[Senate Hearing 110-210]
[From the U.S. Government Publishing Office]
S. Hrg. 110-210
THE IMPACT OF RISING GAS PRICES ON AMERICA'S SMALL BUSINESSES
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS
AND ENTREPRENEURSHIP
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
JUNE 14, 2007
__________
Printed for the use of the Committee on Small Business and
Entrepreneurship
Available via the World Wide Web: http://www.access.gpo/gov/congress/
senate
U.S. GOVERNMENT PRINTING OFFICE
37-352 WASHINGTON : 2007
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092104 Mail: Stop IDCC, Washington, DC 20402�090001
COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
JOHN F. KERRY, Massachusetts, Chairman
CARL LEVIN, Michigan OLYMPIA J. SNOWE, Maine,
TOM HARKIN, Iowa CHRISTOPHER S. BOND, Missouri
JOSEPH I. LIEBERMAN, Connecticut NORMAN COLEMAN, Minnesota
MARY LANDRIEU, Louisiana DAVID VITTER, Louisiana
MARIA CANTWELL, Washington ELIZABETH DOLE, North Carolina
EVAN BAYH, Indiana JOHN THUNE, South Dakota
MARK PRYOR, Arkansas BOB CORKER, Tennessee
BENJAMIN L. CARDIN, Maryland MICHAEL B. ENZI, Wyoming
JON TESTER, Montana JOHNNY ISAKSON, Georgia
Naomi Baum, Democratic Staff Director
Wallace Hsueh, Republican Staff Director
C O N T E N T S
----------
Page
Opening Statements
Kerry, the Honorable John F., Chairman, Committee on Small
Business and Entrepreneurship, and a United States Senator from
Massachucetts.................................................. 1
Corker, the Honorable Bob, a United States Senator from Tennessee 5
Tester, the Honorable Jon, a United States Senator from Montana.. 5
Thune, the Honorable John, a United States Senator from South
Dakota, prepared statement..................................... 59
Testimony
Caruso, Guy F., Administrator, Energy Information Administration,
U.S. Department of Energy, Washington, DC...................... 7
Smith, Frederick W., chairman, president, and chief executive
officer, FedEx Corporation, Memphis, Tennessee................. 16
Lupoli, Sal, president and chief executive officer, Sal's Pizza,
Lawerence, Massachusetts....................................... 24
Myhre, Janet, director, Government Services Group, Chuckals,
Inc., Tacoma, Washington....................................... 28
Lynch, Timothy P. senior vice president, American Trucking
Association, Washington, DC.................................... 35
Alphabetical Listing and Appendix Material Submitted
Caruso, Guy F.
Testimony.................................................... 7
Prepared statement........................................... 9
Corker, the Honorable Bob
Opening statement............................................ 5
Kerry, the Honorable John F.
Opening statement............................................ 1
Prepared statement........................................... 3
Lupoli, Sal
Testimony.................................................... 24
Prepared statement........................................... 26
Lynch, Timothy P.
Testimony.................................................... 35
Prepared statement........................................... 37
Myhre, Janet
Testimony.................................................... 28
Prepared statement........................................... 31
Smith, Frederick W.
Testimony.................................................... 16
Prepared statement........................................... 18
Tester, the Honorable Jon
Opening statement............................................ 5
Thune, the Honorable John
Prepared statement........................................... 59
Comments for the Record
Buis, Tom, president, National Farmers Union..................... 68
National School Transportation Association (NSTA), Alexandria,
Virginia....................................................... 79
Rell, M. Jodi, Governor, State of Connecticutt................... 85
THE IMPACT OF RISING GAS PRICES ON SMALL BUSINESS
----------
THURSDAY, JUNE 14, 2007
United States Senate,
Committee on Small Business and
Entrepreneurship,
Washington, DC.
The Committee met, pursuant to notice, at 9:41 a.m., in
room SR-428A, Russell Senate Office Building, the Honorable
John F. Kerry (Chairman of the Committee) presiding.
Present. Senators Kerry, Cantwell, Cardin, Tester, Snowe,
Coleman, Thune, and Corker.
OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, CHAIRMAN,
COMMITTEE ON SMALL BUSINESS AND ENTREPRENEURSHIP, AND A UNITED
STATES SENATOR FROM MASSACHUSETTS
Chairman Kerry. Good morning. This hearing will come to
order, and I apologize to all our witnesses and my colleagues
for being a little late, but traffic today was more
incomprehensible than it normally is. I see some heads nodding.
So we were a bit delayed and I do apologize to everybody.
Thank you very, very much to this panel particularly for
taking time to come in here and discuss the important impact of
rising gas prices on America's small businesses. Obviously,
this is an important topic not just for our businesses, but
with respect to American security and energy policy as a whole.
I am grateful to all the members of this panel for coming
in. I particularly want to thank Fred Smith and I look forward
to his testimony. Federal Express got its start as a small
business back in 1971 and its success was built in large part
by servicing America's small businesses and facilitating the
ability of a small business to be able to grow and do what it
does. Because he has contact with so many small businesses in
so many parts of the country and the world, I think he is
particularly qualified to share with us his view on how fuel
prices are impacting those businesses and his company.
In addition, he represents an important shift that is
taking place in the country with respect to energy policy, and
that is the recognition among key business leaders, big
business leaders, that our Nation's energy policy is directly
linked to our overall economy, to our security, as well as to a
host of environmental issues. And without a strong energy
policy that invests in efficiency and renewable energy sources,
America is digging itself deeper and deeper into a hole.
Last month, Americans emptied their wallets at the pump,
paying record prices that reached, according to the Department
of Energy Information Administration, $3.22 a gallon. This
price represented a 28 percent increase over a period of just 2
months and a 52 percent increase since the end of January. That
is a big increase for small business folks who use vehicles in
their business on an everyday basis to swallow, and those
rising prices underscore the increased attention that small
business owners are now paying to this issue.
According to a survey conducted by the National Small
Business Administration, 62 percent of small businesses in our
country use vehicles for delivery or customer transportation,
and a majority of those who use vehicles travel more than 50
miles a day.
So we will hear from Administrator Caruso today that we are
not simply dealing with a temporary spike in prices. The Energy
Information Administration projects that gas prices will remain
above $3 at least through the summer months. Meanwhile, small
businesses like the ones we will hear from today, businesses
that operate close to the margin and that rely on vehicles
every day to maintain their competitiveness are struggling to
keep up.
These are the same businesses that are coping with double-
digit increases in the cost of providing their employees health
care, the same burgeoning entrepreneurs that we count on to
create nearly three-quarters of the jobs of our country. These
businesses can no longer be expected to shoulder the burden
that is created by this rapid increase in oil prices coupled
with serious questions about refinery rates and about input
rates to those refineries, as well as output rates.
The good news is that right now, even as we sit here, the
Senate is debating legislation that can put this country on a
clear path toward energy independence. In a single month, we
could rewrite the story of procrastination, manipulation and to
some degree failed leadership, that has defined energy policy
for 30 years. On a bipartisan basis in the Senate, Senators are
working to develop a comprehensive energy policy that will make
the country safer and stabilize and lower fuel costs for small
businesses and all Americans.
I think it is clear that to do that effectively, the final
legislation has to particularly embrace three components. One,
a major increase in the efficiency of all sources and uses of
energy, from pick-up trucks to fluorescent light bulbs.
Two, dramatic incentives for all renewable energy sources,
including a requirement that at least 20 percent of our energy
come from renewable sources like wind and solar by 2020. That
sounds like a lot, but let me tell you, 24 States have already
adopted a standard. Minnesota recently set a 25 percent
standard and California is already near reaching that level. If
the sixth-largest economy in the world can do that on its own,
surely we have the ability to set a standard nationally that we
can meet across the board.
And finally, we need a comprehensive plan to get clean coal
technologies and carbon sequestration off the drawing board and
under construction. Improving fuel economy is also a
cornerstone of this strategy.
I will just end quickly by saying I will put the rest of my
comments in the record.
But after America's second oil crisis in 1980, and many of
us remember President Carter's response to that and the initial
unbelievable gains we made when we made a commitment to
renewables and alternatives, opened the laboratory in Colorado
and committed incentives to that sector, we became the world's
leader in alternatives and renewables. But when ideology
trumped common sense and we pulled the guts out of those
incentives, Germany and Japan took over as the world's leaders.
When the Eastern Bloc countries came into the marketplace in
the 1990s and they realized they needed to clean up the
devastation that communism had left them with, they turned to
Germany and Japan for those technologies. It is estimated that
we have lost upwards of 200,000 jobs or more because of our
myopia with respect to those incentives.
The same is true today with oil imports that have increased
from 37 percent back then to 56 percent today, and our
passenger fleet averages only 25 miles per gallon, which is
exactly the same that it did in 1981. That is happening,
despite the fact that small businesses are contributing to the
technology that could change this.
There is a Massachusetts company in Watertown called A123
which will retrofit a current hybrid with a lithium battery
that gets 40 miles to its one-time use. The average commute of
Americans is less than 40 miles a day. So if more cars were
retrofitted with this, most Americans could actually drive to
and from work without ever touching a drop of gasoline. The
dramatic impact would be that, per vehicle, you could go to 150
miles per gallon in a matter of months.
All of this is achievable, but it is going to take some
leadership and that is what we are here today to talk about. So
I welcome the panel. We look forward to your testimony.
[The prepared statement of Chairman Kerry follows:]
Prepared Statement of Hon. John F. Kerry, Chairman
Good morning. I want to thank our esteemed panel of witnesses for
coming together today to discuss the impact of rising gas prices on
America's small businesses, a crucial topic not only for America's
small businesses, but for this nation's continued security and economic
sustainability.
I am glad that Mr. Smith is able to join us today, and I'm looking
forward to his testimony. Mr. Smith's company Federal Express got its
start as a small business back in 1971, and its success was built in
large part by servicing America's small businesses, so he is in a
unique position to speak on how fuel prices are impacting both his
company and his small business customers.
Mr. Smith also represents an important shift that is occurring in
this country--the recognition among key business leaders that that our
nation's energy policy is linked directly to our economy, our security
and our environment. Without a strong energy policy that invests in
efficiency and renewable energy sources, America is digging itself
deeper into a hole.
Last month, Americans emptied their wallets at the pump, paying
record prices that reached $3.22 a gallon according to the Department
of Energy's Energy Information Administration. This price represented a
28 percent increase over a period of just 2 months, and a 52 percent
increase since the end of January.
Rising prices underscore the increased attention that small
business owners are paying to this issue. According to a survey
conducted by the National Small Business Association (NSBA), 62 percent
of small businesses use vehicles for delivery or customer
transportation, and a majority of those who use vehicles travel more
than 50 miles a day.
We'll hear from Administrator Caruso today that we're not simply
dealing with a temporary spike in prices. The Energy Information
Administration projects that gas prices will remain above $3.00 at
least through the summer months. Meanwhile, small businesses like the
ones we'll hear from today--businesses that operate close to the margin
and that rely on vehicles every day to remain competitive--are
struggling to keep up.
These are the same businesses coping with double digit increases in
the cost of providing their employees health care--the same burgeoning
entrepreneurs that we count on to create nearly \3/4\ of the jobs in
this country. These businesses can no longer be expected to shoulder a
burden created by price gouging oil companies and a government that has
been reluctant to shift its priorities from serving the same old
special interests.
The good news is that right now, the Senate is debating legislation
that would put the country on a clear path toward energy independence.
In a single month, we could rewrite the shameful story of
procrastination, manipulation and--most of all--failed leadership that
has defined our energy policy for thirty years.
On a bipartison basis in the Senate, Senators are working to
develop a comprehensive energy policy that will make America safer and
will stabilize and lower fuel costs for small businesses and all
Americans. But in order to effectively address energy security, the
final legislation must include three components: (1) a major increase
in the efficiency of all sources and uses of energy, from pickup trucks
to fluorescent light bulbs; (2) dramatic incentives for all renewable
energy sources, including the requirement that at least 20 percent of
our energy come from renewable sources like wind and solar by 2020; and
(3) a comprehensive plan to get clean coal technologies and carbon
sequestration off the drawing board and under construction.
Improving fuel economy is the cornerstone of the strategy to reduce
our reliance on imported oil and to stabilize the volatile market for
gasoline. Since America's second oil crisis in 1980, our oil imports
have increased from 37 percent to 56 percent, but our passenger fleet
averages 25 miles per gallon (mpg), the same as in 1981.
Thankfully, small businesses are helping to contribute to a
solution. Today there's a company in Massachusetts that has developed
the technology for a plug-in hybrid car that gets 150 miles per gallon.
The average American's commute is 40 miles--and this car can travel
that far on batteries alone. Just think of the fuel savings if the
average commute didn't require any fuel.
Senator McCain and I first proposed a 35 mpg increase to fuel
standards in 2002, and I've supported efforts to move in this direction
for my entire Senate career. The Commerce Committee has reported a bill
that would achieve 35 mpg by 2020. We must work to guarantee those
improvements and fend off any efforts to weaken the Commerce bill on
the floor.
Second, we need to establish a mandate for renewable energy
production. Over the last 5 years, 24 states and the District of
Columbia have implemented local requirements that a certain percent of
their energy comes from renewable sources by the year 2020. And yet
Republicans continue to stand in the way of a Federal Renewable
Portfolio Standard. States are screaming for leadership on this issue,
and I will once again fight for an aggressive renewable portfolio
standard in this bill.
Finally, this energy bill doesn't adequately address our number one
source of energy: coal. Coal is available, abundant and cheap, that's
true--but it's also a huge source of US greenhouse gas emissions--1.5
billion tons of carbon dioxide each year. Any energy bill worth the
paper it's printed on should make dramatic investments in developing
technologies for clean coal.
These are the first steps Congress must take to address the long
term security and stability of this country's fuel supply. But there
are other steps we can take in the short term to make sure our small
businesses are protected against dramatic interruptions in fuel.
Today, I'm introducing legislation that creates an emergency fuel
assistance program for small businesses in the event of a severe fuel
interruption. Under this program, small businesses and farms that rely
on fuel as a key operating cost would be eligible to receive grants to
help them stay afloat during periods of extraordinarily high gas
prices. This program could go a long way toward helping businesses
operating close to the margin deal with costs that are beyond their
control.
I'm also reintroducing legislation to provide low interest SBA
loans to small business owners dependent on fuel. This legislation has
passed the Senate in two previous Congresses and would provide the
capital that small business owners need to cope with extraordinarily
high increases in fuel prices.
For too long, we've asked Americans to put up with an energy supply
that is unstable and flat out dangerous. The path to energy security--a
path that's being cut in the Senate as we speak--will lead to stability
and lower prices at the pump. I look forward to hearing your
testimonies today, and to working together to secure this nation's
energy future.
Chairman Kerry. Let me turn to my colleagues first. Senator
Corker.
OPENING STATEMENT OF THE HONORABLE BOB CORKER, A UNITED STATES
SENATOR FROM TENNESSEE
Senator Corker. Mr. Chairman, thank you for convening the
meeting. I might have a few editorial comments regarding your
opening statement, but I will reserve that for the floor. I
would rather----
Chairman Kerry. You mean you don't agree with me 100
percent?
[Laughter.]
Senator Corker. But I do want to welcome this distinguished
panel and thank you all for coming. We all apologize for
starting late. You all are very distinguished and we want to
hear from you.
I do want to make some comments about Fred Smith. He is an
icon in the State of Tennessee, wrote a paper in graduate
school that received an ``F'' and proceeded to build a global
enterprise off that failed paper. He is a civic leader. He is a
great American, was a veteran between 1966 and 1970. He is
someone that the State of Tennessee looks to for tremendous
leadership, and Mr. Chairman, I am glad you have called upon
him to help lead us here at the Nation's capital.
So I welcome him and all of the other panelists, some of
which I know personally, and thank you for your testimony.
Chairman Kerry. Thank you very much, Senator. I think, if I
can correct one piece of mythology here, because Mr. Smith was
my classmate and collegemate and I am not too sure that I
didn't see that paper back then when he wrote it, but I know he
didn't fail on it.
[Laughter.]
Chairman Kerry. Am I correct?
Mr. Smith. Senator, the record would show, I think, that it
was a ``C'' grade, which, as you know, I was very gratified to
receive.
[Laughter.]
Chairman Kerry. Well, we have seen what people with ``C''
grades accomplish.
Senator Tester.
OPENING STATEMENT OF THE HONORABLE JON TESTER, A UNITED STATES
SENATOR FROM MONTANA
Senator Tester. Well, thank you, Mr. Chairman. I, too, want
to commend you on holding this hearing. I also want to commend
you on your energy vision for this country. I think it is on
the right track.
As many of you know and some of you may not, I happen to be
a farmer in production agriculture. We use a lot of energy. It
is part of the business. So when fuel prices go up approaching
$3 a gallon for untaxed fuel for my tractor, it cuts a pretty
big hole in my profit margin.
I look forward to hearing from Guy Caruso on the energy
outlook. I certainly sympathize with Mr. Lynch's situation that
he is in in the trucking business. I can't imagine what the
increase in gas prices has done to your bottom line, as well as
Janet Myhre in the office supply business. Mr. Smith, you have
already been talked about. With Federal Express, it speaks for
itself. And to a guy who knows the way to get to my heart, and
that is through my mouth in the pizza business, the food
delivery business, I can imagine your challenges, each and
every one of you. Making sure your business remains profitable
in this time when energy prices have gone up like they have is
truly a challenge, as it is for me.
I can also tell you that if we continue to do business from
an energy standpoint, as we have done over the past 20 years,
my future doesn't look very bright. So we need to make some
changes. We need to make some administrative changes at the
Federal level if we are going to empower small business to be
all they can be and to grow and flourish.
I certainly look forward to each and every one of you
folks' perspective as to how you deal with the current energy
situation and, by the way, I look forward to any ideas, any
silver bullets you may be able to pull out of your holster that
could help us make our energy future bright.
Thank you, Mr. Chairman.
Chairman Kerry. Senator Tester, thank you. Thanks for your
comments. I think everybody on the Committee is thrilled with
your participation on this Committee because you bring very
practical and real-time experience to the Committee. It is
enormously helpful to all of us.
Guy Caruso is the Administrator of the Energy Information
Administration, nominated in February of 2002. He runs the
statistical agency within the U.S. Department of Energy which
provides policy independent data, forecasts, and analyses
regarding energy. We welcome his testimony.
Fred Smith, I have already mentioned, the CEO of FedEx, a
$32 billion global transportation and logistics company that, I
think, if memory serves me correctly, had the benefit in its
early days of a Federal guaranteed loan through SBA. Am I----
Mr. Smith. SBA guaranteed small business investment
companies' investment----
Chairman Kerry. Right, SBIC.
Mr. Smith. Very important.
Chairman Kerry. He has obviously served on the boards of a
number of large public companies. He is Chair of the Business
Roundtable's Security Task Force and a member of the Business
Council and the CATO Institute.
Sal Lupoli, from my State, president and co-founder of
Sal's Pizza from Lawrence, Massachusetts. I have been to his
place. He has hosted a small business consortium that we put
together there. At the age of 22, after graduating from
Northeastern with a degree in business management, he founded
Sal's Pizza with his brother, Nick. Their first year annual
sales were $200,000. Today, his pizza company produces over
12,000 pizzas a week for schools throughout New England and
provides product to several supermarket chains, convenience
store distributors and various concession groups.
Tim Lynch, senior vice president of the American Trucking
Associations. He is charged with developing and executing
strategic plans to ensure that ATA and its member motor
carriers achieve the necessary public policy goals to keep the
U.S. trucking industry safe, efficient and profitable.
And Janet Myhre, director, Government Services Group,
Chuckals Office Products. She joined Chuckals Office Products
in 1999 as the administration operations director and holds a
B.S. in business administration from Park University.
So we are really delighted with the expertise the panel
brings. Mr. Caruso, why don't you lead off.
STATEMENT OF GUY F. CARUSO, ADMINISTRATOR, ENERGY INFORMATION
ADMINISTRATION, U.S. DEPARTMENT OF ENERGY, WASHINGTON, DC
Mr. Caruso. Chairman Kerry and Members of the Committee,
thank you very much for this opportunity. The Energy
Information Administration, as the Chairman mentioned, is an
independent statistical and analytical agency and because we
have an element of statutory independence, with respect to our
activities, our views are strictly those of EIA and should not
be construed as representing those of the Department of Energy
or the Administration. Today, I will focus on our latest short-
term outlook, which we released on Tuesday, looking at crude
oil and gasoline markets and discuss, some of the factors that
have led to these high prices and particularly, as the Chairman
noted, the continued uncertainty that we face in both the short
and the longer term.
Global oil markets have tightened for crude oil and light
petroleum products, especially gasoline. Commercial oil
inventories have dropped sharply since the end of September,
reflecting strong oil demand, production cuts by the
Organization of Petroleum Exporting Countries (OPEC), and only
modest increases in non-OPEC production. Plus, increasing
global demand for light products has put pressure on refinery
capacity worldwide. We project crude oil prices will average in
the mid-$60 per barrel this summer.
Against this background of already tight world markets,
global geopolitical uncertainties continue to threaten global
oil supplies and transport. Geopolitical uncertainty in a
number of countries in the Middle East and Africa will continue
to keep markets on edge. For example, Nigeria's problems have
aggravated the gasoline situation both internally and globally
because that country produces light and sweet crude which is
used by the world's refineries to maximize production of
gasoline.
Turning to gasoline markets, we expect gasoline markets
will remain fairly tight, although we anticipate some
improvement over the next several months. U.S. regular grade
gasoline prices are projected to average $3.05 per gallon over
the summer, and gasoline inventories, which typically build
slightly in April, sharply declined instead because of refinery
outages, both planned and unplanned, and low imports.
Gasoline supply has been affected more than usual by
refinery outages this spring. U.S. refineries typically have
higher outages during the first quarter, which reduces
production of gasoline and other products. But this year,
outages extended into May and even into June, which along with
lower imports and seasonally rising gasoline demand, all
contributed to the steep inventory decline and the upward price
pressure that the Chairman mentioned in his opening remarks.
Refinery throughputs remain lower than typical for this time of
the year, although we expect them to increase over the next
several months. We do think that markets should be adequately
supplied, assuming that there are no disruptions either
naturally-caused or manmade.
Gasoline imports are critical to meeting U.S. summer
consumption needs, particularly in the Northeastern part of the
United States, and they have been lagging last year's level
through this spring. Lower gasoline inventories in Europe
resulted in limited volumes available for export to the United
States early this year. Recently, total U.S. gasoline imports
have returned to more normal levels and we do think that these
normal levels, or even above normal, will be needed to avoid
persistent upward pressure on gasoline prices.
In conclusion, Mr. Chairman, the combination of tight crude
oil and refined product markets, along with ongoing
geopolitical concerns, leaves crude oil and gasoline markets
poised for continued volatility this summer. If gasoline
production increases during the rest of June and import volumes
increase, gasoline markets should ease somewhat, causing prices
to recede from their current levels. With the hurricane season
already beginning, continued tight refinery conditions, low
gasoline inventories, and increased demand for summer travel,
upward pressure on gasoline prices does remain a concern.
In sum, Mr. Chairman, Members of the Committee, most of the
risks in the near term point to upward pressure on prices. And
for the medium to longer term, the fundamental problem, as
noted in the opening remarks, is the lack of infrastructure
investment that we have faced in this country for the last 20
years. We need to increase investment in the infrastructure not
only of refineries, but of the distribution system, as well as
on the demand side, improving efficiency as noted by the
Chairman.
Mr. Chairman, that concludes my remarks. I will be happy to
answer questions at the appropriate time.
[The prepared statement of Mr. Caruso follows:]
[GRAPHIC] [TIFF OMITTED] T7352.001
[GRAPHIC] [TIFF OMITTED] T7352.002
[GRAPHIC] [TIFF OMITTED] T7352.003
[GRAPHIC] [TIFF OMITTED] T7352.004
[GRAPHIC] [TIFF OMITTED] T7352.005
[GRAPHIC] [TIFF OMITTED] T7352.006
[GRAPHIC] [TIFF OMITTED] T7352.007
Chairman Kerry. Well, we look forward to the opportunity to
ask them. Thank you very much.
Mr. Smith.
STATEMENT OF FREDERICK W. SMITH, CHAIRMAN, PRESIDENT, AND CHIEF
EXECUTIVE OFFICER, FEDEX CORPORATION, MEMPHIS, TENNESSEE
Mr. Smith. Senator Kerry, it is always good to see you, and
thank you for clarifying that thing about my school grade. As
you noted and Senator Corker, who represents our hometown
State, FedEx is indeed a very big company, employing about
275,000 folks around the world, 38,000 of them in Tennessee,
Senator. But we did start as a small company and we understand
the issues of small business very well, because our four
operating companies uniquely provide transportation services
that allow small businesses everywhere to connect to an
increasingly large global marketplace.
But I am not here today representing FedEx. I speak to you
today as the co-chairman of a group, the Energy Security
Leadership Council, which is composed of 18 CEOs and retired
four-star admirals and generals who came together because we
collectively believe that the Nation's increasing dependence on
imported petroleum after nuclear proliferation and bioterrorism
represents the greatest economic and security threat to this
Nation.
We base much of what we have recommended on a very in-depth
study conducted by an organization called SAFE, Securing
America's Future Energy, which conducted a simulation at Davos
a year ago in January which showed that very small
perturbations in supply can result in very substantial
increases in prices. A 3 to 4 percent reduction in supply could
easily run the price of a barrel of oil up to $120, $125 a
barrel, which would have very significant deleterious effects
on the U.S. economy.
Much more importantly, I think, is the fact as you noted in
your opening comments, Senator, that we are now importing
almost 60 percent of our petroleum. Transportation is 97
percent fuel petroleum. Ninety percent of the world's oil
reserves are now owned by national oil companies, many of whom
are controlled by countries who, quite frankly, do not have the
best interests of the United States at heart.
If you look historically at the problem, one finds that the
reason that our economy has been able to absorb the tremendous
run-up in fuel prices over the last few years is that between
1975, after the first Arab oil embargo, to the middle part of
the 1990s, the U.S. energy efficiency improved by 100 percent.
And a large part of that improvement was based on a system of
fuel efficiency standards which were enacted by the Congress in
1975 under a Republican administration, which, I might add,
were opposed by the auto manufacturers at the time. And those
fuel efficiency standards, so-called CAFE standards, were very,
very important in the improvements that our economy has seen
and given us the basis to absorb the shock that we have already
seen.
So with that background, we prepared a report to the Nation
which we published in December which recommended that the
Congress consider a balanced piece of legislation which had
three fundamental prongs on which it rested. The first was
increased domestic production. The facts of the matter are
that, worldwide, oil markets are global in nature and a barrel
of oil produced off the coast of South Carolina does have an
effect on the price of oil everywhere.
The second part of our recommendation was that the United
States should promote the production of alternative fuels to
the maximum extent possible. That obviously is something that
has been the source of much debate, but it is very important
that these goals be realistic and not pie-in-the-sky or the
Congress will be sitting here 20 years hence dealing with an
even bigger problem.
And third, and very importantly, is the recommendation that
the Congress enact a new system of fuel efficiency standards
which are quite different from the fleet averages that were
used in the 1975 legislation. Instead, we recommended that
NHTSA be empowered to regulate a fuel efficiency improvement
program by each category of vehicle and by attribute, so that a
Suburban car for a soccer mom would not be in the same category
as a pick-up truck used for agriculture, and within each
category, NHTSA would oversee a program of 4 percent per annum
fuel efficiency improvement, provided that there were
appropriate off-ramps for safety or technological limitations.
With a balanced program like that, the math that we did in
the report to the Nation, which obviously has been made
available to all of you, the United States would see in the
coming years a significant reduction in our dependence on this
foreign imported petroleum.
And I would point out in conclusion, Senator, and I put all
of this in a written statement which I have given you for the
record, many of us on the Energy Security Leadership Council
did not come to this position lightly. I rarely come to
Washington over these many years I have been in business to
argue for Government regulation. Quite the contrary. But in
this particular case, you are talking about very serious
economic and national security risk. You are not talking about
a free market. You are talking about a market which is set by a
cartel whose actions, were they conducted in the United States,
would simply be illegal.
And we think what we proposed to the Nation, and bear in
mind a company like FedEx, who spends over $3 billion a year in
fuel, the CEO of UPS, the CEO of Carnival Cruise Lines, the CEO
of Dow Chemical, the CEO of Southwest Airlines, the CEO of Auto
Nation, the largest seller of automobiles in the country, and
distinguished four-star military officers, including our co-
Chair, General P.X. Kelley, the former Commandant of the Marine
Corps, and many of the admirals and generals who were
responsible in their careers for protecting these oil lanes,
have come to the Congress saying this is a problem that has to
be addressed, and if the Nation doesn't address it, we do so at
our peril.
Thank you very much for your kind attention, Senator.
[The prepared statement of Mr. Smith follows:]
[GRAPHIC] [TIFF OMITTED] T7352.008
[GRAPHIC] [TIFF OMITTED] T7352.009
[GRAPHIC] [TIFF OMITTED] T7352.010
[GRAPHIC] [TIFF OMITTED] T7352.011
[GRAPHIC] [TIFF OMITTED] T7352.012
[GRAPHIC] [TIFF OMITTED] T7352.013
Chairman Kerry. Well, Mr. Smith, thank you very much. I
think your testimony is enormously important for a number of
reasons, not the least of which is that I think you bring a
special kind of validation to the table which is very important
for everybody to hear, not just our colleagues here, but for
people in the country. So we will, I know, follow up with some
questions, but I think it is important testimony and we really
do appreciate your taking time to be here.
Mr. Lupoli.
STATEMENT OF SAL LUPOLI, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
SAL'S PIZZA, LAWRENCE, MASSACHUSETTS
Mr. Lupoli. Thank you, Chairman Kerry, Ranking Member
Snowe, and Members of the Committee. My name is Sal Lupoli and
I am the owner of Sal's Pizza, a family owned business
established in 1990 located in Lawrence, Massachusetts. My
company has over 30 retail stores, two upscale restaurants, and
a central commissary which sells to supermarket chains and
school districts throughout the New England area. I am also on
the board of the Merrimack Valley Chamber of Commerce,
Workforce Investment Board, and many community organizations
throughout the Merrimack Valley in Massachusetts.
I would like to thank you for inviting me to testify today
regarding the impact of rising gasoline prices on small
businesses, particularly mine. I am very grateful that you are
cognizant of the negative effect that the increasing gasoline
prices are having on small businesses across the country and
that you are seeking to address it. Whatever the cause, the
volatile and increasing price of gasoline is wreaking havoc on
American small business.
In the day-to-day operation of my small business, I have as
many as 30 delivery trucks and 5 management vehicles on the
road at any one point. Every day, my company makes deliveries
of fresh ingredients, of product to various supermarkets
throughout New England, 30 franchise stores, retail stores, and
school districts. Obviously, these trucks fall into the
category of non-fuel-efficient vehicles. Unfortunately, there
is no affordable alternative to me at this choice.
Currently, the cost of gasoline in the Merrimack Valley
varies from $2.80 a gallon to as high as $3.09. This is from a
low last year of $1.98. This sudden and unpredictable 50
percent increase hits directly to the bottom line of my
business and countless others. Rising fuel costs have a direct
impact on my means of delivery for my product, but also other
aspects of my business.
For instance, it has a direct impact on my employees. It
has a tremendous effect on them. Many of my employees have low
to modest means. Many of my employees live in low-income areas,
such as Lawrence, Massachusetts, and towns throughout the
Merrimack Valley. Many employees drive their cars to work.
Often I am faced with employees that are unable to afford the
gasoline for their cars. They face days out of work, which
often results in myself or my staff having to pick them up.
This further disrupts daily business operations. We encourage
carpooling. We encourage public transportation. But these
options are always not available in the towns of their
residences.
Another area in rising fuel costs have impacted my business
is to my customers and their expendable income. I have seen a
decline in sales when gas prices increase, only to see business
pick up when prices go down. A family that I would generally
see on a weekly basis on a Friday night is now a twice-a-month
customer. Customers in my restaurant that I see two and three
times a week may only come to my restaurant once a week as a
result of gas price spikes. My business, as any retail,
competes for the expendable dollar. I compete for the customer
dollar when families make a choice between fixing a leaking
faucet or taking the family out to a nice meal at my
restaurant. When gas prices are high, the American small
business loses.
In addition to the direct impact that rising gas prices has
on my business, it is immeasurable. Although my company has
moved its corporate offices to Lawrence, Massachusetts and has
renovated a mill building along with other businesses, which
are my tenants--the mill building consists of 240,000 square
feet--I have found it extremely expensive to heat my building
during the winter months and pay for increasing electricity for
cooling in the summer months. I was forced to consider and
chose to install solar panels on the roof of my mill as an
alternative to the traditional fossil fuel energy. Solar energy
helps defray some costs, but has yet to make a significant
impact on the overall operation.
In order to maintain a level of profit in my operation, I
have no alternative but to pass the costs of rising fuel on to
my customers, whenever possible trying to absorb the cost
myself. On most deliveries, we have been forced to include a
fuel surcharge on our delivery invoices. I am not alone in the
rising prices whenever possible.
According to the 2006 NSBA Small Business Energy Survey of
the businesses that reported passing along their increased
energy cost to their customer, 65 percent have increased their
prices. Of that, 47 percent reduced the amount of business
travel and 18 percent have reduced their workforce. The
ramifications of rising gas prices reverberate throughout the
entire economy.
This concludes my testimony. Thank you again for inviting
me here today and recognizing the threat rising and volatile
energy prices pose to America's small business. As you seek to
address America's oil dependence, the shortcomings of the
national energy policy, and the global climate change, I hope
you will continue to keep America's nearly 26 million small
businesses in mind. I thank you for your time and welcome any
questions.
[The prepared statement of Mr. Lupoli follows:]
[GRAPHIC] [TIFF OMITTED] T7352.014
[GRAPHIC] [TIFF OMITTED] T7352.015
Chairman Kerry. Thank you, Mr. Lupoli, for very graphic,
important and powerful testimony. I don't think a lot of us
necessarily thought that people weren't able to get to work or
that the CEO is going to have to go out and actually pick them
up to get them there, and that is a pretty downstream real
impact, so we appreciate your sharing it with us here.
Mr. Lupoli. Thank you, sir.
Chairman Kerry. Ms. Myhre.
STATEMENT OF JANET MYHRE, DIRECTOR, GOVERNMENT SERVICES GROUP,
CHUCKALS, INC., TACOMA, WASHINGTON
Ms. Myhre. Thank you, Chairman Kerry, Ranking Member Snowe,
and distinguished Members of the Committee for the opportunity
to testify today. My name is Janet Myhre and I am the director
of Government Services Group of Chuckals Office Products, which
is headquartered in Tacoma, Washington. I am here on behalf of
the co-owners, Chuck Hellar and Al Lynden, and our great team
of employees who support the success of our small business. I
know that Chuck and Al would have liked to attend today's
hearing, but as you know, air fare from the West Coast on short
notice is quite high.
Fundamental to Chuckals' growth over the last 13 years has
been a combination of innovative use of technology and powerful
strategic alliances that have enabled the company to offer big
business prices while still preserving small business value and
service. Use of a stockless, just-in-time distribution model,
partnering with key suppliers like Federal Express, and a
commitment to find new and innovative ways to consistently
streamline internal operations has furnished a solid platform
for sustained growth and enabled us to provide a broad product
offering and consistently high service.
Fuel costs impact each and every transaction that our
organization manages and it is the third-largest expense item
on our financial statement after cost of goods and employee
wages. To keep it simple, we have three categories of delivery
expense. The first two categories represent the costs and/or
expense of getting our product to our customers. Category one
is the local and regional deliveries that are handled through
our company-owned vehicles and span a large portion of middle
and south Puget Sound region in Washington State. Currently,
this sector makes up 7 percent of our delivery expense.
Category two is the servicing and delivery to both
commercial and Federal accounts under Federal contracts
nationwide through the use of third-party carriers such as
Federal Express, UPS, and LTL Truckload Relationship. This
category represents 91 percent of our delivery expense.
A final category is the cost of shipment from wholesalers
and manufacturers to our organizations and other internal fuel
expense, such as employee auto reimbursement.
During the past 24 months, we have experienced a total
increase in delivery cost of over 35 percent in the combined
categories. The highest percentage was experienced in the
category of national delivery, which has increased 36.4
percent. Just a quick look at the increases. The local delivery
has increased around 18; the national delivery, 36.4. The third
category for internal kind of uses within the business is 30
percent.
To break down the impact on a per delivery basis, in
January 2005, the average delivery cost to deliver to a local
customer was 56 cents per delivery. Today, our costs have
almost doubled and have peaked at $1.02 per delivery.
When we use other carriers such as UPS, FedEx, and DHL, our
per delivery costs are experiencing the same type of increase.
For example, the cost to ship an order to an Army customer in
January 2006 was averaging $12.40 per order. As of April 2007,
that cost has risen by 34.2 percent to $18.86 per order.
From the early days of Chuckals' organization, we have
applied a business model of continually improving our business
practices to embrace technology and efficiency. One of the
first applications was to be an early leader in transitioning
an industry which heavily depended on a traveling outside sales
team to a technology-driven inside team. Even with this
transition, a limited outside sales team, we incur another
associated cost with fuel for employee auto reimbursement,
indexing our expense reimbursement to the IRS guidelines, which
we have watched jump by 38 percent.
Today, I presented a brief synopsis of the hard costs and
direct impact of double-digit delivery expense that we are
incurring in the delivery segment of our business. It is
important to also discuss the impact this fuel increase has had
on the production and cost of goods. It is quite amazing to
discover how many products are petroleum-based, such as vinyl
and polypropylene resins, which go into binders and hard
plastic office supplies.
We have seen the same percentage increase in our cost of
goods. Many times our suppliers do not charge for hard
transportation costs, but they increase the unit cost of the
product. As an example, we have seen our cost of goods price
increase on a carton of paper by 15 percent during the same 24-
month period. This increase has a direct relationship with the
cost of fuel, both in manufacturing and transportation.
We continue to look for alternative ways to save fuel and
cut costs through efficiencies of technology and management,
such as mapping of local delivery routes, consolidating
customer deliveries, routine maintenance of our fleet, and the
continuous measurement and feedback of productivities of our
drivers. However, we have no options when it comes to the raw
cost of fuel. It is still X miles from point A to point B and
that will consume a defined amount of fuel.
As we have discussed with Senator Cantwell and her staff,
while there are many new options for the consumer both in
alternative fuel and vehicles to combat this fuel emergency,
there currently are very few options for the small business
owner who has commercial fleets which run on gasoline. Couple
the 40 percent increase in fuel cost with the compounding
increase in health care that we have also incurred in the past
3 years, the small business professional is finding it harder
and harder to compete and stay in business.
As we continue to watch our operational margins shrink,
Chuckals will be faced with critical management decisions. What
programs and investment in capital and innovation must be
foregone to absorb the increased cost of fuel and delivery?
What application and impact will this have on our competitive
position in the marketplace and our viability to win future
awards? And finally, what impact does this have on our finest
assets, our employees? We will have to change employee benefit
plans, head count, and other organization structures to react
to the rising costs. Thank you.
[The prepared statement of Ms. Myhre follows:]
[GRAPHIC] [TIFF OMITTED] T7352.016
[GRAPHIC] [TIFF OMITTED] T7352.017
[GRAPHIC] [TIFF OMITTED] T7352.018
[GRAPHIC] [TIFF OMITTED] T7352.019
Chairman Kerry. Very helpful. Thank you very, very much.
That is very helpful testimony.
Mr. Lynch. Let me just say for the record, everybody's
testimony will be placed in the record in full as if read in
full. Thank you.
STATEMENT OF TIMOTHY P. LYNCH, SENIOR VICE PRESIDENT, AMERICAN
TRUCKING ASSOCIATIONS, WASHINGTON, DC
Mr. Lynch. My name is Tim Lynch. I am a senior vice
president with the American Trucking Associations, and on
behalf of our membership, we want to thank Chairman Kerry,
Ranking Member Snowe, and all the Members of the Committee for
giving us an opportunity to testify on this very, very
important subject.
The trucking industry is a vital component of our national
economy. In 2005, trucks transported nearly 11 billion tons of
freight domestically, representing almost 70 percent of all
freight transportation tonnage. The trucking industry accounts
for 84 percent of the nation's freight bill and exclusively
serves the freight needs of over 80 percent of communities in
the United States.
While the industry is very large, it includes hundreds of
thousands of small businesses. As of November 2006, there were
over 700,000 interstate motor carriers in the United States
classified as small businesses, 97 percent of which operated 20
or fewer trucks.
For most motor carriers, fuel is the second-largest
operating expense after labor. Small carriers are particularly
vulnerable to large and swift increases in fuel prices.
Typically, the smaller the carrier, the larger percentage fuel
represents of total operating expenses.
Over the past 4 years, the price of diesel fuel has
steadily increased. According to the Energy Information
Administration, the national average price of diesel rose from
$1.81 per gallon in 2004 to $2.41 in 2005, and then rose again
to $2.71 in 2006. Unfortunately, there doesn't seem to be any
relief in sight. EIA analysts now estimate that diesel will
average $2.75 per gallon in 2007 and $2.76 in 2008.
This year, in order to haul the Nation's freight, the
industry will consume 51 billion gallons of fuel, including
more than 38 billion gallons of diesel fuel, at a record cost
of $106 billion, $3 billion more than in 2006 and more than
double the industry's fuel bill in 2003.
The sharp increase in the cost of diesel fuel is a hardship
for small trucking companies, but the full impact must be
viewed in the context of what also is occurring with fuel
economy and environmental controls. This challenge is fully
captured in the comments that were made by Barry Pottle of
Pottle Transportation of Bangor, Maine.
``Twenty-five years ago, my trucks were getting a little over
4 miles to the gallon. In the mid-1990s, my trucks were getting
close to 7 miles to the gallon. With the new engines and new
requirements for the use of ultra low-sulfur diesel, my trucks
are now getting about 5 miles to the gallon.''
And let me just say, in making that comment, we were not
opposed and do not oppose the new engine requirements and the
use of ultra low-sulfur diesel, but we do want to make the
point that those don't come without some cost. And to put a
fine point on that, for a company like Mr. Pottle's, whose
individual trucks might travel 125,000 miles annually, at a 4-
mile-per-gallon average, he would use 31,250 gallons to travel
those 125,000 miles. At 5 miles per gallon, that would be
25,000 gallons, and at 7 miles per gallon, that would be 17,857
gallons.
If we were to apply today's rate of $2.79 per gallon cost
for diesel, Mr. Pottle's cost per truck would be as follows.
Again, at the 4, $87,000. At the 5, $69,000. And at the 7,
$49,000. The approximately $20,000 difference between a 5 and a
7-mile-per gallon fuel efficiency rate multiplied by the number
of trucks operated by a small business like Mr. Pottle can
literally make the difference between business success and
business failure.
I have a number of recommendations in our testimony, but I
would like to focus on one because given the current debate in
both the Senate and the House, is the APU weight exemption. The
Energy Policy Act of 2005 included a 400-pound weight exemption
for alternative powering units that allow truck drivers to run
fuel-efficient devices, such as generators, to operate heating
and air conditioning units instead of using the main engine.
The Federal Highway Administration has interpreted this
language, incorrectly in our opinion, as giving States the
option of allowing this exemption rather than establishing a
nationwide standard as Congress intended. We need language
clarifying Congress' intent to ensure that small trucking
businesses don't have to choose between advanced idle reduction
strategies and lost productivity due to a weight penalty.
Furthermore, we support legislation currently in the
Senate, S. 894, that would provide a tax incentive to help
offset the cost of these devices, since many small businesses
simply cannot afford to buy them.
I have other suggestions here, including speed limits. Even
within our own industry, the speed issue is somewhat
controversial. I notice that Senator Tester is smiling. I had
the pleasure of presenting ATA's position to the Montana
Trucking Association to have a national speed governed at 68
miles per hour, and Senator Tester, I barely got out of the
State. But we believe it is the right thing to do and we would
certainly urge whatever assistance we might get from the
Congress on that, as well.
I would be happy to answer any questions.
[The prepared statement of Mr. Lynch follows:]
[GRAPHIC] [TIFF OMITTED] T7352.020
[GRAPHIC] [TIFF OMITTED] T7352.021
[GRAPHIC] [TIFF OMITTED] T7352.022
[GRAPHIC] [TIFF OMITTED] T7352.023
[GRAPHIC] [TIFF OMITTED] T7352.024
Chairman Kerry. Thank you very much, Mr. Lynch. I learned
first-hand out there how tough that issue can be for a lot of
folks on those wide-open roads for long distances. It is a
pretty important issue.
Thank you, all of you, very, very much for the testimony
here today. We are going to do about 5-minute rounds, try to
give everybody a chance to get in here. We can go for a second
round afterwards if all of you can put up with that. I know
there will be a lot of questions and a lot of areas we want to
try to cover.
Mr. Caruso, if I could just begin, you mentioned quickly
that the throughput is lower--the refinery throughput is lower.
A lot of Americans don't understand that. They are having
trouble seeing the crude prices are low, but we still have this
problem of supply. Can you just help explain to people? A lot
of small business people keep saying, am I getting manipulated?
Am I being jerked around here? The oil companies walked away
with, since 2005, $225 billion of profit, record levels of
profit, and a lot of people sit there and say, well, what if
they had only had $220 billion or $200 billion or $180 billion?
Is that really the difference in their success versus the
success of these folks over here? So can you help people
understand why the throughput is so low given the crude
situation and where we are on the manipulation issue?
Mr. Caruso. Sure. Why the throughput is low is that there
have been a number of refineries out for either planned or
unplanned maintenance this year. This is not particularly
unusual for January and February, because normally refiners
take down units that need to be maintained for safety and
efficiency reasons in order to be ready for the peak driving
season. So----
Chairman Kerry. Question--should that be, therefore, left
up--since it is having such a dislocative effect on the
marketplace, and as Mr. Smith and others have said, this is not
a free market sort of structure, should there be some better
planning as to what the rate of that offline maintenance, et
cetera, is for the at least planned downtime, because it is
having a serious impact on small business, as you can hear.
Mr. Caruso. Yes.
Chairman Kerry. And a lot of people question whether that
planned maintenance truly couldn't be done in a more
effectively planned manner.
Mr. Caruso. Well, the companies, of course, try to plan it
to maximize their own individual sales opportunities. So no
individual company would take down a refinery because it would
be to their own detriment. They would lose sales. So the
individual refiner's objective is to do this in the most
efficient and planned way so as to maximize their sales.
Now, what has gone wrong is there have been a number of
unplanned outages. You know, of course, we are not an
investigative agency in any way, but we certainly have not seen
any reason to think that there was any attempt to manipulate
the market----but that is not our role. That would be the
Federal Trade Commission, of course.
Chairman Kerry. Can you comment on the likelihood of the
scenario that Mr. Smith described, where you have oil prices at
$120 a barrel?
Mr. Caruso. Well, that is certainly possible, but it would
take a huge disruption in either crude oil or refined products
to get to that kind of number. One could pose--and I know the
group that Mr. Smith is part of did that in the scenario
planning that he mentioned--a severe disruption because we are
so dependent on imports. It could certainly--in the short run,
there is no real pressure relief valve except price because
there is very little cushion, as I have mentioned, with such
tightness in capacity. And, of course, the Strategic Petroleum
Reserve might get you through a short-term situation, but in a
long-term disruption, you could get very high prices.
Chairman Kerry. Mr. Smith, to what degree has this
increased price changed or affected the way you do business
with small businesses? I mean, has it had an impact? Have you
changed actual practices?
Mr. Smith. Well, I think the testimony that you heard
indicates where it has had the most effect on small business.
We decided a long time ago that we should not be in the oil
futures market, so we have in our rates a baseline crude oil
price, which we put on the Internet. And then as the price of
crude goes beyond that, we have a surcharge. So many of the
price increases that were mentioned are the run-up in fuel
prices reflected in the surcharges.
For the air express business at FedEx Express, those
surcharges have gotten up at times during this run-up in fuel
prices to almost 20 percent. For our ground parcel service, it
has been somewhat less, but still very significant. And in the
aggregate, when you are shipping many small shipments the way
many of our small business customers do, this gets to be a very
considerable expense to either them or their customers.
Chairman Kerry. So yours is essentially a straight pass-
through based on a very transparent--it is very transparent----
Mr. Smith. Yes, and we have over the last 3 years steadily
increased the base barrel of crude price. We use the DOE
numbers to establish that.
Chairman Kerry. Also, share with us, if you would, speaking
from your experience as a business person, having come to the
judgments you have come to, why we still have resistance in
some quarters about the change in the CAFE standards and in
trying to get better fuel efficiency on cars. I think one of
the major auto makers stood up the other day and suggested that
this was going to hurt their industry, et cetera. You are
obviously of a different opinion, both from a security point of
view, as well as a business point of view. Can you share with
us quickly why you think it is so compelling and important that
we respond with that as one of the components of our overall
approach?
Mr. Smith. Well, as I mentioned during the testimony, and
in the simulation that as done in Davos, it assumed a 4-percent
reduction in worldwide supply. That is, as you well know with
your knowledge of geography and naval matters, very easy to
accomplish. By simply shutting down the Straits of Hormuz, you
would have far more than 4 percent of worldwide supply taken
off the market. Many individual producers, which are subject to
very volatile political situations, could take that amount off
the market. So that is not far-fetched and it is about 3
million barrels of oil a day, 4 percent of 80 million barrels
of need worldwide per day.
We were very mindful about the issue of the auto
manufacturers in coming up with our recommendation. Certainly,
the last thing in the world we would want to do is to harm our
automotive manufacturers. They are wonderful customers and
great business partners, and I think the facts of the matter
are that our balanced approach, which provides funds from the
government, largely through royalties and all from increased
production, and allows them to retool, would get them into a
better market position, because I think the record is pretty
clear. The U.S. auto manufacturers with the old fleet average
CAFE standards built a lot of small and profitable cars and a
lot of large profitable trucks, and it would have been a lot
better had they, like the foreign manufacturers, been producing
a lot more fuel-efficient vehicles.
So we certainly believe that nothing we have suggested at
the end of the day is harmful. Now, the auto manufacturers, I
certainly can't speak for them, but I do think that they have
come around to the point of view that fuel efficiency standards
are probably in the cards and now they are really just talking
about what those percentages should be.
I would point out one final thing to you, Senator. In 1975,
when the Ford administration and the Congress passed the
original fuel efficiency standards, as I said in my remarks,
they were opposed by the auto manufacturers. Subsequent to the
fact, Henry Ford II, who was the CEO of Ford Motor Company, to
his credit, said, ``I was wrong,'' that this country would not
have achieved the improvements in energy efficiency that it has
achieved absent those fuel efficiency standards.
And I think we are simply in the same place we were before,
except in a much more serious state of vulnerability because,
as you noted in your remarks, imports have gone up from 37
percent to almost 60 percent. So we have an extreme exposure to
a disruption in supply in terms of our economy security and we
are already in the Middle East and involved in combat
operations over there and I don't think these four-star
admirals and generals came to this conclusion lightly, either.
They see a real prescription for a severe national security
challenge unless we do something.
Chairman Kerry. I appreciate that very much.
Senator Snowe.
Senator Snowe. Thank you, Mr. Chairman for initiating this
hearing that rightfully focuses on the impact of rising
gasoline prices on small businesses. I also want to thank all
our witnesses here today for their very graphic and compelling
testimony that speaks to this issue, which affects small
businesses and Americans and particularly low-income Americans
disproportionately. I know I have seen that in my State.
We in America depend on jobs being created from the small
business sector. Approximately two-thirds of all new jobs each
year are created from small businesses. So if they are affected
disproportionately and they can't survive, we can't thrive in
America. So this is clearly an issue of major national
priority.
We have abrogated our responsibilities over the years,
frankly, in developing a very bold and comprehensive National
Energy Policy. We failed to execute the leadership, and as you
mentioned, Mr. Smith, in 1975, it was a generation ago that we
enacted CAFE standards for this country that yielded a 40-
percent increase. I am just relieved that we are finally
considering in the base energy bill that is pending before the
Senate, a CAFE standard increase of another 40 percent that
Senator Feinstein and I have been working on for the last 6
years. There will be efforts to undermine that and I hope we
can resist them. This is the minimum and the least that we can
be doing today in order to improve fuel economy standards.
Ater all, the transportation sector represents 40 percent
of the fossil fuel that is consumed in America. And we have
seen significant job losses in the automobile industry, which
needs to be on the vanguard and the cutting edge to be able to
offer choices to the consumers. They have lost jobs and yet we
haven't increased fuel efficiency standards. And we are losing
jobs today, because every 10-percent increase in oil prices
results in 150,000 jobs being lost in America.
And so I think that we have much more to do. Hopefully, we
can create an ambitious National Energy Policy. We are
surrounded by the consequences of a lack of a National Energy
Policy and it has repeatedly manifested itself, whether it is
in our environment, our economy, or as you say, Mr. Smith,and
our national security. We cannot be shifting billions of
dollars from America to the most volatile, radical regions and
leaders in the world, and that is essentially what we are
doing. So it is in our national security interest to reduce our
reliance on imported oil.
We need to help small businesses, as well, in this process.
People say that we don't have the ability to develop the
technology to increase CAFE standards by 10 miles per gallon
over 10 years. I mean, this country has been founded on
innovation. But when you think about it, 1985, was the last
year in which passenger vehicles went up as a result of the
1975 increase. Think of where we are today. We have got hand-
held computers from mainframes. We have gone from landlines to
cell phones, encyclopedias to the Internet. And we are saying
in America we can't do better?
Absolutely, we can, and that is what the bill on the floor
hopefully can accomplish in challenging that innovation and the
wherewithal, and also spearheading efforts here. And I know
Senator Kerry and I are going to be working on an initiative to
see if we can help small businesses play a leading role in
promoting energy efficiency and combating climate change. But
in the meantime, hopefully, we can do everything we can in the
bill that is pending.
Mr. Smith, I just wanted to ask you, is there anything more
we should be doing in this bill? I thank you for co-Chairing
the Energy Security Leadership Council. Is there anything more
we ought to be doing in this bill that is before the Senate?
Mr. Smith. Well, Senator, the council's recommendation, I
want to urge people to look at again, is a comprehensive bill.
It sits on three fundamental pillars. It is the different, new,
by category, by attribute, fuel efficiency standards with the
off-ramps, incentives and help for the auto manufacturers to
retool, alternative fuel production that is truly feasible. We
all would love to think that we could raise switchgrass in
Montana and the Plains and fuel our vehicles, but we are a few
years away from that and we don't want to destroy the food
markets by overshooting there. And the third part about it, and
I know this is controversial in certain areas, is increased
domestic production.
So it is all three of those which is the best way to deal
with the problem, and quite frankly, from our perspective--and
here I am preaching to the choir, you folks know a lot more
about this than I do--but it seems to be that you cover the
political spectrum in a grand compromise with legislation such
as we recommended and I think is reflected in the bill put
forward by Senators Dorgan and Craig.
So that is what we would recommend, a balanced approach
with all three of those things. And I think the military
officers in our council would also say there is a fourth
element, and we have to get folks around the world who benefit
from the security that the United States military and
particularly our Navy provides to the movement of this oil
around the world, that they have to get in the game and help
pay for this.
Senator Snowe. Good point. Mr. Lynch, you mentioned Pottle
Transportation, and I am very familiar with that company. In
talking to them, it is amazing. Last year they made a
significant profit. That has now dropped even though they had
an increase in business of more than a million dollars. Their
lost profit is attributed primarily to the rising price in
gasoline.
One of the issues that has surfaced in Maine over the last
few years, and one we are trying to change here, is the whole
issue of truck weight limits, and you referred to that in your
testimony. In fact, I met with a group from Maine yesterday
that suggested that we could have a national standard in
America on weight limits. There are 29 States that have waivers
from the weight limits on the Interstate of 80,000 pounds. Data
indicates that if we had a national standard of 97,000 pounds
uniform across the country, that we could promote highway
safety. This is it a safety question for us in Maine, because
having these big trucks rumbling through small towns can lead
to accidents. In fact, we have had two serious tragic accidents
recently in Maine as a result of that.
But second, it would achieve an enormous savings in fuel
cost, not only to the truckers in Maine, the independent
truckers, but also to this country, not to mention the impact
on the environment. Can you speak to that question?
Mr. Lynch. Certainly, and I would really give two comments
on that. First, that recommendation on the 97,000 pounds was
also part of the Energy Security Leadership Council's overall
recommendations. When we saw that, there are certainly portions
of the recommendations that are going to be a little harder to
deal with than others and to accept, but we saw that as a very,
very positive step.
It is important to keep in mind the whole issue of truck
size and weight, the debate previously has generally been along
the lines that we are going to run these bigger, heavier,
longer trucks on every road, every time, everywhere. The fact
of the matter is that right now today, there is something
called the National Highway System, the NHS system. That system
represents about 7 percent of the entire road network in the
country. That system handles 75 percent, though, of the freight
traffic, the truck traffic that runs in the country.
So what we would like to see is concentrate on those roads
where the freight is moving. Do what needs to be done. We
understand that there are bridge issues that have to be dealt
with, off-ramp, on-ramp issues, et cetera. But we think that
these are, as you said, these are not insurmountable problems.
I mean, we can look at these things, identify where the work
needs to be done and what has to happen to make this equipment
the standard on the highway, because we can, in fact, reduce
the number of trucks that operate on the system if we can look
at this from a little more rational way.
Senator Snowe. Thank you.
Chairman Kerry. Thank you, Senator Snowe.
Senator Corker.
Senator Corker. Well, thank you, Mr. Chairman. I think this
testimony has been very enlightening and timely because of what
is on the floor right now and I want to thank the testimony
that has been received regarding businesses. I was on the board
of one of the companies that Mr. Lynch represents and find it
hard for them to figure out how to have a steady stream of
profits based on the various volatilities they face, and
certainly have dealt with some of the issues that you have
focused on in your testimony and want to thank you for that.
I think the reason, though, we are focused over here a
little bit today is we are dealing with some global issues, and
I think the testimony, Mr. Smith, that you gave could not be
more dead on. I was just in Brussels a few weeks ago meeting
with European officials, talking about some of the energy
policies that have been put in place, and I think that
sometimes we here in our country pick winners and losers, or
try to pick winners and losers instead of having a balanced
approach where we have an overall goal that absolutely focuses
on energy security, and I think that is one of the biggest mid-
to long-term issues that we face in our country. I could not
agree more.
But combine that with raising the standard of living for
future generations, growing our GDP, but combines that with
certainly lessening the impact that we have on our world, the
climate, environmental considerations. And I think if we can
hit that sweet spot with our energy policy, then we have done
something that will be great for generations to come.
I would like to just reiterate for my colleagues that I
think what Mr. Smith has said is that he embraces the CAFE
standards that are in the base bill put forth by Commerce, and
I find that fascinating and I appreciate that. We have had a
number of Tennessee companies that do the same.
But I would like for you and Mr. Caruso to focus on an
issue. I am proud to be on the Energy Committee and we have a
really aggressive alternative fuels bill. I am setting out an
amendment that I hope will pass that just sets a standard and
doesn't pick alternative fuels specifically, but sets a
standard for us to meet, because other technologies will come
into play.
But one of the issues that you both have focused on is the
refinery issue and domestic production, and that is something
that we seem not to want to embrace here in our country today,
and there is a lot of focus on price gouging. There is a lot of
focus on refineries being down. I wonder if you all could talk
a little bit about what appropriate policies should be in place
nationally to affect our refining capacity and our own domestic
growth.
Mr. Caruso. Well, as you know, Senator Corker, EIA is not
in the policy business, but I can give you some of the
fundamentals that would lead to the investment needed in the
downstream refinery sector. There hasn't been a new grassroots
refinery constructed in this country since the late 1970s and
that is part of the problem. And one of the reasons that exists
is that for most of that 25 to 27-year period the return on
investment in that sector has been poor. So therefore, the only
additions to capacity have been made at existing plants. That
is partly a problem of getting permitting and other issues, but
it is mainly that the fundamental return on investments was
poor.
Now, as one looks forward, how do we change that? The way
to change it, of course, is to make it more attractive to
invest and for a typical refinery now in the size of, let us
say, 300,000 to 400,000 barrels a day, companies are looking at
$6 to $8 billion in investments that would require about a 20-
year time of operation in which they can get a return on that
investment. Frankly, there is a lot of uncertainty about what
the investment climate will be for refined products over the
next 15 to 20 years.
I think some of the things that are being discussed in the
current energy bill and that were passed in the Energy Policy
Act of 2005 are helping to clarify that outlook, but clearly
companies in the petroleum downstream sector are looking at
greater regulatory certainty and issues that you talk about in
some of the other industries represented here today. But that
is the fundamental issue--getting the investment needed to meet
the demand that we are projecting.
Mr. Smith. Well, Senator, one of the things I would just
point out to the Committee that always makes me stop and
wonder, we are heavily involved in China, as you know. We have
been there 23 years. We have a very large business in China.
The paper today talks about four Senators who want to put
sanctions on China because of their level of exports to the
United States or the balance of payments. But hardly anybody is
talking about the balance of payments issue in the petroleum
sector.
Five or 6 years ago, Saudi Arabia produced about $30
billion from producing oil. I think the last year we have
figures, it went up to $200 billion. Forty percent of our
balance of payments problem is from oil exporting countries
that buy very little from us. The exports to China are going up
at a very rapid rate, not as fast as their exports to us.
So as I said in my remarks, you have to recognize it is a
worldwide market for oil, and a barrel of oil produced in the
United States, whether it is Alaska or off the Outer
Continental Shelf, has an effect on total worldwide prices and
total supply.
And in the case of the refineries, when a business is
looking at whether it can get a return on that invested
capital, there is always a band in there. On the one hand, when
prices are too low, they won't invest. But on the other side of
the coin, when supply is constrained, they have a disincentive
to invest because they can maximize price on the existing
investment. So the way to get refinery capacity, in my opinion,
is to have a greater source of supply and let the market work
to a greater extent than was the case before.
But it has to be, in our opinion on the Energy Security
Leadership Council, a comprehensive approach. We are exporting
billions of dollars, as Senator Snowe mentioned, to people who
wish us ill. In the debate about U.S. production, there is
always this oil spill off of Santa Barbara that is brought up
that took place 30 years ago. Well, all kinds of technology,
again, as Senator Snowe mentioned, has taken place in 30 years
and I would point out to the Committee that during the
disasters of Hurricane Katrina and the other one, whose name
escapes me--Hurricane Rita and Katrina, there were 1,000
offshore rigs in the Gulf of Mexico. There wasn't one drop of
oil spilled.
So not to be producing oil on our Outer Continental Shelf
when the Cubans are getting ready to do it and so forth, or
Alaska, it seems to me, is not in our strategic interest. So we
would say that fuel efficiency standards, alternative fuels,
and production are the answer.
Chairman Kerry. Thank you, Senator Corker.
Senator Corker. Thank you.
Chairman Kerry. I appreciate it. I might just comment
quickly, because this is an issue I have been involved with a
lot around here for a long time. As we debate Alaska, 95
percent of the Alaska oil shelf is open for leasing and the
largest lease in history was letted at the end of the Clinton
administration and is still not fully exploited, I might add.
In addition to that, the largest explored but unexploited oil
field in the world is the offshore Gulf of Mexico, which we
have permitted, which is allowed. A lot of the oil companies
have not done that, I am told, because they are waiting for the
price to be right on it.
So we have permitted significant additional production. I
am all for it. I think we ought to have additional domestic
production. But those are two places where you don't run into a
whole bunch of political and environmental clash. They are
there. They are available. They are subject to exploitation now
and the oil companies are not doing it.
Senator Tester.
Senator Tester. Thank you, Mr. Chairman, and I, too, want
to express my appreciation to the members of the panel for
their testimony today. I am not going to focus on Mr. Caruso or
Mr. Smith as much as the other three, but I do want,
particularly you, Mr. Smith, I want to thank you for your
leadership in the area of production. I think the points you
bring up are well founded and I certainly appreciate that
perspective.
This can be for Janet or Sal, or both. You both run or are
part of successful small businesses, at least to this point
they have been successful for a number of reasons, and I am
sure that when you do your short-term and long-term planning
for the future, energy costs have to be something that you are
very concerned about or you wouldn't be here today, as a matter
of fact. What are you looking at as potential ways that you can
save energy costs down the line that you think are realistic,
or are you just hoping the market gets better as far as price
at the pump? Either one or both.
Ms. Myhre. Just real quickly, with the local delivery, what
we are finding is that we just don't have any options
associated with the fleet or anything like that. We still only
have gas-driven kind of vehicles. So the only thing we have is
to sell more to absorb, you know, hopefully we get to that
level where as our volume of sale increases, obviously the
operational cost for delivery goes down. So that is what we
focus on. We focus our energy into increase our volume to be
able to absorb some of these without having to go to a
downsizing, if you will. We do plan for that, but not in the
initial. We plan for growth.
Senator Tester. OK. Sal.
Mr. Lupoli. Thank you, sir. Much like this answer that was
just given, we found ourselves consolidating a lot of routes.
You know, instead of making deliveries two to three times a
week, we are trying to make that same delivery one or two times
a week. We are trying to carpool with our employees. We really
feel--I feel as the owner of the company that our biggest asset
is our employees. That is what we have to look at first.
So, as far as looking at that bottom line, it is important.
We want to continue to be profitable. But we will not be
profitable if we don't take care of the kids that work in our
company, and almost in excess of 300 kids that work in our
company, or 300 adults, I should say, that work in the company,
I find myself speaking to them and speaking to the managers how
to help these guys consolidate the driving, public
transportation and some of the things that were mentioned at
this table. But it certainly results back to focusing on that
individual worker that needs the most help in my organization
right now.
Senator Tester. Thank you. Mr. Lynch, just as a sidebar,
the reason I was kind of chuckling is because once upon a time
in Montana, we didn't have a speed limit, and I happen to have
been in the legislature when we put one in and I remember the
Trucking Association coming in and saying they wanted, I
believe it is 65, and then I remember going back to my offices
and getting calls from the independent truckers that were not
happy, to say the least. So that is what brought a smile.
But at any rate, what I want to talk to you about real
quickly is the low-sulfur fuel and if, and I think it is going
to happen, we get standards for biodiesel so biodiesel becomes
something that the quality is dependable on, what kind of
impact do you see that having on the low-sulfur fuel issue and
the fuel economy issue?
Mr. Lynch. On the ultra low-sulfur diesel, we are in the
transitional stage now. I think we are probably almost up--
well, frankly, we might even be up close to 100 percent now.
That transition began in October. I will be very honest. Many
of the problems that had been anticipated did not materialize.
There still are some questions about clogging of the filters,
some other issues, particularly in the colder weather States,
there have been some issues there. But again, we didn't see
nearly the number of problems that we had anticipated, but they
could be longer-term.
Senator Tester. Right.
Mr. Lynch. Now, with respect to the biodiesel, we could not
agree with you more on the need for a standard. We think--we
are very supportive of biodiesel, very supportive of its use.
We certainly want to see, though, standards so that when every
farmer decides that they are going to start producing this
stuff, that when it gets into the stream, that it is of high
quality, because frankly, we have an issue also then with the
engines and the warranties on the engines. We have had this
sort of back and forth with the manufacturers.
But again, I think if we stick to a standard, a Federal
standard, and we would hope that the current pending energy
bill would include something along those lines, labeling, and
we are a little ambitious. We would like to see a little
preemption so that we don't get a plethora of boutique fuels
around the country, but we also recognize the challenges with
that. But that is certainly what we would like to see.
Senator Tester. Do you think that will help with the sulfur
issue?
Mr. Lynch. My understanding is that it will not only help
with the sulfur issue, but with the emissions issue, as well.
Senator Tester. OK. Just one other question. It deals with
your testimony that talked about the Federal Highway
Administration interpreting language on basically a generator
that is allowed in the truck for 400 pounds and they are not
allowing for that weight exemption. How long has this been
going on, because to me, it makes perfect sense from an energy
standpoint and from a common sense standpoint to have a
generator instead of a big old hunk of cast iron sitting there
pumping heat or cooling to your cab. How long has this been
going on? When was the exemption given and when did they take
it away?
Mr. Lynch. Language was included in the Energy Act of 2005.
Like most things in this town, the intent and then the
interpretation when it gets to the agency, sometimes it drops a
bit. In this case, the Federal Highway Administration, and we
are not critical of them, but Federal Highway said the way the
language was written, it is not mandatory. It is basically
State by State. Well, for trucks running interstate, they can't
purchase the equipment and be able to run it in one State, but
not run it in the other, so consequently, it is of little
value. So we are still exploring with the Department as well as
in Congress ways to get that done.
Senator Tester. OK. I will rely on people who have more
experience than I to figure out ways to influence the
bureaucracy. Mr. Chairman.
Chairman Kerry. Thank you, Senator Tester.
Senator Cantwell.
Senator Cantwell. Thank you, Mr. Chairman, and thank you
for holding this important hearing. I think when we talk about
all the issues in regards to our energy supplies and the high
cost, I think many people often forget the impact on small
businesses and those that are particularly impacted because
they are in the transportation sector, so thank you for having
this hearing.
Mr. Smith, thank you for your leadership on trying to get a
larger focus on this issue from an industry perspective and
from a national security perspective. I noticed in your Q&A
answer back and forth that you said you no longer were
participating in energy futures as part of your business. Why
is that?
Mr. Smith. Senator, it is probably because we are not smart
enough. But we simply decided that the markets were so volatile
that as a large publicly held company, we shouldn't be
speculating on oil prices. We make it very transparent to our
customers whether using express, ground, freight, or what have
you, that this is the baseline, the barrel price of fuel that
is baked into the rate, and then each month, we have a
surcharge if the prices go beyond that. And we just think it is
a better way to do it. We lose as prices run up because we are
about a month behind on the posting, and then we pick up it,
hopefully, if it ever goes down, on the other side. It is just
a business decision that is fairly standard in our industry as
opposed to the passenger airline industry where there is a lot
of fuel hedging that goes on.
Senator Cantwell. Well, it is a very interesting comment. I
hope that somebody doesn't write a sequel to ``The Smartest
Guys in the Room'' that now is about how the lack of
transparency in energy futures market, which again, you can't
figure out. It is too volatile. So a basic function that
allowed businesses to do something to protect against future
prices no longer works, and it doesn't because it is too
volatile and I personally believe we don't have enough
transparency there.
I hope you will consider the 787 coming out from Boeing
that is 20 percent more fuel efficient. I think that they
listened to customers. Given your CAFE comments, I think the
aerospace industry listened to customers and said, we need a
more fuel-efficient plane. Achieving 20 percent more fuel
efficiency is going to be quite a landmark, so we are excited
for that.
Mr. Smith. I might mention, Senator, that we have on order
15 of the new Boeing 777 freighters, which we start taking
delivery of in 2009, and that airplane in subsequent editions,
based on what the chairman of Boeing, Mr. McNerney, has told
me, will incorporate many of these wonderful technology
improvements embodied in the 787. So we are looking forward to
getting those airplanes. They are about 25 percent more fuel
efficient than the MD-11s which we currently operate.
Senator Cantwell. Thank you. Thank you for that.
Ms. Myhre, when a small business is caught between these
high expenses and delivering service, we just heard Mr. Smith
say how he had adjusted to large carriers and basically
changing and creating a surcharge, what do you do when margins
are obviously a lot tighter at the retail end? I mean, what is
the end result if prices are going to keep going up? Are you
just going to--I mean, is it going to be a job impact? You are
going to lose customers? How----
Ms. Myhre. It can. Originally, we try not to increase our
costs to the end consumer. We are trying to absorb----
Senator Cantwell. Why?
Ms. Myhre. We are trying to watch the market. As you know,
prices went back down very close to the election last year,
back down to a manageable thing, and now again they have crept
back up, and we understand there is a seasonal fluctuation. So
we have tried to put that into our end prices to the customers
for our delivery.
Right now, however, the trend has been continually to rise
and rise and rise with no slide-back. So what we are going to
have to do is start passing on the increase in our expense to
the end product, to the end consumer. And we have quite large
Federal contracts that that is a good portion of our business.
It is destination. So every time I charge for a pencil, my
freight cost has to be included in that unit cost.
So you are going to watch--I cannot surcharge the
government for delivery. I have to deliver--you know, it is
included in the cost of the goods. So we are watching our
industry starting to charge more for a pencil and a pen,
whereas before--it is starting to be competitive. There are
larger plays that can absorb a little bit faster than we can,
so----
Senator Cantwell. Thank you very much. Mr. Lupoli, did you
want to answer that, too?
Mr. Lupoli. I think what is interesting in my business, we
have had growth every single year since the inception and our
philosophy in our business is we take a portion of the profits
every year and reinvest them into the company for expansion.
And I think what is happening in the fuel, for example, last
year, we spent about $130,000 in fuel expense. This year, we
are on budget to probably spend over $200,000. Now, that is
going to come directly out of the bottom line. That is going to
come directly out of profit. We don't have any intention or
desire to cut back quality, cut back certainly employees.
So what is going to happen to us? That means we are going
to have to cut back expanding our stores, and by cutting back
expanding of the stores, we are not offering additional jobs
out there. Although being a small business, every one of our
stores typically employ anywhere between 10 and 15 people, and
as we have a growth plan of 3 to 4 stores a year, well, that is
a big impact if we are not able to expand our stores. That
trickles all the way down to somebody that needs a job, a local
person, a local mom, dad, individual that is looking for that
job that doesn't have the ability or possibly the education for
a high-paying job to come over to our organization. It is not
going to be there because of these rising fuel costs. So in a--
--
Senator Cantwell. Thank you, Mr. Lupoli, and thank you, Mr.
Chairman. I appreciate that very much.
Chairman Kerry. Thank you very much, Senator Cantwell. We
appreciate it. Thank you very much, and thank you for helping
us connect with Ms. Myhre. We appreciate that very much.
Senator Coleman.
Senator Coleman. Thanks, Mr. Chairman. This is a very
important hearing, Mr. Chairman. I really appreciate it.
Mr. Caruso, has EIA, have they done a study? I mean, we
have some great testimony, but have you done a study on the
impact of energy prices on small business?
Mr. Caruso. We have not, Senator. We don't disaggregate our
data collection to that level of detail.
Senator Coleman. It would be worth having more extensive
information, and this has been--I am sitting here listening
about 35 percent increases. I am wondering, Ms. Myhre and Mr.
Lupoli, is there a point where we simply say--is there a
tipping point that says, we can't handle this any more? Is
there a price of gas or something? I am amazed at this figure,
36 percent in a short period of time. I mean, your margins
can't be that great. Is there some point where you say, we
can't afford it. You are going to drive us out of business, or
the price of gas will drive us out of business?
Mr. Lupoli. That is a very real statement, sir, and the
answer is yes. We are getting--my business, our business, we
are getting dangerously close to those levels. What we would
like to do is continue to increase sales, increase expansion,
but we are really finding it difficult to maintain the
foundation we built of giving all our employees insurance,
offering them 401(k) plans, doing all those incentives to keep
the people and create a lifestyle. We are finding it very
difficult, very close to the point right now where those
options don't exist anymore, or they have to be stopped and we
are waiting for this market or this release to take place.
Something has to happen in order to give us some kind of
opportunity to expand, and the rising gas prices are preventing
us from doing that.
Senator Coleman. I appreciate that. Ms. Myhre.
Ms. Myhre. We are in the same option right now, I mean, the
same level that you have to make that critical decision whether
or not you have to scale back your operations in order to
absorb, and what employees and what route. You know, a driver
that drives a route, maybe we will go down to two routes. Maybe
we will get rid of our local employees all the way around and
they will be back home. But maybe we will go to an outside
deliver service and pass it on that way. So yes, every day,
there is a decision that has to be made to absorb 35 percent--
any line item of your financial statement.
Senator Coleman. Is there anything, and Mr. Smith, you have
looked at the big picture, and maybe Mr. Caruso, is there
anything the Government can do in the short term? Is there
anything that we are not doing right now that we could be doing
to lower the cost of a gallon of gas?
Mr. Smith. Well, I think, Senator, the situation we are in
built up over many, many years. We see this very clearly in our
business and I think you would find that the Federal Reserve
looks at our traffic and UPS's traffic as an excellent
surrogate as to what is going on in the economy as a whole, and
since the majority of all business activity is small business,
one of the things that we have seen over the last year is the
echo effect of this run-up, and there is just no question that
the current economic slowdown is directly attributable to the
run-up in fuel prices which has acted as a tax, particularly on
small businesses and lower-income people, where those dollars
have been shipped offshore and they are not recycling in our
economy.
I think Sal's testimony was perfect about the people that
used to come into his restaurant several times a week have to
scale down. So that is what you are seeing. If the situation
were to become worse by the withholding of some supply, either
because of a political act or the cartel determined to increase
it more, I think you would see significant economic travail in
this country, particularly in small business.
Senator Coleman. And yet we clearly have to take a long-
term view, and I----
Mr. Smith. Well, that is the problem. You know, I don't
know any short-term palliative. Obviously, you do something
like have the Government short the market or put petroleum out
of the Strategic Oil Reserve, but it would just be a short-term
effect. I mean, these are long-term issues and they need to be
dealt with in a comprehensive long-term fashion, in our
opinion.
Senator Coleman. Just one question about CAFE. Clearly, we
have to be more aggressive. With the underlying bill there is
going to be an alternative that is out there. The industry is,
I think, finally getting it. They are a little slow to the
dance, but they are getting it. Do you have a position on a
particular--I thought my colleague from Tennessee asked a
question about your position on the underlying bill. Do you
have a position on a particular proposal or is it just the
general concept that the industry has to be at the table and
they aren't now?
Mr. Smith. Our proposal was reflected in the bill that was
put in by Senators Dorgan and Craig, which call for a 4-percent
by category, per year, administered by NHTSA, but very
importantly, with off-ramps if it were technologically
infeasible or there were safety considerations, you know,
traffic fatalities went up or whatever the case may be. So you
have that and then you have, I think in the Commerce bill,
Senator Feinstein's bill, I believe it is 3\1/2\ percent.
But the council believes that the underlying technology
would support what is in the Dorgan-Craig bill. Obviously,
politics enters into the equation. Maybe there is a compromise
at some other level or lower level, I don't know. But we
support the Dorgan-Craig bill and certainly the Feinstein bill
is in that direction, as opposed to lower levels.
Senator Coleman. I appreciate your leadership in this area.
Thank you.
Chairman Kerry. I think, I may be wrong, but I think the
Feinstein bill may ramp up after a number of years. It ramps up
to the 4 percent. So we actually get much closer than people
would think, and there are some restraints on the off-ramps. I
think people have been nervous that the off-ramps could be
deemed by some people to be a non-compliance invitation. That
is a balance that people are trying to get at. But we hope we
can hold it together on the floor.
Senator Cardin, welcome, sir. I think we are going to have
a vote around 11:30, so go right ahead.
Senator Cardin. Mr. Chairman, I am going to be very brief.
I really apologize for not being here earlier to listen to the
testimony and hear my colleagues with the questions and your
answers. The Judiciary Committee, as you know, various
committees including the Judiciary Committee had markup today
and they needed to make a quorum, so I was over in the
Judiciary Committee for this morning.
But I really wanted just to come by to thank the Chairman
and the Ranking Member for holding this hearing. I think this
is a critically important issue to get your input. The energy
policy in this country is so important to this Nation for
national security, becoming energy independent and less
vulnerable to other countries' whims. It is important for our
environment. Global climate change is a real issue that we need
to deal with as a Nation and show international leadership.
But it is also important for economic reasons. I can tell
you, businesses in my community are hurting from the 40 percent
increase in gasoline prices over the last 5 months and energy
costs generally. So I look to this Committee and I look to the
leadership within our business community to come forward with
workable ways that we can find the technology to advance energy
independence and can deal with the economic realities of the
energy pricing as to economic growth in our community.
Mr. Chairman, I am not going to venture to ask a question
that may have already been asked, but I wanted to come by and
tell you that I think this hearing was extremely important. I
will look forward to reviewing the testimony of the witnesses.
Chairman Kerry. Thanks a lot, Senator Cardin. We appreciate
it.
Senator Thune, I apologize. I didn't realize you had come
back in. It was my fault. I am sorry about that.
Senator Thune. Mr. Chairman, I, too, want to express my
appreciation to you and Senator Snowe for holding what I think
is a very important hearing. The impact of fuel prices and
energy prices on small businesses is certainly something that
is being felt all across the country. And in my State of South
Dakota, we travel long distances and we are very dependent upon
the agricultural farm-to-market economy. Obviously that is an
input cost that our economy is having to bear out and it is
having a profound impact.
I guess I would just like to ask a question of some of the
small businesses on the panel about whether any of you have
considered switching to alternative fuel-type vehicles, hybrids
or flex-fuel vehicles, and if not, why, and what are the
barriers to greater use of those types of automobiles.
Ms. Myhre. The co-owners did do some research with our
local fleet management companies, a Ford dealership. We went
out and we did research to see if there was anything currently
on the market to fit our delivery needs. We are a lot of stops,
short route kind of delivery, much like a pizza delivery, I
guess. But there currently is no alternative option for the
type of vehicle we would use.
We only have one diesel truck, so obviously we could use
the biodiesel, and Washington State is starting to have a
better distribution system, I guess better than any other
State, where you can get access to the biodiesel. But for a
gasoline small delivery, we just don't have any commercial
options right now.
Senator Thune. Mr. Smith.
Mr. Smith. Senator, FedEx, along with the Environmental
Defense Fund and Eton Corporation, pioneered the development of
a robust pick-up and delivery vehicle, 700-cubic foot delivery
vehicle like you see our express and ground units using. It
gets about 100 percent more fuel efficiency than the
conventional diesel-powered. It emits about 10 percent of the
emissions of a standard diesel-powered unit. The problem is,
and these are rough order of magnitude numbers, a
conventionally powered vehicle will cost about $55,000 and the
hybrid will cost about $90,000. So it is impossible with that
kind of disparity in capital cost, and if it were reflected in
a smaller vehicle used by office supply or pizza delivery, you
would have the same relative, perhaps percentagewise even
higher.
So as part of this fuel efficiency quest to reach this 4-
percent goal, clearly, the way to do it in the pick-up and
delivery area, and we did include in our recommendations that
light trucks and heavy trucks be included for the first time in
fuel efficiency standards, a big part of that would be to
develop at scale hybrid pick-up and delivery vehicles, because
it is a logical place to introduce those. But you would have to
have incentives to be able to afford them as a small business
unit or a company like FedEx, which employs 77,000 vehicles in
our operation.
But clearly, as Senator Kerry mentioned, the technology is
there. It is just the will and the incentives and the retooling
and the production to put these vehicles--battery-powered
vehicles for the smaller vehicles are certainly on the horizon.
New battery technology can get us where we need to do. And all
of those will be driven by a program like we recommended, which
come from the fuel efficiency standards, because you have to
use technologies like that to get to where you need to get to.
Senator Thune. Mr. Lynch.
Mr. Lynch. Senator, the Class 8 engine tractor is truly a
marvel. This is an engine that typically for over-the-road
truck operations can run anywhere from 150,000 to 200,000 miles
annually. In some truck operations, the vehicle barely stops.
There is a driver in it. It stops. The next driver comes in
after the 10 hours, 11 hours. It is a workhorse vehicle. It is
that efficiency and that dependability, I think, that
ultimately, not in the P&D operation, but in the over-the-road
long-haul operation, that is where the biggest challenge is.
As we look at it, when you are operating at a 4- or 5-mile
per gallon standard now, you have a lot of room to grow and
improve, and we certainly would like to see that. But part of
the challenge there is that same tractor can pull 80,000 pounds
or the same tractor can pull 30,000 pounds and that can make
one whale of a difference as to how much of a CAFE standard
that particular equipment is going to be able to achieve.
But it is certainly something that--I think one of the
Senators said, what can we do? I think it is start now.
Senator Thune. And it sounds like what I am hearing is that
it is going to take that kind of a requirement. It is not going
to happen, the economics are not there currently for you to
start using those types of vehicles until they start producing
them and have some sort of a requirement that they achieve a
certain level of fuel efficiency and, therefore, get the
technology into the assembly lines and what not to be able to
move in a direction that would make those types of vehicles
more cost effective. I mean, in your operation, that is
significant, 55,000 versus 90,000, and I understand you need a
workhorse engine.
How much of it, too--it seems to me that is a bigger issue
than the question I am going to ask now, but how much of it,
too, is having access to alternative fuels at the retail level?
We have about 180,000 gas stations in America and of those,
only about 1 percent make, for example, the 85 available, and
most of that you are probably going to find in the Midwestern
region. So it seems like we have also an infrastructure problem
we have to solve, and these things may have to all be solved
kind of at the same time. But that is something I have been
working on.
I think as we go toward hopefully cellulosic ethanol, we
will see more and more, and the research phase is, of course,
underway. Hopefully, commercialization is not very far away.
But we have got a limit, I think as you noted in your
testimony, Mr. Smith, to what we can do in terms of corn-based
or kernel ethanol. We now have to look at other biomass to be
able to produce it.
I thought your testimony was especially good with regard to
what I think is a very precarious situation that we face in the
world relative to where we get our energy. I think that it
would not take much to disrupt or cause a significant increase
in cost to the American consumer, the American business, if
there is just the slightest hiccup in the Middle East or
Venezuela or someplace like that. I describe that as a
terrorism tax. I think we are paying enormous amounts of money
to countries around the world who have hostile intentions
toward the United States and that we need to diversify away
from that.
The energy bills that we are debating this week and
hopefully will continue to move legislation through here that
addresses this issue, because I think that--I am a big
advocate, as you might expect from my part of the country, for
renewable energy. But we have got to add supply. We have got to
add supply. We have got to figure out ways to get home-grown
American energy so that we do not get 60 percent of it from
outside the United States. I think that is a very perilous
situation for our country.
So I am supportive of whatever steps we can take to move in
that direction, but I am appreciative of your testimony and
comments in response to questions about the best way to go
about that and what makes the most sense in terms of your day-
to-day operations. So thank you for being here and thank you
for your testimony.
I have got a statement, Mr. Chairman, I would like to get
included in the record.
[The prepared statement of Senator Thune follows:]
[GRAPHIC] [TIFF OMITTED] T7352.025
[GRAPHIC] [TIFF OMITTED] T7352.026
[GRAPHIC] [TIFF OMITTED] T7352.027
[GRAPHIC] [TIFF OMITTED] T7352.028
Chairman Kerry. Without objection, it will be put in the
record. I really appreciate the Committee's strong
participation in this, obviously.
Just a couple of quick wrap-up questions and thoughts.
First of all, I am going to be introducing legislation, the
Small Business Emergency Fuel Assistance Act of 2007, which is
based on a Presidential declaration of a fuel emergency. As we
saw after Katrina and other instances, there are moments where
you may really come into the kind of shortfall that Fred Smith
has talked about. And under those circumstances, we want to
create a grant program to help small businesses through a
legitimate fuel emergency. This is not for standard business
operation, but rather a legitimate Presidentially declared
emergency. Eligibility for these grants would be restricted to
businesses with fewer than 50 employees and less than $5
million in gross receipts, eligibility being determined on
those businesses having a plan to, in fact, become more energy
efficient. So hopefully we have a linkage there.
I might also comment that in the 23 years I have been here
now, on the Commerce Committee, when Senator McCain and I tried
to get CAFE standards raised to 35 miles per gallon about 5 or
6 years ago, and the mood of the Senate just was not there. In
fact, one Senator actually brought a poster of a Volkswagen
dragging a plow through a field--a purple Volkswagen, I might
add--and that was the image and the sort of sloganeering used
to try to deter people from moving in this direction, which has
been obvious for a long time.
I think when Harvard and Stanford and Tuck and Wharton and
places do their case studies in the future, one of the dramatic
case studies is going to be the big three out in Detroit,
tragically, who have again and again, from the 1960s on, missed
market trends and missed what consumer desire is or could be,
or what it might be marketed to. They have taken the simplest
marketing route rather than sometimes the most visionary or the
best or the most creative.
I know that in 1990, when we negotiated the Clean Air Act,
I remember sitting there and listening to industry come into
that room where we sat with Senator Mitchell off of the
Majority Leader's office, with John Sununu and Bill Reilly and
George Herbert Walker Bush involved it, and the industry said,
don't do this to us. It is going to cost $8 billion. It is
going to take 10 years. You are going to bankrupt us. We just
can't do it.
The environmental community and others came in and said,
no, it is not. It is going to cost about $4 billion. It can be
done in about half that time and it won't bankrupt folks.
In the end, folks, it took half of that. It cost about $2
billion and it was done in about 2\1/2\ years. Why? Because no
one was able to predict what happens when American ingenuity is
unleashed around a national goal or standard.
We already have the National Academy of Sciences telling us
we have the technology to dramatically change fuel efficiency.
So we run into this simplistic resistance based on old visions
of an old market, when there is really an enormous opportunity
here to grab this and take the ball and run with it. We want
cars made in Detroit. We want American workers making those
cars. We want to beat Toyota and BMW and all the rest of these
folks. But you have sure got to market something, which is a
product that makes sense.
I wanted to buy an E-85 vehicle to drive around
Massachusetts. One gas station, in Chelsea, has the
availability. For the price of 1 week of the war in Iraq, we
could actually pay to put an alternative fuel pump in every
single gas station in America. I mean, these are the real
choices that we face.
And I concur with what Fred Smith said. We have to be
careful not to go rushing off into the grain-based ethanol
because of what it will do to the food markets, as well as what
it does to soil, water, and a lot of other usages where you
have these cellulosic opportunities.
And if you talk to the venture capitalists in California
and Massachusetts and New York and elsewhere, they are already
putting billions of dollars into these other sectors, some of
them promising. They believe there will be an alternative to
fossil fuel maybe 5 or 10 years from now.
So if we set this goal and we start to move our technology
and creativity in that direction, I am absolutely convinced,
based on past experience and current technology, that this is
going to prove so much easier than people think. And Mr. Lynch,
you commented on how many of the problems that had been
predicted didn't show up in terms of the low-sulfur. I think
the same thing will be true here and we ought to have
confidence in America's ability to do these things.
I might ask you just one more question, Sal, in terms of
your business. I wanted to provide a billion dollars of
retooling to the auto industry and I wanted to provide a $4,000
per vehicle credit for hybrids, which I think would change a
lot of attitudes. If you had a better tax incentive available
to you on solar or on other fuel efficiencies, or you, Ms.
Myhre, would that make a difference to sort of the business
plan you lay out, what you might be willing to capitalize on,
and ultimately, to your bottom line?
Mr. Lupoli. Absolutely, yes, sir. What we would do is we
would look at the long-range vision, not trying to put a band-
aid on today but really look at this in 5 to 10 years from now.
You know, oftentimes, people tell you, you know, buying
electricity, trying to contract it right now, or trying to
contract a fuel price right now. I want to extend that. They
are trying to hold you to a 16-month or a 2-year program. I
want to extend it to a 5- or 10-year program.
And if there were more exemptions and we took advantage of
one of them in our State of Massachusetts by putting the
second-largest solar panel system on a private business, we
would do those things, because in the long run, we will be
better off. As opposed to just looking at the short-term gain,
I want to look at the long-term gain, because as prices
continue to increase, when people try to talk about the
amortization of that cost, we really look at it as the gap is
going to close even much faster because it is not going to be a
10-year program. If prices continue to rise, it is really a 5-
year program we are talking about. So before you know, you will
open your eyes and that incentive and that opportunity will be
there to take advantage.
Chairman Kerry. Obviously, your product is price-sensitive
to your consumer, so there is a limit to how much you can
absorb here?
Mr. Lupoli. That is correct.
Chairman Kerry. Without starting to lose business, just
based on your own pricing, and the same for Ms. Myhre. Have
you, however, raised prices? Have you sort of reached that
limit at all?
Mr. Lupoli. We really have, Senator. You know, we really
feel the product to be competitive, and I think that is the
most important thing we are talking about in my industry, there
is only so far you can go, sir, to be competitive. And unless
you are willing to sacrifice the quality or employees, which we
are not, which will never be an option, it really just comes
right out of your pocket. And we are at that point where we
can't really raise any prices anymore. We can't pass that price
over to our customers on the wholesale end of it. So it is just
really becoming a financial burden and it is becoming a great
problem to the employee.
Chairman Kerry. Well, we really appreciate your business
ethics, your values that guide your business, and are very
sympathetic.
We are working on this right now, literally today, and the
mark should be out on the tax bill that we are doing to
accompany what is happening on the energy bill. We are going to
put some serious incentives in there for alternative renewable,
hybrid electric, and plug-in, and really try to stimulate this.
As I said, I fought for a billion dollars in 2004. I think I am
going to be able to get about a half-a-billion dollar tax
benefit to businesses and to the auto industry here to be able
to retool. Hopefully that can help to cushion some of what we
need to do to get these vehicles that Fred Smith talked about.
It is crazy that you all don't have better alternatives. It
is crazy that a whole bunch of folks can't go out there and
find a car or big truck or big SUV, even, that a soccer mom
can't be confident that she can get everybody in the team to
the game with a fuel-efficient vehicle. There is no reason not
to in our country. So----
Senator Cardin. Would the Senator yield just for one
moment?
Chairman Kerry. Sure.
Senator Cardin. I just want to concur in your comments and
just point out what I think is absolutely accurate. You have to
make it a little bit easier for individuals and businesses to
make that initial investment and I look forward to seeing the
tax provisions from the Finance Committee on the energy bill.
Mr. Lynch, we have the technology today to make engines
with alternative fuels as reliable and as efficient so that the
business concern of having the reliability of an engine that
can go 100,000 or 150,000 miles a year, we have that. We just
need to make sure it is available.
I just really want to underscore one point you made, Mr.
Chairman, and that is in my own State of Maryland, we have
governmental fleets and business fleets that want to use
biodiesel. The problem is they can't get biodiesel. Most of the
diesel stations don't offer it. So we also need to make sure
that there is the infrastructure network out there to supply
those that are moving forward with alternative fuels, so that
they can get it conveniently, and that may require some action
on our part to make sure that network is available.
I thank you for yielding, because I agree completely with
your assessment. We have the technology. We have the ability to
get this done. We now need--I think we also have the national
will, by the way. So let us now enact the policy so that we can
get it done.
Chairman Kerry. Well, I really want to thank everybody on
the panel. I know you have traveled some distance. You have all
sat here giving precious time to the Committee. I think it has
been very, very helpful, very important testimony, particularly
at this moment with a bill on the floor. I think some of the
Senators here will take some of this testimony to this debate,
so I think it has been really helpful in that regard.
I will leave the record open in case somebody does have a
question they want to submit in writing to you, but we are
very, very appreciative and with that, we will stand adjourned.
Thank you very much.
[Whereupon, at 11:40 a.m., the Committee was adjourned.
COMMENTS FOR THE RECORD
[GRAPHIC] [TIFF OMITTED] T7352.029
[GRAPHIC] [TIFF OMITTED] T7352.030
[GRAPHIC] [TIFF OMITTED] T7352.031
[GRAPHIC] [TIFF OMITTED] T7352.032
[GRAPHIC] [TIFF OMITTED] T7352.033
[GRAPHIC] [TIFF OMITTED] T7352.034
[GRAPHIC] [TIFF OMITTED] T7352.035
[GRAPHIC] [TIFF OMITTED] T7352.036
[GRAPHIC] [TIFF OMITTED] T7352.037
[GRAPHIC] [TIFF OMITTED] T7352.038
[GRAPHIC] [TIFF OMITTED] T7352.039
[GRAPHIC] [TIFF OMITTED] T7352.040
[GRAPHIC] [TIFF OMITTED] T7352.041
[GRAPHIC] [TIFF OMITTED] T7352.042
[GRAPHIC] [TIFF OMITTED] T7352.043
[GRAPHIC] [TIFF OMITTED] T7352.044
[GRAPHIC] [TIFF OMITTED] T7352.045
[GRAPHIC] [TIFF OMITTED] T7352.046
[GRAPHIC] [TIFF OMITTED] T7352.047