SECTION: CAPITOL HILL HEARING TESTIMONY

LENGTH: 3027 words

COMMITTEE: HOUSE GOVERNMENT REFORM

SUBCOMMITTEE: ENERGY POLICY, NATURAL RESOURCES AND REGULATORY AFFAIRS

HEADLINE: FUEL MARKET STABILITY

TESTIMONY-BY: VICKY A. BAILEY, ASSISTANT SECRETARY

AFFILIATION: OFFICE OF POLICY AND INTERNATIONAL AFFAIRS

BODY:
STATEMENT OF VICKY A. BAILEY ASSISTANT SECRETARY OFFICE OF POLICY AND INTERNATIONAL AFFAIRS U.S. DEPARTMENT OF ENERGY

before the SUBCOMMITTEE ON ENERGY POLICY, NATURAL RESOURCES AND REGULATORY AFFAIRS

COMMITTEE ON GOVERNMENT REFORM UNITED STATES HOUSE OF REPRESENTATIVES

HEARING ON THE CURRENT SITUATION IN U.S. MOTOR GASOLINE MARKETS

April 23, 2002

Good afternoon Mr. Chairman, I am happy to appear before you today to discuss gasoline prices and the complex factors contributing to our current supply and price situation. I would also like to provide some information for your committee on what the Administration is doing to address the situation and to assure you that the Administration wants to work with Congress to ensure stable and affordable energy supplies for American consumers and the US economy.

As we are reminded almost daily, world prices for crude oil are on the rise. Since late January, petroleum prices have risen by over $7 per barrel3/4 an increase of about 30-35 percent3/4 adding as much as 15-20 cents per gallon to the retail cost of gasoline. The Energy Information Administration (EIA), an independent arm of the Department of Energy, expects gasoline prices to rise higher this summer, although prices are expected to peak slightly below last summer's highest levels. The good news is that while nominal prices are currently increasing, real gasoline prices have remained fairly constant in recent decades. The average price for a gallon of gasoline (all grades) in 2001 was $1.49--about the same in real terms as during the 1970s. This is also a lot less than the average price of $1.85 between 1975 and 1985. Since the beginning of 2002, prices (for all grades of gasoline) have averaged just $1.25. Gasoline prices are now substantially lower relative to the prices for food, beverages, and other urban consumer goods, compared to the early 1980s peak.

However, prices are more volatile today than they have been historically. In part, this is a consequence of a supply system that has increased its efficiency by reducing redundancies and inventories. While this can benefit consumers with lower average prices, it can also contribute to price volatility. Obviously other factors such as strong demand growth driven by the economic rebound and seasonal increases in driving, as well as the switchover to cleaner, but more-difficult-to-produce, summer grade gasolines can lead to short-term price increases, especially in the event of a disruption on a pipeline or at a key refinery. U.S. refinery capacity is less than U.S. demand, making us dependent not only on imported crude oil, but also on imported refined products, particularly gasoline. (We currently import about 9% of our total gasoline.) During the high demand summer season, U.S. refineries will typically run at or very near 100 percent capacity utilization while meeting very tight environmental standards for gasoline quality, leaving no margin to deal with upsets in the system. By comparison, most other industry is considered to be at full capacity when utilization rates reach 82 percent. Limited refinery capacity creates the worst problems in certain regions of the country like the Midwest, where additional supply has to come from the Gulf Coast via a transportation system that is already fully utilized. This can lead to increased and volatile prices until that new supply arrives.

While we expect the market to respond, rising crude oil prices, growing gasoline demand for the spring/summer driving season and the more costly summer quality gasolines, both reformulated and conventional, could contribute to the upward price pressure. However, as I mentioned earlier, a large part of the problem is caused by world oil market conditions. Much of the current rise in gasoline prices is a result of OPEC cutting production last fall and winter, as well as today's concerns about political tensions abroad. Because we import more than half of our oil from foreign sources3/4 and this percentage is increasing3/4 and because the price of crude oil is set on the world market, we cannot insulate ourselves from supply swings, associated price increases, and their impact on the gasoline market.

Mary Hutzler, Acting Administrator of our Energy Information Administration, has provided you with a technical report of the current world and domestic petroleum situation, and a sound assessment of the factors contributing to our current rising gasoline prices. I would like to address some of the broader policy aspects of the international and domestic situation.

I note that you will also hear testimony from the Federal Trade Commission today, which has powers the Department of Energy does not have to investigate concerns about fair trade and prosecute in the case of violations. Many of these investigative and enforcement powers are related to energy and petroleum markets, for example: FTC has the power to conduct investigations, prescribe trade rules and seek redress in case of unfair trade practices; prescribe requirements for posting of octane ratings; and enforce energy efficiency labeling rules issued under the Energy Policy Act of 1992.

Over the past few weeks, the international situation has contributed to oil price increases. The market has monitored the situation with Iraq, noting Iraq's stoppage of its oil exports under the UN oil-for-food program. Other major producers have rejected the call for use of oil as a weapon. Clearly, market participants will follow Iraq and the international reaction closely over the next few months. The Department of Energy will continue to monitor the market and actions of international participants.

Because of Venezuela's position as the third largest supplier of imported oil to the United States, the oil market has been sensitive to recent events in Venezuela. However, recent events appear to demonstrate that the oil sector and oil trade is returning to normal.

Administration Actions

I'd now like to turn to actions the Administration has recently taken related to crude oil and gasoline. First and foremost, we will continue to depend on the free market to determine energy supply and price. And, indeed, the market has already responded to price signals--witness the recent opening of the 795-mile Centennial Pipeline, which will be able to move more than 200,000 barrels of refined products a day from the Gulf Coast to Midwest markets. Refinery utilization has grown to capture the higher margins brought on by the higher prices.

Nearly one year ago the Administration released the National Energy Policy, a comprehensive and long-term strategy for ensuring that our citizens will have affordable and reliable energy supplies. We must have a balanced and diversified portfolio of energy sources and we must expand energy production and infrastructure to meet ever-increasing energy requirements. This must be accompanied by improvements in the efficient use and conservation of energy and the protection of our environment.

In the long term, one important and appropriate role of the Government is to work to increase and diversify oil supplies. The National Energy Policy contains a number of recommendations to promote international trade and investment, increase diversity of supply, and improve market transparency. We are working in the Caspian region, in Africa, and in our own hemisphere to bring new supplies to market with increased environmental protection. In the Caspian, for example, I attended the inauguration of the Caspian Pipeline Consortium pipeline that took place in Russia in November of last year. This new pipeline will bring crude oil directly from landlocked Kazakhstan to the Black Sea and then to world oil markets. We also are pleased that the Baku-Tbilisi- Ceyhan pipeline is moving ahead and will supply an additional one million barrels per day of oil to global markets by early 2005. As production in Kazakhstan and Azerbaijan grows over the next several years, this and other pipelines will help feed a growing world oil market with new supplies of oil from stable sources.

We are also carrying out other recommendations from the National Energy Policy that address energy cooperation closer to home. We have launched, with Canada and Mexico, the North American Energy Working Group, which is reviewing ways to further integrate the North American energy market and eliminate regional and local supply disruptions. We are using our Hemispheric Energy Initiative to work with our other partners in the rest of the Americas. We, along with our hemispheric partners, aim to create opportunities for new investment and development of new energy resources and for greater energy conservation.

Furthermore, the National Energy Policy specifically calls for the Administration to hold a meeting with the energy ministers of the Group of Eight nations. Just one year after the release of the National Energy Policy, on May 3, 2002 the United States and Canada will co-chair a meeting of the G-8 Energy Ministers.

We are not only acting in the international arena to address the factors leading to today's rising gasoline prices. The Administration is acting in a number of ways to get our own energy house in order.

As part of the commitments in the National Energy Policy, one of the Administration's actions to improve energy supplies is a review of the impact of the Clean Air Act's New Source Review (NSR) program on energy efficiency, capacity and environmental protection for refineries and utilities. Since its inception, the New Source Review Program has provided considerable health and environmental benefits. However, bipartisan government officials, including State governors and Environmental Commissioners, and industry groups have long expressed the belief that the NSR program is unnecessarily complicated. During the National Energy Policy NSR proceeding, a striking consensus of industry commenters remarked that the program often serves as an unnecessary obstacle to environmentally beneficial projects in the energy sector, such as those that improve energy reliability and efficiency and promote the use of renewable resources. The President's National Energy Policy Development Group tasked EPA in consultation with DOE with investigating whether the NSR program does, in fact, have such impacts. We believe that some parts of the program do have the impacts identified by the industry commenters. This review will be completed in the near future.

As called for by the President's National Energy Policy, the Administration has recently taken three actions to provide flexibility to refiners and distributors that will ease the transition this year from winter-grade to summer-grade reformulated gasoline (RFG). These actions include the elimination of accounting and reporting requirements associated with refiners' transfer or sale of gasoline blendstocks, a regulatory revision that now allows refiners to upgrade conventional

gasoline to RFG if it meets the clean air standards, and finally, increased flexibility in the tank turnover testing tolerance.

To help protect against disruptions in oil supplies, the U.S. government maintains an emergency supply of crude oil in our Strategic Petroleum Reserve (SPR) stored in salt caverns in Louisiana and Texas. In the case of a severe oil supply disruption, the SPR can be used to provide up to 4.2 million barrels of crude oil per day to the U.S. economy for a period of 90 days. This amounts to about 20 percent of total US daily oil consumption. After this period, the drawdown rate will gradually decrease as site inventories are depleted. The entire 561 million barrel inventory would be depleted within 200 days.

In order to increase our protection against disruption, on November 13, 2001, the President directed the Department to fill the SPR to its design capacity of 700 million barrels of oil. In January of this year, the Department issued an initial solicitation for bids to exchange royalty oil produced in the Gulf of Mexico for oil meeting the SPR quality specifications, to be delivered to the SPR sites. In February bids were opened, and a contract was awarded to Equiva Trading requiring delivery of 18.6 million barrels of light, low sulfur oil to the SPR. Deliveries began in April and will be completed by the end of April 2003. The Department plans to conduct another competition this summer and to award contracts for more oil exchanges beginning October 1, 2002. This process will continue until the Reserve has reached its capacity, expected to be in 2005. Administration policy is to use the inventory in the SPR only in the case of physical supply disruptions rather than using the emergency stocks to influence prices.

More specific to the gasoline market, the Department of Energy continuously monitors energy supply and prices to provide information to consumers and the markets. This data assists markets to quickly respond to any supply/demand imbalances. Updates, raw data, and analyses are available through the Energy Information Administration. In addition, each year we conduct a detailed assessment of clean gasoline supplies as the refiners and marketers make the transition to summer gasoline. This assessment provides us information on the status of refinery operations and inventories leading into the summer driving season and the basis for assuring that some aspect of the Federal reformulated gasoline requirements is not unnecessarily limiting gasoline production or distribution.

As we did last year, the Department of Energy will continue to closely monitor gasoline supplies and pricing, and we have again set up a 24 hour Gasoline Hotline--a 1-800 number for consumers concerned about gasoline prices (800-244-3301). In addition, the Secretary has directed the EIA to provide a daily Energy Situation Analysis Report to monitor world events that could disrupt supplies. The Energy Situation Analysis Report is available on the EIA website daily at about 6 p.m. The Secretary recently met with consumer, refining industry and gasoline marketing groups to better understand the situation from their perspectives and to encourage their help to get information out to consumers on the various factors affecting gasoline prices.

But we will also need additional actions to assure adequate and dependable energy supplies at affordable prices and use energy more wisely. We need to improve efficiency and develop new transportation technologies; the National Energy Policy aims to optimize energy efficiency and conservation to effectively manage and extend the use of our energy resources, while also enhancing our standard of living and advancing our environmental objectives. The Department of Energy recently announced the FreedomCAR program, which implements our long-term vision of a dramatic reduction in our dependence on petroleum through the development and deployment of hydrogen fuel cells in automobiles. In addition, the Administration supports significant tax incentives to reduce the price of the highly efficient electric, gas/electric hybrid, and fuel-cell vehicles now coming to market. We will be working with the National Highway Traffic Safety Administration as it moves forward to set future fuel economy standards based on sound science and passenger safety, based on the findings and recommendations of the NAS study.

The renewable fuels standard introduced in the Senate Bill S.517 will greatly increase the use of renewable fuels, such as ethanol and biodiesel, in this nation for the next ten years. The use of renewable fuels is good for our energy security, good for the economy, and good for our environment. It will greatly increase the use of clean burning ethanol, which will reduce vehicle tailpipe emissions (when used in reformulated gasoline). That is something we can all support.

We must also increase domestic oil production through the improvement of exploration and drilling technology and the development of domestic resources like the Arctic National Wildlife Refuge (ANWR). A small portion of ANWR could supply us with the equivalent of about 36 years of the annual imports we currently receive from Iraq. Encouraging the continued diversification of supply from non-OPEC sources of oil like Russia, Latin America, West Africa, and the Caspian region will also help reduce our reliance on oil from the Middle East.

Finally, I would like to turn to the issue of MTBE raised in the Committee's letter of invitation. The MTBE issue creates a challenge for public policy: the inherent need to balance energy supply and price concerns with resolution of environmental concerns, both for air quality and water quality. Congress mandated use of oxygenates to enhance energy security, improve air quality, and support the farm sector in the Clean Air Act Amendments of 1990. Recent EIA analysis has shown that restrictions on the use of MTBE could impact gasoline supplies and increase prices. MTBE has played a significant role in improving air quality in areas impacted by transportation emissions, and provides important quality and volume benefits for our gasoline supply. However, detection of MTBE in our water supply has raised public concerns. To limit the risk of future price spikes we must provide certainty to the market and industry, so that industry has the time and information needed to make investment decisions.

The Department of Energy remains concerned about our current and longer-term energy supply situation. While we fully support the various clean fuel requirements that are necessary to achieve our air quality goals and we share a strong desire to protect the nation's water quality, we believe that it is important that these initiatives be implemented in a way that protects our citizens from price spikes. We are eager to work with the Congress to get our own energy house in order, so that we have adequate, clean, safe supplies of petroleum, at reasonable cost to consumers.

This concludes my testimony Mr. Chairman. I would be glad to respond to any questions you may have.



LOAD-DATE: April 25, 2002