Energy Markets: Increasing Globalization of Petroleum Products
Markets, Tightening Refining Demand and Supply Balance, and
Other Trends Have Implications for U.S. Energy Supply, Prices,
and Price Volatility	 
(20-DEC-07, GAO-08-14).						 
                                                                 
To better understand how changes in domestic and international
petroleum products markets have affected prices, GAO was asked
to evaluate trends in (1) the international trade of petroleum
products, (2) refining capacity and intensity of refining
capacity use internationally and in the United States, (3)
international and domestic crude oil and petroleum product
inventories, and (4) domestic petroleum supply infrastructure.
To address these objectives, we reviewed numerous studies,
evaluated data, and spoke to many industry officials and experts
and agency officials.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-14						        
    ACCNO:   A79149						        
  TITLE:     Energy Markets: Increasing Globalization of
Petroleum Products Markets, Tightening Refining Demand and
Supply Balance, and Other Trends Have Implications for U.S.
Energy Supply, Prices, and Price Volatility							 
     DATE:   12/20/2007 
  SUBJECT:   Crude oil
             Domestic crude oil
             Energy
             Energy demand
             Energy development
             Energy industry
             Petroleum engineering
             Energy management
             Energy planning
             Energy policy
             Energy supplies
             Gasoline
             Petroleum products
             Strategic planning
		
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GAO-08-14



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Report to Congressional Requesters: 

United States Government Accountability Office: 

GAO: 

December 2007: 

Energy Markets: 

Increasing Globalization of Petroleum Products Markets, Tightening 
Refining Demand and Supply Balance, and Other Trends Have Implications 
for U.S. Energy Supply, Prices, and Price Volatility: 

Energy Markets: 

GAO-08-14: 

GAO Highlights: 

Highlights of GAO-08-14, a report to congressional requesters. 

Why GAO Did This Study: 

To better understand how changes in domestic and international 
petroleum products markets have affected prices, GAO was asked to 
evaluate trends in (1) the international trade of petroleum products, 
(2) refining capacity and intensity of refining capacity use 
internationally and in the United States, (3) international and 
domestic crude oil and petroleum product inventories, and (4) domestic 
petroleum supply infrastructure. To address these objectives, we 
reviewed numerous studies, evaluated data, and spoke to many industry 
officials and experts and agency officials. 

What GAO Found: 

International trade in petroleum products has expanded over the past 
two decades, making markets for gasoline and other petroleum products 
increasingly global in nature. Recent plans and mandates in the United 
States and other countries to greatly expand the use of biofuels 
blended with petroleum productsï¿½for example, ethanol blended with 
gasoline and biodiesel blended with petroleum dieselï¿½may have the 
unintended effect of reducing opportunities for trade because blending 
different levels of biofuels with petroleum blending stocks will 
require changes to these blending stocks and thereby reduce their 
fungibility. 

For most of the past 25 years, there has been excess refining capacity 
globally, but this excess has shrunk considerably in recent years as 
demand has increased faster than capacity growth, causing refineries to 
run closer to their production capacity, and contributing to recent 
increases in petroleum product prices, price volatility, and refining 
profits. However, experts say it is unclear whether or for how long the 
current market tightness will continue, in part because of 
uncertainties about how much additional refining capacity will actually 
be built in the face of rising construction costs and initiatives that 
may reduce future demand for petroleum products such as through the 
blending of large volumes of biofuels into the transportation fuels 
markets. 

When measured as average days of consumption, inventories of petroleum 
products and crude oil in the United States indicate a general decline 
over the past 20 years. A number of factors have contributed to this 
decrease in the United States, including reductions in crude oil 
production and the number of refineries as well as efforts to reduce 
inventory holding costs by applying advances in technology. Lower 
operating costs associated with lower inventories may have translated 
into lower consumer prices during normal periods. However, lower than 
normal inventories can lead to higher or more volatile prices in the 
event of supply disruptions or surges in demand. 

The nationï¿½s petroleum product supply infrastructure is constrained in 
key areas and is likely to become increasingly constrained, unless 
timely investments are made. A constrained supply infrastructure can 
exacerbate price effects and price volatility due to a supply 
disruption. However, no central source of data tracks system 
bottlenecks. While there is widespread recognition that a study is 
needed to fully identify the extent of infrastructure inadequacy and 
the impact on prices, to date, no such analysis has been undertaken, 
though such a study was mandated by Congress in 2006 with a June 2008 
deadline. Significant infrastructure expansion plans in the private 
sector could alleviate the stresses. However, a complex permitting and 
siting process involving as many as 11 federal agencies and numerous 
state and local stakeholders has slowed or impeded the expansion and 
construction of new pipelines. Unlike in the case of natural gas 
pipelines, no central federal agency acts to coordinate this permitting 
process. 

What GAO Recommends: 

GAO is making recommendations aimed at improving the functioning of 
petroleum product markets, including that the Secretaries of 
Transportation and Energy coordinate with other agencies to (1) 
encourage more uniform biofuel and petroleum product blending 
practices, (2) conduct a study of infrastructure system adequacy, and 
(3) evaluate the assignment of a lead agency to coordinate permitting 
of infrastructure construction. 

In commenting on the report, the Federal Energy Regulatory Commission 
generally agreed with the reportï¿½s findings and recommendations, while 
the Departments of Energy and Transportation neither fully agreed nor 
disagreed. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.GAO-08-14]. For more information, contact Mark 
Gaffigan at (202) 512-3841, [email protected]. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Petroleum Products Markets Have Become Increasingly Global with Greater 
Trade and Prices Increasingly Linked across Countries: 

Global and Domestic Refining Capacity Have Not Kept Pace with Demand, 
Leading to Tight Demand and Supply Balance and Recently Contributing to 
Higher Petroleum Product Prices: 

Domestic and OECD Inventories of Petroleum Products and Crude Oil Have 
Declined Relative to Demand, with Mixed Effects on Prices and Price 
Volatility: 

U.S. Supply Infrastructure Is Constrained in Key Areas and Likely to 
Become Increasingly Constrained, Thereby Increasing Prices and Price 
Volatility unless Timely Investments Are Made: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Comments from the Department of Energy: 

Appendix III: Comments from the Federal Energy Regulatory Commission: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Figures: 

Figure 1: U.S. Retail Regular Unleaded Gasoline Prices, Annual Average, 
1976 - 2006: 

Figure 2: U.S. Consumption of Petroleum Products, 1965-2006: 

Figure 3: Transport Mode of Petroleum Products in the United States, 
2004: 

Figure 4: Imports and Exports of Gasoline, Kerosene-type Jet Fuel, and 
Diesel Fuel for All OECD Countries, 1984 - 2007: 

Figure 5, U.S. Imports of European Gasoline and Gasoline Blendstocks, 
1993 - 2007: 

Figure 6: Petroleum Product Imports into the United States, 2004-2006: 

Figure 7: Wholesale Gasoline Prices during the 2005 Hurricanes, 2005 - 
2006: 

Figure 8: Refinery Utilization in the World and Selected Countries, 
1980-2006: 

Figure 9: U.S. Crude Oil and Petroleum Product Consumption and Number 
and Capacity of Operable Refineries, 1973 - 2006: 

Figure 10: Refinery Capacity by U.S. Region, 1985-2006: 

Figure 11: U.S. Refinery Distillation Capacity and Capacity of Selected 
Downstream Units, 1982-2006: 

Figure 12: Return on Investment in U.S. and Foreign Refining Compared 
to Other Lines of Business for Major Energy Producers, 1997 - 2005: 

Figure 13: Crude Oil (Excluding Strategic Reserves), Finished Motor 
Gasoline, Kerosene-type Jet Fuel and Diesel Fuel Days Forward Cover in 
the United States, 1984 - 2007: 

Figure 14: Motor Gasoline Days Forward Cover, by OECD Region, 1984- 
2007: 

Figure 15: Crude Oil Days Forward Cover, by OECD Region, 1984 - 2007: 

Abbreviations: 

BP: British Petroleum: 

DOE: Department of Energy: 

DOT: Department of Transportation: 

EIA: Energy Information Administration: 

EPA: Environmental Protection Agency: 

FERC: Federal Energy Regulatory Commission: 

FTC: Federal Trade Commission: 

IEA: International Energy Agency: 

MARAD: U.S. Maritime Administration: 

NYMEX: New York Mercantile Exchange: 

OECD: Organisation for Economic Co-operation and Development: 

SPR: U.S. Strategic Petroleum Reserve: 

United States Government Accountability Office: 

Washington, DC 20548: 

December 20, 2007: 

The Honorable Daniel Inouye: 
Chairman, Committee on Commerce, Science, and Transportation: 
United States Senate: 

The Honorable Maria Cantwell: 
United States Senate: 

In 2003, the price of West Texas Intermediate crude oil, a widely 
watched benchmark crude oil price, averaged about $31 per barrel. By 
2006, the average was about $66 per barrel, and in mid-November, 2007 
the price rose to over $90 per barrel. Wholesale and retail prices of 
petroleum products refined from crude oil, including gasoline, diesel, 
and jet fuel, which normally rise and fall with crude oil prices, also 
generally rose over the period. For example, U.S. retail regular 
gasoline prices--equivalent to wholesale prices plus taxes, marketing 
costs, and retail profit margins--averaged $1.52 per gallon in 2003, 
but by August 2006, they had almost doubled to $3.00 per gallon, and as 
of July 2007, remained relatively high at $2.85 per gallon. Such large 
and sustained increases in gasoline prices have not been seen in the 
United States since the late 1970s and early 1980s, when the start of 
the Iran-Iraq war pushed prices up--even higher than today's prices 
when adjusted for inflation--causing severe economic hardship for many 
Americans and contributing to a global economic recession. While this 
more recent increase in petroleum product prices does not appear to 
have had such far-reaching economic effects, consumers want to know the 
reasons for the large and relatively sudden price increases. Figure 1 
shows retail regular gasoline prices in the United States, in both 
nominal and inflation-adjusted terms during the past 30 years. 

Figure 1: U.S. Retail Regular Unleaded Gasoline Prices, Annual Average, 
1976 - 2006: 

This figure is a combination line graph showing U.S. retail regular 
unleaded prices, annual average between 1976 and 2006. The X axis 
represents year, and the Y axis represents dollars per gallon. One line 
represents nominal price, and the other line represents price adjusted 
for inflation (2006 dollars). 

[See PDF for image] 

Source: GAO analysis of EIA data. 

[End of figure] 

In addition to crude oil prices, a number of factors affect the price 
of petroleum products. As we recently testified before Congress, these 
factors include domestic capacity to refine crude oil into petroleum 
products; inventories of these products; the proliferation of special 
blends of gasoline; the capacity and functioning of the crude oil and 
petroleum product supply infrastructure, which is composed of 
pipelines, barges, tanker vessels, marine terminals, rail, trucking and 
storage tanks; and mergers in the oil industry.[Footnote 1] In 
addition, because the United States imports and exports petroleum 
products, events outside the United States can affect domestic 
petroleum product prices. Imports to or exports from the United States 
typically enter or leave through port facilities on tankers or across 
national borders via pipeline. Our imports of petroleum products come 
from all over the world into ports in the Gulf of Mexico and the east 
and west coasts, and by pipeline from Canada. 

Refineries process crude oil into petroleum products through a variety 
of complicated processes, and a single barrel of crude oil produces a 
varying amount of gasoline, diesel, jet fuel, and other products 
depending on the configuration--or complexity--of the refinery as well 
as the type of crude oil being refined. Refineries can be optimized--or 
"upgraded"--to process different grades of crude oil through the 
addition of specialized refining equipment. U.S. refineries are 
generally optimized to produce large proportions of gasoline to meet 
domestic transportation demand. Cleaner-burning fuels have proliferated 
in response to legislation including the Clean Air Act Amendments of 
1990, leading to additional investments in the refining equipment 
needed to produce the new fuels. 

More recently, a number of European countries, the U.S. federal 
government, and a number of individual states and localities have 
proposed or mandated the use of biofuels--such as ethanol made from 
corn or biodiesel made from soybeans or other crops--partly in an 
effort to reduce greenhouse gas emissions and reduce consumption of 
petroleum products. These mandates call for biofuels to be blended in 
varying proportions with traditional gasoline or diesel. For example, 
U.S. federal biofuel standards call for a minimum proportion and volume 
of biofuels to be sold each year but do not specify how that proportion 
is met. In addition, a number of states and at least one city have 
requirements or plans to require use of biofuels in varying 
proportions, blended with gasoline and diesel. For example: 

* Hawaii, Minnesota, and the city of Portland, Oregon, all currently 
require ethanol to be blended at a 10 percent by volume rate with 
gasoline, although Hawaii only requires this for 85 percent of the 
gasoline sold in the state. 

* Minnesota and Portland, Oregon require 2 and 5 percent biodiesel, 
respectively, to be blended with diesel fuel. Minnesota also requires 
the expansion of ethanol blending to 20 percent by volume by 2013. 

* Four other states--Missouri, Montana, New Mexico, and Oregon--have 
biofuel mandates that will require 10 percent ethanol blended into 
gasoline and/or varying blends of biodiesel: Missouri and Montana have 
no mandated plans for biodiesel; New Mexico calls for 5 percent 
biodiesel blending and Oregon for 2 percent. 

* Other states have "flexible standards." For example, Iowa provides 
tax credits if at least 10 percent of the fuels used by 2009 are 
renewable, with the threshold rising to 23 percent in 2018. Yet this 
can be achieved in a flexible way, using a blend consisting of 85 
percent ethanol and 15 percent gasoline, while other gasoline would be 
blended with less or no ethanol at all. Louisiana will require both 
ethanol and biodiesel to be blended at 2 percent, but only when state 
production reaches certain levels and prices of ethanol and biodiesel 
are sufficiently low. Finally, Washington will require that at least 2 
percent of diesel sold be biodiesel by November 30, 2008, or when a 
determination is made that state biodiesel production can meet the 2 
percent requirement. 

Automakers and refiners told us that these varying biofuel blends will 
require changes to the gasoline and diesel blendstocks--the fuels that 
will be mixed with the ethanol or biodiesel--to maintain engine 
performance and emissions requirements. The production of these new 
blends may also require further refinery changes as well as changes to 
automobile engines. Automakers also told us that in addition to 
increasing the costs of production, changing engines to be able to meet 
performance and emissions standards using a wide mix of biofuel blends 
would also entail potential losses in fuel efficiency. 

From refineries, petroleum products are distributed through an 
extensive supply infrastructure composed of pipelines, barges, tanker 
vessels, marine terminals, rail roads, trucks, and storage tanks. 
Pipelines are generally the cheapest domestic mode for transporting 
crude oil and petroleum products. Crude oil and petroleum products are 
transported in separate pipelines, and while different types and 
specifications of petroleum products are shipped in the same pipelines, 
they must be kept separate during transport and storage in order to 
maintain the specific desirable performance and emissions 
characteristics of these different fuels. Crude oil pipelines connect 
several large refining centers to crude oil sources, and petroleum 
product pipelines connect these refineries to population centers all 
over the country. Trucks and rail have generally distributed only a 
small fraction of petroleum products to wholesale terminals. However, 
they are being increasingly utilized to move ethanol to locations near 
final demand centers where the ethanol is blended with gasoline. This 
is because existing pipelines cannot currently accommodate ethanol due 
to an insufficient collector pipeline network linking ethanol 
refineries with major pipelines, and because ethanol has corrosive and 
other properties that complicate its transport in pipelines that also 
carry petroleum products. 

Refiners, distributors, and marketers of petroleum products maintain 
inventories of crude oil and petroleum products to facilitate smooth 
supply operations and mitigate the effects of supply disruptions. Crude 
oil and petroleum product inventories consist of three levels. Primary 
inventories comprise the crude oil or petroleum products held at 
production sites, refineries, and storage terminals, and in pipelines, 
tankers, barges, and other transportation centers. Secondary 
inventories consist of retail outlets and small storage facilities-- 
those with less than 50,000 barrels of total capacity--that exist 
between the primary distribution system and the end user. Tertiary 
inventories are the petroleum products in the hands of end users, for 
example, in drivers' gasoline tanks. The federal government also 
maintains strategic stocks of crude oil and, in the Northeast, heating 
oil to be released in the event of a major supply shortage. The Energy 
Information Administration (EIA) collects inventory data for the 
primary system. Information about changes in inventory levels can 
inform market participants about underlying demand or supply conditions 
that will influence prices. 

A number of federal agencies have programs and activities related to 
the oversight or monitoring of the refining, distribution, or importing 
of petroleum and petroleum products. For example, the Department of 
Transportation (DOT) oversees crude oil and petroleum product pipelines 
and monitors their operations to ensure public safety. The Federal 
Energy Regulatory Commission (FERC) regulates the "tariffs"--or rates 
and conditions--under which interstate crude oil and petroleum product 
pipelines operate, while individual states have oversight over 
intrastate pipelines within their borders. EIA collects data from 
refiners and others about shipments of crude oil and petroleum products 
by pipeline and barge between regions of the United States. In 
addition, a number of federal and state agencies and other local and 
private entities become involved in approving new supply infrastructure 
projects. For example, the approval to build or repair a pipeline could 
involve DOT's Pipeline and Hazardous Materials Safety Administration, 
the Environmental Protection Agency, Bureau of Land Management (if 
pipelines cross federal lands), Army Corps of Engineers, U.S. Fish and 
Wildlife Service, as well as other federal agencies, and state and 
local stakeholders. Legislation in 2002 mandated the formation of an 
interagency committee to help expedite pipeline review and permitting 
processes for pipeline repairs. That committee is composed of 11 
federal entities. For construction of interstate natural gas pipelines, 
the Federal Energy Regulatory Commission takes a lead role in 
coordinating the permitting process across the relevant federal 
agencies and can convey the right of eminent domain to builders of 
natural gas pipelines to resolve disputes with owners of land needed to 
build a pipeline.[Footnote 2] However, no such federal coordinating 
authority or power of eminent domain exists for construction and 
expansion of new interstate petroleum product or crude oil pipelines. 

To better understand changes in domestic and international markets for 
petroleum products and the implications of these changes for recent 
price increases, you asked us to evaluate trends and effects on 
petroleum product prices in (1) international trade of petroleum 
products; (2) refining capacity and intensity of refining capacity use 
internationally and in the United States; (3) international and 
domestic crude oil and petroleum product inventories; and (4) domestic 
crude oil and petroleum product supply infrastructure, particularly 
pipelines and marine transportation. 

To evaluate trends in the international trade of crude oil and 
petroleum products, we analyzed data from EIA and the International 
Energy Association (IEA) and spoke with numerous government agency and 
oil company officials and industry experts. To assess trends in 
refining capacity, we evaluated IEA, EIA, and Oil and Gas Journal data, 
and spoke with numerous industry experts. To evaluate trends in 
inventories of crude oil and petroleum products, we reviewed data from 
EIA and IEA on inventories and demand to analyze international, U.S. 
national, and regional inventories. We analyzed New York Mercantile 
Exchange (NYMEX) and other futures market data, as well as EIA data, 
and asked experts about the effects of these futures prices for crude 
oil on inventory holding decisions. To evaluate trends in supply 
infrastructure for crude oil and petroleum products, we collected and 
analyzed available data on the pipeline and marine infrastructure 
system, capacity, throughputs, and constraints. We examined reports and 
data from supply disruption case studies to examine those cases' impact 
on prices and price volatility. We spoke with numerous government 
agency and pipeline company officials and industry experts. This report 
focuses on long-term trends in the industry, rather than recent events 
that have influenced prices of gasoline and other petroleum products. 
GAO currently has ongoing work looking at such recent trends as 
refinery outages through the spring of 2007 and mergers in the industry 
since 2000. 

This report uses data from domestic and international wholesale 
petroleum products and crude oil markets and domestic retail markets. 
In contrast to retail prices, wholesale prices do not include taxes, 
distribution and marketing expenses, and profits. In every case for the 
data used in this report, we assessed and determined that the data were 
sufficiently reliable for our purposes. A more detailed description of 
the scope and methodology of our review is presented in appendix I. We 
performed our work from August 2006 through September 2007 in 
accordance with generally accepted government auditing standards. 

Results in Brief: 

International trade in petroleum products has expanded significantly 
over the past two decades, making markets for gasoline and other 
petroleum products increasingly global in nature. This trend has been 
particularly important for the United States; while in 1970 the United 
States was largely self-sufficient in gasoline, we now import over 10 
percent of our annual gasoline consumption. Having access to more 
sources of supply can benefit the United States in the event of 
domestic supply disruptions. For example, the benefit of such 
flexibility in sources of supply helped U.S. marketers and retail 
sellers obtain gasoline and other petroleum products in the aftermath 
of Hurricanes Katrina and Rita, when imports of gasoline to the United 
States increased to fill the void left by damaged or shut-down domestic 
refineries and pipelines. However, the fact that petroleum product 
markets are international means that supply disruptions or unexpected 
increases in demand anywhere in the world can influence U.S. prices. 
Our analysis of wholesale prices in the United States, Europe, and Asia 
shows that prices in geographically dispersed markets rose 
significantly following Hurricanes Katrina and Rita, indicating that 
prices in these markets are linked to some extent. We also evaluated 
petroleum product import data and found that products came from a wider 
range of countries during this period, again indicating that products 
move in response to price signals globally. Recent plans and mandates 
in the United States and other countries to greatly expand the use of 
biofuels blended with petroleum products--for example, ethanol blended 
with gasoline and biodiesel blended with petroleum diesel--may have the 
unintended effect of reducing opportunities for trade because blending 
different levels of biofuels with petroleum blending stocks will 
require changes to these blending stocks and thereby reduce their 
fungibility. For example, if European countries adopt widely different 
blending levels biofuels in gasoline and diesel products as current 
plans call for, the refineries serving these countries will have to 
alter petroleum blending stocks for those blending levels, and this 
could make the blending stocks themselves less tradable across 
countries. 

For most of the past 25 years, there has been excess refining capacity 
globally, but this excess capacity has shrunk considerably in recent 
years as demand has increased faster than capacity growth, causing 
refineries to run closer to their production capacity, and, along with 
rising crude oil prices, contributing to recent increases in petroleum 
product prices and price volatility. Demand for petroleum products has 
grown more quickly than has refinery capacity for much of the past 25 
years, in large part because excess refining capacity historically 
caused profitability of the refining sector to be low compared to that 
of many other industries. More recently, this tightening of the balance 
between supply and demand for petroleum products has, along with higher 
crude oil prices and other factors, contributed to increased petroleum 
product prices and higher oil industry profits, and could contribute to 
greater price volatility. Recently high petroleum product prices and 
increased profits over those seen during the 1990s in the refining 
industry have spurred new refinery capacity investments in the United 
States and internationally. However, experts say it is unclear whether 
or for how long the current market tightness will continue, in part 
because of uncertainties about how much additional refining capacity 
will actually be built in the face of rising construction costs, and 
initiatives that may reduce future demand for petroleum products such 
as through the blending of large volumes of biofuels into the 
transportation fuels markets in many countries. The absence of national 
standards for blending biofuels with gasoline and diesel could also 
increase the number of gasoline and diesel blending stocks refiners 
have to make, which could require additional refining investment to 
make those blends that could crowd out investment in refining capacity 
expansions. 

When measured as average days of consumption, long-term trends in 
inventories of petroleum products and crude oil in the United States 
indicate a general decline over the past 20 years. Similarly, gasoline 
and crude oil inventories in the Organisation for Economic Co-operation 
and Development (OECD) countries, excluding the United States, have 
also generally fallen over the same period.[Footnote 3] Inventories, as 
measured by EIA IEA, and others, have some limitations as a measure of 
what is available to meet demand in the event of a supply shortfall, in 
part because the United States has imported an increasing share of its 
gasoline over the period during which inventories have fallen, and as 
such, the domestic inventory data do not account for large volumes of 
these products on the water or in tankers from foreign sources that are 
destined for the U.S. market or in storage terminals at foreign ports 
serving this trade in gasoline. A number of factors have contributed to 
the long-term decrease in inventory holdings in the United States, 
including reductions in both domestic crude oil production and the 
number of refineries. Advances in technology and changes in management 
processes also may have contributed to reduced inventories by enabling 
refiners to more closely time the production of supplies to meet 
expected demand. Lower operating costs associated with lower 
inventories may have translated into lower consumer prices during 
normal periods. However, in the short term, because inventories provide 
a smoothing effect against temporary demand and supply fluctuations, 
lower than normal inventories can lead to higher or more volatile 
prices in the event of supply disruptions or surges in demand. 

The nation's petroleum product supply infrastructure is constrained in 
key areas and is likely to become increasingly constrained, unless 
timely investments are made. Industry and federal agency officials 
report a systemic lack of pipeline capacity in the supply 
infrastructure system in key states including Arizona, California, 
Colorado, and Nevada, and note the existing supply infrastructure is 
insufficient to carry the commensurate volumes of petroleum products 
and crude oil needed to meet growing demand there. A constrained supply 
infrastructure can exacerbate price effects and price volatility due to 
a supply disruption. For example, during a pipeline outage in 2003 that 
affected pipeline supplies to Arizona, retail prices of gasoline rose 
by about 45 cents per gallon. However, we were unable to assess the 
full extent of supply infrastructure constraints or the impacts of 
these constraints on prices and price volatility, in large part because 
there is no central source of data that tracks system bottlenecks. In 
2006, DOT put forth a legislative proposal and Congress passed 
legislation that mandated the Secretaries of Energy and Transportation 
to conduct periodic analyses of (1) where unplanned petroleum product 
pipeline outages or insufficient pipeline capacity increase prices and 
(2) whether or not regulation is adequate to minimize the potential for 
unplanned losses of pipeline capacity. While there is widespread 
recognition that such a study is needed to fully identify the extent of 
infrastructure inadequacy and the impact on prices, to date, no such 
analysis has been undertaken. DOT and Department of Energy (DOE) 
officials told us that they were not allocated funds specifically to do 
the mandated analyses and that the agencies have not re-allocated other 
funds for this, although DOE told us it has met with DOT to discuss how 
this work could be approached. However, given that the study has not 
begun, it seems highly unlikely that agencies will be able to meet 
their June 2008 deadline for reporting to Congress. There are many 
private sector plans to expand the supply infrastructure, and if 
implemented in a timely fashion, these plans could significantly 
alleviate the stresses on the system. However, a complex permitting and 
siting process involving as many as 11 federal agencies and numerous 
state and local stakeholders has slowed or impeded the expansion and 
construction of new pipelines. The permitting process for building 
natural gas pipeline infrastructure has been made easier by the 
designation of FERC as a lead federal agency to streamline permitting 
for interstate natural gas pipeline expansion, but no such lead federal 
agency exists to facilitate permitting of crude oil or petroleum 
product pipeline construction or upgrading. 

GAO is making recommendations aimed at improving the functioning of 
petroleum product markets, including that the Secretaries of 
Transportation and Energy coordinate with other relevant agencies to 
(1) encourage uniform biofuel and petroleum product blending practices, 
(2) conduct a study of infrastructure system adequacy, and (3) evaluate 
the feasibility of assigning a lead federal agency to coordinate the 
permitting of infrastructure construction. In commenting on the report, 
the Federal Energy Regulatory Commission generally agreed with the 
report's findings and recommendations, while the Departments of Energy 
and Transportation neither fully agreed nor disagreed. 

Background: 

The United States is the largest consumer of crude oil and petroleum 
products of all nations, though demand for crude oil is growing faster 
globally, led by growth in developing countries such as China and 
India. When processed, crude oil is refined to produce petroleum 
products such as gasoline, diesel, and jet fuel, which have been 
instrumental in providing the nation with affordable fuel for 
automobiles, trucks, airplanes, and other forms of transportation and 
heating in some parts of the country. The petroleum industry consists 
of three main segments: the exploration and production segment 
(upstream); the refining and marketing segment (downstream); and a 
third segment typically referred to as the midstream, which consists of 
the infrastructure used to transport crude oil and petroleum products. 
Several U.S. agencies regulate and monitor the downstream and midstream 
oil industry and petroleum product markets. 

The United States Is the Largest Consumer of Crude Oil and Petroleum 
Products, but Global Demand Has Grown Significantly in Recent Years: 

While the United States is the largest consumer of crude oil and 
petroleum products, global demand for crude oil and petroleum products 
is growing at a faster pace than U.S. demand, driven by growing 
consumption of crude oil and certain petroleum products in developing 
countries such as China and India. In 2006, the United States' share of 
world oil consumption was approximately 25 percent. The EIA projects in 
its reference, or "baseline," scenario that world oil consumption will 
continue to grow and will reach 118 million barrels per day in 2030. 
About 43 percent of this growth will come from non-OECD countries, 
particularly China and India, but the United States will remain the 
world's largest consumer. Under the assumptions of EIA's reference case 
scenario, U.S. demand for oil is projected to increase by 30 percent 
between 2005 and 2030--from about 21 million barrels per day in 2005 to 
about 27 million barrels per day in 2030--compared to 39 percent for 
the entire world. Meanwhile, domestic production of oil has generally 
been in decline for decades, leading to greater reliance on imported 
oil. In 2006, the United States imported about 66 percent of its crude 
oil. 

When processed, crude oil produces petroleum products such as gasoline, 
diesel, and jet fuel, which have been instrumental in providing the 
nation with affordable fuel for automobiles, trucks, airplanes, and 
other forms of transportation, and--in some parts of the country-- 
heating. Overall, demand for petroleum products in the United States 
has generally increased over the last 25 years, as shown in figure 2. 

Figure 2: U.S. Consumption of Petroleum Products, 1965-2006: 

This figure is a shaded line graph showing U.S. consumption of 
petroleum products between 1965 and 2006. The X axis represents the 
year, and the Y axis represents barrels per day (in millions). Each 
section represents a different type of product: fuel oil, diesel and 
other middle distillates, gasoline and other light distillates, and 
"others." 

[See PDF for image] 

Source: GAO analysis of BP Statistical Review of World Energy June 
2007. 

Notes: Other light distillates consists of aviation gasoline and light 
distillate feedstock (LDF). 

Other middle distillates consist of jet and heating kerosene, and gas 
and diesel oils (including marine bunkers). 

Fuel oil includes marine bunkers and crude oil used directly as fuel. 

Other consists of refinery gas, liquid petroleum gas, solvents, 
petroleum coke, lubricants, bitumen, wax, and other petroleum products 
and refinery fuel and loss.  

[End of figure] 

Key Aspects of the Petroleum Product Markets: Refining, Inventories, 
and Infrastructure: 

The petroleum industry consists of three main segments: the exploration 
and production segment (upstream); the refining and marketing segment 
(downstream); and a third segment typically referred to as the 
midstream, which consists of the infrastructure used to transport crude 
oil and petroleum products. This report is mainly concerned with 
certain aspects of the downstream and midstream segments, namely 
refining, inventories, and the pipeline and marine supply 
infrastructure. 

Refining: 

Refineries change crude oil into petroleum products primarily through a 
distillation process that separates the crude oil into different 
fractions based on boiling point ranges. One barrel of crude oil 
produces a varying amount of gasoline, diesel, jet fuel, and other 
petroleum products depending on the configuration-or complexity-of the 
refinery and the type of crude oil that is being refined. Through the 
addition of specialized equipment, refineries can be optimized--or 
"upgraded"--to produce greater proportions of specific types of 
products or to use different grades of crude oil. For example, 
hydrocracking units enable refiners to increase the production of 
lighter fuels including gasoline, diesel fuel, and jet fuel; catalytic 
cracking units increase the production of gasoline; and hydrotreating 
units enable refiners to produce lower-sulfur fuels required by the 
European Union, United States, and many other countries. Changes in 
product specifications, shifts in demand, and environmental regulations 
all have important implications for refineries. For example, the 
regulated shift to unleaded gasoline that began in 1974 caused 
refineries to install equipment to produce high-octane components to 
replace the lost lead. Similarly, in response to environmental 
regulations such as limits on the emissions of certain air pollutants 
refineries have invested in equipment and processes to control such 
emissions. The proliferation of some special gasoline blends, or 
"boutique fuels," has made it more complicated to supply gasoline and 
raised costs, significantly affecting operations at 
refineries.[Footnote 4] Last, to the extent that varying amounts of 
biofuels blended with gasoline and diesel require changes to the 
gasoline and fuel blendstocks, further refinery changes may be required 
to accommodate these blends. Shifting demand for petroleum products, 
such as Europe's declining demand for gasoline and growing consumption 
of diesel, can also cause refiners to invest in different processes to 
produce the mix of products desired by the market. 

In general, the United States' refineries are among the most 
sophisticated in the world, and domestic refineries have generally been 
optimized to produce large proportions of cleaner-burning gasoline to 
meet the huge transportation demand subject to various environmental 
constraints. Historically, U.S. and international refining capacity has 
broadly grown and fallen in response to shifts in demand for petroleum 
products. For example, U.S. and international refining capacity fell 
sharply during the early 1980s in response to falling demand for 
petroleum products, caused in part by high prices of these products and 
worldwide recession. By 1983, demand had fallen so much that almost 30 
percent of U.S. refinery capacity was not being used. Many refineries 
were shut down or idled and refining capacity thus fell. Demand began 
growing again in the United States and internationally around 1982. 

Inventories: 

Inventories of petroleum products and crude oil are maintained by 
refiners, distributors, marketers, and others to mitigate the effects 
of disruptions, and to ensure a continuity of supply to their 
customers. Companies build inventories in preparation for planned 
maintenance and production, refining, and logistical systems. The 
primary inventory system comprises the crude oil or petroleum products 
held at production sites, refineries, and storage sites, and in 
pipelines, tankers, barges, and other transportation centers. Secondary 
inventories exist between the primary distribution system and the end 
user, and consist of retail outlets and small tank farms, which have 
less than 50,000 barrels of total capacity. Tertiary inventories are 
inventories held by consumers, for example, in automobile tanks. EIA 
collects inventory data for the primary system. EIA collects inventory 
data for crude oil and petroleum products held in storage at 
refineries, pipelines, and tank farms, and bulk terminals that can 
store at least 50,000 barrels of petroleum products. EIA also collects 
inventory data for Alaskan crude oil in transit by tanker from the 
terminus of the Alaskan pipeline in Valdez, Alaska, to other U.S. 
ports, as well as oil in the Strategic Petroleum Reserve.[Footnote 5] 

Pipeline and Marine Supply Infrastructure System: 

The supply infrastructure is composed of petroleum product and crude 
oil pipelines, barges, vessels, marine terminals, and storage tanks. 
Trucks and rail also distribute a small fraction of the products--about 
6 and 4 percent respectively--but are being increasingly utilized with 
the rise of biofuels such as ethanol, which existing pipelines cannot 
currently accommodate.[Footnote 6] As displayed in figure 3, about 90 
percent of all petroleum products currently travel by either pipeline 
or marine transport. Because of these two modes dominance, our analysis 
of the nation's supply infrastructure system will be limited to the 
pipeline and the marine transport system. 

Figure 3: Transport Mode of Petroleum Products in the United States, 
2004: 

This figure is a pie chart showing transport mode of petroleum products 
in the United States during 2004. 

60%: Pipelines; 
30%: Maritime; 
6%: Motor carriers; 
4%: Rail. 

[See PDF for image] 

Source: GAO analysis of Bureau of Transportation Statistics data. 

[End of figure] 

Pipelines are generally the least expensive mode for transporting oil 
and most petroleum products.[Footnote 7] Most of the United States 
pipeline infrastructure--approximately 166,000 miles of crude oil and 
petroleum product pipeline--was constructed in the 1950s, 1960s and 
1970s to accommodate the needs of the refining sector and demand 
centers at that time. These main pipelines were built to transport 
petroleum products from the Gulf Coast and Midwestern oil fields--where 
many of the nation's refineries were--to the East Coast, the United 
States' largest consuming region. The first large transmission 
pipelines for petroleum products were constructed during World War II, 
and ran primarily from the Gulf Coast to the Mid-Atlantic states; the 
network expanded significantly until the 1970s. Pipelines feed refinery 
centers and market hubs because the regions with the most supply are 
not the regions with the most demand. Most pipelines are common 
carriers, offering transportation services to anyone who wants them, 
but subject to some regulations. While crude oil and petroleum products 
generally do not travel on the same pipelines, numerous different 
petroleum products are shipped back to back in batches through the same 
pipelines. During this process, some blending of any two adjacent 
batches of petroleum products occurs where the two batches interface. 
This blended material may be simply mixed with the lower- valued 
product--for example, the mix of high-and low-octane gasoline at the 
interface between batches of these commodities would be downgraded, or 
mixed with the low-octane fuel--or, if the blended material is 
incompatible with either of the two petroleum products that interfaced, 
it must be removed and reprocessed into something that can be used. To 
access space on a pipeline, a shipper must ask for the right to use 
capacity by nominating amounts of liquid for service to be received, 
delivered or stored by the pipeline company. Different shippers' 
nominations of common products are often combined by the pipeline in 
order to reduce the number of batches and therefore the amount of 
downgrading or reprocessing of blended products. 

Marine transportation of crude oil and petroleum products accounts for 
nearly one-third of domestic shipments. The marine transport system 
consists primarily of waterways; ports and vessels, including crude oil 
tankers; and product tankers and tank barges. Built to accommodate 
smaller vessels, many of the major ports have had to expand in response 
to increasing marine transport and trade and to accommodate larger 
tanker vessels. 

[See PDF for image] 

[End of figure] 

Several U.S. Agencies Regulate and Monitor the Downstream and Midstream 
Oil Industry and Petroleum Product Markets: 

Several U.S. agencies have jurisdiction over or monitor the U.S. 
downstream oil industry and petroleum product markets: 

* Within DOE, EIA collects and analyzes data on the supply, 
consumption, and prices of crude oil and petroleum products, including 
inventory levels, refining capacity and utilization rates, and product 
movements into and within the United States. DOE's Office of Fossil 
Energy manages the U.S. Strategic Petroleum Reserve (SPR), which is a 
federally maintained stockpile of about 700 million barrels of crude 
for use in the case of a major disruption of oil supplies, as well as 
the Northeast Home Heating Oil Reserve, a component of the SPR that has 
2 million barrels of emergency fuel oil for homes and businesses in the 
Northeast that could be released during heating oil supply 
interruptions or high periods of demand caused by severe winter 
weather. 

* FERC is an independent agency that regulates the transmission of oil 
through interstate pipelines by setting and enforcing pipeline 
"tariffs"--the prices and terms under which shippers send their 
products through the pipelines and the rules governing access to these 
pipelines.[Footnote 8] 

* The Federal Trade Commission (FTC) enforces antitrust and consumer 
protection statutes. For example, in the petroleum industry, the FTC 
generally reviews proposed mergers and approves such mergers only if 
they are deemed not to have anticompetitive effects. 

* DOT's Pipeline and Hazardous Materials Safety Administration 
regulates safety for oil pipelines that transport oil and petroleum 
products. Among other things, it oversees oil pipelines' design, 
maintenance, and operating procedures. DOT's Maritime Administration 
(MARAD) reports to Congress on the status of public ports' supply 
infrastructure needs. 

* The Environmental Protection Agency (EPA) develops and enforces 
regulations that implement environmental laws including the Clean Air 
Act, the Clean Water Act, and the Oil Pollution Act, which aim to 
control the discharge of pollutants into the environment by refiners 
and other industries. EPA also administers the National Environmental 
Policy Act, which requires federal agencies to consider environmental 
impacts of proposed actions. 

In addition, individual foreign countries play regulatory roles and can 
affect trade conditions for products through their individual or 
collective actions. The IEA is an organization established by treaty of 
26 mainly net oil-importing OECD countries to cope with oil supply 
disruptions and coordinate an international response in the case of a 
disruption to the global oil supply. Member countries agree to keep 
significant strategic stocks of crude oil and/or petroleum products to 
be available in the event of a severe supply disruption. IEA also 
maintains a database that provides information on IEA member crude oil 
and petroleum product inventory levels, refining capacity, and 
utilization rates. 

Petroleum Products Markets Have Become Increasingly Global with Greater 
Trade and Prices Increasingly Linked across Countries: 

International trade in petroleum products has expanded significantly 
over the past 20 years, making the markets for gasoline, diesel, and 
jet fuel increasingly global in nature, and providing additional 
gasoline supply options for the United States. This trend has been 
particularly important for the United States, which has seen large 
increases in the volume of imported gasoline. A key impetus for global 
trade in petroleum products has been a structural surplus in production 
of gasoline and deficit in production of diesel in Europe as a result 
of a systematic switch in European countries to diesel-burning 
automobiles. While many experts we spoke with believe that growth in 
international trade of petroleum products will likely continue, they 
identified several factors that may limit or change the patterns of 
trade, including plans and mandates to introduce significant volumes of 
biofuels and the potential expansion of differing fuel specifications 
that a proliferation of biofuel blends would entail. 

International Trade in Petroleum Products Has Expanded Significantly: 

International trade in petroleum products has expanded significantly 
over the past 20 years, making the markets for gasoline, diesel, and 
jet fuel increasingly global in nature. Specifically, our analysis of 
IEA data shows that OECD imports of gasoline, diesel, and jet fuel more 
than doubled between 1984 and 2006, from about 80 million barrels per 
month to over 160 million barrels per month. Similarly, OECD exports 
increased from about 55 million to over 140 million barrels per month 
over the same time period. While OECD exports and imports in these 
products have more than doubled, OECD demand for these products rose by 
less than 40 percent during the same time period. Figure 4 shows the 
increase in OECD imports and exports of gasoline, kerosene-type jet 
fuel, and diesel fuel.[Footnote 9] 

Figure 4: Imports and Exports of Gasoline, Kerosene-type Jet Fuel, and 
Diesel Fuel for All OECD Countries, 1984 - 2007: 

This figure is a line graph showing imports and exports of gasoline, 
kerosene-type jet fuel, and diesel fuel for all OECD countries between 
1984 and 2007. The X axis represents the month and year, and the Y axis 
represents the barrels in millions. One line represents the exports, 
and the other line represents the imports. 

Source: GAO analysis of IEA data. 

[End of figure] 

Trade in gasoline has been particularly important for the United 
States, which has seen large increases in the volume of imported 
gasoline. While in 1970 the United States was largely self-sufficient 
in gasoline, we now import over 10 percent of our annual consumption of 
gasoline and smaller percentages of jet fuel and some other 
products.[Footnote 10] U.S. imports of gasoline and gasoline blending 
components, which accounted for about 31 percent of our imports of 
refined petroleum products in 2005, averaged about 1.1 million barrels 
per day, or more than 10 percent of U.S. daily consumption. According 
to DOE, imports have supplied about half of U.S. gasoline demand growth 
from 1993 to 2005.[Footnote 11] These "total gasoline" imports include 
finished gasoline, which can be sold directly to retail markets, as 
well as gasoline blending components that are combined in the United 
States to make finished gasoline to serve various markets, some of 
which use special, cleaner-burning gasoline blends as part of their 
plans to meet federal air quality requirements. 

A key impetus for global trade in petroleum products has been a 
structural surplus in production of gasoline and a deficit in 
production of diesel in Europe. This surplus of gasoline is largely the 
result of a systematic switch in European countries toward automobiles 
with diesel-powered engines, which are more efficient than gasoline- 
powered engines. European regulators promoted diesel fuel use in Europe 
by taxing diesel at a lower rate, and European demand for diesel fuel- 
powered vehicles rose. The European refining and marketing sector 
responded to this change in demand by importing increasing amounts of 
diesel, and exporting a growing surplus of gasoline to the United 
States. The United States has purchased increasing amounts of gasoline, 
including gasoline blendstocks, from Europe in recent years, as shown 
in figure 5. These imports have generally had a strong seasonal 
component, with higher levels of imports during the peak summer driving 
months and lower imports during the fall and winter. The major 
exception to this seasonality came in the months October 2005 through 
January 2006, when imports surged in response to U.S. shortfalls as a 
result of damage to and shutdowns of refineries and pipelines following 
Hurricanes Katrina and Rita in August and September 2005, respectively. 

Figure 5: U.S. Imports of European Gasoline and Gasoline Blendstocks, 
1993 - 2007: 

This figure is a line graph showing U.S. imports of European gasoline 
and gasoline blendstocks between 1993 and 2007. The X axis represents 
the month and year, and the Y axis represents barrels in millions. One 
line shading represents gasoline blendstocks, and the other represents 
gasoline. 

[See PDF for image] 

Source: GAO analysis of EIA data. 

[End of figure] 

Experts and company representatives told us they believe this 
structural imbalance within the European Union will continue for the 
foreseeable future, and perhaps widen, resulting in more exports of 
European gasoline and blending components to the United States. 
Specifically, company representatives and industry experts told us that 
European refiners are unlikely to significantly expand their refining 
capacity in the near future or reconfigure to produce less gasoline for 
a number of reasons, including the following: 

* The profitability of the U.S. gasoline market acts as a draw for 
surplus gasoline worldwide. Many company representatives told us that 
the United States' continued appetite for gasoline--combined with many 
countries' declining demand--has resulted in most surplus gasoline 
being exported to the United States, and that this trend would likely 
continue in the future. For example, some refining interests in Europe 
told us they had configured their refinery operations to be essentially 
a U.S. "gasoline machine." 

* Construction costs have increased significantly, raising the cost of 
investments in refining capacity or upgrades. For example, some 
refining interests in Europe and elsewhere told us that some planned 
conversion and upgrading of refinery capacity in Europe was on hold, 
because of increased construction costs worldwide. Some of these 
upgrade plans called for enhanced diesel fuel production mainly for the 
European market, as well as surplus gasoline exported to the United 
States. 

* European refiners told us that they are reluctant to make large 
investments necessary to produce significantly more diesel because 
doing so will increase their greenhouse gas emissions. Their concern is 
that as greenhouse gas emissions caps are lowered, companies will be 
required to pay to reduce emissions or buy costly emissions credits. 

EIA and other experts have stated that, at times, imports from Europe 
could be provided more competitively than gasoline from the U.S. Gulf 
Coast and other domestic refineries. In addition, more sources of 
supply can also benefit the United States in the event of domestic 
supply disruptions. For example, the flexibility in sources of supply 
helped U.S. marketers and retail sellers obtain gasoline and other 
petroleum products in the aftermath of Hurricanes Katrina and Rita in 
August and September of 2005, respectively, when a large fraction of 
the nation's refineries and pipelines were temporarily shut down. 
During the 3 months following the hurricanes, imports of gasoline to 
the United States increased by about 30 percent compared to what they 
were during the same months in the previous year, and imports came from 
a number of countries that do not typically sell to the U.S, market. 
Imports of other petroleum products into different regions of the 
country also rose. As illustrated by figure 6, U.S. imports of 
petroleum products surged in response to Hurricanes Katrina and Rita 
compared to levels during the same months of the previous 
year.[Footnote 12] 

Figure 6: Petroleum Product Imports into the United States, 2004-2006: 

This figure is a line graph with two horizontal lines, and two vertical 
lines. One of the horizontal lines represents the years 2005 through 
2006, and the other represents 2004-2005. One vertical line represents 
Hurricane Rita landing on the Gulf coast in September 2005, and the 
other represents Hurricane Katrina landing on the Gulf Coast in August 
2005. The X axis of the graph represents the month, and the Y axis 
represents the barrels (in millions). The whole graph is showing 
petroleum product imports into the United States between 2004 and 2006. 

[See PDF for image] 

Source: GAO analysis of EIA data. 

[End of figure] 

In addition to gasoline, kerosene-type jet fuel imports into the Gulf 
Coast surged to about 3.3 million barrels in October of 2005, compared 
to just 20,000 barrels in October 2004. Some countries that did not 
export significant quantities of this fuel in 2004 exported significant 
quantities following the hurricanes to the United States in 2005. For 
example, France exported 580,000 barrels of kerosene-type jet fuel to 
the United States in October 2005, but nothing in October 2004 or 
October 2006. 

Our analysis of wholesale prices in the United States, Europe, and Asia 
shows that prices in geographically dispersed markets rose 
significantly following Hurricanes Katrina and Rita, indicating that 
prices in these markets are linked to some extent. Because imports 
surged from many countries in response to the resulting supply 
disruptions in the United States, gasoline prices around the world rose 
along with prices in the United States before prices eventually 
returned to pre-hurricane levels. Figure 7 illustrates the price spikes 
that occurred in late August and late September 2005 as a result of the 
severe damage to oil and gas production facilities in the Gulf of 
Mexico and to refineries and pipelines onshore from Hurricanes Katrina 
and Rita. The figure clearly shows that European and, to a lesser 
extent, Asian spot gasoline prices--wholesale prices for gasoline 
traded on a daily basis at major market centers--responded to the 
resulting petroleum product supply disruptions in the United States. 
The additional supplies to U.S. markets from Europe and elsewhere 
reduced prices in the United States, and spot prices everywhere 
declined to pre-hurricane levels before the middle of October. 

Figure 7: Wholesale Gasoline Prices during the 2005 Hurricanes, 2005 - 
2006: 

This figure is a combination line graph showing wholesale gasoline 
prices during the 2005 hurricanes between 2005-2006. There are two 
vertical lines. One represents Hurricane Katrina, and the other 
represents Hurricane Rita. There are multiple lines representing: New 
York, U.S. Gulf, Los Angeles, Rotterdam, and Singapore (leaded). The X 
axis represents the day, and the Y axis represents the cents/gallon. 

[See PDF for image] 

Source: GAO analysis of EIA data. 

Note: Breaks in lines represent days for which no data were recorded. 

[End of figure] 

While experts have stated that the availability of additional sources 
of petroleum product supplies has benefited the United States through 
lower and less volatile prices, and foreign gasoline supplies clearly 
helped reduce prices following Hurricanes Katrina and Rita, the fact 
that petroleum product markets are international means the United 
States will be exposed to supply disruptions or unexpected increases in 
demand anywhere in the world. Further, because some foreign suppliers 
are further away from the U.S. demand centers they serve than the 
relevant domestic supply center, the length of time it takes to get 
additional product to a demand center experiencing a supply shortfall 
may be longer than had the United States had more refining capacity. 
For example, imports of gasoline to the West Coast may come from as far 
away as Asia or the Middle East, and the transport time and therefore 
cost is greater. To the extent that imported gasoline or other 
petroleum products come from far away, the lengthening of the supply 
chain has implications for the ability to respond rapidly to domestic 
supply shortfalls. Specifically, if supplies to relieve a domestic 
regional supply shortfall must come from further away, the price 
increases associated with such shortfalls may be greater and/or last 
longer. In this sense, the West Coast is more vulnerable to price 
increases or volatility than is the Northeast, which can receive 
shipments of gasoline into New York Harbor or elsewhere in the U.S. 
Northeast from Europe, often on voyages of less than a week. 

Growth in International Trade of Petroleum Products Is Expected to 
Continue but Growth in Biofuel use May Limit or Change the Patterns of 
Trade: 

With demand for petroleum products growing globally, experts we spoke 
with believe the trade in petroleum products will continue to increase 
for a number of reasons. For example, global trends toward lower-sulfur 
fuels have resulted in more uniform sulfur specifications, creating 
more trade opportunities. Strong global demand for certain petroleum 
products--especially distillates such as diesel and jet fuel--will 
increase competition for, and facilitate global trade of, these 
petroleum products. For example, since 2005, diesel wholesale prices 
have generally been at a premium compared to the price of gasoline, in 
response to sharp consumer demand, and in the United States, diesel 
demand grew 6.9 percent in 2005, compared to 2.5 percent for gasoline. 
Demand for jet fuel is growing with the increase in air transportation, 
and given that jet fuel has uniform global specifications, jet fuel 
will continue to trade relatively freely based on global price signals. 

While many experts we spoke with believe that growth in international 
trade of petroleum products will likely continue, the planned expansion 
of the use of biofuels, such as ethanol made from corn or other crops, 
and biodiesel made from soybeans or other crops, in the United States 
and many other countries could reduce the growth of demand for 
petroleum products and thereby reduce the opportunity for trade. 

At the U.S. federal level, the EPA administers the Renewable Fuel 
Standard Program, which went into effect in 2007 and requires most U.S. 
gasoline refiners, importers and blenders to sell a minimum portion of 
biofuels each year. Refiners can meet the standard by blending biofuels 
with conventional gasoline or diesel in various proportions. Plans and 
mandates in a number of countries and regions, including the United 
States to introduce larger volumes of biofuels, primarily as additives 
to gasoline or diesel, could displace demand for and trade in petroleum 
products. In addition and as discussed previously in this report, some 
of these biofuel policies mandate that all gasoline or diesel sold in 
an area be blended in specific proportions with biofuels, with 
differences across states in the timing and level of such blending. 
Still other states specify a certain proportion of biofuels to be 
blended but allow flexibility in how they are blended, thereby creating 
the potential for widely different biofuel blended fuels within even a 
single state--for example, the mandated biofuel requirement could be 
met by a uniform proportion of ethanol blended into every gallon of 
gasoline used in the state, or by using a small amount of E85 (fuel 
composed of 85 percent ethanol and 15 percent gasoline components) with 
ethanol blended into the rest of the gasoline, and any combination of 
blends and volumes that meets the overall requirements would also 
satisfy the mandate. States and localities have pursued such policies 
for a variety of reasons, including viewing biofuels as a means to 
boost farm economies by increasing demand for feedstock crops while 
also contributing to a cleaner environment.[Footnote 13] However, the 
current absence of uniform standards for biofuels and varying plans by 
various countries and regions to blend different volumes of biofuels 
with petroleum-based gasoline and diesel could reduce the fungibility 
of these fuels and thereby reduce opportunities for trade. 

Global and Domestic Refining Capacity Have Not Kept Pace with Demand, 
Leading to Tight Demand and Supply Balance and Recently Contributing to 
Higher Petroleum Product Prices: 

For most of the past 25 years, there has been excess refining capacity 
globally, but this excess capacity has been reduced over time as demand 
has increased faster than capacity has grown. Capacity growth has 
lagged behind demand for a number of reasons, including low 
profitability in the refining sector and demands on industry to meet 
changing fuel specifications and reduce emissions of environmental 
pollutants. More recently, unexpectedly rapid growth in demand for 
petroleum products caused refineries to run closer to their production 
capacity. Current market tightness has contributed to higher and more 
volatile prices and increased profits in the refining industry. While 
these higher profits have encouraged increased investments in refining 
capacity, it is unclear whether or for how long the current market 
tightness will continue. This uncertainty is, in part, because rising 
construction costs and uncertain future demand make it difficult to 
estimate how many of the planned refining projects will actually be 
completed and because biofuel initiatives in many countries could 
reduce demand for petroleum products while potentially requiring 
further refining investment to make and keep separate different 
gasoline and diesel specifications to be blended with ethanol and 
biodiesel. 

Demand for Petroleum Products Has Grown More Quickly than Has Refinery 
Capacity, Tightening the Supply and Demand Balance Worldwide: 

For much of the past 25 years, demand for petroleum products in the 
United States and internationally has outpaced growth in refining 
capacity. Demand for petroleum products fell dramatically from 1978 to 
1982, creating significant excess capacity--by 1983, almost 30 percent 
of U.S. and world refining capacity was idle. Demand for petroleum 
products began growing again around 1982, and this demand growth, along 
with the shutting down of some idle refining capacity, began to narrow 
the gap between capacity and demand. Since that time, growth in demand 
for petroleum products has generally exceeded growth in refinery 
capacity, causing refineries to run more intensively to meet demand. 
Figure 8 shows how refinery utilization in the United States and 
internationally, with a few exceptions, including the countries of the 
former Soviet Union, has increased significantly since the early 1980s. 

Figure 8: Refinery Utilization in the World and Selected Countries, 
1980-2006: 

This figure is a combination line graph showing refinery utilization in 
the world and select countries between 1980 and 2006. The X axis 
represents the year, and the Y axis represents the percentage. The 
lines each represent: Asia Pacific, European Union 25 +, Former Soviet 
Union, United States, and the World. 

[See PDF for image] 

Source: GAO analysis of BP Statistical Review of World Energy June 
2007. 

[End of figure] 

Refining capacity in the United States has been growing since 1994 
through expansions at existing refineries. The last major complex 
refinery on a new, or "green field" site in the United States was built 
in the 1970s, and many, mostly smaller, refineries were shut down 
starting in the early 1980s. However, as figure 9 shows, even as the 
number of refineries in the United States fell since 1981, refiners 
have since 1994 generally expanded total capacity at remaining 
facilities. Capacity expanded by an annual average of 192,000 barrels 
per day between 1994 and 2006--more than the average-sized refinery in 
2006, which had a capacity of 116,000 barrels per day. For example, 
ExxonMobil's Baytown refinery grew by about 166,000 barrels per day in 
capacity between 1994 and 2006, more than equivalent to adding a new 
refinery. In this sense, it is potentially misleading to say that no 
new refineries have been built in the United States since the 1970s. 
Instead, experts have said that expansion in the United States has 
centered at existing facilities because such expansion is less 
expensive than building an entirely new refinery at a new, "green 
field" site because of lower construction, permitting, and land 
acquisition costs. Some industry officials we spoke with said that 
construction at a green field site can be about two to three times more 
expensive than expanding capacity at existing sites on a per barrel 
basis. 

Figure 9: U.S. Crude Oil and Petroleum Product Consumption and Number 
and Capacity of Operable Refineries, 1973 - 2006: 

This figure is a combination line graph with multiple bars. The X axis 
represents the year, the left Y axis represents the number of operable 
refineries, and the Y axis on the right represents barrels per day (in 
millions). The lines represent: Capacity, Demand, and Number. 

[See PDF for image] 

Source: GAO analysis of EIA data. 

[End of figure] 

Figure 10: Refinery Capacity by U.S. Region, 1985-2006: 

This figure is a combination bar graph showing refinery capacity by 
U.S. region, between 1985 and 2006. The X axis is the area, and the Y 
axis represents barrels per day (in millions). Each group represents: 
East Coast (PAD District 1), Midwest (PAD District 2), Gulf Coast (PAD 
District 3), Rocky Mountain (PAD District 4), and West Coast (PAD 
District 5). Each individual bar represents the years 1995, 1990, 1995, 
2000, and 2006.  

[See PDF for image] 

Source: GAO analysis of EIA data. 

[End of figure] 

Figure 10 shows how much of the recent growth in refining capacity in 
the United States has been concentrated in the Gulf Coast. This growth 
in capacity in the Gulf Coast is consistent with the view of many 
industry experts we spoke with that the Gulf Coast provides one of the 
most competitive environments for U.S. refiners. Experts cited several 
factors, including ready access to imported crude oil supplies, 
numerous options for shipping product to the rest of the United States 
by pipeline and waterways, and a concentration of highly skilled 
workers. 

U.S. refineries also have invested in equipment to upgrade their 
refineries to be able to produce more high-value products from a wider 
variety of raw inputs. For example, hydrocracking equipment enables 
refiners to adjust the yields of various products, and coking capacity 
allows refiners to process heavier crude oils. Figure 11 shows how the 
capacity of such downstream units, particularly hydrocracking and 
coking, has grown faster than distillation capacity overall. The 
addition of such downstream units does not increase the distillation 
capacity of refineries--the traditional measure of capacity--but 
enables refineries to produce a greater portion of products in high 
demand (such as gasoline, diesel, and jet fuel) and also to process 
more heavy and sour crude inputs. In fact, the proportion of gasoline, 
diesel fuel and jet fuel produced per barrel of crude input in the 
United States has increased from 77 percent in 1993 to 81 percent in 
2005 even as the quality of crude oil inputs used has deteriorated. 

Figure 11: U.S. Refinery Distillation Capacity and Capacity of Selected 
Downstream Units, 1982-2006: 

This figure is a combination line graph. The X axis represents the 
year, and the Y axis represents Index, 1987=100. The lines represent: 
distillation, catalytic cracking, catalytic hydrocracking, coking, and 
desulfurization. 

[See PDF for image] 

Source: GAO analysis of EIA data. 

[End of figure] 

Industry officials and experts we spoke with said that several factors 
have caused refinery capacity to grow more slowly than demand in the 
United States. First, industry officials and experts said that refining 
has been a low-, even negative-return business for much of the past two 
decades, with profits too low to encourage significant expansion. 
Companies in the oil industry overall, which includes upstream oil 
exploration and production activities as well as downstream refining 
and retail marketing, have in general performed better than some 
industries and worse than others. However, according to an analysis by 
Deutsche Bank, cash returns on investment for oil companies in the 
Standard and Poor's 500 index were less than the cost of capital from 
1986 to 2000. In other words, it cost companies more to raise the money 
to invest than those investments earned. Within the oil industry, the 
refining segment has been less profitable than other lines of business 
in the petroleum industry, according to EIA data, as illustrated in 
figure 12. Except for a few years since 1977, returns for U.S. refining 
and marketing operations have been lower than returns in foreign 
refining and marketing and lower than exploration and production. 
Specifically, during the entire period 1977-2005, average return on 
investment for the U.S. refining industry was 7 percent, compared to 9 
percent for foreign refining and slightly over 10 percent for all other 
lines of business. For the integrated oil companies that still control 
a major portion of the nation's refining capacity, U.S. refining must 
compete with foreign refining and upstream investment options for 
capital. The lower returns for U.S. refining can make it harder for 
companies to justify expanding U.S. refining capacity. 

Figure 12: Return on Investment in U.S. and Foreign Refining Compared 
to Other Lines of Business for Major Energy Producers, 1997 - 2005: 

This figure is a line graph with shading showing return on investment 
in U.S. and foreign refining compared to other lines of business for 
major entry producers between 1997 and 2005. The X axis represents the 
year, and the Y axis represents the percentage. One line represents the 
foreign refining and marketing, and the other line represents all other 
lines of business. The shading represents the U.S. refining and 
marketing. 

Source: GAO analysis of EIA data. 

Note: This graphic is based on the performance of major energy 
producers covered by EIA's Financial Reporting System (FRS). These 
companies represented about 81 percent of U.S. refining capacity in 
2005. 

[End of figure] 

Another indication that the refinery industry has long had low 
expectations of profitability is that existing refinery capacity has 
sold very cheaply. U.S. refineries have often sold for significantly 
less than what it would cost to build a new similar refinery. According 
to an analysis by the National Petroleum Council of the value of 
existing refinery purchases between 1998 and 2004, refineries sold for 
about one-fourth to one-third the cost of equivalent new construction. 
The cost of buying an existing refinery was also less than the general 
cost of expanding capacity on an existing refining site, which experts 
indicated could be less than one-half the cost of new construction. 
This suggests that refiners have had low expectations of future returns 
in the U.S. refining market. This also indicates that until recently, a 
refiner looking to expand capacity in the United States may have been 
able to do so more affordably by purchasing an existing refinery. This 
would add to that refiner's capacity, but would not expand domestic 
refinery capacity overall. 

A second reason experts cited for slow domestic refinery capacity 
growth is that more rigorous product specifications; the proliferation 
of special gasoline blends, or "boutique fuels" around the country; and 
environmental controls have all required refineries to invest in 
additional processes in order to meet the specifications and 
regulations, and these investments did not typically add to base 
capacity. Officials we spoke with said that the large investments 
required to reduce harmful air emissions at refineries and meet more 
stringent product specifications drew from the capital that may 
otherwise have been available to invest in expanding capacity. 

A third reason for slow domestic refinery growth, according to some 
industry representatives, is that permitting difficulties have 
discouraged refinery expansions. Refineries are required to obtain 
permits from relevant state and local authorities in order to build or 
expand refinery capacity. These are often difficult to obtain owing to 
regulatory hurdles and public opposition. Other experts suggested that 
permitting adds to the difficulty of expanding capacity but has been a 
less important factor than overall low expectations of returns. DOE 
officials told us that resistance to refinery expansions by nearby 
communities could be a more important factor in discouraging new 
domestic refinery construction or expansions. 

Finally, EIA officials and others pointed to the surplus production of 
gasoline in Europe as a major, more recent, reason domestic refinery 
capacity has not kept up with domestic demand. They stated that Europe 
could at times provide gasoline to the Northeast more competitively 
than some Gulf Coast refiners, and therefore gasoline imported from 
Europe has displaced domestic supplies and discouraged domestic 
refinery expansions. 

More recently, global demand for gasoline, diesel, and jet fuel grew 
particularly quickly around 2004, partly as a result of rapid growth in 
China, where demand surged by over 15 percent. In order to increase 
production and meet this recent surge in demand for petroleum products, 
refiners have had to run their refineries even more intensively-- 
capacity cannot be added quickly because of the long lead times 
involved in designing and constructing a refinery or an expansion 
project. Since 2004, world refinery utilization rates have risen to 
around 86 percent, the highest levels since 1980, when data first 
became available. Experts told us that many refineries have been 
running near their production capacity in order to meet demand. This is 
particularly true in the United States and Europe, where refineries 
have been running at or near 90 percent utilization since the 1990s, 
even though spare capacity still existed worldwide, particularly in the 
countries of the former Soviet Union and to a lesser extent in the Asia 
Pacific region. 

Current Market Tightness Has Contributed to Higher Petroleum Product 
Prices, Higher Price Volatility, and Higher Industry Profits: 

The recent tightening of the balance between supply and demand for 
petroleum products has, along with higher crude oil prices and other 
factors, contributed to increased petroleum product prices and higher 
industry profits, and has contributed to greater price volatility. In 
addition, a tight demand and supply balance means less flexibility in 
industry's response to unanticipated events. For example, at times of 
excess capacity, if a particular refinery were to unexpectedly shut 
down for emergency maintenance, capacity that wasn't being used could 
be brought on line to meet demand. However, when refineries are 
generally running near capacity, there is less excess capacity to call 
on, and what available capacity there is tends to be located farther 
away from demand because the lower-cost and nearer refining capacity 
tends to be used up first. 

An analysis by the FTC illustrated the effects of tight refining 
capacity at the regional level. This analysis compared the impact on 
gasoline prices of two refinery outages in the upper Midwest in the 
spring and summer of 2001 with a major refinery outage in Oklahoma in 
July 2003. Each of the Midwest refinery failures was associated with 
wholesale gasoline price increases of between 30 and 40 cents.[Footnote 
14] By contrast, the Oklahoma refinery failure was found to have little 
effect on gasoline prices in that state. The FTC attributed the 
difference in the price responses to the fact that the upper Midwest 
region lacks sufficient refinery capacity to meet the region's demand, 
while Oklahoma produces significantly more petroleum products than the 
state needs. Therefore, when a major disruption occurs, the upper 
Midwest must rely on supplies from distant refineries, while Oklahoma 
simply exports fewer petroleum products to other states. 

Further, as we have previously reported, the West Coast of the United 
States generally has higher gasoline prices than much of the rest of 
the country.[Footnote 15] Among the reasons for these consistently 
higher gasoline prices are a tight supply and demand balance for 
gasoline, the fact that the region is isolated from other major 
domestic and foreign refining regions, and the adoption in California 
of a unique blend of gasoline that is more costly to make than many 
other blends and that is not routinely produced by many refineries 
outside the West Coast. Prices in the West Coast can rise rapidly in 
response to supply disruptions as a result of these factors. 

Profits in the refining industry have increased significantly since 
2002, in part as a result of sustained market tightness and, in the 
United States, owing to wide price differentials between heavy and 
light crude oils. For example, the difference between crude oil input 
prices and petroleum product prices, a strong indicator of refining 
profits, has increased worldwide, though particularly in the United 
States. In the United States, these wide price spreads have caused 
returns on investments in the refining and marketing segment of the 
petroleum industry to reach record levels in 2004 and 2005, the latest 
data we were able to obtain. In the United States, these higher margins 
are, in part, the result of the ability of U.S. refineries to take 
advantage of low-price, low-quality crude oil inputs. Sophisticated 
U.S. refineries are able to convert large quantities of low-quality 
crude oil inputs into higher-valued products, while refineries in the 
rest of the world do not have such capacity to the same extent. Shifts 
in global crude oil production and demand have contributed to a glut of 
such low-quality oils, lowering their price relative to higher-quality 
crude oils and improving the position of U.S. refineries relative to 
that of their international competitors. 

Increased Profit Margins Have Led to More Investment, but Future Market 
Tightness Will Depend on Several Factors: 

Currently high petroleum product prices and high profits in the 
refining industry have spurred new refinery capacity investments in the 
United States and internationally. Global investment in refining has 
increased in recent years. According to IEA data, capital spending grew 
from $34 billion in 2000 to $51 billion in 2005 and is expected to 
average $60 billion per year between 2006 and 2010. Analysis by IEA of 
plans and projects currently underway worldwide suggest that almost 
10.5 million barrels per day of capacity may be added through 2011. 
This rate of refinery capacity growth is somewhat higher than expected 
demand growth, which is projected to grow by about 9.2 million barrels 
per day by 2011. The majority of this capacity expansion is expected to 
take place overseas, especially in China, India, and the Middle East. 
In the United States, EIA officials have said that announced 
investments through 2011 could add an additional 1 million barrels per 
day to domestic refinery distillation capacity, along with significant 
additions to downstream processing capacity. If realized, these 
domestic and international investments could help alleviate the tight 
balance between refining supply and demand. However, since tight 
refining capacity is just one of a number of factors affecting prices, 
the biggest factor being crude oil prices, even a less tight refining 
market may not bring much price relief at the gasoline pump. 

While recent profits and prices have renewed interest in expanding 
refining capacity, experts said it is unclear whether or for how long 
current refining market tightness will continue. Future refining market 
tightness depends on changes in refining capacity and on changes in the 
demand for petroleum products. Industry officials and experts we spoke 
with said future conditions are highly uncertain for several reasons: 

* It has become much more costly to expand refinery capacity in recent 
years due to rapidly rising construction costs. Various construction 
materials such as iron, steel, and concrete are important in energy 
projects, and their costs have increased significantly. For example, 
while prices for iron and steel fell in the decades prior to 2002, 
prices increased by 9 percent annually between 2002 and 2004, and by 31 
percent from 2004 to 2005. Similarly, industry officials said that many 
decades of low investment levels have led to a small pool of qualified 
project engineers to design and oversee construction and expansion 
projects, causing labor prices to soar. Moreover, the Nelson-Farrar 
refinery construction cost index, which tracks prices for materials 
such as iron and steel, equipment and skilled and unskilled labor, 
shows that costs for refinery investment rose by 17 percent from 2002 
to 2005 in real terms. Industry officials indicated that these cost 
estimates did not capture the full extent to which refinery expansion 
costs have increased. Officials also said that the waiting lists to 
purchase key refinery equipment are getting longer. In the United 
States and in Europe, some planned refining expansions have been 
delayed or canceled, in part because of these rising costs and delays 
in acquiring equipment and skilled labor. 

* Uncertainty about future demand makes refinery investments risky and 
may inhibit investments. The United States is considered a mature 
market, with demand for motor gasoline forecast by EIA to grow by 1.2 
percent annually between 2005 and 2030. Meanwhile, refinery capacity 
has on average expanded by almost 1 percent annually since 1999. Some 
industry officials we spoke with believe that U.S. demand for petroleum 
products will peak in the next decade and then begin to decline, 
implying only a temporary need for additional refining capacity. 
Company representatives told us that various proposals under 
consideration dampen the U.S. refining investment climate. For example, 
the Administration has proposed to reduce U.S. petroleum gasoline 
consumption by 20 percent by 2017 through increased use of biofuels and 
more stringent automobile fuel economy standards. If achieved, this 
could turn the United States from a gasoline importer to a net exporter 
within 10 years; and current refining capacity could meet future demand 
even without expansions that are currently planned. 

* Similar initiatives to blend large volumes of biofuels into the 
transportation fuels markets in other countries could similarly 
displace demand for petroleum products. It is unclear whether such 
initiatives could ease the demand and supply tightness that currently 
exists. On the one hand, reducing demand growth can reduce pressure on 
refinery capacity. On the other hand, reduced expectations of future 
demand can alter the attractiveness of refinery investments, and some 
refiners may respond by cutting back refinery expansion plans. 

* New initiatives to blend biofuels in varying proportions into 
transportation fuels could potentially add to the need for further 
refining investments both to refine and to keep separate new blending 
stocks, possibly absorbing resources that could have been used to 
expand capacity. Automobile industry experts we spoke with agreed that 
each different ethanol blend requires a specific gasoline or diesel 
blend stock in order for the resulting blended fuel to meet performance 
and emissions standards. In other words, the gasoline that is blended 
with ethanol to make E10 (10 percent ethanol) is different than the 
gasoline used to make E85 (85 percent ethanol). The absence of national 
standards for blending biofuels with gasoline and diesel could also 
increase the number of gasoline and diesel blending stocks refiners 
have to make, and could lead to a proliferation of new blendstocks. 
Further, to the extent that new equipment is needed at refineries in 
order to produce, handle, or keep separate these various blendstocks, 
refineries will need to invest in this equipment in order to meet 
various federal, state, and local biofuel mandates and standards. These 
added investments could crowd out resources that could otherwise have 
gone to expanding refinery capacity. 

Domestic and OECD Inventories of Petroleum Products and Crude Oil Have 
Declined Relative to Demand, with Mixed Effects on Prices and Price 
Volatility: 

When measured as average days of consumption, long-term trends in 
inventories of petroleum products and crude oil in the United States 
indicate a general decline over the past 20 years. Similarly, gasoline 
and crude oil inventories in OECD countries excluding the United States 
have also generally fallen over the same period. However, there are 
limitations to inventory data as measured by EIA and IEA, in part 
because these data do not fully match stocks with their intended 
markets; in general petroleum product exporting regions will typically 
have large stocks of these products relative to that region's demand, 
while inventories held in net importing regions will typically be lower 
relative to demand. For example, petroleum products stocks of gasoline 
in Canada, Europe, and the Caribbean that are destined for the United 
States are counted as inventories in those countries but not as 
inventories in the United States. A number of factors have contributed 
to the long-term decrease in inventory holdings in the United States, 
including reductions in domestic crude oil production and in the number 
of refineries as well as advances in technology and management 
processes that allowed for reduced inventories and a concomitant 
reduction in operating costs. Lower operating costs associated with 
lower inventories may have translated into lower consumer prices during 
normal periods. However, in the short term, inventory levels tend to 
fluctuate within a "normal" range, and--since inventories provide a 
smoothing effect against temporary demand and supply fluctuations-- 
lower than normal inventories can lead to higher prices in the event of 
supply disruptions or surges in demand. 

Inventory Levels of Petroleum Products in the United States and Other 
OECD Countries have Generally Fallen over the Past Two Decades: 

Privately held inventories of petroleum products and crude oil in the 
United States have generally fallen over the past two decades, in terms 
of average number of days worth of supply, or "days forward 
cover."[Footnote 16] Specifically, as illustrated in figure 13, days 
forward cover for gasoline in the United States averaged about 30 days 
in 1984 but fell to an average of about 12 days for the first 5 months 
of 2007. Similarly, crude oil days forward cover fell from about 29 to 
about 22 days, and jet fuel and diesel fuel days forward cover also 
fell over the same period. 

Figure 13: Crude Oil (Excluding Strategic Reserves), Finished Motor 
Gasoline, Kerosene-type Jet Fuel and Diesel Fuel Days Forward Cover in 
the United States, 1984 - 2007: 

This figure represents crude oil (excluding strategic reserves), 
finished motor gasoline, kerosene-type jet fuel and diesel fuel days 
forward cover in the United States between 1984 and 2007. The X axis 
represents the year, and the Y axis represents the days forward cover. 

Other OECD countries have also generally seen a reduction in days 
forward cover for motor gasoline. Figure 14 shows the general downward 
trends in gasoline days forward cover for the OECD regions of Europe, 
Pacific, and North America excluding the United States. Specifically, 
European stocks declined from about 50 days in 1984 to about 40 days in 
2001, before increasing to almost 46 days on average for the first 5 
months of 2007. The much larger inventory figure for Europe compared to 
that for the United States reflects the fact that the inventory data 
include strategic stocks of gasoline held by some private 
companies.[Footnote 17] The recent increase in European stocks of 
gasoline coincides with a period in which demand for gasoline fell in 
Europe relative to supply, and exports of gasoline to the United States 
increased a great deal. Figure 14 also shows large reductions in 
gasoline stocks in North America, excluding the United States, from 
about 44 to 18 days forward cover over the same time period, while 
stocks in Pacific OECD countries fell more modestly from 20 to almost 
16 days. 

Figure 14: Motor Gasoline Days Forward Cover, by OECD Region, 1984- 
2007: 

This figure is a combination line graph showing motor gasoline days 
forward cover, by OECD region, between 1984 and 2007. The X axis 
represents the year, and the Y axis represents the days forward cover. 
One line represents North America excluding the United States, one 
represents Pacific, and one represents Europe. 

[See PDF for image] 

Source: GAO analysis of IEA data (annual average of quarterly and 
monthly data). 

[End of figure] 

Crude oil stocks in two of the three other OECD regions, Europe and 
Pacific, decreased over the period, while stocks in North America 
excluding the United States rose significantly, driven in part by 
increases in Canadian oil sands production and the storage and delivery 
infrastructure associated with this increased production. Figure 15 
illustrates these changes in crude oil inventories in days forward 
cover. We do not have inventory data for non-OECD countries. However, 
as with petroleum products, net crude oil exporting countries would be 
expected to have much higher levels of days forward cover for crude oil 
than net importing countries, especially if strategic stocks are 
excluded. 

Figure 15: Crude Oil Days Forward Cover, by OECD Region, 1984 - 2007: 

This figure is a combination line graph showing crude oil days forward 
cover, by OECD region, between 1984 and 2004. The X axis represents the 
year, and the Y axis represents the days forward cover. One line 
represents North America excluding the United States, one represents 
Pacific, and one represents Europe. 

[See PDF for image] 

Source: GAO analysis of IEA data (annual average of quarterly and 
monthly data). 

[End of figure] 

Inventories, as measured by IEA, EIA, and others, have some limitations 
as a measure of what is available to meet demand in the event of a 
supply shortfall. For example, as discussed above, the United States 
has imported an increasing share of its gasoline over the period during 
which inventories have fallen, and as such, the domestic inventory data 
do not account for large volumes of these products on the water in 
tankers from foreign sources that are destined for the U.S. market or 
in storage terminals at foreign ports serving this trade in gasoline. 
Our analysis indicates that about 16 million barrels of gasoline and 
gasoline-blending components were en route to the United States on the 
average day during 2006, representing about an additional 2 days of 
forward cover, and an unknown additional amount is held in storage 
terminals that would be available for shipment in the event of a supply 
shortfall in the United States. Data on U.S. gasoline inventories may 
further under-represent available inventories if we ignore the part of 
inventories held at foreign refineries that are intended to serve the 
U.S. petroleum products market. The inventories represented in these 
refineries' storage systems and in the tanker and pipeline system 
supporting the flow of products to the United States, or at least some 
portion, could be considered part of U.S. inventories for the purpose 
of evaluating our days forward cover of products in the event of a 
supply disruption. However, it would be difficult to estimate the 
precise volumes of these foreign inventories as we do not collect such 
data from offshore suppliers and because many of these inventories are 
at varying distances from U.S. markets and would have to be evaluated 
differently, depending on how long they would take to reach the United 
States in the event of a domestic supply shortfall.[Footnote 18] 
Another limitation in interpreting inventory data arises because much 
of the measured volumes of petroleum products in pipelines cannot be 
effectively removed from the pipelines in the event of a supply 
shortfall because they are needed to keep the pressure in the pipelines 
at operable levels. Similarly, some inventories are in so-called "tank 
bottoms," or the part of storage tanks that cannot effectively be 
retrieved in the event of a supply shortfall. As a result of these and 
other limitations, we do not have an accurate measure of precisely how 
much is in the full supply chain to the United States, or the actual 
number of days' worth of usable supply we could rely on in the event of 
a supply disruption. 

Looking forward, the refining expansions discussed previously in this 
report may lead to increases in the days forward cover measure as 
pipelines and storage facilities associated with the new refining 
capacity add to inventory holdings. However, any increase in days 
forward cover is likely to be modest overall because demand is also 
projected to grow, and companies continue to strive to develop more 
efficient inventory holding practices and reduce costs associated with 
holding any excess inventory. 

A Number of Factors Have Contributed to the Long-Term Decrease in 
Inventory Levels Since 1980: 

A number of factors have contributed to the long-term decrease in U.S. 
days forward cover. These factors include (1) a reduction in the number 
of refineries and falling domestic crude oil production, (2) the fact 
that demand has been rising faster than refining capacity for much of 
the past 20 years, (3) gains in technological and management efficiency 
that have allowed companies to reduce the level of operating 
inventories, and (4) the rise of futures markets for crude oil and 
gasoline that have enabled oil companies and others to reduce exposure 
to market risk by holding financial as well as physical stocks of these 
commodities.[Footnote 19] 

In the United States the decline in U.S. crude oil production resulted 
in decreased inventory in gathering pipelines and storage 
infrastructure, as pipelines and storage tanks were decommissioned. 
This decline in production-related inventories could be quite 
significant, although we do not have data to measure it directly. Oil 
production in the United States peaked in 1970 at around 10 million 
barrels per day, but by 2005 had fallen to less than 6 million barrels 
per day. This decline in production has left a number of abandoned 
crude oil pipelines and therefore represents a reduction in measured 
inventories. Similarly, the closure of many small refineries and the 
decommissioning of these refineries' storage and pipeline connections 
to the greater supply infrastructure also reduced inventories held at 
these facilities and in the pipeline connections. As discussed 
previously in this report, this reduction in the number of refineries 
was significant. For example, in 1980, there were well over 300 
refineries in the United States, while in 2006 the number was about 
150. This sheer drop in numbers probably overstates the drop in 
associated inventories because, while the number of refineries fell, 
the average size of refineries rose, both because it was smaller 
refineries that tended to be shut down and because many of the 
remaining refineries expanded their capacity significantly. 
Nonetheless, EIA has stated that refinery closures had an important 
impact on petroleum stocks prior to 1995. 

A related cause of the reduction in days forward cover for petroleum 
products has been the fact that for much of the past 20 years, demand 
for these products has risen faster than domestic refining capacity. 
Because days forward cover is measured as the number of days' worth of 
demand that is in the domestic supply chain, any increase in demand 
that is not met by a commensurate increase in domestic supply will lead 
to a reduction in days forward cover. However, as discussed previously 
in this report, this is potentially misleading because the supply chain 
between foreign refiners and the United States is relevant for 
measuring actual days forward cover and the U.S. imports of gasoline 
have been increasing dramatically over the past decade, and imports of 
crude oil have been increasing for much longer than that. 

According to company representatives and industry experts we spoke 
with, as well as the National Petroleum Council, delivery system 
efficiency improvements have also resulted in reduced crude oil 
inventory levels. Company representatives told us improved information 
technology has given managers better tools needed to optimize stock 
levels, and that this was mirrored in many other industries over this 
same period, as improved logistics and management practices enabled 
companies to more closely track production and delivery. By reducing 
inventories, refiners were able to reduce their operating costs, 
providing incentives to invest in efficiency-improving measures. Some 
officials told us that low refining profit margins were a major driver 
in getting companies to reduce their inventory holdings. 

Finally, the relationship between the future price of crude oil and 
petroleum products and the amount of inventory stored has, at times, 
contributed to changes in overall inventory levels. For example, 
according to a 1997 EIA report, during the period between 1995 and 
1996, the prevalence of instances where the current trading price of 
crude oil or petroleum products was higher than the future expected 
price appeared to be an important factor behind the reduction in 
stocks.[Footnote 20] In such a price environment, oil companies and 
others could sell currently held inventories and buy futures contracts 
to meet their future expected needs. In recent years, the future price 
of crude oil has most frequently been higher than the current price, 
and industry officials told us that this has been a factor in 
explaining why absolute inventory levels increased between December 
2004 and early 2007. For example, total U.S. crude oil stocks, 
excluding strategic stocks, were about 355 million barrels in June 
2007, or about 31 percent higher than in January 2004, according to EIA 
data. 

Long-Term Inventory Cost Reductions have Likely Reduced Prices of 
Gasoline and Other Petroleum Products, but, In the Short Term, 
Reductions in Inventory Levels below Normal Ranges Can Lead to Higher 
Prices during Supply Shortfalls: 

To the extent that improved technology and inventory management over 
the long term have resulted in lower operating costs, some of the 
savings may have been passed on to consumers in the form of lower 
prices. We found no consensus among industry experts about the extent 
of such price reductions, nor any empirical analyses that would 
quantify the savings to consumers from lower inventory holding costs. 
However, because refineries compete with one another to sell their 
products, they would likely be forced to pass on some savings in 
operating costs in order to remain in operation, especially during that 
portion of the last three decades in which there was unused refining 
capacity as well as during recent years when surplus gasoline 
production in Europe has increasingly found its way to U.S. markets. 

However, because inventories provide a smoothing effect against 
temporary demand and supply fluctuations, lower than normal inventories 
can signal underlying changes in supply and demand conditions that will 
cause prices to rise. For example, if a large refinery in the United 
States were to suffer an unexpected outage, the resulting reduction in 
domestic supplies would likely result in a drawdown of that refinery's 
inventories to meet its demand, and if that is insufficient, the 
refinery would buy from other refiners. If inventories were on the high 
end of the normal range, such a disruption would likely have little 
effect on petroleum product prices, all else remaining the same. On the 
other hand, if inventories were on the low side of or below the normal 
range--the result of other supply shortfalls or unexpectedly high 
demand--the additional refinery outage would be more likely to cause 
significant price increases. The size of the supply disruption relative 
to available inventories, as well as to the size of the refining 
sector, can also influence how prices respond. For example, if a large 
refinery outage were to occur in the Gulf Coast refining region, the 
large volume of inventories and the large number and capacity of other 
refiners relative to that refinery's production would likely mean that 
the effect on prices of petroleum products would be small. Similarly, 
the availability of large stocks of gasoline in Europe, often less than 
1 week away by tanker to the U.S. East Coast market, probably insulates 
the latter market from extreme price fluctuations in the event of a 
domestic supply shortfall. On the other hand, if the refinery outage 
were to occur in the West Coast, where one refinery's production would 
be significantly larger relative to available inventories and total 
sector capacity, a significant price response is more likely. For these 
reasons, lower than normal inventories are frequently cited as a factor 
in price run-ups of petroleum products. For example, the Northeast 
diesel price spike of January 2000 was preceded by lower than normal 
inventory buildup, and the California Energy Commission cited 
relatively low inventory levels as one of several contributing factors 
to the gasoline price spike in the spring of 2006. 

U.S. Supply Infrastructure Is Constrained in Key Areas and Likely to 
Become Increasingly Constrained, Thereby Increasing Prices and Price 
Volatility unless Timely Investments Are Made: 

The nation's crude oil and petroleum product supply infrastructure is 
constrained in key areas and may become inadequate to handle future 
volumes of petroleum products and biofuels unless sufficient investment 
is undertaken. Inadequate supply infrastructure can lead to higher 
prices and price volatility during supply disruptions or unexpected 
increases in demand because the supply infrastructure cannot handle the 
changed or increased delivery of fuels. However, the extent of the 
problem and the prospect for the future of the supply infrastructure is 
uncertain, in part because there has been no comprehensive study done 
to assess infrastructure adequacy. There are many planned 
infrastructure expansions that could alleviate the stress on the system 
to some extent. However, a complex approval process--involving numerous 
federal, state, and private entities--and other factors increase the 
time and cost of building and maintaining infrastructure. 

The Nation's Supply Infrastructure Is Constrained in Key Areas and 
Likely to Become More Constrained: 

Industry and agency officials report that key crude and petroleum 
product pipelines are constrained and operating at or near capacity. As 
the Secretary of Energy noted in a December 4, 2007 discussion with 
industry media, the U.S. energy infrastructure system--including oil 
pipelines--is "pressed," and it is important that pipeline and other 
energy infrastructure owners maintain their assets effectively, to 
maintain adequate supplies. Both DOT and industry officials report a 
systemic lack of pipeline capacity in the supply infrastructure system 
in key states including Arizona, California, Colorado, and Nevada, and 
note existing pipeline supply infrastructure is insufficient to carry 
the commensurate volumes of petroleum products and crude oil needed to 
meet growing demand. Industry officials told us that pipelines in the 
Southwestern region, such as Arizona and Las Vegas, have reached 
maximum utilization, or become "constrained." For example, industry 
experts told us that a new petroleum product pipeline from the Gulf of 
Mexico to El Paso is already approaching full capacity. Denver's 
petroleum product pipelines have also become generally constrained and 
unable to meet increased gasoline demand for summer travel. This raises 
the cost of delivering petroleum products to Denver; in instances when 
pipelines are full, shippers must make alternate shipping arrangements 
by more costly rail or truck. Further, a key petroleum product line 
from the U.S. Gulf Coast to North Carolina is reportedly constrained, 
thereby increasing delivery costs for petroleum products in that 
region, and key petroleum product pipelines radiating outward from the 
major refining center of Houston are also reportedly constrained. 
Finally, in certain areas, pipeline infrastructure to support certain 
demand or production centers' needs does not exist. For example, there 
are no petroleum product pipelines into Florida. Additionally, despite 
strong demand in California, the existing petroleum product pipelines 
support the flow of product from California to other Southwestern 
states, but no petroleum pipelines flow into California from other 
regions. 

Industry representatives and federal studies also report that many of 
the nation's port facilities are operating at or near capacity. For 
example, one-fourth of the ports in a U.S. Maritime Administration 
(MARAD) survey described their infrastructure impediments as "severe." 
Officials from the interagency U. S. Committee on the Maritime 
Transportation System, which includes MARAD, the National Oceanic and 
Atmospheric Administration, and the U.S. Army Corps of Engineers told 
us that U.S. ports and waterways are constrained in capacity and 
utilization, and anticipate marine supply infrastructure will become 
more constrained in the future. The Ports of Los Angeles, Long Beach, 
Oakland, Houston, Savannah, and Charleston reported congestion and 
emphasized in a 2005 report that they are experiencing higher than 
projected growth levels. 

The capacity of the supply infrastructure not keeping pace with 
increasing demand in certain areas has raised concerns about the 
adequacy of the infrastructure to accommodate expected increasing 
volumes of crude oil and petroleum products. Population increases in 
the West and South are expected to increase the need for pipelines, 
marine transportation, and capacity utilization there. DOT reports that 
already high pipeline capacity utilization levels may not meet growing 
demands unless significant expansion occurs. The situation is similar 
for the U.S. marine infrastructure. In a 2005 report, MARAD evaluated 
the status of U.S. ports and waterways and concluded that domestic 
marine transport supply infrastructure will become more constrained in 
the future. As imports of petroleum products are projected to increase 
by over 80 percent by volume between 2004 and 2030, according to EIA, 
this anticipated demand growth will challenge a marine transport system 
that is already operating, in some instances, at the limits of its 
capacity. 

The introduction of biofuels will also increase the strain on the 
existing supply infrastructure. For example, ethanol-producing plants 
tend to be relatively small near the sources of biofeedstocks-- 
currently mostly corn--used to make ethanol. At present, the ethanol 
produced by these plants, unless they are located next to rail 
facilities, are typically trucked to central rail loading facilities 
and then shipped to demand regions on unit trains--trains whose cars 
are entirely made up of a single product and typically going to a 
single destination. Trucking biofuels to these central locations is 
costly and also uses petroleum products, thereby reducing the volumes 
of these latter fuels the ethanol can displace. Experts we spoke with 
generally agreed that eventually a more efficient collection system 
will likely be built--probably consisting of feeder pipelines--to 
connect the relatively small ethanol plants to major rail or supply and 
demand centers. Nonetheless, according to DOE, the existing petroleum 
product pipelines are currently not configured to transport ethanol 
from regions where it is currently produced to regions where it is 
consumed. Because pipelines are ultimately the cheapest form of 
domestic shipment of petroleum products and crude oil, it may make 
sense to ultimately ship ethanol through the pipeline system, and 
existing or new petroleum pipelines could be used in certain areas to 
transport ethanol if ongoing efforts by operators to identify ways to 
modify their systems to make them compatible with ethanol or ethanol- 
blended gasoline are successful. 

In addition, as discussed previously in this report, a proliferation of 
biofuel blends in this country will require additional variations in 
the blends of petroleum products that are mixed with these biofuels. 
Pipeline companies report that varying fuel specifications complicate 
petroleum product delivery and supply infrastructure systems by 
requiring separate storage and increasing the complexity of the 
distribution system. Also, pipeline operators told us that sending more 
and smaller batches of these special blends has slowed the flow of 
fuels through pipelines because pulling off more and smaller batches of 
fuels requires a slower speed to not miss significant parts of these 
batches. However, when we asked, these pipeline operators did not offer 
any quantification of the extent to which effective tank capacity 
reduction or pipeline slowness has occurred. 

Infrastructure Disruptions Lead to Increases in Prices and Price 
Volatility and Constraints in Supply Infrastructure Could Exacerbate 
Price Effects: 

A constrained supply infrastructure can be a major factor influencing 
prices of petroleum products during supply disruptions. For example, 
during the rupture in the Kinder Morgan pipeline in Arizona in August 
2003, Arizona's gasoline prices rose by about 45 cents during the 3- 
week period ending on August 25, 2003. Due to the connectivity of the 
pipeline network among California, Arizona, and Nevada, the disruption 
not only caused prices to spike in Arizona itself, but the extra burden 
from Arizona's demand also contributed to higher prices elsewhere in 
the West; during the disruption, California's prices rose by 40 cents 
to peak at $2.10, and Washington, Nevada and Oregon all experienced 
price increases of over 30 cents per gallon.[Footnote 21] Any 
constraint in the supply infrastructure can reduce supply reliability 
by making it more difficult to reallocate supplies in response to even 
relatively minor disruptions in the supply and distribution system. In 
this way, a constrained supply infrastructure could increase price 
volatility and exacerbate price effects due to disruptions. 

When certain localities are inadequately served by pipelines or 
reasonably priced marine supply infrastructure, alternative transport 
modes tend to be more costly, leading to higher prices for consumers. 
For example, since relatively few pipelines connect the West Coast with 
other regions, some supplies of petroleum products and crude oil must 
be shipped by truck or barge from other domestic regions or by tanker 
from foreign countries; such modes of transport are slower and more 
costly than via pipelines. For example, it can take around 2 weeks for 
a vessel to travel from the Gulf Coast to Los Angeles port--including 
transit time through the Panama Canal. This can increase recovery time 
from an unplanned refinery outage, other supply disruption, or an 
unanticipated surge in demand, thereby leading to higher or longer- 
lasting price spikes. 

Federal agency officials and industry experts told us that the slow 
permitting process and corresponding delays in infrastructure 
development could lead to higher and more volatile petroleum product 
prices in the future. For example, while the recent expansion of 
pipeline capacity from the Gulf Coast to El Paso, following the opening 
of the Longhorn pipeline in June 2004, has been expected to ease the 
infrastructure constraint on Arizona's petroleum product supplies, 
permitting impediments continue to perpetuate the lag between the 
growth of demand for petroleum products on the West Coast on the one 
hand and the growth of the pipeline capacity to move products to the 
region on the other. The California Energy Commission has recently 
stated that similar constraints on marine infrastructure expansions to 
accommodate future growth in demand for imports of petroleum products 
will be a major challenge for the West Coast. Such failure of the 
region's supply infrastructure to handle the requisite volumes of 
petroleum products to meet rising demand will continue to contribute to 
the persistence of higher and more volatile prices in the West Coast 
compared to other regions. 

We were unable to assess the extent of supply infrastructure 
constraints or the impacts of these constraints on prices and price 
volatility, in large part because there is no central source of data 
that tracks system bottlenecks. Information that would indicate whether 
a pipeline is operating at or near capacity is also not collected in a 
central location by federal agencies or industry trade groups. These 
data would include pipeline throughputs, measured by the amount of 
product flowing into a pipeline and the volume of output received at 
key market locations. Companies are not required to report such 
information. By contrast, FERC requires natural gas pipelines to 
report, via their web sites, throughput information that allows 
regulatory, public, and private entities to track bottlenecks and 
identify where shortages in supply, or system constraints, affect 
regional prices. A number of studies and analyses of constraints in 
natural gas pipelines have quantified the effects on natural gas 
prices. For example, EIA routinely uses natural gas pipeline capacity 
and outages in making projections about natural gas prices. These data 
on natural gas pipeline capacity and the flow of natural gas are 
collected and evaluated to determine the reliability of the 
infrastructure to meet demand, and it is well understood that 
constrained pipelines lead to higher natural gas prices and can even 
lead to disruptions of service in severely constrained cases.[Footnote 
22] 

We recognize there are differences between the natural gas industry on 
one hand and the petroleum industry on the other, particularly because 
of the fact that the former industry evolved under a rate-regulated 
utility framework, while the petroleum industry did not. Specifically, 
under rate regulation, the former requirement that utilities meet all 
demand at their regulated prices at any point in time necessitated the 
monitoring of supply and infrastructure constraints that could cause a 
failure of service. By contrast, petroleum product prices have largely 
not been regulated, and prices have generally been allowed to adjust to 
equilibrate supply with demand at any point in time. Further, we are 
not suggesting in this report that petroleum product markets should be 
regulated like natural gas or any other markets. However, these 
historical regulatory differences notwithstanding, we believe that it 
is important to understand the extent to which constraints on the 
current petroleum product supply infrastructure affect prices as well 
as the adequacy of the infrastructure to meet growing demand. Federal 
agencies, industry experts, and Congress have all recognized this as a 
priority. For example, industry consultants and agency officials have 
acknowledged the importance of a system-wide study of pipeline capacity 
constraints and regulatory impediments to future investment. In 
addition, DOT officials have stated that the extent of capacity 
restrictions in the nation's pipeline infrastructure is becoming more 
apparent, that the current regulatory mechanisms may not lead to 
appropriate reinvestment in the industry. In June 2006, DOT put forth a 
proposal and in December 2006 Congress passed legislation that mandated 
the Secretaries of Energy and Transportation to conduct periodic 
analyses of the adequacy of the nation's pipeline supply 
infrastructure. The first report to Congress of the results of such an 
analysis is required by June 2008.[Footnote 23] The language for the 
mandate stated that "such analyses should identify areas of the United 
States where unplanned loss of individual pipeline facilities may cause 
shortages of petroleum products or price disruptions and where 
shortages of pipeline capacity and reliability concerns may have or are 
anticipated to contribute to shortages of petroleum products or price 
disruptions. Upon identifying such areas, the Secretaries may determine 
if the current level of regulation is sufficient to minimize the 
potential for unplanned losses of pipeline capacity." Despite 
widespread recognition that such a study is needed to fully identify 
the extent of infrastructure inadequacy and the impact on prices, to 
date, no such analysis has been undertaken. DOT and DOE officials told 
us that they were not appropriated funds specifically to do the 
mandated analyses and that the agencies have not re-allocated other 
funds for this, although DOE told us in its comments that DOE and DOT 
staff have met to discuss how this work could be approached. Given that 
the study has not begun, it seems highly unlikely that the agencies 
will be able to meet their June 2008 deadline for reporting to 
Congress. 

Expansions in Supply Infrastructure Are Planned, but High Construction 
Costs, Investment Risk, and a Complex Regulatory Environment Can Deter 
or Delay These Needed Infrastructure Investments: 

There are many private sector plans to expand the supply 
infrastructure, and if implemented in timely fashion, these plans could 
significantly alleviate the stresses on the system. For example, there 
is a long-anticipated project for a 500-mile petroleum product pipeline 
expansion from Louisiana to Georgia, several plans for new crude 
pipelines to accommodate the expected increased flows of Canadian oil 
sands, as well as other crude and refined product pipeline plans to 
meet more localized needs. However, many such plans are in a conceptual 
stage and/or subject to permitting approval and other possible 
complications. Thus, industry representatives told us, it is difficult 
to determine how many of the industry plans for new construction or 
expansion of existing pipelines will be realized. 

However, the high cost of construction, uncertain investment climate, 
and complex regulatory environment increase the time it takes to build 
this supply infrastructure and raises risk and investment costs. With 
regard to construction costs, a shortage of skilled labor and 
specialized equipment to perform the work, and high prices of steel and 
concrete have increased construction costs and the time it takes to 
expand the nation's supply infrastructure system. For example, pipeline 
companies and other industry experts we spoke with said that major 
pipeline expansion and construction projects take anywhere from 2 to 15 
years to complete and currently cost about $1 million per mile to 
build. With regard to the uncertain investment climate, pipeline 
companies and industry experts told us that uncertainty about petroleum 
product demand, biofuel development and shipping, and future changes to 
fuel specifications complicate the decisions about where and when to 
build new or expand existing infrastructure. Regulations governing 
pipeline and other infrastructure expansions, including regulations 
governing water and air pollution, endangered species protection, and 
public safety, have evolved to protect the environment and ensure 
public safety. However, there can be tension between these goals and 
the goals of ensuring adequate energy supplies and keeping prices down. 
For example, in order to build a new pipeline or significantly expand 
capacity or upgrade an existing pipeline, companies must first navigate 
a mixed and sometimes complex jurisdiction of federal, state, and local 
regulators, as well as secure right of way approval from the necessary 
landowners whose lands will be crossed by the pipeline. At the federal 
level alone, as many as 11 agencies may be involved in granting 
approval to build new pipeline projects. In addition, industry experts 
told us that some potential market entrants have had difficulty meeting 
permitting requirements and are often unable or unwilling to wait out 
lengthy delays in obtaining permits, such as when two companies in 
southern California reportedly recently backed out of plans to build 
storage terminals there after trying to complete the federal, state and 
local approval processes. A study conducted for Association of Oil Pipe 
Lines, an FTC report on gasoline prices, and industry officials told us 
that building or expanding pipelines has become increasingly difficult 
in certain situations. For example, a major pipeline operator 
encountered federal and local legal and regulatory issues that delayed 
for 10 years the development of a key pipeline from the Gulf Coast to 
El Paso, Texas. As a result of such delays and impediments to 
investment, regional demand that could support new pipeline capacity 
must be served by more costly transportation modes for years, as has 
been the case in parts of the Rocky Mountains and Southwest and West 
Coast regions. Finally, an uneven balance of costs and benefits of 
expansion for various entities can also contribute to declining 
investment in supply infrastructure by certain entities. For example, 
DOT reports that common carrier pipelines achieve only modest returns 
from relieving constrained pipeline capacity. However, it reports 
consumers would benefit proportionately greater through the enhanced 
competition resulting from the increased capacity of new pipeline 
investments. Pipeline companies, on the other hand, report they will 
expand when sufficient demand is secured, particularly through the 
"presale" of capacity in the proposed pipeline. 

Ideally, the permitting and approval process should be streamlined 
without sacrificing the important protections provided by regulatory 
oversight. Industry and federal agency officials have pointed out that 
a federal model exists for this in the permitting process for 
interstate natural gas pipelines. Specifically, FERC facilitates 
expansions and construction of natural gas pipelines by serving as the 
lead agency to process company permit applications, conduct the 
required environmental impact study, and coordinate the timing of other 
necessary permits that fall under the purview of various federal 
agencies. In addition, FERC authorizations convey the right of eminent 
domain to pipeline builders to resolve specific right of way issues in 
the event an agreement cannot be reached between a landowner and a 
project sponsor. FERC officials told us that although its 
authorizations convey the right of eminent domain, pipeline companies 
rarely have to exercise it because its existence is usually sufficient 
to get landowners to negotiate a solution with pipeline builders. 
Streamlining the federal regulatory process with regard to crude oil 
and petroleum product pipeline repairs has already begun in response to 
a federal statute passed in 2002 to coordinate environmental reviews 
and permitting needed for pipeline repairs and more clearly define 
federal roles in the pipeline repair process.[Footnote 24] However, 
this streamlined federal process has not been applied to constructing 
new crude oil or petroleum product pipelines or significantly upgrading 
or increasing capacity of existing pipelines.[Footnote 25] 

Conclusions: 

The choices the United States and other countries make about how to 
ensure sufficient supplies and stable prices of petroleum products and 
other fuels such as ethanol and biofuels will greatly influence energy 
prices in the United States. For biofuels in particular, cost and 
availability will depend in part on how well international, federal, 
state, and local governments coordinate their biofuel standards and 
methods of integrating them with petroleum products. Harmonizing fuel 
specifications worldwide, while continuing to allow for regional 
differences in fuels specifications that are there to meet specific 
environmental or vehicle performance goals, would make it easier to 
refine and transport common blends, streamline delivery, increase 
opportunities for trade, provide additional sources of supply, and 
potentially reduce prices and price volatility. However, if the world 
and the United States end up with numerous different biofuel blends--as 
appears to be happening under existing plans and mandates--this could 
expand the array of incompatible gasoline and diesel blending stocks 
and final blended products that cannot be interchanged at the retail 
level, reducing opportunities for trade. In addition, these products 
will have to be segregated during shipment, further straining the 
supply infrastructure. Unless the supply infrastructure catches up and 
keeps up with these changes, the domestic energy supply will be less 
secure and prices will tend to be higher or more volatile. 

Even without these changes, rising demand for crude oil and petroleum 
products over the last 25 years has challenged the supply 
infrastructure for these commodities in certain areas, leading to 
higher prices during supply disruptions or during periods when 
pipelines or ports lack sufficient capacity to transport the products 
suppliers wish to ship. As noted by the Secretary of Energy in December 
2007, the U.S. energy infrastructure system--including oil pipelines-- 
is "pressed," and it is important that pipeline and other energy 
infrastructure owners maintain their assets effectively, in order to 
maintain adequate supplies of energy. In the absence of a comprehensive 
analysis of the likely weaknesses in our infrastructure, policy makers 
and regulatory agencies involved in overseeing the safety and adequacy 
of supply infrastructure remain in the dark about the extent of these 
problems and their effects on prices of petroleum products. Further, as 
demand for petroleum products and biofuels grows, the existing system 
may become increasingly constrained and need to be upgraded and 
expanded to handle greater and different product flows. Because federal 
and state agencies and other entities will be involved in approving 
such upgrades and expansions, it is essential that they be well 
informed as to the current state of the supply infrastructure and the 
areas in most critical need of further investment. Furthermore, the 
lack of a lead agency to streamline the complex and costly permitting 
process for U.S. supply infrastructure construction or expansion 
projects and the lack of ability of federal agencies to convey the 
power of eminent domain in cases where conflicts over infrastructure 
placement cannot be resolved may deter potential market entrants from 
investing in much-needed upgrades in a timely fashion. As a result, we 
could end up with less security of supply and higher and more volatile 
prices in the future. 

Recommendations for Executive Action: 

To better monitor and evaluate the development of our nation's supply 
infrastructure systems, as well as to facilitate the continued 
tradability of products across domestic and global markets and to 
ensure that gasoline supplies from Europe and elsewhere remain 
compatible with U.S. gasoline specifications, we are making a number of 
recommendations that, if adopted, should improve prospects for the 
future security of petroleum product supplies and price stability. 

* To avoid additional proliferation of differing fuel specifications 
that would further burden the existing supply infrastructure and create 
impediments to trade, we recommend that the Secretary of Energy 
coordinate with EPA and other relevant federal agencies, states, IEA, 
the European Union, and other foreign entities to encourage development 
of biofuels and petroleum products standards and blending practices 
that maximize the fungibility of these fuels and minimize the spread of 
differing fuel types that would further strain the supply 
infrastructure, while recognizing that some fuel differences to reflect 
local environmental requirements, engine performance, or other factors 
are likely beneficial. 

* To comprehensively analyze the U.S. supply infrastructure's capacity 
to accept, handle, and transport the increasing volumes and types of 
petroleum products and biofuels expected to traverse its system, we 
recommend the Secretaries of Energy and Transportation undertake the 
comprehensive study of existing and projected increases to the 
infrastructure system--including terminal capacity and pipeline 
throughputs--to evaluate whether future demand is likely to be met by 
existing infrastructure and planned increases as mandated by Congress 
in 2006. To the extent that the data to comprehensively conduct such 
analyses may at present not be collected, the Secretaries should 
consider evaluating the merits of enhancing the reporting of 
utilization and throughputs, perhaps using natural gas pipeline and 
storage reporting requirements as a model. 

* In conjunction with the completion of the first comprehensive study 
of the supply infrastructure, we recommend the Secretary of 
Transportation work with DOE, FERC, EPA, and other federal agencies to 
evaluate the feasibility and desirability of designating a lead federal 
agency, with authority to convey the power of eminent domain, to 
coordinate across agencies and streamline the permitting and siting 
process for crude oil and petroleum product interstate pipeline 
expansions, upgrades, and new construction, using FERC's role with 
natural gas pipelines as a model. If this is found to be feasible and 
desirable, we recommend the aforementioned agencies work together to 
determine which agency should take the lead role and to prepare a 
legislative proposal for Congress to provide any additional authority 
needed to implement this recommendation. 

Agency Comments and Our Evaluation: 

We provided the Departments of Energy and Transportation and the 
Federal Energy Regulatory Commission with a draft of this report for 
their review and comment. 

DOE neither agreed nor disagreed with our report and primarily provided 
technical comments, which we incorporated as appropriate. However, we 
do note that the Secretary of Energy recently commented that the U.S. 
energy infrastructure system--including oil pipelines--is "pressed," 
and that it is important that infrastructure assets are maintained 
effectively, which appears to be in accord with our recommendations. 
Specifically, with regard to our recommendation that the Secretaries of 
Energy and Transportation undertake the comprehensive study of existing 
and projected increases to the infrastructure system, it would seem 
that such a study would be critical in determining the level of 
maintenance and development needed to maintain adequate supplies of 
crude and refined products, a matter of national interest, as stated by 
the Secretary of Energy. Further, in light of the Secretary's comments, 
it would seem prudent that DOE also implement our recommendation to 
work with other federal agencies to evaluate the feasibility and 
desirability of designating a lead federal agency, with authority to 
convey the power of eminent domain, to coordinate across agencies and 
streamline the permitting process for crude oil and petroleum product 
interstate pipeline expansions, upgrades, and new construction. DOE's 
letter is printed in appendix II of this report. 

DOT gave us oral comments on the report. With regard to our second 
recommendation, DOT commented that the agency supports the idea of 
conducting the comprehensive infrastructure study, as mandated by 
Congress in December 2006--in fact, a DOT 2006 legislative proposal 
also included language about the need for such a study--although agency 
officials added that they need funding to accomplish this task. In its 
comments, DOT said it believed our report unfairly portrayed DOT's 
inaction with regard to starting this mandated study as a failure. 
Specifically, it said this was not fair because the agency was not 
appropriated the funding to do the study. In response to these 
comments, we added language to the report that points out that DOT had 
proposed such a study to Congress. We already had language in the 
report acknowledging that DOT and DOE had said that they were not 
appropriated funding for the study. Still, our recommendation is in 
accordance with DOT's 2006 legislative proposal to perform this study, 
and we believe DOT and DOE should take steps to begin this study, 
either by reallocating their current budget or, if this is not 
possible, to request additional funding from Congress. With regard to 
the third recommendation, to study the streamlining of the petroleum 
product pipeline permitting and siting process, DOT commented that the 
agency supported streamlining the process for expanding petroleum 
product pipelines and had already proposed legislative language to 
Congress in 2006 that would have done so and also would have made DOT 
the lead federal agency in coordinating this process. Therefore, DOT 
commented that it had already done what we are asking in our third 
recommendation: namely, to evaluate the feasibility and desirability of 
designating a lead federal agency to coordinate the federal permitting 
process for crude oil and petroleum product interstate pipeline 
expansions, upgrades, and new construction. In reviewing DOT's 
legislative proposal, it does not call for the lead agency to have the 
ability to convey the power of eminent domain, as we also recommend be 
considered. Further, we cannot, on the basis of our work, endorse a 
specific agency to take the lead. Finally, we think that a coordinated 
effort among DOT, DOE, and other relevant agencies is needed to 
evaluate this issue and advise Congress on the best way to proceed. For 
these reasons, our recommendation is still appropriately addressed to 
the Secretary of DOT and the other named agencies. 

FERC generally agreed with our findings and recommendations in the 
draft report, and provided technical comments, which we addressed in 
the body of the report as appropriate. Appendix III contains a 
reproduction of FERC's letter, which underscores FERC's agreement with 
GAO's recommendations and points out that FERC's role as the lead 
agency for siting natural gas pipelines could serve as a good model to 
use in interagency discussions about how this could be accomplished in 
the case of petroleum product pipelines. 

As agreed with your offices, unless you publicly announce the contents 
of the report earlier, we plan no further distribution of it until 30 
days from the report date. At that time, we will send copies of this 
report to interested congressional committees; the Administrator, 
Environmental Protection Agency; the Secretaries of Energy and 
Transportation; the Chairman, Federal Energy Regulatory Commission; and 
other interested parties. We will also make copies available to others 
upon request. In addition, the report will be available at no charge on 
the GAO Web site at [hyperlink, http://www.gao.gov]. 

If you or your staffs have any questions about this report or need 
additional information, please contact me at (202) 512-3841 or 
[email protected]. Contact points for our Offices of Congressional 
Relations and Public Affairs may be found on the last page of this 
report. Major contributors to this report are included in appendix IV. 

Signed by: 

Mark Gaffigan: 
Acting Director: 
Natural Resources and Environment: 

[End of section] 

Appendix I: Scope and Methodology: 

The Chairman and a member of the Senate Commerce, Science, and 
Transportation Committee asked GAO to evaluate trends and effects on 
petroleum product prices in (1) international trade of petroleum 
products; (2) refining capacity and intensity of refining capacity use 
internationally and in the United States; (3) international and 
domestic crude oil and petroleum product inventories; and (4) domestic 
crude oil and petroleum product supply infrastructure, particularly 
pipelines and marine transportation. 

To address the first objective, we examined data from the Department of 
Energy's (DOE) Energy Information Administration (EIA) and the 
International Energy Association (IEA) to evaluate trends in the 
international trade flows for crude oil and petroleum products and 
their price correlations over time at international trading hubs. In 
addition, IEA data were used to calculate total global imports and 
exports of crude oil and petroleum products as well as for key global 
regions including Europe, Asia and the United States. We met with more 
than 20 oil industry companies--including refiners and pipeline 
companies--a number of financial and investment corporations, more than 
25 industry groups, and more than 15 domestic and international 
government agencies to corroborate trend analyses, reports, and data. 
We conducted audit work in various locations in Texas, California, New 
York, and Washington, D.C., as well as Belgium, France, Germany, and 
the United Kingdom to obtain industry's perspective on recent trends in 
the international trade of petroleum product as well as prospective 
trends going forward. In addition, we analyzed EIA and New York 
Mercantile Exchange, (NYMEX) data on historical spot and futures prices 
for crude oil and petroleum products at international and domestic 
trading hubs to see how price volatility has changed over time. 

To address the second objective, we assessed trends in refining 
capacity, refining capacity additions, utilization, complexity, and 
planned investments using IEA, EIA, and Oil and Gas Journal data, and 
determined the data were sufficiently reliable for our purposes. We met 
with more than 20 oil-industry companies--including refiners and 
pipeline companies--a number of financial and investment corporations, 
more than 25 industry groups, and numerous staff and officials of more 
than 15 domestic and international government agencies in California, 
Texas, New York, Washington D.C. ,as well as Belgium, France, Germany 
and the United Kingdom to corroborate trend analyses, reports and data. 
We also reviewed and analyzed trends in refinery investment, operating 
costs, and profitability in the U.S. and internationally, using 
literature and data on U.S. and international refining practices, 
trends and forecasts, and interviewed experts on these trends. 

To address the third objective, we used data from EIA and IEA on crude 
oil and petroleum product inventories and projected demand to conduct 
international, U.S. total domestic, and U.S. Petroleum Administration 
for Defense District (PADD) inventory trend analysis on inventories in 
absolute terms and in "days forward cover" terms. We analyzed NYMEX and 
other futures market data, as well as EIA data, to observe the effects 
of the expected future price for crude oil on inventory holding 
decisions. To collect these data, we conducted a site visit to meet 
with industry and government representatives in Belgium, France, 
Germany, and the United Kingdom to gain information about the European 
Union's policy of maintaining strategic petroleum product reserves and 
their effects on price levels and price volatility. 

To address the fourth objective, we interviewed federal and state 
agencies that oversee the economic, safety, and environmental impacts 
of pipelines and marine transportation on current and future 
utilization capacity of the petroleum product infrastructure. Where 
possible, we collected and analyzed data on the age of the pipeline and 
marine infrastructure system, capacity, throughputs, and constraints. 
We compared data reporting requirements for petroleum products with 
reporting requirements for liquefied natural gas, and identified 
differences in such reporting requirements. We spoke with common 
carrier pipeline operators, port authorities, government entities, and 
trade association and consumer advocate groups to gain their 
perspectives on supply infrastructure investment, capacity utilization 
levels, and potential system constraints. We also reviewed previous 
relevant GAO reports and testimonies, and Department of Energy and 
Department of Transportation reports. In addition, we examined reports 
and data from supply disruption case studies to examine those cases' 
impact on infrastructure, prices, and price volatility. 

During our audit work we consulted with the following entities: 

* We met with the following oil industry companies, including refiners, 
supply infrastructure and oil service companies: BP; Buckeye Partners; 
Chevron Corporation; ConocoPhillips Company; ExxonMobil Corporation; 
Fluor Corporation; Frontier Oil Corporation; Hess Corporation; Holly 
Corporation; Kinder Morgan Energy Partners; Longhorn Partners Pipeline; 
Magellan Midstream Partners; Marathon Oil Company; Mid-continent 
Express Pipeline; Oiltanking GmbH; Paramount Petroleum Corporation; 
Plains All American Pipeline L.P; RaceTrac Petroleum, Inc; Sunoco, Inc; 
TEPPCO Partners L.P; Tesoro Corporation; UOP LLC; Valero Energy 
Corporation. 

* We met with the following financial organizations: Deutsche Bank; 
Goldman, Sachs & Co; JP Morgan Chase Bank; Morgan Stanley; New York 
Mercantile Exchange, Inc. (NYMEX). 

* We met with the following industry groups and expert institutions: 
Allegro Energy Consulting; American Association of Port Authorities; 
American Petroleum Institute (API); Association of Oil Pipe Lines 
(AOPL); Conservation of Clean Air and Water in Europe (CONCAWE); 
Consumer Federation of America; Energy Analysts International, Inc; 
European Petroleum Industry Association (EUROPIA); Global Insight, Inc; 
Institut Francais du Petrole (IFP); Muse Stancil & Co; National 
Association of Regulatory Utility Commissioners; National Petrochemical 
& Refiners Association; Oil & Gas Journal; Petroleum Marketers 
Association of America; Pipeline Safety Trust; PIRA Energy Group; 
Purvin & Gertz, Inc; Stillwater Associates LLC; Turner, Mason & 
Company; the Rabinow Consortium, LLC; UK Petroleum Industry 
Association; Union of European Petroleum Independents (UPEI); 
University of California Energy Institute; Western States Petroleum 
Association; Wood Mackenzie Research and Consulting. 

* With regard to government and agency sources, we met with the 
following U.S. agencies and governmental institutions: Department of 
Defense, including the Army Corps of Engineers; Department of Energy, 
including the Energy Information Administration; Department of State; 
Department of Transportation, including Pipeline and Hazardous 
Materials Safety Administration (PHMSA); Department of Homeland 
Security; Federal Energy Regulatory Commission; Federal Trade 
Commission; Interagency Committee on Marine Transportation; Oak Ridge 
National Laboratory. We met with the following state and local 
governmental agencies: California Energy Commission (CEC); California 
Environmental Protection Agency Air Resources Board (CARB); Hawaii 
Energy Planning and Policy Branch; Port of Houston Authority. We met 
with the following international government and multilateral 
organizations: European Commission Directorate-General for Energy and 
Transport; EBV (German Stockholding Agency); French General Directorate 
for Energy and Raw Materials; International Energy Agency (IEA); 
International Monetary Fund (IMF). 

The report primarily uses data from the domestic and international 
wholesale petroleum product and crude oil markets. In contrast to 
retail markets, wholesale prices do not generally include extra costs 
such as federal and state taxes, distribution and marketing expenses 
and profits. In every case for the data used in this report, we 
assessed and determined that the data were sufficiently reliable for 
our purposes. We performed our work from August 2006 through September 
2007 in accordance with generally accepted government auditing 
standards. 

[End of section] 

Appendix II: Comments from the Department of Energy: 

Department of Energy: 
Washington, DC 20585: 

November 28, 2007: 

Mark Gaffigan: 
Acting Director: 
Natural Resources and Environment: 
Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Gaffigan: 

Thank you for the opportunity to review GAO's report entitled Energy 
Markets: Increasing Globalization of Petroleum Products Markets, 
Tightening Refining Supply and Demand Balance, and Other Trends Have 
Implications for US. Energy Supply, Prices and Price Volatility. The 
breadth and complexity of the topic made this a challenging report. We, 
along with the DOE Office of Policy and International Affairs and the 
Office of Fossil Energy previously provided GAO with technical 
comments. A few additional comments are enclosed for your 
consideration. 

If you have further questions, please contact Joanne Shore (202-586-
4677). 

Sincerely,

Signed by: 

Guy F. Caruso: 
Administrator: 
Energy International Administration: 

Enclosure -: 

[End of section] 

Appendix III: Comments from the Federal Energy Regulatory Commission: 

Federal Energy Regulatory Commission: 
Washington, D.C. 20426: 

November 13, 2007: 

Office Of The Chairman: 
Mr. Mark Gaffigan: 
Acting Director, National Resources and Environment: 
United States Government Accountability Office: 
Room 2T47: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Gaffigan: 

Thank you for the opportunity to comment on your report entitled 
Increasing Globalization of Petroleum Products Markets, Tightening 
Refining Demand and Supply Balance, and Other Trends Have Implications 
for U.S. Energy Supply, Prices and Price Volatility. In general, I 
agree with the recommendations of the report relevant to the 
Commission's responsibilities. The Federal Energy Regulatory 
Commission's (Commission) role in regulating crude oil and petroleum 
products pipelines is defined by the Interstate Commerce Act (ICA). The 
ICA gives the Commission authority to regulate only the transportation 
rates, and terms and conditions of service on these pipelines. The 
Commission does not have authority to regulate the siting of, 
construction of, or the abandonment of service by, crude oil or refined 
petroleum product pipelines. 

Although the Commission does not have siting authority for petroleum 
pipeline construction, the Commission has encouraged and supported the 
building of new and expanded crude and petroleum product lines through 
its issuances of orders on pipeline petitions for declaratory orders. 
The Commission has approved certain rate methodologies and granted 
other rate assurances prior to construction in order to reduce the 
uncertainty and risk inherent with these large infrastructure projects. 
Specifically, the Commission provided pre-construction assurances in 
the following orders: Express Pipeline Partnership issued September 11, 
1996, in Docket Nos. OR96-l1-000 and 001; Enbridge Energy Company, Inc. 
issued March 3, 2005, in Docket No. OR05-1-000; Colonial Pipeline 
Company issued May 23, 2007, in Docket No. No. OR06-8-001; and Calnev 
Pipe Line LLC issued July 20, 2007, in Docket No. OR07-10-000. 

As noted in the report, the Commission is responsible for the siting of 
interstate natural gas transportation pipelines in the United States. 
In this capacity, the Commission has gained extensive experience in 
issues surrounding pipeline construction and operation and has used 
this knowledge in its assistance to other agencies. Of recent note, the 
Commission was asked to assist the State Department in its 
environmental review as lead agency of the proposed TransCanada 
Keystone Pipeline, L.P. (Keystone) project, an oil pipeline crossing 
from Canada into the United States. Specifically, the Commission 
supplied the State Department with information on our environmental 
review process and examples of environmental documentation. Commission 
staff also provided assistance in the selection of the third party 
contractor, guidance on how the Commission facilitates interagency 
cooperation and public scoping meetings, technical assistance in the 
preparation of the draft environmental impact statement, and guidance 
on how the Commission builds the public record for a project. I believe 
our assistance with this project ultimately will help provide for an 
expeditious, but thorough, review and facilitate needed infrastructure 
to the oil industry. 

Finally, the report recommends that several agencies, including the 
Commission, work together to evaluate the feasibility and desirability 
of designating a lead agency with eminent domain authority in order to 
streamline the process for siting oil and product pipelines. The 
suggested use of the Commission's role in the siting of gas pipelines 
as a model will help to expedite the deliberations of the agencies. 
Further, the active participation of the Commission will help 
facilitate a decision on the lead agency designation.

Sincerely, 

Signed by: 

Joseph T. Kelliher: 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Mark Gaffigan (202) 512-3841 or [email protected]: 

Staff Acknowledgments: 

In addition to the individual named above, Frank Rusco (Acting 
Director), Kimberly Cutright, Philip Farah, Craig Fischer, Quindi 
Franco, Samantha Gross, Carol Kolarik, Michelle Munn, Daniel Novillo, 
Alison O'Neil, and Barbara Timmerman made key contributions to this 
report. 

[End of section] 

Footnotes:  

[1] GAO, Energy Markets: Mergers and Other Factors That Influence 
Gasoline Prices, GAO-07-894T (Washington, D.C.: May 23, 2007); GAO, 
Energy Markets: Factors Contributing to Higher Gasoline Prices, GAO-06-
412T (Washington, D.C.: Feb. 1, 2006); GAO, Energy Markets: Gasoline 
Price Trends, GAO-05-1047T (Washington, D.C.: Sept. 21, 2005); GAO, 
Motor Fuels: Understanding the Factors That Influence the Retail Price 
of Gasoline, GAO-05-525SP (Washington, D.C.: May 2005). 

[2] FERC also serves as the lead agency in coordinating the permitting 
process across federal agencies and can similarly convey the right of 
eminent domain for electricity transmission lines. 

[3] The Organisation for Economic Co-operation and Development is a 
group of 30 countries committed to democracy and the market economy to 
support sustainable economic growth, maintain financial stability, and 
assist other countries' economic development. These countries are 
Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, 
France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, 
Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, 
Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United 
Kingdom, and the United States. However, we consider the United States 
separately for the purposes of this report. 

[4] GAO, Gasoline Markets: Special Gasoline Blends Reduce Emissions and 
Improve Air Quality, but Complicate Supply and Contribute to Higher 
Prices, GAO-05-421 (Washington, D.C.: June 2005). 

[5] The Strategic Petroleum Reserve (SPR) is a federally maintained 
stockpile of about 700 million barrels of light crude oil for use in 
the case of a major disruption of oil supplies. 

[6] Access to the rail market is limited and tanker trucks' expenses 
depend on distances traveled. 

[7] By petroleum products, we refer to primarily gasoline, diesel, jet 
fuel, heating oil. Most petroleum products and crude oil are shipped 
primarily by pipeline within the United States. Imports of petroleum 
products and crude oil, however, travel to the United States mainly 
over sea by vessel. 

[8] FERC also collects administrative, financial, and operational 
information on crude oil and petroleum product pipeline companies. 

[9] Figures represent trade originating or ending in OECD member 
nations, including trade between OECD nations, from OECD nations to non-
OECD nations, and from non-OECD nations to OECD nations. Because 
figures include some trade from OECD nations to other OECD nations, 
such trade is counted as both an import and an export and therefore 
includes some duplication of counting. Furthermore, figures do not 
account for trade between non-OECD nations and therefore understate the 
total global trade of these products. 

[10] Total gasoline includes both finished motor gasoline and motor 
gasoline blending components. 

[11] Imports of distillate fuels and jet fuel have also risen in the 
last 20 years, while imports of residual fuel oil have declined. 

[12] The graphic shows that imports remained significantly higher than 
in the same months during the previous year at least through January 
2006. This was likely the result of lasting damage to U.S. refining 
production caused by the hurricanes. 

[13] States are subject to some federal requirements in setting biofuel 
policies. Currently, EPA has determined that only blends of up to 10 
percent ethanol are allowed in conventional gasoline vehicles and 
blends of up to 85 percent ethanol are permitted in flexible fuel 
vehicles. However, the state of Minnesota and the Renewable Fuels 
Association, as well as DOE are developing research and tests to gather 
the data required to facilitate EPA certification of fuel blends up to 
E15 or E20. 

[14] The price increases were measured in gasoline prices in Chicago 
relative to Houston prices. 

[15] See, for example, GAO's Motor Fuels: Gasoline Prices in the West 
Coast Market, GAO-01-608T, (Washington, D.C.: Apr. 25, 2001). 

[16] In the United States, inventory data reported in this report refer 
only to privately held stocks, not the federally held crude oil and 
heating oil strategic reserves. As will be discussed later in this 
report, this is not true of some other OECD member inventory data. 

[17] Unlike in the United States, where the federal government holds 
strategic stocks of primarily crude oil--but also a relatively small 
stock of fuel oil in the U.S. Northeast Home Heating Oil Reserve-- 
European countries hold a large fraction of their strategic stocks in 
petroleum products, including gasoline and certain distillate fuels. 
Some European countries require private companies to maintain these 
stocks. 

[18] It is also not clear that the benefits of collecting and 
maintaining such data outweigh the costs. Evaluating these trade-offs 
was beyond the scope of this report, but such an evaluation would have 
to be made before making a decision to collect a broader range of 
inventory data. 

[19] Assessing the relative importance of these factors with any 
precision would be very difficult and we did not undertake this task in 
this report, so the list of factors should not be seen as a ranking of 
those factors in any way. 

[20] Energy Information Administration, Petroleum 1996: Issues and 
Trends, (Washington D.C., September 1997). 

[21] Note that there may have been additional factors influencing 
prices during this period, so we are not asserting that the pipeline 
outage was responsible for the entire change in prices. 

[22] It should be noted that whether or not the benefits of collecting 
and maintaining such data outweigh the costs is unknown. Evaluating 
these trade-offs was beyond the scope of this report, but such an 
evaluation would have to be made before making any decision to collect 
a broader range of pipeline or other infrastructure data. 

[23] Pub. L. No. 109-468, ï¿½8. 

[24] Pub. L. No. 107-355, ï¿½ 16 

[25] In 2006, DOT identified the need for additional Congressional 
authority to reduce the regulatory burden on companies trying to 
construct new pipelines or repair existing ones. Specifically, DOT 
proposed legislation that, according to DOT, would among other things 
provide "minimal authority" to assist pipeline operators in overcoming 
state and local-level impediments to constructing new pipelines and 
would further streamline the permitting process for pipeline repairs. 
At this time, Congress has not provided this additional authorization. 
DOT's proposal did not call for a federal agency to have the authority 
to convey the power of eminent domain in cases where conflicts over 
infrastructure placement cannot be resolved but it would have 
authorized the Secretary of DOT to "designate an ombudsman to assist 
resolving disagreements between Federal, State, and local agencies and 
pipeline operators arising during agency review of pipeline repairs and 
hazardous liquids pipeline construction projectsï¿½" 

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