'Supply Matters' in Gas-Price 'Street Fight'

API, NACS, others defend industry at House Energy & Commerce hearing

Published in CSP Daily News

WASHINGTON --The House Energy & Commerce Subcommittee on Energy & Power, chaired by Representative Ed Whitfield (R-Ky.), hosted a hearing, " The American Energy Initiative: A Focus on Rising Gas Prices," on Wednesday to examine rising gasoline prices.

Representatives from several industry groups provided testimony:

  • Jack Gerard, president and CEO of the American Petroleum Institute (API). Click here to read prepared testimony.
  • Robert McNally, president of independent energy market and policy research firm The Rapidan Group. Click here to read prepared testimony.
  • Charles Drevna, president of the American Fuel & Petrochemical Manufacturers. Click here to read prepared testimony.
  • Chris Milburn, owner of CarbM Trucking, on behalf of the Owner-Operator Independent Drivers Association. Click here to read prepared testimony.
  • Daniel J. Weiss, senior fellow, Center for American Progress. Click here to read prepared testimony.
  • Michael Breen, vice president, Truman National Security Project. Click here to read prepared testimony.
  • John Eichberger, vice president of government relations, National Association of Convenience Stores (NACS). Click here to read prepared testimony.

Watch the video below or click here to view the hearing.

Gerard said "supply matters," explaining that more domestic production, along with additional Canadian oil supplies from the Keystone XL pipeline, would send a signal to the markets that secure supplies are on the way and help put downward pressure on prices. "Gasoline prices are climbing primarily because the cost of crude oil--which accounts for 76% of the price at the pump--also has been rising, pushed higher by global demand and Middle East tensions. These market forces are challenging but America doesn't have to be held captive by them," said Gerard. "With sound policy and bold leadership, we can put this country's vast resources to work to change the current energy equation."

Drevna echoed calls for increased North American energy supplies and argued that excessive regulation on fuel producers and refineries is contributing to the problem. "The manufacturers of fuels are being hit with a regulatory blizzard that poses a significant threat to both refinery operations and our nation," said Denva. He explained that while there is no quick fix to high gas prices, there are measurable steps Congress can take today to bring relief. "Producing more oil and natural gas right here in America, getting more from Canada and reducing harmful overregulation can't take place overnight. But these actions give us our best shot at creating a secure and stable energy supply for American consumers and a manufacturing renaissance and strong growth in America."

"The retail fuels market is a complex system that is influenced by a wide number of factors. The best strategy for providing long-term relief and stability to consumers is to enact a comprehensive transportation energy policy," said Eichberger, according to a NACS report.

"NACS does not believe that improved efficiency, enhanced sustainability, national energy security and economic growth are mutually exclusive objectives. But if they are not pursued in a strategic, coordinated effort they can lead to unintended consequences that can derail progress towards all of the objectives and, in the end, consumers will endure the brunt through higher prices at the pump. Enhancing supplies of traditional energy resources while conducting an orderly transition to alternatives is the best way to benefit consumers," he said.

Eichberger also explained the how fuel retailers operate, noting that they set prices based upon two factors: competition and cost.

"It is quite literally a street fight. We post our prices at 20 foot signs on the side of the road and empower consumers to shop for the best value at 45 miles per hour. In a survey this year, we found that 40 percent of customers will drive five minutes out of their way to save three cents per gallon."

"For the retailer, this means that they must post a price that is extremely competitive in their market," said Eichberger. "But we have to pay close attention to our costs as well. In 2011, on average it cost a retailer about 17 cents to sell a gallon of fuel. In 2011, the average gross margin was only 18.2 cents--so the average profit per gallon was about 1 to 2 cents."

He discussed what can be done to help the consumer. "Unfortunately, there is very little retailers can do other than to compete," he said. "Our gross margins so far this year are averaging 3.6%. There is not a lot of room for maneuvering, but retailers are doing what they can to offer their customers the best deal possible. Many are offering discounts to customers through a variety of programs. Retailers are doing what they can to attract the price sensitive consumer--but they are limited in what they can do."

Eichberger suggested that Congress should consider a few things to address current concerns over high gasoline prices:

Increase future supplies of oil. The U.S. will never replace Saudi Arabia in terms of oil production, but a commitment to increased production of domestic oil resources will send a signal to the market and will likely help mitigate the inflationary effect of speculative investment.

Evaluate costs of regulations. Every regulation will impose costs on the system and those costs will be passed through to the consumer. Congress and the administration have to make decisions about what they believe is in the best interest of the country, but they need to be aware that the ultimate payer for all regulations is the consumer.

Harmonize fuel regulations. The current CAFE proposal will render the Renewable Fuels Standard impossible. Using modest CAFE projections, the two policies will combine in 2022 to require 37% renewable fuels in every gallon of gasoline. This will cost the retail market at least $22 billion in equipment upgrades. Meanwhile, it is projected that only 15% of the vehicle fleet will be able to run on the fuel.

"I am not saying that either policy is bad, but I am pointing out that when we do not pursue a comprehensive fuels policy we end up establishing programs that contradict one another and impose unintended consequences on the market," said Eichberger.