Hearing of the Senate Energy and Natural Resources Committee

SECTION: CAPITOL HILL HEARING

HEADLINE: HEARING OF THE SENATE ENERGY AND NATURAL RESOURCES COMMITTEE

SUBJECT: ENERGY INFORMATION ADMINISTRATION ANNUAL ENERGY OUTLOOK 2004

CHAIRED BY: SENATOR PETE V. DOMENICI (R-NM)

LOCATION: 366 DIRKSEN SENATE OFFICE BUILDING, WASHINGTON, D.C.

WITNESSES: PANEL I:

GUY CARUSO, ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION, DEPARTMENT OF ENERGY;

PANEL II:

RICHARD J. SHARPLES, SENIOR VICE PRESIDENT, STRATEGIC PLANNING AND MARKETING, ANADARKO PETROLEUM CORPORATION;

PAUL D. KOONCE, CEO - TRANSMISSION, DOMINION ENERGY, INC.;

JAY SAUNDERS, VICE PRESIDENT, ENERGY ANALYST, DEUTSCHEBANK

BODY:
SEN. WYDEN: Mr. Chairman, thank you. Again, you've always been so gracious and I really appreciate it.

Mr. Chairman and colleagues, we have never had gasoline prices this high at this time of the year before. Now the oil companies say that it is not their fault. But I have released evidence indicating that the companies have deliberately curtailed refining capacity and increased their refinery margins, actions that boost gasoline prices higher. In 2001, I revealed internal oil company documents showing that major oil companies pursued efforts to curtain refinery capacity as a strategy for stifling competition and boosting their profits. One oil company document revealed efforts to prevent the restart of the Powerine Refinery in Southern California because they feared its restart would reduce gas prices and refinery profits by two to three cents per gallon.

Now, Shell Oil has announced that it is permanently shutting down its 70,000 barrels per day Bakersfield, California, refinery which is critical to the entire West Coast gasoline market, including my home state. As Yogi Bear said, it is dj vu all over again. Now Shell claimed that there was simply not enough crude oil supply to keep the refinery operating. But recent news articles have reported that both Chevron, Texaco and state of California officials estimate that there is at least a 20 to 25-year supply of crude oil remaining in the area where the Bakersfield refinery is located.

What makes Shell's decision to close the Bakersfield refinery specially curious is that the company never even tried to find a buyer. The California attorney general is investigating Shell's action for potential antitrust violations. Mr. Chairman and colleagues, for the life of me, I can't figure out why the Federal Trade Commission would do absolutely nothing to even investigate the Bakersfield refinery closure because this goes right to the heart of making sure that gasoline prices are affordable on the West Coast of the United States.

Mr. Chairman, I would ask unanimous consent that the letter that I sent the Federal Trade Commission on February 18th of 2004 asking the Federal Trade Commission to investigate the implications for the West Coast gasoline market of the Bakersfield Refinery closure would be made a part of the record.

SEN. DOMENICI: It will be done.

SEN. WYDEN: Mr. Chairman, the only other point that I wanted to make is the Consumer Federation of America has, I think, done some very good work to look at these questions of refinery margins. They have done an analysis, saying that the refinery margins are taking three times as big a bite out of the consumers' pocket, for example, as the actions of the OPEC cartel which are continually highlighted by many in the oil industry. And I would ask unanimous consent that a Consumer Federation of America article letter dated March 4, 2004 be made part of the record as well.

SEN. DOMENICI: That will be done.

SEN. WYDEN: Last point I would make, Mr. Chairman. I just think that it sure looks like the oil companies are using higher oil prices as an excuse to increase their refinery margins and pad the bottom line. The prime example is Exxon Mobil which last year announced an all-time record profit of $4.4 billion, the highest profit by any company in history and here again, the federal government is sitting on its hands with respect to stopping oil companies from exploiting the tight supply market by padding refinery margins and profits.

So the chairman has been very gracious to give me a few minutes to outline these concerns. Like the chairman, I'll be in and out through the course of the morning because of the Budget Committee. But I intend to come back and ask some questions with respect to these issues. This Bakersfield closure doesn't smell right. It doesn't add up and it has great implications for the entire West Coast market. In California, they are paying over $2.00 per gallon. That's the case in Hawaii as well. My state is not far behind, nearly $1.80 per gallon. And I've got to tell you, this Bakersfield closure smells and we're going to stay at it until we get to the bottom of it.

Mr. Chairman, I thank you very much for your thoughtfulness this morning.

SEN. WYDEN: I thank my friend from New Mexico very much. I know everybody's schedule is busy.

Mr. Caruso, a couple of questions for you because I am very concerned that there are administration's policies being pursued now that are going to push gasoline prices up even higher. And I want to walk you through a couple of concerns just for a few minutes. You said, in your testimony, that oil supply is very tight right now and that is a factor in pushing gasoline prices up. Given that, wouldn't you say that it's a bad time for the federal government to adopt policies that would further reduce oil supply?

MR. CARUSO: Further reduce oil supply? I would agree.

SEN. WYDEN: Okay. But the administration is pursuing a policy that is doing just that, that would, in effect, compound what you think is a bad idea and what the administration is doing is making the current supply situation worse by taking oil from this very tight market to fill the strategic petroleum reserve. And I guess my question is, how do you justify going out, filling the strategic petroleum reserve when experts are issuing all these warnings about gasoline supply shortages. It just strikes me as incoherent. But I want to give you a chance to respond.

MR. CARUSO: Sure. The secretary of Energy has asked me to analyze that very point. And our view is it doesn't reduce oil supply. That's the simple answer.

SEN. WYDEN: It doesn't reduce --

MR. CARUSO: It doesn't reduce oil supply.

SEN. WYDEN: By taking it from the private sector and moving into the strategic petroleum reserve, it doesn't take it from the supply?

MR. CARUSO: That's correct. We believe the world oil supply has not been affected by the addition of the-last year, 120,000 barrels a day of oil royalty in kind into the strategic petroleum reserve and the reason is that OPEC producers watch very carefully what's going on in supply and demand situations and they adapt to the, in this case, that 120,000 barrels a day oil being put into the reserve instead of being in the market. That oil-additional oil is being produced by OPEC. It's not a net loss, in our view. It's a net zero.

SEN. WYDEN: Why don't you supply us for the record that analysis because I think the idea of a wordy long-term contract where prices were actually spiking up, wordy contracts that are going to run through the summer at a time when prices go up just leaves me baffled.

So I would love to see your analysis and take a look at it.

MR. CARUSO: I'll be happy to provide --

SEN. WYDEN: To me, it is rocket science. Supply is really short. Oil is taken out of the private sector, moving in strategic petroleum reserve and here you are, consumers getting clobbered in Oregon and California and the West Coast. I think you just-I am sort of incredulous at this.

Given the current West Coast market situation with these huge price hikes in California and Oregon, couldn't the closing of that Bakersfield refinery that I've been talking about this morning cause West Coast gasoline and diesel prices to increase even more?

MR. CARUSO: Well, as our testimony said, it's a very tight market, not only globally but particularly for gasoline in this country. The Shell refinery, as I understand, supplies about 2 percent of California's gasoline and about 6 percent of diesel, and clearly any reduction in refinery capacity does reduce the flexibility to meet a very tight market.

SEN. WYDEN: So you think it could be a problem? You think the Federal Trade Commission should agree with my suggestion to look at this, because I can't find where you're going to make up that supply. And as you know, on the West Coast it is unbelievably tight in California, Oregon and Washington. And you've got these California officials saying they don't understand the case for it. You think the Federal Trade Commission should agree with my requests and look into this, given the answer you've just given that this could bump up prices even higher.

MR. CARUSO: Well, the issue of whether the Federal Trade Commission should look into it I guess is a separate matter. I'm just giving you my assessment of how the impact on the oil market would be. Now, whether it's an FTC or Department of Justice or other issue, I couldn't really comment on that.

SEN. WYDEN: At least you've given me an argument to go back to the Federal Trade Commission to use in terms of making the inquiry, because to me, again, this is pretty obvious. There is no evidence other refineries are going to come forward and increase supply. You've told us a supply shortage can bump up prices. So I'm not going to quote from the movie, but something's got to give.

SEN. DOMENICI: Senator, your time --

SEN. WYDEN: Thank you, Mr. Chairman. And I want to thank Senator Bingaman again for his thoughtfulness.