[Senate Hearing 110-602]
[From the U.S. Government Publishing Office]
S. Hrg. 110-602
WORKSHOP ON OIL PRICES
=======================================================================
WORKSHOP
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
ON
WHY OIL AND TRANSPORTATION FUEL PRICES AND THIS WINTER'S EXPECTED HOME
HEATING FUEL PRICES WILL BE SO HIGH, AND WHAT CAN BE DONE TO ADDRESS
THESE SITUATIONS
__________
JULY 17, 2008
Printed for the use of the
Committee on Energy and Natural Resources
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
JEFF BINGAMAN, New Mexico, Chairman
DANIEL K. AKAKA, Hawaii PETE V. DOMENICI, New Mexico
BYRON L. DORGAN, North Dakota LARRY E. CRAIG, Idaho
RON WYDEN, Oregon LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota RICHARD BURR, North Carolina
MARY L. LANDRIEU, Louisiana JIM DeMINT, South Carolina
MARIA CANTWELL, Washington BOB CORKER, Tennessee
KEN SALAZAR, Colorado JOHN BARRASSO, Wyoming
ROBERT MENENDEZ, New Jersey JEFF SESSIONS, Alabama
BLANCHE L. LINCOLN, Arkansas GORDON H. SMITH, Oregon
BERNARD SANDERS, Vermont JIM BUNNING, Kentucky
JON TESTER, Montana MEL MARTINEZ, Florida
Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
Frank Macchiarola, Republican Staff Director
Judith K. Pensabene, Republican Chief Counsel
C O N T E N T S
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STATEMENTS
Page
Bingaman, Hon. Jeff, U.S. Senator From New Mexico................ 1
Diwan, Roger, Partner and Head of Financial Advisory, PFC Energy. 7
Domenici, Hon. Pete V., U.S. Senator From New Mexico............. 2
Reid, Hon. Harry, U.S. Senator From Nevada....................... 10
Yergin, Daniel, Chairman, Cambridge Energy Research Associates... 3
WORKSHOP ON OIL PRICES
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THURSDAY, JULY 17, 2008
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:05 a.m., in
room SDG-50, Dirksen Senate Office Building, Hon. Jeff
Bingaman, chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW
MEXICO
The Chairman. Why don't we get started? Let me welcome
everybody.
This is being held in the nature of an oil price workshop
to talk about two issues, the way I see it: first, the high
price of oil and the resulting high price of gas at the pump,
which people are faced with today; and second, the high price
for heating fuel which we are seeing and which we are expected
to see more of as we get closer to the winter, particularly
natural gas, propane, home heating oil.
I think we are all aware. All of us hear from our
constituents about the enormous burden that this is on families
throughout the country, these increased prices and the dramatic
increase in prices that they have faced in recent months, that
we have all faced. Also, the burden that this is putting on our
economy is obvious, and I am sure we will hear some about that.
The question that we are going to try to grapple with here
for the next few hours is what are our realistic options for
dealing with these very real problems. My own view is that we
have had a lot of political statements. We have not done enough
perhaps to actually debate the real issues and what concrete
actions could be taken that would have an impact that was
positive for the American people.
Three areas that we have all, I think, begun to focus on.
One relates to the functioning of markets, the whole issue of
speculation, the extent to which that is a factor in
explaining, causing the high prices. Second, what could be done
to further reduce demand. Are there steps that we could take as
a policy matter in that regard? Third, what could be done to
increase supply. I think those are three large areas that I
continue to hear about, and I am sure some of you may want to
add to that list.
My sense is that the way forward will involve actions that
the President and the Administration can take. Let me just
mention and congratulate the BLM on the action they announced
yesterday to have a large oil and gas lease sale in the
northeast portion of the National Petroleum Reserve, Alaska. I
think that is positive, and I compliment them on that
announcement. So there are actions the Administration can take.
There are actions that Congress can take, and of course,
that is the purpose of today's workshop, is to explore those
actions. One of those, of course, is the bill that Senator Reid
is bringing to the Senate floor today and will be the subject
of a lot of debate on the Senate floor, I am sure. Perhaps our
colleagues or our witnesses will have some comments on the
value of us trying to address this issue of speculation.
Then the third area is actions that the American people can
take to help with this problem. Of course, most of that falls
in the area of reducing demand. I think there has, obviously,
been a substantial reduction in demand that has already been
reflected in statistics, but there may be a additional steps
that can be taken there.
So those are the subjects that I thought it would be useful
to address.
Let me just say something about the procedure and then
defer to Senator Domenici.
I think the way we were planning to do this, we have two
excellent witnesses here, Dr. Yergin and Mr. Diwan, who are
here to speak as experts. We are asking them to each take about
10 minutes, give us their ideas as to the causes of the current
high prices, and their recommendations for actions we ought to
take.
After they speak, I was hoping to ask a few questions.
Senator Domenici may have questions as well, and then we open
it up to everybody here just on a first come/first serve basis.
Whoever has a question or a point of view or something they
want to say, we are glad to hear it.
So let me defer to Senator Domenici at this time.
STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR FROM NEW
MEXICO
Senator Domenici. Senator Bingaman, first of all, you and I
get to hear each often and we get to talk a lot. I hope we will
hear from some others and I hope that perhaps we will hear less
from you and I, not that we do not have a lot to offer, but we
do get to talk about this subject frequently.
I thank the two expert witnesses for coming.
A little later on in the program, I will submit just a few
quotes from experts of their caliber who have clearly said that
the problem we have got with price is supply and demand. Yet,
it seems like there are those who continue to think that we are
going to fix this problem some way by a bill that the majority
leader has in mind that has to do with speculation. I am
perfectly willing, as one Senator--and I say that to Senator
Bingaman right now--to consider legislation regarding the issue
that I have just described.
But I frankly believe that there is no question that we
have a rare opportunity to share with the world some increased
production potential of a pretty large dimension as a result of
the offshore potential of the United States. With only about 15
percent of that offshore having been put up for lease, with
almost 85 percent--not all of it is great oil production
property, but 85 percent not used, it seems to me we ought to
be in a bipartisan mode sitting at a table and hand in hand
trying to figure out how we get to a point where we can start
to maximize the use of that great asset which we have before us
which we have not used for 27 years. I mean, it is something to
lock up an asset for 27 years and find out, all of a sudden,
that the American people have found it along with us, and that
we have got to do something about it.
I hope we hear today about that, and I hope Senators
express themselves on that subject.
I for one introduced a bill 3 and a half months ago. I
think many of you know about it. I believe if that bill would
have been adopted or would be adopted now, that it would make a
dramatic change in the way supply and demand came out in terms
of the United States versus the assets that we own in the
offshore that belong to our people.
With that, I would like to put my statement in the record
and say that I hope to learn from these experts whom I have
read about and whom I think have stood pretty stalwart for the
proposition that supply and demand is the problem that is
affecting the price of oil and ultimately the price to
consumers more than any other single thing. I thank them for
all they have contributed, and I hope to hear more from them
today.
Thank you, Senator Bingaman.
The Chairman. Thank you.
Our witnesses are Dan Yergin who is the chairman of the
Cambridge Energy Research Associates who is a frequent
testifier before our committee and many congressional
committees. We, obviously, welcome him back. Roger Diwan, who
is a partner and head of Financial Advisory, PFC Energy. We
very much appreciate you being here as well.
So why don't you go ahead and go in that order, unless you
have a reason to go in a different order, and give us your
thoughts. After we hear from both of you, we will begin some
questions.
STATEMENT OF DANIEL YERGIN, CHAIRMAN, CAMBRIDGE ENERGY RESEARCH
ASSOCIATES
Mr. Yergin. Thank you, Senator Bingaman and Senator
Domenici. I am very pleased to be here to participate in this
workshop, a very constructive way to try and address these
basic questions. So I hope in my few minutes here I can provide
a little bit of a framework for the discussion that will ensue
over the next couple of hours.
Obviously, the very fact that we are together shows the
concern. There is no question as a country and as a world that
we are living through an oil shock right now with tremendous
impacts around the world.
I think also, as suggested, we are, we might say, at a
break point in terms of which we are starting to see some major
changes which will play out over the next few years.
I think, Senator Bingaman, your emphasis on energy
efficiency, that that is one of the three things that we really
need to focus on, is very much to the point.
I will say a few words about how we got here and how we
might get out of here, but I would want to say, in terms of
policy, it seems to me as a country we need to get kind of
beyond this either/or energy debate and instead take a sort of
more ecumenical approach that recognizes the critical
requirements of supplying energy to our $14 trillion economy.
The second is to recognize that we really do have an
investment problem in energy and we are playing a game of
catch-up right now.
The third is talking about the response of markets.
The fourth, over the last several months, I have become
persuaded that expectations about what is going to happen 3 to
5 years from now are really having a very important impact on
price formation.
That we are in an oil shock is completely clear. It
coincides with the credit crisis. That is why people, for the
first time since the 1970s, are talking about stagflation
again. That concept was supposedly banished after the 1970s. We
hear predictions of $200 or $250 a barrel oil. So it is quite
appropriate to ask what is happening and why is it happening.
There is a tendency always to try and find a single
explanation, but for something this complex, I think there is
not a single explanation. A lot of things have come together,
and to kind of make sense of it, I would like to sort of
suggest the heading of the traditional fundamentals and the new
fundamentals.
The traditional fundamentals are what Senator Domenici
referred to, supply and demand, basically the success of the
global economy, 5 years of the best economic growth that we
have had in a generation and rising incomes means rising energy
consumption. Just one set of numbers shows between 1998 and
2002, world oil demand increased by 4 million barrels a day.
Over the next 5 years, it increased by 8 million barrels a day,
and that was because of economic growth. So as a result of
that, we are in a tight supply/demand. Lead times in the energy
industry are long. Things do not happen overnight.
But you might ask, well, why are things not happening
faster? There, I think, are three big reasons for the rather
slow supply response. One is the question of access around the
world to areas for development. The second is the uncertainty
about investment, fiscal, regulatory regimes again around the
world. The third is something I will come back to, the shortage
of people and equipment.
I think the other major traditional fundamental is the
familiar one of geopolitics. We have not had a mega-disruption
like the 1970s. But when you add it up, there are 2 million or
3 million barrels a day that are missing, and you start with
Nigeria where, at some points, up to 40 percent of Nigerian
supply is out. That is one of our major sources of imported
oil. You can just go down the list of Venezuela, Iraq, Mexico,
Russia, and you see this adding up of missing supply. When you
have a tight market, it is vulnerable to the impact of
disruptions. It is vulnerable to price.
I think there is no question that the dangers and
uncertainties related to Iran's nuclear program are a
distinctive part of the oil market today, and there is clearly
an Iranian risk factor in the price of oil today.
So those are the traditional fundamentals.
When I say the new fundamentals, what are they? I think
there are two. One is this doubling of cost. Today if somebody
goes out and wants to develop a new oil field, you are going to
budget it at twice what you would have budgeted it at just 4
years ago. It is a shortage. We created what we call IHS/CERA
Upstream Capital Cost Index, and it shows that in fact, it is
actually something over a doubling in the last 4 years. So that
means every dollar only buys you half as much as it would have
done 4 years ago.
What is the reason? It is the shortage of engineers and
scientists, labor, equipment, steel, commodities. Right now we
are actually--although we talk about the oil shock, there is a
steel shock going on. Since the first quarter of this year,
steel prices globally have gone up 40 percent, and that again
goes into the costs of development.
So all these costs are up, and that then leads to delays,
postponements, in some cases cancellations. In other words, we
can think there is a supply issue and then there is the supply
chain. It is these issues about the supply chain that are a
part of the delay in terms of response. New equipment, new
petroleum engineers get trained, all of that happens, but it
does not happen overnight.
The other issue--and this is one that is obviously very
much on the minds of all the Senators here--is what we might
call oil is the new gold; that is, oil is a storehouse of
value. Increasingly the fact that oil, along with other
commodities, has been seen as an asset class by financial
investors as one that is not connected to what happens to
equities, bonds, and real estate. It has always been there, but
I think only in the last few years has it really emerged on the
scale that we have seen.
None of you need to be told that the role of financial
markets in the oil price is a very controversial subject and
the range of views is from that speculation is the heart of it
to that it is all about supply and demand. I am struck by the
fact that when we use the word ``speculation,'' it has so many
different meanings. There is a technical meaning of those who
provide liquidity in a futures market. It can suggest
manipulators. It can suggest risk takers. It can suggest
irrational exuberance. I think that the effort to get much more
transparency and knowledge about the financial markets,
whatever your point of view, is a very important part of this
dimension.
But it is worth considering that people have all different
reasons as financial investors to be investing in commodities
like oil. It is a hedge against risk. A pension fund might want
to do it to hedge their portfolio against a conflict in the
Middle East. There is a shortage psychology that the world is
running out.
I think what has happened with the dollar, particularly
since last July, has had a big impact, and the U.S. credit
crisis is part of why we have seen commodity prices high. So it
is ironic to think that the crisis that started in the subprime
mortgage market in the United States has traveled around the
world and, through the medium of a weak dollar, has come back
home to Americans in the form of high prices at the pump.
The second point I just wanted to say is that we are at a
break point I think. About 2 years ago, we did a scenario paper
we called Break Point, oil getting to $120 to $150 a barrel. I
think at that time most everybody, including us, would have put
about a zero probability on it happening. But the question is
what happens when you get to that level, and I think we are
seeing it in terms of technology and the dramatic change
particularly in what is happening in the focus of the
transportation and the automobile industry. In fact, last year,
we probably had peak demand in terms of gasoline in the United
States. It is probably going down.
The third point--and Senator Bingaman emphasized this--is
we have a tremendous potential for energy efficiency, both
short- and long-term. The U.S. has double its energy efficiency
since the 1970s. Over the next couple of decades, why can we
not double it again? I also wonder, in terms of a much more
concerted in terms of communication, whether we could save
600,000-700,000 barrels a day in gasoline with no discomfort to
the American people through shaving, minor changes that people
would make, and that would make a difference in the market.
So I think the question, Senator Bingaman, you had in your
speech yesterday, why is this not more highly focused upon, I
think is a very appropriate question.
So in terms of just conclusion on policy, as I said, I do
think we ought to really avoid the either/or. We kind of do
need everything. Renewables will become more important, but as
they become more integrated into the existing energy
infrastructure, it raises questions about how they get
integrated into it. In the meantime, we look at, as I said, our
$14 trillion economy. How do we run it? How do individuals, how
do families continue to pursue their lives and their careers in
that energy is central to it?
I think the second question is encouraging timely
investment, and that is an issue not only in the United States,
but around the world. It is a vigorous game of catch-up. I
think it needs to be thought of in terms of our overall foreign
relations. The United States played a critical role in the
1990s in terms of getting the Baku-Tiblisi-Ceyhan pipeline
built, which brings 700,000 barrels of oil now to the
Mediterranean. I think we ought to be asking where else in our
foreign policy could we do things that would enhance supply.
I think maybe it is just one of the concluding points. It
is striking that we are both more integrated into the global
energy marketplace than we have ever been before, and at the
same time, we have less leverage over that marketplace because
our share of the market has gone down. National oil companies
really have the dominating position now, with over 80 percent
of world reserves. The five super majors account for less than
15 percent of production. China and India are becoming more
important. All of this emphasizes the need for a cooperative,
multifaceted approach to relations with other producers and
certainly with other consumers.
I think the last point I would just like to make is about
expectations. As I said at the beginning, it seems to me that
this tight market and concerns about Iran are two of the
principal things in the price today. But there is this shortage
psychology, a belief in two things: one, that demand is going
to go through the roof in 4 or 5 years, looking at China; and
second, that there is going to be a physical shortage in 4 or 5
years. I think that is particularly strong in the markets, and
things that are significant get discounted like these very
large discoveries off the coast of Brazil, which are perhaps
equivalent to a new North Sea. People do not pay attention to
those. So I think thinking about expectations and their role on
price would be constructive today.
As I said, avoiding either/or, new supplies, renewables,
greater efficiency, all of those come together. All of that
would be a great contribution to reducing the pain and
pressures that Americans are feeling at the pump and the
difficulties faced by American businesses, small and large
alike. I think this would be a fundamental contribution both to
the prosperity of our Nation and to the prosperity of the
global economy, of which we are such a central part.
Thank you.
The Chairman. Thank you very much.
Mr. Diwan, why do you not go right ahead?
STATEMENT OF ROGER DIWAN, PARTNER AND HEAD OF FINANCIAL
ADVISORY, PFC ENERGY
Mr. Diwan. Thank you for inviting me this morning. I would
like basically not to repeat a lot of what Dr. Yergin has said
because I agree with a lot of it, but really focus on a few
points I think which could help us dive more into the subject.
I would like, anyway, to provide a more detailed framework to
understand price formation and how we got to $135-$140 oil.
I think the important moment is really what happened
between 2003 and 2005 where really the world faced two shocks,
a supply shock and a demand shock at the same time, a supply
shock where we had what were called rolling supply disruptions
between Iraq, Venezuela, and Nigeria, which basically rolled on
for a number of years and removed a lot of oil from the market.
At the same time, we had this incredible demand surge not only
in the emerging world but also, in the early part of this
period, in the United States. These two shocks together have
wiped out all the spare capacity which existed in the world.
Basically between 1985 and 2005, OPEC had a lot of capacity
which was unused. That unused capacity waited on the market.
There was no reason for prices to increase because every time
prices increased, OPEC added barrels on the market. By 2004-
2005, that spare capacity basically resided only in one
country. All the other countries were producing at full
capacity, and there were not any more members of the cartel, if
you want. They were like any other producers. Only Saudi Arabia
had spare capacity, and that number is open to debate. Saudi
Arabia says it is around 2 million barrels per day, and let us
assume it is 2 million barrels per day.
When you have a market without spare capacity, we
discovered that it works very differently because you have
really risk only on the upside. You do not have down-side risk.
You have fears of more supply disruption, fears of fields not
coming on line, delays, et cetera. So suddenly the balance,
when you are looking at oil prices, the chances that they would
go up versus going down, is really skewed toward 90 percent
going up. That has created, if you want, a lot more investment
into the commodity directly.
So this is the moment where you start to see the financial
industry start to get interested in the commodity. Before that
you had too much of an OPEC risk, if you want, that you would
invest in and one OPEC country would do something and you would
lose your money. That risk was too big.
So that skewing of the risk on one side started to build
up. Clearly the fundamentals were right, and that is really the
core reason where we are here.
But over the next few years, basically between 2004 and
now, something which is very important happened in the market.
In a way, Dr. Yergin talked a little bit about it. I would like
to focus on it, which is the supply narrative. We do not have
enough supply. There is not enough oil coming on line. Projects
are always delayed. Access is completely closed. It is true,
over the last 4 or 5 years, we have seen non-OPEC supply being
very, very sluggish and barely increasing every year. That has
created more and more talk about peak oil, especially in the
non-OPEC area. Often these issues are misunderstood and put in
fairly simplistic terms, but there is a clear concern here that
supply is not rising on a global basis from non-OPEC. The only
places where really we are investing in a massive way is places
like Brazil or like Saudi Arabia right now.
That supply narrative has changed the expectation, and this
is why around the middle of 2006, you saw the long-term price
expectation rise suddenly from $40 to $100, where suddenly the
market started to price scarcity in the future. The scarcity
narrative is extremely important to understand why you have
financial players coming into the market. So the fundamentals
have driven, if you want, what I call the financialization of
oil markets. Suddenly when the financialization of oil
markets--now oil is a financial asset. It is not anymore really
purely a fundamental supply and demand play.
In this environment, really you ended up with what I
describe to my clients as really two set of news. You have the
bullish news and prices will go up or the very bullish news
where the price goes up very much. The market is only attuned
to these types of news. You know, something happened off the
coast of Brazil or a new field comes on line, it is completely
discounted. The news which are counted on are only the ones
which reaffirm your belief that we have a problem in the
future, that demand is really rising very fast in China and the
Middle East, that prices are not having an impact, and supply
is not coming on line.
That takes us to the next phase really where sometime early
in 2006 suddenly oil has really become a financial asset, and
it has almost left the supply and demand fundamentals because a
lot of the players and the majority actually of the players on
the futures markets are financial players. They are not what we
call commercial players, airlines, oil companies, et cetera.
In the data that CFTC released a few weeks ago where they
really broke down a little bit the players, what you realize is
the commercial players, oil companies and airlines, people who
physically buy and sell oil, represent something like 27
percent of the market right now. The rest is what you would
call speculators, what I would call investors, if you want,
where they decided that oil is an asset class and they are
making constant arbitrage between the dollar, between inflation
rates, between the expectation of different assets, and they
are making portfolio assignments. They decided how much money
they want to go into a commodity versus into dollars.
The correlation is extremely strong, and Dr. Yergin alluded
to that. But think about it. Between July and now, the negative
correlation between oil and the dollar is something in the
order of above 90 percent. So the primary driver of oil prices
over the last 9 months has been the dollar value. It is people
deciding to hedge their dollar, if you want, with oil as they
do with gold and other commodities. The problem is oil is a
small pool compared to the very large pool of money which is
the dollar. The way I describe that you have a very large lake
which is overflowing into a very small pond. This is the money
flowing to the small pond, the small pond being the oil market.
That notion that oil is an asset class--now you see it
every day. I mean, when you look at the daily movement in oil
prices, you cannot relate them to any fundamentals event. You
can very often relate them to what I call the
macrofundamentals, the dollar, the inflation expectation, what
the Fed is doing, what the ECB is doing, et cetera.
How did we get there? How come the financial players have
taken over this market and represent really the largest section
of it?
In a way, what happened is we had a tight regulatory
environment to allow or not allow financial players to come
into the commodity market, but in a way we closed the door on
that years ago. Sometime 10 years ago, we kind of opened the
window, and they came back through window. What I call the
window is the ability for index funds to be linked to
commodities and bring money which is basically not regulated by
the exchanges, where you do not have really position limits.
So you talk to endowments, pension funds, I mean, probably
all our pension funds here are now putting money in oil
commodities rather than what they used to do in the past to put
it in the equity and the stocks of the oil companies because it
correlates in their portfolio. So they are making big bets and
they are trying to basically hedge our pensions mostly for the
decline of the dollar. We have allowed them to do that.
The question is should we allow them to continue doing that
or should we limit their ability to do that? Should we have
them come back, if you want, in the regulatory environment
which we had in the past, that each institution has a limited
amount of commodity it can buy or not? Those are important
questions.
Obviously, they do not obviate the root cause of the issue
here which is tight supply and demand where we still have
demand growing at $140 oil and supply is not coming on line. In
an environment where supply is not coming on line on $140 oil,
the only way you can bring things in balance is push prices to
the limit until you break demand. The reaction is coming from
the demand side, not from the supply side in the short term, if
you want. So the players keep pushing prices up until you break
down demand.
We are starting to see that in the U.S., but we do not see
it on a major level globally. We still have good product demand
growth between the Middle East and Asia, and that is keeping
the supply balance very tight.
So that is what I have to say today, and thank you for
giving me the opportunity.
The Chairman. Thank you very much. I thank both of you for
your excellent testimony.
Senator Reid is here I see, and maybe before I ask any
questions or Senator Domenici does, did you have any statements
you wanted to make or any questions?
STATEMENT OF HON. HARRY REID, U.S. SENATOR
FROM NEVADA
Senator Reid. Mr. Chairman, I appreciate it very much. The
Senate opens at 10 o'clock and I have to be there. So I
appreciate very much you and Senator Domenici allowing me to
say just a few words about this most important discussion that
you are leading here today.
With gas and oil prices setting record prices almost every
day, it is clear that the American people are suffering and
deserve our attention and hopefully some solutions. If there is
one magic pill that will bring energy prices back to sanity--
there is not one. Of course not, but I am hopeful and confident
that if we cast aside partisan divide that has enveloped
Washington, we can begin to stem this growing crisis.
The issue spreads far wider than the reach of the Energy
committee alone. It is fair to say that nearly every committee
here in the Senate has a piece of this intricate oil and gas
puzzle, whether it is speculation, the weak dollar, political
instability in the Middle East, growing cleaner, more
affordable alternative fuels, tax incentives, increasing the
efficiency of our transportation sector. So I am sure that
other committees will follow your lead--or at least I hope they
do--Mr. Chairman Bingaman, to join the process of finding cost
effective, sensible solutions to our dangerous addiction to oil
and the high oil and gas prices that are crippling our economy
and affecting the world economy.
The crossroads of record prices and every-increasing global
demand for oil has brought our Nation and the world to a
crossroads we knew would come 1 day. For America, the yawning
gap between our meager petroleum resources and our enormous
dependence on consumption of oil has caught up with us. We
cannot continue forever to consume 25 percent or more of the
world's oil when we have less than 3 percent of the world's
supply. It is just simple math.
With the many regionally based energy interests in our
country, moving Congress toward a cleaner and safer energy
future has never been easy. That critical task has been made
more difficult in my opinion with a President that has not
shown the necessary leadership to end our addiction to oil and
move toward clean renewable fuels.
That said, we did make progress last year, bipartisan
progress. Was it enough? Of course not, but it was some
progress. We worked to pass last year's landmark energy bill
which moves us slowly in the right direction. We all know that
that bill is only a small down payment on the transformation
that must take place if we are going to meet the urgent
economic, national security, and global warming challenges that
we cannot afford to ignore any longer.
So I hope today this event--and I am confident it will
bring forward new ideas, sensible ideas that can help relieve
the enormous burdens of high gas prices on consumers in the
near term and the long term.
It was just a few weeks ago that I was here testifying, and
I looked next to me and there is T. Boone Pickens, one of my
mortal political enemies for all these years. Suddenly because
of what I had heard on public radio that morning, I realized he
had become my political friend because here is a man who not
only has helped us recognize there is a problem, but he is
focused on a solution. I am so appreciative of T. Boone
Pickens. He is an oil man, a staunch conservative, but he
realizes the enormity of our energy crisis. That is a pretty
good model for the kind of bipartisanship it will take to solve
this problem.
This week I have introduced one solution on the Senate
floor, I hope, legislation to stem the excessive speculation in
the energy markets that many economists believe accounts for 20
to 30 percent, or more some say, of the price we pay at the
pump.
Eighteen years ago the Commodity Futures Modernization Act
for the first time created a whole new class of traders to
enter the commodities market without the same constraints faced
by people trading in the actual physical commodities. Because
of this new law--a mouse click--the energy market was born
overnight. That means that right now Wall Street traders can
raise oil and gas prices simply by logging onto their computers
and executing trades without regard for anything but their own
profits. Traders are bidding up prices by buying huge
quantities of oil just to resell at an even higher price. The
result has been a new class of investor getting rich by buying
oil, only to turn around and sell it at an ever-higher price,
only to stick consumers with the bill, never, ever intending to
take control of that oil actually.
Our legislation that was introduced yesterday will finally
hold the energy futures market to the same standards of
accountability that other futures market are held. This is a
matter of fairness and common sense. We are not saying that all
speculation is bad. It can be very healthy in a well
functioning market. It can help the market find the most
efficient price. But without proper market oversight,
speculation has gotten out of hand, and that is one reason for
record gas prices.
As I have said, curbing excessive speculation is not the
solution to our energy crisis, but it is one step, an important
step, that we can take now to lower prices and ease the burden
of this crisis for the American people.
So, Mr. Chairman, I hope that our Republican colleagues
will support our efforts. Part of the package that they
introduced a week or 2 ago to solve the energy problems or to
take a bite out of the energy problems of this country was
legislation dealing with speculation. If my Republican
colleagues do not like our speculation bill, let us hear from
them how they want it changed. We will be happy to work with
them.
Speculation is, I repeat, a problem. It is a significant
problem and we must address this. I would hope that if we can
get a handle on this speculation issue by legislating, it will
allow us to do other things.
I have spoken to both Senator McConnell and Senator Kyl,
saying let us find out what we can do on this. Let us determine
what amendments you want to offer and we want to offer and let
us see if we can work something out.
But I say to all my friends and anyone within the sound of
my voice, speculation is where we should start. There are other
places we can go and we are happy to take a look at that
perhaps at some time, but let us first look at speculation.
I repeat for the third time here today, speculation is part
of the problem that we have got to address. We have to start
someplace. There is no one shop that we can go to and solve all
the problems. There is no one area of the law that needs to be
changed that solves all the problems.
So I think that this workshop is an area where people can
bring their ideas. If Republicans have other ideas, if
Democrats have other ideas, we are all ears. Let us find out
what we can do. So I appreciate very much you and Senator
Domenici taking time to listen to all Senators. This is open to
everybody, not only members of the committee. So I look forward
to a productive workshop and a good bipartisan effort to find
solutions for the American people.
If I could be excused, I would appreciate it very much, Mr.
Chairman.
The Chairman. Thank you very much for being here and making
a statement. Senator Domenici had one comment, and then we will
go to questions.
Senator Domenici. Mr. Chairman, before the distinguished
Democratic leader leaves--and I understand he must leave--I
would like to just comment to him so we do not have to be doing
all of this with the media. We can do it between ourselves.
Look, as one Senator who is somewhat in the leadership
position on the Republican side, we are willing to look at
speculation. We just want to make sure that our leader, you,
understand that we think there are production issues involved,
that the American people rightfully want us to produce more
energy if we can. I just want you to know that we may very well
work hard with you on the speculation issue. We may not come to
a conclusion, but we are sure going to work at it.
But we expect to bring before the Senate issues that relate
to how we are going to use various Alaskan oil that might come
on soon if we do things right offshore, which has now taken on
a new breath of life which has been in the closet for 27 years.
It is rather abundant. It is not a little, tiny piece of
property. It is a big oil and gas property, and we would like
you to know that we very much want an opportunity to present
that. We will work with you in every way so we will have a
chance to present that to you and to the American people.
My last comment is--I do not know. I keep saying maybe the
Democrats and Republicans can work together on something, and
that might be possible. I leave you with that, fully
understanding of the way I used to do business was that way. I
wish it could come back on energy production, and maybe we
could come up with something for our country instead of for our
parties or for ourselves.
Thank you very much for the way you are handling things,
and just know that there are a lot of Republican Senators who
want to get something done and want to work in a positive way
to get that done.
Thank you, Mr. Chairman.
Senator Reid. Mr. Chairman, if I could just respond to my
dear friend, Senator Domenici.
The Chairman. Yes, go right ahead.
Senator Reid. There is no stronger advocate anyplace in the
Senate than Senator Bingaman for increasing domestic
production. He has given a series of speeches the last couple
weeks that have been, I think, really dramatically sound. So we
look forward to--you know, it may even be that you have one
alternative, to increase domestic production. We have another.
But that does not mean that they are mutually exclusive. We can
work together.
My only point is that no matter what area we start in
regard to doing something about the energy crisis, we have to
start someplace. I chose speculation because I think it is a
real problem. That does not mean that we cannot, on this piece
of legislation, work on other issues. I have given Senator
Bingaman the charge to come up with things that he believes, in
keeping with what the country needs to increase domestic
production and conserve and increase efficiency by maybe
spending some money on new battery research. So we are speaking
from the same hymnbook, but what we have to do is get on the
same page or two so we work together.
I repeat I would hope that we can have this speculation
bill as the beginning to do something for the American people
to let them know that we are focused on the economy. The
economy has had a number of hits, not the least of which is
energy, but not the least of which is housing. We have those
two issues that we are going to try to make some progress on.
So I appreciate the spirit of Senator Domenici's statement,
and I look forward to working with him and all of his 48
colleagues.
The Chairman. Thank you very much again for being here.
Let me just start with a question. Dr. Yergin, let me ask
you. You made a reference that you thought there may be 600,000
or 700,000 barrels of oil that could be saved through increased
efficiency, as I understood it. Could you maybe elaborate a
little bit as to what you are referring to there? There has
been a reduction in usage by Americans faced with high prices.
You are saying that there are other things that we could do to
encourage even more efficiency without doing any damage to the
economy.
Mr. Yergin. Yes. You know, it is the things that we always
hear that are sort of in our left ear as the tips about
driving, but if you just look at the research people have done
about three things, cold starts, tires, lead foot on driving,
and you add up those numbers, you are talking 600,000-700,000
barrels a day. That is not depriving anybody of anything.
But I think there is a woeful lack of knowledge, and in
fact, communicating that knowledge is not an expensive or
difficult thing to do. It affects everybody's behavior. So we
could be talking about 6 or 7 percent of gasoline consumption.
The Chairman. So you are basically suggesting some kind of
just public information campaign to raise people's awareness of
the concrete steps they can take. Is that what you are saying?
Mr. Yergin. Yes. I was struck in your remarks yesterday
commenting that given all that is happening with this, how
little effort there has actually been in terms of that kind of
communication. Yet, of course, what individuals do really adds
up because that is what energy consumption is. It is not
dramatic. It is not building something. It does not take a long
time to happen. But I think you can do that, and those kind of
changes do not impose any burden except making sure we all
check our tires.
The Chairman. Senator Domenici, did you have questions of
the witnesses?
Senator Domenici. Yes, I have one.
First of all, I want to say the idea of promoting
conservation with the American people is an excellent one, and
I think you have testified--you did, Dr. Yergin--that something
is bringing conservation to the mind and hearts of the American
people, and we are beginning to use less. I believe that is
straight, pure cost. I think cost is having an impact on the
American people and they are using less. But we maybe should do
more at the executive branch and otherwise.
I think Senator Bingaman has been constantly an advocate of
this, and I think it is happening, according to the numbers we
are getting.
I would like to ask both of you. I have heard both of you
testify that the root cause of high prices is the supply and
demand imbalance. I heard Dr. Diwan express it in a very
different way based on specifics that changed, and I laud him
for that and thank him for helping us in that regard.
But let me just say if that is the problem--the root cause
of high prices is supply and demand imbalance--what can we do
as policymakers to address this in your judgment. There are
lots of things being discussed. Some have value, obviously.
Some do not. Could you tell us what we ought to do in your
opinion as policymakers now?
Mr. Diwan. I mean, this is a tight market and it took 20
years to get there. I think it is going to take a long time to
unwind it.
I spent most of my career looking at supply and demand
numbers, and I have trouble to see the U.S. as an island
removed from the world. So for me, globally how do you make
sure that supply meets demand and how do you increase supply
over a number years and how do you make sure that demand
responds to prices? Because in a number of areas, prices are
subsidized so that you do not have a response.
It is very difficult for me to say if you move one piece of
the puzzle, it is going to change the whole puzzle. How do you
provide more access to the most prolific petroleum basin? It is
actually probably the biggest thing which will matter in the
long term. How do you have access to basically 80 percent of
the reserve in the world, which are inaccessible to oil and gas
companies, which belongs to national oil companies? The
investment profile of these basins depend very much on State
budgets. That is probably the bigger problem that you are
facing.
The second one is service sector capacity. Even if you open
up more land or more water for exploration and production, it
is not clear that we have what it takes right now to be able to
go drill, explore, produce more. This industry has under-
invested for over 20 years. We got lulled by low oil prices. We
liked them. They pushed a certain behavior in terms of
consumption and supply. Basically we have shrunk this industry
quite dramatically in terms of people and capacity and
logistics to expand again.
So what we are looking at here is a super cycle for
investments, and for that, you really need the signal of the
market of high oil prices to bring back petroleum engineers. I
mean, we do not train a lot of petroleum engineers anymore.
So it is a very big problem, and I have trouble to believe
that you just move one element, it changes completely the
puzzle.
Mr. Yergin. I think there are lots of pieces in this
puzzle. I think some of the things are in the realm of our
relations with other nations in terms of access, encouraging
steady development, encouraging a stable investment
environment.
I think clearly in this country, as per this discussion, we
are having a debate about what is possible with outer
continental shelf. I think we need to look at it, by the way,
not only in terms of oil but in terms of natural gas because I
suspect this winter you may be as concerned with what has
happened with natural gas prices as you are with gasoline right
now and with electric prices as a result of that. So our supply
position for natural gas really will have to be part of that
picture too, and that also fits into the discussion about
opening up areas in this country.
But it is a global question about access. I think it is a
question about--I think the way Mr. Diwan expressed it that all
news is interpreted in a certain way. There needs to be a sense
that, yes, there is new supply coming on. For instance, I come
back again to Brazil, which could be, some people say as big--5
years ago or 6 years ago, nobody really thought there was this
huge supply off of Brazil. Now people at least are saying this
could be as big as the North Sea. Cumulative things like that
start to change expectations, and if that happens, that would
happen before--actually that oil is going to take some years to
flow. So it is about what one anticipates for the future, as
well as where we are now.
Senator Domenici. Thank you.
The Chairman. Senator Dorgan has to leave to chair another
hearing. So let me call on him first. Then we will take the
list of folks in the order they came and just see if any others
have questions or comments or whatever.
Senator Dorgan. Mr. Chairman, thank you. I have to chair a
hearing at 10 o'clock, and I apologize to have to leave.
But I thank both of the folks who have joined us today,
obviously experts and people who know a lot about these issues.
I think it is important that we not talk past each other on
this committee or in the Congress. There is a danger of doing
that. It seems to me that it is a false choice for anyone to
suggest that doing one thing necessarily excludes doing another
thing. I happen to think we have to everything. I think
speculation is a big problem, but I think we have to do
production. We have to do conservation. I would probably even
measure conservation slightly ahead of production in terms of
the cheapest oil that is available through conservation.
Conservation, efficiency, production, renewables. We need to do
all of that.
But I want to ask about speculation, if I might, for the
moment. Mr. Yergin, you indicated that you did a modeling
recently, a year and a half--or was it 2 years ago--on $150 a
barrel oil. What was the date on that?
Mr. Yergin. That would have been September 2006.
Senator Dorgan. So slightly less than 2 years ago. I think
you said although you modeled $150 a barrel oil, you felt at
that point probably almost a zero possibility or a zero
probability.
Mr. Yergin. Yes. It was ironic because in fact when we do
these scenarios, we do not put probabilities on it. But I was
going to say it was not the thing that people just said, oh,
yes, that is exactly what is going to happen.
Senator Dorgan. Right. But I think you said almost a zero
probability, and I think most people would have believed that
back then.
So then the question is what has happened in the last 18
months that went from a zero probability for an expert to
actual $140-some a barrel oil.
Mr. Diwan says that the people in this futures market
affecting price, over two-thirds of them--73 percent I think
you suggest--are what we call speculators, you said what you
call investors. But nonetheless, they are people who are not
hedging a physical product between consumers and producers of a
physical product hedging risk. They are in this market because
they view this as simply a new asset class. They have no
interest in owning oil.
So I guess the question I have is this. What has happened
in the supply and demand fundamentals or expectations--because
Senator Domenici said that both of you said that--I am not sure
that you both said this--but the root cause is supply and
demand imbalance. If that is the case, then what has happened
in supply and demand expectations or changes in the last 18
months that would justify the doubling, more than doubling, of
the price of oil in the 18 months if it is not in some
significant part attributable to speculation by those in the
market that are not engaged in hedging a physical product?
Mr. Yergin. Recently the Dallas Federal Reserve came out
with a study looking at the increase in oil prices between
2003-2007. I think they attribute about a third of the increase
in the price of oil to the decline of the dollar.
So one thing that has happened, if you look at when oil
prices were bumping along at about $70-$80 a barrel at the time
that the credit crisis began exactly a year ago. That is a
point when you look at not only oil. Most all commodity prices
really took off. So one thing that has happened is the decline
in the value of the dollar, the loss of confidence in U.S.
financial markets, loss of confidence in debt. So I think that
is one big thing that has happened.
A second thing that has happened is that Iran has continued
to make progress. Its centrifuges continue to whirl. I think
that the fear of something happening involving Iran--and I
think Mr. Diwan would agree--over the last 2 years has become a
more palpable factor in the market and people looking at those
numbers of what passes through the Strait of Hormuz.
I think the whole movement of the much greater interest of
the financial markets in oil and other commodities is certainly
part of it.
Then the other thing that has happened--and when we did
this scenario, it was premised on delays and postponements in
supply because of the problems in the supply chain. We have
seen no slowing down in the increase of costs in terms of
development, and so this expectation of a shortage period in
2012-2013 has become more a part of this sort of shortage
psychology that is again, as Mr. Diwan said, part of the market
outlook.
So as we are saying, financial markets are part of a
feature in which these other things are happening at the same
time. We have seen Mexican supply go down. We have seen
Venezuelan capacity go down. Iraqi production has not come back
significantly.
One other key factor, in the first half of this decade, the
growth in Russian output more than outpaced the growth in
Chinese demand. Russian production now maybe even is in decline
slightly.
Senator Dorgan. You have also seen the largest assessment
of recoverable reserves ever measured in the Lower 48 just
recently with the Bakken shale in Montana and North Dakota. I
think it relates to what Mr. Diwan suggested, that the good
news does not register apparently.
But I appreciate your response. I have to go chair the
hearing. But I think that speculation probably plays a much
larger role, probably speculation around the very things you
talked about, than does supply and demand.
The Chairman. Let me just give a list of the first five
folks here in the order they arrived so that they know they are
going to be called on if they are still around: Senator Conrad
first, then Senator Barrasso, then Senator Alexander, then
Senator Craig, then Senator Allard. Why do we not start that
way? Senator Conrad, thanks for being here.
Senator Conrad. Mr. Chairman, thank you very, very much for
holding this workshop. Thanks too to the ranking member,
Senator Domenici, for doing this. I really think is exactly
what we should be doing, putting a focus on this issue in a
bipartisan way so that we can try to find a solution or a set
of solutions that would make a difference both near-term and
longer-term.
I asked my staff yesterday to prepare a list of things that
we have done in the Congress since 2004 trying to deal with
what we all saw as an energy challenge to the country.
In 2004, we provided $5 billion of energy tax incentives,
biodiesel tax credits, ethanol tax credits.
In 2005, we passed the Energy Policy Act of 2005, $14
billion of tax incentives for energy efficiency and
conservation, renewable energy, oil and gas incentives, clean
coal projects. We had energy efficiency provisions to provide
higher efficiency standards for appliances and commercial
equipment.
In 2006, we had the Tax Relief and Health Care Act of 2006,
in which we also opened up part of the Gulf of Mexico, 8
million acres there, for leasing for oil and gas.
Then in 2007, we had the Energy Independence and Security
Act providing, for the first time in over 20 years, an increase
in fuel efficiency standards for the automobile and truck
fleet, a dramatic expansion of the renewable fuel standard from
9 billion gallons to 36 billion, with 21 billion to come from
cellulosic. Again, we went back to energy efficiency, new
energy efficiency standards for appliances and lighting,
greater energy efficiency requirements on Federal and
commercial buildings, carbon capture incentives.
Then this year, the farm bill with over $1 billion
dedicated to energy, trying to reduce our dependence on foreign
oil, including a dramatic increase in research on cellulosic,
which I think most of us understand is going to be critically
important because corn-based ethanol has its limits.
I say this by way of a preface that there have been a whole
series of actions, many of them that do not take effect
immediately. Perhaps the only thing that takes effect
immediately is, to the extent speculation is involved here,
steps to address that. But clearly, we do not have just a
short-term problem, and speculation alone will not solve this
matter. There is the issue of supply and demand and the long-
term perceptions, as the two of you have described.
My question to you would be this. If you had it in your
power to design a plan to get results to reduce our dependence
on foreign oil, to reduce this dramatic run-up in prices which
threatens the economy, what would you do?
Dr. Yergin.
Mr. Yergin. You have quite a list there that you have
already established.
I think I would want to look more on the demand side in
terms of efficiency beyond what you have had. I think on the
list, you had clearly one of the most important things was the
fuel efficiency standards and the impact that they can have.
About 10 years ago, I headed a task force at the Department
of Energy on energy research and development, and at that
point, there was not much interest in the subject. I have often
thought if the kind of effort had been started then, we would
not be in the kind of situation we are now.
So without going into the specifics, the other thing is a
long-term, consistent program of research and development
across the energy spectrum. It does not bring results tomorrow,
but that is what we need to diversify our energy mix and to
build much more resilience into the system than we have today.
Senator Conrad. On the production side?
Mr. Yergin. I think that the issue you all are debating
about what do you do about the outer continental shelf, that
other 85 percent, and in an environmentally sound way opening
up--I guess the starting point there is--as I understand, the
money was appropriated to do a seismic survey but not
conducted? I mean, the first thing would be to understand what
kind of resource base we have.
The Chairman. In fairness, I do not think money was
appropriated. I do not think it was requested. So it was
authorized and we directed in the 2005 bill that the 3-D
seismic survey be done, but there was never any follow-up by
the Administration or the Congress to get that done.
Mr. Yergin. So the knowledge base in a sense is the
starting point to know where the real leverage points are in
terms of impact.
Senator Conrad. As I hear you say it, you would be working
all sides of this equation. You would be working on
speculation. You would be working on production. You would be
working on conservation. You would do something in all of those
areas.
Mr. Yergin. Yes, exactly. I go back to the fact that we
have a $14 trillion economy, and it does not just rest on one
leg to do it.
I think we need further clarification. As I said in my
remarks, we use the word ``speculation,'' and it is not clear
often what that means. Clearly, the financial markets have a
much bigger role than they did 3 or 4 years ago in this, as in
other commodity markets. Will it turn out to be a bubble, as we
have seen in other markets, or not?
I think that the problem with the energy market, unlike,
let us say, even housing or the Internet--those are not
affected by geopolitical forces. You have this whole
geopolitical uncertainty that hangs over the energy market
specifically.
Senator Conrad. Would you do something about the value of
the dollar as well since both of you have identified the weak
dollar as a key reason for the run-up in prices?
Mr. Yergin. That is outside. I think that is outside the
realm of energy policy, and I think you have the chairman of
the----
Senator Conrad. Yes. We have got to connect the dots.
Mr. Yergin. Yes. But I think that we should recognize, if
you look at all the commodities, the weakness of the dollar. If
you go outside the United States, the significance of the
weakness of the dollar and the flight--normally during times of
instability, you have a flight dollar. In terms of currency
instability, we have this flight commodity going on right now.
So in principle, we have other problems in the country, but a
stronger dollar I think would actually be a factor that would
help ameliorate----
Senator Conrad. Mr. Diwan, what would you do?
Mr. Diwan. When I look at the energy policy of the United
States--I am a European. So I am taking a slightly different
perspective. In a way what we have done here in the last 25
years, we encouraged consumption and we discouraged production.
We need to fix both things in a way.
We have allowed cars to become very large and very
inefficient. We have not done much about it. I agree with Dr.
Yergin that probably the most important element of legislation
over the past few years was the CAFE standards. But think about
it. We talk a lot about new technology and R&D, et cetera. But
the average car efficiency in the United States right now is
half of what it is in Europe. So we can talk about new
technologies, but there is plenty of available technologies to
get more efficient. So that is the largest problem.
I mean, the United States consumes close to 50 percent of
world gasoline. Those are a little bit scary numbers here.
So we have allowed people to drive bigger cars further out
in the suburbs, and we are paying the price. So we can say it
is speculators, it is oil companies, it is this and that. At
the end of the day, it is us. We need to be honest about it. I
know it is difficult to say it is us. It is easier to say it is
them, whoever they are, speculators, OPEC, et cetera. But we
have done that to ourselves. So we need to look there. So I
think it is both consumption and production in that sense.
But that will take a long time. I mean, you have incredible
infrastructure in this country. You have enormous installed
capital, and to churn that capital to more efficient capital
will take 10, 15, 20 years.
So the question is what can we do in the short term, and
the only thing we can do in the short term is try to do little
things. I mean, look at the commodity laws and see how we got
where we are and look at what I would call the investors, not
the speculators, look at the little things we can do to improve
the efficiency of the cars in the short term. Dr. Yergin talked
about inflating tires. I think it is difficult to ask 300
million people to do it, but we need to encourage those kind of
things.
So there is a lot to be done, but at the end of the day, we
got our priority wrong in the last 25 years and we need to fix
that.
The Chairman. On our list here, I think several of the
folks who I read off before are no longer here. Senator
Barrasso is not here. Senator Alexander is not here. Oh,
Senator Alexander is here.
Senator Alexander. You can let someone else go ahead.
The Chairman. I think the next one here would be Senator
Allard since Senator Craig left. So Senator Allard, go ahead.
Senator Allard. Thank you, Mr. Chairman and thank you for
holding this--I guess you are not calling it a hearing, but
discussion of what has actually been happening as far as the
energy markets. I think you do bring in some interesting
perspectives and whatnot.
I would follow up with what Senator Conrad was approaching.
Many times we are faced with an argument of more independence
as far as the United States is concerned, less dependence on
foreign sources of energy. If we are trying to become more
dependent on just our own sources of energy and whatnot, you
talked about conservation, but on the supply side, what can we
do?
One of the arguments that struck me is that we are the only
country, for example, that limits offshore drilling. I do not
know whether that is correct or not or whether you agree with
that statement. But do we do that as compared to other
countries? How does our controlling supply maybe differ from
what other countries are doing?
Mr. Yergin. Let me say, first of all, I think we import on
a net basis about 58 percent of our oil and about 25 percent of
our total energy. Of course, our two major sources of oil--two
out of three--are our neighbors, Canada and Mexico. So it is
kind of keeping that framework.
So are we going to become energy independent or are we
really going to focus on our energy security and resilience of
our system? I think that is really where we ought to be.
I think on the offshore, I was looking last week at a
survey that said that Norway is the second greenest country in
the world in terms of environmental policies. They produce
about 3 million barrels a day entirely offshore in the North
Sea in a pretty harsh environment. I think one question might
be, how do the Norwegians manage this? I mean, if we want to
see how other people are doing it. I think in this survey, the
U.S. was ranked number 31 in terms of environmental countries.
So I think there are messages there in terms of how other
countries handle it.
Of course, we have that very large energy complex in the
Gulf of Mexico and then off Alaska. I mean, 27 percent of our
oil now comes from the offshore. So it is not like we have not
done it before.
Mr. Diwan. I have a problem with the concept of being
energy independent. After all, we are dependent for everything
else. This is an open world. Even if the United States produced
95 percent of its oil, if something happened in Venezuela or
Nigeria or Iran, oil prices will increase here. Really it is a
price impact. So no matter what happens anywhere else in the
world, it is the butterfly effect. It will have a price impact
in the United States. So at the end of the day, we are linked
globally to everybody else who consumes and produces oil, and
that is what is important.
On the issue of producing more and in the offshore--and I
agree with Dr. Yergin here--we can impose very tough
environmental standards and look at what the industry can do. I
agree that some countries have much tougher standards and have
been able to produce with very little spill or risk of spill
over time. So we can do things.
A broader question here is, how do you fix a policy to both
encourage production and consumption at the same time?
Senator Allard. Many States in the West have a lot of
public lands. Do you have any figures on the amount of known
reserves that we have in public lands and any idea of what
perhaps projected possible reserves might be on public lands?
Mr. Yergin. I do not. The only thing I would say is that
reserves is not a static concept. We have seen that technology
changes and areas that were thought to be in decline or
finished, in the Rockies, for instance, turn out to be
significant producers, or we see unconventional natural gas. So
technology itself expands the resource base. But I do not know
what the current estimates are for the West.
Mr. Diwan. Nor myself. I do not have a number.
The Chairman. Yes, we can sure get all that information for
you.
Senator Allard. I appreciate that very much, Mr. Chairman.
That concludes my questions.
The Chairman. Senator Salazar.
Senator Salazar. Thank you very much, Chairman Bingaman.
I think over the last 3 and a half years on this committee,
we have done some good things around energy. I think the three
pieces of legislation we passed in 2005, 2006, and 2007 were
good. The question now is what more we ought to do, especially
given the pain that the people of America are feeling with high
gas prices.
I think there is broad agreement on conservation, I think
on alternative fuels, alternative energy, I think broad
agreement on new technologies, hybrid plug-ins, battery
technologies, et cetera. But the big debate I think that will
take shape here in the next week or 2 will be about additional
supplies, putting more oil into the pipelines.
My question to you, Dr. Yergin and Mr. Diwan, has to do
with what those additional supply sources might do with respect
to the high gas and diesel and jet fuel prices that we are
paying in America today. I want to be specific.
First of all, with respect to existing leases, there is a
number out there that there is some 68 million acres of public
lands that have already been leased, much of which is not in
production. Is there anything that can be done to put those
into production? What would be the impact in terms of energy
prices?
Second of all, the Alaska petroleum reserve. The Alaska
petroleum reserve is there, proven reserves. Why can that not
be put onto the market, and what would happen if the Alaska
petroleum reserve did come on?
Third of all, offshore. If we looked at the areas that do
not have a moratorium in places off Alaska, if we were to push
for those areas to be opened up, what impact would that have in
terms of our energy prices?
So maybe if you can just answer that last question, in
terms of additional supplies where I think there might be
agreement in terms of us moving forward and trying to push our
production from those areas.
Mr. Yergin. Of course, the offshore areas are the ones with
the longest lead time. So in terms of physical oil coming on,
if you start it today, there are several years. There is the
question of the sense of expectations of new supplies coming
on, and I think ultimately--we have seen it in the last 2 days
I think. We have seen the price drop rather substantially. Who
knows what will happen today?
But it goes back to what Mr. Diwan is saying. When there is
a kind of cumulative shift in the emphasis that from there is
going to be a shortage to, in fact, that new supplies, new
areas are going to open up--and, by the way, the expectations
that people have, the pictures of demand from 2 years ago is no
longer appropriate after these type of prices. Oil is not going
to retain its monopoly position in transportation. You
mentioned hybrids and so forth. We have mentioned biofuels. Oil
will probably have the predominant role. That kind of shift, at
some point, is what starts to bring the prices down. Maybe we
are starting to see the demand responses specifically that will
also reinforce that.
Senator Salazar. Let me push you just a little bit on that
question. When I look at information that we have on the
Alaskan OCS that is not covered by the moratoria, the number
that I have is that there are 918 million acres that are
available out there. I think the numbers from the Minerals
Management Service indicate 1.2 billion barrels of oil in that
area, 17.8 trillion cubic feet of natural gas.
If there was a major push to go into an area of that size,
what impact would it ultimately have on energy prices here in
the U.S.? Would there be an immediate impact? Would it be a lag
impact? What kind of impact would it have?
Mr. Yergin. I mean, it certainly would not have immediate
impact in terms of supply because it would be a 5-, 6-, 7-year
development program. I think if the sense that--and in other
areas--you start to have a sense that new supply is coming on,
that then changes the kind of expectations that are driving the
market.
I think that each of the companies--the reason they bid--
sometimes several companies will bid for a lease and sometimes
no one will bid for it, and sometimes one person will bid--is
because different companies will look at the geological
potential. It is fairly--you know, we use the word
``speculative,'' but speculative in a different way because you
really do not know until you actually start serious
exploration. So there is a lead time.
Senator Salazar. I recognize the lead time because you make
these lands available and it takes time to do the exploration
and to do the quantification and do the development that it is
going to take. But just making them available and getting on a
program to actually get those leased, would that have an impact
on price?
Mr. Yergin. Yes. I think, if I understand your question,
that the sense of new prospective territories being available
and moving toward serious exploration I think would be one
contribution to the mosaic of expectations.
Senator Salazar. Thank you.
I know my time is up. Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Alexander.
Senator Alexander. Thank you very much for really helpful
testimony. I am sorry I missed the last 30 minutes.
But I would like to go back to an understanding of this. Do
I understand each of you to say that today's price for oil
depends to a large extent upon the expected future supply and
future demand of oil? Is that correct? How can I say that more
accurately?
Mr. Yergin. Yes.
Senator Alexander. Because a lot of people say that this
might take 5 years, and I think what I hear you saying is if we
see a shift in demand, such as with plug-in hybrid electric
cars, if this country, using 25 percent of all the oil in the
world, suddenly got on a clear track toward electrifying a
large portion of the cars and trucks, that that expectation
from the future would affect today's oil price. Is that correct
or wrong?
Mr. Yergin. Yes. I want to make clear--and I think both of
us agree with this--you have to start from where we are today.
We have a tight supply/demand balance. We only have about 2
million barrels a day. If something bad happens somewhere in
the world and we lost a million barrels a day, that would have
an immediate negative impact on the market. Part of what is in
the market is the recognition that there is not much margin for
error.
On top of that, however, expectations today--I think we are
both saying--have a larger impact on price than it might have
at other periods because there is this sort of drum beat that
in 2012, 2013, there is going to be a physical shortage of oil
in the world. I find that widely believed when you talk to kind
of a cross section of people who follow these things.
Mr. Diwan. I will add one thing which is important in the
psychology of if you provide more land, they might believe that
the supply is going to increase and they stop putting in the
expectation. You are going to have to do a lot to change the
expectations because the problem is not only the access, but it
is really the ability to go explore, build the facilities, and
produce. The bottleneck in the service sector is such that even
if you are putting more land and good land, which might have
potential reserves, the skepticism vis-a-vis the ability to
produce that in the next 5 to 7 years is very big.
I mean, think about the large fields which are coming on
line right now in the world in Angola and Nigeria and the Gulf
of Mexico and Brazil, et cetera. All of these fields are 4 to 5
years late, behind schedule. On average, they are 4 years
behind schedule. All these fields were--basically we stopped
working on them in the mid-1990s. So we have been waiting for a
long time for that oil to come. That has really permeated the
market. If an oil company tells you it is coming in 6 years, it
is really coming in 10 years, maybe. The fact that often these
fields coming on line are smaller than what they thought they
would be.
So the psychology has been really impacted by what happened
over the last 5 years, all those delays and the incredible
length of time it took to develop these deep offshore fields.
Senator Alexander. But you are still saying that today's
price depends upon the expected future supply and demand. Is
that right? In part. A big part, small part?
Mr. Yergin. I think that in this very tight market, these
expectations loom larger than they would have maybe a few years
ago. There is much more focus on this mid-term notion. You
know, I would say there are four things. There is a tight
supply and demand. There is Iran and these mid-term
expectations about supply and China and demand growth. I think
those are the kind of starting points that are shaping the
psychology of price today.
Mr. Diwan. One thing which is remarkable, if you look at
the price growth, so if you look at oil prices 2, 3, 5, 10, 12
years away, they are very close to today's price. So the market
is having difficulties to understand all of that. We have a
very flat curve in terms of oil prices. We do not have a very
big shift in expectations which are reflected in the price
curve. So the market is basically taking today's balance and
the expectation in the future that not much is happening and
pricing oil in the very long term.
Senator Alexander. You mean locking in today's price at a
future time.
Mr. Diwan. Correct. I mean, if today's price is $135,
prices 10 years from now on the futures exchanges are probably
$137, which does not make a lot of sense in many ways because
you would have very different expectation of----
Senator Alexander. May I ask one other question? Have
either of you made projections? I mean, there is talk about oil
as a bridge to a future when we have a different kind of
energy. As policymakers, how should we think about--how much
oil is the United States going to need 10 years from now, 20
years from now, 30 years from now or as we move to a different
kind of energy future? Have you done projections of that kind?
Mr. Yergin. I do not think so.
Senator Alexander. Did you, sir?
Mr. Diwan. I mean, the difficulty here is price is the most
important function. Depending on prices, your projection will
be very different. So if you believe it is going to be $140 oil
going forward, I think you will see a big destruction of demand
and a faster shift to other energies. If you had $20 oil, you
can be sure that we would have a very steep forecast and demand
increase. So price is what killed the price at the end of the
day.
Senator Alexander. Did you say while I was out of the
room--you said that 27 percent of the activity of the buyers
and sellers of oil today are financial people--or 27 percent
are the people who actually take physical possession of the
oil. Is that what you said?
Mr. Diwan. Yes. The latest CFTC data, which really break it
down, which is April I think, shows that between 27 and 29
percent of the market is commercial.
Senator Alexander. The rest are financial people.
Mr. Diwan. Yes, different type of commercial----
Senator Alexander. Did you say what you thought we should
do about that, if anything?
Mr. Diwan. What I said is what we have done is we have
closed the door and at one point we opened the window. Perhaps
it is time to close the window and make sure that all the
players in the commodity market abide by the same rule of
position limits.
The Chairman. All right. Let me just go through the list so
everyone knows. Some of the folks who were here earlier who I
do not think are here now, Senator Barrasso, Senator Craig,
Senator Voinovich, Senator Cantwell, Senator Chambliss, Senator
Bennett. So the next who is here is Senator Corker.
Senator Corker. Thank you, Mr. Chairman. As others have
said, I think this has been most enlightening and I certainly
appreciate the efforts of you and Senator Conrad and Chambliss
and others to try to solve this problem.
I have only been in this body for about 19 months and
continue to be amazed at the way that we look at things here. I
mean, we have had two experts and many others ad nauseam who
tell us that the law of supply and demand continues to work in
the year 2008, which is an amazing thing. It has worked for so
long before.
Yet, we began to talk about energy legislation instead of
focusing on supply and demand issues. I appreciate so much your
focus on conservation and lessening of demand. Where do we
begin that discussion but with speculation, which is a symptom
of the fact that we do not have the courage or ability in this
country to do the tough lifting of supply and demand? So we
want to do the easy things first, probably the wrong things
first.
I just find it amazing that the majority leader of the
Senate was in here in this body earlier and was talking about
what a great thing this was to have this summit but did not
hear a single thing that was being said, and that is it is
supply and demand. So we start way off here in another place. I
can understand why this body has a 9 percent approval rating
because we do not address the issues as they really are.
Now, I will say this. Since it looks like we are going to
talk about speculation--I do not have control of the agenda.
Nobody here does other than the person who just left.
I would like to understand what we mean about closing the
window. It seems to me that what we ought to be concerned about
in this country is if somebody is manipulating the market. I
mean, at the end of the day, if there is ocean-front property
and there is only so much of it, then it seems like the price
is going to go up, and it seems like that we understand that.
If there is not going to be additional supply and it is going
to be bullish and we are not going to have hurricanes and
things, that that is going to continue to go.
So I guess I have a hard time understanding why we would be
concerned about investors in the market. It seems like what we
would be concerned about is manipulators in the market, and it
seems like to manipulate, you would have to hoard supply
somehow, hoard the product. But I would love for you, if you
would, to expand just a little bit because I think we ought to
try to do the right things and not try to find a bogeyman, if
you will, to sort of pen off politically and make the American
people think we are actually doing something when we are not.
So if you could expand on that and help us, that would be
great.
Mr. Diwan. Yes. I do not think there is a bogeyman here.
What I am trying to say is basically all the commodity
exchanges in general had allowed two types of players on them:
what we call the commercials, people who buy and physically
need oil, sell it or buy it; and the non-commercial, which are
the speculators, if you want. The idea is we need the
speculators to provide liquidity to the market.
In this market, we have traditionally set the position
limit, how much each speculator by himself can hold--you know,
what number of contracts they can hold. In oil it is 3 million
barrels. So we had that legislation for very long.
But we have allowed at one point in 1999 that index funds
do not abide by that position limit. This is what I have called
the window, if you want. So suddenly you have a new type of
players which never bought and sold oil like university
endowments and pension funds globally, not only in the U.S., to
basically use oil as a financial asset, not as a physical
commodity.
We can reimpose that position limit so they would have to
abide like the other speculators. I mean, hedge funds, for
example, have to abide by that limit, but if you are buying
through the index fund, you can basically go beyond your limit.
So that is the one problem.
Senator Corker. So that is a problem. So tell us
specifically because we do really bad things here. Tell us how
we solve that problem.
Mr. Diwan. We do not know how big of a problem it is
because we do not know if we have 500 pension funds which each
of them actually is below the position limit or we have 20 of
them which have massive positions. We do not know that.
Senator Corker. OK. Let me ask you this. In solving a
problem, it seems the first thing we would want to do is to
know the answer to the question or we would want to know how
many people are doing it. Is that correct?
So let me just ask, would it not be wise for us to invest
in staffing and ensuring that we have transparency and
understanding the dynamics of the issue before we try to solve
it? I would just ask you that question.
Mr. Diwan. Sure. I think we need a lot more transparency
and the data has been poor to dismal. This is right now
probably one of the most important parts of the oil price
formation, and we have very little ability to understand
because the data provided by the regulator, CFTC, is
inadequate. If you had a lot more data and transparency, we
would be able to do a lot more analysis.
But there is also an issue of do we need every single
player to disclose publicly the data or the regulator by itself
will have to look at these positions. What we know is basically
that position limits do not apply if you come through one side
of the market. That is what we know. We know that that section
of the market right now, these swap dealers, if you want,
represent the largest section of the market and they have grown
very, very fast. Actually it is the only real increase in the
open interest. It is coming from these players. So the money is
coming in quite fast through that instrument, the index funds.
Traditionally what speculators are bringing to the market
is liquidity. They are buying and selling. The problem with the
index fund, they only come on one side. They only buy long.
They never are short. They are not allowed to. Quite often it
is like a parking lot. They are here to park money. So in a way
they are drawing liquidity away from the market.
Senator Corker. Since we typically do not address the
issues head on, if we were going to try to address this
specific issue that you know more about than anybody on this
panel, how would we do that?
Mr. Diwan. You reimpose position limits for all players. So
if you are coming through an index fund or you are coming
directly to the market, the amount of oil that you can hold is
the same as any other players.
Senator Corker. Now, how do you impose position limits when
this is done over the counter and there are not mechanisms in
place to know what those limits are?
Mr. Diwan. Those are in the future markets. The brokers, if
you want, hedge these positions on the market. The exchanges
regulate already the position limits of all the other actors.
So they need the brokers to disclose data so they can regulate
that.
Senator Corker. So does something have to happen first for
us to be able to do what it is you are suggesting?
Mr. Diwan. We need to ask the regulator to regulate that
aspect and to impose a position limit.
Senator Corker. Thank you, Mr. Chairman.
The Chairman. Senator Murkowski.
Senator Murkowski. Thank you, Mr. Chairman.
Gentlemen, thank you for your comments this morning. I
think we have heard some--I do not know--I would call them the
hard truths when you remind us that our policy in this Nation
has really been to encourage consumption and to discourage
investment. That is really a very big contributor to where we
are today and why we are facing the prices that we are facing.
Sometimes I think we hate to admit that it is us. We are
looking for somebody to point the finger at when, in fact, we
are part of the problem. I think that is sometimes a difficult
reality. So I appreciate your reminding us of it.
I also appreciate the comments about recognizing that it is
not just about providing the access. When it comes to the
supply side, we can go ahead and we can make more acreage
available for leasing, but as we know full well up in Alaska,
you can make that available but you might not see a return on
that ever or it may be 10, 15, 20 years down the road.
Shell put up over $2 billion in leasing. They have been
held up because of litigation for two seasons now, and they are
going to come back and try again next year. But our reality is
that there are other impediments out there, and just suggesting
that we can make more available--yesterday's news back home was
that Interior has put up millions of additional acreage in the
NPRA, and that is good. But that is not new news. That plan was
released in May, but it was not as exciting an issue back in
May because we were not looking at the prices in May that we
are today. So I appreciate the perspective on that.
What I wanted to ask about--and, Mr. Diwan, you mentioned
it, I think, in talking about the supply/demand imbalance and
the access to some 80 percent of the world supply. We know that
right now what we are seeing is the direction that so many
nations are taking in terms of nationalizing their oil assets
and acting in their national interest as opposed to a global
interest. We are talking about how much does market speculation
increase the price. Do we have any idea how much this
nationalization trend is influencing our prices?
Mr. Diwan. I have been looking at prices for most of my
professional life. I have never been able to break it down into
this event has that type of impact and this event has that type
of impact. I do not think I can. I do not know if you have
looked at it differently.
Mr. Yergin. As Mr. Diwan says, I do not know how to parse
it specifically, but I can say that one feature of the current
period is that so much money is flowing into the countries that
control these resources. This year we estimated it might be a
$2.3 trillion income transfer from consumers to producers.
Those countries do not have a great sense of urgency about
developing resources. They are making more money than they
thought they would make. They have to decide where to put that
money. There are lots of claimants domestically for that money.
So they say, what is the rush? So it just takes longer.
Decision-making is slower. Things do not get done. So I think
that is one way that kind of nationalism, if you are saying it,
or national control manifests itself. They just do not feel the
urgency.
Senator Murkowski. You see the front page of the Washington
Post this morning about what Saudi Arabia is doing with their
just incredible resource wealth in terms of creating a new
economic--I do not remember exactly the specifics of it.
But recognizing that trend, I think the comment was made
that one-third of the price increase that we have seen between
2003 and 2007 was attributable to what was going on with the
dollar. In the past decade, we are seeing again this greater
trend toward nationalism. I am assuming that it is your opinion
that this will continue as opposed to shifting any other
direction, that it is going to continue----
Mr. Yergin. Until the price comes down. Prices at this
level--again, it just takes that urgency. So this could be a
while before that trend--I am sorry to interrupt.
Senator Murkowski. No. Go ahead.
Mr. Yergin. I was going to say that one area--and this gets
into the area of diplomacy--is that the U.S., where it can,
ought to be encouraging countries to be timely and expeditious
in their decisionmaking.
Senator Murkowski. When it is in their best interests.
Mr. Yergin. When it is in their best interests.
Senator Murkowski. Very quickly then and I will turn it
over to my colleagues.
In the short term, is it fair to say that the most
immediate thing we could do to help reduce the prices that
people are paying across the country is on the demand side from
a conservation and an efficiency perspective?
Mr. Yergin. Yes. I think that is because you are talking
about physical barrels being consumed in the world and
affecting that tight margin of supply and demand. Our gasoline
market is bigger than the entire oil market of any other
country.
Senator Murkowski. Thank you.
Mr. Diwan. We are already starting to see that. Gasoline
prices are high because crude oil prices are high, but gasoline
per se right now is not very expensive, I mean, the difference
between gasoline and crude, if you want, the margin. One of the
reasons is very simple. Supply has been growing. We are adding
gasoline supply into the market because we have a growth in
refining capacity. We have ethanol, and at the same time,
demand is declining. So the gasoline portion of the price, if
you want, is shrinking, but the crude oil price, which is
really the base of the price, has risen dramatically.
Senator Murkowski. Thank you, Mr. Chairman.
Mr. Yergin. Senator Murkowski, could I just add? Just to
reiterate, the reason we are all here today is the urgency of
this because it goes back to the basic fact we are in an oil
shock and this is a tremendous burden on our economy and the
global economy. At prices at this level, we are running on a
global basis very substantial risks.
The Chairman. Let me just give the listing of folks that I
have here that are here at the current time: Senator Sessions,
Senator Lincoln, Senator Ben Nelson, Senator Menendez, Senator
Isakson, Senator Whitehouse, Senator Tester.
Jeff, why don't you go ahead?
Senator Sessions. Was Senator Nelson ahead of me?
The Chairman. Were you ahead? I was given a list here that
said that Senator Sessions was here and then Senator Lincoln
and then Senator Nelson.
Senator Sessions. I would certainly be pleased to yield my
time to Senator Nelson. I think he was here when I came.
The Chairman. Why don't we go ahead with you then?
Senator Sessions. I think that would be fair and just.
The Chairman. We will do you. What about Blanche? Was she
here ahead of you too?
Senator Sessions. I do not know. I saw her in the hall. She
left. She came back.
The Chairman. We will go to Senator Nelson. Then we will go
to you.
Senator Sessions. Whether she keeps her place or not I do
not know.
The Chairman. Senator Cantwell was here ahead of all of
you, but she stepped out and now she is back. But go ahead,
Senator Nelson.
Senator Ben Nelson. Thank you, Mr. Chairman. I have to say
to my friend from Alabama that he is characteristically
gracious and I appreciate that.
As we think about drilling and the question to drill or not
to drill or where to drill, you mentioned prolific basins or
prolific areas. Do we have currently, with the appraisal that
we have which is outdated, enough knowledge to know where the
prolific areas are, No. 1?
No. 2, would it even be better, though, to have a new
appraisal, an assessment, a seismic assessment, to be helpful?
How long would that take if we decided to wait or to go forth
with a new assessment? Either one of you.
Mr. Diwan. Globally we know that basically most of the
world reserve goes from northern Iraq to the southern tip of
Saudi Arabia on the east side. I mean, basically probably 70
percent of world reserves are concentrated there.
Senator Ben Nelson. Based on what we know right now.
Mr. Diwan. Based on what we know right now and on the size
of fields that we discover in the region and what we know of
the previous surveys, for example, in Iraq where you have
probably--of the eight largest fields which are not producing
in the world, I think seven of them are in Iraq right now.
So we know, with the existing technology we had over the
last 20 years, where these prolific basins are. The United
States is fairly well explored, if you want, because we have
been allowing the oil companies to do a lot more work here, and
in this country, we are willing to go get much smaller pockets
of reserve than anywhere else in the world because the
economics are profitable.
But also we have new technology and sometimes new
technology allows you to discover new reserves. Dr. Yergin was
talking about in Brazil we just discovered the two largest
fields of the last 10 years over the last 18 months.
Senator Ben Nelson. We did not know that because we had not
had the experience with that area in terms of seismic
appraisal?
Mr. Diwan. Correct. Yes.
Mr. Yergin. The technology.
Mr. Diwan. We did not have the technology. These reserves
are below a layer of salt, and traditionally we have not been
able to do good seismic through salt. So we might have the same
in other places in the world.
Senator Ben Nelson. So it would be good to have another
assessment, and would that be true, let us say, of the outer
shelf or the Gulf of Mexico if we are talking about offshore
locations?
Mr. Diwan. Sure. We have exploration in the Gulf of Mexico
and we are discovering a big, new place. We had discovered one
3 years ago which we have not really yet determined. It takes a
long time to determine. You need to drill into depths that you
have never done before. So you are always on the edge of the
technology available at the time.
The same in Brazil. What we discovered--anyway, we do not
have yet the technology to produce. It is really at the edge of
what we know.
Senator Ben Nelson. In terms of the leases that the oil
companies have today--let us say in the outer shelf, the Gulf,
and on the continental United States--are those leases in areas
that you would consider prolific enough for drilling to occur,
for production to occur?
Mr. Diwan. If you discover oil in the United States in
these areas in any significant quantity----
Senator Ben Nelson. What we have today.
Mr. Diwan. Yes. If you have the option of spending money,
you will spend it first in the United States because you will
make more money on any barrel produced here than anywhere else
in the world. So you have incentives to produce as much as you
can in the United States.
Senator Ben Nelson. Then if that is the case, why is there
such an interest in more leases? Is it that the lease is always
greener on the other side of the fence?
Mr. Diwan. You want to have as much oil as possible to
produce. The portfolio of the oil companies is fairly thin in
reserves, if you think about it. They have 10 or 15 years only
for future production in their portfolio. It is fairly thin.
Senator Ben Nelson. Even with 68 million--I am not trying
to be argumentative, but even with 68 million acres under
lease, that is not much more than 15 years at best?
Mr. Diwan. I am pretty sure that a lot of these acres
have--we looked if they are prolific or not, and they are not.
I mean, oil companies are going to drill what they know, and if
there is oil, they will drill it. If there is no oil and gas
under these leases, there is nothing to do about it. A lot of
it is that. I mean, they are going to prioritize every year.
They have a budget and they are going to spend as much as
possible on these leases when they know there is oil and gas.
Mr. Yergin. I think that is the key thing is they
prioritize it. If they spend money to win it, they bid a lease,
they are bidding against other people. They are doing it
because they think there are resources there and then begins a
couple of year or several year process to determine it. Then at
the end of the day, they have a dry hole or they find
resources, but it is not economic to develop or they find
productive resources. I think in other parts of the outer
continental shelf, our knowledge is maybe 30 years out of date
because they were last looked at with technology of 30 years
ago.
Senator Ben Nelson. So would that be helpful to have a
current assessment of the outer shelf?
Mr. Yergin. I think so not only from an oil point of view
but also looking at the degree to which this country has made a
bet on natural gas for electric power generation----
Senator Ben Nelson. Both oil and gas.
Dr. Yergin [continuing]. That it is important from a gas
point of view too because either we import the gas and LNG or
we produce it in North America.
Senator Ben Nelson. My final question goes to speculation.
I think I heard you say 73 percent or near that number would be
speculators. Everybody is a speculator, but it is speculators
that have no interest in taking delivery. Is that fair?
Mr. Diwan. Yes.
Senator Ben Nelson. Five years ago, do we know what that
percentage was?
Mr. Diwan. Probably close to 50 percent.
Senator Ben Nelson. Ten years ago, do we know what that
percentage might have been?
Mr. Diwan. I do not have it off my head, but the market was
much, much smaller. The pie has multiplied by six over the last
the last 6 years.
Senator Ben Nelson. How much data do we need to collect to
know that there is a problem? More data probably helps us
narrow down what to do about the problem, but how much more
data would we have to know to--when I say a problem, driving up
the price of a barrel.
Mr. Diwan. The data has to be a little bit more refined. We
need smaller categories of players rather than these two big
categories of commercial/non-commercial. You want to break
these into smaller categories, which the CFTC has started to
do.
Senator Ben Nelson. How long will it take us to get that
kind of data?
Mr. Diwan. The data exist. We need to process it.
Senator Ben Nelson. No. I understand that you would like to
have refinement. We all would. Purely supply and demand--or
ignoring the fact that so much of it is about future supply and
future demand, that you cannot just say it is as simple as
supply and demand. Oversimplistic responses like that are I
think what are offending the public. They are sophisticated.
They understand that this is a very complex situation. So those
who just say supply and demand, find more, use less, that is
clear that we need to do that, but it is a lot more challenging
than that. Would you agree?
Mr. Diwan. Yes. It is a very complex puzzle.
Mr. Yergin. Maybe Mr. Diwan can elaborate on it. You have
such a range of participants in the financial markets. You have
people that you look at them and say those guys are speculators
and then say that those people are 401(k)s who are trying to
asset-allocate to protect the pensions of people down the road.
So I hope that out of this process we will have some greater
clarity as to this range of people who are the financial market
players and some way to break it down more into categories.
Senator Ben Nelson. I think it was Will Rogers who said
about commodity speculation, when it is pure speculation, that
it is people buying something they are never going to get from
people who are never going to have it. But if that is the case
and it goes to hedge funds and pension funds, that is the most
challenging part that we have to deal with right now rather
than those people who are going with forward contracts to lock
in prices on something that they are going to take and
something they are going to need.
Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Why don't we go with Senator Sessions, Senator Lincoln, and
then Senator Cantwell? We will fit you back in since you were
here earlier than the others.
Senator Sessions. It is basically supply and demand. Is it
not, Dr. Yergin? Is that not what is called the boom and bust
in the oil industry for all these years that you so brilliantly
wrote about in The Prize?
Mr. Yergin. Thank you. I do think when I kind of finished
The Prize and looked at all those hundreds of characters--and
sometimes I think that the two more important characters in the
book are--one is named supply and one is named demand.
Senator Sessions. Where were the speculators when oil was
at $25 a barrel?
Mr. Yergin. Roger.
Mr. Diwan. I think think you did want to play too much in
that market when oil was $25 because you had 5 million per day
of spare capacity in OPEC. If you bought or sold oil, basically
you were betting on OPEC, which was a risky bet. When you
removed that spare capacity from OPEC, suddenly it is supply
and demand. It is not anymore OPEC.
Senator Sessions. In other words, when there is a
deficiency of supply as opposed to demand, the speculators can
profit, and that is when they come out and are more visible and
more aggressive. Prices are surging and they attempt to
capitalize on that by buying contracts for delivery of oil. Is
that not basically what happens?
Mr. Diwan. If you think about the oil futures 6 or 7 years
ago, it was small, fairly liquid and fairly contained with few
players on it. You had sometimes--how could I say that--price
moving in a bizarre fashion because it was small, fairly
liquid. So some of the bigger players could do things.
In the last 6-7 years, that market has really mushroomed.
It is a very big, liquid market. So you brought a lot of
liquidity from these financial players. So the whole structure
of that market has changed.
As you did that, you have brought what I call new
fundamentals in it. Supply and demand, you are right. But
supply and demand of dollars really matter here. The perception
of inflation really matters.
At the end of the day, it is supply and demand of paper
barrels, and these paper barrels--what you have right now, you
have created a structure where we have a lot of people who want
to hold paper demand. You do not have a lot of people who are
willing to provide paper supply. If you are an oil company and
you believe that oil price is going to increase by $20 or $30
because that money keeps coming in, you have little incentive
to go sell forward your production. You would be doing a
disfavor to your shareholders.
So what we have seen is the commercial players, the ones
who are on the long side who are providing, if you want, the
supply on the paper market, have removed themselves from that
market because it was too risky for them. So the futures market
has become, if you want, the sandbox of mostly financial
players.
Senator Sessions. We could say that because of the shortage
and increasing world demand, unusual forces have come into
play. I would just say I do not have a religious objection to
controlling future speculation. If somebody can come up with a
decent idea, I am willing to consider it. Some have worked on
that, but I do not think that is the fundamental problem.
Mr. Yergin, your book--you talk about boom and bust. Some
say that the world has changed. We are beyond peak oil and you
can affect the stock market right now today. I will give you
that opportunity.
With the price surging to these record highs, consumption
has dropped 3 or so percent already in the United States.
Drilling and rigs are out at record levels today. Historically
that has led, after a period of years, to a collapse in the
price. What do you think?
Mr. Yergin. I do not think today is the day to predict a
collapse in the price of oil.
I do think that--and is it at this level? Is it higher?
What I said before, I mean, I think the question of the Middle
East and particularly Iran looms quite large and the
uncertainty about that.
But I think in a sense if we, to some degree, put aside the
geopolitical, I think the reaction to high prices has already
begun, and we will see it in terms of demand and supply. So
will prices spike higher? It depends upon events. It depends
upon economic growth. It depends a lot upon the dollar. But I
think we are in this break point world, as I said, when oil's
position in transportation 5 years from now is not going to
have the absolute dominance that it does today. Our automobile
fleet is going to look different from 5 or 6 years ago than
people would have thought 3 years ago.
Senator Sessions. Nobody can predict the future, but I
think there are some forces at work that could moderate the
surge we have been seeing. Would you agree with that?
Mr. Yergin. Yes, absolutely, and I think those forces are
already at work.
Senator Sessions. Now, I believe that the average family
from my calculations is paying $100 a month more for gasoline
this year than they were 1 year ago. This is after taxes, after
house payment, after basic expenses. The little after-tax money
they have is being depleted dramatically. I think the wealth
transfer that is occurring out of the United States is
unhealthy for our economy. That is a factor too. Is it not? For
policymakers like us, Dr. Yergin, this wealth transfer to other
countries?
Mr. Yergin. I think so. We are seeing the kind of balance
of the world economy being reshaped in front of our eyes.
Senator Sessions. If there is a choice economically for the
health of the United States economy, it is better produce our
oil here, therefore, churning that money within our economy,
than sending it to Venezuela or some Gulf kingdom.
Mr. Yergin. Certainly what is it? It is going to be $600
billion. Would that be the number you would use too? About $600
billion a year flowing out this year, and if that number was
$400 billion, it would be better for our economy.
Senator Sessions. I thank both of you for being here. I
think Chairman Bingaman is not afraid of the truth. He has had
a lot of good panels and a lot of good hearings on these
complex issues. We might as well get serious about it.
As to speculation, I see it as a guy on a desert island. He
is dying of thirst and bugs are biting him and flies are biting
him. Somebody wants to shoo away the flies. What they really
need to do is get him some water. I think this economy needs
some more oil and continued reduction in utilization.
I will confess that I think Republicans and a number of
Democrats should have moved more quickly on CAFE standards but
prices of oil were not very high. We were not worried about it.
I think Democrats and some Republicans should have allowed
more opening for drilling long ago. The pressure was not so
high then. The prices were not so high.
So I think we both made mistakes. But I do truly believe,
Mr. Chairman, if we use less and produce more, we can beat the
speculators and bring some semblance of reality back to this
market that is hurting this country.
The Chairman. Thank you very much.
Senator Lincoln.
Senator Lincoln. Thank you, Mr. Chairman. I would like to
add my thanks for you and Senator Domenici bringing this
together to have a good conversation and continuing the
conversation of what our solutions need to be.
We appreciate you two gentlemen in providing your
expertise. We hope that you know that this is not the first or
the last time that we will be calling on you to help solve this
problem.
I think that for our options here in terms of policy, we
see a lot of focus on long term because we want to ensure, as
Senator Sessions mentioned, that we do not miss these
opportunities not just for what we can do immediately but that
there is a lot more we can do in the long term that will
hopefully eliminate us seeing a repeat of what we are going
through right now. But this problem did not occur overnight and
it is not going to go away--we are not going to solve it
overnight. We have to face that reality.
There are some of us, however, that come from States that
are disproportionately low income working families, and they do
need immediate relief. You all have mentioned certain things
like cold starts, lead foot, tire checking, and other things
like that. I am just curious to see if you have any other
silver bullets that might be helpful to us, particularly for
these low income working families that are getting hit really
hard.
I noticed in my State just over the Fourth of July, I took
my kids to the lake, and listening to the radio, the radio
announcers were pleading with people to please look at their
gas gauges because there were so many cars that were on the
side of the road out of gas, families who had nothing else to
spend. This was their holiday. This was their time with their
family, and yet, they were just trying to get home on that last
little ounce of gas that they had and could not make it.
So you have got a lot of people in dire straits out there
in this country. When we get into talking about solutions, we
kind forget that they are choosing between fuel and food and
whether their kids are going to get to play Little League this
summer, or a whole host of other things. So that, with the
increased price of food, we have got a real situation on our
hands. So if you have got any other ideas of how we protect low
income in this circumstance that we find ourselves in.
Also, if we were to move to an emergency situation, which I
think we should, here in the Congress and take this as an
emergency situation and begin to look at both the long-term
solutions and the short-term solutions, what role do renewables
play? We keep saying that is way out there, that is way out
there.
I have got an automobile parts plant that is going dormant
right now. I mean, how unrealistic is it that we would look to
automobile makers that are downsizing and taking plants
dormant--can we not look toward maybe the production of greater
fuel efficient vehicles, as well as the production of renewable
fuel use vehicles, converted vehicles? I had a lot of farmers,
when I was growing up, that used propane in their trucks.
How quickly can we move to some of those interim solutions
as we look toward increasing our ability to really see a fleet
of vehicles that are more dependent or at least somewhat
dependent on renewable fuels and the use of renewable fuels?
Mr. Yergin. First, as you make clear, the abstract numbers
about oil prices and share of family incomes do come down to
very painful issues for many, many families across the country
who are really living every day the oil shock. So I think that
goes back to what Senator Bingaman was talking about. The value
of an intensive information campaign is both the macro effects
in terms of helping to moderate oil prices and the individual
family effects of helping people manage their energy budget.
Renewables. I am just in that section of my new book
writing the chapter about renewables so I have been thinking
very hard about it and the work that we have done on it. I
think in a way we are crossing the divide that renewables are
going to be a bigger--they will become almost conventional as
time goes on, and I think particularly notable is wind, which
does not address transportation but really is growing quite
substantially.
Senator Lincoln. It produces electricity.
Mr. Yergin. Yes.
Senator Lincoln. If we have electric cars.
Mr. Yergin. Yes.
So I think that I have never seen so much emphasis on
innovation across the energy spectrum, and that includes the
renewables. So I think we have to keep in mind the scale of our
overall energy system, that you can have dramatic growth and it
is still a relatively small part.
On renewable fuels, today about 5 percent of our gasoline
is renewable fuels. So if you look at that, a half million
barrels a day is in itself a significant number, much higher
than it was just a few years ago.
Senator Lincoln. But is it feasible to think we can speed
that clock up? What is the biggest obstacle to speeding that
clock up? Delivering it to the consumer, providing the
research, getting the automobiles retrofitted or----
Mr. Yergin. A lot of different technologies are under the
heading of renewables. I think it is what has already been
addressed in this question, getting to the second or third
generation of biofuels, and there is a lot of debate, even in
the scientific community, about what the timing of that is
going to be. I personally do think that biology will probably
play a bigger role in energy 10 years from now----
Senator Lincoln. Sure. We are looking at algae now as a
feedstock.
But what I am asking you is, is there any one thing that
you would say or recommend that would speed up the clock of
getting us to the idea that I am going to be able to pull up to
a pump somewhere and plug in my car or fill up my tank with a
renewable fuel that comes cellulosic ethanol or algae or
switchgrass or whatever?
Mr. Yergin. I think it comes down to research dollars and
concentration of research dollars and making a lot of different
bets rather than just betting on one particular thing. But I
think people are awfully motivated to do that.
Senator Lincoln. So if we could get those speculators to
invest in that market, then maybe it might move quicker?
Mr. Yergin. I think it is some of the same people. The
speculators also some of your innovators.
Senator Lincoln. Can I ask just one last question, Mr.
Chairman, just quickly?
The Chairman. Yes, go right ahead.
Senator Lincoln. Thank you.
We have seen certainly the sharp increase in the
consumption of oil by China and India. Are there any tools in
our tool box right now that are available to us to help us
address the stress on energy demand on an international level?
Mr. Yergin. Let me jump in there because I do think that
that is a very central question because that is where the
dynamo of growth is. I think it is striking that the Chinese
themselves have put efficiency at the top of their list for
energy. I think over the last couple years, we have observed a
shift in how they are looking at it. I think the degree to
which we can--it is happening, but intensively tie them into
the research and what we are doing in terms of innovation, that
is in our interest as well as it is in their interest.
The degree to which--and I think some of this has happened
already. The Chinese in particular, but the Indians too, need
to feel confident that the kind of international energy
security system that exists around the IEA would work for them
too, that it is not rigged against them in terms of a crisis.
The degree to which the Chinese come and we come to see that we
are actually large importing consumers on the same side of the
table and have similar interests in stable markets, similar
interests in not seeing these kind of prices that we are seeing
today, I think that will be beneficial. So it is an economic
question. It is also very much a question of our overall
relations.
Mr. Diwan. I can add just one element to that. I totally
agree. The question is how do you bring the consumers together
to really think about it. In a way, the IEA is a little bit of
an odd organization. It has been created 25 years ago as an
OECD member. Why the big consumers are not really part and
members of that organization? Why do we not transfer the IEA
into a real consumer organization which can address these
issues with India, China, Brazil inside rather than invited
from time to time as guests?
Senator Lincoln. Thank you, Mr. Chairman.
The Chairman. All right. Thank you.
Senator Cantwell.
Senator Cantwell. Thank you, Mr. Chairman.
Mr. Yergin, good to see you. Mr. Diwan, thank you for your
testimony. I appreciate, Mr. Diwan, you saying that you think
that the market is no longer controlled by supply and demand
fundamentals. Mr. Yergin, thank you for dwelling on the asset
class issue and talking about the need for more transparency. I
appreciate that very much, and I will get to that question.
But I have another question--we have a colleague who says
the reason we should drill more is because it will have a
psychological effect. The Energy Information Administration
said it is not going to have much of an impact before 2030 and
not much of a significant impact after that as well. So I am
asking you what you think about this notion of whether saying
that we are going to drill more would have that psychological
effect.
When we opened up Lease 181 in December 2006, which is 6
million acres, a lot of people were saying it was going to be
the most promising area for new production. Oil was at $57 a
barrel, and we know where it is today. So, obviously, that in
and of itself did not have much of a psychological effect.
There were 500 million acres that were recently put out for
bid on the Gulf of Mexico, and I think companies bid on 200
million of them. Apparently companies are not ready for more
drilling even though prices are high.
So what do you think of this notion of a psychological
impact? I will let you start with that.
Mr. Yergin. I think the word I would use is
``expectations,'' and I think that what happens with supply in
the United States is part of this larger picture and larger
framework of expectations. So if it appeared that there is the
potential of more supply from the United States, as perhaps
more supply from other countries, that that would be part of
changing this kind of shortage psychology that seems to
dominate the market today, which Mr. Diwan described.
Senator Cantwell. Since there really is not a serious
amount of supply in the United States and it is more expensive
to get, will lifting the moratoria really have an effect on
price?
Mr. Yergin. I think the answer is we do not know. I think
before we mentioned the example of Brazil. Ten years ago when
Brazil was talking about opening their offshore, no one
contemplated that there might be a new North Sea off Brazil. No
one would, I think, speculate today that there is a new North
Sea somewhere off the coast of the United States. But truly you
do not know until you have done some exploration, and the
technological revolution in the offshore is sort of space age.
It is very different than it was 10 or 20 years ago.
Senator Cantwell. I am just really struck by your answer to
Senator Bingaman that you could reduce oil demand by 600,000 to
700,000 barrels a day, essentially overnight, here in the
United States by simply implementing measures like filling car
tires.
Mr. Yergin. I know. It sounds like tips.
Senator Cantwell. The 600,000 barrels a day is three times
what the Energy Information Administration says we would get in
2030 from lifting the moratoria. This is overnight juxtaposed
to something that could take place in 2030. So it seems to me
that this notion of some psychological effect is basically a
specious argument. Some of our colleagues are trying to sell
the idea to people that lifting the moratoria is going to have
some immediate effect when we really cannot affect the supply
price here much in the United States, given our OCS resources.
Mr. Yergin. I think I am not familiar with the specific
estimates of the EIA. You look at the history of exploration
around the world, you see examples where you have $2 billion
dry holes off the United States. You also see examples where
people are quite surprised to see additional supplies that they
did not anticipate. Often when people first discover a field,
the reserves are here. As time goes on, the reserve number
grows as the knowledge of the field grows.
But I know I would go back to where I started. To me it is
not an either/or question. I mean, I think addressing the
demand question quickly is extremely important, efficiency. But
I think the supply is also part of the picture. We are not
going to discover probably a new Persian Gulf off the United
States. So it is only going to be part of this overall supply
picture.
Senator Cantwell. Yes, Mr. Diwan.
Mr. Diwan. If I can just talk a little bit about
expectation. It is very difficult to judge expectation.
Clearly, if you believe that there will be more oil in 10 years
in the United States has a lot less impact as your expectation
of oil prices for tomorrow if you believe that we are going to
go bomb Iran. So you are constantly looking at the whole range
of expectation with some short lead time versus a very long
lead time, and it is very difficult to say this has had this
impact versus that had that impact. Clearly, when an Israeli
minister says bombing Iran is unavoidable, it has a big impact
on the oil market versus opening a lease which might produce
oil in 10 years. So we constantly need to juggle and understand
a little bit how did the market react to these issues.
Senator Cantwell. What would be the psychological impact of
saying to the futures market that we are truly going to have
transparency on all U.S. trades?
Mr. Diwan. I would not know how to answer that.
Senator Cantwell. You do not think it would have an impact?
Mr. Diwan. If you----
Senator Cantwell. Dr. Yergin.
Mr. Yergin. The question again?
Senator Cantwell. Do you think saying to the futures market
that you are going to have transparency on all U.S. traded oil
futures would have an impact on the market?
Mr. Yergin. Yes.
Senator Cantwell. Thank you.
The Chairman. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Thank you both for sharing your knowledge and for your
staying power. I know you have had almost 2 and a half hours of
this. So I want to thank you for that as well.
I want to get back to some of your fundamentals so we can
put all of your answers in context. You basically have made the
case that, as it relates to oil, this is a world market. It is
a global market. That means that global production is part of
the element. Is that fair?
Mr. Yergin. Yes.
Senator Menendez. That means that global demand is part of
the element.
I would add a third element I think that you have referred
to, which is global events, so that if you have unrest in
Nigeria or if you have a hurricane in the Gulf, all of those
things can affect prices. Is that fair to say?
Mr. Yergin. Yes.
Senator Menendez. All right. So with that having been said
then, the fact is that how you affect these different elements
are in some ways on the fringe unless you can have a massive
effort either in the demand, reduction, or a massive effort in
the production side, or if you could somehow calm the waters in
a way that there would never be any uncertainty.
So I think it is because of what you have said about how
this is a global context that to some degree explains why even
though we opened up Lease 181 about a year and a half or 2
years ago, gas prices still went up. Even though Americans have
reduced 800,000 barrels a day as a result of higher gas prices
and the Saudis have produced 500,000 barrels more a day, a
total shift of about 1.3 million, gas prices have still gone
up. So is that a fair way of looking at this set of
circumstances?
Mr. Diwan. Yes. It is really a global picture.
Senator Menendez. So, therefore, the suggestion by some who
would have us believe that, for example, opening up the outer
continental shelf tomorrow would immediately reduce gas prices
today, would be a falsehood, would it not?
Mr. Diwan. Yes.
Senator Menendez. Now, I think you made comments before
that part of our challenge here, another element of this
challenge, is that because oil prices were lower during a
period of time, investments in the necessary critical
infrastructure to both drill, refine, lay the labyrinth of oil
lines necessary and do all of the elements of what it takes to
bring oil to the marketplace were not made. Is that fair to
say?
Mr. Yergin. They were made but there was a contraction
going on, and particularly when you had two price collapses of
$10 a barrel. The last price collapse was in 1998 just a couple
of years before this huge demand surge started.
Senator Menendez. So the investments did not keep pace
ultimately with how this explosion took place.
Mr. Yergin. That is right.
Senator Menendez. In fact, we saw a lot of the resources by
the companies, as they were making significant record profits,
in buying back their own stocks, but not necessarily making the
rate of investment necessary to pursue the type of production
necessary.
Mr. Yergin. But I think if you look back to that period in
1998-2000 when you had the price collapse, what they were very
preoccupied was with downsizing to accommodate what was
expected to be a low price environment for some time to come.
The high profits that you are mentioning really came when we
went into this period of much higher prices and high demand.
Senator Menendez. But it is true that much more was made in
buying back stocks than it was in investments, if you look at
the relative amounts.
Mr. Diwan. Buy-back of stocks were quite high when prices
really increased, and one of the reasons is actually the lack
of investable options for some of these very large companies
because they did not have access to these very prolific basins
we are talking about. It is a scale issue.
Senator Menendez. Now, because oil is, in fact, sold on the
world marketplace, production does not guarantee it will get
sold to the highest bidder, generally speaking. Is that not
true?
Mr. Yergin. I am sorry. I did not hear the----
Senator Menendez. Because oil is a world market, is
production largely not sold to the highest bidder?
Mr. Yergin. Yes.
Senator Menendez. So if that is the case, and then we also
look at the Energy Information Agency talking about the 68
million acres that is out there, I mean, I would say that,
first, they do some survey--the Minerals Management Agency does
some survey of this to give some sense of what is the
opportunity. Of course, companies pursue what they believe is a
reasonable opportunity. As you say, there may be some dry
wells, but there is also the expectation that they will find
opportunities. People just do not buy up leases for the sake of
buying leases. Is that fair to say?
Mr. Yergin. They acquire sort of public data and, on the
basis of that, decide they will bid here and not there. Then if
they win the lease, then they go through a much more extensive
period of analysis.
Senator Menendez. Is not cheaper to drill on land than it
is offshore?
Mr. Yergin. Yes.
Senator Menendez. Now, finally, let me ask you two last
questions. Is it not critical, in order for us to deal with
this longer-range issue that you both talked about as part of
it, that demand reduction, Dr. Yergin, you said could be
probably the single most significant thing we can do in the
short term, but in the long term, as we look for renewables, is
having the tax incentives necessary to bring these renewables
to the commercialization aspect not a critical element of
meeting this challenge?
Mr. Yergin. I think without the incentives that we have had
sort of on and off since 1974 for renewables, I do not think we
would see the renewable industry where it is today.
Senator Menendez. In fact, creating a greater stability of
understanding that those incentives are going to be there over
the longer term would, in fact, help us commercialize a lot
quicker. Would that not be true?
Mr. Yergin. Are you talking about----
Senator Menendez. The stability of the tax incentives.
Mr. Yergin. I think, in general, stability of a tax regime
in any branch of the energy industry promotes investment.
Senator Menendez. Finally, the Securities and Exchange
Commission has a proposed rulemaking that would allow oil
companies to report reserves where they have not done any test
wells. It also creates new classes of ``potential reserves''
and not just having oil companies report proven reserves.
My question would be would this rule not make the leases
that oil companies hold, but are not producing, more valuable?
Mr. Diwan. What you have right now in a way is oil
companies keep two books of reserves, the official SEC one and
the one that they look at what is potential. I mean, you drill
two wells. You find oil in both of them, and you know there is
oil in the middle. You cannot book it under the SEC rule. Oil
companies know there is oil in the middle. So they book it
internally and they plan their next well. So what the SEC rules
are doing in a way is coming closer to how the industry itself
looks at its reserves.
Senator Menendez. But clearly, there is----
Mr. Yergin. Senator, could I----
Senator Menendez. Yes, Dr. Yergin.
Mr. Yergin. That adjustment by the SEC is absolutely on
target because basically the rules for--this all goes back to
what you are talking about now about understanding the
financial markets. The rules for reserves were created in the
1970s so that, among other things, we would have a better sense
as a country of what is our reserve base, and then it was also
adapted for the uses of investors. The thing is that the
techniques that were used were the techniques of the 1970s when
the deep water frontier was 600 feet, and today it is 12,000
feet. So what the SEC is basically doing is modernizing a set
of rules that were outmoded by vast changes in technology.
Senator Menendez. I appreciate your answer, but could you
answer the other part of the question? Will that not ultimately
improve the value of that company's stocks by virtue of that
reporting?
Mr. Yergin. You said stocks or their ability to book
reserves?
Senator Menendez. Stocks.
Mr. Yergin. Yes. Since investors judge oil companies and
gas companies by their reserves and if their reserves capture
what is there with modern technology, that would enhance their
value.
Senator Menendez. But that would do nothing, in fact,
however, to necessarily increase supply.
Mr. Yergin. It would do two things. One, it might increase
their foundation for investment. Second, it meets the needs of
investors by giving them a more accurate view of the companies.
Senator Menendez. That would presume, however, that the
investment would flow, that the moneys would flow, that the new
higher stock price would flow not to create dividends but to
plow back into investments.
Mr. Yergin. I think like all companies, they have their
obligations to do both. I think the point that Mr. Diwan made
is a really important one and it goes back to this 80 percent
of the world's resources are controlled by national oil
companies. On a global basis, this question of access is
critical for helping to bring on an investment into new
resources.
Mr. Diwan. I agree. I mean, just to come back to your
question on the value of the company, a lot of the American
companies who are ruled by these SEC rules, I mean, literally
keep two books, one, in view of the technology that we have
today, and often the analysts and the investors know these
numbers. So there is not a huge discrepancy, if you want, with
what they are putting in the SEC and what is known of their own
reserve. So often people investing in these companies know what
the company thinks about its own reserve even if it is not the
way the SEC books it.
Senator Menendez. Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Senator Whitehouse, you are the final Senator here who has
not had a chance to ask some questions. I know Senator Domenici
wants to make a statement. Maybe Senator Conrad or Senator
Murkowski have other questions. But go ahead.
Senator Whitehouse. I appreciate it, Mr. Chairman, and I
thank you and the ranking member for allowing people from
outside the committee to participate in this important hearing.
It is a very nice thing.
I just wanted to ask the two witnesses, given the emphasis
on conservation, given the questions and the figures that
Senator Cantwell had, what advice would you have for us as a
Congress as to ways to increase conservation and encourage
greater conservation? I do not see us policing the tire
inflation of America's drivers. What are the best ways? Have
you thought of ways for us to try to get our hands around the
conservation opportunity, and what are the best recommendations
that you have?
Mr. Yergin. Obviously, Senator Conrad went through the list
of things that you have done. I think it would be a question of
examining, indeed, in the area of incentives, regulations,
technology, just what are the panoply of things that can have
an impact. The problem with conservation, the biggest single
issue, is it not a thing. It is so diverse. So it is really how
do you get the signals and the directions to move there.
Now, obviously, we recognize price is one way to do that.
So I do not have a list of specific things to do. I did
mention just these short-term measures that have an impact. But
I presume that this committee has looked at that and would say
that is something to really kind of focus on, what is the
inventory. If we just think about inventory of resources, what
is the inventory of efficiency resources that we have.
Senator Whitehouse. If you have a chance to, I would be
delighted if you followed up on that after the hearing. It is
something worth thinking a lot about.
Mr. Yergin. I should say that we, within our company, have
created a group that is trying to focus on how do you capture
the efficiency potential that I think we are all convinced is
there.
Senator Whitehouse. Just one last quick question. I do not
know. This may be a very quick answer. A measure of the run-up
in oil prices for the U.S. has been the decline in the value of
the dollar. As the dollar falls, oil prices increase. As oil
prices increase, it has a weakening effect on the economy. The
weakening effect on the economy can, in turn, cause the dollar
to slip further. There is a potential negative feedback loop
that could develop there, and I am wondering how robust you
feel that negative feedback loop is, or are there enough off-
ramps on it that it is not something we need to worry about?
Mr. Yergin. Yes, I would just say that I think you are
absolutely right. What is the opposite of a virtuous circle?
Senator Whitehouse. Vicious cycle.
Mr. Yergin. A vicious cycle. That is partly getting into a
cycle of stagflation, but I think that that is what we are
actually seeing today and you see the divergence between the
Federal Reserve and the European Central Bank and how they are
kind of addressing these questions. So it does reinforce
itself, and that is part of the reason, you know, the severity
of this oil shock we are in and the kind of risks that we are
carrying.
Senator Whitehouse. Conservation would help interrupt that
negative feedback cycle.
Mr. Yergin. Absolutely.
Mr. Diwan. In the short term, if I can add to that, I think
this is the key driver of oil prices now. It is the perception
of what the central bankers are doing about inflation. That is
the most important fundamental in the driver of prices. This
distinction we have what the central banks in Europe and the
U.S. are doing, where we are fighting inflation in Europe and
we are trying to promote growth here, is creating the further
weakening of the dollar and further money coming to the oil
complex. That is a very powerful cycle which has established
itself in the last year.
Mr. Yergin. If you look at gold, if you look at the other
commodities, exactly what Mr. Diwan is describing, you have an
inflationary cycle. Now, if you are outside the United States,
you have a very strong sense of everywhere people are
preoccupied with inflation. That is a time when commodity
prices go up also.
The Chairman. Senator Domenici, did you have a statement
you wished to make here? I know Senator Murkowski has a
question. Maybe Senator Conrad has a question.
Senator Domenici. I have a combination observation and
question.
I would be remiss if I did not, once again, thank you both.
We are pretty fortunate as a group--we, Senators--to have
somebody of your quality give us a whole morning. I have not
been here all morning. So I do not know what torture you have
been through, but you both are smiling. So it must not have
been too bad a morning.
I have come to the conclusion that right here at the end of
this year with the President lifting, by executive order, the
executive moratorium on all of the offshore lands, coastal
lands of America, and giving the Congress an opportunity to do
likewise in whole or in part--it seems to me we can talk all we
like about speculation and we can debate speculation on the
floor.
But I sense that the policy decision that we ought to make
is to open as much of that offshore to production, and some of
the American people are putting it in very simple language.
They want some drilling on American property that is not taking
place now. They do not even want us to use the sophisticated
words of exploration. They say, drill. So I think we are free
to use the word now. We were all scared of it 6 months ago, but
it looks like Americans are saying that in larger and larger
numbers.
I am not trying to talk like I know the answer to this
problem. This is the worst economic problem America has ever
had in my 36 years. I think it is capable of destroying us. It
is capable of making us poor. If we have to do it at a full-
blown high level, $500 billion to $700 billion a year for 8 or
9 years, I do not think we can make it. I think something will
happen. I am not going to ask you all that. I just will be
satisfied in my own mind that it is a very big problem.
I think we ought to go after the offshore and the Alaskan
that is available right now with a vengeance, and we ought to
pass whatever is necessary to open it up and see what happens.
Now, let me just stop for a minute and say, am I being
irrational as I look at what is coming in and have worked on
this for so long, passed three very important bills? You know
that. They are the important ones in the last few years. All
three are the result of Senator Bingaman and Domenici working
together. We had other Senators, obviously, but we did CAFE. We
have done all the things we should have done 20 years ago. We
have done them.
The price is so high that between all of them, we are
conserving like hell. I mean, we have never had such a big
conservation effort without it being mobilized. Senators are
talking about mobilizing it. It is taking effect. The price
plus the things we put into law are causing us to lower
dramatically our use. It could come down more.
But I ask you, am I on the wrong track in saying let us
proceed to get some of these properties released so they can
put them out to bid and get started with the world knowing they
are open?
My whole goal is to pass laws up here that can say to you
two men--you are writing your second book and you are saying,
well, where are the new supplies? You can at least start with
saying America has opened up the offshore and it is open. It is
going to be used sooner or later here. I think it would be an
important adjunct to anybody's analysis of where we are and
what we ought to do. Am I mistaken or not?
I want to say just before that, you have all told us--if
200,000 barrels of Nigerian available got all messed up in a
war, you tell us it has an impact on the market. Why would
200,000 barrels of new oil and X million cubic feet of gas that
are going to be put on the market by America on American
property not have an impact on the price, as would the Nigerian
situation with 200,000 barrels?
Mr. Yergin. As I have tried to say, I think that a
responsible further development of the OCS or part of the OCS
is part of the overall picture. That is, it is supply and
demand. We have got to look at both of them.
I do not think that you are irrational at all in the larger
concern that you are expressing. I mean, you have been through
several of these cycles now, Senator. You know, wherever we are
now, the risks of this could be worse. We could be looking at a
worse situation. You can just go down the checklist of risks.
There are a lot of them there today. So I do not think any of
us would want to say you are irrational.
Senator Domenici. What do you think?
Mr. Diwan. We have been saying that we need to increase
supply, and we need to increase supply everywhere. So I do not
see how we can ask certain countries to do it only for us. We
can decide the environmental standard we want to impose on
these leases. We can change them. We can tighten them if need
be. But increase supply globally is a good thing and globally
includes the United States.
Senator Domenici. I am going to close by stating in the
record there is a new observation taking place by some
Senators, and I am not being critical of them. That is good.
They think they have found something here. They say these
people that have leases, all these companies that have leases
on the offshore, are going to either have to use it or lose it.
I want to state for the record one more time they are subject
to a ``use it or lose it.'' I see you nodding affirmatively.
Every one of those leases says they are either for 5 years or 8
years or 10 years. In the lease, it says if you do not start
producing by the terminal date, you lose the lease. So that is
a ``use it'' already. We do not have land out there that they
can hold indefinitely and not use. They have to use it by the
date on the lease or they lose it. So what we do is we have
them out there doing the best they can to analyze.
They just bid a bid on one piece of the offshore which must
have hit both of your laptops with a pretty big bang, and that
was the biding that was put forth on that little piece of
property that we opened off of Florida. That was the highest
bids we have had for any American leases in history. So they
must think there is oil and gas there. Somebody says, why are
they not producing it? They did not buy it to lose it. They are
going to do it.
Mr. Yergin. Also, one has to remember there are lead times
here. There is a clock ticking, but you have to mobilize. You
have to get the drill ships. You have to do the research. You
have to do the seismic and all of that.
Senator Domenici. Thank you very much.
Thank you, Mr. Chairman.
The Chairman. Senator Murkowski, why do you not go ahead?
Senator Murkowski. A very quick question. Gentlemen, again,
I appreciate your endurance.
I have suggested that if the Congress were to lift the
decades-old ban on ANWR and open that up for exploration and
production, that even though the time for development may be 8-
10 years off, that there would be a psychological impact to the
market, that that would be a signal that increased production
is on the way.
Senator Cantwell in her comments to you kind of challenged
you on the aspect of the psychology, and you spoke to maybe it
is psychology, maybe it is expectations.
A couple of days ago when President Bush lifted the ban on
OCS development, 2 days after his announcement, the prices of
crude fell by $9.26 or 6.3 percent. What is that? Is that
psychology? Is that expectation? I mean, what happened there?
Am I right or is Senator Cantwell right? Or are you guys right?
Mr. Diwan. I think it is very difficult to assign one cause
for oil prices dropping like that over 2 days. I can come up
with 20 different reasons, including the announcement that the
United States will be negotiating directly with Iran. We can
also look at what happened on the broader market and the fact
that you had a very big sell-off, and some of these financial
players had made money on oil and really needed cash to pay off
what they were losing on the other side. So we can come up with
10 or 15 reasons. Somebody like me who has been looking at oil
markets for very long has a lot of trouble to accept there is
one reason why thousands of people are going to do exactly the
same thing at the same moment, selling oil.
Senator Murkowski. But he makes an announcement and it
drops by almost $10. Is that the signal that the market was
looking for that there might be increased production and we
respond to that? Is it psychology? Is it expectation? What is
it?
Mr. Diwan. No, it is not. I think announcing that Bill
Burns was going to Switzerland to talk with the Iranians had a
much bigger impact on the market than announcing that.
Senator Murkowski. Do you agree with that, Dr. Yergin?
Mr. Yergin. Yes. I think that also probably over the last
couple of days, that sell-off, that sort of pessimism about the
U.S. economy was a big factor.
Senator Murkowski. So it is a combination.
Mr. Yergin. It is a combination. It is all of the above.
Senator Murkowski. So we are all right.
Thank you, Mr. Chairman.
The Chairman. Senator Conrad.
Senator Conrad. I think that is the truth.
[Laughter.]
Senator Conrad. First of all, I want to thank very, very
much the chairman of this committee and the ranking member for
organizing this. A special thanks to Senator Bingaman, the
chairman of the Energy committee, for really two outstanding
witnesses. I do not know how many Senators we had here. I think
more than 30. Perhaps as many as 40 Senators were here.
Some of us had hoped that we would have an actual time out
in the Senate for a thing like this because we had competing
hearings going on while Senator Bingaman was conducting this
workshop. I know committees on which I sit were meeting. I wish
we would have had a time out so that others could have been
here because this is exactly what we needed to hear.
To the witnesses, we want to thank you for really I think
outstanding presentations, and we are very fortunate to have
people of your quality who are willing to take some time to be
here to answer our questions.
I thought, Mr. Diwan--is that the correct pronunciation?
Mr. Diwan. Diwan.
Senator Conrad. Diwan. Thank you. Mr. Diwan, at one point
you talked about speculation, but you talked about at the heart
of this is that over the last period of time, we have
encouraged consumption and we have discouraged production. That
takes us to where we find ourselves today. We have encouraged
consumption. We have discouraged production. I mean, we have
actually had tax credits to encourage people to go buy Hummers.
What a bizarre policy that was. We had tax credits to encourage
people to buy Hummers that give 8 miles a gallon or whatever it
is. At the same time, we have held places were off limits to
production.
While it is obvious that we are in a global market and what
we do on both of these equations will not be central to the
overall equation, you also said that our fuel efficiency is
one-half of Europe. It just seems to me it is so abundantly
clear that we should work both sides of this equation. We
should affect what we can affect. We should have more
production. We should allow more access to this resource, and
we should conserve more. We should accelerate what we did on
CAFE standards last year to increase fuel efficiency because we
are way behind. We are way behind.
You indicated we are consuming half of the world's
gasoline, Mr. Diwan, as I recall. You said your conclusion was
it is us. It is us. We are the ones who are in charge of our
own destiny. I hope very much the message that comes out of
this is as clear as your testimony has been because as I have
heard you say it, yes, speculation is part of what is occurring
here, that we have a whole new series of actors that have come
to this market with deep pockets who have put pressure on
prices in the short term.
But it is also true that we have had a set of policies that
have discouraged production and encouraged consumption, and we
have to reverse those. Did I hear you correctly?
Mr. Diwan. Yes.
Senator Conrad. Dr. Yergin, do you agree with that
prescription, that we have got to reverse the longstanding
policies we have had here to discourage production and
encourage consumption, that we have got to go in just the
reverse, that we have now got to encourage production and
discourage consumption?
Mr. Yergin. Yes.
Senator Conrad. I do not know what could be more clear.
Some of our colleagues just want to play on half the ball
field. I mean, in both parties, I hear people that just want to
deal on the consumption side and others who just want to deal
on the production side. As far as I am concerned, both of them
have it half right. Both of them have it half right.
What we need is to get a strategy and a plan that deals
with both sides of the equation. Now, maybe that is too
simplistic, but it seems to me kind of basic. I think the
testimony of you gentlemen has been about as clear as it can
be. I appreciate it very much.
I thank the chairman.
The Chairman. Let me just also thank both of you. I think
it has been very good testimony, very informative. I think a
lot of Senators obviously have a vital interest in trying to
find reasonable solutions, and I think you helped us. So thank
you all very much.
Why don't we conclude our workshop with that? Thank you.
[Whereupon, at 11:55 a.m., the workshop was concluded.]