while during peak demand periods the capacity rate runs between 95 and 98 percent. So, they are working at probably their top capacity.

The high capacity rate causes us to import more refined products and leave us vulnerable to emergency shutdowns and equipment failures at any of our larger refineries.

This problem will only get worse as our fleet of refineries ages. As Linda Stunt said at our last hearing, we are a fossil fuel based economy and we will be for the foreseeable future.

While I support alternative fuels, such as wind and solar, we should continue research in those areas. But it is not realistic that we can replace fossil fuels today or even tomorrow. I think that is really important that we understand that.

Too often those who emphasize alternatives fail to realize that there is no way that alternatives can meet our energy demands. Demand is increasing not only in our country, but also worldwide. For example, China used to export oil. Today, they import oil. The demand for oil in the world is growing.

On fuel for vehicles, we will continue to be petroleum based. We heard testimony at the last hearing that hybrid vehicles look promising. They are certainly on a shorter timeframe than fuel cells. But hybrids are not quite there yet, and the current technology still uses gasoline.

I met yesterday with Rick Waggoner, the President of General Motors, who told me that the electric vehicle program in California is not proving as feasible as many thought. The problems there have increased with the electricity crisis that they have in the State.

I am, however, in favor of alternative fuels for vehicles. I think ethanol, for example, is very promising. In Ohio, 40 percent of the gasoline we use has an ethanol content to it. Although we need to resolve the problem related to the Highway Trust Fund. Many people are not aware of the fact that two and a half cents from the ethanol tax goes into the General Fund of the United States.

I think, particularly, Senator Inhofe, you will remember last year we had a colloquy on the fact that we need to take that two and a half cents and see if we can't get that money put into the Highway Trust Fund. As more and more people use ethanol, States are going to be impacted because that money is not going into the Highway Trust Fund, but added to the General Fund. I have talked with Senator Grassley about this.

At our last hearing, Senator Carper mentioned an experiment in Delaware where they are mixing diesel fuel with soybean oil. I understand in Oklahoma they are doing experiments making ethanol from switchgrass. So, we need to broaden our fuel base.

For today, tomorrow and tomorrow we are still petroleum dependent and we are going to have problems with price spikes and supply disruptions. We need to address the price and supply issues while continuing to improve the environment and public health.

The question is: How do we harmonize our energy needs and our environmental needs so that we come up with an energy policy for this country? There are three main areas where environmental regulations may be causing problems contributing to fuel price spikes and shortages.

The first is the exploration and production of oil and gas, which has led us to increase our foreign imports. The second is during the refining process, environmental regulations are partially responsible for no new refineries in 25 years and the closure of over 75 refineries.

In addition, the constantly changing environmental regulations and the enforcement practices of the EPA, in particular the changing definitions under the New Source Review Program have led to complications in producing refined products. Because of the uncertainty of EPA's New Source Review Program, people are refraining from essential maintain and repair work which will only lead to more facility shutdowns in the near future.

The program has also created a disincentive for installing the latest pollution control devices and modernizing facilities. Installing one piece of equipment can cause the entire facility to trigger in NSR, which may not be financially viably.

Third, the boutique fuel requirements across the country and the inability to site new pipelines have caused additional problems in getting fuel to the consumers. With our growing dependence on natural gas, this problem is only to get worse.

Now, we had an FTC investigation last year. It is very interesting; the report of the FTC got very little coverage in the media. What did they say? Well, what they said is and at that time, if you recall, it was alleged that there was price gouging and price fixing in the Mid West.

The report is very valuable, and I want it entered into the record today. I want to read a couple of quotes from it. "The current high capacity utilization rates in the oil refining industry leave little room for error in predicting short run demand. Unexpected demand for a certain oil product is difficult to satisfy without reducing the supply of another oil product. Unexpected supply problems can result in temporary shortages across many oil products. Assuming that demand continues to grow, occasional price spikes in various parts of the country are likely unless refining capacity is increased substantially."

The FTC found no evidence "of illegal collusion to reduce output to raise prices. Rather each industry participant acted unilaterally and followed individual profit maximization strategies."

The report found the primary causes were refinery production problems, refinery turnarounds, unexpected refinery disruptions and RFG phase two manufacturing problems, pipeline disruptions and low inventories.

So, it went on. It concluded that the gasoline price spike in the Midwest was short lived. Soon after prices spiked, additional gasoline was produced and imported to the region and prices dropped as quickly and dramatically as they had risen, notwithstanding industry's ability to respond to the short-term problems, the longterm refining imbalance in the United States must be addressed or similar price spikes in the Midwest and other regions of the country are likely.

I thought we got off to a good beginning in our last hearing. We have some outstanding witnesses today. We are going to get another perspective on it. I think the witnesses are balanced. We try

to do that so we just don't hear one side of the story. I am looking forward to their testimony.

[The prepared statement of Senator Voinovich follows:]

OPENING STATEMENT OF HON. GEORGE V. VOINOVICH, U.S. SENATOR FROM THE

STATE OF OHIO

Today's hearing is our second in a series, “Interaction of our Environmental Regulations and the Nation's Energy Policy." Two weeks ago, we held our first hearing in which we concentrated on utility issues. Today will we concentrate primarily on oil and gas issues.

One of the great challenges facing our nation is the need to ensure a reliable and dependable fuel supply while continuing to improve public health and the environment. Accomplishing these goals without a major disruption to our economy or our way of life will be a test to our ingenuity and our resolve.

One of the first hurdles we need to surmount is our over-reliance on foreign sources of oil. The extent that our reliance on foreign oil has increased is astonishing. In 1973, during the Arab Oil Embargo, we imported 35 percent of our oil. In the year 2000, that number had climbed to 56 percent. It is estimated that at our present rate of consumption, we will import 65 percent of our oil needs by the year 2020. Since OPEC has us “over a barrel" so to speak they are able to turn the spigots on or off at their whim.

Twice already this year, OPEC has announced a decrease in oil production by a combined total of 2.5 million barrels of oil per day. This action has driven up prices at the pump in the U.S., much to the consternation of many Americans. If not for the help and friendship of the Saudis to minimize the oil cartel's production cuts, we would be in deep trouble. However, it does not sit well with this Senator that while our military is engaged with Saddam Hussein, he is selling us oil.

One of the issues that we face which keeps our imports high is the fact that we have a domestic refining capacity problem. There have been no new refineries built in the last 25 years, and in fact since 1983 we have lost 33 percent of our refineries. The average annual capacity rate is 92 percent while during peak demand periods the capacity rate runs between 95 percent and 98 percent. This high capacity rate causes us to import more refined products and leaves us vulnerable to emergency shutdowns and equipment failures at any of our larger refineries. This problem will only get worse as our nation's refineries age.

At our last hearing, Linda Stuntz said that we are a fossil fuel based economy and we will be for the foreseeable future. I agree.

With regards to fuel for vehicles, the American and world auto-markets will continue to be petroleum based. While demand for fuel oil is increasing in our nation, it is also increasing worldwide. China, for example has gone from a net exporter of petroleum to a net importer. Having said that, I believe it is imperative that we continue to conduct research into the use of alternative fuels for vehicles.

At our last hearing, we heard testimony about the potential that hybrid vehicles posses. Hybrid vehicles are not quite "there" yet and the current technologies still use some gasoline. Still, they are certainly on a shorter timeframe than fuel cells. I met yesterday with Rick Wagoner, the President of General Motors who told me that the electric vehicle program in California is not proving feasible, and the problems will only increase with the electricity crisis.

I also believe ethanol is a promising fuel source. In Ohio, 40 percent of our fuel contains ethanol. As an aside, I am still concerned that we have not satisfactorily addressed the issue of allocating 2.5 cent-per-gallon ethanol fuel tax into the Highway Trust Fund instead of the general treasury. In a colloquy during the MTBE debate last year there was agreement to put the 2.5 cent ethanol tax into the Highway Trust Fund rather than into general revenues. We need to resolve this issue. In addition to ethanol, we should look at other alternative fuels. At our last hearing, Senator Carper mentioned an experiment in Delaware where diesel fuel is mixed with soybean oil. I also understand that in Oklahoma experiments are being conducted that make ethanol from switch grass. All of these activities will help broaden our fuel base.

However, while I support the use of alternative fuels, too often those who emphasize alternative fuels fail to realize that there is no way that they can fully meet our current energy demands. We need to address the price and supply issues while continuing to improve the environment and public health. The question is how do we harmonize our energy needs and our environmental needs to achieve a National Energy Policy.

Therefore, today, we must deal in the reality that our nation is still petroleumdependent and we are going to have problems with price spikes and supply disruptions. We have already discussed the role foreign oil plays in such matters, but we need to explore how they are affected by environmental laws and regulations here in the United States.

There are three main areas where environmental regulations may be causing problems contributing to fuel price spikes and shortages. The first is the exploration and production of oil and gas which has led us to increase our foreign imports.

The second can be traced to the refining process. Environmental regulations are partially responsible for the fact that no new refineries have been built in the last 25 years and that over 75 refineries have been closed in the same time-frame. In addition, constantly changing environmental regulations and the enforcement practices of the EPA in particular the changing definitions under the New Source Review program have led to complications in producing refined products.

Because of the uncertainty of the EPA's New Source Review Program, companies are refraining from essential maintenance and repair work. This will only lead to more facility shut downs in the near future. The program has also created a disincentive for installing the latest pollution control devices and modernizing facilities. Installing one piece of equipment can cause an entire facility to trigger NSR, which may not be financially viable.

Third, the boutique fuel requirements that are in random use across the country and the inability to site new pipelines have caused additional problems in getting fuel to consumers. With our growing dependence on natural gas as an energy source, this problem is only going to get worse.

FTC Investigation

Finally, I would like to say a few words about the Federal Trade Commission investigation into alleged price gouging and price fixing in the Midwest last year. They released their report last Friday. By a 5-0 decision, the FTC found no credible evidence of collusion or other anti-competitive conduct by the oil industry in the causes of the gasoline price spikes in local markets during the spring and summer of 2000.

But the Report itself is very valuable and I am going to enter it into the record and read a few quotes from it. First:

"The current high capacity utilization rates in the oil refining industry leave little room for error in predicting short-run demand. Unexpected demand for a certain oil product is difficult to satisfy without reducing the supply of another oil product, and unexpected supply problems can result in temporary shortages across many oil products. Assuming that demand continues to grow, occasional price spikes in various parts of the country are likely unless refining capacity is increased substantially."

And: "FTC staff found no evidence of illegal collusion to reduce output or raise prices. Rather, each industry participant acted unilaterally and followed individual profit-maximization strategies."

The report found that the primary causes were:

Refinery Production Problems (refinery turnarounds, unexpected refinery disruptions, and RFG Phase II manufacturing problems), Pipeline Disruptions, and Low Inventories.

The report found that the secondary problems were:

Unavailability of MTBE as a Substitute for ethanol in Chicago and Milwaukee, Unocal Patents, waiver of RFG Phase II Requirements in St. Louis, High Crude Oil Prices, Increase in Gasoline Demand, and Taxes.

The report concludes:

"The gasoline price spike in the Midwest was short-lived. Soon after prices spiked, additional gasoline was produced and imported to the region, and prices dropped as quickly and dramatically as they had risen. Notwithstanding the industry's ability to respond to the short-term problem, the long-term refining imbalance in the United States must be addressed, or similar price spikes in the Midwest and other regions of the country are likely."

CONCLUSION

I thought we got off to a good start at the last hearing and with this hearing I hope to build on our findings.

There is no doubt that we are dealing with a national energy crisis. The impact of this energy crisis is, and will continue to be, of such a magnitude that I believe what this committee does this year could have more sway over what happens to the

I think we as a nation need to rethink the manner in which we

approach regulation. We need to keep an open mind. We need not to use some of the terms that we have heard such as "sneak attacks on the environment."

In fact, the opposite is true. If we rethink regulation, we can be in a better position in the future. We can find ourselves in a place

U.S. economy and America's pocket books than at any other time in U.S. history. I maintain optimism that we will be able to deal with these issues in a bipartisan manner. We have a distinguished group of witnesses this morning and I look forward to their testimony.

I would now like to call on Senator Inhofe.

OPENING STATEMENT OF HON. JAMES M. INHOFE,

U.S. SENATOR FROM THE STATE OF OKLAHOMA

Senator INHOFE. Thank you, Mr. Chairman.

By the way, the program that you referred to on the grass is Oklahoma State University. In fact, the person who is heading that up is the former United States Senator Henry Bellmon from Oklahoma. He is very optimistic about that.

You know, so often we look at what might be out there in the future, but our crisis is here now. In a recent report entitled "The U.S. Downstream: The EPA Takes Another Bite Out of America's Fuel Supply," Merrill Lynch concluded that the EPA's clean regulations "will clearly have the impact of reducing existing U.S. refinery capacity."

Now, this is a problem. On this chart back on the price spikes, if you start out with 100 percent refinery capacity, which we have today, everything that is on here will have that effect. Of course, the American people are very sensitive to the cost of energy right

now.