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Opening Statement of Chairman Stevens:
This is the second hearing the Committee has conducted today to address the issue of energy prices. This morning we heard from private-sector energy experts, as well as the federal government, all of whom provided valuable testimony regarding the multiple factors that contribute to energy prices. During this session, we will hear from witnesses from the oil production and refinery industry, 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.
As I indicated this morning, these hearings are designed to examine 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.
Chairman Stevens Q & A with Witnesses
Chairman Stevens: Mr. Slaughter, what’s your answer to Mr. Koch? Why is the Mid-Atlantic singled out? So they have different salary levels? Do they have different transportation problems? Do you know anything about why should the Mid-Atlantic have a different price structure?
Mr. Slaughter: I really don’t know why they would have a different price structure, Senator. I live here as well and purchase gasoline in the area. You know, Maryland does not have refineries. There are refineries in New Jersey, which Mr. Koch mentioned. It is more or less near the end of the Colonial Pipeline system. But, the fact of the matter is Senator that the decisions that are made at the retail level in the gasoline service stations are made by independent businessmen and businesswomen. There are about 168,000 service stations in the United States and only about 10 percent of them are owned and operated by refining companies. The rest are basically, product is sold for resale by independent business people who make their own decisions. And, you know, I think we’ve seen since Katrina and certainly has been stated today, there is pervasive attention being given to pricing of gasoline all over the United States. There are gouging hotlines that have been set up. I have testified now at three hearings at which this has been a major concern of Members of Congress who are questioning. The FTC this morning explained their price-monitoring project in 360 American cities that was set up before Katrina and has been continuing. So, you know, I think there is going to be a great deal of scrutiny given to this practice. We believe that the market pricing system we have has been dealing with a very difficult supply situation caused by Katrina. It had a major impact on the energy infrastructure of the country. Five percent of our refining capacity is not yet back up. A significant amount, 60 percent, of our crude production capacity in the Gulf is still not functioning. So, there still are major outages that are occurring. And, again, as Mr. Caruso referred to, the magnitude of what has happened to the system. But, if there are anomalies, there are people who are looking at every allegation of inappropriate pricing and there is every to believe that that will continue. Indeed the recent Energy bill has a requirement as was mentioned today for the FTC to look at allegations such as these.
Chairman Stevens: Mr. Koch, if it’s any consolation to you, I go back and forth to Alaska quite a bit. The price in the District of Columbia is pretty high, but it’s always higher in Anchorage and we produce the oil, so, you know.
Mr. Koch: Well, you should have been back there yesterday, Mr. Senator. Alaska’s average was $2.80, so it was actually pretty favorable pricing.
Chairman Stevens: It’s coming down, good. I’m going home tomorrow. Mr. Slocum, this morning we had testimony that indicated the price in Europe is very high, probably it exceeds $7 a gallon. And, the net result of that is smaller cars and greater gas mileage and greater conservation. Why the emphasis, I like low prices too, but should we look at price as being a disincentive to increasing demand?
Mr. Slocum: Sure, but I’m not sure that the ends justify the means. Europe has much higher gasoline prices because the level of taxation on gasoline products is significantly higher.
Chairman Stevens: That’s a disincentive.
Mr. Slocum: And, I think that there is no question that one key to sustained economic growth in the United States throughout the 20th Century was sustained levels of very reasonably priced fuel and other energy products. It’s been a key to continued U.S. economic development and Public Citizen is, we are a consumer advocacy group. We understand that there are some benefits to higher prices, but not when it comes at the expense of consumers, particularly middle and lower income consumers, who are going to be hit the hardest. And, when you combine rising gasoline prices with the upcoming crisis in natural gas for this winter, you are going to have millions of Americans who literally are going to be making decisions this winter whether they are going to buy food, whether they are going to pay their rent or their mortgage, or whether they are going to pay their utility bill. Congress needs to understand that there is going to be a major financial crisis this winter when you combine rising gasoline and other energy prices and natural gas prices. It is going to be an epidemic and until we start dealing with it by examining uncompetitive practices in the industry, I think that we are setting ourselves up for a serious economic shock.
Chairman Stevens: Has Public Citizen supported increasing oil supplies, such as drilling offshore or exploring for oil in my State?
Mr. Slocum: Well, considering that the United States is already the third largest producer of crude oil in the world. I’m not so sure that increasing crude oil production is going to get us out of this jam.
Chairman Stevens: I don’t think your figure is accurate.
Mr. Slocum: Well, my figures come from the Energy Information Administration.
Chairman Stevens: Is that right, Mr. Caruso, we’re the third largest producer of crude in the world.
Mr. Caruso: That’s accurate. There’s Saudi Arabia, Russia, and the United States in that order. Yes, sir.
Mr. Slocum: The problem is, is that we are far and away the largest consumer of oil. We use 25 percent of the world’s oil everyday. So, until you deal with demand, which rising prices…
Chairman Stevens: You didn’t answer my question, did you? Do you support additional supplies or not?
Mr. Slocum: No, I do not support it, because I don’t think that increasing supplies of crude is the long-term answer Mr. Chairman.
Chairman Stevens: Mr. Koch, what would you suggest we do about the Mid-Atlantic?
Mr. Koch: Well, the numbers I mentioned earlier were as of the end of last Friday. As of yesterday they dropped somewhat and now the Pacific Coast is the highest priced region in the country. One of the things that we’ve asked for is to provide additional capacity and, in fact, if you watched the markets last week, the exchanges, they were talking about a prospective glut come October. Now, Rita has changed that as of this week. The prices have been ratcheting around and they’ve taken a sudden spike upwards. One of the things that we have been watching, too, is the spread between the wholesale price and the retail price. Once the entire situation unfolded, that spread widened. Not only did the wholesale price dramatically increase, there also seemed to be a significant spread at the retail level as well. We have not been able to see what the justification for that was either.
Mr. Chairman: Mr. Slaughter, how much refining capacity is in the Galveston area.
Mr. Slaughter: Well, there’s about 25 percent of U.S. refining capacity, in the Gulf of Mexico and in the Houston area itself you have about 10 percent significant facilities, I mean you know, Baytown, which is the largest refinery in the United States is in that area. There are a number of refineries in Corpus and Galveston.
Chairman Stevens: Thank you.
Mr. Slaughter: The good news is that much of the area though is not below sea level. I mean that may be a plus in this area.
Chairman Stevens: The bad news is that it’s a Hurricane 4.
Chairman Stevens: I think we ought to make it very plain that we all dislike this concept of gouging the public unreasonably, particularly after a state of emergency, or a disaster such as this. The question is how to define that and who should really police it. Currently 14 states have price-gouging laws. The Federal government has never had one and the question really presented to us by these bills is whether we should have one. Would any of you, let’s go through the four of you. Our colleagues went over about 5 minutes. I think Senator Inouye and I will split this time. My question is, is do you think it’s possible to frame a law which would meet the demands of the public for some control over price-gouging as it’s understood by John Q. Citizen, which is, I think, that someone’s trying to make more money out of a disaster than is warranted by the cost of the product he is trying to sell? Is that a reasonable way to pose it? Mr. Slaughter, what do you think?
Mr. Slaughter: Well, I think given the oversight that’s already been described to you, that the FTC has over the marketplace and everything already, they are looking at market conditions and transactions nationwide. There are a number of state statutes. The difficulty in framing the statute is that you can end up with something that is back door regulation of gasoline prices. And, I think you have to weigh the risks versus the positives and I would tread, frankly, very carefully there in terms of a federal statute given everything that FTC, GAO, and others are already doing to police the market.
Chairman Stevens: The alternative is a price cap. President Nixon put one on once, you remember.
Mr. Slaughter: 1971, I was here, sir.
Chairman Stevens: Yeah, I was here, too. We were both here, but that didn’t work. Now, which alternative is advisable from the point-of-view of the industry? Neither?
Mr. Slaughter: Well, if you looked at something in extreme circumstances in emergencies and you could frame gauging, it would be preferable to price caps because, as you know, it took 10 years to work out of that system and get back to market pricing in the national interest. And, we’d be very concerned about imposition of price caps.
Chairman Stevens: Mr. Slocum?
Mr. Slocum: Well, first of all, I think it’s abundantly clear that price gauging is going on. One thing that the Committee could do is call in the trader who was quoted in this Dow Jones article, boasting that there are so many energy traders making so much money off of the hurricane, that they made so much money in one week, that they didn’t have to work the rest of the year.
Chairman Stevens: Now you’re talking about energy traders, rather than people who are selling gasoline.
Mr. Slocum: Well, right, yes. There are two different components to my testimony. One was dealing with energy traders and the second is dealing with the vertically integrated oil companies. And, I think that there is evidence of price gouging going on in both industries. I think the first thing to do is call in…
Chairman Stevens: The second one is subject to the control of the FTC. The first one is the SEC.
Mr. Slocum: Or the Commodities Futures Trading Commission. But, Congress also has jurisdiction because Congress rolled back some of those regulations and so more than half of the energy trading that’s going on today is in under-regulated exchanges, so called over-the-counter derivatives markets. And, there is a lot that has been written in the trade press.
Chairman Stevens: You’re saying that the speculators are the ones who are gauging.
Mr. Slocum: I’m saying that the speculators are gauging and I’m saying that the vertically integrated oil companies are also engaging in uncompetitive practices that result in price gauging. There are two different industries where it’s occurring, Mr. Senator.
Chairman Stevens: Mr. Caruso?
Mr. Caruso: Well, as you know EIA is not in the policy game, but I take off that hat…
Chairman Stevens: You’ve been here several times. We value your opinion.
Mr. Caruso: Let me give you my opinion. My opinion as an economist is that anything we can do to avoid price controls, that’s the road to go on. With respect to, I think there is a lot of authorities that the FTC and the SEC and others have already, for something like the issue that we’re dealing with, tough to define price-gauging, it seems to me the closer you get to the actual retail level or wholesale level, the better you are and to me that means states. The states’ authorities should be really where I would focus.
Chairman Stevens: Mr. Koch?
Mr. Koch: Well, I think the last thing we want to do is return to what we experienced in the early ‘70s with price controls. That would be the most distasteful. The other thing is whether or not those 14 states that have price-gauging statutes, are they actually doing what they’re intended to do. If they are, there may be room for that at the federal level. Again, our preference would be probably to keep it at the state level, but I think it warrants exploration at the national level if the states aren’t doing what they should be.
Chairman Stevens: I think I should state for the record that I was told by the national entities that distribute gasoline that the prices that they’re charging in the disaster area, in Louisiana, and Mississippi, and Alabama are pre-disaster prices. They had frozen the prices down there for people consuming gasoline in the disaster area. Is that your understanding, Mr. Slaughter?
Mr. Slaughter: That is happening some places, sir. Also, you know, even the wholesalers, the refiner sellers have frozen prices in some of that area and many of them are selling product well below spot price, so it varies by individual company and individual retailer.
Chairman Stevens: Well, they do deserve some credit for that.
Witness Panel 2
Mr. Robert SlaughterPresidentNational Petrochemical and Refiners Association
Mr. Tyson SlocumResearch Director, Energy ProgramPublic Citizen
Witness Panel 3
Mr. Ronald W. KoshVice President of Public and Government RelationsAmerican Automobile Association Mid-Atlantic
Mr. Guy F. CarusoAdministrator, Energy Information AdministrationU.S. Department of Energy