I submit this statement to this Subcommittee today as a representative of the National Association of Convenience Stores ("NACS") and the Society of Independent Gasoline Marketers of America ("SIGMA"). NACS represents an industry of more than 120,000 retail outlets, 75 percent of which sell motor fuels. In 1999, convenience stores sold more than 117 billion gallons of motor fuels which accounts for more than 60 percent of American consumption.
-- SIGMA is an association of approximately 260 motor fuels marketers operating in all 50 states. Together, SIGMA members supply over 28,000 motor fuel outlets and sell over 48 billion gallons of gasoline and diesel fuel annually -- or approximately 30 percent of all motor fuels sold in the nation last year.
Collectively, NACS and SIGMA members sell more than 75 percent of the gasoline and diesel fuel purchased by American consumers each year.
I appreciate the opportunity to submit this statement on the interaction between environmental regulations and the nation's energy policy. The companies I represent are different from all of the witnesses who will give testimony at today's hearing. For all practical purposes, we are a surrogate for the nation's gasoline and diesel fuel consumers. Our primary mission is to secure adequate supplies of gasoline to sell to consumers at a competitive price. My company is not involved in the exploration or production of oil, nor does it refine oil. If companies like mine, independent marketers of motor fuels, are unable to secure this adequate supply, then we cease to be a competitive force in the marketplace. And if independent marketers cease to be an effective competitive force in the marketplace, then consumers lose as retail gasoline and diesel fuel prices rise in response to the supply shortage.
NACS and SIGMA have two primary messages for this Subcommittee today. First, if we, collectively, do not address aggressively the motor fuels supply crisis that is facing this nation in the near future, then the price spikes we have witnessed, for the past decade in California and for the past two years in other portions of the nation, in gasoline, diesel fuel, and other petroleum products will become the norm rather than the exception. Ultimately, if we fail to act, it will be consumers who will pay for this inaction - through higher retail motor fuels prices at the pump.
Second, the debate over the future of our nation's energy policy need not be confrontational. Our nation can have both a clean environment and affordable, plentiful supplies of gasoline and diesel fuel. However, in order to achieve these twin goals, all sides to the current debate - industry, government, consumers, and environmentalists - must approach this debate in a spirit of cooperation, not confrontation.
These are not new points for either the associations I represent or for me. As a California marketer I have personally witnessed these events happening over and over again. I personally have had the opportunity to present these points to Congress in the past. Unfortunately, our warnings have been ignored. However, it is my personal hope that the renewed attention to the need for a national energy policy will produce the results NACS and SIGMA have been calling for over the years.
The challenge facing this Subcommittee and your colleagues in Congress today is straightforward. We must preserve current and future improvements in air quality while at the same time maintaining and expanding supplies of motor fuels. Otherwise, our nation's consumers will pay the price when supply shortages occur and retail prices at the pump spike, as they have done repeatedly over the past three years in several areas of the nation and over the past decade in California. And these price spikes will not be limited to the additional expense of producing the new cleaner fuels. Rather, they will be multiples of this amount as the market drives prices far above the additional cost of manufacture in times of short supply.
I firmly believe that our nation is facing a serious energy crisis in the motor fuels refining and marketing industry. Dozens of petroleum refineries have closed over the past two decades and new environmental protection mandates, such as low sulfur gasoline and diesel fuel, are likely to exacerbate this trend. Operating inventories of diesel fuel and gasoline are at historically low levels and the nation's refineries are operating at or near maximum capacity. Gasoline and diesel fuel demand is increasing by between one and two percent each year, and yet the number of refineries operating to meet this ever increasing demand is decreasing. In 1990, there were essentially six different types of gasoline being sold nationwide. Now, there are over 25 different gasoline formulations, all being transported and distributed through the nation's motor fuel infrastructure. The pressure of overlapping federal, state and local regulations has crippled what was previously one of the most efficient commodity distribution systems in the world -- the United States' fungible grade motor fuels distribution system.
As the saying goes, there is no free lunch. It should not surprise policy makers that after tens of billions of dollars in environmental compliance costs borne by refiners and marketers, the complete fragmentation of the motor fuels distribution system, and the politically-motivated diverse gasoline formulations adopted by various states, there is a price to pay --- a price that ultimately must be paid by consumers of gasoline and diesel fuel. As long as the motor fuels refining and distribution system works perfectly, supply and demand stay roughly in balance and retail prices remain relatively stable. However, if a pipeline or refinery goes down, overseas crude oil production is reduced, the weather disrupts smooth product deliveries, or a new regulatory curve ball is thrown at the motor fuels refining and marketing industries, we do not have the flexibility to react and counterbalance these forces.
If there is one point that I really want to emphasize it is the point of "no free lunch". Our country can have clean and environmentally friendly fuels and it can have plentiful supplies - there will be a cost and it will be borne by the consumer (that is a given) - our job is to make the lunch, if not free, at least a fair bargain.
Californians have become somewhat accustomed to motor fuels price volatility over the
past five years because California is in fact the laboratory for the fuels programs that EPA currently is forcing on the rest of the country. When a refinery in California goes down, or a pipeline breaks, the impact on prices is almost immediate. In California, gasoline prices can increase by 40 cents per gallon within two or three days. When prices get high enough to attract supply from other markets, then eventually the supply shortage is alleviated and prices start to fall.
This is the reason I am submitting this statement today. The motor fuels supply problems we have witnessed in California over the past decade are now being visited on the rest of the nation. If we do not act, independent motor fuels marketers (who I am very concerned about), and gasoline consumers (who we all should be very concerned about), will suffer in the near future.
The public policy solution to the current motor fuels supply crisis will not be simple, but it must be addressed. NACS and SIGMA posit that the solution is not the rollback of environmental protections. This solution is a non-starter and should be discarded. Alternatively, NACS and SIGMA encourage Congress to consider an effective plan to assist our nation's domestic refining industry to meet the challenges posed by ever more stringent environmental mandates and restore fungibility to the nation's distribution system. This will increase gasoline and diesel fuel supplies and keep retail prices down.
We must collectively arrive at a public policy that assures that our nation's refineries, both large and small, stay in business, expand to meet increases in demand, and produce clean, affordable motor fuels. But this policy cannot be achieved without enlightened government policies and programs. The capital expenditures that refineries must make over the next six years in order to meet new environmental mandates are huge. And many refineries, particularly small, regional refineries, will be unable to justify those expenditures and will cease operation - further straining motor fuels supplies. Already, this year, Premcor announced that it would close its Blue Island refinery rather than undertake the upgrades necessary to make low sulfur gasoline
and diesel fuel. Other refineries, owned by both large and small companies, will follow suit in the next few years.
NACS and SIGMA urge Congress to assist these refineries in making these upgrades. This assistance will be particularly important to small- and medium-size " regional" refineries because the environmental upgrade costs fall more heavily on these smaller refineries because they do not enjoy the economies of scale that some larger refineries possess to make these upgrades. And, in many cases, these smaller refineries represent the " marginal" gallon of gasoline and diesel fuel in many marketplaces - the gallon that is the difference between adequate supplies and supply shortages.
- Motor fuels marketers and refiners are not always on good terms. We compete daily in the marketplace for customers and market share. So it may seem odd to have motor fuels marketers recommend to Congress that assistance must be given to our nation's domestic refining industry. However, without adequate and diverse sources of gasoline and diesel fuel supply, independent marketers cannot exist. Thus, the solution we are proposing to Congress is the only way our segment of the marketing industry can survive and can continue to provide consumers - your constituents - with the most affordable, clean gasoline and diesel fuel in the world.
NACS and SIGMA do not have a specific legislative proposal to put forward at this time to put our joint recommendation into operation. Instead, we offer the following principles which we are convinced must be a part of any legislative initiative: (1) greater fungibility in motor fuels and a stop to the balkanization of our nation's gasoline and diesel fuel markets; (2) fuel requirements that recognize the limitations and strengths of the motor fuel distribution system in the United States; (3) reasonable implementation plans for new environmental initiatives; (4) fuels programs that set performance goals, rather than specific formulas; and (5) while we are not suggesting the government bail out refineries which are not economically viable, we believe the economic viability of a refinery should not be determined by the timing of the implementation of a new environmental regulation. If such regulations render a refinery non-viable, then
adjustments to that regulation should be considered.
We look forward to working with this Subcommittee and others in Congress to explore legislative options in the months ahead. We offer our assistance to this Subcommittee in this exploration.
The debate over our nation's energy policy is just starting. But the crisis has been on the horizon for some time. We can either discuss potential solutions collectively now, or we can wait until the next price spike, and the outraged response of consumers. We encourage all parties to this debate to adopt fresh approaches to the problems our nation is facing. Both the environment and our nation's motor fuel consumers can be the winners in this debate, but only if all sides agree with the premise that environmental protection and affordable energy are not inherently contradictory goals. NACS and SIGMA assert that these goals need not be irreconcilable.
Thank you for permitting me to submit this statement.