[Senate Hearing 110-6]
[From the U.S. Government Publishing Office]
S. Hrg. 110-6
GEOPOLITICS OF OIL
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
TO
RECEIVE TESTIMONY ON THE GEOPOLITICS OF OIL AND ITS IMPLICATIONS FOR
U.S. ECONOMIC AND NATIONAL SECURITY
__________
JANUARY 10, 2007
Printed for the use of the
Committee on Energy and Natural Resources
_________
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33-869 PDF WASHINGTON : 2007
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
JEFF BINGAMAN, New Mexico, Chairman
DANIEL K. AKAKA, Hawaii PETE V. DOMENICI, New Mexico
BYRON L. DORGAN, North Dakota LARRY E. CRAIG, Idaho
RON WYDEN, Oregon CRAIG THOMAS, Wyoming
TIM JOHNSON, South Dakota LISA MURKOWSKI, Alaska
MARY L. LANDRIEU, Louisiana RICHARD BURR, North Carolina
MARIA CANTWELL, Washington JIM DeMINT, South Carolina
KEN SALAZAR, Colorado BOB CORKER, Tennessee
ROBERT MENENDEZ, New Jersey JEFF SESSIONS, Alabama
BLANCHE L. LINCOLN, Arkansas GORDON H. SMITH, Oregon
BERNARD SANDERS, Vermont JIM BUNNING, Kentucky
JON TESTER, Montana MEL MARTINEZ, Florida
Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
Frank Macchiarola, Republican Staff Director
Judith K. Pensabene, Republican Chief Counsel
Tara Billingsley, Professional Staff Member
Karen Billups, Republican Deputy Chief Counsel
C O N T E N T S
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TAB NO.
Bingaman, Hon. Jeff, U.S. Senator From New Mexico................ 1
Birol, Dr. Fatih, Chief Economist, Head of the Economic Analysis
Division, International Energy Agency, Paris, France........... 6
Domenici, Hon. Pete V., U.S. Senator From New Mexico............. 2
Dorgan, Hon. Byron L., U.S. Senator From North Dakota............ 5
Hormats, Dr. Robert, Vice Chairman, Goldman Sachs (International) 23
Leverett, Dr. Flynt, Senior Fellow and Director, Geopolitics of
Energy Initiative, New America Foundation, Washington, DC...... 39
Salazar, Hon. Ken, U.S. Senator From Colorado.................... 6
Sanders, Hon. Bernard, U.S. Senator From Vermont................. 4
Smith, Hon. Gordon H., U.S. Senator From Oregon.................. 4
Stuntz, Linda, on behalf of a Council on Foreign Relations
Independent Task Force......................................... 20
Wald, Gen. Charles, U.S. Air Force (Ret.), Former Deputy
Commander, U.S. European Command, and Member, Energy Security
Leadership Council............................................. 32
APPENDIX
Responses to additional questions................................ 67
GEOPOLITICS OF OIL
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WEDNESDAY, JANUARY 10, 2007
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:45 a.m., in
room SDG-50, Dirksen Senate Office Building, Hon. Jeff
Bingaman, chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN,
U.S. SENATOR FROM NEW MEXICO
The Chairman. Why don't we go ahead and get started. I
thank you all very much for coming. The Senate still is in the
process of getting its organizing resolution done, so Senator
Domenici is officially the Chair, but he has allowed me to go
ahead today, as we had intended when we first thought about
this hearing.
Let me just point out the new members--and I know Senator
Domenici probably wants to do the same--and welcome them. We
have three new members on the Democratic side and three new
members on the Republican side. Senators Lincoln and Sanders
and Tester are our new members on the Democratic side. We
welcome them. Senator Tester is here right now. On the
Republican side, Senators DeMint, Corker and Sessions. And, of
course, we welcome them as well.
Let me just briefly go through an opening statement here
and then defer to Senator Domenici.
I think the idea of this hearing was to try to look at the
big picture, begin the year with sort of an overview of the
geopolitics of oil and I hope that that's a useful thing. There
is a quote that my staff dug out of the files of the committee,
from Scoop Jackson, when he chaired this committee back in
1980, and he said, at that time, ``The world will witness a
growing struggle for secure access to oil through the end of
this century and into the next. This gathering energy crisis
deserves the highest priority in the counsels of Government.
Few other problems are more complicated, few other problems
will be more difficult to resolve. Moreover, many of the
policies we are currently pursuing to deal with the energy
crisis are only making it worse.'' So that was Senator
Jackson's view of things in 1980.
I think, today, we still have the struggle for access to
oil that he referred to. We also, of course, have a competition
among consumers that has developed, particularly with the
increasing appetite for oil in places like China and India.
There are great implications for the United States in all of
that, both for our economy and for our national security and
the purpose of this hearing is to get some of the people who
have thought about these issues to give us their views and then
give us a chance to ask some questions.
So let me defer to Senator Domenici for any comments he
has.
STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR
FROM NEW MEXICO
Senator Domenici. Thank you very much, Senator Bingaman,
and thanks to the witnesses for helping us today with their
presentations that the Senators were interested in. I think it
is most beneficial that we put into perspective who owns access
to the oil in the world today. It is rather frightening when
you get just that picture before you and nothing more, to know
how things have changed dramatically and how little of the oil
of the world is owned by the American companies that we are
constantly arguing with and how little these oil companies of
America have access and/or control over these oils.
I have had staff reduce the world's oil to a chart that
shows where we are, and there is no question that private
investors are already at a disadvantage. The rise in national
oil companies has decreased access to reserves through the use
of strategic energy agreements between governments. U.S.
companies are being squeezed out.
Examples are the Chinese national oil company's development
of an energy production agreement in Sudan and Iran, Russia's
re-claiming of oil producing assets from Yukos to form a state
oil company and just yesterday, Venezuelan President Hugo
Chavez called for the end to foreign ownership of crude oil
refineries in the Orinoco region. This activity further limits
investment opportunities for investor-owned companies.
These trends are doubly concerning, given the many producer
nations, political instability, and the lack of a legal system
for enforcement of contract rights resulting in only a
sufficient capital investment in the infrastructure necessary
to sustain existing production, much less new capital on line.
For example, the recent prediction by one scholar of the
extinction of the Iranian oil exports by 2014-2015, will they
allow it to happen or will it be forestalled by investments
from other countries that are less than friendly to U.S.
interests?
I'd ask that the remainder of my remarks be made part of
the record and thank you, Senator Bingaman, for opening the
year with a bit of realism. Thank you.
[The prepared statements of Senators Domenici, Smith and
Sanders follow:]
Prepared Statement of Hon. Pete V. Domenici, U.S. Senator
From New Mexico
I would like to call this hearing to order.
No, you are not imagining things--this is the gavel in my hand.
First, I'd like to congratulate Senator Bingaman on being elected
Chairman of the Committee. I look forward to continuing to work with
him in the fine bipartisan tradition of this Committee.
Senator Bingaman has a commendable desire to get a running start on
the Committee's work. When we scheduled this hearing, we didn't realize
that he would not yet officially be Chairman.
So, for the time being, you get to call me ``Mr. Chairman''--even
though the role is strictly ceremonial in this case.
I do appreciate Senator Bingaman planning this hearing on the
Global Oil Balance and Its Implications for U.S. Economic and National
Security. In a minute or two, I will hand the gavel over to him to
preside. But first, I will share a few thoughts of my own.
As I have stated many times before, energy security is a complex
issue that cannot be reduced to a ``sound bite.'' That being said, I
will briefly summarize what I think are some important issues facing
this nation.
I think it is useful that Chairman Bingaman is holding this hearing
first. In this area, there is great risk in making decisions based on
what we ``know'' to be true from the past--while the reality is that
the world has changed.
Today we will hear about the dangers of our dependence on foreign
sources of oil. But what may be even more frightening--and difficult to
deal with--is the ways in which the very structure of oil markets have
changed.
Most Americans, and many politicians, focus on large multinational
corporations as the face of ``big oil.'' However, today we will hear
that the reality is that National Oil Companies--those owned by foreign
governments--control some three-quarters of the world's oil reserves.
Thus, today, we are largely dependent on supplies of oil controlled
by governments whose values and priorities are often in conflict with
America's.
Why do these changes in world oil markets matter with respect to
our government's policy? Because approaches that focus on' the business
practices of large private corporations will have little effect on
world oil markets--other than to disadvantage private investment by
U.S. companies and harm our consumers.
Private investors are already at a disadvantage. The rise in
National Oil Companies has decreased access to reserves through the use
of strategic energy agreements between governments. U.S. companies are
being squeezed out.
Examples are:
the Chinese national oil companies' development of energy
production agreements in Sudan and Iran; and
Russia's reclaiming of oil producing assets from Yukos to
form a new state oil company.
Just yesterday,Venezuelan President Hugo Chavez called for
the end to foreign ownership of crude oil refineries in the
Orinoco region.
This activity further limits investment opportunities for investor-
owned oil companies.
These trends are doubly concerning. In many producer nations,
political instability and a lack of a legal system for the enforcement
of contract rights results in insufficient capital investment in the
infrastructure necessary to sustain existing production, much less
bring new capacity on line.
Thus, for example, the recent prediction by one scholar of the
``extinction'' of Iranian oil exports by 2014-2015. Will this be
allowed to happen? Or, will it be forestalled by investment from other
states that are less than friendly to U.S. interests?
One option we don't have is to simply pretend that these trends
will go away by themselves. We must take a two-pronged approach: First,
we must do what we can to work toward U.S. energy security.
In 2005, we approved a comprehensive energy bill that is already
showing results in many areas, including:
the production and use of alternative fuels, and
providing for a nuclear renaissance.
Last fall, we passed OCS legislation that will open resource-rich
areas of the Gulf of Mexico. However, there is more we can do. We must
pursue a balance of increased efficiency and increased supply.
For example, I would like to re-examine CAFE standards and whether
we can be more forward-leaning on fuel efficiency mandates. Among other
things, I continue to support authorizing the Administration to
increase standards on passenger vehicles.
While energy self-sufficiency is our ultimate goal, energy is--and
will remain--a world market. We will always be directly impacted by
production and consumption trends in other nations. Thus, it is
appropriate that today we will gather information on how to engage our
domestic and foreign policy to deal with the world as it is today.
______
Prepared Statement of Hon. Gordon H. Smith, U.S. Senator From Oregon
The price and availability of oil and natural gas affects every
American. That's why it is important that the Energy Committee's first
hearing of the 110th Congress is focused on the global oil situation
and its implications for U.S. economic and national security interests.
As a nation, we now depend on oil imports to meet sixty percent of our
oil needs. Even modest disruptions in the world supply can result in
price spikes at the pump, as we have seen in recent years.
I read the testimony of today's witnesses with great interest, and
noticed that--despite widely divergent backgrounds--they all had many
recurrent themes. First, there is little surplus production capacity
relative to global demand. Much of the current production is controlled
by national oil companies that are often making political rather than
economic decisions, and are not making the investments needed to
maintain and expand production capacity.
Second, much of world's oil is produced in politically unstable
nations such as Iraq, Iran, Venezuela and Nigeria. Other nations, such
as Russia, are beginning to use their vast energy resources to extract
political concessions from their customers. The European Union has
recently warned its members against relying too heavily on one supplier
for oil or natural gas.
The global oil market has fundamentally changed as emerging
economies such as China and India face growing energy demands. China is
now the world's fastest growing oil importer, and is seeking long-term
supply contracts around the world. China and the developing nations in
Asia are projected to account for 46 percent of the growth in global
oil demand by 2030.
Hurricane Katrina showed how vulnerable the United States is to a
domestic supply disruption. It also helped us to understand how
geographically concentrated U.S. refining capacity has become. All of
these factors should lead us to reexamine our energy security strategy.
We cannot reduce our dependence on oil without aggressively addressing
the transportation sector. Transportation accounts for 70 percent of
our nation's oil use, and the transportation sector is almost
exclusively fueled by oil.
CAFE standards for automobiles have been stagnant for more than a
decade. In 2002, I joined with Senators Kerry and McCain to sponsor an
amendment to the energy bill to increase CAFE standards to 36 miles per
gallon by 2015. We were told at the time that this would harm the
domestic auto industry and reduce consumer choice. Unfortunately, since
that time the domestic auto and auto parts industries have lost over
215,000 jobs. Consumers have not benefited either. They lose every time
they go to the gas pump.
We were able to use American ingenuity to put a man on the moon
almost 40 years ago. We need to use that same spirit of innovation to
get a family of five from Portland, Oregon to Yosemite National Park
(approximately 740 miles) on one tank of gas. That's why I joined with
several of my colleagues in the 109th Congress to introduce the Fuel
Economy Reform Act, which sets a target of an annual increase of four
percent a year for fuel efficiency gains. We intend to reintroduce this
bill in the near future, and will press for its early consideration.
I believe that the Energy Policy Act of 2005 provided many
necessary incentives for the development of renewable energy resources
and a new generation of cleaner, more-fuel efficient vehicles. We need
to enhance these incentives and send signals to the investment
community about our nation's long-term commitment to renewable
resources and to cleaner, more fuel-efficient vehicles.
I look forward to hearing from the witnesses today and to working
with my colleagues to address these important energy security issues.
______
Prepared Statement of Hon. Bernard Sanders, U.S. Senator From Vermont
Good morning. I am pleased to be a member of the Energy and Natural
Resources Committee and look forward to the excellent work that this
Committee will be doing to ensure a more sane energy policy for our
country. Whether it is requiring an increased commitment to renewable
sources of energy in the electricity sector or to ensuring appropriate
royalty payments from drilling on our public lands, this Committee has
a tremendous responsibility.
I sincerely appreciate Chairman Bingaman and Ranking Member
Domenici bringing together such an astute panel for the first Energy
Committee hearing of the 110th Congress. The geopolitics of oil is a
topic that none of us can afford to ignore and while I don't agree with
every idea put forward by today's witnesses, I thank them for their
time to address us this morning.
What is most striking to me is that, in the prepared testimony,
each of the witnesses discusses the dire need to increase efficiency in
our transportation sector. I believe--in no uncertain terms--that our
failure to increase mileage standards has let the American people down.
As consumers look to make each and every dollar go further, they find
that, despite the technology being available, their automobiles get the
same, or worse--even lower, gas mileage than they did twenty years ago.
Additionally, as we grapple with global warming, I believe we must do
everything we can to get the most out of each gallon of fuel because
the emissions from our cars are simply off the charts. In fact, in
Vermont, vehicle emissions are the single largest source of greenhouse
gas emissions. I hope, with the help of the witnesses, that we can
begin moving forward by starting with a serious discussion of
increasing CAFE standards.
Chairman Bingaman, Ranking Member Domenici, I look forward to your
leadership on this Committee.
The Chairman. Thank you very much for your comments, and
your statement will be included, obviously, in the record.
Senator Dorgan asked to be recognized for a minute, and if
other Senators want to have a minute, they are certainly
entitled to do that. This being the first hearing of the year,
I do think we need to get to the witnesses fairly soon, but go
ahead, Senator Dorgan, with any comments you have.
STATEMENT OF HON. BYRON L. DORGAN, U.S. SENATOR
FROM NORTH DAKOTA
Senator Dorgan. Mr. Chairman, thank you very much. I will
be brief, but it is an important hearing. I'm really pleased
that you've called it.
There is an old saying, if you don't care where you're
going, you'll never be lost. That's important to think about
with respect to this country's energy policy.
Oil is critically important. We will always use fossil
fuels, always need oil. We suck about 84 million barrels out of
the earth a day. Here, in the United States, with our
population, we use \1/4\ of all the oil that is sucked out of
this earth.
We are overly dependent on foreign sources of oil,
especially given the national security implications of that
dependency, and yet I think we're baby stepping on these
issues. We need much more aggressive approaches to reduce that
dependency, much more aggressive approaches on renewables.
Let me give you one example. In 1916, we put in place in
this country tax incentives, robust permanent tax incentives
for the exploration and drilling of oil. 1916, permanent. What
have we done for production tax credit for renewables? Well, we
put something in place in 1992, short-term. We've let it expire
three times. We've extended it five times. We're baby stepping
without major commitments and without a decision about where we
want to head and how we want to get there.
When we passed the energy bill of 2005, I was proud of it.
It moves us down the road, but we need to be much bolder and
much, much more aggressive, and I think what we will hear today
is about the national security implications of us not doing the
right thing and not being bold enough.
So this is a good start, Mr. Chairman. Thank you for
allowing me to say a few words and I hope this Congress will
give us an opportunity to really be bold and be aggressive on
these issues.
The Chairman. Thank you very much.
Are there other members that wanted to make an opening
statement or would you rather go to the witnesses? Anyone else?
Senator Salazar.
STATEMENT OF HON. KEN SALAZAR, U.S. SENATOR
FROM COLORADO
Senator Salazar. Senator Bingaman, Chairman, and to Senator
Domenici as well, I just wanted to say that I very much look
forward to the work of this committee in continuing the
bipartisan tradition that we worked on for the last 2 years,
where we delivered on the 2005 Energy Policy Act and I look
forward to working with our new colleagues, Senators Tester,
Sanders, Lincoln, Corker and Sessions.
I think that the energy issue, at the end of the day, Mr.
Chairman, is one of the very most important issues, perhaps one
of the top two issues that face our world today, and I think
that this committee has the jurisdiction to help us move
forward with the kind of vision and program that Senator Dorgan
was talking about. And I look forward to working with my
colleagues in achieving that vision.
The Chairman. All right. Thank you very, very much.
Let me go ahead with our first witness, Dr. Fatih Birol,
who is the chief economist and the head of the Economic
Analysis Division of the IEA, based in Paris. Thank you very
much for being here. Why don't you go right ahead.
STATEMENT OF DR. FATIH BIROL, CHIEF ECONOMIST, HEAD OF THE
ECONOMIC ANALYSIS DIVISION, INTERNATIONAL ENERGY AGENCY, PARIS,
FRANCE
Dr. Birol. Thank you very much, Mr. Chairman. Good morning,
ladies and gentlemen. First of all, let me thank you for the
kind invitation.
Looking at the next few decades, we think the world is
facing twin energy-related threats. One is the increasing risk
for energy security and the second one is the energy-related
environmental concerns.
For the sake of this meeting, I will focus on the energy
security, but I should mention that energy and environmental
policies are very much linked to each other. When I'm talking
about energy security, we think there are two issues here. Not
only oil but natural gas is also an important issue in terms of
energy security and plays an important role in the geopolitics
of energy as well. But again, for the sake of this meeting, I
am going to focus on oil.
We think the oil markets are going through profound
changes, which would have a set of implications for our
economic, for our domestic policies, as well as for our energy
security.
I would like to bring to your attention four aspects of
this oil market. The first one is the changes in the demand
side; second, in the supply side; the third one, what are the
policy implications of these changes; and fourth, what can be
done in order to address those policy implications.
On the demand side, first of all, I think the general focus
is on the supplier issues, but on the demand side, there is a
major change happening.
First of all, the bulk of the demand growth is coming from
the developing countries. China and India together are
responsible for about 50 percent of the oil demand growth in
the last few years, and looking at the future, we expect China
and India will be responsible for more than \2/3\ of the oil
demand growth.
Why? Very simple. In China today, ladies and gentlemen, 13
persons out of 1,000 persons own a car compared with the United
States, where 780 persons out of 1,000 own a car. With the
increasing income levels in China, one of the first things they
do is to buy a car, which in turn, fuels the oil demand growth.
So the oil demand growth, mainly coming from the developing
countries and--and both in developing countries as well as in
the OECD countries, will be consumed by the transportation
sector--by cars, trucks and jets. And this is a strategic edge
to recognize that the bulk of the resources are in OPEC.
Why is it important to note that the bulk of oil will come
from the transportation sector? Because in the transportation
sector, we do not have readily available alternatives to oil
products. You cannot put coal into the tank of your car. And
the situation is very different, therefore, from the 1970's and
1980's, where we were using oil for many other purposes, for
example, to produce electricity.
But then we hit the price shocks in the 1970's and 1980's.
We were able to switch from--in terms of electricity, from oil
to nuclear or renewables or gas or other things. But in the
case of transportation, there is a concentration, and from the
consumers' point of view, our room of maneuver is very, very
limited. Therefore, I do recognize that this is the Achilles'
heel transportation sector of our current economic system, the
lack of concentration on the demand side.
On the supply side, we see concentration as well, the
number of producers and who they are. We do recognize, in the
energy article of the IEA, that in the next 10 years, none of--
the production will come to a peak and afterwards will decline.
The difference between the global oil demand worldwide and the
decline in--production will need to be made by a very few
number of countries where you have the reserves.
Who are those countries? Saudi Arabia, Iran, Iraq--these
are three countries which have a lot of potential which could
bring the oil to the markets. They have a lot of reserves and
it is very cheap to bring that oil to the markets in those
countries, and potentially, they are the three countries which
can bring oil to the markets.
However, there are very important issues related to this
trend. First of all, the number of countries are diminishing.
Whoever these countries are, it is always a bit useful to
consumers if there is a concentration on the surplus side, that
a number of countries are diminishing the suppliers, and they
work together in certain decisionmaking processes. Second, most
of those countries--all of them--come from a geopolitically
unstable region. This is another issue that we should look at
very carefully. And the third one is that the enlistment
framework in those countries is completely different than we
used to see in the past. In the past, we have seen that when
the prices went up in the 1970's and 1980's, we received a lot
of volumes, oil coming from the North Sea and the Gulf of
Mexico, because money went there. The free money went there and
as a result of that, production increased and oil came to the
markets.
But in this case, in Saudi Arabia, for example, the Saudis
will decide how much oil production will grow and the oil
purchase may not be the only determinant in their decision how
the production capacity will grow.
In the case of Iran, the situation is also similar. Iran
desperately needs money in order to invest to increase the
production capacity, but Iran does not have--unlike Saudi
Arabia--domestic capital. It needs to get money from our side,
but the geopolitical context in Iran will make the life very
difficult for Iran to increase the production capacity.
So these are the uncertainties, for the consumers: a number
of supplies are diminishing that are coming geopolitical, the
unstable region, and the investment market is a very new one.
There is not free access to capital to those countries.
What are the implications? I will just briefly mention the
implications for this concentration on the demand side, on the
transportation sector, and concentration on the supplier side,
a very few number of countries. First of all, in terms--
relative to the process, we should be used to--they should be
used to seeing that the process will be volatile and maybe more
and more determined by the producers. The producers say, we
have a higher rate in the future by looking at this picture.
The risk for the supplier destruction will increase because
of the very little number of suppliers, and in addition to
that, the leverage of the producers is set to increase with the
increase in share.
I wanted to talk a bit on what to do, Mr. Chairman, but I
see that I am out of the time. If you allow 2 more minutes, I
would like to complete--
The Chairman. Yes, why don't you go ahead and give us the
short version of what we need to know. That would be great.
Dr. Birol. OK. So I would like to suggest three areas in
terms of domestically and internationally. The first one is
boosting the domestic production, oil production in the
country. Of course, looking at the sensitivities here and
there, increasing the efficiency, especially in the
transportation sector, which I recognize as the Achilles' heel
of the system, and the alternative fuels, in terms of the
transportation sector, such as biofuels, will be very
important.
Internationally, I imagine that the bulk of the oil is in a
very few number of countries, but globally, we are looking at
transparence of the reserves data. We are not sure how the
reserves data is put together, how much reserve is left in
which country and what are the terms there. I think there is a
need to put some light, shed some light on the reserves
transparency, and finally, perhaps, it may not be a bad idea if
one would put some efforts in order to gain some access to the
areas where it is legally bound to foreign capital, such as
some key Middle East countries, perhaps within the context of
WTO. So these are some areas that I wanted to highlight. Thank
you.
[The prepared statement of Dr. Birol follows:]
Prepared Statement of Dr Fatih Birol, Chief Economist,
International Energy Agency
Mr Chairman, Members of the Committee, it is a privilege to address
this Committee on the critical issue of the oil market outlook and its
policy implications. The energy future which we are creating is
unsustainable. If we continue as before, the energy supply to meet the
needs of the world economy over the coming years will remain too
vulnerable to failure arising from sudden supply interruption and will
cause serious environmental problems. The oil market is a global one so
it is important to provide a global context. To that end, this
testimony draws upon the World Energy Outlook 2006,\1\ published by the
International Energy Agency.
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\1\The World Energy Outlook series is the leading source for
medium-to long-term energy market analysis and has achieved widespread
international recognition. It is the annual flagship publication of the
International Energy Agency. The latest edition was released on 7
November 2006.
---------------------------------------------------------------------------
This testimony will examine in turn the outlooks for Demand, Supply
and Investment, followed by a look at the potential impact of
Alternative Policies and Measures. I would first like to highlight the
following key points:
1. The world is facing twin energy-related threats: that of
not having adequate and secure supplies of energy at affordable
prices and that of environmental harm caused by its use. The
World Energy Outlook 2006 confirms that fossil-fuel demand and
trade flows, and greenhouse-gas emissions would follow their
current unsustainable paths through to 2030 in the absence of
new government action--the underlying premise of the Reference
Scenario. It also demonstrates, in an Alternative Policy
Scenario, that a package of policies and measures that
countries around the world are considering would, if
implemented, significantly reduce the rate of increase in
demand and emissions. Importantly, the economic cost of these
policies would be more than outweighed by the economic benefits
that would come from using and producing energy more
efficiently.
2. Oil demand grows by 1.3% per year through 2030 in the
Reference Scenario, reaching 116 million barrels per day (mb/d)
in 2030--up from 84 mb/d in 2005. The pace of demand growth
slackens progressively over the period. More than 70% of the
increase in oil demand comes from developing countries (notably
China and India), which see average annual demand growth of
2.5%.
3. The transport sector absorbs most of the increase in
global oil demand. In the OECD, oil use in other sectors barely
increases at all. In developing countries too, transport
contributes the bulk of the increase in oil demand. The lack of
cost-effective substitutes for oil-based automotive fuels will
make oil demand more rigid.
4. Oil supply is increasingly dominated by a small number of
major producers, most of them in the Middle East, where oil
resources are concentrated. Non-OPEC production of conventional
crude oil is set to peak within a decade. OPEC's share of
global supply grows significantly, from 40% now to 48% by 2030.
Iran and Iraq have significant potential to expand their
production, but Saudi Arabia remains by far the largest
producer. The need for more transparent and comprehensive data
on oil (and gas) reserves in all regions is a pressing concern.
5. The oil industry needs to invest a total of $4.3 trillion
(in year-2005 dollars) over the period 2005-2030, or $164
billion per year. The upstream sector accounts for the bulk of
this. Almost three-quarters of upstream investments will be
required to maintain existing capacity.
6. A critical uncertainty is whether the substantial
investments needed in the oil production sector in key Middle
East countries will, in fact, be forthcoming. These governments
could choose deliberately to develop production capacity more
slowly than we project in our Reference Scenario. Or external
factors such as capital shortages could prevent producers from
investing as much in expanding capacity as they would like. As
demonstrated by a Deferred Investment Case, slower growth in
OPEC oil production drives up the international oil price and,
with it, the price of gas.
7. The new policies analysed in the Alternative Policy
Scenario halt the rise in OECD oil imports by 2015. OECD
countries and developing Asia become more dependent on oil
imports in 2030 compared to today, but markedly less so than in
the Reference Scenario. Global oil demand reaches 103 mb/d in
2030 in the Alternative Policy Scenario--13 mb/d lower than in
the Reference Scenario. Additional policy measures to promote
improved fuel efficiency of cars and trucks, as well as a
greater market share for biofuels, therefore have the effect of
improving energy security.
8. Our analysis demonstrates the urgency with which policy
action is required. Each year of delay in implementing the
policies analysed would have a disproportionately larger effect
on energy security. Yet there are formidable hurdles to be
overcome. It will take considerable political will to push
through the policies and measures in the Alternative Policy
Scenario, many of which are likely to encounter resistance from
some industry and consumer groups. Politicians need to spell
out clearly the benefits to the economy and to society as a
whole of the proposed measures. In most countries, the public
is becoming familiar with the energy-security and environmental
advantages of action to encourage more efficient energy use and
to boost the share of renewables.
demand
Primary oil demand is expected to continue to grow steadily over
the projection period in the Reference Scenario, at an average annual
rate of 1.3%. It reaches 99 mb/d in 2015 and 116 mb/d in 2030, up from
84 mb/d in 2005 (Table 1). The pace of demand growth nonetheless
slackens progressively, broadly in line with GDP, averaging 1.7% in
2005-2015--only just below the average of the last ten years--and 1.1%
in 2015-2030. Preliminary data for 2005 indicate that global oil demand
rose by 1.3%--well down on the exceptionally high rate of 4% in 2004.
Table 1.--WORLD PRIMARY OIL DEMAND\1\
[Million barrels per day]
----------------------------------------------------------------------------------------------------------------
2005-
1980 2004 2005 2010 2015 2030 2030\2\
----------------------------------------------------------------------------------------------------------------
OECD............................................ 41.9 47.5 47.7 49.8 52.4 55.1 0.6%
North America................................... 21.0 24.8 24.9 26.3 28.2 30.8 0.9%
United States............................... 17.4 20.5 20.6 21.6 23.1 25.0 0.8%
Canada...................................... 2.1 2.3 2.3 2.5 2.6 2.8 0.8%
Mexico...................................... 1.4 2.0 2.1 2.2 2.4 3.1 1.6%
Europe.......................................... 14.7 14.5 14.4 14.9 15.4 15.4 0.2%
Pacific......................................... 6.2 8.2 8.3 8.6 8.8 8.9 0.3%
---------------------------------------------------------------
Transition economies............................ 8.9 4.3 4.3 4.7 5.0 5.7 1.1%
Russia.......................................... n.a. 2.5 2.5 2.7 2.9 3.2 1.0%
---------------------------------------------------------------
Developing countries............................ 11.4 27.2 28.0 33.0 37.9 51.3 2.5%
Developing Asia................................. 4.4 14.2 14.6 17.7 20.6 29.7 2.9%
China....................................... 1.9 6.5 6.6 8.4 10.0 15.3 3.4%
India....................................... 0.7 2.6 2.6 3.2 3.7 5.4 3.0%
Indonesia................................... 0.4 1.3 1.3 1.4 1.5 2.3 2.4%
Middle East..................................... 2.0 5.5 5.8 7.1 8.1 9.7 2.0%
Africa.......................................... 1.4 2.6 2.7 3.1 3.5 4.9 2.4%
North Africa................................ 0.5 1.3 1.4 1.6 1.8 2.5 2.4%
Latin America................................... 3.5 4.8 4.9 5.1 5.6 7.0 1.5%
Brazil...................................... 1.4 2.1 2.1 2.3 2.7 3.5 2.0%
---------------------------------------------------------------
Int. marine bunkers............................. 2.2 3.6 3.6 3.8 3.9 4.3 0.6%
---------------------------------------------------------------
World........................................... 64.4 82.5 83.6 91.3 99.3 116.3 1.3%
---------------------------------------------------------------
European Union.................................. n.a. 13.5 13.5 13.9 14.3 14.1 0.2%
----------------------------------------------------------------------------------------------------------------
\1\ Includes stock changes
\2\ Average annual growth rate
* n.a.: not available
Most of the increase in oil demand comes from developing countries,
where economic growth--the main driver of oil demand--is highest
(Figure 1*). China and the rest of developing Asia account for 15 mb/d,
or 46%, of the 33-mb/d increase in oil use between 2005 and 2030, in
line with rapid economic growth. At 3.4% per year on average, China's
rate of oil-demand growth is nonetheless below the 5.1% rate of 1980-
2004. The Middle East, which experiences the fastest rate of demand
growth, accounts for a further 3.8 mb/d. Higher oil revenues than in
the last two decades boost economic activity, incomes and, together
with subsidies, demand for oil. Demand in OECD countries, especially in
Europe and the Pacific region, rises much more slowly. Nonetheless, the
absolute increase in North America--5.9 mb/d over the Outlook period--
is the second-largest of any region, because it is already by far the
largest consumer. The economies of non-OECD countries will remain
considerably more oil-intensive, measured by the amount of oil used per
unit of gross domestic product (at market exchange rates), than those
of OECD countries.
---------------------------------------------------------------------------
* All figures have been retained in committee files.
---------------------------------------------------------------------------
The transport sector absorbs 63% of the increase in global oil
demand in 2004-2030. In the OECD, oil use in other sectors hardly
increases at all, declining in power generation and in the residential
and services sectors, and growing in industry. Most of the increase in
energy demand in non-transport sectors is met by gas, coal, renewables
and electricity. In non-OECD countries, too, transport is the biggest
contributor to oil-demand growth; but other sectors--notably industry--
also see significant growth.
supply
Resources and Reserves
According to the Oil and Gas Journal, the world's proven
reserves\2\ of oil (crude oil, natural gas liquids, condensates and
non-conventional oil) amounted to 1293 billion barrels\3\ at the end of
2005--an increase of 14.8 billion barrels, or 1.2%, over the previous
year. Reserves are concentrated in the Middle East and North Africa
(MENA), together accounting for 62% of the world total. Saudi Arabia,
with the largest reserves of any country, holds a fifth. Of the twenty
countries with the largest reserves, seven are in the MENA region
(Figure 2). Canada has the least developed reserves, sufficient to
sustain current production for more than 200 years. The world's proven
reserves, including non-conventional oil, could sustain current
production levels for 42 years.
---------------------------------------------------------------------------
\2\ Oil that has been discovered and is expected to be economically
producible is called a proven reserve. Oil that is thought to exist,
and is expected to become economically recoverable, is called a
resource. Total resources include existing reserves, ``reserves
growth''--increases in the estimated size of reserves as fields are
developed and produced--and undiscovered resources. Comparison of
reserves and resource assessments is complicated by differences in
estimation techniques and assumptions among countries and companies. In
particular, assumptions about prices and technology have a major impact
on how much oil is deemed to be economically recoverable.
\3\ Oil and Gas Journal (19 December 2005). Includes proven oil-
sands reserves in Canada.
---------------------------------------------------------------------------
Proven reserves have grown steadily in recent years in volume
terms, but have remained broadly flat as a percentage of production.
Since 1986, the reserves-to-production, or RIP, ratio has fluctuated
within a range of 39 to 43 years. A growing share of the additions to
reserves has been coming from revisions to estimates of the reserves in
fields already in production or undergoing appraisal, rather than from
new discoveries. Some of these revisions have resulted from higher oil-
price assumptions, allowing some oil that is known to exist to be
reclassified as economically exploitable and, therefore, moved into the
proven category. The application of new technology has also improved
reservoir management and boosted recovery rates. The amount of oil
discovered in new oilfields has fallen sharply over the past four
decades, because of reduced exploration activity in regions with the
largest reserves and, until recently, a fall in the average size of
fields discovered. These factors outweighed an increase in exploration
success rates.
Over the past ten years, drilling has been concentrated in North
America, a mature producing region with limited potential for new
discoveries. Less than 2% of new wildcat wells drilled were in the
Middle East, even though the region is thought to hold over 30% of the
world's undiscovered crude oil and condensates and is where the average
size of new fields discovered in the ten years to 2005 have been higher
than anywhere else (Figure 3).
There has been a recent increase in the average size of new
discoveries for each new wildcat well drilled, bucking the trend of
much of the period 1965-1998. The size of newly discovered fields has
continued to decline, largely because exploration and appraisal
activity has been focused on existing basins. However, the application
of new technology, such as 3D seismic, has increased the discovery
success rate per wildcat well, particularly since 1998--boosted by
rising global oil demand and a resulting increase in exploration and
appraisal activity--and, to a lesser extent, since 1991, with the
advent of deep-water exploration (Figure 4). Nonetheless, the average
size of discoveries per wildcat well--at around 10 million barrels--
remains barely half that of the period 1965-1979. The reduction almost
to zero of Middle East exploration, where discoveries had been largest,
was the main reason for the lower average size of discoveries since the
1980s.
Exploration and appraisal drilling is expected to increase to
offset rising decline rates at existing fields and the consequent need
to develop new reservoirs--particularly in MENA, where some of the
greatest potential for finding new fields exists. Proven reserves are
already larger than the cumulative production needed to meet rising
demand until at least 2030. But more oil will need to be added to the
proven category if production is not to peak before then. According to
the US Geological Survey, undiscovered conventional resources that are
expected to be economically recoverable could amount to 880 billion
barrels (including natural gas liquids, or NGLs) in its mean case
(USGS, 2000). Together with reserves growth and proven reserves,
remaining ultimately recoverable resources are put at just under 2300
billion barrels. That is more then twice the volume of oil--1080
billion barrels--that has so far been produced. Total non-conventional
resources, including oil sands in Canada, extra-heavy oil in Venezuela
and shale oil in the United States and several other countries, are
thought to amount to at least 1 trillion barrels (WEC, 2004).
Table 2.--WORLD OIL SUPPLY
[Million barrels per day]
----------------------------------------------------------------------------------------------------------------
2005-
1980 2000 2005 2010 2015 2030 2030\1\
----------------------------------------------------------------------------------------------------------------
Non-OPEC........................................ 35.2 43.9 48.1 53.4 55.0 57.6 0.7%
---------------------------------------------------------------
Crude oil....................................... 32.2 38.1 41.6 45.5 45.4 43.4 0.2%
---------------------------------------------------------------
OECD............................................ 14.6 17.2 15.2 13.8 12.4 9.7 ^1.8%
North America............................... 11.8 10.2 9.8 9.4 9.0 7.8 ^0.9%
United States........................... 8.7 5. 8 5.1 5.3 5.0 4.0 ^1.0%
Canada.................................. 1.2 1.4 1.4 1.1 0.9 0.8 ^2.2%
Mexico.................................. 1.9 3.0 3.3 3.1 3.1 3.0 ^0.5%
Pacific..................................... 0.5 0.8 0.5 0.7 0.5 0.4 ^1.2%
Europe...................................... 2.4 6.2 4.8 3.8 2.9 1.5 ^4.5%
---------------------------------------------------------------
Transition economies............................ 11.5 7.7 11.4 13.7 14.5 16.4 1.5%
Russia...................................... 10.7 6.3 9.2 10.5 10.6 11.1 0.7%
Other....................................... 0.8 1.4 2.2 3.3 3.9 5.3 3.6
---------------------------------------------------------------
Developing countries............................ 6.0 13.2 15.1 17.9 18.5 17.4 0.6%
Developing Asia............................. 2.9 5.3 5.9 6.3 6.1 5.0 ^0.6%
China................................... 2.1 3.2 3.6 3.8 3.7 2.8 ^1.0%
India................................... 0.2 0.6 0.7 0.8 0.8 0.6 ^0.2%
Other................................... 0.6 1.4 1.6 1.7 1.6 1.6 0.0%
Latin America............................... 1.5 3.4 3.8 4.8 5.3 5.9 1.8%
Brazil.................................. 0.2 1.2 1.6 2.6 3.0 3.5 3.1%
Other................................... 1.3 2.2 2.2 2.2 2.3 2.5 0.5%
Africa...................................... 1.2 2.6 3.5 5.2 5.5 4.9 1.4%
North Africa............................ 0.7 0.8 0.6 0.6 0.6 0.7 0.4%
Other Africa............................ 0.5 1.8 2.9 4.6 4.9 4.3 1.6%
Middle East................................. 0.5 2.0 1.9 1.7 1.6 1.4 ^1.1%
---------------------------------------------------------------
NGLs............................................ 2.6 4.9 5.1 5.5 5.8 6.8 1.2%
---------------------------------------------------------------
OECD............................................ 2.3 3.7 3.7 4.0 4.1 4.4 0.7%
Transition economies............................ 0.2 0.5 0.5 0.4 0.5 0.6 1.2%
Developing countries............................ 0.1 0.7 0.9 1.1 1.3 1.8 2.7%
---------------------------------------------------------------
Non-conventional oil............................ 0.4 0.9 1.4 2.5 3.7 7.4 7.0%
---------------------------------------------------------------
Canada.......................................... 0.2 0.6 1.0 2.0 3.0 4.8 6.4%
Others.......................................... 0.2 0.3 0.4 0.5 0.7 2.7 8.2%
===============================================================
OPEC............................................ 28.0 30.9 33.6 35.9 42.0 56.3 2.1%
---------------------------------------------------------------
Crude oil....................................... 26.2 27.8 29.1 30.2 34.9 45.7 1.8%
---------------------------------------------------------------
Middle East..................................... 17.9 19.5 20.7 22.0 25.7 34.5 2.1%
Saudi Arabia................................ 9.4 8.0 9.1 9.7 11.3 14.6 1.9%
Iran........................................ 1.5 3.7 3.9 3.9 4.4 5.2 1.1%
Iraq........................................ 2.6 2.6 1.8 2.2 2.8 6.0 4.9%
Kuwait...................................... 1.3 1.8 2.1 2.2 1.8 4.0 2.5%
United Arab Emirates........................ 1.8 2.2 2.5 2.7 3.1 3.8 1.8%
Qatar....................................... 0.5 0.7 0.8 0.7 0.7 0.5 ^1.9%
Neutral zone\2\............................. 0.8 0.6 0.6 0.5 0.5 0.5 ^0.6%
---------------------------------------------------------------
Non-Middle East................................. 8.3 8.3 8.4 8.2 9.1. 11.2 1.2%
Algeria..................................... 0.9 0.8 1.3 1.1 1.1 0.7 ^2.7%
Libya....................................... 1.8 1.4 1.6 1.7 1.9 2.7 2.0%
Nigeria..................................... 2.1 2. 0 2.4 2.5 2.7 3.2 1.2%
Indonesia................................... 1.5 1.2 0.9 0.8 0.8 0.8 ^0.8%
Venezuela................................... 2.0 2.9 2.1 2.2 2.8 3.9 2.5%
---------------------------------------------------------------
NGLs............................................ 1.8 2.9 4.3 5.4 6.3 9.0 3.0%
---------------------------------------------------------------
Saudi Arabia.................................... 0.7 1.0 1.5 1.9 2.0 2.7 2.5%
Iran............................................ 0.0 0.1 0.3 0.4 0.6 1.1 4.8%
UAE............................................. 0.4 0.4 0.5 0.7 0.9 1.3 3.6%
Algeria......................................... 0.1 0.6 0.8 0.9 0.9 0.7 ^0.3%
Others.......................................... 0.6 0.8 1.2 1.5 1.9 3.3 4.1%
---------------------------------------------------------------
Non-conventional................................ 0.0 0.2 0.2 0.3 0.8 1.5 8.8%
---------------------------------------------------------------
Venezuela....................................... 0.0 0.1 0.1 0.1 0.2 0.4 5.8%
Others.......................................... 0.0 0.1 0.1 0.2 0.6 1.2 10.5%
---------------------------------------------------------------
TOTAL WORLD..................................... 64.9 76.5 83.6 91.3 99.3 116.3 1.3%
===============================================================
Crude oil....................................... 58.3 66.0 70.8 75.7 80.3 89.1 0.9%
NGLs............................................ 4.4 7.8 9.3 10.8 12.2 15.8 2.1%
Non-conventional oil............................ 0.4 1.1 1.6 2.8 4.5 9.0 7.2%
Processing gains................................ 1.7 1.7 1.9 2.0 2.3 2.5 1.2%
----------------------------------------------------------------------------------------------------------------
\1\ Average annual growth rate
\2\ Neutral Zone production is shared by Saudi Arabia and Kuwait.
Production
In the Reference Scenario, conventional oil production continues to
be dominated by a small number of major producers in those countries
where oil resources are concentrated. The share of production
controlled by members of the Organization of the Petroleum Exporting
Countries, particularly in the Middle East, grows significantly.\4\
Their collective output of crude oil, NGLs and non-conventional oil
grows from 34 mb/d in 2005 to 42 mb/d in 2015 and 56 mb/d in 2030,
boosting their share of world oil supply from 40% now to 48% by the end
of the Outlook period. Non-OPEC production increases much more slowly,
from its current level of 48 mb/d to 55 mb/d in 2015 and 58 mb/d in
2030 (Table 2). Conventional oil accounts for the bulk of the increase
in oil supply between 2005 and 2030, but non-conventional resources
play an increasingly important role (Figure 5). The projections to 2010
take account of current, sanctioned and planned upstream projects.
---------------------------------------------------------------------------
\4\ OPEC is assumed to be willing to meet the portion of global oil
demand not met by non-OPEC producers at the prices assumed (see Chapter
1). A special analysis of the effect of lower OPEC investment in
upstream capacity is presented at the end of this chapter.
---------------------------------------------------------------------------
Production in OPEC countries, especially in the Middle East, is
expected to increase more rapidly than in other regions, because their
resources are much larger and their production costs are generally
lower. Saudi Arabia remains by far the largest producer of crude oil
and NGLs. Its total output of crude and NGLs grows from 10.9 mb/d in
2005, to 13.7 mb/d in 2015 and to 17.6 mb/d in 2030 (including Saudi
Arabia's half-share of Neutral Zone production). Most of the rest of
the increase in OPEC production comes from Iraq, Iran, Kuwait, the
United Arab Emirates, Libya and Venezuela. Other OPEC countries
struggle to lift output, with production dropping in Qatar, Algeria and
Indonesia. These projections are broadly commensurate with proven
reserves. OPEC's price and production policies and national policies on
developing reserves are extremely uncertain.
Outside OPEC, conventional crude oil production in aggregate is
projected to peak by the middle of the next decade and decline
thereafter, though this is partly offset by continued growth in output
of NGLs (Figure 6). Production in several mature regions, including
North America and the North Sea, which has been in steady decline in
recent years, stabilises or rebounds in the near term. This reflects
several factors, including the restoration of production capacity lost
through hurricanes and other technical difficulties, and the impact on
increased drilling to boost production in response to recent oil-price
increases. But this trend is expected to be short-lived, as relatively
high decline rates and rising costs soon drive output back down again.
In the longer term, only Russia, Central Asia, Latin America and sub-
Saharan Africa--including Angola and Congo--achieve any significant
increases in conventional oil production.
A lack of reliable information on production decline rates makes it
difficult to project new gross capacity needs. A high natural decline
rate--the speed at which output would decline in the absence of any
additional investment to sustain production--increases the need to
deploy technology at existing fields to raise recovery rates, to
develop new reserves and to make new discoveries. Our analysis of
capacity needs is based on estimates of year-on-year natural decline
rates averaged over all currently producing fields in a given country
or region. The rates assumed in our analysis vary over time and by
location. They range from 2% per year to 11% per year, averaging 8% for
the world over the projection period.\5\ Rates are generally lowest in
regions with the best production prospects and the highest RIP ratios.
For OPEC, they range from 2% to 7%. They are highest in mature OECD
producing areas, where they average 11%.
---------------------------------------------------------------------------
\5\ These rates are based on information obtained in consultations
with international and national oil companies, oilfield service
companies and consultants. Observed decline rates are generally much
lower, as they reflect investment to maintain or boost output at
existing fields.
---------------------------------------------------------------------------
The average quality of crude oil produced around the. world is
expected to become heavier (lower API gravity) and more sour (higher
sulphur content) over the Outlook period.\6\ This is driven by several
factors, including the continuing decline in production from existing
sweet (low-sulphur) crude oilfields, increased output of heavier crude
oils in Russia, the Middle East and North Africa (Figure 7), and the
projected growth of heavy non-conventional oil output. This trend,
together with increasing demand for lighter oil products and increasing
fuel-quality standards, is expected to increase the need for investment
in upgrading facilities in refineries.
---------------------------------------------------------------------------
\6\ However, upstream projects under development may result in a
marginal reduction in the sulphur content and a small increase in the
API gravity of installed crude oil production capacity in the next five
years, according to the IEA's Oil Market Report (12 September 2006).
---------------------------------------------------------------------------
investment
Cumulative global investment in the oil sector amounts to about
$4.3 trillion (in year-2005 dollars) over the period 2005-2030, or $164
billion per year, in the Reference Scenario. Investment relative to
increases in capacity is highest in OECD countries, where unit costs
and production decline rates are high compared with most other regions.
Projected oil (and gas) investment needs in this Outlook are higher
than in previous editions, largely because of the recent unexpected
surge in the cost of materials, equipment and skilled personnel. Unit
costs are assumed to fall back somewhat after 2010, as oil-services
capacity increases and exploration, development and production
technology improves. Upstream investment accounts for 73% of total oil-
industry investment.
The required rate of capital spending over the projection period is
substantially higher than actual spending in the first half of the
current decade, which averaged little more than $100 billion per year.
Investment needs increase in each decade of the projection period as
existing infrastructure becomes obsolete and demand increases. Our
analysis of the spending plans of the world's leading oil and gas
companies through to 2010 shows that they expect their spending to be
much higher in the second half of the current decade than the first.
Upstream Investment
Upstream oil spending--more than 90% of which is for field
development and the rest for exploration--averages $125 billion per
year (Figure 8). Three-quarters of this investment is needed to
maintain the current level of capacity in the face of natural declines
in capacity at producing fields as reserves are depleted. This
investment goes to drilling new wells, to working over existing wells
at currently producing fields or to developing new fields. In fact,
investment needs are far more sensitive to changes in natural decline
rates than to the rate of growth of demand for oil.
Downstream Investment
Cumulative investment in oil refining amounts to around $770
billion ($30 billion per year) in the Reference Scenario. These
projections include the investment needed to meet demand growth and
additional spending on conversion capacity so that existing refineries
are able to meet the changing mix of oil-product demand. Tighter fuel-
quality standards aimed at mitigating the environmental impact of fuel
use are also obliging the refining industry to invest in new quality-
enhancement capacity. The required level of refining capacity, allowing
for normal maintenance shutdowns, rises from 85 mb/d in 2004 to 117 mb/
d in 2030. The largest investments occur in the Middle East and
developing Asia (Figure 9). Most new refineries will be built outside
the OECD (see below).
Although investment in oil tankers and inter-regional pipelines
makes up a small proportion of total investment needs to 2030, the sum
required rises rapidly throughout the projection period, because of the
need to replace a large share of the world's aging tanker fleet. Total
cumulative capital spending amounts to around $260 billion. Investment
in gas-to-liquids plants in 2005-2030 is expected to amount to $100
billion. Most of this investment occurs in the second half of the
projection period. Investment in commercial coal-to-liquids plants,
mostly in China, is projected to total over $30 billion.
Investment Uncertainties and Challenges
Over the period to 2010, the total amount of investment that will
be made in oil and gas infrastructure is known with a reasonable degree
of certainty. Investment plans may change in response to sudden changes
in market conditions and some projects may be cancelled, delayed or
accelerated for various reasons. But the actual gross additions to
supply capacity at various points along the oil-supply chain are
unlikely to depart much from those projected in this Outlook. However,
beyond 2010, there is considerable uncertainty about the prospects for
investment, costs and the rate of capacity additions. The opportunities
and incentives for private and publicly-owned companies to invest are
particularly uncertain. Environmental policies could increasingly
affect opportunities for building upstream and downstream facilities
and their cost, especially in OECD countries. In the longer term,
technological developments could open up new opportunities for
investment and help lower costs.
The availability of capital is unlikely to be a barrier to upstream
investment in most cases. But opportunities and incentives to invest
may be. Most privately-owned international oil and gas companies have
large cash reserves and are able to borrow at good rates from capital
markets when necessary for new projects. But those companies may not be
able to invest as much as they would like because of restrictions on
their access to oil and gas reserves in many resource-rich countries.
Policies on foreign direct investment will be an important factor in
determining how much upstream investment occurs and where.
A large proportion of the world's reserves of oil are found in
countries where there are restrictions on foreign investment (Figure
10). Three countries--Kuwait, Mexico and Saudi Arabia--remain totally
closed to upstream oil investment by foreign companies. Other countries
are reasserting state control over the oil industry. Bolivia recently
renationalised all its upstream assets. Venezuela effectively
renationalised 565 kb/d of upstream assets in April 2006, when the
state-owned oil company, PdVSA took over 115 kb/d of private production
and took a majority stake in 25 marginal fields producing 450 kb/d
after the government unilaterally switched service agreements from
private to mixed public-private companies. The Russian government has
tightened its strategic grip on oil and gas production and exports,
effectively ruling out foreign ownership of large fields and keeping
some companies, including Transneft, Gazprom and Rosneft, in majority
state ownership. Several other countries, including Iran, Algeria and
Qatar, limit investment to buy-back or production-sharing deals,
whereby control over the reserves remains with the national oil
company.
Even where it is in principle possible for international companies
to invest, the licensing and fiscal terms or the general business
climate may discourage investment. Most resource-rich countries have
increased their tax take in the last few years as prices have risen.
The stability of the upstream regime is an important factor in oil
companies' evaluation of investment opportunities. War or civil
conflict may also deter companies from investing. No major oil company
has yet decided to invest in Iraq. Geopolitical tensions in other parts
of the Middle East and in other regions may discourage or prevent
inward investment in upstream developments and related LNG and export-
pipeline projects.
National oil companies, especially in OPEC countries, have
generally increased their capital spending rapidly in recent years in
response to dwindling spare capacity and the increased financial
incentive from higher international oil prices. But there is no
guarantee that future investment in those countries will be large
enough to boost capacity sufficiently to meet the projected call on
their oil in the longer term. OPEC producers generally are concerned
that overinvestment could lead to a sharp increase in spare capacity
and excessive downward pressure on prices. Sharp increases in
development costs are adding to the arguments for delaying new upstream
projects. For example, two planned GTL plants in Qatar were put on hold
by the government in 2005 in response to soaring costs and concerns
about the long-term sustainability of production from the North field.
An over-cautious approach to investment would result in shortfalls in
capacity expansion.
Environmental policies and regulations will increasingly affect
opportunities for investment in, and the cost of, new oil projects.
Many countries have placed restrictions on where drilling can take
place because of concerns about the harmful effects on the environment.
In the United States, for example, drilling has not been allowed on
large swathes of US federal onshore lands--such as the Arctic National
Wildlife Refuge (ANWR)--and offshore coastal zones for many years.\7\
Even where drilling is allowed, environmental regulations and policies
impose restrictions, driving up capital costs and causing delays. The
likelihood of further changes in environmental regulations is a major
source of uncertainty for investment.
---------------------------------------------------------------------------
\7\ In mid-2006, Congress was considering a bill to open up 8% of
ANWR.
---------------------------------------------------------------------------
Local public resistance to the siting of large-scale, obtrusive
facilities, such as oil refineries and GTL plants, is a major barrier
to investment in many countries, especially in the OECD. The not-in-my-
backyard (NIMBY) syndrome makes future investments uncertain. It is all
but impossible to obtain planning approval for a new refinery in many
OECD countries, though capacity expansions at existing sites are still
possible. The risk of future liabilities related to site remediation
and plant emissions can also discourage investment in oil facilities.
The prospect of public opposition may deter oil companies from
embarking on controversial projects. Up to now, NIMBY issues have been
less of a barrier in the developing world.
Technological advances offer the prospect of lower finding and
production costs for oil and gas, and opening up new opportunities for
drilling. But operators often prefer to use proven, older technology on
expensive projects to limit the risk of technical problems. This can
slow the deployment of new technology, so that it can take decades for
innovative technology to be widely deployed, unless the direct cost
savings are clearly worth the risk. This was the case with the rotary
steerable motor system, which has finally become the norm for drilling
oil and gas wells. These systems were initially thought to be less
reliable and more expensive, even though they could drill at double or
even triple the rate of penetration of previous drilling systems. The
slow take-up of technology means that there are still many regions
where application of the most advanced technologies available could
make a big impact by lowering costs, increasing production and
improving recovery factors. For example, horizontal drilling, which
increases access to and maximises the recovery of hydrocarbons, is
rarely used in Russia.
As well as lowering costs, technology can be used to gain access to
reserves in ever more remote and hostile environments--such as arctic
regions and deep water--and to increase production and recovery rates.
New technology has enabled the subsurface recovery of oil from tar
sands using steam-assisted gravity drainage and closely placed twin
horizontal wells, while enhanced oil recovery has been made possible by
injecting CO2 into oil wells and by using down-hole
electrical pumps, to allow oil to be produced when the reservoir
pressure is insufficient to force the oil to the surface.
Although costs have risen sharply in recent years, much of the
world's remaining oil can still be produced at costs well below current
oil prices. Most major international oil companies continue to use a
crude oil price assumption of $25 to $35 per barrel in determining the
financial viability of new upstream investment. This conservative
figure by comparison with current high oil prices partly reflects
caution over the technical risks associated with large-scale projects
and the uncertainty associated with long lead times and the regulatory
environment.
The current wave of upstream oil investment is characterised by a
heavy focus on such projects, involving the development of reserves
that were discovered in the 1990s or earlier. Unless major new
discoveries are made in new locations, the average size of large-scale
projects and their share in total upstream investment could fall after
the end of the current decade. That could drive up unit costs and,
depending on prices and upstream-taxation policies, constrain capital
spending. Capital spending may shift towards more technically
challenging projects, including those in arctic regions and in ultra-
deep water. The uncertainties over unit costs and lead times of such
projects add to the uncertainty about upstream investment in the medium
to long term.
Implications of Deferred Upstream Investment
In light of the uncertainties described above, we have developed a
Deferred Investment Case to analyse how oil markets might evolve if
upstream oil investment in OPEC countries over the projection period
were to increase much more slowly than in the Reference Scenario. This
could result from government decisions to limit budget allocations to
national oil companies or other constraints on the industry's ability
or willingness to invest in upstream projects. For the purposes of this
analysis, it is assumed that upstream oil investment in each OPEC
country proportionate to GDP remains broadly constant over the
projection period at the estimated level of the first half of the
current decade of around 1.3%. This yields a reduction in cumulative
OPEC upstream investment in the Deferred Investment Case vis-a-vis the
Reference Scenario of $190 billion, or 25%, over 2005-2030. Upstream
investment still grows in absolute terms.
Lower oil investment inevitably results in lower OPEC oil
production. This is partially offset by increased non-OPEC production.
Higher oil prices encourage this increased investment and production in
non-OPEC countries. They also cause oil demand to fall relative to the
Reference Scenario. Higher prices for oil and other forms of energy
also reduce GDP growth marginally, pushing demand down further. In
2030, the international crude oil price, for which the average IEA
import price serves as a proxy, is $19 higher in year-2005 dollars and
$33 higher in nominal terms (assuming annual inflation of 2.3%) than in
the Reference Scenario--an increase of about 34%.
As a result of higher prices and lower GDP growth, the average
annual rate of global oil-demand growth over 2005-2030 falls from 1.3%
in the Reference Scenario to 1.1% in the Deferred Investment Case. By
2030, oil demand reaches 109 mb/d--some 7 mb/d, or 6%, less than in the
Reference Scenario (Figure 11). This reduction is equal to more than
the current oil demand of China. Higher oil prices encourage consumers
to switch to other fuels, use fewer energy services and reduce waste.
They encourage faster improvements in end-use efficiency. In the
transport sector, they also encourage faster deployment of biofuels and
other alternative fuels and technologies, such as hybrids. The size of
these effects varies among regions. It is highest in non-OECD
countries, because the share of non-transport uses in final demand
(which is relatively price-elastic) is higher there than in the OECD
and because the share of taxes, which blunt the impact on demand of
higher international oil prices, is generally lower.
The drop in world oil demand that results from higher prices is
accompanied by an equivalent decline in world production in the
Deferred Investment Case. Unsurprisingly, OPEC oil production falls
sharply in response to much lower investment (Figure 12). Including
NGLs, OPEC output is just over 11 mb/d lower in 2030 than in the
Reference Scenario, though, at 45 mb/d, it is still nearly 12 mb/d
higher than in 2005. OPEC's share of world oil production remains
essentially flat at about 40% over the projection period. In the
Reference Scenario, the share rises to 48% in 2030.
The fall in OPEC production is largely offset by higher non-OPEC
output, which climbs to 64 mb/d--some 4 mb/d higher than in the
Reference Scenario and 14 mb/d higher than in 2005. Higher prices
stimulate faster development of conventional and non-conventional
reserves in all non-OPEC regions, as marginal fields become more
commercial. About 1 mb/d, or 15%, of the increase in non-OPEC output
comes from oil-sands in Canada. As a result, the share of non-
conventional oil in total world supply increases from 2% in 2005 to
more than 9% in 2030, compared with less than 8% in the Reference
Scenario.
alternative policy scenario
The Reference Scenario presents a sobering vision of the next two-
and-a-half decades, as the major oil-consuming regions--including the
United States--become even more reliant on imports, often from distant,
unstable parts of the world along routes that are vulnerable to
disruption.
In July 2005, G8 leaders, meeting at Gleneagles with the leaders of
several major developing countries and heads of international
organisations, including the IEA, recognised that current energy trends
are unsustainable and pledged themselves to resolute action to combat
rising consumption of fossil fuels and related greenhouse-gas
emissions. They called upon the IEA to, ``advise on alternative energy
scenarios and strategies aimed at a clean, clever, and competitive
energy future''. The Alternative Policy Scenario presented in the World
Energy Outlook 2006 is a direct response to that request, which the G8
reaffirmed in July 2006 in St. Petersburg.
The Alternative Policy Scenario analyses how far policies and
measures currently under discussion\8\ can take us in dealing with the
grave energy challenges now being faced. Information on more than 1,400
proposed policies and measures has been collected and analysed.
Sectoral and regional effects were also analysed in detail, in order to
help identify the actions that can work best, quickest and at least
cost.
---------------------------------------------------------------------------
\8\ An example for the US would be the implementation of the reform
of CAFE standards proposed by the National Highway Traffic Safety
Administration.
---------------------------------------------------------------------------
The results of this analysis are clear: First, implementing the
policies and measures that governments are currently considering would
lead to significantly slower growth in both fossil-fuel demand and
CO2 emissions. Second, new policies and measures would pay
for themselves--the financial savings far exceed the initial extra
investment cost for consumers.
Demand in the Alternative Policy Scenario
In the Alternative Policy Scenario, the implementation of more
aggressive policies and measures significantly curbs the growth in
total primary and final energy demand--a reduction of about 10%
relative to the Reference Scenario. That saving is roughly equal to the
current energy demand of China. Demand still grows, by 37% between 2004
and 2030, but more slowly: 1.2% annually against 1.6% in the Reference
Scenario.
The reduction in the use of fossil fuels such as oil is even more
marked than the reduction in primary energy demand (Figure 13). It
results from the introduction of more efficient technologies and
switching to carbon-free energy sources. Nonetheless, fossil fuels
still account for 77% of primary energy demand by 2030 (compared with
81% in the Reference Scenario).
Global demand for oil in the Alternative Policy Scenario grows on
average by 0.9% per year, reaching 103 mb/d in 2030--an increase of 20
mb/d on 2005 levels, but 13 mb/d (11%) lower than in the Reference
Scenario. In 2030, the share of oil in total primary energy demand is
32% in the Alternative Policy Scenario, a drop of three percentage
points compared to 2004. By 2015, oil demand will be 15% higher than in
2004, compared to 21% in the Reference Scenario. Increased fuel
efficiency in new vehicles, together with the faster introduction of
alternative fuels and vehicles, accounts for more than half of the oil
savings in the Alternative Policy Scenario. Most of the rest comes from
savings in oil use in the industry and building sectors.
These savings are equivalent to the current combined production of
Saudi Arabia and Iran (Table 3). By 2015, demand reaches 95 mb/d, a
reduction of almost 5 mb/d on the Reference Scenario. Measures in the
transport sector--notably those that boost the fuel economy of new
vehicles--contribute 59% of the savings over the projection period.
Increased efficiency in industrial processes accounts for 13%, and fuel
switching in the power sector and lower demand from other energy-
transformation activities, such as heat plants and refining, for 9%.
More efficient residential and commercial oil use makes up the rest.
Table 3.--WORLD OIL DEMAND IN THE ALTERNATIVE POLICY SCENARIO\1\
[mb/d]
----------------------------------------------------------------------------------------------------------------
Difference versus
Reference
2005 2015 2030 2005^2030 Scenario in 2030
------------------
mb/d %
----------------------------------------------------------------------------------------------------------------
OECD................................................... 47.7 50.7 49.9 0.2% ^5.2 ^9.5%
North America.......................................... 24.9 27.2 27.7 0.4% ^3.1 ^10.2%
United States...................................... 20.6 22.4 22.5 0.3% ^2.5 ^10.1%
Canada............................................. 2.3 2.5 2.5 0.5% ^0.2 ^8.2%
Mexico............................................. 2.1 2.4 2.7 1.1% ^0.4 ^12.7%
Europe................................................. 14.4 14.9 13.9 ^0.1% ^1.4 ^9.3%
Pacific................................................ 8.3 8.5 8.2 0.0% ^0.7 ^7.6%
--------------------------------------------------------
Transition economies................................... 4.3 4.7 5.0 0.6% ^0.7 ^11.8%
Russia................................................. 2.5 2.7 2.9 0.5% ^0.4 ^12.2%
--------------------------------------------------------
Developing countries................................... 28.0 35.6 44.7 1.9% ^6.6 ^12.9%
Developing Asia........................................ 14.6 19.4 25.8 2.3% ^3.9 ^13.2%
China.............................................. 6.6 9.4 13.1 2.8% ^2.2 ^14.5%
India.............................................. 2.6 3.6 4.8 2.5% ^0.6 ^11.3%
Indonesia.......................................... 1.3 1.5 2.2 2.0% ^0.2 ^7.5%
Middle East............................................ 5.8 7.7 8.8 1.7% ^0.9 ^8.9%
Africa................................................. 2.7 3.3 4.2 1.8% ^0.7 ^14.4%
Latin America.......................................... 4.9 5.3 5.9 0.8% ^1.1 ^15.8%
Brazil............................................. 2.1 2.5 2.9 1.3% ^0.6 ^16.0%
--------------------------------------------------------
Int. marine bunkers.................................... 3.6 3.7 3.8 0.2% ^0.4 ^9.8%
--------------------------------------------------------
World.................................................. 83.6 94.8 103.4 0.9% ^12.9 ^11.1%
--------------------------------------------------------
European Union......................................... 13.5 13.8 12.8 ^0.2% ^1.3 ^9.5%
----------------------------------------------------------------------------------------------------------------
\1\ Includes stock changes.
\2\ Average annual growth rate.
Supply in the Alternative Policy Scenario
In principle, lower global oil demand in the Alternative Policy
Scenario would be expected to result in a lower oil price than in the
Reference Scenario. Production in higher-cost fields mainly located in
OECD countries, would be reduced, declining even more rapidly after
2010 than in the Reference Scenario. But concerns about the security of
supply might encourage OECD and other oil-importing countries to take
action to stimulate development of their own oil resources. For
example, the UK government is currently considering such policies (DTI,
2006) and the US Congress is considering allowing more offshore oil
exploration and giving royalty relief for offshore production. For
these reasons, we assumed that oil production in OECD and other net
oil-importing countries--as well as the international crude oil price--
remain at the same levels as in the Reference Scenario. As a result,
the call on oil supply from the net exporting countries is reduced in
the Alternative Policy Scenario. OPEC members and major non-OPEC
producing regions, including Russia, the Caspian region and west
Africa, are most affected (Figure 14). OPEC production reaches 38.8 mb/
d in 2015 and 45.1 mb/d in 2030. The average growth of 1.2% per year is
just over half the growth in the Reference Scenario. OPEC's share of
the global oil market rises from the current 40% to nearly 44% in 2030,
but this is five percentage points lower than that in the Reference
Scenario.
Crude oil production outside OPEC is projected to increase from 50
mb/d in 2005 to 56 mb/d in 2015 and 58.3 mb/d in 2030 (though 1.8 mb/d
or 3% lower than in the Reference Scenario). The transition economies
are expected to account for half of this increase. Latin America and
West Africa account for most of the remainder. Production in OECD
countries is expected to decline steadily from 2010 onwards, as in the
Reference Scenario. The share of non-conventional oil production in
this scenario in 2030, at 8.7%, is an increase of 7.4 mb/d over current
levels. The production of biofuels is also expected to increase
substantially, especially in oil importing countries. Globally, biofuel
production will grow almost 10 times, from 15 Mtoe in 2004 to 147 Mtoe
in 2030. Most of the additional growth, over and above Reference
Scenario levels, is expected to occur in the United States and the
European Union.
The Chairman. Thank you very, very much.
Linda Stuntz is our next witness. Linda is a partner with
Stuntz, Davis and Staffier and has been involved previously
with the Department of Energy in a high position and, most
recently, was part of the Council on Foreign Relations Task
Force that worked up a report on the national security
consequences of U.S. oil dependency. Thank you for being here,
Linda.
STATEMENT OF LINDA G. STUNTZ, ON BEHALF OF A COUNCIL ON FOREIGN
RELATIONS INDEPENDENT TASK FORCE
Ms. Stuntz. Thank you, Mr. Chairman and members of the
committee. It is an honor to be before you today to discuss the
report prepared by an independent task force organized by the
Council on Foreign Relations, released this past October,
entitled, as you described, The National Security Consequences
of U.S. Oil Dependency. Today, let me highlight four points
from this report.
First, you will not find in this report support for the
concept of energy independence for this country. As much as I
know many of you on both sides of the aisle espouse this, it
is, in fact, unrealistic. Barring Draconian measures, the
United States will depend on imported oil for a significant
fraction of its transportation fuel needs for the next several
decades. Moreover, so long as we consume any oil, even if it is
produced domestically, we will be affected by what happens in
the global oil market, just as corn or other markets of that
nature are affected. We cannot wall ourselves off for that
market. Our allies are also dependent on this oil.
Therefore, you will find support in what the task force
focused on, reducing our dependence on all oil and on better
managing the global energy interdependence, which I noted
coincidentally, came up in some of my colleagues' testimony on
the panel.
One idea of many suggestions in the report is that the
International Energy Agency would work perhaps to expand its
membership to include new consumers, such as China, who until
the early 1990's, were actually oil exporters. That is one of
the many changes that has occurred in the global world market.
Second, the constraints on foreign policy caused by energy
require greater integration of foreign policy and energy
policy. The newspapers this morning and every morning are
replete, whether in Asia, Africa, South America or even Europe,
with incidents of energy and foreign policy intermingling, yet
the task force was unanimous in the view that energy issues
have not received sufficient attention in the formulation and
implementation of U.S. foreign policy.
Among other things, the task force recommends that an
energy directorate be established at the National Security
Council, similar to those that exist now, for counter-
proliferation defense policy and international economics.
Third, and it was highlighted by Senator Domenici in his
opening speech, one of things that I believe has changed since
Senator Jackson and I and some of you first began looking at
this very difficult challenge of energy security is the
increasing role of national oil companies. The reality today is
that national oil companies control some \3/4\ of the world's
oil reserves, as best we can tell. ExxonMobile, the largest
privately owned oil company in the world, ranks fourteenth,
roughly, on the list of proven reserve holders in the world. We
are only beginning to come to terms, I would submit, with this
development and what it means for world oil markets.
Interestingly, with their access to reserves in other
countries more limited, privately-owned oil companies, such as
BP, Shell and others, are returning to those areas that remain
open to them, including our U.S. Gulf of Mexico and the North
Sea. Over time, however, given where petroleum reserves are
located and by whom they are controlled, the world will become
increasingly dependent on state oil companies to produce the
oil that is needed. Some of these are highly efficient. They
utilize advanced technology and they conduct their business in
a transparent way on commercial terms that we would understand.
Many, however, do not, and we have to determine how to deal
with them and what their effects will be on the market.
Fourth, in order to address the national security
consequences of U.S. oil dependency, we need a comprehensive
approach. And this will not be a surprise or news to this
committee, but we need it all, we cannot focus on one or the
other. We need to increase the efficiency of oil use, primarily
in transportation fuels. We need to use alternative fuels. We
need to diversify oil supplies, particularly outside the
Persian Gulf, which includes in the United States. We need to
make oil and gas infrastructure more efficient and secure. And
we need to increase the investment in new energy technologies.
The task force considered--and had a lively debate on--
increasing the gasoline tax, increasing CAFE requirements and a
tradable permit program for gasoline allowances. Again, it will
probably be no surprise to you that while the task force
unanimously believed we needed to do one or several of these
things, we did not have an agreement on which one of these
should be pursued.
With respect to alternative fuels, the task force was
enthusiastic, in particular, about the possibility of plug-in
hybrid electric vehicles using energy generated, in particular,
by nuclear power, so that it could deal with some of the
emissions issues, which, of course, are the flip side of all
these energy issues.
The task force also recommended specifically removing the
54 cents per gallon tariff on imported ethanol so that U.S.
consumers may have the benefit of biomass-derived fuels from
countries such as Brazil, where ethanol can be produced at a
lower cost than in the United States at this time.
In conclusion, I very much hope that the task force work
product will be of assistance to the committee as it deals with
these important challenges and I look forward to discussing
these matters further with you.
[The prepared statement of Ms. Stuntz follows:]
Prepared Statement of Linda G. Stuntz, on Behalf of a Council on
Foreign Relations Independent Task Force
Mr. Chairman and Members of the Committee:
It is an honor to appear before you today to discuss the report,
``National Security Consequences of U.S. Oil Dependency,'' released
this past October and authored by an independent task force organized
by the Council on Foreign Relations. This task force was co-chaired by
James Schlesinger and John Deutch, no strangers to this committee.
Members of the task force included experts in foreign policy such as
Graham Allison, leading economists such as Martin Feldstein, energy
experts such as J. Robinson West, business leaders such as Norman
Augustine and experienced energy legislators such as former Senate
Energy Committee chairman Bennett Johnston. As a veteran of many energy
policy battles myself and one who continues to believe (nonetheless)
that, working together, we can improve our own energy security and that
of our children, it was a privilege for me to participate in this
effort.
Every member of the task force has a separate view on what is most
important in this report. I do not purport to speak for all of them
today--the report does that. I would highlight four points from this
report.
First, you will not find support in this report for ``Energy
Independence.'' Indeed, the first of several ``Myths'' highlighted by
the report is this one. ``Barring draconian measures, the United States
will depend on imported oil for a significant fraction of its
transportation fuel needs for at least several decades.'' \1\ Moreover,
so long as we use ANY oil, we will be subject to world oil market
developments and so will our allies. We cannot wall ourselves off from
the global oil market, much as we might wish to. Furthermore, policies
that attempt to significantly reduce import dependence could
dramatically drive up fuel prices. You will find support for reducing
our dependence on all oil and on managing better our global energy
interdependence, for example, by encouraging the International Energy
Agency to work with new major energy consumers such as China and
India.\2\
---------------------------------------------------------------------------
\1\ P. 14.
\2\ P. 52.
---------------------------------------------------------------------------
Second, the constraints on foreign policy caused by energy require
greater integration of foreign policy and energy policy. Whether in
Asia, Africa, South America or even Europe, our foreign policy is
directly affected by the role of that nation in the global energy
marketplace. Yet, the task force was unanimous in the view that energy
issues have not received sufficient attention in the formulation and
implementation of U.S. foreign policy. Among other things, the task
force recommends that an energy directorate be established at the
National Security Council, similar to those that exist now for
counterproliferation, defense policy and international economics.\3\
---------------------------------------------------------------------------
\3\ P. 57.
---------------------------------------------------------------------------
Third, one of the things that has changed most in global oil
markets over the past two decades is the rise of National Oil
Companies. The reality today is that National Oil Companies control
some three-quarters of the world's oil reserves. Exxon Mobil, the
largest privately owned oil company, ranks only l4th on the list of
proven reserve owners.\4\ We are only beginning to come to terms with
this development and what it means for world oil markets, but with
their access to reserves elsewhere increasingly limited, privately
owned oil companies are returning to those areas that remain open to
them, including the U.S. Gulf of Mexico and the North Sea. Over time,
given where petroleum reserves are located and by whom they are
controlled, the world will become increasingly dependent on state oil
companies to produce the oil that is needed.
---------------------------------------------------------------------------
\4\ P. 18.
---------------------------------------------------------------------------
Fourth, in order to address the national security consequences of
U.S. oil dependency, we need a comprehensive approach that: 1)
increases efficiency of oil use, primarily in transportation fuels; 2)
uses alternative fuels; 3) diversifies oil supplies, particularly
outside the Persian Gulf, 4) makes the oil and gas infrastructure more
efficient and secure; and 5) increases investment in new energy
technologies. The task force considered an increased gasoline tax,
increase in CAFE requirements and a tradable permit program for
gasoline allowances. While the task force unanimously endorsed the
adoption of such measures to slow the growth in petroleum consumption,
it did not reach agreement on which of these specific measures to
employ. With respect to alternative fuels, the task force was
enthusiastic about the possibility of ``plug in hybrid'' vehicles,
particularly in conjunction with greater use of nuclear power. The task
force also recommends removing the $0.54 per gallon tariff on imported
ethanol so that U.S. consumers may have the benefit of biomass-derived
fuels from countries such as Brazil, where ethanol can be produced at
lower cost than in the U.S.\5\
---------------------------------------------------------------------------
\5\ P. 39.
---------------------------------------------------------------------------
conclusion
It has been my experience that the energy security debate is one
particularly afflicted by misinformation and failure to define the
problem being addressed. I commend the Committee for seeking the facts
regarding the global oil market, our position in that market, what
options are available to us in the near and longer term, and what the
costs and benefits of those options are. I truly hope that the task
force report can be of assistance to you in this effort and would be
pleased to try to answer any questions you may have about the report or
the matters it addresses.
The Chairman. Thank you very much for that testimony.
Next is Dr. Robert Hormats, who is vice chairman at Goldman
Sachs (International) and has been a witness before this
committee, and several Senate committees that I serve, on
numerous times. We welcome you back and look forward to your
comments.
STATEMENT OF DR. ROBERT D. HORMATS, VICE CHAIRMAN, GOLDMAN
SACHS (INTERNATIONAL)
Dr. Hormats. Thank you very much, Mr. Chairman and members
of the committee. It is a pleasure to be back here.
Let me make just a few points about the situation we face
today. First is that we have a history in this country of going
through periods of great crisis followed by periods of
prolonged complacency and that has caused energy policy to be
sort of light switch--on/off.
I remember my first time coming to this committee. I was
economic advisor to Dr. Kissinger in the 1970's when we had the
first big oil crisis, with long lines and the Arab oil embargo
and high prices, and at that point, we thought the country
would rally behind a very bold policy. Well, there were some
major elements of progress in the 1975 Act under President
Ford, where we had energy efficiency standards for cars. And
after that, a lot of companies moved away from oil to burn
other things to generate power and we used coal in other
things, as opposed to oil, in the industrial part of the
economy.
But then we had other crises that followed, periods of
concern, periods where people would say, we need bold policy.
Then prices go down and we relax and forget about it. I think
that point Senator Dorgan made a moment ago is that even now,
we're just taking baby steps. These steps are not commensurate
with the situation we find ourselves in today. And that is,
people say, look, after 9/11, everything changed. Well, energy
policy really has not changed very much. We're fighting a war
on terrorism. We are spending money, lots of money, for oil.
We're heavily dependent on countries that are very unreliable
suppliers. A large portion of money is spent by us and other
importers, and goes to countries whose interests are hostile to
those of the United States. Some of that money finds its way
into terrorist hands. We should accept the fact that that is
the case.
So what we're doing now is we're fighting in a post-9/11
environment with a pre-9/11 energy policy. It is simply not
sufficient to deal with the national security crisis that we
face today. The crisis is a geopolitical one and the
vulnerability of this country to disruptions--look what is
happening in Nigeria today, kidnappings of people on these oil
rigs. We have Venezuela making very tough statements about
further nationalization. We have Russia using oil as a
political lever. We have instability in the Middle East. If
Iran deteriorates further in the relationship--that will affect
oil. It has happened before. If Iraq deteriorates further and
the civil war increases and other countries start getting
involved, then you have additional tensions. If you have
tensions between the Shiites on one side of the Persian Gulf
and the Sunni on the other, that's going to make transportation
of oil all the more vulnerable. And therefore, we have to come
up with a much bolder set of energy policies for national
security reasons.
The thing about it is, it may be difficult to deal with
some of these situations abroad, of which we have less control.
We have it within the capability of the United States not to
become energy independent. I think Linda has made a very good
point: energy independence, at this point, is not possible, but
we can manage our vulnerability a lot better than we are doing
today and it's the vulnerability that is the huge problem.
How do we do that? We have the capability, for instance, by
insisting on tougher fuel standards for automobiles, to improve
the efficiency with which we use oil. And it's quite possible
to do. It's within the realm of technological possibility. Now
there may be reasons why you can't go as fast as we would like,
but there should be the target of much greater energy fuel--oil
fuel efficiency standards with off-ramps in case there is an
economic reason it can't be done or a technological reason it
can't be done. There ought to be some way--exceptions for a
period of time, but the goal ought to be to reduce the
efficiency--to improve the efficiency of the use of oil as a
transportation fuel because, by and large, in this country, oil
is a transportation fuel and if we can't address that issue,
we're not going to address the overall vulnerability issue.
The second part of this is that there are a number of other
elements there and the laws that are written and the
regulations that come out of this Congress, many of them are
too short-term. Many of the incentives have very narrow windows
so companies can't take advantage of them. I've listed in my
testimony some of these. These are, I think, very important.
Second, some of these structures for the investments that
we want to come into this sector are limited so that certain
kinds of investors--individual investors in certain cases,
institutional investors in other cases--cannot really put money
in because of the structure of the law and the way the
regulations are written. These are additional important points.
Third, we've got to work with other countries, like China
and other countries that are big consumers and growing
consumers, not to have a big fight with China over energy, but
we ought to try to find ways where we can use our ability to
develop, for instance, clean coal technology to help other
countries to utilize their energy resources more efficiently
and in a way which is environmentally sound.
The last point, generally--and I'll stop because I'm over
my time--is we have the technological capability on the supply
side. I've talked about the demand side, greater efficiency in
the use of oil for automobiles and transportation vehicles. We
have the capability, with the entrepreneurialism and the
vitality of this country, as President Ford said in 1975 when
he first talked about this, to utilize this capability in this
country, to develop new, alternative sources of energy. And
there was a lot going on. There is a lot more that can be done
with the right kind of government incentives.
And we also have to use the conventional sources of energy
that we have. We have a lot of them. Environmental practices
have improved a lot. We can't do it only by reducing the use of
energy. We can't do it only by increasing the supply. But when
you combine the two policies that increase our dependence on
our own conventional and non-conventional resources, combined
with greater efficiency of the use of oil in particular, we
have the ability to reduce our vulnerability quite
substantially.
But we need a much bolder policy. It can't be a pre-9/11
policy, it has to be a post-9/11 policy. We're in a war and oil
is one of the elements of that. During World War II, the
American people were called on to buy bonds. There were bond
rallies. People asked, what can I do? How can I help? Now, what
can Americans do? What they can do is support bold energy
policy. If we are committed to a really tough policy, people
ought to be supporting efforts to reduce the wasteful use of
energy across the board. Thank you.
[The prepared statement of Dr. Hormats follows:]
Prepared Statement of Robert D. Hormats, Vice Chairman,
Goldman Sachs (International)
Mr. Chairman and Members of the Committee:
Thank you for your kind invitation to testify on the critically
important subject of the economic and national security implications of
America's oil dependence.
I speak to you today as a citizen concerned about our nation's
increasing dependence on potentially unstable supplies of foreign oil.
This dependence creates profound economic, political and security
vulnerabilities. Also, a portion of the large amounts of petrodollars
accumulated by a number of suppliers is used in ways that threaten
American interests.
By way of background, I was economic advisor to Dr. Henry Kissinger
on the National Security Council staff in the mid 1970s when this
country experienced its first energy crisis after the 1973 Yom Kippur
War, and participated in his Middle Eastern shuttle diplomacy during
the period that followed. At that time, I had high hopes that the Arab
oil embargo, the sharp increase in the price of oil, and the long-lines
at gas stations would produce a bipartisan consensus on energy policy
and jolt our nation into a bold and effective effort to reduce oil
dependence and future vulnerability. Indeed, some progress was made.
The Energy Policy Conservation Act of 1975, championed by our late
President Gerald R. Ford, launched a number of bold initiatives to
achieve this goal. And the country did accomplish significant
improvements in the efficiency of oil use through compulsory mileage
standards for automobiles and because U.S. industry and power plants
shifted dramatically away from using oil as a fuel.
But when prices fell later in the decade, a sense of complacency
set in. Then we were hit by another crisis that caused oil prices to
spike at the end of the 1970s; that was triggered by the fall of the
Shah of Iran and the Iranian Revolution. Complacency set in once again
after that crisis receded and prices fell. Another oil crisis occurred
in 1990 when Iraq invaded Kuwait, after which the sense of urgency
about dramatic alterations in energy policy and use faded again. Decade
after decade our dependence on foreign oil has risen. In the mid-1970s,
35% of this nation's oil consumption was supplied by imports. Now,
three decades later, it is 60%.
After 9/11, again at the beginning of the current Iraq War in 2003,
and again during the large price run-up in and the summer of 2006 the
country had excellent opportunities and powerful incentives to confront
energy vulnerabilities with a bold policy response. The 2005 Energy
Policy Act contained a number of positive features--but these measures
were not commensurate with the seriousness or the urgency of the energy
challenge this country faces.
American dependence on potentially vulnerable oil supplies
continues to grow, with little prospect that it will change--despite
the fact that we are engaged in a War on Terrorism in which oil imports
by the U.S. and other nations provide funds to nations hostile to the
U.S. and countries friendly to us. It is often said that ``9/11 changed
everything!'' Sadly, in the area of energy policy it hasn't changed
very much. American oil vulnerability continues unabated.
There are several national economic and security consequences of
this situation:
If the situation in Iraq continues to deteriorate and other
oil producing nations become more involved, the risks increase
to oil supplies not only from disruptions in Iraq but also from
greater tensions between the Sunni nations on the western side
of the Persian Gulf and the Shiites on the eastern side, with
oil facilities and shipments becoming increasingly vulnerable.
Moreover, added western pressures on Iran over its nuclear
program could lead to oil disruptions or threats thereof;
The American economy remains highly vulnerable to supply
disruptions in oil exporting nations; these could result from
acts or terrorism, political instability, efforts to use oil as
leverage, or natural calamities;
High oil prices resulting from strong demand from countries
such as the U.S. and other major importers give countries such
as Iran and Venezuela added resources to take actions inimical
to American interests;
Oil-dependent friends and allies feel more vulnerable to the
pressures and potential use of oil leverage from supplying
countries and therefore are reluctant to side with the U.S. on
key issues affecting those suppliers;
Oil-related tensions and competition are likely to
intensify--as countries such as China seek to lock up scarce
supplies or make political deals to solidify long-term supply
relationships, or suppliers such as Russian and Iran use oil as
leverage to extract political concessions from consumers.
My concerns about this untenable and dangerous situation led me--
together with a group of other concerned citizens to join the Energy
Security Leadership Council in an effort to press for greater and more
resolute national action on this matter--and for an end to the
divisive, highly polarized debate that has stymied genuine progress on
many fundamental issues. The Council, a project of Securing America's
Future Energy (SAFE), is a nonpartisan group of business executives and
retired military leaders. It recently unveiled a report entitled
``Recommendations to the Nation on Reducing U.S. Oil Dependence.'' (I
will discuss a few of these later in my testimony, along with a number
of recommendations that I believe can also contribute to progress in
this area.) The members of the Council believe that America's energy
security is in a perilous state. Along with my fellow Council members,
I am convinced that America's leaders must move quickly and steadfastly
to confront our high level of oil dependence as a profound national
security challenge.
energy interdependence
Calls for ``energy independence'' offer a false promise to the
American people. They also suggest a sort of xenophobia that implies
that the U.S. can or should attempt to solve its energy problems with
little regard for those of other nations. In fact, oil is a fungible
global commodity, which means that events affecting supply or demand
anywhere will affect oil consumers everywhere. A country's exposure to
world oil prices or oil price shocks is a function of the amount and
types of oil it consumes; the ratio of ``domestic'' to ``imported'' oil
is only a portion of the problem. Even if the U.S. could substitute
domestic energy for all foreign oil--a goal the Council believes to be
impossible--American economic prosperity would still be linked to the
health of a global economy dependent on international oil flows. So as
we work to enhance our own energy security we should also be
strengthening international cooperation with oil producers and
consumers to improve global energy security, efficiency, and
environmentally responsible production and usage.
It is also important to make a distinction between dependence and
vulnerability. There are numerous suppliers of oil that are very
reliable and that use the funds earned in a constructive fashion. There
are others whose facilities are vulnerable to disruption and that use
funds in ways inimical to U.S. interests. But a large portion of the
world's oil comes from this in the second category, posing a series of
economic, political and security risks.
key recommendations
The Council recommends a goal of cutting U.S. oil intensity the
amount of oil it takes to produce a given amount of GDP--in half by
2030. There is a favorable precedent for this objective. Since the mid-
1970s, the U.S. has managed to trim oil intensity by 50%, chiefly by
raising the fuel efficiency of passenger cars, virtually eliminating
oil as a fuel for electric power generation, and expanding less energy-
demanding sectors of the economy, particularly in the area of services.
As a consequence, the U.S. now uses half the amount of oil to produce a
dollar of GDP, in real terms, as it did just thirty years ago.
Unfortunately, however, progress in this area has slowed in the last
ten years.
One key goal must be to make America's prosperity less dependent on
a commodity the production level of which responds only very slowly to
changes in price. Combine this price inelastic supply with 1) the
vulnerability of oil supplies to various types of disruption, 2) the
fact that some countries see oil as a political as well as an economic
commodity, and 3) the fact that much of the world's production is in
the hands of state owned oil companies, many of which use oil revenue
for political or social ends rather than reinvest it in new production
capacity, and you have the recipe for severe energy-related economic
disorder.
As a result of the halving of U.S. oil intensity since the mid-
1970s, the high oil prices experienced in the summer of 2006
represented a smaller relative cost to the economy than in the past.
Further reductions in oil intensity would provide a measure of
insurance against some of the effects of sudden future oil price shocks
or sustained high oil prices. In addition, by boosting the production
of alternative sources of energy to displace oil, we can create more
production capacity at home, keep more of our money in this country,
create a great number of new, high quality jobs in industries that
manufacture and utilize new environmentally responsible energy
production and conservation technologies, and develop new export
products that can be sold to an energy hungry and environmentally
conscious world.
The Global Energy Challenge
The global economy is in the midst of a period of extraordinary
growth that promises to transform the lives of billions of people,
bringing comforts and luxuries to regions where humankind has long
struggled for subsistence. Creativity and the drive for a better life
are the engines of this tremendous surge in output, living standards
and productivity but like all engines they require energy to function.
By 2020, world energy demand is forecast to jump by 50% over 2000
levels, with most of the increase coming in developing countries. The
safe and affordable delivery of all this energy is by no means assured.
Even if resources turn out to be sufficient in the aggregate, their
distribution will not map closely to the topography of demand. The
resultant uncertainty of supply and upward pricing pressure will
exacerbate international tensions stemming from non-energy issues.
Oil provides only 40% of global energy, but, as the premier
transportation fuel, it has emerged as the touchstone of the world's
energy outlook. On both economic and psychological grounds, oil price
spikes threaten the prosperity of many nations, including many of the
poorest on this planet. They also sow the seeds of tension between
exporting and importing nations, among consuming nations, and among
different groups within countries. Indeed, since so much oil is used
for personal transportation, oil prices have an enormous impact on the
pocketbooks of virtually every American family. Correspondingly, policy
efforts that impact oil's cost and availability must take into account
the interests of the average American family and quickly become major
political issues.
America's Clear and Present Dangers
For much of the last century, surplus domestic oil production
reduced U.S. vulnerability to oil disruptions elsewhere in the world.
But America's oil production is now dwarfed by current consumption.
Thus, while the U.S. remains the third largest oil producer in the
world, domestic production can satisfy barely 40% of its requirements.
The U.S. generates 28% of the world's goods and services while
consuming roughly a quarter of its oil production. This may seem like a
balanced, even favorable energy equation, but closer inspection reveals
a different story. Despite considerable progress toward more efficient
energy use, America requires substantially more oil to create a dollar
of Gross Domestic Product (GDP) than is the case in most other
developed countries. Some of this differential in ``oil intensity'' can
be attributed to our nation's vast size, the dispersion of our
population, and less reliance on public transportation. Global military
obligations, which are inextricably linked to our commitment to secure
the flow of oil for the benefit of all nations, further increase
American consumption. But even with these extenuating factors, there
can be little doubt that the U.S. can and must use energy far more
efficiently.
America's long-term supply and demand balance is no more
encouraging. U.S. oil demand is expected to grow 24% over the next two
decades, and even if new discoveries raise its current 3% share of
global oil reserves, our nation will almost certainly still require
substantial amounts of petroleum imports. Import dependence will also
define energy security for our key allies and most of the world's
manufacturing nations. Unfortunately, the developed nations that
consume most of the world's oil are not in a good position to produce
the fuels they need.
A large portion of the world's oil reserves are owned by state-
owned or controlled oil companies in non-O.E.C.D. countries. It is
worth underscoring this point--especially because when oil prices were
rising last summer there were many accusations, misguided in my view,
that this was a conspiracy among the big oil majors, when in fact the
six largest state oil companies have ten times the reserves of the top
six privately owned companies. Some of these state companies are highly
efficient and well run, but others are highly politicized and are not
able to utilize their profits to increase production or modernize
capacity. Because of the large state company role in the world's oil
markets, there is not a ``free market'' for oil. As a result, a
substantial portion of production is politically influenced and
production decisions and practices are frequently economically
suboptimal.
With each passing year, the global oil trends now at work--rising
consumption, reduced spare production capacity, politicized spending
decisions, and potentially high levels of instability in key exporting
countries--all increase the likelihood of an energy crisis. The odds in
favor of a crisis are further heightened by the rise of terrorist
movements bent on targeting critical elements of the world's vulnerable
oil production, processing, and delivery infrastructure.
Given today's precarious balance between oil supply and demand,
taking even a small amount of oil off the market could cause prices to
rise dramatically. In Oil Shockwave, a cabinet-level oil crisis
simulation conducted in 2005 by SAFE and the National Commission on
Energy Policy (NCEP), a 4% global shortfall in daily oil supply--only
3.5 million barrels in a 84 million barrel daily market resulted in a
177% increase in the price of oil, to over $150 per barrel. The
simulation was played out by men and women who have served in the
highest ranks of the U.S. government; Robert M. Gates, our current
Secretary of Defense, for example, filled the role of National Security
Advisor. The hypothetical scenarios put before the participants were
designed to simulate a decline in world oil production due to regional
instability and to terrorism. The incidents were completely plausible,
and some, such as unrest in Nigeria, have subsequently come to pass.
But there was little these skilled officials could do to stop a gut-
wrenching increase in the price of oil. Indeed, one of the major
lessons of the simulation was that the Strategic Petroleum Reserve
(SPR), the emergency supply of federally owned crude oil, offers only
very limited protection against a major supply disruption. Emergency
reserves cannot sustain the United States through a prolonged crisis,
and it will be extremely difficult to reach political consensus on when
it is appropriate to begin using them.
Even under normal conditions, oil dependence has severe economic
consequences. In 2005, direct outlays for imported oil accounted for a
third of the country's $800 billion current account deficit. In 2006
prices, these outlays have gone still higher. By diverting funds away
from domestic consumption and investment, oil imports put a drag on
U.S. economic growth and undercut the nation's long-term competitive
position. Oil dependence also adds billions to our defense expenditures
by making overseas protection of oil supplies a high strategic
priority.
China
Before I turn to a discussion of recommendations, I want to touch
upon the rise of China and how that impacts U.S. energy security. Some
observers have insisted that clashes between the U.S. and China over
energy are inevitable. Chinese companies are buying oil properties and
concluding long-term supply contracts around the world. A few of
China's deals are in countries such as Venezuela, Iran and Sudan, with
which the U.S. has strained or no relations. Also, China's surge in oil
demand was seen, incorrectly, by some as a reason for higher prices
last summer. And China's increased coal production concerns U.S.
environmentalists.
But the fact is that the U.S. and China have many common interests
in the energy area and thus many reasons to cooperate. Consider these
facts:
The U.S. is the world's biggest oil importer. China is the
world's fastest growing oil importer. High prices and supply
instability harm both nations. Price increases in the summer of
2006 primarily reflected the lingering affects of sluggish
world investment in production and refining in the previous
decade, and market perception of high political risk that could
disrupt oil deliveries, which both nations have an interest in
correcting.
Chinese, like Americans, are concerned about their
environment. China faces colossal and urgent environmental
problems, as anyone who has visited Beijing during the winter
has experienced first hand. U.S. companies have great expertise
in clean energy technology that could help.
The U.S. and China have a similar interest in open sea lanes
for oil.
Both nations also desire a secure business and legal
environment for their energy investments in emerging economies
as well as stable and growing supplies from world exporters.
When I look at China and the U.S., I see two nations that have an
enormous interest in cooperation in pursuit of energy security. Several
areas are ripe for a common effort.
A Joint Business-Government Commission on Clean Coal
Technology; this could help China develop and utilize its
massive amounts of coal in an environmentally responsible way
and boost U.S. exports of technology and equipment in this
area.
Joint research on alternative fuels, which should also
include experts from Japan, would draw on the best talent in
these three countries. This could lead to breakthroughs in, or
broader dissemination of, non-carbon based production and use
technologies.
Strengthen U.S.-China cooperation in the context of the
International Energy Agency.
Consultation with one another, and with other regional
nations, to maintain open sea lanes; that could reassure China
that the U.S. will not use its naval power to leverage China on
oil.
Strengthen established regional groups that include China,
the U.S., and other Pacific nations to address environmental
and energy supply issues.
Helping China to increase domestic energy output using state-of-
the-art, environmentally responsible, technologies would slow the
growth of its oil import dependence, reduce imbalances in global
markets, dampen global price pressures, and contain the process of
global warming. And cooperation on these broad energy issues can
strengthen broader U.S.-China ties. The alternative--frequent energy
confrontations--benefits neither country.
There Are No Silver-Bullet Solutions
Success in improving the nation's energy security posture will
demand significant public and private investment--supported by
meaningful tax and other non-tax incentives like loan guarantees--over
a sustained period. Because of the volatility of markets and the
strategic role of oil, a considerable amount of government support is
needed to provide the necessary incentives through a supportive and
reliable regulatory, and tax environment if we are able i) to reduce
America's oil vulnerability; ii) strengthen this nation's capacity to
produce oil and alternative sources of energy; and iii) utilize energy
more efficiently and in an environmentally responsible way. The U.S. is
capable of major breakthroughs if all elements of our society work
together.
The good news is that we Americans have it within our power and our
technological and financial capacity to take meaningful steps to reduce
oil dependence and increase energy security using both proven methods
and technologies and our ingenuity and entrepreneurial capacity to
develop new breakthroughs.
Improving efficiency: In the view of the Council, the most
important thing the U.S. can do to lessen its oil dependence in
the near and medium-term is to utilize oil considerably more
efficiently. With the goal of once again halving oil
intensity--as in the 1980s and 1990s--in the space of two
decades, Americans can do much to protect the economy against
the effects of oil shocks that can be unleashed by forces
beyond our control. Improved vehicle fuel efficiency is the
single most important avenue for further cutting the nation's
oil intensity.
We must face the hard fact that in the U S. oil is primarily
a transportation fuel; unless we can dramatically curb the use
of oil in our cars and trucks, we will be unable to reduce our
oil dependence. Currently the direction is not positive;
through 2030 oil usage by SUVs and light duty trucks is
expected to surge by roughly 77%. The transportation sector
accounts for nearly 70% of all the oil the country uses; and
oil fuels almost 97% of all transportation. With most of the
vehicles on the nation's roads operating at efficiency levels
far below what is achievable with currently available
technologies, there is a clear opportunity to realize sizable
fuel economy gains without overall loss of safety or functional
utility. We propose empowering the National Highway Traffic
Safety Administration (NHTSA) to mandate annual fuel efficiency
increases of 4% while allowing for these increases to be
postponed or constrained if economic, technical, or safety
impediments are demonstrated.
Increasing stable supply. As a second means of improving
America's oil risk profile, the Council recommends efforts to
increase the production of oil in stable regions of the world,
including in the U.S., Canada, and Mexico. We must move beyond
the drill/don't drill debate for this simple reason: by
facilitating the discovery and recovery of conventional oil
resources, in conjunction with stricter environmental
standards, American investment and the capabilities of this
nation's formidable oil experts and oil service companies can
ease the tight supply conditions that unsettle oil prices and
lessen the probability that even modest supply shortfalls will
trigger an international oil crisis. By the same token, a
robust nuclear power program also makes great sense.
Supplies abroad. Just as significantly, by working to ensure
the rule of law, sanctity of contracts, and stable investment
climates abroad, America can help to lower the likelihood of
future disruptions. There a great many potential projects that
can enable the world to diversify the sourcing of oil away from
its present growing concentration on the Middle East. By
utilizing groups such as the International Energy Forum--a
ministerial dialogue among major energy producers and consumers
established in 2003--the conditions for increased investment in
such projects can be enhanced.
Developing alternatives. Third, America can lead the way in
expanding the availability of alternatives to petroleum-based
fuels. Diversifying our transportation fuel supply must be a
key part of any comprehensive effort to improve U.S. energy
security. Without an expanded supply of alternatives,
conventional petroleum will continue to power nearly all of our
motor transport. Such reliance on a single non-substitutable
input creates profound economic dangers. To date, through the
help of federal policies such as the Renewable Fuels Standard,
the phase-out of MBTE as an additive, and tax incentives, corn-
based ethanol has developed as one of the most successful
domestic alternative transportation fuels. Production in the
United States rose from 1.4 billion gallons a year in 1995 to
about 4 billion in 2005.
Although this growth rate is impressive, it is merely a drop
in the bucket when compared to this nation's annual gasoline
consumption of 140 billion gallons; it is equivalent in terms
of energy content to only 2% of our gasoline demand. At a
maximum, corn-based ethanol may be able to displace 10% of our
gasoline use before corn demand outstrips supply. Consequently
if we want to have a significant impact on reducing our
consumption of petroleum-based fuels, the federal government
must encourage the development and commercialization not only
of dedicated energy producing crops such as corn and sugar, but
also of other potentially large-volume bio-fuels like
cellulosic ethanol (which are low cost, do not compete with the
food chain, and provide another revenue stream for farmers)
that is generated from forest residue and agricultural waste
such as wheat straw, switch grass, and corn stover.
Technologies like cellulosic ethanol are poised to dramatically
raise bio-fuels production by shifting acreage-to output
ratios.
However, to transform this promise into reality, existing
federal policies, like the federal loan guarantee program for
innovative technologies must be fully funded and implemented;
and new policies, which encourage and support investment in
commercial facilities and related transportation infrastructure
must be readily adopted.
There are two specific policy changes that I believe would
enhance the development and commercialization of renewable
energy.
The first is for Congress and the Administration to take a
longer term perspective in the way tax incentives are
structured. For example, with respect to the production tax
credit (PTC) for renewable energy sources like wind and
geothermal, the credit is available to projects that are placed
in service before January 1, 2009. Historically this credit has
been renewed only for short periods of time and often after
great uncertainty and delay. This on-again, off-again process
has added significant uncertainty to such projects and
increased their costs. Therefore a longer-term extension of the
PTC, say for five years would help to avoid such problems.
The second is to alter the structure of tax incentives to
encourage investment from additional categories of investors,
including small investors, by enabling them to benefit from tax
incentives--thereby increasing the availability and lowering
the cost of capital for these projects. For example, the way
the law is now written retail investors and taxpayers paying
the alternative minimum tax cannot use the production tax
credit for investment in wind projects; allowing the use of
master limited partnerships for these types of projects would
broaden the group of investors who could help to finance them.
It is worth noting that many of the new technologies being
developed involve high technical risk, significant costs, and
regulatory uncertainties--and that costs of demonstration
projects to show that these technologies can be deployed on a
commercial scale as well as those associated with their
commercial development are significantly greater than the
initial R&D costs. Therefore, maximizing the range of investors
supplying capital, providing reliable incentives, and creating
and funding policies that reduce the significant financial
risks associated with these projects are critical to advancing
the process of proving and commercializing innovative energy
alternatives.
Managing risks: In the Council's view, we must manage risk
within the interdependent global oil economy. In our dangerous
world, threats are one commodity not in short supply. America
contributes far more than any other nation to protecting this
global infrastructure, and the time has come for other nations
to expand their own efforts. All nations have an interest in
the stability of the global oil infrastructure, and a variety
of international efforts could help to ensure the smooth flow
of oil. New multilateral accords should play a role, but there
are also opportunities for expanded reliance on existing
organizations such as the Gulf Coordination Council, NATO, or
ASEAN. A common interest in ``oil security maintenance'' in
partnership with producing nations offers real potential to
improve regional security in areas of rising geopolitical
competition by creating frameworks for pragmatic international
cooperation. Where appropriate, the U.S. should provide
exporting countries with diplomatic support as well as with
counter-terrorism training and other military aid.
I urge you to review the Council's detailed recommendations, which
are contained in our published report. We will be glad to provide any
further clarifications you may require.
The Capabilities of the American People
Last week, the nation mourned the passing of our 3 8th President,
Gerald R. Ford--for whom I had the great privilege of working.
President Ford left a legacy of honesty, integrity and decisiveness.
These aspects of his leadership were particularly evident in his
handling of energy security. In his 1975 State of the Union address,
President Ford recognized the energy dangers threatening the country.
He expressed a ``very deep belief in America's capabilities,''--its
innovative capacity and technological skills to overcome its growing
dependence on imported oil. He also rallied support for fuel efficiency
standards. I share President Ford's optimism in the capacity of
Americans to respond to the challenge of growing energy dependence, and
his belief that Americans will rally around tougher energy measures, if
they are given strong leadership.
America has a long history of pulling together in the face of
national security challenges. I am currently completing a book entitled
The Price of Liberty: How America Pays for its Wars. In all the major
national security challenges of the twentieth century, Americans
demonstrated a remarkable willingness to make patriotic wartime
sacrifices. During World War I and World War II, American's not only
paid dramatically higher taxes but also participated in massive bond
drives to mobilize billions of dollars to support out troops.
Roosevelt's Secretary of the Treasury Henry Morgenthau, when asked
about the significance of such drives, said that they were launched not
only to raise massive amounts of funds, but also to respond to people
who asked ``What can I do to help.'' Today, the answer to this question
lies not in buying more bonds but in buying less gasoline.
Since 9/11 there have been no major bond drives as in past wars--
and only limited steps to reduce our dependence on oil. The time has
come to recognize that energy security is central to the national
security challenges of twenty-first century, and to present the
American people with the unvarnished truth regarding how oil affects
the struggle in which we are engaged. We must meet the threats we face
in the same spirit as our parents and grandparents during past wars--
with far-sighted patriotism and willingness to compromise narrow
partisan, ideological, philosophical and economic positions in the
long-tern national interest.
There are enormous dangers in facing the challenges of a post-9/11
world with a pre-9/11 approach to energy that relies so heavily on oil
from some of the most vulnerable areas of the world and sustains price
levels that benefit countries such as Iran and Venezuela that seek to
undermine our interests and threaten our friends. American leaders and
the American people have rallied the country in past wars; the
challenge is to do so again,
I thank you again for this opportunity to testify.
The Chairman. Thank you very much.
Next is General Charles Wald, who is the former deputy
commander of the U.S. European Command, and he has been very
involved with the Energy Security Leadership Council. We very
much appreciate his being here today to give us his views.
STATEMENT OF GENERAL CHARLES WALD, U.S. AIR FORCE [RETIRED],
FORMER DEPUTY COMMANDER, U.S. EUROPEAN COMMAND, AND MEMBER,
ENERGY SECURITY LEADERSHIP COUNCIL
General Wald. Thank you, Mr. Chairman and members of the
committee, for the opportunity to discuss the global oil
balance and its impact on U.S. and national security.
I recently retired from the Air Force after 35 years of
service and during my career had the opportunity to fly combat
over Vietnam, Cambodia, Iraq and Bosnia and learned much
regarding how to use military assets to effectively solve
national security problems.
But I also learned that many believed the U.S. military is
solely responsible for security. I like to call this the ``Dial
1-800-The-U.S.-Military'' syndrome, because it reflects how
people assume the U.S. military is a toll-free resource that
can be called on to perform tasks that no one else has either
the capability or will to execute.
I recall a recent meeting with several major global oil
company executives in Kazakhstan. Before we began our
discussion, one of the executives thanked me and the U.S.
military for protecting the free flow of oil around the world.
The executive's world view included the expectation that the
U.S. military will be there to provide worldwide security and
to ensure the free flow of oil without any assistance from
others. This struck me, and frankly, does not seem like a good
model, particularly for the United States. The U.S. cannot and
should not be everywhere to protect all the vulnerable
components of the global oil infrastructure.
With regard to the oil dependence issue, military response
and capabilities are by no means the only effective tools
available and in many cases are not appropriate. In fact, the
single most effective step the United States can take to
improve its energy security is to increase transportation
efficiency.
The transportation sector is responsible for nearly 70
percent of the oil the United States consumes. CAFE standards
legislated in 1973 during the Arab oil embargo were
instrumental in helping America lower oil usage by the 1980's,
but there has been little progress since the original mileage
targets were met.
As a consequence, America's light-duty vehicle fleet now
has the worst average fuel efficiency in the developed world.
America must do better in this area. That is why, as you
mentioned, the Energy Security Leadership Council has
recommended vehicle efficiency standards that require 4 percent
annual improvements in mileage per gallon performance but with
regulatory off-ramps.
The National Transportation Safety Administration finds the
4-percent requirement to be technically infeasible, unsafe or
not cost effective.
Some may be surprised to hear from a former General talk
about fuel efficiency standards but they shouldn't be. In the
military, we learned that forced protection isn't only about
protecting weak spots, it's also about reducing vulnerabilities
before you go into harm's way. That's why lowering the Nation's
demand for oil is so critical.
Nearly all of our U.S. military commands have some oil
security tasks and in essence they provide a blanket of
security that benefits all nations. Central Command guards
access to the oil supplies in the Middle East; Southern Command
defends Colombia's Cano Limon pipeline; Pacific Command patrols
the tanker routes in the Indian Ocean, the South China Sea and
the Western Pacific; and my last assignment, as deputy
commander of European Command, which included, by the way, most
of Africa. We patrolled the Mediterranean, provided security in
the Caspian Sea and off the West Coast of Africa.
During that assignment, I became more appreciative of the
size and scope of the oil security challenge. While surveying
that challenge, it became apparent that the U.S. military could
not protect that vast infrastructure without partners--and
trust me, there should be partners in this mission. The free
flow is clearly in the best interests of people all over the
world. These interested parties certainly cannot replicate all
the capabilities of the U.S. military, but their contributions
can free up military tasks that only the U.S. military can
successfully accomplish.
That's why we created a program to train local populations
and militaries in the Caspian region, to develop effective
policing capabilities. That's also why we worked and engaged
international oil firms in creating programs for protecting our
assets. At the end of the day, this cooperative government,
industry and military approach is the only realistic way to
address the growing vulnerability of our worldwide supply.
The armed forces of the United States have thus far been
successful in fulfilling our energy security mission and they
continue to carry out their duties professionally and with
great courage. As a result of this success, many have come to
believe--and I believe, falsely--that energy security can be
achieved solely by military means. We need to change this
paradigm because the U.S. military is not the best instrument
for confronting all the strategic dangers emanating from oil
dependence. The 1973 oil embargo is the most famous example of
the use of energy as a political strategic weapon.
Currently, it has been Russia that has shown the most
willingness to use oil as a political tool. At the beginning of
2006, Russia suspended natural gas exports to the Ukraine,
which, in turn, withheld natural gas destined for Western
Europe. Again, just this week, Russia has stopped natural gas
exports to Belarus, with much the same effect as the 2006
event.
In an oil-dependent world facing increasingly tight
supplies, the growing power of oil exporting countries and the
shift in strategic calculations of other important countries
have all added up to lessen U.S. diplomatic leverage.
Iran, which exports to the United States' European and
Asian allies, has threatened the use of the oil weapon to
retaliate against efforts to constrain their nuclear program.
The European Union relies on Middle Eastern oil, and Russian
gas continues to complicate U.S. foreign policy efforts,
especially when considering our efforts to stop Iran from
developing nuclear weapons. China, with its rapidly growing
dependence on foreign oil also blocks U.S. diplomatic
initiatives in an effort to strengthen its own ties with oil
exporters.
Given all these factors, it is imperative that the United
States make energy security a top strategic priority. Toward
that end, we should mobilize and leverage all of our national
security resources, including our economic power, our
investment markets, our technological products and our
unsurpassed military strength.
I've mentioned many specific recommendations in my written
testimony. One recommendation I would like to mention here is
to call for the U.S. Government to reorganize its bureaucracy
to better address the needs of a comprehensive international
energy strategy and I recommend the Department of Defense, as
was mentioned earlier for the National Security Council, to
designate an individual as their energy security policy expert
and director.
In sum, we need a comprehensive national security strategy
for energy security. We must be prepared for sudden supply
shocks triggered by terrorism or politics. We must promote
greater diversity of fuel options while improving the
efficiency of our Nation's fleet. Most of all, we must have the
courage to shape the future rather than to succumb to the
paralysis of resignation. It is time for America to lead the
way in constraining oil consumption and boosting stable oil
production, to work with other nations to secure its production
of energy products and to maintain the military resources that
will continue to be essential for ensuring energy security.
These are not easy tasks. Making progress will take
enlightened and courageous leadership. I thank you all for the
opportunity to discuss this important issue to our national
security.
[The prepared statement of General Wald follows:]
Prepared Statement of General Charles F. Wald, USAF (Ret.), Former
Deputy Commander, U.S. European Command, and Member, Energy Security
Leadership Council
Chairman Bingaman and Members of the Committee, I thank you for
inviting me to talk to you about the global oil balance and its impact
on U.S. economic and national security. My friend Bob Hormats has done
a great job describing the work of the Energy Security Leadership
Council on which we both serve, and let me say that I agree completely
with his assessment that oil dependence is one of the most serious
economic and national security challenges facing this nation.
Please allow me the opportunity to explain. I retired from the U.S.
Air Force last July after thirty-five years of service. During my
career I flew combat missions over Vietnam, Cambodia, Iraq, and Bosnia,
and I learned a lot about how to use military assets to effectively
solve national security problems. But I also learned that a lot of
people think the military is solely responsible for national security.
I like to call this the ``Dial 1-800-The U.S. Military'' syndrome,
because it reflects how people assume the military is a ``toll-free''
resource that can be called on to perform tasks that no one else has
the capability for or the will to execute. I remember once I was
introduced to some oil company executives in Kazakhstan, and before we
began talking one of them thanked me and the U.S. military for
protecting the flow of oil around the world. He was serious and sincere
about this, and I was seriously concerned. This man's world view
included the expectation that the U.S. military will be there to
provide security all over the world to ensure the free flow of oil
without assistance from others. It did not seem like a good model to
me.
And it's not just a matter of cost, though this approach does
burden the military's budgets as well as its personnel and their
families. It is really an issue of recognizing that true national and
economic security must rest on a nation's full strength, not just on
the backs of its military. This is necessary because some threats
cannot be mastered through military means. In the case of the oil
dependence problem, military responses are by no means the only
effective security measures, and in some case are no help at all.
In fact, the single most effective step the U.S. can take to
improve its energy security is to increase transportation efficiency.
The transportation sector is responsible for nearly 70% of all the oil
the country consumes. Within the transportation sector, oil--nearly 13
million barrels per day of it--accounts for 97% of delivered energy.
More than 8 mb/d are used to fuel the over 220 million light-duty
vehicles that Americans rely on for mobility. For thirty years, these
vehicles have been subject to government-mandated Corporate Average
Fuel Economy (CAFE) standards enacted in the aftermath of the 1973-1974
Arab oil embargo. CAFE was instrumental in helping Americans lower oil
usage by the early 1980s, but unfortunately its requirements for cars
have remained essentially unaltered since they were put in place and
those for light trucks have been improved only slightly. As a
consequence, America's light-duty vehicle fleet now has the lowest
average fuel efficiency in the developed world.
America must do better in this area, and that is why the Energy
Security Leadership Council has recommended vehicle efficiency
standards that require 4% annual improvements in miles per gallon
performance, but with regulatory ``off-ramps'' to protect manufactures
and consumers if analysis by the National Highway Traffic Safety
Administration (NHSTA) finds 4% to be technically infeasible, unsafe,
or not cost-effective for a given year.
Some in the audience may be surprised to hear a former general talk
about fuel efficiency standards, but they shouldn't be. In the military
you learn that force protection isn't just about protecting weak spots,
it's about reducing vulnerabilities before you get into harm's way.
That's why lowering the nation's demand for oil is so important. If we
can lessen the oil intensity of our economy, making each dollar of GDP
less dependent on petroleum, that will mean we're less vulnerable if
and when our enemies do manage to successfully attack elements of the
global oil infrastructure. The best ways to reduce oil intensity are to
improve efficiency and to develop the ability to produce and use
realistic amounts of alternative fuels such as ethanol.
Political forces have often portrayed increased supply and
decreased demand as mutually exclusive ambitions. As I have been
saying, the U.S. needs a comprehensive policy for achieving genuine
energy security. This policy should include increases in production in
places like the Outer Continental Shelf along with strict new
environmental protections. Increased production in the U.S. makes
economic sense, since it will reduce the risk premium that currently
inflates the global price of oil.
Last but not least, they are energy security tasks that must
involve the military, acting either alone or with partners around the
globe. I'd now like to offer a bit of background in that area.
the military's historical involvement in energy security
The United States protects the global oil trade for the benefit of
all nations. In part, this is because the U.S. has unmatched military
capabilities. But another reason is that other nations know the U.S.
military is out there doing the job.
The implicit strategic and tactical demands of protecting the
global trade have been recognized by national security officials for
decades, but it took the Carter Doctrine of 1980, proclaimed in
response to the Soviet Union's invasion of Afghanistan, to formalize
this critical military commitment.
The Carter Doctrine committed the U.S. to defending the Persian
Gulf against aggression by any ``outside force.'' President Reagan
built on this foundation by creating a military command in the Gulf and
ordering the U.S. Navy to protect Kuwaiti oil tankers during the Iran-
Iraq War. The Gulf War of 1991, which saw the United States lead a
coalition of nations in ousting Iraqi leader Saddam Hussein from
Kuwait, was an expression of an implicit corollary of the Carter
Doctrine: the U.S. would not allow Persian Gulf oil to be dominated by
a radical regime--even an `inside force' that posed a dangerous threat
to the international order. More recently, the security agenda in the
Gulf has expanded beyond state actor aggression to include concerns
about terrorist attacks on facilities and supply lines.
threats abound
Since issuing his 1996 ``Declaration of War'' against the U.S. and
its partners, Osama bin Ladin has warned of attacks on oil
installations in the Persian Gulf. Last year, the world came close to
experiencing an oil supply shock when an Al-Qaeda attack on the Abqaiq
facility through which approximately 60% of Saudi Arabian oil exports
pass was barely foiled. In addition to attacking physical
infrastructure, Al Qaeda operatives have also targeted expatriates in
their residential areas, in particular in Riyadh, Saudi Arabia (October
2002) and in al-Khobar (May 2004).
Iraq is also the scene of persistent insurgent and terrorist
attacks on pipelines and pumping stations, especially in the North of
the country. These attacks have severely limited Iraqi oil exports to
the Mediterranean through Turkey, and they are a major reason why Iraqi
oil production has stubbornly remained below its prewar peak. The lost
output has cost Iraq billions of dollars at a time when it needs every
dollar and while U.S. taxpayers have spent billions on the
reconstruction of the country. But if violence continues, and
especially if it spreads to the south, where most of the oil and export
facilities are located, then all of Iraq's oil production could be at
risk. The implications of this supply cut would be severe.
The danger of attacks on shipping is proven--in October 2002, the
French supertanker Limburg was rammed by a small boat packed with
explosives off the coast of Yemen. Most oil shipments have to pass
through a handful of maritime chokepoints. Roughly 80% of Middle East
oil exports pass through the Strait of Hormuz (17 mb/d), Bab el Mandeb
(3 mb/d), or the Suez Canal/Sumed Pipeline (3.8 mb/d). Another 11.7 mb/
d pass through the Straight of Malacca and 3.1 mb/d through the Turkish
Straits. All of these passageways are vulnerable to accidents, piracy,
and terrorism. Since alternative routes are lacking, the effect of a
major blockage at one of these points could be devastating. Even
unsuccessful attacks on tankers are likely to raise insurance rates and
thus oil prices.
partnering for preparedness
Nearly all of our U.S. military commands handle oil security tasks.
Central Command guards access to oil supplies in the Middle East.
Southern Command defends Colombia's Cano Limon pipeline. Pacific
Command patrols tanker routes in the Indian Ocean, the South China Sea,
and the Western Pacific. European Command is involved in oil security
all the way from the Caspian Sea to West Africa.
I happen to know more about European Command, because, in late
2002, I was named its Deputy Chief. It was during this period of my
service that I came to realize that I came face to face with the size
and scope of the oil security challenge. The global economy relies on a
massive oil infrastructure that stretches far beyond the Persian Gulf
to pipelines in the Caucasus and offshore drilling rigs in the Gulf of
Guinea. Surveying this situation, I realized that the U.S. military
could not protect this vast infrastructure without partners. And, trust
me, there should be partners out there, because the free flow of oil is
in the best interest of many people all over the world. These
interested parties certainly cannot replicate all the capabilities of
the U.S. military, but their contributions can free up the military for
tasks that only it can complete. That's why I made an effort to train
local populations in the Caspian region to develop effective policing
capabilities. It's also why I work to engage oil industry firms in
protecting their assets. At the end of the day, this improved division
of responsibilities will benefit the U.S. our Allies, and millions
around the world.
military power has limits
The armed forces of the United States have been extraordinarily
successful in fulfilling their energy security missions, and they
continue to carry out their duties with great professionalism and
courage. But, ironically, this very success may have weakened the
nation's strategic posture by allowing America's political leaders and
the American public to believe that energy security can be achieved by
military means alone. We need to change the paradigm, because the U.S.
military is not the best instrument for confronting all of the
strategic dangers emanating from oil dependence. This is particularly
true when oil is used a political weapon.
The 1973 Arab embargo is still the most famous example of the use
of energy as a political strategic weapon. But in recent years, it has
been Russia that has shown the most willingness to play this dangerous
game, as at the beginning of 2006, when it stopped natural gas exports
to the Ukraine, which in turn withheld the natural gas destined for
Western Europe. The danger of conflict with a nuclear power like Russia
should make it abundantly clear that there are limits on how we can use
military power to guarantee energy flows. But we can take political
steps to counter Russia's brandishing oil and natural gas as political
weapons. Russia wants to join the World Trade Organization (WTO) as a
full member. Russia's entry into this organization must be made
contingent on its behavior. Russia must make a commitment to fostering
energy security; there should be no reward for sowing insecurity.
Of course, energy exporting governments don't need to resort to
full-fledged embargoes to hurt the U.S. and other importers. Exporters
can manipulate price through less drastic production cuts. Tellingly,
after oil prices dropped from their 2006 peak of $78 to about $60 in
the U.S. market, OPEC members began to cut back on production.
Governments in oil-producing countries can also constrain future supply
through investment decisions that lead to long-term stagnant or glowing
growth in production and exports, or even decline. Often enough, future
supply destruction is the unintended or accepted consequence of an
insistence on government control of natural resources. Currently, an
estimated 80-90% of global oil reserves are controlled by national oil
companies (NOCs), which are highly susceptible to being constrained by
political objectives, even if these undermine long-term supply growth.
With this level of state-control, it's impossible to speak of a free
market for oil.
State-controlled production is frequently inefficient, relying on
outdated technology and reserve management techniques. Consider the
case of Venezuela. The demagoguery of Hugo Chavez led to a strike at
that country's national oil company (PDVSA) in the winter of 2002-2003
and then to the dismissal of thousands of well-trained petroleum
engineers. Deprived of the services of expert personnel, Venezuela may
suffer the permanent loss of hundreds of thousands of barrels per day
of production. Chavez also worsened the financial terms for
international oil companies operating in Venezuela, making it even less
likely that emerging best practices will be employed in the country's
oil fields.
While major international oil companies and their advanced
technology still maintain major stakes in Venezuela's oil industry,
this is not the case in Russia, whose government has made it abundantly
clear that it wants to maintain near absolute control over its energy
resources. This power grab has curtailed foreign investment, and
ultimately limited production as well.
Russia's oil industry stands as a testament to the dangers of
political meddling in oil production. After the collapse of the Soviet
Union, Russian production plummeted to only 6 mb/d in the mid-1990s,
but then the efforts of private companies helped push production back
to over 9 mb/d, achieving 10% annual growth rates in 2003 and 2004.\1\
However, with the subsequent expropriations of private enterprises such
as Yukos, the production growth curve has flattened. Government control
over production in Russia will also adversely impact the massive
Shtokman natural gas field and Sakhlain-2 oil projects. President Putin
has determined that tight government control of resources is more
important than the greater revenue that would accrue from increased
production achieved through cooperation with Western oil companies.
---------------------------------------------------------------------------
\1\ EIA, ``Country Analysis Brief: Russia,'' (January 2006),
available online at www.eia.doe.gov/cabs/Russia/Full.html.
---------------------------------------------------------------------------
oil constrains u.s. foreign policy
In an oil-dependent world facing increasingly tight supplies, the
growing power of the oil-exporting countries and the shifting strategic
calculations of other importing countries have lessened U.S. diplomatic
leverage.
Iran, which exports to the U.S.'s European and Asian allies, has
threatened to use the ``oil weapon'' to retaliate against efforts to
constrain the country's nuclear program. Russia's growing self-
assurance and assertiveness cannot be divorced from the leverage it
enjoys because of its oil and gas resources.
European Union reliance on Middle Eastern oil and Russian gas
continues to complicate U.S. foreign policy efforts, especially as far
as efforts to stop Iran from developing nuclear weapons are concerned.
China, with its rapidly growing dependence on foreign oil, also blocks
U.S. diplomatic initiatives in order to strengthen its own ties with
oil exporters. Chinese opposition has helped thwart U.N. Security
Council sanctions against Iran and prevented significant intervention
in the Darfur region of Sudan.
confronting diverse dangers
Giving all these factors, it is imperative that the U.S. make
energy security a top strategic priority. Toward that end, we should
mobilize all of our national security resources, including our economic
power, our investment markets, our technology prowess, and our
unsurpassed military strength. To borrow a metaphor from the energy
sector, this broad approach will result in some dry-holes, but it
should pay solid dividends over time.
The U.S. can set an example with domestic actions. Curtailing
demand is the most important security step we can take. But we should
also demonstrate a willingness to increase domestic production in an
environmentally-responsible fashion. The U.S. should also impress upon
other major exporting countries that they need to more fully develop
their oil and gas reserves. To enhance the global market's ability to
respond to price signals and increase the reliability of global
production, access to U.S. markets and global trade organizations
should be contingent upon the granting of reciprocal access to foreign
investment in energy production. Such access should then be protected
by appropriate laws, regulations, and judicial systems that preserve
the sanctity of contracts. In keeping with this reciprocity
requirement, the U.S. must not take a protectionist stance when foreign
nations seek to invest in U.S. oil companies, unless clear national
security risks can be demonstrated.
The U.S. should also encourage greater transparency and private
ownership in the world's NOCs. This might mean promoting the creation
of national oil companies in countries where oil ministries run energy
operations, and promoting private majority ownership in those countries
where state-run companies already exist. In the long-run, such efforts
will depoliticize the decision-making process of oil investing and
should lead to more exploration of oil in response to market demand.
Iraq is the oil-exporting nation with which we have the most
influence. It is also the country that could boost its oil production
and exports most significantly in the medium and long-term (given some
political stability). In fact, Iraq, the least developed OPEC country,
has the potential to expand its oil production from the current 2.2 mb/
d to 6-8 mb/d over the next decade. It is also a country that
desperately requires, and is eager for, foreign investment in its
energy sector. The U.S. should encourage Iraq to take the steps
necessary for increasing production. These steps should include
improved energy infrastructure security efforts, increased capital
expenditure in the energy sector, a viable Petroleum Law that will
encourage necessary foreign investment, and a reconstituted NOC that
more effectively excludes political considerations from its operations
so as to boost operational efficiency.
The U.S. government should also work with other governments to
minimize the likelihood and impact of supply disruptions. In this
respect, the U.S. should promote greater security of the global oil
infrastructure, which includes everything from ports and tankers to
well and pipelines. The keys to infrastructure security are protection,
repair, and redundancy. This mission will require an expansion of
contingency planning. Multilateral military and civilian rapid response
teams should be formed to respond to attacks and repair damage. This
will likely involve a good deal of American training of other
countries' military and civilian agencies. It will also require the
stockpiling of expensive spare parts in key strategic locations around
the world. The U.S. and its allies should consider adding energy
infrastructure protection as a role for NATO, for instance. Oil
companies also need to be fully engaged in such an endeavor with
funding and dedicated personnel.
Arranging for oil-exporting nations to store more oil in or near
major consuming nations whether in tankers, tanks or petroleum
reserves--can serve as a way to minimize the impact of a supply
disruption. The oil-producing countries could retain absolute control
over that oil, including deciding when to release it and to keep
profits from it. The is not a new idea; the U.S. Government and Saudi
Arabia have at times raised the idea of storing Saudi oil in the United
States, though the details were never worked out.\2\
---------------------------------------------------------------------------
\2\ Patrick Clawson and Simon Henderson, ``Reducing Vulnerability
to Middle East Energy Shocks: A Key Element in Strengthening U.S.
Energy Security,'' Washington Institute for Near East Policy, policy
focus #49 (November 2005).
---------------------------------------------------------------------------
Among consuming nations, the U.S. should promote the build-up of
strategic reserves in key locations across the globe. China and India
are making some progress in this regard, but only very slowly; indeed,
they are planning on building reserve capacity for only 15-20 days
worth of imports, while the United States Government's Strategic
Petroleum Reserve (SPR) now contains 700 million barrels, or the
equivalent of about 60 days of imports. But building reserves is only
half the task. There must be clear decision-making processes for when
to use these reserves. These processes must be developed both
domestically and internationally. Without clear release procedures,
strategic reserves cannot offer maximum protection.
One final recommendation that merits mention is a call for the U.S.
government to reorganize its bureaucracy to suit the needs of a
comprehensive international energy strategy. For example, in the
Department of Defense, which has a salient role to play in global oil
security, there is no civilian office that is dedicated to coordinating
the efforts and needs of the military commands with respect to energy
matters. An Office of Energy Security should be formed to do that.
In sum, a comprehensive national security strategy must address
numerous energy security issues. We must be prepared for sudden supply
shocks triggered by terrorism or political action. We must also be
ready to deal with the stagnation of global production and the
increasing politicization of the global oil market. We must promote
greater diversity of fuel options while improving the efficiency of our
nation's vehicle fleet. Most of all, we must have the courage to shape
the future rather to succumb to the paralysis of resignation. It is
time for America
1) to lead the way in constraining oil consumption and
boosting oil production;
2) to work with other nations to secure the production and
flow of all energy products; and
3) to maintain the military resources that will continue to
be essential for ensuring energy security.
I thank you.
The Chairman. Thank you very much.
Our final witness this morning is Dr. Flynt Leverett, who
is a senior fellow and director of the Geopolitics of Energy
Initiative at the New America Foundation and also a visiting
professor of Political Science at MIT. Thank you for being
here.
STATEMENT OF DR. FLYNT LEVERETT, SENIOR FELLOW AND DIRECTOR,
GEOPOLITICS OF ENERGY INITIATIVE, NEW AMERICA FOUNDATION,
WASHINGTON, DC
Dr. Leverett. Thank you, Senator Bingaman, Senator Domenici
and members of the committee, for the chance to speak with you
this morning. I will try to get to the heart of the topic for
this hearing, namely the geopolitics of oil.
I will start with a very stark assessment and that is, in
my view, during the next quarter century, the most profound
challenges to America's continued global leadership will flow
from the strategic and political consequences of the structural
shifts in global energy markets that previous witnesses have
been laying out for you.
And in the time that I have, I'd like to talk with you
about what I see as those strategic and political consequences
of the structural shifts in the global oil market and what they
mean for American interests.
On both the supply and demand side of the global oil
market, we have seen strategic and political responses to the
kinds of structural shifts that Dr. Birol and others have
described for you.
On the supply side, we've seen the rise of what a lot of
folks call ``resource nationalism''. Resource nationalism is
often defined as national government with oil and gas resources
asserting their ownership rights over those resources in ways
that work against the interests of international energy
companies, something like Mr. Chavez's recent declaration about
nationalizing projects to develop extra heavy crude in the
Orinoco region.
But there is another dimension to resource nationalism that
I think is very important here and that is the use by energy
suppliers of their status as suppliers in a tight market as a
source of political leverage. Venezuela is a good example in
this hemisphere, obviously Russia is an important example, but
there are many others that you could lay out that are very
important for American interests. Saudi Arabia, for example,
using its unique status as the swing producer in the world oil
market to cultivate a kind of alternative strategic partnership
with China, as a hedge against a further deterioration in its
traditional strategic partnership with the United States. This
phenomenon, this aspect of resource nationalism will, I think,
pose an increasingly serious set of challenges to American
interests in coming years.
On the demand side, we see an analogous phenomenon, what I
describe as ``resource mercantilism'', namely the reliance of
energy importing states, China and India being the outstanding
examples, on national energy companies to secure access to
overseas oil and gas resources on a more privileged basis than
simple supply contracts.
In terms of the significance of this phenomenon, I'm not
particularly concerned about Chinese and Indian state-owned
energy companies locking up some critical mass of oil and gas
reserves and keeping them off of international markets. Today,
the equity oil produced by the Chinese national energy company
abroad amounts to less than .5 percent of all the oil that is
produced in the world today. Even with the most optimistic
assumptions of how many equity oil deals Chinese energy
companies will be able to conclude around the world by 2020,
you're still talking about no more than 2 percent of the oil
that is going to be produced in the world.
It's not so much the market impact, but it's really the
geopolitical impact that is important. As Chinese and Indian
state-owned energy companies go about pursuing these deals with
the support of their governments, it basically puts these
countries into competition for geopolitical influence with the
United States and puts us into competition for influence with
these countries in very strategically important regions--the
Middle East, central Asia, Sub-Saharan Africa--and if present
trends continue unchecked, this is going to become an
increasingly important source of geopolitical tension around
the world and an increasingly important source of challenges
for U.S. interests.
Now, resource nationalism and resource mercantilism pose
significant challenges to American interests, each in its own
way, but I would also point out that these two phenomena can
intersect in some particularly challenging ways for the United
States.
One of the ways in which they intersect is in what I have
described as a ``new axis of oil'', namely a loose coalition of
states--energy-producing states and energy-importing states,
loosely organized around a Sino-Russian axis. This axis of oil
is bolstering Sino-Russian cooperation on a whole host of
strategic issues and I believe this axis of oil is emerging as
the principle counterweight to American hegemony in global
affairs.
Let me give you a couple of examples of what I mean. The
axis of oil, this Sino-Russian axis of oil, has been quite
successful over the last 2 to 3 years in essentially rolling
back the projection of U.S. influence into central Asia
following the September 11 terrorist attacks. Russia and China
have cooperated in standing up the Shanghai Cooperation
Organization, the world's largest regional security
organization and the only such organization in the world in
which the United States is not a participant. Working together
in the Shanghai Cooperation Organization, Russia and China have
basically been able to lock us out of central Asia.
Another example of the way the axis of oil is working
against American influence is the Iranian nuclear issue. As
other witnesses have suggested, it is Chinese and Russian
collaboration, particularly in the Security Council, but in
other arenas as well, that is frustrating a very significant
segment of U.S. policy objectives on the Iranian nuclear issue.
Let me stick with Iran for a minute because I think that
the geopolitical and geo-economic stakes go well beyond the
nuclear issue, as important as that is. There is, I would
argue, a broader strategic competition underway between the
United States on the one hand and Russia and China on the other
concerning Iran's economic and political role in the Middle
East and global energy markets in coming decades. Essentially,
the outcome of this competition hinges on which countries will
assume leading roles in helping Iran develop its hydrocarbon
resources.
Iran's resource base is truly impressive. If you take its
gas reserves--the second largest in the world--convert them
into barrels of oil equivalent, and add them to their oil
reserves--also the world's second largest--you basically have a
situation in which the aggregate hydrocarbon reserves of Iran
and the aggregate hydrocarbon reserves of Saudi Arabia are
effectively the same. And each of those countries is
significantly larger in terms of aggregate hydrocarbon reserves
than Russia.
What this means, given Iran's low rate of production, is
that Iran is basically the only major energy producing country
in the world that has the resource potential to increase its
production of both oil and natural gas by orders of magnitude
in coming decades. But to do that, Iran is going to have to get
a lot of investment and a lot of technology transfer.
U.S. policy bars U.S. energy companies from participating
in that process. We threaten secondary sanctions against
European companies that would consider participating in those
projects. And all of that, combined with pretty lousy
investment policies inside Iran, has had an effect. There has
been serious under-investment in uranium production capacity.
Some have even suggested that given the level of under-
investment, Iran is going to face a serious crunch in terms of
its ability to meet its domestic needs and continue exporting
in a significant way in coming years.
But that assumes that Iran doesn't have an alternative and
Iranian officials and energy executives will tell you that,
increasingly, they think they do have an alternative. It's a
three-pronged alternative. It means taking advantage when there
are European companies that are prepared to do deals in Iran.
Fine, let them do the deals. Second, it involves developing
strategic partnerships with--let me call them generically
third-world energy companies. Chinese energy companies are at
the top of that list and Chinese energy companies are
increasingly committing to put very, very significant sums of
investment capital into the development of Iranian oil and gas.
Then the third prong of this strategy, the most recent prong,
is cooperation with Russia, particularly to help Iran develop
its potential as a gas exporter. In return for that help, Iran
has agreed to--the phrase that is used is to coordinate the
marketing of its gas exports to ensure that Iran's emergence as
a major gas exporter does not work against Russian interests.
This is the strategy that the Iranians think will get them out
of the box that they are in now. The United States and even
Europe, to a large extent, are basically irrelevant to that
strategy.
The potential for Russian and Chinese cooperation to
develop Iran's hydrocarbon resources, I think, the potential
for that cooperation and its impact on American interests goes
beyond Iran. Such cooperation has the potential, basically, to
remake the geopolitics of all Eurasia; to establish Moscow as a
leading energy supplier, not just to Europe, but also to Asia;
to have Moscow as the major influence on energy trade in this
part of the world and to consolidate the Sino-Russian axis of
oil as the leading counterweight to American hegemony in
regional and international affairs.
Now, what can we do about this? I will briefly throw out
three ideas.
One is, we have to start taking energy seriously as a
foreign policy issue and prioritizing energy security relative
to other foreign policy objectives. Let me give you an example.
Does it make sense for the United States to push for Ukrainian
accession to NATO when domestic politics in the Ukraine do not,
in the end, support that objective? It involves further
strategic alienation between the United States and Russia. At a
time when we're looking for Russian cooperation on energy, on
Iran, on a whole host of other issues, does it make sense to go
down that road or does it make more sense to incorporate energy
interests in a broad strategic dialog with Russia and recognize
that on some objectives that we have regarding Russia, that
energy security may be more important than those priorities?
The second point is, I think we need a grand bargain
between the United States and Iran.
Senator Domenici. What did you say that was, sir? Repeat
that.
Dr. Leverett. I think there needs to be a grand bargain
between the United States and the Islamic Republic of Iran. My
criticism of the Baker-Hamilton Iraq Study Group
recommendations on engaging Iran is not that they go too far,
but that they don't go far enough. Unless there is a
comprehensive deal between the United States and Iran in which
all of the major bilateral differences between the U.S. and
Iran are resolved in a package, not only will there be no
diplomatic solution to the nuclear issue, but basically, the
United States will lose the race for Iran that I described to
you a few minutes ago. I think it is very important that the
United States embrace a comprehensive wrap approach with Iran
as an important foreign policy objective.
Third, I think it is critical that we take seriously the
goal of encouraging the internationalization of Chinese and
Indian state-owned energy companies. These companies are,
despite their state-owned status, in many ways becoming more
market-oriented, more profit-focused in their operations, in
their strategies, in their planning, and they are increasingly
willing, in significant ways, to operate autonomously from
their national governments. This is a trend that we ought to be
encouraging. In that regard, the political response in this
country to the possibility that a Chinese energy company, which
last year made a serious initiative to buy Unocal, I think,
sent exactly the wrong message to the Chinese. We need to be
encouraging the Chinese and the Indians to rely more on the
market to meet their energy needs and, instead, in many of our
political responses to them, we are sending a message that the
United States will not let the market work in ways that will
meet their needs, which will only encourage what are, from our
perspective, the worst aspects of their current policies. Thank
you very much.
[The prepared statement of Dr. Leverett follows:]
Prepared Statement of Dr. Flynt Leverett,* Senior Fellow and Director,
Geopolitics of Energy Initiative, New America Foundation, Washington,
DC
---------------------------------------------------------------------------
* Flynt Leverett is Senior Fellow and Director of the Geopolitics
of Energy Initiative at the New America Foundation. He is also a
visiting professor of political science at the Massachusetts Institute
of Technology and a principal of Strategic Energy and Global Analysis,
LLC. Previously, he served in government as senior director for Middle
East affairs at the National Security Council, on the Secretary of
State's Policy Planning Staff, and as senior analyst at the Central
Intelligence Agency.
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Mr. Chairman, Senator Domenici, members of the Committee, thank you
for the opportunity to speak with you about the global oil balance and
its implications for America's national security and foreign policy.\1\
In my view, the most profound challenges to America's global leadership
during the next quarter century are not posed by the risk of strategic
failure in Iraq, further proliferation of weapons of mass destruction,
or the growth and consolidation of extremist forces in the Islamic
world. Rather, the most profound challenges to U.S. preeminence during
the next 25 years flow from the strategic and political consequences of
ongoing structural shifts in global energy markets, especially the
global oil market. Most notably, cooperation between China and Russia
on energy matters is bolstering Sino-Russian cooperation on strategic
issues, effectively creating a Sino-Russian ``axis of oil'' as the
principal counterweight to America's global hegemony.
---------------------------------------------------------------------------
\1\ For more detailed presentations of the ideas offered in this
testimony, see Flynt Leverett and Jeffrey Bader, ``Managing China-U.S.
Energy Competition in the Middle East'', The Washington Quarterly
(December 2005); Flynt Leverett and Pierre Noel, ``The New Axis of
Oil'', The National Interest (Summer 2006); and Flynt Leverett, ``The
Race for Iran'', The New York Times, June 20, 2006.
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resource nationalism and resource mercantilism
The basic structural shifts in global energy markets I see boil
down to two important trends:
The first is the tightening of margins between global demand
for crude oil and installed upstream productive capacity. The
global oil supply has grown steadily in recent years, and there
is considerable evidence that it will continue to grow for many
years to come, given suitable oil prices and appropriate levels
of investment. But, in recent years, global demand for crude
oil has been growing faster than supply--in no small part
because of burgeoning energy demand from emerging economic
powerhouses in Asia, particularly China and India. In coming
years, demand is likely to continue bumping up against
installed productive capacity.
The second important structural shift in the global oil
market is the progressive concentration of the world's oil
reserves under the control of national governments and national
oil companies, especially in the Middle East and the former
Soviet Union.
Taken together, these two trends are generating strategic and
political responses on both the supply side and the demand side of the
global oil market. On the supply side, many have noted the rise of
``resource nationalism''. Resource nationalism is often defined as
national governments' assertion of ownership rights over oil and gas
reserves against the interests of international energy companies. But
there is another dimension to resource nationalism on which I want to
focus--that is, national governments making decisions about the
production and marketing of the hydrocarbon reserves under their
control not only on the basis of economic factors, but also on the
basis of strategic and political calculations.
There are many examples of how resource nationalism can challenge a
wide range of American interests. These include:
Russia's application of energy ``levers'' to reestablish its
hegemonic position in the post-Soviet space and bolster its
strategic position vis-a-vis Europe and East Asia;
Venezuela's exploitation of its dominant position as a
Western hemisphere energy producer and exporter to weaken
America's standing in parts of Latin America; and
Saudi Arabia using its unique status as the ``swing
producer'' for the global oil market to cultivate a deepening
strategic relationship with China as a ``hedge'' against
precipitous deterioration in the Kingdom's traditional
strategic partnership with the United States.\2\
---------------------------------------------------------------------------
\2\ On this point, see also Flynt Leverett, ``Reengaging Riyadh'',
in Flynt Leverett, ed., The Road Ahead: Middle East Policy in the Bush
Administration's Second Term (Washington, DC: The Brookings Institution
Press, 2005).
On the demand side, we are witnessing an analogous phenomenon,
which I describe as ``resource mercantilism''--that is, the reliance of
energy importing states on national energy companies to secure access
to overseas oil and gas resources on more privileged bases than simple
supply contracts. Resource mercantilist states provide various kinds of
support to their national oil companies' efforts to acquire hydrocarbon
assets abroad and, like resource nationalist states, often seem to base
their actions in global energy markets on strategic calculations as
well as on commercial and economic considerations.
The outstanding exemplars of resource mercantilism today are, of
course, China and India, both of which perceive increasingly acute
vulnerabilities to their energy security stemming from their growing
reliance on imported hydrocarbons to fill critical portions of their
energy mix. And, there are a growing number of examples of how resource
mercantilism can work against U.S. interests, although not in the way
that many observers initially anticipated. In this regard, while
increased demand from China and other rising Asian economies has had a
very direct effect on global oil prices, there is little evidence that
Chinese and Indian ``equity oil'' deals are keeping or will keep an
economically or strategically significant part of the world's oil
reserves ``locked up'' and unavailable to international markets.
Currently, oil produced from Chinese and Indian overseas
equity assets represents less than one percent of the oil
produced and traded worldwide.
If the most optimistic projections of Chinese and Indian oil
and gas acquisitions abroad prove correct, overseas equity oil
production by Chinese and Indian national energy companies
might represent roughly 2 percent of total worldwide production
in 2020.
However, statist approaches in the external energy strategies of
rising Asian economies are becoming a serious source of geopolitical
tension.
In East Asia, competition between Beijing and Tokyo over a
variety of specific energy deals, a bilateral dispute about
sovereignty over possible natural gas reserves in the East
China Sea, and jockeying over the ultimate destination of a
projected Russian oil pipeline to Asia have all contributed to
the deterioration of Sino-Japanese relations in recent years.
Even more significantly, China's statist approach to
external energy initiatives has become a source of geopolitical
tension between China and the United States. In particular,
China's search for oil is making it a new competitor to the
United States for influence, especially in the Middle East,
Central Asia, and Africa. This, in turn, is creating new
foreign policy as well as commercial options for energy
exporting states at odds with U.S. foreign policy goals,
including Iran, Sudan, and Syria.\3\
---------------------------------------------------------------------------
\3\ Statist strategies for accessing hydrocarbon resources around
the world--with their associated inclination toward corruption,
provision of ``soft'' loans, and offers of investment and aid in
unrelated projects and sectors--also challenge the rules-based
international order for trade and investment in energy that the United
States has long championed and, in some cases, weaken the leverage that
Western governments and international financial institutions can use to
promote better governance and transparency in oil-producing countries.
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the new axis of oil
As separate phenomena, resource nationalism and resource
mercantilism are posing increasingly serious challenges to U.S.
interests around the world. But the challenge to America's global
leadership becomes far more profound when these phenomena intersect, as
they do in what I have called a ``new axis of oil'' that is acting as a
counterweight to American hegemony on a widening range of issues. The
heart of this undeclared but increasingly assertive axis is a growing
geopolitical partnership between Russia (a major energy producer) and
China (the paradigmatic rising consumer) against what both perceive as
excessive U.S. unilateralism in world affairs. Sino-Russian
collaboration provides the essential frame for a loose and shifting
coalition of energy exporting and energy importing states that acts in
specific ways to challenge U.S. leadership in world affairs.
The impact of the new axis of oil on American interests has already
been felt in the largely successful Sino-Russian effort to minimize
U.S. influence in Central Asia. Sino-Russian cooperation has been
critical to the rise of the Shanghai Cooperation Organization, the
world's largest regional security organization (in terms of the
populations and territory of participating states) and the only
regional security organization in the world in which the United States
does not participate. Working through the Shanghai Cooperation
Organization, Moscow and Beijing have collaborated over the past three
years to cap and then roll back the post-9/11 extension of American
influence into Central Asia.
The new axis of oil is also reflected in Sino-Russian cooperation
to frustrate a significant segment of U.S. policy objectives regarding
the Iranian nuclear issue. Both Russia and China have complicated
policy agendas toward the Islamic Republic. To be sure, neither Moscow
nor Beijing sees Iranian acquisition of a nuclear weapons capability as
a Iran as a desirable turn of events. But both are prepared to tolerate
a higher-level of Iranian nuclear development than the present U.S.
administration. Moreover, each has other interests that it wants to
pursue with Iran.
For Russia, these interests include exporting civil nuclear
technology and conventional military equipment. For China, they
include cultivating Iran as an energy supplier.
And, both Moscow and Beijing have interests in collaborating
with Tehran in Central Asia to manage Sunni extremist threats
there and minimize U.S. influence. To these ends, Russia and
China have now included the Islamic Republic in the Shanghai
Cooperation Organization as an observer.
In this context, neither Russia nor China will support multilateral
sanctions against Iran that would put these various interests at risk.
As a result, there is no prospect of getting the United Nations
Security Council to impose sanctions on the Islamic Republic that would
be stringent enough to leverage changes in Iranian behavior on the
nuclear issue.
Even more significantly, Russia and China see the controversy over
Iran's nuclear activities as an important issue on which to ``draw
lines'' against what both Moscow and Beijing consider excessive U.S.
unilateralism in international affairs. In this regard, Russian and
Chinese leaders considered the Iraq war a dangerous precedent and are
determined not to see that precedent repeated in Iran. In the end, the
United States or others may use military force unilaterally to try to
delay Iran's nuclear development, but Moscow and Beijing will use their
status as permanent members of the Security Council to ensure that
there is no plausible international legitimation for such unilateral
action.
the race for iran
The geopolitical and geoeconomic stakes at play in Iran go well
beyond the nuclear controversy. There is now a broader strategic
competition underway between the United States, on the one hand, and
Russia and China, on the other, concerning Iran's economic and
political role in the Middle East and global energy markets in coming
decades. The outcome of this competition hinges in considerable measure
on which countries will assume leading roles in helping Iran develop
its enormous hydrocarbon resources.
Iran's resource base is truly impressive. If one converts Iran's
reserves of natural gas--the second-largest in the world, after
Russia's--into barrels of oil equivalent and adds them to Iran's proven
reserves of conventional oil--the second-largest in the world, after
Saudi Arabia's--Iran's hydrocarbon resources are effectively equal to
those of Saudi Arabia and significantly greater than those of
Russia.\4\ Moreover, Iran's low rates of production of crude oil and
natural gas, relative to its reserves base, suggest that the Islamic
Republic is perhaps the only major energy-producing state with the
resource potential to increase production of both oil and gas by orders
of magnitude over the next decade or so.
---------------------------------------------------------------------------
\4\ In its December 19, 2005 issues, the Oil and Gas Journal lists
Iran's proven reserves of crude oil as roughly 133 billion barrels. The
same source lists Canada as holding the world's second-largest oil
reserves, roughly 179 billion barrels, putting Iran in third place.
However, the reserves estimate for Canada includes 175 billion barrels
of reserves in oil sands; this justifies the statement that Iran holds
the world's second-largest reserves of conventional oil. When one
converts natural gas reserves into barrels of oil equivalent (boe),
Saudi Arabia has 302.5 boe in combined reserves of oil and natural gas
and Iran has 301.7. By way of comparison, Russia's aggregate
hydrocarbon reserves--the world's third-largest--are 198.3 boe. I am
grateful to Bijan Khajehpour of Atieh Bahar Consulting for sharing the
results of his calculations.
---------------------------------------------------------------------------
Iran, however, cannot realize this potential without significant
infusions of investment capital and transfers of technology from
abroad. Since the mid-1990s, U.S. policy has sought to constrain the
development of Iran's hydrocarbon resources by barring U.S. energy
companies from doing business there and threatening European companies
undertaking projects in Iran with secondary sanctions. These policies,
combined with a problematic investment climate in the Islamic Republic,
have limited investment flows and transfers of technology into Iran's
oil and gas sectors. Recently, Iran's Oil Minister publicly
acknowledged this.
Some have suggested that insufficient investment in new productive
capacity, along with the combined effects of the depletion of already
developed oil and gas fields and the growth in its domestic energy
demand has put the Islamic Republic's oil and gas exports into a
precipitous decline. But, it would be a mistake to assume that, absent
rapprochement with the United States, these trends will continue
unchecked and put the Islamic Republic in an increasingly precarious
economic and strategic position.
Over the last several months, Iranian officials and energy
executives have told me that Iran is developing an alternative strategy
for increasing its production and exports of crude oil and natural gas,
a strategy that does not rely on substantially improved relations with
the United States or the West generally. This strategy has three
principal elements.
First, Tehran continues to explore the possibility of energy
deals with European energy companies that are willing to do
business in the Islamic Republic. While some significant
European energy companies are reducing their involvement in
Iran, there are still prominent Europe-based international
energy companies with upstream investments there that are
pursuing additional deals.
Second, Iran is developing ties to state-owned energy
companies in other Islamic countries (i.e., Petronas in
Malaysia) and, more importantly, to national energy companies
in China and India. Chinese companies, in particular, are
making commitments to invest substantial amounts of capital in
Iran's oil and gas sectors.
Third, Iran is exploring possibilities for cooperation with
Russia to develop its energy production and export
capabilities. In particular, Tehran is now willing to
``coordinate'' the marketing of Iranian gas exports with Moscow
to ensure that Iran's emergence as a gas exporter does not work
against Russia's economic or strategic interests. In return,
Moscow has agreed to provide financial and technical support to
help Iran boost its natural gas production.\5\ In this context,
at the most recent summit meeting of the Shanghai Cooperation
Organization, Russian President Vladimir Putin and Iranian
President Mahmoud Ahmadinejad announced that their two
countries would explore possibilities for cooperating to
provide energy exports to Asia.
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\5\ According to both Iranian diplomats and current and former
Russian officials, a high-level working group has been set up to
oversee bilateral energy cooperation. On the Iranian side, the working
group is headed by the Deputy Oil Minister; on the Russian side, it is
headed by the chief of Gazprom's international activities.
Privately, Iranian officials and energy executives acknowledge that
this approach is not the optimal way to develop their country's
hydrocarbon resources. But, as a senior Iranian diplomat put it to me
recently, Iran ``cannot wait on the West forever.''
The significance of Russian and Chinese cooperation to develop
Iran's hydrocarbon resources goes far beyond its impact on the rate at
which the Islamic Republic's oil and gas exports increase or decline or
on the extent of Tehran's regional and international isolation. Such
cooperation has the potential to help Moscow consolidate a position as
the leading player in supplying energy resources to major markets in
Asia as well as Europe, with considerable attendant strategic benefits.
It also has the potential to consolidate a Sino-Russian axis of oil as
the principal counterweight to U.S. hegemony in regional and
international affairs.
strategic challenges and policy responses
There are other arenas in which structural shifts in the global oil
market and strategic and political responses to those shifts pose
serious challenges to America's leadership in international affairs.
For example, how major energy exporting states--primarily in the Middle
East and Russia--handle their enormous and growing current account
surpluses is now as important to the management of global economic
imbalances and the future of the dollar as the world's leading reserve
currency as the decisions of China and other major Asian economies.
Here, too, there is considerable potential for a variant of the axis of
oil to develop considerable strategic leverage over the United States.
Of course, the foregoing analysis poses the critical question:
``What is to be done?'' The intellectually and politically facile
answer to this question is to advocate ``energy independence'' for the
United States. Unfortunately, this is not a serious response to the
strategic challenges facing our country. Simply put, there is no
economically plausible scenario for a strategically meaningful
reduction in the dependence of the United States and its allies on
imported hydrocarbons during the next quarter century. Reducing our
dependence on domestically produced and imported hydrocarbons has many
attractions as a policy goal, but we should have no illusions about how
rapidly this can be achieved or how soon it can provide meaningful
relief to the strategic challenges I have described.
This means, above all, that we must begin to take energy security
seriously as a foreign policy issue and prioritize energy security as a
national security objective relative to other foreign policy goals. For
example, how important is an abortive drive for Ukraine's accession to
NATO to American interests compared to securing Russian cooperation
with the United States and its allies on energy supplies, as well as
cooperation on the Iranian nuclear issue and other pressing problems?
Reasonable and honorable people can come up with different answers to
this question and others like it, but to avoid addressing the questions
is to avoid the responsibilities of political leadership.
Beyond this general proposition, I would suggest two other concrete
policy responses to the strategic challenges growing out of trends in
the global oil balance. First, it is critical for the United States to
pursue a ``grand bargain'' with the Islamic Republic of Iran--that is,
a diplomatic process aimed at resolving all of the outstanding
bilateral differences between the United States and Iran as a package.
My criticism of proposals for issue-specific or step-by-step engagement
with Iran, such as those presented in the Iraq Study Group report, is
not that these proposals go too far but, rather, that they do not go
far enough. By continuing to reject a grand bargain with Tehran, the
Bush administration has not only foreclosed any real chance that Iran
will accept meaningful long-term restraints on its nuclear activities;
it has also put the United States in a losing position in the longer-
term geopolitical and geoeconomic struggle over Iran.\6\
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\6\ I have written elsewhere on the content and feasibility of a
U.S. Iranian grand bargain; see Flynt Leverett, Dealing With Tehran:
Assessing U.S. Diplomatic Options Toward Tehran (New York: The Century
Foundation, 2006).
---------------------------------------------------------------------------
Second, it is important to induce the leading resource mercantilist
states, China and India, away from statist approaches in their external
energy strategies, so as to reduce the chances that they will bolster
their strategic commitments to an axis of oil as an international
counterweight to the United States. In this regard, it is critically
important to bring China and India into the International Energy
Agency, the OECD's established ``club'' for major energy importing
states. Similarly, it is important to encourage the
internationalization of Chinese and Indian national energy companies.
There is considerable evidence, especially in the Chinese case, that
these companies are becoming more market-oriented and profit-focused in
their strategies and operations, and are increasingly willing to
challenge their national governments over external energy initiatives
that d not make commercial sense. In many ways, these companies are the
most promising channels for promoting more market-based approaches to
external energy policy in China and India.
The Chairman. Thank you very much.
Let me ask just a few questions and then I'll defer to
Senator Domenici and then we'll take Senators in the order that
they arrived, going back and forth between the two sides.
Dr. Birol, let me ask you first. You, I think, alluded to
the need for additional transparency in the resource estimates
or calculations that exist in some of these areas that are very
important for us. My impression is, from your testimony, that
there is very little, if any, exploration going on by Saudi
Aramco at this time in that area, and I wonder if that is the
case and also whether that indicates anything about the
likelihood of them developing some of these reserves that they
are understood to have. Is it possible also that we are
misjudging the rates that we're going to see supplies decline
from some of those areas?
Dr. Birol. Thank you, Mr. Chairman. A reserve transparency
is needed both for international oil companies and national oil
companies. I would definitely suggest the point that some of
the international oil companies recently went through difficult
times because they didn't assess their own reserves the right
way. But looking at the key resource holders, especially in the
major producers in the Middle East, the amount of oil left in
those countries, exact knowledge about the amount of oil left
in those countries is very important knowledge for all of us,
for everybody who is on this planet, as all the numbers show
that the bulk of the oil in the future will need to come from
those countries.
Now, Saudi Arabia is a key player and will remain so for
several years to come and the Saudis have the highest reserves
in the world. We do believe that Saudi Arabia has enough oil to
meet the growth in global oil demand. However, there are two
important points here. One, we would like to be sure, as many
people in world--I mean, analysts in the world, how much oil is
there and what are the feet-by-feet production levels in Saudi
Arabia so that we have an overview of the general picture,
which would make everybody feel better and give more confidence
to the investor.
The second issue, which is, I think, even as crucial as
this one, the growth which will come from Saudi Arabia will not
be mainly as a function of their reserves but as a function of
their willingness to increase the production capacity.
Saudi Arabia has the reserves, Saudi Arabia has the money
to transform these reserves to production, but whether or not
in the future Saudi Arabia will increase the production as they
did in the past, as much as the world demands from them, or
they will leave their oil for the next generations. And Saudi
Arabia is differently--they will decide what they are going to
do. But it is also the consumers' right to recognize that one
day, production from those countries in which we do not have
excess, free, extra capital, to go directly into production,
may change their policies and this may have serious
implications for the consumers.
The structure of the oil market is changing, Mr. Chairman.
In the past, the money could have access to many oil deposits
in the North Sea, the Gulf of Mexico, but in the future, it
will not be the case. Therefore, how much oil will come will be
decided by a very few number of national oil companies. And
again, market conditions may not be the primary determinant
when they are making those decisions. So, from that point of
view, there are two major uncertainties: one, whether or not we
will have the reserves and the money we'll need in the future,
and two, it would be very good to have a more transparency on
the reserves in all Middle East countries and the rest of the
world.
The Chairman. Let me ask Dr. Leverett, one of the
suggestions you had is that we need to encourage--as I think
you stated, encourage the internationalization of Chinese and
Indian energy companies. Could you be a little more concrete as
to what actions we have--what leverage does our Government have
to actually bring that about? And how would you proceed, if you
were in a position to do so?
Dr. Leverett. It's a very good and important question,
Senator Bingaman. You're right, the leverage of the U.S.
Government in this area is limited. In the end, if American
energy companies decide to pursue joint venture projects
upstream, downstream, wherever, with Chinese or Indian state-
owned companies, they will ultimately make that decision on
commercial grounds. But I think that the political climate and
the policy framework that is established can have the effect of
encouraging or discouraging this kind of cooperation.
A couple of examples. I already mentioned the political
response last year, with regard to the possibility of CNOOC
taking over Unocal. I'm certainly not going to make a judgment
about the relative merits of CNOOC's offer for Unocal versus
Chevron's offer from the standpoint of what was better for
Unocal shareholders, but the political response in the United
States to just the possibility that CNOOC might take over
Unocal, I think, essentially sent the wrong message to the
Chinese, which is--and they are already very deeply suspicious
about this--the United States encourages China to rely more on
the market to meet its energy needs, but the Chinese have very
profound doubts that when push comes to shove, we will really
let the market, as a matter of policy, work in a disinterested
way where their interests are a concern. And the political
response to the Sino bid last year, I think, reinforced all of
those suspicions on their part.
I would also say, if you look at other countries where
international energy companies are based, in many cases,
particularly in Europe, these companies, with their
governments' encouragement, are actively pursuing possibilities
for joint ventures with Chinese and Indian companies. It has
become an important part of the strategy for some European
energy majors and there is a policy framework in Europe that
encourages that.
In this country, I would say the policy framework is, at
best, ambivalent on the issue of how desirable it is for
American energy companies to be cooperating with Chinese and
Indian energy companies and I think it would be in our
interests in the long run if we looked on those kinds of
possibilities more favorably.
The Chairman. Thank you very much.
Senator Domenici.
Senator Domenici. Thank you very much, Senator Bingaman.
I'm sure that two of the witnesses having to sit and wait and
get this short time to speak to us is rather boring. But I
would like to tell you that, at least from my standpoint and I
hope from the rest of the Senators, that we would conclude the
same. This kind of hearing is very unusual for us. We don't
usually take testimony of this type. We're usually arguing
about who is buying what kind of car or what we should do about
changing the rules regarding the amount of mileage average cars
are going to be getting--all very important things, but what
you've told us today is just absolutely startling with
reference to the future.
I don't know what we have to do to convince both ourselves
and the American people that we must change and do things
differently. I just don't know what we have to do besides
listening to people like you who are spending your brain power
trying to tell us what's going on, that just won't work for too
long. And I want to thank you for it and only say that I'm
really sorry that we don't have more time. And I commend our
chairman for suggesting that we open our year this way. But I
still don't think we're going to get it out of one hearing, Mr.
Chairman. I don't know if we should pick four or five things
that they recommend and say, ``These are things that came out
of that, why don't we do something about them?'' I don't know
yet, but I'm very, very concerned.
Dr. Leverett, I'll invest a couple of minutes with you and
then I'm going to go over to Linda Stuntz. You know, among all
the important issues that you see occurring and accruing out
there in the world, you came up with discussion of Iran and
Russia; is that correct?
Dr. Leverett. Yes. There are obviously a lot of specific
issues that we could take up under this rhetoric, but I think
that the question of the possibilities for Russian and Iranian
cooperation on energy matters is an issue that has potentially
very, very profound geopolitical and geostrategic implications
for the United States. Russia and Iran together control almost
half of the world's proven reserves of natural gas. If those
two countries are cooperating, coordinating in terms of the way
they develop and market their gas exports, they could be
potentially twice as influential in the global gas trade as
Saudi Arabia is in the global oil trade. And I think that
within the last 18 months, Russia and Iran have announced their
intention to begin cooperating in this area. There is a high-
level Russian/Iranian working group set up to do this. A senior
official of Gazprom chairs it on the Russian side, the deputy
oil minister of Iran chairs it on the Iranian side, and Russia
and Iran are discussing an increasingly wide array of potential
energy initiatives, marketing projects and pipeline projects
that would increase both Iranian and Russian influence in
regional energy markets.
Senator Domenici. Well, let me say, from my standpoint, and
you can try this on and then if you'd like to comment and
critique what I've said, I'll ask a question about the
nationalization of oil as an asset around the world. You and I
are talking about Russia here and Iran and what they are doing
together in their self-interests. Is Russia working as hard as
it seems to me to regain its international powers in the
region, in the large region that might be called Sino? Is it
working as hard as I think and are they doing it with a lot of
disregard for the rules because they don't necessarily want to
follow them?
Dr. Leverett. I think the short answer to your question is
yes, they are working very hard to do this. President Putin has
made it a cardinal element of his foreign policy to restore
Russia to what he would see as its rightful status as a great
power in world affairs. But in contrast to previous Russian
leaders, he sees the economic aspects of power and indicates
that Russia, particularly its energy resources, has the
foundation for establishing--re-establishing Russia's role as a
great power. I think he and his advisors are working very hard,
very strategically to maximize Russia's international standing
and influence.
Senator Domenici. I want to say to my fellow Senators that
about 7, 8, 9 years ago, until about 2 years ago, it was very
easy to strike a deal with Russia, the remnants of the Soviet
Empire. If we just had money to give to them, they'd give us
almost anything.
Dr. Leverett. Yes.
Senator Domenici. That's gone. They have a new kind of
identity. You can hardly talk to them about anything. They're
not interested and they act about as affluent as they really
are. If you want to deal on their terms, fine. If not, go home.
And they act just like they have plenty of money in the bank,
and it turns out, from what you've said, they do. And it's not
from the deal that you're talking about, they've already put
some together, pre-Iranian, and wait until they get it done.
Linda, could I ask you, would you simply turn that map
around and show us what's up there so we Senators can see that?
Will you put that out for them, too?
Now, Senators, right here in front of us, if there is
anything--that's fine, go ahead and put it up where they can
see it. If there is anything that has startled me in
preparation for this hearing and in today's hearing, it's this
chart here, which according to our staff, national oil
companies control \3/4\ of the world's oil reserves. Now,
national oil companies, the way we're defining it, kind of gets
confusing to some of us. Owned by the state is what national
means. So state-owned oil companies has \3/4\ of the world's
reserves. Looking at this chart, you're going to see that the
bars on the right reflect the size of the reserves held by the
world's oil companies. National oil companies are in red and
pink. Despite the fact that some focus on large U.S.
corporations as the face of big oil in parentheses, ExxonMobile
is the largest non-government-owned company and is at number
14. The relative size of the reserves held signified by the
length of the bar is also quite striking.
Well, what I'm trying to tell you is that all this argument
here in the United States about our oil and gas companies being
so big, and so gigantic that they're taking us over, and so
gigantic that we ought to rule them, and so gigantic that we
ought to tax them more, well, if you want to come to your
senses, just put this chart in front of you and it will tell
you what's happening to America--the idea of companies owning
oil and/or gas reserves, to provide that to the world in some
kind of a capitalistic, free-market approach. Linda, could you
tell me--and that's startling me in terms of the future of the
world--does that bother you at all, the trend that is moving in
the direction that that chart seems to show?
Ms. Stuntz. It concerns me that we don't know about this,
that there is so little awareness of this. National oil
companies are not new. They have--Saudi Aramco has been around
for a long time. What is different--and I think many of the
themes were picked up by Dr. Leverett--is that with the price
of oil where it is now and where it's been, they don't need
Western capital in the way that they have before.
Also, I think, particularly here in Washington, there has
been the notion that they don't have access to technology, if
they don't get it from Western companies. That's a bit of a
myth also. There are global technology companies. There are
fabulous engineers in other places in the world. I'm not going
to say maybe it's quite as good, but I think we need to
disabuse ourselves of the notion that these folks are somehow
dependent on us. They're not, and all of the things you've
heard, really, I think, is a striking agreement among the panel
that we have to figure out how to deal with them.
They are quite capable of making alliances with others and
what that means for us then--I just think we need to get our
head around that and figure out what that means for policy. So
I appreciate your attention to this and I think it is something
that needs to be more broadly understood.
Senator Domenici. OK, thank you very much.
The Chairman. Yes, thank you very much.
Senator Tester is next.
Senator Tester. Thank you, Mr. Chairman. I've got a
question, as long you're warmed up, Linda. One of the first
things you talked about was the issue of America's energy
independence and how it wasn't achievable. There are a lot of
different perspectives when you talk about energy and national
security, affordability for regular folks, economic and so on.
Is it that? And you talked about Draconian measures, as I
recall, but it is that America's energy independence is not
that important or it is that we don't have the technology to
get it done at this point in time, or is it that, from your
perspective, from a technological standpoint, it's simply not
obtainable?
Ms. Stuntz. I would say, from an economic standpoint, it's
not achievable. We cannot--we could technologically, if we were
willing to pay an unlimited amount for the price of gasoline,
if we were willing to waive a lot of environmental
requirements, impose speed limits and, I mean, a whole host of
things which I think would be unacceptable to us as a public,
we could, over some period of time, never import a drop of oil.
My point is, that is not going to make us independent of what
happens, of all these things that you've been hearing about
this morning in global oil markets. It's not going to mean that
we don't need to care about whether or not Russia is a reliable
supplier to Europe because that matters to us, too. It's a
fungible commodity.
But we can't--just one more, quickly. I believe Dr. Hormats
was right. The key is vulnerability. We need to make ourselves
less vulnerable to those vagaries, even though we can never be
completely independent of them.
Senator Tester. OK, thank you.
Dr. Hormats, you talked about development of alternative
sources of energy. Just from your perspective, where do you see
it--because there are a lot of different alternative energy
potentials out there--where do you see the best opportunity?
Dr. Hormats. Well, I think there are a number of ways. I'll
just use a couple. Cellulosic ethanol, in my judgment, is one
of the very interesting alternatives for several reasons. One,
it doesn't compete with the food chain.
The Chairman. I think maybe you could pull that microphone
out or turn it on or something.
Dr. Hormats. Yes, sorry. Thank you.
Thank you, Senator. Cellulosic ethanol, I think, is one
area that is very important for a number of reasons. It doesn't
compete with the food chain. It is basically using waste
material, corn stalks or switch grass or a whole variety of
other things. And at this point there is not a large,
commercially-viable production facility, but most experts think
that with the proper amount of Government support, there will
be.
Also, the conversion rate is very efficient compared to
things like corn or even sugar, so I think that's one area
where the farm community benefits substantially. We reduce our
dependence and it's a very efficient way of doing things, and
with the right kind of incentives, I think you could do that.
Wind energy, I think, still has a lot of potential in this
country as well and there are a couple points that enhance this
prospect.
One is, if you take--let me just use one example with
relationship to the production tax credit for renewable energy
resources like wind or geothermal. Part of the problem is that
there is a very narrow window for people to get that. If your
project is not completed by the time the window is closed, then
you don't get it. And the problem is that it's a very--in some
cases, a very short-term window. So there are two or three
things, or actually several ways in which--the way the laws are
written and the way the incentives are written can be helpful
in giving a longer-term time perspective to people who are
going to invest in these new sources of energy and this would
be one of them.
Part of the problem is that when you get the price going
down again, as it is today, people say, we don't really need to
do this, the crisis is over, we can relax. The problem is, we
really need a longer-term perspective and the way the law--the
way the regs are written, the way the PTC is written, you
should have a broad enough window to give people who are
committing capital for a long period of time the assurance that
it's going to be there when their project is complete.
Otherwise you get a sort of on-again, off-again process.
So the answer of cellulosic ethanol is one among several,
but it is just one that I think happens to have a lot of
potential at the moment, if we can develop it further and
develop the technology and develop the regulatory and the tax
support to do it. We've got the capability, because we've got a
lot of switch grass and corn stalks and things, and a lot of
States would benefit, not to mention national security.
Senator Tester. Thank you. Just one last question. I don't
know if any of you have had the opportunity to look at energy
policy in other countries, and I know we're different than
anybody else, but if you have, are there--I mean, I've heard
three components here, listed fairly regularly, with the
exception of Dr. Leverett's presentation, and that is, deal
with domestic production efficiencies and biofuels. Are there
any other components to other countries' energy policies that
could be of benefit to this country? And it's open to anybody.
Dr. Birol. The International Energy Agency, we have 26
member governments and the United States is, of course, the key
one. All the countries are faced with these twin energy traits:
the subject of supply, which we are discussing today, and the
second one is the environmental challenge, that we discussed a
lot today. And in many cases, they are very much interrelated
and many countries do look at--in addition to efficiency
increase and the alternative fuel, such as biofuels and the
wind and hydro, they also look at the nuclear power from very
different angles. Nuclear power again is on the agenda of many
countries, even the countries who didn't, in the past, for
different reasons, ban nuclear in their system.
The reason here is twofold: One, natural gas prices are
very, very high, which makes the electricity production from
natural gas very expensive, and the second, as we were
discussing with Russia, one of the signals of what Russia gave
with the Ukraine-Russia disputes there, security of the gas
supply is a key issue and, as my colleagues mentioned here,
Russia plus Iran makes about 50 percent of the proven gas
reserves, two countries in the headlines of the newspapers for
energy.
So, therefore, from the security platform, many countries
look at nuclear very closely. In Europe, in Asia, they are both
in development in developing countries. But in most of the
countries, there is one common denominator--it is the increase
of energy efficiency. This is, I think, perhaps the most
important one that we have to put the emphasis on, because it
is very, very cost-effective and easier, compared to nuclear
and the others, to implement and get the support of the public.
Thank you.
Senator Tester. Thank you, panel.
Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Senator Martinez.
Senator Martinez. Mr. Chairman, thank you very much. I want
to really commend you and the ranking member for calling this
hearing. I think we always tend to say thank you for calling
this important hearing, but some hearings are more important
than others and I happen to think this one is tremendously
important and timely and I thank the panel for being here
today.
I represent the State of Florida and we are vitally
interested in developing alternative fuel sources in Florida,
particularly, as you mentioned, cellulosic ethanol. We view
ourselves as a State that can be a part of the future in that
regard.
One of the things that I hear is, in order for us to
develop a domestic ethanol production capability, that
maintaining the tariff on importing Brazilian ethanol is a good
thing for us. And I know, Ms. Stuntz, you suggested that that
tariff ought to be removed. Help me with those conflicting
currents of encouraging domestic development of the industry
while at the same time providing a tremendous challenge for
that development by taking off the tariff.
Ms. Stuntz. Senator, it's a good question. I think the
realty is, today, the cost of cellulosic ethanol, according to
analyses I've seen, are about five times the cost of corn-based
ethanol and potentially even higher than biomass-based ethanol.
So it's a significant cost premium today. We've got to do work
demonstrations and development to bring that cost down because
it clearly is the long-term answer.
Removing the tariff so that low-cost Brazilian ethanol
could come in and help us at the time, to give us--to me makes
sense as a bridge, frankly, to give us time to do the work that
is necessary to bring the cost of that cellulosic ethanol down.
Because we're already seeing in the marketplace, as corn-based
ethanol is ramped up, corn prices are at about an 11-year high.
I was looking for Senator Dorgan, someone who would know better
than I do offhand. And you're seeing some pressure, so why
not--I don't believe allowing Brazilian or other sugar-based
ethanol to come in would significantly slow the work that needs
to be done. I think it would assist consumers in the bridge
period.
Senator Martinez. Would it also maybe help us in developing
a distribution system? Because I know that's one of the areas
in which we're also way behind.
Ms. Stuntz. Absolutely. I think we have got to get to work
on--again, as that market expands, we are nearing the limit of
how far we can go with tanker transportation, barge
transportation of ethanol. I know that Brazil ships ethanol by
dedicated ethanol pipelines. I have been beginning to hear--and
perhaps some of these in the funding--private sector funding
are looking at the possibility of dedicated ethanol pipelines
in this country. The technical issues may turn out to be less
problematic than economic ones in terms of, ``Do you have a
sufficient market to justify and be able to finance that?''
Perhaps Dr. Hormats could say more about that.
But I think you're exactly right. It's all got to come
together, and again, doing this in a way that allows that
infrastructure to develop would make sense.
Senator Martinez. Dr. Hormats.
Dr. Hormats. Yes, Linda's point is an interesting and a
very good one. I think part of the problem is if there is a
gathering system, a distribution system for more conventional
sources like corn, for instance. Corn has been marketed as a
very commercial and efficient commercial marketing system. For
things like switch grass or corn stalks or things like that,
there is no efficient gathering system and the distribution
process is sort of makeshift. There are lots of little local
plants that will be developed, but we need to find a much more
efficient way of getting it into the commercial system and
distributing it in gas pumps and things like that. Therefore,
the more volume there is, the more the incentive exists to
develop the kind of things that Linda was talking about, to
make a more efficient distribution, gathering and marketing
system for these products.
Senator Martinez. Shifting to the geopolitical implications
of all of it, Dr. Leverett, I traveled to Georgia recently and
saw firsthand not only the influence but the bullying, really,
of Russia as it relates to a foreign policy interest merging
with the supply of natural gas, particularly to that country. I
was also intrigued by your recommendation of a very aggressive
engagement with Iran. Some things come to mind as we look to
that. I agree with you that in an unfortunate world, that would
be a desirable thing. However, there seemed to be some very
difficult, long-term goals that the Iranian government seems to
be pursuing that might be very difficult for us to overcome.
You say in your remarks that we have rejected negotiations with
Iran--I'm not sure of the exact language you used, but
something along those lines. I'm sure there has not been
anything on the table from Iran for us to reject, and I wonder
how we would deal with, No. 1, their nuclear ambitions and, No.
2, their stated intent of the destruction of the State of
Israel.
Dr. Leverett. You've asked exactly the right questions
about U.S. Iran policy, precisely because the problems between
the United States and Iran are so difficult and there is such
an enormous amount of baggage in this relationship on both
sides that my argument is the only way this problem is going to
be resolved is if it is resolved comprehensively. My own view
is that Iran will not agree to strategically meaningful limits
on its nuclear activities in the absence of what would, in
essence, be a security guarantee from the United States,
basically a commitment by the United States not to use force to
change the borders or the form of government of the Islamic
Republic of Iran. There is no way that an American
administration can offer that kind of guarantee unless a range
of other problems that we have with Iran--its support for
terrorist organizations, its attitude toward the Arab-Israeli
conflict and so on--are also dealt with. But there is no way
that an Iranian government is going to deal with those issues
unless there are things on the table relating to U.S.
acknowledgement of an important regional role for Iran,
normalization of relations, and lifting of U.S. sanctions. At
this point, the issues have become so balled up with one
another that you can't resolve any of the outstanding
differences between the two countries, I think, without
resolving all of them.
In fact, in the spring of 2003, the Iranians offered to
negotiate on the kind of comprehensive basis that I am
describing and the Bush administration rejected that overture,
did not pursue it. The United States and Iran did cooperate
very, very extensively after 9/11, with regard to Afghanistan,
for a period of almost 2 years, with the Iranians playing very
constructively in that process. And again, it was the United
States that terminated this dialog. There is much about Iran's
behavior and its rhetoric that we rightfully find unacceptable
and offensive, but the issue is, how are you going to go about
changing that behavior and resolving problems?
My position at this point is that you can't do it unless
you're prepared to do it comprehensively. I think that the
Iranian leadership, even with President Mahmoud Ahmadinejad in
office, would be prepared to engage in a serious process with
the United States if they believed it was really aimed at the
kind of comprehensive resolution I've described. I think that
would help us on the nuclear issue. I think that would help us
in terms of the larger war on terror. I think it would help us
regionally. And as I tried to indicate today, I think it would
be enormously beneficial in terms of long-term energy security.
Senator Martinez. Can I comment on that quickly?
The Chairman. Sure.
Senator Martinez. It will be very quick.
The Chairman. Because we need to get some other questions
in.
Senator Martinez. This may be right and we may be able to
get something if we have a broad dialog with Iran, I don't
know. But I want to just go back very briefly to two points.
One, we had excellent relations with the Shah. And the Shah,
who we put on the throne, by the way, turned around during the
middle part of the 1970's and did a lot of things that were
quite harmful to America's energy interests. Point one is good
relations with the country may be possible, but even the guy we
put on the throne was very, very unhelpful in the middle part
of the 1970's.
The second point is, even if we were able to achieve these
kinds of goals, which I think are noble goals, if we can work
out all these things--I'm a little skeptical, but you know
what? It's possible. The fact is, that shouldn't deter us one
bit from doing the kinds of things we're talking about in this
country, to develop new sources of energy, new measures of
efficiency to reduce our vulnerability, should this not occur.
So it is perhaps important, and I don't deny that maybe it
could happen, but we've got a job to do domestically quite
apart from that and we shouldn't think that that is an answer
to the kinds of broader issues that we have been talking about
because the best relations with a country in a given situation
can turn very sour, as was the case in the Iran in the 1970's,
and then again, after the fall of the Shah as well. So we
shouldn't be complacent about these kinds of things.
The Chairman. If we can go on to Senator Cantwell. We're
trying to do 7-minute rounds and I think we can do one for each
of the Senators still here, if we try to stick to that. Go
ahead.
Senator Cantwell. Thank you, Mr. Chairman.
I think, Dr. Hormats, that's a great lead-in to the
questioning that I'd like to go to. It was kind of brought up
by the Chairman earlier about technology.
First, let me just say thank you for all the panelists
being here and thank you, Dr. Hormats, for talking about the
extension of renewable tax credits for longer horizons. I
personally believe as long as we're continuing to use oil at
the level we are and only giving 2- or 3-year horizons to the
renewables, not only are you only going to have limited
development, you basically prevent any kind of the
manufacturing from happening in the United States--so the job
creation, so thank you, General Wald, for mentioning the
efficiency standards for automobiles. I hope next week, in the
Commerce Committee, we'll have a bipartisan bill that we can
start working on and look at that.
But my question goes to--coming from the Northwest, we kind
of look at China as a market and not as a competitor. That's
because of Microsoft and Boeing and agriculture, and now the
Chinese are drinking lots of Starbucks coffee. So we look at--I
think we even looked at President Hu's visit a little
differently than the rest of the country did. But why not,
given that China, I think, in 2009, will become the largest
carbon dioxide emitter? A whole decade before, we'd thought
we'd have all this pollution. Why not look at this technology
issue, of technology transfer, Dr. Leverett and Dr. Hormats?
Even from the Government's perspective of the energy efficiency
technology that we have as intellectual property as a way to
leverage the relationship with China, beef up the bilateral
relationship to a substantive level and use that as at least a
starting point to move not only a great economic opportunity
for the United States but move China away from Iran?
Dr. Leverett. I totally agree with you. I think that we
need--I've put in my written testimony a number of elements of
what I call the United States-China Energy Partnership, which
could involve Japan or it could involve----
Senator Cantwell. Or in Asia, the United States-Asia energy
policy.
Dr. Leverett. On many levels, United States-Asia--and there
are a variety of reasons. The Chinese are increasingly
dependent on imported oil and they are making these
arrangements with Russia that you've described and it's
bringing them closer to Russia since Russia is a big supplier.
And, of course, the Middle East, they are conducting diplomacy,
which is not entirely consistent with what we believe to be in
our interests.
On the other hand, there are a great many areas where our
interests do converge, because they are more and more dependent
on imported oil and it is important, I think, to get them to
think like a consumer and work with the consumer groups, work
with the IEA. There is another energy forum that has been
developed at a ministerial issue.
Senator Cantwell. Get them admitted to the IEA.
Dr. Hormats. Yes. Part of the problem with the IEA is
because you have to be a member of the OEC to be a member of
the IEA, but it seems to me you can find some relationship to
bring them closer, along with India and others, to work more
closely with the IEA. And there is another ministerial form
that has been developed, separate from the IEA, with producers
and consumers.
But your broader point is absolutely correct. We should
look at China because of--as an opportunity, as opposed to a
threat. They have environmental problems. We have developed in
this country, and are developing now, some very efficient ways
of using coal in an environmentally responsible way. Clean coal
technology is being developed here. We have great technological
capabilities that we're developing in our country. If we work
with China, we would have a broader market to sell some of
those, which would bring more capital to be available, in the
first place, to help to develop them. And a broader partnership
would be important across the board for coal, for new
technologies, for new ways of developing efficient utilization
of existing technologies and the cars that the Chinese are
building, a large number of the cars are being developed.
And it's a jobs argument here. This is the part of the
problem that I think does not get enough attention. If we
really get out in front in energy technology, it can be a great
source of job creation in this country, for new types of
energy, which we can use here and abroad, and therefore, a
partnership at a very high political level.
I had suggested to the State Department before the last
summit, President Hu did a lot better in Washington than he
did--your Washington than he did in this Washington. And the
reason was because of the cooperative relationship that was
developed on a commercial basis. That could happen in energy.
We need a cabinet-level committee to do it. We had one with
Japan in the 1970's, we can have one with the Chinese and this
would be of huge benefit to reduce tensions, to avoid the
conflicts over Sudan, Iran, Iraq and elsewhere, if we do it
right. And give it a high level and have someone senior in the
NSC do this, which I think is a good idea, and also in the
State Department. The State Department has this idea, I know,
because I've given it to them, and others have, but they've
really not developed it at a high enough level.
Senator Cantwell. Dr. Leverett?
Dr. Leverett. I think you've really--you've hit on a
potential win-win initiative. There is tremendous and growing
interest in China now, both in the official community and the
business community, about doing things to improve the demand
side management part of their energy security equation. But
part of it is, in a sense, being behind the curve
technologically. And to some degree, there are still--I believe
they are still are policy restrictions on exporting some of
this technology to China. I think this could be an area where
Congress could very constructively take initiatives that would
drive policy in a constructive direction because this is part
of the energy security equation. The Chinese, themselves, want
to pay more attention, just as a brief indicator of that, and
also kind of responsive to the questions Senator Tester asked,
in terms of what other countries are doing. China's fuel
efficiency standards for vehicles marketed in China are today
more rigorous than those on the books in the United States.
Ms. Stuntz. May I just comment very briefly, as maybe a
little bit of a dissenting view. I think this is a great goal,
but we need to go into this with our eyes open. Every 10 days,
China is opening a coal plant with the capacity to serve a town
the size of Dallas or San Antonio. Most of those coal plants
are not controlled even as well as most of the plants in the
United States. They don't even have the base technology that we
are putting on right now. A fifth of them are actually
characterized as illegal because they haven't been approved by
the Federal Government of China. So there is, in part because
they can't control all that's going on in the provinces. So I
think it is a great aspiration, but we need to be clear about
what is actually happening on the ground in China in terms of
what's being built. And if we could just raise them up to even
the sorts of levels that we're having here and then move beyond
that for the future, I think that would be great.
Dr. Hormats. I agree with that. They are going to do it
anyway. We could help them make it more efficient and certainly
better from an environmental standpoint.
Ms. Stuntz. I hope we're not saying they should follow the
same route that we have. I would hope that we're saying that we
would help them leapfrog that process. I'm well aware, having
led a delegation to China in November, and we were all excited
because we had energy-efficiency technologies in a good form,
but I noticed right next to us, at the same hotel, in a much
larger venue, was the mining industry of China. So I know
exactly the challenge, but to me, if we could help them
leapfrog that, isn't that a great incentive for them to become
a better economic interest with the United States and helping
us? So instead of going to Iran to look for oil, they know that
we can give them energy efficiency. And I think the Chinese do
want to be more environmentally sensitive than they are today.
They know they are going to get a black eye if they don't
approach this issue.
Dr. Leverett. There are enormous demonstrations in China,
by the Chinese, because of the terrible environmental
standards. And the health problem is horrible in China for that
reason.
The Chairman. Please make your comment sort of brief. We
need to get on to some other questions.
Dr. Birol. OK, just one comment. We work very closely with
China and India, especially in the last couple of years, and
just to let you know, at the last board meeting, we voted
Chinese minister and Indian minister participants at the IEM
meeting, which is very unusual for us. We just signed if we
want to deal up the relationship with China and India in that
format. And the second point, very briefly, is that there is
already the partnership between China, India, the United States
and Japan--the Asia-Pacific Partnership--in the technology area
that I wanted to bring to your attention. Thank you.
The Chairman. All right, thank you very much.
Senator Smith.
Senator Smith. Thank you, Mr. Chairman.
Thanks to each of our witnesses.
Ms. Stuntz, a question to clarify on the issue of corn-
based ethanol and its cost versus cellulosic ethanol. You said
that it is more expensive; is that the case because it's
inherently more expensive to produce into energy or because we
don't have the infrastructure and the gathering of the
materials in this country?
Ms. Stuntz. With the technologies we have now, it is
inherently more expensive to produce ethanol from the cellulose
of these plant feedstock materials than the technology that we
now have to produce it basically from the fermentation of corn.
Senator Smith. In a country where they had such technology,
is it more expensive to produce than corn-based ethanol? In
other words, if we get it, if we get the infrastructure, what
are the costs comparisons between corn and cellulosic?
Ms. Stuntz. I believe that there are certain types of plant
substances--switch grass and so forth--where the efficiency,
the conversion efficiency looks like it will actually be better
than it is from corn, but we just don't have the technology yet
to do that. And I agree with Dr. Hormats, the infrastructure
issue is actually on top of that in terms of what the cost
would be. Actually, the ethanol infrastructure is still a bit
immature also and could be optimized. Beyond that is an ability
to gather all these sources of waste, which sometimes gets
ignored. And I think a lot of work needs to be done on that,
because it will have to be collected, it will have to be
ordered from long distances. So it's a ways in the future, but
I think there is a great deal of interest now, both by the
private sector, importantly, as well as the Government, and it
can happen.
Senator Smith. I think everyone on the panel is saying it
should be pedal to the metal on developing these
infrastructures and a way to convert this, because that is one
of the building blocks for how we get closer to energy
independence.
Dr. Hormats. Could I just say one thing?
The Chairman. I think you need to turn on that microphone.
Dr. Hormats. Sure, good point. Thanks.
One difference is, when you're competing with corn, you're
competing with the food stock of the country, and the price
goes up. All this other stuff--the switch grass and the
cornstalks and a lot of this other-- wood chips and things,
those are essentially waste materials, so the starting point is
much cheaper. The difference also is that there are some
commercially-viable plants to do corn ethanol already. We
haven't really gotten far enough down the chain to develop
those commercially viable plants for this other stuff. Some are
being--but they won't be quite ready. They're not ready quite
yet, and that's why some greater degree of government effort is
needed to help them get from the R&D stage to the development
stage, because you can get better efficiencies once you get the
volume.
Senator Smith. And your view is that we don't retard R&D
and infrastructure development if we take away the protection
against importing----
Dr. Hormats. I don't think so. I haven't really looked at
the economics to that point, but I think that the competition
from some of this other stuff, if we're in a country that
believes in competition, that could help. But I would say the
primary thing is to really get the Government incentives right
to provide the capability----
Senator Smith. And if we do that right, then the
protectionism that currently exists----
Dr. Hormats. Then you don't need it, right.
Senator Smith. We don't need it. And, moreover, it would
allow the industry to develop in this country in a way that
doesn't create an artificial sort of price that is
uncompetitive--grows to be uncompetitive with what the world
market will ultimately be.
Dr. Hormats. Exactly. And it can't be based just on the
movement of prices from month to month because then that
creates--this has to be a long-term strategy, to give the
companies the incentive, and once you do get the critical mass,
then you're in a much better position to resist this--to stand
up to competition. And you're absolutely right, at that point,
more and more people start using it and the volume enhances the
efficiency so you don't have an artificially high price
indefinitely.
Senator Smith. One of the things that I think really needs
to be emphasized by this Senate and you all with your voices is
that American oil industries are not--they are not controlled
by the Federal Government. They are private, for-profit
industries. There are competitors in the world. An overwhelming
percentage of the competitors to Chevron, Exxon, and all the
others, now are nation-state oil industries. I guess one of the
questions I really have for you and your insights is, what are
these nation-state oil industries that are using energy as a
political weapon against their neighbors? What kind of
investments are they making for the future in terms of
exploration, in terms of infrastructure, as opposed to American
oil companies that don't have government control?
Dr. Birol. They do also make investments and they make
investments more or less to nation oil companies and
international oil companies and the amount of investment they
make is more or less the same in terms of dollars. But there is
a small trick here. We just saw this picture, and this picture
is a static picture. When we look at the future, the contrast
will be even sharper because the oil companies own the
reserves, which are declining. This is the point I wanted to
say that the national oil companies have young fields and rich
fields, so the difference between the international oil
companies and national oil companies will change, and in favor
of the Nation oil companies because international oil companies
are losing reserves and they are not able to have major gains
to access the new reserves.
So, in coming to the investments, international oil
companies are making a lot of investments in order to maintain
the current production capacity, to replace what they have,
because it is declining. They have to inject money to slow down
the decline. And the national oil companies are making
investments to increase the production capacity. So from that
point of view, both of them are making investments, but in
terms of the production growth, it is coming mainly from the
national oil companies. And looking at the future, the picture
will change drastically, especially after 5 or 6 years.
Senator Smith. That brings me to my final point, and then
I'll turn it back, Mr. Chairman.
This is not a criticism, Dr. Leverett, but I found your
testimony especially chilling in terms of national security
implications for our country. It reminded me a little bit that
we need to return to Dayton with Russia and others. I'm
reminded that in doing that, in asking for energy cooperation,
we essentially have to admit to their spheres of influence and
tacitly agree to their conduct toward their neighbors.
See, to me, whether Ukraine becomes a member of NATO is not
our business. I mean, we get a veto, I suppose. That's the
business of Ukrainians. And if they want to be free and they
meet the qualifications, our policy is, they get to join. It's
shared values. So to say we're not--we're going to say to the
Ukrainians, you can't. I don't care--it's up to them. I don't
really care if they join or not, but that's up to Ukraine, and
I don't want to change the standard just because Russia is
going to be offended. I don't know where Russia is going. I
mean, Mr. Putin has made it very clear to this Senator that he
wants his empire back. It's not going to be communist, but it's
sort of a capitalist empire that basically is becoming more and
more dictatorial and following its historic pattern.
That really worries me. It would worry me if I were an
Estonian or a Latvian or a Pole or a Ukrainian or a Georgian,
and I don't think we can accede to that. I don't think we can
bargain away those kinds of values that the United States has
for the sake of energy security. So I want to say that is a
concern.
I think our focus needs to be domestically and then just
have a really good military capacity to deal with this. When it
comes to Iran, sitting down with them, they made it very clear
what they would want from us and that is essentially a military
domination of the Middle East. That is a horrifying prospect.
If I was an Israeli, I know what that means: I'm gone, I'm
exterminated. And I don't think we can accede to that in the
name of energy cooperation. So I just wanted to say that. If
any of you have a comment on that--I mean, those are the stakes
and I don't think we can play in that game.
Dr. Leverett. Senator, let me respond just briefly on
Russia and Iran. First of all, on Iran, I'm not talking about
acceding to Iranian military domination of the Middle East.
First of all, frankly, Iran has no capability to project
significant levels of conventional military capability much
beyond its borders.
Senator Smith. They'll get them. If they get the energy and
we cooperate, they can reload their treasury with petrodollars.
Dr. Leverett. They are reloading their treasury whether we
cooperate with them or not. The issue for me is, in strategic
terms, are we better off trying to have some influence over the
way that those petrodollars are accumulated and recycled and
invested and used, and how countries that have those kinds of
sources of influence use those influences, or are we going to
basically, as you say, not play in that game and let other
countries play, and therefore, accrue the strategic benefits
from that? Those are the trends that I see happening right now,
with the emergence of the axis of oil. We basically cannot
accomplish our policy objectives toward Iran, because other
countries are playing in a game that we've essentially taken
ourselves out of, and I don't think that's going to serve
American interests in the long run.
On Russia, you're right. In the cold war with the Soviet
Union, we accepted the notion of spheres of influence, because
basically we made a calculation that managing the nuclear
balance and preserving international stability was a more
important foreign policy interest of the United States than a
quixotic effort to push the Soviets out of their empire before
the natural course of events forced them out of their empire.
I would argue we are in a somewhat analogous situation vis-
a-vis energy. Russia has this status and leverage as a major
energy producer. They are using it to accumulate more and more
regional and international influence. Do we want them to use
that influence in ways that work against our interests or work
in favor of our interests? If we want them to work in ways that
support our broader policy objectives, we probably are going to
have to accord some attention and some legitimacy to things
that they care about. That is the nature of strategy. That is
the nature of diplomacy.
The Chairman. Senator Sessions, you're the clean-up hitter.
Go right ahead. We're glad to have you on the committee.
Senator Sessions. Thank you. It is a fascinating subject
and I'm honored to be with you, and on this committee, and to
participate with this panel.
With regard to my friend Gordon Smith's comments, I was at
Riga recently and there was sort of an off-the-record
discussion over the former Soviet Republic being in NATO and
one made the point that it's a question of values. Putin had
announced that the greatest disaster of the 20th century was
the collapse of the Soviet Union and they thought the best
thing that happened in the 20th century was the collapse of the
Soviet Union. So I guess I'll say to you, there are more
matters than just economics. What might seem most rationale to
us, our nations oftentimes act directly contrary to their
national economic interests, and how we bring that kind of
reasoned analysis to it, I don't know. But I do suggest, Dr.
Leverett, that you made some very valuable points and it is
true that we'd all be better off if we could accomplish what
you suggested there. But it's not easy.
It strikes me now that our national crisis--I think all of
you will agree and I'll run down this quickly so we can wrap
up--is driven by our dependence, is driven by our need for that
fuel that goes into our mobile vehicles. I believe it was--you
said that at the beginning--we've got electricity, we've got
nuclear and coal in large amounts. So that's not a crisis and
natural gas also is a player there.
Ms. Stuntz, you suggested--I believe you stated and I think
I recall that the Council on Foreign Relations' report
indicated an increased role for nuclear power; is that correct?
Ms. Stuntz. That's correct. We did not spend a lot of time,
and did not have the ability to spend a lot of time on that but
it seems to us, to get at our dependence on oil for
transportation, we need to do all we can on biofuels, but it
may not be enough. And if we could move to electric vehicles
which then recharge at night--and we don't think a plug-in
hybrid is as far away maybe as some others and there have been
some exciting developments recently that we can take advantage
of--clean coal and nuclear and fuels like that--and turn it
into the transportation field and give us that kind of
resiliency in the choices that we have now for electricity.
Senator Sessions. And electricity, unfortunately we've
gotten in the habit, in recent years, when natural gas prices
were low, we were using a lot of natural gas to generate
electricity and we could actually--and I think the D.C. busses
use natural gas. I mean, natural gas is a possible, a mobile
vehicle system. I think you'll agree. I see nods there. And
it's also much cleaner, is it not, Dr. Hormats, in terms of
global warming gases and carbon?
Dr. Hormats. Sure, yes.
Senator Smith. So, to me, that would make a nice move, to
reduce the natural gas and electricity production and place it
more in meeting this mobility challenge. Of course, you're also
suggesting, several of you, that when you increase domestic
production--I think is something we need to act on. We're doing
it with the Gulf Coast. My area of Alabama is supportive of
that and it's good for us. Biofuels, cellulosic ethanol is so
exciting to me. We have the potential to grow a lot of switch
grass. It's something I've been interested in and Auburn
University has done a lot of research on.
But it's that--as you suggested, is it a trend? Is the
transformation of that cellulosic, dry material into a fuel
that's driving the cost--and we're not quite there yet
technologically and that's where we need to invest money, would
you agree, Dr. Hormats?
Dr. Hormats. Absolutely. We have to invest the money in the
R&D but also in the development plans, to make it commercially
viable. Yes, I totally agree. And it's very doable. The
technology is there, it just needs to be expanded and
commercialized.
Dr. Birol. May I just add something on biofuels, why it is
very important to develop the biofuels and giving incentives?
We should put into perspective that the share of biofuels is
today far from being a real alternative to oil products. Today,
the share of biofuels in the global oil supply is less than 0.8
percent--not even 1 percent. Just a perspective that there is a
big room for improvement, therefore large incentives, a lot of
time. It's not a very easy solution.
Senator Smith. General Wald.
General Wald. I think, first of all, I didn't get a chance
to speak much here, but everything that has been talked about
today has to happen to make this go away. The interesting thing
about Iran that was discussed--and I don't disagree that dialog
is a good thing, but the assumption is that Iran is going to
potentially cooperate in any way. So that would be nice, but we
have to plan that they won't. Like Mahmoud Ahmadinejad, the
President of Iran, today has regulated and, via government
subsidies, developed in 5 years their entire fleet of
automobiles via natural gas in Iran. Now that's a strategic
issue to me. And they're going in a direction of their own way
on this thing.
So I think, in a sophisticated way, we've been
disadvantaged with Russia in our negotiations, but I think
countries like Azerbaijan, as far as our relationship and vis-
a-vis Iran and our preparation for a consequence with Iran that
will not be in our favor, needs to be addressed today. Now, if
we were, today, to do everything that was mentioned today on
this panel, it will still take us 15 to 20 years to get there.
So we have a window of vulnerability for a decade or more that
we have to pay attention.
Then the last thing I'd like to mention on this, on the
security aspect, is since 1980, the U.S. Government, through
military application, has put about $50 billion to $60 billion
a year into the Persian Gulf. That doesn't count the current
Iraq war or the 1990 Iraq war. And that's good for our country,
for security interests, but the problem is, we're subsidizing
world energy. There is nobody else in the world doing this, and
really, if you look at how much we're paying per gallon, me, as
a U.S. citizen today, for gasoline, you could almost say it's
$7 a gallon, based on the fact that we're subsidizing world
security on this issue. So I think none of these things are
silver bullets. We have to do all of them. And I would appeal
to you, as the U.S. leadership and as Senators, to do something
comprehensive, across the board, as soon as possible.
Senator Sessions. Well, I think that's an excellent
statement, General Wald. If you're familiar with Tom Freeman's
theory that the more wealth these oil countries have, the worse
they behave, both domestically and in foreign policy; do you
agree with that? It seems to be true. He even had a little
chart, the Freedom Chart, I think, that he put with that.
General Wald. I know Tom and I think his ideas are pretty
close. I mean, I'm not necessarily sure you can associate the
oil wealth with bad behavior, because we have a lot too, but I
do think what it does do is give countries that necessarily
don't agree with us the freedom to act like they want to.
Senator Sessions. It gives them the ability to increase
benefits for that citizen by a small amount and use the extra
to invest in military ventures and bad behavior, and it seems
to be absolutely happening. I do agree. And I'm part of, with
Senators Joe Lieberman and Lindsay Graham and a number of
others, a caucus that says we should treat the energy question
as a matter of national security, and I think some of the
comments you've made here today are real chilling. As Senator
Smith said, that drives that home, and this panel has made me
more convinced that we do need to see that.
Now, Mr. Chairman, I would just say that means a couple
of--means one big thing. I'm a free market conservative. I
don't believe in silly policies that drive up the cost to
consumers for some vague, theoretical, feel-good thing. I'll
just tell you, that's my view of it. However, if it is a matter
of national security, then maybe we can justify spending more
on this issue of transformation and alternative fuels and those
kind of things than we would otherwise. And, in fact, I think
we're at that point. I'm prepared to think critically as a
member of this committee, Mr. Chairman, on how we can utilize
our resources to enhance both our environment and our economic
independence.
Dr. Hormats. Can I just add one quick comment? Our group,
the Energy Security Leadership Council, is putting together
people like General Wald, financial people, business people,
and a number of others to try to look at just that element of
security. I think all the members, General Wald and myself and
a number of others, Robbie Diamond, who is here, and others
stand ready to work with you, because the security element is
what makes this different from any other commodity. And it's
not a market environment, so you have to come up with solutions
where the Government plays a role simply because it is not a
free market and is vulnerable to the whims of companies and
countries whose interests are very much different from those of
the United States.
The Chairman. OK. Thank you very much, Senator Sessions,
and thank you all again for being here.
Let me mention two things. First of all, on this issue of
biofuels, we've put out a notice that we're going to have an
all-day conference that the committee is sponsoring, on
February 1, to look at all the different aspects of the
biofuels issue. Many stakeholders are already planning to be
here. I just wanted to mention that again.
There are quite a few Senators who came and were not able
to stay and ask questions. If they have questions, we've
advised them that their questions need to be in by the end of
business tomorrow. Then we would ask, if any of them are
directed at specific members of the panel, if you could try to
respond in a couple of weeks. We would appreciate it very much.
Thank you again for being here; it was a very useful hearing.
Senator Sessions. Thank you, Mr. Chairman.
[Whereupon, at 12 noon, the hearing was adjourned.]
APPENDIX
Responses to Additional Questions
----------
[The following questions were sent to the witnesses. When
the answers are received, they will be retained in the
committee files.]
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC, January 17, 2007.
Dr. Fatih Birol,
Chief Economist, Head of the Economic Analysis Division International
Energy Agency, Paris, France.
Dear Dr. Birol: I would like to take this opportunity to thank you
for appearing before the Senate Committee on Energy and Natural
Resources on Wednesday, January 10, 2007 to give testimony regarding
the global oil balance and its implications for the U.S. economic and
national security.
I am enclosing a list of questions which have been submitted for
the record. If possible, please respond to these questions by email to
Amanda Kelly,
amanda_kelly.energy.senate.gov, by Tuesday, February 6, 2007.
Sincerely,
Jeff Bingaman,
Chairman.
[Enclosure.]
Questions From Senator Domenici for Dr. Birol
1. Your written testimony indicates that your ``Alternative Case,''
includes savings from fuel-switching in the power sector. What types of
power did you assume we would be switching to?
2. At the hearing, you suggested that the chart showing the
relative size of reserves held by the Nation's oil companies as a
``static'' picture, and that a projection of future reserves would show
an even more dramatic difference between reserves held by state-and
investor-owned oil companies. We would appreciate any further
information and data reflecting those projections.
Questions From Senator Domenici for All Witnesses
1. At the hearing, I heard concerns expressed regarding the lack of
investment in major oil producing regions, particularly the Middle
East, by investor-owned corporations. Even in those areas that have not
been closed to private investment, political instability, and a lack of
a legal infrastructure for entering into and enforcing contracts seem
to be major obstacles. How can the U.S. convince other states that
legal and business models that encourage private investment are in
their interest as well as ours?
2. Do you have any suggestions for how investor owned companies can
position themselves to gain greater access to state-held resources? In
the past, these corporations have had expertise that was valuable to
the national oil companies. To what extent is this still true, and what
can
3. Is it inevitable that investor-owned companies are destined to
simply fulfill the role of ``service companies'' to producers of
nationally-owned resources'? How does that trend affect U.S. energy
security'?
4. The fact that an oil company is nationally-owned does not
necessarily exclude the benefits of competition and foreign
participation. An example is Norway, How can we promote that business
model in the world'?
5. Today we heard testimony that, as a result of the lack of access
by investor-owned oil companies to the world's oil ``cheapest'' oil
reserves, they are increasingly forced to pursue opportunities in older
and more technologically challenging fields. Do you have any
information regarding the level of investment on the part of investor-
owned companies that will be required for them to maintain their
current levels of production? How does the cost to those companies
required to maintain their current level of production compare to the
investment required by the world's largest nationally-owned companies?
6. Some analysts have suggested that the trend toward privatization
occurred when prices were low, and governments wanted to spread risk.
Now nationalization is occurring when prices are high, because
governments want to capture the profits. There have been proposals in
the U.S. to increase taxes on oil companies, which seems to be a
different path to the same goal. Whether the policy is direct
nationalization, or appropriation of profits through new taxes, doesn't
this increase risk to investors, reducing the industry's ability to
make new capital investment?
Questions From Senator Cantwell
question one: impact of growing chinese fossil fuel demands
The growth of China's energy economy is absolutely astounding. On a
recent trip there I learned that they are building roughly 1,000
megawatts of electrical capacity per week, most of it using outdated
coal-fired technology. In a single year the Chinese are now putting up
the equivalent electricity capacity as the entire Spanish electrical
grid.
I also learned that while China only became a net oil importer in
1993, with their accelerating rush towards private vehicles--by 2010
China is expected to have 90 times more cars than they did 1990--
Chinese exports in 2030 will match those of the U.S. today.
It is also important to note that new projections predict China
will overtake the United States as the world's largest carbon dioxide
emitter by 2009, a full decade earlier than previous projections.
I share the deep concern of several of our witnesses that if these
trends continue, the results for both global oil demand and carbon
emissions will be disastrous.
That's why I believe we must proactively engage and collaborate
with China on clean energy alternatives for both our nation's and the
world's benefit. I am proud that my home state of Washington already
has significant trade ties with China, and we view it as a vast
potential export market for our homegrown clean energy technologies.
All Witnesses:
How can the United States constructively engage China as a partner
in securing a stable global oil economy?
Senior Chinese officials I met with told they fully recognize the
economic, environmental, and security vulnerabilities of their growing
fossil fuel dependence, but said they saw few alternatives to meeting
their country's incredible demand for energy. How can we help get them
the clean energy technologies they want and we want to sell to them?
Could Chinese adoption of these technologies create the economies of
scale that would drive down the production costs of many renewable
energy technologies?
Are there likely to be other benefits of such energy collaboration
with the Chinese in terms of other U.S. regional security objectives
such as in North Korea, Iran, and the former Soviet Republics? For
example, China is the number one importer of oil and gas from Iran and
they are bound by energy deals valued at around $120 billion dollars.
Dr. Leverett, what do you think the U.S. can the United States do
to counter the Sino-Russian energy axis described in your testimony?
question two: importance of reducing u.s. oil demand
in transportation sector
It is clear that targeting our transportation system's demand for
oil is a key component of improving our nation's energy security. And
in fact most future global oil demand is linked to transportation use.
If we are going to make any difference in our increasingly dire oil
addiction, we need a multi-tiered effort that both increases our use of
alternative fuels and reduces our overall demand for fossil fuels.
Success of Vehicle Fuel Economy Standards
According to the 2002 report by the National Academies of Science,
gasoline consumption (and oil imports) would be 2.8 million barrels per
day higher if CAFE standards had not been imposed in the mid 1970s
following the Arab Oil Embargo. Unfortunately, after doubling the
average gas mileage of U.S. vehicles CAFE standards stagnated and have
not been increased since 1985.
Next week, I look forward to joining a bipartisan coalition in
reintroducing our ``Ten-in-Ten Fuel Economy Act,'' which would increase
CAFE standards for all passenger vehicles, including light trucks and
SUVs, by 10 miles per gallon over 10 years. This balanced and
technically feasible bill would save 25 million barrels of oil per day
by 2025, the same amount of oil we currently import from the Persian
Gulf.
All Witnesses:
How do you think a reduction in demand of 2.5 million
barrels per day would help improve our reliance on foreign oil
imports?
Do you believe that increasing the demand for more efficient
vehicles in the largest car market in the world might affect
the efficiency of vehicles sold in other countries?
A recent analysis by an Energy Department analysis found
that increasing CAFE standards to a combined fleet average of
35 miles per gallon could save as much as 0.5% of our Gross
Domestic Product--roughly $60 billion per year or $200 per
capita per year in the United States. Given this tremendous
benefit, why do you think it has been so difficult to increase
CAFE standards?
Mr. Wald, you testified that increasing transportation
efficiency is the single most effective step the U.S. can take
to improve its energy security. Can you expand on why you
think, from a military and national security perspective, it is
critical that we increase the overall efficiency of nation's
transportation fleet?
Mr. Wald, I also understand that the Defense Department
spends $10.6 billion annually on fuel, or 97 percent of the
federal government's use, and almost 2 percent of the entire
country's use. And that as much of 70 percent of our military
convoys in Iraq, which are increasingly at risk from roadside
bombs, are carrying fuel.
Given these facts, how could the military benefits from more
efficient vehicle technology? Would you say such technologies would
qualitatively increase our nation's military strength?
Breakthrough technologies
Do any of the witnesses see any groundbreaking or game
changing technologies that could dramatically change this bleak
future oil demand outlook?
Plug-in hybrids promise to break the historic wall between.
the transportation and electricity sector and provide new and
diverse alternative energy sources to displace gasoline and
diesel.
What role will biofuels have in replacing world oil demand?
Would it be in the national interest to pursue an all out
effect in vehicle lightweighting technologies such as the use
of composites, or better battery technologies for vehicles?
question three: mystery of high world oil prices
The projected price of oil in competitive world market has been
estimated by the Energy Department to be in the range of S 15 per
barrel. And several sources estimate the most efficient OPEC
production, in particular Saudi Arabia where the bulk of world oil
reserves are, cost as little as $2 to S5 per barrel to produce. Just
about four years ago OPEC's target world oil price was between $22 and
$28 per barrels. Now we seem content with $50 to 60 per barrel oil, and
would be happy if it stayed there for years to come!
All Witnesses:
What caused this dramatic rebaselining in the world oil
price? How come $25 per barrel was okay for everyone a few
years ago, now consuming nations would be happy to pay double
that.
What does this target price shift mean in terms of real
dollars transferred from U.S. consumers to OPEC and other major
oil producers?
Are there ways we can achieve more stability in the world
oil price? Why are there no long-term price contracts in the
oil business? It would seem be in the interest of both
producing and consuming nations to know in advance how much
they would be spending or receiving for a certain amount of
oil.
As you know, the United States manages a strategic petroleum
reserve and IEA maintains a shared strategic reserve. Have
these proven effective in securing reasonable pricing from
OPEC? Could larger reserves help stabilize world oil prices, or
at least prevent volatility or future supply shocks?
What is the value in increasing domestic oil production in
environmentally sensitive US oil fields? Isn't this just at
best a drop in the bucket in terms of global oil supply?
question four: need for collaboration among major oil consumers
rather than military action
For decades now, ensuring our nation's oil security has been
pursued by both competitive economic means and political-military
means. It now seems that the net effect of overt military action has
proven to be at most of questionable value and may even be
counterproductive and contributed to the current destabilization we see
in the world oil market.
Several witnesses have described that the geographic distribution
of the world's fossil fuel reserves means that OPEC will only gain more
leverage in setting future world energy prices. This dynamic, combined
with the fact that National Oil Companies control 80 to 90 percent of
the world's oil supplies, means to me that maybe it would be wiser to
focus on collaborative action among major oil consumers, rather than
continue to rely on military action.
All Witnesses:
What do you think the net effect of the Iraq war on the
world oil price?
What is the prospective effect of a total collapse of the
Iraq oil sector?
Could an organization of major oil consuming countries
useful or feasible as a counterweight to OPEC?
Could IEA form the nucleus of such an organization?
How can we quickly allow China and other major oil consuming
countries to participate fully in and SEA framework?
Mr. Wald:
In addition to being at odds with a collaborative approach
to oil conservation and carbon emissions reduction, do you
believe the use of US military power to guarantee oil security
feasible in world where OPEC members become nuclear weapons
states? How can one or two U.S. carriers project compelling
power against a nuclear-armed Iran?
question five: iran's role in the world oil market
The ``Oil weapon''
As was mentioned in witness testimony, Iran has threatened to use
its oil supply as a weapon to achieve its strategic objectives,
including building a nuclear energy, and probably a nuclear weapons
program.
How realistic is this threat and what can we do to counter
it?
I understand that while Iran is a major oil exporter, they
have a severe refinery shortage and must import much of their
gasoline. Is this a potential leverage point for trade
sanctions against Iran?
Iran's oil sector evolution
A recent article by Roger Stern suggests that Iran's oil export
capacity might dry up within ten to fifteen years, essentially
eliminating a vital government revenue source. This is in contrast to
the testimony today which shows the potential of expansion to pre Iran-
Iraq war levels of over 6 million barrels per day.
Do you believe the Stern analysis is credible'? Obviously
policy implications toward Iran are quite different if they are
really not going to be a major oil exporter within a couple
years.
Negotiating with Iran
Dr Leverett's testimony suggests that the US needs to strike
a ``grand bargain'' with Iran. What would be the terms of such
a bargain as you envision them?
Questions from Senator Sanders
1. For Ms. Stuntz--As I understand it, the National Security
Council's energy task force has recommended an automatic 4% yearly
increase in CAFE standards. I am interested in what factors were
considered in making the decision on what the specific yearly increase
should be.
2. For All Members of the Panel--Unfortunately, not many of you
mentioned climate change in your testimony and it only briefly came up
during the hearing. This is a major concern for me because the ongoing
burning of fossil fuels--most obviously oil--is leading to global
warming. Global warming, in turn, is increasing pressure on natural
resources across the globe, and many experts are already warning that
this pressure could lead to increased civil unrest in many parts of the
world, unrest that could lead to armed conflicts. The ``geopolitics of
oil'' should at the very least mention the ``geopolitics of global
warming.'' With this in mind, why is there not more emphasis on this
important issue in your testimony?
Question From Mr. Sessions
1. Many commentators have criticized the usage of the phrase
``energy independence,'' pointing out that it sets up an unrealistic--
if not impossible or undesirable--goal for U.S. energy policy. Given
the various priorities that we face when discussing our energy policy,
particularly when we consider the issue as a matter of national
security, how would each member of the panel articulate the over-
arching goal of our policy?
______
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC, January 17, 2007.
Mr. Robert D. Hormats,
Vice Chairman, Goldman Sachs (International), New York, NY.
Dear Mr. Hormats: I would like to take this opportunity to thank
you for appearing before the Senate Committee on Energy and Natural
Resources on Wednesday, January 10, 2007 to give testimony regarding
the global oil balance and its implications for the U.S. economic and
national security.
I am enclosing a list of questions which have been submitted for
the record. If possible, please respond to these questions by email to
Amanda Kelly,
amanda_kelly.energy.senate.gov, by Tuesday, February 6, 2007.
Sincerely,
Jeff Bingaman,
Chairman.
[Enclosure.]
Questions From Senator Domenici for All Witnesses
1. At the hearing, I heard concerns expressed regarding the lack of
investment in major oil producing regions, particularly the Middle
East, by investor-owned corporations. Even in those areas that have not
been closed to private investment, political instability, and a lack of
a legal infrastructure for entering into and enforcing contracts seem
to be major obstacles. How can the U.S. convince other states that
legal and business models that encourage private investment are in
their interest as well as ours?
2. Do you have any suggestions for how investor owned companies can
position themselves to gain greater access to state-held resources? In
the past, these corporations have had expertise that was valuable to
the national oil companies. To what extent is this still true, and what
can
3. Is it inevitable that investor-owned companies are destined to
simply fulfill the role of ``service companies'' to producers of
nationally-owned resources? How does that trend affect U.S. energy
security?
4. The fact that an oil company is nationally-owned does not
necessarily exclude the benefits of competition and foreign
participation. An example is Norway. How can we promote that business
model in the world?
5. Today we heard testimony that, as a result of the lack of access
by investor-owned oil companies to the world's oil ``cheapest'' oil
reserves, they are increasingly forced to pursue opportunities in older
and more technologically challenging fields. Do you have any
information regarding the level of investment on the part of investor-
owned companies that will be required for them to maintain their
current levels of production? How does the cost to those companies
required to maintain their current level of production compare to the
investment required by the world's largest nationally-owned companies?
6. Some analysts have suggested that the trend toward privatization
occurred when prices were low, and governments wanted to spread risk.
Now nationalization is occurring when prices are high, because
governments want to capture the profits. There have been proposals in
the U.S. to increase taxes on oil companies, which seems to be a
different path to the same goal. Whether the policy is direct
nationalization, or appropriation of profits through new taxes, doesn't
this increase risk to investors, reducing the industry's ability to
make new capital investment?
Questions From Senator Cantwell
question one: impact of growing chinese fossil fuel demands
The growth of China's energy economy is absolutely astounding. On a
recent trip there I learned that they are building roughly 1,400
megawatts of electrical capacity per week, most of it using outdated
coal-fired technology. in a single year the Chinese are now putting up
the equivalent electricity capacity as the entire Spanish electrical
grid.
I also learned that while China only became a net oil importer in
1993, with their accelerating rush towards private vehicles--by 2010
China is expected to have 90 times more cars than they did 1990--
Chinese exports in 2030 will match those of the U.S. today.
It is also important to note that new projections predict China
will overtake the United States as the world's largest carbon dioxide
emitter by 2009, a full decade earlier than previous projections.
share the deep concern of several of our witnesses that if these
trends continue, the results for both global oil demand and carbon
emissions will be disastrous.
That's why I believe we must proactively engage and collaborate
with China on clean energy alternatives for both our nation's and the
world's benefit. I am proud that my home state of Washington already
has significant trade ties with China, and we view it as a vast
potential export market for our homegrown clean energy technologies.
All Witnesses:
How can the United States constructively engage China as a partner
in securing a stable global oil economy?
Senior Chinese officials I met with told they fully recognize the
economic, environmental, and security vulnerabilities of their growing
fossil fuel dependence, but said they saw few alternatives to meeting
their country's incredible demand for energy. How can we help get them
the clean energy technologies they want and we want to sell to them?
Could Chinese adoption of these technologies create the economies of
scale that would drive down the production costs of many renewable
energy technologies?
Are there likely to be other benefits of such energy collaboration
with the Chinese in terms of other U.S. regional security objectives
such as in North Korea, Iran, and the former Soviet Republics? For
example, China is the number one importer of oil and gas from Iran and
they are bound by energy deals valued at around $120 billion dollars.
Dr. Leverett, what do you think the U.S. can the United States do
to counter the Sino-Russian energy axis described in your testimony?
question two: importance of reducing u.s. oil demand
in transportation sector
It is clear that targeting our transportation system's demand for
oil is a key component of improving our nation's energy security. And
in fact most future global oil demand is linked to transportation use.
If we are going to make any difference in our increasingly dire oil
addiction, we need a multi-tiered effort that both increases our use of
alternative fuels and reduces our overall demand for fossil fuels.
Success of Vehicle Fuel Economy Standards
According to the 2002 report by the National Academies of Science,
gasoline consumption (and oil imports) would be 2.8 million barrels per
day higher if CAFE standards had not been imposed in the mid 1970s
following the Arab Oil Embargo. Unfortunately, after doubling the
average gas mileage of U.S. vehicles, CAFE standards stagnated and have
not been increased since 1985.
Next week, I look forward to joining a bipartisan coalition in
reintroducing our ``Ten-in-Ten Fuel Economy Act,'' which would increase
CAFE standards for all passenger vehicles, including light trucks and
SUVs, by 10 miles per gallon over 10 years. This balanced and
technically feasible bill would save 2.5 million barrels of oil per day
by 2025, the same amount of oil we currently import from the Persian
Gulf.
All Witnesses:
How do you think a reduction in demand of 2.5 million bands
per day would help improve our reliance on foreign oil imports?
Do you believe that increasing the demand for more efficient
vehicles in the largest car market in the world might affect
the efficiency of vehicles sold in other countries?
A recent analysis by an Energy Department analysis found
that increasing CAFE standards to a combined fleet average of
35 miles per gallon could save as much as 0.5% of our Gross
Domestic Product--roughly $60 billion per year or $200 per
capita per year in the United States. Given this tremendous
benefit, why do you think it has been so difficult to increase
CAFE standards?
Mr. Wald, you testified that increasing transportation
efficiency is the single most effective step the U.S. can take
to improve its energy security. Can you expand on why you
think, from a military and national security perspective, it is
critical that we increase the overall efficiency of nation's
transportation fleet?
Mr. Wald, I also understand that the Defense Department
spends $10.6 billion annually on fuel, or 97 percent of the
federal government's use, and almost 2 percent of the entire
country's use. And that as much of 70 percent of our military
convoys in Iraq, which are increasingly at risk from roadside
bombs, are carrying fuel.
Given these facts, how could the military benefits from more
efficient vehicle technology? Would you say such technologies would
qualitatively increase our nation's military strength?
Breakthrough technologies
Do any of the witnesses see any groundbreaking or game
changing technologies that could dramatically change this bleak
future oil demand outlook?
Plug-in hybrids promise to break the historic wall between
the transportation and electricity sector and provide new and
diverse alternative energy sources to displace gasoline and
diesel.
What role will biofuels have in replacing world oil demand?
Would it be in the national interest to pursue an all out
effect in vehicle lightweighting technologies such as the use
of composites, or better battery technologies for vehicles?
question three: mystery of high world oil prices
The projected price of oil in competitive world market has been
estimated by the Energy Department to be in the range of $15 per
barrel. And several sources estimate the most efficient OPEC
production, in particular Saudi Arabia where the bulk of world oil
reserves are, cost as little as $2 to $5 per barrel to produce. Just
about four years ago OPEC's target world oil price was between $22 and
$28 per barrels. Now we seem content with $50 to 60 per barrel oil, and
would be happy if it stayed there for years to come!
All Witnesses:
What caused this dramatic rebaselining in the world oil
price? How come $25 per ban-el was okay for everyone a few
years ago, now consuming nations would be happy to pay double
that.
What does this target price shift mean in terTns of real
dollars transferred from U.S. consumers to OPEC and other major
oil producers?
Are there ways we can achieve more stability in the world
oil price? Why are there no long-term price contracts in the
oil business? It would seem be in the interest of both
producing and consuming nations to know in advance how much
they would be spending or receiving for a certain amount of
oil.
As you know, the United States manages a strategic petroleum
reserve and IEA maintains a shared strategic reserve. Have
these proven effective in securing reasonable pricing from
OPEC? Could larger reserves help stabilize world oil prices, or
at least prevent volatility or future supply shocks?
What is the value in increasing domestic oil production in
environmentally sensitive US oil fields? Isn't this just at
best a drop in the bucket in terms of global oil supply?
question four: need for collaboration among major oil consumers
rather than military action
For decades now, ensuring our nation's oil security has been
pursued by both competitive economic means and political-military
means. It now seems that the net effect of overt military action has
proven to be at most of questionable value, and may even be
counterproductive and contributed to the current destabilization we see
in the world oil market.
Several witnesses have described that the geographic distribution
of the world's fossil fuel reserves means that OPEC will only gain more
leverage in setting future world energy prices. This dynamic, combined
with the fact that National Oil Companies control 80 to 90 percent of
the world's oil supplies, means to me that maybe it would be wiser to
focus on collaborative action among major oil consumers, rather than
continue to rely on military action.
All Witnesses:
What do you think the net effect of the Iraq war on the
world oil price?
What is the prospective effect of a total collapse of the
Iraq oil sector?
Could an organization of major oil consuming countries
useful or feasible as a counterweight to OPEC?
Could IEA form the nucleus of such an organization?
How can we quickly allow China and other major oil consuming
countries to participate fully in andMA framework?
Mr. Wald:
In addition to being at odds with a collaborative approach
to oil conservation and carbon emissions reduction, do you
believe the use of US military power to guarantee oil security
feasible in world where OPEC members become nuclear weapons
states? How can one or two U.S. carriers project compelling
power against a nuclear-armed Iran?
question five: iran's role in the world oil market
The ``Oil weapon''
As was mentioned in witness testimony, Iran has threatened to use
its oil supply as a weapon to achieve its strategic objectives,
including building a nuclear energy, and probably a nuclear weapons
program.
How realistic is this threat and what can we do to counter
it?
I understand that while Iran is a major oil exporter, they
have a severe refinery shortage and must import much of their
gasoline. Is this a potential leverage point for trade
sanctions against -Iran?
Iran's oil sector evolution
A recent article by Roger Stern suggests that Iran's oil export
capacity might dry up within ten to fifteen years, essentially
eliminating a vital government revenue source. This is in contrast to
the testimony today which shows the potential of expansion to pre Iran-
Iraq war levels of over 6 million barrels per day.
Do you believe the Stem analysis is credible? Obviously
policy implications toward Iran are quite different if they are
really not going to be a major oil exporter within a couple
years.
Negotiating with Iran
Dr Leverett's testimony suggests that the US needs to strike
a ``grand bargain'' with Iran. What would be the terms of such
a bargain as you envision them?
questions from senator sanders
1. For Ms. Stunt--As I understand it, the National Security
Council's energy task force has recommended an automatic 4% yearly
increase in CAFE standards. I am interested in what factors were
considered in making the decision on what the specific yearly increase
should be.
2. For All Members of the Panel--Unfortunately, not many of you
mentioned climate change in your testimony and it only briefly came up
during the hearing. This is a major concern for me because the ongoing
burning of fossil fuels--most obviously oil--is leading to global
warming. Global warming, in turn, is increasing pressure on natural
resources across the globe, and many experts are already warning that
this pressure could lead to increased civil unrest in many parts of the
world, unrest that could lead to armed conflicts. The ``geopolitics of
oil'' should at the very least mention the ``geopolitics of global
warming.'' With this in mind, why is there not more emphasis on this
important issue in your testimony?
question from senator sessions
1. Many commentators have criticized the usage of the phrase
``energy independence,'' pointing out that it sets up an unrealistic--
if not impossible or undesirable--goal for U.S. energy policy. Given
the various priorities that we face when discussing our energy policy,
particularly when we consider the issue as a matter of national
security, how would each member of the panel articulate the over-
arching goal of our policy?
______
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC, January 17, 2007.
Dr. Flynt Leverett,
Senior Fellow, Director, Geopolitics of Energy Initiative, New America
Foundation, Washington, DC.
Dear Dr. Leverett: I would like to take this opportunity to thank
you for appearing before the Senate Committee on Energy and Natural
Resources on Wednesday, January 10, 2007 to give testimony regarding
the global oil balance and its implications for the U.S. economic and
national security.
I am enclosing a list of questions which have been submitted for
the record. If possible, please respond to these questions by email to
Amanda Kelly,
amanda_kelly.energy.senate.gov, by Tuesday, February 6, 2007.
Sincerely,
Jeff Bingaman,
Chairman.
[Enclosure.]
Questions for All Witnesses
1. At the hearing, I heard concerns expressed regarding the lack of
investment in major oil producing regions, particularly the Middle
East, by investor-owned corporations. Even in those areas that have not
been closed to private investment, political instability, and a lack of
a legal infrastructure for entering into and enforcing contracts seem
to be major obstacles. How can the U.S. convince other states that
legal and business models that encourage private investment are in
their interest as well as ours?
2. Do you have any suggestions for how investor owned companies can
position themselves to gain greater access to state-held resources? In
the past, these corporations have had expertise that was valuable to
the national oil companies. To what extent is this still true, and what
can
3. is it inevitable that investor-owned companies are destined to
simply fulfill the role of ``service companies'' to producers of
nationally-owned resources? How does that trend affect U.S. energy
security?
4. The fact that an oil company is nationally-owned does not
necessarily exclude the benefits of competition and foreign
participation. An example is Norway. How can we promote that business
model in the world?
5. Today we heard testimony that, as a result of the lack of access
by investor-owned oil companies to the world's oil ``cheapest'' oil
reserves, they are increasingly forced to pursue opportunities in older
and more technologically challenging fields. Do you have any
information regarding the level of investment on the part of investor-
owned companies that will be required for them to maintain their
current levels of production? How does the cost to those companies
required to maintain their current level of production compare to the
investment required by the world's largest nationally-owned companies?
6. Some analysts have suggested that the trend toward privatization
occurred when prices were low, and governments wanted to spread risk.
Now nationalization is occurring when prices are high, because
governments want to capture the profits. There have been proposals in
the U.S. to increase taxes on oil companies, which seems to be a
different path to the same goal. Whether the policy is direct
nationalization, or appropriation of profits through new taxes, doesn't
this increase risk to investors, reducing the industry's ability to
make new capital investment?
Question From Senator Cantwell
question one: impact of growing chinese fossil fuel demands
The growth of China's energy economy is absolutely astounding. On a
recent trip there I learned that they are building roughly 1,000
megawatts of electrical capacity per week, most of it using outdated
coal-fired technology. in a single year the Chinese are now putting up
the equivalent electricity capacity as the entire Spanish electrical
grid.
I also learned that while China only became a net oil importer in
1993, with their accelerating rush towards private vehicles--by 2010
China is expected to have 90 times more cars than they did 1990--
Chinese exports in 2030 will match those of the U.S. today.
It is also important to note that new projections predict China
will overtake the United States as the world's largest carbon dioxide
emitter by 2009, a full decade earlier than previous projections.
I share the deep concern of several of our witnesses that if these
trends continue, the results for both global oil demand and carbon
emissions will be disastrous.
That's why I believe we must proactively engage and collaborate
with China on clean energy alternatives for both our nation's and the
world's benefit. I am proud that my home state of Washington already
has significant trade ties with China, and we view it as a vast
potential export market for our homegrown clean energy technologies.
All Witnesses:
How can the United States constructively engage China as a partner
in securing a stable global oil economy?
Senior Chinese officials I met with told they fully recognize the
economic, environmental, and security vulnerabilities of their growing
fossil fuel dependence, but said they saw few alternatives to meeting
their country's incredible demand for energy. How can we help get them
the clean energy technologies they want and we want to sell to them?
Could Chinese adoption of these technologies create the economies of
scale that would drive down the production costs of many renewable
energy technologies?
Are there likely to be other benefits of such energy collaboration
with the Chinese in terms of other U.S. regional security objectives
such as in North Korea, Iran, and the former Soviet Republics? For
example, China is the number one importer of oil and gas from Iran and
they are bound by energy deals valued at around $120 billion dollars.
Dr. Leverett, what do you think the U.S. can the United States do
to counter the Sino-Russian energy axis described in your testimony?
question two: importance of reducing u.s. oil demand
in transportation sector
It is clear that targeting our transportation system's demand for
oil is a key component of improving our nation's energy security. And
in fact most future global oil demand is linked to transportation use.
If we are going to make any difference in our increasingly dire oil
addiction, we need a multi-tiered effort that both increases our use of
alternative fuels and reduces our overall demand for fossil fuels.
Success of Vehicle Fuel Economy Standards
According to the 2002 report by the National Academies of Science,
gasoline consumption (and oil imports) would be 28 million barrels per
day higher if CAFE standards had not been imposed in the mid 1970s
following the Arab Oil Embargo. Unfortunately, after doubling the
average gas mileage of U.S. vehicles, CAFE standards stagnated and have
not been increased since 1985.
Next week, I look forward to joining a bipartisan coalition in
reintroducing our ``Ten-in-Ten Fuel Economy Act,'' which would increase
CAFE standards for all passenger vehicles, including light trucks and
SU-Vs, by 10 miles per gallon over 10 years. This balanced and
technically feasible bill would save 2.5 million barrels of oil per day
by 2025, the same amount of oil we currently import from the Persian
Gulf.
All Witnesses:
How do you think a reduction in demand of 2.5 million
barrels per day would help improve our reliance on foreign oil
imports?
Do you believe that increasing the demand for more efficient
vehicles in the largest car market in the world might affect
the efficiency of vehicles sold in other countries?
A recent analysis by an Energy Department analysis found
that increasing CAFE standards to a combined fleet average of
35 miles per gallon could save as much as 0.5% of our Gross
Domestic Product--roughly $60 billion per year or $200 per
capita per year in the United States. Given this tremendous
benefit, why do you think it has been so difficult to increase
CAFE standards?
Mr. Wald, you testified that increasing transportation
efficiency is the single most effective step the U.S. can take
to improve its energy security. Can you expand on why you
think, from a military and national security perspective, it is
critical that we increase the overall efficiency of nation's
transportation fleet?
Mr. Wald, I also understand that the Defense Department
spends $10.6 billion annually on fuel, or 97 percent of the
federal government's use, and almost 2 percent of the entire
country's use. And that as much of 70 percent of our military
convoys in Iraq, which are increasingly at risk from roadside
bombs, are carrying fuel.
Given these facts, how could the military benefits from more
efficient vehicle technology? Would you say such technologies would
qualitatively increase our nation's military strength?
Breakthrough technologies
Do any of the witnesses see any groundbreaking or game
changing technologies that could dramatically change this bleak
future oil demand outlook?
Plug-in hybrids promise to break the historic wall between
the transportation and electricity sector and provide new and
diverse alternative energy sources to displace gasoline and
diesel.
What role will biofuels have in replacing world oil demand?
Would it be in the national interest to pursue an all out
effect in vehicle lightweighting technologies such as the use
of composites, or better battery technologies for vehicles?
question three: mystery of high world oil prices
The projected price of oil in competitive world market has been
estimated by the Energy Department to be in the range of $15 per
barrel. And several sources estimate the most efficient OPEC
production, in particular Saudi Arabia where the bulk of world oil
reserves are, cost as little as $2 to $5 per barrel to produce. Just
about four years ago OPEC's target world oil price was between $22 and
$28 per barrels. Now we seem content with $50 to 60 per barrel oil, and
would be happy if it stayed there for years to come!
All Witnesses:
What caused this dramatic rebaselining in the world oil
price? How come $25 per barrel was okay for everyone a few
years ago, now consuming nations would be happy to pay double
that.
What does this target price shift mean in terms of real
dollars transferred from U.S. consumers to OPEC and other major
oil producers?
Are there ways we can achieve more stability in the world
oil price? Why are there no long-term price contracts in the
oil business? It would seem be in the interest of both
producing and consuming nations to know in advance how much
they would be spending or receiving for a certain amount of
oil.
As you know, the United States manages a strategic petroleum
reserve and IEA maintains a shared strategic reserve. Have
these proven effective in securing reasonable pricing from
OPEC? Could larger reserves help stabilize world oil prices, or
at least prevent volatility or future supply shocks?
What is the value in increasing domestic oil production in
environmentally sensitive US oil fields? Isn't this just at
best a drop in the bucket in terms of global oil supply?
question four: need for collaboration among major oil consumers
rather than military action
For decades now, ensuring our nation's oil security has been
pursued by both competitive economic means and political-military
means. It now seems that the net effect of overt military action has
proven to be at most of questionable value, and may even be
counterproductive and contributed to the current destabilization we see
in the world oil market.
Several witnesses have described that the geographic distribution
of the world's fossil fuel reserves means that OPEC will only gain more
leverage in setting future world energy prices. This dynamic, combined
with the fact that National Oil Companies control 80 to 90 percent of
the world's oil supplies means to me that maybe it would be wiser to
focus on collaborative action among major oil consumers, rather than
continue to rely on military action.
All Witnesses:
What do you think the net effect of the Iraq war on the
world oil price?
What is the prospective effect of a total collapse of the
Iraq oil sector?
Could an organization of major oil consuming countries
useful or feasible as a counterweight to OPEC?
Could IEA form the nucleus of such an organization?
How can we quickly allow China and other major oil consuming
countries to participate fully in and IEA framework?
Mr. Wald:
In addition to being at odds with a collaborative approach
to oil conservation and carbon emissions reduction, do you
believe the use of US military power to guarantee oil security
feasible in world where OPEC members become nuclear weapons
states? How can one or two U.S. carriers project compelling
power against a nuclear---armed Iran?
question five: iran's role in the world oil market
The ``Oil weapon''
As was mentioned in witness testimony, Iran has threatened to use
its oil supply as a weapon to achieve its strategic objectives
including building a nuclear energy, and probably a nuclear weapons
program.
How realistic is this threat and what can we do to counter
it?
I understand that while Iran is a major oil exporter, they
have a severe refinery shortage arid must import much of their
gasoline. Is this a potential leverage point for trade
sanctions against Iran?
Iran's oil sector evolution
A recent article by Roger Stern suggests that Iran's oil export
capacity might dry up within ten to fifteen years, essentially
eliminating a vital government revenue source. This is in contrast to
the testimony today which shows the potential of expansion to pre Iran-
Traq war levels of over 6 million barrels per day.
Do you believe the Stern analysis is credible? Obviously
policy implications toward Iran are quite different if they are
really not going to be a major oil exporter within a couple
years.
Negotiating with Iran
Dr Leverett's testimony suggests that the US needs to strike
a ``grand bargain'' with Iran. What would be the terms of such
a bargain as you envision them?
questions from senator sanders
1. For Ms. Stuntz--As I understand it, the National Security
Council's energy task force has recommended an automatic 4% yearly
increase in CAFE standards. I am interested in what factors were
considered in making the decision on what the specific yearly increase
should be.
2. For All Members of the Panel--Unfortunately, not many of you
mentioned climate change in your testimony and it only briefly came up
during the hearing. This is a major concern for me because the ongoing
burning of fossil fuels--most obviously oil--is leading to global
warming. Global warming, in turn, is increasing pressure on natural
resources across the globe, and many experts are already warning that
this pressure could lead to increased civil unrest in many parts of the
world, unrest that could lead to armed conflicts. The ``geopolitics of
oil'' should at the very least mention the ``geopolitics of global
warming.'' With this in mind, why is there not more emphasis on this
important issue in your testimony?
question from senator sessions
1. Many commentators have criticized the usage of the phrase
``energy independence,'' pointing out that it sets up an unrealistic--
if not impossible or undesirable--goal for U.S. energy policy. Given
the various priorities that we face when discussing our energy policy,
particularly when we consider the issue as a matter of national
security, how would each member of the panel articulate the over-
arching goal of our policy?
______
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC, January 17, 2007.
General Charles F. Wald,
USAF (Ret.), Bipartisan Policy Center, Washington, DC.
Dear Gen. Wald: I would like to take this opportunity to thank you
for appearing before the Senate Committee on Energy and Natural
Resources on Wednesday, January 10, 2007 to give testimony regarding
the global oil balance and its implications for the U.S. economic and
national security.
I am enclosing a list of questions which have been submitted for
the record. If possible, please respond to these questions by email to
Amanda Kelly,
amanda_kelly.energy.senate.gov, by Tuesday, February 6, 2007.
Sincerely,
Jeff Bingaman,
Chairman.
[Enclosure.]
Questions From Senator Domenici for All Witnesses
1. At the hearing, I heard concerns expressed regarding the lack of
investment in major oil producing regions, particularly the Middle
East, by investor-owned corporations. Even in those areas that have not
been closed to private investment, political instability, and a lack of
a legal infrastructure for entering into and enforcing contracts seem
to be major obstacles. How can the U.S. convince other states that
legal and business models that encourage private investment are in
their interest as well as ours?
2. Do you have any suggestions for how investor owned companies can
position themselves to gain greater access to state-held resources? In
the past, these corporations have had expertise that was valuable to
the national oil companies. To what extent is this still true, and what
can
3. Is it inevitable that investor-owned companies are destined to
simply fulfill the role of ``service companies'' to producers of
nationally-owned resources'? How does that trend affect U.S. energy
security'?
4. The fact that an oil company is nationally-owned does not
necessarily exclude the benefits of competition and foreign
participation. An example is Norway, How can we promote that business
model in the world'?
5. Today we heard testimony that, as a result of the lack of access
by investor-owned oil companies to the world's oil ``cheapest'' oil
reserves, they are increasingly forced to pursue opportunities in older
and more technologically challenging fields. Do you have any
information regarding the level of investment on the part of investor-
owned companies that will be required for them to maintain their
current levels of production? How does the cost to those companies
required to maintain their current level of production compare to the
investment required by the world's largest nationally-owned companies?
6. Some analysts have suggested that the trend toward privatization
occurred when prices were low, and governments wanted to spread risk.
Now nationalization is occurring when prices are high, because
governments want to capture the profits. There have been proposals in
the U.S. to increase taxes on oil companies, which seems to be a
different path to the same goal. Whether the policy is direct
nationalization, or appropriation of profits through new taxes, doesn't
this increase risk to investors, reducing the industry's ability to
make new capital investment?
Questions From Senator Cantwell
question one: impact of growing chinese fossil fuel demands
The growth of China's energy economy is absolutely astounding. On a
recent trip there I learned that they are building roughly 1,000
megawatts of electrical capacity per week, most of it using outdated
coal-fired technology. In a single year the Chinese are now putting up
the equivalent electricity capacity as the entire Spanish electrical
grid.
I also learned that while China only became a net oil importer in
1993, with their accelerating rush towards private vehicles--by 2010
China is expected to have 90 times more cars than they did 1990--
Chinese exports in 2030 will match those of the U.S. today.
It is also important to note that new projections predict China
will overtake the United States as the world's largest carbon dioxide
emitter by 2009, a full decade earlier than previous projections.
I share the deep concern of several of our witnesses that if these
trends continue, the results for both global oil demand and carbon
emissions will be disastrous.
That's why I believe we must proactively engage and collaborate
with China on clean energy alternatives for both our nation's and the
world's benefit. I am proud that my home state of Washington already
has significant trade ties with China, and we view it as a vast
potential export market for our homegrown clean energy technologies.
All Witnesses:
How can the United States constructively engage China as a partner
in securing a stable global oil economy?
Senior Chinese officials I met with told they fully recognize the
economic, environmental, and security vulnerabilities of their growing
fossil fuel dependence, but said they saw few alternatives to meeting
their country's incredible demand for energy. How can we help get them
the clean energy technologies they want and we want to sell to them?
Could Chinese adoption of these technologies create the economies of
scale that would drive down the production costs of many renewable
energy technologies?
Are there likely to be other benefits of such energy collaboration
with the Chinese in terms of other U.S. regional security objectives
such as in North Korea, Iran, and the former Soviet Republics? For
example, China is the number one importer of oil and gas from Iran and
they are bound by energy deals valued at around $120 billion dollars.
Dr. Leverett, what do you think the U.S. can the United States do
to counter the Sino-Russian energy axis described in your testimony?
question two: importance of reducing u.s. oil demand
in transportation sector
It is clear that targeting our transportation system's demand for
oil is a key component of improving our nation's energy security. And
in fact most future global oil demand is linked to transportation use.
If we are going to make any difference in our increasingly dire oil
addiction, we need a multi-tiered effort that both increases our use of
alternative fuels and reduces our overall demand for fossil fuels.
Success of Vehicle Fuel Economy Standards
According to the 2002 report by the National Academies of Science,
gasoline consumption (and oil imports) would be 2.8 million barrels per
day higher if CAFE standards had not been imposed in the mid 1970s
following the Arab Oil Embargo. Unfortunately, after doubling the
average gas mileage of U.S. vehicles CAFE standards stagnated and have
not been increased since 1985.
Next week, I look forward to joining a bipartisan coalition in
reintroducing our ``Ten-in-Ten Fuel Economy Act,'' which would increase
CAFE standards for all passenger vehicles, including light trucks and
SUVs, by 10 miles per gallon over 10 years. This balanced and
technically feasible bill would save 25 million barrels of oil per day
by 2025, the same amount of oil we currently import from the Persian
Gulf.
All Witnesses:
How do you think a reduction in demand of 2.5 million
barrels per day would help improve our reliance on foreign oil
imports?
Do you believe that increasing the demand for more efficient
vehicles in the largest car market in the world might affect
the efficiency of vehicles sold in other countries?
A recent analysis by an Energy Department analysis found
that increasing CAFE standards to a combined fleet average of
35 miles per gallon could save as much as 0.5% of our Gross
Domestic Product--roughly $60 billion per year or $200 per
capita per year in the United States. Given this tremendous
benefit, why do you think it has been so difficult to increase
CAFE standards?
Mr. Wald, you testified that increasing transportation
efficiency is the single most effective step the U.S. can take
to improve its energy security. Can you expand on why you
think, from a military and national security perspective, it is
critical that we increase the overall efficiency of nation's
transportation fleet?
Mr. Wald, I also understand that the Defense Department
spends $10.6 billion annually on fuel, or 97 percent of the
federal government's use, and almost 2 percent of the entire
country's use. And that as much of 70 percent of our military
convoys in Iraq, which are increasingly at risk from roadside
bombs, are carrying fuel.
Given these facts, how could the military benefits from more
efficient vehicle technology? Would you say such technologies would
qualitatively increase our nation's military strength?
Breakthrough technologies
Do any of the witnesses see any groundbreaking or game
changing technologies that could dramatically change this bleak
future oil demand outlook?
Plug-in hybrids promise to break the historic wall between.
the transportation and electricity sector and provide new and
diverse alternative energy sources to displace gasoline and
diesel.
What role will biofuels have in replacing world oil demand?
Would it be in the national interest to pursue an all out
effect in vehicle lightweighting technologies such as the use
of composites, or better battery technologies for vehicles?
question three: mystery of high world oil prices
The projected price of oil in competitive world market has been
estimated by the Energy Department to be in the range of S 15 per
barrel. And several sources estimate the most efficient OPEC
production, in particular Saudi Arabia where the bulk of world oil
reserves are, cost as little as $2 to S5 per barrel to produce. Just
about four years ago OPEC's target world oil price was between $22 and
$28 per barrels. Now we seem content with $50 to 60 per barrel oil, and
would be happy if it stayed there for years to come!
All Witnesses:
What caused this dramatic rebaselining in the world oil
price? How come $25 per barrel was okay for everyone a few
years ago, now consuming nations would be happy to pay double
that.
What does this target price shift mean in terms of real
dollars transferred from U.S. consumers to OPEC and other major
oil producers?
Are there ways we can achieve more stability in the world
oil price? Why are there no long-term price contracts in the
oil business? It would seem be in the interest of both
producing and consuming nations to know in advance how much
they would be spending or receiving for a certain amount of
oil.
As you know, the United States manages a strategic petroleum
reserve and IEA maintains a shared strategic reserve. Have
these proven effective in securing reasonable pricing from
OPEC? Could larger reserves help stabilize world oil prices, or
at least prevent volatility or future supply shocks?
What is the value in increasing domestic oil production in
environmentally sensitive US oil fields? Isn't this just at
best a drop in the bucket in terms of global oil supply?
question four: need for collaboration among major oil consumers
rather than military action
For decades now, ensuring our nation's oil security has been
pursued by both competitive economic means and political-military
means. It now seems that the net effect of overt military action has
proven to be at most of questionable value and may even be
counterproductive and contributed to the current destabilization we see
in the world oil market.
Several witnesses have described that the geographic distribution
of the world's fossil fuel reserves means that OPEC will only gain more
leverage in setting future world energy prices. This dynamic, combined
with the fact that National Oil Companies control 80 to 90 percent of
the world's oil supplies, means to me that maybe it would be wiser to
focus on collaborative action among major oil consumers, rather than
continue to rely on military action.
All Witnesses:
What do you think the net effect of the Iraq war on the
world oil price?
What is the prospective effect of a total collapse of the
Iraq oil sector?
Could an organization of major oil consuming countries
useful or feasible as a counterweight to OPEC?
Could IEA form the nucleus of such an organization?
How can we quickly allow China and other major oil consuming
countries to participate fully in and SEA framework?
Mr. Wald:
In addition to being at odds with a collaborative approach
to oil conservation and carbon emissions reduction, do you
believe the use of US military power to guarantee oil security
feasible in world where OPEC members become nuclear weapons
states? How can one or two U.S. carriers project compelling
power against a nuclear-armed Iran?
question five: iran's role in the world oil market
The ``Oil weapon''
As was mentioned in witness testimony, Iran has threatened to use
its oil supply as a weapon to achieve its strategic objectives,
including building a nuclear energy, and probably a nuclear weapons
program.
How realistic is this threat and what can we do to counter
it?
I understand that while Iran is a major oil exporter, they
have a severe refinery shortage and must import much of their
gasoline. Is this a potential leverage point for trade
sanctions against Iran?
Iran's oil sector evolution
A recent article by Roger Stern suggests that Iran's oil export
capacity might dry up within ten to fifteen years, essentially
eliminating a vital government revenue source. This is in contrast to
the testimony today which shows the potential of expansion to pre Iran-
Iraq war levels of over 6 million barrels per day.
Do you believe the Stern analysis is credible'? Obviously
policy implications toward Iran are quite different if they are
really not going to be a major oil exporter within a couple
years.
Negotiating with Iran
Dr Leverett's testimony suggests that the US needs to strike
a ``grand bargain'' with Iran. What would be the terms of such
a bargain as you envision them?
Questions from Senator Sanders
1. For Ms. Stuntz--As I understand it, the National Security
Council's energy task force has recommended an automatic 4% yearly
increase in CAFE standards. I am interested in what factors were
considered in making the decision on what the specific yearly increase
should be.
2. For All Members of the Panel--Unfortunately, not many of you
mentioned climate change in your testimony and it only briefly came up
during the hearing. This is a major concern for me because the ongoing
burning of fossil fuels--most obviously oil--is leading to global
warming. Global warming, in turn, is increasing pressure on natural
resources across the globe, and many experts are already warning that
this pressure could lead to increased civil unrest in many parts of the
world, unrest that could lead to armed conflicts. The ``geopolitics of
oil'' should at the very least mention the ``geopolitics of global
warming.'' With this in mind, why is there not more emphasis on this
important issue in your testimony?
Question From Mr. Sessions
1. Many commentators have criticized the usage of the phrase
``energy independence,'' pointing out that it sets up an unrealistic--
if not impossible or undesirable--goal for U.S. energy policy. Given
the various priorities that we face when discussing our energy policy,
particularly when we consider the issue as a matter of national
security, how would each member of the panel articulate the over-
arching goal of our policy?
______
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC, January 17, 2007.
Ms. Linda G. Stuntz,
Partner, Stuntz, Davis & Staffier, PC, Washington, DC.
Dear Ms. Stuntz: I would like to take this opportunity to thank you
for appearing before the Senate Committee on Energy and Natural
Resources on Wednesday, January 10, 2007 to give testimony regarding
the global oil balance and its implications for the U.S. economic and
national security.
I am enclosing a list of questions which have been submitted for
the record. If possible, please respond to these questions by email to
Amanda Kelly,
amanda_kelly.energy.senate.gov, by Tuesday, February 6, 2007.
Sincerely,
Jeff Bingaman,
Chairman.
[Enclosure.]
Question From Senator Domenici for Ms. Stuntz
. There has been a great deal of attention paid to the so-called ``
'98-'99'' contracts for oil produced in the Gulf of Mexico. These
contracts did not contain price ceilings for royalty relief. This was
clearly an expensive mistake, but the language is in valid contracts
with multiple oil companies, some of which are owned by foreign
entities. Some in the other body have proposals that would attempt to
alter these contracts, contrary to our contract law. Do we run the risk
of setting a bad example for other countries if we don't respect the
sanctity of our own government's contracts?
Questions From Senator Domenici for All Witnesses
1. At the hearing, I heard concerns expressed regarding the lack of
investment in major oil producing regions, particularly the Middle
East, by investor-owned corporations. Even in those areas that have not
been closed to private investment, political instability, and a lack of
a legal infrastructure for entering into and enforcing contracts seem
to be major obstacles. How can the U.S. convince other states that
legal and business models that encourage private investment are in
their interest as well as ours?
2. Do you have any suggestions for how investor owned companies can
position themselves to gain greater access to state-held resources? In
the past, these corporations have had expertise that was valuable to
the national oil companies. To what extent is this still true, and what
can
3. Is it inevitable that investor-owned companies are destined to
simply fulfill the role of ``service companies'' to producers of
nationally-owned resources'? How does that trend affect U.S. energy
security'?
4. The fact that an oil company is nationally-owned does not
necessarily exclude the benefits of competition and foreign
participation. An example is Norway, How can we promote that business
model in the world'?
5. Today we heard testimony that, as a result of the lack of access
by investor-owned oil companies to the world's oil ``cheapest'' oil
reserves, they are increasingly forced to pursue opportunities in older
and more technologically challenging fields. Do you have any
information regarding the level of investment on the part of investor-
owned companies that will be required for them to maintain their
current levels of production? How does the cost to those companies
required to maintain their current level of production compare to the
investment required by the world's largest nationally-owned companies?
6. Some analysts have suggested that the trend toward privatization
occurred when prices were low, and governments wanted to spread risk.
Now nationalization is occurring when prices are high, because
governments want to capture the profits. There have been proposals in
the U.S. to increase taxes on oil companies, which seems to be a
different path to the same goal. Whether the policy is direct
nationalization, or appropriation of profits through new taxes, doesn't
this increase risk to investors, reducing the industry's ability to
make new capital investment?
Questions From Senator Cantwell
question one: impact of growing chinese fossil fuel demands
The growth of China's energy economy is absolutely astounding. On a
recent trip there I learned that they are building roughly 1,000
megawatts of electrical capacity per week, most of it using outdated
coal-fired technology. In a single year the Chinese are now putting up
the equivalent electricity capacity as the entire Spanish electrical
grid.
I also learned that while China only became a net oil importer in
1993, with their accelerating rush towards private vehicles--by 2010
China is expected to have 90 times more cars than they did 1990--
Chinese exports in 2030 will match those of the U.S. today.
It is also important to note that new projections predict China
will overtake the United States as the world's largest carbon dioxide
emitter by 2009, a full decade earlier than previous projections.
I share the deep concern of several of our witnesses that if these
trends continue, the results for both global oil demand and carbon
emissions will be disastrous.
That's why I believe we must proactively engage and collaborate
with China on clean energy alternatives for both our nation's and the
world's benefit. I am proud that my home state of Washington already
has significant trade ties with China, and we view it as a vast
potential export market for our homegrown clean energy technologies.
All Witnesses:
How can the United States constructively engage China as a partner
in securing a stable global oil economy?
Senior Chinese officials I met with told they fully recognize the
economic, environmental, and security vulnerabilities of their growing
fossil fuel dependence, but said they saw few alternatives to meeting
their country's incredible demand for energy. How can we help get them
the clean energy technologies they want and we want to sell to them?
Could Chinese adoption of these technologies create the economies of
scale that would drive down the production costs of many renewable
energy technologies?
Are there likely to be other benefits of such energy collaboration
with the Chinese in terms of other U.S. regional security objectives
such as in North Korea, Iran, and the former Soviet Republics? For
example, China is the number one importer of oil and gas from Iran and
they are bound by energy deals valued at around $120 billion dollars.
Dr. Leverett, what do you think the U.S. can the United States do
to counter the Sino-Russian energy axis described in your testimony?
question two: importance of reducing u.s. oil demand
in transportation sector
It is clear that targeting our transportation system's demand for
oil is a key component of improving our nation's energy security. And
in fact most future global oil demand is linked to transportation use.
If we are going to make any difference in our increasingly dire oil
addiction, we need a multi-tiered effort that both increases our use of
alternative fuels and reduces our overall demand for fossil fuels.
Success of Vehicle Fuel Economy Standards
According to the 2002 report by the National Academies of Science,
gasoline consumption (and oil imports) would be 2.8 million barrels per
day higher if CAFE standards had not been imposed in the mid 1970s
following the Arab Oil Embargo. Unfortunately, after doubling the
average gas mileage of U.S. vehicles CAFE standards stagnated and have
not been increased since 1985.
Next week, I look forward to joining a bipartisan coalition in
reintroducing our ``Ten-in-Ten Fuel Economy Act,'' which would increase
CAFE standards for all passenger vehicles, including light trucks and
SUVs, by 10 miles per gallon over 10 years. This balanced and
technically feasible bill would save 25 million barrels of oil per day
by 2025, the same amount of oil we currently import from the Persian
Gulf.
All Witnesses:
How do you think a reduction in demand of 2.5 million
barrels per day would help improve our reliance on foreign oil
imports?
Do you believe that increasing the demand for more efficient
vehicles in the largest car market in the world might affect
the efficiency of vehicles sold in other countries?
A recent analysis by an Energy Department analysis found
that increasing CAFE standards to a combined fleet average of
35 miles per gallon could save as much as 0.5% of our Gross
Domestic Product--roughly $60 billion per year or $200 per
capita per year in the United States. Given this tremendous
benefit, why do you think it has been so difficult to increase
CAFE standards?
Mr. Wald, you testified that increasing transportation
efficiency is the single most effective step the U.S. can take
to improve its energy security. Can you expand on why you
think, from a military and national security perspective, it is
critical that we increase the overall efficiency of nation's
transportation fleet?
Mr. Wald, I also understand that the Defense Department
spends $10.6 billion annually on fuel, or 97 percent of the
federal government's use, and almost 2 percent of the entire
country's use. And that as much of 70 percent of our military
convoys in Iraq, which are increasingly at risk from roadside
bombs, are carrying fuel.
Given these facts, how could the military benefits from more
efficient vehicle technology? Would you say such technologies would
qualitatively increase our nation's military strength?
Breakthrough technologies
Do any of the witnesses see any groundbreaking or game
changing technologies that could dramatically change this bleak
future oil demand outlook?
Plug-in hybrids promise to break the historic wall between.
the transportation and electricity sector and provide new and
diverse alternative energy sources to displace gasoline and
diesel.
What role will biofuels have in replacing world oil demand?
Would it be in the national interest to pursue an all out
effect in vehicle lightweighting technologies such as the use
of composites, or better battery technologies for vehicles?
question three: mystery of high world oil prices
The projected price of oil in competitive world market has been
estimated by the Energy Department to be in the range of S 15 per
barrel. And several sources estimate the most efficient OPEC
production, in particular Saudi Arabia where the bulk of world oil
reserves are, cost as little as $2 to S5 per barrel to produce. Just
about four years ago OPEC's target world oil price was between $22 and
$28 per barrels. Now we seem content with $50 to 60 per barrel oil, and
would be happy if it stayed there for years to come!
All Witnesses:
What caused this dramatic rebaselining in the world oil
price? How come $25 per barrel was okay for everyone a few
years ago, now consuming nations would be happy to pay double
that.
What does this target price shift mean in terms of real
dollars transferred from U.S. consumers to OPEC and other major
oil producers?
Are there ways we can achieve more stability in the world
oil price? Why are there no long-term price contracts in the
oil business? It would seem be in the interest of both
producing and consuming nations to know in advance how much
they would be spending or receiving for a certain amount of
oil.
As you know, the United States manages a strategic petroleum
reserve and IEA maintains a shared strategic reserve. Have
these proven effective in securing reasonable pricing from
OPEC? Could larger reserves help stabilize world oil prices, or
at least prevent volatility or future supply shocks?
What is the value in increasing domestic oil production in
environmentally sensitive US oil fields? Isn't this just at
best a drop in the bucket in terms of global oil supply?
question four: need for collaboration among major oil consumers
rather than military action
For decades now, ensuring our nation's oil security has been
pursued by both competitive economic means and political-military
means. It now seems that the net effect of overt military action has
proven to be at most of questionable value and may even be
counterproductive and contributed to the current destabilization we see
in the world oil market.
Several witnesses have described that the geographic distribution
of the world's fossil fuel reserves means that OPEC will only gain more
leverage in setting future world energy prices. This dynamic, combined
with the fact that National Oil Companies control 80 to 90 percent of
the world's oil supplies, means to me that maybe it would be wiser to
focus on collaborative action among major oil consumers, rather than
continue to rely on military action.
All Witnesses:
What do you think the net effect of the Iraq war on the
world oil price?
What is the prospective effect of a total collapse of the
Iraq oil sector?
Could an organization of major oil consuming countries
useful or feasible as a counterweight to OPEC?
Could IEA form the nucleus of such an organization?
How can we quickly allow China and other major oil consuming
countries to participate fully in and SEA framework?
Mr. Wald:
In addition to being at odds with a collaborative approach
to oil conservation and carbon emissions reduction, do you
believe the use of US military power to guarantee oil security
feasible in world where OPEC members become nuclear weapons
states? How can one or two U.S. carriers project compelling
power against a nuclear-armed Iran?
question five: iran's role in the world oil market
The ``Oil weapon''
As was mentioned in witness testimony, Iran has threatened to use
its oil supply as a weapon to achieve its strategic objectives,
including building a nuclear energy, and probably a nuclear weapons
program.
How realistic is this threat and what can we do to counter
it?
I understand that while Iran is a major oil exporter, they
have a severe refinery shortage and must import much of their
gasoline. Is this a potential leverage point for trade
sanctions against Iran?
Iran's oil sector evolution
A recent article by Roger Stern suggests that Iran's oil export
capacity might dry up within ten to fifteen years, essentially
eliminating a vital government revenue source. This is in contrast to
the testimony today which shows the potential of expansion to pre Iran-
Iraq war levels of over 6 million barrels per day.
Do you believe the Stern analysis is credible'? Obviously
policy implications toward Iran are quite different if they are
really not going to be a major oil exporter within a couple
years.
Negotiating with Iran
Dr Leverett's testimony suggests that the US needs to strike
a ``grand bargain'' with Iran. What would be the terms of such
a bargain as you envision them?
Questions from Senator Sanders
1. For Ms. Stuntz--As I understand it, the National Security
Council's energy task force has recommended an automatic 4% yearly
increase in CAFE standards. I am interested in what factors were
considered in making the decision on what the specific yearly increase
should be.
2. For All Members of the Panel--Unfortunately, not many of you
mentioned climate change in your testimony and it only briefly came up
during the hearing. This is a major concern for me because the ongoing
burning of fossil fuels--most obviously oil--is leading to global
warming. Global warming, in turn, is increasing pressure on natural
resources across the globe, and many experts are already warning that
this pressure could lead to increased civil unrest in many parts of the
world, unrest that could lead to armed conflicts. The ``geopolitics of
oil'' should at the very least mention the ``geopolitics of global
warming.'' With this in mind, why is there not more emphasis on this
important issue in your testimony?
Question From Mr. Sessions
1. Many commentators have criticized the usage of the phrase
``energy independence,'' pointing out that it sets up an unrealistic--
if not impossible or undesirable--goal for U.S. energy policy. Given
the various priorities that we face when discussing our energy policy,
particularly when we consider the issue as a matter of national
security, how would each member of the panel articulate the over-
arching goal of our policy?