[Senate Hearing 110-680]
[From the U.S. Government Publishing Office]
S. Hrg. 110-680
HIGH DIESEL FUEL PRICES
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HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
TO
EXAMINE WHY DIESEL FUEL PRICES HAVE BEEN SO HIGH AND WHAT CAN BE DONE
TO ADDRESS THE SITUATION
__________
SEPTEMBER 23, 2008
Printed for the use of the
Committee on Energy and Natural Resources
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
JEFF BINGAMAN, New Mexico, Chairman
DANIEL K. AKAKA, Hawaii PETE V. DOMENICI, New Mexico
BYRON L. DORGAN, North Dakota LARRY E. CRAIG, Idaho
RON WYDEN, Oregon LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota RICHARD BURR, North Carolina
MARY L. LANDRIEU, Louisiana JIM DeMINT, South Carolina
MARIA CANTWELL, Washington BOB CORKER, Tennessee
KEN SALAZAR, Colorado JOHN BARRASSO, Wyoming
ROBERT MENENDEZ, New Jersey JEFF SESSIONS, Alabama
BLANCHE L. LINCOLN, Arkansas GORDON H. SMITH, Oregon
BERNARD SANDERS, Vermont JIM BUNNING, Kentucky
JON TESTER, Montana MEL MARTINEZ, Florida
Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
Frank Macchiarola, Republican Staff Director
Karen K. Billups, Republican Chief Counsel
C O N T E N T S
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STATEMENTS
Page
Bingaman, Hon. Jeff, U.S. Senator From New Mexico................ 1
Charbonneau, Patrick, Vice President, Government Relations,
Navistar, Inc.................................................. 36
Gruenspecht, Howard, Acting Administrator, Energy Information
Administration................................................. 4
McCurdy, Dave, President and CEO, Alliance of Automobile
Manufacturers.................................................. 24
Scott, Gregory M., Executive Vice President and General Counsel,
National Petrochemical and Refiners Association................ 9
Sessions, Hon. Jeff, U.S. Senator From Alabama................... 3
Windsor, Barbara, President and CEO, Hahn Transportation, Inc.,
New Market, MD................................................. 16
APPENDIX
Responses to additional questions................................ 39
HIGH DIESEL FUEL PRICES
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TUESDAY, SEPTEMBER 23, 2008
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 10 a.m. in room
SD-366, Dirksen Senate Office Building, Hon. Jeff Bingaman,
chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW
MEXICO
The Chairman. Why don't we go ahead and get organized here
to start the hearing? Please take a chair. Thank you for
joining us at this hearing today. We knew this would be a slow
time in Washington, a quiet period, so we decided this is a
good time to have this hearing.
I do think the subject of the hearing is very important.
The diesel fuel market and also looking some at the aftermath
of Hurricanes Ike and Gustav in the Gulf Coast, the recent
spike in diesel demand and prices is a sign of the increased
tightness in the market. While clearly the erratic price of
crude oil, which we saw go up $16 in a few hours of trading
yesterday, is a major piece of what is driving the price for
diesel but it's also true that there are separate influences at
work in the diesel market.
Global demand for diesel has surged while demand for
gasoline has declined. Meanwhile, the recent hurricanes are
highlighting how little cushion we have in our supply system.
As the refineries work toward restoring full operational
capacity, there simply is not enough oil flowing in the Gulf
Coast to completely fill the pipelines.
While diesel market tightness is a long-term systemic
issue, and recovering from the hurricanes is a short-time
emergency, both of them offer an opportunity to reconsider the
appropriateness of the policies that we currently have in
place.
I know that some of my colleagues are strong advocates for
increased use of diesel fuel in our passenger fleet. I share
their enthusiasm for the increased fuel efficiency afforded by
diesel engines but I believe there's a suite of issues that
need to be better understood if we're to consider shifting
United States energy policy in this direction. We need to
better understand, first and foremost, whether we have enough
diesel fuel available to support this kind of increased
consumption. The recent price surge certainly seems to suggest
that the world does not have any diesel fuel to spare.
We also need to consider whether diesel fuel really emits
fewer greenhouse gas emissions than gasoline on a wheels-to-
wheels or wells-to-wheels basis. While it's clear that fewer
greenhouse gases are emitted from the tail pipes of diesel
cars, those greenhouse gas savings may be offset by increased
emissions from the refineries that make the fuel.
Finally, we need to understand the costs associated with
making diesel fuel clean enough to meet our local air pollution
requirements because emissions of some local pollutants are
higher with diesel fuel than with gasoline.
I think it's also important to know how the restoration
efforts are progressing in the Gulf as we hear stories of fuel
stations in the Southeast running out of fuel. We need to
understand whether the situation is expected to improve in the
near future or whether we need to expect further supply
problems to work their way through the system.
With refineries still out of power more than a week after
Hurricane Ike, it seems our emergency response policy which
relies completely on crude oil stored in the Gulf Coast is not
well suited to meeting the ongoing threat of hurricane-related
supply disruptions.
While this is a topic that deserves a more full discussion
than we're able to give it today, I thought it would be useful
to suggest that we should think of the current disruption in
the context of what policy measures could be taken to prevent
recurrences of these kinds of disruptions.
I thank the witnesses for being here. I'm sorry that our
fifth witness from the National Electrical Manufacturers
Association was unable to join us to discuss the connection
between diesel fuel, the diesel fuel market and global
electricity. Nevertheless, I do look forward to a good
discussion on these interrelated topics.
Before I introduce the witnesses, let me call on Senator
Sessions for any opening statement he would like to make.
[The prepared statement of Senator Domenici follows:]
Prepared Statement of Hon. Pete V. Domenici, U.S. Senator From
New Mexico
Senator Bingaman, thank you for holding this hearing and I want to
thank the witnesses for joining us this morning.
In the past year we have seen gas prices climb to record levels. We
are all aware of the difficulties those prices are causing for American
families. Unfortunately, Congress has not taken action on the matter,
outside of suspending oil deliveries to our strategic reserve. While I
believe that time has run out to reach a bipartisan agreement on
comprehensive legislation this year, I hope that the next Congress will
meet our enormous energy challenge with solutions that are big enough
to resolve it.
As we have heard so much about the cost of gasoline, the price of
diesel has undergone an even larger price spike. Over the last few
months while gasoline rose to $4.11 per gallon, diesel soared above
$4.80 per gallon. These added expenses have made their way into every
aspect of our economy and it is clear that something must be done to
reverse course.
What is equally clear is the cause: global demand has increased
significantly and supply has not kept pace. In the meantime, our
country has become increasingly reliant upon foreign nations for our
energy supplies. As proud as I am of this Committee's recent
accomplishments, much bolder action is needed to reverse this trend.
Today we will hear about a 200 thousand barrel per day expansion at
a refinery in China. We will hear about a 600 thousand barrel per day
facility opening in India. For our part, the United States' most
significant change to the diesel supply has been a reduction in its
sulfur content. This action was important, and will result in a great
deal of environmental benefit, but it cost money and did not increase
supply. After more than 30 years without a new refinery built in this
country, it is time to seek a more balanced approach to our energy
policy.
I look forward to hearing from the witnesses about actions that can
be taken to reduce the price of diesel, make better use of it, and
continue to build on the progress that we have made in developing our
nation's energy policy. It is my hope that our conversation today will
inform a larger debate going forward, and I'll have some questions for
the witnesses on what solutions they propose after we have heard their
testimony.
Thank you.
STATEMENT OF HON. JEFF SESSIONS, U.S. SENATOR
FROM ALABAMA
Senator Sessions. Thank you, Mr. Chairman, for having this
hearing. It's something you and I have talked about previously
on several times, and it deals with questions that I am
interested in, have discussed at some length with staff and
actually done some research into this question.
I believe it's Popular Mechanics that compared, I believe,
a Volkswagen diesel engine to a Toyota Prius and concluded that
not only was it comparable in mileage but got a good bit better
mileage than the Hybrid Prius and emitted less global warming
gases, and we know 50 percent of the automobiles in Europe are
diesels and if we're getting that much better mileage and
reducing CO2 emissions, the question I have is why
aren't we using more diesel automobiles, and what are the
factors that are causing this?
One of the questions I'd like to ask--and I have a vague
recollection that maybe a decade or so ago, some understanding
may have been reached when the Americans were not happy with
diesel, they thought it was dirty, were unaware of the new
high-tech low-sulfur fuels, the high- tech engines that are so,
so much cleaner today than they used to be.
I've seen a Mercedes plant in Alabama, their Blue Tech
Diesel, and the tail pipe is clean. You can put your finger in
it and it's clean. It's not like the old black diesel pipes. So
we've made some great steps forward.
So I guess my question is how did we get into this
circumstance? Are the Europeans smarter than the Americans? Do
we need to--when we incentivize a hybrid automobile
substantially, do we have no incentive for diesel? We know that
diesel fuel is taxed at 24 cents a gallon whereas gasoline is
at 18 cents a gallon. So we've got actually a disincentive for
diesel.
So to me, progress is progress. We certainly have a better
understanding that a diesel engine--we have more confidence
that it has a long lifetime of performance. We have less
confidence about that in some of the battery- powered engines.
So I'm not against the hybrids. I'm all for the hybrids.
I've supported that and I look for all kind of alternatives,
but I thank you, Mr. Chairman. I repeat again what I've said
before. You are having hearing after hearing on issues that are
important to helping America decide how to handle this energy
question, and I thank you particularly for having this one. I
think it's an important issue.
The Chairman. Thank you very much. Let me just introduce
our witnesses here.
Dr. Howard Gruenspecht is the Acting Administrator of the
Energy Information Administration. He's a frequent witness
before our committee. We appreciate him coming back.
Mr. Gregory Scott is the Executive Vice President for the
National Petroleum and Refiners Association.
Ms. Barbara Windsor is the President and CEO of Hahn
Transportation, out of New Market, Maryland. Thank you for
being here.
Our former colleague, Dave McCurdy. We're very honored to
have him here. He's President and CEO of the Alliance of
Automobile Manufacturers.
Why don't each of you take about 6 minutes and give us the
main points you think we need to understand about this set of
issues and then I'm sure both Senator Sessions and I will have
some questions.
Dr. Gruenspecht.
STATEMENT OF HOWARD GRUENSPECHT, ACTING ADMINISTRATOR, ENERGY
INFORMATION ADMINISTRATION
Mr. Gruenspecht. Chairman Bingaman, Senator Sessions, I
appreciate the opportunity to appear before you today to
discuss the market for diesel fuel.
The Energy Information Administration is the independent
statistical and analytical agency within the Department of
Energy. We don't promote, formulate or take positions on policy
issues and our views should not be construed as representing
those of the Department of Energy or the Administration.
Prices for crude oil, gasoline and diesel fuel all set new
records this year. While rising crude oil prices were the
primary driver of record product prices, diesel prices rose
much more than gasoline prices. The peak price of diesel in
mid-July was $1.88 higher than the year-earlier level while the
peak price of gasoline in early July was $1.13 higher than the
year earlier level.
The diesel crack spread, the difference between the crude
oil price and the wholesale price of diesel, averaged 75 cents
a gallon over the January through July 2008 period,
substantially above the comparable year ago period. In
contrast, the gasoline crack spread over January through July
2008 declined compared to the comparable year-ago period.
In the first half of 2008, we experienced abundant gasoline
supplies, relatively weak demand, and increased use of ethanol,
all of which contributed to reduced gasoline margins. Since
gasoline accounts for nearly half the output of a typical
United States refinery, refiners responded to the lower margins
by pulling back on refinery utilization, measured as input to
the refinery divided by capacity. This year, utilization
through July has been about 6 percentage points lower than
normal.
Turning to distillate--that's both heating oil and diesel
fuel--prices in the United States this year reflected tight
world markets, not just the United States supply demand
balance. World diesel demand growth is coming from increasing
use, particularly in developing countries. Also, several
unusual circumstances, including a severe drought in Chile that
reduced its hydropower generation, earthquakes and disruptions
of coal supply in China, and power shortages in South Africa,
all increased the demand for diesel fuel generation, pushing up
the price of diesel worldwide.
Higher diesel crack spreads encouraged refiners to increase
the yield of diesel in their output product streams. While
yield changes are limited by both refinery equipment and crude
oil characteristics in the near term, even small shifts in
yields can lead to significant changes in volumes and diesel
output is actually up over last year, despite lower refinery
utilization rates.
The United States has been exporting more diesel than
usual. For example, Europe imported about three times as much
U.S.-origin diesel in the first half of this year compared to
2007 and Latin America imported more U.S.-origin diesel this
year as well, about twice as much as it imported in the
comparable period in 2007.
Before the recent hurricanes, product prices had declined
from their peaks in July, mainly due to a decline in the price
of crude oil. The worldwide diesel supply demand balance has
also eased somewhat and will likely continue to improve as
China and India expand refinery capacity and demand in Latin
America abates with the end of their winter season.
Turning to our domestic situation, while the hurricane
damage was less then feared, refineries have been slow to
return to operation due to lack of power. Significant amounts
of refinery production were lost and, with refineries unable to
fill pipelines that move product to the Midwest and the East
Coast, inventories have been dropping and spot shortages,
mainly of gasoline, are occurring, even with imports increasing
to help fill the gap.
Diesel supplies are in somewhat better shape. EIA's
petroleum data for the week of September 12 through September
19, which are being collected yesterday and today and will be
issued tomorrow, are likely to show low refinery runs and
continued declines in product inventories. These data, though,
are a lagging indicator of a situation that is improving, as
indicated in yesterday's retail price data. Prices are coming
down even in the affected regions.
Our most recent short-term energy outlook released before
Hurricane Ike hit on September 9 forecasts WTI crude oil prices
at $120 per barrel in the fourth quarter, with residential
heating prices averaging $4.06 per gallon and diesel at 4.11
per gallon.
Recently, crude oil markets have weakened and then
fluctuated amid concerns about demand declines in the United
States and economic slowdown throughout the world. If crude oil
were to be $10 lower than we had projected, that would
translate into about a 25 cent lower price for products.
Shifting to a longer-term view, we expect world markets to
keep pressure on the distillate fuels balance and prices. As
discussed by Senator Sessions, Europe is continuing to shift
more of its light-duty vehicles to diesel, in addition to
growth for heavy-duty vehicles.
In the United States, we expect a shift in demand from
gasoline to diesel, due to greater use of renewable fuels
displacing petroleum-based gasoline and increased use of diesel
to meet the fuel economy standards enacted in last year's
Energy Independence and Security Act. As a result, our
reference case projections show a decline in United States
petroleum-based gasoline demand through 2022 but a 12 percent
increase in diesel.
So, in addition to the operating changes to boost yields
described above, some refiners are investing in hydro-cracking
units and other equipment to increase their ability to make
additional diesel fuel. The prices will likely continue to
fluctuate, for both diesel and gasoline. However, in future
years, we expect diesel to remain at a premium to gasoline more
often than it has in the past.
This completes my testimony and I would be glad to answer
any questions you would have.
[The prepared statement of Mr. Gruenspecht follows:]
Prepared Statement of Howard Gruenspecht, Acting Administrator, Energy
Information Administration
Mr. Chairman and Members of the Committee, I appreciate the
opportunity to appear before you today to discuss the distillate fuel
market and this year's distillate fuel prices.
The Energy Information Administration (EIA) is the independent
statistical and analytical agency within the Department of Energy that
is responsible for producing objective, timely, and relevant data,
projections, and analyses that are meant to assist policymakers, help
markets function efficiently, and inform the public. We do not promote,
formulate, or take positions on policy issues and our views should not
be construed as representing those of the Department of Energy or the
Administration.
pre-hurricane diesel and gasoline market overview
Prices for crude oil, gasoline and diesel set new records in 2008.
After rising above $4 per gallon in June, the national average regular
gasoline price in EIA's weekly price survey peaked at just over $4.11
on July 7, about $1.13 higher than at the same time last year. Diesel
prices experienced an even greater increase this year. Having passed
the $4 per gallon mark in April, U.S. diesel prices peaked at $4.76 on
July 14, $1.88 higher than the same time in 2007.
While crude oil and product prices were setting new records in the
first 7 months of 2008, the markets for gasoline and distillate fuels
(diesel and heating oil) exhibited very different behavior. Both
gasoline and distillate prices were pushed up by record crude oil
prices, but gasoline prices did not rise as much as crude oil prices,
while distillate prices rose more than crude oil prices, as illustrated
in Figure 1.* (Note that both heating oil and diesel prices tend to
move together since they are similar products, derived from the same
boiling range material from crude oil.
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* Figures 1-4 have been retained in committee files.
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Figure 1 displays the basic components of average gasoline and
diesel prices during the first 7 months of this year in relation to
their values for the comparable 2007 period. For example, diesel prices
averaged $4.07 per gallon from the beginning of this year through July.
Crude oil, the feedstock for gasoline and diesel, averaged $2.56 per
gallon. Refiners processed the crude oil and received an average of
$3.31 per gallon, providing 75 cents per gallon of diesel fuel above
crude oil costs to cover refining costs and profits. Pipelines,
terminal operators, distributors and retailers received about 29 cents
per gallon to store and move the product to retail stations, and taxes
accounted for about 47 cents per gallon. Separating product prices into
these components helps to explain different elements of the petroleum
market, but the relationship between crude oil and product prices can
be a two-way street. For example, strong demand for distillate products
is one factor that can add pressure to crude oil prices.
Figure 1 shows that higher crude oil prices accounted for about
$1.14 of the per-gallon increase in the January-July gasoline and
diesel prices over their levels in the comparable 2007 period. Figure 1
also shows that average prices at the wholesale level were higher for
diesel than for gasoline. During the first 7 months of 2007, the diesel
price spread (the difference between wholesale diesel and crude oil
prices) averaged about the same as the gasoline spread, but, in 2008,
the average diesel price spread expanded significantly over 2007, while
the average gasoline spread narrowed. The combination of abundant
gasoline supply and relatively weak demand depressed gasoline margins
this year. With gasoline accounting for nearly half the output volume
of a typical U.S. refinery, refiners in the United States responded by
pulling back on crude oil inputs. At the same time, world distillate
(diesel and heating oil) markets tightened, affecting U.S. diesel and
heating oil prices. Although refinery utilization dropped in 2008 as a
result of the gasoline market weakness, higher diesel margins led
refiners to increase refinery distillate yields (the ratio of
distillate output to crude oil input), allowing for increased
distillate production in spite of the decline in crude oil inputs.
Figure 2, which shows the crack spreads (spot product price minus
spot West Texas Intermediate (WTI) crude oil price) for gasoline and
low-sulfur distillate, details the different price paths for these two
products relative to crude oil. Abundant gasoline supplies, as
evidenced by very high inventories early in March 2008, drove the
gasoline crack spread to low levels, creating incentives for refiners
to reduce production. Gasoline crack spreads were relatively weak
through July and into August, typically the peak gasoline demand
periods. They did, however, increase towards the end of August before
hurricanes Gustav and Ike. At the same time, wholesale (i.e., spot)
distillate prices were very high relative to crude oil, keeping diesel
and heating oil prices above that of gasoline though the summer months.
Yet, distillate inventories in the United States were generally not
particularly low (Figure 3), indicating adequate U.S. supply.
The price of distillate prior to the hurricanes appeared to reflect
tight world distillate markets this year, not just the U.S. supply/
demand balance. World diesel demand growth is coming both from
increasing transportation use and increasing use of distillate as a
fuel for electricity generation, particularly in developing countries
where electricity demand is outstripping generating capability.
Generally, oil product demand in the non-OECD countries, where oil
demand is growing fastest, is more heavily weighted towards distillate
than is product demand in the U.S. On top of this trend, several
unusual circumstances were boosting distillate demand further. Chile
has been experiencing both a severe drought that reduced its hydropower
generation and reduced imports of natural gas from Argentina. This, in
turn, caused Chile to turn to more diesel fuel for electricity
generation. As a result of these problems, Chile's diesel imports are
expected to increase 5 to 10 percent in 2008 over 2007. China's demand
for diesel also continued to increase as it turned to diesel-powered
generators to combat shortages, stemming in part from recent
earthquake-related disruptions of coal and natural gas supplies, and to
provide adequate electricity for the Olympic Games this summer. South
African mining companies are turning to diesel generators to deal with
a power crisis in that part of the world. Even Europe experienced some
very tight supplies of ultra-low sulfur diesel this past fall and this
year. This very tight international situation has been pushing up the
price for diesel worldwide, including in the United States.
As a result of strong international diesel demand, the United
States has exported more diesel than is typical, as shown in Figure 4.
Both Europe and Latin America purchased unusually high volumes from the
United States. Europe imported 119 thousand barrels per day from the
United States during the first half of 2008, compared to 37 thousand
barrels per day in the first half of 2007. At the same time, Latin
America imported a record volume of distillate from the United States:
302 thousand barrels per day compared to 147 thousand barrels per day
in the first half of 2007.
Prior to the recent hurricanes, product prices had declined from
their peak July levels, mainly as a result of the decline in the price
of crude oil. In addition, the supply-demand balance in the diesel
market had eased, and is expected to ease further through the end of
the year for several reasons. Specifically, the regional diesel balance
in Asia is expected to improve due to the recent start of China's 200-
thousand-barrel-per-day refinery expansion at Qingdao and the planned
start later this year of the 600-thousand-barrel-per-day refinery at
Jamnagar in India. Latin America's problems may ease a bit as their
winter season ends, particularly if Chile sees some drought relief.
refinery response to weak gasoline and strong diesel prices
Refiners typically modify their output of a product either by
adjusting the inputs to the refinery, which affects the output of all
products, or by adjusting the yield or fraction of a product produced
from a barrel of crude oil. Both types of adjustments have been made by
refiners in 2008 to meet the market conditions.
Normally, refinery utilization (refinery inputs divided by
capacity) varies seasonally with demand and maintenance outages.
Utilization generally is highest during the summer months of May
through August, where the industry frequently averages about 95 percent
utilization. In the winter months of January through March, utilization
frequently averages closer to 89 percent.
This year, with wholesale gasoline prices sometimes below the price
of crude oil, increased use of ethanol, and plenty of inventory volumes
to supply the market, refiners pulled back both on refinery utilization
and on gasoline yields. Refinery utilization averaged 86.6 percent for
January through July 2008, which is 5.6 percent lower than typical
January through July utilizations seen before 2006, when damage
following the hurricanes in 2005 affected utilization patterns.
Despite the reduction in refinery utilization rates in 2008,
distillate production has been high due to yield adjustments. While the
extent of changes in the product mix is limited in the short term by
the equipment available at each refinery, even small yield shifts among
products can still produce a significant swing in volumes. For example,
if refinery inputs are at 15.4 million barrels per day, a one-
percentage point change in yield represents a 154,000-barrels-per-day
change in product volume. This year, many refiners made operating
changes to increase the amount of distillate produced for each barrel
of crude oil that they ran.
During early spring, refiners typically begin to adjust yields to
maximize gasoline production. However, because of the much higher crack
spreads for diesel fuel this year, this shift did not occur.
Furthermore, preliminary data indicate distillate yields have been near
or above historical highs for many months this year. At the extreme,
data for the months of April and May indicated some refineries have
been able to increase distillate yields as much as 10 percentage points
over last year while decreasing gasoline yields a similar amount.
looking ahead--short-term
The recent hurricanes have changed the market substantially.
Although structural damage to refineries, pipelines, and platforms was
less than had been feared, the lost production and the time required
for system restart has put gasoline in short supply, and may somewhat
delay the typical winter inventory build of distillate products, adding
to gasoline, diesel and heating oil prices. In the week following
Hurricane Ike, gasoline prices in EIA's weekly price survey rose
substantially, particularly in the South Atlantic region (Petroleum
Administration for Defense District , or PADD, 1c), the Midwest (PADD
2) and the Gulf Coast (PADD 3). Diesel prices did not show similar
impacts--in fact, diesel prices fell on a national average basis, in
all but one region. Information regarding the timing of the recovery
from hurricane-related shutdowns of refining and oil and natural gas
production is changing on a daily basis.
Recently, crude oil prices fell below $100 for the first time since
early March. Perceptions have shifted from worries about having enough
supply to meet demand to worries about demand significantly falling in
the U.S. and spreading to other parts of the global economy.
Additionally, some sizeable volumes of non-Organization of the
Petroleum Exporting Countries (OPEC) production, such as in Brazil and
Azerbaijan, recently came online, leading to an improved perception
regarding non-OPEC supply growth for the second half of 2008 in
comparison to the first half of the year.
EIA's most recent monthly Short Term Energy Outlook, published
September 9 before Hurricane Ike and before additional signs of slowing
global economic activity, forecast crude oil markets tightening further
with WTI price averaging about $120 during the fourth quarter. Under
these conditions, residential heating oil would average about $4.07 and
diesel $4.11 per gallon under normal winter weather conditions. If, on
the other hand, crude oil averages something closer to $100, these
estimated prices could be reduced by as much as 50 cents per gallon. We
will be looking closely at these uncertainties in our next Outlook.
looking ahead--longer term
While we expect some near-term easing in the global distillate
balance relative to conditions experienced in the first half of 2008,
there is a long-term underlying trend that will continue to keep
pressure on distillate fuel. Distillate fuel consumption has been
growing at a higher percentage rate worldwide than gasoline for many
years. Europe has been a primary factor in this shift. In response to
concerns about energy efficiency and greenhouse gases, Europe has been
shifting its light-duty vehicle fleet to more diesel-fueled vehicles--
on top of the increases in diesel fuel used in commercial heavy-duty
vehicles. The net result is that Europe consumes more distillate than
gasoline, and distillate fuel use is growing while gasoline use is
declining.
Looking ahead at U.S. demand over the next 15 years, EIA also
expects a significant shift in demand from petroleum-based gasoline to
distillates. The Energy Independence and Security Act (EISA) of 2007
substantially increased the renewable fuel mandate that was first
established in the Energy Policy Act of 2005 and also significantly
increased corporate average fuel economy standards for light-duty
vehicles. More use of renewable fuels, primarily ethanol, will displace
petroleum-based gasoline, as will higher fuel economy standards. In
addition, vehicle manufacturers are expected to produce more diesel
vehicles as part of their strategy to comply with tougher fuel economy
standards. While the shift towards diesel is likely to be smaller than
the one Europe has seen, U.S. refiners will be facing a significant
change in refinery product mix that will impact investments.
In the 15-year period from 2007 to 2022, the increased use of
ethanol and increased light-duty vehicle efficiency standards projected
in our 2008 Annual Energy Outlook reference case is expected to result
in a decline in the demand for petroleum-based gasoline of about 610
thousand barrels per day (7 percent). However, continued growth in
heavy-duty vehicle use of diesel over the same period is projected to
push up distillate demand by about 690 thousand barrels per day (12
percent). As discussed in the Annual Energy Outlook 2008, EIA expects
that a significant portion of the EISA mandate for cellulosic fuels
could be met using a biomass-to-liquids (BTL) technology to produce a
renewables-based diesel fuel from biomass.
Refiners are responding to the changing demand outlook and high
distillate margins with short-term operating changes to increase
distillate yields over gasoline. In addition, some refiners are
installing hydrocracking units, which are designed to take heavy
material from the crude tower and make distillate fuel. With additional
operating changes and with the new hydrocracking capacity being
planned, U.S. refiners might not need to do much more to satisfy U.S.
distillate needs, although we are continuing to monitor and analyze
this issue.
In summary, since hurricanes Rita and Katrina in 2005, we have seen
continued strength in distillate prices relative to gasoline, buoyed by
the continued world demand growth for this fuel. While diesel prices
will probably fluctuate above and below gasoline prices from time to
time, they may well remain at a premium to gasoline much more often in
the future than they have historically.
This concludes my statement, Mr. Chairman, and I will be happy to
answer any questions you and the other Members may have.
The Chairman. Thank you very much.
Mr. Scott.
STATEMENT OF GREGORY M. SCOTT, EXECUTIVE VICE PRESIDENT AND
GENERAL COUNSEL, NATIONAL PETROCHEMICAL AND REFINERS
ASSOCIATION
Mr. Scott. Thank you, Mr. Chairman. My name is Greg Scott.
I am here representing the National Petrochemical & Refiners
Association today.
NPRA is a national trade association with nearly 500
members, including companies that operate and own virtually all
of the United States refining capacity as well as most of the
Nation's petrochemical manufacturers.
I am grateful for the opportunity to appear at this
hearing.
There is no one answer to the question of why diesel fuel
prices are so high. However, there are a number of factors that
contribute to the current situation. First and foremost is the
current high price of the crude oil from which diesel fuel is
derived.
As you can see by examining Chart 1, which my human
assistant is helping me with, there's a strong correlation
between the price of crude oil and the price of diesel fuel.
This shouldn't be a surprising thing, given the fact that crude
oil costs make up over 65 percent of the price of diesel fuel.
Refiner marketer transportation margins and Federal and State
taxes make up the rest of the price.
Second, like gasoline, diesel is a commodity product and
therefore susceptible to the simple rules of supply and demand.
Third, despite continuing domestic refinery expansions, the
reality is that current United States refining capacity
struggles every day and every month to meet high domestic
demand for the full range of petroleum products, including
gasoline and diesel.
Finally, the United States refining industry has invested
billions of dollars over the last several years to successfully
implement the first portions of EPA's Ultra Low Sulfur Diesel
Program or ULSD Program.
This program has reduced sulfur levels in highway diesel
fuel significantly which is a great achievement. However, ULSD
is significantly more expensive to manufacture than traditional
diesel fuel. In addition, the strict sulfur limits of the ULSD
Program result in the diversion of some higher sulfur
distillate products, products that previously were used to make
highway diesel, into other fuel streams, such as offroad diesel
and home heating oil.
The relative amounts of gasoline and diesel fuel produced
at a refinery is essentially fixed by the configuration of the
refinery's process units. An individual refinery's ability to
vary gasoline and diesel production, for example to increase
diesel fuel production when demand is high, is constrained by
its existing hardware. Refiners can and do make changes to
their product slate and many have already done so this year in
response to the market's high diesel demands.
However, it is not simply a matter of throwing a switch or
turning some knobs on the refinery. As you can see in Chart 2,
the average ratio of gasoline production to diesel fuel
production has been trending downward for the last several
years and just to interpret that chart, as that line trends
down, we are making more diesel compared to gasoline out of the
average refinery.
Clearly, domestic refineries are squeezing the maximum
gallons of diesel out of their equipment. In fact, diesel fuel
production is expected to be about 10 percent higher in 2008
than it was last year in 2007.
The Chairman. Let me just ask on that chart.
Mr. Scott. Yes, sir.
The Chairman. Since, as I understand it, when the line goes
down, you're producing more diesel relative to gasoline.
Mr. Scott. That's correct.
The Chairman. When it goes up, you're producing less.
Mr. Scott. In my written testimony, we go through a fairly
detailed example of about 42 barrels of crude oil, what's the
yield of different products, and it's normally, in general,
about 20 gallons of gasoline and about 10 gallons of diesel
fuel, 2:1. As the markets signal more gas is needed, that line
will tend to trend upwards. As it's currently signaling more
diesel is needed, that line's going to trend downward.
The Chairman. Why has it been going up since--I can't tell
what the date is there at the bottom.
Mr. Scott. From July through August----
The Chairman. Yes.
Mr. Scott [continuing]. It has been going back up. You
know, I am guessing it is probably a result of the summer
driving season and summer gasoline demand and also the need to,
at some point, start building winter diesel fuel stocks.
The Chairman. OK.
Mr. Scott. My colleagues at EIA have reported the national
days of supply for distillate fuel oil, in essence th diesel
inventories, were at 32.1 gallons on September 12 of this year.
This time last year, inventories were about 32.8 days of supply
on hand. Both of these inventory numbers are at the high end of
the historical inventory band for diesel fuel.
Comparing these year-to-year inventory numbers indicates
there is no current drastic shortage of distillate fuel oil in
the United States. As long as inventories are strong, the
markets are signaling that current supplies are adequate for
the current demand.
Increasing demand for diesel in the United States and
globally has shown little elasticity in the face of higher
crude oil and petroleum product pricing. While higher crude oil
prices and the resulting higher gasoline prices have led to
reductions in domestic gasoline demand, as Dr. Gruenspecht
indicated, such demand reductions in diesel have not occurred
to date.
Today, there are a 150 United States refineries owned by
approximately 60 companies with aggregate crude oil processing
capability of 18 million barrels per calendar day. That
compares to 15.2 million barrels per calendar day in 1996. That
growth of 2.8 million barrels per day of capacity is equivalent
to building a new refinery every year for 12 consecutive years.
Despite the significant increases in refinery capacity, the
United States still does not possess significant capacity or
sufficient capacity to satisfy all domestic fuel demand. If we
collectively look at the future, there are strategies that can
be pursued to address these issues in the years ahead.
At a time when diesel prices are high, with adequate
supplies, refineries need more, not less, legislative and
regulatory certainty. In order to make current and future
investment decisions, refiners must know what the regulatory
and tax policy landscape will look like in 5 or 10 years. If
Congress fails to fully consider the fuel supply impacts of
legislation and implementing regulations, then the current
situation will not improve.
In our opinion, Congress should make increasing the
nation's supply of oil, oil products and natural gas, a Number
1 public policy priority. We can start to achieve this goal by
allowing the moratorium on the OCS oil and gas exploration to
expire at the end of this month.
Congress also in our opinion should encourage continued
domestic refining capacity expansion by extending and expanding
the refinery expensing provision in Section 1323 of EPACT 2005.
NPRA was pleased to see that the Senate Finance Committee
included such a provision in its new energy tax package which
the Senate will consider later this week, but we were
disappointed to see that the benefits of this expensing
provision would be overwhelmed and even contradicted by the
punitive tax increases on domestic oil companies also contained
within that bill.
NPRA and its members stand ready to work with Congress to
ensure a stable and effective fuels policy. Such a policy must
encourage the development of a diversity of resources to
improve our national security, assist consumers and protect our
environment.
I appreciate this opportunity to testify and welcome your
questions.
[The prepared statement of Mr. Scott follows:]
Prepared Statement of Gregory M. Scott, Executive Vice President and
General Counsel, National Petrochemical and Refiners Association
i. introduction
Chairman Bingaman, Ranking Member Domenici, and members of the
committee, I am Greg Scott, Executive Vice President and General
Counsel of NPRA, the National Petrochemical and Refiners Association.
NPRA is a national trade association with nearly 500 members, including
those who own or operate virtually all U.S. refining capacity, as well
as most of the nation's petrochemical manufacturers who supply
``building block'' chemicals necessary to produce products ranging from
pharmaceuticals to fertilizer to Kevlar. I am grateful for the
opportunity to share our views on why diesel prices have been so high,
and what can be done to address the situation.
There are a number of factors that contribute to the current high
price of diesel. First and foremost is the high price of the crude oil
from which diesel fuel is derived. Second, like gasoline, diesel is a
commodity product and therefore susceptible to the basic economic rules
of supply and demand. Domestic and global demand for diesel remains
very high and, unlike gasoline, diesel demand has not moderated in the
face of increased prices. Third, despite continued past and current
domestic refinery expansions, current U.S. refining capacity continues
to struggle to meet high domestic demand for the full range of
petroleum products. Finally, the U.S. refinery industry has made
significant investments over the past decade to successfully implement
the first portions of the Environmental Protection Agency's Ultra Low
Sulfur Diesel, or ULSD, program. While the ULSD Program has resulted in
significant reductions in the sulfur levels in highway diesel fuel,
ULSD is both more expensive to make and results in the diversion of
some higher sulfur distillate fractions--fractions that in the past
were used to make highway diesel fuel--into other fuel streams such as
off-road diesel fuel and home heating oil.
I will address each of these factors in more detail below and then
provide NPRA's views on what can be done to address the situation.
ii. background--refining 101
It may be helpful for members of the Committee to have some basic
background on the chemistry and mechanics of oil refining. Such a
framework will make it easier to answer the questions posed by this
hearing.
No two refineries are identical. The choice of processes and
refinery equipment is based on crude oil type, product demand, and
product quality requirements. Refineries process crude oil to produce
many different types of petroleum products. Besides gasoline and diesel
fuel, refineries also produce jet fuel, residual fuel oil, asphalt,
lubricants, petrochemical feedstocks (i.e., ethylene, propane,
propylene, naphtha, and gas oil), and other miscellaneous products.
Crude oil, the basic feedstock, is not a homogenous substance. It
varies widely in color, gravity, viscosity, sulfur content, metals
content and other characteristics. There are hundreds of crude oils
available throughout the world. Crude oil types include sweet (low
sulfur), sour (high sulfur), heavy (high specific gravity), light (low
specific gravity), paraffinic, naphthenic, and intermediate (somewhere
in between paraffinic-and naphthenic-type).
A refinery is really nothing more than a complex, large-scale
chemistry set with four basic processes: distillation, hydrocleaning,
cracking, and blending. Refining separates the many compounds present
in crude oil by boiling it at different temperatures. The chemistry of
hydrocarbons is the principle used in this process--the longer the
carbon chain, the higher the temperature at which the compounds will
boil. Generally, crude oil is heated and changed into a gas. The hot
gases are passed into the bottom of a distillation column and become
cooler as they move up the height of the column. As the gases cool
below their boiling point, they condense into a liquid. The liquids are
then drawn off the distilling column at specific heights, ranging from
heavy residues at the bottom, raw diesel fuels in the mid-sections, and
raw gasoline at the top. These raw fractions are then processed further
to make several different finished products.
The simplest refineries consist of crude and vacuum distillation,
reforming and some hydrotreating capacity. The next level of complexity
adds catalytic cracking and some additional hydrotreating. The most
complex refineries include coking, more hydrotreating and
hydrocracking. Additional processes yield the petrochemicals that serve
as the building blocks for everything from cleaning agents to
cosmetics, clothing, medicines and plastics.
Gasoline is the largest volume petroleum product manufactured by
our nation's domestic refineries (8.4 million barrels/day in 2007),
accounting for nearly half of U.S. petroleum product production.
Distillate fuel oil (which includes highway and off-road diesel plus
home heating oil) accounts for the second largest petroleum product
(4.1 million b/d at U.S. refineries in 2007). EPA reports that diesel
fuel oil is produced at 136 continental U.S. refineries.\1\
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\1\ ``Summary and Analysis of the 2008 Nonroad Diesel Fuel Pre-
compliance Reports,'' EPA420-R-08-017, September 2008, page 4. http://
www.epa.gov/otaq/highway-diesel/compliance/420r08017.pdf
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Diesel fuel is a mixture of hydrocarbons for use as a heavy-duty
truck (compression ignition engine) fuel. Key properties include
aromatics content, cetane number/index, distillation temperatures, and
sulfur content. To be used in the United States, diesel fuel must meet
both EPA and ASTM specifications (ASTM D-975 (Standard Specification
for Diesel Fuel Oils) and 40 CFR Part 80 and 40 CFR Section 69.51) .
Distillate fuel oil is produced from hydrocarbons that are heavier than
gasoline and lighter than lubricants. Therefore, a large fraction of a
barrel of crude oil does not contain hydrocarbons that are suitable as
components of distillate fuel oil. Simply put, a barrel of crude cannot
be used to make only gasoline or diesel, but instead makes a variety of
petroleum products.
It is important to understand this last point. A barrel of crude
oil is 42 gallons. From a barrel of crude, a ``typical'' domestic
refinery can produce approximately 10 gallons of diesel fuel, 20
gallons of gasoline, 4 gallons of jet fuel, and 6 gallons of other
products, including LPG, fuel oil, lubricants, coke and asphalt.\2\ The
precise volume of each product derived from a barrel of crude depends
on many factors, including the chemical characteristics of the crude,
the technology available at the individual refinery to distill and
process the crude's fractions, market demands, and the regulatory
standards a fuel must meet.
---------------------------------------------------------------------------
\2\ The sum of these products is not 42 gallons because a portion
of crude oil is consumed as fuel in the refining process.
---------------------------------------------------------------------------
Thus, while most refineries have some flexibility to alter their
production from a single barrel of crude oil between gasoline, diesel
fuel and other petroleum products, this flexibility is very limited and
is constrained by the basic chemistry of petroleum products, the
equipment at the individual refinery, and the technologies of the
engines in which these products are to be used. For example, if the
markets are signaling that diesel fuel is in high demand, some
refineries might be able, to a modest degree, to increase diesel fuel
production and reduce gasoline production. The ``typical'' numbers
above (20 gallons of gasoline and 10 gallons of diesel from a barrel of
crude) may be altered to introduce a diesel fuel bias (19 gallons of
gasoline and 11 gallons of diesel from a barrel of crude). However,
there is a limit to this bias that cannot be exceeded due to the
equipment available at each refinery.
Domestic petroleum refiners move between a ``gasoline-bias'' and a
``diesel-bias'' throughout an average year, on average maximizing
gasoline production in the Spring of each year (in anticipation of the
summer driving season and high gasoline demand) and maximizing diesel
production in the fall of each year (in anticipation of the home
heating oil season and high distillate demand). As depicted on Chart
1,* the ratio of gasoline production, divided by diesel production, has
steadily declined for the past two and one half years. A declining
ratio translates into greater diesel fuel production.
---------------------------------------------------------------------------
* All Charts have been retained in committee files.
---------------------------------------------------------------------------
Similarly, there are seasonal swings in inventories: the days of
supply of distillate fuel oil ranges from 25-35 days, at the low end at
the beginning of summer and at the high end at the beginning of winter.
EIA reports that the national days of supply for distillate fuel oil
was 32.1 days on September 12, 2008 and was 32.8 on September 14,
2007.\3\ These inventories are at the high end of the historical
inventory band, indicating that there is not a distillate fuel oil
supply shortage at the present time.
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\3\ http://tonto.eia.doe.gov/oog/info/twip/twip_distillate.html
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In addition, EIA reports that the days of supply of gasoline ranges
from 21-26 days, at the low end during the winter and at the high end
at the beginning of summer in order to accommodate the transition from
winter to summer gasoline specifications. The national days of supply
for gasoline was 20.1 days on September 12, 2008 and was 20.2 on
September 14, 2007.\4\
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\4\ http://tonto.eia.doe.gov/oog/info/twip/twip_gasoline.html
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Recently, statistics have been reported that indicate that our
nation's domestic refining industry is not operating at full capacity.
Those statistics do not reflect the full story. First, some refineries
have been out of service for repairs, environmental upgrades,
maintenance (``turnarounds'') and expansion. Second, over the past
month, the operations of several dozen refineries along the Gulf Coast
have been impacted negatively by Hurricanes Gustav and Ike and are
either just getting back to normal operations or are in start-up mode.
Finally, as the inventory statistics above indicate, there is no
shortage of gasoline or diesel fuel in the United States. Thus, as long
as inventories are strong, the markets are signaling to domestic
refiners that current supplies are adequate for current demand. Any
significant increase in domestic production simply is not necessary to
maintain adequate supplies of gasoline and diesel fuel.
Based on this background on petroleum refining and diesel fuel
production and supply, I will now address the factors contributing to
high diesel fuel prices.
iii. high crude oil prices
As noted above, crude oil is the fundamental feedstock for diesel
fuel. As Chart #2 indicates, crude oil prices (the solid line in the
chart) have increased significantly over the past five years. This
chart also tracks (the dashed line in the chart) the price of highway
diesel fuel over this same time period. As you can see, the price of
highway diesel fuel closely tracks the price of crude oil with some
slight variations due to supply and demand issues.
This correlation should not be surprising to the Committee.
According to the EIA, the cost of crude oil makes up 64 percent of the
cost of a gallon of diesel fuel. Refining, transportation and retail
costs comprise another 25 percent, and federal and state taxes are the
remaining 11 percent of the price of a gallon of diesel fuel in August
2008.\5\
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\5\ http://tonto.eia.doe.gov/oog/info/gdu/gasdiesel.asp
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Thus, as long as crude oil prices remain high, it would be
difficult to anticipate significant reductions in diesel fuel prices.
Crude oil prices have come some down off their summer highs of over
$140.00 per barrel. If this trend in crude pricing continues and past
experience provides us with any guide to the markets' future behavior,
moderating crude oil prices should moderate upward pressures on diesel
fuel prices. However, additional factors are at play in the markets
that may cause a departure from past experience.
iv. high global demand for diesel and diesel supply
As I am sure other witnesses before this Committee will relate,
many consider diesel fuel to be the ``fuel of the future'' and are
making significant investments to develop and product diesel-
poweredhighway vehicles in record numbers. In other parts of the world,
this trend towards diesel-powered vehicles and away from gasoline-
powered vehicles is already well underway and will accelerate in the
coming years.
Over the past two decades, Europe has transformed into an economy
that powers its vehicles on diesel fuel. Diesel's share of new vehicle
sales has exceeded 50 percent annually for the last several years.
Europe's strong shift from gasoline to diesel has created supply
challenges for itself and its imports of diesel are growing.
As diesel fuel demand across the world and in the United States
increases, this demand has shown little elasticity in the face of
higher crude oil and petroleum product pricing. While higher crude oil
prices and the resulting higher gasoline prices have led to reductions
in domestic gasoline demand, according to EIA, such demand reductions
for diesel have not occurred to date. This may be due to the fact that
substantial amounts of diesel consumption is non-discretionary (a
school bus must still drive its route; a commercial truck must still
deliver its goods). Conversely, some gasoline consumption appears to be
discretionary, as both overall petroleum consumption and gasoline
consumption has declined, month-over-month, in each of the last 12
months, according to EIA .
Domestic (and world-wide) refining capacity for gasoline and diesel
fuel is increasing to respond to this increased demand. Today, there
are 150 U.S. refineries, owned by 60 companies, with aggregate crude
oil processing capacity of 17.6 million barrels per calendar day (as of
January 1, 2008) as compared to 15.2 million b/d on January 1, 1996.\6\
And these refineries are getting larger and more complex. In 1981, the
average refinery in the United States had approximately 57,000 b/d of
crude oil distillation capacity. Today, the average refinery has a
capacity of over 110,000 b/d. This growth is equivalent to building a
new refinery every year for 12 consecutive years.
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\6\ http://www.eia.doe.gov/emeu/aer/pdf/pages/sec5--21.pdf 9
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Despite these increases in domestic refining capacity over the past
decade, the United States continues to struggle to meet domestic
gasoline and diesel fuel demand. The U.S. is a net importer of gasoline
and a net exporter of distillate fuel oil.\7\ Although precise
statistics are not available as to the specifications of the
distillates being exported, it is likely that the distillates exported
from the U.S. are higher sulfur diesel fuels, which is not in demand in
this country due to the ULSD program. These higher sulfur fuels
continue to command higher prices due to significant demand overseas.
As a result, most distillate exports are designed to serve these
demands.
---------------------------------------------------------------------------
\7\ Exports of distillate fuel oil in May and June 2008 were
444,000 and 654,000 b/d,7 respectively (by comparison, exports of
distillate fuel oil in 2007 averaged 240,000 b/d and imports were
301,000 b/d). Distillate fuel oil in May and June 2008 was shipped from
the U.S. to more than 20 countries, primarily in South America and
Europe. Imports of distillate fuel oil in May and June 2008 were
188,000 and 179,000 b/d, respectively. The U.S. is a net exporter of
distillate fuel in response to increasing, strong global demand and
adequate U.S. supplies. This tight global supply-demand balance may
result in a continuation of the recent role for the U.S. as a net
exporter of distillate fuel oil (in 2007 and earlier years, the U.S.
was a net importer of distillate fuel oil).
---------------------------------------------------------------------------
v. diesel product costs have increased, and highway diesel capacity has
remained static, due to ulsd program
The Environmental Protection Agency (EPA or Agency) has required
significant reductions in the sulfur content of diesel fuel. The Agency
issued rules in 2001 to reduce the sulfur content in highway diesel
fuel by 97% by June 2006 and standards in 2004 to reduce the sulfur
content in nonroad diesel by 75% by June 2007 and by 99% by June 2010.
These regulations required the installation of new, or increased
capacity (e.g., expanding the reactor volume) process equipment (i.e.,
distillate hydrotreater) to remove the sulfur compounds in distillate
fuel oil-compatible streams. This equipment also results in higher
operating costs because of the hydrogen and catalysts required for this
equipment. For example, the sulfur in crude oil may be 5,000--20,000
parts per million (ppm); so a considerable amount of sulfur reduction
is required to meet EPA regulations at a cap of 15 ppm. EPA's standard
can be technically met, but at a high cost. U.S. refiners have spent
billions of dollars on these units. There has been considerable
activity securing permits, ordering and installing equipment, unit
commissioning, and integrating the equipment at the refinery.
There are several different types of sulfur compounds in these
streams and some are harder to remove than others. There is also
variability depending on the type of crude oil and processing before
the stream is desulfurized. In addition, this desulfurization step must
be accomplished while ensuring that other key properties are on-spec
(i.e., density, cloud point, and distillation temperatures).
vi. impact of hurricanes on domestic refining
Hurricane Gustav made landfall in Louisiana on September 1 and
Hurricane Ike made landfall in Texas on September 15. These events were
obviously disruptive to people, businesses and property. Ports,
refineries, pipelines and offshore oil and gas platforms were closed.
After the passage of these hurricanes, damage was assessed and
facilities came back as power was available and safety concerns were
considered. Some refineries are restarting production at reduced rates.
Others have damage to repair before they are available to restore
operations.
Many refineries in the Houston/Galveston area are still shut down
or in restart mode. Four refineries in the Port Arthur, Texas area are
still shut down. In the Houston/Galveston area, five refineries are
still shut down and four are restarting. NPRA does not have an estimate
of when all of these affected refineries will return to full operation.
The U.S. Department of Energy has expeditiously delivered emergency
exchange crude oil from the Strategic Petroleum Reserve to refineries
in response to disruptions caused by both hurricanes. The exchange
agreement includes return of the principal amount of similar quality
crude oil to the SPR, plus payment of an in-kind negotiated premium.
This is an appropriate use of this resource.
vii. recommendations
NPRA has several recommendations for this Committee concerning
steps that can be taken to address current high diesel fuel prices.
Unfortunately, in the short term, there is little that can be done in
the public policy arena to immediately impact diesel fuel supplies and
prices. However, if we collectively look to the future, there are
strategies that can be pursued to address these issues in the years
ahead.
First, a general recommendation. At a time when diesel prices are
high, despite adequate supplies of diesel, refineries need more----not
less----legislative and regulatory certainty to make reliable project
feasibility analyses and to drive future investment opportunities. If
Congress fails to fully consider the fuel supply impacts of legislation
and implementing regulations, then this situation will not improve.
Refiners support and encourage continued environmental progress.
However, if policymakers have tended to overlook and take for granted
the supply side of the environmental-energy equation, then we are
destined for more of the same. It is imperative, in our opinion, that
determining the impact on supply must be fully embedded in the policy-
making process. In working with policymakers on improvements to fuels
and facilities, NPRA has often commented that industry needs time,
flexibility or more realistic standards to minimize negative impacts on
fuel supply. Policymakers, however, often opt to promulgate regulations
that are ``technology forcing,'' constructed with limited and often
theoretical ``margins of safety,'' and requiring implementation in the
shortest time possible--all without adequate attention to fuel supply
impacts. Congress should make increasing the nation's supply of oil,
oil products and natural gas a number one public policy priority.
Let me apply this general recommendation to several specific
legislative initiatives currently under consideration by this Congress.
Since the price of crude oil makes up a significant portion of the
cost of diesel fuel, reducing crude oil prices should have a beneficial
impact on diesel prices. Applying basic economic principles, if crude
oil supplies increase and demand remains the same, then the upward
pressures on products derived from crude, such as crude oil, should
lessen. To increase crude oil supplies, Congress should permit the
moratorium on oil and gas exploration on the Outer Continental Shelf to
lapse at the end of this month and free our nation's energy industries
to increase crude oil supplies.
Congress also should encourage continued domestic refining capacity
expansion by extending and expanding the refinery expensing provision
in section 1323 of the Energy Policy Act of 2005. We were pleased to
see such a provision in the most recent energy tax package released by
the Senate Finance Committee and strongly support that provision. This
initiative encourages the expansion of domestic refineries and a
resultant increase in diesel fuel supplies.
However, the same Senate Finance bill that includes the refinery
expansion provision also includes tax measures that will raise the cost
of capital on domestic refiners--in effect, washing away the capacity
expansion incentives in other sections of the bill. Clearly, Congress
is sending mixed messages with respect to whether domestic refinery
expansions should be encouraged. If this Congress wants domestic
refinery capacity increased, then it must adopt policies that further
these goals----not policies that work against them.
The refining industry is further challenged to comply with mandated
reductions in diesel sulfur content in 2010 and the enormous federal
Renewable Fuel Standard, which includes significant submandates for
biodiesel and renewable diesel. Again, these policies respectively
discourage increased domestic diesel fuel production and increase the
costs of this production.
viii. conclusion
NPRA members are dedicated to working cooperatively at all levels
to ensure an adequate supply of clean, reliable and affordable
transportation fuels. We stand ready to work with Congress to ensure a
stable and effective fuels policy that utilizes a diversity of
resources to improve our national security, assist our consumers and
protect our environment, all without jeopardizing the refining
industry's jobs and profitability and other industries dependent on the
financial health of the refining industry. I appreciate this
opportunity to testify today and welcome your questions.
The Chairman. Thank you very much.
Ms. Windsor.
STATEMENT OF BARBARA WINDSOR, PRESIDENT AND CEO, HAHN
TRANSPORTATION, INC., NEW MARKET, MD
Ms. Windsor. Thank you, Mr. Chairman and Senator Sessions.
My name is Barbara Windsor. I'm President and CEO of Hahn
Transportation, headquartered in New Market, Maryland.
My family built and grew this business over the past 75
years and today we operate more than 100 trucks and employ over
a 150 individuals. As a trucking company, we are dependent on a
plentiful supply of diesel fuel. In fact, our company purchases
approximately 2,600 gallons of diesel fuel daily to ensure that
our trucks are able to deliver freight to our customers.
Last year, Hahn Transportation spent over 1.7 million on
diesel fuel and this year, we are expected to pay an additional
$950,000 to $1 million more on that fuel. This dramatic 55
percent year over year increase in the cost of diesel fuel is
harmful to the trucking industry and to the United States
economy.
Today, I appear before you representing not just my company
but also the American Trucking Association. ATA is the national
trade association of the trucking industry. Through its
affiliates, state associations and affiliated conferences and
other organizations, ATA represents more than 37,000 trucking
companies throughout the United States.
Diesel fuel is the lifeblood of the trucking industry. Each
year, the trucking industry consumes over 39 billion gallons of
diesel fuel. This means that a one cent increase on the average
price of diesel costs the trucking industry an additional $391
million a year in fuel expenses.
The national average price of diesel fuel is currently over
$4 per gallon which is a $1.06 more than just a year ago. The
trucking industry is on pace to spend an incredible $159.9
billion on fuel this year. This is $47 billion more than we
spent in 2007 and more than double the amount we spent just 4
years ago.
Today, it costs approximately $1,200 to refuel a truck. As
a result of this dramatic increase in the price of diesel,
which has coincided with the downturn in the economy and the
softening of the demand for the freight transportation
services, many trucking companies are struggling to survive.
In the first half of 2008, more than 1,900 trucking
companies with at least five trucks or more have failed. This
was the largest number of trucking-related failures since 2001.
It is very likely that a large number of companies that operate
fewer than five trucks also will have turned in their keys
during this first half of the year.
For most truckers, fuel has now surpassed labor as the
largest operating expense we have. Diesel fuel's a commodity
that is refined from petroleum. Like most commodities, it is a
competitive marketplace. Its price is determined by supply and
demand. The dramatic run-up in petroleum product prices,
including gasoline and diesel, is the result of a confluence of
factors.
First, there's been an increase in global demand for
petroleum, primarily on the rapid growth in China and India,
but also from the increased demand among Europe and the Persian
Gulf countries.
Second, there is very little excess petroleum in the market
and any disruptions, potential and real, translates into an
immediate price spike.
Third, we have borne witness to a dramatic decline in the
value of the dollar. Five years ago, the dollar was at a parity
with the Euro. Today, the dollar is worth nearly 30 percent
less than the Euro.
Finally, we note that there has been a significant increase
in the amount of dollars invested in the petroleum futures
market by non-commercial participants and believe that this
increased speculation may be partially responsible for the
increase in commodity prices.
Against this backdrop, we greatly appreciate the
opportunity to discuss actions that Congress can take to help
address the soaring prices of diesel fuel. The fuel prices we
face today is very severe. There is no one single solution to
high oil prices and Congress must embrace a multifaceted
approach to solving this problem.
We are not going to be able to conserve our energy, our way
out of this crisis, nor will we increase our production,
provide a total solution to this. We're going to need every
tool in the tool shed to address this crisis. Keeping with this
metaphor, we need a drill to expand the supply of petroleum, we
need a saw to cut the demand for petroleum, and we need a
hammer of government to ensure that the petroleum markets are
transparent and not subject to increased speculation by
manipulation.
First recommendation is to increase supply, increase the
domestic exploration, increase domestic refining capacity, and
one national diesel fuel standard.
The second recommendation is to demand control our speed,
reduce main engine idling, address congestion and highway
infrastructure, fully fund EPA's Smart Way Program, enhance
truck productivity, support truck fuel economy standards and
support research and development of new technology.
Third recommendation is to ensure market transparency and
prevent excessive speculation and manipulation.
During the past 5 years, the assets allocated to
commodities, commodity index trading strategies have risen from
13 billion to 260 billion. The huge increase in dollars
invested in the petroleum futures market and the prevalence of
exempt transactions and/or electronic exchanges that are not
regulated by the Commodities Future Trading Commission has led
many experts to conclude that ``the current price of petroleum
is artificially inflated and has departed from the fundamental
market forces of supply and demand.''
While we cannot quantify the extent of which speculation is
responsible for the recent dramatic increase of the price of
crude oil, we believe that excessive speculation is part of the
problem. For this reason, we believe that Congress should take
steps to increase the transparity of the petroleum exchanges
and establish reasonable position limits for non-commercial
traders to prevent excessive speculation.
At a minimum, Congress should require the CFTC to regulate
the petroleum markets to the same extent that regulates other
commodity trading. Reasonable position limits should be imposed
that ensure the ability of consumers of the underlying
commodity to effectively hedge market risk while limiting
excessive speculation from investors that have been using the
futures market for asset accumulation.
Mr. Chairman, ATA appreciates this opportunity to offer our
insight into measures that the country should take to help
address this high diesel fuel crisis and I'd be happy to answer
any questions.
Thank you.
[The prepared statement of Ms. Windsor follows:]
Prepared Statement of Barbara Windsor, President and CEO, Hahn
Transportation, Inc., New Market, MD
Mr. Chairman and Members of the Committee:
My name is Barbara Windsor, and I am the President of Hahn
Transportation, a trucking company headquartered in New Market,
Maryland. My family built and grew this business over the past 75 years
and today we operate more than 100 trucks and employ over 150
individuals. As a trucking company, we are dependent on a plentiful
supply of diesel fuel. In fact, our company purchases approximately
2,600 gallons of diesel fuel daily to ensure that our trucks are able
to deliver freight to our customers. Last year, Hahn Transportation
spent approximately $ 1.7 million on diesel fuel and this year we
expect to spend an additional $950,000 more for that fuel. This
dramatic (55%) year-over-year increase in the cost of diesel fuel is
harmful to the trucking industry and the U.S. economy.
Today, I appear before you representing not just my company, but
also the American Trucking Associations (ATA). I am proud to serve as
an ATA Vice Chairman and the former Chairman of its Political Action
Committee. ATA is the national trade association of the trucking
industry. Through its affiliated state trucking associations,
affiliated conferences and other organizations, ATA represents more
than 37,000 trucking companies throughout the United States.
The trucking industry is the backbone of this nation's economy
accounting for more than 80% of the nation's freight bill with nearly 9
million Americans working in trucking-related jobs. The trucking
industry delivers virtually all of the consumer goods in the United
States. We are an extremely competitive industry comprised largely of
small businesses. Roughly 96% of all interstate motor carriers operate
20 or fewer trucks.
Diesel fuel is the lifeblood of the trucking industry. Each year,
the trucking industry consumes over 39 billion gallons of diesel fuel.
This means that a one-cent increase in the average price of diesel
costs the trucking industry an additional $391 million a year in fuel
expenses. The national average price of diesel fuel is currently over
$4.00 per gallon, which is nearly $1.06 more than just one year ago.
The trucking industry is on pace to spend an incredible $159.9
billion on fuel this year. This is $47 billion more than we spent in
2007, and more than double the amount we spent just four years ago.
Today it costs approximately $1,200 to refuel a truck. As a result
of this dramatic increase in the price of diesel, which has coincided
with a downturn in the economy and a softening of the demand for
freight transportation services, many trucking companies are struggling
to survive. In the first half of 2008, more than 1,900 trucking
companies with at least five trucks failed. This was the largest number
of trucking related failures since 2001. It is very likely that a large
number of companies that operate fewer than 5 trucks also have turned
in their keys during the first half of this year.
This hardship surprises few in the industry. For most truckers,
fuel has surpassed labor as their largest operating expense. Over the
past five years, total industry consumption of diesel fuel has gone up
roughly 15 percent, while the price of diesel has nearly tripled during
the same time period.
Trucking is a highly competitive industry with very low profit
margins. This explains why many trucking companies are reporting that
higher fuel prices have greatly suppressed profits, if they are making
a profit at all. Our industry cannot simply absorb this rapid increase
in fuel costs. We must pass some of these costs through to our
customers. So not only do high fuel prices devastate truckers, but
their customers as well. Ultimately, the consumer is forced to pay
higher prices for food, clothing and other basic necessities.
a. why has the price of diesel increased?
Diesel fuel is a commodity that is refined from petroleum. Like
most commodities in a competitive marketplace, its price is determined
by supply and demand. The following chart demonstrates the close
correlation between the price of petroleum and the prices of gasoline
and diesel fuel.
With the exception of a brief period following Hurricanes Katrina
and Rita in 2005, the prices of gasoline and diesel have paralleled the
price of petroleum. The price spikes in refined products following the
hurricanes of 2005 help illustrate the problem our nation faces when
petroleum is available in the marketplace, but refining capacity is
inadequate.
The dramatic run-up in petroleum product prices, including gasoline
and diesel, is the result of a confluence of factors. First, there has
been an increase in global demand for petroleum primarily from the
rapid growth in China and India, but also from increased demand among
Europe and the Persian Gulf countries. Until recently, the United
States demand for petroleum and refined products has steadily
increased. This year, however, as a result of exorbitantly high fuel
prices and a slowing economy, the U.S. has experienced some demand
destruction. The U.S. Energy Information Administration estimates that
U.S. petroleum consumption fell 4.5% during the first half of 2008,
compared with the corresponding period in 2007.
Second, the story behind the global supply of petroleum amounts to
a wall of worry. The U.S. is the third largest oil producer in the
world; however, our production of domestically produced oil from Alaska
is declining and new sources of production have been placed off limits
for environmental reasons. A large majority of the world's oil supply
is controlled by foreign countries. Many of these countries have come
together to form the OPEC cartel, whose mission is to restrict
petroleum supplies and prop up prices. Other oil producing nations,
such as Nigeria, Venezuela and Russia, are politically unstable or
simply do not agree with U.S. policies and may intentionally withhold
oil from the market in an attempt to hurt U.S. interests. As a result,
there is very little excess petroleum in the market and any
disruption--potential or real--translates to an immediate price spike.
Added to this wall of worry is an increased risk premium on each
barrel of oil. This risk premium is based upon geopolitical instability
and a new found appreciation of the vulnerability of U.S. production
and refining capabilities to hurricanes in the Gulf of Mexico and
southern U.S.
Third, we have borne witness to a dramatic decline in the value of
the dollar. Five years ago, the dollar was at parity with the Euro.
Today, the dollar is worth nearly 30% less than the Euro.
While the weak dollar has helped U.S. manufacturers export their
goods, it has hurt U.S. consumers who have seen significant erosion in
their purchasing power. Since oil is denominated in dollars, a large
percentage of the increased price of oil can be attributed to the
significant fall in the value of the dollar relative to other world
currencies.
Finally, we note that there has been a significant increase in the
amount of dollars invested in the petroleum futures market by non-
commercial participants and believe that this increased speculation may
be partially responsible for the increase in commodities prices.
It is clear that our energy crisis is a complex problem that
requires a comprehensive solution.
b. a comprehensive solution is required
Against this backdrop, we greatly appreciate the opportunity to
discuss actions that Congress can take to help address the soaring
price of diesel fuel. The fuel crisis we face today is severe. There is
no one single solution to high oil prices and Congress must embrace a
multifaceted approach to solving this problem. We are not going to be
able to conserve our way out of this crisis. Nor will increased
production provide a total solution. We are going to need every tool in
the tool shed to address this crisis. Keeping with this metaphor, we
need a drill to expand the supply of petroleum, we need a saw to cut
the demand for petroleum, and we need the hammer of government to
ensure that petroleum markets are transparent and not subject to
excessive speculation or manipulation.
1. The Drill--Recommendations to Increase Supply
For the foreseeable future, the trucking industry will continue to
depend upon the diesel engine and an adequate supply of diesel fuel to
deliver America's freight. Presently, there is no technology that is
capable of replacing the efficiency of the diesel engine for heavy duty
trucks. As our population continues to grow and other nations continue
to industrialize, the global demand for diesel fuel will continue to
increase.
The International Energy Agency has stated that global supplies may
not keep up with demand through 2013 and that spare capacity from the
Organization of Petroleum Exporting Countries will shrink, resulting in
a ``tight'' market with little spare oil production capacity. The
dramatic increase in the price of oil is partially fed by the
perception that over the next few years there will be a shortage of oil
as a result of the failure to invest in increasing oil supplies. For
these reasons, in addition to reducing consumption and lessening the
demand for petroleum, we need to focus on increasing our supply of
crude oil.
A. Increase Domestic Exploration.--ATA believes that increasing our
domestic supply of crude oil will help lower diesel fuel prices. To
achieve this goal we need to begin environmentally responsible
exploration for crude oil in the Arctic National Wildlife Reserve and
Outer Continental Shelf. We also must begin developing the oil shale
resources in Colorado, Utah and Wyoming and eliminating the barriers to
utilizing coal-to-liquid technologies to exploit our vast domestic coal
resources. The technology exists to ensure that these resources are
developed in a manner that protects the environment. We also must
consider the fact that drilling in Alaska or mining in Colorado
requires Clean Air Act permits, Clean Water Act permits and land use
development permits, all of which contain a host of environmental
protections. Compare this to the drilling for oil in Venezuela or off
the coast of Cuba with virtually no environmental protections. The
debate over whether to drill in these areas of the United States has
been ongoing for decades. In light of geopolitical instability, the
growing demand for energy from Asia and Europe, and new drilling
techniques to ensure that environmentally-sensitive areas remain
protected, it is time to change these policies and develop these
critical domestic resources.
B. Increase Domestic Refining Capacity.--For years now it has been
apparent that the U.S. has underinvested in refining capacity.
Regardless of the reason for this underinvestment (e.g., environmental
restrictions or economic factors), it is time to reverse this trend.
To help expand U.S. refining capacity, ATA has asked that EPA
streamline its permitting process to facilitate refinery expansions and
new refinery construction. Congress also should consider enacting
incentives to encourage increased domestic refinery capacity.
C. One National Diesel Fuel Standard.--While gasoline moves people,
diesel fuel moves our economy. Due to the uniquely interstate nature of
diesel fuel, Congress should take extraordinary steps to ensure that no
state enacts a boutique diesel fuel mandate. Today, California and
Texas require special boutique diesel fuel blends. These unique blends
cost more to produce and prevent diesel fuel from simply being
transported from one jurisdiction to another in times of shortage. In
addition, boutique fuels are typically produced by only a handful of
refineries, which results in less competition, higher refining margins,
and ultimately higher fuel prices.
While Congress took steps to curb the proliferation of boutique
fuels as part of the Energy Policy Act of 2005, the Act created a
loophole for states seeking to enact renewable fuel mandates. To date,
five states have enacted biodiesel mandates and several others are
considering this course of action. In light of the recently enacted
biodiesel mandate as part of the expanded federal renewable fuel
standard (RFS), Congress should preempt state biodiesel mandates. These
duplicative state mandates are not needed to ensure a strong domestic
biodiesel industry and will simply create an economic environment where
biodiesel producers can charge extraordinarily high prices for their
product--insulated from the checks and balances of a competitive
market. The federal RFS guarantees that 1 billion gallons of biodiesel
will be consumed domestically--the free market must be allowed to
operate to ensure that this mandate is achieved in the most cost
effective manner possible. State biodiesel mandates will distort the
free market and prevent biodiesel from being consumed in those parts of
the country where it is most economical to do so. Congress must preempt
state biodiesel mandates as inconsistent with our national interest and
efforts to promote the cost effective use of biofuels.
While on the subject of biodiesel, we would be remiss if we did not
call for renewed efforts to close the splash and dash loophole. The
American public would be outraged if they knew that their tax dollars
were being spent to subsidize biodiesel that is ultimately exported for
sale outside the U.S. Beginning next year the Congressionally-mandated
biodiesel standard will require U.S. companies to consume 500 million
gallons of biodiesel. This number jumps to a billion gallons in 2012.
For this reason, we do not believe that we should create an incentive
to export subsidized biodiesel, which will drive up the price of this
mandated alternative fuel for U.S. consumers.
2. The Saw--Recommendations to Reduce Demand
Reducing the nation's consumption of diesel fuel will reduce the
overall demand for petroleum and should result in lower prices for
petroleum products.
A. Control Speed.--The typical heavy-duty diesel truck travels
between 5 and 7 miles on a gallon of diesel, depending upon load,
route, equipment and drivers' skill. Speed has a direct correlation to
fuel consumption. In fact, for each mile per hour that a truck travels
above its optimal fuel efficiency point, its fuel economy decreases by
1/10 of a mile per gallon. For example, a truck traveling at 65 mph
that is capable of achieving 6 miles per gallon, will achieve only 5
miles per gallon when traveling at 75 mph. For this reason, ATA
recommends that Congress establish a national speed limit of 65 mph for
all vehicles. Of course, to achieve the maximum benefit of this policy,
the federal government will need to partner with States to ensure
strict enforcement of the 65 mph speed limit.
ATA also has petitioned the Administration to require that all new
trucks be equipped with factory-installed devices that electronically
limit the truck's maximum speed to 68 mph. In addition to the fuel
conservation benefit from ensuring that trucks do not exceed this
speed, we are confident that this measure will further reduce the
number of truck-related fatalities that occur on our nation's roadways.
B. Reduce Main Engine Idling.--Truck drivers idle their trucks out
of necessity. The Department of Transportation's Federal Motor Carrier
Safety Administration (FMCSA) Hours-of-Service regulations require
mandatory off duty rest periods. Many over-the-road drivers rest in the
sleeper berth compartment in their truck cabs. As the driver rests in
the truck's sleeper compartment, he/she will often need to cool or heat
the cab to rest comfortably. In extremely cold weather, truck drivers
also will idle their engines to prevent the engine block from freezing.
Argonne National Laboratory estimates that the average long-haul truck
idles for 1,830 hours per year. With hundreds of thousands of these
trucks on the road, idling has a significant impact on fuel consumption
and the environment. The U.S. Environmental Protection Agency (EPA)
estimates that idling trucks consume approximately 1.1 billion gallons
of diesel fuel annually.
Several options are currently available to reduce engine idling.
Auxiliary power units (APUs) are among the most popular choices in
anti-idling equipment providing climate control (heating and cooling),
engine preheating, battery charging, and power for household
accessories without use of the truck's main engine. APUs have been
proven by the Federal Highway Administration to save up to one gallon
of fuel per hour of idling and to substantially reduce emissions and
greenhouse gases.
More than 30 states, counties, or cities have adopted regulations
limiting the amount of time a commercial vehicle can idle. While
reducing main engine idling is a laudable goal, three major barriers
stand in the way of trucking companies purchasing such equipment for
their daily use: (1) the failure to grant exceptions for the additional
weight associated with anti-idling equipment, (2) the imposition of a
federal excise tax on the purchase of such devices, and (3) the actual
cost of the devices themselves.
Since idling reduction equipment will add weight to a truck, many
fleets cannot afford to reduce their cargo capacity to compensate for
the installation of idle reduction equipment on a truck. To address
this concern, Congress authorized a 400-pound weight exemption for
trucks equipped with idle reduction equipment under Section 756 of the
Energy Policy Act of 2005. While Congress' intent was to mandate this
exemption, the Federal Highway Administration (FHWA) has determined
that states ``may'' adopt the exemption on a voluntary basis. FHWA's
interpretation of the weight exemption gives states the option of
whether to allow the exemption or not. To date, 32 states have passed
legislation recognizing the 400-pound weight tolerance and a handful of
states are exercising enforcement discretion. ATA asks Congress to
clarify the 400-pound weight exemption as being applicable to idling
reduction equipment nationwide.
A recent IRS interpretation applies the Federal Excise Tax (FET) to
the purchase of idle reduction equipment, which has increased the cost
of this equipment and consequently reduced consumer demand for these
proven anti-idling solutions. The 12 percent tax acts as a disincentive
to truckers looking to reduce main engine idling. FET makes the
acquisition of APUs more expensive and beyond the reach of potential
buyers. The tax alone for a large fleet looking to buy 1,000 APUs at a
typical retail price of $8,000 is almost $1 million. Taxing devices
that are proven to reduce fuel consumption and diesel emissions clearly
sends the wrong message to the nation. By taxing APUs, we are doing a
great disservice to both our economy and the environment. To address
these disincentives, ATA asks Congress to amend Section 4051 of
Internal Revenue Code to make idling reduction equipment purchases
exempt from FET. This action will increase demand for the introduction
of idling reduction equipment, thereby ensuring greater fuel
conservation and a cleaner environment.
While APUs are a proven alternative to main engine idling, most
trucking companies just cannot afford purchasing devices that can cost
up to $10,000 per unit. ATA is seeking financial incentives from
Congress in the way of tax credits or grants to expedite the
introduction of idling reduction equipment across the Nation.
C. Address Congestion and Highway Infrastructure.--Americans waste
a tremendous amount of fuel sitting in traffic. According to the most
recent report on congestion from the Texas Transportation Institute, in
2005, drivers in metropolitan areas wasted 4.2 billion hours sitting in
traffic, consuming 2.9 billion gallons of fuel annually. ATA estimates
that if congestion in these areas was eliminated, nearly 32 billion
gallons of fuel would be saved and carbon emissions would be reduced by
314 million tons over a 10-year period. ATA recommends that Congress
invest in a new congestion reduction program to eliminate major traffic
bottlenecks, with a specific focus on bottlenecks that have the
greatest impact on truck traffic.
D. Fully Fund EPA's SmartWaySM Program.--In February
2004, the freight industry and EPA jointly unveiled the
SmartWaySM Transport Partnership, a collaborative voluntary
program designed to increase the energy efficiency and energy security
of our country while significantly reducing air pollution and
greenhouse gases. The program, patterned after the highly-successful
Energy Star program developed by EPA and DOE, creates strong market-
based incentives that challenge companies shipping products and freight
operations to improve their environmental performance and improve their
fuel efficiencies. To become a partner a fleet must commit to reduce
fuel consumption through the use of EPA-verified equipment, low-
viscosity lubricants, or other measures. By 2012, the
SmartWaySM program aims to save between 3.3 and 6.6 billion
gallons of diesel fuel per year. EPA predicts SmartWaySM
participants will also reduce their annual greenhouse gas emissions by
48 million tons of CO2 equivalents. SmartWaySM is
one voluntary greenhouse gas program that not only works, but exceeds
expectations.
SmartWaySM is a unique resource that reviews the use of
new technologies that are proven to reduce fuel consumption and then
uses market incentives to promote their deployment. The trucking
industry has fully embraced SmartWaySM and relies upon the
innovativeness of this cutting edge program. The entire nation benefits
from SmartWaySM through the fuel that is conserved and the
emissions reductions it produces. For this reason, Congress should
increase the investment in this program to facilitate its expansion.
While the program is growing by leaps and bounds, future funding
remains uncertain. ATA and other freight and shipping sectors continue
to work towards ensuring a separate line item in future EPA
appropriations for SmartWaySM, but we are troubled by the
FY08 funding cuts to the program. More specifically, total monies
allocated to the program this year dropped from roughly $3 million in
FY07 to $2 million in FY08. Funding cuts to grants, contracting,
marketing, technology development, and other program expenses have
severely undermined the mission of the program. It is our hope that EPA
will redirect an additional $1 million from the Climate Protection
Program under the FY08 budget to ensure the continued growth and
success of this remarkable program. Given that the Energy Star
program's annual operating budget is $50 million, we also ask that
Congress provide a line item appropriation to ensure that
SmartWaySM is adequately funded in the future.
E. Enhance Truck Productivity.--By reducing the number of trucks
needed to move the nation's freight, the trucking industry can reduce
fuel consumption, which would produce significant environmental
benefits. More productive equipment--where it is consistent with
highway and bridge design and maintenance of safety standards--is an
additional tool that should be available to states. A recent study by
the American Transportation Research Institute found that use of these
vehicles could reduce fuel usage by up to 39%, with similar reductions
in criteria and greenhouse gas emissions. The reduction in truck
vehicle miles traveled on highways such as the New York Thruway,
Massachusetts Turnpike, Florida Turnpike, and on roads throughout the
Western United States, has lowered the amount of fuel burned in these
states. These examples of responsible governance could be replicated by
other states if given the necessary flexibility under federal law.
F. Support Truck Fuel Economy Standards.--Congress should ensure
that fuel economy standards for commercial medium-and heavy-duty trucks
are technologically and economically feasible, do not compromise truck
performance, and provide manufacturers sufficient stability and lead
time for production. Given that fuel economy in the industry has
remained flat over the last quarter century and fuel now is the largest
operating expense for many fleets, it is more critical than ever to
increase fuel economy for these vehicles. ATA will be working closely
with the U.S. Department of Transportation and the National Academy of
Sciences as they evaluate fuel economy, fuel efficiency, and establish
associated standards for medium-and heavy-duty trucks as directed under
the Energy Information and Security Act of 2007.
G. Support Research and Development of New Technologies.--As we
look toward the future, the trucking industry will be pressured to
reduce its carbon output. The industry will find it difficult to do
this without new affordable technologies. To address this issue,
Congress should fund research and development in the areas of new
engine technologies, aerodynamics, low-carbon fuels, fuel additives,
lubricity, tires, batteries, hybrids, anti-idling equipment,
insulation, and rolling resistance specific to operations of line-haul
trucks. Technology advancements have stalled for many years and an
infusion of funding into an organized research program will be critical
to developing the next generation of more efficient and lower carbon-
emitting trucks.
3. The Hammer--Recommendations to Ensure Market Transparency and
Prevent Excessive Speculation and Manipulation.
During the past five years the assets allocated to commodity index
trading strategies have risen from $13 billion to $260 billion. The
huge increase in dollars invested in the petroleum futures markets and
the prevalence of exempt transactions and/or electronic exchanges that
are not regulated by the Commodity Futures Trading Commission (CFTC)
has led many experts to conclude that the current price of petroleum is
artificially inflated and has departed from the fundamental market
forces of supply and demand. While we cannot quantify the extent to
which speculation is responsible for the recent dramatic increase in
the price of crude oil, we believe that excessive speculation is part
of the problem. For this reason, we believe that Congress should take
steps to increase the transparency of the petroleum exchanges and
establish reasonable position limits for non-commercial traders to
prevent excessive speculation. At a minimum, Congress should require
the CFTC to regulate the petroleum markets to the same extent that it
regulates other commodity trading activities. Reasonable position
limits should be imposed that ensure the ability of consumers of the
underlying commodity to effectively hedge market risk while limiting
excessive speculation from investors that have begun using the futures
markets for asset accumulation.
Balancing the need for an efficient petroleum market with the
desire to limit petroleum speculation could help burst any speculative
bubble that has formed in the petroleum markets. Congress should
consider the merits of expanding government oversight of electronic
petroleum exchanges and establishing position limits to make it less
attractive for Wall Street to speculate on petroleum prices, while
ensuring that a robust market exists for legitimate purposes. Most
importantly, we note that the recommendations to increase oversight and
establish reasonable position limits for non-commercial traders are
remedies that have no potential downside. Under a worst case scenario,
the transparency of the market is improved, but the price of oil
remains unaffected. Under a best case scenario, these remedies burst
the speculative bubble that continues to grow, restores investor
confidence in the futures markets, and drives asset accumulators out of
the futures markets resulting in a relatively quick reduction in the
price the oil.
ATA appreciates this opportunity to offer our insight into measures
that the country should take to help address high diesel fuel prices.
The Chairman. Thank you very much.
Dave, we're glad to have you here. Please go right ahead.
STATEMENT OF DAVE MCCURDY, PRESIDENT AND CEO, ALLIANCE OF
AUTOMOBILE MANUFACTURERS
Mr. McCurdy. Thank you, Mr. Chairman and members of the
committee.
On behalf of the members of the Alliance of Automobile
Manufacturers, the 10-member companies, Senator Sessions
mentioned one, Mercedes Benz, we have 4 German members,
Mercedes, BMW, Volkswagen and Porsche, and 3 Japanese members,
Toyota, Mazda, Mitsubishi, and the 3 United States-based
manufacturers, General Motors, Ford and Chrysler, and soon an
11th member, Jaguar-Land Rover.
But we do appreciate the opportunity to come talk to you
about the role that clean diesel will play in reinventing the
automobile.
The principal challenge, as you identified, Mr. Chairman,
will be removing both the fuel and technology cost barriers
that currently exist. Last year, Alliance members supported a
tough new energy law, primarily written by this committee, that
raises fuel economy to at least 35 miles per gallon by 2020, a
40 percent increase. Higher mileage means lower carbon dioxide
emissions. Under this law, the auto industry will dramatically
reduce CO2 by 30 percent. We are the first industry
to commit to such challenging CO2 reductions.
Currently, there are close to five million diesel vehicles
on U.S. roads and highways, those light-duty trucks and cars.
Over the next year, automakers will launch more than a dozen
new clean diesel car and truck models that meet the world's
strictest clean air standards. By providing dramatic increases
in fuel efficiency, 20 to 40 percent better than comparable
gasoline engines, clean diesel vehicles can play a vital role
in reducing United States oil consumption and reducing vehicle
CO2 emissions.
The combination of outstanding performance with
significantly increased fuel economy led analyst J.D. Power and
Associates to forecast that ``diesels will account for 14
percent of the United States market in 2017, up from 3 percent
today.'' That level of market penetration would save more than
29 billion gallons of gasoline and reduce CO2
emissions by over 250 million metric tons over the lifetime of
these vehicles.
Now clean diesel engines of today bear no resemblance to
conventional diesel engines that many of us saw, I even owned,
in the 1980s. Clean diesel vehicles meet the performance
demands of consumers. They have high torque. They're smooth and
quiet running and they have significantly improved fuel
economy, but they also meet the most stringent Federal and
state emission standards.
This environmental progress is a result of the new clean
diesel system, combining clean diesel fuel, which we've
discussed, with advanced turbo engines, with improved injection
systems and effective exhaust control technology that result in
reduced emissions more than 90 percent. This chart may be hard
to show but we'll bring it up closer, if you'd like. It's
really a system, fuels, engine and capture system.
Recently, talking about incentives that was mentioned by
Senator Sessions, the IRS announced and the EPA certified that
clean diesel vehicles from Volkswagen and Daimler would qualify
for the Alternative Motor Vehicle Tax Credit. Other currently
available clean diesel models are expected to qualify for this
credit as well.
The Alliance and the industry applaud Congress for creating
tax credits for clean diesel, hybrids, fuel cells and all other
advanced technologies. These credits encourage consumers to
purchase these vehicles by offsetting some of the price premium
this technology requires.
Upgrades to the fuel injection systems, the turbo-chargers,
electrical system, mechanical components and emissions control
system increase the cost of diesel vehicles by $5 to $10,000
over their gasoline counterparts.
Now, the life cycle fuel savings from diesel make up for
the higher upfront costs, unless, and I have to emphasize that,
unless diesel fuel is significantly more expensive than
gasoline.
We are concerned that the cost of diesel fuel could be a
barrier to widespread acceptance of clean diesel technology by
United States consumers. In Europe, as mentioned, almost 50
percent of all new vehicles are powered by clean diesel
technology.
In addition to superior fuel economy, a main reason
Europeans buy diesel-powered vehicles is that the fuel taxes
are heavier on gasoline. In the United States, diesel fuel is
more expensive than gasoline, as all the witnesses have
testified, and is taxed at a higher rate. See the chart here.
Just from yesterday, pricing impacts on the market, the
variation, the difference between diesel and regular gasoline.
Anything to lower the cost of diesel fuel will encourage
consumers to consider purchasing a clean diesel vehicle. Policy
that increases the cost of diesel fuel will certainly
negatively impact consumer acceptance of this technology.
Recently, Margo Oge, Director of EPA's Office of
Transportation Air Quality, stated, and I quote, ``Diesel
passenger vehicles are one important piece of the future
technology puzzle. Clean diesel is a viable, efficient
technology to help improve our air quality and energy
security.'' Mr. Chairman, we agree.
Given this outstanding combination of performance, low
emissions and fuel savings, we are confident that the new
generation of clean diesel is here to stay, and we certainly
look forward to working with this committee and Congress to
address barriers to expanding this exciting new technology in
the United States market.
Thank you.
[The prepared statement of Mr. McCurdy follows:]
Prepared Statement of Dave McCurdy, President and CEO, Alliance of
Automobile Manufacturers
Mr. Chairman, Good morning, my name is Dave McCurdy and I am the
President and CEO of the Alliance of Automobile Manufacturers
(Alliance). The Alliance is a trade association made up of ten car and
light truck manufacturers including BMW Group, Chrysler LLC, Ford Motor
Company, General Motors, Mazda, Mercedes-Benz USA, Mitsubishi Motors,
Porsche, Toyota and Volkswagen. On behalf of the member companies of
the Alliance I would like to thank you for giving me an opportunity to
talk with you about the role clean diesel will play in reinventing the
automobile. The principle challenge will be removing both the fuel and
technology cost barriers that currently exist.
Last year, Alliance members supported a tough, new national energy
law written in large part by this Committee that raises fuel economy to
at least 35 MPG by 2020, a 40% increase. Higher mileage means lower
carbon dioxide (CO2) emissions. Under the energy law, the
auto industry will dramatically reduce CO2 by 30%, which
makes us the first industry to commit to such challenging
CO2 reductions.
Currently, there are close to 5 million diesel vehicles on U.S.
roads and highways. Over the next year automakers will launch more than
a dozen new clean diesel car and truck models that meet the world's
strictest clean air standards.
By providing dramatic increases in fuel efficiency--20 to 40
percent better than comparable gasoline engines--clean diesel vehicles
can play a vital role in reducing U.S. oil consumption and reducing new
vehicle CO2 emissions. The combination of outstanding 1
performance with significantly increased fuel economy is leading auto
industry analysts like J.D. Power and Associates to forecast that
diesels will account for 14 percent of the U.S. auto market in 2017, up
from 3 percent today. That level of market penetration would save more
than 29 billion gallons of gasoline, and reduce CO2
emissions by over 250 million metric tons, cumulatively over the
lifetime of these vehicles.
The clean diesel engines of today bear no resemblence to
conventional diesel engines. Today's clean diesel vehicles not only
meet the performance demands of consumers--high torque, smooth and
quiet-running engines, and significantly improved fuel economy--but
also meet the most stringent Federal and state emissions standards.
This environmental progress is the result of the new clean diesel
system--combining clean diesel fuel, advanced turbo engines with
improved injection systems and effective exhaust-control technology to
reduce emissions more than 90 percent.
In fact, the Internal Revenue Service recently announced, and the
Environmental Protection Agency certified, that clean diesel vehicles
from Volkswagen and Daimler would qualify for the alternative motor
vehicle tax credit and it is expected that several other currently
available clean diesel models will also qualify for this credit.
The member companies of the Alliance applaud Congress for creating
tax credits for clean diesel, hybrids, fuel cells, and all other
advanced technologies. These credits will encourage consumers to
purchase these vehicles by offsetting some of the price premium this
technology requires. Upgrades to the fuel injection systems,
turbochargers, electrical system and mechanical components and
emissions control system increase the cost of diesel vehicles by five
to ten thousand dollars over their gasoline counterparts. Over the life
of the vehicle, fuel savings from diesel engines potentially make up
for the higher upfront cost, unless diesel fuel is significantly more
expensive than gasoline.
Alliance members are concerned that the cost of diesel fuel could
be a barrier to widespread acceptance of clean diesel technology by
U.S. consumers. In Europe, almost 50% of all new vehicles are powered
by clean diesel technology. In addition to superior fuel economy, a
main reason Europeans buy diesel-powered vehicles is that fuel taxes
are heavier on gasoline. In the U.S., diesel fuel is more expensive
than gasoline and is taxed at a higher rate. Anything that can be done
to lower the cost of diesel fuel will help encourage consumers to
consider purchasing a clean diesel vehicle. Any policy that increases
the cost of diesel fuel will most certainly negatively impact consumer
acceptance of the technology.
Recently, Margo Oge, Director of EPA's Office of Transportation and
Air Quality stated ``Diesel passenger vehicles are one important piece
of the future technology puzzle. Clean diesel is a viable, efficient
technology to help improve our air quality and energy security.'' We
agree. Given its outstanding combination of performance, low emissions
and fuel savings, we are confident that the new generation of clean
diesel is here to stay. We look forward to working with Congress to
address barriers to expanding this exciting new technology in the U.S.
market.
The Chairman. Thank you all very much for the excellent
testimony.
Let me start with a few questions and then Senator Sessions
and Senator Dorgan and Senator Murkowski will all have
questions, I imagine.
The trends that everyone seems to agree upon, and speak up
if I'm misstating this, but the trends are that we're using
more diesel relative to gasoline in the mix of fuels that we
use. That trend has been there and it's going to continue into
the future.
Also, the price of diesel is higher relative to gasoline
than it used to be. It used to be, in fact, I think just the
opposite. I can remember when my strong impression was that
diesel was cheaper than regular gasoline and now it's
substantially higher and the trend seems to be toward more of a
problem there.
We all know that the price of oil has gone up or has gone
up substantially in the last year and that impacts the price of
gasoline and the price of diesel, but can we single out or
isolate those factors that are causing the price of diesel to
be going up at a much faster pace than the price of gasoline?
That's the question.
Ms. Windsor, you cite one item there. You say that the
adoption of requirements for boutique fuel for diesel in
California and Texas----
Ms. Windsor. That's right, yes.
The Chairman [continuing]. Is an increased cost that is put
on there.
I think, Mr. Scott, you indicated that EPA's got their new
requirements with regard to low sulfur have increased the cost
of producing diesel, but the difference between the cost of
producing it and the cost that's being charged for it still is
substantially higher, as I understand it, than is the case with
gasoline.
Mr. Scott. Mr. Chairman, you've noted the historical
picture on that gas sign that Mr. McCurdy put up normally has
diesel below gasoline prices.
The commentary I can make is that diesel fuel is a
commodity and it reacts. We are in a worldwide market for
petroleum products and as the demand for diesel fuel continues
to grow and, as Mr. McCurdy said, I think, the auto
manufacturers would expect it to grow further, we need to keep
pace with our refining capacity, otherwise, you know, supply
and demand works and it's a question of where the supply and
demand line cross at what price level.
The Chairman. If the supply and demand works, why hasn't
the supply of diesel that's being provided to the market kept
pace with the demand?
Mr. Scott. I actually believe it has. Dr. Gruenspecht may
be better able to answer this than I am, but I know that our
members have been switching to maximize their diesel efficiency
and the production from the refineries, but there's only so
much with existing equipment you can do.
There's basic chemistry issues that come into play that
limit how far you can, let's say, swing a refinery toward
distillate production.
The Chairman. Dr. Gruenspecht, why don't you comment on
that? Also, could you comment on this issue about how I think
you said we are exporting more to Europe, more diesel, than we
used to, we are exporting more to Latin America than we used
to? How does that square with the fact that demand is
outstripping supply here and driving up prices?
Mr. Gruenspecht. As has been suggested by others, I think
there are world market pressures. From 2002 to 2007 we were
importing more diesel distillate fuel than we were exporting.
In the first 7 months of 2008, given some of the conditions I
mentioned in my testimony--the situation in Chile, the
situation in South Africa, the situation in China--we were
exporting more diesel than usual.
But I want to point out that our stocks of diesel fuel
remained in the normal range throughout this period. By taking
advantage of some of the high prices that were available for
diesel, that's one of the things that kept refinery runs high
because you could make a lot of money on your diesel at the
same time you weren't making much money on gasoline.
So, the issue with exports is sort of a tricky one because
if one imagines a world where those opportunities were not
available, you might also be imagining a world where refinery
utilization would have been even lower than it was.
In some sense, you sell the entire mix of products that
comes out of the refinery. What you can produce is constrained
by the carbon and the hydrogen inputs. What a refinery is is a
big system for taking apart hydrocarbons in the crude oil and
forming them into different hydrocarbon products.
So, yes, exports were up. Those markets needed a product,
just like, in many respects, the United States needs gasoline
now in Senator Sessions' region of the country, and we are
pulling in more gasoline from the rest of the world than we
normally would.
So, you know, sometimes we're on the receiving end of these
extraordinary situations and sometimes we're on the sending-
product abroad-end of the extraordinary situation.
The Chairman. Senator Sessions.
Senator Sessions. I had a town meeting in a little
restaurant in Alabama and I complained about the high price of
diesel and an older gentleman, I think it turned out he was an
engineer, came up later and said, ``Well, it's better fuel.
That's why it's more expensive.'' I said, ``It didn't use to be
more expensive.'' He said, ``People are smarter now. Got more
BTUs.''
Mr. Scott, is it a better fuel for transportation?
Mr. Scott. I'm going to leave that to the experts on how
various fuels----
Senator Sessions. You get 30 percent better gas mileage.
Mr. Scott. If that's the question, does it get better fuel
economy, the answer to that is yes. The diesel engine generally
is a more efficient engine for a gallon of fuel.
Senator Sessions. It takes a certain type fuel, what we
call the diesel fuel, to----
Mr. Scott. Yes, sir.
Senator Sessions. Ms. Windsor, do you have any thought
about that?
Ms. Windsor. Yes, I do, because after ultra-low sulfur,
which is 15 parts per million, came into our society a year
ago, when diesel fuel, when it went from 500 parts per million
which there is still some produced but most of the diesel fuel
is ultra-low sulfur, 15 parts per million, it burns cleaner.
However, the new engines are mandated, the 2007 engines and
newer, will be all ultra-low sulfur diesel.
We find that the ultra-low sulfur diesel price versus the
500 parts per million, the low-sulfur diesel, runs anywhere
from 10 to 12 cents per gallon more and we've been told that's
because of additional refining.
Also, because of the quality of the burn and the lubricity
and so forth, we find out that we are getting anywhere from one
to two gallons at least less miles per gallon.
Senator Sessions. On ultra-low sulfur?
Ms. Windsor. Yes, we burn more fuel with the ultra, but it
burns cleaner.
Senator Sessions. Mr. McCurdy, you foresee that with the
mileage requirements that we must meet as a nation, the
automobile industry has concluded that one aspect or effort to
meet that would include more diesel engines because of the
rather dramatic mileage increase you get.
Would that help you meet the standards that we've imposed
on the automobile industry?
Mr. McCurdy. Absolutely, Senator Sessions. As I indicated,
we've committed to a 40 percent increase in CAFE, and one of
the technologies that we believe will enable us to get there,
if widely adopted in mass market, I diesel because of the
efficiency and also it is cleaner as far as CO2
emissions.
As my colleagues here indicated, and I certainly wouldn't
want to debate Ms. Windsor on the quality of sulfur versus low
sulfur of the particulates, but, you know, in the United
States, in Europe, 51 percent of vehicles are diesel now and
they are certainly higher-efficiency vehicles, but the
difference and the reason that we weren't able to get them as
widely used in the United States partly is regulatory.
California and several states have higher emissions
requirements than the Federal Government and we couldn't
produce the so-called 50-State car. It was a 45-State car and
for mass manufacturers, they're not going to produce a vehicle
or introduce a vehicle that can't be sold in all 50 States.
Senator Sessions. Is that clarified now in the new law?
Mr. McCurdy. As of 2000--as a matter of fact, yes, with the
introduction of ultra-low sulfur diesel, which is kind of
like--my basic understanding is it's like when we had moved
from leaded to unleaded gasoline, you take the lead out, you
take the sulfur out, and certainly it's cleaner. It's a bit
more complicated and it affects the price some.
But two manufacturers have just introduced diesel into
California and so therefore it meets the highest stringency in
the world.
Senator Sessions. Now, could I just offer as my time winds
down, the Europeans in their tax policies substantially favor
diesel over gasoline. It's a dollar a gallon more. We have a 6
percent more tax on diesel, penalizing diesel 6 cents, and it's
24 to 18, I believe, cents a gallon difference. Is that good
policy in your opinion for the country?
Mr. McCurdy. Senator, I think the chairman mentioned it in
the beginning, and I want to commend this committee because too
often energy discussions and debates are superficial and really
are not thought through and I think this committee is trying to
bring some serious thought to this question.
Some of our policies are actually inconsistent. I'll cite
some examples. On one hand, we want to encourage conservation,
we want to encourage efficiency, and yet many are saying that
gas prices are too high. We have a tax policy that in Europe,
as we indicated, encourages, pushes drivers to the utilization
of diesel and conservation of all gasoline.
So it doesn't make sense right now to have--if we're going
to introduce more diesel into the United States in the car
market, then this tax policy should be reviewed because right
now, it's an inhibitor.
Originally, I think tax on diesel was a consideration about
who used the highways the most and the trucking industry bore a
big part of that, but if we want to really focus on efficiency
and reducing CO2, this tax policy should be
reviewed.
Senator Sessions. The statement here that you gave that if
we go to 14 percent of auto market diesel, according to J.D.
Power and Associates, up from 3 percent today, that that would
mean a saving of 29 billion gallons of gasoline which is a
substantial savings just on that.
So I think, Mr. Chairman, you're having a good hearing. I
won't belabor the point, other than to say that I do believe
our goal as a nation must be to reduce our consumption of fuel
and, in particular, our consumption of imported fuel. Every
amount that we can save through conservation and efficiency
first reduces, would you not think, Mr. Gruenspecht, our
imports normally?
Mr. Gruenspecht. That's correct--imports are on the margin.
Senator Sessions. The margin. So it would tend--anything we
save is basically a reduction of imports which is good for our
economy and we've got a proven engine that the Europeans find
to be very beneficial to them that uses 30 percent less and
that has got to be a part of our mix, and thank you for
allowing this discussion.
The Chairman. Thank you.
Senator Dorgan.
Senator Dorgan. Mr. Chairman, it's usually--I should say
it's unusual to come to a hearing and agree with almost
everything that I've heard on this panel and also among the
witnesses. I think----
Senator Sessions. You haven't been hearing from your
farmers and truckers like I have, Senator Dorgan.
Senator Dorgan. No, I've heard from all of them. We're
prodigious users of energy in North Dakota and I agree with you
that conservation is critically important. I agree with Mr.
Scott, we should drill more, produce more. We should expand our
refining capacity. I mean, I agree with the need to do all of
that.
I do want to focus on the title of this hearing is why have
diesel fuel prices been so high. Let me come back to a point
that I've made repeatedly to this committee and that is
unbelievable relentless speculation in the oil futures market.
Ms. Windsor, you spoke of that especially.
Mr. Gruenspecht, did yesterday's experience in the oil
futures market disabuse the EIA of the notion that there's no
speculation going on?
Yesterday, oil jumped $25 a barrel, crushing the one-day
record of $10 a barrel. It settled about $15 a barrel up.
Was there some unbelievable moment in supply and demand
relationship that caused that yesterday or was that just
unbelievable speculation, Mr. Gruenspecht?
Mr. Gruenspecht. I would say it's hard to provide instant
analysis, but I would think that yesterday's experience was a
good example of a short-term movement in prices that does not
reflect fundamentals. It probably reflects some kind of trader
activity. They're really two different kinds of--by the way,
the EIA view, I think, expressed by Administrator Caruso, who
I'm now acting for since he's left,----
Senator Dorgan. Right.
Mr. Gruenspecht [continuing]. Has been that fundamentals
are the primary factor driving oil markets, but I think EIA's
testimony has always been that other factors can affect short-
run movements.
The most likely answer regarding yesterday's price movement
is it was a ``squeeze'' where some trader had a short-term
position and needed to get out of it but didn't start buying
until too late. The other option, frankly, is manipulation and
the CFTC has a case from July against, I think, a company
called Optiver that discusses a manipulation designed to
increase prices at the market close.
I would expect the CFTC--in fact, yesterday I was thinking
how I would answer this if it came up--I would want to look
into the possibility of manipulation and I noticed in looking
at the clips this morning that the director or the acting
director, I guess, of enforcement at CFTC stated he would be
scouring Monday's trading to determine whether anyone engaged
in illegal manipulative activity. So I guess I would say the
cause yesterday was trader activity.
Senator Dorgan. Mr. Gruenspecht, well, you've described it
as a squeeze. Some would say it's more than a squeeze
yesterday, but let me go back here because it relates--I think
there are a lot of things that have caused this diesel price
issue.
But EIA, as I've indicated before, Mr. Gruenspecht, you've
seen this chart, we spend $100 million on the agency called EIA
and we've got terrific people working there and so on, and we
ask them to give us their estimate of what's going to happen to
pricing and I assume that they use the fundamentals of supply
and demand, projecting what will demand be, what will supply
be, in order to evaluate what will happen with the pricing.
If I might show on this chart, starting in May of last
year, this yellow line is where the EIA thought prices would
go. July, they thought this would be the line. November last
year, this would be the line. May of this year, this would be
the line. These are all the best estimates of the EIA using
fundamentals to evaluate what would happen to prices. This red
line, by the way, is what happened to prices.
Mr. Gruenspecht, you've heard me query Mr. Caruso about
this. The best experts in a $100 million Federal agency have
told us the way it appears this line is going to look all the
way along every time they've done the assessment, but in fact
here's the way the line went.
My guess is it went this way because it has no relationship
to the fundamentals that you studied that produced all these
yellow lines and yesterday was perhaps more than a squeeze.
Ms. Windsor, when you describe this piece, if you're a
trucker out there and you described how many truckers have gone
under, if you're a trucker out there and you hear that there's
a squeeze in the refining capacity or this or that, you know,
there's not much you can do about it.
Ms. Windsor. No.
Senator Dorgan. This issue, this issue of a run-up in
speculation on the futures market in which the market become
broken and doesn't track at all with what the experts think
should happen, that's also outside of the realm of any trucker
to have any impact on at all and so we've had hearing after
hearing on this and we've had all the experts come who have an
interest in saying there is no speculation, who tell us that,
there's nothing going on, don't believe your own eyes, and so
that's the dilemma here.
I think the issue that you've just described, Mr. McCurdy,
about the engine, Ms. Windsor also has talked about a much more
engine, all of these things are interesting to this committee
because you made a point that is very important. We can't ask
somebody to produce a car that's not going to have fuel in all
50 States. The same is true with trying to move toward in the
longer-term hydrogen fuel cell vehicles.
How do you change an infrastructure of being able to get
gasoline and then a month later buying a new vehicle and
finding a place to fuel with hydrogen, right? I mean that's
probably 20 years away.
So these are all really interesting, challenging things,
and I think Senator Bingaman has put us on the path to trying
to think through bolder and more interesting and more
innovative approaches to all of these energy challenges we
have.
Mr. McCurdy. If I could just respond to one point my friend
and former colleague raised, and that is, the infrastructure
issue which is a huge question because if you look at ethanol,
you look at the number of stations available, there's some
1,700 out of a 170,000, but in diesel, it's about 49 percent of
stations offer diesel. So there is a core infrastructure that
would allow for an expansion of diesel much more rapidly than I
think some others--across--that's nationwide, that's true, and
it varies by State and some States probably a little higher, in
more rural States.
So yes. The infrastructure could be expanded. It should be
improved, but I think, you know, the technology barriers are
one issue. The cost barrier and price is certainly the other
and the disproportionate taxation and what we saw the price
difference.
The Chairman. Senator Murkowski.
Senator Murkowski. Thank you, Mr. Chairman, and thank you
to the witnesses.
I want to try to understand just a little bit better what
the real impact of the EPA regulations on the clean diesel and
the ultra clean diesel fuel requirements.
When we moved to these requirements, at that time EPA
indicated the cost was going to be somewhere between four and a
half to five cents a gallon. I don't know if I heard you
correctly, Ms. Windsor, but I thought that I heard you say it's
more like double that.
Ms. Windsor. It can be, yes.
Senator Murkowski. Twelve cents per gallon. Do we actually
know how much these regulations have affected prices, and
beyond that, is it completely factored in or are there still
refineries that are undergoing the conversion so that we'll
continue to see this price increase further? What do we know
about these numbers?
Mr. Scott. Dr. Gruenspecht.
Mr. Gruenspecht. One way to look at this, and not in an
engineering way but in a market way, is to look at the
difference between heating oil prices because heating oil
prices are a high-sulfur product and diesel fuel prices, and we
can look at what that difference was before this ultra-low
sulfur diesel rule came in and after. Obviously, the prices are
changing every day but, generally speaking, I think, before the
2005 hurricanes, typically on the Gulf Coast the prices were
one to two cents higher for diesel oil than for heating fuel on
the spot market.
That gap opened up quite a bit. I think, currently, it's 13
to 14 cents would be a typical gap. So if you take the one-to-
two cent gap that you had before and now look at the 13-to-14
cent gap, you might say that the impact of the program as it's
worked through the market has been to increase the size of that
difference by a little bit more than 10 cents, maybe 11-12
cents a gallon, which I think is consistent with what was said
by others.
Senator Murkowski. Then again, Mr. Scott, if you want to
speak to that, but also, so is that what we can expect that gap
to be or is it going to increase further as the conversion
continues or are we done with it?
Mr. Scott. First of all, we're not done with the
conversion. I think it's important to distinguish between cost
and price and the cots of mining a diamond is very different
than the cost that you and I would pay for it.
So the cost to the nation's refiners of the diesel sulfur
reductions have been, I think, about $22-$23 billion to date.
That's investments made in the facilities. The costs are
determined--I'm sorry. The prices are determined by the market
and if there is less diesel being made by the same machines
because we've reduced the sulfur, then shortages tend to give
rise to price pressures.
We have not fully implemented the ULSD Program. We have
implemented most of the onroad program, the highway diesel
fuel. Offroad, meaning tractors, other diesel-powered
generators, that sort of thing, is coming over the next couple
of years and then there's a third phase which is marine and
locomotive diesel which will be coming in the 2010 timeframe.
So our folks continue to make their upgrades in order to
take the sulfur out, but it's not over yet.
Senator Murkowski. So, Mr. McCurdy's photograph of
yesterday's prices in terms of what you pay for unleaded gas
versus what you're saying for diesel as of yesterday, you would
expect to see that differential remain for some time. Is that
what you're suggesting?
Mr. Scott. I would be foolish to suggest future prices, but
unless we increase supply of diesel fuel, there's no reason to
expect downward pressures on prices.
Senator Murkowski. Which brings us back to Mr. McCurdy's
point about the need to perhaps examine the tax policies.
I know my family's a perfect case in point. My family up in
Alaska had a diesel Suburban and as soon as my husband began to
really appreciate what was happening with the diesel prices, we
unloaded that vehicle and if we in fact do want to encourage,
as the Europeans do, encourage more Americans to purchase these
vehicles, it's not going to happen if you have that kind of a
continuing differential in price. It's just not going to be
there.
Mr. Chairman, thank you.
The Chairman. Senator Craig.
Senator Craig. Thank you, Mr. Chairman, and to all of the
witnesses, Dave, it's good to see you again, and to all of you,
thank you for being here.
I suspect we need you all in a very clear way more than we
ever have because the Congress is falling all over itself at
this moment trying to figure out where it should go and I am a
living case in point.
I just came from an EPW Committee hearing where the
chairman is pounding on EPA for not enforcing what the courts
said they had to do with carbon and therefore some political
motive was moving the EPA not to do what the courts had said
they must and that is regulating, controlling carbon emissions
greenhouse gas. But over here, we're suggesting that we have
cost the consumer another 15 cents a gallon because we did do
it or at least we cleaned up diesel substantially more than it
has been.
Mr. Chairman, I find that a phenomenal and interesting
contradiction, nearly, or at least one without balance because
EPA, at the time the sulfur debate was going on, was talking 3,
4, 5 cents, somewhere in that range, cost differential in a
cleaner fuel. Today, you're suggesting it's anywhere from 10 to
12 to 14 cents.
Now if you use that indices and applied it against the
committee's analysis of their climate change legislation, it's
only going to cost $6.7 trillion and then you double it or
triple it, oops, no wonder the American consumer and voter has
decided at this moment that we don't deserve a good job
performance rating.
This committee, frankly, does. We've done some phenomenal
work in energy policy, thanks to this chairman and the ranking
member and this committee over the last good number of years,
and we've tried to stay out or at least work out our
differences in, if you will, competing or contradictory
approaches.
Congress hasn't been as successful at that. I remember
buying diesel at 19 cents. Those were the good old days. We
were actually using it to pump water. We quit that at 30 cents
a gallon. It was no longer economical. We switched to
electrical power.
So, Mr. Chairman, I remember a time when a diesel truck
arrived at our farming and ranching operation and literally
unloaded the entire truck because that's the volume we were
buying it in. Those days are long gone. Then it was considered,
if you will, kind of a spin-off from the processing and maybe
Senator Sessions is right, the engineers had--finally the
consumer became smarter as it relates to the economics of
diesel.
But I'm not sure we have. So it's very important for us as
we make these changes in policy that you from the private
sector react and say here are the impacts of what we do or what
we potentially do to the consumer.
Right now, the one impact we ought not do to the consumer
is cost them more money. They're, if you will, stressed out to
the limit and that's, I think, my greatest frustration, is how
we create these balances to address what most of us view as a
real problem and that is we shouldn't put more carbon into the
atmosphere, but how do we create those effective blends and
certainly the transportation industry is going to play a very
valuable role in that.
I apologize for not being here for your testimony. Oil is
trading down a $1.01 at this moment, so that there's a little
bit of despeculation going on in the market today where there
maybe was speculation yesterday. Sounds like a normal market
day in the business of energy.
Thank you, all. Thank you, Mr. Chairman.
The Chairman. All right. Let me see. Senator Murkowski, did
you have another questions?
Senator Murkowski. No, thank you.
The Chairman. If not, I want to thank the witnesses. I
think it's been useful testimony. Obviously we haven't
completed the right policy in all these areas, but I think it's
useful to understand the different factors that we need to keep
in mind.
Thank you, all, for being here and that will conclude our
hearing.
[Whereupon, at 11:10 a.m., the hearing was adjourned.]
[The following statement was received for the record.]
Statement of Patrick Charbonneau, Vice President, Government Relations,
Navistar, Inc.
Chairman Bingaman, Ranking Member Domenici, and members of the
committee, my name is Patrick Charbonneau and I am Vice President of
Government Relations at Navistar International Corporation (Navistar,
Inc.). On behalf of Navistar, Inc., I would like to take this
opportunity to thank you for allowing me to submit written testimony
regarding the issue of diesel fuel prices.
Navistar, Inc. (NYSE: NAV) headquartered in Warrenville, Illinois,
is a holding company whose wholly owned subsidiaries produce
International brand commercial and military trucks,
MaxxForceTM brand diesel engines, IC brand school and
commercial buses, and Workhorse brand chassis for motor homes and step
vans. It also is a private-label designer and manufacturer of diesel
engines for the pickup truck, van and SUV markets. The company also
provides truck and diesel engine parts and service. Another affiliate
offers financing services.
the issue
The transportation industry has been hit by the unusual price
disparity between diesel fuel and gasoline. Diesel has become higher in
price than gasoline versus historic price parity.
the impact
Bankruptcies
More than 1,900 trucking companies went bankrupt during the 1st
quarter of 2008 and 42,000 trucks idled (2.1 % of the nation's trucks).
Up to 20% cost disparity with gasoline results in over $10 billion in
annual excess fuel costs to the diesel drivers.
Truck Sales Drastically Down
Add on to the excess fuel costs $5k to $10k in price increases for
new near zero emissions trucks in 2007 and again in 2010, and the
result is truck sales down 43% and the job losses at truck and supplier
plants. As a reference point the auto industry is down only 12% in the
same period.
Dieselization Rates Down
The dieselization rate of lighter vehicles, such as heavy duty
pickups, has dropped from a historic 70% dieselization to below 50%.
The diesel vs. gas price disparity is impacting the consumer decisions
to buy diesel vehicles, which enjoy the 30 to 40% fuel efficiency
improvement over gasoline.
U.S. Burns More Fuel
Without this price difference being addressed, dieselization of
consumer vehicles will contract instead of expand resulting in the
United States (U.S.) burning more fuel and having to look for more
sources of oil.
what is causing the problem?
Congress is reviewing many of the factors in the fuel pricing and
supply situation. However, insufficient attention has been given to the
fact that the demand for diesel fuel and gasoline is changing, in an
environment where improvements in fuel efficiency and reductions in
CO2 emissions have become an important goal.
Gasoline demand is dropping in the U.S. and in Europe due to the
use of ethanol, reduced driving/smaller cars (in the U.S.) and diesel
passenger cars demand (over 50% in Europe). Diesel demand is increasing
in Europe, China and India. The impact of increased dieselization in
the U.S. is clear. The Environmental Protection Agency (EPA) has
estimated that if the U.S. passenger car market was 35% diesel, the
U.S. would save the equivalent of the oil that we import from Saudi
Arabia.
If the price disparity is impacted by the shift in demand, changes
in diesel supply can be achieved through conventional and non
conventional means.
A conventional means is refinery flexibility. U.S. refineries
produce \2/3\ gas for every \1/3\ diesel. In European refineries the
focus is for more fuel efficient diesel resulting in almost 2/3 diesel
for every \1/3\ gas. More flexibility in U.S. refineries could
significantly increase the production of fuel efficient diesel without
increasing gasoline output.
Non conventional methods for acquiring more diesel without
generating excess gasoline include biodiesel, Fischer Tropsch fuel from
a variety of feedstocks (biomass, natural gas, low value refinery
products, coal, etc) and diesel from shale oil.
clean diesel background
Diesel has undergone a revolution that has resulted in diesel
emissions levels for particulates and NOX down over 90% from
unregulated products. The fuel economy attributes of over 30% better
efficiency than gasoline products as well as long life have made diesel
the product of choice for the transportation industry. Because of the
fuel efficiency and CO2 emissions benefits, passenger car
industries such as Europe have dieselization rates of over 50%.
conclusion
Congress has not focused on the specific issue of price disparity
between diesel and gasoline. Mr. Chairman, I am pleased that you are
focusing this committee's attention on the high diesel fuel prices.
Ultimately, what needs to be determined is what can be done to resolve
not only the short term diesel availability and price but the longer
term diesel fuel availability and its impact on future fuel efficiency
objectives.
Again, thank you Mr. Chairman and Ranking Member and members of the
committee for the opportunity to provide this testimony.
APPENDIX
Responses to Additional Questions
----------
Response of Dave McCurdy to Question From Senator Landrieu
Question 1. As we respond to an increased global demand for diesel
fuel and a call for increased production of biofuels, what role to you
believe biodiesel will play in the future of diesel use?
Answer. In enacting the Energy Independence and Security Act
(EISA), Congress recognized the potential for biodiesel and other
biofuels to help lessen our dependence on petroleum-based fuels,
improving our national energy security and reducing greenhouse gas
emissions from the transportation sector. Diesel vehicles deliver
between 20 to 40 percent higher fuel economy than comparable gasoline
models, providing a promising technology pathway for automakers to meet
EISA's required 40 percent increase in fuel economy standards by 2020.
As I state in my written testimony, diesel vehicles currently
account for about 3 percent of new vehicle sales in the U.S. light duty
market. J.D. Power and Associates recently forecast that diesels will
account for 14 percent of the U.S. auto market in 2017. For comparison,
diesel vehicles account for as much as 50 percent of the passenger
vehicle fleet in some European nations.
The Committee's hearing on September 23rd highlighted increasing
pressure on diesel supply and the resulting higher price of diesel
relative to gasoline. A growing market for diesel automobiles over the
next decade could create additional demand pressures. Increased
production of renewable fuels compatible with diesel engines, including
both renewable diesel and biodiesel, could alleviate some of the
resulting price pressure on diesel fuel as we go forward.
Both renewable diesel and biodiesel have significant promise for
supplementing, and ultimately displacing, conventional diesel fuel.
However, unlike renewable diesel fuel, biodiesel fuel is not fully
fungible with petroleum-based diesel either in the distribution
infrastructure or in vehicle engines. Since biodiesel degrades quickly,
care must be taken during fuel production and distribution to assure
acceptable quality at the retail level. Poor quality fuel can cause
serious problems that might lead consumers to reject both the fuel and
the vehicle. Most diesel manufacturers accept the use of biodiesel at
levels up to 5 percent by volume (B5) as long as the fuel meets
accepted quality standards. Some vehicles may be able to use higher
biodiesel levels, especially in light of the recently defined standards
for biodiesel blends of between 6 and 20 percent (B6-B20).
Congress can help assure an adequate fuel supply to support the
growth of a diesel automobile market by making working with standards
organizations, fuel producers and distributors to promote high-quality
and dependable biodiesel fuel. Congress can also promote policies to
support price-competitiveness of diesel fuel, biodiesel and renewable
diesel fuel relative to gasoline to encourage greater penetration of
diesel automobiles in the U.S. market.
______
Department of Energy,
Washington, DC, November 12, 2008.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Mr. Chairman: On September 23, 2008, Howard Gruenspecht,
Acting Administrator, Energy Information Administration, testified
regarding why diesel fuel prices have been so high, and what can be
done to address the situation.
Enclosed are the answers to 6 questions submitted by you, Senators
Domenici and Lincoln to complete the hearing record.
If we can be of further assistance, please have your staff contact
our Congressional Hearing Coordinator, Lillian Owen.
Sincerely,
Lisa E. Epifani,
Assistant Secretary, Congressional and Intergovernmental Affairs.
[Enclosures.]
Responses to Questions From Senator Bingaman
Question 1. Is the recent surge in demand for diesel for electric
generation a short term or long term factor? What arc alternative
options for low-cost, off-grid electrification? Might this be a good
application for biodiesel?
Answer. Diesel generators are often used in response to emergency
situations, when commercial electricity supplies are disrupted. As a
result, spikes in diesel generation arc most often short-term
phenomena, rather than long-term solutions to providing electricity.
For instance, disruptions to coal transportation systems in China last
year during particularly harsh winter weather resulted in an increase
in diesel generation. Many South American countries rely on diesel
generators when drought conditions lower hydroelectric supplies.
In the long-run, electricity providers seek more cost effective
solutions to supplying reliable electricity generation rather than
continuing to rely on diesel generators. In China, for instance, there
are plans to expand nuclear, coal-fired, and renewable generation.
Unfortunately, these solutions can take a long time to implement
because of the need to expand the infrastructure to support the
expansion of electricity, including transmission lines, railroads and
highways.
It is likely that diesel generators will continue to be used as
short-term solutions to emergency situations, because they can be used
to quickly respond to power disruptions, so that the use of biodiesel
to fuel generators would be possible. In remote areas with no access to
national grids and where it is difficult and expensive to expand
transmission lines, renewable energy sources--for example, micro
hydroelectric facilities, wind, solar, and other off-grid renewable
technologies--could also provide relatively cost-effective power
solutions.
Question 2. NPRA has stated that U.S. diesel exports are not clean
enough to be consumed inside the U.S. Are there export data to back up
this claim? Might there be other domestic applications for some of that
diesel? For instance, could it be used for heating oil?
Answer. This year's distillate exports include both low sulfur and
ultra-low sulfur distillate that could be used in the U.S. EIA uses
export data provided by the U.S. Bureau of the Census that does not
break out ultra-low sulfur diesel from low sulfur, but we confirmed
that some of the product being exported included ultra-low sulfur
diesel. The high sulfur distillate market (fuel with greater than 500
ppm sulfur) includes home hearting oil and fuel for electric generating
use. Historically, high sulfur distillate represented more than half of
total distillate exports. For example, in 2000 high sulfur exports
represented 77 percent of the exported volumes, while in 2007 they
represented 51 percent. This year, high sulfur exports dropped to 13
percent of total distillate exports, both because most U.S. distillate
production (88 percent) is now low or ultra-low sulfur distillate and
because some of the major export areas needing distillate, such as
Europe, now use low sulfur or ultra-low sulfur product.
Responses to Questions From Senator Domenici
Question 1. On the second page of your written testimony, I noticed
that in the past year, the cost to refine a gallon of gasoline has
declined, while the cost to refine a gallon of diesel has increased.
According to your chart, the cost to refine gasoline dropped by 31
cents, but the cost to refine diesel increased by 18 cents. Can you
explain why these numbers went in opposite directions?
Answer. Figure 1 of the testimony, presents a simplified view of
price components to help explain variations in retail prices. The
component labeled as the ``wholesale crack'' in the figure is not
refining costs to produce the products shown. Rather, the wholesale
crack, defined as the wholesale price of gasoline or diesel minus the
cost of crude oil to the refinery is a measure of the revenue available
to cover remaining refining costs and refining profits associated with
gasoline or diesel production after crude costs are removed. This
revenue varies in the short run as a result of basic supply and demand
forces in the markets for crude and products.
Figure 2 in the testimony displays time series of wholesale diesel
and gasoline crack spreads. Looking at gasoline, it shows that during
2007 the wholesale price were often much larger than crude oil costs,
implying high profitability. This year. however, gasoline markets have
had ample supply relative to demand as a result of declining demand,
increased use of ethanol (and thus less need for crude-based gasoline),
and increased availability of gasoline imports. This ample supply
reduced the wholesale gasoline crack spread, and at times, pushed
gasoline prices below the price of crude oil resulting in financial
losses for gasoline production. At the same time, the distillate
market, which includes diesel, and is distinct from gasoline market,
tightened considerably worldwide as a result of growing demand,
particularly in the electricity generating sector. That pulled diesel
prices up relative to crude oil cost, improving refining profits from
diesel production.
Question 2. Since 2002, EIA has broken out the price of diesel into
its component costs--refining, distribution and marketing, taxes, and
crude oil. In May 2002, refining accounted for 5.1 percent of the price
of diesel, but since then, and even as the price of oil has increased
substantially, refining costs have consistently been much higher. I
understand that one factor in this increase may be the decision to
mandate the use of Ultra-Low Sulfur Diesel fuel. EPA initially
estimated this would cost no more than 5 cents per gallon. The
transition to ULSD is important to improving air quality, but has it
come at a greater cost than we expected? Can you describe any other
factors that may account for the substantial increase in refining as a
percentage of the price of diesel??
Answer. The data represented in Figure 1 reflects the sum of
refining costs and profits which varies. The ``wholesale diesel crack''
component will vary both as a percent of total price and as an absolute
value with the changing distillate and gasoline supply-demand balances
in the short run. We do not have any direct measure of how the cost of
producing diesel fuel has increased over time. Both heating oil and
diesel fuel tend to move together with the general distillate market
tightness or looseness, so looking at the difference between diesel
prices and heating oil prices over time will help to isolate the impact
diesel specification changes such as the move to ultra low sulfur
diesel (ULSD) may have had. Prior to 2005 and the hurricane impacts on
prices, wholesale diesel prices on the Gulf Coast would normally
average one to three cents above No. 2 fuel oil (heating oil). After
the ULSD program began in 2006, diesel has been averaging 13-14 cents
per gallon over No. 2 fuel oil. This implies that the ULSD program may
be contributing about 10 cents per gallon to the price of diesel fuel.
This is relatively consistent with the studies done on ULSD
production costs. For simplicity, EPA, EIA, NPC and others use single
numbers to discuss cost estimates. But these costs are difficult to
compare. EIA's 2001 report. Transition to Ultra-Low Sulfur Diesel
explains the difficulties in comparing costs in greater detail. For
example, costs will increase with the relative amount of ULSD produced
compared to 500 ppm sulfur or high sulfur distillate, with the amount
of ``cracked stock'' (distillate material that conies from fluid
catalytic cracking or coking units) that needs to be desulfurized, with
the scale of the units used to desulfurize the distillate, and whether
new or revamped units could be used. The clean diesel program has
grown, with more of the distillate market being required to use low or
ultra-low sulfur fuel, which alone would be expected to result in
increasing costs.
Question 3. The military has undertaken a program aimed at
providing a greater share of their energy needs with domestically
produced fuel--much of this work has focused on taking greater
advantage of our domestic coal reserves. What impact do you believe
coal-to-liquids fuels could have on the price of diesel?
Answer. Given the amount of coal-to-liquids distillate fuels EIA is
projecting in the AE02008 reference case in 2030. approximately 137,000
barrels per day, and the amount of diesel fuel use projected in 2030,
4.871 million barrels per day, the price effect would be likely be
limited. In general, adding new supply to an extremely tight market for
all distillate range material should lower prices to some extent for
all midrange distillate products, but EIA has not performed
quantitative analysis on this topic.
Response to Question From Senator Lincoln
The rise in both gas prices and diesel prices are especially
worrisome in a rural state like Arkansas, where families have to drive
long miles to work and school and the grocery store. The combination of
lower incomes, high fuel prices, and the heavy dependence on pickup
trucks and vans and use of farm equipment is putting an even tighter
squeeze on family budgets. Rural residents do not have mass transit or
grocery stores nearby and few alternative fuel options available to
ease the pain at the pump.
Question 1. I do believe that most of our energy policy option will
focus on the long-term, as we are not going to solve this problem
overnight. However, in you expert opinions, what do you believe are
Congress' most immediate options for providing relief to hard-working
families and businesses which rely mostly on diesel fuel?
Answer. The Administration has pursued, as you note, significant
strategies to increase both the efficiency of motor vehicles and the
supply of alternative fuels for transportation use. These measures have
included increased fuel economy standards for both cars and light
trucks, mandates for greater use of non-petroleum fuels and incentives
for their production, biofuels research, incentives for advanced hybrid
vehicles, and increased access to domestic resources for increased
domestic energy production. Despite these long-term initiatives, world
oil prices rose to very high levels, peaking in the summer of 2008. The
resulting gasoline prices of about $4.00 per gallon, and diesel prices
even higher prompted widespread public concern.
Fuel prices have fallen sharply since their mid-2008 peak under the
combined influence of consumer adjustments and weaker economic growth
both in the United States and worldwide. These lower fuel prices
provide significant relief to hard-working families and businesses.
Additionally. the Department of Energy remains focused on long-term
energy security through alternative fuels, increased domestic energy
production and gains in enemy efficiency.
______
National Petrochemical & Refiners Association,
Washington, DC, October 9, 2008.
Hon. Jeff Bingaman,
Chairman, U.S. Senate, Committee on Energy and Natural Resources, 304
Dirksen Senate Office Building, Washington, DC.
Hon. Pete Domenici,
Ranking Member, U.S. Senate, Committee on Energy and Natural Resources,
304 Dirksen Senate Office Building, Washington, DC.
Dear Senators Bingaman and Domenici: I testified before the Senate
Committee on Energy and Natural Resources on September 23, 2008 on
diesel prices.
I am pleased to respond to the questions sent on September 25,
2008. Please see the enclosed document.
NPRA and its members look forward to working further with the
Committee on this issue.
Sincerely,
Gregory M. Scott,
Executive Vice President and General Counsel.
Responses to Questions From Senator Bingaman
Question 1. Is there a channel of communication between the
refining industry and the auto manufacturers to ensure that your
industries move in step toward increasing both diesel engines passenger
vehicles and diesel fuel?
Answer. Antitrust law does not permit a trade association to direct
oil company decisions to produce diesel fuel supplies at certain
volumes. Oil companies are prohibited from discussing fuel production
plans with each other. Oil companies make fuel production decisions
independently.
The refining industry and auto manufacturers jointly sponsor
cooperative, precompetitive research through the Coordinating Research
Council. The major committees of CRC are Performance, Atmospheric
Impacts, Emissions, and Advanced Vehicle/Fuel/Lubricants. This is a
venue for frequent communication for many employees in the refining and
automaker industries.
Question 2. NPRA has stated that U.S. diesel exports are not clean
enough to be consumed inside the U.S. Are there export data to back
this up? Might there be other domestic applications for some of that
diesel? For instance, could it be used for heating oil?
Answer. On page ten of NPRA's testimony, we explain that precise
statistics are not available as to the specifications of the
distillates being exported. EIA reports Department of Commerce data
which labels this product as 15-500 ppm sulfur.\1\ NPRA mentioned the
lack of precise statistics because the Department of Commerce does not
report data for distillate fuel oil exports with less than 15 ppm
sulfur. Therefore, there is a question as to the precise sulfur content
of these exported volumes. The Department of Commerce plans to correct
this confusion in the future by showing data separately for 15-500 ppm
sulfur and less than 15 ppm sulfur.
---------------------------------------------------------------------------
\1\ EIA http://tonto.eia.doe.govidnav/pet/pet move exp dc NUS-
Z00_mhhl_m.htm. Department of Commerce http://www.census.gov/foreign-
trade/schedules/b/2008/c27.html#2710 which shows two sulfur content
categories for distillate fuel oil--1) less than or equal to 500 ppm
sulfur and 2) greater than 500 ppm sulfur.
---------------------------------------------------------------------------
Also on page ten of our testimony, we note that 15-500 ppm sulfur
distillate fuel oil is not in demand in the U.S. highway diesel fuel
market because of the ULSD program. This product could be used in non-
highway diesel and heating oil applications. On page six of NPRA's
written testimony, we cite EIA data that U.S. supplies of distillate
fuel oil (all diesel plus heating oil) are currently at 30 days,
indicating clearly that current U.S. supplies are more than adequate.
EIA's written testimony includes statements that this exported
distillate fuel oil is being used for nontransportation uses such as
for electric generation (see page 7).
Response to Question From Senator Domenici
Question 1. The EIA tells us that oil costs $2.65 per gallon, on
average. After refining, we are told that refiners receive an average
75 cents per gallon of diesel fuel to cover refining costs and profits.
How much of the 75 cents per gallon represent a refiner's costs and how
much is profit?
Answer. NPRA does not have an estimate of a refiner's profit for
production of an individual petroleum product. However, several press
reports and the earnings statements of companies in the refining
business show significant decreases in overall refining margins over
the last three financial quarters--with some companies even posting
losses. Refiners are the first to feel the impact of high crude prices.
With the existing conditions of high crude oil prices, tight credit
markets and demand decreases, refiners will continue to operate in a
challenging economic environment in the foreseeable future.
______
October 23, 2008.
Hon. Jeff Bingaman,
Chairman, U.S. Senate, Committee on Energy and Natural Resources,
Senate Dirksen Building, Room 304, Washington, DC.
RE: Response to Follow-Up Questions from September 23, 2008 Testimony
of Barbara Windsor, President & CEO, Hahn Transportation, Inc., and
American Trucking, Associations Vice Chairwoman
Dear Senator Bingaman: Thank you for the opportunity to testify
before the Senate Committee on Energy and Natural Resources' recent
hearing entitled Why Diesel Fuel Prices Have Been so High, and What can
be Done to Address the Situation. Additionally, ATA appreciates and
strongly supports the pro-active effort of Senators' Lincoln, Bingaman,
and others, to incentivize idle reduction systems for the nation's
truck fleet through the introduction of S. 894. This letter responds to
your requests for additional information. The responses set forth
herein represent the positions supported by the American Trucking
Associations (ATA).
Response of Barbara Windsor to Question From Senator Lincoln
Diesel truck idling reductions considered one way to help alleviate
diesel supply and demand imbalance. And one of the methods to help pave
the way for increased use in anti-idling equipment is to provide tax
credits to companies that purchase this equipment. As you may know, I
introduced legislation last year, S. 894, the Idling Reduction Tax
Credit Act which provides a business tax credit of 25% of the cost of
idling reduction devices, up to $1,000.
Question 1. Given the run-up in diesel prices and demand, how has
the importance of such tax credits increased? In what additional ways
can Congress help increase the availability of idle reduction systems?
Answer. To put the importance of expediting the introduction of
idle reduction equipment into the mainstream of trucking operations,
one needs to go no further than looking at the amount and cost of
diesel fuel trucking consumes on an annual basis. In 2006, trucks
consumed over 39 billion gallons of diesel fuel at a cost of $106
billion. According to U.S. Environmental Protection Agency estimates,
1.1 billion gallons of diesel fuel (or nearly 3%) is attributed to
truck idling. With trucking's diesel fuel bill reaching $113 billion in
2007, and 2008 projections estimated at over $159.9 billion, most
fleets today say fuel is now their highest operating expense.
The Energy Information Administration (EIA) reported that the
national average retail price for on-highway diesel fuel is currently
at $3.65 per gallon, down from its historic high of $4.76 in July of
this year. The EIA estimates that the average price for diesel fuel in
the nation will be at $4.01 per gallon in 2008. With the fuel economy
of large trucks remaining relatively flat over the last quarter century
(typically 6.0 to 6.5 miles per gallon), companies are looking for
other ways to conserve fuel, reduce carbon and emissions, and improve
their bottom-lines. High on these company wish-lists is the purchase of
idling reduction devices. Unfortunately, given the state of the
nation's economy, high fuel costs, limited discretionary capital, and
the overall slowdown in trucking, the purchase of idling reduction
equipment remains unattainable for many businesses.
Long-haul trucks serve both as the drivers' work place and
residence. Therefore, trucks idle for comfort, safety, and necessity.
The average truck consumes roughly 1 gallon of fuel an hour when
idling. Idling reduction devices can cut these hourly diesel fuel
consumption levels from none (assuming battery power or electrification
options) to roughly .2 to .4 gallons per hour (assuming options such as
direct-fired heaters, auxiliary power units, etc.).
Recognizing that 96 percent of all trucking companies in this
country are designated as small businesses, fleets are desperately
seeking measures to further incentivize the purchase of idling
reduction technologies for their trucks. To this end, Congress could
help increase the availability of idle reduction systems through the
following measures:
a. issue business tax credits on the purchase of idling reduction
devices
ATA appreciates and endorses S. 894, the Idling Reduction Tax
Credit Act, which provides a business tax credit of 25 percent of the
purchase cost of idling reduction devices, up to $1,000 per device.
While earlier efforts to secure business tax credits of up to $3,500
per idling reduction device were unsuccessful in the House, a $1,000
business tax credit would go a long way towards introducing such
devices into trucking fleets. ATA asks the Congress to enact
legislation affording fleets business tax credits on the purchase of
idling reduction devices.
b. support research and development for idling alternatives
Technology advancements have stalled for many years and an infusion
of funding into an organized research program is critical to develop
the next generation of idling reduction technologies. ATA asks the
Congress to fund research and development in the areas of new-
generation batteries and anti-idling equipment.
c. recognize weight exemption for installation of idling
reduction equipment
Since idling reduction equipment may add substantial weight to a
truck, many fleets cannot afford to reduce their cargo capacity to
compensate for the installation of idle reduction devices on a truck.
Overweight trucks can be cited by state enforcement officials and run
the risk of receiving substantial penalties. To address this concern,
Congress authorized a 400-pound weight exemption for trucks equipped
with idle reduction equipment under Section 756 of the Energy Policy
Act of 2005. While Congress' intent was to mandate this exemption, the
Federal Highway Administration (FHWA) determined that states ``may''
adopt the exemption on a voluntary basis. FHWA's interpretation of the
weight exemption gives states the option of whether to allow the
exemption or not. ATA asks the Congress to clarify the 400-pound weight
exemption as being applicable to idling reduction equipment nationwide.
d. increase funding for usepa's smartwaySM program
In February 2004, the freight industry and USEPA jointly unveiled
the SmartWaySM Transport Partnership, a collaborative
voluntary program designed to increase the energy efficiency and energy
security of our country while significantly reducing air pollution and
greenhouse gases. The program, patterned after the highly-successful
Energy Star program developed by EPA and DOE, creates strong market-
based incentives that challenge companies shipping products and freight
operations to improve their environmental performance and improve their
fuel efficiencies. To become a partner a fleet must commit to reduce
fuel consumption through the use of EPA-verified equipment. One of the
predominant measures in the program to achieve fuel savings is to
employ idling reduction strategies and devices. By 2012, the
SmartWaySM program aims to save between 3.3 and 6.6 billion
gallons of diesel fuel per year. EPA predicts SmartWaySM
participants will also reduce their annual greenhouse gas emissions by
48 million tons of CO2 equivalents. SmartWaySM is
one voluntary greenhouse gas program that not only works, but exceeds
expectations.
While the trucking industry has fully embraced
SmartWaySM and relies upon the innovativeness of this
cutting edge program, future funding remains uncertain. While ATA and
other freight and shipping sectors continue to work towards ensuring a
separate line item in future EPA appropriations for
SmartWaySM, we are troubled with the FY08 funding cuts to
the program. More specifically, total monies allocated to the program
this year dropped from roughly $3 million in FY07 to $2 million in
FY08. Funding cuts to grants, contracting, marketing, technology
development, and other program expenses have severely undermined the
mission of the program. It is our hope that EPA will redirect an
additional $1 million from the Climate Protection Program under the
FY08 budget to ensure the continued growth and success of this
remarkable program. Given that the Energy Star program's annual
operating budget is $50 million, ATA asks that the Congress provide a
line item appropriation to ensure that SmartWaySM is
adequately funded in the future.
e. require dedication of dera monies to state idling reduction efforts
The Diesel Emissions Reduction Act (DERA) was passed as part of the
Energy Policy Act of 2005. DERA is a bipartisan initiative authored by
Senator Voinovich that authorizes $1 billion over five years to help
states clean up diesel fleets through the establishment of voluntary
national and state-level grant and loan programs to reduce emissions
from existing diesel engines through clean diesel retrofits. Idling
reduction devices are covered as retrofits under the DERA language. In
FY 2008, the DERA program received $49.5 million to carry out its
intent, a far cry from the $150.5 million short of the original. ATA
asks the Congress to fully fund the annual $200 million DERA
authorization levels over the next four years and require states
receiving DERA retrofit funding to dedicate no less than 20 percent of
such allocations towards the development of grants and/or low-interest
loan programs for the purchase of idling reduction devices.