[Senate Hearing 109-950]
[From the U.S. Government Publishing Office]
S. Hrg. 109-950
OIL DEPENDENCE AND ECONOMIC RISK
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
JUNE 7, 2006
__________
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COMMITTEE ON FOREIGN RELATIONS
RICHARD G. LUGAR, Indiana, Chairman
CHUCK HAGEL, Nebraska JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia CHRISTOPHER J. DODD, Connecticut
NORM COLEMAN, Minnesota JOHN F. KERRY, Massachusetts
GEORGE V. VOINOVICH, Ohio RUSSELL D. FEINGOLD, Wisconsin
LAMAR ALEXANDER, Tennessee BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire BILL NELSON, Florida
LISA MURKOWSKI, Alaska BARACK OBAMA, Illinois
MEL MARTINEZ, Florida
Kenneth A. Myers, Jr., Staff Director
Antony J. Blinken, Democratic Staff Director
(ii)
C O N T E N T S
----------
Page
Biden, Hon. Joseph R., Jr., U.S. Senator from Delaware, opening
statement...................................................... 9
Greenspan, Hon. Alan C., President, Greenspan Associates LLC,
Washington, DC................................................. 3
Prepared statement........................................... 7
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening
statement...................................................... 1
Additional Material Submitted for the Record
Podesta, John, president of the Center for American Progress,
prepared statement............................................. 39
(iii)
OIL DEPENDENCE AND ECONOMIC RISK
----------
WEDNESDAY, JUNE 7, 2006
U.S. Senate,
Committee on Foreign Relations,
Washington, DC.
The committee met, pursuant to notice, at 9:00 a.m., in
room SH-216, Hart Senate Office Building, Hon. Richard G. Lugar
(chairman of the committee) presiding.
Present: Senators Lugar, Chafee, Coleman, Voinovich,
Alexander, Sununu, Murkowski, Martinez, Biden, Nelson.
OPENING STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM
INDIANA
The Chairman. This hearing of the Senate Foreign Relations
Committee is called to order. Let me mention at the outset that
the Chair is aware of the vigorous schedules that Senators
have, and I want to simply indicate that, for the record, we
are likely to have a rollcall vote at about 10 a.m., and at
that point the Chair will declare a recess of about 10 minutes
in which the Senators may vote, so we'll have that
interruption.
Likewise, there will be a joint session of the Congress to
hear the distinguished President of Latvia, and some Members
may be joining that situation. The hearing, however, will
continue here throughout that period of time because this is a
serious endeavor and we are very grateful to have our
distinguished witness with us this morning. So I, as the Chair,
will try to accommodate the Members, but at the outset we know
that we have these scheduling situations.
Today the committee meets to continue our examination of
the geopolitical consequences of energy imbalances and United
States dependence on energy imports. In previous hearings, we
have focused on quantifying the costs of U.S. energy dependence
and examining options for improving our energy security. We
also have explored in detail how energy is shaping our
relationships with other nations, including India, China, and
the Persian Gulf states. Later this month, we will have
hearings that look at energy in the context of our
relationships with Latin America and with Russia.
Today, with the help of our esteemed witness, former
Federal Reserve Chairman Alan Greenspan, we will have a unique
opportunity to examine economic effects of United States energy
dependence. We are delighted that Chairman Greenspan has joined
us today. He has given extraordinary service to our country
over many years, and no one speaks with greater authority on
the United States economy. His presence here, for his first
Congressional testimony since leaving the Federal Reserve, is a
testament to the economic importance he ascribes to solving our
energy dilemma.
The Foreign Relations Committee has devoted intense
scrutiny to energy issues because we believe that America's
national security and our economic well-being depend on
reducing our dependence on foreign oil and establishing more
predictable, transparent, and cooperative relationships with
both producer and consumer nations. To this end, I have
introduced the Energy Diplomacy and Security Act which would
strengthen United States diplomatic capabilities related to
energy and encourage greater international cooperation on
energy security.
As Secretary Rice stated before this committee, our
diplomatic activities around the world are being--and she used
the term--``warped'' by petro-politics. Important foreign
policy goals--from accelerating progress in the developing
world and expanding trade, to preventing weapons proliferation
and promoting democratic reform--are being undermined by
international energy imbalances that have weakened our foreign
policy leverage, while strengthening the hand of oil-rich
authoritarian governments. In a speech in March at the
Brookings Institution, I attempted to outline these dynamics in
greater detail, and I ask those remarks be entered in the
record.
[Editor's note.--The aforementinoed speech appears at the
end of this hearing in the Additional Material Submitted for
the Record section.]
As recently as 4 years ago, spare production capacity
exceeded world oil consumption by about 10 percent. As world
demand for oil has rapidly increased in the last few years,
spare capacity has declined to less than 2 percent. Any major
disruption of oil creates scarcity that will drive prices up.
Our vulnerability was made clear to Americans after the
devastation of Hurricanes Katrina and Rita. But even as
supplies rebounded from those disasters, we experienced a
continued upward trend in oil prices. Events such as the civil
unrest in Nigeria, uncertainty over Iran's nuclear program, and
worries over Venezuelan supply have kept the price of oil above
$70 a barrel.
Our capacity to deal with these energy vulnerabilities in a
foreign policy context is shaped in part by the ability of our
own economy to adjust to changing energy markets. Eventually,
because of scarcity, terrorist threats, market shocks, and
foreign manipulation, the high price of oil will lead to
enormous investment in, and political support for,
alternatives. The problem is that by the time sufficient
motivation comes to the markets, it may be too late to prevent
the severe economic and security consequences of our oil
dependence.
Today, we will have the benefit of Chairman Greenspan's
insights into the risks of oil dependency to our economic
prosperity. We are all interested in a clearer picture of how
current energy prices are affecting our economy, how our
economy may react to certain types of supply disruptions, and
what steps we should take as a Nation to reduce the economic
risks of our energy vulnerability.
We welcome again Chairman Greenspan to the Foreign
Relations Committee, and thank him for lending his expertise to
our ongoing inquiry. At the time that the distinguished ranking
member comes I'll recognize him, of course, for his opening
comment and statements, but for the moment we want to make the
best use of our time and we'd like to proceed directly to our
distinguished witness. We're delighted to have you and we would
ask you to proceed.
STATEMENT OF HON. ALAN C. GREENSPAN, PRESIDENT, GREENSPAN
ASSOCIATES LLC, WASHINGTON, DC
Dr. Greenspan. Well, thank you very much Mr. Chairman,
Senators. This morning I shall try to detail how the balance of
world oil supply and demand has become so precarious that even
small acts of sabotage or local insurrection have a significant
impact on prices. American business, to date, has largely
succeeded in finding productivity improvements that have
contained energy costs. American households, however, are
struggling with rising gasoline prices.
Even before the devastating hurricanes of last summer,
world oil markets had been subject to a degree of strain not
experienced for a generation. Oil prices had been persistently
edging higher since 2002 as increases in global oil consumption
progressively absorbed the buffer of several million barrels a
day in excess capacity that stood between production and
demand. Today, world oil production stands at about 85 million
barrels a day, and little excess capacity remains. Just how
much excess capacity and of what quality oil, is a matter of
debate. But no matter what the precise answer, the buffer
between supply and demand is much too small to absorb shutdowns
of even a small part of the world's production. Moreover,
growing threats of violence to oilfields, pipelines, storage
facilities, and refineries, especially in the Middle East, have
increased the private demand to hold oil inventories worldwide.
Oil users judge they need to be prepared for the possibility
that at some point a raid will succeed, with a devastating
impact on supply.
For most of the history of oil, its producers and consumers
determined its price. Only those who could physically store
large quantities of oil had the ability to trade. But important
advances in
finance have opened the market to a much larger number of
participants. There has been a major upsurge in over-the-
counter trading of oil futures and other commodity derivatives.
Thus, when in the last couple of years it became apparent that
the world's oil industry was not investing enough to expand
crude-oil production capacity quickly enough to meet the rising
demand, increasing numbers of hedge funds and other
institutional investors began bidding for oil. They accumulated
it in substantial net long positions in crude oil futures,
largely in the over-the-counter market. These net long futures
contracts, in effect, constituted a bet that oil prices would
rise. The sellers of those contracts to investors, when all of
the offsetting claims are considered, are of necessity, the
present owners of the billions of barrels of private
inventories of oil held throughout the world--namely, the
producers and consumers.
Even though inventories of oil have risen significantly in
recent years, persistent upward price movements have made it
apparent that the rise in investors' ownership claims to the
world's oil inventories has likely exceeded the inventory
increase. This implies a reduction in the unencumbered
inventory holdings of producers and consumers. In other words,
some part of the oil in the world's storage tanks and pipelines
is spoken for by investors. The extent of the surge in
participation by financial institutions in claims on real
barrels of oil is reflected in the near tripling of the
notional value of commodity derivatives (excluding precious
metals) during the four quarters of 2005 reported by U.S.
commercial banks. Most of those contracts are for oil. The
accumulation of net long positions in oil on the New York
Mercantile Exchange by noncommercial traders, which is to say
by investors, has exhibited a similar pattern.
The new participants, investors, and speculators in the
world's 2 trillion-a-year oil market are hastening the
adjustment process that has become so urgent with the virtual
elimination of the world supply buffer. With the demand from
the investment community, oil prices have moved up sooner than
they would have otherwise. In addition, there has been a large
increase in oil inventories. In response to higher prices,
producers have increased production dramatically and some
consumption has been scaled back. Even though crude oil
productive capacity is still inadequate, it too has risen
significantly over the past 2 years in response to price.
Hypothetically, if we still had the 10 million barrels a
day of spare capacity that existed two decades ago, neither
surges in demand nor temporary shutdowns of output from
violence, hurricanes, or unscheduled maintenance would be
having much, if any, impact on price. Returning to such a level
of spare capacity appears wholly out of reach for the
foreseeable future, however. This is not because there is any
shortage of oil in the ground. The problem is that aside from
Saudi-Aramco, few, if any, national oil companies which own
most of the world's proved oil reserves are investing enough of
their surging cash flow to convert the reserves into crude oil
productive capacity. Only Saudi-Aramco appears sufficiently
concerned, at least publicly, that high oil prices will reduce
the long-term demand for oil, which could significantly
diminish the value of Saudi Arabia's--or indeed, any
country's--oil reserves.
Although outlays on productive capacity are rising, the
significant proportion of oil revenues held as financial assets
suggests that many governments perceive that the benefits of
investing in additional capacity to meet rising world oil
demand are limited. Moreover, much oil revenue has been
diverted to meet the perceived high-priority needs of rapidly
growing populations. Unless those policies, political
institutions, and attitudes change, it is difficult to envision
a rate of reinvestment by these economies adequate to meet
rising world oil demand. Some members of the Organization of
Petroleum Exporting Countries (OPEC) have recently announced
expansion plans. But how firm such plans are, is difficult to
judge. They and other nations have rebuffed offers by
international oil companies to help tap their reserves.
Opportunities to expand oil production elsewhere are limited to
a few regions, notably the former Soviet Union.
Besides feared shortfalls in crude oil capacity, the
adequacy of world refining capacity has become worrisome as
well. Over the past decade, crude oil production has risen
faster than refining capacity. A continuation of this trend
would soon make lack of refining capacity the binding
constraint on growth in oil use. This may already be happening
in certain grades of oil, given the growing mismatch between
the heavier and more sour content of world crude oil production
and the rising world demand for lighter, sweeter petroleum
products.
There is thus a special need to add adequate coking and
desulphurization capacity to convert the average gravity and
sulphur content of much of the world's crude oil to the lighter
and sweeter needs of product markets, which are increasingly
dominated by transportation fuels that must meet ever more
stringent environmental requirements. Yet, the expansion and
modernization of world refineries are lagging. For example, no
new refinery has been built in the United States since 1976.
The consequence of lagging modernization is reflected in a
significant widening of the price spread between the higher-
priced light sweet crudes such as Brent, which are easier to
refine, and the heavier crudes such as Maya, which are not.
To be sure, refining capacity does continue to expand,
albeit too gradually, and oil exploration and development is
continuing, even in industrial countries. Conversion of the
vast Athabasca oil sands reserves in Alberta to productive
capacity, while slow, has made this unconventional source of
oil highly competitive at current market prices. However,
despite improved technology and high prices, additions to
proved reserves in the developed world have not kept pace with
production; so those reserves are being depleted.
The history of world petroleum is one of a rapidly growing
industry in which producers have sought to provide consumers
with stable prices to foster the growth of demand. In the first
decade of the 20th century, pricing power was firmly in the
hands of Americans. Even after the breakup of the Standard Oil
monopoly in 1911, pricing power remained with the United
States--first with the U.S. oil companies and later with the
Texas Railroad Commission, which would raise limits on output
to suppress price spikes and cut output to prevent sharp price
declines.
Indeed, as late as the 1950s, crude oil production in the
United States (more than 40 percent of which was in Texas)
still accounted for more than half of the world total. In 1951,
excess Texas crude was poured into the market to contain the
impact on oil prices of the nationalization of Iranian oil.
Excess American oil was again released to the market to counter
the price pressures induced by the Suez crisis of 1956 and the
Arab-Israeli War of 1967.
American oil's historical role ended in 1971, when rising
world demand finally exceeded the excess crude oil capacity of
the United States. At that point, the marginal pricing of oil
abruptly shifted--at first to a few large Middle East producers
and later to market forces broader than they, or anyone, can
contain.
To capitalize on their newly acquired pricing power in the
early 1970s, many producing nations, especially in the Middle
East, nationalized their oil companies. The full magnitude of
the pricing power of the nationalized companies became evident
in the aftermath of the oil embargo of 1973. During that
period, posted crude oil prices at Ras Tanura, Saudi Arabia,
rose to more than $11 per barrel, far above the $1.80 per
barrel that had been unchanged from 1961 to 1970. The further
surge in oil prices that accompanied the Iranian Revolution in
1979 eventually drove up prices to $39 per barrel by February
1981. That translates to $76 per barrel in today's prices.
The higher prices of the 1970s abruptly ended the
extraordinary growth of U.S. and world consumption of oil and
the increased intensity of its use which were hallmarks of the
decades following World War II. Since the more than tenfold
increase in crude oil prices between 1972 and 1981, world oil
consumption per dollar of real GDP equivalent of global gross
domestic product (GDP) has declined by approximately one-third.
In the United States, between 1945 and 1973, consumption of
petroleum products rose at a startling average annual rate of
4.5 percent, well in excess of growth of our real GDP. However,
between 1973 and 2006, U.S. oil consumption grew, on average,
at only a half a percent per year, far short of the rise in
real GDP. In consequence, the ratio of U.S. oil consumption to
GDP fell by half.
Much of the decline in the ratio of oil use to real GDP in
the United States has resulted from growth in the proportion of
GDP composed of services, high-tech goods, and other less oil-
intensive industries. The remainder of the decline is due to
improved energy conservation: greater home insulation, better
gasoline mileage, more efficient machinery, and streamlined
production processes. These ongoing trends seem to have
intensified of late with the sharp, recent increases in oil
prices.
To date, it is difficult to find serious erosion in world
economic activity as a consequence of sharply higher oil
prices. Indeed, we have just experienced one of the strongest
global economic expansions since the end of World War II. The
United States, especially, has been able to absorb the huge
implicit tax of rising oil prices so far. However, recent data
indicate we may finally be experiencing some impact.
Clearly, if the current almost nonexistent supply buffer
were significantly increased through a step-up in supply or a
stepdown in consumption, oil prices would fall, perhaps
sharply. This would likely occur even if there were no decrease
in the threat to oil facilities from attacks or hurricanes. A
large enough buffer could absorb such contingencies with modest
impact on price.
But for good reason, holders of claims to the existing
private inventories of oil apparently do not foresee a
likelihood of change sufficient to alter the current outlook.
This does not mean that oil prices will necessarily move
higher, however. All of the concerns about future contingencies
are already discounted in today's spot price. It will require a
change in the outlook one way or the other to move crude oil
prices. History tells us that will happen--often.
The U.S. economy has been able to absorb the huge impact of
rising oil prices with little consequence to date because it
has become far more flexible over the past three decades owing
to deregulation and globalization. Growing protectionism would
undermine that flexibility and make our Nation increasingly
vulnerable to the vagaries of the oil market.
Current oil prices over time should lower to some extent
our worrisome dependence on petroleum. Still higher oil prices
will inevitably lead to more vehicle transportation to hybrids,
and despite the inconvenience, plug-in hybrids. Corn ethanol,
though valuable, can play only a limited role, because its
ability to displace gasoline is modest at best. But cellulosic
ethanol, should it fulfill its promise, would help to wean us
of our petroleum dependence, as could clean coal and nuclear
power. With those developments, oil in the years ahead will
remain an important element of our energy future, but it need
no longer be the dominant player.
Thank you very much, Mr. Chairman, I look forward to your
questions.
[The prepared statement of Dr. Greenspan follows:]
Prepared Statement of Hon. Alan C. Greenspan, President, Greenspan
Associates LLC, Washington, DC
Mr. Chairman, Senator Biden, and members of the committee. This
morning I shall try to detail how the balance of world oil supply and
demand has become so precarious that even small acts of sabotage or
local insurrection have a significant impact on oil prices. American
business, to date, has largely succeeded in finding productivity
improvements that have contained energy costs. American households,
however, are struggling with rising gasoline prices.
Even before the devastating hurricanes of last summer, world oil
markets had been subject to a degree of strain not experienced for a
generation. Oil prices had been persistently edging higher since 2002
as increases in global oil consumption progressively absorbed the
buffer of several million barrels a day in excess capacity that stood
between production and demand. Today world oil production stands at
about 85 million barrels a day, and little excess capacity remains.
Just how much excess capacity, and of what quality oil, is a matter of
debate. But no matter what the precise answer, the buffer between
supply and demand is much too small to absorb shutdowns of even a small
part of the world's production. Moreover, growing threats of violence
to oilfields, pipelines, storage facilities, and refineries, especially
in the Middle East, have increased the private demand to hold oil
inventories worldwide. Oil users judge they need to be prepared for the
possibility that at some point a raid will succeed with a devastating
impact on supply.
For most of the history of oil, its producers and consumers
determined its price. Only those who could physically store large
quantities of oil had the ability to trade. But important advances in
finance have opened the market to a much larger number of participants.
There has been a major upsurge in over-the-counter trading of oil
futures and other commodity derivatives. Thus, when in the last couple
of years it became apparent that the world's oil industry was not
investing enough to expand crude oil production capacity quickly enough
to meet rising demand, increasing numbers of hedge funds and other
institutional investors began bidding for oil. They accumulated it in
substantial net long positions in crude oil futures, largely in the
over-the-counter market. These net long futures contracts, in effect,
constituted a bet that oil prices would rise. The sellers of those
contracts to investors, when all of the offsetting claims are
considered, are of necessity the present owners of the billions of
barrels of private inventories of oil held throughout the world--
namely, the producers and consumers.
Even though inventories of oil have risen significantly in recent
years, persistent upward price movements have made it apparent that the
rise in investors' ownership claims to the world's oil inventories has
likely exceeded the inventory increase. This implies a reduction in the
unencumbered inventory holdings of producers and consumers. In other
words, some part of the oil in the world's storage tanks and pipelines
is spoken for by investors. The extent of the surge in participation by
financial institutions in claims on real barrels of oil is reflected in
the near tripling of the notional value of commodity derivatives
(excluding precious metals) during the four quarters of 2005 reported
by U.S. commercial banks. Most of those contracts are for oil. The
accumulation of net long positions in oil on the New York Mercantile
Exchange by noncommercial traders, which is to say by investors, has
exhibited a similar pattern.
The new participants, investors and speculators, to the world's $2
trillion-a-year oil market are hastening the adjustment process that
has become so urgent with the virtual elimination of the world supply
buffer. With the demand from the investment community, oil prices have
moved up sooner than they would have otherwise. In addition, there has
been a large increase in oil inventories. In response to higher prices,
producers have increased production dramatically and some consumption
has been scaled back. Even though crude oil productive capacity is
still inadequate, it too has risen significantly over the past 2 years
in response to price.
Hypothetically, if we still had the 10 million barrels a day of
spare capacity that existed two decades ago, neither surges in demand
nor temporary shutdowns of output from violence, hurricanes, or
unscheduled maintenance would be having much, if any, impact on price.
Returning to such a level of spare capacity appears wholly out of reach
for the foreseeable future, however. This is not because there is any
shortage of oil in the ground. The problem is that aside from Saudi-
Aramco, few, if any, national oil companies which own most of the
world's proved oil reserves are investing enough of their surging cash
flow to convert the reserves into crude oil productive capacity. Only
Saudi-Aramco appears sufficiently concerned, at least publicly, that
high oil prices will reduce the long-term demand for oil, which could
significantly diminish the value of Saudi Arabia's--or indeed, any
country's--oil reserves.
Although outlays on productive capacity are rising, the significant
proportion of oil revenues held as financial assets suggests that many
governments perceive that the benefits of investing in additional
capacity to meet rising world oil demand are limited. Moreover, much
oil revenue has been diverted to meet the perceived high-priority needs
of rapidly growing populations. Unless those policies, political
institutions, and attitudes change, it is difficult to envision a rate
of reinvestment by these economies adequate to meet rising world oil
demand. Some members of the Organization of Petroleum Exporting
Countries (OPEC) have recently announced expansion plans. But how firm
such plans are is difficult to judge. They and other nations have
rebuffed offers by international oil companies to help tap their
reserves. Opportunities to expand oil production elsewhere are limited
to a few regions, notably the former Soviet Union.
Besides feared shortfalls in crude oil capacity, the adequacy of
world refining capacity has become worrisome as well. Over the past
decade, crude oil production has risen faster than refining capacity. A
continuation of this trend would soon make lack of refining capacity
the binding constraint on growth in oil use. This may already be
happening in certain grades of oil, given the growing mismatch between
the heavier and more sour content of world crude oil production and the
rising world demand for lighter, sweeter petroleum products.
There is thus a special need to add adequate coking and
desulphurization capacity to convert the average gravity and sulphur
content of much of the world's crude oil to the lighter and sweeter
needs of product markets, which are increasingly dominated by
transportation fuels that must meet ever more stringent environmental
requirements. Yet the expansion and modernization of world refineries
are lagging. For example, no new refinery has been built in the United
States since 1976. The consequence of lagging modernization is
reflected in a significant widening of the price spread between the
higher-priced light sweet crudes such as Brent, which are easier to
refine, and the heavier crudes such as Maya, which are not.
To be sure, refining capacity does continue to expand, albeit too
gradually, and oil exploration and development is continuing, even in
industrial countries. Conversion of the vast Athabasca oil sands
reserves in Alberta to productive capacity, while slow, has made this
unconventional source of oil highly competitive at current market
prices. However, despite improved technology and high prices, additions
to proved reserves in the developed world have not kept pace with
production; so those reserves are being depleted.
The history of world petroleum is one of a rapidly growing industry
in which producers have sought to provide consumers with stable prices
to foster the growth of demand. In the first decade of the 20th
century, pricing power was firmly in the hands of Americans. Even after
the breakup of the Standard Oil monopoly in 1911, pricing power
remained with the United States--first with the U.S. oil companies and
later with the Texas Railroad Commission, which would raise limits on
output to suppress price spikes and cut output to prevent sharp price
declines.
Indeed, as late as the 1950s, crude oil production in the United
States (more than 40 percent of which was in Texas) still accounted for
more than half of the world total. In 1951, excess Texas crude was
poured into the market to contain the impact on oil prices of the
nationalization of Iranian oil. Excess American oil was again released
to the market to counter the price pressures induced by the Suez crisis
of 1956 and the Arab-Israeli War of 1967.
American oil's historical role ended in 1971, when rising world
demand finally exceeded the excess crude oil capacity of the United
States. At that point, the marginal pricing of oil abruptly shifted--at
first to a few large Middle East producers and later to market forces
broader than they, or anyone, can contain.
To capitalize on their newly acquired pricing power in the early
1970s, many producing nations, especially in the Middle East,
nationalized their oil companies. The full magnitude of the pricing
power of the nationalized companies became evident in the aftermath of
the oil embargo of 1973. During that period, posted crude oil prices at
Ras Tanura, Saudi Arabia, rose to more than $11 per barrel, far above
the $1.80 per barrel that had been unchanged from 1961 to 1970. The
further surge in oil prices that accompanied the Iranian Revolution in
1979 eventually drove up prices to $39 per barrel by February 1981.
That translates to $76 per barrel in today's prices.
The higher prices of the 1970s abruptly ended the extraordinary
growth of U.S. and world consumption of oil and the increased intensity
of its use which were hallmarks of the decades following World War II.
Since the more than tenfold increase in crude oil prices between 1972
and 1981, world oil consumption per real dollar equivalent of global
gross domestic product (GDP) has declined by approximately one-third.
In the United States, between 1945 and 1973, consumption of
petroleum products rose at a startling average annual rate of 4\1/2\
percent, well in excess of growth of our real GDP.
However, between 1973 and 2006, U.S. oil consumption grew, on
average, at only \1/2\ percent per year, far short of the rise in real
GDP. In consequence, the ratio of U.S. oil consumption to GDP fell by
half.
Much of the decline in the ratio of oil use to real GDP in the
United States has resulted from growth in the proportion of GDP
composed of services, high-tech goods, and other less oil-intensive
industries. The remainder of the decline is due to improved energy
conservation: greater home insulation, better gasoline mileage, more
efficient machinery, and streamlined production processes. These
ongoing trends seem to have intensified of late with the sharp, recent
increases in oil prices.
To date, it is difficult to find serious erosion in world economic
activity as a consequence of sharply higher oil prices. Indeed, we have
just experienced one of the strongest global economic expansions since
the end of World War II. The United States, especially, has been able
to absorb the huge implicit tax of rising oil prices so far. However,
recent data indicate we may finally be experiencing some impact.
Clearly, if the current almost nonexistent supply buffer were
significantly increased through a step-up in supply or a stepdown in
consumption, oil prices would fall, perhaps sharply. This would likely
occur even if there were no decrease in the threat to oil facilities
from attacks or hurricanes. A large enough buffer could absorb such
contingencies with modest impact on price.
But for good reason, holders of claims to the existing private
inventories of oil apparently do not foresee a likelihood of change
sufficient to alter the current outlook. This does not mean that oil
prices will necessarily move higher, however. All of the concerns about
future contingencies are already discounted in today's spot price. It
will require a change in the outlook one way or the other to move crude
oil prices. History tells us that will happen--often.
The U.S. economy has been able to absorb the huge impact of rising
oil prices with little consequence to date because it has become far
more flexible over the past three decades owing to deregulation and
globalization. Growing protectionism would undermine that flexibility
and make our Nation increasingly vulnerable to the vagaries of the oil
market.
Current oil prices over time should lower to some extent our
worrisome dependence on petroleum. Still higher oil prices will
inevitably move vehicle transportation to hybrids, and despite the
inconvenience, plug-in hybrids. Corn ethanol, though valuable, can play
only a limited role, because its ability to displace gasoline is modest
at best. But cellulosic ethanol, should it fulfill its promise, would
help to wean us of our petroleum dependence, as could clean coal and
nuclear power. With those developments, oil in the years ahead will
remain an important element of our energy future, but it need no longer
be the dominant player.
The Chairman. Thank you very much, Chairman. I'd like to
recognize now the distinguished ranking member of our
committee, Senator Biden, for his opening statement.
OPENING STATEMENT OF HON. JOSEPH R. BIDEN, JR., U.S. SENATOR
FROM DELAWARE
Senator Biden. Dr. Greenspan, thank you very much for being
here. Today's headlines obviously make it clear just how
important this hearing is. On the one hand, we have concern
about inflation, led by the petroleum-based energy costs that
has increased 61 percent at an annual rate in the first quarter
of this year. And on the other hand, we have our financial
markets roiled by the worry that the Federal Reserve's
prescription--continuing a course of 15 straight rate
increases--could put the brakes on an economy that is already
slowing down some.
We could not have clearer evidence, in my view, of our
country's vulnerability to oil prices. I am pleased to be
working with my colleague, the chairman of the committee, on a
series of hearings relating to the cost of our dependence on
imported oil, and joining with him and others in a search for
alternatives.
But today, it's a privilege to hear you. You've guided this
Nation's monetary policy for almost two decades, and through a
wide variety of domestic and international challenges, and
through profound changes in our economy. In my view, no one in
the world who spoke on economic affairs was more listened to
than you were, Mr. Chairman. Not always understood, but
listened to. It's a little daunting to have you before this
committee, someone of your stature. You yourself once said,
``If I turn out to be particularly clear, you probably
misunderstood what I said.'' So your pronouncements, although
they seem clear to me today, then as the Chairman has said,
they can still move markets. And we appreciate your candor and
your clarity and some guidance for us in the challenges we
face.
The last time you appeared before this committee, Mr.
Chairman, you were facing--we were facing--the Pesos crisis,
the first wave of international financial crises in the late
1990s. The topic of today's hearing presents threats of a
similar magnitude to our economy, in our view, and to our
security. Today we're concerned about fundamentals, about the
fuels that make our economy run, about the threats to our
economic security, because we do not control--as you've pointed
out very starkly, by going through the historical analysis--we
do not control access to those fuels like we did in the 1950s
and 1960s. And we're looking for ways that we can move to a
more secure source in the near future.
And it seems to me our failure to set a national energy
policy and reduce our consumption of oil has handcuffed our
foreign policy and weakened us economically. Global oil
consumption--especially with the extremely rapid modernization
of countries like China and India--is growing faster than the
discovery and development of new supplies. And supply has never
been so tight, as you point out, relative to demand. We now
live in a world that consumes 85 million barrels every day.
That's an enormous amount, and meanwhile the world's spare
production capacity has shrunk to 2 percent of demand. And that
means the slightest thing--a terrorist attack in Saudi Arabia,
talk tough on Iran, violence in Nicaragua, even a bad storm in
the Gulf--can cause oil markets to panic, for reasons you've
stated in terms of it being controlled by private investors as
well.
Here in the Foreign Relations Committee, we deal every day
in foreign policy implications of our dependence on imported
fossil fuels. Most obviously, there are complex relationships
with what Michael Mandelbaum calls, and others have called, the
``Axis of Oil''--the oil-rich regimes around the world.
This dependence has a pernicious effect, in my view, on our
foreign policy. It literally helps us fuel terrorism--the very
terrorism we're fighting--because some of the dollars we spend
on crude wind up in the pockets of the radicals that we are
worried about. It limits our options and limits our leverage in
dealing with national security threats, because oil-rich
countries can stand up to us and oil-dependent countries are
afraid to stand with us.
And it undercuts our hopes, in my view, of advancing
democracy and freedom because repressive regimes, swimming in a
sea of high-priced oil, can resist pressures to reform as we
see right now in Iran.
To cite just one example, Iran's most recent threats to
disrupt oil exports--as a direct response to our attempts to
deal with their nuclear ambitions--was immediately translated
into an increase in oil prices, a jump to $73 a barrel. Not
just economic forces, but political conflicts, drive the
markets.
I will not repeat what the Chairman has often mentioned
about the ability of nation's to essentially indicate, or
impact the security of other countries by threatening to and/or
curtailing access to oil. It has a powerful, powerful impact.
So we're here today to get a chance to talk to you about
the economic impact of oil and gas prices. And during your long
tenure, Mr. Chairman, oil and gas prices spiked dangerously
several times.
So you've repeatedly warned us about the potential impact
of those fundamental energy prices on inflation as they worked
their way through the economy, as well as the potential to slow
economic activity as consumers and producers move limited
dollars from other sectors to cover energy costs.
In your last Monetary Report to Congress last year, Dr.
Greenspan, you placed significant stress on the potential
problems that could arise from a jump in energy prices.
You reported then that the impact that could have on
consumer spending--the hit to the average American pocketbook--
would depend on how much incomes were growing. On that front,
the news is not encouraging. Yesterday's, I guess it was
yesterday's, June 2nd Wall Street Journal piece on data
suggests a rise in energy prices are hurting low income
shoppers.
On that front, as I said, it depends on how incomes are
growing. The last reports from the job market show yet another
disappointingly small increase in the number of Americans
finding work. And the persistence of a very troubling notion of
stagnation in wages. Something, it seems to me, is not going
right. Thus far, in the economic recovery when the job picture
is as weak at it appears to be, I wish you--I'm going to ask
you to speak to that, if you will. Wages are still flat, up
just a penny an hour. That's 40 cents for a 40-hour work week.
And the cost of living, including the cost of gasoline, and
everything made and transported with petroleum continues to
grow faster than incomes.
The cost of gasoline went up 2 cents a gallon last week.
That's over 40 cents more for every 20 gallons of gas pumped.
That means that the higher price of gasoline really hurt low-
income and middle-income families. Gas is pretty much a fixed
cost for the average American family who can't switch cars or
move closer to work. For them, it's is not an abstract
discussion.
As I said, I referenced the Wall Street Journal article
saying ``Rising Energy Prices Pinch Low-Income Shoppers.'' Slow
growth, flat wages--American households are part of the context
we need to understand when we talk about the impact of oil
prices.
In the bigger picture, our dependence on foreign oil feeds
a cycle of dependence on foreign lenders to finance our
dependence on foreign oil. Our trade deficit, which you've
often spoke to, through March of this year, is $192 billion--
that's 6 percent of our economy. Thirty percent of that
deficit--$65 billion--was the cost of our petroleum imports.
That number could grow, I'm told, to as high as $100 billion
this year.
To finance that trade deficit, we are borrowing from other
countries, and supply of our debt will eventually outrun our
demand, the way things are going. As we are already seeing,
that means a weaker dollar, making imported oil--and the
thousands of consumer goods from cars to computers--even more
expensive.
Until we do something about our dependence on imported oil,
we will not be in control, in our view, of our economic
security. Will we, are we going to be able to restore our
energy security by reducing our consumption of oil? Will we,
can we, how do we make the most progress in the shortest amount
of time? If we focus on fuels that we put in our cars and
trucks, 70 percent of the oil we consume is used in
transportation. Can we immediately begin to reduce oil
consumption by switching to fuels that we can grow at home and
making better, and more efficient use of our energy that we
consume?
You pointed out that ethanol is not the answer, but it
seems to me ethanol may be a way to begin to jump-start this
process, as a logical element of the process of moving to
cellulosic fuels and other fuels. I agree with you that we have
to move faster in clean coal technology and nuclear energy.
But it seems to me we have to make sure, first of all, that
we're driving good cars by increasing fuel efficiency. By
requiring that every car sold in the United States is a flex-
fuel vehicle that can run on alternative fuels like E85--85
percent ethanol.
Second, it seems to me, we need to make sure that we're
using good fuels by requiring all major oil companies to add
alternative fuel pumps to at least half of the gas stations
they own.
And finally, it seems to me, we need to put in place the
market and the infrastructure for alternative fuels so that as
new, more advanced fuel technologies like cellulosic and
ethanol become more widely available, with the available cars
and the pumps that we, hopefully, have already begun to have
put in place.
So, we've asked you here today to help us understand better
the shape we're in today, and to draw on your experience, which
is extensive, to understand how we manage this move into the
future. So Doctor, your statement was enlightening. I'm looking
forward to being able to ask you questions, and Mr. Chairman, I
thank you for the courtesy of allowing me to make my statement
at this point. Thank you again, Mr. Chairman.
The Chairman. Thank you very much, Senator Biden. Let me
just say that the Chair will try to make a pragmatic choice. We
have a number of members here, and as I indicated earlier on
we'll have a rollcall vote at 10:00, and of course, some
members will be attending the joint session, which all members
have been asked to attend.
So with the concurrence of the ranking member, I'm going to
suggest we have, perhaps, besides the two of us at the moment,
maybe a 5 minute round so as many Senators can be heard during
that period, and I plan to return after the vote and continue
on, and the ranking member will too, so we can ask our
questions more extensively then.
So, we'll try a 5-minute round and begin with Senator
Chafee.
Senator Chafee. Thank you, Mr. Chairman, very much. And
I've got my question here. In your prepared statement you said
that much oil revenues have been diverted to meet the perceived
high priority needs of rapidly growing populations, and maybe
you could talk about what's happening in China and India. Those
of us that have been to China see all the bicyclists, and I'm
sure the Chinese are going to gradually change from bicycles to
petroleum-based vehicles. One point three billion people, in
India also, a billion people. How's that, what effect is that
going to have on this issue?
Dr. Greenspan. Well, Senator, as you're aware, the motor
vehicle culture in China is gaining very rapidly. All you have
to do is remember that it wasn't that long ago when there were
traffic jams in Beijing with bicycles. And now it's just car to
car, bumper to bumper, and they're producing cars at a very
rapid pace and indeed coupled with their imports they're
adding--the actual sales level is quite high.
The problem in China is, even before this surge, is that
their oil efficiency is half ours. Namely, the ratio of oil
consumption to GDP is twice that of the United States, and
there's a great deal of inefficiency, and obviously since their
basic desire is essentially to move as fast as they can in the
manufacturing area, the issue of fuel efficiency is not their
highest priority even though they are aware of it, and
obviously increasingly are aware of environmental problems that
affect them.
There's no question that fuel efficiency will increase in
China as the economy gets more sophisticated. But because it
starts at such a highly inefficient level, and because its
growth rate is far faster than the world average, it's a major
demander of oil and indeed it's the second largest consumer in
the world and probably--talking about the contribution to the
increase in the demand--it is by far the dominant force, and is
very likely to be until they run into really serious congestion
with respect to car saturation. But at the moment, the demand
for gasoline is going up quite significantly.
Senator Chafee. And India is similar? China and India have
their own reserves, so as they come onto the market,
transportation is 65 percent of our consumption--as these two
colossus come onto the market, supply and demand has to be a
factor.
Dr. Greenspan. India has got, of course, a good deal less
in the way of consumption levels than China. And although it's
growing, it's not growing as fast as China, and the level of
economic activity there is much less than in China. So, I would
say India is possibly a concern, but China is by far the most
important issue. The great irony, however, is that the two most
rapidly growing consumers in crude oil in absolute terms
recently is China and the United States, not India.
Senator Chafee. Thank you, Mr. Chairman. I'd just note that
I think in the grand scheme of things, as these two countries
dip their straw into the world's reserves, their appetite is
going to be enormous and that's just going to be a factor on
the price.
Dr. Greenspan. I think you're addressing a very important
aspect of our future.
The Chairman. Thank you, Senator Chafee, Senator Coleman.
Senator Coleman. Thank you, Mr. Chairman, it's a great
pleasure to have you here today, Chairman Greenspan.
I had a chance about a week or so ago to review a
presentation by the CEO of Alliance Bernstein, talking about
the possibilities of lessening dependency, things like hybrids,
in a couple of years Toyota may be out with a lithium battery
that could sustain and have a tremendous impact on reducing the
need for fuel for transportation, and then as you note--not
just corn ethanol, but cellulosic ethanol--and the possibility
of even going to 60 billion barrels of ethanol in some time in
the not-too-distant future.
And you end your presentation here, with those
developments, oil in the years ahead will remain an important
element of our energy future, but it would no longer be the
dominant player. With the possibility of cellulosic out there,
with the possibility, very short-term of hybrids--does that
mean that we should be engaging on some kind of Manhattan
Project to accelerate, quickly, the opportunity of cellulosic--
it's kind of at our fingertips but we're not there yet? And
what would that mean, and how do we accelerate getting there?
Dr. Greenspan. Well, the reason I raise the issue that corn
ethanol is limited is merely the fact that you get 2.7 gallons
of ethanol out of a bushel of corn. If you just do the
arithmetic we produce 11 billion bushels of corn a year. If you
convert that into actual gasoline equivalent, considering the
fact that the BTU per gallon of corn ethanol is about two-
thirds that of gasoline, it's an important addition, and indeed
it's of very significant importance, especially today.
But over the longer run, it's going to have to be
cellulosic where the real ethanol imprints are going to come
from, because there you don't have the types of restraints--the
more corn we put into ethanol the less we feed to hogs and
that's a very important tradeoff. It's not the case with
cellulosic ethanol and the advantage is there, if we can
essentially start to make that productive and get anywhere near
the increases in yields of acreage of switchgrass. For example,
we've gotten in the grains over the last 15, 20, 30 years. The
growth in agricultural productivity has been awesome--if we
could associate that with switchgrass, we're going to have an
awful lot of gallons of cellulosic ethanol, and I think that's
important as where the edge is.
Senator, the major problem that I think we have is that, as
I pointed out in my prepared remarks, the United States
controlled the world oil industry until, for the first 100
years of the industry. We set the price, we decided,
essentially, when there was a surplus or a deficit and
corrected it, and the growth in the oil markets moved very
significantly in pace.
Starting in the 1970s, as I pointed out, we lost price
control. We will never get it back unless we can find a way to
refill the vacant reservoirs of east Texas which were filled
with crude oil--we've used it all. In other words, our power
over oil was the reserves we had in the ground in the United
States. Despite Alaska, despite California, despite the Gulf of
Mexico which has been a very major addition, we're out of it.
We're out of the market, essentially, as a very critical player
with respect to price.
That means that if we are very significantly tied to
petroleum for our way of life, which indeed we are--in other
words, Senator Biden points out that people drive cars in a way
which represents what they think of themselves as people--what
their lifestyle is. It's hard to imagine disengaging an
American from his car. We all squawk when the gasoline price
goes up but there is no evidence that we reduce the mileages we
drive. We eventually will buy cars which are more fuel
efficient, use less gasoline, but it's not because we drive
less. And therefore, I think the basic focus is to find ways to
recognize that we are not going to be a world power in oil ever
again. And the dramatic and very facile reduction in our oil
use, I should say that the rising prices have been a very
effective tool in compressing demand. Our demand has very much
flattened out and we are gradually disengaging ourselves from
petroleum. If it happens sufficiently, smoothly, then that's
the best of all possible contingencies. What we have to make a
judgment on is what happens if it doesn't go smoothly and what
types of policies that we can address, and I think you point
out the critical ones--how do we get consumption down basically
on our highways--which incidentally use one out of every seven
barrels consumed in the world every day.
Senator Coleman. Thanks, Chairman.
The Chairman. Thank you very much. Senator Voinovich.
Senator Voinovich. Thank you, Mr. Chairman. It's nice to
see you again, Chairman Greenspan.
The last couple of years I've been very concerned about our
dependence on foreign sources of energy. In fact I've called
for a second Declaration of Independence, that is, to become
less reliant on foreign energy sources because of our national
security interests, and also our economic concerns. Several
weeks ago I was in Brussels at a Thurman Marshall Fund meeting
and I was quite taken back with the concern the Europeans have
in terms of their energy vulnerability--Iran and also the
practices and policies of the Russian Federation. They're very
worried about how that's all going to work out.
Your testimony this morning seems to give the impression
that maybe things aren't as bad as some of us think they are. I
really feel that this country needs to have a reaction like we
had to Sputnik going up, in terms of becoming more energy
independent.
We had testimony here several months ago from a Dr. Luft
and he said, ``Oil prices are not going down at any time, the
rise in oil prices will yield large financial surpluses to the
Middle Eastern oil producers. This petro-dollar windfall will
strengthen the Jihadists while undermining the strategic
relationship the region's oil producers have with the United
States. Real concern about impact on security.'' We had other
testimony, I'll quote from Hillard Harrington who heads the
Energy Modeling Forum at Stanford, he said ``Many large scale
models of the U.S. economy estimate that the level of real GDP
could decline by 2 percent for a doubling of oil prices.''
Since the economy is growing more rapidly than 2 percent per
year, that impact would not mean recession, basically going
along with what you've said.
Other researchers, however, think that these estimates
underestimate the impacts, because they do not focus explicitly
on sudden and scary oil price shocks. These other researchers
think that our historical experience suggests that the level of
real GDP would decline more than 5 percent for doubling of the
oil price, and he goes on to say, ``My personal view is that
the higher estimate may be closer to what actually would happen
if we had a major disruption, and that would mean a
recession.''
So I'd be really interested in terms of our vulnerability,
in terms of our security, and also the issue of what impact an
interruption would have on our GDP and our economy.
Dr. Greenspan. Well, Senator, I think those same models
will indicate that the impact on the GDP is a function of how
rapidly the prices change. In other words, at this moment, we
are observing a fairly significant increase in oil prices, in
fact energy prices generally. And until very recently, it is
very difficult to find any serious impact on actual levels of
real activity. There's been no significant cutback in
consumption. In fact, seasonally adjusted, our weekly 20
million barrels a day consumption in recent weeks has actually
been edging up, not down. It's certainly the case throughout
this year. We're a little bit slow and it's a small aberration,
but there is no sharp correction and the reason is basically
that we have developed a degree of flexibility in this economy
which starts off in the 1970s with the bipartisan deregulation
that we were all involved with, and which has carried forward
to this day, especially in the financial area, and in the
transportation areas, which has given us an ability to absorb
shocks, of which energy is one, and come back readily.
American corporations have been hit by a very large
increase in energy costs. Yet, profit margins of nonfinancial,
nonenergy corporations continue to grow. The reason in part is
that there has been a large increase in cost, but the
productivity that has been put in place in the last several
years with respect to energy-saving equipment has apparently
been enough to keep the actual unit cost of energy moving at a
relatively modest rate. In other words, a goodly part of the
price increase has been offset by improved productivity and
coupled with other productivity gains, profit margins continue
to grow, which means that we have not had the real serious
impact.
If you look at motor gasoline consumption--seasonally
adjusted--gasoline which essentially is used in passenger cars
and light trucks--it has not gone down. In fact, if anything
it's tilted up slightly. The only serious area of reduction in
energy use is apparently in diesel, where those big Class VII,
Class VIII tractor trailers consume huge amounts--in fact, 20
percent of total motor fuel on highways is consumed by heavy
trucks. Those have cut back significantly. And for a number of
reasons. Obviously, there has been efficiently in the way that
goods are carried because of that.
But there is, as yet, no really serious issue here with
respect to the impact on the United States. If, however, we get
a sharp increase in prices very quickly, because our capital
stock, our facilities, still really are built, and were
originally constructed with $20 oil in mind, and therefore
there's not a great deal of efficiency built into our capital
stock, so if we get a big shock it can create a significant
contraction in our economy. It's very difficult to tell how
much, because an awful large part of it is psychological. But
if the flexibility is there, the flexibility that enabled us to
get hit by 9/11, declined very sharply but for a very short
period of time, and because of the flexibility of the system
that we have built, we were able to absorb it. I'm not terribly
concerned about that problem.
So, as far as national security policies are concerned, I
think it's important to one, make certain that we maintain a
flexible economy and two, to find ways to one, recognize that
we're not going to be a price setter in oil in any conceivable
future--to find ways to wean ourselves off gasoline is a
critical issue of energy. That applies very importantly on
highway fuel, cellulosic, and ultimately applies gas-to-oil
technologies, which if we ever get to natural gas hydrates
which is a huge potential long-term source of methane--we can
find ways to get ourselves away from the actual petroleum
industry, but it will essentially require very considerable
effort, and I think the most practical places are in cellulosic
ethanol, and in hybrids. Because right now you get a hybrid
car--you plug it in overnight, eight or nine hours--and you can
get 100 miles a gallon on it. The technology is going to
improve, but that is a very major saver of gasoline. And if you
combine the new ethanols with that, it's a decline in
convenience of the motor vehicle to drive it, but it is not as
though we have a choice of good and bad. We've got a choice of
not-so-good, and worse. We have to make a choice of one or the
other.
The Chairman. Thank you very much, Mr. Voinovich. Senator
Alexander.
Senator Alexander. Thank you, Mr. Chairman. Dr. Greenspan,
thank you for being here. Thank you for your analysis and as I
hear you, you're saying we were oil independent until the early
1970s. The United States--quite a bit we make speeches about
this goal--oil independence from foreign oil and we had it
until the early 1970s. You're telling us we're not ever going
to have it again, if I hear you right.
Dr. Greenspan. I wish I could find the means to think my
way through to such an eventuality. I've tried. I failed.
Senator Alexander. But it helps that--so I assume by
implication you're suggesting that our best government policy
is probably not to join China in chasing around the world,
tying up every oil reserve that we can. That is a long-term
solution. That's probably not our most promising course. I
think I also hear you saying that because of this enormous
flexibility of our economy, and I heard you say it about 9/11,
which was a revelation to me, that despite the dislocations of
9/11, the economy absorbed those. And I think you're also
saying to us that even with these relatively high prices for
gasoline, our flexible economy is so strong that it seems to
absorb those.
The question I'm getting to is, what in the market is going
to drive this transformation that logic would impel us toward?
Based on your analysis, we should be finding something else to
put in our cars and trucks other than petroleum-based fuel. And
it's almost that simple, because you say we're not going to
stop driving, and so we're going to continue to drive more,
we're not going to compete with China for oil, so I guess my
question is--if you're in our shoes, and we're looking for
government policies, it seems to me our economy is so strong
and flexible that there may be nothing in the market that will
force us to make the changes that we need to make to find the
alternate fuel.
For example, you mentioned hybrids. Well, Mr. Goan, the
President of Nissan, is renting Toyota's technology and not
building many hybrids because he says when you build something
that costs you $6,000 to put in the car, and customers are only
willing to pay $2,000, you've got a problem. So what in the
marketplace is going to drive this transformation for alternate
fuel?
Dr. Greenspan. I would think, Senator, that you have to
start with the presumption that if you do nothing, what is
likely to happen. And then ask yourself, would that outcome be
acceptable, and how would you alter it? And I would put forth
the projection of what would happen if you do nothing. If you
do nothing, what we will find is that the pressures on price
are very likely to continue. I don't necessarily think they
need to go much higher, because we've already had--as I pointed
out in my prepared remarks--the whole financial industry moving
in advance of events, and they may have already created a price
which already projects a goodly part of this future.
But let's just say the prices are where they are--what is
going to happen is that we're going to start to get major
changes in fuel efficiency cars purchased by American
consumers. Especially hybrids, and if the price goes higher
which it very well may be, despite the fact that Americans say
they do not like plugged-in hybrids--that's not what happens
when the choices ultimately are there--people accept what is
made available. We don't have the capability of, when I was a
kid, 19 cents a gallon gasoline, huge gas guzzlers, vast
sources of oil, never worry about energy--we don't have those
choices, we have to make a judgment. As it stands now, it makes
no sense to go out and basically try to find oil. The oil that
really is available that is sufficiently cheap to essentially
exploit is held by the nationalized oil companies.
My judgment is that if you look at the trends that have
developed since the early 1970s, we have been weaning ourselves
off oil very considerably. We are now half as intensive as we
were, and we will continue to be considerably less intensive.
The critical area is clearly on highways, and there is
where we have to figure one, how do you drive certain numbers
of miles which American consumers want. And you can do that
either by getting substitutes for motor fuels other than
petroleum. It looks to me now like cellulosic ethanol is the
largest potential--there is coal-diesel and a variety of
others, other forms of bio-diesel which you can get--but it's
either that or you change the nature of the motor. And here I
think it's going to be both.
If that is indeed the case, and we get, as Senator Chafee
pointed out, continued increases in Chinese demand, in world
demand, likely prices may very well move higher, and what will
happen is that we will--the markets will force us, or more
exactly, prices of gasoline will rise to a level where everyone
will be very unhappy--they will not stop driving. They will pay
the price, but they will buy much fewer gasoline-consuming
vehicles in one form or another.
That's where the future is, and indeed you can make the
case that obviously petroleum will continue to be available in
some significant quantities. And if there is a very substantial
decline in consumption of oil in the United States, the price
will come down worldwide. That will create a significant gap,
because remember, we consume a quarter of the world's oil right
now.
If we are able to bring down our consumption by a number of
means, that's where the world is likely to end up and I'm not
sure that is all that bad, and from a national security point
of view, we won't be literally disassociated from petroleum,
but the problems that it's easy to be concerned about, namely
all this huge amount of cash going to countries who are not
friends of ours, it's a very serious issue. And the quickest
way that you can shut that off is to open up a gap in spare
capacity, and you can do that by increasing capacity which is
very difficult, or lower consumption. That will lower the price
significantly and if we're asking for a national security
implication, because such a significant part of the price is
probably the result of this new surge in demand for oil by the
financial system, the financial system will turn around and
prices will come down quite considerably, and that more than
anything else I know, will shut off a goodly part of the very
large cash flow which is going to those who do not have our
best interests at heart.
The Chairman. Thank you very much, Senator Alexander. Now,
let me mention that Senator Biden and I will go to the floor
temporarily. I will pass the Chairmanship over to Senator
Sununu for his questions and he will exhaust that time on
Senator Murkowski or Senator Martinez, then hopefully we'll be
back so we will not lose----
Senator Sununu [presiding]. Hopefully you'll be back so I
don't have to serve as Chairman for too long. I think all of my
colleagues will appreciate that.
Dr. Greenspan, I served on the Budget Committee in the
House. I'm on the Foreign Relations Committee here, and the
Banking Committee, so I've seen you testify a fair number of
times, and I want you to know I appreciate the novelty of your
two word declarative ``I failed.'' It's not something that
we've heard very often, and for good reason, but it's
refreshing. It's always refreshing to hear someone be clear
about what they know and what they don't know, what they can
envision and what they have a hard time foreseeing.
I want to begin by checking your math. You made a point
about the fact that corn-based ethanol is almost certainly
unable to have any significant role in supplanting petroleum.
You mentioned 11 billion bushels, 2.7 gallons a bushel, roughly
a two-thirds conversion factor, that translates in 18 billion
gallons which sounds like a lot if we use every bushel of corn
in America to produce a petroleum substitute. That's gallons,
yes. Compared to national consumption--I did the quick math--on
the order of 180 or 200 billion gallons, so we're talking about
10 percent of the total petroleum usage in the country if we
starved every hog in the country.
I think that's important to emphasize here, while I
understand the value of the ethanol program to farmers and to
those that participate in it. But if we use every bushel of
corn, we're still only talking about 10 percent of what we
consume in petroleum.
It seems to me that to the extent that we're concerned
about this problem, I don't see a great national security
threat by a family of four deciding to buy a mini-van that gets
22 miles to the gallon instead of 28 miles to the gallon. I
think as you point out, it's the choice they make and Americans
enjoy driving cars--most of the oil, the vast majority, is used
for transportation, and most of that is a consumer decision, a
lifestyle decision.
But what is important to avoid economic dislocations is the
maintenance of the flexibility you talked about--the resilience
in the economy. So, I think that the important question from my
perspective is how do we maintain that flexibility, and are
there things that we could do or might do that would hurt that
flexibility. I am always worried about the unintended
consequence. I would like you to comment on things that you
believe might undermine that flexibility in general, and
specifically about policies such as production tax credits,
government R&D subsidies on fossil fuel technology, CAFE
standards. Are those things that should be pursued, or should
we have concerns about how they would affect this underlying
resilience?
Dr. Greenspan. Senator, the major threat to flexibility
that we now perceive is twofold. The one that concerns me most
is the very modest yet not large move toward protectionism in
this country.
Protectionism, to the extent that you block the free flow
of goods, services, and finance--almost by definition
undermines flexibility and the adjustment process. And to the
extent that we engage in that, that we prevent the ability of
everything to move when something else moves, which is what
flexibility does, and what creates the type of resilience we
saw in 9/11, and indeed in the stock market crash of 1987 and
the crash of 2000--the economy barely went down in those
particular areas, largely because of the considerable
flexibility in the international area, but also in the
financial area.
The one great change that has occurred in the United
States, and indeed the rest of the world, is the dramatic
increase in international technology--which coupled with an
extraordinary expansion in new types of financial products
which laid off credit risk from highly vulnerable, highly
leveraged financial institutions which made loans to those who
were far more capable of absorbing risks. I'm speaking mainly
of credit derivatives, but there are a whole series of other
financial instruments that are relevant. That has given us a
flexibility that if we try to overregulate that particular area
it will reduce the flexibility, reduce our ability to make the
types of adjustments that we've been able to make, and will
create a problem that in the event of an oil shock or crisis,
our ability to absorb it and reduce the impact on employment
and output would be limited.
Senator Sununu. I think that the impact of protectionism on
our economy's flexibility is something that most Members of
Congress can internalize pretty well. We understand the impact
of setting up those kinds of tariffs and borders. But this is
one that I'd like you to elaborate on a little bit. You're
saying that the existence of a credit derivatives market
contributes to that economic flexibility. You also mention in
your testimony, though, the participation of the financial
markets in the energy futures markets and commodities markets
and is that also something that you see as increasing our--the
resiliency and the flexibility of our economy? Has that been a
positive step? Some people would view that as speculation, and
speculation is always bad, but you view it as a positive step?
Dr. Greenspan. I do indeed, Senator. And the reason I do,
as I point out in my prepared remarks is the great advantage of
speculation in the sense that it was originally supposed to be
understood, is that when there are perceived imbalances in the
future, speculation or investing or endeavoring to look for
abnormal rates of return in the financial field tends to
advance the adjustment process so that when the corrections
actually occur, they are far less abrupt.
And what we are seeing today because of the existence of
hedge funds and others taking on fairly large positions in the
oil-derivatives markets, and then effectively increasing the
demand for real barrels of oil, is to move the price up and
therefore to hasten the adjustment process which indeed is
occurring--that is, we are literally seeing significant
acceleration in energy productivity within the corporate
sector. We are seeing a flattening out, not a decline, but a
flattening out of gasoline demand, and indeed a decline in
overall motor fuel consumption on highways because of price.
And that would not have happened were it not for the financial
system being involved, because prices would have been lower
through a considerable amount--part of 2004 through most of
2005, and if that were the case, the levels of demand would be
higher, the pressures on the economy far greater, and we would
have increased the risk of a shock.
So, what the financial system has done is preventive
medicine if I may put it that way.
Senator Sununu. Thank you. Senator Murkowski.
Senator Murkowski. Thank you, Chairman Greenspan. It's a
pleasure to have you here this morning and to hear your
testimony.
I want to go back to a statement you had made to Senator
Coleman. You indicated that the power over oil that we once had
was what we had here in the ground in the United States and
that gave us that ability to be somewhat energy independent, or
oil independent--if you will--and we lost that after the early
1970s.
I want to hear a few comments from you this morning about
the direction of natural gas, an area where I think we look to
in this country as that next great area of possible dependence.
Right now we're in a situation where our imports of LNG are at
a pretty minimal level. I understand it's about 3 percent right
now, but the increase--LNG imports have increased by 180
percent in the past several years, still accounting for only
about 3 percent of our U.S. imports.
The concern that I have had is that we go in the same
direction with natural gas as we are with oil--being dependent
on foreign sources for an extremely important resource for us
here in this country--and a recognition that we can do
something about it, because we have that ability to grow that
resource here.
You've mentioned that, and this was in a hearing that we
had before the Energy Committee a couple of years ago--that in
order for us to meet our demand here in this country, we must
rely on imported LNG. We're trying to move a project down from
Alaska to get Alaska's natural gas to the rest of the United
States. That project is not moving as quickly as we would like.
We recognize that the country is counting on Alaska's gas to
come down. We're trying to make sure that, in fact, that
happens.
I am very concerned that we take the approach with a
resource like natural gas and say, ``Well, we simply can't
produce enough of it here in this country. We must look to
foreign nations for that resource,'' and we must put ourselves
again in that position of being vulnerable, of providing cash
to those countries--that as you point out--might be our friend
today, but who knows where they're going to be next year.
My question to you is where are we with the demand/supply
picture with natural gas--how do we keep ourselves from getting
in the same position with natural gas as we are with oil in
terms of our reliance?
Dr. Greenspan. Senator, you raise a very important question
and indeed with the loss of production in the Gulf of Mexico as
a result of Katrina and Rita last summer, we're not back to
productive capability domestically that we had been.
For a generation, we had looked to Canada for piped gas for
about a sixth of our needs, and we were growing reasonably well
and price was low--I remember when it was $2 per MBTUs. The
problem is that the only outlook we really have got is
liquefied natural gas. And there are several problems as to why
we have not picked up as quickly as I think we need to in that
particular area.
First, of course, is that a goodly part of the liquefied
natural gas market is on long-term contract around the world.
And, for example, there's a very big contract, the biggest
probably that I ever remember from the operations in Indonesia
to Japan, which was a major source of their liquefied natural
gas in the long-term contracts, and it worked exceptionally
well.
We have not been able to do that--we get a lot of our LNG
from Trinidad and the Caribbean, but the size of what we are
going to need and can very readily use right now has got to
come from Qatar or from the Middle East or from other sources--
there's a big dispute as I'm sure you're aware now with respect
to Russian gas going LNG to the United States. But our problem
is that we've got to one, hopefully get longer-term contracts
with the actual producers of the gas which will then ship it to
us, and then we've got to be certain that we've got the
terminals. Until fairly recently, the ``not in my back yard''
notion made it very difficult to bring LNG terminals into the
United States for fear that there would be these tankers that
would explode and a variety of other problems.
Most importantly, we do not yet have a spot market in
liquefied natural gas, and the reason we don't is, for example,
the trade in crude oil represents such a--imports of crude oil
worldwide represent effectively 60 percent of world
consumption. The trade from one country to another is very
large. The figure is only a fourth in natural gas, and a goodly
part of that is piped gas, including the piped gas from Russia
down into Europe. So, we don't have the degree of
sophistication as of yet in international trade in LNG, but we
are going to need to make this a viable source in the United
States, essentially equivalent to how we handle crude oil.
It's going to take a while, but if we can do that, we will
then have the capability of converting gas into liquids with
the new technologies that are coming on and this could be
another source of replacement of petroleum, and may, indeed, be
an actually significant possibility. So, the LNG issue has got
a lot of facets to it, all of which are very important for the
United States, for our national security and for the
maintenance of, essentially, a car fleet on the roads not
fueled by natural gas, but eventually fueled by the liquids we
can derive from natural gas, provided we've got adequate
capabilities to purchase it and import it.
Because we do have the inklings--you remember, energy is
not rising in real terms anywhere near energy consumption in
the United States--anywhere near what our incomes are. So we
have the capability of buying, we have the purchasing power
that produces other goods and services which gives us the
ability to buy a great deal of energy of the type that we would
need, and that largely--in the natural gas field, is to
accelerate the capabilities of getting contracts, long-term
contracts, and deliverable supplies of LNG, and eventually the
North Slope gas which would not be a small addition--as you
point out--to the lower 48 States' consumption.
Senator Murkowski. Mr. Chairman, I have to excuse myself
and go vote. I appreciate you mentioning the North Slope gas,
and I absolutely appreciate you mentioning the great potential
with natural gas hydrates. I believe when we look to that as a
long-term future, there's great potential there. It needs to be
nurtured, but I do get concerned that we focus on imported LNG
and we are in a situation with natural gas as we are currently
with oil in terms of our dependency and our energy security and
the vulnerability that we face.
I'm trying to figure out a way to get our stuff down to the
lower 48 to help in, I think, a significant way. I appreciate
your comments.
Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator Murkowski. At
this point we'll have a second round of questioning and we'll
have a 10-minute limit on questions in each round.
Chairman Greenspan, in your testimony you mentioned the
desirability of price increases in oil being gradual. In fact,
you discuss that it's remarkable that the impact on the
economy, even given fairly sharp increases, has not been
greater. I would just ask--the reason in this context--one of
the real problems of remaining too calm about all this, is that
a great deal on the ground doesn't happen. We talked a little
bit about the problems of corn ethanol and this is not a
solution, and we decided to go on to cellulosic. But even in
this interim period, the corn ethanol situation suffers from
the fact that, despite a lot of plants being started, not much
ethanol is being produced. And furthermore, even if it was
being produced, the number of outlets in terms of filling
stations and gas stations is de minimus at this point. The
number of flex-fuel cars in the country, likewise, despite
promises by automobile companies to produce half a million
more, in the case of both Ford and General Motors this year--so
that even that particular solution really needs urgency, and is
clouded by the MTBE factor in which ethanol has been diverted
off to California and New England, so the price of ethanol at
the pump at one of these M85 stations, using market economics,
is almost identical with the petroleum. Therefore the Mom and
Pop people who have started these places, because the oil
companies have resisted doing so, sometimes don't sell very
much ethanol. It's hard to keep them in the game.
On the cellulosic front, there are real problems in the
Department of Energy, as I see it, just getting the regulations
for the loan guarantees for our companies such as Iogen who
wants to come into Idaho. I cite them because they are the only
large candidate for production of cellulosic ethanol very soon,
and they may not start until the end of this year or next year.
Now, in the midst of this, what happens if, for example, an
incident such as the Russians cutting off natural gas to the
Ukraine, albeit for only 48 hours, but nonetheless, the shock
waves through Europe were substantial from this--or other
suggestions by countries. Picking up on that measure that they
could simply stop production for a while. That it may be in
their strategic interests not to worry about markets or
pricing, but the availability.
Leaving aside, as you point out, their lack of interest in
going into their reserves, exploiting those, or trying to find
capital around the world to do that--what I'm just wanting to
examine for a moment is what are the possibilities or even the
probabilities of shock therapy coming from national decisions
that change the pricing situation abruptly, but with United
States no more prepared, still fumbling about as we try to get
these alternatives under way?
Dr. Greenspan. Well, Senator, as you point out, in certain
respects, Europe is in far worse shape than we are. Europe's
solution to the Russian gas problem, in my judgment, is to have
very substantial liquefied natural gas terminals on standby.
With contracts, contingent contracts out there to import
natural gas liquids. It won't pay Europe to do that, but what
it will do is put a cap on the price. In other words, it will
significantly restrain the issue of what is, largely equates to
a monopolistic position that Russian has with respect to
European gas. And if that standby facility is there, it will be
costly to maintain. It will be costly to get it contingent
contracts. It will also depend on an issue that I was
discussing with Senator Murkowski, namely the advent and the
emergence of a viable spot market in liquefied natural gas.
But it strikes me that we ought to be in similar--try to
create similar sorts of devices. But having said that, it's not
terribly difficult to imagine--you remember the aborted
insurgency raid on the major Saudi Arabian facility not too far
from us, the gas processing facility. Had they succeeded in
shutting that down, there would be an incredible impact on the
world. We do have strategic petroleum reserves both here and in
Europe which we would use and presumably it would obviously be
the type of problem which is exactly what the reserve is for.
The Chairman. What sort of procedures could we adopt--just
to pick up your point--the Europeans have this rather expensive
contingency factor, but take the Saudi example. If they had
succeeded, this is a real problem for the world, quite apart
from us, but I'm not certain, aside from our strategic oil
reserves, what we've got that really is a stopper in these
cases.
Dr. Greenspan. We don't have much. If, however, we do not
undercut the flexibility of our economy, we will take the
shock. There's no way of avoiding the shock. Strategic
petroleum reserve of 700 million barrels is not a small amount
and when really--it very much depends on the extent of damage
and how fast the systems can come back.
But I can very readily envision a shock in which even if we
can bring in strategic control in reserve, the market price
will still go straight up. And as I pointed out with respect to
the discussion with Senator Alexander on the issue of the
impact on the American economy--rising prices per se need not
have an effect on American economic growth if the rise is
gradual and the adjustment process is able to take place.
But a shock has got to be absorbed in one form or another,
and at this particular stage, we don't have any backup other
than the strategic petroleum reserve and our flexibility. We've
got to find more ways to deal with this problem.
The Chairman. In going a little further with this--if the
shock occurred in our economy, and on various other days you've
testified on these sorts of subject--we have already a fairly
large Federal deficit. We have an even larger deficit in terms
of our trade imbalance. We are dependent upon others to loan us
money by our bonds essentially. It's sort of a grand bargain to
keep the world economy afloat this way, so there is still some
purchasing power elsewhere.
But please explain what that kind of shock in our economy
might mean, not only to us and our ability to cope with all of
this, but to the world economy.
Dr. Greenspan. Mr. Chairman, it's difficult to give you a
definitive answer because there are lots of different ways in
which that can unfold. We don't know to what extent the
foreigners hold U.S. dollars, basically because under our
constitution we protect foreigners' property rights as firmly
as we protect our own. And if you're looking for a safe haven
for resources, and you don't trust your own currency, your own
economy, or any of a number of reasons, you do know that a
deposit in the United States is safe. And a large part of the
accumulation of U.S. Treasury securities are that. I won't
mention who, but I had a very interesting conversation with a
monetary authority person abroad who has very large holdings of
U.S. dollars and he asked me at one point when there was some
question about possible problems, whether the United States
securities were safe? And I said, ``Of course they are.'' And
he said, ``That's very important to us because that's the
reason we keep our money with you.'' Now I don't know the
extent to which--how much are the aggregate holdings, or the
result of that and how much are just economic investments in
real rates of returns and productivity.
But that is a critical issue. It is basically that we are
safe and I feel fine about that the Constitution is not going
to be affected by a problem in the oil fields of the Middle
East, but as an economic issue I would be concerned. I don't
know any way to differentiate those particular issues. But I
think you can reasonably well conclude that whatever the
consequences are of a major shutdown of a Middle East facility,
most specifically related to the processing of crude oil, the
more the damage is to the world industrial structure. And the
greater our flexibility, the greater our ability to absorb
that. But there is no scenario which I am aware in which we get
off scott-free. It's going to be a real serious problem, and I
think the purpose of your deliberations in this committee is
largely to make judgments as to what can this Government do
to--not eliminate a potential shock--there is no way you can do
that. But how do we set in place sets of policies which
diminish its impact.
The Chairman. Well, you've accurately stated our quest and
there are obviously foreign policy and security implications in
this, in addition to those issues covered by our Energy
Committee or the Banking Committee or Armed Services
Committee--each one of us has a role but we've tried really in
these hearings to get a comprehensive view of our national
security and the foreign policy aspects, and your testimony is
helpful.
Senator Biden.
Senator Biden. Mr. Chairman, it's such a pleasure to have
you. I mean it sincerely. You are so, the breadth of your
knowledge is impressive and very much needed by this committee,
and the clarity with which you talk about it, is extremely,
extremely helpful.
I'd like to focus on, in the short time we have, two
pieces. One, by the way, not that it matters, but I couldn't
agree with you more about the question if this is a
Constitutional investment or an economic investment, and I have
a feeling a significant part of it is--and I'm praying that
this relates to the certainty of the investment as opposed to
the economic return, which is a big, big piece as well. But as
you said, no one's going to know until it ever gets tested, and
pray God we don't get it tested that clearly.
And in terms of flexibility--that's really what we're about
here in this committee. The Senator and I had opportunities,
both during the hearings and working our staffs together and us
talking--we're really not naive enough to think that we're
going to talk about and be able to be ``energy independent''
which is a phrase which is thrown around, but flexibility
matters a great deal. Not only the broad flexibility of our
economy, but flexibility as we build in flexibility to be able
to deal with oil shocks, and it's a process--we're talking
about a process to put in training.
And I'd like to get to a point which is when we struggle--
not just the two of us, but others--including my colleague from
Florida and my colleague from Ohio. We're all basically on the
same page here. As we struggle with the notion of providing
flexibility by having alternative fuels--and as you point out,
the vast majority, you know, one in seven barrels of oil in the
world is consumed on American highways--so obviously that's the
biggest, biggest ticket item you could impact on. And 90-some
percent of all of the refined oil is going into the engine or
the tank of an automobile.
Right now there's the economic incentive for alternative
fuels to have a shelf-life. There's actually a lot of
discussion on the street--which you've forgotten more about
than I'm ever going to learn--about investments in alternative
energy sources. There is a burgeoning industry that is--goes
well beyond corn ethanol out there--and one of the worries I
have--worries is the wrong phrase--one of the concerns I have
is in the past when we controlled oil, figuratively speaking,
in the sense you used it in the phrase, up until the early
1970s, and now the cartel controls it. There has been this sort
of self-interest realization on the part of oil that, if it
gets too expensive, you're going to find yourself in the
position where it's not beneficial for the industry in the
long-run and those who hold the reserves--it clearly,
notwithstanding the lip service, I should maybe not say it,
clearly notwithstanding discussion on the part of major
American oil companies about their interest in finding
alternative sources of fuel--it is not really overwhelmingly in
their interest that we would, in fact, make a major shift in
consumption of oil.
So here's my concern, and I'd like you to speak to it two
ways. One, is it legitimate, the concern I'm about to express;
and two, if it is--what do we do about it? I am concerned that
as the decision to get the tens of, the billions of dollars,
tens of billions of dollars over the next decade of investment
needed to, in fact, produce or generate an alternative energy
source, the kind of investment needed to make it--to give us
the flexibility, where it takes up 20, 25, 30, 40 percent of
our consumption, at least in automobiles, over the next decade
or more--that it rests upon the price being competitive with
oil. And I don't say this as, I'm not making a populist
argument here. But it would seem to me to be in the naked self-
interest of the major energy producers--oil fossil fuel
producers now--that if that became a genuinely competitive,
alternative source of energy that allowed us not independence,
but genuine flexibility, that it would be very much in the
interest of the industry to drop the price. It doesn't take
much for them to swallow losses for some time in order to have
the effect of driving out of business what are essentially,
great potential--cellulosic, for example--great potential, but
in its infancy. Is that a concern that is not well-placed? Are
the economic incentives for major oil, whether it's Saudi
Arabia and OPEC, or specific energy companies--is that concern
of mine misplaced? Are we still going to get the kind of
investment which--we're talking the need of billions of dollars
of capital to move into these alternative sources of energy to
make them competitive, so we're producing billions of gallons--
equivalent gallons of oil by alternative sources.
Is it a misplaced concern?
Dr. Greenspan. Your concern that people in the oil industry
concerned about competition coming in, would produce cellulosic
ethanol at a subsidized price to drive out the competition? Or
a----
Senator Biden. Just in terms of simple flexibility. We had
two very impressive panels that came before us about 3 or 4
weeks ago. And they pointed out that in order for us to get to
the point where there is really an alternative to fossil fuel
for transportation, that you really have to acquire a scale
sufficiently large in the existing oil industry now. You have
to have, not just the kinds of plants that are bringing
economic growth to Southern Indiana, producing four million
barrels a year, roughly, equivalent--you have to get on the
scale of the major oil refineries, in terms of production. And
that is not necessarily in the immediate self-interest with oil
at the price it is now and likely to remain, of those very
companies.
So where do you get the tens of billions of dollars of
investment? And they gave it a--I realize it's more
illustrative than--but they, one of the very well-respected
figures we had before us, speaking about alternative energy, he
gave a chart, it was kind of a wish list. He said, look, the
projected ``if'' in switchgrass, we produce, we have the
increased yield per acre, increased productivity we've had in
corn just in the last 30 years. That if you devoted the
prairies of--I think he picked South Dakota--to, that exist now
to a higher yield but in an economically competitive
switchgrass process by which you refine the switchgrass for, as
you point out, that's the better bang for the buck in terms of
a percentage of it that is usable and is closer to a BTU
equivalent of oil, et cetera. He said, and he put up a chart,
he said ``South Dakota would be the second largest producer of
energy.'' And he was making a point that wasn't literal, but
illustrative of the kind of thing that can happen if we put,
for example, 60 million acres--as opposed to 110 million
acres--60 million acres in ethanol-based fuels over the next 15
years.
And he made a statement--he said that as Australia tried to
move to an ethanol-based system--as it began to take root, the
price of oil was dropped significantly, making it uncompetitive
without subsidies, and it really tanked. Whereas in Brazil,
they--for reasons I realize that's a controlled economy, I'm
not suggesting we emulate it or model it--but the bottom line
is, Brazil really is at a place now where they have a distinct
flexibility--an alternative. They do not have to listen to
Chavez and his ranting and ravings about what he's going to do
to them, cutting off access oil.
And so the question is, is there any reasonably
historically, or purely from an economic incentive standpoint,
and I'm about to go over my time. I apologize, Mr. Chairman,
but is there any concern about if we were to mandate in a
process, flex-fuel automobiles, mandate ethanol-ready gas
stations and so there's enough of an infrastructure so that if
you build a car there's a place to fill it up--if we were to
mandate more rational mileage for American automobiles. And we
both come from UAW states, it's not something we're looking
forward to going on and just looking for fights--but if we did
all of those things, would you have to put, essentially, a
floor on the, you know, of $30 or $35 or the equivalent of a
barrel of oil in order to make sure that you've got investors
who are willing to invest in the long-run and not worried if
all of a sudden, oil drops to $26 a barrel and their
investments tank?
Dr. Greenspan. I think that's quite unlikely, and let me
give you the reasons why I think so. It's a legitimate
question, because I would say if you had raised that question
20 years ago, it's a real question. And the reason it would be
a real question is that at that particular point, it was quite
apparent that you could get, let's say, a 5- or 6-year lead on
significant amounts of crude oil out of potential unexplored
reserves other than OPEC. That is no longer available. And, in
fact, if you take a look at the far distant futures contracts
now, for example, go out to December 2012--crude oil is $66 a
barrel. Twenty, no 10 years ago, even 5 years ago, 6 years ago,
that figure was $20 a barrel. The reason that has happened is
that the full structure of the international oil industry is
getting tighter and tighter and tighter. It started off in 1870
and we have consumed an unbelievable amount of oil. And
whatever there was, there is less, and it's beginning to show
up in various different places. It's beginning to show up in
inability on the part of those drilling in less hospitable
places to get oil, and it's very costly.
So what I think is going to happen here is we are already
beginning to see private equity funds beginning to invest in
ethanol. Just as the Chairman mentioned, this particular
facility that is being put up and may be available, he said, by
the end of the year--that will tell you what the potential cost
runs are and what a good deal of the economics are. And if it
appears to be credible, you'll begin to get an awful lot of
financial assets coming in--not an insignificant part of what
the oil industry, the hedge fund industry who are now investing
in oil--I think they'd start to go into those particular types
of projects.
Especially if the numbers make sense, which I think they
do, for reasons exactly why you point out. If that is indeed
the case, there will be potential concerns of the type you
raise, Senator. I cannot say with certainty that it will not
all of a sudden be some pocket of weakness in oil prices which
brings it all the way down.
The real problem, strangely enough, is what happens to the
price of oil if we succeed? Because, if indeed we get a real
major displacement of gasoline use on U.S. highways, the world
price will come down. My guess is, and I must tell you I can't
argue that it's very much greater than a guess--it will not
drop back to $20 a barrel. It will drop, but it will drop back
to levels which will not undercut the economic viability of the
cellulosic ethanol, and indeed it may very well be that the
marginal cost and rates of return of cellulosic ethanol may
very well be determining the crude oil price.
Senator Biden. Well, I pray for that day.
Dr. Greenspan. Well, we may inadvertently, all of a sudden,
South Dakota may become the new energy czar.
Senator Biden. It seems to me your view is one that's
shared by most of us up here, that we're really reaching an oil
peak here, and it seems to me that it's the end of cheap oil. I
would love to envision the world being more secure. Enough that
in fact we move back to that ``Bay of Cheap Oil,'' but in terms
of the reserves available, in terms of what I look at there--
and I don't pretend--I think I know, I feel I know a lot more
about foreign policy than I do about the oil industry. But the
fact is, I don't see the near term, no matter how well we
succeed, that there's so much stability in the oil-producing
countries around the world in the next generation that we
aren't going to find ourselves subject to--in bad need of
flexibility.
My time is up, I can't tell you how much I appreciate your
being here, Mr. Chairman. Your views are welcome and greatly
respected, and I thank you for taking the time.
Dr. Greenspan. Thank you very much.
The Chairman. Thank you, Senator Biden. Senator Voinovich.
Senator Voinovich. Thank you, Mr. Chairman. I do share
Senator Biden's appreciation of your being here today.
Recently, I met with, a kind of reception with the chairmen
of the three major U.S. auto companies, and they indicated that
they definitely were going to go forward with more ethanol-
fueled vehicles. In fact, one of them said that 25 percent were
going to be ethanol, E85. I have met with representatives from
the oil industry and talked to them about the infrastructure
needed to make this available, E85, and their response was
that, number one, they weren't really interested in putting
those pumps in. And the reason for it was that the cost of
ethanol was high and that in some instances, higher than
gasoline. And last but not least, that when people find that
they're going to have to tank up more often with ethanol than
with gasoline, they're going to be less inclined to use
ethanol.
The concern that I have is that there seems to be a
collision, maybe going to occur between the auto makers who, by
the way, get credit for their E85 even though you may not use
E85, and the auto companies saying, you know, we're not that
interested in it.
We are thinking about--building on the last energy bill--of
increasing the tax credit for building these pumps from 35 to
50 percent. In other words, we're going to say, ``We're going
to make it more worth your while to put these pumps in.'' And
I'd be interested in what you think of that.
Second of all, from your testimony, I got the impression
that you really felt that the future was in cellulosic
renewables, and that's puzzling to a degree, because if you
look out in the marketplace, we're seeing tremendous
investments in ethanol refineries. In my State when I was
Governor, I tried to get them to build a refinery. I couldn't
do it to save my soul, and we've got three that are underway
and looks like we're going to have more. There's supposedly 38
of them being built in the country, and the issue is for us, in
terms of investment, should we be putting--or in terms of
incentives--be putting more money into that, or should we spend
a lot more of our dollars in moving in the area of cellulosic
which I understand the technology still isn't there yet for
cellulosic, and by the way, these ethanol plants aren't going
to be able to handle cellulosics. They will have to add
something or build new ones. And of course the other one is the
hybrid that you made mention of, and that is the electric
battery plus gasoline. I met with somebody recently and they
were talking about diesel-electric for big trucks.
So I'd be interested in your comments about some of these
statements I've made and where do you think we're going and if
you were in our shoes, where would you be putting your money?
Dr. Greenspan. I think it's a very tough question and I'll
tell you why. First of all, it's ultimately going to be the
markets and technology which will determine what is what. The
real problems with ethanol are one, that whenever you're
dealing with a huge, say 9 million barrel a day gasoline
market, and the inability to intertwine the two types of oils
in the pipelines, because as you know you cannot put ethanol
through oil pipelines because of the chemical----
Senator Voinovich. That's the other thing they mentioned,
they've got to truck it in to do it.
Dr. Greenspan. Exactly. It's got to be. Ethanol has got to
be until we find some solution to that, a generally local
issue. In other words, what you've got to do is have your local
refinery essentially working off local crops and delivered by
trucks and you can't get huge volumes of that very easily right
away. And I don't know enough about the actual details of what
the costs are and the like, and the ability to shift from corn
to cellulosic, but I do know that because corn is inherently
limited in size, it has been a very useful additive to date,
and is clearly that's all we've got. So, cellulosic is very
nice, but it's hypothetical at this particular point.
But, if ethanol is to be a really significant issue here,
it's going to have to be cellulosic. And so I would think that
what we'd want to do is to get up as quickly as possibly on
technologies of cellulosic and find it----
Senator Voinovich. So you would be, if you're--we're going
to try to pass another, it's the second version of an energy
bill----
Dr. Greenspan. Yeah, I would move as quickly as I could to
find out whether cellulosic is really a practical alternative.
Because if it turns out that the plants actually work, are
cost-effective and have potential, reasonably good capacity,
with very few problems which invariably occur in these sorts of
technology which we don't anticipate in advance. If you can
find out if this stuff works rather quickly, I would try--
because of the inability to add/mix corn and cellulosic
ethanols as far as the production facilities are concerned--to
find out whether you've got something here. Because if you do,
then I think you move ahead as quickly as you can in developing
cellulosic, because that's the only thing that's going to
create the volumes adequate to really be a major competitive
thrust against gasoline.
Then I'd also be trying to move as quickly as we can on
liquefied natural gas, and the gas to liquids conversion
capabilities, which are also beginning to work here----
Senator Voinovich. Can I interrupt you just a minute. That
gets into another issue and I'm sorry I missed the testimony--
your response to Lisa Murkowski's questions. But you know and I
know that the high cost of natural gas has clobbered a part of
our economy, the chemical industry, and they haven't been able
to adapt as some others have.
Dr. Greenspan. They've moved out of the country.
Senator Voinovich. We're a net, right, we used to be a net
exporter, now we're an importer. I had a company in the other
day. They were in 3 years ago. They had 22,000 people in the
United States, now they've got 14,000 and they basically said,
``If you don't do something about these natural gas costs,
we're going to lose more jobs.'' And in our home heating, I
mean, we've increased lie heat dramatically to help people with
their heating costs. We got a break this last winter because it
wasn't as bad as what people expected, but we're now seeing the
cost of natural gas go down quite a bit because I guess they've
got a great deal of supply out there and----
Dr. Greenspan. It's basically a weather phenomenon.
Senator Voinovich. But you think it's a phenomenon, you
think that the natural gas costs will ratchet up again?
Dr. Greenspan. Well, we're now at about a little over $6
for a million BTUs. We had been, of course----
Senator Voinovich. $16, $14, $15, yeah.
Dr. Greenspan. Really sharply, the problem is storage
capabilities with gas are not obviously as efficient as with
liquids, and when you have any commodity without inventory,
like electric power or, even to a lesser extent natural gas,
demand and supply variations create huge immediate changes in
price, rather than work their way through the inventory system,
which is what happens in oil.
And so the gas issue here largely is going to rest--not on
the current balances which we now have which is, you know, we
import a large chunk of our gas from Canada. We produce a big
chunk of it in the United States, although the production has
come down because of the hurricanes--and it's liquefied natural
gas where the answer lies.
Senator Voinovich. Yeah, but can I ask you something? The
question is, we talk about LGN--what I've been getting from
talking to people, are they, is the infrastructure being put in
the United States in order to bring in LGNs and I understand
that some of the people overseas that provide LGN are wondering
whether or not we're going to have the places where it can be
brought in and stored.
Dr. Greenspan. Yeah, we--our problem at the moment is
actually less the terminals which we have a fairly large number
that are planned, authorized, or under construction. It's
getting the LNG to begin with. In other words, what we need to
do is--because a lot of this stuff is on long-term contract, we
have yet to get very substantial long-term commitments as the
Japanese have with the Indonesian liquefied natural gas
operations. And it's only when we start to get those longer-
term contracts or the LNG market becomes sufficiently large and
sophisticated that there is a spot market, which there isn't to
speak of now, and that's what our problem is. We need to get a
more sophisticated market. But there is a lot of stranded gas
out in the world which is available and if you can get a world
market in LNG it could be rivaling a good deal of the oil
market in certain respects.
Senator Voinovich. I'm out of my time, but the real
question is, is Mr. Jones in Cleveland, Ohio, whose natural gas
costs have gone up astronomically, and he's saying to me,
``Senator, what are you doing about bringing down my natural
gas costs?'' and the question is what are the prospects, you
know, in the next year or 2 years to see a situation where I
can say to him, ``You know, I think that maybe you're going to
see a 25 percent reduction in your natural gas costs.''
Dr. Greenspan. Well, I think what you can say, Senator, is
the fact that if we get this ``stuttering'' process of
expanding liquefied natural gas on track, which we should be
able to do, I hope, within a couple of years, then the price
begins to reflect the marginal cost of bringing gas from a lot
of different places in the world to the United States which had
been--I don't know where it is now, but as of the last time I
looked at the cost structure--is down in the area of $4 per
million BTUs. Now, I don't know whether or not that
automatically is what the price will become, but at some point
it's going to be LNG imports which is going to set the price
for all of the gas in the United States. It can't do it yet.
It's only 3 percent of the total.
The Chairman. Thank you very much, Senator Voinovich.
Senator Nelson.
Senator Nelson. Thank you, Mr. Chairman. Mr. Chairman, it's
good to see you.
Dr. Greenspan. Good to see you, Senator.
Senator Nelson. Given the fact that we in the United States
have about 3 percent of the world's oil reserves, yet we
consume 25 percent of the world's oil production, certainly
your testimony is well-received, and I think will go a long way
in trying to jolt some people out of this oil dependence.
But I'd like you to comment on an additional fact, just for
the record, that 79 percent of the world's oil reserves are
controlled by governments, suggesting that substantial amounts
of proven global reserves could be subject to political
decisions, not market forces.
Dr. Greenspan. Well, I'm fearful that they're doing it now.
And the real problem that I think we have is that vast amounts
of reserves in the ground which could be extracted for just a
few dollars a barrel. It used to be in a sense, it's gone up a
lot, but it's still relatively negligible. The problem is that
the incentives for the nationalized oil companies to do that
are not very great. The sole exception, at least to those whom
I've spoken with who really are concerned about the high price,
are the leaders of Saudi-Aramco, who recognize that a 250
billion reserve plus situation is very precarious if all of a
sudden the United States, the big user, starts to switch to
non-oil, non-petroleum means of energy, because what that will
do in the long-run is lower the market value of their reserves,
and they recognize that, and they're trying, essentially, to
expand capacity to hold the prices down.
But the vast proportion of those national oil companies
rebuff the international oil companies--the ones with the
technology and capability of going in--and if a deal could be
made, some royalty or something like that, we could increase
the crude oil capacity of the world very significantly with the
effect of bringing prices down quite markedly. But there is
very strong political resistance to do that, and even outside
of OPEC. I mean, Mexico, its constitution prevents foreigners
from having any commitment in the national patrimony which is
their crude oil, despite the fact that PEMEX executives,
Mexican national oil company, are petitioning their government
to allow them to ask foreigners to come in so that certain
particular fields deep in the Gulf of Mexico and deep down
under the sands are there, but they don't have the technology
to get there. And so far, nothing has happened. And that's true
everywhere.
And that's what our problem largely is. It's not as though
the oil is not there, it's just that the capability of
converting it into productive capacity to meet the growing
demands from China, India, everywhere else in the world are a
very big question, a very big problem.
Senator Nelson. Well given that, we each year go through a
drill up here where we try to increase CAFE standards, and we
always get beat trying just to increase miles per gallon on
SUVs, phased in over a number of years. Is this not the time,
in addition to what you've testified about alternative fuels
like ethanol, nuclear and so forth, is this not also the time
for us to have the likes of a Manhattan Project where we go out
and develop an engine for the future that will be totally
independent of oil?
Dr. Greenspan. I think the example of the Manhattan
Project--that project was far more narrow than people realize.
There was a specific technology that, as you know, there had
been an early discovery that the uranium atom was unstable and
that eventually led to the Chicago operation----
Senator Nelson. Then let me substitute for Manhattan, an
``Apollo'' project.
Dr. Greenspan. Okay. That is actually a more relevant
thing, because we're starting with much less knowledge. I would
hope we don't have to do that, and the reason is that at the
moment, I think the markets are working in the direction of a
solution. If we create an ``Apollo Project'' it may fail, it
may not fail, but one thing it surely will do is that it will
eliminate all of the market incentives, because there would be
no way for a private equity fund that wanted, for example, to
invest in the cellulosic project to compete with unlimited
funds of an Apollo Project.
So, I would hope not, but not because I think it may not
succeed. It might. But I'm almost certain that it would divert
what is already working at this stage--to be sure slowly--and
it's very frustrating, but it is working. And I'd like to see
the market forces
continue, because they are working. We've seen the gradual
disengagement of the United States from petroleum--it's been
going on for 35 years. We've now reduced our dependence by half
and we're still moving it down. And at some point we're going
to get to a level where it's not going to be a national
security question any more. And I would hate to divert that
process.
Senator Nelson. Reduced our dependence by half, and yet our
consumption of foreign oil goes up as a percentage of our total
consumption.
Dr. Greenspan. That is correct, and indeed it will continue
to do so. And this is the reason why if we can get a major
shift in how we drive our motor vehicles--whether or not it's
hybrid or plug-in hybrids, or whether or not it's cellulosic-
based ethanol--or whether we find we can work from liquefied
natural gas of which there is a vast amount out there,
converting that into liquids. There are an awful lot of
alternate sources, and they're not mutually exclusive. So,
we're on our way, gradually, to weaning ourselves off
petroleum. It is slow, and I regret to say in many cases, it's
like watching grass grow, but it is working. And I think we
have to be careful to nurture that process.
Senator Nelson. Final question, Mr. Chairman. Is your
opinion the same with regard to the development of an Apollo-
type project for a new engine if you set a date certain in the
future so that the market forces knew that within that 30-year
period that you would not have the competition of this new
engine?
Dr. Greenspan. Senator, I don't think that this Congress or
the next one can commit the United States to such a view. The
pressures, as you know far better than I, when that particular
deadline begins to grip, it would have very profound
implications. A lot of constituents would become very strained
as a consequence. I'm not sure how successful you would be to
put that in place. I would hate to see it tried, because I
don't think in the past when we've tried such things it ever
really worked out very well.
Senator Nelson. Is that to say that you are suggesting to
us that over the course of the next 20 or 30 years that what we
should do is reduce our energy consumption of foreign oil so
that we're completely free of foreign oil over the course of
the next two or three decades?
Dr. Greenspan. I would say we reduce our consumption of
petroleum. Because whether foreign or domestic, it doesn't
affect the price. But what is necessarily the case, as far as
the United States is concerned, if national security is the
issue, is weaning ourselves off of those very serious sources
of supply which create problems for us. The issue is to get off
petroleum, not whether or not it's imported or not. And I think
that where our ethics ought to be are in those promising areas
where large possible changes are conceivable. And that's the
reason why I would like to see us move as quickly as we could
to find out whether the various forms of cellulosic ethanol are
in fact feasible. Everyone thinks they are, everyone has
figured out the acreages we need of switchgrass and the extent
of types of significant crop yield changes that are required
and the technology of converting these carbohydrates into oil
is well known. Indeed, we used to use ethanol in American motor
vehicles before the first World War, so it's not an unknown
technology, but we don't know if we can make it work at the
levels, the volumes, the huge volumes that are going to be
required to make a very major--very major effect in motor
gasoline consumption in the United States.
Senator Nelson. Well, if it doesn't work, I'm going to be
advocating for an Apollo Project.
Dr. Greenspan. I hope it works, sir.
The Chairman. Thank you very much, Senator Nelson. I have
just one more question and this concerns an area we haven't
touched upon today. Some in the coal industry believe that
there are possibilities for believing there's a portion of the
petroleum demand in the United States which is the use of coal.
This then leads to other questions--quickly environmental
considerations which many in our country believe that although
there are large reserves of coal available they have
environmental problems.
Now this leads to a debate--we've been reading in the
press--between various companies in the coal industry. Some are
saying that it may simply be a prudential measure that at some
stage the United States will require carbon sequestration and
therefore if you're building a new power plant you ought to
build one that takes that into consideration. Whereas others
take a more traditional view. That is that all of this carbon
sequestration is very expensive. Even the procedures are not
altogether well established, they would claim. And then we have
sort of the issue of the scientific evidence for climate
change, global warming, which sometimes leaves the science into
the almost theological as people dispute this in the country.
So it swirls around the coal business in a big way.
On the other hand, the discussion of coal can't be omitted
from the conversation because from the United States'
standpoint, we do have a lot of coal. As locally based in many
places in our country and there are many persons who are
prepared to build power plants under certain circumstances that
sequester the carbon and might serve us for a long time.
Have you given any thought to the place of coal in this?
And the debate that I've just described abruptly here?
Dr. Greenspan. Well, Mr. Chairman, it's fairly obvious that
if the worst of all possible circumstances arose, we do have
the technology to create, to build only plug-in motor vehicles,
and to use only coal, whether it's cleaned, or otherwise, to
generate electric power. We can keep our vehicle fleet on the
road. Now I grant you that there will be a lot of required, re-
plug ins every hundred miles or thereabouts, but we could do
it. That's the extreme fallback position.
Less than that is obviously we are moving toward the
sequestrated carbon and other clean technologies, but I don't
think we've focused enough on nuclear. The technology of
nuclear has changed dramatically since Three Mile Island. The
French have been running three-fourths of their electric power
system for decades on nuclear and it's worked quite fine. I
think that our knee-jerk reaction against the issue of nuclear
is in the full context of our environmental requirements, and
indeed the health requirements involved in getting a very large
coal economy, have got to be matched against nuclear. Nuclear's
got problems, there are difficulties clearly with waste and a
number of other issues, but we are developing technologies
which can address it on an interim basis, meaning 100 years or
something like that. Without putting nuclear into the mix here,
I think we're making a mistake.
But the one thing we can say with a reasonable degree of
accuracy is that the energy abundance on which this Nation was
built is over. We no longer have the choice of one abundant
energy source versus another. We're now having to make choices
as I put in before, between the non-good, and the still less
non-good. We will not have the uninhibited lifestyle available
to us that very low-cost and available energy enabled us to
live up through the 1950s and the 1960s and indeed even today.
Because what is happening is year by year we're getting closer
to the point where we're starting to really run out of oil,
even in the national oil companies. And at some point we're
going to reach a peak of production, and it's going to start
down. That doesn't mean that oil is going to go away. You can
have a decline go on for a long period of time and still
produce a good deal of oil, but oil is a finite resource. We
have to remember that we tend to switch to a new major fuel
before the other major fuel is dissipated. We moved to coal
before we denuded the forests of wood, and we moved to
petroleum before we ran out of coal. And I would surely presume
we're going to move to the next set of energy technologies
before we run out of oil.
The Chairman. Senator Voinovich, do you have additional----
Senator Voinovich. I do, Mr. Chairman.
I'd just like to get back to that natural gas question
again. From what I heard you say, it's probably going to be 3
or 4 years before Mrs. Jones in Cleveland, Ohio, is going to
see her cost of heating go down?
Dr. Greenspan. I don't know what the time frame is. If you
had asked me 2 years ago, I would have said we probably would
be there by now--we haven't been. It's been a much more
difficult, just plain institutional structure--it's got nothing
to do with technology or anything like that. It's just that we
haven't managed it in a way to lock in foreign sources of gas,
find the appropriate tanker fleets, get the contracts written
so certain numbers of deliveries are made to each LNG terminal
per month, and have the gasification of the liquids structured
in such a manner that it goes into the pipelines as we need
them----
Senator Voinovich. So, basically what you're saying is that
the future in terms of getting our costs down are the liquefied
natural gas, and we've got to move on that as quickly as we
can.
Dr. Greenspan. Yes, I can not envisage any way to get
natural gas prices down in the United States other than through
a significant increase in the imports of liquefied natural gas.
Senator Voinovich. Well, you might be interested to know
that the last energy bill did provide some significant
incentives in clean coal technology to--we have an abundance of
coal, 250 years of coal in this country to utilize that more
than we're now doing it, and the other thing--I don't know
whether you're aware of it, but I have a Nuclear Regulatory
Commission under my subcommittee in another committee. We have
19 applications. They are coming into the NRC, and so because
of the incentives that we put into the energy bill, they're
moving in that direction. So I think that's something that we
should be----
Dr. Greenspan. Are we getting to, yet, a standardized
nuclear plant which everyone can basically deal with without
waiting for the years and years of people fussing over----
Senator Voinovich. Well, the technology's out there, and in
addition to that, we've made it easier for them. They can now
commit to their application with the technology and siting, and
most of these are going to site them in areas that are already
sited, so you don't have to deal with the ``not in my back
yard'' syndrome that they run into, and the technology's pretty
well accepted. A lot of it is European technology. Some of it
has been used in South Africa--so I think that we're, we've got
it, and I think the reason why we're seeing the applications is
because we do have the technology that we can move forward
with.
The other question I have is dealing with--getting back to
oil--after sitting in on hearings I start to sweat bullets
about how vulnerable we are to some foreign power deciding to--
I mean, I thought what if Saudi Arabia becomes unstable?
Somebody like Osama bin Laden gets elected and with their
mindset, we're just going to cut it off and it doesn't make any
difference whether we get the money or not, we're going to do
what we're supposed to do. You have Chavez talking about it
down in, you know, let's get at the United States--so I think
we should be moving away from the Persian Gulf in terms of that
area because it's not that stable, and God only knows where
this whole terrorism thing's going to finally play out. We
don't know. We're very uncertain about this.
But if you take that into consideration, the next question
is, we spend--according to testimony before this committee--
about $50 billion a year to protect our oil in the Persian
Gulf. And if we gradually move away from that source, who's
going to pick up the costs of protecting it? I mean, I don't
think some of our European allies get it that we've been doing
them a big favor for a long time of protecting that source of
oil supply.
So, the question is, if we move away from that--first of
all, do you think that's a good idea? Second of all, if we do--
maybe this is beyond, you know, it may be a foreign policy
question--what implication does that have in terms of our
relationship with these countries in the Persian Gulf?
Dr. Greenspan. First of all, Senator, I think that the
issue is not from whom we purchase our crude oil. It's what the
price is. Because we have an international market. And merely
saying that we won't buy from one supplier or the other is
really not terribly important, because the trade is so large
and the interchange of crudes is so substantial that there's
one price in the world for each particular grade adjusted for
transportation and the like. And so whether we buy from Saudi
Arabia, or from Venezuela, or from Canada doesn't matter. The
question basically is what is the overall oil infrastructure
supply and therefore, given the world demand, what is its
price. And I think our interests and indeed I think I've always
envisaged the reason why we have such large investments in the
Middle East to protect oil is essentially that we are the major
user. We consume 25 percent of the world production, but it
doesn't matter where we get the oil. But what we do know is
that if the Middle East gets shut down or places in the Middle
East from which we get no oil shut down, the cost to us will go
up the same. And so, our interest is in maintaining the supply,
and indeed not only the Middle East, but actually the tanker
shipments across the various oceans.
So our interest has got to be, until we can reduce our
consumption, to hope and protect if we can, the existing system
until it eventually begins to peak--and it will go down of its
own--I don't know whether or not it starts down in the 2040s as
I gather the Energy Information Agency of the Department of
Energy has been projecting, or whether some new technologies
come in and reservoirs are capable of getting 80 percent
recoveries--well above what it is now. Obviously, it increases
the availability very substantially--it's hard to know where
all of this is coming out, but what we do know is our interest
is, so long as we are very critically determined on petroleum,
to make sure that its aggregate supply is maintained. Not that
it's maintained in any particular geographic arrangement.
Senator Voinovich. Mr. Chairman, can I ask one more
question? It gets back to your legislation. Tom Friedman
recently suggested that we refocus our policy on developing an
access of energy to compete with. He quotes it ``Access of
Evil'' that would mean that India, China, and the United States
get together and start talking with each other about this whole
energy business. To talk about the supply and how we need the
supply and what are some of the things that maybe we can do
respectively to try to reduce the demand.
Dr. Greenspan. I'm not sure what it is that that confab
will conclude and what we can do to enforce the particular
conclusion. If there is a, for example, a joint discussion to
find ways in which we can all conserve on energy, and
interchange ideas and abilities, there may be something to
that. But it's not clear to me that the three of us combined
somehow can be a cartel which will dictate to OPEC--doesn't
sound credible to me. Because I don't think any of us has the
capability of restraining our use of petroleum without
impacting on our economies very significantly and it's only
when we find alternate means and alternate solutions that we
have that capability. So, Tom Friedman has got a lot of good
ideas. I'm not sure this is one of his better ones.
Senator Voinovich. Thank you, Mr. Chairman, and thank you,
Mr. Chairman.
The Chairman. Thank you, Senator Voinovich, and we all
thank you again, Chairman Greenspan for your testimony today.
It's been comprehensive and very, very helpful.
I want to present for the record--a request by Senator
Biden--the written testimony of John Podesta, President of the
Center for American Progress, to be made a part of the record.
Without objection, that insertion will occur.
[Editor's note.--The previously referred to information
appears in the Additional Material Submitted for the Record
section at the end of this hearing.]
Thank you again, we look forward to continuing our visits
with you.
Dr. Greenspan. Thank you very much, Mr. Chairman.
The Chairman. The hearing is adjourned.
[Whereupon, at 11:37 a.m. the hearing was adjourned.]
----------
Additional Material Submitted for the Record
Prepared Statement of John Podesta, President of the Center for
American Progress
Chairman Lugar, Senator Biden, and members of the Senate Foreign
Relations Committee, thank you for the invitation to submit testimony
today on the critically important topic of our Nation's oil dependence
and the risk it poses to our economy. The Center for American Progress
has placed a high priority on developing policy solutions to a variety
of energy-related issues, including the pressing challenge of our
Nation's growing dependence on oil and the closely related threat of
global warming.
The United States is saddled with rising prices for gasoline and
crude oil, escalating uncertainty in energy markets, and increasing oil
importation stretching into the foreseeable future. These stubborn
facts will not change without an aggressive policy response that
promotes both radically increased energy efficiency in our vehicle
fleet and a rapid shift to greater use of alternative renewable fuels.
At the Center for American Progress, it is our belief that such a bold
program to advance both new technology for conservation and greater use
of biofuels to replace polluting fossil fuel will have a tremendous
positive impact on jobs and economic growth, as well as securing
improved national, economic, and environmental security. This moment
holds both great risk and great opportunity.
Let me quickly review the underlying fundamentals.
supply is struggling to keep up with demand
Today the cost of a gallon of gasoline remains well above $3 per
gallon in many parts of the country, and the cost of a barrel of oil
continues to hover above $70. Just a few years ago, these prices would
have been unthinkable, and they are having a significant and regressive
impact on working families and on our greater economy. The causes of
these persistent high prices are clear. Global demand is outpacing
supply and refining capacity, creating a tight market that leaves us
and our allies increasingly vulnerable to disruptions in energy
supplies from unstable and sometimes hostile countries (which adds a
further premium to prices). Consumers have insufficient choices in fuel
type, fuel efficiency, or even other transportation options, all adding
to the economic strain on families.
The United States is responsible for 25 percent of global oil
demand, largely for our vehicle fleet, yet we possess less than 3
percent of proven oil reserves. Clearly domestic supplies cannot solve
this problem. Oil is a global commodity, and global demand will define
our options as long as we rely on oil as the lifeblood of our economy.
These patterns show few signs of declining. Today global oil demand has
already surpassed 80 million barrels per day, and the Energy
Information Administration (ETA) projects it to reach 103 million
barrels per day in 2015 and nearly 120 million barrels per day in 2025.
Projected increases in world oil demand would require an increase of
more than 42 million barrels per day relative to 2002 crude oil
production capacity, the equivalent of four Saudi Arabias, but global
oil reserves are already being depleted three times faster than new
reserves are being discovered, according to a 2004 Department of Energy
(DOE) analysis.
Domestically, our demand shows even more alarming trends. As the
largest consumer of oil on the planet, we are most vulnerable to
fluctuations in this market. Yet America's dependence on imported oil
has grown steadily since 1972, when domestic output reached its peak of
11.6 million barrels per day. Domestic production is now 9 million
barrels per day and declining. Yet total oil consumption is nearly 21
million barrels per day, and, absent change, projected to reach 29
million barrels per day by 2025. Today, 66 percent of oil consumed in
the United States comes from foreign sources, up from 58 percent in
2000, with about 20 percent of those imports coming from the volatile
Persian Gulf region. In spite of these alarming statistics, the
efficiency of our vehicles is moving in the wrong direction. In 1987,
the average fuel economy of U.S. auto and light truck fleet was 26 mpg;
in 2004, that number had fallen to 25 mpg.
reliance on oil has real costs to the u.s. economy
In 2005, the United States spent over $300,000 a minute on foreign
oil. Oil is the largest component of the U.S. trade deficit, which has
reached an unprecedented cumulative level of $2.835 trillion during
this administration. In 2005, our trade deficit reached $723.6 billion,
a 17 percent jump over the previous year and twice the trade deficit of
2001. Oil imports accounted for nearly 25 percent of the entire
deficit, with rising crude oil costs adding an estimated $70 billion to
the Nation's trade imbalance in 2005 and as much as $100 billion
predicted in 2006. Volatility in the oil market creates further costs,
estimated by the DOE at $7 trillion during the past 30 years. Together,
these impacts mean that our reliance on oil is a substantial drain on
our overall economy.
Rising energy costs are also highly regressive. Working families--
who spend the largest share of their income on transportation and
energy--are hit the hardest. A recent Center for American Progress
analysis found that between March 2001 and May 2006, rapidly rising
gasoline prices and flat minimum wages have resulted in a nearly 105
percent increase in the cost for minimum wage earners of getting to
work each week. On average, it now takes 11.2 hours of work--until
Tuesday morning--for these low wage earners to pay to get to work, up
from an average of 5.5 hours in March 2001. Amid these rising gasoline
and oil prices, 23.2 million families with incomes of less than $24,102
paid almost 8 percent of their annual income for gasoline in 2004,
according to the most recent data from the Bureau of Labor Statistics.
And that's before the recent jump in gas prices.
Yet while consumers are taking a hit at the pump, oil companies
have made record profits. In 2005, Exxon earned the highest profit ever
recorded by a corporation: $36 billion. Large profits were reaped
throughout the industry, with companies like Valero Energy--the
Nation's largest oil refiner--posting record quarterly earnings of $849
million. In light of the record-breaking profits and substantial social
costs from energy prices, there is a need for increased Federal
oversight on issues of market power and consolidation, market
manipulation, and price gouging.
A further cost to America's businesses and consumers has been the
failure to put the full weight of public policy behind the transition
to energy efficient and renewable energy technologies. U.S. auto
manufacturers, who are hemorrhaging jobs, are losing market share to
foreign competitors in the race to produce more fuel-efficient vehicles
and could benefit from strong manufacturing conversion incentives to
get more efficient and alternative-fuel cars on the road. The slow
progress in bringing biofuels to scale delays the benefits to U.S.
farmers and refinery and construction workers that will come from an
emerging renewable fuels industry and upgraded infrastructure.
reliance on oil poses serious national security
and diplomatic challenges as well
Since 2001, America's dependency on foreign oil has steadily
increased, even as the cost of oil has more than doubled. This
dependence compromises our foreign policy objectives by compelling the
United States to support or tolerate authoritarian regimes that pose a
threat to its national security. An increasing share of the world's oil
imports will come from these undemocratic countries, not from friendly,
stable ones like Canada or Norway.
These political risks both threaten our security and impose direct
costs by driving an ever larger risk premium into the price of each
barrel of oil. Osama bin Laden has identified the global energy
infrastructure as an important target for his followers, and in
February 2006, suicide bombers attacked a key oil processing facility
in Saudi Arabia. The attackers failed to penetrate the heavily guarded
facility's security perimeter, but nevertheless oil prices jumped 3.4
percent. Likewise, Iran has to do no more than threaten to cut supply
for oil prices around the world to spike, as it demonstrated once again
this week.
The defense of the global oil infrastructure is another cost born
in large part by the United States. Around the world, the U.S. military
is charged with protecting pipelines, refineries, and strategic sea
lanes from terrorist or insurgent attack. The Department of Defense has
stepped up its arms deliveries and training to forces in Angola and
Nigeria. As long as American forces remain in Iraq, a significant
number of them will spend their time guarding highly vulnerable
pipelines, refineries, loading facilities, trucking routes, and other
petroleum installations. The U.S. Navy is patrolling the vital tanker
lanes of the Persian Gulf and the Strait of Hormuz, the South China
Sea, and the Strait of Malacca. While these costs are not solely born
in the defense of oil, our dependence on oil makes them essential.
The Congress may have to vote again before the end of the year to
raise the Federal debt limit, this time to $9 trillion. The combination
of our unbalanced fiscal policy with a deepening trade deficit, a third
of which came from imported petroleum products in 2005, is untenable.
As we finance our deficits in global capital markets, we reduce our own
flexibility in national security matters while increasing the leverage
of our competitors. I do not want to overstate the importance of this
development, but it is imprudent to think that the increase in our debt
attributable to energy costs will not negatively impact our national
security.
Climate change--which is caused by excess emissions of heat-
trapping gases from the combustion of fossil fuels as well as other
human activities--also poses a growing threat to our national and
economic security. Scientists project that the earth's average
temperature will increase 2 to 10+F (1.4 to 5.8+C) over the next 100
years if the world fails to curb greenhouse gas emissions (of which the
United States currently accounts for 25 percent). The U.S. State
Department released a report
predicting that these increases in temperature would cause sea levels
to rise (threatening the coastal areas where 53 percent of Americans
live), more frequent and severe storms, the widespread destruction of
ecosystems, and more frequent heat waves and droughts. One of the many
lessons of Katrina is that the economic and social impacts of such
natural disasters would be enormous.
In much of the developing world, meanwhile, reliance on oil has
already been devastating. The International Energy Agency (lEA)
estimates that for every $10 hike in the cost of a barrel of crude, the
economy of an oil importing country in sub-Saharan Africa is impacted
more than 10 times as much as the United States. As a result, important
gains reaped from sensible debt forgiveness initiatives are being wiped
out by rising energy costs (see Annex 1). For example, the increase in
the cost of imported oil from 2002 to the projection for 2006 for
Ethiopia is over 10 percent of their total debt service relief granted.
This increased cost of oil is equal to 4 percent of their GDP. To put
that percentage in context, Ethiopia spends the equivalent of 2.6
percent of their GDP on health care. The resulting squeeze on
struggling developing world budgets can lead to serious consequences
with international repercussions. Decreasing our reliance on oil and
helping the developing world to do the same would reduce greenhouse gas
emissions and global inequity, thereby ultimately increasing domestic
economic security in our Nation and the developing world.
leadership in moving away from oil dependence is needed
To find a path forward that strengthens our domestic economy and
increases our security, it is essential that the Senate continue to
show real leadership in advancing policy solutions that break our
dependence on oil in a manner consistent with the rising threat of
climate change. These policies should encourage the domestic production
of more efficient vehicles and the development of a domestic renewable
fuels industry and infrastructure that decreases both oil consumption
and greenhouse gas emissions.
The American Fuels Act (S. 2446) written by Chairman Lugar and
Senator Obama, for example, is a bipartisan measure that creates
meaningful incentives for commercializing the next generation of
ethanol and investing in new fueling infrastructure. The recently
introduced Clean EDGE legislation (S. 2829) contains many building
blocks for a rapid transition to a more secure energy future, including
strong incentives for the rapid deployment of an E85 ethanol
infrastructure for distribution and fueling stations, increased
investment in commercialization of cellulosic ethanol, strong
incentives and mandates for the deployment of flexible fuel vehicles
and hybrid electric cars within the fleet, as well as manufacturing
conversion incentives for domestic production of high performance cars.
In addition, innovative policies that will ensure reductions in oil
consumption, like the binding oil savings targets included in the
Vehicle and Fuel Choices for American Security Act (S. 2025), or an
increase in fuel economy standards, should be part of a meaningful
policy program to break the grip of imported oil on the domestic
economy. Senator Tom Daschle, a Distinguished Fellow at the Center for
American Progress, and Vinod Khosla, who testified before this
committee just last month, have recently proposed a Carbon Alternative
Fuel Equivalent standard that expands on the traditional CAFE
calculations to incorporate both fuel economy and the use of
alternative fuels in a single metric that captures the benefits of
reduced carbon emissions.
Over time, ending our oil dependence will mean a stronger economy,
more jobs, healthier communities, greater innovation, and a more
efficient and productive workforce. These benefits should not be
delayed. The economy of Brazil offers a compelling picture of what an
alternative fuel future holds for the United States. Since the mid-
1970s, Brazil has saved $100 billion dollars by substituting
domestically produced ethanol for imported oil. Ethanol now accounts
for 20 percent of Brazil's transportation fuel market, and production
of flexible fuel vehicles able to run on gasoline or ethanol has grown
from less than 1 percent of the Brazilian new car market in 2001 to
more than 70 percent today. The country of Sweden has proposed to do
even more, setting a national goal to end their reliance on oil
altogether over 15 years by 2020.
The United States has had its own success with the recently enacted
Renewable Fuel Standard (RFS). The RFS mandates that 7.5 billion
gallons of ethanol be used in the U.S. fuel supply by 2012, but a
rapidly growing ethanol industry is on track to meet that requirement
well before the deadline. We need to nurture this success into an even
larger market for renewable fuels from sources that minimize
environmental impacts and greenhouse gas emissions. All opportunities
to expand the market for clean renewable fuels should be pursued. For
example, the Environmental Protection Agency's rulemaking on mobile
source emissions presents a unique one. By replacing with ethanol the
25 percent of our gasoline supply that is made up of aromatic
compounds, we have the opportunity to improve air quality and protect
public health while increasing our national and economic security.
Clearly, there is much to be done, but as seen in the previous
examples, much is possible. It is time for concerted effort to move
rapidly toward increased energy independence by uniting the country
behind a bold national goal as we did with the Manhattan Project or the
Apollo space program. The American people are looking to you for
leadership.
Thank you for the opportunity to submit this testimony.
ANNEX 1: THE IMPACT OF HIGHER OIL PRICES ON SELECT HIPC COUNTRIES \1\
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Total
Cost of Increase Increase Public poverty
Debt service Annual oil Estimated cost Projected cost Increase in oil in in cost in cost expenditure reduction
Country GDP (US$ in relief granted consumption (bbl of oil to of oil to annual cost to 2006 as as as on health expenditures
2005) (US$) in 2003) \2\ country in 2002 country in 2006 country 2002- percent percent percent as percent as percent
(US$) \3\ (US$) \4\ 2006 \5\ GDP debt GDP GDP (2002) GDP (est.
relief 2006) \6\
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Mauritania................... 1.4 billion..... 1.1 billion..... 9 million....... 184 million..... 520 million.... 336 million.... 38.3 30.5 24.8 2.9 5.5
Sao Tome and Principe........ 69 million...... 200 million..... 0.2 million..... 5 million....... 14 million..... 9 million...... 20.4 4.5 13.2 9.7 31.1
Guinea-Bissau................ 280 million..... 790 million..... 0.9 million..... 19 million...... 53 million..... 34 million..... 18.9 4.3 12.2 3.0 5.3
Sierra Leone................. 1.1 billion..... 950 million..... 2 million....... 50 million...... 141 million.... 91 million..... 12.5 9.6 8.1 1.7 4.9
Gambia....................... 429 million..... 90 million...... 0.7 million..... 15 million...... 43 million..... 28 million..... 10.1 31.1 6.5 3.3 5.0
Burundi...................... 730 million..... 1.5 billion..... 1 million....... 23 million...... 65 million..... 42 million..... 8.9 2.8 5.7 0.6 2.9
Senegal...................... 8.0 billion..... 850 million..... 11 million...... 238 million..... 671 million.... 434 million.... 8.4 51.0 5.4 2.3 8.6
Rwanda....................... 1.8 billion..... 1.4 billion..... 2 million....... 46 million...... 130 million.... 84 million..... 7.1 6.0 4.6 3.1 10.6
Ethiopia..................... 8.8 billion..... 3.3 billion..... 10 million...... 207 million..... 585 million.... 378 million.... 6.6 11.4 4.3 2.6 17.0
Malawi....................... 2.0 billion..... 1 billion....... 2 million....... 42 million...... 118 million.... 76 million..... 5.9 7.6 3.8 4.0 15.4
Guinea....................... 3.6 billion..... 800 million..... 3 million....... 64 million...... 182 million.... 118 million.... 5.1 14.7 3.3 0.9 3.3
Mozambique................... 5.7 billion..... 4.3 billion..... 4 million....... 84 million...... 238 million.... 154 million.... 4.2 3.6 2.7 4.1 17.6
Tanzania..................... 12.1 billion.... 3 billion....... 8 million....... 169 million..... 476 million.... 308 million.... 3.9 10.3 2.5 2.7 12.1
Niger........................ 3.4 billion..... 1.2 billion..... 2 million....... 41 million...... 117 million.... 76 million..... 3.4 6.3 2.2 2.0 6.5
Burkina Faso................. 5.4 billion..... 930 million..... 3 million....... 61 million...... 173 million.... 112 million.... 3.2 12.0 2.1 2.0 5.9
Uganda....................... 8.0 billion..... 2 billion....... 4 million....... 77 million...... 217 million.... 140 million.... 2.7 7.0 1.8 2.1 10.7
Mali......................... 5.4 billion..... 900 million..... 2 million....... 33 million...... 92 million..... 59 million..... 1.7 6.6 1.1 2.3 7.7
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\1\ This survey includes only countries in Africa that have reached either their completion or decision points under the Heavily Indebted Poor Country Initiative (HIPC) and are 100 percent
reliant on oil imports. These are 17 of the total 29 HIPC countries.
\2\ Calculations made assume 2003 consumption levels are representative of levels in 2002 and 2006.
\3\ Cost of oil to country in 2002 is calculated using CIA World Factbook figures for estimated 2003 country consumption levels and an average of 2002 weekly crude oil prices provided by the
Energy Information Administration of the Department of Energy, or $20.99/bbl. Inflation since 2002 is assumed to be negligible.
\4\ The estimated 2006 world oil price, $59.31/bbl is the average of 2006 weekly world prices as of June 1, 2006, as provided by the Energy Information Administration of the Department of
Energy.
\5\ Increase in cost of oil from 2002 to 2006 denotes a 183 percent increase.
\6\ What is considered ``Poverty Reduction Expenditure'' varies according to country, but primarily includes public spending on education and health. It may also include rural infrastructure,
water works, roads, HIV, social safety nets, and agricultural research.
Sources: CIA World Factbook; U.S. Department of State, Bureau of African Affairs; The World Bank, Energy Sector Management Assistance Program and International Development Association;
International Monetary Fund; Department of Energy, Energy Information Administration; United Nations Development Program.