SPEAKERS CONTENTS INSERTS
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72–701 DTP
2001
2001
ENERGY ISSUES AFFECTING THE
AGRICULTURAL SECTOR OF THE U.S. ECONOMY
HEARINGS
BEFORE THE
SUBCOMMITTEE ON CONSERVATION, CREDIT,
RURAL DEVELOPMENT, AND RESEARCH
OF THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
APRIL 25, and MAY 2, 2001
Serial No. 107–6
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Printed for the use of the Committee on Agriculture
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COMMITTEE ON AGRICULTURE
LARRY COMBEST, Texas, Chairman
JOHN A. BOEHNER, Ohio
Vice Chairman
BOB GOODLATTE, Virginia
RICHARD W. POMBO, California
NICK SMITH, Michigan
TERRY EVERETT, Alabama
FRANK D. LUCAS, Oklahoma
SAXBY CHAMBLISS, Georgia
JERRY MORAN, Kansas
BOB SCHAFFER, Colorado
JOHN R. THUNE, South Dakota
WILLIAM L. JENKINS, Tennessee
JOHN COOKSEY, Louisiana
GIL GUTKNECHT, Minnesota
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BOB RILEY, Alabama
MICHAEL K. SIMPSON, Idaho
DOUG OSE, California
ROBIN HAYES, North Carolina
ERNIE FLETCHER, Kentucky
CHARLES W. ''CHIP'' PICKERING, Mississippi
TIMOTHY V. JOHNSON, Illinois
TOM OSBORNE, Nebraska
MIKE PENCE, Indiana
DENNIS R. REHBERG, Montana
SAM GRAVES, Missouri
ADAM H. PUTNAM, Florida
MARK R. KENNEDY, Minnesota
CHARLES W. STENHOLM, Texas,
Ranking Minority Member
GARY A. CONDIT, California
COLLIN C. PETERSON, Minnesota
CALVIN M. DOOLEY, California
EVA M. CLAYTON, North Carolina
EARL F. HILLIARD, Alabama
TIM HOLDEN, Pennsylvania
SANFORD D. BISHOP, Jr., Georgia
BENNIE G. THOMPSON, Mississippi
JOHN ELIAS BALDACCI, Maine
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MARION BERRY, Arkansas
MIKE McINTYRE, North Carolina
BOB ETHERIDGE, North Carolina
LEONARD L. BOSWELL, Iowa
DAVID D. PHELPS, Illinois
KEN LUCAS, Kentucky
MIKE THOMPSON, California
BARON P. HILL, Indiana
JOE BACA, California
RICK LARSEN, Washington
MIKE ROSS, Arkansas
ANÍBAL ACEVEDO-VILÁ, Puerto Rico
RON KIND, Wisconsin
RONNIE SHOWS, Mississippi
Professional Staff
WILLIAM E. O'CONNER, JR., Staff Director
LANCE KOTSCHWAR, Chief Counsel
STEPHEN HATERIUS, Minority Staff Director
KEITH WILLIAMS, Communications Director
Subcommittee on Conservation, Credit, Rural Development, and Research
FRANK D. LUCAS, Oklahoma, Chairman
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JERRY MORAN, Kansas
Vice Chairman
JOHN R. THUNE, South Dakota
DOUG OSE, California
TOM OSBORNE, Nebraska
SAM GRAVES, Missouri
ADAM K. PUTNAM, Florida
MARK R. KENNEDY, Minnesota
EARL F. HILLIARD
Ranking Minority Member
JOHN ELIAS BALDACCI, Maine
DAVID D. PHELPS, Illinois
MIKE THOMPSON, California
JOE BACA, California
COLLIN C. PETERSON, Minnesota
EVA M. CLAYTON, North Carolina
RYAN E. WESTON, Subcommittee Staff Director
(ii)
C O N T E N T S
APRIL 25, 2001
Clayton, Hon. Eva M., a Representative in Congress from the State of North Carolina, prepared statement
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Hilliard, Hon. Earl F., a Representative in Congress from the State of Alabama, opening statement
Lucas, Hon. Frank D., a Representative in Congress from the State of Oklahoma, opening statement
Pickering, Hon. Charles W. ''Chip'', a Representative in Congress from the State of Mississippi, prepared statement
Putnam, Hon. Adam H., a Representative in Congress from the State of Florida, prepared statement
Stenholm, Hon. Charles W., a Representative in Congress from the State of Texas, prepared statement
Witnesses
Coffman, Jack T., senior vice-president, power supply, Oklahoma Gas & Electric Company, Oklahoma City, OK
Prepared statement
English, Hon. Glenn, chief executive officer, National Rural Electric Cooperative Association, Arlington, VA
Prepared statement
Felmy, John C., chief economist and director of policy analysis and statistics, American Petroleum Institute, Washington, DC
Prepared statement
Gorham, Michael R., president, National Propane Gas Association, Grand Rapids, MN
Prepared statement
Heck, Ron, vice-president, American Soybean Association, and member, National Biodiesel Board, Perry, IA
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Prepared statement
Horvath, Skip, president, Natural Gas Supply Association, Washington, DC
Prepared statement
Jensen, Lynn, chairman, National Corn Growers Association, Lake Preston, SD
Prepared statement
Jordan, Jerry, chairman, Independent Petroleum Association of America, Columbus, OH
Prepared statement
MAY 2, 2001
Hilliard, Hon. Earl F., a Representative in Congress from the State of Alabama, opening statement
Prepared statement
Lucas, Hon. Frank, a Representative in Congress from the State of Oklahoma, opening statement
Moran, Hon. Jerry, a Representative in Congress from the State of Kansas, prepared statement
Witnesses
Buckley, Glen N., chief economist and director, Agri-Business, CF Industries, Inc., on behalf of the Fertilizer Institute
Prepared statement
Collins, Keith, Chief Economist, U.S. Department of Agriculture
Prepared statement
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Graves, David, president and chief executive officer, National Council of Farmer Cooperatives
Prepared statement
Maze, Dennis, producer, on behalf of the Alabama Farmers Federation
Prepared statement
Rajkovich, David N., partner, Farmington Fresh
Prepared statement
Rodekohr, Mark, Director, Energy Markets and Contingency Information Division, Office of Energy Markets and End Use, Energy Information Administration
Prepared statement
Swenson, Leland, president, National Farmers Union
Prepared statement
Warfield, Ronald W., president, Illinois Farm Bureau; executive board member, American Farm Bureau Federation
Prepared statement
Submitted Material
American Corn Growers Association, statement
United Fresh Fruit & Vegetable Association, statement
''Post Conference Comments of the California Dairy Coalition of Concerned Energy Users'', submitted by Mr. Thompson of California
ENERGY ISSUES AFFECTING THE AGRICULTURAL SECTOR OF THE U.S. ECONOMY
WEDNESDAY, APRIL 25, 2001
House of Representatives,
Subcommittee on Conservation, Credit,
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Rural Development, and Research,
Committee on Agriculture,
Washington, DC
The subcommittee met, pursuant to call, at 2:08 p.m., in room 1300 Longworth House Office Building, Hon. Frank D. Lucas (chairman of the subcommittee) presiding.
Present: Representatives Moran, Thune, Ose, Osborne, Graves, Putnam, Kennedy, Hilliard, Baldacci, Phelps, Thompson, Clayton, Etheridge, and Stenholm (ex officio).
Staff present: Ryan Weston, staff director, Subcommittee on Conservation, Credit, Rural Development, and Research; Callista Gingrich, chief clerk; Anne Simmons, and John Riley.
OPENING STATEMENT OF HON. FRANK D. LUCAS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF OKLAHOMA
Mr. LUCAS. This hearing of the Subcommittee on Conservation, Credit, Rural Development, and Research to review energy supply and demand issues affecting the agriculture sector of the U.S. economy will come to order.
I would like to welcome everyone today to this subcommittee's first of two hearings which will provide our members the opportunity to listen to energy producers and users.
Energy and the American economy is a complex and multi-faceted topic. While this subcommittee does not, generally, follow all energy matters, the effect that energy supply and demand has on agricultural and rural communities is a major concern to this subcommittee.
Since agricultural producers have a low return on investment and equity when compared to many sectors of the American economy, volatile swings in energy and other input costs can drastically alter their net revenues. Higher prices for oil, gas, diesel, electricity, natural gas, propane, and fertilizer caught many producers unaware this past year.
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We need to know what led us to this current situation, how future price shocks can be minimized, do renewable fuels play an adequate role in fuel supply, and how can producers better cope with increased input prices. What is the outlook of the U.S. energy supply and demand in 1 year, 5 years, and 10 years?
According to the Congressional Research Service, U.S. refineries today can only meet 85 percent of the domestic demand for refined petroleum products, while a decade ago, they could meet 94 percent of the Nation's product requirement. Furthermore, the United States now imports 52 percent of its oil, up from 47 percent a year ago. So not only are we importing more of our oil, but we are also losing ground on our refining capacity.
For the record, I am not singling out the oil industry. The other energy industries also face unique internal and external challenges. In order for short and long-term energy goals to be realized, any energy legislation that we consider needs to be comprehensive. We do not have all of the answers and are interested in hearing what our witnesses have to say in order to help develop sound policy. New production techniques and sources, infrastructure needs, regulatory compliance, and hedging tools for energy users and producers must be thoroughly discussed and reconciled.
I look forward to today's testimony, and I turn to Ranking Member Hilliard for any comments he may offer.
OPENING STATEMENT OF HON. EARL F. HILLIARD, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ALABAMA
Mr. HILLIARD. Thank you very much. Mr. Chairman, members, and distinguished guests, I am glad to be here on what, for me, is an historical occasion. Of course, this is the first hearing of this subcommittee that has been held since I became the ranking member.
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The topics in the jurisdiction of this subcommittee are very important and especially important to my district. We have had 3 years of drought in Alabama, and during that time, the conservation reserve set-asides were invaluable in feeding the livestock in the State, keeping them alive, and keeping farmers in business.
Since I represent the Alabama Black Belt, which is among the poorest rural areas in the Nation, rural development is a burning issue in my district and State, and I intend to work intensely on that issue. This subcommittee should be of aid to everyone economically and can be of great importance to the Nation.
Today and next week, we are dealing with testimony regarding the energy crisis that is troubling our Nation and which promises to be a problem which will not go away soon. While power outages and rates in the west are getting the publicity, they are affecting others who do not get publicity. The media rarely covers the rural farmers who spend their lives growing our food. The price of fertilizer has multiplied. Heating costs for poultry growers have increased, and since the farmer does not own the chickens, he cannot pass the cost increase on to the consumer. This is only one instance in one industry of the effect of the increase in energy costs.
This sudden leap in energy costs has become a real endangerment to our food supply, and it is our duty to understand its origins and its causes. It is also our duty to do everything within our power to serve our constituents. It is our duty to restore a fair energy pricing structure so that farmers can rely on our national power supply to serve them at a fair cost.
In the light of all of this, I will listen to the testimony given today and next week, and look forward to working with all of you to end this crisis.
Thank you very much, Mr. Chairman.
Mr. LUCAS. Thank you, Mr. Hilliard, and I look forward to the relationship not only that we have had in past years on the full Agriculture Committee, but working together on this subcommittee to face the challenges on behalf of rural America. The Chair would request that other Members submit their opening statements for the record so that the witnesses may begin their testimony and to ensure that we have ample time for questions.
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[The prepared statements of Members follows:]
PREPARED STATEMENT OF HON. CHARLES W. ''CHIP'' PICKERING, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MISSISSIPPI
Mr. Chairman, I deeply appreciate your decision to hold this series of hearings regarding the agriculture energy crisis. We are all very aware that record-low prices have led to tremendous suffering within the agriculture community. Fortunately, Congress has responded to the needs of farm families and has provided the assistance necessary to help farmers keep their heads above water for the time being. However, the agriculture industry is now being further burdened by skyrocketing prices for fuel, fertilizer, and natural gas. It is vital that Congress now look for avenues to provide additional assistance to ensure that American consumers are ensured the continued availability of an abundant and affordable supply of food and fiber.
While much of the agriculture industry has only recently become concerned with rising energy prices, I have been aware of the seriousness of this situation for some time. The first agriculture sector hit by this crisis on a wide scale was the poultry industry, the number one industry in my home State of Mississippi. Poultry producers in Mississippi and throughout the South have been devastated by a harsh winter coupled with astronomically high natural gas and propane prices. These growers depend on natural gas and propane as sources of heat to keep their birds warm during the winter. Throughout most of the industry, energy prices paid by poultry growers have doubled and even tripled. Keep in mind that poultry producers are not eligible for the Federal assistance programs that are available to the majority of other agriculture sectors. In addition, these growers make huge investments and take on enormous debt to keep their operations up to the standards of the integrators with which they contract to grow birds. Therefore, when poultry producers take a hit of this magnitude, it really hurts.
Let me provide you with just one example which is typical of poultry growers in my State. Don James, a constituent of mine in Jones County, MS, spent more on heating bills for just one batch of chickens during the winter of 2001 than he spent during the entire year of 2000. To put this in perspective, Mr. James' total costs for propane in 2000 was $19,000 which allowed him to raise five batches of birds. However, due to high gas prices and an abnormally cold winter, he paid $18,000 in heating costs to raise his first batch of birds alone in 2001. Mr. James is not heating his poultry houses to simply keep his birds comfortable, but to keep them alive so that he is able to make a living for his family. Mr. James' situation reflects similarly the situation faced by every poultry producer in my district. Many of my producers simply do not have the resources to pay these enormous energy bills.
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I want to do everything possible to provide relief to farmers throughout the country, particularly poultry producers, whose livelihoods are being threatened by rising energy costs. I have introduced legislation, the Farm Emergency Energy Act (H.R. 396), that authorizes the Secretary of Agriculture to provide direct relief to farmers who have suffered and will suffer from the impact of high energy costs. My legislation has been endorsed by the National Chicken Council and was recently introduced by Senator Sessions in the Senate. I urge my colleagues to cosponsor this bill so that we can get relief to our farmers as soon as possible.
Mr. Chairman, again, I appreciate the fact that you are bringing attention to the seriousness of the farm energy crisis by holding this hearing. As a result, it is my hope that we see quick congressional action that will help our farmers meet the challenge of skyrocketing energy costs.
PREPARED STATEMENT OF HON. ADAM H. PUTNAM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF FLORIDA
Mr. Chairman, I appreciate the subcommittee holding this hearing today to review the critical situation now facing our Nation's agricultural producers due to the steep increase in fuel costs over the last year. I have a particular interest in the issue as the cost of harvesting and farming operations has severely impacted Florida agriculture producers.
Citrus growers in my district and throughout the State are now experiencing roughly a 44 percent increase in harvesting costs over last year. Grove care including irrigation has risen 60 percent this year, and half of this is a direct result of the increase in the price of ammonium nitrate fertilizer, and the other half is due to the severe drought conditions now facing Florida citrus growers.
In addition, Florida poultry producers have experienced particular hardships due to increased fuel costs. The price of propane used to board chicks has nearly doubled in the last year and has become a major production cost for the boiler industry. Boiler producers cannot sustain these high-energy costs as the average price of propane per gallon has gone from 80 cents per gallon to over 170 cents per gallon.
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I encourage public and private sectors to work together to address this critical situation and develop an energy policy that incorporates he needs of American agricultural producers.
PREPARED STATEMENT OF HON. EVA M. CLAYTON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH CAROLINA
I want to thank Chairman Lucas and Ranking Member Hilliard for calling these important hearings. I am certain that there are some who will wonder why the Committee on Agriculture is holding hearings on the issue of energy. The chairman and ranking member show great wisdom in recognizing that our current energy difficulties span the economic spectrum.
Because of this, there can be no quick fix to our difficulties nor will there be a magic bullet that will solve all of our woes with a single well-placed shot. The problems of specific economic sectors will require solutions that address their particular issues. It is the job of the Agriculture Committee to do what it can to investigate how our energy problems contribute to the woes of farmers and to recommend solutions accordingly.
In recent years, American agriculture has born tremendous difficulties. As commodity prices have fallen to historically low levels and exports have diminished, the fortunes of American farmers have deteriorated as well.
Now, on top of these adversities, the affliction of skyrocketing energy costs is added. Agriculture is an energy intensive industry. Fertilizing fields, heating barns, drawing thousands of gallons of water—all of these require significant amounts of energy. For every dime that our farmers see their energy bills go up, they see their slim profit margins go down.
Natural gas is a critical component in the production of nitrogen based fertilizers. At the beginning of 2000, the average price of natural gas was $2.37 per MMBtu (million British thermal units). At the beginning of 2001, the contract price for the same amount of natural gas was almost $10. Clearly, when there is a 400 percent increase in one of the primary input production costs, farmers will have to absorb that loss.
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In the First Congressional District of North Carolina, the livelihoods of many farmers depend upon turning a profit on their tobacco crops. Curing and drying tobacco after the harvest often requires a great deal of natural gas. For these farmers, the double expense of expensive fertilizer up front and increased heating costs to cure the tobacco later is a heavy load to bear.
Farmers also suffer alongside all Americans in absorbing the effects of spiking petroleum and gasoline costs. Running heavy farm equipment in the field all day requires huge amounts of gasoline or diesel.
Almost a year ago petroleum prices hovered at almost $40 per barrel—an almost astronomic cost compared to the low prices that we enjoyed throughout much of the 1990's. I have watched gratefully as those prices slowly edged downward in recent months to their current level of $28 per barrel.
However, I've been dismayed and confused to see that, in spite of the major reductions in the price of crude oil, few costs appear to have been passed along to consumers. In fact, the cost of a price of gasoline has barely budged. This during a time in which energy companies and petroleum conglomerates are taking in enormous profits. A few recent headlines will suffice to illustrate that not everyone is suffering the high costs of energy. April 25—''Chevron 1Q Earnings Surge Past Estimates.'' April 23 —''Exxon Mobil Tops 1Q Estimates.'' April 11—''Philips Looks to Beat Yearly Estimates.''
My point here is not to deny companies their fair share of profits, but to point out that the rules of a rational and transparent marketplace are supposed to provide benefits for consumers as well as producers and processors. That is clearly not happening in this instance. It is my hope that this Congress and the administration can take action to ensure that consumers alone do not bear the high costs of energy.
I want to again thank the Chair and the ranking member for holding these hearings today. It is imperative that we move forward and seek solutions that provide all parties their due, but which, at their core, focus on the needs of consumers and seek to enable farmers a sustainable livelihood.
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PREPARED STATEMENT OF HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
I appreciate Chairman Lucas calling this series of hearings on energy supply and demand issues, and I look forward to working with him and Ranking Member Hilliard to ensure that agriculture's unique needs, as well as its role as part of the solution, are part of the national energy policy debate.
Food cannot be produced without energy, and energy cannot be produced without food. The agriculture and energy industries, so essential to our national security, have been hammered by problems in recent years. Working together, however, they can help each other and make our Nation stronger.
Agricultural producers cannot pass along higher costs to the consumer, and in recent years Congress has had to pump billions of dollars into the farm economy to prevent complete disaster.
For years now, the Nation's oil and gas industry has been devastated by low prices, increased production costs and overall uncertainty. Former Senator Lloyd Bentsen once said that when America imported more than half of its crude and petroleum products, it would have reached a peril point. Well, we are now there. It has been more than twenty years since we had a national energy policy in place, and it is past time to develop another one.
As a nation, we must provide incentives to explore and produce the Nation's remaining oil and gas reserves. We must also research and develop all sources of energy including wind, solar, hydroelectric, and other forms of renewable energy. In short, it is time to find new ways to meet our Nation's growing energy needs.
Last year, Congress passed the Biomass Research and Development Act so that the Energy and Agriculture Departments would continue to research and develop agricultural, forestry, and waste materials into energy sources.
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Over the last 20 years, progress has been made in promoting the use of ethanol at the State and Federal levels. Research must be done to expand ethanol production into areas where corn is not readily available, and ways must be found to use animal manure for energy production.
The time is right to promote the use of bio-diesel, a fuel made from surplus vegetable oils, recycled oils and animal fats. This fuel has passed vigorous environmental, health and engine testing. Soybean growers have spent over $25 million of their own money to successfully commercialize this fuel. Fuels such as ethanol and bio-diesel can be and should be a part of a national energy program.
Our Nation's energy policies should be comprehensive and framed to encourage the development and use of many viable fuels. We need a responsible approach that will infuse our energy sector with both efficiency and competition, seeking to protect America against emergencies in the energy market.
The recent rolling blackouts in California may change forever how the public and policy makers think about U.S. energy policy. In the meantime, American agriculture can provide a ready source of raw materials to help meet our Nation's energy needs.
Mr. LUCAS. I would like to invite our first panel to the table. Mr. Lynn Jensen, chairman of the National Corn Growers Association, Lake Preston, SD; and Mr. Ron Heck, vice-president of the American Soybean Association and member of the National Biodiesel Board, Perry IA.
Mr. Jensen, would you please begin when ready.
STATEMENT OF LYNN JENSEN, CHAIRMAN, NATIONAL CORN GROWERS ASSOCIATION, LAKE PRESTON, SD
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Mr. JENSEN. Thank you, Mr. Chairman.
My name is Lynn Jensen, and I am chairman of the National Corn Growers Association. I would like to summarize my statement and ask that my full testimony be included in the record.
We are pleased to appear before you today to provide our views on ethanol and the current energy situation. As you know, our Nation is facing another energy crisis. We read daily press reports about higher gasoline prices. Today, I want to outline our views on how ethanol and other renewable fuels can increase the supply of motor fuel while providing economic opportunity for rural communities.
Ethanol is a major priority for NCGA. Thousands of farmers have invested in cooperatives that now produce 40 percent of the current ethanol production. Dozens more ethanol projects are being developed by farmer investors. Ethanol is simply the biggest value-added success story in agriculture today.
There are two general types of ethanol processing facilities, known as wet mills and dry mills. Most new ethanol production capacity is in the dry mill technology, using farmer coop business structures. Wet mills are corn refineries. They produce starch, ethanol, corn sweeteners, corn oil, corn gluten feed and corn gluten meal. Dry mills use simpler technology to produce ethanol and dried distillers grains, and that is sold as a high quality feed ingredient. So one of the myths, that ethanol production is taking corn and wasting it to produce fuel, is immediately dismissed when you look at the array of products that come out of ethanol plants.
Ethanol production is efficient. The cost of producing ethanol is far below what is predicted. A 1986 report by USDA predicted that the cost of producing ethanol in 1995 would be $2.11 per gallon. Instead, those costs were about $1.15 per gallon. And now, the industry average production cost is between 95 cents and $1.10 per gallon. Mr. Chairman, research is making a difference. Costs are coming down.
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Ethanol facilities are also energy efficient. The UE analysis found that for every 100 BTU's of energy used to produce ethanol, 135 BTU's of ethanol are produced. That is because corn plants are really very efficient solar panels. They myth that it takes more energy to produce a gallon of ethanol than is contained in the ethanol itself is just that, a myth. Last year, ethanol production set a new record of 1.63 billion gallons, using more than 600 million bushels of corn.
Still, we are concerned about the future of the industry and the support for ethanol as part of the administration's energy policy proposals. Certainly, there will be energy legislation in the 107th Congress. Several bills have been introduced and the White House is expected to release the outlines of their energy strategy soon. It is important for rural communities to have new economic opportunities from an expanding ethanol industry.
NCGA established an ethanol task force to develop the legislative strategy. The following six-point plan outlines our legislative goals. (1) Support a renewable fuels content standard in the energy bill.
(2) Support efforts that achieve an orderly elimination of MTBE from the gasoline supply. Eleven States and the city of Chicago have already banned MTBE and 14 more States are considering similar legislation.
(3) The gasoline supply system is under stress and we are committed to greater flexibility for refiners and blenders. However, let me be very clear. Proposals to eliminate the oxygen standard are not part of our flexibility plans. And for the record, Mr. Chairman, let me reiterate our complete opposition to any waiver of the oxygen rate requirement for California or any other jurisdiction.
(4) Ethanol provides economic, environmental, and energy security benefits. We support preferential tax treatment for ethanol; especially, changes in the small ethanol producer tax credit like those contained in H.R. 5279, introduced in the 106th Congress. Congressman Thune has assured me that he intends to reintroduce this legislation in the near future. We also support changes in the Tax Code that will direct all revenue from ethanol blended gasoline that currently goes to deficit reduction into the Highway Trust Fund.
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(5) NCGA maintains a strong commitment to clean air. We strongly supported proposals that recognized the environmental benefits of ethanol. This principle is central to our commitment to the RFG oxygen rate requirement.
(6) We support the newly established CCC program that is part of the USDA biofuels initiative. This program needs to be continued on a long-term basis and should be authorized in the farm bill.
NCGA also supports efforts in Congress to encourage value-added agriculture. As I said in the beginning of my testimony, Mr. Chairman, ethanol is the biggest value-added success we have going. What will be the next ethanol and how are we going to find it? We have a research agenda that is aimed at finding and commercializing the next ethanol and establishing a carbohydrate industry or economy of the future. And we will work with you to make value-added agriculture a reality in the next farm bill.
Finally, Mr. Chairman, the Congress is faced with difficult choices regarding energy and environmental policy. Our approach is to decouple them to pursue a two-track approach. First, we develop a comprehensive energy strategy that includes a renewable fuels requirement that compliments the oxygen rate requirement of the RFG program, and then develop new environmental policy that considers changes in fuel and vehicle technology that is based on sound science. This would provide the ethanol industry the signals needed to attract investment while maintaining the benefits of current law that has provided millions of Americans with cleaner air.
Thank you, Mr. Chairman. That concludes my statement, and I will be happy to answer any questions.
[The prepared statement of Mr. Jensen appears at the conclusion of the hearing.]
Mr. LUCAS. Thank you, Mr. Jensen. Mr. Heck.
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STATEMENT OF RON HECK, VICE-PRESIDENT, AMERICAN SOYBEAN ASSOCIATION; MEMBER, NATIONAL BIODIESEL BOARD, PERRY, IA
Mr. HECK. Thank you for the opportunity to be here this afternoon. I am Ron Heck, a soybean and corn producer from Perry, IA. I am currently serving on the executive committee of the American Soybean Association and as a member of the Board of Directors of the National Biodiesel Board.
The reasons for this hearing are troubling for American agriculture. These are times when the prices for our commodities are at record lows and energy and other input costs are high, with the threat of getting even higher over the next several months.
While in the short term there is little we can do to completely alleviate this situation, ASA believes the development of a comprehensive national energy plan would help avoid these crisis situations in the future. We feel strongly that a national energy plan should include a viable renewable fuels component that includes both biodiesel and ethanol.
As you know, Mr. Chairman, the last 8 to 10 years, U.S. soybean growers have invested in the research, development, and commercialization of biodiesel. Biodiesel is a mono-alkyl ester-based oxygenated fuel. It contains no petroleum but can easily be blended with petroleum. Biodiesel is typically blended at the 20 percent level with diesel or at the 2 percent level or lower. It can be used in compression-ignition diesel engines with no modifications. Biodiesel in its neat or 100 percent pure form is biodegradable and nontoxic and is the first and only alternative fuel to meet the EPA's tier I and tier II health effects testing standards. Biodiesel is renewable and domestically produced from agricultural resources; namely, soybean oil.
Biodiesel has many environmental and operational benefits. However, I would like to highlight the fuel's lubricity benefits. Even at very low blends, biodiesel contributes operational and maintenance benefits to diesel engines, and this is even more significant when using ultra-low sulfur diesel.
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Last May, EPA proposed a reduction in sulfur content of highway diesel fuel of over 95 percent from its current level of 500 parts per million. Biodiesel has no sulfur or aromatics, and tests have documented its ability to increase fuel lubricity significantly when blended with petroleum diesel, even at blends of 1 percent or lower.
Soybean growers began to invest in biodiesel almost a decade ago, not because we wanted our own ethanol, but because soybean protein is highly sought after as a product, leaving soybean oil as a valuable but abundant co-product. Because of a large supply of vegetable oils, we have a surplus of soybean oil, and that depresses the price of the entire bean.
While biodiesel, as a fuel, is relatively new to our country, it is widely accepted and utilized in Europe, where motorists use 250 million gallons annually. Our biodiesel industry leaders have worked closely with the European industry in sharing research, performance data, and consumer information. The European biodiesel industry is strongly supported by government and by agribusiness.
While biodiesel offers environmental, energy security and economic development benefits, it is not yet competitive in the United States on a pure cost comparison. Public support will be necessary to help the industry develop. Our culture and our policies are formed on petroleum products, most of which are imported. I understand, Mr. Chairman, that you are from an oil and gas-producing State, and I certainly do not want to imply that soybean growers are opposed in any way to the use of petroleum products. In fact, agriculture is a major user of petroleum products, and that is the reason for the hearing today. However, I would like to make the challenge that our country needs to have an aggressive energy policy that includes renewable fuels and power generation as well as significant domestic production of both oil and gas.
We are currently working with the administration on the development of a national energy strategy that we hope will include a strong renewable fuels policy. We are also working with the National Corn Growers Association and the ethanol industry on legislation that would establish renewable fuel standard for all motor fuels, requiring a small blend of either ethanol or biodiesel to be incorporated. consumers would notice no difference in their fuel except that their engines would run just a little bit better.
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The current biodiesel market is small but growing rapidly. Approximately 5 million gallons of biodiesel were produced in fiscal year 2000, up from 500,000 the year before. Approximately 20 million will be reduced this year. If only soybean oil were the feed stock that was used, we would reduce our current surplus of soybean oil by one-third, raising soybean prices by as much as 16.5 cents per bushel.
ASA is currently proposing legislation that would provide a partial exemption to the diesel fuel excise tax to diesel fuel suppliers who use low blends of biodiesel. This is a program that by raising the price of soybean oil, would save the Government more than $2 in revenue for every dollar spent. We propose reducing the Highway Trust Fund for the lost expense of the excise tax with funds that would be available from a commodity credit corporation from the increase in soybean prices.
Mr. Chairman, we think the timing is right for these policies and for a strong commitment to homegrown renewable energy.
[The prepared statement of Mr. Heck appears at the conclusion of the hearing.]
Mr. LUCAS. Thank you, Mr. Heck, for those observations about the sixth district of Oklahoma. And those of you familiar with Oklahoma know that in the course of redistricting, there is not many months left for the sixth district, so as we consolidate down to five.
A question that I put to both of you, this committee, of course, has specific responsibility for authorizing agricultural research programs; and in particular, things like biofuels. Are there specific technologies that need more assistance in order to make biofuels more effective and more efficient? Are there things we should be doing as a committee? Either one of you.
Mr. HECK. Mr. Chairman, the soybean growers have invested many, many millions of dollars into researching these issues, and we are satisfied that we have a viable product in many market situations. However, there is a biomass research and development committee, a joint committee of the USDA and the Department of Energy, that I also happen to be on, that is assigned exactly the task of reviewing those issues. And the co-chairman is Mr. Glenn English, who is also here today, and I would say that we had two meetings, with another one scheduled in June, and we will be looking at those issues, and it would be a little early for a report on that, but there will be one forthcoming by the end of the year.
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Mr. JENSEN. I would just like to say, a few of my comments relating to the cost of ethanol production and what the projections were back in 1986 and what they ended up being in 1995, compared to the projection, a lot of it has to do with the type of research that was partially funded by the Government, in terms of bringing down the cost of production, that is bringing it down, continually, farther all the time.
Another area that we are constantly exploring, and I touched a little bit on in my talk, was the new uses for corn, and what else we are seeing out there that can offset different energy needs, things like the polyester industry like PLA in Blair, NE, and those type of projects. So there has been a lot of good success stories in the past in terms of how these types of research have played into bringing down the cost of production and contributing more to energy security. But giving a specific example of what we need for the future today in research, I would be a little off, I am guessing.
Mr. LUCAS. Mr. Heck, you touched on the question about diesel and the EPA standards. And being one of those farmers out there who owns a 1977 year model tractor, it, of course, is a particular concern to me, the proposal about reducing the sulfur levels. Do you think that the refiners out there, from your observations of what is going on, will be able to produce enough highway diesel and off-road diesel under the present environment when the time comes to meet those requirements?
Mr. HECK. Well, they say that they can't, and I have every reason to believe them, but there is another technical problem as well. As you take the sulfur out, you have to put something back in the fuel to restore its lubricity to keep the engines running properly. And there is a limit to how much detergent, which is the additive—there is a limit to how much detergent you can add back in without having the diesel fuel gel up even in summer conditions because, essentially, it is too soapy. Biodiesel solves that problem quite easily, providing better fuel and longer engine life, and that is why we are proposing the low blends as the best alternative use for now of soybean oil.
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Mr. LUCAS. Thank you, Mr. Heck. Mr. Hilliard, any questions?
Mr. HILLIARD. Yes, I do. Thank you very much. Mr. Jensen, you indicate in your testimony that ethanol has been used in 15 percent of the reformulated gasoline produced on an annual basis. Why is this the case?
Mr. JENSEN. In the reformulated gasoline, are you asking, excuse me, that if, currently, about 15 percent of the reformulated gasoline contains ethanol?
Mr. HILLIARD. Yes.
Mr. JENSEN. And the balance of the gasoline in the reformulated gasoline market, the oxygenated used is MTBE. And that is the component, of course, that is showing up in the groundwater and giving us all the problems across the Nation, which has, in essence, led to a greater opportunity to ethanol.
Mr. HILLIARD. Why not 20 percent or 30 percent?
Mr. JENSEN. Right now, I believe it is a cost issue, that the MTBE is cheaper than ethanol. So in the areas where it is logistically cheaper to put, to blend, MTBE in——
Mr. HILLIARD. At today's prices, that is still the case?
Mr. JENSEN. Yes, it is. I am not sure if I understand—the additive is, whether it be ethanol or MTBE, regardless of the price of gasoline at the pump, it is the price of the addictive that would dictate which product would be used.
Mr. HILLIARD. Now, let me ask both of you a question. Are both of you involved with the administration's energy policy working group?
Mr. JENSEN. To a point, we are.
Mr. HILLIARD. Tell me about you and your industry, and we will let him talk.
Mr. JENSEN. I beg your pardon?
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Mr. HILLIARD. Are you involved in your industry?
Mr. JENSEN. I am sorry. You will have to rephrase the question for me.
Mr. HILLIARD. Are you involved with the administration energy policy working group?
Mr. JENSEN. Staff has been consulting with that group and working with the administration on implementing a renewable standard into that program.
Mr. HILLIARD. Are you working actively on an ongoing basis or is this just a policy consideration that you are involved because of your position?
Mr. JENSEN. Our organization is working on it with them on an ongoing basis.
Mr. HILLIARD. OK.
Mr. HECK. We are working through the USDA. Secretary Veneman is on that group and that is where we get our input.
Mr. HILLIARD. Ethanol is generally blended at what percentage rate in most uses?
Mr. JENSEN. Depending on the area of the country, where I am from in the upper Midwest and South Dakota, 10 percent is a very common blend. In the areas in the reformulated gasoline market, I believe it is somewhere around 2.7 percent of the gasoline is blended—or 2.7 percent or 5.7 by volume in the gasoline, 5.7 percent by volume is ethanol.
Mr. HILLIARD. All right. Let me ask this. Are there instances in other parts of the world where it is used at a higher percentage than here in this country?
Mr. JENSEN. I believe there is. I know at different times Brazil has used a 21–22 percent. I couldn't give you exacts around the world, other than yes, there are areas that use a higher blend.
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Mr. HILLIARD. Does that increase their costs?
Mr. JENSEN. I can't give you a good answer on that. I wouldn't now.
Mr. HILLIARD. Well, if I recall, earlier, you said something about the additive, and you mentioned that ethanol was costly and it would run up the price of the total product.
Mr. JENSEN. I don't believe I ever attributed ethanol to increasing the price of the product. In fact, it is quite the opposite.
Mr. HILLIARD. Oh, it is?
Mr. JENSEN. Right now, I alluded—or I talked about in my testimony what has happened to the price of ethanol right now at the plant and what was predicted to be a $2.11 per gallon cost of ethanol actually, in reality, turned out to be only $1.15 in 1995. And we continue to ratchet those costs down as we become more efficient in production and as new research shows us better ways to do things. So right now, current cost of production, runs right around $1 a gallon, which is much cheaper than what people across the Nation are paying for gasoline.
Mr. HILLIARD. My final question is, from time to time, we still hear concerns about the blendability of ethanol. Can you tell me what those concerns are and whether they are valid? And if so, what is being done to address them?
Mr. JENSEN. Blendability concerns—I am trying to think of some. In South Dakota where we have been blending for years, of course, those issues have been addressed and there are no blendability issues. In fact, throughout the upper Midwest, ethanol is widely used in a very preferred fuel. The only blending issues that I can think of that may have been forwarded, I don't believe are valid, are just mainly in the distribution channel.
Mr. HILLIARD. Thank you.
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Mr. LUCAS. Mr. Thune.
Mr. THUNE. Thank you, Mr. Chairman, and thank you for calling this hearing. I think it is a very timely one.
I also want to recognize Mr. Jensen, a fellow South Dakotan, who resides in my district, and after reapportionment, will still reside in my district, but has certainly distinguished himself in the area of ethanol and value-added, so I appreciate very much, Lynn, having you here. Lynn comes from eastern South Dakota, I come from western South Dakota, but he is one of the better guys from that part of the country.
So let me just, if I could, follow up on a couple of questions that have sort of surfaced and been raised. But one of the questions has to do with the fact that opponents of ethanol have argued and believe that if a renewable fuel standard is enacted, or if the California RFG waiver is not granted and MTBE is banned, that the ethanol industry will not be able to supply the demand that would be needed. How would you respond to that statement?
Mr. JENSEN. Let me ask, the question, again, are you suggesting that if the waiver is not granted, that the supply won't be met?
Mr. THUNE. Correct. I am saying that is an argument that the opponents of ethanol make.
Mr. JENSEN. Yes. I talked about in my testimony earlier about the added production that has happened over the course of the last several years has been in the form of farmer-owned value-added, which I am an owner of myself. Myself and several thousand in South Dakota, about 1,500 farmers went together for one plant. There are plants right now being proposed all across the upper Midwest. In fact, about a month ago, at a meeting where a lot of ethanol producers were together, over 100 different ethanol plants were in one stage or another, whether early proposal or whether actually breaking ground, and almost all of those were farmer-owned cooperatives. Those facilities are out there waiting for the right signals from Congress that says the market is going to be there.
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And in Mr. Kennedy's district and in your district, Mr. Thune, the potential for growth is phenomenal. And given the right signals and the right tools, agriculture will step up and meet that challenge. I am very excited about my participation as an owner in an ethanol plant and that is how I plan on capturing value. And we can meet those needs simply because the capacity is there. We are using less than 7 percent of our corn crop right now in ethanol production, and we could easily ramp that up.
Mr. THUNE. Let me say, also, just acknowledge, because you mentioned in your testimony, but thank you for your support of the changes that we are trying to make, the small producer tax credit, which is legislation that we will be introducing tomorrow. But you mentioned farmer-owned ethanol plants in South Dakota. It seems that, I think, for a lot of farmers, there is some risk involved in investing in these plants, and you noted this as well. But is it difficult to get investors when so many issues with supply are tied to Government policies?
Mr. JENSEN. Yes, it is. The more secure we are with Government policies, the easier it is to attract investors. There is no doubt about that. And in essence, that becomes a banking issue. The more comfortable the banks are with the stability of the Government ties to ethanol production, the more readily they are to loan members—or loan money to those members to be a part of those cooperatives. So they are as big a component in the risk assessment of Government involvement in ethanol production as the farmers are themselves.
Mr. THUNE. Important, I think, that you all know what we are going to be doing so that people who are in the process of making investments.
Mr. Heck, just one question with respect to the soybean issue. If a renewable fuel standard were enacted, would you still see the need for a biodiesel tax credit?
Mr. HECK. That is very tough to say without seeing the details of the two proposals. And it also depends somewhat on what the goals of the committee might be trying to achieve. As a soybean grower, just the consumption of the soybean oil is our objective, and there might be more than one way that that could be done. As a fuel user, having biodiesel available to use because of the lubricity qualities, that it makes my engine run better and last longer, is a desirable situation however it is achieved.
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Mr. THUNE. I would simply say, again, Mr. Chairman, in conclusions, that I believe very strongly that whatever we do in terms of farm bill policy and everything else, the debate that we are having right now, that value-added development promotion needs to be an integral part of that. And it is, particularly, again, this hearing is timely in light of the fact that in my State, and I am sure many States across the country, we have seen a 30 cents spike in gasoline prices in the last week or two, pointing to the need, again, for an energy strategy in this country that relies more heavily, I think, upon alternative fuel. So thank you, again, for the hearing, and panel, for your testimony.
Mr. LUCAS. Absolutely, and your good work in this effort, Mr. Thune. Mr. Thompson. Mr. Osborne.
Mr. OSBORNE. Thank you, gentlemen, for being here. Thank you for your testimony. It is very interesting to all of us from your part of the country, certainly. I guess I would like to follow up on a question posed by Mr. Thune. You are talking about sufficient quantity to meet the needs of California. Is there a sufficient delivery system, because as you know, the clock is ticking on their situation. I don't know what they have got left, 100 days, 90. I don't know what it is, but they are going to use a lot of arguments out there, and do you feel that an adequate amount of ethanol can be delivered on time?
Mr. JENSEN. I think that is a good question to hear asked, because that is one that does pop up a lot. And we have spent some resources in that area, because it is a very valid concern. And yes, we are very comfortable with the delivery system that is in place right now and what, actually, is coming up. Of course, the most common way right now to get ethanol into California is by barge down the Mississippi, thorough the Panama Canal, and back up into California. MTBE comes into California this way right now, a lot of it does. So we really aren't changing a lot there.
Other areas of delivering ethanol, of course, is through rail. But one of the latest developments is shipping ethanol, and that is pure ethanol in a pipeline with plugs on each end of it. And the experiments that we have had people check into, all indications are that that has been very successful to this point, and we expect that to be more developed all the time.
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Mr. OSBORNE. Do you feel that this information has been adequately communicated to the administration, that the objections of some in California have been met in a way that is clear enough, forceful enough, that people on the national scene understand it?
Mr. JENSEN. Apparently, not. But we are going to continue and try to get people to listen to that message, because it is very important. I guess, if we thought that it was already a clear communicator, we could back off in that area, but according to the questions we are hearing on the Hill, that is definitely something we are going to have to tell that story a little bit better.
Mr. OSBORNE. OK. Just a couple other questions. If it costs about $1 a gallon to produce ethanol, why do you think that ethanol is frequently higher at the pump than regular gasoline?
Mr. JENSEN. I think in any business it appears that the cost of production is not indicative of the selling price or the retail price. And ethanol is spot bid just like gasoline is, and when there is the ability to add to the cost of a product—I guess I look at South Dakota, for instance. Wherever there is a demand for the product, the price is higher. Wherever the demand is neutral, it is priced lower, simply because the incentives are there for it to be priced lower. Right now, I do not know why ethanol is priced higher in some areas of the country than it is in other areas. I can't seem to find a good reason for it.
Mr. OSBORNE. I would share your observation. Every time I drive around my district, I take a look at the pump, and I often ask inside, and sometimes they will say, well, we have got a smaller tank, the demand exceeds the supply. And so I am assuming that as these plants come on line, maybe the price will go down. At least, I would hope so.
A couple questions for Mr. Heck. What is the cost per gallon to produce soybean oil?
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Mr. HECK. At the current time, for a gallon of biodiesel produced from soybean oil, depending on the quantities, it could be from $1.50 to $2 per gallon.
Mr. OSBORNE. OK. And do you think that can be reduced over time? Is it a matter of technology or is that about as far as it is going to go?
Mr. HECK. Well, that is one of those research projects we were talking about a little bit earlier. If you use the entire soy oil product as diesel, as biodiesel, it has to bear the entire cost. The oil industry uses what is known as fractionalization, taking out the most valuable expensive molecules and then burning the residual, which that should drive the price of biodiesel down later as we would develop and take out the more valuable co-products.
Mr. OSBORNE. And one last question. What would you say an optimal blend would be for biodiesel?
Mr. HECK. For lubricity purposes alone, in the low blends, it varies with the quality of the original fuel. Sometimes a blend as low as 0.25 percent can be enough to provide the necessary fuel quality. On other diesel fuels, it requires up to 2 percent blend. Stanodine, the largest diesel fuel injector manufacturer in the country, has gone on record recommending a 2 percent blend as something to consider, because fuel will always meet the quality standards at 2 percent.
Mr. OSBORNE. Thank you, Mr. Chairman.
Mr. LUCAS. The gentleman from Illinois.
Mr. PHELPS. Thank you, Mr. Chairman. Thank you for providing this hearing for some valuable input from you gentlemen, and we appreciate you very much.
Mr. Jensen, and I guess, both, Mr. Heck, my district is home to ADM, I should say. So it is very much important to me to see ethanol enhanced as much as it possibly can. I was looking through your testimony as much as I could. Is there anything you recently have identified, since the fuel prices are what they are, and the energy crisis has been heightened in that respect, from electricity to fuel, natural gas, has that developed your plans to be more aggressive in seeing how ethanol could play a major role, change your goals for the near future or long term, as opposed to the way we were progressing without this height of crisis?
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Mr. JENSEN. I guess from the National Corn Growers' stance, I can't say that it has accelerated our stance. It certainly has created an opportunity, and these are mixed blessing opportunities. As Mr. Heck talked earlier about us being fairly large energy users ourselves, we are looking for opportunities just to push our own product in the market at our own expense. We are looking for ways to be more efficient and drop our energy costs all the way around also. We don't want to introduce something to the market that we feel is detrimental to our own business and we have to use it.
I don't think that it has really accelerated it so much, as it has made very obvious the opportunity and simply allows for timing, for people to—people are much more receptive to the message right now because they understand the importance of energy right now. When fuel is cheap, or energy is cheap, it is very hard to get people interested—and plentiful. Forget cheap, just plentiful, it is hard to get people interested in alternative energy when they have plenty themselves right now. So right now it is simply the timing.
Mr. PHELPS. Do you think we could better the chances and get more attention to its use if we tied national security measures to alternative fuels? Because it seems to me that if we were in some type of, heaven forbid, war situation that was bigger than we like to think, and dependence on the foreign oil that we have could possibly put us in jeopardy, and having alternative fuels that could work in our military resources seem like could strengthen our argument for ethanol use. Wouldn't you think?
Mr. JENSEN. I would think so. We, certainly—energy security and national security are something that we have talked about for years. Once again, we have always seemed to come through. When we have—we don't guard our cornfields with military personnel. And we do look at our overseas oil industry as something we are vitally dependent on. When the crisis happened last time in the early 1980's, we weren't at near the level of dependence that we are today. But we have been lulled into thinking that it a very acceptable percent of our imports of petroleum are at a comfortable level. And until people understand that any small breakup of that has a devastating impact on our prices and availability, then they won't understand how it is a national security issue.
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Mr. PHELPS. Just one last observation, maybe question. I have met with different independent farmer groups throughout my district in the last few months who are interested in forming their own business group in providing ethanol production. They have identified acres to be contracted in a regional designed area that would have the number of bushel for the number of gallons that would need to be produced, providing the market even stays as it is, let alone what might be anticipated to increase. Does your group provide any kind of—are you engaged with any of those groups that may be showing some leadership and some aggressive spirit in organizing in that way?
Mr. JENSEN. As you know, the National Corn Growers is very grassroots oriented, and we have State associations. Of course, the State of Illinois has a very strong association that we work very closely with. And we provide technical help for those that want to form cooperatives, and we are in the process of building a—or putting together a workshop for producers that want to own their own ethanol plants to come together and simply learn how to ask the right questions, is an ethanol plant right for their area, and how to critique the business plan, how to look for the builders, those types of things. So we do work very closely with the State associations and the county organizations through the States to try and facilitate whatever we can in farmer-owned value-added.
Mr. PHELPS. I see my time is up. In the University in Evansville, as a former State representative, we helped fund a demonstration project for ethanol production there that can, hopefully, be duplicated. And so that is where my interest came. Thank you.
Mr. LUCAS. Mr. Kennedy.
Mr. KENNEDY. Yes. Thank you very much for your testimony and thank you for recognizing that Minnesota is a leader on this issue, having already implemented a 10 percent requirement for ethanol, and now we are considering implementing a requirement for biodiesel in the State as well to try to provide some leadership to the country. We are also happy to have 15 ethanol plants in the State of Minnesota, six of them in my district, and I am happy to be supporting Thune's tax credit for small producers. And I do hold out that hope that if we can keep this oxygen rate requirement in California, that we can triple the production of ethanol.
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I am curious, I didn't hear a lot of conversation, Mr. Jensen, in your testimony about E–85 and what potential that can be, and I am always surprised when I go to a number of communities that have ethanol plants and they don't even offer E–85 availability there. What hope should we be able to hold out for an 85 percent ethanol blend and what could it do for our energy needs?
Mr. JENSEN. This is an area of priorities when we look at where are we going to spend our energies as a national association and an organization that represents a very broad base. The 85 markets that we have been involved in, and of course, Minnesota has been a very successful E–85 program and it continues to grow, today, is still probably a pilot program, looking at different—Illinois, in the Chicago region, has an E–85 program also. Right now, the E–10 market and the reformulated gasoline market is, certainly, the largest market that requires little or no infrastructure changes. And that is the reason the major emphasis of the National Corn Growers has been on those two areas versus the 85. It is not that we think that E–85 is not valid or has a future, but we are just looking at what is the most gradual change that people can accept that won't have any type of increased cost to them through an infrastructure change.
Mr. KENNEDY. And I agree with the broader emphasis on E–10, but as we know, there is an education process where we have to get the automobile companies to make E–85 capable cars, which they are beginning to do, and I think we need to encourage our members across the Midwest that are the biggest proponents of ethanol to start doing this testing in a broader scale, as you are saying to be prepared to withstand the arguments, again, once we win the E–10 argument, to move onto the higher levels.
And Mr. Heck, I have gotten a lot of feedback, as well, from truckers and other users on biodiesel. So most of this input came before the Bush administration decided to keep the standards for reduced sulfur, which really make the need for biodiesel that much greater. What efforts are your organization doing to reach out to the users and try to build the support across a number of different constituencies for doing what we are doing in Minnesota at the national level?
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Mr. HECK. We are approaching that on a smaller regional basis through our State organizations. For example, as you pointed out, your State is taking the lead in that. My State, the State of Iowa, is also promoting branded biodiesel. And we are starting at the State level where we know that we can handle the demand and where the audience is the most receptive. Because honestly, a national program would be prohibitively expensive at this point.
Mr. KENNEDY. OK. We are having a big energy debate in this country, and that is good. And part of my frustration is when we are outside of the Agriculture Committee, and the Energy Committees are just broadly talking, we don't seem to be making the headway of raising the consciousness of what ethanol, and biodiesel, and other renewable fuels could be. I read a Wall Street Journal article talking about one of the reasons why we have higher gasoline prices is because MTBE is made out of natural gas, and with natural gas going up, that is going up, and it had a very extensive article. It didn't once mention ethanol. What do we need to do in the Agriculture Committee, outside of the Agriculture Committee, to try to raise the awareness of what ethanol, and biodiesel, and other forms could mean to the energy debate? I will ask both of you that question.
Mr. JENSEN. I wish I knew the answer to that one. Raising awareness through this whole process has been one of the major stumbling blocks—getting people interested. And as I mentioned before, when we are running into potential shortages or price spikes, it has certainly helped get our message into the Department of Energy. And I think as it looks like things are going to happen again this summer, that there is going to be energy spikes and possible shortages, we will just have to keep hammering them, because it seems like that is what gets peoples' attention. Anything less than that, it is too easy to be complacent.
Mr. KENNEDY. Well, and I encourage that, because I think this really is a communications battle ring more than, really, anything else. Thank you.
Mr. HECK. We are working through the USDA and the Secretary of Agriculture, and Vice President Cheney's energy committee, hoping for some results from there. As a committee, whatever you could do for budget provisions to raise the profile to be included would be very helpful to us.
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Mr. KENNEDY. OK. Thank you.
Mr. LUCAS. Mr. Baldacci.
Mr. BALDACCI. Thank you very much, Mr. Chairman, and thank you for holding these very important hearings.
I guess I would like to ask you just, the first question is that I was reading the background material, and it said that the Clinton administration had put forward the biobased products and bioenergy initiative, which was supposed to triple the use of films and products derived from biomass by 2010. And it says that it is an Executive order, and I was wondering, within your administration working group, is that still in effect, or do you know?
Mr. JENSEN. That would be the CCC program, and currently, that is in effect, and I believe it is scheduled to sunset in 2 years.
Mr. HECK. It is in effect and has been strengthened by the biomass energy act, Biomass Research and Development Act, last year, sponsored by Senator Luger. So it has now got bipartisan support and the approval of Congress to continue.
Mr. BALDACCI. So it bodes well 2 years down the road based on that reinforcement. You are talking about the Agricultural Risk Protection Act, where they amended it to include the biomass research that was done in the 2000 Agricultural Risk Protection Act last year.
One other thing that I would like to bring to your attention, I know it is not in your industry, particular, but there is a couple of issues in the northeast that pertain to MTBE, which has been contaminating groundwater all over the northeast, and it is the hope that the renewables, such as ethanol, can play an important role and will continue to grow into the future. Now, in our State, we are trying to ban the MTBE, or at least get its phase-out initiated, and given that potential, that there is a demand that is estimated to exceed 550 million gallons per year. Now, part of the effort to triple this particular area of the renewables was the possibility of developing pilot plans. And I think that what I would like you to consider is the possibility, especially, in our State, where the natural resources and potatoes, which is an element which can be derived for ethanol, be looked at as a possibility along with the biomass in the wood that is unused and to determine whether we would be able to gain any use from that, needing to be disposed anyway, as two venues to look at the opportunity to begin maybe a pilot plant in the northeast, since it is an area where most of the MTBE is situated.
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Mr. JENSEN. I will just comment on that and go on the record, I guess, as saying that we have been strongly behind a diversified ethanol industry, and that includes the biomass industry. We recognize that there are certain areas of the country that are going to have an advantage over biomass ethanol over corn-based ethanol. And we believe that the market is big enough to include all different types of ethanol into that marketplace. And we have worked with the biomass industry to try and include them in the different pilot programs that are out there, and welcome working with the in the future.
Mr. BALDACCI. Thank you very much. I look forward to working with you and your industry to be able to do that.
Mr. Chairman, I don't have any other particular questions at this time, and I would just like to thank you again and thank you for that opportunity to work together to expand the development of this nationally, and I look forward to these hearing results. Thank you.
Mr. LUCAS. Mrs. Clayton.
Mrs. CLAYTON. Thank you, Mr. Chairman, for having the hearings.
And one of the questions I was going to ask, Mr. Thune raised it, and I gather because you are supporting the initiative of small producers of ethanol, does that include the opportunity for biomass as well in the tax credit that Representative Thune has proposed?
Mr. JENSEN. I am not sure if it does or not. We would welcome it. I believe it does and we would welcome that.
Mrs. CLAYTON. I am just following on your response to my colleague when he asked about potatoes. I am aware in my district, as well, there has been considerable research in biotech with the sweet potato and finding it as an additive. And they are particularly encouraged now as they are looking at the whole issue of MTBE to see that as a viable substitute. They are going into this biotech industry, and if we could find an incentive to encourage those people who want to invest in that and to get a cooperative grower, that certainly would help in that area.
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On both of those, corn growers and soybean growers, biotech as well as the opportunity for increasing the utilization of biodiesel, we will be having a farm bill, and obviously, we were talking to a lot of the agriculture sector. What policy issues do you see in not only terms of the innovation of using agriculture to supplement the energy, but also, as farmers, yourselves, we utilize energy, natural gas, gasoline, everything, and certainly, we want to increase the opportunity of using corn, and soybeans, and other biomass, but there ought to be a policy statement or concern about the pricing, control, and opportunity for using these energies, because you are so dependent on that. I know our farmers now are talking about, whether it is peanuts, or whether it is tobacco, or whatever, natural gas is going up and we don't have all of these innovations yet.
We are going to be writing a farm bill, and it seems to me we will miss an opportunity if we only do what we have been doing before; that is, to do it in piecemeal. If we could find how you could stir our thinking to be a little more holistic in this policy, I would appreciate it if you would share with this committee—you don't have to start out now, but I welcome, Mr. Chairman, if we could ask them if they would share back to us what kind of policy statements that we could consider. I know that that would be part of your purview here in this committee. So I want to encourage that. That is the extent of my comments.
Mr. LUCAS. Thank you. The Chair now turns to the ranking member of the full committee, the gentleman from Texas, Mr. Stenholm.
Mr. STENHOLM. Thank you, Mr. Chairman. And I have a statement that I would like included in the appropriate place, the beginning of the hearing today.
Mr. LUCAS. So ordered.
Mr. STENHOLM. I am sorry Mr. Kennedy has left, but the question that he asked the panel a moment ago is a very pertinent one, and my answer is, Mr. Chairman, what you and Mr. Hilliard are doing today is about one of the most positive aspects of answering that question that I have seen in my 22 years here in the United States Congress. I represent the oil patch as well as the cotton patch. And we have been observing now for the last several years, as we saw some very real problems in the oil patch about 2 years ago when oil got down to $8 a barrel, very few people in this room, other than some of the witnesses you will hear from in just a few moments, were concerned about $8 oil, because we, as farmers, were enjoying 50 cents diesel and 70 cents diesel. We came to believe it was an inherent American right.
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And then all of a sudden, just as we can't produce corn for a $1.50 a bushel, you can't produce oil for $8 a barrel. And I make that observation by saying, the last time I checked, you can't produce food and fiber without oil and gas. You cannot produce oil and gas without food and fiber. Therefore, there is a very distinct need for cooperation between our two industries. And today, the hearings, the panels that you have put together, and the testimony that they will be giving, indicate that there is a growing realization that that is true.
In the past, we have had fights between the oil and gas industry and the ethanol industry because of the rightful perception that it was unfair as they were struggling with low oil prices, to have subsidized ethanol competing with them. And you can't argue that that is not factual. But now we are beginning to look as a nation in the President's working group, which I am glad to hear you indicating that you are being not only consulted, but you are an integral part of that working group, because that indicates that this hearing today, and the effort and the testimony today, will not just be the end today. This is the beginning.
Just as this morning, Mr. Jensen, when we were talking in terms of where corn fits in the farm bill and some of the ethanol questions that were asked there, I understand you have quite a lengthy study that answers some of the questions I posed to you this morning regarding California ethanol, why the exemption, why that some in the environmental community do not see the benefit of reducing greenhouse gases by the use of ethanol.
I don't want to put all of this in the record today. I understand cost is not necessary in this, but it is necessary for we, in the Congress, and others working on this, to look at the facts now, to do what we talk about so often in both industries, base our decisions based on good sound science. We have good sound science that indicates that ethanol can play a very significant role in the energy needs of this country. We have got good sound science that shows that we can reduce the amount of oil and gas we have to use in order to produce the food and fiber, and to drive our cars, and to heat and cool our homes, and it is in our best interest to do that.
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I remember Senator Lloyd Bentsen, then-Secretary of the Treasury Lloyd Bentsen of Texas, once observing that we will have—and this was years ago—we will have a major national security problem when we begin importing more than 50 percent of our energy needs. We have come through the 50 percent; we are going through the 60 percent. We are heading for real problems, unless we are able to come together with some workable solutions.
Mr. Chairman, I say the answer to Mr. Kennedy's problem is the beginning today, and I hope that we can take, and I hope that my colleagues who do not reside in the oil patch will read and listen attentively to the oil and gas industry as they discuss their views regarding the energy policy, just as I am glad to have the oil and gas industry in the audience listening to the biodiesel, the ethanol, the biomass, and then hopefully, we can continue to work together to produce the energy that our country needs at a price that will be able to maintain our competitiveness in the international marketplace.
And in the same light, I hope those that continue to advocate the cutting of the budget regarding research and development in the energy patch will begin looking at our whole card and will begin defending this, because it is certainly not anything for any of us to apologize for of suggesting that we should spend some of our taxpayer dollars in the area of research and development, working with private enterprise in order to come up with new and better ways to do that which we are all interested in doing, and that is produce energy efficiently. Drill where we need to drill, do it environmentally safe, and develop all sources of energy.
So Mr. Chairman, I commend you for this hearing. I hope you and Mr. Hilliard will fully continue to move the Agriculture Committee along this line. I know that there will be other committees suggesting that this is not the jurisdiction of the Agriculture Committee. I would hope we would correct them at every instance in saying it is the jurisdiction of the Agriculture Committee and we hope to work with the other committees and with the administration in developing a national energy policy that will be sufficient. Thank you for holding the hearing. I appreciate the indulgence of the committee for allowing me to participate.
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Mr. LUCAS. As always, the gentleman from Texas insights are very outstanding and right to the point. And clearly, that is one of the goals of the ranking member and I, as to grow our jurisdiction, so to speak, having watched the ranking member of the full committee and others in times past practice that artful—the ranking member, I believe, has one more question.
Mr. HILLIARD. Yes. I would like to ask each one of these gentlemen the question pertaining to your industry. What does it cost to produce a gallon of soybean oil, and what will it take to decrease that cost, and what does it take to produce a gallon of ethanol in a 15 percent blend, and what does it—what will it take to reduce that cost?
Mr. HECK. The current price of a gallon of biodiesel made from soybean oil is about $1.50 in large quantities, and 4 years ago, it was $4 a gallon. So it has been headed down. To reduce that cost, we have to take out the most valuable molecules, the co-products, which would require research so that we could do what is done with a barrel of oil. The fuel is the residual that is left over after the valuable molecules have been taken out. At this point, we don't have the research to take out the valuable molecules and make the valuable products from the soybean oil so that we may burn the residual at a lower price. So it takes research, and it takes research money, and it will take Federal research money. That is my request for the budget. And Congressman Stenholm has got it exactly right. We need some of the synergy, some of the similar energies between what has been done with crude oil needs to be done with the bioproducts and that will bring the price of the fuel lower.
Mr. JENSEN. In terms of the ethanol industry, as I mentioned earlier, cost of production seemed to be ranging from the 95 cents to $1.10 at the plant. That seems to be fairly common among the efficient plants across the Nation, depending on their location. In areas of bringing costs down, obviously, we are always looking at plant efficiency, whether it be enzyme efficiency or just different infrastructural changes inside the plant that can make them run better.
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But an area, of course, in the area of research, is we are constantly looking for the other half of the ethanol product, after we are done with corn, and that is the dried distillers grains or what, basically, goes out as the livestock feed. And looking for areas to increase that demand, get the people that are not using those products to better understand how it fits into the rations. Those things drive that demand up and, thus pulling down the cost of the co-product, which is ethanol. So that is one of the areas we are working on and will continue to work on. Simply, to always drive down the cost of ethanol.
Mr. HILLIARD. Thank both of you.
Mr. LUCAS. The Chair and the subcommittee wish to thank the panel for your statements and your answers, your observations. Thank you.
Mr. HECK. Thank you, Mr. Chairman.
Mr. JENSEN. Thank you.
Mr. LUCAS. And now we call upon the second panel to be invited to the table. Mr. Glenn English, chief executive officer, National Rural Electric Cooperative Association, Arlington, VA; Mr. Skip Horvath, president, Natural Gas Supply Association in DC; Mr. John C. Felmy, chief economist and director of policy analysis and statistics at the American Petroleum Institute in DC; Jack T. Coffman, senior vice-president for power supply, Oklahoma Gas & Electric Company, Oklahoma City, OK; Mr. Michael R. Gorham, president, National Propane Gas Association, Grand Rapids, MN; Mr. Jerry Jordan, chairman of the Independent Petroleum Association of America, Columbus, OH.
And while the panel is being seated, I would note that the Chair wrote a letter several weeks ago to Vice President Cheney, observing that we wanted to be, and needed to be, and should be involved in the task force process with the conclusions that they might come up with, and I have received a positive confirming letter back. So I think we are on track.
With that, I turn to the gentleman formerly from Washita County, Oklahoma, Mr. English.
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STATEMENT OF HON. GLENN ENGLISH, CHIEF EXECUTIVE OFFICER, NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION
Mr. ENGLISH. Thank you very much, Mr. Chairman. It is a pleasure to be back in this room, and certainly, before this subcommittee. And never did I imagine that I would be testifying before a Chairman from the Sixth Congressional District of Oklahoma.
Mr. LUCAS. And I only have 57 questions for you.
Mr. ENGLISH. I was afraid of that.
Mr. Chairman, my name is Glenn English. I represent over 900 elective cooperatives in 46 States across this country. We serve in some 83 percent of all the counties in this country, and we also serve 35 million consumers in this Nation. I think most members of this committee are well aware of the fact that we are, actually, owned by the consumers themselves, and our objective is to bring electric power to those consumers in the least costly fashion. So with that, I would simply say that I think it is obvious that our overall objective is to put the consumers first and to make sure that their power supply is safeguarded against volatility, both from the standpoint of supply, cost, and the equality of electric power.
I don't think it is any secret as far as this subcommittee's concern, and certainly, not this Congress, that the electric utility industry is moving toward the same kind of boom bust cycle that we have seen elsewhere in the energy business. Those of us who have been in the oil and gas business and serving those parts of the country are well aware of that and very sensitive to it as Mr. Stenholm pointed out. The electric utility market conditions today, though, in many ways mirror what we saw that existed some 65 to 70 years ago when electric cooperatives were first created; we had similar conditions.
Also, it should be noted, Mr. Chairman, that these kinds of conditions will very likely affect agriculture. It brings one more unknown, one more volatile cost, into the calculation that every farmer, every person living in rural America must make. And these margins are very, very slim, and I certainly don't need to tell this committee that. And obviously, this could in some cases be the straw that broke the camel's back. So it is a difficult situation.
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But the good news is for those areas that are served by electric cooperatives, we have been very successful in keeping this kind of instability out of the situation. And I would refer the members in the testimony that was submitted, a newspaper article from Anza, a little community south of Palms Springs, California. Anza is a community that has their own electric cooperative, provides for their own electric power. In fact, they have their own electric generation across the line in Arizona, and the local newspapers had great fun in pointing out how stable their prices have been, and they have had a plentiful supply of electric power, and haven't had any of the difficulties that have been experienced by many others in the State of California.
However, there are a number of unanswered questions, and certainly, there is a muddy future as far as the electric consumers, and in agriculture, in general. And I would like to touch on those very quickly, Mr. Chairman. One is reserved capacity. We simply do not know today what an adequate reserve capacity is. A few years ago, it was roughly 30 percent. Now that has shrunk to roughly 15 percent, and I am talking about the entire industry across this country.
Transmission capacity. Transmission capacity in this country in terribly inadequate and is a contributor to many of the problems that we are seeing in California and we are going to see in other parts of the country this summer. The Congress is contemplating some changes to try to improve and deal with the situation, but that seems to be geared more toward additional incentives, additional guaranteed profits, which drive up the cost, which I don't think is the right direction to go.
FERC regulation of electric cooperatives. We have had some of the Federal Energy Regulatory Commission who have pointed out, well, we can't do anything in California simply because of the fact that we don't regulate electric cooperatives. Of course, the other part of that is that electric cooperatives, as the members of this committee are well aware, obtain RUS financing to build generation, and that financing can only be provided if the need exists. In other words, if the consumers have the need. So electric cooperatives have very little electric surplus to provide anyone other than their own membership. And that, obviously, would mean a waste of the very limited and valuable resources that exist at the Federal Energy Regulatory Commission, and we would like to see the Federal Energy Regulatory Commission spend a good deal of their time focusing on the issue of market power, a huge problem.
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Retail competition. Pennsylvania is cited as the place where competition is working, where we are seeing great success. I would point out, and we have numerous electric cooperatives in the Commonwealth of Pennsylvania, that we have yet to see the first consumer served by an electric cooperative to be offered the opportunity for competition. They simply haven't had any other choice. So in many ways, this is much like the problems that we faced years ago when nobody wanted to serve many of these people in rural America, and I think that continues to be the case even today.
And there are numerous other problems, such as captive shipping problems. As far as our railroads are concerned, there is virtually no competition there, drives up the cost and problems. So we have many difficulties and challenges that face rural American and the need for electric power.
I am delighted to be here, Mr. Chairman. I would be happy to respond to any questions members of the committee might have.
[The prepared statement of Mr. English appears at the conclusion of the hearing.]
Mr. HORVATH.
STATEMENT OF SKIP HORVATH, PRESIDENT, NATURAL GAS SUPPLY ASSOCIATION, WASHINGTON, DC
Mr. HORVATH. I am happy to be here today, Mr. Chairman. Thank you for inviting me.
We are blessed in this country with a vibrant highly competitive natural gas production industry where 8,000 natural gas producers compete with each other at hubs around the country to sell their wares. Thousands of buyers and sellers meet at these hubs, electronically, to produce a price that pops out every hour or so. These prices are highly transparent, done in an open market, and very much like the stock market, it produces an extremely competitive production process for getting the gas to consumers. We have this Congress to thank for that, because this Congress, in 1989, enacted the Wellhead Decontrol Act, and that unleashed competitive forces on an industry that until then was run and price controlled by another act of this Congress, the Natural Gas Policy Act of 1978. That act did not fare so well, and it produced high prices. The Wellhead Decontrol Act drove prices down. This Congress produced to consumers an over $600 billion savings from that time on, 1989 until now. That was a great job and the best thing the U.S. Congress could have done for this industry and for the farmers community, and indeed, the consumers of the country.
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So if this Congress did such a good job, and we are doing such a good job, why are prices so volatile? The volatile—and by the way, I am used to having to repeat testimony by another panelist. Rarely do I get to repeat testimony by a Congressman, but the Congressman from Texas, in fact, was exactly right. A couple of years ago, natural gas prices were at an all time low, under $2 an MCF or for 1,000 cubic feet. And like any business, any competitive business, when someone doesn't want to buy your product, and no one was for quite a while, that is why prices were low, you disinvest in yourself. And when you disinvest in yourself, you slow down production, you stop looking forward and spending the money you need to produce more of your product because people just aren't buying it.
At the same time, this economy was beginning to—not beginning, but was booming, and all of our customer bases started increasing their demand for our product. So just as we saw the low, things started shooting up. And all of our customer bases, after telling us for a long time they weren't going to grow, suddenly started increasing.
In any competitive market, when demand outstrips supply, the only thing that can happen is price goes up to clear the market, and that is exactly what happened. And that is a good thing. It is good, because what it means is that it draws more competitors into the market to bring about more supply of that commodity, and that is exactly what happened.
In the natural gas industry, we created over 35,000 new jobs last year. We increased the number of drilling rigs by 2 1/2 times, from over 300 to almost 900, and 80 percent of those, 4 out of 5, are looking for natural gas. That means only 1 out of 5 are looking for oil. That is the other commodity we produce. And the top 10 producers increased their investment by 25 percent. That is an awful lot in one year. That is $41 billion in new investment. So the higher—the volatile prices you have seen are good for the country because it is bringing in more producing, more production, and we are beginning to bear fruit.
The Energy Information Administration of DOE reports almost 4 percent of an increase from 1999 to 2000 in natural gas production. They are expecting another 3 percent or so this year. That may not sound like a lot. It is for the following reason. In 1990, we found ourselves having to produce a new 10 percent of natural gas each year because of what is known in our industry as a decline rate. As these wells deplete, the rate at which they deplete is called decline rate, and the 10 percent means that you have to find another 10 percent that was lost in the previous year decline. In 1990, 10 percent, and that is what it was for decades. Today's rate is 23 percent. That means just to produce what we did last year, we have to find 23 percent more production, more wells, to find that 23 percent. And we found that and grew it some by the 2 to 4 percent that the DOE estimates.
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So you see, we have done a lot to—we have done everything we can, in fact, to get as much gas out of the ground as we can, and we will continue to do so because this free market allows that to happen.
Is there anything left for Government to do? Yes, and I presume others on the panel will talk to it more. I will just simply mention it, and that is access to Federal Government lands on which gas exists. Thirty percent of the lands in the country are set aside where we have some restrictions or complete restrictions for access, and we do find that we need access to those lands in order to produce even more gas for the country.
With that I will—I see my time is about up—I will close. Natural gas continues to be a safe, reliable, and efficient fuel source to be used for everything from drying crops to cooling chicken coops for the agricultural community and, indeed, for home use as well. And I simply ask that this congressional committee keep in mind that competition is the best way to maximize the consumption benefits to the agricultural community. And with that, I conclude my testimony and take any questions. Thank you.
[The prepared statement of Mr. Horvath appears at the conclusion of the hearing.]
Mr. LUCAS. Thank you. Mr. Felmy.
STATEMENT OF JOHN C. FELMY, CHIEF ECONOMIST AND DIRECTOR OF POLICY ANALYSIS AND STATISTICS, AMERICAN PETROLEUM INSTITUTE
Mr. FELMY. Thank you, Mr. Chairman. The American Petroleum Institute is pleased to have the opportunity to present a statement on energy supply and demand issues affecting the agriculture sector of the U.S. economy. We also welcome this opportunity to discuss how the current energy situation developed, as well as the energy situation in the United States over the next decade, and how all this points to the need for a new national energy policy for the United States. API is a national trade association representing more than 400 companies engaged in all sectors of the U.S. oil and natural gas industry.
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The events of the past year, heating oil logistical problems in New England, tight gasoline supplies in the Midwest, super heated demand for natural gas, and California electric power disruptions, have forced the Nation, including the agricultural community, to start thinking comprehensively about the energy issues facing our economy. In fact, the farming and ranching community has been especially hard hit by these shocks, as have been most of the non-agricultural rural areas, as the prices of natural gas, diesel fuel, propane, fertilizer, and electricity have soared.
Last year's problems were merely harbingers of what we may expect if our Nation and its leaders do not get serious about looking for long-term solutions to our energy needs. Already this year, we are experiencing a second set of price spikes in gasoline caused by tight markets for gasoline. Unless we realistically address these issues in an effective national energy policy, these shocks may continue with increasing frequency.
The challenge is clear before us. The Department of Energy has recently forecast U.S. energy consumption between 1999 and 2000. While natural gas will rise from 23 percent of consumption to 28 percent in 2020, oil will remain at about its current 40 percent market share. Most recent energy studies confirm this, that even with increasing efficiency and rapid infusion of new technology, we will need to develop more oil.
Thus, we need to focus on our future needs, renewables used in gasoline, such as ethanol, play an important role and will continue to grow significantly well into the future. Of critical importance, however, is to avoid mandates, thereby, giving refineries the flexibility they need to use ethanol in markets and during seasons that make sense.
The current gasoline situation points out the problems we face. Because we have been running the refineries at high rates of output for winter fuels, gasoline production so far this year is 1.7 percent lower than last year. At the same time, this year's gasoline demand is up by 1.6 percent. Also, imports of gasoline are down 7 percent. As a result, the demand being greater than supply and the required inventory reductions to meet the EPA summer gasoline mandates, gasoline inventories are lower than last year's relatively low levels.
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These conditions have resulted in price volatility, especially, in the Midwest. The refineries are now finishing their required maintenance and have increased production of gasoline during the recent 5 weeks. If the system can continue to work smoothly, a significant buildup in gasoline inventories to be ready for the summer driving system is possible.
Another factor that has increased the cost of gasoline is the cost of crude oil. OPEC has reduced its output twice this year already. As a result, crude oil prices have risen since mid-March, and the United States is becoming increasingly dependent on imported foreign oil. In order to ensure reliable and secure sources of oil, we must diversify the sources of our supplies, both domestic and foreign, and increase the volumes of both.
But even if we were to obtain all the oil we need, as difficult and uncertain as that may be, our energy supply would still be under enormous strain. That is because the squeeze between refinery capacity and refinery utilization is growing. As hard as we are working our refineries, we are losing ground to demand. Large investments will be required at, essentially, all domestic refineries and many product terminals. Refinery capacity utilization averaged 92.6 percent in 2000. At peak levels of demand, it topped 95 percent. This compares to average capacity utilization in other industries of 82 percent. Refinery utilization is high because our capacity is below what it was 20 years ago. Recent increases have not kept up with the growth in demand.
Refinery flexibility to meet demand has been increasingly hamstrung by the plethora of new regulations, and this situation seems likely to get only worse, not better. The proliferation of so called boutique fuels is a major factor in today's energy situation.
The Clean Air Act amendments required State implementation plans under which individual metropolitan areas create their own fuels to meet clean air requirements. The attached chart shows that there are 14 different types of gasoline, and with three grades, that means there are 45 different types of gasoline. It also affects our pipelines. They have less flexibility to separate fuel batches and it is very difficult to maintain fuel on-spec and delivered.
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Moreover, the reduced flexibility means that accidents and downtimes for maintenance can have a much more disruptive impact on the flow of supply. While our companies are working hard to supply these required fuels, further proliferation of such specialized fuels will exacerbate the overall situation.
Moreover, Congress has refused to authorize exploration of the small section of the Arctic National Wildlife Refuge, and estimates are that this could yield 5.716 billion barrels of technical recovered oil. We would encourage consideration of that area as an area for exploration.
Let me conclude, after more than 2 decades of inaction, the American public can no longer afford the luxury of not coming to grips with the U.S. energy needs while maintaining a clean environment. We can, as a nation, do both, and we cannot afford to heed these negativists who would tell us otherwise. Meeting U.S. energy needs and protecting the environment are both critical to our Nation's continued economic growth and critical to achieving the future prosperity and wellbeing we all seek.
Thank you, Mr. Chairman. I will be happy to answer questions.
[The prepared statement of Mr. Felmy appears at the conclusion of the hearing.]
Mr. LUCAS. Mr. Coffman.
STATEMENT OF JACK T. COFFMAN, SENIOR VICE-PRESIDENT, POWER SUPPLY, OKLAHOMA GAS & ELECTRIC COMPANY, OKLAHOMA CITY, OK
Mr. COFFMAN. Thank you, Mr. Chairman. I am senior vice-president of Power Supply at Oklahoma Gas & Electric Company, headquartered in Oklahoma City, Oklahoma. We serve over 700,000 retail customers in urban, suburban, and rural settings, both in Oklahoma as well as western Arkansas. We are the largest supplier of electricity in Oklahoma, and our sister company, Enogex, Incorporated, is one of the largest gas gathering and transportation pipeline systems in the country, serving most of Oklahoma, portions of Arkansas, Texas, and Missouri.
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I am extremely proud and honored to testify before Chairman Lucas, who for the past 8 years has represented our constituency very well. The fact that he has convened this important hearing today is emblematic of his leadership in matters pertaining to the agricultural community, both in Oklahoma and in the Nation.
OG&E is a major provider of electricity and related services in rural America. In Oklahoma, we are the primary provider covering 30,000 square miles of territory in our State, as well as western Arkansas. Most of this area consists of rural counties and we are deeply engrained in the economies and social fabric of those communities. We view ourselves as valued members of those communities that we serve.
As the chairman already appreciates, OG&E enjoys a very strong and positive working relationship with the cooperatively owned electric utilities in Oklahoma. We have worked together on matters of common interests, concerning industry-related issues and rural issues. And in my opinion, the Oklahoma experience is a model for investor-owned utilities and coops to emulate elsewhere in the country.
Farmers and others living and working in rural America have many needs arising from their particular geographic, social, and economic circumstances. However, what farmers and other rural interest have in common with their non-rural counterparts is a compelling need for stable and affordable energy supplies and prices.
OG&E strongly believes that the most important thing for this subcommittee to understand in reviewing energy policy, excuse me, as it affects the price and supply of electricity in rural America, is the overarching necessity of securing and maintaining a well diversified basket of energy sources used to generate electricity. A diversity of supply options is key in affordable and reliable electricity.
Two weeks ago, I had a fertilizer manufacturer come to our office and meet with some of our engineering people and myself. We looked at his feed stock, which is natural gas, and he said he can no longer afford that just because not only today's current prices, but his forecast of forward prices, were looking at an integrated gasification process to try and take coal and give him a feed stock so that his fertilizer plant can remain in production and produce competitively priced fertilizer for farmers. So this price effect is not just for electricity, it also affects the farmer through natural gas consumption in other industries that use it as a feed stock.
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I don't want to miss the opportunity to slip in a word about recent California experience. If the Nation has learned anything about recent events, it is that the market for consumers must not be insulated from the real world price signals. We just can't do it. It is a predictable disaster when consumers are disconnected from the true cost of production and their usage is independent from those costs, and I think that is what you are seeing. It is a recipe for high cost restricted supply and a wide range of destructive economic dislocations which serve no social purpose in either the short term nor the long term
In this regard, the subcommittee should think about insulating the rural community from the core economics of electricity markets and the fallacy of that. Clearly, there may be special needs for the community that assistance, and by all means, you should take whatever steps are targeted as necessary to cure those, but over the long term, Government subsidies are not a surrogate for economic decision making based on real world cost of energy or any type.
I would like to summarize some of the dynamics that OG&E considers to be important in this subcommittee's deliberations. On natural gas, we watched our price of gas climb 400 percent over the last year. We deliver gas to our plants, currently, at about $5 per million BTU's as compared to $1 per million BTU for coal. We think the economics of coal generation are good. We are looking at some future plants, but there are so many uncertainties around the regulations of those, and particularly, with the Clean Air Act, that I think we need some guidance, and those things need to be incorporated in the national energy policy.
How can we reduce that cost or how can we get more plants built which will take gas away as a feed stock? By reducing the regulatory and environmental risks associated with installing a new coal plant. We support efforts in Congress and those in the administration who understand the imperative in making efforts to incorporate this into a balanced responsible energy policy for the future.
In order to maintain stable, affordable electricity to fuel the economy and maintain our global industrial competitiveness, our national policy must make it possible to use coal and base load plants. It is our most abundant fuel. It keeps us with a balanced energy portfolio, and that is what I would recommend for this subcommittee to consider. I will be happy to answer any questions. I appreciate the opportunity to testify before you.
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[The prepared statement of Mr. Coffman appears at the conclusion of the hearing.]
Mr. LUCAS. Thank you. Mr. Gorham.
STATEMENT OF MICHAEL R. GORHAM, PRESIDENT, NATIONAL PROPANE GAS ASSOCIATION, GRAND RAPIDS, MN
Mr. GORHAM. Thank you, Mr. Chairman, for the opportunity to offer testimony here today.
My name is Mike Gorham. I am in the gas distribution business in Minnesota. We have a propane operation in Grand Rapids and natural gas systems in 12 other small communities. We also operate and maintain natural gas pipelines serving ethanol plants. But I am here today as the National Propane Gas Association president.
NPGA has about 3,800 member companies. We serve people in nearly every congressional district in the Nation, including, in fact, 641 member outlets are located in the districts represented by the members of this subcommittee. We understand the concerns expressed about this past winter's fuel prices because rural America and the propane gas industry grew up together. In fact, agriculture users account for almost 8 percent of the propane produced in this Nation. We are confident this relationship will continue.
Today, I would like to talk about three things: (1) How our industries are connected; (2) To address some of the factors affecting fuel prices; and (3) Talk about ways that propane marketers and farmers can work together to deal with today's energy markets.
Propane is extracted from both crude oil and natural gas. When either crude oil or natural gas prices increase, propane is likely to follow. When both crude oil and natural gas prices are low, propane will likely be low. And we have seen both sides of that coin recently. As was testified earlier, it wasn't that long ago that we saw $8 crude and close to $1 natural gas out in the field. Propane prices at that time were low. This last winter, over the last year, crude has hit $35 a barrel and I have actually paid over $10 for natural gas into my systems. Propane prices rose.
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So how do higher propane prices affect propane marketers such as myself? My accounts payable, my accounts receivable costs skyrocket when this happens, and it puts a severe strain on my business operating capital. Since this means going to the bank for most propane companies, if we could have a normal winter demand without the price events of the last winter, we would take it.
What happens in the production end with high natural gas prices? First of all, there is an incentive for increased natural gas production, and that is good. Second, and not so good, there is a decreased incentive to extract propane from the higher priced natural gas. And third, there is another perverse incentive to not burn natural gas as a refinery boiler fuel and burn something else instead. That turns out to be propane sometimes; in fact, a lot times. And the net effect is that there is many thousands of barrels a day of less propane production when we need it the most. And of course, less supply means higher prices.
And then there is weather. Last winter was a cold winter and, of course, the colder the winter, the more consumption and the more cost regardless of energy price. And how cold was it? Last winter was the 14th coldest winter on record in the United States. But the real significance, I think, to consumers is probably the swing, because the winter before last was the warmest in 25 years. So the net effect, and it is really a psychological thing as well as a real event, is consumers would have had much higher fuel bills even without higher fuel costs.
So the factors which combine to drive fuel bills higher this winter are (1) high natural gas prices and their sub-effects of less extraction and more propane use as boiler fuel; and the second one is it was a cold winter. These have a common thread. They are both beyond the control of the retail fuel distributor, or the customer for that matter. So what do we do about it? This is not an acceptable situation going forward.
(1) We need to talk more about fuel supply issues. NPGA sponsored a briefing last fall for farm group associations. We intend to continue that practice where we talk about fuel supply and fuel price issues so that people can plan ahead and anticipate some of this stuff happening. We need to take to hear—there is an article in Neighbors' magazine here. It is published by the Alabama Farmers Federation and it talks about propane and poultry growers in the last winter, and I would ask that this be inserted in the record of this hearing. The article points out, ''Fortunately, some Alabama growers contracted their gas early this year, and for those few, the energy crisis has not been as devastating.'' Price hedging is a practice whose time has come; especially, for those unable to pass on their increased fuel costs to others.
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Concluding, factors affecting prices are beyond control for marketers, propane marketers, and for farmers. We can minimize impact through better communications and by encouraging farmers to take advantage of hedging opportunities that are out there. NPGA and its members are committed to working with Congress and our valued agricultural customers to address these issues. On behalf of the members of the NPGA, I thank you, Mr. Chairman, and the subcommittee members, for giving us this opportunity today, and we will answer any questions you may have.
[The prepared statement of Mr. Gorham appears at the conclusion of the hearing.]
Mr. LUCAS. Thank you. Mr. Jordan.
STATEMENT OF JERRY JORDAN, CHAIRMAN, INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA, COLUMBUS, OH
Mr. JORDAN. Last, but hopefully, not least. Thank you, Mr. Chairman. I, too, appreciate the opportunity to testify.
I am Jerry Jordan, president of Jordan Energy, Inc. of Columbus, OH and chairman of the Independent Petroleum Association of America, IPAA. Today, I am testifying on behalf of IPAA, the National Stripper Well Association, and 32 cooperating State and regional oil and gas associations. Those associations represent thousands of independent oil and natural gas producers in the United States. The independents in this country drill 85 percent of the wells that are drilled, produce 40 percent of the oil and two-thirds of the natural gas in this country.
There are great similarities between the independent producers and the agricultural community. Both are price takers and not price makers. We are both dramatically affected by the action of the commodity markets. For example, when oil prices dropped in 1998–99, domestic producer revenues dropped by $19 billion. My written testimony provides detailed information on the issues designated for this hearing. In my brief time here, I want to focus on a few points.
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First, I want to emphasize that the current supply and demand situation with natural gas, which has brought the high prices, was both foreseeable and predictable, and predicted, although the severity was underestimated. The vision to see it coming was broadly shared by both industry and Government experts. It was documented in the 1999 National Petroleum Council report on natural gas. In ad