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