SPEAKERS CONTENTS INSERTS
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SOLUTIONS TO COMPETITIVE PROBLEMS IN THE OIL INDUSTRY
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
MARCH 29, APRIL 7 AND JUNE 28, 2000
Serial No. 127
Printed for the use of the Committee on the Judiciary
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
Page 2 PREV PAGE TOP OF DOCCOMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR S. SMITH, Texas
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
MARY BONO, California
SPENCER BACHUS, Alabama
JOE SCARBOROUGH, Florida
DAVID VITTER, Louisiana
JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
Page 3 PREV PAGE TOP OF DOCHOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
THOMAS E. MOONEY, SR., General Counsel-Chief of Staff
JULIAN EPSTEIN, Minority Chief Counsel and Staff Director
C O N T E N T S
March 29, 2000
April 7, 2000
June 28, 2000
Page 4 PREV PAGE TOP OF DOCOPENING STATEMENT
Hyde, Hon. Henry J., a Representative in Congress From the State of Illinois, and chairman, Committee on the JudiciaryL1, 7, 131
Barrett, Hon. Tom, a Representative in Congress From the State of Wisconsin
Blumenthal, Richard, attorney general, State of Connecticut, Hartford, CT
Callaghan, Lisa, policy analyst, Northeast Advanced Vehicle Consortium, Boston, MA
Campbell, Hon. Ben Nighthorse, a U.S. Senator From the State of Colorado
Cavaney, Red, president, American Petroleum Institute, Washington, DC
Chretien, Larry, executive director, Boston Oil Consumers Alliance, Jamaica Plain, MA
Collins, Hon. Mac, a Representative in Congress From the State of Georgia
Columbus, Tim, partner, Collier, Shannon, Rill, and Scott, Washington, DC, on Behalf of the Society of Independent Gasoline Marketers of America
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Fisher, Mike, attorney general, Commonwealth of Pennsylvania, Harrisburg, PA
Gee, Robert, Assistant Secretary for Fossil Energy, United States Department of Energy, Washington, DC
Gilman, Hon. Ben, a Representative in Congress From the State of New York
Hall, Hon. Tony, a Representative in Congress From the State of Ohio
Hauter, Wenonah, director, Critical Mass Energy and Environment Program, Public Citizen, Washington, DC
Hoekstra, Hon. Pete, a Representative in Congress From the State of Michigan
Ichord, Bill, vice president, Unocal Corporation, Washington, DC
Jordan, Jerry, president, Jordan Energy, Inc., Columbus, OH, on Behalf of the Independent Petroleum Association of America
Kenderdine, Melanie, Acting Director, Office of Policy, Department of Energy, Washington, DC
Page 6 PREV PAGE TOP OF DOC Lashof, Daniel, senior scientist, Natural Resources Defense Council, Washington, DC
Littlefield, Roy, executive vice president, Service Station Dealers Association, Lanham, MD
Love, James, economist, Center for the Study of Responsive Law, Washington, DC
Markey, Hon. Ed, a Representative in Congress From the State of Massachusetts
Murkowski, Hon. Frank, a U.S. Senator From the State of Alaska
Parker, Rich, Director, Bureau of Competition, Federal Trade Commission, Washington, DCL32, 157
Patmon, Bill, councilman, Cleveland City Council, Cleveland, OH
Perciasepe, Bob, Assistant Administrator for Air and Radiation, Environmental Protection Agency, Washington, DC
Pikrallidas, Susan, vice president of Public and Government Relations, American Automobile Association, Washington, DC
Page 7 PREV PAGE TOP OF DOC Ryan, George, Governor, State of Illinois, Springfield, IL
Sanders, Hon. Bernie, a Representative in Congress from the State of Vermont
Segal, Scott, partner, Bracewell and Patterson, Washington, DC, on Behalf of Valero Energy Corporation
Slaughter, Bob, general counsel, National Petrochemical and Refiners Association, Washington, DC
Snowden, Jane, program director, Meals on Wheels, Madison, WI
Spencer, Todd, executive vice president, owner-operator Independent Drivers Association, Grain Valley, MO
Stabenow, Hon. Debbie, a Representative in Congress From the State of Michigan
Thompson, Tommy, Governor, State of Wisconsin, Madison, WI
Vaughn, Eric, president, Renewable Fuels Association, Washington, DC
Weygand, Hon. Bob, a Representative in Congress From the State of Rhode Island
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Zimmerman, Edwin, partner, Covington & Burling, Washington, DC
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Barrett, Hon. Tom, a Representative in Congress From the State of Wisconsin: Prepared statement
Blumenthal, Richard, attorney general, State of Connecticut, Hartford, CT: Prepared statement
Callaghan, Lisa, policy analyst, Northeast Advanced Vehicle Consortium, Boston, MA: Prepared statement
Cavaney, Red, president, American Petroleum Institute, Washington, DC: Prepared statement
Chretien, Larry, executive director, Boston Oil Consumers Alliance, Jamaica Plain, MA: Prepared statement
Collins, Hon. Mac, a Representative in Congress From the State of Georgia: Prepared statement
Columbus, Tim, partner, Collier, Shannon, Rill, and Scott, Washington, DC, on Behalf of the Society of Independent Gasoline Marketers of America: Prepared statement
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Fisher, Mike, attorney General, Commonwealth of Pennsylvania, Harrisburg, PA: Prepared statement
Gee, Robert, Assistant Secretary for Fossil Energy, United States Department of Energy, Washington, DC: Prepared statement
Gilman, Hon. Ben, a Representative in Congress From the State of New York: Prepared statement
Hall, Hon. Tony, a Representative in Congress From the State of Ohio: Prepared statement
Hauter, Wenonah, director, Critical Mass Energy and Environment Program, Public Citizen, Washington, DC: Prepared statement
Hoekstra, Hon. Pete, a Representative in Congress From the State of Michigan: Prepared statement
Hyde, Hon. Henry J., a Representative in Congress From the State of Illinois, and chairman, Committee on the Judiciary: Prepared statementL4, 72, 133
Ichord, Bill, vice president, Unocal Corporation, Washington, DC: Prepared statement
Page 10 PREV PAGE TOP OF DOC Jackson Lee, Hon. Sheila, a Representative in Congress From the State of Texas: Prepared statement
Jordan, Jerry, president, Jordan Energy, Inc., Columbus, OH, on Behalf of the Independent Petroleum Association of America: Prepared statement
Kenderdine, Melanie, Acting Director, Office of Policy, Department of Energy, Washington, DC: Prepared statement
Lashof, Daniel, senior scientist, Natural Resources Defense Council, Washington, DC: Prepared statement
Littlefield, Roy, executive vice president, Service Station Dealers Association, Lanham, MD: Prepared statement
Love, James, economist, Center for the Study of Responsive Law, Washington, DC: Prepared statement
Markey, Hon. Ed, a Representative in Congress From the State of Massachusetts: Prepared statement
Parker, Rich, Director, Bureau of Competition, Federal Trade Commission, Washington, DC: Prepared statementL34, 158
Patmon, Bill, councilman, Cleveland City Council, Cleveland, OH: Prepared statement
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Perciasepe, Bob, Assistant Administrator for Air and Radiation, Environmental Protection Agency, Washington, DC: Prepared statement
Pikrallidas, Susan, vice president of Public and Government Relations, American Automobile Association, Washington, DC: Prepared statement
Ryan, George, Governor, State of Illinois, Springfield, IL: Prepared statement
Sanders, Hon. Bernie, a Representative in Congress from the State of Vermont: Prepared statement
Segal, Scott, partner, Bracewell and Patterson, Washington, DC, on Behalf of Valero Energy Corporation: Prepared statement
Slaughter, Bob, general counsel, National Petrochemical and Refiners Association, Washington, DC: Prepared statement
Snowden, Jane, program director, Meals on Wheels, Madison, WI: Prepared statement
Spencer, Todd, executive vice president, owner-operator Independent Drivers Association, Grain Valley, MO: Prepared statement
Page 12 PREV PAGE TOP OF DOC Stabenow, Hon. Debbie, a Representative in Congress From the State of Michigan: Prepared statement
Thompson, Tommy, Governor, State of Wisconsin, Madison, WI: Prepared statement
Vaughn, Eric, president, Renewable Fuels Association, Washington, DC: Prepared statement
Zimmerman, Edwin, partner, Covington & Burling, Washington, DC: Prepared statement
Material submitted for the record
SOLUTIONS TO COMPETITIVE PROBLEMS IN THE OIL INDUSTRY
WEDNESDAY, MARCH 29, 2000
House of Representatives,
Committee on the Judiciary,
The committee met, pursuant to call, at 10:06 a.m. in room 2141, Rayburn House Office Building, Hon. Henry J. Hyde (chairman of the committee) presiding.
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Present: Representatives Henry J. Hyde, George W. Gekas, Howard Coble,
Charles T. Canady, Bob Goodlatte, Steve Chabot, Asa Hutchinson, Edward A. Pease, James E. Rogan, Mary Bono, John Conyers, Jr., Robert C. Scott, Sheila Jackson Lee, and William D. Delahunt.
Staff present: Thomas E. Mooney, Sr., general counsel-chief of staff; Joseph Gibson, chief antitrust counsel; Sharee Freeman, counsel; Sheila F. Klein, executive assistant to general counsel; Patrick Prisco, assistant to the staff director-deputy general counsel; Becky Ward, office manager; Amy Rutkowski, staff assistant; James P. Farr, financial clerk; Sharon L. Hammersla, information resources manager; Robert Jones, staff assistant, and Cori Flam, minority counsel.
OPENING STATEMENT OF CHAIRMAN HYDE
Mr. HYDE. The committee will come to order.
The Chair is informed that, due to the fact that the House is in session and the Senate is in session and going to have some votes, there may be a lot of coming and going, but we are blessed to have Chairman Ben Gilman of the International Relations Committee here, and we will begin with him.
First, I have a brief statement to make, and then I will ask Mr. Conyers if he would make a brief statement, and then the rest of the committee hopefully can make even briefer statements and we can proceed.
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Today, the committee holds an oversight hearing on solutions to competitive problems in the oil industry. All of us who drive are painfully aware that gas prices have risen dramatically in the last few months. Our friends from the northeast and around the country know that home heating oil costs have gone through the roof. Some may ask: why should the Judiciary Committee hold a hearing on this issue? To my friends, I would reply: why have prices gone up?
The primary reason is that the member countries of the Organization of Petroleum Exporting Companies, or OPEC, have conspired to restrict the supply of crude oil.
Now, it is true they had a very recent meeting and agreed to increase the production, which is one small solution to a much-larger problem. But it is a short-term solution.
We have an institutional dependence on imported petroleum, and that is a problem that we have got to address. We have got to reconcile the needs of a good, healthy environment with the needs of a civilization that needs petroleum. These are long-range problems which require long-range solutions.
OPEC comprises a classic cartel that fixes prices and restricts supply. Its conduct violates section one of the Sherman Act as a contract, combination, or conspiracy in restraint of trade. In our country, people go to jail for that kind of behavior. Unfortunately, for complicated reasons of international law, the antitrust laws don't reach the sovereign governments that make up OPEC. Nonetheless, the high prices resulting from OPEC's conduct demonstrate the consumer harm that occurs when antitrust law cannot reach the conspirators. So, for those who question the vitality of antitrust laws, you need look no further than this situation to see where we would be without them.
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In short, OPEC presents a classic antitrust problem that does not lend itself to traditional antitrust solutions, but the OPEC cartel is more than that. It is a complicated national security, diplomatic, and economic threat to our survival and our prosperity. We mustn't yield an inch to the conspirators and we must unrelentingly confront the threat they pose.
Now, a number of our colleagues have created imaginative and thoughtful legislative solutions to their threat. We must look at diplomatic solutions like Representative Ben Gilman's Oil Price Reduction Act. The OPEC countries have to understand that they need us as much as we need them.
In the dark night of 1991, they dialed 911. Brave Americans like President George Bush, General Colin Powell, General Norman Schwarzkopf and thousands of our young men and women answered the call and rescued them from the tender mercies of Saddam Hussein. But now, in the sunshine of a new millennium, they seem to have forgotten our number.
We must look at policies that will allow us to increase our domestic production of oil. It has been falling since 1985, and is now at all-time lows. I think Senator Frank Murkowski's Arctic Coastal Plain Domestic Energy Security Act points us in that direction. In that regard, I am sure we will hear concerns from environmentalists about that approach. I share their concerns. There must be reason and balance on both sides.
My understanding is that oil drilling technology has become much safer for the environment in recent years. I am told there has not been a gusher since the 1920's. Let us look at that on a factual rather than an emotional basis. By all means, raise legitimate environmental concerns, but don't blindly cut us off from exploration that may be vital to our economy.
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We must consider our tax structure. Senator Ben Nighthorse Campbell's American Transportation Recovery and Highway Trust Fund Protection Act addresses that issue. Just last week I met with a group of truckers who are members of the Teamsters, and they suffer daily. They need immediate relief or many of them will be out of business.
The average automobile driver also pays the price. In preparing for this hearing, I was surprised to learn that Federal and State taxes make up as much as 37 percent of the cost of a gallon of gasoline. I know everyone wants their road money, but that is a punishing tax burden when gas prices are so high.
We must address the regional problem of home heating oil in the northeast. Our colleagues, Representatives Bernie Sanders, Ed Markey, and Bob Weygand all have interesting ideas in that field. We need to do something to prevent the kinds of unpredictable price spikes that hurt many consumers there this winter.
Finally, my good friend, Representative George Gekas, has introduced the National Resource Governance Act that would set up a national commission to study all these approaches. I think that is very much in order, given the multifaceted nature of this problem.
OPEC may think it has us by the throat. That would be a mistake. As I look at the talented men and women before us on the witness panel and up here on this dias, I remain confident that we are more than equal to the threat. American courage and ingenuity will defeat this threat, as it has others in the past.
Page 17 PREV PAGE TOP OF DOC So let me close with some hopeful notes that illuminate why I remain so optimistic. Certainly, OPEC's illegal conduct alarms us, but we must remember that from every challenge springs an opportunity. I hear reports about American companies that are developing all sorts of new ways of generating electricitygeothermal, solar, and wind. I read in Roll Call just this week about a conference to occur here next week on all sorts of new engines for cars that are cleaner and use fuel more efficiently. The possibilities are amazing.
I hear that a group called the Northeast Advanced Vehicle Consortium has already shown that today we can power city buses, not with one new kind of engine but with threehybrid electric, compressed natural gas, and low-sulfur diesel fuel. Each lessens our dependence on oil and each is better than what went before.
So I say to those who are working on these kinds of solutions, you are the Thomas Edisons and the Alexander Graham Bells of our age. We appreciate your efforts and ask you to continue to exercise your vision. With your help, our Nation will prevail against those who challenge our survival and our prosperity.
I also want to take this opportunity to announce that I have decided to schedule a second day of hearings on this topic next week on Friday, April 7th. While we have a number of excellent witnesses here today, I don't think we have heard from everyone that we need to on this topic.
I was disturbed by news reports in the last few days about zone pricing, a practice under which gas prices vary greatly from one neighborhood to the next. These reports indicate that the economically disadvantaged may be paying the highest prices, which strikes me as a particularly unjust situation. I want to know if there is any red-lining going on and whether the Robinson-Patman Act is being violated, so we will look at that topic, as well as continuing on the topics we are considering today.
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Because we have a great number of witnesses, many of whom are Members who have other places to go, I am going to ask that all Members other than Mr. Conyers who may have opening statements either place them in the record or give them during the question time or limit your statements to about two minutes, if you could, so we can get the witnesses on their way.
[The prepared statement of Chairman Hyde follows:]
PREPARED STATEMENT OF HON. HENRY J. HYDE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS
Today the Committee holds an oversight hearing on ''Solutions to Competitive Problems in the Oil Industry.'' All of us who drive are painfully aware that gas prices have risen dramatically in the last few months. Our friends from the Northeast and around the country know that home heating oil costs have gone through the roof.
Some may ask why should the Judiciary Committee hold a hearing on this issue? To which my reply is, why have prices gone up? The primary reason is that the member countries of the Organization of Petroleum Exporting Countries, or OPEC, have conspired to restrict the supply of crude oil.
OPEC comprises a classic cartel that fixes prices and restricts supply. Its conduct violates Section 1 of the Sherman Act as a ''contract, combination . . ., or conspiracy in restraint of trade.'' In our country, people go to jail for that kind of behavior. Unfortunately, however, for complicated reasons of international law, the antitrust laws do not reach the sovereign governments that make up OPEC.
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Nonetheless, the high prices resulting from OPEC's conduct demonstrate the consumer harm that occurs when antitrust law cannot reach the conspirators. So, for those who question the vitality of the antitrust laws, you need look no further than this situation to see where we would be without them. In short, OPEC presents a classic antitrust problem that does not lend itself to traditional antitrust solutions.
But the OPEC cartel is more than thatit is a complicated national security, diplomatic, and economic threat to our survival and our prosperity. We must not yield an inch to the conspirators, and we must unrelentingly confront the threat they pose.
A number of our colleagues have created imaginative and thoughtful legislative solutions to their threat. We must look at diplomatic solutions like Ben Gilman's Oil Price Reduction Act. The OPEC countries have to understand that they need us as much as we need them. In the dark night of 1991, they dialed 911. Brave Americans like President George Bush, General Colin Powell, General Norman Schwarzkopf, and thousands of our young men and women answered the call and rescued them from the tender mercies of Saddam Hussein. But now in the sunshine of a new milllennium, they seem to have forgotten our number.
We must look at policies that will allow us to increase our domestic production of oil. It has been falling since 1985 and is now at all time lows. I think Frank Murkowski's Arctic Coastal Plain Domestic Energy Security Act points us in that direction. In that regard, I am sure that we will hear concerns from environmentalists about that approach. I share their concerns. There must be reason on both sides. My understanding is that oil drilling technology has become much safer for the environment in recent years. I'm told there has not been a gusher since the 1920s. Let's look at that on a factual, rather than an emotional, basis. By all means, raise legitimate environmental concerns, but don't blindly cut us off from exploration that may be vital to our economy.
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We must consider our tax structure. Ben Nighthorse Campbell's American Transportation Recovery and Highway Trust Fund Protection Act addresses that issue. Just last week, I met with a group of truckers who are members of the Teamsters, and they suffer daily. They need immediate relief, or many of them will be out of business. The average automobile driver also pays the price. In preparing for this hearing, I was surprised to learn that federal and state taxes make up as much as 37% of the cost of a gallon of gasoline. I know that everyone wants their road money, but that's a punishing tax burden when gas prices are so high.
We must address the regional problem of home heating oil in the Northeast. Our colleagues, Bernie Sanders, Ed Markey, and Bob Weygand all have interesting ideas in that field. We need to do something to prevent the kinds of unpredictable price spikes that hurt many consumers there this winter.
And finally, my good friend George Gekas has introduced the National Resource Governance Act that would set up a national commission to study all of these approaches. I think that is very much in order given the multi-faceted nature of this problem.
OPEC may think that it has us by the throat. That would be a mistake. As I look at the talented men and women before us on the witness panel and up here on this dais, I remain confident that we are more than equal to the threat. American courage and ingenuity will defeat this threat as it has others in the past.
So, let me just close with some hopeful notes that illuminate why I remain so optimistic. Certainly OPEC's illegal conduct alarms us, but we must remember that from every challenge springs opportunity.
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I hear reports about American companies that are developing all sorts of new ways of generating electricitygeothermal, solar, and wind. I read in Roll Call just this week about a conference to occur here next week on all sorts of new engines for cars that are cleaner and use fuel more efficiently. The possibilities are amazing. I hear that a group called the Northeast Advanced Vehicle Consortium has already shown that today we can power city buses not with one new kind of engine, but with three: hybrid-electric, compressed natural gas, and low sulfur diesel fuel. Each lessens our dependence on oil, and each is better than what went before.
So I say to those who are working on these kinds of solutions, you are the Thomas Edisons and Alexander Graham Bells of our age. We appreciate your efforts and ask you to continue to exercise your vision. With your help, our nation will prevail against those who challenge our survival and our prosperity.
I also want to take this opportunity to announce that I have decided to schedule a second day of hearings on this topic, next week on Friday, April 7. While we have a number of excellent witnesses here today, I do not think that we have heard from everyone that we need to on this topic. I was disturbed by news reports in the last few days about zone pricing, a practice under which gas prices vary greatly from one neighborhood to the next. These reports indicated that the economically disadvantaged may being paying the highest prices, which strikes me as a particularly unjust situation. I want to know if there is any redlining going on and whether the Robinson-Patman Act is being violated. So we will look at that topic as well as continuing on the topics we are considering today.
Page 22 PREV PAGE TOP OF DOC Because we have a great number of witnesses, many of whom are Members who have other places to go, I'm going to ask that all Members, other than Mr. Conyers, who may have opening statements either place them in the record or give them during the question time. That cooperation will help us move things along.
With that, I will turn to Mr. Conyers for his opening statement.
Mr. HYDE. With that, I turn to Mr. Conyers.
Mr. CONYERS. Thank you, Mr. Chairman. Good morning, Members and to our very distinguished guests.
I begin by complimenting the chairman on his remarks. My remarks will be considerably shorter because we are in agreement. I was just sorry that he had mentioned the gas tax repeal. If you hadn't said that, I could have just adopted your statement. You touched on the problem of consumers, and certainly our people that drive trucks for a living and the Teamsters.
May I compliment the witnesses here. Some of my closest working friends in the Congress are on this panel. I mention the leader of the Progressive Caucus, Bernie Sanders. Chairman Ben Gilman and I have been working on foreign affairs matters, particularly in Haiti, for more years than we both care to discuss. And, of course, Ed Markey works very closely with us in the Judiciary Committee on a wide spectrum of matters. I am also delighted to see Senator Campbell and Mr. Weygand.
Despite the recent spike in oil prices, it is undeniable that our economy is the most robust that it has been in generations, and, remarkably, we have both low inflation and low unemployment, and our economy is growing at a healthy pace. While we have experienced high prices both in auto fuel and heating oil, we know that this is going to be a constructive hearing. I am glad that the Judiciary Committee is exercising this jurisdiction.
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Now, over the last several yearsfour, to be exactCongress has remained virtually silent on energy issues. Rather than enact a national energy policy, as was done in 1992, we in this body have approached the energy issue in fits and starts, without a comprehensive plan. There have been attempts to raise oil prices even in recent years coming from this body and from the oil industry, itself.
Now it is clear that OPEC has played a large role in the recent spike in world oil prices. The OPEC countries, in addition to our allies such as Mexico, Venezuela, and Norway, collectively agreed to a draconian cut in oil production last year, which has caused the world demand for oil to outstrip supply by about a million barrels a day.
Although price fixing such as this is forbidden under our antitrust laws, we, nevertheless, must recognize that our antitrust laws are of limited use in this area.
The Foreign Sovereignty Immunity Act and the Act of State Doctrine likely preclude an antitrust suit against OPEC, either by private parties or by the government. In light of this, the administration has embarked on a massive diplomatic mission to persuade OPEC to increase its oil production. Some of these efforts are yielding results. Our allies have agreed to boost oil production. And I want to compliment the international diplomatic efforts of Secretary Richardson, a former colleague. And we should continue to press for diplomacy in this area to create a stable oil market for the future.
But, even as we try to boost production overseas, we can't overlook events here in America. We have just experienced a wave of oil company mergersBP/Amoco, Exxon/Mobil, another proposed one between BP/Amoco and Arcoand, while mergers supposedly create the greater efficiencies, they can also encourage oligopolistic behavior if the proper safeguards are not in place.
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American oil companies should not use the international oil shortage as an excuse to raise gas prices higher than the market dictates or to fail to lower retail prices once the price of crude oil falls.
Our own oil companies significantly have declined to testify before this committee today. It is noteworthy that, as recently as last year, domestic oil companies were asking Congress and the administration for assistance because oil prices were too low. And during the 1980's, when oil prices were dropping, Texas oil producers echoed a similar cry.
So I hope American oil companies won't remain forever silent, because I think this committee deserves to hear what they are doing to help American consumers.
So I stand here ready and willing to work with all of my colleagues and the various private sector parties toward a solution on the issue.
We need to look at a comprehensive approach that includes diplomacy, a move toward greater fuel efficiency, and other avenues that may be important to us, because it seems to me that we may want to consider reauthorizing the President's authorities under the Energy Policy and Conservation Act.
I look forward to the discussion that will follow, Mr. Chairman, and I thank you for allowing my opening statement.
Mr. HYDE. Thank you, Mr. Conyers.
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I would beg the indulgence of the rest of the Members. Let us go ahead with Senator Campbell, because he has a vote very shortly, we are told, over in the Senate.
With your forbearance, we will hear from Senator Ben Nighthorse Campbell from the beautiful State of Colorado. He is a graduate of San Jose State University, a veteran of the United States Air Force, and, before beginning his political career, he was a self-employed jewelry designer, rancher, and trainer of champion quarter horses. He was first elected to the State Legislature in 1982, to the United States House in 1986, and to the United States Senate in 1992. He serves as chairman of the Senate Indian Affairs Committee.
Senator Campbell, we welcome you.
Mr. CAMPBELL. Thank you, Mr. Chairman, for reading that just like my mother wrote it. You didn't have to, however. I am not in cycle, not running this term, but it was very nice of you.
I appreciate your time. I see my friend, Senator Murkowski is here. He is the chairman of our full committee. We have done four hearings on this issue. With your approval, I would be happy to defer to him, if he has a tighter schedule than me, because I have got a few minutes.
Mr. HYDE. Well, either one of you or both.
Mr. MURKOWSKI. Well, my subject matter is a little different, I believe, than yours.
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Mr. CAMPBELL. Your choice.
Mr. HYDE. Senator, you may as well go ahead. Ben is yielding to you.
Mr. MURKOWSKI. I will take advantage of the opportunity afforded by my good friend, Senator Campbell, if I may.
Mr. HYDE. Surely.
STATEMENT OF HON. FRANK MURKOWSKI, A U.S. SENATOR FROM THE STATE OF ALASKA
Mr. MURKOWSKI. I have got a couple of charts that I would like to share with you, and it is my understanding that the purpose of the hearing is solutions to competitive problems in the oil and gas industry.
Mr. HYDE. Senator, before you proceed, I would like to make just a couple of introductory remarks about you.
Senator Frank Murkowski represents the great State of Alaska and is a graduate of Santa Clara University. After a tour in the Coast Guard, he served as Alaska's Commissioner of Economic Development and as president of Alaska National Bank.
Page 27 PREV PAGE TOP OF DOC He was first elected to the Senate in 1980, and in 1995 he became chairman of the Committee on Energy and Natural Resources and has a vital interest, as do we all, in this subject.
Mr. MURKOWSKI. Thank you for that introduction, Mr. Chairman. I very much appreciate the opportunity to be here with you.
Let me try and be brief and to the point.
If you look at the chart over here, I think you will see the dilemma that we are currently in in this country relative to the U.S. crude oil production, which has declined, as you can see, from 1990 through 1999, and the demand, which has increased, in spite of our efforts for conservation and awareness that we do have a potential for greater utilization of renewables. But the fact is renewables still are 4 percent, or thereabouts. In my State it does get dark at night, so solar is not the answer that it might be in Texas or New Mexico.
There is a harsh reality associated with where we are today.
I would like to just mention a couple of things that I think are pertinent as we consider the type of relief that allegedly we got from the OPEC ministers yesterday.
Now, the announcement that came out today was that they were going to increase production by approximately 1.7 million barrels, but let us be sure we understand their arithmetic, because, as we know, a year ago they set a quota, when they got their discipline together, that they would produce 23 million barrels a day. Well, we know they have been cheating. They have been over-producing. They have been producing 24.2 million barrels a day.
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Now, if we look at that differential, we recognize that there might be only an increase of 500,000 barrels a day. I am speaking specifically of the 24.2 that they have been producing, and the difference between that and what their target was, and that differential is 1.2. If you subtract 1.2 from 1.7, which is what they say they are going to produce now, that is an increase of 500,000 barrels a day.
There is an assumption that that oil is going to go to the United States. That is not true. That oil is going to be made available to the customers of OPEC.
Now, we have an additional consideration that is pretty hard to define, but in the last year we have had a growth in demand in the world somewhere in the area of 1.4 to 1.6 million barrels. That is not factored in this equation either.
So when one addresses our energy policyand I don't believe we really have oneand we look at the relief that allegedly we have got and what we anticipate in hoping that oil prices will go down, I think the comment today on CNN that was made is that there is nothing dramatic likely to happen.
Now, there is a potential contribution from non-OPEC, but if you get down to the bottom line here you are faced with a unique situation where we have the world demand at 76.3 million barrels and the total production at 75.3and that is total productionso we are short roughly a million barrels a day currently, and perhaps two million barrels if you factor in that increase over the last year.
Page 29 PREV PAGE TOP OF DOC Now, you might say, ''Well, the Senator from Alaska is throwing arithmetic around here,'' but we should understand just how meaningful this additional announcement from OPEC really is, because I am of the opinion that what we are really doing is we are pulling down our reserve stocks in this country. And we have seen that in the heating oil issue, where our heating oil stocks are low. We know our gasoline stocks are low because we have been making heating oil when we should be converting over to gasoline.
So if you are not confused now, let me leave you with one more thought. Let us look at our friend Saddam Hussein. Now, the day before yesterday, the Department of Commerce released, if you will, its ban on certain technology sales to Iraq to allow them to increase their refining capacity. Now, that is kind of interesting, because, if you look at where our imports are coming from, the largest single increase in our oil supply, single increase, is coming from Iraq. You can see in 1997 it was down to nothing. Last year it averaged 300,000 barrels a day. Today it is 700,000 barrels a day, and, with what we gave the Iraqis the day before yesterday, that will allow them to increase their production.
Now, it seems rather ironic to me that in 1991 we fought a war over there, Mr. Chairman, and the consequences of that war were the loss of about 147 American service personnel. We had about 473 that were wounded. We had 23 that were taken prisoner.
In addition to that, Mr. Chairman, we have had to keep Saddam Hussein corralled. We have been enforcing no-fly zones. The cost to the American taxpayer since the end of the war has been over $10 billion. I find it inexcusable that we should look for relief to this guy.
Page 30 PREV PAGE TOP OF DOC Now, here's what the Washington Post said on March 29th, which is today. ''Who must we beg if we fail to develop our own resources? Even in modern times, Saudi Arabia still engages in electric shock treatment, fingernail extraction, lashing, flogging, amputations of hands and feet, religious discrimination and acts, people jailed, no judicial rights, and the country is holding 200 political prisoners, according to Amnesty International.''
Well, that is not Iraq, it is Saudi Arabia. But if you look at a couple of other things that are kind of interesting that came out, ''Lott seeks military action against Iraq,'' claiming that Iraq is using funding that is coming from the U.S. from oil sales to develop a missile capability. Well, we know that he is doing it.
Here's another headline: ''Smuggling of Iraq Oil is Rising, U.N. is Told.''
Well, I don't believe we can trust Saddam Hussein, but that is where we are placing our trust, if you will.
It comes down to some interesting comparisons. We are now 46 percent dependent on 11 OPEC nations for oil. Eight of the 11 have economic sanctions by the U.S. Government against human rights abuses, terrorism. Six of the 11 have State Department travel warnings in effect. Yet, that is where we are going to get our oil.
Well, I don't know. If you can't trust yourself to travel there, can you trust yourself to get oil there? The question is: can we look at pump price as a reduction? I don't think you are going to see anything significant. I think you are going to see a bump as a consequence of the psychology of the release. But let us make sure we all understand just what we got out of this deal, because I don't think it is significant, from the long-term benefit of consumers, let alone the national security of our country.
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So I will conclude, Mr. Chairman, with a reference to what we have got to do about it.
Now, we can look to a relief immediately of the taxes on gasoline, and there is a down side to that because we can't jeopardize the highway trust funds. In the Senate we have a combined bill, one bill that has two covenants in it. One is, for the balance of this year, relief from the 4.3 cent a gallon gas tax that was originally put on back in 1993. Some of you will remember that, when the other party came in and proposed a giant BTU tax. We were able to defeat that, but the 4.3 cent a gallon went to the Senate floor, was a tie vote, the Vice President broke the tie.
Now, those funds were directed into the general treasury, not the highway trust fund at that time. We came later and put it back in the highway trust fund.
But the idea in the Senate bill is to make whole or hold harmless the highway trust fund, which means it is going to have to come from some place.
If the price of gasoline regular comes up to $2 a gallon, then we would propose to take off all the gas tax. That is about 18.3 cents a gallon.
Now, we would also hold harmless the highway trust fund in that instance. That is immediate relief, but, as I say, it puts pressure on the budgeteers going to have to make up that funding some place else.
Page 32 PREV PAGE TOP OF DOC There are a couple of other considerations that we have. Of the Rocky Mountain overthrust belt, 65 has been withdrawn by this administration because it is not accessible for oil and gas exploration. We have got a tremendous potential in Texas, Louisiana, and other areas, OCS. We have to pursue that. We have to do more domestically. We have to do more in my State of Alaska, where we have been producing nearly 20 percent for the last 23 years. And if we get an opportunity to go into the arctic oil reserve, which we can do safely, we could make up the immediate difference because we have got the room in our pipeline. That pipeline is designed to produce two million barrels a day and is currently producing a little more than one million barrels.
So I have taken up too much time, but I did want to kind of give you an overview of what we are trying to do over there, kind of question, if you will, that we look at the arithmetic on what we have got to see if it is real, and recognize that it is a terrible thing to depend on Saddam Hussein for relief in this country as a superpower. I just find that a tough one to take.
My tirade is over, so I will go back to my hole on the other side.
Mr. HYDE. Thank you, Senator, very much.
We have a vote approving the journal. I am going to skip that so we can proceed, and I invite any Members who think their statistic will support missing the journal approval, fine.
Next, then, we will hear from Senator Campbell.
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Thank you, Senator, for your great contributions.
STATEMENT OF HON. BEN NIGHTHORSE CAMPBELL, A U.S. SENATOR FROM THE STATE OF COLORADO
Mr. CAMPBELL. Thank you, Mr. Chairman.
I certainly want to associate my comments with Senator Murkowski. We have done four hearings on this issue, and he certainly has taken the lead on our side of the Hill.
We have dealt primarily with supply and demand, as you know, in those hearings, and this committee, as I understand it, is dealing more with price fixing or potential gouging, things of that nature. But clearly they are related, and I appreciate the opportunity to make a few comments, myself, primarily from the standpoint of personal experiences.
I am certainly not here, by the way, Mr. Chairman, to defend the people who are buying two-ton SUVs as status symbols to deliver the kids to school and complaining that gas prices are not lower when they are only getting four miles to the gallon. I understand that, and I have read about that in the paper.
Specifically, I wanted to bring attention to one segment of the economy, how these high prices are affecting them. Other panelists will probably talk somewhat about the devastating effects that our farmers are going through as they go into planting season with the increased cost of fuel. PerhapsI notice with interest a couple of panel members from the northeastcertainly the devastating effects on families in the northeast as they went through the latter part of this last winter, and maybe still facing problems in which some people are actually having to make the decision of whether they eat that day or stay warm that day. That is a terrible decision to have to make in a country as great as this one. But I would hope other Members focus on that part of the devastating effects of the increase of oil prices.
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I wanted to specifically bring to your attention what I consider one of the backbones of America, and that is the effects of the increased oil prices on the trucking industry.
As you probably know, 95 percent or more of everything that is manufactured or grown in the United States travels by truck at one point or another. It may go by ship, may go by plane, may go by some other form of transportation, but it is always on a truck at one point or another.
Almost 9.6 million people earn their livelihood with jobs directly or indirectly from trucking. In addition, the trucking industry contributes over 5 percent of America's gross domestic product, which is the equivalent of $372 billion every single year. So it is a major industry.
I know the industry pretty well, Mr. Chairman, because I got through college by driving an 18-wheeler, I still have a CDL, I still occasionally drive and own a small rig. I know when I fill up the tank what it costs for diesel fuel.
During the last break a couple weeks ago, when we had a week out in the Senate, I spent three of those days, in fact, driving a truck for a little company called NorColo, which is a Northern Colorado Trucking Company, delivering all things beer from the Budweiser Plant in Fort Collins. I did it because I wanted to get a better feeling about how the increased fuel costs are affecting not only truckers, but the people that have to ship, the people that have to make their livelihood by depending on the trucking industry.
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I can tell you that stopping in fuel stops and diners, delivery points, and talking to shippers, it is worse than we imagine here in Washington, DC.
I met a man, in fact, last week by the name of Wesley White from Oregon who said that that was his last run. He had used his whole pension as a 20-year police officer to go into business himself by buying his own truck, and he told me that that was his last run. He has to park it for good, because the increase of fuel prices have been so bad that sometimes when he bids the shipping cost it costs him more for fuel than he can make by delivering the goods.
There are many trucking companies that are simply parking those rigs. Some of them, the great big ones, are simply going to pass on the cost increase of doing business to the consumer, which are me and you and everyone else who relies on their goods being shipped by truck.
In the last two months, as you probably know, Mr. Chairman, hundreds of truckers have come to Washington, DC, to ask for help. There were several protests. I went to the first one in February. I went to another one last week. I think, when talking to those citizens that came here, they are not people that want hand-outs and they are not here driven by profit margins; they are people whose backs are against the wall who have every right to expect some relief from their United States Congress. Their families' livelihood depend on it.
I met a trucker in the first group that, in fact, was living with his wife and two little kids, both of themthey looked to me like they were under three years oldliving in the sleeper of the truck because they couldn't afford to keep the truck running, which was their income, and make their home payments. That is a terrible predicament to put working people in. And he was certainly not a man that wanted a handout. He just wanted a fair chance to earn an honest living.
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The real problem, as Senator Murkowski mentioned, though, is that we simply do not have a good, sound, long-range energy policy and we have let ourselves become too dependent on foreign oil.
As the Senator mentioned, our production is down by 17 percent, while our consumption has climbed by 14 percent. Now we are faced with skyrocketing diesel prices. We have to literally beg OPEC to increase production, which may or may not help, as the Senator indicated.
When we have current sanctions, as he mentioned, on eight out of the eleven, I am not sure we can trust them. And I don't think that it is beyond anybody's imagination in here to recognize what Iraq is going to do with the profits they make from increased oil sales. Very clearly, they are going to increase armament. That is what they have always done in the past. That is what they will do in the future. And I hate to think of the day when we are going to have to go back to the Middle East and fight another war because of the encouragement we gave them by letting ourselves be dependent on Iraqi oil.
But, in any event, the latest news reports indicate that even the money in our supplemental appropriations bill of $1.6 billion are going to cover the Pentagon's soaring fuel costs. It may not be enough. There is a national defense component to this getting more and more dependent, as I am sure the chairman is aware.
Even though OPEC will agree to increase production, as the Senator has pointed out, the Senator from Alaska, I think our expectations that they are going to increase production are far overblown, and the reduction that we may see at the fuel pumps may be two or three cents.
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In addition to that, they tell us that the actual increase of turning on the spigots in the gulf area may take as much as two months to get that oil here, because it has to be shipped by tanker, as you know. It may take an additional four to six weeks to be refined at the refineries.
And so, if we are going to see any relief at all, even if it is a few cents, it may not be here until well into this summer.
The long-range goal, of course, ought to be that we become less dependent, as Senator Murkowski has mentioned.
Now, in that context, I introduced Senate bill 2161, that I know some of my colleagues on the House side have found interesting. It is called the Transportation Recovery and Highway Trust Fund Protection Act of 2000. It doesn't deal with the 4.3 cents a gallon increase that the Senator talked about. This deals primarily with diesel fuel.
The bill would temporarily suspend the Federal excise tax on diesel fuel for one year, or until the price of crude oil is reduced to the December 31, 1999, level. That is about 24 cents a gallon. It would replace lost revenues, money from the budget surplus, back into the trust fund, and so we are going to protect the trust fund.
It is endorsed by the American Trucking Association, the Independent Truckers Association, the Colorado Motor Carriersa number of other motor carriers.
Page 38 PREV PAGE TOP OF DOC Even at that, I think that bill, in and of itself, will help, yet we could do other things, too.
A number of us have signed a letter to the President asking him to reduce the oil we have stored in the strategic oil reserves. As you probably know, that has been done in the past several times, as the chairman might note. I think that would help to drive the costs down. The President has not seen fit to do that, as you probably know.
Senator Hutchinson from Texas has introduced a bill to get some tax relief to the people that are involved with stripper wells. As you know, the stripper wells in this country, Mr. Chairman, have just declined dramatically from over 5,000 to, I think, less than 600 now of the companies that still deal with stripper wells.
A stripper well, Mr. Chairman, is a well that is producing less than 15 barrels per day, so it is not economically feasible to keep those wells open, at that rate, unless they get some relief.
As you also probably know, once those wells are shut down, it is literally impossible to reopen them. There are thousands of those in the United States. Collectively, they account for tens of millions of barrels per year that we are just going to seal off and not be able to use.
The Senator from Alaska also mentioned the attempt to open some of our new fields in Alaska that has met with some difficulty.
Page 39 PREV PAGE TOP OF DOC In addition to that, we can do a lot of things. We know that we have the technology, developed in the 1970's to squeeze oil out of rocks, called ''oil shale,'' in the American west. They can do it. They can't do it economically, yet. They can do it for $40 to $45 a barrel. I imagine if OPEC raises the price that much, we will see a new rush to try to encourage those American companies to proceed with the getting of oil shale oil. We can do it. We can. We ought to be giving them some kind of tax relief so that they could make up the difference for when oil costs go too high in the Middle East.
In 1973, we had bought 35 percent of our oil from foreign sources. Today, we buy 56 percent, and some reports say as high as 62 percent. That is only going to get worse.
We are tethered to them like an umbilical cord, make no doubt about it, Mr. Chairman. And even if they do reduce the cost by increasing the production, that is only short-term relief. We are going to be facing this problem in another few years, as sure as you are sitting here and as sure as I am sitting here, too. We are some superpowerreduced to groveling at the OPEC boards.
Well, I don't want to take all your time. Some of my colleagues are coming back. But I want to note that my concern is really with the people who use diesel fuel in trucking, but they are trying to do their part. Caterpillar, Detroit Cummings, which are the big manufacturers of the engines that drive trucks, as well as ships and tractors, too, Mr. Chairman, all of them have new technology they are putting into engines even this year that get better mileage, that reduce the sulfur content, that can run on low-sulfur fuel. They have cleaner emissions, more-efficient engines, so I know that the manufacturers of these engines that are going into the trucks are doing the best we can.
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But clearly we can do better, and the best we can do is not only some short-term relief for the people who use diesel fuel, but to try to impress on our colleagues the importance of having some long-term independent production of oil so that we don't have to go through this continual cycle.
Thank you very much for your indulgence, Mr. Chairman.
Mr. HYDE. Well, thank you for your contributions, Senator. It is great to see you over here.
Next, we have Representative Ben Gilman from the 20th District of New York. He is a graduate of the University of Pennsylvania and the New York University Law School. He served with distinction during World War II before becoming an assistant attorney general for the State of New York.
He was first elected to the State Legislature in 1966, before coming to the United States House in 1972. He serves as my chairman on the Committee on International Relations.
We welcome you, Chairman Gilman.
STATEMENT OF HON. BEN GILMAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK
Page 41 PREV PAGE TOP OF DOC Mr. GILMAN. Thank you, Mr. Chairman, and my colleagues. I want to thank you for addressing this very important issue, and I think your series of hearings is going to do a great deal to help us develop a sound energy policy for our Nation.
I am pleased to be able to appear before your committee with my colleagues this morning, and particularly to discuss my measure, H.R. 3822, which we call the ''Oil Price Reduction Act of 2000,'' a measure which passed the House, as you may recall, last week by a vote of 382 to 38, a resounding support for trying to do something about our energy policy.
This bill focuses the spotlight on OPEC's price-fixing activities and highlights the uncompetitive nature of the global oil market. My measure, H.R. 3822, will ensure that we move at a proper direction. Its enactment will, in my view, help to ensure that the forces of demand and supply will set the prevailing market price of oil, and not any back room deal among nations that do not share our own national interests.
In early March, a news release from the Energy Department confirmed what we had all suspectedthat oil revenues to OPEC and to other major oil exporting countries have doubled over the past two years to $212 billionthat is $212 billiontheir highest level since 1984.
My measure, H.R. 3822, will help the administration follow through on its previous unfulfilled commitments to reduce the market power of OPEC and its key oil-producing allies and to develop a long-term approach to America's energy security.
Admittedly, this isn't the end-all or the full answer, but it is an important symbol and an important signal that we are giving to the oil-producing nations.
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The International Relations Committee held two days of hearings on OPEC and the northeast energy crisis and U.S. policy toward OPEC on February 10th and March 1st. We took testimony from several administration witnesses, including our Secretary of Energy, Bill Richardson.
This measure was thoroughly debated within our International Relations Committee and on the House floor last week. Regrettably, the Rules Committee extricated some teeth in that legislation, but, nevertheless, it is a balanced, responsible approach to the challenge that the American economy and the American consumer faces from the current energy price crisis that has been engineered by OPEC and by other major net oil exporters.
In short, we sent a strong message to the OPEC price cartel prior to their meetings earlier this week in Vienna that continued withholding of oil production from the market to prop up their prices of oil and should be an important consideration in our overall foreign policy toward all of the OPEC members. Apparently, they reacted saying they resented American pressure being put on them to reduce the control of their oil prices.
Now, is OPEC price fixing? I think the answer to that is obvious by quoting a statement issued earlier this month by Secretary General of the OPEC organization, who stated, ''We should increase production by an amount needed to reach the target price of around $24 a barrel.'' In so many words, this is a resounding yes, and underscores that they are price fixing.
I am concerned that the end result will be that in the years ahead OPEC will continue to thumb its nose at our Nation and the American consumer will be faced with steadily-rising gas and diesel prices throughout the summer, whenever OPEC feels that that is in order.
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Just what decisions has OPEC made in their recent meeting? Well, the latest news reports indicate that the oil ministers have decided to release an additional 1.45 million barrels a day into the market, or about a third of the current 4.32 million barrel a day production cutbacks of its membership. Many oil analysts believe that it will not bring any immediate relief to our hard-pressed American consumers for the coming summer driving season. It falls short of the level needed to restore the badly-depleted oil inventories in our own Nation, and it will result in severely impacting our Nation's economy. It is already affecting the trucking industry, the airline industry, and it will have a major impact on consumer prices throughout our country.
What specific policies has the administration put in place toward OPEC? Well, it dispatched Secretary of Energy Richardson to the OPEC countries to engage in what was called ''quiet diplomacy'' over the past two years. And, as prices steadily rose, Secretary Richardson conducted business as usual with OPEC members, pursuing business leads for American companies, while failing to protect the interest of the American consumer.
In fact, it appears that Secretary Richardson might well have been giving the green light to some of the OPEC ministers when he told them, prior to their meeting in March of last year, ''We feel that lower prices are good for consumers, but we recognize that they can have a negative impact domestically on some of our friends. So far, OPEC's response has been responsible and restrained.'' That statement was made by Secretary Richardson in March of 1999.
Now, how does my bill, H.R. 3822, respond to OPEC and the ongoing energy crisis? Well, specifically, Mr. Chairman, my bill requires the President, not later than 30 days after its enactment, to send to the Congress a report containing a description of our security relationship with each OPEC member and any other major net oil exporting country, together with information about our assistance programs and government-supported salesarms sales, particularlythose nations. So many of our constituents ask us, ''How come you are not doing anything with those countries who we helped save when they were being invaded or helping protect their national security? Look what they are doing to us. Congressman, what are you doing to respond to that?'' I am sure you have all heard that.
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This bill requires a Presidential determination whether or not an OPEC member is engaged in price fixing to the detriment of our own nation's economy.
Finally, my bill further directs that the President should undertake a concerted bilateral and multilateral diplomatic campaign to bring about the end of international oil price fixing arrangements once and for all.
And, while I remain sympathetic to many energy policy reform measures which are being discussed today in front of your committee, my Oil Price Reduction Act does have a narrower focus and a clear objective regarding the operations of this international price cartel.
Mr. Chairman, where do we go from here? In light of yesterday's OPEC's meeting's decision to maintain high energy prices, the administration needs to rethink its whole energy policy, and that is why I think this hearing is so important. It will help us focus attention on just what we can do to come forward with a sensible national energy policy.
I recommend that the first place to start is to work with us in enacting, of course, my own measure, the Oil Price Reduction Act, and to send a message to OPEC that its price-fixing policies are a serious threat to the American consumer and to the American economy.
Mr. Chairman and my colleagues, during our hearings, Chairman Leach and Mr. Manzullo expressed a view that if OPEC is price fixing they should be held legally accountable and they should be sued in our courts. I know our antitrust laws have worldwide reach, as has been demonstrated in the actions in our courts against the Iranian cartel. Our laws certainly should apply to OPEC's depredations.
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As I understand it, there are three significant barriers to holding OPEC legally responsible. The fact that under the Foreign Sovereign Immunities Act, only properties involved in the commercial activity in question may be levied upon to satisfy a judgment. This should and could be easily brought, at least for some antitrust cases.
Secondly, the fact that the direct purchasers of oil from OPEC are unlikely to sue them. We should allow consumers or our States to bring some sort of a suit for damages; thus, for some cases, at least, the Illinois brick doctrine should be revived. I understand that this committee proposed to do so in H.R. 11942 of the 95th Congress.
Third, the Act of State Doctrine was invoked to bar the case of the International Association of Machinists against OPEC. I am not any expert on the Act of State Doctrine, but I believe that, as in the case with respect to the Hickenlooper amendment, which was part of the Ford Assistance Act, that Congress should be able to direct the courts that they should spell out when not to apply the doctrine in a particular set of circumstances.
Accordingly, Mr. Chairman and my colleagues, I would state that it is not against the foreign policy interests of the United States for a suit to be maintained against OPEC for antitrust violations, and I hope that your committee can explore that possibility.
Mr. Chairman, I want to thank you for your committee's opportunity to appear before your committee this morning, for taking up this very important issue. This issue is of such grave importance to our consumers, particularly our seniors, to our Nation's economy, that we must continue to focus on ways of relieving the burden of high energy prices on a more permanent basis, that we must develop a sound national energy policy.
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Thank you, Mr. Chairman.
Mr. HYDE. Thank you, Mr. Chairman.
[The prepared statement of Mr. Gilman follows:]
PREPARED STATEMENT OF HON. BEN GILMAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK
I am pleased to appear before your Committee this morning to discuss H.R. 3822, the ''Oil Price Reduction Act of 2000,'' a measure which passed the House on Wednesday, March 22 by a vote of 382 to 38. This bill puts the spotlight on OPEC's price-fixing activities and highlights the very uncompetitive nature of the global oil market. Its enactment will, in my view, help to ensure that the forces of demand and supply set the prevailing price of oil, and not any backroom deal among countries that do not share our national interests.
In early March, a news release from the Energy Department confirmed what we had all suspected: oil revenues to OPEC and other major oil exporting countries have doubled over the past two years to $212 billiontheir highest level since 1984. This measure will ensure that the Administration follows through on its previous unfulfilled commitments to reduce the market power of OPEC and its key oil producing allies and to develop a long- term approach to America's energy security.
The International Relations Committee held two days of hearings on ''OPEC and the Northeast Energy Crisis'' and ''U.S. Policy Toward OPEC'' on February 10th and March 1st. We heard testimony from several Administration witnesses including the Secretary of Energy Bill Richardson. This measure was thoroughly debated as well inside the International Relations Committee and on the House floor last week. It is a balanced and responsible approach to the challenge that the American economy and the American consumer faces from the current energy price crisis engineered by OPEC and other major net oil exporters.
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In short, we sent a strong message to the OPEC price cartel prior to its meetings earlier this week in Vienna that continued withholding of oil production from the market to prop up the price of oil will be an important consideration in our overall foreign policy toward all OPEC members.
Is OPEC price fixing? The answer to that question is obvious by quoting a statement issued earlier this month by the Secretary General of that organization. We should increase production ''by an amount needed to reach the target price of around $24 a barrel.'' In so many words, this is a resounding YES.
I am concerned that the end result will be that OPEC will continue to thumb its nose at the U.S. and the American consumer will be faced with steadily rising gas and diesel prices through the summer.
What decisions has OPEC made in its recent meeting? The latest news reports indicate that the oil ministers have decided to release an additional 1.45 million barrels a day into the marketor about a third of the current 4.32 million barrel a day production cutbacks of its membership.
Many oil analysts believe that it will not bring any immediate relief to the hard- pressed American consumer for the coming summer driving season. It falls well short of the level needed to restore the badly depleted oil inventories in our country.
What specific policies has the Administration put in place toward OPEC? It has dispatched the Secretary of Energy to OPEC countries to engage in ''Quiet Diplomacy'' over the past two years. As prices rose, Secretary Richardson conducted business as usual with OPEC members pursuing business leads for American companies while failing to protect the interests of the American consumer.
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In fact, it appears that Secretary Richardson might well have been giving the green light to OPEC Ministers when he told them, prior to their meeting in March of last year, ''We feel that lower prices are good for consumers, but we recognize they can have a negative impact domestically on some of our friends . . . so far OPEC's response has been responsible and restrained.''
How would this bill respond to OPEC and the ongoing energy crisis? Specifically, this bill requires the President not later than 30 days after enactment to send the Congress a report containing a description of our security relationship with each OPEC member and any other major net oil exporting country, together with information about our assistance programs and government-supported arms sales to those countries.
This bill requires a Presidential determination whether or not an OPEC member is engaged in price-fixing to the detriment of the U.S. economy.
Finally, this bill further directs that the President should undertake a concerted bilateral and multilateral diplomatic campaign to bring about the end of international oil price-fixing arrangements.
While I remain sympathetic to many energy policy reform measures which will be discussed in front of your Committee this morning, the Oil Price Reduction Act has a much narrower focus and a clear objective regarding the operations of an international price cartel.
Where do we go from here? In light of the OPEC meeting's decision to maintain high energy prices, the Administration needs to rethink its whole energy policy. The first place to start is to work with us in enacting the Oil Price Reduction Act and to send a message to OPEC that its price-fixing policies are a threat to the American consumer and to the American economy.
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Mr. Chairman, during our hearings Chairman Leach and Mr. Manzullo expressed the view that if OPEC is price-fixing they ought to be held legally accountable, and sued in our courts. Our antitrust laws have worldwide reach, as has been demonstrated in the actions in our courts against the Uranium Cartel and our laws certainly ought to apply to OPEC's depredations.
As I understand it there are three significant barriers to holding OPEC responsible:
a) the fact that under the foreign sovereign immunities act, only property involved in the commercial activity in question may be levied on to satisfy a judgement. This should, and could, easily be broadened, at least for antitrust cases.
b) the fact that the direct purchasers of oil from OPEC are unlikely to sue them. We should allow consumers or states to sue for damages. Thus, for some cases, at least, the Illinois Brick doctrine should be revised. I understand that this Committee proposed to do so in H.R. 11942 of the 95th Congress.
c) the ''act of state doctrine'' was invoked to bar the case of International Association of Machinists v. OPEC. I am not an expert on the act of state doctrine but I believe that, as in the case with respect to the Hickenlooper Amendment, part of the Foreign Assistance Act, the Congress should be able to direct the Courts that they are not to apply the doctrine in a particular set of circumstances.
Page 50 PREV PAGE TOP OF DOC Thus, I would state in law that it is not against the foreign policy interest of the United States for a suit to be maintained against OPEC for antitrust violations.
Mr. Chairman, thank you for the opportunity to appear before your Committee this morning. This issue is of such importance to our consumers, particularly our seniors, that we must continue to focus on ways of relieving the burden of high energy prices on a more permanent basis.
Mr. HYDE. Next we have Representative Bernie Sanders, the at-large representative from the State of Vermont. Before coming to Congress he worked as a writer, a documentary producer, a director of the American People's History Society, and a college professor. He began his political career as mayor of Burlington, Vermont, and was first elected to this House in 1990. He serves on the Banking and Government Reform Committees.
Sorry to have kept you so long, Congressman Sanders. We welcome you.
STATEMENT OF HON. BERNIE SANDERS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VERMONT
Mr. SANDERS. Thank you very much, Mr. Chairman, for holding this important hearing. This is an issue of enormous consequence, and I am glad that we are hearing different ideas. I certainly am in agreement with at least some of what we have heard so far.
Before I get to the thrust of my remarks, Mr. Chairman, let me very briefly comment on some of what we have heard already.
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A point that has not been made that I think needs to be placed on the record is that, to the best of my understanding, when we talk about oil production in Alaska, we should be aware that about 60,000 barrels of oil every day produced in Alaska are ending up in Asia. They are going to China. They are going to Japan, Korea, and Taiwan. At a time when oil prices are soaring in this country, I think that is an issue that we might want to explore.
Secondly, I agree with Ben Gilman and others who wonder why, when the United States went to war, lost men in that war, spent a huge sum of money defending the royal regimes in Saudi Arabia and Kuwait, they have now turned their backs on this country.
I think, at the very least, that suggests a lack of gratitude for the sacrifices that this country has made to put these billionaire families in power, and it is questionable whether we should have done that in the first place, but that is the reality.
But there is a point that I want to make on that issue. Ben and others have raised the question about what do we do about OPEC. Is OPEC involved in price fixing? I think, by definition, that is the reason that OPEC exists. They come together to fix prices in order to make as much money as they can for oil producers.
What do we do about it? Mr. Gilman has made some interesting suggestions. Let me make another one.
I am not a fan of the World Trade Organization. I have a lot of problems with the WTO. But I find it interesting that this country has not gone before the WTO and said to the WTO that right on the surface OPEC is violating all kinds of free trade and international trade agreements that the WTO is all about.
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If we are going to the WTO in order to defend some billionaire from Ohio who produces bananas, I think we should be going to the WTOand this is an idea that Representative Peter DeFazio of Oregon has brought forthand challenge OPEC before the WTO in violating of various rules of that institution.
Mr. Chairman, the main point that I wanted to make today is to talk very briefly about legislation that I have introduced, which, in less than two months, already has 98 cosponsors, including 24 republicansit is very much a bipartisan billand 27 representatives who are not from the northeast.
Mr. Chairman, there are a number of Members in support of that legislation who are on the Judiciary CommitteeRepresentative Conyers and Delahunt, and Frank, Nadler, Sheila Jackson Lee, Representative Meehan, Walkman, and Weiner. We are waiting for your support, Mr. Chairman, as well.
Now, what would this legislation do? What is it about? It is based on a 1998 Department of Energy report, and what it would do is create a home heating oil reserve with two million barrels of that reserve located in the northeast, and we think in New York Harbor, where there are already facilities in existence today that have met environmental standards.
I am very proud that several weeks ago the President in his radio address essentially endorsed this legislation.
It would also provide for a reserve of 4.7 million barrels in the strategic petroleum reserve in the Gulf Coast.
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As you know, we already have, through the strategic petroleum reserve, over 500 million barrels of oil on reserve. This would increase the reserve by about 1 percent and use some of the facilities in the Gulf Coast to store some of that home heating oil.
Now, why are we proposing this idea? I think the answer is pretty simple. There is not a debate, I think, within the administration, within the Congress, within the people of this country, that essentially we were unprepared for the current crisis in oil that we have experienced this winter. I think the administration has basically acknowledged that they were caught napping, Congress was not as aggressive as we should be.
Now, what are some of the solutions? You have heard some ideas. Let me propose another one.
I come from the Northeast, and in the Northeast we have seen basically a doubling of home heating oil prices in the last year. For better or worse, many States in the Northeast are highly dependent upon home heating oil. As you know, it gets awfully cold in the Northeast. It gets 20 and 30 below zero. Many of our people, including senior citizens, don't have a lot of money.
What ended up happening is the President appropriately released some $300 million in reserve from the LIHEAP fund, but that is not enough, because there were a whole lot of families who were paying more than they could afford for home heating oil.
Now, what are some of the sensible things that we can do so that we are not caught napping again? One prediction I am quite confident in making, Mr. Chairman, is it will be cold in New England next winterand you can quote me on that. So what should we do?
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I think, at the very least, what we should do is have a reserve available so that, if there is a shortage of home heating oil, if the price of home heating oil goes up, the President of the United States can release some of that home heating oil and lower prices. I think this is common sense.
I think, also, it is not an expensive proposition. In fact, it probably ends up to be a money-making proposition for the Government, because when that oil is sold it can be sold a little bit higher than what the market will then bear.
It is also important to note that we have many cosponsors of this legislation are not from the Northeast. Why is that? They are concerned about the high cost of diesel oil. As you know, diesel oil is pretty much interchangeable with home heating oil, so when home heating oil prices go up, diesel is converted into home heating oil. That means that diesel prices go up, and the truckers that Senator Campbell appropriately talked about really suffer.
So this is a fairly conservative proposal. It says, ''Let us not be caught napping. Let us not simply say that the Government cannot do anything.'' If we have a reserve available when there is a shortage, when prices can go up, it will lower home heating oil prices. It will tell the entire world, including OPEC, that the United States Government is capable of responding in an appropriate way.
As I indicated, Mr. Chairman, this bipartisan legislation has 98 cosponsors, 24 republicans, people from throughout the country. I think it is a common-sense proposal. I would hope that we could get it passed, the Congress, as soon as possible, so that we can be up and running next year.
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I thank you very much, Mr. Chairman, for holding this hearing.
Mr. HYDE. Thank you very much, Mr. Sanders.
[The prepared statement of Mr. Sanders follows:]
PREPARED STATEMENT OF HON. BERNIE SANDERS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VERMONT
Mr. Chairman, thank you for inviting me to testify at this important hearing on ''Solutions to Competitive Problems in the Oil Industry.''
On February 4th, I introduced H.R. 3608, the Home Heating Oil Price Stability Act, a bill that I believe would provide a long-term solution to the heating oil crisis that plagued the Northeast this winter. In just a short period of time, H.R. 3608 already has 98 co-sponsors, including 24 Republicans and 27 Representatives not from the Northeast. In short, H.R. 3608 would authorize the Department of Energy to establish a home heating oil reservemuch like the Strategic Petroleum Reservethat the President would be able to draw upon when fuel prices skyrocket like they have this winter.
Mr. Chairman, we must make certain that the huge increase in home heating oil prices that we experienced this winter never happens again. This bill to create a permanent home heating oil reserve is common sense legislation: it is a cost- effective way of making sure that the government has a mechanism to lower oil prices when situations like extreme cold weather cause them to rise.
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H.R. 3608 is based, in part, on a 1998 Department of Energy report suggesting that a home heating oil reserve would be an effective method of stabilizing home heating oil prices in the future. Under the bill, the federal government would lease already-established storage facilities in the Northeast to create a 2 million barrel home heating oil reserve. The bill would also use one of the four Strategic Petroleum Reserve caverns in the Gulf Coast to store an additional 4.7 million barrels of home heating oil. The President would be authorized to use the new reserve only when fuel oil prices dramatically increase. Most economic experts agree that an influx of home heating oil into the market would drive prices down.
The astronomical prices that our constituents have been forced to pay for fuel oil in order to stay warm this winter is outrageous. In fact, heating oil prices this winter were the highest they have ever been in history. Congress and the President have the power to provide a long-term solution to this crisis. The time to act is now.
Mr. Chairman, I would like to make the following points in support of this legislation:
First, winter is not a natural disaster, it takes place every year. Yet, we continue to be unprepared for a severely cold winter. In fact, fuel oil shortages have taken place in the Northeast about once every three years. Most recently, these shortages have occurred during the winters of 19831984, 19881989, 19961997, and 19992000. Each time we have given the private sector another chance to provide an adequate supply of home heating oil to deal with a severe winter, and each time they have not come through.
Page 57 PREV PAGE TOP OF DOC But, we must not blame the private sector. I believe that it is simply too much to ask for the private sector to keep an adequate supply of home heating oil to deal with a very severe winter like the one we just experienced in the Northeast.
In fact, one of the major reasons that there was a very low supply of home heating oil this winter, was due to the fact that the private sector lost a lot of money during the prior two winters because they stored too much home heating oil. These prior winters were much warmer than normal, and people did not consume as much heating oil as the private sector thought. This caused the private sector to suffer a serious setback as a result.
It is simply too risky in terms of receiving a reasonable profit, for the private sector to store an adequate amount of heating oil to deal with a very severe winter. Therefore, it is time that the federal government stepped up to the plate to provide a small home heating oil reserve that would be used specifically for this kind of situation.
Second, the creation of a heating oil reserve would pay for itself, especially if the Administration decided to go forward with a crude oil/home heating oil swap by using the Strategic Petroleum Reserve. A crude oil/home heating oil swap would be a win-win-win situation:
A) It would immediately lower the price of oil for consumers throughout the country;
B) It would provide a long-term solution to the heating oil problem at minimal cost; and
C) it would quell the critics who are against depleting crude oil from SPR since the oil will all be returned at a later date.
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In addition, according to a June 1998 Department of Energy Report to Congress, the federal government would actually make a profit of $46 million by buying and selling heating oil from the regional reserve during a severe winter.
Finally, and perhaps most importantly to many of the Members that serve on this Committee, the establishment of a home heating oil reserve would provide benefits not only to consumers in the Northeast but to almost every American in this nation. According to the '98 Department of Energy Report, during severe winter weather, the Northeast region would realize $368.7 million in savings through the establishment of a home heating oil reserve. However, the nation would also realize a savings of $56.5 million in jet fuel costs and a total national benefit of $838 million by the creation of a home heating oil reserve.
The national savings incurred by the establishment of a heating oil reserve are mainly due to the fact that diesel fuel and jet fuel are used as substitutes for heating oil during a fuel oil shortage. Using diesel fuel and jet fuel to heat homes in the Northeast during a heating oil shortage, causes the price of diesel fuel and jet fuel to spike dramatically as we have experienced this winter. The heating oil shortage this winter has caused diesel fuel prices to rise to over $2.00 a gallon in some areas. Diesel fuel is the largest cost of small business independent truckers, and at this price, many truckers cannot afford to run their trucks and stay in business.
Due to this important fact, the Owner-Operator Independent Driver's Association representing 47,000 small business truckers has come out in strong support of H.R. 3608. Here is what this group has said about this legislation:
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The Owner-Operator Independent Drivers Association (OOIDA) would like to strongly endorse your legislation, H.R. 3608, the Home Heating Oil Price Stability Act. Home heating oil and diesel fuel are nearly identical products. The failure of the fuel industry to prepare for the fuel demand during this winter's cold temperatures also put the squeeze on the diesel fuel supply for the trucking industry.
The heating oil shortage has also caused some airlines to charge fuel surcharges to their passengers because of the high price of jet fuel. If a heating oil reserve were in place, diesel fuel and jet fuel would not have to be used as substitutes for heating oil, and the price of these fuels would be dramatically reduced.
Mr. Chairman, I would hope that every member of Congress would support H.R. 3608 and I would be happy to answer any questions you may have regarding this legislation. Again, thank you for giving me this opportunity to express my views.
Mr. HYDE. Next, we will get to Ed Markey, who is from the 7th District of Massachusetts, a graduate of Boston College and its law school. He served in the U.S. Army Reserve, was first elected to the State Legislature in 1972. He was first elected to this House in 1976, and has served with great distinction ever since. He serves on the Commerce and Budget Committees.
I am going to break protocol just because I know Ed so well and we have been here a long time, and just make a comment on what we have heard so far, because I respect your judgment in these matters.
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We have heard incremental solutions. Representative Sanders' idea is a good one. It helps, anticipatorily, a problem in the Northeast. Ben Gilman talked about ''jawboning.'' It is useful, one option. Suing, litigation against OPEC, is nutty. I mean, you are not going to solve the problem through litigation.
OPEC has got the oil. They have got the oil and they are going to price it based on the laws of supply and demand, and they are going to get all they can get out of it.
The only way to beat that problem long-range is to out-produce them. That is allwe have to out-produce them. We are not doing that. We are not remotely considering that because of ideological obstacles and mindsets that just won't let us go after our own resources, of which we have an abundance. We really do.
My favorite story, as I flew over the Alaskan pipeline, was watching the caribou nuzzle the pipeline to stay warm. We were told that was a horrible thing, and it wasn't a horrible thing. It was a very useful thing.
We need to spend as much time thinking about ways to exploit our own resourcesnatural gas and petroleum and what have youin an environmentally acceptable way, and that is the tough problem.
But a mindset that says no, you can't do it, is our problem. We can do it. We are going to have to do it if we are looking for a solution. And, in the long runand we ought to be thinking about it now, and you are the kind of guy, and so is Mr. Sanders and Mr. Weygand, to be thinking about itwhat do we do when we run out of petroleum. It is going to happen, maybe not in our lifetime, but we are closer to it today than we were when we used to celebrate solar weekends and things.
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We have had a warning. This is a break for us, for civilization, telling us about this problem. We are going to have to produce and learn to produce in an environmentally acceptable way. That, I think, is what I am learning, or the lessons I am drawing from this.
I shouldn't pick on you, but I respect your views, as I do Bernie's and Bob's.
Anyway, we are pleased to hear from you, Representative Markey.
STATEMENT OF HON. ED MARKEY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MASSACHUSETTS
Mr. MARKEY. Thank you, Mr. Chairman, very much.
First, let me say that there is good news. The good news is that our economy, which in 1980 registered oil as 7 percent of our gross domestic product, today registers it as only 3 percent of our gross domestic product, so there is no oil interruption today short of something going up to $3 or $4 a gallon, which could have the same impact upon us today as it did in the 1970's. That is good news.
A lot of that is because of antitrust law. It is the antitrust law, however, that broke up AT&T, because our society has moved from an industrial base to an information base since that major antitrust decision was made, and today the vast bulk of the new jobs, new industries in our country, are coming from these industries which are not dependent upon oil at all. At most they use electricity, and we don't use oil to generate electricity, for the most part, in our country any longer. That is the good news.
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The bad news is that we have lost, again, part of the lessons which we have learned in the 1970's. We were in denial with regard to our own consumption of energy. The average automobile got 13.5 miles a gallon. I asked my father in 1976, ''What was your first car, Pop?'' He said, ''Well, it was a Model A in 1930.'' My father is 89 today. I said, ''Well, what did it get per gallon?'' He said, ''Well, probably 12, 13 miles a gallon.'' So we had gone from 1930 to 1976 and made no real improvement, in terms of the fuel economy standards of the internal combustion engine.
We peaked at 27.5 miles a gallon some time in the mid to late 1980's, and there was a precipitous decline right through the mid 1980's in our dependence on imported oil. It went down to about 32 percent of all of our oil consumed in America. And then it began spiking again.
So I guess the one lesson that I would seek to once again relearn as a country was that we were kind of denying our ability to apply technologies to make ourselves more efficient. You know, this microchip revolution helped make every automobile a computer, which we really didn't want to do. We wanted to keep out Japanese automobiles because they were much more efficient when, in fact, by letting them in it forced our industries to respond. But then we kind of capped it at 27.5 miles a gallon, in terms of our demand that they continue to improve, so we haven't seen any since the late 1980's.
If the average automobile got 35 miles a gallon today, which is quite easily achievable if we wanted to have that as our goal consistent with safety, we would back out a couple of million barrels of oil a day.
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Mind you, Alaska only provides on million barrels of oil a day, so even if we had the biggest strike of all time in Alaska that matched the strike we have already made, we might, if we are lucky, add one more million barrels from Alaska. That would be it.
Automobile efficiency, alone, could double that, triple it, depending upon where we put the standard, and then we become the controllers of our own destiny.
Yes, short term we needthe next time when oil goes down to $12 a barrel, we have got to fill the strategic petroleum reserve. A billion barrels of oilwe are at 560 million right now, but a billion barrels of oil, we could deploy two million barrels a day, our State, our government could against our government, and do it for 500 days in a row. That is a heck of a weapon to have, if you fill it at $12 a barrel and then you start deploying it at $32 a barrel.
What we do is we deploy it at $32 a barrel, we buy at $32 a barrel. We buy high and sell low. It is a backwards policy.
And we should have a billion. It would terrify OPEC if they knew we had a President that would deploy two million barrels a day. We would bring them to the bargaining table, combined with all the other diplomatic pressure, all the other strategic concerns that they might have, but we don't do that. We don't think of ourselves as another State dealing with states. We kind of depend that they are independent free market operatives out there, which is just the delusion that we continue to allow ourselves to operate under.
Page 64 PREV PAGE TOP OF DOC So I guess my one message to you would be that, as we look back historically, I think that people are going to look at the breakup of AT&T as the single most important thing that happened in the 1980's, with the exception of the tearing down of the Berlin Wall. It transformed our economy, made us much more efficient, brought this ability to have the oil of the 21st century, information, to the fore, and is allowing us to make our society more efficient and to dominate the world markets in that area and to reduce down to only 3 percent the role that oil plays in our GDP.
I would say that, along with that, if we did have full electricity restructuringand I firmly believe that we have to have radical restructuring of our electricity marketplace, so that wherever electricity is generated it can be sold anywhere around Americathat if that was made possibleand I think Congress for five years has just delayed too long on thiswe would give incentives for solar or wind to be generated in the deserts of New Mexico or Texas or California, and then wheel the thousand miles, because now the markets would be opened around the country and there would be a real incentive for that kind of investment to be made.
We haven't made those changes yet. I think we have to. It is within our power. We can't allow investor-owned utilities to continue to block this kind of marketplace change.
There was a time when monopolies had to be granted by States to generate electricity. I don't think that is the case any longer. I think it all has to be made wide open domestically. You just have to knock down all these state-granted monopolies.
Page 65 PREV PAGE TOP OF DOC So, generally speaking, I do believe at the end of the day that technology will be our salvation, that on automobiles and refrigerators and stoves and air conditioners we can make ourselves ever-more efficient. They will never again, by the way, have the power over us that they had in the 1970's because we are now no longer an industrial Nation but an information service-based Nation in terms of our jobs, and that is just going to continue to accelerate.
I would spend more money, as a Government, investing in renewables, in efficiency. I would understand that we may find more fossil fuels. We have found this huge strike off of Canada at Sable Island, which is going to make New England and New York completely independent of oil as a generating source for electricity forever. There is 100 years of natural gas off of our coast, so we are at the front of the pipeline now, and by 2020 we will never again have any need for nuclear or oil-powered electricity in our northeastern region of the country.
But even that is, again, small compared to what we have already been able to enjoy in technology improvements in our consumption of energy.
I would urge us, on a bipartisan basis, to have learned these lessons of the last 25 years, to understand that the biggest decision, the biggest oil strike we made was in each gas tank in America by increasing from 13.5 to 27.5 miles a gallon.
We shouldn't allow SUVs to be regulated as trucks. It is crazy. They are being used as passenger vehicles all across suburban America. Unfortunately, once you can pay $60,000 for one of these vehicles, what do you care if the price of gasoline is $1.75 or $1.90. If you can afford a $60,000 car, you are completely and totally independent of the market in terms of oil, so you have that rising without any regulation at all. None. So the poor, ordinary person has to buy within this framework of passenger vehicles getting 27.5 miles a gallon; meanwhile, the wealthy out in the suburbs are paying $60,000 or $70,000, pretending that it is a truck.
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We are going to have millions of these riding our streets, making us ever more dependent. We have to do something about it. We have to change those regulations. We can't allow these people to flaunt their wealth in ways that make us more dependent.
So, short-term, yes, we need a regional petroleum reserveBernie is rightup in the northeast for New Jersey, New York, and all of New England, those eight States. We are 40, 50, 60 percent dependent upon fuel oil.
The President does have the inherent authority in existing law to put that into effect. He has announced that he will. I think it would be good if Ernie's law passed. I have a piece of legislation, as well. Bob is very interested in the subject and he'll make his presentation.
But, generally speaking, technology is our friend. It is where we are the leader. We may have to mandate it. It is a tough thing to do. But we are now 13 years from seeing any improvement in fuel efficiency, and I would just hate to have my father's conversation in 1976 come back to me as I look at our current over-dependence again, because we put most of our oil into gasoline tanks. That is the sad pogo-like conclusion that you have to reach about the problem that we have recreated for ourselves in the year 2000.
Thank you, Mr. Chairman.
Mr. HYDE. I thank you, Representative Markey.
Page 67 PREV PAGE TOP OF DOC [The prepared statement of Mr. Markey follows:]
PREPARED STATEMENT OF HON. ED MARKEY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MASSACHUSETTS
Mr. Chairman, and Members of the Committee. I want to begin by thanking you for giving me the opportunity to testify at today's hearing.
As I consider the current energy outlook, I am struck by the transformation that has taken place since the early years after I first arrived in Washington. Back then, we had price controls on oil and natural gascontrols which had been in place since the Nixon Administration and which established at least 32 different prices for natural gas and 7 tiers of oil prices. Oil prices were beginning to spike upward from $13 towards a peak of over $37 a barrel. Consumers were about to resume facing gas lines at the pump. We were supposedly running out of natural gas and therefore had to pass a Fuel Use Act barring it from being used for electricity generation. President Carter was calling for a massive multi-billion dollar government investment in synfuels, which he claimed, was essential to meeting our future energy needs. Energy Secretary James Schlesinger was telling us that if we didn't build 1000 nuclear power plants we would be facing blackouts and brownouts across the country. We were going to strip oil from shale in a corner of Colorado that would, in light of the relevant impact upon the environment, be designated a ''National Sacrifice Zone.'' New cars consumed an average of 12 miles per gallon, and Detroit was telling us they just couldn't make them any more energy efficient than the Model A Ford my Dad bought back during the Depression.
Today so much has changed. The concept of oil and gas price controls now seems as distant and dated as polyester leisure suits and avocado green refrigerators. The Carter-era synfuels program that was supposed to lead us out of the world of ever-higher oil prices actually had nothing to do with today's lower prices. In fact, the program is long dead, buried, and largely forgotten. Colorado survived. Moreover, today, we are awash in cheap natural gaswith pipelines coming down from off the coast of Nova Scotia that will transform our energy marketplace in New England. We haven't ordered a single new nuclear powerplant since 1973, but we have met our electricity needs with alternative fuels and by becoming more energy efficient. Today, new cars consume an average of 27 miles per gallon (although Detroit is still telling us they just can't make them any more energy efficient)!
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But, in recent months, the world has again been facing an upward spike in oil prices. And while many observers believe that the current high prices are likely to be much shorter in duration and severity that the huge oil shocks we experienced back in the Seventies, these increased prices have put increased focus on the importance of a sound national energy policy and upon the competitive structure of the domestic oil and gas industries.
Over the course of the past year, the Commerce Committee's Energy and Power Subcommittee, on which I serve, held two hearings on the competitive issues raised by the Exxon-Mobil merger and another hearing on oil price increases in which we examined concentration in the oil industry. The testimony we received at those hearings has clearly indicated a tendency towards greater concentration in the domestic oil industry, a development which merits continued regulatory and Congressional attention. However, our hearings also showed that the Federal Trade Commission has been willing to vigorously examine oil company mergers and take strong legal action pursuant to its authorities under the federal antitrust laws to block anti-competitive mergers or require divestiture where necessary to address competitive problems. In both the Exxon-Mobil, and the BP/Amoco-ARCO cases, the FTC ordered divestiture of certain key assets or, in the BP/Amoco-ARCO case, was willing to block a proposed merger in order to force such divestiture. I would hope that the Committee would support providing increased resources for the FTC so it can continue its ongoing anti-trust work in these markets. For example, the FTC, in its most recent testimony to the Subcommittee, indicated that it is currently providing support to the Attorneys General of several Northeastern states that are currently investigating the increases in home heating oil and diesel fuel prices.
But in addition to focusing on the competitive issues within the industry, policymakers also must focus on assuring that our nation has a coherent national energy policy. In my view, such a policy must include the following elements:
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First, we should immediately reauthorize the President's authorities under the Energy Policy and Conservation Act, which empowers the President to draw down stocks from the Strategic Petroleum Reserve. EPCA is set to expire at the end of this week. Congress should schedule immediate action on the EPCA reauthorization bills before it expiresas the President has requested. I think that it sends a terrible signal to OPEC if, just a few days after the Vienna meeting, the U.S. Congress fails to reauthorize the President's power to deploy the Strategic Petroleum Reserve when and if needed.
Second, we should create a regional refined product reserve in the Northeast in order to better insulate this regionwhich is most dependent on heating oil in the winterfrom sudden, unexpected price shocks. The President has announced his support for such a Reserve, and last week, I sought to attach an amendment to the Oil Price Reduction Act (H.R. 3822), which would have accomplished this objective by amending the Markey-Lent-Moorhead amendment to EPCA to authorize such a regional reserve. Representative Sanders has also introduced a freestanding bill calling for such a Reserve. While enactment of such legislation would be desirable, it is important to recognize that EPCA already provides authority to the President to create a regional reserve.
Third, we should increase our energy efficiency and diversify our fuel supply base. For example, the President and the Vice President have proposed a budget that includes over $1 billion next year to accelerate the research, development, and deployment of alternative and more efficient energy technologies, as well as $4.0 billion in tax incentives over five years to benefit our energy-reliant consumers and businesses. Unfortunately, the Budget Resolution passed by the House last week was silent about these tax incentives.
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Fourth, we should increase our investment in renewables and energy efficiency technologies that help our nation reduce its consumption of fossil fuels. For example, the Administration's budget request includes a proposed $275 million in R&D efforts next year to make offices, homes, and appliances 50% more energy efficient within a decade. People understand what that means for their home heating bill. Overall, meeting this goal would save consumers $11 billion a year in energy costs. Congress should fully fund this program.
Fifth, we must assure that low-income working families get the help they need to reduce their consumption of fossil fuels. Expanding DOE's Weatherization Assistance Program would help low-income households make their homes more energy efficient. Such households are least able to afford high monthly energy costs. This program has already weatherized almost 5 million low-income homes and is saving 3.0 million barrels of oil each year. With funding from DOE and the states, our nation could add more than 150,000 homes to the list in the next yearthereby saving more than an additional 91,000 barrels of oil per year. The Administration's budget request seeks $154 million for this program in FY 2001 and an additional $19 million for the current year in the FY 2000 supplemental spending bill. Congress should approve this request.
Sixth, we should increase automobile fuel efficiency standards, and extend such standards to cover light trucks and sport utility vehicles. If we had adopted 45 mile-per-gallon CAFE fuel standards for cars and 34 mile-per-gallon CAFE standards for Sport Utility Vehicles and light trucks five years ago, we would have saved 237 billion gallons of gas over that time. It is time for us to update CAFE standards, so that our automobile companies will take additional steps to make the vehicles we buy more fuel-efficient.
Page 71 PREV PAGE TOP OF DOC I believe that this package of initiatives would do much to reduce our nation's vulnerability to the type of oil price volatility that we have seen in recent months. I look forward to working with you, Mr. Chairman, and other Members of the Committee, to advance such measures in the coming year.
Mr. HYDE. I totally agree with you. And I get the feeling, from what you are saying, that you are not happy with the so-called ''energy policy'' of our country. And I am not trying to be partisan. I am just saying we all have been asleep, to coin a phrase, while this problem has been festering, and we had warnings many years ago.
We need a concerted effort to formulate a workable energy policy which will use the Government's good offices to foster the development of this technology, if that is what is requiredand I am persuaded it is.
I notice your sparing use of the word ''nuclear.'' And I understand that, except that that should be part of the technology, it would seem to me, too, that we should include in our study, because that has enormous potential, it seems to me, with all its dangers, but that is an idiosyncratic opinion.
But you made a great contribution, as you did, too, Bernie.
Representative Weygand is from the 2nd District of Rhode Island, a graduate of the University of Rhode Island.
Before beginning his career, he was a landscape architect, and he was first elected to the State Legislature in 1984. He was elected Lieutenant Governor in 1992, and first elected to this House in 1996.
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He serves with distinction on the Banking and the Budget Committees.
We are pleased to hear from you, Representative Weygand.
STATEMENT OF HON. BOB WEYGAND, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF RHODE ISLAND
Mr. WEYGAND. Thank you, Mr. Chairman. It is nice to be before the Judiciary Committee. It is unfortunate, sometimes, to be the very last speaker having heard everything that you would like to say already said by my colleagues.
The last three speakers and myself are all from the Northeast, so we have born very similar kinds of problems, but I was intrigued, Mr. Chairman, at your initial comments before Ed Markey spoke about the best way to holistically look at this problem.
There are incremental things that we can do, and I would like to talk about that. Then I want to get something specifically on the table with regard to the Justice Department and the Federal Trade Commission, if I could do so.
I was a small business owner, and one of the things that you learn in business is that the law of supply and demand is the basic premise for most everything that we do. And the law of supply and demand has certainly reared its ugly head this past winter for the Northeast. We saw it with the spiking of the home heating oil prices.
Page 73 PREV PAGE TOP OF DOC But you asked earlier: how do we really take into consideration all of the things that have been said here by Senators Campbell and Murkowski, Ben Gilman, and certainly Bernie Sanders, Ed Markey, and myself?
I think, if you take a look at the whole energy planand remember, and not to be partisan, that only just a year ago there were members in the Republican leadership that wanted to do away with the Department of Energy which would certainly have been a great loss to us now if you had done that. But certainly everyone; the administration and the House and Senate, have been derelict in our duty to make sure that we had truly a state-of-the-art kind of energy policy.
I think the solution comprises a number of components. One is certainly getting OPEC to produce more, because that helps, in terms of supply. Certainly, what Senator Murkowski talks about with regard to domestic production, here is an avenue that we should pursue environmentally-sound domestic production is a way to go.
Alternative sources of energy, like Sable Island, that Ed Markey just talked about a little while ago, alternative sources of energy like natural gas and solar and wind, most definitely we have been derelict in making sure that we have explored more and more of those.
Third, conservation. Ed Markey talks about his Dad's 1936 Model A. This morning, I was almost run over by a 1999 Suburban that was 22 feet long, guzzling nine miles to the gallon, when Mr. Markey's 1936 Model A was doing twelve miles to the gallon. Have we really come that far in 64 years? It seems that today we are still doing the very same things we did in 1972 and 1971 before we had the oil crisis in 1973, 1974, and 1975.
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Have we not learned from those experiences? And what are we doing, as a Congress, to change that?
Lastly, but certainly not least, is the idea of a reserve. This reserve that has been talked about is 570 million barrels, but, Mr. Chairman, it is only filled right now with about 400 million barrels of crude oil, only 400. We are deficient right now in the total supply that is out there.
We also require and request that there be a New England or Northeast reserve so that we can use it to try to, again, balance supply and demand, because a sound energy policy is one of stabilizing the marketplace so that businesses and consumers have a reasonable way to make sure that they have the energy that they need.
But what bothered me most, Mr. Chairman, was what happened this past winter between the month of January and beginning of March, when we saw home heating oil prices in the Northeast spike from about $1, $1.09, $1.10 a gallon to about $2 a gallon. We saw the price in three weeks go up $0.78 a gallon in the Northeast. That same gallon of home heating oil which was coming from the Gulf Coast, domestically produced, most of it, was going to the mid-Atlantic and the Midwest at less than half of that. As a matter of fact, the increased cost to the midwest States was only about $0.10 to $0.14 a gallon for home heating oilsame production cost, same transportation cost, yet going to the Northeast it was $0.78 more a gallon in three weeks, yet going to Chicago, Indiana, and other places it was only about $0.10, $0.12, $0.14, or $0.15 a gallon morenot my numbers, Department of Energy numbers that they released, which is part of my statement. You will see the spiking that occurred right there.
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Some will say that, well, with the transportation cost to the frozen rivers of the Northeast, not enough inventory is available. I would suggest that what Ben Gilman talked about and what other people have talked about with regard to price fixing and price gouging by OPEC happens right here domestically.
So 45 of us back on February 10th wrote a letter to the Justice Department, which I have included as part of my statement. It included Democrats and Republicans, alike. Don Sherwood and I authored the letter. We sent it to the Justice Department. It took them approximately six weeks to finally respond, and their response was, ''We are sending it to the Federal Trade Commission.''
The Federal Trade Commission received it about a week-and-a-half ago, and then they said to us they are going to look into it.
But it would seem to me that if we are really concerned about energy policy, about production, about conservation, about alternative sources of energy, about a reserve, we also must look at the injustice that occurs with price fixing that certainly occurred this past winter.
In New England and the northeast, we have only about six wholesalers that actually deliver home heating oil to the entire northeast.
I am 51 years old, and I remember very vividly back in 1974, 1975, hearing about and seeing on the news oil tankers sitting off the coast of New England, waiting day by day for the price to increase before they brought in the crude oil. We yelled and hollered about it. We changed our energy policy altogether as to what we were going to do in the future.
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The same thing happened this winter in the northeast. The same thing happened, yet we don't hear a lot of hollering about price fixing with the production of oil in our own country.
We can yell about OPEC, we can yell about the foreign countries and what they have done to us over the last two years to reduce the amount of production, but at the same we must be very vigilant about what has happened to the northeast over this past winter.
This committee must act on making sure that there is a fair and open playing field. I think it was Ben Gilman, or maybe it was the chairman earlier that talked about red-lining within different parts of citiesred-lining so that the poor income areas may not be getting the best possible heating oil prices. Well, the same thing happened to States in the northeast this past winter.
It is a travesty to think that, indeed, this continues to go on.
I hope that the committee will look at and require that the Federal Trade Commission and Justice, as part of an overall energy policy, a better way of dealing with price fixing of home heating oil, as well as gasoline.
With that, Mr. Chairman, I thank you very much for allowing this testimony by all of us and certainly look forward to the deliberation by the committee.
Mr. GEKAS [assuming Chair]. We thank the consumer, our colleague. His remarks, of course, will be taken into consideration.
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I was just remarking at a sidebar with the gentleman from Michigan that, indeed, although it is slapping my own back a little bit, the bill that I introduced takes into consideration all of the ideas that have been expressed here today in the form of a formation of ideas for a long-term energy policy, which would take into consideration the conservation, domestic oil drilling, tax credits, looking into price fixing, whatever that might entail in the way you describe itall of these things.
So I am asking you to take a look at the theme of long-term energy policy, number one, and number two, my modest little proposal that could achieve that.
We thank the gentleman.
Mr. WEYGAND. Thank you, Mr. Chairman.
Mr. GEKAS. We are ready for the next panel now, which will consist of the chairman, Mr. Hyde, calling the witnesses.
Chairman HYDE [resuming Chair]. Thank you, Mr. Gekas.
Our next panel consists of two Government officials charged with enforcing our Federal and State antitrust laws.
First, we have Mr. Rich Parker, director of the Bureau of Competition at the Federal Trade Commission. He is a graduate of the University of California Davis and the UCLA Law School. After law school, he clerked for Judge William Byrne of the Central District of California. Before coming to the FTC, he was a partner at the Washington law firm of Olmelvany & Myers. He took his current position last year.
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To introduce the next witness, I will turn to Mr. Gekas.
Mr. GEKAS. Yes, thank you Mr. Chairman.
This is a unique situation that has arisen. The next witness, Attorney General Mike Fisher of the Commonwealth of Pennsylvania was elected to that post in 1996. Since then, he has become well-known among the circles of Members of Congress, especially those in the Judiciary Committee, in the issues of tobacco settlements and others. And I must tell you that he has been a gadfly to me, personally, on this issue and many others, never ceasing to seize the opportunity to contact me, to advise me, and to state his concerns.
That is equally true, then, for the issue at hand. He first got his smattering of law at Georgetown.
Is that familiar to the chairman? Mr. Hyde, he went to Georgetown.
Mr. HYDE. I understand.
Mr. GEKAS. Does that help at all?
Mr. HYDE. Is that the law school or
Mr. GEKAS. Both.
Page 79 PREV PAGE TOP OF DOC Mr. HYDE. Well, yes, the college certainly helps. The law school I am indifferent towards.
Mr. GEKAS. At any rate, he has even an increased sense of comfort now in sitting as a witness.
Then, laterand here's the unique thingMike came to the House of Representatives in the Commonwealth of Pennsylvania, where I had served, and then he graduated or was demoted, depending on the viewpoint, to the Senate of Pennsylvania, where I was already ensconced, and he joined our Judiciary Committee, and we have been working on matters ever since.
This is very unique and emotional, almost, for me and for Mike for him to appear at this juncture in the halls of Congress.
We introduce him to the members of the committee with great pride.
Mr. HYDE. Thank you very much, Mr. Gekas.
First, Mr. Parker.
STATEMENT OF RICH PARKER, DIRECTOR, BUREAU OF COMPETITION, FEDERAL TRADE COMMISSION, WASHINGTON, DC
Page 80 PREV PAGE TOP OF DOC Mr. PARKER. Thank you very much, Mr. Chairman and members of the committee, for asking the Federal Trade Commission to participate in the hearing today.
We are charged with enforcing the Federal antitrust laws, a responsibility that we share with our colleagues at the Department of Justice. Over the last several years, we have spent a lot of time looking at antitrust issues in the energy industry, generally, and the oil industry, in particular.
I can tell you that, in the last two years, fully one-third of our attorney time has been devoted to issues in this industry. It is obvious, given the merger wave in the industry, that a lot of that was devoted to mergers, but we most certainly have been looking at practices, and we are participating with the States in an investigation currently going on of the home heating oil situation in the northeast and elsewhere.
The issue I was asked to address more specifically would be the issue of OPEC. And let me take you through the antitrust issues presented by that cartel.
Looking at the conduct, there is absolutely no question that an agreement on output for the purpose of raising price has been illegal in the United States for 110 years. It is, per se, illegal. It is the kind of conduct that has, from time to time, been prosecuted criminally.
There is also no doubt that the Sherman Act applies extraterritoriallythat is, the fact that these folks meet in Jakarta or in Vienna or other non-U.S. locations is of no moment. The legislation of this Congress and decisions of the Supreme Court make clear that conduct that takes place abroad, agreements that are entered into abroad that are intended to and do have the effect of disturbing competitive conditions in the United States are actionable under the Sherman Act.
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The problem with going after OPEC is not the conduct, it is who is doing it. The problem is that they are sovereign nations, and that runs into several legal doctrines that defeated the one occasion on which this was attempted, that being a suit by the Machinists Union against OPEC back in the late 1970's and early 1980's.
Let me go through those doctrines briefly.
The first is the Foreign Sovereign Immunities Act, legislation passed by this Congress in 1976 which basically gives immunity to foreign governments, against courts exercising jurisdiction over foreign governments except in delineated circumstances.
One of those circumstances is for commercial activities. Unfortunately, the district court for the Central District of California in the Machinist case held that what the OPEC nations were doing may appear to be commercialthat is, they are making output decisionsbut, in fact, they are engaging in a uniquely governmental function which is regulating natural resources, and hence it was held that the commercial activities exception did not apply.
The second relevant doctrine is the Act of State Doctrine, which has been mentioned several times here, and when the Machinist Union case was taken to the ninth circuit, that is what was at issue there. That is what the court applied.
The Act of State Doctrine says no matter if it is commercial activities, no matter if the Foreign Sovereign Immunity Act would allow jurisdiction to be asserted, a court should not put itself in the position of declaring invalidone sovereign should not declare invalid the sovereign act of another nation. That was the holding by the ninth circuit, because they held that, in order to get an injunction against OPEC, they would have to declare that their method of governing output would be invalid under U.S. law, and so it was that they applied the Act of State Doctrine.
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Now, the Supreme Court has not ruled on any case concerning OPEC at all, but the Machinist case most certainly would stand as something that would have to be overcome in any litigation.
My experience, as a practical litigator, also would lead me to point out that, in any litigation against OPEC, there would be serious issues in getting discovery abroad, and one can imagine the complications that might arise in enforcing a judgment or an injunction against that group of sovereign nations.
So let me just summarize quickly that a suit against OPEC would most certainly require one if not more trips to the Supreme Court, with an uncertain conclusion.
Perhaps more importantly, the filing of such a lawsuitindeed, the beginning of such an investigationwould be a consequential act dealing with those countries in a very sensitive part of the world and ought to be undertaken only after a comprehensive analysis by all parties in Government who are concerned with the foreign policy and with the energy policy of the United States.
Thank you very much.
Mr. HYDE. Thank you, Mr. Parker.
[The prepared statement of Mr. Parker follows:]
Page 83 PREV PAGE TOP OF DOCPREPARED STATEMENT OF RICH PARKER(see footnote 1), Director, Bureau of Competition, Federal Trade Commission, Washington, DC
Mr. Chairman and members of the Committee, I am Richard G. Parker, Director of the Federal Trade Commission's Bureau of Competition. I am pleased to appear before you today to present the Commission's testimony concerning the important topic of competitive problems in the oil industry. Competition in the energy sectorparticularly in the petroleum industryis vitally important to the health of the economy of the United States. Antitrust enforcement has an important role to play in ensuring that the industry is, and remains, competitive. Today, we will describe the Commission's recent antitrust enforcement efforts in the oil industry. We will also provide a brief discussion of legal and other complications that would arise in an antitrust lawsuit against the Organization of Petroleum Exporting Countries (''OPEC'').
Consumers have experienced considerable price increases in gasoline and home heating oil in the past year, and domestic refineries have had to bear a large increase in the price of crude oil. The price of imported crude oil rose from $10.92 per barrel in the first quarter of 1999 to over $31.00 in March, 2000. Gasoline prices were $.95 per gallon and heating oil was $.80 per gallon in the first quarter of 1999. One year later, both peaked at over $1.70 (see footnote 2) Increases of this magnitude call for scrutiny by antitrust enforcement authorities to determine whether they result from collusion or exclusion. They also remind us that effective merger enforcement remains critical to preserving competition among domestic and foreign private oil companies.
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The FTC is a law enforcement agency with two distinct but related missions: preserve competition in the marketplace and protect the consumer. The Commission's statutory authority covers a broad spectrum of sectors in the American economy, including the companies that comprise the energy industry and its various components. The Commission's Bureau of Competition enforces two antitrust laws, the FTC Act(see footnote 3) and the Clayton Act.(see footnote 4) The Commission shares jurisdiction with the Department of Justice under section 7 of the Clayton Act to prohibit mergers or acquisitions that may ''substantially lessen competition or tend to create a monopoly.''(see footnote 5) Under section 5 of the FTC Act, the Commission prohibits ''unfair methods of competition'' and ''unfair or deceptive acts or practices.'' The Commission shares its expertise in competition and consumer protection matters by providing advice and guidance to states and other federal regulatory agencies.(see footnote 6)
Consumer protection is the goal of antitrust enforcement across all industries; its importance is particularly clear in the energy industry, where even small price increases can have a direct and lasting impact on the entire economy. Towards that end, the Commission has expended a substantial part of its resources in recent years enforcing antitrust laws in energy industries. In fiscal years 1999 and 2000 to date, the Bureau of Competition spent 115 work years on investigations in energy industries, almost one-third of its total enforcement budget. So far in fiscal 2000, the Bureau has spent over 35 work years on energy related matters.
II. CAUSES OF THE CURRENT PRICE SPIKE
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The recent spike in gas and heating oil prices appears to be caused by several factors, all related to the imbalance of supply and demand. During 1998 and 1999, OPEC countries and several other non-OPEC exporting countries curtailed the supply of crude oil available to the world market. During the same time period, a number of Asian economies began to recover from a regional recession, causing increased demand for petroleum products. The result was that worldwide consumption exceeded production, and inventories were drawn down. The price increase in crude oil caused by the excess of demand over supply also reduced refiners' margins, causing them to cut production and use inventories to meet demand.
To exacerbate the situation, the weather on the East Coast was also unusually severe in January, which had a two-fold effect: it both caused the demand for heating oil to increase, and decreased supply because frozen rivers and high winds delayed product movement. Demand for electric power also increased, causing utilities to turn to distillates as a substitute for interruptible natural gas supplies. In addition, several refinery outages in January contributed further to the supply-demand imbalances.
III. PROTECTING COMPETITION IN THE OIL INDUSTRY
The Commission's responsibility is to prevent anticompetitive mergers and collusive or abusive activities from contributing to price increases in the oil industry. The Commission does this in several different ways. For analytical purposes, it is best to think of the Commission's antitrust enforcement authority as divided into merger and nonmerger sectors. Enforcing the law against anticompetitive mergers prevents the accumulation of unlawful market power. Enforcing the nonmerger provisions of the antitrust laws prevents anticompetitive collusive activities or the acquisition or abuse of market power.
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A. Merger Enforcement
Much of the Commission's experience with enforcing the antitrust laws in energy industries has been in analyzing mergers. Merger enforcement is the first line of defense in protecting a competitive marketplace, because it preserves rivalry that brings lower prices and better services to consumers. The Commission blocks those mergers that increase the likelihood that the merged firm can unilaterally, or in concert with others, increase prices or reduce output or innovation. The Commission has an extensive history of carefully investigating mergers in the energy industries, particularly petroleum. The FTC has challenged mergers in those industries that would be likely to reduce competition, result in higher prices, and injure the economy of the nation or any of its regions.(see footnote 7)
The Commission has been particularly active in the last two years in investigating petroleum mergers due to the ongoing trend of consolidation and concentration in this industry. For example, on February 2, 2000 the Commission voted to challenge the proposed merger of BP/Amoco and ARCO.(see footnote 8) In recent years, the Commission has investigated the mergers of Exxon and Mobil(see footnote 9) and BP and Amoco(see footnote 10) the two largest oil mergers in history-and the combination of the refining and marketing businesses of Shell, Texaco and Star Enterprises to create what was, at the time, the largest refining and marketing company in the United States.(see footnote 11)
Page 87 PREV PAGE TOP OF DOC Our merger review investigations revealed that these transactions threatened competition in local or regional markets. The Commission allowed these mergers to proceed only after demanding significant changes that would fully restore the competition lost as a result of the merger. For example, in the Exxon/Mobil merger review, the Commission ordered divestiture of all Mobil stations from Virginia to New Jersey, and all Exxon stations from New York to Maine, as well as additional retail divestiture in the Southwest, a refinery, and other pipeline and terminal assets. This was the largest divestiture in history.
In BPAmoco, the Commission ordered divestiture in 30 local gasoline markets mostly in the Midwest, and in Shell-Texaco, the Commission preserved competition through divestiture in local gasoline markets and also in refining and pipeline markets.
B. Nonmerger Enforcement
Preventing anticompetitive mergers is not sufficient to protect competition in any industry. Merger enforcement must work in tandem with nonmerger enforcement against illegal monopolies and collusive practices. In the oil industry, monopoly cases are few. While there are certainly relevant antitrust markets where one firm may wield significant market power, most oil industry markets are served by multiple firms.(see footnote 12) Thus, the focus of nonmerger investigation in this industry has been, and likely will remain, on concerted activities that have anticompetitive effects.
(1) Fundamental Problem: OPEC Activity Leading to Higher Prices for Crude Oil
The Committee has expressed interest in whether the Commission believes that OPEC and its members could be liable under U.S. antitrust laws. The oil industry is unique among commercially important global industries in that a large share of the reserves of the base commodity is owned and regulated by sovereign nation-states. These states regard crude oil as their primary (and perhaps only) natural resource and tightly control how that resource is exploited. This fact significantly complicates the application of competitive principles to the global oil industry. Sovereign nations typically enjoy several jurisdictional and substantive defenses to the antitrust laws that are not available to domestic or foreign private companies.(see footnote 13)
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A group of nations holding the largest oil reserves have formed OPEC for purposes of making joint output decisions. The efficiency of the cartel has varied over time. However, OPEC's members recently agreed among themselves to reduce output to a level far short of the amount that would be pumped in a freely competitive market. So far, this agreement has been maintained by those countries. The result is oil prices that substantially exceed the marginal cost of supplying oil. The same activity undertaken by a group of commercial firms would constitute a per se violation of the U.S. antitrust laws.
Is OPEC, because it is composed of sovereign nations, immune from liability under the U.S. antitrust laws? This question raises a number of complex issues related to international jurisdiction, sovereignty, and diplomatic relations. While the Commission does have expertise in analyzing competition in the energy sector, it does not presume to have final authority to provide definitive answers or advice to this Committee about the appropriateness of U.S. antitrust enforcement against OPEC members. That expertise and authority reside in the executive branch, including the Department of Justice and other executive agencies. We strongly recommend that this Committee also confer with those authorities about the legal issues outlined below.
The most significant attempt to enforce the antitrust laws against OPEC occurred in the 1970s in the case of International Association of Machinists (IAM) v. OPEC,(see footnote 14) a case in which a union brought suit against OPEC for allegedly violating section 1 of the Sherman Act(see footnote 15) by fixing the price of gasoline. In IAM, both a federal District Court and the Court of Appeals for the Ninth Circuit declined to apply the antitrust laws against OPEC, but for different reasons.
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(a) Foreign Sovereign Immunity
The District Court held that OPEC was protected by the sovereign immunity doctrine, which holds that each independent sovereign is equal in sovereignty to all other states.(see footnote 16) Thus, the courts of one nation generally have no jurisdiction to entertain suits against another nation. This doctrine was codified by Congress in the Foreign Sovereign Immunities Act of 1976.(see footnote 17) That Act, however, contains an exception for an ''action based upon a commercial activity.''(see footnote 18) A foreign nation is deemed to have waived its immunity when it engages in ''commercial activity.'' However, the District Court held that the OPEC agreement was not commercial activity under the statute because it related to the sovereign's choices about how the natural resources within its control are to be exploited. As the court stated, ''it is clear that the nature of the activity engaged in by each of these OPEC member countries is the establishment by a sovereign state of the terms and conditions for the removal of a prime natural resource to wit, crude oil from its territory.''(see footnote 19) Other courts have agreed that a foreign nation's decisions concerning its natural resources are not subject to the jurisdiction of U.S. courts.(see footnote 20)
(b) Act of State Doctrine
The Court of Appeals affirmed dismissal of the action but declined to reach the sovereign immunity question. Instead, the court relied on the act of state doctrine, which ''declares that a United States court will not adjudicate a politically sensitive dispute which would require the court to judge the legality of the sovereign act of a foreign state.''(see footnote 21) This doctrine is not jurisdictional, but rather prudentialit deems a judicial remedy inappropriate for international comity reasons and due to domestic considerations of separation of powers of co-equal branches of government.(see footnote 22) As the court noted:
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When the courts engage in piecemeal adjudication of the legality of the sovereign acts of states, they risk disruption of our country's international diplomacy. The executive may utilize protocol, economic sanction, compromise, delay, and persuasion to achieve international objectives. Ill-timed judicial decisions challenging the acts of foreign states could nullify these tools and embarrass the United States in the eyes of the world.(see footnote 23)
Thus, the Ninth Circuit declined to adjudicate the supply-restricting actions of OPEC under the antitrust laws.
In the nearly twenty years since the IAM case was decided, there have been no additional antitrust challenges that we know of, either to OPEC's activities or to any similar activities of foreign nations. That does not mean, of course, that the Ninth Circuit's decision is the final word on these issues. The Supreme Court has not directly addressed the issues raised by OPEC's conduct, and a number of these issues are open to dispute. Thus, any potential lawsuit against OPEC and its member nations would implicate a number of difficult legal and practical questions.
Among the complex legal questions presented would be the application of the doctrine of sovereign immunity. An important issue would be whether the conduct of OPEC and its member nations would be considered sovereign acts under the Foreign Sovereign Immunities Act, as they were in IAM, or commercial activities. The dividing line between ''sovereign'' and ''commercial'' activities can be elusive, particularly where, as here, a government's extraction and sale of natural resources from its own territory is concerned. Another issue would be the relevance, if any, of international law regarding sovereign immunities.
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Interpreting the act of state doctrine could be equally difficult. A government challenge could well resolve the separation of powers concerns that underlie the doctrine. Any decision granting an injunction or other remedy would likely require a finding that certain decisions of OPEC member nations were invalid under U.S. law, however, which is the paradigm used for application of the doctrine.(see footnote 24) Little guidance exists as to how to analyze the application of the doctrine under such circumstances.
In addition, it is possible that OPEC and its member nations might not be ''persons'' subject to the antitrust laws. A small number of decisions hold that a foreign state cannot be sued under the antitrust laws for actions taken in its sovereign capacity.(see footnote 25) In IAM, the district court concluded that it was compelled to dismiss the action against the foreign sovereign members of OPEC because they could not be made defendants in an antitrust suit.
A possible enforcement action also raises practical questions as to whether jurisdiction can be obtained over OPEC and its member nations, how a factual investigation could be conducted with respect to documents and witnesses located outside the United States, and the nature and enforceability of any remedy.
Finally, and perhaps most importantly, any enforcement action would raise significant diplomatic considerations. A decision to bring an antitrust case against OPEC would involve not only, and perhaps not even primarily, competition policy, but also defense policy, energy policy, foreign policy, and natural resource issues. In particular, any action taken to weaken a sovereign nation's defenses against judicial oversight of competition lawsuits, for example, would have profound implications for the United States, which places buying and selling restrictions on myriad products. Consequently, any decision to undertake such a challenge ought to be made at the highest levels of the executive branch, based on careful consideration by the Department of Justice and other relevant agencies.
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(2) Potential Collusion to Raise Prices for Refined Products
The fact that application of the U.S. antitrust laws to OPEC's decision to reduce output is problematic does not mean that there is no place for nonmerger antitrust enforcement in this industry. Continued antitrust oversight of these markets is important to ensure that private market participants do not, through anticompetitive conduct, exacerbate conditions caused by OPEC, cold weather, or other factors. For example, private firms' actions to fix prices, reduce supply, or tie products could all be antitrust violations. The potential is always present for producers, refiners, or distributors to take advantage of sudden market imbalances to engage in anticompetitive conduct in the hope that their illegal activities will be lost in all the noise.
A number of State Attorneys General in the Northeast have opened an investigation of the increase in prices for heating oil and diesel fuel in their jurisdictions and have requested that the Federal Trade Commission assist them. We are providing such assistance but I cannot comment further on this law enforcement investigation. The Commission continues to monitor gasoline price increases and competition across the U.S., looking for any indications that the antitrust laws have been violated.
The Commission thanks the Committee for holding this important hearing. The American public needs to know what forces are at work in this vital sector of the economy. Higher prices for products that are critical to our citizens' quality of life and for the efficient functioning of the national economy are a matter of serious concern. The Commission has devoted substantial resources to preserving competition in the oil industry during this period of consolidation through aggressive merger enforcement and nonmerger investigations. The Commission remains committed to taking all appropriate action to challenge private conduct that violates the antitrust laws. But, as we have noted above, antitrust enforcement against OPEC and its members involves considerably more complex questions than comparable actions against private companiesquestions that ultimately would be resolved by other agencies in the executive branch.
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Mr. HYDE. Attorney General Fisher?
STATEMENT OF MIKE FISHER, ATTORNEY GENERAL, COMMONWEALTH OF PENNSYLVANIA, HARRISBURG, PA
Mr. FISHER. Thank you very much, Mr. Chairman and members of the committee. I want to thank my friend of many years, Congressman Gekas, for that warm introduction. I always like to say that, having served for the first time in the Pennsylvania State Senate Judiciary Committee under at that time Chairman Gekas' tutelage, I always say that Congressman Gekas taught me everything that I know. But I appreciate the friendship and his warm words and the chance to be here before this very prestigious committee.
I am joined here today by Jim Donahue, who is the chief of our antitrust section in Pennsylvania.
I want to just talk about a couple things, which I think are pretty typical of the actions that have been taken by some of my colleagues in other States, particularly in the Northeast this winter, from the standpoint which we face as the State attorneys general in our respective States.
Of course, the winter started with a sharp increase in the price of home heating oil, and it has continued to affect consumers this spring. Consumers who struggled all winter with high home heating oil prices, of course, now find themselves dealing with high gasoline prices.
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Let me explain just briefly what our office has done.
Since the middle of January, we have been looking at the rapid increase in heating oil prices and the effect it has been having on Pennsylvania's consumers. We focused our efforts on two fronts. Number one was to ensure that those heating oil dealers who previously had contracted with consumers to provide a supply of heating oil this winter at specific price have done so. In that regard, we have already brought a lawsuit against one Philadelphia area heating oil dealer, who had obtained pre-paid contracts with a number of consumers and then failed and refused to make the deliveries this winter.
Our Bureau of Consumer Protection in Philadelphia heard from numerous consumers who had previously paid for home heating oil during the summer months. They complained that the dealer they had contracted with ignored their request for delivery.
This conduct, in addition to creating a financial hardship, placed the health of many older Pennsylvanians at risk.
After an investigation of the heating oil dealer's alleged practices, we filed that lawsuit, a case which is currently pending in the court of common pleas in Philadelphia.
Our second focus has been to determine whether there was any collusion behind the huge increase in price of heating oil that began around January 15th and continued through about February 15th, and actually spiked at its highest point on February 7th.
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I want to talk briefly today about some of the information that we found, because part of our focus is to determine whether collusion is behind this increase. Because this investigation continues to be ongoing, I cannot share with you at this point all of the facts that we have developed in our investigation, but hope to be able to do that some time in the future.
What we have found, however, is that Pennsylvania and the rest of New England and the mid-Atlantic States, we all get our home heating oil from the same sources. These sources are refineries around Philadelphia, refineries in Northern New Jersey, and then refineries in Louisiana and Texas.
Imported refined product makes its way into Pennsylvania from refineries also in Latin America, the Caribbean, or Europe, and we found that most of this is unloaded either in New York or in Philadelphia.
Western Pennsylvania and western New York are served by refineries in Ohio.
Regardless of the origination, heating oil is then distributed throughout Pennsylvania and throughout most of the northeast by pipeline.
New England is served, in some cases, by barges and tankers, which go to the ports of New Haven, Providence, Boston, and Portland. All of these States, however, compete for the same pool of home heating oil, supply of oil. A disruption in any one of these States has an impact on the rest of the region.
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In the case of heating oil, we saw the rapid increase in price, as I said, hitting its peak on February 7th. These price increases have been caused by a variety of factors. In the case of heating oil, the past two warm winters were actually part of the cost, because it prompted dealers, wholesalers, terminals, and refineries to stock less oil, and in actuality the early warm temperature of this winter caused to make that problem worse.
We have also been looking at whether collusion caused some of the heating oil price increases this past winter.
Of course, underlying prices in heating oil and gasoline are, obviously, the increases of crude that have been brought on by OPEC.
As has been pointed out by Mr Parker, neither the FTC or my office or other attorneys general really can do much in the legal arena against the countries that make up OPEC. Everyone asks how it is possible that a price increase in the Middle East immediately translates into a price increase at the pump or from heating oil delivers by trucks. The answer to that question involves the way in which heating oil and gasoline are priced.
In the case of heating oil, dealers have two choices. One choice is to buy in advanceremember, we are talking about the dealerseither by taking physical possession of oil and storing it, or by buying a futures contract. The other choice is to buy as needed.
If oil is purchased as needed, the price in the northeast is typically based on the spot market price for that particular day. Information about future shortages or supply disruptions affect the spot price, which, in turn, affects the prices at the refinery to terminal, terminal to wholesaler, and wholesaler to retail levels.
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When supplies are low, this price increase is exacerbated because there is no low-cost supply around, which a particular dealer may go to to lure customers.
Similar pricing is used in gasoline. In addition, gasoline retailers have relatively low margins and must pay for the gasoline at the time of delivery; thus, the only way to pay for tomorrow's shipments of gasoline to the dealer is to raise the price on a supply that the dealer got yesterday.
The question can be asked, you know, what can we do about these types of price spikes in the future. From a law enforcement standpoint, we stand ready to vigorously enforce the Federal and State antitrust laws, but doing so, I must warn you, is a massive task for any one State.
We are working collectively with attorneys generals in New Jersey, Rhode Island, Connecticut, and some other States, as well as the FTC, to look at this winter's problems, and will continue to do that in the future.
We would have to review pricing at hundreds of sale points for heating oil and thousands of sale points for gasoline in such investigation.
The more-effective route, as has been said by previous speakers, really is prevention. In that regard, I have some suggestions that are similar to what you have heard. I think clearly we need to increase exploration and production in the United States. The larger the share of total oil production we control, the less vulnerable we become.
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In this regard, I am very pleased to see that Congressman Gekas has introduced a bill that would establish a blue ribbon commission to investigate and study the issues and problems relating to our dependence on foreign sources of energy. I would urge this committee and the Congress to promptly consider that legislation.
Second, we can look at moving as much energy consumption away from oil products and leaving oil products to fuel transportation needs. Congressman Markey talked about electric deregulation. I come from a State, Pennsylvania, that has been in the forefront of electric deregulation. Clearly, however, Pennsylvania and other States would be better off if, in fact, all energy supplies were on the same system.
I would encourage you to look at what Pennsylvania has done, because it has been a model and it has produced tremendous competition and some opportunities for our people.
Third, we can try to address our demand needs for gasoline.
These steps, albeit it steps that will involve some long-term commitments, will, in my opinion, directly address our needs. But, in the meantime, I can assure you that our office, I am sure other attorneys general, will be as vigilant as possible in trying to work with you and trying to meet the demands of our States.
Mr. HYDE. Thank you very much, General Fisher.
[The prepared statement of Mr. Fisher follows:]
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PREPARED STATEMENT OF MIKE FISHER, ATTORNEY GENERAL, COMMONWEALTH OF PENNSYLVANIA, HARRISBURG, PA
Good morning Chairman Hyde and members of the Committee. It is my pleasure to speak today on a situation that has weighed heavily on Pennsylvanians this winter. I commend the Committee for taking action on the issue. What began this winter with a sharp increase in the price of home heating oil has continued to affect consumers into this spring. The consumers who struggled all winter with the high price of keeping their homes warm now find themselves dealing with tremendously high gasoline prices. Allow me to describe to you what my Office has been doing to protect Pennsylvania consumers during this crisis.
Since the middle of January, my Office has been looking at the rapid increase in heating oil prices and the effect it is having on consumers. My Office has focused its efforts on two fronts. Number one is to ensure that those heating oil dealers who have contracted with consumers to provide a supply of heating oil this winter at a specific price have done so. In that regard, we have already brought a lawsuit against one Philadelphia area heating oil dealer who had obtained pre-paid contracts with a number of consumers and failed to make the appropriate deliveries. Our Bureau of Consumer Protection office in Philadelphia heard from 12 consumers who had previously paid for heating oil during the summer months. They complained that the dealer they had contracted with ignored their requests to deliver the designated contracted amounts of oil, forcing many of them to look elsewhere for whatever oil they could get and at whatever price. This conduct, in addition to creating a financial hardship, placed the health of many older consumers at risk. After an investigation of the heating oil dealer's alleged practices, our Office filed a lawsuit to halt its business operations and to seek relief for consumers harmed by the failure to abide by its contracts. That action is pending in the local courts. We also have a number of complaints about other heating oil dealers which we are investigating.
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Our second focus has been to determine whether there was collusion behind the recent huge increase in the price of heating oil that began around January 15 and continued through about February 15. I will talk briefly today about some of the information we have found. Because part of our focus is to determine whether collusion is behind this increase and because this investigation is ongoing, I cannot comment at this time on the actual future investigative steps we will take.
Pennsylvania and the rest of the New England and Mid-Atlantic states get their heating oil from the same sources. Those sources are the refineries around Philadelphia, in Northern New Jersey and in Louisiana and Texas. Imported, refined product makes its way into Pennsylvania from refineries in Latin America, the Caribbean or Europe and is unloaded either in New York or in Philadelphia. Western Pennsylvania and Western New York are also served by refineries in Ohio. Regardless of origination, heating oil is distributed throughout most of Pennsylvania by pipeline. New Jersey and New York are also served by pipelines. New England is served by barges and tankers which go to the ports of New Haven, Providence, Boston and Portland. All these states compete for the same supply of oil. A disruption in any of these states has an impact in the rest of the region. In the case of heating oil, we saw a rapid increase in price between January 15 and February 15 with prices peaking around February 7. More recent has been the significant increase in gasoline prices.
These price increases have been caused by a variety of factors. In the case of heating oil, the past two years warm weather prompted dealers, wholesalers, terminals and refineries to stock less oil. We have also been looking at whether collusion caused some of the heating price increase this past winter. Of course, underlying the increases in heating oil and gasoline are increases in the crude oil price caused by OPEC's reduction of production over the past year.
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As it has been pointed out, there is little the FTC or my Office can do in the legal arena against the countries that make up OPEC. Everyone asks how is it possible that a price increase in the Middle East immediately translates into a price increase at the pump or from heating oil delivery trucks. The answer to that question involves the way in which heating oil and gasoline are priced. In the case of heating oil, dealers have two choices. One choice is to buy it in advance, either by taking physical possession of oil and storing it or by buying a futures contract. The other choice is to buy it as needed. If oil is purchased as needed, the price in the Northeast is typically based on the spot market price that day. Information about future shortages or supply disruptions affect the spot price which, in turn, affects the prices at the refinery to terminal, terminal to wholesaler and wholesaler to retailer levels. When supplies are low, this price increase is exacerbated because there is no low cost supply around which a particular dealer may use to lure new customers. Similar pricing is used in gasoline. In addition, gasoline retailers have relatively low margins and must pay for their gasoline at the time of delivery. Thus, the only way to pay for tomorrow's shipments of gasoline is to raise the price on the supply a dealer got yesterday.
The question can be asked what can we do about these types of price spikes in the future? From a law enforcement standpoint, we stand ready to vigorously enforce the federal antitrust laws, but doing so is a massive task. We would have to review pricing at hundreds of sale points for heating oil and thousands of sale points for gasoline in such an investigation. The more effective route may be prevention. In that regard, I have some suggestions. First, we need to increase exploration and production in the United States. The larger the share of total oil production we control, the less vulnerable we are to the whim of foreign producers. In this regard, I am pleased to see that Congressman Gekas has introduced a bill which would establish a Blue Ribbon Commission to investigate and study the issues and problems relating to our dependence on foreign sources of energy. I would urge the prompt consideration of this legislation.
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Second, we can look at moving as much energy consumption away from oil products and leaving oil products to fuel transportation needs. Third, we can try to address our demand needs for gasoline. These steps, albeit steps that will involve some long-term commitments, will most directly address our needs.
Again, I thank the Committee for inviting me here this morning, and I would be happy to answer any questions the Members may have.
Mr. HYDE. Mr. Conyers?
Mr. CONYERS. I want to thank the witnesses. I appreciate the testimony.
Have you, attorney general, had any experience with the fact that there might be environmental degradation if we increase domestic exploration a great deal?
Mr. FISHER. Well, it is an issue. Pennsylvania has had some reputation in the past as an oil and gas producing State. We don't do much any more.
I had the opportunity to chair the Senate Environmental Resources and Energy Committee for ten years as a member of the Pennsylvania State Senate, so I dealt with a number of these issues, and those issues are there. But, I think, as we often do and have done, I think we frequently, as a Government and as a society, sometimes go too far in one direction.
Page 103 PREV PAGE TOP OF DOC I think today we may have gone a little bit too far in the direction of discouraging domestic oil production, whether it be in my State or in other States across this country.
I think we can do it.
Mr. CONYERS. Do you know anything about the Alaska National Wildlife Refuge problem?
Mr. FISHER. I am familiar with it.
Mr. CONYERS. Well, it seems that they clash. That is what we are trying to figure out. You know, it is easy to say, ''Let us explore and produce more,'' but we are running into some potentially big problems in that area.
Mr. FISHER. We are, but I think we need to recognizeand this winter and I am sure what the balance of this year will show is that we have to more closely examine those policies, whether it be in a State like Pennsylvania to encourage some more domestic production, or whether it be in Alaska and other places where we do have some supplies, where we become less dependent on foreign imports.
Mr. CONYERS. Okay. Thanks.
We are happy to have the FTC here today. What is the connection between mergers and the current oil crisis, if any?
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Mr. PARKER. The answer to the question is that I believe and certainly hope none. We have spent a lot of time looking at these mergers and would not have approved any of them unless we believedand we do believethat we had achieved divestiture sufficient to preserve competition.
So it was in Exxon/Mobile we got several billion dollars worth of divestitures, including a sweep of Exxon or Mobile stations between Virginia and the Canadian border, as well as a sweep of Exxon out of California, and new purchasers will be coming in there.
So we would not have passed on these mergers had we not believed that we achieved divestiture sufficient to preserve competition, while at the same time attaining whatever efficiencies might be available from those mergers.
Mr. CONYERS. Well, there are still others that are still watching and examining this very carefully, because it might start out that way, but other results may show you that that what you originally thought could avert oil pricing and collusive activity might happen anyway. So I hope you won't relax your vigilance because it seemed okay at the time of approval.
Mr. PARKER. No relaxation, sir. This is an extremely important area, and we spent a lot of resources on it and will continue to do that.
Mr. CONYERS. Now, in the 19951997 period, when the cost of finding oil increased, is it correct that oil companies resorted to mergers to reduce their cost, but increased at the pumpthe price increased at the pump at the same time. Is that a sorry episode in this whole examination of the oil industry?
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Mr. PARKER. I think that it is true that the mergers were, at least in part, done to reduce production cost, but I think that the cost of prices going up at the pump I believe were a result of a lot of complex economic forces, and I do not believe they were the result of those mergers. No.
Mr. CONYERS. Well, what about the refineries' own practice of zone pricing?
Mr. PARKER. Zone pricinglet me just say this. We have ongoing investigations going in the home heating area and one other, and so I don't want to talk specifically about that. Let me just address where they might
Mr. CONYERS. But they are being investigated as we speak?
Mr. PARKER. Right. And where they might run afoul of the law. If they are entered into collusively, you could have a section one violation. They could also raise issues under the Robinson/Patman Act. I would note, also, that one of the reasons we achieved huge divestitures in the northeast in the Exxon/Mobile matter was because of that practice and our belief that it limited competition and it limited entry.
So, without commenting on current investigations, I would say that there are antitrust issues raised by zone pricing. Yes, sir.
Mr. CONYERS. Well, I would like to see FTC use all of its resources and pursue these inquiries with all the vigor that you can, because this is a huge area of antitrust over which you have jurisdiction, and it is very important that that part of the Bureau of Competition is really watching and giving us the best investigation and prosecution where necessary that you can.
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I thank you very much.
Mr. PARKER. May I add one point? I would add that we are most certainly doing that, and I would add that we are very much helped in our investigations by Attorney General Fisher and his colleagues, as well. We work very well with the States in order to provide consumers with vigorous antitrust enforcement, and so we have a lot of very good people looking at the issues that you have identified, sir.
Mr. CONYERS. Thank you.
Mr. HYDE. Thank you very much.
Mr. GEKAS. Yes. Thank you, Mr. Chairman.
Mr. Parker, I was struck by your testimony about how the OPEC countries are inviolate or unreachable by our antitrust endeavors, and for the first time it really came home to me through your testimonyso I have to thank you for itthat it is the national government in those areas which is operating, which is the oil producer or the oil magnate, as it were, itself.
Mr. PARKER. Yes.
Page 107 PREV PAGE TOP OF DOC Mr. GEKAS. So implied in that is that, if any one of those countries had oil industries underneath them which themselves operated, that they might be reachable; is that correct? Private oil industries?
Mr. PARKER. If private companies were engaging in this conduct, they would be a per se violation of the antitrust laws. And you are quite rightthe problem with going after OPEC is not the antitrust laws, themselves; it is the fact that the people who are engaging in the conduct are governments.
Recall that these governments' economies begin and end with oil, and that really is what the government does, and that is why I think it is a unique industry in that respect, but that creates huge legal problems under our system.
Mr. GEKAS. But then the subsidiary problem that I see is I thought that there were some non-OPEC entities that would join with the prices set by OPEC, not a part of OPEC. Are they, too, national governments? Is the Mexico quotient or the Venezuela quotient or even the Alaska quotient, are they in the same barrel? That is a way to say itin the same barrel as the OPEC countries from the standpoint of reachability?
Mr. PARKER. That is an excellent question.
The OPEC hangers-on, I believe, are Mexico, Norway, and Russia, who are not OPEC members but who do get involved and sit at the table and do get involved in these agreements, as I understand it. They are not reachable.
Page 108 PREV PAGE TOP OF DOC If, however, a private company came to that table or companies and agreed to that price or agreed on output with them, they would be reachable.
Let me make a distinction. If OPEC raises the price by X percent and a private company sees that price and, without agreeing, matches it, that would not be an antitrust violation because they have not agreed, they have decided unilaterally. But let me assure you that if a private company were engaging in this activity it would be a very serious matter and, as I said, they would be in per se violation of the antitrust law. No question about it.
Mr. GEKAS. Could I ask the Chair for one additional minute so I could complete my inquiry? Thank you.
General Fisher, outstanding in your remarks was the theme of low suppliesthat is, a lot of this is exacerbated right away because of the absence of supplies. Are we talking about lack of supplies or low supplies at the dealer level or at the origin in Louisiana or where? Or is it all over that the low supplies exacerbate the problem?
Is it possible that there would be supplies, adequate supplies in Louisiana, but the dealer who deals directly with Pennsylvania and Connecticut would still have low supplies?
Mr. FISHER. Well, you had the crude production that was down. That was the beginning of it. But then the purchases, either for storageand, as I say, the wholesalers, who are the ones who deliver to the dealers, the wholesalers would purchase it either for storage at a facility that they owned or would purchase a futures contractin other words, the ability to buy it. Just like the homeowner had the ability to get it from the dealer at, say, $0.75 a gallon, the dealer or the wholesaler would have a contract to buy it at a barrel price.
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What happened is one of the problems we saw was, with the unusually warm winters the prior two winters, everyone guessed the wrong way and didn't stock up and didn't basically order the refiners to process the crude into home heating oil or diesel fuel in a way that the supplies would be where needed.
So when the cold weather cameand, as I say, we are looking at whether or not there were some other factors besides cold winterin other words, an attempt to further suppress that supply, plus some trades at the Mercantile Exchange in New York, everyone was caught short, not only the little person who delivered the heating oil in his or her truck, but the wholesaler who delivered it to them.
Mr. GEKAS. Thank you very much.
I thank the Chair for indulging me.
Mr. HYDE. Mr. Scott?
Mr. SCOTT. Thank you, Mr. Chairman.
General Fisher, did you want to expand on that last comment?
Mr. FISHER. No, thank you.
Mr. SCOTT. Okay.
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Mr. Parker, you have indicated that the Federal Trade Commission can't do much about foreign nations conspiring to raise prices, but there are other agencies in government that can intervene; is that correct?
Mr. PARKER. I would say that any plaintiff, whether it was us or Justice, would face those same barriers.
Mr. SCOTT. How about the State Department?
Mr. PARKER. The State Department, obviously, could pursue diplomatic pursuits. But, in terms of litigation, those doctrines would apply to any plaintiff.
Mr. SCOTT. But the State Department diplomatic route would be the route to take, so we are not totally powerless.
Mr. PARKER. I would think that, yes, that that would be a route that could be taken. Yes.
Mr. SCOTT. Now, are you aware of any companies that have gone out of business as a result in the recent spike in oil prices?
Mr. PARKER. No, other than I heard the testimony this morning about truckers suffering, and I am sure there is a lot of businesses who have suffered as a result of this, which is why this is one very serious matter and we are taking it very seriously.
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Mr. SCOTT. Now, violations of antitrust statutes carry troubled damages; is that right?
Mr. PARKER. In a private case they do. You can get injunctive relief. A private plaintiff can get troubled damages. A government can get disgorgement of ill-gotten gains and perhaps civil penalties, as well as the criminal sanction for certain types of cartel activity.
Mr. SCOTT. Have you found any potential defendants for those kinds of sanctions other than foreign governments?
Mr. PARKER. In the OPEC situationlooking at the OPEC conspiracy, the answer is no. Again, I am not commenting on any ongoing investigation beyond that, but, as to what OPEC is
Mr. SCOTT. Are you suggesting that there are ongoing investigations into this matter?
Mr. PARKER. There are ongoing investigations, as I said, into the price spikes in the United States, not into OPEC's activities.
Mr. SCOTT. Okay. Now, we heard from the gentleman from Rhode Island that he suspects that there may be some domestic price fixing going on. Are you looking at that?
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Mr. PARKER. If there is domestic price fixing, the States and the FTC will uncover it. That is our job, we intend to do it.
Mr. SCOTT. I know you are going to be a little bit evasive as to what you are looking at, but can you say whether that is an area that you are actively looking at now?
Mr. PARKER. I can say that whether the price spikes in the Northeast were the result of collusive activity is an area that we are looking at. Yes, sir.
Mr. SCOTT. Okay. General Fisher, you indicated that some of the local oil delivery companies had promised to deliver at certain prices and we not following through. Did the purchasers in that situation agree and promise to buy a certain amount of oil?
Mr. FISHER. Well, what they would do, Congressman, is perhaps last summer you would agree to, say, pay your local dealer $250 for a supply of home heating oil at a certain number of gallons for that $250 come winter, and you already paid the money at a price per gallon. Once winter came, we had numerous complaints in the Philadelphia area that the dealers just said, ''We are not going to deliver,'' because the cost that they were paying was sometimes twice what they had been paid for it, and some of them just chose that they were going to, you know, obviously face any litigation, and we have filed that litigation.
So people who already paid, say, $250 for a supply had to go buy it somewhere else, if they could get it, at, say, $500.
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Mr. SCOTT. Are those companies still in business?
Mr. FISHER. They are still in business, but, you know, obviously, some of them will have a difficult time meeting the demands that they have had, and, obviously, we are going to continue pursuing our case.
I would suspect that there will be fewer people in the home heating business next winter than there were this current winter.
Mr. SCOTT. That is after you finish with them?
Mr. FISHER. I just think that there is a numberwhat you are talking about is probably a lot of small companies. You are talking about small companies that probably couldn't withstand the significant losses that would occur in one particular winter.
Mr. SCOTT. Now, do they have the ability to buy futures to protect themselves from this?
Mr. FISHER. They do, but what we found, at least in Pennsylvania, is most of them gambled the wrong way. They didn't want to get stuck with an over-supply that their consumers weren't buying, so they didn't buy. And then, when the shortage came and the cold weather came, the price at which they could purchase it exceeded their ability to pay.
Page 114 PREV PAGE TOP OF DOC Mr. HYDE. The gentelady from Texas.
Ms. JACKSON LEE. Mr. Chairman, I thank you very much. I thank you for this very important hearing.
Let me say to both Mr. Parker and Mr. Fisher, I agree with much of what you have said. We find, however, that we come from different regions and we begin talking that way. I come from Texas, and you realize that sometimes the dialogue differs. But I think this hearing is important because this is a national issue which we must confront.
I am going to make a few comments and then ask questions. I totally agree that one of the errors of what we have not done here in the United States, Republicans or Democrats, is an effective domestic energy policy. Having worked in oil and gas law for a good 17 years, we have suffered because, if any of you recall the 1970's and early 1980's of curtailment, the curtailment issue and take or pay, it was almost the same thing with gas. We failed to buy up what we needed, or we had too much, and so we curtailed, and then we had a situation where we had signed a lot of agreements that you took what you ordered and we had too much to take and not enough money to pay for it in the gas industry.
So we find ourselves somewhat in similar conditions, but might I note that we should at least acknowledge the good news that OPEC will be putting out about 1.7 million barrels of oil, and that should get us up to about 2.8, and, as well, see a decrease around October to the price per gallon, $1.36 and going down. I think that should be noted as good news that we at least have a policy that worked with OPEC and brought about some resolution.
Page 115 PREV PAGE TOP OF DOC But the question comes as to what we do now, and so I would like to pose some questions, in light of this whole concern of domestic production.
Might I, Mr. Parker, directly ask you to officially, even though you may have some underlying investigations that you might not be able to comment on, I want to officially request that you look into any price fixing that may be going on at the pump. I think it is extremely important. It impacts truckers, our workers, our business operators, along with just our day-to-day civilians who are trying to get back and forth, and certainly those who are going to be taking their youngsters on their summer vacations this summer. I would be interested in whether or not that is on your agenda.
But I would like to hear your responsesand maybe this would be for Mr. Fisherabout what we do about domestic production. You may not view yourself as an oil expert, but, with the conflicting very important concerns about the environment and offshore production, where do we go for domestic production. And then your thoughts about ensuring that we fill up the strategic petroleum reserve, because we understand that it is half filled. How do we ensure that this happens? Would that have a positive effect on eastern States, as it would midwestern States, as it would southern oil-producing States like Louisiana and Texas?
If you would, I would yield to you at this point.
Mr. PARKER. I don't hold myself out as much of an expert on some of the more national and international supply issues, but let me just say that I think it is important that we look at where we can produce oil products and produce them not only in a cost-efficient but in an environmentally-sound basis.
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You know, I have said and I continue to believe that perhaps the petroleum industry hasn't pushed as hard recently, particularly in the last decade, to really go after that production because the price was suppressed. I just wonder, and I suspect that perhaps, as now prices have increased on the world market, that you'll see more initiatives coming forth.
I think that is good. That is the economy in which we live in. But I think we do have to reevaluate some of the environmental requirements that are in place.
I know in my own State, although it wouldn't be a big producer in the overall, it could produce some oil and natural gas for spot markets that could help in some difficult times like we have now.
So I think a total reevaluation is needed, while at the same time recognizing that we have the environment that we need to protect.
Ms. JACKSON LEE. Well, I agree with you, and I think this may be the time to call, even though about a year or two ago there were some efforts to dismantle the Department of Energy, I think we would do better to refine its responsibilities and have it be at the fore of a domestic energy policy.
This may be the time for a national task force that includes consuming States, but you indicated that you all might produce some, as wellproducing States in a realthere are a lot of advocacy groups, I realize, that represent the oil industry, but I am talking about those who directly have responsibility to the citizens, and begin to structure and advise on a domestic energy policy that we all could live with.
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We keep talking about it. It has been talked about through the 1970's, the 1980's, and every time we are at the pumps, but we never get a complete answer.
Mr. Chairman, I would appreciate it if Mr. Parker could answer that last question about my interest in some activities at the pump and whether prices are going up just at the pump, not based upon the fact that the barrels are down, and an investigation on that.
Mr. HYDE. The gentlelady's time has expired, and we have Mr. Goodlatte, and we expect a vote imminently. With that information, if the gentlelady wishes to ask another question?
Ms. JACKSON LEE. No, I don't. I just would like Mr. Parker to answer the question. I don't need to ask another question. I think he is ready to answer it, or at least advise me.
Mr. HYDE. Very well.
Ms. JACKSON LEE. Thank you, Mr. Chairman.
Mr. PARKER. Without commenting on an ongoing investigation, I can't talk specifically about it, but I can tell you that, in response to your question, we don't bring anything to the table on the environmental drilling balance, but we do believe in markets, and that if there is price fixing at the pump or any effort to undermine a competitive condition in the oil industry, that is something in which we would take a great interest.
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Ms. JACKSON LEE. Thank you very much.
Thank you, Mr. Chairman.
Mr. HYDE. You bet.
The gentleman from Virginia.
Mr. GOODLATTE. Thank you, Mr. Chairman.
In light of the fact we have a vote, I will be brief.
Mr. Parker, I noted that, when these prices started spiking up several weeks ago, that diesel fuel increases preceded the gas prices. Do you know why that was?
Mr. PARKER. I don't have any information on that. No, I do not. These are very complex economics in this area, and our objective is to look through it and to see if there was anything caused by a disruption in competitive forces, but I do not have an answer to your question.
Mr. GOODLATTE. I started hearing from truckers long before I started hearing from automobile drivers, and I noticed, myself, that, for a period of time, diesel fuel was quite a bit more expensive.
Page 119 PREV PAGE TOP OF DOC Could you look into that and let the committee know what you find about the reason for that?
Mr. FISHER. I think I just would like to comment.
One of the potential reasons for thatwe saw that in the Northeastis that the products diesel fuel and home heating oil are essentially the same thing, and it was that area where the shortage existed, which probably impacted the price of diesel fuel quicker than it did on gasoline.
Mr. GOODLATTE. Including in other parts of the country, because I am in Virginia?
Mr. FISHER. Including other parts of the country.
Mr. GOODLATTE. Okay. Thank you.
Is there any sign, Mr. Parker, that, as a result of the increased prices, that consumption is declining to match? Are the laws of supply and demand working here?
Mr. PARKER. I don't have specific information on that, although I have certainly seen public reports on that suggesting that is true. And I would also say that there has been a decline in consumption on people who simply can't afford heating oil in a way that is particularly troublesome.
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Mr. GOODLATTE. Attorney General Fisher, do you want to add anything to that?
Mr. FISHER. No, sir.
Mr. GOODLATTE. Let me ask you this. You were, in response to the gentlewoman from Texas' question, indicating it was your hope that domestic oil production would increase as a result of the higher prices making it more attractive to reopen wells and drill new wells and so on. Do either of you have any signs that that kind of activity is taking place?
Mr. FISHER. I think it is too early to see whether or not that has taken or will take place, but, as I say, I just wonder whether or not the higher price for the product might not also result in some higher production, and that sounds like economic rules that I understand in this country, and it will probably be part of what you look at here.
Mr. HYDE. The Chair would like to announce there is a vote on. We will go over and vote and then return, so we may finish with the panel. We won't recess for lunch, so we will be right back.
If Mr. Goodlatte wishes to persist in asking General Fisher or Mr. Parker questions, he is free to do so.
Mr. GOODLATTE. Mr. Chairman, I thank you. I have finished my questions.
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Mr. HYDE. Wonderful. We will return as promptly as we can after the vote. This panel, of course, is free to go. Thank you very much for your contribution.
Mr. HYDE. The committee will come to order.
Our third panel consists of four private witnesses who will tell us about the effects of high oil prices across the country.
First we have Mr. Todd Spencer, executive vice president of the Owner-Operator Independent Drivers Association. He began his career as a truck driver in 1976, when he bought his own rig. He went to work for the Association in 1981 as editor of its magazine. He took his current position in 1992.
Next we have Ms. Susan Pikrallidas, the vice president of public and government relations of the American Automobile Association. She is a graduate of Gustavas Adolphus College and Georgetown Law School. She worked 5 years in the House, first for Congressman Wiley Mayne and then for the House Foreign Affairs Committee. After leaving, she joined AAA, where she has been since that time.
Next we have Mr. Larry Chretien, the executive director of the Boston Oil Consumers Alliance. He holds a master's degree in economic policy from Northeastern University and was a city council member in Quincy, Massachusetts, and then served as the energy director for Quincy Community Action Programs. He took his current position last October.
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Finally, we have Mr. James Love, an economist with the Center for the Study of Responsive Law. Mr. Love was educated at Harvard and Princeton. He has worked as an economist at the Frank Russell Company and taught at Rutgers and Princeton. He also spends substantial time in Alaska, giving him knowledge of Alaskan oil production issues.
We welcome you all.
We will start with you, Mr. Spencer.
STATEMENT OF TODD SPENCER, EXECUTIVE VICE PRESIDENT, OWNER-OPERATOR INDEPENDENT DRIVERS ASSOCIATION, GRAIN VALLEY, MO
Mr. SPENCER. Thank you, Mr. Chairman, members of the committee. We are thrilled to be here today to participate and let you know that skyrocketing cost of diesel fuel and the inability of small business truckers to pass on these costs is causing financial ruin throughout the trucking industry.
Small business truckers, those who own six or fewer trucks, make up 70 percent of the trucking industry. Under present circumstances, most are operating at a loss. In recent weeks, many small business truckers have simply gone out of business, with thousands more soon to follow.
The problem of truckers has begun to show up in other areas of the economy, as well. Truckers are missing insurance payments and not making their truck payments. Truckers are turning their trucks in to truck dealerships and finance companies in record numbers. No matter how many miles they drive or how many hours they work, the money to offset higher fuel costs just isn't there.
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This committee held a hearing with drivers that worked at container ports just days ago. Their situation is the same as virtually every other owner-operator. They have no direct control over the rates they are paid or bargaining leverage to increase their rates. The only option they have is to completely withhold their services, which hurts them and the surrounding communities. It doesn't resolve the problem, either, because steamship lines just go find another port where drivers are slightly less frustrated.
Our organization has a member that is in a position to negotiate those rates. Shippers among the Fortune 500 companies tell him, ''We are already paying a surcharge to the ship lines and to the railroads. There is nothing left for you and for the truckers.''
Unless something is done, and done quickly, we expect to see disruptions in transportation services. Truckers are angry with OPEC actions. They are equally angry at domestic oil interests that have allowed oil inventories to reach record lows. We can talk the politics of oil for a long time, but small business truckers will be going out of business at an alarming rate while we do that. We need relief right now.
Relief from fuel taxes is an option, but it may not be the best option. Federal fuel taxes go into the highway trust fund to build and maintain roads. That is important. And whether you are talking about a cut of 4.3 cents per gallon or the full 24.3 cents per gallon Federal tax that truckers pay, both fall far short of offsetting the nearly 50 cent increase in diesel fuel prices.
Having said that, I would also add that truckers will welcome relief, no matter how it comes, through taxes or something else. The something else that we have in mind is we believe Congress should create a mandatory fuel surcharge program to be imposed by motor carriers, brokers, and freight forwarders that takes effect when there are sharp increases in fuel prices, is sufficient to offset the higher prices, and is automatically passed through to the people that actually pay for the fuel.
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This is a much-needed short-term solution, but it would also be a long-term solution that would respond to unpredictable fuel prices in the future.
Second, we are asking for a government investigation into the destructive and predatory rate-making processes raging through the trucking industry. If drivers were properly compensated for their cost, this fuel crisis would be a mere bump in the road.
Two weeks ago, we held a rally on the mall to bring attention to this problem. The event was covered by CSPAN. One member wrote us after watching the event. He said,
''Thank you and OOIDA and the drivers that went to the Capital. Had I been aware of the gathering sooner, I would have joined, as I was on my way home with a load from the Chicago area. I had just completed 54 days on the road, trying to make up for lost revenue because of the rising cost of fuel, all for naught. If I break even, I will be lucky.
''About 45 minutes before CSPAN began the live coverage from the Mall, I called the finance company to tell them I could no longer afford my payments and to find out where to turn my equipment in. The person I needed to speak with was busy, so I left a message. Then I sat down in front of the television. I don't often watch CSPAN because I have become disillusioned with my Government.
''Well, after 30 minutes of listening to you and the legislative representatives speak, my eyes were starting to water, and it was getting hard to swallow. I was starting to feel that maybe someone was trying to help.
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''As your rally was breaking up, my phone rang. It was the head of the collection department. She presented me with a couple of options, but now there was a new fire burning within me. You and the Members of Congress gave me hope for the future.
''I told the finance company I wanted to keep my truck and trailer rolling and to continue being an asset to my country.''
Let us reward that hope with the appropriate solution.
Thank you for the opportunity to be here today.
[The prepared statement of Mr. Spencer follows:]
PREPARED STATEMENT OF TODD SPENCER, EXECUTIVE VICE PRESIDENT, OWNER-OPERATOR INDEPENDENT DRIVERS ASSOCIATION, GRAIN VALLEY, MO
Mr. Chairman, Ranking Member Conyers, and members of the committee: Thank you for the opportunity to describe to you the problems that this fuel crisis is creating for the trucking industry and particularly small business truckers.
Simply put, the skyrocketing cost of diesel fuel, and the inability of small busi ness truckers to pass on these increased costs to their customers, is causing financial rain throughout the industry. Small business truckers, those who own 6 or fewer trucks, make up 70% of the trucking industry. They are paying hundreds of dollars more a week in fuel prices than they did last fall. Owner-operators and small business truckers earn an average income of $35,000 per year and can ill afford these rapidly rising fuel costs. Under present circumstances, it is very difficult for most truckers to break even, and many are operating at a loss. In recent weeks, many small business truckers have simply gone out of business, with thousands more approaching financial ruin. Unless something is done, those hundreds will turn into thousands, and the entire country will face a real crisis. Many members have told us that when they lose their business, they are losing everything they have worked for.
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As you can see from the graph in the first attachment to my testimony, as fuel costs go up, a trucker's net income goes down.
The effects of the problems of truckers has begun to show up in other areas of the economy. Truckers are missing their insurance payments and not making their truck payments. Truckers are taming their trucks back into truck dealers in record numbers. With a glut in the used track market, trackers are only getting cents on the dollar for the equity they thought they had built up in their trucks. This means that those who turn back their trucks to the finance company carry large debts with them as they exit the business. According to an article in the Arkansas Democrat-Gazette on March 26, truck finance companies have seen a record number of delinquencies in the last two months. With your permission, Mr. Chairman, I would like to submit this article for the record.
This article also provides several good illustrations of how the fuel crisis is hurting truckers: A Mr. Westmark tells how he is paid by the mile, but that his pay hasn't changed despite the increase in fuel prices. ''The $3,000 monthly payments on his equipment didn't change either. Currently, Mr. Westmark travels about 4,000 miles each week, the maximum allowed by law. Some drivers say that they have to drive more just to make ends meet. Staying on the road all the time is the only way Mr. Westmark can make enough to survive.'' ''I live on the road,'' he said. ''I have no personal life.''
A Mr. Dockett has a contract to carry freiRlit for Dart Transit Inc. of Egan, Minnesota. ''The company pays him 82 cents for each mile he drives. From that he has to pay all his expenses, including fuel, he said. The company didn't increase his pay then the price of diesel increased, he said. He has found other ways to make ends meet. He no longer take vacations and has delayed any major purchases, he said.'' ''I have to keep driving,'' Dockett, 42, said. ''What else can I do?''
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''Companies with small fleets face the same problem. Tradewinds Transportation Inc., of Star City in Lincoln County, which operates 10 trucks, struggles just to pay its monthly bills, said Randy Harrison, vice president of the company.'' ''We've got the business,'' Harrison said. ''The problem is the fuel.'' ''Harrison and his son, Doug, started the business in August when fuel was cheap. They invested almost $1 million in equipment and signed contracts to carry freight at a set rate. Then the price of fuel started going up. He hasn't been able to pass along the extra cost to customers, he said, so his company has been absorbing the expense. He can't do that much longer if the price continues to rise, he said.'' ''Shutting down the business isn't an option, he said. The company can't sell its equipment for enough to settle its debts.'' ''We have to stay in, '' Harrison said. ''It's going to be tough but we don't have a choice. We'll just have to keep tightening our belts.''
''A North Little Rock trucking company with about 150 trucks is struggling just as much. A spokesman for the company, who asked that he and his company not be identified, said the company is barely surviving. It's the worst crisis in the 40-year history of the company, he said.''
Two weeks ago we held a truckers rally on the Mall to bring attention to this problem. Some truckers followed the convoy in their automobiles because they had already lost their track. Among the attendees were a husband and wife with a little girl who were all riding in the truck because they could no longer afford both a house and a truck. This situation is intolerable.
For as many truckers who shouldered the expense of driving to Washington to speak to their lawmakers, there were thousands more who could not afford the trip and watched it on CSPAN, With your permission Mr. Chairman, I would like to submit for the record a letter from one of our members and read you just an excerpt from it that sums up the desperation faced by the small business trucker, and the fact that they are looking to Washington for help, for a solution, to keep their business alive. Mr. Ray Wothe, a gentleman who saw our Washington rally on television. [see attachments].
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Mr. Chairman, some trackers like this gentleman have hope. Now they need action.
If we don't fix this problem soon, more trackers will continue to lose their businesses or will refuse to drive unprofitably and stop trucking. When they do, we are going to begin to see greater disruptions and increased costs in our economy as goods do not get to market and just-intime deliveries to manufacturers cease to arrive ''just-in-time.'' Even Internet commerce will be affected - because trackers are an indispensable link between on-line companies and the consumer. Every aspect of our economy will be impacted.
The high cost of fuel may be the result of anti-competitive behavior among oil producing nations, short-sighted distribution decisions by domestic oil companies, or a lack of a national energy policy. These problems, however, are complex and will require long term solutions. We have opinions on long term solutions, however, truckers cannot wait for long term solutions. They need help right now!
Our opinions are similar toward proposals to cut federal fuel taxes. Cutting the taxes that contribute to highway construction and repair would be like burning your famiture to keep your house warm. Eventually we have to raise the fands to pay for road construction, and if we push off these costs into the future, we will have to pay even more.
The proposals we have heard for reductions in the tax of 4.3, 18, and 39 cents per gallon may be helpful, but would only be a partial solution to fuel price increases of over 50 cents per gallon. Not only would these tax reduction proposals not compensate truckers for the full increase in fuel prices, we remain unconvinced that the fall amount of the tax reduction would be passed along and reflected in the price of fuel at the pump. Furthermore, a tax cut would put the U.S. government in the untenable position of subsidizing OPEC's price increases.
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The highways are our workplace, and with the poor conditions of many roads today OOIDA is not quick to embrace proposals that would slow their construction or repair. But we will consider them, and our members will take them in this time of desperation, unless another solution is forthcoming.
Although proposals to investigate practices in the oil industry may be warranted, reductions in federal fuel taxes may be tempting, and the creation of a federal energy policy to reduce reliance on foreign fuel sources may be long overdue, these options will do little to address a major defect in the trucking industry that has been brewing for years and has finally boiled over with this crisis: the trucking industry's inability to establish and maintain rates that compensate it for its basic costs.
For too Ion g owner-operators have been working just on the edge of profitability. This fuel crisis is pushing them over that edge and illustrates dramatically the seriousness of this problem. If the trucking industry, and owner-operators in particular, could establish and maintain higher rates to be adequately compensated for their increased fuel expenses, we would not be here before this committee today.
OOIDA has two proposals to address this problem:
First, Congress should create a mandatory fuel surcharge to be imposed by motor carriers, brokers, and freight forwarders that takes effect when there are sharp increases in fuel prices, is sufficient to compensate for fuel prices, is automatically passed through to the owner-operators who actually pay for fuel costs, and would last until fuel prices went down or until regular rates in the trucking industry caught up to the higher fuel costs. This is a much needed short-term solution that would immediately help owner-operators and motor carriers recover their additional fuel costs, but it would also be a long term solution that would respond to unpredictable fuel price increases without requiring additional legislative or regulatory action in the fature.
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Such legislation would give truckers the ability to pass on their increased costs to the people who benefit from their services, the public at large. In this way the burden of increased, fuel surcharges will be spread thinly among a greater number of people rather than heaped solely on small business truckers who cannot bear this burden without going bankrupt and losing their businesses.
Finally, this proposal will not take a single dime away from the highway trust fund.
Second, we are also asking for a government investigation into the destructive and predatory competitive rate making processes raging through the industry. The practice of the industry to pass all costs onto the owner-operator, keeping the owner-operator constantly on the edge of financial rain, has major safety implications.
In trying to outlast the fuel crisis, many truckers are operating at a loss, hoping to stay afloat until the price of fuel goes down and they can begin to operate profitably again. If truckers are operating at a loss, there is the risk that they will not have the necessary resources to properly maintain their vehicles in a safe condition.
The link between the financial stability of a motor carrier and safety has long been known. In 1988 the Office of Technology Assessment came out with a report that concluded ''. . . that the economic success of a carrier has an identifiable effect on operation and fleet condition; in fleets having financial difficulties, vehicles are not as well maintained and equipment tends to be older.'' Gearing Up for Safety: Motor Carrier Safety in a Competitive Environment, Office of Technology Assessment, September 1988. In other words, safety costs money.
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Mr. Chairman, this Congress and the new Motor Carrier Safety Administration have spent the last year placing more and more requirements, regulations, and responsibilities on truckers in the name of safety. Many people view trucking safety in ternis of where and when to blame the trucker. We believe that track safety policy should be based equally on how can we support truckers. In this manner we can make sure that the industry attracts and retains the most responsible people for the job, ensure that they have the resources to properly maintain their vehicle, and rest assured that they need not drive longer hours than allowed by law to earn enough to support themselves and their families. Experience, we believe, is the most important factor in the safe driving of a truck, yet the industry is losing experienced, safe drivers and is trying to replace them with younger, more inexperienced people.
We believe that an investigation into the practices in the trucking industry that keep truckers on the financial edge is a necessary complement to the important work of Congress on safety in 1999.
If drivers were properly compensated for their costs, this fuel crisis would be a mere bump in the road. A mandatory fuel surcharge is clearly a viable solution for today's fuel crisis, and a comprehensive study into the factors that contribute to the financial tightrope that owneroperators are forced to walk everyday could help us devise better transportation policies in the future.
Mr. Chairman, I must repeat, small business truckers are desperately hoping for solutions to this devastating crisis. I sincerely hope the Congress takes the appropriate action as quickly as possible to help this vital segment of the truck transportation industry survive.
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Mr. HYDE. Ms. Pikrallidas?
STATEMENT OF SUSAN PIKRALLIDAS, VICE PRESIDENT OF PUBLIC AND GOVERNMENT RELATIONS, AMERICAN AUTOMOBILE ASSOCIATION, WASHINGTON, DC
Ms. PIKRALLIDAS. Thank you, Mr. Chairman. I am Susan Pikrallidas, AAA's vice president for public and government relations.
I have submitted a written statement and respectfully request that it be included in the hearing record.
As you can well imagine, with 43 million members, most of whom are motorists, AAA is particularly interested in the issue of gasoline prices, and we very much appreciate this opportunity to testify before your committee today.
Gasoline prices, as you know, are breaking records nationwide. In fact, they have registered their biggest 12-month increase in history.
While we enjoyed unexpectedly low prices last year, we have been jolted by the unpredictable and mercurial nature oil prices when oil supply is controlled by a cartel. We have also been reminded of this Nation's dependence on a finite resource.
In addition to representing motorists, AAA is the largest provider of leisure travel in the country, so we are paying close attention to any changes travelers may contemplate as we approach the busy spring and summer travel months. At this time, AAA does not expect overall travel to decline, but the results of a recent survey by one of our largest clubs, AAA Michigan, suggests that more travelers may stay closer to home, driving shorter distances.
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During the past several weeks, proposals have been floated to deal with the spike in gas prices: increasing domestic production, releasing oil from the strategic petroleum reserve, and reducing or temporarily suspending the Federal gasoline tax.
AAA would like to focus on the gas tax. Proposals to reduce the Federal tax by 4.3 cents per gallon have received a great deal of attention. While attractive at first glance, such proposals do not address the root cause of the problem, which is lack of supply due to the OPEC cartel.
The benefits to motorists from reducing the gas tax are, at best, minimal. Repealing 4.3 cents would amount to about a dollar a week for the average consumer; however, the resulting loss of revenue to the Highway Trust Fund would be disastrous to the important work of fixing the Nation's highways and bridges and improving safety.
It is highway and traffic safety that is of most concern to AAA. Lower receipts to the Highway Trust Fund compromise the safety of the traveling public. We take these roads back and forth to work and on vacations. Our children take these roads to school, and our public safety officials use these arteries to respond to emergencies.
Mr. Chairman, the U.S. is suffering skyrocketing gas prices for one primary reasonOPEC. AAA is pleased that OPEC has agreed to increase supply, but is disappointed that the amount is not higher.
Added to that problem, however, is that domestic inventories have been allowed to remain low for far too long. In previous testimony before Congress, and in a letter to former Energy Secretary Hazel O'Leary, AAA stressed that maintaining low domestic inventory levels leaves the U.S. at the mercy of OPEC and other supply disruptions.
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Mr. Chairman, if history has proven anything, it is that OPEC can hamstring our economy enough without inadequate inventories adding to the problem.
AAA urges Congress and the administration to take whatever steps are needed to ensure that oil companies quickly pass on the lower cost of the fuel expected with increased supplies. We also urge closer oversight of the level of domestic inventories in the future.
On the other hand, AAA recognizes that part of the supply and pricing problem is rooted in U.S. consumption of oil products, and, in particular, gasoline. AAA believes motorists need to understand that the behaviors surrounding their driving have an impact on gasoline consumption. To help educate our members and other motorists, AAA has issued a ''Gas Watchers' Guide,'' which details the many ways in which motorists can conserve fuel. We believe motorists can take steps to curb the demand side of our problem.
Mr. Chairman, particularly in this time of high prices, AAA believes we must all be smarter, more-informed consumers. AAA is committed to working with the Department of Energy and Members of Congress to educate motorists about how they can do their part to conserve gasoline.
To conclude, Mr. Chairman, Congress made a very important decision by creating the Highway Trust Fund and establishing the direct link between user fees paid by motorists in the form of a gas tax and trust fund monies being dedicated to improving the Nation's surface transportation infrastructure.
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AAA urges Congress to recognize that a gas tax reduction, though well-meaning, will: one, provide little, if any, actual relief to motorists; two, not solve the real problem, which is supply; and, three, cause real problems as our highways and bridges continue to deteriorate, and, with that, the safety of the motoring public.
Asking Americans to choose between a gas tax reduction and safety is posing the wrong question. The right question is: how should Congress and the administration manage an energy strategy that reduces dependence upon a foreign cartel? That way, motorists would have the safe highways they have paid for through their gas taxes and an oil supply they can rely on.
Again, Mr. Chairman, thank you for this opportunity to share AAA's views on this important subject.
Mr. HYDE. Thank you very much, Ms. Pikrallidas.
[The prepared statement of Ms. Pikrallidas follows:]
PREPARED STATEMENT OF SUSAN PIKRALLIDAS, VICE PRESIDENT OF PUBLIC AND GOVERNMENT RELATIONS, AMERICAN AUTOMOBILE ASSOCIATION, WASHINGTON, DC
Thank you, Mr. Chairman. I am Susan Pikrallidas, AAA's vice president for public and government relations.
Page 136 PREV PAGE TOP OF DOC As you can well imagine, with 43 million members, most of whom are motorists, AAA is particularly interested in the issue of gasoline prices and we very much appreciate this opportunity to testify before your committee today.
Gasoline prices are breaking records nationwide. In fact, they have registered their biggest 12-month increase in history. While we enjoyed unexpectedly low prices last year, we have been jolted by the unpredictable and mercurial nature of oil prices when oil supply is controlled by a cartel. We have also been reminded of this nation's dependence on a finite resource.
In addition to representing motorists, AAA is the largest provider of leisure travel in the country, so we are paying close attention to any changes travelers may contemplate as we approach the busy spring and summer travel months. At this time, AAA does not expect overall travel to decline, but the results of a recent survey by one of our largest clubs, AAA Michigan, suggests that more travelers may stay closer to home, driving shorter distances.
During the past several weeks, proposals have been floated to deal with the spike in gas prices: increasing domestic production, releasing oil from the Strategic Petroleum Reserve, and reducing or temporarily suspending the federal gasoline tax.
AAA would like to focus on the gas tax. Proposals to reduce the federal gas tax by 4.3 cents per gallon have received a great deal of attention. While attractive at first glance, the problem with such proposals is that they will not address the root cause of the problem, which is lack of supply due to the OPEC cartel. The benefits to motorists from reducing the gas tax are, at best, minimalrepealing 4.3 cents would amount to about $1/week for the average consumer. However, the resulting loss of revenue to the Highway Trust Fund would be disastrous to the important work of fixing the nation's highways and bridges and improving safety.
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Mr. Chairman, in 1998 Congress recognized the importance of properly investing gas tax dollars by working hard to enact TEA21. Because of that historic legislation, motorists now trust that their taxes are invested appropriatelyin mobility: highways, bridges, public transit, safety, as well as pedestrian and bike trails.
It is highway and traffic safety that is of most concern to AAA. Lower receipts to the Highway Trust Fund compromise the safety of the traveling public. We take these roads back and forth to work and on vacations, our children take these roads to school, and our public safety officials use these arteries to respond to emergencies.
Mr. Chairman, the U.S. is suffering skyrocketing gas prices for one primary reason: OPEC. Added to that problem, however, is that domestic inventories have been allowed to remain low for far too long. In previous testimony before Congress, and in a letter to former Energy Secretary Hazel O'Leary, AAA stressed that maintaining low domestic inventory levels leaves the U.S. at the mercy of OPEC and other supply disruptions. Mr. Chairman, if history has proven anything, it's that OPEC can hamstring our economy enough without inadequate inventories adding to the problem.
In a recent meeting with Energy Secretary Bill Richardson, AAA expressed our concerns about low domestic inventories. We also expressed AAA's serious concerns about reducing the federal gasoline taxfor the reasons we have outlined today. Moreover, we told the Secretary that AAA supports the Administration's position on use of the Strategic Petroleum Reserve so far. But we further stated that AAA would support putting the Strategic Petroleum Reserve on the table if OPEC does not agree to increase supply in March to the extent necessary to stabilize gas prices.
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We also made clear to Secretary Richardson that AAA recognizes that part of the supply and pricing problem is rooted in U.S. consumption of oil products and, in particular, gasoline. AAA believes motorists need to understand that the behaviors surrounding their driving have an impact on gasoline consumption. To help educate our members and other motorists, AAA has issued a ''Gas Watcher's Guide,'' which details the many ways in which motorists can conserve fuel. We believe motorists can take steps to curb the demand side of our problem.
The ''Gas Watcher's Guide'' stresses to motorists that how you use your vehicle can be just as important as which vehicle you use. For example, slowing down can conserve gasoline. Consolidating trips and errands, keeping tires properly inflated, and using regular unleaded fuel (if your owner's manual does not recommend a higher grade) can all save gasoline and money. A four-wheel drive vehicle will burn more gasoline than a smaller vehicle when used for routine driving.
Mr. Chairman, particularly in this time of high prices, we need to be smarter, more informed consumers. AAA is committed to working with the Department of Energy and Members of Congress to educate motorists on how they can do their part to conserve gasoline.
Mr. Chairman, Congress made a very important decision by creating the Highway Trust Fund and establishing the direct link between user fees paid by motorists and trust fund monies being dedicated to improving the nation's surface transportation infrastructure. Because of TEA21, the trust fund is now dedicated to providing Americans the safe and efficient transportation system for which they have paid and on which they rely.
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AAA urges the committee to recognize that a gas tax reductionthough well-meaningwill (1) provide little, if any, actual relief to motorists; (2) not solve the real problem, which is supply; and (3) cause real problems as our highways and bridges continue to deteriorate and with that, the safety of the motoring public. Asking Americans to choose between a gas tax reduction and safety is posing the wrong question. The right question is: How should Congress and the Administration manage an energy strategy that reduces dependence upon a foreign cartel? That way motorists would have the safe highways they've paid for through their gas taxes and an oil supply they can rely on. Short-term fixes, while politically popular, are not in the best interests of highway safety and the overall economic well being of the nation.
Again, Mr. Chairman, thank you for this opportunity to share AAA's views on this subject.
Mr. HYDE. Next, Mr. Chretien.
STATEMENT OF LARRY CHRETIEN, EXECUTIVE DIRECTOR, BOSTON OIL CONSUMERS ALLIANCE, JAMAICA PLAIN, MA
Mr. CHRETIEN. Mr. Chairman and members of the committee, thank you very much for holding the hearing and allowing me to be here.
My organization is a nonprofit 501(c)(3). Primarily, we are a home heating oil buying network with over 6,000 residential members and 150 non-residential members in eastern and central Massachusetts. Collectively, we use about five million gallons of oil per year, and that gives us enhanced buying power to drop the price of oil to about 10 to 30 cents per gallon less than the average resale price in Massachusetts. Our members save $100 to $300 per household.
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We also operate an energy conservation loan fund and an oil bank funded by our members to assist low-income households, but in times like this, we advocate for policies that are pro-consumer and pro-environment.
I would like to make these comments:
Prices for heating oil and gasoline have obviously risen because demand is far greater than supply. OPEC certainly can be blamed and actions should be taken to counteract their cartel, but we should be talking about why we are so dependent upon foreign oil in the first place, whether that oil is from OPEC or from non-OPEC nations.
Speaking to the cartel, there are arguments for and against releasing oil from the strategic petroleum reserve. One argument against the release has been that the reserve is not large enough to make a difference in the peak driving system that we are coming up to. If that is the case, looking to the future, when and if crude drops to something more reasonable, we should purchase more oil for the reserve.
I would like to echo what Congressman Markey said, which is that hindsight is always best, but when the crude was $10 per barrel, we should have been purchasing a lot of it, because crude will inevitably skyrocket again some day, we should have a reserve of something like one billion barrels, enabling us to feel freer about making releases from the reserve.
Turning to the domestic side of the issue, I would like to point out that the retail price of home heating oil doubled in Boston from early January to early February, but every penny of that increase went to pay higher wholesale prices, so retail oil dealers cannot be blamed. They are in a very competitive market with each other and with natural gas.
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This graph shows that the margins that retailers were getting actually declined during the price spike. They are sort of hurting along with every consumer.
But on January 3rd, the wholesale price was about $0.13 cents higher than the crude price per gallon. On February 7, the wholesale price was $1.08 higher than the crude price. I would like you to pay attention to that.
Therefore, I urge the Departments of Justice and Energy and the FTC to collaborate, for a change, and determine which industry players benefited the most from that sudden surge. Particular attention should be paid to refiners, wholesalers, and market players that are in between those refiners and wholesalers. Perhaps we have allowed far too much in the way of horizontal consolidation and vertical integration in the oil industry.
If audits prove that the price spike was not caused by antitrust violation, then the results may indicate that we would benefit by a heating oil reserve in the northeast and other policies that would prevent sudden price spikes.
It is important to conduct the investigation before we forget about the price spike. First, we want to determine who, if anyone, violated the antitrust laws. Second, we want to make good policy decisions before next winter comes before us.
Looking ahead, the best way to resolve the mismatch between supply and demand, in our opinion, is through energy efficiency and renewable energy. High crude oil prices are certainly a stimulant for higher domestic oil production and gas production, but we strongly support higher fuel efficiency standards for automobiles and increased funding for programs such as weatherization and the Million Solar Roofs Program. Both are DOE programs.
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To be candid, I think that it is a bipartisan national disgrace that, while Japan is putting the Honda Insight and the Toyota Prius on the market this spring, American car makers and American consumers, for that matter, remain asleep at the wheel.
Again, I would echo Congressman Markey talking about the great potential for increasing the fuel efficiency of American cars. That easily could be two million to three million barrels per day.
I also hope that if you pass a bill to nationally restructure the electric utilities, that you include very strong provisions for demand side management and renewable energy.
Electricity, oil, and gas, no matter how they are used in the end, all play off one another, and you would have to keep sight of that.
Finally, let me leave you with this: my organization is pro-consumer, not pro-consumption. We want sustainable energy policies that provide us with warmth and mobility, not just oil. As you deliberate, please consider how the oil industry is today within the context of how our economy has changed over the last 20 years and what we want our Nation to be 50 years from now.
I thank you very much for this honor of testifying before you.
Mr. HYDE. Thank you very much.
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[The prepared statement of Mr. Chretien follows:]
PREPARED STATEMENT OF LARRY CHRETIEN, EXECUTIVE DIRECTOR, BOSTON OIL CONSUMERS ALLIANCE, JAMAICA PLAIN, MA
My name is Larry Chretien and I am the executive director of the Boston Oil Consumers Alliance. Thank you for granting me this opportunity to comment on ''Competitive Problems in the Oil Industry''.
My organization is a non-profit, 501-c3. We are a home heating oil buying network with over 6000 residential members and 150 non-residential members. Because we collectively use about 5 million gallons of oil per year, we have enhanced buying power and pay 1030 cents per gallon less than the average retail price, saving $100$300 per year per household. We also operate an Energy Conservation Loan Fund and an Oil Bank funded by members to assist low-income households. In times like this, we advocate for public policies that are pro-consumer and pro- environment.
I would like to make these comments:
Prices for heating oil and gasoline have obviously risen because demand is far greater than supply. OPEC certainly can be blamed and actions should be taken to counteract their cartel, but we should be talking about why we are so dependent upon foreign oilwhether the oil is from OPEC or non-OPEC nations.
Page 144 PREV PAGE TOP OF DOC In terms of the cartel, there are arguments for and against releasing oil from the Strategic Petroleum Reserve. One argument against a release is that the reserve is not large enough to make a difference in the peak driving season. If that is the case, looking to the future, when and if crude drops to something reasonable, we should purchase more oil for the reserve. Hindsight is always best, but when crude was $10 per barrel, we should have purchased a lot. Because, when crude skyrockets again someday, we should have a reserve of something like one billion barrels, enabling us to feel freer about making releases.
Thinking domestically, I would like to point out that the retail price of home heating oil doubled in Boston from early January to early February. But every penny of that increase went to pay higher wholesale prices, so retail oil dealers cannot be blamed. They are in a very competitive market with each other and with natural gas. But on January 3, the wholesale price was about thirteen cents higher than the crude price per gallon. On February 7, the wholesale price was $1.08 higher than the crude price. Therefore, I urge the Departments of Justice and Energy and the Federal Trade Commission to collaborate and determine which industry players benefited the most from that sudden surge. Particular attention should be paid to oil refiners, wholesalers, and market players in between. Perhaps we have allowed far too much horizontal consolidation and vertical integration in the oil industry.
If audits prove that the price spike was not caused by anti-trust violations, then the results may indicate that we would benefit by a heating oil reserve in the Northeast and other policies to prevent sudden price spikes. It is important to conduct this investigation before we forget about the price spike. First, we want to determine who, if anyone, violated anti-trust laws. Second, we want to make good policy decisions before next winter.
Page 145 PREV PAGE TOP OF DOC Looking ahead, the best way to resolve the mismatch between supply and demand is through energy efficiency and renewable energy. High crude oil prices are certainly a stimulant for higher domestic oil and gas production. But we strongly support higher fuel efficiency standards for automobiles and increased funding for programs such as Weatherization and the Million Solar Roofs program. To be candid, I think that it is a bipartisan national disgrace that while Japan is putting the Honda Insight and the Toyota Prius on the market, American carmakers and American consumers remain asleep at the wheel. I also hope that if you pass a bill to nationally restructure the electric utilities, that you will include strong provisions for demand-side management and renewable energy.
Finally, let me leave you with this. My organization is pro-consumer, not pro-consumption. We want sustainable energy policies that provide us with warmth and mobility, not just oil. As you deliberate, please consider the oil industry within the context of how our economy has changed over the years and what we want our nation to be like fifty years from now.
Thank you very much for this honor of testifying before you.
Mr. HYDE. Mr. Love?
STATEMENT OF JAMES LOVE, ECONOMIST, CENTER FOR THE STUDY OF RESPONSIVE LAW, WASHINGTON, DC
Mr. LOVE. Thank you, Chairman Hyde.
I was very pleased in the audience to hear you talk about the need to work on conservation and cleaner forms of energy, and I think it is important to always keep in mind that we have to look long-term, and I think that was very good.
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My own testimony is on antitrust issues. The thing I focused the most on in my written statement has to do with the issue of collaborative agreements between oil companies, which is a problem in antitrust, not only in the area of the oil industry, but also comes up in other industries, such as telecommunications or pharmaceuticals or areas where companies are often competitors in one part of a market and collaborators in another, and raises questions as to how vigorous they are in the competition area, given the degree to which they act as partners in other areas.
The oil industry, in particular, is plagued by this issue because there are really big economies of scale of developing oil fields, of doing exploration of transportation, and it is often the case that there are collaborative agreements between oil companies. The Trans-Alaska oil pipeline is owned by several different companies. They will collaborate on the gathering of seismic data, they are involved in joint ventures. Even oil fields, like the Prudhoe Bay Oil Field, have a lot ofprobably hundreds of different people have an interest in the oil field, but it only has two operators, and so actually, in a lot of cases, in lots of parts of the world, if you can't participate in these joint agreements and these collaborative agreements, it is difficult to do business and it drives your cost up.
So the oil industry is not the atomistic industry where you have a lot of independent companies. You have a lot of companies that are often dealing with each other at different levels.
Now, when the wave of oil mergers began really in 1998, when we began to focus on it with the proposed BP/Amoco merger, I remember we started a series of meetings with the Federal Trade Commission on first the BP/Amoco and then later the Exxon/Mobile and then the BP/Arco merger were the ones that I worked on the most, and the conversation sort of went like this: at first, we had picked up in the trade press there had been some meeting in Rome, high level meeting in the oil industry, where the trade press had reported on the industry's attempts to solve its chronic problems, which was referred to as kind of the ruinous competition variety, the excessive competition, low prices. That was kind of the nature of the gathering.
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And then it was followed by this series of mergers, not only in the United States, which Americans tend to look at, but also in Europe, with, for example, Total and Petrofina, and then in Japan whenI can't say a lot of these words rightNippon and Mitsubishi Oil merged. There was a global consolidation that happened in a variety of sectorsin distribution and refining and production and things like that.
We began to talk to the FTC about, when they looked at these mergers, do they look at the way these companies are inter-related to each other, or do they look at more or less, you know, do they have gas stations across the street in upstate New York.
I think one of the criticisms I would have about the way the merger review has taken place is that the U.S. Government has tended to focus on highly-discrete and geographically-focused areas of U.S. potential competitive problems, like maybe looking at a refinery or pipeline here or there, or some gas stations, you know, in various States, where they maybe compete head-to-head and require divestitures, but not looking at the degree to which these companies cooperate in a more global basis, including issues that would be really important to the behavior of the cartel.
The last three pages of the testimony are examples of some of the collaborative agreements that companies are engaged in that are relatively recent things, such as the first one, I will just go through sort of quickly to sort of see how we look at this.
The first one is between Royal Dutch Shell and Texaco, involving an arrangement that involves activity in 32 States in the United States, involving supply of gas to 9,700 gas stations and about 7 percent of the national gasoline market.
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The next one is a different agreementsome of the same playersShell, Texaco, and this is also with Saudi Refining, with the Saudis. This joint venture is the sixth-largest refining company in the United States, and it has, in some areas, about 8 percent of the national market.
The next one is Chevron and Texaco, so this time it is Texaco with Chevron, another one of the big, major companies. This is in 55 countries.
So you have got Texaco and Chevron being partners in 55 countries, and so some will ask, ''Well, what makes you think they will be fierce competitors in the 56th country if they are partners in 55?'' I mean, to us, just sort of practical people, we ask those questions.
Then we have BP/Amoco, because they have already merged at this point with Amoco, with Royal Dutch Shell in another venture in product.
The next pageExxon, Mobile, and Shell. So you have got now Exxon and Shell. This has to do with production operations in California, where prices have really been high lately.
And then BP and Texaco is the next one that is referred to, having to do with a European refining operation.
So I guess one of the points we wanted to raise was that the proposed guidelines on joint ventures are just out, as you know, and they are not fine yet. They are still under review. And so we think this is a good time to ask what they are trying to accomplish with the joint venture guidelines, and I think the oil merger case is a good illustration.
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And so partly what we would be looking at is to have this committee focus a bit, if possible, on whether the guidelines are too focused on providing safe harbors and green lights for mergers and joint ventures, I should say, and sort of rationales why joint ventures would not be attacked under antitrust law, and whether or not there needs to be a little bit more of the component of understanding how joint ventures and collaborative agreements reduce competition and how that should be reflected in a merger review.
I know I have probably talked too long. The rest of it is in my statement. I will be happy to answer questions. Thank you.
Mr. HYDE. Thank you very much.
[The prepared statement of Mr. Love follows:]
PREPARED STATEMENT OF JAMES LOVE, ECONOMIST, CENTER FOR THE STUDY OF RESPONSIVE LAW, WASHINGTON, DC
My name is James Love. I am an economist, working at the Center for the Study of Responsive Law. I am also the Director of the Consumer Project on Technology. (http://www.cptech.org). Both organizations were founded by Ralph Nader.
My testimony today will address our concerns about concentration in the petroleum industry, as well as more general concerns about the failure of the FTC and the US Department of Justice to adequately consider the extensive nature of ''collaborations among competitors,'' in evaluating mergers.
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At the Center for the Study of Responsive Law, I have worked on several recent oil mergers, beginning with the BP/Amoco merger, and most recently with the Exxon/Mobil and BP/Amoco Arco merger. We opposed all three mergers, on the grounds that they would lessen competition, and harm consumers.
Before my current job, I had extensive experience in analyzing various aspects of the oil and gas industry, and worked on issues as diverse as taxation, oil and gas leasing policy, oil pipeline regulation, and the conservation of oil fields. This work was on behalf of several state governments as well as non- governmental organizations.
My testimony will make the following points:
1. Over the past three years, there has been a huge concentration in the petroleum sector.
2. The current Department of Justice and Federal Trade Commission horizontal merger guidelines focus on market share metrics that understate concentration, by failing to address the degree and importance of joint ventures and other collaborations.
3. The Petroleum Industry involves extensive joint ventures and other collaborations, for virtually all aspects of the industry.
4. Joint ventures and other collaborations substantially reduce the degree of independence among firms in an industry.
Page 151 PREV PAGE TOP OF DOC5. As the industry becomes more concentrated, it becomes much easier to monitor cheating within cartels, and to discipline firms that engage in aggressive competition.
6. The need to provide better metrics for horizontal mergers is a broader issue, and has relevance for other industries such as pharmaceuticals and biotechnology, telecommunications, entertainment and software, to mention only a few areas.
7. The FTC guidelines on collaboration among competitors are inadequate.
1. Increases in concentration in the Petroleum Sector.
Since 1998 in particular, there has been a wave of mergers in the global petroleum industry. In a March 10, 1999 hearing before the Committee on Commerce, Subcommittee on Energy and Power, that was examining the Exxon/Mobil merger, William J. Baer, the Director of the FTC's Bureau of Competition, testified:
As many have noted, this merger does not occur in a vacuum, but appears to be part of an ongoing trend of consolidation and concentration in this industry. In recent months, we have seen the merger of BP and Amoco - which was the largest industrial merger in history until Exxon/Mobil was announcedand the combination of the refining and marketing businesses of Shell, Texaco and Star Enterprises to create the largest refining and marketing company in the United States. In addition, Tosco acquired Unocal's California refineries and marketing business; Ultramar Diamond Shamrock acquired Total's North American refining and marketing operations; and Marathon and Ashland combined their refining and marketing businesses. We also have seen the worldwide combination of the additives businesses of Shell and Exxon. Other combinations, such as the pending combination of the refining and marketing businesses of Ultramar Diamond Shamrock and Phillips (which we are currently examining), likely will follow. These consolidations and joint ventures are not limited to the United States: BP and Mobil have combined their refining and marketing operations in Europe, and Total and Petrofina have recently announced their own merger plans.
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There were many others. For example, Nippon Mitsubishi Oil Corp, was created out of the merger between Nippon Oil Co and Mitsubishi Oil Co in April 1999. In 1999 BP Amoco sought to acquire ARCO, which was the first merger actually blocked by the FTC, but which may be approved after a sale of ARCO's Alaska assets to Phillips. The fact that the FTC has caused a handful of mergers and joint ventures to be modified is somewhat helpful, but not a particularly aggressive approach to what has occurred.
When the BP/Amoco merger was announced on August 11, 1998, Robert Weissman and I issued a statement that predicted a wave of new oil and gas mergers, and called upon antitrust authorities to provide a public forum on the issue of concentration in the petroleum and mining sectors.
We fear the BP-Amoco merger, announced today, will hurt consumers by raising prices, spur a round of anticompetitive mergers in the oil industry and dangerous concentration of economic and political power. We are asking U.S. antitrust authorities to create a forum for public comment on the issue of concentration in the petroleum and mining industries, and to solicit views on issues such as mergers and joint ventures. Today's announcement regarding British Petroleum and AMOCO suggests we may be faced with a series of mergers, as is now occurring in the telecommunications industry. In the telephone industry, the early mergers were approved without much thought as to how each new merger created an environment where the next merger was more likely. We think it is appropriate to consider in a pro-active way the larger picture, and how public policy objectives of efficiency and consumer welfare are best servedeither by competition among the many or collusion among the few. Insufficient scrutiny of this merger will soon lead to other mergers and a policy crisis in the petroleum sector, given the lack of policy guidance or a well-developed theory regarding concentration that will adequately protect consumers. Consumers currently benefit from low prices for petroleum, a consequence, in part, of the degree of competition in the industry. We believe giant mergers like these will hurt competition, and hurt consumers.
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2. The current Department of Justice and Federal Trade Commission horizontal merger guidelines focus on market share metrics that understate concentration, by failing to address the degree and importance of joint ventures and other collaborations.
The current DOJ/FTC guidelines on horizontal mergers place a lot of attention on the Herfindahl-Hirschman Index (''HHI'') of market concentration. This is calculated using the sum of the squares of market shares, based upon sales in a relevant market. I think this is a useful metric, but it is clearly an inadequate measure of concentration in an industry where firms are often collaborators in various joint ventures, partnerships and other deals.
The appeal of the HHI is that the index seems to capture the non-linear relationship between market shares and market power that would be predicted by some game theoretic models of imperfect competition and strategic behavior. However, in models of strategic behavior, one should assign a larger role to the extensive webs of collaborative agreements between firms.
3. The Petroleum Industry involves extensive joint ventures and other collaborations, for virtually all aspects of the industry.
The oil industry involves capital intensive projects that often have large economies of scale. Many of these investments are quite durable, and the combination of durable, high fixed, sunk costs is also associated with significant entry barriers.
These are particularly important in the areas of exploration, production, oil and gas pipeline markets and refining, but also to some degree in distribution.
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Exploration involves the costly collection of seismic data and analysis of well data. Firms may share costs for seismic exploration, or even share the expense of some exploratory wells. For a variety of reasons, firms sometimes bid together for new oil and gas leases.
Production of an oil field is often done through unitization of the field. For example, there were a large number of owners of the Prudhoe Bay oil field in Alaska, but only BP and ARCO were operators. The other leaseholders shared the expenses and the production as members of the Prudhoe Bay Unit. Sometimes the only way a leaseholder can develop her interest in a field is through participation in a unit.
Oil pipelines benefit from huge economies of scale and are very durable. In the Prudhoe Bay field, the major owners of the oil field were the initial owners of the TAPS pipeline. Firms that were not part of the TAPS ownership suffered from the high TAPS tariffs when they shipped oil to downstream markets.
Every major oil company is involved in countless joint ventures, partnership agreements, units, and other deals.
4. Joint ventures and other collaborations substantially reduce the degree of independence among firms in an industry.
It is costly to be excluded from such agreements, and the risk of exclusion is a credible form of discipline with the industry. In some US states, the state government has the theoretical power to force firms to include a leaseholder in a unitized oil field, but it is difficult to prevent firms from discriminating against a minority interest in a field, or from offering unreasonable terms.
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For oil companies of significant size and ambition, there are many advantages to being included in various collaborations, and many costs to being excluded. As markets are concentrated, the relative bargaining power of the larger firms increases, and the relationship becomes more collaborative, and less competitive.
5. As the industry becomes more concentrated, it becomes much easier to monitor cheating within cartels, and to discipline firms that engage in aggressive competition.
The problem for any cartel is cheating. In general, the less concentrated the industry, the easier it is to cheat, and the harder to discipline cheaters. The more concentration (in all aspects of the petroleum industry), the easier to monitor industry actions, and to coordinate efforts. OPEC may benefit somewhat from a more competitive private sector, such as for bidding on leases and development projects. But OPEC also benefits from increased concentration, which makes it much easier to monitor the private actions, and even to solicit cooperation from the leading private actors.
We have raised these issues with the FTC on different occasions, as have others. For example, in an August 13, 1998 letter regarding the BP/Amoco merger, Representative Dennis Kucinich wrote Mr. Robert Pitofsky to ask:
Should the traditional Herfindahl-Hirschman Index (''HHI'') of market concentration used in the current horizontal merger guidelines be modified to reflect the degree to which companies that ''compete'' with each other are participants in joint ventures and partnerships where they cooperate?
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. . . To what degree does the nature of the energy industry require extensive use of joint ventures or partnerships for the efficient production and transportation of energy, and what risks are presented by these arrangements?
. . . If BP and Amoco merge, will this create an environment where the new entity's combined market shares of pipelines, production units or other facilities create risks for other companies, and might competitors consider mergers to compensate or react to this increased concentration?
6. The need to provide better metrics for horizontal mergers is a broader issue, and has relevance for other industries such as pharmaceuticals and biotechnology, telecommunications, entertainment and software, to mention only a few areas.
There are many industries where joint ventures, partnerships, strategic alliances, cross licensing of intellectual property and other collaborations lessen competition. One area of particular interest is the pharmaceutical and biotechnology sector, where firms will increasingly need access to broad biotechnology patents and other intellectual property rights to develop new products. We are aware of a case where a firm indicated it did not want to develop a new technology that would undermine Amgen's EPO market, for fear that it would not be able to license other patents from Amgen. Another area is telecommunications. AT&T and Time-Warner are involved in countless joint ventures, partnerships and other collaborations. AOL licenses software and desktop links from Microsoft and also competes against Microsoft. Telecommunications firms that are supposed to be competitors in US markets sometimes are partners in overseas markets.
Page 157 PREV PAGE TOP OF DOC7. The FTC guidelines on collaboration among competitors are inadequate.
The FTC held hearings on proposed guidelines on ''collaborations among competitors'' in 1997. The thrust of the inquiry was to provide guidance in areas where antitrust authorities would generally approve or discourage collaboration among competitors. Among the questions the FTC asked were:
a. Whether the price- or output-related decisions of competitor collaborations may harm competition
b. Whether restrictions on competition between or among the members of a competitor collaboration, or between the collaboration and another entity, may harm competition
c. Whether the competitor collaboration increases the likelihood of collusion outside the joint venture as a result of sharing confidential, competitively sensitive information or other mechanisms
d. Whether the competitor collaboration may raise rivals' costs
e. Whether a denial of membership in or access to a competitor collaboration may harm competition
f. Whether a competitor collaboration that lacks market power in any relevant market may still harm competition in a relevant market
Page 158 PREV PAGE TOP OF DOC When the draft guidelines were published in 1999, the FTC's upbeat press release said ''competitive forces of globalization and technology are driving firms toward complex collaborations to achieve goals such as expanding into foreign markets, funding expensive innovation efforts, and lowering production and other costs. The increasing varieties and use of collaborations by rivals have yielded requests for improved clarity regarding their treatment under the antitrust laws.''
The FTC/DOJ draft guidelines provided a green light for a number of activities, including explicit safe harbors for agreements ''when the market shares of the collaboration and its participants collectively account for no more than twenty percent of each relevant market in which competition may be affected,'' and for certain R&D collaborations, as well as for a number of other types of agreements that the FTC judged pro-competitive or justified on a variety of efficiency grounds. The guidelines were nuanced, and also identified potential problems and warnings, including, for example, for explicit price fixing agreements.
On the whole, however, the guidelines did not provide a framework exploring the degree to which such agreements undermine the FTC/DOJ's standard analysis of market power, and in particular, the guidelines do not comment in a meaningful way how the existence of a web of collaborative agreements in one set of markets undermines the very notion that firms will act like competitors in a different set of markets. In discussions with the FTC staff, we raised this issue, and we also asked the FTC to turn the discussion around. If the companies could engage in a number of collaborative agreements to achieve efficiencies, as they have for years in terms of joint venture pipelines, unitized oil field development, and shared collections of seismic data, why should the government approve the giant mergers? In what sense was it necessary to create firms through mergers that were so huge, when they could achieve efficiencies in production, exploration and transportation through joint ventures?
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Finally, we asked the FTC to do something more proactive and useful for the public in merger reviews. We asked that the Hart Scott Rodino Act and procedures be changed so that firms engaged in mergers would be required to provide a list of joint ventures, partnerships, licensees for patents, and other collaborative agreements, and to the extent possible, this information should be published on the Internet, during the merger review. This would permit the public to better evaluate the true competitive impact of continued mergers in pharmaceutical, telecommunications, oil industry fields and other industries where collaborative agreements are so common.
APPENDIXEXAMPLES OF OIL INDUSTRY COLLABORATIONS BY THIRU BALASUBRAMANIAM
Royal Dutch Shell and Texaco Equilon Enterprises LLC
Equilon is a joint venture between Shell and Texaco headquartered in Houston, Texas. Equilon was formed in January 1998. Shell owns 56% of Equilon and Texaco owns 44% of Equilon. Equilon is comprised of major components of Shell's and Texaco's midwestern and western U.S. refining and marketing business and their nationwide transportation and lubicrants operations. Equilon refines and markets gasoline and other petroleum products in all or parts of 32 states under the Shell and Texaco brand names.
Equilon is the seventh largest refining company in the U.S. Equilon has an estimated 6.8% share of the national gasoline market and an estimated 13.1% share of the gasoline market in its geographic area. Equilon is estimated to be the fifth largest retail gasoline marketer in the U.S. supplying approximately 9,700 service stations.
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Royal Dutch Shell, Texaco, and Saudi Refining Motiva Enterprises LLC
Motiva is a joint venture between Shell, Texaco, and Saudi Refining, Inc., a corporate affiliate of Saudi Aramco. Motiva was formed in July 1998. Shell owns 35% of Motiva, and Texaco and Saudi Refining each own 32.5% of Motiva. Motiva is comprised of major components these companies' refining and marketing businesses in the Gulf Coast and the eastern United States. Motiva refines and markets gasoline and other petroleum products in all or parts of 26 states and the District of Columbia under the Shell and Texaco brand names.
Motiva is the sixth largest refining company in the U.S. Motiva has an estimated 8% of the national gasoline market and an estimated 16.7% share of the gasoline market in its geographic area.
Equilon and Motiva have a combined capacity of approximately 1.6 million barrels pert day.
Chevron and Texaco Caltex Coroporation
Caltex is jointly owned by Chevron (50%) and Texaco (50%). Caltex refines crude oil and markets gasoline and other petroleum products in approximately 55 countries in Asia, Africa, the Middle East, New Zealand and Australia. In 1999 Caltex sold 1.8 million barrels per day of crude oil and petroleum products.
BP Amoco and Royal Dutch Shell Altura Energy, Ltd.
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Altura is a limited partnership between BP Amoco and Shell combining the respective companies' producing assets in the Permian Basin of West Texas/Southeast New Mexico. Altura was formed in March 1997. BP Amoco owns 64% and Shell owns 36% of Altura.
Exxon-Mobil and Royal Dutch Shell Aera Energy LLC
Aera is jointly owned by Exxon-Mobil (48.2%) and Shell (51.8%). Aera was formed in June 1997. Aera combined Exxon- Mobil's (Mobil before the merger) and Shell's exploration and production operations in California.
BP Amoco and Texaco Nerefco
Nerfco is a refinery in Rotterdam, Netherlands jointly owned by BP Amoco (69%) and Texaco (31%). Nerefoc has a production capacity of 380,000 barrels per day.
Mr. HYDE. Your full statements will be made a part of the record.
Mr. SCOTT. Thank you, Mr. Chairman.
Mr. Spencer, do drivers have the opportunity to purchase gasoline in advance, or get guaranteed prices?
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Mr. SPENCER. No. Almost all owner-operators are going to be buying their fuel through the network of truck stops, some 3,000 around the country, and that is generally an exclusive place for them to purchase fuel.
Mr. SCOTT. And there is no contract, no global contract, where they can buy gasoline at a set price, perhaps at a discount, because of the buying power of any kind of group?
Mr. SPENCER. Not that I am aware of.
Mr. SCOTT. Okay. Mr. Chretien, we heard in Pennsylvania there was a failure to deliver on contracts. Do you find that in the Boston area?
Mr. CHRETIEN. There was a big case in Worcester in central Massachusetts where that occurred, and the attorney general stepped in and they came to a settlement and that company had to return money to about 4,000 consumers. But, in general, for the most part, dealers were complying with that particular model.
Mr. SCOTT. Mr. Love, you indicated a problem with the mergers in the oil industry. We heard a little earlier that there may be some benefit to the mergersthat is, they are more efficient. I think the implication in your testimony is the merger results in higher prices.
If there are enough independent companies, notwithstanding the mergers, can you comment on whether or not that would create efficiencies that would lead to lower prices, or are we in a situation where there are necessarily higher prices?
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Mr. LOVE. I think competition leads to lower prices, and I think that excessive concentration reduces competition, and that is the potential risk and harm to consumers.
Now, on the issue of efficiencies in the oil industry, you can turn the joint venture issue and collaborative venture on its head, and you can say, ''If 100 different companies can elect a single operator to operate a big oil field, why do you have to have a lot of concentration to develop a big oil field?''
It is already the case that the oil industry can accomplish a big, complicated, capital-intensive thing through a variety of joint venture mechanisms. They do it all the time. I mean, it is so common in the industry and it has been for a long time. It has probably beenit is a fundamental part of the industry.
Mr. SCOTT. Well, we deal with antitrust all the time, and there are some models where competition does not lead to lower prices. In the medical field, for example, those that get the very expensive machines, you end up with lower efficiency when every hospital in the area has the expensive machine for which the need can be met with only one machine in the area. Therefore, you go into a certificate of need. Unless you can show there is a demand for the additional machine, you can't buy one, because what happens is the needyou know, people will pay what the bill is, and if you have got costs, you have got to meet the costs. The lower efficiency, in that case, leads to higher prices, and competition would lead to higher prices, not lower prices.
Page 164 PREV PAGE TOP OF DOC Mr. LOVE. I understand that. For example, if you were to have two pipelines from the north slope of Alaska down to the Lower 48, you would have a problem, because it is much cheaper to build a big pipeline than two small pipelines. There are huge economies of scale. That would be inefficient.
And if you were to have 100 operators on the Prudhoe Bay Field in Alaska, that would be inefficient, because you are better to have one or two operators on a field and to share expenses. But the industry already has mechanisms, and, in fact, a rich history of working those things out through undivided interest pipelines, joint interest pipelines, unitized fields. There is actually lots of laws in unitization of oil fields. A lot of governments in different States can force the unitization of a field in order to protect minority interests so they don't get excluded.
So those kind of situations exist. In fact, they are the kinds of things referred to in the guidelines. However, in that sense they undermine the need for consolidation at the company level, because if the companies can achieve their efficiencies through those contractual arrangements and legal fixes and things like that, they don't have to actually become a smaller number of players.
Now, the risk in the oil industry in having a smaller number of players is that the way the cartel is undermined is by people cheating on the cartel. The way the cartel is undermined is by people producing more than they are supposed to be producing and not necessarily revealing it to all the players in the cartel, and that is how you discipline a cartel is you have better surveillance of production and distribution and all aspects of things, and you punish people that engage in activity that is too pro-competitive.
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If you have a company that is too competitive and too aggressive and trying to explore or develop or push too hard for higher levels of production, there are ways you can harm people. You can exclude them from a variety of things.
Now, it is harder to do that when you have 20 companies or 30 companies. It is very difficult to do that. It is not so hard to do that if you have, you know, five or six big companies.
And so there is a relationship between the point you reach in concentration and the abilitythese companies have the same interests as OPEC does. It is not as if BP and Exxon are, like, enemies of OPEC. I mean, OPEC is a really good friend to them. It is accomplishing the Lord's work, from their point of view.
I used to live in Alaska, and I can tell you there were practically members of OPEC up there. If they could find out a way to join, they would have done it. They were thumbs-up on the cartel in Alaska because, you know, that is where we got a lot of money up there.
So I know what it is like, and the companies look at things the same way.
So you can't depend on the big companies to undermine the cartel. What you can count on is a lot of companies to undermine the cartel because people cheat in cartels. That is what undermines cartel activity. We are for cheating in this particular casenot as a general matter, you know.
Page 166 PREV PAGE TOP OF DOC Mr. SCOTT. Thank you, Mr. Chairman.
Mr. HYDE. Well, thank you very much. And I want to thank this panel, not only for a significant contribution to a complicated subject, but for your patience and waiting so long. That is the way it works around here, but you were wonderful and I appreciate it.
The committee stands adjourned.
[Whereupon, at 1:18 p.m., the committee was adjourned.]
SOLUTIONS TO COMPETITIVE PROBLEMS IN THE OIL INDUSTRY
FRIDAY, APRIL 7, 2000
House of Representatives,
Committee on the Judiciary,
The committee met, pursuant to call, at 9:45 a.m., in room 2141, Rayburn House Office Building, Honorable Henry J. Hyde (chairman of the committee) presiding.
Present: Representatives Henry J. Hyde, George W. Gekas, Howard Coble, Edward A. Pease, and Robert C. Scott.
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Staff present: Thomas E. Mooney, Sr., general counsel-chief of staff; Daniel M. Freeman, parliamentarian-counsel; Joseph Gibson, chief antitrust counsel; Sharee Freeman, counsel, Sheila F. Klein, executive assistant to general counsel; Becky Ward, office manager; Amy Rutkowski, staff assistant; Samuel F. Stratman, communications director; James B. Farr, financial clerk; and Cori Flam, minority counsel.
OPENING STATEMENT OF CHAIRMAN HYDE
Mr. HYDE. The committee will come to order.
Today the committee holds its second oversight hearing on ''Solutions to Competitive Problems in the Oil Industry.'' As I said at last week's hearing, the current crisis with OPEC presents a classic antitrust problem that does not lend itself to traditional antitrust solutions. I won't repeat my lengthy opening statement from the hearing last week in which I set forth my views on this topic, but it has been made publicly available for anyone who wants to read it. At that time, we heard from a number of witnesses who presented us with a wide range of proposed solutions to the current crisis.
I don't think there is any single magic bullet that solves the problem, but there are a number of things we can do to help ourselves. Our national security and our prosperity depend on our doing them. I am pleased that several of our witnesses today will propose solutions relating to increasing our domestic production and to producing engines that use fuel more efficiently. I think we need to make progress in both these areas.
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We will also address another issue: zone pricing. Zone pricing is the practice of oil refiners and distributors charging different wholesale prices to gasoline retailers depending on the retailer's location. The legality of this practice depends largely on the intent of the wholesaler. I am concerned aboutand I want to stress that I don't now knowwhether it is happening for illegitimate reasons. Various sources suggest a number of reasons why gasoline prices may differ from one area to anotherdifferent tax structures, different costs, differences in what the local market will bear, efforts to stifle competition, race or class discrimination, and others.
If zone pricing occurs because of differences in tax structures, differences in costs, or differences in what the local markets will bear, then it may not create a legal problem. However, press reports seem to indicate that at least in some cases the wholesale price differs substantially for stations that are quite close together. If that proves true, it may create legal problems. For example, if it occurs because a distributor is trying to stifle competition, then it may create a legal problem under the antitrust laws, in particular, the Robinson-Patman Act. If it occurs because of racial discrimination, it may create a problem under the civil rights laws. At any rate, I want to stress that I am not drawing conclusions, just asking questions.
We have a fine line-up of witnesses and I believe they will illuminate all these issues for us, and we certainly look forward to their testimony.
[The prepared statement of Chairman Hyde follows.]
Page 169 PREV PAGE TOP OF DOCPREPARED STATEMENT OF HON. HENRY J. HYDE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS, AND CHAIRMAN, COMMITTEE ON THE JUDICIARY
Today the Committee holds a second oversight hearing on ''Solutions to Competitive Problems in the Oil Industry.''
As I said at last week's hearing, the current crisis with OPEC presents a classic antitrust problem that does not lend itself to traditional antitrust solutions. I will not repeat my lengthy opening statement from that hearing in which I set forth my views on those topics, but it has been made publicly available for those who wish to read it. At that time, we heard from a number of witnesses who presented us with a wide range of proposed solutions to our current crisis.
I do not think that there is any one magic bullet that solves the problem, but there are a number of things we can do to help ourselves. Our national security and our prosperity depend on our doing them. I am pleased that several of our witnesses today will propose further solutions relating to increasing our domestic production and to producing engines that use fuel more efficiently. I think we need to make progress in both those areas.
We will also address another issuezone pricing. Zone pricing is the practice of oil refiners and distributors charging different wholesale prices to gasoline retailers depending on the retailers' location. The legality of this practice depends largely on the intent of the wholesaler. I am concerned about, but I want to stress that I do not now know, whether it is happening for illegitimate reasons. Various sources suggest a number of reasons why gasoline prices may differ from one area to another: different tax structures, different costs, differences in what the local market will bear, efforts to stifle competition, race or class discrimination, and others.
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If zone pricing occurs because of differences in tax structures, differences in costs, or differences in what the local markets will bear, then it may not create a legal problem. However, the press reports seem to indicate that at least in some cases, the wholesale price differs substantially for stations that are quite close together. If that proves true, then it may create legal problems. For example, if it occurs because a distributor is trying to stifle competition, then it may create a legal problem under the antitrust laws, in particular the Robinson-Patman Act. If it occurs because of racial discrimination, then it may create a problem under the civil rights laws.
At any rate, I want to stress that I am not drawing conclusions. I am just asking questions. We have a fine lineup of witnesses, and I believe that they will illuminate all of these issues for us. We look forward to their testimony.
With that, I will turn to Mr. Conyers for his statement.
Mr. HYDE. Mr. Scott, do you have an opening statement?
Mr. SCOTT. Thank you, Mr. Chairman. And I want to thank you for convening this hearing.
Last week, the committee held a hearing on the rising cost of fuel in this country. We just scratched the surface on the problem, therefore, I am delighted that you have reconvened a committee hearing on this issue.
Page 171 PREV PAGE TOP OF DOC At our last hearing, Rich Parker, the Director of the Bureau of Competition of the FTC testified that it is unlikely that an antitrust suit against OPEC could succeed because of the Act of State Doctrine and Foreign Sovereign Immunities Act. There may be other things we can do. Mr. Chairman, you mentioned zone pricing as one area that we may be able to look at.
I am also looking forward to continuing our conversation about energy policy in general, particularly our country's dependence on oil, both foreign and domestic, new models of energy efficiency and alternative fuels such as wind, geothermals, hydroelectric, electric cars, and other ways that we can get from under our dependence on foreign oil.
So Mr. Chairman, I am delighted that you have reconvened the meeting and look forward to the testimony of our witnesses.
Mr. HYDE. Thank you very much, Mr. Scott.
Mr. Gekas, have you an opening statement?
Mr. GEKAS. Yes, just a brief opening statement.
Mr. Chairman, you are correct in stating that we have heard many different devices and plans offered for diminution of our problems in the energy sufficiency field. And we are eager, as you say, to hear what the witnesses say in the context of that. I am going to ask each of the witnesses, when my time comes, about a comprehensive planlike the kind the chairman has advanced and the kind that I have advanced personally through legislationand to see where the individual proposals might fit into a comprehensive package.
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Thank you very much, Mr. Chairman.
Mr. HYDE. Thank you, Mr. Gekas.
Our first panel consists of two Government witnesses. One will speak to the OPEC situation and the other will speak to the issue of zone pricing.
Our first witness is Mr. Robert Gee, the Assistant Secretary for Fossil Energy at the United States Department of Energy. He is a graduate of the University of Texas and its law school. He practiced energy law at the Tenneco Oil Company, the Interstate Commerce Commission, and the Federal Energy Regulatory Commission. He served on the Texas Public Utility Commission from 1991 through 1997. After that he became the Assistant Secretary for Policy and International Affairs. He moved to his current position in April 1999.
Our second witness is Mr. Richard Blumenthal, the Attorney General of the State of Connecticut. He is a graduate of Harvard College and Yale Law School. After law school, he clerked for Justice Harry Blackmun of the Supreme Court and has had a long career in public service, acting as an aide to Senator Abraham Ribicoff, as the United States Attorney for Connecticut, as a State Representative, and as a State Senator. He was first elected Attorney General in 1990 and has been reelected twice.
We welcome both of you.
Mr. Gee, we will be very pleased to hear from you. If you can restrict your summary to 5 minutesgive or takewe are not punctilious about that. So we can hear all our witnesses this morning, if you could summarize it in 5 minutes, then take questions at the end of the panel and we will put your full statement in the record.
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STATEMENT OF ROBERT GEE, ASSISTANT SECRETARY FOR FOSSIL ENERGY, UNITED STATES DEPARTMENT OF ENERGY, WASHINGTON, DC
Mr. GEE. Thank you, Mr. Chairman. I have submitted a formal statement for the record and with the committee's permission, I will take just a few minutes to summarize its key points.
The recent announcement by OPEC and others that more oil will be flowing into global markets is good news for consumers. It will build oil inventories and, as we have already seen in the past week, it will lower prices. But the recent price spike reminds us that every American can still be affected by actions and decisions that occur well outside our borders.
The recent volatility in oil markets is yet another in a series of cycles. This one perhaps more extreme in its roller coaster effect than others in our past. It is a cycle that actually began in 1997 when OPEC substantially increased production at just about the time when the economic downturn in Asia began to sharply reduce global oil demand. This led to unprecedented low oil prices, the lowest in 50 years, and much of our domestic industry suffered as a result.
The most recent price spike came as a result of a series of production cuts as both OPEC and non-OPEC producing countries attempted to compensate for the plunge in prices. Unfortunately, these cuts came at the same time petroleum stocks were at their lowest in recent history. This combination led to the sharp price spikes we have recently experienced.
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It is important to note that these dramatic swings in prices have largely resulted from an imbalance of less than 3 percent in world oil supply and demand. Today, the world consumes 75 million barrels of crude oil per day. A 2-million barrel supply overhang led to the price plunge in 1998. A 2-million barrel supply shortfall contributed to the price hike of this year.
This is the nature of the global oil market that affects every American. Today, 52 percent of the oil consumed in the United States originates from outside our borders. That is not only due to declining domestic production, but from a continuing rise in U.S. demand. Our petroleum appetite has increased more than 20 percent since 1985.
There are some short-term global actions that can help. We have diversified our international sources of oil supply. Last year, we imported oil from 40 different countries. We can engage in global diplomacy, and I believe Secretary Richardson deserves a considerable amount of credit for the diplomatic efforts he has made in recent weeks.
But in the longer run, we must continue to take actions that strengthen our own domestic energy security and protect those Americans that can be harmed most by sharp price fluctuations. That is what the President and the Department of Energy have been doing over the last several months.
To ease the problems faced by low-income Americans this past winter, the President released nearly $300 million from the Low Income Home Energy Assistance Program. In the pending supplemental appropriations bill, he has asked Congress for another $600 million for this program.
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We have renegotiated delivery schedules for royalty crude oil coming into our Strategic Petroleum Reserve so that this oil goes into the market in the short term. In return, we will acquire a proportionally greater amount of oil for our emergency oil stockpile later this year. Within the last month, the President has also announced several new actions, including his support for a regional heating oil reserve in the Northeast. This would be a 2-million barrel emergency supply of heating oil that could be released when supply shortages threaten economic harm to consumers. We are currently working on plans for this reserve and we are prepared to work with Members to pass legislation that would establish clear authorities for its creation and use.
The President has also called on Congress to extend the Energy Policy and Conservation Act, the legislation that provides organic authorities for the Strategic Petroleum Reserve. Despite the recent visibility and concern expressed over our Nation's oil situation and our energy security, the legislative authority's foremost important energy emergency response tool has been allowed to lapse. It expired on March 31st. It is critical that Congress act soon to extend this legislation to ensure that the President maintains the ability to use all available tools to respond to future energy needs.
There are also opportunities, Mr. Chairman, to increase our domestic oil production and perhaps slow, or even halt, the decline in America's oil fields. The President has announced a package of tax incentives to support new domestic exploration and production. In my formal statement, I have described his proposals for expending of geological and geophysical costs and for clarifying the accounting of delay rental payments on a petroleum resource. Both measures can help producers cut the costs of doing business and, as a result, devote more dollars to actually getting oil out of the ground and to domestic markets.
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In the longer run, perhaps our greatest opportunity to strengthen domestic oil production is through the development of improved technology. Not many people realize that for every barrel of crude oil we have produced in this country, we have left two barrels behind, currently beyond the capability of conventional technology. For the immediate future, we must preserve access to reservoirs where this oil exists. Too many domestic fields in this country are being plugged and abandoned. Many of these fields still contain significant quantities of crude oil.
When a field is abandoned and its surface equipment is removed, the cost of restoring this equipment and reopening the field can be enormous. Much of the original equipment may have been capitalized over years, if not decades. It takes a huge reinvestment to bring these fields back into operation. Often, the capital requirements are too large for most domestic producers, even if prices were to rise to several times their current levels. Consequently, much of the remaining oil is abandoned and, for all intents and purposes, lost forever.
If this occurs, even the best technology we might develop will have little benefit because we will have very few places to apply it. So my office has a specific program to provide cost-sharing assistance to producers willing to try new approaches to keep these fields in operation. Last year, we announced a $23 million program in Federal technology assistance for a new round of these projects, adding to $116 million of assistance provided to an earlier set of projects. Together, these efforts can help recover more than 650 million barrels of domestic crude oil that might otherwise be left in the ground.
Page 177 PREV PAGE TOP OF DOC We are also providing specific technical assistance to our smallest producers, independent companies, many of them family-owned, who are becoming the dominant players in our domestic industry. Independent producers today drill 85 percent of the new wells in this country. They produce nearly half the crude oil from the lower 48 States and more than two-thirds of the Nation's natural gas. This type of assistance buys us time. It gives us the opportunity to develop the innovations that can recover a greater proportion of the oil we currently leave behind.
I have described some of these innovations in my formal statement. In the interest of time, I won't repeat them except to say that, if we are successful, the U.S. oil industry of the future will be shaped by advances being made today in computer technology, in fiber optics, in miniaturization, perhaps even in biotechnology. There are remarkable opportunities. And if we can sustain a partnership between Government and industry in developing these new technologies, we can look forward to a day when the roller coaster rise of prices comes to a stop.
Our goal is a future in which the United States is producing the full potential of its domestic resource and the cost of a barrel of oil is set solely by markets, not by cartels.
This concludes my opening statement, Mr. Chairman, and I will be pleased to answer any questions you or other members of the committee may have.
[The prepared statement of Mr. Gee follows.]
Page 178 PREV PAGE TOP OF DOCPREPARED STATEMENT OF ROBERT GEE, ASSISTANT SECRETARY FOR FOSSIL ENERGY, UNITED STATES DEPARTMENT OF ENERGY, WASHINGTON, DC
Mr. Chairman and Members of the Committee:
As virtually every American is aware, our economy has endured a new cycle of volatility in oil markets. It began in 1997 when the Organization of Petroleum Exporting Countries (OPEC) substantially increased oil production. At about the same time, global demand took a downward turn. Much of Asia lapsed into recession, and the world had two years of relatively mild winters.
As a result, the availability of crude oil in global markets began to exceed demand, and oil prices plunged to historic lows.
In the spring of 1998, as Middle East nations watched oil prices plummet, both OPEC and non-OPEC oil producing nations proposed the first of three production cuts. As the consequences of continually falling prices became apparent to producing countries, they stiffened their resolve to hold to agreed production cuts. Just as these cuts took hold, world demand for oil began increasing. Tight world markets began to drive up prices and led refiners to draw down stocks worldwide to meet demand growth.
Crude oil and petroleum product prices rose rapidly, especially over the past 12 months. West Texas Intermediate crude oil, one of the U.S.'s benchmark crude oils, rose from about $12 per barrel in February 1999 to $34 a barrel in the first week of March 2000.
Page 179 PREV PAGE TOP OF DOC This dramatic swing in prices has largely resulted from an imbalance between world supply and demand of less than 3 percent. In a world that consumes 7075 million barrels of crude oil per day, a two million barrel per day excess in supply caused oil prices to spiral downward in 1998; a two million per day shortfall in supply, coupled with low stock levels, caused oil prices to skyrocket upward in 19992000.
Low inventories leave little cushion to meet sudden increases in demand or decreases in supply, increasing the possibility of price runups. In particular, U.S. Northeast heating oil and diesel prices surged in January 2000, when cold weather and supply problems occurred at a time when petroleum product stocks were low. With little distillate stock cushion, local supplies were diminished, and prices spiked. Large volumes of distillate imports, warm weather, and increases in production have since resolved this supply shortage in the Northeast.
The nation's consumers, however, are now facing a very tight gasoline market. U.S. crude oil and gasoline inventories are at historically low levels. On top of low stocks, refineries need to increase crude inputs about one million barrels per day by mid summer.
U.S. Dependence on Petroleum. Today, the United States is still heavily dependent on crude oil, in spite of the growth in use of other fuels such as natural gas and coal. In 1998, petroleum supplied nearly 40 percent of our energy needs. Since 1985, domestic crude oil production has been declining, while domestic oil consumption has increased by more than 20 percent. The result is a growing reliance on oil imports. In 1974, net imports of crude oil and products supplied about 35 percent of U.S. consumption. In 1998, net imports supplied about 52 percent of U.S. consumption, the highest percentage ever.
Page 180 PREV PAGE TOP OF DOC Our sources of these imports, however, have changed significantly over the last two decades. Last year, we imported 4.85 million barrels of oil per day from OPEC, down 22% from the 6.19 million barrels of oil per day we imported from OPEC in 1977. Our imports now come from over 40 countries around the world. During this same period, OPEC's share of the world market has dropped from 49% to 40%.
In the past, oil shortages have taken a significant toll on the U.S. economy. The most recent price spikes, while still a threat to reignite inflation and dampen economic growth, have not had the major or immediate impact on the U.S. economy they might have had 10 or 20 years ago. Increased energy efficiencyin cars, homes, and manufacturinghas helped insulate the economy from these short-term market fluctuations. In 1974, for example, we consumed 15 barrels of oil for every $10,000 of gross domestic product. Today we consume only 8 barrels of oil for the same amount of economic output.
Thus, the Administration's policy of encouraging conservation has paid real dividends for the American people. In fact, had Congress fully funded our Conservation and Renewable Energy requests, over $1.67 billion additional dollars would have been committed to this effort.
Let me take a moment to briefly outline the basis for our energy policy. Our energy policy is based on:
Market forcesnot artificial pricing.
Pursuing diverse sources of supply and strong diplomatic relations with energy producing nations.
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Working to improve the efficiency and environmental acceptability of production and use of traditional fuels through new technology development.
Diversifying our energy sources through long-term investment in alternative fuels and energy sources.
Investing heavily in increasing efficiency in the way we use energy.
Maintaining and strengthening our insurance policy against supply disruptionsthe Strategic Petroleum Reserve.
These are the foundations of the Clinton Administration's policiesand over the long-term they work to provide affordable, secure supplies of energy.
The Problem of Volatility. Extreme market volatility negatively impacts several sectors of economyboth for energy producers and consumers. The rapid increase in the price of home heating oil created hardship for many families in the Northeast and Americans living on modest incomes. High fuel costs have hurt independent truckers, small businesses that are energy intensive, and farmers.
Market volatility has also created difficulties for the nation's oil producers. When prices plunged in 199899, domestic production declined by more than 300,000 barrels per day. More than 30,000 oil workersnearly 1 out of 10lost their jobs. Drilling rigs were scrapped. Even as prices rebounded, financial markets have remained cautious, money continues to be tight, and reinvestment in the domestic oil industry has not fully materialized. Some of the lost production may never come back on line.
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In short, while $34 per barrel adjusted for inflation is still less than the $70 per barrel equivalent price seen in 1981, the extreme price volatility over the last year has created market dislocations. President Clinton and Energy Secretary Richardson have repeatedly urged policies that can help restore market stability by turning to markets and free market principles to set the future price of oil. At the same time, the Administration has recognized that actions must be taken to cushion the nation's economy and its most vulnerable consumers from future volatile swings in oil prices.
Aftermath of OPEC Decision. For several months, Energy Secretary Richardson engaged in numerous discussions with oil producing nations urging them to increase production in line with current market demands. These diplomatic efforts paid off when OPEC announced its decision on March 28 to increase production quotas by approximately 1.7 million barrels per day. Coupled with additional outputs from other oil producing nations, the production increases will help replenish low inventories and better meet current demand.
Typically, it takes 4 to 6 weeks for crude oil produced in the Middle East to reach the United States; however, markets often react well in advance of actual shipments.
As of Tuesday, April 4, the price of West Texas Intermediate (a benchmark domestic crude oil) for May delivery dropped to around $25.50 per barrel, down more than $8.50 from the posted price in February.
By March 27, 2000, the national average retail regular gasoline price had dropped to $1.508 per gallon, down 2.1 cents from the prior week but 42.6 cents higher than a year ago. This was the first decrease in the national average retail regular price since early January 2000. The national average retail diesel fuel price was $1.451 per gallon on March 27, 2000, down 2.8 cents from the prior week but 40.5 cents higher than last year.
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Ultimately, as markets determine if the increased production levels are sufficient to meet demand and rebuild depleted inventories, we expect the downward trend of prices to continue.
Administration's Mitigation Measures. Beginning in January, the Administration took several steps to mitigate the impact of high heating oil and diesel prices.
These included the release of additional Low Income Home Energy Assistance Program (LIHEAP) funds to help low-income Americans pay their energy bills, along with a number of short-term actions intended to ease the immediate problems faced by truckers, heating oil distributors, and others. In all, nearly $300 million has been released to help low income families pay their energy bills. The President has also requested another $600 million in additional LIHEAP funds in the pending Supplemental Appropriations bill, and he is seeking an additional $19 million from Congress for low-income home weatherization in FY 2000.
Secretary Richardson also directed our Strategic Petroleum Reserve Office to renegotiate oil delivery contracts for the Reserve's royalty-in-kind program. The Energy Department has contracted for 28 million barrels of federal royalty oil from the Gulf of Mexico to be delivered to the Strategic Petroleum Reserve's storage facilities in Texas and Louisiana. About 10 million barrels of this oil have already been delivered. The Department has renegotiated contracts to shift the delivery of 5 million barrels of oil from this spring to later this fall and winter, when conditions are more favorable for putting crude oil in the Reserve. Postponing delivery dates until prices are expected to be lower also allowed DOE to negotiate greater than contracted-for quantities of crude oil.
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President's Actions to Strengthen Oil Reserves and Domestic Supplies. On March 18, President Clinton announced additional steps to strengthen America's energy and economic security. They included:
1) Reauthorizing the Strategic Petroleum Reserve, our emergency crude oil inventory;
2) Enacting a comprehensive tax incentive package, balanced between incentives to support domestic oil production, continue diversifying our energy supplies, and increasing the energy efficiency of our economy.
3) A call to Congress to draw up legislation establishing a regional heating oil reserve with an appropriate trigger mechanism to help protect consumers in the Northeast and New England;
Reauthorizing the Strategic Petroleum Reserve. The Strategic Petroleum Reserve is our ''first line of defense'' against the threat of energy shortages that can cripple our economy; however, the organic authorities for the Reserve in the Energy Policy and Conservation Act expired on March 31st. Congress extended EPCA for only six months last September. Although the Senate has passed a 4-year extension last September, the House has not taken action since that time.
It is critical that the Congress extend EPCA as soon as possible to ensure that the president maintains the ability to use all available tools to respond to the needs of the United States economy.
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Enacting a Comprehensive Tax Incentive Package. To insulate the economy from the effects of future price increases, the President has called on Congress to enact a comprehensive and balanced package of tax incentives.
The President is proposing new steps to support new domestic exploration and production, and to lower the business costs of producers when oil prices are low. These tax proposals will cost less than $1 billion over ten years. They include:
Expensing of Geological and Geophysical Costs: The President is proposing to support domestic exploration and production by adjusting the treatment of the costs of exploration and developmentgeological and geophysical costsin the tax code. Under current law, geological and geophysical costs may be deducted if the related exploration activity was unsuccessful but must be capitalized if the exploration activity was successful. By allowing the industry to expense these costs, we will be encouraging the discovery of new reserves.
Allowing Expensing of Delay Rental Payments: A ''delay rental payment'' is an amount paid by a lessee to the lessor of a petroleum resource when the lessee does not begin producing commercial quantities of oil or natural gas as soon as was agreed. The delay rental payment is intended to compensate the lessor for the royalties he does not receive while production is delayed. Currently, the federal tax code requires delay rental expenses to be capitalized under some circumstances. Allowing producers to expense delay rental payments in the year incurred will lower the cost of doing business and allow more dollars to be invested in finding and producing new domestic oil reserves.
Page 186 PREV PAGE TOP OF DOC The Administration will also continue to examine measures to preserve marginal well production. Domestic marginal wells (which produce 15 barrels of oil per day or less) account for more than 20 percent of onshore oil production in the lower-48 States. An estimated three-fourths of these wells are owned by smaller, independent producers. The Administration will continue to evaluate whether a tax credit for selected marginal wells that could be activated under specific market conditions should be proposed as a ''safety net'' to help these wells maintain their economic viability during periods of low oil prices.
Expanding the Nation's Diversity of Fuel Supply. In his March 18 announcements, the President again stressed the need to diversify our energy supply by starting ''down the right path toward real, long-term energy security.'' The President believes that any tax package to improve the energy security of the country must include incentives to improve energy efficiency and promote the use of renewable energy. In his proposal, therefore, the President also included (1) tax credits for electric, fuel cell, and qualified hybrid vehicles, (2) tax credits for efficient homes and buildings, and (3) tax credits for efficient, non-petroleum based sources of power. He also reemphasized the importance of Congressional passage of his FY 2001 budget request which includes more than $1.4 billion to accelerate the research, development and deployment of alternative energy sources and more efficient end-use technologies.
The President also directed the Department to conduct a 60-day study on converting factories and major users from oil to other fuels, to determine whether this will help to free up future oil supplies for use in heating homes.
Support for Establishment of a Regional Heating Oil Reserve. The President remains concerned about the effect that future shortages of heating oil may have on consumers, particularly in the Northeast and New England. To reduce the likelihood that future shortages will harm consumers, the President is:
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Supporting the Establishment of a Regional Reserve: The President supports the creation of a two million barrel heating oil reserve in the Northeast with an appropriate trigger to combat future product shortages. In the event of heating oil shortages, heating oil can be sold from the reserve to increase the supply on the market.
Directing DOE To Undertake Necessary Environmental Reviews: The President has directed the Department of Energy to begin the appropriate environmental reviews for the creation of the heating oil reserve.
Calling on Congress to Establish a Reserve Through Legislation: The President has called on Congress to pass legislation that authorizes creation of a regional heating oil reserve and includes an appropriate trigger. The President has reserved his right to establish a reserve under his existing authority in the event that Congress fails to act.
Investing in Better Technology to Boost Domestic Oil Exploration and Production. If we hope to avoid the roller coaster fluctuations of oil prices 10 or 15 or more years into the future, we must invest in better oil exploration and production technology todayand most importantly, sustain that investment in the coming years.
It has been the steady pace of technology that has helped keep the domestic industry viable. In the 1970s, an exploratory well had about a 14 percent chance of finding producible hydrocarbons. Today, those odds have more than doubled. An exploratory well in the 1970s, on average, added about 10,000 barrels of oil in new reserves. Today, an exploratory well adds four times that amount, more than 40,000 barrels in new reserves.
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Major technological advances in oil exploration, such as three- and four-dimensional seismic drilling, are helping us to find more oil at greater depths, both on- and off-shore. At the same time, these technologies have reduced the environmental footprint left by exploration and production to 1/10th the size it was 25 years ago.
Research and development partnerships between government and industry have become increasingly important in recent years. The domestic petroleum industry of the 21st century is not the industry of the 1970s or even the 1980s. It no longer is dominated by ''Big Oil.'' Increasingly today's modern-day domestic oil industry is an industry of independentsan industry of smaller companies. Independent producers now drill 85 percent of all new wells in this country. They account for almost half of the crude oil produced in the lower 48 States and two-thirds of the natural gas. They are the ones that can benefit most from new technologyespecially technology that resolve production problems in the older, more complex U.S. fieldsbut they are the ones least able to afford research and development. Eighty percent of these companies employ less than 20 workers.
Our petroleum technology efforts at the Department of Energy fit into two primary categories:
One is to maintain access to the resource through the transfer of existing and improved oil and gas production technologies into the hands of domestic producers, especially the smaller independents.
The other is to develop the longer-range technologies that can ultimately produce the full potential of that resource.
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If we don't maintain access to the resourceor in other words, if we don't find ways to forestall the abandonment of still-productive oil fieldsdeveloping longer-range technologies will be of virtually no benefit. Most of the resource will be lost before these technologies are ready.
When domestic wells are plugged and abandoned, the surface infrastructurepumping units, gathering systems, storage tanks, and other equipmentthat has been installed and financed over decades is dismantled. The capital investment necessary to restore this infrastructure can be so large that few of today's companiesespecially the smaller onescan obtain the necessary financing no matter the price of oil. The resource is, for all intents and purposes, no longer accessible under any reasonable price or technology scenario.
That's why we have placed a high priority on keeping oil fields facing imminent abandonment in production through such efforts as:
The Reservoir Class Field Demonstration Program. Eight years ago we began a program to cost-share field tests of technologies that could prolong the economic life of fields threatened with imminent abandonment, yet known to contain considerable quantities of remaining oil.
The program achieved some major successesrevitalizing production in places like Utah and Michigan. It gave producers the opportunity to apply innovations that didn't exist a decade ago in fields that no longer were of economic interest to many of the larger companies.
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In February 1999, Secretary Richardson announced that he would restart the Reservoir Class Field Demonstration Program. In October, we selected 10 projects to receive $23 million in Federal funding, all of which involve independent producers.
These efforts have the potential to keep nearly 650 million barrels of domestic crude oil from being abandoned.
Technology Assistance to Independents. Also to maintain access to reservoirs, we have set aside funding to assist the smallest of our independent producers solve specific field production problems. Since this program began in 1995 and was restarted last year, 45 companies have received targeted grants to apply innovative solutions that have kept many wells in production.
The Preferred Petroleum Upstream Management Practices Program. We are also kicking off a new effort we call the ''Preferred Petroleum Upstream Management Practices Program'' (PUMP) program. Our plan is to find out where geologic, regulatory or other factors have combined to hold back production, and then develop an integrated set of ''best practices'' that can get production back up quickly. This month, we will issue a competitive solicitation to begin this program. We will be looking for proposals that identify these ''best practices,'' show how they can be used to overcome regional production constraints, how they can improve the bottom line, and how they can be transferred to other producers.
These are some of the efforts that keep oil flowing that might otherwise be shut in. If we are successful, we can halt the decline in domestic production during this decade. This will preserve access to reservoirs and provide time for better technology to be developed that can extract even greater amounts of crude oil from the Nation's reservoirs.
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The potential for improved oil technologies is enormous. Many people are surprised to know that for every barrel of crude oil produced in the United States in the history of the domestic oil industry, nearly two barrels have been left in the ground. Technological improvements can help U.S. producers recover a much greater portion of the oil that is currently beyond the capabilities of today's exploration and production processes.
Examples of Longer-Range Potential of Technology. Already, the same technology used by Steven Speilberg to create the dinosaurs of Jurassic Park is being used to image the flow patterns of oil reservoirs. 3D seismic became a more widely used tool when advances in computer technology brought down the cost of digital processing. And that has helped boost exploratory well success rates to as high as 50 percent. Now companies are adopting 4D seismicadding time to the data setand beginning to see new production benefits. One company has seen recovery rates jump to 70 percent.
Artificial intelligence is just beginning to make its mark in the industry. That, combined with micro-technologyperhaps one day, nano-technologycould lead to a new generation of ''smart'' auto-drilling systems that can reduce the costs and increase the success rates of future drilling.
A complete ''logging and chemical laboratory-on-a-chip'' might be in the industry's future. This technology would analyze for hydrocarbons near the bottom of the hole while drilling is underway. Fiber optics, perhaps embedded in composite drill pipe, could bring about quantum improvements in the way data is transmitted from the bit to petroleum engineers on the surface.
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In the future, new polymers and other chemicals, along with different types of gas injection (including greenhouse gases such as carbon dioxide), could offer better ways to force previously unmoveable crude oil through the tight pores of reservoir rocks and to production wells. It may also be possible to use naturally-occuring microbes that live deep in reservoirs to produce substances that can aid in the future recovery of crude oil.
These are some of the examples of technology that begins to maximize productionthat allows us to tap the true potential of the considerable oil wealth that remains in this country.
It will take a combination of actionsboth near- and long-term, both to encourage additional domestic oil production and to increase the efficiency in our future use of oilto give the United States a more stable energy future.
The problem of market volatility will not be solved overnight. It will take continuing dialogue and a common understanding among both consuming and producing nations that stability in oil markets is a shared and desirable goal. Much of Secretary Richardson's recent success in discussions with energy ministers and key global leaders was the availability of data which showed global petroleum stocks at extremely low levels. This kind of data will continue to be important, and a goal of the Department is to improve the quality and accuracy of international data.
A fully responsive and capable Strategic Petroleum Reserve is also a key element of a more secure energy future, and we will continue to work with Congress to pass its reauthorization as soon as possible.
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Also given the hardships imposed by fluctuations in home heating oil prices to many low-income families in the Northeast, we will continue to work with Congress to establish a regional arm of the Strategic Petroleum Reserve that will provide heating oil to help cushion future price swings.
Finally, we will continue to make investments in technology that can increase the amount of crude oil that can be produced in the future from our own domestic resources. If these programs are successful, we may be able to halt the decline in U.S. oil production by the mid part of this decade and begin to slow our growing dependence on imported oil.
These steps are key elements of a sound, comprehensive energy strategy that has helped sustain the longest economic expansion in American history. They will enhance America's energy security, create jobs, protect the environment, and produce long-term savings for consumers.
This concludes my prepared statement, Mr. Chairman. I will be pleased to answer any questions.
Mr. HYDE. Thank you very much, Mr. Gee.
STATEMENT OF RICHARD BLUMENTHAL, ATTORNEY GENERAL, STATE OF CONNECTICUT, HARTFORD, CT
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Mr. BLUMENTHAL. Thank you very much, Mr. Chairman.
I want to thank you for giving me this opportunity to speak to you about the subject that you raised in your opening remarks during the first session on this subject and now have repeated here, namely, zone pricing. I recognize that you have not reached any conclusions, but may I say, you are asking the right questions. Who is impacted? How adversely? Is there a violation of law? And in fact, is the overall effect to stifle competition?
I would submit very clearly that this practice of zone pricing is insidious and invisible. It distorts the free market. It raises prices for everyone, but most especially for individual consumers who are within the neighborhoods or areas that are charged more because they are thought to be more affluent or perhaps isolated or simply are part of a market that can bear higher prices.
The way the system of zone pricing works is, as the chairman has described it, the big oil companies divide geographic areas into different zones. Then they are able to dictate the prices charged at the pump within those zones, some of them 6 to 10 cents higher than other areas, because of restrictive provisions in their agreements with the retailers that require those dealerspeople who deal directly with consumersto buy their product from only one supplier. It is that restrictive interference with the free market that really powers or drives the zone pricing mechanism.
And it has the very anomalous and unfortunate result that a driver delivering the same brand to a number of different dealers in the same truck from the same terminal may be charging a different price, varying 6 to 10 cents, to different dealers who may be a block or so from each other. And within a radius of just a few miles, different retailers may, as a result, be charged different amounts simply because they are within different zones.
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The dealers themselves, many of them, are against this practice, in effect belying the reasoning normally given by the big oil companies, which is that it fosters competition. The dealers would like to see competition. They abhor this practice because it ties their hands and victimizes not only them but consumers.
So really this kind of practice flies in the face of what consumers deserve, dealers deserve, and the free market deserves. Unfortunately, it is very, very difficult now to prosecute. In fact, almost no cases have arisen under the Robinson-Patman Act within the last two decades. Most of the precedentsand some of them are cited in my testimonydate from the 1960's and 1970's.
The problems under the current law are two-fold. First, there is a requirement under Robinson-Patman that there be a prima facie showing of injury to competition. And that injury must be sustained and substantial. There are a number of elements that have to be proved to meet that test. And the dealers are unable to overcome the proof hurdles, the evidentiary barriers, because very often the zones change, they are kept secret, and they are based on formulas that may be arbitrary and beneficial only to the oil companies, but nonetheless are kept confidential. So there are evidentiary barriers there, as well as the problems of simply meeting the obstacles of the test itself.
And there is a second barrier to proof under Robinson-Patman, and that is under 2(b), meeting competition is an absolute defense. The oil companies, unfortunately, are able to use that excuse or defense and thereby overcome many of the cases that have been brought privately. Meeting competition is something that oil companies are expected to do, but very often the kinds of situations lend themselves to the use of this defense as a ploy in order to defeat the cases brought against them.
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I have suggested in my testimony a number of very simple options to cure the problems currently in the law. They are called loopholes. I don't know whether ''loophole'' is the right terminology, but simply clarifying the law, so as to ban this kind of price discrimination. It is price discrimination. It is used against different dealers by the oil companies. Another option would be to very simply, under the Petroleum Marketing Practices Act, enable the dealers to buy from more than one source. In other words, prevent the sole source provisions that are now in almost all of these contracts. A third option would be to clarify Robinson-Patman so as to reduce some of the evidentiary barriers.
All three options I would recommend for consideration. My preference would be to amend the Petroleum Marketing Practices Act so as to liberate the dealers and enable them to buy from whomever they want, get the benefit of the best price, and then pass it on to their consumers.
[The prepared statement of Mr. Blumenthal follows.]
PREPARED STATEMENT OF RICHARD BLUMENTHAL, ATTORNEY GENERAL, STATE OF CONNECTICUT, HARTFORD, CT
I appreciate the opportunity to speak today on the issue of zone pricing in the gasoline industry.
The nation has watched aghast as gasoline prices virtually doubled from under $1 to over $2 gallon in many places within barely a year. Their rapid rise and volatility have been shocking. They have siphoned hundreds of dollars out of individual consumer's budgetshitting particularly hard the elderly and people on fixed incomes.
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The power of the major oil companies to charge inflated, excessive, arbitrary prices results from gasoline dealer franchise agreements dictating that the gasoline dealers are required to purchase products from a single supplier. As a result of such sole source provisions, gasoline dealers are powerless to seek or shop for a cheaper supply of gasoline. Hence, consumers in the higher price zones pay a higher retail price.
Zone pricing is invisible and insidious. It distorts the free market. It is possible only because of restrictive contracts that include sole source provisions. It benefits only the oil industry, to the detriment of consumers.
The major oil companies have claimed that this differential pricing mechanism is simply meeting the competitive situation in each zone. Yet, one look at their zone system demonstrates that zone pricing is simply designed to increase profits by setting prices based on what the oil companies think the market will bear. The refining companies map out areas and charge dealers different wholesale prices according to secret formulas based on relative wealth, isolation, or other factors. Connecticut, for example, is a geographically small state, but Mobil, one of the largest gasoline distributors in the state, has 46 zones. In one recent example, the wholesale price for gasoline in a town with higher per capita income was six cents higher than the wholesale price for the same gasoline in a nearby town with a significantly lower per capita income.
The problem is national. Zone pricing is used by the major oil companies in virtually every state. In California, for example, one major oil company has three price zones within a 14 square mile area, with different prices for gasoline stations only 6 miles apart. Around the nation, zone boundaries change frequently, arbitrarily and secretly.
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Oil companies claim that zone pricing is a response to competition, and is needed to help their dealers in more demanding market areas compete and maintain market share. Those claims are untrue and unsupportable. The only real purpose of zone pricing is to allow oil companies to squeeze out extra profits from retailers and consumers wherever they see an opportunity.
In a truly free and open market, every retailer would be free to buy his brand of gasoline from whichever wholesaler offered the best price at that time, and the retailer would pass some of the savings on to the consumer to stay competitivewhich is the way a free market should work. Wholesale prices of gasoline by the major oil companies would be based on the supply and demand at the dealer level and the costs of buying and refining gasoline. Under zone pricing, by contrast, they often include an extra secret surcharge based on where the gas station is. Obviously, that isn't a free market. It's a market which has been captured and abused by the major oil companies.
I have worked closely with the Connecticut chapter of the Gasoline and Service Dealers of America (GASDA) to enact state legislation prohibiting zone pricing. The fact that GASDA has fought so hard for this legislation demonstrates the retailers' dissatisfaction and frustration with such arbitrary price gouging schemes. (The strength of industry opposition shows how lucrative it is for big oil companies.) Our local small businesses know our market best. If zone pricing were really necessary to promote competition, as big oil claims, then retailers would advocate it. Instead, they abhor it, because they know it stifles competitionunfairly to dealers and drivers alike. Robust competition on a level retail playing field, without price manipulation from wholesalers, ultimately benefits consumers.
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Zone pricing may seem to be a practice that is illegal under our federal antitrust law. Indeed the Robinson-Patman Act, 15 U.S.C. 13, states in pertinent part:
It shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchases of commodities of like grade and quality . . . and where the effect of such discrimination may be substantially to lessen competition . . .
Clearly, zone pricing by its nature is price discrimination. Court interpretations of the Act, however, have required that the discrimination be continuous. Because zones and zone pricing schemes change frequently, at least one court has held that the zone pricing differential is temporary and therefore does not have a significant effect on competition. American Oil Company v. FTC, 325 F.2d 101 (7th Cir. 1963).
In addition, subsection (b) of the Robinson-Patman Act establishes a defense to a price discrimination claim when the ''lower price or the furnishing of services or facilities to any purchaser or purchasers was made in good faith to meet an equally low price of a competitor, . . .'' This ''meeting competition'' defense has doomed any successful legal action against zone pricing under the Robinson-Patman Actnot because zone pricing is really pro-competitive, but because the whole system has been designed to be so complex that proof is extraordinarily difficult, and legal challenges can seldom succeed.
Now is the time for Congress to act. I recommend one of three options which would lead to lower prices at the gas pumps.
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First, Congress could enact legislation prohibiting zone pricing. I suggest the following language for the committee's consideration: ''No person engaged in the business of furnishing gasoline to retail distributors of gasoline may use a pricing system under which the wholesale price paid for gasoline by any such retail distributor is determined based on the location of the retail distributor in any geographic zone.''
Second, Congress could enact legislation that establishes a clear prohibition against price discrimination in this context. The committee could consider language such as:
A person engaged in the business of furnishing gasoline to retail distributors of gasoline shall sell gasoline to all retail distributors of gasoline at the same base price minus any bona fide volume discount and plus any actual transportation cost. The invoice for the sale of such gasoline shall indicate the base price and any discounts or transportation costs. Such base price shall not be adjusted more than once in any twenty-four hour period and shall be the rack price as posted in the oil price information service.
Third, Congress could consider an amendment to the Petroleum Marketing Practices Act (PMPA), 15 U.S.C. 2801, et seq. prohibiting major oil companies from dictating the source of supply of the brand name gasoline.
The PMPA was enacted in 1978 to provide national standards for gasoline franchise agreements regarding the termination and nonrenewal of such franchise agreements. Unfortunately, while Congress, in approving the PMPA, recognized that gasoline dealers are in a weak bargaining position with the major oil companies over terms of the franchise agreement, the PMPA does not provide specific protection against unfairly burdensome franchise provisions foisted upon gasoline dealers by the major oil companies.
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The power to impose zone pricing is solely based on the power of the major oil companies to control purchases by the gasoline dealers. If the wholesale supply of gasoline were truly competitive, and a Mobil gasoline dealer could purchase Mobil gasoline from any Mobil gasoline wholesaler, the major oil companies could not dictate the price of wholesale gasoline based on location. The dealer could simply choose another vendor of the same brand of gasoline at a more competitive price.
Thus, the PMPA could be amended to prohibit the anti-competitive provisions in gasoline dealer franchise agreements that dictate the wholesale source of gasoline. I suggest that the committee consider the following language: ''No franchise, as defined in subdivision (1) of 15 USC 2801, shall limit the source of acquisition of gasoline by a retail distributor except that the franchisor may require that such gasoline is the same brand as the franchisor.''
I urge the Judiciary Committee to carefully consider these options in an effort to deliver more competition and lower prices to gasoline stations throughout the United States.
Mr. HYDE. Thank you very much.
We will now entertain questions.
Page 202 PREV PAGE TOP OF DOC Mr. SCOTT. Thank you, Mr. Chairman.
Mr. Gee, you mentioned the fact that 2 million barrels a day were enough to cause wild fluctuations in prices. Does the Strategic Petroleum Reserve serve as a buffer for this? That is to say, you can release 2 million barrels a day when the price skyrockets? When the price plummets, you can buy it back?
Mr. GEE. Congressman, the reserve has the potential of influencing price, depending on the volume released, the rate of draw down. Its current inventory is 570 million barrels and it has a daily drawdown capability of 4.1 million barrels per day. So arguablyto give you a direct answerit could be utilized, if it were so decided, to influence price under emergency interruption circumstances, as the law requires.
Mr. SCOTT. I thought the law was just supply, not price.
Mr. GEE. The law is supply. That is correct but the law was amended in 1992, to account for price, as well as supply. It is to address emergency supply interruptions.
Mr. SCOTT. So as long as there is a supply at whatever cost, present law doesn't let you get involved?
Mr. GEE. We don't look at necessarily a price, per se, under the law. Obviously, what the law says is an emergency interruption of supply. It doesn't say when the price reaches a certain level then it wants a drawdown. The law is not written that way. But what I am saying is that obviously the emergency circumstances that would occasion resort to the reserve would be one of concern about price and its impact on U.S. energy security, the domestic impact on our economy.
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So it can be utilized to influence price under emergency circumstances.
Mr. SCOTT. When the price goes up 30, 40, 50 percent, some of us think that is an emergency. Is this something we ought to be looking into as a possibility?
Mr. GEE. I think it is worthwhile certainly to look to continue the reserve and the authoritywhich, by the way, has now lapsedso that we have that tool available. I think that certainly what constitutes an emergency is something which many people might have differing opinions on. We know, for instance, that particularly in the Northeast where the severity of the price spike was felt so acutely right in the middle of the heating oil season, many people who were dependent upon heating oil felt that it was a life-threatening situation.
That is why, for example, the President is proposing the creation of a regional product reserve that would endeavor to address localized shortages such as that where you do have a price spike which might have as its trigger something other than the current trigger in law, which is one of an emergency supply interruption.
Mr. SCOTT. Thank you.
Mr. Blumenthal, you mentioned the fact that some ofI am not sure if I heard you rightyou said that the zone pricing could be very disadvantageous in areas where the residents were high-income. I thought the experience was that the low-income areas would get hit the hardest.
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Mr. BLUMENTHAL. They are really both victims of this practice, Congressman. Many disadvantaged areas are as hard hit by zone pricing as affluent areas because the expectation is that people who live in disadvantaged areas simply won't seek or shop around for better prices, or may be more isolated where they live. And likewise, more affluent areas are thought to be able to bear higher prices. But often the focus is on those neighborhoods that are economically disadvantaged because they are thought, very simply, to tolerate the higher prices and be unable to shop around.
Mr. SCOTT. When you have zone pricing, if you are going to show an antitrust violation, do you have to show an actual conspiracy?
Mr. BLUMENTHAL. Under Robinson-Patman, there doesn't need to be a conspiracy if there is price discrimination. The problem really is, as I stated earlier, that proof of price discrimination requires a showing of injury to competition. In other words, that but for the existence of zone pricing, there would be crossing over or a greater equality in both the prices and the profits, that is, revenues and income. So it is often very difficult to show that discrimination actually injures competition. You have to show, number one, that the different retailers are in competition with each other, and second, that the disfavored are charging substantially higher prices at the pump.
Mr. HYDE. I am going to note that your time has expired. We have eight more witnesses. We could go on indefinitely, but I do appreciate that. So if you don't mind, Mr. Gekas is recognized for 5 minutes.
Page 205 PREV PAGE TOP OF DOC Mr. GEKAS. Mr. Blumenthal, a year ago or 2 years ago, when prices were relatively low and we heard very little lament from the consuming public, was zone pricing going on?
Mr. BLUMENTHAL. It was indeed, Congressman. In fact, we sought to ban it in Connecticut and a number of other States did as well because even at times when prices are lower, they could be lower still but for zone pricing. Really, zone pricing hurts everyone because it raises the bar. It means that oil companies can control the price at the pump and can prevent it from going lower than it would otherwise.
Mr. GEKAS. So it is not a phenomenon brought about by what we now term the current crisis in oil prices. Is that correct?
Mr. BLUMENTHAL. It is a practice that has existed for decades. Yes, that is correct.
Mr. GEKAS. Mr. Gee, about 2 weeks ago I introduced a piece of legislation that would create a Blue Ribbon Commission, much like the one that applied itself to the Social Security problems of 1977 and 1983, to bring about a comprehensive energy policy that would targetand perhaps succeed in bringing about United States self-sufficiency in energy within 10 years. It sounds a lot like the Kennedy call for getting someone to the moon in 10 years, but it happened. We did put a man on the moon in 10 years.
The actions that you testified to that have emerged recently on the part of your Department and the Administrationfor instance, calling for tax incentivesI would want that to be in this comprehensive policy. In fact, I specifically mention it. We remember the bad history of the removal of oil depletion allowances, and the imposition of excessive profits taxes, et cetera, that stifled the domestic output of oil.
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You are careful in articulating these tax incentives on the capital or expending side of what to do about domestic drilling, et cetera, and we favor that. But there is an absence in what I have seen in your testimony about the fullest exploration of the Alaskan oil fields, about off-shore drilling, and about other ways in which we can foster on Federal lands and other properties in our country the exploration of oil.
What is the disfavor you see in the Alaskan possibilities? Or why haven't you mentioned that as one of the possibilities?
Mr. GEE. Certainly that is a worthwhile question, Congressman.
This Administration supports environmentally responsible development of our natural resources on public lands.
Let me first address matters affecting the outer continental shelf and then I will get to Alaska.
We have favored continued development of existing leasehold, certainly. On the outer continental shelf, we were able to successfully put into law over the last 5 years the Deep Water Royalty Relief Act, which encouraged additional exploration in deep waters in our outer continental shelf. So I think with respect to exploration in the OCSobviously there are differences of opinion over where in the OCS we ought to explore, but certainly we are on record as having favored and having incentivized continued exploration and production off the OCS for certain leaseholds.
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With respect to Alaska, certainly this Administration, as you know, does not favor ecological reasons development of the Alaska Natural Wildlife Reserve. We do favor, however, and we have decided within the last year and a half, to open up additional exploration and production in Alaska of the National Petroleum Reserve in Alaska. In fact, our Department worked very closely with the Department of Interior in reaching that determination.
As I understand it, the Department of Interior is now proceeding forward in the process of granting leases in the NPRA in Alaska.
So we do favor some additional exploration and production in Alaska. As you know, we do not favor any of those activities in the ANWR.
Mr. GEKAS. But your statement is that off-shore drilling is favored so long as we take care of the ecological problems and the continental shelf problems.
Mr. GEE. That is true.
Mr. GEKAS. Why can't you transpose that policy to ANWR and say that you favor that so long as we can consider in doing so the ecological and environmental problems? I think that is part of what should be done.
When Secretary Richardson said that someone was asleep during what happened during the last year in the spiking of oil prices, it seems to me that that is proved by your saying that recently we have developed these policies on tax incentives, et cetera. We should all wake up and adopt a comprehensive policy.
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Those few that you mention here are not enough to guarantee self-sufficiency, and I would like to see more of an effort by the Congress and by the administration for that comprehensive policy for which I yearn.
I thank the Chair.
Mr. HYDE. I thank the gentleman very much.
I will not burden you with questions, but take advantage of the opportunity that you are both here to just suggest one of my own great concerns, which is somewhat along the lines of Mr. Gekas.
Back in 1973, I remember the mild panic that prevailed in the long lines at the gas stations. I was not in Congress in 1973, but I had a friend who was who said it was pretty dangerous to have a congressional plate on your car as you waited in line for gasoline. People directed their remarks at you rather forcibly.
I also had the great experience of travelling to Saudi Arabia, Kuwait, the United Arab Emirates, and Iran with Secretary Blumenthal under President Carter to try and negotiate with the OPEC countries not to raise their prices. Secretary Blumenthal was very effective, not in terms of results, but he certainly persuaded me that the OPEC countries, in raising the prices of their product, were damaging their own investments in this country. It made a lot of sense. But it brought home to me how vulnerable we are, especially in time of crisis, to foreign imports.
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Also, knowing we have the resources here, it just seems to me the wise people ought to not wait for a crisis, but start thinking of ways to responsibly extract the natural gas and the petroleum that is in abundance around our country and that we have access to.
The environmentalists have to be madewe must be mindful of their concerns, but at the same time, they have to be a little more mindful of the fact that energy makes this country run and keeps our homes warm and gives us food on the table. So some reconciliation between the legitimate needs of the environment and the legitimate needs of energy independence, it seems to me, is something we need to pay more attention to. We wait until crises occur. We used to have solar energy days, and we were trying to squeeze petroleum out of shale, and all of that. Then that frenzy or furor died down.
But these little shots across the bow can be helpful if we spur the reconciliation between the environmental concerns and the energy concerns. I am glad that smart people like you are thinking about these problems.
Mr. Coble, the gentleman from North Carolina, welcome. Do you have questions?
Mr. COBLE. Very briefly, Mr. Chairman.
Mr. Gee, much has been said about repealing the 4.3 percent tax. It is my belief that that tax is not collected at the pump and, therefore, consumers probably would realize nothing as a result of such a repeal. Do you concur with that?
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Mr. GEE. I certainly think there is a high probability that if that tax were repealed it would not be flowed through to the consumer. Yes, Congressman.
Mr. COBLE. Let me ask each of you a question. The chairman pretty well touched on it, as did the gentleman from Pennsylvania.
I am not proposing that we rate the environment, by any means. Oftentimes when you even suggest increasing domestic drillinghere is a guy who is insensitive to the environment. I am not insensitive at all to the environment, but I believe that if we increase domestic drillingand I am not convinced it ought to be restricted exclusively to Alaska. I believe it can be done in an environmentally sound manner and I believe it can be done in such a way that would obviously diminish our dependency upon OPEC oil.
What say you experts to that?
Mr. GEE. Certainly there have been a number of technological advances in the oil exploration and production sector over the last decade or decade and a half that have had the benefit of increasing rates of production and minimizing what we call the environmental footprint. Obviously, these decisions of exactly where we explore for new production are going to have to be balanced with our desire to maintain the environmental integrity of a lot of our public lands and resources.
But I do thinkand as I indicatedat the time this administration decided to open up leasing in the National Petroleum Reserve in Alaska, one consideration that the Interior Department looked at was the improvements of oil field technology in minimizing the environmental footprint. That was one reason they decided to go ahead and open up leasing on the NPRA.
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Mr. COBLE. Mr. Blumenthal?
Mr. BLUMENTHAL. As the chief law enforcement of my State, Connecticut, one of my responsibilities is to enforce environmental laws, so I am very sensitive, as you are, to the very important policy goals those laws serve.
The thrust of my earlier remarks was that oil prices at the pumpwhich is where they are felt by consumers and where you all may hear the criticism that results from excessively high oil priceswill not come down unless there is more competition, unless the free market really works. And that is the reason zone pricing ought to be abolished and specifically banned. In other words, the environmental costs will be for naught if we have to incur them, unless we make the free market really work to the benefit of everyone.
The history is, as you well know, that prices are very elastic on the way up and very inelastic on the way down. One of the big reasons is zone pricing.
Mr. COBLE. Thank you, gentlemen.
Thank you, Mr. Chairman.
Mr. HYDE. Mr. Pease?
Mr. PEASE. Thank you, Mr. Chairman.
Page 212 PREV PAGE TOP OF DOC I regret that other responsibilities made me tardy for the hearing. Therefore, I did not hear from our witnesses.
But I do want to thank you, Mr. Chairman, for convening this hearing and the witnesses for being here. I have received your written materials, but because I did not hear your presentation, I have no questions.
It is clear, though, as I look around the room, that I can see who is either in a safe district or not retiring, since it is Friday and just about everybody else is back home. [Laughter.]
Mr. HYDE. Thank you very much, Mr. Pease.
I want to thank both of you gentlemen for your contribution.
Mr. HYDE. Our second panel consists of eight witnesses. The first four will speak to the issue of zone pricing, and the second group of four will speak to other aspects of the OPEC crisis.
Our first witness on this panel is Mr. William Patmon, a city councilman from Cleveland, Ohio. He is a graduate of Eastern Michigan University and the Harvard Senior Executive Program. Mr. Patmon has been active in the construction business, serving with several companies. He has also worked with the Cleveland Neighborhood Development Corporation and the Glenville Development Corporation. On the City Council, he serves as chairman of the Finance Committee. He also serves on the Public Safety, Public Utilities, and Transportation Committees.
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Our next witness is Dr. Roy Littlefield, the executive director of the Service Station Dealers of America. Dr. Littlefield is a graduate of Dickinson College and Catholic University, where he earned his master's degree and his Ph.D. After a tour of duty with Senator Thomas McIntyre, he worked as the director of Government Affairs for three national trade associations and also has taught as an adjunct professor at Catholic University.
Our next witness is Mr. Tim Columbus, a partner at Collier, Shannon, Rill, and Scott. He is a graduate of Harvard and the University of Virginia Law School. After law school, he joined his present firm and has been there since that time. He represents a wide range of clients in the petroleum industry and appears today on behalf of the Society of Independent Gasoline Marketers of America.
Our next witness is Mr. Edwin Zimmerman, a partner at Covington & Burling. He is a graduate of Columbia University and its law school. He served in the Army during World War II and after law school clerked for Justice Stanley Reed of the Supreme Court. He has been a professor at Stanford Law School and head of the Antitrust Division of the Department of Justice. He has been with Covington & Burling since 1969.
Next we have Mr. Jerry Jordan, president of Jordan Energy. He is a graduate of Dennison University and the University of Michigan Law School. Before founding his own company, he was a partner in the law firm of Vorys, Sater, Seymour, and Pease and the CEO of Clinton Gas Systems. He has also served as an adjunct professor at Capital Law School and is currently chairman of the Independent Petroleum Association of America. He appears today on behalf of that group.
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Next we have Mr. Scott Segal, a partner in the law firm of Bracewell and Patterson. He is a graduate of Emory University and the University of Texas Law School. Aside from his law practice, he served as the Director of Forensics at the University of Texas and as the director of the Cement Kiln Recycling Coalition. He has written more than 30 articles on environmental law and appears today on behalf of Valero Energy Corporation.
Next we have Dr. Daniel Lashof, a senior scientist at the Natural Resources Defense Council. He is a graduate of Harvard and has a Ph.D. from the University of California. Before coming to NRDC, he worked at the Environmental Protection Agency. He has written and spoken widely on global warming and other environmental topics.
Finally, we have Ms. Lisa Callaghan, a policy analyst with the Northeast Advanced Vehicle Consortium. Ms. Callaghan is a graduate of the University of Virginia. Before taking her current position in 1998, she worked with the Electric Transportation Coalition and consulted with Fidelity Investments. She has also written news reports on electric vehicles for the Financial Times of London.
So we begin with Mr. Patmon.
STATEMENT OF BILL PATMON, COUNCILMAN, CLEVELAND CITY COUNCIL, CLEVELAND, OH
Mr. PATMON. Thank you to the chairman, Mr. Hyde, and to the committee for this opportunity.
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As most other people who live and work on Cleveland's east side, I thought higher gas prices had to do with the cost of operations. Higher prices in insurance, maintenance, labor, and so forth. However, in this case, it is the furthest thing from the truth. Cost of retail operations is basically the same throughout the region. Shell has intentionally created a discrimination in pricing on the east side of Cleveland. This zone pricing scheme results in millions of dollars in disposable income lost to a community that can ill afford to pay more for less.
Our research shows that stations located in the African-American communities in Shell's east side Cleveland zones pay more per gallon wholesale than stations located within the suburban majority communities of higher income. The median income for the oppressed zone areas is $10,908. The median income in areas that charged a lesser wholesale price is $28,595.
Further research showed trucks dispatched from Shell's distribution centers charging a higher wholesale price for stations with lower income levels and lower prices to stations in affluent areas with higher income levels. This flies in the face of all reason given that the delivery costs to the inner city stations is often less due to the location of Shell's distribution center on the east side of Cleveland's downtown.
Our research also showed that in 1997 Shell sold gasoline at wholesale prices within the inner city so much higher than suburban areas that the wholesale price for the inner city was greater than the retail price for affluent communities. An example of this is that on January 20, 1998, the Shell station located at West 117th and Clifton Boulevard, in an affluent west side area was selling one gallon of regular grade Shell gasoline for 99 cents retail, while Shell was forcing its east side zone dealers to pay $1.02 wholesale for the same gasoline.
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After writing letters to Shell, meeting with Shell's representatives, protests, picketing Shell's distribution center, the company's reply to us was that they were doing nothing illegal.
Federal action is needed. The State law has not kept abreast with this increasingly common practice of zone price discrimination in Ohio. The Marizette lawsuit was forced to reply on the Ohio Sales Practices Act passed into law almost 30 years ago. The Ohio law limits damages to a 2-year look-back period with no threat of punitive damages, thus making these practices an acceptable business risk, given their limited and capped nature. While any changes in Federal law may not help the current situation in Cleveland, it would send a clear message that these practices will not be tolerated in a country built on the proposition of fairness and equity.
The damage done is far-reaching and systematic. Communities with limited disposable income can ill afford to fall victim to these predatory practices.
[The prepared statement of Mr. Patmon follows.]
PREPARED STATEMENT OF BILL PATMON, COUNCILMAN, CLEVELAND CITY COUNCIL, CLEVELAND, OH
SUMMARY REVIEW OF CLEVELAND (MARIZETTE) SHELL CASE
Cindy M. Marizette, et al. v. Shell Oil Company, et al.
Page 217 PREV PAGE TOP OF DOC In 1997, constituents of Cleveland Councilman William Patmon were complaining of price discrimination targeting inner city, predominantly African-American neighborhoods of Cleveland, Ohio. Councilman Patmon took this opportunity to inquire of the major petroleum dealers in the Cleveland market. Receiving no or inadequate response, the matter resulted in several public demonstrations under the leadership of Councilman Patmon. The Petroleum Dealers continued to ignore demands for fairness and equity. The refusal to stop the predatory pricing practices inherent in zone pricing resulted in a lawsuit being filed by the law offices of former Congressman, Robert E. Sweeney. This lawsuit, Marizette v. Shell, (CV 347743) was filed in January of 1998 in the Court of Common Pleas for Cuyahoga County where it continues to be litigated today.
''The real danger lies in the failure of the Court to realize that requiring minorities to accept wider forms and higher levels of private discrimination corrodes faith in the values proclaimed as fundamental. A minority person whose children attend underfunded and inadequate de facto segregated schools and who lives in a segregated neighborhood receiving less than its share of public services does not feel that society is race neutral because this segregation is imposed by private actions without the use of governmental classifications. Whatever the sources of discrimination, public or private, the experience of discrimination itself, when left unremedied by a legal system, creates cynicism and hostility and ultimately undermines the legitimacy of the legal system that excuses it.''
Suggs, Robert; Racial Discrimination in Business. Vol. 42 Hastings Law Journal, pg 1257, at 1313 (July, 1991).
''Where gross statistical disparities can be shown, they alone in a proper case may constitute prima facia proof of pattern or practice of discrimination.''
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City of Richmond v. J.A. Croson Co., 488 US 469, at 501 (1989).
THE OHIO CONSUMER SALES PRACTICES ACT ORC. 1345 ET. SEQ.
The basis of the Marizette complaint is the claim that Shell was unconscionable in the pricing of its product. It gouged the poorest and most segregated part of the Cleveland market. The action was at least ''de facto'' discrimination, since it resulted in higher prices for gasoline sold in black neighborhoods, even though it was done in a seemingly legal manner.
The complaint is filed as a class action, asking that the court certify a class defined as follows:
All customers of a Shell gas station located in the eastside pad who are African-American and who reside within the eastside pad and have purchased gasoline from an eastside pad Shell station for personal, family or household use at any time from 1994 to the present
The heart of the Marizette complaint charges as follows:
Between 1994 and 1996, Shell isolated twelve (12) stations on the city of Cleveland's eastside and in the adjacent city of East Cleveland. These stations fall within an area herein defined as ''the eastside pad.'', a group of neighborhoods that are overwhelmingly black and of low/moderate and below poverty income. On average, Shell charged these twelve stations wholesale prices that were six-to-seven cents more per gallon of gasoline than it charged its other Greater Cleveland dealers.
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In 1997, Shell was charging eastside pad Shell dealers wholesale prices as high as twelve cents more per gallon than wholesale prices it was charging its dealers operating in other Greater Cleveland pads. Sometimes eastside Shell Oil dealers were paying more wholesale per gallon to Shell than other dealers were selling retail.
Since 1994, Shell's wholesale price differential has forced eastside pad dealers to pay significantly more for Shell gas than other Greater Cleveland Shell dealers.
Since 1994, Shell knew that increased wholesale prices charged its eastside pad dealers would be passed on to plaintiff and other similarly situated eastside pad Shell consumers via increased retail gasoline prices within the eastside pad.
Eastside pad neighborhoods targeted for increased wholesale prices contain more black residents and more economically disadvantaged black residents than any other neighborhood in Greater Cleveland. Median black residency for Wards 4, 5, 6 and 10 and East Cleveland is 89%.
According to 1990 U.S. Census data, Cleveland is 46.6% black. Excluding the city of Cleveland, Cuyahoga County is 14% black.
Neighborhoods within the eastside pad are among Cuyahoga County's most racially segregated and economically depressed. The 1990 U.S. Census documents that median family income for eastside pad neighborhoods is $10,908.00, as compared to Cuyahoga County median family income of $28,595.00. 37.2% of eastside pad households have below poverty income. In Cuyahoga County, 11% of households fall below poverty level.
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Shell does not operate any of the twelve eastside stations, thus there can be no argument that costs of operation contribute to any price differential.
Shell has knowingly committed unfair and unconscionable acts and practices through its pricing scheme, which deliberately targets black, economically disadvantaged Cleveland and East Cleveland neighborhoods for higher wholesale prices.
Federal Trade Commission Cases
FTC v. Sperry & Hutchinson Co., 405 U.S. 233 (1972)
''Like a court of equity, [the commission] considers public values beyond simply those enshrined in the letter or encompassed in the spirit of the antitrust laws.'' That is, unfairness can overturn a commercial practice, even if that practice is not technically illegal or actionable under other regulatory codes or laws.
FTC Statement of Basis and Purpose of Trade Regulations Rule 408, Unfair or Deceptive Advertising and Labeling of Cigarettes: 29 Fed. Reg. 8355 (1964)
Specifies that a practice is unfair:
''(1) whether the practice, without necessarily having been previously considered unlawful, offends public policy as it has been established by statutes, the common law, or otherwisewhether, in other words, it is within at least the penumbra of some common-law, statutory, or other established concept of unfairness; (2) whether it is immoral, unethical, oppressive, or unscrupulous; (3) whether it causes substantial injury to consumers or competitors or other businesses.''
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This forgoing passage was cited by the Supreme Court with approval in Sperry & Hutchinson.
Since then Congress has elaborated on what practices are unfair, and defines the FTC's authority to regulate such activity as follows:
''. . . The Commission shall have no authority . . . to declare unlawful an act . . . on the grounds that such act . . . is unfair unless the act . . . causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and is not outweighed by countervailing benefits to consumers.'' The Federal Trade Commission Act Amendments of 1994, Pub. L. 103312 Sec. 9 , adding a new 15 U.S.C. Sec. 45(n) (Aug. 26, 1994)
This is a codification of the unfairness standard adopted by the Commission in Dec. 17, 1980 letter from 5 commissioners to the Consumer Subcommittee of the Senate Committee on Commerce, Science and Transportation.
The Senate Report provides following legislative history to that bill:
''Consumer injury may be substantial under this section if a relatively small harm is inflicted on a large number of consumers . . .
Sen. Rep. No. 130, 103(d) Cong., 2d Sess. 12 (1994)
Page 222 PREV PAGE TOP OF DOCFINAL COMMENT
For the sake of this summary state law and precedent have been ignored, but there is an emerging trend there as well, holding merchants responsible for unconscionable practices that offend the communities sense or racial and class equality. That is not to say that in a capitalistic economy we have abandoned our devotion to fair and even rigorous competition. But even from the standpoint of Adam Smith himself, can it really be said that acceptable competitive benefits can come from targeting racially segregated and poorer neighborhoods and gouging them simply because you can get away with it?
Federal action is needed, State law has not kept abreast with this increasingly common practice of zone price discrimination. In Ohio the Marizette case has been forced to rely on the Ohio Consumers Sales Practices Act passed into law almost thirty years ago. The Ohio law limits damages to a two year look back period with no threat of punitive damages. Thus making these practices an ''acceptable'' business risk given their limited or capped nature. While any changes in Federal law may not help in our current situation in Cleveland, it would send a loud message that these type of practices will not be tolerated in a 21st century America.
IN THE COURT OF COMMON PLEAS
CUYAHOGA COUNTY, OHIO
CINDY M. MARIZETTE
1480 E. 111th Street
Page 223 PREV PAGE TOP OF DOCCleveland, OH 44106
SHELL OIL COMPANY
A Delaware Corporation
1 Shell Plaza
Houston, TX 77001
SHELL OIL COMPANY
c/o Statutory Agent
C.T. Corporation System
815 Superior Ave., N.E.
Cleveland, OH 44114
Plaintiff Cindy M. Marizette is an African-American resident of the City of Cleveland. She sues individually and on behalf of similarly situated consumers who purchased gasoline for personal, family or household use from any Shell Oil gas station located in the ''eastside pad'' in the City of Cleveland and/or in adjoining East Cleveland. ''Eastside pad'' henceforth refers to a geographic pricing area, designated by Shell in approximately 1994 for its franchisees/dealers (dealers) selling Shell gasoline in twelve Shell gas stations comprising the eastside pad. The eastside pad is comprised primarily of residents who are black and economically disadvantaged.
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Since 1994, Shell has demanded significantly higher wholesale gasoline prices from its eastside pad dealers than from its dealers outside the eastside pad. For example, as of January 20, 1998, the Shell station located at West 117th and Clifton Boulevard, in a westside pad, was selling one gallon of regular grad Shell gas for $.99 retail while Shell was forcing its eastside pad dealers to pay $1.02 per gallon wholesale for the same grade of gasoline.
Shell's unfair, unconscionable practices of forcing significantly higher wholesale prices on its eastside pad dealers has injured eastside pad residents by causing higher retail prices for Shell gas in their eastside pad neighborhoods.
From 1994, Shell purposely targeted the eastside pad for higher wholesale prices knowing that its residents were least able to protect themselves from such unfair, unconscionable practice. Accordingly, plaintiff, as an eastside pad resident, submits the following complaint for Class Action Status, for Damages and for Declarative and Injunctive Relief. The claim arises under the Ohio Consumer Sales Practices Act (CSPA), R.C. 1345.01 et seq.
Plaintiff Cindy M. Marizette resides in Cleveland, Ohio. She lives in Ward 9, which falls within the eastside pad. She is an African-American and has been a customer of a Shell Oil gas station located in the eastside pad. Since 1994, she has been injured by Shell's practice of charging its eastside pad dealers higher prices for Shell gasoline than it charges other Greater Cleveland Shell dealers.
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Defendant Shell Oil Company (Shell), incorporated and headquartered outside Ohio, is authorized to conduct business in Ohio. At relevant times, through designated agents, it has set wholesale gasoline prices for all Shell dealers in the Greater Cleveland market.
Plaintiff realleges prior allegations as though fully rewritten herein.
This Court has jurisdiction over Shell pursuant to R.C. Sec. 2307.382. Venue is proper pursuant to Ohio Civil Rule 3 (B) (3), (6) and (7).
Plaintiff realleges prior allegations as though fully rewritten herein.
Shell distributes and markets gasoline. Within Cuyahoga County, Ohio, Shell wholesales its gasoline to dealers who lease their Shell gas stations from Shell.
Under CSPA, R.C. 1345.01 (C), Shell is a supplier ''engaged in the business of effecting consumer transaction, whether or not he deals directly with the consumer.''
Page 226 PREV PAGE TOP OF DOC In 1991, Shell set approximately two wholesale prices for its Greater Cleveland dealers for each gasoline grade. The pricing areas (''pads'') were divided geographically, one on Cleveland's eastside and one on its westside. Prices were uniform within each pad.
In 1992, Shell began dividing the Greater Cleveland market into smaller pads: approximately two on the east and approximately two on the west. Shell gave each pad its own wholesale price for each gasoline grade.
In 1994, Shell continued dividing the Greater Cleveland market into even smaller pads, which led to approximately six pads on the eastside and approximately six on the west.
Then, between 1994 and 1996, Shell isolated twelve (12) stations on the city of Cleveland's eastside and in the adjacent city of East Cleveland. These stations fall within an area herein defined as ''the eastside pad.'' Except for Station Number 12, all stations are located in neighborhoods that are overwhelmingly black and of low/moderate and below poverty income. On average, Shell charged these twelve stations wholesale prices that were six-to-seven cents more per gallon of gasoline than it charged its other Greater Cleveland dealers.
In 1996, Shell carved out a separate and lower pricing pad for eastside pad Station Number 12. Shell no longer charged its Station Number 12 dealer the increased wholesale prices given other eastside pad dealers. Significantly, Station 12, located in Ward 11 at Nottingham and East 185th Street, is 89% white, 10% black, and significantly less economically deprived that other eastside pad neighborhoods.
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From 1997 to today, in the City of Cleveland, Shell continues maintaining two or three pricing pads on the west and five pads on the east. The eastside pad which is at issue lies within Cleveland's racially segregated, economically disadvantaged eastside neighborhoods and in the adjacent, highly segregated and economically disadvantaged City of East Cleveland.
In 1997, Shell was charging eastside pad Shell dealers wholesale prices as high as twelve cents more per gallon that wholesale prices it was charging its dealers operating in other Greater Cleveland pads.
In 1997, eleven eastside pad Shell stations labored under Shell's wholesale price differential. Dealers operating these eleven stations are primarily minority.
Since 1994, Shell's wholesale price differential has forced eastside pad dealers to pay significantly more foe Shell gas than other Greater Cleveland Shell dealers.
At all relevant times, plaintiff has resided in the eastside pad and has purchased gasoline at one or more of Shell's eastside pad stations.
Plaintiff is a consumer under CSPA, R.C. 1345.01 (D); she has engaged in a consumer transaction through purchase of Shell gasoline for personal, family and/or household use.
Since 1994, Shell knew that increased wholesale prices charged its eastside pad dealers would be passed on to plaintiff and other similarly situated eastside pad Shell consumer via increased retail gasoline prices within the eastside pad.
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Eastside pad neighborhoods targeted for increased wholesale prices contain more black residents and more economically disadvantaged black residents than any other neighborhood in Greater Cleveland. Median black residency for Wards 4,5,6 and 10 and East Cleveland is 89%.
According to the 1990 U.S. Census data, Cleveland is 46.6% black. Excluding the city of Cleveland, Cuyahoga County is 14% black.
Neighborhoods within the eastside pad are among Cuyahoga County's most racially segregated and economically depressed. The 1990 U.S. Census documents that median family income for eastside pad neighborhoods is $10,908.00, as compared to Cuyahoga county median family income of $28,595.00. 37.2% of eastside pad households have below poverty income. In Cuyahoga County, 11% of households fall below poverty level.
Shell is knowingly committing unfair and unconscionable acts and practices through its pricing scheme, which deliberately targets black, economically disadvantaged Cleveland and East Cleveland neighborhoods for higher wholesale prices.
Plaintiff, individually and as a class representative, asserts that Shell's wholesale pricing in the eastside pad is a continuing unfair act or practice in connection with a consumer transaction under CSPA, R.C. 1345.02 (A), in that:
At relevant times, Shell understood that increased wholesale prices charged its eastside pad dealers would be passed on to retail customers of that eastside pad Shell stations;
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At relevant times, Shell knew that black, economically disadvantaged eastside pad residents would become a captive market for higher gasoline prices prevailing within their neighborhoods;
At relevant times, Shell knew that retail gasoline prices for plaintiff and similarly situated Shell consumers substantially exceeded Shell gasoline prices readily available to Shell's Cuyahoga County customers outside the eastside pads;
At relevant times, Shell knew its wholesale pricing scheme would cause eastside pad residents to face substantially higher gasoline prices that residents outside the eastside pad.
In devising and instituting its wholesale pricing differential solely for the eastside pad, Shell knowingly took advantage of plaintiff's and each similarly situated resident's inability to protect himself/herself.
Plaintiff realleges all prior allegations as though fully rewritten herein.
Plaintiff, individually and as a class representative, asserts that Shell's wholesale pricing in the eastside pad is a continuing unconscionable act or practices in connection with a consumer transaction under CSPA, R.C. 1345.03 (A) in that:
Page 230 PREV PAGE TOP OF DOC At relevant times, Shell understood that increased wholesale prices charged its eastside pad dealers would be passed on to retail customers of the eastside pad Shell stations;
At relevant times, Shell knew that black, economically disadvantaged eastside pad residents would become a captive market for higher gasoline prices prevailing within their neighborhoods;
At relevant times, Shell knew that retail gasoline prices for plaintiff and similarly situated Shell consumers substantially exceeded Shell gasoline prices readily available to Shell's Cuyahoga County customers outside the eastside pads;
At relevant times, Shell knew its wholesale pricing scheme would cause eastside pad residents to face substantially higher gasoline prices that residents outside the eastside pad.
Through its wholesale pricing differential targeting eastside pad neighborhoods, Shell knowingly, unfairly and unconscionably took oppressive advantage of plaintiff and similarly situated consumers.
Plaintiff alleges prior allegations as though fully rewritten herein.
Resulting from Shell's acts or practices described in Counts I and II, plaintiff and each similarly situated consumers has sustained and continues to sustain damages.
Page 231 PREV PAGE TOP OF DOC Since 1994, when Shell began its unfair and/or unconscionable wholesale pricing scheme, each eastside pad similarly situated consumer to any and all available statutory damages.
Shell intentionally and maliciously enacted its unfair, unconscionable pricing scheme, knowing it would force inequitably higher prices on the pad's black and economically from the predatory practice. Punitive damages are proper to discourage Shell and others from such illegal conduct in the future.
CLASS ACTION ALLEGATIONS
Plaintiff realleges prior allegations as though fully rewritten herein.
Plaintiffs sues individually and as representative of the class (the ''Class''), to be defined as follows:
All customers of a Shell gas station located in the eastside pad who are African-American and who reside within the eastside pad and have purchased gasoline from an eastside pad Shell station for personal, family or household use at any time from 1994 to the present.
The Class is so numerous that joinder of all member is impracticable.
Questions of law and fact are common to the Class.
Page 232 PREV PAGE TOP OF DOC The claims of the representative plaintiff are typical of the claims of the Class.
Plaintiff will fairly and adequately protect the interests of the Class. Plaintiff is represented by experienced counsel who has handled consumer-oriented class action litigation.
A Class maintained under Civil Rule 23 (B) (1) (a) is appropriate because prosecution of separate actions by individual class members would create a risk of inconsistent or varying adjudication with respect to individual members of the class, which would establish incompatible standards of conduct for Shell as the party opposing the Class.
A Class under Civil Rule 23 (B) (1) (b) is appropriate because prosecution of separate actions by individual members of the Class would create a risk of adjudication with respect to individual members of the class which would, as a practical matter, be dispositive of the interests of the other members not parties to the adjudication or would substantially impair or impede their ability to protect their interests.
A Class under Civil Rule 23 (B) (2) is appropriate because Shell has acted on grounds generally applicable to the Class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the Class as a whole.
A Class under Civil Rule 23 (B) (3) is appropriate because questions of law or fact common to members of the Class predominate over any questions affecting only individual members, and a class action is superior to other available methods for this controversy's fair, efficient adjudication.
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WHEREFORE, plaintiff demands on behalf of herself and of those similarly situated:
that Shell's unfair and/or unconscionable act or practice of charging higher wholesale gasoline prices to its eastside pad dealers be declared illegal under CSPA, R.C. 1345.01 et seq.,
that Shell be enjoined from charging eastside pad dealers substantially higher wholesale gasoline prices than prices it charges its other Greater Cleveland dealers outside the eastside pad for the same grade of gasoline;
that plaintiff and each class member be awarded from Shell:
any and all available statutory damages;
reasonable attorney fees, under CSPA, R.C. 1345.09 (F) (2);
punitive damages of Forty-Eight Million ($48,000,000.00) Dollars;
further relief as this Court deems just, including but not limited to costs of this suit.
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Trial by jury is demanded on all Counts set forth.
Mr. GEKAS [assuming Chair]. We thank the gentleman.
We turn to the next witness, who will be allotted 5 minutes. The written statements will be made a part of the record.
The gentleman may proceed.
STATEMENT OF ROY LITTLEFIELD, EXECUTIVE VICE PRESIDENT, SERVICE STATION DEALERS ASSOCIATION, LANHAM, MD
Mr. LITTLEFIELD. Mr. Chairman and members of the committee, I appreciate the opportunity to appear before you today to present the dealer community's views and concerns about the refiner practice of zone pricing.
SSDA is a national association representing 22 State and regional associations with a total membership in excess of 20,000 small businesses in 38 States, and individual members in all 50 States, the District of Columbia, Puerto Rico, and Guam.
The major oil companies are using zone pricing to push higher gasoline prices on dealers and consumers whenever and wherever they have an opportunity to do so. Zone pricing has become so fragmented that it is not unusual to see a zone that includes only one or two of the supplier's branded stations. Nor is it unusual to see two nearby stations being charged grossly disparate prices by the same supplier.
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While we acknowledge that in some cases zone pricing has been used to lower a dealer's price to meet competition, we believe that in the overwhelming majority of instances it is used to exact higher prices from dealers and consumers. Nor does a minimal fraction of a cent in transportation costs even begin to explain the wide pricing disparities resulting from zone pricing.
SSDA believes that the major oil companies are using zone pricing to manipulate retail gasoline prices. Zone pricing systems are not cost-based. Rather, they are based upon formulas that are retail-based. Through zone pricing, the oil companies secure opportunistic profits in local markets at the expense of both dealers and the public.
Through their use of narrowly defined zones, oil companies control the retail prices charged by the dealer. The oil companies know that by raising a specific dealer's wholesale or tank wagon price, they can force the dealer to raise his or her price to the ultimate consumer. By employing parallel zone pricing strategies, the oil companies can and do send signals to each other to raise the retail prices charged in a given local market.
In one recent pricing case, Schwartz v. Sun in December 1998, a former division manager for Sun admitted that Sun had used tank wagon pricing as a way of ''sending a signal'' to the industry to raise prices. His testimony revealed that there were ''occasions where Sun's management would want to send a signal to the industry that they would like to lift, so they would just raise the dealer's tank wagon price and that should have a correlating uplifting effect on the retails, which it usually did.'' His testimony revealed that ''everyone monitored everyone else's moves. We would watch the competition and they would watch us.''
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From the dealer's point of view, the most troubling aspect is the loss of retail margin control. A real world examination of this practice reveals the formally independent dealer with a greatly reduced role in his own operation's profitability. He has now become, for all intents and purposes, a commissioned agent. The oil companies have in effect gutted PMPA with no repercussions from any governmental authority.
Under present law, there is little that the dealer can do to protect himself or herselfor the publicagainst zone pricing. Because the dealer ordinarily leases the station from a particular oil company, which forbids the dealer from purchasing gasoline from any other source, the dealer has no choice but to continue to buy gasoline from that supplier when its tank wagon price is exorbitant. And when your supplier is your landlord, there is extra pressure to bear.
On November 8, 1999, a Chevron general manager wrote to dealers that if certain legislative initiatives, including a restriction or prohibition of zone pricing, passed the Administration Legislature, the dealers in that State would be subject to a ''new market value rental program'', which would result in greatly increased rents.
The Robinson-Patman Act states ''it shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality.'' We understand that to mean that a supplier must offer like products to similar customers at like prices. Clearly the intent of the law is being ignored.
Page 237 PREV PAGE TOP OF DOC But dealers cannot find any meaningful relief under the Robinson-Patman Act or other existing antitrust laws. The Robinson-Patman Act is too complex. Pursuing a claim under it is too expensivein the range of $250,000 to $300,000for a small independent dealer. Moreover, spending 35 years in litigation against your landlord and supplier will necessarily result in the deterioration of the parties' relationship, making the continuation of business dealings nearly impossible.
As shareholder demands have increased, the pressure on oil companies to generate ever-higher profits, zone pricing has more than likely become the most efficient way to accomplish this at the retail marketing level. Although we can understand and sympathize with these dynamics, we don't think it should be at the expense of the consumer and the service station dealer.
So long as zone pricing continues, dealers and consumers will be the victims of the oil companies' opportunistic pricing practices. In this age of mounting gasoline prices, some meaningful remedy should be found.
[The prepared statement of Mr. Littlefield follows.]
PREPARED STATEMENT OF ROY LITTLEFIELD, EXECUTIVE VICE PRESIDENT, SERVICE STATION DEALERS ASSOCIATION, LANHAM, MD
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Dealer Community Concerns of Zone Pricing
In the overwhelming majority of instances it is used to exact higher prices from dealers and consumers
Used to manipulate retail gasoline prices
Oil companies secure opportunistic profits in local markets
There is little that a dealer can do to protect himself or herselfor the publicagainst zone pricing.
Oil companies are both the landlord and the supplier
Leasee dealers cannot purchase gasoline from any other source
Threats of raising rents if legislation restructuring or prohibiting zone pricing is passed
Price discrimination laws are complex, expensive to litigate, and time consuming
Dealers believe that most zone pricing is discriminatory against both dealers and motorists.
Page 239 PREV PAGE TOP OF DOC Mr. Chairman and Members of the Committee on the Judiciary, my name is Roy Littlefield and I serve as Executive Vice President of the Service Station Dealers of America and Allied Trades (SSDAAT). I appreciate the opportunity to appear before you today to present the dealer community's views and concerns about the refiner practice of zone pricing.
SSDAAT is a 54 year-old national association representing 22 state and regional associations with a total membership in excess of 20,000 small businesses in 38 states; and individual members in all 50 states, the District of Columbia, Puerto Rico, and Guam.
The major oil companies are using zone pricing to push higher gasoline prices on dealers and consumers whenever and wherever they have an opportunity to do so. Zone pricing has become so fragmented that it is not unusual to see a ''zone'' that includes only one or two of the supplier's branded stations; nor is it unusual to see two nearby stations being charged grossly disparate prices by the same supplier. While we acknowledge that in some cases zone pricing has been used to lower a dealer's price to meet competition, we believe that in the overwhelming majority of instances it is used to exact higher prices from dealers and consumers. Nor does a minimal fraction of a cent in transportation costs even begin to explain the wide pricing disparities resulting from zone pricing.
SSDAAT believes that the major oil companies are using zone pricing to manipulate retail gasoline prices. Zone pricing systems are not cost-based. Rather they are based upon formulas that are retail-based. Through zone pricing, the oil companies secure opportunistic profits in local markets at the expense of both dealers and the public.
Through their use of narrowly defined zones, oil companies control the retail prices charged by the dealer. The oil companies know that, by raising a specific dealer's wholesale or ''tankwagon'' price, they can force the dealer to raise his or her price to the ultimate consumer. By employing parallel zone pricing strategies, the oil companies can and do send signals to each other to raise the retail prices charged in a given local market.
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In one recent pricing case (Schwartz v. Sun Company, Inc., December 1998), a former division manager for Sun admitted that Sun had used tankwagon pricing as a way of ''sending a signal'' to the industry to raise prices. His testimony revealed that there were ''occasions where Sun's management would want to send a signal to the industry that they would like to lift so they would just raise the [dealer tankwagon price] and that should have a correlating uplifting effect on the retails, which it usually did.'' His testimony revealed that ''everyone monitored everyone else's moves. We would watch the competition and they would watch us.''
From the dealer's point of view, the most troubling aspect is the loss of retail margin control. A real world examination of this practice reveals the formally independent dealer with a greatly reduced role in his own operation's profitability. He has now become, for all intents and purposes, a commissioned agent. The oil companies have in effect gutted PMPA with no repercussions from any governmental authority.
Under present law, there is little that the dealer can do to protect himself or herselfor the publicagainst zone pricing. Because the dealer ordinarily leases the station from a particular oil company, which forbids the dealer from purchasing gasoline from any other source, the dealer has no choice but to continue to buy gasoline from that supplier when its tankwagon price is exorbitant. And when your supplier is your landlord, there is extra pressure to bear. On November 8, 1999 a Chevron General Manager wrote to dealers that if certain legislative initiatives, including a restriction or prohibition of zone pricing, passed a state legislature, that dealers in that state would be subject to a ''new market value rental program'' which would result in greatly increased rents.
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The Robinson-Patman Act states ''it shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality.'' We understand that to mean that a supplier must offer like products to similar customers at like prices. Clearly the intent of the law is being ignored.
But dealers cannot find any meaningful relief under the Robinson-Patman Act or other existing antitrust laws. The Robinson-Patman Act is too complex. Pursuing a claim under it is too expensivein the range of $250,000 to $300,000for a small independent dealer. Moreover, spending 35 years in litigation against your landlord and supplier will necessarily result in the deterioration of the parties' relationship, making the continuation of business dealings nearly impossible.
As shareholder demands have increased the pressure on oil companies to generate ever-higher profits, zone pricing has more than likely become the most efficient way to accomplish this at the retail marketing level. Although we can understand and sympathize with these dynamics, we don't think it should be at the expense of the consumer and the service station dealer.
So long as zone pricing continues, dealers and consumers will be the victims of the oil companies' opportunistic pricing practices. In this age of mounting gasoline prices, some meaningful remedy should be found.
Mr. HYDE. Thank you, Dr. Littlefield.
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STATEMENT OF TIM COLUMBUS, PARTNER, COLLIER, SHANNON, RILL, AND SCOTT, WASHINGTON, DC, ON BEHALF OF THE SOCIETY OF INDEPENDENT GASOLINE MARKETERS OF AMERICA
Mr. COLUMBUS. Thank you, Mr. Chairman.
My name is Tim Columbus and I am a member of the law firm of Collier, Shannon, Rill and Scott in Washington. I appear today on behalf of our client, the Society of Independent Gasoline Marketers of America. SIGMA is a national trade association comprised of approximately 270 independent marketers and chain retailers across the country, whose members sell approximately 20 percent of the gasoline sold in the United States at retail.
Mr. Chairman, I come here today not to praise zone pricing, but similarly not to bury it. SIGMA's members are both suppliers and retailers and as such have recognized that zone pricing is a historic and relatively pervasive means by which suppliers of motor fuel have responded to their perception of competitive circumstances within a particular market; established wholesale prices for their dealers; and thereby pursued an interbrand competition strategy.
SIGMA is well aware that zone pricing can be abused. However, the value to SIGMA's members of a supplier being able to price its products at levels reflective of unique competitive circumstances in a particular relevant geographic market outweighs the risk of abuse. Relevant geographic markets in the petroleum marketing industry are normally relatively small, ranging from a few blocks to a few miles in radius or diameter.
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Conditions in those markets can vary greatly from the competitive condition in an adjoining market. Let me give you a couple of examples.
Mr. Chairman, as you are probably aware, Cook County, Illinois, has a unique tax on motor fuels. Therefore, a retailer who is on the county side of the border has a cost structure which is radically different than a retailer which is literally across the street. Zone pricing is a means by which the supplier of that county-side retailer can adjust the prices and thereby enable that county-side retailer to remain viable.
Similarly, in Connecticut, which is General Blumenthal's beatConnecticut has the highest excise tax structure on motor fuels in the contiguous 48 States. If you are on the Connecticut side of the Massachusetts-Connecticut border, you are looking at the best part of a 14-cent price disadvantage. Without zone pricing, I sincerely doubt a supplier will be able to make the kind of competitive allowance for his retailer it is going to take to keep that Connecticut side of the border retailer viable.
In short, Mr. Chairman, it is my client's view that banning zone pricing is unlikely to actually help dealers. It has been our experience over the years that any effort to level prices has rarely resulted in that price being leveled at a lower level. It has almost always risen to the higher level. As a consequence, those individuals who are facing unique competitive circumstances will lose the support that historically has been made available to them by the suppliers. That will render them non-competitive. That will cost them volume. And it will endanger their economic viability.
Page 244 PREV PAGE TOP OF DOC In conclusion, again, I bear no great brief for zone pricing. However, I am unaware of a more viable alternative means by which the marketplace can take into account unique competitive circumstances. I have heard a lot today about somebody a block awaythat can be a big difference. It is not just tax differences, it is access. The antitrust laws protect competition, not competitors. That is a decision you all have made. Interbrand competition is something that the Supreme Court has endorsed as recently as the last couple of years when we changed vertical resale price maintenance maximum from a per se to a rule of reason test.
Somewhere in here, you all have to make a decision to choose between the consumer and the competitor. My people would love you to choose the competitor, but I think you are going to have a hard time making that choice.
If my testimony has raised any questions you want to ask, I would be happy to respond, Mr. Chairman.
[The prepared statement of Mr. Columbus follows.]
PREPARED STATEMENT OF TIM COLUMBUS, PARTNER, COLLIER, SHANNON, RILL, AND SCOTT, WASHINGTON, DC, ON BEHALF OF THE SOCIETY OF INDEPENDENT GASOLINE MARKETERS OF AMERICA
Good morning. My name is R. Timothy Columbus. I am a member of the law firm of Collier, Shannon, Rill & Scott, PLLC and appear on behalf of our client, the Society of Independent Gasoline Marketers of America (''SIGMA''). SIGMA is a national trade association comprised of approximately 270 independent marketers and chain retailers or motor fuels. SIGMA's members operate retail motor fuel outlets in all 50 of the states and their sales comprise approximately 20 percent of retail motor fuels in the United States. As independent marketers and private brand retailers, SIGMA's members neither own or control the means of producing and refining crude oil. Thus, they are entirely dependent on third parties for supplies of motor fuels.
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Mr. Chairman, my purpose in appearing today is to provide the Committee with SIGMA's views regarding ''zone pricing'' practices. SIGMA historically has opposed state and local legislation aimed at prohibiting such pricing practices. Simply stated, Mr. Chairman, SIGMA does not praise zone pricing nor does it seek to bury zone pricing.
As the Committee is aware, zone pricing is not unique to the petroleum industry, but its use in that industry is frequent and relatively pervasive. Zone pricing's use by refiners and some marketers is a normal part of an inter-brand competition strategy. Specifically, zone pricing frequently serves as the most effective means of providing independent components of a ''branded'' distribution system with price support in the face of specific, highly-localized competitive conditions. While the geographic parameters of a relevant market in the retail sale of gasoline may vary, those parameters are normally relatively limited, ranging from a radius of a few blocks to a few miles. Thus, the need for price support in one relatively-small market will not indicate, in most instances, a need for similar price support in other markets.
SIGMA opposes state and local legislation seeking to prohibit zone pricing. SIGMA takes its position not because it believes that zone pricing is immune from abuse but rather because independent competitors' need for price support to respond to specific conditions in a particular market is so great as to outweigh the risk of such abuse. Most motor fuel retailers are relatively small entities, at least in the context of the petroleum business. As a consequence, they frequently look to their larger, more economically-powerful suppliers for assistance in the context of tough, competitive conditions.
A few examples of the type of competitive situation requiring unique price support from a supplier may be helpful to the Committee. The necessity to establish different pricing zones to reflect competitive conditions arising out of differences in taxation between jurisdictions is not infrequent. For example Mr. Chairman, Cook County, Illinois, has a unique tax on motor fuels sales. A retailer on the County side of the Cook County border has, as a consequence of that tax structure, a significantly higher cost base than a retailer who may literally be across the street. If the prices charged to that Cook County retailer are not established in a way that reflects this reality, that retailer will absolutely exit the market. Similar conditions exist at state borders such as the border between the State of Connecticut and the Commonwealth of Massachusetts. Connecticut's uniquely high tax structure places Connecticut retailers at a significant disadvantage vis-a-vis the Massachusetts retailer only a few blocks away. Similarly, there may be conditions such as a new market entrant's ''grand opening'' which generate pricing conditions that would render an individual retailer, if unsupported by its supplier, non-competitive. Any sustained period of being non-competitive in the gasoline market results in a significant loss of volume to a retail outlet.
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In all of the above-described circumstances, an independent marketer-dealer not only wants, but probably needs its supplier's support. However, SIGMA concludes that the supplier which is barred from limiting the offer of such price support to those actually experiencing the competitive threat which justifies it, will not provide that support. Simply stated, SIGMA believes that if to support one dealer or group of dealers, a supplier would be required to lower its price to all of its customers, then that supplier will permit that dealer to die on the competitive vine. Respectfully, Mr. Chairman, that is not a good result for an independent marketer or an individual dealer.
Eliminating zone pricing may have other unforeseen and undesirable consequences for an independent retailer. For example, if the elimination of zone pricing actually imposes a restraint on inter-brand competition, then that action would induce integrated sellers to avoid entering into any new relationships with lessee-dealers or other independent marketers. SIGMA believes that refiner-marketers will not gladly abandon entire geographic areas because of unique competitive conditions, rather they will integrate forward into direct operations to serve the motorists in that area and thereby avoid any Robinson-Patman Act problems.
In summary, SIGMA recognizes the risk that zone pricing can be abused. However, recognizing the ever heightening pressure to promote inter-brand competition, and the Supreme Court's recognition of the importance of inter-brand competition to consumers, SIGMA accepts the necessity of reserving the zone pricing tool to a supplier's discretion. In the long term, proponents of a ban on zone pricing believe that all differences in price will be resolved by a supplier's making all prices the same at the lowest level. Most independent marketers' experience indicates that if all prices are to be at a single level, these prices will be at the higher, not the lower, level. As a consequence, neither independent marketers' nor consumers' interests would be served by prohibiting zone pricing.
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Mr. Chairman, SIGMA appreciates this opportunity to express its views on this topic. I will happily respond to any questions which my testimony may have raised.
Mr. HYDE. Thank you, sir.
STATEMENT OF EDWIN ZIMMERMAN, PARTNER, COVINGTON & BURLING, WASHINGTON, DC
Mr. ZIMMERMAN. Thank you, Mr. Chairman.
My function here today is to provide a brief overview of the relationship between the Robinson-Patman Act and zone pricing. I come with no particular axe to grind. I just want to explain the act.
It was passed in 1936. In essence, it is intended to prohibit price discrimination by a seller to similarly situated buyers of the same product in interstate commerce when the effect of that discrimination is substantially to lessen competition or to hurt competition with the person who grants or receives the discount or with customers of the person who is giving or receiving the discount. In other words, it is not against any price difference, only against price differences that result in injury to competition.
The main concerns of the act are the effects of price discrimination as so defined at the seller's level or at the buyer's level. The statute is a complicated one, as you have been told. Generations of lawyers have grown fat and wealthy working with the statute.
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The Justice Department, traditionally, has not enforced the statute. The Federal Trade Commission used to, but no longer does so. Enforcement, for the most part, is by private parties who seek damages, claiming injury by reason of price discrimination. There has been extensive litigation over the meaning of injury to competitors. And when private parties seek damages, they have to show that they have lost profits due to the price discrimination.
Zone pricing is not confined to gasoline distribution. You will find that many other industries use it, for what that is worth. It typically reflects the fact that a seller discerns similar competitive conditions to exist in some areas that differ from conditions in other areas and wishes to price in response to those local conditions.
Sometimes if a seller identifies a group of buyers that operate within a zone, it will charge a uniform price. One could say, theoretically, that a uniform price to everyone in the same zone is itself a form of discrimination if indeed there are different costs involved. But the way the act has been interpreted, if you charge the same price, there is no discrimination.
So the real problem that has come up in zone pricing is when you have two zones with different prices. The big problem to somebody complaining under the act about discrimination is to show that there has been competitive injury. You could have differences in prices between two zones to dealers in the same product but no competitive injury because the dealers may be in different functional situations, or because they may be in sufficiently different geographic areas so that there is no competitive impact.
Page 249 PREV PAGE TOP OF DOC In my testimony, there is an excerpt from the opinion of the Maryland attorney general on the legality of zone pricing. He statesand he is correctthat zone pricing, of itself, is not illegal, unless you change the law. But the question of legality depends on whether you show that differences in prices between different zones result in competitive injury.
And as you might expect, different cases go different ways, depending on the facts. It is a fact-intensive situation. There can be zone pricing that results in competitive injuries, and there have been decisions to that effect and recoveries of damages. There are other situations in which zone pricing has been held not to result in competitive injury.
It is true, as General Blumenthal said, that there is a meeting competition defense, but even there the law is unsettled. Some jurisdictions say you cannot use the meeting competition defense to meet the price of the competing dealer's supplier. You can only use it to meet the price of the supplier to your own dealer. Other jurisdictions go the other way.
So in short, zone pricing is not illegal, per se. It can be illegal under some circumstances and the circumstances will be fact-specific.
[The prepared statement of Mr. Zimmerman follows.]
PREPARED STATEMENT OF EDWIN ZIMMERMAN, PARTNER, COVINGTON & BURLING, WASHINGTON, DC
Page 250 PREV PAGE TOP OF DOC I propose to provide today a brief overview of the relationship between the Robinson-Patman Act and the practice of zone pricing in the distribution of gasoline.
The Robinson-Patman Act dates from 1936 when it was enacted as an amendment to Section 2 of the Clayton Act. In essence, it is intended to prohibit price discrimination by a seller to similarly situated buyers of the same product in interstate commerce when the effect of that discrimination may be substantially to lessen competition or injure, destroy or prevent competition with the person who grants or knowingly receives the benefits of the discrimination, or with customers of either of them.
The two main concerns of the Act are with the effects of price discrimination on competition at the seller's levelthe ''primary line''and at the buyer's levelthe ''secondary line.'' There is also the possibility of a ''tertiary line'' injury to the buyer's customers.
The statute is a complex one that has generated much litigation as to the meaning of such terms as ''different purchasers,'' ''like grade and quality,'' ''commerce,'' ''commodities,'' ''sales,'' ''price difference,'' ''line of commerce,'' ''injury to competitors,'' etc. The statute provides, among other things, that the seller can defend against the accusation of illegal discrimination by showing that its lower price was made in good faith to meet an equally low price of a competitor, or that price differences are cost-justified. Needless to say, the content of these defenses has been the subject of extensive litigation.
The Justice Department traditionally has not enforced the Robinson-Patman Act. The Federal Trade Commission in the past did enforce it but has been inactive in recent years. Enforcement is for the most part by private parties seeking treble damages claiming that they have been injured by the discrimination. As noted above, there has been extensive litigation over ''the injury to competitors'' requirement. When private suits are brought by buyers alleging secondary-line discrimination and seeking damages, the aggrieved purchaser must prove the loss of profits resulting from the price discrimination.
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Zone pricing is not confined to gasoline distribution. It typically reflects the fact that a seller discerns similar competitive conditions to exist in the some areas that differ from conditions in other areas, and wishes to price in response to those local conditions.
If a seller identifies a group of buyers that it regards to be operating in a relatively uniform competitive climate and establishes a zone, provision of an identical price to those buyers in the zone does not constitute Robinson-Patman Act discrimination to the buyers in the zone even though the net-back of sales to some buyers may be higher than for other buyers in the zone. As the statute is presently interpreted, charging identical prices to different competing buyers cannot constitute price discrimination. The focus for Robinson-Patman Act purposes is the final price paid by the buyer to the seller, and if an identical price is charged there is no price discrimination.
Complaints about zone pricing have arisen primarily because of the existence of different zones with different prices. Assuming that the commodity sold is of ''like grade and quality'' and assuming further that the interstate commerce requirements are fulfilled, then the initial issue raised by a challenge to differing prices in different zones is whether the competitive injury requirements of the Act have been met. It may be that buyers in different geographic zones do not compete with each other for the same customers because they perform different functions or are in different geographic areas, and hence are not injured by the price difference. This is a fact-specific question.
Evidence of actual competition between the dealers is essential to establishing a Robinson-Patman claim. Assuming that there is a competitive relationship between the favored and the disfavored dealer in the different zones, then the further injury to competition question is whether the difference is sufficient to support an injury to competition conclusion. The Maryland Attorney General summed up the law in his opinion of January 28, 1994 on the legality of zone pricing as follows:
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''In order to prove that zone pricing violates the Robinson-Patman Act, it is necessary to prove a sustained and substantial price discrimination sufficient to influence the favored customers' resale price or to prove that a dealer in a disfavored zone suffered a sales or profit decline caused by the more favored tank wagon price a competitor in a different zone received. . . . Conversely, if price discrimination in neither sustained nor substantial in amount, or if the lost sales by a competing dealer are minimal, there is no injury to competition due to the price discrimination.'' (P. 8)
As might be expected, resolution of these issues is peculiarly fact specific. In a case such as Bargain Car Wash, Inc. v. Standard Oil Co. (Indiana), 466 F.2d 1163 (7th Cir. 1972), the court found price discrimination and competitive injury. On the other hand, in American Oil Company v. F.T.C., 325 F.2d 101 (7th Cir. 1963), the court on the facts there found that the price discrimination had only a de minimis effect on competition which was not sufficient to trigger liability under the purposes of the Act.
The Maryland Attorney General's Opinion, at p. 9, listed the matters that must be investigated as including:
1. history and background of the system;
2. competitive pattern of the zones;
3. price differentials between zones over at least a one-year period;
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4. effect of the price differential on pump prices;
5. economic effects of the price differentials to dealers in different zones on competition between dealers of the same brand located in different price zones; and
6. whether lost sales can be directly attributed to the price to dealers in the favored zone.
Even if because of zone pricing differences, injury to competition can be established, it may be possible that the seller can establish the ''meeting competition'' defense provided by Section 2(b) of the Robinson-Patman Act: ''That nothing herein contained shall prevent a seller rebutting the prima facie case thus made by showing that his lower price . . . to any purchaser or purchasers was made in good faith to meet an equally low price of a competitor. . . .'' If a meeting competition defense is established, then the seller is absolved of Robinson-Patman liability regardless of any adverse effects on competition resulting from the price differences. The defense is an absolute one.
As with other provisions of the Act, there is substantial complexity and disagreement as to the scope and availability of the meeting competition defense. A threshold question of whether the defense is available for zone pricing seems to be resolved by Falls City Indus. v. Vanco Beverage, Inc., 460 U.S. 428 (1983), which indicates that on a proper showing of competitive necessity, the meeting competition defense can be invoked for lower prices maintained in certain geographic areas while higher prices were instituted elsewhere. However, there are still unresolved differences among the federal courts as to whether the defense is available to support price reductions to a retailer to meet a competing retailer's lower price made possible by its supplier. The Supreme Court continues to leave the issue unresolved. See ABA Antitrust Law Development (Fourth), p. 456.
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As the opinion of the Maryland Attorney General concluded, ''zone pricing itself does not violate'' the Robinson-Patman Act (P. 10). There may, however, be situations in which price differences between different zones are both substantial and sustained and where the zones are close enough together for dealers in the disfavored zone to have their customers shift to dealers in the favored zone, causing injury to those dealers. There may, on the other hand, also be situations in which the dealers in one zone do not compete with dealers in the other zone, or where the price differences are transitory or too small to significantly impact the profit of the dealers. As the above-cited cases indicate resolution of such issues depends on the particular facts involved.
Mr. HYDE. Thank you very much.
STATEMENT OF JERRY JORDAN, PRESIDENT, JORDAN ENERGY, INC., COLUMBUS, OH, ON BEHALF OF THE INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA
Mr. JORDAN. Thank you, Mr. Chairman.
In addition to IPAA, which is the organization I am chairman of, I am here today testifying on behalf of the National Stripper Well Association and 32 State and regional oil and gas associations around the country. We are on the other end of this subject. We are the producers in this countrythe smaller producers in this countryof oil and natural gas.
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These associations represent thousands of independent producers. This is the segment of industry that is most damaged by a lack of a domestic energy policy that recognizes the importance of our natural resources. The issue in these times is how our country got into the recent situation which brought us rapidly increasing gasoline, diesel, and fuel oil prices and what we can do to avoid such situations in the future.
Domestically, we import over 55 percent of our crude oil. So the issue now is how to encourage domestic production and yet try to eliminate our foreign dependency and to emphasize the most reliable of our foreign suppliers. Natural gas is often cited to be the answer because it is basically domestically produced. However, there are problems that I don't have time to go into about natural gas. It is a great and environmentally sound alternative, but there are many problems that we face with regard to future natural gas production in this country.
As we move into this new millennium, we are finding ourselves relying more and more on independent producers versus the major oil companies. This is because most of the majors have left our shores in terms of their focus on exploration and development.
Independent producers in this country drill 85 percent of the wells and produce two-thirds of the natural gas in the country. Oil prices are set on a world price, a world market. The U.S. is a price taker and independent producers are the most susceptible to shifts in prices. Our segment of the industry was damaged severely during what we considered to be the low oil price crisis of 1998 and 1999. We are recovering slowly, but we need policies designed to bolster our industry because our country absolutely needs this industry.
Page 256 PREV PAGE TOP OF DOC We have eliminated, to a large extent, nuclear. We have severely damaged coal. And we have now turned to natural gas. But remember that the same people that look for and produce natural gas are the oil companies of this country and oil companies of this world. So we have put all our eggs in our basket, and we need everyone to understand what our basket needs in order to flourish and in order to do our job.
Excess short-term oil production capacity world-wide is limited. Experts place it between 3 million and 4 million barrels a day before the recent OPEC action. Everyone is still trying to assess exactly what production increases will result from OPEC's decision. But the key point in the short-term is that the world is not awash in oil that can be supplied by simply opening spigots.
That means that our lack of a plan or a policy makes no sense. That is obvious. But what should we do? Obviously, there is no single answer.
First, we must continue to work with foreign producer nations to move toward oil policies that produce stability needed to maintain and enhance our domestic production. That means we have to recognize the national security aspects of the energy business to our country. We may not like it, but oil and gas is where we have put our emphasis and it is going to be years before alternative energy sources cover any significant part of that energy picture.
Second, we must develop better policies to enhance and maintain domestic oil and natural gas production. We need both of these. We must begin treating domestic oil and natural gas production as a critical element of our national economic security. To do this at the Federal level, we should aim in two areas where we can have the greatest effect: access to capital and access to domestic natural resources from Government controlled lands and water.
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With regard to land access, we have to rememberas one of you said already todayoil and gas explorationand even oil and gas exploration on public landsis not equivalent to destruction of the environment. We can do both. We have proved we can do both. Studies have shown that we can do both. We can explore and develop our natural resources on-shore, off-shore, in Alaska, all around this continent, like other countries are doing, and we can do it safely and certainly with less risk than we get from the tankers that bring all this imported oil into our shores.
Access issues differ between areas. ANWR has been closed by Executive action. It could be opened with a stroke of the pen. But other areas, like in the Rockies, are affected by permittingI like to call them gameswhereby we have periods of time that tend to overlap where in this area we can't do anything because of a particular endangered species. A few months later, it is a different endangered species. When you put it all down together and you lay out the mosaic, it amounts to basically prohibition to operate in those areas, too. So you can see how complicated this land access question is.
What I really want to talk about todayto make my pointis concerning capital access. I turn to the tax provision because in the last few weeks something has developed which I find really unique.
We have a situation where the President of the United States, the Secretary of Energyas evidenced by Mr. Gee this morningour industry, and basically all the experts agree on a relatively limited package of tax provisions that should be adopted. What we have to do, in my opinion, is realize that this is a unique opportunity. We do not normally, in our industry, find ourselves in agreement with everybody on any part of our program.
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In this particular case, we do. I listened to Secretary Richardson yesterday, and I think he has done a good job in terms of doing what he can with regard to foreign producers, but he recognizes the importance of our domestic industry and how important it is for us to have these additional tools.
They are not give-aways. They are methods. These expenditures are going to be made. We need to encourage capital that can be expended in our industry so we can find more oil and gas. These provisions, like the expensing of geological and geophysical expenses and delay rentals, marginal well tax creditsthings like this. Marginal well tax credits should be mentioned. That is a tax credit. It sounds like a give-away.
But the tax credit in this particular case would be triggered to relatively low oil prices so that if we get real low oil prices like we had 2 years ago or a year ago, we will end up plugging and partially abandoning thousands of wells in this country. It means that we are giving up huge reserves that we could rely on in the future as we need them.
By using a tax credit, like a marginal well tax credit, you end up essentiallyit would only come into effect if prices were very low. It means that the producers of those marginal wells could afford to keep them open longer because of that tax credit. It would be to the benefit of our country.
I know I have covered too much, but that is the emphasis I want to make this morning.
Page 259 PREV PAGE TOP OF DOC Thank you very much.
[The prepared statement of Mr. Jordan follows.]
PREPARED STATEMENT OF JERRY JORDAN, PRESIDENT, JORDAN ENERGY, INC., COLUMBUS, OH, ON BEHALF OF THE INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA
Mr. Chairman, members of the committee, I am Jerry Jordan, President of Jordan Energy, Inc. of Columbus, Ohio. Today, I am testifying on behalf of the Independent Petroleum Association of America and the National Stripper Well Association. IPAA represents independent oil and gas producers, the segment of the industry that is damaged the most by the lack of a domestic energy policy that recognizes the importance of our own national resources. NSWA represents the small business operators in the oil and natural gas industry, producers with stripper or marginal wells.
This hearing is addressing a key questionsolutions to the competitive problems in the oil industry. To best address this threat it is essential to understand the current state of domestic energy and its production. We have an economy that is based on energyfrom transportation to manufacturing to the Internet. More specifically, it is based on petroleumcrude oil and natural gas. And, like it or not, despite all the efforts to change the mix of energy sources, petroleum remains the predominant source and will continue to do so for the foreseeable future.
Domestically, we import about 56 percent of our crude oil demand. In all likelihood, we will not become self-sufficient in crude oil. So, the issue is how to try to limit our foreign dependency and to emphasize the most reliable of our foreign suppliers. Natural gason the other handis largely a domestic resource, and imports are mainly from other North American sources. In the future domestic oil and natural gas production will be more and more dependent on a healthy independent exploration and production industrymajor oil companies began shifting their new production from the United States after the oil price crisis in 1986, and this pattern will continue.
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Oil prices are set on a world market. The U.S. is a price taker. Independent producers are the most susceptible to shifts in prices. We were damaged the most severely during the low oil price crisis of 199899. We are recovering slowly, but we need stability and we need policies designed to reflect the nature of our industry
The current situation is not stable and we need to understand how vulnerable the US economy is to decisions by foreign governments. As a result of the extended low oil prices in 199899, capital investment in oil production throughout the world declined. Existing production was lost. In the U.S., production dropped from 6.5 million B/D to 6.0 million B/D. Worldwide, new projects were delayed which limited increases in production capacity. Meanwhile, demand continued to increase.
Excess short-term capacity worldwide is limited. Experts placed it between 3 and 4 million barrels per day before the recent OPEC actionprobably closer to the lower figure. Everyone is still trying to assess exactly what production increases will result from OPEC's decisions. But, the key point is thatin the short termthe world is not awash in oil that can be supplied by opening the spigots.
Moreover, the wild card becomes Iraq. In late May or early June, the UN sanctions review is scheduled. If Iraq pulls its exports off the marketas it has beforeprices can skyrocket well above current levels. Depending on the severity of the situation, the United States' only recourse could be use of the Strategic Petroleum Reserveand that is not a long term solution.
Page 261 PREV PAGE TOP OF DOC Clearly, Saddam will use his country's oil resources to try to extracate Iraq from the straight jacket of UN sanctions. Many knowledgeable experts already want to end the sanctions. If Iraq withdraws its oil from the market, it could erode what little resolve exists in the world constrain his actions. Then, Iraq will be in a position to sell as much oil as needed to rebuild its oil industry, its armaments, and worst of all, to terrorize the world with its weapons of mass destruction.
Taken together, this shows that this important factor of our economy is in the hands of foreign rulers. We end up relying on a kingdom in Saudi Arabia to work with a radical Iranian government to stabilize oil prices. We have effectively handed Saddam Hussein the control of world oil prices that he sought when he invaded Kuwait.
These policies make no sense. But, if not these policies, what should we do? There is no single answer.
First, we must continue to work with foreign producer nations to move toward oil policies that produce the stability needed to maintain and enhance our domestic production. And, as we do, we cannot assume that other countries are willing to sacrifice their national incomes to meet our expectations that product prices should be low in the U.S.
Second, we must develop better policies to enhance and maintain domestic oil and natural gas productionwe need both. Frequently, they are discovered and produced together. We must begin treating domestic oil and natural gas production as a critical element of national economic security. To do this at the federal level we must direct our efforts at the two areas where they can have the greatest effectaccess to capital and access to domestic natural resources from government controlled lands and waters.
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ACCESS TO CAPITAL
Let me first address access to capital. Since domestic producers must take the world oil price, the federal government needs to look at actions it can take to improve capital flow into this critical industry. Generally, there are two areas for possible actiontax reforms and federally backed financial instruments. I want to focus on tax reforms.
Following his recent radio address, President Clinton released documents indicating that he intended to propose legislation to allow expensing of geological and geophysical costs and of delay rental payments. These are sound first steps, but more must be done.
He also indicated that he was evaluating proposals dealing with marginal wells. Action regarding these wells is essential to preserve existing production and we believe there are four key elements that should be enacted immediately:
A 5-year net operating loss carryback;
Eliminating the net income limitation on percentage depletion for marginal wells;
Eliminating the 65 percent net taxable income limit on percentage depletion; and,
Creating a countercyclical marginal wells tax credit.
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Will these steps guarantee that domestic production will rebound? Nothing is certain but it will guarantee that more capital will get into this industry when it is needed. And it will avoid the mistakes of 1986 when Congress enacted Alternative Minimum Tax provisions, just as the industry needed capital to rebound from low oil prices. This was one of many factors that have resulted in the loss of about 2 million barrels per day of domestic production from 1986 to 1997.
Subsequently, we may need to look at other tax reforms that can help bring capital to this industry.
Regarding access to natural resources, the Administration avoids dealing with the clear need to open federal lands to exploration and production. It hides behind an environmental sensitivity argument that is proven wrong by its own DOE report. It focuses on arguments against opening ANWR and avoids dealing with access issues offshore and in the Rockies where its own National Petroleum Council Natural Gas study concludes that some 213 trillion cubic feet of natural gas is either off limits or difficult to permit.
Access issues differ between these areas. ANWR has been closed by executive action and can be opened with the stroke of a pen. Constraints on offshore activity are both executive and legislative, through moratoriums. These are based on outdated reactions to spills occurring in the past. The Administration's own study, Our Ocean Future, concluded unequivocally that offshore oil and natural gas production is a success story. We need to move into the 21st century in making enlightened decisions to use these critical national resources.
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Access in the Rockies won't be resolved by a single act. Here, we are dealing with a mosaic of limitations. In some areas, land has been placed completely off limits. The Antiquities Act of 1906 has been used to declare some areas as national monuments. In other areas, the Department of Agriculture is proposing to expand roadless areas in national forests that will preclude oil and natural gas development. We must also deal with permitting limitations. For example, many areas in the Rockies are limited during certain times of the year because of management plans designed to protect various species. While each plan individually provides opportunities for resource development, collectively, they interact to effectively prohibit oil and natural gas extraction. Similarly, because these are federal lands, federal agencies must permit the actions. These agencies are charged with task of developing environmental management plans for areas under NEPA. NEPA can be used to create effective, environmentally sound management plans or it can be used to delay and deny access. Frequently, the results reflect the attitude of the agency and its leaders.
If we are to provide the country with the domestic energy it deserves, we need to create national policies that allow environmentally sound development of these resources. It can be done but it will take courage to counteract environmental extremists.
Mr. HYDE. Thank you, Mr. Jordan.
STATEMENT OF SCOTT SEGAL, PARTNER, BRACEWELL AND PATTERSON, WASHINGTON, DC, ON BEHALF OF VALERO ENERGY CORPORATION
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Mr. SEGAL. Thank you, Mr. Chairman, and good morning.
My name is Scott Segal. I am a partner in the Washington office of Bracewell and Patterson, a Houston-based law firm. I work in energy and environmental policy areas. I am also a professor of environmental management at the University of Maryland.
Today, I appear on behalf of Valero Energy Corporation, a San Antonio, Texas-based independent refiner. If you wanted to slot our segment of the industry, we fit some place between Mr. Jordan, and Mr. Columbus and the marketers down at the other end of the table. So thankfully, you won't be hearing about zone pricing from us.
Rather, what I want to discuss with you today are some mechanisms that address a critically overlooked part of the energy price and supply problem, and that is the refining capacity of the United States.
We have heard a lot about OPEC increasing production in response to some international pressure that has been applied. However, automobiles do not runcontrary to popular beliefon crude petroleum. They run on refined product, which means that if there are problems in petroleum refineries, those must be addressed or increased productiondomestic or foreignis not going to have the desired effector at least all the effect it could haveon gasoline prices in the United States.
But unfortunately, today as we sit here, productive refining capacity in the United States has been in a continual decline. In fact, between 1980 and the present date, over half of U.S. refineries have closed. They have closed for a variety of reasons, I am the first to admit. But at least one of the reasons they have closed is the layer upon layer of Government regulations that are placed on petroleum refineries in the United States that are not matched by similar regulation on foreign refineries overseas.
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We have to look at every regulation through a prism. Not only its direct costs and constraints that are imposed on operations here in the States, but also in terms of the international competition problem.
The relationship between stretched refinery capacity and current prices cannot be doubted. As EIA recently testified, ''We are now facing a very tight gasoline market. U.S. crude oil and gasoline inventories are at alarmingly low levels not seen for decades.'' Even after we get through this spring and into the summer driving season, we still may not have the desired effect of a decrease in prices from OPEC production. EIA expects to see high refinery utilization rates on top of precariously low gasoline stocks.
What does that mean? If there is a refinery disruption, or if there is an import disruption, there can be a surge effect on demand that would not normally have been a problem were we not operating refineries at a 90 percent utilization rate. That's not the place to operate. But the frightening part about EIA's assessment is that we are violating the energy Hippocratic oath: Government do no harm. In fact, some of the price difficulties are spurred by Government policy which has not taken into account the effects on capacity. Layer upon layer of Government regulation are developed in a vacuum not taking into account the multiple effect.
Over the course of the last decade, the Clean Air Act itself has cost refineries $37 billion in compliance costs. The total book value of those refineries is $31 billion. So Clean Air Act costs exceed book value of the refineries by $6 billion.
Valero is not suggesting that we roll back environmental laws. Far from it. Valero has invested millions of dollars in the development of clean, alternative fuels for formulated gasoline, lower sulphur fuels, and clean fuel additives like MTBE. We have developed these and work hard to produce these. So we are not in the business of asking Government to roll regulations back.
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Instead, we believe we can take the current gains that we have already made, maintain them in place, even make some improvements. However, for future environmental regulations we should take into account the effect of international competition and the effect it could have on price and supply.
Here is a concrete example.
We have had great success with reformulated gasoline since the adoption of the Clean Air Act amendments. We are about to change from Phase One reformulated gasoline to Phase Two reformulated gasoline, and we are doing it this summer during the tightness of the summer driving season. If we do that, we are going to lose 150,000 barrels a day of refined capacity once again in an already tight market. We should delay that transition until such time as there is some stability in the market. Keep Phase One of the program, with all its substantial benefits, in place for the near term.
I want to end by suggesting that in the longer termas Mr. Gekas suggestedwe need a comprehensive energy policy in place. We need to stimulate energy independence in the United States. Domestic refiners in this country strongly support that proposition. But how do we do it? We have to shrink the gap between what foreign refiners have and what domestic refiners have. And there are ways to do that that environmental organizations might support as we work together.
We could make the World Trade Organization a little more transparent. We could recognize that when foreign refiners do not meet the same levels of environmental protection as international norms dictate, they are in fact subsidizing their domestic industry overseas. And when they subsidize, we can open up countervailing duty remedies in this country to examine those subsidies and make sure that those subsidies are addressed. We can offer tax credits for environmental investments to make sure that the competitive difficulties are reduced between domestic refiners and foreign refiners.
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We believe these are suite of constructive suggestions which in the long term can stimulate energy independence. In the short term, though, we need to make sure that environmental regulations do not further shrink capacity, and we ought to think constructively about delaying the onset of Phase Two reformulated gasoline.
Thank you very much.
[The prepared statement of Mr. Segal follows.]
PREPARED STATEMENT OF SCOTT SEGAL, PARTNER, BRACEWELL AND PATTERSON, WASHINGTON, DC, ON BEHALF OF VALERO ENERGY CORPORATION
Good morning. Chairman Hyde, Congressman Conyers and Members of the Committee, my name is Scott Segal and I am a partner in the Washington office of the Houston-based law firm Bracewell & Patterson, L.L.P. I am also a professor of environmental management at the University of Maryland (University College). Over the last decade, it has been my honor to represent independent refiners like the Valero Energy Corporation headquartered in San Antonio, Texas. I thank you for this opportunity to share our concerns with you.
As one of the largest independent refining and marketing companies in the United States, Valero is concerned with the recent increases in the price of gasoline at the fuel pump. The rate of increase in pricessome six cents per week per gallon nationwidequite simply has never been seen before, while in a comparative sense, the cost of automobile travel per mile traveled remains relatively low. And while reduced petroleum production overseas is part of the problem, we believe the root causes are far more complex, and include the dangerously high refinery utilization rates we are now experiencing in this country. We hope today's hearing can be part of a constructive dialogue on restoring some order to gasoline prices in ways which are within the purview of the federal government.
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Valero owns and operates five refineries in Texas, Louisiana, and New Jersey with a combined throughput capacity of approximately 785,000 barrels per day. Earlier this month, Valero announced that it would shortly acquire another refinery in California, adding an additional 130,000 barrels per day of capacity to the Valero system. The company is recognized as an industry leader in production of reformulated gasoline (''RFG''), CARB Phase II gasoline, low-sulfur diesel, and oxygenates. Valero has coupled its marked its recent expansions with its commitment to community, receiving many awards for environmental performance and for community service. We believe this balanced approach to independent refining puts Valero in a unique position to comment on the role product standards can have on refinery capacity and consequently on supply.
The United States has long recognized the importance of domestic refining to its economy and national security. Hundreds of thousands of employees have found high-paying jobs in the refining sector, and the energy sector plays a vital role in the gross domestic product of the U.S. Further, the National Defense Council Foundation has found that the competitive disadvantages faced by the domestic refining industry threaten military mobilization and preparedness by undermining reliable access to fuel supplies. The Department of Commerce in 1994 in making a finding pursuant to Section 232 of the Trade Expansion Act of 1962 verified the definitive linkage between threats to refining and threats to national security. Once again, President Clinton has made a similar finding. Independent refining in particular adds to the ability of the United States to keep a variety of fuel streams in production simultaneously, producing adequate jet fuel for our defense and adequate reformulated fuels for our environment.
Unfortunately, the productive refining capacity of the United States has been in a continual decline for a number of years, beginning most recently with significant declines in investments in the 1980s, a trend which has accelerated in recent years. The following illustrates the point:
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According to a National Petroleum Council (''NPC'') study prepared for the Secretary of Energy, in the 1980's, the number of domestic refineries dropped from a high of 315 to only 184. 131 refineries closed (a 42% decrease), and domestic refining capacity fell from 17.9 to 15.7 million barrels per day, a 13% decline.
NPC also noted that during the same period, imports of foreign refined gasoline more than doubled from 140,000 to 366,000 barrels per day.
NPC further predicted that there was to be a substantial restructuring in the coming years characterized by shutdowns of refining capacity.
Adverse predictions have been proven to be part of an accelerating trend with the American Petroleum Institute (''API'') concluding in 1999, ''One of the most dramatic trends in the petroleum refining sector has been the closure of almost half of U.S. refineries since 1980.''
For many independent refiners, the situation is all the more dire, given the lack of upstream production or the limited downstream marketing to cushion the blow of diminishing refinery margins.
The Current Price Situation and Refinery Utilization
The relationship between refinery capacity stretched virtually to its limits by high utilization and the ability of gasoline production and distribution to respond to price spikes cannot be doubted. As the Director of the Energy Information Administration's Petroleum Division testified earlier this month, ''We are now facing a very tight gasoline market. U.S. crude oil and gasoline inventories are at alarmingly low levels not seen for decades.'' EIA has further noted that this situation is not likely to resolve itself by the summer driving season because high refinery utilization rates makes the system ripe for any perturbation. They note:
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But even after we get through the spring, we may see price volatility this summer as well. EIA expects to see high refinery utilization rates on top of precariously low gasoline stocks. This combination leaves little room for the unexpected. Unplanned refinery outages, import delays or demand increases can create price surges above levels shown in the EIA forecast. EIA is currently projecting regular gasoline prices to peak at $1.56 per gallon this summer. Price volatility can result in a 2025 cent per gallon price surge such as those seen in California historically, which brings the price to $1.80 for a time.
The truly frightening part of EIA's assessment is our inability to respond to the upset conditions the gasoline market may well face. While there are many reasons for highly restrained capability of refineriesparticularly independent refineriesto expand capacity, it is tragic that so many of them are inflicted in part by government. Not the least of the restraints are imposed by the growing layers of environmental restraints placed upon the modern refinery. In the very near future, petroleum refineries will face the implementation of a variety of new regulations placed on products and on production processes. Most of the regulations were developed in a vacuum, without fully understanding the cumulative impact on capacity, and hence on gasoline price and supply.
Clean Air Implementation Impacts Refinery Capability to Respond
The Clean Air Act alone has been a source of regulatory authority that has greatly undermined the flexibility of the modern refinery. Over the course of the last decade, the National Petroleum Council estimated that total Clean Air Act investments in the refining sector exceeded the total book value of the refineries brought into compliance by $6 billion dollars. Things are even worse today. Refiners face near simultaneous implementation of Phase II of the RFG program, reductions in sulfur and air toxic constituents, changes to diesel fuel, and, perhaps, limitations on the use of useful, clean-fuel additives like MTBE. At the same time, the U.S. Environmental Protection Agency has made it increasingly difficult for refiners to expand capacity based upon restrictive interpretations of the New Source Review program under the Act.
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Valero is not suggesting that the federal government abandon its environmental priorities. Valero itself has great experience in and commitment to making products for clean-fuel markets like federal RFG areas and California, in particular. We agree with EPA's assessment of the success of the Phase I federal RFG program. Phase I RFG reduces ozone-forming compounds, such as VOCs, by over 28 percentthat's 44 percent above the 15 percent requirement of the law. Emissions of air toxics have been reduced by approximately 30 percentthat's almost twice as much as required by law. Even emissions of oxides of nitrogen (NOx) are reduced by 23 percent with Phase I RFG, even though the law does not require any specific reduction in NOx emissions with Phase I RFG. In short, the record is impressive, and we believe both EPA and refiners can be proud of it.
Part of the secret of the success of implementing Phase I RFG was that the consumer was shielded from serious price disruptions resulting from its introduction. This was achieved through careful planning, plenty of available crude and blendstocks, and the ability to concentrate on RFG without so many other regulatory distractions. Unfortunately, these conditions no longer obtain. It is clear that already tight refinery capability will be further complicated by the introduction of the Phase II RFG of the complex model. Specifically, summer capacity could be reduced by as much as 100150 MB/D. With gasoline prices already up nearly 50 percent over last year, such a transition to Phase II RFG over the summer could spell serious price troubles for American consumers.
The Role of Clean-Fuel Additives Like MTBE
On another front, if Congress or the EPA should commit to a timetable to reduce or eliminate MTBE at the same time, the RFG supply could diminish by another 11 to 15 percent. MTBE helps to extend the gasoline supply and moderate supply disruptions. The Department of Energy has testified that, ''From an energy security perspective, oxygenates provide a way to extend gasoline supplies. The transportation sector is almost totally dependent on oil. One of the few near-term options for reducing oil dependency is to expand our use of oxygenates.'' EPA's own Blue Ribbon Panel further noted that, ''MTBE is currently an integral component of the U.S. gasoline supply both in terms of volume and octane.''
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MTBE makes up a significant percentage of the volume of every gallon of RFG. The Clean Air Act requires each gallon of RFG to contain two percent, by weight, of oxygen. To achieve this level, refiners must add enough MTBE by volume equal to approximately ten percent of the volume of each gallon of gasoline. As described above, MTBE is the oxygenate-of-choice in 8085 percent of RFG. Thus, the total consumption of MTBE in the United States gasoline pool is approximately 286,000 barrels per day. Domestic production supplies approximately 202,000 barrels per day. Approximately 18,000 barrels per day enter the U.S. as part of imported reformulated gasoline. And another 89,000 barrels per day is imported ''neat,'' or not yet mixed with gasoline.
Assuming that the total U.S. gasoline pool is 8.2 million barrels per day, MTBE represents about 3.5 percent of the total volume of gasoline consumed. It is important to note, however, that MTBE is of higher octane than gasoline, and thereby allows refiners to use components of the refining process that are of lesser quality (i.e., lesser octane). Therefore, if you remove MTBE from the gasoline supply, you would lose between five and seven percent of the total volume of gasoline. The Department of Energy has estimated that this is equivalent to removing four or five refineries producing 100,000 barrels a day.
We can hardly envision a less auspicious time to announce a frontal assault on between 11 and 15 percent of gasoline supply in RFG areas, and as much as 5 to 7 percent of the overall supply. Phasing down the use of MTBE in the near future could have a devastating effect. A cap could send an unfortunate market signal. As a result, obtaining additional capitalization for expansion and maintenance would be difficult, thus endangering the industrial base of production.
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Let us not forget that California first felt substantial price increases and short supply of gasoline when two West Coast refineries were down intermittently. If Congress should effectively eliminate the use of MTBE, it would create a market effect similar to the complete loss of 4 to 5 100,000 barrel per day refineries. American consumersand particularly those nearest the poverty level with the least disposable incomewould surely find such a result intolerable.
A Suggestion: Retaining the Successes of Phase I RFG
Because of the already tenuous situation refineries face with high utilization and little flexibility, Valero suggests that EPA delay implementation of Phase II RFG and keeping in place the highly successful Phase I RFG program until price and supply factors have adequately stabilized. We believe that such an approach is consistent with the intent of the Act. Section 211(k)(1) of the Act, which set up the federal RFG program, commanded that EPA was to implement the program ''taking into consideration the cost of achieving such emissions reductions, any nonair-quality and other air-quality related health and environmental impacts and energy requirements.'' The most recent court to construe this provision observed that while EPA could not use the provision to mandate ethanol (a step potentially inconsistent with clean-air goals), it could use this authority ''to ensure that any emission reduction steps do not have inordinate economic, environmental, or energy effects.'' American Petroleum Inst. v. EPA, 52 F.3d 1113 (D.C.Cir. 1995). Considering both cost and energy supply ramifications therefore seem quite consistent with the letter and intent of the law.
In the past, EPA has exercised enforcement discretion in response to conditions likely to cause energy price and supply problems. In October 1993, the Agency did so when a pipeline system failure occurred as the new low-sulfur diesel program was being introduced. Enforcement discretion was also used during a recent winter oxygenate program in metropolitan New York. And most recently, in response to the home heating oil shortage of refinery distillates, DOE recommended this strategy. On March 9, 2000 in testimony before the House Commerce Committee's Energy and Power Subcommittee, the Director of DOE's Office of Policy noted that the Administration, in response to the fluctuation in the oil markets, ''Worked with states on a case-by-case basis on possible Clean Air Act waivers to help add to the quantity of available fuels ensuring that people had adequate fuel oil supplies.''
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Luckily, in the current case, we already have a program in place in Phase I RFG that is highly protective of human health and the environment. Industry, environmentalists and government all agree on one thing: Phase I RFG has achieved tremendous successes in air qualitybeyond legislative requirementsand has done so without causing price and supply disruptions. However, implementing Phase II RFG at a time of such uncertainty in gasoline markets and tight capacity among refineries cannot ensure the same smooth transition. If an ill-timed complete transition to Phase II RFG were to occur under less than optimal price and supply pressures, the continued consumer-acceptability of the RFG program could not be guaranteed. The result could sacrifice the substantial successes we have already achieved with Phase I RFG.
In addition, Valero urges the Congress and the Administration to take a hard look at any change in the regulatory status of MTBE, viewing such change through the prism of price and supply. For example, should the two-percent fuel oxygen standard be subject to a state-requested waiver, such a request should not be granted if the requesting state may precipitate a spike in price or shortage of supply. Again, we should be vigilant not to inflict our own wounds.
Some have argued that the solution to relatively high gasoline prices lies in the development of alternative sources of motor fuels. While there is little doubt that the very finite nature of fossil fuels necessitates development of alternatives, in the short term such development cannot seriously be viewed as a mechanism to address our current difficulties. The problem of market concentration is an area of great interest to this Committee. One can hardly imagine a more concentrated market than the current ethanol industry. In 1997, the General Accounting Office wrote that, ''The ethanol industry is dominated by a few large firms. Sixty-five percent of capacity is owned by the three largest firms, and the largest firm, Archer Daniels Midland, owns 50 percent of capacity.'' (U.S. General Accounting Office, Tax Policy: Effects of the Alcohol Fuels Tax Incentive, March 6, 1997). Some have put the ADM share even higher. See, Arnold Reitze, GWU Professor, environmental law, Tulsa Law Journal, 1994, at 530 (''The tilt toward ethanol makes little sense except as a response to political pressure. The big winner would be the Archer-Daniels-Midland company of Decatur, Illinois, because it controls over 70 percent of the domestic ethanol market.''). Therefore, placing our eggs in the ethanol basket is likely to reduce competition, not enhance it. This is hardly a recipe for success in reducing energy prices to the consumer.
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Energy Independence: Regulatory Constraints and International Competition
Valero does not oppose the implementation of appropriate environmental regulations in the United States, based upon addressing real risks with sound scientific approaches. To the contrary, Valero has invested millions of dollars in manufacturing clean fuels. However, unless a sense of equity is present in the system, unearned advantages are conferred on our foreign competitors when regulations are implemented. This happens in two ways: first, as costs of production increase in the U.S., incentives are created to import gasoline from nations without costly standards; and second, as new requirements are placed on the quality of the refined product itself, foreign refiners benefit by cleaning up only the portion of their gasoline pool destined for export, dumping the rest of the comparatively dirtier fuel in their pool destined for domestic consumption.
Valero alone spends on the order of $100 million per year in environmental compliance expenditures. The real cost of these unequal environmental standards in terms of international competitiveness for U.S. refiners is tremendous. The Office of Technology Assessment has found that the cost to the domestic refining industry for pollution abatement is substantial and is higher than for most other industries. API has calculated that petroleum refining could account for a disproportionate 17% of the national environmental expenditure in the year 2000.
Foreign refiners simply do not share the U.S. concern for environmental protection as reflected in actual and enforceable standards. One published industry study (OGJ) examined 26 scheduled and proposed environmental regulations, concluding that regulations may well confer competitive advantages on foreign refiners, with 16 regulations likely to account for actual increases in imports. As long as environmental compliance costs remain a significant burden on domestic refiners, and one that is not shared by our foreign competitors, refineries will close as a result of import penetration. Under these conditions, the Energy Information Administration has predicted a 137% increase in gasoline imports from 1994 to 2010.
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While no company likes to expend capital on regulatory compliance burdens, neither Valero nor any other responsible company advocates rolling back environmental regulations currently in place in the United States. The American people will not tolerate such a course, and they shouldn't have to. Rather, Valero believes that domestic refiners can be competitive with foreign refiners provided that foreign refiners are not allowed to take unfair advantage of the laxity of their environmental programs. Therefore, we recommend policies designed to target such inequalities. Here are some options:
As it considered during the National Energy Strategy discussions at the beginning of the decade, the U.S. should consider adoption of an ''environmental investment tax credit,'' similar to the research and development tax credit. At the very least, such an approach could reduce the competitive disadvantage created by the drain of capital effected by regulatory compliance burdens; and
U.S. regulatory agencies, such as the Environmental Protection Agency, should make sure that environmental regulations do not create greater competitiveness problems. Regulations should apply equally to both U.S. and foreign refiners to the maximum extent possible.
Valero recognizes that these policy options are not without cost. However, the real world costs of doing nothingand potentially sacrificing the domestic refining industry to import penetrationis a far greater threat to the U.S. economy and national security. Valero believes that the U.S. government can advocate these policy options in a manner fully consistent with international trade obligations.
Page 278 PREV PAGE TOP OF DOCConclusion
Valero Energy Corporation appreciates this opportunity to appear before the House Judiciary Committee regarding competition and the oil industry. Petroleum refiners know that flexible and pragmatic policies designed to ensure sufficient refining capacity are the lynchpin to a market system capable of responding efficiently to price and supply questions. We can establish such flexibility without sacrificing our commitments to protection of human health and the environment. Indeed, by facilitating the production of new generations of clean gasolines, a robust refining industry can do a great deal to enhance environmental protection. But, such success is only possible if regulations are designed with both energy and environmental needs in mind and with full understanding of the global marketplace in which our industry operates.
Mr. HYDE. Thank you very much.
STATEMENT OF DANIEL LASHOF, SENIOR SCIENTIST, NATURAL RESOURCES DEFENSE COUNCIL, WASHINGTON, DC
Mr. LASHOF. Thank you very much, Mr. Chairman, Mr. Scott. On behalf of NRDC's 400,000 members, I am happy to appear at this hearing and I would like to make just three points.
The first point is that the United States cannot produce its way out of vulnerability to oil price spikes. Second, rolling back environmental standards governing the oil industry would not significantly affect oil prices, but would damage irreplaceable natural resources. And third, the United States can and should reduce its dependence on petroleum by increasing the fuel efficiency of vehicles.
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Point number one, we can't produce our way out of this problem. The fact is that oil is a global commodity. Prices are set in international markets. Even if the United States did not import any oil, unless we are prepared to go back to an era of price controls that I don't think is an experience anybody here wants to repeat, our prices are going to depend on the world market price even if we could become entirely self-sufficient in oil, which I don't think any analysts have really suggested we could do in the foreseeable future.
So our prices are going to depend on foreign markets. The only way we can reduce our vulnerability is to reduce our dependence on petroleum. Domestic production will not solve that problem.
Domestic production would only affect the prices to the extent that it affects the global supply and demand balance. But the fact is that the U.S. has simply exploited its most accessible, largest volume oil reserves. There is additional oil to be had, but not in sufficient quantities to substantially affect global markets. In fact, the United States produces only about 12 percent of global petroleum supplies. We consume 25 percent of global supplies. So our leverage on the international market is much larger through demand than it is through supply.
Over the long term, the U.S. share of production inevitably will declineeven if we open up every natural place in this country, every national park, we drill everywhereU.S. production as a share of global production will decline. The geology is just clear. The United States only has 2 percent of global reserves. Gulf State OPEC members have 65 percent. We can't change geology.
Page 280 PREV PAGE TOP OF DOC There are renewed calls to open up the Arctic National Wildlife Refuge. The fact is that the best estimate of the amount of oil there3.2 billion barrelswould add just .3 percent to global oil reserves. It would not significantly change the oil supply-demand balance, it will not reduce U.S. vulnerability to price spikes imposed by the OPEC cartel.
Let me turn to point number two. Rolling back environmental standards, as I suggested, won't help our vulnerability to oil price spikes, but it will damage environmental resources. The oil industry has made a lot of progress in reducing its environmental footprint. But it remains a very large-scale industrial activity that is simply incompatible with protecting our most treasured coastal wetlands, our Arctic National Wildlife Refuge, and other wildlife refuges.
Oil production inevitably involves various risks including spills, the release of drilling waste, dumping of contaminated produced water, and on-shore impacts from terminals, even in coastal development. Production in Alaska has resulted in converting one of the largest wilderness areas in the United States into one of the world's largest industrial complexes. There are 1,500 miles of road, pipeline, thousands of acres of industrial facilities that produce air pollution. There are spills, huge volumes of waste to dispose of. The industry can and has moved to reduce its footprint, but it cannot become compatible with protecting these natural resources in at least some areas that we have decided to set aside.
Third, let me turn to the demand side where we have the most leverage.
The most effective law the Congress has passed to reduce our dependence and risk of oil price spikes was the Corporate Average Fuel Economy law passed in the 1970's. It doubled fuel economy between about 1975 and 1985, but over the last 10 years, there have not been increases. In fact, the fuel efficiency of new vehicles today is at its lowest point since 1980. The standards have been stagnant. In fact, Congress has continued to impose riders that prevent the Department of Transportation from even considering increasing the fuel economy of our light trucks and cars. And as a market share, sport utility vehicles and other light trucks have grown from 20 percent of the market to 50 percent of the market. Fuel economy has actually declined.
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So I believe if we are going to look for opportunities to reduce our dependence, we should be focusing on increasing the fuel efficiency of our vehicles which use two-thirds of our oil, eliminate the rider that prevents the Department of Transportation from updating the fuel efficiency standards which are way overdue, and we should look at tax credits to bring advanced technology, hybrid electric gasoline vehicles into the market more rapidly as the Administration has proposed to do.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Lashof follows.]
PREPARED STATEMENT OF DANIEL LASHOF, SENIOR SCIENTIST, NATURAL RESOURCES DEFENSE COUNCIL, WASHINGTON, DC
The United States can not produce its way out of vulnerability to oil price spikes. The price of oil is determined primarily by international markets, which will affect U.S. consumers regardless of the level of domestic oil production.
Rolling back environmental standards governing the oil industry would not significantly effect oil prices, but would damage irreplaceable natural resources.
The United States can and should reduce its dependence on petroleum by increasing the fuel efficiency of vehicles, particularly SUVs and other ''light trucks.''
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My name is Daniel Lashof, and I represent the Natural Resources Defense Council, where I am a senior scientist and director of the global warming project. I appreciate the opportunity to appear before you today. My testimony will address appropriate policy responses to our nation's excessive dependence on petroleum.
For over ten years I have been active on national energy policy issues. I recently served on the Energy Research and Development Panel of the Presidents' Committee of Advisers on Science and Technology, which produced a report to the President on Federal Energy Research and Development for the Challenges of the Twenty-First Century. Previously I served on the Federal Advisory Committee on Options for Reducing Greenhouse Gas Emissions from Personal Motor Vehicles. I hold a bachelor's degree in physics and mathematics from Harvard University and a doctorate from the University of California at Berkeley.
The Natural Resources Defense Council is a national, non-profit organization of scientists, lawyers, and environmental specialists, dedicated to protecting public health and the environment. Founded in 1970, NRDC serves more than 400,000 members from offices in New York, Washington, Los Angeles, and San Francisco.
In this testimony I will make three main points. First, the United States can not produce its way out of vulnerability to oil price spikes. Second, rolling back environmental standards governing the oil industry would not significantly effect oil prices, but would damage irreplaceable natural resources. Third, the United States can and should reduce its dependence on petroleum.
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1. The United States can not produce its way out of vulnerability to oil price spikes.
Oil is a global commodity. The price of oil is therefore determined primarily by international markets. This will continue to be the case regardless of the level of domestic oil production unless the United States wants to return to an era of price controls and de facto rationing, which is not an experience that anyone is anxious to repeat. In other words, as long as U.S. oil markets remain open, the price of gasoline in Chicago, Detroit and Washington will fluctuate with global oil prices, even if the United States did not import any oil. Changes in domestic oil production will, therefore, only affect oil prices to the extent that they influence the global supply/demand balance. The United States, however, only produces about 12% of global petroleum supplies, so even large changes in domestic production will have only a marginal effect on global markets. Over the long term, the U.S. share of global production will inevitably decline further. The United States has only 2 percent of world oil reserves, while Gulf State OPEC members control about two-thirds of proven reserves. Opening the coastal plain of the Arctic National Wildlife Refuge to oil exploration would not appreciably change this situation. USGS's mean estimate is that 3.2 billion barrels could be economically produced, which would add just 0.3 percent to global reserves.
In contrast, the United States is responsible for about 25% of world petroleum demand. This fact alone indicates that the we can have a much larger impact on global markets on the demand side than on the supply side. This conclusion is strengthened by the fact that there are large untapped energy efficiency resources whereas our most abundant and accessible oil resources have already been exploited. I will return to this point in part 3 of my testimony.
Page 284 PREV PAGE TOP OF DOC2. Rolling back environmental standards governing the oil industry would damage irreplaceable natural resources
The data presented above makes it clear that rolling back environmental standards would be totally ineffective as a policy response to recent oil price spikes. This would, however, put irreplaceable natural resources at risk. The oil industry has made significant progress in reducing the environmental impacts of its operations, but oil production remains an inherently damaging and risky activity that is simply incompatible with protecting fragile natural resources, such as remaining coastal wetlands and wildlife refuges. For example, offshore oil and gas development continues to result in oil spills, the release of drilling waste, dumping of contaminated ''produced water'' and on shore impacts from terminals, pipelines and other facilities:
Oil spills. This is the most obvious impact of offshore development. While platform blowouts resulting in large spills are rare, pipeline spills are not. According to DOI statistics, from 1986 through 1997, some 2 million gallons of oil was spilled from OCS oil and gas operations. In January of this year, an oil pipeline in the Gulf of Mexico ruptured after becoming fouled with an anchor from a drilling rig and spilled some 94,000 gallons of crude oil into the Gulf about 120 miles south of New Orleans.
Drilling waste. Drilling operations generate more than a thousand tons of drilling waste per well. Toxic pollutants in drilling waste include lead, naphthalene, arsenic, copper and selenium. Suspended solids in drilling waste can smother bottom dwelling organisms and alter critical benthic habitats. Disposal of OCS drilling wastes typically involves dumping it over the side untreated.
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Produced water. ''Produced water'' (brine in the formation that is brought up along with oil from a well), is generated in massive quantities by production operations. Produced water contains a variety of toxic pollutants, including benzene, toluene, and the radioactive pollutants Ra 226 and Ra 228 (produced water generated off Louisiana has been found to contain levels of radioactivity higher than that permitted to be discharged by nuclear power plants and higher than the level that distinguishes hazardous from non-hazardous waste under RCRA).
Onshore impacts. Offshore oil and gas extraction typically requires extensive onshore industrial development to process and transship oil or gas. Pipelines, storage facilities, processing facilities and other industrial infrastructure built to support offshore oil and gas has resulted in substantial environmental damage to coastal resources. For example, a study done for NOAA in the 1980's conservatively estimated that offshore pipelines crossing coastal wetlands in the Gulf of Mexico had destroyed more coastal salt marsh than exists in New Jersey through Maine. Particularly in areas where little infrastructure presently exists, onshore impacts can be expected to be substantial.
Renewed calls for opening the Arctic National Wildlife Refuge to oil exploration are generally accompanied by claims that the environmental impact would be minimal, yet a review of the impact of existing oil development in Alaska tells a different story. Once part of the largest intact wilderness area in the United States, Alaska's North Slope now hosts one of the world's largest industrial complexes. More than 1,500 miles of roads and pipelines and thousands of acres of industrial facilities sprawl over hundreds of square miles of once pristine arctic tundra. Impacts include air pollution, spills and waste:
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Air pollution. Oil operations on Alaska's North Slope emit tens of thousands of tons of oxides of nitrogen annually, which contribute to smog and acid rain. In addition, North Slope oil facilities release tens of thousands of tons of methane, a potent greenhouse gas that contributes to global warming.
Spills. Each year, hundreds of spills involving tens of thousands of gallons of crude oil and other petroleum products and hazardous materials occur on the North Slope. In 1995, approximately 500 spills occurred involving more than 80,000 gallons of oil, diesel fuel, acid, biocide, ethylene glycol, drilling fluid, produced water, and other materials.
Waste. Oilfield activities generate tens of thousands of cubic yards of sewage sludge, scrap metal, garbage, and waste every year.
3. The United States can and should reduce its dependence on petroleum
Almost thirty years after the first OPEC oil embargo the United States is still dependent on petroleum for 97% of its transportation energy needs. As a result, two-thirds of our petroleum consumption goes to fuel transportation. With average efficiencies declining for new vehicles, and a 21 percent increase in miles driven between 1990 and 1998, the petroleum dependence of transportation is continuing to rise.
CAFE standards helped double vehicle efficiencies from 1975 to the late 1980s, reducing the impact of high oil prices on consumers. This is the most effective policy that Congress enacted in response to the oil crises of the 1970s, and it can be used again to protect citizens from fluctuations in oil prices such as those we are now experiencing. Unfortunately since 1995 provisions in the transportation appropriations Acts have prohibited the Department of Transportation (DOT) from even examining the need to raise the Corporate Average Fuel Economy (CAFE) standards. As a result of this rider and the growing market share of SUVs, the average fuel economy of all new passenger vehicles is at its lowest point since 1980. Congress should allow DOT to implement the law as intended, and study the technical feasibility and economic practicability of raising standards.
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SUVs should be held to the same efficiency standards as other passenger vehicles, by ending their classification as light trucks. The weaker CAFE standard for light trucks was intended to allow for legitimate differences between commercial vehicles and passenger vehicles, but allows SUVs to consume one-third more oil per mile than cars. With SUVs and other light trucks now accounting for half of new vehicle sales, this unintended loophole must be closed. The technology currently exists for SUVs to meet the tighter standard for cars, at an estimated additional cost of $575, which is recouped in less than two years from savings in gasoline bills (UCS, 1999).
Recent analysis shows that CAFE standards could be raised to over 40 miles per gallon for new cars and light trucks by 2010. This would result in oil savings of about 3 million barrels per day below business-as-usual projections, with a net economic gain for consumers of $69 billion over the life of the vehicles (ACEEE, 1998).
To complement higher fuel economy standards, Congress should enact tax incentives to encourage consumers to purchase energy efficient products, and to spur the production of energy from clean, renewable resources. By providing a direct financial reward, incentives can help to overcome market barriers to the full commercialization of new technologies. The tax code already provides incentives for some efficiency and clean energy measures, but major areas are currently left out of what could be a comprehensive tax policy.
In particular, ''hybrid'' vehicles integrate a conventional gasoline internal combustion engine and on-board battery-electric power into a single drivetrain. These vehicles have the great advantage of requiring no additional fueling infrastructure, and are likely to provide a transition path to electric and fuel cell cars. Hybrid cars available commercially for the first time this year in the U.S. are capable of fuel efficiencies of 60 to 70 miles per gallon, 2 to 3 times that of the average new passenger vehicle. Consumer tax incentives for clean highly-efficient hybrid vehicles would facilitate the rapid commercialization of this promising technology.
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ACEEE (1998). Approaching the Kyoto Targets: Five Key Strategies for the United States. American Council for an Energy Efficient Economy. August 1998.
PCAST (1997). Federal Energy Research and Development for the Challenges of the Twenty First Century. Report of the Energy Research and Development Panel, The President's Committee of Advisors on Science and Technology. November 1997.
UCS (1999). Greener SUVs: A Blueprint for Cleaner, More Efficient Light Trucks. Union of Concerned Scientists, July 1999.
USGS (1988). Arctic National Wildlife Refuge, 1002 Area, Petroleum Assessment. USGS Fact Sheet FS04098, May 1998.
Mr. HYDE. Thank you very much, Doctor.
Now Ms. Callaghan. We saved our best for last.
STATEMENT OF LISA CALLAGHAN, POLICY ANALYST, NORTHEAST ADVANCED VEHICLE CONSORTIUM, BOSTON, MA
Ms. CALLAGHAN. The least controversial for last, I hope.
Page 289 PREV PAGE TOP OF DOC I am pleased to have the opportunity today to talk about the important efforts underway by industry and Government-industry partnerships to introduce hybrid, electric, and fuel cell vehicles to the U.S. market. These clean car technologies offer the United States the promise of a reduced energy consumption and improved air quality and public health.
The current increase in gas prices has focused national attention on U.S. dependence on oil. Cars and trucks alone use two-thirds of all petroleum in the country. The transportation sector as a whole accounts for one-third of energy use in the U.S. And the primary vehicle technology in usethe internal combustion engineis only about 18 percent efficient in real-world conditions.
As we are seeing, our high energy consumption and heavy dependency on oil to supply that energy leaves us vulnerable to major shifts in price or supply. While there is currently much discussion of short-term responses to this problem, the long-term solution in the transportation arena is to develop commercially viable vehicles that cut gas consumption dramatically or are not powered by gasoline at all. Efforts to develop and commercialize these clean car technologies are already underway.
For example, Honda is currently selling a hybrid electric car in the United States. Called the Insight, the car uses an electric motor in combination with a gas engine. It gets 65 miles per gallon in combined city-highway driving.
Toyota has already been selling a mass production hybrid in Japan for over 2 years. It has been a huge success with over 30,000 units sold. The Prius gets approximately 55 miles per gallon and will be launched in the United States this summer. It is important to note that these hybrids offer performance that is comparable to gas cars and are being priced under $20,000, making them quite affordable.
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Last year, DaimlerChrysler displayed a hybrid Dodge Durango. Although this hybrid SUV would only get 18.6 miles per gallon, that is still a 20 percent improvement over the regular Durango's 15.5 miles per gallon. A recent Boston Globe article by the Northeast Sustainable Energy Association calculated that a mere 20 percent increase in vehicle fuel efficiency could cut the average American family's annual oil consumption by a few hundred gallons.
There are also efforts underway to transition the automobile away from gasoline entirely. All the major auto makers have offered battery-powered electric cars for sale or lease in the U.S. Electric cars have no tail-pipe emissions, and because they get their energy from the power grid, they can take advantage of the move toward clean power sources like wind or solar.
Auto makers are also investing heavily in another type of electric car powered by fuel cells. A fuel cell produces electricity from the reaction of hydrogen and oxygen, with no pollutants and no carbon dioxide emissions. DaimlerChrysler has committed to introduce a production fuel cell car by 2004, although widespread availability of such cars is not likely to occur before 2010.
This is what the future of the automobile industry looks like. And this prediction comes not just from wishful thinking of environmentalists. It comes straight from the car companies themselves.
GM chairman, Jack Smith, stated that no car company will be able to thrive in the 21st century if it relies solely on the internal combustion engine. Ford, Toyota, and Honda have all been jockeying to position themselves as the green car company.
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As consumers, we should hold car companies to their commitments and reward them when they follow through. And policymakers should be aware that these activities are being spurred in part by intelligent Government policy. Regulatory drivers such as strict emissions and fuel economy standards push the auto industry to continue to improve their products, as was the case with air bags and catalytic converters. And Government programs that match private investment and help companies conduct advanced research and demonstration.
I would also like to mention that there are important efforts underway to make heavy duty vehicles such as trucks, buses, and delivery vans cleaner and more fuel efficient, too. California and New York City have both made a commitment to transition their bus fleets to compressed natural gas. New York recently announced plans to purchase 125 hybrid buses. And the U.S. Postal Service will place 500 electric delivery vans into its service routes this fall.
These technologies represent an enormous economic opportunity for the United States, one that we should not let pass by. It is estimated that by 2010, the global fleet could reach 650 million vehicles. This fleet is not sustainable using current internal combustion engine cars. The U.S. should seize the opportunity to become the world leader in providing advanced vehicle technologies to the global fleet.
[The prepared statement of Ms. Callaghan follows.]
PREPARED STATEMENT OF LISA CALLAGHAN, POLICY ANALYST, NORTHEAST ADVANCED VEHICLE CONSORTIUM, BOSTON, MA
Page 292 PREV PAGE TOP OF DOC My name is Lisa Callaghan. I am a policy analyst at the Northeast Advanced Vehicle Consortium in Boston, Massachusetts. We are a non-profit organization that brings together private and public entities working to advance clean transportation technologies, including hybrid, electric and fuel cell systems for passenger vehicles and heavy-duty vehicles, in the Northeastern U.S.
I am pleased to be here today to talk about the important efforts underway by industry, and through industry/government partnerships, to introduce hybrid, electric, and fuel cell vehicles to the U.S. market. These clean-car technologies offer the United States the promise of reduced energy consumption and improved air quality and public health.
Right now, the sudden increase in gas prices is focusing national attention on U.S. dependence on oil. Cars and trucks alone use two-thirds of all petroleum in the country. The transportation sector as a whole accounts for one-third of energy use in the U.S. And the primary vehicle technology in usethe internal combustion engineis only about 18% efficient in real world use.
As we are seeing, our high energy consumption, and heavy dependency on oil to supply that energy, leaves us vulnerable to major shifts in price or supply. While there is currently much discussion of short-term responses to this problem, the long-term solution in the transportation arena is to develop commercially viable vehicles that cut gas consumption dramatically or are not powered by gasoline at all. Efforts to develop and commercialize these ''clean car'' technologies have been underway for years and will continue long after this current price spike is gone.
Page 293 PREV PAGE TOP OF DOC For example, Honda recently became the first car company to offer a hybrid-electric car to the U.S. market. Called the Insight, the car uses an electric motor in combination with a gas engine. It gets 61 mpg in the city, 70 mpg on the highway, topping EPA's fuel economy rankings for model year 2000 cars. By comparison, the similarly-sized Honda Civic gets 28 mpg in city driving, 35 in highway driving. The Insight's fuel savings results both from the hybrid propulsion system and the car's extremely lightweight aluminum body.
Toyota has already been selling a mass-production hybrid in Japan for over two years. They introduced the Toyota Prius in December 1997, and since then, over 30,000 units of the Prius have been sold. In fact, monthly production had to be ramped up to meet the high demand. Toyota plans to introduce the Prius in the U.S. this summer. The 4-door, 5-passenger Prius uses an electric motor and a gas engine to achieve a combined fuel economy of approximately 55 mpg. It is also important to note that hybrids such as the Insight and the Prius offer performance comparable to gas cars and are being priced under $20,000, making them quite affordable.
Currently, all the other major automakers are also developing hybrids, using various platforms. Last year, DaimlerChrysler displayed a hybrid Dodge Durango. Although this hybrid SUV would only get 18.6 mpg, that is still a 20% improvement over the gas Durango's 15.5 mpg. A recent Boston Globe article by the Northeast Sustainable Energy Association calculated that a mere 20% increase in vehicle fuel efficiency could cut the average American family's annual oil consumption by a few hundred gallons.
There are also efforts underway to transition the automobile away from gasoline entirely. All of the major automakers have offered battery-powered electric cars for sale or lease in the U.S., as do some smaller car manufacturers. Electric cars have no tailpipe emissions. And, because they get their energy from the power grid, they can take advantage of the move toward green energy sources like wind and solara move spurred, in part, by electric utility deregulation.
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Automakers are also investing heavily in another type of electric carfuel cell vehicles. A fuel cell produces electricity from the reaction of hydrogen and oxygen, with water as the only by-product. While there are no pollutants and no carbon dioxide emissions associated with this technology, the first fuel cell cars to come to market will likely have emissions resulting from the process of generating hydrogen to power the car. However, in the long term, it is conceivable that these cars would become truly emission free. DaimlerChrysler has committed to introducing a production fuel cell car by 2004, although widespread availability of such cars is not likely to occur before 2010.
Electric motors, fuel cells, hydrogen fuelthis is what the future of the automobile industry looks like. And this prediction comes straight from the car companies themselves. GM chairman Jack Smith stated that ''(n)o car company will be able to thrive in the 21st century if it relies solely on the internal combustion engine.'' Ford's new chairman, William Clay Ford, has declared himself an environmentalist and is working to position Ford as the ''green car company.'' Ford has competition for that title from Toyota and Honda, which have also been putting their green foot forward. Toyota's president declared that ''(a)utomakers that deliver practical, greener products will command the market in the 21st century.'' And full-page ads touting Honda's line of environmentally friendly vehicles can be found in major national magazines.
As consumers, we should hold car companies to their commitments and reward them when they follow through. As companies like Ben & Jerry's have shown, companies with a social conscience can attract an amazing degree of brand loyalty among customers.
Page 295 PREV PAGE TOP OF DOC And policymakers should be aware that these exciting developments are being spurred in part by intelligent government policy. Regulatory drivers, such as strict emissions and fuel economy standards, push the auto industry to continue to improve their products, as was the case with airbags, catalytic converters and bumper standards. And government programs that match private investment help companies conduct advanced technology research and demonstration.
These technologies represent an enormous economic opportunity for the U.S.one that we should not let pass us by. In 1990, the global fleet was 430 million vehicles. By 2010, it could increase by roughly 50% to 650 millionmuch of that growth coming in countries like China and India. This increase is not sustainable using current internal combustion engine cars. The U.S. has the opportunity to become the world leader in providing advanced vehicle technologies to the global fleet.
Finally, I would like to mention that there are important efforts underway to make heavy-duty vehiclessuch as trucks, buses and delivery vanscleaner and more fuel efficient too. California and New York City have both made a commitment to transitioning their bus fleets to compressed natural gas. Also, New York recently announced that it plans to purchase 125 hybrid-electric buses for delivery in 2001 and 2002. The U.S. Postal Service will place 500 electric delivery vans, built by Ford, into its service routes beginning in the fall of 2000.
Re-making the automobile would seem like a long overdue effort. The internal combustion engine car of today is remarkably unchanged from its first, 19th century incarnation. While it has brought us incredible mobility, it also carries some heavy costs. Now is the time to make the automobile a 21st century technology.
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Mr. HYDE. Thank you, Ms. Callaghan.
This has been a fascinating panel. We will now take questions.
Mr. SCOTT. Thank you, Mr. Chairman.
I am intrigued by the last two witnesses concerning the alternative fuels for vehicles.
One number that wasn't mentioned or I missed it was the range of the cars. That has been one of the problems, that once you gas up, you can only go about 80 miles before you gas up again.
Can you comment on that?
Ms. CALLAGHAN. That is one of the reasons they are developing hybrids. Range is not an issue with them. A hybrid, because it gets perhaps twice the fuel economy, can go between 600 and 700 miles on a full tank of gas. A typical car goes about 300 miles. Hopefully with developments like fuel cells, we will see that pure electric cars can extend their range, too. It is a problem with battery electrics, although they can go more than enough for the average commute, which is under 20 miles a day. Electric cars go far beyond that, but they don't fulfill the same kind of range that a typical gas car does.
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Mr. SCOTT. A few years ago, we had a lot of people taking advantage of solar panels in houses. As soon as the tax credits evaporated, the industry collapsed.
What kind of tax credits could we think of if we want to stimulate the alternative fuel for cars industry?
Mr. LASHOF. Mr. Chairman, we believe that tax credits can be targeted at bringing this new technology into the market more rapidly that wouldn't be very expensive to the Treasury. They would be designed particularly to target hybrid vehicles that combine gasoline and electric motors. What you need to do is soften the market up and increase the production volume. Once you get into mass production, these vehicles can become very competitive.
Mr. SCOTT. So the tax credits would only be needed to get the industry started? It could easily sustain itself without subsidies after it gets going?
Mr. LASHOF. Yes. I believe a tax credit for a period of about 4 or 5 years would bring this market to maturity and these cars are going to be very attractive to consumers because of their high fuel economy, because of their long range, and they can be fueled with conventional gasoline.
Mr. SCOTT. And the marginal manufacturing cost is not significantly more than the marginal manufacturing cost for other cars now?
Page 298 PREV PAGE TOP OF DOC Mr. LASHOF. I think that is not entirely clear at this point. Certainly in the first generation it is more expensive because they are being produced in relatively low volumes. They are more complicated because you are combining an electric motor with a gasoline engine. But there are also some savings that you can obtain because you are downsizing the gasoline engine as well.
Then obviously the fuel economy benefit means that over the life of the vehicle, the consumer comes out ahead. But the marketplace has had a hard time valuing that because consumers have a hard time projecting over 5 or 10 years those fuel savings. So the tax credits help to overcome that as well.
Mr. SCOTT. Mr. Segal, did you want to comment?
Mr. SEGAL. Yes.
I just wanted to say that in the current gasoline pool, there are some alternative fuels that are already participating even without Government subsidy or tax credit. One is MTBE, which is essentially a natural gas derivative that accounts for about 5 percent of the gasoline pool. Of course, some folks in the Administration and Congress are thinking about phasing it out. But if we phase it out, it is like closing four to five 100,000-barrel a day refineries.
So we hope that we will let some market forces also allow alternative materials to remain in the gasoline pool in addition to developing electric cars.
Page 299 PREV PAGE TOP OF DOC Mr. SCOTT. Mr. Patmon, in your litigation, have you done any discovery? Have they taken depositions?
Mr. PATMON. They are starting that process now, yes.
Mr. SCOTT. You have made allegations, but you haven't gotten much of a response yet?
Mr. PATMON. Not much.
Let me say that the allegations that were made had to do with our receiving accessand I can't talk a whole lot about itto the pricing system. We actually were getting at one point delivered to my office anonymously the readouts from how the gas was being priced across the region. So it wasn't something we were guessing about. We presented this information to Shell for them to deny it and they haven't. I suspect it will be used in court.
Mr. SCOTT. Thank you, Mr. Chairman.
Mr. HYDE. Thank you, Mr. Scott.
Mr. PEASE. Thank you, Mr. Chairman.
Page 300 PREV PAGE TOP OF DOC Thank you all for being with us today in a complex and difficult matter.
In the interest of full disclosure, I would like to begin by advising the chairman and the panelists that my brother is employed by Equilon, which does downstream marketing for Shell and Texaco. But as will be evident quickly from the shallow nature of my understanding of this subject, we don't converse a lot on the specifics of this industry. But I want you to at least know that.
Mr. Patmon, I want to pursue your concerns on zone pricing because I share them, if they are leading where I think they are leading from the presentation that you made.
I understand there may be economic and market reasons for differential pricing. And though you didn't say this, I conclude that there may be a racial differentiation in pricing. If that is the case, I am tremendously concerned about that potential situation.
Are you far enough in your process to draw any conclusions yet on this subject?
Mr. PATMON. The areas I describedthe majority community on the west side and the minority community on the east side, and the surrounding suburbs are majority white. The 12 gas stations I am speaking about are located basically on the east side of Cleveland in the inner city. The station that I described earlier that was selling gas retail for 99 cents while the wholesale price on the east side was $1.02. The stations actually could have driven across town and bought gas cheaper than they could from the truck that drives in and supposedly sells at wholesale.
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From our research, from a centralized distribution center, trucks were actually delivering to stations, going further out, same driver, same truck, and selling at a cheaper price. So it had nothing to do with delivery or location.
Since the majority of people who were being oppressed were African-American, there was nothing else for us to conclude.
Mr. PEASE. Do you have any idea how much longer that litigation is going to last?
Mr. PATMON. No, but I am confident in the people who are handling itex-Congressman Robert Sweeney is the lead counsel on the case. Again, he sees validity in it and he has spent a number of years here.
But he was also concerned that there was no Federal way to attack this, that we had to rely on a 30-year-old State law to deal with it. The Patman Act does not sufficiently address this to deal with it on a local level. So we are actually suing under a State law.
Mr. PEASE. I appreciate that. I will be interested, as this progresses, for you to continue to advise the committee of the litigation.
Mr. Columbus, you gave an example of zone pricing being used in a situation where the State excise taxes in one State were considerably higher than the contiguous State. I conclude from that, that the suppliers would compensate in the zone where the taxes are higher by lowering their prices to those retailers so that they could be competitive with those across the line.
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Mr. COLUMBUS. To the extent, they can. Absolutely. Making up 15 cents is not going to happen on the wholesale level.
But it is my understanding that the Cook County tax is frequently a pricing factor in terms of how dealers in northern Illinois are pricing. My people, who buy at the rack and get support when they need it, are beneficiaries of that kind of price support.
Mr. PEASE. I confess to you that I don't know what I think on that at this point. One side of me applauds the major producers for trying to help some of their dealers. The other side of me says that if the States want to impose that kind of tax, they ought to pay the price for driving out business in their own State.
How is the balance determined by the companies when they make those decisions?
Mr. COLUMBUS. I can't speak for the oil companies. Each of them makes its own pricing decisions, and my clients have been as mystified by some of those pricing decisions as anybody in America.
But what I can tell you is that what you see increasingly is an emphasis on interbrand competition. In fact, in another Illinois case, the Supreme Court last year changed what has been 50 years of antitrust law in saying that maximum vertical resale price maintenance, which used to be a per se violation of the Sherman Act, is not anymore.
Page 303 PREV PAGE TOP OF DOC As antitrust has evolved over the last 25 years, we have gone increasingly from a focus on a particular form of behavior's impact on an individual competitor or group of competitors and a refocus onto those pricing practices' impact on competition, on consumer interests. With injury to competition increasingly being defined on a frequent basis as a market participant's ability to get sufficient power to raise and sustain prices above what would be a competitive level.
That is the level of inquiry which the courts are using now. I believe it is the one used at the Federal Trade Commissioner by Mr. Parker, who appeared before you last week, and by the Department of Justice. I am not so sure it is a bad one.
It frustrates individual participants in the marketplace. I understand their frustration. I am not saying they are wrong, but that is where we are going. And some days that choice is between the consumer and the competitor. So far, public policymakers have chosen the consumer.
Mr. PEASE. Mr. Chairman, unanimous consent for 2 more minutes?
Mr. HYDE. Surely.
Mr. PEASE. Thank you, Mr. Chairman.
Mr. Zimmerman, could you help me understand a little better the ''meeting competition'' defense? I think I understood you to say that if there was no competitive injury because of a rise in the price, then there was no violation. Coupled with what Dr. Littlefield said about the apparent convergence of decisions to raise prices among various erstwhile competitorsI suppose there isn't any injury to the companies, but there certainly could be injury to consumers.
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I would like to understand the defense a little better so I can understand the issue a bit better.
Mr. ZIMMERMAN. The Robinson-Patman Act prohibits discrimination that results in injury to competition or to the competitor that receives the disadvantaged price. But it is competitive injury that is being talked about, so you have to show that there is more than a price difference.
As far as meeting competition is concerned, even if you show competitive injury, if a supplier is in good faith meeting the competition, typically, of his competitor, the act gives him an absolute defense. The wrinkle like you have here and where you have a split in the courts is when the supplier is not meeting his own competition, but he is meeting the competition of the supplier to his dealer's competitor. So some courts say that a major oil company selling to a dealer that is meeting stiff competition from a competing dealer, and that stiff competition results from price allowances from that competing dealer's suppliersome courts say that the initial supplier can meet that competition in good faith, and that is an absolute defense.
Other courts say that absolute defense is only good if the supplier is meeting another supplier looking to the first supplier's dealer. In other words, you cannot meet the competition of the other supplier to the other dealer. There is a split in the courts. The Supreme Court knows it and has expressly said that they express no opinion on this.
Mr. PEASE. Thank you.
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Though my time is up, if there is anybody else who would like to comment on that question, I would like to hear it.
Mr. LITTLEFIELD. Sure.
We acknowledge that some zone pricing is to meet competition to come down. And that is usually the defense of zone pricing. But our concern is all the zone pricing that is used to raise prices.
Mr. Zimmerman quoted from an Attorney General letter in Maryland. That was a 1994 letter which said that zone pricing is not, per se, illegal as long as you go up in price but not down in price. We can supply that letter for you.
Then a follow-up on that, one company went to Annapolis and testified that they had 47 zones in Maryland, but we only go up in price. And now one company has three to four times that. It just opened the flood gates. That is our concern. It has never been to meet the competition to go down, which would be pro-consumer. It is going the other way to exact extra money.
Mr. PEASE. Thank you.
If you could supply the committee with that letter, we would appreciate it.
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Thank you all.
Thank you, Mr. Chairman.
Mr. HYDE: I want to thank Mr. Scott and his able counsel and Mr. Pease and Mr. Gekas, who had to go, for attending this fascinating hearing. We have assembled an awful lot of smart people who know what they are talking about.
Mr. Patmon, your lawsuit, the Marizette case, is useful in many ways, not only on the matter of zone pricing for petroleum but other commodities that have a differential in the retail price depending on the neighborhood. I think the discovery in your case, the depositions, will be revealing. We will follow that very carefully. If you will keep us informed, I think that will be fine.
Ms. Callaghan, you have the answer of answers, namely, much more efficient machines which ought to be on the threshold reducing our dependence on this elusive, dwindling, non-renewable source.
Dr. Lashof, your comments are very important. We need to preserve our environment. But I just will say parenthetically that as I flew over the Alaskan pipeline, mindful of the fact that environmentalists said it was an ecological disaster, I saw lots of caribou rubbing up against the pipe to stay warm. [Laughter.]
Mr. HYDE. So there are many facets to some of these interesting problems. You have made a great contribution. Your statements will be digested. And hopefully Robinson-Patman needs some improvement. Maybe it can come out off this. We will see.
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Thank you so much.
The committee stands adjourned.
[Whereupon, at 11:33 a.m., the committee was adjourned.]
(Footnote 1 return)
This written statement represents the views of the Federal Trade Commission. My oral presentation and response to questions are my own, and do not necessarily represent the views of the Commission or any individual Commissioner.
(Footnote 2 return)
Energy Information Administration, Heating Fuels and Diesel Update, March 2, 2000, at www.eia.doe.gov. See also Statement of John Cook, Petroleum Division Director, Energy Information Administration, Department of Energy, Before the Committee on Energy and Natural Resources, United States Senate (Feb. 24, 2000).
(Footnote 3 return)
15 U.S.C. §4158.
(Footnote 4 return)
15 U.S.C. §1227.
(Footnote 5 return)
15 U.S.C. §18.
(Footnote 6 return)
In recent years, the Commission has been active in supporting the deregulation of the electric power industry. See Commission Letter to the Honorable Thomas E. Bliley, Chairman, Committee on Commerce, United States House of Representatives, Concerning H.R. 2944, The Electric Competition and Reliability Act (Jan. 14, 2000); Comment of the Staff of the Bureau of Economics, Federal Trade Commission, ''Inquiry Concerning Commission's Merger Policy Under the Federal Power Act,'' Dkt. Nos. RM958000 and RM947001 (May 7, 1996); ''Revised Filing Requirements,'' Dkt. No. RM984000 (Sept. 11, 1998); Comment of the Staff of the Bureau of Economics of the Federal Trade Commission Before the Alabama Public Service Commission, Dkt. No. 26427, Restructuring in the Electricity Utility Industry (Jan. 8, 1999).
(Footnote 7 return)
Section 7 of the Clayton Act specifically prohibits acquisitions where the anticompetitive acts affect ''commerce in any section of the country.'' 15 U.S.C. §18.
(Footnote 8 return)
Federal Trade Commission v. BP Amoco, p.l.c., Civ. No. C 000416 (SI) (N.D. Cal. Feb. 4, 2000) (complaint) On March 15, 2000, the Commission and all other parties obtained an order from the Court adjourning the preliminary injunction hearing while the Commission evaluates the parties' proposal to sell all of ARCO's Alaska operations to Phillips Petroleum Co.
(Footnote 9 return)
Exxon Corp., FTC File No. 991 0077 (Nov. 30, 1999) (proposed consent order).
(Footnote 10 return)
British Petroleum Company p.l.c., C3868 (April 19, 1999) (consent order).
(Footnote 11 return)
Shell Oil Co., C3803 (April 21, 1998) (consent order).
(Footnote 12 return)
Exxon Corp., supra, Separate Statement of Chairman Pitofsky and Commissioners Anthony and Thompson.
(Footnote 13 return)
See United States Department of Justice and Federal Trade Commission, Antitrust Enforcement Guidelines for International Operations (April 5, 1995), reprinted at 4 Trade Reg. Rep. (CCH) 13,107, at §3.31 (Foreign Sovereign Immunity) and §3.33 (Acts of State).
(Footnote 14 return)
477 F. Supp. 553 (C.D. Cal. 1979), aff'd, 649 F.2d 1354 (9th Cir. 1981), cert. denied, 454 U.S. 1163 (1982).
(Footnote 15 return)
15 U.S.C. §1.
(Footnote 16 return)
The District Court also held that foreign nations were not ''persons'' for purposes of a Sherman Act suit, although that determination was not necessary to the outcome of the case, given the court's holding on the jurisdictional issue. The U.S. Supreme Court has held that a foreign nation may be a plaintiff in a Sherman Act case. See Pfizer Inc. v. India, 434 U.S. 308 (1978). The Court has not spoken on the issue of a foreign nation as a defendant in an antitrust case.
(Footnote 17 return)
28 U.S.C. §1330 et seq.
(Footnote 18 return)
28 U.S.C. §1605(2).
(Footnote 19 return)
IAM, 477 F. Supp. at 567. See also Restatement (Third) of International Law §443, ''[a]n official pronouncement by a foreign government describing a certain act as governmental, is ordinarily conclusive evidence of its official character.''
(Footnote 20 return)
MOL, Inc. v. Peoples Republic of Bangladesh, 736 F.2d 1326, 1329 (9th Cir. 1984) (abrogating a contract to export native fauna concerned ''Bangladesh's right to regulate its natural resources, . . . a uniquely sovereign function''); Rios v. Marshall, 530 F. Supp. 351, 372 (S.D.N.Y. 1981) (''temporary removal of manpower resources'' is not a commercial activity under the FSI Act).
(Footnote 21 return)
IAM, 649 F.2d at 1358.
(Footnote 22 return)
The Supreme Court described the act of state doctrine as ''a consequence of domestic separation of powers, reflecting 'the strong sense of the Judicial Branch that its engagement in the task of passing on the validity of foreign acts of state may hinder' the conduct of foreign affairs.'' W.S. Kirkpatrick & Co. v. Environmental Tectonics Corp., 493 U.S. 400, 404 (1990), quoting Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 423 (1964).
(Footnote 23 return)
IAM, 649 F.2d at 1358.
(Footnote 24 return)
Kirkpatrick, 493 U.S. at 405.
(Footnote 25 return)
See, e.g., Hunt v. Mobil Oil Corp., 550 F.2d 68, 78 n.14 (2d Cir. 1977); Interamerican Refining Corporation v. Texaco Maracaibo, Inc., 307 F. Supp. 1291, 1298 (D. Del. 1970).