[Senate Hearing 106-506] [From the U.S. Government Publishing Office] S. Hrg. 106-506 RISING OIL PRICES, EXECUTIVE BRANCH POLICY, AND U.S. SECURITY IMPLICATIONS ======================================================================= HEARING BEFORE THE COMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE ONE HUNDRED SIXTH CONGRESS SECOND SESSION __________ MARCH 24, 2000 __________ Printed for the use of the Committee on Governmental Affairs U.S. GOVERNMENT PRINTING OFFICE 64-134 cc WASHINGTON : 2000 _______________________________________________________________________ For sale by the Superintendent of Documents, Congressional Sales Office U.S. Government Printing Office, Washington, DC 20402 COMMITTEE ON GOVERNMENTAL AFFAIRS FRED THOMPSON, Tennessee, Chairman WILLIAM V. ROTH, Jr., Delaware JOSEPH I. LIEBERMAN, Connecticut TED STEVENS, Alaska CARL LEVIN, Michigan SUSAN M. COLLINS, Maine DANIEL K. AKAKA, Hawaii GEORGE V. VOINOVICH, Ohio RICHARD J. DURBIN, Illinois PETE V. DOMENICI, New Mexico ROBERT G. TORRICELLI, New Jersey THAD COCHRAN, Mississippi MAX CLELAND, Georgia ARLEN SPECTER, Pennsylvania JOHN EDWARDS, North Carolina JUDD GREGG, New Hampshire Hannah S. Sistare, Staff Director and Counsel Paul R. Noe, Senior Counsel Joyce A. Rechtschaffen, Minority Staff Director and Counsel Jonathan M. Gill, Minority GAO Detailee Darla D. Cassell, Administrative Clerk C O N T E N T S ------ Opening statements: Page Senator Thompson............................................. 1 Senator Lieberman............................................ 2 Senator Voinovich............................................ 4 Senator Akaka................................................ 6 Senator Cleland.............................................. 7 Senator Domenici............................................. 9 Witnesses Friday, March 24, 2000 David L. Goldwyn, Assistant Secretary for International Affairs, U.S. Department of Energy...................................... 11 Jay E. Hakes, Ph.D., Administrator, Energy Information Administration................................................. 14 Red Cavaney, President and Chief Executive Officer, American Petroleum Institute............................................ 30 Richard N. Haass, Vice President and Director of Foreign Policy Studies, The Brookings Institution............................. 32 Robert E. Ebel, Director, Energy and National Security, Center for Strategic and International Studies........................ 34 William M. Flynn, Vice President, New York State Energy Research and Development Authority...................................... 36 John P. Holdren, Ph.D., President's Committee of Advisors on Science and Technology, Belfer Center for Science and International Affairs, Kennedy School of Government............ 38 Adam E. Sieminski, Director, Deutsche Banc Alex. Brown........... 41 Alphabetical List of Witnesses Cavaney, Red: Testimony.................................................... 30 Prepared statement........................................... 75 Ebel, Robert E.: Testimony.................................................... 34 Prepared statement........................................... 90 Flynn, William M.: Testimony.................................................... 36 Prepared statement........................................... 97 Goldwyn, David L.: Testimony.................................................... 11 Prepared statement........................................... 59 Haass, Richard N.: Testimony.................................................... 32 Prepared statement........................................... 87 Hakes, Jay E.: Testimony.................................................... 14 Prepared statement with attachments.......................... 66 Holdren, John P.: Testimony.................................................... 38 Prepared statement with attachments.......................... 112 Sieminski, Adam E.: Testimony.................................................... 41 Prepared statement........................................... 130 Appendix Additional material submitted for the Record: Six-page synthesis of PCAST Report........................... 124 Independent Petroleum Association of America (IPPA), prepared statement.................................................. 152 Nuclear Energy Institute, prepared statement................. 162 RISING OIL PRICES, EXECUTIVE BRANCH POLICY, AND U.S. SECURITY IMPLICATIONS ---------- FRIDAY, MARCH 24, 2000 U.S. Senate, Committee on Governmental Affairs, Washington, DC. The Committee met, pursuant to notice, at 10:00 a.m., in room SD-342, Dirksen Senate Office Building, Hon. Fred Thompson, Chairman of the Committee, presiding. Present: Senators Thompson, Voinovich, Domenici, Lieberman, Akaka, and Cleland. OPENING STATEMENT OF CHAIRMAN THOMPSON Chairman Thompson. Let's come to order, please. Thank you all for being with us here this morning. Today the Committee is holding an oversight hearing on rising oil prices, Executive Branch policy and U.S. security implications. As we all know, oil is an essential component of our economic vitality and lifestyle. Petroleum products fuel 97 percent of our transportation needs, for example. Oil is the primary energy source for many industries and a key feed stock for others. High oil prices affect everything from travel, shipping, autos, chemicals, consumer products, technology, and home heating. It wasn't long ago that we enjoyed historically low oil prices. A little more than a year ago, oil was about $10 per barrel. Gasoline was less than $1 per gallon. In March 1999, OPEC decided to decrease oil production and drive up oil prices, even as world oil consumption was rising. Since then, oil prices have tripled to about $30 per barrel. During this winter, home heating oil prices doubled in the Northeast. As Secretary Richardson put it, the administration was caught napping at that price jump. Economists are predicting gasoline prices will continue to rise in the near term and some think that gasoline could cost about $2 per gallon this summer. Oil also has important application for our national security. Because oil is the life blood of our economy, it must be reliable, affordable, and predictable. Relying completely on others to supply it can present dangerous consequences to our prosperity and way of life, both vital interests that the country must be prepared to defend. The United States is becoming increasingly reliant on foreign oil. This is cause for alarm, given that some of the world's leading oil producers are politically unstable, face difficult internal issues, or live in tough neighborhoods. We now depend on foreign sources for over half of our oil needs and we are heading to 60 percent within 5 years. It seems that few people view our reliance on foreign oil as a problem until prices are raised. Here in Washington, it is tempting to enjoy the political windfall of low oil prices; so long as prices are low, policymakers are prone to ignore the link between oil imports and national security. But it seems to me that there is a danger not having a proactive energy policy. The recent oil price shocks may be a sign that these chickens will come home to roost and perhaps might be a blessing in disguise if it gets our attention. It seems to me that after a decade, when we were using more oil, consumption was increasing and production was declining, during which we enjoyed historic low prices because of a given set of circumstances that was prevalent at the time--the Asian economic crisis, weather, various other things, miscalculations by OPEC, oversupply from their standpoint--those forces are simply reversing themselves now, as could be expected. But after all of this happening, we find ourselves now that OPEC has changed its mind about its policies. We are all in a state of shock that such a thing could happen. It does not seem to me like we really ought to be, and so now we are looking at some short-term solutions that I hope will not present more problems than they cure, and also, hopefully again, some long-term solutions that we usually seem to want to take a look at only when prices go up. But I think the issues of supply and stability, frankly, are much more important than temporary price increases, considering the historical price of oil anyway. But anyway, with that, I will turn it over to Senator Lieberman. OPENING STATEMENT OF SENATOR LIEBERMAN Senator Lieberman. Thank you, Mr. Chairman. Thank you particularly for moving quickly to convene this timely hearing on this problem that has been of great concern and frustration to the Northeast this winter and now is to consumers of gasoline throughout the country. The worst of the home heating oil panic that hit the Northeast this winter has now subsided, mostly because temperatures have warmed, although the supply eventually came up to begin to meet the demand. But consumers are still bearing a very heavy financial burden with oil prices at the $27 to $28 per barrel range, and gasoline prices, as everyone knows, are still rising unabated. Because our gasoline stocks are now at about the level they usually are on Labor Day, reputable analysts are predicting drivers could be paying between $2 and $2.50 per gallon at the pump as the spring and summer vacation season approaches. Incidentally, one of the questions that I will want to ask the witnesses today is about the inventories. There was a recent article in Business Week that indicated that normally the oil industry builds its stocks of oil, to a peak around April 1 and then runs them down through the summer driving season. This year, however, gas stocks are at the ultra-low levels now, usually seen around Labor Day. I want to ask questions about that. More generally, Mr. Chairman, I know Secretary Richardson has had some success in pressuring OPEC to step up its oil production, and, of course, I am grateful that he has taken an aggressive role in trying to ease the current squeeze, but still we will not know by how much or how soon output will be raised until the OPEC conference in Vienna on Monday. That reminds us of what Senator Thompson has said, which is that we have put ourselves in a position where we are dependent on foreign sources of oil and therefore vulnerable. I was also encouraged that the President, in his radio address last Saturday, called for the creation of a regional home heating oil reserve for the Northeast, with an appropriate trigger that would supply additional heating oil to the market during a future shortage. Senator Dodd and I introduced a proposal along these lines last month, so I look forward to working with the administration on a bill that we can hopefully pass this year so that we can give some sense of security to businesses and family consumers in the Northeast, before next winter's home heating oil season begins. But I must say none of this eases the frustration of being caught in an all too familiar and aggravating OPEC oil vise yet again. So I hope we can discuss today how this great country of ours got to this point of economic vulnerability to a cartel whose supply-controlling, price-fixing practices would be illegal in this country. I hope that we will, if you will allow me to put it this way, not just get mad at OPEC today, but figure out how to get even, and in that sense, I mean by beginning to take the steps that are necessary for our country to be more energy independent. In the meantime, a lot of us have talked about the desirability of responding to the oil crunch by drawing down from the enormous crude oil inventory we have in the Strategic Petroleum Reserve to add to supply that will reduce prices. I do not view this as a panacea, but it certainly could and probably would have a short to mid-term effect on gasoline prices, and it gives some strength to our position and makes us, I think, more than simply a supplicant without resources, begging and pleading at the OPEC's table. I remain concerned that we have not gone into the Strategic Petroleum Reserve, but I'm encouraged that some of our witnesses advocate the approach, particularly and preferably the so-called swap approach that would involve the release of oil now to refiners in exchange for a promise to return additional amounts of oil to the reserve in the future. But let's step back and look at the big picture, and it looks a lot like the Chairman indicated. It is clear that the price volatility and the threat that it presents are symptoms of the more fundamental long-term problem, which is our dependence on foreign oil. By failing to provide our own citizens with energy alternatives that are within our control, we limit our options in times of national emergencies and entrust our economic and therefore, our strategic security too much to the whims of others. I think it is imperative that we take some steps now to wean ourselves from foreign oil and to develop a domestic infrastructure to deliver reliable alternatives. First, we have to invest the time, money, and energy, to wisely increase our domestic gas and oil production, diversify our energy mix to include more solar energy, fuel cells, wind and even nuclear power, and develop long-range strategies for harnessing these additional energy resources. I know in this regard that there are different and difficult balances to be made, particularly about the drilling of oil domestically. Again, some have suggested that we target, for instance, the Arctic National Wildlife Refuge. The U.S. Geological Survey estimated that there is less than a 6-month supply of commercially recoverable oil in ANWR, which is not inconsequential, but nonetheless convinces me as I make my personal comments, that it is not worth it to destroy this refuge for that amount of oil, which some have estimated would never meet more than two percent of our Nation's need at a given time. But those are the balances that we are going to have to make, each of us and the Nation as a whole, as we try to become less dependent on foreign sources of oil. Second, in the context of the utility deregulation debate, Senator Jefferson and I are cosponsoring legislation that would require utilities to use renewables for ultimately 20 percent of their power projection by the year 2020. Third, we have got to take stock of the domestic energy market and evaluate national and individual consumer decisions affecting our energy supply and efficiency. In some areas here, the results are actually encouraging. Conservation and efficiency measures that have been taken by American businesses have significantly improved the energy efficiency of the overall economy. During the crisis of the 1970's, nearly nine percent of our GDP was spent on oil. That is down to three percent today and I think we can build on that progress. But the record is not so bright across other sectors of the economy, particularly when it comes to our driving habits where vehicle miles have increased by 130 percent over the last 30 years and, despite early improvements in fuel efficiency, current standards have stagnated and Congress has imposed a freeze on raising or even studying the benefits of raising the corporate average fuel efficiency. I think we have got to do much better at that. So, bottom line, Mr. Chairman, I hope that we will use this moment of dwindling oil supply and rising prices to heed the warning signs, to think about our future health and security as a Nation, and to act together to adopt a new progressive energy policy for this new century. I thank you. We have an excellent group of witnesses and I look forward to hearing from them this morning. Chairman Thompson. Thank you very much. Senator Voinovich, do you have any questions. OPENING STATEMENT OF SENATOR VOINOVICH Senator Voinovich. Mr. Chairman, first of all, I want to thank you and Senator Lieberman for holding this hearing today. I have been concerned about this Nation's lack of an oil policy or energy policy back from the 1970's, when we had that terrible situation where our gas prices went through the roof. In spite of the fact that we have been through these peaks, this Nation has not taken the time to sit down and develop an energy policy and to get all of the competing interests together in a room and figure out where we are going. Yesterday, Senator Warner, Senator Baucus, and I held a news conference in opposition to reducing the tax on gasoline by 4.3 percent, which people are suggesting is going to solve the problem that we have, on the grounds that about all that would do is save the average driver a year about 43 bucks and break the covenant that was made by this Congress to the governors of this country that we would have reliable and stable source of revenue so that we could deal with the highway and transportation problems that we have in this country. I also mentioned the fact that the proposal was just another thing to take our eye off the real issue, and the real issue is that we do not have an energy policy. Senator Lieberman, I think you eloquently spoke to some of the various options that are available to us. But we have not been willing to do that, to bring them to the table. And the environmental interest--we cannot do this and we cannot do that. The fact is, we have to get our national security interest on the table. We have got to get our economic interest on the table. We have to get our environmental interest on the table and reconcile them. But one thing I think most people would conclude after we do that is that we are too dependent on oil from around the world, from a lot of places that are very unstable. We have to do, as a Nation, a better job of providing our own source of oil. The issue is how do you go about doing that and at the same time, give consideration to the environmental concerns and other concerns that people have? This is an ideal time to do it because of the fact that we are seeing just what impact this has had on our economy in the short run and God knows how long it will be, but I suspect Secretary Richardson and the President--we have got a November election coming up, some miracle is going to happen before November that gas prices are going to go down. I am confident of that, folks. It will happen. But then the issue is, after the dog has stopped barking, are we just going to go back to the way we did things before and not really confront this issue? So it is time to get together on a bipartisan basis and try and face this thing forthright and stop dealing with it by putting it in a drawer, and of course, to try to explain to the American public, that there are a lot of things that we could be doing. But, it has got to be a multifaceted program that we have, and not just one silver bullet that we are going to say is going to solve this problem. I am anxious to hear what you have to say about this issue from a national defense point of view. We do not think about that, do we? We have our Strategic Petroleum Reserve, but what if we do really get into a jam? How vulnerable are we from a national security point of view as a result of the policies that this Nation has been following? So, again, I want to congratulate the two of you for holding this hearing and let's hope that after this crisis is over, that everybody just does not go back to where they were before. We ought to take this thing on and make a covenant among ourselves that we are going to stay on this administration and the next administration to make sure that this Nation has an overall energy policy, and one that will protect our security interest and also deal with our own economy. Thank you. Chairman Thompson. Thank you. Senator Akaka, did you have any opening comments. OPENING STATEMENT OF SENATOR AKAKA Senator Akaka. Thank you very much, Mr. Chairman. I want to thank the Chairman and the Ranking Member for having this very important hearing this morning. America has energy problems and we all understand that there is no overnight solution, but we have got to work on it. More than 55 percent of the oil we consume is imported. And in places like Hawaii and New England, import dependence is 75 percent or greater. Our import dependence has been rising for the past two decades and we cannot turn this trend around overnight, and this is our problem. As I see it, two things will reverse our energy problem: A multifaceted energy strategy and the commitment to sustain that strategy. In my judgment, we need both of these in equal proportions. If we want to improve our energy outlook, we should adopt energy conservation and demand reduction measures. We should develop energy resources that diversify our energy mix and strengthen our energy security. We should adjust tax policies to assist marginal oil producers, encourage energy efficiency, and promote renewable energy. We should build more efficient buildings and weatherize existing structures, so that they waste less energy. We should give up our gas guzzling SUVs and drive a new generation of cars that consume one-third as much energy. These are long-term measures to improve energy security, but I want to point out an immediate, short-term energy security initiative, championed by the Clinton administration, that has not been given the praise it deserves, and I am referring to the Clinton initiative to fill the Strategic Petroleum Reserve. For the first time in many years, the Clinton administration has added significant volumes of oil to the Strategic Petroleum Reserve. This achievement was possible thanks to a collaboration between the Department of Energy and the Department of Interior. This creative arrangement, known as the Outer Continental Shelf Royalty In-kind Program, will add 28 million barrels of oil to the Strategic Petroleum Reserve this year. Instead of receiving lease payments for oil produced on Federal lands, the government receives crude oil that we deposit in the Strategic Petroleum Reserve. Filling this reserve means greater energy security in times of crisis. For too many years, we treated our Strategic Petroleum Reserve as a petty cash account. In 1996 and 1997, we sold $450 million of Strategic Petroleum Reserve oil for deficit reduction. Whenever we needed a quick budget fix, Congress and the administration agreed to dip into the Strategic Petroleum Reserve and sell the emergency reserves. Through the royalty in-kind program, we reversed many years of bad energy policy. Unfortunately, this is a temporary program that expires later this year. But if we extend the royalty in-kind program, we could fill the Strategic Petroleum Reserve to capacity by the year 2007. That would be a great accomplishment, if we could do it, but it will not happen without an extension of the royalty in-kind program. Six members of this Committee come from New England and Mid-Atlantic States that are suffering high energy prices. I'm sure that all of you support the Clinton administration proposal to establish a regional home heating oil reserve. If you support the regional home heating oil reserve, you should also support an extension of the royalty in-kind program. The royalty in-kind oil has been the only source of new oil for the Strategic Petroleum Reserve in the past decade and it is likely to be the only source of petroleum product to fill New England's regional reserve. Thank you very much, Mr. Chairman. Chairman Thompson. Thank you. Senator Cleland, did you have any comment. OPENING STATEMENT OF SENATOR CLELAND Senator Cleland. Yes, sir, Mr. Chairman. Thank you for having this hearing. It is very timely and I want to thank you and Senator Lieberman for bringing us together. Mr. Chairman, I might say that the question of high gas prices, to me, is deja vu all over again. I was head of the Veterans Administration in this town in the late 1970's, and the devastating thing that I remember about those years are rising gas prices, which basically, on their own, programmed in about three percent of the terrible record inflation that we had in those days. So I think that rising oil and gas prices are a tremendous threat to the economic growth that we have sustained over the last 7 or 8 years. I think we have to act on this threat to our economic well-being and we have to act quickly. I think we need to go back and turn the pages of history back about 20 years, to what President Carter was thinking about in those days. That was synthetic fuels and more research in that regard, ethanol, and using some of our technology to devise means where we could become more energy self-sufficient. How did we get to where we are? Well, the 1997 Asian economic recession, among other factors, led to a decrease in global demand for oil. As the market became saturated, the price per barrel of crude oil plummeted. At the beginning of 1999, consumers enjoyed the lowest real dollar price for gasoline in history. Mr. Chairman, actually, in my State, the average price last year in Georgia for gasoline was 89 cents per gallon. I cannot even hardly run my wheelchair that economically efficient. That is pretty cheap. Now, Senator Lieberman tells us that gas prices, by Labor Day, may go to $2 per gallon or $2.50 per gallon. This is of great concern to us and great concern to citizens in this country and people in my State. Well, the 1999 gas prices did not stick. The events caused domestic oil production to be curtailed to extremely low levels. In fact, by July, 1999, domestic oil output had fallen to levels last seen in 1946, right after World War II. Think of that. By July, 1999, domestic oil output had fallen to levels last seen in 1946. All of these events compounded to amplify the devastating effect when, in March 1999, OPEC adopted production quotas to reduce the global supply of petroleum. By cutting output as much as 4 million barrels per day, OPEC was successful in driving the cost of gasoline up as much as 33 cents per gallon in just a single year. This sharp increase in oil prices has caused tremendous hardship for many of our industries in this country and certainly in Georgia and elsewhere, not to mention those individuals who must rely on home heating oil for warmth in the winter months. Over the last several weeks, I have been contacted by many of my constituents who expressed their serious concerns about the impact of the recent dramatic increase in petroleum prices. Among other concerns, propane dealers are facing difficulty in trying to purchase and market their product. In several areas of my State, propane provides vital fuel for home heating. Also, propane is heavily integrated into the management of George's poultry operations. We are the leading poultry processor in the country and poultry operations processors are a leading industry in the State. The high cost and lack of product have caused economic hardships to these industries, which rely on propane for daily operations. Because of my concern about the continued rise in oil prices, I've contacted President Clinton to request the administration's assistance in addressing the problem. I also called on the President to examine the release of petroleum from the Strategic Petroleum Reserve. While a release of petroleum from the Strategic Petroleum Reserve is one possibility, I believe we actually have got to consider any and all policy options which may serve to alleviate the increasing cost of oil, including strong diplomatic pressure on those oil producing nations which actually rely on the United States for two things, one, a market for their products, and, two, the guarantor of their security. We should also take a close look at several legislative proposals to reduce or temporarily suspend the tax on gasoline and diesel fuel. Senator Campbell has introduced S. 2090, America's Transportation Recovery Act, to place a 1-year moratorium on the 24.3 cent per gallon tax on diesel fuel, effective only if the price per barrel remains above the December 31, 1999 market value, followed by a permanent reduction in the tax to 4.3 cents, to begin on October 1, 2005. Well, I want us to do what is right, prudent, and wise, but there is a very palpable air of near-crisis when I go home to my State and see the very real effects the rising oil prices are having on average working Americans when they have to fill up the gas tank to drive or to car pool or when they buy airline tickets to visit friends or family or when they are paying their monthly utility bills. My constituents are getting socked where it hurts, in their wallet, every single day. When I go home to Georgia each weekend, people want to know what we are doing in Washington to address incredibly high gasoline prices. Mr. Chairman, I am grateful for this hearing today so we can review what is actually being done and possibly come to a consensus on what else is appropriate. I know this is a very delicate situation, and it is having very painful consequences on Georgians and on all Americans. We must all recognize the severity of the situation and the need to act, and act swiftly. The American public is looking to us to produce an effective and bipartisan response to this challenge. Thank you very much, Mr. Chairman. Chairman Thompson. Thank you very much. Senator Domenici, I think, suggested we go directly to the witnesses. Senator, do you have any---- Senator Domenici. I have been stimulated. Chairman Thompson. Senator Domenici. OPENING STATEMENT OF SENATOR DOMENICI Senator Domenici. And I finally woke up. Is that all right with you, Mr. Chairman? Thank you very much for having this hearing, and thanks to our witnesses. Actually, what caused me to say a few words is that my friend, Senator Lieberman, met me back behind the Chairman's desk, and told me that today, he did not leave out nuclear energy. Senator Lieberman. We have a running dialogue on that. Senator Domenici. Heretofore, he has spoken about America's energy mix, and I have not heard him say that we need to look at nuclear power. But he has told me privately, that it is absolutely urgent, and so I wanted to thank him for being all- inclusive this morning. Senator Lieberman. Thanks for making that public again, Senator. [Laughter.] Senator Domenici. Essentially, I have a lot of questions. I would suggest, however, right up front that the response of the administration compared to the size and the dimension of this crisis, and its potential harm to Americans, is totally inadequate. This is a big-time American problem. We can keep putting it off, and we might have a new President who will do little or nothing, but the truth of the matter is that this problem will not go away, because we are at the mercy of a number of countries who have their interests at stake, not ours. As a matter-of-fact, when we talk about OPEC, we have got to remember that we did not say anything when oil was selling at $10 per barrel, and Mexico could not make it economically at $10 per barrel, but we were thriving on cheap oil like kids with a new toy. The same thing happened for month after month during this recovery period. Venezuela, the same way. They are totally an oil dependent economy. When it was $9.50, $10, or $11, we didn't say, ``Wait. Wait. Maybe we ought to figure out some way so they can have a reasonable economy.'' So now, when the price goes back up, we think we can negotiate our way out of this. I want to tell you another thing. There is this notion that we can send our ambassador, as good as he is, Secretary Richardson, around the world to negotiate. Negotiation with the cartel is no substitute for an energy policy. It is not an energy policy. It is, in fact, the opposite of an energy policy. Since we do not have an energy policy it means we have to go try to convince countries one at a time to change their policies to help the United States. Now, my suggestion is that if the administration does not want to adopt an energy policy, then somebody in Congress that has jurisdiction ought to look at every single aspect of energy supply for the United States and then proceed to maximize the use of the variety of energy sources. Now, obviously, environmental concerns will be raised, but the production of energy should not be a necessary evil, as I have heard some in this administration say as it relates to public domain and the use of public domain for oil and gas drilling. Not so. It is an absolutely necessity, not evil, and we should open all our lands that we possibly can to oil and gas exploration. During this administration, we have minimized our options. How in the world do we send any signal that we are serious when we minimize exploration on public lands? We talk about natural gas as being the great solution to all of our problems. Yet, we lock up huge supplies of natural gas in the offshore fields that are loaded with natural gas, all in the name of the environment. Then, we turn around and have 1,000 new ships loaded with oil coming into our ports because of our growing dependence, and where is the discussion of environmental risk in that? There is a great environmental risk when you add hundreds of thousands of ships that have to come into our harbors, loaded with oil and other related products. Yet we leave our lands and our offshore drilling unexplored because somebody has decided that that is a big environmental issue. Let's look at it. How big is it versus the crisis? I close by saying we ought to look at the reality. Oil Patch suffers from lack of reasonably priced capital. There's no doubt about it. The administration is right about one thing, this is a stability problem. This is a volatility problem. Part of the volatility has to be solved by new mechanisms for financing oil field operations. I am going to introduce a bill to create an entity much like Fannie Mae and Freddie Mac for Oil Patch. We are going to call it Paddie Mac, and it will be introduced pretty soon. It will be a very good talking point for us to consider. It will not cost anybody any money; you'll use the great skills of hedging on the marketplace to assist those who are investing in Oil Patch. Last, I want to conclude that today, as we sit here, there are 103 nuclear power plants roaming the seas and oceans of the world, more than America has onshore producing energy. They are run by the U.S. Navy and they are on naval ships from battleships to submarines--103 is my number, I believe. Now, since their inception in 1954, I say to my friend, Senator Lieberman, there has not been one accident. There has not been one leak. There has been absolutely nothing happening except precisely what the Navy has predicted, total safety, and only one seaport will not accept them, Senator Lieberman. They pilot right into any seaport in the world with the nuclear power plants in their hulls operating. New Zealand decided many years ago they will not accept them. All the rest of the seaports in the world accept them. They are not afraid of them. They do not tell them to wait 200 miles offshore. Here we are, fussing over what we are going to do with waste in the United States, to put it in a temporary, but disposable, situation so we can move on with a second generation and third generation of nuclear power. Borderline insanity from the standpoint of an enlightened country, what we are doing with nuclear power. I was not going to talk, but I did. Thank you. Chairman Thompson. Well, as you see, we are desperately seeking solutions, since we have no opinions ourselves as to what to do about this matter, so we are pleased to have with us today David Goldwyn, Assistant Secretary for International Affairs at the Department of Energy, and Dr. Jay Hakes, Administrator of the Energy Information Administration. Thank you both for being with us, and the full text of your remarks will be entered into the record. Summarize them for us, if you would. Mr. Goldwyn, would you like to proceed with your testimony? TESTIMONY OF DAVID L. GOLDWYN,\1\ ASSISTANT SECRETARY FOR INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF ENERGY Mr. Goldwyn. Yes. Thank you, Mr. Chairman. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Goldwyn appears in the Appendix on page 59. --------------------------------------------------------------------------- Mr. Chairman and Members of the Committee, I am pleased to appear before you today and I appreciate the opportunity to address the current situation in the world oil market and the short- and long-term solutions that have been advanced by the Department of Energy and the administration to respond to the situation we now face. The measures that we have taken are substantial and they seek to protect our economic, security, and national interests. The administration is concerned, as all of you are, about oil price volatility. Oil inventories have fallen to levels that could put global economic growth at risk unless OPEC and non- OPEC producers increase production soon. OPEC will obviously have its chance to act when it next meets on March 27. Many of you and your constituents are asking how did this happen? Why are prices so high? What is our government doing about it? My testimony will seek to respond to each of these questions and I hope to reassure you and the American people that the Department of Energy, led by Secretary Richardson, is concerned, is taking measures to deal with the problem, and that we do have an energy policy and an energy strategy in place to deal with the situation and to respond to in the future. While, on the whole, competitive markets have provided consumers low average prices, the price volatility that we have been seeing in the market, $10 a barrel a little over a year ago and $30 a barrel earlier this month, hurts both consuming and producing nations. Here at home, as you know, $10 oil led to shut-in wells and put many independent producers out of business. $30 oil hurts our consumers, especially those on low incomes, those who drive long distances, as well as businesses and truckers. Overseas, it was no different. $10 oil, as Senator Domenici pointed out, was harmful to Venezuela, Mexico, and other countries, and $30 oil is causing severe damage to oil- importing nations in the developing world, as well, and threatens the economic recovery in Asia. So what we all want, producers and consumers, is a more stable market and our energy policies are focused on ensuring stability in the long run and addressing the recent volatility that we have been seeing. My colleague, Dr. Hakes, is going to talk about the market conditions that led us to the situation and also the current markets, so I am not going to address those points, but let me turn to what we have been doing to restore stability, increase production, and address our short- and long-term energy strategy. Secretary Richardson and the Department were out in front in recognizing the problem of low inventories. When we received signals from our Energy Information Administration last fall, Secretary Richardson began quietly starting diplomatic action with the major producers. Because of our efforts, we are no longer the lone voice calling for action. Major consuming nations, the European Union, the International Energy Agency, the OECD countries, have all joined our efforts. There has also been a shift in the attitude of producers in the last month. A month ago, when we started this, they were saying they thought there was no problem in the oil markets. They thought that prices were all right, that stock levels were satisfactory, and there was not any jeopardy to the world's economy. After Secretary Richardson went to Mexico, Norway, Saudi Arabia, Kuwait, and had meetings and phone calls with other ministers, including Venezuela, there is now a consensus to increase production. There is a consensus that volatility is bad. There is agreement they will reevaluate the data, and Dr. Hakes and I were both on the trip with Secretary Richardson to give them this data, so that they could look at the current oil market situation and try to reach a new level of production which would do what all of us want, which is to sustain world economic growth. This week, the Secretary's energy diplomacy is continuing in earnest. He has been to Nigeria, Algeria, and Norway, and met with the OECD ambassadors in Paris. Our momentum is continuing. Kuwait, Venezuela, Saudi Arabia, Algeria, Iran, Mexico, and Norway, have all made public statements saying they support production increases. So now we are in an environment where the question has gone from if or when we are going to have an increase in production to how much, and the Secretary and others have pushed for an early and substantial increase in production. But our concerns about long-term energy security did not begin with $10 oil or $30 oil. Since Secretary Richardson has been at the Department of Energy, we have taken a number of measures to increase our Nation's energy security. In February, 1999, we took steps to strengthen domestic production and improve security for the long term. Senator Akaka mentioned the program to add 28 million barrels of royalty oil to the Strategic Petroleum Reserve from royalty on-line oil. To support domestic production, we streamlined procedures for producers, provided administrative and accounting relief for small producers and invested in technology for recovery in endangered or hard to produce oil reservoirs, as well as many other steps. We've also been working to diversify our sources of supply. You know, I can talk later about our work in Africa, Latin America, and also the Caspian Sea. There is concrete evidence that, in terms of diversity of supply, this approach is working. Our top supplier of oil varies from week to week, among Canada, Venezuela, Saudi Arabia and Mexico. We are actually less dependent on OPEC oil and last year imported crude oil from 40 different countries. I have talked a lot about what we are doing internationally, but there have been a number of domestic responses, as well. This past weekend, as you know, the President announced a series of steps to address the current situation, strengthen our energy security, and reduce our reliance on foreign oil. The President's plan includes establishing an environmentally sound home heating oil reserve in the Northeast, calling for reauthorization of the Strategic Petroleum Reserve, which is due to expire next week, through extension of the Energy Policy and Conservation Act, and enacting a comprehensive package of tax incentives to improve our energy efficiency, promote the use of alternative fuels, and preserve the productive capacity of the domestic oil industry. He talked a lot about investing in energy efficiency and alternative energy technologies by calling on Congress to fully fund the more than one billion dollar request the administration has made to accelerate research and development of more energy-efficient technologies. And over the past month, the administration has also made a number of aggressive short- term moves to ease the current situation. The President released almost $300 million in funds to low- income individuals to pay their higher heating bills, and fortunately, this year that aid reached people in time, rather than the slow pace in earlier instances. He has asked for $600 million more to replenish that fund and is also seeking $19 million from Congress for low-income home weatherization. We have also taken measures to increase oil supply, increasing Coast Guard support for tankers, small-business loans for heating oil distributors and other small businesses, and also encouraging refiners to produce as much heating oil as possible. The President has also directed the Department to study ways to reduce regional reliance on heating oil, mainly through the increased use of natural gas, and to study the impacts in interruptible natural gas contracts on heating oil supply, and we expect these studies to be completed soon. These are all concrete measures whose impact in the future can be significant. In terms of future responses, we have looked at ways in which we can prevent this from happening again and look at how the Department can help. One is by reestablishing an energy emergency office, another is working with industry to get better information on world oil inventories, and a third is the possible development of global data regimes to give producing and consuming nations an early warning system when supplies and production levels get out of balance with demand and consumption needs. Mr. Chairman, in a few short days, we are going to have some important news. OPEC ministers are going to begin their meeting on March 27 in Vienna, and we expect that OPEC and its allies will agree to increase oil production, effective April 1. The oil market seems to be sharing this view, as oil prices have come down over the past 2 weeks, falling below $30 per barrel. But we still do not know what the magnitude of the production increase will be and what the timetable will be. With enough additional supply, we should expect some further easing of crude oil prices in the next few weeks, although it does take awhile for those to reach the pump. OPEC's decision is not going to be the whole story. We are also going to need to look at what non-OPEC producers are doing and how the market reacts. Our fundamental policy is not to interfere with market forces. But Secretary Richardson and the rest of the administration look at these measures next week, see what OPEC and non-OPEC producers do, and assess what additional steps, if any, need to be taken at that time. I heard many other questions, and I think I will leave those for the question and answer period. That concludes my prepared testimony. Chairman Thompson. Thank you very much. Dr. Hakes. TESTIMONY OF JAY E. HAKES,\1\ Ph.D, ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION Mr. Hakes. I would point out that the Energy Information Administration is an analytic arm of the Department of Energy. I frequently testified before congressional committees on energy issues and I think that members on both sides of the aisle will tell you that we try to base this on good analysis and let the chips fall where they may. I would also say that we are a major provider of data and information on this subject. In recent days, we have had as many as 35,000 people come onto our Website in 1 day, looking for information on energy, particularly oil issues. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Hakes with attachments appears in the Appendix on page 66. --------------------------------------------------------------------------- I think the history of this is relatively clear. OPEC took a third step last March to cut production and, over time, because of rising demand in the world, we have got a situation where the world was producing less oil than it was consuming. World stocks got drawn down creating a sellers market and very high prices. I think the data on this is shown pretty well in the graph that I brought.\2\ It is actually in the handout, it is the third item there, even though it looks like the first item. You can see that when the cuts started, the inventories in the United States for all petroleum were above normal levels. Late last year there was a dramatic drop bringing levels to well below the normal range that we would expect and creating what my somewhat conservative government agency has called ``alarming'' stock levels. One way we started to describe this some months ago was that we were skating on thin ice. In other words, when stocks are very low, if you get all the breaks going your way, you may not get big run-ups in prices, but if any little thing goes wrong, like a frozen Hudson River or a refinery going down, it gets very magnified because of these low stock levels. I think if I can show the next graph,\2\ it shows what happens when the ice breaks. This is basically the situation in the Northeast, where you had a run-up in prices that took place in just a very brief period of 2 or 3 weeks. Diesel fuel ran up to $2.12. This is one of the most rapid increases in prices in American history. --------------------------------------------------------------------------- \2\ The graphs referred to appear in the Appendix on page 71. --------------------------------------------------------------------------- As you can see, the market did correct this regional imbalance, and prices are basically back down to the national levels, albeit high levels. We are in a situation now where actually gasoline costs more than diesel fuel and prices on the West Coast are higher than they are on the East Coast. I think that as long as we maintain low stock levels, that the United States will be vulnerable to these kinds of price spikes. It is particularly true on the coasts. In the middle of the Nation, people are more tied into the delivery system and less subject to these interruptions, but in California and New England, which are sort of at the end of the delivery chain, this vulnerability will continue to exist. Of course, we will be looking at what happens on Monday to see if production levels will be increasing and some steps will be taken to get world inventories back into more equilibrium. I will cut my comments short because I know all of you will have many questions. Chairman Thompson. Thank you very much, Dr. Hakes. We all know, and I think we're here today, primarily because of oil prices. I am hopeful that it will cause us to once again focus, as Senator Voinovich has pointed out this morning, on something that I consider a much more serious problem, and that is supply. Nobody holds hearings or gets very excited about the issue of supply until we have an issue with regard to prices. And now everyone wants to focus on short-term solutions as to what to do about it. I guess I approach it, as I have had time to think about it and look at some of the writing on the subject, maybe from a bit of a contrarian position, maybe as far as most of us here behind the table are concerned, and that is it seems to me the quicker the so-called solution affects prices, the more skeptical we ought to be about the solution, because it interferes with market forces, which will invariably reverse themselves and moderate out. And it allows us to ignore the longer-term problem of supply and stability in regions of the world as Senator Domenici pointed out. There is only one oil market and that is the world market. It is important that our supplier friends maintain themselves, too. If they--through instability or other reasons--are not able to supply not only us, but the world, then we have a world problem. You state, Mr. Goldwyn, in your testimony, that the administration's energy policy is based on market forces and not artificial pricing. You note that the oil price controls in the 1970's prolonged shortages and high prices, yet the administration is still talking about the Strategic Petroleum Reserve to address the high oil prices and is proposing a home heating oil reserve to address higher heating prices in the Northeast. Clearly, the Northeast has a special problem and it deserves attention, but these are both market interventions. So which way is it, an energy policy based on market forces or one based on market interventions? I was under the impression that the Strategic Petroleum Reserve was there for disruptions in supply. It was not set up to have anything to do with prices. Perhaps some would like to change that now. I do not think it would be a good idea to change that policy. And it also seems to me that the swap ideas that we have heard discussed, in terms of the Strategic Petroleum Reserve, perhaps make sense unless we predict that prices go down and we miscalculate and prices actually go up. We will be able to get our oil at the lower price, but that would be pulling oil off the world market at a time when prices are already going up. I would also think that OPEC would be watching to see what we are doing with regard to our reserve and would react accordingly. On the home heating situation, what do you do? If people know that at a target price, the oil is going to be dumped on the market and prices are going to go down, how is that going to affect them? So, what is the administration's position with regard to these two so-called short-term solutions, and if they are really viable and on the table, do they not go against a policy based on market forces that I think most everybody has concluded that, basically, is the way to go? Mr. Goldwyn. Mr. Chairman, the administration's policy is to respect market forces. I think, in terms of the use of the Strategic Petroleum Reserve, that you are absolutely correct that the legislation provides that it is for national supply emergencies, and the reluctance of the Secretary to recommend its use or to recommend a swap so far, and the reluctance of the President to use it so far, is because there has been no determination that there is a national supply emergency at this time. And we have been working to get OPEC and non-OPEC producers to do what the market is encouraging them to do, which is to allow supply to meet demand. We have got to see how that works out, and that is why there has been no actions on that so far. Now, I guess the reason that the President has said that all options remain on the table, including a sale, or a swap, or other measures, is that if OPEC refuses to let market forces do what they are intended to do, if there is an artificial response which causes a supply emergency, then the question is, is that an appropriate time to use the Strategic Petroleum Reserve for a sale or a swap? Are they creating an emergency situation here or not? That is a determination that is going to have to be made in the future when we see how the market reacts. I would distinguish the swap from the sale only in the sense that people say government ought to act more like business. Businesses are smart in how they manage their resources and are able to sell high--buy low and sell high. The Federal Government tends to do just the opposite. The idea behind a swap is we can grow the size of the reserve by the end of the year, increase our security, and try and deal with a short-term situation. But it is not a preferred option. I think that is why you have not seen it exercised so far. With respect to home heating oil and the creation of a reserve in the Northeast, the Northeast is a different situation, as you pointed out. This winter, a lot of the problem was that there were low stocks, so when the prices went up and there was not a reserve there and harbors froze over and barges could not get through, supply could not get to market. It would have been good if there were higher supplies and if people had thought ahead, who were responsible for stocking home heating oil to do that, but it did not happen. So I think the idea of a reserve is meant to address the unique situation of the Northeast, but one of the things we will have to do in the coming weeks is to figure out, how do you create that in a way that does not mess with the market? How do you do that in a way that is sort of respectful of the businesses that work there, but also protective of the interests of consumers? It is not an easy question, but it is one that we are going to apply ourselves to in order to minimize the interference in the market. Chairman Thompson. All right, sir. You talked about domestic production and taking steps to assist that. I think we all know that solutions to the problem have to do with either decreasing consumption or increasing production. And we all have ideas about what to do or what not to do on both sides of that ledger, but clearly, as has been pointed out, the administration must take the lead in coming together with the right kind of package here. But, it certainly would seem that domestic production--increasing domestic production, new oil fields, increasing production from existing fields, is an important part of that. Domestic production dropped 5.6 percent in 1999, and a great many of our small producers went out of business. So the proof is in the pudding, isn't it? It does not seem like we are doing very much in that regard. Mr. Goldwyn. Mr. Chairman, I would say two things. One, is that obviously it is best that producers respond to the market, and part of the problem, as Senator Domenici pointed out with the volatility, is when prices swing up and down, there is less incentive when it is down for them to produce. It is hard for them to predict what their income is going to be, and so producers got hurt badly by that drop in oil. And right now what we saw is a slowdown in exploration and production when it was not profitable, but now we need that production and it is not there. But the administration, in fact, has taken a number of measures and I am just going to give the very highlights of this, because we have been and are concerned about domestic production. One of them was lifting the ban on the export of Alaskan North Slope oil to extend life of the fields there. Another was, in Alaska, also opening the National Petroleum Reserve, also on the North Slope; providing heavy oil and stripper-well oil relief on Federal lands. The deep water and marginal leases royalty relief measures have actually brought deep water gulf production to new highs, and alternative minimum tax relief for small producers. Research and development helps industry a lot, lowering refining costs and enabling them to make more money by making it cheaper for production in difficult circumstances or geologic environments. Funding 32 reservoir class technology demonstration program projects has been much appreciated by industry--the Royalty Fairness and Simplification Act and also revisions we have made in the Energy Policy and Conservation Act. Last year when prices went so low, there were additional measures to deal with--the impacts on small producers, particularly suspending production requirements for stripper oil on Federal lands and royalty relief on Federal lands, also some new technologies for independent producers and trying to make more advanced technologies for improved recovery available to them. So I think there has been a good deal of concern and a good deal of money put into research and development, and balancing the environmental concerns to have some deep water explorations, but not in other areas where there is more sensitive environmental concern. Chairman Thompson. I think several of those things were begun last year, weren't they? Mr. Goldwyn. A number of those were done last year and others were done earlier. Yes, sir. Chairman Thompson. That is kind of late in the game, isn't it? Mr. Goldwyn. On the small producer front, I guess when they were in deep trouble, we moved to help them, but I think the-- -- Chairman Thompson. Well, a lot of people think the country is in deep trouble with a 55 percent dependency, and we have been that way for a long time. As we can get into this a little earlier, back as far as at least 1994, the Department of Commerce determined that increased oil imports impair our national security. This is not new news to us. Senator Lieberman. Senator Lieberman. Thanks, Mr. Chairman. Dr. Hakes, just by way of some factual premises here, how much of our imported oil, percentage-wise, comes from the OPEC countries? Mr. Hakes. I will try to get you an exact number. I know that we actually import less from the OPEC countries than we did in the 1970's. The growth of production in places like Mexico and Canada has led much of our dependency to be on places that are closer to us. OPEC actually has less of the share of the world market today than it did in the 1970's and much less of our petroleum comes from OPEC. That may not be a definitive issue in the sense that it is world oil market. INSERT FOR THE RECORD In 1999, total crude oil and product imports averaged 10.6 million barrels per day. OPEC accounted for 4.9 million barrels per day or 46 percent of that total. Since the Arab oil embargo in 1973, U.S. imports from OPEC have varied from a high of 6.2 million barrels per day in 1977 (70 percent of total imports) to a low of 1.8 million barrels per day (36 percent of total imports) in 1985. Senator Lieberman. Right, and OPEC helps determine, and plays a critical role in determining the world market. Mr. Hakes. Yes. Senator Lieberman. Secretary Goldwyn, what do we need OPEC to do on Monday at their meeting in Vienna? In other words, what are we looking for to create the kind of supply that will meet demand here, and obviously I'm speaking short-term, leaving aside everything else we talked about, about longer- term energy policy changes? Mr. Goldwyn. Well, what we want them to do is, and in fact what we have been working with them to do, is to understand what market demand is, that demand for crude oil is not going to go down the second quarter as many of them said, but will go up in the United States and it will be level in other places. We are asking them to look at the gap. Looking in the last quarter, there are 75 million barrels being demanded and 73 being produced, so we have said you have got to let supply meet demand. But, we also want them to look ahead for the second quarter and the third and the fourth quarter, for that matter, and plan production increases that are going to bring the market back into equilibrium. We do not recognize their legitimacy and so we do not tell them to pick a price and here is the exact amount that you need, but we educated them with help from Dr. Hakes on what our situation is, on the need for crude oil to get into the market in April and May, so it can be refined for gasoline over the summer, and that this is a worldwide situation. So we are looking for a significant increase at this meeting. Senator Lieberman. So, are we looking for a 2 or 3 million barrels a day increase in supply? Mr. Goldwyn. I guess we have been reluctant to put a number on it, in part because we did not want to get into the business that OPEC is, of picking what is the right number of supply. What we have given them is really orders of magnitude. So far, that has been the size of the gap. But we want to look at the third and the fourth quarter also, but I think in terms of order of magnitude---- Senator Lieberman. Will the announcement they make on Monday be clear? In other words, do we expect it to have a number attached to it or will it be a more fuzzy diplomatic language? In other words, will they say, we are going to increase production by so many million barrels per day? Mr. Goldwyn. It may not be clear and it may not be Monday. Senator Lieberman. It may not be Monday? Mr. Goldwyn. No, their meetings begin on Monday, but they may run for a couple of days. It is hard to predict from their past behavior how they are going to act. I think they understand, because Secretary Richardson has called every minister in OPEC with whom we have diplomatic relations, that we need a clear signal for the market. But they have a number of choices in how they could characterize their position. It could be an increase in production or it could be an increase in quota. It will take us some analysis, I think, to look at what they say and then what the market effect is going to be. The other thing that we are going to look at is, OPEC is not the whole story. We are going to look at what non-OPEC producers do, as well--Mexico has already indicated it will go its own way and it will increase production--what Norway is going to do, what other non-OPEC members are going to do. Our analysis of OPEC's decision, non-OPEC producers and how the market reacts is going to be what is going to tell us what the real effect of that decision is. That may take us a little bit of examination. Senator Lieberman. If, by whatever means, we determine that the OPEC decision and the decision of the other non-OPEC oil producing nations is inadequate to meet demand, and here again I'm thinking short-term, second, third, fourth quarter of this year, what alternatives does the administration have to try to make the problem less painful for the American consumer and the American economy? Mr. Goldwyn. Two of them had been talked about this morning and the President said that all options remain on the table. One of them is the swap of Strategic Petroleum Reserve oil. The other is the sale of SPR oil. Another is to try and work with refiners to take whatever measures we have now and make better use of them. Those are the top of the list. We are already taking measures to make sure the Federal Government makes more efficient use of the oil that we consume, but a lot of those are going to be sorted medium-term rather than short-term. Senator Lieberman. Right. I hear you to say that if OPEC does not adequately increase supply next week at their meetings, and the same is true for the non-OPEC oil producing nations, that it is more likely that the administration will consider swaps from the Strategic Petroleum Reserve as a way for us to increase supply short-term. I guess I would simply say I hope so. I hope that is true, if OPEC does not bring supply to meet demand, because otherwise we are going to have a very difficult driving season, spring and summer, in this country. Dr. Hakes, let me ask you to speak, and Secretary Goldwyn, if you want to add, a little bit about this question of oil inventories in our country. Let me state it with this edge to it. Some have suggested to me--not that there is anything illegal about it, as far as I can tell, I do not believe there is--that the oil industry, our oil industry, acted in its economic self-interest as the price of world oil went up, which is to say they bought less of it, hoping it would go down and they would buy it at more favorable prices. The effect of that was to make the problem worse because it reduces supply. I wonder if you could describe what happened in the last 6 months or so, maybe 1 year, after OPEC spiked up the price of world oil, evaluate the behavior of our oil industry and the oil inventories, and then suggest if there is anything that we could or should be doing about that, which is to say, to intervene in the market. I would ask Mr. Goldwyn to answer the same. Mr. Hakes. Well, I guess I would prefer to deal with this year to sort of avoid a long dissertation. If you go a few weeks before the real run-up in prices in the Northeast, the refineries were running at very low levels, which did lead to low product stocks. Now, if you look at the economics of refining at that point, they were operating on very thin margins; so it would be hard for an outside person to understand why they would be running at high levels, because there just were not margins available for them to make much money. Now, once the price ran up, then the margins ran up, and this has been an incentive for refining to pick up a bit. It is running higher now than it was then. However, refining levels are still lower than they were last year at this time and maybe a little bit lower than one might expect from the spreads that currently exist. Last week, refineries ran at about 89 percent of capacity. We estimate that, at points this spring, refineries will have to run at about 98 percent to provide the necessary supply. I do not know what the alternatives are to the market. I mean, the market certainly brings about corrections. You can see, even in the Northeast, as bad as that problem was, there was some market correction to it. But I think this is an area that requires continued discussion. It is a little more severe in the heating oil situation, because you're talking about health and safety there. I mean, if a person pays more for gasoline, that is very irritating and may be economically damaging, but if you were actually to run out of heating oil, that could be a real health and safety issue for a lot of people. So I think that the inventories question, in particular, requires more work, and, of course, we are doing some larger studies on these issues so we can answer that question in a little more detail. Senator Lieberman. I look forward to the results of those. Secretary Goldwyn, do you have any thoughts on this, which is whether government should be doing anything to either require or incentivize, create incentives, for oil inventories to be maintained at a more even level, so that we avoid the exacerbation of the impact of world price fluctuations? Mr. Goldwyn. It is a hard question, Senator Lieberman, because past attempts to try and incentivize or try and control prices, incentives have often led to worse situations than existed before the intervention. I mean, I think it was a hard market lesson for all the people who sell home heating oil in the Northeast, not to have planned ahead, and that is a lesson that they may change, and the fact that the government is working to create a reserve is going to have an impact on them. You know, we have had a bunch of warm winters, and so I think everyone is at a high price, attuned to the fact that we have got to plan for the worst and not for the same. In terms of other inventories, it is hard to imagine what we could do to be helpful, but as Dr. Hakes said, people who are expert in this, and we obviously work closely with API and others, will look at the question of what we can do to not let this happen again. Senator Lieberman. Thanks very much. My time is up. Chairman Thompson. Thank you. Senator Voinovich. Senator Voinovich. I am pleased with the fact that there is a lot more diversification in terms of foreign oil supply, so we are not as reliant as we have been on some of the nations that are a little bit questionable; but the fact of the matter is that we have seen an enormous increase in gasoline prices, and, with all due respect, I think the Department of Energy should have been paying more attention and monitoring the situation so that we would not end up where we are today. I share Senator Lieberman's interest in what is going to happen at that meeting in Vienna, and hopefully we are going to get a good result, and with a little cramming, take care of a situation that could have been taken care of if we had done our homework during the past number of months. That being said, I notice that we have seen a greater and greater reliance upon foreign oil, and all of the projections that I see indicate that we are going to be even more reliant on foreign oil. Has anyone ever sat down to figure out what the number ought to be? Are we too reliant? Should we be less reliant? If we should be less reliant, in terms of our national economic and security interests, how do we go about achieving that goal? I think of our exploration policies. I think of our tax policies. I think of our environmental policies, if the Department of Interior, the Department of Energy, and the Environmental Protection Agency ever sat down together and talked about does the left hand know what the right hand is doing? We have not built any new refineries in this country. If you talk to the refiners, they say our environmental policies have had a negative impact on their going forward with refineries. We have a new controversy over new source pollution permits by the Environmental Protection Agency, where they are cracking down, and it is going to make it more difficult. We just have ordered the oil companies to change, to reduce substantially, the sulfur in the gasoline, which some predict will be five or six cents more per gallon. It may very well be justified, but there are so many--Yucca Mountain. Senator Domenici is not here, but we passed the bill about moving forward with that place to store high-level radioactive material. The President is threatening to veto it. That leaves the whole issue of nuclear power. The biggest power problem with nuclear power in this country is what do you do with the waste? We have had that around a long time. The Europeans have seemed to handle it. We just can't seem to get that under control. If you start looking at all of these various things that are going on, it does not really seem like we have got our act together. I would like to know, from your perspective, what is the number, in terms of our reliance on foreign oil? Are we too reliant today on foreign oil supply? Mr. Goldwyn. Senator, let me try and answer all those questions, and first, we are very dependent on foreign oil and we should be less dependent on foreign oil, and that is the direction we want it to go, and it is going up and not down. This has been a problem for a long time for the United States. Since the 1970's, we have been looking at measures to try and make ourselves more energy secure and reduce our dependence. A number of those measures have been successful. And so, I think we have not picked a number, but what we have done is launched a series of measures to give us choices, to give Americans choices and to give us the ability to reduce our dependence on foreign oil. Let me just try and deal with them in a couple of baskets. After the oil shocks of the 1970's, we decided first we needed to have some security in case there was an interruption, so not only do we have the Strategic Petroleum Reserve, but we have got the International Energy Agency, 25 countries in there, and they have got reserves. So we have got some insurance against a supply interruption. We also started a campaign then, which has intensified now, to reduce the intensity, basically, increase how efficiently we use oil. As a result, the U.S. economy is far less dependent on oil and the ability of oil to impact other sectors of the economy is far less than it was in the 1970's. That has provided us some energy security and some insurance, as well. We have had campaigns to try and give Americans choices in kinds of supply, as well as diversity of supply. We have also worked around the world to make sure there are more suppliers that are outside of OPEC, in Africa and Latin America and the Caspian Sea, so that no one particular country can have too disproportionate an influence on our security or the security of our allies. The two big baskets are energy efficiency and renewables. Energy efficiency is an important thing. I have one statistic here on some investments that we're making in energy efficiency, which, if things like advanced vehicle technologies and alternative fuel research were successful, we could reduce our consumption by 700,000 barrels per day by 2010, and 1.5 million barrels per day by 2020. That is pretty much an order of magnitude from where we are right now. Senator Voinovich. I have seen some of that information, but when you see what the experts are saying, they are saying we are going to become more reliant on foreign oil. Now, I mean, in spite of all of what you're saying---- Mr. Goldwyn. But we have choices, Senator, and there are choices to make right now, which is either we can continue to invest and invest more, as the administration has recommended for some time, in alternative fuels, in renewable sources of energy, in research and development that will give us more choices. If we have those, if we do that research and development, if we are able to make that investment, then we will have choices other than crude oil and gasoline, things like the new generation of vehicles. Senator Voinovich. But isn't it a combination of a couple of things? Well, we are going to have to become more energy- efficient and we are going to do this and we are going to do that. So you go ahead and do it, and in spite of that, you are continuing to be more reliant on foreign oil. I mean, it is not one thing or another. Don't we really have to look at opening up more opportunities for us to have a domestic supply of oil, combined with that? In other words, we have this, ``Well, this is the way to get the job done.'' We had a hearing in Cleveland with a couple of congressmen about bringing nuclear waste through our city streets or our highways, and people were very disturbed about that. I said do not worry about it, because Yucca Mountain is not going to be there. You forget that I will be dead before that happens; what you ought to be worrying about is the nuclear stuff that is piling up at our two nuclear power plants in Ohio, that one of these days, they are going to run out of space and what are they going to do at that time? But the issue that came up was what is the solution? Where are we going to get our supply of energy, if you don't consider nuclear and somebody said solar. What I am trying to say is I think there is too much of this, this is the silver bullet thing. What I am interested in is what are your ideas on how we can expand the availability of more oil, domestically produced oil? What's your thoughts on that? Mr. Goldwyn. Well, we do believe that we need to take measures and, in fact, have proposed measures to increase domestic oil production, in opening the National Petroleum Reserve (NPR), up in Alaska. There is more offshore drilling in the Gulf. We are making investments in nuclear energy, too. I am sorry Senator Domenici is not here right now, but we have asked for a 56 percent increase in the Nuclear Energy Research Initiative. We are looking at a fourth generation of nuclear reactor technology. So, you are right. We have got to look at nuclear. We have got to look at domestic production. We have got to find ways to make it economic for domestic producers to do this. We are looking at gas-to-liquids technology, to get the natural gas from Alaska in a cost-efficient way into the U.S. market, so we do not have to buy it from someone else. So we have to look at the supply side and we also have to look at the demand side. Consumption is increasing. So you are right; there is not a silver bullet and we have to do all of them. But our ability to make huge gains in reducing dependency is probably going to come more from providing choices and making more efficient use of the oil that we consume, and having more new industries use other kinds of fuel than it is from the domestic side. But you are right. We have got to do both. Senator Voinovich. Usually, when I was governor, I always said if you cannot measure it, do not do it. We would say by X time, we are going to try and reach a number. Have you sat down and said, by X year, we are going to be less reliant on foreign oil and we are going to bring it down by 50 percent or 45 percent, and what is the method that we are going to use in order to get to where we want to go? You have got to have some goal. Have you done that? Mr. Goldwyn. Well, I think we do it--we have done it, but not in the sense of picking a number to reduce by, but we have done it in saying that we have got to do less importing and we have to look at all the measures, domestic production, research and development, efficiency, and everything else, to make that number go down and not up. Senator Voinovich. I would suggest that, as a Nation, we ought to figure out what the number is and then figure out how we are going to achieve it and hold ourselves responsible; and you know something, if we do that, we might just make it. Mr. Goldwyn. Thank you, sir. Chairman Thompson. Thank you very much. Senator Akaka. Senator Akaka. Thank you very much, Mr. Chairman. Secretary Goldwyn, 1 week from today, provisions of the Energy Policy and Conservation Act, which authorize Strategic Petroleum Reserve and DOE's international programs, will expire. Because of high oil prices and a desire to change our energy policy, we are facing a difficult time passing a reauthorization. There will be many amendments related to the current energy situation. It is probably unlikely that we can resolve them in time to enact a bill before the March 31 deadline. I am sure that the leadership of the Energy Department is concerned about what would happen if Congress failed to act and we had a gap in Strategic Petroleum Reserve or international energy authority at the time when we need it most. In today's tight energy market, the last thing we need is more uncertainty. My question to you is, will you please tell the Committee the consequences of Congress' failure to reauthorize the Energy Policy and Conservation Act? Mr. Goldwyn. Senator, thank you for raising that. Obviously, we are deeply concerned about the extension of the act, and all that we are asking for is really a simple extension of the existing law, which we hope will make it easy for the House to act. I think our lawyers have looked carefully at what our ability is to do things like use the Strategic Petroleum Reserve in the absence of the act, and we have looked at what the authorities are under appropriations law and other laws. I think the prudent answer is that it is a lot harder and this is the worst possible time to let this act expire, and that we hope that it will be renewed, just a simple extension, before March 31. We are not without options, and I do not want to give the legal briefs, since I am a lawyer, but not an energy lawyer. But the right answer, as your question implies, is to renew that immediately. Senator Akaka. I hope there are contingency plans to take us on here. Secretary Hakes, you paint a fairly bleak picture about gasoline pricing during the summer driving season that is coming. You state that with low stocks and a market short on crude oil, the situation is ripe for gasoline price volatility. What is your prediction concerning supply? Do we expect gasoline supply shortages and, if so, do you have any expectation as to the location of shortages? Mr. Hakes. Well, I think we are back into a situation where we are skating on thin ice. Our prediction for the average price for regular gasoline is that we think it will peak somewhere between $1.57, which is not too much higher than it is now. But I think that understates the threat of volatility, because I think your State, the West Coast area, and the Northeast, tend to be more vulnerable if, say, a single refinery goes down for unplanned maintenance. So, you could see spikes well above this. We are seeing some of this on the West Coast right now. The average price in California is more than 20 cents higher than the national average, and in northern California, even more than that. Of course, this is very contingent on what happens next week, whether more supplies are produced, but based on what our current expectation is, we think this will be a very tight summer. Senator Akaka. From what you said, I take it that the shortage will not be critical, and probably Hawaii, the West Coast, and the Northeast States will probably suffer more than the rest of the country. Mr. Hakes. I think because of the transportation delivery system and the location of refineries, those areas tend to be more vulnerable, yes. Senator Akaka. In his testimony on the next panel, John Holdren states that it is not certain that any oil will be found in the coastal shelf if the Arctic National Wildlife Refuge is opened to oil development. My question is what is your prediction concerning oil supplies in that region? Mr. Hakes. Senator Murkowski has asked EIA to do a study on that particular question, on the production capability in ANWR. The U.S. Geological Survey, in my understanding, is actually coming out with some new information very, very soon, which we will use in that study. So I would prefer to delay a detailed answer to that question a month or two. I think we will be coming out with a specific study on that. Senator Akaka. Should our problem increase, do you see where we may be needing gasoline rationing? Mr. Hakes. No. You know, there are a lot of advantages to the market setting the price. If you look back in the last two decades, since we moved away from price controls, on average, and even including this recent spike price, energy prices in this country have risen more slowly than the general rate of inflation. I think also because of the market, we do not get in quite as tight a box where we would run out of supply. So I may be proven wrong by events, but I have said with considerable confidence that I think the market--even with the shortages--the market will be flexible enough to supply the product to people who want to buy it. It may come at a higher price, but I do not think we will see a repeat of the gasoline lines that we had in the 1970's, for instance. Senator Akaka. Thank you very much. Thank you, Mr. Chairman. Chairman Thompson. Thank you. Senator Domenici. Senator Domenici. Thank you, Mr. Chairman. Dr. Hakes, let me ask you, who made the miscalculation with reference to supply? Did somebody and was it intentional? Mr. Hakes. Are you talking about the estimations that were made last year of what the supply for the year would be? Senator Domenici. I am talking about the fact that there is not enough supply and that that is why the prices are going up, and that happened because certain countries produced less. I'm asking: Why did they do that and where did they get their information? I mean, it is not like this just happened overnight because--it was done initially by not just OPEC, but those who work with OPEC. We talk of OPEC and we do not think Mexico is a part, but thus far, they have been running on parallel tracks. They're running together; right? Mr. Hakes. Well, I think there were several factors. One is it was never clear to the producers, and, frankly, not clear to us at all points, exactly what the OPEC strategy was going to be in two respects. One is OPEC was a little bit more successful this time because they have had the best compliance record with their quotas that they have ever had. As you know, they frequently have had high levels of cheating. They did not have that this time. The other thing that was unknown to producers and I would say also to us in the government, is how long the OPEC quota cuts were going to last. Were they going to relax them in December? Were they going to relax them in March? Whenever. So, I think the investment community in the United States was a little bit hesitant to rush back into production because of these uncertainties. As you have seen, the production response to higher prices has not been there: It has been somewhat muted. I would say EIA, which is an independent organization, tracks this as well as anybody and I will match our record against anybody, but we certainly, if you look back to, say, June of last year, thought that OPEC would actually be producing more, because we thought that its production would be more at the levels of previous cheating and not this time. Venezuela, in particular, has really turned around from being one that almost ignored the quotas to now almost being the strictest follower of the quotas. Senator Domenici. So from my understanding of this, OPEC was successful in keeping everybody on board and reducing the quotas of the members, correct? Mr. Hakes. They are more successful than they have ever been. The current quota is 23 million barrels a day and they are actually producing 24 million barrels a day. So over time there has been some erosion in the quota, but if you compare this to other actions by them in the past, they have had the highest level of compliance they have ever had. Senator Domenici. So do you have any idea why they arrived at that quota? Where did they get it? Did they think there would be a supply shortage in the world? Did they think the prices were going to go up dramatically? Mr. Hakes. I think originally they were shocked by $10 a barrel. They had made an increase in 1997, at the time that they thought it would meet rising world demand, and shortly after that increase, the world price started to drop dramatically. Just as this hurt private producers all around the world, the treasuries of these nations were decimated. At the time, they said that what they wanted to do was bring stocks back into the normal level; but as stocks got back into the normal level, the quotas stayed where they were. So the delay in raising production has been a serious problem. But their initial goal, as they stated it, was to deal with this big overhanging in supply, which created a difficult situation. I think some consumers at the time were happy with the 89- cent gasoline, but the fact of the matter was those prices were not sustainable, because the world cannot produce oil at those prices. And I do not think OPEC is going to maintain the price of $25 per barrel because other places in the world can produce a lot of oil at $21 per barrel. So any swing in the market, I think, over the long-term is unsustainable. But I think their initial action was based on a fear of that $10 per barrel oil. Senator Domenici. So if we thought we were getting a good deal at 89 cents per gallon gasoline, clearly that was going to be short-lived, and somebody as knowledgeable as you knew that, right? Mr. Hakes. Yes. We, I think, have pointed out at every valley and peak in the market that this was likely to be a short-term situation. Now, this situation turned around faster than we were saying at the time, because we had no knowledge of how OPEC was going to deal with it, and the three OPEC cuts combined are almost 4.5 million barrels per day. That is a lot of oil. We had said this will take awhile to work off these low prices. They got worked off a lot quicker because OPEC made a decision that they could cut oil production by 4.5 million barrels per day. Senator Domenici. I would ask Mr. Goldwyn, did I hear you correctly that, with reference to incentives to Oil Patch America, that you were aware that incentives had to be built-in that would be tied to price. So, if the oil came in below a certain price, incentives would trigger in, and if they got over certain price, they would be triggered out? Did I read that or hear you say something like that? Mr. Goldwyn. No, sir. Senator Domenici. Let me ask you, if we are talking about something like stability or consistency, wouldn't it be a good idea to take a look at all the tax incentives that go to Oil Patch and decide that they ought to be--I will use the word countercyclical, but I do not want to stop there, because it is hard for people to know what that means. But, essentially that the incentives would be triggered on and off, depending upon the price, which would keep us from closing down a lot of our wells and the like, if the price came tumbling down? Mr. Goldwyn. Without being a tax lawyer, we ought to have a rational system that does not provide incentives where none are needed, and that has them there when they are required. Senator Domenici. Let me ask if either of you with the Energy Department--has the administration ever asked that there be an evaluation of all Federal lands that currently are closed to energy production, and for you to estimate what they might yield if, in fact, they were developed in an orderly and sound manner? Mr. Goldwyn. In two ways, I am aware that there are some analyses of what the oil productive capability of Federal lands is. I do not know whether that is a comprehensive study or not, and certainly in the preparation of a comprehensive national energy strategy, we looked at all those things, on Federal lands and non-Federal lands, and also balancing the environmental cost of exploration on Federal lands. Senator Domenici. Mr. Chairman, I do not want to ask them to do that. I think that would be a major undertaking. But I think it is very important that we ultimately know what we are talking about. For instance, we know one thing. ANWR is American public lands--the ANWR reserves--and we do know there is a pitched battle as to whether or not we should make available to the American consumer and to our enterprises and our workers. Do either of you know what the estimated production of American oil would be if we developed the ANWR reserve? Mr. Hakes. The USGS has published studies on that in the past, as I believe the EIA may have, but the Geological Service is updating some of its work, and we will be updating our work at the request of Senator Murkowski, so I believe we will be able to give you our best estimate of that in some detail, maybe in another 6 weeks or so. Senator Domenici. Well, I want to state my own view for the record. It is pretty close to economic arrogance for a country like ours to say we are not going to seriously consider 16 billion barrels of oil that would come from our property, drilled for by Americans who would be employing Americans, and the cash flow would be to Americans instead of foreign countries, and that is my estimate, is 16 billion barrels. That is 30 years of Saudi imports to this country, based on today, which is not a lot. They do not send us a lot. But that is a lot of oil. In the scheme of things, it may not be that much oil, but it is American oil, and I guess the Department of Energy clearly is not yet willing to look at that and other sources of our own oil to help show the world we are doing something for ourselves. Is that a correct statement, Mr. Goldwyn? Mr. Goldwyn. It is a correct statement that the administration does not support exploration in ANWR because of the environmental sensitivity of that area and the miles and miles of roads and pipe that would be required to explore there, but the administration does support development on some Federal lands, as they have in some places in Alaska; and so I think it is a question of balancing those two interests. But the administration is not opposed to exploration of oil on Federal lands. Senator Domenici. Well, Mr. Chairman, the environment is not the principal jurisdiction of this Committee, but the question really is about weighing risks. There is no question you have got to look at what risks are involved in doing this versus what risks are involved in not adding to the American production of home-grown oil for the next 25 or 30 years. I will submit some questions in writing and I thank you, Mr. Chairman. Chairman Thompson. Thank you very much. I think this points out the fact that each one of these options are very controversial. You are asked what is the plan? Well, the fact of the matter is what we decide the plan is, to a certain extent, is the plan--and every one of these things are very controversial. I despair over the fact that we are obviously not going to come together with some kind of a give-and-take on these various options until we absolutely have to. It is just like Social Security. We continue with the goodies, retirement income and things like that, take the tax off it, and we put off reform until we absolutely have to. I assume, in our case, the price will have to get even higher for a longer period of time in order for us to do some of these long-term things, whether they be ANWR or the CAFE standards or whatever they might be. One final thing. We are talking about everybody being asleep at the switch here, but a year ago, a bipartisan request was sent to the administration for an expedited review and investigation under Section 232 of the Trade Expansion Act, into the impact of the increasing foreign oil imports on U.S. national security. There had previously been a determination by the Department in 1994, I believe, that, in fact, did impact national security. So a year ago, a bipartisan group of Senators asked that the administration take another look at that. My understanding is that the Department of Commerce has had a report on the President's desk since November. What is your understanding about that? Is that true? Mr. Goldwyn. We called over to the White House this morning, anticipating that, Mr. Chairman, you might ask this question, and what we were told is that the findings of that study, which has been delivered to the White House, are being reviewed, and that we expect a report to be released soon. Chairman Thompson. What about a little more than that? [Laughter.] Mr. Goldwyn. I know we have submitted---- Chairman Thompson. Don't make me go through the next two or three questions. When is soon? Give me a range of time possibilities here. Mr. Goldwyn. My life expectancy shrinks by the hours while I give the White House time to do the report, but the White House is keenly aware of the urgency of this report, that it is expected here, and that indeed this morning, and even before then, that the Senator has asked for this to be delivered promptly. Chairman Thompson. I am sure they know that the longer we wait, the more the presumption is going to be against them, in terms of what is in that report. So let's go ahead and get it out and factor that in. You have got a distinct advantage as a witness. This gentleman, Mr. Goldwyn, was born in Tennessee and went to school in Connecticut. So he is practically the perfect witness to come up here today. Gentlemen, thank you very much. We are going to call the second panel. I want to ask our second panel to step forward. Our first witness will be Red Cavaney, President and Chief Executive Officer of the American Petroleum Institute. He will be followed by Dr. Richard N. Haass, Vice President and Director of Foreign Policy Studies at the Brookings Institution; and Robert E. Ebel, Director of the Energy and National Security Program at the Center for Strategic and International Studies; William M. Flynn, Vice President, New York State Energy Research and Development Authority; Dr. John Holdren, President's Committee of Advisers on Science and Technology, Belfer Center for Science and International Affairs, Kennedy School of Government; and Adam Sieminski, Director of Deutsche Banc Alex. Brown. Thank you, all of you, for being with us today. Mr. Cavaney, would you like to proceed with your testimony? TESTIMONY OF RED CAVANEY,\1\ PRESIDENT AND CHIEF EXECUTIVE OFFICER, AMERICAN PETROLEUM INSTITUTE Mr. Cavaney. Thank you, Mr. Chairman. My name is Red Cavaney. I am President and CEO of the American Petroleum Institute, and I appreciate the opportunity to offer our assessment on the recent oil supply situation and on the impact of rising petroleum product prices on consumers. I request that my written statement be inserted into the hearing record. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Cavaney appears in the Appendix on page 75. --------------------------------------------------------------------------- Chairman Thompson. All statements will be made a part of the record. Mr. Cavaney. Thank you. America's oil and natural gas industry is committed to supplying our Nation's consumers with a reliable and affordable supply of energy for all their needs. We also pledge to provide consumers with the information they need about the current gasoline price situation, as well. Four important points need to be understood. First, the cost of crude oil is a key determinant of prices at the gasoline pump, and crude oil prices are a function of supply and demand in the international marketplace. Second, high crude oil prices have resulted from a decrease in foreign oil production and greater demand for oil from recovering Asian economies and the continued growth of the Western economies. Third, although prices have risen rapidly, retail prices, after adjusting for inflation, are generally well below gasoline prices in the early 1980's. Finally, the U.S. oil and natural gas industry is operating its refineries at record production levels and will continue to increase production as we approach the prime driving season. The price increases we were experiencing were brought on by short-term shocks that resulted from sudden changes in supply and demand. Just as prices are up now, they will turn down when factors change, and change they will. We commend the Federal Government for taking a balanced approach to the current situation by encouraging more crude oil production while refraining from interfering in the marketplace, which is still the best way to get gasoline to consumers reliably and at the lowest cost. We believe the government and industry can work closer together to ease some of the hardships and concerns faced by American consumers. We are pleased to learn that the Energy Information Administration has acted on one of our recommendations and is convening a pre-summer transportation fuels outlook conference to evaluate the status of gasoline, diesel, and jet fuel production and inventories. We are also asking EIA to expand the scope of its winter fuels conference. API is also eager to provide additional information on market conditions. Our industry is committed to continue working closely with the Department of Energy, to monitor the situation and give Americans the latest and most accurate information available. Educated consumers are a vital asset. In the short-term, the government should also take steps to help prevent another recurrence of the home heating oil situation. It can increase funding for the low-income home energy assistance program and more quickly and equitably release funds, as well as consider expanding Small Business Administration emergency loans to home heating oil dealers and to truckers. In the long run, government can reduce our reliance on foreign supplies and also exert downward pressure on international crude oil prices by opening our most attractive oil and natural gas prospects to responsible exploration and development. Since 1983, access to available lands in the Western United States were nearly 67 percent of our onshore oil reserves and 40 percent of our natural gas reserves are located; that access has declined by 60 percent. Our industry supplies the energy to keep America going strong, but to continue to produce domestic oil and natural gas, we must have improved access to State and Federal lands. Senator Lieberman. Mr. Cavaney, could you just go back-- excuse me for the interruption, because those are interesting and important numbers. Where is 67 percent of the domestic oil---- Mr. Cavaney. Of our onshore oil reserves. Senator Lieberman. Onshore, and 40 percent of onshore gas. Mr. Cavaney. And 40 percent of our natural gas. Senator Lieberman. And where is that, generally speaking? Mr. Cavaney. The 10 Western States. Senator Lieberman. That is what you were talking about. OK. Mr. Cavaney. If you look at all that is available to us, the statistics are pretty well the same; 61 percent of the total reserves, onshore and offshore, are also basically restricted access at the present time, and that is according to USGS and MMS data. Also, the Federal Government has imposed layer upon layer of regulations on U.S. refineries without sufficient regard as to their collective impact on a refiner's ability to meet the full range of American consumer needs. Refineries need flexibility to respond to the fast-paced changes in today's world. Overregulation reduces that flexibility. A soon-to-be-proposed regulation to drastically lower the sulfur content of diesel fuel is an example of government action that could have significant negative consequences on our ability to supply heating oil and diesel fuel in the near future. We share the government's interest in further cleaning the air. However, reductions beyond the 90 percent we have already proposed are likely to drive up fuel manufacturing costs unnecessarily, imposing yet additional burdens on our Nation's truckers, farmers, and homeowners in the Northeast, in particular. We have talked directly to EPA Administrator Carol Browner about our concerns, and today API and other impacted parties are visiting OMB to reiterate our opposition. In closing, we share your concern for the help and welfare of your constituents. America's oil and natural gas companies have a long and proud history of providing this country's consumer with a reliable and affordable supply of energy, to make their homes comfortable and to take them where they need to go when they want to go. We recognize you are faced with increasing demands to address this situation. To the extent to which we can help in your efforts to better understand the possible effects of the many proposed actions under consideration, we are here to assist you. Thank you. Chairman Thompson. Thank you very much, and thank you for staying close to your time here. Dr. Haass. TESTIMONY OF RICHARD N. HAASS,\1\ VICE PRESIDENT AND DIRECTOR OF FOREIGN POLICY STUDIES, THE BROOKINGS INSTITUTION Mr. Haass. Thank you, Mr. Chairman, and Senator Lieberman. I think it is clear why we are here today. It is because of the large and relatively sudden surge in oil prices from just over $10 a barrel a little more than a year ago to around $30 today. This has translated into an equally dramatic increase in retail gasoline prices. In many cases, these increases have caused real hardships for individuals, families, and businesses. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Haass appears in the Appendix on page 87. --------------------------------------------------------------------------- I think, though, it is important not to confuse higher oil prices with high oil prices. The recent prices, while obviously higher, are not particularly high by historical standards, especially when adjusted for inflation. Indeed, in real terms and despite the recent increases, today's energy prices are no higher and, actually compared to some years, say in the early 1980's, are actually lower, than they were over the past 3 decades. It is important to keep in mind, as well, that one of the reasons the prices are so much higher today is because of where we were 12 months ago and the fact that oil prices had fallen so far. Still, the question arises as to whether higher prices constitute a national security problem for the United States. Within limits, and I would suggest we are nowhere near such limits, the answer is no. It is not because higher oil prices are without impact, economically, to businesses to the economy as a whole. But in and of themselves, the sorts of prices we are experiencing do not threaten either American or global prosperity. Indeed, what is normally more important than the specific price of oil is price stability and predictability. This conclusion has several consequences for American policy. First, and as has already been discussed, I would suggest use of the Strategic Petroleum Reserve, would not be warranted under current circumstances. I would reserve, so to speak, the Strategic Petroleum Reserve for true crises. Second, the United States ought to engage in regular consultations dealing with long-term supply and demand projections with OPEC producers. Such talks could not change market fundamentals; technology will do that, but they can prove useful in preventing and smoothing out the sort of price fluctuations we have seen. Implicit in saying this is the notion, controversial perhaps in some places, that low prices, per se, should not be a goal of American energy policy. Low prices have an adverse impact on American businesses and communities that depend upon oil production. They obviously encourage consumption with all that that means for the balance of trade and for the environment. Low prices discourage exploration and production which, over time, exacerbate supply shortages. And low prices obviously cause great potential instability in countries that are of vital national importance to us, including Mexico and Saudi Arabia. I, therefore, would hope that the Senate would avoid any sort of sanctions along the lines that the House has been recently considering against the oil producers, and indeed, in general, I would jettison the idea of a confrontational relationship with the OPEC producers, in part because I do think it is possible to work out a more cooperative approach to smooth out oil pricing. Second, we cannot somehow disaggregate the oil part of our relationship with these countries from everything else. Many of these countries are in a position to affect vital national interests of the United States, whether in the area of drugs or involving basic questions of foreign policy, weapons of mass destruction, and so forth. So, what, then, should we do? Let me just suggest here, and I want to associate myself with the comments of the Chairman, that the real question of the relationship between oil and national security deals with supply and not price. There has got to be simply enough oil to meet the bulk of the world's demands. And it is not enough that the United States, alone, can meet its oil imports, because as it has already been pointed out, there is really only one global oil market. Even if somehow we could manage to meet our needs, if the needs of our major trading partners and allies were not met, we would then indirectly suffer as a result. Senator Lieberman, as you and some of your colleagues have suggested, there is no single answer--no simple answer--to this. It is the reason that this country has had so much difficulty coming up with and implementing what you might call a comprehensive energy policy. But it touches on a whole range of issues that cuts across foreign policy and defense policy. It cuts across economic policy and it cuts across domestic policy. Again, there is no one locus of decision-making in this area, be it within this body or within the Executive Branch. But energy involves a whole range of issues, from questions of strategic reserves to conservation, to new energy sources, to finding new places to produce oil, to the Arab-Israeli issue, to the IEA and other sharing arrangements, to making sure that we have an adequate military in case there is another supply interruption threatened by Saddam Hussein or anyone else. Let me end with two last points, as I see the red light. One is to keep an emphasis on the Persian Gulf. It is still home to two-thirds of the world's proved oil reserves, and to the extent there is a swing region in the world oil market, it is the Persian Gulf. To the extent there is a swing producing country, it is Saudi Arabia. Two other countries have a big potential to affect international energy, one more in the negative sense, which is Iraq, one more in the positive sense, which is Iran. In the case of Iraq, the United States cannot think of having a secure energy policy so long as Saddam Hussein is in power. And in the long run, not simply containing Iraq, but bringing about a different government in that country is very much part of a long-term energy policy for this country. Second, and here I would welcome some of the comments made by the Secretary of State recently, I also think it argues for some new thinking about U.S. relations with Iran. Right now, U.S. policy towards Iran seems to be penalizing American oil producers, in many cases, much more than it seems to be penalizing Iran. Again, I think it is impossible to think of global energy policy in the absence of steps that would somehow get Iranian production on line, in full, with American participation. Thank you very much. Chairman Thompson. Thank you. Mr. Ebel. TESTIMONY OF ROBERT E. EBEL,\1\ DIRECTOR, ENERGY AND NATIONAL SECURITY, CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES Mr. Ebel. Thank you, Mr. Chairman. It has been more than 25 years now, since the Arab oil embargo disrupted oil supplies in October 1973. How has the United States fared since that time? Not too badly, in fact. Our per capita use of oil has come down, but so then has our domestic crude oil production. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Ebel appears in the Appendix on page 90. --------------------------------------------------------------------------- However, our population growth has more than offset the decline in per capita oil use. And that, unfortunately, translates into much higher dependence on oil imports, which, as noted, now surpasses 50 percent. In the interim, and in response to supply and price crises, we have worked our way through price controls, through oil import quotas, through a synthetic fuels corporation, and through subsidies and tax credits for various kinds of alternative forms of energy. But then, the market eventually adjusts itself and the remedies of the day go back on the shelf. Today I know of no reasonable scenario which does not foretell an increasing reliance on imported oil. Does that mean our national security is more in jeopardy today than in the past, simply because of this higher dependence? How do we define national security? George Kennan has offered the least complicated definition and I quote, ``The continued ability of this country to pursue its internal life without serious interference.'' If we accept that definition, then oil imports do threaten national security. And the greater the dependence, the greater the prospect for interference. When we consider the world's growing appetite for oil, where will that oil come from? It will come from the Middle East, because that is where the oil is. Today's rogue states-- Iran, Iraq and Libya--had well better be tomorrow's suppliers if supply is to match anticipated demand. That finding comes out of our strategic energy initiative project, of which Senator Lieberman is a congressional co-chair. Let me list several other findings. We found that fossil fuels will continue to dominate world energy supply, at least to the year 2020. We found that there are two comparatively new influences on energy decision-making: The growing role being taken on by nongovernmental organizations and the mounting concern over global warming. We found that there is an interest in renewables, and that matches concerns over global warming, but we also found that their relative contribution to world energy supply will be mostly unchanged. Finally, we found in looking ahead, sporadic price volatility--price hikes and price declines with accompanying implications for producers and consumers. This is what business as usual in the world oil industry is all about. Policymakers come under tremendous pressures to do something about high oil prices, high heating oil prices, and high gasoline prices. And that something is usually in the form of government intervention or regulation, which tries to artificially shape economic forces. Unfortunately, these actions tend to prolong crises rather than relieve them. Several are on the table, as mentioned this morning. One is the withdrawal from the Strategic Petroleum Reserve. I would strongly advise against withdrawals, if only because we would send the wrong message to OPEC. Those exporting companies might conclude, let the United States add to supply and we will hold firm with our cuts. It has been suggested that, instead of withdrawals, why not a form of swaps, with withdrawals to be replaced at a later date? Swaps are difficult, however, because of pricing complications. Finally, a third option attracting support is the establishment of a home heating oil reserve for consumers in the northeastern United States. Questions arise--how much to hold in that reserve and what triggers the release? Having set a precedent, what next? Surely other groups will be impacted by higher oil prices and they will seek relief. Farmers in the sowing season. Farmers in the harvest season. Where does it all end? A much better policy response would be to provide financial assistance programs for the low-income home heating oil consumers in the Northeast. I would conclude with a thought that with only minor exception, the oil exporting companies are just as vulnerable as the oil importing countries. These countries are exposed to the dangers of the so-called Dutch Disease. Dutch Disease appears when one sector of an economy, such as oil, flourishes at the expense of other sectors, namely agriculture and manufacturing. Sizable revenues from exports greatly improve local currencies against others, which makes imports particularly attractive at the expense of local industries. Clearly, unless and until all exporting countries diversify away from their inordinate dependence on oil derived income, there will always be pressure on their part to maximize revenues from the depleting source. That translates into a continued price volatility or, as I noted earlier, business as usual. Thank you, Mr. Chairman. Chairman Thompson. Thank you very much. Mr. Flynn. TESTIMONY OF WILLIAM M. FLYNN,\1\ VICE PRESIDENT, NEW YORK STATE ENERGY RESEARCH AND DEVELOPMENT AUTHORITY Mr. Flynn. Thank you, Chairman Thompson and Senator Lieberman. On behalf of Governor George Pataki and the residents of New York State I want to thank you for the opportunity to testify today concerning the energy supply and price problems that New York State and the Northeast region have been experiencing since last January. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Flynn appears in the Appendix on page 97. --------------------------------------------------------------------------- New York State relies on heating oil more than any other State in the Nation. We consume 20 percent of the Nation's total distillate demand--43 percent of New York's households use oil for space-heating--over 2.9 million households. In February, retail heating oil prices soared to record levels, from $1.24 per gallon on January 17 to a record-breaking $2.02 per gallon on February 7, with New York City metropolitan area customers paying $2.25 per gallon. To put this price in perspective, last year, the average price per gallon of heating oil was 91 cents. States throughout the Northeast experienced similar price increases. The economic burden of rising oil prices is not confined to heating oil. For example, New York motorists annually consume over 5.6 billion gallons of gasoline and nearly 1 billion gallons of diesel fuel. Increasing pump prices will also significantly increase the cost of transporting people and goods in and out of New York. What were the reasons for these price increases? There was no single definable factor that we can point to as the ultimate cause of these price increases. There are, however, a number of market factors that contributed which bear mentioning. One, economic growth in the United States and the strengthening economies of the Pacific Rim contributed to a resurgence in the demand for petroleum at the same time OPEC and non-OPEC nations reduced production. Two, the petroleum industry has adopted just-in-time resupply of inventories. Additionally, New York's heating oil bulk storage capacity declined by 20 percent over the past 5 years. As for gasoline over this same period in-state storage capacity fell by over 17 percent. Three, New York and New England do not have any refineries. We rely on refineries in New Jersey, Pennsylvania, the Gulf Coast and imports to meet our needs. And, refinery utilization rates have dropped. Four, weather--we had mild weather in December that continued into early January. When the extreme cold weather arrived in mid-January, we experienced a sharp increase in demand by all sectors, creating greater competition among buyers, including interruptible natural gas customers and electric generators. Five, resupply problems caused by icing on the Hudson River and high seas and strong winds on Long Island Sound, delayed barge shipments to key coastal and inland oil terminals. This exasperated the already tight supply situation. Caught up in all these market forces are consumers. While we expected prices to rise because of OPEC cutbacks, the sudden and dramatic price increases were way above the expected norm, particularly because this winter was 9 percent warmer than normal and 1 percent warmer than last year. We estimate that just the heating oil price increase will cost New York's economy about $650 million more than last year, with nearly $450 million of this increase felt by residential heating oil customers. Also, truckers in New York and throughout the Nation are feeling the pinch of high diesel prices, although diesel prices have dropped from a high $2.70 per gallon in February, the full effect of these prices have yet to hit the stores that rely on trucking to meet demand for their products. As for gasoline, national inventories are 12 percent lower than year ago levels, and in the mid-Atlantic States these inventories are 20 percent lower than last year. The average retail price for a gallon of regular gasoline in New York escalated 18 cents per gallon in recent weeks. The current statewide gasoline price is 55 cents per gallon higher that last year--far exceeding the previous all-time high of $1.51 per gallon during the Persian Gulf war. Obviously, this situation deserves much attention as we come close to the summer season. Faced with this situation, Governor Pataki directed several actions. We established emergency provisions for shelter and heating by working with the Red Cross. We were in constant contact with county energy emergency coordinators across the State, with the U.S. Coast Guard, with oil distributors, and terminal operators and oil companies to get the best available information about the supply situation. Governor Pataki called upon the Public Service Commission to voluntarily keep utility customers who could switch to oil or natural gas. The New York State Department of Tax and Finance issued temporary certificates to heating oil distributors and trucking companies. The New York State Department of Environmental Conservation granted a 1-week waiver to allow New York City municipal facilities to use slightly higher sulfur oil to meet their heating needs. Governor Pataki also asked the Consumer Protection Board and our authority to investigate the causes of the current shortage. Therefore, our authority is surveying heating oil distributors, terminal operators, refiners, electric generators, natural gas utilities, and interruptible customers to determine the causes. We expect to issue a report later this spring, at which time we will make it available to this Committee. Besides the actions we took in-state, there were several Federal measures we initiated. Governor Pataki called upon the administration for an increase in LIHEAP funds. Governor Pataki then raised the LIHEAP income limits for eligibility to help the elderly and the working poor. Governor Pataki and other elected Northeast officials, also asked for the release of oil from the Strategic Petroleum Reserve in mid-February. If the administration had acted then, we would be seeing greater supplies of gas and diesel fuel today. I would also add some humble recommendations, some of which have already been mentioned today. We need to use the United States influence with OPEC and non-OPEC to achieve a more competitive oil market. Domestic crude oil production has declined. We need to accelerate recovery technologies and improve the economics of finding and withdrawing oil from domestic reservoirs. An important step in New York and in the Northeast is better fuel diversity. We need to study the possible expansion of natural gas pipeline capacity and we need to look at new technologies such as fuel cells and alternative fuel vehicles as a way to provide us with greater energy security. The Federal Government must do a better job of coordinating within the Department of Energy. They must take a more active lead role. And the Federal Government should also ensure that there is adequate funding in place for Coast Guard ice breakers. These ice breakers are essential in keeping the Northeast and Midwest waterways open for the movement of petroleum. At NYSERDA our principle mission is to promote energy efficiency and to develop New York's renewable resources. NYSERDA has and will continue to support oil heat research. We strongly support continued DOE funding for the Brookhaven National Lab oil heat research. Again, Mr. Chairman, on behalf of Governor Pataki, thank you for inviting me to testify today and I would be happy to answer any questions you may have. Chairman Thompson. Thank you very much. Mr. Holdren. TESTIMONY OF JOHN P. HOLDREN,\1\ PH.D., PRESIDENT'S COMMITTEE OF ADVISORS ON SCIENCE AND TECHNOLOGY, BELFER CENTER FOR SCIENCE AND INTERNATIONAL AFFAIRS, KENNEDY SCHOOL OF GOVERNMENT Mr. Holdren. Thank you for the opportunity to present my views here today. I do want to say that although, as the Chairman indicated in his introduction, I am affiliated both with Harvard University and with President Clinton's Committee of Advisors on Science and Technology, I am speaking here today as an individual and not representing any of those other organizations. --------------------------------------------------------------------------- \1\ The prepared statement of Mr. Holdren with attachments appears in the Appendix on page 112. --------------------------------------------------------------------------- The burden of my testimony today, and I should say I have submitted for the record a much longer statement than I am going to make here, can be summarized in four points. The first one is that we should be trying both to increase domestic oil production above what it would otherwise be and trying to reduce U.S. oil consumption below what it would otherwise be. Second, we should be trying to do these things both by using price and non-price incentives of various kinds to affect the choices that are made among the energy alternatives that are available out there now, and also by investments and incentives and other measures that promote the development of improved energy supply and energy end-use options from which we will be able to choose in the future. My third point is that having said all of that, analysis both of recent history and of the technological possibilities suggests that there is a much larger potential in increasing efficiency of energy use and in deploying substitutes for oil than there is potential for increasing the domestic production of oil. My fourth point is that we are not now doing enough in any of these dimensions. We are not doing enough in terms of a sensible array of the incentives to promote appropriate choices among today's technologies. We are not doing enough in terms of investments in research, development, and demonstration of advanced technologies for energy end-use and for substitution for oil in the U.S. energy mix. My own focus in the bulk of my testimony is on the technological potential of the various approaches and on the measures that we could and should be taking to bring that technological potential into being, but I want to urge the Committee not to neglect, in its larger deliberations, the crucial question of incentives, both in the short-term and the long-term, that affect what we deploy from the menu of technology options that are available at any given time. Turning then to that question of the technical potential of different approaches, my written statement contains an analysis that suggests that between the time of the first Arab OPEC oil price shock in 1973 and 1999, the effect of increasing efficiency and substitution for oil in the U.S. economy was at least three times as big in terms of effective displacement of oil import dependence, as was the effort to enhance domestic production. My rough estimate is that efficiency and substitution for oil was worth over 10 million barrels a day in 1999, in the sense that our oil demand was that much lower than it would have been had pre-1973 business-as-usual trends persisted over that period. It is harder to assess the exact contribution of the attempts to increase domestic production in that period, for which, of course, there were considerable incentives, considerable investments, and considerable technological improvements brought to bear. But if one makes a reasonable assumption about the size of the impact, it is at least three times smaller than the impact on the efficiency and non-oil supply side. If you turn to the question of the potential for the future, as opposed to the historical performance, I think a number of useful things can be said. If we were to manage to increase the rate of decrease of the energy intensity of the U.S. economy, that is, the amount of energy it takes to generate a real dollar of gross domestic product, from its recent historical trend, which is a 1.2 percent per year decline in energy intensity of the economy, to 2.2 percent, which is halfway between where we are and where we were at the height of energy intensity declines after the second oil price shock; if one were to do that and if the U.S. economy were to grow at three percent per year real over the next three decades, we would save, as a result of that efficiency improvement, 5.5 million barrels a day in 2010 and more than 20 million barrels a day of total energy oil equivalent in 2030. In the oil sector alone, the potential is clearly very high. If you simply look at the transport sector, which is two- thirds of U.S. oil use, and look at the prospective impact of the program on a new generation of vehicles, the study by the President's Committee of Advisers on Science and Technology (PCAST) that I led on U.S. energy research and development strategy completed in 1997, concluded that the results of PNGV could be displacing 4 million barrels a day by 2030, with comparable efforts on light trucks and heavy trucks displacing another 2 million barrels a day, 6 million barrels a day altogether. If you look, by comparison, on the supply side and ask what the Energy Information Administration's year 2000 energy outlook, going out to 2020, says the prospects are for enhancing domestic production, the difference between their reference case and their high world oil price case, which adds to the incentives to improve domestic production, is 800,000 barrels per day in 2020, between those two cases. Expanding non-oil supply is a lot more promising than that. If you look at the potential, for example, to expand natural gas supply and use natural gas to displace oil in the home heating sector, in the industrial sector, and even in the motor vehicle sector, where compressed natural gas can substitute for gasoline, you find that that potential is in the multiple millions of barrels per day by 2020. If you look at biofuels, the potential is also multiple millions of barrels per day by the period 2020 to 2030. If you look at the potential of renewable electricity generating technologies to free up more natural gas from the power generating sector to use in other sectors to replace oil, that is also in the multiple million barrel per day class by 2020 to 2030. So the potential for replacing oil is very large, and the potential for saving oil is very large, but those potentials are not going to be realized even in the technological sense if we do not make the needed investments. When PCAST looked at the current picture of U.S. investments in energy research and development, we found that in fiscal year 1997, the U.S. energy R&D expenditures at the Federal level were at the same real level that they had been in 1973, and, of course, half that level as a fraction of the GDP. We deemed that level of investment in energy research and development to be incommensurate with the challenges and opportunities that the energy scene is going to present in the 21st Century, and we recommended that that level of investment should roughly be doubled over the ensuing 5-year period, that is, starting in fiscal year 1999 and out to fiscal year 2003. The Clinton Administration, in its fiscal year 1999 budget request, accepted about two-thirds of those recommendations. The Congress passed 60 percent of that, and so we ended up with 40 percent of what PCAST had recommended in enhanced investments in alternative technologies in the fiscal year 1999 budget. There was a further increase in fiscal year 2000, but the gap between the PCAST recommendations and what the administration has recommended and, in turn, the gap between what the administration recommended and the Congress passed is getting wider. So what we have achieved in turning around the decline in U.S. energy R&D is a lot more than nothing, but it is also a lot less than, in the view of me and my colleagues, is required. We did, just to close very quickly, a follow-on report that was released in 1999 on the role of increased international cooperation in addressing these problems. The oil problem and many other aspects of the global energy predicament cannot be successfully addressed by technologies that the United States deploys domestically alone. Dr. Haass made the same point a few minutes ago. It is in our interest to see that advanced technologies that reduce the world's dependence on imported oil and that reduce emissions of air pollutants and greenhouse gases, as well, should be deployed as widely as possible, and it is in the United States' interest to cooperate with other countries to see that that happens. A six-page synthesis of PCAST report \1\ on international cooperation has been provided to the staff and to the press and I hope that it will also be entered into the record. I will close just by saying that it does not seem to me that any of these are partisan issues. They are issues in which the national interest, as seen by Republicans and Democrats alike, is very similar. So I hope that the administration and the Congress will find it possible to work more closely together to generate the enhanced investments in achieving the potential to reduce dependence on imported oil that is out there. --------------------------------------------------------------------------- \1\ The report appears in the Appendix on page 124. --------------------------------------------------------------------------- Thank you very much. Chairman Thompson. Thank you very much. Mr. Sieminski. TESTIMONY OF ADAM E. SIEMINSKI,\2\ DIRECTOR, DEUTSCHE BANC ALEX. BROWN Mr. Sieminski. Mr. Chairman, and Senator Lieberman, thank you. Like Dr. Holdren, my bosses at Deutsche Bank assured me that I was totally on my own up here, so I was hoping that they would not be listening in this morning, since rather than go through the 21 pages of testimony that I gave the Committee about what I knew, I thought we could spend just a minute or two on what I do not know. My dear friend and colleague, Bob Ebel, earlier today said, ``Adam, if you tell them what you do not know, we are going to be here all day.'' --------------------------------------------------------------------------- \2\ The prepared statement of Mr. Sieminski appears in the Appendix on page 130. --------------------------------------------------------------------------- So I thought I would try to limit it to five things that I think are important in the crude oil markets today that should be of great interest to the Committee. I do not know five things that are worth half-a-million barrels a day of oil apiece. First, is worldwide inventories. Are they falling at the normal 1.2 million barrel per day rate right now, or is it less than that, because the preliminary data says less? This is very important to OPEC. The second thing that I do not know is whether Iraq is going to be able to quickly raise exports from its recent level of only 1.7 million barrels per day to the 2.2 million barrels per day rate that I think they are capable of doing and, in fact, they achieved in late 1999. Alternatively, we might see a cutoff in June of Iraqi exports, as we have seen nearly every 6 months when the oil-for-food program comes up for reauthorization at the United Nations. The third thing that I do not know is whether or not higher oil prices are going to dampen the world economy and demand for oil by 200,000 to 300,000 barrels per day, or maybe have a similar but positive impact on world oil supply. On the demand side, let me just mention that just this morning, the government released the durable goods orders number for February, and it fell by 2.3 percent, including an 8.7 percent decline on the transportation side of durable goods orders. I am beginning to wonder if maybe high prices for gasoline, diesel fuel, and jet fuel are already having an impact on the view that companies have about the future need for those pieces of equipment. The fourth thing that I do not know is what the true short- term excess production capability is within the OPEC cartel. There is a pie chart in my testimony that shows a very uneven distribution of excess capacity within OPEC, with Saudi Arabia having more than half of it, Kuwait, the United Arab Emirates, big chunks, but other countries having less. If that is true, what that might mean is getting an agreement in OPEC to raise production this time, and it gets worse in the next required increase, maybe this summer or in the fall, because of the inability to evenly spread the increases throughout the cartel. The fifth thing that I do not know is what the weather is going to be this summer, what it is going to be next winter or, interestingly, if the lack of additions to natural gas storage which we are seeing occurring now might end up creating a natural gas problem in the coming winter that would compound the oil problem we are going to have. Now, the other thing that I do not want my bosses at Deutsche Banc to know is that they pay me pretty good money to try to know the answers to these things, and I spend a lot of time doing this, and if I do not know the answers, I do not think OPEC does, either, so they are in a serious bind. Chairman Thompson. Isn't it refreshing, though, to come to a place where we know all the answers? [Laughter.] Mr. Sieminski. Well, so, Mr. Chairman, Senator, let me try to give you five recommendations for what you could do in the face of this uncertainty. The first thing that I think you should do is to keep funding agencies like the Energy Information Administration (Dr. Hakes, who was here this morning), and the International Energy Agency in Paris to try very hard to improve the data collection and analysis functions of those agencies. I think if good oil market information is known by everybody, including OPEC, we are all going to be better off. The second thing I think you have to look at is lowering taxes on production-related energy activities. This was a very successfully implemented strategy in the North Sea, in the early 1990's, and caused North Sea production to rise after a lot of analysts said it would fall. You might want to look very carefully at the idea of lowering taxes at the consumer end, because that actually just goes the reverse of what you are trying to accomplish. Chairman Thompson. You say look very carefully at it. You mean you would recommend against it? Mr. Sieminski. Yes. I agree with Senator Domenici, who said that the idea of taking money away from the highway program in the near term to deal with this situation is really not a particularly good idea. Most of the world looks at us and thinks we are a little silly over here in the United States complaining about gasoline prices, given that we are still getting it for $1.50 per gallon and it is $4 or $5 in most of the European countries and many countries in Asia. The third thing I would say is do not tie up the prospective oil producing areas in Alaska, the Outer Continental Shelf, and the western lands, because we need it. Be careful about environmental rules. Environmental rules make sense generally, but I think you can get carried away with that and it can get very expensive. I think we should take a more accommodating attitude towards mergers, simply because bigger companies, I believe, are going to have a better ability to deal effectively, not just with OPEC, but with all of the non- OPEC countries that they are going to have to operate in over the coming years. Fourth, I think we should encourage the flow of capital overseas. I believe we should reverse the trend towards imposing unilateral sanctions here in the United States. Over the last 5 years, most of the growth in non-OPEC oil came from Norway, the United Kingdom, Canada, Brazil, Mexico, and Columbia. My projections for the next 5 years say it is going to be Angola, Sudan, Russia, Azerbaijan, Kazakhstan, Yemen, Chad, and a number of other countries where I think that we first want to encourage investments to go in there, and second, I think we do not want to impose sanctions on so many of these countries that we will not get the oil out. Finally, actually, there is another one. I think we ought to be prepared (I think as New York State did) to temporarily suspend fuel regulations if we have a gasoline problem. You could get imports of gasoline feed stocks from Europe and Asia to help a crisis if we see one, if the fuel specifications were relaxed for a short period of time. Finally, the Strategic Petroleum Reserve. Look, I agree that the petroleum reserve ought to be reserved for emergencies. The problem is, nobody can define what the emergency is. If you have a free market, you never have a shortage, because prices go up, and that deals with the situation. So what I would suggest is that the Department of Energy ought to look into the idea of using a more market- oriented approach to the Strategic Petroleum Reserve. As an example, if the trigger mechanism were tied to the difference between where prices are now versus where they look like they are going to be in the futures market a year or two down the road, at any particular time, you could use that difference as the trigger mechanism to define the degree of an emergency or a shortage. If that type of approach had been taken over the course of the last 10 years, the Strategic Petroleum Reserve would have only been used three times, maybe four. One of those would have coincided with the release (sale) that did take place by the Department of Energy in 1996. The other two would have been purchases or borrowing of oil into the Strategic Petroleum Reserve (when prices were low) that would have taken place in June 1993 and in late June-December 1998. Using the amount of difference between the front end and back end of the futures curve as the trigger mechanism, we would have been lending oil out into the markets over the course of the last month or two under this kind of a plan. I agree that it is a good idea to preserve the Strategic Petroleum Reserve for a true supply crisis, but I think it is almost impossible to define what that is politically, and I would rather let the markets define it. Note that this does not have anything to do with absolute price. Just as an example, if oil was $40 today, but the future price a year or two down the line was $50, we would be buying oil for the strategic reserve, not selling it. Thank you. Chairman Thompson. So basically, what you are saying is that in a free market, there can never be a shortage, even if OPEC totally shut us down and did not give us anything, there would be enough in the world market, it would just be at an astronomically high price. Mr. Sieminski. Right, and I assure you that that would not last for a very long time, but this trigger mechanism could actually deal with that. The near-term price could go to $100 per barrel, but probably most companies and analysts would say that, well, it is not going to last and certainly within a year or two, it is going to be back down to $20 or $25. Chairman Thompson. Thank you. Senator Lieberman, I know you have to go. Senator Lieberman. Thanks very much for your courtesy, Mr. Chairman. Very interesting idea. Incidentally, the panel has been superb. I think you really each contributed to our understanding of the problem and hopefully to the public's understanding. We might hope they would read the transcript. It is more likely they will see you on C-SPAN, but you have been excellent. On this last interesting idea about a trigger mechanism for the reserve, what is the gap between what oil is costing now and what it would cost in the futures market a year from now that you would set as a standard? Mr. Sieminski. Senator, the gap right now is probably--it varies from day to day, but it is up over $6. It is probably $6 to $8 per barrel, so that current price that is $28 in the market, a year from now or 18 months from now is about $20. Senator Lieberman. So what is the gap that would trigger the reserve? Mr. Sieminski. With a 95 percent confidence level, so in other words, you are only dealing with that five percent that you want to deal with; the trigger would probably come in somewhere around $4 per barrel when oil is low and about $5 dollars or so per barrel when prices are high. Senator Lieberman. That is about the standard you used in saying that it would only have had been used three times. Mr. Sieminski. That is correct. Senator Lieberman. Including in December of last year, 1999. Mr. Sieminski. Well, yes. We would have had something happen sometime over the course of the last couple of months. Senator Lieberman. What I am asking you, Mr. Sieminski, I take it from what you said about this question of the unevenness of spare production capacity in OPEC, and the internal political difficulties that creates in OPEC, that you expect they will not make a decision to increase supply next week, adequately to meet world demand. Mr. Sieminski. I think that OPEC is going to act on the side of caution, because they are very afraid of having a renewal of what happened in late 1997, when there was too much oil on the market, and that uneven capacity issue comes into play, as well. I think the market needs a minimum of 1.5 barrels a day, and I think that we are likely to see something a little bit less than that coming from the OPEC countries. Senator Lieberman. Thanks. Mr. Cavaney, thanks for your testimony. I am correct, I believe, in saying that API has been opposed to using the Strategic Petroleum Reserve. Mr. Cavaney. We believe it should be reserved for its intended purpose and not to intervene in the market. Senator Lieberman. Is there a different position or a more open position on the question of swaps, because when that has been talked about, there is a suggestion, though I have never heard it made explicit, that the oil industry is more open to swaps than to an actual release of oil from the reserve? Mr. Cavaney. Philosophically, that is still a measure of market intervention, but we would be prepared to sit down, and explore and discuss in further detail how that might work, because how the mechanisms kick in and so forth would have an impact. Senator Lieberman. OK. I appreciate that. Let me ask if you can sketch for us, and this is real difficult. We tried to do it a little bit earlier. As we talk about trying to have a new national energy policy and creating more energy independence, American energy independence, through all the means we are talking about here, renewables, alternatives, and more production of oil and gas within our control, what the potential is domestically? You mention the percentages in terms of the western States, but in terms of barrels? Mr. Cavaney. I can share with you, this data that I am about to give you is from 1995 U.S. Geological Survey and Minerals Management Service estimate, the U.S. undiscovered potential reserves are 78 billion barrels of oil and 885,000 TCF. Senator Lieberman. What is that? Mr. Cavaney. TCF, trillion of cubic feet of natural gas. So, oil alone, which has what has been principally the discussion today, is 78 billion barrels. That, as you noticed just recently, the Geological Survey updated the non-U.S. supply potential and increased it by about 20 percent. If you look historically at their revisions, they have all been upward. As was mentioned earlier by the EIA, they soon expect to come out with another revision. We expect it will be upward, so it may well be more than 78 billion barrels in the near future. Senator Lieberman. I want to ask you a question next that is pretty hard to answer, because it is highly subjective, and if I asked it in the crudest fashion, I would say how much of that is not environmentally controversial? In other words, how much of it is not being developed for economic reasons, and then I would ask what economic incentives, apart from market price, could we create to encourage the development of those resources? Mr. Cavaney. It is difficult to answer. To some people, any drilling is a concern, and, to others, it can be done in an environmentally sensitive way, and we should maximize that. What concerns us in the macro sense, by any use of mathematics, about 60 to 61 percent of the reserves are basically restricted and not available. That reduces, by a very large amount, the capacity to basically take market risk. As you are aware, people have to invest huge amounts of money in order to both first explore and then bring production online and then, ultimately, deliver it to a refiner to make it into heating oil, diesel fuel, crude oil, whatever the case may be. So what you do, since you have opportunities to look worldwide, and what has been the trend of late, is increasingly U.S. producers, because of the obstacles here in the United States, the long-term and costly permitting process and, in some cases, the inability to get permits, increasingly U.S. producers have gone to foreign countries, and we are not as attractive a place as we were 20 years ago. There are things that can be done, by easing the regulatory burden for permitting, by opening up some of these lands, by looking at whether or not the United States provides a level playing field in its tax policy with other countries, because there are ample reserves there for us to be able to bring on a good deal more domestic production and, therefore, ease some of the price pressures we have right now with the strong reliance on foreign oil production. Senator Lieberman. Thanks. Hopefully, we are in a climate where we could figure out ways to do some of that. Some of the battles we are fighting, I understand there are strong opinions on both sides, at least in the foreseeable future, such as ANWR, it is hard to see them getting anywhere. But I hope there are other areas of potential that we all might work on that are less confrontational. Mr. Cavaney. These areas that I have mentioned include all the Rocky Mountain States, very attractive, particularly for gas, the Gulf of Mexico, very attractive there, all of Alaska, not just the ANWR part, and offshore, both on the East Coast and on the West Coast. So there are ample opportunities there to look. Senator Lieberman. Dr. Haass, I wanted to ask you, at the foreign policy level, you are right, of course, that we have ongoing relations with OPEC and other oil-producing nations that are important, and they are important to us strategically and in other ways. Of course, we are important to them. Obviously, we went into Operation Desert Storm to protect a group of them. We have been involved in economic assistance, disaster assistance, to our Central American, Latin American neighbors and allies who produce oil. There is a mood here now, and it is somewhat reflected, although it has been moderated in the House bill, to strike back, and it is an understandable mood. I want to ask you how you strike the balance here? And when I say how do you strike the balance, I mean, it is certainly, generally speaking, as I listen to the experts in this area who pretty much feel that, although the market is the market, the world price going up to $34 per barrel is excessive; that $10 was too low, and it is not just splitting the difference, but most of the people you listen to seem to say, ``Well, $18, $20, to $22 a barrel seems to be kind of a consensus preferred rate.'' So in the midst of that kind of excessive pricing, what do we do with our allies? There is a tendency, understand, not to be vindictive, but to say, ``Hey, you know, we sent half-a- million of our soldiers over there to protect you 10 years ago. We gave you aid when you had a disaster. We helped you out when you had an economic crisis. Why are you squeezing us now?'' Mr. Haass. I understand the sentiment. I think the producers understand it, as well, and they are uncomfortable with it. It is one of the reasons you will see them responding. Indeed, I do not think they ever thought prices would get to the point they have gotten. They were extremely unhappy, for obvious reasons, with $10 per barrel oil. I have no reason to believe that any of them actually thought we were heading north of $30 per barrel, in part for the reason you warned. They are worried about the political reaction, and they understand their own economic future is somewhat intertwined with the world's economic future. So the idea that they would bring down the temple is not in their interest, either. I would just say two things, though, Senator. First of all, you might say our moral authority to weigh in with them would be somewhat greater if we had shown a little bit of concern about low oil prices. It is not enough for the Secretary of Energy to get on his bicycle when oil prices are at $30 and say bring them down. He has also got to get on his bicycle when the prices are $10 and say, ``We understand this is causing hardship for you. It actually could cause national security problems for us, so let's talk about how we avoid that.'' You heard it from the panel today--greater transparency is key here. To the extent producers and consumers can sit down and talk about long-term projections of supply and demand, to add transparency to calculations, people then can adjust levels of output in order to anticipate these changes and, as a result, hopefully avoid them. In many ways, it is akin to the same logic that you heard with the petroleum reserve. To the extent you look at the future, you can anticipate it and take steps, in the process helping to prevent undesirable futures from coming about. But it means, therefore, to some extent eschewing a confrontational relationship with OPEC and become somewhat more cooperative. Senator Lieberman. That is a helpful thought and it has obviously not happened at this point. Maybe that is another lesson to be learned from this crisis, to be on a more continuing basis of discussion with the oil-producing nations, to avoid these extremes, both up-and-down, which are not good for either the producers or the consumers. I was going to ask you, Dr. Holdren, a lot of questions, but you answered them all. I just think your testimony was very interesting in terms of the enormous potential for energy savings in the investments we are making in the new technology vehicles, for instance, next generation, new generation vehicles, and in some of the renewables and conservation. So I thank you. I just wonder, Mr. Chairman, if I may read into the record. Dr. Hakes asked a question earlier about the extent to which we depend on OPEC for our daily oil supply, and he did not have the number right off the top of his head, but he dropped it off at the desk before he left. His figures say that U.S. crude use is 14.8 million barrels per day, and that the OPEC-imported crude is 4.8 million barrels per day, and the total U.S. crude imports are 8.59. So OPEC is about half, 49 percent, of our imported crude, and about 28 percent of our total use, so it gives us interesting dimensions. Mr. Chairman, I apologize for having to go. I was supposed to be somewhere 15 minutes ago. I thank you for your courtesy in letting me go first and in holding the hearing. I hope and I believe that we have contributed to the dialogue in a thoughtful way, and most importantly, I think you have each given us--and the two witnesses before--some material to work with now as we go forward, both in terms of our international relations and also in terms of our domestic policy. So I thank you very much. Chairman Thompson. Thank you very much. You pointed out that the United States gets about half of its oil from OPEC, and I believe it was Dr. Holdren's written statement that said half of that comes from the Persian Gulf; is that correct? Mr. Holdren. Right Chairman Thompson. In listening to the interchange with Dr. Haass here, it occurred to me that is why it seems to me that, I do not want to say the long run, but generally speaking, that market forces will win out in this thing, not because we remind our friends in the Gulf area of what we have done for them or anything or because we prick their conscience, but because it is in their self-interest, not only to maintain the relationship with us, and I do not think they kid themselves as to why we were down there in Desert Storm, but also in terms of the international marketplace. So I think, if they are enlightened at all, they take all those things into consideration and that works in our favor, maybe not as rapidly as we would like and, as Dr. Haass points out, that does not keep us from talking and trying to take the sharp edges off maybe in the process, but it looks to me like it is a very much of a good news situation. That is not the bigger long-term problem, if they are going to be so unenlightened as to do things that are outrageous. I think the bigger problem is, as you point out, potential problem, is things that the leadership in some of our friends' countries can maybe do very little about, and that is internal economic problems. It was pointed out that they are so dependent on oil. You think we are dependent on oil. They are the ones that are dependent on the oil, in terms of their income, so it was very good to be reminded, I think, of that interrelationship. Would all of you agree that, generally speaking, with Dr. Haass' comment that historically, prices are not particularly high by historical standards, not higher than in past decades, especially in the early 1980's, I believe, was where you put in some cases, some years where--compared to some years, it is actually lower? Is that a fair assessment? Mr. Cavaney. If you look at the gasoline data nationwide and adjust it for inflation, it is about 40 percent lower than it was at its height, which was in the early 1980's. Chairman Thompson. Talking about the Gulf area there, which you, Dr. Haass, I think you have broadened the discussion to what our real attention ought to be on here. Do you welcome the recent overtures that we have made toward Iran, for example? Does that contribute toward your view as to what we should be doing to maybe open that part of the world up for us? Does it make any difference? Mr. Haass. In general, I do welcome it, but I say that without great confidence one way or the other about what dividends it will yield. But I think it's worthy as an investment. We are not risking a lot by importing rugs or pistachios, and Iran is one of the key countries in one of the key regions of the world. It is hard for me to see how, in the long run, U.S. national security interests are served by the United States and Iran being estranged. So, to the extent this may lead to some momentum with what is clearly a more reformist government in that country, good. But we have also got to recognize that the hold of the reformers in Iran on the policy of their own country is clearly less than complete. There are independent centers of decision making in their country which may have, as their principal objective when they get up every morning, to frustrate any rapprochement or normalization between our two countries. So I predict it is going to be one of those ``steps backwards for every step forwards'' type of process. But I believe the administration was correct in moving away from dual containment and in not tarring Iran and Iraq with the same brush. Having a differentiated policy and essentially investing a little bit in the Iran relationship to see what might come of it makes sense. Chairman Thompson. All right. But, specifically, I take it from your statement that our long-range goal there is to free up some oil from that area. Mr. Haass. Right. Iran is one of the principal producers of the world. U.S. companies do not participate in it. Iran is producing a significant amount of oil now. I would think they could produce perhaps a bit more were the United States to be involved. Put it this way: Whatever penalty Iran pays from our non-participation is overwhelmed by the increase in the price of oil. For every dollar that oil goes up per barrel, I estimate that Iran's revenues go up by somewhere between $1 billion and $1.5 billion. So, oil price fluctuations overwhelm any potential impact of American sanctions. Chairman Thompson. What do you think is going to happen with regard to Iraq, both in the longer term play, influence they have down there with regard to our allies, ourselves, but also in terms of what they do with their oil production as we lift sanctions? Mr. Haass. I think Iraqi oil production will, for the most part, continue to come up. The regime wants this, particularly to the extent it can smuggle oil, because that allows them to get the revenues and escape the controls of the international community, which is obviously what Saddam Hussein wants to do. He wants to avoid as much of his revenues being captured as he can, because to the extent we capture the revenues in this U.N.-overseen account, we can then have some handle on how that money is spent. But there is a bigger question about Iraq. It is a bad penny about to turn up. We are living on borrowed time. It is more a question of when, and not if, Saddam Hussein pops up and presents us with a weapons-of-mass-destruction problem. Mr. Sieminski. Senator, if I could come back to your question about oil prices. Chairman Thompson. Yes, sir. Mr. Sieminski. On page 21 of my testimony, there is a chart that shows oil prices in today's dollars, going back to 1960. With oil at $30 or over $30, that is higher than it has been at just about any time since 1980, 1981 or 1982, so at that level, it is pretty high. Now, if prices come down and average lower than that for the year, then I think you could say that prices are not that bad compared to where they have been in the past, but if prices stay at $30 or go higher, and they could, there is an issue. The other thing I would like to mention is again back to this point of what is called backwardation in the oil markets, the gap between where prices are today and where the futures market is saying prices will be a year from now is the highest that it has ever been. So, what that says, in relative terms, is this a big problem, and that is obviously what consumers are feeling. Chairman Thompson. I see. Well, let me ask you this first, on another subject. Dr. Holdren, you state that, in your opinion, that we have had better success in decreasing consumption than we have in increasing production. Is that generally---- Mr. Holdren. Yes, that is the finding, and that is not to say we should not continue to try to strengthen domestic production. Chairman Thompson. Does anyone take issue with---- Mr. Holdren Ultimate magnitudes? Chairman Thompson. Does anyone take issue with that really? My question there is why do you think that is? Is it because of the efforts that we have made or not made, or is it because of the inherent problems with production, or why do you think that has been historically true? Mr. Holdren. I think increasing domestic production is a very hard problem. A very distinguished geophysicist, M. King Hubbert, many years ago did a series of analyses based on assessments of discovery rates and the likely amount of oil to be found, and so on and so forth, in which he predicted that the peak of U.S. domestic oil production would occur around 1970. He predicted that in the 1950's and became a prophet in his own time when it happened. M. King Hubbert would have argued that the reason for that, again, was not inadequacy of our efforts, but the fact that there is a certain amount of high-quality, accessible oil out there to be found, and after you spent a lot of effort at it, you found a certain fraction of it and your capacity to find more is constrained by the fact that you have already found and used a lot of it. There are differences of opinion about how much more remains to be found and how long you can stave off a steeper decline. The Energy Information Administration's year 2000 outlook out to 2020 basically said that with continuing technological innovation--and there has been a lot in seismic exploration, horizontal drilling, secondary recovery--we could expect to hold it flat between 2005 and 2020 at about 7.3 million barrels per day, and they estimated further that if the price of oil were as high as $28 per barrel in 1998 money, that you could add about 800,000 barrels to that in 2020. Now, if the price of oil were higher still, obviously you could do better than that. If the country made the judgement that every conceivable place you should look for oil should be opened to exploration and production, you could do better still. The EIA forecast did not assume that the---- Chairman Thompson. That is not going to happen, of course, but what about a modest opening up of restricted lands? Mr. Holdren. Well, if you opened up--I mean, I say in my testimony that sort of the middle of the road estimates of what you are likely to find in the coastal plain of the Arctic National Wildlife Refuge might be comparable to Prudhoe Bay, and if you look at the production history of Prudhoe Bay, it peaked around 2 million barrels a day, with a long tail at 1 million barrels a day, so you might suppose if you did that you could be getting an extra million barrels a day during the decade stretching out from 2010 to 2020 and more. That would be worth having. The difficult dilemma that the policy makers have to face is whether that addition to domestic production is worth the costs and the risks, environmentally, against the possibilities of getting considerably larger amounts with considerably less effort and less environmental risk on some of these high-leverage opportunities for oil displacement by alternative technologies. Chairman Thompson. Well, that gets to my next question. Mr. Cavaney, do you have anything to add to that, thoughts that cross your mind? Mr. Cavaney. No. I think, in general, what you are going to do is you are going to look for the oil that is the most inexpensive to lift, because it is a competitive global market. New technology, though, has had a dramatic impact in reducing those costs and making old fields good. So, I think give people the opportunity, and the industry has proven it has been very resourceful, and I think you will see figures in excess of that. Mr. Ebel. Mr. Chairman, could I jump in? Chairman Thompson. Yes, sir. Mr. Ebel. Two points I'd like to make: One, we have talked about the advances of technology and how it has allowed us to find oil cheaper and quicker, and that is great. But there is a downside to these advances in technology which have not been discussed, and that is it also allows us to deplete our fields faster, which has a downside impact. Second, I think any additional barrel of domestic oil that we could add to supply is worthwhile. We just have to be careful not to delude ourselves that it is going to reverse our increasing dependence on foreign oil. It is not going to happen. Chairman Thompson. So do you think there is really nothing we can do, as a practical matter, to substantially reduce our dependence? Mr. Ebel. We can slow down our increasing reliance on foreign oil. But I do not see a situation arising where this new oil coming from ANWR or from some offshore area would allow us to reverse our increasing dependence---- Chairman Thompson. Would you be willing to guess at any realistic percentages? If we start doing some things better than we have done, and all these things have tradeoffs, you talk about ANWR. But you start talking about CAFE standards on the other side. Everything has tradeoffs. Can you foresee a time, if we started doing some things better, we could get down to 40 percent, 30 percent, on any continuing basis? Mr. Ebel. I doubt that very much. Chairman Thompson. Really? Mr. Ebel. I do not think that is a realistic goal at all. When we go out to look for oil, it is like throwing a forward pass in a football game. Three things can happen, and two of them are bad. One is that you can drill a well and you find nothing or you drill a well and you find something, but it is not producible at today's price and today's technologies. If you are lucky, you find something that is. So there are more than adequate risks out there in the exploration side, and we can talk about the potential of these areas which are denied to us now, but there is only one way to find out whether that potential is real or not, and that is to drill a well. It was not too long ago that the media was hyping the potential to be found in the Caspian Sea and central Asia, many stories that we have at last found an alternative to the Persian Gulf. Well, reality has set in and we have not found an alternative to the Persian Gulf. We perhaps have found something comparable to the North Sea, but, by the year 2010, if exploration efforts are successful, if pipelines have been built and are operating, we might see a contribution to the world oil supply on the order of two to three percent, important at the margin, but not---- Mr. Holdren. Mr. Chairman, could I just augment that for one second? Chairman Thompson. Yes. Mr. Holdren. I think Mr. Ebel is absolutely right in saying that there is no prospect that efforts to enhance domestic production could reverse our growing dependence on imports, but I very strongly believe, and argued in my testimony, that efforts to increase the efficiency of oil use and to displace it with non-oil alternatives could certainly reduce our dependence on foreign imports. It is a question of whether we will make the choices to move in that direction. Chairman Thompson. What do you think about that, Mr. Ebel? Mr. Ebel. Well, in my oral remarks, I mentioned about how we responded in the past to oil supply crises, to price crises, where we trotted out renewed attention to alternatives. We tried our hand at a synfuels corporation, but then the market adjusted itself, and these new approaches get put back on the shelf, to be trotted out at the time of the next crisis. Our findings are that alternative fuels, yes, will grow in absolute terms, but in relative importance to our total energy supply, will be about the same 20 years from now as it is today. Chairman Thompson. Yes? Mr. Holdren. That will depend on choices that we can make. If we make different choices, we could have a different outcome. Chairman Thompson. I will get to you in just a minute, Mr. Cavaney. The question always, I guess, is how dramatic would the choices have to be and to what extent? We have not made any tough choices yet, and according, I believe, to your figures, Mr. Holdren, that we are getting 7.5 percent of our energy supply from renewables; half of that is hydro, biomass, geothermals, solar, wind. You know, everybody wants some cost- free solution. But here we are, after all this time, with these extremely low percentages in these areas. Obviously, we can do more. I have heard some people say we are spending about as many research dollars in these areas as we can effectively utilize. Is it really realistic to think that we are going to do that much better, as far as renewables are concerned? Mr. Holdren. Although some people say this, I do not agree at all that we are spending research dollars at the rate we could effectively utilize. The PCAST panel that wrote the 1997 report, which had 21 members, a very large proportion of them from the private sector--people experienced in oil, gas, nuclear, renewables, efficiency--reached the unanimous conclusion that we could be very cost-effectively spending twice as much as we are spending today on Federal energy R&D, taking into account what the private sector is doing (which is very important) and is likely to continue to do. We concluded further that, if we did that, the gains would be quite substantial in the array of technologies that could be brought to the point of commercialization. But there does remain the question of incentives. The fact is that for most of the period after the early 1980's, the price of oil has been low; the price of natural gas has been low. It is very hard for renewables or even for coal and nuclear power to compete with natural gas when natural gas-fired electricity generation can make electricity for three cents a kilowatt hour. It is hard to touch it. Natural gas will not always be that cheap. We may not always be willing to put the amount of carbon dioxide into the atmosphere that that approach to electricity generation puts in. But as long as it is that cheap, and as long as no policy measures to narrow the gap are put in place, based on the public benefits perceived from having a wider, more diverse portfolio, you are not going to see the penetration of alternatives. So I said in my testimony and I will say again, we need the R&D to develop a more diverse array of energy technology options, both for supply and for increased end-use efficiency. We also need incentives that will cause us to deploy them, and until we are ready, I believe, to talk about the dreaded T-word or its equivalent, that is gasoline taxes, and carbon taxes, we won't get the job done. You can reduce income taxes and capital gains taxes to compensate for the energy tax revenue, to make it revenue-neutral. The economy would probably do better if you do that than it would under business as usual, that is, if you raise the taxes on bads and decrease them on goods. But if we are not willing to talk about measures of that sort, we will continue to be vulnerable to an overdependence on imported oil and to overreliance on other energy technologies that are running big environmental risks. Chairman Thompson. Well, listening to you, you could make the case that what we really need is much higher prices for a long period of time in order for us to do the right thing. Mr. Holdren. I would say certainly somewhat higher prices for those energy sources that bring big external costs, either in terms of the environment or in terms of foreign policy, military policy, national security and so on. Chairman Thompson. That would certainly include oil; wouldn't it? Mr. Holdren. I would include oil. Chairman Thompson. I mean, does anybody really disagree with that, in terms of just objective analysis? I guess you would be better at it if you were a political scientist more than some of your other specialties, because a lot of it has to do with what we do up here, what the next President does and so forth. But does anybody really think that anything is going to be done in terms of renewables or anything else unless we have something dramatic happen in the price area? Mr. Ebel. Let me respond to that, and I think it goes back to the interest that you expressed as the first panel was coming to an end. But, as you wanted to know, what happened to that Section 232 report? Well, it is sitting in somebody's in- box in the White House. Back in the 1980's, I had the pleasure--well, responsibility of preparing a Section 232 petition, which took a year for the government to respond to, and the answer was yes, our oil imports threaten our national security, but present policies suffice. I would not be a bit surprised if that is the answer you are going to get when this one comes out of the in-box. Chairman Thompson. At first blush, that does not look like it makes much sense; does it? Mr. Ebel. But that is the response, present policies suffice. Chairman Thompson. Is that the correct response, in your opinion? Mr. Ebel. Well, it is what we have been talking about. If that is not the correct response, what is the correct response? If you cannot do anything on the supply side, on the domestic supply side, what can you do on the domestic demand side? But as long as oil is going to be relatively cheap, it will be hard to get the public and the Congress to focus on that issue. Chairman Thompson. Mr. Cavaney. Mr. Cavaney. Mr. Chairman, as I had mentioned earlier when talking about undiscovered reserves and the like, one of the things we should not overlook is natural gas. The United States has a tremendous abundance, 885 trillion cubic feet. Chairman Thompson. What is the problem with that? Why aren't we utilizing natural gas more? Mr. Cavaney. Several things. Again, a large part of it is in areas that are restricted for use; the other is basically you need significant investment to go after it, because, as was mentioned by Mr. Ebel, is that technology allows you to find this and better pinpoint it, but it also allows you to more quickly use up those reserves, so you have to keep peddling faster and faster. So, we need to be able to recognize that the extent to which we can integrate natural gas more into the economy, particularly in the industrial sector and in the Northeast, in areas--in homes or other areas--we will create more demand and that will attract more capital, and therefore we will have more growth in natural gas. Chairman Thompson. Any further observations? Oh, I did have one more, Mr. Sieminski--to ask you to elaborate on one more point before we quit. You mentioned--I believe--the excess capacity that the Saudis had, in comparison with some of the other Persian Gulf countries or OPEC countries. I am not sure I got the significance of that. Could you go through that again? Mr. Sieminski. The estimates of excess capacity, that is, the ability of the OPEC countries to raise production immediately, range from about 4 million barrels a day up to as high as 6 million barrels a day. Most of the forecasters or analysts that look at that think that Saudi Arabia alone is about half of that capability. So, the Saudis could increase production by at least 2 million barrels a day, maybe as much as 3 million barrels a day. If the world really needs 2 million barrels a day more right now, the Saudi share within OPEC is typically about 30 percent of OPEC's output the Saudies could easily make up their portion of a large production increase to meet worldwide demand over the next year or two, or whatever. The problem for the cartel is going to be that a number of countries, Indonesia, Libya, right now Iran, Nigeria, maybe even Venezuela, do not have the capability to go up as much as Saudi Arabia, Kuwait, and the United Arab Emirates. So, that creates a political problem within the cartel in terms of getting an agreement to the production increase. Chairman Thompson. So the Saudis are going to be more likely to want to loosen than some of the other countries? Mr. Sieminski. Exactly, and the others are going to hold back because---- Chairman Thompson. Unless the others are persuaded that their long-term, overall global interests---- Mr. Sieminski. Right. Senator, I would like to point out one last thing, back to this swap idea and the SPR, so that I do not get into trouble with my friends in the producing industry here in the United States. Of the four times that the SPR could have been used in a situation that was out of the normal range over the last 9 years, two of those would have been times when oil would have been added to the SPR. I would also point out that in a swap, oil in the SPR ultimately would be greater; that is, oil would be added to the SPR, whether it was being lent out in a time of shortage that you have now or borrowed in at a time of excess supply, like we had in 1993 and 1998. The way the swap agreement would work, taking advantage of the futures market, is that Strategic Petroleum Reserve would get more oil back in both cases than they had---- Chairman Thompson. Let me see if I understand---- Mr. Sieminski. So, actually, the taxpayer could get more oil and not have to pay for it. Chairman Thompson. Let me see if I understand this. That is premised on the notion that we would lock in a price, that we would trade expensive oil for cheap oil and we can wind up with more oil at the same price. Mr. Sieminski. Exactly. Chairman Thompson. What if we are wrong and everyone is wrong, and prices, instead of dropping, increase? We would get ours back at the lower price, but we would be doing it at a time that we would be taking that much money out of the market. Wouldn't that increase even further to the higher prices that would be occurring at that time and exacerbating the problem? Mr. Sieminski. If you had a second problem at the time that the oil was supposed to be returned a year or two later, if the markets were still in serious or significant backwardation, you could just simply implement the program again, lend more oil out of the SPR at that time, defer the return. In fact, Senator Akaka from Hawaii had mentioned the royalty on-line program. Right now, we are actually adding oil into the Strategic Petroleum Reserve, and frankly, I think that that is a good program, but bad timing. I think it ought to be continued, but if I were running the SPR, what I would do is make a deal with those producers to let them keep that and return that oil to me a year from now and I would get more barrels and we would have a little bit more supply. Chairman Thompson. You would just keep doing it until the price dropped? Mr. Sieminski. Yes, sir; I would. Now, the risk would actually be borne by the futures market. Let the speculators or OPEC pay for this. Let's not let the taxpayer pay for it. Chairman Thompson. Well, I understand that. I am more interested in what it does to the world market, what it would do to the world market. I don't know. Maybe it is not enough to make that much difference. Mr. Sieminski. This trigger mechanism is one of the things that the Department of Energy could do in trying to implement this. It is a touchy situation. I mean, there are lots of good reasons for not using the SPR, saving it for that ``super crisis.'' Chairman Thompson. For what it was intended for. Mr. Sieminski. For what it was--yes. Chairman Thompson. I think that is a happy note to end on. Mr. Sieminski. I was actually thinking about this, Senator, the question of what is that huge horrendous problem that we are going to have. When the SPR was originally set up, it was part of the International Energy Agency agreements to share oil around and the idea was that you needed a countervailing force to OPEC, and I am not sure that we should not consider at least using it from time to time, just to let producers or a cartel know that they cannot get away with everything. Chairman Thompson. OPEC could also be a countervailing force to our decisions to use the---- Mr. Sieminski. They could. The SPR is capable of doing 4 million barrels a day for 90 days. Now, I do not think anybody would recommend that that is what we should do if there is a gasoline price problem in May or June, but you could actually publish right now that if the backwardation in the market--and the other word that is used in the futures market is contango. That is when prices are real low, like $10 in January 1999 and but the futures market is rising, maybe up to $15 a couple of years out. When backwardation or contango is very steep, the SPR would just automatically release a couple hundred thousand barrels a day or bring in a couple hundred thousand barrels a day if it is in contango, and let the market decide. The DOE could publish a schedule, that at a low level of backwardation, that there would be this much available, if anybody wanted to take advantage of it. As backwardation increases; that is, as that near-term---- Chairman Thompson. Everybody would look at that and make decisions based on what they knew was going to happen at a particular time. I think we need to get a whole lot smarter before we start doing that kind of stuff. But you have the last word. Mr Flynn does, maybe. Mr. Flynn. Thank you, Senator. I thought I would jump in on the discussion here. It is a follow-up to what Mr. Ebel was saying before. I think what is very important--that what we are doing here today is bringing a focus on the other alternative uses of energy. At our authority in New York State, we have been talking about oil heat research, and we believe we are the only State in the Nation that does this type of research. As a matter of fact, at our authority, we do over $1 million a year in oil heat research. But how we do it is we do collaborative efforts, not only with the petroleum industry, but with the gas industry and the renewables industry. We feel that this type of effort, the collaborative effort, prepares us for the future. The only way that we are going to be taking the emphasis off of the oil industry is leaders such as yourself who are going to have to trumpet the cause to the American people, so that they stop focusing just on oil and that there are other fuel uses that can be used to help us in these dire times. Chairman Thompson. Well, some of these things that you are doing at the State level can be a good example for us. Thank you very much, gentlemen. This has been extremely helpful to us. Thank you for being here with us. The record will remain open for 10 days following the close of the hearing. We are adjourned. 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