Comments on Senate Hearing on Gas Prices

On May 15th, the Senate Committee on Energy and Natural Resources conducted a hearing entitled Short-Term Energy Outlook Summer 2007: Oil and Gasoline. You can listen to the web cast here. I have done so, and this essay will be about my impressions of the hearing.

You can find the testimony of the various witnesses at the links below:

Mr. Guy Caruso – EIA Administrator
Paul Sankey
Geoff Sundstrom
Kevin Lindemer

Mr. Sankey is an analyst with Deutsche Bank, Mr. Sundstrom represents AAA, and Mr. Lindemer is an analyst with Global Insight. The witnesses really knew their material, although Mr. Sundstrom seemed terrified and Mr. Caruso had to make sure some of his answers were “politically correct.” On one occasion he stated that the EIA does not foresee that cellulosic ethanol is going to scale up to even a billion gallons by 2030, and one senator said “Isn’t that in direct contrast to what the president thinks?” Then some pretty nifty tap-dancing ensued.

The Q&A, in my opinion, was an embarrassing display of partisan politics, and revealed serious deficiencies in some of the senators’ understanding of energy issues. Some Republican senators took the opportunity to push for coal-to-liquids and drilling in ANWR, and some Democrats did a bit of grandstanding over windfall profits – directly ignoring the answers the witnesses were giving them.

For example, Paul Sankey had explained that oil companies lost a lot of money in the 80’s and 90’s, and therefore investments fell off. A couple of different senators kept asking the same question again and again: “Yeah, but why aren’t they investing today, with record profits?” And Sankey kept telling them that they were.

Sankey didn’t mince words at all, and at one point told the committee to keep in mind that these record high prices are less than half the level of the prices in Europe.

Anyway, here were some of the more interesting exchanges which I transcribed myself. Senator Craig Thomas was the first to demonstrate that he didn’t understand the answer to a question:

Senator Craig Thomas: Most any time that you have great markets and so on, you also have investment, like in the refineries. When the market is there, and the price is high, I don’t understand the lack of incentive to invest.

Paul Sankey: The incentive is there, and the companies are now investing, it’s just not an issue that you can expect that 4 years after companies are making losses, that suddenly there is an exponential increase in investments in refining capacity. It’s just not that simple. It’s a very tough market out there for any kind of infrastructure investment, as I mentioned you have competition from the Canadian heavy oil sands, you have competition from Asia, in Europe; but these companies are increasing their investments. The fact is that the companies are deploying capital to the best of their ability. One disincentive for investment is brought about by uncertainties in regulation and government interference. One concern they have is that regulations will cause them to lose money if they invest now. In my opinion it’s in your interest to maintain a stable regulatory environment to encourage investment.

Senator Craig Thomas: I agree with that. But if lack of infrastructure is causing the price to go up, and the companies are not investing in infrastructure then it seems to be a bit of a contradiction.

So, right after Sankey says they are investing, Senator Thomas can’t understand why they aren’t investing. I lost count of how many times Sankey went through the investments that are taking place now.

Immediately after the above exchange, Senator Ron Wyden from Oregon apparently awoke from a slumber, because he asked the same question:

Senator Wyden: Mr. Sankey, quick question. You stated that in the 80’s and 90’s, there were poor returns for the companies, and that contributed to their problems. But now we also have the problem of starving investment in refineries, but we have record profits. Certainly that’s been the case for the last 5 or 6 years. Why wouldn’t the companies have invested in refineries and in the infrastructure – the things that were missing in the 80’s and 90’s – in the last 5 or 6 years?

Paul Sankey: This goes to the same point. You had losses as recently as 2002, and there have been changes in regulations – potential threats to gasoline as the fuel you want to make in this country. If you are talking about an investment of 2 or 3 billion dollars, it’s immensely expensive now to add refineries, and there are huge amounts of uncertainties over how much it will ultimately cost you because of all the other challenges that there are out there with global energy infrastructure competing away the staff and materials to do the job. But even amongst all that, we have some fairly significant investment going on right now. One of the subtleties here is that we may not be adding a tremendous amount of capacity, but in terms or our ability to upgrade more complex heavy, sour crude there is very definitely a surge of investment going on.

Senator Wyden: I can see the argument, and you make it eloquently in your paper for not going forward with investments in the 80’s and 90’s; it just doesn’t make sense given these record profits.

You have to wonder whether he heard a word that Sankey said. Is he just posturing? Or is he not paying attention? Or does he not understand that investments are actually being made (as I show in later)? Yes, these are the people formulating our energy policy.

The other exchange that I watched in disbelief happened between Senator Robert Menendez and Sankey:

Senator Menendez: Over the past few years, it seems that bracing for the onslaught of record high prices at the gas pump has become as common as planning for the summer vacation. And we see prices rise and fall, we understand the concept of a changing supply and demand chain, that’s not foreign to us, but when we see no singular event, no visible cause for the increase in prices, consumers scratch their heads and try to figure out what’s happening. This is the 3rd year in a row in which consumers are facing gasoline prices above the $3/gallon mark. Yet there’s no devastating hurricane this year; there’s no single event at a refinery or in an OPEC country that explains why, in the first half of May, consumers are already experiencing sticker shock. Mr. Sankey, when you say there is no price manipulation through the whole supply chain, then why do prices seem to spike during times of greatest motorist activities such as the summer, and Memorial Day weekend? Now, I am sure that demand is part of the answer, but it seems that we find that it is in these time periods that the prices spike. Is that just convenience, that it just conveniently happens that way? Is it just a pure coincidence?

Now remember, Senator Menendez just said that he understands all about supply and demand, and now is asking if it’s a coincidence that prices increase at the times of highest demand. If I had been a witness, it would have been hard for me to hide my disbelief at this question from another member of the Senate who happens to be formulating energy policy.

Paul Sankey: I would highlight once again, that BP has 2 of the 5 largest refineries in the U.S. effectively running at half capacity right now because of the safety issues. What happens in times of such tight capacity is that you have an extremely seasonal market. What happens is that at times of demand run-up, you begin to exceed available supply and prices rise exponentially, attempting to price out demand or encourage more supply. What you will find in such a tight market is that in winter you will suddenly get tightness in natural gas and heating oil, because there isn’t that available spare capacity to address the sudden seasonal rise in demand, and when you get to driving season – because everyone loves to go to the beach on Memorial Day – what you find is that you exceed available supply and then prices rise exponentially.

Then Senator Menendez gets his facts completely wrong:

Senator Menendez: Isn’t there a reality that we are paying for some industry decisions that actually reduced refining capacity in this country? I mean there was a time that we had greater refining capacity, and the industry reduced that refining capacity, and as a result of making that decision, consumers today find themselves with exactly the consequences that you have described in your testimony before.

Sankey then tried to explain something about the cycle, but did not correct Senator Menendez on the key point: Refining capacity has not been reduced; it is at an all time high. Some refineries have been closed down, but the expansion of the existing ones far surpasses the lost capacity from those that were shut down. See my essay addressing this.

But Senator Menendez continued:

Senator Menendez: My point is that the reduction in refining capacity helped drive up the cost.

Your point is incorrect, and you misinformed a lot of people when you made it. Perhaps this kind of misinformation explains some of your anger at the oil industry?

But don’t take my word for it. Visit the EIA and see the numbers for yourself. Refining capacity has increased by 2 million barrels per day in the past 10 years. And in the past 5 years? The years that Senator Wyden complained that no investments were being made? Refining capacity has increased since 2002 by 700,000 barrels a day – 250 million barrels a year. To put this in perspective, that amount is equal to 10.7 billion gallons, or about double the entire ethanol production in the U.S. That’s the amount of refinery expansion that a number of senators on the committee pretended never happened because they believe no investments have been made (and this on top of the investments to upgrade heavy, sour crudes and to produce ULSD and ULSG).

Final Thoughts

I don’t know if the committee members are really so uninformed, or whether they were just playing politics. You got the impression watching the web cast that they were making some statements just to make sure those were picked up by the media, regardless of whether they were accurate. Senator’s Wyden’s comments are a perfect example. It was clearly explained to him that investments are being made, and then he turned around and asked why they weren’t investing.

The comments from Senator Menendez may be another matter. He may actually believe that refining capacity has been reduced. But he is on the energy committee. He should understand the overall picture. This is important stuff, and we can’t have energy policy being formulated by people who are either proceeding with half-baked ideas, or are just interested in scoring political points.

There is also one thing that all politicians must come to grips with. Let me make it crystal clear that I firmly support tough environmental regulations. I support the move to ultra-low sulfur diesel (ULSD) and gasoline. I support phasing out benzene in gasoline. I would also point out that Senator Wyden has been actively involved in this issue. But the politicians have to understand that these regulations do have consequences. If you tell refiners they must install equipment to produce ULSD, there are four things to keep in mind.

First, this necessarily redirects capital that might have gone into expanding refining facilities. Second, it increases the costs of producing the fuel. Third, this additional level of processing reduces the overall product yield. Fourth, and perhaps of greatest importance, it increases the complexity of the refinery. Those are the consequences. The more complex the refineries are, the more unreliable they are going to be. So, when you formulate these sorts of rules, don’t sit around and scratch your heads and ask “Gosh, I wonder why gasoline prices are going up?” A big part of the reason gasoline prices are going up is because of the policies you have enacted. Many of which – as in the case of the aforementioned environmental regulations – I agreed with. Nonetheless, these are issues that helped crimp supplies and add to costs.

But I have to tell you that I am sick of this crap. I want you guys to put your heads together and formulate a coherent energy policy. Stop playing politics with this. It is far too serious a matter. Also, the committee members need to get up to speed ASAP on energy issues. We don’t need members on the energy committee who have a tenuous grasp of these issues. Finally, listen to what your experts are telling you. If you are going to call expert witnesses to testify, don’t completely ignore their testimony just so you can spew your canned sound bites. START SOLVING SOME FLIPPING PROBLEMS!

11 thoughts on “Comments on Senate Hearing on Gas Prices”

  1. The problem is not just with politicians who are either too dumb or too interested in making political hay, it’s also with the American people, who are dumb enough to accept such idiocy.
    Even more disappointing is the media. I’m a member of the media, and it saddens me that my compatriots aren’t doing a better job of educating Americans, instead of regurgitating talking points, and serving up mountains of celebrity palaver.

  2. I’m a member of the media, and it saddens me that my compatriots aren’t doing a better job of educating Americans, instead of regurgitating talking points, and serving up mountains of celebrity palaver.

    I wish some of these guys would held accountable. For instance: “Senator Menendez, in last week’s senate hearings on oil and gas, you said ‘there was a time that we had greater refining capacity’. When was that sir? According to the EIA statistics, currently we are at an all time high for refinery capacity, and it has been growing for years.”

    Otherwise, he is just going to repeat this the next time the subject comes up.

    Cheers, Robert

  3. While congress debated refinery capacity, a very instructive drama is playing out in California.

    I posted this on the other topic, where it may have been lost. I wonder what the senators and the FCTR would think of this:

    Valero: Damned if you do, damned if you don’t

    Valero had agreed to take its Wilmington HF alkylation unit down and modify it for the ReVap process, which uses a modified HF acid catalyst that reduces the chance of forming a toxic vapor cloud in the event of an accident. The South Coast Air Quality Management District has a memorandum of understanding with Valero to complete the work by May 9 or be subject to a $5,000/day fine (capped at $1 mil/yr). The MOU is here: SCAQMD MOU with Valero Local opposition has delayed implementation for nearly 2 years. Now Valero is paying the daily fine rather than take the alkylation unit down at a critical time for CA gasoline supplies. Valero is taking a huge risk here, in the event there was an accidental release of HF at Wilmington, the company could face hundreds of millions of dollars in potential lawsuits.

    Now we have the CA Assembly Speaker, Fabian Nunez, saying he wants politicians to take over planning maintenance of refineries.

    As regulators ratchet down on environmental emsissions and fuel quality specifications, it makes it increasingly difficult to produce gasoline. Paul Sankey’s warnings seemed to fall on deaf ears. I would expect more political posturing from Washington but little else.

  4. I want you guys to put your heads together and formulate a coherent energy policy. Stop playing politics with this. It is far too serious a matter.

    I don’t know what the mix is between political posturing and ignorance on the part of the political leadership, but I would submit that the Senators’ seeming pig-headedness with regards to the facts may be more ignorance and less malicious/political than would seem possible from the outside.

    They’re caught in a conundrum. The politicians want low prices, high environmental quality, and supply to match an unrestrained growing demand. When I was at Caltech, they used to say “Sleep, social life, and grades: pick two”. Similarly, they can (maybe) have any two of those things, but they can’t have all three. But political survival requires that they deliver all three, or at least appear to be doing so. But they can’t. But they need to. People confronted with this sort of severe cognitive dissonance can ignore tangible, demonstrable realities sitting right in front of them, so it’s easy for them to simply not hear the inconvenient testimony.

  5. Even more disappointing is the media. I’m a member of the media, and it saddens me that my compatriots aren’t doing a better job of educating Americans, instead of regurgitating talking points, and serving up mountains of celebrity palaver.
    Free market at work? Seems like in the mad rush to get the maximum return on investment the news is dumbed down and spiced up with celebrity stupidity. Why pay someone good money to do a clever analysis if only a handful of people will watch it? But hey, everyone loves American idol.

    And then, of course, there is the local BS: “Local man stung by a bee – how a trip in the backyard could land you in intensive care. Details coming up”. Drummed up nothingness, but hey, we can do it cheaply.

    The one media organization that is resisting this best, to my knowledge, is the BBC. However, they enjoy some priviledges that would probably never fly in the land of opportunity, such as licensing fees.

    The bigger threat, as I see it, is capitalism gone wild, to coin a phrase. Capitalism, it is said, is the worst available system, except for all the alternatives. For capitalism to work, you need the government to play the role of maker and enforcer of the rules. Problem is with today’s politicians is that they are the best money can buy: so instead of fair rules, designed to protect everybody; we get lobbyist designed rules, designed to make it easier for the rich to make even more money.

    Thus we see the ugly side of capitalism: left to its own devices the rich always get more powerful. You poor guys better get back to work…

  6. The politicians want low prices, high environmental quality, and supply to match an unrestrained growing demand. When I was at Caltech, they used to say “Sleep, social life, and grades: pick two”. Similarly, they can (maybe) have any two of those things, but they can’t have all three.

    That is a great way to put it. You should trademark that phrase. I am going to borrow it. 🙂

    Cheers, Robert

  7. “Congress is overwhelmingly staffed by lawyers. I have met some of these notables, and with the exception of Rep. Bartlett, most of them are energy illiterates, if not energy cretins.” — March 12 commentary by Randy Udall

  8. nothing about dedicated development of negagallons

    1- mass transit. hi speed rail from san diego to sacramento will save how many hundreds of millions of gallons? from chicago to st louis how much gas saved?

    2- hybrid and plug in hybrids save how much gas. why is every gov’t fleet vehicle not plug in hybrids, crp all they do is city driving.

    tired of talking about why gas prices are hi, and why there isn’t more gas. we don’t need more, we shoudl want less gas.

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