[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
RISING DIESEL FUEL COSTS IN THE TRUCKING INDUSTRY
=======================================================================
(110-124)
HEARING
BEFORE THE
SUBCOMMITTEE ON
HIGHWAYS AND TRANSIT
OF THE
COMMITTEE ON
TRANSPORTATION AND INFRASTRUCTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
MAY 6, 2008
__________
Printed for the use of the
Committee on Transportation and Infrastructure
U.S. GOVERNMENT PRINTING OFFICE
42-306 PDF WASHINGTON : 2008
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COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE
JAMES L. OBERSTAR, Minnesota, Chairman
NICK J. RAHALL, II, West Virginia, JOHN L. MICA, Florida
Vice Chair DON YOUNG, Alaska
PETER A. DeFAZIO, Oregon THOMAS E. PETRI, Wisconsin
JERRY F. COSTELLO, Illinois HOWARD COBLE, North Carolina
ELEANOR HOLMES NORTON, District of JOHN J. DUNCAN, Jr., Tennessee
Columbia WAYNE T. GILCHREST, Maryland
JERROLD NADLER, New York VERNON J. EHLERS, Michigan
CORRINE BROWN, Florida STEVEN C. LaTOURETTE, Ohio
BOB FILNER, California FRANK A. LoBIONDO, New Jersey
EDDIE BERNICE JOHNSON, Texas JERRY MORAN, Kansas
GENE TAYLOR, Mississippi GARY G. MILLER, California
ELIJAH E. CUMMINGS, Maryland ROBIN HAYES, North Carolina
ELLEN O. TAUSCHER, California HENRY E. BROWN, Jr., South
LEONARD L. BOSWELL, Iowa Carolina
TIM HOLDEN, Pennsylvania TIMOTHY V. JOHNSON, Illinois
BRIAN BAIRD, Washington TODD RUSSELL PLATTS, Pennsylvania
RICK LARSEN, Washington SAM GRAVES, Missouri
MICHAEL E. CAPUANO, Massachusetts BILL SHUSTER, Pennsylvania
TIMOTHY H. BISHOP, New York JOHN BOOZMAN, Arkansas
MICHAEL H. MICHAUD, Maine SHELLEY MOORE CAPITO, West
BRIAN HIGGINS, New York Virginia
RUSS CARNAHAN, Missouri JIM GERLACH, Pennsylvania
JOHN T. SALAZAR, Colorado MARIO DIAZ-BALART, Florida
GRACE F. NAPOLITANO, California CHARLES W. DENT, Pennsylvania
DANIEL LIPINSKI, Illinois TED POE, Texas
DORIS O. MATSUI, California DAVID G. REICHERT, Washington
NICK LAMPSON, Texas CONNIE MACK, Florida
ZACHARY T. SPACE, Ohio JOHN R. `RANDY' KUHL, Jr., New
MAZIE K. HIRONO, Hawaii York
BRUCE L. BRALEY, Iowa LYNN A WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania CHARLES W. BOUSTANY, Jr.,
TIMOTHY J. WALZ, Minnesota Louisiana
HEATH SHULER, North Carolina JEAN SCHMIDT, Ohio
MICHAEL A. ARCURI, New York CANDICE S. MILLER, Michigan
HARRY E. MITCHELL, Arizona THELMA D. DRAKE, Virginia
CHRISTOPHER P. CARNEY, Pennsylvania MARY FALLIN, Oklahoma
JOHN J. HALL, New York VERN BUCHANAN, Florida
STEVE KAGEN, Wisconsin ROBERT E. LATTA, Ohio
STEVE COHEN, Tennessee
JERRY McNERNEY, California
LAURA A. RICHARDSON, California
ALBIO SIRES, New Jersey
(ii)
?
SUBCOMMITTEE ON HIGHWAYS AND TRANSIT
PETER A. DeFAZIO, Oregon, Chairman
NICK J. RAHALL II, West Virginia JOHN J. DUNCAN, Jr., Tennessee
JERROLD NADLER, New York DON YOUNG, Alaska
ELLEN O. TAUSCHER, California THOMAS E. PETRI, Wisconsin
TIM HOLDEN, Pennsylvania HOWARD COBLE, North Carolina
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
TIMOTHY H. BISHOP, New York ROBIN HAYES, North Carolina
MICHAEL H. MICHAUD, Maine HENRY E. BROWN, Jr., South
BRIAN HIGGINS, New York Carolina
GRACE F. NAPOLITANO, California TIMOTHY V. JOHNSON, Illinois
MAZIE K. HIRONO, Hawaii TODD RUSSELL PLATTS, Pennsylvania
JASON ALTMIRE, Pennsylvania JOHN BOOZMAN, Arkansas
TIMOTHY J. WALZ, Minnesota SHELLEY MOORE CAPITO, West
HEATH SHULER, North Carolina Virginia
MICHAEL A. ARCURI, New York JIM GERLACH, Pennsylvania
CHRISTOPHER P. CARNEY, Pennsylvania MARIO DIAZ-BALART, Florida
JERRY McNERNEY, California CHARLES W. DENT, Pennsylvania
BOB FILNER, California TED POE, Texas
ELIJAH E. CUMMINGS, Maryland DAVID G. REICHERT, Washington
BRIAN BAIRD, Washington CHARLES W. BOUSTANY, Jr.,
DANIEL LIPINSKI, Illinois Louisiana
DORIS O. MATSUI, California JEAN SCHMIDT, Ohio
STEVE COHEN, Tennessee CANDICE S. MILLER, Michigan
ZACHARY T. SPACE, Ohio THELMA D. DRAKE, Virginia
BRUCE L. BRALEY, Iowa, Vice Chair MARY FALLIN, Oklahoma
HARRY E. MITCHELL, Arizona VERN BUCHANAN, Florida
LAURA A. RICHARDSON, California ROBERT E. LATTA, Ohio
ALBIO SIRES, New Jersey JOHN L. MICA, Florida
JAMES L. OBERSTAR, Minnesota (Ex Officio)
(Ex Officio)
(iii)
CONTENTS
Page
Summary of Subject Matter........................................ vi
TESTIMONY
Card, Mike, President, Combined Transport........................ 38
Felmy, John, Economist, API...................................... 4
Johnson, Wayne, Director of Logistics, American Gypsum Company... 38
Slocum, Tyson, Director, Public Citizen's Energy Program......... 4
Spencer, Todd, Executive Vice President, Owner-Operator
Independent Drivers Association................................ 38
Te Beau, Suzanne M., Chief Counsel, Federal Motor Carrier Safety
Administration, U.S. Department of Transportation.............. 38
Todd, Ryan, Integrated Oils Analyst, Deutsche Bank AG............ 4
Voltmann, Robert A., President and CEO, Transportation
Intermediaries Association..................................... 38
PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS
Altmire, Hon. Jason, of Pennsylvania............................. 62
Bishop, Hon. Timothy H., of New York............................. 63
Carney, Hon. Christopher P., of Pennsylvania..................... 64
Cummings, Hon. Elijah E., of Maryland............................ 67
Latta, Hon. Robert E., of Ohio................................... 75
Mitchell, Hon. Harry E., of Arizona.............................. 76
Oberstar, Hon. James L., of Minnesota............................ 77
Richardson, Hon. Laura A., of California......................... 80
PREPARED STATEMENTS SUBMITTED BY WITNESSES
Card, Mike....................................................... 84
Felmy, John...................................................... 93
Johnson, Wayne................................................... 97
Slocum, Tyson.................................................... 104
Spencer, Todd.................................................... 124
Te Beau, Suzanne M............................................... 129
Todd, Ryan....................................................... 133
Voltmann, Robert A............................................... 149
SUBMISSIONS FOR THE RECORD
Voltmann, Robert A., President and CEO, Transportation
Intermediaries Association, responses to questions from the
Subcommittee................................................... 163
ADDITIONS TO THE RECORD
The Associated General Contractors of America, written statement. 168
Auto Research Center, Mike Camosy, General Manager, written
statement...................................................... 173
NATSO, Inc., written statement................................... 179
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HEARING ON RISING DIESEL FUEL COSTS IN THE TRUCKING INDUSTRY
----------
Tuesday, May 6, 2008
House of Representatives
Committee on Transportation and Infrastructure,
Subcommittee on Highways and Transit,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:04 a.m., in
Room 2167, Rayburn House Office Building, the Honorable Peter
A. DeFazio [Chairman of the Subcommittee] presiding.
Mr. DeFazio. The hearing will come to order. The
Subcommittee on Highways and Transit is in session today for a
hearing on rising diesel fuel costs, the impact on the trucking
industry, and the spillover into other aspects of the economy.
We will hear from two panels, the first will delve into the
murky question of high gas prices. We will hear some
interesting and, I think, very contrasting testimony there. And
then the second panel, where we will look at the impacts of the
high fuel prices, where and how they may be charged to
shippers, and where and how the money that shippers might pay
for additional fuel costs are either distributed to those who
actually provide the transportation or not.
There are some interesting submissions in the testimony and
there is a lot of talk about free markets and those sorts of
things, but I think we are going to find today that we aren't
looking totally at just supply and demand and free markets that
are transparent in Adam Smith's traditional view of the world.
I did study economics and I will be interested to see
people defend having essentially what I see in the brokerage
companies as an oligopsony, where there are a few brokers that
dominate the industry dealing with a large diversity of small
providers who really have very little or no market power, and
they have no information. So how can it be a free market when
they lack information? And I hope that that is addressed here
today.
And then in terms of pure supply and demand in terms of
high diesels prices, I think that some of the testimony
received today will point to some of the issues that have been
raised here in Congress, the issue of the speculative market
that was created at the behest of Enron, which, according to
the former CEO of ExxonMobil--and he should know, he had a nice
little $400 million retirement he is buying oil fields with--
but he said, when oil was $60 a barrel, that $20 a barrel was
purely speculative, and he thought that was good thing because
ExxonMobil was engaged in making money not only with supply but
in speculating on supply, and the conventional wisdom is this
provides liquidity in the market.
But when you have a huge entry by those who have absolutely
no intention of ever taking delivery and those who do not
utilize the product but merely are engaged in the market, in a
totally opaque, unregulated market, and speculating and self-
dealing and/or dealing in ways that would violate other laws if
they were dealing in other commodities, driving up the price
unnecessarily, I would hope that we can address that a bit too.
The bottom line is we are seeing a huge number of small and
independent trucking companies go out of business. The records,
unfortunately, cut off at five or more, but we do know that we
are seeing a dramatic number of people lose their trucks, lose
their livelihoods, and go out of business. We are also seeing a
large run-up in the cost of shipping. And we have got to do
what we can to mitigate these things here in Congress and I
don't believe we should just throw up our hands and say
everything is the way it is, and that is the way it is going to
be. I think we are going to find that there are some places
where an appropriate action by Congress might help mitigate
these problems.
We need to change our ways in this Country. We need to
become more fuel efficient. We need to become more energy
independent. We need to develop new technologies, new fuels.
But on the way to that future, which, unfortunately, is some
time yet off, we don't need to be price-gouged on the way
there. We don't need to see unnecessary loss of people's
livelihoods on the way there, and I think we can take some
steps to prevent that.
With that, I turn to my colleague, Mr. Duncan.
Mr. Duncan. Thank you, Mr. Chairman, for holding this
hearing on rising diesel fuel costs in the trucking industry. I
would also like to thank the witnesses for attending this
important hearing.
We have all seen the headlines about escalating fuel prices
and their impact on our economy. Specifically, diesel fuel has
set record highs over the past year, hitting more than $4.00
per gallon. These prices have been rising steadily, as everyone
knows, over the past couple of years. Statistics from the
Energy Information Administration show the retail price of a
gallon of diesel fuel rose 48 percent in the last year and 166
percent in the last five years.
Rising fuel costs have had a major impact on the trucking
industry. The trucking industry spent more than $112 billion on
fuel in 2007 and forecasts a record high of more than $140
billion for 2008. The trucking industry is facing unparalleled
operating cost increases due to rising fuel costs. Just a one
cent increase in diesel prices costs the trucking industry an
additional $391 million per year. Because 84 percent of all the
goods we use and consume get to us on goods, they are essential
to our economy and daily life. Rising fuel costs have the
potential to increase the cost of everything Americans consume
that travels by truck.
What to do about oil? Robert Samuelson, a Washington Post
columnist, a few days said this. He said, What to do about oil?
First, it went from $60 to $80 a barrel, then from $80 to $100,
and now to $120. Perhaps we can persuade OPEC to raise
production as some senders suggest, but this seems unlikely.
The truth is that we are almost powerless to influence
today's prices. We are because we didn't take sensible actions
10 or 20 years ago. If we persist, we will be even worse off in
a decade or two. The first thing to do, start drilling.
Robert Samuelson is no conservative saying that.
Years ago we heard people say, well, we don't need to
increase our domestic energy production because it won't help
the problem immediately. Some of us said then it might not help
it immediately, but it would help a few years down the road.
Unfortunately, we didn't do that. We put 85 percent of our
offshore oil resources off limits. We refused to drill in ANWR,
in a 19.8 million acre reserve, which is 36 or 37 times the
size of the Great Smokey Mountains National Park. And we want
to drill on about 2,000 or 3,000 acres more up there, but we
won't do that. No country in the history of this world has put
as much of its natural resources off limits to production.
We don't have to produce all of our domestic energy needs,
but we must produce a little more, or we are going to become
even more vulnerable to OPEC and foreign energy producers. That
is the only hope that we have. If we don't do that, then we are
going to see these prices escalate even more.
There are some groups that are primarily made up of very
wealthy people who want gas prices to go even higher, but a lot
of poor and lower income and working people in this Country are
being hurt even at the prices that prices are at now. So we can
do these things in environmentally safe ways that we couldn't
do back in the 1920s or even the 1950s or 1960s. I think some
people have the idea still in the 1920s, where they have to put
oil wells up every 25 or 50 yards. But today you can put one
oil well up and go down several miles or out several miles and
the footprint above ground is negligible. So we don't need to
be afraid to produce more, and if we don't, then we are going
to see these prices go even higher, and even more poorer and
lower income and working people will be hurt.
Thank you, Mr. Chairman.
Mr. DeFazio. I thank the gentleman.
Chairman Oberstar wanted me to convey his regrets. He is in
the process of returning from Europe, where he was addressing
the EU on transportation issues. He, in particular, in his
statement wanted to be certain to point out that although
some--notably Senator McCain and Senator Clinton--had proposed
suspending the gas tax, albeit in slightly different ways--one
theoretically to be paid for, the other just suspended--and
this is something I have said a number of times: in 1993, the
gas tax was 18.3 cents yet gas was a buck a gallon; diesel was
less. Today, Federal gas tax is 18.3 cents; gas in my home
State is about $3.75 a gallon and diesel is well over $4.00,
and the Federal tax hasn't gone up. So, he, in particular,
wanted to make that point. He had other concerns that he wanted
to raise, and we will place his statement in the record.
With that, we will proceed.
Oh, sorry. Mr. Mica.
Mr. Mica. Thank you, Chairman DeFazio. Thank you also for
holding this very topical hearing on the rising fuel costs in
the trucking industry.
Truckers across the Nation are absolutely struggling. This
is not only a personal disaster for independent truckers, but a
disaster right now for the trucking industry and for all
Americans. Most of our goods are delivered and our foodstuffs
by truck. If you haven't been to the grocery store lately, you
need to get there, because you join American families in seeing
sticker shock and a lot of the cost that is now incurred by our
truckers is being passed on in the cost of higher food.
You know, it is nice to talk about windmills and solar
panels and alternative energy sources, but, in reality--and you
have to face reality--it is going to be a decade and a half
before any of that makes a substantial impact. In the meantime,
we have got to find a solution to bring costs under control.
And if you are facing double-digit increases in fuel costs,
percentage increased just over a matter of months, and you are
in the trucking industry, you have got a very critical
situation on your hands.
You need a long-term policy, but we also need a short-term
policy. The short-term policy can only evolve around increasing
the supply. You don't need to be a Harvard PhD in economics to
figure this out, but we need an increase in supply of diesel
and gasoline fuel in the short-term, and to do that we are
going to have to tap some of our domestic resources wherever
they be. I don't know if it is going to take $4.50, $5.00,
$5.50, $6.00.
I don't know what the magic price per gallon is going to be
for those driving a car or a truck, but at some point the
people are going to come up the steps of the Capitol and shake
Members of Congress, physically shake them, I think, and say
that we have got to do something about these staggering
increases in costs; and the only solution, period, is going to
be to increase some of the domestic supply, rather than make it
more difficult to access, more costly to obtain and prohibitive
to get on the market. Those are not the solutions.
This is a good opportunity to hear from some of those that
have been affected in a disastrous fashion by this situation.
Appreciate your calling this timely hearing. But we have got to
look at increasing the supply period if we are going to see any
decrease in cost or any relief to these truckers.
Thank you and I yield back.
Mr. DeFazio. Thank you, Chairman--Mr. Ranking Member.
Sorry.
Mr. Mica. I like Chairman.
Mr. DeFazio. Well, with the Chairman in absentia, if you
can do that speech in four different languages, we will make
you Chairman for the day.
With that, we would turn to Mr. Tyson Slocum, Director of
the Public Citizen's Energy Program.
Mr. Slocum. Five minutes.
TESTIMONY OF TYSON SLOCUM, DIRECTOR, PUBLIC CITIZEN'S ENERGY
PROGRAM; RYAN TODD, INTEGRATED OILS ANALYST, DEUTSCHE BANK AG;
AND JOHN FELMY, ECONOMIST, API
Mr. Slocum. Thank you very much, Mr. Chairman, Members of
the Committee. On behalf of Public Citizen's 100,000 members
nationwide, I thank you for this opportunity to testify here
today. Public Citizen is one of America's largest consumer
advocacy organizations, and, as Director of the Energy Program,
we have been dedicated to solving problems in America's energy
markets and make sure that consumers have access to affordable,
reliable, and clean sources of energy.
Now, there is no question that the American economy has
slowed, possibly in a recession, partly due to rising energy
prices. Now, there are some segments of the economy, however,
that remain immune from this slowdown, and that would be the
energy sector, particularly oil and gas companies, and many of
the financial companies that are wreaking havoc on under-
regulated futures markets. And it is those two issues that I
would like to focus on in my five minutes today, because while
there are several variables that influence energy prices--
supply and demand and things like that--there is no question
that Congress can take some easy action to address these two
variables: investment decisions by the oil industry, increase
market concentration among oil companies, and under-regulation
of futures markets that encourage harmful speculation.
Addressing these issues, I believe, would provide consumers
with better access to adequately competitive markets and fair
energy prices.
Now, everyone talks about oil company profits. ExxonMobil,
as the industry leader, just since January of 2007, $51.5
billion in profits. But that is not all. In addition, by far,
their largest expenditure was buying back their stock--$40
billion in stock repurchases since January 2007, compared to
only $4.3 billion of capital and exploration investment in the
United States.
What this indicates to me is that large, vertically
integrated oil companies are not reinvesting these record
earnings, fueled by high market prices, back into the kinds of
investments that are going to provide consumers with the kind
of long-term relief that they need. In all, the largest five
oil companies operating in America have spent $170 billion
buying back stock since 2005, and that is more than they have
spent investing in U.S. oil infrastructure.
And the profit margins on their operations have been very
robust. The return on capital employed, which is the
measurement that the oil industry uses, have been very healthy.
Exxon, the industry leader, a 32 percent return on capital
employed for its global operations and a 65 percent return on
capital employed on its U.S. refining business. And that is why
they are not building new refineries. Because their profit
margins are so high with tight refining capacity helped by a
number of mergers in the last few years that reduced
competition in this sector, they don't want this gravy train to
end.
Now, consumers have been doing their part. Gasoline
consumption slowed last year. We have got excess supplies of
crude oil. But, yet, the speculators on Wall Street continue to
drive the price up. And most analysts, including us at Public
Citizen, believe that there is a huge disconnect between
supply-demand fundamentals and the current record-high market
prices for oil, and that has to do with the rise of harmful
speculation driven mainly by relatively new players, such as
hedge funds and some old standbys such as large investment
banks like Goldman Sachs and a few of the large oil companies.
Because Congress de-regulated these energy trading
exchanges in the year 2000, much of the operations of these
energy traders are below the radar screen of an effective
police force of Federal regulators. Lacking that kind of
transparency, lacking the kind of basic disclosure, these
players are potentially engaging in harmful anti-competitive
practices on these futures markets that are driving prices up.
Re-regulating these exchanges is key to restoring sanity to our
futures markets and to reduce the level of harmful speculation.
Additionally, the rise of these financial players in
acquiring and controlling physical energy infrastructure
assets, such as Goldman Sachs' acquisition in 2006 of 40,000
miles of petroleum product pipeline in their acquisition of
Kinder Morgan, has clearly given them an insider's peek to
allow them better access to push prices up.
So restoring some sanity to these futures markets would
bring prices down to consumers.
Thank you very much for your time.
Mr. DeFazio. Thank you, and thanks for sticking close to
your appointed time.
Mr. Ryan Todd, Integrated Oils Analyst, Deutsche Bank AG
will be next.
And you can depart from your prepared testimony if you
wish. I always like it if members of the panel begin to enter
into a little bit more of an interaction where they disagree,
but go right ahead with however you wish to proceed with your
five minutes, Mr. Todd.
Mr. Todd. Thank you, Mr. Chairman.
I would like to begin by touching on crude oil prices, as
that is really at the root of the comments here today and the
root of high gasoline and high diesel prices. As a little
preface to that, I would like to say that in a previous life,
prior to working at Deutsche Bank, I was actually an upstream
engineer involved in the exploration and production of oil and
gas supplies. So I have sat on both sides of the table, and one
thing I can say from sitting on both sides of the table----
Mr. DeFazio. For clarification, what is an upstream
engineer? I assume that means you are not working on getting it
out of the ground, you are somewhere further up in the process?
Mr. Todd. No, it is exploration and production activities,
as opposed to refining activities, which would be downstream.
Mr. DeFazio. Okay. All right, so upstream. Okay, good.
Thank you. We will credit you that 15 seconds. Go ahead.
Mr. Todd. Thank you.
As I was saying, one thing that I think is clear from my
time on both sides of the table is that both the oil industry
and Wall Street has done a terrible job at forecasting oil
prices for various reasons, and one of the things--with an
economics background, Mr. Chairman, one of the things that I
think has been very interesting--outside of the straightforward
supply-demand issues involved--is the fact that we have seen
that higher prices have actually lowered supply in many ways
and actually increased demand.
Now, when I say that, it seems a little backward
economically, but what we have seen is that as prices have
risen globally, the international oil companies--due to
resource nationalism, increasing government fiscal takes abroad
and sometimes here at home, and an incredibly tight service and
construction industry--have provided incredible constraints on
the industry's ability to ramp up supply. At the same time,
demand has been surprisingly robust here in the United States
up until just recently, and certainly demand growth
internationally has been very, very strong. Demand growth in
oil producing nations especially, we have seen that higher oil
prices have actually driven rapid demographic and GDP growth in
oil producing nations who are flushed with cash and can afford
to subsidize energy prices, which actually make demand even
stronger as prices go higher.
So the markets look at this, they see that spare capacity
is incredibly tight globally, and even though they see that
potentially on forecasts there could be a loosening in the
balance in coming months, they look ahead and they worry that
geologic constraints and the constraints in growing supply that
I mentioned above will limit the industry's ability to generate
enough supply to meet growing demand.
Now, economically speaking, the one way to get around this
is to drive up prices to a high enough level that there is a
demand destruction, restoring balance to the supply-demand
balance globally.
With this in mind, we look at gasoline prices. The number
one prices with gasoline prices is crude oil prices. A year ago
we testified before the Senate that higher gasoline prices
would eventually create higher gasoline prices. Not a very
pleasant thing to say, but certainly we have seen that to a
certain extent. A year ago, if you were to look, crude oil
prices in terms of dollars per gallon, were essentially $1.60 a
gallon. If you were to throw on refining the marketing margin
on top of that, maybe an additional $0.80. Some retail and tax
on top of that and you basically get to your $3.00 a gallon.
Today we see that just in terms of crude cost per gallon it
stands at about $2.85 a gallon. If you put that close to $0.60
of retail and tax margin on top of that, you are approaching a
price of almost $3.50 a gallon, assuming you can make gasoline
for free, assuming refining makes no profit whatsoever. Now,
this we have actually seen in the first quarter of this year.
Most refiners are actually losing money. Refining margins have
actually been negative for many weeks in the first quarter of
this year, partially due to the fact, again, of high crude
prices and falling demand here in the United States.
So that brings us to diesel. Now, diesel prices have risen
more quickly than gasoline prices. There is no surprise there.
Historically, diesel was at a discount to gasoline. Essentially
what we have seen is a demand or a premium in the market. The
dieselization of the European auto fleets has European demand
up 2.5 percent year-on-year on average over the past few years
versus gasoline demand that was down 2 percent a year over that
same time frame. International demand has been strong, both
transportation and industry-oriented, and U.S. diesel demand in
the last three months is up almost 10 percent year-on-year
versus gasoline demand, which is down almost 1 percent year-on-
year over the same time period. Again, I think some of this
will probably come out. The diesel demand is probably less
discretionary; it is very industrial-oriented. So strong demand
and tight U.S. refining capacity, which has been built to
maximize gasoline production, not diesel production, has driven
diesel prices to record levels.
Now, the best thing, from our recommendation, is to allow
the markets to allocate capital to the places which are tight,
in this case diesel capacity, which is happening here in the
United States as it is expanding, but it is something that does
take time and capital.
Mr. DeFazio. Thank you. Very good.
We now turn to Mr. John Felmy, Economist for the American
Petroleum Institute. Mr. Felmy.
Mr. Felmy. Thank you, Mr. Chairman and Ranking Member
Duncan.
I am John Felmy, Chief Economist of API, the national trade
association of U.S. oil and natural gas industry. API
represents nearly 400 companies involved in all aspects of oil
and natural gas industry, including exploration and production,
refining, marketing, transportation, as well as service
companies that support our industry.
I would like to talk about petroleum markets today and why
prices have been rising. Higher prices are a burden on families
and businesses, particularly those in the transportation sector
such as trucking and the airlines. Being able to understand why
the increases have happened is the first step to being able to
do something about them.
The biggest factor in the price increases? It is higher
crude prices, as mentioned earlier. Throughout the first four
months of the year, average crude oil prices were up about
$1.00 per gallon, $42.00 per barrel higher than the same period
a year ago. A similar comparison shows that gasoline prices are
up $0.71 a gallon and diesel up $1.03. Gasoline prices have
risen more slowly because of weakening demand, record
production, strong imports, and ample inventories.
Crude oil, the raw material for all petroleum fuels, is the
biggest cost component of gasoline and diesel. Crude oil is
bought and sold on international markets, and most of what we
need we import.
This week, refiners were paying as much as $2.86 per gallon
of crude oil they need to make a gallon of gasoline or diesel
and other products. That is most of the price at the pump. When
you add about $0.47 in gasoline taxes (or almost $0.54 cents in
diesel taxes) to each gallon, you have accounted for the vast
majority of what people are paying.
Crude oil prices have been rising because of strong
worldwide demand, even as U.S. overall petroleum demand,
including demand for gasoline, has flattened. However, in the
U.S., demand for diesel has remained strong. This follows a
long-term trend here and around the world. Over the past five
years, U.S. demand for highway diesel has been rising at triple
the rate of gasoline. In Europe, demand has also been rising,
reflecting growth in diesel vehicles, spurred in part by lower
taxes on diesel.
Continuing strong U.S. demand for diesel versus weakening
demand for gasoline is a key factor why diesel prices have been
higher here than gasoline prices. Demand for diesel has
remained strong in the face of higher prices at the pump in
large part because its use is less discretionary. Consumption
is mostly business-related. Fuel is an indispensable cost
component and just one of the costs in the manufacturing-
distribution chain. Also, keep in mind that, unlike Europe,
taxes on diesel in the U.S. are higher than on gasoline, and
the new ultra-low sulfur diesel formulations cost more to
produce, too.
U.S. refiners have been working hard to meet demand,
churning out record amounts of both gasoline and distillate,
which includes heating oil and gasoline, nearly 9 million
barrels of gasoline and more than 4 million barrels per day of
distillate during the first four months of this year. At the
same time, they continue to invest heavily in environmental
improvements, including billions of dollars for cleaner burning
gasolines and diesel fuels. Recently, despite healthy industry
earnings, refiner and retail margins have tightened.
Industry earnings are strong, but don't be deceived by the
big numbers. The size of gross earnings is largely a function
of the size of the industry, which is massive because of the
magnitude of the job the industry has to do. Both taxes paid
and investments made to keep supplies coming in years ahead are
also massive, which is why earnings on each dollar of sales
last year aren't as remarkable as the rhetoric and accusations
might suggest. In 2007, earnings per dollar of sales were just
over $0.08, about a penny above the all-industry manufacturing
average and a good bit lower than the rates of some other
prominent industries. And I might add that for the companies
that reported so far for the first quarter, the profit rate of
the industry was 7.5 cents on a dollar, and for refiners it was
about one-half a cent, with some refining companies losing
money.
Siphoning away earnings from the industry through new tax
schemes won't help address the current market situation. It
won't increase investments, it won't produce more supply, and
it won't help consumers. It will hurt oil and natural gas
company owners, 98.5 percent of which have no connection with
the oil industry other than through pensions they receive
invested in oil company stock or through their 401(k)s, IRAs,
and other stock holdings. Price gouging laws, another term for
price controls, also won't work. They would discourage
investment in new supplies and could lead to allocation
controls and gasoline lines.
There is no magic wand to fix this situation, nor is there
a silver bullet. It comes down to increasing supply and
reducing demand. There are a lot of ways to work on both ends
of that equation, including developing other forms of energy
and conserving. However, one strategy we can't overlook is
expanding access to more of the Nation's petroleum reserves,
much of which government policies have put off limits. Energy
independence is a slogan, not good policy, but we can produce
more and ease global market tightness. That, along with more
conservation, is how to put downward pressure on crude oil
prices.
That concludes my remarks. I would be happy to answer your
questions.
Mr. DeFazio. Thank you, Mr. Felmy.
I thank all the witnesses for being so succinct. We will
now proceed to the questioning.
Mr. Slocum, you touched on something which neither of the
second two witnesses mentioned, and I am going to ask them
about that, which is the issue of what is commonly called the
Enron loophole, which dealt with commodities trading, the
commodities modernization act, and regulation of derivatives
and over-the-counter trade blossoming in energy. What would you
say is the premium for those speculative activities on a gallon
of gas?
Mr. Slocum. Roughly $0.70 per gallon of regular gasoline,
which is about $30.00 per barrel of crude oil. And that is a
fairly conservative estimate of the role of pure speculation in
these futures markets.
Mr. DeFazio. But don't economists say, well, it is not just
speculative, that creates liquidity and it is guarding against
risk? I mean, surely, it is the producers and/or the consumers
in these markets, right?
Mr. Slocum. No, not necessarily. It is absolutely true that
a certain amount of speculation or hedging is essential, but we
have got a type of financial bubble that is being created, much
like we just went through in a very painful way, and will
continue to go through in a painful way, in the housing market,
where the lack of adequate regulation over this market has
encouraged a high level of speculative activity by financial
firms, many of whom have no direct connection to the physical
delivery or production of the product. The vast majority of
trades, more than 95 percent, on these markets do not result in
the physical delivery of crude oil or other petroleum products,
and it is that level of speculation that has been driving these
prices up.
Mr. DeFazio. So your position is a return to at least the
status quo in terms of regulation? I understand they have
established an exchange in London now. How can you control
speculation in worldwide markets? But, anyway, your position is
about $0.70 of what people are paying at the pump today is a
windfall for speculators one way or another.
Mr. Slocum. That is correct.
Mr. DeFazio. And, by the way, Goldman Sachs did predict
today that oil would go to $200 a barrel within the next two
years.
Mr. Slocum. And that itself has created a feeding frenzy,
because speculators have been driving the price up this morning
because now the ceiling has been set far higher. So it isn't
necessarily unrest in Nigeria or other issues, but, rather,
predictions by large commodity dealers that the sky is the
limit.
Mr. DeFazio. Okay, so, Mr. Todd, Mr. Felmy, do you think
there is any credibility to the idea that some of this is
speculative fluff; we are paying more than we need to because
people are trading off the books in a very opaque way, may well
be self-dealing, but none of that violates any laws because the
laws don't apply? Should we take some steps to reimpose at
least what existed previously in terms of the level of
regulation of these markets? Since Enron no longer exists, we
know they are not going to come to the Hill and lobby. Well,
they exist, but in a different form, shall we say.
Mr. Todd?
Mr. Todd. I would disagree. Certainly, I am not a
commodities trader, so----
Mr. DeFazio. So you don't think there is any impact by
speculators on the market?
Mr. Todd. I certainly think that the speculation can--it
does not create trends; it can exaggerate trends sometimes. It
can create short-term volatility at times.
Mr. DeFazio. Would you say $200 would be an exaggerated
trend, if we are headed there, and Goldman, who deals in these
kinds of exchanges, is predicting that? And maybe before they
predicted that, yesterday they went long?
Mr. Todd. I think, in general, the effects of speculation
on the market is speculation. Most of the serious studies that
I have seen on the effects of speculation have generally
disagreed with Mr. Slocum's analysis. I believe----
Mr. DeFazio. What about what Lee Raymond said, it was $20
on a $60 barrel? I mean, he was a pretty smart guy, wasn't he?
Didn't you work for them, ExxonMobil?
Mr. Todd. I did previously work for ExxonMobil.
Mr. DeFazio. Was he exaggerating?
Mr. Todd. He was a pretty smart guy.
There is a certain amount of fear volatility in premium
which is built into the market, and I certainly would agree
with that, and I think Mr. Raymond and----
Mr. DeFazio. Okay, so you don't think we should re-
regulate; everything is just fine the way it is and it is all
just being driven by pure market forces, except for some----
Mr. Todd. I think that increased visibility in the futures
trading market probably would not do undue damage. At the same
time, I think that with increased visibility and increased
transparency you would see that essentially the supply-demand
fundamentals, which are incredibly tight when the market looks
ahead and they say, you know what, we don't believe--every year
we forecast----
Mr. DeFazio. That was a good answer. So you are saying it
wouldn't cause undue harm; i.e., we could try it and then we
would see that really there isn't a lot of speculation. That
would be great. Then you wouldn't be here and I wouldn't be
here next year saying, well, we can take care of part of this
problem, at least, in the short-term by reigning in the
speculation. So that would be great.
Mr. Felmy?
Mr. Felmy. Mr. Chairman, the whole area of speculation is
highly complex, and I have been to conferences where I have
seen very thoughtful, very intelligent people come down on both
sides of it. What I see internationally is tight market
conditions, as Mr. Todd mentioned. We see strong continued
demand growth in China, even though the U.S. has slowed----
Mr. DeFazio. Right. We have covered this ground. But the
question is do you believe, as Mr. Todd just said, that if we
were just to--you know, since Enron caused my part of the
Country to pay about 30 percent more for electricity because of
a bankrupt company that was manipulating the market. And we can
say there was a deal of speculation going on there, so if we
changed the rules to accommodate them. They are gone. Could we
just do away with the Enron loophole, go back to the way things
were and not cause undue harm, would you agree? And then we
could get to the bottom of this, whether speculation is or is
not a culprit in the big run-up?
Mr. Felmy. Well, I personally----
Mr. DeFazio. I mean, what would it hurt to have these
trades at least no longer opaque and no longer off the books?
What would it hurt to have the trading in just--we are not
going to set prices, we are just going to say we want to know
what is going on here with the trading and who----
Mr. Felmy. Well, I would rely on the views of the
Commodities Futures Trading Commission, which is the regulator,
in terms of what they feel they need in terms of regulation.
But I think in terms----
Mr. DeFazio. Well, come on, in the Bush Administration?
They don't believe in regulation. They have contempt for
government and they hate regulation. So do you----
Mr. Felmy. Mr. Chairman, I think it comes down to
fundamentals.
Mr. DeFazio. Do you, Mr. Felmy, do you or do you not
support what Mr. Todd said? I mean, you disagree, but would it
hurt if we just provided that information in some modicum of
regulation of the market? Would that hurt your----
Mr. Felmy. Well, I would have to see the nature of the
regulation.
Mr. DeFazio. Okay, thank you.
Mr. Felmy. But I would also share that----
Mr. DeFazio. Thank you. Mr. Felmy, thank you. I don't want
to take up so much time, so I want to ask another question.
Let's go to the profits. It is interesting that you report
profits one way when you talk to us, both Mr. Todd and Mr.
Felmy--they are really not making much money if you look at the
profits versus their gross, and it is really pretty small
compared to other industries--but the funny thing is, in the
ExxonMobil financial and operating review, they don't use that
measure. So if that is the most appropriate measure, why don't
they report it that way to their stockholders? To their
stockholders, they talk about fabulous returns, great rate of
return on the share, you know, all those sorts of things they
talk about here. They don't say, aw, gee, we are really not
doing too good. In fact, I did see the head of ExxonMobil
bemoaning the fact that they only had the second largest
quarterly profit in the history of the world, slightly less
than the first largest, which was theirs last year, in the
first quarter of this year.
So I guess why is it you come to us and say they are really
not making much money, and they report to the world and their
stockholders that they are making bucket loads of money? Why do
you use this measure that they don't use in their own report?
Mr. Felmy. Because, Mr. Chairman, we are asked to explain
how much of that price is earnings, and that is the only way
you can do it, to basically take net income divided by sales to
get 7.5 cents for the first quarter.
Mr. DeFazio. Why is it not in their financial report?
Mr. Felmy. But in terms of their financials, Mr. Chairman,
it is a case that they are explaining the return on the capital
that they used, the return on the equity, and that is their
business function, so that is their appropriate way.
Mr. DeFazio. Good. Okay, one last question. Now, Mr. Todd
said that we should let the markets determine where the capital
would go and maybe we could deal with our diesel refining
shortage or other refinery shortages or exploration, you know,
sort of a paucity of investment there, although he mentioned
other constraints, to be fair. But last year, when ExxonMobil
bought back $40 billion worth of stock and their capital
investment was 10 percent of that, that is market forces,
right? Because they were driving up their stock value; they
were buying back their stock. So when are they going to start
using some of these fabulous profits for diesel refining
capacity? My understanding is they say they have no intention
of building a new refinery or they are going to use it more
robustly for exploration or, God forbid, maybe looking at
alternative fuels or technologies.
Mr. Felmy. Mr. Chairman, the companies are working for the
benefit of their shareholders, which are the millions of
retirees and other Americans that have invested in these oil
companies.
Mr. DeFazio. Yes, yes, I have heard that before.
Mr. Felmy. It is a difficult challenge to be able to decide
how much you are going to be able to invest, which,
incidentally, the industry invested $175 billion last year,
compared to $155 billion of net income. They also make
decisions in terms of things like share buy-backs, which I am
stunned that people criticize that because they are supporting
their shareholders; they pay dividends and they keep money for
a rainy day.
Mr. DeFazio. Okay, thank you.
Mr. Felmy. These are all decisions they need to make.
Mr. DeFazio. Mr. Slocum, would you like to respond to that?
Mr. Slocum. I would.
Mr. DeFazio. And this will be the last.
Mr. Slocum. Absolutely, a CEO of an oil company that did
not do things to return value to shareholders should be fired,
and it is true that I don't think any of the CEOs of any of the
major oil companies are going to be fired any time soon. The
question is, though, what government policies are promoting
this. It is not the job of the government to look after the
shareholders all the time of these corporations; that is the
job of the energy company CEOs. And when I see billions of
dollars in subsidies that are provided courtesy of the American
taxpayer, when I see below market or non-payment of royalties
for the privilege of extracting valuable energy commodities
from land owned by the American people, I see an opportunity
for reform. I think that oil companies should have slightly
higher tax liability by revoking all of these valuable
subsidies so that we can increase investments where the oil
companies are unwilling to do, in things that will actually get
us off of our addiction to oil by heavily investing in mass
transit, providing bigger financial incentives to American
families, to buy more super-fuel efficient vehicles and install
solar panels on their home----
Mr. DeFazio. Okay, we are getting a little off the subject
here, but----
Mr. Slocum. Sorry.
Mr. DeFazio. Appreciate your global view of how we might do
it, but thank you. With that, I will turn to Mr. Duncan.
Mr. Duncan. Well, thank you, Mr. Chairman. I expressed my
views in my statement, so I want to yield my time at this time
to Mr. Coble.
Mr. Coble. I thank you, Mr. Duncan.
Thank you, Mr. Chairman.
The gentleman from Tennessee, in his opening statement,
indicated that this issue is essential to our economy and our
daily lives. Mr. Chairman, if anybody doubts that, you check
with truckers and farmers and nurses and teachers who have to
use their automobiles in their daily work. It clearly does, Mr.
Duncan, impact us negatively, the soaring price, that is.
Mr. Chairman, pardon my modesty, but two decades ago I
indicated that we needed to explore, drill, refine, and it
could be done, I am confident, without damaging the
environment, and many others joined me when I said that; and
those words were prophetic at the time I think prophetic now.
Gentlemen, good to have you all with us. Let me put this
question to either of you. It may have been touched on, but I
want to revisit it. Diesel prices have traditionally been lower
than gasoline prices. In recent times, however, diesel has
consistently been higher than gasoline. What has caused the
reversal, A, and is this likely to change in the foreseeable
future? Either of you. Fire away, Mr. Todd.
Mr. Todd. I will speak to that. In general, there are a few
things at play, which I touched on briefly in my testimony.
Primarily, diesel demand is growing much more quickly, both
here in the United States and internationally, versus gasoline
demand. That stretching of the diesel production capacity is
what has driven up prices. It can't be ignored, as well, that
diesel is more expensive to produce now due to additional
regulation, ultra-low sulfur diesel. There is additional cost
of supply, but it is primarily demand driven.
Mr. Coble. Anybody want to weigh in further?
Mr. Felmy. Well, I would add, Congressman, that, in
addition, the industry has been doing a lot in terms of
producing record amounts of distillate product. We have also
seen imports decline as continued demand worldwide for diesel
limits available supply. So it is a combination of those
factors too.
Mr. Coble. Well, when I indicated that I called, two
decades ago, for exploring, I am sure that we could explore
without exploiting. I am not promoting dirty air or dirty
water; it can be done safely, I am convinced of that. Now,
having said that, new refineries have not been built in
America, I am thinking, for two, perhaps in excess of two
decades. Has there been any increase in refining capacity in
the United States? And, if so, how much has capacity grown and
how has this been accomplished without building new refineries?
Mr. Felmy. Congressman, if you look back over the lasts 10
to 12 years, we have seen capacity of the refineries within the
existing fences expand by roughly around 200,000 barrels a day.
That is within the existing fences and that is the equivalent
of a new 200,000 barrel a day refinery every year for that same
period.
Mr. Coble. Yes, you want to weigh in, Mr. Slocum?
Mr. Slocum. Yes. It is true that the industry has been
conducting recent refining expansions and does have plans for
more, but it is not at a rate that is going to keep up with
projected demand; and we have seen that the industry lagged
behind on providing excess capacity for diesel. And I don't
have access to the latest numbers, probably my esteemed
colleague at Deutsche Bank may, but I believe that refining
margins for diesel have probably been far stronger in recent
months and recent years compared to in the past. So the profit
incentive is there but, again, I haven't seen the corresponding
level of financial commitment by the industry to reinvest those
record earnings and take those price signals and invest it in
the infrastructure that our economy desperately needs.
Mr. Coble. Thank you.
Mr. Felmy, in your written testimony you indicate that
crude oil is the biggest component of diesel. You furthermore
state that the United States imports most of what we need. How
much of an impact does the weak dollar have on the price of
diesel and would increasing the domestic supply of oil
potentially reduce costs of diesel?
Mr. Felmy. Well, first, there is no question that
increasing supply and reducing demand can help the prices of
oil commodities, including crude oil, which then can be
manufactured to diesel. In terms of the share, what we have
seen is a continued increase in the cost of crude oil such as
it has gone up by $1.00 a gallon and diesel has been up $1.03.
So it is very easy to see how much of the cost increases have
been going up due to the higher crude costs.
Mr. Coble. Mr. Todd, your body language tells me you want
to say something.
Mr. Todd. Regarding the question on the dollar, I would say
that it is very clear that the Federal policy, which is--and
slowing economy, which has contributed to weaken our dollar to
record levels, has had a very strong impact on crude oil prices
and, thus, gasoline and diesel prices. The two have marched,
since January of 2007, more or less hand-in-hand, crude price
and the devaluation of the dollar. Many people look at buying
crude as a hedge against the dollar devaluation, so very strong
correlation.
Mr. Coble. Thank you, gentlemen, for being with us.
Mr. Slocum?
Mr. Slocum. Yes. And I do think there is a certain chick
and egg phenomenon with the weakening dollar and rising crude
oil prices that it is unclear at this point which variable is
chasing the other; and it could be a situation where the
speculators that are driving up the price of a barrel of crude
are helping contribute to the further erosion of the value of
the dollar.
Mr. Coble. Thank you, gentlemen.
Thank you, Mr. Chairman.
Mr. DeFazio. Thank you, Mr. Coble.
We will go in the order in which Members appeared. Mr.
Sires?
Mr. Sires. Thank you, Mr. Chairman. And I want to thank you
for being here today, trying to make sense of all this that is
happening.
I just have a couple of questions. As you know, there are a
number of proposals before Congress that would require fuel
surcharges to be collected by the motor carrier or the broker
and to be passed through to the drivers bearing the cost of the
fuel. How do you see this regulation affecting the trucking
industry, this surcharge pass-through? Anyone. Because I am
very concerned about the transparency of it, how it affects,
you know, just the entire industry.
Mr. Felmy. Congressman, we don't have a position on that
issue at this point, so I am afraid I can't help you in that
regard.
Mr. Sires. Do you see a better way? Can you think of a
better way than passing on a surcharge? Do you have a position
on that?
Mr. Felmy. We have not addressed this issue.
Mr. Sires. No. Anybody else? Mr. Slocum?
Mr. Slocum. No, this isn't an issue that Public Citizen has
been intimately involved with, unfortunately. I am happy to get
back to you in some written statement on Public Citizen's
analysis of the situation.
Mr. Sires. That would be great, because there are a number
of proposals floating around here.
Maybe you can help me understand this, because I am not as
knowledgeable as some people. It seems to me that the crude oil
jumps from one day to the next, and it seems to me there are
already people hiding behind the pump, ready to raise the price
as soon as it jumps. What about all those purchases before
that, the supply that was bought before that? How does that
work? How does it seem to me that oil prices jump from one day
to the next and it is already on the pumps the next day, it
seems to me? How does that work? Mr. Slocum, can you help me
with that?
Mr. Slocum. Right. There have been some investigations,
particularly by some State attorney generals, into potentially
anti-competitive practices in so-called zonal pricing and other
financial and contractual arrangements between refiners and
other large wholesale suppliers and some of the regional
distributors and retailers. There is no question that there has
been--just as we have seen a rise in the market concentration
within the refining industry, we have also seen it in some of
these other wholesale distributional systems. So I think that
Congress conducting an investigation that would complement what
some attorney generals have been doing at the State level to
determine whether or not these markets and these financial
arrangements are adequately competitive and whether or not they
are resulting in higher prices to consumers at the pump than
there otherwise would be if we had a little more competition or
transparency in these contractual arrangements.
Mr. Felmy. If I could respond. I think that you either
believe in conspiracy or markets, and what we have here is a
very rapid transmission of price information throughout the
system. Whereas, in the past, a dealer or a wholesaler would
not know what the prices are; now, within seconds, they know
what is going on in the futures exchange, they know what is
happening in wholesale markets, they have got price signals. So
things move very quickly.
In terms of the product that they have purchased before,
remember, this is not a cost-plus business and, as explained to
me or explained publicly by the association that deals with
that, this is a cash flow concern by retailers. Ninety percent
of the retailers are not owned by the integrated oil companies
and they have a real cash flow challenge when you have price
change. So if they are looking over their shoulder, wondering
what is going to be the cost of the next delivery, then they
may not have the cash flow without responding in advance.
That is just simply from presentations I have heard from
the retailer side of the business.
Mr. Sires. Thank you very much.
Mr. DeFazio. Thank you. We now turn to Mr. Latta.
Mr. Latta. Thank you very much, Mr. Chairman. Appreciate
it. Good morning and, again, thank you and Ranking Member
Duncan. I too want to thank you very much for holding these
hearings and welcome to the witnesses.
Just briefly, as has already been pointed out by the
Ranking Member, we do have a crisis in this Country on
continuing our reliance on foreign oil, and the rising cost of
the diesel fuel is another indicators of the disaster that is
going to occur in this Country if we don't change our course
now and stop that over-reliance on that oil from other
countries. As has been pointed out again by the Ranking Member,
Mr. Duncan, the United States is at a crucial point in terms of
our own domestic energy production.
With estimates that China and India, combined, will consume
more energy than the United States by 2015, we have to
seriously take a look at our own domestic energy production and
continue to reduce our dependence and reliance on Middle
Eastern oil. China's increasing offshore energy production to
reduce its own dependence on foreign oil, growing their own
production at an average of 15.3 percent per year, with plans
to make offshore production of China's largest source of oil by
doubling production by 2010.
I hear daily from my constituents in Northwest Ohio
regarding the rising diesel prices, as well as gas prices. It
hits the automobile driver, the truck driver, looking at their
own personal pocketbooks, and this rise in the diesel fuel is
having a dramatic increase on the effect of businesses in our
area. Consequently, it is not only directing the impact of
paying more for that diesel fuel, but the higher costs are
being passed down to the consumer through the rising cost of
consumer goods.
Where I am from, in Northwest Ohio, I live just south of
the Ohio Turnpike, along I-75, and within a day's drive I am
within 60 percent of the United States population, so we are
heavily into trucking and shipping in my area. Trucks transport
freight to 19,346 manufacturing companies in Ohio, supply goods
to 59,660 retail stores, and stock 24,466 wholesale trade
companies. In addition, trucks supply goods to 5,414
agricultural businesses and deliver the produce and products to
markets to nearly 80 percent of the communities in Ohio that
are only exclusively served by trucks. So the rise in the
diesel fuel cost in the trucking industry is a major crisis in
the Country.
Talking about China and its energy usage and where they are
going to be in next few years, really, I guess the question is
going to be on diesel usage, where you see diesel usage in
China and where it is going to be in the near future, and what
is that doing to do to the overall market, not only across the
world, but here in the United States; and how much is that
going to drive the cost in the near future, because that is one
of the questions. You drive by the stations and you see the
diesel cost continuing to go up. But as we are in daily
competition for that same barrel of oil across the world, and
with China using as much energy as it is going to use in the
near future, where do you see the oil or oil with diesel in the
near future with the amount that China is going to be
consuming?
Mr. Todd. I will touch briefly on that. We would see that
diesel will remain at a premium to gasoline, probably,
structurally going forward. Diesel growth globally, partly
driven by diesel growth in China, India, and developing
nations, but also driven by diesel growth in Europe and here at
home, will grow faster than gasoline and will probably keep
diesel at a premium to gasoline going forward.
Mr. Latta. Thank you, Mr. Chairman.
Mr. DeFazio. Thank you.
Ms. Hirono.
Ms. Hirono. Thank you, Mr. Chairman. I realize that this
market, this industry is very, very complicated and regulators,
State as well as Federal, are very hard-pressed to figure out
what is going on. The State of Hawaii had also filed a lawsuit
a number of years ago regarding pricing in this industry, and
we had to settle because it is really hard to prove anything.
Now, Mr. Todd and Mr. Felmy, if I read your testimony, the
gist of your testimony, basically, you wouldn't want the
Federal Government to step back in to re-regulate; you pretty
much would like to have the marketplace set prices. I think
that was the gist of your testimony. Is that accurate? Okay, I
am going somewhere with this.
You would like the free marketplace to do what a free
market is supposed to do. However, we know that we provide
billions and billions of dollars in subsidies to this industry,
so, on the one hand you are saying let the free market dictate
and set the prices; on the other this is an industry that
enjoys billions of dollars in subsidies. So what I can't see as
a consumer is why we should continue to do this. I mean,
really, can you think of a really good reason why you should
have both sides, you know, have Government support you as well
as arguing that Government should leave you alone?
Mr. Felmy. Well, I think, Congresswoman, it is, first, very
helpful to look at what the real subsidies are there. The
Department of Energy just released a study last week that
indicated that the total subsidies for all aspects of the oil
and gas industry were about $2 billion. And when you convert
that to million Btu, they were very nearly the bottom of energy
industries in terms of those provisions.
Mr. Slocum's testimony came up with a number of $9 billion.
I honestly can't find that anywhere in the report. But if you
look at it in terms of the actual subsidies, they are very low.
But, more importantly, to the extent that you have subsidies or
anything that lowers the cost to the industry, it can benefit
consumers.
Ms. Hirono. I don't know how you can say that when the
prices keep going up. As a consumer, I don't see how these
subsidies are particularly helping to keep the prices of
gasoline and diesel low.
Mr. Felmy. Because it lowers the cost of operations. The
primary reason why we are seeing gasoline prices go up is the
increase in the cost of manufacturing the product via crude
oil.
Ms. Hirono. Well, okay. We can sit here and have all kinds
of arguments, but I think if we look at the bottom line for
consumers, it is very difficult to figure out what we should do
in order to create alternative energy to wean ourselves away
from imported oil and not having to drill in pristine areas of
our Country. My point is this is a very complicated industry
and we are hard pressed, but it seems to me that we should
start with just getting rid of these subsidies that I don't
think can be justified. Thank you.
Mr. Felmy. Then you are raising the cost of the operation
of the industry, and there is no way you can argue that helps
consumers.
Ms. Hirono. Thank you, Mr. Chairman.
Mr. Slocum. Congresswoman, if I may respond to your
questions about subsidies.
Ms. Hirono. Go ahead.
Mr. Slocum. It is true that the U.S. Energy Information
Administration, which is the research arm of the Department of
Energy, recently came out with a much needed report looking at
overall energy subsidies. And it is true that their number for
the oil industry was just over $2 billion a year annually,
which is a huge number. But the Department of Energy did not
include several very large tax breaks that are enjoyed by the
petroleum industry in that analysis, and that is the primary
difference between our two calculations.
The first large tax break that the Department of Energy's
analysis did not include was the manufacturing tax deduction
which Congress provided many different industries in the fall
of 2004, but it classified oil extraction and oil refining as a
manufacturing activity. The Department of Energy did not
include that, and that is a highly lucrative tax break, over
$700 million a year. In addition, the last in-first out
accounting method, so called LIFO, which some Members of
Congress have targeted for repeal, that would constitute a one-
time value of between $4 billion and $5 billion.
So those tax breaks were not included in the Department of
Energy analysis and Public Citizen thought it prudent to
include those.
Mr. Felmy. If I may, those are provisions that are
available to all industries, and there is no justification for
singling out the oil industry. And raising those will not help
consumers; it raises the cost of operation.
Mr. DeFazio. Okay, thank you, Ms. Hirono.
Mr. Felmy, if I may, so you are saying the $2 billion a
year subsidy from the taxpayers to the industry, if the
industry didn't receive that subsidy from the taxpayers, you
would be charging them even more at the pump?
Mr. Felmy. Mr. Chairman, I am not----
Mr. DeFazio. That $2 billion would translate to higher
prices?
Mr. Felmy. I am not going into prices, Mr. Chairman. I am
simply saying it would be a higher cost for the industry, and
there is no way you could make that argument that it would
benefit the consumers.
Mr. DeFazio. But maybe it would come out of their profits,
or maybe it would come out of their stock buy-back program, or
maybe it would come out of the CEO's retirement pension--$400
million, not bad for Mr. Raymond. But okay, thank you.
We would turn now to Mr. Boustany.
Mr. Boustany. Thank you, Mr. Chairman.
I think, first, we should start off with a little bit of a
dose of reality in looking at the oil and gas markets, and the
complexity of it. There is significant risk--geopolitical risk,
geologic risk--and that hasn't really come up in this
discussion. I think, secondly, we have to accept the fact that
we are dependent on fossil fuels and will be for the
foreseeable future. So we need to strategically manage that
dependence. We have had 40 years of energy policies that really
have not been much of energy policy in this Country, and this
110th Congress is no exception. In fact, some of the policies
being advocated are entirely detrimental. We lack a long-term,
a mid-term, and a short-term policy, particularly just looking
at the fossil fuel industry, with regard to upstream and
downstream development, and these are critical issues.
I know Mr. Slocum mentioned the issue about refining
capacity and why profits aren't being used for refining
capacity. But if you look at refining capacity and the barriers
to building out refining capacity in this Country, they are
enormous. I have spoken to the Kuwaitis and tried to entice
them to come down in Louisiana in my State to build a new
refinery, and they said no, absolutely not, unless we find a
U.S. partner; it is entirely too expensive; we would rather
build in North Africa or we will build another refinery in the
Mid-East.
So what are we doing? We are sitting here and we are making
our U.S. companies less competitive. We are looking at taking
away important manufacturing breaks that all of our
manufacturing sector has at this time, and we complain that we
are chasing manufacturing out of this Country. Give me a break.
And then to demonize the U.S. oil and gas companies, let's
look at what happened in the Gulf of Mexico after Hurricanes
Rita and Katrina. In record time, when 80 percent of all the
production was down, in record time they got this back up and
running to deal with the problems we had in this Country. It
was a remarkable turnaround.
So I think we need a little balance in this discussion,
first and foremost. We have to recognize we must strategically
manage this dependence as we then transition into investment
into alternative fuels and other energy options.
But let me get to a couple of questions. One, we have
talked about the profits; we have talked a little bit about
subsidies. Could you gentlemen talk about what U.S. oil
companies currently pay in taxes?
Mr. Felmy. If I could. If you look at the last year of
available data, Department of Energy indicated that if you take
a share of taxes as a share of net income before taxes, the oil
and gas industry, under their financial reporting system, paid
40.7 cents on the dollar in taxes, compared to all
manufacturing of 22.1 cents. So it is a heavily taxed industry
in terms of the share of their net income.
Mr. Boustany. Thank you.
Any of you other gentlemen want to comment on this?
Mr. Slocum. I think it is probably accurate that the oil
industry is paying more in taxes than they have in the past,
and that is primarily because they are awash in so much money.
It is a very lucrative business.
Mr. Boustany. Mr. Slocum, do you understand the cyclical
nature of the oil and gas industry, and the fact that oil was
down at $10.00 a barrel, less than $10.00 a barrel in the late
1990s and that it is a multi-year planning process and that you
have got significant geopolitical and geologic risk? So to
simply look at this in one-year terms is really an inaccurate
depiction of the reality.
Mr. Slocum. Well, I absolutely agree that historically the
industry has been very cyclical, but I think some elements of
that cyclical history are being repealed. I think that the
industry responded to that first by engaging in an
unprecedented wave of mergers to address some of the problems
that occurred----
Mr. Boustany. So the U.S. oil industry is remarkably
resilient and flexible. We should be proud of that and we
shouldn't be advocating policies by singling out the oil and
gas industry to make them less competitive when they have to
fight against national oil companies and all the geopolitical
risks that are attendant with that.
Secondly, I would say that all the discussion about
speculation, while interesting, is really merely diversionary
in many respects because we do have very accurate, very timely
pricing information throughout the oil and gas industry. But it
basically ignores the fact that we have a fundamental, very
tight supply and demand equation, and when almost 1 million
barrels a day are taken off the Nigerian market because of
pipeline disruptions and terrorist activity, when you have the
U.K., a strike which took some 500,000 or so barrels off per
day, and then the Saudis are dealing with a situation whereby
they do not have the reserve capacity now to ramp up production
to meet extra demand, we need to focus on the fundamentals in
this industry and do everything that we can to make this a more
competitive industry and promote U.S. interest to strategically
manage our oil dependence at this time.
So I challenge my colleagues on both sides of the aisle.
Let's look at some reasonable policies, a real energy policy
that looks at the entire spectrum and looks at drilling in this
Country. It can be done in environmentally sound ways and with
a light footprint; we have seen it in Louisiana. The oil and
gas companies have made tremendous strides in this area. I
think we need to look at a real energy policy and not just
simply try to point fingers and pick out demons.
With that, Mr. Chairman, I think my time has expired and I
yield back.
Mr. DeFazio. I thank the gentleman. Just one clarification
to the answer to one point. Mr. Felmy, you said the industry
paid 40 percent in taxes. So ExxonMobil--I am staggered by
this. So they had a $40 billion profit last year and they paid
40 percent in taxes? Would I find that if I go through their
report?
Mr. Felmy. I am not familiar with the Exxon financials to
be able to give you an answer to that, Mr. Chairman.
Mr. DeFazio. Well, but where did the 40 percent number come
from?
Mr. Felmy. The 40 percent number comes from Table 1 of the
financial reporting system of the U.S. Department of Energy
that tabulates the financial information on the major oil
companies of the United States, and it is basically just taking
income taxes as a share of net income before taxes, and it
works out to 40.7.
Mr. DeFazio. So income taxes as a share of----
Mr. Felmy. Net income before taxes.
Mr. DeFazio.--net income before taxes. Okay. So they are
paying over the highest corporate rate in America, then. There
is no 40 percent bracket for corporations. So they are
overpaying their tax. I guess we will see. Okay. We will have
to look at that. Thank you.
Mr. Slocum. Mr. Chairman, may I add something to that, sir?
Any estimate that is being provided by the Department of Energy
or other entity is just that, it is an estimate. The only way
that we will find out exactly how much they are paying in taxes
is to consult with the Internal Revenue Service. We are not
necessarily saying to make those public----
Mr. DeFazio. Okay, thank you.
Ms. Richardson.
Ms. Richardson. Yes. Thank you, Mr. Chairman.
I have a question for you, Mr. Felmy. I am kind of a new
Member on the block, and before I get into my question, I am a
new Member here, but I wasn't very comfortable with, I felt,
how you were cutting off our Chairman, and I would really
appreciate it, in the future, a little more respect. I worked
very hard to get here, and I think the American people sent us
here for a purpose, and I felt it was crossing the line. And I
feel very comfortable in making that statement to you.
So, Mr. Felmy, my question is in which piece of the oil
pipeline can Congress, in your opinion, do the most to promote
lower diesel prices? What do you recommend regarding
distribution prices, taxation, etc.? And how do you blame the
weak dollar for our current prices?
Mr. Felmy. Well, the most important thing that Congress can
do is to increase supplies or reduce demand. Now, in the case
of diesel, that is an enormous challenge because diesel is not
discretionary; the trucking community is very much tied to
operations on that. We can, however, do things that increase
supply. We can improve the infrastructure. We can aid things
that could lead to overall improvement in the market, which
would reduce the cost of manufacturing diesel. So there a host
of things that can be done to be able to improve supply or
reduce demand.
Ms. Richardson. I thought I read, though, that the supply,
in fact, we do have adequate supply. Would you say that that is
not true?
Mr. Felmy. Well, if you look at the worldwide situation,
which is what you have to look at, for example, in 2007 we saw
that production worldwide for oil was virtually flat, at the
same time that demand went up by 1.1 million barrels a day,
according to the International Energy Agency. So there is no
question to me that what we see is a tighter market. Going
forward, we will have to see what happens with worldwide
demand. IEA is forecasting about a percent and a half increase
in world demand, and we have these struggles, as was mentioned
earlier, in terms of Nigeria, the blip that happened in
Scotland, and a host of other places around the globe for
producing oil, not to mention which Venezuelan production, what
will happen with President Chavez's plans, Mexican oil
production. So we have an enormous struggle in terms of a tight
market with only a small amount of excess capacity to be able
to respond to shocks.
Ms. Richardson. So are you saying to me that we can do
nothing to reduce our costs except for to increase our supply
or reduce our demand, that there are no other things within the
industry that can be done to help with this issue? I am not
saying completely resolve the issue, but you mean to tell me
there is absolutely nothing within the industry that can be
done besides us addressing those two issues, increasing supply
or reducing demand?
Mr. Felmy. Well, as an economist, those are the things that
we look at first and primarily. To increase supply is to both
produce more oil, perhaps more refinery capacity for diesel
because of the tightening market for diesel worldwide, in
Europe, potentially in the U.S., and so on. So it is something
that we need to look at. Some of our companies are expanding in
that regard, looking at more opportunities in diesel, which
appear to be something they are considering. So, yes, at a
lower level, that is really what, ultimately, the supply and
demand factors come into play.
Ms. Richardson. Okay, but we have heard the Chairman and
several other Members mention some other areas that could be
considered. You don't equally feel that those are valuable,
besides increasing supply and reducing demand?
Mr. Felmy. Well, I think that it is the market fundamentals
that are driving the situation. If you look at how much crude
oil costs are up, they are up $1.00 a gallon year over year;
diesel is up $1.03; gasoline is up $0.71. So that tells me very
clearly what we see is, at least in my opinion, market
fundamentals that are the situation
Ms. Richardson. Okay.
My last comment. Mr. Chairman, I understand that currently
we have had a little discussion about the Enron loop, and I
guess it is Mr. Welch who I think currently has a piece of
legislation that would deal specifically with this. I would be
willing to follow your lead on what you recommend as we, as a
Committee, could help to bring that forward, if you feel it is
appropriate after this discussion.
Mr. DeFazio. I thank the gentlelady. In fact, the issue is
also in discussion as part of the farm bill. It may get
resolved there. If it doesn't get resolved there, Mr. Welch has
legislation and I believe Mr. Stupak has legislation on the
same subject, as do I. So we have some choices out there and I
think it would be prudent to at least deal with that.
We now turn to the former Chairman from the great State of
Alaska, Mr. Young.
Mr. Young. Thank you, Mr. Chairman. This is an interesting
presentation. I am, of course, one who has been through this
war over the years. Deja vu. I can remember when we had the
embargo in 1973 and we immediately acted to increase the supply
by building the Trans Alaska Pipeline. That is the last action
we have done in this Congress to increase the supply of fossil
fuels to the United States and American citizens, the last act;
and I think it is long overdue. I do not believe that we can
ever drill our way into total independence, but we can drill
our way into some stability, Mr. Chairman, in the sense that we
have ANWR, 74 miles from an existing pipeline. We could deliver
a million and a half barrels of oil and supply the United
States in three years. That doesn't solve the problem.
If we want to solve the problem and quit pandering to the
general public--and that is what this Congress is doing, is
pandering now--we are not looking at a solution to a problem--
if we would like to solve this problem, being as you are the
Chairman of the Subcommittee, I suggest we raise the taxes to
$1.00 a gallon. That makes you put your money where your mouth
is. Because if we can stabilize the cost of fossil fuels, then
there would be the incentive and the stability to use and
develop the alternate sources of energy, other than ethanol,
which I am strongly opposed to. But no one wants to touch that.
You don't even mention it. I tried it in a highway bill. I
wanted to raise it $0.05 a gallon and, my God, the world came
to an end.
Now we have the question on diesel fuel, which is actually
a different program. I can't see why we can't--because diesel
plays a major role in delivering products through the trucks
and the locomotives to our consumers--why we can't set up a
different strata. If we don't want to raise diesel fuel taxes,
then raise it on gasoline. So people would have the knowledge
that, yes, it is not going to go down--and, by the way, I don't
think it will because we have built no refineries--and we are
still dependent. And we just watched what happened in Nigeria
yesterday, and it put up the price of oil $3.00 because we
don't have any reserve, Mr. Chairman. We don't have the
refinery capability and supply is not there, and what has
occurred is we are really in shortage of storage and shortage
of reserves now, and foreign countries are consuming what we do
not have availability to. That is our problem.
We can talk about the environment all you want. I know Mr.
Slocum is down there. If you want to solve the environment,
back a tax for $1.00 a gallon so people will stop driving like
a bunch of idiots, which they are doing right now. Did anybody
watch anybody drive here today when you came to work? They are
driving cars 100 miles an hour. I drive 60 miles an hour and
they pass me like I am standing, and they honk the horn at me
and wondering why they are spending fuel. Yet, they are
complaining about $4.00 gasoline.
I worry about the truckers. I worry about those that
deliver product to consumers. But I am not worried about the
general public when it comes down to how they misuse the fossil
fuels we have left. So we have a lot of oil in this Nation. We
have not developed it. Not one development other than the Gulf
of Mexico other than the Trans Alaska Pipeline. Approximately
36 million barrels of oil in ANWR can't be open. Chukchi Sea,
$2.6 billion we bid on that last week, the oil industry did. I
don't know whether they are going to be able to develop it or
not. Beaufort Sea, Lucian Chain, off the Coast of California,
off the coast of Florida, off the coast of North Carolina,
coast of Virginia, all oil. Rocky Mountains. We just haven't
done it.
So we have a choice, Mr. Chairman, and this hearing and
everybody else need to understand it, and this Congress, to get
off the duff and either do something or quit pandering to the
general public and look for a real solution. It is easy to
blame the major oil companies. Absolutely, let's blame them.
Let's tax them. But when you do that, you are not going to hurt
Exxon, you are not going to hurt BP, you are not going to hurt
Shell. You are going to hurt the domestic production. Those are
international companies. And then we do not have any production
in this Nation.
So, Mr. Chairman, I think these hearings are good. I don't
have any questions. I like to make statements on this type of
matter because I have been doing it for years. We have got to
start doing something instead of talking. We have to start
doing something with result. And I will promote a tax so the
general public will slow down, will change their driving
habits, will have a different vehicle, and we will save fuel. I
am not for trucks for doing that because they are delivering
the products we consume.
We did this in World War II. If you go back to the history,
we had a 35 mile an hour speed limit. I am not advocating that;
my God, everybody gum and glue it. We did have gas ration. I am
not advocating that. But we also had preferential use of fossil
fuels. The farmer had use of fossil fuels at a more reasonable
rate and no rationing, because he was producing food for the
war effort. Maybe we ought to look at that. Maybe we ought to
give a break to the truckers and the locomotives and the people
that are delivering products. Maybe we ought to do that. But we
better do something instead of just talking.
I have been in this business long enough to watch nothing
happen in this Congress when it comes to fossil fuels that we
are dependent upon the foreign countries today. China is
consuming more barrels of oil today than we are. Not per
capita, per day. And they are going to triple that in the next
two years. So the sellers, they don't have to sell it to us
anymore; they sell it to another country with a heartbeat. So
we have got to start developing our own sources. And it is
here, we have the Btus. I haven't even talked about coal,
because under this Speaker we can't talk about coal because we
contaminate the air; in the meantime, we all can break
ourselves economically in this Country.
So, Mr. Chairman, I hope everybody just starts thinking
about the solutions. Solutions, I have them: raise a tax on a
gas so the public starts being aware it is going to be high for
the rest of the time and the rest of their lives, and they will
drive differently and have a different automobile; make an
exemption for trucks and locomotives and ships that deliver
products to and from this Nation to the consumer; instigate an
idea that maybe there is a better way than ethanol, which is
the dumbest thing we ever did when you think about it--a food
for a fuel, when we have starving people in this Country and in
this world?
So, Mr. Chairman, I thank you for having this hearing and
thank you for putting up with me and thank you for recognizing
me. I yield back the balance.
Mr. DeFazio. I thank the former Chairman for his
provocative statement.
Mr. Baird.
Mr. Baird. I thank the Chair. I actually thank the former
Chair as well. He didn't give you a chance to answer his
statement, but I would like to. I think he raises some pretty
good points, both about the issue of what the impact of a gas
tax might be and also about the idea of distinguishing between
the delivery and cargo sector of our economy versus the
personal vehicle sector. And the reason I am interested in that
is because passenger vehicle use has options: you can carpool,
you can take buses; not always, but many options. But it seems
to me the delivery sector, the cargo sector doesn't. So take a
few minutes and respond, if you would, to Mr. Young's
provocative thoughts and share your thoughts on that, if you
would.
Mr. Slocum. Sure, please. I will start. First, they were
indeed very important comments, and in response to opening up
new areas of domestic production, which a number of Members
have raised today, well, Congress did just that in December of
2006. Congress voted to open up 8.3 million acres of new
development in the Gulf of Mexico, and the markets responded by
sending the price of crude oil skywards. So increasing domestic
levels of production when there is no shortage of crude oil is
not a solution to energy independence or to lower prices.
Consumers are doing their part. I believe that motorists
are not gluttons for punishment; they have reduced demand by
over a percent, which is fairly remarkable in an economy our
size and a population of over 300 million people.
Mr. Baird. Talk a little less on the production side and
more about the impact of the $1.00 a gallon gas tax in terms of
anticipated impact on consumption and also the differential
notion that I think is intriguing between taxing gasoline
versus diesel.
Mr. Slocum. First of all, Public Citizen opposes efforts to
temporarily repeal the Federal gas tax. We do not believe that
a Federal gas tax, which has remained the same since the mid-
1990s, at 18.4 cents a gallon and 24.4 cents a gallon for
diesel, is a culprit behind high prices. Right now, those
represent----
Mr. Baird. I will stipulate to that. Go ahead with his
proposal.
Mr. Slocum. Well, I agree with the sentiment of what the
Congressman is saying, that an increased gas tax may result in
less demand. The problem, from Public Citizen's point of view,
is the punitive action that that has. We have already seen
people with rising crude and gasoline prices pay what
essentially amounts to a tax, and I believe that our
President----
Mr. Baird. I am going to ask Mr. Todd and Mr. Felmy to
comment on this.
Mr. Todd. In general, I think that we have typically tried
to do a policy here in the United States which says we want to
protect the environment, we want to increase supply, we want to
have cheap gasoline. We want to do all these things that are
kind of mutually exclusive. With that being said, I think that
a higher gasoline tax in order to destroy demand is probably
a--it is tough to get through here in Washington, but it is
probably not a bad policy.
Mr. Baird. What about this differential between gasoline
tax versus diesel tax to spare the cargo transportation sector
from the personal vehicle use?
Mr. Todd. We haven't looked at it and I would have a tough
time commenting on it. Certainly, in Europe, they have favored
diesel versus gasoline, which is why they drive diesels; and we
have favored gasoline, which is why we drive gasoline cars. So
it would seem like----
Mr. Baird. I am not----
Mr. Todd.--but you would have to have a corresponding
increase certainly in diesel production capacity to make it
work; otherwise, you would artificially inflate diesel demand
without----
Mr. Baird. That is a good point. I am not sure the
distinction between the type of fuel versus--I think it is
better to distinguish between the usage of the fuel. And if
there is a manner in which you could--you know, I don't care if
a truck delivering groceries is a diesel powered truck or a gas
powered truck. That use, in my mind, should have preference, as
Mr. Young seemed to suggest, over passenger vehicle because
there is less flexibility.
Mr. Felmy?
Mr. Felmy. In general, we don't have a perspective on the
level of taxation as it is used for road construction, things
along that line. We do object to general taxation of that type
that is used for overall goals such as deficit reduction and
things like that.
The differential in terms of diesel versus gasoline is
fairly complex; there are a lot of things that you need to look
into. Diesel car technology presents a tremendous opportunity
going forward in terms of efficiency improvements with now the
introduction of ultra low sulfur diesel. So one could see, if
you were trying to move toward more efficiency, that would be
one technique to do it.
Mr. Baird. Mr. Slocum, one final question, which I actually
can't resist. Was Ralph Nader the founder of Public Citizen?
Mr. Slocum. Yes, he was, in 1971, and he ceased being
president in 1980. So it has been a while.
Mr. Baird. I will spare you my thoughts on the impact of
Mr. Nader on the environment with the result of the election of
2000.
Mr. Slocum. I appreciate that.
Mr. DeFazio. We now turn to Mrs. Capito.
Mrs. Capito. Thank you, Mr. Chairman.
I want to thank the panel, too. This is an extremely
important issue and very complex, as we have heard. I have two
questions. First, I represent the State of West Virginia. It
has abundant resources of coal. Former Chairman Young alluded
to coal, but there is technology there where coal can be
liquified and used for diesel or for other fuels. They do it in
South Africa, I believe, for almost all of their fuel. With the
price of oil going up so excruciatingly high, the reason that
we don't have these coal liquification plants, among other
reasons, is the absolute cost of them; and there is a lot of
technology on carbon catcher aspect of this. Do you all have
any comments on coal liquification as a way to ease the
situation around the high price of diesel and gas in general?
Mr. Slocum. Sure. Given the extremely high capital costs
involved with these coal-to-liquid projects, and given some of
the environmental concerns, it still is not competitive, even
in an era of record-high crude oil prices. The coal-to-liquid
industry has addressed that by entering into or proposing to
enter into long-term purchase agreements with the Air Force. I
would not see broader application other than in select segments
of the economy, just because of the enormous costs involved,
capital costs, for those projects.
Mrs. Capito. Mr. Felmy?
Mr. Felmy. I think the National Petroleum Council said very
clearly that, going forward, we are going to need all forms of
energy; we are going to need energy efficiency improvements; we
are going to need alternatives; we are going to need
renewables. Coal to liquids is one of that suite of things that
we are going to need. Yes, it is high-cost right now, but
technology improves. This is a demonstrated technology that has
been around for a very long time. And if memory serves me, I
think the Department of Energy has a forecast for coal to
liquids somewhere around 700,000 barrels a day, going forward,
by 2030. That is dependent, of course, on capital costs and so
on, but it is one of the things we need to look at.
Mrs. Capito. Thank you.
Did you have a comment?
Mr. Todd. I would agree with the fact that, in general,
based on the comments that I have said on the challenges to
increase oil supply sufficiently, to keep up with demand, we do
need everything; we need coal, we need nuclear, we need
biofuels, we need conservation, we need wind energy. We need
the whole range of the spectrum. It is very difficult, from a
cost perspective, with coal; it is difficult from an
environmental perspective barring carbon sequestration and
capture; and, in general, again, I think subsidies get very
difficult, but the markets will allocate capital to those
things which can be economically competitive and beneficial.
Mrs. Capito. Right. That is what I would like to see. I
would like to see this Congress and future Congresses take this
technology, take this natural resource that we have abundantly
in this Country and use it to help every single individual
buying gas at the gas pump. And I particularly like the
diversification aspect of coal to liquid. It is not going to
solve everything, but it is going to be a small part, and can
be a small part, of solution of the problem. So I appreciate
all your comments and I will keep pushing for that.
My second question is we have a lot of individual truckers
and we have a big timbering industry; a lot of them are private
contractors that really are on a needle's eye, really,
balancing their budget. And I guess the most difficult thing
for people right now, consumers at all levels, but particularly
people who are making their living on transportation, is the
total uncertainty of what you are going to wake up to the next
day. And this is a difficult question, but what--can you
prognosticate? Are we in the middle, are we at the bottom, are
we at the top? You know, I really think that if we can get some
certainty back into the market, some certainty back into
stabilization of our prices, I think people would then begin to
make some of the adjustments that we have talked about here
today.
So do you all have a comment on where are we on a scale?
Are we on a run-up, a rundown? And I know it is hard to
predict, but I would like to hear your comments on that. Thank
you.
Mr. Slocum. Well, I think Goldman Sachs answered that for
us last night when they released a report saying that they were
predicting $200 for a barrel of oil in a short period of time.
So it is clear that the largest energy commodity trader on the
planet is extremely bullish about where oil is going to go. So,
unfortunately for the American economy and the American driver,
we ain't seen nothing yet. I think prices are going to continue
to escalate until we restore some transparency to these energy
trading markets to clamp down on some of this harmful
speculation that we have been experiencing.
Mr. Todd. In general, I do the same thing that Arjun Murti
at Goldman Sachs, who created that report this morning, I do
the same thing and, in general, I wouldn't place too much
weight in the forecast. We have been wrong before; we will be
wrong again. The fact that Goldman Sachs says it doesn't mean
oil is going to $200 a barrel. We do have a supply problem. We
do need higher prices in order to--higher prices are, as we
speak, rationing back demand, again, as we speak, which is
good, and it is promoting alternative energies, which is also
good. But, in general, where we are is going to depend to a
large degree on international growth and where that goes. If we
continue to see growing demand----
Mrs. Capito. So basically the uncertainty still exists.
Mr. Todd. The uncertainty is----
Mrs. Capito. And will for a while. Thank you.
Mr. DeFazio. I thank the gentlelady. I would be happy to
share the Goldman Sachs report with her. They have their own
idea about where it is headed.
Mr. Arcuri.
Mr. Arcuri. Thank you, Mr. Chairman, and thank you,
gentlemen, for being here.
You know, I was thinking while you were speaking. I
remember one time they used to say that what was good for
General Motors is good for America, and some people believed
it; some people didn't. But I don't imagine anyone is ever
saying what is good for ExxonMobil is good for America. And,
you know, it troubles me that we sit here and I listen to you
talk about supply problems, and then in the next breath they
are talking about building new refineries, and it seems to me
it is missing the real problem here or the real issue, and that
is that the amount of oil is finite. Whether we are at peak oil
now or whether we passed it a couple years ago or whether we
are going to pass it in a couple years, it is going to be more
and more expensive to get more oil out. And I guess the reason
I said that at the beginning is my question is what are the oil
companies doing to develop alternative energy? I mean, what we
are trying to do is make it cheaper for us to get goods to/from
where they are produced to where they are consumed, and that is
what the cost of diesel is all about. So are they going to do
anything? I mean, I know what they know how to do is drill for
oil and refine it and pump it. Does Government have to do all
of that? Do we have to be the ones that are giving subsidies to
oil companies to promote it or is there any responsibility on
the part of oil companies to develop alternative energy?
Mr. Felmy. Congressman, the oil industry is first and
foremost involved in keeping oil flowing 24/7, because that is
what you are here asking us questions on.
Mr. Arcuri. Well, is it energy or oil? What is it?
Mr. Felmy. Well, first and foremost it is gasoline and
diesel, because that is what everybody is talking about right
now. But looking forward, the companies are major investors in
emerging energy. Between 2000 and 2005 they invested $98
billion in total emerging energy, which included a host of new
things, such as oil sands, oil shale, L&G, gas liquids, and so
on. And then they also invested in non-hydrocarbons and in
energy efficiency improvements. So they are looking forward,
but it is a delicate, very challenging question to be where do
you put your bets in the future and keeping fuel flowing.
Mr. Arcuri. Well, I have been hearing that since the 1970s
when I was in grammar school and we were talking about what are
we going to do to lower the price of oil, what are we going to
do to make America independent; and the oil companies continue
to say the kind of things that I am hearing, unfortunately,
today. Thirty years we have been hearing this and still there
has been either no development or certainly that we haven't
heard about yet because the oil companies are too busy pumping
the oil that is out there. So at what point do they say we are
more concerned with getting energy and keeping cars and diesel
trucks moving, or are they just going to continue to pump oil
and continue to watch the prices go up?
Mr. Felmy. Well, they are continuing to invest heavily
across the board in all types of projects. As I mentioned
earlier, $175 billion, as documented by Oil & Gas Journal. They
have a delicate challenge in terms of where do you make an
investment so that, after all, you have a fair return to your
shareholders.
Mr. Arcuri. Well, but why do they keep investing in finite
resources like coal and oil? Why are they not investing in
other renewable sources of energy that are not finite?
Mr. Felmy. I just pointed out they are investing in other
non-finite energy sources, such as energy efficiency and non-
hydrocarbons. So they are making those investments, but it is a
difficult challenge when you have got to, first of all, satisfy
your customers today and then look forward to the energy
future. You also have to satisfy your owners, which are the
millions of Americans who are retirees and other owners of the
companies that you simply not----
Mr. Arcuri. But those are also the people that are paying a
lot of money at the pump and they are also the people who are
going to benefit from the developing of alternative energy in
the future, which is actually going to drive up, probably, the
cost of stock, effects on Mobil were to come up with
alternative energy that isn't finite in its nature.
Thank you, Mr. Chairman. I have nothing further.
Mr. DeFazio. Ms. Fallin.
Ms. Fallin. Thank you, Mr. Chairman, and thank you,
gentlemen, for joining us today to visit with us about a very
important issue.
I have just a couple of points I would like to make and
then just ask your opinion about a couple of things. Congress,
in past legislation, has voted on drilling in ANWR, in opening
up Alaska and even some of the Gulf areas. In 1991, the Senate
blocked it, and in 1995 President Clinton vetoed ANWR and
drilling there, and then, as you have heard in testimony, we
haven't had a new refinery in 25 years in the United States.
And I also know from just talking to the people in the industry
that it takes about 10 years to even go through the permitting
process, the environmental rules and regulations, just to even
talk about a refinery because it is so complicated to build
one.
But my question is if, in 1995, 1991, if we would have
allowed more drilling--allowed drilling, I should say, in ANWR,
and more off-coast drilling in the United States, what would
have been the effect upon our supply and the cost of gasoline
today if the United States policy had been different, and if we
had had the refineries being built during that time period?
Mr. Felmy. Well, I think if you look at the Deepwater
Royalty Relief Act, which was passed in 1995, on the impact of
production in the Gulf, it is truly stunning. They have gone
from a very small estimate of resources to finding, I believe
it is, something on the order of 10 billion barrels equivalent.
That is added supply; it is an increasing share of the Gulf's
production, and it is an important additional supply.
If you look at the time lines for developing ANWR in terms
of everything you would have to do to be able to go through the
whole process of permitting, finding, and so on, we would
probably be producing right now. How much is of course
uncertain until you are actually producing, but the USGS
estimates are for a mean estimate of 10 billion barrels, which,
if you produced it over 30 years, would 1 million barrels a
day. So those could be some substantial--first of all, they are
substantial improvement in resources and could be additional.
And in terms of refinery, we haven't built a new refinery,
but we have expanded existing capacity. We may need more
capacity going forward, and that is on the drawing boards right
now according to the Department of Energy.
Ms. Fallin. Would it have had an effect upon the price of
gasoline today if we had those supplies online?
Mr. Felmy. Well, I can't speculate about price because of
antitrust law, but it is fundamental to an economist core
existence that if you increase supply, all other things equal,
it can help the market.
Ms. Fallin. Okay.
Mr. Todd, do you have a comment?
Mr. Todd. I would agree that, in economic terms, the prices
would probably be lower, but we have no idea how much lower
they would be. Again, in general, I think it is good policy for
us to, if we, as consumers, want to use oil, to produce as much
as we can, just as we ask other countries to produce as much as
they can. So, yes, we would probably be lower, but no idea how
much.
Ms. Fallin. Don't know for sure?
Mr. Todd. And in terms of refining capacity, again, there
seems to be a lot of discussion about how much refining
capacity we are building. We are adding significant refining
capacity and we have every year for probably the last 20 years.
There is major investment going on as we speak, a major
investment in Texas, a major one in Louisiana, adding
additional capacity, adding additional capacity that is
actually focused on producing as much diesel as possible.
Again, that is where the higher margins are and that is where
the capital is going. But, again, it is a global balance as
well. Refineries are being built internationally. Refiners in
general are not making any money right now, or very little
money, so it is a delicate balance. When you look on an
investment time frame that is 10 years down the road, as to if
we ramp up ethanol production, if we all drive more fuel-
efficient cars, if we do these things, what are the incentives
for me to build a refinery now that is going to come online
five years from now, when we might have an entirely different
environment?
Ms. Fallin. My time is about ran out, but let me ask you
another question. Some Members of Congress have been advocating
putting a windfall profits tax back in place. What would that
do to the marketplace and supply and demand and the cost?
Mr. Todd. It would lower supply.
Ms. Fallin. And----
Mr. Todd. Higher taxes have never increased supply, so I
have a very difficult time envisioning that it would do
anything other than increase prices.
Ms. Fallin. And if yo lower supply, what happens?
Mr. Todd. Prices go up.
Ms. Fallin. Okay.
Sir?
Mr. Felmy. I think it is instructive from the studies of
the Congressional Research Service that we affirm that, that
the windfall profits tax of the early 1980s led to reduced
supply, increased imports, and that is not good for consumers.
Ms. Fallin. So you are telling me that gasoline prices
could go up even further?
Mr. Felmy. Once again, I don't speculate on gasoline prices
because of antitrust, but I see a tighter market.
Ms. Fallin. Let me ask the economist.
Mr. Todd. Yes.
Ms. Fallin. Okay.
Did you have something you wanted to say?
Mr. Slocum. Yes, please. First, the primary decisions in
the oil and gas industry affecting production is the market
price of that underlying commodity. And unless you price a
windfall profits tax at a punitive Swedish style rate, it is
not going to discourage production as long as oil is over $100
a barrel. And the proposals that I have seen from Congress thus
far are not punitive tax rates, they are tax rates that would
reduce somewhat returns to shareholders, to the owners of
publicly held companies. But, typically, economists do not
believe that corporate income taxes are paid by end consumers;
they are paid by the shareholders of the company in the form of
slightly lower stock value or lower dividends, things like
that. So I would disagree that enactment of a reasonable
windfall profits tax would hamper domestic oil production.
And getting back at some of the other questions you were
asking, about whether or not bringing on new sources of
production, such as the Arctic National Wildlife Refuge, would
reduce prices, we have already seen that basic supply-demand
fundamentals are not being followed in the crude oil markets.
U.S. gasoline demand is down over a percent from a year ago,
and that is significant because the United States is far and
away the largest gasoline consumer on the planet, and the
markets have responded by increasing the market price, which is
exactly the inverse of what you would expect. So even if we
were bringing on massive new supplies, as long as we have
dysfunctional, non-transparent futures markets where prices are
actually set, it will probably be irrelevant what is going on
in supply and demand.
Ms. Fallin. I appreciate your answer to that, but I think
my question was more towards if we increase the U.S. supply--
since now we buy over 62 percent of our energy needs from
foreign countries--what would that do to our own market and
supply and the cost of gasoline.
Mr. DeFazio. I thank the gentlelady for the question, and I
think it was responsive.
Mr. Braley.
Mr. Braley. Thank you, Mr. Chairman. I first want to
comment that I certainly agree with your characterization of
the former Chairman's testimony as provocative. There were
things that he said that I agreed with; there were things he
said that I found intriguing; and there were things that I
blatantly disagreed with. And as a big fan of the TV show Ice
Road Truckers, which is filmed in his State, and as a former
trucker, I take a very serious interest in the topic we are
here to discuss today.
I got my driver's license on October 30th of 1974, right in
the wake of the oil embargo and the aftermath, and there were a
lot of things that happened that the oil and gas industry
didn't have much to do with. One of the things we saw was we
saw incredible change in innovation in the U.S. auto industry,
which produced vehicles like the Chevy Vega, the Ford Pinto,
the AMC Gremlin, and a host of other vehicles whose sole
purpose was to try to get better fuel mileage and to preserve
the precious resources that we had available in this Country.
Setting aside for the moment some of the safety
implications of those vehicles, one of the things we know is,
if we look back through history, we can see various spurts of
innovation to try to address things that affect both supply and
demand in the marketplace we are talking about. For example, if
you go back and look at some of the documentation from Renault,
a French auto maker, in the early part of this century you will
see that they were producing an internal combustion engine that
was capable of getting 70 miles per gallon, almost 100 years
ago.
So one of the concerns I have on this Committee is that we
are looking at this problem in a global viewpoint, not just a
narrow focus viewpoint. And I want to start with you, Mr.
Felmy, because you are an economist by training, is that
correct?
Mr. Felmy. Yes.
Mr. Braley. And I think you would agree that one of the
things economists have to do is have an understanding of
history.
Mr. Felmy. Yes.
Mr. Braley. Because market trends and things economists
study are based upon an assessment of how things evolve
historically and how we can predict future economic trends
based on things we have learned from the past. Is that a fair
statement?
Mr. Felmy. Yes..
Mr. Braley. One of the things that students of history know
is that there was a little thing called the whiskey rebellion
in this Country. Do you remember that?
Mr. Felmy. I would say yes, barely.
Mr. Braley. All right.
Mr. Felmy. I couldn't give you any details on it, but I do
remember the title of the history.
Mr. Braley. One of the things that former Chairman Young
was talking about was that his opinion that ethanol was an
incredibly poor idea as part of this equation we are talking
about. Do you remember him saying that?
Mr. Felmy. Yes.
Mr. Braley. Do you agree with that statement?
Mr. Felmy. Well, the oil industry has been committed to
adding more ethanol into the fuel supply. We were originally
agreed to the renewable fuel standard, and the industry has a
requirement this year of using 9 billion gallons, and the
industry is working very hard to meet those requirements for
ethanol. It is the law.
Mr. Braley. Well, I brought up the whiskey rebellion for a
very specific purpose, because the truth is we have been
refining corn a lot longer in this Country than we have been
refining petroleum, isn't that true?
Mr. Felmy. Oh, absolutely. There is no question. Worldwide
we have been refining ethanol without gasoline additives for a
long time.
Mr. Braley. And, in fact, frontier farmers, which caused
the whiskey rebellion, were converting corn into grain alcohol
and selling it because it was easier to transport it in that
fashion than in a food commodity fashion.
Mr. Felmy. No question. In fact, if history reminds me, I
think Abraham Lincoln was involved in shipping whiskey across
the rivers at that point, and I think it is also a case that
Henry Ford, one of his original vehicles was designed to run on
ethanol, if memory serves me.
Mr. Braley. That is correct.
Now, one of the things that has happened here in Washington
lately is ethanol is being blamed for a lot of things. It is
being blamed for the rise in rice prices worldwide; it is being
blamed for the rise in food cost and in energy cost. One of the
questions I have for you is do you like to eat corn?
Mr. Felmy. Absolutely. It is one of my favorite vegetables.
Mr. Braley. Good. Well, I had some great----
Mr. Felmy. I love it every summer.
Mr. Braley. Do you understand, Mr. Felmy, that there is a
big difference between the corn you buy in a store and the corn
that is grown in cornfields in Iowa and Illinois and Indiana
that is used to produce ethanol?
Mr. Felmy. Having grown up in central Pennsylvania, I know
the problems you have when you eat the wrong type.
Mr. Braley. It is not a very tasty----
Mr. Felmy. It is not a pretty sight.
Mr. Braley. Exactly right.
Mr. Slocum, one of the things that we have been talking
about here today is how supply and demand affect the actual
price that people at the pump, especially as it relates to the
trucking industry, and I would like you to comment on one of
Mr. Felmy's earlier statements, where he said you either
believe in conspiracy or markets, as explanation of what is
happening right now in the oil market. One of the things that I
have learned from studying history is that usually conspiracies
develop in the absence of appropriate market regulation and
intervention, and I would like you to comment on that as you
see it relating to the problems that bring us here today.
Mr. Slocum. Right. I don't know if I would use the word
conspiracy to talk about some of the anti-competitive issues
that Public Citizen believes exists in America's energy
markets; it is more, as the Federal Trade Commission has termed
them, profit maximization strategies. And there is nothing
wrong with that as long as they are being conducted in a
competitive fashion.
But when you have got an industry like petroleum and oil
and gas that is inelastic in its supply, and you have demand
that is largely inelastic, and you have high levels of market
concentration of producers and refiners, and you have got
unregulated energy trade markets where the prices of these
commodities are set, that opens the door very wide to collusive
and other anti-competitive practices by the industry. And all
Public Citizen is seeking is increased Government oversight
over these important markets. It is bad policy, from our
perspective, to allow energy markets that determine the prices
we all pay in our economy and what we pay at the pump and to
heat and cool our homes, to be set in an unregulated fashion.
We are not talking about Hugo Chavez style intervention here in
the marketplace; we are talking about basic Government
oversight over critical commodities essential to the health of
the U.S. economy.
And when you approve the number of vertically integrated
mergers in the U.S. petroleum industry that we have over the
last decade, thereby reducing the level of effective
competition in key industries like refining, I believe that you
are setting the stage for profits and prices that would be much
higher than if consumers had access to adequately competitive
markets.
Mr. DeFazio. I thank the gentleman for his questions.
Mr. Brown.
Mr. Brown. Thank you, Mr. Chairman. This has been an
interesting discussion, and I hope I am not going to be
redundant in some of my questions, but it has been pretty
interesting, the dialogue that we have been exchanging between
the Members and the panel.
My concern is that as we talk about the demand and we talk
about the supply and we talk about how we are going to do the
markets and how we are going to generate the price, what
concerns me is the vulnerability we find ourselves in, our
economy in the United States, where we are using some 21
million barrels of oil a day and some 62 percent of that comes
from someplace else. And I know we talked about subsidizing oil
companies, and I don't think we do that; that is based on the
research that we must find additional energy, and we are doing
the same thing, I guess, in the other alternative fuels, be it
wind or be it ethanol or whatever else we find out there. So I
think we must look at it as a total picture, not just isolate
one item against the other.
I was impressed when my good friend from Louisiana really
brought some calm and reality to the process by saying that we
have got to get off of the oil glut or whatever we call
ourselves today. So we must find an alternative energy
solution, but we can't do it unless we have cooperation across
the whole spectrum. We cannot reduce our demand for 13 million
barrels of oil a day that we get from outside the continental
United States, a lot of places that don't particularly like who
we are and a lot of it is not stable, like the Nigerian problem
we find ourselves in today. And everything that happens impacts
the oil price, so the consumer has to deal with it.
And I was just doing a little quick calculation, and maybe
some of you guys have got a quicker pencil than mine, but at
the price of oil of $120 a barrel, and we are using 13 million
barrels coming from offshore, we are generating over half a
trillion dollars worth of trade imbalance every year, which is
a major concern as we deal with the price of the dollar and we
are buying oil with the dollar and the Euro is being bought,
which is now $1.57 or something compared to the dollar. So all
of those factors injected in, we have got to become energy
independent in the United States. We not only have to deal with
lack of our own energy supply, but now we have got to compete
in some kind of a monetary market that the dollar is pretty
weak.
So with that being said, Mr. Felmy, do you know whether we
could convert those trucks from diesel to natural gas? Would
that be a major cost to do that?
Mr. Felmy. I would think that it would be a major cost. It
is quite a bit of different combustive thing. I am not an
engineer to give you any specifics, but it would strike me as
being fairly high cost. And then the challenge in terms of
natural gas is that we don't have a lot of excess natural gas.
Our production has been relatively flat; we are relying more
and more on imports, including liquified natural gas imports.
So that would present some other challenges.
Mr. Brown. Well, but you know, just like we do in our
petroleum explorations, we have plenty of natural gas. I know
off the coast of South Carolina. We are not talking about the
beaches. We are talking about 50 miles, even 100 miles off the
coast. There is a tremendous reserve of natural gas, but there
again we are not dealing with that issue.
We need to be proactive in trying to find alternative
energy supplies. We have particular potential for nuclear power
which we are using about 20 percent in the United States, 80
percent of France. We have a lot of catching up to do if we
have the will to do it, and sometimes our energy policy is no
and no is not the answer.
Mr. Felmy. I think the National Petroleum Council clearly
said exactly that, that we are going to need all forms of
energy. We are going to need energy efficiency, and all too
often things are taken off the table before you have a real
opportunity.
There is an excess of 600 trillion feet of natural gas that
is estimated that you could produce, much of which is off
limits. The Marcellus Gas Shale Play in my area of Pennsylvania
is an exciting opportunity. There is a host of resources we
could develop.
Mr. Brown. Right. Well, Mr. Chairman, thank you for holding
this hearing and thank you for this exchange.
Mr. DeFazio. I thank you, Mr. Brown.
Mr. Space.
Mr. Space. I yield, Mr. Chairman. Thank you.
Mr. DeFazio. Okay. Mr. Duncan.
Mr. Duncan. We need to get on to the second panel, so I
thank the witnesses for being with us. Thank you.
Mr. DeFazio. Okay. I will just ask one last question. I am
just curious. We visited the refinery issue, and we heard that
last year refineries were very profitable. This year,
refineries are theoretically losing money.
But I guess the question is if Exxon Mobil is a fairly
major refinery, if they almost beat their quarterly record
profit for the largest corporate quarterly profit in the
history of the world, and they are losing money on refining,
where does the money come from?
Mr. Todd. From the oil and gas production side of the
business.
Mr. DeFazio. Okay. So, basically, if you are vertically
integrated, maybe in certain years you can make the money over
here with squeezed refinery capacity and the concentration in
refining and, in other years, you are going to make the money
over here in the production side. Vertical integration is a
great thing that way, right?
Mr. Todd. Yes. To a certain extent, it provides a type of
natural hedge.
Mr. DeFazio. Not to the particular source maybe.
Mr. Todd. It provides a type of a natural hedge for a
company, correct, but it doesn't always work out that way. In
the late nineties, nobody was making very much money on
anything, upstream or downstream.
Mr. DeFazio. Right. Well, I doubt we are headed back to the
nineties, particularly looking at Goldman Sachs, but I can
agree with you. I hope they are wrong, but I am sure they did
very well today because if they are going to put the report out
today. I would love to see what their positions in the market
were yesterday.
I thank all the members of the panel for your forbearance.
This went on longer than we expected, but we will go to the
next panel. Thank you very much.
I am going to take a one minute break. The next panel can
get set up.
[Recess.]
Mr. DeFazio. All right. We are going to move on now to our
second panel.
I guess referring back to the first panel, when we talked
about upstream-downstream, you folks are the downstream portion
of this issue. You are getting to deal with the high prices. I
am not certain we convinced anybody or illuminated too much,
but I thought it would be useful just to have some discussion
of some of the causes of high prices and some potential ways to
address it.
We are going to go now to panel two. We will go first to
Ms. Suzanne Te Beau from the Federal Motor Carrier Safety
Administration, Department of Transportation.
Ms. Te Beau.
TESTIMONY OF SUZANNE M. TE BEAU, CHIEF COUNSEL FEDERAL MOTOR
CARRIER SAFETY ADMINISTRATION, U.S. DEPARTMENT OF
TRANSPORTATION; TODD SPENCER, EXECUTIVE VICE PRESIDENT, OWNER-
OPERATOR INDEPENDENT DRIVERS ASSOCIATION; MIKE CARD, PRESIDENT,
COMBINED TRANSPORT; ROBERT A. VOLTMANN, PRESIDENT AND CEO,
TRANSPORTATION INTERMEDIARIES ASSOCIATION; AND WAYNE JOHNSON,
DIRECTOR OF LOGISTICS, AMERICAN GYPSUM COMPANY
Ms. Te Beau. Thank you. Good afternoon, Mr. Chairman,
Ranking Member Duncan.
I am the Chief Counsel for the Federal Motor Carrier Safety
Administration and am here today on behalf of Administrator
John Hill who was not able to attend. I have been asked to
provide background on the agency's jurisdiction over interstate
property brokers.
For FMCSA's purposes, a broker is defined as a person other
than a motor carrier or an employee or agent of a motor carrier
that sells, offers for sale, negotiates for or holds itself out
by solicitation, advertisement, or otherwise as selling,
providing, or arranging for transportation by motor carrier for
compensation. Generally, brokers are transportation
intermediaries who procure the services of motor carriers to
transport property.
Historically, Federal oversight of brokers has been limited
primarily to ensuring that brokers register for authority,
provide evidence of financial responsibility, and designate
process agents for service.
Brokers arranging for transportation of property in
interstate commerce were first regulated by the Interstate
Commerce Commission in 1935. Brokers were required to obtain
operating authority from the ICC and meet financial
responsibility and other regulatory requirements.
The ICC Termination Act of 1995 continued the registration
requirement if the broker is fit, willing, and able to provide
the service, comply with applicable regulations, and continued
the financial responsibility requirement. The brokers must file
evidence of financial responsibility such as a surety bond or
trust fund agreement.
However, ICCTA transferred oversight of these requirements
to the Department of Transportation where they were delegated
to the Federal Highway Administration.
With the enactment of the Motor Carrier Safety Improvement
Act of 1999, which established FMCSA, oversight of this
authority was then transferred to our agency. MCSIA, however,
did not amend any of the broker statutory or regulatory
requirements, but did reemphasize that the primary mission of
FMCSA was safety.
In 2005, Congress enacted SAFETEA-LU, which addressed
broker requirements. Specifically Section 4142(c) of SAFETEA-LU
continued the registration requirement for brokers of household
goods. However, it amended the law to provide the Secretary
discretion to continue to register brokers of non-household
goods if the Secretary finds that such registration is needed
for the protection of shippers.
FMCSA believed it was in the best interest of shippers to
continue registering all brokers. In August 2006, the Agency
published a notice in the Federal Register finding that
continued registration of non-household goods brokers is needed
for the protection of shippers. As a result, property brokers
remain subject to both registration and bond requirements.
SAFETEA-LU added requirements specific to households goods
brokers designed to better educate shippers who use the
services of such brokers by requiring the distribution of key
information regarding the moving transaction. The statute
increased existing penalties or created new penalties for
certain household goods broker infractions.
In addition to these statutory requirements, property
brokers are subject to a number of regulations found in Title
49 of the Code of Federal Regulations. Regulations primarily
found in Parts 371 and 387 contain record-keeping and
accounting requirements and prohibit misrepresentation and
rebating, impose broker financial responsibility requirements,
require brokers to preserve records, and establish procedures
for designating process agents.
Under the Household Goods Consumer Protection Regulations,
a broker of household goods is prohibited from providing an
estimate before it has an agreement in place with a carrier
evidencing that the carrier has adopted the broker's estimate.
To implement Section 4212 of SAFETEA-LU and provide
additional protections to individual household goods shippers,
in February 2007, the agency published a notice of proposed
rulemaking proposing a separate sub-part of Part 371
regulations applicable only to household goods brokers. The
NPRM proposes to raise the minimum surety bond or trust fund
for household goods brokers to $25,000. We anticipate
publishing of this final rule in 2009.
In order to obtain authority to operate as a broker,
applicants must register and be granted operating authority. A
prospective broker is required to file an application to
request authority to become a broker.
Upon completion of the filing, as is the case with motor
carrier applicants, notice of the application is published in
the FMCSA Register and there is a 10-day period to allow for
protests.
Before broker authority is issued, the applicant must also
file evidence of a surety bond or trust fund to meet the
financial responsibility requirements and a form designating
its process agents. The purpose of the surety bond or trust
fund agreement is to ensure that the transportation the broker
arranges is provided. In other words, it is designed to protect
shippers who pay brokers who do not meet their obligation to
arrange for transportation service or to pay the motor carrier
who does not receive payment.
As to enforcement, FMCSA's oversight efforts are integrated
with other aspects of the agency's enforcement program.
Following a grant of authority, FMCSA monitors the status of
the brokers' surety bond or trust fund agreement through its
licensing and insurance data system, which is also accessible
to law enforcement and the general public from the FMCSA web
site.
As with other areas of commercial regulations, FMCSA field
investigations are complaint-driven. Many of the complaints we
receive regarding brokers are outside the scope of our
jurisdiction. These types of complaints usually concern
contractual disputes for which a private right of action is
available to the complainants.
When we receive complaints that do fall within the scope of
our authority, we generally respond with a field investigation.
Mr. Chairman, this concludes my brief summary of FMCSA's
statutory and regulatory authority over interstate property
brokers. I would be pleased to answer any questions.
Mr. DeFazio. Thank you, Ms. Te Beau.
We would now turn to our next witness. I want to make sure_
they gave me a different order here_I have the order right,
yes. It would be Mr. Todd Spencer, Executive Vice President,
Owner-Operator Independent Drivers Association.
Mr. Spencer.
Mr. Spencer. Good morning, Chairman DeFazio, Ranking Member
Duncan, distinguished Members of the Subcommittee. I am very
pleased to be here to testify today on this extremely important
issue to small business trucking and the nation.
As you know, the trucking industry plays a vital role in
our Nation's economic well-being. Small businesses comprise a
vast majority of this industry in the United States.
Approximately 96 percent of motor carriers have fleets of 20 or
fewer trucks and 87 percent operate just 6 or fewer trucks.
This is very much a small business industry, and the cost
of fuel is very often the largest operating expense with which
small business truckers must contend. For them, fuel costs can
easily be 50 percent or more of their total operating expenses.
To say the least, small business truckers are severely
impacted by current prices at the pump. They are experiencing
unprecedented operating cost increases and are being forced to
make tough decisions in the name of saving their businesses and
providing for their families. Thousands have parked their
trucks or gone out of business in the past year alone.
Without the services small business truckers provide the
price of goods will dramatically increase and undoubtedly add
to our Nation's economic woes. That is precisely what happened
prior to the last recession in the year 2000 when more than
250,000 trucks were repossessed due to business failures.
A recent report estimated that 935 American trucking
companies went out of business in the first quarter of this
year. The report estimates those businesses operated
approximately 42,000 trucks and accounted for roughly 2.1
percent of the Nation's over-the-road heavy-duty truck
capacity. While this data was shocking, it wasn't even the
complete picture since this data doesn't include the numbers
for those with five or fewer trucks that also failed.
Every day at our headquarters in Missouri, we hear from
truckers who have recently lost their businesses, and the
overwhelming majority cite the inability to recoup increased
fuel costs as a primary contributing factor to their failures.
This morning, the AAA calculated the national average
retail price of diesel at an astonishing $4.24 per gallon which
is actually down a penny from its historic high just last week.
That is more than $1.30 higher than last year at this time.
Unfortunately, the Department of Energy predicts that
diesel prices will continue to rise. To put this into
perspective, each time the price of fuel increases by 5 cents,
a trucker's annual costs increase by roughly $1,000. This is an
enormous burden on the small business trucker whose average
annual income is around $38,000.
Throughout the history of the trucking industry, the only
viable marketplace solution to erratic and rising fuel prices
has been the application of a fuel surcharge. With diesel
prices consistently going up, shippers are paying more now in
fuel surcharges to get their freight moved than ever before.
But due to the dynamics of the industry and the lack of
regulatory oversight, middle men often hold all the cards and
are able to exploit shippers as well as truckers particularly
when it comes to surcharges. Most shippers do not realize that
the surcharges they are paying aren't necessarily going through
to the trucker who is paying for the fuel to move their
freight.
Collecting fuel surcharges and not passing them through to
whoever is paying the associated fuel cost is simple fraud. It
is a common practice in the trucking industry, and it has a
devastating impact on small businesses.
To hide their tracks, unscrupulous brokers and their
representatives make outrageous claims about massive litigation
and economic re-regulation whenever sunlight gets close to
being shown upon some of the trucking industry's normal
practices and realities that have been created.
Unfortunately, FMCSA as the only Federal agency with
jurisdiction over the registration and oversight of freight
brokers does little, if anything, to rein in unscrupulous
brokers or their activities. FMCSA seldom responds to
complaints about brokers and, to my knowledge, never takes any
action against them.
Small businesses are truly the backbone of our Nation's
economy. Their economic health is necessary if a stable
trucking industry is to be available in good times and in bad
to move freight across the Country. If we do not find ways to
help them soon, I have no doubt that we will see greater
disruptions in the movement of our Nation's commerce and a
further worsening of our Nation's economy.
Thank you for the opportunity to share our views today. I
will be happy to answer questions.
Mr. Duncan. I asked the Chairman if I could get one quick
clarification. You said 935 companies went out of business in
the first quarter and 87 percent of the companies had 6 or
fewer trucks, but the 935 did not count the companies that had
5 or fewer trucks. So there could have been hundreds of more?
Mr. Spencer. I am confident there were. You know the other
figure.
The actual numbers between 2000 and 2002 when we saw the
last run-up in fuel prices were that a quarter of a million
trucks actually ended up being repossessed. I mean that is how
many that went back on the market. The economics of that and
the economics overall is what precipitated the recession then.
Mr. Duncan. Well, I didn't want to go into that.
Mr. Spencer. Sure.
Mr. Duncan. Those are shocking figures. I wanted to make
sure I had it straight. Thank you.
Mr. DeFazio. I thank the gentleman for his clarification.
We would now turn to the next witness. Mr. Mike Card,
President, Combined Transport, Central Point, Oregon, welcome.
We appreciate your being here today and the long trip. I know
how long it is.
Mr. Card. Thank you, Chairman DeFazio and Members of the
Subcommittee.
My name is Mike Card. I am the President of Combined
Transport, a family owned and operated trucking company located
in Central Point, Oregon.
Today, I appear before you not just for my company but also
the American Trucking Association who has 37,000 members,
trucking companies and affiliates.
Each year, the trucking industry consumes over 39 billion
gallons of diesel fuel. This means that a 1 cent increase in
the average price of diesel costs the trucking industry an
additional $391 million in fuel expenses. Today, it costs me
approximately $1,200 to fill one truck.
The dramatic increase in the price of diesel combined with
the downturn in the economy jeopardizes the survival of many
trucking companies. In the first quarter, as was just
mentioned, over 1,000 trucking companies failed, and this was
the largest number since 2001.
My family built and grew Combined Transport over the past
30 years, and today we operate more than 400 trucks and employ
over 500 individuals. My company purchases approximately 25,000
gallons of diesel fuel daily, and this recent escalation in the
price of fuel costs me an additional $4 million a year. It is
harmful to my company, the trucking industry and the U.S.
economy.
I am a specialized carrier. We haul specialized
commodities, building materials, heavy equipment, windmill
towers, transformers.
Thirty-five percent of my miles that my fleet travels are
empty miles. We are not hauling a load. We are returning empty,
and I do not have a customer to pay for the fuel on those miles
or my costs. While this is often built into the rates we
charge, the rapid escalation in the price of diesel fuel has
turned profitable contracts that I negotiated in October to
unprofitable obligations in May because I don't have enough
money built in for my costs.
Against this backdrop, we greatly appreciate the
opportunity to discuss actions that Congress can take to help
address the soaring price of diesel fuel. So there are three
initiatives that I would like to discuss that will help reduce
the trucking industry's consumption of diesel fuel. First is
auxiliary power units, APUs, which will reduce idling; the
second is speed limits; and the third is the EPA's SmartWay
program.
The first issue, idle reduction, is a very important part
because our drivers live in the trucks when they are away from
home. They don't idle because they want to. They idle out of
necessity, and the idling is necessary to maintain the sleeper
compartment's comfortable temperatures and other uses.
APUs can save up to one gallon of fuel per hour and
substantially reduce emissions and greenhouse gases.
There are three major barriers that stand in the way of
trucking companies purchasing APUs for their daily use. First
is the actual cost of the devices themselves. They cost about
$10,000. It is really unaffordable today to put that much money
out for every truck when the economy is tough.
There is also the weight problem that we have. These units
weigh about 400 pounds, and it takes away from our cargo
carrying capacity. Congress passed an exception to the
additional weight, but not all States have taken that
exception, and there is only about seven of them that have.
Finally, there is a 12 percent Federal excise tax on
purchasing APUs. It shouldn't be there. It shouldn't be part of
the transportation usage for idling.
The other big thing that we should do is we should control
speed. Congressman Young mentioned the embargo problems we had
in the seventies. We reduced the speed limit to 55 miles an
hour back then.
We think that we need to reduce speed to 65 miles an hour
for all vehicles because there is a direct correlation to speed
and fuel use. For example, a truck traveling at 65 miles an
hour can achieve about 6 miles per gallon. A truck traveling at
75 miles per hour only achieves 5 miles a gallon.
So, in addition to the fuel conservation benefits, we are
confident that this measure will reduce truck-related accidents
on our Nation's highways as well.
The third issue is the EPA's SmartWay program. EPA's
SmartWay program of which my company is an authorized member is
a voluntary program patterned after the highly successful
Energy Star program. It encourages trucking companies to
improve their fuel efficiency by creating market-based
incentives to reduce fuel consumption through the use of super
single tires, better aerodynamics, APUs and other technologies.
It looks like Congress might be trying to cut the cost of
that program. We think that is an important program.
So, even though I am not here to physically shake up
Congress, like Congressman Mica mentioned, I am here to ask for
help. Thank you for allowing me to come before you and thank
you.
Mr. DeFazio. Thank you, Mr. Card.
We would now turn to Mr. Robert Voltmann, President and
CEO, Transportation Intermediaries Association.
Mr. Voltmann. Thank you, Mr. Chairman.
TIA is the professional organization of the $162 billion
U.S. third party logistics industry. All TIA members adhere to
the only mandatory code of ethics in the transportation
industry. Transportation intermediaries 3PLs act as travel
agents for freight.
They serve tens of thousands of shippers and carriers,
bringing together the transportation needs of those shippers
with the corresponding capacity and special equipment offered
by motor, rail, air and ocean carriers. ThreePLs get to know
the shipper's business and tailor a package of transportation
services to meet those needs.
ThreePLs have two customers in every transaction:
For their shipper customer, the 3PL brings expertise,
significant and sophisticated software resources, relationships
with thousands of carriers, insurance coverage, claims
management, carrier screening and carrier payments.
For their carrier customers, 3PLs bring equilibrium to
equipment imbalances, provide small carriers with access to big
shippers, provide carriers with an active sales force in every
market, manage the relationship with the shipper and even
assume the shipper's credit risk for the carrier.
It is a total fabrication to state that 3PLs are profiting
from fuel surcharges. In truth, due to the dynamic nature of
the 3PL carrier contracts and the more static nature of the 3PL
shipper contracts, 3PLs are paying trucking companies more
money when fuel spikes occur than the fuel surcharges they
actually receive from shippers. As fuel costs increase, 3PLs
have to pay more or the carrier will not haul the load.
TIA members report that their profit margins have declined
10 percent since early 2007 versus 2008 because of the rising
fuel costs and weak economy. This is the direct result of 3PLs
paying their carriers more for fuel than the 3PLs receive from
the shipper.
The trucker alone decides how much money they need to
profitably handle a specific shipment on a specific day, and
they are never forced to take a shipment. Regulation is not
necessary.
As I stated earlier and is detailed in our written
submission, shippers and 3PLs are paying fuel surcharges to
carriers, sometimes at a loss to the 3PL. All carriers are free
to accept or reject any load. If the shippers and 3PLs were not
paying fuel surcharges the carriers wouldn't take the freight.
We believe that the Truck Act will essentially return the
industry to tariffs and, if enacted, every broker, forwarder
and carrier would have to detail their income on every load. In
no other American business has Congress so repudiated
deregulation and private enterprise.
Disclosure requirements would return the industry to the
nightmare of lawsuits not seen since the undercharge crisis of
the 1990s. If enacted, we believe that the Truck Act would also
give shippers and 3PLs a strong incentive to avoid disclosure
of their margins and the exposure to lawsuits under the Act by
avoiding altogether the use of carriers that utilize owner-
operators, and such a result would have a devastating effect on
the very people this proposal is supposed to help.
Mr. Chairman, the members of TIA urge this Committee to
maintain a free and open market in transportation.
Thank you.
Mr. DeFazio. Thank you.
Now, we would turn to the last witness, Mr. Johnson.
Mr. Johnson. Thank you, Mr. Chairman, Members of the
Subcommittee.
I am Wayne Johnson, Director of Logistics for the American
Gypsum Company in Dallas, Texas. I am representing today,
though, the National Industrial Transportation League with more
than 600 members that ship their products by all modes of
transportation including motor carriers. I am also the Chairman
of the League's Highway Transportation Committee.
League members are well aware that diesel fuel prices have
increased significantly. According to the EIA, the national
average diesel price of fuel this last week was $4.14 a gallon,
an increase of $1.33 since a year ago and more 62 cents in the
last two months.
Obviously, this rapid increase represents a challenge to
all sectors of the freight transportation community.
Fortunately, the transportation industry has the tools to meet
this challenge.
Over 25 years ago, Congress deregulated the motor carrier
industry in order to free the industry from outdated,
unnecessary government regulations. That policy has been a
spectacular success and has resulted in a strong, innovative,
efficient and highly responsive motor carrier industry.
The system depends upon a complex set of individually
negotiated, market-driven confidential contracts. This system
is flexible, efficient and, because these agreements are
negotiated in a highly competitive and dynamic environment,
these agreements are extremely responsive to changes in market
conditions, including the price of fuel.
For years, the shippers have created fuel surcharge
programs within their confidential agreements with their
carriers. They reflect the differing conditions under which
each shipper operates.
Some shippers have a specific fuel surcharge provision in
their agreements often based on national indexes. Others prefer
to roll changes in fuel prices into the rate so that they pay a
flat rate for all inclusive charges. Thus, there is no right
answer to the question of what a fuel surcharge should be or
even whether a separate fuel charge should be included in a
confidential motor transportation agreement.
For many shippers, fuel costs are the responsibility of the
trucking company. It is protected by the fuel surcharge
mechanism which it negotiates with its shippers.
In other cases, the trucking company employs the services
of an independent operator which typically is responsible for
the cost of fuel. The independent operator has the same
opportunity and responsibility to negotiate fair compensation
from the trucking companies with which they do business as
trucking companies have when they enter into agreements with
shippers.
This is a competitive system. Shippers, brokers, carriers
can enter into and exit this market freely, participating on
terms that they can negotiate in light of market conditions.
Competition is made possible by the fact that these agreements
are confidential and no party is forced to disclose its
economic interest to the other.
Legislation has been introduced, S. 2910 and H.R. 5934,
that would require a motor carrier, broker or freight forwarder
to provide to a person who bears the cost of fuel a payment in
the amount equal to the charges invoiced which relate to the
cost of fuel. That person would also have to provide a written
list that specifically identifies any freight charge, broker's
fee or commission, fuel surcharge or adjustment or other
charges.
Finally, the proposed legislation would forbid a person to
cause a motor carrier, broker or freight forwarder to present
false or misleading information in an oral representation about
a rate, charge, or allowance.
The League strongly opposes this proposed legislation. This
bill would substantially undermine the current competitive
system by forcing one party to reveal to the other its
confidential business information. This would be an
unprecedented, unnecessary, unwarranted intrusion into the
workings of a competitive market and would likely harm
competition.
The proposed legislation would also be likely to spawn
substantial litigation as one party tries to prove whether
another caused false or misleading information in an oral
representation. This type of ``he said, she said'' litigation
would be almost impossible to resolve and would do nothing more
than provide a windfall to the litigation bar.
At bottom, this proposed legislation would undo the highly
successful competitive market that the Congress has
successfully created in the motor carrier industry.
In sum, the League is strongly opposed to these two bills
and believes that the current system of confidential contracts
appropriately provides for the needs of all sectors of the
transportation marketplace.
I would be pleased to answer any questions you may have.
Mr. DeFazio. Thank you.
We are going to try. The Republicans are in a bad mood
today, so we are having some procedural votes. We will see how
far we can get with the first round of questions.
To Ms. Te Beau, I just want to clarify the law a little bit
here when it talks about parties. Each party to a broker
transaction has the right to review the record of the
transaction required to be kept by these rules.
In the logistics journal of TIA, they have a statement that
says nothing in the statute or regulation requires you to send
the information. You only have to make them available, make the
information available in your office during normal business
hours. That is part of the question.
They also say that if the carrier shares the information
from the accounting, you may have an action against them, i.e.,
a carrier who employs independent truck drivers, the TIA is
saying they may have an action against them.
Then the third part of the question is what is a party,
because if the independent trucker working for the carrier is a
party, then I don't believe TIA would be accurate in their
assertion.
Could you address those?
Ms. Te Beau. I can try, sir.
With regard to the first part, I assume that you are
referring to our regulations under Part 371 for the record-
keeping requirements.
Mr. DeFazio. Yes.
Ms. Te Beau. With regard to whether they have the right to
only come and see the information onsite, the regulations do
not address that specifically. I would have to look at that. I
do not think we have had any complaints specifically on that.
Mr. DeFazio. Okay. There is nothing that would preclude a
rulemaking that would say that they have to transmit the
information as opposed to making someone travel to their place
of business during those working hours in order to get
information which they are lawfully entitled to.
Ms. Te Beau. Are you asking if the regulations preclude an
interpretation that way or preclude a regulation that way?
Mr. DeFazio. Preclude a regulation, there is nothing that
would preclude your enhancing the regulation.
Ms. Te Beau. Not that I am aware of.
Mr. DeFazio. Okay. Then how about party? What is a party in
the case that we refer to here?
Ms. Te Beau. It is not defined under the regulation, but I
would think that would be a party to the agreement that is
made. So it would be, I guess, a broker and the motor carrier
or, if it is an owner-operator contracting with the broker.
Mr. DeFazio. So you are saying that if a carrier contracts
with the broker and then I enter into an agreement with the
carrier, I am not entitled to any transparency about the
transaction between those two?
Ms. Te Beau. I am saying our regulation says party, and you
are asking the definition of a party. That is the way I am
reading it on its face.
Mr. DeFazio. Right. Okay. How about cause of action if a
carrier is good enough to share its information?
Since we are talking about market forces and free markets.
I don't know how many people have read Adam Smith. I did. I had
to struggle through it. You know he talks about the amount of
information that has to be made available.
In this case, we have total opacity. We determine the
charges in a very complicated way to the shippers, and then we
pay the carriers in a different way, particularly the
independent carriers. My question is if a carrier shared that
information, what would be the cause of action?
Ms. Te Beau. I do not understand there to be a cause of
action. I am not clear what the cause of action would be.
Mr. DeFazio. Okay. Well, because they were so concerned
about lawsuits, I was just concerned about them filing lawsuits
against people who actually obtain market information. I was
just kind of curious about that.
Mr. Spencer, you look like you want to say something there.
Mr. Spencer. I just find it really, really curious that the
organization that says all of their members have a mandatory
code of ethics and their memos that they send out to their
members are basically an instruction on how to circumvent what
has been the law since the 1960s. This is current law, and this
is how we circumvent it because, for God's sake, we don't want
to comply because this might screw up a free market.
Mr. DeFazio. To Mr. Voltmann, I guess I question what is
the problem with transparency?
Did you ever read Adam Smith? Do you understand how markets
are supposed to work? People are supposed to have some
information.
Mr. Voltmann. I do understand Adam Smith. In a transparent
and free market, transparency comes not from privity of
contract but from public information.
There are 20,000 licensed property brokers in the United
States. The largest single company in the United States
represents less than 5 percent of the market. It is the most
diverse industry, I think, you can find in the United States.
The privity of contract--and the ICC never challenged
this--these are regulations that go back, as Mr. Spencer said,
to the 1960s. We don't believe that it does anyone any good to
know what the broker has negotiated its margin with the
shipper.
Mr. DeFazio. Doesn't that create a more competitive market?
I mean suddenly people say: Gee, it is all on the internet.
I can figure out. Gee, I see what they paid. I am going to try
to negotiate a better deal over here.
Gee, I see what they paid. I know now, gee, I can maybe
raise my price a little as an independent trucker who is going
broke and can't afford the fuel on the run that they have been
assigned.
They are told, oh, they can choose. They can pick and
choose. They have to pay for the truck. They have to keep
moving.
Wouldn't everybody benefit? Wouldn't this be great to have
a totally transparent market so both the truckers could be more
competitive and the shippers could be more competitive and the
brokers could be more competitive?
Mr. Voltmann. Again, Mr. Chairman, transparency in a free
market comes from public information.
Mr. DeFazio. Right, and this could be posted on the
internet. It could be public.
Mr. Voltmann. It is posted. It is public, what rates are
being offered by brokers, what rates are being sought by
carriers on publicly open exchange boards, hundreds of
thousands of loads and transactions. This is a very crazy and
diverse market without any equilibrium.
Mr. DeFazio. But how are the charges established?
Mr. Voltmann. The charges are out there, what people
actually pay.
Mr. DeFazio. Established, how they are established,
including the fuel charges, that sort of thing?
Mr. Voltmann. It really depends on what the carrier asks
for.
Mr. DeFazio. Okay. So then what is the reference in the TIA
newsletter to cause of action if a carrier shares the
information from the accounting? What is that about?
Mr. Voltmann. We believe that the regulations provide for
that carrier to see an accounting on its load but not to share
privity of contract or in violation.
Mr. DeFazio. The load isn't actually up on the internet?
People don't actually see what is paid for the load? It is a
confidential contract?
Mr. Voltmann. It is confidential.
Mr. DeFazio. So there is all this stuff up there, but it is
not what was really paid for particular loads.
Mr. Voltmann. There are.
Mr. DeFazio. How do we establish that baseline? How do you
know?
Mr. Voltmann. In a competitive market, Mr. Chairman, it is
established, one, by the market and, two, by companies and
organizations that track pricing and post average price per
load, average loads available in a particular market.
Mr. DeFazio. So, basically, you are just saying that the
independent truck drivers are just not conversant enough with
the internet and they should have laptops in the cab and be
tracking all this stuff.
Mr. Spencer, can you comment on that?
Mr. Spencer. Well, certainly that would be ideal, but still
we haven't got to the disclosure that really is the core of the
issue. I actually brought an example that is illustrative of
how unbalanced the field is and how the lack of information can
really get exploited to the Nth Degree, and it shows off the
difference where the parties are, the disparity of the
difference in the parties.
I notice in the comments regarding how well brokers are
doing that the economic end result has been their margins have
been squeezed a little bit.
In my comments, it was in essence there were roughly 1,000
trucking companies with 45 or more trucks that went out of
business. I mean this is real. This is a real economic squeeze.
Getting to the core of the question here, one specific
example where a shipper paid $1,425 to have their goods moved.
In addition to that, they paid $342 in a fuel surcharge for
that, assuming that that surcharge was going to the person who
paid for the fuel, that actually expended for the fuel.
The trucker that moved the load got 600 bucks. That was an
all inclusive rate, 600 bucks, which basically means the broker
didn't spend a dime on fuel, took the $1,767 total, paid $600.
They netted $1,167. Our trucker grossed $600 and had all of the
expenses out of that.
So it is not a surprise to me why these folks aren't having
their margins squeezed; they are going out of business. That
will continue to happen until there is a disclosure that is an
actual practice, not just simply required in the laws from the
sixties and hopefully required again when Congress is done.
Mr. DeFazio. Okay. I hate to do this because we have been
here a long time today already. Mr. Duncan, Ms. Hirono, I am
not quite done, and we do have these three votes. They should
go relatively quickly.
The first one is a motion to adjourn, and then I don't know
what the second is. Then the third vote is actually
substantive. But it should all be done, hopefully, unless they
have other procedural votes. Well, within five minutes of the
last vote, I will be back here and would urge other Members to
be back here.
I can't quite predict when that will be. Hopefully, just to
give everybody a little break, let's say five after 1:00. That
way, you can go grab a soda or something like that.
Thank you. I thank you for your forbearance.
[Recess.]
Mr. DeFazio. We will come back to order.
We are kind of between votes here, and they are going to
swear in a new Member, et cetera. So we are going to try and at
least move through my part of the questions. When Mr. Duncan is
able to return--Ms. Hirono and Mr. Michaud said they have
questions--we will be able to get you out of here.
Again, I regret this is not an efficient institution here.
I guess I would like to ask for the shipper witness, Mr.
Johnson, we heard a good deal from Mr. Voltmann about how
everything has been. Can shippers go online and see how much
other shippers are paying to move their product?
Mr. Johnson. No, we cannot.
Mr. DeFazio. No. Okay.
Mr. Johnson. You cannot. You don't know exactly what they
are paying, no.
Mr. DeFazio. Okay. Then as a shipper, would it disturb you
that a part of the rate that is being charged includes, as we
heard from Mr. Spencer, a significant fuel surcharge?
Would shippers feel concerned that they are paying a higher
rate ostensibly to defray the high cost of fuel, but that isn't
being passed through?
Mr. Johnson. No.
Mr. DeFazio. That wouldn't concern shippers?
Mr. Johnson. We are just interested in the competitive
rates that we need at the time. As long as we feel the rate is
competitive, that is what we are looking for depending on the
circumstances.
Mr. DeFazio. Right, competitive, but you don't know what
other people are paying, and you don't know whether the fuel
surcharge is an excuse to charge you a higher rate or whether
it is actually being passed through to the carrier. But that
doesn't matter?
Just competitive means you set a price that you think you
can pay and you try and find someone?
Mr. Johnson. The circumstance of the shipment will
determine what price we need to pay for that shipment. It may
change from day to day.
Mr. DeFazio. Now, Mr. Spencer, that information you gave to
us, how did that particular trucker get that information?
Mr. Spencer. He was able to get the information after the
fact. The curious thing that I didn't mention about this load
previously is this is a government shipment that he moved that,
again, the disparity in what he received as opposed to what the
broker collected.
The characteristic of every government shipment is there
will be a government bill of lading that will clearly list that
information on there, that will also clearly list the fuel
surcharge. I mean to not share that with the trucker is a
conscious decision absolutely not to do it, but if you pursue,
you can find it out after the fact.
Mr. DeFazio. If you can what?
Mr. Spencer. If you can pursue, many times you can find out
what a government bill of lading was after the fact.
Mr. DeFazio. So that is why this shipper was able to find
out through the Freedom of Information Act or somehow what the
government contracted for or is this a case where the
independent trucker directly contracted with the broker and
therefore was entitled?
Of course, they aren't entitled to information on the other
end, are they? They are never entitled to that information
Mr. Spencer. Well, actually, the regulations, again the
current regulations do say that this information is to be
provided to any party to the transaction, any party. I think
that is clear. They should have been entitled to that
information, but they won't get that information from the
broker because that is a regulation they don't comply with.
With a government load, if you persist hard enough, you can
generally find somebody that will give you the information, and
I think that is what happened in this instance.
Mr. DeFazio. So, party, once I asked Ms. Te Beau about
party. Do you have an opinion on what a party is?
If an independent trucker contracts with a carrier who has
contracted with a broker, is the trucker a party or are they
just excluded from any of it?
Mr. Spencer. Oh, in my opinion, clearly they are a party.
Actually, from a real perspective, they are the key party in
that if they don't perform, if they don't deliver the goods, if
they can't pay for the fuel, obviously no transportation
service actually takes place.
Mr. DeFazio. But we have heard they are free to reject
loads, et cetera. I mean those arguments. Is there a reality
out there?
Mr. Spencer. The reality is you may very well be in a truck
stop in Portland, Oregon, and you have been there for three
days and various brokers post loads on load boards. Maybe they
are calling you because they have your phone number, offering
these various loads, and it is early.
It is early in the week, and the loads are, for example,
typical of the one that I mentioned. The load actually paid
$1,767. They offered the trucker $600. As long as there is no
urgency on the part of the broker to actually get this load
covered, they have all the latitude in the world to actually
shop this load downward.
As the load gets later in the week, then the urgency may
rise just a little bit. Well, we will give this guy another
couple hundreds bucks to get the load moved.
Now, bear in mind, the way this situation works not only
disadvantages the trucker from an economic standpoint but also
has impacts on other things as well. Here, we have a shipment
that has a whole week to move, but it doesn't move until the
very last minute because they haven't been able to find
somebody to haul it cheap enough.
Well, this impacts all kinds of other safety regulations
that are directly related to how quickly a load can move. It
affects speed limits. It affects hours of service compliance.
These things, no matter what you may say, are always going to
be intertwined. Economics impacts highway safety, and pressure
impacts highway safety.
To say that hey, look, we benefit greatly from this free
market approach and that is the way it ought to be sort of
ignores reality.
Mr. DeFazio. Mr. Voltmann, just sort of a housekeeping
thing because I am a bit confused by your testimony, on page
three, you say, the 3PL pays a carrier within hours of delivery
even though the cargo shipper may take up to 30 days after
delivery to pay the 3PL. That is because credit agencies are
tracking and they track on days to pay, nonpayment complaints,
et cetera. No one wants to have a negative credit rating.
But then on page eight of your testimony, you say typically
the carrier pays its fuel surcharges to the date the load is
booked, say, $3.00 on April 1st. The load might actually move,
however, on April 10th when fuel costs $3.25. The carrier will
receive the money for that load on May 8th when he is paying
$3.75 for the fuel.
I had a little trouble. At the front there, we are saying
they are paid within hours, and here that would seem to be
several weeks.
Mr. Voltmann. Mr. Chairman, it is a dynamic market.
Mr. DeFazio. But I mean the original assertion is, say,
overly global. Would you admit that they do not pay the carrier
within hours because in some cases it is more than three weeks
since you used that example?
Mr. Voltmann. No, Mr. Chairman.
Mr. DeFazio. No? Okay.
Mr. Voltmann. What I said was that the 3PL can pay the
carrier within hours. They do pay.
Mr. DeFazio. It says this is because the 3PL pays the
carrier within hours. You left out, I guess, the word, can. I
will add it right there, ``can'' pay the carrier within hours.
Would that be correct?
Mr. Voltmann. Yes.
Mr. DeFazio. Okay. They can pay, but they can take up to a
month or so.
Mr. Voltmann. Right, and the average days of pay for
shippers to brokers is about 65 days after the cargo is
delivered. So the carrier is not waiting those 65 days for
payment. They can receive within hours if that is what they
want or within 30 days.
Mr. DeFazio. Right. I just was puzzled at the contrast
there.
Mr. Voltmann. Okay.
Mr. DeFazio. Now, you are talking about the tough times for
the 3PLs and that some are losing money. It is kind of like the
discussion we had with the fellow representing the Petroleum
Institute where he talked about, well, if you look sales, their
percentage on sales is down.
Of course, Exxon Mobil just had the second largest
quarterly profit in the history of the world, but you can say
their profitability is down too. They didn't have the most
profitable quarter in the history of the world.
But you are saying the margin declined 10 percent during
the first quarter compared to the first quarter of 2007: ``C.H.
Robinson Worldwide, the largest 3PL in the United States,
reported that its margin declined 10 percent during the first
quarter compared to the first quarter of 2007. The reduction in
margin is a direct result of their receiving less revenue from
shippers while paying carriers more for fuel.''
I just would like to know how we are going to substantiate
that because I do note that C.H. Robinson Worldwide's earnings
per share was up by 19 percent, gross revenues were up by 22.6
percent, gross profits were up 13.8 percent, net income was up
18.3 percent, and gross margin was up 18.3 percent.
So they are passing on all this fuel surcharge, and they
are making more money. That is pretty good.
Mr. Voltmann. Mr. Chairman, it is good.
Mr. DeFazio. Yes.
Mr. Voltmann. And it shows a dynamic, growing market.
Mr. DeFazio. But are they passing on a fuel surcharge? We
don't know that, do we? We can't know that. We are not allowed
to know that.
Mr. Voltmann. We do know that, Mr. Chairman.
Mr. DeFazio. We do? How do we know it?
Mr. Voltmann. C.H. Robinson is a publicly traded company.
They have to report to the SEC. They have to report to the Wall
Street analysts.
Mr. DeFazio. So do they report what their fuel surcharge
proceeds were and then the disbursements of that particular
line item in their budget?
Mr. Voltmann. They don't break it out as clearly as you are
intimating.
Mr. DeFazio. Right.
Mr. Voltmann. What they have said in their reports and to
the analysts is that fuel has decreased. The rising cost of
fuel has decreased their margin because they are passing more
on to the carrier than they are collecting from the shipper.
Our other publicly traded companies have also reported
similarly.
Mr. DeFazio. Margins are down. Profits are up. Not bad,
right?
Mr. Voltmann. Margins are down, nor does this take into
effect, Mr. Chairman, the thousands of small brokers that have
gone out of business. Fifty percent of this industry, of the
20,000 companies that are in this industry, have revenues of
under a million dollars gross.
Mr. DeFazio. Mr. Spencer or Mr. Card, you are in the
business. How do you know that fuel surcharges are being passed
on to your members?
Mr. Spencer. Clearly, we have been inundated with comments
from members about no, we are not getting any. We are only
getting a portion of it, and this includes broker loads but
also includes loads that come through motor carriers as well
that do collect surcharges or presumably.
I would think, clearly, it is something that brokers could
easily report because they are required to capture that
information, again by the current regulations.
So is it a chronic problem? Darn right, it is, unless there
is some regulation.
Mr. DeFazio. How do you know? How do you know it is a
chronic problem if these are proprietary agreements and the
fuel surcharges are proprietary between the shippers and the
brokers?
Mr. Spencer. Well, you know I mentioned a while ago what
would be a anecdotal example.
Mr. DeFazio. Right, we have one. Until we have more
transparency, we won't know for sure.
Mr. Voltmann. Mr. Chairman?
Mr. DeFazio. Yes.
Mr. Voltmann. What the members are reporting to me is that
70 percent of carriers ask for an all-in rate per mile. They
don't ask to have fuel broken out. If they did, the members
would price it that way, but the carriers aren't asking for
that.
Mr. DeFazio. Fuel broken out doesn't mean the amount of
money that the broker received for fuel. It just means we will
break out what we are paying you for fuel. We aren't going to
say to you how much we received for fuel.
Mr. Voltmann. Well, Mr. Chairman, the way this market works
is the broker buys freight from the shipper at a price he
believes he can resell to a motor carrier and make money. It is
not a real estate transaction. It is much more of a commodity
transaction where the broker is deciding whether or not they
can make money on the transaction.
Mr. DeFazio. Right, but do shippers ask for all-in rates?
Mr. Voltmann. Yes, they do.
Mr. DeFazio. Okay. Do they get them?
Mr. Voltmann. Yes, they do.
Mr. DeFazio. Whenever they ask for them?
Mr. Voltmann. And so do the motor carriers when they ask
for them, which is what I am telling you 70 percent of our
members report.
Mr. DeFazio. Okay.
Mr. Voltmann. Our members report that 70 percent of motor
carriers only ask for a rate per mile.
Mr. DeFazio. Okay. I received bad information. So I regret
to inform the panel. They told me this would be a 15-minute
vote, and it was a 5-minute vote, and I have 2 minutes and 20
seconds left to get there.
I am trying to expedite things here as much as I can and I
will urge other Members. I don't know what is happening now
since we are off the program, but hopefully this will not take
long. I will call the staff, and they can let you know.
Thank you for your forbearance.
[Recess.]
Mr. DeFazio. Again, thank you for your forbearance. You are
getting a little insight into how legislation is or is not made
around here.
Mr. Michaud, question?
Mr. Michaud. Thank you very much, Mr. Chairman, for having
this hearing. It is very important when you look at the cost of
diesel fuel and the cost of trucking all across this Country.
So I appreciate your hearing this morning.
I just have one question that is related to the cost of
trucking and the use of diesel fuel, and my question will be
for Mr. Spencer and Mr. Card, if you both could answer it. I
would like to actually hear your thoughts on the current
patchwork of truck weights all across the Country, with 100,000
pounds versus 80,000 pounds which relates to the cost of how
much truckers can consume with diesel.
So I would like each of you just to comment on the truck
weight issue and the disparity across the Country.
Mr. Card. Well, there is not only a disparity across the
Country but across North America. There is a great new study
out by the American Transportation Research Institute that
talks about how more productive vehicles can really save fuel
per pound of freight that is hauled.
So we believe that even though the economy is slow now, as
we get busy again or busier, the congestion problems that we
have in this Country are going to get worse. We burn fuel
sitting in traffic. It would be better to have a free flow of
traffic. If we can haul larger, more productive vehicles
safely, we should do it.
Mr. Spencer. Our organization has always taken a position
that no one is well served by a patchwork of varying State
regulations on size and weight. We have always been adamant
proponents of uniform sizes and uniform weights simply because
to do anything different doesn't make economic sense. It works
out to, quite often, a discriminatory economic move to small
business because relatively only a handful of big carriers can
set up for certain elements.
We have also noticed the other curious element is that it
is quite often not truckers that are even proponents of bigger
and heavier. It is often the shipping community.
Of course, I understand where they are coming from. They
don't see any overriding sense of responsibility to address the
highway safety issues that come along or, for that matter, the
highway cost responsibility. If they think they can save a buck
by moving more, they certainly will.
This is an issue that begs for a broader discussion. I am
certain it is going to get one as part of this highway bill.
Mr. Michaud. Thank you.
My next question is to Ms. Te Beau. In Maine, actually part
of the interstate system has 80,000 pounds. The other part has
100,000 pounds.
The Maine Department of Transportation did an analysis on
safety issues to get the trucks off the secondary roads. I
believe they came back and said you actually could help reduce
the number of fatal accidents by as much as 10 percent by
increasing the weight limit on the interstate.
So my question to you is on the safety issue. Do you feel
that the 100,000 pounds is an unsafe issue?
Ms. Te Beau. First of all, FMCSA doesn't regulate the size
and weight issues. I know that sounds a little strange. It is
actually a Federal Highway Administration issue.
Naturally, we are interested in safety interests and things
that address that, but I am not in a position to provide an
answer to your question.
Mr. Michaud. So you never looked at the safety issue at all
or have done any studies on that then?
Ms. Te Beau. It would be the other administration that
would have.
Mr. Michaud. Okay, thank you.
Thank you very much, Mr. Chairman.
Mr. DeFazio. Thank you.
Ms. Hirono.
Ms. Hirono. Thank you, Mr. Chairman.
Just to get your position straight, Mr. Card, do you
support H.R. 5934? Does your organization support that?
Mr. Card. I don't know what H.R. 5934 is?
Ms. Hirono. It is the one relating to making sure that
truckers know how much the surcharge is. It is the one that Mr.
Voltmann and Mr. Johnson do not support. If you haven't taken a
position on it, that is okay.
Mr. Card. I haven't taken a position on it.
Ms. Hirono. Mr. Spencer, what about your organization?
Mr. Spencer. Oh, clearly, we are supporters of the two key
elements of that legislation.
I think it is really important that we understand just how
simple this is. One, it simply says if a shipper pays a fuel
surcharge, if. It doesn't require them to or any particular
amount, but if they do, it should go for its intended purpose
to the trucker.
The other element of that is simply transparency in the
transaction which has been required since the sixties, just
simply never been complied with. Obviously, it won't, left up
to the market because it benefits the other not to comply.
Ms. Hirono. Another question: This is an industry where,
for example, the sum of the barriers to entry for trucking
companies is far lower than for brokers, et cetera. There was
some testimony--I believe it was from both Mr. Voltmann and Mr.
Johnson--that indicated that this is an industry where the
truckers should be able to negotiate their contracts.
But this is for Mr. Card and Mr. Spencer. Since you both
testified that the trucking side of the equation is made up of
many small trucking companies, when you look at the negotiation
power of the brokers vis-a-vis the truckers, I would say that
there is an unequal negotiation power. Would you agree with
that?
Mr. Spencer. I clearly would agree with that and
understand. I can't understand how it serves any other purpose.
It doesn't serve the interest of the shipper. It certainly
doesn't serve the interest of the consumer. It doesn't serve
the interest of the trucker because he is discriminated against
or disadvantaged by it. It simply serves the interest of the
broker.
Looking beyond this, we have heard the specter of
litigation and lawsuits and things like that raised by this
issue. I am fully aware right now that at least 40 LTL shippers
are suing trucking companies over overcharging and over-
collecting on fuel surcharges.
I mean this appears to me that this is not a system that
the market is handling very well at all. It is disadvantaging
shippers. It is disadvantaging some big carriers. It is
certainly shortchanging the small guys. So we ought to be
looking into this issue and, again, transparency benefits
everyone.
Ms. Hirono. You would agree with the statement that for a
lot of trucking companies, which are really smaller companies,
their bargaining position vis-a-vis the brokers is really that
they have limited ability to say to heck with you, I am not
going to enter into a contract with you?
Mr. Spencer. They don't really have any bargaining
position.
Ms. Hirono. I guess that is a loaded question, but you
agree with that.
Mr. Spencer. About like somebody at a payday loan shop has
bargaining.
Ms. Hirono. Thank you.
Thank you, Mr. Chairman.
Mr. DeFazio. Thank you, Ms. Hirono.
I just want to follow up on the issue which was just raised
again about fuel surcharges. As Ms. Hirono, I believe, said or
I think it was actually Mr. Spencer said if there is a
surcharge, it would have to be passed on to the actual provider
of the transportation service.
Now, Mr. Voltmann says they are passing on the fuel
surcharges, but we can't know that because it is proprietary.
I guess my question would be if they are passing the fuel
charges, how come 42,000 truckers or trucks? What was the total
number of trucks? It was 42,000 larger than 5?
Mr. Spencer. It was 985 motor carriers that operate in
excess of 42,000 trucks. Now that is a number that can be
documented, looking at government data. There would be
additional numbers in that. Those in the fire below five, no
one will know about those.
Mr. DeFazio. So I haven't noticed that labor costs have
gone up. I haven't noticed. I don't know what the other factors
might be. Is this a larger than normal number for that time
period?
Mr. Spencer. Oh, certainly. These numbers actually parallel
what we saw in 2000 when there were ultimately a quarter of a
million large trucks repossessed.
Mr. DeFazio. So, if all the fuel surcharges are being
passed on, why would so many people be going broke?
I guess, Mr. Voltmann, you would just say they are bad
business people?
Mr. Voltmann. No, Mr. Chairman. In fact, I have that slide
if you will permit it to be put up: Trucking Failures to Fuel
Price.
Mr. DeFazio. Maybe the brokers aren't extracting enough out
of the shippers, is that what you are saying, or there is
resistance or they are not capable of getting a fuel charge
that really reflects the market?
Mr. Voltmann. Mr. Chairman, shippers negotiate in an open
market. The shippers are negotiating a rate that they believe
with which they can make money selling their product. The
brokers are buying that freight and reselling it and making a
profit, and the carriers are accepting it with the hopes or to
make a profit.
The point of this fuel surcharge or of this chart, if you
look, is in the 2000 to 2003 period that Mr. Spencer is talking
about, when fuel was a $1.50 a gallon. Who wouldn't want to go
back to a $1.50 right now? Trucking failures were at their
highest.
When we moved to the period of 2003 to 2006, fuel is
increasing at a much more precipitous rate, yet trucking
failures are at their lowest point in history because freight.
We were not in a freight recession at that time, and there were
11 brokered loads per truck posted on the public exchanges.
So what you have, even today, look at the price of fuel.
Yes, trucking failures are beginning to increase but not nearly
to the rate they did in 2000 to 2002, when fuel is now three
times what it was in that time period. That is the reason.
There is not a one-to-one ratio of fuel pricing to trucking
failures. The ratio is between the amount of freight being
offered and the amount of trucks in the marketplace.
Mr. DeFazio. Okay. This is all sort of like talking to the
first panel, the oil industry, because Exxon Mobil is
complaining.
The shippers have a lot of leverage here. You are not
exacting full costs, the additional cost for fuel surcharges.
There is sort of freight recession, the way you are describing
it.
Mr. Voltmann. There is a freight recession.
Mr. DeFazio. There is a freight recession.
Then how does C.H. Robinson see all of their factors, first
quarter, up, earnings up, gross revenues up, gross profits up,
net income up, gross margin up?
I mean if there is such a squeeze on here, they just must
be astounding business people, and I guess everybody else is
not very good or something.
Mr. Voltmann. Mr. Chairman, first of all, it is a huge
company in economics.
Mr. DeFazio. Well, how big is huge, because I thought you
said no one controls more than 5 percent of the market?
Mr. Voltmann. They don't.
Mr. DeFazio. Okay.
Mr. Voltmann. They are a $7.3 billion publicly traded
company, and that is less than 5 percent of the market.
Mr. DeFazio. Five percent of the loads?
Mr. Voltmann. No. Five percent of the value of the market.
Mr. DeFazio. No, I am not talking about value. What percent
of the loads do they control? You don't know?
Mr. Voltmann. I don't know.
Mr. DeFazio. All right.
Mr. Spencer, you seem anxious to say something.
Mr. Spencer. Well, I think it is kind of interesting
because the economic reality that Mr. Voltmann points out is
kind of this boom-bust cycle frenzy that, to a large extent,
they contribute to. In essence, they help wipe truckers out,
and then they come back even when fuel prices are high, and
they can prosper. They feed right into this boom-bust
mentality.
But I can tell you I know the experience of our members
dealing with shippers is 70 percent don't say we don't want a
surcharge, we want a flat rate. They virtually all say we would
like to have a surcharge.
Our experience in dealing with shippers is that they
generally do believe surcharges are fair, and they are fully in
the camp right now of remembering those figures he looks at.
They don't want to be gooned to death two years, three years
from now when the economy starts moving back again, and all of
these 20-year veteran small business people have been wiped
out. They don't want to be gooned. So they are much more
sympathetic to the truckers' dilemma.
Not so with the people that Mr. Voltmann represents. They
basically profit whether times are good, whether times are bad.
I mean the data shows that.
We are not against them profiting, not at all. Again, what
we are talking about is the need for a mandatory pass-through
and simple disclosure. That will go a long way to resolving the
problem.
Mr. DeFazio. Only mandatory if it was charged as fuel
surcharge? Only mandatory if it was charged or represented as a
fuel surcharge?
Mr. Spencer. Absolutely.
Mr. DeFazio. Yes, okay.
I guess then back to Mr. Voltmann. We have this disconnect
because we have no information, and you would say that is a
free market functioning. I would say it is not, but we can
disagree over that.
But you are saying for the most part or almost universally
the fuel surcharges are being passed on except perhaps in the
instance of the government contract we heard about. Is there
anything illegal about not passing on the fuel surcharge in its
entirety?
Say you were going to charge $1,000 for a load, but you add
on a $300 surcharge. You just keep the whole surcharge, and you
were going to pay the trucker out of the $1,000, say the $600,
kind of the example we heard about. Anything illegal about
that?
Mr. Voltmann. It doesn't happen.
Mr. DeFazio. It doesn't happen. Okay, well, then I guess it
would be wonderful if we could open up the books here and see
if it really doesn't happen because this is kind of like
Rashomon.
I mean profits are up for the largest broker, but they are
being squeezed, and they are passing on all the fuel surcharge
to the truckers. We have a huge and growing number of truckers
going broke, but nothing is going on here except pure market
forces in a totally opaque market.
Mr. Voltmann. Mr. Chairman, let me because we started
having this discussion before votes.
In your State, in Oregon, the first exchange was created by
Al Jubitz at the Jubitz Truck Stop. It operates much the same
way as the New York Stock Exchange operates. Brokers put in
their buy truck rates.
Mr. DeFazio. That scares me if that is the way it works.
Mr. Voltmann. Carriers put in their sell truck rates.
Mr. DeFazio. Right. We have a well-organized casino like on
Wall Street.
Mr. Voltmann. Well, I disagree with your characterization
of it.
DAT and the others, there are several of these. Hundreds of
thousands of loads are posted on these systems every day. You
can see the buy rate. You can see the sell rate. This is how
you get transparency in an open market.
I can see what a company is offering to sell their stock
for, I can see what people are willing to buy stock for, but I
don't get to see what you actually buy your stock for.
Mr. DeFazio. The key point is the representation to the
shippers and the opacity, but in any case we are going to
disagree over that.
Just one last question: You say that the TRUCC Act would
subject your members to more lawsuits. I am puzzled by that
because there is no new rights of action in here. In fact,
there are contract disputes that are settled through litigation
now. So that would continue.
This, in my opinion, if your members actually followed the
new requirements, that would give them more defense for
following the regulations against this flood. How many lawsuits
have been filed?
All I know it was flood, we heard. Twenty-seven, was that
the flood?
Mr. Spencer. Oh, I don't know, maybe 20, 22 over a span.
Mr. DeFazio. Against the flood of lawsuits that are out
there and/or would result from this.
I am just curious. If there is no new right of action, why
do you come to that conclusion?
Mr. Voltmann. Except, Mr. Chairman, it is a right. It is a
new right of private action. It is a new right.
Mr. DeFazio. Because the pass-through? Is that the concern
about passing through the fuel surcharge which is done
routinely anyway?
Mr. Voltmann. No.
Mr. DeFazio. Is that the concern?
Mr. Voltmann. No, Mr. Chairman.
Mr. DeFazio. Okay. Which part of it then, the billing and
collection practices?
Mr. Voltmann. Mr. Chairman.
Mr. DeFazio. The false, misleading information?
I mean those are the two major parts of the bill:
disclosure pass-through and false and misleading information.
So which of those two is going to trigger a flood of lawsuits?
Mr. Voltmann. First of all, Mr. Chairman, this is not a new
right. The Interstate Commerce Commission from the 1960s
allowed this between the parties.
Mr. DeFazio. You are criticizing this very brief piece of
legislation.
I am asking which of those two provisions is it that would
bring about the flood of lawsuits, a disclosure and a pass-
through.
Mr. Voltmann. I was trying.
Mr. DeFazio. Well, it is a simple question. Is it because
fuel surcharges would be required to be passed through or is it
because of the amending the false and misleading information
section? Which one of those two are you particularly concerned
about?
Mr. Voltmann. It is the other provision, Mr. Chairman, in
which all margins must be posted by both the broker and the
motor carrier.
Mr. DeFazio. So, if we took out all margins, you would
support the legislation?
Mr. Voltmann. No. We don't believe that the government.
Mr. DeFazio. Oh, you would still oppose the legislation.
Mr. Voltmann. We would still oppose it because we don't.
Mr. DeFazio. Well, I thought maybe we could get to
agreement there for a second. Thank you.
I want to say in response to the testimony of the ATA. The
APU thing, I mean we ended up with a discretionary word in
SAFETEA-LU instead of a mandatory word. That should be dealt
with.
You have several other provisions in there. One, in
particular, I will ask everybody if they would agree with this.
You said, in agreement with a point raised during the first
panel, that there should be some re-regulation of energy
commodities in your testimony, Mr. Card. That was point six in
your testimony.
Mr. Spencer, would you agree with that?
Mr. Spencer. We think the opportunities that currently
exist for manipulating the petroleum markets are extreme.
Mr. DeFazio. Okay. So you answer is yes?
Mr. Spencer. Yes.
Mr. DeFazio. All right.
Mr. Voltmann, your folks ought to be concerned about fuel
costs. Would you agree with that?
Mr. Voltmann. Not our issue, Mr. Chairman.
Mr. DeFazio. What?
Mr. Voltmann. Not our issue, Mr. Chairman.
Mr. DeFazio. You would say no opinion?
Mr. Voltmann. No opinion.
Mr. DeFazio. No opinion, okay.
Mr. Johnson, as representing shippers?
Mr. Johnson. As a shipper, we like capitalism the way it
stands, and the open market is fine. So we have pretty much no
objection to it.
Mr. DeFazio. I couldn't quite follow. You have no objection
to regulating or you think everything is just fine the way it
is?
Mr. Johnson. Keep the open market the way it is.
Mr. DeFazio. Okay. Well, it is an interesting response from
the shipper point of view.
Oh, Mr. Platts, do you have questions?
Mr. Platts. Thank you, Mr. Chairman.
No question, just want to thank the witnesses in the prior
panel. I could make it but for the written testimony to give
the Committee and all of us Members, great insights to the
issue and the challenges the industry is facing.
Thank you, Mr. Chairman.
Mr. DeFazio. Thank you for coming, Mr. Platts. I appreciate
it.
Ms. Hirono, do you have any further questions?
Okay, with that, the Committee will stand adjourned. Thank
you very much for your testimony.
[Whereupon, at 2:09 p.m., the Subcommittee was adjourned.]
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