[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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                         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
                                 ------                                

              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


                                 ------                                
                            C O N T E N T S

                              ----------                              
                                                                   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.''

                              ----------                              


                       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.

[GRAPHIC] [TIFF OMITTED] T0126.009


    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.]

                                 
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