[Senate Hearing 110-654]
[From the U.S. Government Publishing Office]
S. Hrg. 110-654
SUMMIT ON ENERGY
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
TO
CONSIDER HOW WE ACHIEVE A MORE SECURE, RELIABLE, SUSTAINABLE AND
AFFORDABLE ENERGY FUTURE FOR THE AMERICAN PEOPLE.
__________
SEPTEMBER 12, 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
Karen K. Billups, 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................ 8
Cohn, Gary, Co-President, Managing Director and COO, Goldman
Sachs, New York, NY............................................ 67
Deutch, John, Professor of Chemistry, Massachusetts Institute of
Technology, Cambridge, MA...................................... 21
Domenici, Hon. Pete V., U.S. Senator From New Mexico............. 9
Krenicki, John, Vice Chairman, President and CEO, General
Electric Energy Infrastructure, Atlanta, GA.................... 61
McConnell, Hon. Mitch, U.S. Senator From Kentucky................ 6
Odum, Marvin, President, Shell Oil Company....................... 27
Reicher, Dan, Director, Climate Change and Energy Initiatives,
Google.Org, San Francisco, CA.................................. 19
Reid, Hon. Harry, U.S. Senator From Nevada....................... 1
Roberts, James, Chief Executive Officer, Foundation Coal
Corporation, Linthicum Heights, MD............................. 64
Rowe, John, Chairman and CEO, Exelon Corporation, Chicago, IL.... 62
Steenland, Douglas, President and CEO, Northwest Airlines,
Minneapolis, MN................................................ 66
Verrastro, Frank, Director, Energy and National Security Program,
Center for Strategic and International Studies................. 12
Wagoner, Richard, Chairman and CEO, General Motors, Detroit, MI.. 68
Yergin, Daniel, Chairman, Cambridge Energy Research Associates,
Cambridge, MA.................................................. 14
SUMMIT ON ENERGY
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FRIDAY, SEPTEMBER 12, 2008
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:35 a.m. in room
SDG-50, Dirksen Senate Office Building, Hon. Harry Reid
presiding.
OPENING STATEMENT OF HON. HARRY REID, U.S. SENATOR FROM NEVADA
Senator Reid. There are many who deserve credit and thanks
for organizing this summit. I appreciate the work that Senator
McConnell has done. He and I have done our best to put together
a fair group of witnesses.
Of course Senators Bingaman and Domenici who are so unique,
both coming from the same State, being chair and ranking member
of that committee off and on over the last several years,
appreciate their good work. Of course, I again extend my
appreciation to those who are here from government. There are
academics here, people from industry.
Especially I want to thank Senator Conrad whose idea this
was, lead organizer of this summit, suggesting this was
something we should do. So he's pushed relentlessly to have
this done. Of course, we've all watched with interest the work
that's he's done on a strictly bipartisan basis coming up with
some energy legislation that we'll see in the next few days.
I think we've seen two diverging trends in this energy
debate. One I think is very encouraging and one perhaps, not
so. On the one side, as the fall campaigns heat up, we've seen
energy move into a more partisan realm with candidates looking
to score points with sound bites that really solve nothing.
But on the other side, we're seeing increasing consensus.
When all political dust settles our energy challenges can't
fall into political partisan bickering. We've got to understand
that it's, the issue, is bigger than any one of us, any one
political party.
I think an encouraging trend toward bipartisanship is some
things that's happened the last few days. We've seen the gang
of ten, which has continued to work on their product. They
recognize, and we all recognize, their work is certainly not
perfect. Compromise never is.
But we've seen also, for example, yesterday, Senators
Baucus and Grassley come up with what they think is a way to
move forward on this. We've seen the month's long work of two
Senators, Cantwell and Ensign. Democrat and Republican working
to move forward on what they believe is an answer to a
significant problem we have in the energy world.
So these are all good signs. In Nevada this last August, on
the 19th, I had the final day of a 2-day summit on energy. It
was a national summit. It was really worked out so well.
We had coming together, industry, labors, sportsmen,
environmentalists, Democrats and Republicans. To come with a
serious purpose to find a solution to some of the problems we
have with energy. It was unique that I was sharing the stage
with T. Boone Pickens.
He wanted to make his presentation on a blackboard. The
President of the University said when he requested that, they
don't use blackboards anymore. So he had to go to the girl's
volleyball department.
The only one they could find in the University. Boone did a
great job as a teacher up there telling us what he thinks
should be done. What he thinks should be done is a direction
that a lot of us believe is the right direction.
He and Al Gore have gotten together, recognizing that the
security of our Nation is extremely important. One of the
answers to a more secure Nation is not being dependent on 70
percent of our oil being imported from foreign sources. So
today's summit is the latest step in this bipartisan trend.
But I have to say that this bipartisan trend has been a
hallmark of Bingaman/Domenici's work on the Energy Committee
for a long, long time. So we're going to hear today from noted
academic leaders, America's high tech giants and oil company
executives. With energy legislation, we hope, moving to the
floor next week as Senator McConnell and I think it will. This
is a rare opportunity to put our ideas directly into action.
But the legislation of this work period is just one of many
steps we must take. It is important. I think we all agree that
a problem as big as this requires comprehensive solutions. I
wish we had a magic formula that we could mix up and solve all
of our problems.
I wish we could have a silver bullet to solve our problems.
I think the only silver bullet we have is to decrease our
consumption of fossil fuels. There are a number of ways we can
do that, conserve energy, of course. We can do this painlessly
in a number of ways by improving efficiency of our buildings,
our household appliances.
We also need to move to renewable energy which is so
important. We all recognize that. We also need to demand a
better fuel efficiency from our automobiles.
Most people in this room probably never saw a Model T. But
some of us have. A hundred years ago when the Model T was
introduced, this little vehicle averaged 13 to 21 miles a
gallon.
Since then we've invented television, taken to the skies,
landed on the moon, put a man on the moon. But most of our cars
and trucks in 2008 average 13 to 21 miles a gallon, just like
the Model T. So we can do better. We have to do better.
One part of the solution is the advanced technology vehicle
manufacturing incentives program that a number of people are
talking about. So I want to do everything I can to see if we
can secure funding to implement this important program as soon
as possible, hopefully this year. We also, of course, need to
bring down prices for the oil we use in many different ways. We
have to go after speculators, price gougers and oil producing
nations who game or cheat the system and leave American
consumers paying the bill.
Finally, I think we can all agree that we need to view this
not as a crisis. It's hard to put that out of our calculation,
but as an opportunity. An opportunity to see if America can
move back into the world of being the most efficient automobile
manufacturer in the world, automobiles made here in America.
That solar panels and wind turbines will power the planet
in the years to come can be built by American workers, that the
transition from fossil fuels of old to renewable fuels of
tomorrow can create jobs, protect our national security and
cleanse our environment.
Already State and local governments are joining with the
private sector. These entrepreneurs who have made our country
so successful see the light. That there is money to be made in
this world that we have created where people who are willing to
invest not only can make money, but make a better world.
So thank you all for being a part of this program. I think
it's long time past for the Federal Government to take a lead
to help clean our country and move to a clean revolution in
every city and town across our country. The American people
demand that we do something differently. They're demanding
bold, new ideas and creative solutions. I'm confident the day's
panel will help move meaningfully to that end and move away
from what we have now which is status quo.
On behalf of Senator McConnell, we have some business on
the floor. We're in session today. We created it so there will
be no votes, but there is work that we have to do. So if you
would be good enough to excuse us after we complete our
statements, Senator Bingaman and Domenici. We would appreciate
it.
Senator McConnell.
[The prepared statement of Senator Snowe follows:]
Prepared Statement of Hon. Olympia J. Snowe, U.S. Senator From Maine
I want to thank Chairman Bingaman, Ranking Member Domenici, as well
as the Majority and Minority Leaders for holding this timely summit on
how we achieve a more secure, reliable, sustainable and affordable
energy future for the American people. I also want to thank our broad
collection of experts for their time and their insight into how our
country can reestablish a coherent energy policy that will both enhance
our nation's security and ultimately provide Americans with clean and
economical energy.
I am encouraged by the development of this summit, and I hope that
we can build upon this event to forge a resolution to a crisis that is
afflicting every American. In June of this year, Senator Ben Nelson and
I wrote to Senate leadership, and later to the President, calling for
an energy summit that would bring together the President, the Bicameral
Leadership of Congress, and key stakeholders to move beyond this energy
paralysis that is costing Americans every single day at the pump and
invoking fear as winter approaches.
Specifically we stated that, ``The partisan stalemate on energy
issues must end and we believe it will require good-faith efforts from
both ends of Pennsylvania Avenue. Accordingly, we urge you to convene a
national energy summit with the President with the goal of developing a
consensus on sensible proposals that can address the crisis facing all
of our constituents.''
I continue to believe it is essential that such a national summit
be convened, to truly develop consensus legislation that can be passed,
implemented, and produce tangible results for the American people. I
hope that today's summit is the beginning of more serious discussion of
the most pressing issue facing the American people.
Americans will not accept anything less than an energy revolution,
a sentiment that is leaps and bounds beyond the half measures that
Congress has proposed. Clearly, we must expand our vision beyond a
patchwork energy policy and boldly lead the United States to a future
in which America's energy is no longer controlled by unstable suppliers
and rogue nations.
On Wednesday, September 10, 2008, this stark reality was
illustrated once again when the OPEC Cartel announced that the
petroleum market was oversupplied and that overall production will be
reduced by 520,000 barrels per day. As the New York Times reported,
``the cartel's members appeared deeply split, with one camp, led by
Iran and Venezuela, advocating reductions in output to stem further
price declines, and another, led by Saudi Arabia, wishing to allow
prices to fall further.''
The reverberations of this decision, made in part by America's
enemies, are profound and chilling. According to Michael Stoddard of
Environment Northeast, the price of heating oil will translate into a
shift of $11 billion from the Northeast to foreign countries, and
collectively America will transfer an estimated $700 billion to foreign
countries. For individual families, the consequence of a nonexistent
energy policy is that they are paying roughly $3,500 just to stay warm
during the winter.
At the same time, the opportunity to reestablish our energy policy
is firmly in our own hands. Sheikh Zaki Yamini, a Saudi Arabian oil
minister of the 1970s and the architect of the 1973 oil crisis,
recently offered an interesting prediction on the future of oil: ``The
Stone Age did not end for lack of stone, and the Oil Age will end long
before the world runs out of oil.'' The point is, when less expensive
and cleaner energy alternatives are viable, oil will be displaced
irrespective of the level of world supply. If we are to hasten the
arrival of that day--as costs, as well as environmental and national
security concerns dictate we must--it is imperative that our federal
government provide the incentives and assistance to encourage
entrepreneurs to lead the way to a new energy paradigm that ends the
oil age.
The foundational shift in our energy markets highlights the anemic
federal effort to adopt the next generation of energy technology and
policies. We are not only in the midst of an energy crisis but also a
crisis of confidence in our governmental institutions--both Congress
and the Administration--to actually do something about it. The
manifestations of our current energy policy, or lack thereof, are
discernible in some of the greatest issues facing America. The critical
issues of climate change, the trade imbalance, an inflexible foreign
policy in the Middle East--are all directly related to our energy
policy, and with increasing clarity we are witnessing the consequences
of petroleum dependency. Concurrently, clean energy production has
undergone rapid technological advances in the past decade, and its
costs have dropped appreciably.
Clearly, it is illogical to produce additional energy when that
energy is wasted through inefficiency. It is imperative that we promote
energy efficiencies that enhance the use of existing resources. As Dan
Reicher has stated before the Senate Finance Committee, ``energy
efficiency is our cheapest, cleanest, and fastest energy option.''
Accordingly, I believe a long-term energy plan should encourage energy
efficiency with the same level of commitment as we have invested in the
production of clean energy.
That is why I long have championed energy efficiency tax credits as
a Member of the Senate Finance Committee and worked to ensure that the
2005 Energy Bill included landmark tax credits for energy efficient
buildings. One tax credit, that provides a $2,000 credit for the
construction of new, energy-efficient homes, already has saved our
country 51 gigawatt hours of electricity since it was created in 2005.
I also fought for revolutionary tax incentives for commercial buildings
and retrofitting existing homes that were enacted into law. Current
practices saddle future generations with the costs of inefficient
buildings, and given our current circumstances, it is unacceptable that
we continue to construct porous buildings that waste expensive energy
purchased offshore.
Yet, Congress already has allowed one of my provisions that assists
homeowners in improving the efficiency of their homes to expire at the
beginning of this year. This is the antithesis of the energy policy
that our nation must employ to address rising energy costs. For
example, a taxpayer could use a $300 tax credit, included in the tax
extenders package, to purchase a high efficiency oil furnace, which
would save over $180 annually according to calculations based on
Department of Energy data and recent home heating prices. This tax
credit is essential to save home heating oil and reduce our reliance on
foreign oil. Other energy efficiency tax incentives, such as the
commercial buildings deduction, expire at the end of this year and,
incredibly, the future of these credits is in limbo because of
Congressional inaction.
At a time when we must be investing in energy efficiency, it is
incomprehensible that these tax credits have not been extended. Our
failure to provide an extension for these incentives works directly
against their very purpose. We must come together to find a way to
provide long-term extensions of these provisions to instill the
confidence necessary for consumers to know that if they make the right
investment, that they will have a tax incentive to reward them for the
energy efficiencies that they gain through retrofitting their home, or
building more efficient new homes and commercial buildings.
Furthermore, it is beyond my comprehension that Congress has failed
to extend renewable production tax credit [PTC]--a key catalyst for
moving our country to self sufficiency through increased use of wind,
wave, biomass, and geothermal power--which is set to expire December
31st. As a Member of the Finance Committee, I long have been a champion
of this critical incentive and on December 14th, 2006, I sent a letter
with 41 of my Senate colleagues to the President requesting that we
extend the renewable energy PTC, at least through the end of 2013.
Specifically, the letter stated, ``The PTC is a vital component in
financing new renewable energy projects. As you know, it is crucial to
our national security that we expand and strengthen investment in
renewable energy resources. The continued development of energy also
will spur significant economic development opportunities, stabilize
prices by diversifying the electric generation supply, and help reduce
greenhouse gas emissions.''
At a time when job losses are crippling a struggling economy, a
long-term extension of this tax credit could create 100,000 jobs, yet
we have failed to promote a palpable opportunity to energize our
economy and reduce our reliance on foreign oil. So we are not only
forfeiting the opportunity to promote energy independence, but also the
collateral job creation that accompanies greater clean energy
investment exactly at a time when our economy requires a tangible
boost.
Just imagine where we might be if we had approved these extensions
last January! As a result of Congress' failure to approve these common
sense provisions, a potential bright spot in our economy, our renewable
energy industry, is faced with uncertainty: Will Congress act or not?
This point was reiterated before the Finance Committee last February,
when Dr. Dan Arvizu, of the National Renewable Energy Laboratory
stated, in reference to the PTC, that, ``While I can only imagine the
challenges that confront those who deliberate and adopt a federal
budget, anything we can do to move beyond a year-to-year approach, and
chart a long term course for renewable energy policy, will provide us
with lasting benefits.'' I believe we should have at least a ten year
extension of this critical tax extender. If we want to set our country
on an irreversible track to self-sufficiency and demonstrate to the
world that we are committed to clean energy, we should make this vital
production tax credit permanent. An assurance of this magnitude
provides a strong signal to investors that they can count on these
credits as they decide whether to develop renewable energy and thereby
maximize our ability to accelerate a clean, self-sufficient energy
policy. Similarly, a long range commitment to renewable energy makes
clear to oil producing nations--and to Americans burdened with enormous
energy costs--that the United States is on a steady course to energy
independence, not one interrupted by politically driven decisions every
year or two.
We know what America can achieve when our innovative spirit is
unleashed. We must seize on the entrepreneurial spirit that has spurred
our economy in the past. Just consider what we have accomplished--the
microchip, the Internet, and the microwave are all American innovations
that altered our lifestyle--this type of vision will bring about the
energy revolution that the American people are seeking from Washington.
At a recent speech in Atlanta, author Tom Friedman urged America to
retake the lead in the world through innovation in ``ET''--Energy
Technology. Friedman said the United States needs to ``invent a source
of abundant, cheap, clean, reliable electrons.'' He compared the ``ET''
movement to the ``IT'' (Information Technology) movement of the last
decade.
To that end, I strongly believe that we should develop innovation
grants for the thousands of entrepreneurs who are developing the next
energy concept that will revolutionize our energy policies. The
Advanced Research Projects Agency--Energy, which was authorized in the
2005 Energy Policy Act, has not been funded by Congress--and it should
be. This is a basic step forward in expanding federal research, but we
also should use this model to allow private industry and private
citizens the incentives and opportunities to also develop America's
next innovative idea.
Finally, there are additional steps that I believe our country must
take in the short-term. As we approach a winter under an unprecedented
pricing structure for home heating oil, it is unacceptable that the
federal government would store refined heating oil in tanks in the
North East Home Heating Oil Reserve Program. I have introduced
legislation with Senator Dodd and Chairman Kerry that would release
this heating oil if prices remain over $4 per gallon. The releases
would occur in a staggered process throughout the winter and invest the
monies from the sale of this heating oil in weatherization. At a time
when we know that the prices will force individuals to use cooking
stoves, space heaters, and kerosene cans that can lead to fires as well
as produce toxic fumes, we must take every step to reduce prices by
releasing these supplies to the open market and use the revenue to
invest in weatherization.
In addition, I am appalled that the National Highway Traffic Safety
Administration's (NHTSA) draft Environmental Impact Statement (EIS)
used an assumption of $2.26 per gallon of gasoline in 2016 to justify
their proposed reduced fuel economy standards. This is the type of
nonsensical response that regrettably demonstrates the appallingly low
level of seriousness with which this issue is approached in too many
circles in our government. We must accept the reality of the energy
crisis and plan accordingly. Every American would tell NHTSA that a
$2.26 per gallon estimate is, at best, exceedingly optimistic, if not,
more accurately, absurd.
Our country has lost years by not forging a comprehensive energy
policy, so we must redouble our efforts to make up for lost time. We
have foolishly forfeited years of American innovation because Congress
has failed to craft the policies that inspire and encourage a nation of
entrepreneurs. It is my sincere hope that we can build on today's
energy summit to bring about the change in energy policy that the
American people demand.
I thank you all for being here today and I look forward to
reviewing the testimony of the witnesses.
STATEMENT OF HON. MITCH MCCONNELL, U.S. SENATOR FROM KENTUCKY
Senator McConnell. Thank you, Senator Reid. It's great to
be here. I want to also thank Senator Bingaman and Senator
Domenici for their leadership and all of those, of our
colleagues who are around the table, who expressed
extraordinary interest in this.
I do want to say, with regard to Senator Domenici. As we
all know he is wrapping up 36 years of extraordinary service in
the Senate. He has been our energy expert on our side for a
long time.
I know it must be gratifying to him, even though he will
not be here next year, that the subject that he has devoted
such an extraordinary percentage of his public service to is
the No. 1 issue in America. We hate it that you won't be here
next year, Senator Domenici because you have been a wonderful
leader on the subject of energy over the years. So much of what
you've suggested we ought to do. We should have done a lot
earlier.
Over the past several months Congress has been engaged in
this important debate. Americans are rightly frustrated over
the high cost of gas at the pump and the high cost of energy in
general. The $4 a gallon gasoline was the tipping point of
galvanizing consumers across the country and sparking Congress
to refocus its energy on a problem that has been with us for
decades.
The seriousness of the problem and the need to do something
about it soon was brought home to me in an especially vivid way
during my time at home in Kentucky over the August break. In
dozens of public events I spoke to commuters, farmers and
owners of small and large businesses whose lives have been
disrupted, in some cases tragically so, by the high cost of
gas. Kentucky is home to about 80,000 farms. I heard about the
soaring cost of fertilizer which is made with natural gas, the
cost of fueling farm equipment with diesel and even the rising
cost of seeds, which are often trucked into farms from long
distance.
I heard about the soaring cost from UPS which is Kentucky's
largest employer and the owner of one of the Nation's largest
air fleets. A recent article in one of the national papers
noted that UPS drivers have been told by management not to take
left hand turns. It saves gas by cutting down on idling time.
The article was meant to be funny. But I assure you the
employees in Louisville are not laughing.
Nor are the residents in rural Kentucky who are among the
hardest hit consumers in the Nation as a result of high gas
prices. With lower than average incomes and few mass transit
options, most of these folks are now spending a giant chunk of
their paychecks each week on fuel. The average resident of
Owsley County in Eastern Kentucky, for example is now spending
more than 15 percent of his or her income on fuel, the fourth
highest average of any county in the Nation.
But perhaps the most distressing story I've heard about is
the consequences of high fuel prices from the operators of the
dialysis center in Elizabethtown who told me some of their
patients are cutting down on life sustaining treatments.
Because it's just too expensive for them to drive back and
forth from their homes four times a week. These people are
desperate for help.
Republicans, I assure you, are open to any reasonable
suggestion that will lead to a concrete, meaningful result. It
is with this in mind that Republicans have already coalesced
around a simple and straight forward principle that we believe
could and should form the basis for bipartisan legislation on
this issue. We need to both find more American energy and use
less.
We know that we can find more domestic energy by means of
deep sea exploration off our coasts and by developing western
oil shale deposits, which according to conservative estimates
represent at least 800 billion barrels of recoverable oil. At
the moment the vast majority of these enormous domestic
resources are off limits to consumers as a result of Federal
regulation. Republicans have repeatedly demonstrated our strong
support for energy conservation measures. Most recently we
demonstrated that commitment by supporting the first increase
in Federal fuel economy standards for cars and trucks in
decades.
But it must be said at the outset that conservation alone
is clearly insufficient. While all of us may envision a future
in which America does not run on fossil fuels, this is not
today's reality. Nor will it be for many years to come. We need
to be realistic and recognize that in the near term we will
still need more oil and gas.
I believe that this oil and gas should come from America's
own ample, domestic reserves, not from the Middle East. We
cannot and should not ask people like rural Kentuckians to
assume the burden of this transition when we have enormous
energy reserves under our own feet. Reserves that the
government has made increasingly difficult to tap.
Indeed few people seem to realize that as America's energy
consumption has increased over the last three decades, we've
actually been producing less and less of it at home. As a
result of government regulation at every level, America's
domestic oil production has dropped to roughly half of the ten
million barrels per day that we produce right here at home
three decades ago. This trend toward less domestic energy
production may have made sense to some people at the time of
cheap oil. It makes no sense at a time of $4 a gallon gasoline.
Most people realize that.
The American people are demanding that Congress do
something to alleviate high gas prices and to do something
significant. Some of the proposals we have heard certainly try
to make that effort. But by and large, they fall seriously
short. They either ignore the need for increased domestic
supply or they're disproportionately meager in light of the
severity of the crisis.
The primary drivers of the current oil shock, economic
growth in China and India, are not going away. The American
people realize this. That's why they're not likely to be
satisfied with half measures from Congress.
In this case I'm convinced finding more means finding a lot
more. We have the resources. Americans want us to use them.
They are exactly right.
I look forward to hearing the proposals of today's
witnesses. It is my hope that today's summit energizes the
Senate and brings us even closer to delivering a concrete,
meaningful solution to the people of Kentucky and to the rest
of the American people as quickly as possible. Thank you.
STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW MEXICO
The Chairman [presiding]. Alright, why don't we go ahead.
Let me make a short statement and then call on Senator Domenici
to make any statement he would like. Then we'll go ahead with
witnesses and follow that with questions.
Let me start by thanking Senator Reid and Senator McConnell
for asking our Energy and Natural Resources Committee to
organize this event. Senator Domenici and his staff have worked
with me and my staff to gather energy policy experts and high
level executives of energy related industries to talk about all
facets of the energy challenges that confront the Nation. I
know Senator Reid referred to the National Clean Energy Summit
that he hosted in August. A great many excellent policy
recommendations came out of that summit.
The purpose of today's energy summit is to foster
additional bipartisan dialog here in the Senate on how we can
achieve a more secure, reliable, sustainable and affordable
energy future for the country. Obviously this is a very
challenging goal. To put this in some context, in June, the
Energy Committee had hearings on a comprehensive and
provocative report that was put out by the International Energy
Agency. It detailed a mix of technologies ranging from carbon
capture and storage to concentrating solar power that need to
be developed and deployed in order to meet our energy needs and
reduce greenhouse gases.
Transforming our economy from one based on fossil fuels to
one based on clean energy will not happen overnight. It will
require enormous investments; the range of $40 to $50 trillion
was the estimate we heard.
Our goal is attainable if we encourage private sector
investment in clean energy today, if we prioritize and sustain
the support for energy technologies over the long term and if
we ensure that those technologies that we do develop are in
fact, manufactured and deployed here in this country. So we
have a great many challenges to talk about today. I appreciate
all the witnesses being here to help us understand these
challenges.
Let me call on Senator Domenici for any statement he would
like to make.
STATEMENT OF PETE V. DOMENICI, U.S. SENATOR FROM
NEW MEXICO
Senator Domenici. Mr. Chairman, I want to join you in
thanking everybody that has come here this morning obviously
willing to participate in this discussion and our two leaders
for their direction. Obviously they've stated it for
themselves. We can all heed it.
I, myself, would just like to put into perspective for a
moment why we're here, why I think we're here. On May the first
of this year I introduced a bill with 18 co-sponsors that
essentially did a number of things, the biggest of which was to
open the Continental Shelf of the United States to drilling and
that is take off the statutorily imposed moratorium that has
been existent for many years. So the first premise of that bill
was to do that.
The second was to proceed with ANWR knowing full well that
that was extremely controversial. Nonetheless, it was on the
bill.
The bill also contained the proposition for converting coal
to liquid.
It also contained a provision for removing a moratorium on
regulations on the promulgation of regulations with reference
to the oil shale in the State of Colorado and Utah.
About a month later the Minority Leader asked me if I would
change that bill to a shrunken bill. I shrunk it down by taking
out some of the controversial bills. Low and behold on our side
of the aisle, we had a bill with 44 co-sponsors. But the
primary focus of it was that we would try to use more American
oil.
We're here today because that little stream turned into a
bipartisan effort to open more of the off shore resources of
America. We were astounded. I think, almost to a man or to
woman, as Senators to find that within three or 4 months of the
debate here in the U.S. Senate about opening the off shore that
we owned, that the American people began to say, ``Drill''
We were so frightened of the idea of drilling that we were
using fancy words like exploration. We would say to ourselves,
don't use drill. That's bad. Just make sure you use this fancy
word, exploration.
It turned out the American people didn't care. They decided
we should drill. Up came from the hinterlands of America,
``Drill.'' Up came at the Republican Convention, ``Drill,
drill, drill.'' Now that's all we hear from our American people
is that they want us to drill and to produce more of our own
energy.
Now I'm not here telling you that that will solve America's
problems at all. I'm merely telling you that's what brought us
to this point. We are grateful that a bipartisan group of
Senators, we know who the leaders were. They got together as a
group of 10, I think, and took this cudgel and said we will try
to put together a different bipartisan approach.
But it will have the opening of some of the Outer
Continental Shelf, not all of it, some of it. We have proceeded
from that point to today. You can apply your own logic as to
what this group can do or will do or will not do with reference
to that status that I have just described.
That's about where we are. The group of 10 is out trying to
put together Senators and have changed the format of the
original bills which I did which were partisan and I think,
admittedly so. We wrote them for Republicans. We even put ANWR
in the original ones. We didn't go across the aisle.
But you all did. The gang of ten did. Now we are here,
Senator Bingaman, not limited at all by the little historical
sketch that I have given, but to hear what the experts tell us
we ought to be doing to get ourselves out of one of the most
significant crisis we have ever had.
I could have used my time otherwise. I could have tried to
tell you what we have already accomplished. Because it does not
do my heart any good to continue to hear, either direct or by
implication, that we have done nothing because we have done
much.
Under the leadership of Senator Bingaman for half the time,
myself for half the time, the Energy Committee has produced an
array of initiatives that are having and will have a dramatic,
positive effect on the energy crisis of the United States.
They're in a statement I have, but I will put the statement in.
[The prepared statement of Senator Domenici follows:]
Prepared Statement of Hon. Pete V. Domenici, U.S. Senator From
New Mexico
Senator Bingaman, as we discussed at yesterday's markup, this is my
36th and final year as a Senator. It has been my pleasure to serve a
great deal of that time with you.
Over the years I have witnessed--and had the good fortune to play a
role in--many accomplishments here in the Senate. I have had an
opportunity to work with colleagues of all ideological stripes. I have
now served six full terms during seven presidential administrations. I
have worked with, and on behalf of, the great people of New Mexico. And
it has truly been a privilege.
My years as Chairman and Ranking Member of the Budget Committee
were particularly rewarding. After decades of deficits, with a Congress
held by one party and a President from the other, we came together to
do something big for the American people by passing the Balanced Budget
Act.
We have made bipartisanship something of a habit on the Energy and
Natural Resources Committee, as well. As a result, three major energy
bills have been signed into law in the past three years. The full
impact of these measures is far more significant than many people
understand, or can feel, at this point.
We took important steps to modernize the electric sector. We opened
areas to domestic production of oil and gas. We advanced clean energy
technologies and jump-started alternative fuels. We raised vehicle
mileage standards, and--something I take great pride in--we ushered in
a brighter tomorrow by starting a nuclear renaissance in this country.
While bipartisanship played an essential role in all of these
accomplishments, it is not the only factor that goes into making good
policy. We also worked through a Committee process, with Members who
know--from experience and expertise--what makes policies and programs
effective.
I was here during the last energy crisis that our nation faced, in
the 1970s, and too often I saw good intentions translate into bad
policy. This happens when the desire to simply get something done
prevails over the more advisable but more difficult path forward.
Today we face a new energy challenge, unparalleled in our nation's
history and extending well beyond our borders. The fundamental question
that must be answered is how we will meet our growing energy needs in a
clean, affordable, and reliable way.
It is with deep regret that I declare that over the past year,
Congress has failed to address this challenge. We have spent too much
time debating policies that will do nothing to resolve the imbalance
between the supply of oil and the demand for it. As prices soared past
$100 a barrel, to $120, and then to nearly $150--many in Congress
refused to rethink positions that were formulated years before under
much different circumstances. As American consumers suffered at the
pump, this Congress ground down into gridlock.
We have created vote structures that favor political cover and
enable us to delay tough decisions. Popular policies have been muddied
with poison pills like tax increases. And we have seen amendments on a
single topic pitted against one another, knowing full well that if both
were offered, both would fail and not done the work necessary to
reconcile the differences between them.
For these reasons, I encourage my colleagues to not only listen to
the witnesses before us today, but to start listening to each other as
well. We will continue to discuss the dangers of importing our energy
from overseas and the threats that greenhouse gases pose to the global
climate. But if we continue to talk past each other, this situation
will not go away--it will grow worse.
The following we know as fact: over the next 20 to 30 years, our
country will require more oil. If we don't set out to improve
conservation and increase energy production here at home, we will
continue to rely on dangerous regions and pay even higher prices. We
will weaken our economy and our national security.
The difficulties we face in our energy sector have indeed risen to
the level of a crisis. And yet, the Senate will likely adjourn for four
of the last five months of this year, having only managed to suspend
the delivery of oil to the Strategic Petroleum Reserve.
As disappointed as I am in the current state of affairs, and as
pessimistic as my remarks may seem, I believe that we have a great
opportunity going forward. In the face of crisis, we have always found
a will, and a way, to act. I believe we can still come together and
develop a response on a scale that matches our problems.
It is with great sadness that I tell you, however, that I think it
is too late to do so this year. This meeting should be a conference to
hammer out the final details of a bill, not a summit to build consensus
for a measure that has yet to be drafted. The spirit of bipartisanship
that helped us balance the federal budget has not guided us this year.
The next Congress should learn from our mistake and seize this
historic moment to come together, cast the tough votes, and make
progress on these issues. Our conversation here today can help inform
those efforts. I look forward to hearing from the witnesses and my
fellow Senators.
Mr. Chairman, I think it was more fruitful for me to state
the history. Because I think the history that got us here was
one of saying produce more of our own at home. That isn't
everybody's wish around this table.
But to put it into perspective, that is what started this
momentum. I, for one know that the crisis is multi-faceted. The
solutions are multi-faceted and tough to get to.
It won't be an easy achievement. But I do believe,
permeating throughout that is the fact that the American
people, have quite properly, seen that if you've got some of
your own resources, you ought to seriously think about using
them, U.S. Congress. I think that's what they're saying to us.
Thank you very much.
The Chairman. Thank you very much. Let's turn to our
witnesses now. We have a very distinguished panel of witnesses.
Let me introduce the entire panel and then call on each of
them to speak for about 3 to 5 minutes and give us the main
points that they think we ought to have in mind as we continue
with this debate. Obviously the full statements of all
witnesses will be included in the record. So if they could
summarize their main points that would be appreciated.
On the panel is, let me start on the left of the panel.
Frank Verrastro, Director of Energy and National Security
Program at the Center for Strategic and International Studies.
Dan Yergin, Dan has, of course, been here many times. We
appreciate him coming back. He is the Chair of the Cambridge
Energy Research Associates, which we very much appreciate him
being here.
Dan Reicher, who is also a regular witness here in the
Congress, Director of Climate Change and Energy Initiatives at
Google.org.
Next is Professor John Deutch, who is well known to all of
us and a frequent testifier as well on many issues. He's a
professor at MIT. We appreciate him being here.
Mr. Marvin Odum is the President of Shell Oil Company. He
made a special effort to be here today. So we appreciate his
presence as well.
Why don't we start with you, Frank? We'll go down the line.
As I said, each of you take 3 to 5 minutes and tell us the main
points you think we need to understand.
STATEMENT OF FRANK VERRASTRO, DIRECTOR, ENERGY AND NATIONAL
SECURITY PROGRAM, CENTER FOR STRATEGIC AND INTERNATIONAL
STUDIES
Mr. Verrastro. Thank you, Mr. Chairman, Senator Domenici,
members of the committee and also members of the Senate. I very
much appreciate the opportunity to be here this morning. I've
worked on energy issues for about 30 years in both government
and in the private sector.
There are ways that we can ensure a reliable, affordable,
safe, secure and environmentally benign energy future. I
commend the committee and also the group of 10, now the group
of 16, for putting this session together to discuss a
bipartisan way of approaching this issue.
Let me begin with an orientation on some of the basic
facts. As the solutions and options we discuss this morning,
they need to be put in the context of today's market reality.
Those realities talk about higher prices, uneven and increasing
demand, limited access capacity, heightened geo-political and
investment risks and increased concern over climate change in
the environment.
I would argue that to complicate matters further, as though
we needed that, we are simultaneously facing these challenges
against a back drop of a changing global landscape. It's one
characterized by emerging new players with new agendas, new
leverage, different business practices. We're doing it against
the outmoded institutions which may not be up to the task. So
we need to consider that as well.
We're looking at a series of new alignments in this new
landscape. New alignments. New rules. So we need new policies.
The energy system we have today is truly global. It is
immense. It's enormous. The projections are that will only grow
larger as a function of population, GDP growth and increased
standards of living going forward.
Today energy demand is projected to rise by over 50 percent
between now and 2030. The bulk of that will be in the
developing and emerging economies, not the OECD. The landscape
is changing.
Some 85 percent of our energy demand globally is met with
fossil fuels. While oil accounts for the majority of fuel use
in the OECD, coal is the king in the non-OECD, where fossil
fuels make up over 90 percent of total energy consumption. So
overlaying a carbon constraint on an 85 percent fossil fuel
dependent world is an enormous task.
Reducing that figure to 75 percent is a huge lift.
Eliminating those fuels any time soon, I would argue, is
impossible. As we currently have nothing to replace them at
scale. At scale.
So as previously stated, it's a huge challenge. But it's
also a unique opportunity for the United States to lead in this
role. Having said that, given both the forecast for new demand
growth and the present trends for investment, access and
climate considerations, and we refer to those as the above
ground risks, it's not the molecules in the ground. The path
around is clearly unsustainable. So we have to change.
The transformation is necessary. I would argue, in many
ways, it's already underway. But that transformation is one
that will take decades, not months or years and requires the
thoughtful and careful balancing of economic security and
environmental objectives. One that in the interim will require
the continued use of conventional fuels and infrastructure as
well as the development of new technologies, alternative fuels
of all form, conservation and efficiency.
So we need to distinguish between the truly visionary and
strategic and the tactical interim steps that will move us from
the current system to a more sustainable future. We need to do
this in a bipartisan fashion. So I commend the Senate for
taking this hearing.
Let me make a final point. This is on the issue of energy
independence. While I understand the political attraction of
slogans in this election year and how well this resonates with
the American public, energy independent should not be confused
with enhancing energy security.
There are 190 odd nations around the world and none of them
is energy independent. That's for good reason. One need only be
reminded on our reliance on the global market to replace lost
production in the aftermath of Hurricane Katrina. That was
refined products, not crude oil.
Further, as national policy such independence is in many
ways incompatible with our trade agreements, our treaty
obligations and I would argue, our foreign policy objectives.
We will undoubtedly remain engaged in the Middle East. We
really don't want to see lower cost Middle East energy supplies
to competitor nations around the world.
Having said that, U.S. energy security can and must be
enhanced and we could do this in five steps, I would argue.
First, by improving efficiency across the board in
transport as well as in the industrial, commercial and
residential sectors by diversifying our fuel choices and fuel
suppliers and this includes the sustaining of domestic
production as been pointed out. We are the world's third
largest oil producer. We really can't afford to lose that
position or to let depletion and decline rates in the United
States put us in a position of increasing our import dependence
which is currently at about 56 percent.
We need to continue to drill. We need to do so selectively
and in an environmentally sound manner. We also need to find a
way to preserve the role of coal for it comprises 50 percent of
our electricity. We need to look for more ways to promote
domestic gas development even as we pursue accelerated
development of alternative fuels, including nuclear, biofuels
and of course, renewables.
From a security perspective it's also worth noting that we
have significant resources, non-conventional energy, especially
in the Western hemisphere. This is oil sands and oil shale. But
we need to work on minimizing their carbon footprints, if we
actually think that this is to be realized.
Third, we need a renewed commitment to research and
technology, development and deployment and to expanding and
enhancing our infrastructure. This is a capability issue. It
includes human skills as well. So it's education components.
Fourth, we need to find more creative and better ways to
manage global geo-politics. I'll be happy to elaborate on that.
If we are truly serious about pursuing climate goals, we need
to set an economy wide price for carbon.
I have specific suggestions with respect to many of these
issues. But I'll hold those in the interest of time for
specific questions. Thank you, Mr. Chairman.
The Chairman. Thank you very much. Dr. Yergin, go right
ahead.
STATEMENT OF DANIEL YERGIN, CHAIRMAN, CAMBRIDGE ENERGY RESEARCH
ASSOCIATES, CAMBRIDGE, MA
Mr. Yergin. Thank you. It's an honor to be at this energy
summit. I'd like to express my appreciation to the leaders, the
chairman and the ranking member of the Energy Committee, to the
committee itself and to the gang of 10/16 for shaping this
summit and bringing us all together. With the summit it's
certainly expressing the great concern about the need for a
comprehensive approach. I'm pleased to be able to contribute to
that discussion.
In order to prepare for this, yesterday I read a major
article from Time magazine entitled, ``The Energy Crisis: Time
for Action.'' It detailed the many risks and threats from the
current energy course and laid out ideas for the future and it
even used the phrase, ``impending disaster.'' Of course the
article was from May 7, 1973, 5 months before the famous
October 1973 embargo more than 35 years ago.
In other words as many of you know, as a Nation we have
been at work at this for a long time. As Senator Domenici
emphasized, and as this committee knows from its own hard work,
actually much has been accomplished as a Nation. We're more
than twice as energy efficient as we were when that article
came out in 1973. Yet, also, as this dialog makes clear, there
is much to be done to meet the needs of the American people in
terms of energy.
So let me address two pieces. One is just to pick up from,
really, where we were last July, just 2 months ago when it
turns out we were at the break point. When we met oil prices
were just about at their peak of $147.27. Now it's just a
little over $100. What's happened?
I think we have to go to the credit crisis to understand
that. That ever since the credit crisis began last, a year ago,
July, there's been a big debate as to whether the rest of the
world is de-coupled from the U.S. economy or not. That debate
has gone back and forth. It's been related to what's happened
to the dollar. It's going down and it's now going up.
I think with the sharp price decline that we've seen over
the last 2 months, prices are still high, but a decline. The
oil market is really conveying the notion that in voting
against the idea that Europe and Japan are de-coupled from the
U.S. economic downturn. So instead what's happening in the
market now is reflecting a weaker global economy and thus a
weaker global oil demand. I think that's the heart of the
change that we've seen.
We have entered, I think, that break point scenario. Prices
at the level what they were in July and where they are now and
the apprehensions and insecurities that go with them have set
in a series of motion a process that's changing the scene. We
see in terms of consumers are voting for more efficient cars.
They're managing their transportation differently. Businesses
are making different decisions and government policies are
changing, notably reflected in the fuel efficiency standards,
the first ones in 32 years.
We see break point in another way. Last year was probably
the year of peak demand in terms of U.S. gasoline. That's going
down. Overall oil demand in the United States is down 4
percent, over 4 percent this year compared to last year. So I
think that's the market.
This focus of the summit is on energy policy. Let me try
and just distill maybe, seems to me, lessons from 35 years of
national experience going back to 1973. It leads me to talk
about the need, which is reflected here in the word, bipartisan
and the work of the committee and the gang of 10 and it's now
16, an ecumenical approach, a balanced integrated approach.
I think the first point and I think we're hearing it now,
is avoiding either/or as you look at the energy debates in the
United States of the last 35 years there's been an awful lot of
either/or. But the truth is that we have a $14 trillion economy
that runs on 100 quadrillion BTUs of energy every year. That's
a lot of energy. As we've heard there's not a single solution
to it. There's no magic wand.
Renewables are crossing the divide, to use a term we use.
They're becoming part of the energy mix. They're going to grow.
They're going to become more extensive. But at the same time,
as Frank has emphasized, oil and natural gas today are a little
over 60 percent of our total energy consumption. That's not
going to go away soon.
The second point is one that goes back to something that
Senator Bingaman said, the importance of encouraging timely
investment because that's really what gives us our energy
future. We need timely investment across the entire energy
spectrum. We're playing a game of catch up in the world economy
in terms of investment. This requires efficient and timely
decisionmaking whether we're talking the United States or in
resource holding countries.
It also requires something else. It requires consistency.
An on again/off again production tax credit is not a way to
promote stable development of renewable energy. The PTC needs a
longer term horizon.
Certainly in terms of investment there is also a greater
recognition of the role of investment in developing off shore
oil resources. A quarter of our oil now comes from the off
shore. A third of the entire world oil supply comes from off
shore. It's part of the portfolio. Uncertainty is the enemy of
investment and predictability is a vital ingredient.
A third point and it follows from what Frank said, is
understanding the relationship of the United States in global
energy markets. We have become more integrated. As Frank
pointed out, we import about 56 percent of our oil. That's a
lot of oil. We keep hearing 70 percent, but when we do our
numbers we keep coming up with 56 percent, still a very big
number.
But we are less influential in the global energy markets
because our share has gone down because of growth elsewhere.
This emphasizes the need for a cooperative multi-faceted
approach to relations both with other consumers and producers
in the interest of our energy security.
The final point I want to go to is expectations.
Expectations is really, of course, what drives action. It
drives policy. It's what brings us all together. It drives
investment. It drives technological innovation.
The role of expectations hinges on what we think the future
is going to be and what we need and what the urgency of it will
be. I think a major contribution to a sounder energy future
would be to create an environment that, based upon realistic
assessments, that ensures a timely investment is really and
convincingly and steadily on the way. The answer to today's
energy problems and more importantly, the answer to tomorrow's
energy problems is not either/or.
We need an ecumenical approach, a comprehensive, an
integrated approach, a combination of new oil and gas supplies,
renewables, alternatives, efficiency, much more emphasis on
innovation, all developed with the appropriate environmental
and climate considerations in mind. Such an approach would be a
great contribution, not only to relieving what's obviously
already been discussed this morning, relieving the pain and
pressures that the American people are feeling at the pump and
the difficulties that are faced by American businesses today
whether large or small. It would also be a fundamental
contribution to the future prosperity and security of our
Nation and to the global economy of which we are so essentially
part.
Thank you.
[The prepared statement of Mr. Yergin follows:]
Prepared Statement of Daniel Yergin, Chairman, Cambridge Energy
Research Associates, Cambridge, MA
It is an honor to appear at this Energy Summit. I would like to
express my appreciation to the Chairman and Ranking Member and to the
Committee for the opportunity to appear this morning. In convening this
timely Summit, the Committee is expressing its great concern about the
need for a comprehensive approach, and I am very pleased to be able to
contribute to the discussion.
I prepared for this hearing by reading a major article from Time
Magazine entitled ``The Energy Crisis: Time for Action''. It detailed
the many threats and risks from the current energy course and laid out
ideas for the future. It even used the strong words ``impending
disaster''.
Of course, the article was from May 7, 1973--five months before the
famous October 1973 embargo--and more than 35 years ago. In other
words, as this Committee knows, as a nation we have been at this for a
long time. And, as this Committee also knows from its own hard work,
much has been accomplished. After all, as a nation we are more than
twice as energy efficient as we were when that article appeared. Yet
there is much to do to meet the needs of the American public and energy
security and ensure that our nation can, as this Summit lays out,
``achieve a more secure, reliable, sustainable and affordable energy
future.''
Let me address two dimensions to help start the discussion--the oil
market today, and an ``ecumenical'' broad-based approach to energy
policy. First, let me start with the oil market.
i. the oil market: a new phase?
Like any major movement in a major market, the decline in oil
prices since July is the result of multiple factors. But two stand out:
Prices and Weakening Demand
The first is the increasingly evident weakness in the global
economy. Ever since the credit crisis hit in the summer of 2007, there
has been a debate as to whether the rest of the world economy is
``decoupled'' from the United States. Some thought that Europe and Asia
would not be affected because of their own dynamism. Others thought
that the impact would show up, but with delay.
The weakness of the dollar was predicated on the view that the U.S.
would weaken and that Europe and other regions would not. The Federal
Reserve has identified a relationship between a weaker dollar and
higher oil prices going back to 2003.\1\ That dollar weakness in turn
fueled commodity prices, including that of oil, both as a repository of
value against the dollar--and on the notion that global demand for
these commodities would remain strong.
---------------------------------------------------------------------------
\1\ Stephen P.A. Brown, Raghav Virmani, and Richard Alm, Economic
Letter--Insights from the Federal Reserve Bank of Dallas, May 2008, p.
6.
---------------------------------------------------------------------------
Over the last few months, it has become evident that the economic
weakness is spreading. And that in turn means weaker oil demand. With
the sharp price decline, the oil market is voting against the idea that
Europe and Japan are decoupled from the U.S. economic downturn, and
instead the market is now focusing on a weaker global economy and thus
a weaker global oil demand.
Breakpoint
As oil prices moved up over $100 and then over $120 a barrel, they
entered into what we call the ``Breakpoint Scenario''.\2\ Prices at
that level--and the apprehensions and insecurities that go with them--
set in motion a set of reactions that would start to undercut those
prices.
---------------------------------------------------------------------------
\2\ Breakpoint Revisited: CERA's $120-$150 Oil Scenario, CERA:
2008.
---------------------------------------------------------------------------
We see that happening: Consumers are in the market for more
efficient cars. They are also managing their transportation
differently. Businesses are making decisions predicated upon higher
prices. Government policies are changing, notably reflected in the
first new fuel efficiency standards in 32 years.
The reality of Breakpoint was already becoming evident in the
spring when our analysis indicated a point of ``peak demand'' for U.S.
gasoline had been reached in 2007, and that a continuing decline was
likely.\3\ At this point, gasoline demand in the United States is down
2 percent compared to last year--the result of greater efficiency,
behavioral changes, and economic circumstances. Overall oil demand is
down more than 4 percent.
---------------------------------------------------------------------------
\3\ Drivers Turn the Corner in the United States: Gasoline ``Peak
Demand'' Sooner than Expected, CERA: 2008.
---------------------------------------------------------------------------
ii. an ecumenical approach--balanced and integrated
In response to the Summit's focus on energy policy, let me offer
some thoughts based on 35 years of national experience--going back to
1973.
Avoiding ``Either Or''
So often, it has seemed over the decades, US energy policy debates
turns into an ``either/or'' debate, which sets conventional supply
against renewables and conservation--as though one partial approach or
another is sufficient. We need an ecumenical approach and indeed a
portfolio strategy. Our $14 trillion economy runs on 100 quadrillion
Btu (British thermal units) of energy per year-50 million barrels of
oil equivalent per day (of which actual oil is currently somewhat over
20 million barrels per day).
Alternatives and renewables have and should have an important role
to play in our energy economy, and their role will and should grow. The
CERA study on these options, Crossing the Divide: The Future of Clean
Energy, outlines how that could happen.\4\ At the same time we also
have to keep in mind the overall scale of our energy needs, costs, and
time. A great deal of effort is going into innovation, and the impact
will be significant. But the timing and scale remain uncertain. And, as
renewables grow in scale, the question of how they are integrated into
the existing energy infrastructure becomes more important.
---------------------------------------------------------------------------
\4\ Crossing the Divide: The Future of Clean Energy, CERA
Multiclient Study.
---------------------------------------------------------------------------
Today, oil and natural gas together represent a little over 60
percent of our total energy consumption. Most of the rest is coal and
nuclear. Renewables are about 6 percent; most of that is biofuels and
hydropower. Given these proportions, and in light of today's high
prices, it is urgent to ask how to ensure the adequate supplies of oil
and natural gas that are needed on an environmentally sound basis and
at a price that does not damage the overall economy.
Encouraging Timely Investment
The current oil shock underscores the need to encourage timely
investment across the energy spectrum. Investment has to be stepped up
in order to play a vigorous game of catch-up with a growing world
economy. That, in turn, requires efficient and timely decision making,
whether in the United States or in resource-holding countries, as well
as the facilitation of large, complex projects that bring on
significant new supplies.
It also requires consistency. An on-again, off-again Production Tax
Credit is not a way to promote stable development of renewable energy.
A PTC needs a longer-term time horizon. At the same time, there is also
greater recognition of the role of investment in developing offshore
resources.
Uncertainty is the enemy of investment, whether for renewables and
alternatives or for conventional energy. Predictability, by contrast,
is a vital ingredient.
The Role of Markets
Markets themselves, with their decentralized decision making,
generally provide faster and more effective mechanisms for responding
to high prices and shortages than systems of price control, which can
have unintended and very painful consequences.
The United States and Global Markets
The United States is more integrated into the global marketplace
than in years past, and yet it has less leverage over the market. Our
oil imports today are twice what they were in the 1970s. Yet our share
of world markets is less, and the role of other nations greater. In the
1970s the United States represented 30 percent of world oil
consumption. With economic growth elsewhere, the US share is down to 24
percent. The balance is changing in other ways. National oil
companies--which vary greatly in their character and capabilities--
control over 80 percent of world oil reserves. The five ``supermajor''
oil companies account for less than 15 percent of the world's total oil
production or a net basis. China and India are now significant players
in the market. The list of shifts goes on.
The realities of the global markets and America's integration into
them emphasize the need for a cooperative, multifaceted approach to
relations with both producers and other consumers and put a premium on
how we manage, think through, and structure our relations with other
countries.
Price and Expectations
The final point to consider is the role of expectations. Part of
the pressure driving up oil prices into July was due not only to the
short-term situation--the latest disruption in Nigeria, the ratcheting
up of tension over Iran's nuclear program--but also to expectations
about very tight supplies three or five years down the road,
particularly because of the anticipated high growth in countries such
as China and India. These longer-term expectations fed back into
current prices.\5
\\---------------------------------------------------------------------------
\5\ The importance of longer-term expectations is also emphasized
in the Dallas Federal Reserve's Economic Letter.
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Prices are now lower due to a refocusing back to shorter-term
demand.
The focus may change again. More general expectation of very tight
supplies in the future is based upon the assumption that the global
market cannot generate the responses that are warranted--in terms of
demand and efficiency; in terms of new supplies and timely investment;
and in terms of renewables, new technologies, and alternatives.
A major contribution to a sounder energy future would be to create
an environment, based upon realistic assessments, that ensures that
timely investment is really and convincingly on the way.
The answer to today's energy problem is not ``either or'' We need
an ecumenical approach--a combination of new oil and gas supplies,
renewables, and greater efficiency--all developed with appropriate
environmental and climate change considerations in mind.
Such an approach would be a great contribution not only to
relieving the pain and pressures that the American people are feeling
at the pump and the difficulties that are faced today by American
businesses, small and large alike. It would also be a fundamental
contribution to the future prosperity of our nation and to the global
economy of which we are so centrally a part.
The Chairman. Thank you very much.
Dan Reicher, go right ahead, please.
STATEMENT OF DAN REICHER, DIRECTOR, CLIMATE CHANGE AND ENERGY
INITIATIVES, GOOGLE.ORG, SAN FRANCISCO, CA
Mr. Reicher. Senator Bingaman, Senator Domenici, other
Senators here today, thank you for organizing this summit and
for inviting me to participate. I serve as Director of Climate
Change and Energy Initiatives for Google.org, a unit of Google
which makes investments and advances policy in several areas
including climate change and energy. I previously served as
Assistant Secretary of Energy for Energy Efficiency and
Renewable Energy and DOE Chief of Staff in the Clinton
Administration. I was also Co-founder and President of New
Energy Capital, a private equity firm focused on investments in
clean energy projects.
To meet the critical challenges of the 21st century,
climate change energy security and economic development, we
indeed need a bold, new vision for how America generates and
uses electricity. We must become smarter and more efficient in
the way we use electricity, green our electricity supply
through a massive scale up of renewable energy and electrify
our transportation fleet with plug in vehicles to reduce our
dangerous oil dependence. Our vision is a 21st century U.S.
electricity system featuring hundreds of thousands of mega
watts of renewable power, millions of plug in vehicles and tens
of millions of energy efficient homes and businesses.
The biggest impediment to achieving this vision is not
technology or even finance, it is policy, particularly at the
national level. The current regulatory model for electricity is
broken. It does not encourage utilities to help people save
energy.
It retards renewable energy development. It discourages
modernization of the grid. It fails to cut greenhouse gas
emissions. We need to fundamentally rethink this model.
Most importantly, we need to put a price on carbon in order
to significantly reduce global warming pollution. Putting a
price on carbon, however, will not be enough to drive the
urgent changes we need in our energy system. In addition to
national climate legislation, we also need aggressive and
targeted Federal energy legislation. There are four critical
elements.
First, we need large scale public and private investment in
electricity infrastructure and modernization of the power grid.
Spurring this investment will require overcoming the current
barriers to siting and construction of new electricity
infrastructure, especially large scale transmission. This may
require greater Federal authority balanced by strong
environmental standards to overcome resistance to long
distance, interstate transmission lines that are essential to
the development of large scale renewables.
Second, we need strong standards and incentives for clean
energy. These include a national renewable energy standard, a
national energy efficiency resource standard and aggressive new
appliance efficiency standards. As Dan Yergin just explained,
we also need stable, long term tax credits and other financial
incentives for energy efficiency, renewable energy and plug in
vehicles.
Third, we need the Federal Government to take a leadership
role in an exciting recent development, the increasing
interplay between energy hardware and information software and
the corresponding rise of the internet and connectivity it
brings. From smart meters and smart appliances to smart homes
and a smart grid, we're poised to significantly advance our
ability to make, monitor and use energy more productively. With
smart policy, like revenue de-coupling, we can align interests
putting utilities in the position to make money helping
consumers use less energy.
Fourth, we need major increases in government R and D. We
must dramatically scale up investment in research and
development for clean energy technologies. Total Federal energy
R and D is less than half what it was at its peak in the late
1970s. Federal investment in this area will more than pay for
itself just as it has in computer science, aerospace and
biomedical research.
If enacted, these measures should stimulate literally
trillions of dollars of investment, largely from the private
sector over the next three decades to make the transition to a
more efficient, low carbon, electricity system. It will also
create millions of new jobs. This is an enormous opportunity.
One quick example, American consumers get a paper utility
once a month that is complicated and encourages little except
prompt payment.
What if utility customers had online, real time information
about their home energy use?
What if their air conditioner, electronic equipment,
appliances and lights, were programmed to automatically cut
their bills?
What if their car ran on electricity instead of gasoline
and automatically charged at night when electricity was cheaper
or during the day from the solar panels on the roof?
These are exciting opportunities, but we are unfortunately
a long way politically from making them happen. Sadly, the
Congress has been unable to pass even a 1-year extension to
renewable energy tax credits that will expire at the end of the
year to say nothing of more fundamental changes outlined above.
But I am hopeful with the progress of the last few weeks that
we might actually break the current impasse.
Going forward we have a big opportunity with a new
President and a new Congress and unprecedented concerns about
high energy prices, our oil dependence and climate change.
There's never been a better moment. Let's seize the
opportunity. Thank you.
The Chairman. Thank you very much. Professor Deutch, go
right ahead.
STATEMENT OF JOHN DEUTCH, PROFESSOR OF CHEMISTRY, MASSACHUSETTS
INSTITUTE OF TECHNOLOGY, CAMBRIDGE, MA
Mr. Deutch. Mr. Chairman, Senator Domenici, I first
appeared in front of this committee somewhat over 30 years ago
when I was being considered for confirmation as the first
Director of Energy Research at the Department of Energy. Scoop
Jackson was in the chair and I say that the Senator Domenici
was a member of that committee. It has been my privilege and my
pleasure to work with Senator Domenici both inside and outside
of government when I've been at the Department of Energy, when
I've been in the intelligence community and when I've been in
the Department of Defense.
I want to begin by taking this opportunity to tell him my
tremendous respect and my gratitude for what he's done for the
country and my affection for Senator Domenici.
[Applause.]
Mr. Deutch. Now Senator Domenici will remember some of
those events of the 1970s. President Nixon's project
Independence which called on the United States to become
independent of imported oil at a time when we were taking less
than 20 percent of our oil from abroad. Senator Domenici will
remember Vice President Rockefeller's 1975 proposal for $100
billion energy independence authority. He will also recall
President Carter's 1978 National Energy Plan.
Oil and gas was de-regulated in 1977. An action
acknowledging that market forces are more efficient than
government regulation to allocate energy to users. In 1978, I
stood by President Carter in the Rose Garden when he announced
that the United States would have 20 percent solar energy by
the year 2000. There was a creation of the Synthetic Fuels
Corporation, an effort to set backstop technologies to imported
oil in synthetic oil and gas. Congress has appropriated tens of
billions of dollars for research and development and
demonstration.
I do not believe that the sum of all these efforts allows
the country to meet its energy challenges for the future. We
are not sufficiently, rapidly making a transition from
conventional oil and gas to other sources of energy. We have
not reduced emissions of carbon dioxide and other greenhouse
gases and avoided the adverse consequences of climate change.
We are not managing the foreign policy consequences of energy
import dependence from politically unstable or unfriendly parts
of the world, Iran, Venezuela and Russia.
I offer seven priority suggestions for what we should do to
put ourselves on a path for taking care of our energy security.
This is not a list which says pick some. It says you must do
them all. There are other things as well.
First, I believe we need to establish a charge for
greenhouse gas emissions. This charge ought to be large enough
so that it increases the opportunity for better energy
efficiency, the use of renewable energy sources such as wind,
geothermal. It will help make nuclear a reality and it will
lead to carbon free use of coal.
The revenue from this charge should be used for impact
assistance for groups such as the needy and the elderly that
cannot be expected to carry the burden of higher energy prices
and should be used for energy research, development and
demonstration. It should be used to offset other taxes so as to
make the macro economic consequences of an energy charge like
this, less burdensome.
Second, it is absolutely crucial that this country learns
how to use its coal in a clean, carbon free way. That means
that the government must establish a much more aggressive
program to demonstrate the regulatory framework, the technical
performance and the cost of carbon sequestration. I keep on
pointing out that while there are many interesting efforts
underway today in carbon capture and sequestration, there is
yet, no concrete plan for a large scale project at scale, a
million tons a year or greater, that demonstrates the proper
sequestration of carbon.
Third, we must improve the efficiency of our energy use.
Fourth, it is critical that we accelerate the pace of
energy innovation. The record does not point to the fact that
the expenditures that have been made on energy research,
development and demonstration have been adequate for the needs
of the country. There are several changes which could take
place which would make energy innovation more successful in
this country.
The first is a creation of an energy innovation council
that would have a national energy research, development and
demonstration plan involving all government agencies, not just
the Department of Energy. Department of Energy expenditures
certainly have to be increased, but that's not a complete
solution. We have to launch a large, integrated energy research
and development program in critical areas such as batteries,
cellulosic biomass, photovoltaics, gas separations and the
like.
We need to establish a career path for people who have
energy technology credentials within the civil service. I
believe we need to consider establishment of an energy
technology corporation to manage the demonstration projects
that are so urgently needed. Examples include carbon
sequestration, gas to liquids, smart electricity distribution
grids, large scale cellulosic biomass production, carbon
capture and sequestration, first mover, once through, nuclear
power plants.
Several people have mentioned a need to increase domestic
oil and gas production. It is not only going to make some
contribution to our energy needs, but it is also an important
signal to other countries that we need their production as
well. If we do not do something at home it is hard to convince
other countries to increase their production.
Sixth, we need to expand the use of commercial nuclear
power. It is an essential, carbon free source of electricity. I
know Congress has done a great deal to put in measures to
increase the incentives for new, first of a kind, nuclear power
plants. The process is moving too slowly. The process is moving
much too slowly.
Seventh, we need to improve the coordination of energy
policy. Let me just say that there is a fantastically close
relationship between energy policy in the domestic area and our
foreign policy. James Schlesinger and I have recently co-
chaired a study for the task force for the Council on Foreign
Relations on the national security linkage between oil and gas
import dependence and foreign policy. It's incredibly important
that we take into account in all of our foreign policy
deliberations, energy aspects and in our domestic concerns,
foreign policy implications of what we do.
Let me just point out Iran. We have in Iran, three
conflicting problems.
One is they produce about three million barrels of oil per
day for the international market.
Second they're interested in acquiring a nuclear weapon.
Third, they are not a constructive force in our efforts in
bringing a secure country in Iraq.
All of this indicates the interaction between energy, oil
and gas especially, and our foreign policy efforts.
Let me conclude, Mr. Chairman by noting that there's also a
strong relationship between U.S. nuclear non-proliferation
policy, our nuclear force structure and our nuclear power and
nuclear energy commercial developments. The Department of
Energy is involved in all three aspects, non-proliferation,
commercial power development and of course, being responsible
for our nuclear weapons program. My experience as Under
Secretary of Energy and as Chairman of the Department of
Defense's nuclear weapons council for 2 years, leads me to
believe that the transfer of those responsibilities from
nuclear weapons from the Department of Energy elsewhere in the
government to the Department of Defense, or to some independent
agency would be a mistake.
You will hear proposals put before you of that kind. I do
not believe that it would strengthen our role with respect to
nuclear fore structure. I do not believe that it would
strengthen our efforts with respect to energy research and
development.
Over the years the national laboratories which were
involved in weapons, Livermore, Los Alamos and Sandia, have
made a tremendous contribution to our energy R and D. That
should be re-invigorated. It would strengthen both our energy
efforts and it would strengthen our efforts at nuclear weapons
security.
Thank you very much, Mr. Chairman. Thank you very much.
[The prepared statement of Mr. Deutch follows:]
Prepared Statement of John Deutch, Professor of Chemistry,
Massachusetts Institute of Technology, Cambridge, MA
Chairman Bingaman, Senator Domenici, Members of the Committee, my
name is John Deutch, and I am Institute Professor of Chemistry at the
Massachusetts Institute of Technology. During the Carter administration
I was Director of Energy Research, Acting Assistant Secretary for
Energy Technology, and Undersecretary of the Department of Energy
(DOE). During the first Clinton administration I was Undersecretary for
Acquisition and Technology and Deputy Secretary of Defense, as well as
Director of Central Intelligence. During President Reagan's
administration I served as a member of the White House Science Council
and during the second Clinton administration I served as a member of
the President's Council on Science and Technology. Over the years I
have served as a board member and/or a consultant for many energy
companies, and as an advisor to government agencies and not-for-profit.
I continue to do so. I teach a subject in physical chemistry and in
energy technology at MIT and serve on MIT's energy council.
I first appeared before this committee over thirty years ago for my
confirmation hearing to be Director of Energy Research. Senator
Domenici was a member of the committee at that time, and it has been a
privilege and a pleasure to work with him over the years. He has made
tremendous contributions to this country and I hold him in the greatest
respect and indeed with considerable affection.
Senator Domenici will remember, and perhaps some others here today,
energy issues that were debated by Congress during the 1970s:
Many different national energy plans:
--President Nixon's 1973 Project Independence intended to make the
United States independent from imported oil by 1985;
--Vice President Rockefeller's 1975 proposal to create a $100
billion (real money at that time) Energy Independence
Authority to provide over a ten year period loans and
guarantees to private companies to develop new domestic
energy sources;
--President Carter's 1978 National Energy Plan.
Oil and natural gas price deregulation in 1977. An action
acknowledging that market forces are more efficient than
government regulation to allocate energy to users.
President Carter's goal of 20% of all energy use from solar
by the year 2000, announced in 1978.
Creation of the Synthetic Fuels Corporation in 1979 for the
purpose of demonstrating production of synthetic gas and
liquids from coal and shale.
Annual Congressional appropriations for research,
development, and demonstration (RD&D), for a range of energy
supply and conservation technologies, at expenditure levels
significantly greater than today, in real terms.
Despite these and many other well-intentioned energy policy
initiatives, the fact is that the United States has not been, and is
not now, on a path to a secure and sustainable energy future. Although
energy consumption per unit of gross domestic product is projected to
continue to decline, due in large part to high projected prices,
aggregate consumption of oil, natural gas, and coal is projected to
increase. The DOE's Energy Information Administration estimates that
oil imports, crude and products, will remain at high levels--about 60%
of U.S. oil consumption--for the next two decades. In addition, North
America is expected to become a net importer of natural gas in the form
of LNG. EIA projects, in its 2008 Annual Energy Outlook, that renewable
sources of electricity capacity will grow from 10% in 2005 to 12% in
2030, while coal generating capacity will grow from 34% to 36%, during
this same period. Total U.S. carbon dioxide emissions, mostly from
coal-fired electricity generating plants, are expected to grow at an
annual rate of 0.6%.
In sum, the U.S. economy is not meeting the three great energy
challenges the country faces: (1) beginning the long and demanding
transition away from a petroleum based economy; (2) reducing emissions
of carbon dioxide and other greenhouse gases, in order to avoid the
adverse consequences of global climate change, and (3) managing the
foreign policy consequences of energy import dependence from
politically unstable or unfriendly parts of the world, e.g., Iran,
Venezuela, and Russia.
There are several reasons why it has proven so difficult for the
United States to adopt and sustain a national energy policy:
unrealistic goals, shifts in direction with each change in
administration, difference among regional interests, strongly held
views by different interest groups about technology winners, and
vacillation in public attention as energy prices go up and down. But,
in my judgment, the root cause is that our political leaders find it
difficult to speak the truth about energy matters.
The public understandably wants affordable energy, free from
foreign dependence and adverse environmental effects, but these
objectives cannot be easily or quickly met. The reality is that
progress will be slow because of the scale and magnitude of investment
required, because of the need to invent and demonstrate new technology,
and because of the need to adapt market structure and consumer
preferences to new patterns of energy use. Moreover, the likelihood is
that real energy prices--for electricity, home heating, motor and
aviation gasoline--will continue, on average, to increase in real terms
in the coming decades.
The sharp rise in oil prices has once again focused the public's
attention on the urgency of providing for our energy future. If
significant action is not taken today and sustained for several
decades, we will, once again, run the risk that future generations of
Americans will experience greater economic costs and dislocations,
including conflict, than needs to be the case.
I offer seven priority actions that the country must take in order
to be on a path to a sustainable future. The list is not a menu that
offers choice; all these action and perhaps others, are required.
1. Establish a charge for greenhouse gas emissions. The
Administration should propose and Congress should enact a
charge for greenhouse gas emissions. The charge could be in the
form of an emission tax or a cap-and-trade system with sale of
emission permits. The charge should be set at a sufficiently
high level, for example $30 per tonne of CO2,
equivalent, so carbon free electricity generation, such as
wind, geothermal, nuclear and coal with carbon capture and
sequestration, is economic. Revenue from the charge should be
allocated to (1) impact assistance for groups such as the needy
and elderly that cannot afford higher electricity prices, (2)
energy research, development, and demonstration, and (2) off-
setting other existing taxes in order to reduce the macro-
economic impact of the charge. With a comprehensive national
program in place, industry will have a clear signal for their
future energy infrastructure investments. Many existing
burdensome regulatory mandates, such as state renewable
portfolio standards, could be rolled-back, as part of a process
to harmonize federal and state controls on greenhouse gas
emissions.
2. Establish an aggressive program to demonstrate carbon
sequestration. The new administration should propose. and
Congress should enact, an a ten-year program for 3 to 5
sequestration demonstrationprojects sequestering about 1
million tones of CO2 per year, at a cost of about
$100 million per year per project (including the cost of
CO2). The success of any effort to control
greenhouse gas emissions in the United States depends on large
scale deployment of coal electricity generation with carbon
capture and storage. The present pace of demonstrating the
technical, economic, and environmental characteristics of this
key technology and the construction of a regulatory framework
that has public acceptance, is much too slow. These projects
should proceed in coordination with a new national regulatory
framework that establishes rules for site selection,
monitoring, modeling, and verification of the sequestered
CO2, and site liability after some period of
operation. Consideration should be given to establishing a
special purpose public-private corporation to execute the
sequestration demonstration program in order to streamline the
process of design, engineering, and project management.
3. Improve the efficiency of energy use. All experts agree
that improving efficiency of energy use is a priority
objective. Improvement in the U.S. economy's energy
productivity as measured by gross domestic product per unit
energy should be expected to continue, as consumers and
industry adjust to higher real energy prices. A notable current
example is the accelerating adoption of compact fluorescent to
replace less efficient incandescent light bulbs.
However, the historical record of effectiveness of government
efforts, at both the state and federal level, to improve energy
efficiency is mixed. Energy efficiency standards for buildings,
appliances, automobiles, (CAFE), and federal demonstration
programs in the DOE, DOD, GSA, and other agencies have their
role. But, the U.S. consumer and smaller private companies seem
reluctant to make investments or change behavior and avoid
choosing options that provide energy services at lower life-
cycle cost. National and local regulation involving demand side
management or other mandates have had limited effectiveness. We
need to find a better way to spread best practice through the
economy. I do not have an answer about how best to achieve this
but we need to reproduce the success of the agricultural
extension service in improving the productivity of U.S. farms
in the first half of the 20th century.
4. Accelerate energy innovation. The current pattern of DOE
research, development, and demonstration (RD&D) management is
inadequate for the future energy innovation the country
requires.
The past record of federal sponsorship--principally the DOE
and its predecessor agencies--is not adequate to meet today's
challenges. Consider these shortcomings:
A linear ``technology driven'' rather than ``market'' or
application driven approach research development of
demonstration of new technology;
Little coordination between the R&D programs in various
agencies: DOE, EPA, DOA, NSF, DOC, and others. For example, no
five-year program budget exists for energy R&D across all
involved government agencies;
Reliance on traditional direct funding (and control) of R&D
projects and episodic use of indirect incentives, such as
guaranteed purchase, tax credits, loans;
A mixed record on integrating private industry and
government RD&D.
Congressional influence out weighing technical merit in the
selection of technologies and projects.
Consider the following suggestions for accelerating the federal
effort in energy innovation:
(1.) Create an inter-agency Energy Innovation Council
to develop a multi-year National Energy RD&D strategy.
The Council would have the authority and responsibility
to plan, program, and budget energy and environment
RD&D for all agencies.
(2.) Increase the energy RD&D program budget to more
than twice its current level.
(3.) Launch a sustained and integrated energy R&D
program in key areas, examples include: batteries and
energy storage, cellulosic biomass, photovoltaics, gas
separations. This effort should include basic research,
as well as exploratory development, and involve
universities, industry, and the DOE national
laboratories.
(4.) Create an energy technology career path within
the civil service.
(5.) Establish an Energy Technology Corporation (ETC)
to manage demonstration projects. The purpose of the
ETC is to establish the feasibility of new energy
technology by demonstrating technical, economic, and
environmental performance. Examples include: (a) Carbon
capture and sequestration, (b) Gas To Liquids, (c) a
smart electric distribution grid, (d) large scale
cellulosic biomass production, (e) first-mover once-
through nuclear power plants.
The record shows that DOE does not have the
authorities or expertise to carry out successfully such
demonstration projects. New technology deployment,
which after all is the purpose of innovation, requires
demonstration that is convincing to the private sector
and to investors.
The purpose of the proposed ETC is different from the
1979 Synthetic Fuels Corporation. The Synthetic Fuels
Corporation focused on production of synfuels, not
technology demonstration, and thus was vulnerable to
the bittersweet collapse in oil prices.
The technical demonstration projects proposed for the
ETC are not based on price expectation but serious
externalities like climate change and the long-term
need to make the transition away from petroleum
dependence.
5. Expand domestic oil and gas production. The United States
should expand access to areas for oil and gas exploration--in
Alaska, the Gulf Coast, and the east and west coasts. While the
amount of environmentally responsible incremental production
will be modest compared to total oil and gas consumption, the
increased production will slow the anticipated decline in
domestic production. Importantly, any measures to expand
domestic production will add credibility to United States
efforts to encourage countries that possess resources to expand
their production.
6. Expand the use of commercial nuclear power. Because
nuclear power is essentially a carbon free source of
electricity, it is highly desirable to expand its use. However,
nuclear power faces three significant challenges. First, the
cost of nuclear power generation is too high compared to coal
in absence of a carbon charge. The impact of the recent
increase in the cost of all large capital projects has been
greater on nuclear power than other forms of generation. The
assistance provided for a few new nuclear power plants in the
2005 Energy Policy Act is justifiable, provided that nuclear
plants subsequently constructed are economic under commercial
terms.
Greater progress is needed on radioactive waste management.
The new administration and Congress would be wise to hedge
successful licensing and completion of the Yucca Mountain
underground spent fuel disposal facility by authorizing a new
long-term program for away-from-reactor storage, with DOE
taking custody of the spent fuel at federal facilities.
It is important that any expansion of nuclear power in the
United States and other countries occurs without increasing the
risk of nuclear weapons proliferation. President Bush and the
G-8 have taken an important initiative that deserves bipartisan
support: nuclear supplier states will offer front-end
enrichment and back-end waste management services under
attractive terms to countries who are new users of nuclear
power, in order to prevent the spread of enrichment and
reprocessing.
However, domestically, the Bush administration advocates a
return to a ``closed'' fuel cycle, where spent reactor fuel
from commercial reactors is reprocessed to produce mixed oxide
fuel. This advanced fuel cycle initiative has no justification
at present. Developing the closed fuel cycle will require vast
federal R&D expenses with dubious advantages for waste
management compared to the ``once-through'' fuel cycle, when
both short term and long term risk are considered. To be sure,
at some time in the future, if nuclear power expands
significantly, the cost of natural uranium ore will increase to
the point that reprocessing is economically justified. However,
there is no indication that this point will be reached for at
least the next 50 years.
In the meantime, a decision by the United States to return to
a policy of reprocessing commercial spent fuel, abandoned in
the Ford and Carter administrations, sends a message to other
countries, especially in the Middle East and Asia, that
reprocessing is acceptable and has advantages compared to the
once-through-fuel cycle. And these countries will not use fancy
``proliferation-resistant'' fuel cycles invented by DOE labs,
but rather the widely known and simple PUREX method used by
most states that have separated plutonium for a weapon.
The United States, for the foreseeable future, should limit
fuel cycle R&D to laboratory research on new separation
methods, engineering analysis comparing different fuel cycles,
and perhaps some process development unit (PDU) scale
engineering studies.7. Improve the coordination of energy
policy. The new administration should establish a new inter-
agency Energy Coordinating Council, co-chaired by the Secretary
of Energy and Director of the National Economic Council to
interagency harmonization of energy policy including such
matters as
I conclude by underscoring the strong linkage between energy policy
and national security. James R. Schlesinger and I co-chaired a study
for the Council on Foreign Relations that describes how dependence on
imported oil and gas is increasingly constraining the ability of the
United States and its allies to accomplish important foreign policy
objectives. Iran is a good example--its 3 million barrels per day of
oil exports is important to international oil markets.
Iran's ability to stop these exports and thus disrupt the
international oil market, is a factor that the United States and its
allies must consider as they weigh possible actions to slow Iran's
effort to acquire nuclear weapons, or to interdict Iranian support to
Iraqi insurgents.
This linkage between energy and security exists in other areas as
well. For example, how China meets its growing energy demand will
increasingly impact world energy markets and hence influence the global
climate, as well as how much U.S. consumers will pay for motor
gasoline.
The point is that United States must consider the domestic
consequences of foreign policy energy decisions and vice versa; the
country has not done this well in the past. The interagency Energy
Coordinating Council proposed above could be useful in providing the
president with a coordinated view of the domestic and international
aspects of contemplated energy policy. In addition, the Secretary of
Energy should be a participant in any National Security Council
meetings that involve energy issues.
There is also strongrelationship between U.S. nuclear non-
proliferation policy, nuclear force structure, and nuclear power
development. The DOE is involved in all three aspects and should remain
so in the future because of the breadth of its technical capability.
You will hear proposals to transfer responsibility for management of
the U.S. nuclear weapons program and the weapons complex from the DOE
to the Department of Defense or a newly created independent agency. My
experience as Undersecretary of Energy and Chairman of the DOD's
Nuclear Weapons Council leads me to believe that this transfer has no
bearing on nuclear force policy issues and the transfer would neither
improve the management of the weapons program, or save money.
Separation of the national laboratories involved in nuclear weapons--
Livermore, Los Alamos, and Sandia--would greatly reduce DOE's capacity
to carryout its energy mission.
The enterprise of generating, distributing, and using energy in the
United States is enormous, complicated, and inter-connected. Casual
attention will not constructively shape energy development, or fairly
balance the many competing regional and private interests. Moreover,
there are no quick fixes or technical break throughs that can sidestep
the lengthy and demanding process of adapting the economy and the life
style of our citizens to a sustainable, post-petroleum world. The
United States has the resources, the technology and talented people,
and the industrial base necessary to provide for a secure energy
future. However, the country has not yet reached consensus or adopted a
national energy policy scaffold that encourages the needed changes in
production and consumption, but also has the flexibility to adapt to
market reality and accommodate unexpected ingenuity that will emerge
from working on this great challenge. It is high time for the country
to embark on the exciting and important tasks that I have outlined.
The Chairman. Thank you very much.
Mr. Odum, why don't you go right ahead?
STATEMENT OF MARVIN ODUM, PRESIDENT, SHELL
OIL COMPANY
Mr. Odum. Good morning and thank you. First of all I'd like
to thank the Senators for allowing me to move to the morning
meeting. As I'm sure you know we have a rather large hurricane
bearing down on the Texas coast. I'm anxious to get back and
deal with some of the business issues there.
The--I can assure you though that the infrastructure is as
prepared as it can be. We have the thousands of people that
work in that industry in safe locations. It will be returned to
production as absolutely quickly as possible.
I'd like to commend Senator Bingaman and Domenici for
holding this summit and all of the Senators, of course, that
are here today. I think it is precisely the kind of dialog that
our Nation needs to have on energy policy. If we're going to
successfully meet the energy challenge we will need this type
of cooperative spirit.
It is an undeniable truth that when we will need more of
all kinds of energy including that saved through efficiency and
conservation. By all kinds of energy, of course, I mean oil and
gas, coal, biofuels, wind, solar, nuclear, hydrogen and
potentially others. Along with this there are two other points
that you've heard from me before.
First, that oil and gas will remain critical fuels for our
economy for decades to come.
Second, we must develop all energies with particular
attention to addressing CO2 emissions.
As one of the largest oil and gas producers, I'm going to
focus my comments on the oil and gas side of this equation.
Then I'll conclude with just a few comments on the broader
energy policy.
The fact is that the U.S. imports much more petroleum than
it should. I'm not going to repeat all the numbers that we've
heard before, but 12 million barrels a day, $600 billion a year
to pay for that. The U.S. is in somewhat of a unique position
among the world's nations in not producing more of our own
resources instead expecting others to produce it for us.
I think the choice is fairly clear. We can continue to
import evermore oil and gas as we transition to a new energy
mix that's at an unknown point and time in the future or we can
develop more of our own resources. We have, potentially,
abundant resources.
The U.S. has a well designed system in place for managing
oil and gas exploration and development. We also have a very
strong system in place for ensuring the environmental impacts
are avoided or mitigated. If more areas are open to oil and gas
exploration, I think it is crucial that adequate funding be
provided to Federal agencies that manage those activities.
When adequate funding is not in place, the system breaks
down, permits are not issued on time, environmental studies are
questioned and the system is vulnerable to litigation. Just
because lands are leased, doesn't mean drilling will commence.
I'll use Alaska as a case in point.
Alaska's Chukchi and Beaufort Seas are some of most
promising, undeveloped, hydrocarbon basins in the U.S. In the
last couple of years, Shell has invested more than $2 billion
in leases and hundreds of millions more in equipment, studies,
permits, training and other preparation trying to bring more
production to the U.S. market. We've assembled what is arguably
the most environmentally sensitive and thoroughly responsible
exploration program in history.
But with permit slippage and litigation delay, we're nearly
3 years on and have yet to drill a single exploration well. Let
alone produce much needed oil and gas. Remember this is an area
that's open to leasing.
Our drilling program in the Beaufort has been delayed now
for a second year as the nine circuit, Court of Appeals has
deliberated over a lawsuit against the MMS. We still do not
have a decision.
I'd also like to comment on the topic of revenue sharing.
It is important to recognize that states and communities
adjacent to off shore development will have infrastructure
needs such as roads, schools and demands for basic public
services. Revenue sharing is available for four Gulf of Mexico
states and it will help address some of those needs. Congress
should routinely extend revenue sharing to other areas,
starting with Alaska.
So to close, the challenges we face today result, I think,
from not having a comprehensive energy policy like we're
talking about today. These challenges cannot be resolved with
one simple solution. We need to face some hard truths and
produce more energy, all forms of energy.
You're going to find a lot of commonality with the other
panel members in these next couple of statements. Because I
believe a comprehensive energy policy should include providing
more access to domestic oil and gas resources, encouraging more
investment in alternatives and renewables, and there are some
exciting things happening there. Encourage and reward more
conservation and efficiency, reduce CO2 emissions
using market mechanisms, such as cap and trade, that enables
such reductions and also, very much need to account for carbon
capture and storage which we heard from Mr. Deutch.
We are committed to meeting the energy challenge and to
working with Congress and the American people to find real
solutions. In 2008 we will invest somewhere around $35 to $36
billion, which is more than our profits in 2007, to bring more
energy to the world. So I'll stop there and look forward to the
questions and our conversation.
The Chairman. Thank all of you for excellent testimony. Let
me start the questions, then we will have questions from
Senator Domenici and then we'll go back and forth between
Democrats and Republicans in the order that people arrived. We
have a long list. So I'll try to be brief in my questions.
One of the issues that I think we're going to have to
better understand is in order to reduce the use of petroleum in
the transportation sector, there's sort of three options,
obviously increased efficiency, everyone agrees is important.
But when you start looking at other ways to substitute for
imported oil being used to be refined into gasoline for the
transportation sector, there's sort of three options out there.
One is the one Dan Reicher was referring to, which is
electrify the transportation sector. Get more and more of our
vehicles operating off electrical power.
Second, of course, is biofuels as a way to substitute for
petroleum use directly.
Third is the proposal that T. Boone Pickens is advertising
and advocating these days which is the thought that we can meet
many of our transportation needs through more use of natural
gas rather than through use of gasoline refined from oil.
I'd be interested in any of you who have an idea as to
which of those courses is most promising to tell us what you
think. I mean, obviously we're doing some of each that's
appropriate. But is there one of the three that holds the
greatest promise or one of the three that holds the least
promise? Any of you have thoughts?
Professor Deutch.
Mr. Deutch. Mr. Chairman, I'm all in favor of all three,
but I want to just suggest to you in each case there is a
significant barrier. In the case of substitute electricity for
hybrid vehicles or all electric vehicles, we have to have the
electricity. That means that it has to come either from clean
coal or it has to come from nuclear.
In the case of biofuels, we've looked at this in some
detail. We don't want to compete with food. We want to have
cellulosic biomass. There really is a limit of what you can
expect from this. I would say that an aggressive limit for the
United States would be like, two billion barrels of oil
equivalent a day. That's still a small fraction of what we need
to do.
With respect to natural gas let me point out North America
has become an importer of natural gas. Natural gas is likely to
become more and more, for us, like petroleum. So substituting
natural gas and petroleum, yes, that's maybe a good thing to do
in the short run. In the long run they're both very important.
Final point is the rest of the world is important here too.
The rest of the world is rushing to use more oil, like China in
their transportation system. So this is also has an
international aspect that the rest of the world is going to be
consuming oil for automobile transportation at to a higher
rate.
The Chairman. Mr. Odum, did you have a thought about this?
Mr. Odum. If I could just add, I think it's a very
important question. Because I think it points to an important
topic that covers more than just this single question. Which is
going back to what Dan Yergin said, there is no single answer
here.
So I listen to that question, I hear those three options. I
think they're all important. They will all be part of the
solution that we need for the energy challenge in the U.S.
Neither one on its own will solve the problem.
The Chairman. Dan, did you want to comment?
Mr. Yergin. Just briefly, Mr. Chairman. I think, again, all
three need to be part of the solution. I would put
electrification of vehicles at the top of the list though.
What's interesting, I think, is that this move that we're
seeing in the marketplace today to hybrids, actually allow us
to take the first option which is electrification and combine
it with a second option which is biofuels.
You can electrify a vehicle as General Motors and Toyota
are doing. Those vehicles will be out next year or the year
after. Meanwhile there's a 12 or 14 gallon tank into which
biofuels could go. So we could hybridize in yet another way,
those two technologies.
Over time we do have to make the transition away from corn
based ethanol to cellulosic ethanol for all the reasons that I
think you know well. I do think natural gas has a role. I would
put it further down the list.
Fleets, for example, buses, trucks, vehicles that come back
to the same place at night, but I would say that should be a
much smaller part of this mix going forward compared to
electricity at the top of the list, biofuels in the middle and
natural gas at the bottom.
The Chairman. Frank.
Mr. Verrastro. Yes, I concur with Dan's points and also
with Marvin. If you had to do priority ranking, it strikes me
that in the short term, hybrid technology is just terrific. If
you can increase the vehicle standards and current technology
you could increase it by, you can double.
So what the Congress did in the Energy Efficiency Act was
terrific, maybe not aggressive enough. If you double the
mileage, $4 gasoline becomes $2 gasoline. If you supplement
that with plug in hybrids, you have the opportunity to have
both liquid fuels and electricity.
Going to fully electric it just strikes me there's three
questions. One is on efficiency, at least now until we upgrade
the grid. It takes three units of primary energy at the front
end to give you one unit of electricity at the back end.
So which leads to the second point of what's your fuel
source and base load. As John said, it's either nuclear or
coal. Could be natural gas is not the scale up for renewables
yet at this point.
Third point is reliability. At this situation ice storms,
wind, squirrels can take down the system. We need to make sure
the system is reliable.
On compressed natural gas, I would agree with Dan. I think
it's lower on the list for fleets, especially for buses, it's
terrific. You can secure the size of the gas tank because as
you compress the natural gas, your mileage efficiency goes
down. Your miles able to be driven on a tank of CNG is lower.
So for cabs, city cabs, something that's used on campuses,
maybe local police forces and for buses, great idea, for the
general public, probably not there yet.
The Chairman. Senator Domenici.
Senator Domenici. Thank you, Mr. Chairman. I'm very pleased
to see so many Senators here that want to ask questions that I
just want to ask three.
First, Professor Deutch, I think you know. Speaking nuclear
power for a moment, we're making some fantastic strides as a
Nation now with reference to applications for nuclear power
plants. As you know we have gone from zero applications,
license applications for design and construction before the
passage of the Energy Policy Act to what's contemplated now is
a total of 23 applications, 34 units.
I would say that's a rather significant step forward, leap
forward by the United States in a commitment to going nuclear
as rapidly as we can, consistent with the delicate nature of
the licensing process. But you stated we should--we're going
too slow on licensing. I really want you to believe me that I
think that's the case. But I cannot find any way to use less
time in the process.
If you and your people at MIT can look at the licensing
process and tell us how we can save time, you would do us a
great favor. The only thing we have done, and I'll just give it
to you outright, we put 1 year after the licensing process is
finished for citizen involvement. Because there are so many
institutional approaches, institutional negatives they file
against this that you've got to give them some time or you'll
end up with never ending litigation.
So we're using 1 year in this 42 months that we claim is
necessary. If you can find how we would do it with less, I
believe everybody would be interested in hearing. Now if you
already know, you can tell us now. If not, I will go to the
next question.
[Laughter.]
Senator Domenici. That's what I thought would happen. Now
let me say to Dr. Yergin. This is the second time you've
appeared to help us. I want to tell you personally, as I leave,
what great admiration I have for you.
I just whispered to my friend, the chairman, that if I were
putting together any group of, as small as five, advisors on
energy policy to help us, I would put you on that five. I might
even put you on the three if we went that far. So I want to ask
you a question. How did we move so quickly from an American
energy scene which was short of natural gas? We were even
beating ourselves up for using natural gas to make electricity
because we claimed we didn't have enough.
All of sudden we're talking like we have so much. I seem to
believe we have much more than we thought. But where are you in
terms of proving that up? Where did we get the information that
we have so much more natural gas than we thought we had?
Mr. Yergin. First, thank you for your more than gracious
words. I appreciate it.
Senator Domenici. You're welcome.
Mr. Yergin. As with Professor Deutch, I have great
admiration for the role you've played in energy over these many
years and the consistency you've brought to it. I think the big
change on natural gas has been it's, you know, what you see in
the energy industry constantly, is this process of innovation
that looks like you're in a dead end and then something changes
it. What's changed it is in terms of the development of
unconventional gas.
I think it's--and probably Mr. Odum can add to that, but
over the last 2 years or 3 years what seemed to be very much of
a fringe activity has now put us in a more abundant position.
Last year our gas production went up 9 percent after many years
of thinking that we were going to be tied into a global LNG
market which as Professor Deutch said, we are, but not to the
extent. So I think it's still unfolding and one big question
about it is this kind of a short term rush or does this really
open up a whole new horizon for natural gas in our economy.
So I think that's been, to me, the biggest reason for the
change of perspective over the last 2 years.
Senator Domenici. The last question is the price of oil has
dropped nearly $50 in the past 2 to 3 months. Dr. Yergin says
that the softened demand has caused that. Do you agree? We'll
start over there at your end.
Do you agree?
Mr. Verrastro. I think there's three or four pieces that go
into this. Clearly reduction in demand and then part of that is
a result of higher prices.
The second is, I think, the prospects for additional
production coming on line. Projects that were delayed last year
because of cost and technical difficulties, we're going to
start seeing them third and fourth quarter of this year, first
quarter of next year. So we're going to have a supply.
We also have alternative fuels that have made a huge
contribution. We're seeing demand reduction. Technology has
played a big role. I actually, a personal view is that there
has been price speculation in the market. I think the drop from
$147 to $100 over the last several weeks should indicate this
is more than just fundamentals.
Senator Domenici. Did you want to add anything Dr. Yergin
to my statement of your position?
Mr. Yergin. I think those other factors are certainly part
of it as well. In other words, it isn't just one thing. But I
think this demand, this shift in demand and the focus on demand
is a very important part of it.
Certainly, as Frank said, the financial markets have been
playing a much more important role in the oil market than they
had in previous years. Oh, yes, and Frank whispered to me, very
important, is the strength of the dollar. I mean we've seen an
inverse move between the dollar and commodities and the change
of the dollar. We've seen all the commodity prices come down.
Senator Domenici. Thank you.
The Chairman. Senator Dorgan.
Senator Dorgan. Mr. Yergin, you describe the financial
markets playing a much more important role. That's part of what
Mr. Verrastro talked about with speculation as a portion of
that. Is that correct? Is that what you mean?
Mr. Yergin. Speculation is part of it. But it's more
generally that the financial markets are engaged. It's also
pension funds concerned about the equity markets, in turn
concerned about delivering returns, looking at commodities as
an asset allocation class.
Senator Dorgan. Mr. Chairman, let me say that I hope that
this, which I think is a wonderful opportunity today, is
perhaps the first in a series of urgent hearings that we would
hold to put together the comprehensive plan that could come
from a series of different centers of thought and interest here
on comprehensive energy policy. It appears to me that $4 for a
gallon of gasoline became the tipping point. That filled the
political system with enough helium to make things interesting
and to have crowds gather chanting, ``Drill, baby, drill'' and
it filled the policy discussion with enough urgency so that
everybody's now talking about comprehensive energy
legislations. So, I mean, this is certainly on the right
subject at the right time.
My own view is we should do everything, drill. By the way
the one thing that nobody's talking about is, it's a small
piece. But there's estimated a half a million barrels of oil a
day that the Cubans are making available and the Canadians and
the Spanish and the Chinese and others are able to lease and
we're not. That ought to be part of the drilling that American
firms ought to be able to access.
But drilling, conservation, efficiency, renewables, all of
it has to be part of what we're about with respect to
comprehensive energy legislation. Also addressing what I think
is excess speculation in the markets. But what I'd like to ask,
you know, if we don't do something.
We should do all of these things. But the question is what
is game changing? What is it that can bring us back 15 years
from now or 15 years of that, after that to not be talking
about the same set of problems? Mr. Yergin talked about 30
years ago, you know, every 15 or so years, we hang around
thumbing suspenders talking about the same old issues which I
called yesterday, forever.
What is game changing? What truly is game changing here? Of
the things that have been discussed by the witnesses, what do
you say to us that you think in policy represents something
that really is game changing for America's future energy use in
terms of how you would prioritize it?
Mr. Verrastro. Senator, when you roll back to the 1970s,
we're in a totally different place. I would argue that we had
excess capacity in the 1970s. We actually were playing with
that through the last 25 years. So we had excess refining
capacity, excess crude oil capacity, excess transmission
capacity.
The growth of China, but also of the non-OECD countries
have tightened up the demand/supply balance. People didn't make
the investments because there had been an overhang. The year
2004 to us was kind of the watershed year where everyone took
notice that things were in tight supply.
Players behave differently in a tight market. We
consistently want to go back and say, well what are the tools
that we used in the 1980s and 1990s. They're the wrong tools
because that was in a surplus market.
So, in terms of priorities, it just strikes me that the
first thing you do when you look at this increasing projection
of global demand, is unless you change the curve, you're
constantly chasing this elusive target where you increasingly
have to plug in various forms of supply. The above ground
issues that I alluded to and they're everything from access to
commerciality to sabotage and terrorism, distribution,
infrastructure, investment. It's not the molecules in the
ground that seem to be the problem at this point. Because I
think the endowment, the resource endowment in the world is
enormous. But accessing them, converting them, then delivering
to places where they're needed is the issue.
So the first and foremost thing is to change demand. I
think on the transportation side for oil, going to hybrids
tomorrow in a broader scale is a no-brainer. We have the
technology. If you can reduce demand by 50 percent by
definition you reduce oil imports.
Maintaining U.S. production is the second piece of that,
especially on the liquid fuel side because if you let the U.S.
go into decline, even if you take the demand curve down, the
gap is still filled by imports. At some point we have to make
room for China and India. Otherwise we're competing for all
these fuels in the market.
Like oil, natural gas will soon become like a bidding war
on eBay. This is the second piece on natural gas. On the gas
piece I think technology has really helped.
These unconventional plays, sub soil plays on the oil side,
things we couldn't see 15 years ago with horizontal drilling,
looking at permeability and porosity of the zones you can
actually move the gas through with fracturing. You can do the
same with shale oil, like we're doing in the Bakken. It's a
different type of play.
But these are supplements. They're not replacements. This
transition that I think we're all looking for where you have
fuels that are available, affordable, reliable and
environmentally benign, all require tradeoffs.
So Dan, I and Marvin, we're all part of this National
Petroleum Council study that we produced last year. We
constructed this triangle. Triangle said you have to look at
economics. You have to look at environmental performance and
then you have to balance that against security.
Ideally you like to be in the center of the triangle where
all three issues are balanced. Efficiency and low emission
fuels are the only thing that fit in the center of the
triangle. Everything else that you play with, whether it's
nuclear or coal or natural gas, they all have tradeoffs.
So they may benefit you on the economic side, cost you on
the foreign policy side. Benefits you on the environmental
side, but costs more somewhere else. I think that's the
juncture we're at.
I think we need to manage the transition is the point I'm
getting to. We want to get to a different future. But there's
smart things you need to put in place now.
We're resetting the system. The next President is the
transition President.
Senator Dorgan. Mr. Chairman, might I just make a 30-second
observation? I understand you want to move to others. It seems
to me that in the infancy of various approaches to deal with
this renewables and conservation approach and so on, we move
toward what we incent.
We incented people to go look for oil and gas. I got from
the Congressional Research Service the other day, on two of the
tax incentives for people to go look for oil and gas, we have
provided $177 billion of tax incentives in the last 40 years.
That's a pretty robust, aggressive incentive.
Compare that with what we've done with other things that
might be game changing, renewables and so on, which is pathetic
and anemic. So, I mean, I think we really have to evaluate what
is game changing. Then how do we pursue it with the right kind
of robust incentives that you can count on?
The Chairman. Senator Thune.
Senator Thune. Thank you, Mr. Chairman. I want to thank the
panel for their insights today and observations about what we
all perceive to be a major issue affecting the economy in this
country. I would argue is a national security issue as well.
I think that the triangle that you described is a good one.
Because I believe that there are lots of implications that go
beyond just the clear economic impact this has on people across
this country. In my view, in a State like South Dakota, some of
the members here who represent rural States, the impacts are
even more profound because you've got largely agricultural
economies that are very energy dependent, diesel, fertilizer,
all the input costs that go into agricultural production
continue to go up as a result of what we're facing across the
world today in terms of the increasing global demand for all
forms of energy, but particularly for fuels.
We've got a number of things that we've been looking at. I
appreciate the observations with respect to efficiencies and
conservation and everything else, trying to address this in a
balanced way. I guess my question would be of all those
different types of technologies, what do you perceive to be the
one that we can realize the most quickly?
A lot of the things that we're talking about are 5-year,
10-year issues. We're all looking at how do we bridge to that
technology. Right now I think we are in a transitional time. I
think we're, you know, the oil and gas production, things that
we're doing today or the energy sources we rely upon today, I
think are designed as a bridge to get us to those new
technologies and that future energy source.
But we obviously want to get there as quickly as possible.
In my part of the world we're working to develop as fast as we
can, cellulosic ethanol. We've had great success with corn
based ethanol with 1.7 billion gallons in 2001. This year it's
over 9 billion gallons.
So much so that many of our producers are saying we're
going to run into what they call the blend wall. That is that
we've got a lot of production. We don't have enough demand out
there right now because we have limitations on how much can be
blended.
As a result from that the price of ethanol has gone down
dramatically relative to gasoline to the point where it's
becoming very difficult for producers to find any kind of a
margin right now in corn based ethanol. We're trying to push
toward cellulosic ethanol. We're very close.
I mean, I've been out at NREL and they've done some
wonderful things in terms of testing there. The key is to make
it commercially viable. That's kind of the world I live in.
We're very much into biofuels where I come from.
But I guess my question for all of you is, which of these
various technologies that have been talked about are the most,
I guess, that we would have an opportunity to realize some
benefit from in the shortest amount of time?
Mr. Yergin. Let me just jump in with part of the answer
because I think your question very much ties into Senator
Dorgan's question and where Senator Bingaman was. To me it
seems when you look at it all, the agenda is pretty clear that
there are a list of things. I think Frank has done a very good
point of pointing out we want to skip over hybrids. But hybrids
themselves are pretty darn important.
But I think and, you know, are we going to see 5 years from
now is the big surprise. When I look at the energy history you
always see that there are these big surprises that come. Is the
big surprise going to be in biofuels that we don't see it or is
it going to be electricity and transportation or maybe
something that we don't even quite see?
In the near, medium term it does seem to me that the, you
know, the big source that we have if we can figure out how to
handle it because it's not one thing, is efficiency. That's
what gives us time to address these other things. Then it's
have a consistent process that John Deutch described so we
don't have the stop and go on the technologies. That we have
young people who are making careers in science in it, so that
35 years from now we're not reading another Time magazine
article that's now 70 years old that still sounds like where we
were.
I'll just tell you when I looked at that Time magazine
article, a lot has changed since we didn't have Google. We
didn't have cell phones. We didn't have PCs. But you look at
the agenda 35 years ago and it sounds, to some degree, like the
agenda we're talking about today.
So there is that sense that we need that I don't think we
know the answer on what the game changers, what the big
innovation and that's why we've got to go down several paths at
the same time.
Mr. Reicher. Could I just echo that, Senator? It's not
sexy, but energy efficiency I do think is the fastest,
cheapest, near term resource that we've got. You know you look
at, just simply look at the cost of electricity from, you know,
high cost photovoltaics at one end, even coal. Lower down the
scale, nuclear, natural gas vastly cheaper as energy efficiency
at a couple of cents a kilowatt/hour.
I just would urge you to take a look at what California has
been able to do over the last 30 years keeping its per capita
electricity use flat over 30 years. While in the rest of the
country it's risen 40 to 50 percent. There's three things that
the State did, very wisely.
One, it actually gave utilities the incentive. They can
make money in California encouraging efficiency, encouraging
people to use less electricity. Most of the rest of the country
you can't do that. So the incentive is to sell more.
The second thing the State did very early on was to adopt
aggressive building codes. Again, very boring stuff, I have to
admit it. But very aggressive building codes and so it gets
built there. It's vastly more efficient than in most of the
rest of the country.
The third thing was to launch a real serious effort in
appliance standards, electronic equipment standards. Again,
terribly boring, but it has really driven a lot of change, in
fact cause what we've been able to do at the Federal level to
finally get off the ground.
So California is a great example. I think if we had done
that in the rest of the country our total energy use would be
dramatically lower today. I don't have the numbers at my
fingertips, but it's significant.
Second game changer, completely other end of the spectrum.
Several weeks ago we and several venture capital firms made an
announcement about an advance geothermal technology. John
Deutch may remember the days of what we used to call hot, dry
rock back in the Carter Administration.
But essentially instead of traditional geothermal where you
drill down to a pocket of steam or hot water, this modern
geothermal technique, you can literally drill anywhere in the
United States or all over the globe and at some point you get
to hot, dry rock. There may not be water there. But if you can
put a fluid down there and bring it back up, you can make steam
and turn a turbine and make electricity.
The oil companies are very interested in this. The
Australians lead the world. The EU has made significant
investments. This technology is being proven out.
A major MIT study in 2007 told us that 2 percent of the
heat energy between three and ten kilometers below the United
States, 2 percent of that, if we could capture it, represents
2,500 times U.S. energy use. The oil companies know how to
drill to those depths. They know how to fracture rock. They
know how to move fluids around.
If we could take that kind of drilling, apply it to this
enhanced geothermal system, as we call it, EGS approach. I
think we may be there with a new technology that's base load as
opposed to solar and wind which are intermittent, which is
ubiquitous literally from border to border and coast to coast.
The joke I tell is that if the big dig in Boston had been
vertical instead of horizontal, at $12 billion we might be
making electricity in New England right now from deeper
geothermal.
So this is a very interesting breakthrough technology.
Major venture capital firms in the United States are beginning
to take a step. We at Google have put money into a couple of
companies. We're supporting the development of a new heat map
for the United States. I would strongly encourage you take a
look at that.
The Chairman. We're going to run out of the opportunity for
members to ask questions here before we run out of members. I
think we'll try to stick with a 5-minute rule at this point.
Senator Cantwell, you're next.
Senator Cantwell. Thank you, Mr. Chairman. It's been good
this last conversation because it goes to questions that I
have. First I want to say that Senator Dorgan and myself and
other members of the Energy Subcommittee are having a hearing
next week on the continuation of speculation. So thank you.
One, I wanted to comment about your points about
speculation because I do think it's an important issue. We have
seen a $6.7 billion savings to businesses and consumers since
the price has gone down. While part of it might be reduction in
demand, we're seeing an export out of the market of large
volumes of capital that just happen to coincide with the same
time that we have decided to be more aggressive from a
regulatory perspective.
So, $6.7 billion in savings to consumers and businesses is
a big deal to our U.S. economy. Hopefully we might even see the
price go down below $100 a barrel which would be pretty
remarkable that we've seen this run up in such a short period
of time. But my question is really about avoiding this for the
future and you were just talking about this as it relates to
energy efficiency.
I love, Professor Deutch, that you mentioned Scoop Jackson
because I think if he was here he would have said, listen we
went through this in the 1970s and we didn't act. So what is it
going to take for us to act today? My point is we're having
this discussion about drilling verses energy efficiency,
renewables and the investment. I think EIA basically says that,
you know, if you open up all the Outer Continental Shelf, you
did all the drilling that you possibly could do.
You're only talking in the next, you know, by 2030 in the
hundreds of thousands barrels of oil. But juxtaposed to that
their own calculations is you can have enough from wind power
to build the equivalent of 50 new coal plants. So you all have
talked about energy efficiency and renewables and technology.
So I'm just asking you as you look at the next 20 to 30
years, so that we can calibrate this for the American public.
I'm interested in knowing are you saying that the majority of
the opportunity we have before us in driving down that price or
let's just say, because there's many factors there. I'm sure
Mr. Yergin would say there's many factors here. But the
majority of the opportunity that exists before us in having new
supply and getting a reduction in foreign oil has to do with
renewables and efficiency and new technology platforms.
Professor Deutch.
Mr. Deutch. I don't know really how to begin with this. Let
me just say the single most important issue with wind at large
scale and with other renewable sources such as photovoltaics or
central thermal power is the intermittency of the supply. It is
not base load.
So somehow you have to find a way to manage that
intermittency. That means energy storage. So if you said to me
what would be the one single thing which would really make a
difference would be----
Senator Cantwell. My question if you could, if you could
comment on this is. Is the majority of the opportunity before
us on renewables and efficiency and new technology verses
drilling? I think we're having this debate around here as if
everybody thinks that drilling is going to be the majority of
solution impact for us.
I hear you all talking about the big opportunities in these
new areas. That's why I wanted to know where you thought the
majority of the opportunity existed?
Mr. Deutch. It is certainly not in drilling, but drilling
is an important component of doing this because it tells other
producers in the world that we're doing our share in trying to
keep supply up.
Senator Cantwell. Thank you.
Mr. Reicher.
Mr. Reicher. As I said I think the biggest opportunity is
in fact to do more with less. Efficiency is the near term
opportunity, I think. Added to that we're seeing a very
heartening decline in the price of producing renewable
electricity and renewable fuels and I think adding that to the
mix.
So I think the big component is going forward that we can
seize are in fact inefficiency and renewables. Obviously the
traditional fuels are going to be with us for a long, long
time. We need to ensure those supplies. But if we can lower
demand and if we could start to aggressively move alternatives
in, I think that we'll both be better off from an economic
standpoint as well as an environmental stand point.
The Chairman. Senator Corker.
Senator Corker. Yes, sir, Mr. Chairman. Thank all of you
for your testimony. I think most of us have heard or been with
all of you.
The Chairman. Did I cut you off, Dr. Yergin? Did you want
to make a comment before?
Mr. Yergin. Just very quickly. I think there's a little bit
of apple and oranges. I mean wind is growing fast. It's 30
percent of our new electricity added last year.
But wind, unless all of our cars are plug in hybrids
doesn't do much at all for oil because there's only about 2
percent of our electricity is generated with oil. I think in
terms of the off shore, the EIA. It's very interesting what
they have calculated.
But there's the evidence for it, is based upon 30-year-old,
35-year-old technology because there's no expiration. The
example is Brazil started its ethanol program because they
didn't have any oil. In their deep off shore they have just now
discovered something that people are now saying may be as large
as the North Sea. They didn't know it was there.
Senator Cantwell. Not to have a debate, Mr. Chairman, but
we, yes. We've had Brazil. Guess what? Did we see the price go
down? No, we didn't.
Since Brazil's discovery we've had the ride of our lives.
America cannot continue to have this kind of roller coaster.
The Chairman. Senator Corker.
Senator Corker. Thank you, Mr. Chairman. I thank all of you
for your testimony. The thing that I'm struck most by in your
testimony is the commonality ana that is that each of you seem
to believe that we need to do all of the above.
I've just gone through and experienced with others to help
craft a bill. We had a rule that said that unless everyone
agreed, even though some of it may be hard to digest, it would
not occur. As I listen to you and here we have a representative
from big oil, ok. We have a representative, if you will, from
the geeky side of energy, Mr. Reicher. We're glad you're here.
[Laughter.]
Senator Corker. We are glad all of you are here. You have
various, certainly varying backgrounds. I would like to ask the
question. You've listened to each other's testimony. Do you
disagree with anything that and I know you might weight them
slightly different and that's what compromise is all about.
But is there anything that you disagree with that one of
the other witnesses might have said? Yes, sir? Big oil.
[Laughter.]
Mr. Odum. So maybe consistent with the way you ask the
question, largely the answer is no. I don't think there's an
inconsistency. I think this response that I hope is coming
through, it's not this verses that. It's we need to do all of
these, is important.
I think, if I could go back to the game changer comment. I
hope that the game changer here is that we set a policy in
place that's looking 20, 30, 40 and 50 years out and saying
where does the U.S. want to be at that point in time and that
we stick to that policy. Because we'll have lots of variation
in between, but we have to stay focused on that long term
picture.
Senator Corker. Are there any disagreements? The geeky side
is coming up.
Mr. Reicher. Again, the way you phrased the question, we do
need to do everything. It is, though, the relative waiting when
it comes to Federal policy, when it comes to appropriations,
when it comes to tax incentives, when it comes to how we
support R and D. We have limited time. We have limited capital,
both public and private, so that--the devil is unfortunately in
the details.
But indeed, we do need a broad portfolio going forward. If
I had to weight this, I would say the big opportunity to first
cut demand, lower what we need. So whether it's traditional or
alternative supplies that we then meet remaining demand with,
we lower those needs as well.
So cutting demand whether it's respect to transportation
fuels or electricity, we've got to do that first. It's the low
hanging fruit. Low hanging fruit grows back. There are always
continuing opportunities that come up as a result of
technological progress.
So that to me ought to be the going in for all of us across
the board from the traditional to the alternative side.
Senator Corker. Mr. Chairman, I know I have a little time
left. I'd just like to say that these are really diverse
witnesses and they each have said that we need to all of the
above. I am absolutely convinced that if the Senate decided,
that if leadership decided, that we really wanted to pass an
energy bill, that we could pass an energy bill with 70 votes. I
believe that with all of my heart.
I just hope that this summit leads to us, whenever
leadership decides it's in the best interest of the Senate,
that I hope that we will actually pass a bill. I thank you for
having this. I think this testimony has shown from 5 very
diverse people that in the energy community, that people that
actually focus 100 percent of their time on energy, there's
lots of commonality. I think that commonality is represented in
the Senate too. I thank you for this hearing.
The Chairman. Senator Pryor.
Senator Pryor. Thank you, Mr. Chairman. Thanks again for
holding this hearing.
Mr. Odum, let me start with you, if I may? In the Congress
right now, there's several proposals floating around about
drilling. I think the House has a proposal, maybe a Republican
proposal. I think that Senator Bingaman's working on a
proposal. There's been several Senators grouped together in a
bipartisan group.
By the way, Saxby, what's our number now? We started at G-
10. Are we at 20?
Senator Chambliss. We're at 20 today and growing.
Senator Pryor. Twenty today and growing. So we have 20 plus
Senators who are working together on a bipartisan solution. But
let me ask you, if you could help us, all of us in the Senate
understand about drilling. This is something that our group has
talked about.
How much new drilling can the industry handle let's say
over the next 7 years? I'll just pick that number. I mean some
proposals are let's just open up all the Outer Continental
Shelf, some are let's take the East Gulf Coast and maybe some
other areas.
I think the group of 20 Senators, we've really talked about
we want to go where we know where oil is and you have some
infrastructure and some ability to get to that oil relatively
quickly. So help us work through that if you can. How much
should we open? How quickly should we open it?
Mr. Odum. A couple of views on that. Where I would start is
that I think what we shouldn't underestimate is the industry as
a market, the industry's response to the higher prices and the
higher demand for energy. I don't know that a lot of that
response is very visible yet. But we can already see it on the
demand side, for example. You know, demand for oil being down
over 900,000 barrels a day in 2008.
The industry is responding in a similar way. The piece I
have pointed to is an example lately is the, and these are
rough numbers, but deep water rigs, there's a lot of
production. We talked about off shore and how important it is.
Deep water rigs, there's 30 of those in the world right now and
they're all 30 working, every one of them.
Senator Pryor. Right.
Mr. Odum. But in the next 5 years they're going to be
somewhere between 80 and 90 deep water rigs because those are
being built all over the world. So is the industry stressed in
terms of infrastructure? Yes.
Is it stressed in terms of having enough people to do all
of this work? Yes.
But there is a response to that and that is what's
happening and during the process of opening up areas for
leases, doing the proper environmental studies that you do
before you open those areas, is the time that will be used to
build up that infrastructure.
Senator Pryor. Does it make sense to you though that we go
first to where we're fairly confident that there is oil and
infrastructure? Is that a good place to start?
Mr. Odum. I do think it's, in terms of the quickest
production that could come on. The closer you are to
infrastructure, the better off we're going to be. I think
that's true.
I think, you know, I'll go back to something I said in my
statement. I just can't help it, which is we have areas that
are open now, but we're being blocked from actually pursuing. I
don't think we should lose sight of that either and that was my
off shore Alaska example.
Senator Pryor. We're aware of that. We've been talking
about that in our group. Let me ask the group, all the
panelists if I may a question.
That is in our group of 20 Senator's bill that we're
proposing. These ideas we put out. I don't know if all of you
all have seen sort of the concepts that we're all talking
about?
They sound very consistent with what all the panelists said
today. But one of the things we call for is an Apollo style
project to try to get our vehicles off of oil. I think the goal
we set is over the next 20 years we want to see at least 85
percent of all new vehicles sold in the U.S. use non-petroleum
fuel sources.
First I'd just to hear from the panel if you think that is
a good goal? Is it something we should as a matter of public
policy pursue? Then second, I just like to hear from the panel
if there's any concerns that you all have with the G-20
proposal as far as you know.
Mr. Deutch.
Mr. Deutch. Senator, I, first of all want to say how
unfortunate I think it is to use analogies like Apollo Project
and Manhattan Project for these kinds of issues. Those
technology driven projects which were so successful in our
country's history occurred in a completely government sector
creation, application and execution. Here we're talking about
having a technology deployed into a real economy where people
are, you know, making consumer decisions.
So I just want to say that the issue here is much more
demanding. That's the first point. The second point, I would
also want to caution against specific targets, percentage
targets. As again, as I mentioned in my comments I've been
embarrassed about overly optimistic targets in the past.
The third point has to do with actually how are you going
to displace the use of petroleum or natural gas in vehicles? I
would say here the group should have a responsibility of
tracking that they actually have the electricity, production,
storage and distribution to carry it out as it grows. I think
you are going to have some real strains if you really have the
kinds of numbers you were referring to at producing in the
United States the electricity generation capacity that you have
in mind because I don't think we have an environment for new
coal plants or for new nuclear plants.
As we know the renewable, geothermal and other electricity
generating technologies are coming along slower. So I ask you
to pay attention. When I looked at the plan, I haven't looked
at it in great detail, I was worried about the accompanying
management of the electricity supply.
The Chairman. Senator Chambliss.
Senator Chambliss. Thank you, Mr. Chairman. Professor
Deutch, I think what you just said just highlights the
complexity of this issue. I'm more, frankly I'm disappointed
that this room is not packed with all 100 Senators because as
we think through this a lot of times things seem simple. You
just produce more oil. You manufacture more gasoline. All of a
sudden the price comes down.
But you just hit on something that is so critically
important that I do wish that all Senators were here to hear
that. Because it highlights, to me, and as we've been through
this dialog over the last 3 months in our group, how truly
complex this issue is.
Mr. Odum, I want to get back to you on a two part question.
One thing that I hear about as I'm back home, well obviously,
the No. 1 issue, the No. 2 issue and the No. 3 issue is gas
prices. But one thing I consistently hear from folks is that we
haven't had a refinery built in this country in 25 years. We
need more refineries built. I'd like for you to address that as
to whether or not you do have the capacity to manufacture
additional supply.
Second, well, let me let you address that first. I don't
want to complicate my second question.
Mr. Odum. I'll try to keep the answer just as straight
forward. As a company, I'll start by saying that we, along with
our partners, are investing $7 billion in a refinery in Texas
on the Texas Coast, unfortunately in the path of the hurricane
as we speak. But that will effectively increase the size on the
order of a new refinery. It's an enormous project.
I think what should be done is an assessment of all the
expansions that are taking place across the U.S. I think what
you'll find is there is quite a bit of investment in refining
capacity.
The second thing is to look and just to make sure we all
understand how difficult it is then--that's a brown field
expansion, of course, how difficult it is to build a refinery
in a green field area to get a permit. Then be allowed to make
that investment to build a refinery is very challenging, which
is why we're focused on existing facilities and expanding
those.
Senator Chambliss. Second question, from an oil company
perspective. Obviously you're in business to make money. But I
think you're also clearly in the business to try to provide an
energy source to your customers.
What, from an oil company perspective, can be done
immediately to help lower gas prices? I don't mean over the
next 30 days. I mean, I'm talking about realistically whether
it's 12 months or 36 months, but short term, from an oil
company perspective. What do you think could be done?
Mr. Odum. I really wish I had something on the order of a
magic answer to that, which I don't. So I think it's the things
that we've already mentioned on this panel. It's efficiency and
conservation are going to be the most near term, significant
impacts that we can have on prices. I think beyond that it goes
very quickly to the all of the above answer in terms of we need
to bring the accessible oil and gas resources online as quickly
as we can, but be working on these alternatives at the same
time.
Senator Chambliss. Right. There again that goes back to
Professor Deutch's answer there that this thing is so complex
and we've tried to address all of the above. I think it's the
only legislation that's out there right now that seeks to do
that. Obviously you're going to get a lot of criticism when you
seek to address all of the above.
Dr. Yergin, I was recently made aware of a MIT study which
concluded that speculative activity in the futures market was
the driving force behind the increase crude oil prices. The
study largely dismissed any relevance associated with the weak
dollar, the political instability in some producing nations and
the basic supply and demand situation. I'm curious to know
whether you agree with this particular study's conclusion that
a speculative bubble is the leading cause of the price increase
and that these other factors, such as the dollar, such as
production and instability in those countries and supply and
demand for sweet, crude oil had little, if any impact on both
the rise and fall of crude oil prices over the summer.
Mr. Yergin. I haven't seen that study. I've just heard
about it. I think that's probably not one of Professor Deutch's
studies but from somebody else.
I think it's kind of absurd to say that. Look, in my
testimony I cite the Federal Reserve that says between 2003-
2007 a significant part of the increase in the price of oil
before the final run up was because of the weakening dollar. So
to dismiss the dollar seems to me to not make any sense. To
dismiss demand is truly absurd because what we've had since
2004 is a demand shock.
In 2004 Chinese oil demand went up 16 percent. We went into
5 years of the best economic growth that we've had in a
generation and low and behold the best economic growth in a
generation with China and India coming into the picture was
going to drive oil demand. I think, so demand, I think has
actually been the starting point.
There are a lot of other things on top of it. I don't know
if the study also dismisses disruptions in Nigeria losing 40
percent of their oil. Venezuelan capacity being down a million
barrels a day. Mexican capacity going down. Russian production
flattening out. I mean, so these are all part of this mix and
those have been very significant. So in short hand I would say
I look forward to reading that study.
The Chairman. Senator Ben Nelson.
Senator Ben Nelson. Thank you, Mr. Chairman. Hopefully as a
result of this effort and the gang's efforts we'll move from
trying to score political points to finding solutions to the
challenges that we all face and the questions that are raised
when we go home about the energy issues. What we're going to do
to find solutions. Hopefully this will help us along in the
course, I think, that's been charted.
As we look at the efforts to find new sources and we look
for new solutions and new technologies it's reasonably clear
that we do face certain inhibiters and prohibiters to moving as
quickly as we would like to. I'd like to ask a question, for
example, on nuclear. Even if we were able to move the number of
permits consistent with the applications as quickly as
possible, is there U.S. construction capacity to build 23
nuclear plants in the United States in a reasonably short
period of time?
I want to get to the nuts and bolts of what we're talking
about so that we realize that no matter what policy we set
forth, we have to deal with the reality. I'm not negative about
it. I just want to be realistic about it. Would anybody like to
respond to that?
Professor Deutch.
Mr. Deutch. We have looked at this in our MIT study on
nuclear energy 2003. We're redoing that study right at the
present time. It's no question about the fact that there is
ability to build nuclear plants in this country.
I would say to you that 20 plants would take a good deal of
time. I would also point out that----
Senator Ben Nelson. Can you be even more specific than a
good deal of time or?
Mr. Deutch. It would certainly take and I might want to
give you a more precise answer. It would certainly take 15
years, something in that order.
But what I would like to say is we've really reduced the
amount of domestic U.S. industry expertise in nuclear energy.
That would have to be built back over time if it's going to be
a major contributor. That is if it's going to maintain its 20
percent contribution for electricity into the future.
So we have some questions about how to rebuild our domestic
nuclear industry and not just rely----
Senator Ben Nelson. We could accelerate it, but there would
be certain limits on how fast we could accelerate it.
Mr. Deutch. That's correct.
Senator Ben Nelson. Would it help if we took the approach
that I understand the French are taking more of a standardized
plant or a cookie cutter approach so that every new application
doesn't have to involve the technical review that it gets
today?
Mr. Deutch. Yes, but I think that is happening, sir. I
think the industry and the NRC are and the Department of Energy
are going for a standardized plant designs by two or three
manufacturers. The real fact is we can do better. One plant per
year would be nice. We don't have one plant under construction
right now, but we have some capacity. A lot has to be done.
Senator Ben Nelson. How fast will standardization
accelerate the permitting process? Because the rumors and some
facts would indicate that it may take twice as long to get a
permit as it does to build a plant.
Mr. Deutch. Senator, I want to say something. This goes
back to a remark made by Senator Domenici. When I talk about
the barriers to expanding the deployment of nuclear it is not
principally because of licensing.
It has to do with the cost of these plants. It has to do
with issues of giving confidence on waste management. There are
several other elements that are required before nuclear really
takes off. I did not ever imply nor do I believe that the most
urgent matter is to get licenses out of the NRC quicker. It's
these other issues that I think are important.
Senator Ben Nelson. But some of the staffing problems that
were mentioned and making certain that we have them in the
budgets of the agencies are adequate to take care of the
technological work would apply to the electricity grid as well,
would it not?
Mr. Deutch. Yes.
Senator Ben Nelson. Do you have any thoughts about whether
there ought to be a single agency in charge of citing,
permitting, so that it doesn't get caught in the bureaucracy
between DOE and FERC?
Mr. Deutch. I'm going to get myself into trouble here.
Senator Ben Nelson. I'll try to help you out.
Mr. Deutch. I would say I'm a great believer that FERC
should have an authority on nuclear, on all electricity,
licensing----
Senator Ben Nelson. Citing.
Mr. Deutch. Locations, grid, you know, like we have for
natural gas, ability to set high grid power lines. I think the
authority for FERC should be greatly expanded in this regard
relative to the states.
Senator Ben Nelson. If you don't do that, won't you be in a
constant position of ambidextrous, ambiguity between the
various agencies? The left hand doesn't know what the right
hand is doing or they're at odds?
Mr. Deutch. That's my opinion, yes, sir.
Senator Ben Nelson. Is there any other opinion?
The Chairman. Please make the opinion brief.
Mr. Reicher. We're talking about two different things. One
is nuclear licensing which I'm assuming we're continuing at the
NRC. Then in terms of transmission citing we're talking about
FERC.
I would agree that greater authority on the part of the
FERC to build transmission capacity is important, but
environmental standards, we're going to have to deal with State
interest. But we need to build up transmission capacity in this
country if we're going to have any hope of taking advantage of
renewable capacity.
Senator Ben Nelson. Thank you for dealing with the nitty
gritty. Thank you, Mr. Chairman.
The Chairman. Senator Voinovich.
Senator Voinovich. You talked about the fact that the world
has changed. I look at the geo-political situation that we're
confronted with. A couple of years ago I attended a session of
the National Defense University. I walked out of there quite
frightened about the security implications of our being relying
on foreign sources of oil in terms of interruption in the flow
of oil to our country.
What I wonder about is if you look at the fact that someone
else controls the price and the supply and then take into
consideration that we're sending $600 billion, that's what
they're saying, overseas. About 60 percent of that is being
picked up by OPEC nations. If you look at our national debt
that's growing, it'll be over $10 trillion. Since 2001 it's
gone up 40 percent or more and 70 percent of its being
purchased by the Japanese to Chinese and OPEC nations.
One of the things that's of concern to me is that this all
has some national security implications. If somebody controls
the cost of something that's very valuable or can control the
supply of it, and they're also at the same time buying your
debt and if you were in the business world you're probably
going to put that company out of business. I know it's a little
more complicated than that.
But I don't think the national security part of this has
been given enough priority in terms of our considerations. I've
talked about, you know, for years in the Department of Public
Works Committee and I keep talking about harmonizing our
energy, our environment, our economy and our national security.
For some reason we aren't able to do that. That's part of the
problem why we can't get legislation passed.
So I'd be interested in. Is this dimension something that's
of concern to any of you or am I just exaggerating it? I'm
talking about more/less energy, you know, conservation, all the
things you're talking about. But I think there seems to be more
of an urgency here than we're giving.
Mr. Deutch. Mr. Chairman, may I? First of all let me say
that the first time I appeared here Scoop Jackson, this was his
major point about the connection between energy and national
security. I couldn't agree with you more about the severity of
it. It's increasingly strong connection.
Again, my colleague, Jim Schlesinger and I have been
talking about this. It is influencing our foreign policy and
our freedom of action to pursue our other foreign policy
objectives around the world. It is of major concern.
The issue is we can't do away with it because we are
dependent and our allies are dependent. It is something that
has to be managed and it has to be managed more carefully and
more consistently.
Mr. Yergin. I would add to that. We talk about the economic
cost of high oil prices. There certainly is as your suggesting,
a geo-political cost. That cost is also quite high.
Look at what's happening in Latin America in terms of the
shift. Look at the shift. It's about $500 billion a year that
we're spending on oil imports, some of that going to Canada and
so forth.
But we're seeing all together a shift of income on
something like $2 trillion this year from the oil importers to
the oil exporters. With that goes a lot of power. I know Frank
Verrastro mentioned the National Petroleum Council's study.
Two trillion is a big number. It's worth keeping in mind.
Frank headed the geo-political part of the National Petroleum
Council study and I know that that was a very big part of it
that you wrestled with.
Mr. Verrastro. Yes. If I just might add one thing. In the
concept that the world is changing, the G8, the developed
world, in 1997 controlled 65 percent of global GDP. By 2007 it
was 58 percent and the projections are by 2015, it will be 45
percent.
So there's this emerging group of countries that will have
more political weight, more leverage. Some are producing
nations. Some are consuming nations. The landscape is changing.
In that context I think the rule is changing.
I was also on Dr. Deutch's study at the Council of Foreign
Relations. This idea of integrating energy policy into foreign
policy, trade policy, economic policy, environmental policy, we
like to have these silos. But as a practical matter, energy is
a strategic commodity. It's being played around the world that
has a lot more component pieces.
The Chairman. Next is Senator Conrad.
Senator Conrad. Thank you, Mr. Chairman. Thank you so much
for organizing this. Thanks to the witnesses.
We've been engaged in this effort that started as a gang of
10, 5 Democrats, five Republicans that then grew to 16 and now
20. We have other Senators ready to sign up in the coming days.
We came together with the belief that it was urgently required
that we act and that we act in a comprehensive way, that we
don't do just one thing, that we don't bet the farm on one
technology or one approach. But that we'd be broad based and
that we'd look comprehensively.
So our proposal focuses on renewables and conservation and
efficiency, electric plug in and geothermal and hydrogen and
drilling off shore and nuclear and clean coal. Some of a lot of
different things with none of us knowing precisely what has the
greatest ``bang for the buck'' over time. But a belief if we
plant a lot of seeds some of them will grow. That we absolutely
have to have an ability to transition to whatever future
technologies might be available.
Now, whether we have precisely the right goals or precisely
the right numbers attached to them. I don't think any of us
know. I think what we are confident of is that we have the only
bipartisan, comprehensive approach. That other plans that are
now coming along in many cases closely track what we have
proposed. But none of them have the comprehensive approach that
we have suggested.
In listening to each of you it sounds to me like all of you
are endorsing a comprehensive approach. Can I just ask each of
the witnesses if that's the case, if that's what you are
recommending to us?
Mr. Verrastro. Senator, I think it is. The question is the
amount of balance so those relative pieces here and the
sequencing, I think, is important too. Conservation and
efficiency, easiest to do, need to get started now. Technology,
broad array and then keep in mind the timeframes that it takes
to get things. You're preserving options for something else to
come along.
Senator Conrad. I think, Dr. Yergin.
Mr. Yergin. Yes, I think the simple answer is yes. I think
that's right. I think you said it, is that we don't know what's
going to actually have the biggest ``bang for the buck.'' We'll
know a lot more in 5 years. But to get to 5 years you've got to
get going and we've got to be consistent.
Senator Conrad. If I could just interrupt before we go to
the next. On the question of efficiency, I just had a meeting
in Dickinson, North Dakota which is in the middle of the oil
patch. I had a man come representing a Fisher Industries.
They just had done an external review of all their
operations to improve efficiency. They had somebody come in and
evaluate all of their engines, were able to save 34 percent.
Evaluate all of their lighting, were able to save 50 percent.
Some of that lighting was only 1 year old. But they chose to
replace it because they could get such greater efficiency.
So clearly that has got to be part of what we do. One of
the things our group is now looking at is building codes
because we've seen the very successful California effort and
how dramatically their success was in savings there.
Mr. Yergin. Senator, if I could say that one thing too. In
terms of the balance that can have an impact. What you've just
addressed is getting efficiency so it's not at the tail end,
but that it is not something you can look at and say, this is
efficiency. But when you add it up, it is a thing and to get it
into that big piece at the top.
Mr. Reicher. Yes, and I would echo that. It's more than
language. I think the better term is efficiency than
conservation. Conservation is doing less with less. It's
turning down the lights, putting on a sweater, sitting in the
dark, whatever.
Efficiency is doing more with less. It's greater
productivity that we can get out of our economy. The company
you're referring to, they're going to do well. They're even
going to do better. They've cut their costs. They're going to
produce more. So language really matters in this regard. I
would urge you to think in those terms.
The other thing is please don't forget the low income
community, the people who really take in on the chin are people
who are facing high oil and gas prices, who have to heat homes,
buy electricity. You and I spend one or two or 3 percent of our
take home income on energy. They can spend 15, 20, 30 percent.
We have unfortunately neglected the Home Weatherization
Program. We've done 5 or 6 million homes. In 30 years, there
are 28 million eligible homes.
We have put money into LIHEAP. But LIHEAP is a 1 shot buy
down of energy bills. Where as weatherization goes in, 5
people's homes, and the returns are over 10, 20, 30 years.
We shouldn't be doing 100,000 homes a year. We should be
doing a million homes a year for the next 10 years. At least
get to a half or a third of the eligible families.
Senator Conrad. You'll be pleased to know we have $2
billion in this plan for weatherization.
The Chairman. Could you shorten your responses so we can
get to a few more people here before we have the noon recess?
Go ahead.
Mr. Deutch. The Energy Policy doesn't only have to be
comprehensive. It has to be sustained. We've had problems both
keeping it sustained and with your Fisher example, of
efficiency in North Dakota points out the importance of best
practice.
The government has not been good at having programs which
it has deployed best practiced through the economy, especially
to smaller companies and smaller businesses, which are usually
less energy efficient. So getting best practice is very
important.
Mr. Odum. So yes to the comprehensive question. On the
efficiency side, I mean, it is such an opportunity that when
you talk about things and new energy sources that will create
jobs. We have a new business around providing people with those
efficiency ideas to large industrials and others. So it is a
big opportunity.
The shift in technology in the future is to move that to
the front end of the equation and think about how to build
something, not just how to make it more efficient after it's
built.
Senator Conrad. If I could just make a concluding
statement. We've also dedicated $5 billion for battery
technology because almost every expert that has come before our
group said that is a huge opportunity for the country.
The Chairman. Senator Murkowski.
Senator Murkowski. Thank you, Mr. Chairman. Gentlemen,
thank you for your comments, your insights this morning. Hard
to believe that it was just a couple months ago that we had a
similar panel and it was sitting at $145 a barrel and today
it's $100. Some would suggest, oh, the pressure is off.
I can tell you at home in Alaska the pressure is not off.
We just had an energy hearing in the regional community of
Bethel. The discussion about what folks are paying whether it's
at the pump, it's six bucks a gallon at the pump.
Home heating fuel is anywhere between $7 and $10 a gallon.
Food prices are absolutely astronomical, $10 for a gallon of
milk if you can get it. It doesn't make a difference the fact
that we've gone down $47 in the past couple months per barrel.
The pain to the American public is there.
I want to ask a question about just the consistency and the
predictability in our policies. I would suggest from the get go
that there is not a lot of consistency, unfortunately or
predictability for the industry. There in lies a part of the
problem.
We do have to have solutions that are not either/or. We do
have to have a comprehensive approach if we're going to advance
a reasonable energy policy. We're struggling now as we wrap up
this session with how we extend the tax credits for whether
it's wind or some of the other renewables that are out there.
But in the meantime you've got an industry that says, are
we on or are we off? What do we do? How do we invest?
There are some who are suggesting that if we should open up
ANWR for drilling. If we do open up more areas off shore that
in fact what will happen is the message then is that we're not
really serious about the renewables and the alternatives
because we can't get these tax credit extensions for more than
a couple years. Then we send a signal that well, it's more of a
focus on drilling.
How do we get out of this kind of fickle policy as it
relates to the signals that are sent? You're saying, you're all
saying that we need all of the above. We need to do more
domestic production. We need to encourage that and enhance it.
We need to go down the track of the next generation of energy
which is alternatives and renewables.
But our policies are not helping the picture right now.
What suggestions do you have? Professor, you're smiling like,
well that's an obvious. Go ahead.
Mr. Deutch. It sounds to me like all 20 Senators who are
here have exactly the same view of this that you just
expressed, that you've got to do all of the above. So I'm
saying if you all say we've got to do all of the above and it's
all connected, there's not one piece of it that can go without
the other. It doesn't make any sense. It should happen.
I mean, why isn't it happening? Because I couldn't agree
with you more. You can't do this by selecting one thing. I'm
impressed that everybody here sees that it's all of these
things have to happen together.
Senator Murkowski. Are any of you concerned that by doing
more domestically when it comes to increased production that
some how or another we're taking the ball off of advancing
renewables and alternatives?
Mr. Odum. I do think it's important to send the right
signals. So I don't think they need to be incompatible by any
respect. I do think it's exactly the way the message needs to
be communicated is that we need both.
On the renewable and alternative side I think a more
comprehensive program that allows for the kind of support those
programs need early on in life, but have an understanding as to
how then that would go way over time as you expect those
technologies to develop. But a longer term picture would be
part of that answer.
Senator Murkowski. Mr. Yergin.
Mr. Yergin. I've been writing a new book looking at the
last 20, 30 years of energy policy. When you stand back and
look at it you really do see. It's quite surprising how much it
will change over a 3- or 4-year period in terms of commitment,
non-commitment, stop and go.
But it sure seems to me that renewables need to address the
production tax credit but have an awful lot of momentum, public
support, venture capital money. It's a different environment
for renewables than it was even 3, or 4, or 5 years ago. So I
don't think there's a sense that they're going to be lost in
the mix. The question is how to get them from being very small
to start to being a significant part of the mix.
Mr. Reicher. I do think the on again/off again approach we
have taken to incentives for renewables has been a big, big
problem. Major investors come to the table, but pull back
because you get a 1 or 2 year extension we've got to address
it. It may not be that the tax code is the right place to be
doing this.
Other countries do it in different ways. Feed in tariffs
are used across Europe. If we have revenues from selling carbon
credits, that may be another way to do it. The tax code that's
so dependent on appropriations to find an offset, you know,
that's a problematic way to be helping an industry get going.
But I do disagree some with Dan, the renewable energy
industry is in a very immature state. It does need the support.
Traditional industry does enjoy much more permanent subsidies.
If you look at nuclear liability insurance, it's a 20- or
30-year authorization. If you look at the oil and gas industry
many of the subsidies there are in fact long term or permanent.
This one or 2 year, on again/off again support we give to these
emerging technologies just won't work.
The Chairman. Ok. We've got, let's see here.
Senator Landrieu. Mr. Chairman, could I ask if we could
extend this ten after the hour?
The Chairman. I'm glad to extend it to 10 minutes after the
hour. I may not be able to stay for the full time. We do have
another panel starting at one.
So we will just proceed. If people could keep their
questions short and their answers short, that will help. The
line up I've got still here is in the order that people
arrived: Klobuchar, Whitehouse, Salazar, Akaka, Landrieu,
Lincoln.
Senator Klobuchar.
Senator Klobuchar. Thank you very much, Mr. Chairman. Thank
you for your leadership. I'm one of the gang of 20. As a former
prosecutor it was hard to join, but I did.
I had our sign that Senator Conrad rejected of the E, you
know, energy. But I had a question. The reason that it
interested me, this proposal and the work that's being done, is
I thought there was a reasonable approach to look at high
potential for domestic production in certain areas. But also
the thing that really interested me, that it was a bipartisan
effort to try to extend the production tax credits.
I would agree with you, Dr. Yergin. It's been this game of
red light, green light, on again/off again. There's actual
studies showing how 8 months before it goes off the investment
lags.
But the other thing that interested me was just the focus
on the technology and trying to push that with cars and trucks.
I thought you put it best, Mr. Verrastro, when you talked
about, simply that I'm going to use that a 50 percent increase
in efficiency turns $4 a gallon gas into $2 a gallon gas. My
question is of maybe Mr. Reicher, Dr. Yergin, would be about
where that technology really is. Because, you know, I've heard
that maybe we have the technology, but it's a few years out or
we're going to have to buy it from other countries or it's too
expensive.
Mr. Reicher. So let me quickly say we built a fleet of plug
in hybrid vehicles at Google. We converted Toyota Priuses and
Ford Escapes. Our employees are driving them. We hired
professional drivers to go and test them.
The Ford Escapes are getting 50 miles per gallon. The
Toyota Priuses, plug in Toyota Priuses are getting 90 miles per
gallon. We know how to build these cars. I do admit battery
technology has some distance to go.
The good news is you have big automobile manufacturers from
General Motors to Toyota stepping up and planning to build
these. So this is near term technology. No doubt we've got to
continue to improve some things inside.
But unlike, for example, a major move to hydrogen, for
example, this is here today. So it does though require some
government support. I do think incentives, like we provided for
non-plug in hybrids, provided for plug ins would be very
useful, continued R and D funding, Federal procurement for the
U.S. fleet, all those things would help. But it's near.
Senator Klobuchar. The idea here is to shift some of the
resources and the incentives we've been giving to oil and to
put some of those incentives into R and D.
Mr. Reicher. R and D and commercialization incentives.
Agreed.
Senator Klobuchar. One question on cellulosic ethanol.
Minnesota is obviously like South Dakota as Senator Thune was
explaining, has been one of the major areas for ethanol. We
have, I think, 400 of the 1,200 pumps or 1,600 pumps that there
are. We know how difficult it is, this chicken/egg possibility
that we produce, but then there may not be enough vehicles that
are flex fuel. Then there may not be enough places to get it.
So that's why this idea of developing these cars and trucks
that are not only hybrids, but also are flex fuel, have the
ability to go to flex fuel interest me. Also obviously going to
the cellulosic ethanol, the next step with switch grass and
prairie grass and LG and whatever we can do. My question is we
have right now we're on E85, but there's some talk of looking
at more blends going up from E10 to E20. That would be a way of
doing this that would be more mainstream. Does anyone want to
address that?
Professor Deutch.
Mr. Deutch. I think these are very, very important steps
for the country to take. You can go to E80 without, E20, I'm
sorry I'm going the wrong way, E20 without any problem.
Cellulosic ethanol has a tremendous possibility in this country
and it should be pursued as rapidly as possible.
Senator Klobuchar. Alright. Thank you very much.
The Chairman. Senator Whitehouse is next and Senator
Salazar you're after that. Maybe if you could preside for the
balance of the panel? That would be helpful.
Then after you, Senator Akaka, Senator Landrieu and Senator
Lincoln as long as the witnesses are able to stay and people
still have questions.
Senator Whitehouse.
Senator Whitehouse. Thank you, Mr. Chairman.
Senator Domenici. Senator Whitehouse, would you yield for
just a moment?
Senator Whitehouse. Of course I would.
Senator Domenici. I wonder on our way out, are we going to
startup again at one? Is that the plan?
The Chairman. That's the plan.
Senator Domenici. Then I will try to be here so we can
start it together. If you would permit me as we plan to leave
here to make one observation for the record. I really am
pleased to hear that the panel, which is very divergent in many
respects as to where they come from and where their interests
have evolved to lay it almost to rest the idea that America--
let me put a premise before us.
However we are going to go about diminishing our use of
automobiles that use derivatives from crude oil as their source
of energy, however we're going to do that. It seems to be the
testimony that we're going to have to use crude oil for a long
time, almost indefinitely and a lot of it and that we shouldn't
let our supply fall from where it is now. We ought to try to
keep it up.
I have been amazed, Mr. Chairman, at how many people have
confused using American crude oil for this long term bridge,
confused that with, you shouldn't be using crude oil because
you're trying to solve the problem of greenhouse gases. I mean,
there is no question we're going to use automobiles. In doing
that we're going to use our own crude oil or we going to use
somebody else's. I think we finally got that that most people
understand it.
But there seem to be some policymakers who just seem to say
we shouldn't bring any more oil on board because we don't want
to be using it. While you all seem to be telling us we're going
to use it. I think that's a very important thing we finally
have arrived at, Mr. Chairman.
Maybe there are some still out there that don't want to
produce American oil, but I think we're getting there little by
little and we've almost arrived at the time when most
policymakers would concur. I think you've been part of leading
us. I have. I'm glad we're there. I think it's desperately
important we understand that issue.
The Chairman. Senator Whitehouse.
Senator Whitehouse. Thank you, Chairman Bingaman.
Gentlemen, we're in the middle of a near total mortgage system
meltdown in this country. We have a health care system that
burns 16 percent of our GDP in which the Medicare liability
alone has been estimated at $34 trillion. We're burning $10
billion a month in Iraq.
This Administration has run up $7.7 trillion in national
debt by our calculation. There is worsening evidence everyday
of global warming with worsening environmental, national
security and economic ramifications.
In the light of those conditions do any of you seriously
contend that drilling for more oil is the No. 1 issue facing
the American people today?
[No response.]
Senator Whitehouse. Now it doesn't seem so. If we're going
to deal with conservation which strikes me as where most of the
lowest hanging fruit and the highest return investment exists
at this point, particularly immediately. We're looking for as
practical suggestions as we can get into this legislation as it
moves forward.
I've heard you talk about weatherization. I could not agree
more. I think electric vehicles presents another huge
opportunity. Are there other, even potentially smaller and more
technical areas where you think there's room for what I might
call a quick fix or something that isn't to heavy a lift that
will make things right?
One example that comes to mind is in the commercial real
estate industry very often the lease makes the operator
entirely immune from energy cost in big malls and things like
that. There may be a way to solve a specific technical problem
like that. Could you give us a list of what you think are the
best, quick, even if they're not big things, little things add
up.
What are the best, smart, quick fixes that you can think
of, even if they're not very big ones?
Mr. Reicher. Very quickly. More aggressive approach to
applying standards, again, very boring, but if we could make
our refrigerator----
Senator Whitehouse. Boring can work.
Mr. Reicher. Boring can work. Boring has worked
significantly. That's No. 1. I do think building codes.
Building codes. Building codes, there's just extraordinary
things you can do with that.
A third thing I would say is using information technology
to better monitor and manage our energy use. You're seeing the
emergence of that from all sorts of companies. I think that's
going to be very interesting. If the Federal Government did its
own procurement and its own building, its own operations, took
much more of a lead than it is today, 500,000 buildings,
500,000 Federal vehicles. That could be 2 percent of all U.S.
energy use could be a great laboratory.
Senator Whitehouse. Professor Deutch had his hand up also.
If you could touch briefly before you go on whether the
metering in homes is something we should look at to a two way
time of use and so forth. The meter in my house is a pretty
antiquated piece of technology compared to almost any other
piece of technology. It seems to be holding back the IT
development.
But Professor Deutch, let me ask you first.
Mr. Deutch. The word quick sort of startled me because I
think one important area is batteries for storage. I mean that
really is an important point, but it may not be quick. I do
recall that at one time the United States had a 50 mile per
hour speed limit. That would give you immediate, enormous
gains. I don't know how that would go down with the American
people, but I will tell you that it would----
Senator Whitehouse. Have you been on an American highway
recently?
Mr. Deutch. But I will tell you that that would have an
enormous payoff. With respect to smart metering in homes, I
think that that's coming. It will have tremendous effects. It's
certainly one of the things that Mr. Reicher has proposed.
Again, will not come quickly, but it is extremely important and
will have effects.
Mr. Yergin. One quick thing that might make a difference. I
don't know what the state is on for finding support for it, but
within the Department of Energy is the demonstration, the group
that can work with small and medium sized businesses to simply
teach and communicate with them. I suspect that those are one
of the things that funding goes up and down for and mostly
down.
Senator Whitehouse. My time has expired. I thank the Acting
Chair.
Senator Salazar [presiding]. Thank you very much, Senator
Whitehouse. Let me ask a couple of questions and then I think
there's four or five other people that still want to ask
questions so with the patience of the panel, Senator Akaka will
chair the hearing after I leave because I have to leave in just
a second.
Let me say first I think that what we have seen from all of
you as a panel and I thank you for your testimony here today,
is that there is an agreement on a lot of what we have to do.
The question is whether or not there is a willingness and the
political courage to do what it is that you as experts would
ask us to all do. I think that's part of what we're trying to
do with our gang of 20, or 24 now, that is trying to pull
together a comprehensive energy package that is not a stop and
go, but it is comprehensive and sustainable over a long period
of time.
I have a couple of questions to ask of you. Let me just ask
this one of Dr. Yergin and Professor Deutch and that is with
respect to coal. We talked about hybrid. We talked
conservation, briefly on that. We talked about some of the new
technologies like hybrids and hybrid plug ins and things that
are no-brainers that we ought to move forward with.
The question is, I think, Mr. Reicher raised has to do with
whether electricity going to come from for these new national
vehicle fleets. We're going to create nuclear coal. Those are
possibilities.
My question is about coal because I think we have the types
of coal resources. Coal is to us and oil is to Saudi Arabia.
Our problem is that when you put the triangle together that I
think you were describing, Mr. Verrastro, we have the carbon
problems that comes with the burning of coal.
You said in the 2004 that we were going to move forward
with carbon capture and sequestration and develop clean coal. I
don't see frankly much of that happening, not a single
demonstration project of any significance going on around the
country. So is there a role for us to try an include a carbon
capture or sequestration clean coal technology in a very major
way as we move forward with energy policy.
Mr. Yergin. Professor Deutch just finished his big study at
MIT and has thought a lot about it.
Mr. Deutch. Bluntly put, there is no solution to our energy
future without using coal. If you're going to use coal in a
responsible way, we have to do carbon capture and
sequestration. We're woefully behind.
Senator Salazar. Let's agree on that point then, Professor
Deutch and let's say what is it then that we as the U.S. Senate
should do?
Mr. Deutch. I believe that the program which is in place
now for sequestration demonstrations in the Department of
Energy is too small. Too small in both in terms size of
projects, the scope of each project is woefully inadequate in
terms of monitoring and verification and site selection. The
process for setting a regulatory framework where you as a
citizen and I as a citizen will be happy to have the
CO2 sequestered in saline aquifer has not begun to
take place. So we're way behind.
Senator Salazar. The essence, Dr. Deutch, is that I share
this with Senator Bingaman and Senator Domenici. Is that we're
disappointed that we're not moving forward with the Department
of Energy in that way in a more robust way to try to deal with
clean coal technologies and carbon sequestration.
Let me ask you another question because of the shortness of
time here and that is with respect to oil shale. I heard you,
Mr. Verrastro, talk about oil shale and tar sands being very
much a part of our comprehensive energy program. In the 2005
Act we did adopt an oil shale research and development program
which is underway in my State where 80 percent of the oil shale
is located in oil shale reserves.
We have six pilot projects that are underway and a lot of
research and development in situ processes that are moving
forward, but so many unanswered questions. How much energy is
it going to take to heat up the shale to take the kerogen out
of the shale? How much water is it going to take to do all of
that, just from your point of view?
I would imagine you're familiar with the regulatory program
we had in place with the research and development and leasing
program. Is that an adequate program for us to move forward
with the development of oil shale? Why don't I start, Mr.
Verrastro, with you?
Mr. Verrastro. Senator, I think you fit two of the pieces
together. The climate change piece to me is the game changer.
I'm going to get to oil shale in a second, but one of the
things that happening now that you're going to see next spring.
We've stopped the development of at least 30 coal-fired power
plants that I'm aware of because of either uncertainty or
increased cost or regulatory burdens. We can't scale up nuclear
in time.
Renewables have a great piece, but we have to solve the
intermittency problem, the near term fix if demand stays high,
is the compressors. We're going to go to gas. So while we have
increased domestic production of gas we're going to use a lot
more of it than we think we are and if the price goes up people
are going to see in their electricity bill the increased price
of gas just like we saw with oil.
On the issue of shale, after I left the government I worked
with Tosco before I went to Pennzoil. So I'm familiar with
shale in Colorado. There's a couple of different kinds of
shale. Technology has certainly moved.
The big difference between the Green River Basin and the
Bakken, for example, is that with horizontal technology now you
can actually go in, if the rock is permeable and porous and
push the oil through and produce it as liquid conventional
fuel. In Colorado if you have to mine it and re-tort it. There
are other problems but technology is moving and actually Shell
has a project where they actually heat the subsurface for
several years. They heat it up so that you can move it in a
liquid state.
I think the technology funding has to go forward, but it is
a question of priorities and timing. So as we go forward this
whole climate change debate has to be rolled into the security
debate.
Senator Salazar. Any other comments? Let me just thank all
of you. Senator Akaka, it's your turn for questions, also your
turn for chairing the Senate.
Senator Akaka [presiding]. Thank you very much, Senator
Salazar. Let me say thank you to the panel, an elite group of
experts in energy. Many of my questions have been answered.
Just one that has been on my mind, I'm looking for the best
way, and this has to do with policy. The best way to
incorporate carbon reduction policies into a national energy
policy to ensure consistency and we haven't been consistent.
There's no question about that. You reveal that. But my
question, what is the best way to do that, to incorporate
carbon reduction policies with our energy independence and cost
and reliability objectives?
Mr. Deutch. I think the single most important thing we
could do is to set a significant charge for carbon emission
from all fossil fuel uses, in transportation, electricity and
elsewhere. There are two ways of doing that, the cap and trade
system or a carbon charge directly. I would be happy with
either one.
I think that's a question about which goes down better. I
think there are reasons to prefer a direct carbon charge with
recycling of that money to the economy. But that is the single
most important thing we could do. Incidentally, it would permit
you to get rid of a lot of other regulations because once you
have a carbon charge, you add some of these offer incentives
we've reached, more would be redundant.
Mr. Reicher. Senator, I would add just from a
jurisdictional standpoint one of the challenges you face is the
Department of Public Works has authority over that kind of
regulation. Senate energy deals on the energy side of this
equation. I think we've really got to take a more integrated
approach to how we're going to deal with these, this mix of
energy, environmental and economic and security problems that
you've heard from the panel. Setting the price on carbon is not
going to be adequate.
These energy fixes we're talking about are not going to be
adequate in and among themselves. We need to do both. From a
political standpoint these need to be integrated analytically
and beyond.
Senator Akaka. Thank you.
Senator Landrieu.
Senator Landrieu. Thank you all very much. I want to really
again just say how pleased I am with the outcome of the summit.
I was one of the ones that encouraged the summit to take place.
As a member of a group that has been working for the last
several months. Our group has grown from an initial 10 to now
20 with Senator Conrad and Senator Chambliss who have given
extraordinary leadership to this group. We have many more
Senators very interested in our comprehensive approach.
Let me ask the question. Senator Whitehouse was a very
experienced prosecutor, deftly crafted his question to get a
non-answer from you all. But let me try to ask it this way.
Again, you stated this, I believe several times, but I did
hear you say that more domestic production is essential to this
challenge before us. Is that correct or not correct?
Mr. Yergin. Senator, let me first say that down here at
this corner of the table we have the strong sense that we
haven't quite come to grips with that question. Now you
explained why we couldn't do it.
Senator Landrieu. He is very crafty.
[Laughter.]
Mr. Yergin. We're sort of saying what happened here. How
could we miss that?
I don't want to speak for everybody, but my sense is that
we're all saying that it goes back to either/or that domestic
production is certainly part of the picture. If we look at the
U.S. energy balance, I mean where else? I mean we're going to
have alternatives, renewables. They're small, but growing,
great potential for technological change, big conservation has
a lot to offer.
Then there's conventional energy which is where most of our
energy comes from.
Senator Landrieu. Mr. Reicher, let me ask you. A group of
Democrats, and I am one of them, but there's a group to the
left, way to the left that really appreciates your focus on
this. So I want to ask you this question. Do you believe that
more domestic production is a part of this equation?
Mr. Reicher. We clearly are getting most our energy today
from traditional sources. I expect we will be, that will be the
case for some number of years into the future. So do we need to
be producing more natural gas in a responsible way,
domestically? Yes, I think that is something we need to be
doing.
Senator Landrieu. Do you think we have to produce more oil
domestically at least for the next 5 or 10 years?
Mr. Reicher. I think you know we have a limited domestic
supply of reasonably attainable, economically obtainable oil.
So I just think the risk we run here is that if we overstate
what we can do domestically in terms of our oil supply. What
results from that is we take our attention away from real
options that I think we've all stressed which is what can you
do with efficiency on the front end to lower demand.
What can you do in terms of vehicle technologies?
Senator Landrieu. Professor Deutch. Go ahead.
Mr. Reicher. Let me just add one more thing.
I do think that there are base load renewable resources. I
mentioned geothermal being one of the major ones. I think
biofuels offer a significant opportunity. So I just want to be
sure that as we push for more domestic oil production let's be
realistic about what we really can increase. Let's make sure
that we don't in the process take our eyes off some of these,
probably more significant, opportunities we have.
Senator Landrieu. I think you heard from the group of us
that that is what we're trying to accomplish, is a balance
between pushing for more domestic reserves of oil and gas as we
push for these other efficiencies that you have so eloquently
spoken about.
But Professor Deutch, would you please comment on this
limited domestic endowment issue. Because I really take issue
with the charge that we hear around here that there's just not
enough oil and gas anywhere to do any good. I point to the Gulf
of Mexico, which I'm familiar as you might imagine representing
the State of Louisiana, that in 1982 the estimates from MMS
were that there were like 3 billion barrels of recoverable oil
in the Gulf. We've been drilling for 20 years since and today
that estimate has now gone up to 30 billion barrels of
recoverable oil.
So would one of you or any of you comment on is it true or
have I been mislead that technology is enabling us to find more
domestic sources than we thought we had before of both oil and
gas?
Mr. Deutch. Senator, I think it's clear that over time
we've been using up our conventional oil and gas in the lower
48 and the Gulf and even in Alaska. As we use up the
conventional oil and gas low cost production, we have to go to
higher cost methods to either find new oil or get more oil in
place out. So the trend, there's obviously more oil and more
gas reserves in the United States and off its coasts, so you
have plenty of oil there to pay the cost of getting it done.
But I want to underline that doing something to increase
U.S. production of natural gas and oil is an integral part of a
comprehensive approach to our energy future. You cannot do it
by growing it or walking around it. Especially it is impossible
to go to countries in the Persian Gulf and say you must
increase your production if they don't see the United States
making some effort to keep up its production.
So I want to be clear that something has to be done to
improve our production of oil and gas in the United States.
Senator Landrieu. Dr. Yergin.
Mr. Yergin. Yes. I think the point that we're asking other
people to increase their production. Frank mentioned the
numbers in the growth in world demand. But we don't necessarily
want to be part of it.
I think when you look at the history of it, you see there's
always this pessimism and technology changes. It changes on the
alternatives and renewables, but also changes in terms of the
production of oil and gas. Discoveries are made and then it
turns out the ultimate recoverable reserves are much greater
because you learn more about the field.
So that the kind of estimates that are there now for other
off shore areas are very preliminary. I think the other thing
that gets lost in the discussion goes back to something very
important Frank has said. If coal becomes more limited, nuclear
doesn't happen with the speed that people might anticipate,
that means we're basically going to burn more natural gas and
electric generation. That's the course we're on.
When you explore off shore, you're not only exploring, as
you know, for oil, you're also exploring for natural gas. So
you're also exploring for keeping the lights on. So, you know,
it's not only what we're going to put in our cars, but it's
also the electricity side of it. I think that often gets lost
in the discussion. That's going to be very important issue.
Frank mentioned what we might be looking at in terms of
electricity.
Senator Landrieu. Thank you. As a pro-drilling Democrat I
couldn't think of a more positive note to end on. Thank you
very much.
Senator Akaka. Let me thank the panel very much for your
valuable responses and your contribution today. Thank you. This
panel is concluded.
[RECESS].
The Chairman [presiding]. Ok, thank you all for coming back
together here. This is the second panel on our energy summit.
We'll try to have the same format here and ask our speakers to
summarize the main points they think we need to try and
understand in 3 to 5 minutes each. Then that will give us a
chance for questions by Senators.
I hope we have a group of Senators who are still planning
to arrive here. As I think we're all aware, as the Friday
afternoon progresses it gets a little harder. We have a very
distinguished group of folks to testify on this second panel.
Mr. John Krenicki, who is the Vice Chairman, President and
CEO of General Electric Energy Infrastructure.
John Rowe is the Chairman and CEO of Exelon Corporation.
James Roberts is the CEO of Foundation Coal Corporation.
Douglas Steenland is the President and CEO of Northwest
Airlines.
Mr. Gary Cohn is the Vice President, Managing Director and
Chief Operating Officer of Goldman Sachs. Thank you very much
for being here.
Rick Wagoner is the chairman and the CEO of General Motors
Corporation. We very much appreciate you being here.
Let me just, before calling on the witnesses to make their
statements, let me see if Senator Domenici had a statement he
wanted to make.
Senator Domenici. Mr. Chairman, I do not other than to say
thanks to the witnesses. We've been asked to hold this event,
you and I, by our leadership. What a response we've received
when people like these take of their time.
I hope some Senators come to share with us the opportunity
we have to talk to those who are in the trenches in a real
sense and a big part of the energy policy and energy problems
that confront our country. I thank you for presiding. I'll be
here for as long as I possibly can.
Hope that the witnesses know that we will consider what
they say and what they share with us that's particular to their
businesses. We clearly understand that that's appropriate and
that's why you're here, to share what you think that you know
about this energy crisis based on your reputations and your
work. We thank you for that.
Thank you, Senator Bingaman.
The Chairman. Thank you very much. Let me just say at the
outset that all of the written statements that have been
developed here will be included in the record in their
entirety. So Mr. Krenicki, why don't you go ahead and start.
We'll just go across the panel.
STATEMENT OF JOHN KRENICKI, VICE CHAIRMAN, PRESIDENT AND CEO,
GENERAL ELECTRIC ENERGY INFRASTRUCTURE, ATLANTA, GA
Mr. Krenicki. Ok. Thank you, Mr. Chairman. I'm John
Krenicki. I run the energy businesses for General Electric. I
appreciate the opportunity to participate in today's energy
summit and would like to commend you and Senator Domenici for
your leadership in attempting to forge a bipartisan response to
our current energy challenges.
GE's energy businesses offer a diverse portfolio of
products and services in the area of fossil power generation,
gasification, nuclear, oil and gas, water, transmission
distribution, smart metering and renewable energy technologies
such as wind, solar and biomass. I know policies for all of
these technologies are of interest to you and your committee.
But today I would like to focus on just one in my opening
comments, the production tax credit for renewable energy.
By the time the gavel falls on the 110th Congress the world
will know the answer to a very important question, will
Congress and the U.S. Government be a reliable partner in the
quest for a cleaner, more secure, energy future or not? Since
entering the wind industry in 2002, GE has invested over $700
million in technology, increased wind turbine production six
fold and tripled our U.S. wind turbine assembly sites. We've
expanded capacity from 10 wind turbines per week to over 13 per
day. We have grown renewable energy jobs at GE to more than
2,500.
GE has also tripled the number of its suppliers in the wind
industry. Who now cover 15 States and account for an additional
2,500 jobs. Last year we announced that two blade manufacturing
companies will build brand new facilities in Aberdeen, South
Dakota and Newton, Iowa to supply GE wind turbines, adding an
additional 1,250 jobs.
The renewable energy tax credit is the foundation of this
growth. In 2002 when we entered the U.S. market when energy
added only about 1 percent of the new electric generating
capacity installed that year. Last year, 34 percent of the new
electrical generating capacity was wind.
We're proud to have played an important role in one of the
world's most successful renewable energy policies. Mr.
Chairman, you and your colleagues should be very proud of that
success. However, complacency and inaction bear consequences.
According to a study last year, Navigant Consulting
concluded that PTC expiration would place 76,000 jobs and more
than $11 billion in clean energy investment at risk. There is a
global dimension as well. The connection between a stable
domestic policy and a vibrant export sector for renewables is
exemplified by Germany, whose incentive system has earned it a
reputation as the world's leading green power country.
Wind power technology is the country's second leading
export for Germany after automobiles. Yet this year the United
States, thanks to the PTC, will surpass Germany in electricity
generated from wind energy.
How does the United States win by stumbling into an outcome
that disrupts the sufficient deployment of clean energy? By
extending the PTC you will reaffirm United States global
leadership in the deployment of clean, carbon free, renewable
energy and send a signal that Congress stands ready to join
others in addressing the more complicated problem of climate
change. We are ready to help.
Thank you again for the opportunity to participate in
today's summit. I look forward to your questions.
The Chairman. Thank you very much.
Mr. Rowe, please go right ahead. Thank you for being here.
STATEMENT OF JOHN ROWE, CHAIRMAN AND CEO, EXELON CORPORATION,
CHICAGO, IL
Mr. Rowe. Thank you, Mr. Chairman and members of the
Senate. I'm the Chairman of Exelon in Chicago. Through our
retail utilities, ComEd and PECO, we serve over 12 million
people which is the largest number of any electric company in
the Nation.
Our generation company has fossil, hydro, nuclear and
renewable generation facilities. Indeed our nuclear fleet is
the largest in the Nation and the third in the world. I have
had the privilege of chairing or chairing in the past, the
Nuclear Energy Institute, that is an electric institute in the
bipartisan National Commission on Energy Policy. I commend to
the members of this committee NSEP's reports on climate change
in increasing our energy security.
Our three priorities at Exelon are quite simple.
First, we believe Congress must pass legislation that
limits greenhouse gas emissions. We know that is what brings
you all here.
Second, and I apologize for a somewhat hackneyed phrase. We
believe we need something akin to a Marshall Plan to jump start
the whole array of low carbon energy resources.
Third, we believe we need continued support of wholesale,
competitive markets.
I want to applaud you, Chairman Bingaman for your early
leadership on carbon cap and trade systems and also for
including cost containment provisions. I believe these
components are necessary as Congress seeks to pass a bill that
slows, stops and reduces greenhouse gas emissions while
protecting the American economy. We need an economy wide bill
with realistic targets and timetables and effective cost
containment mechanism and rate protection for our customers by
allocating allowances to regulated electricity delivery
companies. Our industry needs prompt action or it will be ham
strung in making the right investments.
The reason I made the metaphor to the Marshall Plan is that
nothing else will suffice. Changing from a carbon based economy
to a low carbon economy is a very, very big deal. We obviously
need every form of national commitment to energy efficiency
possible.
Our research confirms that in some ultimately unknown
quantity but it's very substantial. Energy efficiency is our
most cost effective approach to lowering our carbon intensity.
We need a firm commitment to low and zero carbon and greenhouse
gas emitting generation resources.
That commitment should include an expanded loan guarantee
program for nuclear and I thank Senator Domenici, especially
for his work on this for a number of years. It also should
include further support for carbon capture and sequestration.
Here I would commend Chairman Boucher for his work in the
House.
I agree entirely with my colleagues from General Electric.
We need a commitment to a production tax credit for renewables.
One that lasts. The on again/off again PTC is untenable.
Indeed, energy policy must be sustainable in this country if
energy is to be sustainable.
Finally, we need Congress' continued support of
competitive, wholesale markets. The FERC has just completed a
comprehensive re-examination of wholesale markets and has taken
further steps to encourage energy efficiency and demand
management.
Those seeking to undo competitive markets would undo work
that the Congress and this committee has done for 30 years. To
change course at this time in the face of massive investment
requirements would be a grave error. Recent work by the Brattle
Group predicts that the electricity industry will need $1.5
trillion in investment over the next two decades, plus the
investment to address climate change.
You simply can't do that efficiently without competition.
Recent studies show that competitive markets have been the most
friendly for wind generation development and also for inducing
customers to respond to rising prices by adjusting their
electricity demand.
Mr. Chairman, members of the Commission, we thank you for
your attention. We urge early action on all three of these
fronts. Meanwhile, we at Exelon have put together a plan to
reduce, offset or displace our carbon footprint by 2020. We are
hard at work on it and we'll try to do our part.
Thank you very much.
The Chairman. Thank you very much.
Mr. Roberts.
STATEMENT OF JAMES ROBERTS, CHIEF EXECUTIVE OFFICER, FOUNDATION
COAL CORPORATION, LINTHICUM HEIGHTS, MD
Mr. Roberts. Good afternoon. My name is Jim Roberts. I am
the Chairman and CEO of Foundation Coal Corporation, one of our
Nation's leading coal producers.
I am also the Chair of the National Mining Association, the
National Trade Association and voice of the U.S. Mining
Industry. I thank you for the opportunity to appear today and
participate in the summit on behalf of both Foundation Coal and
the NMA.
There are three main messages or points I would like to
leave you with today.
The first is quite simple. Coal is not merely important to
the United States and the world, it is indispensable. Coal is a
prime source of energy throughout the world including here in
the United States where it generates more than 50 percent of
our Nation's electricity. We cannot maintain U.S. electric
reliability and energy security without coal nor can we
realistically expect the increased use of coal elsewhere in the
world to stop or reverse course.
My second point is in the response to those who would argue
that increasing the use of coal in addressing climate change
concerns are irreconcilable objectives. What is irreconcilable
is trying to address climate change without supporting, full
boar, the development and deployment of advanced clean coal
technologies including, most importantly, carbon capture and
storage, otherwise known as CCS. Between 1990 and 2030 global
CO2 emission are projected to increase by
approximately 99 percent.
If the United States and every OECD nation stopped using
coal altogether the projected increase in CO2
emissions would still be 75 percent. In other words we could
tear down every coal plant in the United States, in the entire
industrialized world tomorrow without seriously addressing
climate change concerns. To be clear, Foundation Coal and the
National Mining Association support the timely adoption of
comprehensive Federal climate legislation.
The current state of indecision on climate change is
holding us back as a Nation from doing the things we need to do
today to meet our current and future energy needs. But taking
coal from our energy mix is not an answer. Today's energy
crisis is about cost or price, principally the price of
gasoline. If we don't begin to act soon, tomorrow's energy
prices, as it relates to electricity will not just be about
price, but about supply as well.
It's one thing to pay a high price for energy. It's another
not to have it there at any price. All one need do is read the
2007 long term reliability assessment from NERC to see the
handwriting on the wall as to the coming crisis in electricity.
The question or challenge before us is how do we keep using
coal to meet our energy needs but reduce CO2
emissions? The answer is carbon capture and storage.
This leads me to my third point that the United States,
namely the Federal Government must do much more to support and
accelerate development and deployment of CCS. Over the past 10
years the Federal Government has spent approximately $3.5
billion on clean coal R and D and demonstration projects. In
the context of the challenge we face this is wholly inadequate.
There's no greater example of Federal efforts falling short in
this arena than the Department of Energy's incomprehensible
decision to withdraw support from the FutureGen Project in
Mattoon, Illinois.
We walk a fine line in attempting to deal with the energy
climate equation. We need to push technology as hard and as
fast as we can. Yet we cannot afford to get ahead of
technology. Carbon mandates are restrictions that are not in
sync with technology development, threatens great harm to our
economy and the well being of our citizens and in turn public
support of our efforts to address climate change concerns.
Let me speak to those who express support for carbon
capture and storage and other advanced clean coal technologies
but who suggest that we should not build any new coal fired
generating capacity in this country until CCS is fully
deployable. There are two very serious problems with this
thinking.
One, by depriving us of much needed electricity generating
capacity in the near term that threatens to drive us closer to
the crisis in electricity supply of which NERC has warned.
Two, the moratorium on new coal fire capacity that does not
include full scale CCS deployment will stop CCS development
dead in its tracks.
It is important to understand no one will ever build an
IGCC plant with CCS if we don't first build several IGCC plants
without it. Likewise, we can't expect anyone to build a plant
with a 65 percent carbon capture if we don't first build plants
with 20 percent capture. As with any kind of technological
advance we have to walk before we can run.
Michael Phelps would not have won eight gold medals in
Beijing, if years ago he would not have been allowed in the
pool until he was able to set a new world record. We have to
start somewhere. We need to push advanced clean coal
technologies including CCS as rapidly and as hard as we can.
But we cannot afford to ban all new coal plants prior to those
technologies being commercially ready.
To do so would threaten our economy and our energy security
and would have the devastating impact from a climate
perspective of squashing the very technology, CCS, that is
absolutely central and an essential element of any realistic
climate plan. We need to put the pedal to the metal on clean
coal and CCS, not slam on the breaks on anything short of
perfect. Otherwise we will solve neither the energy nor the
climate challenges ahead of us.
I thank you for the opportunity to appear today. I look
forward to your questions.
The Chairman. Thank you very much.
Mr. Steenland, go right ahead.
STATEMENT OF DOUGLAS STEENLAND, PRESIDENT AND CEO, NORTHWEST
AIRLINES, MINNEAPOLIS, MN
Mr. Steenland. Thank you, Mr. Chairman. Thank you, Senators
for the opportunity to appear today. I appear today in my
capacity as Chairman of the Board of Directors of the Air
Transport Association and as the CEO of Northwest Airlines.
I'd like to make the following points.
First, a strong U.S. airline industry is essential to the
strength and growth of the U.S. economy. High oil prices are
challenging our ability to meet the needs of our passengers and
the communities we serve across the country. In today's
environment, airlines are pure price takers. We have no choice
but to purchase fuel irrespective of the price.
In addition to the historically high prices we face, we
also have been faced recently with very significant price
volatility which is making business planning extremely
difficult. Fuel is now 40 to 50 percent of total operating
costs of U.S. airlines. From June 2007 to July 2008, oil went
from $67 a barrel to $147 a barrel, a 119 percent increase.
That $80 increase has added over $34 billion to the U.S.
airlines 2008 fuel bill. Unstable, unpredictable, high oil
prices have led to airline fare increases and significant
service reductions. To help address that we advocate for a
multi-faceted energy policy which includes the following.
First, expand domestic supplies by environmentally
responsible drilling. Today we import nearly 5.5 billion
barrels of oil a year at more than a $600 billion cost to the
U.S. Looking to increase supplies, including lifting the ban on
OCS drilling will help reduce oil prices and boost U.S. and
local economies.
We believe this can be accomplished safely from an
environmental standpoint. As our own actions demonstrate we are
also very strong advocates of conservation and technology.
Unfortunately today, we cannot partake, as I said before, of
alternative fuels.
In addition to addressing critical supply issues, we also
want to address what we believe is excessive speculation in
energy markets. In the opinions of many the high volume of
paper future investments in contracts have helped accelerate
the run up in oil prices. From 2003 to July 2008, commodity
index investments grew from 13 billion to over 300 billion and
commodity prices tripled in that time.
Changes in supply and demand fundamentals and the strength
of the devaluation of the dollar while contributors cannot
alone account for the massive oil spike we have witnessed. We
believe that the amount of financial trading that has come in
has clearly facilitated those price increases. We're not alone
in that view.
Experts around the world have also acknowledged this
linkage. Whether it's the United States Conference on Trade and
Development, reports that have come out of MIT, Lehman Brothers
and Citibank, a report earlier this week introduced by any
number of Senators and where actions by the government of
Japan, the European Central Bank and OPEC leaders have also
acknowledged this linkage. We suggest that the mere threat of
legislation to curb excessive speculation has contributed to
the bursting of the oil bubble that we have seen recently where
over the last several weeks oil has gone from $147 a barrel to
$100 a barrel yesterday. While this relief is important, we
hope that permanent legislation will be enacted to help
facilitate this.
Most of all we need transparent, well regulated markets to
prevent excessive speculation from returning. To ensure that
regulators can----
Senator Domenici. Could you hold a minute, sir?
Mr. Steenland. Sure.
Senator Domenici. Senator Bingaman, could we have him go
back about two sentences or three in his testimony? I missed
something in there.
The Chairman. Yes. Is it possible to just repeat the last
few sentences of your testimony there so Senator Domenici
could?
Mr. Steenland. Sure. I would be glad to.
The Chairman. Thank you.
Mr. Steenland. Recently the oil market's prices have gone
from $147 a barrel to $100 a barrel over the course of the last
several weeks. We believe a contributor to that reduction has
been the introduction and the prospect of legislation to
address financial speculation in the commodity markets. We need
transparent, well regulated markets to prevent excessive
speculation to ensure that regulators can detect and address
concerns that could lead to a big run up in prices and to
reduce volatility caused by big swings and speculative
activity.
We urge the Congress to reach a comprehensive, bipartisan
approach to energy legislation before this session ends this
September. Thank you very much.
The Chairman. Yes, Mr. Cohn, go right ahead.
STATEMENT OF GARY COHN, CO-PRESIDENT, MANAGING DIRECTOR AND
COO, GOLDMAN SACHS, NEW YORK, NY
Mr. Cohn. Mr. Chairman, Senators, thank you. Good
afternoon. I'm Gary Cohn, President and Co-Chief Operating
Officer of Goldman Sachs.
Thank you, Senators Bingaman and Domenici for allowing me
to participate and share Goldman Sachs' perspective. There are
few topics more important than the subject of this hearing.
Finding a solution to achieve a more secure, reliable,
sustainable, affordable energy future for American people is
very important. Goldman Sachs is a global investment bank and
securities firm with more than 30,000 people worldwide. Our
people are involved in numerous aspects of the energy markets.
As an active participant in the energy sector, our strategy
is to act as an advisor, a financier, a principal and a manager
of risk on behalf of our clients while operating at the center
of global, financial markets. We work as an advisor to numerous
leading energy companies worldwide.
As a financier for global energy projects and companies we
have helped to raise over $400 billion in the last 5 years.
As a co-investor in a diversified portfolio of energy
companies, we have invested more than $8 billion in companies
globally that employ more than 100,000 people worldwide.
As a manager of risk, on behalf of our clients, we have
facilitated approximately $220 billion in hedges across a
variety of industries and products from companies in the
transportation, oil and gas, power, metals and agricultural
industries.
Neither private capital alone, nor government policy is
enough to incentivize the development of the advanced energy
technologies our country needs. We must work together to bring
balanced solutions. Otherwise high energy prices will be the
only catalyst the market will respond to in order to invest in
the modern energy economy.
Such solutions should also address the importance and the
pressing challenges of protecting our environment and
addressing climate change. Over the past decade, Goldman Sachs
has invested heavily in the development of clean energy
technologies including wind, solar, geothermal, biofuels and
clean coal. We also have an environmental policy framework in
place that requires our firm to take into consideration the
impact of all our investment decisions may have on the
environment.
Again, I commend you for convening this forum. Thank you
for allowing me to share Goldman Sachs' perspective.
The Chairman. Thank you very much.
Mr. Wagoner, we're glad to have you here. Please go right
ahead.
STATEMENT OF RICHARD WAGONER, CHAIRMAN AND CEO, GENERAL MOTORS,
DETROIT, MI
Mr. Wagoner. Thank you very much, Mr. Chairman. Pleasure to
be with you today. I really appreciate the opportunity to speak
on such an important topic.
Last year Congress passed an energy bill that focused
primarily on promoting energy conservation. Among the
provisions in that bill was a dramatic 40 percent increase in
fuel economy requirements for cars and light trucks. General
Motors and our competitors are hard at work making sure that we
can achieve this objective which requires a huge commitment of
research and development, engineering and capital spending and
access to capital to fund those investments.
We believe last year's energy bill has laid the ground work
for a comprehensive and forward looking U.S. energy policy, one
that addresses both energy demand and energy supply. Speaking
for GM, we think it's time for the U.S. to take control of our
energy future. As a Nation we have the capability to do this
and faster than most people think.
It will require a massive investment in new technologies.
It will require a commitment from all sectors of the U.S.
economy, a partnership among government, industry, academia and
the American public. It will require a constancy of purpose, a
long term national commitment to improving our energy security
despite the inevitable short term swings in the price of oil.
Most importantly it will require leadership, direction and
vision from our government. In this regard I want to commend
the work that the bipartisan gang of 10 is doing. This
comprehensive approach of this group to promote new energy
supplies and encourage the development of and purchase of
advanced technology vehicles is laudable. Many of the
provisions being developed by this group should be included in
the next energy bill.
Looking specifically at the automotive sector, our industry
has a real opportunity to move away from our traditional,
almost complete reliance on oil as the source of energy that
powers our vehicles. In particular we see tremendous
opportunities to develop and promote the use of biofuels,
batteries and hydrogen fuel cells. To achieve the improvements
that are possible in the transportation sector, it's important
that we have a clear consensus on what's required to bring
these new technologies to market in volume.
We as automakers need to take the lead by developing the
technologies and then driving their cost down so consumers can
afford them. But there are other important roles that need to
be played as well. In short, we need a clear, long term policy,
consistency of direction, alignment of regulation and a strong
commitment from all sectors of American society to develop and
implement the technologies that will allow us to achieve our
mutual goals.
Thank you and I look forward to your questions.
The Chairman. Thank you all for your excellent testimony.
Let me start and ask a question or two and then call on Senator
Domenici.
Let me ask you, Mr. Wagoner. One of the issues that
obviously we're struggling with here this week and the next
couple weeks in Congress is the issue of additional government
loan guarantees or loans for the auto industry. Could you
describe your thoughts? We passed a bill that was signed into
law by the President that made provision for loans to retool
the auto industry.
What more do you think is appropriate or essential and what
would be the benefit of Congress doing more in this area as you
see it?
Mr. Wagoner. Yes, sir, Mr. Chairman. I think what we need
to do next is enable those loans which were authorized under
the Energy Security Act last year, 25 billion direct loans for
suppliers and auto makers of all varieties. We need to provide
the appropriation to enable those authorized loans to be
extended. We need to very quickly draft the regulations to
allow the loans to be extended. We need to make sure that the
regulations under which they're extended are reasonable and
consistent with the objective of the Energy Act.
If that is done, then I think the $25 billion included in
the Energy bill last year would be a very helpful in enabling
the industry to move more rapidly. Particularly in the context
that since the bill was passed last year, the capital market
conditions have worsened significantly. So the availability of
credit is much tighter for companies of all shapes and sizes
whether they be the smallest supplier or the largest OEM.
Obviously the conditions in the U.S. economy and the U.S.
market have weakened dramatically. So the ability to fund these
investments from our normal cash-flow from our business is
significantly retarded. So I think, particularly right now, if
Congress could move rapidly to enable the loans that were
approved to be funded and dispersed.
Again only against projects which bring significant
improvements in fuel economy. That would be a tremendous help
to the auto sector.
The Chairman. Let me just be sure I understand. Your
thought is that the authorizing language that we included in
last year's bill was the appropriate language to put in. You're
saying we now need to fund the provisions that were previously
enacted. Is that right?
Mr. Wagoner. What I'm saying is we think the amount 25
billion is a very good amount to ensure that we can stay on the
path that we've been on. Regulations do need to be written.
Funding needs to be authorized.
I would say the specific terms that were included last year
are not comprehensive enough from our perspective. So we would
like to suggest some amplification of those terms. I think very
much in the spirit of the initial terms that were suggested.
But I would say somewhat amplified.
The Chairman. Could you be a little more specific as to
what you mean there by amplifying the terms?
Mr. Wagoner. Right.
The Chairman. What are the problems that you see with the
language that we enacted last year?
Mr. Wagoner. The language enacted last year basically
allows investments for products that improve fuel economy in a
single step by 25 percent. The language we would like to see
expanded would be to provide funding for projects which are
consistent with the commitments in fuel economy. Actually 25
and then at 40 percent which we've agreed to, but don't require
every single project to cover a full 25 percent.
Let me give you a specific example. It will be very
expensive for us to apply our hybrid system, our General Motors
hybrid system across a broad range of vehicles. Generally this
hybrid system that we think has the broadest consumer appeal
because it's lower cost will not by itself, in one step, get a
25 percent fuel economy.
So basically dramatically expanding this kind of hybrid
system would not be eligible for funding under the rule as it's
initially written. I understand from our competitors, many of
the projects they would undertake, which would enact
significant improvements in fuel economy, 10, 15, 20 percent,
would not be eligible for this funding support.
The Chairman. So you----
Mr. Wagoner. So what we're talking about is trying to offer
language which would, I think, be consistent with the spirit of
the law, but enable projects that don't each individually get
25 percent or more improvement recovered.
The Chairman. Thank you very much.
Senator Domenici.
Senator Domenici. Mr. Chairman, let me say I don't think
that I have enough time to ask each of you the questions that I
would like to ask. You have raised some very interesting
points, each one of you. You could be of more help than I'm
going to be able to solicit in my questions. But I'm going to
try a couple.
Let me just start with you, Mr. Rowe. First I want to
complement you and your company for your far sightedness.
You're a big holder of nuclear power plants as part of your
delivery system. That has proved to be very wise looking at the
market.
You also are confident about the future in that you have
put your company in a position where you would like to get
licenses from the Nuclear Regulatory Commission to add to your
fleet by building new power plants that are nuclear. Is that
not correct?
Mr. Rowe. That is, sir.
Senator Domenici. I don't intend to treat you as if you're
the one down there doing the applying. I know you're the head
man at the top. But I think you know that the answer to these
questions.
Today we have a much more modern way to file the
applications than we did the last time they were filed. We used
a disc, a little computer disc, that is the entire application.
As before, we used to have a pick up truck full of those things
that we were sending over to the Nuclear Regulatory Commission.
I guess that kind of surprised you when this process was
taking place and you were spending your few millions of dollars
to get the license work ready. Is that not true?
Mr. Rowe. The new processes at the Commission are in fact,
very helpful. What is most helpful of all that they do is the
approval of construction and operation being one basic
proceeding. So you don't run the risk of re-litigating the same
issues when you start and when you end.
Senator Domenici. I want to ask you, it's a matter of
record that I don't expect you to know the answer. But we have
been told unequivocally over and over by the Regulatory
Commission, whom I personally have great confidence in. I think
it's a fabulous commission for a difficult time in our history.
But we've been told that the first applications, there's no
way to get around it, are going to take 42 months from the day
they file it to completion. I would ask if you and your
experts, without offending the Nuclear Regulatory Commission,
don't worry about that. If you would tell us where there are
places that we might save time, even if they are not general.
Maybe you save time only if certain conditions are met.
There are a lot of power plants now that are applied that don't
seem to have the opposition that we had 25 years ago. It might
be that we could do some of this quicker. I would like to just
pose that to you, not for now, but would you tell our committee
that you will do that for us in due course?
Mr. Rowe. I would be happy to get you and the chairman and
the members of the committee the best letter I can on that.
Personally I believe that the best thing the industry can
do to help the Commission in this is to submit the most
standardized designs possible. The best thing the Congress can
do to help the Commission is remind them how badly we need
nuclear energy in a low carbon economy.
Senator Domenici. Now let me move over to GE. I'm fully
aware of what you do. I've had an opportunity to meet you
before. You have a very wide portfolio under your particular
hierarchy of your company.
But I might just ask you're also in the nuclear power
business. Everybody should know that it isn't a non-competitive
business even though we have not been in it for a while there's
some powerful competitors from Arriva out of France to English
companies to a lot of them, Japan with Toshiba. Let me ask, how
are you, how is GE doing? Are you up front big competitors? How
many plants do you--have you applied for that have GE power
plants in them?
Mr. Krenicki. We are very committed to nuclear power. My
opening comments were centered around wind. But we're equally
committed to nuclear power.
We've been in this business for over 50 years. We're
working with the NRC and many of our customers on licensing the
next generation of design. Roughly one-third of the world's
nuclear plants are operated on GE technology.
So we are very committed. But we're going to need to see
more demand in the United States. Today roughly there's about
104 reactors in the United States.
The United States is a leader in nuclear energy. We've done
it before we can do it again. But I agree. As you look at a low
carbon future, nuclear has to be part of the solution. It's a
part of the GE strategy to aggressively invest in nuclear
energy.
Senator Domenici. Mr. Chairman, I have only one last
question. I would like to ask Mr. Roberts this question with
reference to the military. The U.S. military is working with
various developers of liquids from coal to use as
transportation fuel for the military.
I would just like to ask you how important that activity is
to the future of coal and how can it serve the country in your
opinion?
Mr. Roberts. I think the first thing I'd like to point out
about coal to liquids, Senator, is that it's not a research and
development process. It's been around at least since the 1930s.
Senator Domenici. Correct.
Mr. Roberts. If anybody has ever flown from South Africa,
Johannesburg, the plane that you have taken off in was probably
fueled by a combination of aviation fuel from traditional
sources as well as aviation fuel produced from coal to liquids.
So it's already here. It's a process that we have.
We look at coal to liquids in the coal industry as an
additional source of a domestic supply of energy that we have
here at home. Coal makes up 90 percent of all the energy,
fossil fuel energies that the United States has. It makes up
for 64 percent of all the world's energy.
The coal to liquids, the fuel that's made from coal to
liquids is cleaner than aviation fuel or diesel fuel that's
made from petroleum products. It's made from a source that's
domestic. It improves our energy security. It has the potential
of creating thousands and thousands of jobs here at home.
So it's very important not only to the coal industry. We
believe it's important to the national energy.
Senator Domenici. Let me just be very specific. I should
have been. Section 526 is kind of commonly known now in your
industry as the section of law that has passed that makes it
very difficult to import Canadian fuel because of the
requirement that it match up against a certain criteria that is
hard to achieve. Are you aware of that problem are you not?
Mr. Roberts. I'm not specifically aware of the exact
restrictions there, Senator.
Senator Domenici. Alright. I guess I'll ask somebody else
about section 526. I think it's very important to the coal
business. We're trying to solve problem that exists.
Mr. Chairman, I'm going to yield back now. I thank you for
the time.
The Chairman. Alright. Thank you very much. Senator Nelson?
Senator Bill Nelson. Thank you, Mr. Chairman. Gentlemen,
thank you for what you do and how you contribute to our
country.
Mr. Steenland, I wanted to underscore on behalf of Senator
Levin and me, a very important part of your testimony. You're
the CEO of Northwest Airlines. You said when a bunch of us had
filed speculation, anti-oil, future contract, speculation
bills. And you said that in your testimony was a major
contributing factor to the drop of oil from $147 to $100.
Is that a correct characterization of your testimony? If
so, how much as a result of filing those bills did Northwest
save?
Mr. Steenland. Senator, that was our testimony. I think
it's very difficult to portion how much is due to the potential
of additional regulation and lawmaking on the financial side of
speculation verses strengthening of the dollar, weaknesses in
global economies. But when you look at over the span of
literally, 8 weeks, when oil goes from $147 to $100 and there's
no other demonstrable, external change that can explain it.
Clearly a contributing factor, in our judgment, had to
believe the leadership that you, Senator Levin and others
provided on this issue. To just give you a sense of the
magnitude, for us, every dollar of change in crude oil is $42
million of annual costs. So that $40 reduction was $1.6 billion
in savings that we would have realized on an annual basis.
So that is meaningful, significant and it's clearly going
to help us avoid further reductions, look to minimize further
increases in fares. We would encourage that the threat of
legislation become the reality of law to try to provide
additional reporting, additional transparency, the opportunity
for the CFTC to impose position limits when appropriate and to
be in a position to do that across the board.
Senator Bill Nelson. I hope so. Senator Levin, indeed, has
been a leader in this for a number of years.
Mr. Wagoner, I wanted to ask you, first of all I want you
to know that I learned to drive a pick up truck. I started
driving, you could drive in Florida then at age 14. It was a
General Motors product and ever since I've had either General
Motors or Ford products.
I preface that by asking you, I believe that you really
need financial incentives to retool the industry. But what's
going to happen is because of your financial condition, that's
not going to be enough. You all are going to come to us with
some kind of rescue package and ask us to rescue you.
You're looking at somebody, when I was a young Congressman,
I voted for the Chrysler bay lot. But I must admit it is hard
for me to do that when each year that I've been in the Senate,
you all, collectively Detroit, have posed us and beat us every
year when we have tried to increase miles per gallon standards.
So could you respond, please, as to why we should now come to
the financial rescue?
Mr. Wagoner. Thank you, Senator. Yes, to be clear what
we're asking for is basically the fulfillment of what was
included in the Energy Act that was passed last year.
That Energy Act, as you know, included a significant
increase, 40 percent.
Senator Bill Nelson. That was the first time in the 8 years
that I've been in the Senate that we were able to get that
through. But every year Detroit opposed us. We couldn't get any
miles per gallon entries.
Mr. Wagoner. Senator, what I can tell you is that the
increase that was approved last year as you recall was
supported, I think, unanimously by the auto industry. As part
of that significant re-tooling that would be required, the bill
included direct loan provision of $25 billion. So what we're
asking for is that that provisions for the loans now be funded
and be enabled to support the manufacturers to invest in these
new technologies.
I'm not here today and I don't know of my colleagues from
other auto companies either, asking for any bail outs. What
we've said, very specifically, is the bill that we supported
and you all approved, required a significant improvement of
fuel economy which we agreed to. As part of that the loan
program was included.
Particularly given the fact that industry conditions have
gotten, not auto, but general industry conditions and credit
conditions have gotten so difficult, it would be very helpful
if that funding could be approved.
The Chairman. Senator Bond.
Senator Bond. Thank you very much, Mr. Chairman. I
apologize for having missed this morning's session. I had a
number of meetings set up.
I don't serve on Energy. I serve on Environment and Public
Works and we have probably had a little too much activity in
the energy field. I would join with Mr. Roberts in saying that
the cancellation of FutureGen was incomprehensible. I said the
same in much longer and more explicit letters to the Department
of Energy and other relative bodies.
But I also serve on the Intelligence Committee where I have
to go right now to talk about the national security
implications of energy. We are seeing, I think, a real threat
that energy has become, possibly, a next weapon in competition,
not always friendly competition, with other nations. But we are
here today to talk about doing something, as Mr. Wagoner said,
to take control of our energy future.
Setting aside the national security implications, it is
probably the most important thing I hear when I go back to
people in Missouri. It doesn't matter whether you're a family,
whether you're worrying about going to a job or taking your
kids to work. Whether you're a farmer who's getting killed by
high energy prices, workers who are seeing their jobs
disappear. Airline travelers who find their services cutoff.
I'm delighted we have representatives of airline and automotive
industries today because you all are classic examples of why
this is such a problem.
I think all of us recognize that a little price decrease is
not good enough. We need to lower gas prices. That's why, I
personally, don't think a little off shore drilling is enough.
We need to open up as much as we can. We don't need a little
bit more, I think we need a lot more.
I have some questions that primarily are for the first
panel. But I would like a comment from anyone who will offer
it. The Gang of 10 proposal, which is a good step forward,
which still leaves 70 percent of the offshore areas on our
Outer Continental Shelf closed to production will opening up, I
think it's about 14 percent more of the Outer Continental Shelf
make a difference in oil prices in the view of any of you?
Mr. Cohn, maybe? You're in the financial area, maybe you
could comment on that?
Mr. Cohn. I would comment that any increase in supply will
help the price of oil. Our fundamental belief is that we're in
a supply/demand market and supply and demand basically set the
price. Any time you can affect one of those two legs of the
equation, you're going to help the equation out.
So either increasing supply or conserving on demand is
going to be a help.
Senator Bond. We need to do all of them. But for example
the House has come up with a plan that would only open up about
3 percent of the 10 billion barrels of oil off our Pacific
coast. I imagine for that small an increment, you're not going
to get much ``bang for the buck.'' Is that fair?
Mr. Steenland.
Mr. Steenland. I think just echoing what Mr. Cohn said, the
more the market perceives that additional supply is going to
come online, I think the more favorably the market will
respond. That will impact positively with respect to lower
prices.
Senator Bond. That's an economic question. I want to bounce
back to Mr. Cohn. We're talking about speculation. Obviously
speculators provide a useful role.
From what I've seen the money in the market on long term
energy futures are people investing for the long run,
retirement funds, say predicting oil is going to go to $200 or
$250. My question is how much did talking about dealing with
speculation have an impact on the price or what kind of impact
did lifting the executive moratorium on off shore drilling
have?
Mr. Cohn. Look, I think we're all happy that the price of
oil has come down in recent days and recent months. That's a
good thing for the economy. It's a good thing for the world
economy. It's a good thing for everyone involved.
The reality of the price coming down, I think, may be just
a mere coincidence that the price of oil came down while there
was discussion going on on curbing speculation in the United
States. Remember the oil market is a global market. A barrel of
oil is fungible anywhere in the world. It can be delivered
anywhere in the world. People can trade oil anywhere in the
world.
I don't really ever believe in coincidences, but there
seems to be a coincidence here between the talk and the
economic picture that changed quite dramatically in the world.
I think most of us are aware that we have gone through a fairly
dramatic change in economic views and economic outlooks, not
just here in the United States and Europe, but in Asia and the
rest of the world. That has coincided with the decline in
price.
You know, an interesting fact that I would just throw out
here. I know that you're all aware that the CFTC just finished
a very rigorous study of the oil market. I think for the first
time ever, we've all been able to see all of the data
accumulated in one place, where we've literally seen 100
percent of the index speculators disclosed, who they are, what
they are.
The CFTC has done an interesting job in gathering the data
and being able to tell you if we had exchange limits or if we
had position limits in place, who would have been in excess of
those position limits and who would have been in excess of
those exchange limits.
I think there's been a rampant view that there have been
hundreds of investors who have taken positions well in excess
of the current existing exchange limits. What the data actually
found out, in the non-commercial category, in WTI, which is the
U.S. oil grade that delivered in this country, there were six
clients that had a position in excess of current exchange
speculative position limits. One of them was the United States
Hedge Fund.
Ironically, it had the largest position. It was on the
short side. They were short 14,700 lots of WTI. Two of them
were European pension funds, long term investors, as you've
talked about on the long side. One of them was an Asian
sovereign wealth fund on the long side. One of them was a
United States long only asset manager. The last one was a
Canadian pension fund on the short side.
So when you've got all the data in one place trying to
understand this dramatic effect of speculators. You found that
there were six clients on a global basis that had positions in
excess of speculative limits. So again, I get back to my
original response. If we can increase supply in any way, shape
or form and diminish demand any way, shape or form. We will
have a better oil price and that will be better for all of us.
Senator Bond. Thank you, Mr. Cohn.
May I ask very quickly, Mr. Steenland and Mr. Wagoner?
The Chairman. If you could do so quickly.
Senator Bond. Just how much impact oil prices have had on
your employment and your future prospect?
Mr. Steenland. Senator, Northwest Airlines along with most
of the rest of the airline industry, we will be about 10
percent smaller in the fourth quarter of this year than we were
in the fourth quarter of last year. That's almost entirely oil
related and will be approximately 2,500 to 3,000 full-time
equivalent employees fewer this year than last year.
Mr. Wagoner. It's hard to speculate just on one factor, but
I would say the overall economic decline, partly driven by
higher oil prices, financial market weakness, obviously has the
U.S. auto market now running the weakest it's run probably
since 1993. You know, the ramifications have been huge. We
announced plans to eventually cease production at four truck
plants which, you know, in and of itself, would be 10 to 15,000
people.
Frankly, the ramifications for us in our industry have been
significantly greater. So obviously the latest economic
downslide has been very difficult for the auto industry.
Senator Bond. Thank you very much.
The Chairman. Thank you.
Senator Klobuchar.
Senator Klobuchar. Thank you very much, Chairman. Thank you
to all of you. Welcome to Mr. Steenland. Northwest Airlines is,
we hope for as long as we can in the near future, our hometown
airline.
I was curious. I know Mr. Steenland, when this speculation
issue came up you got many of your customers to write in. We
were deluged with emails. Could you talk about what you heard
from customers during that time?
Mr. Steenland. I think what we heard is not too dissimilar
to what you and everyone here hears when you go home for your
work periods. That energy is of an extraordinary high priority
and concern. I think it's a reminder of how critically
important air service is to economies, to the way people lead
their lives these days.
We are entirely dependent on energy as it's now become 40
to 50 percent of our cost structure. The extraordinary run up
in prices which we think is where speculation has been a
contributor has clearly had an impact. Not just on us, but on
the communities we serve and the customers that we have
responsibilities for.
Senator Klobuchar. I was listening to Mr. Cohn and I know
there are other studies, recent studies showing different
things about speculation. We have the mere fact that the prices
went up. But 25 percent in a few month period and we didn't see
that kind of increase in demand, certainly not in the United
States, not worldwide.
Do you just want to talk a little bit about your
interpretation on the front line of the speculation issue, Mr.
Steenland?
Mr. Steenland. I think, you know, we, as to the CFTC study,
we're glad they did it. I think there are some questions as to
the accuracy and the dependability of it. We think there ought
to be an institutionalized reporting obligation, so we're not
simply dependent on, you know, an ad hoc study that the CFTC
does. But where there's ongoing reporting obligations.
So they have a full, constant, regular view of the entirety
of the trading market. There's transparency and that they are
in a position to impose position limits, not just on the
regulated exchanges, but on the over the counter markets as
well.
We think that's very hard to argue with and we think that's
a good bit of regulatory policy for this important agency to
have on such a critically important commodity.
Senator Klobuchar. Because I was frustrated, we had the
Chair of the CFTC. I was saying to him when as a prosecutor I
always liked all the tools I could have, even if I didn't use
them. He didn't seem interested in having more tools to
regulate those markets.
But, Mr. Wagoner, turning to the rest of the topic at hand
that we focused on this morning, I'm in the group of 20 and one
of the things that really interested me was the incentives to
develop this next generation of hybrid and electric cars and
trucks. I'll ask you what I asked this morning. One of the
things I keep hearing is just the battery technology is just
not where we want it to be, at least not produced in this
country. I know the Chevy Volt is coming out in 2 years and
those kinds of things.
But could you tell me where we are with the battery
technology and how we could best tailor our incentives so it's
produced in this country?
Mr. Wagoner. Yes, the premise of your question is, Senator,
exactly in line with our findings as we sort of scour the world
for capability to get the Chevy Volt to market on the timeframe
that we've committed to. It is fair to say that much of the
technology in battery today is outside the United States. I
would say generally concentrated in Japan, where accessing the
technology is difficult and Korea.
One Senator asked me earlier today why is that true? I
think it's pretty clear because those countries have, for 20
years or so, made it a national policy to encourage the
development of battery technology. We, in the U.S. have not
done that. As a result are way behind. That's the bad news.
I think the good news is that as we look to a future where
we shift automotive propulsion from mechanical to electrical,
over time that would mean, if we were successful, demand for
millions of batteries which provides a great business
opportunity. So I don't think this is a battle that the U.S.
has lost. But I do think heavy support and investment by the
U.S. Government in battery research, productionizing batteries
and certainly what would be very helpful to us and consumers,
the early adopters of these technologies.
I can assure you the first few Chevy Volts we build are
going to be very, very expensive vehicles. We will eat a lot of
the cost.
Senator Klobuchar. So I should wait for a while?
Mr. Wagoner. No. The good news is we will subsidize your
purchase. But what would I think help and what is generally
comprehended in much of the legislation in discussion of this
topic are consumer incentives.
I think we have to recognize that as we bring these new
technologies on we're running against a tough target, that the
internal combustion engine fueled by petroleum is very low cost
and very high quality. So as we bring in new technologies
consumer tax credits, incentives are going to be very helpful
as well.
Senator Klobuchar. Then one last question. Mr. Krenicki, I
liked what you said about how important the production tax
credit is. Obviously that's in our legislation as well for a 3-
year extension or something like that to make sure this thing
has been going off 1 year, then it's off for 6 months. It's led
to problems in investment.
I just got a report today from the Center for American
Progress that showed that the U.S. can create 2 million jobs
over 2 years by investing in rapid, green, economic jobs. It
actually shows that with $100 billion in investment you could
create four times more jobs than spending the same of money
within the oil industry. Could you talk a little bit about why
you think that we could more quickly get more jobs in knowing
that I also, you know, many of us support a combination of
things?
But why these green jobs? Something new to so many people
in this country, green technology, could support more jobs?
Mr. Krenicki. You know if I look at the business I run we
have over 10,000 engineers. Many of those engineers are working
in renewable technology. Those jobs didn't exist at GE 6 years
ago.
So as we build leadership in the United States, it's a
source of tremendous exports in manufacturing, high-paying,
engineering jobs. I think the same can be done in nuclear
energy, cleaner coal. So as we build leadership in this country
it will create exports and lots of high-paying jobs here at
home.
Senator Klobuchar. Thank you.
The Chairman. Senator Conrad is next. He's agreed to defer
to Senator Levin for some questions. Go ahead.
Senator Levin. First, just to thank Senator Conrad for
deferring just for a minute. That's all I will take. This is
just for Mr. Wagoner.
You gave us some very good example of where minor
modification in section 136 would make it more practical in
terms of achieving its goals. If you could submit for the
record, for the committee, the other needed modifications in
order to achieve that part of the law which we passed last
year. I think it would be very helpful. If you could do that
for the record, if you would?
Mr. Wagoner. I'd be pleased to do that, Senator.
Senator Levin. I think the full committee needs to be
familiar with that.
Mr. Wagoner. Be pleased to do that.
Senator Levin. Thank you. Also one other question, Mr.
Wagoner, did you speak for the industry in your testimony?
Mr. Wagoner. Yes, I did. We have, even as recently as the
last couple of days have had extensive conversations with my
colleagues at Ford and Chrysler and Mr. Gettlefinger from the
UAW and his staff, so within that group, yes.
Senator Levin. Thank you. Thank you, Senator Conrad.
The Chairman. Senator Conrad, go ahead.
Senator Conrad. Thank you, Senator Levin. Thanks again to
the chairman of the committee for organizing this summit.
Thanks to the ranking member for his participation and thank
you for really producing an outstanding day.
I think the witnesses have been just exceptional, Mr.
Chairman and Senator Domenici. I think you can feel very good
about what you've done to help the Senate grapple with this
issue.
I'd say first to Mr. Wagoner, the gang of 10 as the press
dubbed us, now a group of 20 and with more Senators ready to
come on board over the weekend. In our proposals we have $7.5
billion to help the domestic industry retool. That's not loans.
That's direct money because we think it's critically important
to reducing our dependence on foreign oil to move to the
vehicles of the future.
No. 2, we have $5 billion over 10 years in battery
technology research because our group became convinced during
the deliberations that that is absolutely essential to
America's competitive position.
Could you help us understand if those investments are in
line with what you're thinking is? Are they the right
priorities?
Mr. Wagoner. Thank you, Senator. To be honest I wasn't
familiar with all of the specifics of the items you're working
on. So can't comment exactly on the numbers.
But I think the strategic direction you're citing is very
much consistent with the conversation we just had on battery
technology where we think that is a fundamental building block
for the future of the auto industry. While the U.S. is behind,
it would be a shame not to get back into that tremendous
opportunity. As a general rule, our thought is that actually
the U.S. and the world is run with automotive technology driven
by petroleum for 100 years.
We are now at an inflection point. Whether it's over the
next 5, 10 years, or 20 years, the industry is going to
fundamentally evolve in its sources of power. So it is, I
think, a very appropriate time for obviously the manufacturers
have a tremendous interest in it.
But I think from the perspective of the U.S. Government, if
we wish to continue to have a robust and strong manufacturing,
engineering sector in the automotive side, which is the largest
manufacturing sector in the country. It's a very good time to
get direction from the Congress and support for the key
technologies. So we very much would like to participate and
comment and contribute to your deliberations.
Senator Conrad. Let me just say that I would say to all of
you the group of 20, the basic concept is we got to increase
production. We've got to reduce demand. We have adopted a
strategy, not of just one thing or two things. We've adopted a
strategy that involves support for renewables, conservation,
improved efficiency, electric plug in, geothermal, hydrogen,
drilling off shore.
The Senator from Missouri questioned how much we've
expanded drilling off shore. We have a phased approach to
opening up off shore. We open the Eastern Gulf. We open up off
of Virginia, North Carolina, South Carolina, Virginia. We open
up off of Alaska.
We do it on a phased basis. We then have time to go out and
do the seismic work to see what additional areas have real
opportunity. Because just opening up, frankly, you can open up
everywhere, the problem is the testimony we heard this morning
from the representative of the major oil companies was we've
got only 30 offshore rigs in the world, every one of them
spoken for.
So you can just say you're open up everything, but it
doesn't have meaning. It doesn't have meaning unless you've got
the rigs to do it, unless you've got the trained personnel to
do it. The fact is we can only do it on a phase basis.
So, you know this notion that we're just going to open up
everything. All of a sudden everything's going to happen, is
not reality. Our group has tried to deal with reality.
In addition, we've got provisions for nuclear power because
we think we're going to have to expand nuclear power. We have
clean coal, significant investment there.
Let me just ask if I could, Mr. Krenicki. Do you think
we're going in the right direction? This is 20 Senators, 10
Democrats, 10 Republicans.
Mr. Krenicki. Absolutely. I think the answer is all. So we
have to do a lot of many things. If I look at just what's
happened in renewable energy in a relatively short period of
time with good policy, the U.S. is leading the world. It's the
most dynamic market.
The U.S. is the Saudi Arabia of wind. We're taking
advantage of that. I think we've got to keep building it out.
It'll have significant benefits. It'll be totally consistent
with any climate policy that is tackled in the next
Administration.
So I think the group of 20 is terrific. I applaud your
efforts.
Senator Conrad. Mr. Rowe, do you think we're headed in the
right direction?
Mr. Rowe. Yes, sir, indeed I do. I'm very grateful for the
effort. I think particularly your focus on the climate change
legislation and coming up with a practical bill that includes
the economy is very important.
Let me just say though that while I agree with Mr. Krenicki
that the answer is all. They come at dreadfully different
prices. We think that at least in the early stages, energy
efficiency measures are the places where you get the most bang
for the least dollars. We just don't know how long that lasts.
On the other hand, we look at wind and we may be the Saudi
Arabia of wind, but sometimes it costs almost as much. We think
the cost in terms of dollars per barrel--dollars per ton of
carbon dioxide of relying on wind is in the $80 to $100 a ton,
pre-subsidy. Whereas gas, you may be talking $20 to $40 and
nuclear more like $40 even at the high prices we're looking at
today.
Senator Conrad. Right.
Mr. Rowe. So the point I'm getting to is you need all. The
group is entirely right to push all. But when we put our
consumer hats on, the cost to the consumer is very different
from one of these technologies to the other.
Senator Conrad. Mr. Roberts.
Mr. Roberts. I certainly agree with the others here. To Mr.
Rowe's point about cost and representing the coal industry. I
want to make it clear on one point that we believe that the
full panoply of resources is the way we should go,
conservation, energy efficiency, oil, natural gas.
But what we have to realize is that we cannot do it without
our most abundant and affordable source of energy here at home.
That's coal.
Senator Conrad. We have a substantial in our group of 20, a
substantial investment in clean coal because we agree with you.
It's got to be part of an overall comprehensive package.
Mr. Roberts. Yes it does, thank you.
Senator Conrad. Mr. Steenland, what would be your reaction?
Mr. Steenland. Senator, we clearly support a broad based,
multi-faceted approach. Unfortunately on our side, you know,
airplanes don't work very well on wind and the nuclear powered
airplane hasn't manifested itself yet. So we're still heavily,
heavily dependent on crude oil and the refining of that crude
oil into jet fuel.
We have taken and invested billions of dollars in terms of
conservation efforts through purchasing new, more fuel
efficient aircraft and the like to recognize the significant
expense that we bear here. When we look at it, why we support a
broad based bill, we tend to focus on what's in it to help
control the supply or to expand the supply on the crude oil
side and to the extent that there is expansion of areas
available for drilling. We think that's a constructive
approach.
Senator Conrad. Mr. Cohn.
Mr. Cohn. Senator, I agree with your premise. I agree with
my distinguished colleagues on the panel. Look, I think the tax
incentives that you have for wind and solar are very important.
I think the loan guarantee program, very important. I think
nuclear power, very important. Conservation, very important.
Smart growth technology expanding and upgrading the
transportation network, all very important.
All this takes an enormous amount of capital. No one talks
about the trillions of dollars we're talking about right now to
rebuild the energy infrastructure of the United States. To
attract that capital you're going to have to compete with other
markets and other alternatives for the capital. The capital is
going to tend to gravitate where it can get the highest rate of
return with the most surety involved.
As long as we can create some rate of return with some
predictability, we will be able to attract the capital into the
system.
Senator Conrad. Mr. Wagoner.
Mr. Wagoner. Just, I agree as well. I appreciate the
leadership of your group. Because I think it very much is
exactly the direction that we need to go to.
I would just go back to a point I made in my testimony that
as we have historically looked at alternatives in our sector
and others, we've seen that when oil prices are high, everybody
wants to do something new. We're excited about it. We get the
investment cranked up and oil prices go back down.
Consumers tell us what they're going to buy. They tell us
everyday. So I would simply say as you and your colleagues look
at this, the broad expanse is terrific but we have to recognize
there will be market factors that will move up and down in
those countries today that I mentioned earlier who are leading
in battery technology had a persistent commitment to that
technology even when oil prices went down to whatever it was,
$10 or $20 a barrel not that long ago.
So I do think and would ask that your work comprehend a
long vision and a commitment among all of us in a consistency
of direction so we don't find ourselves in situations such as
we're encountering today.
Senator Conrad. That's what our bill contemplates, on the
battery side, a 10-year commitment.
Mr. Wagoner. Terrific.
The Chairman. Let me see if Senator Domenici, do you have
some additional questions or comments that you wanted to make?
Senator Domenici. Mr. Chairman, I'll follow, you go ahead.
The Chairman. Are there other members?
Senator Nelson, go ahead.
Senator Bill Nelson. Just one comment, Mr. Chairman. I just
want to clarify to Senator Conrad's question to Mr. Steenland
about the gang of 20 proposal. They omit in their proposal
addressing speculation.
They say in their proposal they want to wait until the CFTC
reports. So I want you to have that information as to how you
would like to react to that because we're talking about action
on this next week, Mr. Steenland. So tell me what you think.
Mr. Steenland. We've previously met with Senator Conrad and
Senator Graham and we conveyed our views as to the
appropriateness of what we thought in the urgency of including
provisions in their package that addresses the speculation
issue. We would encourage them and hope that they would get to
that point before all is said and done.
Senator Conrad. The report that is being referenced I think
is coming September 15, but our group, the gang of 20. I've
supported the speculation piece. Within our group there are
differences on speculation. We tried in our proposal to
influence the supply/demand relationship. But I strongly
support the speculative legislation that Senator Nelson and
others, Senator Dorgan and others have offered because I think
that is a key component as well.
The Chairman. Senator Klobuchar, did you have another
question?
Senator Klobuchar. No, I'm just fine. I would like to----
The Chairman. Oh, sorry. I didn't realize Senator Nelson
was still asking questions. Go ahead.
Senator Bill Nelson. I just want to conclude that thought
about speculation. There was a report that was released
Wednesday by Masters Capital Management Hedge Fund that said
that ``financial speculators drove up oil prices and then after
the prices peaked on July the 11th began a mass stampede for
the exits.'' That's a quote.
They pulled $39 billion out of the crude oil market,
Masters said leading to a sell off of 127 million barrels of
oil futures. Mr. Cohn, that seems to contradict or be at
variance with what you had said. What do you think about that?
Mr. Cohn. I am quite aware of Mr. Master's piece. Just for
those of you who don't know, Mr. Master's is a hedge fund
manager, off shore in St. Croix who runs an equity fund that
has very long transportation stocks and airline industries. I
hope he does very well, by the way in his position.
Mr. Master's is not really an economist with formal
training. There was a piece put out later in the week. You may
be well aware of, Philip Verlinger put out a piece who is a
quite recognized economist, has served here in the Capitol as
an economist on energy policies. I'll take one moment to read
his concluding paragraph for you. This is a piece after the
Master's piece, he sort of responds to the Master's piece.
``Let me conclude with a simple comment. The accidental
hunt brothers, act two by Michael W. Masters and M.K. White is
the worst example of junk economic analysis published in a very
long time. The author demonstrates nothing in the article that
is devoid of any intellectual content. One can make a stronger
case for a rooster's crow causing the sun to rise. Their report
is utter and complete perversion of what we teach in
economics.''
Senator Bill Nelson. Let me ask you about the New York
Mercantile Exchange Report. They concluded, this is about a
week ago, that 81 percent of all of the oil futures contracts
on the New York Mercantile Exchange were exchanges by
speculators, not by commercial users of oil. Give us your
opinion about that.
Mr. Cohn. I think that the New York Mercantile, although I
have enormous respect for them. I have served on their board
and I've served on their Executive Committee in prior years. I
think that unfortunately they lack the transparency of
information. that was why the CFTC, by your body was asked to
get involved and really create full disclosure and full
transparency in what's going on in the market.
I would put a lot more confidence in the CFTC data where
they have captured 90 percent of all market participants
including the over the counter market which the NYMEX doesn't
see. The NYMEX only sees those transactions which take place on
their exchange, an equal and opposite transaction to that can
take place in the over the counter market. Therefore even
though I know what they see and I served on their control
committee which controls the liquidity of the contracts, I know
they don't have very good information.
That's why I was so interested in seeing the CFTC
information that we were able to see yesterday which really
did, for the first time in the history of the commodity markets
in the United States, really paint a relatively clear picture
of what's going on.
Senator Bill Nelson. Does Goldman Sachs----
Mr. Cohn. Could I add one more thing to that? They tell you
81 percent of its speculative. Now that's also an interesting
number because there are long speculators and there are short
speculators. You could have longs and shorts net each other
out.
So you could basically have 40 percent long, 40 percent
short. They cancel each other out. The other 20 percent on the
market be real end users but you could publish that you had 80
percent, 80 percent speculators in that market.
Senator Bill Nelson. Does Goldman Sachs engage in the
speculative market on the oil futures contracts?
Mr. Cohn. We engage in the oil market on behalf of our
clients day in and day out. As I said in my opening comments
we've been the facilitator of over $220 billion of commodity
hedges where we act as an intermediary between our clients and
the exchange. We provide our clients like Northwest Airlines,
jet fuel hedges, there's no jet fuel contract in the world. We
take the risk of selling the jet fuel hedges. We then hedge
that into other similar products where we inherit the risk. So
we are engaged in the markets on a global basis, day in and day
out.
Senator Bill Nelson. Your client, Northwest Airlines uses
that oil from those futures contracts. Do you engage in the
buying and selling of future oil contracts for clients that do
not use that oil?
Mr. Cohn. The way the futures contract actually works, they
engage in a financially settled hedge with us. They use that as
an insurance policy against price protection. They actually
source their jet fuel from a third party, physical provider.
We do engage in transactions with people who are not
ultimate producers or consumers of the commodity.
Senator Bill Nelson. Ok. So the answer to my question is
yes. Now the simple follow up question is----
The Chairman. Let's do this one follow up and then Senator
Klobuchar's going to be anxious to get in her questions.
Senator Bill Nelson. Then are you of the opinion that buy
and sell in this marketplace and obviously one of the premier
firms in Wall Street, is it your opinion that speculation has
no effect on the price of oil that we've seen in the run up and
the reduction?
Mr. Cohn. It's not a simple yes/no answer. The speculators
are in every market in the world. We need speculators to be in
the markets. So in any given moment of time can a speculator
have an influence on the market? Absolutely. Anyone who would
say that would be naive.
So markets are meeting places for buyers and sellers.
Buyers need to enter the market, drive the market price to a
place where it attracts sellers. That is the natural balancing
act that goes on day in and day out.
Why you need the speculator in the market and why the
commodity index was created many years ago is our industry, 20
years ago was a very difficult industry. We had only clients
that wanted to sell future production forward. So we had many
clients that wanted to go drill oil wells, but they needed some
predictability of the price of oil they were going to receive
out of the well to go borrow money.
They tried to enter the market and sell the oil. There was
no natural long in the market. The consumers are so fragmented
that they don't amalgamate to a big enough position.
So we actually, as a firm, came up with the idea in the
early 1990s to create a long only, static investor in the
commodity markets. We created the commodity index where we
could allow people that were willing to commit large pools of
capital into the market for a very long period of time to
facilitate the actual producers and allow them to be able to
hedge their production forward to increase their production.
So without speculators in the market, the market doesn't
exist. The speculator is sort of the rubber band or the spring
in the middle that allows buyers and sellers to transact. It
just doesn't work that well that a buyer wakes up in the
morning and says, I want to buy at this price and the seller
wakes up simultaneously and says, I want to sell at that price.
If the world worked like that, it would be a great world.
But there's not a market in the world that works like that. So
you need people to absorb all those price movements and those
people are the speculators.
Senator Bill Nelson. So you don't want us to do anything
against speculators. Ok. Mr. Chairman, thank you.
Mr. Cohn. By the way, I'm in total agreement with what Mr.
Steenland has said on transparency and creating more
disclosure.
The Chairman. Senator Klobuchar.
Senator Klobuchar. Thank you very much, Mr. Chair. Mr.
Cohn, I just want to talk about how it looks from our vantage
point here. It's not just about CFTC.
It's about a government that's been broken in terms of
watching some of these financial transactions. Whether it's on
Wall Street where there's been admissions on all sides where
these things have broken down. Whether it's Fannie Mae or
Freddie Mac, whether it is toxic toys coming in, that a lot of
these agencies are shadows of their former selves.
When you see things happen like that Enron loophole, you
know in the middle of the night it just gets changed. Change is
the way that these markets can be regulated. I understand that
you're going to have speculators and people in these markets.
But you have to understand from our vantage point that the
people that are the victims of this.
You can survive it if your things go up and down. These are
people who can't. In Minnesota who are filling up their trucks
half with gas and they can't go up to their cabins in the
summer. So the problem with this is that the people who have
most been affected by it, have the least disposable income.
So what we're trying to do and I would agree with Senator
Nelson, that we need to give them more tools. We don't want to
mess up the market. We're happy to listen to you. But we need
to give them more tools.
I guess just to make this real and why I'm supporting the
gang of 20 thing when it does have speculation. I'm going to
try to get it on there, if we can. The reason I'm supporting it
is that we have to move as a country forward. I understand I
can't get everything that I want in this.
But I just want to ask to make this real. Mr. Krenicki, did
you say that you believe that if we don't keep these investment
strategies in place, how many jobs will we lose from your own
company alone?
Mr. Krenicki. If the PTC goes away, history has shown us
when that happens the industry declines 90 percent. Will that
happen again? We think directionally it will decline and
American Wind Energy Association estimates about 76,000 jobs
would go away.
Senator Klobuchar. Thank you. Mr. Wagoner, if we keep going
the way we are in the auto industry and we don't think ahead to
these green jobs and new economy, what do you think will
happen?
Mr. Wagoner. You would have to tell me what's going to
happen to the price of oil, right? Because basically that's
what is driving the, you know, the demand for our products and
frankly extends across the entire economy.
So when oil prices are low everything goes great. When they
go high then we, you know, we get into situations like we are
today. From a business perspective we much prefer to have a
diversity of sources. We think that would provide a longer term
stability and conditions for the U.S. economy to continue to
grow which I think is at the root cause of addressing some of
the issues of your concern.
Senator Klobuchar. Thank you. Then Mr. Steenland, our
hometown airline, if we just keep going the way we're going and
we don't do more with our own domestic supply and we don't do
more with wind and solar and all these things that can feed
into new energies. What do you think will happen to the airline
industry and all the employees we have in Minnesota?
Mr. Steenland. I certainly think if you dial back, you
know, to the middle of July and you look at the world where oil
is at $147 a barrel. I think the U.S. airline industry and the
economy as a whole would be looking radically different in that
airfares would be materially higher, service would be
materially reduced. All that means for hubs that for which
corporate headquarters have expanded service to small
communities and the like would be, clearly would have been
adversely affected.
Hopefully we can stabilize with the type of legislation
that's being proposed, you know, a lot of the experts for, take
it for what's its worth, say that the sort of the long term,
natural supply and demand price of oil ought to be in the $70
to $90 a barrel range. If that's true, I think we can, you
know, manage through this in a relatively decent way. But if we
see the return of oil with that's in the $140 range. I think
the world is going to look much different.
Senator Klobuchar. Very good. I have to go be on a Moorhead
radio station. So I'll tell them all that you're supportive of
us moving ahead.
I am serious about that we need support from the corporate
community as we try to move these things going forward in
Congress. We need, if you're truly supportive of these things
what I've seen so many times when we try to move climate change
legislation, Mr. Rowe or other things is people kind of say
they're for it and then people are making calls against it.
We just can't afford to have that happen. We're going to
need your help. Thank you.
The Chairman. Senator Domenici, go right ahead.
Senator Domenici. Yes, thank you, Mr. Chairman. I want to
say again to all of you how much we are indebted to you for
taking time off to come to talk with us. I believe, Mr. Cohn,
your explanation from the marketplace standpoint of supply and
demand and how it has an impact on the price of oil whether we
like it or not, whether we like the result or not, is very
necessary.
You see an environment here where we can't help it. We are
very much affected by emotions and most of the time it's
emotions of our constituents. Frequently the emotion button is
pushed by the wrong set of facts or the wrong interpretation.
We have a difficult job, as you can tell, trying to put
together an energy bill. In fact the Chairman and I, who put
three of them together in the past 7 years, one being the very
large package that most of you are aware of and two others.
Among the other two we had, we finally passed CAFE changes.
I say to you, Mr. Wagoner, I'm not sure that you smiled as
I said that. But a few years ago, you would not have. But
Congress finally came around and said it's obvious. We've got
to have smaller cars, lighter cars. We've got to take the
chance of increased injuries that might occur if that's one of
the facts.
But we did that and we also did whatever was necessary to
bring nuclear power on. It's coming pretty strong. Now we have
an issue that is, boy, right up to the top. It has to do with a
very collateral issue to what you have been speaking of as
witnesses today. That's if we have additional reserves that are
American should we open them up for development?
That's what brought us to where we are. We started that
moving along. From that came a well of support from the
American people to drill for what was ours. That now we have an
argument going. How much of that which is ours should we open
up?
It's strange that we would go from not wanting to do any to
those of us who started this debate wanted to open all of it
and let that be decided in the future as we needed. I was very
pleased to hear the oil companies that are out there using
these platforms, that you all know about even though you're not
in the business, the giant platforms that the oil developers
put out in the water. It turned out to be technologically
speaking very, very exciting products. There's no leakage.
There's no spillage.
When they get down they can have 10 or 12 wells off of one
footprint. They can have directional drilling. It's just rather
incredible feat of ingenuity with reference to off shore
drilling.
If you were here this morning you would have heard the
witness whose company does most of that, tell us that there are
30. All 30 are busy and they plan to double or triple that
amount, especially since they think they are going to have the
American off shore market be put up for acquisition so they can
plan on using what they build, what they add to this fleet of
30. That's rather exciting. It ought to be exciting to you as
businessmen to think that finally the American oil industry is
going to be turned loose.
We have a lot of complaints about the oil industry, but
what it all comes down to the bottom line, we're the only
country that has any oil companies of real significance left in
the world. I guess you know that. All the oil businesses are
owned by states. They're government owned with just our
American big five. They're the only companies that are
privately owned.
I think in the final analysis we probably have to be proud
of them, whether we want to be or not. We're lucky we've got
them. Some people think they make too much money. But when it
comes to developing our resources, they're pretty darn good.
When it comes to developing resources around the world, they're
very good. I think they're pleased if we open up more of our
own property so they can do it here rather than run around the
world fighting with the kind of dictators and other people,
personages, that they've been confronted with as you've watched
them over the years.
So if we open up the Outer Continental Shelf and it gets
let out for bid, in time we will have perhaps as many as 80 or
90 offshore rigs of significance. They will be producing oil
for us for a long time. The previous witnesses have told us,
yes, indeed we will be using oil for a long time, even as we
move through all these new things we're going to do. It's not
that we want to. It's just that we have to. We can't avoid
using it for quite some time.
I used to say one generation. I'm wrong. They're saying
it's much more than one generation. It's perhaps as many as 30
or 40 years that we will continue to use it.
The issue that brought this to boil was should it be ours
or should it be somebody else's as we continue to have to use
oil. That's the issue. It should be ours if it can be and
rather than somebody else's. The only place we know that it's
ours is the off shore of the United States. That's where it is
in abundance.
My last observation is we speak much of producing green
jobs. General Electric has told us precisely what it means. I
would say we have to be careful.
We didn't have time to inquire. But we want to make sure
that a lot of that work is done here. I do know that some of it
is not that we are importing a lot of it from Germany.
I hope if we make permanent or get 5 years or 10 years to
this credit so that it's got its strength, it's pinned down. I
hope more of the business will come to our country and be done
here. I would ask, my last parting shot, if General Electric
would tell me their observations about that because it's very
important.
Will these jobs come here in more abundance than now in
your opinion?
Mr. Krenicki. Absolutely. You see many non-U.S.
manufacturers investing significant amounts of money in the
United States today. One of the dynamics of the wind business
is transportation costs are astronomical. So transporting large
parts like wind blades and towers, that work has to be done
close to the markets. So it will bring jobs to where the market
is.
Senator Domenici. So that will help us.
Mr. Krenicki. Absolutely.
Senator Domenici. Thank you, Mr. Chairman. It's good to be
with you. Thank you all.
The Chairman. Thank you all again. This has been excellent
testimony. We appreciate you taking your valuable time to talk
to us today.
Thank you. That will conclude our summit.
[Whereupon, at 2:45 p.m. the summit was adjourned.]