[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
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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
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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