Today's hearing is our second in a series on the Interaction of our Environmental Regulations and the Nation's Energy Policy. Two weeks ago, we held our first hearing in which we concentrated on utility issues. Today will we concentrate primarily on oil and gas issues.
One of the great challenges facing our nation is the need to ensure a reliable and dependable fuel supply while continuing to improve public health and the environment. Accomplishing these goals without a major disruption to our economy or our way of life will be a test to our ingenuity and our resolve.
One of the first hurdles we need to surmount is our over-reliance on foreign sources of oil. The extent that our reliance on foreign oil has increased is astonishing. In 1973, during the Arab Oil Embargo, we imported 35% of our oil. In the year 2000, that number had climbed to 56%. It is estimated that at our present rate of consumption, we will import 65% of our oil needs by the year 2020. And since OPEC has us "over a barrel" so to speak they are able to turn the spigots on or off at their whim.
Twice already this year, OPEC has announced a decrease in oil production by a combined total of 2.5 million barrels of oil per day. This action has driven up prices at the pump in the U.S., much to the consternation of many Americans. If not for the help and friendship of the Saudis to minimize the oil cartel's production cuts, we would be in deep trouble. However, it does not sit well with this Senator that while our military is engaged with Saddam Hussein, he is selling us oil.
One of the issues that we face which keeps our imports high is the fact that we have a domestic refining capacity problem. There have been no new refineries built in the last 25 years, and in fact since 1983 we have lost 33% of our refineries. The average annual capacity rate is 92% while during peak demand periods the capacity rate runs between 95% and 98%. This high capacity rate causes us to import more refined products and leaves us vulnerable to emergency shutdowns and equipment failures at any of our larger refineries. This problem will only get worse as our nation's refineries age.
At our last hearing, Linda Stuntz said that we are a fossil fuel based economy and we will be for the foreseeable future. I agree.
With regards to fuel for vehicles, the American and world auto-markets will continue to be petroleum based. While demand for fuel oil is increasing in our nation, it is also increasing world-wide. China, for example has gone from a net exporter of petroleum to a net importer. Having said that, I believe it is imperative that we continue to conduct research into the use of alternative fuels for vehicles.
At our last hearing, we heard testimony about the potential that hybrid vehicles posses. Hybrid vehicles are not quite "there" yet and the current technologies still use some gasoline. Still, they are certainly on a shorter time frame than fuel cells. I met yesterday with Rick Wagoner, the President of General Motors who told me that the electric vehicle program in California is not proving feasible, and the problems will only increase with the electricity crisis.
I also believe ethanol is a promising fuel source. In Ohio, 40 percent of our fuel contains ethanol. As an aside, I am still concerned that we have not satisfactorily addressed the issue of allocating 2.5 cent-per-gallon ethanol fuel tax into the Highway Trust Fund instead of the general treasury. In a colloquy during the MTBE debate last year there was agreement to put the 2.5 cent ethanol tax into the Highway Trust Fund rather than into general revenues. We need to resolve this issue
In addition to ethanol, we should look at other alternative fuels. At our last hearing, Senator Carper mentioned an experiment in Delaware where diesel fuel is mixed with soybean oil. I also understand that in Oklahoma experiments are being conducted that make ethanol from switch grass. All of these activities will help broaden our fuel base.
However, while I support the use of alternative fuels, too often those who emphasize alternative fuels fail to realize that there is no way that they can fully meet our current energy demands. We need to address the price and supply issues while continuing to improve the environment and public health. The question is how do we harmonize our energy needs and our environmental needs to achieve a National Energy Policy.
Therefore, today, we must deal in the reality that our nation is still petroleum-dependent and we are going to have problems with price spikes and supply disruptions. We have already discussed the role foreign oil plays in such matters, but we need to explore how they are affected by environmental laws and regulations here in the United States.
There are three main areas where environmental regulations may be causing problems contributing to fuel price spikes and shortages. The first is the exploration and production of oil and gas which has led us to increase our foreign imports.
The second can be traced to the refining process. Environmental regulations are partially responsible for the fact that no new refineries have been built in the last 25 years and that over 75 refineries have been closed in the same time-frame. In addition, constantly changing environmental regulations and the enforcement practices of the EPA in particular the changing definitions under the New Source Review program have led to complications in producing refined products.
Because of the uncertainty of the EPA's New Source Review Program, companies are refraining from essential maintenance and repair work. This will only lead to more facility shut downs in the near future. The program has also created a disincentive for installing the latest pollution control devices and modernizing facilities. Installing one piece of equipment can cause an entire facility to trigger NSR, which may not be financially viable.
Third, the boutique fuel requirements that are in random use across the country and the inability to site new pipelines have caused additional problems in getting fuel to consumers. With our growing dependence on natural gas as an energy source, this problem is only going to get worse.
FTC Investigation
Finally, I would like to say a few words about the Federal Trade Commission investigation into alleged price gouging and price fixing in the Midwest last year. They released their report last Friday. By a 5-0 decision, the FTC found no credible evidence of collusion or other anti-competitive conduct by the oil industry in the causes of the gasoline price spikes in local markets during the spring and summer of 2000.
But the Report itself is very valuable and I am going to enter it into the record and read a few quotes from it. First:
"The current high capacity utilization rates in the oil refining industry leave little room for error in predicting short-run demand. Unexpected demand for a certain oil product is difficult to satisfy without reducing the supply of another oil product, and unexpected supply problems can result in temporary shortages across many oil products. Assuming that demand continues to grow, occasional price spikes in various parts of the country are likely unless refining capacity is increased substantially."
And:
"FTC staff found no evidence of illegal collusion to reduce output or raise prices. Rather, each industry participant acted unilaterally and followed individual profit-maximization strategies."
The report found that the primary causes were:
Refinery Production Problems (refinery turnarounds, unexpected refinery disruptions, and RFG Phase II manufacturing problems), Pipeline Disruptions, and Low Inventories.
The report found that the secondary problems were:
Unavailability of MTBE as a Substitute for ethanol in Chicago and Milwaukee, Unocal Patents, waiver of RFG Phase II Requirements in St. Louis, High Crude Oil Prices, Increase in Gasoline Demand, and Taxes.
The report concludes:
"The gasoline price spike in the Midwest was short-lived. Soon after prices spiked, additional gasoline was produced and imported to the region, and prices dropped as quickly and dramatically as they had risen. Notwithstanding the industry's ability to respond to the short-term problem, the long-term refining imbalance in the United States must be addressed, or similar price spikes in the Midwest and other regions of the country are likely."
CONCLUSION
I thought we got off to a good start at the last hearing and with this hearing I hope to build on our findings.
There is no doubt that we are dealing with a national energy crisis. The impact of this energy crisis is, and will continue to be, of such a magnitude that I believe what this committee does this year could have more sway over what happens to the U.S. economy and America's pocket books than at any other time in U.S. history. I maintain optimism that we will be able to deal with these issues in a bipartisan manner. We have a distinguished group of witnesses this morning and I look forward to their testimony.