[Senate Hearing 106-930]
[From the U.S. Government Publishing Office]
S. Hrg. 106-930
ENERGY AND AGRICULTURE
=======================================================================
HEARING
before the
COMMITTEE ON AGRICULTURE,
NUTRITION, AND FORESTRY
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
ON
ENERGY AND AGRICULTURE
__________
JULY 20, 2000
__________
Printed for the use of the
Committee on Agriculture, Nutrition, and Forestry
U.S. GOVERNMENT PRINTING OFFICE
70-093 WASHINGTON : 2001
_______________________________________________________________________
For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC
20402
COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
RICHARD G. LUGAR, Indiana, Chairman
JESSE HELMS, North Carolina TOM HARKIN, Iowa
THAD COCHRAN, Mississippi PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky KENT CONRAD, North Dakota
PAUL COVERDELL, Georgia THOMAS A. DASCHLE, South Dakota
PAT ROBERTS, Kansas MAX BAUCUS, Montana
PETER G. FITZGERALD, Illinois J. ROBERT KERREY, Nebraska
CHARLES E. GRASSLEY, Iowa TIM JOHNSON, South Dakota
LARRY E. CRAIG, Idaho BLANCHE L. LINCOLN, Arkansas
RICK SANTORUM, Pennsylvania
Keith Luse, Staff Director
David L. Johnson, Chief Counsel
Robert E. Sturm, Chief Clerk
Mark Halverson, Staff Director for the Minority
(ii)
C O N T E N T S
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Page
Hearing:
Thursday, July 20, 2000, Energy and Agriculture.................. 1
Appendix:
Thursday, July 20, 2000.......................................... 49
Document(s) submitted for the record
Thursday, July 20, 2000.......................................... 157
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Thursday, July 20, 2000
STATEMENTS PRESENTED BY SENATORS
Lugar, Hon. Richard G., a U.S. Senator from Indiana, Chairman,
Committee on Agriculture, Nutrition, and Forestry.............. 1
Grassley, Hon. Charles E., a U.S. Senator from Iowa.............. 15
Harkin, Hon. Tom, a U.S. Senator from Iowa, Ranking Member,
Committee on Agriculture, Nutrition, and Forestry.............. 3
Conrad, Hon. Kent, a U.S. Senator for North Dakota............... 13
Kerrey, Hon. J. Robert, a U.S. Senator from Nebraska............. 27
Johnson, Hon. Tim, a U.S. Senator from South Dakota.............. 17
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WITNESSES
Johnston, Hon. J. Bennett, Former Senator [D-La], Johnston and
Associates, LLC................................................ 28
Richardson, Bill, Secretary of U.S. Department of Energy;
accompanied by Dan Reicher, Assistant Secretary of Energy; and
Mark Mazur, Acting Director, Energy Information Administration. 4
Schlesinger, James, Former Secretary of Defense and Energy....... 19
PANEL I
Baumes, Harry S., Ph.D., Senior Vice President, WEFA, Inc.,
Eddystone, Pennsylvania........................................ 37
Collins, Keith, Chief Executive Officer, U.S. Department of
Agriculture, Washington, DC.................................... 36
Hutchens, Don, Executive Director, Nebraska Corn Board, Lincoln,
Nebraska....................................................... 45
McCarthy, W. James, General Manager, Government and Public
Affairs, CITGO Petroleum Corporation, Tulsa, Oklahoma.......... 41
Vaughn, Eric, President, Renewable Fuels Association, Washington,
DC............................................................. 39
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APPENDIX
Prepared Statements:
Lugar, Hon. Richard G........................................ 50
Harkin, Hon. Tom............................................. 52
Craig, Hon. Larry E.......................................... 53
Kerrey, Hon. J. Robert....................................... 62
Grassley, Hon. Charles E..................................... 66
Johnston, Hon. J. Bennett.................................... 79
Baumes, Harry S.............................................. 97
Collins, Keith............................................... 106
Eischens, Curt............................................... 144
Horvath, R. Skip............................................. 138
Hutchens, Don................................................ 134
McCarthy, W. James........................................... 121
Richardson, Bill............................................. 69
Schlesinger, James........................................... 74
Vaughn, Eric................................................. 90
Document(s) submitted for the record:
Letter to Hon. Richard G. Lugar, from Ali I. Al-Naimi........ 158
ENERGY AND AGRICULTURE
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THURSDAY, JULY 20, 2000
U.S. Senate,
Committee on Agriculture, Nutrition, and Forestry,
Washington, DC.
The Committee met, pursuant to notice, at 9:04 a.m., in
room SD-106, Dirksen Senate Office Building, Hon. Richard G.
Lugar, (Chairman of the Committee,) presiding.
Present: Senators Lugar, Grassley, Harkin, Conrad, Kerrey,
and Johnson.
OPENING STATEMENT OF HON. RICHARD G. LUGAR, A U.S. SENATOR FROM
INDIANA, CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND
FORESTRY
The Chairman. This meeting of the Senate Agriculture
Committee is called to order. We are privileged to have today a
number of distinguished witnesses to discuss energy policy in
our country with special pertinence to agriculture.
I will issue an opening statement. When Senator Harkin, our
Ranking Member, has arrived, he will be recognized, and then we
will hear from the distinguished Secretary of Energy, Secretary
Richardson, and members will ask questions after each of our
first three witnesses, and likewise the distinguished panel
that will follow.
I begin the hearing by raising what I believe is a very
important question: Are Americans prepared for the inevitable
consequences resulting from the lack of a strategic energy
policy? Does an energy policy exist with our government or with
private industry that will guarantee adequate energy supplies
for a growing American economy? And, if not, who will tell the
American people that we are headed for lower growth in jobs,
income, comforts, standard of living, and competitive position
in the world?
In my judgment, our Nation is facing an emerging energy
crisis. Demand for energy is rapidly increasing, and supplies
may not be emerging to meet this demand, even at high prices.
We are here today to assess present energy policy and determine
if amendments to our policy are appropriate. And in addition to
high prices at the gasoline pump, we have been alerted recently
to possible shortages of natural gas, and will discuss this
morning potential electrical brownouts.
In reviewing our energy policy, we must consider the fact
that events beyond our borders have tremendous impact. As
economics of developing nations continue to grow, so will their
demands for energy. Such growth will fuel the greenhouse gas
problem and increase world dependence on Persian Gulf oil.
OPEC decisionmaking is a major factor. I invited the oil
minister of Saudi Arabia, Ali Naimi, to participate in today's
hearing. He replied he is unable to attend due to previous
commitments.
Economic growth in the United States has produced a tight
market for many forms of energy. Electricity demand in the
first half of the year 2000 is up 3.5- to 4-percent from the
previous year. Over half the increase in world oil demand from
1998 to 1999 was attributable to increased United States demand
for oil. The price of natural gas and diesel have risen
dramatically due to increased demand, tight supplies, low
inventory. We know the United States needs to build new power
plants, but current plans are for these plants to be fired by
natural gas. Are natural gas supplies adequate to meet that
demand?
At the Federal level, are we doing enough to address the
transmission problems that could be associated with
increasingly deregulated electricity markets? The Energy
Information Administration forecasts the demand for natural gas
is likely to increase by 2-percent per year over the next 20-
years. Energy security expert Daniel Yergen asks whether we are
prepared to make the investments in exploration, new pipelines,
and distribution facilities needed to meet this rapidly growing
market.
At the same time the demand for energy is growing, new
environmental regulations are being imposed upon energy
facilities and fuels, and many of these policies are needed to
produce a cleaner environment. The Reformulated Gasoline
Program is one example.
We also need to assess our energy research and technology
policies in light of the greenhouse gas problem. I have
cosponsored Senator Murkowski's legislation to further the
growth of new energy technologies. Senator Daschle and I have
introduced a bill to solve the MTBE problem and triple the use
of renewable fuels by the year 2010. We have introduced a
market trading system to allow oil companies to produce
renewable fuels in the areas of the country where they can most
economically be marketed.
President Clinton recently signed into law my bill to
establish an aggressive research, development and demonstration
program, making it easier to convert biomass into ethanol.
Since biomass feed stocks tend to have very low cost, this
program could lead to dramatic reductions in the cost of making
ethanol.
One additional idea I think needs to be considered is the
creation of a presidentially led energy and environmental
security task force to coordinate our environmental and energy
security programs. Such a task force, in my judgment, should
include at least representatives of the National Security
Council, the Council of Economic Advisors, the Departments of
Agriculture, Energy, EPA, Transportation, and Treasury.
[The prepared statement of Senator Lugar can be found in
the appendix on page 50.]
I would welcome comments from our distinguished witnesses
on any of these legislative initiatives.
Finally, I simply thank the witnesses for coming, for their
preparation for what I think will be a very important hearing,
and I now turn to my distinguished colleague, Senator Tom
Harkin of Iowa, for his opening remarks.
STATEMENT OF HON. TOM HARKIN, A U.S. SENATOR FROM IOWA, RANKING
MEMBER, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
Senator Harkin. Mr. Chairman, first of all I want to thank
you for calling this important hearing on energy policy and the
impact on energy policy and the impact on American agriculture.
I also want to commend and thank you for your leadership on the
initiative you took to get the administration to start moving
ahead on the research needed to convert biomass to some of our
renewable fuels, especially in the cellulosic area. I think
that really holds a great promise, and again I commend you for
your leadership in that area.
In March I sent a letter to you, Secretary Richardson, and
to Secretary Glickman. I am pleased by your decision to form a
working group to examine the implications of high oil prices
for farmers. I have also hoped that we can try to get to the
bottom of some of these exorbitant increases in gasoline prices
in the Midwest.
Farmers have a lot at stake with respect to energy costs
and our national energy policies. Even though farmers have
greatly increased their energy efficiency over the years, they
are still highly vulnerable to these price increases,
especially now, when corn in Iowa is down to about $1.40 a
bushel and beans are about $4.40 a bushel. Things are pretty
tight in the Midwest right now.
And right now USDA estimates that direct fuel expenses for
farmers will increase by $2.5 billion or 40-percent this year
compared to 1999--40-percent compared to last year. Higher
energy prices are also reflected in the greater costs for grain
drying, fertilizer, pesticides. The Iowa Farm Business
Association estimates that higher energy costs will add more
than $1,300 to this year's expenses for a 660-acre-corn-and-
soybean farm. So any actions that can be taken to alleviate the
impacts on farmers would certainly help.
Frankly, though, as the Chairman does, I see agriculture
more as a solution to our energy challenges than as a problem
area. I think we have barely scratched the surface of the
potential for agriculture to supply domestically produced
renewable and environmentally friendly energy.
Renewable sources now constitute only about 3-percent of
U.S. energy supplies and only about 1.2-percent of gasoline,
but our reliance on foreign petroleum is growing dramatically,
to the point where we now import about 60-percent of our
petroleum. We are far more reliant now than we were in the
1970s.
But renewable fuels like ethanol and biodiesel enhance our
energy security. They improve our environment. They increase
farm income. They create jobs and economic growth in rural
communities. Ethanol use already adds about 20-cents-a-bushel
to the price of corn. Replacing MTBE with ethanol would add
another 14-cents-to-corn-prices and increase farm income by
about $1 billion a year.
There is also tremendous potential in biomass such as
switchgrass, and wind energy, which is a growing industry, by
the way, in my State. I saw your comments on that, Mr.
Secretary. Hydrogen used in fuel cells will allow efficient use
of biofuels and the storage and transportation of wind and
solar energy.
If renewable energy is going to have a chance to get a
footing and grow, it will have to be given an opportunity to do
so. That is why I was so outraged by the efforts to lay the
blame for high Midwest gasoline prices on clean air rules and
the use of ethanol. The facts are now out, and the facts show
the blame was unfounded and unfair, but this experience is a
harsh lesson in how hard we are going to have to continue to
fight for the increased use of renewable fuels.
Mr. Chairman, again, I thank you for calling this hearing
and for your great leadership in this area.
[The prepared statement of Senator Harkin can be found in
the appendix on page 52.]
The Chairman. Thank you very much, Senator Harkin.
Secretary Richardson, we are delighted to have you, and
would you please proceed?
STATEMENT OF HON. BILL RICHARDSON, SECRETARY. U.S. DEPARTMENT
OF ENERGY, ACCOMPANIED BY DAN REICHER, ASSISTANT SECRETARY OF
ENERGY FOR ENERGY EFFICIENCY AND RENEWABLE ENERGY; AND MARK
MAZUR, ACTING DIRECTOR, ENERGY INFORMATION ADMINISTRATION
Secretary Richardson. Thank you. Mr. Chairman, Senator
Harkin, I want to commend you for the very broad, gracious way
you tied all the issues together, and I commend you, especially
this committee, for holding this hearing and for your singular
contribution in the area of bioenergy, which could be the
future for our energy security.
Senators I first would like to join you in expressing my
personal condolences to the death of a member of your
committee, Senator Coverdell, and I would express my sympathy
to his wife, Nancy. I would like to just state that for the
record.
Mr. Chairman, I want to thank you for giving me the
opportunity to speak with you about some of the issues you
discussed. I also would like to address the alternative
opportunities we now have, specifically in biofuels, on which
your committee has worked very hard, which can help ease our
Nation's excessive dependence on fossil fuels.
Mr. Chairman, Senator Harkin, we both have opportunities to
answer the Nation's energy challenges. My responses to the
energy issues of this year have been grounded in the Clinton-
Gore administration's energy policy. These are the six points
that we believe are the key foundations of our policy:
One, market forces and not artificial pricing. Two,
diversity of supply, and strong diplomatic relations with
energy producing nations. Three, improving the production and
use of traditional fuels through new technology development.
Four, diversity of energy sources, with long-term investment in
alternative fuels and energy sources. Five, increasing
efficiency in the way we use energy. And, six, maintaining and
strengthening our insurance policy against supply disruption,
the Strategic Petroleum Reserve.
Let me just mention, members of the Committee, some
relatively good news on pricing, although I am most sensitive
to some of the serious problems in America's farm economy. Mr.
Chairman, as you know, we are seeing some recent signs of
encouragement in our oil and gas markets, thanks to our
adhering to this policy.
The Energy Department's Information Administration is now
reporting that conventional regular gasoline has dropped 13-
cents-per-gallon since this time last month nationwide, from
$1.68 to $1.55. In the Midwest, regular gasoline is down 28-
cents, from $1.87 to $1.49. And also in the Midwest,
reformulated gas has gone down 48-cents in the last month. This
is good news for the American consumer. It has gone from $2 to
$1.52. Hopefully these are some favorable trends. We think they
may be some trends that will continue.
And, as you know, diesel is in the same family as heating
oil, and we are concerned about heating oil supplies for the
upcoming winter. We need to build stocks, so this is creating
some price pressure on diesel which affects our Nation's
farmers and truckers.
I also want to state my concern over the current low
inventories of natural gas, which you did, too. We need to
watch these levels carefully. Continued low inventories when
the cold weather comes could force prices up considerably and
put the pinch on America's families.
But we do have some good news. According to the Energy
Information agency, retail, on-highway prices of diesel are
down about 2-cents in just about the past 3-weeks, nationwide.
In the Midwest, diesel is down 3-cents over that period. Still,
they are unacceptably high.
Part of this relief stems from our work of the past 7-
months, when we moved vigorously to boost supply. As you know,
I have talked extensively with oil producing nations. OPEC and
other producers have heard our concerns and have twice boosted
their output. We hope they continue to keep an open mind.
Our latest data shows that there are roughly 3.5-million
barrels per day more oil on the market than during this time
last year. That is a welcome addition to the world market, and
it is exerting downward pressure on gas prices.
But we can't claim victory. Regular gas is, on the average,
around 38-cents more expensive than it was at this time last
year. This is mainly because we simply have not been able to
replenish stocks as demand continues to soar. We need to
exercise longer term solutions. We need not only to ease this
demand, we need to ease America from its dependency on imported
energy sources, which you stated in your opening statement.
Here is a solution on meeting demand, and that is the
bioenergy solution. The President is committed to such a
vision, introducing proposals to boost domestic production,
spur energy efficiency, and increase the use of alternative
energy resources.
We have extensive opportunities in the field of bioenergy.
Mr. Chairman, I know that this issue is of great personal
interest to you and every member of this committee. And I see
that Senator Conrad has come in. He has been a champion on
these issues, too.
Examples of your leadership, Mr. Chairman, include this
committee's previous hearings on the importance of biofuels;
second, your attendance and presentation at the signing
ceremony, and subsequent hearing on Executive Order 13134,
Developing and Promoting Biobased Products and Bioenergy; and
most recently, as you stated, passage of a law, the Biomass
Research and Development Act of 2000, signed by President
Clinton on June 22, 2000, your bill.
Finally, I would be remiss if I didn't acknowledge your
role and this committee's role in aligning the research
programs at the Departments of Agriculture and Energy in this
extremely important area, and the office director that is
heading up these joint efforts is here with me today.
Mr. Chairman, bioenergy resources already meet over 3-
percent of our Nation's energy requirements, and consumption
has been rising by nearly 3-percent annually since 1990. But
even this growth cannot meet our growing concerns on air
quality, climate change, dependence on foreign energy supplies,
and the sluggish economic conditions in the Nation's farm and
forestry sectors.
If we are to see a meaningful decline in our future
reliance on fossil fuels, if we are to lessen our vulnerability
to interruptions in energy supply, if we are to kindle a whole
new field of agricultural and forestry economics, then we need
a cooperative national effort to develop a range of renewable
energy sources, and bioenergy can be at the heart of such an
effort.
Creating such a vigorous market will boost demand for
dedicated energy crops, providing new revenue streams for
farmers and new cash flow for rural economic development. The
current uncertainties on the farm and in our forestry industry
could be eased by long term energy crop contracts with
biorefineries. This is the focus of the bioenergy initiative,
integrating the existing bioenergy and bioproducts programs
within the Energy Department and the Department of Agriculture.
In FY 2000, we awarded more then $18 million in contracts to
promote the biorefinery industry.
Mr. Chairman, I want to take a moment to commend you also
for the bill you forwarded to make sure we take aggressive
action on the promise of bioenergy. As you know, we have been
working under the President's executive order since August of
last year. That order set a goal of tripling the use of
bioenergy in the U.S. by 2010. We can get there. I also want to
thank Senator Harkin for his initiative in making sure we have
coordinated efforts within the bureaucracy.
We have also already established the National Biobased
Products and Bioenergy Coordination Office, and have produced
our first integrated, multiagency strategic plan for biofuel
and biopowered research. Our FY 2001 budget includes
substantial increases for biofuels and biopower, $40 million at
the Department of Energy and $44 million at the Department of
Agriculture.
With your bill's enactment, we have taken an important step
towards that goal. The world is demanding more energy. It is
wise that we position America's farmers as the supplier to meet
that demand.
We would like to ask that this committee lend its support
to our research and development budget requests, so that we can
make our research plans a reality and meet our goal of tripling
the use of bioenergy in the United States.
There are also ample opportunities in wind power, which I
know is of interest to this committee, and especially to
Senator Harkin. Of the top 15 wind resource States, 12 are
located in America's agricultural heartland.
To take advantage of this, in June of 1999 I announced the
Wind Powering America Initiative, which challenges the country
to harvest enough of this area's vast wind resources to
generate just 5-percent of America's electricity needs. Just 5-
percent will return economic benefits of over $60 billion by
the year 2010.
A successful example of a good wind program is Storm Lake
in Senator Harkin's home State of Iowa, which has developed the
world's largest wind farm. Total annual payments to landowners
in that area are already $500,000, and will continue over 20-
years. Imagine what we can do nationwide.
Let me close, Mr. Chairman, with what the Clinton
administration, what steps we have taken during this year to
ensure that America has the energy resources it needs. You will
recall the President's vigorous actions when we had a heating
oil shortfall this spring, that he has proposed a heating oil
reserve, and has taken aggressive actions to ensure that those
who need help when cold rolls around, receive it.
We are also helping America's oil producers, testing new
technologies and giving a hand to those already in the field.
We have got some domestic oil and gas initiatives that we need
approved by this Congress.
But there is still more that we can do to get relief to
consumers. Mr. Chairman, last month the President sent a letter
to Majority Leader Lott, urging that the Congress work with the
administration to enact the President's pending energy
proposals without delay.
The President has asked for a $4 billion package of tax
incentives to encourage domestic oil and gas production, and
for consumers to purchase more efficient cars, homes, and
consumer products. It has idled on the Hill for 2-years.
In FY 2001 the President advanced a $1.4 billion investment
for Energy Department programs in energy efficiency, renewable
energy, natural gas, and distributed power systems. The Senate
should be commended for supporting 97-percent of the
department's FY 2001 budget for renewable energy resources, an
increase of $50 million above the final House mark. I hope that
the Senate prevails in budget reconciliation deliberations
before the conference Appropriations Committee.
The Department is urging the Congress to appropriate our
entire request of $154 million for our Weatherization
Assistance Program in 2001. This will be a step towards full
restoration of this vital program that reduces the heating and
cooling costs of low income families by an average of $200 per
year, thus helping them cope with the high prices of fuel that
they, of all Americans, are least able to afford.
Also of concern, the Congress has postponed action to
extend the Energy Policy and Conservation Act, which authorizes
two central components of our Nation's energy security, the
Strategic Petroleum Reserve and our participation in the
International Energy Agency. Mr. Chairman, I need that
authority to use that Strategic Petroleum Reserve in case of an
emergency.
The President also submitted--and you mentioned this, Mr.
Chairman, in your opening statement, the issue of electricity
reform--we have submitted the Comprehensive Electricity
Restructuring Act 2-years ago, and we need Congress to enact a
bill. We are encouraged by recent action in both the House and
Senate, but, as you mentioned, the possibility of brownouts and
blackouts and a weak electricity grid nationally is of great
concern.
Mr. Chairman, it is no longer a question of if the electric
utility industry is going to change, it is when. And I know
that this is an issue of particular interest to rural
communities, to the farming sector. We need to act on this
issue now.
I have crossed the country, talking to Americans, having
electricity summits, warning them about brownouts this summer.
Power went out in the San Francisco Bay area last month when
temperatures soared, and 3-week days ago utilities in New
England and on the West Coast were stretched to the limit as
the one-two punch of hot weather and the unexpected loss of
several power plants nearly brought on blackouts.
Mr. Chairman, I welcome this challenge that you have
offered to develop a bipartisan energy policy, and as you
mentioned, we have a lot to do. I thank you for your time.
[The prepared statement of Secretary Richardson can be
found in the appendix on page 69.]
The Chairman. Well, thank you very much, Secretary
Richardson. Let me thank you for mentioning our colleague,
Senator Coverdell, at the beginning of your comments. As I
mentioned on the floor yesterday, he was a very valued member
of this committee and participated vigorously with us, and we
will miss him.
I simply want to start by saying I appreciate the
initiatives you have outlined, and you have indicated six
principles, and right at the top, market forces, diversity,
diplomacy, in which you have been involved.
But my basic question still is one that must come to you
and your associates almost every day, and that is, the
infrastructure needed in this country to provide for the
projected increases in growth year-by-year and the time frame
required for all of these things to happen are not working for
us. These again and again are mentioned, that even after people
make decisions, there are time lags in large capital
investments.
For example, the New York Times points out that even given
all of the disruption of this year with regard to very high
prices for gasoline and protests throughout the country, that
the demand for gasoline at the pump has gone down by only
seven-tenths of 1-percent. Now, the Times points out that, that
is different from a 2-percent increase year-to-year the year
before, 2-percent or 3-percent the previous 2-years before
that.
But nevertheless we are dealing with a very big figure, the
consumption of gasoline, for example, in the country, and even
the escalation of prices to that level did not change demand by
more than seven-tenths of 1-percent, which means that even if
market forces work, and they surely will with regard to natural
gas.
You have cited the low inventories. Many observers point
out that they are so low that they are almost beyond remedy at
this point; that it would be impossible physically to get
natural gas at inventory levels that would be at all
comfortable into the country. Prices already are rising. The
markets speculatively take a look at that, whether it is in
spot markets or in the stock market for energy companies.
And, as a matter of fact, as you point out, whether it be a
brownout this summer or a plant disruption. I receive letters
now from my State routinely, from heavy industrial users of
natural gas who point out that if we have a very severe winter,
that they may have to shut down. In addition to inconvenience
at the pump, unemployment, layoffs of people occasioned by our
failure to have adequate supplies.
And this is why I sort of come back to the thought, is
there any comprehensive effort involving yourself, the
President, the Vice President, everybody, to try to give some
confidence to the American people that even though we have
disruptions now that are fully foreseeable, and in some cases
not easy to remedy, there is some overall plan?
Now, you point out government doesn't do this alone. Market
forces, other countries, all sorts of suppliers, energy
research still undone. But I just think there is a growing lack
of confidence in the American people that those of us who are
in charge have some idea.
And what is suspected is that the supplies will be
inadequate, that prices will continually go up, and worse
still, that even at any price energy will be unavailable to
some of our communities. The thought will come back, well, we
should have done more to conserve, that in essence we have been
a wasteful people, that somehow growth of jobs and industry and
what have you really is not going to be accommodated.
This is why I started with, who will give this news to the
American people, that essentially we are now headed for a lower
growth, lower comforts, hazardous level? I think that is
unacceptable. I think the people are going to say, get the
supplies, stop horsing around with this situation; find it,
invest the money that is required, tell the truth as to how
much it is going to cost, but we want to be supplied. In other
words, we do not want to be constrained.
Now, if this is a philosophical issue, then we need to sort
of fight this out. There may be those in our society who would
say that we are profligates and we shouldn't want that much,
but I think the majority are going to say that we do want that
much. As a matter of fact, we can have that much, if we use our
brains, our capital, our ingenuity, we have some framework of
leadership.
Now, how do you address this overall, big problem? You have
tried to address, I think correctly, the reserves that might
help in New England, helping maybe a little more reserve of
natural gas generally, working with the Saudis as you have, but
these at best are small fixes in what is a fundamental problem,
as I see it.
Secretary Richardson. Mr. Chairman, you are absolutely
right. The administration does have a plan. We are refining
that plan. We recognize that there are potential home heating
oil shortages. We are concerned about natural gas, too, both
the prices and access, and other issues.
We are concerned also about the whole issue that you
mentioned, the demand for gasoline in the course of 1-year
increased 4-percent, the highest ever. Now, we can pat
ourselves on the back and say this is because of a booming
economy and more technology, but that would be wrong.
Senator I think we need a joint strategy. I have laid out
some initiatives that we would like to see passed. I think the
Congress can contribute enormously by working with us. I think
we need a dialogue with industry. I just met with the home
heating oil industry yesterday, and I think through
collaboration and partnership we are addressing some of the
problems in the home heating oil situation in New England this
year.
Senator, you mentioned the brownout issue. Again, I am
really worried about that. I am worried about our distribution,
our generation, our transmission system. We have a grid that is
a Third World grid, for a booming economy for the world's
biggest superpower. And that is going to take investing in more
power, in regional transmission organizations, in more
renewable energy.
In order to do that, Senator, we need legislation that
restructures, and enables the utility industry to invest more,
that allows the rural co-ops to compete and invest more, too.
We need a reliability standard. Will that deal with the
brownouts next month? Maybe not necessarily those, but at least
it will lay us a foundation for a more modern electricity grid.
On natural gas, we need to work together. We have set up an
interagency natural gas task force. We need to find ways to
have the deep water royalty relief. Natural gas is clean. It is
going to mean some hard choices in terms of pipelines. We think
is the fuel of the future.
Senator I think in your area, bioenergy, if we can in
America's heartland use crops that help our farmers, that give
us energy security.
My point is, Senator, we are developing a plan, but it is
going to require a national dialogue, and you accenting and
pointing out these problems and these issues is very helpful,
and we need to continue. I think this hearing you are having is
good, I have seen the witness list, the very, very broad range
of expertise. I am going to read this transcript very carefully
and see if we can crank it in and move forward.
The Chairman. Thank you. Let me point out that even as we
have this hearing here, on the floor is the agriculture
appropriation bill. I know the distinguished Ranking Member
will be involved shortly in that, so I am going to recognize
him, and constrain each of us to 5-minutes or a little bit
more, so that not only we can all be heard but we can hear the
distinguished witnesses, and go back and forth to vote as
required.
Senator Harkin.
Senator Harkin. Thank you very much, Mr. Chairman.
Mr. Secretary, I for one want to commend you, and I want to
commend your department, I want to commend the Clinton-Gore
administration for their leadership on a number of issues in
the energy area. Especially I want to commend you, Mr.
Secretary, for taking the leadership to establish the National
Biobased Products and Bioenergy Coordinating Office which you
mentioned in your opening statement. My information is that
they are doing well, they are getting some proposals together,
and I look forward to meeting with them myself.
I also want to commend you for the increase that you have
put into your budget request for FY 2001 for biobased and
bioenergy fuels. I think that is a good step in the right
direction.
I also again want to commend you, and through you the
Clinton-Gore administration for their energy initiatives. We
have had it here now for about--it is one thing to provide
leadership. You have got to have some followers hip, too.
We have had $4 billion in tax incentives for oil and gas
production, for more efficient cars and homes and products.
Congress hasn't done anything on it. We haven't acted on it. It
has been sitting here for at least two or 3-years, if I am not
mistaken, and not one thing has been done. And Congress has not
acted to reauthorize the Strategic Petroleum Reserve, either.
So, quite frankly, I think, having been in Congress for a
number of years, it just seems like we don't do anything unless
a crisis stares us in the face. I remember when I was on the
Science and Technology Committee in the House back in the
1970s, and then once the oil crisis was over with and the
Reagan administration came, we dropped all of our research
programs on alternative fuels because everyone just, well,
everyone felt we didn't need it then. And so we just drifted
through another decade, another almost two decades, without
understanding what was happening with our oil and gas supplies.
One other observation, Mr. Secretary. You know, I might
take a little issue now with you or with those that are saying
that we should be feeling pretty good now because gasoline
prices are coming down. In July of 1999, regular unleaded
gasoline in Iowa was $1.10 a gallon. In June of this year it
was about $1.80-these are round figures--$1.80 a gallon.
And guess what, it has dropped now down to $1.52, and we
are told to feel good. You know, they boosted it up 70-cents
and they have dropped it about 20-cents, and we are supposed to
feel good. Nonetheless, it is still about 40 some percent
higher this year than it was last year, as I said in my opening
statement, with farmers. And that is hurting all of our
production. It is hurting our income picture in rural areas.
Mr. Secretary, I guess the only question I really have that
I would just again like to ask you about is the amount of
energy and effort that you, your department, is putting into
the mid and long term. You know, it just seems like we get
caught up in these crises, and it is sort of the old story
about the alligator and the swamp. You know, you don't really
tend to think about the long term.
But once again, I think we have to begin laying the
groundwork and the plans for the mid and long term production
of energy in this country. And again, I just want to hear from
you as to your thoughts of what your department not only is
doing but what you think we should be doing in the area of
biobased fuels and biobased energy production in this country,
and what the potential is for wind. You mentioned we have the
largest wind farm in the world in Iowa. We do, and it is
working well, and farmers are making money off of it, and it
doesn't take very much land, either. The capacity there is
tremendous for more of that.
So tell me what you see down the pike. I mean, what should
we be doing now, not for next year, not for this year, what
should we be doing for 10-years and 20-years from now?
Secretary Richardson. Senator, first of all, I think you
were getting some very good advice from your able staff when
they said that even though the trends are good, these prices
are still unacceptably high for the farm economy. So, I am not
gloating over those decreases. I think we have got a favorable
trend, and hopefully we are going to continue that.
I think you are so right, Senator, that we have to look at
the long range because of what has happened with our economy.
What would I say is something that we need to do together? You
mentioned wind. I am very bullish on wind, and I think your
support for continued research is key.
I didn't mention in my remarks to Senator Lugar the
importance of America's refining capacity. Our refining
capacity has weakened. We need to boost that. A lot of small
refineries have closed in the past decade. In fact, I saw a
couple in Iowa. Right near the airport there was one that
closed, that I saw, that I was very concerned about. Even
though total U.S. refining capacity has expanded and become
more competitive, we have to be clear and careful about that.
I mentioned electricity restructuring. This is a long range
investment, that we should invest in our electricity grid so it
can deal with the growing demand, and that means not just
investing in new power sources, not just investing in regional
transmission organizations, but also in renewable energy and
renewable technology, biomass, solar, wind, geothermal. I think
these are investments that we delayed and somehow we have put
aside, and we need to bring back.
I think renewable energy--you mentioned the tax credits--
this is long range. For farmers, we recently announced an
initiative that affects farmers, fuel efficiency for lighter
trucks. I think there is tremendous potential here. This will
involve a lot of farm equipment, farm vehicles. This is an
investment that we need to work with in the future.
Natural gas, this is something that I think is going to
require a national bipartisan effort, because it is not just a
question of access to natural gas, it is a question of
transportation, it is the whole issue of ``not in my back
yard.'' But, you know, I have encouraged a lot of our Federal
buildings--and the Federal Government is the biggest consumer
of energy--to do more with natural gas.
Senator I could go on and on, except to say that we do have
an office of emergencies at the Department of Energy. We have a
policy office. I have all of my people here.
You did ask for what specifically in biodiesel,
biodiversity, bioenergy we have, and what we have planned. Dan
Reicher, my expert on this is here. Mr. Chairman, could I call
him up, or is that----
The Chairman. Yes, please do. Please identify yourself and
your office, if you would.
Mr. Reicher. Mr. Chairman, I am Dan Reicher, Assistant
Secretary of Energy for Energy Efficiency and Renewable Energy,
and I will just say quickly, we are, as the Secretary noted,
very excited about the opportunities for biomass. We are
focused on programs that will allow us to use biomass to make
power, electric power; to make liquid transportation fuels; and
indeed, Mr. Chairman, to replace some of the petroleum now used
in the chemical industry with biomass.
Added together, that investment in technologies to support
the use of biomass for power, fuels, and chemicals, we think we
can triple U.S. primary energy use from biomass to almost 10-
percent by 2010, and that would be a big step forward for us.
What it is going to take is increased investment in the
technologies. It is going to take some smart policies. The
Secretary talked about tax incentives, for example and the
right environmental policies.
And it is going to take stimulating markets, as well. We
think with our large energy demand in the Federal Government
itself, powering our 500,000 buildings, we think we can help
drive some of these new markets for biomass and bioenergy as
well.
Secretary Richardson. Mr. Chairman, the key is also a
partnership with the private sector. Technology can take us to
more energy security and fuel efficiency. New natural gas
technology, new technology for wind, new technology for fuel
efficiency, fuel cells, hybrid vehicles, cars, and SUVs that
are 40-miles-per-gallon. That last technology is something that
I wanted to underscore, too it should be a long term priority.
The Chairman. Thank you very much.
Senator Conrad.
STATEMENT OF HON. KENT CONRAD, A U.S. SENATOR FROM NORTH DAKOTA
Senator Conrad. Thank you very much, Mr. Chairman.
Thank you, Mr. Secretary, for being here. Thanks for your
leadership and your warning us repeatedly that we were headed
for trouble. I can't remember how many meetings I have been in
with you, or speeches that I have heard you give.
I remember very distinctly when you discussed with the
Energy Research Institute at the University of North Dakota,
you gave the keynote address several years ago, and warned
there very clearly that we were headed for trouble, outlined a
series of steps that needed to be taken, including incentives
for greater production and incentives for renewables, and
unfortunately precious little has been done by the Congress in
response to your repeated warnings. I think we do function kind
of in a crisis mode. That is, I am afraid, more typical than
not for Congress.
But this is a circumstance that just a crisis response is
not going to work, because when you head over the cliff and
your are in a brownout, you can't respond quickly enough. That
is the hard reality that we confront. These are long lead time
investments that need to be made to expand capacity in oil and
gas, expand capacity in renewables and all the rest.
I just put up a couple of quick charts that talk about what
our farmers are facing out there, and I come from one of the
most agricultural States in the Nation. This is the index of
fuel prices, with 1990-'92 being the base of 100-percent. You
can see what has happened from 1999 until now. It doesn't
reflect fully the last little dip we have had, about 2- to 3-
cents that has come off diesel in the last several weeks, which
is welcome. But when we look at the movement from 95-cents a
gallon last year up to over $1.50, it is pretty stunning out
there. My State university says it is going to cost every farm
in my State, on average, $4,000.
Let me just put up the context within which we are
operating here, to show why that is a very serious blow. This
chart shows in green the prices that farmers paid for inputs,
and the red line is the farmers' prices received, what farmers
are receiving for what they sell. I think this tells it about
as dramatically as it can be told. The farmers are receiving
dramatically reduced prices for what they sell. In fact, we
have got record low prices. Inflation-adjusted, this is as low
as it has been.
And we look at the input costs, the things that farmers
have to buy, including energy, they have continued to go up,
and with respect to energy they have risen dramatically. This
has put farmers in a cost-price squeeze that is literally
unprecedented.
I am going to my State fair this weekend. What would you
say to the farmers who are going to come up to me and say,
``Senator, what is being done?'' alternatively, ``What can be
done?'' If you had a very brief conversation with a North
Dakota farmer and he said to you, ``Mr. Secretary, what are the
things that are being done right now, and what can be done,''
in a very thumbnail response, what would it be?
Secretary Richardson. Senator, I would say five things to
your farmer and your constituents. I would say first that
prices are turning downward this week, that we are looking at
some favorable trends.
The second thing I would say to them is, we are looking
beyond, we hope to go beyond, soon, the pipeline and refinery
problems that we have been experiencing.
The third thing I would say is, we need inventories to be
built. I think that is key.
The fourth thing I would say is that we are hopeful that
this week's downward trend is going to lead to, as I said,
lower prices this summer and this fall, that red chart you had.
And then the fifth thing I would say is that we have to
focus on the long term; that we have to have bipartisan support
for a lot of the initiatives that you have outlined and Senator
Lugar has outlined. That is funding energy R&D. That is
boosting tax incentives to increase domestic production. I see
Senator Johnson is here. He has been a champion of the oil and
gas industry. What we have as a marginal well tax credit for
oil and gas; geologic expensing; payback provisions to improve
and incite exploration. And then, lastly, and you have been a
champion on this, too, and that is electricity restructuring,
that grid, that grid that we need to modernize and be more
competitive.
So those are the five things, it sounds like 14, but it
really is under five, that I would say to your constituent. And
the last one, Senator, is the technology that I believe we are
investing so that, that farmer can participate in America's
energy future, not just for survival but can make money. I
think that is the key, and I think this is something that our
programs, through the leadership of this committee, have
enabled us to do.
Senator Conrad. One last question, if I could, Mr.
Chairman.
What is your forecast--you have got the experts there--in
terms of trends and prices? What is the forecast for fall, as
we go into fall harvest, for diesel prices?
Secretary Richardson. The new Energy Administration Acting
Director is here, and I would like to call him forward. Is it
permissible?
The Chairman. Please come forward, and identify yourself
and your office, please, for the record.
Mr. Mazur. Mr. Chairman, I am Mark Mazur from the Energy
Information Administration.
Mr. Conrad, generally for going into the fall we project
prices to be roughly today's levels with slight downward trends
for diesel and gasoline.
Senator Conrad. And when you say ``slight downward trend,''
you are talking a couple of cents?
Mr. Mazur. A couple of cents, yes.
Senator Conrad. All right. Thank you.
The Chairman. Thank you very much, Senator Conrad.
Senator Grassley.
STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM IOWA
Senator Grassley. I have had a chance to get here late, and
what I have heard is that the problems we have are Congress's
fault for not acting.
And I am not here to say that Congress can't do a lot of
things to help this, but I wonder if it is fair to blame
Congress, if it also isn't then fair, as a matter of equity and
laying everything out on the table--and this doesn't come
within your jurisdiction, Secretary Richardson--but when we
have pipeline and refinery problems, as we did during April and
May, and creating part of the problems in June, particularly in
Chicago and Detroit, isn't it fair at the same time to raise
the question why the Environmental Protection Agency couldn't
delay the reformulated gasoline Phase II provisions for three
or 4-months to accommodate what was unpredictable at the time
they initiated their regulations, when the refineries and the
pipeline problems weren't there? But they did not respond with
that sort of request on the part of the Governor of Wisconsin
or the Governor of Illinois, as an example.
More in your area, couldn't we have seen downward trends in
exploration for oil and downward trends in exploration for
natural gas, and the Senate Energy Committee tells us about
two-thirds of the known supply of, on-tap supply of natural gas
is under Federal lands, and we have seen this trend, because so
much of exploration, so much of our country has been taken off
bounds for exploration. And when you have lower supply, you
have higher prices, obviously. Isn't it about time that we
start looking at encouraging greater exploration in the
continental United States?
Secretary Richardson. Senator Grassley, first let me just
say that I think we need a bipartisan energy policy, and I am
not here to blame anybody. I think, as Senator Lugar said in
his opening statement, I think it is important that we have
joint efforts, short term and long term.
On your first point, Senator Grassley, here are the reasons
for higher gasoline prices, and you mentioned two of them. The
reasons are the high price of crude, and the refinery problems.
You talked about the pipeline problems, the Wolverine, the
Explorer problem. High demand, as I mentioned, the highest
demand ever. Low inventories. Temporary market dislocation from
the introduction of RFG-II into the market. And the utilization
rate of refineries at about 96-percent nationwide.
Now, what I mentioned earlier, the price of Midwest
gasoline has gone down substantially. Now, it is still
unacceptably high. And what we are attempting to look at
Senator, is the whole issue of the price differential for
reformulated gas, RFG of 2- to 5-cents. And why was there such
a spike at one time? I think this is the focus of the Federal
Trade Commission, and they should be looking at all of these
issues and reporting back to us, to you, to us, sometime this
month.
Again, it is a combination of forces that have hit us all
at once, and I do think we do have a policy. We have been
prepared. I think it is commendable to have reformulated
gasoline. That was the 1990 Clean Air Act. We all participated
in that.
I think what we now need to do, Senator, is deal with this
whole supply issue, this whole demand issue, find ways to
increase production, you are absolutely right, domestic oil and
gas production. We need to reduce our reliance on imported oil.
We have proposals before you to help the domestic oil and gas
producers with some tax credits. I think we need to do that. We
need to find ways----
Senator Grassley. But on that point, could I interrupt you?
Isn't it under our law allowing the President to take certain
lands out of bounds for exploration? The President can then
take action to put that land in bounds, it would seem to me. I
have not studied the law, but I know that it is presidential
decisionmaking or through the Interior Department that, that
has been done. Can't they undo that in such an emergency
situation as we have right now?
I mean, are we concerned about less reliance upon
importation of energy or are we not? And the extent to which we
aren't, and we are always going to be terribly too dependent
upon it, but we can do more, and alternative fuels are one of
those, and tax credits are one. But when we aren't making
adequate use of what God has given us, it seems to me we ought
to.
Secretary Richardson. Senator, I think we need to balance
domestic production--the private market, boosting our oil and
gas and our energy producers--with protecting the environment.
Now, we believe that there is enough potential for exploration
in existing Federal and offshore land to do the job you
mentioned.
Now, what has happened a lot to our domestic producers,
especially in the oil and gas area, is even though gas is at
$30, you know, a lot of them are still hurting, because when it
was $10 a barrel, many went out of business. Rig counts are
still down. They are getting back up.
And so we think a combination of finding ways that access
can be improved, making it an environmentally sound matter,
getting rid of a lot of red tape that exists there. I mentioned
the importance of deep water royalty relief that we need to
have extended again for natural gas.
But I think, Senator, this is why we need to make a
national energy policy a priority for both sides. At the end of
this session we should have a tax credit bill of initiatives
that are important to you, that are important to us, so that we
can get on with a long range policy that you mentioned.
Senator Grassley. This is my last point. We decimated the
exploration and oil drilling business. Last month the number of
rigs exploring was down once again, I don't know whether down
to a particular historic low. Qualified people to work in the
industry are down. It is very difficult to find the type of
people you need. Just the last few years of not being able to
explore as freely as in the past has put us in a condition
where, even if the change in policy came now, there would be a
long lead time to get back to where we ought to be, to find
more sources of domestic production.
[The prepared statement of Senator Grassley can be found in
the appendix on page 66.]
The Chairman. Thank you very much, Senator Grassley.
Senator Johnson.
Senator Johnson. Thank you, Mr. Chairman. I have a markup
going on right now, as we speak, dealing with CARA legislation,
and it is important for me to return there, and I will be very,
very brief. I would like to submit a statement, with your
consent.
The Chairman. It will be accepted, and likewise Senator
Grassley's statement will be published.
STATEMENT OF HON. TIM JOHNSON, A U.S. SENATOR FROM SOUTH DAKOTA
Senator Johnson. Very good. Thank you, Mr. Chairman. I
commend you for holding this hearing today on what is a
critical and timely issue.
Currently in my home State of South Dakota, gasoline prices
are second highest in the Nation. It is particularly
frustrating, particularly in light of recent data that has been
shared with us indicating that retail prices continued to go up
at the same time that wholesale prices were plummeting for
petroleum in the Midwest.
These high fuel prices couldn't come at a worst time for
South Dakota consumers, particularly those in our farm and
ranch sector of our economy, as commodity prices have bottomed
out. As my good friend from North Dakota has so ably shown with
his charts, input costs continue to go up sharply while return
on the farmer's labor, particularly in the grain sector,
continues to go down.
This requires a long term plan, and I appreciate the
discussion that has taken place here relative to a consensus
that we do need less reliance on imported petroleum, but I
would have to observe that we need less reliance on petroleum,
period. This is a finite, nonrenewable source of energy.
There may be more that we can do to generate more
production in the United States, although I think, as Secretary
Richardson has ably pointed out, this involves some balancing
going on. We would like to see more production. On the other
hand, my constituents are not clamoring to open up wilderness
regions particularly right now, either, and there is a
balancing act that has to go on there.
So long as this is a finite fuel, so long as we continue to
be significantly reliant on foreign nations, we are going to
continue to be vulnerable to market shocks such as we have just
witnessed this year. I commend Secretary Richardson for his
very hard work to negotiate with OPEC and the non-OPEC oil
producing nations, Norway, Mexico and so on, that has at least
begun to move us back in a better direction. But I think that
we are going to continue to be vulnerable until we become far
more serious than we have been with development, research and
development of alternative renewable fuels, with a particular
eye on agriculturally based fuels.
In my home State of South Dakota, the one area where you
have an opportunity to save some money right now is to utilize
the existing E-85 fuel pumps that we have positioned around the
State of South Dakota. We don't have enough of them, but they
pump 85-percent ethanol, 15-percent gasoline. They work very
well. The experience has been good with the vehicles in our
State, and you can buy that fuel for 35-cents a gallon less
than standard gasoline.
So some of this is not far distant rocket science that we
haven't figured out. Some of this is doable and capable of
implementation on the more near horizon, and it is my hope that
as we continue this debate about how better to generate a good
level of continuity in petroleum production, that we also
continue to become more aggressive than we have been up to now
on the development of these alternative fuels.
Ethanol certainly is not the sole answer to our problems
with energy in America, but it is one piece of the puzzle, and
I think that we can do better in that regard. It is my hope
that with the phase-out of MTBE, that we not give up concern
about oxygenating fuel, and again I would hope that ETBE would
be viewed as a very serious option in that regard. It has to do
with clean air rather than fuel availability.
Again, I just want to share with the Secretary my concern
that while we do need to continue to negotiate aggressively, I
think we need to regroup in terms of our conservation
strategies as well, but we need also to be thinking beyond
petroleum as a source of energy in this country. And, Mr.
Chairman, you have been very helpful in that regard. This
committee I think has been focused significantly in that
direction, but we need to reenergize that effort, given the
experience we have had these past months.
And so I simply want to share that with the Secretary, and
I am going to have to excuse myself for votes that I have to
take in the Energy and Natural Resources Committee right now.
But I do appreciate this hearing, and hopefully this will lead
to a better understanding and a greater bipartisan effort on
this urgent issue.
The Chairman. I thank the Senator for all of his
contributions to that bipartisan effort in our committee.
And I thank you, Secretary Richardson, for coming this
morning, for exploring with us as you have. I hope you will
stay closely in touch, and we will be closely in touch with
you, because this issue will likely increase in some intensity
and severity as we have described, and the public will be
asking us for answers and explanations. But we thank you for
coming.
Secretary Richardson. Thank you, Mr. Chairman. Thank you.
The Chairman. The Chair would like to call now the
distinguished former Secretary of Defense and Energy, James
Schlesinger.
Secretary Schlesinger, welcome once again to the
Agriculture Committee. We have appreciated your coming before
us on several occasions in the past. This is another timely
appearance, and we look forward to your testimony this morning.
STATEMENT OF HON. JAMES SCHLESINGER, FORMER SECRETARY OF
DEFENSE AND ENERGY
Mr. Schlesinger. Well, thank you, Mr. Chairman.
Let me start by joining with you and with Secretary
Richardson in paying respects to Senator Coverdell. I worked
closely with Senator Coverdell on the question of aid to
Colombia. He was an extraordinarily good Senator, hardworking,
but more important than that, he was a good man, and we shall
miss him.
Mr. Chairman, you have my statement, and I shall not read
it at this time. I will simply mention a few highlights.
The Chairman. Excellent.
Mr. Schlesinger. The first point that I would like to make,
and I want to emphasize this point, is that all too frequently
we use the phrase ``energy policy'' or ``national energy
policy'' as a kind of incantation, as a talisman that will ward
off distress in the energy area. By contrast to that, we must
recognize that an energy policy will have to choose a specific
goal or goals, and that means sacrifice of other objectives.
In the past, starting with the Arab oil embargo, with
President Nixon's Project Independence, all through the 1970s
the great stress was on reducing dependency on foreign oil
imports, reducing dependency on OPEC. That has become less
relevant from a national security standpoint than it was in
those past decades, because of the collapse of the Soviet
Union, and therefore the collapse of the Soviet threat to the
oil tap in the Middle East, and also because of the Gulf War.
Saddam Hussein will be the last Middle East potentate to seek
control over the oil supplies of the Middle East.
That is not to say that the national security objective has
gone away. Oil affects both our foreign policy and our foreign
policy calculations, but it is far less serious than it was in
the 1970s when there was a Soviet Union.
In the intervening years we have moved away from that
willingness to use government intervention in the attempt to
reduce dependency on foreign sources of supply, and towards
reliance on the market. Sometimes it is presented as if
reliance on the market were a free good, as it were, that
solves problems. It solves some problems; it creates other
problems.
Prices in the marketplace, as we have just experienced,
will fluctuate, and when prices go up, consumers are unhappy,
users are unhappy. When prices go down, producers are unhappy.
Avoiding price fluctuations, of course, implies that one
controls the market, which is the opposite direction from which
we have moved.
Also, we depend upon price signals, price signals to create
the new infrastructure for expanded capacity. We will not have
expanded capacity until those prices go up, and as a
consequence, at this time we have problems with the
infrastructure for our energy industries, perhaps most
immediately, the infrastructure facing the electric power
industry in what Secretary Richardson referred to as the
``Third World'' grid.
The reason that we have that, Mr. Chairman, Senator Conrad,
is that we moved enthusiastically into competition in the
electric power industry without considering the need for
expanded capacity in the grid. And as cheap power moved around
in the grid, we discovered that we were operating at close to
100-percent of capacity. If we want to move towards competition
and move cheap power around the country, we have got to be
prepared to take national measures to encourage strengthening
of the grid.
I should mention something also, Mr. Chairman, that you and
Secretary Richardson have referred to, and that is the existing
problems or the prospective problems with regard to natural gas
supply. We are not moving enough natural gas into storage at
this time. It may or may not be a serious problem next winter.
In your remarks you indicated that it could be a serious
problem.
If we have a normal winter this coming winter, we are going
to have serious problems with supply come late January, early
February. We only are moving perhaps as little as 2.5-trillion
cubic feet into storage, and that is far less than we would
need to get us through the winter. It also means that we are
producing less natural gas than we should, and the consequence
of that is that when winter comes, we may have a problem. We
should pray for warm weather.
Why are we producing less natural gas? Because the price
signals earlier were not right to encourage the drilling
activity that is necessary to have the degree of deliverability
that is essential to have ample supplies. Moreover, we have a
very high depletion rate with regard to natural gas, depletion
rates of 30-percent, sometimes greater, and that means in order
to sustain the present level of production, we must be finding
7-trillion cubic feet a year. That is going to be quite a major
effort.
So these matters are a reflection of, in large degree, the
decision to move towards reliance on the market mechanism. That
has many advantages, but it does create the potentiality for
price spikes.
You have discussed amply, I think, the conditions in the
Midwest this year. It is plain that when the Congress passed
the Clean Air Act amendments and called for Phase II of RFG on
June 1st of this last year, that they did not anticipate, one,
that the OPEC nations would hold down the availability of
petroleum and, two, that the price signals to refiners as well
as a shortage, a relative shortage of supply, would result in
low operating rates of refineries.
Since oil has become available, since refinery margins have
improved, the refineries are now operating at 95- or 96-percent
of production. But no one could have anticipated those changes.
It points to the need for careful coordination between
environmental considerations and energy considerations. We
sometimes make these decisions independently, and then we have
reason to regret them.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Schlesinger can be found in
the appendix on page 74.]
The Chairman. Thank you very much, Secretary Schlesinger.
You have made, I think, an important point, that in moving
toward market forces, clearly the market must see price
signals, and that leads to commitment of private capital for
investment and the time lag that we have discussed a little bit
earlier on, that even after the investment is made, the
infrastructure, the construction of this takes time, as well as
the filling of the pipelines or the transmission lines or what
have you.
I just query, from your standpoint, you have been involved
in government in many capacities, likewise in private industry,
what is the responsibility of the Government in these
situations? We could, I think, take sort of a laissez faire
attitude Towards that now, given this price spike in natural
gas that is apparent, it probably will be clear to many
companies that investments in both drilling as well as thinking
through the transportation thing are warranted. Boards of
directors will be committing that money. People will be out in
the field doing this.
But here we are in government, people coming to Washington
and pointing out that they are not only being inconvenienced
but maybe severely hurt if there are shutdowns of plants due to
a very severe winter, quite apart from the problems of poor
people in our country. We wrestle with this question each year
in terms of the home heating legislation. How much is to be
appropriated for our States that are in the northern part, in
particular, or for low income people everywhere throughout the
country?
The market works, sort of roughly, with jerks and starts
and spikes, but there are a lot of human problems here. There
are a lot of people who are badly hurt in the process, and then
government responds to those situations with ad hoc income
supplements or strange machinations one way or another, really
to ameliorate discontent.
You know, I think you are correct, that the thought of an
energy policy out there that somehow guides all this is
probably not an appropriate idea for a government that, after
all, is so diffuse as ours in the number of responsible people.
But at what point will it become more apparent, given the fact
we don't have the Soviet Union and we don't have this external,
to think about our own growth, our own prosperity?
And maybe this starts with the President. I suggested
roughly in my opening remarks a coordinating council that
somehow brings together EPA and the Department of Energy, but
also Agriculture and Defense, and the President, because this
is big stuff.
And without coming to that point, I think the lack of
confidence of the American people in our government, whether it
is the executive or the Congress or people throwing bricks at
each other as to why it all failed, leaving aside private
industry, vitriolic, demagogic attacks on oil barons, gas
barons or what have you, we are going to go through this many,
many times. So maybe it is inevitable.
But can you give us any general wisdom as to how you would
begin to formulate a governmental response that takes private
capital into consideration so that we get better results?
Mr. Schlesinger. Well, Mr. Chairman, that is a very complex
question. Ideally, governments will be flexible and they will
anticipate change. We have not been very good at that.
You mention a coordinating council. The administration set
up the National Economic Council, and I would have thought that
this energy problem and environmental problem might have fallen
under the purview of the NEC. It may be desirable to have an
additional body to coordinate within the Government.
The first rule, it seems to me, is that of Hippocrates,
which is ``do no damage,'' or do as little damage as possible.
It is clear, I think, that we have changes in our policies that
are serious changes.
For example, the Project Independence of President Nixon
stressed nuclear power. In the subsequent years, to say the
least, the stress on nuclear power has gone away. Both
President Nixon and President Carter stressed coal conversion.
In the light of change, changed attitudes towards greenhouse
gases, going towards coal is less than an ideal policy, and
national policy has changed as a practical matter.
But, in addition to these serious changes in policies, we
change policies capriciously, and that, it seems to me, is
something that can be avoided. One of the great advantages of a
focus on the long run as you suggest, is that it will hold down
these capricious changes in policy.
The view of the world has changed. For example, in the
1970s it appeared that we would have less natural gas than
appeared in the subsequent 20-years. The industry will tell you
today that we will be able to deal with our natural gas
problems next winter, but the public may not like the price.
Well, it is true that prices will always equilibrate
markets when they are permitted to do so. But I think that the
U.S. Government might begin to look seriously at moving the 35-
trillion-cubic-feet of natural gas that is up there in Alaska,
starting with Prudhoe Bay.
For over 25-years, as you will remember, Senator, Congress
has had the Alaska Natural Gas Transportation Act to deal with
the choice of a pipeline to move that fuel down to the lower 48
States. Nothing has taken place in the early years because it
was not economically feasible.
We have now reached the point of feasibility, and it seems
to me that this is something that Congress can do, that
government can do, and that is to smooth the path to the
development of this kind of infrastructure which will, I think,
be necessary, as we continue to move towards the use of natural
gas in power plants, to supplement the production in the lower
48 States. I commend it to you. I commend it to Chairman
Murkowski, to take a look at that issue.
Those are the things that you can do if you anticipate what
will happen in the future, and we have good judgment about the
longer run future, far better than short run judgment. We have
good long run judgment.
I trust that, that response sort of responded to your
question.
The Chairman. I think that is very helpful, and you have
raised really three areas in which perhaps it would be
appropriate, as opposed to lamenting the lack of an energy
policy.
As you said, we have had a debate in the past on nuclear
energy, and we haven't had much of a debate recently. The whole
issue has been how can we store waste from the past, not do you
extend or expand nuclear energy in this country. Other
countries are having that debate and are expanding the use of
nuclear energy.
Now, it could very well be, as we raise this, that the
emotions involved in this, or the practical problems of storage
of the unspent fuel and the debate we are still having over
where it is to go and under what circumstances. But up front
the public needs to know this is a big issue, that this is one
way in which some energy might come to some parts of the
country.
Another, as you say, is in the coal conversion area.
Clearly, for reasons you have mentioned, the greenhouse gas
debate, other environmental considerations, coal has not been
favored, certainly soft coal. Some hard coal, on occasion, but
nevertheless cost is involved in that, and availability. But
there is a lot of coal left in the country. You know, in the
same way that presumably, theoretically, the supply of nuclear
energy is huge, likewise for coal.
So if we are interested on the supply side of this, those
are two items which in other fora have been more or less put
out of the picture of our energy debate. Now, you mentioned
finally Alaska, and this, Senator Murkowski clearly would be in
favor of a policy that got to the natural gas in Alaska, and in
fact espouses that, has many supporters.
But that is sure to become an environmental issue, almost
an icon situation. Beyond our practical aspects of that
transmission, it probably is going to have to come back into
debate, same as coal and nuclear, hazardous as those pursuits
are, because there is a very large supply.
And, as you say, when we were having the deregulation of
natural gas debates in the latter part of the 1970s, the
Metzenbaum-Abouresk filibuster on the Bentsen bill, the
assumption was that natural gas is so limited, that if we ever
deregulated natural gas, the price would spike up and never
come down. It was almost a theological view of the parties that
were held at that point. Now, that has changed, thank goodness,
in only 20-years.
Mr. Schlesinger. Those who were concerned about
deregulating natural gas are now its most enthusiastic
supporters because of its limited environmental effects.
The Chairman. So I have noticed. I mean there is a shift in
the generation. So I think that is a helpful contribution to
this hearing, that it is not just a question of gasoline spikes
in Chicago. You know, the question that we are trying to look
at is, is there a will of the American people, of our
government, of our industry, to provide adequate supplies for
the growth of this country, for the comfort of this country?
You point out correctly, as we all would, that there are
tradeoffs and they involve the environment, and the environment
involves the health of the American people, the well-being of
people likewise. Now, these may or may not be compatible. You
know, you suggested that sometimes, in your opening comments,
that the tradeoffs are very severe. You finally have to choose
one another.
You know, maybe it is question, I suppose, of the ingenuity
of the American people that are researchers, as to how many
formulations we come up with that are good on supply and good
on environment, good on health. I don't know the answer to that
question.
This is why the biomass area, which at best, as we heard
today, by 2010 might formulate 10-percent of our power, not a
solution but still an incremental change that at the margins is
helpful, given the big figure for energy in our country, and
there does appear to be a lot of promise there of renewable
supplies. And strategically, as we look at the world, we don't
have the Soviet Union but we may have somebody some day, and
this is a good time to put our house in order so that we do not
have the perils that President Nixon and you and others faced
back then.
Let me now recognize my colleague----
Mr. Schlesinger. Could I comment for a moment, Mr.
Chairman?
The Chairman. Yes, yes.
Mr. Schlesinger. I strongly support the work on biomass. It
is not going to be a solution for this decade, but if indeed we
are able to find the enzymes that can break down cellulosic
biomass, we would have a new energy option that is serious. We
don't know whether we can be successful, but we should work on
it.
With regard to environment and Alaska, there are two
aspects. One is the opening up of the National Petroleum
Reserve to exploration. That is objected to by the
environmentalists, strongly.
The other aspect, which is to bring down the natural gas in
Prudhoe Bay and elsewhere, we have already solved the
environmental problems in the sense that under the Alaska
Natural Gas Transportation Act there was chosen an Alaska
natural gas transportation system that goes down the very same
transportation corridor as does the Alyeska pipeline, and has
all of its permits in place still after 20- or 25-years. So I
think on that point the environmental issue is manageable.
The Chairman. That is a very important distinction. I
appreciate your mentioning that.
Mr. Schlesinger. We also have, I think, the question that
Senator Grassley raised about opening up additional areas for
exploration. There is a clear conflict between closing off
areas, particularly the most promising areas, and reducing the
growth of our dependency on foreign sources of supply.
The Chairman. That is right, and there probably the
American people do have to make some choices, because by and
large we are enthusiastically in favor of larger national
spaces, and we also are in favor of lower price of gasoline,
natural gas, both, and at the same time.
Mr. Schlesinger. And they expect you to deliver both to
them, Mr. Chairman.
The Chairman. That is right, and that is why we are meeting
today, to call upon Senator Conrad.
Senator Conrad. I thank the Chairman, and thank you, Mr.
Secretary. I am struck once again how fortunate our country is
to have people of your quality and ability who are willing to
come to public service as you have in the past, and we
appreciate that service very much.
Mr. Schlesinger. Thank you very much, Senator.
Senator Conrad. You mentioned in your testimony that one
place that government may have a role and a responsibility is
with respect to the capacity of the grid. Could you tell us
what steps you think the Congress should take with respect to
improving the capacity of the grid? What are the practical
steps that we need to take?
Mr. Schlesinger. There are two aspects of that. One is the
capacity and the other is the reliability of the grid. I worry
about the latter, for several reasons.
As I indicated earlier, when we moved to competition, this
meant that much greater volumes of electric power would pass
over the grid, and that meant that the grid would be loaded up.
The electric power system is this delicate alternating current
system that is always subject to instability, and a breakdown
somewhere in the system may lead to a larger breakdown.
I believe--correct me if I'm wrong, Mr. Chairman--that
Senator Gorton has a bill with regard to the reliability of the
electric power grid?
The Chairman. I am uncertain of that, Sir.
Mr. Schlesinger. Anyway, that is one thing that I think
that the Congress should look at very hard. Over the years
since the 1967 blackout in New York State, industry has been
left to worry about this problem on its own. It established the
NERC in the late 1960s to worry about reliability problems, and
it has served well until this much greater demand was placed
upon the grid by the encouragement of competition.
I think that the Congress needs to look at that. I think
the administration needs to look at that. Enhancing the
reliability of the grid would be the first thing that I would
worry about. I would particularly worry about it, Mr. Chairman,
Senator Conrad, because of the possibilities of cyber warfare,
information warfare.
The existence of the grid, the reliability of the grid, is
a prime target in asymmetric warfare, as a war game of the NSA
showed a few years ago, ``Eligible Receiver,'' in which
hypothetically power was shut down along the East Coast. This
would have a devastating effect on the country, and worrying
about the reliability of the system is particularly germane at
this time.
Expanded capacity, it will come only as a result of
pressure on the industry, because it is uneconomical. Once
again, the price signals are not there, Mr. Chairman. It is
uneconomical to expand capacity unless there is pressure to
bring about capacity expansion.
Senator Conrad. Thank you for that. Let me ask you, as I
said to the Secretary, I am going to my State fair this
weekend. I am going to be asked, I am sure often, what should
be done?
Mr. Schlesinger. I beg pardon?
Senator Conrad. I will be asked repeatedly, what should be
done about the spike in prices? What would your answer be to
those farmers?
Mr. Schlesinger. I would say several things, Senator. The
first one is, I think, indicated by the dialogue between
Senator Grassley and Secretary Richardson, that we probably
need to have more flexibility with regard to the imposition of
environmental restrictions on a particular date certain, if the
circumstances, that were imagined at that date was laid down,
have changed.
That has resulted in an unforeseen--largely unforeseen,
there were warnings of this--but unforeseen 6- or 8-months ago,
problem. And flexibility with regard to these rules I think is
essential, and the Chairman's suggestion that we have a
coordinating council that watches this from the standpoint of
the executive office might be a very good idea.
The second thing is. It may be cold comfort in light of the
charts that you showed to those who are watching the gap
between input prices and output receipts increase but the fact
of the matter is that last year oil prices had hit $10 a
barrel, which had basically crushed the desire to invest in
exploration in the world outside of OPEC and forced us to
become more dependent on Middle East sources of supply, such
that when demand revived, there was less spare capacity around
the world.
The benefits of last year, as it were, with regard to fuel
prices, are part of the cause of the high prices of this year,
and we should as a country be looking at ways, in my judgment,
to stabilize prices. That may include the imposition and then
the reduction of taxes on gasoline, for example, such that the
price is more stable than it has been. It puts a terrible
burden on an independent producer, as being the most dramatic
example, to have these kinds of price fluctuations while they
are operating on narrow margins.
Mr. Chairman, you might think in this committee about the
possibilities of stabilization of prices through the fiscal
system. It would permit greater security in planning for
farmers, and it would being in over time, I believe, some
considerable revenue to the Federal Government that will, of
course, diminish whenever prices go up.
But we are living in a peculiar period in which OPEC's
strength has returned. It is sometimes said, Mr. Chairman, that
modern OPEC is like a tea bag, in that it works only when it's
in hot water. And when the prices of oil got down to $10 a
barrel, the OPEC nations pulled themselves together, achieved
the necessary cohesion to cut production. Normally, unless they
are right up against it, they don't do that. Most of the time,
I think, in the period ahead we are going to see lower prices
than we see today.
Senator Conrad. Thank you.
The Chairman. Thank you very much, Senator Conrad.
Let me just, without alarming the hearing by asking a
question like this, when you talk about stabilizing, are you
suggesting perhaps that if the coordinating council in
government, including the President, said we are growing at the
rate of 2-percent in our energy needs, this country, every
year, and so as a result we are going to need 2-percent more of
something that provides us energy.
So OPEC comes along and says, ``Well, for reasons of ours,
we are going to restrict so many barrels this year.'' And the
President counters and says, ``Well, if you are going to do
that, we are going to release X number from the petroleum
reserve, and we will sell those on the market, have revenue in
our kitty back here.'' And then OPEC moves the other way and we
move the other way. We store more in the reserve.
I mean, is this essentially the kind of mechanism that a
government has, not as a countercyclical affair or to disrupt
the price mechanism, but we are in that business in a way. We
have this emergency reserve, although there is argument as to
the conditions under which it should be used. Secretary
Richardson has touched upon this a little bit today. We are
going to use a little bit of it for New England's problems, as
perceived, but that is sort of an ad hoc fix of a particular
geographical location. You are talking, I think, about a much
broader stabilization effort.
Mr. Schlesinger. Yes. The reserve in New England, Mr.
Chairman, is not going to do that much good, in that it is
projected at 2-million-barrels of heating oil. That is trivial
in relation to the total requirement. It is a gesture, and it
may be a desirable gesture, but it is not going to
significantly affect the market.
It would seem to me that this is an area in which we might
well consider a fluctuating tariff, and particularly if the
OPEC nations continue to have cohesion, which I doubt, and
maintain an excessive price, that we be prepared to use a
fluctuating tariff for the purpose of stabilizing prices.
The Chairman. I would just point out parenthetically, I
mentioned in my opening statement we invited the Saudi oil
minister to testify. He is prepared to respond to questions in
writing. But one point that he and others have made, with OPEC,
is that with the exception of the Saudis and perhaps slightly
more capacity in Kuwait, they are already going full steam.
So, in essence, they are pointing out this is still a
worldwide supply and demand problem in which they do not bear
the onus, at least in their judgment, for having precipitated
the prices. But it is an interesting point of view, and we will
have the record replete with those thoughts.
Mr. Schlesinger. The Saudis, in the late 1970s and in
recent years, have been amongst the doves of OPEC right now the
Saudi policy is to pull that price down, not entirely for our
benefit but to prevent the erosion of oil's share in the energy
market.
The Chairman. We have been joined by Senator Kerrey.
Senator, do you have questions of this witness, or are you
prepared to let Secretary Schlesinger move on, and we would
then hear from Senator Johnson?
STATEMENT OF HON. J. ROBERT KERREY, A U.S. SENATOR FROM
NEBRASKA
Senator Kerrey. He seems to be appealing for release.
Mr. Chairman, I just thank you for holding the hearing. It
is obvious that gasoline prices have dropped a bit, from the
attendance here this morning, but in Nebraska our energy price
increases for a single year are in excess of about $400 million
of additional payments that we just voted in the crop insurance
bill, so it is a very big issue for the most important part of
our economy.
And I appreciate, Mr. Secretary, your historical analysis
and presentation of how easy it is for us to sort of lose sight
of the fact that we still have significant dependency on
foreign sources, even though OPEC has weakened, and that it is
very important for us, if we want to be productive and we want
to have higher standards of living, we still have to have
energy to produce those higher standards of living. And we in
Nebraska are very much aware of that.
Mr. Chairman, I appreciate very much your holding this
hearing, and I would not ask any additional questions to
Secretary Schlesinger, and look forward to the additional panel
and the additional witnesses.
[The prepared statement of Senator Kerrey can be found in
the appendix on page 62.]
The Chairman. Thank you very much, Senator Kerrey. I would
point out Senator Kerrey was a major factor in moving the
Committee toward having these hearings. He has sounded the
alarm consistently, along with Senator Conrad, and I appreciate
both of them participating.
And we thank you especially for coming, and look forward to
seeing you again.
Mr. Schlesinger. Thank you, Mr. Chairman. And Senator
Kerrey, may I express my and I think the country's sorrow at
your retirement.
Senator Kerrey. Thank you. Thank you.
Mr. Schlesinger. You have been a fresh breath here in
Washington. Thank you.
Senator Kerrey. Thank you.
The Chairman. Thank you very much.
The Chair would call now our former colleague, Senator
Bennett Johnston of Louisiana. It is really a special privilege
to have you, and you are welcomed by your former colleagues and
your current friends, and we look forward to hearing your
testimony.
STATEMENT OF HON. J. BENNETT JOHNSTON, A FORMER U.S. SENATOR
FROM LOUISIANA, JOHNSTON AND ASSOCIATES, LLC
Mr. Johnston. Well, Mr. Chairman, thank you very much, and
thank you for the invitation to appear. And may I say, just as
an aside, that daughter Sally had a little girl last night.
The Chairman. Well, this is very good news, because that is
a new constituent of mine, as it turns out, without becoming
very personal.
Mr. Johnston. Indeed, and I am sure she will be a Lugar
voter.
The Chairman. I hope so. That will be great.
Mr. Johnston. Mr. Chairman, first of all I want to
apologize for my written statement, which is made on my own
behalf, prepared by me, as you could probably tell, which means
that I don't have staff. And don't laugh, because you all will
1-day be in that kind of situation. I tell Senator Kerrey he
will soon lose his staff, and it is not a very good situation
when you have to do your own work, and you can see how the
quality suffers.
Mr. Chairman, we have gone through another one of these
same old, same old price gouging accusations of the big oil
companies, and still another FTC investigation of oil, as to
why these prices went up so fast. By my count, Mr. Chairman,
this is the 17th investigation of price gouging. Not one, not
one single one of those investigations has shown any evidence
of collusion or market power or price gouging, and so this one
will be.
There are, in fact, two investigations that have been done
on the reasons for these prices, one by EIA, Energy Information
Administration, one by the Congressional Research Service, both
of which found no evidence of price gouging. And indeed the
Congressional Research Service accounted for the difference
between the Midwest prices, particularly in the Chicago market
and elsewhere, and virtually to the penny, and I can go into
what those reasons are, and you probably, I know staff has a
copy of that.
The EIA investigation talked about refinery margins being
squeezed. Now, how can that be, that you can have refinery
margins squeezed while at the same time oil companies are
announcing the biggest profits in history? I mean, at Chevron,
for example, I think we had the best first quarter that we have
ever had, and yet we made no money on motor gasoline, and that
is a pattern throughout the industry. How can that be?
Well, it is very, very simple. That is, you sell crude oil
on the international markets at world prices and you make a lot
of money on that when OPEC has the prices high. When prices are
low, as they were in 1999, down around $10 a barrel, we weren't
making any money on crude oil but we were doing okay on motor
gasoline. And so it is that, that is the reason why, among big
profits, you have no profits on motor gasoline.
Actually, historically the big oil companies, I might say,
have enjoyed about one-half the profits on a percentage basis
as the S&P Industrials have, and I might add, I don't know what
do you tell your farmers when you go to the fair. One thing you
could tell them is that crude oil is now less than half, in
real terms, what it was in 1981, if that makes them feel any
better. You can also tell them gasoline is now, in real terms,
below where it was in the 1950s and 1960s, which we think of as
the halcyon days of oil and gas. I know politically that is
probably not going to sell, because people look----
Senator Kerrey. You know what they will do. They will come
back and tell you what has happened to the price of wheat and
corn over that period of time, as well.
Mr. Johnston. That is exactly right. There are problems,
and you can summarize those as being supply, price, and
volatility.
On the question of supply, when I was last talking about
oil here in the Senate we were importing about 50-percent. We
are importing 56-percent now. EIA says we are going to import
70-percent by 2020. So, Mr. Chairman, anybody who thinks you
are going to reverse that trend is--I mean, I have been hearing
this for over a quarter of a century. Nixon's energy
independence was no foreign imports, and it is all a pipe
dream. I mean, we don't have the oil and gas in this country to
avoid it.
There is plenty of crude oil in the world today. You know,
when you look at where it is, sometimes that is a problem:
Kazakstan, the former Soviet Union, Venezuela, of course Iraq,
Iran. There is plenty of crude oil, and eventually the price
will elicit that crude oil to come on the market.
The problem is, of course, the price, which was $11 in late
1998, went up to $34 in March, down now to a little more than
$30 a barrel, but as I say, still less than one-half what it
was in 1981. The real problem with energy is volatility. I
mean, that is the political problem. What is the proper price
of oil? I mean, is it really $10 or $11 a barrel, as it was in
late 1999? It really is not, because if it stays there for very
long, you put people, the producers, out of business, and you
allow OPEC to do its thing.
Now, those who say that we don't have an energy policy and
that we need an energy policy are suggesting that volatility is
the problem, that it can be controlled by government, and that
it is your job to control it. Mr. Chairman, I want to tell you
in the strongest way possible, I have been through this.
In 1973, when I came here, and we were holding hearings on
OPEC and the price of oil, this very problem, everything was
regulated. Crude oil was regulated, you know, gasoline was
regulated. We had all this old oil and new oil. Natural gas was
regulated from the well head to the burner tip. Electricity was
thought of as being a natural monopoly.
Mr. Chairman, the most controversial and difficult
legislative battles I went through in all of those years were
with respect to the price of energy, particularly natural gas
but also crude oil. Back in those days they were seriously
talking about rationing. They were saying we were going to run
out of natural gas and crude oil about the turn of the century.
You know, it was going to be over $100 a barrel. It was going
to be just awful. And if we deregulated natural gas, Ralph
Nader and his crowd said, oh, the price is going to go through
the roof.
Well, Mr. Chairman, we know what happened. We deregulated,
after a huge fight, and the price of natural gas went down and
stayed down, and frankly until recently. It has doubled over
the past year, but even so, in real terms, even at $4 an MCF,
it is about 15- or 17-percent what it was, the maximum spot
market price, which got up to about $9. And inflation-adjusted,
it is just 15- or 17-percent what it was. Now, I think it is
going up. I think we are going to have a problem with the price
volatility of natural gas, for a whole lot of reasons.
But the point is, we fought all those battles, and
successfully so. There is plenty of oil. There is, according to
the National Petroleum Council, there is going to be enough
natural gas to provide some, I think it is 34-percent increase
by 2010, if we do everything right, if we allow drilling where
we are supposed to be allowing it and what have you.
The Chairman. Let me just ask, if I may at this point, I
hate to interrupt you, Senator Johnston, but we are in the last
5-minutes of the roll call vote. And so before any of my
colleagues become anxious or I become anxious about that
situation, Senator Harkin, our colleague, has offered an
amendment, and that is the subject of the vote. So, if I may, I
would like to call for just a short recess at this point in
your testimony, where you have got us to the point that there
are supplies, at a price, and then if you could pick up your
thought after we return, which will be 5-minutes or so from
now, I would appreciate it. Thank you.
Mr. Johnston. Thank you, Mr. Chairman.
[Recess.]
The Chairman. Our hearing is called to order again, and
would you please proceed, Senator Johnston?
Mr. Johnston. Thank you, Mr. Chairman.
Right before you left I had stated that I believe that
there are adequate supplies of oil and gas. The problem is one
of volatility, and it is a serious problem, and I think the
problem is likely to get a lot more serious as we face
blackouts, brownouts, rapid escalation in the price of natural
gas and continued fluctuation in oil.
The question is, what do you do about it? I would say
first, Mr. Chairman, that you should avoid impeding market
forces. It is a great temptation. Let me give you just one
example of the current solution du jour for dealing with the
problem, and that is the Northeast heating oil reserve. It
proposes to take 2-million-barrels, which Secretary Schlesinger
says is not enough--it is a pretty good amount--but put that in
a government storage.
Now, what is wrong with that? Well, first of all, heating
oil has got to be turned. You can't keep it there for years
like you can the Strategic Petroleum Reserve. It will
chemically degrade if you don't turn it. Typically, private
people turn it five times a year. The government would do so
less often, probably once a year.
So the Government will go out and procure storage. Where
are they going to get it? Private sector. They don't have any
themselves. So they are going to take out of private sector
storage the 2-million-barrels which they will buy. Then that
will actually take out of use some 10-million-barrels. If they
turn it five times and they have got 2-million-barrels, you
take out of use 10-million-barrels in order to get 2-million-
barrels of government reserves.
Then what is the Government going to do with it? Well, the
Government presumably would let it go in times of high prices.
Well, you can guarantee high prices because the private people
who--it is expensive, you know, to procure and store, private
storage. If they see the Government with 2-million-barrels out
there overhanging the market, they are not going to put in
their usual amount of heating oil. They are going to put in
less.
So you create the shortage and then you have got to figure
out how the Government is going to release it and what kind of
regulations you have. I mean, are you going to let people buy
it and then resell it at a higher price? It recalls the crude
oil allocation problems of the 1970s.
I can predict, Mr. Chairman, it is going to be a grand and
glorious mess if they do it. Looks like they are going to do
it. And it is not going to work, and when it is not going to
work, then they are going to say, ``Well, we didn't have enough
in storage, we've got to get more,'' which is only going to
exacerbate the situation.
Same thing is true on the Strategic Petroleum Reserve. We
created that for the purpose of dealing with serious supply
interruptions, not price spikes. The Congress is simply not
capable of setting a price which is a proper price and adhering
to it. And then the market gets used to that supply, and it
makes matters worse rather than better.
What can we do? Let me suggest a number of very simple
things, not easy to do, maybe, but they are simple. You need to
drill in those places where you can drill: Arctic National
Wildlife Refuge.
I cannot understand why this Congress will not drill in the
Arctic National Wildlife Refuge. There is no commercial fish
there. Caribou is no problem. Right next door in the Prudhoe
Bay they drilled, and the caribou population went up 700-
percent. That ought to be proof enough. There is enough oil
there, we think, to at least reverse the decline. We drill out
in the Gulf of Mexico, which has over 1-billion-pounds-of-
commercial-seafood, great recreational areas. No recreation up
on the North Slope. I can't understand why we don't drill
there.
We ought to be drilling in places like, for example, Lease
Sale 181 out in the Gulf; in the Destin Dome. Let me tell you,
in the Destin Dome, my company, Chevron, has a lease out there.
I don't know if they are going to be allowed to drill, but it
is over 100-miles offshore. We think there are over 2-trillion-
cubic-feet of natural gas.
Florida has said you can't drill out there, and it is due
for a decision by the Secretary in, I think, next month. This
being a political year and Florida being a big State, you can
predict how that is going to come out. This is natural gas. It
can't spill. You can't see it from the beach. It is serviced
out of Alabama. And yet Florida says we can't drill there. And
let me tell you, Florida is going to have a natural gas
shortage.
It is simple. It may not be easy to do. Electricity, yes, I
fully agree we need to go to electricity competition. Someone
asked what we should do about the grid. Well, for one thing,
you need to build more transmission. Transmission is about 6-
percent of the cost of delivering that electricity, and yet we
are woefully short on transmission facilities.
And one of the reasons is that FERC is not allowing a rate
of return--actually, they haven't set the rate of return, but
their administrative law judge has recommended, I think it is
9.6-cents, I think, which is not enough. You are getting more
at the State level, allowed by the State commissions, than the
9.6. And they are not going to build any transmission. I mean,
this is very, very bad policy, very clear. Members of Congress
ought to be writing to FERC now and say give a rate of return
that will bring forth transmission supplies.
As far as, I mean when you are talking about reliability,
you have got to build more transmission, first of all. That is
the biggest thing, because our electricity industry grew by a
group of local companies which, you know, it might be State-
wide, it might be multi-State, but they were local, and their
reliability margins were set by their public utility
commissions, and they didn't basically send a lot of energy
outside of their own grid.
Now we are interconnected, imperfectly and not well
interconnected, and you need to build much more of that
transmission. It is going to be a very, very serious problem,
the problem of transmission, as well as the problem of
additional electricity generation.
One of the problems there is there are no more--you can't
go out and buy a turbine now. G.E. has got all of its turbines
bought up for years to come. Intergy, in a very smart move, I
think, bought them all up. And so if you want to build a new
gas-fired power plant, which is the cheapest and the best way
to do it now, you have got to wait in line for a long time to
get your turbine. So things are going to get worse in
electricity before they get better.
We ought to do something about siting, siting plants,
siting pipelines. It takes too long. California, let me tell
you, people are pulling their hair out in San Diego now over
the price of energy because they are way--the price has spiked
way up because there is a shortage of supply and there is a
transmission problem. We need to speed that along, the siting.
I remember back in the 1970s I chaired a conference. The
bill passed, I think, both houses, as I recall, on critical
energy supply facilities, siting of critical energy supply
facilities. It didn't pass, but it is the kind of thing that
ought to be considered.
And, finally, there are some other things I could say, but
perhaps most important, you need to pursue the nuclear option
in this country. You can talk about renewables, but look,
renewables are going to be a small part of the solution.
Nuclear is 20-percent of our electricity now, and could be much
bigger. It is nonemitting, doesn't cause any greenhouse gas
problems.
And if you lose what you have now, you are going to
exacerbate that natural gas price problem, because the
reasonable prices for natural gas depend upon keeping your
present nuclear facilities going. That could be a whole hearing
in itself, of how you do that, but let me just say that is what
you need to do.
So, Mr. Chairman, you are going to have political energy
problems, but I would, in the strongest way I can tell you, say
stick to the basic policy of market forces. We do have an
energy policy which was procured at great political loss of
blood, and it is called market forces. We need to perfect that,
preserve that, and expand it.
Thank you.
[The prepared statement of Mr. Johnston can be found in the
appendix on page 79.]
The Chairman. Thank you very much, Senator Johnston.
Let me just highlight for a moment the point you have made
that volatility is the problem, and you have cited the swing in
a short time from $10-a-barrel oil to $34, or $30, as it may be
now, and the inadequacy of government in attempting to define
what the proper price ought to be.
There is at least some more than anecdotal material that
the OPEC countries, in trying to think through their policy,
have come out with the thought maybe that $25-a-barrel is a
proper price. Now, this may be a tactical point of view with
regard to the politics of oil in the world, and pressures from
our country and others may have something to do with at least a
profit level that makes possible the infrastructure building
for themselves or other considerations we would have in trying
to bring those investments.
With Secretary Schlesinger, I pursued at the last of his
testimony this thought: If we were to try to combat volatility,
is it a reasonable proposition that our government would try to
make an estimate of the growth of the economy or the growth of
energy resources, and the two are somewhat correlated, and say
that we are going to try to facilitate 2-percent growth every
year? Now, in order to do that, we will need to have X number
of units of energy in some form, and so we are prepared really
to act as a government to try to bring that about.
I would suggest, and you mentioned a little bit in your
testimony with regard to oil, if we finally come to that, that
we have the Strategic Reserve, and so there would be at least
the viability or a possibility of utilizing some of the
strategic reserve, not with the thought of depressing the price
of oil all-time, but having stated that we are going to need so
much, that we would supply that much. OPEC, others, would all
know that is where it is headed, that we are not dumping the
entirety of the reserve or doing something irrational.
I think you raised some very good points which in a larger
hearing we would have to try to think through, that is, the
distribution of this oil and physically, even if you have on
paper an idea of equilibrium, how in the marketplace and given
the facilities we have, all of this occurs.
And it may be that practical people will say finally,
because you have suggested with regard to the New England
heating oil thing, that this is not going to work. Even though
it sends signals, the practical aspects of this, in this time
frame and so forth, are beyond what they are going to be able
to do. That may be the case.
I am just trying to get to what I think the common sense
question many Americans would say, is surely there must be
someone who can do something about a situation that goes from
$10 to $34, that jerks all of us completely out of shape. And
you may say, ``Well, what's sauce for the goose is sauce for
the gander.''
People were suffering in oil country last year, and this
year it is very high, but even then oil newsletters point out
people want to make sure it stays there a while before they
begin to make these sorts of investments and begin to build the
infrastructure and all the rest, and it may not have lasted
that long. They sort of suspect somewhere it might go down
again, therefore even in these conditions the market works, but
haltingly, with great reservations, with a lot of skepticism on
the part of people who may lose money, who have to put the
money out there.
And I am just trying to figure out, where does government
or any public group come into this picture? We are all watching
the drama of why people make investments, how high does it have
to be, how high does it stay, while on the other hand consumers
of the product all over the country come not only to Washington
but to State capitals, to mayors and so forth, and demand
relief, and all sorts of ad hoc solutions are a result of that.
Mr. Johnston. Mr. Chairman, all I can say is, almost
invariably, I will say invariably, when the Government steps
in, they make matters worse.
Now, with respect to the $25 target, is it ploy with OPEC?
I personally don't believe so. I think $25 is about as much as,
as high as you can have without eliciting a big supply response
by the world, a big efficiency and conservation response.
Now, I remember back in the 1970s when the experts came in
and said that there was no elasticity in the consumption of
gasoline. It didn't matter where the price of gasoline went, it
is inelastic. You are not going to use any more or any less.
And the problem was that they had these computer models that
showed, you know, at 32-cents there is so much consumption, at
36--you remember when gasoline was 32-cents?--at 36-cents it is
not that much more. Well, they were using a very narrow range.
What we found was that there is huge elasticity in
consumption, but there is a big lag time. If you are driving a
big SUV, I call them urban assault vehicles, you can't easily
and quickly make a change to a more fuel-efficient car. But
believe me, if that price would stay up very high, $1.75, $2 a
gallon, those SUVs are not going to be worth much because
people are going to be getting into something smaller.
That is what happened in the 1970s. The Saudis remember
that better than anybody. Not only did it bring forth
conservation, huge conservation, but it also--I mean, look at
natural gas consumption. It is, in the industrial sector, it is
down from what it was back in the 1970s, because of
conservation, not because we are producing less.
So what you have got to be able to do is sort of weather
the storm and wait for the supply reaction. The supply reaction
will happen, and it will happen much better than we as planners
and the Government can do. Believe me, I mean, I have watched
our budgets at Chevron. I mean, we had a planning budget last
year of $19 a barrel, and we are still doing some additional
exploration. If we thought the price was going to be up around
$30, we would do much, much more in terms of exploration.
That is just one company, and I can tell you the other
companies do exactly the same thing. It is economics. The
market system works just like they say it does, but again, the
problem is lag time.
Probably the best thing to do, you know, if you can't think
of anything else, is call for an investigation by the FTC. The
results are going to be predictable, but it doesn't do much
harm and it is not taken too seriously by those who know about
it. But if you can get by with doing that kind of thing,
without really tinkering with the marketplace, you are a lot
better off.
It took me a long time to come to these conclusions. I
mean, I came here as a little lawyer from a medium-size town,
and not knowing much about energy. I found out, in a quarter of
a century, how this thing works, and the market makes it work.
The Chairman. Senator, we thank you for distilling that
wisdom of the quarter century today for us, and, as always, it
is great to have you here in our committee.
Mr. Johnston. Thank you very much, Mr. Chairman.
The Chairman. The Chair would like to call now a
distinguished panel composed of Keith Collins, chief economist,
U.S. Department of Agriculture, Washington, DC.; Harry S.
Baumes, senior vice president, WEFA, Inc., Eddystone,
Pennsylvania; Eric Vaughn, president of Renewable Fuels
Association, Washington, DC.; W. James McCarthy, general
manager, Government and Public Affairs, CITGO Petroleum
Corporation, Tulsa, Oklahoma; Don Hutchens, executive director,
Nebraska Corn Board, Lincoln, Nebraska; and R. Skip Horvath,
president of the Natural Gas Supply Association, Washington,
DC.
Gentlemen, we appreciate your coming. We appreciate your
patience. At this hour you are still with us, and we are
grateful. Now, if you could summarize your statements in 5-
minutes more or less, I would appreciate it. The statements, I
will say, for all six of you will be published in full in the
record, so they will be a part of our permanent record.
Dr. Collins, it is always a privilege to have you before
the Committee. Will you please proceed?
STATEMENT OF KEITH COLLINS, CHIEF ECONOMIST, U.S. DEPARTMENT OF
AGRICULTURE
Mr. Collins. Thank you very much, Mr. Chairman. On behalf
of USDA, we appreciate the opportunity to participate in your
hearing today on energy issues. In my 5-minutes I would like to
make five points.
Point number one is that U.S. agriculture uses a lot of
energy in a lot of alternative forms. Each year agriculture
accounts for about 2-percent of the energy use in the United
States. Diesel fuel is the largest energy input among the
direct uses of energy, and fertilizer the largest among the
indirect uses of energy.
An important trend in American agriculture has been that
energy efficiency has been steadily improving. Farm output per
unit of direct energy used has increased 60-percent since 1980.
Now, that means that agriculture is less vulnerable to energy
price shocks than it was back then, although it is still
vulnerable. It also means that agriculture is making an
important contribution to energy conservation, and I think it
illustrates Mr. Johnson's point about long term price
elasticities of energy demand in agriculture.
Point number two: The energy price increases this year are
reducing farm income, and this is coming from two different
sources, on the price side and on the cost side. When a
consumer spends $1 on food, about 8-cents goes to cover
transportation and energy, for those energy and transportation
costs after the commodity leaves the farm.
These marketing costs are increasing the business costs,
the operating costs, of processors and transporters and so on.
And what they do, then, is they will pass forward to consumers
and back to farmers those costs in the form of lower prices
being bid at central markets, and as well higher basis or even
lower prices in more remote farm markets.
At this point we don't see a whole lot of price effects; we
are mostly unable to measure price effects because of all the
other factors that are going on right now that are affecting
prices at the farm. However, I would note that truck rates have
risen for moving some agricultural commodities, but spot rail
and barge rates are actually lower so far this summer than they
were a year ago.
Well, in addition to the reduction in farm revenue, net
farm income is also reduced by higher farm production expenses
on energy. When a farmer spends $1 on total production costs,
about 3-cents goes to direct fuel and oil costs. This year we
expect that is going to rise to about 4-cents, which would be
the highest rate since 1986. In dollar terms, this translates
into direct fuel expenses being $8.1 billion this year. That is
up $2.3 billion over last year. That is a 40-percent increase.
Thus far, prices of indirect energy inputs such as
fertilizers and chemicals have not changed very much. We do
forecast a small increase in expenditures on those inputs.
However, as natural gas prices and oil prices remain elevated,
the higher production costs will be for chemicals, fertilizers,
machinery, custom work. Things are going to get reflected into
the prices farmers pay for those inputs down the road.
Point number three: In the short term, farmers can do
little to avoid these higher fuel costs, and these costs will
reduce farm income dollar-for-dollar. However, over time,
particularly if the high prices persist, there are a number of
strategies that farmers can employ to reduce the impacts,
including planting less energy-intensive crops, using
alternative practices such as reduced tillage, contracting fuel
supplies, storing fuel, investing in smart and energy-efficient
machinery and buildings.
Point number four: The higher energy prices and the
impending large corn crop are expected to increase the demand
for ethanol this year, reduce ethanol's production cost,
increase ethanol profitability. This is going to increase
incentives to expand ethanol production capacity, and that is
going to make more ethanol available to replace MTBE and help
solve the water contamination problem, and it should help make
more ethanol available to be blended with conventional gasoline
as well as an RFG to help solve the Nation's tight gasoline
supply problem.
Point number five: On the farm program side, I can report
that USDA and DOE are working together to implement the
President's Executive Order 13134, as well as your bill, the
Biomass Research and Development Act of 2000.
I am also pleased to report that we have about completed
our proposed rule on the bioenergy program which Secretary
Glickman announced several months ago, under which the
Commodity Credit Corporation would share input costs with
ethanol and biodiesel processors. We plan to send that rule to
the Federal Register late next week. And I also report that we
are about complete with our solicitation, as required under our
appropriations bill for FY 2000, that will allow us to take
applications for biomass pilot projects up to 250,000 acres on
CRP land.
We are optimistic that bioproducts and bioenergy will
become an important new income opportunity for more and more
farmers as we move through this decade, as well as reduce the
national dependence on fossil fuel.
And that completes my statement.
[The prepared statement of Mr. Collins can be found in the
appendix on page 106.]
The Chairman. Thank you very much, Dr. Collins.
Dr. Baumes.
STATEMENT OF HARRY S. BAUMES, SENIOR VICE PRESIDENT FOR
INDUSTRY AND AGRICULTURE, WEFA, INC.
Mr. Baumes. Mr. Chairman, it is a pleasure to be here this
morning to talk about energy issues in agriculture, and I am
sorry, but I must digress a little bit because I am especially
happy to be here this morning, because I took the train down
from Philadelphia. I missed your opening comments, and one of
the reasons, not one but the reason I missed your opening
comments was that we had an electrical problem with Amtrak and
the train broke down outside the BWI station. So I am very
sensitive to blackouts and power outages this morning.
I am happy to be here, though, to share my comments on
energy issues in agriculture. Many of my comments will mirror
Mr. Collins'. I would like to focus my remarks on four areas.
One is direct usage of energy inputs in agriculture, production
agriculture in particular; indirect usage of energy inputs in
production agriculture. And then discuss very quickly the
short-run implications, and longer-run implications as well.
In the farm operation, whether crops or animal production,
farmers demand energy inputs for different types of energy
inputs, different types of production activities. Planting,
harvesting, primarily require diesel fuel or fuels to operate
equipment. Electricity powers irrigation systems milking
parlors, air conditioning and dryers. Natural gas and liquid
propane powers dryers too. Gasoline, diesel, and lubricants are
necessary to run equipment.
In the aggregate, farmers expended on direct energy inputs
an average of over $9 billion per year between 1996 and 1999.
By my calculations, that is nearly 5.5-percent of total cash
expenses and about 5-percent of total production expenses.
Estimates of energy expenditures on cash costs are expected to
rise considerably for the year 2000.
By my estimates, we are looking at a rise in direct energy
costs of close to $2.5 billion, pushing the figure to almost
$12 billion for the year 2000. Total cash expenses are also
estimated to rise, but at a slower rate, so as a consequence we
are looking at direct energy costs to increase their share of
total cash costs to about 7-percent from 5-percent.
If we look at individual crops, direct energy costs
expended by farmers on corn per acre have averaged somewhere
between $24 to $25 per acre, according to USDA estimates and
WEFA's estimates over the past 4-years. That is about 15-
percent of variable cash expenses.
Soybeans is not as energy-intensive, takes about $6 to $10
in direct energy expenses, only 7-percent of variable cash
expenses. Wheat is similar in terms of absolute magnitude. It
requires about $10 in direct energy costs and it accounts for
14-percent of cash expenses.
So, as Mr. Collins said, energy is a major input and
clearly an important factor to agriculture production, and as
these costs rise, the farmer has very little opportunity to
adjust and his returns are adversely affected.
Indirect usage by agriculture reflects the amount of energy
consumed in production of manufactured inputs, primarily
fertilizers and pesticides. Farmers use millions of tons of
fertilizer and millions of pounds of pesticide. Fertilizer
production, particularly nitrogen production, is extremely
energy-intensive.
Anhydrous ammonia, the primary feedstock to produce
fertilizers, nitrogen fertilizers, is also a product used by
farmers. Every ton of ammonia produced in the U.S. requires
somewhere between 33- to 34-million BTUs of natural gas. For
the past 4-years the price of natural gas has been fairly
stable and energy costs in ammonia production have accounted
for 75-percent of the total production cost.
Now, more recently, energy prices facing the fertilizer
producers are closer to $4 per million BTU of gas, and this has
raised the cost considerably. In the absence of being able to
pass these costs on to farmers or to buyers, 15- to 20-percent
of the U.S. ammonia capacity has shut down in response to these
higher gas prices.
Energy-intensive fertilizers and crop chemical costs
account for about 43-percent of the variable cash expenses for
corn production, 35-percent for wheat production, and 40-
percent for soybean production. Couple these with the direct
energy costs of 10- to 15-percent for these crops, and you can
clearly see that energy is an important input to agriculture.
In the short run, the farmer has little opportunity to
adjust. He has to ``suck it up,'' in the vernacular. He has to
pay higher costs for his diesel fuel, and operate, and that
will directly affect his bottom line. In the longer run, when a
farmer can alter his production schedule, change his complement
of energy inputs, move to alternative or less energy-intensive
crop production or animal production, he can ameliorate or
mitigate some of the costs of higher priced energy.
Mr. Chairman, this concludes my comments this morning. I
would be happy to answer any questions the Committee may have.
[The prepared statement of Mr. Baumes can be found in the
appendix on page 97.]
The Chairman. Thank you very much, Dr. Baumes, and we are
grateful that you made it despite the hazards of energy in your
transportation this morning.
I am delighted that Eric Vaughn is with us again. His
association with renewable fuels obviously strikes a chord with
many of our members, as has been mentioned today, and we look
forward to your testimony.
STATEMENT OF ERIC VAUGHN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, RENEWABLE FUELS ASSOCIATION
Mr. Vaughn. Mr. Chairman, we always strive to strike
chords, so it is once again an opportunity I greatly appreciate
to appear before you and your committee.
My name is Eric Vaughn. I am the president of the Renewable
Fuels Association. We are the national trade association for
the domestic ethanol industry. There are 61-ethanol-production-
facilities. Probably the finest ethanol production facility,
though, is in South Bend, Indiana, New Energy Corp.
Over 600-million-bushels-of-corn are going to be processed
into ethanol this year. According to the Energy Information
Agency, for the past 9-months we have hit record production
levels. This past month 110,000-barrels-a-day of ethanol were
produced.
The great news, in addition to all that, is that since
1990, the passage of the Clean Air Act Amendments, the domestic
ethanol industry has doubled in size, and some 600,000 farmers
today own and operate ethanol production facilities. Again, we
have doubled in size since 1990.
I listened this morning, and always, Mr. Chairman, coming
before your committee is an education. I wasn't certain we were
in the Energy Committee--excuse me, the Agriculture Committee--
all morning long.
I have noted with some degree of real satisfaction that
virtually every major environmental, agriculture, and energy
issue that has affected renewable fuels, ethanol, biobased
diesel, has started, has gotten its push, and has been
supported by you, Mr. Chairman, and this committee, not the
Environment Committee and not the Energy Committee, not to
slight them for not being here, but it is you and your
committee.
It was the clean octane amendment that was added to the
1990 Clean Air Act amendments, the only amendment, by the way,
that passed on the floor that year, that instructed the oil
companies to begin to use alternative sources of clean octane
and not ever-increasing levels of aromatics. There was a huge
outcry of support for that at the time, because it was just
about that time, almost exactly 10-years ago, that we were in
the Persian Gulf.
In fact, August 2nd, coming up, is the 10-year anniversary
of that activity.
There was a tremendous amount of interest in energy
security, energy policy, and energy prices, just like we are
facing today. But instead of beating your chest, instead of
giving long-winded speeches, this committee took action, and
you, Sir, are to be congratulated for that action.
But you didn't stop there. A couple of years later you
worked very closely at lifting the oxygenate cap that EPA
imposed. You also worked with the Environmental Protection
Agency to try to adopt a carbon monoxide credit for these
alternative fuels and their use in reformulated gasoline. You
have worked aggressively to promote tax policies, and are to be
specifically congratulated for your co-op provisions in the tax
provisions that helped to develop these co-op operations and
activities all across the country.
And now you are working again on biomass provisions, and
you are to be congratulated for the work that you are doing not
to just talk about energy policy but to produce results, and
results that we are already beginning to see in many of our
ethanol production facilities.
You haven't stopped there, though. This committee has been
very busy. You are now working with the Environment and Public
Works Committee to try to fix the problem of MTBE in
reformulated gasoline. It is not an easy fix, as you know. You
have been the principal cosponsor of two major legislative
initiatives, and I daresay to you and members of this committee
who have put the bridge together, you are bridging between the
East and West Coasts, where MTBE is so dominant, and the
Midwest where ethanol is so dominant, and attempting to bridge
the differences, concerns and problems associated with Federal
reformulated gasoline regulations.
But you are not simply looking at MTBE, you are also taking
a very honorable position in trying to make sure there is no
backsliding, a critical component of this program. That was the
intent of the Clean Air Act Amendments in the first place.
What does all this have to do with agriculture and farmers
and this committee? Everything. Six-hundred-million-bushels-of-
corn have been processed. We have doubled the size of this
industry. Mr. Lugar, we have doubled it because of leadership
like yours and members of this committee.
The recent run-up in gasoline prices across the country
frightened, angered--frankly, there are words I can't use in
open public committee about what they did to members of our
industry, angering our industry because many people in the oil
business blamed ethanol, blamed the ethanol industry for the
run-up in prices. In 12-months conventional gasoline prices in
Chicago ran up 29-percent, while reformulated gasoline prices
went up 34-percent. MTBE prices went up 30-percent. Ethanol
prices remained steady.
We have oversupplied for this market. We have over a
quarter of a billion gallons of excess capacity today, ready to
meet the demands of reformulated gasoline. And this industry is
now looking at gasoline prices, both conventional and
reformulated gasoline with ethanol, at 92-cents wholesale
today. We didn't run the prices up, Mr. Chairman, as you know,
and unfortunately I can't claim credit for running them down,
but I have three very quick recommendations.
Number one is supply management. The oil industry today has
adopted a just-in-time delivery mechanism, which essentially
means about a two-day supply. While I am not calling for
regulations to increase that supply availability, the oil
industry should be prodded, maybe encouraged by this committee
and others, to adopt a more reasonable plan of action in terms
of supply. Maybe 4-days of supply, just to help smooth out some
of those rough edges, especially when it comes to prices.
Second, environmental regulations, we still have a North
and South reformulated gasoline program. We ought to have one
national reformulated gasoline program. It would help out
tremendously. And, Mr. Chairman, while the Federal
Environmental Protection Agency, after 5-years, has issued a
Notice of Proposed Rulemaking on a CO credit, it is inadequate,
it is not worthy of the action that this committee has put
toward that issue, and needs to be strengthened.
And, finally and lastly, with your leadership on
renewables, we need a renewable energy program. And while I
would be the last to admit, unfortunately, for some in this
room, that renewables can't make a huge impact, it is making an
impact and a positive one toward energy security, environmental
security, and agricultural security all across the country.
Again, I appreciate the opportunity to be here, Sir. I look
forward to your questions.
[The prepared statement of Mr. Vaughn can be found in the
appendix on page 90.]
The Chairman. Thank you very much, Mr. Vaughn.
Mr. McCarthy.
STATEMENT OF W. JAMES MCCARTHY, GENERAL MANAGER, GOVERNMENT AND
PUBLIC AFFAIRS, CITGO PETROLEUM CORPORATION
Mr. McCarthy. Thank you very much, Mr. Chairman. I am Jim
McCarthy, and I head up the Government and Public Affairs for
CITGO Petroleum Corporation. According to the latest available
data, CITGO is the second largest marketer of gasoline in the
United States, with about a 10.3-percent share. We do not do
any exploration and production, and we also do not own or
operate any CITGO retail sites. Those are all independently
owned by local business people.
I too am pleased to be here, to have this opportunity to
speak about the overall issue of providing energy that is so
critical not only to the American farmer but also to the
economic well-being of our country. We empathize with those
families whose household budgets felt the impact of the rapidly
rising gasoline prices, and it is our sincerest hope that a
sound, cohesive national energy policy emerges from hearings
such as this, because what America does need is an energy
policy that ensures the quality of life that the American
people expect and deserve.
Unfortunately, it is our opinion that Americans' ability to
have dependable supplies of transportation fuels when and how
they want it is in jeopardy as a result of our regulatory
policies. The situation that we saw earlier this summer is a
classic case of the relationship between supply, demand, and
resulting price.
In a free market system, the price of a commodity like
gasoline is not so much a factor of the cost of manufacturing
but rather the relationship between the consumer's demand for a
product and the manufacturer's ability to supply it to the
marketplace. The current situation, the price of gas in the
Midwest was driven up by the inability to manufacture and
distribute it to the marketplace to meet that consumer's
demand. Once again, the consumer paid the price, the hidden
price, of the impact of the regulatory policies, primarily
driven by the EPA.
I know you are familiar that both the recently released
June 5 DOE memorandum and the June 15 Congressional Research
memorandum attributed the price swings to five major factors,
so I won't go into them.
However, clearly refiners' crude costs have gone up the
equivalent of 30-cents per gallon over 1-year ago today. We had
exceptionally low inventories which were drawn down, in order
to turn our tanks, or in order to meet the new lower Phase II
RFG program restrictions, and that was the only way to bring
the new product to the market. There was an unusual rash of
operational problems. Refineries, pipelines, and even marine
channels were under--could not be fully utilized because of
these operational problems.
I am sure you are familiar that a recent Federal court
ruling gave Unocal a valid patent on a blend formulation, which
quite frankly caught the industry off guard and caused RFG
production to be scaled back, further restricting our
production.
And, finally and most importantly, and the point I am
trying to make today, is the inescapable fact that there are
too many fuels out there, not just a North and a South fuel,
but this summer alone there are 13-grades-of-gasoline, making
about 39-different-types-of-gasoline that we have to deliver
over the summer.
Now, this is being manufactured and delivered in a system
that was basically designed for six different fuels, so the
strain on the system is incredible. We have a patchwork of
fuels that unintentionally constrains refiners' ability to
manufacture and then supply the fuels that are mandated by the
various governments.
About 30-percent of the gasoline sold in the U.S. is RFG,
including the Midwest markets in Chicago and Milwaukee. In
those markets, however, we do not use MTBE, but rather we do
use ethanol, and this means that the RFG that we utilize around
the rest of the country cannot be moved in to meet a short
demand, because we have to have a special blend stock called
RBOB. This RBOB was more difficult to manufacture than any of
us had anticipated, and so supplies were exceptionally low.
Nevertheless, the marketplace did take over and the supplies of
RBOB were brought in and the price came down.
The important point is that this is a recurring theme
around our country. As local regulators have created new and
different gasolines, refiners no longer have the flexibility to
quickly shift supplies to the area of greatest need. The result
is situations that previously we could have corrected very
quickly, and no longer can do in the same time frame. It takes
longer to turn these products, create the products, and then
ship them to where they need to go.
This summer's price/supply situation is not the first
occurrence and we do not believe it will be the last, unless
our industry's warnings are heeded. Similar situations occurred
in 1989 with the advent of EPA's RVP program; again in 1991
during Phase I of the Reformulated Gas Program; again in 1999.
According to industry experts, we are in a nightmare of
patchwork environmental regulations which are wreaking havoc
with gasoline supply and price stability, and we agree with
that point.
The important point to recognize is that the root cause
stems from the unfortunate fact that this Nation's only energy
policy appears to be, at least from a petroleum perspective,
driven by the Environmental Protection Agency. And in reality
it is not a policy at all, but rather a hodgepodge of
regulations which has changed every year since 1970, when the
Clean Air Act was originally passed.
And it appears that unfortunately there is no end in sight.
Our industry is already faced with the next wave, EPA's
requirements for ultra-low sulfur gasoline and the diesel
specifications. CITGO is concerned that the EPA again is not
listening to the warnings, and that there will be shortages
again , causing price spikes, as a result of the recent Tier II
gasoline regulations and the sulfur regulations for diesel.
Unless EPA changes its approach, we will see more and greater
price spikes.
Meeting the new gasoline regulations will cost about $8
billion for our industry, and will present significant
challenges to our engineering abilities. Because it is high
capital cost, it is likely that some refiners will be unable to
justify that investment and will simply shut down that
particular stream. This will tighten supply.
Others, however, have already said that due to the high
cost of conventional desulfurization technology, they will try
new but unproven technologies to reduce sulfur content of
fuels. These new technologies will be less costly but will have
limited commercial experience, and will likely result in
initial operating problems, which will further tighten supply
and cause price spikes.
In addition, in order for us to meet the 2004 deadline
required by the EPA, the industry will face significant hurdles
just to obtain the necessary permits, to put together the
necessary engineering and construction resources and hardware
to get it done in time. If EPA somehow does not properly
facilitate the permitting, or if other regulations, such as the
proposed diesel sulfur regulation or the ban on MTBE, overlap
this Tier II work, then we are clearly on a course for
disaster.
I have additional concerns about EPA's proposed diesel fuel
sulfur rule, which carries a $10 billion price tag.
Specifically, whether it is even possible to provide the needed
supplies of diesel within the 15-ppm sulfur level cap imposed
within the rule. With the current distribution system, it will
be extremely difficult to deliver this fuel with 15-ppm to the
consumer.
The problem is that the new diesel must share the same
distribution system with other products that will have
significantly higher sulfur levels. More fundamentally, due to
the cost to produce the 15-ppm sulfur diesel, many refiners,
once again, will drop out of that marketplace, and we know what
will happen. This could drastically reduce the supply of
diesel, and supply disruptions will occur, and once again,
price spikes.
The bottom line is that the diesel sulfur rule is being
proposed with a number too low, and the timing is far too soon.
Similar health and environmental benefits can be obtained with
a more reasonable 50-ppm sulfur cap.
Nevertheless, EPA has arbitrarily selected standards for
the proposed diesel sulfur without the technology to support
the standard. In summary, the automobile engine manufacturers
don't have the after treatment technology to meet the standard,
and the oil industry doesn't have the desulfurization
technology to manufacture it in a cost effective manner.
Even more importantly, next year EPA plans to propose
another rule to lower the sulfur content of off-road diesel.
Here again, due to the manufacturing, supply, and distribution
issues already mentioned, the supply of off-road diesel will
drop and prices will increase, specifically for the
agricultural community.
In my written testimony I have provided what we think are
the solutions to this particular situation, and they are very
basically six.
Number one, regulations must address greatest environmental
and health concerns first.
Number two, regulations must be based on sound science and
current data.
Number three, regulations must carefully balance the total
anticipated cost of compliance, both capital and maintenance,
over a specified period of time, against the anticipated
benefits over those same time frames.
Number four, the regulated community must have a more
active role in setting the priorities.
Number five, regulations should set performance
requirements but allow for creative, innovative solutions as
well as sufficient lead time.
And, number six, each regulation should include an
automatic sunset provision that can be overridden if necessary.
With that, I will close my remarks, and I look forward to
your questions. Thank you very much.
[The prepared statement of Mr. McCarthy can be found in the
appendix on page 121.]
The Chairman. Thank you very much, Mr. McCarthy.
Mr. Hutchens.
STATEMENT OF DON HUTCHENS, EXECUTIVE DIRECTOR, NEBRASKA CORN
BOARD
Mr. Hutchens. Chairman Lugar and Members of the Committee,
thank you for the opportunity to put a farmer face on this
issue, and we do appreciate that opportunity.
I have got to tell you that my name is Don Hutchens and I
represent 30,000 corn farmers in the State of Nebraska, but I
am also knee deep in this industry of agriculture, because I am
also a producer. I try to spend my weekends, but anymore it is
difficult to spend weekends on the farm when your neighbors are
stopping by and asking the very question that Senator Conrad
has to answer when he goes home to the North Dakota State Fair.
I was also looking forward to having Senator Kerrey here,
because it was 18-years ago when a younger farmer in my
community met up with a young Senator, then running for
Governor, so it is a pleasure for me to cross paths with him
again in his waning months of his term here in Congress.
When I came into State government when Senator Kerrey was
Governor, it was in the mid-1980s, and it was a very difficult
time for agriculture, as you well know, Senator Lugar. But I
continue to farm with a 91-year-old father, who probably saw
times that make these times pale in comparison.
And as I was sitting listening to the testimony today, I
thought of the two happiest times in my father's life dealt
with energy, and it was when REA put electricity on the farm,
and when he could finally sell the horses and buy a gas-powered
tractor. He is still on the farm. He uses diesel, and he is
still actively in the field, not as much as he would like. But
I think it is interesting, the changes that we have seen in
production agriculture as it relates to energy.
I want to compliment this committee on what you have done
in the past in addressing farm legislation that would put $5.4
billion in market loss payments in farmers' pockets. My
concern, though, Senator, is that $5.4 billion, in comparison
to the numbers that ERS have put together, may be lost this
year just in the having to pay for those increased energy
costs. That means that $5.4 billion isn't going to go to
capital costs. It is not going to write down operating loans.
It is not going to flow through the economy the way it normally
would, and it is not going to put kids through their education.
Nebraska farmers have been hit extremely hard. In fact, my
farming interests lie in the southwestern part of Nebraska,
where the drought is the most severe across the corn belt.
Those farmers are using more energy, and they have no choice
but to continue to use energy in the production of our State's
leading crop, and that is corn, because if you don't produce,
you don't qualify for crop insurance. And right now the only
way that you can really come out of the program is farming for
the loan deficiency payments, so we have to crank out every
possible bushel that we can, so it hits Nebraska farmers
extremely hard.
And the sad part about it is that the consumer will not
help us incur those costs, because you and I will not pay a
penny more for a pound of meat or a loaf of bread, because we
have that inability in agriculture to pass those costs on down
to the consumer.
In Nebraska, and you have heard the statements on energy
prices so I won't repeat those on diesel, propane, and
gasoline, but in Nebraska we have 79,000 wells. And I will give
you an example, that our normal irrigation cost per well would
be about $2,200. Given the fact that we have already pumped,
about 3-weeks ago, as much as we normally would all summer, our
potential costs on those irrigation wells are going to move to
about $6,600 per well. You do the math. We can eat up, Senator
Lugar, the $390 million of market loss payments very quickly.
Some comments made about our already practices in energy
conservation with new equipment, new farming practices, even
using genetically modified crops to reduce applications in
fields. But I can guarantee you that it has been the American
farmers that have paid for those costs, and as we talked, and
it was mentioned earlier that we can adapt new farming
practices, we can, but it comes at a cost. And you know it is
energy, it is fertilizer, and it is seed and it is chemicals
that capture the majority of the costs for farmers.
The next issue I want to mention, because it is the most
recent one, the thought process in the country has moved away
from gasoline and diesel, even though it is a major concern and
a major draw on our financial capabilities, but now it has
moved to natural gas. Predominantly, natural gas is the
predominant product within anhydrous ammonia, and you know this
fall and this spring farmers will use over 4-million-tons-of-
anhydrous-ammonia. Your State, Illinois, Iowa, Nebraska, we use
about 50-percent of the anhydrous ammonia in agricultural
production.
My numbers say that anhydrous ammonia per ton has risen
from about $140 a ton to about $270 a ton over the last year.
Farmers are going to find it very difficult to absorb energy
costs and fertilizer costs within the same growing season.
My fear is that we are on the brink of another financial
disaster in agriculture, and I don't want to sound just like
the issues that farmers always bring to the table, so I guess I
want to draw some potential solutions to that. Eric Vaughn is
probably one of the most adequate spokesmen for the ethanol
industry, and so I yield that he has given most of that
information to you over the past.
But 99-percent of the farmers tell us they find it so
ironic that, as big energy users, we can't find the opportunity
to use more and more corn in the production of ethanol. And I
think you have stated in the past that there is probably higher
cost to a barrel of oil than maybe the $30 that we recognize.
Also, there is an opportunity to expand the production of
natural gas, and whether it is additional drilling here in the
United States or importing additional reserves of natural gas,
we should do everything possible in that vein.
Expand the market for biodiesel. Biodiesel and ethanol
together helps. As Eric mentioned, we are not going to solve
the energy problem with using agricultural products, but we do
play a larger role in that.
Expand the breaks for farmers to adopt new technology that
uses less energy. One that hasn't been mentioned here today is
more research and understanding of carbon sequestration. Can we
pay farmers a green payment, or can we pay them to store carbon
and help in the aspect of cash flow?
And then, as was mentioned here by the last testimony, an
aspect of sulfur in diesel, I believe that you can find some
advocates who will work with you in saying that maybe 15-ppm is
too low, and it is going to transfer some additional costs onto
production agriculture that we can't bear at this point in
time.
There is a number of other areas. I would like to also
mention that Senator Conrad's question of what do we tell the
American farmer out there, I haven't heard the right answer yet
this morning in Secretary Richardson's or Schlesinger's
comments, with all due respect.
There is also one other way, Senator, that we address the
problems of higher energy costs for agriculture. We can do it
in the energy arena, but we also have to do it in the aspects
of farm policy that provide farmers the capability of
tolerating periods of higher energy prices, and we are going to
have to look at some alternatives or some additions or
improvements on foreign policy that will add to the ability of
farmers to pay for higher energy.
Thank you for the time, and I appreciate the opportunity.
[The prepared statement of Mr. Hutchens can be found in the
appendix on page 134.]
The Chairman. Thank you very much, Mr. Hutchens.
Before I call upon you, Mr. Horvath, let me mention that on
the Senate floor I have just been advised that the Senate
Democrats have objected to a committee's continuing to meet.
They have got that right. Therefore, we have been advised that
the hearing should conclude. So the formal part of the hearing
will conclude. I will ask the recorder to cease recording.
[The prepared statement of Mr. Horvath can be found in the
appendix on page 138.]
[The prepared statement of Mr. Eischens can be found in the
appendix on page 144.]
[Whereupon, at 12:10 p.m., the Committee was adjourned.]
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A P P E N D I X
July 20, 2000
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DOCUMENTS SUBMITTED FOR THE RECORD
July 20, 2000
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