[Senate Hearing 106-930]
[From the U.S. Government Printing Office]

                                                        S. Hrg. 106-930

                         ENERGY AND AGRICULTURE



                               before the

                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION


                         ENERGY AND AGRICULTURE


                             JULY 20, 2000


                       Printed for the use of the
           Committee on Agriculture, Nutrition, and Forestry

70-093                     WASHINGTON : 2001

            For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 


                  RICHARD G. LUGAR, Indiana, Chairman

JESSE HELMS, North Carolina          TOM HARKIN, Iowa
THAD COCHRAN, Mississippi            PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            KENT CONRAD, North Dakota
PAUL COVERDELL, Georgia              THOMAS A. DASCHLE, South Dakota
PAT ROBERTS, Kansas                  MAX BAUCUS, Montana
PETER G. FITZGERALD, Illinois        J. ROBERT KERREY, Nebraska
CHARLES E. GRASSLEY, Iowa            TIM JOHNSON, South Dakota
LARRY E. CRAIG, Idaho                BLANCHE L. LINCOLN, Arkansas
RICK SANTORUM, Pennsylvania

                       Keith Luse, Staff Director

                    David L. Johnson, Chief Counsel

                      Robert E. Sturm, Chief Clerk

            Mark Halverson, Staff Director for the Minority


                            C O N T E N T S



Thursday, July 20, 2000, Energy and Agriculture..................     1

Thursday, July 20, 2000..........................................    49
Document(s) submitted for the record
Thursday, July 20, 2000..........................................   157


                        Thursday, July 20, 2000

Lugar, Hon. Richard G., a U.S. Senator from Indiana, Chairman, 
  Committee on Agriculture, Nutrition, and Forestry..............     1
Grassley, Hon. Charles E., a U.S. Senator from Iowa..............    15
Harkin, Hon. Tom, a U.S. Senator from Iowa, Ranking Member, 
  Committee on Agriculture, Nutrition, and Forestry..............     3
Conrad, Hon. Kent, a U.S. Senator for North Dakota...............    13
Kerrey, Hon. J. Robert, a U.S. Senator from Nebraska.............    27
Johnson, Hon. Tim, a U.S. Senator from South Dakota..............    17


Johnston, Hon. J. Bennett, Former Senator [D-La], Johnston and 
  Associates, LLC................................................    28
Richardson, Bill, Secretary of U.S. Department of Energy; 
  accompanied by Dan Reicher, Assistant Secretary of Energy; and 
  Mark Mazur, Acting Director, Energy Information Administration.     4
Schlesinger, James, Former Secretary of Defense and Energy.......    19

                                PANEL I

Baumes, Harry S., Ph.D., Senior Vice President, WEFA, Inc., 
  Eddystone, Pennsylvania........................................    37
Collins, Keith, Chief Executive Officer, U.S. Department of 
  Agriculture, Washington, DC....................................    36
Hutchens, Don, Executive Director, Nebraska Corn Board, Lincoln, 
  Nebraska.......................................................    45
McCarthy, W. James, General Manager, Government and Public 
  Affairs, CITGO Petroleum Corporation, Tulsa, Oklahoma..........    41
Vaughn, Eric, President, Renewable Fuels Association, Washington, 
  DC.............................................................    39


Prepared Statements:
    Lugar, Hon. Richard G........................................    50
    Harkin, Hon. Tom.............................................    52
    Craig, Hon. Larry E..........................................    53
    Kerrey, Hon. J. Robert.......................................    62
    Grassley, Hon. Charles E.....................................    66
    Johnston, Hon. J. Bennett....................................    79
    Baumes, Harry S..............................................    97
    Collins, Keith...............................................   106
    Eischens, Curt...............................................   144
    Horvath, R. Skip.............................................   138
    Hutchens, Don................................................   134
    McCarthy, W. James...........................................   121
    Richardson, Bill.............................................    69
    Schlesinger, James...........................................    74
    Vaughn, Eric.................................................    90
Document(s) submitted for the record:
    Letter to Hon. Richard G. Lugar, from Ali I. Al-Naimi........   158

                         ENERGY AND AGRICULTURE


                        THURSDAY, JULY 20, 2000

                                       U.S. Senate,
         Committee on Agriculture, Nutrition, and Forestry,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:04 a.m., in 
room SD-106, Dirksen Senate Office Building, Hon. Richard G. 
Lugar, (Chairman of the Committee,) presiding.
    Present: Senators Lugar, Grassley, Harkin, Conrad, Kerrey, 
and Johnson.


    The Chairman. This meeting of the Senate Agriculture 
Committee is called to order. We are privileged to have today a 
number of distinguished witnesses to discuss energy policy in 
our country with special pertinence to agriculture.
    I will issue an opening statement. When Senator Harkin, our 
Ranking Member, has arrived, he will be recognized, and then we 
will hear from the distinguished Secretary of Energy, Secretary 
Richardson, and members will ask questions after each of our 
first three witnesses, and likewise the distinguished panel 
that will follow.
    I begin the hearing by raising what I believe is a very 
important question: Are Americans prepared for the inevitable 
consequences resulting from the lack of a strategic energy 
policy? Does an energy policy exist with our government or with 
private industry that will guarantee adequate energy supplies 
for a growing American economy? And, if not, who will tell the 
American people that we are headed for lower growth in jobs, 
income, comforts, standard of living, and competitive position 
in the world?
    In my judgment, our Nation is facing an emerging energy 
crisis. Demand for energy is rapidly increasing, and supplies 
may not be emerging to meet this demand, even at high prices. 
We are here today to assess present energy policy and determine 
if amendments to our policy are appropriate. And in addition to 
high prices at the gasoline pump, we have been alerted recently 
to possible shortages of natural gas, and will discuss this 
morning potential electrical brownouts.
    In reviewing our energy policy, we must consider the fact 
that events beyond our borders have tremendous impact. As 
economics of developing nations continue to grow, so will their 
demands for energy. Such growth will fuel the greenhouse gas 
problem and increase world dependence on Persian Gulf oil.
    OPEC decisionmaking is a major factor. I invited the oil 
minister of Saudi Arabia, Ali Naimi, to participate in today's 
hearing. He replied he is unable to attend due to previous 
    Economic growth in the United States has produced a tight 
market for many forms of energy. Electricity demand in the 
first half of the year 2000 is up 3.5- to 4-percent from the 
previous year. Over half the increase in world oil demand from 
1998 to 1999 was attributable to increased United States demand 
for oil. The price of natural gas and diesel have risen 
dramatically due to increased demand, tight supplies, low 
inventory. We know the United States needs to build new power 
plants, but current plans are for these plants to be fired by 
natural gas. Are natural gas supplies adequate to meet that 
    At the Federal level, are we doing enough to address the 
transmission problems that could be associated with 
increasingly deregulated electricity markets? The Energy 
Information Administration forecasts the demand for natural gas 
is likely to increase by 2-percent per year over the next 20-
years. Energy security expert Daniel Yergen asks whether we are 
prepared to make the investments in exploration, new pipelines, 
and distribution facilities needed to meet this rapidly growing 
    At the same time the demand for energy is growing, new 
environmental regulations are being imposed upon energy 
facilities and fuels, and many of these policies are needed to 
produce a cleaner environment. The Reformulated Gasoline 
Program is one example.
    We also need to assess our energy research and technology 
policies in light of the greenhouse gas problem. I have 
cosponsored Senator Murkowski's legislation to further the 
growth of new energy technologies. Senator Daschle and I have 
introduced a bill to solve the MTBE problem and triple the use 
of renewable fuels by the year 2010. We have introduced a 
market trading system to allow oil companies to produce 
renewable fuels in the areas of the country where they can most 
economically be marketed.
    President Clinton recently signed into law my bill to 
establish an aggressive research, development and demonstration 
program, making it easier to convert biomass into ethanol. 
Since biomass feed stocks tend to have very low cost, this 
program could lead to dramatic reductions in the cost of making 
    One additional idea I think needs to be considered is the 
creation of a presidentially led energy and environmental 
security task force to coordinate our environmental and energy 
security programs. Such a task force, in my judgment, should 
include at least representatives of the National Security 
Council, the Council of Economic Advisors, the Departments of 
Agriculture, Energy, EPA, Transportation, and Treasury.
    [The prepared statement of Senator Lugar can be found in 
the appendix on page 50.]
    I would welcome comments from our distinguished witnesses 
on any of these legislative initiatives.
    Finally, I simply thank the witnesses for coming, for their 
preparation for what I think will be a very important hearing, 
and I now turn to my distinguished colleague, Senator Tom 
Harkin of Iowa, for his opening remarks.


    Senator Harkin. Mr. Chairman, first of all I want to thank 
you for calling this important hearing on energy policy and the 
impact on energy policy and the impact on American agriculture. 
I also want to commend and thank you for your leadership on the 
initiative you took to get the administration to start moving 
ahead on the research needed to convert biomass to some of our 
renewable fuels, especially in the cellulosic area. I think 
that really holds a great promise, and again I commend you for 
your leadership in that area.
    In March I sent a letter to you, Secretary Richardson, and 
to Secretary Glickman. I am pleased by your decision to form a 
working group to examine the implications of high oil prices 
for farmers. I have also hoped that we can try to get to the 
bottom of some of these exorbitant increases in gasoline prices 
in the Midwest.
    Farmers have a lot at stake with respect to energy costs 
and our national energy policies. Even though farmers have 
greatly increased their energy efficiency over the years, they 
are still highly vulnerable to these price increases, 
especially now, when corn in Iowa is down to about $1.40 a 
bushel and beans are about $4.40 a bushel. Things are pretty 
tight in the Midwest right now.
    And right now USDA estimates that direct fuel expenses for 
farmers will increase by $2.5 billion or 40-percent this year 
compared to 1999--40-percent compared to last year. Higher 
energy prices are also reflected in the greater costs for grain 
drying, fertilizer, pesticides. The Iowa Farm Business 
Association estimates that higher energy costs will add more 
than $1,300 to this year's expenses for a 660-acre-corn-and-
soybean farm. So any actions that can be taken to alleviate the 
impacts on farmers would certainly help.
    Frankly, though, as the Chairman does, I see agriculture 
more as a solution to our energy challenges than as a problem 
area. I think we have barely scratched the surface of the 
potential for agriculture to supply domestically produced 
renewable and environmentally friendly energy.
    Renewable sources now constitute only about 3-percent of 
U.S. energy supplies and only about 1.2-percent of gasoline, 
but our reliance on foreign petroleum is growing dramatically, 
to the point where we now import about 60-percent of our 
petroleum. We are far more reliant now than we were in the 
    But renewable fuels like ethanol and biodiesel enhance our 
energy security. They improve our environment. They increase 
farm income. They create jobs and economic growth in rural 
communities. Ethanol use already adds about 20-cents-a-bushel 
to the price of corn. Replacing MTBE with ethanol would add 
another 14-cents-to-corn-prices and increase farm income by 
about $1 billion a year.
    There is also tremendous potential in biomass such as 
switchgrass, and wind energy, which is a growing industry, by 
the way, in my State. I saw your comments on that, Mr. 
Secretary. Hydrogen used in fuel cells will allow efficient use 
of biofuels and the storage and transportation of wind and 
solar energy.
    If renewable energy is going to have a chance to get a 
footing and grow, it will have to be given an opportunity to do 
so. That is why I was so outraged by the efforts to lay the 
blame for high Midwest gasoline prices on clean air rules and 
the use of ethanol. The facts are now out, and the facts show 
the blame was unfounded and unfair, but this experience is a 
harsh lesson in how hard we are going to have to continue to 
fight for the increased use of renewable fuels.
    Mr. Chairman, again, I thank you for calling this hearing 
and for your great leadership in this area.
    [The prepared statement of Senator Harkin can be found in 
the appendix on page 52.]
    The Chairman. Thank you very much, Senator Harkin.
    Secretary Richardson, we are delighted to have you, and 
would you please proceed?


    Secretary Richardson. Thank you. Mr. Chairman, Senator 
Harkin, I want to commend you for the very broad, gracious way 
you tied all the issues together, and I commend you, especially 
this committee, for holding this hearing and for your singular 
contribution in the area of bioenergy, which could be the 
future for our energy security.
    Senators I first would like to join you in expressing my 
personal condolences to the death of a member of your 
committee, Senator Coverdell, and I would express my sympathy 
to his wife, Nancy. I would like to just state that for the 
    Mr. Chairman, I want to thank you for giving me the 
opportunity to speak with you about some of the issues you 
discussed. I also would like to address the alternative 
opportunities we now have, specifically in biofuels, on which 
your committee has worked very hard, which can help ease our 
Nation's excessive dependence on fossil fuels.
    Mr. Chairman, Senator Harkin, we both have opportunities to 
answer the Nation's energy challenges. My responses to the 
energy issues of this year have been grounded in the Clinton-
Gore administration's energy policy. These are the six points 
that we believe are the key foundations of our policy:
    One, market forces and not artificial pricing. Two, 
diversity of supply, and strong diplomatic relations with 
energy producing nations. Three, improving the production and 
use of traditional fuels through new technology development. 
Four, diversity of energy sources, with long-term investment in 
alternative fuels and energy sources. Five, increasing 
efficiency in the way we use energy. And, six, maintaining and 
strengthening our insurance policy against supply disruption, 
the Strategic Petroleum Reserve.
    Let me just mention, members of the Committee, some 
relatively good news on pricing, although I am most sensitive 
to some of the serious problems in America's farm economy. Mr. 
Chairman, as you know, we are seeing some recent signs of 
encouragement in our oil and gas markets, thanks to our 
adhering to this policy.
    The Energy Department's Information Administration is now 
reporting that conventional regular gasoline has dropped 13-
cents-per-gallon since this time last month nationwide, from 
$1.68 to $1.55. In the Midwest, regular gasoline is down 28-
cents, from $1.87 to $1.49. And also in the Midwest, 
reformulated gas has gone down 48-cents in the last month. This 
is good news for the American consumer. It has gone from $2 to 
$1.52. Hopefully these are some favorable trends. We think they 
may be some trends that will continue.
    And, as you know, diesel is in the same family as heating 
oil, and we are concerned about heating oil supplies for the 
upcoming winter. We need to build stocks, so this is creating 
some price pressure on diesel which affects our Nation's 
farmers and truckers.
    I also want to state my concern over the current low 
inventories of natural gas, which you did, too. We need to 
watch these levels carefully. Continued low inventories when 
the cold weather comes could force prices up considerably and 
put the pinch on America's families.
    But we do have some good news. According to the Energy 
Information agency, retail, on-highway prices of diesel are 
down about 2-cents in just about the past 3-weeks, nationwide. 
In the Midwest, diesel is down 3-cents over that period. Still, 
they are unacceptably high.
    Part of this relief stems from our work of the past 7-
months, when we moved vigorously to boost supply. As you know, 
I have talked extensively with oil producing nations. OPEC and 
other producers have heard our concerns and have twice boosted 
their output. We hope they continue to keep an open mind.
    Our latest data shows that there are roughly 3.5-million 
barrels per day more oil on the market than during this time 
last year. That is a welcome addition to the world market, and 
it is exerting downward pressure on gas prices.
    But we can't claim victory. Regular gas is, on the average, 
around 38-cents more expensive than it was at this time last 
year. This is mainly because we simply have not been able to 
replenish stocks as demand continues to soar. We need to 
exercise longer term solutions. We need not only to ease this 
demand, we need to ease America from its dependency on imported 
energy sources, which you stated in your opening statement.
    Here is a solution on meeting demand, and that is the 
bioenergy solution. The President is committed to such a 
vision, introducing proposals to boost domestic production, 
spur energy efficiency, and increase the use of alternative 
energy resources.
    We have extensive opportunities in the field of bioenergy. 
Mr. Chairman, I know that this issue is of great personal 
interest to you and every member of this committee. And I see 
that Senator Conrad has come in. He has been a champion on 
these issues, too.
    Examples of your leadership, Mr. Chairman, include this 
committee's previous hearings on the importance of biofuels; 
second, your attendance and presentation at the signing 
ceremony, and subsequent hearing on Executive Order 13134, 
Developing and Promoting Biobased Products and Bioenergy; and 
most recently, as you stated, passage of a law, the Biomass 
Research and Development Act of 2000, signed by President 
Clinton on June 22, 2000, your bill.
    Finally, I would be remiss if I didn't acknowledge your 
role and this committee's role in aligning the research 
programs at the Departments of Agriculture and Energy in this 
extremely important area, and the office director that is 
heading up these joint efforts is here with me today.
    Mr. Chairman, bioenergy resources already meet over 3-
percent of our Nation's energy requirements, and consumption 
has been rising by nearly 3-percent annually since 1990. But 
even this growth cannot meet our growing concerns on air 
quality, climate change, dependence on foreign energy supplies, 
and the sluggish economic conditions in the Nation's farm and 
forestry sectors.
    If we are to see a meaningful decline in our future 
reliance on fossil fuels, if we are to lessen our vulnerability 
to interruptions in energy supply, if we are to kindle a whole 
new field of agricultural and forestry economics, then we need 
a cooperative national effort to develop a range of renewable 
energy sources, and bioenergy can be at the heart of such an 
    Creating such a vigorous market will boost demand for 
dedicated energy crops, providing new revenue streams for 
farmers and new cash flow for rural economic development. The 
current uncertainties on the farm and in our forestry industry 
could be eased by long term energy crop contracts with 
biorefineries. This is the focus of the bioenergy initiative, 
integrating the existing bioenergy and bioproducts programs 
within the Energy Department and the Department of Agriculture. 
In FY 2000, we awarded more then $18 million in contracts to 
promote the biorefinery industry.
    Mr. Chairman, I want to take a moment to commend you also 
for the bill you forwarded to make sure we take aggressive 
action on the promise of bioenergy. As you know, we have been 
working under the President's executive order since August of 
last year. That order set a goal of tripling the use of 
bioenergy in the U.S. by 2010. We can get there. I also want to 
thank Senator Harkin for his initiative in making sure we have 
coordinated efforts within the bureaucracy.
    We have also already established the National Biobased 
Products and Bioenergy Coordination Office, and have produced 
our first integrated, multiagency strategic plan for biofuel 
and biopowered research. Our FY 2001 budget includes 
substantial increases for biofuels and biopower, $40 million at 
the Department of Energy and $44 million at the Department of 
    With your bill's enactment, we have taken an important step 
towards that goal. The world is demanding more energy. It is 
wise that we position America's farmers as the supplier to meet 
that demand.
    We would like to ask that this committee lend its support 
to our research and development budget requests, so that we can 
make our research plans a reality and meet our goal of tripling 
the use of bioenergy in the United States.
    There are also ample opportunities in wind power, which I 
know is of interest to this committee, and especially to 
Senator Harkin. Of the top 15 wind resource States, 12 are 
located in America's agricultural heartland.
    To take advantage of this, in June of 1999 I announced the 
Wind Powering America Initiative, which challenges the country 
to harvest enough of this area's vast wind resources to 
generate just 5-percent of America's electricity needs. Just 5-
percent will return economic benefits of over $60 billion by 
the year 2010.
    A successful example of a good wind program is Storm Lake 
in Senator Harkin's home State of Iowa, which has developed the 
world's largest wind farm. Total annual payments to landowners 
in that area are already $500,000, and will continue over 20-
years. Imagine what we can do nationwide.
    Let me close, Mr. Chairman, with what the Clinton 
administration, what steps we have taken during this year to 
ensure that America has the energy resources it needs. You will 
recall the President's vigorous actions when we had a heating 
oil shortfall this spring, that he has proposed a heating oil 
reserve, and has taken aggressive actions to ensure that those 
who need help when cold rolls around, receive it.
    We are also helping America's oil producers, testing new 
technologies and giving a hand to those already in the field. 
We have got some domestic oil and gas initiatives that we need 
approved by this Congress.
    But there is still more that we can do to get relief to 
consumers. Mr. Chairman, last month the President sent a letter 
to Majority Leader Lott, urging that the Congress work with the 
administration to enact the President's pending energy 
proposals without delay.
    The President has asked for a $4 billion package of tax 
incentives to encourage domestic oil and gas production, and 
for consumers to purchase more efficient cars, homes, and 
consumer products. It has idled on the Hill for 2-years.
    In FY 2001 the President advanced a $1.4 billion investment 
for Energy Department programs in energy efficiency, renewable 
energy, natural gas, and distributed power systems. The Senate 
should be commended for supporting 97-percent of the 
department's FY 2001 budget for renewable energy resources, an 
increase of $50 million above the final House mark. I hope that 
the Senate prevails in budget reconciliation deliberations 
before the conference Appropriations Committee.
    The Department is urging the Congress to appropriate our 
entire request of $154 million for our Weatherization 
Assistance Program in 2001. This will be a step towards full 
restoration of this vital program that reduces the heating and 
cooling costs of low income families by an average of $200 per 
year, thus helping them cope with the high prices of fuel that 
they, of all Americans, are least able to afford.
    Also of concern, the Congress has postponed action to 
extend the Energy Policy and Conservation Act, which authorizes 
two central components of our Nation's energy security, the 
Strategic Petroleum Reserve and our participation in the 
International Energy Agency. Mr. Chairman, I need that 
authority to use that Strategic Petroleum Reserve in case of an 
    The President also submitted--and you mentioned this, Mr. 
Chairman, in your opening statement, the issue of electricity 
reform--we have submitted the Comprehensive Electricity 
Restructuring Act 2-years ago, and we need Congress to enact a 
bill. We are encouraged by recent action in both the House and 
Senate, but, as you mentioned, the possibility of brownouts and 
blackouts and a weak electricity grid nationally is of great 
    Mr. Chairman, it is no longer a question of if the electric 
utility industry is going to change, it is when. And I know 
that this is an issue of particular interest to rural 
communities, to the farming sector. We need to act on this 
issue now.
    I have crossed the country, talking to Americans, having 
electricity summits, warning them about brownouts this summer. 
Power went out in the San Francisco Bay area last month when 
temperatures soared, and 3-week days ago utilities in New 
England and on the West Coast were stretched to the limit as 
the one-two punch of hot weather and the unexpected loss of 
several power plants nearly brought on blackouts.
    Mr. Chairman, I welcome this challenge that you have 
offered to develop a bipartisan energy policy, and as you 
mentioned, we have a lot to do. I thank you for your time.
    [The prepared statement of Secretary Richardson can be 
found in the appendix on page 69.]
    The Chairman. Well, thank you very much, Secretary 
Richardson. Let me thank you for mentioning our colleague, 
Senator Coverdell, at the beginning of your comments. As I 
mentioned on the floor yesterday, he was a very valued member 
of this committee and participated vigorously with us, and we 
will miss him.
    I simply want to start by saying I appreciate the 
initiatives you have outlined, and you have indicated six 
principles, and right at the top, market forces, diversity, 
diplomacy, in which you have been involved.
    But my basic question still is one that must come to you 
and your associates almost every day, and that is, the 
infrastructure needed in this country to provide for the 
projected increases in growth year-by-year and the time frame 
required for all of these things to happen are not working for 
us. These again and again are mentioned, that even after people 
make decisions, there are time lags in large capital 
    For example, the New York Times points out that even given 
all of the disruption of this year with regard to very high 
prices for gasoline and protests throughout the country, that 
the demand for gasoline at the pump has gone down by only 
seven-tenths of 1-percent. Now, the Times points out that, that 
is different from a 2-percent increase year-to-year the year 
before, 2-percent or 3-percent the previous 2-years before 
    But nevertheless we are dealing with a very big figure, the 
consumption of gasoline, for example, in the country, and even 
the escalation of prices to that level did not change demand by 
more than seven-tenths of 1-percent, which means that even if 
market forces work, and they surely will with regard to natural 
    You have cited the low inventories. Many observers point 
out that they are so low that they are almost beyond remedy at 
this point; that it would be impossible physically to get 
natural gas at inventory levels that would be at all 
comfortable into the country. Prices already are rising. The 
markets speculatively take a look at that, whether it is in 
spot markets or in the stock market for energy companies.
    And, as a matter of fact, as you point out, whether it be a 
brownout this summer or a plant disruption. I receive letters 
now from my State routinely, from heavy industrial users of 
natural gas who point out that if we have a very severe winter, 
that they may have to shut down. In addition to inconvenience 
at the pump, unemployment, layoffs of people occasioned by our 
failure to have adequate supplies.
    And this is why I sort of come back to the thought, is 
there any comprehensive effort involving yourself, the 
President, the Vice President, everybody, to try to give some 
confidence to the American people that even though we have 
disruptions now that are fully foreseeable, and in some cases 
not easy to remedy, there is some overall plan?
    Now, you point out government doesn't do this alone. Market 
forces, other countries, all sorts of suppliers, energy 
research still undone. But I just think there is a growing lack 
of confidence in the American people that those of us who are 
in charge have some idea.
    And what is suspected is that the supplies will be 
inadequate, that prices will continually go up, and worse 
still, that even at any price energy will be unavailable to 
some of our communities. The thought will come back, well, we 
should have done more to conserve, that in essence we have been 
a wasteful people, that somehow growth of jobs and industry and 
what have you really is not going to be accommodated.
    This is why I started with, who will give this news to the 
American people, that essentially we are now headed for a lower 
growth, lower comforts, hazardous level? I think that is 
unacceptable. I think the people are going to say, get the 
supplies, stop horsing around with this situation; find it, 
invest the money that is required, tell the truth as to how 
much it is going to cost, but we want to be supplied. In other 
words, we do not want to be constrained.
    Now, if this is a philosophical issue, then we need to sort 
of fight this out. There may be those in our society who would 
say that we are profligates and we shouldn't want that much, 
but I think the majority are going to say that we do want that 
much. As a matter of fact, we can have that much, if we use our 
brains, our capital, our ingenuity, we have some framework of 
    Now, how do you address this overall, big problem? You have 
tried to address, I think correctly, the reserves that might 
help in New England, helping maybe a little more reserve of 
natural gas generally, working with the Saudis as you have, but 
these at best are small fixes in what is a fundamental problem, 
as I see it.
    Secretary Richardson. Mr. Chairman, you are absolutely 
right. The administration does have a plan. We are refining 
that plan. We recognize that there are potential home heating 
oil shortages. We are concerned about natural gas, too, both 
the prices and access, and other issues.
    We are concerned also about the whole issue that you 
mentioned, the demand for gasoline in the course of 1-year 
increased 4-percent, the highest ever. Now, we can pat 
ourselves on the back and say this is because of a booming 
economy and more technology, but that would be wrong.
    Senator I think we need a joint strategy. I have laid out 
some initiatives that we would like to see passed. I think the 
Congress can contribute enormously by working with us. I think 
we need a dialogue with industry. I just met with the home 
heating oil industry yesterday, and I think through 
collaboration and partnership we are addressing some of the 
problems in the home heating oil situation in New England this 
    Senator, you mentioned the brownout issue. Again, I am 
really worried about that. I am worried about our distribution, 
our generation, our transmission system. We have a grid that is 
a Third World grid, for a booming economy for the world's 
biggest superpower. And that is going to take investing in more 
power, in regional transmission organizations, in more 
renewable energy.
    In order to do that, Senator, we need legislation that 
restructures, and enables the utility industry to invest more, 
that allows the rural co-ops to compete and invest more, too. 
We need a reliability standard. Will that deal with the 
brownouts next month? Maybe not necessarily those, but at least 
it will lay us a foundation for a more modern electricity grid.
    On natural gas, we need to work together. We have set up an 
interagency natural gas task force. We need to find ways to 
have the deep water royalty relief. Natural gas is clean. It is 
going to mean some hard choices in terms of pipelines. We think 
is the fuel of the future.
    Senator I think in your area, bioenergy, if we can in 
America's heartland use crops that help our farmers, that give 
us energy security.
    My point is, Senator, we are developing a plan, but it is 
going to require a national dialogue, and you accenting and 
pointing out these problems and these issues is very helpful, 
and we need to continue. I think this hearing you are having is 
good, I have seen the witness list, the very, very broad range 
of expertise. I am going to read this transcript very carefully 
and see if we can crank it in and move forward.
    The Chairman. Thank you. Let me point out that even as we 
have this hearing here, on the floor is the agriculture 
appropriation bill. I know the distinguished Ranking Member 
will be involved shortly in that, so I am going to recognize 
him, and constrain each of us to 5-minutes or a little bit 
more, so that not only we can all be heard but we can hear the 
distinguished witnesses, and go back and forth to vote as 
    Senator Harkin.
    Senator Harkin. Thank you very much, Mr. Chairman.
    Mr. Secretary, I for one want to commend you, and I want to 
commend your department, I want to commend the Clinton-Gore 
administration for their leadership on a number of issues in 
the energy area. Especially I want to commend you, Mr. 
Secretary, for taking the leadership to establish the National 
Biobased Products and Bioenergy Coordinating Office which you 
mentioned in your opening statement. My information is that 
they are doing well, they are getting some proposals together, 
and I look forward to meeting with them myself.
    I also want to commend you for the increase that you have 
put into your budget request for FY 2001 for biobased and 
bioenergy fuels. I think that is a good step in the right 
    I also again want to commend you, and through you the 
Clinton-Gore administration for their energy initiatives. We 
have had it here now for about--it is one thing to provide 
leadership. You have got to have some followers hip, too.
    We have had $4 billion in tax incentives for oil and gas 
production, for more efficient cars and homes and products. 
Congress hasn't done anything on it. We haven't acted on it. It 
has been sitting here for at least two or 3-years, if I am not 
mistaken, and not one thing has been done. And Congress has not 
acted to reauthorize the Strategic Petroleum Reserve, either.
    So, quite frankly, I think, having been in Congress for a 
number of years, it just seems like we don't do anything unless 
a crisis stares us in the face. I remember when I was on the 
Science and Technology Committee in the House back in the 
1970s, and then once the oil crisis was over with and the 
Reagan administration came, we dropped all of our research 
programs on alternative fuels because everyone just, well, 
everyone felt we didn't need it then. And so we just drifted 
through another decade, another almost two decades, without 
understanding what was happening with our oil and gas supplies.
    One other observation, Mr. Secretary. You know, I might 
take a little issue now with you or with those that are saying 
that we should be feeling pretty good now because gasoline 
prices are coming down. In July of 1999, regular unleaded 
gasoline in Iowa was $1.10 a gallon. In June of this year it 
was about $1.80-these are round figures--$1.80 a gallon.
    And guess what, it has dropped now down to $1.52, and we 
are told to feel good. You know, they boosted it up 70-cents 
and they have dropped it about 20-cents, and we are supposed to 
feel good. Nonetheless, it is still about 40 some percent 
higher this year than it was last year, as I said in my opening 
statement, with farmers. And that is hurting all of our 
production. It is hurting our income picture in rural areas.
    Mr. Secretary, I guess the only question I really have that 
I would just again like to ask you about is the amount of 
energy and effort that you, your department, is putting into 
the mid and long term. You know, it just seems like we get 
caught up in these crises, and it is sort of the old story 
about the alligator and the swamp. You know, you don't really 
tend to think about the long term.
    But once again, I think we have to begin laying the 
groundwork and the plans for the mid and long term production 
of energy in this country. And again, I just want to hear from 
you as to your thoughts of what your department not only is 
doing but what you think we should be doing in the area of 
biobased fuels and biobased energy production in this country, 
and what the potential is for wind. You mentioned we have the 
largest wind farm in the world in Iowa. We do, and it is 
working well, and farmers are making money off of it, and it 
doesn't take very much land, either. The capacity there is 
tremendous for more of that.
    So tell me what you see down the pike. I mean, what should 
we be doing now, not for next year, not for this year, what 
should we be doing for 10-years and 20-years from now?
    Secretary Richardson. Senator, first of all, I think you 
were getting some very good advice from your able staff when 
they said that even though the trends are good, these prices 
are still unacceptably high for the farm economy. So, I am not 
gloating over those decreases. I think we have got a favorable 
trend, and hopefully we are going to continue that.
    I think you are so right, Senator, that we have to look at 
the long range because of what has happened with our economy. 
What would I say is something that we need to do together? You 
mentioned wind. I am very bullish on wind, and I think your 
support for continued research is key.
    I didn't mention in my remarks to Senator Lugar the 
importance of America's refining capacity. Our refining 
capacity has weakened. We need to boost that. A lot of small 
refineries have closed in the past decade. In fact, I saw a 
couple in Iowa. Right near the airport there was one that 
closed, that I saw, that I was very concerned about. Even 
though total U.S. refining capacity has expanded and become 
more competitive, we have to be clear and careful about that.
    I mentioned electricity restructuring. This is a long range 
investment, that we should invest in our electricity grid so it 
can deal with the growing demand, and that means not just 
investing in new power sources, not just investing in regional 
transmission organizations, but also in renewable energy and 
renewable technology, biomass, solar, wind, geothermal. I think 
these are investments that we delayed and somehow we have put 
aside, and we need to bring back.
    I think renewable energy--you mentioned the tax credits--
this is long range. For farmers, we recently announced an 
initiative that affects farmers, fuel efficiency for lighter 
trucks. I think there is tremendous potential here. This will 
involve a lot of farm equipment, farm vehicles. This is an 
investment that we need to work with in the future.
    Natural gas, this is something that I think is going to 
require a national bipartisan effort, because it is not just a 
question of access to natural gas, it is a question of 
transportation, it is the whole issue of ``not in my back 
yard.'' But, you know, I have encouraged a lot of our Federal 
buildings--and the Federal Government is the biggest consumer 
of energy--to do more with natural gas.
    Senator I could go on and on, except to say that we do have 
an office of emergencies at the Department of Energy. We have a 
policy office. I have all of my people here.
    You did ask for what specifically in biodiesel, 
biodiversity, bioenergy we have, and what we have planned. Dan 
Reicher, my expert on this is here. Mr. Chairman, could I call 
him up, or is that----
    The Chairman. Yes, please do. Please identify yourself and 
your office, if you would.
    Mr. Reicher. Mr. Chairman, I am Dan Reicher, Assistant 
Secretary of Energy for Energy Efficiency and Renewable Energy, 
and I will just say quickly, we are, as the Secretary noted, 
very excited about the opportunities for biomass. We are 
focused on programs that will allow us to use biomass to make 
power, electric power; to make liquid transportation fuels; and 
indeed, Mr. Chairman, to replace some of the petroleum now used 
in the chemical industry with biomass.
    Added together, that investment in technologies to support 
the use of biomass for power, fuels, and chemicals, we think we 
can triple U.S. primary energy use from biomass to almost 10-
percent by 2010, and that would be a big step forward for us. 
What it is going to take is increased investment in the 
technologies. It is going to take some smart policies. The 
Secretary talked about tax incentives, for example and the 
right environmental policies.
    And it is going to take stimulating markets, as well. We 
think with our large energy demand in the Federal Government 
itself, powering our 500,000 buildings, we think we can help 
drive some of these new markets for biomass and bioenergy as 
    Secretary Richardson. Mr. Chairman, the key is also a 
partnership with the private sector. Technology can take us to 
more energy security and fuel efficiency. New natural gas 
technology, new technology for wind, new technology for fuel 
efficiency, fuel cells, hybrid vehicles, cars, and SUVs that 
are 40-miles-per-gallon. That last technology is something that 
I wanted to underscore, too it should be a long term priority.
    The Chairman. Thank you very much.
    Senator Conrad.


    Senator Conrad. Thank you very much, Mr. Chairman.
    Thank you, Mr. Secretary, for being here. Thanks for your 
leadership and your warning us repeatedly that we were headed 
for trouble. I can't remember how many meetings I have been in 
with you, or speeches that I have heard you give.
    I remember very distinctly when you discussed with the 
Energy Research Institute at the University of North Dakota, 
you gave the keynote address several years ago, and warned 
there very clearly that we were headed for trouble, outlined a 
series of steps that needed to be taken, including incentives 
for greater production and incentives for renewables, and 
unfortunately precious little has been done by the Congress in 
response to your repeated warnings. I think we do function kind 
of in a crisis mode. That is, I am afraid, more typical than 
not for Congress.
    But this is a circumstance that just a crisis response is 
not going to work, because when you head over the cliff and 
your are in a brownout, you can't respond quickly enough. That 
is the hard reality that we confront. These are long lead time 
investments that need to be made to expand capacity in oil and 
gas, expand capacity in renewables and all the rest.
    I just put up a couple of quick charts that talk about what 
our farmers are facing out there, and I come from one of the 
most agricultural States in the Nation. This is the index of 
fuel prices, with 1990-'92 being the base of 100-percent. You 
can see what has happened from 1999 until now. It doesn't 
reflect fully the last little dip we have had, about 2- to 3-
cents that has come off diesel in the last several weeks, which 
is welcome. But when we look at the movement from 95-cents a 
gallon last year up to over $1.50, it is pretty stunning out 
there. My State university says it is going to cost every farm 
in my State, on average, $4,000.
    Let me just put up the context within which we are 
operating here, to show why that is a very serious blow. This 
chart shows in green the prices that farmers paid for inputs, 
and the red line is the farmers' prices received, what farmers 
are receiving for what they sell. I think this tells it about 
as dramatically as it can be told. The farmers are receiving 
dramatically reduced prices for what they sell. In fact, we 
have got record low prices. Inflation-adjusted, this is as low 
as it has been.
    And we look at the input costs, the things that farmers 
have to buy, including energy, they have continued to go up, 
and with respect to energy they have risen dramatically. This 
has put farmers in a cost-price squeeze that is literally 
    I am going to my State fair this weekend. What would you 
say to the farmers who are going to come up to me and say, 
``Senator, what is being done?'' alternatively, ``What can be 
done?'' If you had a very brief conversation with a North 
Dakota farmer and he said to you, ``Mr. Secretary, what are the 
things that are being done right now, and what can be done,'' 
in a very thumbnail response, what would it be?
    Secretary Richardson. Senator, I would say five things to 
your farmer and your constituents. I would say first that 
prices are turning downward this week, that we are looking at 
some favorable trends.
    The second thing I would say to them is, we are looking 
beyond, we hope to go beyond, soon, the pipeline and refinery 
problems that we have been experiencing.
    The third thing I would say is, we need inventories to be 
built. I think that is key.
    The fourth thing I would say is that we are hopeful that 
this week's downward trend is going to lead to, as I said, 
lower prices this summer and this fall, that red chart you had.
    And then the fifth thing I would say is that we have to 
focus on the long term; that we have to have bipartisan support 
for a lot of the initiatives that you have outlined and Senator 
Lugar has outlined. That is funding energy R&D. That is 
boosting tax incentives to increase domestic production. I see 
Senator Johnson is here. He has been a champion of the oil and 
gas industry. What we have as a marginal well tax credit for 
oil and gas; geologic expensing; payback provisions to improve 
and incite exploration. And then, lastly, and you have been a 
champion on this, too, and that is electricity restructuring, 
that grid, that grid that we need to modernize and be more 
    So those are the five things, it sounds like 14, but it 
really is under five, that I would say to your constituent. And 
the last one, Senator, is the technology that I believe we are 
investing so that, that farmer can participate in America's 
energy future, not just for survival but can make money. I 
think that is the key, and I think this is something that our 
programs, through the leadership of this committee, have 
enabled us to do.
    Senator Conrad. One last question, if I could, Mr. 
    What is your forecast--you have got the experts there--in 
terms of trends and prices? What is the forecast for fall, as 
we go into fall harvest, for diesel prices?
    Secretary Richardson. The new Energy Administration Acting 
Director is here, and I would like to call him forward. Is it 
    The Chairman. Please come forward, and identify yourself 
and your office, please, for the record.
    Mr. Mazur. Mr. Chairman, I am Mark Mazur from the Energy 
Information Administration.
    Mr. Conrad, generally for going into the fall we project 
prices to be roughly today's levels with slight downward trends 
for diesel and gasoline.
    Senator Conrad. And when you say ``slight downward trend,'' 
you are talking a couple of cents?
    Mr. Mazur. A couple of cents, yes.
    Senator Conrad. All right. Thank you.
    The Chairman. Thank you very much, Senator Conrad.
    Senator Grassley.


    Senator Grassley. I have had a chance to get here late, and 
what I have heard is that the problems we have are Congress's 
fault for not acting.
    And I am not here to say that Congress can't do a lot of 
things to help this, but I wonder if it is fair to blame 
Congress, if it also isn't then fair, as a matter of equity and 
laying everything out on the table--and this doesn't come 
within your jurisdiction, Secretary Richardson--but when we 
have pipeline and refinery problems, as we did during April and 
May, and creating part of the problems in June, particularly in 
Chicago and Detroit, isn't it fair at the same time to raise 
the question why the Environmental Protection Agency couldn't 
delay the reformulated gasoline Phase II provisions for three 
or 4-months to accommodate what was unpredictable at the time 
they initiated their regulations, when the refineries and the 
pipeline problems weren't there? But they did not respond with 
that sort of request on the part of the Governor of Wisconsin 
or the Governor of Illinois, as an example.
    More in your area, couldn't we have seen downward trends in 
exploration for oil and downward trends in exploration for 
natural gas, and the Senate Energy Committee tells us about 
two-thirds of the known supply of, on-tap supply of natural gas 
is under Federal lands, and we have seen this trend, because so 
much of exploration, so much of our country has been taken off 
bounds for exploration. And when you have lower supply, you 
have higher prices, obviously. Isn't it about time that we 
start looking at encouraging greater exploration in the 
continental United States?
    Secretary Richardson. Senator Grassley, first let me just 
say that I think we need a bipartisan energy policy, and I am 
not here to blame anybody. I think, as Senator Lugar said in 
his opening statement, I think it is important that we have 
joint efforts, short term and long term.
    On your first point, Senator Grassley, here are the reasons 
for higher gasoline prices, and you mentioned two of them. The 
reasons are the high price of crude, and the refinery problems. 
You talked about the pipeline problems, the Wolverine, the 
Explorer problem. High demand, as I mentioned, the highest 
demand ever. Low inventories. Temporary market dislocation from 
the introduction of RFG-II into the market. And the utilization 
rate of refineries at about 96-percent nationwide.
    Now, what I mentioned earlier, the price of Midwest 
gasoline has gone down substantially. Now, it is still 
unacceptably high. And what we are attempting to look at 
Senator, is the whole issue of the price differential for 
reformulated gas, RFG of 2- to 5-cents. And why was there such 
a spike at one time? I think this is the focus of the Federal 
Trade Commission, and they should be looking at all of these 
issues and reporting back to us, to you, to us, sometime this 
    Again, it is a combination of forces that have hit us all 
at once, and I do think we do have a policy. We have been 
prepared. I think it is commendable to have reformulated 
gasoline. That was the 1990 Clean Air Act. We all participated 
in that.
    I think what we now need to do, Senator, is deal with this 
whole supply issue, this whole demand issue, find ways to 
increase production, you are absolutely right, domestic oil and 
gas production. We need to reduce our reliance on imported oil. 
We have proposals before you to help the domestic oil and gas 
producers with some tax credits. I think we need to do that. We 
need to find ways----
    Senator Grassley. But on that point, could I interrupt you? 
Isn't it under our law allowing the President to take certain 
lands out of bounds for exploration? The President can then 
take action to put that land in bounds, it would seem to me. I 
have not studied the law, but I know that it is presidential 
decisionmaking or through the Interior Department that, that 
has been done. Can't they undo that in such an emergency 
situation as we have right now?
    I mean, are we concerned about less reliance upon 
importation of energy or are we not? And the extent to which we 
aren't, and we are always going to be terribly too dependent 
upon it, but we can do more, and alternative fuels are one of 
those, and tax credits are one. But when we aren't making 
adequate use of what God has given us, it seems to me we ought 
    Secretary Richardson. Senator, I think we need to balance 
domestic production--the private market, boosting our oil and 
gas and our energy producers--with protecting the environment. 
Now, we believe that there is enough potential for exploration 
in existing Federal and offshore land to do the job you 
    Now, what has happened a lot to our domestic producers, 
especially in the oil and gas area, is even though gas is at 
$30, you know, a lot of them are still hurting, because when it 
was $10 a barrel, many went out of business. Rig counts are 
still down. They are getting back up.
    And so we think a combination of finding ways that access 
can be improved, making it an environmentally sound matter, 
getting rid of a lot of red tape that exists there. I mentioned 
the importance of deep water royalty relief that we need to 
have extended again for natural gas.
    But I think, Senator, this is why we need to make a 
national energy policy a priority for both sides. At the end of 
this session we should have a tax credit bill of initiatives 
that are important to you, that are important to us, so that we 
can get on with a long range policy that you mentioned.
    Senator Grassley. This is my last point. We decimated the 
exploration and oil drilling business. Last month the number of 
rigs exploring was down once again, I don't know whether down 
to a particular historic low. Qualified people to work in the 
industry are down. It is very difficult to find the type of 
people you need. Just the last few years of not being able to 
explore as freely as in the past has put us in a condition 
where, even if the change in policy came now, there would be a 
long lead time to get back to where we ought to be, to find 
more sources of domestic production.
    [The prepared statement of Senator Grassley can be found in 
the appendix on page 66.]
    The Chairman. Thank you very much, Senator Grassley.
    Senator Johnson.
    Senator Johnson. Thank you, Mr. Chairman. I have a markup 
going on right now, as we speak, dealing with CARA legislation, 
and it is important for me to return there, and I will be very, 
very brief. I would like to submit a statement, with your 
    The Chairman. It will be accepted, and likewise Senator 
Grassley's statement will be published.


    Senator Johnson. Very good. Thank you, Mr. Chairman. I 
commend you for holding this hearing today on what is a 
critical and timely issue.
    Currently in my home State of South Dakota, gasoline prices 
are second highest in the Nation. It is particularly 
frustrating, particularly in light of recent data that has been 
shared with us indicating that retail prices continued to go up 
at the same time that wholesale prices were plummeting for 
petroleum in the Midwest.
    These high fuel prices couldn't come at a worst time for 
South Dakota consumers, particularly those in our farm and 
ranch sector of our economy, as commodity prices have bottomed 
out. As my good friend from North Dakota has so ably shown with 
his charts, input costs continue to go up sharply while return 
on the farmer's labor, particularly in the grain sector, 
continues to go down.
    This requires a long term plan, and I appreciate the 
discussion that has taken place here relative to a consensus 
that we do need less reliance on imported petroleum, but I 
would have to observe that we need less reliance on petroleum, 
period. This is a finite, nonrenewable source of energy.
    There may be more that we can do to generate more 
production in the United States, although I think, as Secretary 
Richardson has ably pointed out, this involves some balancing 
going on. We would like to see more production. On the other 
hand, my constituents are not clamoring to open up wilderness 
regions particularly right now, either, and there is a 
balancing act that has to go on there.
    So long as this is a finite fuel, so long as we continue to 
be significantly reliant on foreign nations, we are going to 
continue to be vulnerable to market shocks such as we have just 
witnessed this year. I commend Secretary Richardson for his 
very hard work to negotiate with OPEC and the non-OPEC oil 
producing nations, Norway, Mexico and so on, that has at least 
begun to move us back in a better direction. But I think that 
we are going to continue to be vulnerable until we become far 
more serious than we have been with development, research and 
development of alternative renewable fuels, with a particular 
eye on agriculturally based fuels.
    In my home State of South Dakota, the one area where you 
have an opportunity to save some money right now is to utilize 
the existing E-85 fuel pumps that we have positioned around the 
State of South Dakota. We don't have enough of them, but they 
pump 85-percent ethanol, 15-percent gasoline. They work very 
well. The experience has been good with the vehicles in our 
State, and you can buy that fuel for 35-cents a gallon less 
than standard gasoline.
    So some of this is not far distant rocket science that we 
haven't figured out. Some of this is doable and capable of 
implementation on the more near horizon, and it is my hope that 
as we continue this debate about how better to generate a good 
level of continuity in petroleum production, that we also 
continue to become more aggressive than we have been up to now 
on the development of these alternative fuels.
    Ethanol certainly is not the sole answer to our problems 
with energy in America, but it is one piece of the puzzle, and 
I think that we can do better in that regard. It is my hope 
that with the phase-out of MTBE, that we not give up concern 
about oxygenating fuel, and again I would hope that ETBE would 
be viewed as a very serious option in that regard. It has to do 
with clean air rather than fuel availability.
    Again, I just want to share with the Secretary my concern 
that while we do need to continue to negotiate aggressively, I 
think we need to regroup in terms of our conservation 
strategies as well, but we need also to be thinking beyond 
petroleum as a source of energy in this country. And, Mr. 
Chairman, you have been very helpful in that regard. This 
committee I think has been focused significantly in that 
direction, but we need to reenergize that effort, given the 
experience we have had these past months.
    And so I simply want to share that with the Secretary, and 
I am going to have to excuse myself for votes that I have to 
take in the Energy and Natural Resources Committee right now. 
But I do appreciate this hearing, and hopefully this will lead 
to a better understanding and a greater bipartisan effort on 
this urgent issue.
    The Chairman. I thank the Senator for all of his 
contributions to that bipartisan effort in our committee.
    And I thank you, Secretary Richardson, for coming this 
morning, for exploring with us as you have. I hope you will 
stay closely in touch, and we will be closely in touch with 
you, because this issue will likely increase in some intensity 
and severity as we have described, and the public will be 
asking us for answers and explanations. But we thank you for 
    Secretary Richardson. Thank you, Mr. Chairman. Thank you.
    The Chairman. The Chair would like to call now the 
distinguished former Secretary of Defense and Energy, James 
    Secretary Schlesinger, welcome once again to the 
Agriculture Committee. We have appreciated your coming before 
us on several occasions in the past. This is another timely 
appearance, and we look forward to your testimony this morning.

                       DEFENSE AND ENERGY

    Mr. Schlesinger. Well, thank you, Mr. Chairman.
    Let me start by joining with you and with Secretary 
Richardson in paying respects to Senator Coverdell. I worked 
closely with Senator Coverdell on the question of aid to 
Colombia. He was an extraordinarily good Senator, hardworking, 
but more important than that, he was a good man, and we shall 
miss him.
    Mr. Chairman, you have my statement, and I shall not read 
it at this time. I will simply mention a few highlights.
    The Chairman. Excellent.
    Mr. Schlesinger. The first point that I would like to make, 
and I want to emphasize this point, is that all too frequently 
we use the phrase ``energy policy'' or ``national energy 
policy'' as a kind of incantation, as a talisman that will ward 
off distress in the energy area. By contrast to that, we must 
recognize that an energy policy will have to choose a specific 
goal or goals, and that means sacrifice of other objectives.
    In the past, starting with the Arab oil embargo, with 
President Nixon's Project Independence, all through the 1970s 
the great stress was on reducing dependency on foreign oil 
imports, reducing dependency on OPEC. That has become less 
relevant from a national security standpoint than it was in 
those past decades, because of the collapse of the Soviet 
Union, and therefore the collapse of the Soviet threat to the 
oil tap in the Middle East, and also because of the Gulf War. 
Saddam Hussein will be the last Middle East potentate to seek 
control over the oil supplies of the Middle East.
    That is not to say that the national security objective has 
gone away. Oil affects both our foreign policy and our foreign 
policy calculations, but it is far less serious than it was in 
the 1970s when there was a Soviet Union.
    In the intervening years we have moved away from that 
willingness to use government intervention in the attempt to 
reduce dependency on foreign sources of supply, and towards 
reliance on the market. Sometimes it is presented as if 
reliance on the market were a free good, as it were, that 
solves problems. It solves some problems; it creates other 
    Prices in the marketplace, as we have just experienced, 
will fluctuate, and when prices go up, consumers are unhappy, 
users are unhappy. When prices go down, producers are unhappy. 
Avoiding price fluctuations, of course, implies that one 
controls the market, which is the opposite direction from which 
we have moved.
    Also, we depend upon price signals, price signals to create 
the new infrastructure for expanded capacity. We will not have 
expanded capacity until those prices go up, and as a 
consequence, at this time we have problems with the 
infrastructure for our energy industries, perhaps most 
immediately, the infrastructure facing the electric power 
industry in what Secretary Richardson referred to as the 
``Third World'' grid.
    The reason that we have that, Mr. Chairman, Senator Conrad, 
is that we moved enthusiastically into competition in the 
electric power industry without considering the need for 
expanded capacity in the grid. And as cheap power moved around 
in the grid, we discovered that we were operating at close to 
100-percent of capacity. If we want to move towards competition 
and move cheap power around the country, we have got to be 
prepared to take national measures to encourage strengthening 
of the grid.
    I should mention something also, Mr. Chairman, that you and 
Secretary Richardson have referred to, and that is the existing 
problems or the prospective problems with regard to natural gas 
supply. We are not moving enough natural gas into storage at 
this time. It may or may not be a serious problem next winter. 
In your remarks you indicated that it could be a serious 
    If we have a normal winter this coming winter, we are going 
to have serious problems with supply come late January, early 
February. We only are moving perhaps as little as 2.5-trillion 
cubic feet into storage, and that is far less than we would 
need to get us through the winter. It also means that we are 
producing less natural gas than we should, and the consequence 
of that is that when winter comes, we may have a problem. We 
should pray for warm weather.
    Why are we producing less natural gas? Because the price 
signals earlier were not right to encourage the drilling 
activity that is necessary to have the degree of deliverability 
that is essential to have ample supplies. Moreover, we have a 
very high depletion rate with regard to natural gas, depletion 
rates of 30-percent, sometimes greater, and that means in order 
to sustain the present level of production, we must be finding 
7-trillion cubic feet a year. That is going to be quite a major 
    So these matters are a reflection of, in large degree, the 
decision to move towards reliance on the market mechanism. That 
has many advantages, but it does create the potentiality for 
price spikes.
    You have discussed amply, I think, the conditions in the 
Midwest this year. It is plain that when the Congress passed 
the Clean Air Act amendments and called for Phase II of RFG on 
June 1st of this last year, that they did not anticipate, one, 
that the OPEC nations would hold down the availability of 
petroleum and, two, that the price signals to refiners as well 
as a shortage, a relative shortage of supply, would result in 
low operating rates of refineries.
    Since oil has become available, since refinery margins have 
improved, the refineries are now operating at 95- or 96-percent 
of production. But no one could have anticipated those changes. 
It points to the need for careful coordination between 
environmental considerations and energy considerations. We 
sometimes make these decisions independently, and then we have 
reason to regret them.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Schlesinger can be found in 
the appendix on page 74.]
    The Chairman. Thank you very much, Secretary Schlesinger. 
You have made, I think, an important point, that in moving 
toward market forces, clearly the market must see price 
signals, and that leads to commitment of private capital for 
investment and the time lag that we have discussed a little bit 
earlier on, that even after the investment is made, the 
infrastructure, the construction of this takes time, as well as 
the filling of the pipelines or the transmission lines or what 
have you.
    I just query, from your standpoint, you have been involved 
in government in many capacities, likewise in private industry, 
what is the responsibility of the Government in these 
situations? We could, I think, take sort of a laissez faire 
attitude Towards that now, given this price spike in natural 
gas that is apparent, it probably will be clear to many 
companies that investments in both drilling as well as thinking 
through the transportation thing are warranted. Boards of 
directors will be committing that money. People will be out in 
the field doing this.
    But here we are in government, people coming to Washington 
and pointing out that they are not only being inconvenienced 
but maybe severely hurt if there are shutdowns of plants due to 
a very severe winter, quite apart from the problems of poor 
people in our country. We wrestle with this question each year 
in terms of the home heating legislation. How much is to be 
appropriated for our States that are in the northern part, in 
particular, or for low income people everywhere throughout the 
    The market works, sort of roughly, with jerks and starts 
and spikes, but there are a lot of human problems here. There 
are a lot of people who are badly hurt in the process, and then 
government responds to those situations with ad hoc income 
supplements or strange machinations one way or another, really 
to ameliorate discontent.
    You know, I think you are correct, that the thought of an 
energy policy out there that somehow guides all this is 
probably not an appropriate idea for a government that, after 
all, is so diffuse as ours in the number of responsible people. 
But at what point will it become more apparent, given the fact 
we don't have the Soviet Union and we don't have this external, 
to think about our own growth, our own prosperity?
    And maybe this starts with the President. I suggested 
roughly in my opening remarks a coordinating council that 
somehow brings together EPA and the Department of Energy, but 
also Agriculture and Defense, and the President, because this 
is big stuff.
    And without coming to that point, I think the lack of 
confidence of the American people in our government, whether it 
is the executive or the Congress or people throwing bricks at 
each other as to why it all failed, leaving aside private 
industry, vitriolic, demagogic attacks on oil barons, gas 
barons or what have you, we are going to go through this many, 
many times. So maybe it is inevitable.
    But can you give us any general wisdom as to how you would 
begin to formulate a governmental response that takes private 
capital into consideration so that we get better results?
    Mr. Schlesinger. Well, Mr. Chairman, that is a very complex 
question. Ideally, governments will be flexible and they will 
anticipate change. We have not been very good at that.
    You mention a coordinating council. The administration set 
up the National Economic Council, and I would have thought that 
this energy problem and environmental problem might have fallen 
under the purview of the NEC. It may be desirable to have an 
additional body to coordinate within the Government.
    The first rule, it seems to me, is that of Hippocrates, 
which is ``do no damage,'' or do as little damage as possible. 
It is clear, I think, that we have changes in our policies that 
are serious changes.
    For example, the Project Independence of President Nixon 
stressed nuclear power. In the subsequent years, to say the 
least, the stress on nuclear power has gone away. Both 
President Nixon and President Carter stressed coal conversion. 
In the light of change, changed attitudes towards greenhouse 
gases, going towards coal is less than an ideal policy, and 
national policy has changed as a practical matter.
    But, in addition to these serious changes in policies, we 
change policies capriciously, and that, it seems to me, is 
something that can be avoided. One of the great advantages of a 
focus on the long run as you suggest, is that it will hold down 
these capricious changes in policy.
    The view of the world has changed. For example, in the 
1970s it appeared that we would have less natural gas than 
appeared in the subsequent 20-years. The industry will tell you 
today that we will be able to deal with our natural gas 
problems next winter, but the public may not like the price.
    Well, it is true that prices will always equilibrate 
markets when they are permitted to do so. But I think that the 
U.S. Government might begin to look seriously at moving the 35-
trillion-cubic-feet of natural gas that is up there in Alaska, 
starting with Prudhoe Bay.
    For over 25-years, as you will remember, Senator, Congress 
has had the Alaska Natural Gas Transportation Act to deal with 
the choice of a pipeline to move that fuel down to the lower 48 
States. Nothing has taken place in the early years because it 
was not economically feasible.
    We have now reached the point of feasibility, and it seems 
to me that this is something that Congress can do, that 
government can do, and that is to smooth the path to the 
development of this kind of infrastructure which will, I think, 
be necessary, as we continue to move towards the use of natural 
gas in power plants, to supplement the production in the lower 
48 States. I commend it to you. I commend it to Chairman 
Murkowski, to take a look at that issue.
    Those are the things that you can do if you anticipate what 
will happen in the future, and we have good judgment about the 
longer run future, far better than short run judgment. We have 
good long run judgment.
    I trust that, that response sort of responded to your 
    The Chairman. I think that is very helpful, and you have 
raised really three areas in which perhaps it would be 
appropriate, as opposed to lamenting the lack of an energy 
    As you said, we have had a debate in the past on nuclear 
energy, and we haven't had much of a debate recently. The whole 
issue has been how can we store waste from the past, not do you 
extend or expand nuclear energy in this country. Other 
countries are having that debate and are expanding the use of 
nuclear energy.
    Now, it could very well be, as we raise this, that the 
emotions involved in this, or the practical problems of storage 
of the unspent fuel and the debate we are still having over 
where it is to go and under what circumstances. But up front 
the public needs to know this is a big issue, that this is one 
way in which some energy might come to some parts of the 
    Another, as you say, is in the coal conversion area. 
Clearly, for reasons you have mentioned, the greenhouse gas 
debate, other environmental considerations, coal has not been 
favored, certainly soft coal. Some hard coal, on occasion, but 
nevertheless cost is involved in that, and availability. But 
there is a lot of coal left in the country. You know, in the 
same way that presumably, theoretically, the supply of nuclear 
energy is huge, likewise for coal.
    So if we are interested on the supply side of this, those 
are two items which in other fora have been more or less put 
out of the picture of our energy debate. Now, you mentioned 
finally Alaska, and this, Senator Murkowski clearly would be in 
favor of a policy that got to the natural gas in Alaska, and in 
fact espouses that, has many supporters.
    But that is sure to become an environmental issue, almost 
an icon situation. Beyond our practical aspects of that 
transmission, it probably is going to have to come back into 
debate, same as coal and nuclear, hazardous as those pursuits 
are, because there is a very large supply.
    And, as you say, when we were having the deregulation of 
natural gas debates in the latter part of the 1970s, the 
Metzenbaum-Abouresk filibuster on the Bentsen bill, the 
assumption was that natural gas is so limited, that if we ever 
deregulated natural gas, the price would spike up and never 
come down. It was almost a theological view of the parties that 
were held at that point. Now, that has changed, thank goodness, 
in only 20-years.
    Mr. Schlesinger. Those who were concerned about 
deregulating natural gas are now its most enthusiastic 
supporters because of its limited environmental effects.
    The Chairman. So I have noticed. I mean there is a shift in 
the generation. So I think that is a helpful contribution to 
this hearing, that it is not just a question of gasoline spikes 
in Chicago. You know, the question that we are trying to look 
at is, is there a will of the American people, of our 
government, of our industry, to provide adequate supplies for 
the growth of this country, for the comfort of this country?
    You point out correctly, as we all would, that there are 
tradeoffs and they involve the environment, and the environment 
involves the health of the American people, the well-being of 
people likewise. Now, these may or may not be compatible. You 
know, you suggested that sometimes, in your opening comments, 
that the tradeoffs are very severe. You finally have to choose 
one another.
    You know, maybe it is question, I suppose, of the ingenuity 
of the American people that are researchers, as to how many 
formulations we come up with that are good on supply and good 
on environment, good on health. I don't know the answer to that 
    This is why the biomass area, which at best, as we heard 
today, by 2010 might formulate 10-percent of our power, not a 
solution but still an incremental change that at the margins is 
helpful, given the big figure for energy in our country, and 
there does appear to be a lot of promise there of renewable 
supplies. And strategically, as we look at the world, we don't 
have the Soviet Union but we may have somebody some day, and 
this is a good time to put our house in order so that we do not 
have the perils that President Nixon and you and others faced 
back then.
    Let me now recognize my colleague----
    Mr. Schlesinger. Could I comment for a moment, Mr. 
    The Chairman. Yes, yes.
    Mr. Schlesinger. I strongly support the work on biomass. It 
is not going to be a solution for this decade, but if indeed we 
are able to find the enzymes that can break down cellulosic 
biomass, we would have a new energy option that is serious. We 
don't know whether we can be successful, but we should work on 
    With regard to environment and Alaska, there are two 
aspects. One is the opening up of the National Petroleum 
Reserve to exploration. That is objected to by the 
environmentalists, strongly.
    The other aspect, which is to bring down the natural gas in 
Prudhoe Bay and elsewhere, we have already solved the 
environmental problems in the sense that under the Alaska 
Natural Gas Transportation Act there was chosen an Alaska 
natural gas transportation system that goes down the very same 
transportation corridor as does the Alyeska pipeline, and has 
all of its permits in place still after 20- or 25-years. So I 
think on that point the environmental issue is manageable.
    The Chairman. That is a very important distinction. I 
appreciate your mentioning that.
    Mr. Schlesinger. We also have, I think, the question that 
Senator Grassley raised about opening up additional areas for 
exploration. There is a clear conflict between closing off 
areas, particularly the most promising areas, and reducing the 
growth of our dependency on foreign sources of supply.
    The Chairman. That is right, and there probably the 
American people do have to make some choices, because by and 
large we are enthusiastically in favor of larger national 
spaces, and we also are in favor of lower price of gasoline, 
natural gas, both, and at the same time.
    Mr. Schlesinger. And they expect you to deliver both to 
them, Mr. Chairman.
    The Chairman. That is right, and that is why we are meeting 
today, to call upon Senator Conrad.
    Senator Conrad. I thank the Chairman, and thank you, Mr. 
Secretary. I am struck once again how fortunate our country is 
to have people of your quality and ability who are willing to 
come to public service as you have in the past, and we 
appreciate that service very much.
    Mr. Schlesinger. Thank you very much, Senator.
    Senator Conrad. You mentioned in your testimony that one 
place that government may have a role and a responsibility is 
with respect to the capacity of the grid. Could you tell us 
what steps you think the Congress should take with respect to 
improving the capacity of the grid? What are the practical 
steps that we need to take?
    Mr. Schlesinger. There are two aspects of that. One is the 
capacity and the other is the reliability of the grid. I worry 
about the latter, for several reasons.
    As I indicated earlier, when we moved to competition, this 
meant that much greater volumes of electric power would pass 
over the grid, and that meant that the grid would be loaded up. 
The electric power system is this delicate alternating current 
system that is always subject to instability, and a breakdown 
somewhere in the system may lead to a larger breakdown.
    I believe--correct me if I'm wrong, Mr. Chairman--that 
Senator Gorton has a bill with regard to the reliability of the 
electric power grid?
    The Chairman. I am uncertain of that, Sir.
    Mr. Schlesinger. Anyway, that is one thing that I think 
that the Congress should look at very hard. Over the years 
since the 1967 blackout in New York State, industry has been 
left to worry about this problem on its own. It established the 
NERC in the late 1960s to worry about reliability problems, and 
it has served well until this much greater demand was placed 
upon the grid by the encouragement of competition.
    I think that the Congress needs to look at that. I think 
the administration needs to look at that. Enhancing the 
reliability of the grid would be the first thing that I would 
worry about. I would particularly worry about it, Mr. Chairman, 
Senator Conrad, because of the possibilities of cyber warfare, 
information warfare.
    The existence of the grid, the reliability of the grid, is 
a prime target in asymmetric warfare, as a war game of the NSA 
showed a few years ago, ``Eligible Receiver,'' in which 
hypothetically power was shut down along the East Coast. This 
would have a devastating effect on the country, and worrying 
about the reliability of the system is particularly germane at 
this time.
    Expanded capacity, it will come only as a result of 
pressure on the industry, because it is uneconomical. Once 
again, the price signals are not there, Mr. Chairman. It is 
uneconomical to expand capacity unless there is pressure to 
bring about capacity expansion.
    Senator Conrad. Thank you for that. Let me ask you, as I 
said to the Secretary, I am going to my State fair this 
weekend. I am going to be asked, I am sure often, what should 
be done?
    Mr. Schlesinger. I beg pardon?
    Senator Conrad. I will be asked repeatedly, what should be 
done about the spike in prices? What would your answer be to 
those farmers?
    Mr. Schlesinger. I would say several things, Senator. The 
first one is, I think, indicated by the dialogue between 
Senator Grassley and Secretary Richardson, that we probably 
need to have more flexibility with regard to the imposition of 
environmental restrictions on a particular date certain, if the 
circumstances, that were imagined at that date was laid down, 
have changed.
    That has resulted in an unforeseen--largely unforeseen, 
there were warnings of this--but unforeseen 6- or 8-months ago, 
problem. And flexibility with regard to these rules I think is 
essential, and the Chairman's suggestion that we have a 
coordinating council that watches this from the standpoint of 
the executive office might be a very good idea.
    The second thing is. It may be cold comfort in light of the 
charts that you showed to those who are watching the gap 
between input prices and output receipts increase but the fact 
of the matter is that last year oil prices had hit $10 a 
barrel, which had basically crushed the desire to invest in 
exploration in the world outside of OPEC and forced us to 
become more dependent on Middle East sources of supply, such 
that when demand revived, there was less spare capacity around 
the world.
    The benefits of last year, as it were, with regard to fuel 
prices, are part of the cause of the high prices of this year, 
and we should as a country be looking at ways, in my judgment, 
to stabilize prices. That may include the imposition and then 
the reduction of taxes on gasoline, for example, such that the 
price is more stable than it has been. It puts a terrible 
burden on an independent producer, as being the most dramatic 
example, to have these kinds of price fluctuations while they 
are operating on narrow margins.
    Mr. Chairman, you might think in this committee about the 
possibilities of stabilization of prices through the fiscal 
system. It would permit greater security in planning for 
farmers, and it would being in over time, I believe, some 
considerable revenue to the Federal Government that will, of 
course, diminish whenever prices go up.
    But we are living in a peculiar period in which OPEC's 
strength has returned. It is sometimes said, Mr. Chairman, that 
modern OPEC is like a tea bag, in that it works only when it's 
in hot water. And when the prices of oil got down to $10 a 
barrel, the OPEC nations pulled themselves together, achieved 
the necessary cohesion to cut production. Normally, unless they 
are right up against it, they don't do that. Most of the time, 
I think, in the period ahead we are going to see lower prices 
than we see today.
    Senator Conrad. Thank you.
    The Chairman. Thank you very much, Senator Conrad.
    Let me just, without alarming the hearing by asking a 
question like this, when you talk about stabilizing, are you 
suggesting perhaps that if the coordinating council in 
government, including the President, said we are growing at the 
rate of 2-percent in our energy needs, this country, every 
year, and so as a result we are going to need 2-percent more of 
something that provides us energy.
    So OPEC comes along and says, ``Well, for reasons of ours, 
we are going to restrict so many barrels this year.'' And the 
President counters and says, ``Well, if you are going to do 
that, we are going to release X number from the petroleum 
reserve, and we will sell those on the market, have revenue in 
our kitty back here.'' And then OPEC moves the other way and we 
move the other way. We store more in the reserve.
    I mean, is this essentially the kind of mechanism that a 
government has, not as a countercyclical affair or to disrupt 
the price mechanism, but we are in that business in a way. We 
have this emergency reserve, although there is argument as to 
the conditions under which it should be used. Secretary 
Richardson has touched upon this a little bit today. We are 
going to use a little bit of it for New England's problems, as 
perceived, but that is sort of an ad hoc fix of a particular 
geographical location. You are talking, I think, about a much 
broader stabilization effort.
    Mr. Schlesinger. Yes. The reserve in New England, Mr. 
Chairman, is not going to do that much good, in that it is 
projected at 2-million-barrels of heating oil. That is trivial 
in relation to the total requirement. It is a gesture, and it 
may be a desirable gesture, but it is not going to 
significantly affect the market.
    It would seem to me that this is an area in which we might 
well consider a fluctuating tariff, and particularly if the 
OPEC nations continue to have cohesion, which I doubt, and 
maintain an excessive price, that we be prepared to use a 
fluctuating tariff for the purpose of stabilizing prices.
    The Chairman. I would just point out parenthetically, I 
mentioned in my opening statement we invited the Saudi oil 
minister to testify. He is prepared to respond to questions in 
writing. But one point that he and others have made, with OPEC, 
is that with the exception of the Saudis and perhaps slightly 
more capacity in Kuwait, they are already going full steam.
    So, in essence, they are pointing out this is still a 
worldwide supply and demand problem in which they do not bear 
the onus, at least in their judgment, for having precipitated 
the prices. But it is an interesting point of view, and we will 
have the record replete with those thoughts.
    Mr. Schlesinger. The Saudis, in the late 1970s and in 
recent years, have been amongst the doves of OPEC right now the 
Saudi policy is to pull that price down, not entirely for our 
benefit but to prevent the erosion of oil's share in the energy 
    The Chairman. We have been joined by Senator Kerrey. 
Senator, do you have questions of this witness, or are you 
prepared to let Secretary Schlesinger move on, and we would 
then hear from Senator Johnson?


    Senator Kerrey. He seems to be appealing for release.
    Mr. Chairman, I just thank you for holding the hearing. It 
is obvious that gasoline prices have dropped a bit, from the 
attendance here this morning, but in Nebraska our energy price 
increases for a single year are in excess of about $400 million 
of additional payments that we just voted in the crop insurance 
bill, so it is a very big issue for the most important part of 
our economy.
    And I appreciate, Mr. Secretary, your historical analysis 
and presentation of how easy it is for us to sort of lose sight 
of the fact that we still have significant dependency on 
foreign sources, even though OPEC has weakened, and that it is 
very important for us, if we want to be productive and we want 
to have higher standards of living, we still have to have 
energy to produce those higher standards of living. And we in 
Nebraska are very much aware of that.
    Mr. Chairman, I appreciate very much your holding this 
hearing, and I would not ask any additional questions to 
Secretary Schlesinger, and look forward to the additional panel 
and the additional witnesses.
    [The prepared statement of Senator Kerrey can be found in 
the appendix on page 62.]
    The Chairman. Thank you very much, Senator Kerrey. I would 
point out Senator Kerrey was a major factor in moving the 
Committee toward having these hearings. He has sounded the 
alarm consistently, along with Senator Conrad, and I appreciate 
both of them participating.
    And we thank you especially for coming, and look forward to 
seeing you again.
    Mr. Schlesinger. Thank you, Mr. Chairman. And Senator 
Kerrey, may I express my and I think the country's sorrow at 
your retirement.
    Senator Kerrey. Thank you. Thank you.
    Mr. Schlesinger. You have been a fresh breath here in 
Washington. Thank you.
    Senator Kerrey. Thank you.
    The Chairman. Thank you very much.
    The Chair would call now our former colleague, Senator 
Bennett Johnston of Louisiana. It is really a special privilege 
to have you, and you are welcomed by your former colleagues and 
your current friends, and we look forward to hearing your 


    Mr. Johnston. Well, Mr. Chairman, thank you very much, and 
thank you for the invitation to appear. And may I say, just as 
an aside, that daughter Sally had a little girl last night.
    The Chairman. Well, this is very good news, because that is 
a new constituent of mine, as it turns out, without becoming 
very personal.
    Mr. Johnston. Indeed, and I am sure she will be a Lugar 
    The Chairman. I hope so. That will be great.
    Mr. Johnston. Mr. Chairman, first of all I want to 
apologize for my written statement, which is made on my own 
behalf, prepared by me, as you could probably tell, which means 
that I don't have staff. And don't laugh, because you all will 
1-day be in that kind of situation. I tell Senator Kerrey he 
will soon lose his staff, and it is not a very good situation 
when you have to do your own work, and you can see how the 
quality suffers.
    Mr. Chairman, we have gone through another one of these 
same old, same old price gouging accusations of the big oil 
companies, and still another FTC investigation of oil, as to 
why these prices went up so fast. By my count, Mr. Chairman, 
this is the 17th investigation of price gouging. Not one, not 
one single one of those investigations has shown any evidence 
of collusion or market power or price gouging, and so this one 
will be.
    There are, in fact, two investigations that have been done 
on the reasons for these prices, one by EIA, Energy Information 
Administration, one by the Congressional Research Service, both 
of which found no evidence of price gouging. And indeed the 
Congressional Research Service accounted for the difference 
between the Midwest prices, particularly in the Chicago market 
and elsewhere, and virtually to the penny, and I can go into 
what those reasons are, and you probably, I know staff has a 
copy of that.
    The EIA investigation talked about refinery margins being 
squeezed. Now, how can that be, that you can have refinery 
margins squeezed while at the same time oil companies are 
announcing the biggest profits in history? I mean, at Chevron, 
for example, I think we had the best first quarter that we have 
ever had, and yet we made no money on motor gasoline, and that 
is a pattern throughout the industry. How can that be?
    Well, it is very, very simple. That is, you sell crude oil 
on the international markets at world prices and you make a lot 
of money on that when OPEC has the prices high. When prices are 
low, as they were in 1999, down around $10 a barrel, we weren't 
making any money on crude oil but we were doing okay on motor 
gasoline. And so it is that, that is the reason why, among big 
profits, you have no profits on motor gasoline.
    Actually, historically the big oil companies, I might say, 
have enjoyed about one-half the profits on a percentage basis 
as the S&P Industrials have, and I might add, I don't know what 
do you tell your farmers when you go to the fair. One thing you 
could tell them is that crude oil is now less than half, in 
real terms, what it was in 1981, if that makes them feel any 
better. You can also tell them gasoline is now, in real terms, 
below where it was in the 1950s and 1960s, which we think of as 
the halcyon days of oil and gas. I know politically that is 
probably not going to sell, because people look----
    Senator Kerrey. You know what they will do. They will come 
back and tell you what has happened to the price of wheat and 
corn over that period of time, as well.
    Mr. Johnston. That is exactly right. There are problems, 
and you can summarize those as being supply, price, and 
    On the question of supply, when I was last talking about 
oil here in the Senate we were importing about 50-percent. We 
are importing 56-percent now. EIA says we are going to import 
70-percent by 2020. So, Mr. Chairman, anybody who thinks you 
are going to reverse that trend is--I mean, I have been hearing 
this for over a quarter of a century. Nixon's energy 
independence was no foreign imports, and it is all a pipe 
dream. I mean, we don't have the oil and gas in this country to 
avoid it.
    There is plenty of crude oil in the world today. You know, 
when you look at where it is, sometimes that is a problem: 
Kazakstan, the former Soviet Union, Venezuela, of course Iraq, 
Iran. There is plenty of crude oil, and eventually the price 
will elicit that crude oil to come on the market.
    The problem is, of course, the price, which was $11 in late 
1998, went up to $34 in March, down now to a little more than 
$30 a barrel, but as I say, still less than one-half what it 
was in 1981. The real problem with energy is volatility. I 
mean, that is the political problem. What is the proper price 
of oil? I mean, is it really $10 or $11 a barrel, as it was in 
late 1999? It really is not, because if it stays there for very 
long, you put people, the producers, out of business, and you 
allow OPEC to do its thing.
    Now, those who say that we don't have an energy policy and 
that we need an energy policy are suggesting that volatility is 
the problem, that it can be controlled by government, and that 
it is your job to control it. Mr. Chairman, I want to tell you 
in the strongest way possible, I have been through this.
    In 1973, when I came here, and we were holding hearings on 
OPEC and the price of oil, this very problem, everything was 
regulated. Crude oil was regulated, you know, gasoline was 
regulated. We had all this old oil and new oil. Natural gas was 
regulated from the well head to the burner tip. Electricity was 
thought of as being a natural monopoly.
    Mr. Chairman, the most controversial and difficult 
legislative battles I went through in all of those years were 
with respect to the price of energy, particularly natural gas 
but also crude oil. Back in those days they were seriously 
talking about rationing. They were saying we were going to run 
out of natural gas and crude oil about the turn of the century. 
You know, it was going to be over $100 a barrel. It was going 
to be just awful. And if we deregulated natural gas, Ralph 
Nader and his crowd said, oh, the price is going to go through 
the roof.
    Well, Mr. Chairman, we know what happened. We deregulated, 
after a huge fight, and the price of natural gas went down and 
stayed down, and frankly until recently. It has doubled over 
the past year, but even so, in real terms, even at $4 an MCF, 
it is about 15- or 17-percent what it was, the maximum spot 
market price, which got up to about $9. And inflation-adjusted, 
it is just 15- or 17-percent what it was. Now, I think it is 
going up. I think we are going to have a problem with the price 
volatility of natural gas, for a whole lot of reasons.
    But the point is, we fought all those battles, and 
successfully so. There is plenty of oil. There is, according to 
the National Petroleum Council, there is going to be enough 
natural gas to provide some, I think it is 34-percent increase 
by 2010, if we do everything right, if we allow drilling where 
we are supposed to be allowing it and what have you.
    The Chairman. Let me just ask, if I may at this point, I 
hate to interrupt you, Senator Johnston, but we are in the last 
5-minutes of the roll call vote. And so before any of my 
colleagues become anxious or I become anxious about that 
situation, Senator Harkin, our colleague, has offered an 
amendment, and that is the subject of the vote. So, if I may, I 
would like to call for just a short recess at this point in 
your testimony, where you have got us to the point that there 
are supplies, at a price, and then if you could pick up your 
thought after we return, which will be 5-minutes or so from 
now, I would appreciate it. Thank you.
    Mr. Johnston. Thank you, Mr. Chairman.
    The Chairman. Our hearing is called to order again, and 
would you please proceed, Senator Johnston?
    Mr. Johnston. Thank you, Mr. Chairman.
    Right before you left I had stated that I believe that 
there are adequate supplies of oil and gas. The problem is one 
of volatility, and it is a serious problem, and I think the 
problem is likely to get a lot more serious as we face 
blackouts, brownouts, rapid escalation in the price of natural 
gas and continued fluctuation in oil.
    The question is, what do you do about it? I would say 
first, Mr. Chairman, that you should avoid impeding market 
forces. It is a great temptation. Let me give you just one 
example of the current solution du jour for dealing with the 
problem, and that is the Northeast heating oil reserve. It 
proposes to take 2-million-barrels, which Secretary Schlesinger 
says is not enough--it is a pretty good amount--but put that in 
a government storage.
    Now, what is wrong with that? Well, first of all, heating 
oil has got to be turned. You can't keep it there for years 
like you can the Strategic Petroleum Reserve. It will 
chemically degrade if you don't turn it. Typically, private 
people turn it five times a year. The government would do so 
less often, probably once a year.
    So the Government will go out and procure storage. Where 
are they going to get it? Private sector. They don't have any 
themselves. So they are going to take out of private sector 
storage the 2-million-barrels which they will buy. Then that 
will actually take out of use some 10-million-barrels. If they 
turn it five times and they have got 2-million-barrels, you 
take out of use 10-million-barrels in order to get 2-million-
barrels of government reserves.
    Then what is the Government going to do with it? Well, the 
Government presumably would let it go in times of high prices. 
Well, you can guarantee high prices because the private people 
who--it is expensive, you know, to procure and store, private 
storage. If they see the Government with 2-million-barrels out 
there overhanging the market, they are not going to put in 
their usual amount of heating oil. They are going to put in 
    So you create the shortage and then you have got to figure 
out how the Government is going to release it and what kind of 
regulations you have. I mean, are you going to let people buy 
it and then resell it at a higher price? It recalls the crude 
oil allocation problems of the 1970s.
    I can predict, Mr. Chairman, it is going to be a grand and 
glorious mess if they do it. Looks like they are going to do 
it. And it is not going to work, and when it is not going to 
work, then they are going to say, ``Well, we didn't have enough 
in storage, we've got to get more,'' which is only going to 
exacerbate the situation.
    Same thing is true on the Strategic Petroleum Reserve. We 
created that for the purpose of dealing with serious supply 
interruptions, not price spikes. The Congress is simply not 
capable of setting a price which is a proper price and adhering 
to it. And then the market gets used to that supply, and it 
makes matters worse rather than better.
    What can we do? Let me suggest a number of very simple 
things, not easy to do, maybe, but they are simple. You need to 
drill in those places where you can drill: Arctic National 
Wildlife Refuge.
    I cannot understand why this Congress will not drill in the 
Arctic National Wildlife Refuge. There is no commercial fish 
there. Caribou is no problem. Right next door in the Prudhoe 
Bay they drilled, and the caribou population went up 700-
percent. That ought to be proof enough. There is enough oil 
there, we think, to at least reverse the decline. We drill out 
in the Gulf of Mexico, which has over 1-billion-pounds-of-
commercial-seafood, great recreational areas. No recreation up 
on the North Slope. I can't understand why we don't drill 
    We ought to be drilling in places like, for example, Lease 
Sale 181 out in the Gulf; in the Destin Dome. Let me tell you, 
in the Destin Dome, my company, Chevron, has a lease out there. 
I don't know if they are going to be allowed to drill, but it 
is over 100-miles offshore. We think there are over 2-trillion-
cubic-feet of natural gas.
    Florida has said you can't drill out there, and it is due 
for a decision by the Secretary in, I think, next month. This 
being a political year and Florida being a big State, you can 
predict how that is going to come out. This is natural gas. It 
can't spill. You can't see it from the beach. It is serviced 
out of Alabama. And yet Florida says we can't drill there. And 
let me tell you, Florida is going to have a natural gas 
    It is simple. It may not be easy to do. Electricity, yes, I 
fully agree we need to go to electricity competition. Someone 
asked what we should do about the grid. Well, for one thing, 
you need to build more transmission. Transmission is about 6-
percent of the cost of delivering that electricity, and yet we 
are woefully short on transmission facilities.
    And one of the reasons is that FERC is not allowing a rate 
of return--actually, they haven't set the rate of return, but 
their administrative law judge has recommended, I think it is 
9.6-cents, I think, which is not enough. You are getting more 
at the State level, allowed by the State commissions, than the 
9.6. And they are not going to build any transmission. I mean, 
this is very, very bad policy, very clear. Members of Congress 
ought to be writing to FERC now and say give a rate of return 
that will bring forth transmission supplies.
    As far as, I mean when you are talking about reliability, 
you have got to build more transmission, first of all. That is 
the biggest thing, because our electricity industry grew by a 
group of local companies which, you know, it might be State-
wide, it might be multi-State, but they were local, and their 
reliability margins were set by their public utility 
commissions, and they didn't basically send a lot of energy 
outside of their own grid.
    Now we are interconnected, imperfectly and not well 
interconnected, and you need to build much more of that 
transmission. It is going to be a very, very serious problem, 
the problem of transmission, as well as the problem of 
additional electricity generation.
    One of the problems there is there are no more--you can't 
go out and buy a turbine now. G.E. has got all of its turbines 
bought up for years to come. Intergy, in a very smart move, I 
think, bought them all up. And so if you want to build a new 
gas-fired power plant, which is the cheapest and the best way 
to do it now, you have got to wait in line for a long time to 
get your turbine. So things are going to get worse in 
electricity before they get better.
    We ought to do something about siting, siting plants, 
siting pipelines. It takes too long. California, let me tell 
you, people are pulling their hair out in San Diego now over 
the price of energy because they are way--the price has spiked 
way up because there is a shortage of supply and there is a 
transmission problem. We need to speed that along, the siting.
    I remember back in the 1970s I chaired a conference. The 
bill passed, I think, both houses, as I recall, on critical 
energy supply facilities, siting of critical energy supply 
facilities. It didn't pass, but it is the kind of thing that 
ought to be considered.
    And, finally, there are some other things I could say, but 
perhaps most important, you need to pursue the nuclear option 
in this country. You can talk about renewables, but look, 
renewables are going to be a small part of the solution. 
Nuclear is 20-percent of our electricity now, and could be much 
bigger. It is nonemitting, doesn't cause any greenhouse gas 
    And if you lose what you have now, you are going to 
exacerbate that natural gas price problem, because the 
reasonable prices for natural gas depend upon keeping your 
present nuclear facilities going. That could be a whole hearing 
in itself, of how you do that, but let me just say that is what 
you need to do.
    So, Mr. Chairman, you are going to have political energy 
problems, but I would, in the strongest way I can tell you, say 
stick to the basic policy of market forces. We do have an 
energy policy which was procured at great political loss of 
blood, and it is called market forces. We need to perfect that, 
preserve that, and expand it.
    Thank you.
    [The prepared statement of Mr. Johnston can be found in the 
appendix on page 79.]
    The Chairman. Thank you very much, Senator Johnston.
    Let me just highlight for a moment the point you have made 
that volatility is the problem, and you have cited the swing in 
a short time from $10-a-barrel oil to $34, or $30, as it may be 
now, and the inadequacy of government in attempting to define 
what the proper price ought to be.
    There is at least some more than anecdotal material that 
the OPEC countries, in trying to think through their policy, 
have come out with the thought maybe that $25-a-barrel is a 
proper price. Now, this may be a tactical point of view with 
regard to the politics of oil in the world, and pressures from 
our country and others may have something to do with at least a 
profit level that makes possible the infrastructure building 
for themselves or other considerations we would have in trying 
to bring those investments.
    With Secretary Schlesinger, I pursued at the last of his 
testimony this thought: If we were to try to combat volatility, 
is it a reasonable proposition that our government would try to 
make an estimate of the growth of the economy or the growth of 
energy resources, and the two are somewhat correlated, and say 
that we are going to try to facilitate 2-percent growth every 
year? Now, in order to do that, we will need to have X number 
of units of energy in some form, and so we are prepared really 
to act as a government to try to bring that about.
    I would suggest, and you mentioned a little bit in your 
testimony with regard to oil, if we finally come to that, that 
we have the Strategic Reserve, and so there would be at least 
the viability or a possibility of utilizing some of the 
strategic reserve, not with the thought of depressing the price 
of oil all-time, but having stated that we are going to need so 
much, that we would supply that much. OPEC, others, would all 
know that is where it is headed, that we are not dumping the 
entirety of the reserve or doing something irrational.
    I think you raised some very good points which in a larger 
hearing we would have to try to think through, that is, the 
distribution of this oil and physically, even if you have on 
paper an idea of equilibrium, how in the marketplace and given 
the facilities we have, all of this occurs.
    And it may be that practical people will say finally, 
because you have suggested with regard to the New England 
heating oil thing, that this is not going to work. Even though 
it sends signals, the practical aspects of this, in this time 
frame and so forth, are beyond what they are going to be able 
to do. That may be the case.
    I am just trying to get to what I think the common sense 
question many Americans would say, is surely there must be 
someone who can do something about a situation that goes from 
$10 to $34, that jerks all of us completely out of shape. And 
you may say, ``Well, what's sauce for the goose is sauce for 
the gander.''
    People were suffering in oil country last year, and this 
year it is very high, but even then oil newsletters point out 
people want to make sure it stays there a while before they 
begin to make these sorts of investments and begin to build the 
infrastructure and all the rest, and it may not have lasted 
that long. They sort of suspect somewhere it might go down 
again, therefore even in these conditions the market works, but 
haltingly, with great reservations, with a lot of skepticism on 
the part of people who may lose money, who have to put the 
money out there.
    And I am just trying to figure out, where does government 
or any public group come into this picture? We are all watching 
the drama of why people make investments, how high does it have 
to be, how high does it stay, while on the other hand consumers 
of the product all over the country come not only to Washington 
but to State capitals, to mayors and so forth, and demand 
relief, and all sorts of ad hoc solutions are a result of that.
    Mr. Johnston. Mr. Chairman, all I can say is, almost 
invariably, I will say invariably, when the Government steps 
in, they make matters worse.
    Now, with respect to the $25 target, is it ploy with OPEC? 
I personally don't believe so. I think $25 is about as much as, 
as high as you can have without eliciting a big supply response 
by the world, a big efficiency and conservation response.
    Now, I remember back in the 1970s when the experts came in 
and said that there was no elasticity in the consumption of 
gasoline. It didn't matter where the price of gasoline went, it 
is inelastic. You are not going to use any more or any less. 
And the problem was that they had these computer models that 
showed, you know, at 32-cents there is so much consumption, at 
36--you remember when gasoline was 32-cents?--at 36-cents it is 
not that much more. Well, they were using a very narrow range.
    What we found was that there is huge elasticity in 
consumption, but there is a big lag time. If you are driving a 
big SUV, I call them urban assault vehicles, you can't easily 
and quickly make a change to a more fuel-efficient car. But 
believe me, if that price would stay up very high, $1.75, $2 a 
gallon, those SUVs are not going to be worth much because 
people are going to be getting into something smaller.
    That is what happened in the 1970s. The Saudis remember 
that better than anybody. Not only did it bring forth 
conservation, huge conservation, but it also--I mean, look at 
natural gas consumption. It is, in the industrial sector, it is 
down from what it was back in the 1970s, because of 
conservation, not because we are producing less.
    So what you have got to be able to do is sort of weather 
the storm and wait for the supply reaction. The supply reaction 
will happen, and it will happen much better than we as planners 
and the Government can do. Believe me, I mean, I have watched 
our budgets at Chevron. I mean, we had a planning budget last 
year of $19 a barrel, and we are still doing some additional 
exploration. If we thought the price was going to be up around 
$30, we would do much, much more in terms of exploration.
    That is just one company, and I can tell you the other 
companies do exactly the same thing. It is economics. The 
market system works just like they say it does, but again, the 
problem is lag time.
    Probably the best thing to do, you know, if you can't think 
of anything else, is call for an investigation by the FTC. The 
results are going to be predictable, but it doesn't do much 
harm and it is not taken too seriously by those who know about 
it. But if you can get by with doing that kind of thing, 
without really tinkering with the marketplace, you are a lot 
better off.
    It took me a long time to come to these conclusions. I 
mean, I came here as a little lawyer from a medium-size town, 
and not knowing much about energy. I found out, in a quarter of 
a century, how this thing works, and the market makes it work.
    The Chairman. Senator, we thank you for distilling that 
wisdom of the quarter century today for us, and, as always, it 
is great to have you here in our committee.
    Mr. Johnston. Thank you very much, Mr. Chairman.
    The Chairman. The Chair would like to call now a 
distinguished panel composed of Keith Collins, chief economist, 
U.S. Department of Agriculture, Washington, DC.; Harry S. 
Baumes, senior vice president, WEFA, Inc., Eddystone, 
Pennsylvania; Eric Vaughn, president of Renewable Fuels 
Association, Washington, DC.; W. James McCarthy, general 
manager, Government and Public Affairs, CITGO Petroleum 
Corporation, Tulsa, Oklahoma; Don Hutchens, executive director, 
Nebraska Corn Board, Lincoln, Nebraska; and R. Skip Horvath, 
president of the Natural Gas Supply Association, Washington, 
    Gentlemen, we appreciate your coming. We appreciate your 
patience. At this hour you are still with us, and we are 
grateful. Now, if you could summarize your statements in 5-
minutes more or less, I would appreciate it. The statements, I 
will say, for all six of you will be published in full in the 
record, so they will be a part of our permanent record.
    Dr. Collins, it is always a privilege to have you before 
the Committee. Will you please proceed?


    Mr. Collins. Thank you very much, Mr. Chairman. On behalf 
of USDA, we appreciate the opportunity to participate in your 
hearing today on energy issues. In my 5-minutes I would like to 
make five points.
    Point number one is that U.S. agriculture uses a lot of 
energy in a lot of alternative forms. Each year agriculture 
accounts for about 2-percent of the energy use in the United 
States. Diesel fuel is the largest energy input among the 
direct uses of energy, and fertilizer the largest among the 
indirect uses of energy.
    An important trend in American agriculture has been that 
energy efficiency has been steadily improving. Farm output per 
unit of direct energy used has increased 60-percent since 1980. 
Now, that means that agriculture is less vulnerable to energy 
price shocks than it was back then, although it is still 
vulnerable. It also means that agriculture is making an 
important contribution to energy conservation, and I think it 
illustrates Mr. Johnson's point about long term price 
elasticities of energy demand in agriculture.
    Point number two: The energy price increases this year are 
reducing farm income, and this is coming from two different 
sources, on the price side and on the cost side. When a 
consumer spends $1 on food, about 8-cents goes to cover 
transportation and energy, for those energy and transportation 
costs after the commodity leaves the farm.
    These marketing costs are increasing the business costs, 
the operating costs, of processors and transporters and so on. 
And what they do, then, is they will pass forward to consumers 
and back to farmers those costs in the form of lower prices 
being bid at central markets, and as well higher basis or even 
lower prices in more remote farm markets.
    At this point we don't see a whole lot of price effects; we 
are mostly unable to measure price effects because of all the 
other factors that are going on right now that are affecting 
prices at the farm. However, I would note that truck rates have 
risen for moving some agricultural commodities, but spot rail 
and barge rates are actually lower so far this summer than they 
were a year ago.
    Well, in addition to the reduction in farm revenue, net 
farm income is also reduced by higher farm production expenses 
on energy. When a farmer spends $1 on total production costs, 
about 3-cents goes to direct fuel and oil costs. This year we 
expect that is going to rise to about 4-cents, which would be 
the highest rate since 1986. In dollar terms, this translates 
into direct fuel expenses being $8.1 billion this year. That is 
up $2.3 billion over last year. That is a 40-percent increase.
    Thus far, prices of indirect energy inputs such as 
fertilizers and chemicals have not changed very much. We do 
forecast a small increase in expenditures on those inputs. 
However, as natural gas prices and oil prices remain elevated, 
the higher production costs will be for chemicals, fertilizers, 
machinery, custom work. Things are going to get reflected into 
the prices farmers pay for those inputs down the road.
    Point number three: In the short term, farmers can do 
little to avoid these higher fuel costs, and these costs will 
reduce farm income dollar-for-dollar. However, over time, 
particularly if the high prices persist, there are a number of 
strategies that farmers can employ to reduce the impacts, 
including planting less energy-intensive crops, using 
alternative practices such as reduced tillage, contracting fuel 
supplies, storing fuel, investing in smart and energy-efficient 
machinery and buildings.
    Point number four: The higher energy prices and the 
impending large corn crop are expected to increase the demand 
for ethanol this year, reduce ethanol's production cost, 
increase ethanol profitability. This is going to increase 
incentives to expand ethanol production capacity, and that is 
going to make more ethanol available to replace MTBE and help 
solve the water contamination problem, and it should help make 
more ethanol available to be blended with conventional gasoline 
as well as an RFG to help solve the Nation's tight gasoline 
supply problem.
    Point number five: On the farm program side, I can report 
that USDA and DOE are working together to implement the 
President's Executive Order 13134, as well as your bill, the 
Biomass Research and Development Act of 2000.
    I am also pleased to report that we have about completed 
our proposed rule on the bioenergy program which Secretary 
Glickman announced several months ago, under which the 
Commodity Credit Corporation would share input costs with 
ethanol and biodiesel processors. We plan to send that rule to 
the Federal Register late next week. And I also report that we 
are about complete with our solicitation, as required under our 
appropriations bill for FY 2000, that will allow us to take 
applications for biomass pilot projects up to 250,000 acres on 
CRP land.
    We are optimistic that bioproducts and bioenergy will 
become an important new income opportunity for more and more 
farmers as we move through this decade, as well as reduce the 
national dependence on fossil fuel.
    And that completes my statement.
    [The prepared statement of Mr. Collins can be found in the 
appendix on page 106.]
    The Chairman. Thank you very much, Dr. Collins.
    Dr. Baumes.


    Mr. Baumes. Mr. Chairman, it is a pleasure to be here this 
morning to talk about energy issues in agriculture, and I am 
sorry, but I must digress a little bit because I am especially 
happy to be here this morning, because I took the train down 
from Philadelphia. I missed your opening comments, and one of 
the reasons, not one but the reason I missed your opening 
comments was that we had an electrical problem with Amtrak and 
the train broke down outside the BWI station. So I am very 
sensitive to blackouts and power outages this morning.
    I am happy to be here, though, to share my comments on 
energy issues in agriculture. Many of my comments will mirror 
Mr. Collins'. I would like to focus my remarks on four areas. 
One is direct usage of energy inputs in agriculture, production 
agriculture in particular; indirect usage of energy inputs in 
production agriculture. And then discuss very quickly the 
short-run implications, and longer-run implications as well.
    In the farm operation, whether crops or animal production, 
farmers demand energy inputs for different types of energy 
inputs, different types of production activities. Planting, 
harvesting, primarily require diesel fuel or fuels to operate 
equipment. Electricity powers irrigation systems milking 
parlors, air conditioning and dryers. Natural gas and liquid 
propane powers dryers too. Gasoline, diesel, and lubricants are 
necessary to run equipment.
    In the aggregate, farmers expended on direct energy inputs 
an average of over $9 billion per year between 1996 and 1999. 
By my calculations, that is nearly 5.5-percent of total cash 
expenses and about 5-percent of total production expenses. 
Estimates of energy expenditures on cash costs are expected to 
rise considerably for the year 2000.
    By my estimates, we are looking at a rise in direct energy 
costs of close to $2.5 billion, pushing the figure to almost 
$12 billion for the year 2000. Total cash expenses are also 
estimated to rise, but at a slower rate, so as a consequence we 
are looking at direct energy costs to increase their share of 
total cash costs to about 7-percent from 5-percent.
    If we look at individual crops, direct energy costs 
expended by farmers on corn per acre have averaged somewhere 
between $24 to $25 per acre, according to USDA estimates and 
WEFA's estimates over the past 4-years. That is about 15-
percent of variable cash expenses.
    Soybeans is not as energy-intensive, takes about $6 to $10 
in direct energy expenses, only 7-percent of variable cash 
expenses. Wheat is similar in terms of absolute magnitude. It 
requires about $10 in direct energy costs and it accounts for 
14-percent of cash expenses.
    So, as Mr. Collins said, energy is a major input and 
clearly an important factor to agriculture production, and as 
these costs rise, the farmer has very little opportunity to 
adjust and his returns are adversely affected.
    Indirect usage by agriculture reflects the amount of energy 
consumed in production of manufactured inputs, primarily 
fertilizers and pesticides. Farmers use millions of tons of 
fertilizer and millions of pounds of pesticide. Fertilizer 
production, particularly nitrogen production, is extremely 
    Anhydrous ammonia, the primary feedstock to produce 
fertilizers, nitrogen fertilizers, is also a product used by 
farmers. Every ton of ammonia produced in the U.S. requires 
somewhere between 33- to 34-million BTUs of natural gas. For 
the past 4-years the price of natural gas has been fairly 
stable and energy costs in ammonia production have accounted 
for 75-percent of the total production cost.
    Now, more recently, energy prices facing the fertilizer 
producers are closer to $4 per million BTU of gas, and this has 
raised the cost considerably. In the absence of being able to 
pass these costs on to farmers or to buyers, 15- to 20-percent 
of the U.S. ammonia capacity has shut down in response to these 
higher gas prices.
    Energy-intensive fertilizers and crop chemical costs 
account for about 43-percent of the variable cash expenses for 
corn production, 35-percent for wheat production, and 40-
percent for soybean production. Couple these with the direct 
energy costs of 10- to 15-percent for these crops, and you can 
clearly see that energy is an important input to agriculture.
    In the short run, the farmer has little opportunity to 
adjust. He has to ``suck it up,'' in the vernacular. He has to 
pay higher costs for his diesel fuel, and operate, and that 
will directly affect his bottom line. In the longer run, when a 
farmer can alter his production schedule, change his complement 
of energy inputs, move to alternative or less energy-intensive 
crop production or animal production, he can ameliorate or 
mitigate some of the costs of higher priced energy.
    Mr. Chairman, this concludes my comments this morning. I 
would be happy to answer any questions the Committee may have.
    [The prepared statement of Mr. Baumes can be found in the 
appendix on page 97.]
    The Chairman. Thank you very much, Dr. Baumes, and we are 
grateful that you made it despite the hazards of energy in your 
transportation this morning.
    I am delighted that Eric Vaughn is with us again. His 
association with renewable fuels obviously strikes a chord with 
many of our members, as has been mentioned today, and we look 
forward to your testimony.


    Mr. Vaughn. Mr. Chairman, we always strive to strike 
chords, so it is once again an opportunity I greatly appreciate 
to appear before you and your committee.
    My name is Eric Vaughn. I am the president of the Renewable 
Fuels Association. We are the national trade association for 
the domestic ethanol industry. There are 61-ethanol-production-
facilities. Probably the finest ethanol production facility, 
though, is in South Bend, Indiana, New Energy Corp.
    Over 600-million-bushels-of-corn are going to be processed 
into ethanol this year. According to the Energy Information 
Agency, for the past 9-months we have hit record production 
levels. This past month 110,000-barrels-a-day of ethanol were 
    The great news, in addition to all that, is that since 
1990, the passage of the Clean Air Act Amendments, the domestic 
ethanol industry has doubled in size, and some 600,000 farmers 
today own and operate ethanol production facilities. Again, we 
have doubled in size since 1990.
    I listened this morning, and always, Mr. Chairman, coming 
before your committee is an education. I wasn't certain we were 
in the Energy Committee--excuse me, the Agriculture Committee--
all morning long.
    I have noted with some degree of real satisfaction that 
virtually every major environmental, agriculture, and energy 
issue that has affected renewable fuels, ethanol, biobased 
diesel, has started, has gotten its push, and has been 
supported by you, Mr. Chairman, and this committee, not the 
Environment Committee and not the Energy Committee, not to 
slight them for not being here, but it is you and your 
    It was the clean octane amendment that was added to the 
1990 Clean Air Act amendments, the only amendment, by the way, 
that passed on the floor that year, that instructed the oil 
companies to begin to use alternative sources of clean octane 
and not ever-increasing levels of aromatics. There was a huge 
outcry of support for that at the time, because it was just 
about that time, almost exactly 10-years ago, that we were in 
the Persian Gulf.
    In fact, August 2nd, coming up, is the 10-year anniversary 
of that activity.
    There was a tremendous amount of interest in energy 
security, energy policy, and energy prices, just like we are 
facing today. But instead of beating your chest, instead of 
giving long-winded speeches, this committee took action, and 
you, Sir, are to be congratulated for that action.
    But you didn't stop there. A couple of years later you 
worked very closely at lifting the oxygenate cap that EPA 
imposed. You also worked with the Environmental Protection 
Agency to try to adopt a carbon monoxide credit for these 
alternative fuels and their use in reformulated gasoline. You 
have worked aggressively to promote tax policies, and are to be 
specifically congratulated for your co-op provisions in the tax 
provisions that helped to develop these co-op operations and 
activities all across the country.
    And now you are working again on biomass provisions, and 
you are to be congratulated for the work that you are doing not 
to just talk about energy policy but to produce results, and 
results that we are already beginning to see in many of our 
ethanol production facilities.
    You haven't stopped there, though. This committee has been 
very busy. You are now working with the Environment and Public 
Works Committee to try to fix the problem of MTBE in 
reformulated gasoline. It is not an easy fix, as you know. You 
have been the principal cosponsor of two major legislative 
initiatives, and I daresay to you and members of this committee 
who have put the bridge together, you are bridging between the 
East and West Coasts, where MTBE is so dominant, and the 
Midwest where ethanol is so dominant, and attempting to bridge 
the differences, concerns and problems associated with Federal 
reformulated gasoline regulations.
    But you are not simply looking at MTBE, you are also taking 
a very honorable position in trying to make sure there is no 
backsliding, a critical component of this program. That was the 
intent of the Clean Air Act Amendments in the first place.
    What does all this have to do with agriculture and farmers 
and this committee? Everything. Six-hundred-million-bushels-of-
corn have been processed. We have doubled the size of this 
industry. Mr. Lugar, we have doubled it because of leadership 
like yours and members of this committee.
    The recent run-up in gasoline prices across the country 
frightened, angered--frankly, there are words I can't use in 
open public committee about what they did to members of our 
industry, angering our industry because many people in the oil 
business blamed ethanol, blamed the ethanol industry for the 
run-up in prices. In 12-months conventional gasoline prices in 
Chicago ran up 29-percent, while reformulated gasoline prices 
went up 34-percent. MTBE prices went up 30-percent. Ethanol 
prices remained steady.
    We have oversupplied for this market. We have over a 
quarter of a billion gallons of excess capacity today, ready to 
meet the demands of reformulated gasoline. And this industry is 
now looking at gasoline prices, both conventional and 
reformulated gasoline with ethanol, at 92-cents wholesale 
today. We didn't run the prices up, Mr. Chairman, as you know, 
and unfortunately I can't claim credit for running them down, 
but I have three very quick recommendations.
    Number one is supply management. The oil industry today has 
adopted a just-in-time delivery mechanism, which essentially 
means about a two-day supply. While I am not calling for 
regulations to increase that supply availability, the oil 
industry should be prodded, maybe encouraged by this committee 
and others, to adopt a more reasonable plan of action in terms 
of supply. Maybe 4-days of supply, just to help smooth out some 
of those rough edges, especially when it comes to prices.
    Second, environmental regulations, we still have a North 
and South reformulated gasoline program. We ought to have one 
national reformulated gasoline program. It would help out 
tremendously. And, Mr. Chairman, while the Federal 
Environmental Protection Agency, after 5-years, has issued a 
Notice of Proposed Rulemaking on a CO credit, it is inadequate, 
it is not worthy of the action that this committee has put 
toward that issue, and needs to be strengthened.
    And, finally and lastly, with your leadership on 
renewables, we need a renewable energy program. And while I 
would be the last to admit, unfortunately, for some in this 
room, that renewables can't make a huge impact, it is making an 
impact and a positive one toward energy security, environmental 
security, and agricultural security all across the country.
    Again, I appreciate the opportunity to be here, Sir. I look 
forward to your questions.
    [The prepared statement of Mr. Vaughn can be found in the 
appendix on page 90.]
    The Chairman. Thank you very much, Mr. Vaughn.
    Mr. McCarthy.


    Mr. McCarthy. Thank you very much, Mr. Chairman. I am Jim 
McCarthy, and I head up the Government and Public Affairs for 
CITGO Petroleum Corporation. According to the latest available 
data, CITGO is the second largest marketer of gasoline in the 
United States, with about a 10.3-percent share. We do not do 
any exploration and production, and we also do not own or 
operate any CITGO retail sites. Those are all independently 
owned by local business people.
    I too am pleased to be here, to have this opportunity to 
speak about the overall issue of providing energy that is so 
critical not only to the American farmer but also to the 
economic well-being of our country. We empathize with those 
families whose household budgets felt the impact of the rapidly 
rising gasoline prices, and it is our sincerest hope that a 
sound, cohesive national energy policy emerges from hearings 
such as this, because what America does need is an energy 
policy that ensures the quality of life that the American 
people expect and deserve.
    Unfortunately, it is our opinion that Americans' ability to 
have dependable supplies of transportation fuels when and how 
they want it is in jeopardy as a result of our regulatory 
policies. The situation that we saw earlier this summer is a 
classic case of the relationship between supply, demand, and 
resulting price.
    In a free market system, the price of a commodity like 
gasoline is not so much a factor of the cost of manufacturing 
but rather the relationship between the consumer's demand for a 
product and the manufacturer's ability to supply it to the 
marketplace. The current situation, the price of gas in the 
Midwest was driven up by the inability to manufacture and 
distribute it to the marketplace to meet that consumer's 
demand. Once again, the consumer paid the price, the hidden 
price, of the impact of the regulatory policies, primarily 
driven by the EPA.
    I know you are familiar that both the recently released 
June 5 DOE memorandum and the June 15 Congressional Research 
memorandum attributed the price swings to five major factors, 
so I won't go into them.
    However, clearly refiners' crude costs have gone up the 
equivalent of 30-cents per gallon over 1-year ago today. We had 
exceptionally low inventories which were drawn down, in order 
to turn our tanks, or in order to meet the new lower Phase II 
RFG program restrictions, and that was the only way to bring 
the new product to the market. There was an unusual rash of 
operational problems. Refineries, pipelines, and even marine 
channels were under--could not be fully utilized because of 
these operational problems.
    I am sure you are familiar that a recent Federal court 
ruling gave Unocal a valid patent on a blend formulation, which 
quite frankly caught the industry off guard and caused RFG 
production to be scaled back, further restricting our 
    And, finally and most importantly, and the point I am 
trying to make today, is the inescapable fact that there are 
too many fuels out there, not just a North and a South fuel, 
but this summer alone there are 13-grades-of-gasoline, making 
about 39-different-types-of-gasoline that we have to deliver 
over the summer.
    Now, this is being manufactured and delivered in a system 
that was basically designed for six different fuels, so the 
strain on the system is incredible. We have a patchwork of 
fuels that unintentionally constrains refiners' ability to 
manufacture and then supply the fuels that are mandated by the 
various governments.
    About 30-percent of the gasoline sold in the U.S. is RFG, 
including the Midwest markets in Chicago and Milwaukee. In 
those markets, however, we do not use MTBE, but rather we do 
use ethanol, and this means that the RFG that we utilize around 
the rest of the country cannot be moved in to meet a short 
demand, because we have to have a special blend stock called 
RBOB. This RBOB was more difficult to manufacture than any of 
us had anticipated, and so supplies were exceptionally low. 
Nevertheless, the marketplace did take over and the supplies of 
RBOB were brought in and the price came down.
    The important point is that this is a recurring theme 
around our country. As local regulators have created new and 
different gasolines, refiners no longer have the flexibility to 
quickly shift supplies to the area of greatest need. The result 
is situations that previously we could have corrected very 
quickly, and no longer can do in the same time frame. It takes 
longer to turn these products, create the products, and then 
ship them to where they need to go.
    This summer's price/supply situation is not the first 
occurrence and we do not believe it will be the last, unless 
our industry's warnings are heeded. Similar situations occurred 
in 1989 with the advent of EPA's RVP program; again in 1991 
during Phase I of the Reformulated Gas Program; again in 1999. 
According to industry experts, we are in a nightmare of 
patchwork environmental regulations which are wreaking havoc 
with gasoline supply and price stability, and we agree with 
that point.
    The important point to recognize is that the root cause 
stems from the unfortunate fact that this Nation's only energy 
policy appears to be, at least from a petroleum perspective, 
driven by the Environmental Protection Agency. And in reality 
it is not a policy at all, but rather a hodgepodge of 
regulations which has changed every year since 1970, when the 
Clean Air Act was originally passed.
    And it appears that unfortunately there is no end in sight. 
Our industry is already faced with the next wave, EPA's 
requirements for ultra-low sulfur gasoline and the diesel 
specifications. CITGO is concerned that the EPA again is not 
listening to the warnings, and that there will be shortages 
again , causing price spikes, as a result of the recent Tier II 
gasoline regulations and the sulfur regulations for diesel. 
Unless EPA changes its approach, we will see more and greater 
price spikes.
    Meeting the new gasoline regulations will cost about $8 
billion for our industry, and will present significant 
challenges to our engineering abilities. Because it is high 
capital cost, it is likely that some refiners will be unable to 
justify that investment and will simply shut down that 
particular stream. This will tighten supply.
    Others, however, have already said that due to the high 
cost of conventional desulfurization technology, they will try 
new but unproven technologies to reduce sulfur content of 
fuels. These new technologies will be less costly but will have 
limited commercial experience, and will likely result in 
initial operating problems, which will further tighten supply 
and cause price spikes.
    In addition, in order for us to meet the 2004 deadline 
required by the EPA, the industry will face significant hurdles 
just to obtain the necessary permits, to put together the 
necessary engineering and construction resources and hardware 
to get it done in time. If EPA somehow does not properly 
facilitate the permitting, or if other regulations, such as the 
proposed diesel sulfur regulation or the ban on MTBE, overlap 
this Tier II work, then we are clearly on a course for 
    I have additional concerns about EPA's proposed diesel fuel 
sulfur rule, which carries a $10 billion price tag. 
Specifically, whether it is even possible to provide the needed 
supplies of diesel within the 15-ppm sulfur level cap imposed 
within the rule. With the current distribution system, it will 
be extremely difficult to deliver this fuel with 15-ppm to the 
    The problem is that the new diesel must share the same 
distribution system with other products that will have 
significantly higher sulfur levels. More fundamentally, due to 
the cost to produce the 15-ppm sulfur diesel, many refiners, 
once again, will drop out of that marketplace, and we know what 
will happen. This could drastically reduce the supply of 
diesel, and supply disruptions will occur, and once again, 
price spikes.
    The bottom line is that the diesel sulfur rule is being 
proposed with a number too low, and the timing is far too soon. 
Similar health and environmental benefits can be obtained with 
a more reasonable 50-ppm sulfur cap.
    Nevertheless, EPA has arbitrarily selected standards for 
the proposed diesel sulfur without the technology to support 
the standard. In summary, the automobile engine manufacturers 
don't have the after treatment technology to meet the standard, 
and the oil industry doesn't have the desulfurization 
technology to manufacture it in a cost effective manner.
    Even more importantly, next year EPA plans to propose 
another rule to lower the sulfur content of off-road diesel. 
Here again, due to the manufacturing, supply, and distribution 
issues already mentioned, the supply of off-road diesel will 
drop and prices will increase, specifically for the 
agricultural community.
    In my written testimony I have provided what we think are 
the solutions to this particular situation, and they are very 
basically six.
    Number one, regulations must address greatest environmental 
and health concerns first.
    Number two, regulations must be based on sound science and 
current data.
    Number three, regulations must carefully balance the total 
anticipated cost of compliance, both capital and maintenance, 
over a specified period of time, against the anticipated 
benefits over those same time frames.
    Number four, the regulated community must have a more 
active role in setting the priorities.
    Number five, regulations should set performance 
requirements but allow for creative, innovative solutions as 
well as sufficient lead time.
    And, number six, each regulation should include an 
automatic sunset provision that can be overridden if necessary.
    With that, I will close my remarks, and I look forward to 
your questions. Thank you very much.
    [The prepared statement of Mr. McCarthy can be found in the 
appendix on page 121.]
    The Chairman. Thank you very much, Mr. McCarthy.
    Mr. Hutchens.


    Mr. Hutchens. Chairman Lugar and Members of the Committee, 
thank you for the opportunity to put a farmer face on this 
issue, and we do appreciate that opportunity.
    I have got to tell you that my name is Don Hutchens and I 
represent 30,000 corn farmers in the State of Nebraska, but I 
am also knee deep in this industry of agriculture, because I am 
also a producer. I try to spend my weekends, but anymore it is 
difficult to spend weekends on the farm when your neighbors are 
stopping by and asking the very question that Senator Conrad 
has to answer when he goes home to the North Dakota State Fair.
    I was also looking forward to having Senator Kerrey here, 
because it was 18-years ago when a younger farmer in my 
community met up with a young Senator, then running for 
Governor, so it is a pleasure for me to cross paths with him 
again in his waning months of his term here in Congress.
    When I came into State government when Senator Kerrey was 
Governor, it was in the mid-1980s, and it was a very difficult 
time for agriculture, as you well know, Senator Lugar. But I 
continue to farm with a 91-year-old father, who probably saw 
times that make these times pale in comparison.
    And as I was sitting listening to the testimony today, I 
thought of the two happiest times in my father's life dealt 
with energy, and it was when REA put electricity on the farm, 
and when he could finally sell the horses and buy a gas-powered 
tractor. He is still on the farm. He uses diesel, and he is 
still actively in the field, not as much as he would like. But 
I think it is interesting, the changes that we have seen in 
production agriculture as it relates to energy.
    I want to compliment this committee on what you have done 
in the past in addressing farm legislation that would put $5.4 
billion in market loss payments in farmers' pockets. My 
concern, though, Senator, is that $5.4 billion, in comparison 
to the numbers that ERS have put together, may be lost this 
year just in the having to pay for those increased energy 
costs. That means that $5.4 billion isn't going to go to 
capital costs. It is not going to write down operating loans. 
It is not going to flow through the economy the way it normally 
would, and it is not going to put kids through their education.
    Nebraska farmers have been hit extremely hard. In fact, my 
farming interests lie in the southwestern part of Nebraska, 
where the drought is the most severe across the corn belt. 
Those farmers are using more energy, and they have no choice 
but to continue to use energy in the production of our State's 
leading crop, and that is corn, because if you don't produce, 
you don't qualify for crop insurance. And right now the only 
way that you can really come out of the program is farming for 
the loan deficiency payments, so we have to crank out every 
possible bushel that we can, so it hits Nebraska farmers 
extremely hard.
    And the sad part about it is that the consumer will not 
help us incur those costs, because you and I will not pay a 
penny more for a pound of meat or a loaf of bread, because we 
have that inability in agriculture to pass those costs on down 
to the consumer.
    In Nebraska, and you have heard the statements on energy 
prices so I won't repeat those on diesel, propane, and 
gasoline, but in Nebraska we have 79,000 wells. And I will give 
you an example, that our normal irrigation cost per well would 
be about $2,200. Given the fact that we have already pumped, 
about 3-weeks ago, as much as we normally would all summer, our 
potential costs on those irrigation wells are going to move to 
about $6,600 per well. You do the math. We can eat up, Senator 
Lugar, the $390 million of market loss payments very quickly.
    Some comments made about our already practices in energy 
conservation with new equipment, new farming practices, even 
using genetically modified crops to reduce applications in 
fields. But I can guarantee you that it has been the American 
farmers that have paid for those costs, and as we talked, and 
it was mentioned earlier that we can adapt new farming 
practices, we can, but it comes at a cost. And you know it is 
energy, it is fertilizer, and it is seed and it is chemicals 
that capture the majority of the costs for farmers.
    The next issue I want to mention, because it is the most 
recent one, the thought process in the country has moved away 
from gasoline and diesel, even though it is a major concern and 
a major draw on our financial capabilities, but now it has 
moved to natural gas. Predominantly, natural gas is the 
predominant product within anhydrous ammonia, and you know this 
fall and this spring farmers will use over 4-million-tons-of-
anhydrous-ammonia. Your State, Illinois, Iowa, Nebraska, we use 
about 50-percent of the anhydrous ammonia in agricultural 
    My numbers say that anhydrous ammonia per ton has risen 
from about $140 a ton to about $270 a ton over the last year. 
Farmers are going to find it very difficult to absorb energy 
costs and fertilizer costs within the same growing season.
    My fear is that we are on the brink of another financial 
disaster in agriculture, and I don't want to sound just like 
the issues that farmers always bring to the table, so I guess I 
want to draw some potential solutions to that. Eric Vaughn is 
probably one of the most adequate spokesmen for the ethanol 
industry, and so I yield that he has given most of that 
information to you over the past.
    But 99-percent of the farmers tell us they find it so 
ironic that, as big energy users, we can't find the opportunity 
to use more and more corn in the production of ethanol. And I 
think you have stated in the past that there is probably higher 
cost to a barrel of oil than maybe the $30 that we recognize.
    Also, there is an opportunity to expand the production of 
natural gas, and whether it is additional drilling here in the 
United States or importing additional reserves of natural gas, 
we should do everything possible in that vein.
    Expand the market for biodiesel. Biodiesel and ethanol 
together helps. As Eric mentioned, we are not going to solve 
the energy problem with using agricultural products, but we do 
play a larger role in that.
    Expand the breaks for farmers to adopt new technology that 
uses less energy. One that hasn't been mentioned here today is 
more research and understanding of carbon sequestration. Can we 
pay farmers a green payment, or can we pay them to store carbon 
and help in the aspect of cash flow?
    And then, as was mentioned here by the last testimony, an 
aspect of sulfur in diesel, I believe that you can find some 
advocates who will work with you in saying that maybe 15-ppm is 
too low, and it is going to transfer some additional costs onto 
production agriculture that we can't bear at this point in 
    There is a number of other areas. I would like to also 
mention that Senator Conrad's question of what do we tell the 
American farmer out there, I haven't heard the right answer yet 
this morning in Secretary Richardson's or Schlesinger's 
comments, with all due respect.
    There is also one other way, Senator, that we address the 
problems of higher energy costs for agriculture. We can do it 
in the energy arena, but we also have to do it in the aspects 
of farm policy that provide farmers the capability of 
tolerating periods of higher energy prices, and we are going to 
have to look at some alternatives or some additions or 
improvements on foreign policy that will add to the ability of 
farmers to pay for higher energy.
    Thank you for the time, and I appreciate the opportunity.
    [The prepared statement of Mr. Hutchens can be found in the 
appendix on page 134.]
    The Chairman. Thank you very much, Mr. Hutchens.
    Before I call upon you, Mr. Horvath, let me mention that on 
the Senate floor I have just been advised that the Senate 
Democrats have objected to a committee's continuing to meet. 
They have got that right. Therefore, we have been advised that 
the hearing should conclude. So the formal part of the hearing 
will conclude. I will ask the recorder to cease recording.
    [The prepared statement of Mr. Horvath can be found in the 
appendix on page 138.]
    [The prepared statement of Mr. Eischens can be found in the 
appendix on page 144.]
    [Whereupon, at 12:10 p.m., the Committee was adjourned.]

                            A P P E N D I X

                             July 20, 2000















































































































                             July 20, 2000