[Senate Hearing 108-3]
[From the U.S. Government Publishing Office]



                                                          S. Hrg. 108-3

                         OIL SUPPLY AND PRICES

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

          TO RECEIVE TESTIMONY REGARDING OIL SUPPLY AND PRICES

                               __________

                           FEBRUARY 13, 2003


                       Printed for the use of the
               Committee on Energy and Natural Resources


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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                 PETE V. DOMENICI, New Mexico, Chairman
DON NICKLES, Oklahoma                JEFF BINGAMAN, New Mexico
LARRY E. CRAIG, Idaho                DANIEL K. AKAKA, Hawaii
BEN NIGHTHORSE CAMPBELL, Colorado    BYRON L. DORGAN, North Dakota
CRAIG THOMAS, Wyoming                BOB GRAHAM, Florida
LAMAR ALEXANDER, Tennessee           RON WYDEN, Oregon
LISA MURKOWSKI, Alaska               TIM JOHNSON, South Dakota
JAMES M. TALENT, Missouri            MARY L. LANDRIEU, Louisiana
CONRAD BURNS, Montana                EVAN BAYH, Indiana
GORDON SMITH, Oregon                 DIANNE FEINSTEIN, California
JIM BUNNING, Kentucky                CHARLES E. SCHUMER, New York
JON KYL, Arizona                     MARIA CANTWELL, Washington
                       Alex Flint, Staff Director
                     James P. Beirne, Chief Counsel
               Robert M. Simon, Democratic Staff Director
                Sam E. Fowler, Democratic Chief Counsel
                Scott O'Malia, Professional Staff Member
         Jennifer Michael, Democratic Professional Staff Member


                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Bunning, Hon. Jim, U.S. Senator from Kentucky....................     6
Burns, Hon. Conrad, U.S. Senator from Montana....................     4
Cavaney, Red, President and CEO, American Petroleum Institute....    17
Domenici, Hon. Pete V., U.S. Senator from New Mexico.............     1
Ebel, Robert E., Director, Energy Program, Center for Strategic 
  and International Studies......................................    15
Feinstein, Hon. Dianne, U.S. Senator from California.............     2
May, James C., President and CEO, Air Transport Association of 
  America........................................................    23
Simmons, Matthew R., Chairman and CEO, Simmons & Company 
  International, Houston, TX.....................................     6
Wyden, Hon. Ron, U.S. Senator from Oregon........................     5

                               APPENDIXES
                               Appendix I

Responses to additional questions................................    47

                              Appendix II

Additional material submitted for the record.....................    61

 
                         OIL SUPPLY AND PRICES

                              ----------                              


                      THURSDAY, FEBRUARY 13, 2003

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2:33 p.m., in 
room SD-366, Dirksen Senate Office Building, Hon. Pete V. 
Domenici, chairman, presiding.

          OPENING STATEMENT OF HON. PETE V. DOMENICI, 
                  U.S. SENATOR FROM NEW MEXICO

    The Chairman. We will start the hearing.
    I have asked this hearing to take place to take testimony 
on global oil supply and global demand issues. We are 
particularly concerned in light of the recent sharp increases 
in the price of oil and gasoline.
    Specifically, the committee is interested in, from my 
standpoint, what is occurring in the global oil markets today; 
what has caused the recent price increases; what is being done 
to prevent future supply shortages, and does our current energy 
policy address this.
    I have decided to forego an opening statement on my own 
because we have four distinguished witnesses, and obviously no 
one wants to stay here very late. I would like very much for 
all of you to get a chance to testify and answer questions.
    So with that, I yield to Senator Bingaman. Then, Senator 
Burns, we will yield to you for whatever your desires are on 
opening statements.
    Thank you, gentlemen, for coming.
    Senator Bingaman.
    [The prepared statements of Senator Domenici and Senator 
Feinstein follow:]
       Prepared Statement of Hon. Pete V. Domenici, U.S. Senator 
                            From New Mexico
    I have called this hearing to take testimony on global oil supply 
and demand issues. We are particularly concerned in light of recent, 
sharp increases in the price of oil and gasoline.
    Specifically, this committee is interested in:

          1. What is occurring in the global oil markets today;
          2. What has caused the recent price increases;
          3. What is being done to prevent future supply shortages and 
        does our current energy policy address this.

    This is the second time in two years that this committee has held a 
hearing like this in response to the high price of crude oil. The last 
hearing was in February 2000. At that time, the United States was 
paying the highest price for oil since the Gulf War. That meant that 
consumers were paying record prices for gasoline, heating and diesel 
fuel.
    Fuel costs also drove up the price of food, textiles and 
manufactured products. Anything that had to be transported cost more, 
including people. Now, two years later, we are faced with the same 
crisis. Prices are soaring and supplies are down.
    Today, crude oil is trading at $35/barrel; Gasoline prices have hit 
$1.60/gallon; Heating oil has hit $1.20/gal. According to a 2000 
International Monetary Fund study, our national prosperity takes a hit 
every time the price of oil climbs. Every $5/barrel increase in the 
price of oil means an average reduction in the GDP of 0.4 percent.
    Clearly, this already-slow economy does not need the further drag 
of rising oil prices. The current supply shortage is a result of a 
combination of factors:

   three month oil strike in Venezuela, which removed nearly 2 
        million barrels of day from the world market.
   cold winter weather in the Northeast.
   low crude and petroleum stocks and
   market jitters over Iraq.

    Some of these causes are different than the ones two years ago. But 
what hasn't changed is our dangerous dependence on foreign oil. The 
U.S. consumes 19.5 million barrels of crude oil each day. 
Unfortunately, nearly 60 percent of our daily supplies come from 
imports. That number has been climbing for decades.
    In 1973, we imported 35 percent of our oil. In 1990, imports had 
climbed to 42 percent. Now, 13 years later, we import nearly 60 percent 
of our oil. The Energy Information Administration estimates that figure 
will grow to 68 percent by 2025. While our dangerous dependence on 
foreign oil grows, our own production continues to decline. Today, we 
are producing no more oil than we did half a century ago. Our 
production today is the same as it was in 1950.
    That isn't because we don't have it. The United States has the 12th 
largest amount of oil reserves in the world, according to the EIA.
    If we continue on this path of declining production and increasing 
importation, our economy will suffer, the cost of heating our homes and 
driving our cars will continue to climb and we will continue to 
jeopardize our own national security.
    It is a dangerous world. I am not comfortable turning over the fate 
of our economy and our national security to Middle East oil producers--
or any other producer for that matter. It is bad energy policy. It is 
bad economic policy. If we are going to have enough oil and gas--and at 
a reasonable price--we have to explore our own available resources.
    We have tremendous reserves in the Gulf of Mexico and the frontier 
of Alaska, not to mention the resources in the continental U.S. located 
on ``multi-use'' designated federal lands. If we don't step up the 
plate and take responsibility for providing more of our own energy, we 
allow foreign suppliers to hold hostage our economy and our national 
security.
    I am committed to working with my colleagues to pass a 
comprehensive energy bill that will make responsible, environmentally-
sound domestic energy production a priority. We have four outstanding 
witnesses here today to discuss the current oil prices and provide 
insight to our future supply outlook. We have deliberately limited the 
number of witnesses to ensure that members are able to hear from these 
experts and engage in serious discussion about our energy priorities 
and concerns.
    It is a pleasure to have you here, and I look forward to hearing 
your testimony. Before we begin, I would like to remind my colleagues 
that the record will remain open until 5:00 pm today for members to 
submit questions.
                                 ______
                                 
       Prepared Statement of Hon. Dianne Feinstein, U.S. Senator 
                            From California

    Mr. Chairman, let me start off by saying that I am very concerned 
about America's fuel supply and the amount of oil this nation consumes.
    The prospect of an imminent war in Iraq, the continued uncertainty 
in Venezuela, and the lack of a strong response from the Federal 
government to address our balkanized fuel market have all contributed 
to push the price of oil to over $35 a barrel and the average price of 
gasoline to over $1.50 per gallon nationwide.
    Higher energy prices will impact every American family and business 
this winter and conditions will only worsen as we approach the peak 
driving season this summer. As usual, prices are predicted to be 
especially high in California.
    If we go to war, prices are predicted to spike even higher since 
there could be a temporary loss of oil exports from Iraq and 
neighboring Persian Gulf countries. Prices are also predicted to climb 
as oil companies shift more and more of their refining to use ethanol 
instead of the harmful fuel additive MTBE (Methyl Tertiary Butyl 
Ether). Currently, approximately 65 percent of the gasoline in 
California is blended with ethanol, not MTBE.
    I believe there are a few ways the Federal government must respond 
now to the uncertain conditions on the horizon in our fuel markets.
    First, Congress must allow states to waive the 2% oxygenate 
required in gasoline under the Clean Air Act.
    This is something California has sought for quite some time because 
the requirement to blend California's gasoline with 2 percent oxygenate 
is an unnecessary cost to Californians and has polluted our waters with 
MTBE.
    In California, Governor Gray Davis ordered a phase-out of MTBE by 
the end of 2003, but the Federal law requiring two percent oxygenates 
remains, putting our State in an untenable position.
    This is because the best available substitute for MTBE to meet the 
two-percent requirement is ethanol, but there is not a sufficient 
supply of ethanol to meet the projected demand in California and the 
rest of the country. Congress must act to waive the two percent 
oxygenate requirement in place.
    With inadequate ethanol supplies, we can expect supply disruptions 
and price spikes during the peak driving months of this summer. Higher 
costs for ethanol will add to predictions that retail gasoline prices 
may climb to unprecedented levels on their own this summer because of 
uncertainty in the world oil markets.
    In the last session of Congress, I introduced legislation with 
Senator Inhofe--now the Chairman of the Environment and Public Works 
Committee--to give California and other States the relief they need 
from the unwarranted, unnecessary 2 percent oxygenate requirement. I 
plan to reintroduce this legislation soon to give state officials 
flexibility to determine whether to use oxygenates in their gasoline.
    As the Senate begins to craft an energy bill this year, I look 
forward to working with members of this Committee and other interested 
parties to come up with fair and equitable solutions to improve our 
fuel markets.
    Another step Congress can take to reduce dependence on petroleum is 
to increase Corporate Average Fuel Economy standards.
    I am concerned by the enormous amount of oil this nation consumes. 
The United States is now the largest energy consumer in the world, with 
4 percent of the world's population using 25 percent of the planet's 
energy. 40 percent of the oil this nation uses goes directly into our 
automobiles--that means 12 million barrels of oil each day.
    Today, SUVs and light duty trucks comprise more than half of the 
new car sales in the United States. As a result, the overall fuel 
economy of our nation's fleet is the lowest it has been in two 
decades--because fuel economy standards for these vehicles are far 
lower than they are for other passenger vehicles.
    By employing technologies to increase efficiency and reduce our 
demand for oil, I believe we can pass on great savings to the American 
family and businesses--not to mention reduce carbon dioxide emissions.
    Last month, Senator Snowe and I--along with 12 other Senators--
introduced legislation to close the ``SUV Loophole,'' and require that 
SUVs meet the same fuel efficiency standards as passenger cars by 2011. 
If implemented, closing the SUV Loophole would:
   Save the U.S. 1 million barrels of oil a day and reduce our 
        dependence on foreign oil imports by 10 percent.
   Prevent about 240 million tons of carbon dioxide--the top 
        greenhouse gas and biggest single cause of global warming--from 
        entering the atmosphere each year.
   Save SUV and light duty truck owners hundreds of dollars 
        each year in gasoline costs.

    Simply put, this legislation is the single most important step the 
United States can take to limit dependence on foreign oil and better 
protect our environment.

    Senator Bingaman. Thank you, Mr. Chairman. I will defer to 
your wishes and not make an opening statement. I am looking 
forward to hearing the testimony. I think it is very timely. 
There are a lot of serious issues related to prices and supply 
of oil and other fuel that we need to hear about today.
    The Chairman. Thank you very much.
    And we now proceed. Senator Burns, excuse me. Go ahead.

         STATEMENT OF HON. CONRAD BURNS, U.S. SENATOR 
                          FROM MONTANA

    Senator Burns. James May, it is nice to see you in a 
different venue. You have never been up here before. Thank you 
for coming.
    Mr. Chairman, thank you for having this hearing. I am going 
to submit my statement for the record.
    We completed a trip into Russia the first part of December 
looking at the possibilities of increasing our number of 
sources for energy. I have read a couple of books on Winston 
Churchill, and he says our security will be found in the 
variety of sources rather than the reliability on a single 
source, even though the supply may be large.
    I think with new players coming into the world oil market, 
western Africa being one, the Caspian Basin, and Russia itself. 
However, in Russia there is a lack of infrastructure and 
investment to make it viable at this time. But if Russia wants 
to be a player in the world market, it will force them to adopt 
land reform and legal reform and those kind of things that we 
want to see in a worldwide market setting. I think we should 
pursue that.
    So I thank you for holding this hearing today.
    And we have been doing some things both on the supply side 
and also on new technologies that are very exciting, and I am 
excited about our witnesses today and looking forward to 
hearing their testimony.
    [The prepared statement of Senator Burns follows:]
   Prepared Statement of Hon. Conrad Burns, U.S. Senator From Montana
    Thank you, Mr. Chairman, for holding this hearing today and to the 
witnesses for appearing. They are each experts who specialize in energy 
markets and can give us insight into the state of the U.S. Oil Supply 
and help us determine the direction we should be heading to with 
respect to our nation's energy policies.
    The United States consumes about 19 million barrels of oil per 
day--60 percent of which we import from other countries. A great 
portion of the oil we use is used for transportation, about 12 million 
barrels per day. The U.S. is a big country, and we move people and 
products across it every day with great efficiency and safety. That is 
one of the reasons we lead the world in GDP.
    Because our economy is greatly dependent on the ability to move 
these people and products, countless American jobs and families are 
intertwined with the price and availability of oil. Whether you think 
that is a good thing or a bad thing, it is the inescapable truth. Far 
beyond the price of gas at the pump, we all are beginning to understand 
that the source of the oil we buy is as important as the price. There 
is no reason to line the pockets of our enemies with the oil we buy.
    There are three ways to improve long-term energy security with 
respect to oil: 1) reduce our overall use; 2) increase domestic 
production; and 3) increase the number of players in the world market. 
Alone, none of these is a silver bullet, but all three in combination 
can have a significant effect.
    The population of this country is growing, which is a great thing. 
We are a prosperous and dynamic nation. That alone means we will 
probably continue to use more oil into the foreseeable future. Of 
course there are ways to reduce the amount of oil our people and their 
cars and trucks and airplanes use. We should be using more ethanol in 
this country--it's a hugely underused resource. And the President has 
supported the FreedomCar initiative to develop cars that run on 
hydrogen fuel cells, which I support wholeheartedly.
    In Montana (at Montana State University) we are doing 
groundbreaking work on fuel cells, and it is a very exciting field. 
Some of the best scientists in the nation and the world have been 
working on fuel cells for the last twenty years and more, and I am 
encouraged by the President's commitment. However, our expectations 
need to be realistic. We are still in research and development phase of 
transportation fuel cells. The cost of energy produced by fuel cells is 
still sky-high and not nearly reliable enough. We'll get there, but it 
won't be tomorrow, and it won't be next year. You can look to fuel 
cells as the future, but not as the present.
    On the domestic energy front, I echo the comments of my colleagues 
that we need to do more. We have oil and gas reserves on public lands 
that are completely impossible to access. ANWR is only one example. 
Slowly, we have let the ``Not In My Backyard'' philosophy overtake the 
need for a dependable domestic energy supply. We need to know where the 
reserves are and be willing and able to access them as a way to protect 
our country. With modern drilling technology and our high environmental 
standards, the United States should be leading the world in wise 
resource production. Instead, we have placed ourselves at the whim of a 
volatile world market. The U.S. may well be an importer of oil as long 
as any of us are alive, but we should be doing better than we are here 
at home.
    Looking at our imports, there are actions we can take as a nation, 
and as a Congress to improve the current situation. We need to take a 
close look at our trading partners and promote democracy rather than 
terror. We need to encourage a more countries to be active players in 
the oil market. Places like Russia, Western Africa, the Caspian Basin, 
and others are emerging as promising sources. American investment in 
those countries can be the key to developing a liquid and stable 
worldwide market.
    In many cases, that investment will not happen unless these 
countries undertake meaningful land and judicial reforms. We should 
encourage that reform, and make a commitment to those countries that 
are willing. For example, when I traveled to Russia in December, I met 
with government officials and who explained the great challenges they 
face in securing foreign energy investment. I signed a statement of 
joint cooperation between our countries with members of the Duma, and 
committed that I would bring the message back to you. As a result, I am 
introducing a Resolution to encourage improved cooperation with the 
Russian Federation on energy development issues, and I hope all of you 
will become cosponsors.
    We all know we are in a challenging time, and the U.S. and each of 
us should do what we can to better our safety, our economy, and our 
security. Thank you to the witnesses for helping us determine what 
those actions should be.

    The Chairman. Thank you very much.
    Senator did you want to make any brief opening remarks?
    Senator Wyden. Whatever is your pleasure. Are we allowed to 
do that?
    The Chairman. Just as brief as you can make it.

           STATEMENT OF HON. RON WYDEN, U.S. SENATOR 
                          FROM OREGON

    Senator Wyden. Thank you, Mr. Chairman. I very much 
appreciate your holding the hearing, Mr. Chairman.
    I am particularly concerned because right now you have got 
consumers getting clobbered, but we are also seeing oil company 
profits soar through the roof. Royal Dutch Shell reported a 
$2.8 billion profit for the fourth quarter of 2002, up 46 
percent from the year before. During the same quarter, Exxon 
Mobil reported a 53 percent increase in its quarterly profit. 
We really need to get at these issues.
    And I will say that I think it is very regrettable that the 
administration is unwilling to come here today to discuss these 
issues. We have tried, under both Chairman Domenici and Senator 
Bingaman, to work in a bipartisan way on difficult issues. You 
cannot do that if the administration is not here at a time when 
oil prices are one of the key economic issues of our time.
    I appreciate your letting me say that, Mr. Chairman. I look 
forward to questions.
    The Chairman. Let me comment on your last observation. The 
administration is not here. The administration is scheduled to 
be here. We are out on recess, and I think it is the following 
week or the first part of the week after that the Secretary 
will be here himself.
    Senator Bunning, we did not have any opening remarks, 
either the chairman or I.
    Senator Bunning. I am just going to ask you permission to 
enter them into the record, and I will question the witnesses.
    [The prepared statement of Senator Bunning follows:]

   Prepared Statement of Hon. Jim Bunning, U.S. Senator From Kentucky

    Thank you, Mr. Chairman.
    Oil is an important commodity that makes this country move. We rely 
on it to drive our cars, heat our homes, travel, and deliver goods and 
services to companies and homes across the country. America's reliable 
and affordable oil has helped raise our standard of living and enhance 
our modern life.
    Thanks to new technology, we have increased our conservation to 
operate with less energy and less impact on the environment. Despite 
these accomplishments, the United States is currently facing a tight 
reserve of oil.
    The long, cold winter we have experienced this year, the Venezuela 
crisis, and the threat of a possible war with Iraq have all made 
matters worse. Our gas prices are up almost 38 cents per gallon higher 
than last year's prices. This causes me concern, especially since the 
upcoming summer months are when so many families take to the road for 
their annual vacation.
    Higher prices place a strain on American family's budget and, in 
turn, our economic recovery. The United States is the single largest 
user of petroleum in the world. Now is the time for us to boost our 
domestic energy sources as well as promote conservation.
    The United States today produces less energy than we did in World 
War II. Our supplies are almost 120 million barrels lower than they 
were a year ago. The need to increase our own production of energy is 
especially true given the high possibility of war with Iraq. It is 
already estimated that fears over a war have driven oil prices higher 
in recent months.
    Our national security has never been so important and we must 
strengthen our energy independence to protect ourselves from madmen 
like Hussein and the politic of the middle east. ANWR and other areas 
should be examined to reduce our dependence on foreign oil. ANWR alone 
has the potential to produce over 1 million barrels a day. That could 
fuel Kentucky's oil needs for the next 80 years.
    We have no choice. We must reduce our dependence on foreign oil and 
increase our domestic supply.
    I look forward to hearing about the status of our oil supply today. 
I appreciate the time our witnesses have taken today to come testify.
    Thank you.

    The Chairman. Great. Thank you so much. Thank you for 
coming today.
    With that, we are going to proceed. Mr. Matthew Simmons, 
chairman and CEO of Simmons & Company from Houston, Texas, will 
lead off. Robert Ebel, director for the Center for Strategic 
and International Studies here in Washington. James May is here 
with a new hat on, president and CEO of the Air Transport 
Association. It is good to have you here. And Red Cavaney, 
president of the American Petroleum Institute. It is good to 
have all of you.
    Let us start with you, Mr. Simmons.

      STATEMENT OF MATTHEW R. SIMMONS, CHAIRMAN AND CEO, 
          SIMMONS & COMPANY INTERNATIONAL, HOUSTON, TX

    Mr. Simmons. Chairman Domenici and fellow Senators, I have 
spent 30 years focusing exclusively on energy-related 
investment banking and research, and I am honored to be here to 
testify today. While I am a member of various energy groups, 
including the National Petroleum Council and several others, I 
am actually here today strictly as an independent energy 
observer and a concerned citizen about the gravity of America's 
energy issues.
    The United States has a multitude of serious energy 
problems, but perhaps the most immediate and serious is our 
precarious oil supplies and ultra-low oil stocks. The last time 
U.S. oil stocks were so low was in October 1975. In the Gulf 
Coast, the Midwest, and the Rockies regions, crude stocks fell 
by another 7 million barrels last week, and in this critical 
region, crude stocks have never been lower on a day's usage 
basis.
    Until recently, most of our oil problems have been largely 
ignored, but now the prices are on the move again due to 
increasing winter demand, flat new daily oil supply, and 
particularly Venezuela's oil system which is now in turmoil. 
And we are now likely to test exactly how much excess capacity 
the world really has, how well our global tanker industry can 
shift to radically different global oil flows, and even how 
well the U.S. Strategic Petroleum Reserve, the SPR, really 
works. The danger of physical shortages in one of more key 
petroleum products in the United States has probably never been 
so high.
    Once oil prices bounced back to $27-$28 last summer, most 
oil observers assumed this high price was a war premium. What 
went almost unnoticed at the time was a rapid fall in U.S. 
petroleum stocks. U.S. petroleum stocks were already low as the 
third quarter came in. Then a serious of bad luck events, two 
hurricanes, the Tokyo nuclear problem, the sinking of the 
Prestige, just continued to pull both U.S. and OECD stocks ever 
lower.
    And finally came the surprise no one could have imagined. 
Venezuela, the United States' closest and long-term very loyal, 
reliable oil supplier, suddenly saw its oil system virtually 
shut down. Venezuela's production has apparently edged back, 
but exports are still 1.6 million barrels a day less than they 
averaged in November and for the most of the last couple of 
years. And the lost oil production in just December and January 
has taken about 120 million barrels out of the global oil 
system.
    For the first few weeks of the Venezuelan strike, the 
impact on U.S. oil supplies was minimal, but this was probably 
simply a liquidation of stored oil stocks in the Caribbean and 
elsewhere. Once this temporary liquidation ended, U.S. oil 
stocks finally felt the full brunt of Venezuela's oil shutdown, 
and in almost every category of oil stocks, we are now at or 
approaching record lows.
    This turmoil raises a series of troubling questions, which 
I outlined in my written remarks. It is far easier to raise 
these serious questions than it is to answer any of them, but 
let me highlight just the most serious of these.
    Our low oil stocks are dangerously low. No one knows how 
serious they are because we have no solid data on where minimum 
operating levels in the oil system really are or even the 
status of secondary and tertiary stocks.
    How will U.S. stocks ever get rebuilt?
    The Chairman. Excuse me. Can I interrupt you for a moment 
first? I really do not want you to hurry. It seems like you are 
moving very fast. I have talked to you before, and you talk 
slower than that. Can you talk more slowly than that? It is 
much easier to understand you.
    Mr. Simmons. I am watching my 5 minutes.
    [Laughter.]
    The Chairman. We will give you an extra 30 seconds if you 
talk more slowly.
    In any event, what do you mean when you say oil stocks?
    Mr. Simmons. The oil inventories that create the way that 
our logistics in the United States work. What is really 
misunderstood is for this country and its geographic size to 
actually keep 20 million barrels a day flowing through the 
system, we have to have an enormous amount of inventory that is 
really not usable. It is just a line pack. So when I say oil 
stocks, it is not equities. It is the physical inventory of 
crude oil and all the finished products.
    The Chairman. Okay. Proceed.
    Mr. Simmons. What we do not know is how dangerously low our 
oil stocks are because there is a very critical component 
called minimum operating levels, and once we drop below minimum 
operating levels, we have no operational flexibility left. We 
also, unfortunately, do not have any way to measure what is 
outside primary stocks. That is inventory holdings of 50,000 
barrels or more.
    How will U.S. stocks ever get rebuilt? It is unlikely, now 
that we are so low, that U.S. oil production will suddenly turn 
around. There are massive deep water developments underway 
today, but only a handful are going to come on stream in 2003, 
and production declines, I am afraid, in Alaska, the lower 48, 
and the shallow waters of the Gulf of Mexico are still 
accelerating.
    In the last 6 years, global non-OPEC, non-former Soviet 
Union supply only grew by 2.2 million barrels a day, less than 
half over the prior 5 years, and effectively only four 
countries created almost all of this growth, and three of these 
four countries are now experiencing production declines.
    The flattening of supply was not for a lack of exploration 
and production spending. As an example, the top five publicly 
held oil and gas companies spent in cash $150 billion on E&P 
costs over the past 4 years, and their oil and gas production 
barely grew. The former Soviet Union turned out to be the only 
real positive oil supply growth in the past several years, but 
report after report now shows that Russia's physical ability to 
grow its oil exports is maxed out.
    OPEC is still the giant source of the world's incremental 
oil, and within OPEC only one country has any sizeable excess 
capacity, Saudi Arabia. Saudi Arabia has been a constant and 
reliable supplier to the United States for over 60 years. Saudi 
Arabia steadfastly assured the OECD and the United States that 
it can increase its production from around 8 million barrels a 
day today to as high as 10.5 million barrels a day. But they 
also openly acknowledge that in order to sustain this surge 
rate, new wells need to be drilled.
    Saudi Arabia, like the entire Middle East, has only a 
handful of giant oil fields which anchor a very high percentage 
of their daily output. With only one exception, all the Middle 
East fields are old.
    Saudi Arabia's excellent reservoir technicians are very 
candid about Saudi's three-fold oil challenges. One, the mature 
age of their fields; two, the great amount of water coming out 
of these world-class reservoirs; and three, the tight complex 
formations they are now dealing with to keep production stable 
and growing. None of these oil challenges suggests there is an 
easy way to increase Saudi Arabia's oil output rapidly on a 
sustained basis. And in my opinion, it is not a foregone 
conclusion that Saudi Arabia can sustain a 10.5 million barrel 
per day oil production, and it might be hard to even approach 
this production level. It has been over 20 years since Saudi 
Arabian oil fields produced a greater amount of oil than they 
do today.
    If Saudi Arabia still has ample spare productive capacity, 
it might also become a moot point because of the severe limit 
in the world's tanker fleet. There are many troubling signs 
that the world has now run out of spare tanker capacity other 
than some very old, rusty ships.
    We still have a month-and-a-half of winter weather 
remaining. Thus, U.S. oil demand is likely to stay high and oil 
stocks will probably continue to fall. And at some point it is 
likely that our Strategic Petroleum Reserve will need to be 
drawn, but it is also critical that this not be done 
prematurely merely to dampen high prices. The minute the United 
States announces it is using the SPR, many planned imports of 
oil from other producers will likely turn away to other parts 
of the world, and this could make tight markets even tighter. 
And we have never genuinely tested our SPR for any sustained 
period.
    Absent a one-time supply boost from the SPR, there is no 
short-term remedy for the tight oil situation we presently 
face. The problem took too long to create for a quick fix to 
remedy the situation. The only regions that could add 
meaningful domestic oil are in Alaska and the offshore 
continental waters of the Atlantic and the Pacific, but much of 
this territory is still under strict drilling bans. It is also 
hard to alleviate these problems through voluntary conservation 
efforts, though every single effort to save oil helps.
    Let me end these remarks by addressing the impact of $30 to 
$35 oil on our economy. Since we are possibly headed into a new 
era where high prices are a necessity to ensure steady supply, 
it is important that we really understand what high prices 
really mean.
    How painful are current oil prices? $35 oil in 2003 dollars 
would be about $15.25 in 1974 terms. $1.50 motor gasoline is 
still one of the least expensive liquids anyone can buy in any 
convenience store anywhere in the United States.
    Higher prices clearly cost the American consumer more, but 
they also generate a far higher revenue to the Government in 
both royalty income and increased corporate income taxes. This 
windfall on extra Government revenue needs to be wisely used to 
help offset those most hurt by energy prices and for any 
measures that can boost supply.
    An important final point people need to realize about high 
energy prices is that unlike some other parts of the economy, 
almost every cent of this increased revenue gets plowed back to 
keep the world supply from declining, and this plow-back 
creates jobs. So the impact is not entirely negative.
    Thank you for the opportunity to address the oil supply 
problems we face. These are serious issues.
    [The prepared statement of Mr. Simmons follows:]

      Prepared Statement of Matthew R. Simmons, Chairman and CEO, 
              Simmons & Company International, Houston, TX

    I am Matthew Simmons, Chairman and Chief Executive Officer of 
Simmons & Company International, a specialized energy investment bank. 
I have spent the past 30 years focusing exclusively on energy related 
investment banking and research. I am honored to be invited to testify 
today at this critically important Senate Energy Hearing about the 
current oil markets. While I am a member of various energy groups 
ranging from the National Petroleum Council to National Ocean 
Industries, U.S. Oil and Gas Association, and International Association 
of Drilling Contractors, I am here strictly as an independent energy 
observer.
    I am here today to testify that the U.S. has serious energy 
problems on multiple fronts ranging from rapidly dropping natural gas 
supplies, dwindling spare capacity and feedstock concerns for our 
expanded electricity grid, and particularly our precarious oil supplies 
and ultra-low oil stocks.
    Until oil prices surged above $30, most of our oil problems had 
been largely ignored. What people considered ``high'' oil prices were 
blamed on the threat of an imminent war with Iraq. Few industry 
observers or executives paid sufficient attention to a record plunge in 
U.S. oil stocks that had steadily occurred over the past eight months.
    Today, the U.S. and the world are facing an extremely tight oil 
system. This tightness has been brought on by a renewed surge in 
demand, triggered by the first normal winter the Northern Hemisphere 
has seen in several years, together with a flattening of daily global 
supply, long before Venezuela's oil system began shutting down due to 
Venezuela's internal political strife. Now, we are likely to test 
exactly how much excess capacity the world really has, how well our 
global tanker industry can shift to a radically different global oil 
flow and even how well the U.S. Strategic Petroleum Reserve--the SPR--
really works.
    Oil prices have returned to the high levels last seen in late 
September 2000. But, U.S. and OECD oil stocks are much lower than they 
were in the fall of 2000. Three years of oil prices far higher than 
anyone expected has failed to bring on any significant supply 
increases, other than a reported spurt in supplies from the Former 
Soviet Union (FSU) and this surge is now over due to limits to Russia's 
export capacity.
    Tanker rates have risen five to ten-fold in the past four months. 
Many observers assumed this spike in tanker rates was due to record 
levels of oil at sea. Instead, it appears to be due to unusually long 
periods with no spot tankers available to lift oil from the Middle East 
for delivery to the Far East or the Gulf Coast.
    These high oil prices serve as an important reminder of how 
critical oil is to our economy. The U.S. remains the single largest 
user of petroleum in the world today, with daily consumption still 
almost four times the two second largest oil consumers: Japan and 
China. Ironically, the U.S. is still the third largest producer of oil, 
but we are also the world's single largest oil importer by a factor of 
almost double the next largest importer, Japan. When our gross finished 
oil product imports are added to our daily imports of crude oil, we now 
average 10.5-11 million barrels a day of imported oil. This amounts to 
an import cost of almost $500 million each day or over $180 billion 
annually.
    Ever since oil prices collapsed in 1982, most Americans assumed any 
future problems in our oil supplies were over. The only interruption to 
this oil tranquility occurred during the build-up to Desert Storm, but 
a speedy defeat instantly brought oil prices back to low levels.
    In the Fall of 1996, oil prices rose above $25 for the first time 
(absent the Gulf War spike) in two decades. At the time, most industry 
observers assumed this rise was temporary and would obviously soon lead 
to surging new supplies. Indeed, the price rise was temporary as fears 
of the ``Asian Flu'' in mid-1997 created a widely held belief that the 
world had a massive oil glut. The weaker oil prices got, the greater 
most people erroneously assumed this oil glut had grown.
    By early 1999, oil prices had suffered their biggest collapse in 50 
years. Drilling new wells in both the U.S. and around the globe 
plummeted. Massive downsizings occurred in all U.S. oil and gas 
companies. Project after project was delayed or cancelled.
    Throughout this painful collapse, there was never any official 
accounting of this presumed glut. It failed to show up in any recorded 
OECD oil stocks. With the benefit of hindsight, the glut was imaginary 
and our global oil markets were probably in a comfortable balance with 
any real ``glut'' representing only a handful of extra days' supply.
    In early March 1999, a justifiably panicked group of OPEC countries 
engineered a 2 million barrel per day cut in OPEC output in an effort 
to raise oil prices as not a single OPEC producer could avoid massive 
budget deficits with oil selling for even $20 a barrel, let alone $10. 
This cut sent oil prices spiraling upward and within 18 months oil 
prices had crossed $30 for only the second time in twenty years. Oil 
prices stayed in this $26 to $32 band through the first half of 2001.
    In late June 2001, oil prices began to weaken based on fears that 
the economies of the OECD were slowing down. While many economists 
blamed this slowdown on high oil prices, the real culprit was a sudden 
halt in the rapid growth of the population of Dot.com companies and the 
end of the aggressive expansion of the telecommunications industry. 
Neither had anything to do with high oil prices.
    Until 9/11, oil prices stayed above $25. Post 9/11, oil prices 
plunged to below $20 for the first time in several years, although 
these prices were accompanied by a record level of speculators shorting 
crude oil contracts in our NYMEX commodity exchanges. Once these 
speculators began to lighten up on heavy shorting, oil prices began to 
rebound. By last summer, they were back to the levels seen throughout 
2000 and the first half of 2001.
    Once oil prices reached a $27 to $29 range, industry observers 
quickly ascribed these ``abnormal prices'' to ``a war premium.'' 
Moreover, almost all forecasters assumed that this premium would soon 
vanish.
    What went almost unobserved at the time was a rapid fall in U.S. 
petroleum stocks. By the end of the 3rd quarter of 2002, crude oil 
stocks were at levels rarely seen at this time of the year when stocks 
typically build to insure steady winter demand.
    Much of this drop in crude oil stocks correlated with a similar 
drop in U.S. imports of Iraqi crude. Why so much Iraqi crude ever found 
its way to U.S. shores is a mystery to me. No other Middle East crude 
grade, other than Saudi Arabia, can tolerate the transportation charge 
to come so far.
    With U.S. petroleum stock already low, two back-to-back hurricanes 
then caused a further jolt to our crude imports, because of the 
interruption to tanker traffic into the Gulf of Mexico. Refiners took 
advantage of these low stocks to minimize Fall refinery runs. Thus, 
product stocks began to fall.
    Once these two hurricanes had passed, U.S. oil stocks were 
uncomfortably low. A growing number of industry analysts finally began 
to question whether high oil prices were the result of a war premium, 
or merely a reflection of how tight petroleum stocks had actually 
become. These low stocks did not occur overnight. They were the 
cumulative result of a series of unplanned events. These unfortunate 
series of events then began to compound at a spiraling pace.
    A tighter restriction on tanker traffic through the Bosporus began 
crimping what had been a steady growth in Russian exports to the OECD. 
Japan suddenly discovered unreported cracks in their nuclear plants, 
causing a shut-down of many nuclear plants that will last through this 
Spring. As a substitute, Japan needed higher levels of oil imports than 
it had in years. Then came the sinking of the tanker, Prestige. In the 
aftermath of this awful environmental tragedy, other older single-hull 
tankers were banned from many ports.
    These events led to a skyrocketing of tanker rates. As tanker rates 
soared, many analysts assumed OPEC was putting record levels of oil on 
the high seas. Instead, just the opposite was probably happening.
    In the midst of a rapidly tightening oil market, came the surprise 
no one could have imagined. Venezuela, OPEC's most reliable oil 
supplier to the U.S., suddenly saw its oil system shut down, similar to 
what happened in Iran 24 years ago.
    Venezuelan oil and finished petroleum refined from Venezuelan oil 
makes up 1.5 to 1.7 million barrels per day of normal U.S. oil supply. 
For the first few weeks of the Venezuela ``strike'', U.S. oil supplies 
were spared any dramatic impact, but this probably was simply a result 
of a liquidation of excess stocks in both the U.S. and throughout the 
Caribbean.
    Over the past few weeks, U.S. oil stocks have finally felt the full 
brunt of Venezuela's oil shut-down. In almost every category of oil 
stocks, we are now at record lows. Total U.S. oil supplies are now 
almost 120 million barrels lower than they were a year ago. On a day's 
supply basis, U.S. oil stocks are far lower than when we last had a 
nasty oil shock in 1979. We have lost virtually all forms of any oil 
cushion.
    Other OECD stocks are not much better. Japan and Korea apparently 
liquidated any spare oil stocks when their refinery margins were break-
even or negative, leaving Pacific Basin stocks far too low even before 
all the turmoil. European stocks have fared better. But, on the whole, 
they have barely grown over the past year while the rest of OECD stocks 
have shrunk.
    This turmoil raises a series of troubling questions:

   How serious are the record low levels of US and OECD stocks?
   How quickly can these stocks be re-built?
   Why has oil supply been so stagnant over the past few years?
   Will Gulf of Mexico Deep water production increases be high 
        enough to offset decline rates from elsewhere in the Gulf?
   How reliable are the surging exports from the Former Soviet 
        Union? Why is other non-OPEC supply so small?
   How long will Venezuela's oil exports be in such turmoil?
   What is OPEC's real immediate excess capacity?
   Does the world have sufficient tanker capacity to substitute 
        the transport of oil over the water from a 6 to 8 day trip to 
        tanker travel from the Middle Ease which takes between 40 to 45 
        days?
   How good is the U.S. oil data collection system?
   Do we even know (with any degree of accuracy) how much the 
        U.S. is now producing, let alone what we can reliably expect 
        domestic production to be?
   Are there sufficient drilling rigs and trained crews for 
        U.S. oil supplies to suddenly reverse their long-term decline?
   Is the controversial ANWR, or the even larger Wildlife 
        Reserve to the west of Prudhoe Bay a viable solution to this 
        temporary supply squeeze?
   How destructive to the economy is $30 to $35 oil? Economists 
        tell us almost every day that $30 oil has almost always lead to 
        U.S. recessions. Are we sure this is true?

    It is far easier to raise these serious questions than it is to 
answer any of them.
    Let me begin by addressing the grave nature of our low oil stocks. 
It is hard to precisely know how dangerous these low stocks really are. 
The industry has not physically tested what constitutes Minimum 
Operating Levels of stocks since 1988. Most likely, crude stocks are at 
or below Minimum Operating Level estimates in most parts of the 
country. Many of our finished stocks must also be below the same 
minimum operating levels.
    Falling below this critical level does not automatically trigger 
shortages, but the system has zero flexibility or cushion left. All the 
reported U.S. stock data is subject to revisions. The report also only 
measures ``primary stocks,'' which are deemed to be any petroleum 
storage in excess of 50 thousand barrels. There are merely anecdotal 
guesses of where secondary and tertiary stocks now are. But it is hard 
for me to believe we could have record drops in primary stocks and not 
have simultaneous liquidation of secondary and tertiary stocks 
occurring further down the supply chain. Unfortunately, no one really 
knows how fragile total U.S. oil stocks might be. We have no good data 
on non-primary stocks nor do we have any precise measure of what stock 
levels constitute minimum operating levels.
    The EIA has best energy data collection in the world, but these 
numbers are simply manually completed forms. All of them are subject to 
human error. Most of the reported U.S. oil production data is also 
simply an educated guess.
    With no real-time production reports and no measurement of non-
primary stocks, and no strong sense what minimum operating levels of 
stocks actually are, there is no ``central air traffic control system'' 
that would even alert us when stocks dropped too low, until it was too 
late and physical shortages began to appear.
    How does the U.S. back itself out of this box? It is unlikely that 
U.S. oil production will suddenly turn around. While there are massive 
deepwater developments underway today, only a handful will come on-
stream in 2003. More deepwater projects are scheduled for 2004, but the 
biggest surge of new deepwater projects will happen in 2005 and beyond. 
Will these be large enough to offset production declines in the shallow 
part of the Gulf and the Lower 48 states? Some assume the answer is 
``Yes.'' Others argue the production declines in Alaska, the lower 48 
states and the shallow waters of the Gulf of Mexico are still 
accelerating and will merely offset all the new deepwater production. 
What everyone needs to appreciate is that many of these massive new 
deepwater oil projects also reach peak production rates fast and then 
begin relatively steep declines.
    Is the U.S. the only country where supply increases are slim? No. 
Total non-OPEC, non-Former Soviet Union, oil supplies grew from 29.1 
million barrels per day in 1990 to 34.2 million barrels per day in 
1995, an increase of 5.1 million barrels per day. Canada, the U.K. and 
Norway were responsible for more than half of this surge.
    But, in the next six years, from 1995 through 2001, this same 
global non-OPEC non-FSU supply only grew by 2.2 million barrels per 
day, less than half the growth of the prior five years. Four countries 
were the primary contributors to this far smaller growth: Mexico 
(+440,000 barrels per day,) Canada (+330,000 barrels per day,) Norway 
(+500,000 barrels per day) and Brazil (+610,000 barrels per day.) Three 
of these four countries now have oil production probably entering a 
long-term decline. The oil from almost twenty other meaningful oil 
producers managed a cumulative gain of a modest 280,000 barrels per day 
over six long years. For the first time in years, spiking oil prices 
failed to create any surge supply.
    This flattening of supply is not for a lack of E&P spending. The 
top five publicly-held oil and gas companies will have spent about $150 
billion on E&P costs over the past four years and their overall oil and 
gas production barely grew.
    There are still many published forecasts that anticipate a surge in 
oil production for the 4th quarter of 2002 and a further surge in the 
3rd and 4th quarters of 2003. But these are merely forecasts and could 
easily be wrong. They all ignore the concept of decline rates. Sadly 
for U.S. and global oil and gas, depletion or decline rates is not a 
theory. It is as basic to the physical flow of oil as gravity is to the 
earth.
    There are growing signs that many parts of the global oil scene are 
peaking and beginning to decline, just as happened in the U.S. in 1970. 
Generally, once this occurs, even if drilling grows exponentially, it 
moderates the natural rate of production decline.
    The former Soviet Union turned out to be the only really positive 
oil supply growth in the past several years, assuming all its reported 
oil output expansion is real. But report after report now shows that 
Russia's physical ability to grow its oil exports is maxed out. So this 
surprise surge has now ended until new ports and pipelines can be 
built.
    OPEC is still the giant source of the world's incremental oil. Any 
surge needs or any emergency supply additions to replace lost 
production from places like Venezuela can only come from one place: The 
Middle East. And within the Middle East, only one country has any 
sizeable extra capacity: Saudi Arabia.
    Fortunately, Saudi Arabia has been a constant and reliable supplier 
to the U.S. for over 60 years. Aside from a single occasion in late 
1973 when 5% of their oil was embargoed from coming to the U.S. for 
about 65 days, Saudi Arabia has always insured its oil supply is ready 
when needed. Saudi Arabia is also the only global oil producer to spend 
billions of dollars in an effort to continually maintain spare 
productive capacity. All the other OPEC producers, as a group, probably 
have small amounts of spare capacity they could hopefully add, but 
collectively, this capacity does not total anything remotely enough to 
replace lost exports just to the U.S. from Venezuela.
    Saudi Arabia has steadfastly assured the OECD that it can increase 
its production from around 8 million barrels per day today to as high 
as 10.5 million barrels per day. But they also openly acknowledge that 
in order to sustain this surge rate, new wells need to be drilled. As 
of last week, such an increase in drilling had yet to occur. Saudi 
Arabia has just begun processing the paperwork necessary to import the 
additional rigs needed to sustain any increase in its oil production.
    Saudi Arabia, like the entire Middle East, has a handful of giant 
oilfields which anchor a very high percent of their daily output. With 
only one exception, all the Middle East fields are old.
    In an excellent technical presentation I attended last week at the 
Exploration and Development Research Center in Saudi Arabia which is 
perched atop Ghawar, the world's single largest field, the Saudi-Aramco 
technicians were very candid about Saudi's three-fold oil challenges:

   the age of their fields;
   the growing amount of water coming out of these world class 
        reservoirs; and
   the tight, complex formations they are now dealing with to 
        keep production stable and growing.

    None of these oil challenges suggest that there is an easy way to 
increase Saudi's oil output rapidly.
    Saudi Arabia is, without question, our most reliable supplier and 
can develop increased oil production more economically than probably 
anywhere else in the world. But Saudi Arabia's cost to create new oil 
production is also high; it is simply relatively less expensive than 
anywhere else.
    It is extremely important for anyone contemplating the price Saudi 
Arabia should ask for its oil to also understand the severe social 
pressures this government faces. Its population is exploding. 30 years 
ago, Saudi had 6 million people. Riyadh was a tiny village of 25,000 
Bedouins. Today, Saudi's population has mushroomed to almost 25 million 
people, when 7 million non-Saudis are included. The country has rarely 
been able to balance its budget even during the past three years of 
high oil prices. It struggles to expand its electricity grid and 
desalinated water supplies to keep pace with its population growth. 
Both are essential for any society that wants to avoid poverty, hatred 
and internal strife. Both are costly and extremely energy intensive. 
Gone are the days when Saudi was a cheap energy provider. And when the 
country's social costs are added to its wellhead costs, a barrel of 
Saudi oil is no more or less expensive than most other parts of the 
globe.
    I have serious doubts about Saudi Arabia's ability to sustain 10.5 
million barrels per day of oil production. It might be hard to even 
approach this production level. It has been over 20 years since Saudi 
Arabian oilfields produced a greater amount of oil than they do now.
    Hopefully, Saudi Arabia and the Middle East still have ample spare 
productive oil capacity. But, all this excess might be moot because a 
severe limit in the world's tanker fleet might make this extra capacity 
undeliverable in time to meet any country's emergency use. There are 
clear signs that the world's spare tanker capacity has now been used 
up.
    Charter rates for most types of tankers have risen to 20 year highs 
since last October. These high rates have so far only dropped when only 
a handful of rusty tankers are available for any Middle East liftings. 
Thus far, after every dip, the rates seem to creep ever higher.
    The math involved in making up Venezuela's 2.4 million steady flow 
of oil exports by simply shifting this export burden to the Middle East 
shows how daunting this task would be.
    It takes a steady flow of 13 to 16 medium to small tankers to 
export Venezuela's 2.4 million barrels of oil a day. Some of these 
exports are to Caribbean refineries only two or three days away. 
Tankers coming from Lake Maracibo to our Gulf Coast take 6 to 8 days.
    To substitute even one million barrels each day of lost Venezuela 
supply from the Arabian Gulf for the Gulf Coast takes over 40 VLCC 
(Very Large Crude Carriers.) Prior to the Prestige sinking, the world 
probably had less than 20 spare tankers of this size, so the logistics 
to safely substitute lost Venezuelan exports are non-existent. And no 
country relied on these exports more than the U.S.
    Since we still have 46 days of winter weather remaining, U.S. oil 
demand is likely to stay high, exceeding our ability to keep stocks at 
these low levels. Thus, oil stocks will probably continue to fall. At 
some point, it is likely that our SPR will need to be drawn. But it is 
also critical that this is not done prematurely (i.e. merely to dampen 
high prices.) The minute the U.S. announces it is using the SPR, many 
planned imports of oil from other producers will likely turn away to 
other parts of the world. This could make a tight market even tighter. 
And we have never genuinely tested our SPR for any sustained period.
    Once winter is over, and if the SPR has been tapped, the U.S. will 
still have to struggle to find a way to replenish the SPR and also 
rebuild our badly depleted oil stocks. There does not seem to be any 
simple way out of the box we find ourselves in. There is no reliable 
computer model to help the U.S. rebuild the oil cushion it squandered 
over the past decade or two.
    In my opinion, there is no short term remedy for the tight oil 
situation we presently face. The problem took too long to create for a 
quick fix to remedy the situation.
    Creating access to areas where significant quantities of added oil 
might be found probably does not work in the lower 48 states or the 
shallow waters of the western and central Gulf of Mexico.
    The only regions that could add meaningful domestic oil are in 
Alaska and the OCS waters of the Atlantic and the Pacific. But, much of 
this territory is still under strict drilling bans.
    It is also hard to alleviate these problems through voluntary 
conservation efforts, although every effort to save oil helps. In 
reality, our nation's enormous oil consumption comes not through waste 
but through the physical size of our country, our enchantment with 
suburbia, two career families, lack of mass transportation and traffic 
congestion. All of these are hard to change or fix. What energy 
conservation needs is more dramatic changes like brand new types of 
engines, but these take decades to implement. In the meantime, America 
ought to pay close attention to the new generation of diesel engines 
now being used throughout Europe which apparently have 30 to 50% better 
fuel economy than gasoline engines of similar performance.
    Let me end these remarks by addressing the impact of $30-$35 oil on 
our economy. Do these prices automatically trigger a recession? In the 
minds of many economists, the answer is ``Yes.''
    Since oil prices are unpredictable and hard to control, and since 
it seems likely we are headed into a new era where higher prices are a 
necessity to insure a steady supply, it is important that we really 
understand what ``high prices'' really mean.
    $35 oil in 2003 dollars would be about $15.25 in 1974 terms. $1.50 
motor gasoline is still one of the least expensive liquids anyone can 
buy in any convenience store.
    Higher prices clearly cost the American consumer more, but they 
also generate a far higher revenue to the government in both royalty 
income and increased corporate income taxes. And, unlike some other 
parts of the economy, almost every cent of this increased revenue gets 
plowed back to keep the world's energy supply from declining.
    Thank you for the opportunity to address the oil supply problems we 
face. These are serious issues.

    The Chairman. Thank you very much.
    I note three Senators have arrived and we welcome all three 
of them. We welcome you, Senator. It is nice to have you here 
from Alaska, and a good friend who has been relieving me in the 
chair from Wyoming, thank you for joining.
    Senator you are going to be conducting the hearings on 
forests, and thank you for coming and joining us today. I look 
forward to meeting with you on your forest hearings in advance 
of them. If you can help brief me and get me ready so I will 
know a little bit.
    Senator Craig. We will do it.
    The Chairman. We thank you very much. I wanted to comment 
on when I said you should slow up so I could understand you. I 
do thank you for the presentation you made today and for coming 
by my office and showing me in detail some of your in-depth 
analysis in particular of the natural gas situation, which you 
are not testifying about today. But I note your last forecasts 
on natural gas, among many, were pretty close to being right. 
You have a little bit less optimistic viewpoint on natural gas, 
but I think it is urgent that we hear that series of views at 
some point also.
    Mr. Ebel, would you please proceed?

 STATEMENT OF ROBERT E. EBEL, DIRECTOR, ENERGY PROGRAM, CENTER 
            FOR STRATEGIC AND INTERNATIONAL STUDIES

    Mr. Ebel. Thank you, Mr. Chairman. Thank you for the 
opportunity to contribute to a better understanding of world 
oil supplies and the prices that consumers pay for these 
supplies.
    Mr. Chairman, I wish I could inform you that the future for 
oil exporters and oil importers looked promising. 
Unfortunately, I cannot. Energy demand in the developing 
countries of the world is likely to exceed energy demand in the 
developed countries by the end of the next decade if not 
sooner. Where will the supplies come from to meet that growth 
in demand? The growth in demand is going to be met by expanded 
production in the developing world, and these circumstances to 
me do not offer a comforting future.
    Because oil has become a truly international commodity, the 
United States, as other oil consuming countries in the world, 
stands vulnerable to any event anywhere anytime that would 
affect energy supply and demand. These events can come in any 
form. Witness the Asian financial crisis of the late 1990's 
which sent oil prices plunging. Today high oil prices reflect 
the impact of the Venezuelan crisis and the psychological 
impact of the anticipated military intervention in Iraq.
    Mr. Chairman, our vulnerability is not necessarily found in 
the volumes of oil we import. Rather it is the price that we 
pay for the oil we consume, whether secured through imports or 
from our own oil fields.
    Well, what surprise lies next beyond the horizon? Will it 
be Mexico where continued failure to develop oil reserves might 
lead to a decline in its ability to export? Might it be an 
expanded war in Nigeria encompassing the offshore oil fields? 
Might it be Saudi Arabia, as Mr. Simmons alluded to, the 
question of health of certain of that country's major oil 
fields?
    In my judgment, we are not likely to face any physical 
shortages of oil in the coming years if you set aside natural 
or manmade interferences in the timely and adequate access to 
these supplies. Indeed, this is the decade for growth in 
production and exports by non-OPEC countries. OPEC understands 
that and may patiently wait for the next decade when non-OPEC 
growth diminishes and OPEC can then regain whatever market 
share it has lost, for the future of oil is not determined by 
current levels of production. Rather, the future is defined by 
reserves in the ground. And where are these reserves? Saudi 
Arabia, Iraq, Iran, and I would add Russia.
    But let us suppose that OPEC is not content to wait, not 
content to stand idly by watching its market share declining. 
Prices in turn would decline, helpful to importers but damaging 
politically and financial to exporters.
    Mr. Chairman, this development would only underscore that 
there is no oil-related scenario I might describe for you does 
not lead to instability somewhere.
    Technology has allowed us the quicker and cheaper discovery 
and development of oil and gas under conditions unthinkable a 
decade ago. But these advantages have a down side, for that 
technology allows fields to be depleted faster. That in turn 
translates into the need to find and develop oil and gas 
reserves in volumes greater than ever before, a challenge where 
success is more and more difficult.
    Mr. Chairman, we often speak of energy independence, but 
that energy independence can only come when there is a 
political will to take meaningful action. The political will to 
establish our Strategic Petroleum Reserve and to set CAFE 
standards came out of the 1973-74 oil crisis. Because of that 
political will, we are far better prepared today to respond to 
oil supply interruptions.
    That raises the unthinkable. Might military intervention in 
Iraq play out in a way where our worst case scenario is 
realized; that is, where Iraqi oil is off the market for months 
and where the abilities of Kuwait and Saudi Arabia to export 
oil have been damaged by sabotage? Would the resultant high 
prices, physical shortages, and probable economic recession 
once again give this Nation the political will to embark on an 
energy program of substance and impact? Is that what it will 
take?
    Mr. Chairman, late last year we at CSIS prepared a set of 
four scenarios describing the possible impact on supply and 
prices following an attack on Iraq. One of our scenarios, our 
worst case scenario, I have just described for you. I would ask 
your permission to submit these four scenarios for the record.
    The Chairman. They will be admitted and made part of the 
record. Thank you very much.
    Mr. Ebel. Thank you, Mr. Chairman, for my oral testimony, 
and I look forward to any questions you or members of your 
committee may have. Thank you.
    [The scenario submitted by Mr. Ebel follows:]
           AFTER AN ATTACK ON IRAQ: THE ECONOMIC CONSEQUENCES
                          the no-war scenario
   Saddam capitulates, and stays.
   Oil volumes unchanged.

or

   Saddam replaced.
   Production and export expand.
   Prices decline to $20/bbl for the whole of 2004.
                            the benign case
    Iraqi oil production ceases for three months. It is resumed slowly 
in the second quarter and reaches two-plus million barrels per day 
(mbd) by the third quarter. Other OPEC countries make up for most of 
the lost Iraqi oil. The U.S. announces intent to use the strategic 
petroleum reserve (SPR), calming the oil market.
    In the end, no drawdown of strategic oil reserves is deemed 
necessary. Even so, there is limited panic buying on the oil market. 
Oil prices therefore spike at the initiation of hostilities. But 
continued high OPEC production and incremental non-OPEC production 
allow prices to fall to the low $20s by the third quarter.
                         the intermediate case
   Iraqi oil is off the market for six months.
   Popular sentiment prevents Gulf Cooperation Council 
        countries from increasing production.
   Fear of oil shortages results in stock building.
   The U.S. government releases one mbd of SPR oil.
   OECD allies do likewise.
   Nevertheless, global stocks remain tight through 2003.
   Lower global growth and hence demand for oil, higher non-
        OPEC production, and some easing in the Middle East oil 
        production cause prices to fall to an average of $30 in 2004.
                        the worse case scenario
   The Republican Guard sets most oil wells in Iraq on fire.
   As a result, Iraq oil is off the market for all of 2003.
   Acts of sabotage reduce oil exports in other Middle East oil 
        producing countries.
   There is discussion of the use of oil as a political weapon 
        against the U.S.
   There is a major oil supply disruption of five to six mbd.
   There is a quick release of two mbd from SPR and one mbd 
        from other International Energy Agency strategic stocks.
   Consumer hoarding further exacerbates the situation.
   Oil prices spike to $80 per barrel in the first quarter.
   The oil supply-demand situation improves over time, but 
        slowly, with prices falling to an average of $40 in 2004.

    The Chairman. Thank you.
    You are next, Red. Please proceed.

         STATEMENT OF RED CAVANEY, PRESIDENT AND CEO, 
                  AMERICAN PETROLEUM INSTITUTE

    Mr. Cavaney. Thank you, Mr. Chairman, members of the 
committee. I am Red Cavaney from the American Petroleum 
Institute.
    I am pleased to present API's views on what can be done to 
keep our Nation's oil and natural gas supplies ample, 
affordable, and secure. This is an enormous challenge, not 
totally within the industry's control. Government also has an 
important role to play. A secure energy future for our Nation 
will depend greatly on how well we work together.
    Today, oil and natural gas provides 62 percent of our 
Nation's energy, sourced both domestically and from abroad. 
Diverse, multiple sources of supply clearly enhance our 
Nation's energy security.
    The U.S. Energy Information Administration, EIA, projects 
that between 1999 and 2020, oil consumption in the United 
States will increase by 2.5 billion barrels annually and by 16 
billion barrels globally. Natural gas consumption will increase 
47 percent in the United States and 92 percent globally. 
According to EIA, meeting this new worldwide demand for oil 
alone will require additional production capacity equal to 
eight times Saudi Arabia's current output, at an investment 
cost that would exceed $1 trillion.
    Our companies must look both at home as well as abroad if 
we are to have secure energy supplies. At home this means to 
Federal lands which Congress had earlier set aside for energy 
development and other important uses. According to the U.S. 
Geological Survey and the U.S. Minerals Management Service, 
Federal lands contain 77 percent of our Nation's estimated 
undiscovered oil and 59 percent of its estimated undiscovered 
natural gas. Almost all of these resources lie in Alaska, on 
the Outer Continental Shelf, and in the mountain West. These 
volumes amount to almost 100 billion barrels of technically 
recoverable oil, or 47 years at current domestic production 
rates, and 577 trillion cubic feet of technically recoverable 
natural gas, or the equivalent of 30 years of current 
production.
    Much of the oil and gas on these lands cannot now be 
developed. A recent study prepared by three U.S. cabinet 
agencies noted that more than one-third of Federal land in the 
mountain West is unavailable for energy development leasing.
    Importantly, that number does not reflect the full range of 
restrictions limiting development. Existing policies forbid 
leasing on Federal lands on most parts of the Outer Continental 
Shelf, in the Arctic National Wildlife Refuge, and in many 
other areas. In some places land that could be leased is not, 
or leasing restrictions such as prohibitions on any surface 
activity make it impossible to develop. These factors have 
effectively put off limits 33 percent of estimated undiscovered 
oil resources and 40 percent of estimated undiscovered natural 
gas resources located on Federal lands.
    In addition to these limitations, complicated bureaucratic 
procedures and numerous lawsuits remove yet additional 
resources. Time is money in our business, and permitting and 
related delays measured in years drive away necessary 
investment capital and production interest. We welcome the 
Government's plan to evaluate post-leasing obstacles to 
developing vitally needed resources on these lands.
    All too often access is denied in the name of the 
environment. However, extensive Government oversight, careful 
timing of development, and environmentally proactive and 
protective new techniques such as 3-D seismic imaging and 
directional drilling have greatly reduced any potential harm.
    We urge the Government to work with us to find ways to make 
more of the oil and gas on Federal lands available to American 
consumers.
    Government can also help by decreasing reliance on 
unilateral trade sanctions that do not prevent development 
abroad but do keep U.S. firms from participating by promoting 
fair tax policies that allow U.S. energy companies to operate 
on a level playing field internationally and by doing a better 
job in coordinating the myriad new and old regulations that 
affect all sectors of our industry.
    This hearing and the work of the House and Senate last year 
on energy legislation demonstrate your understanding of the 
challenges we all face. Massive amounts of oil and natural gas 
will be needed to provide the economic growth necessary to 
enhance the quality of people's lives in the years ahead. 
Industry has the know-how, technology, and access to capital to 
provide this energy, but farsighted and comprehensive energy 
policies are also critical. For that, your help is absolutely 
essential. Only by working together can we provide for a more 
secure energy future and a better life for your constituents, 
our neighbors.
    Thank you.
    [The prepared statement of Mr. Cavaney follows:]

         Prepared Statement of Red Cavaney, President and CEO, 
                      American Petroleum Institute

    Thank you Mr. Chairman and members of the Committee. I am Red 
Cavaney, President and CEO of the American Petroleum Institute, a trade 
association representing over 400 companies from all sectors of the oil 
and natural gas industry.
    Joining API in this statement are the Domestic Petroleum Council, 
the International Association of Drilling Contractors, the Independent 
Petroleum Association of America, the National Ocean Industries 
Association, the Natural Gas Supply Association, and the U.S. Oil and 
Gas Association, which together represent hundreds of oil and natural 
gas companies.
    I'm pleased to be here to talk about what can be done to keep the 
nation's oil and natural gas supplies ample, affordable and secure. 
Recent tightness in world crude oil supplies and higher oil and natural 
gas prices make this an especially timely subject.
    Our nation depends on oil and natural gas for the lion's share of 
its energy, and for more than a century, U.S. oil and natural gas 
companies have dependably provided them.
    Reliable and affordable oil and gas have helped raise living 
standards dramatically for most Americans and made us the most mobile 
society in history. Oil and gas have provided the raw materials for a 
vast array of goods that enhance modern life, everything from cell 
phones to computers to artificial heart valves.
    Our member companies have gone to nearly every state and around the 
world to ensure America has the oil and gas it needs. Our diverse 
sources of supply have increased the nation's energy security.
    Thanks to ever improving technology, our companies have also 
learned to operate with less energy and far less environmental impact.
    In tomorrow's world, our society will require more energy than 
today, including more oil and gas. To meet that rising demand, U.S. 
companies must remain on the cutting edge of technology, continue to 
enhance environmental performance, and pursue energy development where 
the economic, environmental and political challenges are greater than 
ever before.
    Our companies also must continue to develop alternative forms of 
energy. Oil and gas are versatile, affordable and indispensable for the 
foreseeable future, but time brings change. No one can be certain how 
the nation's energy future will unfold. We want to be in the forefront 
when new directions are taken.
    Our goal is to remain America's principal fuel providers. However, 
the challenge of providing tomorrow's Americans with the energy they 
must have is not completely within industry's control. Government has a 
critical role to play, and our future success will greatly depend on 
how well you in government and we in industry work together.

               FACTS ABOUT OIL AND NATURAL GAS IN AMERICA

    Oil and natural gas provide most of the nation's energy and are 
principal engines driving our economy. We consume almost 20 million 
barrels of oil per day and more than 57 billion cubic feet of natural 
gas per day.
    Oil provides nearly 40 percent of total U.S. energy; natural gas 
provides about 22 percent. Oil provides almost all of the fuel for our 
cars, trucks, trains, jets, and ships. It powers construction 
equipment. It heats millions of homes.
    Clean-burning natural gas fuels virtually all new electric power 
generation. It heats more homes than oil. It also could become an 
essential energy source for providing hydrogen for tomorrow's fuel 
cells.
    U.S. companies provide about 85 percent of the nation's natural 
gas. Most of the rest is imported from Canada. We consume about half of 
Canada's total natural gas production.
    U.S. oil fields provide about 42 percent of the nation's oil. The 
remaining 58 percent is imported from many different parts of the 
world. Almost 10 percent of the oil we consume comes from Canada. Some 
11.4 percent comes from Persian Gulf countries, most from Saudi Arabia. 
Other important suppliers include Mexico, West Africa, the United 
Kingdom, Norway and Venezuela.
    International companies, including some based in the United States, 
have played a critical role developing oil fields. Our diverse 
suppliers help reduce problems that could occur if supplies are 
disrupted from a single country or region and make it harder for a 
group of suppliers to control supplies and drive up prices.

                    DEMAND FOR OIL AND GAS WILL GROW

    Demand for energy, including oil and gas, will experience strong 
growth in the U.S. and even stronger growth worldwide. For example, the 
U.S. Energy Information Administration (EIA) projects that between 1999 
and 2020 oil consumption will increase 39 percent in the U.S. and 58 
percent globally. In the developing nations alone, oil consumption will 
double. EIA estimates natural gas consumption will increase 47 percent 
in the U.S., 92 percent globally, and 197 percent in the developing 
nations.
    These projections assume moderate energy prices, more conservation 
and aggressive expansion of alternative energy.
    The stakes are high. If less than adequate new supplies are brought 
on line globally, prices could increase, slowing trade and economic 
growth. Living standards could stagnate or rise more slowly. Fewer 
people would be lifted from poverty. Fewer resources would be available 
for health care, education and housing.
    The volumes of oil and gas that must be developed over the next few 
decades are massive, partly because of rising demand and partly because 
many existing reservoirs are in decline. This is especially true in the 
United States. EIA estimates that meeting the increase in world demand 
will necessitate developing new oil production capacity equal to eight 
times Saudi Arabia's current output. The investment to achieve this 
could exceed one trillion dollars.

                FINDING ENERGY TO MEET OUR FUTURE NEEDS

    Meeting U.S. future energy needs means we will have to continue 
importing substantial amounts of oil and gas and develop more resources 
at home. Both strategies are necessary to ensure adequate supplies and 
diverse suppliers. They are also necessary to keep the cost of energy 
as reasonable as possible.
    An added benefit of new domestic development is more U.S. jobs--
jobs producing energy, jobs in equipment supply and facility 
construction, and jobs outside the industry created when industry 
workers spend their salaries. Also, when domestic production occurs on 
federal lands, companies pay substantial royalties to the U.S. 
treasury.
    The Middle East may contain the bulk of the world's remaining oil 
resources, but promising resources remain to be developed in Russia, in 
the Caspian region, in Africa, in Latin America and in the United 
States.

           FEDERAL LANDS PROVIDE MOST DOMESTIC OPPORTUNITIES

    Producing more energy at home means looking to multiple-use federal 
lands, which Congress set aside to help provide energy to the nation. 
They comprise about 31 percent of total U.S. land area and a large part 
of the Outer Continental Shelf. They contain far more estimated 
undiscovered oil and natural gas than state and private lands, which 
have traditionally provided most domestic oil and gas.
    According to data supplied by the U.S. Geological Survey and the 
U.S. Minerals Management Service, federal lands contain about 77 
percent of the nation's oil and 59 percent of its natural gas. Almost 
all of the federal lands holding these resources lie in frontier areas, 
mostly in Alaska, on the Outer Continental Shelf, and in the Rocky 
Mountain states.
    These resource numbers translate to 99.4 billion barrels of 
undiscovered oil (47 years worth at current domestic production rates) 
and 577 trillion cubic feet of undiscovered natural gas (30 years worth 
at current domestic production rates). Both are amounts recoverable 
using existing technology, so those numbers may prove conservative.
    We already produce substantial amounts of oil and natural gas on 
federal lands, and, between 1980 and 2000, their share of total 
production rose significantly. By 2000, about one third of domestic oil 
and nearly 38 percent of domestic gas were produced on federal land.
    However, a growing U.S. economy required far more additional energy 
than growth in production on federal lands provided. For example, 
between 1980 and 2000, the increase in U.S. consumption of oil products 
was more than ten times greater than growth in oil production from 
federal lands. Unsurprisingly, during this same period, the nation's 
reliance on imported oil grew from 37 percent to 53 percent.
    Moreover, the nation did not take advantage of rising estimates of 
potential oil and natural gas resources on federal lands which reflect 
advances in oil and natural gas exploration and extraction 
technologies. This expanding potential has far outstripped increases in 
production from federal lands.

     GOVERNMENT HELP NEEDED TO MAKE FEDERAL LANDS ENERGY AVAILABLE

    Government action is necessary to ensure sufficient access to oil 
and gas resources on federal lands. Too many of the best oil and gas 
prospects are now officially or unofficially off limits. They include 
resources in northern Alaska, in areas off our coasts, and in the Rocky 
Mountain region.
    Government policy forbids development in most parts of the Outer 
Continental Shelf and in the Arctic National Wildlife Refuge. In other 
areas, leasable land isn't leased. For example, within the Rocky 
Mountain region, about 600,000 acres of the 3.2 million acre Bridger-
Teton National Forest in Wyoming are legally available for oil and gas 
leasing, having cleared the environmental review process. However, 
forest managers have taken no action on 132 applications seeking lease 
bidding on a portion of that acreage. Some of these applications are 
now more than seven years old.
    In addition, leasing restrictions, such as prohibitions on any 
surface activity, make it impossible to develop leased areas. These 
various factors have put about 35 percent of estimated undiscovered oil 
resources and 53 percent of estimated undiscovered natural gas 
resources on federal lands effectively off limits.
    Unfortunately, that is not the full extent of the access problem. 
Complicated bureaucratic procedures and numerous lawsuits have produced 
indefinite delays during permitting of leased lands. Companies 
unsuccessfully pursue development for years and give up. Many conclude 
it is more productive and fairer to stockholders to invest capital 
abroad.
    Many of these problems exist in the Rocky Mountain area, the 
subject of a recent U.S. inter-agency study mandated by the Energy 
Policy and Conservation Act amendments. The study says that federal 
lands holding most of the undiscovered oil and gas resources in the 
Rocky Mountain area are available for leasing. But the study fails to 
assess all of the factors that can stop development, especially post-
leasing roadblocks.
    We encourage the committee to support evaluation of all 
restrictions on federal lands development.

                        ENVIRONMENT IS PROTECTED

    Restrictions on access are said to protect the environment. 
However, all too often access is denied in the name of the environment 
when significant harm is extremely unlikely. Extensive government 
oversight, timing of development activities, and cutting-edge 
technology have reduced impacts to a bare minimum. The law mandates 
cleanup of sites when operations are completed.
    Our companies' cutting-edge technology includes 3-D seismic 
technology to ``see'' underground to help determine the location of 
recoverable oil and gas before drilling begins, dramatically improving 
the exploration success rate and reducing cost and environmental 
impacts. The technology involves computers that process sound wave data 
to provide a visualization of the subsurface environment.
    Companies also frequently employ sophisticated directional drilling 
to reduce environmental impacts and increase well productivity. 
Directional drilling allows wells to be drilled that reach long 
horizontal distances from the drilling site. For example, on Alaska's 
North Slope the Alpine field (containing some 429 million barrels of 
proved reserves) uses two drilling pads to produce oil from formations 
beneath some 40,000 acres of land. The pads and interconnecting road 
occupy only 94 acres or two tenths of one percent of the field area.
    Because technology constantly improves, environmental risks are 
steadily reduced. A good example of the latest technology for use in 
Alaska is a lightweight, modular drilling and production platform with 
temperature-controlled legs that help minimize impacts on the tundra. 
Like much other Arctic equipment, the platform can be flown in by 
helicopter avoiding the need to build roads across wild terrain.

                     OTHER WAYS GOVERNMENT CAN HELP

    Government can help ensure the nation has adequate energy supplies 
in other ways. They include decreasing reliance on unproductive 
unilateral trade sanctions that hamper development internationally; 
promoting fair tax policies that encourage investment in domestic and 
international exploration and production; and doing a better job of 
coordinating the myriad of new and old regulations that affect all 
sectors of the industry.
    Less reliance on unilateral trade sanctions which do almost nothing 
to change the behavior of targeted countries would expand development 
opportunities for U.S. international oil and natural gas companies 
while increasing and diversifying global energy supplies.
    Fair tax policies would also encourage more development. While not 
the sole answer to ensuring adequate oil and gas supplies, tax measures 
such as the expensing of geological and geophysical costs and delaying 
rental payments will promote greater domestic exploration and 
production. Shortening the depreciation life for refinery assets from 
ten to five years will reduce the cost of capital and remove the 
current bias in the tax code against needed refinery capacity 
expansion.
    One of the most serious threats to the foreign operations of U.S. 
tax-paying oil and natural gas companies is the risk that the income 
earned from those operations will be taxed twice. Such tax policy 
places U.S. companies in an uncompetitive position that could mean 
foregoing foreign exploration and development projects. Because the 
United States must import much of its energy for many years to come, it 
is in our interest that U.S. companies be involved in finding and 
producing energy around the world.
    Finally, more sensible and carefully coordinated regulations would 
strengthen the ability of the industry to continue meeting U.S. energy 
demand. An example is motor fuel regulations. Government motor fuel 
regulations have been steadily reducing vehicle emissions, and new 
rules will soon continue this trend. However, some old rules, such as 
the Clean Air Act oxygenate requirement for reformulated gasoline, make 
it harder to keep customers supplied with clean, affordable fuel. 
Moreover, poor timing of new rules, which are requiring massive capital 
investments, could unnecessarily diminish the ability of industry to 
maintain a steady flow of supply to consumers.

                               CONCLUSION

    Throughout history, no energy source has contributed more to 
society than oil and natural gas. These energy sources make us all 
better off and always have been there when needed. However, in the next 
few decades, demand for both will substantially increase in the United 
States and around the world. Ample future supply is essential to 
continued economic growth and rising living standards.
    This hearing and the work that was done in the House and Senate 
last year on energy legislation are evidence of your understanding of 
the challenges ahead and what is at stake. We in the U.S. industry have 
the know-how, technology, capital and dedication to help provide the 
energy our citizens need, but success meeting our goals also depends on 
your help enacting more enlightened energy policies.
    We look forward to working with you for a more secure energy future 
for America.

    The Chairman. Thank you very much.
    Mr. May, would you please proceed? Your statement is 
already in the record.

         STATEMENT OF JAMES C. MAY, PRESIDENT AND CEO, 
              AIR TRANSPORT ASSOCIATION OF AMERICA

    Mr. May. Thank you, Mr. Chairman. I am going to provide the 
committee with a somewhat different perspective this morning. I 
certainly would not want to compete with the experts to my left 
on the long-term problems of energy, but I think I can offer 
some short-term perspective of some of the problems that high 
energy prices are creating.
    The airlines are in perilous financial condition. Two major 
airlines representing more than 20 percent of the industry are 
in bankruptcy. Others are on the brink. Industry debt exceeds 
$100 billion. The industry lost over $10 billion last year, and 
cash reserves and ability to borrow are nearly extinct. With 
the prospect of war on the horizon, the picture is obviously 
bleak.
    Although we aggressively reduce costs where possible, 
stubbornly high fuel prices and escalating security and 
insurance costs, among others, have combined with a particular 
vengeance in this under-performing economy. Now, to address 
this perfect storm of adversity, we have embarked on an 
unprecedented program of self-help which includes annual 
savings of over $10 billion in operating expenses, more 
draconian steps. Our cost savings include initiatives on 
conservation. Today's fleet is three times more fuel efficient 
than it was in the 1970's. We are achieving what amounts to a 
40 mile per passenger gallon rate on efficiency in our aircraft 
compared to 26 with the average automobile in the United 
States.
    But with all of this and additional cost savings measures, 
fuel prices are in fact beyond our ability to battle alone. In 
the past 12 months, February 2002 to the beginning of this 
week, we have seen in excess of a 100 percent increase in spot 
fuel prices that have ranged from 57 cents to a buck 20.
    We have not seen price increases of this magnitude since 
the Gulf War buildup in 1990. Then we had cash resources and 
borrowing power to cushion the blow. Today we do not.
    Increases in fuel prices affect the airlines in two 
different ways. First, the cost of fuel has a direct impact on 
the cost of operations. Second, fuel cost increases have 
repeatedly triggered economic recession which in turn results 
in a substantial decline in demand for travel.
    Now, fuel costs constitute 15 percent of our operating 
expenses today. A little fact: every penny increase in the 
price of jet fuel costs our industry $180 million a year. So 
should the current 25 cent per gallon premium we are paying 
remain in place, it is going to add $4.5 billion in annual cost 
to the airlines industry. Now, in the absence of pricing power, 
the ability to pass these costs along in the form of higher 
airfares, these increases come right from our bottom line.
    My written testimony contains two charts prepared by the 
ATA economics team. Taken together, they make two points. 
First, since the early 1970's every significant spike in fuel 
prices has led to a recessionary period in our economy. And 
second, with every one of those recessions, airline profit 
margins dive into the red.
    So why should this committee or others care about the 
plight of the airlines? I think the answer is that the combined 
economic impact of civil aviation on the U.S. economy exceeds 
$900 billion, and we account for over 11 million American jobs. 
Sadly, fully half the jobs lost in the United States since 9/11 
have been in travel and tourism. That is over 460,000 jobs that 
we have lost. Now, in short, the economic health of the 
airlines directly impacts the health of the U.S. economy.
    Mr. Chairman, we recommend several actions to alleviate the 
situation short term and reduce the cost burden that falls so 
heavily on oil-dependent consumers.
    First, we urge this Congress to press the administration to 
implement releases of at least a million barrels per day from 
the Strategic Petroleum Reserve until supplies or inventory 
return to more normal levels. We believe these releases, 
whether in the form of loans to refiners or sales, will have an 
immediate short-term impact on crude and refined product 
prices, significantly reducing the so-called ``war premium'' 
currently hanging over the oil markets and, hopefully, will 
help stave off further economic dislocation.
    Second, as a modest demonstration of a national commitment 
to bringing oil prices down, the 4.3 cents per gallon jet fuel 
tax adopted in 1993 originally as a deficit reduction measure, 
which currently feeds a $12 billion aviation trust fund, would, 
if eliminated, cut $600 million annually from our fuel cost 
burdens.
    Mr. Chairman, I know that there are strongly held views 
regarding releases from the SPR. In fact, many on this 
committee have got strong views on it. But these difficult 
times require difficult choices, and as Mr. Simmons said a 
minute ago, it is probably the only short-term solution that is 
available to us.
    Bringing down per-gallon prices by just 1 penny I talked 
about saves us $180 million a year. That same 1 penny decline 
will save home heating oil consumers some $70 million a year, 
and at the gas pump that same penny means $750 million to 
motorists. So it is an action that could benefit the entire 
community.
    Let me note in closing that in the past the SPR relief has 
come too late to help. I hope, if you agree, this committee 
will urge the administration to act quickly.
    Thank you for the opportunity to appear today.
    [The prepared statement of Mr. May follows:]

 Prepared Statement of James C. May, President and CEO, Air Transport 
                         Association of America

    Mr. Chairman and members of the Committee, I am James C. May, 
president and chief executive officer of the Air Transport Association 
of America. I appreciate the opportunity to appear before you today to 
discuss the impact of current oil supply and price issues affecting the 
airline industry and its customers.
    By way of background, ATA's member airlines \1\ collectively 
account for approximately 95 percent of the revenue passenger miles and 
freight ton-miles flown in the United States. With fuel representing 
our second largest item of expense, the recent fuel price run-up is a 
particular cause of concern for the future of the airline industry.
---------------------------------------------------------------------------
    \1\ ATA member airlines include: Airborne Express, Alaska Airlines, 
Aloha Airlines, America West Airlines, American Airlines, American 
Trans Air, Atlas Air, Continental Airlines, Delta Air Lines, DHL 
Airways, Emery Worldwide, Evergreen International Airlines, FedEx, 
Hawaiian Airlines, JetBlue Airways, Midwest Express Airlines, Northwest 
Airlines, Polar Air Cargo, Southwest Airlines, United Airlines, United 
Parcel Service Airlines, and US Airways. Associate members include: 
Aeromexico, AirCanada, Air Jamaica, KLM Royal Dutch Airlines and 
Mexicana.
---------------------------------------------------------------------------
                         STATE OF THE INDUSTRY

    The airlines are in perilous financial condition. Two major 
airlines, representing more than twenty percent of the industry, are in 
bankruptcy. Passenger carriers have reported over $10 billion in 2002 
net losses. Industry debt now exceeds $100 billion, while the 
industry's $15 billion total market capitalization continues to 
decline. Our ability to borrow to support continuing losses is 
evaporating. The few airlines that have been able to achieve a profit 
are doing so under tremendous adversity--and with the prospect of war 
on the horizon, the overall picture is bleak.
    The reasons for the imperiled condition of the industry are clear. 
Revenue has declined sharply following the 9/11 attack on America. 
Although carriers are aggressively reducing costs where possible, 
stubbornly high fuel prices and escalating security and insurance 
costs, among other things, have combined with a particular vengeance in 
an under-performing economy. We have embarked on an unprecedented 
program of self-help to address this ``perfect storm'' of adversity: 
The industry has already achieved annual savings of over $10 billion in 
capital and operating expenses, and efforts are well underway to remove 
billions more in costs. Issues such as fuel prices, however, are 
obviously beyond our ability to battle alone. That is why today's 
hearing and the interest of the Committee in taking action are so 
important.
    The industry was suffering from the softening economy in early 
2001. The events of 9/11, however, drove losses that year to $7.7 
billion, despite the $5 billion in government compensation for the 
costs of the terrorist shutdown of our aviation system. Last year the 
picture darkened when despite industry cutbacks in spending, losses 
topped $10 billion. And analysts predict that the industry will lose 
another $4 to 6 billion this year, meaning that airlines are on target 
to lose about $25 billion in the 2001 to 2003 period.

                       CURRENT FUEL PRICE TRENDS

    In the first eleven months of 2002, our fuel prices increased by 
27%. Even more alarmingly, since the beginning of December, this rate 
of increase has grown to 55%. This run-up is being fueled by conditions 
in the U.S., where oil futures have soared on high demand combined with 
weak supplies and war jitters. As a result, Jet A spot fuel prices have 
increased 100% in just one year.
    We have not experienced price increases of this magnitude since the 
Gulf War buildup in the fall of 1990. However, the circumstances the 
industry finds itself in today are vastly different. The current fuel 
price increase is taking place against a backdrop of economic chaos in 
the airline industry. There is no cash cushion, no borrowing capacity, 
and no apparent relief in sight.
    On the surface, the sources of our current fuel price problems are 
Venezuela, the weather, and the Middle East situation. Since the 
beginning of the general strike in Venezuela in December, we have seen 
a significant reduction in our crude oil stocks and refined product 
inventories. At the same time, the more severe winter weather we have 
been experiencing in the home heating oil belt, has resulted in a steep 
decline in home heating oil inventories.
    Added to the reduction in supply, the tensions and uncertainties 
surrounding availability of Middle Eastern supplies has resulted in the 
price of crude oil being bid up. Moreover, Iraq is currently exporting 
2.3 million barrels per day. In a scenario that includes a complete 
shutdown of Iraqi oil, and with Venezuela remaining out of the picture, 
demand would exceed OPEC's capacity by a substantial margin. Under such 
a scenario, prices are likely to continue to rise.

        IMPACT OF FUEL COST INCREASES ON AIRLINES AND CONSUMERS

    Increases in fuel prices affect the airlines in two ways; the cost 
of fuel has an obvious and direct impact on the cost of operation, and 
fuel cost increases have repeatedly triggered economic recessions, 
which in turn result in a substantial decline in demand for air travel 
and air cargo.
    Fuel price increases have a particularly adverse impact on airlines 
because even in good time fuel costs constitute roughly 10-12% of our 
operating expense. Every penny increase in the price of jet fuel costs 
the airline industry $180 million a year. In the absence of pricing 
power--the ability to pass these costs along in the form of higher 
airfares--these increases come right off the bottom line.
    An even more pernicious aspect of the fuel price increase is the 
relationship between the economy and air travel. The link between fuel 
prices and the health of the economy is clear. Three of the major 
recessions of the past thirty years can, in large measure, be 
attributed to the steep increases in fuel prices that accompanied the 
1973 Middle East oil embargo, the 1980 Iran Crisis, and the 1990-91 
Gulf War. (See Chart I below) The airline industry is inextricably tied 
to the overall economy--even minor recessions result in reduced demand 
and increased sensitivity to prices for leisure as well as business 
travelers.



    Past fuel spikes and attendant recessions have brought about 
widespread hardship in the airline industry. As Chart II shows, airline 
profitability suffers as a direct consequence of a weakening economy. 
During the first Gulf War, almost half of the major airlines filed for 
protection under Chapter 11 of the Bankruptcy Code, long-standing 
airlines went out of business, more than 100,000 airline employees lost 
jobs, and the industry went into a financial tailspin from which it 
took years to recover.
    We all have much at stake--it is not simply a matter of airline 
finances; it is the national economy. Civil aviation has a profound 
impact on the U.S. economy. A recently completed analysis perform by 
DRI-WEFA found that in calendar 2000:

   Civil aviation's total impact on the U.S. economy amounted 
        to 9 percent of GDP.
   $343 billion and 4.2 million jobs were produced in civil 
        aviation or in industries related to civil aviation such as 
        travel and tourism.
   Combined direct, indirect, and induced economic impact of 
        civil aviation totaled $904 billion and 11.2 million jobs.

    Unquestionably, the financial situation of the airlines has had a 
negative effect on the U.S. economy. Of the jobs lost in the United 
States since 9/11, fully half 462,000 jobs according to the Bureau of 
Labor Statistics have been in the travel and tourism sector. As airline 
pain spreads, communities across the country are rapidly affected. 
Forced contraction in the industry means less service or no service to 
some communities, increasingly isolating them from the economic 
mainstream. The adverse impact on consumers and the broader economy is 
extensive.

                         CONSERVATION MEASURES

    The airlines are doing everything they can to conserve fuel. 
Throughout the history of commercial aviation, airlines have insisted 
upon the most fuel-efficient aircraft possible and have worked with 
airframe and engine manufacturers to reduce fuel consumption. Today's 
fleet is nearly three times more fuel-efficient than the fleet we were 
operating at the time of the first OPEC fuel crisis. In fact, our fuel 
conservation efforts have resulted in a fuel consumption rate of almost 
40 passenger miles per gallon in today's aircraft--a rate that compares 
favorably with the most fuel-efficient automobiles.
    Changes in cruise speed, use of flight simulators, sophisticated 
flight planning systems, increasing load factors and the introduction 
of newer, more aerodynamic aircraft designs combined with modern engine 
technology, are all recent success stories. Airlines continue to look 
at every possible facet of their operations to further improve fuel 
efficiency through measures like taxiing on one engine, delaying 
startup and push back, removing all discretionary weight, and using 
ground power instead of on-board auxiliary power units while at the 
gate. These and similar measures are increasingly being used where 
commensurate with safety considerations to save fuel and, not 
incidentally, to reduce emissions. However, as of today our options for 
further dramatic improvements on the order of what we have been able to 
achieve over the past few decades are limited.

                          RECOMMENDED ACTIONS

    ATA recommends several actions to alleviate the situation and 
reduce the cost burden that falls so heavily on oil-dependent consumers 
like the U.S. airline industry.
    First, we urge the Congress to press the Administration to 
implement releases of at least one million barrels per day from the 
Strategic Petroleum Reserve (SPR) until the arrival of the Middle East 
oil expected as a result of the OPEC quota increase to offset 
Venezuelan sources. We believe that these releases--whether in the form 
of loans to refiners or sales--will have an immediate impact on crude 
and refined product prices, significantly reduce the so-called ``war 
premium'' currently hanging over oil markets, and help stave off 
further economic dislocation.
    Secondly, as a modest demonstration of a national commitment to 
bringing oil prices down, the 4.3 cents per gallon jet fuel tax adopted 
in 1993 must be repealed. Repeal of this tax, which currently adds 
about $600 million annually to the airlines' fuel cost burden will have 
an immediate benefit on cash flow at a time when air carriers are 
running low on cash.
    The Strategic Petroleum Reserve was established to compensate for 
times of supply disruption. Based on both inventory and price data, we 
are currently suffering a supply disruption. While some people suggest 
that the SPR is like a rainy day fund and should be tapped only during 
the most adverse circumstances, the fact is, Mr. Chairman, we are in a 
storm. The higher oil prices we are experiencing are devastating to the 
airlines, the travel and tourism sector, and the overall economy. A 1 
million-barrel per day release from the strategic petroleum reserves 
would be the equivalent of major tax relief at no cost to the U.S. 
Treasury. It would provide a huge boost to our struggling economy.
    In the absence of a crude oil infusion, the high prices we are 
seeing today will spread as the spring refinery turn-around season 
commences. The continuing strain on inventories will linger into the 
summer driving season with the attendant high prices and further 
dampening effect on the U.S. economy. Thus, we believe that the entire 
economy will significantly benefit were the administration to begin 
releases from the strategic petroleum reserves. Instead of refined 
product drawdowns we would have the opportunity to keep our refineries 
running full out, and the summer season gasoline stock build could 
begin on schedule.
    A release from the SPR will have an immediate impact on the prices 
paid for jet fuel, home heating oil and other consumer fuels. Remember 
that every penny the price drops for jet fuel is a cost saving of $180 
million to the airline industry, $70 million to the home heating oil 
consumer, and $750 million to motorists. Previous releases have 
demonstrated the salutary effect on oil market, but more often than not 
these previous releases have been a too small and too late--like taking 
an over-the counter remedy for an infection that has been allowed to 
fester for weeks. We can not wait until the effects of higher fuel 
prices have spread throughout the economy--we need an immediate 
infusion of relief.

                               CONCLUSION

    Mr. Chairman, the national economy has much riding on the outcome 
of our engagement with Iraq. Even before we enter the fray, however, 
the Congress and the administration can take steps in the area of 
energy policy to control the runaway price spiral currently underway. 
We urge you to repeal the 4.3 cents per gallon jet fuel tax now and to 
call upon the administration to release crude oil from the strategic 
petroleum reserves in order to deliver some short term economic relief 
for the industry and ultimately our customers.
    The problems facing the airline industry have a direct and 
substantial effect on the overall economy. By the same token, the 
prescription we propose will have broad benefits for all of our 
citizens during this period of economic uncertainty. When the economy 
benefits, the airlines, our employees and our customers benefit as 
well.

    The Chairman. Thank you very much.
    We are going to proceed recognizing the Senators in the 
order that they arrived, if that is all right. If somebody has 
an emergency and arrived late but must go ahead of schedule, 
just let me know and we will try to move you up.
    Let me welcome the Senator from Louisiana. Thank you very 
much for coming. Delighted that you are serving on this 
committee, and I happen to be its chairman this year.
    Senator Landrieu. Thank you, Mr. Chairman. I have enjoyed 
working with you on these important issues.
    The Chairman. Thank you very much.
    Rather than ask each witness a few questions, let me 
concentrate some questions on Mr. Cavaney. Let me talk with you 
about your testimony with reference to available land, publicly 
owned lands or properties, for development of oil and gas.
    First, would you go back and tell us, based on testimony 
you have given us, how much of the Federal lands are available 
for oil and how much for natural gas? You used 33 percent and 
40. Tell us what that means. What is your definition there of 
that?
    Mr. Cavaney. There are two items here. The first is the one 
we want to characterize which is that it is technically 
recoverable, and that means using the technology we have today, 
that is the amount of oil or natural gas that could be 
recovered based on the analysis by the USGS and MMS.
    Now, why this is referred to as undiscovered is because 
these are estimates based on their analysis of the topography, 
the geology, the seismic that has been done, but it has not 
been tested by actual drilling. So that is why there is a 
difference between those numbers and the approximate 22 billion 
barrels of known reserves.
    Most of the production the industry has produced over the 
last century has come from private lands, and that is why at 
this stage we have about run out of opportunities on private 
lands, and the really big remaining deposits and resources, 
looked at on a scale of about 5 to 1, if you will, rest on 
these public lands, and that is why the emphasis on those.
    One other point I would make----
    The Chairman. Wait, now. When you say Federal lands, what 
Federal lands are included? Is this offshore lands also?
    Mr. Cavaney. This is principally in Alaska, Outer 
Continental Shelf, east and west coasts, as well as Alaska and 
down in the Gulf, and a bit in the Mountain States.
    The Chairman. So when this number is used, can you break it 
down a little further? What percentage is Alaska and what 
percentage is Outer Continental Shelf and what is continental 
America?
    Mr. Cavaney. The percentages are large. We would be glad to 
provide them for the record. Principally both of the two 
coasts, in which there has been very little activity at all, 
would be the most significant if you added the two of them 
together.
    The Chairman. So while you are not here to suggest what we 
ought to do, it is implied that if something were done with the 
current off-limits policy of the Nation regarding offshore, 
that what would be available? 33 percent for oil and 40 percent 
of natural gas. But what is that related to? Current use?
    Mr. Cavaney. That is the total amount of land that is 
available. That amount would be not available. So the remainder 
would be.
    But one of the concerns that we have is that Congress 
authorized and the administration--it started back in the 
Clinton administration and was finished by the current 
administration--under EPCA did an analysis of the leasing 
stipulations in five basins in the mountain West. They came out 
with some figures saying that about 70 percent of the land was 
available.
    But the point we want to make is that that study was 
incomplete from the standpoint of the industry because just 
having a lease does not give you the right to go ahead and 
drill and produce natural gas or crude oil. What you also have 
to do is you have to deal with all the other Federal laws that 
impact it. You have to deal with the permitting within the area 
which is complex. You also have to deal with the local 
situation in the case where there are citizen situations that 
have to be dealt with and the like.
    And what happens there is these things have a history, and 
we will submit for the record a number of cases where these go 
on for years and years and years after you have the lease. So 
what is increasingly happening is people in the oil and gas 
industry are saying I have got to put good money down, wait 
several years without the assurance of knowing whether I can 
ever even drill a well. So what we are finding is the amount of 
drilling activity is not increasing at levels that is necessary 
given the amount of depletion we have and given the amount of 
demand that we have.
    And the resources are there, and we are just asking that we 
work with the Congress and the administration to looking at an 
analysis exactly where these needs are, what is worth doing 
because all of the land that is included here does not all have 
oil and gas under it, but they know that there are certain 
portions and there may be areas that are not environmentally 
sensitive that make good sense where there is a significant 
amount of resources, and those should be the things that should 
be considered for development to the benefit of the American 
consumer and energy security.
    The Chairman. The last question on this and I will then 
yield to our ranking member, Senator Bingaman.
    When you refer to inland now--I am not talking about off 
the continent--are there two kinds of governmental steps? One 
is permitting and the other is post-permitting?
    Mr. Cavaney. The first is leasing. There is some pre-
leasing work, but then after the lease is granted, then there 
is the permitting, all the post-lease work which is permitting 
and the whole chain that follows. This is where the obstacles 
are and this is the concern as to why we are not getting the 
access, not because of the leases in and of themselves. We 
agree with the finding that the leases can be given and 
granted, but just having a lease, as I mentioned, is not 
sufficient to allow you to be able to explore and openly 
produce oil and natural gas.
    The Chairman. So are you quibbling with the conclusions, or 
are you asking that we go beyond them?
    Mr. Cavaney. I am asking that they go beyond because the 
conclusions, while accurate, are incomplete and do not give 
you, the Congress, or the administration the tools to look at 
the issue.
    The Chairman. Senator Bingaman.
    Senator Bingaman. Thank you, Mr. Chairman.
    Let me just follow on this same line of questioning, Mr. 
Cavaney. The Bureau of Land Management issued its summary of 
this study that you are talking about, the scientific inventory 
of onshore Federal lands oil and gas resources and reserves. It 
also looked at the extent and nature of restrictions or 
impediments to their development. The summary is as follows.
    ``An estimated 57 percent of oil and 63 percent of gas are 
available under standard stipulations. Only 15 percent of oil 
and 12 percent of gas are totally unavailable. The remaining 
oil and gas are available with increased restrictions on 
development. Land that is closed to development contains 
comparatively little oil and gas potential.''
    Do you agree with that summary?
    Mr. Cavaney. It is fairly general to agree with all of it 
because the sort of non-standard stipulation covers a wide, 
wide range, as you can appreciate, and it tends to be very 
basin-specific and you have to look at the individual 
situations.
    We are not asking for broad authority to do various kinds 
of things. What we are asking for is there something here that 
we think Congress and the administration and the industry could 
work together and identify things that make sense, not in areas 
that are pristine and do not involve work and efforts, but we 
ought to look at it given the concerns about energy security 
and the demand that lies ahead.
    Senator Bingaman. Let me shift to a few questions about the 
Strategic Petroleum Reserve. You have all indicated various 
views as to whether it is appropriate to use it at this 
particular point. If we actually proceed to military conflict 
with Iraq, is it your view--does it make sense? I would just 
like each of you to respond as to whether you think at that 
point it is appropriate for us to use the Strategic Petroleum 
Reserve. Mr. Simmons, do you have a view on that?
    Mr. Simmons. Given how tight oil inventories are throughout 
the OECD and the improbable nature of oil inventories outside 
the OECD, because we do not have any way to measure them, I 
think that there is a very serious danger in a premature use of 
the Strategic Petroleum Reserve until we absolutely know we 
have a crisis because the minute we use it, market forces will 
drive oil elsewhere. I think it is likely, unfortunately, we 
are going to have to use the SPR this year, but I think if we 
prematurely use it, then it could accidentally really backfire 
on us.
    I also think that since we have never really had a serious 
fire drill of the SPR since we developed it in 1974 and since 
our need for imports is so much higher, that it would really 
behoove the Government to start running simulations to just 
make sure it all physically works because if we had an oil 
shortage, for instance, in New England or the upper Midwest, 
you are a long day's away from the use of the SPR. So in the 
meantime while we are not using it, we can at least run 
simulations to make sure that it works as well as we hope it 
does.
    Senator Bingaman. Let me just add, before you answer there, 
Mr. Ebel, that my information is the International Energy 
Agency has announced that member countries will release oil 
from their strategic reserves in the event of an attack on Iraq 
in order to calm markets.
    Our administration has not acted to articulate any policy 
with regard to the SPR oil. Some have argued that this has 
added to the uncertainty surrounding the oil and that we should 
at least do what the International Energy Agency has done and 
that is state our intention if in fact military action is 
required.
    Do you have a view on this?
    Mr. Ebel. I do. I would think that a calming statement is 
in order. We should be prepared to release the oil. We do so in 
coordination with Europe and Japan. We can put 12 million 
barrels a day on the market at full force.
    But it depends, Senator, on which scenario plays out. If we 
have a quick, decisive victory in Iraq, a calming statement 
would be sufficient. But if there is some reaction by Saddam 
Hussein where his oil is off the market for, let us say, 6 
months, then we need to tap into the SPR probably to the tune 
of about a million barrels of oil a day, again in coordination 
with other OECD member countries.
    In our worst case scenario, which I described briefly in my 
oral presentation, we probably would have to take 2 million 
barrels a day off the market. At a max we can take 4 out of the 
SPR and put it into the market at a max. But I do not think we 
would do that because we would not know how long that worst 
case scenario is going to last. It is just human nature to be 
careful and not to tap into the SPR to the fullest extent right 
from the beginning.
    But I support the use of the SPR in the event of a severe 
supply emergency. That is its intended purpose. Keep in mind 
the value per barrel in the Strategic Petroleum Reserve. What 
is the imputed value of each barrel in the reserve? Is it $50, 
$75, $100? So you could end up replacing lower cost oil with 
higher cost oil.
    Senator Bingaman. Mr. Cavaney, did you have a response?
    Mr. Cavaney. Yes, Senator. I would like to speak to the 
point about the International Energy Administration. We, the 
United States, and many other countries right after the first 
oil shock signed a treaty, and the treaty gave the power to the 
IEA that in the event of some emergency where 7 percent of the 
world's oil was taken out of circulation, they had the power, 
without even really asking the permission of the individual 
countries who had signed that, to develop an allocation system 
and force the SPR in our case and other countries to move their 
reserves onto the market. That was intended to be a very 
stabilizing effect. That is in place. We have to comply with 
it.
    What I might say is during the Gulf War that we had, the 
IEA actually did that. They did a small amount. It is sort of 
like the test that has been talked about. It went out there. It 
had a calming effect and it complied.
    But we have a different situation. In the Gulf War, when 
you added together the Iraqi volumes--they were about 3 million 
on a 66 million a day demand--and the Kuwaiti volumes, they 
were over that hurdle. Today when you look at Iraq, Iraq's 
production is down significantly, about 3 percent of the world 
market, not the 7 that is required. So there would have to be 
some other act before that actually came into play. So that is 
one factor.
    I tend to agree very much with the other statements here, 
that the President has the authority on the SPR. He should 
exercise it when he feels it is appropriate, and that should 
not be to manipulate or move around price. It ought to be in 
the case where there is a supply crisis of some kind and the 
determination made, and then it is appropriate to release it. 
But to do so prematurely may have unintended consequences, and 
the need may be greater, so you ought to watch it very 
carefully.
    Senator Bingaman. Mr. May.
    Mr. May. Senator, our views are clear. We think that there 
ought to be a million barrel a day short-term release. We think 
that the consequences are significant. We have outlined for you 
the economic consequences to this industry, and we also have 
made the point I think that it is fine to wait till the 
appropriate time. But history has shown that frequently the 
release has been made too late in the cycle, and I think we do 
not want to make that mistake again.
    Senator Bingaman. Thank you.
    The Chairman. Thank you very much, Senator Bingaman.
    Senator Wyden.
    Senator Wyden. Thank you, Mr. Chairman.
    I want to continue on this tack with respect to the 
Strategic Petroleum Reserve. I strongly favor release of oil 
now. I think the test, frankly, is met just with Venezuela. Mr. 
Ebel, you and I have talked about this. The test is 7 percent 
disruption. I think it is met.
    Look at the Wall Street Journal, not exactly a left wing 
organ. They are advocating what you are talking about, Mr. 
Ebel.
    I think the question that I would ask of you and maybe some 
of the other panelists is it seems to me that the lack of a 
policy, the lack of a clear policy, from this administration or 
any administration in this kind of climate contributes to the 
uncertainty that is generating this premium on oil and that we 
badly need a clear policy articulated. The Wall Street Journal 
advocated one approach that I would favor. I am on board. I 
think that is a good basis for common ground.
    What do you think, Mr. Ebel? Is the absence of a policy 
contributing to uncertainty that is contributing to this 
problem?
    Mr. Ebel. Mr. Cavaney, mentioned the 7 percent trigger that 
the OECD member countries would follow. I had the privilege of 
writing that particular program about 20 some years ago, and if 
I recall correctly, we made it so difficult, it was almost 
impossible to put it to use today.
    But the 7 percent today translates into 5.5 million barrels 
of oil. That is a lot and that is more than you would get 
certainly even under our intermediate case scenario where you 
would have the loss of Iraqi oil plus the loss of Venezuelan 
oil, but oil of OPEC members, Kuwait and Saudi Arabia, still 
flowing.
    The problem that I see is not here in this country; it is 
in Saudi Arabia. Saudi Arabia might say, well, if you are going 
to tap into your Strategic Petroleum Reserve, then we do not 
need to put any more oil onto the market. We will just sit 
tight.
    Senator Wyden. So you do not think we need to have a policy 
articulated? You are not there with the Wall Street Journal.
    Mr. Ebel. I think we do have a policy. We have not put it 
into effect yet.
    Senator Wyden. I think there are two pieces to the puzzle. 
One was discussed with Senator Bingaman. That is the actual 
release. I happen to favor that. Reasonable people can differ. 
What I do not think is a close call is making it clear that we 
are prepared to do it. I think it is unfortunate.
    I mentioned Senator Domenici has worked so hard in a 
bipartisan way on all of these issues, and I think the 
administration is being AWOL on this hearing at a time when we 
are faced with the prospect of war. I mean, consumers are 
spending $100 million more per day on energy now than they were 
a year ago. That is a fact. What is also a fact are those 50 
percent increases in profits that I mentioned of two companies. 
And I think we need a policy, and I think we need the 
administration making it clear where we stand.
    You agree, I gather, Mr. Ebel?
    Mr. Ebel. I do. I truly think that the American people need 
to be informed exactly what the policy is. And is it in play 
now or is it going to in play when the oil loss reaches a 
certain level, or do you put it into play today to try to 
mitigate prices which is, unfortunately, not the original 
intent of the Strategic Petroleum Reserve.
    Senator Wyden. I think my time is about up. I know Mr. 
Cavaney has a difference of opinion. I would only say in 
response to something that you mentioned, Mr. Cavaney, is the 
Wall Street Journal also argues that this situation is pretty 
much analogous to the Gulf War situation that we faced at the 
beginning of the 1990's. So there are differences of opinion. I 
think we need a policy.
    Thank you, Mr. Chairman.
    The Chairman. Do you have the Wall Street Journal there?
    Senator Wyden. I am going to make it available to all my 
colleagues.
    The Chairman. Maybe we should read it. It is not that I 
question you. It is just I would like to see it.
    Senator Wyden. Would you like me to read from it?
    The Chairman. I will wait until I get it.
    Senator Wyden. Okay.
    The Chairman. Let us see. Who is next?
    Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman.
    Most of you have touched on this. Given the fact that we 
have not even begun to open up exploration in our domestic 
sources offshore, both the west coast and the east coast, 
Florida--the only place that we drill off the coast is off 
Louisiana and Texas. Given the fact that we know that there is 
a huge source of oil reserves in Alaska, not only oil but 
probably a very large reserve of natural gas, are any of you 
advocating that the policy of this United States of America--
and we need an overall oil and energy policy--that we should 
explore in those areas? Anybody. It is a toss-up. Anybody can 
take the ball.
    Mr. Simmons. I would be delighted to start. This happens to 
be a subject I addressed last night at Duke University's 
Environmental Center, and I think tragically what we have done 
in the United States for well-intentioned purposes is gone out 
of our way to shut down a lot of the offshore areas that might 
or might not have been able to produce significant amounts of 
domestic energy. In doing so, we basically exponentially 
increase the amount of imported oil by maritime transportation.
    The fact of the matter is that the danger of oil spills is 
exponential, a magnitude of many, many manifold, by doing the 
latter versus the former. We are now basically desperately 
hoping that Maritime Area in Canada can basically find natural 
gas and find oil to help us out of our problem. There is a 
certain amount of hypocrisy of hoping that Canada can do what 
we are not able to do as a country.
    So I really think that if we have the serious problems that 
we are probably going to have this year, that it is a wake-up 
call for America to get serious about how important domestic 
energy is and how important it is to protecting a vital 
environment versus the opposite of continuing to use more and 
more and bringing it in over tankers that are getting older and 
older. And preventing tanker spills is like preventing car 
accidents. You cannot do it. So I think it is an unbelievably 
important thing. It is too bad we waited so late.
    Senator Bunning. Others?
    Mr. Ebel. Senator, we have all known individuals of great 
potential who, for a variety of reasons, have never been able 
to live up to that potential. And we say, what a loss, what a 
shame. Nations are very much the same. We know of nations that 
have had great potential but for a variety of reasons have 
never lived up to that potential. The United States has a still 
unused resource potential. What a shame if that resource 
potential were not put to work.
    Mr. Cavaney. Senator, there is one axiom I think most 
everyone agrees with, and that is, energy security is a 
function of diversification of multiple sources. And the extent 
to which we stop relying on the United States to provide our 
oil--the demand is going to continue. There are no 
substitutable energy forms that are going to come on in the 
next decade or 2 that are significantly going to curb the 
demand for fossil fuels, both crude oil and natural gas. So 
what we ought to be doing is looking to those, hold us to the 
highest possible standards, but go ahead and explore and 
produce where it makes sense and not in areas where it should 
not be, and that will then enhance our energy security.
    The oil and natural gas is there. Let us take advantage of 
it. Whether we decide to actually drill it or know it is there 
and have the capacity to use it when we want is yet another 
thing that can be considered, but it would be again a shame if 
we did not do any of that.
    Right now the projections are that within the period of 
2020, we are going to be in a position, if continue on the 
current course, where we will be importing 80 percent of our 
oil, and if you look at natural gas and some of the issues that 
are there, we may end up actually going down the exact same 
path on natural gas where we end up importing LNG, but that is 
a topic for another hearing, Mr. Chairman.
    Senator Bunning. Mr. May, I know that it would mean cheaper 
oil for the airline industry and therefore the cost of flying 
and things would go down.
    Mr. May. Senator Bunning, ATA actually has had a 
longstanding position that the United States should do 
everything it can to develop its oil resources.
    Senator Bunning. Last question, because none of you touched 
on it. I spent about a week in Russia. In talking with the 
leadership of Russia and the natural resources Russia has in 
regards to crude oil--and they are significant, whether you 
know that or not. You probably do. The United States is 
genuinely helping with pipelines and everything in Russia to 
bring their crude oil to port, thus I hope eliminating the 
problems that we have in the Middle East because of the 
instability in the Middle East.
    Do you all think that Russia can play a significant part in 
alleviating not our demand so much for importing, because that 
would still be importing, but the instability of the Middle 
East? Go right ahead.
    Mr. Cavaney. As an industry, we have had a number of 
discussions with the Russians, the counterparts, both the 
government as well as the CEO's and the technical experts in 
many of the large Russian companies. They do have scaleable 
reserves there that they could bring to market. They are very 
interested in serving our market. The difficulty they have at 
the present moment is they are essentially landlocked with much 
of what they have got, so they need to develop pipelines and 
other sources, whether it is deep water ports.
    We will see in some measure of time Sakhalin Island and 
everything on the Pacific side has great, great potential for 
serving the Far East as well as our west coast. And there is 
already active work underway out there by U.S. companies and 
also other major oil companies. So we see great promise in the 
development of Russia.
    But let us also consider the Caspian, West Africa. These 
are the diversification things that we think enhance the 
security and ought to be encouraged, and we are trying to do 
all we can as an industry to get those supplies.
    Senator Bunning. Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Bunning.
    Senator Murkowski.
    Senator Murkowski. I want to thank you, Senator, for asking 
the question and getting all you gentlemen on record in support 
of exploration and drilling in ANWR, hopefully opening up our 
resources that we know are so substantial and in recognizing 
that we can achieve those goals in terms of national security 
issues, the diversification.
    Speaking to the environment--and I appreciate, Mr. Simmons, 
your comments with regard to the tankers. One of the things 
about ANWR that we get hit with is that somehow we are going to 
be despoiling the environment, and I think people need to look 
at the whole picture here. You are absolutely right on point 
when you say that it is far more dangerous, you are far more 
apt to have an accident when you have single-hulled tankers 
going up and down the west coast carrying foreign oil. If we 
are carrying our domestic product, we have got double-hulled 
tankers. We have got Americans that are building those tankers, 
so we are providing the jobs. We have got economic security, 
and we have got environmental security.
    I believe, Mr. Cavaney, you have mentioned we look to 
Russia, we look to the Caspian, we look to other places. If I 
recall what is happening in Russia, they are certainly making 
great strides and advancements, but they have had some terrible 
environmental problems with their pipelines over there. When 
you look at what is happening in Alaska and how we do the job, 
how we transport that oil, we do it safely, we do it in an 
environmentally sound manner. We feel we do it better in Alaska 
than they do anywhere else in the world, and we would like to 
be able to continue that. As you all know, our pipeline is half 
full and we have got room to do a little bit better.
    Also, talking about the environment and the advances that 
have been made, our pipeline is 30 years old. We have got some 
technology that has come on in the past 30 years that, as you 
had pointed out as well, is substantial in terms of how we do 
the job, do it better, do it safer, the seismic technology, the 
3-D, the directional drilling. Also, the new, almost a Lego 
type of a system where you are able to put an elevated platform 
so you are not harming the tundra, you are not causing any 
damage, again going back to we can do it better and safer than 
anywhere else in the country.
    I am kind of getting off on my soapbox rather than asking 
any specific questions.
    I wanted also to make a comment, just personalizing as it 
relates to the airlines. We have talked to folks with Alaska 
Airlines and are told that with a 1 penny increase in the price 
of aviation fuel, it is $4 million to Alaska Airlines. In my 
State, if we are not able to fly around, nothing much happens. 
So we are very cognizant of what these price increases are 
going to do within the aviation area.
    Mr. May. Senator, if I might.
    Senator Murkowski. Please.
    Mr. May. All of the States that I see represented on the 
dais today have significant small market operations, and they 
are fed in many ways by this hub and spoke system that we have. 
The health of service to those small markets is very, very much 
dependent on the health of the big carriers. And we are in a 
perilous financial condition, and the energy costs are 
contributing to that. So it is very much in everyone's interest 
to do whatever they can to keep these airlines healthy and in 
particular those for small markets because they are going to be 
the first routes to go in a significant restructuring.
    Senator Murkowski. Well, anything that you all can do 
within your industry to help us make the production available 
domestically is going to be greatly appreciated, and as you all 
point out, the sooner we can have it happen, the better off we 
are as a country.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator.
    Senator Thomas.
    Senator Thomas. Thank you, Mr. Chairman.
    To the extent that the Government has a role in doing 
something here--and obviously there is a role--it seems to me 
we need an overall energy policy. We worked at it very hard 
last time. Put yourself in our place and each of you tell me 
what would be your first priority for an energy policy for the 
United States.
    Mr. Simmons. I think you have to start, as fuzzy as this 
sounds, with some ability to convince Americans right up and 
down the ladder that, like it or not, energy is the single most 
important thing in our society. It creates water. It creates 
food. And if we basically blind ourselves to basically not 
liking energy and wanting to go someplace else, we have an 
unsustainable economy. If you could ever figure out a way to 
make that breakthrough and get people to understand how real 
this is and what realistic cost needs to be, I think all sorts 
of other things start unraveling and become doable. But I think 
until we have a wake-up as to how unbelievably vital energy is, 
I think all the other things tend to be band aids or things 
that are possible but not politically acceptable. So I think 
you all have your work cut out for you.
    Mr. Ebel. The core of our energy policy for a number of 
years now has been to encourage U.S. companies to search for 
oil outside the United States but away from the Persian Gulf. 
That should be continued because security of supply comes 
through a diversity of supply.
    But where is the political will, as I tried to get across 
in my oral comments, to make substantial changes in our policy, 
to get the Americans to understand the role that energy plays 
in our day-to-day economy?
    The average American consumer has two concerns only: price 
and availability. He does not care where his oil comes from. It 
does not bother him in the least. Energy independence does not 
cross his mind when he pulls into his favorite filling station. 
But what stares him in the face is that little price that he 
sees, and that is what he remembers. It is the change, the size 
of the change, and the suddenness of the change.
    He has only three options when it comes to energy and to 
make better use of the energy that he consumes. He has his 
light switch. He has his thermostat, and he has his car keys. 
And that is all he can do when it comes to at least his 
management of energy.
    I think what we need is an energy primer for the American 
people to get them to understand how that electricity gets to 
the switch on the wall or how does the gasoline get to their 
favorite filling station. Until they really understand the 
complexities of the situation, they will remain concerned only 
with price and availability.
    Senator Thomas. They understood in California a while back 
I believe.
    Mr. Ebel. Price.
    Senator Thomas. Yes, sir.
    Mr. Cavaney. Senator, in one word, comprehensive. If you 
look at energy policy over the last several decades, it has 
been done in an ad hoc manner. We dealt with one entity, then 
another entity, and we never looked at the entire picture. What 
has happened with technology is these things actually touch up 
against one another and there is interchangeability. So, if we 
are going to get off this very precarious position we have 
placed ourselves in as a country and with regard to our energy, 
we need to have a comprehensive solution that looks at all of 
the elements and tries to do the best rationalization that we 
can.
    I thought Congress made a good start, both in the House and 
the Senate, last year, but as you noted, we did not get it all 
the way there. I hope this will be the beginning of that 
discussion again for this Congress and that we can come up with 
a comprehensive policy.
    Mr. May. Senator, I will be parochial. We are paying $600 
million a year in a tax that was enacted in 1993 in the name of 
deficit reduction. It is specific to jet fuel. And I think it 
is inappropriate, and repealing that tax as quickly as possible 
would have a marvelous short-term impact on the health of our 
industry.
    Senator Thomas. On airlines, not on the energy.
    Mr. May. That is correct, but it is an energy tax that was 
imposed in the name of deficit reduction, and I do not think 
it----
    Senator Thomas. How about the energy tax on highways?
    Mr. May. I do not represent the trucking industry and I 
would not pretend to.
    Senator Thomas. I got you, okay. Well, thank you, 
gentlemen. I appreciate it.
    The Chairman. Thank you very much.
    Senator Landrieu, do you have any questions?
    Senator Landrieu. Yes, thank you, Mr. Chairman. First of 
all, let me thank you, Mr. Chairman, for your leadership and 
also our ranking member. You have both worked very hard over 
many years to fashion a policy that makes sense for our Nation 
and the world and try to balance the environment with our needs 
of our industry. Particularly you, Mr. Chairman, and your focus 
on revitalizing our nuclear industry and trying to be mindful 
of land conservation issues, as well as promoting domestic 
drilling. I want to thank you for that.
    Just a few points. One, while I agree with my colleague, 
the Senator from Oregon, about the possibility of a release 
from the SPR being something that might help--and of course, 
several of you testified about the treaty that is in place that 
will trigger that automatically in the event that we hit that 
certain level--I want to just remind everyone for the record 
that there are only 600 million barrels of oil in the SPR. We 
consume 7 billion a year. So we would have basically a 30-day 
supply of oil in the SPR.
    Now, I am not saying that we do not have the capacity to 
increase those reserves, but at some cost as the value now 
rises to do that, but just to put this in perspective. I 
realize that there are some people that might think this war 
could last a few days or a week or 2 weeks, but if you get 30 
days or 60 days, I do not want people to think that there is 
enough reserve. Now, that is our SPR. I know there are other 
reserves in the world which leads us to thinking that that 
might be part of a solution. But ultimately it is going to be, 
I think, more domestic drilling, more conservation measures, a 
combination. That is one.
    My second point is this. I wanted to call to the 
committee's attention, because I was very confused, Mr. 
Chairman, about this when I first got here because, as you 
know, most of the OCS production takes place off the coast of 
Louisiana and Texas--and I have said 100 times we are pleased 
to host that production. We are learning how to do it in an 
environmentally sensitive way.
    And Mr. Simmons, I agree with you the dangers to our 
environment are far exceeded by tankers plying our waters than 
by the pipelines that we lay to retrieve that gas and oil.
    But I was perplexed when the staff handed me a chart, which 
I will show for the record, Mr. Chairman, that says that off 
the coast of Texas and Louisiana, which is the western Gulf, 
there are approximately 37 billion barrels of reserve, 
according to the national assessment. This is our national 
assessment. Yet, on the Florida side of the line, there were 
only 2.7 billion barrels. I was wondering if just the geologic 
formation stopped at the line between Louisiana and 
Mississippi. I am not a geologist, but it just did not make 
sense.
    And then I was told the reason for the great difference is 
because on one side of the line, we are actively exploring and 
looking; on the other side of the line, we are prevented from 
looking. So when they give an estimate of how much is there, 
they tell you there are 2 billion, but actually if you wanted 
to just guess and since their section is a little bit larger 
than our section--I know this map is not very large--but I 
would estimate that it would be about 50 billion barrels, I 
mean, just a rough guess, if the formations were the same. 50 
billion barrels, not 2 billion.
    So part of it is that we have got to work off the right 
figures, and the bottom line, whether you are talking about 
Alaska or Florida or California, there are huge, huge untapped 
reserves. Let me say if we really got into a bad situation and 
needed Louisiana to produce enough oil for everyone, we could 
do it for 5 years. That is how much oil is off the coast of 
just Louisiana alone to keep this country operating for 5 
years. Now, I do not think that is what we should do, but that 
is how much is there.
    I agree with you that part of it is just accepting that 
fact, not trying to bury your head and saying, well, it is just 
not there. It is not true. There is lots and lots of oil and 
gas.
    The answer is: A, you do not have to drill everywhere 
because you do not need to because there is a lot of oil and 
gas in places that, if you could just open them up and have a 
reasonable drilling policy, we could get them.
    But my question is this. What I do not understand is now 
that our imports are pretty much diverse in the sense of 40 
percent we produce and consume ourselves, we get 21 percent 
from Canada, 18 percent from Mexico, 16 from Venezuela, our 
supply is more diverse than it used to be. I think we used to 
get most or everything from Saudi Arabia. Would it lower the 
price if we produced more? And if so, by how much? And how much 
would we have to produce by? Does the domestic production have 
a direct impact on keeping that price lower?
    Because the real problem is, whether it is for the airlines 
or for the 4.5 million people who live in my State, or for the 
chemical producers, the petrochemical producers, my farmers, my 
small business people, they cannot sustain this increase in 
price. They just cannot sustain it, Mr. Chairman. Our economy 
is so weak now if we do not figure out some sort of appropriate 
solution to keep this price stable and relatively low, this 
economy is going to be hurt and even much worse than it is now. 
And our small business people are hanging on. Our farmers are 
barely hanging on. Our airline industry is barely hanging on.
    While I am for more production, my question is, does more 
production help or do we need other market mechanisms to try to 
keep this price stable or keep it low to get through the war 
and try to strengthen our economy? Would you each take a chance 
at that?
    Mr. Simmons. Senator, I worry that in fact we basically 
fooled ourselves over the last 20 years with prices that did 
not work. They created pathetic returns throughout every sector 
of the energy business, and perhaps we basically got accustomed 
to prices that were just false because at some point prices 
have to be high enough to sustain readily available energy. And 
there is no evidence that domestic energy is cheaper than 
anyplace else. Unfortunately, that is not necessarily a 
panacea.
    However, there is an unbelievably important element. I 
mentioned briefly that there are a lot of signs we are now out 
of tanker capacity. Tanker rates basically in the third quarter 
of last year were about $5,000 to $10,000 a day for very large 
crude carriers, VLCC's, and by the middle of October, they were 
$40,000 a day, and by early January, they were $100,000 a day. 
That basically creates a transportation cost on top of oil from 
the Arabian Gulf of about $3.50 a barrel. So there is your 
advantage.
    Now, unfortunately, it might be $35 here and $3.50 on top 
of that. So I think it would be wrong for anyone to think that 
domestic energy is cheap, but when transportation becomes 
really expensive and probably constrains the availability, then 
in fact domestic energy wins hands down. So I think that you 
are absolutely right in your concern.
    Senator Landrieu. Mr. Ebel.
    Mr. Ebel. Let me try to put the Strategic Petroleum Reserve 
in a slightly better perspective. You are absolutely correct 
that we have about 600 million barrels in it. Relate that, 
though, not to what we consume but what we import, and then 
look at where the oil comes from. We import, let us say, 11.3 
million barrels of oil a day. Take out Canada and then take out 
other sources. And every reliable supply that you take out, it 
adds to the amount of days that that SPR can be used to offset 
losses of oil from unreliable sources. So we are much better 
off than what many people think.
    Second, in my oral remarks I made the point that the United 
States does not stand in isolation from the world oil market. 
We stand vulnerable to any event anywhere anytime that impacts 
on supply and demand which, in turn, impacts on prices. So 
because of that, we cannot be protected from price increases 
that would result from an event disrupting supply over which we 
would have no control. So we are vulnerable to price 
volatility. The price goes up, we are vulnerable; the price 
goes down, we are vulnerable.
    Mr. Cavaney. I think your instincts are exactly right. 
While it would maybe not have a direct effect on a barrel-per-
barrel basis, like any commodity this is traded globally. It is 
very transparent. And the extent to which you have excess 
capacity in both the United States as well as in other foreign 
countries, and the capacity far exceeds the amount of demand at 
the time, you are going to get the classic case of supply and 
demand working. Like when you go into a grocery market and find 
out there are plenty of choices there, usually the price is 
less.
    But more importantly besides that is the security and the 
knowledge to know, just to the point that Mr. Ebel made, is if 
we have a problem where some of our external supplies are cut 
off, we have more options and we have to rely less on people 
who maybe are not the reliable supplier that we would like. So 
there is both a premium that comes from the law of supply and 
demand, and there is also an opportunity for more security.
    Senator Landrieu. Let me just insert this one, Mr. 
Chairman. I know my time is up. Normally I think the mechanics 
of the market work in normal times. But what you just said, 
when the demand goes up, the price goes up--the whole world is 
at sort of a low economic level right now. In the United 
States, our economy is very, very soft. There are very few 
places in the world, except for China, that are very robust. So 
you would think because the demand was lower, the price would 
be lower, but the price is going higher. And I know it is the 
uncertainty with the war.
    But are there any market mechanisms that could be put in 
place besides just the expression of a policy, the threat to 
release from SPR that could help stabilize prices or keep 
people from hording in a sense that is not appropriate? And I 
am not talking about interfering. I am talking about mechanisms 
that might help to stabilize the price. Or do you think that 
the benefit is just to keep it rising? That is just the natural 
course and it should not be interrupted in any way.
    Mr. Ebel. One approach, of course, would be to encourage 
the development of as many sources of supply that you can, and 
that is one reason why the world is so attracted to Russia. 
Here is a player that in the middle of the 1980's was the 
leading producer of oil in the world. Then the bottom fell out 
and now they are returning to their days of past glory. It is a 
slow return. But last year they produced about 7.6 million 
barrels of oil a day, of which about 5 was put on the market.
    It does not make me any difference whether we ever see a 
drop of oil from Russia in this country. That is not the 
concern. The concern is how much oil can Russia put on the 
market, period. That is what is going to count. And that is why 
we are helping develop oil in Azerbaijan and Kazakhstan and the 
Caspian Sea, to give importers around the world another major 
choice.
    Senator Landrieu. And we have more choices and more supply 
and then the price will drop.
    Mr. Ebel. That is how security comes about.
    The Chairman. Thank you very much, Senator.
    Senator Landrieu. Thank you.
    The Chairman. Senator Alexander.
    Senator Alexander. Senator Thomas asked you to put yourself 
in his shoes and help him think about what priorities should be 
for an energy policy. Let me ask a similar question. Assuming 
we are trying to create a comprehensive energy policy and one 
section of that should have to do with research and 
development, what would your priorities be for energy research 
and development in a comprehensive energy policy?
    Mr. Ebel. I was attracted very much by a line in the 
President's State of the Union message where he said that he 
hoped that an American born that day would be able to drive a 
hydrogen fuel cell car, the first car that he would drive.
    I think eventually our demand for oil will decline before 
physical supply becomes a problem. I think a hydrogen based 
economy is the future not only for the United States but for 
almost all oil-consuming countries.
    How quickly can we get to that future? What stands in the 
way? Saudi Arabia, Iran, Iraq, Kuwait, the oil producers of the 
Persian Gulf, because all they have is oil, and they are going 
to work that oil in a way to reduce incentives to go to a 
hydrogen fuel based economy to develop alternative forms of 
energy, always make oil just a bit more attractive than other 
forms. Once the demand for oil is replaced by something else, 
what future do they have? Would we be any longer interested in 
them? Absolutely not.
    Mr. Simmons. I would think, Senator, that there are some 
very long-term things that are going to take an awful lot of 
R&D from someone. The role of nanotechnology in future sources 
of energy could be phenomenal, but sometime your committee 
should invite Dr. Smalley from Rice who is a Nobel Laureate in 
nanotechnology. He has some phenomenal ideas, but he is very 
specific. They are going to take 30 years. That is a long 
bridge.
    I think in the meantime we could basically do some better 
work on things like the diesel engine. Europe has had some 
radical breakthroughs in the diesel engine: 30 to 50 percent 
more fuel efficiency apparently. It is not something that needs 
to be developed. But there are some technical issues of 
incorporating that here.
    I think part of the issue in the R&D we are going to have 
to spend in the next 10 or 15 or 20 years is making sure we are 
focusing on the right things and not throwing too much money at 
things that might not make a big difference and throwing the 
money at the things that are real long-term and you have to 
start today or real short-term that do not have monumental 
barriers before they make an impact.
    Senator Alexander. Thank you.
    Mr. Cavaney. Senator, I think to follow on to what Matt had 
said, Government has a very important role to play in the pre-
competitive nature, the kinds of things that have the long 
terms that require the big bucks. Hydrogen is certainly an area 
where they can do that.
    But importantly, Government should stay active and look at 
all the alternative energy forms because anybody who has looked 
at this thing comprehensively says essentially we need all the 
energy we can get efficiently from wherever we can get it. So 
there is going to be an increasing role for solar, for wind, 
for some of the other alternatives, but we are now, on some of 
those, starting to get into the competitive nature where 
Government's role may be less sitting there and doing basic 
research and more working to educate people and remove barriers 
and the like.
    Mr. May. Senator, from the perspective of the airlines, we 
look at it as where we can do R&D to be more efficient. And I 
think that is as big an improvement as we can make. As I said 
in my testimony, the fleet today is three times more energy 
efficient than it was in 1970. The newest of the aircraft that 
are out today are substantially more efficient than that, and I 
think the more we can do to fly efficiently, to have engines 
that are more efficient, that is where we can, from an R&D 
perspective, contribute to this issue.
    Senator Alexander. Thank you for your comments.
    We have a chairman and a ranking member with long-term 
horizons. So I would invite you, after the hearings, if you 
think of any further answers to that question about energy R&D 
and specifically the names of one or two persons from whom this 
committee ought to hear, such as the doctor from Rice, I would 
like to have them, and I imagine other members of the committee 
would too. So I would invite you to send them to me.
    Thank you very much.
    The Chairman. Thank you, Senator. Were you finished?
    Senator Alexander. I am.
    The Chairman. I have a few more follow-ups and then I will 
yield to Senator Bingaman.
    First, Senator Alexander, I have spoken to the chief of 
staff on our side about your interest in science and the 
future, and we are going to arrange a panel and a day's hearing 
on science and technology changes that would move us towards 
that day when the squeeze of oil and natural gas would not have 
such a profound negative impact on the American people. And we 
will do that.
    I would just say one thought comes to my mind. In starting 
to learn about what we are doing, I found a most interesting 
flow graph about energy and its starting point in the United 
States and its terminal point when it is delivered for use. And 
it is phenomenal. Only 40 percent gets to the end where people 
use it. So 60 percent of the energy that is produced is lost 
before we use it, which leads me to think that whatever 
superconductivity research we are doing is probably inadequate 
and probably behind schedule.
    The first superconductivity centers were set up in the 
waning days of Ronald Reagan. The reason I remember is one was 
set up in one of our laboratories. It was about $3 million or 
$4 million. That laboratory was one of the laboratories that 
sparked the idea that perhaps we would get to the day when if 
you cooled the source of conductivity around the conduction to 
a low enough degree, you could move it with no friction and 
consequently no loss. It is kind of exciting. I would think we 
ought to perhaps hear from somebody on that.
    Let me just talk about SPR for a minute and say to all the 
Senators who participated in the SPR discussion, I think a 
hearing like this in the United States just has to bring forth 
a discussion on SPR. I would hope that you all understand that 
we are not moving toward an energy bill that has as a 
cornerstone for our future SPR. Obviously, it is nothing more 
than an emergency, gap-filling measure that came about only 
when the United States had that huge supply interruption when 
the Shah of Iran went down. We decided we ought to put a little 
bit of it in the ground.
    We have even been worried from time to time whether we 
could get out. We are so used to doing things in a grandiose 
way only to find at the end they do not work. I have been 
checking, and I do think it will work. We have been told the 
engineers can get the oil out of the ground and move it around 
where we need it.
    But I would suggest that the administration may be wiser 
than we think in not announcing a SPR policy, the Wall Street 
Journal notwithstanding. There are going to be plenty of 
opportunities in the ensuing months to declare the kind of 
emergency that brings on the need for SPR, and whenever it is 
going to be--it is not here yet. We have had these prices of 
oil already before in the United States, and we did not have 
them with Venezuela going down the drain. It was other reasons 
that caused it since we put SPR into operation. So I would 
think the more we keep everybody guessing as to whether we are 
going to do that, the better we are off as a Nation and the 
more apt we are not to get supplies in any way predicated upon 
SPR or non-SPR built into this huge, huge oil supply equation, 
which SPR will just be a little dribble however it is used.
    I did get the statement of the EIA and the 7 percent 
trigger that was mentioned, and it does not say anywhere in 
here that the United States has agreed to that. Are we a 
partner to such an agreement?
    Mr. Cavaney. We signed a treaty which obligates us to do 
that, and I will provide----
    The Chairman. We will get it. It is a little bit vague as 
to what you will do in response to the crisis as described as 7 
percent. It says you will do a bunch of conservation things. It 
does not necessarily say SPR would be released. Is that not 
right?
    Mr. Cavaney. You are absolutely right. It says a number of 
measures and it is really left up to them.
    The Chairman. Let me just say to all of you it is 
interesting that we sit here all wondering who is going to 
finally come up with an American energy policy, and you are 
wondering when we are going to educate the people, and we are 
wondering whether we are going to educate you and everything 
else. I think we are all educated enough. The problem is we 
have got to go do it, and it is not as easy anyone would think. 
Maybe it would be easier if the population was better educated. 
You may be suggesting that.
    But there are not any simple answers. Supply is not an 
answer all by itself either. On the other hand, it does seem to 
me that supply and conservation are, just right up front, two 
very natural things. They ought to be a brother and a sister 
when it comes to this program, this attempt to put a policy 
together. It does not seem yet that Americans are sufficiently 
concerned about supply to do anything even close to making some 
common sense decisions about supply. We seem to be convinced 
that supply just ought to be held up because some of it is a 
bit risky.
    I do not know when the time will be that we will be in 
sufficient risk for some who have created barriers to domestic 
production. We will conclude that maybe they are wrong, whether 
it be Alaska or offshore or whatever or the inlands of the 
United States. Everything is a balancing of risks and we are 
here, concerned about supply of either natural gas or crude 
oil.
    We will have a hearing on natural gas soon. The same kind 
of concern will be in the air, although we will not be quite as 
worried about domestic supply. We will be talking about 
something a little different, whether we are now all piling up 
on natural gas because it would appear to be here in abundance. 
So that is the great new energy of choice now. So we are busy 
making sure that we use every bit of that choice we can.
    But essentially between producing more and conserving and 
long term figuring out how there is diversity, it is pretty 
obvious that we know where we ought to go. How we get there is 
not going to be so easy.
    We do plan a trip to Russia as soon as we have a 
significant lapse here and see if the committee wants to go 
take a look at the Russian fields in a few of the former 
Russian republics. It is interesting to note that there is 
plenty of oil. The question is will they get it out and will 
they get it to market or will they be tied up internally. They 
have got some enormous internal problems.
    Having said that, I want to ask is there anything that any 
of you would like to comment on in the last few moments here 
that would help us in your opinion with reference to our job? 
Yes, Mr. Cavaney.
    Mr. Cavaney. Mr. Chairman, we have collected a number of 
suggestions that we think will help, and I would like to be 
able to submit them for the record for consideration, 
opportunities to look at where we can expedite, speed up the 
processes that are underway and look at some new processes and 
the like.
    The Chairman. Thank you. Do you have some that have to do 
with permitting and post-permitting costs on public lands?
    Mr. Cavaney. Yes, absolutely.
    The Chairman. Will you submit those?
    Mr. Cavaney. We will provide those.
    The Chairman. Do you any of you have anything else? Yes.
    Mr. Ebel. Mr. Chairman, as you think about Russia and your 
forthcoming trip, keep in mind that over the years we have been 
wrong three times about Russia and now we are offered the 
opportunity to be wrong again.
    Mr. Simmons. Senator, I would like to come back to where I 
started on our very alarming low petroleum inventories or 
stocks and suggest that the Energy Information Administration, 
which is the only depository of data, needs a lot of beefing up 
and a lot of help. We really need to know where minimum 
operating levels are, and it is a regional issue. We really 
need to know something about secondary and tertiary stocks 
because if we basically go over the edge, it is really a 
disaster. So that is an area your committee could be of some 
real help in.
    Mr. May. Mr. Chairman, while the long-term solutions are 
critical and everyone can agree, even if they do not have the 
answers, I hope we do not overlook the short-term crisis 
either.
    The Chairman. We can report to your newest clientele that 
you are right on with concern about them. You have not 
volunteered any information. It is their cause. That is all 
that you have talked about, and we understand that and thank 
you.
    Senator Bingaman.
    Senator Bingaman. Thank you, Mr. Chairman.
    Let me ask two somewhat related questions. Mr. May, it 
seems to me in the past when we have seen substantial increases 
in the price of jet fuel, that many of the airlines put 
surcharges on their tickets or the price of their tickets. Has 
that happened? Is there a reason why that does not happen to 
take some of the financial pressure off? I know you lose a few 
customers when you do that, but you do not lose most of them.
    Mr. May. One of the unfortunate byproducts of the weak 
economy, Senator, and the reality of the airline business today 
is an almost total lack of pricing power. We wish we had the 
opportunity to pass through a lot of the costs that we are 
incurring. As a simple example, I have one member company that 
has gone into the capital markets to borrow in excess of $1.2 
billion over 2 years simply to pay the taxes and other 
obligations imposed by the Federal Government. That does not 
begin to touch the increase in fuel prices. If we could pass it 
through, it would be a wonderful day for us. But we do not have 
the pricing power now to be able to do that.
    Senator Bingaman. Mr. Cavaney, let me ask you. There is an 
article in Energy Daily today that notes that API is pledging a 
10 percent improvement in the efficiency of its member oil 
refineries by 2012 and the introduction of a new system for 
measuring and aggregating emissions across the oil and natural 
gas industries. I was interested in whether that new system 
will also estimate the effect of emissions from gas venting and 
flaring.
    Mr. Cavaney. Senator, that is a project we have been 
working on for 2 years so that our companies which have far-
flung enterprise could basically call a shot. And yes, it will 
take care of measuring of venting and flaring among all the 
activities that the industry does, upstream, downstream, and 
transportation distribution.
    Senator Bingaman. Thank you very much. Thank you, Mr. 
Chairman.
    The Chairman. Thank you. We stand in recess. Thank you.
    [Whereupon, at 4:13 p.m., the hearing was adjourned.]


                               APPENDIXES

                              ----------                              


                   Responses to Additional Questions

                              ----------                              

                                 Air Transport Association,
                                 Washington, DC, February 25, 2003.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Mr. Chairman: I would like to thank you for offering me the 
opportunity to appear before your committee on February 13 to provide 
testimony regarding oil supply and prices. On the attached pages I have 
responded to the questions submitted for the hearing record. If there 
is any further information you require, I would be pleased to provide 
it to you or your staff.
    Once again, my deepest appreciation for permitting me to appear 
before the Committee on behalf of the Air Transport Association.
            Sincerely,
                                              James C. May,
                                                 President and CEO.
              Responses to Questions From Senator Domenici
    Question 1. You have heard from the other witnesses regarding the 
outlook for global oil markets. The projections show increasing supply 
pressure as demand growth in the developing world accelerates. You have 
outlined a couple of short-term solutions, such as tapping the SPR. 
Does your association support specific initiatives to increase domestic 
production in order to diversity U.S. supplies?
    Answer. Yes. ATA vigorously supports creating environmental and 
financial incentives for domestic oil exploration, production and 
refining. Accessing every incremental portion of our untapped reserves 
lessens the ability of foreign sources to maintain a potential 
stranglehold on the U.S. economy. ATA has been a member of the Energy 
Stewardship Alliance, and we specifically support opening the Coastal 
Plain of the Arctic National Wildlife Refuge to oil and gas 
development.
    Question 2. Are you aware of the recent announcement by OPEC to 
reduce production targets in the 2nd quarter of this year due to 
returning production from Venezuela? Does this concern your members or 
do you believe that OPEC is justified in reducing production to prevent 
a glut in oil.
    Answer. We are concerned with the reduction proposed by OPEC. OPEC 
has established a benchmark price for the so-called ``basked of 
crudes'' that has been exceeded for months, yet OPEC has not responded 
by increasing production sufficiently to bring prices down to the 
levels its benchmark. OPEC's proposed second quarter action is further 
support for decreasing U.S. reliance on overseas sources of petroleum 
and increasing domestic production.
    Question 3. Your association represents a number of foreign 
carriers. Are you aware of any other countries releasing supplies from 
their strategic reserves to relieve the pressure on crude oil prices as 
you have advocated today? If so, which countries and what percentage of 
their overall oil supplies are imported?
    Answer. None of our foreign members' home countries has released 
supplies from their strategic reserves. However, both the nature of 
those countries and the nature of civil aviation in those countries is 
considerably different than in the United States. The U.S. is an 
importer of petroleum, and U.S. civil aviation constitutes 
approximately 40% of the world's commercial air transportation system 
and consumes almost 10% of U.S. refined product. Two of the countries 
in which ATA's foreign member carriers are domiciled--Canada and 
Mexico--are petroleum exporters. In the other two countries--the 
Netherlands and Jamaica--civil aviation is a very small part of their 
overall transportation system and utilizes a very small part of the 
countries' petroleum demand.
    Question 4. I understand that, as a result of past price increases, 
airlines adopted a fuel surtax. When was this charge implemented and 
where is it being applied? In light of the significant increase in fuel 
prices, do you believe it is likely that such a charge will be applied 
to all flights?
    Answer. ATA has never maintained information on airfare initiatives 
taken by our members. However, we were able to obtain this information 
form UBS Warburg (attached).* ``Their information covers fare 
initiatives taken from January 1997 through October 2002. During that 
time there were three occasions when airlines introduced or eliminated 
fuel surcharges. Twice airlines introduced fuel surcharges that were 
widely adopted and they once eliminated the surcharge but increased 
fares by an equal amount. The surcharges were introduced in 2000 when 
jet fuel prices were rapidly increasing. This was also a time of 
increasing demand for air travel making it possible to increase prices.
---------------------------------------------------------------------------
    * Retained in committee files.
---------------------------------------------------------------------------
    The situation airlines face today is one of sharply increasing jet 
fuel prices but a very weak passenger demand environment. This weak 
demand has resulted in sharp fare decreases, rather than increases and 
no successful initiatives with respect to a fuel surcharge. As of 
Friday, February 21, four airlines had introduced a modest fuel 
surcharge that other airlines had not yet matched.
             Responses to Questions From Senator Feinstein
    Question 1. What is your opinion on increasing CAFE standards or at 
least closing the SUV loophole so fuel standards of passenger cars and 
SUVs and light trucks are aligned?
    Answer. As an organization representing airlines, ATA has not 
addressed CAFE standards. Therefore we take no opinion on the matter.
    Question 2. What is your opinion on allowing a governor of a state 
to waive the 2 percent oxygenate requirement?
    Answer. Oxygenate requirements to do not apply directly to jet 
fuel, and we have not focused on its impact, if any, on the supply of 
jet fuel.
                                 ______
                                 
              Center for Strategic & International Studies,
                                 Washington, DC, February 25, 2003.
Hon. Pete V. Domenici,
U.S. Senate, Washington, DC.
    Dear Senator Domenici: I appreciated very much the opportunity to 
testify before the Senate Committee on Energy And Natural Resources on 
February 13, 2003 and to offer my thoughts on oil supply and pricing. 
If I can be of further assistance to you and to your Committee, please 
let me know.
    Enclosed are my responses to questions that have been submitted for 
the record. I would be pleased to provide any additional information 
that might be required.
            Sincerely yours,
                                            Robert E. Ebel,
                                          Director, Energy Program.
[Enclosure]

              Responses to Questions From Senator Domenici

    Question 1. You have provided the Committee a copy of a report you 
co-authored entitled ``After an Attack on Iraq: the Economic 
Consequences.'' This study outlines for possible outcomes of a war with 
Iraq and the impact each would have on oil supplies and the 
corresponding impact on price. Please briefly summarize that study for 
the Committee.
    Answer. CSIS first developed four scenarios with regard to military 
intervention in Iraq and then anticipated the impact each would have on 
oil supplies and in turn on oil prices.
    Under the first or No-War Scenario, Saddam stays and oil volumes 
remain unchanged. Prices would decline, as a war premium largely 
disappears. Or, Saddam is replaced, possibly by a coup. Production and 
exports expand, and prices begin to decline, averaging perhaps $20 per 
barrel for the whole of 2004.
    Under the second or Benign Scenario, military intervention ends in 
a quick, decisive victory and Iraqi oil is off the market for three 
months. Other OPEC countries, as promised, make up for most of the lost 
Iraqi oil. An intent to use the SPR is announced, but nothing more. 
Prices do spike at the initiation of hostilities, but quickly begin to 
decline, to low $20s within nine months, and to $20 per barrel during 
2004.
    Under the third or Intermediate Scenario, Iraqi oil is off the 
market for six months, OPEC sits tight, 1 million barrels per day is 
released from the SPR, and other IEA member-countries do likewise. But 
supplies are tight. Prices spike to the low $40s, then begin a gradual 
decline, reflecting lower demand, higher non-OPEC supplies. Prices 
average $30 for all of 2004.
    The last scenario is the Worse Case Scenario. Saddam reacts 
violently to the intervention. Iraqi oil is lost for twelve months. 
There is sabotage inside Kuwait and Saudi Arabia, resulting in a major 
supply disruption of five to six million barrels per day. The United 
States releases 2 million barrels per day from our SPR. Other IEA 
members provide 1 million barrels per day, all partly offset by 
consumer hoarding. Prices spike to $80 per barrel at the beginning of 
hostilities. A decline eventually sets in, but to just an average of 
$40 per barrel for all of 2004.
    Question 2. You noted in your testimony that the outlook for global 
supply and demand for oil doesn't look good based on the fact that 
demand in developing countries will grow significantly. Could you be 
more specific regarding the time frame and price outlook under this 
scenario?
    Answer. My point is this. By the end of the next decade, that is by 
2020, or possibly even earlier, the consumption of energy by the 
developing nations of the world will exceed the amounts of energy 
consumed by the developed world. That change will carry political, 
economic, and environmental considerations. For example, where will the 
oil come from to meet expanding demand? From countries thought not to 
be wholly reliable: Angola and Nigeria in West Africa; from Kazakhstan, 
Azerbaijan and Russia. Moreover, it is thought that Libya, Iraq, and 
Iran will have to be producing and exporting at or very near capacity 
if projected world oil demand is to be fully satisfied. With regard to 
consumers among the developing world, India and China will lead the way 
in terms of growth in oil demand, and will become major importers. 
Relationships between these importers and the exporting countries may 
mean political linkages not necessarily in the interests of the United 
States. It is, in sum a world to be defined by growth in demand in 
unstable areas, to be supplied by imports from unstable areas.
    Future prices will be determined by the pace of world economic 
growth, the willingness of oil exporting countries to attract 
investment and expand export capabilities, the efforts of these 
exporters to control prices by controlling export volumes, and of 
course by an event or series of events that might intrude on supply 
and/or demand levels. So many factors come into play that attempting to 
forecast future price levels is an exercise in futility.
    Question 3. You also noted that you expect non-OPEC developing 
countries to provide a greater percentage of global supply. Please 
identify those countries you see as providing the most significant 
supplies and a brief description of their political stability.
    Answer. Based on what we know today, Russia, Kazakhstan and 
Azerbaijan would fall into that category, as would Angola. Civil war 
continues in Angola and there is always the prospect that the oil 
sector could be involved. Angolan production and exports are scheduled 
to increase substantially this decade, and interference with that 
growth could strain other suppliers.
    Russia, Azerbaijan, and Kazakhstan have been the subjects of heavy 
media attention for months now. A good portion of the media coverage 
has been misleading, and these three countries together, let alone 
individually, are not going to replace OPEC. But they will be offering 
importers another choice and that is important for security of supply.
    Azerbaijan and Kazakhstan are vulnerable on several accounts. 
First, these countries are where they are today because of their strong 
leaders. That is their strength. But that is also their weakness. No 
political opposition, even a loyal opposition, is allowed. Thus, an 
unexpected void at the top, for whatever the reason, could easily lead 
to civil unrest. Moreover, oil from both countries must transit through 
others to reach ports of export. Transit pipelines should never be 
regarded as completely reliable, and are often viewed as targets of 
opportunity.
    Nonetheless, I would think that Azerbaijan and Kazakhstan might be 
providing some 3 percent or so of world oil supply by the end of this 
decade. Not pivotal, but important at the margin.
    Russia clearly has the potential to export the equivalent of 7 
percent to 8 percent of world oil supply by the year 2010, if 
investment conditions are sufficiently attractive.
    Question 4. What is your outlook on Russia's ability to develop and 
transport its vast oil and gas resources? What are Russia's biggest 
challenges to becoming a bigger player in the world oil market?
    Answer. I have two crystal balls on my desk at CSIS--one for 
pessimists, the other for optimists. Looking into the crystal ball set 
aside for pessimists, we see a Russian oil industry with certain of the 
same characteristics today that caused the CIA to render its 1977 
prediction of troubles ahead.

   A declining reserves-to-production ratio. I should note 
        however that the oil companies did succeed last year in 
        replacing volumes produced, but barely. For the past handful of 
        years, they have not successful in doing so.
   A poor quality reserve base.
   Emphasis of developmental drilling over exploratory.
   Overproduction and water encroachment at existing fields.
   No major new discoveries to build on, at least in the near-
        term, if not longer.

    What do we find if we look into the crystal ball set aside for 
optimists? Are there answers to the questions, can the growth in oil 
production be sustained beyond the near term? Could Russian oil be 
restored to its glory days of the 1980s?

   The geologic potential is there, although much of this 
        remaining potential is found in very inhospitable areas.
   Ray Leonard, a Yukos official, and an American with good 
        international credentials, following considerable 
        investigation, has placed Russian proven reserves at between 90 
        to 110 billion barrels, roughly double that level generally 
        accepted and matching those of Iraq.
   The answer is yes, if Russian oil companies do not repeat 
        the mistakes of their Soviet predecessors.
   The answer is yes, the past could return, if Russia, the 
        European Union, and the United States want it to happen.
   The answer is yes, if Russia improves its investment 
        climate, and that means ``the rule of law'' must be firmly in 
        place.
   The answer is yes, if foreign oil investors respond, and 
        that means the world oil market must be of sufficient 
        attraction to offset the risks of doing business in Russia.
   Equally important, the state of relations between Russia and 
        the United States will have much to say about the presence in 
        Russia of foreign oil companies and in turn the acceptance by 
        Russia of these investors.
   The last, remaining hurdle is the Russian ``we can do it 
        ourselves'' attitude. That attitude could work to keep its oil 
        potential from any early realization.

    The challenge facing Russia today is to provide the means to move 
the exportable surpluses of oil to foreign markets. Pipeline carrying 
capacity is being utilized at or very close to its limit. Thus, major 
new pipelines, eastward to serve the growth markets in the Far East, 
and pipelines and ports aimed at the U.S. market, will be required. 
But, there is an internal struggle going on. Who will own these new 
pipelines, the government or the companies?
    The oil companies seek private ownership because that would provide 
the needed access to pipeline capacity and additionally the right to 
set pipeline tariffs. Conversely, the government determines access to 
state-owned pipelines and sets the tariff for the use of these 
pipelines.
    Finally, there seems to be growing concern among several senior 
officials of the government that too much reliability is being placed 
on the income earned from oil and gas exports, that the country needs a 
more diversified economic base. Might this attitude have some impact on 
future production and export levels? Possibly, but it is too early to 
tell.
    Question 5. You served as the Director over the CSIS study entitled 
``The Geopolitics of Energy in the 21st Century.'' This report 
indicates, as does your testimony today, that we are likely to face 
continued geopolitical uncertainty in many of current and future oil 
producing states. Do you think that this will be a deterrent to new 
investment and development of these oil fields and therefore limit or 
delay the addition of new supplies to market?
    Answer. No, I do not. There have been, and continue to be, 
political uncertainties in virtually every oil producing and exporting 
country. Companies attempt to identify the degree of risk, and compare 
that level of risk with the indicated return on investment. If the risk 
compares unfavorably with the investment return, then a commitment is 
at least postponed.
    Oil companies have the major challenge of replacing every barrel 
they produce, if they want to stay in business. In an expanding market, 
they must do even better, and must find more oil than they sold. So, 
when new promising regions open up to investment, all companies will 
take a long hard look. Moreover, keep in mind that it takes 5 to 7 
years on average to bring a new discovery into play and, for the major 
companies, world-class opportunities are hard to come by, and cannot be 
ignored, regardless of the politics.
    Investment may be slowed from time to time, but that often is more 
a reflection of developments in the market place, that is, when demand 
is down, when low current oil prices cause companies to cut back on 
their oil and gas field exploration and development budgets.
    An attractive price will always bring supplies onto the market. But 
supplies are reduced when price levels do not offer sufficient 
incentive. That is the way the market works.
    Question 6. Would you agree that the U.S. should be braced for more 
supply disruptions and price spikes, unless we are able to better 
utilize our own existing oil and gas supplies?
    Answer. Yes, I would agree that we should better utilize our own 
existing oil and gas supplies, but that by itself is not going to 
protect us from the impact of more supply disruptions and price spikes. 
Because oil is truly an international commodity, we are vulnerable to 
events anywhere, anytime that would impact on oil supplies. A 
disruption outside the United States that interrupts world oil supply 
will cause prices to rise, everywhere. Similarly, a reduction in demand 
somewhere would pressure world oil prices downward, including prices in 
the United States. We would have to have price controls in effect if we 
wanted to negate outside influences, and I hope we can avoid that.
    There are more players than ever in the world oil market, and that 
simply means more opportunities for supply disruptions, for whatever 
the reason. Supply disruptions and price spikes are here to stay, 
unfortunately, and we cannot stand in isolation.

             Responses to Questions From Senator Feinstein

    Question 1. What is your opinion on increasing CAFE standards or at 
least closing the SUV loophole so fuel standards of passenger cars and 
SUVs and light trucks are aligned?
    Answer. Both steps should have been taken long ago.
    Question 2. What is your opinion on allowing a governor of a state 
to waive the 2 percent oxygenate requirement?
    Answer. Presumably the governor would have good reason to do so, 
that is, he is reflecting the needs of his state and the position of 
his constituents.
    Question 3. You indicated that your organization has constructed 
alternative scenarios for near-term oil prices in view of the potential 
war with Iraq. Can you tell me which scenario you see unfolding at the 
moment?
    Answer. Initially, I had thought that our Benign Scenario would 
play out, that is, a quick and decisive victory by coalition forces, 
prices would temporarily spike, but then start to decline and that 
decline would continue next year. I have briefed a considerable number 
of audiences on our scenarios. At the end I ask the audience, which 
scenario do they vote for? Most general audiences, that is, with little 
or no oil background, vote for the Benign Scenario. But, I have to ask, 
is this more wishful thinking on their part? Those audiences of 
individuals very familiar with the oil industry normally vote for the 
Intermediate Scenario, that is, Iraqi oil is off the market for months, 
prices spike, we tap into our Strategic Petroleum Reserve, and prices 
begin to decline, but slowly.
    The market consensus seems to be that oil prices will be 
considerably lower next year than what they are today, which implies 
the Benign Scenario is realized. But I always worry when there is a 
consensus in the oil industry.
    Let's stick with the Benign Scenario, but prepare for the worse.
    Question 4. How concerned should Californians be about the expected 
rise in gas prices this summer, since more than 8 percent of 
California's fuel comes from Iraq? What should Californians be doing to 
prepare for the summer?
    Answer. Iraqi oil will be lost following military intervention, but 
that loss will not be directed to the Californian market. Iraqi oil 
will be lost to the world market, and prices will go up everywhere. 
Saudi Arabia and other OPEC member-countries have promised that they 
will increase production to make up for any loss of Iraqi oil, and we 
will hold them to that promise, but it takes 40 to 50 days to move an 
oil tanker from the Persian Gulf to the United States. Suppliers like 
Saudi Arabia have considerable volumes in storage in the Caribbean that 
can be drawn upon. And we always have our Strategic Petroleum Reserve 
to draw upon, if conditions warrant.
    There really isn't much the individual Californian consumer can do. 
Californian consumers and other consumers across the country should 
not, upon the first TV report that the military intervention has begun, 
rush out and top off their gas tanks. That most likely would cause an 
immediate shortage of gasoline. But it is difficult to control human 
emotions.
                                 ______
                                 
                              American Petroleum Institute,
                                 Washington, DC, February 27, 2003.
Hon. Pete Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    Dear Mr. Chairman: Attached are the American Petroleum Institute's 
responses to questions submitted for the record to the Senate Energy 
and Natural Resources Committee February 13, 2003 hearing on oil supply 
and prices.
            Sincerely,
                                               Red Caveney,
                                                 President and CEO.
[Enclosure]

              Responses to Questions From Senator Domenici

    Question 1. I was very interested to read your comments on the 
energy resources available under multiple-use designated federal lands. 
As you probably know, this Committee will hold a hearing on that issue 
on Feb. 27. I have spoken to a number of producers and they tell me 
that access to federal lands is very difficult. Do you have any 
recommendations as to how we might improve the regulatory process to 
ensure that responsible exploration is permitted using the best 
technology available?
    Answer. As referenced in our testimony, here are suggestions to 
improve leasing and permitting on federal lands:

   Mandate an Energy Policy and Conservation Act (EPCA) Phase 
        II study assessing post-leasing impediments to development in 
        five resource basins addressed in 2003 report.
   Initiate EPCA evaluation of resources and both pre- and 
        post-lease impediments to development for other federal lands, 
        including the Outer Continental Shelf.
   Require DOI to timely complete all outstanding resource 
        management plans needed to allow thousands of permitting 
        decisions to proceed.
   Provide specific oil and gas leasing and permitting reform 
        measures as identified by the federal government's Applications 
        for Permits to Drill (APD) Project Team.
   Direct funds to agencies involved in public lands 
        development, requiring timely preparation of necessary 
        environmental documentation for such activities.
   Fund MMS/BLM permitting/management activities from bonus 
        bid/royalty stream.
   Codify Executive Orders (EO 13212 and EO 13211) to expedite 
        increased energy supply and availability to the nation by (1) 
        considering the affect of federal regulations on the nation's 
        energy supply, distribution and use, and (2) ensuring ``energy 
        accountability'' within federal resource management agencies. 
        Accountability may include requiring internal agency audits to 
        establish performance measures and benchmarks for addressing 
        permit backlogs and Resource Management Plan updates.
   Provide support for pending CEQ-led administration pilot 
        program, Northern Rocky Mountain Energy Policy Program, to 
        foster early collaboration of federal and state decision-making 
        and effective management of energy policy issues on public 
        lands in the northern Rocky Mountains.

    Question 2. Mr. Simmons and Mr. Ebel both testified to the fact 
that our existing production domestically was facing significant 
decline in yields. In fact, we are producing the same level of crude 
oil as we did in the 1950s. Please give the committee a sense for the 
status of U.S. production.
    Answer. U.S. production of oil remains relatively flat. Production 
increased in 2002 by 0.7 percent. Increases in Alaska were offset by 
declines in lower 48 production. The deepwater Gulf of Mexico remains a 
bright prospect as technological progress has enabled development of 
oil reservoirs in thousands of feet of water. Unfortunately, these 
resources are relatively expensive to develop as a deepwater platform 
can cost a billion dollars.
    Question 3. Despite the rising prices and low petroleum stocks, we 
have yet to see significant increase in oil supplies. To what do you 
attribute this lack of investment and activity?
    Answer. Due to limited access in the U.S., investment activity has 
focused abroad. The companies have invested billions of dollars in 
areas such as Nigeria, the Caspian and Russia. Production is rising in 
these areas and as soon as pipelines are built in many of these areas, 
oil will flow in greater volume.
    Question 4. You heard the testimony of Mr. May, who advocated the 
release of 1 million barrels of oil per day from the Strategic 
Petroleum Reserve (SPR) to relieve prices. Do you support this 
proposal?
    Do you believe it is a wise precedent to have the President release 
oil from the SPR as a means of temporarily relieving price pressure? 
What message will this send to producers?
    Answer. The SPR was set up to deal with supply emergencies such as 
we felt during the first oil embargo. It was not intended to be used to 
manipulate price. Second, the oil released from the SPR eventually must 
be returned. This has the effect of driving up prices.

             Responses to Questions From Senator Feinstein

    Question 1. What is your opinion on increasing CAFE standards, or 
at least closing the SUV loophole so fuel standards of passenger cars 
and SUVs and light trucks are aligned?
    Answer. While our industry would be impacted by more stringent CAFE 
standards in the longterm, the primary impact would be to restrict the 
types of vehicles that the automobile industry can market and consumers 
can purchase. We have generally deferred to the automobile 
manufacturers and others the task of assessing how changes CAFE changes 
would impact manufacturers and consumers. API generally opposes 
inefficient government policies that seek to limit consumer choices, 
but we have not taken a position on increases in CAFE.
    Question 2. What is your opinion on allowing a governor of a state 
to waive the 2 percent oxygenate requirement?
    Answer. API has worked for several years to obtain repeal of the 
federal 2% oxygen requirement for reformulated gasoline. Absent federal 
legislation repealing this requirement, API would support state 
petitions to waive the 2% requirement. API filed an amicus letter in 
support of California's suit against EPA, which the state filed upon 
disapproval of its waiver request.
    However, a federal solution would provide more certainty to the 
fuels system. Without a federal solution, consumers will be subject to 
the costs of uncoordinated state actions. Individual states are banning 
the use of MTBE, but they cannot change the federal RFG oxygen 
requirement. Thus, they will be forced to use ethanol to fulfill the 2% 
requirement. The distribution of gasoline would be made more complex, 
leading to potential supply problems and increased market volatility if 
some areas have repealed the 2% requirement and some have not.
    Question 3. Last year, your organization supported the fuels 
provisions in the Energy Bill passed by the Senate. I believe you and 
your members also had a role in crafting the fuels provisions. What 
percentage of refineries in the United States does API represent? Can 
you tell me what the current position of API is with regard to federal 
fuels legislation and an ethanol mandate? Does this position differ 
from the rest of the refineries in the U.S.?
    Answer. The companies belonging to API operate 60% of the U.S. 
refinery capacity.
    API strongly supports comprehensive fuels legislation that will 
eliminate the 2% oxygenate requirement for RFG, phase down the use of 
MTBE, and include a safe harbor provision that will eliminate a 
manufacturer's or distributor's liability for a defective product claim 
arising out of the addition of a government-mandated additive to 
gasoline. API also recognizes the desire of many in Congress and the 
Administration to provide a market for renewable fuels and supports a 
requirement to use up to 5 billion gallons of renewables in U.S. 
gasoline at the end of a phase-in period, providing that the 
legislation includes banking and trading provisions, which would allow 
these fuels to be used in an economically efficient manner.
    API's position opposing the 2% oxygenate requirement for RFG is 
shared by virtually all U.S. refineries. However, some refineries--
particularly those that have not been required to use MTBE in RFG--are 
opposed to the renewables requirement passed by the Senate last year. 
While API cannot speak for these refineries, they have stated their 
principled opposition to government fuel mandates and pointed to the 
additional consumer costs (less than 1 cent per gallon according to the 
DOE) that could result.
    Question 4. Does ethanol really allow this nation to import less 
foreign oil? How much less? Are the costs of production and the costs 
to consumers worth this extra cost?
    Answer. Increased ethanol use alone will not significantly reduce 
oil imports. It is important to understand that ethanol, as it is 
produced today, requires the use of significant amounts of fossil fuel. 
Also, in some circumstances, other gasoline components must be taken 
out of gasoline before ethanol can be blended. Therefore, a gallon of 
ethanol displaces only a fraction of a gallon of gasoline.
    That being said, it is important to note that there are 
circumstances where the use of ethanol makes sense. The fuels 
legislation currently being considered by the 108th Congress would 
eliminate the federal RFG oxygen requirement, phase out the use of MTBE 
and establish a renewable fuels mandate with a banking and trading 
program. These fuels provisions would allow ethanol to be blended where 
it makes the most economic sense, and would provide needed octane and 
volume to gasoline markets. With respect to cost impacts, a recent 
study by MathPro, Inc., a nationally recognized economic consulting 
firm, showed that the cost to consumers of this fuels proposal 
(inclusive of a renewable fuels mandate with banking and trading) was 
less than the cost to consumers of what will happen under the status-
quo of state-by-state MTBE bans and a continuation of the federal RFG 
oxygen requirement.
    Question 5. Can refineries make gasoline that meets the 
requirements under the Clean Air Act? If so, is there any justification 
for not repealing the 2% oxygenate requirement?
    Answer. Refiners have been saying for years that they can produce 
gasoline meeting clean-burning fuels and the federal reformulated 
gasoline (RFG) requirements without the use of oxygenates. Therefore, 
the federal oxygen requirement for reformulated gasoline (RFG) should 
be repealed, as it forces oxygenates in each gallon of RFG, which can 
create supply and market inefficiencies.
    In the early- to mid-1990s, the Auto/Oil Air Quality Improvement 
Program conducted testing on fuels meeting California reformulated 
gasoline (CaRFG) requirements with and without oxygenates. There were 
no significant differences in exhaust emissions or total air toxics 
emissions with or without oxygenates. In fact, in several non-federal 
RFG markets in California, the industry produces gasoline that meets 
the more stringent California RFG standards without using oxygenates. 
In addition, reformulated blendstocks--the base gasoline in which 
oxygenates are added--typically meet RFG performance requirements 
before oxygenates are added. These facts demonstrate that oxygenates 
are not needed to make cleaner burning fuels and that the federal 
oxygen content requirement should be repealed.

              Responses to Questions From Senator Campbell

    Question 1. At the end of 1998, the composite price of crude oil 
was around $9.81; it was $24.44 in 1999. Currently, the prices are 
inching toward $35.00. What precautions were taken in the past to try 
and stop this trend, especially from 1998 to 1999? What is being done 
now?
    Answer. In 1998 and 1999, we warned that the crude oil prices were 
so low as to cause a severe depression in our industry. Over 60,000 
workers lost their jobs as firms were forced out of business. We noted 
that these very low prices set the stage for future price volatility. 
We noted that there was a severe need for national energy legislation 
that addressed the needs of a growing economy. We are struggling to 
meet the needs of consumers under outmoded and conflicting regulations 
that prevent our industry from expanding production, refining and 
distribution facilities. Our industry is running its refineries at very 
high levels of utilization and importing as much crude oil and 
petroleum products as possible, but without legislation that corrects 
fundamental flaws in our tax and regulatory system, we will be unable 
to easily meet the needs of consumers.
    Question 2. Long distance drivers buy 200 to 400 gallons of diesel 
every 24 hours on some hauls. Add to that truck payments, permits, 
insurance, upkeep and road fees and many of the independent operators 
are barely scraping by. No wonder the fuel price increase is putting so 
many of them out of business. Since 98 percent of all things that are 
bought and used are shipped by truck, what has been proposed to help 
truckers?
    Answer. We recognize that the trucking, farming and travel 
communities have been severely affected by the higher prices. Refined 
product prices, such as diesel fuel, are determined by world crude oil 
prices. These prices are very high because of the strike in Venezuela, 
the cold winter, nervousness about Iraq, a potential strike in Nigeria 
and increased demand of a growing economy. Our industry has experienced 
very low profit rates over the past year. We are forced to pass a share 
of crude oil cost increases on to our customers or we would be 
unprofitable. Over the past three months, crude oil prices have 
increased by about 29 cents per gallon and diesel prices have increased 
by about 29 cents per gallon. No one in the refining and marketing 
industry is making excess profits.
    Question 3. Gasoline is delivered to Colorado and other Rocky 
Mountain states mainly from gulf state refineries. Are there any 
pipeline bottlenecks in the delivery system that could cause price 
spikes similar to those experienced in the mid-west either through 
rupture or anti-competitive behavior?
    Answer. Colorado and the other Rocky Mountain states are about in 
rough balance with regard to gasoline. According to the EIA Petroleum 
Supply Annual 2001, the Rocky Mountain states (PADD IV) imported about 
23 MB/D of gasoline from the Midwest (PADD II) and about 9 MB/D from 
the Gulf Coast (PADD III) and exported about 21 MB/D to the West Coast 
(PADD V). Therefore, net imports into PADD IV equaled about 11 MB/D. 
Total gasoline consumption in PADD IV in 2001 was about 270 MB/D, so 
net imports represented less than 4 percent of demand.
    Since the Rocky Mountain states' net gasoline imports are a 
relatively small percentage of total demand, problems on pipelines 
going into the region should not be a major risk. However, significant 
supply shortages from whatever the cause can cause price spikes. 
History has shown that when price spikes occur, market forces work to 
even out supply and demand. The higher prices result in additional 
product going to the region with the price spike.
    It is important to note that government investigations into price 
spikes in the Midwest and elsewhere have never attributed price 
volatility to anti-competitive behavior.
    It is also important to note that PADD IV is a unique market with 
many logistical challenges that come from its low population density, 
its low demand concentration and its geography. In fact, EPA has 
recognized the unique characteristics of the market in applying special 
phase-in provisions to the region under both the gasoline and diesel 
sulfur rules. The industry has constructed its facilities to 
efficiently serve this region. With a logistical system that must run 
like clockwork, anything that makes the system less flexible, such as 
unique fuel requirements, presents a potential for price spikes. Fuel 
mandates, for instance, were a significant contributing factor to the 
price spikes in the Midwest in the spring of 2000.
    Question 4. You mention in your statement that federal lands 
contain about 77 percent of the nation's oil and 59 percent of its 
natural gas. However, leaseable, energy-rich areas are not being 
leased, despite having cleared the environmental review process; this 
is particularly true in the Rocky Mountain West. For those involved, 
this seems to be a win-win situation. Money would go into the treasury 
for those resources extracted while increasing our domestic supplies of 
oil and natural gas. Why, in your opinion, are these lands not being 
leased? What can be done to help ease the roadblocks that are holding 
up this process?
    Answer. The recent EPCA study outlines some of the reasons federal 
lands are not being leased. Some lands are not leased because of 
Congressional or Presidential action witness restrictions on most 
offshore areas except Central/Western Gulf of Mexico. Other lands are 
not leased because requisite federal land use planning or NEPA analysis 
has not been undertaken or completed. Additionally, many areas are 
leased but with very restrictive stipulations such as ``No Surface 
Occupancy'' or very limited timeframes allowed for operations.
    However, restricted leasing of public lands is only part of the 
access problem. After a company obtains a BLM lease, it must obtain a 
wide variety of approvals and permits before drilling can commence. The 
first step is usually to obtain BLM approval of the ``Application for 
Permit to Drill'' or APD. In order to obtain approval, an applicant 
must first obtain other permits, reviews, and approvals. For example, 
the applicant very likely will have to conduct an Environmental Impact 
Study, a Cultural Survey, and an Endangered Species Survey. The 
applicant will also likely have to obtain a Private Landowner Agreement 
and a Right of Way permit.
    The Bureau of Land Management (BLM) CANNOT always approve an APD, 
regardless of its merits. For example, in Wyoming's Powder River Basin 
development of 39,400 wells and approximately 8.2 Tcf of natural gas 
(43% of the natural gas in the Powder River Basin, according to the 
EPCA study) is on hold because coal bed natural gas (CBNG) development 
was not included in the area's original Resource Management Plan (RMP). 
Until the RMP specifically addresses CBNG development, the BLM cannot 
approve CBNG APDs. Moreover, the problem of out-dated Resource 
Management Plans is not isolated to the Powder River Basin. According 
to the National BLM Wilderness Campaign, over 50% of the BLM's 
management plans are over 15 years old, and over 75% are over ten years 
old. Updating a Resource Management Plan is a long, slow process, 
although the agency in the last 2 years has increased planning 
resources to address at least 9 time sensitive plans that impact oil 
and gas development. Increased staffing of BLM field offices could help 
this further.
    The BLM DOES NOT always approve APDs in a timely manner. Currently, 
there is a backlog of over 2,800 applications. Quick development is 
essential for onshore projects to be economic. Drilling permits are 
required to be issued within 30 days, but a recent study by IPAMS found 
that it took an average of 84 days for an APD to be approved. Several 
groups have suggested ways the permit approval process could be 
improved. These include the federal APD Task Force, Public Lands 
Advocacy, and the Independent Petroleum Association of Mountain States. 
Few, if any, of the recommendations have been adopted.
    BLM's permitting problems also affect oil and gas development on 
private lands. Companies frequently need BLM approval for roads and, 
more importantly, pipelines to cross BLM lands. Once again, if a 
Resource Management Plan does not address pipelines, getting Right of 
Way approval can involve significant delays and hurdles. Williams, 
Questar, and Kern River have all proposed pipelines that have had to go 
through this process.
    Even when BLM does issue a drilling permit, a company still needs 
other federal, state, county, and local permits. Obtaining them can be 
equally difficult. For example, Montana has a temporary moratorium on 
approving APDs (drilling permits) for coal bed natural gas, preventing 
the development of up to 17.7 TCF of natural gas. Even counties can 
create roadblocks. For example, Delta County in Colorado has attempted 
to deny a gas drilling proposal there, effectively preempting 
jurisdiction over the existing state approval process.
    Additionally, while approval of the APD is in some ways the most 
important step, without other permits it is useless. Examples of other 
permits are air permits to run compressors and water permits to 
discharge water. Failure to secure these permits can scuttle a project 
as surely as failing to obtain a lease.
    Question 5. What can be done to help ease the roadblocks that are 
holding up this process?
    Answer. There are several actions that can be taken to improve the 
situation.

   Mandate an Energy Policy and Conservation Act (EPCA) Phase 
        II study assessing post-leasing impediments to development in 
        five resource basins addressed in 2003 report.
   Initiate EPCA evaluation of resources and both pre- and 
        post-lease impediments to development for other federal lands, 
        including the Outer Continental Shelf.
   Require DOI to timely complete all outstanding resource 
        management plans needed to allow thousands of permitting 
        decisions to proceed.
   Provide specific oil and gas leasing and permitting reform 
        measures as identified by the federal government's APD Project 
        Team.
   Direct funds to agencies involved in public lands 
        development, requiring timely preparation of necessary 
        environmental documentation for such activities.
   Fund MMS/BLM permitting/management activities from bonus 
        bid/royalty stream.
   Codify Executive Orders (EO 13212 and EO 13211) to expedite 
        increased energy supply and availability to the nation by (1) 
        considering the affect of federal regulations on the nation's 
        energy supply, distribution and use, and (2) ensuring ``energy 
        accountability'' within federal resource management agencies. 
        Accountability may include requiring internal agency audits to 
        establish performance measures and benchmarks for addressing 
        permit backlogs and Resource Management Plan updates.
   Provide support for pending CEQ-led Administration pilot 
        program to foster early collaboration of federal and state 
        decision-making and effective management of energy policy 
        issues on public lands in the northern Rocky Mountains.

              Responses to Questions From Senator Domenici

    Question 1. You noted in your testimony that prices have gone up, 
supplies are limited, and reserves are way down--but these factors have 
failed to stimulate significant new exploration and development. What 
must happen before additional production is installed? And what action 
by the federal government do you believe would be effective in boosting 
domestic production?
    Answer. The biggest reason increased U.S. oil production is not 
occurring is that the natural declines taking place in most U.S. basins 
are too steep to be replaced by simply drilling more wells from the 
same basins. Adding to this problem is an extremely low level of oil 
exploration in the U.S. There were times over the past year when as few 
as ten drilling rigs were listed as exploring for oil anywhere in the 
U.S.--including the deepwater acreage of the Gulf of Mexico. At such 
low exploration levels, U.S. oil production will continue to decline 
for the foreseeable future.
    This problem is unlikely to be corrected (if it can be corrected at 
all) until virgin acreage is opened up to exploration. Unfortunately, 
the only remaining prospective virgin areas where sizeable oil 
resources are likely to be found all happen to be in places now mostly 
banned from any drilling activity, including ANWR, the offshore waters 
of the Pacific Ocean, the Atlantic Outer Continental Shelf and the 
eastern portion of the Gulf of Mexico. Since the prospect of oil 
exploration in any of these regions has been so remote for so long, it 
is not clear how plentiful the commercially available reserves of 
either oil or natural gas even are, but by shutting down any efforts, 
we insure none ever get developed.
    The federal government has the ability to open these long-banned 
areas. If we fail to do this, we virtually insure a continued decline 
of domestic oil and natural gas.
    Question 2. I understand that OPEC has announced its intention to 
cut supply targets in the 2nd quarter due to easing supply pressures 
worldwide. Do you think this action is wise?
    Answer. OPEC's announced intention to cut supplies in the 2nd 
quarter would be a terrible mistake. But OPEC oil ministers reached 
this decision after being repeatedly warned by many prominent energy 
analysts that oil prices would likely collapse once spring begins and 
winter demand ends. Each OPEC country faces enormous spending pressures 
to cope with rapidly expanding populations and the urgent need for 
simple basics like electricity and water. A price collapse is so 
damaging and painful to these countries that they might end up cutting 
production at the worst possible time for already low OECD stocks.
    Question 3. The EIA, in its Annual Energy Outlook, projected oil 
prices to remain in the $25-$26 per barrel range through 2025. Yet, 
they expected U.S. production to continue to decline over that same 
time period. Do you believe these estimates are accurate?
    I have no confidence in such estimates. The EIA has been 
notoriously wrong in its predictions of energy prices for as long as I 
have been tracking their predictions, which goes back over a decade. I 
vividly remember serving as a co-panelist with Jay Hawkes, former EIA 
head, at an energy conference held in November 1998, moderated by 
Senator Bennett Johnston. He was asked by Senator Johnston how sure he 
was about the ETA's prediction that it would take at least 7 years 
before oil prices would climb back from $10 to $17.50. He confidently 
defended this price forecast as very reasonable. Obviously, this was 
one of the many EIA pricing forecasts that was very wrong.
    In reality, predicting future energy prices has been a treacherous 
job for anyone, since prices are now set in commodity exchanges and 
volatility has become increasingly higher. The EIA's more solid 
prediction is that U.S. oil production will decline.
    Question 4. EIA has indicated that there is a surplus capacity 
between 2 million to 2.5 million barrels per day, primarily located in 
OPEC countries that can be brought online if needed. Do you believe 
this capacity actually exists? If so, how long will it take to bring it 
to market?
    Answer. Estimating OPEC's surplus capacity is a sheer guessing game 
since no one has any factual information, including the EIA. A year 
ago, most experts were sure OPEC's excess capacity was around 5 to 7 
million barrels a day. Today, almost no one assumes the excess capacity 
could be over 3 to 3.5 million barrels per day.
    I have vocally challenged the assumption of OPEC having even 2 
million barrels per day of capacity that could be immediately brought 
to market. But I also lack the data to know whether I am right in this 
view.
    Some people who estimate OPEC's excess capacity include capacity 
that could be added by drilling more wells. When new events such as 
drilling additional wells are added to this number, the time this takes 
can easily stretch to six months or even a year. Thus, this 
``theoretical addition'' should never be classified as spare capacity.
    Whatever spare capacity there is throughout the global oil industry 
only exists in OPEC. Within OPEC, only two countries could possibly 
have over 100,000 to 200,000 barrels per day of real spare capacity; 
the UAE and Saudi Arabia. The UAE's spare capacity is unlikely to 
exceed 250,000 barrels per day. Saudi Arabia publicly declares they 
could increase their capacity at a surge rate of about 2 million 
barrels per day, but it also acknowledges that more wells would have to 
be drilled to sustain this rate. In either country, it takes close to 
70 days from when a tanker is first chartered, then loaded to the time 
oil would finally arrive either on the east coast or the Gulf of 
Mexico. Given the current tightness in the global tanker market, even 
this time line might be too optimistic.
    Question 5. Under the current growth estimates produced by EIA, 
significant amounts of oil and gas will be shipped worldwide. Do you 
believe that the United States has adequate shipping and pipeline 
capacity to meet the growing demand?
    Answer. The logistics to supply the U.S. with 19 to 20 million 
barrels per day of petroleum is extremely complex and most of the key 
parts of our supply chain are quite old. The global tanker fleet of 
Very Large Crude Carriers (VLCCs) is less than 390 vessels--none of 
which can make more than four trips a year from the Arabian Gulf to the 
U.S. The spare tanker capacity for vessels this large has rarely been 
more than 15 to 20 excess tankers. With simply the loss of the Prestige 
(an old single-hull tanker which sunk off the Spanish coast last fall) 
probably took almost all of this excess off the market.
    To merely replace 1 million barrels per day of supply from 
Venezuela by VLCCs coming from the Middle East would take an extra 30 
to 32 VLCCs. This is far beyond the spare capacity of the global tanker 
fleet.
    Once oil enters the U.S. supply system, it needs to travel through 
pipelines like the Capline System which takes over 1 million barrels 
per day from the Gulf Coast and Gulf of Mexico into the heartland of 
the U.S. Capline, like all our main energy pipelines is old and it 
needs to operate at full capacity to simply supply the current needs of 
PADD II.
    Similar bottlenecks exist throughout our delivery system.
    Question 6. I am troubled by the recent reports that crude stocks 
are at levels not seen since 1975. Obviously, further reductions could 
negatively impact our refining capacity and force prices higher on 
consumer products like heating oil, gasoline and diesel fuel.

          a. If OPEC follows through on its commitment to reduce 
        production in the 2nd quarter, how will the U.S. build up our 
        reserves in the future?
          b. Are other countries also facing a similar decline in 
        reserve capacity?
          c. What are the best available options to increase our 
        reserves in both the near term and long term?

    Answer. Concerns about low U.S. oil stocks should be a matter of 
deep concern to any American citizen. Most people do not understand how 
much oil stock or inventory that is permanently needed for our oil 
logistics to keep a steady flow of crude oil to the refineries and 
finished products delivered to their final point of use.
    Both crude oil and all finished products have minimum operating 
levels of stocks which vary by each region of the country. Today, we 
are below this level in many key regions with no early hope of 
rebuilding supplies, even if OPEC produces more oil.
    The only way to create more permanent oil supplies that convert 
into stable and growing stocks with any certainty of near term 
availability is added supply from Canada, although Canada's pipeline 
capacity is almost full, or from Mexico, where a maximum of 100,000 
barrels per day of extra supply probably exists. The real long-term 
solution lies in opening up U.S. frontier virgin regions as I have 
already addressed.
    There is sadly little way to quickly create any relief to these low 
stocks. It took almost a decade to chew through what was once a 
reliable cushion of oil and petroleum finished product inventories, 
which moved the U.S. oil system steadily closer to ``Just, Just in Time 
Supply.''
    Question 7. Many have called for release of supplies from the 
Strategic Petroleum Reserve (SPR). What message does this send to 
supplier if the U.S. taps the available reserves to reduce price 
pressure?
    Answer. It would be a terrible mistake to begin using our SPR to 
manage supply shortages until physical shortages appear. Thus, using 
the SPR is essential but as its use begins, a careful assessment needs 
to be made of the nature of the shortages, how long they might last and 
where they are occurring so a proper decision can be made on how much 
SPR oil needs to be used.
    It is easy for people to want to announce the use of the SPR or to 
actually begin draining these precious stocks to bring high prices 
under control which would simply be a temporary measure. But, the 
announcement, itself, would likely keep barrels of imported crude away 
from the U.S., thus creating a bigger problem than the use of the SPR 
was intended to correct.
    I would like to add one final comment on the use of the SPR. As 
soon as the need for the emergency supply ends, the SPR needs to be 
immediately followed by a rapid restocking of this reserve which is now 
far below the levels originally created when the SPR was first 
designed.
    Question 8. It is my understanding that producers are facing 
declining production yields. Could you elaborate on this trend?
    Answer. Almost all key producers of oil and natural gas now face 
steady declines in most of their production. These rates of decline are 
also increasing. Oilfield technology created the ability to drain 
reserves from multiple layers in a new oil or gas field and recover 
greater amounts of oil than originally planned but this also created 
far more rapid decline rates than the industry had previously 
experienced.
    Declines in excess of 20% per annum, before additional development 
wells are drilled to help offset such declines, are now becoming 
typical for almost all oil regions in both the U.S. and abroad. 
Declines in excess of 50% in the first year of production are now 
becoming typical for natural gas in both the U.S. and Canada.
    It takes an enormous amount of drilling to merely fight this 
decline problem. The lack of any reliable data on what the natural rate 
of decline even is for most regions underlies the confusion about 
depletion (which is how I describe the whole decline issue.) Depletion 
issues are perhaps the most misunderstood aspect of the oil industry 
today by even the largest producers in the world.

             Responses to Questions From Senator Feinstein

    Question 1. What is your opinion on increasing CAFE standards or at 
least closing the SUV loophole so fuel standards of passenger cars and 
SUV's and light trucks are aligned?
    Answer. Increasing CAFE standards on all light trucks and SUV's to 
a parity with passenger cars is a sensible part of a good and balanced 
energy plan, assuming the safety of this important component of our 
U.S. vehicle fleet can be maintained, an issue I am not qualified to 
opine on. But it is extremely important that all stakeholders 
appreciate the precise amount of probable gasoline savings that this 
move can create and the lengthy time it takes to reach the full impact 
of this change.
    The passenger car fleet has a long turnover. The light truck fleet, 
so far, has shown little signs of any turnover. Older light trucks seem 
to always find a use someplace. Thus, it would take a long time to 
implement meaningful energy savings through this change. In the short 
term, the only realistic energy savings will come from better 
efficiency of just the increment of new light trucks once these new 
CAFE standards are applied, unless a law banning the use of older, less 
efficient vehicles is also passed as new legislation. There is a 
precedent to banning older vehicle use in countries like Singapore, but 
I suspect this would be extremely unpopular in the U.S., though 
possibly a good long term energy conservation idea.
    Once the entire existing fleet of light trucks has disappeared and 
is replaced by more fuel-efficient vehicles, it would save 
approximately 640,000 barrels per day. But it would take decades to 
achieve these energy savings. (According to the latest EIA data, the 
fuel consumption difference between light trucks and SUVs compared to 
passenger cars is 17.6 versus 22.1 miles per gallon or 4.5 miles per 
gallon. The average miles these light trucks travel total 11,140 miles 
per year. Thus, each vehicle would save 129 gallons a year. There are 
approximately 76 million light trucks in the U.S. today.)
    Question 2. What is your opinion on allowing a governor of a state 
to waive the 2 percent oxygenate requirement?
    Answer. It might make good policy to allow a governor of a state to 
waive RFG rules when supplies get too tight. But, any permanent waiver 
would create a far dirtier gasoline pool and probably trigger massive 
lawsuits from the beleaguered and financially strapped refinery 
industry which spent billions to comply with these EPA rules. I also 
think the whole effectiveness of RFG fuels needs to be reviewed now 
that the industry has had almost a decade of experience in dealing with 
the complex new suite of gasoline brands.

                              Appendix II

              Additional Material Submitted for the Record

                              ----------                              

                               Arctic Slope Regional Corp.,
                                     Barrow, AK, February 13, 2003.
Hon. Pete V. Domenici,
Chairman, Committee on Energy and Natural Resources, Dirksen Senate 
        Office Building, Washington, DC.
    Dear Mr. Chairman: On behalf of the Arctic Slope Regional 
Corporation (ASRC) and its 8000 Inupiat Eskimo shareholders, I want to 
thank you for holding a hearing before the Senate Energy and National 
Resources Committee on oil supply and prices. I would also like to 
submit testimony for the hearing record.
    My submitted testimony was originally presented on July 11, 2002, 
before the House Committee on Resources on the then pending ``Energy 
Security Act.'' The testimony provides ASRC's views on the provisions 
of that measure which would open the Coastal Plain of the Arctic 
National Wildlife Refuge (ANWR) to oil and gas exploration and 
development. As you know, the Coastal Plain is the nation's best 
prospect for major new oil discoveries. In addition, ASRC owns 92,160 
acres of lands with the Coastal Plain, near Kaktovik, one of our eight 
remote Inupiat Villages on the North Slope. We are, however, not 
permitted to develop and have the economic benefit of these private 
lands until Congress acts to open the Coastal Plain to oil and gas 
leasing.
    We strongly urge the Senate Energy and National Resources Committee 
to adopt legislation to open the Coastal Plain.
            Sincerely,
                                             Richard Glenn,
                                          Vice President for Lands.

       Testimony of Richard Glenn, Vice President, Arctic Slope 
                          Regional Corporation

    My name is Richard Glenn. I am the Vice President of Lands for 
Arctic Slope Regional Corporation (ASRC). I am here to offer testimony 
in support of the passage of the Energy Security Act (or, the ``Act''), 
and wish to give specific support to Title V of the Act, which is 
titled, ``The Arctic Coastal Plain Energy Security Act of 2001.''
    ASRC is the Alaska Native-owned regional corporation representing 
the Inupiat Eskimos of Alaska's North Slope. ASRC owns surface and 
subsurface title to certain Alaskan North Slope lands. This ownership 
stems from an earlier claim of aboriginal title--covering the entire 
Alaskan North Slope--that was eventually settled in part by the Alaska 
Native Claims Settlement Act of 1971 (ANCSA). Under the terms of ANCSA, 
ASRC's land selection rights, which amounted to a small fraction of 
what was originally claimed as aboriginal title, were further limited 
by what at that time were pre-existing state and federal withdrawls. 
ASRC's corporate mission is to enhance the cultural and economic 
freedoms of it shareholders.
    With title to approximately 4.6 million acres of surface and 
subsurface estate, our regional corporation represents the biggest 
North Slope landowner outside of the federal government. ASRC lands 
include the subsurface estate to 92,160 acres of land within the Arctic 
National Wildlife Refuge (ANWR) Coastal Plain. The ASRC-owned ANWR 
subsurface estate lies under and adjacent to the Inupiaq village of 
Kaktovik. The Kaktovik Native village corporation, KIC, holds the 
surface title to these same lands.
    More than eight thousand Inupiat comprise the membership of ASRC, 
seventy-five percent of whom live in Arctic Slope communities scattered 
from the Canadian border in the east to the Chukchi Sea in the west, 
covering an area about the size of the state of Minnesota. We live 
close to the land and sea and depend on the resources they provide, 
including caribou, fish, seabirds and marine mammals. In addition, we 
also depend on jobs, because today's subsistence lifestyle demands a 
mix of financial resources and traditional resources. As a result, the 
values of our people and of our regional corporation reflect our 
recognition of the benefits of careful stewardship of the land and the 
need for gainful employment for our people. This blend of development 
and stewardship is reflected in a core value statement of our 
corporation, which states that we ``shall develop our lands and 
resources by means that respect Inupiat subsistence values and ensure 
proper care of the environment, habitat and wildlife.''
    As owners of lands which we view as our traditional homeland, as 
subsistence hunters who have close ties to the land and sea and the 
resources they provide, and as village and North Slope community 
residents who have witnessed firsthand the exploration and development 
of Alaskan North Slope by the oil industry, we offer our support of the 
Arctic Coastal Plain Energy Security Act of 2001. In doing so, we have 
three main priorities: First, the protection of our subsistence way of 
life and the resources upon which we depend. Second, the opportunity 
for economic self-determination by allowing environmentally responsible 
exploration and development of Native-owned lands within ANWR. Third, 
the opening of the public lands of the Coastal Plain to responsible oil 
and gas exploration and development.

          A BALANCE OF STEWARDSHIP AND RESPONSIBLE DEVELOPMENT

    In our region we constantly balance the protection of the land with 
the need for environmentally sound exploration and development of 
natural resources. In our view, the Act provides this kind of balance, 
and it obligates the Secretary of the Interior to follow a method of 
careful stewardship regarding oil and gas exploration and development 
in the ANWR Coastal Plain. The method has proved itself with successful 
exploration and development of other federal North Slope lands--most 
recently in the National Petroleum Reserve in Alaska (NPR-A).
    The Inupiat people have contributed to responsible North Slope oil 
and gas development. Thirty years ago, our people were strongly opposed 
to all forms of oil and gas development in our region. We feared it. 
With our regard for the environment in mind, we created strong 
permitting and zoning policies within our local borough government. We 
were not complacent with oil development, we were--and still remain--
vigilant. In the face of strong local development ordinances, oil 
industry exploration and development methods have improved over the 
last twenty-five years. We have fought, argued, commented and 
complained, and on occasion we have said, ``No''; and the industry has 
listened. As a result, today's oil industry on the North Slope is a far 
cry from the industry of the past. In fact, we believe that the North 
Slope oil and gas practices of today are the best examples of 
environmentally responsible development. Industry practices still are 
not perfect, and we remain vigilant, in an effort to continually 
improve industry's performance in our environment. We are confident 
that with the appropriate level of local consultation and control, the 
Coastal Plain of ANWR can be explored and developed in a way that 
protects natural resources for everyone.
    The oil industry of today follows a strict local permitting and 
zoning process that protects areas warranting special designation. Our 
Inupiat people have a part in this process at all governmental levels. 
Today's drill rigs explore in the winter season, when a snow and ice 
cover has formed a protective layer between exploration equipment and 
the underlying tundra. Seismic acquisition is now conducted by 
vibrating vehicles rather than the shothole/dynamite methods of the 
past. Drilling practices are strongly regulated by state and federal 
agencies, and no drilling wastes or equipment are left onsite after an 
exploratory well is completed. Finally, production facilities are 
located only in acceptable areas, and occupy a small fraction of their 
former area. The advent of directional drilling and the streamlining of 
production methodology has allowed for the smaller footprint of 
infrastructure in Alaska's oil fields. Once in place, production 
facilities have little or no impact on local fish and wildlife 
resources of the area.

         ECONOMIC SELF-DETERMINATION FOR ALAKA'S INUPIAT PEOPLE

    In northern and northwestern Alaska, there is no industry except 
for resource extraction. The land is too cold for agriculture, and too 
remote for refined manufactured products. In addition, the way of life 
in our rural communities has with time become a combination of 
subsistence and cash economies. As a result, our people are needful of 
both a healthy natural environment and access to gainful employment. 
With the exception of a small amount of tourism and government service 
positions, our people can look only to resource development for jobs 
within our region. Hence, we have assisted with the development of the 
North Slope oil and gas resources through our own Native-owned oil 
field service company subsidiaries, which has employed and developed 
the skills of our people. In addition, we have made efforts to seek 
title to subsurface and surface lands, including the KIC lands acreage, 
that hold natural resource potential, that we might benefit from the 
oil and gas industry as a resource owner of lands that have been 
traditionally used by our people. As it now stands, we are prevented 
from developing our Kaktovik-area lands due to Section 1003 of ANILCA. 
The exploration and development of the Coastal Plain of ANWR, including 
the KIC lands, then represents an issue of economic self-determination 
for our people.
    In addition, our local government and village residents realize 
great benefit from the sustained presence of the oil and gas industry 
on the North Slope. Because of the practices developed over time on 
Alaska's North Slope, the residents of the North Slope Borough live in 
a land with few environmental hazards, and have begun to build in their 
communities what is often taken for granted in the rest of this 
country. Facilities for education, health care, police and fire 
protection, reliable power generation, and sanitation all have been 
initiated by the North Slope Borough, thanks to a revenue stream 
generated by the taxation of property including oilfield 
infrastructure. In the absence of new development such as the potential 
development of the Coastal Plain, the North Slope Borough revenues 
would see a sharp decline, due to the depreciation of the older Prudhoe 
Bay infrastructure. Our communities are cleaner and safer, our people 
are living longer, and our children no longer have to travel a thousand 
miles or more to get a primary and secondary education.
    With Borough operating revenue as well as programs initiated by our 
Native organizations, we are building training programs to give our 
local workforce skills to participate anywhere in today's economy. For 
example, we have established an education foundation at ASRC that 
provides financial assistance to Inupiat members interested in 
obtaining a college degree or technical training. Finally, ASRC 
continues to incorporate into its business the Inupiat value of 
respecting and taking care of our elders. ASRC has established an 
elders benefit trust that provides elderly Inupiat members with a 
monthly stipend to offset the high cost of living in the region. Many 
of our elders do not have retirement funds as many did not work prior 
to the introduction of the oil industry within our region. The reason 
for this is simply because prior to the oil industry we did not have an 
economy, and thus no jobs for our elders to work at to save for a 
retirement fund.

                        IN THE NATIONAL INTEREST

    Finally, we view the exploration and development of the ANWR 
Coastal Plain as in the nation's interest. This ANWR Coastal Plain 
marks the most significant onshore area for potentially large 
accumulations of oil and gas in the nation. Even with conservation and 
assuming that the United States oil demand remains static, there needs 
to be new production to replace production from older declining fields. 
The super-giant Prudhoe Bay oil field, which once produced twenty 
percent of the nation's crude supply, has declined to less than half of 
its peak production. America needs a continuing source of domestically 
produced oil. The alternative, importing oil from countries of 
political instability, or from countries with less than acceptable 
environmental practices, will surely do more harm than good.

       COMMENTS ON SPECIFIC PROVISIONS WITHIN TITLE V OF THE ACT

    Section 503(d)--Relationship to State and Local Authority--ASRC 
strongly supports this provision, and the desire of the North Slope 
Borough to retain its broad governmental powers regarding development 
in the Coastal Plain. These powers, including planning, permitting, 
zoning, right-of-way determination, and taxation are the tools by which 
the residents of the North Slope become stakeholders in the development 
of Coastal Plain lands.
    Section 503(e)--Special Areas--ASRC strongly supports the provision 
that mandates the participation of Kaktovik and the North Slope Borough 
in the selection of lands, if any, for designation of special areas 
worthy of special management or protection. The local residents have 
the most to offer in determining the special status of any lands, and 
should be consulted.
    Section 506(a)(7)--ASRC strongly supports the provision that 
mandates lessees, agents and contractors of Coastal Plain exploration 
and development follow the terms of section 29 of the 1974 Federal 
Agreement and Grant of Right of Way for the Operation of the Trans-
Alaska Pipeline, of employment and contracting for Alaska Natives and 
Alaska Native Corporations from throughout the State.
    Section 507--Coastal Plain Environmental Protection--ASRC strongly 
encourages local consultation for all the terms of Section 507 Parts a 
through f. In light of the successful process adopted by the Department 
of the Interior for the exploration and development of the northeastern 
part of the National Petroleum Reserve in Alaska, ASRC suggests that 
Interior adopt a similar framework to incorporate consideration of 
local input from the village of Kaktovik and from the North Slope 
Borough for environmental protection measures regarding the Coastal 
Plain of ANWR. Such input would include strong recommendations for 
siting of consolidated facilities where the local population desires, 
so that village residents can benefit from jobs, and the proposed 
facilities can benefit from existing infrastructure.
    Section 507(d)--ASRC recommends strengthening this section to 
mandate that subsistence access is ensured.
    Section 510--Conveyance--ASRC strongly supports the entirety of 
Section 510, which addresses the completion of conveyance of the 
surface title of the KIC lands to the Village Corporation and 
conveyance of the subsurface title of the same lands to ASRC, in the 
interest of removing any clouds on title.
    Section 511--Impact Fund Assistance--ASRC strongly supports Section 
511 of the Act, which provides for Impact Fund Assistance, following 
the model of the NPR-A impact fund assistance program. Although the 
positive impacts of development may often outweigh any negative ones, 
the negative impacts still do exist. The villages closest to the 
effects of oil and gas development are always in the most need of 
impact fund assistance to address some of the direct negative effects 
of development.
                                 ______
                                 
      Statement of the National Association of Convenience Stores 
      and the Society of Independent Gasoline Marketers of America

                              INTRODUCTION

    Thank you, Chairman Domenici and Senator Bingaman, for the 
opportunity to submit these comments relating to the United States 
retail motor fuels market. The National Association of Convenience 
Stores (``NACS'') and the Society of Independent Gasoline Marketers of 
America (``SIGMA'') appreciate the opportunity to submit this statement 
for the hearing record.
    The topic of today's hearing is ``Oil Supply and Prices.'' It is 
axiomatic that local, national, and global developments that impact on 
crude oil supplies have a significant impact on the overall supplies of 
gasoline and diesel fuel and, consequently, on the retail price of 
gasoline and diesel fuel to consumers.
    However, it is not as widely understood that, in addition to the 
volatility in crude oil supplies and prices, the systemic challenges 
facing the nation's motor fuel refining and distribution industries 
have an equal, if not greater, long-term impact on the price motorists 
pay for motor fuel. These systemic challenges, which have been brought 
to the attention of this Committee for years, have not been addressed 
and have not abated.
    Until these systemic challenges are addressed, any action this 
Committee takes on increasing or stabilizing crude oil supply will have 
a substantial impact only in the short-term on the retail prices 
motorists pay for gasoline and diesel fuel at the pump. It is only 
through addressing the systemic challenges that lasting and long-tern 
reductions in motor fuel price volatility can be accomplished.

                            THE ASSOCIATIONS

    NACS is an international trade association comprised of more than 
1,700 retail member companies operating more than 100,000 stores. The 
convenience store industry as a whole sold 124.4 billion gallons of 
motor fuel in 2001 and employs 1.4 million workers across the nation.
    SIGMA is an association of over 270 independent gasoline marketers 
operating in all 50 states. Last year, SIGMA members sold over 48 
billion gallons of motor fuel, representing over 30 percent of all 
motor fuels sold in the United States in 2002. SIGMA members supply 
over 28,000 retail outlets across the nation and employ over 270,000 
workers nationwide.

              THE ROLE OF INDEPENDENT MOTOR FUEL MARKETERS

    Collectively, the members of NACS and SIGMA sell approximately 80 
percent of the gasoline consumed in the United States every year. 
However, the vast majority of NACS members and all SIGMA members do not 
``make'' gasoline and diesel fuel. Instead, they are motor fuel 
marketers, purchasing gasoline and diesel fuel under contract or on the 
open market. As a result, NACS and SIGMA members are as exposed as are 
consumers to fluctuations in the overall supply, and to volatility in 
the price of crude oil and the impact this volatility has on wholesale 
and retail motor fuel prices.
    In fact, independent motor fuel marketers represent the closest 
proxy for gasoline and diesel fuel consumers that exists in the 
nation's motor fuel refining and distribution industry today. Shortages 
in gasoline and diesel fuel supplies, caused by world events, low 
inventories, refinery or pipeline outages or turnarounds, or the 
simple, enduring stresses in the motor fuel distribution system, impact 
independent marketers first--before your offices begin to hear 
complaints from consumers and businesses about the retail price of 
gasoline and diesel fuel.
    Consequently, any examination of ``Oil Supply and Prices'' would be 
incomplete without a discussion of how the crude oil supply picture 
impacts gasoline and diesel fuel supplies and the price marketers must 
pay for these products. In addition, any examination of the forces 
acting on retail motor fuel prices would be incomplete without an 
additional discussion of the challenges refiners and marketers face in 
turning this crude into refined products and delivering these products 
to consumers. In short, even if adequate and moderately priced supplies 
of crude oil can be assured, motor fuel price volatility cannot be 
addressed and alleviated until more systemic challenges to the nation's 
refining and distribution industries are resolved.

              CONSIDERATIONS FOR A NATIONAL ENERGY POLICY

    NACS and SIGMA believe that the Energy and Natural Resources 
Committee has a unique opportunity and a definitive responsibility, 
while crafting national energy policy legislation, to address the 
systemic challenges currently impacting the nation's motor fuel 
refining and distribution industries. Access to reliable supplies of 
crude oil, the primary focus of this hearing today, are vital for the 
United States. But it is equally vital for the Committee to recognize 
that ample supplies of domestic and imported crude oil are irrelevant 
to consumers if the nation's motor fuel refining and distribution 
industries are incapable of refining those barrels of crude oil into 
gasoline and diesel fuel and delivering these products to consumers in 
adequate supplies and at reasonable prices.
    Our members submit that it is the loss of our nation's motor fuel 
refining and distribution systems' efficiency--caused by the imposition 
of overlapping federal, state and local fuel specifications--that has 
led to a loss of domestic refining capacity, regional supply shortages, 
and significant increases in wholesale and retail motor fuel price 
volatility across the nation. We encourage the Committee to consider, 
as part of its debate this year on national energy policy legislation, 
provisions that would harmonize the various levels of motor fuels 
regulations in an effort to accomplish four principle objectives:

   Preserve and, if possible, increase domestic refining 
        capacity;
   Restore fungibility to the motor fuels supply and 
        distribution system;
   Enhance the available supply of motor fuels; and
   Maintain or improve environmental quality.

    These are not new principles for NAGS or SIGMA, nor is this the 
first time we have urged this Committee to address these principles. In 
fact, Tom Robinson, Chief Executive Officer of Robinson Oil Company in 
San Jose, California, told this Committee in 1996 that the marketing 
community was concerned about the loss of motor fuel supply fungibility 
brought on by the imposition of non-coordinated fuel specifications and 
the impact this would have on gasoline and diesel fuel supplies and 
wholesale and retail price volatility. At that time, Mr. Robinson 
recommended that the Congress address this issue in a comprehensive 
manner.
    Today, almost seven years later, we again call upon this Committee 
and this Congress to address these issues in a comprehensive manner. We 
have attached the testimony of Mr. Robinson to this statement (see 
Attachment 1) as an important point of reference. As the Committee 
reviews this prior testimony, it is striking to observe how accurate 
Mr. Robinson's predictions, made seven years ago, were, and how little 
has been accomplished since 1996 to prevent the fulfillment of these 
predictions. In fact, many would argue that, since 1996, our nation has 
moved in the exact opposite direction--towards more balkanization in 
our motor fuels markets and greater stresses on the nation's refining 
and distribution systems.

            CURRENT PRESSURES ON MOTOR FUEL PRICE VOLATILITY

    It is significant that the Committee will be considering an energy 
policy bill during a very challenging time for the motor fuels 
industry. Current supply and demand conditions, international events 
and the implementation of seasonal regulatory requirements will 
influence the market as the Committee proceeds over the next several 
months. Today, we would like to describe for the Committee the current 
market situation, the underlying factors contributing to the today's 
market, and an analysis of conditions that will impact the market in 
the near future. We hope our comments will be useful to the Committee 
as it proceeds to develop a national energy policy over the next 
several weeks and months.
    As of Wednesday, February 5, according to the U.S. Energy 
Information Administration (EIA), the national average retail price for 
regular gasoline was $1.53 per gallon. Historically, the first week of 
February marks the lowest annual point for retail gasoline prices. The 
fact that retail prices are so high so early in the year should be 
worrisome for this Committee and for consumers. If history is any 
guide, high retail prices in mid-February portend even higher retail 
prices during the summer driving season, when gasoline demand is at its 
highest. There are several factors that have contributed to the 
current, abnormally high retail price level and there are several 
factors that have contributed historically to the annual increase 
during the spring months.
    Many of the factors influencing today's relatively high gasoline 
and diesel fuel wholesale and retail prices will most likely be 
discussed during this hearing. Principle among them are the strikes in 
Venezuela and the potential military conflict in Iraq. In short, crude 
oil prices have increased from $26.67 a barrel at the end of November 
(just before the Venezuelan strikes began) to over $35.00 a barrel 
earlier this week. Meanwhile, crude oil stocks have dropped from 287 
million barrels on hand to 269.8 million barrels. This is below the 
Lower Operational Inventory Level established by the National Petroleum 
Council and represents the lowest inventory level since October 1975. 
Over the past few months, America's refineries have pulled from their 
stored supplies of crude oil in order to maintain operations and 
satisfy consumer demand, resulting in the lower inventory levels we see 
today.
    For this reason, the nation's gasoline inventory actually increased 
from 200 million barrels at the end of November to 209 million barrels 
at the end of January. However, the pressure on crude supplies and the 
increase in crude prices have started to pressure retail prices 
upwards. At the end of November, the average national retail prices for 
87 octane gasoline was $1.38 per gallon. This slowly increased to $1.45 
per gallon by mid-January and only recently moved above $1.50 per 
gallon. During the same time period, the average uncontracted, 
wholesale, or ``spot,'' market price (derived from the Energy 
Information Administration's report on conventional and reformulated 
gasoline spot prices in New York, Chicago, Los Angeles and the Gulf 
Coast) increased from 70 cents per gallon to $1.00 per gallon.
    There is a direct relationship between increases in spot prices and 
retail prices. A recent report issued by the Energy Information 
Administration, ``Gasoline Price Pass-through,'' published in January 
2003 (Attachment II) confirms this relationship. EIA's analysis 
describes the manner in which changes in overall supplies and prices in 
the spot gasoline market are reflected in the prices consumers pay at 
the pump. EIA has developed the capability to accurately predict the 
retail price of gasoline based upon movements at the spot market to an 
accuracy within a penny per gallon. Put another way, EIA's report 
concludes that retail gasoline price movements--upwards or downwards--
can be accurately predicted by examining spot market prices. If spot, 
wholesale prices rise, it is likely that retail prices will reflect 
this movement. And if spot prices fall, retail prices generally fall by 
a like amount.
    It is important to note that energy industry analysts, including 
the Energy Information Administration, have predicted that even if the 
Venezuelan strikes were to end immediately, it could take several 
months before Venezuelan production returns to normal. This means that 
the strikes could continue impacting the U.S. market for many weeks to 
come.

               SUMMER TRANSITION WILL IMPACT THE MARKET 
                    DURING ENERGY BILL CONSIDERATION

    In the shadow of these international events that impact overall 
crude oil supply in the United States, the motor fuels refining and 
distribution system is preparing for the summer driving season. Along 
with that comes the regulatory requirement to produce motor fuels that 
have lower emission standards than those required during the winter 
months. Each year, this has a direct impact on the price of gasoline at 
retail, simply because this summer gasoline is more expensive to 
produce. During the spring of each calendar year, the gasoline 
distribution system seeks to clear winter-grade product before bringing 
summer-time product to retail, which creates a temporary supply 
imbalance and agitates the price impact of the transition.
    Last spring, the Environmental Protection Agency implemented minor 
regulatory changes to the environmental rules governing the winter-to-
summer transition in an attempt to prevent the gasoline supply 
shortages and wholesale price volatility that the nation experienced 
during the 2000 and 2001 transition periods. During the spring of 2002, 
wholesale and retail gasoline prices remained fairly stable, leading 
EPA, along with many observers, to conclude that its minor regulatory 
changes had been effective in smoothing the transition from winter to 
summer gasoline. However, a more detailed analysis of early 2002 
reveals a different story.
    The national average price of gasoline prior to the 2002 transition 
season was $1.11 per gallon (week ending February 4). This February 
2002 price was substantially lower than previous years ($1.44 per 
gallon on February 5, 2001 and $1.32 per gallon on February 7, 2000) 
due primarily to reduced gasoline demand and expanded gasoline supplies 
in the wake of the terrorist attacks of September 11, 2001.
    During the transition period in 2002, national average gasoline 
prices increased to a high of $1.41 per gallon on April 8. Compared to 
the previous two years where prices increased to highs of $1.70 in 2001 
and $1.68 in 2000, many people viewed this as a significant 
accomplishment. But if one were to look at the rate of increase in each 
of the three years, it is evident that there was very little progress 
made. In fact, in 2002 prices increased during the transition period by 
30 cents per gallon, compared to an increase of 26 cents per gallon in 
2001 and 36 cents per gallon in 2000 (see Attachment III).
    Based upon the previous three years' experience, it is 
understandable why some observers, including EIA, have forecast an 
increase in the wholesale and retail price of gasoline as the 2003 
transition season begins. All of the current indicators point towards a 
rough transition to summer gasoline in 2003:

   Crude oil inventories are down;
   Crude supplies from Venezuela will not return to 2002 levels 
        until late spring at the earliest;
   A potential Middle East conflict will impact negatively on 
        crude shipments from the Persian Gulf;
   Even if crude supplies are adequate, our nation's refining 
        capacity has not increased in 30 years;
   Much of the nation has experienced a cold winter, leading 
        refiners to produce more home heating oil late into the season 
        to meet demand and to delay increased gasoline production, to 
        rebuild gasoline inventories as the summer driving season 
        nears; and
   Wholesale and retail prices are already, prior to the 
        transition season, at historically heightened levels.

                               CONCLUSION

    The current condition of the petroleum marketplace is a direct 
result of the imbalance between supply and demand. The strikes in 
Venezuela led to the dramatic reduction in domestic supplies and the 
potential conflict in the Persian Gulf only exacerbates the uncertainty 
in tile marketplace. Today's retail prices are abnormally high for this 
time of year, but there are identifiable and measurable factors that 
contributed to this abnormality.
    As the Committee proceeds with its business to create a national 
energy policy, the members of NACS and SIGMA encourage the Committee to 
pay special attention not to current challenges leading to today's 
market conditions but to the systemic challenges that cause disruption 
and volatility in the marketplace on an on-going basis. Today's market 
conditions will correct themselves in time. The systemic problems, 
however, demand congressional attention.
    The members of NAGS and SIGMA are prepared to assist the Committee 
in any manner possible as it addresses these important issues. Thank 
you again for the opportunity to provide these comments today.
                              Attachments

    [Note: These attachments have been retained in committee files.]

Attachment I--Testimony of Thomas L. Robinson, President, Robinson Oil 
        Company, Inc., at a hearing of the Senate Committee on Energy 
        and Natural Resources, May 9, 1996
Attachment II--``Gasoline Price Pass-through,'' U.S. Energy Information 
        Administration, January 2003.
Attachment III--Crude Oil and Gasoline Stocks and Prices, 2000-2003. 
        Tables Generated from Information provided by the U.S. Energy 
        Information Administration

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