Testimony of AAA Before the Senate Committee on Energy and Natural Resources

WASHINGTON, D.C. – May 15, 2007

“Short-Term Energy Outlook Summer 2007: Oil and Gasoline”  

Troy GreenAAA appreciates your invitation to appear before the Energy and Natural Resources Committee to discuss the short-term future of oil and gasoline prices. AAA’s concern revolves around the impact rising prices have on consumers.

As you may know, AAA is the largest paid-membership organization in North America. Earlier this year we were fortunate enough to have achieved the milestone of having 50 million members in the United States and Canada. Our members drive approximately 25 percent of all the motor vehicles in operation in this country. Using figures from the U.S. Department of Transportation, we estimate they will purchase approximately 33 billion gallons of gasoline this year and at current prices will spend about $100 billion on gasoline.

The important question is: With prices having risen more than 70 cents a gallon this year, are Americans driving less? The fact is that consumers at different income levels are affected differently by higher prices. There are affluent people in America for whom spending an additional $100 per month on gas is not an issue. Some people have other transportation options and flexibility and can reduce their consumption of higher-priced fuel. But the vast majority of Americans have no choice but to absorb the extra $50, $100, or $150 a month in gas prices. They have to go to work, take children to daycare, and go to the grocery. This is not discretionary travel that can be limited.

Like it or not, gasoline is a significant part of many Americans’ budgets. When gas prices increase, there is less money to spend on other things. The extra expense results in a sacrifice elsewhere in a family’s budget – groceries, healthcare, college savings, retirement planning.

Part of what we do at AAA is help motorists understand what they can do to reduce the burden of high gas prices, from vehicle maintenance to trip-chaining, to purchasing more efficient vehicles, there are things that Americans can do to mitigate the impacts of high fuel prices. We also work to help motorists understand what is going on in the fuel markets, and in times of crises, like after the hurricanes of 2005, to help them understand how their decisions can impact what happens in the market.

Unlike others that frequently comment on gasoline pricing, AAA has no involvement in the regulation, refining, shipping, blending or sale of gasoline. We do not trade oil and gasoline futures, operate hedge funds, sell mutual funds, distribute investment newsletters or make commissions on the sale of energy stocks.

AAA has increasingly found itself involved in the great national debate on America’s energy future and has been able to fill an important niche in objectively monitoring the price of fuel, advising consumers about fuel conservation and, to a limited degree, helping motorists anticipate what they might expect to pay to fuel their personal vehicles in coming months and years.

Because America’s energy challenges are increasing rather than moving toward a workable solution, AAA intends to engage in the public policy debate to a greater extent and to play a greater role in helping the public understand the choices and consequences of pursuing – or not pursuing — specific courses of action.

This week American consumers are experiencing the highest average prices they have ever paid for gasoline. They know this because on Mother’s Day Sunday, May 13, AAA’s daily, online Fuel Gauge Report Web site recorded a highest-ever nationwide average price for self-serve regular gasoline of $3.073 per gallon.

We have crossed the $3 per gallon threshold twice before. Prices topped out at $3.036 per gallon on August 7 of last year, after Israel invaded Lebanon. That price nearly reached the then-record average price of $3.057 per gallon paid by Americans on Labor Day Monday of 2005, after Hurricane Katrina temporarily closed or damaged critical oil and gasoline infrastructure along much of the Gulf Coast.

As frustrating and unpleasant as our two previous national experiences with $3 gasoline have been, both were accompanied by an oil price at or exceeding $75 per barrel and a natural or man-made disaster with the real or perceived ability to block the flow of petroleum for some period of time.

This summer is clearly different, however. This year, $75 oil prices and dramatic news about hurricane damage or a possible war throughout the Middle East are absent. Instead, we have sky-high gasoline prices as the cost of oil rests comfortably near the $60 per barrel target set by OPEC, amidst crude inventories that are routinely described as plentiful. Without OPEC, Mother Nature, or an imminent man-made catastrophe to blame for the high price of gasoline, Americans want to know, “why?”

I am certainly not appearing before this committee today to say that AAA has the answer. But as near as we can tell, there are strong indications the problem lies at least in part with the fact that the domestic refineries that supply gasoline to America’s network of filling stations, as well as the companies that import gasoline from abroad for sale here, have been slow to supply the wholesale distribution network as consumer demand for their product has continued to rise.

AAA leaves it to the experts at the U.S. Department of Energy to cite the specific numbers behind this situation. But we are concerned about the number and frequency of refinery outages this year in light of the large profits the industry has been reporting quarter after quarter for most of this decade.

In fact, the very idea that America should be losing ground in its ability to supply enough gasoline to our economy – not oil, which this committee knows is a different problem – is troubling. It is troubling because the oil refining business has for several years been described by the international financial community as enjoying a “renaissance” of profitability and because they – and scores of our public and private institutions – employ armies of economists and statisticians to forecast the rates at which economies grow, populations expand, motor vehicles are produced and energy consumption increases.

With all of these numbers being collected, exchanged over the Internet and run through computers, Americans should be able to expect that those who refine oil into gasoline do a better job of anticipating demand growth, plan to meet that growth, and then make the necessary investments in plants, equipment and labor to provide the fuel at a cost that has some semblance of stability. AAA doesn’t know the answer, but we do think it would be worth the Committee’s time and trouble to find out.

With these thoughts as a background for our discussion on short-term gasoline prices, AAA would first like to say that no one can know with certainty the price of gasoline this summer. For example, it was our belief the national average price of self-serve regular would not exceed $3 per gallon this Spring, but this was before anyone knew gasoline inventories would drop for 12 consecutive weeks as refiners continued to report equipment problems. Instead, what AAA tries to do is identify and describe a trend that points to top or bottom for fuel pricing. We do this to help consumers anticipate what their monthly fuel expenses will be.

With that said, let’s look at what we know right now: We know that gasoline inventories are critically low especially on the West Coast; our refining and distribution infrastructure are stressed due to maintenance/investment issues, but also due to the introduction of ethanol into the blending process and our boutique fuel requirements; increased imports of gasoline, which have been growing, are hoped for but not assured; hurricane season is on the way; and much of the world’s oil production shipping still takes place in a dangerous part of the world.

We also know the stock market has just had a record run, demand for gasoline remains strong, and the summer travel season – which is important to our quality of life and crucial to the financial success of tens of thousands of tourism-related business across this country – is around the corner.

Knowing these things, and using our experience watching gasoline prices, the wholesale and retail gasoline prices generated for AAA by Oil Price Information Service, and the production, inventory and import numbers produced by DOE, AAA thinks prices are likely to move somewhat higher over the next 60 days, perhaps approaching $3.25 per gallon. But the much- ballyhooed $4 per gallon gasoline will not materialize as a national average price unless the oil price marches into the $75 per barrel or higher range – a scenario that is only likely if an unknowable event such as a hurricane or geo-political conflict were to seriously threaten or disrupt energy flows. In making the projection to media that a $4 per gallon average gasoline price was not probable, AAA has been described in the last few weeks by some analysts as “conservative” and “not wanting to panic” consumers. In fact, our views simply reflect our interpretation of the best available data and analysis.

In closing, AAA would like to address the notion that if the price of gasoline goes high enough Americans will significantly reduce their gasoline consumption and help solve our energy problem. Again, AAA does not believe that Americans are frivolously driving around wasting either gasoline or money. According to AAA’s most recent study of driving expenses, it costs 52.2 cents per mile to own and operate a typical new vehicle in the United States. That’s $52.20 to drive 100 miles — and this number was calculated using an average fuel price from the fourth quarter of last year of just $2.26 per gallon.

What we have seen based on many years of watching Americans’ driving habits is that motorists reduce their discretionary driving only based on a significant slowdown in the economy and the possibility of job loss, or in response to gasoline shortages. While no one wants to pay high gasoline prices – and those prices do not inflict pain equally since those at the lower end of the economic scale are disproportionately burdened by rising prices – much of our driving is essential and is not easily traded for other modes of transportation. Instead, we think rising gasoline prices are a tax hike on the overall economy in which overall consumer spending is cut to pay for a commodity that has become, in many ways, as essential as food and shelter.

Whether the result of geopolitical, refining, or distribution factors, the fluctuations in fuel prices underscore the nation’s vulnerability and the need to take a broad approach to securing a more diverse and sustainable supply of energy into the future. AAA acknowledges that fossil fuels will play a critical role in our nation’s economy for the foreseeable future, but we strongly believe steps must be taken to decrease our reliance on oil and refined gasoline to ensure the strength of our economy, the security of the nation, and our way of life.

Thank you again, Mr. Chairman, for allowing AAA to address this Committee on this critically important topic.

Geoff Sundstrom – Director, Public Affairs

Geoff Sundstrom is Director, AAA Public Affairs and is based at AAA’s National Office in Heathrow, Florida. He is a widely-quoted source on a variety of automotive and travel topics, and is AAA’s leading spokesperson on energy issues, including gasoline prices. He has managed AAA’s well-known Fuel Gauge Report gasoline price survey since the late 1980’s, including its migration from a paper-based product to the Internet in 2000. He is the author of AAA’s Gas Watcher’s Guide, a free brochure that helps consumers conserve fuel. Geoff is interviewed on a regular basis by national financial and consumer media, and advises local AAA clubs on media relations. He is at the forefront of AAA’s efforts to respond to gasoline price spikes or reports of fuel outages. Geoff joined AAA in 1989 after working for eight years as a business journalist in Washington, D.C. for Automotive News magazine, the New York Journal of Commerce and Kyoto News Service. Geoff holds a journalism degree from Northern Arizona University in Flagstaff.

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