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The witnesses are:
Opening Statement of Chairman Ted Stevens
This is the first of two hearings today addressing the issue of energy prices. We will hear throughout the day from representatives from the oil production and refinery sectors, consumer and trade groups, and the federal government. Senator Inouye and I thank our witnesses for being here – and for agreeing to join us on short notice.
This hearing examines the short- and long-term rise in domestic energy prices and will explore whether price gouging is occurring, or whether the market is controlling prices in response to an abnormal market circumstance.
Over the last 2 years, we have seen prices triple with oil rising to $70 per barrel. The impact of high energy prices can be seen at all levels of our economy. It has resulted in job losses, trade deficits, and constraints on consumer spending and economic growth.
The consequences of rising energy costs cannot be underestimated. All Americans feel the economic impact of this crisis. They are paying more at the pump, and businesses are beginning to pass their energy costs onto the consumer by increasing the price of basic goods and services.
I am concerned about allegations of consumer price gouging in the wake of Hurricane Katrina, particularly with respect to retail gasoline, and today’s hearings will explore these allegations.
Chairman Stevens Q & A with Witnesses
Chairman Stevens: Thank you very much. That’s a very hopeful statement. Let me get mundane here. My experience goes back to the time when there was competition at the gas station and prices were coming down because of it. I worked in a small gas station and I soon learned that if the gas price went down too low, by the time the next truck came back they couldn’t buy enough gas to fill the tanks up to keep in business. Now, we hear a lot about price gouging from the gas station. Could both of you comment on what is the role? People who are operating these gas stations in my judgment have to raise the price in order to have the money to by the next load of fuel to sell to their consumers. Am I right or wrong? Mr. West?
Mr. West: Senator, I think that’s essentially correct. About 90 percent of the gas stations in the United States are owned independently. They are not owned by the big oil companies. Basically, they buy in expectation of replacement cost, which is what you’re saying. That’s how they operate. There may be instances of price gouging, but price gouging is very difficult if there is competition. If there’s no competition, maybe you can do it, but basically it is expectation of replacement cost. That’s what drives them.
Chairman Stevens: Do you have any comment Mr. Bustes?
Mr. Bustnes: No, I completely agree actually. I agree with Mr. West.
Chairman Stevens: You’ve each commented upon measures we could take. Do you think that those measures take legislation to accomplish? Are these measures you’ve suggested such that they could be done by the industry without any further changes in our national laws?
Mr. West: The two things which I have mentioned, the two short-term fixes, which are increased inventory and redundancy in systems in refineries and in pipelines, theoretically the industry could do that by themselves, but there is a cost, particularly on maintaining inventories. If they do it for a long period of time it could be quite expensive. But, essentially, they could do and I think they should be encouraged to do it, but I think long-term a framework should be established.
Mr. Bustnes: Two thoughts, Mr. Chairman. Regarding the question as to whether we should have policy to encourage these technologies for efficiency, for instance, to enter the marketplace, my answer would be that over the long-term economics is going to sort these things out, if you will. The marketplace will going to sort these things out. However, policy can be very helpful in terms of accelerating the marketplace and what is delivered into the marketplace in the direction that we want. And, this is why we leave it out as an option to help that acceleration. Now, specifically, does it require legislation or can it be done administratively? It’s the latter. Most of the things that we suggest as policy options, Mr. Chairman, can be done in an administrative fashion as opposed to having to do legislation. The other point to know, that I very much agree with, is that when it comes to this being a national effort, it will require coordination between the federal, state, and local levels. There’s no question in my mind that that is correct. And, as such, many of the measures that we’re talking about in the report can be done at the state level. And, in fact it could be a very interesting thing for this country to let the states experiment a little bit before we adopted certain things on the federal level. Thank you.
Mr. West: I was just going to add one thing. I think there is one area that is very important and that is if you want to build new refineries in the United States, you’re simply going to have to review, particularly the question of new source review in terms of environmental permitting. And whether that requires a change or law or regulation, I’m not sure. But, that really is a very serious problem.
Chairman Stevens: Shortly, should the Strategic Petroleum Reserve play any part in our consideration of the price of the product sold at the pump?
Mr. West: I would respectfully submit that Katrina was an interruption of supply, which affected price, so it’s entirely appropriate to use it. To just use it to manage price, I’m not sure that’s such a good idea because it can become politicized at times as it has in the past. But, I think in terms of, again, I go back to my point, the government is a factor. It is important to recognize, the government immediately after 9-11 started filling SPR with royalty oil from the Gulf of Mexico for the purposes of supporting the market and taking oil off the market. So, the government was intervening in the market. Now people say, “Well, we can’t use SPR to release oil.” But, in fact, it was being used previously to pull the oil off. So, I’m trying to say is have government understand its role in the market and make sure it’s consistent.
Chairman Stevens: Very shortly, you want to add anything, Mr. Bustnes?
Mr. Bustnes: I can’t comment on that. Sorry, Mr. Chairman.
Chairman Stevens: Thank you very much.
Opening State of Senator Conrad Burns (R-MT)
Thank you, Mr. Chairman for holding this hearing on high fuel prices, and also to the witnesses for providing us with some insight into this serious and complex situation. In this time when the Senate has so many important responsibilities before it I am glad we are able to consider this issue. As we work to help the families and individuals who have been affected by Hurricane Katrina and prepare for Hurricane Rita, and to appoint new justices to the Supreme Court, I know that fuel prices may seem like a small issue. But it’s one that affects every single American, and I appreciate this opportunity to address it.
I spoke to people from one corner of the state to the other and just about every one of them were concerned about the price of fuel. They told me time and time again how it is affecting their families and businesses. These are not people who were worried about not being able to take their boat to the Lake, they’re worried about shipping their wheat to market after harvest and driving their kids to school. In a place like Montana you can’t just decide not to drive, the communities are small and far apart. We can’t park the cars and take the metro to work instead.
Montanans are particularly hard hit because so much of our economy depends on production agriculture, and the inputs into growing this country’s food and fiber include fuel and fertilizer. We buy retail, sell wholesale, and pay the shipping both ways.
Montanans ask me how I can help, and today I hope we can identify steps to help in the short-term and also in the longer term. I look forward to finding out how the oil and fuel supplies are affected by the rules Congress put in place, the advantages of further diversifying our domestic supply, and how trading and speculation are affecting prices. The Senate has called upon the Federal Trade Commission to investigate the causes of high prices, and I support that effort. Americans have the right to know whether they’re being taken advantage of.
One of the things this hurricane is showing us is exactly how important the Gulf is to our nationwide energy network. 1 out of every 4 barrels of domestically produced oil comes out of the Gulf. When you turn that off, we all feel its importance. I know there are a lot of good people working hard to restore the off- and on-shore components of those energy systems.
If we are to reduce our risk of disruption, I suggest that we should continue to grow the operations offshore in the Gulf, and also to other areas where it might be appropriate. Places like the Rocky Mountain West, which has huge reserves under federal land, and ANWR. We need to diversify our production to additional geographic areas.
And when we do produce additional oil, we need to be able to refine it. Not a single new refinery has been built in this country since 1976, yet refiners will spend $20 Billion in this decade to upgrade their existing facilities and meet environmental regulation. Like everyone here, I recognize the need for solid laws to protect our air and water quality, but I think we also need to balance new regulations with their ultimate cost to American families.
There are no easy answers here. We need to expand our range of transportation fuel options, and we are doing that on the private side, and also with federal dollars and initiatives. The market does work. As gas and diesel become more expensive, more Americans are choosing alternative fueled vehicles and hybrids more often. Hydrogen-fueled cars are becoming more and more a reality, and alternatives like coal gasification – turning coal into diesel – become more attractive.
I look forward to discussing these options today and hearing the witness testimony. Thank you, Mr. Chairman.
Daniel K. InouyeSenator
There have been many painful lessons in the wake of the Katrina disaster, but two of the most critical fall squarely in the jurisdiction of this Committee, runaway gas prices and our economy’s dependence upon oil.
While the disruption to Gulf shore production was bound to have an impact on prices, I believe it failed to explain how, for example, consumers in Atlanta, Georgia, were asked to pay $6 a gallon, more than twice the national average. Many other markets saw similar, sudden increases. These jaw-dropping prices, which in most cases are now closer to the national average, suggest that some people may be taking advantage of a national tragedy to line their pockets.
We need to make certain that the Federal Trade Commission (FTC) is exercising its authority to ensure that consumers pay fair prices for fuel, as well as, other consumer products. And we also need to protect consumers from the excesses of market power concentrated in a limited number of energy companies.
Also, Katrina demonstrated that this country remains perilously dependent on oil, regardless of where it is produced. And so I believe that the time is ripe to re-examine the fuel efficiency standards of our automobiles.
The Senate examined this issue in 2002, and today the circumstances call for us to return to the issue. Oil demand is the key to our dependence and a major source of our economic vulnerability. It can be an Achilles heel for our nation, or the challenge that prompts policymakers and our corporate citizens to be international leaders in the effort to reduce consumption.
I look forward to working with you, Mr. Chairman, to address these needs.
Witness Panel 1
Mr. Odd-Even BustnesResearcher, Energy and Resources ServicesRocky Mountain Institute
Mr. Robin WestChairman of the BoardPFC Energy Team
Witness Panel 2
Mr. Jim WellsDirector, Energy, Resources, and Science IssuesU.S. Government Accountability Office
Mr. John SeeselAssociate General Counsel for EnergyFederal Trade Commission