Democratic News

March 24, 2004
The President
The White House
Washington, D.C. 20500
Dear Mr. President: I am concerned about the impact that rising petroleum and petroleum product prices are having on the American economy, American consumers and American jobs. The Short Term Energy Outlook released earlier this month by the Energy Information Agency (EIA) underscores these concerns: “Gasoline prices remained tight and crude oil prices rose again in February [ending the month above $36/bbl]. The prospects for oil prices diminishing significantly prior to the driving season have weakened, and there is a high likelihood of additional gasoline price increases this spring. Even if unexpected significant refinery or pipeline disruptions are avoided, national monthly average regular gasoline pump prices are projected to reach a peak of about $1.83 per gallon this spring. Summer (April to September) gasoline prices are now expected to average about $1.74 per gallon this year. This would be a record in nominal dollar terms and the highest inflation-adjusted summer average since 1985. For 2004 as a whole, national regular gasoline pump prices are now expected to average $1.67 per gallon, 10 cents higher than our previous projection. About half of the increase reflects higher crude oil prices, with the remainder reflecting the impact of low inventories, robust demand, and uncertain availability of gasoline imports.” EIA Administrator Guy Caruso testified on energy prices before the Senate Committee on Energy and Natural Resources on March 4. He stated that the average household paid $200 more for gasoline in 2003 than in the previous year. It is worth noting that the EIA data he presented were national averages for families without children. When two children are added to this calculation, along with regional factors for states like California or Texas where the average number of miles driven is greater than the national average, the combined increase in fuel costs may in fact double. As EIA data clearly shows, fuel prices across the board are near historic highs. This includes not just gasoline, but diesel and jet fuel as well. Jet fuel prices, according to an article in USA Today last week, are at their highest level in a year, up more than 30 cents over the last decade’s average. Leading U.S. airlines increased fares by $5 last month in order to offset the high cost of fuel. The American Transport Association estimates that every penny increase in average jet fuel prices translates into increased costs for the industry of $180 million. This year’s average price is running 17 cents above last year’s average. If this continues, the airlines will face some $2.7 billion in increased fuel costs. We can no longer ignore the rising cost of these important transportation fuel products, and of natural gas, that are so central to our nation’s economy security. American consumers and American businesses need relief, and they need it now. I believe that there are specific steps that the Administration can take right now to relieve the current tightness in our fuels markets and to put our national fuels system on a better long-term footing. Increasing Domestic Supplies of Natural Gas The first set of specific steps the Administration could take to address current high prices involves increasing our domestic supply of natural gas. *Reprogram additional funds in FY 2004 to Federal oil and gas programs and request supplemental funds to reverse the cuts to Federal oil and gas programs in the Administration’s FY 2005 Budget Request Federal programs to support increased domestic oil and gas production have fared poorly in your most recent Budget Request to the Congress, despite the many public statements of support for such increased production by Administration officials. One case in point is the Oil and Gas Management Program in the Bureau of Land Management (BLM) of the Department of the Interior. This is the program that governs onshore oil and gas production on Federal lands. The 94,000 Federal onshore oil and gas wells currently account for 11 percent of U.S. natural gas production and 5 percent of our oil production. Your own Administration’s figures show that there is a backlog of oil and gas lease applications and drilling permits on Federal lands of about 2,100 for the current fiscal year. Instead of taking aggressive action to reduce this backlog to zero over the next year, your latest Budget Request cuts $3 million from the budget of the Oil and Gas Management Program, with the difference to be made up by raising fees on the independent oil and gas producers for each lease application or drilling permit that they apply for. As a result of this “status quo” level of effort in the BLM, your Budget Request estimates that the bureaucratic backlog in BLM will only decline by 200 in FY 2005, for a net backlog of 1,900 lease applications and drilling permits. This is woefully inadequate in light of current high prices. Instead of making it more costly for domestic producers to look for oil and gas on Federal lands, and doing little or nothing to make the necessary resources available in the field to speed the processing of leases and permits, the Administration should be asking Congress for a much greater increase in this budget. I recommend that you take the following three actions to boost domestic natural gas production: 1. Request that FY 2004 funds be immediately reprogrammed to start reducing the drilling backlog at BLM; 2. Submit a supplemental request for an additional $8 million for FY 2005 to take the backlog to zero; and 3. Direct the BLM to abandon the notion of a rulemaking that would erect greater fiscal barriers to the exploration and production of oil and gas on Federal lands. A second set of deep budget cuts affecting natural gas production can be found in your Budget Request for the Department of Energy’s oil and gas R&D programs. These programs are focused on providing independent producers with access to new technologies that make domestic production of oil and gas more efficient and effective. Your Budget Request for FY 2005 cuts these programs by nearly half. One particularly important program, DOE’s Petroleum Exploration and Production Research, would be slashed by 84 percent under your Administration’s proposal. Again, given the need to sustain domestic production and the strong support for these programs on a bipartisan basis, these are difficult funding decisions to justify. I recommend that, at a minimum, you submit a supplemental request of $37.1 million for FY 2005 for DOE oil and gas R&D programs, so that these programs can be maintained at their current level of funding. Relieving Gasoline Price Pressure for Consumers The next set of steps I would recommend deal with relieving price pressure on gasoline for consumers. *Temporarily suspend using royalty-in-kind oil to fill the Strategic Petroleum Reserve The Senate has voted in favor of temporarily suspending the use of oil taken in-kind by the Federal government to fill the Strategic Petroleum Reserve. I supported that action, proposed on a bipartisan basis by Senators Carl Levin (D-MI), Susan Collins (R-ME), and Hillary Rodham Clinton (D-NY). While the Senate vote was not binding on the Administration, the idea of not diverting oil from the market to fill the Strategic Petroleum Reserve at a time of exceptional tightness in oil markets makes sense at least as a signal to the market that the Administration recognizes the depth of economic hardship being caused by current high prices. I recommend that you direct the Secretary of Energy to suspend this policy temporarily, to be reinstated when oil prices return to more normal levels.
*Press the Organization of Petroleum Exporting Countries (OPEC) to increase oil supply The Organization of Petroleum Exporting Countries (OPEC) has successfully managed the global oil market with an increasing degree of precision since its announcement in March 1998 of a pact to lower output and keep oil prices within a $22-28 per barrel price band. Supply has been tight and prices have remained high in particular over the past 12 months. On February 10, 2004, OPEC announced a surprise agreement to cut its output quotas by 1 million barrels a day, or 4 percent, starting in March, because of concern that prices may fall once winter ends in the northern hemisphere. Meanwhile, crude oil prices in New York reached a 13-year high of $38.18 a barrel on March 17, two weeks before OPEC's next meeting. Given the economic impact that high energy prices are having on American families and businesses, your Administration needs to act more aggressively to combat the mounting economic crisis. With a decrease in supply, the demand for oil could send prices at the gasoline pump well above $2 a gallon this summer. It is time that this Administration use every means at its disposal to bring down high energy prices. OPEC has limited its production of oil to drive prices higher and collect additional profits. This is not acceptable. I recommend that the Administration exert diplomatic pressure on OPEC to abandon its agreement of February 10 and to increase oil supplies instead. *Fine-tune the current gasoline sulfur regulation to ease price pressures on consumers EPA is in the process of implementing a new rule on sulfur in gasoline. This rule sets the acceptable level of sulfur in gasoline at 120 ppm as of January 1, 2004. Over the next two years, this level will drop to only 30 ppm. The move to cleaner, more sulfur-free transportation fuels is necessary and should continue. The rule rewards companies that achieve early reductions in their operations’ baseline level of sulfur to generate sulfur credits for use in 2005. An additional level of special credits called “allotments” was developed to reward companies which made significant capital investment. The rule, however, does not have a reliable mechanism for independent fuel importers to participate in the system if markets are tight and the number of allotments they need to buy (to stay in compliance) are not available. I recommend that the Administration revise this rule to allow independent importers to carry a small deficit balance in case they are unable to buy enough allotments. By doing so, we will facilitate the ability to move more gasoline that is currently on the world market to U.S. consumers this summer, without compromising environmental protections. If unexpected significant refinery or pipeline disruptions occur, or if gasoline prices rise to levels that cause significant economic harm, I recommend that your Administration be prepared to issue an emergency rule allowing the use of the sulfur credits for 2005 in this year. This additional flexibility in the use of sulfur credits would not result in any greater emission of sulfur dioxide over the two-year period of 2004-2005, but would add to the ability to bring more gasoline into the United States so that consumers are not paying more than they should. *Develop a national fuels strategy While some of the preceding actions show how fuel prices can be temporarily moderated by lowering barriers to fuels already on world markets this summer, we need to get our national fuels system in order for the longer term. Although your Administration published a general report on national energy policy in 2001, our country still lacks a focused national fuels strategy. Current policies on issues such as the operation of the Strategic Petroleum Reserve (SPR) are simply outdated. The Administration has made no progress towards stopping and reversing the increasing balkanization of U.S. fuel markets – a balkanization that hits every consumer right in the pocketbook with higher fuel prices than necessary. And there has been no attempt over the past few years to build consensus around a balanced approach to both increase the supply of refined fuels and increase the efficiency of our oil use economy-wide. The SPR was created in 1975 in response to the fuel supply crisis we encountered due to the Arab oil embargo of 1973. Back then, the United States benefited from significant excess refining capacity and discretionary stocks. Today, nearly 30 years later, circumstances have changed considerably. Oil companies, like many U.S. businesses, have adopted just-in-time inventory management practices. Demand for transportation fuels in the U.S. has grown dramatically. Yet, we have not built any new refineries, we have just required existing ones to operate at full capacity. Our refineries are now having difficulty keeping up. Today, more than 30 percent of gasoline supplied to East Coast markets is imported. These changed circumstances and new needs call out for a number of policy initiatives that should be undertaken as part of a broader national fuels strategy. First, such a strategy should look at how conservation in transportation fuel use can be enhanced. Instead of debating on the merits of any single approach to the problem, it would be more productive if the Administration were to set a policy target for itself of oil savings it would like to achieve economy-wide over the next 10 years. This would give the Administration and the public a yardstick to evaluate the effectiveness of various policy proposals. Such a target would likely be broadly supported across the political spectrum. In the Senate, one such proposal for an oil savings target was supported last year by a vote of 99-1. I recommend that the Administration set such a policy target, after public consultation. Second, the Department of Energy and the Environmental Protection Agency should start addressing the need for further refining capacity in areas, such as the East Coast, that are now importing gasoline to keep pace with demand. States, localities, consumer groups, environmental groups, and industry should all be invited to participate in a process to identify measures to facilitate capacity expansion. For such a process to succeed, there would have to be credible actions ongoing at the same time to spur increased conservation. I believe that such a process would identify the current barriers to building additional refining capacity, such as permitting and financial disincentives. I would recommend that you immediately set such a process in motion, and that you issue a report to the Congress and the public within six months, identifying specific options for improving regulatory practices or streamlining permitting processes in order to increase U.S. refining capacity. Third, the Administration needs to review its policies regarding the operation and use of the SPR. Right now, we lack “rules of the road” for tapping the SPR that are clearly defined and clearly understood. As I have pointed out in previous letters to the Department of Energy, a clearer understanding of how SPR oil will be managed in a new environment of volatile markets and increasingly higher prices would provide more certainty to the market. That, in turn, would restrain speculative price swings when supplies are tight. I urge you to initiate a rulemaking on proper management of the SPR in a high-price environment. This should encompass a serious conversation with consumers, producers and public policy makers about how to manage our strategic oil reserves to best benefit our nation, with adequate consideration of the interests of all parties, but particularly that of consumers and the taxpayer. Fourth, when fuel markets are tight, product flexibility is crucial. If a region needs more gasoline than its refineries can produce, or if a refinery or pipeline shuts down unexpectedly, flexibility becomes the key factor determining the speed at which motor fuels can be supplied from other regions to meet the shortfall and dampen price spikes to consumers. The proliferation of “boutique” fuel specifications across the country has greatly reduced the overall flexibility and efficiency of our fuels system. It is a major factor in the increasing fragility of our fuels system to price spikes. The Clean Air Act authorized states to regulate fuels (through Federally-approved state implementation plans) in order to attain a national air quality standard. That was the right policy, but the implementation has been flawed. There are now dozens of different kinds of fuels being required by different States, all with Federal approval, leading to more than 110 formulations of these boutique fuels throughout the United States. These 110-plus different fuel types make the use of existing transportation infrastructure for fuels much less efficient, and correspondingly more expensive to run. Those costs get passed directly on to consumers. The large number of fuel types also limits flexibility in product distribution, particularly if a disruption occurs. Consumers pay for that lack of flexibility whenever there is a price spike. As you may recall, your 2001 energy policy report directed the Environmental Protection Agency (EPA) to study “opportunities to maintain or improve the environmental benefits of state and local boutique clean fuel programs while exploring ways to increase the flexibility of the fuels distribution infrastructure, improve fungibility, and provide added gasoline markets liquidity.” Despite that three-year-old directive, your Administration has not taken any significant steps to reduce the growth of these boutique fuels. I believe it is time for the Administration to take real action to reduce the proliferation of boutique fuels. This is necessary if we are to increase the ability to provide adequate supply of gasoline and other fuels in times of disruption or in tight markets, such as those we will see this summer. As a cornerstone of a national fuels policy, I recommend you direct the Administrator of the EPA, with technical assistance as needed from the Secretary of Energy, to require revisions of state implementation plans to reduce the overall number of fuel specifications by at least a factor of five, and preferably closer to a factor of ten. *Encourage IEA to correct its strategic stock modeling methods The International Energy Agency’s (IEA) monthly oil market report is critically important to the global oil market. The supply, demand and stock figures that IEA projects each month literally turn markets. Energy experts tell me that the method IEA uses to calculate monthly demand and supply figures is flawed, and that it encourages OPEC to “undershoot” the market in terms of the amount of crude oil it supplies to the world market. A revision to the strategic stock calculation methodology could fix this. The root of this flaw lies in the fact that the current IEA market report treats stocks of oil in the major consuming countries as a fixed, invariable amount. But this treatment of stocks is not realistic, and its effect on IEA’s models is to bias them towards understating the amount of oil that OPEC needs to produce for the world market – the so-called “Call on OPEC.” Recently it appears that OPEC has given great credence to the “Call on OPEC” in determining what it should supply to the market. Further, key OPEC nations such as Saudi Arabia have at times interpreted IEA data to mean that the IEA will not punish certain behavior by the cartel to maintain high prices, so long as they meet the “Call on OPEC” levels. Given the importance of this IEA forecast methodology, it is crucial that it be based on the best possible real-world data, and not on a static and unrealistic treatment of stock levels. A more real-world treatment of stocks in IEA’s oil forecast methodologies would alleviate some of the tension which many analysts believe is keeping crude prices higher than they otherwise might have be. I recommend that your Administration engage vigorously with the IEA to improve the realism of the models underlying its monthly oil market report. That change, though seemingly esoteric, could make a real difference at the pump to Americans. I believe that carrying out the 13 recommendations I have outlined in these six areas will help to relieve some of the pressure in our fuels markets that consumers will otherwise be seeing in the days and weeks ahead, and set the stage for a long-term improvement in our fuels security. None of these 13 recommendations requires new legislative authority from Congress – you already have the power to implement them. I hope that you will consider these recommendations and promptly take action on them. Sincerely, Jeff Bingaman
Ranking Member cc: The Honorable Spencer Abraham Secretary of Energy