[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
U.S. ENERGY AND MINERAL NEEDS, SECURITY AND POLICY
=======================================================================
OVERSIGHT HEARING
before the
SUBCOMMITTEE ON ENERGY AND
MINERAL RESOURCES
of the
COMMITTEE ON RESOURCES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
Wednesday, March 16, 2005
__________
Serial No. 109-4
__________
Printed for the use of the Committee on Resources
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house
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______
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COMMITTEE ON RESOURCES
RICHARD W. POMBO, California, Chairman
NICK J. RAHALL II, West Virginia, Ranking Democrat Member
Don Young, Alaska Dale E. Kildee, Michigan
Jim Saxton, New Jersey Eni F.H. Faleomavaega, American
Elton Gallegly, California Samoa
John J. Duncan, Jr., Tennessee Neil Abercrombie, Hawaii
Wayne T. Gilchrest, Maryland Solomon P. Ortiz, Texas
Ken Calvert, California Frank Pallone, Jr., New Jersey
Barbara Cubin, Wyoming Donna M. Christensen, Virgin
Vice Chair Islands
George P. Radanovich, California Ron Kind, Wisconsin
Walter B. Jones, Jr., North Grace F. Napolitano, California
Carolina Tom Udall, New Mexico
Chris Cannon, Utah Raul M. Grijalva, Arizona
John E. Peterson, Pennsylvania Madeleine Z. Bordallo, Guam
Jim Gibbons, Nevada Jim Costa, California
Greg Walden, Oregon Charlie Melancon, Louisiana
Thomas G. Tancredo, Colorado Dan Boren, Oklahoma
J.D. Hayworth, Arizona George Miller, California
Jeff Flake, Arizona Edward J. Markey, Massachusetts
Rick Renzi, Arizona Peter A. DeFazio, Oregon
Stevan Pearce, New Mexico Jay Inslee, Washington
Devin Nunes, California Mark Udall, Colorado
Henry Brown, Jr., South Carolina Dennis Cardoza, California
Thelma Drake, Virginia Stephanie Herseth, South Dakota
Luis G. Fortuno, Puerto Rico
Cathy McMorris, Washington
Bobby Jindal, Louisiana
Louie Gohmert, Texas
Marilyn N. Musgrave, Colorado
Steven J. Ding, Chief of Staff
Lisa Pittman, Chief Counsel
James H. Zoia, Democrat Staff Director
Jeffrey P. Petrich, Democrat Chief Counsel
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SUBCOMMITTEE ON ENERGY AND MINERAL RESOURCES
JIM GIBBONS, Nevada, Chairman
RAUL M. GRIJALVA, Arizona, Ranking Democrat Member
Don Young, Alaska Eni F.H. Faleomavaega, American
Barbara Cubin, Wyoming Samoa
Chris Cannon, Utah Solomon P. Ortiz, Texas
John E. Peterson, Pennsylvania Jim Costa, California
Stevan Pearce, New Mexico Charlie Melancon, Louisiana
Thelma Drake, Virginia Dan Boren, Oklahoma
Bobby Jindal, Louisiana Edward J. Markey, Massachusetts
Louie Gohmert, Texas Nick J. Rahall II, West Virginia,
Richard W. Pombo, California, ex ex officio
officio
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C O N T E N T S
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Page
Hearing held on Wednesday, March 16, 2005........................ 1
Statement of Members:
Gibbons, Hon. Jim, a Representative in Congress from the
State of Nevada............................................ 1
Prepared statement of.................................... 3
Grijalva, Hon. Raul M., a Representative in Congress from the
State of Arizona........................................... 3
Prepared statement of.................................... 4
Statement of Witnesses:
Caruso, Hon. Guy F., Administrator, Energy Information
Administration, U.S. Department of Energy.................. 5
Prepared statement of.................................... 8
Copulos, Milton R., President, National Defense Council
Foundation................................................. 41
Prepared statement of.................................... 43
Hegburg, Alan S., Senior Fellow, Energy Program, Center for
Strategic and International Studies........................ 50
Prepared statement of.................................... 51
Logan, Jeffrey, Senior Energy Analyst and China Program
Manager, International Energy Agency....................... 19
Prepared statement of.................................... 21
Menzie, W. David, Geologist, U.S. Geological Survey.......... 29
Prepared statement of.................................... 31
OVERSIGHT HEARING ON ``U.S. ENERGY AND MINERAL NEEDS, SECURITY AND
POLICY: IMPACTS OF SUSTAINED INCREASES IN GLOBAL ENERGY AND MINERAL
CONSUMPTION BY EMERGING ECONOMIES SUCH AS CHINA AND INDIA.''
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Wednesday, March 16, 2005
U.S. House of Representatives
Subcommittee on Energy and Mineral Resources
Committee on Resources
Washington, D.C.
----------
The Subcommittee met, pursuant to call, at 10:00 a.m., in
Room 1324, Longworth House Office Building, Hon. Jim Gibbons,
Chairman of the Subcommittee] presiding.
Present: Representatives Gibbons, Peterson, Pombo (ex
officio), Grijalva, Faleomavaega, and Costa.
STATEMENT OF THE HON. JIM GIBBONS, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF NEVADA
Mr. Gibbons. Good morning. The Subcommittee on Energy and
Mineral Resources will come to order. The Subcommittee today is
going to hear testimony on U.S. energy and mineral needs,
security and policy: impacts of sustained increases in global
energy and mineral consumption in emerging economies such as
China and India. Under Committee Rule 4(g), the Chairman and
Ranking Minority Member can have opening statements. And any
Member other than that who wishes to make a statement can have
it included in the record under unanimous consent.
Let me begin with my remarks this morning before we start.
First of all, I want to welcome all of our witnesses today.
It is a pleasure to have you here before us. We may be
interrupted by a series of votes, which are usually something
we have to deal with. That is what you hired us to come here to
do is to vote on the Floor. So we will try to do it as
expeditiously as possible and make sure the impact on your
presence and the time you have to spend here is minimal.
But the Subcommittee today meets to hear testimony on
global energy and mineral transactions and the potential
impacts on U.S. energy and mineral needs and the impact on
security and policy as well. My opening remarks are not laden
with a bunch of statistics, because I am certain that our
witnesses who are here with us today will have that aspect of
this debate fully covered. My intent is to set the tone of this
important oversight hearing and encourage an open discussion on
the future of U.S. energy and mineral policies in light of
sustained increases in resource demand by emerging economies
such as China and India.
This hearing should not be viewed as an attempt to do China
or India-bashing. These countries simply are learning that
economic success is directly linked to energy consumption. It
just so happens that economic growth in these countries is not
only outpacing the rest of the world, but is also exceeding
their own growth expectations. Last Friday, for example, the
International Energy Agency, IEA, revised upward by 25 percent
China's demand for oil for the year 2005. And in order to
sustain this economic growth, emerging economies such as China
and India will need more and more supplies of energy and
minerals. This is an issue which has garnered a great deal of
attention in the mainstream media. And I would demonstrate to
the audience, this package here, what I am holding in my hand,
is a small sample of recent media coverage given to this
meteoric economic growth, and thus the energy and mineral
consumption in India and China is at issue today.
Many of these articles that I have just pointed to, along
with information from numerous reports covering a range of
issues and topics related to U.S. energy and mineral security,
can now be found on our Subcommittee's website. I encourage my
colleagues and their staffs to utilize this information in
going forward in reviewing our domestic energy and mineral
strategy for the future.
So where does this fit into the U.S. and to the U.S.
picture? Well, the U.S. has been at the top of the food chain
for most of recent history. One of the major reasons we are in
the U.S. and have been so successful is that we recognized
early that the foundation for economic growth is built with
energy and minerals, but continued success tends to foster
apathy and disinterest in that which has created this success
and the U.S. is no exception to that rule. Our domestic energy
and mineral policies have languished over the years driving
investment overseas, increasing our reliance on foreign sources
of energy and mineral resources. Last year, the U.S. imported
more than 63 percent of its oil, placing our energy needs
increasingly at the mercy of foreign governments. Yet, we
continue the cycle of tolerating irresponsible energy and
mineral policies and thereby continuing to discourage
investment in domestic energy and mineral production and
subsequently becoming more dependent on foreign sources.
Yesterday, crude oil prices closed at $54.85 a barrel.
Natural gas closed at $7.16 per million BTU. The U.S. trade
deficit in energy is more than 25 percent of our total balance
of payment and continues to increase at a rapid rate. The U.S.
must take a serious look at its energy and mineral supply
strategy for the long-term. And we must start by enacting a
comprehensive national energy policy that encourages diversity
of fuel use, increases domestic production and self-
sufficiency.
I welcome our witnesses, as I said earlier. I look forward
to their testimony. But before I turn to our witnesses, I would
like to turn to our Ranking Member, Mr. Grijalva. And I would
like to welcome him at this time for any remarks he may have.
[The prepared statement of Mr. Gibbons follows:]
Statement of The Honorable Jim Gibbons, Chairman,
Subcommittee on Energy and Mineral Resources
The Subcommittee meets today to hear testimony on global energy and
mineral trends and their potential impacts on U.S. energy and mineral
needs, security and policy. My opening remarks are not laden with
endless statistics because I'm certain our witnesses who are in the
``statistics business'' will have that aspect of this debate fully
covered. Rather, my intent is to set the tone of this important
oversight hearing and encourage an open discussion on the future of
U.S. energy and mineral policies in light of sustained increases in
resource demands by emerging economies such as China and India. This
hearing should not be viewed as an attempt to do China or India-
bashing. These countries simply are learning that economic success is
directly linked to energy consumption. And it just so happens that
economic growth in these countries is not only outpacing the rest of
the world, but is also exceeding their own growth expectations.
Last Friday, for example, the International Energy Agency (IEA)
revised upward by 25 percent its estimates of China's demand for oil
for the year 2005. And in order to sustain this economic growth,
emerging economies such as China and India will need more and more
supplies of energy and minerals. This is an issue that has garnered a
great deal of attention in the mainstream media. I hold in my hand a
small sampling of the recent media coverage given to the meteoric
economic growth--and thus energy and minerals consumption--in China and
India. Many of these articles, along with information from numerous
reports covering a range of issues and topics related to U.S. energy
and mineral security can now be found on our Subcommittee website. I
encourage my colleagues and their staffs to utilize this information as
we go forward in reviewing our domestic energy and minerals strategy
for the future.
So, where does the U.S. fit into this picture? The U.S. has been at
the top of the food chain for most of recent history. One of the major
reasons we in the U.S. have been so successful is that we recognized
early-on that the foundation for economic growth is built with energy
and minerals. But continued success tends to foster apathy and
disinterest in that which has created the success, and the U.S. is no
exception.
Our domestic energy and minerals policies have languished over the
years, driving investment overseas and increasing our reliance on
foreign sources of energy and mineral resources. Last year, the U.S.
imported more than 63% of its oil, placing our energy needs
increasingly at the mercy of foreign governments. Yet we continue the
cycle of tolerating irresponsible energy and mineral policies, thereby
continuing to discourage investment in domestic energy and mineral
production, and subsequently becoming more dependent on foreign
sources. Yesterday, crude oil prices closed at $54.85 per barrel.
Natural gas closed at $7.16 per million Btu. U.S. trade deficit in
energy is more than 25 percent of our total balance of payments, and
continues to increase at a rapid rate. The U.S. must take a serious
look at its energy and mineral supply strategy for the long-term. We
must start by enacting a comprehensive national energy policy that
encourages diversity of fuel use, increased domestic production, and
self-sufficiency.
I welcome our witnesses today and look forward to their testimony.
Before turning to our Ranking member I would like to welcome my friend
and Full Committee Chairman from California, Mr. Pombo, and recognize
him for any opening remarks he may wish to give at this time.
______
STATEMENT OF THE HON. RAUL GRIJALVA, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ARIZONA
Mr. Grijalva. Thank you very much, Chairman Gibbons, and I
join you in welcoming our guests and look forward to the
information in the hearing. Global energy supply and demand are
becoming an increasingly important issue with the potential to
adversely affect the United States as global demand for energy
increases particularly in the emerging powerhouse economies of
China and India. While a number of supply side and supply chain
factors have contributed to the situation, the most significant
long-term factor contributing to rising oil prices is an
increase in Asian demand, most notably from China. China's
unprecedented growth not only makes it a driver of long-term
increase in energy prices, but also the most vulnerable to
rising oil prices.
In the United States, a key domestic fossil fuel that we
have become so dependent on--oil--is diminishing, though our
appetite for it continues to grow. We have only 3 percent of
the world's oil reserves, yet we consume 25 percent of the
world's yearly supply. While we have known for years that
conservation, energy efficiencies, alternative energy
technologies are feasible and available, the U.S. has remained
an economy overwhelmingly dependent on fossil fuels. As a
Nation, we have resisted options to raise fuel mileage
standards or to increase renewable portfolio standards, but
instead harp on the need to open protected areas to new oil and
gas development. Overseas, emerging countries such as China and
India, appear to be less resistant to new options. For example,
China and its Asian neighbors are responding to high global oil
prices by accelerating their search for alternative power
sources and encouraging energy conservation. Speaking at the
annual Asian power conference in Singapore two weeks ago, Asian
energy officials said their governments are increasingly
diversifying their fuel mix to cut dependence on imported oil
by developing other power sources such as natural gas,
geothermal, hydro, liquefied, hydro liquefied natural gas and
renewable fuels.
In closing, let me say as we prepare to consider national
energy legislation when we return from the Easter recess, we
must recognize that there is no single solution to meeting the
Nation's energy needs. We cannot simply drill our way out of
high oil and gas prices nor can we drill our way to energy
security. Ultimately, we as policymakers must develop a
national energy plan that takes full advantage of both
conventional and unconventional resources and encourages energy
efficiency and new technologies. Thank you, Mr. Chairman.
[The prepared statement of Mr. Grijalva follows:]
Statement of The Honorable Raul M. Grijalva, Ranking Democrat,
Subcommittee on Energy and Mineral Resources
Thank you, Chairman Gibbons. I join you in welcoming our
distinguished guests and look forward to an enlightening and
informative hearing.
Global energy supply and demand are becoming an increasingly
important issue with the potential to adversely affect the United
States as global demand for energy increases, particularly in the
emerging powerhouse economies of China and India.
As reported this month in The Asian Times, ``A notable feature of
2004 was the volatility in oil prices--New York light sweet crude
prices reached a peak of US$55.67 on October 25, ending the year up
33.6% at $43.45 per barrel. While a number of supply-side and supply-
chain factors have contributed to this situation, the most significant
long-term factor contributing to rising oil prices is an increase in
Asian demand, most notably from China. China's unprecedented growth not
only makes it a driver of a long-term increase in energy prices, but
also the most vulnerable to rising oil prices. ``
In the United States, a key domestic fossil fuel that we have
become so dependent upon--oil--is diminishing, though our appetite for
it continues to grow. We have only 3% of the world's oil reserves, yet
we consume 25% of the world's yearly production of oil.
While we have known for years that conservation, energy
efficiencies, alternative energy technologies are feasible and
available, the U.S. has remained an economy overwhelmingly dependent on
fossil fuels.
As a Nation, we have resisted options to raise fuel mileage
standards or to increase renewable portfolio standards, and instead
harp on the need to open protected areas to new oil and gas
development. Oversees, emerging countries, such as China and India,
appear to be less resistant to new options.
For example, China and its Asian neighbors are responding to high
global oil prices by accelerating their search for alternative power
sources and encouraging energy conservation. Speaking at the annual
Asia Power Conference in Singapore 2 weeks ago, Asian energy officials
said that their governments are increasingly diversifying their ``fuel
mix'' to cut dependence on imported oil by developing other power
sources such as natural gas, geothermal, hydro, liquefied natural gas
and renewable fuels.
In closing, let me say that as we prepare to consider national
energy legislation when we return from the Easter recess, we must
recognize that there is no single solution to meeting the Nation's
energy needs. We cannot simply drill our way out high oil and gas
prices. Nor can we drill our way to energy security. Ultimately, we, as
policymakers, must develop a national energy plan that takes full
advantage of both conventional and unconventional resources and
encourages energy efficiency and new technologies.
______
Mr. Gibbons. Thank you very much. I would like to welcome
to the Committee, the Chairman of the full Committee, Mr.
Richard Pombo of California. And if he has any remarks, he is
welcome to give them. And I would like to welcome Mr. Peterson
of Pennsylvania, who is very interested in the issues of energy
from his home State. There are no opening remarks other than
those, so with that, we will turn to our witnesses today. I
will introduce them. The Honorable Guy F. Caruso, who is the
administrator of the--energy information administrator. Jeffrey
Logan, China program manager, International Energy Agency. Dave
Menzie, chief of the international minerals section of the
USGS.
Mr. Gibbons. Gentlemen, if you would please rise and raise
your right hand, we swear in our witnesses.
[Witnesses sworn.]
Mr. Gibbons. Let the record reflect that each of the
witnesses answered in the affirmative. We will begin by hearing
from the honorable Guy Caruso. Mr. Caruso, welcome, the floor
is yours.
STATEMENT OF HON. GUY F. CARUSO, ADMINISTRATOR, ENERGY
INFORMATION ADMINISTRATION
Mr. Caruso. Thank you, Mr. Chairman. And Chairman of the
full Committee, Mr. Pombo, and members of the Subcommittee. It
is a pleasure to be here to present the Energy Information
Administration's outlook for energy markets. As we meet this
morning, global oil markets remain extremely tightly balanced.
Strong economic growth and particularly the energy growth of
2004, which put upward pressure on crude oil and natural gas
prices continues in 2005 and we see a very strong growth again
this year led by not only China, but the other developing Asian
countries, as you mentioned, India. And the United States as
well continues to have strong growth, particularly in the
transportation fuels. What this has done is stretched the
capacity to produce, store, refine and transport oil on a
global basis, nearly to the limit, which means that there is
little or no cushion to deal with unexpected changes in either
supply or demand so that whenever one occurs, whether it be
small or large, the only pressure relief valve is prices. And
what we are seeing today with nearly $55 of WTI, West Texas
Intermediate, and the high prices of natural gas is a
manifestation of that tightness globally and in particularly
north America.
Over the long run, IEA does a long-term forecast based on
existing policies and rules and regulations. And what it means
is if we keep on the path we are on, we are going to see very
strong growth in energy demand in this country, about a third
increase in our demand over the next 20 years. But our domestic
supply won't keep up with that demand, which means we'll become
more increasingly dependent on imports of energy, both oil and
natural gas. We see our import dependency going from 27 percent
in 2003 to 38 percent in 2025. But we are using energy more
efficiently. It's not all a negative story. Our economic growth
has been averaging about 3 percent over the last 20 years, and
we see that--we project forward about that level of growth.
And our energy demand has been growing at 1.5 percent, so
we are actually producing more GDP per unit of energy used, but
we are becoming less flexible in dealing with this situation as
we depend on oil more for transportation--about 70 percent of
our oil is used in transportation. Our oil import dependency,
you have several figures before you. The second one shows that
oil import dependency will rise from about 57 percent on a net
basis in 2003 to 68 percent in 2025. Most of that growth will
be in the transportation sector, and therefore, there is little
flexibility in terms of changing our demand and supply patterns
with respect to transportation.
Turning to natural gas, we see that import dependency
growing as well from 15 percent to 28 percent over the next 20
years because it has been the fuel of choice in the electric
power sector and continues to be used heavily in the industrial
sector. Our domestic supplies will not keep up with that
demand, therefore we see imports from Canada and more
particularly from LNG, liquefied natural gas, growing very
sharply to over 6 trillion cubic feet by 2025. So we will
become dependent not only on oil imports from foreign sources
but as well, natural gas from outside of North America.
On a global basis, world economic energy growth will
increase by more than 50 percent over the next 20 years and
that will be led by growth in developing countries. China and
India will grow very fast, not only for oil, but natural gas.
And coal will dominate in the electric power sector, which has
implications of course for greenhouse gases. We expect about
120 million barrels of day of oil demand by 2025. And we
believe the resources are adequate to meet that kind of demand.
Nevertheless, it will represent a significant investment
challenge for our international oil companies, national oil
companies. And as we have seen, political instability often
inhibits the proper path of investment in many of these
countries in the upstream.
So in conclusion, the economic growth in populous countries
of the world such as China, India and the United States will
certainly increase energy demand sharply. Fossil fuels will
remain a dominant source of energy. And the dependence on
foreign sources of oil will increase significantly for not only
the United States, but particularly those countries in
developing Asia. Mr. Chairman, thank you very much again for
this opportunity to present the IEA's outlook.
[Charts used in Mr. Caruso's oral presentation follow:]
[GRAPHIC] [TIFF OMITTED] T0126.006
[GRAPHIC] [TIFF OMITTED] T0126.007
[The prepared statement of Mr. Caruso follows:]
Statement of Guy Caruso, Administrator, Energy Information
Administration, U.S. Department of Energy
Mr. Chairman and Members of the Committee:
I appreciate the opportunity to appear before you today to discuss
the impact of increases in global energy demand on U.S. energy needs,
security, and policy, particularly the impact of sustained increases in
emerging economies such as China and India.
The Energy Information Administration (EIA) is an independent
statistical and analytical agency within the Department of Energy. We
are charged with providing objective, timely, and relevant data,
analysis, and projections for the use of Congress, the Administration,
and the public. We do not take positions on policy issues, but we do
produce data, analysis, and forecasts that are meant to assist policy
makers in their energy policy deliberations. Because we have an element
of statutory independence with respect to the analyses, our views are
strictly those of EIA and should not be construed as representing those
of the Department of Energy or the Administration. However, EIA's
baseline projections on energy trends are widely used by government
agencies, the private sector, and academia for their own energy
analyses.
The Annual Energy Outlook provides projections and analysis of
domestic energy consumption, supply, prices, and energy-related carbon
dioxide emissions through 2025. Annual Energy Outlook 2005 (AEO2005) is
based on Federal and State laws and regulations in effect on October
31, 2004. The potential impacts of pending or proposed legislation,
regulations, and standards--or of sections of legislation that have
been enacted but that require funds or implementing regulations that
have not been provided or specified--are not reflected in the
projections.
The U.S. projections in this testimony are based on the AEO2005,
which was released on the EIA website on February 11, 2005. In addition
to the long-term U.S. forecast of energy markets, EIA also prepares a
long-term outlook for world energy markets, which is published annually
in the International Energy Outlook (IEO). The latest edition of this
report, the IEO2004, was published in April 2004. The projections in
the AEO2005 and the IEO2004 are not meant to be exact predictions of
the future but represent likely energy futures, given technological and
demographic trends, current laws and regulations, and consumer behavior
as derived from known data. EIA recognizes that projections of energy
markets are highly uncertain and subject to many random events that
cannot be foreseen such as weather, political disruptions, and
technological breakthroughs. In addition to these phenomena, long-term
trends in technology development, demographics, economic growth, and
energy resources may evolve along a different path than expected in the
projections. Both the AEO2005 and the IEO2004 include a large number of
alternative cases intended to examine these uncertainties. The AEO2005
and IEO2004 provide integrated projections of U.S. and world energy
market trends for roughly the next two decades. The following
discussion briefly summarizes the highlights from AEO2005 for U.S.
energy demand and supply. It is followed by a discussion of the key
trends in world energy markets projected in the IEO2004, with a focus
on China and India.
U.S. Energy Outlook
U.S. Energy Prices
In the AEO2005 reference case, the annual average world oil price
1 increases from $27.73 per barrel (2003 dollars) in 2003
($4.64 per million Btu) to $35.00 per barrel in 2004 ($5.86 per million
Btu) and then declines to $25.00 per barrel in 2010 ($4.18 per million
Btu) as new supplies enter the market. It then rises slowly to $30.31
per barrel in 2025 ($5.07 per million Btu) (Figure 1). In nominal
dollars, the average world oil price is about $52 per barrel in 2025
($8.70 per million Btu).
---------------------------------------------------------------------------
\1\ World oil prices in AEO2005 are defined based on the average
refiner acquisition cost of imported oil to the United States (IRAC).
The IRAC price tends to be a few dollars less than the widely-cited
West Texas Intermediate (WTI) spot price and has been as much as six
dollars per barrel lower than the WTI in recent months. For the first
11 months of 2004, WTI averaged $41.31 per barrel ($7.12 per million
Btu), while IRAC averaged $36.94 per barrel (nominal dollars) ($6.26
per million Btu).
---------------------------------------------------------------------------
There is a great deal of uncertainty about the size and
availability of crude oil resources, particularly conventional
resources, the adequacy of investment capital, and geopolitical trends.
For example, the AEO2005 reference case assumes that world crude oil
prices will decline as growth in consumption slows and producers
increase their productive capacity and output in response to current
high prices; however, the October 2004 oil futures prices case for West
Texas Intermediate crude oil (WTI) on the New York Mercantile Exchange
(NYMEX) implies that the average annual oil price in 2005 will exceed
its 2004 level before declining to levels that still would be above
those projected in the reference case. While not discussed here, the
AEO2005 includes other cases based on alternative world crude oil price
paths to evaluate this uncertainty.
In the AEO2005, average wellhead prices for natural gas in the
United States are projected to decrease from $4.98 per thousand cubic
feet (2003 dollars) in 2003 ($4.84 per million Btu) to $3.64 per
thousand cubic feet in 2010 ($3.54 per million Btu) as the availability
of new import sources and increased drilling expand available supply.
After 2010, wellhead prices are projected to increase gradually,
reaching $4.79 per thousand cubic feet in 2025 ($4.67 per million Btu)
(about $8.20 per thousand cubic feet or $7.95 per million Btu in
nominal dollars). Growth in liquefied natural gas (LNG) imports, Alaska
production, and lower-48 production from nonconventional sources is not
expected to increase sufficiently to offset the impacts of resource
depletion and increased demand in the lower-48 States.
In AEO2005, the combination of more moderate increases in coal
production, expected improvements in mine productivity, and a
continuing shift to low-cost coal from the Powder River Basin in
Wyoming leads to a gradual decline in the average mine-mouth price, to
approximately $17 per ton (2003 dollars) ($0.86 per million Btu)
shortly after 2010. The price is projected to remain nearly constant
between 2010 and 2020, increasing after 2020 as rising natural gas
prices and the need for baseload generating capacity lead to the
construction of many new coal-fired generating plants. By 2025, the
average mine-mouth price is projected to be $18.26 per ton ($0.91 per
million Btu). The AEO2005 projection is equivalent to an average mine-
mouth coal price of $31.25 per ton in nominal dollars ($1.56 per
million Btu) in 2025.
Average delivered electricity prices are projected to decline from
7.4 cents per kilowatthour (2003 dollars) ($21.68 per million Btu) in
2003 to a low of 6.6 cents per kilowatthour ($19.34 per million Btu) in
2011 as a result of an increasingly competitive generation market and a
decline in natural gas prices. After 2011, average real electricity
prices are projected to increase, reaching 7.3 cents per kilowatthour
(2003 dollars) ($21.38 per million Btu) in 2025 (equivalent to 12.5
cents per kilowatthour or $36.61 per million Btu in nominal dollars).
U.S. Energy Consumption and Supply
Total energy consumption is projected to grow at about one-half the
rate (1.4 percent per year) of gross domestic product (GDP), with the
strongest growth in energy consumption for electricity generation and
commercial and transportation uses (Figure 2). Total energy consumption
is expected to increase more rapidly than domestic energy supply
through 2025. As a result, net imports of energy are projected to meet
a growing share of energy demand. Net imports are expected to
constitute 38 percent of total U.S. energy consumption in 2025, up from
27 percent in 2003 (Figure 3).
Total petroleum demand is projected to grow at an average annual
rate of 1.5 percent in the AEO2005 reference case forecast, from 20.0
million barrels per day in 2003 to 27.9 million barrels per day in 2025
(Figure 4) led by growth in transportation uses, which account for 67
percent of total petroleum demand in 2003, increasing to 71 percent in
2025. Improvements in the efficiency of vehicles, planes, and ships are
more than offset by growth in travel. In 2025, net petroleum imports,
including both crude oil and refined products (on the basis of barrels
per day), are expected to account for 68 percent of demand, up from 56
percent in 2003.
In the U.S. energy markets, the transportation sector consumes
about two-thirds of all petroleum products and the industrial sector
about one-quarter. The remaining 10 percent is divided among the
residential, commercial, and electric power sectors. With limited
opportunities for fuel switching in the transportation and industrial
sectors, large price-induced changes in U.S. petroleum consumption are
unlikely, unless changes in petroleum prices are very large or there
are significant changes in the efficiencies of petroleum-using
equipment.
Total demand for natural gas is also projected to increase at an
average annual rate of 1.5 percent from 2003 to 2025 (Figure 5). About
75 percent of the growth in gas demand from 2003 to 2025 results from
increased use in power generation and in industrial applications.
Growth in U.S. natural gas supplies will depend on unconventional
domestic production, natural gas from Alaska, and imports of LNG. Total
nonassociated unconventional natural gas production is projected to
grow from 6.6 trillion cubic feet in 2003 to 8.6 trillion cubic feet in
2025. With completion of an Alaskan natural gas pipeline projected for
2016, total Alaskan production is forecast to increase from 0.4
trillion cubic feet in 2003 to 2.2 trillion cubic feet in 2025. Total
net LNG imports in the United States and the Bahamas are projected to
increase from 0.4 trillion cubic feet in 2003 to 6.4 trillion cubic
feet in 2025.
Total coal consumption is projected to increase from 1,095 million
short tons in 2003 to 1,508 million short tons in 2025, growing by 1.5
percent per year. About 90 percent of the coal is currently used for
electricity generation. Coal remains the primary fuel for generation
and its share of generation is expected to remain about 50 percent
between 2003 and 2025. Total coal consumption for electricity
generation is projected to increase by an average of 1.6 percent per
year, from 1,004 million short tons in 2003 to 1,425 million short tons
in 2025.
Total electricity consumption, including both purchases from
electric power producers and on-site generation, is projected to grow
from 3,657 billion kilowatthours in 2003 to 5,467 billion kilowatthours
in 2025, increasing at an average rate of 1.8 percent per year. Rapid
growth in electricity use for computers, office equipment, and a
variety of electrical appliances in the end-use sectors is partially
offset in the AEO2005 forecast by improved efficiency in these and
other, more traditional electrical applications and by slower growth in
electricity demand in the industrial sector.
Total marketed renewable fuel consumption, including ethanol for
gasoline blending, is projected to grow by 1.5 percent per year in
AEO2005, from 6.1 quadrillion Btu in 2003 to 8.5 quadrillion Btu in
2025, largely as a result of State mandates for renewable electricity
generation and the effect of production tax credits. About 60 percent
of the projected demand for renewables in 2025 is for grid-related
electricity generation (including combined heat and power), and the
rest is for dispersed heating and cooling, industrial uses, and fuel
blending.
International Energy Outlook
The IEO2004 includes projections of regional energy consumption,
energy consumption by primary fuel, electricity consumption, carbon
dioxide emissions, nuclear generating capacity, and international coal
trade flows. World oil production and natural gas production forecasts
are also included in the report. The IEO2004 projects strong growth for
worldwide energy demand through 2025. Total world consumption of
marketed energy is expected to increase by 54 percent, from 404
quadrillion Btu in 2001 to 623 quadrillion Btu in 2025.
World Energy Consumption by Region
The IEO2004 reference case outlook shows the strongest growth in
energy consumption in the developing nations of the world (Figure 6).
The fastest growth is projected for the nations of developing Asia,
including China and India, where robust economic growth accompanies the
increase in energy consumption over the forecast period. GDP in
developing Asia is expected to grow at an average annual rate of 5.1
percent, compared with 3.0 percent per year for the world as a whole.
With such strong growth in GDP, demand for energy in developing Asia is
projected to double over the forecast period, accounting for 40 percent
of the total projected increment in world energy consumption and 70
percent of the increment for the developing world alone. Energy demand
increases by 3.0 percent per year in developing Asia as a whole and by
3.5 percent per year in China and 3.2 percent per year in India.
Developing world energy demand is projected to rise strongly
outside of Asia, as well. In the Middle East, energy use increases by
an average of 2.1 percent per year between 2001 and 2025, 2.3 percent
per year in Africa, and 2.4 percent per year in Central and South
America.
In contrast to the developing world, slower growth in energy demand
is projected for the industrialized world, averaging 1.2 percent per
year over the forecast period. Generally, the nations of the
industrialized world can be characterized as mature energy consumers
with comparatively slow population growth. Gains in energy efficiency
and movement away from energy-intensive manufacturing to service
industries result in the lower growth in energy consumption. In the
transitional economies of Eastern Europe and the former Soviet Union
(EE/FSU) energy demand is projected to grow by 1.5 percent per year in
the IEO2004 reference case. Slow or declining population growth in this
region, combined with strong projected gains in energy efficiency as
old, inefficient equipment is replaced, leads to the projection of more
modest growth in energy use than in the developing world.
World Energy Consumption by Energy Source
Oil will continue to be the world's dominant energy source. Oil's
share of world energy remains unchanged at 39 percent over the forecast
period. China, India, and the other countries of developing Asia
account for much of the increase in oil use in the developing world
and, indeed, in the world as a whole (Figure 7). Developing Asia oil
consumption is expected to grow from 14.8 million barrels per day in
2001 to 31.6 million barrels per day in 2025, an increase of 16.9
million barrels per day. The developing Asian increase in oil use
accounts for 39 percent of the total world increment in oil use over
the forecast period. China and India alone account for one-fourth of
the world oil increment between 2001 and 2025. In the industrialized
world, increases in oil use are projected primarily in the
transportation sector. In the developing world, demand for oil
increases for all end uses, as countries replace non-marketed fuels
used for home heating and cooking with diesel generators and for
industrial petroleum feedstocks.
The IEO2004 reference case shows supply able to keep up with demand
over the next 20 years, with world oil consumption in the range of 120
million barrels per day by 2025. EIA's view, which is based on
information from the latest United States Geological Survey (USGS)
World Petroleum Assessment on oil resources and reserves, is that
potential supply concerns to 2025 arise primarily from obstacles to
investment in capacity growth rather than resource adequacy. Our view
in this regard is shared by many analysts, but differs from some
analysts who are concerned about an imminent ``peak oil'' problem. In
EIA's view, the ultimate size of an oil field is rarely known when it
is discovered. Rather, with drilling and improved technology, the full
extent of the recoverable resource typically increases over time. This
process is demonstrated at the national level by the increase in U.S.
proved reserves of oil in 5 of the last 7 years notwithstanding
significant production and limited discoveries. Global proved reserves
are also higher today than they were 30 years ago, despite
substantially increased production.
While we believe that sufficient oil resources are available to
meet the projected growth in demand to 2025, substantial investment
will be required to bring these resources into production. Although the
IEO2004 reference case forecast assumes that the necessary investments
will be made based on economic criteria, there are several important
barriers to investment that could impede realization of this scenario.
Some of the main challenges are: 1) international major producers lack
access to resources in some key countries; 2) national oil companies
are guided by governments and are not always motivated to expand
capacity based on economic criteria; 3) political instability limits
development in some regions; and 4) poor economic terms that slow
investment.
Natural gas demand is projected to show an average annual growth of
2.2 percent over the forecast period. Gas is seen as a desirable option
for electricity, given its efficiency relative to other energy sources
and the fact that it burns more cleanly than either coal or oil. The
most robust growth in gas demand is expected among the nations of the
developing world, where overall demand is expected to grow by 2.9
percent per year from 2001 to 2025 in the reference case (Figure 8). In
the industrialized world, where natural gas markets are more mature,
consumption of natural gas is expected to increase by an average of 1.8
percent per year over that same time period, with the largest increment
projected for North America at 12.9 trillion cubic feet. China, India,
and the other nations of developing Asia are expected to experience
among the fastest growth in gas use worldwide, increasing by 3.5
percent per year between 2001 and 2025.
Coal remains an important fuel in the world's electricity markets
and is expected to continue to dominate fuel markets in developing
Asia. Worldwide, coal use is expected to grow slowly, averaging 1.5
percent per year between 2001 and 2025. In the developing world, coal
increases by 2.5 percent per year and will surpass coal use in the rest
of the world (the industrialized world and the EE/FSU combined) by
2015. Coal continues to dominate energy markets in China and India,
owing to those countries' large coal reserves and limited access to
other sources of energy. China and India account for 67 percent of the
total expected increase in coal use worldwide (on a Btu basis) (Figure
9). Coal use is projected to increase in all regions of the world
except for Western Europe and the EE/FSU (excluding Russia), where coal
is projected to be displaced by natural gas and, in the case of France,
by nuclear power for electric power generation.
The largest increase in nuclear generation is expected for the
developing world, where consumption of electricity from nuclear power
is projected to increase by 4.1 percent per year between 2001 and 2025.
Developing Asia, in particular, is expected to see the largest
increment in installed nuclear generating capacity over the forecast,
accounting for 96 percent of the total increase in nuclear power
capacity for the developing world as a whole. Of the 44 gigawatts of
additional installed nuclear generating capacity projected for
developing Asia, 19 gigawatts are projected for China, 15 for South
Korea, and 6 for India.
Consumption of electricity from hydropower and other renewable
energy sources is expected to grow by 1.9 percent per year over the
projection period. Much of the growth in renewable energy use is
expected to result from large-scale hydroelectric power facilities in
the developing world, particularly among the nations of developing
Asia. China, India, and other developing Asian countries are
constructing or planning many new, large-scale hydroelectric projects
over the forecast period, including China's 18.2-gigawatt Three Gorges
Dam project which is scheduled to be fully operational by 2009. The
Indian government has plans to add 50 gigawatts of hydroelectric
generating capacity by 2012.
Alternative International Forecasts
As noted earlier, there is considerable uncertainty associated with
any long-term forecast. Changes in key assumptions about economic
growth and energy intensity lead to substantial differences in the
projections for 2025. To quantify this uncertainty, IEO2004 includes
high and low economic growth cases. The IEO2004 reference case shows
total world energy consumption reaching 623 quadrillion Btu in 2025,
but this varies substantially under different assumptions about
economic growth, ranging from 542 quadrillion Btu (in the low economic
growth case) to 710 quadrillion Btu (in the high economic growth case).
Thus, there is a substantial range of 168 quadrillion Btu, or about
one-fourth of the total consumption projected for 2025 in the reference
case, between the projections in the high and low economic growth
cases.
While it is true that there is a great deal of uncertainty in long-
term forecasts, it is equally true that EIA's forecast of worldwide
energy use is largely in agreement with projections from other
organizations that provide comparable forecasts. The International
Energy Agency's (IEA) World Energy Outlook 2004 (October 2004),
Petroleum Economics, Ltd's (PEL) World Long Term Oil and Energy Outlook
(March 2004), and PIRA Energy Group's (PIRA) Retainer Client Seminar
(October 2004) all produce forecasts that are comparable to the
IEO2004. Three of the four forecasts expect worldwide energy use to
expand by about 1.8 to 1.9 percent per year (IEO2004, IEA, and PEL)
between 2000 and 2020 (Figure 10). PIRA proffers a more robust
forecast, expecting energy use to expand by 2.4 percent per year, but
the PIRA forecast only extends to 2015.
The forecasts show some variation in expectations for the world's
future fuel mix. The forecasts do have similar expectations about the
growth of oil over the 2000 to 2020 time period (except for PIRA, which
forecasts only to 2015), projecting average annual increases of between
1.6 percent (PEL) and 1.9 percent (PIRA). They also generally agree
that natural gas will be among the fastest growing energy sources in
the forecast, although the increase in world natural gas demand in the
IEO2004 at 2.1 percent per year is somewhat lower than the other
forecasts, where the growth in natural gas use ranges from 2.6 percent
per year to 2.8 percent per year. However, the PIRA forecast sees a
much higher increase in coal use than do any of the other forecasts.
IEO2004 expects higher growth for nuclear power than the other
forecasts, and the IEA projects higher expected growth in renewables
than the other forecasts.
Conclusion
Continuing economic growth in populous countries of the world, such
as China, India, and the United States, is expected to stimulate more
energy demand, with fossil fuels remaining the dominant source of
energy. While our analysis suggests that world fossil energy resources
are adequate to meet demand requirements, it also suggests that the
countries accounting for most of the growth in fossil energy
consumption will increasingly rely on imports. Dependence on foreign
sources of oil is expected to increase significantly for China, India,
and the United States. These three countries alone account for 45
percent of the world increase in projected oil demand over the 2001 to
2025 time frame. A key source of this oil is expected to be the Middle
East.
Furthermore, although natural gas production is expected to
increase in all of these countries, natural gas imports are expected to
grow faster. In 2001, India and China produced sufficient natural gas
to meet domestic demand, but, by 2025, natural gas production in these
two countries will only account for about 60 percent of demand. In the
United States, reliance on domestic gas supply to meet demand falls
from 86 percent to 72 percent over the projection period. The growing
dependence on imports in these three countries occurs despite
efficiency improvements in both the consumption and the production of
natural gas.
In this environment, the level of energy prices, particularly oil
prices, is highly uncertain. It depends on the adequacy of investment
in exploration and production efforts, technology, and infrastructure.
It also depends on the actual rate of growth in demand, political
stability around the world, and improvement in end-use technologies.
Higher energy price trends can lead to major changes in the energy
supply slate and, if energy prices are high enough, the level of
demand. For example, in a high oil price case completed as part of
AEO2005, gas-to-liquids and coal-to-liquids became important parts of
total U.S. energy supply by 2025. Unconventional oil and natural gas
resources can also play a much larger role.
This concludes my testimony, Mr. Chairman and members of the
Committee. I will be happy to answer any questions you may have.
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______
Mr. Gibbons. Thank you very much, Mr. Caruso. We appreciate
your insight. And your testimony is always very helpful to us
as we go forward in this discussion. And we turn now to Mr.
Jeffrey Logan, who is the China program manager for the
International Energy Agency. Mr. Logan, the floor is yours. And
by the way, for each of our witnesses, we will, by unanimous
consent, enter into the record your full and complete written
statement. And of course, you're free to summarize, within a 5-
minute timeframe, your remarks, if you wish.
STATEMENT OF JEFFREY LOGAN, CHINA PROGRAM MANAGER,
INTERNATIONAL ENERGY AGENCY
Mr. Logan. Mr. Chairman, thank you very much, members of
the Subcommittee and ladies and gentlemen. I'm very happy to be
here this morning on behalf of the International Energy Agency
to talk about China's energy sector. Although China is not a
member of the International Energy Agency, we have clearly been
engaging the country much more seriously to better understand
its surging energy demand and take appropriate steps where
possible. I'm here primarily to discuss the oil and gas sector
in China, although I would like to start with a few general
words about a trend in China in the energy sector that could
have very important long-term implications and that trend has
to do with the energy economic relationship in China.
Until the late 1990s, China's average reported energy
consumption grew only half as quickly as the economy. In other
words, its energy elasticity was surprisingly low, 0.5. There
are serious and well-known questions about the validity of
official Chinese statistics, but energy use still grew more
slowly than gross domestic product, even with these data
problems in account. This was a remarkable achievement for a
developing country and it resulted in significant savings in
energy use and greenhouse gas emissions. But since the new
millennium, energy consumption in China has surged.
In 2004, the energy elasticity rose to over 1.5, meaning
there is a 1.5 percent growth in energy use for every 1 percent
growth in GDP. Energy experts in China and abroad have provided
very little information that accurately describes why the
economy has been using so much more energy over the past 5
years. Indeed, the changing economic relationship caught
Chinese planners themselves off guard and is largely
responsible for the serious energy shortages that exist in
China right now, especially in the electricity sector.
Historically, China's economic growth has gone through
cycles of rapid expansion followed by periods of slower growth.
We believe that China is currently in the peak of one of its
expansionary periods and is likely to grow less rapidly in the
near future. But we need to understand more fully the apparent
changes in China's economic and energy relationship as the
impact of such a change over even just a few years can have a
lasting impact on global markets, energy security and
greenhouse gas emissions.
Now on to the oil sector. China's opaque oil sector has
attracted immense attention over the past few years. Oil demand
in China grew by over 27 percent in the past 2 years, while
domestic production has been largely stagnant. As a result,
crude imports have climbed by 75 percent between 2002 and 2004.
And China now relies on imported crude for 4 of every 10
barrels that it consumes. Perhaps surprisingly, though, Chinese
oil demand in 2004 equaled only one-third the level of the
United States. IEA forecasts envision Chinese demand continuing
to grow to the year of 2030 when it reaches nearly 14 million
barrels per day. At that time, Chinese crude imports would
roughly equal those of the United States today.
Still, total Chinese demand then will be one-third less
than what the United States consumes right now. Three drivers
account for the most recent growth surge in China's oil demand.
Increasing vehicle ownership, growing industrial demand for
petrochemical feed stocks and perhaps most unusually the
surging need for oil-fired backup power generation due to the
severe electricity shortages there. The vehicle and
petrochemical sectors are likely to continue to grow steadily
in the future, but we anticipate a fall-off in the amount of
oil that is used for backup power generation in the near future
as more coal and hydroelectric plants come on-line. The timing
of this falloff, however, is difficult to predict, but we
anticipate it will start in the second half of 2005.
Rising crude imports in China have alarmed government
policymakers. They have developed a multi-pronged approach to
help address the country's looming energy insecurity. The
measures include promoting State-owned oil companies to
purchase overseas equity oil, diversifying sources of oil
supply, launching construction of strategic petroleum reserves,
developing alternatives to oil and enacting demand side
efficiency measures. I have outlined each of these measures in
my written testimony.
The IEA continues to believe that global oil reserves are
sufficient to accommodate global demand through 2030 and
beyond. More important uncertainties however, relate to
maintaining stable output among major producers, dealing with
environmental issues like climate change, and marshalling the
necessary investment in each link of the oil supply chain.
China has taken major steps to boost the use of natural gas
primarily as a way to improve urban air quality.
But China's natural gas policy is fragmentary and
development occurs on a project-by-project basis rather than by
focusing on the needs of the entire gas chain. Developments in
China's gas sector have surprised many critics, though. The
first gas pipeline to Beijing in the late 1990s was widely
predicted to be an economic failure, the main criticism being
that the government focused only on a supplied push strategy
and seemed to ignore the needs of consumers. But gas demand has
developed fairly quickly however, and a second pipeline to
Beijing is now under development.
The new cross country West-East Pipeline faces similar
criticism. Potential users have little incentive to switch from
coal. The pipeline started commercial operation in late 2004, a
year ahead of schedule, and will slowly ramp up to a design
capacity in the year 2007. The pipeline faces potential
competition from imported LNG from Shanghai where several
import terminals are under consideration. Promoting natural gas
use in China as a substitute for coal and oil serves global
interests in energy security, climate change and trade. Global
gas supply for LNG production is expanding rapidly and rising
Chinese imports are not likely to stress the international gas
markets as they have in the oil sector. Although Chinese energy
companies will face increasing challenges in global energy
markets, they have demonstrated a growing capacity to compete.
More than ever, U.S. policy should be focused on engaging China
on energy issues because the security, commercial and
environmental implications are too great to ignore. Thank you
very much for your attention and I would be happy to answer any
questions you might have.
[The prepared statement of Mr. Logan follows:]
Statement of Jeffrey Logan, Senior Energy Analyst and
China Program Manager, International Energy Agency
Summary
Chinese energy demand has grown robustly over the past three years
and is likely to remain intimately tied to future economic performance.
The average Chinese citizen consumed only one-fourteenth as much oil as
the average American in 2004, but China will play an increasingly
important role in all aspects of the global petroleum market. The
current frenzy to purchase overseas oil assets by Chinese state-owned
oil companies is likely to slow in the near term as policymakers
realize more effective ways to boost energy security. China does not
currently import natural gas, but that will change by next year and 5-
10 LNG terminals are possible by 2015. Global economic, environmental,
and security interests related to China's energy sector are best served
through an active program of collaboration to promote energy
efficiency, natural gas utilization, and coordinated use of strategic
petroleum reserves.
Overview
China has charted a bold course of economic reforms over the past
25 years, achieving mixed, but often remarkable results given the
development challenges it faces. Reported average annual GDP growth of
over nine percent has improved living standards for hundreds of
millions of Chinese people to a level unmatched in any point of Chinese
history. China now plays a key role in the supply and demand of many
global commodity markets including steel, cement, and oil. (See Figure
1.) If sustained, China's development will likely create the world's
largest economy, as measured in purchasing power parity, in about two
or three decades. Per capita wealth, however, will remain far below
OECD levels. Enormous opportunities and challenges await commercial,
governmental and social interests across the globe in parallel with
China's development.
This document provides an update on current oil and natural gas
trends in China, and looks at future growth projections. Where
possible, it describes potential impacts on U.S. interests and
recommends ways for U.S. policy to help overcome negative impacts. It
is based largely on the International Energy Agency's dialogue and
collaboration with China as a Non-Member Country participant. It begins
with an overview of recent changes in the Chinese energy-economy
relationship.
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A Changing Energy-Economic Relationship
Chinese energy demand has surged since the arrival of the new
millennium, when a new round of investment-driven economic growth
began. Preliminary Chinese data indicate that the energy elasticity of
demand (the growth rate of energy consumption divided by that of GDP)
surpassed 1.5 in 2004. In other words, for every one percent increase
in GDP, energy demand grew by over 1.5 percent. The shift reverses
China's recent historical trend of maintaining energy elasticity below
1.0. (See Figure 2.) For most developing countries, including India,
Brazil, and Indonesia, energy elasticities greater than 1.0 are normal,
but for China it is a groundbreaking change.
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Many analysts rightly question the validity of Chinese economic and
energy statistics; GDP is likely underreported right now, although from
the late 1970s until the end of the 1990s, it was considered
overstated. Likewise, Chinese energy consumption, coal in particular,
is tracked poorly. Coal use from 1996-1999 is now regarded as massively
underestimated by analysts both inside and outside of China due to
untracked output from small coal mines. One of the contributing factors
behind China's current energy crunch is indeed these poorly tracked
energy statistics: good energy policy and energy planning require
accurate data.
Despite the problems with data quality, the general trend raises
concern. Is this new energy-economy relationship in China temporary or
does it indicate a deeper structural change within the economy? The
difference could have a profound impact on future global energy
markets, energy security, and environmental quality. Almost no
authoritative research has been published to explain the surging
elasticity. A clearer understanding of what is happening in Chinese
energy markets may never be uncovered, but more research into the new
energy-economic relationship would benefit the international community
and China. More importantly, greater Sino-international collaboration
on energy efficiency would serve global trade, environmental, and
security interests.
Oil Sector: The Search for Security
China surpassed Japan in late 2003 to become the world's second
largest petroleum consumer. 1 In 2004, Chinese demand
expanded nearly 16 percent to 6.38 million barrels per day (b/d), about
one-third the level in the United States. (See Table 1.) Domestic crude
output in China has grown only very slowly over the past five years. At
the same time, oil demand has surged, fueled by rapid
industrialization. Imports of crude oil grew alarmingly in 2003 and
2004 to meet demand, increasing nearly 75 percent from 1.38 million
barrels per day (b/d) in 2002 to 2.42 million
b/d in 2004. Imports now account for 40 percent of Chinese oil demand.
---------------------------------------------------------------------------
\1\ Contrary to many press reports, China is not the second largest
importer of crude oil. That distinction still belongs to Japan, which
imported more than twice as much oil as China in 2004.
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As described in the IEA's March 2005 Oil Market Report, a
significant driver of recent oil demand growth in China--perhaps on the
order of 250-350 thousand barrels per day--has been the need for oil-
fired back-up power generation in the face of serious electricity
shortages. Other contributing factors are the rise in personal car
ownership and growing industrial petrochemical needs, which are likely
to continue growing fairly steadily. However, the amount of fuel oil
and diesel used for back-up power generation will likely decline, as
China closes the generation shortage by installing new coal, natural
gas, hydro, and nuclear power plants. It has also promised to institute
tougher new demand-side efficiency measures.
Chinese policymakers and state-owned oil companies have embarked on
a multi-pronged approach to improve oil security by diversifying
suppliers, building strategic oil reserves, purchasing equity oil
stakes abroad, and enacting new policies to lower demand.
Diversifying Global Oil Purchases
Over the past decade, Chinese crude imports have come from a much
wider and more diverse set of suppliers. In 1996, most of China's crude
imports came from Indonesia, Oman, and Yemen. By 2004, Saudi Arabia was
China's largest supplier accounting for 14 percent of imports, with
Oman, Angola, Iran, Russia, Vietnam, and Yemen together supplying
another 60 percent, and the remainder which came from a long list of
other suppliers. (See Figure 3.) By diversifying crude suppliers, China
has lowered the risk of a damaging supply disruption.
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Establishing Strategic Oil Reserves
China's 10th Five-Year Plan (2001-2005) called for the construction
and use of strategic petroleum reserves by 2005. Construction has begun
at one of four sites slated to store government-owned supplies. Chinese
officials plan to gradually fill up to 100 million barrels of storage
by 2008 (equivalent to 35 days of imports then). Original plans called
for boosting stocks to 50 days imports in 2010, but this may be
slightly delayed. On the other hand, the recent surge in imports has
led Chinese policymakers to consider an even more aggressive long-term
plan for 90 days of stocks, perhaps by 2020.
The IEA has shared experiences with China on member country
stockpiling practices since 2001. Chinese officials have stated their
intent to slowly fill their new stocks depending on global conditions.
They have demonstrated less concern, however, in coordinating release
of their future stocks as part of a larger global system. In other
words, China may be more inclined to use strategic stocks to influence
prices even without the threat of severe supply disruptions. We are
exploring this.
Overseas Equity Oil
Chinese national oil companies (NOCs) have been active abroad for
over a decade, but their hunt for overseas oil assets has accelerated
in the past few years. This drive to buy overseas assets is a
policymaking reaction to the rapidly growing need to import crude oil,
and is an attempt to boost energy security. Most outside analysts
question the efficiency and effectiveness of this policy; the act of
owning resources, especially ones purchased recently at relatively high
prices, does not significantly improve oil security because the risk of
supply disruptions is largely ignored.
Chinese oil companies are not alone in overseas investment. The
country's ``going out'' strategy is an attempt to create stronger
Chinese companies, effectively use surplus foreign exchange reserves,
and deal with over-invested domestic sectors. While a significant
number of oil-related announcements have been made in the press since
2001, much of this activity is still waiting to be finalized. The lack
of transparency over investment amounts, production sharing contract
details, and proven petroleum reserves may create a more successful
image of Chinese companies than is actually the case.
Until recently, Chinese companies seemed most comfortable operating
in locations not dominated by the oil majors. This meant countries like
Sudan, Angola, and Iran. For example, over half of Chinese overseas oil
production currently comes from Sudan. Activity has picked up in other
areas recently, however, including Russia, Kazakhstan, Ecuador,
Australia, Indonesia, and Saudi Arabia to name just a few. Chinese
companies appear to be improving their ability to purchase assets
without overpaying, as earlier reports suggested, but this conclusion
is only supported with anecdotal information. (See Text Box 1.)
[GRAPHIC] [TIFF OMITTED] T0126.012
A key strength of Chinese NOC activity abroad is their ability to
package complete investment deals in producing countries. In exchange
for ownership of oil resources there, they can offer associated
economic development projects (hospital and school construction, for
example), investment opportunities in the lucrative Chinese market, and
potential military transactions. International oil companies often
complain that they cannot compete against these packaged Chinese deals.
But Chinese NOCs are also limited in what they can accomplish due to
technology shortcomings and lack of experience.
In 2003, Chinese state-owned oil companies pumped about 0.4 million
b/d of equity oil. The figure is projected to rise by 8 percent
annually thru 2020 when it hits 1.4 million b/d. At that time, this
would amount to approximately 1.5 percent of global petroleum output,
indicating that Chinese companies would have little influence on
overall market trends.
Leading the drive among Chinese state-owned companies, China
National Petroleum and Gas Company (CNPC) claims to have petroleum
assets in 30 countries. It plans to spend $18 billion in overseas oil
and gas development between now and 2020. Most of CNPC's overseas
production currently comes from Sudan, Kazakhstan, and Indonesia. Many
speculated that CNPC would take a share in the restructured assets of
Yukos, but a $6 billion ``loan'' to Rosneft was used only for long-term
oil purchases.
A disappointment for China during the year included the Russian
decision to build an oil pipeline to Nakhodka with Japanese
contributions, rather than to Daqing in northeast China with CNPC's
participation. Discussions are still ongoing regarding a potential spur
line that would feed China's northeast. Russian oil sales from Siberia
to China would serve U.S. interests in general as they would offset
long-distance demand from the Middle East. China and Kazakhstan have
made rapid progress in negotiating and starting construction on a
cross-border pipeline that will initially deliver 0.2 million b/d of
crude and products to Xinjiang province, and possibly later doubling to
0.4 million b/d. China appears to have made a geopolitical decision to
secure its oil supplies with this line as costs would probably not pass
a commercial test. Initial petroleum for this pipeline will likely be
supplied by Russia and not Kazakhstan. Generally, more pipelines
evacuating landlocked resources is a good thing.
China Petroleum Company (SINOPEC) is newer to the international
game than CNPC and hopes to start pumping smaller quantities of equity
oil in 2005 from activities in Yemen, Iran, and Azerbaijan. Perhaps the
largest story in 2004 was SINOPEC's agreement in Iran to spend $70
billion over 25 years to purchase LNG cargoes and participate in
upstream oil activities there. The vast majority of this investment
will be used to purchase long-term LNG supplies; the depth of the
economic ties linking Iran and China in this deal should not be
overstated.
China National Overseas Oil Company (CNOOC), the most progressive
and outwardly-oriented of the Chinese state-owned oil companies, has
been very active in Australia and Indonesia. In 2004, it succeeded in
securing significant natural gas stakes in both countries. CNOOC
surprised the global community in early 2005 when it was rumored to
want to purchase Unocal for roughly $13 billion. Many analysts believe
that CNOOC would ultimately be only interested in keeping the Asian oil
and gas assets of Unocal.
In summary, Chinese companies are increasingly active abroad and
appear to be improving their business skills. They are unlikely to be
able to purchase enough assets through over the coming decades to
greatly influence the availability or pricing of global oil supplies.
Furthermore, owning overseas assets does little to improve physical
energy security without the capability to project strong military
power. Anecdotal reports already indicate that some Chinese
policymakers are beginning to question the wisdom of trying to boost
energy security by purchasing overseas equity assets. Other Asian
countries have realized it is more efficient to rely on global markets,
strategic reserves, and demand-side efficiency measures. It seems
likely, therefore, that the overseas purchasing binge will soon slow.
Demand-Side Measures
Per capita oil consumption in China is only one-fourteenth the
level in the United States, indicating that strong growth could
continue for many years. The transport sector in China will likely
experience the strongest demand for oil over the mid- to long-term.
Currently, there are roughly 24 million vehicles in China, with
projections anticipating 90-140 million by 2020. This would push
transport demand from 33 percent of total Chinese petroleum demand to
about 57 percent (from 1.6 million b/d in 2004 to roughly 5.0 million
b/d in 2020).
To partially address this problem, China enacted new automobile
efficiency standards in late 2004. In Phase I, running from mid-2005
until January 2008, no increase in fleet fuel consumption will be
allowed without penalties. Phase II would then begin and require a 10
percent reduction in fleet fuel consumption.
Another measure that has gained renewed attention is the imposition
of a vehicle fuel tax. This policy would ban all road use fees
instituted at the local level and replace them with a nationwide tax
ranging from 30-100 percent of the current price of vehicle fuel.
Gasoline prices in most Chinese cities, for example, are currently the
equivalent of about $1.60 per gallon. The fuel tax, if enacted, would
raise gasoline prices to $2-$3 per gallon. The initiative has been
discussed for years but lacked uniform support from policymakers. It
has gained new steam over the past year with the surge in imported
crude volumes.
[GRAPHIC] [TIFF OMITTED] T0126.013
The Long-Term View
Without measures to limit demand or create alternative fuels,
Chinese oil consumption appears set to grow rapidly for the foreseeable
future. The World Energy Outlook 2004 forecasts Chinese petroleum
demand in 2030 at just under 14 million bpd, about one-third less than
current demand in the United States. (See Figure 3.) China's import
dependency will continue to grow, however, reaching 75 percent. In
2030, China would be importing as much oil as the United States did in
2004.
The IEA believes there are enough worldwide petroleum reserves to
meet global demand through 2030 and beyond. More important uncertainty
relates to marshalling the necessary upstream investments, maintaining
stable petroleum output in major producer countries, building mid- and
downstream infrastructure in consuming countries, and dealing with
environmental issues like climate change. Furthermore, competition
between China and India to purchase overseas oil assets is raising the
stakes in upstream oil markets, but it is premature to say how this
will evolve and impact long-term U.S. interests.
The Promise of Natural Gas in China: Whither Policy?
China has taken major steps since 1997 to boost natural gas use,
mainly as a way to improve urban air quality. But gas was largely
ignored for most of China's modern history and new market-oriented
measures are needed to fully encourage natural gas use.
Domestic gas production currently stands at 40 billion cubic meters
(BCM) and accounts for roughly 3 percent of the country's total energy
demand. Chinese policymakers envision gas use rising substantially
through 2020, when demand would reach 200 BCM and account for 10
percent of total energy demand. Baseline IEA estimates are currently
less optimistic of future gas markets in China 2, but the
potential for dramatic change cannot be discounted. With the right
policy framework, gas use could be significantly higher than even
Chinese government forecasts.
---------------------------------------------------------------------------
\2\ The World Energy Outlook 2004 forecasts natural gas accounting
for 6 percent of China's total final energy consumption in 2030.
---------------------------------------------------------------------------
Chinese policymakers increasingly view natural gas as the fuel of
choice for its environmental, security, and industrial advantages. But
the gas industry is in its infancy and many barriers must be overcome
before this relatively clean energy source can make a significant
impact. The International Energy Agency recently completed a detailed
study of China's gas sector and delivered important recommendations to
the Chinese government. 3 Provided below is a summary of why
China is promoting development of the gas sector, the challenges it
faces, and how some of these barriers could be addressed.
---------------------------------------------------------------------------
\3\ Interested readers should consult this IEA publication for more
complete information: ``Developing China's Natural Gas Market: Policy
Framework and Investment Conditions,'' International Energy Agency,
Paris, 2002.
---------------------------------------------------------------------------
Drivers for Natural Gas
China is taking new measures to promote the use of natural gas for
three reasons. First, natural gas used in place of coal can help China
address environmental problems that have become urgent economic and
social issues. Replacing coal with natural gas basically eliminates
emissions of sulphur oxides and particulates, the two most serious
local and regional pollutants. Gas also offers steep reductions in
nitrogen oxide and greenhouse gas emissions.
Second, natural gas can help China diversify its energy resources
and address growing concerns over energy security. Imported crude oil
now accounts for 40 percent of annual demand and will likely continue
to grow rapidly. Additionally, coal demand has soared since 2002,
resulting in localized transportation bottlenecks. China could help
alleviate these energy security concerns by increasing reliance on
natural gas. International gas markets are better able to supply China
over the coming decades without jeopardizing overall energy security
compared to oil because many new producers are ramping up their output.
Finally, natural gas has the potential to accelerate modernization
of the country's industrial facilities. Most of China's industry is
based on coal-burning technology, which is inherently less efficient
than gas-fired equipment. Modern natural gas boilers, for example,
convert about 92 percent of the energy contained in natural gas to
useable heat. Coal boilers on the other hand, waste 20 percent or more
of the input energy in the process. Similarly, advanced combined-cycle
gas turbines used to generate electricity are nearly 60 percent
efficient, while coal-fired steam turbines convert only about 40
percent of the energy in coal into useful electricity. Greater use of
natural gas would also free up China's rail system to transport higher-
value goods.
Developments and Hurdles
Important gas projects have been launched to support China's
ambitious development targets for natural gas. A 3,900 kilometre, $24
billion West-East Pipeline started commercial operation in late 2004.
(See Figure 4.) Throughput will slowly ramp up to 12 BCM in 2007 as
downstream projects and distribution networks are completed. The fact
that CNPC completed the pipeline one year ahead of schedule, and
without participation from its planned investment partners (Shell,
Exxon-Mobil, and Gazprom), is testament to the drive and ability of
Chinese energy companies. Although many outside observers question the
economics of the pipeline, similar doubts were raised when China built
its first gas pipeline to Beijing. The economics were shaky at the
time, but that line is now oversubscribed and a second line will begin
delivering gas to the capital in 2006.
[GRAPHIC] [TIFF OMITTED] T0126.014
Two LNG terminals are also under construction in southeastern
China, with perhaps a dozen more under discussion and consideration.
LNG imports in China became an extremely hot topic in 2004 as coal
prices rose substantially, along with incomes and air pollution. If
even half of the LNG terminals currently under discussion are built,
China could be importing 15-30 BCM of natural gas by 2015.
Talks continue on international natural gas pipelines with Russia
and Kazakhstan as well, but progress has been slow. A joint feasibility
study funded by Russia, China, and South Korea that would deliver 20
BCM of Russian gas to China and 10 BCM to South Korea is currently
under evaluation. This pipeline may also have been ahead of its time,
but Russia's Gazprom blocked any further discussion of the deal.
Important hurdles exist for natural gas market development, including:
Natural gas is expensive compared to coal if
environmental costs are not included;
China is not believed to be endowed with abundant and
cheap gas reserves, and known supplies are often located far from the
main centers of demand;
Gas supply infrastructure is fragmented and huge
investment is needed to finance its expansion;
China lacks a legal and policy framework to encourage
investment in the gas sector; and
There is a lack of knowledge over how to best develop
natural gas technology and markets.
Perhaps the weakest link in China's current natural gas chain is
the perception of high costs that results in weak demand for gas.
Without stronger market pull for gas, the entire natural gas chain will
remain weak, no matter how much the government tries to development the
market by administrative dictate.
To realize the ambitious target for gas market development in
China, there is a need for the government to go beyond the ``project-
by-project'' approach by publishing a comprehensive national natural
gas policy. Such a policy could address issues of gas exploration,
development, distribution, pricing, marketing as well as imports. It
should be part of a coherent national energy policy, as China's gas
industry is intertwined with the coal and the electrical power
industry, and with environmental policy.
Preparation of a national natural gas law is also an urgent
priority. Such a framework would provide a clear legal expression of
the government's policy and strategy for gas industry development and
the ground rules for operation of the gas industry. Almost every
country where a natural gas industry has been established, whether
based on indigenous resources or imports, has adopted a gas law in the
early stages of market development. Adopting such a law would help
create a more stable environment for investment and operation, reduce
uncertainty and investment risk, and consequently lower the cost of
capital.
Theoretically, environmental protection, in particular the
reduction of local atmospheric pollution, is the key driving force for
increased gas use in China. However, important challenges remain in
turning this theoretical driver into a real market mover. China has put
in place a whole set of environmental laws and regulations on air
pollution, but a lack of adequate means for enforcing implementation
makes most of them ineffective.
China lacks a central body to address coordination the country's
overall energy strategy. Although an ``Energy Bureau'' was established
several years ago, it does not have the capacity to implement effective
and sufficient policy measures. There are roughly 30 employees at the
Energy Bureau in China, while most OECD countries would have hundreds,
if not thousands, of employees to create the policy framework and
oversight needed to steer a modern energy industry. Given the current
shortages of electricity and coal, Chinese planners announced the
formation of an Energy Task Force in early March 2005 to further
strengthen overall energy policy development. This step, however, is a
disappointment to some who called for the creation of an energy
ministry.
Synopsis
China's rapid economic growth has had a mixed impact on global
markets. While China must take some of the blame for rising global
commodity prices recently, it rarely receives recognition for helping
keep the price of manufactured products low. China's rapid growth over
the past few years should also be kept in perspective: China's 1.3
billion people currently consume only one-half the energy as the 290
million citizens in the United States, and Chinese oil demand is only
one-third as large. Chinese policymakers have done a laudable job of
steering economic reform, but a huge number of challenges--from
population imbalances and environmental pollution to political reform
and AIDS--await solutions before the country can raise individual
standards of living to anywhere near current OECD levels. The
international community must engage China in order to minimize the
challenges and maximize the opportunities that lie ahead.
Chinese NOCs have become much more active abroad, especially in
regions not dominated by the major international oil companies. They
have strategic advantages that can help them open doors in some
producing countries, but their standards for safety, governance, and
transparency remain an issue for all stakeholders. Most importantly,
the purchase of overseas assets by Chinese NOCs is not likely to boost
the country's energy security in a cost-effective manner since this act
does not address potential supply and transit disruptions. The dash for
overseas assets is likely to begin slowing in the near-term as
policymakers digest this reality and weigh the high prices that NOCs
are paying for sometimes questionable assets. Current estimates do not
foresee Chinese companies playing a big enough role abroad to skew
overall long-term oil market pricing or security, although rising
domestic demand is clearly one reason for the current high global oil
price. Chinese companies may also catalyze the development of more
global resources than would have been case without their presence.
______
Mr. Gibbons. Thank you very much, Mr. Logan. Again, this
panel certainly appreciates your insight on these issues and
your testimony has been helpful to us. We will turn now to Dave
Menzie, chief of International Minerals Section from the USGS.
Mr. Menzie, welcome, the floor is yours. We look forward to
your testimony.
STATEMENT OF DAVE MENZIE, CHIEF, INTERNATIONAL MINERALS
SECTION, U.S. GEOLOGICAL SURVEY
Mr. Menzie. Good morning, Mr. Chairman. Thank you for the
opportunity to discuss the effects of rapid economic growth in
developing countries on global mineral markets and on the U.S.
economy, national security and global environment. This
statement describes the link between mineral consumption and
economic development, outlines how China's development is
affecting mineral markets and examines some implications of
this development.
Since the late 1980s, economic growth in China has been
between 7 and 9 percent per year, doubling the economy every 8
to 10 years. China has been undergoing industrialization moving
through a series of stages that include development of
infrastructure, followed by development of light manufacture,
followed by development of heavy manufacture, with increased--
and then increased consumption of consumer goods and finally
development of a service economy. Changes in these stages come
roughly at 5-year intervals, with each stage taking about 20
years to complete and with the stages overlapping. During each
stage of the economic development, consumption of particular
mineral commodities rises dramatically by an order of
magnitude.
How is China's economy affecting growth in the mineral
markets? First of all, China's rising consumption of mineral
commodities has resulted in higher prices, lower stock levels
of mineral commodities such as aluminum, copper, gold, iron
ore, nickel platinum group metals and tin. And another result
has been high levels of use of world productive capacity. As a
result, this has left little excess capacity to handle supply
disruptions, and there have been shortages of mineral
commodities that have caused manufacturers to limit production
of finished goods. USGS has received numerous contacts recently
from companies trying to find sources of iron ore and steel
including the types of steel used in the manufacture of
automobile axles and in defense applications.
China is the leading producer of a number of minerals,
including aluminum, antimony, cement, fluorspar, coking coal,
magnesium, rare earths, steel, tin, tungsten and zinc. However,
because of the demand of its economy Chinese exports for
mineral commodities such as rare earths, silver, tin and
tungsten are declining. China controls export of some of its
mineral commodities by requiring export permits and it has
export duties on other commodities. There are a significant
source of a number of mineral commodities for which the U.S. is
dependent for imports of its supplies, and these include things
like antimony, barite, fluorspar, magnesium and there are
things that are used in batteries, ceramics, electronic
components, flame retardants, metallurgical processing and
petroleum drilling.
In order to meet the needs of its growing economy, China
has had to increase both its production and import of mineral
commodities. China's large aluminum, copper and steel
industries are dependent upon imports of raw materials, and
there has been increasing interest by China in owning the
sources of the raw materials for these industries and in
purchasing companies overseas.
What are some of the implications of these trends? First of
all, China and other developing countries are likely to
continue to follow a general pattern of growth. For example, if
Chinese consumers follow the example of their Japanese, Korean,
Malaysian and Taiwanese neighbors, their auto ownership could
rise from about 10 per thousand to 100 cars per 1,000 in about
10 years. Increased environmental residuals from developing
countries will become a major source of both domestic and
international issues, especially looking at transnational
flows. Increased competition could take place among countries
seeking sources of mineral commodities to supply their
industrial production.
National policies regarding both the domestic and
international resource ownership and policies concerning
mineral exports are examples of ways that governments could
attempt to secure advantage for domestic industries. As
developing countries increase their per capita income
consumption, several changes are likely. Higher national
incomes are likely to lead to increased consumption of mineral
commodities, but at the same time, the higher incomes lead to
increased resistance to mineral production. This could create
difficulties for companies that are seeking to increase
exploration for new mineral deposits. Increased volatility in
mineral prices could result from slowdowns in developing
economies. During a downturn, developing economies could turn
up their new production capacity to produce mineral commodities
to an export toward developed countries and resulting in
significant trade disputes.
An example of this was the cement exports to the United
States that took place from Asia in 1997. In developing
countries, high prices and increased competition for mineral
commodities could bring additional economic pressure on our
manufacturers. New strategies could be developed that would use
information technology to increase recycling, reuse and
remanufacture and would help to alleviate this trend. There has
been increasing calls from reliable information on both energy
and mineral consumption in the press in recent months. And
finally, the continued growth in the economies of China and
other large developing countries could result in a period of
real rising prices for mineral commodities such as occurred
following World War II. Thank you, Mr. Chairman.
[The prepared statement of Mr. Menzie follows:]
Statement of W. David Menzie, Geologist, U.S. Geological Survey
Good morning, Mr. Chairman. Thank you for the opportunity to
discuss the effects of rapid economic growth in developing countries on
global mineral markets and on the United States economy, national
security, and the global environment. This statement describes the link
between mineral consumption and economic development; outlines, in
particular, how China's development is affecting mineral markets; and,
examines some implications of this development. This information is
based upon a recently released U.S. Geological Survey (USGS) Open-File
Report 2004-1374, ``China's growing appetite for minerals.''
The USGS, through its Mineral Resources Program, is the primary
Federal provider of scientific and economic information for objective
resource assessments and unbiased research results on national and
international mineral potential, production, trade, consumption, and
environmental effects. This USGS role is clearly defined and unique
from other Federal, State, local or private entities. These USGS
activities provide information ranging from that required for land
planning decisions on specific management units to that required for
national and international economic, foreign policy and national
security decisions.
One of the major international news stories of 2004 was the rapid
growth of the Chinese economy. China's growth earned headline status
because China is consuming large amounts of raw materials and is
becoming a more important factor in global trade and economic growth in
other countries. Development on the scale that is now occurring is
greatly increasing world consumption of minerals and will affect
patterns of mineral production, trade, and consumption.
The Connection Between Minerals and Economic Development
For many developing countries, economic growth has just begun;
however, China's economic growth is not new. Since the late 1980s,
economic growth in China has been between 7 and 9 percent annually,
doubling the economy every 8 to 10 years. China has been undergoing
industrialization, moving through a series of stages that include
development of infrastructure, followed by development of light
manufacture, development of heavy manufacture, increased consumption of
consumer goods, and finally, by the development of a service economy.
Based upon the experiences of the Federal Republic of Germany and Japan
during the post-World War II period, and of the Republic of Korea in
the period 1970-95, changes begin at roughly 5-year intervals and each
of the stages takes about 20 years to complete- with stages
overlapping. During each stage of economic development, consumption of
particular mineral commodities rises dramatically.
For example, the first or infrastructure stage is characterized by
large increases in consumption of cement, crushed stone, and sand and
gravel; cement consumption may rise from a few tens of kilograms per
person per year to 0.5 to 1 ton of cement per person per year. During
the second or light manufacturing stage, consumption of copper may
increase from less than a kilogram per person per year to around 10
kilograms per person per year. In the third or heavy manufacturing
stage, consumption of aluminum, iron ore, and steel rises. For example,
aluminum consumption typically increases from less than a kilogram per
person per year to 10 to 30 kilograms per person per year. The consumer
goods stage of development is characterized by increased consumption of
durable goods such as automobiles. Increases in the consumption of
metals with specialty applications such as nickel, which is used in
stainless steel, industrial minerals, and fuels are characteristic of
the fourth or consumer goods stage. Finally, high but static rates of
per capita consumption of minerals in finished goods are characteristic
of the ultimate services stage.
China's per capita consumption of copper (about 2.5 kg in 2004)
suggests that it is about 20 to 30 percent of the way through the light
manufacturing stage of development.
How Chinese Economic Growth is Affecting World Mineral Markets
USGS analysis indicates that China's rising consumption of mineral
commodities has resulted in higher prices and lower stocks of mineral
commodities such as aluminum, copper, gold, iron ore, nickel, platinum-
group metals, and tin. Another result has been high levels of use of
world production capacity for many commodities. This has left little
excess capacity to handle supply disruptions. In some cases, shortages
of mineral commodities have caused manufacturers to limit their
production of goods. World demand for iron ore, iron and steel scrap,
blast furnace coke and steel has been especially strong. This contrasts
strongly with the situation of 2001 when analysts argued that 10 to 20
percent of steel capacity was unneeded. As with other mineral
commodities, most of the increase in steel demand has come from China.
The USGS has received numerous contacts recently from companies trying
to find sources of iron ore and steel, including those used in the
manufacture of automobile axles and in defense applications.
China is the leading producer of a number of minerals including
aluminum, antimony, cement, fluorspar, coking coal, magnesium, rare
earths, steel, tin, tungsten, and zinc. However, because of the demands
of its economy, Chinese exports of mineral commodities such as rare-
earth elements, silver, tin, and tungsten, are declining. China
controls exports of some mineral commodities such as antimony, coking
coal, and tungsten by requiring an export permit. China also maintains
duties on exports of some mineral commodities. China is a significant
source for a number of mineral commodities for which the United States
is dependent upon imports for most of its supply. These include
antimony (79 percent of imports), barite (90 percent), fluorspar (65
percent), indium (49 percent), magnesium compounds (68 percent), rare
earths (67 percent), tungsten (47 percent), and yttrium (88 percent).
These mineral commodities have important uses in applications such as
batteries, ceramics, electronic equipment, flame resistant materials,
metallurgical processing, and petroleum drilling.
In order to meet the needs of its rapidly growing economy, China
has had to increase both its production and imports of minerals
commodities. China's large aluminum, copper, and steel industries are
dependent upon imports of raw materials. As a result, China has made
significant foreign investment in bauxite and alumina, copper, iron
ore, and nickel production facilities. Last fall, state-owned China
Minmetals Corporation entered into discussions to purchase the Canadian
company Noranda, Inc. Although those negotiations have not resulted in
an agreement to date, they are indicative of interest by China in
owning sources of the mineral commodities that its industries rely
upon. China's rapid economic development and increased consumption of
mineral commodities are also increasing environmental residuals
released into the environment.
Some Possible Implications of the Rapid Economic Growth in Developing
Countries
USGS analysis of mineral consumption patterns shows that continued
strong economic growth in China and other developing countries with
large populations has some important implications.
1. China and other developing countries are likely to follow
general patterns of development. China is now well along in its light
manufacturing stage and has begun to develop its heavy industry and
even to consume durable goods such as automobiles. If Chinese consumers
follow the example of their Japanese, Korean, Malaysian, and Taiwanese
neighbors, Chinese auto ownership could rise from about 10 to 100 autos
per thousand people within the next 7 to 10 years. Unless there is a
significant improvement in automobile engines, this could create a
significant increase in environmental residuals.
2. Increased environmental residuals from developing countries
will become a major issue both domestically in the developing countries
and internationally. Transnational flows of environmental residuals
could increase disputes between nations.
3. Increased competition could take place among countries seeking
sources of mineral commodities to supply industrial production.
National policies regarding domestic and international resource
ownership and policies concerning mineral exports are examples of ways
that governments could attempt to secure advantages for domestic
industries.
4. As the developing countries increase their per capita income,
several changes are likely. Higher national incomes are likely to lead
to increased consumption of mineral commodities. At the same time,
higher national incomes are likely to increase resistance to mineral
production because preferences for environmental goods and services
increase with income. This could create difficulties for companies
seeking to increase exploration for new mineral deposits and to extend
lives for some deposits that were thought to be reaching the end of
their production.
5. Increased volatility in mineral prices could result from
slowdowns in developing economies, which are producing and consuming
very large quantities of mineral commodities. If during such a
downturn, developing countries turn their growing capacity to produce
mineral commodities to exports to developed countries, significant
trade disputes could take place. The rapid increase in imports of
cement from Asia into the United States following the downturn of Asian
economies in 1997 is a small example of what could happen.
6. In developed countries, high prices and increased competition
for mineral commodities could bring additional economic pressure on
manufacturers. New strategies could be developed that would use
information technologies together with innovations in product design to
reduce the costs of disassembling durable goods at the end of life of
products and of sorting materials. This could increase reuse,
remanufacture, and recycling of components and help manufacturers to
avoid high cost new materials.
7. Rapid changes in mineral consumption are creating conditions
where reliable information for economic and national security planning
and developing public policies will be increasingly important.
8. Continued growth of the economies of China and other large
developing countries could result in a period of rising real prices for
mineral commodities. This would be in contrast to the last 30 years,
during which real prices of many minerals have declined. Over the next
20 years, mineral commodity price trends may more closely resemble the
period from 1950 to 1970 than the last 30 years because of the
proportion of the world's economies undergoing development.
The rapid economic growth in developing countries is greatly
increasing global mineral consumption, changing global patterns of
mineral production, trade, and increasing releases to the environment.
These changes have important implications for the economy and national
security of the United States.
Thank you, Mr. Chairman, for the opportunity to discuss this
important matter, and in so doing, to showcase the significant
information gathering and analytical capabilities resident in the USGS.
______
Mr. Gibbons. Thank you very much, Mr. Menzie, you have
added a perspective on the mineral picture here that is very
important and critical to this panel's understanding. We
appreciate your testimony. To each of our witnesses now, I want
to explain that we will be going into a 5-minute questioning
period where members will have an opportunity to address
specific questions to you. We will try to limit those to 5
minutes each depending upon the schedule here.
Let me begin by asking, perhaps, Mr. Caruso, when we look
at oil today at $55 a barrel, what is driving up the price of
oil? Is it something other than demand, which doesn't seem to
be rising as quickly as the price of a per barrel cost? What is
driving oil to $55?
Mr. Caruso. Mr. Chairman, the main factor driving up the
price of oil is the not only the increase in demand, which was
very robust in 2004, 2.7 million barrels a day, but the fact
that it used up almost all of the productive capacity in the
world. So that we have an extremely tight situation, not only
in the production side, but in the refining industry and in
transportation. And so that any small change, whether it be a
strike of workers in Nigeria or a problem in Iraq, the only
safety relief valve is price. So the price in economic terms
has become very inelastic in the short run, goes up much faster
than the percentage increase in demand.
Mr. Gibbons. You raise the issue of productive capacity. Is
that at the well that we are talking about or is that in the
refined product productive capacity?
Mr. Caruso. Currently, it's in both. During October of 2004
when Hurricane Ivan shut in about 500,000 barrels a day of U.S.
capacity in the Gulf of Mexico, the world was essentially
operating at 100 percent of capacity. With that capacity being
back on stream, maybe we are up to about 98 utilization on a
global basis out of 84.5 million barrels a day. Any industry
operating that close to the margin spread out over many
thousands of miles means this enormous inflexibility to deal
with problems.
And second, because of the increase in demand for
transportation fuels, gasoline and diesel, the ability of
refiners not only in the U.S. but in Europe and even in Asia is
now also being stretched very thin. It is not only productive
capacity at the wellhead, but the ability to convert that crude
oil into that mix of products that is currently being demanded.
And China is a big part of that, because as Jeff pointed out, a
big part of their incremental demand is in increased use of
passenger cars and trucks.
Mr. Gibbons. Are we increasing our capacity to refine fuels
in this country?
Mr. Caruso. We are, but only at existing facilities. We
have not built a new refinery since the late 1980s. All of the
incremental capacity to refine has been added at the
bottlenecking at existing refineries or some additional
capacity, but at existing sites. So we have had added capacity,
but relatively slowly. And we are increasingly dependent on
imports of products, particularly from Europe and the Caribbean
export refineries, which we expect to continue over the next 2
decades.
Mr. Gibbons. Very briefly for my education and those of
members of the Committee, can you tell me exactly where the
United States imports its oil from?
Mr. Caruso. Sure. The main suppliers are Canada, number
one.
Mr. Gibbons. How much do they provide us?
Mr. Caruso. They are providing about 1.8 million barrels a
day out of 12, so about one-sixth of our imports in 2004. Saudi
Arabia is slightly behind, a couple hundred thousand barrels a
day less, maybe at 15 percent. And then Mexico, maybe just a
little bit less than that, 14 percent. And then fourthly
Venezuela. So those top four, Canada, Saudi Arabia, Mexico and
Venezuela account for almost 70 percent of our imports. The
rest come from a large number of countries like Nigeria and
others from--much less from Norway, UK. But the others are much
smaller. The key, the other key to that question is in the
future, we expect most of the incremental supplies--I mentioned
we are going to need 8 million barrels a day of more demand and
it will be in the form of imports. Most of that will be coming
from, we believe, Persian Gulf OPEC countries.
Mr. Gibbons. My time has expired.
Mr. Grijalva.
Mr. Grijalva. Thank you, Mr. Chairman. Let me begin, Mr.
Menzie, if I may, and I appreciate the data you have given on
behalf of USGS with regard to the global mineral market and
China's effect on it. Let me ask you a question. The
Administration has proposed that program be reduced by 28.5
million in the 2006 budget. So how will the international
minerals program accommodate this loss? And will you be able to
produce and present to Congress the kind of data and
information that you have to date?
Mr. Menzie. Sir, the cuts, as I understand them, would
eliminate international mineral reporting and the work on
minerals internationally through our global assessment program.
So those would not be available in the future.
Mr. Grijalva. The primary focus then for USGS then will be
to look at domestic minerals, Federal lands primarily?
Mr. Menzie. As I understand it, that's correct, sir.
Mr. Grijalva. Mr. Logan, in your discussion with the
Committee, as you were talking, you said that--let me see if
I'm quoting you correctly, the environmental issues are too
great to ignore. Can you outline some of the environmental
implications of the situation in China as a consequence of the
statement you made that those issues are too hard to ignore?
Mr. Logan. China currently consumes about 2 billion tons of
coal each year and a lot of that consumption happens in
outdated and very inefficient technologies, old boilers or
furnaces. Power plants, emit huge quantities of sulfur dioxide
and other harmful pollutants. We see increasing amounts of air
pollution from China traveling across the Pacific ocean and
even reaching U.S. territory. But from a global perspective,
probably more important is the rise in greenhouse gas emissions
in China. And since coal is by far the most carbon intensive
fuel, the intensity of the carbon emissions in China are very
high. They have taken a lot of steps to try to rationalize
energy use in China. But as I mentioned, the last few years, we
have seen a very disturbing trend where the economy is using
much more energy to produce a unit of economic growth than it
had in the past. So we believe that China's energy development
plans are intimately tied to global and environmental quality
and global and environmental issues. And that's why we believe
it is too important to ignore.
Mr. Grijalva. And my last question, Mr. Chairman, Mr.
Caruso, the Asian Times reported that China has joined the
United States and Japan in developing strategic petroleum
reserves and the 75-day period of emergency reserves in four
locations. I want to ask how is that development--how will that
affect the energy prices both in the long-term and the short-
term, the development of both reserves?
Mr. Caruso. Yes, indeed that's correct. China has started a
program to develop strategic petroleum reserves at a relatively
low level of fill for 2005. Jeff might have more detail, but I
think it's less than 100,000 barrels a day for 2005. And so I
don't think it will have a large impact, but certainly as I
mentioned, when the market is tight as it is, it certainly
will--there will be some small impact, I believe, this year in
the short term. In the long term, I think it is probably a net
benefit to have China in the position where it has strategic
reserves so that we will be able to rely on those in the case
of some sort of a disruption. To the extent that other
countries develop this kind of a cushion in terms of strategic
reserves as we have done in this country and in other IEA
countries, I think it is a net plus for global market
stability.
Mr. Grijalva. In that same equation, how would our reserve,
given the competition for fossil fuels between the United
States, China and India--and I can only describe it as
competition--how does the Nation's strategic petroleum reserve
factor into that competitive equation?
Mr. Caruso. Well, our fill rate is also relatively low at
roughly 100,000 barrels a day this year. And we are approaching
the full capacity, design capacity of 700 million barrels. So I
would not expect there to be much of a market impact in terms
of competition for oil to fill China's reserve compared with
filling ours. I think it's such a small part of the 84.5
million barrel a day global market that I don't think that will
be a major factor in the oil market.
Mr. Gibbons. Thank you, Mr. Grijalva. We will turn to Mr.
Peterson now.
Mr. Peterson. Thank you, Mr. Chairman, I want to thank the
panel for very interesting testimony. Mr. Caruso, I was reading
from some information that was a part of your--it said total
demand for natural gas is also projected to increase at an
average annual rate of 1.5 percent from 2003 to 25. 75 percent
of the growth in gas demand from 2003 to 2005 results from
increased use of power generation and industrial applications.
Is the bulk of that power generation?
Mr. Caruso. Yes, Congressman Peterson. The amount of
increment in gas will be about 50 percent of our growth. I will
make sure that's accurate for the record, but that's my
recollection. But by far, the largest increment of growth will
be in electric power.
Mr. Peterson. I don't think it was wise when we went there,
but that's another issue, because what we are not talking about
is the homeowner. I mean today, gas--the price, the continued
price increase of gas and the projected price increase of gas
is going to put the American homeowner in a very difficult
strait, especially older people with large homes. Much of
America depends on natural gas to heat their homes and
commercial application, the cost to heat commercial
establishments and those who use natural gas as a heavy use to
make, bake or cook, to make their product. I have my dry kilns
that in my district that dry wood and use natural gas. They
have shut down. They no longer can dry wood competitively with
natural gas. I don't think we have any idea how much of this is
going on around the country if people are moving away from
natural gas, which they ought to be moving toward in my view.
I guess what scares me about your testimony or stuns me is
we are saying we're going to double the importation of gas in
the next 15 years. And it's almost all through LNG, from your
charts. You're going to increase LNG use in this country by 16
times. Do you really think that is doable? You have to build
the most expensive ships the most controversial ports and you
buy from unstable countries who will double or triple the price
when we increase the volume. And can we even get there? Can we
increase LNG by 16 times?
Mr. Caruso. I think we can. The investment patterns that we
see going on overseas to develop liquefaction capacity are
moving forward at a reasonably good pace. And the
regasification proposals currently at FERC are more than 20 to
build regasification terminals. We don't think that 20 will be
built, but that's how many are being proposed or have been
submitted to FERC, the Federal Energy Regulatory Commission.
So we think the gas is there. There appears to be
investment willingness to build the liquefaction capacity. And
based on our projections, we certainly believe the demand will
be there.
Mr. Peterson. I know the gas is there. I mean, that's not
the issue. But is it wise for us to become importers of natural
gas? Now what you didn't mention is can you build a port, but
now you have to build a pipeline to connect it to the current
system. I don't know of only one gas company that is even
talking about that. Is there much of that going on?
Mr. Caruso. There is some going on, but there is more to
the story than just the liquefaction and regasification. There
is hooking up with the existing distribution system. And that
will also represent significant investments as well. Certainly,
I know there is debate going on in this Chamber as well as the
Senate as we speak on the wisdom of our energy policy, but
clearly, you know, what can I say from the IEA point of view,
our projections indicate that the demand will be there largely
in electric power and industrial applications. And as you point
out, 60 percent plus of our homes in this country are heated by
natural gas. So I think the wisdom--I, of course, rely on the
decisionmakers and policymakers to debate that.
Mr. Peterson. Well, you are the agency that reports the
data. So I am not picking on you. You are not the policymaker.
But your data you are giving us assumes that is the only option
we have is LNG.
Mr. Caruso. In fact, Chairman Pombo and others have asked
what would happen if this--we did not indeed meet this type of
demand, whether it be for reasons of the inability to site the
regasification terminals or the investment wasn't made. And
clearly what our studies have shown is that if supply is not
available or the infrastructure is not built, as I mentioned
with oil, there's only one pressure relief valve. If the demand
is there and supply is not forthcoming, that means higher
prices.
Mr. Peterson. And I think we are at the busting--we are at
the wall already. I don't think homeowners, commercial and
industrial in this country continue to pay the highest natural
gas prices in the world, which we have. Oil prices, everybody
pays the same. But the natural gas prices, they go from $0.80
to $7 and something. You can't compete with 80 cent gas, which
many countries have. A lot of countries have gas for less than
a buck. We are really putting ourselves in a terrible
competitive--but the assumption that we have to double our
importation and it's all on the back of LNG is a dangerous,
flawed strategy, because--and I know my time is up, but be
prepared for the next round, because I am not done. I am just
getting started.
Mr. Caruso. I am well aware of it.
Mr. Gibbons. We will turn to someone who understands the
importation of energy in this part of America that is unique to
most others, Mr. Faleomavaega from American Samoa.
Mr. Faleomavaega. Thank you, Mr. Chairman. Just on a
follow-up question that Mr. Peterson is trying to pursue here.
Maybe gentlemen, you can help me. It is my understanding that
the state of Qatar currently largest reserves of natural gas in
the world. Am I correct in this?
Mr. Caruso. They are in the top three. There is Russia,
Iran and Qatar. They are all very close. The three of them
together have about 70 percent of the world's natural gas
reserves.
Mr. Faleomavaega. My understanding, Bolivia has made
findings of natural gas and very pretty much in abundance. How
does this compare then to us as to what Mr. Peterson is trying
to pursue here? Over the years--and I will follow up with a
question. This has always been the issue for how many years now
we keep talking about more and more our country has to input
our fuel resources, especially oil and fossil fuel. And somehow
we seem to be spinning our wheels. Every year we go through
this round talking about limited energy resources and what are
we doing about it and bringing up this issue as Mr. Peterson
reiterated about the supply of gas alone, what is the option
there available because of our dependence on this resource from
other countries? Are we doing enough R&D?.
This is another point of my question. It has always been a
touch and go when we talk about alternative energy resources
but it always comes back to fossil fuel. Doesn't seem to be any
real seriousness maybe perhaps in part of our government and
maybe the energy companies. What are some of the alternative
resources that we could really do serious R&D so we don't have
to be so dependent on these other countries for these
resources? I am asking all three of you gentlemen.
Mr. Caruso. You are absolutely right. Certainly technology
and R&D are the answer for the long term, and I think there has
been a significant amount and continues to be. There can always
be more. And one cannot overlook technology that has been done
over the last several decades that has led to substantial
improvements in the way we use--as I mentioned, we are using
about half the amount of energy per unit of GDP than we were
using 30 years ago.
So there has been improvement and certainly some of the oil
and gas that's being produced today wouldn't have been produced
under the technology of 30 years ago. There are developments,
deep water drilling. There is a lot that has been happening.
But in terms of alternative energy supplies, there is a
long lead time when it comes to thing like hydrogen, fuel cell
development and others. So until then, what we have been doing
is importing oil and now more and more natural gas, because
that's the available supplies at a reasonable cost.
And indeed, you mentioned Qatar, our estimates is that
Qatar LNG, when it's up and running and deliverable to the U.S.
would probably come into the east coast at about $3.60 a
thousand cubic feet which is about half of today's spot price.
So economics will drive this. Very pertinent question that
Congressman Peterson raised about strategic and whether this is
the path we should be on or not. This is worth anticipating.
Mr. Faleomavaega. The three most populous countries in the
world, China, India and the United States, even though we
consume over 30 percent of the world's energy resources with a
population of only 486 million people, do you get the
impression that there is such an evil thing on the part on
China and India that they have to look for energy resources. I
mean 2 billion people combined population, the demand for the
consumption is there. I notice that India wanted to do a $4
billion pipeline contract with Iran going through Pakistan, and
we are placing very serious objections to this. What is your
take on this?
I notice that China is going to central and South America
shopping for more oil supplies because of this demand. Is it
bad for these two nations to be seeking other oil resources,
just like we are trying to do in other parts of the world?
Mr. Logan. I can try to say a few words about that. I think
when we look at the development of China's economy and we see
that how immensely people's lives have changed in the last 30
or 40 years, it is truly remarkable. Literally hundreds of
millions of people have been lifted out of dire poverty and a
lot of that has been associated with rising energy consumption.
So, no, I don't think we can consider that China and India and
other large developing economies don't have a right to improve
their standards of living by using more energy. It's
inevitable, it's going to happen and I think we have to prepare
for it.
In terms of Chinese and Indian and some other large state-
owned companies, energy companies investing abroad, there's a
mixed picture, I think. We see some benefit when state-owned
companies from China and India invest in resources that other
international energy companies ignore for political or economic
reasons. They are making it possible to bring on some
incremental supply to the global market, because no one else
will touch those resources.
Mr. Faleomavaega. I know my time is up. Just a quick
observation, my understanding, Kazakhstan has the third largest
oil reserves potentially in the world. Something also to
consider. But one thing I wanted to note as a matter of
observation, if we have really been serious about refinement.
My understanding is we have enough coal supply. And Mr.
Peterson probably knows more about coal more than I do. And how
much R&D is going into refining coal as an energy resource and
I'm curious about that. Every time I hear about coal, it is an
environmentally dangerous resource for fuel. My question is how
much R&D have we put in there, if this is good for the next
1,000 years, to provide the energy needs for country? Why
aren't we doing enough research to make coal as a better
resource, environmentally safe? And just a matter of
observation. Mr. Chairman, I know my time is up.
Mr. Gibbons. Thank you very much.
Let me just say that each year we do add money into a Clean
Coal Technology Program in this country that helps with that
research and development.
One of the observations I want to make before turning it
over to Mr. Peterson is a concern that some of us have is a
monopolization of the oil production and the products that come
from that by a country with its demand tying up those
international sources, so whether it be the United States,
whether it be China, whether it be India, whether it be any
other country going out there and acquiring the only or
remaining productive capacity, that monopolizes that whole
issue, which then puts a tremendous variability and instability
into the whole program for what we do in terms of our growth.
And I will come back to my question.
I want to go to Mr. Peterson. We probably each have time
for one more additional question before we go to go do two
votes, at which time we will come back and hear our second
panel.
Mr. Peterson.
Mr. Peterson. Yes. I wanted to mention the coal thing, but
I guess I don't have time.
We do have a clean coal technology fluidized bed boiler; we
use it for our dirtiest lowest BTU that's on top of the ground
that was put there as waist coal years ago. We're burning it
cleanly, but we have chosen not to use it in this country, even
though, in my view, it takes the particulate out of the air and
puts it in the fuel waste that does not go in there, but we
just closed the door on coal, unfortunately. But I am going to
go back to natural gas.
I think natural gas is the one fuel that can bridge us
through these difficult times, but I guess I'm stunned that
we're listening to Greenspan--who I don't think knows crap
about energy--because he said we should do LNG. He's the guy
who has raised the LNG issue in every hearing in the last year
and a half. He's the one that put natural gas in the hearing
process when he asked to come to the Commerce Committee and
talk about it. And he has given the LNG solution, which, in my
view, is the worst potential solution we have.
This country has adequate reserves to drill its way out of
the natural gas problem and be competitive with the rest of the
world. We have huge reserves in natural gas. But if the
government-imposed moratoriums on all the areas where gas is
readily available continue, and have been supported by three
presidents--I think erroneously, including this one--I think
that's a mistake in this country.
Natural gas is going to be the bridge to hydrogen. All the
hydrogen makers tell you we're going to make hydrogen out of
natural gas before we make it out of water and other things
because that's the easiest, simplest way to do it.
I have an all natural gas bus company at State College
that's going to start enhancing with hydrogen with the hopes
down the road on running them on hydrogen, but it will be
hydrogen made from natural gas.
Now we're using natural gas unlimitedly for power
generation, which I think is a waste. What we ought to have is
a no-growth-in-oil-use policy in this country. We have three
percent of the world's oil, we have almost unlimited natural
gas in this country that we can drill for. And I guess I would
like to make the statement for the press and everybody else, a
gas well is not an oil well, and nobody wants to talk about
that. I think it's time for this country to decouple oil and
gas leasing. A gas well is a 6-inch hole in the ground with a
steel casing, cement at the bottom, cement at the top, and we
let gas out. That's not a huge environmental hazard, but we
have been conditioned as a public to think it is.
Many of our gas fields are dry gas, you don't even have
fluids hardly. So I think, I mean, I think it's ludicrous that
we don't have a policy about opening up our rich fields to
drill for natural gas in lots of very safe places. I'm told
there's--I forgot how many trillion feet off of the shore of
New Jersey 80 miles out.
This summer my staff visited Canadian drilling rigs on the
Great Lakes--I didn't go, I wished I had have. And Canada
drills in our Great Lakes, sells us the gas. And I have never
heard a complaint on the shores of Lake Erie about that
drilling. If they hit an oil well, the cement truck is ready
and it plugs it, they don't use it. But the natural gas is
piped underground, undershore, nobody even knows it's there, it
lets gas out.
I mean, natural gas is not an environmental hazard. You
have a two-acre lot, if you're doing it on land, that you have
to clear to produce the well, and once it's over, there's a
tank and a couple of pipes there. I mean, it's not an
environmental--why this country thinks drilling for natural gas
is a hazard, it's the clean burning fuel. We should be fueling
all public transportation with natural gas, taking relief of
oil. We should be fueling taxicabs, delivery trucks, service
trucks that go short distances. They have a new engine that
uses natural gas for diesel where you can go back to 15 percent
diesel and 85 percent natural gas. Think how much cleaner that
would be with diesel trucks on the highways. There is an engine
being worked on, and it's pretty close to being available. I
mean, I think for us to have a natural gas policy that our only
answer is to import LNG--and there is no way, in my view, that
you can increase the LNG into this country by 16 times in the
period of time this mentioned, I think that's a very flawed
policy.
Mr. Gibbons. Mr. Peterson, thank you very much for the
discussion on natural gas. And you can tell he's not sitting on
the fence on this issue.
We did have a signal, as you heard from the buzzers, there
are 2 votes going to take place. We anticipate that this will
take about 30 minutes for the next 2 votes, so we're going to
adjourn this hearing for 30 minutes.
Before I do, and before I release this panel, I want to
thank all of you three for coming here today. We will call up
our next panel at the beginning when we return. But there are
going to be a number of written questions that we will submit
to the members of the panels; we would like those to be
answered and submitted back to us within a week, if we could
possibly do that, no longer than 10 days, of course, after
that.
With that in mind, I will tell the members that we have
about 5 minutes to run vote, and we're going to adjourn this
hearing--or recess this hearing, not adjourn, we will recess
for about 30 minutes.
[Recess.]
Mr. Gibbons. The Subcommittee on Energy and Mineral
Resources will come back to order. We will call up our second
panel now, and before I make those names known, I want to
apologize to everybody. You've just now experienced
Congressional time, what we call 30 minutes turns into an hour,
of course. So with that, I want to call up our second panel,
which will be Milt Copulos, President National Defense Council
Foundation, and Alan S. Hegburg, Senior Fellow, CSIS Energy
Program, the Scowcroft Group.
Mr. Gibbons. Gentlemen, welcome. We will turn now to Mr.
Copulos. Welcome, the floor is yours. We look forward to your
testimony.
STATEMENT OF MILTON COPULOS, PRESIDENT,
NATIONAL DEFENSE COUNCIL FOUNDATION
Mr. Copulos. Thank you, Mr. Chairman. I would like to thank
you for the opportunity to testify.
Mr. Chairman, America is heading headlong into disaster, a
disaster of our own making. Three decades ago, the Arab Oil
Embargo made clear that our Nation's dependence on import oil
was reaching dangerous levels and threatened to jeopardize our
military and economic security, but that warning went unheeded.
Today, despite all of the rhetoric and posturing and
lamentations about energy, our security situation is far worse
than it was in 1973. In fact, on a volumetric basis, oil
imports today are more than double the level they were then.
We are also becoming increasingly dependent on imports of
important non-fuel minerals. We are 100 percent dependent on
imports for 17 important non-fuel minerals ranging from
graphite to gallium, and 80 or more percent dependent on
another dozen.
Under any circumstances, our reliance on transoceanic
imports for key commodities would be a cause for concern, but a
confluence of factors has heightened the threat that they pose
to a critical level. These factors have a growing competition
for resources from emerging economies, particularly that of
China, and to a lesser degree India, and the inherent
instability of the nations that constitute our most important
sources of transoceanic supplies.
For two decades, China's economy has grown between 7 and 9
percent annually, the highest rate of any nation on earth. To
fuel this growth the PRC has developed a ravenous appetite for
natural resources. Indeed, China counts for 40 percent of the
total growth of oil demand in the past 4 years. Similarly,
China's frenetic economic expansion is also credited as being a
major factor driving the recent increases in nonfuel mineral
prices. India, too, while not equalling China, still has an
economy growing at around 6-1/2 percent a year, with the
accompanying increases in the need for both energy and nonfuel
minerals.
But the stunning economic growth of emerging Asian
economies is not the only concern in regard to transoceanic
imports. Six nations, Canada, Mexico, Saudi Arabia, Venezuela,
Nigeria and Iraq, provided 66.9 percent of U.S. Oil imports
last year, accounting for 42 percent of our total supply. Of
these 4, Saudi Arabia, Venezuela, Nigeria and Iraq furnished
37.7 percent of our imports, equalling 23.7 percent of total
supply. And that's where the danger lies.
In December of last year, al-Qaeda issued a statement that
said, in part, we call on Mujahadin in the Arabian Peninsula to
unify their ranks and target the oil supplies that do not serve
the Islamic nation, but the enemies of that nation. There is
little doubt that terrorists are trying to make good on the
threat. Since May of 2003, 90 people have died in terrorist
incidents in Saudi Arabia, and there have been dozens of
attacks on oil-related facilities in Iraq. Although these
incidents have not seriously disrupted supplies as yet, sooner
or later they will.
Even without a major supply disruption, however, they have
been a principle factor in the huge oil price increases since
in the past year. Nigeria is plagued with ethnic violence and
banditry in its oil-producing regions, losing an estimated
145,000 barrels a day to theft.
In Venezuela, President Chavez, a close confident of Fidel
Castro, with suspected ties to insurgents in Colombia and al-
Qaeda, has threatened to cutoff oil shipments to the United
States. In short, we face a new reality of increased
competition from emerging nations of Asia, and critical
instability among our principle transoceanic sources of supply.
It is a reality that makes our continued dependence on imports
an unacceptable risk, but it's a risk we need not take.
The simple truth is that our Nation does not have an energy
shortage. All we need to do is find the political will to take
advantage of our incredible energy endowment. Consider this,
there are 104 trillion cubic feet of so-called stranded gas in
Alaska. Utilizing well-proven gas-to-liquids technologies would
permit us to convert the stranded resource into clean burning
fuels that could be shipped to the lower 48 States by the
trans-Alaska Pipeline System. And that's just the tip of the
iceberg.
The U.S. holds 62.5 percent of the world's oil shale
deposits, the equivalent of 530 billion barrels of oil. That's
more than twice the proved reserves of Saudi Arabia. The U.S.
Also holds 25 percent of the world's coal reserves, 275.1
billion tons, or enough to maintain current production levels
for 2 centuries.
There also remain huge untapped resources of conventional
oil and gas resources in areas offshore that are currently
closed to development.
One of the most exciting prospects is methane hydrates,
known as the water that burns. U.S. methane hydrate resources
are estimated to hold 320,222 trillion cubic feet of natural
gas; that is the equivalent of 51.1 trillion barrels of oil.
One, just one, onshore methane hydrate deposit in Alaska is
estimated to hold 519 trillion cubic feet of natural gas, the
equivalent of 82.9 billion barrels of oil.
We also have emerging technologies that can help us use the
energy resources we have more efficiently, and provide
alternative sources of fuel. Hybrid electric vehicles, for
example, can substantially improve automotive mileage.
The choice is really very simple; we can act now to do
something to use our domestic resources, or stand idly by and
allow us to be overwhelmed by events. If we fail to act, we
will have no one to blame but ourselves.
[The prepared statement of Mr. Copulos follows:]
Statement of Milton R. Copulos, President,
National Defense Council Foundation
My name is Milton R. Copulos and I am President of the National
Defense Council Foundation.
I would like to thank Chairman Gibbons and the Members of the
Subcommittee for the opportunity to testify today.
America is rushing headlong into disaster. What is worse, however,
is that it is a disaster of our own design.
Three decades ago, the Arab Oil Embargo made it clear that the
nation's growing dependence on imported oil was reaching dangerous
levels and threatened to jeopardize our economic and military security.
Despite that dramatic demonstration of our vulnerability nothing has
been done to address the problem.
At the time of the Arab Oil Embargo in 1973, we imported 34.8% of
our oil. In 2004, imports averaged 62.9%, and on a volumetric basis
were more than twice the level they were 30 years ago.
We may soon come to regret our complacency.
A confluence of factors has occurred that heightens the jeopardy we
face from our profligate import dependence.
THE FIRST FACTOR: EMERGING ECONOMIES
On one front, we have skyrocketing demand, driven in large part by
the frenetic pace of economic growth in nations such as China and
India. Indeed, for the past decade China has experienced a growth rate
of between 7% and 9%, with a phenomenal rate of 9.5% in 2004. India's
GDP has grown at an average of 6% for the same period, hitting 8.2% in
the first quarter of 2004. In contrast, U.S. GDP grew at 5.6% for the
same period, and Japan at 5%.
Fueling this economic growth will require oil in increasing
amounts. So much oil in fact, that the ability of current suppliers to
produce it may be stretched to the breaking point.
To illustrate, oil consumption in developing countries is expected
to rise by 3% annually over the next 20 years. This means it will
increase from 14.5 million barrels per day in 2000 to 29.8 million
barrels per day by 2025. Within this total Chinese oil consumption,
which accounted for fully 40% of the growth in world oil demand over
the past four years, is expected to rise from the 5.56 million barrels
per day recorded in 2003 to 12.8 million barrels in 2025. Of this
total, 9.4 million barrels per day are expected to be accounted for by
imports.
India, too, is expected to see a dramatic rise in its oil
consumption with a 28% increase projected for just the next five years.
Under the best circumstances, the competition for oil generated by
the explosive economic growth of Asia will serve to put a tremendous
upward pressure on prices, driving them well above the current $50 plus
per barrel average. OPEC officials have said oil prices could rise to
as much as $80 a barrel and they may well be correct. In fact, under
the right circumstances the price could be even higher.
Under the worst circumstances, as our organization warned in a Los
Angeles Times article five years ago, the competition for oil could
lead to armed conflict--particularly with China. Lest this statement
seem alarmist or far-fetched, I would note that the Chinese are, for
the first time in their history, developing a ``blue water'' navy
capable of operating beyond their shores, and their naval doctrine has
been revised to provide for the projection of force in an arc running
roughly 800 miles from their shoreline.
But, I said there was a confluence of factors, and the growth of
global demand is just one of them. The other, equally important factor
is the growing instability of the nations on which we rely for the bulk
of our imports.
THE SECOND ELEMENT: UNSTABLE SUPPLIERS
Six nations, Canada, Mexico, Saudi Arabia, Venezuela, Nigeria and
Iraq, contribute 66.9% of all U.S. oil imports, equaling 42% of our
total consumption. Of these, four, Saudi Arabia, Venezuela, Nigeria and
Iraq account for 37.7% of our imports or 23.7% of the oil we use.
And that's where the danger lies.
September 11th 2001 changed forever the way we must view resource
dependency. We must never allow ourselves to forget that one of al-
Qaeda's principal objectives is to destroy the U.S. economy. Indeed,
that is the reason the World Trade Center was selected as a target--it
was a symbol of America's remarkable economic strength.
More important, al-Qaeda and its affiliates understand all too well
that one way to bring about their goal of economic disruption is to
disrupt our supplies of imported oil. If anyone harbors doubts that
this is true, they need only look to al-Qaeda's December 11th 2004
statement which made the threat explicit stating:
``We call on the mujahideen in the Arabian Peninsula to unify
their ranks and target the oil supplies that do not serve the
Islamic nation but the enemies of this nation.''
Continuing the statement also urged that al-Qaeda followers:
``Be active and prevent them from getting hold of our oil and
concentrate on it in particular in Iraq and the Gulf.''
As dramatic as the December 18th statement was, however, what it
actually did was to officially sanction what was already going on.
For the past several years, America's transoceanic oil supplies
have been under growing assault.
In October of 2001, Sri Lankan Tamil Tiger terrorists conducted a
coordinated suicide attack on an oil tanker involving five small boats.
Seven people were killed.
Eleven months later, al-Qaeda affiliated suicide bombers attacked
and holed the French oil tanker Limberg in Yemen killing one crewman
and causing a 90,000 barrel oil spill.
In the summer of 2002, Saudi Interior Ministry forces thwarted an
al-Qaeda plot to attack and cripple the loading dock at Ras Tanura
which handles 10% of the world's oil supplies.
A report by the Institute for the Analysis of Global Security
documented over 100 attacks on oil pipelines between April of 2003 and
April of 2004.
Last July gunmen stormed an oil tanker at anchor in Indonesia.
The list goes on and on, but the point is simple: if oil must cross
an ocean to get here, it is not secure.
But external terrorists are not the only threat.
The facts show that three of our most important sources of oil
imports are so insecure that relying on them is tantamount to playing
Russian Roulette with all the chambers in the gun loaded. Together
these nations account for over one-quarter of our transoceanic oil
imports.
Let's take them in order of importance.
PLAYING RUSSIAN ROULETTE WITH OIL SUPPLIES
Saudi Arabia, the world's largest oil producer and location of one-
fourth of the world's proved conventional oil supplies accounts for
12.1% of U.S. oil imports or roughly 7.6% of the oil we use.
With almost 40% of its population under the age of 15 and declining
fortunes that have seen Saudi Arabia's per capita income drop by 80%
adjusted for inflation since its peak a quarter century ago, the Desert
Kingdom is rife with unrest--much of it directed at the West. Indeed,
since May of 2003 90 people have been killed in terrorist incidents and
foreign nationals have been urged to leave. It is true that the Saudi
Interior Ministry is attempting to combat the terrorist threat to their
country, and has arrested hundreds of al-Qaeda suspects, but the threat
continues to grow. Moreover, over the past year, al-Qaeda cells
operating in Saudi Arabia have increasingly targeted oil-related
facilities for attack.
But even if terrorists do not disrupt the flow of Saudi oil,
another concern has recently surfaced: the ability of the Desert
Kingdom to maintain its production levels. Matthew Simmons of the
Houston-based Simmons Company International set off a firestorm of
controversy in petroleum industry circles with his analysis of Saudi
Arabia's oil production capability. It is his contention that the
failure of the Saudis to invest in maintaining its huge Ghawar oil
field has undermined that nation's ability to ``surge'' production in
response to market needs. The Saudis have always been viewed the
supplier of last resort. If Simmons is correct, the prospect of global
shortage is far greater than previously believed.
Venezuela provides 12.1% of U.S. oil imports equaling 7.4% of
domestic consumption. With the election of Hugo Rafael Chavez Frias as
President, relations between the U.S. and its fourth largest oil
supplier entered a new era of hostility. A self-styled populist with
close ties to Fidel Castro and terrorist groups operating both in Latin
America and around the globe, he recently threatened to cut off oil
shipments to the United States. Chavez is openly sympathetic to al-
Qaeda. Moreover, he is cited in the latest edition of the State
Department's ``Patterns of Global Terrorism'' report as having ``an
ideological affinity'' with Colombia's FARC and ELN terrorist groups.
The State Department also says that weapons and ammunition captured
from FARC rebels have been traced to official Venezuelan stocks and
facilities. The situation in Venezuela is further complicated by
internal strife that was manifest in a general strike that shut down
that nation's oil industry for several months beginning in December of
2002.
Nigeria, which supplies 8.7% of U.S. oil imports accounting for
5.5% of our consumption, has been plagued with ethnic and political
turmoil in the Niger Delta, its principal oil producing region. In
2004, an average of 145,000 barrels of oil per day was lost to theft
and vandalism. Moreover, foreign oil workers and facilities have been a
frequent target of violence. For example, in April of 2004 two
Americans working for Chevron were attacked and killed, and in January
of 2005, 300 armed villagers from the village of Owaza attacked two
Royal Dutch Shell flow stations forcing the evacuation of 18 staff
members.
In addition to security issues, serious questions have also been
raised concerning Nigeria's reserve estimates with Royal Dutch Shell
recently reducing the reserve estimates of its holdings their by 67%,
or almost 1.5 billion barrels. Moreover, even if reserve estimates are
accurate, Nigeria suffers from a lack of investment funds to maintain
and expand its oil and gas production. This fact raises further
question about Nigeria's ability to maintain current production levels
in the years ahead.
OTHER OIL SUPPLY ISSUES
While terrorism and political instability are major sources of
concern regarding transoceanic U.S. oil imports, they are not the only
factors threats to transoceanic oil imports. Another important concern
are the efforts by the emerging Asian economies to become major
participants in the development of global oil resources, and especially
such efforts directed at traditional U.S. suppliers.
On January 20th, the Chinese government signed agreements with
Canada to help develop Canadian uranium mines and oil reserves. Among
the areas of greatest interest to the Chinese are the Canadian tar
sands deposits in Alberta province. The 175 billion barrels of
recoverable oil trapped in Canadian tar sands represent a resource base
two-thirds the size of Saudi Arabia's. In addition, China has expressed
interest in investing $2 billion to purchase a 49% interest in a
pipeline to carry oil 720 miles from Alberta to the northwest coast of
British Colombia.
China's move to enter into oil production and development
agreements with traditional U.S. suppliers is not limited to Canada.
China already operates two oil fields in Venezuela and has signed an
agreement to develop 15 declining fields in Zumano in eastern
Venezuela. The Venezuelan government has also invited China to
participate in exploration projects in the Orinoco belt, one of the
world's richest oil deposits. China has also made overtures concerning
oil exports to Mexico's national oil company, PEMEX.
It is not just the Chinese, however, that are fishing for oil in
traditional U.S. waters. India recently signed an oil cooperation
agreement with Venezuela. The agreement is the most recent in a series
of overseas oil development projects initiated by India's state-owned
Oil and Natural Gas Corporation (ONGC). They also have projects
underway in Russia, Vietnam, Sudan, Myanmar and Australia.
Clearly, competition for the world's oil resources will become
increasingly strong in the years ahead. But oil is not the only natural
resource which poses an import vulnerability danger to the United
States. Nonfuel mineral imports, too, create an unacceptable economic
and military vulnerability.
THE IMPORTANCE OF NONFUEL MINERALS
Few Americans give much thought to the important role nonfuel
minerals play in our nation's economy. Yet, while it is not commonly
understood, they are as essential to a modern industrial state as
energy. In fact, 16.8% of U.S. GDP is a direct product of minerals and
materials mining and processing.
To illustrate, in 2004, the value of nonfuel minerals produced in
the United States totaled $44 billion. But that was just the tip of the
iceberg. These raw minerals, along with minerals imports generated $418
billion in processed mineral materials. These processed minerals, in
turn, added $1.97 Trillion in value to U.S. manufactured goods. All
told, some $16.8% of U.S. GDP is directly linked to minerals and
materials processing. As a result, one out of every six jobs in our
economy is directly or indirectly tied to mineral production.
Yet as important as these commodities are to America's economic
success, their supply is not assured.
TENUOUS SUPPLIES
We currently rely on foreign sources for 100% of seventeen
important minerals. These range from gallium, which is used in such
critical applications as the manufacture of semiconductors, computer
chips and transistors to graphite, which is used for such high-tech
products as fuel cells, and so-called ``nano-flakes,'' 20 micron thick
graphite particles that have a broad range of applications from
advanced computer technology to aerospace.
We are also dependent on foreign sources for 80% or more of another
dozen key nonfuel minerals including titanium sponge, which has a wide
range of important defense applications, including providing upgraded
armor for the Abrams M1A2 tank; palladium, which is essential to
catalytic chemistry, and tantalum which is essential to the manufacture
of corrosion-resistant chemical equipment and microcircuitry.
Overall, the value of U.S. imports of raw and processed materials
increased 30% between 2003 and 2004. More important, though, this
increase occurred even though the tonnage of materials imported
declined. The reason for the price increase in the face of decreasing
imports was simple: market competition.
As with oil, the competition for nonfuel minerals is intensifying,
and as with oil, the primary reason for this intensification is the
stunning increase in China's appetite for these commodities.
THE ROLE OF CHINA
As noted, China's GDP has been growing at an accelerated pace for
two decades--in fact doubling in size every eight to ten years. An
important aspect of this growth is that it has been largely the result
of spending on capital goods and construction projects which are by
their nature both energy and mineral intensive. The effect of the
demand created by this spending has been to spark skyrocketing demand
for nonfuel minerals and strain production and processing capabilities
to the limit.
The extent of the current global shortage of some nonfuel minerals
and materials is illustrated by the situation in regard to steel. In
2001, it was estimated that there was somewhere between 10% and 20%
excess steel processing capacity around the globe. But in 2004, demand
for steel was so strong that France petitioned the European Mining
Commission to suspend antidumping duties.
Although Chinese officials indicate they plan to restrict their
country's growth rate to around 8%, even that level of expansion will
place a strain on world mineral markets. Therefore, as with oil,
competition for nonfuel minerals between China and the industrialized
nations of the world will remain a permanent fixture of the global
economy.
ADDRESSING THE OIL IMPORT PROBLEM
Given that the perils of America's import dependence are a reality,
the question is, how can the nation's vulnerability be reduced?
Perhaps the greatest irony arising from our current energy and
minerals dilemma is that the answer has been at hand all along: make
better use of what we have.
In saying this, I am not advocating some draconian plan that relies
on effectively hamstringing the economy in the name of reduced energy
use. Rather, I am saying that America does not suffer from a shortage
of energy. The simple truth is that America's energy endowment is more
than sufficient to provide for all of our needs, both today and in the
future. The only real shortfall that we have is a shortfall of the
political will to find innovative ways to fully utilize the resources
we are blessed with.
For example, there currently are some 104 Trillion cubic feet of
``stranded'' natural gas resources in Alaska--gas than currently cannot
reach market due to an inability to transport it. Alaska's natural gas
could help reduce our dependence on imported oil, if only we were able
to find a way to get it where it is needed. In the long run, a gas
pipeline could provide the means for transporting Alaskan gas to
market, but it will take time to accomplish its construction, and time
is a luxury we do not have.
Fortunately, there is another way to take advantage of this
resource.
GAS TO LIQUIDS
The Fischer-Tropsch technology to convert natural gas to liquid
fuels has existed since the 1920s. It is currently in use in South
Africa to produce approximately 200,000 barrels of liquid fuel per day.
It would be possible to build a mobile Fischer-Tropsch processing plant
on Alaska's North Slope near Prudhoe Bay to convert the stranded gas to
liquid fuels that could be transported by the Trans-Alaska Pipeline
System.
In addition to helping reduce oil imports the project would have
several added benefits.
First, the fuel produced in this manner would be extremely clean,
and would thereby benefit the environment.
Secondly, as oil production at Prudhoe Bay continues to decline, it
will, in the near future, fall to a level insufficient to sustain flow
through the TAPS system. Therefore, a substantial amount of recoverable
oil might be left behind because it could not be transported. The added
volume of throughput generated by a gas-to-liquids plant would help
sustain the levels needed to maintain TAPS operations and thereby
significantly extend ultimate recovery from the Prudhoe Bay field.
A third benefit would be the ability to demonstrate the
practicality of building mobile gas-to-liquids plants for use by the
Armed Forces as a means of providing fuel in the field.
Perhaps the most important benefit, however, would be that in
demonstrating the practicality of converting natural gas to liquids in
the harsh Alaskan climate, the project would open the door to
exploiting the vast methane hydrate resources that exist in Alaska.
METHANE HYDRATES
Methane Hydrates provide another potentially huge source of energy.
They were discovered in the 1960s. They consist of methane gas trapped
in a lattice-like ice and are found largely in ocean bottom sediments
lying below 450 meters and in permafrost. The Energy Information
Administration estimates that the United States methane hydrate
resources in place hold 320,222 Trillion cubic feet of natural gas.
This is the equivalent of 51.1 Trillion barrels of oil. More important,
onshore methane hydrate deposits in Alaska are estimated to hold 519
Trillion cubic feet of natural gas, the equivalent of 82.9 billion
barrels of oil.
What makes methane hydrates so promising is the fact that in
December of 2003, a joint U.S., Japanese and Canadian research program
to determine if methane hydrates could be produced reported their
results. The answer was affirmative. According to officials involved in
the project, it will be possible to produce these resources
economically within a few years. Alaska's onshore methane hydrates, by
themselves, would be sufficient to eliminate the need to import oil
entirely.
But methane hydrates are not the only option.
OIL SHALE
The United States also holds 62.5% of the world's oil shale
deposits. The oil shale reserves found in the Green River formation
that extends through Wyoming, Colorado and Utah is estimated to hold
some 130 billion barrels of recoverable oil. The Eastern Marine
formation may hold as much as 400 billion barrels.
The earliest recorded production of oil shale occurred in Autun,
France in 1929. Even as the first oil well was being drilled in the
United States in 1859, the first commercial oil shale industry was
beginning in Scotland. Production there ranged between 1 million and 4
million tons annually between 1881 and 1955. After 1955, competition
from cheap oil imports caused production to gradually decline until
1962 when it ceased.
While interest in producing U.S. oil shale resources has surfaced
whenever oil prices rose sharply in response to tight supplies, new oil
discoveries would drive prices down and make oil shale an uneconomic
alternative. Oil shale was in effect always a bridesmaid but never a
bride. The need to be concerned over energy security coupled with
rising prices may finally provide an incentive to take advantage of
this prolific resource.
COAL
The United States is also richly endowed with coal resources. In
fact, the U.S. is the ``Saudi Arabia'' of coal holding 25% of the
world's recoverable coal reserves. Totaling 275.1 billion tons, U.S.
coal resources are sufficient to meet current production levels for 200
years. Like natural gas, the technology to convert coal to liquid fuels
has been long known. Also, new advances in Clean Coal Technology have
addressed many of the environmental concerns that previously caused
objections to coal liquefaction and gasification. Moreover, as with oil
shale, the concern over energy security coupled with the anticipated
sustained high prices for oil may combine to make synthetic fuels
produced from coal an economically viable alternative.
While alternatives like methane hydrates, oil shale and synthetic
fuels from coal all provide options that could and should be pursued,
there is another source of fuel to offset oil imports that warrants
consideration: making full use of our domestic oil and gas resources.
CONVENTIONAL RESOURCES
Vast, undeveloped deposits of oil and natural gas lie in areas
foreclosed to exploration. The Arctic National Wildlife Refuge, for
example, holds what may be the last onshore ``Super Giant'' oilfield in
North America. Further, the experience of developing the vast Prudhoe
Bay oilfield has demonstrated that oil and gas exploration and
production can be conducted in sensitive environments without causing
irreparable harm.
Similarly, there are huge potential deposits of both oil and
natural gas in offshore areas currently foreclosed to exploitation. As
with the Arctic, much experience has been gained in developing offshore
hydrocarbon deposits that shows such resources can be produced in an
environmentally sound manner.
NEW TECHNOLOGIES AND ALTERNATIVE FUELS
In addition to developing our rich domestic energy endowment, it
also makes sense to encourage both efficiency and non-hydrocarbon
alternatives. One of the most promising new technologies is the hybrid
electric vehicle. Although automobile manufacturers may well have
initially introduced hybrids as a response to pressure from
environmental interest groups, their public acceptance has far exceeded
anything that could have been anticipated. As a consequence all of the
major auto manufactures are seeking to expand their hybrid lines. A
particularly interesting new development is the so-called ``plug-in''
hybrid electric which can achieve a fuel efficiency level of several
hundred miles per gallon.
Alcohol fuels and other bio-based fuels also can help to offset
some portion of oil imports. But in the end, it is also important to
recognize that there are roughly 220 million privately owned cars and
light trucks in the United States that will continue to require
conventional fuels to operate. Since their average lifespan is 16.8
years, the need for conventional fuels will remain with us for decades
to come. Therefore, options like gas-to-liquids, methane hydrates, oil
shale and synthetic fuels as well as expanded production of
conventional oil and gas resources will be necessary if import levels
are to be reduced.
What is perhaps most critical in developing a plan to reduce
America's oil import burden is to recognize that there is no single
solution. Rather the answer is to do everything. We must take full
advantage of both conventional and unconventional resources and
encourage efficiency and new technologies.
ADDRESSING THE NONFUEL MINERALS PROBLEM
The problem of nonfuel minerals imports is somewhat more difficult
to address than that of oil import dependence. The reason for this is
that there are some mineral commodities that are not found within our
borders. Therefore, any program to address nonfuel mineral imports must
take a two-part approach.
As with domestic energy resources, our dependence on imports for
some nonfuel minerals is the product of government restrictions. While
it was the policy of the U.S. government to encourage domestic mineral
development through the middle of the 20th century, a variety of laws
and regulations were imposed beginning in 1964 that increasingly
discouraged domestic mineral development.
Over the succeeding decades, more and more restrictive regulations
have been added to the mix with the end result being the decline of our
extractive industries. The impact of these rules is most dramatically
illustrated by the fact that North American mineral firms only allocate
between 7% and 10% of their exploration budgets to the search for
domestic minerals.
Clearly, removing unreasonable or excessively restrictive
regulations will go a long way towards reviving the domestic mineral
industry and reducing the need to import those minerals that can be
produced from domestic sources. There still remains, however, the
problem of meeting the need for minerals that cannot be found at home.
There are three ways in which this problem can be addressed.
The first step is to ensure that the government maintains adequate
stockpiles of those strategic and critical materials we cannot produce
for ourselves. History has demonstrated that no matter what the cost of
maintaining a strategic stockpile may be, it is still cheaper than
attempting to acquire critical materials in a time of crisis through
the marketplace.
A second step is to encourage the recycling of those minerals that
can be retrieved from abandoned equipment. For example, millions of
automobiles are scrapped each year, and all of them have catalysts that
contain platinum group metals. Many of these catalysts are retrieved so
that the platinum group metals they contain can be recovered. We should
ensure that they all are.
A third step is to aggressively research alternatives to those
nonfuel mineral commodities we cannot produce for ourselves. In this
way the need for imports can be permanently ended.
CONCLUSION
I began my testimony by saying that America was rushing headlong
into disaster. I stand by that statement. Our transoceanic energy
resources are already under assault and it is just a matter of time
before forces hostile to our nation and what it stands for succeed in
causing a major disruption of supplies. Whether it is the result of a
terrorist act or an intentional embargo as occurred in 1973 is of
little consequence. What is important is to understand that it is
coming and coming soon--probably within the next two years. When it
does happen we should not again find ourselves asking why nothing was
done to prevent it.
Even if there is no supply disruption, however, there remains the
fact that increasing competition for energy resources will continue to
exert an upwards pressure on prices. This holds out the prospect of
high energy prices reducing economic growth, fueling inflation and
further aggravating our balance of trade.
Most important, it also means that we will continue to export jobs
abroad.
And also bear in mind that some portion of every dollar we spend to
purchase transoceanic oil finds its way into the hands of people who
intend to do us harm.
I also repeat that the disaster we are facing is of our own making.
The United States is endowed with a resource base more than adequate to
meet its needs--if only we are able to make full use of it.
The choice we face is simple. We can either find the political will
to do those things necessary to break the shackles of oil and nonfuel
mineral imports, or we can continue to stand idly by and allow events
to overwhelm us. If we fail to find the courage to do what is right, we
will have no one to blame but ourselves when the next crisis wreaks
havoc throughout our economy.
______
Mr. Gibbons. Thank you very much. We appreciate, certainly,
your testimony. It's very helpful, as I said about the other
testimony before the Committee as well. And we will turn now to
Mr. Hegburg for your comments. Welcome, the floor is yours, and
I look forward to your testimony as well.
STATEMENT OF ALAN S. HEGBURG, SENIOR FELLOW,
CSIS ENERGY PROGRAM, THE SCOWCROFT GROUP
Mr. Hegburg. Thank you, Mr. Chairman. And thank you very
much for the invitation to appear before you.
If I could, I would just like the record to show that I'm
here on behalf of the CSIS Energy Program, and solely on their
behalf, and I don't speak for anyone else.
Mr. Gibbons. Certainly.
Mr. Hegburg. I would like to just pick up on something that
was mentioned this morning, which is the nature of the oil
market as it is, and how you look at it, and what that means
going forward for the United States.
There are several interpretations as to what's going on in
the market, but two of them are quite important for the next
round of investment in the oil and gas business, particularly
in the oil business. One is that this is a bubble market, this
is a very high-priced market, and it's an analysis that's held
mostly by energy economists that because it's an energy market,
it will decline rapidly, and then we will come back again. And
the cycle of going up and coming down is very short.
Now, if you're an investor as an oil company, that means
that you're looking at a very short term where you're going to
be at high prices, and then all of a sudden very quickly, you
are at low prices. So I think there is a logical explanation
for why companies are not investing.
Not investing anywhere in the oil sector--although
investment is taking place, but not at the rates that are
needed--comes at a time when the entire surplus of this sector
has been worked off. Earlier we discussed the surplus on the
oil-producing side and surge capacity and how that has come
down to essentially a million barrels a day for an 80-million-
barrel-a-day demand. The surplus in refining capacity. The
surplus in the service sector and probably in pipelines too,
not just in the United States, but worldwide; pipelines are
being built elsewhere, but, in fact, a lot of investment needs
to come into this infrastructure to meet the demand numbers
that are out there.
The second interpretation, which is a longer
interpretation, is that we are at a structural change in the
oil market in that we're at higher price levels, and we're
going to see these levels for some amount of time. So the
investment cycle is longer, it's not shorter, it's not 3 years,
it may be 10 years; it may be longer than that, which means you
should invest because you can get your money back relatively
quickly, and then if the prices are going to stay high, you can
generally make money, as a private investor, over a fair amount
of years.
Those are really two fundamentally different views of what
the future holds, but they have obviously severe implications
for the structure and the ability to supply the demand which we
see in the short term. And I think Guy Caruso talked a bit
about that in terms of the period after 2025, but, in fact, the
period of 2010 to 2015 actually is quite important. And I think
in the short term, as was mentioned, it's particularly
important in the refining sector since the capacity in the
refining sector is very high and it's being used very much.
That means unless there is investment in the refining sector of
the United States, we will see a fair amount of product
imports.
Now product imports have historically come from the
Caribbean and from the Atlantic basin. The Atlantic basin
product import supply is coming down, and that suggests that
we're going to have to rely more and more on the Caribbean. And
there is very few refinery positions left in the Caribbean,
which means you have to import product from a longer distance,
which means they're more expensive. So the refining sector,
given the nature of it on a worldwide basis, is an equally
important need in this society, as the producing sector is.
And it seems to me for Congress, in its deliberations and
looking forward, one of the issues--and I don't do policy
issues for Congress, I'm not a lobbyist, but one of the issues
is how do you encourage the financial markets and the capital
markets to invest at a time when they're hesitant to invest
because their market outlook is too short?
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Hegburg follows:]
Statement of Alan Hegburg, Senior Fellow, Energy Program,
Center for Strategic and International Studies, Washington, D.C.
Mr. Chairman, Members of the committee, I appreciate the
opportunity to appear before you today to discuss recent global oil
developments and their implications for U.S. energy requirements and
commercial markets.
I am appearing on behalf of the Center for Strategic and
International Studies where I am a Senior Fellow with the Energy
Program. The remarks are drawn from some recent CSIS analysis as well
as from my own personal observations and experience, including policy
positions in the U.S. government and almost 20 years in the energy
industry.
Recent Developments.
Over the past 18 months there have been three significant
developments which have prompted serious assessment of the implications
for U.S. energy supply for the immediate period as well as for the long
term.
They are:
Forecasts from the EIA predict a 50 percent increase in
worldwide oil demand over the next two decades. These demand forecasts
take place at a time when the surplus in oil surge capacity is at its
lowest level in 30 years.
Unexpected high oil prices in 2004. Prices increased
rapidly, similar to the increases in the 1970s, suggesting a structural
shift in oil prices to a higher level. Surprisingly, this occurred
without prompting a major public outcry and with little impact on
short-term world economic growth.
The emergence of new competitors in the international
market place determined to secure short term oil imports as well as
longer term oil investments.
These and related developments have prompted a reassessment of the
implication for U.S. energy policy as it seeks to adjust and manage a
changed international energy market.
Demand forecasts.
EIA's long-term forecast for oil demand is similar to that of the
International Energy Agency. Behind the 50 percent increase in oil
demand to 2025 is a short-term demand forecast reflecting a continuing
dramatic increase in the growth of oil demand.
Historically, short-term demand has grown only slowly. For example,
it took 18 years for oil demand to grow from 60 to 70 mmb/d. However
the increase from 70 to 80 mmb/d took only 8 years. Now, the IEA
forecasts oil demand to exceed 90 mmb/d in 2010, only five years from
now.
This pace of increase will require dramatic increases in investment
and infrastructure all along the oil supply chain.
Even if continued high prices reduce this rate of growth, and
absent a major economic or financial change, oil demand is expected to
remain on an upward trajectory for the foreseeable future.
Given the long lead times in the oil investment cycle, the
increased supply to meet this demand will have to come from areas with
some surplus capacity, primarily the Middle East, as well as from new
production in the Caspian, Latin America, Africa, West Africa, and the
U.S. offshore Gulf of Mexico.
Beyond 2010-2015, production from the Arabian Gulf will account for
the major share of incremental supply to the world market.
With U.S. oil production flattening increases in U.S. domestic
consumption will be met increasingly from imports. This increased
dependency will include both crude oil and, absent significant
investment in domestic refining capacity, refined petroleum products.
Oil Prices
The period 2003-2004 witnessed a wide variety of supply
developments contributing to the rapid increase in prices. These
included: declines in Venezuelan production; domestic strife in Nigeria
leading to reduced crude exports; strikes in Norway; concern over
Russia's ability to sustain production and exports as a result of the
Yukos affair and pipeline capacity concerns; sabotage and security
concerns in Iraq; and, the sustained loss of U.S. production in the
Gulf of Mexico resulting from Hurricane Ivan.
Oil prices remained high in spite of increases in production from
OPEC member countries. The quality of the OPEC crudes being offered to
the market was less attractive to refiners who were competing for the
higher quality crude oil leading to price discounting for the surge
capacity offered to the markets.
The most significant cause of higher oil prices was higher demand,
however. Growth in Chinese and U.S. oil demand accounted for the
majority of the worldwide increase.
With supply continuing to be stretched and demand forecasts
continuing to be bullish, most analysts expect oil prices to remain at
or near current levels for the next year or two. Whether these prices
demonstrate a cyclical or a structural change in oil prices is a major
question.
For many of us the change appears structural as industry and
consumers adjust to the higher price levels. At the same time, there is
also likely to be a correction in response to market developments.
New Competitors in the Market Place
The emergence of China in both the trading and investment markets
has prompted speculation if not concern. In the trading market, China
has emerged as a new competitor for worldwide crude oil in response to
its increasing demand and short term peaking of domestic production.
Of equal importance is the emergence of Chinese investment in both
OPEC and non-OPEC countries. Chinese companies have aggressively
pursued oil investment opportunities in, inter alia, Kazakhstan, Sudan
and Australia, and is considering deals in Venezuela, Canada, Russia
and Iran. China, as a matter of strategic importance, appears
determined to lock up long-term supplies in expectation of continuing
tight markets.
Private companies complain that the ability of the Chinese to
outbid them for attractive prospects reflects their lower cost of
capital and ability to offer political sweeteners and perhaps guarantee
better prices. At the same time, there is at least one example of China
winning a closed auction indicating that the record of Chinese
investment practices is mixed.
The practice of tying commercial investment to politics and finance
to acquire oil supplies is not new. The French government pursued a
similar strategy in the late 1970s rather than join the International
Energy Agency with its reliance on multilateral cooperation and market-
based strategies.
Whatever the nature of the deals, Chinese oil trading and
investment strategies carry the potential to lock up attractive
additional opportunities at the expense of private investors and, of
equal importance, reduce the liquidity in the trading market as the
crude it obtains is likely to be dedicated solely for use in the
Chinese market.
Bilateral oil deals involving consuming governments are a two edged
sword for a producing country. On the one hand they appear to offer a
guaranteed and growing market for incremental production, something
producers have sought for years. However such access may come at the
expense of price, as Chinese investors and buyers try to leverage
guaranteed access to the market in exchange for lower prices.
Implications for U.S. policy
U.S. policy since the Carter Administration has been to rely on
private investment, international commercial decisions on investment
and trading activities, and access to a generally fungible
international market to supply the United States. The United States has
been able to leverage access to an attractive domestic market in which
to invest and sell under commercial terms to encourage sales and
investment. This strategy has worked.
The question is whether this strategy can continue to assure
supplies at the levels required and at acceptable prices.
Worldwide investment over the past year in the oil sector has
reportedly been below levels needed to effectively meet increasing
short-term demand. In addition, and in spite of higher prices, private
companies appear to have had difficulty replacing oil reserves over the
past year. The reasons appear to be numerous and involve a failure to
obtain access to promising opportunities, delays in bringing new
production on stream, and changes in investment terms.
Several producing governments have radically changed investment
terms by increasing the government share of the investment,
unilaterally changing investment laws, and increasing the government
financial take.
These developments can have serious consequences. They can reduce
the attractiveness of international investment particularly in those
countries expected to provide incremental production. Abrupt government
decisions to abrogate the financial terms of the investment contract
can, at a minimum, reduce the reinvestment opportunities needed to
continue to increase production. Such action also reduces the amount of
money available to private investors for investment. And, most
importantly, these practices tend to have a dampening affect on the
addition of new short term oil production to meet the expected demand
growth, helping to maintain high prices if not increase them while
doing little to improve the supply demand balance over the mid to
longer term.
It is in this context in which the debate over the future of U.S.
energy policy is being framed.
______
Mr. Gibbons. Thank you very much, Mr. Hegburg. And I
appreciate your testimony, too, because yours is the economics
of investment, which is very important.
I always want to ask a few questions, if I may, and
beginning with you, Mr. Hegburg, because what I see is a
difference between large national oil companies and small
private oil companies and the way that they're able to--small
companies aren't able, I should say, as readily or with the
same economic efficiency as national oil companies--to attract
capital. Why--how do you explain that? I mean, they're all
dealing with the same commodity at the end, but we've got a
lower rate or a lower or a better--or sweeter, I should say--
capital infusion with national oil companies than with the
smaller private oil companies. Why is that?
Mr. Hegburg. Mr. Chairman, can I just make sure we're
talking about the same thing?
Mr. Gibbons. You must, because you're talking to a
geologist here that doesn't know what he's saying. Go ahead.
Mr. Hegburg. National oil companies, to my mind, is a State
oil company, such as Saudi or Amoco or Kuwait Petroleum
Company. Then there's the international majors, which are
privately owned-- ExxonMobil, BP, Shell. Then there are the
smaller, independent companies which are the companies that
vary greatly in size in the United States. Also, there are a
number of independents overseas in other countries.
If the question is can the smaller companies attract
capital? Some of the larger independent companies can, and they
are in the international marketplace, and you will see them in
Egypt and Algeria. Some of them are very interested in Libya
and have actually obtained acreage. Their strategies vary in
terms of investment. They will sometimes try to get a position
and then farm out that position to a larger, better financed
company to help them pay for it and take a smaller share,
depending on what they've found.
Also, they may be in consortia. International companies,
both the independents as well as the large international
majors, normally bid in consortia, as opposed to individually.
And that means smaller companies can come in and take in 5 or
10 percent, which reflects their position. And it happened in
Azerbaijan; for example, there were a number of smaller
companies that came into consortia in the early days of
Azerbaijan.
The very small independents in the United States obviously
have a problem making--having enough money to play in the big
areas, so unless they consolidate or find something else, they
are essentially excluded from the international marketplace.
Now, they can go to Canada, which is relatively simple for them
to invest, but getting into a larger play somewhere
internationally is partly a function of capital, partly a
function of human resources. And just from my own experience,
at least one large company I'm aware of, when Russia opened up,
decided not to go into Russia because it would have tied up its
human resource capacity in the company, which meant it would
have committed, its geologists and financial people and lawyers
and production engineers would have been committed to Russia,
and the payouts in Russia look very long.
So it was not an economic decision to go into Russia, in
spite of the high degree of probability that they could find
reserves.
Mr. Gibbons. So really the difference between large
international companies and the smaller private companies in
terms of the cost of capital required to produce the same
product or the same oil from the same oil field is basically
due to, in terms of what I understood, the risk involved with a
smaller company versus a larger company?
Mr. Hegburg. I think that's it. There is a number of risk
factors that a smaller company is not willing to take on. Large
companies will take on a substantial amount of risk as long as
their portfolio is diversified, and that they have some very
high-risk properties and some very low-risk properties; so
they're not all in one place and their risk is very high. And
they have decided on their capital budgets that that's where
they are going to put their investment.
And you will hear anecdotally in the industry now among the
very large companies that they have a lot of cash, their
capital budgets are large, but they're not being spent because
they have decided to focus their efforts in 1, 2, or 3
countries. And this is a change because in the old days, if you
look back since 1979, companies invested throughout the world
in a variety of places and brought a number of new areas to the
floor, Angola was one, Azerbaijan is one, Kazakhstan is one.
These are all new producers in the marketplace. Azerbaijan was
an old producer in the Russia system, but it's a new producer
in the international marketplace. And that was largely because
companies went out and invested in a wide range of places, in
part because they did not find the U.S. Market attractive for
investment for a variety of reasons, or in part because new
areas were opened up, or in part because some of the OPEC
countries did not allow them to invest, and of course that was
Iran--because of U.S. sanctions--Saudi Arabia, Kuwait and the
non-OPEC Mexico, which you couldn't invest.
So you went and looked at those places you think you could
find oil. And of course that's what brought a huge amount of
investment to China, a lot of oil investment went into China.
And they've had relatively good success, particularly in the
Bohai and down in the South China Sea finding oil, but it was
driven, in part, by opening up to foreign investment.
Mr. Gibbons. Mr. Copulos, we heard testimony from the IEA
representatives that were here talking about the 2020 timeframe
for China and the increase of about 1.4-million-barrels-per-day
consumption, which I was somewhat surprised, in reading through
the testimony, that they say that that sort of change in the
economic picture for China will have very little influence--or
not very little influence on overall market trends. Do you
agree with that or do you disagree with that?
Mr. Copulos. No, I think it's utter nonsense. China and
India together, particular--Asia in general, but China and
India in particular are going to be driving the world oil
market for decades to come. They said that you could see--for
example, at the same time they said you could see China
automobile ownership increase from one in 1,000 to one in 100.
Well, if you do the math, that's 120 million automobiles that
suddenly are on the road. Now that's going to be a major
factor.
Also, at the same time that you're seeing this growth of
Chinese and Indian and probably Philippine and Indonesian
consumption, you're also going to see a decline in a lot of the
world's older oil fields unless a lot more is found, and
certainly in terms of the U.S. So it means, among other things,
that we're going to be competing much more vigorously with the
Chinese for overseas supplies if we don't do something more to
develop what we have here at home.
Mr. Gibbons. Well, can we make up our own energy shortfalls
by depending upon increases in efficiency and renewal of energy
sources in this country?
Mr. Copulos. No. When people talk about, for example, the
CAFE standard automobile mileage, if today you wanted to offset
our imports using CAFE, you would have to average 420 miles to
the gallon. Now, my car doesn't quite do that, but the trouble
is that's a moving target, because as we add more automobiles
and domestic production were to decline, you would have to be
running ever faster to stay in place. So it's one of those
things designed by the left.
Mr. Gibbons. So if we do nothing, in other words, if we
keep status quo on our domestic production in this country,
we're going to ultimately end up with an enormous trade deficit
by the imported energy alone. What do we need to do in this
country, in the United States, to increase domestic production
or domestic--from domestic supplies of oil and gas?
Mr. Copulos. Well, let me begin by saying there is no need
for us to be importing any oil whatsoever, we can do it
domestically. And what we need to do first and foremost is to
open up those areas to development that are most evident where
we know we can do things. For example, if we went into Alaska,
we've got 104 trillion cubic feet of stranded gas up in Alaska.
If you were to build a gas-to-liquids plant up there, convert
that, that's 16.6 billion barrels oil equivalent. If you went
into ANWR next door, the U.S. Geological Survey estimates that
at 10 billion barrels--of course they've never been right on an
estimate, in my recollection, they tend to be very low, but
let's take their number, 10 billion barrels, then there's an
onshore deposit of methane hydrates, which is equivalent to 519
trillion cubic feet of gas, or about 82.9 billion barrels of
oil converted from gas to liquids to fuel. So right there you
have 4 times our current proved reserves in just those 3 items.
Then we have our offshore oil and gas, which is an enormous
resource we've barely tapped. We have 500--and I'm using the
low USGS estimates on this by the way--530 billion barrels of
oil equivalent in oil shales, that's twice Saudi Arabia's prove
reserves. We've got 275.1 million tons of coal which can be
converted using clean coal technology, and that doesn't even
begin to get the real foreign burner, which is methane hydrate.
So as I said, we've got 320,222 trillion cubic feet of natural
gas, 51.1 trillion barrels of oil. So we can do it.
What has been lacking is not the resources, what has been
lacking is not the technology--and I should also add, we do
have a lot of alternatives that have value--what has been
lacking is a political will, and until such time as we find the
political will, we're going to stumble along.
I was telling one of the staff people here I ran across a
piece I wrote in 1978 that said that by the year 2010, we would
be importing 70 percent of our oil, and we would be paying $65
a barrel if we did nothing to resolve the issue. Well, 5 years
from now--I may have been a tad high on the percentage and a
tad low on the price, but we're pretty much in that ballpark.
And I didn't come to that conclusion because I'm some kind of a
genius, it's because I could add and subtract and look at
decline rates, and increases in consumption. It's not rocket
science to figure it out. It's also not rocket science to
figure out the solution, which is to use what we have, use it
efficiently, use it cleanly, but use it.
Mr. Gibbons. What will it take to move the political
pendulum, in your opinion, in a direction which will allow for
decisions to be made, policy decisions to be made in this
country to promote, for example, the utilization of oil shale
methane hydrates, additional oil fields that we now know are
out there, ANWR, et cetera; what is it going to take?
Mr. Copulos. Well, I have seen it twice in my lifetime--
I've been doing this about 31 years--and the first time was the
construction of the Trans-Alaska Pipeline System, which had
enormous opposition until the 1973 embargo, and all of a sudden
prices went through the roof, supplies were short. The second
time was during the Iranian oil boycott war, about three things
mixed in altogether there, when again, prices went up real
high, supplies were short. And we made so much progress on
that, few people know this, that by October of 1985, Saudi
Arabian exports to the United States had fallen to 27,000
barrels a day. It panicked them. They entered into force
measure provisions in their contract to cut oil prices in half.
By April Fools Day, 1986, the spa price was actually $9.99, but
the result was they went from 27,000 barrels a day of exports
to the U.S. To over 800,000 in a very short period of time. And
in the process, by cutting the price, destroyed much of the
U.S. Independent oil industry and caused a huge number of
stripper walls to be shut in, losing an enormous amount of
domestic production. Had they not done that, I don't think we
would be sitting here today talking about this issue.
So it's two things, it's price and supply; and frankly,
supply more than price. People will find a way to pay for
energy no matter what it costs, but when there are gasoline
lines out there they start shooting each other.
Mr. Gibbons. Mr. Hegburg, you wanted to make a statement.
Mr. Hegburg. Thank you, Mr. Chairman.
Could I just make a couple of observations? I don't want to
get into the debate about ANWR and CAFE standards, but it seems
to me there's a couple of things to look for. One is, in the
transportation fuels market today in this country, we're seeing
alternative fuel penetrate the market, so the market may be
driving us somewhere to reduce our reliance on pure gasoline;
that is possible, and that will actually have an impact on our
transportation fuel demand, which is the core of the import
problem for the United States. I'm not saying it's going to be
within a couple of years, but in fact it is happening.
And it may take a different form, but the fact that we do
see alternative fuels emerging in the marketplace--and not just
what CNG and others suggest, but there is an opportunity out
there to reduce the demand that we have and the growth in
demand for gasoline in this country.
Mr. Gibbons. Let me follow that up because I think that
leads to a very important part of this question, part of the
equation, and that is that would require a dramatic increase,
as you stated, in investment in infrastructure because
alternative fuels are going to require, as Mr. Peterson said,
construction of new highly complex, very technical shipping
requirements, ports for LNG, but if you've got some of these
alternative fuels, you're going to require a new infrastructure
to replace current and existing infrastructure.
Where do we go to get that level of international or
national investment that's going to be required for this?
Mr. Hegburg. Thank you, Mr. Chairman. I was keeping metric
gas outside the issue of transportation fuel and focusing on
the oil alternatives to oil transportation and better use of
transportation fuels in the oil sector. There is no question
infrastructure investments will have to be made, we're going to
have to make them anyway. I mean, the point is, as I was saying
earlier, we need more infrastructure investment in the United
States, whether it's in imports, whether it's in refining, and
everything else. And it happens when returns attract the
capital. And if you anecdotally talk to refiners today and ask
them why are they not investing in refining capacity at
adequate levels, you think, well, it's the environmental
question, it's the permitting question, and it's generally the
return question. They are very hesitant in refining sector to
make huge amounts of investment which is what the refining
sector requires because they are very uncertain, particularly
if they have a 3-year time horizon, that they could actually
end up with very high-cost investment and very, very low or
negative returns. So the markets have to sort of pick up on
that.
Mr. Gibbons. Very briefly. What does the government need to
do to ensure or to encourage that kind of investment at this
point, then?
Mr. Hegburg. I hate to speak for the industry, because I
have no idea what they would like from the government. In some
places they would like better depreciation rates, they would
like--some companies would like, in the case of Alaska, as you
know, guaranteed rates at the well head for natural gas, and I
think that is to protect from the down price pressures on
natural gas, because I think as we have discussed earlier, LNG
is likely to drive prices down in the United States, not up,
and if that's the case, then the Alaskan gas is going to be
very much like long-hall Russian gas in the 1970s, it was very
expensive, and the net backs at the well head were very, very
low. So there will be pressures for that; obviously there would
be pressures for some kinds of fiscal incentives. I'm sure that
you've all heard this from companies, but those are the kinds
of things I can imagine that would be on the table for them
when they start going down this road before they go to the
investment decision.
Mr. Gibbons. Well, it seems to me, then, it's going to take
almost a crisis of some sort before government reacts then to
some pressure from an industry to get them to move; because
normally government doesn't move voluntarily in any direction
unless there is external pressure of a magnitude which would
justify, you know, changes to our policy at this point in time.
So are we going to have to reach a crisis before we get
government to act to do these things that should be done in a
long-term anticipation of where this country's energy needs are
going to be?
Mr. Hegburg. Thank you, Mr. Chairman. I agree with you. A
number of us have been surprised when prices went up over the
last year or so that there was no huge reaction of the public
at large. It did have a demand impact, obviously, not very
great, unlike 1979 when people were lined up around the block
to get oil.
What will it take? It may take a crisis, that's
historically how we actually do public policy often. It also
may just take, as I mentioned earlier, market changes,
fundamental market changes which sort of occur in the current
situation without a great deal of crisis when companies decide
there is something to this, this market has legs, we need to be
in this market, we will be late to the market, but we need to
be in the market.
And it's conceivable that in the industry itself--and I
think over the past month or so I have noticed a couple of CEOs
are talking about energy policy and the need for energy policy
and the need for changes in energy policy. Now they're not
specific, but when the industry participants start talking
about the need for changes, that suggests to me that they are
willing to be public and say things that they otherwise
wouldn't say in a marketplace where they were perfectly
satisfied with what was going on.
Mr. Gibbons. Before I release you gentlemen from this
panel, I want to go back to Mr. Copulos, who talked a little
bit about the increase in our dependency on 17 commodities,
commodities that I think we're 100 percent dependent upon in
this country. And you know that the value of imported raw and
processed mineral commodities has increased, even though the
volume of imports has declined.
Do you believe that we have a sound policy today regarding
this problem; or do we need to have a new policy, an Interior
Department policy for not only recognizing, but collecting the
information for this, that we're now seeing being stripped from
our inventory of information that we collect all this?
So I guess two parts of that question: One, the economics
of 100 percent dependence on 17 commodities. And second, the
removal of information from our ability to collect that data
and know where that data is leading us.
Mr. Copulos. Well, to answer your first part, I come at
this from a perspective of having been the author of the one
and only Strategic Minerals Report done by the National
Strategic Minerals Council in the White House--it was abolished
right after that--and one of the things we learned at that
time--
Mr. Gibbons. When was that produced?
Mr. Copulos. 1988. I actually have a copy somewhere in my
files.
What we saw then was there was a lot of pressure to get rid
of stockpiles, strategic stockpiles for budgetary reasons, one
would be to sell it to help alleviate the deficit. The only
trouble with that strategy is, as we learned in World War II
and during the Korean War and many other times in our history,
was that no matter what the stockpile costs--and we're only
talking about minerals we can't produce ourselves and don't
have a substitute for--it's a fraction of what it's going to
cost you to--stockpiling is going to be a fraction of what it's
going to cost you if you have to buy it in times of crisis.
We allowed our World War II stockpiles to be sold off and
decline immediately after--in the immediate post-war period,
Korea came along and we paid 8 to 10 times their value to
replace them in a very short period of time under crisis
conditions, which caused all sorts of other problems. When the
Korean War broke out and during the Vietnam War, we had been
dumping some of our nickel stockpiles, there was a Canadian
nickel strike, and all of a sudden we wound up short of
nickels. These things happen.
And so we have to hold ourselves harmless against them,
especially when you're talking about, for example, gallium;
gallium arsenide is fundamental to the manufacture of computer
chips. And I don't think there is anyone who would argue that
today the computer is not an essential element of our society,
it also happens to be an essential element of our national
defense with the new electronic battlefield that we've seen
operate so effectively.
Graphite, which we tend to think of as pencils, is also
what is being used to manufacture microchips. So we need a
stockpile. Where we can develop substitutes through R&D we
should. And we should also look into recycling. There are a lot
of things like millable metals, and so on that you can recover
from through recycling. And a lot of that's done, perhaps we
need to make sure it's done to the maximum degree possible.
Now in terms of information, one of the reasons we were
able to do the report that we did in 1988 is we did have access
to that information, We had good information. You can't make
good decisions without good information. I'm always in favor of
having as much information available to our legislators as
possible because the decisions they make are far too important
to be made in the absence.
And if I might, I do want to add one brief thing that gets
us back to energy a little bit. Talking about alternatives,
because I think one thing we need to really get into the record
and start understanding is to start being honest about what
alternative energy is and is not doing in our economy.
On the transportation sector, if you factor out alcohol
fuels that are used as an octane booster and inoxygenate an
extender. There are about 175,000 alternative fuel vehicles on
the road today, the bulk of which you're seeing is your natural
gas. So let's not argue that they are making a lot of inroads,
it's simply not true, and we're fooling ourselves if we say
they are.
The other thing is, in many cases the alternative fuel
vehicles that are out there are dual-fueled, and they're using
gasoline instead, and I can give you a longer list of examples.
That's not to say they can't be used, shouldn't be used, or we
shouldn't encourage them, but I think one of the things we need
to do is start making sure that when people do acquire an
alternative fuel vehicle, they actually use the fuel.
The second thing is we have to bear in mind that there are
220 million cars and light trucks that are currently in the
United States today; they need conventional fuels, you're not
going to go back and retrofit them, they've got an average life
span of 16.8 years. And as long as they're on the road we're
going to need--we looked at this in our 2003 report, and it was
our estimate that it would take 25 years to make a transition
from our current fuel mix to alternatives. I think that figure
is still valid. It can be done, but we need to first make a
decision that we want to do it.
Mr. Gibbons. Thank you both very much. We're, of course,
running out of time here for our panels, and I just wanted to
sum up--first of all, I would like to show a slide if I could,
if we could bring it up on the screen there for not just the
panel, but for the audience as well.
As you look at that graphic up there, it's pretty much of a
statement of the balance between the economic and environmental
progress we've made between 1970 and the year 2000. And as you
can see, since 1970, there have been emissions of six criteria
pollutants that have dropped between 28 and 98 percent. And
while in America we saw 164 percent increase in the GDP, a 37
percent increase in population, a 42 percent increase in energy
consumption, and a 140 percent increase in vehicle miles
driven.
Now, what this says is that we have significantly increased
our gross domestic product in this country by vehicle miles
driven, while at the same time reducing pollutants in six
important criteria for air pollution.
I don't think we could achieve the reduction in our
pollutants or the increase in the economic standard of this
country without the state-of-the-art pollution controls and
energy efficiencies from our factories, from manufacturing, in
vehicles, and offices in homes throughout. So I think what the
point of this slide is that it's clear the United States has
the technology to both improve its economic base, as well as
address air quality standards and reduce the pollutants in the
air as well. So to me it's a very important indicator of the
American ingenuity, the entrepreneurial skills in this country
in order to balance out the economy that we have in this
country.
And if we can go to slide 2, I think this is what we're
faced with now as we look over there. We're looking at the
problem of having areas of this country which are known sources
of--known areas where there are resources for this country to
develop, but they are off limits. When you look at that area
for California, the east coast, the Florida coast and the Gulf
of Mexico, the center part of the Rockies, all of that's
literally off limits to oil and gas exploration and
development. And as this country moves forward with its
economic expansion, the population expansion, the demand for
energy in this country can only increase if we expect to
maintain our economic advantage in the world, and I think it's
very clear to everybody and anyone who looks at this photograph
that we've got to address some of the problems we have with the
restrictions on our exploration for oil and gas if we're going
to be able to supply the demand, supply the needs of this
country. Even in, as many of you have said, the face of
alternative fuels which are out there--which are necessary,
they're needed, they're a critical component to the energy and
economic picture of this country, but we've got to start
looking at where we can produce these fuels, and what are our
restrictions and why are we restricting ourselves from that.
That, I think, was the fact and the issue that Mr. Peterson was
talking about.
We have created our own binding restriction on this country
by ourselves by refusing to allow oil and gas exploration--for
whatever reason, whether it's aesthetic purposes, NIMBY
purposes, whatever you want to call it, the not-in-by-back-
yard-issue, which I think hurts us, harms us economically
tremendously in our ability to get over the importation of
foreign sources of energy for this country.
With that said, let me wrap this up because many of you
have been here longer than had anticipated for this hearing. I
do want to thank you gentlemen, and as I said to the previous
panel, we will submit written questions to you, we would ask
that you look at those questions, and of course respond to us
in writing for additional questions that me or members or staff
of this Committee may have. With that, I want to thank both of
you very much for sticking around that extra time,
understanding the Congressional schedule being part of our
Committee, giving us what I think is probably some of the most
insightful testimony and interesting facts with regard to where
this country is going regarding our energy portfolios, where
we're going economically. Where we need to be going in the
future is a very critical policy decision that we in Congress
have to make. And your assistance, your help, your insight and
guidance is a big part of that overall picture.
So with that I want to thank you both. I want to release
the second panel, and with that, in addition, this Subcommittee
hearing is adjourned.
[Whereupon, at 12:40 p.m., the Subcommittee was adjourned.]