last year. This sudden and
unpredictable 50-percent increase hits directly at the bottom
line of my business, and countless others.
In my industry one major problem is that many of my service
and maintenance contracts are fixed cost contracts with
billable rates established well in advance, sometimes for a
period of a year with no opportunity to recoup increased
expenses. Although I routinely try to include an estimated
escalation percentage in my pricing, the actual cost of
gasoline is impossible to project. If I project too large an
increase, I will lose the contract. If I project too small, I
will lose money.
Direct impact on cash flow, the life blood of any business
is seen when you compare a weekly operating cost for fuel from
$325 in December of '06 to my current expense of $510 a week.
This represents an increase of 60 percent in only five months.
A fellow contractor in my area provided me with the cost
figures of his company showing an increase of 113 percent in
fuel costs between '02 and '06. How in the world does a small
business owner like me supposed to cope with this sort of a
volatile and devastating price increase? How can I expect to
formulate a viable business model with these sorts of wild
price fluctuations? How can I grow my business? How can I add
additional employees?
As summer months approach, fuel costs continue to rise,
almost expidentially with the temperature. Unfortunately for my
business the summer price surge occurs during a period of
increased fuel consumption as a result of expanded service
activity. I dare say that these numbers are typical for most
businesses regardless of their geographic location.
In fact, 75 percent of respondents doing an NSBA survey
last year reported their businesses had either been
significantly or moderately effected by rising prices.
In order to maintain any level of profit in my operation I
have no alternative but to pass the cost of rising gasoline
prices onto my customers. Sometimes I could arbitrarily
increase--just put a fuel surcharge on, but I cannot do that on
fixed cost contracts and long term customers, and I cannot
arbitrarily raise hourly rates.
One unique problem that I face in the New Orleans area, the
fact that many areas are still recovering, is that the
availability of service stations is a factor. No long are there
sources of fuel on every other corner. It's imperative that my
service technicians be properly routed to ensure that they have
adequate gas supply for their day's routes as they make their
rounds.
The immediate problem of removing flood waters from my
property, working to help family and employees return and
recover, reestablishing customer contact and establishing
necessary financing when my accounts receivable became accounts
inconceivable following the storm all seem to have been a
foreteller of today's problem of upwarding spiraling fuel
costs. Despite such persistence obstacles in the situation in
New Orleans has improved. At least I no longer have to fill
five gallon gas cans at a remote location and fuel my trucks by
hand. Now my main concern seems to be what will the price be at
the pump when my trucks roll out in the morning.
It is one thing to deal with such uncertainty and
volatility in the midst of what is arguably the worst natural
disaster in the nation's history, it is another to have to deal
with the day-to-day basis a year and a half after the event
occurred.
New Orleans area, we are working to solve these problems.
The rising cost of gas is just a devastating problem that we
are fighting, but it is something that we are trying to deal
with. The NSBA has several issues that they are supporting and
ideas that they are behind. I mentioned in my written
testimony: Increasing and diversifying the domestic and energy
production; improving the efficiency standards which would help
anyone; studying utilization of hybrid vehicles especially
those that run on alternative fuels but they need to be
something that are capable of carrying service loads on major
service trucks and most hybrid vehicles will not accomplish
that.
Thank you for your time, sir. And I welcome questions.
[The statement of Mr. Mitternight follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Markey. Thank you, Mr. Mitternight.
Speaking of alternative fuels, Mr. Donn Teske is a farmer
from northeastern Kansas. He is now in his seventh year as the
Kansas Farmers Union President. He serves on the Boards of
numerous other agricultural associations. He has worked at
Kansas State University as a farm analyst.
We welcome you, Mr. Teske. Whenever you feel comfortable,
please begin.
Statement of Donn Teske, President, Kansas Farmers Union
Mr. Teske. Thank you, Congressman Markey. Thank you Member
Sensenbrenner. Members of the Committee.
I consider this a really unique opportunity for a pretty
darn nervous redneck farmer from Kansas to be addressing this
group. So if I get to stuttering around, have patience with me.
Energy consumption in agriculture is a very significant
issue, and I really welcome the opportunity to have it. And
representing and speaking on behalf of Kansas Farmers Union and
National Farmers Union, we really want to compliment this
Committee on the proactive approach that they are having to
address in this very serious issue.
Personally we operate a fifth generation farm in northeast
Kansas, as the Congressman said. We are on the eastern edge of
the Flint Hills in Pottawatomie County, Kansas.
The operation is about 2,000 acres, about two-thirds of
that is native bluestem grass, another 500 acres of it is
certified organic. On that we raise commodities that we sell
into the organic livestock industry, mostly alfalfa hay, red
clover hay, corn, milo, wheat, soy beans; that type of thing.
In the past my wife and I operated a dairy farm there for
many years. My wife Kathy was really glad to see the cows go.
Agriculture has really been stagnant for quite a few years
now. I have farmed for 30 years and a lot of times it ends up,
you know, you are in the red. And if it is in the black, it is
usually about the difference in the government subsidy payments
that make the difference.
Both my wife and I have had to seek off farm employment to
sustain a family. To me there is something wrong when you have
a farm operation that size and both spouses are working off the
farm to feed the family so they can produce their share of the
country's food supply virtually for free.
Now on top of that we get into a situation like this where
we have been blindsided by super high energy costs, and it is a
double whammy.
The former Congressman from Massachusetts John Kennedy once
said that the farmer is the only entity out there that buys
everything retail and sells everything wholesale. And there is
a lot of truth in that. You know, everything that we put into
the farm we buy in the marketplace and we have virtually no
control over what we get from it. And the new energy costs
expenses that we are getting on, we cannot automatically pass
on. So the buck stops here, and it is with us, and it has
really been a bad situation. And we are trying to deal with
this at a time when oil companies are recording record profits?
A little hard to digest.
To put it in a little perspective into the farm situation,
I got some information from Kansas State University Farm
Management data. In 2000 it took about 115 bucks to put in an
acre of non-irrigated crops in Kansas. Out of that 26 percent
was energy related. In 2005 it took 140 bucks and about 35
percent is energy related. That is over 20 bucks an acre that I
got to figure out how to come up with.
To put it on a personal note, I have some letters that I
would like to include as support from a real bank and from a
trucker.
I had a trucker that took a load of hay to Texas for me a
couple of weeks ago. That load of alfalfa hay was 20 tons. It
is going to bring me about a $3500 check when it is all done.
The increased expenses on the recent escalation in fuel prices
compared to what we did before is going to add 600 bucks of
trucking expense to that load. Somewhere between the three
entities, the trucker, the dairyman and myself, we got to
figure out how to absorb that 600 bucks to keep going the way
we have been going. And that does not work very well.
Now on the positive side of things it looks to me like
society is finally starting to address the issue of our
environment. And I think that is wonderful. Global warming to
me is very real, and I think it is the scariest thing that I am
leaving for my children. Economies can be fixed. Governments
can be fixed. You mess up our world, you kind of got a problem.
I think that we as a nation need to take responsibility,
and I have four quick steps that I wanted to put in.
Number one and foremost is energy conservation. We are a
gluttony nation and we need to do something about it.
Number two. We need a nationwide renewable portfolio
standard, especially addressing community wind would be my
passion.
Number three. I think we need to address the food issues in
our transportation system and food delivery. We need to go back
to more local food production and supply and distribution. We
are shipping our food all over the country.
And number four. And the worst case scenario is we may have
to look at rationing because we may have to separate the
entertainment from the necessities.
And I do want to thank you. And would ask that that be
included.
Thank you.
[The statement of Mr. Teske follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Markey. I thank you, Mr. Teske. And without
objection it will be included in the record.
We thank you for quoting President Kennedy on farm policy.
That is very helpful to me. Actually, we were just the reverse
in the Markey family. My father was a milkman, so we actually
go back to the retail again, going door-to-door with it, having
the company purchase it wholesale.
We will now move on to our next witness. Our next witness
is Sylvia Estes. She is a Native American Indian. She owns two
businesses in Virginia Beach, Virginia; the Pipeline Industrial
Group performs new construction, demolition, design build,
emergency response mostly for the Federal Government.
We welcome you, Ms. Estes. Whenever you are ready, please
begin.
Statement of Sylvia Estes, Pipeline Industrial Group
Ms. Estes. I am more nervous than he is.
Chairman Markey. Well, he did a great job. I am sure you
will, too.
Ms. Estes. He did a fabulous job.
I am a farmer as well. I have a horse farm and a
construction company, both of which, anyone here we all know
that fuel costs going up have firm fixed price contracts which
means we do not get economic adjustments and we eat it off the
bottom line. So as your costs keep going up or our costs keep
going up, our profit margins keep going down.
I will sit here and try go back to my prepared statement.
Founded in January 2000 Pipeline Industrial Group started
with four employees and two trucks. Our primary work was
petroleum. The field of petroleum had lapsed, and we went into
construction. The Government grew us in construction. As of
today, we support 120 people, that includes wives and children.
We are a team. We work together as a team. Together we overcome
problems every single day. We do whatever the Government ask of
us, whether it is new construction or Hurricane cleanup.
I have talked about rising gas prices and how they are
effecting the small businesses like mine and the families and
the community they support. We cannot build in contingency to
our proposals with the Government. Any additional costs at all
comes off our bottom line profits.
The rise in fuel costs effect nearly every aspect of my
business in one way or another. Many direct costs. It costs me
more to run my business. Costs of materials, copper, steel,
they have escalated in price. The cost in labor, and my
employees expect more money. In order for them to even get to
work I have to pay them more money. And in order to keep them,
I have to get employees that do not have as much experience so
that I can afford them. And then I have to train them and I
have to start all over again.
Every time our economy shifts, the small business shifts.
We are good people. We work hard. We want to do good for you.
We believe that there is technology available to you that we
all hope that you would look at. Technology that is a little
different than the normal.
I spent four days writing your speech that I cannot even
remember. I looked at every single thing on the internet I
could possibly read, and my poor brain got fried. I did find
one thing that I found was extremely interesting and it was
called SkyTran. Runs off of solar energy. It is not paid for by
the government. It is private industry. Whether it will work or
not, I cannot answer that. I do not have your answers, but I do
know that there is technology here in the United States that
does have your answers.
And instead of us relying on someone else to give our
country what we need to exist, why can we not rely on
ourselves? We do it everyday as a team. Look at Hurricane
Katrina. We all pitched in together. That is what America is
made of. It is not made of politics. And I will give you small
joke that I have recently been told. Politics are the worst
kind of ticks to have. And as a country girl, I agree with
that.
I am sorry. We are out here earning a living. We want to
make the best for our employees. We treat them with respect. We
give them the respect that they are out there working for us.
And as long as we keep that respect in life, we all keep moving
up. When we take that respect away, and when you start raising
the cost consider the fact that these people are not eating
lunch. You may actually have enough money in your bank account
to afford to go out to lunch, but most employees do not. They
skip lunch, they skip breakfast and they eat dinner.
I have a nursery in my office so I can keep my employees. A
lot of babies being born. It is one way that I can give back
instead of giving raises. Every employer should be responsible
for their employees. You should not go to sleep at night if you
do not think your business is going to make it. You should
figure out how to make it.
I would like to ask you guys to look at how to make it. If
I can tell you in four days between running a business, two
businesses and two teenagers, there is not much left of me. But
I do know that there are answers. I know they are here. I know
the internet is a great source for them. I have read more
articles. One says it is pro, one says it is against. I mean,
what is real? Does anyone truly know what is truly real? I
agree with him, global warming is real. We are experiencing
more storms. In fact, I have been invited by the government to
go next week or the week after to a world global emergency
summit because we all are facing problems.
We need to pay attention to what it is going to be twenty
years from now, forty years from now, not just today. We have
children and, hopefully, someday grandchildren.
And I thank you.
[The statement of Ms. Estes follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Markey. Thank you. Thank you Ms. Estes very much.
And I heard what you said at the beginning of your
statement and I know you will not take this as a compliment,
but you would be an excellent politician. Really, you have the
makings of one. You are very good.
And next we have John Felmy. Dr. Felmy is the Chief
Economist of the American Petroleum Institute. He is
responsible for overseeing economic statistical and policy
analysis of the American Petroleum Institute. He has over 25
years experience in energy, economic and environmental
analysis. He received bachelor's and master's in economics from
Pennsylvania State University, and a Ph.D. in economics from
the University of Maryland.
Welcome, Dr. Felmy. Whenever you are ready, please begin.
Statement of Dr. John Felmy, Chief Economist, American Petroleum
Institute
Mr. Felmy. Chairman Markey, Ranking Member Sensenbrenner,
Members of the Committee, I am John Felmy, Chief Economist at
API, the national trade association of the U.S. oil and natural
gas industry. API represents nearly 400 companies involved in
all aspects of oil and natural gas industry, including
exploration and production, refining, marketing, transportation
as well as service companies that support our industry.
U.S. oil and gas companies understand the frustration that
consumers are expressing about gasoline prices. We recognize
that these higher prices adversely impact individuals,
households, businesses and potentially the economy. Our member
companies are doing everything they can to meet the fuel needs
of U.S. consumers.
As of today, crude oil inventories have been building and
are 8.9 percent above the five year average at this time.
Year to date gasoline production is 8.85 million barrels
per day, the highest ever. Thanks to the industry's major
investments in state-of-the-art refining technologies, our
companies are able to squeeze more gasoline and diesel fuel
from a barrel of crude oil compared to past years. Looking
ahead, we expect to bring the equivalent of an additional eight
new refineries into operation by 2011.
Despite the industry's all out efforts we are still faced
with a set of challenges that in combination have driven up
gasoline prices. Most importantly, crude oil prices have
fluctuated significantly driven by lingering geo-political
tensions, OPEC's continuing production controls and worldwide
demand growth.
More than half the price of gasoline is attributable to
crude oil. Oil companies do not set the price of crude. It is
bought and sold in international markets and the price paid for
a barrel of crude reflects the market conditions of that day.
A second major factor is that gasoline demand in the U.S.
reached a record high in the first quarter of this year. The
Department of Energy forecasts that demand will increase
further in the summer driving season, which begins this month.
Moreover, nearly half of U.S. gasoline is blended with
ethanol so as demand has gone up, ethanol prices and the cost
of ethanol blended gasoline has risen as well.
In addition, the annual switchover to summer blend gasoline
required by EPA has occurred. And this warm weather gasoline is
more expensive to produce. The switchover requires a large
supply drawdown to meet regulations. Unless gasoline is
available to import because of spring refinery maintenance in
Europe, an 18 day French port workers strike in March led some
European refiners to reduce production.
U.S. gasoline production this year is at all time record
highs despite regularly scheduled refinery maintenance and
several unexpected problems that have interrupted some refining
operations. The maintenance is a normal procedure, though
delayed in some cases by damages suffered from the catastrophic
hurricanes in 2005.
While maintenance curtails refining operations temporarily,
it helps to ensure the longtime viability of the refinery and
protects the health and safety of our workers.
Some are again accusing the industry of illegal activity.
Our industry has been repeatedly investigated over the many
decades by the Federal Trade Commission and State Attorneys
General. Of more than 30 investigations that we are aware of,
all have resulted in exoneration.
I would also note the introduction of price gauging
legislation in Congress. I would caution that this legislation
could have many unintended consequences that would not benefit
consumers.
Rising gasoline prices are a burden on U.S. consumers, but
they cannot be viewed in isolation from the U.S. energy
situation. Solution to the energy challenge that we face is to
increase and diversify sources of supply, including
alternatives, reduced demand and expand infrastructure. We have
plentiful domestic oil and gas resources remaining to be
discovered in the U.S. Only government policies stand in the
way of increasing access to these resources, facilitating
refining capacity and pipeline expansions and increasing energy
security.
America can meet its energy challenges just as it has met
great challenges in the past. But meaningful changes in energy
policy will be required.
API stands ready to work with your Committee and others in
the Congress and the Administration to help bring about these
changes that are so important for America's energy future.
With that, I will thank the Committee and I will be happy
to answer any questions you might have.
[The statement of Dr. Felmy follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chairman Markey. Thank you, Dr. Felmy, very much.
That completes the time for opening statements by the
witnesses. The Chair will now turn and recognize himself for
five minutes.
Dr. Felmy, yesterday in the Senate Commerce Committee
legislation dealing with fuel economy of cars and light trucks
was passed. Senator Cantwell added an amendment which dealt
with the issue of oil price gauging. Can I ask you some
questions about that?
Do you agree that President Bush should have the authority
to declare a temporary national emergency if there was a
threatened or existing disruption of oil and petroleum supplies
due to events such as a hurricane or a terrorist attack?
Mr. Felmy. I believe that in the area of price gauging you
have a number of possibilities that could be considered. I have
not seen the exact legislation to know the exact wording on how
that could be declared and what else would go with it. But we
do have cases where governors have the ability to be able to
declare emergencies for some situation such as that. So it
would be something that we would have to look at carefully.
Chairman Markey. Well, you were quoted in yesterday's
newspaper as saying that ``Senator Cantwell's legislation was
unfortunate political rhetoric with no basis in facts.'' So I
think that today's answer is somewhat different, in fact
radically different from what you said yesterday.
Let me ask another question. Do you agree that in the event
that there was a national emergency, national energy emergency
that it should be illegal to charge unconscionably excess
prices for gasoline?
Mr. Felmy. As an economist, Mr. Chairman, I do not know
what ``unconscionable'' means.
What we have seen in the past in terms of changes have been
largely as a result of market forces at all levels of the
supply chain. I simply do not know what ``unconscionable''
means in terms of a definition that can be usefully employed
that would not cause potential problems in the marketplace that
could, again, have unintended consequences.
Chairman Markey. I think the other witnesses know what
unconscionable would mean in terms of high energy prices. I see
all four heads nodding.
Do you agree, Dr. Felmy, that especially at a time when we
might be in a national energy emergency that there should be an
explicit statutory ban on manipulative practices in wholesale
petroleum markets?
Mr. Felmy. I am not an attorney, Mr. Chairman, so I cannot
comment beyond just I believe the understanding of the law is
that you already have many provisions in place to deal with
manipulation under the regulatory authority of the Commodities
Future Trading Commission and the Federal Trade Commission.
Chairman Markey. Do you agree that it should be illegal to
knowingly submit false information about wholesale petroleum to
the Federal Trade Commission?
Mr. Felmy. I--again, Mr. Chairman, I am not an attorney.
But my understanding is that you already have those provisions
in place. You have had prosecutions to that effect for false
submitting of data to various entities.
Chairman Markey. Let me ask the other witnesses quickly if
each of you could tell us what it would mean to each of you
briefly if the price of gasoline moved over $4 a gallon. Very
briefly.
Mr. Thomas.
Mr. Thomas. The number of students riding school buses
would dramatically increase, but the problem would be that we
would not be able to afford to deliver that bus service because
that money would be taken out of the education.
Chairman Markey. Mr. Mitternight.
Mr. Mitternight. It would require me to definitely raise
prices to my customers and try to renegotiate contracts. I
would have to find some way to pass that cost on in order to
make any profitability.
Chairman Markey. Mr. Teske.
Mr. Teske. At this point in agriculture, we do not have
that ability to pass it on. So we are talking about disaster
within the agriculture industry. And you are talking about
additional subsidies or you are talking about some major change
within the marketing system.
Chairman Markey. Ms. Estes.
Ms. Estes. I work for the Federal Government, and I know
they do not have any money, so I cannot pass it on either. So I
would say it be closing my doors down.
Chairman Markey. Well, I will say this: It is the goal of
the speaker to pass legislation that will deal with this issue
of price gouging. And we intend on doing that this year, very
very soon.
In the first three months of this year ExxonMobil, Chevron,
ConocoPhillips, Shell and BP collectively reported $29.4
billion in profits.
This Congress in January in one week, the first week,
passed legislation to reclaim $14 billion in excessive
royalties that the oil companies had received and created a
fund for renewable energy and for energy conservation. The
White House opposes that. That is half of the money that these
oil companies made in three months. And we are trying to move
the country in a different direction, which this Administration
continues to fight us.
The time of the Chair has expired. We will turn and
recognize the gentleman from Wisconsin, Mr. Sensenbrenner.
Mr. Sensenbrenner. I thank the gentleman for giving me this
time.
We live in a market economy. And one of the laws that
Congress cannot repeal is the law of supply and demand. So if
we want the price of anything, including petroleum, to go down
we have to either increase the supply or reduce the demand or a
combination of the two.
I think probably the most telling immediate statistic that
we have is that our refining capacity is about 17 million
barrels a day and the demand for gasoline is about 21 million
barrels a day. Can I ask all five witnesses if they think that
we would get immediate price relief if we went on a crash
program to increase our refining capacity so that we are able
to have more product on the market, starting with you Dr.
Felmy?
Mr. Felmy. Mr. Sensenbrenner, I would agree that increase
in capacity would allow more refining of petroleum products for
the consumer. And as an economist, whenever you increase
supply----
Mr. Sensenbrenner. Okay. I want some brief answers. I got
five minutes.
Mr. Felmy. Yes, sir.
Mr. Sensenbrenner. Ms. Estes.
Ms. Estes. Absolutely.
Mr. Sensenbrenner. Mr. Teske.
Mr. Teske. I'm not convinced in that itself would do it.
Mr. Sensenbrenner. Okay. Mr. Mitternight.
Mr. Mitternight. I think in the long run it would. I do not
think it would be immediate because the cost of the fabrication
or the construction of the new refineries would be there. But I
think in the long run it would definitely bring the cost down.
Mr. Sensenbrenner. Mr. Thomas.
Mr. Thomas. I think it would bring the cost down.
Mr. Sensenbrenner. Okay. Now another way to reduce demand
is to raise the price. In my opening statement I talked about
the carbon tax that the U.N. is talking about imposing of
approximately $100 a ton which translates to about a dollar a
gallon of gasoline, according to last Saturday's Washington
Post. What do you think would happen to your businesses if we
passed this carbon tax, starting with your, Mr. Thomas?
Mr. Thomas. Well, as long as the school buses remained
exempt from the Federal taxes that they are now----
Mr. Sensenbrenner. Okay. That is a good thought.
How about you, Mr. Mitternight.
Mr. Mitternight. Any increase in taxation, if there is
anyway to reduce taxes and being from Louisiana we have above
and beyond our far share of taxes on everything that we do. So
we could not----
Mr. Sensenbrenner. Just come to Wisconsin if you want to
see how bad taxes are.
Mr. Teske, how about the dollar a gallon increase because
of the carbon tax that has been talked about.
Mr. Teske. You know, I would not like that for the same
reasons we said all along, but at the same time if all the
polluters had that same carbon tax on it, I think we could make
dramatic differences. Those coal plants do a heck of a lot more
than my farm equipment does.
Mr. Sensenbrenner. Okay. Ms. Estes.
Ms. Estes. Bottom line, it would hurt my employees more
than it would hurt me. Financially at this point I cannot keep
giving them raises. They are going to go without food. So----
Mr. Sensenbrenner. Dr. Felmy.
Mr. Felmy. A carbon tax could have severe negative impacts
on the economy. API does not have a specific position on many
of these global policies that are being discussed, but we would
certainly welcome the opportunity to talk about all of them.
Mr. Sensenbrenner. Okay. Now some people around here,
including my dear friend the Chair seemed to think that the
magic wand is increasing CAFE standards. And I saw the chart
that he had raised behind him during his opening statement. I
ask you because my time is running out, Dr. Felmy, when the
CAFE standards kicked in we had a period of double digit
interest rates stagflation and then followed by a recession.
How much of the reduced imports do you think were caused by
economic factors other than the increase in the CAFE standards?
Mr. Felmy. Mr. Ranking Member, I have not done an
analytical study but there is no question there were three
broad factors that caused the reduction in demand.
CAFE standards could have had an impact.
We also had high prices. We had $3.22 per gallon in 1981 in
today's dollars for gasoline.
And finally economic activity slowed down and recession all
had significant impacts.
Mr. Sensenbrenner. Okay. So it would be your considered
judgment that it was not exclusively the raising of the CAFE
standards that caused the reduction in our percentage of oil
that we imported from overseas?
Mr. Felmy. That would be my judgment, sir.
Mr. Sensenbrenner. I thank the Chair.
And I yield back the balance of my time.
Chairman Markey. The Gentleman's time has expired.
The Chair recognizes the Gentleman from Oregon, Mr.
Blumenauer.
Mr. Blumenauer. Thank you.
And I, Mr. Chairman, would like to thank you and the staff
of assembling I think a very useful panel. I thought the range
of experience that was given in real life, putting a face on
this, was extraordinarily helpful. And I appreciate what we
have heard.
I am particularly want to, just if I could, Mr. Teske, you
had given a hint there, you talked about the carbon tax or some
sort of carbon system. I mean I think most people agree the
world is moving in this direction. We have got ten northeastern
states that are doing it, most of the business community
understand that there will be some carbon constraint.
You hinted at something. Would it make a difference to you
or any of the panel members if there was some sort of carbon
constraint in terms of what happened to it? If it was used to
be able to help give you the type of energy technology that you
want? If it was used to defray the high costs that some
particularly lower income people were contending with? If it
was used to offset the costs, for example in some cases, of
more energy efficient equipment or technology? Does that make a
difference to you in terms of how this money is used? Are there
ways that it could be used that it would make a difference to
how you do business?
Mr. Teske. That is kind of an interesting concept. As I
kind of hinted at there, I do not like new taxes but we have to
take environmental responsibility. My belief is that global
warming is true, and so where do we take those steps. And so I
was having this discussion with a close friend that I have a
lot of respect in recently, and we were talking about the
current marketing structure and could we address increased fuel
costs alone to reduce demand. And both of us did not think that
marketplace would allow that flow through to happen so the
general economies could flow.
And so about the only we are going to have to do it is with
some type of Federal Government interaction. And whether that
is a carbon tax or something else, I do not know what the
proper structure for that is. But I do not think the ``free
marketplace'' that we have now is going to absorb that and pass
that through the system. And so we would have devastated
businesses and economies all around the country with trying to
do it with just increased gas prices alone.
If the polluters that were building this carbon problem
were taxed equally across the board, I would have a hard time
arguing with that.
Mr. Blumenauer. Let me just say, I do not want to catch any
of unawares, but I want to plant the seed and invite you to
think about ways that it might make a difference to you.
And I would like to follow up, Mr. Teske, with one thing
that you talked about in terms of the farm legislation. Because
one of the things that this Committee is looking at, we are not
originating legislation per se, but we are looking at big
concepts. We do have a farm bill that is coming along that has
lots of opportunities to deal with rural redevelopment, to deal
with--there will be an energy title in it. To deal with things
from wind to solar to biomass where Federal farm policy might
be able to reduce the carbon footprint of American agriculture
and help farmers do that. And I wondered if you had any
thoughts about what the farm bill might do to help in your
situation with the energy question?
Oops. I realized I have less than a minute, and that is not
fair either. I will follow up with you personally on that.
I just wanted to make one point. We talked about refining
capacity, Mr. Chairman. It just seems to me that there is a
pretty clear record that there were opportunities for--there
has only been one refinery proposal, to my knowledge, in the
last 30 years. One in Yuma. Since the early 1990s it has
received all of its environmental permits, but could not get
financing because nobody wanted to invest in it. And the oil
companies had lots of money. It was not that they did not have
money to invest. It seems to me that there were bets made that
they could make money without increasing refining capacity.
Thank you, Mr. Chairman.
Chairman Markey. Okay. The Gentleman's time has expired.
The Chair recognizes the Gentleman from Arizona, Mr.
Shadegg for seven minutes.
Mr. Shadegg. Thank you, Mr. Chairman, and thank you for
holding this hearing.
I do not really want to get into the issue in great depth,
but I want to begin by asking unanimous consent to put into the
record a letter from Arizona Clean Fuels Yuma, which goes into
the issue raised by the Gentleman from Oregon just a moment
ago. Arizona Clean Fuels Yuma, I believe, is very close to
having its financing. The letter includes with it a lengthy
analysis of the delays in the construction project. The
Gentlemen is correct, I think that is the only effort to get a
new refinery on line. They detail at length the regulatory
impediments to that. And I would put that in the record, if I
might.
Chairman Markey. Without objection, it will be included in
the record.
Mr. Shadegg. I want to thank the panel for their testimony.
I think it is very interesting. It actually reminds me of a
number of conversations with my wife over what happens at this
time of year, and I will go into that in just a moment.
I do want to follow up on a line of questioning that Mr.
Sensenbrenner had. He asked you about a carbon tax and were a
carbon tax to add a dollar to the cost of fuel, what that would
do in terms of having an impact on you.
Another idea that is floating out there, and it has been
proposed by a lot of thoughtful people, and has been
implemented in part in Europe is the idea of a cap and trade
program. That is we would set a cap on carbon emissions and
then you would buy and sell trading permits. Europe has
implemented such a cap and trade system, not by the way for
mobile sources but for fixed courses of carbon. And it has
caused an increase in the cost of energy of between 16 and 25
percent. Let us assume it is half of that, an increase of eight
percent or ten percent.
Each of you expressed concern about a carbon tax in terms
of driving up the cost of fuel. I assume your thoughts about an
increase in cost would be the same if it were as a result of
the imposition of a cap and trade system? Mr. Thomas, would
you----
Mr. Thomas. Yes, the result would be the same.
Mr. Mitternight. Yes. Any increase in taxation does the
same thing.
Mr. Shadegg. Mr. Teske.
Mr. Teske. I believe I have addressed that issue.
Mr. Shadegg. Fair enough.
Ms. Estes.
Ms. Estes. I am not sure if the increased tax of a $1.00 is
going to make a difference.
Mr. Shadegg. Mr. Felmy.
Mr. Felmy. If implemented in the same technique as using a
carbon tax, then you would likely have the same impacts. The
issue with cap and trade is allowances and a whole host of much
more complicating factors that can distort the system
significantly.
Mr. Shadegg. Yes. One of my concerns is that in Europe it
appears to have added cost without having achieved the
environmental goal. And that would be one of my concerns.
Let me ask another concern, because I am curious about
this. I personally favor if you are going to impose a cost to,
for example, reduce carbon emissions, I would rather have it be
a visible cost. I have a little bit of concern that if it were
in a cap and trade as opposed to a carbon tax, it would be
buried and people would not be able to see it. I hope you all
understand what I am saying.
If there is going to be a cost to reduce carbon in our
atmosphere, would you rather it be clearly set out and visible
so we know what that cost is, or does that not matter and if it
were buried in a cap and trade system, that would be just as
well with you? Mr. Felmy.
Mr. Felmy. API only has a position that we would like all
the different options to be discussed. These are very
complicated systems to put in place.
Mr. Shadegg. Fair enough.
Ms. Estes. It is a question of whether you would see it or
not or have it varied?
Ms. Estes. I would rather see it. And I think the American
people, right now one of the big things I saw is we do not have
any trust.
Mr. Shadegg. Right.
Ms. Estes. So I would rather see it. I believe they need to
see it.
Mr. Shadegg. Fair enough.
Mr. Teske.
Mr. Teske. I would like to see it.
Mr. Shadegg. Mr. Mitternight.
Mr. Mitternight. I agree. I would want to know where it is
going.
Mr. Shadegg. Mr. Thomas, I had the impression that most
school buses run on diesel, but maybe I am wrong about that.
Mr. Thomas. You are correct.
Mr. Shadegg. Okay. And so your fleet would be diesel fleet.
And when we are talking generally gasoline prices, you are
talking about diesel prices having gone up the same, is that
what you are saying?
Mr. Thomas. Actually more.
Mr. Shadegg. Diesel prices have gone up more?
Mr. Thomas. Yes, they have.
Mr. Shadegg. Have you taken a look at natural gas as a fuel
for your fleet?
Mr. Thomas. Yes. Actually the industry has. And the net
effect is that we believe that clean diesel has the best effect
overall on both the supply for the fleet and not only the
global impact, the emissions impact, but the availability to
school districts.
Mr. Shadegg. There are developments in clean diesel which
dramatic recent development making it even cleaner than natural
gas, is that correct?
Mr. Thomas. It actually almost reduces all the emissions
that we consider toxic.
Mr. Shadegg. So you would----
Mr. Thomas. Clean diesel.
Mr. Shadegg. That leads me to kind of a broad question.
Would you all agree that we need to keep a broad diversity in
our fuels, that is gasoline, diesel, biodiesel, liquid to gas,
coal liquid to gas? Is a broad diversity something you think
will help hold down costs for down the line?
Mr. Thomas. Well, I think it would.
Mr. Shadegg. Mr. Mitternight.
Mr. Mitternight. I would think it would, again as long as
it is adaptable to a small business' fleet of vehicles that you
can adapt easily.
Mr. Shadegg. Mr. Teske.
Mr. Teske. In the short term yes, in the long term I think
we will have something come out a clear winner that is a lot
better than petroleum. Hopefully, hydrogen or something like
that.
Mr. Shadegg. Well, yes. I am not limiting this to
petroleum, by any means.
Ms. Estes.
Ms. Estes. Yes, I definitely agree that you need to look at
the wider spectrum. There are other alternatives out there. You
have mentioned Europe is using a nuclear power system----
Mr. Shadegg. I appreciate that. We will look into it.
Mr. Shadegg. Mr. Felmy.
Mr. Felmy. Going forward we will need all sources of energy
to increase, we will need energy efficient and we will need
more infrastructure.
Mr. Shadegg. My time is just about expired.
You said, Dr. Felmy, that there is a large supply drawdown
required by regulations. My wife says why do the gas prices go
up at this time of year every year. And she says why--you said
summer fuel is more expensive. Is the Government causing by
either regulation or by prescription of a formula gasoline
causing prices to go up at this particular time of year?
And with that, I yield.
Mr. Felmy. The regulations require summer blend gasoline
starting May 1st, unless you are in California, and then it is
March 1st, April 1st, May 1st. So it is a much more complicated
system.
You need cleaner burning gasoline that has less vaporative
properties, and that is more expensive to produce.
Mr. Shadegg. I am done. I yield.
Chairman Markey. The Gentleman's time has expired.
The Chair recognizes the Gentlelady from California, Ms.
Solis.
Ms. Solis. Thank you, Mr. Chairman.
I would like to make a comment directed to Mr. Felmy. While
I appreciate your testimony on the oil and natural gas industry
claiming that they understand the frustrations of our
consumers, I tend to question that appreciation of your
testimony and what I have read in your statement.
First you go to great length to defend the industry profits
and criticize efforts to protect consumer gauging. And you left
out several details, some of which I would like to mention.
In April of 2004 Bloomberg New Service reported that
ExxonMobil refining profit rose 39 percent. And we heard
earlier from our Chairman regarding that. They actually made a
profit of $1 billion.
ConocoPhillips in their first quarter 2004 report stated
that the U.S. refining margin increased almost 31 percent and
that most of their overall corporate earnings came from the
refining side of the business.
And another report released in 2005 shortly before
Hurricane Katrina hit showed that in August of 2005 refinery
margins rose 54 percent and that those profit margins were
responsible for 60 percent of the increased cost of fuel at the
pump.
Other studies estimated that as much as two-thirds of the
increased cost of gas at the pump is a direct result of profit
margins of refiners.
And immediately after Hurricane Katrina Murphy Oil, a
company with refineries impacted by the Gulf Coast, lamented
the fact that it had refineries off line because it is missing
out ``record margins.''
And in your written testimony you also contend that
Congress can help by opening up areas which are off limits to
new production. However, you leave out critical information
about the lands which are available for leasing upon which
there is no current production. In 2003 the Bureau of Land
Management reported that 85 percent of the oil and 88 percent
of the proven gas on Federal lands in Colorado, New Mexico,
Utah, Montana and Wyoming were available for leasing and
development. Of those areas which are currently available
offshore, only 35 percent are currently in production.
It is disingenuous in my opinion to argue that your
industry needs greater access when it is not currently
producing in areas already available.
Do you have a comment?
Mr. Felmy. There are several points you brought you,
Congresswoman.
First in terms of access. While you may have access for
leasing, there are a whole host of other restrictions postly
that can prevent you from actually exploring. But irrespective
of that, the ability to produce more oil and gas anywhere will
increase supplies for whatever reason and potentially help
consumers.
Now in terms of the refinery situation, this is a
fundamental focus of markets at work. Refining margins go up,
they go down. They were very low at the beginning of the year.
They increased subsequently from that. But these are forces of
supply and demand that effect the prices of crude oil, the
prices of natural gas and ultimately refining margins. And I
would also like to point out those are margins and not
necessarily profits. Because the margins themselves are gross
margins for which you then have to deduct all the costs. And it
is very difficult to see what happens.
In the first quarter, for example, if you also put it in
context, the oil industry in terms of earnings on the dollar
made 9.1 cents on a dollar. Comparing that to all of
manufacturing for 2006, which is the only data we have
available right now. We do not have the first quarter. You had,
taking out the car companies which of course they have had
their struggles, the average profit earnings margin for
manufacturing industries was 9.5 cents on a dollar.
So what we have is a situation where----
Ms. Solis. I would also like to hear from our other
witnesses, if possible. Thank you.
Mr. Felmy. Okay. Thank you.
Ms. Solis. I think I got the gist of your comment.
If we could start with Mr. Thomas, briefly.
Mr. Thomas. I am going to pass.
Mr. Mitternight. I am not a 100 percent sure of the
question. Can you briefly----
Ms. Solis. More of a comment. I mean what I was saying that
actually we are finding that there are lands available to
conduct and produce, provide for more production but there
really has not been an effort on the part of the oil
corporations or companies to do that.
Mr. Mitternight. Right.
Ms. Solis. You heard a little bit of that from one of our
colleagues who left, Mr. Blumenauer, who said that the last
refinery or proposed permit that was actually issued was
almost, what? Several years ago. And the blame or attempted
blame was that the regulations were onerous that kept the
production from occurring from that facility coming out in
play. That is not necessarily true, and that is what we are
trying to get to.
Mr. Mitternight. Just a brief comment. Again, being from
Louisiana where we have our fair share of offshore drilling
going on, there is a serious problem. There is still lots of
area to further development offshore. But there are a lot of
State regulations as well as Federal regulations. And as much
as we trying to salvage our coast, there are a lot of problems
in developing that area.
Chairman Markey. The Gentlelady's time has expired.
The Chair recognizes the Gentleman from Oregon.
Mr. Walden. Thank you, Mr. Chairman.
I want to thank our witnesses today. I have enjoyed your
comments and your testimony.
For more than 21 years I have also been a small business
owner with my wife. We are in the radio business. So our
transmitters run electricity, not oil, which is a good thing at
least unless there is a power outage, then they run on LP gas.
So I am concerned about the economy, obviously. I
understand, Ms. Estes, what you are saying and Mr. Mitternight
and others about what it is like to make a payroll and take
care of the people that work for you. It is not easy and it is
always challenged, and especially when you have uncontrollable
costs. And the radio business in small markets, very reflective
of the local economy. And we cannot really push our costs up to
somebody else either. And so it is a challenge.
With that, let me just ask you Mr. Teske recommended a
national energy portfolio standard, right? A requirement, a
mandate that says every power company has to have a certain
percentage of renewal energy in their portfolio, the percentage
of which we might all argue about. There are some who would say
that in some regions of the country that will drive up the cost
of energy because you will be forced to perhaps buy a renewable
energy source that is more expensive than what you are today
getting.
So, Ms. Estes, you have raised the question about
additional costs in your business. Is that direction from the
Government a mandate on what your local supplier has to buy,
does that effect you if your price goes up?
Ms. Estes. Yes, it effects me. It effects me through the--
--
Mr. Walden. Can you move that mike a little closer. That is
why it cuts out on you.
Ms. Estes. Sorry about that. Yes, it effects me. It not
only effects me through my employees, it effects me through the
supplies, through the materials; pretty much everything.
Do I believe that we need to mandate and add more
alternatives? Absolutely. Is it going to cost us? Yes, but in
the long run, is it not going to save us?
Mr. Walden. Well, it might. And I guess--see, I come at it
the other way, which I would rather have an incentive system.
And in the Energy Policy Act of 2005, which some of us on this
Committee were on the other Committee that wrote that and it is
now law, that created the incentives for example that are
driving the production of ethanol by putting a $1 a gallon tax
credit there, that are giving .51 cent a gallon credit for
agrobiodiesel development. And I assume those who are in
agriculture have seen some benefit if you are on the growing
end of it.
I will tell you the story about my cattle rancher. It cost
him $100,000 a year more to finish off his herd because of the
increased cost of corn. So he did not think much of ethanol out
in Oregon, because we are not raising a lot of corn out in
Oregon, so I mean it has that effect.
But that Energy Policy Act we passed and put into law also
has the incentives, I think it is 1.9 cent a kilowatt hour to
encourage production of wind energy, geothermal energy, solar
energy. Half that credit for woody biomass.
So I kind of come at that I would rather incent the market
to go rather than arbitrarily demand and mandate and drive your
costs up and your costs. That is my own personal preference,
but I do not know. Maybe you wanted the mandated costs from
here. We can pick 20 percent of all your power has to be green
and let you figure out why. But there are members of this
Committee that pose wind generation off their coasts.
Dr. Felmy, we talk about trying to be energy independent.
Can you speak to the reserves that are in the United States in
the lower 48 and Alaska of what that could do if we could
access those reserves in terms of energy independence?
Mr. Felmy. In terms of undiscovered resources that if we
could have access to them, they could do a substantial amount
toward reducing imports. It is in excess, I believe, of a 100
billion barrels of oil that could be available for developing
that would go a long way to helping reduce our import
dependence.
Mr. Walden. I want to go to the issue of refinery capacity.
Because I gassed up in Brothers, Oregon, which none of you
should ever know about necessarily because it is a very small
little burg on the way between Burns and Bend and there is one
pump and a diesel pump. And it was like 3.99 a gallon, if my
eyesight was right. And they would sell me $15 worth because it
is that kind of limited capacity, but it got me to the next
town where I could gas up fully for $3.35.
The point is, though, I talked to a group of cattlemen that
were there. And they are concerned about this price because
what it takes to run their pickups and haul their horses and
cows and all. And they asked me about refinery capacity. And so
my colleagues have raised this issue as well, and I am
concerned. Because I know your capacity has increased. Even
though the number of refineries has been reduced, the refinery
capacity itself through new technology has increased, correct?
Mr. Felmy. That is correct.
Mr. Walden. How many companies own the refineries, do you
know? How consolidated is that market?
Mr. Felmy. Well, if you look at the top eight refiners, I
have looked at this in comparing it to Commerce Department
Census Bureau data, the share of total refining capacity is
about two-thirds. And that compares to other industries that
are large consumer products industries which have more
concentration of ownership than the refining industry.
So it does not look to me as though it is an overly
concentrated. And I firmly believe it is a highly competitive
industry.
Mr. Walden. If it is highly competitive, the profit margins
are fairly significant even though the percentage, I
understand, is 9 percent. But many industries, 9 percent is not
a bad margin to have. Why is it we are not seeing more
investors build refineries? I mean, we are on the bubble, I
mean that is my sense after several years on these committees.
The big storm in Louisiana that knocks out a couple of
refineries or a fire here, or a breakdown there, prices go
through the roof all of a sudden, you know. Why are we not
seeing more--do I not have another minute to finish up here?
Yes.
Why are we not seeing more refineries being constructed?
Mr. Felmy. Well, in terms of new refineries, I think
Congressman Shadegg pointed out the difficulties of Arizona
Clean Fuels in terms of all the hurdles they have to face. But
the industry has expanded the refinery capacity. The equivalent
of a new refinery every year for the last ten years within the
gates, and their announcements indicate that you could see, as
I believe and my testimony said, an additional equivalent of
eight more refineries. But it is a cyclical business. The
returns have not been good. And ultimately if you want to
invest, say, $2 or $3 billion in a new refinery, you have to
assure returns to your shareholders.
Mr. Walden. And is supply of the feedstock an issue
domestically to get it refined or do you have enough of the raw
product coming in?
Mr. Felmy. Well, worldwide markets are fairly efficient so
you are able to usually attract imported crude oil to be able
to refine it into petroleum products. But it is more expensive,
as my testimony indicated.
Ms. Solis [presiding]. Time is up. Thank you.
Mr. Walden. My time has expired. Thank you very much.
Thank you, Madam Chair.
Ms. Solis [presiding]. Thank you.
I would like to recognize Congressman Cleaver for seven
minutes.
Mr. Cleaver. Thank you, Madam Chair.
I thank all of you for being here. Thank you, Mr. Thomas,
for being here. I am very much interested in school bus issues.
And I look--I am from Kansas City, Missouri. I have looked at
the fleet of school buses and I know why they are yellow. We
used to have red fire trucks and we did a study and it showed
that yellow was much better seen.
But we have got to improve, I think, the look of the buses,
which is secondary to my real concern, which is what do you
think the capacity of school districts would be if by 2017
school buses were required to have a fleet of biodiesel buses
or hybrids? It is a ten or 15 year period for the school
districts to ramp up and get fuel efficient vehicles?
Mr. Thomas. The impact, because of the hybrids that we have
available now, IC Corporation has a hybrid out there that is
being tested in several states and the results are dramatic.
There is a dramatic decrease in the emissions, almost 90
percent and there is a dramatic increase in its fuel
efficiency, the miles per gallon would get. If the Federal
Government would mandate that, certainly the industry would
respond. And industry would, just as they have responded with
clean diesel, and this is the first year we have had to outfit
the whole fleet with clean diesel engines, we would comply. So
the impact, I think, would be dramatic and positive.
Mr. Cleaver. Thank you.
Mr. Felmy, I am one of the co-sponsors of the Federal Price
Gouging Prevention Act that was mentioned earlier. And I agree
with you that there may be some difficulty in defining
unconscionably excessive. I think I could do it. But you are in
that industry. Could you give me just your belief or figure for
unconscionably excessive movement of gasoline prices?
Mr. Felmy. Congressman, as an economist I cannot do it.
What we have seen over repeated increases in prices, whether it
be Hurricane Katrina or Rita or what we have experienced this
year, is markets at work. And so I would be very concerned that
if you were to put in an artificial definition, however
crafted, that it could have the unintended consequence
especially when combined with civil, criminal penalties, jail
time and so on, of traumatizing the market at a point where you
actually need movements of supplies, you need to be able to
attract imports, you need to be able to bring--you need a
demand restraint and so on. I would just be very concerned that
this could set us back to the price controls of the '70s, which
were an unfortunate episode we experienced.
Mr. Cleaver. Well, this Act would not prosecute anyone for
the normal natural movement of prices. The market will deal
with that. But what this legislation would deal with is
situations where it appears based on either natural disasters
or other events that may not have had an impact on the
industry, and yet the prices would soar.
And as members of Congress, I think you would agree that it
is difficult to explain to the constituents, or I would like
for you to give me information on how to do it when you go home
and people talk to at your neighborhood meetings about a $400
million bonus for an executive for MobilExxon, Lee Raymond. And
then they go and look--in Kansas City the average price of
gasoline today is like $2.92 and rising. So when you look at
Raymond getting $400 million as a retirement benefit, the
people at my town hall meetings are not interested in me saying
well the market is just kind of taking care of things and do
not worry about. I mean you can, or at least I hope, understand
that people are angry out here. And someone mentioned it
earlier, there was a $14 billion tax cut for the oil industry.
And then they recorded the highest profits in the history of
the planet.
And so, you know, I am not a bomb thrower, you know. I want
to be able to sit down and have an intelligent discussion. The
public is not inclined to be that patient right now. They are
angry, and so can you help me?
Mr. Felmy. Well, Congressman, we clearly know the
frustrations of consumers. I cannot comment on any individual
company's compensation policies. But if you look at the size of
that in the context of a multi hundred billion dollar
corporation, it really is insignificant in the scheme of
things.
Mr. Cleaver. That will not work. I can tell you now, that
will not work out on Blue Ridge Boulevard in Kansas City. So
give me something else.
I mean, these people are having difficulty earning $13 an
hour or, you know, they are working all day and you start
saying well that is not much money in the context of things.
Mr. Felmy. And, Congressman, I understand that. But one has
to put it in proper context, just as you need to put the
overall earnings of the industry in proper context. That they
are consistent with the earnings, as I mentioned earlier, with
manufacturing industries. And we understand the frustrations of
consumers.
Ms. Solis [presiding]. Unfortunately time has expired.
Mr. Cleaver. Thank you, Madam Chair.
Ms. Solis [presiding]. I would like to recognize
Congressman Sullivan for five minutes.
Mr. Sullivan. Thank you, Madam Chairman.
And in my opening statement I wanted to submit these two
letters into the record, and I ask unanimous consent to do it.
I didn't ask unanimous consent earlier.
Ms. Solis [presiding]. Without objection.
Mr. Sullivan. Thank you.
You know, you hear a lot about all this stuff. And I agree
with you. I think that compensation is big and I do think
saying that, you know, it is insignificant is a good answer. It
does not work, does it, out there? But companies do what they
do and we cannot control that.
But, you know, I was going to ask I guess Mr. Felmy, you
know we have gas prices are high, higher than usual, people are
going to experience that probably more so this summer. And, you
know, well I guess I will ask you if we had more refineries, do
you think that would help the prices?
Mr. Felmy. I think that anytime you are able to increase
the supply of any product, whether it be gasoline or whether it
be any other product, you help the market conditions.
Mr. Sullivan. And do you think Katrina, because of the
geographical location--we did not have much geographical
diversity on our refineries in this country. Really, a lot of
them--I guess 40 percent or so are down in that area that was
effected by Katrina and Rita. Did that have any impact on
price, do you think, as an economist?
Mr. Felmy. Well, as an economist the industry took a
beating from refining capacity shutdown, \25/30\ percent of
capacity, pipelines were shutdown, import facilities were
shutdown, production, complete production in the Gulf of Mexico
was shutdown. We had a real supply hit of all different
dimensions. At the same time you had increased demand leading
into the Labor Day holiday.
So there is no question we took a hit from both supply and
demand and what you saw, markets respond as a result.
Mr. Sullivan. You, sir, or anyone here, does anyone have
any evidence, or the FTC or anybody have any evidence of any
price gouging that occurred after Hurricane Rita and Katrina?
Is there anything that we can point to that is overwhelming
evidence that states that there absolutely was price gouging
and collusion and price fixing? Does anyone have anything they
can say?
Mr. Mitternight. I can answer it from my personal
experience. Prices escalated somewhat immediately thereafter,
but the State Attorney General and the State put a price cap so
that no prices could be increased. You know, they froze prices
where they were to try to protect people.
It was not necessarily a price problem as much as an
availability. You know, there were no places to----
Mr. Sullivan. So, Mitternight, you have experienced a great
deal of adversity down there during all that. I heard you
talking about it and it was terrible and prices were high. But
was anybody convicted of price gouging down there?
Mr. Mitternight. There may have been one or two isolated
instances in some of the rural areas around the city. But in
general, no.
Mr. Sullivan. But probably if that happened, it was like an
independent guy?
Mr. Mitternight. Correct.
Mr. Sullivan. Not like ExxonMobil or anybody with a
concerted effort to fix prices?
Mr. Mitternight. No. In fact in most cases some of the
larger corporations, the Shell and those kind of places worked
diligently to try to get a few isolated stations open to
provide a supply. And they were working with the emergency
relief people also and providing the fuel for them.
Ms. Clarke. Okay. Yes, I know you have been through a lot
down there.
Dr. Felmy, have you heard of anything, any evidence by the
FTC, any evidence by anybody, State, law enforcement agency of
conviction or suspicion or anything of any price fixing or
gouging that has occurred in the United States of America?
Mr. Felmy. In terms of any type of illegal activity beyond
the subjected price gauging, no. I mean, I think there probably
were a handful of instances in a few states where individual
owners, perhaps, exercised poor judgment in terms of the
results. But it certainly was not widespread. And that is my
recollection from what the discussion was.
Mr. Sullivan. So I guess it is safe to say, though, we can
say today in this hearing that there has never been evidence of
any widespread price fixing or price gouging that has occurred
in the United States of America through any of these companies
with an organized effort to do that? Would that be safe to say?
Everybody? Mr. Thomas, would you say?
Mr. Thomas. I think that would be safe to say?
Mr. Sullivan. Mr. Mitternight.
Mr. Mitternight. Not to my knowledge, no.
Mr. Sullivan. Mr. Teske.
Mr. Teske. I am just a cynical old redneck from Kansas. I
do not believe a bit of crap that comes out of the petroleum
industry.
Mr. Sullivan. All right.
Mr. Teske. But that is just my opinion.
Mr. Sullivan. And it is America. You can say that, sir.
Ms. Estes.
Ms. Estes. I was able to read both sides of it. And you
asked if anyone brought literature. Yes, I did. And I brought
it about that thick. And to go through that information, it
goes both ways. For every article that says that there was,
there is an article that says they are wrong. For every article
that says there is, there is an article that says it is
something else.
So for me to determine what is right, I cannot tell you. I
would need more than four days.
Ms. Solis [presiding]. Unfortunately, time has expired.
Thank you.
Mr. Sullivan. Thank you.
Ms. Solis [presiding]. I would like to recognize
Congresswoman Herseth Sandlin for five minutes.
Ms. Sandlin. Thank you, Madam Chairwoman.
Thank you all for your testimony today.
And before I pose some additional questions on this
refining capacity issue, I do want to just clarify a few
things.
My friend Mr. Walden from Oregon and I see eye-to-eye on a
lot of things, but I do want to sort of clarify what I viewed
as important in the Energy Policy Act of 2005. The incentives
that Mr. Walden referred to in terms of the dollar per gallon
for biodiesel and the 51 cent credit on ethanol, those have
been around for over 20 years, these incentives. It was the
renewable fuel standard as a mandate that in my opinion caused
the mix of incentives, existing incentives, and expanding
those, extending them in the Energy Policy Act and the mandate
creating the market, imposing the competition that for years
was not there and I think attributes perhaps, Mr. Teske, to
some of what we know the attitude is farm country because of
our difficulty of getting a market for ethanol for a long time
until we had that mandate. And since we have had that mandate
we have seen start-up companies take off in the investment of
new technologies to make the production process even more
efficient. Not just for corn ethanol, but increasingly
cellulosic ethanol and the potential that has. And that leads
me to this refining capacity issue because we are focusing on
refining capacity only for fossil fuels and petroleum products.
But, Mr. Felmy, would you agree that along Mr. Sullivan's
question, because you did take this body blow, right, in terms
of your imports, port of entry, the refining capacity being
concentrated in a certain geographic region of the country.
That it is not just increasing the supply of the product, it is
having a decentralized and geographically diverse distribution
system and where the refining capacity would exist?
Mr. Felmy. I am not quite sure. Are you asking that it
would be preferable to have a geographical dispersed capacity
on that?
Ms. Sandlin. Yes. Would that not in terms of how the
market--would the market function more effectively in terms of
insulating us from those types of body blows if geographically
our refining capacity either for petroleum products or refining
capacity in biorefineries throughout rural American would
assist in insulating us from those types of price fluctuations?
Mr. Felmy. Well, it would likely help in terms of specific
disasters, such as hurricanes which are, of course,
concentrated in the Gulf of Mexico. There is, however, a trade
off with costs that when you get to a highly dispersed level of
production, it can increase your distribution costs. So there
is somewhat of a trade off. But certainly to the extent that
you do not have all your capacity located in one area that is
vulnerable to hurricanes, that of course can help in terms of
more supply reliability.
Ms. Sandlin. But if highly dispersed and used more locally
increased with flux-fuel vehicles, that type of infrastructure,
that would assist consumers as well, correct?
Mr. Felmy. That would certainly lower the transportation
costs versus long distance shipping, which can be quite
expensive ethanol because you cannot include it in pipelines.
Ms. Sandlin. And you had mentioned that over the years the
industry has expanded existing refineries equivalent to one new
refinery, but in doing so has that not enhanced the degree of
concentration geographically of where our refining capacity
exists?
Mr. Felmy. Yes. You are expanding the existing within the
existing fences. And so if you have a concentration there, then
of course it increases more of that capacity in a area. And
that is unfortunate, but it is the only place we can locate the
refineries right now.
Ms. Sandlin. But is it not also true that while the
industry may have expanded in certain existing refineries,
there were a number of mergers throughout the 1990s that led to
closures of some existing refineries? Is that true?
Mr. Felmy. I do not think so much the mergers led to
closures of refineries. I think what you saw is divestiture of
those refineries actually to a whole new class of independent
refiners who have gotten much larger.
So, for example, refiners such as Valero, who were much
smaller, it picked up assets from these divestitures. And so
the concentration impact has gone up since 19--I guess the
first date I have is '97 from around 49 percent to about 66\2/
3\ roughly. But that still does not put it out of line with
other industries in terms of supplying consumers.
Ms. Sandlin. No, it does not. But some of us share the same
concerns about other sectors and industries like the livestock
industry and the concentration there when we do not have the
kind of competition when you have that type of concentration
develop and the impact that that ultimately has on prices for
producers, for consumers and on down the line.
I see my time is up. So I will yield back any remaining
time. I do not have it. So thank you, Mr. Chairman.
Chairman Markey. Thank you. The Gentlelady's time has
expired.
The Gentlelady from Tennessee, Ms. Blackburn, is recognized
for five minutes.
Ms. Blackburn. Thank you, Mr. Chairman.
Mr. Mitternight, I know a little bit about that area where
you are from. I have a dad who, 81 years old, just sold his oil
filled equipment business, worked in it every day of his life
up until recently down in southern Mississippi. I know
Metairie. And I would imagine that you would probably agree
with me that regulation is just choking the business down
there. And I imagine you also would support one-stop
regulation, a one-stop shop for working with all these
regulatory State and Federal agencies to get these refineries
up and running?
Mr. Mitternight. I agree, a thousand percent. There have
been some negotiations between economic development people in
Louisiana and some of the foreign countries to try to establish
a new refinery, the first one in 35 years in the country, so--
--
Ms. Blackburn. Right. It would go a long way to solving the
problem we have.
Mr. Mitternight. It would. Right.
Ms. Blackburn. And it sounds like Mr. Teske and Ms. Estes
would also like to get rid of a little bit of regulation that
hampers small business. Most of us small business people would.
Mr. Mitternight, on the energy expenses fuel cost, what
percentage of your total business expense do you give toward
fuel cost?
Mr. Mitternight. It is fluctuating. But right now my energy
costs are probably 6 to 8 percent of my overall expense.
Ms. Blackburn. Six to 8?
Ms. Estes, how about you? What is your percentage?
Ms. Estes. In the last year--in the last two years, about
1600 a month. And I have actually had one month----
Ms. Blackburn. No. I just need a percentage. $1600 a month
does not really--I mean, there is nothing to balance that
against.
Ms. Estes. Within 4800 to 7,000.
Ms. Blackburn. That would be helpful.
You know, you said your employees would like to have a
little bit of a raise to help offset some of those energy and
fuel costs. And I think most people in America would like to
have that. And I look forward to a day when our small
businesses can be more taxation and regulation free so that
they can enjoy that.
You said you had a seven percent profit margin?
Ms. Estes. Yes.
Ms. Blackburn. Okay. That is pretty good, is it not?
Ms. Estes. For Federal contracts----
Ms. Blackburn. I think for most small businesses, you know
you are running twice the GDP. So that is a pretty good profit
margin, I would think. So congratulations on having a 7 percent
profit margin at the end of the year. Having been a small
business person you enjoy those years when you do come out
ahead.
Mr. Felmy, I know I am going to run out of time and we are
getting ready to have votes in a few minutes. There are others
who want to ask questions.
When I am with my constituents in Tennessee and we talk
about the increase in transportation fuels, the increase in
electricity and all of these energy costs, people turn around
and they look at you and they say ``You ought to be able to do
something about this.'' The Federal Government has been piling
on regulation for years and years and years. Federal Government
increases our taxes. The gas tax goes up, it is not going to
the Highway Fund, now they are sending over to research global
warming. And they do not like that.
I would love to hear from you as an economist what three or
four things you feel like we could do that would actually make
a difference in the price at the pump and the price that people
are paying for energy. Because I think that is part of the
frustration.
You know, we talk about things that need to happen short
term, mid term, long term. We talk about conservation efforts.
We talk about incentives. And all of those things, the Energy
Act of '05, which has been referenced, did a good bit of that.
And that is commendable. But people want to know what we could
do that would actually help make that change. And I would love
to hear from that. And if I run out of time, if you would
submit it to me in writing.
Mr. Felmy. Thank you, Congresswoman.
Put simply we need to increase supply. That means to
increase supply of production of oil and gas in our own
country, which would both stimulate the economy, lower our
trade deficit and help economic activity.
We need to streamline regulations so that we can more
expeditiously expand refinery capacity or perhaps build a new
refinery.
And we need infrastructure to be put in place, whether it
be pipelines or power lines, or ports, or terminals, or
everything that goes to actually getting that fuel to
consumers. We are going to need more renewable energy, we are
going to need more emerging energy technology to be able to
help and we are going to need more energy efficiency.
So things that would help consumers in terms of more
efficient vehicles, more efficient houses, more efficient
operations will reduce the demand. That combined with increased
supply can help consumers.
Ms. Sandlin. Thank you, sir.
I yield back.
Chairman Markey. The Gentlelady's time has expired.
The Chair recognizes the Gentleman from New York, Mr. Hall
for five minutes.
Mr. Hall. Thank you, Mr. Chairman.
And thank you for your presence here and your discussion
with us. I am sorry I missed your opening statements. I was
booked in another Committee at the same time. Funny how they do
that.
The good news, I wanted to point out, from the latest IPCC
report that the Ranking Member mentioned in his opening
statement is that there are plenty of currently available and
affordable technologies, and policies, that can reduce global
warming, pollution and oil imports.
As this Committee is already discovering in hearings we
have held, and Mr. Teske made clear, when it comes to global
warming the costs of inaction far outweighs the cost of action.
Many of the smart actions we could take today like raising CAFE
standards would save consumers money.
And I wanted to ask Mr. Thomas, you are probably familiar
with this. My home District, one of the five counties I
represent, Westchester County, is running hybrid buses on their
bus loops around the country. And has there been any discussion
that you have heard about combining that with if you are
running hybrids you can certainly run biodiesel hybrids.
Mr. Thomas. Yes.
Mr. Hall. So there you are compounding one new technology
with another, and it would seem to increase the efficiency or
shall we say, to lower the demand for petroleum products.
Mr. Thomas. Exactly. We are very excited about it as an
industry. The IC Corporation has taken the lead on this and as
well as Westchester County, New York and several other states
they have introduced the hybrid. And we are excited about the
results.
The problem is is that the cost of that vehicle is
dramatically more than the cost of today's regular old clean
diesel school bus. So we have to do something about coming up
with the up front cost to offset the capital expense in order
to get the emission and the fuel efficiency benefits.
Mr. Hall. But given the size of the overall yellow school
bus fleet in the United States, which was amazing when I read
about it in your written comments, would it not be worth it in
your mind----
Mr. Thomas. Certainly.
Mr. Hall [continuing]. If the Government were to
incentivize or subsidize the up front costs?
Mr. Thomas. And the congestion mitigation air quality
formula funds that come out of DOT would be a perfect avenue to
do that.
Mr. Hall. I am driving an American made hybrid which shuts
down the motor when you are a standstill. So if a school bus is
caught at a stop light or in a traffic jam, and suddenly stops
pumping out fumes from diesel or biodiesel, that would
contribute to air quality----
Mr. Thomas. Definitely.
Mr. Hall [continuing]. As well as reducing global warming.
Mr. Thomas. And for every bus that is on the road, you have
50 cars that are not.
Mr. Hall. Right. So I just wanted to comment also on a
remark that was made from a member on the other end of the
bench here about ``companies do what they do, we cannot control
that,'' I think was quote/unquote. The fact is that we do
control that. That we regulate airlines, we regulate meat
packing companies, we recognize all kinds of--you know, when
the public interest and health or national security are at
stake, we do sometimes decide that it is in our interest to
regulate.
And I just wanted to ask starting with Dr. Felmy, I guess,
about the sort of rockets and feathers syndrome that when
petroleum prices or gas prices at the pump go up, they seem to
go up fast. And then they seem to drift down more slowly like a
feather. My constituents are seeing that and talking to me
about it. It does not seem to follow the price of oil. And, in
fact, the gasoline that is already in the ground at a
particular gas station, the truck has already come and
delivered it, and then you see the guy on his ladder up that
night changing the numbers. And I have driven to events and
come back later the same night and the price was .10 cents
higher. I am just curious why it is also so fast to go up and
so slow to come down?
Mr. Felmy. Sometimes it does, sometimes it does not. In
some cases in the past if you look, you have had perfectly
symmetrical rises and falls. The public does not always
recognize that, though. They tend to have a very visile
response to the price increases, but as they come down and
economic studies have verified this, you tend to have less
shopping behavior, less discipline on the market and so you
sometimes see prices.
Ultimately it really is a function of why did the prices go
up. If crude oil prices went up rapidly and gasoline prices
followed and crude oil prices do not come rapidly, then there
is no reason to suggest why gasoline prices would. Because the
cost of producing gasoline is most importantly tied to crude
oil costs.
In terms of the individual gas station owner, 95 percent of
the stations roughly are owned by independent businessmen who
make their own decisions about what the price is. They do that
as a function of the market for the gasoline based on their
local conditions and the costs of what they spend it, along
with a lot of other things that they take into account. Their
decision about the price is not necessarily tied to what they
paid for the gas in the pump.
Generally we have heard from, for example, the dealer
organizations that it is more of a replacement cost that is a
challenge for them. As an independent businessman if he sees
the price going up dramatically, has a feeling that the cost of
gasoline is going to be much higher, then he is concerned about
not having the cash flow to be able to buy that next tank load
of gasoline.
Mr. Hall. Thank you, Mr. Felmy.
I am sorry. My time has expired for my other questions.
I yield back.
Chairman Markey. Okay. The Gentleman's time has expired.
What we are going to do now is ask the witnesses if they
will each give us the one minute they want us to remember about
skyrocketing gasoline and oil prices.
And we thank each of you for testifying here today. And
your one minute summation of your views on this looming $4 a
gallon gasoline threat to our economy is something we very much
appreciate.
Mr. Thomas. One minute.
Mr. Thomas. Thank you.
The impression that I would like to leave the Committee
with is very simple. As gas and diesel prices go up, I hate to
say it this dramatically, but children are at risk and in many
cases when school bus service is pulled off the road, actually
we have an increase of student injuries and fatalities. That is
how dramatic it is in my industry. And I would just like to
leave you with that impression.
Chairman Markey. Mr. Mitternight.
Mr. Mitternight. I would just like to say, as I indicated
in my written testimony, a 60 percent cost increase in the cost
of gasoline from December of '06 to the current time is
impossible for me to recoup on fix contracts. And it comes
right out of the bottom line, which impacts salaries and
everything else. So it is a dire situation for small businesses
to compete with.
Chairman Markey. Mr. Teske.
Mr. Teske. Thank you.
As I said earlier, I am pretty cynical about what I hear.
There has been enormous amounts of--that is going other
directions now. And I have never seen anybody that has been
short of fuel. Everyplace you go to buy gas, they will sell it
to you. So I am puzzled. I mean, I do not quite understand the
concept.
So my ideal world would be every farmer having his own wind
turbine where he goes and plugs his tractor in at night and he
is completely off the grid and off the petroleum. That would be
my perfect world.
Thank you.
Chairman Markey. Thank you.
Ms. Estes. I agree. The fact that the firm fixed price,
there is not much we can do about it. What my concerns are, and
the one thing I will leave with you, is the American public.
The effects that it is having on the lower class, they cannot
afford any increases. And that is my main concern. You are
creating anger and poverty.
Chairman Markey. Dr. Felmy.
Mr. Felmy. The current gasoline situation is clearly a
function of markets at work. Higher cost to manufacture
gasoline, crude oil costs, ethanol costs, summer blend fuel
that is coming in, marry that to market conditions with strong
demand for gasoline, a supply challenge because of lower
imports. The refiners have responded by producing record
amounts of gasoline, but we still have a tight market. And it
is that movement of the market that allows supplies to be able
to be diverted where they are needed and does not foster gas
lines that we have experienced in the past.
Chairman Markey. Thank you, Mr. Felmy, very much.
All I can tell you is that your testimony was really
excellent, and especially the ordinary citizens that came here
to Washington. I mean, it is right out of central casting. You
really did a great, great job.
We are committed to answering this question. We have to
change our behavior here in the United States. We have seen a
doubling of the price of gasoline over the last ten years. It
is unsustainable if it goes to $4 a gallon. In other words, the
price of not doing something is much, much higher than the
price of doing something. It has already gone up a buck and a
half and it is heading toward two and a half bucks that it will
have gone up over the last ten years. So now we have to change
direction. We have to innovate. We have to ensure that the
automotive sector, that every sector changes and that we take
the revenues that we have been sending into the oil and gas
industry and we begin to redirect them towards the renewable
energies, towards the innovative new technologies that can
change the direction in this country. That will be our task
including our goal of passing legislation that outlaws price
gauging by oil companies in this country, and to do it this
year.
We thank each of you for your testimony.
With that, this hearing is adjourned.
[Whereupon, at 4:10 p.m. the Committee was adjourned.]
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