[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
PRICES AT THE PUMP: MARKET FAILURE
AND THE OIL INDUSTRY
=======================================================================
HEARING
BEFORE THE
ANTITRUST TASK FORCE
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
MAY 16, 2007
__________
Serial No. 110-84
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
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COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas STEVE CHABOT, Ohio
MAXINE WATERS, California DANIEL E. LUNGREN, California
MARTIN T. MEEHAN, Massachusetts CHRIS CANNON, Utah
WILLIAM D. DELAHUNT, Massachusetts RIC KELLER, Florida
ROBERT WEXLER, Florida DARRELL ISSA, California
LINDA T. SANCHEZ, California MIKE PENCE, Indiana
STEVE COHEN, Tennessee J. RANDY FORBES, Virginia
HANK JOHNSON, Georgia STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois TOM FEENEY, Florida
BRAD SHERMAN, California TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota
Perry Apelbaum, Staff Director and Chief Counsel
Joseph Gibson, Minority Chief Counsel
------
Antitrust Task Force
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California STEVE CHABOT, Ohio
RICK BOUCHER, Virginia RIC KELLER, Florida
ZOE LOFGREN, California F. JAMES SENSENBRENNER, Jr.,
SHEILA JACKSON LEE, Texas Wisconsin
MAXINE WATERS, California BOB GOODLATTE, Virginia
STEVE COHEN, Tennessee CHRIS CANNON, Utah
ANTHONY D. WEINER, New York DARRELL ISSA, California
ARTUR DAVIS, Alabama J. RANDY FORBES, Virginia
DEBBIE WASSERMAN SCHULTZ, Florida STEVE KING, Iowa
LAMAR SMITH, Texas, Ex Officio
Perry Apelbaum, Staff Director and Chief Counsel
Joseph Gibson, Minority Chief Counsel
C O N T E N T S
----------
MAY 16, 2007
Page
OPENING STATEMENT
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan, and Chairman, Antitrust Task Force. 1
WITNESSES
The Honorable Bart Stupak, a Representative in Congress from the
State of Michigan
Oral Testimony................................................. 2
Prepared Statement............................................. 4
Dr. Mark N. Cooper, Director of Research, Consumer Federation of
America
Oral Testimony................................................. 6
Prepared Statement............................................. 8
The Honorable Richard Blumenthal, Attorney General for the State
of Connecticut
Oral Testimony................................................. 28
Prepared Statement............................................. 30
The Honorable Heather Wilson, a Representative in Congress from
the State of New Mexico
Oral Testimony................................................. 39
Prepared Statement............................................. 40
Dr. John Felmy, Chief Economist, American Petroleum Institute
Oral Testimony................................................. 42
Prepared Statement............................................. 59
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Executive Summary entitled ``What Goes Down Must Come Up: A
Review of the Factors Behind Increasing Gasoline Prices, 1999-
2006,'' Carol Dahl, Ph.D., Professor of Economics, Colorado
School of Mines, April 2007,
submitted by Dr. John Felmy, Chief Economist, American
Petroleum Institute............................................ 44
APPENDIX
Material Submitted for the Hearing Record
Prepared Statement of the Honorable Sheila Jackson Lee, a
Representative in Congress from the State of Texas, and Member,
Antitrust Task Force........................................... 76
PRICES AT THE PUMP: MARKET FAILURE AND THE OIL INDUSTRY
----------
WEDNESDAY, MAY 16, 2007
House of Representatives,
Antitrust Task Force
Committee on the Judiciary,
Washington, DC.
The Task Force met, pursuant to notice, at 1:13 p.m., in
Room 2141, Rayburn House Office Building, the Honorable John
Conyers, Jr. (Chairman of the Task Force) presiding.
Present: Representatives Conyers, Davis, Smith, Chabot, and
Keller.
Staff present: Stacey Dansky, Majority Counsel; Mark
Dubester, Majority Counsel; Stewart Jeffries, Minority Counsel;
and Brandon Johns, Majority Staff Assistant.
Mr. Conyers. The hearing of the Antitrust Task Force will
come to order.
Good afternoon.
As summer approaches, consumers are panicking over the
price of gasoline at the pump. Prices have skyrocketed. Today's
average U.S. price of a gallon of gas is $3.03, short just
barely of the record high reached in September of 2005 after
Hurricane Katrina hit.
In Michigan, gas prices have reached their highest levels
ever, at $3.27 a gallon. My State is now the third most
expensive State for gasoline in the country, behind only
California and Illinois.
Now, how did we get to this crisis, and what are the
solutions?
Cartels, the OPEC cartel, to be specific, which accounts
for the two-thirds of the world's oil reserves and over 40
percent of the world's oil production. Most significantly,
OPEC's oil exports represent about 70 percent of the oil traded
internationally. This affords them considerable control over
the global market.
Its net oil export revenues should reach nearly $395
billion this year, and its influence on the oil market is
predictably dominant, especially when it decides to reduce or
increase its levels of production. For years, this conspiracy
has unfairly driven up the cost of imported crude oil to
satisfy the greed of oil exporters.
We have long decried OPEC but, sadly, no one in the
Government has tried to take any action. Because the
Subcommittee Chairman, Bart Stupak, of Michigan is here and I
happen to know that he is also chairing his own hearing in
another room around the corner, I will suspend my statement,
invite our colleague, Mr. Stupak, to join us here, and with the
approval of the rest of the Members of the Task Force and the
Ranking Chairman----
Mr. Chabot. We have no objection.
Mr. Conyers. Thank you.
We would invite Bart Stupak to begin.
He has been a Member of this body since 1992, has served on
the Energy and Commerce Committee as Chairman of the Oversight
and Investigation Subcommittee and will be holding hearings
looking into the causes behind rising gas prices.
He is also a leader in the Democratic Caucus on Energy
Issues and is the author of the Federal Price Gouging
Prevention Act, which would give the Federal Trade Commission
the authority to investigate and punish those who unreasonably
inflate the price of energy.
Without objection, his statement will be entered into the
record.
And we welcome you to the Judiciary Committee, the Task
Force on Antitrust. Welcome, Bart.
TESTIMONY OF THE HONORABLE BART STUPAK, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MICHIGAN
Mr. Stupak. Thank you, Mr. Chairman, Mr. Chabot, thank you,
and thank you for the courtesy.
I am in a hearing with British Petroleum. We are looking at
the Texas City explosion that occurred in 2005 in which 15
people were killed, another 180 people injured and also what
has happened up at Prudhoe Bay where we shut down our oil
fields, America's most strategic oil field, last summer because
of leaks.
And it looks like it is, testimony is showing us, through
lack of maintenance while they had record profits. In fact,
during that period of time, they received $106 billion in
profits from 1999 to 2005 but yet they cannot maintain their
maintenance which led to explosions and deaths and things like
that.
But today we are here to talk about gas prices.
You are right, Mr. Chairman, on the 22nd of this month, we
will hold hearings on the price gouging legislation and other
legislation we have.
Today, on the news, you heard that nationwide average price
for gasoline hit $3.10 a gallon. This is higher than any time
last year, and we haven't even begun the summer driving season.
While consumers pay record prices, oil companies make record
profits.
For years, big oil has told us that the cost of a gallon of
gas is directly related to the price of crude on the world
market. However, in April of this year, a barrel of crude oil
was $63. A year before, last year, a barrel of crude was $70.
Despite the fact that crude is $7 a barrel cheaper than last
year, gas prices are almost 50 cents higher per gallon.
Clearly, there is more at play than simply the price of crude
oil.
Since 1980, more than 200 refineries in the U.S. have been
closed. Only one new major refinery has been requested and
environmental permits were permitted within a year for that
refinery. It was chosen, though, the oil companies chose never
to build it.
Oil companies complain there is too much environmental red
tape, but as I said, since 1976, only one application for a new
refinery has occurred, and those permits were approved
forthwith.
In fact, there is evidence that the oil companies have
intentionally reduced refinery capacity to drive up gas prices.
The Oversight Investigations Committee--I will leave you the
internal documents from Mobil, Chevron and Texaco--in 1995 and
1996, specifically, advocated that these companies limit
domestic refining capacity to drive up prices.
Today, there are fewer independent refineries in the United
States, according to the May 2004 GAO study. The four or five
largest oil companies now own the majority of the refineries,
giving these companies a significant amount of control over the
entire distribution process, from exploration for oil to the
gas that goes in your tank. Shrinking refinery capacity and a
reluctance to invest in new infrastructure have significantly
restrained gasoline supplies, driving refinery profits to
record highs.
Take, for example, after Hurricane Katrina. Refinery
profits were 255 percent higher than they were the same time
the previous year. The average profit margin between a barrel
of crude oil and a barrel of gasoline now, today, is $30, as
reported in the May 3 BusinessWeek article.
That is about 70 cents in refinery profits based on a $3
per gallon of gas. So according to experts, the spread or the
profit should be $8 or $9 a barrel, not the $30 we see today.
At $8 or $9 a barrel for a refinery, they earn about 20 cents a
gallon, which is a reasonable profit margin.
As a result of these enormous profits, in the first 3
months of 2007, Valero, the Nation's largest refinery,
announced $1.1 billion in profit. That is up 30 percent over
last year. ExxonMobil's refineries alone made $1.9 billion in
the first quarter.
I have introduced legislation, the Federal Price Gouging
Prevention Act, to protect American consumers from being gouged
at the pump. It is H.R. 1252. It would give the FTC, Federal
Trade Commission, the authority to investigate and punish those
who artificially inflate the price of energy. The FTC would be
empowered to exercise its authority at each stage of energy
production and distribution supply chain. The legislation
applies to gasoline, diesel fuel, crude oil, natural gas, home
heating oil and propane.
Over 100 Members of Congress have already co-sponsored this
legislation.
I have also introduced the Prevent Unfair Manipulation of
Prices, the PUMP Act, H.R. 594. the PUMP Act would increase the
oversight by the Commodity Futures Trade Commission of over-
the-counter energy trading. According to the April 30 Financial
Times, the CFTC, Commodity Futures Trading Commission, has
taken the rare step of having to issue subpoenas to McGraw-
Hill, which produces trade publications on energy trading.
Because the CFTC does not have the authority to ask traders
for this information, it is instead forced to take legal action
against third party publications. Without proper oversight,
energy prices can be driven up by fear, greed and speculation.
Economists have estimated that improving oversight of these
markets would eliminate the fear premium on crude oil and lower
the price by as much as $20 a barrel, or almost 50 cents per
gallon.
By passing these two bills, Congress can reign in the
excessive profits made by the oil companies and the speculation
of unregulated energy markets. Just counting the 50 cents per
gallon of excess profit on refineries and 50 cents per gallon
of fear premium--we call it fear premium--these two bills could
save consumers $1 per gallon at the pump.
In addition, I encourage this Committee to continue to
investigate the influence that big oil has on the price of
gasoline, including a May 2004 GAO report, because they do talk
about is there collusion between the companies, why have they
failed to invest in refinery infrastructure?
So I want to thank this Committee for allowing me to
testify. I look forward to take any questions you may have.
[The prepared statement of Mr. Stupak follows:]
Prepared Statement of the Honorable Bart Stupak, a Representative in
Congress from the State of Michigan
Chairman Conyers and Members of the Committee, gas prices are
causing Americans significant financial hardship, and I appreciate the
work this Committee is doing to address this problem. Thank you for
allowing me to appear before you today.
Last week, the nationwide average price for gasoline hit $3.07 a
gallon. This is higher than any time last year, and we have yet to
reach the peak driving season for 2007. As we approach Memorial Day and
increased summer driving, gas prices are expected to be even higher.
While consumers pay record prices, oil companies make record profits.
For years, Big Oil has told us that they have no control over gas
prices because it is dependent on world crude oil prices.
However, in April, a barrel of oil cost $63. A year before, a
barrel of crude oil was $70. Despite the fact that crude oil was $7 a
barrel cheaper than last year, gas prices were almost 50 cents per
gallon higher. Clearly, there is more at play than simply the world
crude oil market.
Since 1980, more than 200 refineries in the United States have been
closed. Demand for gasoline continues to grow every year, but a new
refinery has not been built since 1976. Only one new major refinery has
requested environmental permits in the past 30 years. While the permits
were granted, the refinery was never built.
The oil companies complain that there is too much environmental red
tape. The truth is that very few companies have even tried to build new
refineries, instead opting to upgrade existing facilities and run them
as close to capacity as possible.
In fact, there is evidence that oil companies have intentionally
reduced refining capacity to drive up gas prices.
Internal documents from Mobil, Chevron, and Texaco in 1995 and 1996
specifically advocated that these companies limit domestic refining
capacity to drive up prices.
Today, there are fewer independent refineries in the United States,
according to a May 2004 Government Accountability Office (GAO) study.
The 4 or 5 largest oil companies now own the majority of refineries,
giving these companies a significant amount of control over the entire
distribution process, from exploration to your gas tank.
Shrinking refinery capacity and a reluctance to invest in new
infrastructure have significantly restrained gasoline supplies, driving
refinery profits to record highs.
For example, after Hurricane Katrina, refinery profits were 255
percent higher than they were at the same time a year before, according
to the The Washington Post.
The average profit margin between a barrel of crude oil and a
barrel of refined gasoline is now $30, as reported in a May 3, 2007
Business Week article. That's about 70 cents in refinery profits for
every $3 gallon of gas. According to experts, $8 or $9 a barrel, or
about 20 cents a gallon, is a more reasonable profit margin.
As a result of these enormous profit margins, in the first three
months of 2007, Valero, the nation's largest refinery company,
announced profits of $1.1 billion, up 30% over last year. ExxonMobil's
refineries alone made $1.9 billion in the first quarter of 2007.
Other oil companies have enjoyed similar profits. During the first
3 months of 2007, Royal Dutch Shell's profit was $7.3 billion. Chevron
reported $4.7 billion, up 18 percent from last year. ConocoPhilips made
more than $3.5 billion. And ExxonMobil's profits were more than $9.2
billion.
I have introduced legislation, the Federal Price Gouging Prevention
Act (HR 1252) to protect American consumers from being gouged at the
pump.
H.R. 1252 would give the Federal Trade Commission (FTC) the
authority to investigate and punish those who artificially inflate the
price of energy. The FTC would be empowered to exercise this authority
at each stage of the energy production and distribution supply chain.
The legislation applies to gasoline, diesel fuel, crude oil,
natural gas, home heating oil, and propane.
Over 100 Members of Congress have already co-sponsored this
legislation, and I look forward to moving it soon.
I have also introduced the Prevent Unfair Manipulation of Prices
(PUMP) Act, HR 594. The PUMP Act would increase oversight by the
Commodity Futures Trading Commission of over-the-counter energy
trading.
According to an April 30 Financial Times story, the CFTC has taken
the rare step of issuing a subpoena to McGraw-Hill, which produces
trade publications on energy trading. Because the CFTC does not have
the authority to ask traders for this information, it is instead forced
to take legal action against third-party trade publications.
Without proper oversight, energy prices can be driven by fear,
greed, and speculation. Economists have estimated that improving
oversight of these markets would eliminate the ``fear premium'' on
crude oil and lower the price by as much as $20 a barrel, or almost 50
cents per gallon of gasoline.
By passing my two bills, Congress can reign in the excessive
profits made by the oil companies and the speculation on unregulated
energy markets.
Just counting the 50 cents a gallon of excess profit by the
refineries, and the 50 cents per gallon of fear premium, these two
bills could save consumers up to $1 a gallon at the pump!
In addition to my legislation, I encourage this Committee to
investigate the influence the Big Oil has on the price of gasoline. Is
there any collusion between these companies? Why have they failed to
invest in refinery infrastructure?
As Chairman of the Oversight and Investigations Subcommittee in
Energy and Commerce, I have scheduled a hearing on gas price gouging
and the factors that go into the price of gasoline.
I thank the Committee for allowing me to testify, and I look
forward to your questions.
Mr. Conyers. Well, we have decided that we will send you
the questions in writing and then incorporate them into the
hearing, Bart Stupak, but thank you for getting us started.
Mr. Stupak. Thank you, Mr. Chairman.
Mr. Conyers. Not only do you have one piece of legislation
for us to examine, but two, and we want to get further
descriptions of them to include in the record. I don't want to
take up anybody's time here.
Mr. Stupak. Well, take a look at the PUMP Act, Mr.
Chairman. About half the trades on the oil market are not being
subject to any kind of Government oversight, and that is when
you do get the fear, speculation and greed. Everything we have
looked at we can save $20 a barrel if we just put oversight. I
am not saying regulation, I am just saying oversight. Why are
some of the trades on the oil market subject to oversight and
the others are not?
Mr. Conyers. I thank my colleagues.
And I thank you.
And we will now recess for two votes that are pending. And
we stand in recess.
Mr. Smith. Mr. Chairman, may I----
Mr. Conyers. Yes?
Mr. Smith. Just a point of personal privilege, if I may.
Mr. Conyers. Absolutely.
Mr. Smith. I want, while we are here and before we get
interrupted by the votes, want to congratulate you on a happy
birthday today.
Now, there are a couple ways to look at this. We could
maybe look at it, Jack Benny said he was 39 forever. I won't
ask whether you have doubled Jack Benny or not, but it is a
credit to you that you are as active and vibrant and alert and
take the initiative you do. There is no sign of any age
whatsoever, and we appreciate that in our Chairman.
On a more partisan note, the fact that you are so hale and
hearty should be reassuring to John McCain, I would assume.
[Laughter.]
Mr. Conyers. Well, thank you very much, Ranking Member
Lamar Smith. I am just so happy you didn't ask for my age,
because I have lied and misrepresented it for so many years, I
am not sure what it really is at this point. [Laughter.]
So the Committee stands in recess, and thank you so very
much.
[Recess.]
Mr. Conyers. The Committee will come to order. The
Antitrust Task Force continues its hearing intermittently
between our responsibilities on the floor.
Our next witness is not a stranger to the Committee. Mark
Cooper is Director of Research at Consumer Federation of
America. He is responsible for analysis and advocacy in the
area of telecommunications, media, digital rights, economic and
energy policy. He has provided expert testimony in more than
250 cases for public interest clients, including attorneys
general, people's council and citizen interveners before State
and Federal agencies, courts and legislators in almost four
dozen jurisdictions in the United States and Canada. A Yale
University Ph.D., a Fulbright fellow and author of numerous
books and articles.
Welcome, Mr. Mark Cooper, and you may begin.
TESTIMONY OF MARK N. COOPER, DIRECTOR OF RESEARCH, CONSUMER
FEDERATION OF AMERICA
Mr. Cooper. Thank you, Mr. Chairman and Members of the
Committee. I appreciate the opportunity to offer the consumer
perspective on rising gasoline prices.
American gasoline consumers are fed up, mad as hell, and
they have good reason to be. Over the past 5 years, the average
household expenditure for gasoline has increased by over
$1,000. A major cause of this immense increase is the failure
of Federal antitrust authorities to prevent the abuse of market
power by oil companies and the failure of the Administration
and Congress to enact policies to address the problems that
plague the gasoline market.
Between January of this year and the first week in May,
gasoline prices increased about 80 cents per gallon. Over 60
cents was the result of an increase in the amount taken by
domestic refining and marketing. In the past 5 years, the
increase in price paid to domestic refining and marketing has
cost consumers over $130 billion.
Consumers believe that gasoline prices are unreasonable and
that there is something the Administration and Congress can do
about it, and our analysis shows they are right. The domestic
refining sector has become so concentrated that these price
increases represent the abuse of market power in the industry.
The merger wave of the past decade dramatically reduced the
number of refineries and companies in the wholesale market. As
a result, the vast majority of markets in the U.S. are
concentrated. Lacking competitive pressures, the industry has
failed to expand refinery capacity adequately and dramatically
reduced the amount of gasoline in storage. This makes markets
vulnerable to price surges, even when routine maintenance is
conducted, not to mention unexpected events. The companies put
up prices, blame supply and demand, but they are the cause of
the supply side problem.
With prices rising faster than cost, net income in U.S.
refining has increased sharply, far faster than in foreign
refining. Oil companies' profits have increased far more than
profits at comparable U.S. non-oil companies, setting records
in 3 of the last 4 years. Excess profits in the past 4 years
exceed $200 billion.
The increase in cash flow is so great that the industry
cannot absorb it, so it is throwing huge quantities of cash--
stock buybacks, debt reduction, dividends and huge piles of
cash. Net new investment has been paltry compared to the growth
of net income, especially in domestic refining.
This is great for their Wall Street performance, but it is
bad news for Main Street America.
This industry has all of the characteristics of market
failure: Basic structural conditions of low elasticity of
demand and supply; concentration and barriers to entry;
conduct, including lockstep pricing, conscious parallelism in
which each of the individuals mutually reinforces the other;
bad management, so bad that they can't even handle routine
maintenance without interrupting supply and putting prices up;
and, finally, performance, high prices, excess profit,
underinvestment and in the inability to absorb cash flow. This
is a picture of fundamental market failure.
The pain felt by consumers is ultimately the result of a
policy failure at every level. Antitrust officials approve too
many mergers and imposed weak conditions on those that went
through so that they could not discipline market power.
Congress and the Administration have stood idly by and done
nothing to help consumers.
We believe that to address the short-term problem of price
spikes, we need a strategic refinery reserve and a strategic
product reserve that are dedicated to ensuring we have excess
capacity sufficient to discipline pricing abuse.
We need antitrust authorities that really do their job and
look very closely at unilateral actions that raise prices. We
need authority to make sure they can look at those kinds of
behaviors.
We need commodity market regulators who look at all the
market, and we need joint Federal-State task forces to oversee
both the physical and financial markets, so we have more
eyeballs with different perspectives overseeing this vital
energy commodity.
To address long-term problems, we need fundamental changes
in supply and demand. We have to accelerate the day when we
will use less oil by setting aggressive, concrete targets for
reducing American oil consumption, above all, increasing CAFE
standards.
We need a national policy that promotes the research,
production and use of biofuels in a socially and
environmentally responsible manner.
Now is the time to act. Six years ago was the time to act.
Hopefully, the current round of spikes, which has gotten
everybody's attention, will finally convince policymakers to
take some measures that alleviate the pain that Americans have
been suffering at the pump.
Thank you.
[The prepared statement of Mr. Cooper follows:]
Prepared Statement of Mark N. Cooper
Mr. Conyers. Thank you, Mr. Cooper.
Because of time constraints, we are going to call on
Attorney General Richard Blumenthal from Connecticut as the
next witness.
He has advocated reforms in the health insurance industry,
has fought unfair utility rate charges, has led the fight
against big tobacco in terms of their deceptive marketing aimed
at children, has investigated insurance industry abuses. In
other previous public services he was administrative assistant
to United States Senator Abe Ribicoff, aide to former United
States Senator Daniel Moynihan and was a law clerk to the
Supreme Court Justice Harry Blackmun. He has also worked with
the NAACP Legal Defense Fund, has served in the Connecticut
House of Representatives, and we are delighted that his
schedule would permit him to join us for this important hearing
before the Antitrust Task Force today.
We welcome you, Mr. Attorney General.
TESTIMONY OF THE HONORABLE RICHARD BLUMENTHAL, ATTORNEY GENERAL
FOR THE STATE OF CONNECTICUT
Mr. Blumenthal. Thank you so much, Mr. Chairman. I am
honored to be before you and have long admired the great work
that you have done in the consumer area and so many other areas
where I have observed the many contributions that you have
made. And so I am particularly honored to be here before you.
Mr. Conyers. Thank you.
Mr. Blumenthal. And particularly so on this subject, which
concerns consumers as much or more than any. I have found that
there is none that angers and outrages the consumers of the
country more, and with great reason, than this one precisely
because of the statistics that you have just heard from Mr.
Cooper, which are so compelling and persuasive as to the need
for fundamental change.
This market is not just failed, it is dysfunctional, and it
overpowers consumers and causes abuses, enables those abuses in
a way that virtually none other in the country today.
As I was driving here from the airport, I thought back to a
meeting that I had with the United States Attorney General less
than a year ago involving a number of my colleagues from all
around the country, both Republican and Democrat attorneys
general, who met with him and the chairman of the FTC with the
single purpose of persuading them to begin a Federal
investigation. And, unfortunately, our plea went unheeded then.
There has been no effective Federal investigation.
We pleaded with Attorney General Gonzalez and FTC Chairman
Majoras Platt to begin an investigation of the oil industry,
and we offered our partnership in that work. All 50 attorneys
general have a task force investigating monopolistic abuses on
the part of the oil industry, but we lack the authority and
expertise and resources of the Federal Government, and so we
invited, we beseeched the Federal Government to join with us in
that investigation, and so far they have declined to do so.
There is a need to provide greater authority but also to
use that authority effectively to enforce the law. The law
without enforcement is dead letter.
And so as we review what can be done to change the law, I
think at the top of the priorities ought to be the kinds of
demands that you have made, Mr. Chairman, other Members of the
Committee and Congress that the Justice Department be more
aggressive and vigorous in enforcing these laws that protect
against antitrust and consumer abuses.
I am here to strongly support the legislation that you have
proposed that would enable antitrust enforcement against OPEC.
By an accident of interpretation in the Federal courts, we lack
that authority now, but there is no clearer instance of
monopolistic pricing than on the part of those OPEC countries.
And if they were entities in any way within the reach of law,
there would be no question that they were breaking laws and
doing business in the United States. And so I strongly support
that measure.
I also believe that we ought to have, as a remedy under the
antitrust laws, the potential to break up the big oil companies
if they abuse their market power. Clearly, there is a
concentration of power.
I know my colleague, Mr. Felmy, differs on that point. He
says that there is robust competition, no concentration of
power. I think there is virtual unanimity among economists that
there is a concentration of power. Indeed, I have fought it.
For example, the ExxonMobil merger, and the statistics, support
that view overwhelmingly.
The question really is what to do about it--whether they
are capable of using that power wisely or whether they need to
be policed and stopped from abusing it--and I think they have
clearly demonstrated that they will abuse it unless antitrust
authorities apply the laws with the potential remedy of
breaking up some of the concentration.
I also support in my testimony--and I won't go through
every detail, because it is in the testimony, and I would
simply ask for permission to make it a part of the record--a 1-
year moratorium on any future mergers; a prohibition against
any oil company merger in a highly concentrated market unless
there is a showing by the FTC that there is a benefit to
consumers; a series of steps to expand refinery capacity and
product inventory levels, which are a vital weak point in the
system now; a series of measures, including banning zone
pricing, which divides geographic turf. Big oil companies
divide that turf, deciding what consumers can pay in different
geographic areas and through their agreements with franchisees
enforce those kinds of rules on them.
And, finally, I strongly support measures relating to
conservation, alternative fuels, essentially, to reduce the
dependency and, as it is called, addiction to big oil.
And I think that, again, to close where Mr. Cooper did,
there is a need, as Mr. Felmy says, to avoid doing harm, first
do no harm, but the point here is that there can be no more
egregious harm than to watch prices rise at the pump, 50 cents
higher than last year at this time, when crude is lower, $7 a
barrel lower.
That is an outrage, and consumers are rightly angry about
it, and I hope that the Congress will give States and State
attorneys general some of the measure that I think can help us
overcome it.
Thank you.
[The prepared statement of Mr. Blumenthal follows:]
Prepared Statement of the Honorable Richard Blumenthal
Mr. Conyers. Thank you so much. The documents you referred
to will be incorporated into the record. There is so much that
we can talk about and so little time to do it. So we will stay
in touch.
Mr. Blumenthal. Thank you.
Mr. Conyers. The Chair wants to recognize the gentlelady
from New Mexico, Heather Wilson, a senior Member of the Energy
and Commerce Committee in the House, a leader in efforts to
protect consumers from price gouging and who has led a
bipartisan effort after Hurricanes Katrina and Rita to prevent
price gouging during emergencies. We passed one of her pieces
of legislation overwhelmingly just recently.
She serves also on the Environment and Hazardous Materials
Subcommittee, Health Subcommittee and Telecommunications and
Internet Subcommittee of the Energy and Commerce Committee. She
is also on the Intelligence Committee and has been active, very
active, in the subject matter that brings us here today.
And we will incorporate your full statement into the record
and invite you to begin.
TESTIMONY OF THE HONORABLE HEATHER WILSON, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF NEW MEXICO
Mrs. Wilson. Thank you, Mr. Chairman, and happy birthday.
Mr. Conyers. Oh, thank you, just as long as you don't ask
me how old I am.
Mrs. Wilson. I won't, sir.
Mr. Conyers. Thank you so much.
Mrs. Wilson. Thank you, Mr. Chairman, and thank you for
holding this hearing.
I believe very strongly that we need a balanced long-term
energy policy for the country that makes America more energy
independent, and there are a variety of ways to do that, but I
think that everybody concerns when the price at the pump goes
up to $3.10 a gallon, which is what it is, on average, and was
$3.06 when I last filled up my car at I-25 and Alameda in
Albuquerque. Drivers across the Nation are feeling the pinch in
their pocketbook, and it is uncomfortably high.
There are a number of pieces to this puzzle, and part of
addressing energy independence is to understand the factors
driving prices and to mitigate those factors. That certainly
means reducing demand and moving toward alternative fuels and
E85 ethanol. The country of Brazil is almost completely energy
independent. They import almost no oil, because they depend on
E85, which is ethanol that they make from sugarcane, hydrogen
and biofuels.
I would note that the Senate, with the leadership, in a
bipartisan way, of Senator Bingaman and Senator Domenici, has
passed the Senate Energy Savings Act, and that is now pending
here in the House.
Whether it is hybrid vehicles or conservation or changing
the way in which we calculate fuel savings for trucks, these
are the kinds of things that can reduce demand.
At the same time, we have to diversify supply. We have got
worldwide volatility and worldwide increases in demands in oil.
We import over 60 percent of our oil from countries that
generally don't like us, and we don't want to be in that
situation, whether it is violence in Nigeria and dealing with
that or the fact that we are making some advances here in
domestic exploration, including the passage of the Gulf of
Mexico Security Act of 2006, so we diversify our sources of
supply.
We have got supply chain bottlenecks, and some have
mentioned also refinery capacity already. We have very little
margin of error in our refinery capacity. We have got about
800,000 barrels per day in the United States of crude oil
refining capacity that is currently offline, and that
translates to about 400,000 barrels a day in lost gasoline
production. In a normal season, about 100,000 barrels are
offline.
One of the pieces, though, I think is to look at the issue
of price gouging, and I have reintroduced my legislation that
passed overwhelmingly in the House in the last Congress. I
don't think Federal law adequately addresses price gouging.
Currently, under the FTC, Federal Trade Commission, rules, they
can investigate collusion, but they cannot investigate price
gouging; they don't have the legal authority.
My bill would prohibit price gouging at any time for
gasoline or diesel fuel, crude oil, home heating oil and
biofuels. It would direct the Federal Trade Commission to come
up with a definition of price gouging for both retail and
wholesale.
One of the difficulties is that we have 30 States with
price gouging laws and very different definitions of what that
means. I think we need an extensive rulemaking in order to come
up with a very good definition so everybody knows the rules of
the road.
The bill provides for both criminal and civil sanctions as
well as civil enforcement by the Federal Trade Commission as
well as the State attorney generals if the FTC does not act.
I thank the Committee for its consideration of this
legislation, and I look forward to working it through in this
Congress.
Thank you, Mr. Chairman.
[The prepared statement of Mrs. Wilson follows:]
Prepared Statement of the Honorable Heather Wilson, a Representative in
Congress from the State of New Mexico
Chairman Conyers and Ranking Member Smith, thank you for providing
me the opportunity to testify before the House Committee on the
Judiciary.
We need to make America more energy independent and that is going
to take a long-term, balanced approach that deals with supply, demand
and protecting consumers.
Americans are again seeing gasoline price spikes at the pump with
prices reaching over $3 a gallon all over the country. Back home in
Albuquerque, New Mexico, prices for unleaded gas range from $3.09 to
$3.25. A month ago prices in New Mexico hovered around $2.80 and a year
ago prices were around $2.90.
While price fixing, collusion and other anti-competitive practices
are currently illegal on the federal level, there is no federal
statutory prohibition against price gouging.
Following the Hurricane Katrina disaster, gasoline prices
fluctuated up to $6 per gallon in some communities. I was concerned
that current law does not adequately address price gouging that does
not rise to the level of antitrust prohibitions.
Last Congress I introduced HR. 5253, the Federal Energy Price
Protection Act of 2006. A little more than a year ago, on May 3, 2006
the House passed H.R. 5253 by a vote of 389-34. Unfortunately, the
Federal Price Protection Act of 2006 stalled in the Senate.
I have reintroduced the Federal Energy Price Protection Act.
The Federal Energy Price Protection Act prohibits price gouging--at
any time--in the market for gasoline, diesel fuel, crude oil, home
heating oil, and biofuels.
The Federal Energy Price Protection Act directs the Federal Trade
Commission to define by rule the terms ``price gouging'', ``wholesale
sale'', and ``retail sale''. The existing state statutes in this area
have vastly different definitions and interpretations. Under a
rulemaking, the FTC would have the benefit of receiving, and the
obligation to consider, comment from interested parties on the
definition of price gouging. The Act directs the FTC to define price
gouging within 6 months of enactment.
The Federal Energy Price Protection Act provides for strong civil
enforcement by the FTC, by States' Attorneys General, and criminal
enforcement by the U.S. Attorney General and the Department of Justice.
The Federal Energy Price Protection Act provides for civil
penalties for price gouging. For ``wholesale sale'' violations, the
penalties are 3 times the ill-gotten gains of the seller, plus an
amount not to exceed $3 million, per day of a continuing violation. For
``retail sale'' violations, the penalties are simply 3 times the ill-
gotten gains of the seller.
The Federal Energy Price Protection Act provides for criminal
penalties. ``Whole sale'' violations will be punishable by a fine of no
more than $150 million, imprisonment for not more than 2 years, or
both. ``Retail sale'' violations will be punishable by a fine of no
more than $2 million, imprisonment for not more than 2 years, or both.
At least 30 states have laws that prohibit price gouging or
excessive price increases. Most states have laws that are triggered in
the event of a declared emergency, with a few having laws that may be
applicable at other times as well. Other states may also exercise
authority under general deceptive trade practice laws depending on the
nature of the state law and the specific circumstances in which price
increases occur.
When defining ``price gouging'', the devil is in the details. Under
the provisions of The Federal Energy Price Protection Act, the Federal
Trade Commission would consider public comment in defining exactly what
wholesale pricing is, what retail pricing is, and it gives them some
regulatory authority to come up with definitions. The truth is, there
are about 30 State laws. Some of those laws are very, very different,
and it makes sense to allow the States and those involved to come up
with a national definition that will work best for consumers in the
marketplace.
The government doesn't set prices, but we do have a responsibility
to prohibit price gouging and unfair manipulation of the markets.
Opportunists should not be able to reap ill-gotten windfall profits on
the backs of America's families, particularly when disaster strikes.
A federal statutory prohibition against price gouging is one piece
of the puzzle. We also need to deal with other pieces of the puzzle as
we move along, everything from building refinery capacity, encouraging
more hydrogen-powered cars, using ethanol in our gas tanks, exploring
for energy in America and in American waters and conservation so that
America becomes more energy independent.
We need a balanced, long term energy plan for the country that
makes us more energy independent.
Again, thank you for allowing me the opportunity to testify before
the Committee on the Judiciary.
Mr. Conyers. My congratulations to you for your past
efforts, and we look forward to you continuing in this
Congress.
I would like now to introduce our last witness, the Chief
Economist and Director of the Statistics Department at the
American Petroleum Institute, Dr. John Felmy. Twenty years'
experience in energy economic and environmental analysis,
Bachelor's and Master's in Economics from the Pennsylvania
State University and a Ph.D. in the same area from the
University of Maryland, a member of several professional
associations, including the American Economics Association,
International Association for Energy Economics, and is serving
as the chairman of the Policy Committee of the Alliance for
Energy and Economic Growth.
We welcome you and look forward to your contribution to
this hearing.
Mr. Chabot. Mr. Chairman, before the doctor gets started,
if I could just ask a question. We have got a vote on the
floor, so we are going to head over for that, I guess, and
there is a markup in this room at 4 o'clock, and I was just
wondering what the Chair was thinking relative to panel Members
asking questions and that sort of thing.
Mr. Conyers. We will go till 3:59.
Mr. Chabot. Okay. Because we may not be back here for
another----
Mr. Conyers. Yes.
Mr. Chabot. We have got two 20-minutes votes, they are
saying.
Mr. Conyers. That is life in the Congress.
Mr. Chabot. Excellent. I just wanted to make sure we
understood where we were at. Thank you, Mr. Chairman.
Mr. Conyers. You are welcome.
Dr. Felmy, welcome to the Committee.
TESTIMONY OF JOHN FELMY, CHIEF ECONOMIST,
AMERICAN PETROLEUM INSTITUTE
Mr. Felmy. Thank you, Mr. Chairman and Members of the
Committee. We appreciate the invitation to present API's view
on gasoline prices.
We recognize that consumers are frustrated with today's
higher prices. However, the cause of the higher prices is an
imbalance between supply and demand, worsened, at least, in
part, by policy failures, which the current price control
proposals could make worse.
Price control legislation fails to address this cause and
is premised on this about how fuel is marketed. Our companies
have been producing record amounts of fuel to supply their
customers in highly competitive markets. The industry has
supplied about 8.85 million barrels per day to date this year.
However, because of maintenance at European refineries and a
French port workers strike, less imported gasoline has been
available. Gasoline imports typically make up about 12 percent
of our supply.
As a result, total U.S. gasoline supplies have struggled to
keep up with demand, which has been extremely strong. During
the first quarter of 2007, total U.S. gasoline demand set a
record, increasing almost 2 percent over the same period in
2006.
Besides record-breaking demand and sluggish imports, other
factors have been contributing to higher gasoline prices. They
include crude oil prices, which account for more than half the
cost of gasoline and are set on international markets, the
annual switchover to more expensive to produce summer blend
gasoline required by EPA and regularly scheduled refinery
maintenance and on-plan problems that have prevented refiners
from making even more gasoline.
In short, the price increases reflect supply and demand,
and the same is true for past price increases that have been
thoroughly investigated by Government agencies who would not
have hesitated to take the industry to task if illegal or
improper activity had been discovered. Invariably, these
agencies have explained price spikes by supply-demand
conditions that had nothing to do with the manipulation of
supplies or illegal agreements among companies.
A 2006 investigation by the U.S. Federal Trade Commission
found ``no evidence indicating that refiners make product
output decisions to affect the market price of gasoline.
Instead, the evidence indicates that refiners responded to
market prices by trying to produce as much high-value products
as possible. The evidence collected in this investigation
indicated that firms behave competitively.''
Those who persist in suspecting that the industry is
holding back supplies often cite the lack of new refinery
construction. However, over the past 10 years, existing
refineries have expanded capacity equivalent to building 10 new
refineries, and based on public announcements of refinery
expansions are projected to add capacity equivalent to an
additional eight new refineries by 2011.
Another explanation advanced to explain high prices is
industry mergers. Industry mergers have occurred only after
careful FTC scrutiny to ensure competitiveness of all markets.
There is no shortage of competitors today. The eight biggest
refiners account for about 66 percent of the market at the
beginning of 2006--a level of concentration that is comparable
to other consumer products industries. There is nothing we are
aware of in a professional peer-reviewed literature tying
higher prices to mergers. In that category, I exclude a 2004
GAO report dismissed by the FTC as badly flawed.
In short, the justifications advanced in support of price
control legislation are without merit. Price control laws could
prevent the operation of laws of supply and demand, hamstring
efforts to secure ample supplies of fuel to consumers. Such
proposals are cousins of the disastrous price and allocation
controls of the 1970's which led to gasoline lines, odd or even
days and millions of angry motorists.
If price controls are enacted, the 12 percent of our daily
gasoline consumption met by imports could be jeopardized.
Because of artificially low prices, exporters would have less
incentive to ship to U.S. markets. Also, they may prefer to
ship to other markets rather than risk jail time or exorbitant
fines supplying the U.S.
Finally, after a natural disaster in the U.S., the same
disincentives could affect domestic suppliers, making it harder
to end regional shortages that typically follow national
disasters.
The U.S. oil and natural gas industry is doing everything
it can to produce the fuels consumers demand. Markets work and
have done more for consumers than price controls could ever
hope to, but we also need policies that focus on increasing
supplies, encouraging energy efficiency and conservation in all
sectors of the economy, including transportation and reporting
and promoting responsible development of alternative and non-
conventional sources of energy.
At a minimum, we must do no harm. Price control laws
threaten consumers and the Nation's energy security. We can do
much, much better.
Finally, Mr. Chairman, I would like to submit for inclusion
in the record the executive summary of a recent study by
Professor Carol Dahl. Professor Carol Dahl is an economist at
the Colorado School of Mines who has studied, at our request,
many of the issues he discussed today.
Mr. Conyers. Without objection, so ordered. We will include
it.
[The information referred to follows:]
Mr. Felmy. Thank you, Mr. Chairman.
[The prepared statement of Mr. Felmy follows:]
Prepared Statement of John Felmy
I am John Felmy, chief economist of API, the national trade
association of the U.S. oil and natural gas industry. API represents
nearly 400 companies involved in all aspects of the oil and natural gas
industry, including exploration and production, refining, marketing and
transportation, as well as the service companies that support our
industry.
The oil and natural gas industry understands America's frustrations
about gasoline prices. Higher prices are a burden to households and
potentially threaten the economy.
However, the evidence overwhelmingly demonstrates that higher
prices reflect an imbalance between supply and demand, worsened at
least in part by policy failures, which the current price-control
proposals will make still worse. The contention that higher prices are
driven by market failure or market manipulation, including the holding
back of supplies, is not credible. The prices are a symptom of larger
energy challenges facing the nation and must be addressed in other
ways.
U.S. oil companies are working extremely hard to provide Americans
with the fuels they need and demand.
U.S. refineries have been making record amounts of gasoline, about
8.85 million barrels per day to date this year (see Figure 1). However,
less imported gasoline has been available. Typically, imports make up
about 12 percent of gasoline supply. Less foreign gasoline has been
available in part because of spring refinery maintenance in Europe and
an 18-day French port-workers' strike in March, which led some European
refiners to reduce production. As a result, total U.S. gasoline
supplies have struggled to keep up with demand, which has been
extremely strong. During the first quarter of 2007, total U.S. gasoline
demand set a record, increasing almost 2 percent over the same period
in 2006.
The most important factor in higher gasoline prices has been higher
crude oil prices. More than half the cost of gasoline is attributable
to the cost of crude oil. Crude oil prices have fluctuated
significantly, driven by lingering geopolitical tensions, OPEC's
continuing production controls, and worldwide demand growth. Oil
companies do not set the price of crude. It is bought and sold in
international markets, with the price for a barrel of crude reflecting
the market conditions at the time of purchase. It is well recognized
that the market for crude oil has tightened. World oil demand reached
unprecedented levels in 2006 and continues to grow due to strong
economic growth, particularly in China and the United States. World oil
spare production capacity--crude that can be brought online quickly
during a supply emergency or during surges in demand--is near its
lowest level in 30 years.
In addition, the annual switchover to ``summer blend'' gasoline
required by EPA has occurred, and this warm-weather gasoline is more
expensive to produce. The switchover lowers yields per barrel of oil
and requires a large supply drawdown to meet regulations, which reduces
inventories.
Finally, despite record U.S. gasoline production, regularly
scheduled refinery maintenance and unexpected problems relating to
extreme weather, external power outages and other incidents have
prevented refiners from making even more gasoline. Maintenance is a
normal procedure, though it has been delayed, in some cases, by damage
suffered from the catastrophic hurricanes in 2005. While maintenance
curtails refining operations temporarily, it helps ensure the long-term
viability of the refinery and protects the health and safety of
workers.
In short, the recent price increases reflect the forces of supply
and demand. And the same is true for past price increases that have
been thoroughly investigated by government agencies who would not have
hesitated to take the industry to task if illegal or improper activity
had been discovered. Invariably, these agencies have explained price
spikes by supply/demand conditions. The evidence is overwhelming that
refiners are not withholding supplies or otherwise manipulating the
market.
Here, for example, is what the U.S. Federal Trade Commission said
in May 2006 as a result of an investigation: \1\
---------------------------------------------------------------------------
\1\ ``Investigation of Gasoline Price Manipulation and Post-Katrina
Gasoline Price Increases,'' U.S. Federal Trade Commission, May 22,
2006.
``. . . the best evidence available through our investigation
indicated that companies operated their refineries at full
sustainable utilization rates. Companies scheduled maintenance
downtime in periods when demand was lowest in order to minimize
the costs they incur in lost production. Internal company
documents suggested that refinery downtime is costly,
particularly when demand and prices are high. Companies track
these costs, and their documents reflected efforts to minimize
unplanned downtime resulting from weather or other unforeseen
calamities. Our investigation uncovered no evidence indicating
that refiners make product output decisions to affect the
market price of gasoline. Instead, the evidence indicated that
refiners responded to market prices by trying to produce as
much higher-valued products as possible, taking into account
crude oil costs and other physical characteristics. The
evidence collected in this investigation indicated that firms
---------------------------------------------------------------------------
behave competitively.''
Those who persist in suspecting, despite the massive evidence to
the contrary, that the industry is holding back supplies often cite the
lack of new refinery construction. While it is true that no new
refinery has been built since the 1970s, companies have steadily
increased the capacity of existing refineries and continue to do so.
Over the past ten years, existing refineries have expanded capacity
equivalent to building 10 new refineries and, based on public
announcements of refinery expansions, are projected to add capacity
equivalent to an additional eight new refineries by 2011.
Another explanation advanced to explain higher prices is industry
mergers. As with all industries, mergers have occurred only after
careful FTC scrutiny to ensure the competitiveness of markets. There is
no shortage of competitors today, and market power is not heavily
concentrated. The eight biggest refiners account for 66 percent of the
market, a level of concentration that compares favorably to other
consumer product industries. There are close to 60 refining companies,
about 142 refineries, and about 165,000 retail outlets, all but a small
percentage of these outlets owned by small businessmen and women. A
2004 report by the FTC said that the share of U.S. refining capacity
owned by independent refiners with no production operations rose from 8
percent in 1990 to over 25 percent in 2006.
A 2003 GAO report says that mergers affected prices by less than
one half of one cent per gallon at the wholesale level, but the FTC
dismissed the report as ``fundamentally flawed'' and full of ``major
methodological mistakes.'' It says the report's conclusion ``lack any
quantitative foundation.'' Beyond this suspect GAO report, we are
unaware of anything in the professional literature tying higher prices
to mergers. Indeed, in part as a result of the mergers, the industry
has become more efficient, which has reduced costs to consumers, though
this benefit has been masked by sharp increases in crude oil prices.
None of the arguments advanced to justify the price-control
proposals has a strong factual and analytical basis, yet even if all
did, price-control legislation would be a supremely bad idea. The
proposals could interfere with the operation of the law of supply and
demand, hamstringing efforts to secure and deliver ample supplies of
fuel to consumers.
Today's proposals are cousins of the disastrous price and
allocation controls of the 1970s. Those policies established price
ceilings on domestically produced crude oil and refined products,
keeping them artificially low compared to world prices. This resulted
in decreased domestic crude oil production while domestic demand for
crude oil and refined products increased, leading to a worsening of
shortages and increased oil imports. It was the era of gasoline lines,
odd or even days, and millions of angry motorists, victims of the
misguided policies of their own government, which should have known
better.
If price controls are enacted, the 12 percent of our daily gasoline
consumption met by imports could be jeopardized. Overseas suppliers
would not have an incentive to ship to U.S. markets if the price were
kept artificially low. Also, they might prefer to ship to other markets
rather than risk jail time or exorbitant fines in the U.S.
In addition, today's proposals contain vague pricing requirements
that make it virtually impossible for marketers to know in advance if
their actions will be found to be in or out of compliance and,
therefore, will be extremely difficult to enforce fairly. For example,
under these bills, how is a gas station operator to know whether a
price increase of five, ten or fifteen cents a gallon will be
considered ``unconscionable?'' This legal uncertainty, especially when
coupled with the serious risk of jail time or exorbitant fines, could
discourage a supplier from doing business in areas affected by a
natural disaster when supplies have been substantially reduced, thus
delaying a return to normal conditions.
Price-control laws will not solve today's problems. The U.S. oil
and natural gas industry is doing everything it can to produce the fuel
supply needed to meet consumer energy needs. Congress needs to allow
the oil and gas industry to invest today's earnings in meeting
tomorrow's energy needs and continue to operate within a market system,
which has done far more for consumers than price controls could ever
hope to. However, the industry cannot meet U.S. energy challenges
alone. Our nation's energy policy needs to focus on increasing
supplies; encouraging energy efficiency and conservation in all sectors
of the economy, including transportation; and promoting responsible
development of alternative and non-conventional sources of energy.
At a minimum, we must do no harm. Price control laws threaten
consumers and the nation's energy security. We can do much, much
better.
__________
APPENDIX 1: OIL AND NATURAL GAS INDUSTRY EARNINGS
Proponents of ``price-gouging'' proposals say they are partly
justified by the oil and natural gas industry's large earnings. There
is considerable misunderstanding about this. Companies' earnings are
typically in line with other industries and often lower. For 2006, the
industry's annual earnings averaged 9.5 cents on each dollar of sales.
The average for all manufacturing industries was 8.2 cents or about a
penny lower. From 2002 to 2006, average earnings for the industry stood
at approximately 7.4 cents on each dollar of sales--a penny above the
five-year average for all U.S. manufacturing industries.
It should not be forgotten that the energy Americans consume today
is brought to us by investments made years or even decades ago. Today's
oil and natural gas industry earnings are invested in new technology,
new production, and environmental and product quality improvements to
meet tomorrow's energy needs. Between 1992 and 2005, the industry
invested more than $1 trillion--on six continents--in a range of long-
term energy initiatives: from new exploration and expanding production
and refining capacity to applying industry leading technology. In fact,
over this period, our cumulative capital and exploration expenditures
exceeded our cumulative earnings.
Furthermore, the industry's future investments are not focused
solely on oil and natural gas projects. For example, one oil company is
among the world's largest producers of photovoltaic solar cells;
another oil company is the world's largest developer of geothermal
energy; and the oil and gas industry is the largest producer and user
of hydrogen. Over the last five years in North America alone, we have
invested $12 billion in renewable, alternative and advanced non-
hydrocarbon technologies. In fact, when you add up all of the various
types of emerging energy technologies, our industry, over the five
years, has invested almost $100 billion--more than two and half times
as much as the federal government and all other U.S. companies
combined.
It also requires billions more dollars to maintain the delivery
system necessary to ensure a reliable supply of energy and to make sure
it gets where it needs to go: to industry customers. According to the
EIA, Americans will need 28 percent more oil and 19 percent more
natural gas in 2030 than in 2005. The industry is committed to making
the reinvestments that are critical to ensuring our nation has a stable
and reliable supply of energy today and tomorrow.
It is also important to understand that those benefiting from
healthy oil and natural gas industry earnings include numerous private
and government pension plans, including 401K plans, as well as many
millions of individual American investors. While shares are owned by
individual investors; firms, and mutual funds, pension plans own 41
percent of oil and natural gas company stock. To protect the interest
of their shareholders and help meet future energy demand, companies are
investing heavily in finding and producing new supplies.
Mr. Conyers. Before we go to vote, just tell me, Dr. Felmy,
how did Mr. Blumenthal and Mr. Cooper get it so wrong? Is there
some way we can explain their understanding of the dimensions
of the problem?
Mr. Felmy. Mr. Chairman, I am an economist. I fundamentally
believe in markets, markets at work, and as I look at the data
carefully, what I see is an industry that has, true, a shortage
of refinery capacity through a whole host of reasons leading up
over years. We faced enormous challenges this year in terms of
what was actually happening with markets. Their perception of
what is going on is simply different than my own. As an
economist, I believe in markets.
Mr. Blumenthal. And I believe in markets too, Mr. Chairman.
This one simply isn't working because it has become so
concentrated and power is in so few hands that have failed to
expand refinery capacity when it is desperately needed, failed
to maintain proper levels of inventory and thereby exposed the
system to the shocks of pipelines bursting and other temporary
phenomena and failed to be responsive to consumers. And the
Federal Government bears a share of the responsibility, the
Department of Justice and FTC, in failing to enforce the law.
So I think there is concentration of market power, clearly.
The question is what to do about it, how to remedy it.
Mr. Conyers. Mark Cooper?
Mr. Cooper. It is wonderful to believe in markets, but you
also have to accept the proposition that sometimes they fail.
And in this case, this year we have got an excuse about some
refineries out here and there. For the last 7 years, we have
had a different excuse each year. And the simple fact of the
matter is that once is an accident, twice is a surprise, six
times means there is a fundamental flaw in the structure that
has failed to build an industry that can actually deliver a
stream of product at reasonable prices.
You can't look at oil company profits in the last 4 years
and say they are not extreme, excessive. Last year, they were
twice the average for the manufacturing sector, and they have
averaged about seven or eight points over the last 4 years.
So if you look at the structural characteristics of the
market, not just pray to it and believe in it, but analyze it,
you have to conclude that there is a market failure here of
immense proportions.
Mr. Conyers. Heather Wilson, last word.
Mrs. Wilson. I am not an economist, Mr. Chairman, but I am
a mom with a Subaru, and I think people are upset about how
high their gas prices are, and it puts a real crimp in their
pocketbook.
But we are not going to get out of this overnight. We need
a balanced long-term energy plan for this country that makes us
more energy independent and helps to keep the prices down. I am
a big believer in competition.
Mr. Conyers. Mr. Keller?
Mr. Keller. Thank you.
Mr. Attorney General Blumenthal, I don't disagree with you
on this NOPEC issue at all. I may even co-sponsor it.
But just for the sake of argument--you are a good
attorney--do you believe, in your legal opinion, that if we
pass this, that we will have jurisdiction over these OPEC
nations in Federal court and that we would be in a position to
enforce a judgment against them if we are able to acquire a
judgment?
Mr. Blumenthal. The answer to that question, a very central
and obviously excellent question is unequivocally yes.
This measure would, very simply, have the effect of
removing from the Federal Sovereign Immunities Act of 1976 the
flawed interpretation, in my view flawed interpretation, given
by the Ninth Circuit in the OEM case--I can give you the exact
citation, IAM v. OPEC, 644 F. 2d 1354. It is a 1981 case and,
essentially, in my view, extends immunity to the OPEC nations,
wrongly interprets their commercial activities as acts of state
rather than, in fact, economic and commercial activities.
But the Congress has the authority to apply jurisdiction--
that is the key concept here--and it can through this measure.
Mr. Keller. Time is running out.
Dr. Felmy, let me just get you the central question here to
kind of sum up what the other side has said. There is no doubt
that the majority of the cost in a gallon of gasoline is crude
oil, and there is no doubt that crude oil is a commodity
governed by the law of supply and demand, and there is nothing
we can do in Congress to pass a law changing the law of supply
and demand.
But it has been pointed out, both by Mr. Blumenthal and by
Congressman Stupak, that in fact gas prices are 50 percent
higher this year despite the fact that crude oil is $7 a barrel
lower. And they say that something else is at play here, and,
specifically, what they are alleging, just to be frank, is that
oil companies are intentionally not building any new refineries
in the past 30 years because they want to drive prices up.
And to support that, they say three things: One, the idea
that it is difficult to get environmental permits is false,
they say, because only once in the last 30 years, they say, was
a permit requested and it was granted; two, they say there are
certain internal documents from the big oil companies that say
that they want to limit refinery capacity to drive up prices;
and, third, they point out that big oil companies like Exxon
had $400 million to pay CEO Lee Raymond last year, why don't
they use the money to build a new refinery.
So you tell me what your side is to those arguments.
Mr. Felmy. Thank you, Congressman.
The fact is the industry is expanding refinery capacity. As
my testimony indicated, while we have not built a new refinery
for 30 years, and I would say it is an enormous challenge to
build a new refinery and to articulate that, I testified last
week before Chairman Markey's Committee, and I would propose to
submit the same letter that was provided by Arizona Clean Fuels
in terms all the difficulties they have faced in terms of
actually developing a new refinery.
Second, we have expanded existing capacity because it is
easier to do so within the walls of the existing refineries.
But even that is a challenge because you have complex
permitting problems. You have also got local folks who don't
want you there. When refineries were developed originally, they
were out in the middle of nowhere. Now, communities have built
up or they were on desirable waterfronts. People just simply
don't want an industrial facility. So even expanding an
existing one is.
And, finally, the industry produced record amounts of
output this year, and that is a key factor that we are
explaining, that it is a combination of both crude oil costs,
which I mentioned, but also supply and demand fundamentals in
terms of increased demand, a decline in imports and it was more
than even a record production of output of gasoline could show.
Mr. Keller. I don't have a Ph.D. in economics from Harvard
or MIT, and you are an economist, so just explain it to me as
if I am in 6th grade to help me out.
This is what they are saying, and I want your response.
They are saying, a year ago crude oil was $70. This year, a
barrel of crude oil is $63. Despite the fact that crude oil was
$7 a barrel cheaper last year, gas prices are now $7 cheaper
than they were last year, gas prices are 50 percent higher.
Why? I mean, what is the explanation for that?
Mr. Felmy. Well, first, I just looked at the AAA data from
last year and a year ago gasoline prices were $2.93 and now
they are $3.10, so I am not quite sure where 50 cents----
Mr. Keller. So you take issue with the 50-cent issue to
start with. Okay.
Mr. Felmy. In any case, there is no question it is not just
crude oil. We have seen crude oil increase from earlier this
year, and that is where you are talking about an increase from
$50 a barrel to $66 they peaked out. But it is clearly a tight
market, that it is an increased demand, it is a limitation of
imports, which we have traditionally been able to increase from
Europe, and so it is a combination of supply and demand
factors. With less supply and more demand, you have a tighter
market. That yields price increases.
Mr. Keller. Mr. Blumenthal, you are one of the ones who
made that argument. I would ask Congressman Stupak but he is
gone. Why is it that gas is higher this year despite the fact
that crude oil is $7 a barrel lower. What is your explanation?
Mr. Blumenthal. Well, there are a number of explanations.
Partly, he has given them. We have all repeated them. Lack of
refinery capacity, concentration in the market, which gives
power to the oil companies that impose, for example, zone
pricing, geographic divisions of economic turf that are
inherently anticompetitive, essentially a collection of
anticompetitive practices, beginning with shortages of supply,
lack of refinery capacity. There has been no new refinery
built, albeit expansion of existing refineries but still not
enough.
And I think credit, if I may use that term, has to be given
where it also should lie to the OPEC cartel. They have failed
to provide the supply that would enable lower prices, but with
a lack of refining capacity, the question is whether the United
States industry could really do anything productive with it.
Mr. Keller. Let me follow up with that. Let's assume that
the four or five largest oil companies own most of the
refineries, and for sake of argument, they don't want to expand
capacity.
Isn't it true that if I don't like the prices at my local
ExxonMobil gas station, I can just go across the street to
Chevron and BP? I mean, doesn't Chevron and BP keep Exxon
honest, so to speak?
Mr. Blumenthal. The simple answer is no.
Mr. Keller. Why is that?
Mr. Blumenthal. Well, talk to your constituents. They tend
to rise together. Prices tend to go up----
Mr. Keller. I talked to them all today, and everybody wants
me to do something about it, and if I could change the law of
supply and demand, I would do it. But I want you to tell me, I
mean, you are the expert testifying, why is it that competition
isn't sufficient in order to keep one group from price gouging
the other?
Mr. Blumenthal. Because there has been consolidation. In
our part of the State--I know you are from Florida----
Mr. Keller. I mean, are you alleging collusion, I guess,
between these big companies?
Mr. Blumenthal. We don't know, is the most honest answer.
Certainly, conscious parallelism, at a minimum, exists, which
is not collusion.
Mr. Keller. If I talk to my constituents, do you think they
would tell me the problem is conscious parallelism?
Mr. Blumenthal. You won't get very far with your
constituents talking about conscious parallelism, nor would I
in court in an antitrust case, but we have more than enough
evidence to begin a national investigation, which I have urged
the Department of Justice to do, meeting with the United States
Attorney General and the chairman of the FTC. There should be a
Federal joint investigation. There should be not one but a
series of investigations focusing at different levels of the
industry.
Mr. Keller. All right. And let me follow up, because I have
just got to wrap up. I have got to go vote too.
Are you concerned if we pass the NOPEC law that you are
advocating that these OPEC nations could possibly embargo oil
to the United States like they did in 1973 as a response to
such a lawsuit?
Mr. Blumenthal. No, I am not concerned about that fact,
because--or about that possibility, I should emphasize. All we
are doing is require they submit to the jurisdiction of our
courts, abide by our rules, play by those rules fairly and
compete so as to be on a level playing field. And in my view,
they have to do business with the United States.
Mr. Keller. Okay.
Mr. Cooper, I know you want to respond, but since you are
out there for the consumers and want the lowest possible
prices, I assume you would be supportive of efforts to drill in
ANWR, which would give us 16 billion barrels of oil, which is
the equivalent of 58 years worth of oil from Iraq?
Mr. Cooper. It is our belief that drilling will do nothing
to lower the price of oil.
Mr. Keller. You don't think 16 billion barrels of oil----
Mr. Cooper. Absolutely not. It is a miniscule addition to
supply, first of all. Second of all----
Mr. Keller. Fifty-eight years' worth of oil from Iraq is
miniscule?
Mr. Cooper. From Iraq?
Mr. Keller. Fifty-eight years' worth of----
Mr. Cooper. In terms of the world supply, there is almost
no difference. You add almost nothing in terms of the global
supply from crude.
Second of all, it will do nothing to build any refineries.
Mr. Keller. Let me just stop you. Do you oppose the ANWR
drilling?
Mr. Cooper. We absolutely oppose ANWR drilling.
Mr. Keller. And let me give you a follow-up question. What
do you believe is the cause of the spike in gas prices? Do you
believe it is lack of refinery capacity, or what is the nub of
what you are trying to say?
Mr. Cooper. Since January, the overwhelming increase has
come from domestic refining, up 65 cents a gallon that is taken
by refiners. That is an uncontrovertible fact from the EIA's
numbers. Sixty-five-cent increase in what is known as the
domestic spread, that is the amount that domestic refining
takes. This year, there is no doubt about that. After Katrina,
there was no doubt about it.
Mr. Keller. All right, Mr. Cooper.
Let me give you a chance, Dr. Felmy, because you are kind
of outnumbered here. Do you want to respond to just the
allegation as, ``Hey, don't blame supply and demand. It is
really the failure to increase your capacity and conscious
parallelism on the part of the oil companies to let the prices
go up.''
What is your response on behalf of the Petroleum Institute
to those allegations?
Mr. Felmy. Well, I don't know what conscious parallelism
is, and I have heard that term in the past, but my
interpretation is prices move together because markets are at
work. You have one price, the market-clearing price. So this
notion of parallelism I have never understood from an economic
context.
But the industry is working very hard. We have plans to
expand existing refinery capacity even more. We have expanded
it the equivalent of a new refinery every year for the last 10
years.
But we do face fundamental challenges. We have an import
challenge this year, and we have continuing demand growth, and
that has resulted in the higher prices.
Mr. Keller. Why not build the new refineries? What is the
short answer?
Mr. Felmy. Well, the short answer is, there are a whole
series of hurdles you have to go through in terms of
permitting, in terms of NSR conflicts, and you have to
financially look at it, is it wise to build a new refinery to
return a return to your shareholders, given the uncertainties
going forward.
Mr. Keller. Is it true that you all have only asked for one
permit in the past 30 years and it was granted or is that a
misstatement by Mr. Stupak?
Mr. Felmy. I don't know the answer to that, because it is
such a large industry. I don't know that that is the case. I
don't know yes or no.
Mr. Keller. Let me ask you--and I hate to cut you off, but
I have got to vote, I am already in trouble here--to wrap it
up, you are an economist, is that correct?
Mr. Felmy. Yes, sir.
Mr. Keller. Do you believe that someone who understands the
law of supply and demand, that having 16 billion barrels of oil
extra is irrelevant to the issue of price as a determinant of
crude oil for supply and demand?
Mr. Felmy. There is no question to me that expanding
production from anywhere in the world by the equivalent of 16
billion barrels is an increase in supply, and that will help a
market in terms of whenever you have increased supply or
reduced demand, it results, generally, in lower price.
Mr. Keller [presiding]. Gentlemen, I want to thank you all.
I have tried to be fair to all sides and get all your testimony
out. I am going to have to recess this hearing at this point to
go vote, but I very much appreciate you staying and answering
the questions.
Mr. Blumenthal. Thank you, sir.
Mr. Keller. You bet.
[Recess.]
Mr. Conyers [presiding]. The Chair recognizes the gentleman
from Alabama, Mr. Artur Davis.
Mr. Davis. Thank you, Mr. Chairman.
Mr. Cooper, Dr. Felmy, let me get your attention back. I
apologize to you, as I know the Chairman has, that,
unfortunately, we have had a number of procedural votes, and we
are none happier about it than you are, so I apologize that it
has depleted your audience.
But I want to do is, frankly, use my time to ask you some
of the questions people ask me when I go back home to see if
you can make my answers better informed.
First question, a lot of people ask me, why are prices at
the pump going up when there has not been a disruption in
supply in the Middle East? I suppose we can argue about the
level of production capacity we are getting in the Middle East,
but I think it is hard to make the case there has been a major
disruption in supply either.
So can either one of you quickly speak to that point:
Prices going up, no disruption in supply. Why?
Mr. Cooper. This season, there is no doubt that it is a
domestic problem, and, actually, Katrina was the thing that
woke people up. Crude didn't go up, we didn't need crude, and
we learned that there is a domestic problem. And the lack of
refinery capacity; the inability of the industry to change over
from winter fuels to summer fuels, which happens every year,
that is no surprise, they have to do that every year; the fact
that demand is growing--yes, that has happened every year for
an awfully long time. There are no surprises here. So this is
an industry that has mismanaged the simple basics of switching
fuels and meeting demand which they know is increasing.
We believe that the underlying cause is a lack of
sufficient competition, the competitive discipline that makes
each individual company worry about running short and therefore
adding more capacity so that they never have to tell their
customers, ``We are out'' or that they have to raise their
price. The fact that there are only two or three companies that
they can look across the street, they see the price, they know
no one else is going to come along, and so they both put the
price up immediately. Most Americans think that that is not the
way it is supposed to happen.
Mr. Davis. Let me ask a second question related to that,
and, Dr. Felmy, perhaps you can chime in on this one.
The industry often says that, well, even if we had a
stimulus and delivery from the Middle East, even if Saudi
Arabia, for example, dramatically stepped up their production,
even if we somehow had a surge in production in Iraq and Iraq
returned to the oil market, that it wouldn't matter, because we
haven't had a refinery built in a while.
A lot of people in your industry say, ``Well, we haven't
had refineries built for 25 years because of regulation,
environmental standards.'' Can both of you weigh in on why the
industry has not had more refinery development?
Mr. Felmy. There is the question of building a new
refinery, but, as I have pointed out in my testimony, we have
expanded the existing capacity the equivalent of a new refinery
for every year for the last 10 years, and the public
announcements are for an additional expansion of, I believe, an
additional 1.6 million barrels a day of capacity going forward.
So the industry is looking forward to increasing that capacity.
In terms of the Middle East and crude, there is no question
if you look at the increases this year so far, you saw crude
oil prices go from $50 a barrel to over $66 a barrel. So,
clearly, part of it was cost; clearly, part of it is the
turnover to the new summer price gasoline, which is an enormous
challenge for the industry, because we effectively have to draw
down inventory to very low levels so that you are able to bring
in the new summer-based gasoline and still be compliant with
EPA standards. So it is a challenge.
Mr. Davis. Let me make sure I understand that. You are
saying that the industry has stepped up the existing refinery
capacity to the equivalent of building a new refinery.
Mr. Felmy. The equivalent of building a new refinery every
year for the past 10 years.
Mr. Davis. Okay. Well, that is helpful to know, because
every now and then we hear from some in industry that the
environmental standards are just too heavy and we can't get new
refineries.
Let me ask you one last set of questions. If you would jump
in on this, Mr. Cooper. Instituting or reinstituting a windfall
profit tax, would it have an impact on prices at the pump short
or medium term?
Mr. Cooper. It would not have an impact on prices at the
pump. What it would is tax away the windfall, the cash that has
been piling up. The American majors have bought back over $60
billion in stock. Now, that is great for their stock
performance on Wall Street, no doubt about it, but that is
money that is not being put to productive use. The cash has
piled up. They have increased their dividends, they have
reduced their debt, they haven't put it back into the sector in
a productive way.
So if you taxed away a windfall, you will have no effect on
the efficient operation of that market. It is truly, in the
last 4 years, a windfall that the industry could not absorb.
Mr. Davis. Well, let me ask you both one last question
before I have to take my leave.
Both of you, is there anything that could be done from a
regulatory standpoint by this Congress that would impact
contemporary prices at the pump?
Mr. Felmy. In terms of contemporary prices, there is very
little that can be done instantly to change supplies or demand.
There is no question to encourage consumers to use gasoline
wisely, to encourage them to properly tune their cars, to their
inflate their tires, to drive sensibly. A softening of the
demand is the one option that could help, and so advising
consumers of what they can do is a potential hopeful aspect.
Mr. Davis. Mr. Cooper, would you like to weigh in?
Mr. Cooper. In the short term, the industry won't help us,
we know that. The authority in the Congress to look at the
market will not help us in the very short term. So, yes,
consumers can try to cut back.
But let's be clear: We have spent a decade digging this
hole. We have built over several decades a society that drives
a lot. I would like to remind people, it is interesting, in
many suburban communities in this country, it is illegal to
walk to the grocery store. Now, I say it that way to get your
attention. Because zoning laws have said we don't want
commercial establishments in those neighborhoods, and we don't
even want sidewalks in those neighborhoods. That is the way we
have chosen to live, and it has increased demand, and the
industry knows it.
So we are not going to change that in the short term. This
is a long-term problem, but there are immediate things that can
be done that can start and send a signal in addition to some
oversight. We think there is plenty of abuse that could be
found if we had laws that let people look at unilateral action.
But your answer is, I think, to tell your constituents,
``It took a long time to get in this hole, and it is going to
take a long time to get out, but now is the time to start.''
Mr. Davis. That is actually about what I tell them.
I yield back, Mr. Chairman.
Mr. Conyers. Thank you very much.
Is there anything here, with two distinguished witnesses,
at the end of a few minutes only left in this hearing, that we
could attest to on the record that you do agree on?
Mr. Cooper. We agree that people ought to adjust their
behaviors as best they can to lower their demand. That is
something we always tell people, to think about the extra trip,
to get your car tuned, to clean your air filter, to inflate
your tires, to take the bags of sand that you threw in the
trunk in the winter for traction, take them out in the summer,
because you are burning gas.
We do agree on that. That is an important set of short-term
things to do. But I suspect that is about as far as we go on
our agreement.
Mr. Felmy. Mr. Chairman, I would agree with Mr. Cooper
that----
Mr. Conyers. Amazing.
Mr. Felmy [continuing]. Using energy wisely is something we
agree on.
But I think we both share the interest in seeing expanding
refinery capacity. It is a question of how you get there. And
we feel that there are policies that the Congress can enact
that would help us expand capacity. We feel we are already
doing quite a bit. But I think that that is something that
remains that could help consumers.
Mr. Conyers. Could you take back to the industry, Dr.
Felmy, that more and more of us want more refineries built, and
quickly?
Mr. Felmy. Well, the industry very carefully looks at what
expanded capacity has happened, what going forward is
potentially possible, but it is an economic calculation that
they have to look at very carefully in terms of returns to
their owners. And there are large uncertainties out there that
have just begun to come around, such as the proposals in the
Senate for alternative fuels of 35 billion gallons, reducing
gasoline demand that makes a further challenge in terms of
doing the calculations on building that new capacity.
But, certainly, we understand the position, and I will
communicate that to my management.
Mr. Conyers. What do we tell the people, Cooper, that we
are being put on hold here? I guess there is no way I can be
optimistic about refineries. You tell me, on the other hand,
that taxing the profits is not a real solution. So where are
both of you leaving a concerned Member of Congress?
Mr. Cooper. Well, frankly, if you taxed away the profits,
it depends what you did with them. I mean, if you took that
$200 billion--I will just give you an example--which I see as
excess profit, and you directed that to the auto industry, that
is about half of what the Transportation Department said it
would cost to get us to 35 miles per gallon. Boy, that would be
a real good use of those excess profits, and that kind of
policy is something that we may have to look at. We may have to
look at ways to incentivize the alternative solutions.
I think you heard an answer here about refineries that is
really, really troubling. The chairman of Exxon earlier this
year said, ``We think gasoline demand will decline starting out
in 2020 or so, and therefore we are not going to consider
building new refineries. Well, that is 12 more years of pain.
So they are not going to give you the solution to the refinery
problem.
There was legislation introduced in the last Congress about
a strategic refinery reserve. If the industry is not going to
give us more refinery capacity because 16 years is a time
horizon that they want to keep making all this money past 15
years, then this Congress is going to have to step in with a
social return on capital that fits the needs of the people. We
cannot wait for 15 years before they think the marketplace will
start to create a balance or even your policy. Imagine what
they said, ``If you pass laws which reduce the demand for
gasoline, we are not going to build refineries to reduce and
improve the supply-demand balance.'' I think that is an
outrage.
Mr. Felmy. Well, Mr. Chairman, there are several comments I
could give to that, but the first is the discussion of the
windfall profits tax. Our history with that tax when it was
imposed in the eighties was a disaster. It increased the cost
of the industry, it reduced production, as documented by the
Congressional Research Service, and largely increased imports.
I fail to see how that can help consumers.
Secondly, the companies are owned by millions of Americans.
Taking money away from the industry is equivalent to taking
away from millions of Americans who have invested their hard-
earned savings in that. Fully, 41 percent of the equity of
companies is owned by retirement plans of some type. So one has
to be cautious in terms of where you are taking money from and
what the impact is.
But the bottom line is it potentially raises cost, and that
I fail to see how it can help consumers.
Mr. Cooper. Mr. Conyers, let me respond to the question
about stock ownership. I suggest that if you go to your
constituents and say, ``Look, use your dividends from the oil
companies to pay your gasoline bills,'' they will fall down
laughing, and they might not send you back here.
That is not an answer to that question. Sure, there are
investors here and there, but those investments are highly
concentrated among richer people, yes, there are some pension
funds in there, but, by and large, the average American is
paying through the nose at the pump, and they are not getting
it back in their dividends from oil company stock.
Mr. Felmy. Well, just as a point, Mr. Chairman, 485,000
folks in the State of Michigan are members of State and local
pension funds that are invested in oil companies. And
approximately 18 million Americans have similar types of
investments. So one has to be cautious that our companies are
owned by millions of Americans.
But going forward, there are things that I believe we can
do in terms of streamlining the regulation process, resolving
questions about new source review for refineries, and it could
help expand the existing plans already announced for an
additional 1.6 million barrels a day of capacity.
Mr. Conyers. I would like now to recognize the
distinguished Ranking Member, Steve Chabot, of Ohio for
concluding remarks.
Mr. Chabot. Thank you very much, Mr. Chairman, and my
opening statement and concluding remarks will all be contained
in the same couple of minutes here.
I want to thank you for holding this important hearing
today. There is not an issue that comes up more often when I am
talking with my constituents back in Cincinnati than the high
cost of gasoline at the pump. Every day, people raise questions
about price fixing, questions about oil companies or service
stations taking advantage of their market power to stick it to
the consumer, and these concerns won't diminish until this
Congress is willing to take steps to make energy more
affordable to consumers.
The national average, as we have said, is anywhere from
$3.10--last weekend, when I got gas back home, it was between
$3.13 and $3.19 in my district, back in Cincinnati, and we
haven't even entered the traditional summer driving season.
That peak driving season starts around Memorial Day and ends
around Labor Day.
Up 90 cents since January, and forecasters expect prices to
continue surging through the summer months, and I don't have to
tell anyone how these price hikes have and will continue to
impact consumers and their families and ultimately weigh down
the economy.
Over the last decade, it has become alarmingly clear that
America is far too dependent on foreign oil to meet our energy
needs. Disservingly, we import more than a third of the oil we
consume and much of it from OPEC nations. At the same time, the
number of refineries operating in the U.S. has decreased from
over 300 to fewer than 150, with the last domestic oil refinery
being built, as we know, back in 1976.
Various efforts have been announced by the current and
previous Administrations, and bills have been introduced in
Congress to address this ongoing problem, including exploring
new sites in both ANWR and the Outer Continental Shelf in order
to replenish domestic oil reserves. Yesterday, the president
ordered stricter rules for automobile fuel efficiency and the
use of alternative fuels.
There is no doubt that we need to focus on both short-and
long-term strategies to address these issues. We need increased
domestic production and refinery capabilities, and we need to
put a stronger emphasis on alternative energy and conservation
efforts.
The hearing today is important, although, obviously, it got
very divided up, and we want to, I think, apologize to the
witnesses. There were a whole series of votes that took place
on the floor that sort of broke this hearing up, but we are all
making the best use of it that we obviously can.
And it gives us the opportunity to examine these seasonal,
if not daily, price surges from another perspective, through
the antitrust lens. And, in particular, we have had the
opportunity this afternoon to examine whether OPEC's cartel
structure plays a substantial role in this roller coaster ride
and examined whether the oil industry consolidation that has
taken place in this country has resulted in limited oil
supplies and higher fixed gas prices and examined the
effectiveness of measures that have been introduced to respond
to this situation, such as H.R. 2264, the Conyers-Chabot-
Lofgren NOPEC bill, which we reintroduced last week and also
introduced it in the last Congress.
And also H.R. 1252, the Federal Price Gouging Prevention
Act and the Federal Energy Price Protection Act of 2007, which
have been introduced by two of our witnesses that we had here,
the distinguished gentleman, Mr. Stupak, from Michigan and the
distinguished gentlewoman, Mrs. Wilson, from New Mexico.
And, again, I appreciate the Chairman holding this hearing.
I apologize for running out of time here, and I know that
another Committee is coming in that is going to kick us out,
and that is a Committee that we are all on also, so thank you
again, Mr. Chairman.
Again, we apologize to the witnesses for any difficulty you
might have had testifying and responding. It has been one of
those days up here.
Mr. Conyers. Well said.
We will keep the record open for 5 days for questions and
answers that may come from both of you.
Thank you for this initial hearing. There is much more
inquiry that is required here. This is not a simple subject,
but you have gotten us off to a great start.
Dr. John Felmy, Mr. Mark Cooper, we thank you so much.
The hearing is adjourned.
[Whereupon, at 3:58 p.m., the Task Force was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
Prepared Statement of the Honorable Sheila Jackson Lee, a
Representative in Congress from the State of Texas, and Member, Task
Force on Antitrust