[Joint House and Senate Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 112-478
GAS PRICES IN THE NORTHEAST: POTENTIAL IMPACT ON THE AMERICAN CONSUMER
DUE TO LOSS OF REFINING CAPACITY
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HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
APRIL 26, 2012
__________
Printed for the use of the Joint Economic Committee
_____
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JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
SENATE HOUSE OF REPRESENTATIVES
Robert P. Casey, Jr., Pennsylvania, Kevin Brady, Texas, Vice Chairman
Chairman Michael C. Burgess, M.D., Texas
Jeff Bingaman, New Mexico John Campbell, California
Amy Klobuchar, Minnesota Sean P. Duffy, Wisconsin
Jim Webb, Virginia Justin Amash, Michigan
Mark R. Warner, Virginia Mick Mulvaney, South Carolina
Bernard Sanders, Vermont Maurice D. Hinchey, New York
Jim DeMint, South Carolina Carolyn B. Maloney, New York
Daniel Coats, Indiana Loretta Sanchez, California
Mike Lee, Utah Elijah E. Cummings, Maryland
Pat Toomey, Pennsylvania
William E. Hansen, Executive Director
Robert P. O'Quinn, Republican Staff Director
C O N T E N T S
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Opening Statements of Members
Hon. Robert P. Casey, Jr., Chairman, a U.S. Senator from
Pennsylvania................................................... 1
Hon. Kevin Brady, Vice Chairman, a U.S. Representative from Texas 3
Hon. Pat Toomey, a U.S. Senator from Pennsylvania................ 15
Witnesses
Dr. Diana Moss, Vice President, American Antitrust Institute,
Washington, DC................................................. 6
Mr. Robert Greco, Group Director of Downstream and Industry
Operations, American Petroleum Institute, Washington, DC....... 8
Mr. Thomas D. O'Malley, Chairman, PBF Energy, Parsippany, NJ..... 10
Dr. Michael Greenstone, Director, Hamilton Project, 3M Professor
of Economics, MIT, Washington, DC, and Cambridge, MA........... 11
Submissions for the Record
Prepared statement of Chairman Robert P. Casey, Jr............... 32
Prepared statement of Vice Chairman Kevin Brady.................. 33
Prepared statement of Dr. Diana Moss............................. 34
Prepared statement of Mr. Robert Greco........................... 39
Prepared statement of Mr. Thomas D. O'Malley..................... 41
Prepared statement of Dr. Michael Greenstone..................... 42
Prepared statement of Hon. Donna Christensen..................... 46
Chart titled ``Mid-Atlantic and Northeast Gasoline: Weak Demand
and Ethanol Haave Displaced Gasoline Production of Up to Four
Marcus Hook Size Refineries''.................................. 48
Chart titled ``U.S. Refinery Produced Gasoline: Policy Will Cause
Demand to Decline--The Question is by How Much?................ 49
Prepared statement of Hon. John P. de Jongh, Jr.................. 50
Prepared statement of Mr. Denis Stephano......................... 51
Chart titled ``Northeast Refinery Capacity''................. 53
GAS PRICES IN THE NORTHEAST: POTENTIAL IMPACT ON THE AMERICAN CONSUMER
DUE TO LOSS OF REFINING CAPACITY
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THURSDAY, APRIL 26, 2012
Congress of the United States,
Joint Economic Committee,
Washington, DC.
The committee met, pursuant to call, at 2:37 p.m. in Room
G-50 of the Dirksen Senate Office Building, the Honorable
Robert P. Casey, Jr., Chairman, presiding.
Senators present: Casey and Toomey.
Representatives present: Brady, Burgess, and Duffy.
Staff present: Conor Carroll, Gail Cohen, Cary Elliott,
Will Hansen, Colleen Healy, Patrick Miller, Ted Boll, and
Robert O'Quinn.
OPENING STATEMENT OF HON. ROBERT P. CASEY, JR., CHAIRMAN, A
U.S. SENATOR FROM PENNSYLVANIA
Chairman Casey. Well thank you, everyone. The Committee
hearing will come to order. I'm sorry I'm so late. I'll do an
opening statement, which I'll go through with great speed, and
then we'll go to our Vice Chair.
I want to thank everybody for being here. Today's hearing
is focused on the impact that closures of petroleum refineries
serving in the Northeast could have on prices at the pump in
the Mid-Atlantic and New England regions. Since September 2011,
two refineries in the Philadelphia area, and one, I should say,
a major Caribbean export refinery supplying the East Coast,
have in fact closed.
Additionally, a third Philadelphia area refinery is slated
to shut down this summer. In addition to the immediate impact
on gas prices, we will explore at this hearing the long run
cost to the economy associated with higher gasoline prices, as
well as the actions that can be taken to encourage the adoption
of cleaner, cheaper alternatives to petroleum, such as natural
gas.
When the situation remains--I should say while the
situation remains fluid, with the potential sale of the three
Philadelphia area refineries, I'm concerned that the Northeast
is losing needed refining capacity. I'm especially concerned
that this loss in refining capacity is happening at a time when
consumers are already facing rising gas prices.
With limited pipeline capacity to import from the Gulf
Coast, this loss of refining activity in the Northeast will
increase the region's dependence on European gasoline and
diesel, and lead to higher prices for consumers. A recent
Energy Information Administration report detailed the possible
consequences of this reduction in refining capacity, which
include greater price volatility and potential shortages in the
Northeast.
I am focused, as I know so many people here are, on
ensuring that changes in refining capacity in the Northeast
have as little impact as possible on energy prices, on jobs in
our communities, and on the economic recovery. I've urged the
administration to become directly involved in this issue. I met
with workers at the three Pennsylvania refineries,
Philadelphia, Trainer and Marcus Hook, to discuss the impact
shuttering the refineries would have on the workforce.
Together, these refineries represent half, half of the
refining capacity in the northeastern United States. I'd like
to recognize representatives from the United Steel Workers
Local 10-1, Local 10-901, and Local 10-324, who are in the
audience this afternoon. Also attending today's hearing are
members of the International Brotherhood of Boilermakers, Local
13, and Steamfitters Local 420.
Closure of these facilities would likely mean that the
Northeast region will experience a decrease in the supply of
ultra low sulfur diesel, so-called ULSD. At the same time,
there will be an increase in demand for ULSD, as both a
transportation fuel and for home heating. With closure of the
northeastern refineries' refining activities will be
centralized in the Gulf Coast region. This will affect the
price of gasoline, diesel and heating oil, and lead to
potential shortages of these fuels in the Northeast.
An earlier prolonged cold spell next winter could send home
heating prices skyrocketing, further hitting consumers. Today
gas prices are pushing $4 at the pump, well ahead of the summer
driving season. We're facing higher prices, despite the fact
that U.S. production of oil is at its highest level since 2003.
For the first time in a decade, the U.S. is importing less than
half of the oil we use.
Yet with only two percent of the world's proven oil
reserves, there's little impact the United States can have on
the price of oil, which is set by the supply and demand in the
global marketplace. Focusing on U.S. demand for oil offers more
promise. The United States consumes more than 20 percent of the
world's oil. Our dependence on oil to meet transportation needs
leaves consumers with few choices, making them vulnerable to
oil and gasoline price rises.
By promoting policies that reduce our dependence on foreign
oil, the United States can help to reduce global demand for
oil, and ultimately, ultimately prices. If oil accounted for a
smaller share of our energy needs, the U.S. economy and
American consumers would be less vulnerable to price spikes in
the oil market.
It's clear that we need to accelerate natural gas
development and use. Natural gas is produced right here at
home, creating jobs. It's a clean source of energy, lower
emissions than traditional gasoline. Finally, it's cheap.
Converting vehicles, especially commercial vehicles to run on
natural gas could play a role in the move to a cleaner energy
alternative.
In the coming weeks, I'll introduce legislation that
provides states with both the funding and the flexibility to
develop initiatives that (1) encourage use of natural gas as a
transportation fuel and (2), encourage public and private
investment in natural gas vehicles and transportation
infrastructure.
These actions will encourage the use of natural gas, while
reducing our dependence on petroleum and our vulnerability to
oil price spikes. We have a terrific group of witnesses today,
with wide expertise on energy issues and I look forward to
hearing from them. But first, we'll hear from the Vice Chair of
the Joint Economic Committee, Congressman Kevin Brady.
[The prepared statement of Chairman Casey appears in the
Submissions for the Record on page 32.]
OPENING STATEMENT OF HON. KEVIN BRADY, VICE CHAIRMAN, A U.S.
REPRESENTATIVE FROM TEXAS
Vice Chairman Brady. Well thank you, Chairman Casey for
calling today's hearing. It's most appropriate, in light of
high gasoline prices and a White House energy policy that's
truly coming home to roost. While the President has touted
``all of the above'' energy policies, the actual policies have
been anything but that.
They've been decidedly unfavorable to America's energy
manufacturing industry, and that's true for crude oil
production as well as refining. The administration has thwarted
oil and gas development on federal lands and offshore, and
imposed a hasty and prolonged moratorium in the Gulf of Mexico
on drilling, and then hindered resumption of exploration
through slow permitting.
Most recently, it's denied increasing the assured and safe
supply of crude oil from our ally, Canada, through the Keystone
pipeline to American refineries. The President also risks the
jobs of American energy workers, by threatening punitive tax
treatment of energy manufacturing, for example, by singling
this sector out, and rescinding incentives to encourage job
creation and manufacturing here in America.
Why is energy manufacturing different than any other form
of manufacturing? Why are these good-paying energy jobs deemed
expendable by the White House, and why is the President himself
pushing taxes, encouraging energy companies to send their jobs
overseas? This manufacturing deduction, by the way, is an
important incentive to refining, and will further make these
projects less economically viable if the President has his way.
The administration is also pursuing policies that will
shrink and punish petroleum refining, both by forcing it to
blend in alternative fuels, even when they do not yet exist, by
mandating ever more stringent emission standards, even when the
costs are huge and the benefits uncertain. America is
experiencing an energy revolution, with the potential to become
the largest energy-producing country on the planet.
Let's be clear. The rise in energy manufacturing driven by
new technology is occurring on private lands, not federal
lands. In fact, at President Obama's request, his
administration has launched a flurry of regulatory attacks on
oil shale development in America, leaving the country to pray
that Washington will not smother the technology in the crib
with more layers of regulation.
Senator Lisa Murkowski, in a recent editorial entitled
``America's Lost Energy Decade,'' pointed out that in 2002 the
U.S. Senate decided against opening a small section of the
Arctic National Wildlife Refuge to oil and gas production. The
most cited reason at the time was that it would take too long,
ten years, for the oil to reach the market.
Now, ten years later, the White House is pleading with
Saudi Arabia to produce more oil, when we could be controlling
our own supply. Senator Murkowski correctly concluded that long
lead times should be a reason to approve drilling quickly, not
to continue putting it off.
Other non-OPEC countries do not lock away their resources,
not even pristine Norway, which is the world's seventh largest
exporter of oil, and second largest exporter of natural gas.
Our regulatory tale is one of self-inflicted wounds, cutting
off our nose to spite our face. This country is blessed with
resources that can be developed, produced and processed safely
and cleanly, to support economic growth and technological
development, which in turn will position us to further advance
the state of the environment.
All of this is critical to ensuring that America continues
to have the strongest economy in the world throughout the 21st
century. Refinery closures and job losses are painful, but even
more so when our own government's policies contribute to them.
Americans want to balance a healthy economy with a clean
environment. They don't want their factories shut down
effectively by order of the government, and products brought
into the country from places that are much less environmentally
committed than we are in the United States.
Regulators need to take a rational, balanced approach, that
recognizes that ignoring economic consequences hurts the very
citizens and workers whose welfare they are charged to protect.
First, our regulatory mechanism at least needs to be
functional. It makes no sense whatsoever to impose blending
requirements on refiners for cellulosic ethanol that doesn't
exist in requisite quantity, and then fine them for not using
it. It makes no sense to push corn ethanol consumption to a
level that invalidates our car engine warranties. It makes no
sense to impose sulfur content limits on gasoline, that
actually may increase CO2 emissions, when the EPA is
trying to reduce those emissions as well. These are unforced
policy errors we can't afford to commit, especially in this
struggling economy.
Second and more fundamentally, the administration,
lawmakers and regulators must ask themselves if they're
pursuing radical solutions that may never come to fruition,
while missing opportunities to push steady and certain
improvements. Are they provoking protracted lawsuits and
delaying projects? Are their actions causing older, more
polluting equipment to stay in place longer, and are they
driving America's firms out of business and costing us jobs,
while inviting more dependence on foreign countries with worse
pollution records?
Regulations should facilitate the market's functioning,
neither treating private enterprise as an adversary, nor
pressing for preconceived outcomes in one sphere, while
ignoring collateral damage in the other. Devising good
regulatory policy doesn't have to be intensely adversarial. It
can be more collaborative, engage in incentives to the private
sector, and above all be mindful that it ought to serve
economic growth and technological development, the ultimate
sources of better living standards.
Like the Chairman, I look forward to hearing our witnesses'
testimony and probing their ideas for better regulation of oil
refineries and in general. I yield back.
[The prepared statement of Representative Brady appears in
the Submissions for the Record on page 33.]
Chairman Casey. Thank you, Vice Chairman Brady. What I'll
do now is introduce each of the witnesses by way of their
background and biography, and then I'll start with Dr. Moss for
her testimony. Let me say two things. Number one to the
witnesses, and to the audience, once again I apologize for
being late. I thought the mark-up I was in would be about 12
minutes shorter than it was.
Secondly, if you can keep your testimony as close as
possible to five minutes. If you go beyond that by a few
seconds, nothing will happen. If you go beyond it by more,
we'll probably start standing up and waving our arms, and we'll
try not to do that.
But we're honored to have such a great panel. Dr. Diana
Moss is Vice President, Director and Senior Research Fellow of
the American Antitrust Institute. She specializes in the
economics of antitrust, regulation and energy, and natural
resources. Dr. Moss was a senior staff economist and
coordinated campaign analysis in the Office of Market, Tariffs
and Rates Division of the Corporate Applications, Federal
Energy Regulatory Commission from 1995 to 2000.
She has published and spoken widely on energy regulation
and antitrust issues, and is also an adjunct professor at the
University of Colorado Department of Economics. Her Ph.D. in
Mineral Economics was earned at the Colorado School of Mines in
1989. Dr. Moss, thank you for being here.
Second, Mr. Robert Greco is Group Director of Downstream
and Industry Operations for the American Petroleum Institute or
so-called API. In this capacity, he directs API's activities
related to refining, pipelining, marketing and fuel issues.
Over his 21 year career at API, Mr. Greco has managed
exploration and production activities, policy analysis, climate
change issues, marine transportation, refining, gasoline and
jet fuel production issues and Clean Air Act implementation
efforts.
Before API, he was an environmental engineer with the U.S.
EPA, with expertise in automotive emission control
technologies. He has an M.S. degree in Environmental
Engineering from Cornell University, and a BA in Biology from
Colgate University. Mr. Greco, thank you for being here.
Third, we have Mr. Thomas O'Malley. He currently serves as
Chairman of the Board of Directors of PBF. Mr. O'Malley has
more than 30 years of experience in the refining industry. He
served as Chairman of the Board and chief executive officer of
Petropolis, I'm sorry, Petro Plus Holdings AG from 2006 until
February 2011.
Mr. O'Malley was Chairman of the Board and chief executive
officer of PREMCOR, Incorporated, a domestic oil refinery, from
February of 2002 until its sale to Valero in August of 2005.
Prior to joining PREMCOR, Mr. O'Malley was Chairman and Chief
Executive Officer of Tosco Corporation. He previously served as
Vice Chairman and Chief Executive of Salomon Brothers Oil
Trading Division. Mr. O'Malley, thank you for being with us.
Dr. Michael Greenstone is the 3M Professor of Environmental
Economics at the Massachusetts Institute of Technology. He's
also a senior fellow in Economic Studies and Director of the
Hamilton Project. Previously, Dr. Greenstone served as chief
economist for the President's Council of Economic Advisers
under President Obama.
Dr. Greenstone's academic work is focused on identifying
government's appropriate role through regulations, taxes or
spending in a market economy. Dr. Greenstone became a member of
the Environmental Economics Advisory Committee of EPA's Science
Advisory Board in 2003. In 2004, he received the 12th Annual
Kenneth J. Arrow award for best paper in the field of health
economics.
He received a Ph.D. in Economics from Princeton University
in 1998, and a B.A. in Economics from Swarthmore College, Mr.
Toomey and I know where that is, in 1991. So Dr. Moss, you're
first. Thank you.
STATEMENT OF DR. DIANA MOSS, VICE PRESIDENT, AMERICAN ANTITRUST
INSTITUTE, WASHINGTON, DC
Dr. Moss. Thank you. I would like to thank Chairman Casey
and the members of the Joint Economic Committee for holding
this hearing. It is an honor to appear here today. My testimony
raises competitive issues relating to refinery closures in the
Northeast, and their potential impact on refined petroleum
product prices.
As a preliminary matter, it is important to consider the
backdrop against which refinery closures are occurring. First,
the Northeast is a unique area relative to other parts of the
U.S., with few refineries, high refining market concentration
and a significant dependency on imports of petroleum products.
Second, it is important to recognize that domestic prices
are not entirely determined by OPEC. Crude oil accounts for
about 70 percent of the price of gasoline at the pump, but
downstream activities, such as refining, terminaling and
storage, and retail marketing and distribution, make up 15
percent.
So the U.S. has little control over cartelized crude
prices. Activities that we can control domestically account for
a not insignificant proportion of gasoline prices. Let me
briefly highlight a number of competitive issues that arise
from refinery closures. The first is refining market
concentration.
With the closure of the Marcus Hook, Philadelphia and
Trainer refineries, there will be between a 40 and 50 percent
loss in refining capacity in PADD 1, between 2011 and mid-2012.
Much like mergers, refinery closures can affect the
distribution of refinery ownership. For example, concentration,
as measured by the Herfindahl Index, in PADD 1 was about 3,300
at the end of 2010, and will increase to around 4,000 by mid-
2012.
By antitrust standards, such a market would be unconducive
to competitive outcomes. Three firms controlled about 90
percent of capacity in 2011, but only two firms will control
about 90 percent of capacity by mid-2012 after all of the
closures are completed. This represents a major structural
change in the northeast refining market.
High concentration in bottleneck industries can raise
concerns over the exercise of market power. For example, firms
acting alone or in coordination with rivals may have a greater
ability and incentive to withhold output in the short run, or
capacity additions in the long run, to drive up prices. A
second consideration is the possible of vertical foreclosure,
or that integrated refiners could possess the ability and
incentive to exclude their downstream rivals, such as
wholesalers and retailers from the market, thereby raising
prices.
Higher concentration in refining and in wholesaling
increases this possibility. Here, I note that in addition to
increases in refining concentration, wholesale market
concentration has also increased in some PADD 1 states such as
Pennsylvania.
A third consideration is the impact of refining closures on
the transportation network. In 2010, PADD 1 imported 72 percent
of its petroleum needs, much of which came from the Gulf Coast,
and some from imports from abroad. With less refining capacity
available to self-supply within the Northeast, imports will
likely rise and supply chains will lengthen, to bring in
imports from more remote sources.
Longer supply chains are more fragile or prone to
disruption or collapse, and may magnify the effects of market
power that is exercised at concentrated bottlenecks along the
way. The questions I raise do not imply that there is or there
is sure to emerge a competitive problem associated with
refinery closures. In fact, prices may rise in response to
natural economic conditions, such as the need to bid supplies
away from other lucrative markets, from capacity constraints on
transportation networks, or from the costs of upgrading or
expanding the network.
In fact, some factors may also mitigate competitive
concerns. For example, vertical integration in PADD 1 has
declined over the last several years, as firms spin off assets
to concentrate on more profitable activities. But the fact
remains, two refiners will control the market, one of which is
vertically integrated, and that continues to be of concern.
Refinery utilization rates are also relatively low right
now in the Northeast, making a potential withholding strategy
less probable. But utilization rates jumped from 56 percent to
72 percent between the end of 2011 and the beginning of 2012,
after the Marcus Hook and the Trainer closures, and they may
further rise, in light of constraints on bringing in more
supplies from outside PADD 1, and in light of declining
investment in refining.
In sum, it would be prudent for policymakers to be prepared
to address a number of developments in the Northeast. This
includes tight refining capacity and strategic competitive
behavior, particularly involving refiners that control large
shares of capacity, marginal capacity that sets the price.
Policy responses to high gasoline prices would consider
prices, output, innovation, but also economic growth, equity
and national security. If competitive issues appear to be
playing a role in the aftermath of closures, it will be
important to scrutinize carefully for further M&A activity in
the Northeast. Moreover, some potentially anti-competitive
behavior such as withholding to drive up prices is beyond the
reach of the antitrust laws.
[The prepared statement of Dr. Diana Moss appears in the
Submissions for the Record on page 34.]
Chairman Casey. Dr. Moss, thank you. That was only 27 over.
That's good. Mr. Greco, thank you for being here.
MR. ROBERT GRECO, GROUP DIRECTOR OF DOWNSTREAM AND INDUSTRY
OPERATIONS, AMERICAN PETROLEUM INSTITUTE, WASHINGTON, DC
Mr. Greco. Thank you. Good afternoon, Chairman Casey, Vice
Chairman Brady, members of the Committee. My name is Bob Greco
and I'm Downstream Group Director for API. Thank you for the
opportunity to testify today. API represents more than 500
companies engaged in all aspects of America's oil and natural
gas industry. The industry supports 7.7 percent of our economy,
9.2 million jobs, and millions of Americans who hold ownership
stakes through pension funds, retirement accounts and other
investments.
Refineries are critically important to our nation. They
make the fuels that virtually all Americans use and that drive
our economy. They contribute to our energy and national
security, and they provide jobs for tens of thousands of
Americans and substantial revenue to local, state and federal
governments.
The recent refinery closures in the northeastern U.S. are
of great concern. They have the potential to impact families,
communities and other manufacturing industries, and to reduce
tax revenues. We very much regret that. It's also important,
however, to understand the reasons why refining is such a
challenging business, and why closures sometimes occur, and to
also know that the refining industry is resilient and will
continue to supply the products that all Americans need.
Refining is highly competitive. It is also historically
been a low profit margin industry, faced with a heavy slate of
regulations involving many billions of dollars in environmental
investments and compliance costs. Because of these and other
factors, some refineries, often after sustained periods of
financial losses, have had to shut down.
About 75 U.S. refineries have closed since 1985. As this
has happened, however, the remaining larger, more efficient
facilities have expanded capacity, so that total U.S. refining
capacity has actually increased by 13 percent. The ability of
our industry to add capacity and deliver larger amounts of
gasoline and other products over a flexible distribution
network, and also to draw on imported products when necessary,
will help us continue to provide Americans the fuels they need.
The higher prices we see now have also been a challenge for
our refineries. Rising global demand and Middle East tensions
have pushed the cost of crude oil higher. The cost of crude oil
is the single biggest factor in the price of gasoline,
accounting for about three-quarters of the pump price,
excluding gasoline taxes, and is the largest cost incurred by
refineries.
Refiners have struggled to pay these higher raw material
costs to make products for Americans, at a time when demand has
been relatively weak because of (1), the recession, and (2),
the federal ethanol blending mandate. This has severely pushed
down margins and has negatively affected the refining sector.
Refining is a difficult business, but we can make better
energy policy choices that can help the industry remain a
reliable, stable supplier of affordably-priced fuels and keep
its workers employed. Good policy choices means sensible
regulations, fair tax policies and sufficient access to the
crude oil from which all refined products are made.
Decisions made in Washington, D.C. are a big part of this
equation, but so are those made by local and state governments,
such as state requirements for ultra low sulfur home heating
oil. Excessive rules can raise costs and make it harder for our
refineries to compete and stay in business.
Policies such as those embraced by the current
administration, that limit crude oil production in the United
States, or prevent ready supplies from being imported from
Canada, put upward pressure on crude oil prices, that
eventually affected refineries and those who consume the
gasoline, diesel and other products they make.
That's why we've been calling on the administration for a
change of course. We've urged them to expand access to
America's vast oil and natural gas resources on public lands,
that could also add supplies to markets and put downward
pressure on prices. We've urged them to approve the Keystone
Xcel pipeline, which could deliver from Canada very large
additional quantities of crude oil to U.S. refineries that
serve U.S. consumers.
We've called for more sensible, cost-effective regulations,
that show a practical regard for potential impacts on the
industry, its employees and those who depend on the products
they make. We've asked the EPA in particular to reconsider a
virtual blizzard of new, poorly thought-out or unnecessary
rules affecting our refining sector including, for example, a
rule that forces refiners to blend into gas with advanced
biofuels that do not yet exist, or pay a fee for doing so.
Another example is the fuel changes being considered by EPA
in its Tier 3 rulemaking. These potential requirements have yet
to be justified, but they could threaten to increase fuel
manufacturing costs, increase refinery greenhouse gas
emissions, and make U.S. refineries less competitive with
foreign refiners.
And we've challenged billions of dollars in proposed tax
increases on an industry that already pays vast sums to the
government, at far higher effective tax rates than most other
industries. In conclusion, America's refineries are a critical
part of the nation's industrial bedrock, and part of the fabric
of the communities in which they operate.
They make products that are absolutely indispensable to
America, they are vital to our national security. Our
policymakers must understand this, for this vital sector of our
economy to continue serving America as best as it can. Thank
you.
[The prepared statement of Mr. Robert Greco appears in the
Submissions for the Record on page 39.]
Chairman Casey. Thanks, Mr. Greco.
Mr. O'Malley.
MR. THOMAS D. O'MALLEY, CHAIRMAN, PBF ENERGY, PARSIPPANY, NJ
Mr. O'Malley. Chairman Casey, Vice Chairman Brady and
members of the Committee, thank you for giving me the
opportunity to testify at today's hearing on some of the
factors that led to the refinery closures in the Northeast, and
hopefully I'll be able to say something about leading to the
reopening of these refineries in the Northeast.
PBF Energy owns three refineries with a total capacity of
about 540,000 barrels a day. Two of these refineries are
located in the Northeast, one in Delaware and one in New
Jersey. The Delaware refinery was taken over from Valero in
2010 in a closed-down state. We spent several hundred million
dollars to fix it and reopened it. The Paulsboro refinery was
also bought from Valero in 2010, and was in danger of being
closed. Both of these refineries are supplying crude oil
products to the U.S. East Coast.
The third refinery we own is in Toledo, Ohio, and has
operated on a continuous basis since we acquired it from Sunoco
in 2011. We employ, including direct employees and contractors
who work at the facilities, about 2,000 people. The recent
refinery closures that have occurred or are currently pending
are the tip of an iceberg.
If fuel substitutions, from 2012 to 2022 mandated under the
Energy Independence and Security Act of 2007 are maintained, we
will lose over that time period an additional ten percent
minimum of U.S. refining capacity, and thousands of high-paying
jobs that this important industry provides.
The 1,400,000 barrels a day of renewable fuels, over and
above the 2011 mandate will, we believe, be far more expensive
than the oil products coming from refineries.
When you combine this with what can only be described as an
aberrant administration of the 2007 Act, particularly on
renewable identification numbers (RINS) by the Environmental
Protection Agency, it's easy to come to the conclusion that the
U.S. government will drive refining companies out of business.
This extra fuel substitution has no basis in economic
reality, and is marginal in terms of environmental improvement.
The Act of 2007 may have seemed good policy in 2007, but it
sure isn't today.
If bio and renewable fuels manufacturers can produce on a
superior economic basis to hydrocarbon fuels, they should do
so. They should take market share, but the old fashioned way,
through better quality, better price and without government
mandates or subsidies.
Indeed, as the gentleman from the API said, we are on a
road that may in fact get us to energy independence. But it's
going to come from more production of hydrocarbons, and not
taking corn out of the food chain and turning it into ethanol
or some other dream process that doesn't exist on an economic
basis, to make advanced biofuel at great cost to the consumer.
The other government action that will close more refineries
and raise the price of fuel is the EPA plan for Tier 3
gasoline. The industry will have to spend billions of dollars
to comply, money which independents, who now control 60 percent
of the capacity in this country, probably don't have. Why are
they doing this? To lower the sulfur content from 30 parts per
million to 10 parts per million.
Under this Tier 3 plan, the total sulfur removed from PBF's
gasoline production of about 4.5 billion gallons per annum,
would be less than one-eighth of what one 500 megawatt coal-
fired power plant emits in a year. You have several of those
plants not so far from here. Is this good policy in a weak
economy, where it helps to kill one of our last heavy
industries, that provides high-paying jobs and meets the needs
of the population?
The hearing is focused on the impact of potential closures
of petroleum refineries serving the Northeast, and the effect
on prices. But this is not just a problem in the Northeast.
It's a problem for the nation. In the short, medium and long-
term, it is my view that these closures will lead to higher
prices than if those refineries were operating. In certain
circumstances, we could see dangerous shortages develop, which
could lead to severe economic disruption in the Northeast.
In conclusion, we need to see an adjusted government policy
that seeks to maintain this important strategic manufacturing
industry, and not a series of policies and laws that destroy
it. Removing the 2007 renewable fuel mandate, eliminating the
mandate for ten percent ethanol in gasoline, and holding EPA
back from an aggressive stance on Tier 3 gasoline
specifications, would in my view lead to a reopening of some of
the closed refineries and long-term employment for thousands of
workers in the Delaware Valley.
Fault cannot be placed on either the Democrats or the
Republicans. This is just a combined policy that hasn't worked
and should be changed. Thanks for taking the time for inviting
me, and the courtesy of listening.
[The prepared statement of Mr. Thomas D. O'Malley appears
in the Submissions for the Record on page 41.]
Chairman Casey. Thank you, Mr. O'Malley. Dr. Greenstone.
STATEMENT OF DR. MICHAEL GREENSTONE, DIRECTOR, HAMILTON
PROJECT, 3M PROFESSOR OF ECONOMICS, MIT, WASHINGTON, DC, AND
CAMBRIDGE, MA
Dr. Greenstone. Thank you, Chairman Casey, Vice Chairman
Brady and members of the Committee for the opportunity to speak
today. The potential closure of petroleum refineries on the
East Coast have led to speculation that energy prices may rise,
possibly dramatically in some instances.
I think this hearing provides an opportunity to consider
our energy choices more broadly. Any consideration of our
energy system must recognize that we're in the midst of a
natural gas revolution.
This is perhaps best illustrated by the figure to my left,
which reports the ratio of petroleum to natural gas prices on
an equal energy content basis. What's really amazing about the
chart is for the 25 years, from roughly 1980 to 2005, the ratio
was two to one.
Then beginning in about 2005, our natural gas production
began to increase, a lot of it in your home state of
Pennsylvania, and you saw this ratio changed dramatically. Now,
the petroleum price is about six times the natural gas price.
This practically unprecedented change in the ratio of oil to
natural gas prices presents an incredible opportunity for the
United States. It's creating economic opportunities around the
country and over the longer term, I believe offers an
opportunity to strengthen our energy security by reducing our
dependence on petroleum.
Indeed, the first signs of a transition to increased
reliance on natural gas in the transportation sector are
beginning to emerge. But the key point is that this transition
will not proceed optimally or quickly, unless we make proactive
policy choices.
Specifically, one of the most challenging features of our
energy system is that many of our energy choices involve what
economists call externalities. That is to say, the choices
individuals make about the production or consumption of a
particular energy source impose costs on others, in the form of
shorter lives, higher health care expenses, a changing climate
and a constrained national security or weakened foreign policy.
The current energy playing field is tilted, because our
individual energy choices are based largely on the visible
costs that appear in our electric bills, and appear at the gas
pump. This system masks the full or social costs arising from
these energy choices. The second figure to my left helps to
illustrate this.
If you take an example, look at coal, the private cost of
producing a kilowatt hour of coal is in blue there, and it's
about 3.2 cents per kilowatt hour. But if one were to account
for external costs--health problems and the changing climate,
for example--and use numbers from the National Academy of
Science and from the United States government, the true social
cost is 8.8 cents per kilowatt hour.
In contrast, the private cost of a kilowatt hour of
electricity from a new natural gas plant is about 4.1 cents,
and then if you were to add in the external costs such as
health costs and the projected damages from changes in the
climate, the full social cost is about 5.2 cents.
So despite the relatively low social cost of natural gas,
industry and consumers have little incentive to change their
energy choices. This is because coal, and in the transportation
sector gasoline, are comparatively inexpensive when only their
private costs are considered. A better approach to energy
policy would involve a fairer competition between energy
sources that placed them on a level playing field.
This would involve pricing carbon and other pollutants
appropriately. I want to emphasize, though, that even in the
absence of a national policy to price these external costs,
there are still other policy options available. As an example,
some existing U.S. policies aim to correct externalities in
energy use in the transportation sector, but they don't treat
natural gas fairly. That's something that's going to be
illustrated in the Hamilton Project paper by my colleague,
Chris Knittel from MIT, that will be released in June.
Let me just give you an example of some of the findings
from that paper. So for example, the federal renewable fuel
standard ensures that transportation fuels sold in the U.S.
contain certain volumes of renewable fuels, but does nothing to
encourage the use of natural gas.
The stated rationale behind the Act is to promote energy
independence and security, and to favor clean fuel sources. Use
of natural gas would clearly advance the mission of the Act,
and until natural gas is included in the renewable fuel
standard as a Conventional Biofuel, it will be at a
disadvantage to fuels such as ethanol.
Another example comes from electric vehicles, where we
currently have large subsidies to the income tax code to
purchase these vehicles. What that is missing is the fact that
vehicles that run on compressed natural gas produce similarly
low amounts of greenhouse gas emissions as electric vehicles,
and yet they're not as privileged through the tax code.
Finally, there are also issues in infrastructure which
require further analysis, with respect to bringing natural gas
to the transportation sector. Without prejudging the outcome, I
think it would be appropriate to study whether some targeted
subsidies for the construction of natural gas refueling
stations are justified.
Let me conclude by bringing this back to the subject of
today's hearing. Periodically, the energy sector shows up in
the headlines. Most often this is due to price spikes, like
those that some project would occur in the Northeast following
the potential closure of petroleum refineries, or due to
environmental damages associated with energy production or
consumption.
Our current energy policies encourage these problems rather
than discourage them, by failing to allow all energy sources to
compete on a level playing field. I would make respectfully two
recommendations that would help to level the playing field.
The first is the federal government should price the
external costs--that is the health, environmental and security
costs--associated with the production and consumption of
various energy sources. That reform would allow all energy
sources to compete on a level playing field.
Second, if it's infeasible to fully price these external
costs, then the forthcoming Hamilton Project paper makes a
compelling case for putting natural gas on equal footing with
renewable fuels under the Federal Renewable Fuel Standard, and
by providing equal subsidies to electric vehicles and vehicles
that run on compressed natural gas.
I'd like to thank the entire Committee once again for
inviting me to participate in discussion, and I would be happy
to entertain any questions.
[The prepared statement of Dr. Michael Greenstone appears
in the Submissions for the Record on page 42.]
Chairman Casey. Thank you, Doctor, very much. We'll move to
questions now. Before I do that, let me recognize a
distinguished member of our audience. I'd like to recognize
Congresswoman Donna Christensen, the United States Virgin
Islands delegate to Congress. She's there, I think, in the
first row. Thank you so much for being here.
She's here this afternoon and has written testimony that
will be included in the official record of the hearing. The
Virgin Islands has been directly impacted by the recent
refinery closures, I should say. In February 2012 Hovensa, the
U.S. Virgin Islands refinery, was shut down.
This refinery, which produced, I should say, 350,000
barrels per day, employed 2,000 workers. Half of the refinery's
product was exported to the Northeast. For 45 years, the
refinery was the Virgin Islands' largest private sector
employer. Now, it will operate as an oil storage facility and
employ just 100 people.
Clearly, this economic hit for the Virgin Islands has been
substantial, and the loss of refining capacity also affects
consumers in the northeastern United States. I appreciate
Congresswoman Christensen being here today, and I'm grateful
she's offered us a perspective by way of her testimony.
[The prepared statement of Hon. Donna Christensen appears
in the Submissions for the Record on page 46.]
Chairman Casey. Dr. Moss, I wanted to start with you. In a
pertinent part on page three of your testimony, where you
outline in the first paragraph so-called downstream activities,
refining, distribution of refined products to storage
terminals, wholesale and retail marketing, all of those under
the umbrella of downstream activities, and you say that ``these
activities make up a not insignificant 17 percent of the final
retail price of gasoline.''
So I guess my first question is when it comes to that part
of your testimony, and you consider that, and you also
consider, as you observed, that the Northeast has the fewest
number of refineries and the highest level of both market
concentration and increase in concentration, how does that
competitive situation in the northeastern United States compare
to other regions of the country?
Dr. Moss. That's a good question. I think the comparison,
if you look at the EIA's breakdown in terms of what makes up
the final price of gasoline at the pump, that's an interesting
breakout, and I think some of my colleagues here pointed out
that some of that goes to taxes. Obviously, crude oil plays a,
has a huge impact, along the lines of about 75 percent in
making up the final price of gasoline.
My point is that we can't ignore what goes on in a
downstream sector, by way of saying well, it's all driven by
crude oil prices, because it's not. In large part, crude has a
large impact on retail prices, but we do have control over the
downstream part of our industry, that occurs under our own
domestic roof.
If there is competitive mischief or anti-competitive
mischief that evolves from a very highly concentrated refining
sector, and incentives that are created for firms to behave
strategically, even a 15 percent portion of the final gasoline
price could account for significant price spikes.
So my message, I think, is that we can't rack this entirely
up to factors outside of our control, meaning OPEC. We do have
control over our domestic industry, what the structure of that
industry looks like, and how competitive outcomes are in that
industry. Compared to other regions of the country, this is
very, very unusual, in terms of high refining concentration,
wholesale concentration and the like.
So PADD 1 or the Northeast in particular provide a very
unique competitive scenario or landscape against which we need
to evaluate the possibility of price hikes.
Chairman Casey. Let me ask one more question in this round.
We've worked very hard, a broad coalition of people in
Pennsylvania, to be constructive in our engagement with the
companies, to try to prevent the closures and try to maintain
refining capacity, and literally maintain refineries in
southeastern Pennsylvania.
Mr. Toomey and I and members of Congress in both parties
have been working with and meeting with the employers, the
workers and the unions representing those workers, a lot of
people working together. I want to commend so many people for
making that effort.
But one of the concerns that we have is that right now,
there's an offer, several offers, but offers from outside
groups which would operate refining operations, refining
locations I should say, using those facilities not as
refineries, but in this one case potentially operating it as a
terminal.
I wanted you to comment on that, in terms of some of the
consequences to operating one of the idled or closed refineries
as a terminal, instead of keeping it as a refinery. Is there
anything you can say with regard to that and the consequences?
Dr. Moss. Well, I obviously can't speak to the mechanics or
the engineering aspects of converting refineries into terminals
and storage facilities. But from a competitive standpoint, I
think even that requires a fair bit of scrutiny. For example,
if refineries are taken over to serve a fundamentally different
purpose, we would want to know who's purchasing those
facilities, to avoid any further concentration of terminaling
and storage amongst a very small set of firms or suppliers in
the market, which could in turn drive up wholesale market
concentration.
I mentioned both refining market concentration and
wholesale market concentration are important, particularly in
this area where there are so few suppliers. So I think we would
want to be very careful, through antitrust enforcement and
investigations, to make sure that refining assets don't turn
over in a way that exacerbates concentration and refining, and
that terminaling and storage markets do not also become more
concentrated, because they went to firms that have a dominant
presence in the market.
Chairman Casey. Thanks very much. Vice Chairman Brady.
Vice Chairman Brady. Mr. Chairman, because we're told
Senate votes start very quickly, with your permission, I'd like
to call on Mr. Toomey, so that both of you can have a first
round of questions.
Chairman Casey. Sure, thank you.
OPENING STATEMENT OF HON. PAT TOOMEY, A U.S. SENATOR FROM
PENNSYLVANIA
Senator Toomey. Vice Chairman Brady, thank you very much
for your kind accommodation of our voting schedule. I
appreciate it. Senator Casey, thank you for leading this
hearing, and I want to thank the witnesses, as well as the
guests who are here today.
This is a very, very big deal in southeastern Pennsylvania.
We've got thousands of families that are out of work, that are
facing the possibility of losing existing jobs, and in many
cases, with pretty grim prospects of getting back to work at
comparable jobs.
So I think it's important that we understand a little bit
better how we got here, and the prospect going forward. I am
very concerned, for instance, with Mr. O'Malley's suggestion
that this might be the tip of the iceberg. We currently have
the hope that a new buyer could come in and operate the
Philadelphia refinery.
We have a hope that the trainer facility could continue to
operate as a refinery. But if Mr. O'Malley is right, and there
are circumstances in place that jeopardize the future viability
of refineries generally going forward, then all of this is in
question.
So I want to touch on three areas in which I think the
federal government in Washington is contributing to the
problem. Now I'd be the first to acknowledge, there are many
macroeconomic factors that contribute to pressure on the
refining sector, on this industry, contribute significantly to
the causes for the closures that we've seen and that we're
worried about.
But there are also some factors that we in Washington are
responsible for. I want to touch on three of them. One is the
CAFE standards that we have adopted, which it seems to me
unambiguously have the effect of forcing people to buy smaller
and lighter and less powerful cars than they would prefer. That
diminishes demand for gasoline and diminished demand has an
effect on the refining industry.
Second is the ethanol mandates, which I want to dwell on a
bit, and then finally there are EPA regulations on the
refineries themselves. But I've got a chart here that I'd like
to call to your attention, and do you have a printed version
that I can have? Thank you.
This depicts--the black line that's generally sloping
upward is the price of gasoline, and that is on the right-hand
scale, and that's really there for information purposes. What I
find very interesting is the green segment at the top of this
chart. The combined red and green segments together represent
the total refined product that is produced in the Northeast and
the Mid-Atlantic region.
The green section is the ethanol component, which you can
see started to expand dramatically from a very, very minimal
sliver of a green line prior to 2003, to a very, very big
segment of this graph by oh, increasing really through the last
decade. My understanding is that if you quantify the ethanol
that is represented on this chart, that which serves just the
Northeast and the Mid-Atlantic states, it is equivalent to the
gasoline production of two Marcus Hook production refineries.
That's a pretty staggering amount, and I think it's an
important comparison to think about. So my question, and I'll
direct this first to Mr. O'Malley, but others, please feel free
to weigh in on this. Given that ethanol now, by mandate of the
federal government, replaces ten percent of what would
otherwise be gasoline, how significant an impact do you suppose
that has had on the prospects of the refining sector?
[Chart titled ``Mid-Atlantic and Northeast Gasoline: Weak
Demand and Ethanol Haave Displaced Gasoline Production of Up to
Four Marcus Hook Size Refineries'' appears in the Submissions
for the Record on page 48.]
[Chart titled ``U.S. Refinery Produced Gasoline: Policy
Will Cause Demand to Decline--The Question is by How Much?
appears in the Submissions for the Record on page 49.]
Mr. O'Malley. The reason for the closure of the refineries
in Pennsylvania is that they didn't make money, and the reason
they didn't make money is that you took away their market. You
delivered the market to the farm industry. It is not ten
percent. That is what it should be, but through the
administration of the EPA and actions, I must say, of Congress,
it has to go above ten percent, because in addition to a
mandate for ten percent, there was a gallonage mandate assigned
to the gasoline pool.
Because the use of gasoline in the United States has fallen
off, we now have a mandate that will go up to 12, 13, 14, 15
percent, and we have a motor industry that says we can't really
deal with that. You're going to injure the engines on cars. Now
if you put on top of it the insanity associated with cellulosic
fuels, you will ultimately take away another 10 or 15 percent
of this industry.
When I say the tip of the iceberg, I chair a company that
has three refineries. I'm not completely sure that my three
refineries can continue to operate in the future, and since two
of them are in the Northeast, we may be in a more difficult
situation than you might believe.
This is a total mess, and it really does need to be fixed.
The fix, my colleague here on the left, I agreed with basically
everything he said, except for one word that he kept putting
in: subsidy. Level the playing field. If natural gas is a more
efficient fuel in the United States, let's use it as much as we
can. If ethanol is a more efficient fuel in the United States,
let's use it. But level out the playing field, and when you do
level the playing field, you're going to find that that
terrible old-fashioned gasoline that we've been putting in our
cars for so many years, is the most efficient fuel.
We've made enormous strides in cleaning it up. Today,
gasoline looks nothing like it looked 20 years ago. I have the
privilege of being 70 years of age and having worked in this
industry forever, and you know, I look around at what we
produce, and it's a hell of a lot better today than it was
before. So yes, that chart tells the story, only it's going to
get much worse.
Senator Toomey. Thank you, Mr. O'Malley, and Mr. Chairman,
I see my time has expired. But if it's okay with you, if we
could allow the other panelists to respond. If they have any
comments they'd like to make, I would welcome that.
Chairman Casey. Thank you. Mr. Greco.
Mr. Greco. Just to echo Mr. O'Malley, you're essentially
correct about when you look at future projections of demand for
U.S. gasoline. It's flat or declining, and the two big drivers
are the increased ethanol mandate, which under ISA 2007 is
going to drive you to 20 or 30 percent of the gallon being
taken up by ethanol or some of the biofuel, and increasing CAFE
standards.
So we may be driving more. We may be using more cars on the
road, but they're going to be using less hydrocarbons, and
that's only going to continue to increase the pressure on the
refining sector.
Senator Toomey. Thank you. Dr. Greenstone.
Dr. Greenstone. Sure. I would just add that Mr. O'Malley
raised the important issue of leveling the playing field, which
was the theme of my testimony. I think, you know, EISA and the
renewable fuel standard, in some respects I think they were
efforts to try and level the playing field. I'm not sure
everyone would agree that they accomplished that in the fairest
or most efficient way.
I want to just highlight that we got into the world of
subsidies for ethanol and other potential replacements for
petroleum largely because we don't price the social costs--the
health costs and the carbon costs associated with the use of
petroleum.
If we priced those, then we would truly have a level
playing field, and it would be possible for ethanol and natural
gas and whatever the other potential replacements for petroleum
are, to compete on a level playing field.
Senator Toomey. Of course, if we did that, we'd also have
to take into account the higher food prices that we have as a
result of using 40 percent of the corn in gasoline tanks.
Dr. Greenstone. Senator, I'm not pushing for ethanol or the
Renewable Fuel Standard. My only point is that currently,
that's the second-best policy that I think the country has
wandered into, and it's largely driven by the fact that we
don't price the negative parts of petroleum currently.
Senator Toomey. Thanks. Can I just comment on the
externalities? Refineries are held at very strict environmental
standards, both for the products they make and for the
emissions from those refineries. Those are being driven by EPA
for health reasons and for other considerations. These
refineries have to compete based on those emissions, and have
produced and have cleaned up their facilities, so that our air
is much cleaner.
We are taking into account those externalities. They're
being addressed through environmental regulations, and are
reflected in the fuels we produce and the operations that we
run.
Chairman Casey. Thanks very much, Mr. Toomey. Vice Chairman
Brady.
Vice Chairman Brady. Thank you Chairman, for hosting this
hearing. I'm going to ask a tax question of Mr. Greco and Mr.
O'Malley. But on the regulatory side, a story. The Gulf Coast,
where I live, refines a bit of energy production in America. As
a result of high vehicle travel, topography and industry, we've
had to work hard to lower our ozone emissions over the past
decade, successfully have.
We invest in industry about a billion dollars to do that.
Ironically, some of the key technologies that EPA has mandated
our refineries to use, to lower NOx and ozone emissions, the
byproduct is it drives up CO2 emissions, which we
are now told we have a problem there.
It would be wonderful if the EPA's right hand knew what its
left hand was doing, so that when we make these types of
investments, we can actually meet the Clean Air standards we
all want to meet. My question, Mr. Greco and Mr. O'Malley,
relates to the manufacturing deduction. It was passed in the
mid-2000s. The goal of it, we looked at the jobs going
overseas, Ways and Means Committee and others, and said look:
if a company manufactures, produces, invents here in the United
States, creates jobs in the United States, you have a lower tax
rate than if you do that overseas, you get the manufacturing
deduction, which has worked.
It is, to my understanding, a key part of the refinery
puzzle. The President has proposed eliminating that deduction
for one industry in America, energy. One industry. One
manufacturing industry in America, energy. So my question is to
Mr. Greco and Mr. O'Malley, when it comes to the Northeast,
whose goal is to maintain existing capacity and restart
capacity that has been lost, if the President succeeds in
eliminating that manufacturing deduction, does it make it
easier to bring back that capacity, harder to bring back the
capacity, or have no impact? Mr. Greco.
Mr. Greco. When we talk about the industry broadly, as you
mentioned, this is a broad manufacturing tax deduction. It
applies to all manufacturing industries. The proposals on the
table are to single out one industry, oil and gas industry, and
to eliminate that.
Any time you change a tax, make a tax change like that
specifically to one industry in particular, you are going to
disadvantage that industry relative to its foreign competition.
So if you want to look at tax policy broadly, which is a true
national U.S. conversation, we ought to do that. But to single
out a single industry and a single tax credit for punitive
treatment relative to other industries, is poor tax policy and
is not going to support our refining industry.
Vice Chairman Brady. Thank you, sir. Mr. O'Malley?
Mr. O'Malley. I have operated refineries in both England
and Germany, two companies that in fact invented socialism.
They have lower corporate tax rates than the United States has.
Anything that would give us less of an advantage on taxes is
going to make the business more difficult. This business has a
very low rate of return on a historical basis, about three
percent per annum over the last 20 years.
Vice Chairman Brady. Can I stop you there? Can you make
that point one more time, because we get the impression up in
Washington that big oil is all one monolith, making money hand
over fist. Did you just say in the refining sector, the margin
is how much?
Mr. O'Malley. The margins are incredibly small. Over the
past 20 years, rate of return on capital employed in the
refining business is about three percent. It's a marginal
business. The majors are leaving this business. When I entered
the business, about 15 percent was controlled by independents.
Today, we're up to 60 percent.
When very, very smart and big and rich companies exit a
business, there's usually a reason, and the reason is it's a
low return business.
Vice Chairman Brady. Does that play into your testimony,
the point you made early on, that the Northeast has lost these
refineries because they can't make money?
Mr. O'Malley. The Northeast lost three refineries because
they can't make money. I mean Sunoco lost a billion dollars
over the past three years running these refineries. Certainly,
Conoco-Phillips would never close a refinery. I speak from some
base of knowledge. At one of my many career stops I was vice
chairman of that company.
I move around a bit. People don't like to keep me too long.
They closed that refinery because they were losing a lot of
money on the refinery, plain and simply. Nobody does this to
hurt people.
Vice Chairman Brady [presiding]. I would like to keep you
longer, but our time's expired. So Mr. Duffy is recognized.
Representative Duffy. Thank you, Mr. Chairman. Excuse me.
So when we're talking about loopholes here for oil companies,
those are loopholes exclusively for big oil, right, that you're
referring to?
Mr. O'Malley. I'm not aware of any loopholes. We're trying
to actually carve out a negative loophole by removing a tax
credit that's applicable to all manufacturing and penalizing
one industry, that's correct.
Representative Duffy. So that loophole does specifically
apply to your industry? You don't want to talk about loopholes
for big gas and big oil?
Mr. O'Malley. Just the industry that I understood the
hearing is on, is the refining industry. We are pure
manufacturers. Our company produces not one barrel of crude
oil. We go into the open market and we buy it. We are no
different than the General Motors Corporation buying steel,
aluminum, plastics, etcetera, and putting together a car. We
put together something that drives a car.
Representative Duffy. Are there some tax threats right now
that might impact all of you? Are there some changes in the tax
code that could affect the refining industry that you're aware
of?
Mr. O'Malley. Am I personally aware of particular
proposals?
Representative Duffy. Yes.
Mr. O'Malley. Well certainly if the industry is singled out
and we are included in the industry, and you change the
depreciation, well sure, that's going to hurt us.
Representative Duffy. And you can eat that cost though,
right? You won't pass that on to the end consumer as a refiner?
Mr. O'Malley. That would be nuts. Look. Just as a point,
there's an indirect tax that we're going to pay in the year
2013, emanating from biofuels and cellulosic fuels. It will
total $120 million. Can we absorb that? I hope we make after
tax $120 million in that year. No, there is no chance.
In fact, the biofuels program that is in place will be a
tax on the American consumer, that will run up in the year,
well probably 2013, to three to four billion dollars. It's a
hidden tax. You're producing biofuels and getting these
renewable certificates, which by the way have in some cases
been fraudulently issued by companies approved by the EPA, you
know, a total craziness.
This whole system that has been constructed is a house of
cards, and unfortunately that house of cards is collapsing on
the men and women in the refineries that are being closed down
or have already been closed down. In essence, if you want to
know why the refineries were closed down, I would kind of say
look in the mirror, and we can find the guilty parties.
Representative Duffy. I want to be clear just on one point,
and I think we're going to have a second round, and this will
maybe set up the second round of conversation. Is it because in
the Northeast, there was overcapacity in our refining sector?
Mr. O'Malley. Absolutely not.
Representative Duffy. Okay. So with the closure of these
refineries, are you now going to import refined gas from other
portions of the country?
Mr. O'Malley. The largest refinery in the world is located
in India. It's run by Reliance Industries. The average wage
rate there is about 1/15th of what we pay. They essentially
don't pay income tax. They are classed as an export refinery.
Is the East Coast taking in fuels from India? Yes, we are.
Representative Duffy. So my question is can you import
refined gas at a cheaper price than you can produce it in this
region?
Mr. O'Malley. I would say the following. If you have a
refinery in India that doesn't pay any tax and pays 1/15th the
wage, they certainly can produce it a bit cheaper than we can.
Representative Duffy. So is the point that the consumer, by
way of the closure of these refineries, is now going to benefit
in this region of the country? Because of these closures, they
can now access cheaper refined fuel from India and maybe from
the Gulf area? Is that the point you're making?
Mr. O'Malley. Well, is that my point? No. My point is that
the collapse of these refineries, in essence, has been caused
by the substitution of biofuels, of ethanol into the pool. So
you shut down these refineries. Now what will replace the
gasoline, the diesel that were produced at these refineries?
Imports. Those imports will either come from the Gulf Coast, up
the Colonial pipeline, or they'll come in by vessel.
At what price will they be sold? That will be determined by
the market. Will it be higher or lower? Well, I don't know the
answer to that.
Vice Chairman Brady. Thank you, and Dr. Burgess is
recognized.
Representative Burgess. Thank you, and I want to thank all
of you. This has really been an enlightening discussion. Mr.
O'Malley, I will agree with you about the Energy Independence
Security Act of December 2007. I have been here six years in
the United States House of Representatives, and that was by far
the most troubling piece of legislation that came through.
I'm on the Committee of Energy and Commerce. It came
through our subcommittee, our full committee. It came through
on the floor, came back from the conference committee. I was
astounded at what a bad idea it was, and really disappointed
when President Bush signed that legislation.
We saw the immediate effects with the rise in the price of
gasoline in the summer, the rate of rise of the price of
commodities, with food to fuel diversion, our automobile
manufacturers almost overnight were placed into crisis because
of having to retool their manufacturing, and on top of all of
that, you couldn't even read all of that bad news because our
light bulbs changed.
So I thought that was a very bad idea, and in fact you may
be interested. There's a House bill now, a current bill, H.R.
424 called the LEVEL Act, to back out that ethanol blend wall
that you described, because of just the reason that you
described.
Yeah, E-10 may be a problem for some folks. I spent a lot
of time down at my lawnmower repair man, because of things that
happened to those small motors because of the ethanol and
gasoline. No one has been able to convince me, from the
Department of Energy or the Environmental Protection Agency,
that they have done the studies on the engines, to assure that
E-15 will not be further damaging to those engines, and
furthermore, I'm not sure who bears the liability for the sale
of that gasoline that goes into those engines, that then
subsequently ruins them.
I suspect as a manufacturer, as a refiner, you probably
have some concerns about that as well; is that correct?
Mr. O'Malley. That's very correct. We're not going to
deliver E-15. We're not going to deliver E-15 because we're
concerned it will be the same circus that we had with MTBE,
that we destroyed motor vehicles. I own outboard motors, drive
around in a little boat, and there's no way I will put gasoline
combined with ethanol in it, because it will destroy the
engine.
The EPA has not done an appropriate scientific study. This
was rushed through the EPA. Exactly why, I don't know.
But in all fairness to the discussion, I theorize that
cellulosic ethanol might have been invented by President Bush
when he was down chopping wood on the ranch.
The whole idea of ethanol, again I would point out from my
industry's standpoint, bring them on. Just don't mandate it and
don't subsidize it, particularly when we don't have the money
to subsidize anything. The country's on the road to bankruptcy,
and here we are talking about more subsidies for this or that.
The country doesn't have the money for subsidies.
Representative Burgess. I feel compelled to point that
although that was the worse legislation I had seen to date,
there's been a lot worse stuff that's happened since then. If
you want to talk about subsidies, we can talk about that darn
health care law, where we are well on the road to ruin from
that.
But again, I'd point out to you the LEVEL Act, H.R. 424,
and I'd be interested in your thoughts on that. I am trying to
get some enthusiasm for that at the committee level. I just
have to ask you. You brought up the issue of the renewable
identification numbers.
I have had constituents in my office back home in Texas,
who have purchased RINs from various outfits, only to find out
that they were basically a parking lot for a church next door,
and there was no manufacturing or production facility at the
address. There's an enormous sense that EPA, as an agency,
seems to be taking a hands-off approach.
What essentially has happened is we have created the
mortgage-backed security industry over again, without all the
transparency and market securitization that was present in that
industry. You have people literally selling blue sky to
unsuspecting parties, who then are left holding the bag, and
the EPA simply says ``well, buyer beware.''
But it's their program. They set it up. They created this
nightmare, and unfortunately now we have people who are
suffering the economic hardship of having bought something that
in fact did not exist.
Mr. O'Malley. I have had direct discussions with Bob
Perciasepe, the number two person at the EPA on this subject,
and Margo Oge, who's the head of the Fuels Section there, and
I've expressed my amazement at the fact that they approved
companies to issue these RINs. They approved them based on a
fly-by, I suppose, of the church parking lot, and now the
industry went out and bought these RINs from these approved
parties, and the EPA says ``well, you made the mistake. You
have to pay for it.''
It is one of the worst abuses of government power that I
have seen in my long career of dealing with the government.
It's an amazing situation. The only way to cure it, in my view,
is eliminate the program, because the program is idiotic. Every
barrel of this biofuel that we buy, we make diesel at a cost of
somewhere around $4 to the consumer, $4 a gallon.
When we buy these RINs, that biodiesel costs you six,
seven, eight dollars a gallon. Is this an intelligent thing?
And if the population, the ``American people'' that the
Congress always talks about actually knew this, I believe
they'd stand up and revolt. But somehow, we've hidden it under
the covers, and it's just a dumb program.
Representative Burgess. It absolutely is, and Mr. Chairman,
I hope we will have the opportunity to have further hearings on
this, and have the EPA in attendance, because Mr. O'Malley's
exactly right. This is a massive fraud that's being perpetrated
on the American people, and it is the mid-level producer who's
left holding the bag for $10 million, which they can ill afford
to lose. We're going to drive people out of business, drive
people into bankruptcy. Is this the type of job creation that
we should be pursuing? Absolutely not. Mr. O'Malley, thank you
for your testimony.
Vice Chairman Brady. Thank you, Dr. Burgess. Mr. O'Malley,
please don't hold back. You know, feel free to tell us how you
feel on any of these issues. Chairman Casey----
Mr. O'Malley. Just at a certain age, you get to say things.
Vice Chairman Brady. I understand. Senator Casey has
requested a second round. I know he'll be back as soon as he
can. So to begin, again, thank you to all the witnesses being
here today. We've heard concerns about moving to E-15. We've
heard concerns about new mandates on ultra low sulfur diesel.
We've heard about new emission standards for industrial plants.
Since the goal clearly of this hearing, for Chairman Casey,
Mr. Toomey and others, is to restore refining capacity to the
Northeast, could Mr. Greco and Mr. O'Malley and any, for that
matter, could you explain what major new regulations confront
refineries in particular, and the impact on the likelihood of
restarting or growing capacity in the Northeast?
Mr. Greco. Well certainly. Right now, we're confronting a
variety of new regulations. We're obviously complying with
those that are on the books, those are the law. But EPA is
moving forward very aggressively in a number of areas. We're
looking at fuel changes in Tier 3, which includes sulfur and
RVP changes. We're looking at stationery source controls on
CO2 emissions, as well as on criteria pollutants,
NOx, Sox, those types of pollutants.
So we're looking at that whole range of controls on
emissions. These are all at the point where EPA is moving
forward. We have not seen proposals yet on these. We have not
seen a justification for these rules yet. So our basic message
to EPA is help us understand. Explain what the need is for
these, justify the need before you go ahead with the proposal.
The typical process is to release the justification at the
same time you release the proposal, and then they get finalized
together. That doesn't strike us a good approach to
policymaking.
Vice Chairman Brady. In the case of the Gulf Coast, where
EPA technology mandates reduced NOx and ozone, but drove up
CO2, is there a collaborative way where industry can
work with our regulators to achieve those clean air goals, but
do it in a way that doesn't shut down refineries, doesn't drive
up the price of energy?
Mr. Greco. Well, we tried to work collaboratively with the
government. We clearly, we're the experts. We think we know how
to run our facilities, and how best to implement requirements
cost-effectively. The challenge is, as Mr. O'Malley mentioned,
is EPA has taken a very different view of things. I think the
E-15 is a very good case in point.
You've got the auto industry, you've got the oil industry,
you've got marketers. You've got small engine manufacturers.
You pretty much have most everyone except the ethanol
manufacturers, saying this is premature and this is a bad idea.
But EPA went forward and approved those partial waivers, even
while ongoing research was being conducted by the oil industry
and the auto industry.
In fact, we're looking at finalizing a report next week,
which will have more information come Tuesday about work that
the auto industry and the oil industry has done, looking at E-
15 compatibility, and it just underscores our concerns, that
this was a hasty judgment and one that was politically driven.
Vice Chairman Brady. If the EPA is successful on E-15, more
ethanol blending, what's the impact on refineries?
Mr. Greco. Well certainly, we're confronted with this huge
ethanol mandate, biofuels mandate that we have to meet. EPA is
portraying this as maybe helping you avoid this blend well,
when we would saturate the market. At best, assuming E-15 was
as good as EPA says it is, and assuming it could be used in all
the vehicles EPA says it can be used in, it might extend the
blend wall a year or two.
But we're talking about a program that we have another
decade or more than we have to blend ethanol in, and it's not a
solution. The true solution in our mind is right-sizing the
program. You need to adjust the ethanol mandate, the biofuels
mandate to what the vehicle fleet can safely use, and we're
very close to exceeding that where we are right now.
Vice Chairman Brady. Thank you. Mr. O'Malley or any of the
witnesses want to comment?
Mr. O'Malley. I would comment that the only reason for E-15
is to drive up the use of ethanol, to take more corn out of the
food cycle and put it into the fuel cycle. There is no
justification for E-15. It's a program that I don't know what
price is going to be paid for it, but again, not holding back,
it's nuts.
Vice Chairman Brady. Sure. Dr. Moss, in your testimony, if
I understood it, you suggested maybe a future potential for
higher gas prices on the East Coast based on increased market
concentration, due to, obviously, these refinery closures. Can
you elaborate exactly how you foresee that occurring, and if a
refinery raises the price of gasoline above cost, what happens?
How do other refineries react?
Dr. Moss. Well, that is essentially the thrust of my
testimony. Economists and antitrust enforcers tend to worry
about industries that become highly concentrated, because
obviously with fewer suppliers, those industries or markets are
more conducive, potentially, to the exercise of market power,
because firms can indeed influence the market price, because
they control a good portion of the market, or firms can band
together.
Vice Chairman Brady. Can I ask you a trend question?
Dr. Moss. Sure.
Vice Chairman Brady. I get the impression in your testimony
that you foresee more integration in the industry. But I've
noticed a number of companies are actually breaking up,
upstream and downstream, in part, I believe, because refining
is a very tough, low margin tough business to survive in. So
isn't the trend going the opposite direction?
Dr. Moss. From what I read and understand, yes, there has
been sort of a deintegration, from a vertical perspective, in
the industry. So and I mention that that might be a mitigating
factor. If firms are--if the concern is that fully integrated
firms will use their market position to leverage market power
into another level of the industry.
If there's deintegration, then that may become less of a
concern. However, the refining market in the Northeast, as I
noted, is very highly concentrated with just two firms, after
all of these closures, accounting for almost 90 percent of
capacity. I think that fact pattern leaves competitive
concerns, even vertical concerns squarely on the table, and
certainly with a high concentration, as we see in refining,
with just again the two firms controlling most of the output.
We would potentially still worry about just restricting
output to raise prices as well.
Vice Chairman Brady. Thank you, Dr. Moss. Mr. Duffy.
Representative Duffy. Mr. Greenstone, did you say that you
were on the President's economic team; is that correct?
Dr. Greenstone. During the first year of the
administration, I was the chief economist at the Council of
Economic Advisers.
Representative Duffy. Okay, and listening to your
commentary, you were talking about the social costs of
different fuels that we use. You were talking about coal, but
there's a social cost to the use of coal and also a social cost
to the use of oil, and maybe a less apparent cost to maybe wind
or solar or natural gas, right?
Dr. Greenstone. That's correct.
Representative Duffy. And therefore the government maybe
should step in and increase the cost of coal or gas
prematurely, or the government should step in and try to reduce
the cost of wind, solar or natural gas, is that right? The
government should come in and try to make a play on the social
cost?
Dr. Greenstone. Yes. Thank you for the question,
Congressman Duffy. I think the point I was trying to make is
when we consume electricity that's generated from fire and coal
plants right now, or various other energy sources, we pay
whatever comes across our utility bill. But that's not the only
cost we pay. In addition, we pay with shortened lives, higher
health care bills, changing climate, weakened national security
when it comes to petroleum. Just because those don't show up on
the bill currently, that doesn't mean we're not paying them.
Representative Duffy. Okay, and you're a proponent of
natural gas; is that right?
Dr. Greenstone. No. I'm a proponent of leveling the playing
field for all energy sources. So what does that mean in
practice? That means in practice that when we make our energy
choices as consumers, the prices should reflect the cost of
producing the kilowatt hour of coal, but also all the other
costs that consuming that kilowatt hour of coal produces.
Representative Duffy. So in essence, in your version, we
want to see the cost of oil go up, to take into account the
cost of lives and climate change and global warming, right?
Dr. Greenstone. The idea is that we're paying those costs
now, but we're not able to make choices that reflect, that
recognize those costs.
Representative Duffy. I want to be clear, that you want
that to be reflected in the end price of that product; correct?
Dr. Greenstone. I think we as a society would be able to
make better choices if the price, the end price of that product
reflected the full social cost.
Representative Duffy. So in essence, you believe that the
end cost then should be higher; correct?
Dr. Greenstone. It depends on the energy source.
Representative Duffy. Let's use gas. Not natural gas, but
gas for petroleum, yes.
Dr. Greenstone. So yes. So we've been talking as a panel,
some of the EPA regulations are meant to help reflect that
price, and my own view is that not all of those social costs
are recognized.
Representative Duffy. They only gave me five minutes. So I
want to be very clear on what you're telling us here. You would
like to see gas, petroleum, so gas at the pump, reflect the
actual social cost of the use of that energy source, which
would mean it would have to go up in price, because today, per
your testimony, it doesn't accurately reflect the social cost
in the price; yes or no?
Dr. Greenstone. Congressman Duffy yes, and all other energy
sources as well.
Representative Duffy. Right, and so if you do that, if you
want to make sure that we increase the cost of our gas at the
pump, and in essence you might then see more use of wind and
solar and natural gas, in that calculation, have you taken into
account the social cost of the men and women who are sitting in
this room today, that are steelworkers and boilermakers, who
will lose their jobs because you, as an advisor to the
President, say that as a social policy, I want to see more
Americans use a different energy source. Have you considered
then the loss of these men's jobs for that policy?
Dr. Greenstone. That's an important question, and of
course, when one causes changes in the economy, people lose
their job and that's a real cost. In an adequately defined
system, they would be recognized. Let me also make----
Representative Duffy. You're willing to bear that cost
though, just to be clear?
Dr. Greenstone [continuing]. Sorry?
Representative Duffy. You're willing to bear the cost of
these men's jobs for that social policy?
Dr. Greenstone. Well, I think it's very important, I think
you're raising a really important part of----
Representative Duffy. I only have 30 seconds. You're
willing to bear that cost of the social policy?
Dr. Greenstone [continuing]. If I could finish. In
addition, I think part of that calculation has to be, and I'm
glad that Senator Casey has returned to the room, the
tremendous opportunities that appear for people who would
produce the alternative.
Representative Duffy. And again, I guess I don't know how
well our boilermakers are at making windmills or solar panels,
or our steelworkers. But to be clear, as we've talked about
natural gas in your testimony, I think it's clear that natural
gas is coming from fracking, and I wonder if you're supportive
of fracking, and if you have any issues with the EPA regulating
the refining of natural gas, just the same as we've supported
the EPA's regulation of refining of petroleum?
I mean there's a whole set of issues that start to spiral
out here, when you start to take into account the social policy
which you reference, and I think you must have advised the
President on these policies, because we see more and more
implementation of these policies, that have a real impact, not
just on the men that I see in this room today, but also a lot
of the union members in my district who are losing their jobs
because of EPA regulation, even outside of oil, and I know my
time is up, and I'm sorry for going over.
Dr. Greenstone. Is there time for me to answer your
question?
Vice Chairman Brady [presiding]. There's a little bit of
time for both, if that's all right.
Representative Duffy. If I could have--thank you.
Chairman Casey. Everyone's left here, so I think if I give
you another minute or minute and a half, that would be great.
Dr. Greenstone. So I believe your question--I'm sorry. I
think the question--maybe you could repeat the question?
Representative Duffy. I was moving on to fracking, and
there's a cost. If you want to say natural gas is clean and as
a social policy you like that over petroleum, do you also say
you support then fracking, which produces natural gas?
And then when you look at EPA regulations, are you okay
with minimizing those regulations on the refining of natural
gas, which is needed, as opposed to the refining regulations
that we see for petroleum from the EPA?
Dr. Greenstone. Yeah, okay. So let me just clearly state. I
stopped working in the White House in February 2010. I would
be--I think it would be slightly delusional to think that my
thoughts stuck around so clearly, that the President is still
searching the hallways looking for them all the time.
Representative Duffy. I think he's embraced them, but go
ahead.
Dr. Greenstone. But let me just say whatever the social
costs are, be they from environmental damage associated from
fracking, be they from greater air pollution, be they from
greater CO2 emissions, they should be reflected in
the energy prices. You know, candidly, until we have a system
where those prices are reflected, we'll continue to make
choices that cause, you know, cause shortened lives, cause
climactic changes, and constrain our foreign policy in ways
that are adverse.
Representative Duffy. And if I could just have one more
point. My concern is what bureaucrat makes that decision? What
bureaucrat makes that policy, that social decision? Or does the
bureaucrat want to give that decision to the boilermakers,
because I bet that the boilermakers and the steelworkers have a
different social philosophy than a bureaucrat that works in the
administration, or any other one of these agencies in
Washington, D.C., and there's a differential in social policy
and social view.
Dr. Greenstone. Congressman, I think you're raising a very
important question, who makes the decision, and I think it's
important to underscore that that decision's being made all the
time today. With respect to greenhouse gases, it's largely
being made that that has no damages.
So it's not that this would be a change in someone making
the decision. The decision is made today; it's just made in a
very particular way that doesn't reflect the full cost.
Representative Duffy. But a bureaucrat isn't then making
the decision to increase the cost because of their social
analysis today. My time is up. I'm sorry. I yield back to
Senator Casey.
Dr. Greenstone. Thank you for your interest in my
testimony.
Chairman Casey. Congressman thank you, and Doctor, thank
you. I guess when I left, I missed some engagement here. But I
think we have some agreement here, number one, that we don't
want refineries in Pennsylvania or anywhere else to close. I
hope we agree on that, and we're trying to push hard on that.
Another area where we might have consensus, I just want to
raise this; others can comment on this or respond to it. Dr.
Moss, I just wanted to ask you about a piece of legislation
which is one, I don't consider this some kind of magic wand,
but one tool we can use to have an impact on oil prices.
Legislation in the Senate, the so-called NOPEC Act, that
would allow, give the Justice Department the authority, which
it does not have now, to bring price fixing or antitrust cases
against OPEC. I wanted to get your sense of that legislation,
and the impact, and if you can make any assessment as even, you
know, a numerical analysis in terms of what that would mean
potentially for lower crude oil prices.
Dr. Moss. That's a good question, Senator, and I think it's
been posed numerous times in the last several years. I think
the honest answer is that the NOPEC legislation raises a rather
snarly group of issues. If you talk to antitrust experts, those
who are steeped in knowledge and practice involving application
of the U.S. antitrust laws, reaching our laws to OPEC would be
very, very difficult, as they stand today.
OPEC obviously does not operate within the United States
borders. There has been concern about the marketing arm of the
Venezuelan oil company operating within the U.S. I believe
that's CITGO. There have been efforts to get to OPEC indirectly
through the operation of CITGO in the United States.
But there are hurdles, applying laws against sovereign
entities outside the United States, I think, would be largely,
that would be difficult to do. Giving the U.S. DOJ the
authority to apply antitrust laws against OPEC, I think, it
also poses some concerns and hurdles, not the least of which is
to consider what the political implications of that would be,
in terms of reaching out to OPEC and potentially setting up an
antitrust enforcement action.
So I can't come out one way or the other. I think it's very
clear that if OPEC did not control world crude oil prices,
prices would be lower, and there is some disagreement or some
disagreement about whether OPEC has actually been as effective
in setting and maintaining prices over the last several years.
The structure of OPEC has changed, and whether the
agreement is as tight as it used to be, I think, is in question
at this point.
Chairman Casey. I know we may have others that might have a
comment. If you could briefly comment, only because we're
coming to the end, and I know because of my voting schedule
here, it's been one of those days here. I've had to interrupt
the hearing, so I'm sorry about that. But I know we have to
wrap up. Vice Chairman Brady has no more questions, and I don't
either. But I know we're again limited on time, and I'm sorry
about that.
Mr. Greco. Just one quick comment. API opposes NOPEC. It
raises very serious constitutional questions going forward.
What we really should be focusing on is how do we develop our
own resources? If we're concerned about a resource-constrained
world, we just had a recent reevaluation of U.S. resources that
raise it tremendously.
We can be an energy powerhouse. We ought to be competing
and developing our own domestic resources, rather than
assessing punitive damages or trying to against other
countries.
Mr. O'Malley. I would second that, and support that. The
biggest thing we can do on oil prices is produce more oil in
the United States, and we're on a road where we can have
tremendous production in the future, if we would just let the
industry do it.
Chairman Casey. We're thankful some of those numbers are
up. Doctor?
Mr. O'Malley. Excuse me?
Chairman Casey. No. I said I'm thankful that some of those
numbers are up now, as opposed to a few years ago.
Mr. O'Malley. They're going up fast.
Chairman Casey. Doctor?
Dr. Greenstone. I don't have much to add, just to note that
there's been this incredible increase in domestic production,
and I think we're, you know, for what was unimaginable even,
you know, five years ago, could be imaginable, which is we
could well be energy independent when it comes to petroleum in
the foreseeable future.
Chairman Casey. Well thanks everyone. I know what we'll do
is leave the record open for how many days? Five days, for
other submissions to the record. I know that I mentioned
earlier that we had representation from individual unions, and
I know some of their leaders, if they are not here now, were
here. Dave Miller, the president of Steelworkers Local 10-901,
Dennis Stefano, president of 10-234, and John Clark, the
business manager of the Boilermakers 13.
I think Jim Savage from Local 10-01 of Steelworkers was not
here, but I wanted to commend the work of those unions and
their leaders who are here with us, and of course the work that
they've done with us on refineries. We're grateful for the
witnesses who are here today, and apologize for some of the
problems we had with scheduling.
But this hearing was scheduled weeks ago. Votes get
scheduled sometimes within hours, and we're sorry about that. I
want to thank our Vice Chair for being here, coming all the way
across the Capitol again to sit with us, and I think I owe him
a visit across the way. We're adjourned.
[Whereupon, at 4:13 p.m., the hearing was adjourned.]
SUBMISSIONS FOR THE RECORD
Prepared Statement of Senator Robert P. Casey, Jr., Chairman,
Joint Economic Committee
Good afternoon. Today's hearing is focused on the impact that
closures of petroleum refineries serving the Northeast could have on
prices at the pump in the Mid-Atlantic and New England regions.
Since September 2011, two refineries in the Philadelphia area and
one major Caribbean export refinery supplying the East Coast have
closed. Additionally, a third Philadelphia-area refinery is slated to
shut down this summer.
In addition to the immediate impact on gas prices, we will explore
the long-run costs to the economy associated with higher gasoline
prices, as well as actions that can be taken to encourage the adoption
of cleaner, cheaper alternatives to petroleum, such as natural gas.
While the situation remains fluid with the potential sale of the
three Philadelphia-area refineries, I am concerned that the Northeast
is losing needed refining capacity.
I am especially concerned that this loss in refining capacity is
happening at a time when consumers are already facing rising gas
prices.
With limited pipeline capacity to import from the Gulf Coast, this
loss of refining activity in the Northeast will increase the region's
dependence on European gasoline and diesel and lead to higher prices
for consumers.
A recent Energy Information Administration report detailed the
possible consequences of this reduction in refining capacity, which
include greater price volatility and potential shortages in the
Northeast.
I am focused on ensuring that changes in refining capacity in the
Northeast have as little impact as possible on energy prices, on jobs
in our communities, and on the economic recovery.
I have urged the Administration to become directly involved in this
issue.
I met with workers at the three Pennsylvania refineries--
Philadelphia, Trainer and Marcus Hook--to discuss the impact that
shuttering the refineries would have on the workforce. Together, these
refineries represent half the refining capacity in the northeastern
United States.
I would like to recognize representatives from the United
Steelworkers Local 10-1, Local 10-901 and Local 10-234 who are in the
audience this afternoon. Also attending today's hearing are members
from the International Brotherhood of Boilermakers Local 13 and
Steamfitters Local 420.
Closure of these facilities would likely mean that the Northeast
region will experience a decrease in the supply of Ultra-Low Sulfur
Diesel (ULSD), at the same time there will be an increase in demand for
ULSD as both a transportation fuel and for home heating.
With closure of the Northeastern refineries, refining activities
will be centralized in the Gulf Coast region. This will affect the
price of gasoline, diesel and heating oil and lead to potential
shortages of those fuels in the Northeast.
An early or prolonged cold spell next winter could send home
heating prices skyrocketing--hitting consumers hard.
Today, gas prices are again pushing $4 a gallon--well ahead of the
summer driving season. We are facing higher prices despite the fact
that U.S. production of oil is at its highest level since 2003. For the
first time in a decade, the United States is importing less than half
the oil we use.
Yet, with only 2 percent of the world's proven oil reserves,
there's little impact the United States can have on the price of oil--
which is set by supply and demand in a global market--by addressing
only the supply side of the equation.
Focusing on U.S. demand for oil offers more promise. The United
States consumes more than 20 percent of the world's oil. U.S.
dependence on oil to meet its transportation needs leaves consumers
with few choices, making them vulnerable when oil and gasoline prices
rise.
By promoting policies that reduce our dependence on foreign oil,
the United States can help to reduce global demand for oil and,
ultimately, prices.
If oil accounted for a smaller share of our energy needs, the U.S.
economy and American consumers would be less vulnerable to spikes in
oil prices.
It's clear that we need to accelerate natural gas development and
use. Natural gas is produced right here at home--creating jobs. It's
clean, with lower emissions than traditional gasoline. And it's cheap.
Converting vehicles, especially commercial vehicles, to run on
natural gas could play a role in the move to cleaner energy
alternatives.
In the coming weeks, I will introduce legislation that provides
states with funding and flexibility to develop initiatives that:
Encourage the use of natural gas as a transportation
fuel; and
Encourage public and private investments in natural gas
vehicles and transportation infrastructure.
These actions will encourage the use of natural gas--an energy
source which the United States has in abundance--while reducing our
dependence on petroleum and vulnerability to oil price spikes.
We have a terrific group of witnesses this afternoon, with wide
expertise on energy issues. I look forward to each of your testimony.
__________
Prepared Statement of Representative Kevin Brady, Vice Chairman,
Joint Economic Committee
Today's hearing is most appropriate in light of high gasoline
prices and a White House energy policy that is coming home to roost, so
to speak. While the President has touted an ``all of the above'' energy
policy, his actual policies have been anything but that. They have been
decidedly unfavorable to America's energy manufacturing industry--and
that is true for crude oil production as well as refining.
The Administration has thwarted oil and gas development on federal
lands and offshore. It imposed a hasty and prolonged moratorium on Gulf
of Mexico drilling and then hindered resumption of exploration through
slow permitting. And most recently, it has denied increasing the
assured and safe supply of crude oil from our ally Canada through the
Keystone pipeline to U.S. refineries.
The President also risks the jobs of American energy workers by
threatening punitive tax treatment of energy manufacturing, for
example, by singling this sector out and rescinding incentives to
encourage job creation and manufacturing here in America. Why is energy
manufacturing different than any other form of manufacturing? Why are
these good-paying energy jobs deemed expendable by the White House, and
why is the President himself pushing taxes that encourage energy
companies to send these jobs overseas?
This manufacturing deduction, by the way, is an important incentive
to refining and will further make these projects less economically
viable if the President has his way.
The Administration is also pursuing policies that will shrink and
punish petroleum refining both by forcing it to blend in alternative
fuels even when they do not yet exist and by mandating ever more
stringent emission standards even when the costs are huge and the
benefits are uncertain.
America is experiencing an energy revolution with the potential to
become the largest energy-producing country on the planet. But let's be
clear, the rise in energy manufacturing driven by new technology is
occurring on private lands, not federal lands. In fact, at President
Obama's request, his Administration has launched a flurry of regulatory
attacks on oil shale development in America, leaving the country to
pray that Washington will not smother the technology in the crib with
more layers of regulation.
Senator Lisa Murkowski in a recent editorial entitled ``America's
Lost Energy Decade,'' pointed out that in 2002 the U.S. Senate decided
against opening a small section of the Arctic National Wildlife Refuge
to oil and gas production. The most cited reason at the time was that
it would take too long--ten years--for the oil to reach the market.
Now, ten years later, the White House is pleading with Saudi Arabia to
produce more oil when we could be controlling our own supply.
Senator Murkowski correctly concluded that long lead times should
be a reason to approve drilling quickly, not to continue putting it
off.
Other non-OPEC countries do not lock away their resources, not even
pristine Norway, which is the world's seventh largest exporter of oil
and second largest exporter of natural gas.
Our regulatory tale is one of self-inflicted wounds--cutting off
our nose to spite our face. This country is blessed with resources that
can be developed, produced, and processed safely and cleanly to support
economic growth and technological development, which in turn will
position us to further advance the state of the environment. All of
this is critical to ensuring that America continues to have the
strongest economy in the world throughout the 21st century.
Refinery closures and job losses are painful but even more so when
our own government's policies contribute to them. Americans want to
balance a healthy economy with a clean environment. They don't want
their factories shut down effectively by order of the government and
products brought into the country from places that are much less
environmentally committed than the United States.
Regulators need to take a rational, balanced approach that
recognizes that ignoring economic consequences hurts the very citizens
whose welfare they are charged to protect.
First, our regulatory mechanisms at least should be functional. It
makes no sense whatsoever to impose blending requirements on refiners
for cellulosic ethanol that does not exist in requisite quantity and
then fine them for not using it. It makes no sense to push corn ethanol
consumption to a level that invalidates car engine warrantees. And it
makes no sense to impose sulfur content limits on gasoline that may
increase CO2 emissions when the EPA is trying to reduce
those emissions as well. These are unforced policy errors we cannot
afford to commit, especially in this struggling economy.
Second and more fundamentally, the Administration, lawmakers, and
regulators must ask themselves if they are pursuing radical solutions
that may never come to fruition while missing opportunities for steady
and certain improvements. Are they provoking protracted lawsuits and
delaying projects? Are their actions causing older, more polluting
equipment to stay in place longer? Are they driving America's firms out
of business and costing us jobs while inviting more dependence on
foreign countries with worse pollution records?
Regulation must facilitate the market's functioning, neither
treating private enterprise as an adversary nor pressing for
preconceived outcomes in one sphere while ignoring collateral damage in
others. Devising good regulatory policy doesn't have to be intensely
adversarial. It can be more collaborative, engage the incentives of the
private sector, and above all be mindful that it ought to serve
economic growth and technological development, the ultimate sources of
better living standards.
I now look forward to hearing our witnesses' testimony and probing
their ideas for better regulation of oil refineries and in general.
__________
Prepared Statement of Diana L. Moss, Vice President and Director,
American Antitrust Institute
i. introduction
I would like to thank Chairman Robert Casey and the members of the
Joint Economic Committee for holding this hearing on the loss of
refining capacity in the Northeast and its potential impact on the
prices of refined petroleum products (RPPs). I appreciate the
opportunity to appear here today.\1\ The American Antitrust Institute
is a non-profit education, research, and advocacy organization. Our
mission is to increase the role of competition in the economy, assure
that competition works in the interests of consumers, and sustain the
vitality of the antitrust laws. The AAI has long been involved in
analyzing the competitive implications of issues in the energy
industries, including electricity, natural gas, petroleum, and
renewables.
Much of the analysis available to date on refinery closures in the
Northeastern U.S. focuses on the relatively straightforward economics
of their potential impact on RPP prices such as gasoline, heating oil,
and ultra low sulfur diesel (ULSD). Perhaps the most pressing question
for policymakers is whether the current downturn in the refining sector
in the Northeast is part of a cyclical trend--and will rebound at some
point in the future--or if it represents a structural shift that could
reflect a permanent change in refining fundamentals. The answer is that
it is too soon to tell. Nevertheless, the industry may be at a critical
juncture where policy responses are particularly important.
---------------------------------------------------------------------------
\1\ Diana Moss is Vice President and Senior Fellow, American
Antitrust Institute (AAI) (www.antitrustinstitute.org). This testimony
has been approved by the AAI Board of Directors.
---------------------------------------------------------------------------
My testimony today acknowledges the importance of underlying
economics as integral to the larger picture surrounding refinery
closures. However, I will focus primarily on perhaps a less obvious
aspect of the problem, namely the importance of the competitive
landscape in downstream petroleum markets in analyzing the implications
of refinery closures and crafting appropriate policy responses. This is
not to say that there is a competitive problem, only that refinery
closures fundamentally alter the structure of markets in ways that
potentially change competitive incentives facing suppliers.
ii. background
Refined petroleum product price dynamics in the U.S. and the
Northeast, in particular, are affected by a complicated and changing
landscape. This backdrop is influenced, as always, by the world crude
oil market, changes in petroleum resource exploitation in the U.S. and
Canada, and shifts in how the U.S. utilizes its complex networks of
downstream assets, including refineries, product pipelines, and
terminaling and storage facilities. Price dynamics are also affected by
changes in domestic consumption driven by economic recession beginning
in 2008, the effects of which are still lingering but may reverse in
time. A host of other factors, however, may signal a more permanent
downturn in oil consumption, including: increases in fuel economy
standards, the ethanol content of fuels, and the use of pure bio-fuels.
Finally, fundamental changes in the U.S. refining industry,
particularly in the Northeast, are an integral part of the picture.
The pattern of crude oil consumption has changed in ways that are
important for an analysis of refining in the Northeast. For example,
between 2004 and 2010, oil consumption in the U.S. and Europe fell by
almost six percent. Consumption in China, the Middle East, Latin
America, and other Asian countries, however, increased by about eight
percent.\2\ In the early 2000s, Saudi Arabia was the largest exporter
of crude oil to the U.S. Between 2004 and 2010, however, those export
levels fell by 27 percent. Exports to the U.S. from Venezuela and
Mexico also fell off and Canada, which is now the leading exporter to
the U.S., increased exports by 18 percent.\3\
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\2\ Federal Trade Commission, Gasoline Prices and the Petroleum
Industry: An Update Figure 3, 7 (September 2011), available at http://
www.ftc.gov/os/2011/09/110901gasolinepricereport.pdf.
\3\ FTC, supra note 2 at Table 10 (p. 59).
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In approaching the problem of refinery closures in the Northeast
U.S. it is, as a preliminary matter, important to point out that U.S.
gasoline prices are heavily influenced by the dynamics of cartelized
world crude oil markets. The U.S. has little control over OPEC.
Currently, crude prices make up about 72 percent of retail gasoline
prices in the U.S.\4\ While membership in OPEC has changed somewhat,
and there is some ongoing debate as to how effective the cartel is in
setting and maintaining crude prices, it is widely held that higher
prices contribute in substantial part to higher prices of gasoline than
what would emerge without the cartel.
---------------------------------------------------------------------------
\4\ Energy Information Administration, Gasoline and Diesel Fuel
Update (April 16, 2012), available at http://www.eia.gov/petroleum/
gasdiesel/.
---------------------------------------------------------------------------
When the spotlight falls on actual or projected increases in RPP
prices in the U.S., there is sometimes a tendency to overplay the role
of OPEC in price determination. To be sure, crude oil prices factor
significantly into downstream prices. However, domestic downstream
activities--including refining, distribution of refined products to
storage terminals, and wholesale and retail marketing--also play an
important role. These activities make up a not insignificant 17 percent
of the final retail price of gasoline.\5\
---------------------------------------------------------------------------
\5\ EIA, supra note 4.
---------------------------------------------------------------------------
The impact of downstream activities on RPP prices is amplified by
what we see happening in the Northeastern U.S. refining markets.
Relative to other PADDs, PADD 1 has special features are that are
potentially relevant to competition. For example, PADD 1 has the: (1)
fewest number of refineries; (2) largest number of refinery idlings and
closures; (3) highest levels of market concentration and increases in
concentration over time; (4) highest levels of wholesale market
concentration; (5) lowest refining capacity utilization rates; and (6)
greatest dependency on imports of petroleum products from other PADDs
and abroad. My testimony touches on each of these factors, which
collectively draw attention to the competitive landscape.
iii. refinery closures in padd 1
A. Market Concentration
Refining market developments in PADD 1 stand in stark contrast to
those in other PADDs, where concentration has remained relatively
stable over the last several years. Refinery idlings and closures in
PADD 1 are attributed to poor economics such as low refining margins.
Many refiners are devoting resources to more profitable upstream
activities such as exploration and production. Sunoco has publically
stated that it is leaving the refining business and has (or plans to)
idled or closed three refineries in the last three years totaling
658,000 barrels per day of crude distillation capacity.\6\
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\6\ Sunoco is Leaving the Refining Business, energyandcapital.com,
September 6, 2011, http://www.energyandcapital.com/articles/sunoco-is-
leaving-the-refining-business/1750.
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The number of refineries in the U.S. continues to decline. Between
1985 and 2011, there was a 31 percent decrease in the number of
refineries in the U.S. and a 52 percent decrease in PADD 1.\7\ While
there are fewer refineries in the U.S., their average capacity has
increased over time, due to the development of higher capacity,
technologically advanced facilities, and the networking of refineries.
These fewer, larger refineries account in large part for the fact that
of 45 total refiners, the top 10 account for 75 percent of total U.S.
refining capacity.\8\ In PADD 1, there were 14 operating refineries in
2004.
---------------------------------------------------------------------------
\7\ Energy Information Administration, ``Number of Capacity of
Petroleum Refineries,'' (number of operating refineries), available at
http://www.eia.gov/dnav/pet/pet_pnp_cap1_a_(na)_8OO_Count_a.htm.
\8\ Anthony Andrews, Robert Pirog, and Molly F. Sherlock,
Congressional Research Service, The U.S. Oil Refining Industry:
Background in Changing Markets and Fuel Policies 17 (November 22,
2010), available at http://digital.library.unt.edu/ark:/67531/
metadc29627/.
---------------------------------------------------------------------------
By the beginning of 2011, that number had fallen to 10.\9\ By mid-
2012, after the closure of Sunoco's Marcus Hook and Philadelphia
refineries and ConocoPhillips' Trainer refinery, and assuming no idled
facilities come back on line, there will be 7 operating refineries.
These closures represent a 43 percent loss in capacity from 2011
through 2012.\10\
---------------------------------------------------------------------------
\9\ EIA, supra note 7.
\10\ PBF Energy's Delaware City Refinery came back on line in
October of 2011.
---------------------------------------------------------------------------
The PADD system, developed during World War II to allocate fuels
from petroleum products, does not accurately capture the concept of a
market, either from an economic or antitrust perspective. PADD
boundaries are encompass far broader areas than what consumers would
consider in searching out lower-priced supplies, or suppliers that
could undercut prices increases elsewhere in the market. Such markets--
determined by transportation constraints and production cost
differentials--are likely to be much smaller and more concentrated than
PADD-based markets.\11\ Nonetheless, PADD-based statistics do give us
some sense of changes in market structure that are relevant to today's
inquiry into refinery closures.
---------------------------------------------------------------------------
\11\ The FTC's analysis of relevant markets in petroleum merger
cases is a good illustration of this concept, whereby concentration is
significantly higher than on a PADD-basis.
---------------------------------------------------------------------------
Refinery idlings and closures are reflected directly in changes in
market concentration in PADD 1. In 2004, for example, concentration in
PADD 1 was about 2,700. But by the end of 2010, concentration reached
3,300 HHI.\12\ The Federal Trade Commission (FTC) notes that these
changes are due largely to the Valero-Premcor merger. However,
increases in concentration also reflect changes in the distribution of
ownership associated with refinery closures. For example, the year-end
2010 statistics reflect the idling of Chevron's Perth Amboy refinery,
PBF's Delaware City refinery, Nustar's Savannah refinery, and Western's
Yorktown refinery. These closures drove up the market shares of Sunoco
and ConocoPhillips significantly, increasing market concentration.
---------------------------------------------------------------------------
\12\ FTC, supra note 2 at Table 13 (p. 62).
---------------------------------------------------------------------------
Closure of ConocoPhillips' Trainer refinery and Sunoco's Marcus
Hook refinery in late 2011, coupled with the restart of PBF Energy's
Delaware City refinery slightly lowered market concentration. However,
three major players (ConocoPhillips, Sunoco, and PBF Energy) continued
to account for about 93 percent of refinery capacity. With the planned
closure of Sunoco's Philadelphia refinery in mid-2012 (if a buyer
cannot be found), market concentration will increase to almost 4,000
HHI. This will leave only two firms (PBF Energy and ConocoPhillips)
that account for 86 percent of refinery capacity.\13\ This will cause a
significant change in the structure of the PADD 1 market.
---------------------------------------------------------------------------
\13\ Energy Information Administration, Refinery Capacity Data by
Individual Refinery as of January 1, 2011, available at http://
www.eia.gov/petroleum/refinerycapacity/.
---------------------------------------------------------------------------
b. competitive issues
The refining industry is a ``bottleneck,'' or a segment through
which all inputs must pass to ultimately reach the consumer.
Bottlenecks are a common feature of most networked industries and often
involve highly concentrated markets and high sunk and environmental
compliance costs that discourage new entry. Control of bottleneck
facilities potentially raises concerns over the exercise of market
power. For example, in the majority of merger enforcement actions
involving downstream petroleum markets, the FTC's concern centered on
the increased likelihood that the merged firm could unilaterally--or in
coordination with other rivals--withhold capacity to drive up price.
Much like in electricity markets where firms are differentiated by
capacity, as opposed to by product, strategic withholding of refining
capacity could result in anticompetitive increases in RPP prices. It is
therefore important to consider scenarios involving refiners that
control large shares of capacity, marginal capacity that sets the
market price, or facilities located strategically near transportation
and terminal networks. In highly concentrated markets that are less
conducive to competitive outcomes, such as PADD 1, the possibility of
refiners coordinating short-term outages and longer-term idlings or
closures are also greater.
It is clear from the analysis above that market shares and
concentration are directly affected by refinery idlings and closings.
However, PADD 1 is currently in the grip of two potentially opposing
forces--high concentration and low capacity utilization rates. The
likelihood of price increases is generally higher when capacity is
tight relative to demand, as opposed to at low utilization rates. In
other words, incentives to exercise market power by withholding output
can be defeated by the presence of excess capacity in the market, as
currently exists in PADD 1. Capacity utilization rates in other PADDs
are currently above 90 percent, whereas in PADD 1, they are at about 68
percent, down from 93 percent in 2005.\14\
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\14\ Energy Information Administration, Refinery Utilization Rates
React to Economics in 2011 (March 20, 2012), available at http://
www.eia.gov/todayinenergy/detail.cfm?id=5470.
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However, one effect of refinery closures in PADD 1 might be to
increase utilization rates. Indeed, between December 2011 and January
2012, capacity utilization in PADD 1 jumped from 56 to 72 percent--
about a 30 percent increase.15 It is too early to determine whether the
uptick signals a longer-term trend. However, it is possible that with
the closures of Sunoco's Marcus Hook and Conoco-Phillips Trainer
refineries in late 2011, other refineries have taken up the slack.
Regardless of the cause, if utilization continues to increase, it will
be important for policymakers to monitor for price spikes and their
potential causes, including strategic competitive behavior.
---------------------------------------------------------------------------
\15\ Energy Information Administration, East Coast Refining
District Percent Utilization of Refinery Operable Capacity, available
at http://www.eia.gov/dnav/pet/hist/
LeafHandler.ashx?n=PET&s=MOPUEEC2&f=M.
---------------------------------------------------------------------------
While the foregoing competitive concerns focus largely on short-run
output restrictions, it is also possible that long-term, high levels of
market concentration increase the risk that suppliers can coordinate on
capacity investment decisions.\16\ Slower investment keeps capacity
tight and increases the probability that anticompetitive withholding
will produce significant and sustained price increases. Indeed, capital
expenditures in refining capacity declined, on average, by 3 percent
annually over the period 2005 to 2010. While this is likely to reflect
a reticence by U.S. refiners to expand their presence in markets with
unfavorable economics, ongoing decreases in investment, particularly in
concentrated markets, should be monitored.\17\
---------------------------------------------------------------------------
\16\ For almost 60 years, economists have probed into competitive
issues in the domestic petroleum industry, include concerns over
potentially exclusionary conduct in gasoline marketing beginning in the
1950s, the concept of ``conscious parallelism,'' or that
anticompetitive coordination does not necessarily take the form of a
conspiracy, refusals to deal and the potential incentives to foreclose
rivals associated with integrated refining-marketing, and entry
barriers at the refining level. See, e.g., for discussion of various
competitive issues: J. B. Dirlam and A. E. Kahn, Leadership and
Conflict in the Pricing of Gasoline, 61 YALE L. J. 818 (1952); B.
Turner, Conscious Parallelism in the Pricing of Gasoline, 32 ROCKY
MNTN. L. REV. 206 (1959-1960); W. Adams, Vertical Divestiture of the
Petroleum Majors: An Affirmative Case, 30 VAND. L. REV. 1115 (1977); J.
W. Markham and A. Hourihan, Horizontal Divestiture in the Petroleum
Industry, 31 VAND. L. REV. 237 (1978); W. L. Novotny, The Gasoline
Marketing Structure and Refusals to Deal with Independent Dealers: A
Sherman Act Approach, 16 ARIZ. L. REV. 465 (1974); and E. V. Rostow and
A. S. Sachs, Entry into the Oil Refining Business: Vertical Integration
Re-examined, 61 YALE L. J. 756 (1952).
\17\ CRS, supra note 8 at 19.
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iv. wholesale markets and gasoline prices in padd 1
National gasoline prices have continued their steady march upward
since the mid-2000s, marked by periodic exogenous shocks. The
hurricanes in 2005 caused spikes associated with temporary refinery
disruptions, as did the phase out of MTBE in the summers of 2006 and
2007. Likewise, the impact of the global recession beginning in 2008
caused gasoline prices to plunge as demand fell off. But since the
beginning of 2009, prices have resumed their upward trend.
A number of factors can influence gasoline price behavior. For
example, if upstream (e.g., wholesale RPP) prices continue to increase,
accompanying downstream (e.g., retail RPP) price increases can be
reinforced by what economists term ``asymmetry'' or the ``rockets and
feathers'' effect. This is the tendency for downstream petroleum prices
to increase faster than upstream prices when upstream prices are on the
rise, but to fall more slowly when upstream prices are on the
decline.\18\ There are various theories that could explain asymmetry,
including oligopolistic coordination, consumer search costs, and
inventory adjustment costs.\19\
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\18\ Asymmetry is observed between a number of upstream-downstream
price combinations. The most common is wholesale gasoline-retail
gasoline prices, followed by crude oil-retail gasoline prices.
\19\ Theories of coordination could include signaling adherence to
a collusive agreement at the refining or retail levels. For more detail
see, e.g., Diana L. Moss, The Petroleum Industry, Merger Enforcement,
and the Federal Trade Commission, 53 THE ANTITRUST BULLETIN 203 (Spring
2008).
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Gasoline prices are also potentially influenced by the effects of
increased market concentration resulting from the last wave of mergers
in the late 1990s and early 2000s. When upstream and downstream markets
are concentrated in vertically integrated industries, competitive
concerns can arise. For example, vertical integrated firms may possess
the ability and incentive to foreclose rivals from the market by
limiting their access to customers or inputs, or raising rivals' costs
by forcing them to operate at inefficient scale.\20\ Successful
foreclosure of rival gasoline retailers by vertically integrated
refiner-marketers could increase prices in retail markets.
---------------------------------------------------------------------------
\20\ Some economic research appears to support the notion that
merger involving refiner-marketer combinations activity in the U.S.
since the mid-1990s increased wholesale and, sometimes, retail prices.
Moss, supra note 19.
---------------------------------------------------------------------------
Refining concentration in PADD 1 is already high and, as noted,
might be driven higher by additional refinery closures. But it is also
clear that between 2004 and 2010, wholesale concentration increased by
between about 300 and 700 HHI points in some PADD 1 states--
particularly Pennsylvania where there is a geographic concentration of
refining capacity--but also Maine and Rhode Island.\21\ Similar to
refining markets, however, state-level measures of wholesale
concentration are likely understate market concentration since terminal
networks are typically defined around smaller, metropolitan areas.\22\
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\21\ FTC, supra note 2 at Table 14, at 63.
\22\ Data from FTC merger investigations shows that terminaling and
marketing markets are much smaller and more concentrated than state-
based markets.
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Higher levels of refining and wholesale market concentration should
be considered in light of the mitigating fact that refiner integration
into gasoline marketing has declined since the early 2000s. For
example, rack sales of gasoline in PADD 1 increased from 68 percent to
75 percent in 2010, while sales to co-ops and dealer-tank-wagon
declined from 17 percent to 14 percent.\23\ Indeed, there is evidence
that integrated petroleum companies and refiners are spinning off
downstream assets to concentrate on more profitable upstream
activities. Moreover, large independent gasoline retailers can play a
role in disciplining retail gasoline prices.
---------------------------------------------------------------------------
\23\ FTC, supra note 2 at Table 15 (p. 65).
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At first blush, these observations might support the notion that
integrated refiners potentially have less ability to affect gasoline
prices through vertical foreclosure than in the past. However, this
must be viewed against the looming prospect of two firms in PADD 1
accounting for almost 90 percent of refinery capacity. Under those
circumstances, jobbers and other distributors that purchase at the rack
and independent gasoline retailers potentially face the prospect of
dealing with fewer firms, one of which (ConocoPhillips) is vertically
integrated into wholesale and retail marketing. Much like concentration
in refining markets, this situation should be carefully monitored.
v. changing use of the transportation network
Changes in the pattern of imports into PADD 1 and network usage
also have competitive implications. Pipeline networks in the U.S. were
largely designed and constructed to accommodate long-established
trading patterns between supply and demand centers, within the U.S. and
abroad. When those patterns change--as they are in light of the
Northeast refinery closures--new constraints can emerge. For example,
increased product flows and capacity constraints, reversals of product
flows, shifting shares of pipeline versus ocean-borne (i.e., tanker and
barge) transportation, and new pipeline transportation all affect usage
of downstream networks, with associated effects on costs, prices, and
disposition of supplies. A good analogy is the changed use of the U.S.
high voltage transmission grid following regulatory reforms in the mid-
1990s. Expansion of wholesale power markets, accompanied by higher
volume, longer distance transfers of electricity and new trading
patterns exposed limitations on the grid. Today, the industry faces
similar issues, as renewables such as wind generators are located on
remote parts of the grid.
PADD 1 is unusual in that it is a net importer of petroleum
products. In 2010, 72 percent of total product supply in PADD 1 was met
by ``imports.'' Just over one half of supply came from other PADDs
(primarily PADD 3) and 20 percent from foreign imports. PADD 1
therefore supplied only about 21 percent of its own needs in 2011.\24\
The economics of this situation are straightforward. Additional
supplies must be procured from non-PADD 1 sources to make up for
refining capacity shortfalls, particularly for ULSD and gasoline. Those
supplies can come from a variety of sources--PADD 3, PADD 2, Canada,
and foreign sources.\25\
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\24\ FTC, supra note 2, Table 11 (p. 60).
\25\ Energy Information Administration, Potential Impacts of
Reductions in Refinery Activity on Northeast Petroleum Product Markets,
(February 27, 2012), available at http://www.eia.gov/analysis/
petroleum/nerefining/update/.
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Regardless of how shortfalls resulting from refinery closures are
met, RPP prices in PADD 1 will likely increase relative to other PADDs,
for a number reasons. First, scarce supplies must be bid away from
other, more lucrative markets, potentially raising prices.\26\ Second,
capacity constraints on the Colonial pipeline that moves product from
the Gulf Coast and up the eastern seaboard will potentially drive up
transportation costs and therefore prices. Constraints on existing
terminal and storage capacity and configurations might likewise
adversely affect prices. Third, the costs of altering or building new
infrastructure to accommodate the PADD 1 refining situation (should it
become permanent) are potentially high and could increase prices.
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\26\ Supplies that come from abroad should, in any robust economic
analysis, account for the indirect costs associated with dependency on
foreign fuel sources.
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Finally, if products are imported to PADD 1 from atypical or more
remote sources, supply chains will probably become longer and more
complex, potentially driving up costs and prices.\27\ Under these
circumstances, supply chains become more ``fragile'' and prone to
disruption from events such as input market shocks, weather, or
political events. This fragility could be exacerbated by the presence
of concentrated markets at critical, constrained junctures in the
supply chain. Such circumstances can create incentives for firms to
exercise market power through unilateral or coordinated conduct, and
are therefore important to monitor.
---------------------------------------------------------------------------
\27\ EIA, supra note 25, at 23.
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vi. conclusion
It is as yet unclear how refinery closures in the Northeast will
affect RPP prices, particularly gasoline. Should prices rise, proposals
for addressing them will highlight the tension between competition
policy and broader-based public policy. Competition policy views
domestic petroleum refining and marketing much like any other commodity
market, using methodologies and economic tools to evaluate whether
mergers or strategic firm conduct are likely to harm competition and/or
consumers. Public policy, on the other hand, is apt to treat high
gasoline prices as a societal problem. In addition to traditional
consumer welfare and economic efficiency concerns, public policy would
potentially consider equity, economic growth, and national security as
key factors in crafting approaches.
Given these concerns, public policy could view petroleum markets as
candidates for special rules or treatment that would not be considered
in the realm of competition policy. It is thus important that
approaches separate the underlying market dynamics (e.g., scarcity)
associated with refinery closures in the Northeast from outcomes that
are related to strategic competitive behavior. If the latter appears to
be a factor in the evolving Northeast refinery situation, then it would
be prudent for policymakers, including antitrust enforcers, to consider
several important questions.
One question is whether past mergers have had an effect in creating
the market structures and incentives that facilitate anticompetitive
outcomes. In making budgetary decisions, Congress might also consider
that the FTC will need resources to monitor for and investigate
potential competitive concerns. Finally, antitrust may not be able to
address some competitive issues. Much like the California electricity
crisis of the early 2000s when generators engaged in unilateral
withholding strategies to drive up wholesale electricity prices,
withholding of refinery output or restraining growth in capacity
likewise does not constitute a violation of U.S. antitrust laws.\28\ In
such circumstances, public policy would play a larger role in ensure
that competition and consumers are not harmed.
---------------------------------------------------------------------------
\28\ Withholding output or capacity as part of a collusive strategy
would be reachable under Section 1 of the Sherman Act. Likewise,
exclusionary conduct by a single firm could be a violation of Section 2
of the Sherman Act. If a withholding strategy was likely in a post-
merger context, it could be a cognizable anticompetitive effect under
Section 7 of the Clayton Act.
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__________
Prepared Statement of Robert Greco, The American Petroleum Institute
Good afternoon. My name is Bob Greco and I am Group Director of
Downstream and Industry Operations for the American Petroleum Institute
(API). Thank you for the opportunity to speak at this hearing today.
API represents all aspects of America's oil and natural gas
industry. The industry supports 7.7 percent of our economy, 9.2 million
jobs, and millions of Americans who hold ownership stakes through
pension funds, retirement accounts, and investments.
Refineries are critically important to our nation. They make the
fuels that virtually all Americans use and that help drive our economy.
They contribute to our energy and national security. And they provide
jobs for tens of thousands of Americans and substantial revenue to
local, state, and federal governments.
The recent refinery closures in the Northeastern U.S. are a matter
of great concern. They have the potential to impact families,
communities, and other manufacturing industries, and to reduce tax
revenues. We very much regret that.
It's also important, however, to understand the reasons why
refining is such a challenging business and why closures sometimes
occur--and to also know that the refining industry is resilient and
will continue to supply the products that all Americans need.
Refining is highly competitive. It has also traditionally been a
low-profit margin industry faced with a heavy slate of regulations over
the decades involving many billions of dollars in environmental
investment and compliance costs. Because of these and other factors,
some refineries--often after sustained periods of financial losses--
have had to shut down. About 75 U.S. refineries have closed since 1985.
As this has happened, however, the remaining larger, more efficient
facilities have expanded capacity so that total U.S. refining capacity
has actually increased by 13 percent. This has allowed the sector to
continue to reliably provide Americans with the fuels they need.
The ability of our industry to add capacity and to produce and
deliver larger amounts of gasoline and other products over a flexible
distribution network--and also to draw on imported products when
necessary--will help us continue to supply markets here.
The higher prices we see now also have been a challenge to our
refineries. Rising global demand and Middle East tensions have pushed
the cost of crude oil higher. The cost of crude oil is the single
biggest factor in the price of gasoline--accounting for about three-
fourths of the pump price excluding gasoline taxes--and is the largest
cost incurred by refineries.
Refiners have struggled to pay higher crude prices to make products
for American markets at a time when U.S. demand has been relatively
weak because of (1) the recession and its aftermath, and (2) the
federal ethanol blending mandates. This has severely pushed down
margins and has negatively affected the refining sector.
Refining is a difficult business. But we can make better energy
policy choices that can help the industry remain a reliable, stable
supplier of affordably priced fuels and keep its workers employed.
Good policy choices mean sensible regulations, fair tax policies,
and sufficient access to the crude oil from which all refined products
are made. Decisions made in Washington, D.C., are a big part of this
equation, but so are those made by local and state governments, such as
state requirements for ultra-low sulfur home heating oil.
Excessive rules can raise costs and make it harder for our
refineries to compete and stay in business. Policies--such as those
embraced by the current administration over the past three years--that
limit crude oil production in the United States or prevent ready
supplies from being imported from Canada put upward pressure on crude
oil prices that eventually affect refineries and those who consume the
gasoline, diesel fuel, and other products they make.
That's why we have been calling on the Administration for a change
of course.
We've urged them to expand access to America's vast oil and natural
gas resources on public lands that could also add supplies to markets
and put downward pressure on prices.
We've urged them to approve the Keystone XL pipeline, which could
deliver from Canada very large additional supplies of crude oil to U.S.
refineries that serve U.S. consumers.
We've called for more sensible, cost-effective regulations that
show a practical regard for potential impacts on industry facilities
and to the people who work there or who depend on the products they
make.
We've asked the EPA in particular to reconsider a virtual blizzard
of new poorly thought-out, unnecessary, and even counterproductive
rules that could threaten our refining sector. For example, refiners
are facing an impending ``blend wall'' where the mandates to blend
ethanol into gasoline will soon exceed our ability to safely use these
fuels in existing vehicles. Moreover, refiners are also required to
blend into the gasoline supply advanced biofuels that do not yet exist,
or pay a fee when they cannot meet the mandates. This policy is
regulatory absurdity, and effectively amounts to a hidden tax on
gasoline manufacturers.
Another example is the so-called Tier 3 rules for further sulfur
reduction in gasoline. EPA has yet to demonstrate any air quality
benefits from reducing sulfur by the amount being considered, and an
analysis by the respected energy consulting firm Baker & O'Brien shows
that implementing the new requirements could increase refinery
greenhouse gas emissions because of the use of energy-intensive hydro
treating equipment to remove sulfur from the gasoline.
The Baker & O'Brien study also found that U.S. refiners could face
$10-17 billion of up-front capital costs and $5-13 billion of recurring
annual operating expenses under several Tier 3 scenarios. That could
translate to increases between 6 cents and 9 cents per gallon in the
cost of manufacturing gasoline. If a vapor pressure reduction
requirement is included, the cost increase could be as much as 25 cents
per gallon, and four to seven U.S. refineries might close because their
owners could not make the required investments to meet the new
requirements. While the sulfur reduction requirement alone, with an
upfront cost of nearly $10 billion and an annual operating cost of $2.4
billion, probably would not lead to refinery closures, these
additional, unjustified costs would only further weaken the
competitiveness of domestic refiners.
Of course, diminished domestic fuel manufacturing capacity would
lead to increased reliance on imported petroleum products from foreign
refineries that may be operating under substantially less stringent
environmental standards than exist in the United States--all for what
would be at best modest incremental environmental benefits here at
home.
Decisions made in Washington, D.C., can have a big impact on
refiners and the fuel market, but so can those made by state and local
governments. For example, the current New York state requirement for
ultra-low sulfur home heating oil is unjustified and may impact the
reliable supply of home heating oil this winter. Fortunately the state
legislature is reconsidering this draconian reduction, and we urge New
York to do so quickly before the requirements go into effect this
summer.
U.S. refineries are under pressure for a combination of reasons,
and increased regulatory costs are certainly a factor. The discourse on
environmental protection in this country should not be cast as being
either for it or against it, which is really a straw man debate, but
instead should focus on making regulation more efficient so it
materially benefits the environment without impeding economic growth
unnecessarily, and avoids hindering other environmental improvements
inadvertently.
Existing refinery regulations and fuel requirements clearly
contribute to a cleaner environment and safer workplace, but,
unnecessary, inefficient, and excessively costly requirements hamper
our ability to provide and distribute fuels to America, while also
employing hundreds of thousands of people and enhancing our national
security. We have already seen some refineries close, at least in part
due to the cumulative impact of environmental controls.
The U.S. oil and natural gas industry has invested over $209
billion since 1990 toward improving the environmental performance of
its products, facilities and operations. In the year 2009 alone, $12.4
billion was spent implementing new technologies, creating cleaner
fuels, and funding ongoing environmental initiatives. 52% of the
industry's environmental expenditures in 2009 targeted air pollution
abatement, meeting or surpassing the requirements of the 1990 Clean Air
Act.
In light of the environmental progress the nation has experienced,
we therefore urge the Administration to take a step back on Tier 3 and
its other proposed rules. We must be sure that new regulatory proposals
are necessary, properly crafted, practical, and fair, to allow U.S.
refiners to remain competitive, preserve good paying refinery jobs, and
ensure our energy security.
America's refineries are a critical part of the nation's industrial
bedrock and a part of the fabric of the communities in which they
operate. They make products that are absolutely indispensable to
America. They are vital to our national security.
Our policy makers must understand this for this vital sector of our
economy to continue serving America the best it can.
Thank you.
__________
Prepared Statement of Thomas D. O'Malley, Chairman, PBF Energy
Chairman Casey, Vice Chairman Brady and Members of the Committee,
thank you for giving me the opportunity to testify at today's hearing
on some of the factors that led to refinery closures in the Northeast.
I'm Tom O'Malley and I serve as chairman of PBF Energy.
PBF Energy owns three refineries with a total capacity of 540 MBD.
Two of the refineries are located in the Northeast, one in Delaware
City, Delaware and the other in Paulsboro, New Jersey. Both of these
refineries were acquired from Valero in 2010, one in a closed down
condition and the other in danger of being closed. Both refineries are
in operation today supplying fuel to the East Coast. Our third refinery
is in Toledo, Ohio and has operated on a continuous basis since
acquisition in March of 2011. We employ at the three refineries,
directly and with contractors, about 2,000 people.
The recent refinery closures that have occurred or are currently
pending are the tip of an iceberg. If the fuel substitutions from 2012
to 2022 mandated under the Energy Independence Act of 2007 are
maintained, we will lose over that time period an additional 10%
minimum of U.S. capacity and the thousands of jobs that this important
industry provides.
The 1,400,000 BBLs per day of renewable fuels over and above the
2011 mandate which includes 10% Ethanol in gasoline will, we believe,
be more expensive than the product coming from refineries. When you
combine this with what can only be described as an aberrant
administration of the 2007 Act, particularly on RINs (Renewable
Identification Numbers), by the EPA, it's easy to come to the
conclusion that the government will drive refining companies out of
business. This extra fuel substitution has no basis in economic reality
and is marginal in terms of environmental improvement. The Act of 2007
may have seemed good policy in 2007. It is not today. If bio/renewable
fuels manufacturers can produce on a superior economic basis to
hydrocarbon fuels, they should do so and take market share the old
fashioned way, better quality and better price without government
mandates or subsidies.
We are on a road that may in fact get us close to independence on
the Energy front. But, it will come from more production of
hydrocarbons and not from taking corn out of the food chain and turning
it into Ethanol or from some dream process that doesn't exist on an
economic basis to make advanced bio-fuel at great cost to the consumer.
The other government action that will close more refineries and
raise the price of fuels is the EPA Plan for Tier 3 Gasoline. The
industry will have to spend billions of dollars to comply; money which
the independents, who now control 60% of our capacity, don't have. Why?
To lower sulfur content from 30 parts per million to ten parts per
million. Under this Tier 3 Plan, the total sulfur removed from the PBF
gasoline production of about 4.5 billion gallons would be less than 1/8
of what one 500 MW coal-fired power plant emits in a year. You have
plants of this size not farfrom here.
Is this good policy in a weak economy, where it helps kill one of
our last heavy industries that provides high paying jobs and meets the
needs of our population?
This hearing is focused on the impact of potential closures of
petroleum refineries serving the Northeast and the effect on prices.
This is not just an issue for the Northeast, but for the entire nation.
In the short, medium and long term, it is my view that these
closures will lead to higher prices. In certain circumstances, we could
see dangerous shortages develop which could lead to severe economic
disruption.
Current Government policy will drive refineries in other areas of
the country out of business and this will further complicate the East
coast situation.
We need to see an adjusted government policy that seeks to maintain
this important strategic manufacturing industry and not a series of
policies and laws that destroy it.
Removing the 2007 law's renewal fuel mandate eliminating the
mandate for 10% ethanol in gasoline and holding the EPA back from an
aggressive stance on Tier 3 fuel specifications would, in my view, lead
to a healthy Delaware Valley refining industry and jobs for the workers
in lhis valuable industry.
This situation is not the fault of either the Democrats or the
Republicans. But, it can only be solved by a Congress that works
together in the interest of all the American people.
Thank you for inviting me and the courtesy of listening to my
views.
__________
Prepared Statement of Michael Greenstone, 3M Professor of Environmental
Economics, Massachusetts Institute of Technology; Director, The
Hamilton Project; and Senior Fellow, The Brookings Institution
Thank you Chairman Casey, Vice Chairman Brady, and members of the
Committee for inviting me here today.
My name is Michael Greenstone, and I am the Director of The
Hamilton Project, the 3M Professor of Environmental Economics at the
Massachusetts Institute of Technology, and a Senior Fellow at the
Brookings Institution. I am honored to have the opportunity to speak
with you today about America's energy choices, as prompted by the
repercussions of potential refinery closures on the East Coast.
i. introduction
Thanks in part to an economic infrastructure heavily dependent on
energy use--roads and highways, ports and railways, broadband and
computer networks, manufacturing plants and shipping facilities--
American workers and businesses are among the most productive in the
world and the most globally integrated. One innovation after another
over the centuries, fueled by cheap and plentiful energy from coal,
oil, and natural gas, has allowed the nation's economy to transition
from one based on agriculture to one based on high-value-added
manufacturing and services aided by computerization. Our standard of
living--among the highest on earth--would simply not be possible
without energy and the systems that have been developed to harness it.
The potential closures of petroleum refineries on the East Coast
have led to speculation that energy prices may rise, possibly
dramatically in some instances. This hearing provides an important
opportunity to consider our energy choices more broadly. Specifically,
it provides a moment to remember that our energy sources often come
bundled with costs that go beyond what we pay at the pump or in our
electricity bills and that sound choices involve recognizing all costs.
ii. the natural gas revolution
The discovery of vast amounts of natural gas shale resources in the
United States and the advancement of drilling technologies that allow
us to develop these resources have dramatically changed our country's
energy situation. Over the course of the last decade, U.S. natural gas
prices have plummeted while petroleum prices have increased
significantly. As you can see from the figure below, on an equal energy
content basis, the price of oil traded at roughly twice the price of
natural gas for roughly twenty-five years. Their prices were roughly
linked because of the opportunities for substitution of one for the
other. This dramatically changed in 2005 when our natural gas
production began to increase, and petroleum now trades at over 6 times
the price of natural gas at the beginning of 2012.
The practically unprecedented change in the ratio of oil to natural
gas prices presents an incredible opportunity for the United States. It
is creating economic opportunities around the country during what
remain tough economic times, reducing the price of energy for many
Americans, changing the mix of electricity sources on the grid in a way
that reduces carbon emissions, and over the longer term offers an
opportunity to strengthen our energy security. Reducing our dependence
on petroleum-based energy sources in favor of natural gas could have
many benefits--including the development of a more diverse set of
options that does not constrain our foreign policy choices and provides
great protection against oil price shocks in the future.\1\ The first
signs of a transition to increased reliance on natural gas in the
transportation sector are beginning to emerge, but this transition will
not proceed optimally or quickly unless we make proactive policy
choices.
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\1\ Gail Cohen, Frederick Joutz, and Prakash Loungani, 2011,
``Measuring energy security: Trends in the diversification of oil and
natural gas supplies,'' Energy Policy 39 (2011) 4860-4869, Elsevier.
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iii. the social costs of energy
One of the challenging features of our energy system is that many
of our energy choices involve what economists call ``externalities.''
That is to say, the choices that individuals make about the production
or consumption of a particular energy source impose costs on others in
the form of shorter lives, higher health care expenses, a changing
climate, and weakened national security. The current energy playing
field is tilted because our individual energy choices are based solely
on the visible costs that appear on electric bills and at the gas pump.
This system masks the full or social costs arising from those energy
choices.
The social cost of energy includes the price we pay at the gas
pump--known as the ``private costs''--plus the less obvious impact of
energy use on health, the environment, and national security.
Economists refer to these additional damages as negative externalities,
or ``external costs.''
The dramatic differences in the private and social costs of
different energy sources--seen in the figure below, which adds on the
external costs associated with each electricity source--illustrate how
the low-private-cost energy sources on which we rely often come with
high external costs.
For example before accounting for external costs, a coal plant is a
competitively priced way to produce electricity. But the costs of coal
increase dramatically when the full costs of production are included.
Specifically, the social cost per kilowatt hour of energy for existing
coal plants is more than double the private cost--8.8 cents compared to
3.2 cents. In contrast, the private cost of a kwh of electricity from a
new natural gas plant is 4.1 cents and the full or social cost is 5.2
cents. These calculations are from a recent Hamilton Project paper and
are based on the National Academy of Science's estimates of the non-
carbon (primarily health) costs from producing a kwh of the various
energy sources and the United States Government's estimates of the
damages from climate change due to the release of greenhouse gases.\2\
---------------------------------------------------------------------------
\2\ Michael Greenstone and Adam Looney, ``A Strategy for America's
Energy Future: Illuminating Energy's Full Costs,'' The Hamilton Project
strategy paper, Brookings Institution, May 2011, http://
www.hamiltonproject.org/\1/2\les/downloads_and_links/
05_energy_greenstone_looney.pdf; Michael Greenstone and Adam Looney,
``Paying Too Much for Energy? The True Costs of Our Energy Choices,''
Daedalus, Spring 2012, Vol. 141, No. 2: 10-30; National Academy of
Sciences (NAS). 2010. Hidden Costs of Energy. National Academies Press.
Washington, DC. 154; Interagency Working Group on Social Cost of
Carbon, United States Government. 2010 (February). ``Technical Support
Document: Social Cost of Carbon for Regulatory Impact Analysis Under
Executive Order 12866.'' http://www.epa.gov/oms/climate/regulations/
scc-tsd.pdf
---------------------------------------------------------------------------
Once the social costs of all energy sources are accounted for,
natural gas power plants stand out as the least expensive electricity
source today. This outcome reflects the low prices of natural gas due
to the recent dramatic increase in reserves and the fact that the
health and environmental costs associated with natural gas are lower
than for other fossil fuels.\3\
---------------------------------------------------------------------------
\3\ It is critical to underscore that there are important
unresolved questions about the external costs of natural gas drilling,
including its effect on water and air quality and the degree of
fugitive greenhouse gas releases. There are also unquantified external
costs from nuclear and other energy sources. The numbers in this
testimony and the figure should naturally be updated as new information
emerges.
---------------------------------------------------------------------------
Despite the relatively low social costs of natural gas, industry
and consumers have little incentive to change their energy choices
based on comparing social costs. This is because coal and gasoline are
comparatively inexpensive when only their private costs are
considered--their costs to health, the climate, and national security
are obscured or indirect, and so consumers behave as if they were less
costly than they truly are.
Current energy policy tilts the balance in favor of energy sources
that only appear cheap because their prices do not account for their
full costs, although society nevertheless bears the external costs. A
better approach to energy policy would involve a fairer competition
between energy sources that placed them on a level playing field. The
best approach is to price carbon and other pollutants appropriately.
But in the absence of a national policy to price these external costs,
there are still other policy options available. The Hamilton Project is
exploring some of these policy options in research to be released this
June.
iv. an uneven playing field
Increasing our natural gas consumption--or altering our energy
consumption in any manner--is easier said than done, since different
forms of energy are not necessarily competing with one another on an
even playing field. For example, several barriers prevent us from fully
utilizing natural gas in the transportation sector, as an upcoming
Hamilton Project paper by Chris Knittel will discuss.
Some existing U.S. policies aim to correct externalities in energy
use in the transportation sector, but they do not treat natural gas
fairly. For example, the Federal Renewable Fuel Standard as outlined in
the Energy Independence and Security Act of 2007 ensures that
transportation fuels sold in the U.S. contain certain volumes of
renewable fuels, but does nothing to encourage the use of natural gas.
Of course, natural gas is not a renewable fuel, but the stated
rationale behind the Act is to promote energy independence and
security, and to favor clean fuel sources. Use of natural gas would
clearly advance the mission of the Act. Until natural gas is included
in the Renewable Fuel Standard as a Conventional Biofuel, it will be at
a disadvantage to fuels such as ethanol.
Electric vehicles provide another example of natural gas's
comparative disadvantage. Electric vehicles receive much larger
subsidies through income tax credits than do vehicles that run on
compressed natural gas. These two forms of vehicles produce comparable
amounts of greenhouse gas emissions, and fairness would dictate that
both should receive equal subsidies.
There are also issues in infrastructure which require further
analysis. Decades of reliance on gasoline as our main fuel for
transportation have led to the build-out of petroleum-focused
infrastructure. For example, 120,000 gas stations exist in the United
States for vehicle refueling, while there are fewer than 400 public
refueling stations for natural gas. As a result, natural gas vehicles
are prohibitively impractical for most consumers. We find ourselves in
a situation in which the status quo is inherently favored, even if our
energy needs in the short-run may be better served by natural gas and
in the long-run by innovation. Without prejudging the outcome, it would
be appropriate to study whether some targeted subsidies for the
construction of natural gas refueling stations are justified.
v. conclusions
I will conclude by bringing this back to the subject of today's
hearing. Periodically, the energy sector shows up in the headlines--
most often this is due to price spikes, like those that some project
would follow the potential closure of petroleum refineries in the
Northeast or due to environmental damages associated with energy
production or consumption. Our current energy policies encourage these
problems, rather than discourage them, by failing to allow all energy
sources to compete on a level playing field.
I respectfully make the following recommendations that aim to
correct this core problem with our energy system:
First, the federal government should price the external
costs, that is the health, environmental, and security costs,
associated with the production and consumption of energy. This reform
would allow all energy sources to compete on a level playing field.
Second if it is infeasible to fully price these external
costs, then a forthcoming Hamilton Project paper makes a compelling
case for putting natural gas on equal footing with renewable fuels
under the Federal Renewable Fuel Standard and by providing equal
subsidies to electric vehicles and vehicles that run on compressed
natural gas.
I would like to thank the entire committee once again for inviting
me to participate in this discussion. I will gladly respond to any
questions.
__________
Prepared Statement of Congresswoman Donna Christensen
Good afternoon Chairman Casey and Members of the Joint Committee:
Thank you for the opportunity to submit remarks to be included in
the official record of this very important hearing. As we all are
acutely aware every time we stop at a gas station, or receive our
electric bills in the mail, the ongoing energy crisis has been and will
be regarded as one of the most defining issues of our time.
With the domino like closing and idling of refineries that supply
fuel to the Northeast happening far too frequently, it is very fitting
that we come together to discuss gas prices in the region and the
resulting potential impact on the American consumer due to the loss of
refining capacity.
Being the Congressional Representative of the U.S. Virgin Islands,
which served as home to what was the western hemisphere's third largest
oil refinery--it is imperative that I lend my voice, and the voice of
my constituents to the discussion being had today. They are also
represented in the audience today by, Ira Hobson and Oswin Newton, two
members of the Steelworkers who are among the recently laid-off
workers.
Prior to its shut down of operations in February of 2012, the
HOVENSA oil refinery exported more than half of its output to the East
Coast and produced approximately 350,000 barrels per day of refined
product. At its height, HOVENSA produced more than 500,000 barrels per
day with \2/3\ of it going to the east coast, which included jet fuel
and other refined products.
Before it closed its doors, it had begun to export to other
markets, cutting its exports to the Northeast to 55% percent. Though
the impact of HOVENSA's closing is only beginning to be seen, we can be
assured that American consumers from New Jersey to St. Croix, St.
Thomas or St. John will have an adverse lasting impact for years to
come.
It has been suggested that environmental and health protections are
to blame for recent refinery closures in the United States and its
territories. Speaker John Boehner also has repeated claims that [quote]
``extremely challenging regulations'' for U.S. refineries are causing
gasoline prices to rise.
The truth is that the recent refinery closures were not driven by
environmental protections. And they certainly were not caused by
regulations that haven't even been proposed. The truth is that recent
decisions to close or sell refineries along the East Coast are based on
market factors such as oil prices, consumer demand, and competition.
When it announced the refinery closure, the company stated very
clearly that the closure was due to $1.3 billion in economic losses
[quote] ``caused primarily by weakness in demand for refined petroleum
products due to the global economic slowdown and the addition of new
refining capacity in emerging markets.''
The company also noted that as an oil-fired refiner, it was at a
competitive disadvantage with other mainland refiners that use cheap
natural gas to power their facilities.
The company's CEO testified before the 29th Legislature of the
Virgin Islands and reiterated that poor market conditions, including a
drop in demand for the refinery's petroleum products, had put it on a
path to bankruptcy. He also dismissed suggestions that an EPA order to
install modern pollution controls was a factor in the company's
decision to close the refinery.
The Pennsylvania refineries also have faced challenging market
conditions. They process the most expensive type of crude oil. Demand
for their products has fallen, and excess capacity has squeezed their
profit margins.
Elsewhere in the United States, refineries are thriving. In 2011,
U.S. refining capacity reached 17.7 million barrels per day, the
highest level in at least 25 years. In particular, Gulf Coast
refineries have been able to process cheaper sources of crude compared
to the rest of the country and maximize production. As a result,
several refineries in the Gulf Coast are actually expanding their
capacity.
Given that the U.S. Virgin Islands being such a small community,
the impact of HOVENSA's recent closing has already begun to reverberate
throughout the entire community--and regionally as well. With over
2,000 jobs lost due to the shut down, businesses that rely on HOVENSA,
their suppliers, hotels and restaurants and even some of our private
schools are wondering how they are going to keep their doors open. This
coupled with the ongoing recession, couldn't have come at a worse time
with the local government having had to cut salaries, announce layoffs
and deal with the impact of cutbacks in federal spending.
In addition to that other concerns remain. Our neighbors in Puerto
Rico remain concerned about where they will be able to secure jet fuel
that was once originally supplied by HOVENSA. While we have worked it
out to some degree, at one point, there was a threat that a local
business was in jeopardy of losing a contract with the Department of
Defense due to uncertainty regarding the ability for Hurricane Hunters
and other DOD assets to be able to refuel on St. Croix. Those two
examples alone reflect the anxiety and concern regarding who will be
supplying the Virgin Islands in place of HOVENSA and at what price, but
of course it extends to our gas stations and the consumers.
With 25% of our population below the national poverty level, and
our cost of living 17% higher than the national average and with energy
cost rates 4 times the national average, the price of fuel in the
future dominates conversations every single day in my district. HOVENSA
has recently agreed to continue to supply fuel until the end of the
calendar year (they were originally going to stop supplying at the end
of June 2012), but before that time the Virgin Islands Water and Power
Authority (VIWAPA) will again have to tender to buy more than 2 million
barrels of petroleum for its power generating facilities. The response
to their recent request for proposals to supply was poor, but before
the end of the year a supplier will have to be in place.
The majority of the community remains doubtful that there stands a
chance that our already burdensome cost of energy per kilowatt hour at
.43 for residential and .45 for commercial has a chance of being
reduced, once transportations costs of getting the fuel to the Virgin
Islands is factored into the price that consumers pay.
And so while the focus of this hearing is on the impact of the
closures on the Northeast, it is important to bring to the joint
committee's attention and concern that in addition to the direct
economic impact of the loss of jobs, scholarships for the children of
their managerial employees, and the purchasing of supplies from the
local companies, as well as the loss of value to those and other
businesses, the closure of HOVENSA not only affects consumer prices for
gasoline and other petroleum products in the Northeastern states, but
has a severe impact in the U.S. Virgin Islands as well.
The Committee is also considering natural gas as an alternative
fuel. It is clear to me that not having it available was a major factor
in HOVENSA's closing, but our utility (VIWAPA) is also compelled to
find a way to replace diesel with natural gas to lower the costs to
consumers and to burn a clean fuel. Barriers include transportation and
storage of LNG and our small economy of scale.
As the Committee and the Congress go on to determine what the
response will be, and what remedies will be applied please ensure that
they will include the entire area of impact which includes the U.S.
Virgin Islands.
__________
Prepared Statement of the Honorable John P. de Jongh, Jr., Governor of
the U.S. Virgin Islands
Chairman Casey and distinguished Members of the Joint Economic
Committee, thank you for the opportunity to participate in this
important hearing and to provide the views of the Government of the
U.S. Virgin Islands on the macro economic impact of recent refinery
closures on the Northeast. As you know, the U.S. Virgin Islands has
been adapting to the sudden closure of one of the largest refineries in
the Atlantic Basin, and it is encouraging to the people of the U.S.
Virgin Islands to know that this Committee is concerned with the
broader economic implications of the loss of refining capacity in the
region.
HOVENSA, which is a joint venture between Hess Corporation and
Petroleos de Venezuela, is one of the 10 largest refineries in the
world, located on the island of St. Croix in the U.S. Virgin Islands
(``USVI''). On January 18, 2012, after more than 45 years of
operations, HOVENSA announced plans to shut down the St. Croix refinery
by mid-February. By February 16, 2012, HOVENSA had ceased refining
operations and completed closure of the refinery. Discussions between
HOVENSA and the USVI concerning future plans for the refinery are
ongoing.
Prior to closure, HOVENSA had a refining capacity of over 500,000
barrels per day (bbl/d) and it produced 350,000 bbl/d in 2011. HOVENSA
provided refined oil to meet the needs of the USVI and was an important
source of gasoline, home heating oil and other distillate fuels for the
eastern part of the United States. HOVENSA was also a major supplier of
jet fuel to the United States military.
HOVENSA has traditionally sent most of its product to the East
Coast and has for many years ``play[ed] a significant role in supplying
the Northeast.''\1\ In 2007, the East Coast imported 307,000 bbl/d from
HOVENSA, which was two-thirds of the refinery's output that year. While
total imports had declined somewhat by 2011, when the East Coast
imported 158,000 bbl/d from HOVENSA, imports of gasoline and distillate
were steady and HOVENSA continued to be an important supplier of
gasoline and distillate to the East Coast. In 2011 (through November),
HOVENSA accounted for almost thirty percent of total East Coast
distillate imports (which includes ultra-low sulfur diesel or ULSD) and
thirteen percent of the gasoline imports.\2\
---------------------------------------------------------------------------
\1\ Potential Impacts of Reductions in Refinery Activity on
Northeast Petroleum Product Markets, U.S. Energy Information
Administration, at 8 (Feb. 2012).
\2\ The HOVENSA refinery closure removes an important source of
East Coast Gasoline and distillate supply, U.S. Energy Information
Administration, at 1 (Feb. 23, 2012).
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While retail gasoline prices are often linked to rises in crude oil
prices, refinery closures are further impacting gas prices.\3\ Indeed,
``[w]hen supply is tight with product inventories diminishing relative
to normal levels, product prices can rise, sometimes sharply.''\4\
There is little doubt that HOVENSA's closure has resulted in an
increase in gas prices on the East Coast, as well as in the Virgin
Islands. Immediately following HOVENSA's January 18, 2012 announcement,
gasoline futures rose 2 percent on the New York Mercantile Exchange.\5\
---------------------------------------------------------------------------
\3\ Rising Gasoline Prices 2012, Congressional Research Service
(March 1, 2012); Short-Term Energy and Summer Fuels Outlook, U.S.
Energy Information Administration (Apr. 10, 2012).
\4\ Potential Impacts of Reductions in Refinery Activity on
Northeast Petroleum Product Markets, U.S. Energy Information
Administration, at 21 (Feb. 2012).
\5\ Refinery Closing Threatens Virgin Islands' Debt, Employment,
Bloomberg (Feb. 9, 2012).
---------------------------------------------------------------------------
As was noted in a recent study by the U.S. Energy Information
Administration, ``[r]efinery closures in the U.S. Virgin Islands and
the Philadelphia area are likely to affect product distribution
arrangements along the entire East Coast. With the HOVENSA shutdown,
both the Lower Atlantic and New York Harbor lose a major source of
supply.''\6\ As a result, there are additional supply needs throughout
the Northeast. But the lost volumes not only disrupt the supply chain,
they also create logistical problems as those volumes need to be
replenished from alternate sources, which face problems bringing supply
to the East Coast. Specifically, there is difficulty in moving product
from the Gulf Coast to the Northeast because the pipeline that delivers
product is at or near capacity and shipments from the Gulf Coast to the
Northeast are subject to the Jones Act. By contrast, shipments to U.S.
ports from the USVI are exempt from Jones Act requirements and thus
such obstacles have not been a concern for imports from the USVI.
---------------------------------------------------------------------------
\6\ Potential Impacts of Reductions in Refinery Activity on
Northeast Petroleum Product Markets, U.S. Energy Information
Administration, at 24 (Feb. 2012).
---------------------------------------------------------------------------
The U.S. Energy Information Administration predicts that as a
result of the combined closures of HOVENSA and the Philadelphia
refineries, ``[t]he industry may face significant logistical challenges
in the Northeast for a year or more, as infrastructure changes will be
necessary to accommodate replacement product flows.''\7\
---------------------------------------------------------------------------
\7\ Id. at 3.
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It should come as no surprise, then, that the East Coast has been
particularly affected by rising gas prices experienced throughout the
United States. ``The U.S. average retail price of regular gasoline
increased almost 7 cents to $3.59 per gallon as of February 20, 2012,
about 40 cents per gallon higher than last year at this time. Prices
were up across all regions . . .. The East Coast price rose 4.2 cents
to $3.65 per gallon, and had the largest increase compared to a year
ago, at 48 cents.''
Furthermore, it is not only gasoline prices that have been affected
by refinery closures. Prices for distillate fuel, primarily ULSD, are
expected to rise as well. ``Looking ahead ULSD demand in the Northeast
is expected to increase considerably.''\8\ Use of ULSD for
transportation is increasing. And rising ULSD prices are particularly
problematic in the northeastern United States, where State regulations
in New York, soon to be followed by Massachusetts, New Jersey, Vermont
and Maine, are beginning to require heating oil to meet the low sulfur
levels found only in ULSD. As with gasoline, providing sufficient ULSD
``volume to the Northeast will be hampered by logistical constraints.
With the [Gulf Coast] pipeline running near capacity, moving the needed
product to the Northeast with require Jones Act tankers, which may be
in short supply.''\9\
---------------------------------------------------------------------------
\8\ Id. at 9.
\9\ Id. at 12.
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As noted above, the USVI supplied thirty percent of the East
Coast's distillate imports in 2011. With the closure of HOVENSA the
East Coast has lost an important source of ULSD at a time when industry
analysts warn that demand is on the rise and there are limited
possibilities for replacing the lost volume.
All of this is to say nothing of the catastrophic impact of the
HOVENSA closure on the USVI itself, which has lost not only its largest
employer and taxpayer but also its sole existing source of gasoline and
the fuel oil that powers its electricity and water supplies. The
economic problems triggered by the loss of the Pennsylvania refineries
are magnified many times over in the USVI, which now faces not only
higher fuel prices but also substantial increases in utility prices and
a dramatic loss of public revenue.
I hope this brief letter helps the Committee to understand the
important role the USVI has played in supplying the East Coast with
gasoline and distillate imports and the significant impact the closure
of HOVENSA has had on East Coast supplies.
Please let me know if you have any questions or if my
administration can provide any further information.
__________
Prepared Statement of Denis Stephano, President, United Steelworkers
(USW) Local 10-234, Representing Oil Refinery Workers at the former
ConocoPhillips Co., Trainer, PA
My name is Denis Stephano and I am president of United Steelworkers
(USW) Local 10-234 at the former ConocoPhillips refinery in Trainer,
Pa. Before ConocoPhillips shut down the refinery at the end of January,
my local represented 234 operations and maintenance workers. We worked
alongside an average of 150 contractors and 200 salaried personnel.
On May 1, Delta Air Lines' wholly-owned subsidiary, Monroe Energy
LLC, reached agreement with Phillips 66 to purchase the Trainer, Pa.,
facility. The acquisition is supposed to close in the first half of
2012. Re-opening this refinery will provide jobs for hundreds of former
ConocoPhillips and Sunoco Marcus Hook workers.
Even though the former ConocoPhillips refinery has been sold, its
purpose mainly will be to produce jet fuel. Sunoco's Philadelphia
refinery is still for sale and if it is not bought by the end of August
it will shut down. This is the East Coast's largest refinery with
335,000 barrels-per-day and analysts say that if this capacity is
shuttered oil prices in the Northeast will soar.
The Philadelphia refinery alone accounts for nearly a quarter of
refinery capacity on the East Coast, and the U.S. Energy Information
Administration (EIA) predicts that if it shuts down, ``petroleum
product markets in the Northeast could be significantly impacted.''
East Coast refineries mainly serve the Northeast, supplying about
40 percent of Northeast gasoline sales and 60 percent of distillate
(diesel fuel and heating oil) sales in 2010, according to the EIA.
About half of the supply came from the three Philadelphia-area
refineries. Another supply source for the Northeast was eliminated when
HOVENSA (a joint venture between Hess Corp. and Petroleos de Venezuela)
in February closed its St. Croix refinery (550,000 b/d) in the U.S.
Virgin Islands. This refinery mainly supplied the Northeast with
gasoline and Ultra-Low-Sulfur Diesel (ULSD).
East Coast refining capacity has been steadily declining since
2000. The attached Northeast refinery crude capacity chart shows
regional capacity at 1,780,700 b/d in 2000 and it plunges to 773,200 b/
d in July 2012 if a buyer is not found for the Sunoco Philadelphia
refinery. Western Refining has already shut down and sold the Yorktown,
Va., refinery and it is being demolished and turned into a terminal.
Sunoco's Eagle Point refinery in Westville, N.J., met the same fate.
This situation will result in higher prices at the pump and for
home heating oil and other petroleum products. With the three
Philadelphia-area refineries operating the Northeast can be assured of
a steady supply of gasoline, home heating oil and ultra-low-sulfur
diesel. Take out the Marcus Hook and Philadelphia refineries and the
Northeast becomes subject to fuel supply shortfalls and price spikes
while new infrastructure is being put into place during the next
several years. The EIA says that ``in the longer run, higher prices and
possibly higher price volatility can result from longer supply
chains.''
The EIA says that adequate refining capacity is available outside
of the East Coast to replace the lost capacity, but this makes the
Northeast far more dependent on Gulf Coast refineries and fuel imports
for its gasoline needs. This presents a major logistical problem. The
Colonial Pipeline, which carries most Gulf Coast products to the
Northeast, is running near capacity. It is being expanded but the EIA
says it still will not be able to make up for the entire lost
production from the shutdown of the Philadelphia-area refineries.
The second major logistical problem in getting product from the
Gulf is the small number of Jones Act tankers. The Jones Act requires
that commercial shipments between two U.S. ports must be on U.S.-flag
ships that are constructed in the U.S., wholly owned by U.S. citizens
and staffed with U.S. citizens and U.S. permanent residents. Only 56
such tankers exist and they are usually chartered months in advance,
limiting their short-term availability.
We view the Jones Act as a critical domestic jobs policy enabler
that supports both economic and national security of our shoreline
shipping. The USW is a strong advocate of the Jones Act and is a member
of the AFL-CIO Maritime Trades.
The third major logistical problem is receiving products at ports
and connecting into the product pipelines that originate in the
Philadelphia-area refining complex to serve inland Pennsylvania and
western New York markets. The existing equipment at the ports is
designed to unload crude oil and needs substantial modification to
handle oil products. Plus, there are few pipelines at the ports that
are connected to existing crude oil terminals.
Shutting down the Philadelphia-area and HOVENSA refineries also
makes it difficult for the Northeast to get ULSD fuel. Demand for this
fuel is increasing as states mandate use of it in place of high sulfur
heating oil. New York will be the first Northeast state to require ULSD
in July 2012. By 2018 the states of Maine, Massachusetts, New Jersey
and Vermont will have implemented the ULSD requirement. As the economy
improves more ULSD will be needed because it is a required
transportation fuel. Obtaining ULSD fuel will be a challenge because
the Gulf Coast is the only place to obtain it and the logistical
problems mentioned earlier are likely to cause supply shortfalls and
price spikes. It is not unconceivable that some people in the Northeast
may find themselves having to choose between heating their home and
eating. Others literally could freeze to death in their homes.
Being dependent on the Gulf Coast for petroleum product supplies
also makes the Northeast vulnerable to supply problems arising out of
hurricanes that hit the Gulf region. Refineries in the storm's path are
shut down in anticipation of the hurricane and afterward it can take
several weeks or months to restart the refineries, depending on whether
or not the facilities sustained damage.
For example, Hurricane Katrina made landfall on Aug. 29, 2005 and a
month later 900,000 million b/d of refining capacity remained shut
down. Hurricane Rita made landfall several weeks later in September and
in early October 2.2 million b/d of refining capacity that had been
shuttered by Hurricane Rita remained shut. This meant that, at one
time, roughly one-third of U.S. refining capacity was shut down. The
Colonial Pipeline was also shut down in anticipation of Hurricane Rita.
Afterward, it did not operate at full capacity because of lack of
product from the shutdown refineries and problems with electrical
supply.
Gasoline shortages arose and prices spiked because of these
problems. The Philadelphia-area refineries were operating and could
churn out gasoline, ULSD and jet fuel to make up for some of the loss
from the Gulf Coast. These refineries helped spare the Northeast from
some of the pain at the pump. With these refineries gone the Northeast
is left vulnerable to the whims of Mother Nature--not exactly a
situation that bolsters the region's energy security.
Gas prices in the Northeast would have to be high enough to attract
Gulf Coast oil products, and the Northeast would also be competing for
these products with other countries. These two factors would cause the
price of gasoline in the Northeast to remain high.
Besides obtaining oil products from the Gulf Coast refineries, the
Northeast would increasingly have to depend upon oil product imports
from other countries if the Philadelphia-area refineries are shuttered.
This also would cause gas prices to rise. This is a particular problem
with global tensions running high. Iran has been threatening to shut
the Strait of Hormuz and block oil shipments. One-fifth of the world's
oil trade passes through there. Since a number of European refineries
have been shut down, India and the Far East have been cited as likely
sources of gasoline and other fuel imports. These areas are subject to
terrorist attack and are in less stable parts of the world.
My testimony and the accompanying chart show a disturbing trend by
the oil industry to cease refining, while holding onto these viable
assets as mere storage. While we understand the oil industry and price
fluctuations are global, US energy security and regional economies
should not be held hostage to shareholder profits. Our citizens deserve
better and Congress should investigate these practices.
Thank you for providing me this opportunity to present testimony.