Good morning, Mr. Chairman, Senator Jeffords, and members of the Committee. My name is Mike Ports. I am President of Ports Petroleum Company, an independent motor fuels marketer headquartered in Wooster, Ohio. Ports Petroleum owns and operates 60 high volume unbranded retail motor fuels outlets. Our company operates these stores under the "Fuel Mart" name in 11 states from Ohio to Nebraska, south to Mississippi, and east to Georgia.
I appear before the Committee today representing the Society of Independent Gasoline Marketers of America and the National Association of Convenience Stores. While my company does not retail gasoline and diesel fuel in Oklahoma, many SIGMA and NACS members, including Love's Country Stores of Oklahoma City and QuikTrip of Tulsa, are major Oklahoma marketers. I speak in part on their behalf today. Mr. Chairman, Tom Love and Chester Cadieux asked that I extend their personal greetings to you at this hearing.
II. The Associations
SIGMA is an association of more than 250 independent motor fuel marketers operating in all 50 states. Last year, SIGMA members sold more than 48 billion gallons of motor fuel, representing more than 30 percent of all motor fuels sold in the United States in 2003. SIGMA members supply more than 28,000 retail outlets across the nation and employ more than 270,000 workers nationwide.
NACS is an international trade association comprised of more than 1,700 retail member companies operating more than 100,000 stores. The convenience store industry as a whole sold 124.4 billion gallons of motor fuel in 2003 and employs 1.4 million workers across the nation. Together, SIGMA and NACS members sell approximately 80 percent of the gasoline and diesel fuel purchased by motorists each year.
III. General Comments on Refining and Gasoline Policy
Thank you for inviting me to testify today on the environmental regulatory framework affecting oil refining and gasoline policy. My company does not refine gasoline or diesel fuel, but we do sell it to thousands of consumers every day. Consequently, the environmental regulations that govern refining of crude oil into gasoline and diesel fuel do not apply to my company directly. But it would be a mistake to conclude that my company, all SIGMA and NACS members, and all American citizens have not been negatively affected both by the economic burdens imposed on refiners by environmental protection regulations and by the lack of a federal policy to insure that these burdens do not lead to motor fuel supply shortages and retail price volatility. Unfortunately, extreme wholesale and retail price volatility has become the norm, rather than the exception. NACS and SIGMA have been called to testify before congressional committees regularly since 1996 as these committees investigate the underlying causes for periodic price spikes in the gasoline and diesel fuel markets. Our message has remained consistent with what you will hear from me today.
Today, retail gasoline prices across the nation are at some of the highest levels in history and diesel fuel prices are not far behind. Despite a common misperception, rising retail gasoline and diesel fuel prices generally do not benefit motor fuel retailers. In fact, rising wholesale prices have the opposite effect -- retailer margins are compressed and marketers record lower in-store sales.
Historically, negative public reaction to rising retail gasoline prices led the media and some legislators to allege "price gouging" by retailers and to launch investigations into retailer pricing practices. Such investigations have uniformly found that rising retail prices are caused by fully justified market forces, particularly product supply shortages or unusual demand increases, rather than collusion or price gouging.
The congressional reaction to, and the media coverage of, the price volatility we have experienced in 2004, however, has taken on a much less strident and more reasonable and educated tone. In general, with a few notable exceptions, allegations of price gouging and collusion have been replaced by a discussion of high crude oil prices, increases in demand, supply constraints or dislocations caused by refinery problems and "boutique" fuels, stringent environmental regulations, and lack of growth in domestic refining capacity. SIGMA and NACS welcome this more responsible dialogue regarding the underlying causes for the price volatility we are experiencing thus far in 2004. We hope that this dialogue will result in meaningful, systemic reforms of the nation's motor fuel refining and distribution policies -- reforms SIGMA and NACS have called for every year since 1996.
Simply stated, the environmental compliance burdens placed on the nation's domestic motor fuel refining industry over the past twenty years have effectively destroyed the world's most efficient commodity manufacturing and distribution system. To enhance the quality of our air, an objective of which SIGMA and NACS are completely supportive, the government has imposed on domestic refiners tens of billions of dollars in costs and has fragmented the motor fuels distribution system into islands of boutique fuels. But as for all other good things, there is a price for this cleaner air that ultimately must be paid by consumers of gasoline and diesel fuel.
As long as the motor fuels refining and distribution system works perfectly, supplies are adequate and retail prices remain relatively stable. However, if there are any new stresses placed on the system, such as a pipeline disruption or an increase in world oil prices, the industry no longer has the flexibility to react and counterbalance these forces. Currently, our nation does not have a rational or comprehensive motor fuel refining policy. Instead, environmental protection policies -- well-intentioned, but poorly implemented from the perspective of motor fuel supplies -- have compromised the ability of the domestic motor fuel refining and marketing industries to meet consumer demand.
Congress has a choice to make with respect to motor fuel refining policy. It can continue down the path followed for the past two decades. This path, as we have witnessed, results in static or reduced domestic refining capacity, balkanization of the motor fuel markets, increased imports, increased volatility in wholesale and retail prices, and rising costs for consumers. Right now, on our current path, there is a disincentive for refiners to increase capacity due to the costs involved and the lack of opportunity to achieve a reasonable return on that investment. Alternatively, we can embark on a different path. One that continues to encourage clean fuels. One that restores fungibility to the gasoline and diesel fuel supply system. One that encourages, rather than discourages, expansion of domestic refining capacity. One that changes the fundamental economic calculus that a refiner makes when it decides whether to spend the huge sums necessary to make the upgrades required to produce clean fuels or to close the refinery. SIGMA and NACS urge Congress to examine closely this alternative path. If we don't like the current situation, then we collectively need to chart a new course in order to change the future.
IV. Recommendations for Comprehensive Motor Fuels Policy
I must stress that there are no short-term solutions to the challenges facing the nation's refining and marketing industry. The challenges have been building for twenty years. In fact, we have more challenges in the near future in the form of the new ultra low sulfur on-road diesel fuel program, scheduled to be implemented in 2006. Our nation's fuels distribution system is even now not certain this product can be moved from the refinery to the consumer without significant contamination. As a result, in addition to the challenges we are facing with gasoline supplies, SIGMA and NACS are concerned about on-road diesel fuel supply shortages, and significant price volatility, in 2006 and beyond.
It is time for Congress to enact a set of federal motor fuel refining policies to:
· Preserve and, if possible, increase domestic refining capacity;
· Restore fungibility to the motor fuel supply and distribution system; and,
· Enhance the available supplies of gasoline and diesel fuel.
These goals should not be viewed as an "either/or" situation. Our nation can have a clean environment and still enjoy affordable, plentiful supplies of gasoline and diesel fuel. But we must embark on a new path together.
As an initial matter, several provisions in the fuels title of the Conference Report on H.R. 6, the comprehensive energy policy bill under consideration by Congress, will be important first steps towards achieving these goals. In particular, the repeal of the federal reformulated gasoline oxygen mandate, the blending of compliant RFGs, and the study on the negative supply impact of boutique fuels promise some relief to the refining and marketing industries. SIGMA and NACS urge Congress to pass H.R. 6 as soon as possible.
However, NACS and SIGMA suggest that the enactment of H.R. 6 is only the first step. To build on the provisions in H.R. 6, at a minimum, the following steps must be considered:
· Prevent the spread of new boutique fuels during the implementation of the new ozone air quality standard, if necessary through a federal pre-emption of fuels regulation or the introduction of a basket of "federal fuels" that a state may adopt; and,
· Restore fungibility, without loosening environmental protections, to the nation's gasoline and diesel fuel supplies by reducing the number of fuels permitted.
Restoring fungibility to the refining and distribution system while maintaining environmental protections will require the simultaneous adoption of policies to promote the preservation and expansion of domestic refining capacity. Congress, at a minimum, also must consider the following:
· Assist domestic refiners through the Federal tax code to enable them to produce uniform clean fuels;
· Streamline siting and permitting procedures to permit the expansion of existing refineries and, eventually, the construction of new domestic refineries; and,
· Finalize New Source Review regulations to remove uncertainty from refinery routine maintenance and expansion plans.
None of the policies listed above are without controversy. However, NACS and SIGMA urge this Committee to end the gridlock that has stifled meaningful action on any of these policies for the past decade. Consumers across the nation -- your constituents -- are paying for this gridlock every day when they buy gasoline and diesel fuel. Our members remain ready and willing to assist the Committee in its efforts to achieve these goals.
In summary, SIGMA and NACS ask you to always keep in mind that every time the government changes fuel specifications manufacturers are faced with a decision to allocate capital to a refinery or to stop making specification fuels. In every such instance, some manufacturers will determine than additional investment is unjustified and the relevant facilities’ production will be lost to the market. Consequently, the choice is clear. Continue our current domestic motor fuel refining policies -- or perhaps it is better described as a lack of a policy -- or choose a new path that encourages the production by domestic refiners of plentiful supplies of clean gasoline and diesel fuel.
Thank you again for inviting me to testify today. I would be pleased to answer any questions my testimony may have raised.