[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]





         AMERICA'S ENERGY NEEDS AS OUR NATIONAL SECURITY POLICY

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

                                HEARING

                               before the

                  SUBCOMMITTEE ON ENERGY AND RESOURCES

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 6, 2005

                               __________

                           Serial No. 109-14

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform
                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
20-688                      WASHINGTON : 2005
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001

                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut       HENRY A. WAXMAN, California
DAN BURTON, Indiana                  TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota             CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana              ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania    DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee       DIANE E. WATSON, California
CANDICE S. MILLER, Michigan          STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio              CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California          LINDA T. SANCHEZ, California
GINNY BROWN-WAITE, Florida           C.A. DUTCH RUPPERSBERGER, Maryland
JON C. PORTER, Nevada                BRIAN HIGGINS, New York
KENNY MARCHANT, Texas                ELEANOR HOLMES NORTON, District of 
LYNN A. WESTMORELAND, Georgia            Columbia
PATRICK T. McHENRY, North Carolina               ------
CHARLES W. DENT, Pennsylvania        BERNARD SANDERS, Vermont 
VIRGINIA FOXX, North Carolina            (Independent)
------ ------

                    Melissa Wojciak, Staff Director
       David Marin, Deputy Staff Director/Communications Director
                      Rob Borden, Parliamentarian
                       Teresa Austin, Chief Clerk
          Phil Barnett, Minority Chief of Staff/Chief Counsel

                  Subcommittee on Energy and Resources

                 DARRELL E. ISSA, California, Chairman
LYNN A. WESTMORELAND, Georgia        DIANE E. WATSON, California
ILEANA ROS-LEHTINEN, Florida         BRIAN HIGGINS, New York
JOHN M. McHUGH, New York             TOM LANTOS, California
PATRICK T. McHENRY, North Carolina   DENNIS J. KUCINICH, Ohio
KENNY MARCHANT, Texas

                               Ex Officio

TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                   Lawrence J. Brady, Staff Director
                 Dave Solan, Professional Staff Member
                          Lori Gavaghan, Clerk
                     Krista Boyd, Minority Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on April 6, 2005....................................     1
Statement of:
    Ebel, Robert E., chairman, energy program, Center for 
      Strategic and International Studies........................    72
    Hormats, Robert, vice chairman, Goldman Sachs International..    54
    Sell, Jeffrey Clay, Deputy Secretary, Department of Energy...    24
    Woolsey, R. James, former Director of Central Intelligence...    36
Letters, statements, etc., submitted for the record by:
    Ebel, Robert E., chairman, energy program, Center for 
      Strategic and International Studies, prepared statement of.    75
    Higgins, Hon. Brian, a Representative in Congress from the 
      State of New York, prepared statement of...................     6
    Hormats, Robert, vice chairman, Goldman Sachs International, 
      prepared statement of......................................    58
    Issa, Hon. Darrell E., a Representative in Congress from the 
      State of California, prepared statement of.................     3
    Kucinich, Hon. Dennis J., a Representative in Congress from 
      the State of Ohio:
        Prepared statement of....................................     9
        Prepared statement of Deron Lovaas.......................    15
    Sell, Jeffrey Clay, Deputy Secretary, Department of Energy, 
      prepared statement of......................................    26
    Watson, Hon. Diane E., a Representative in Congress from the 
      State of California, prepared statement of.................    91
    Woolsey, R. James, former Director of Central Intelligence, 
      prepared statement of......................................    40

 
         AMERICA'S ENERGY NEEDS AS OUR NATIONAL SECURITY POLICY

                              ----------                              


                        WEDNESDAY, APRIL 6, 2005

                  House of Representatives,
              Subcommittee on Energy and Resources,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:05 p.m., in 
room 2247, Rayburn House Office Building, Hon. Darrell E. Issa 
(chairman of the subcommittee) presiding.
    Present: Representatives Issa, Westmoreland, Marchant, 
Higgins and Kucinich.
    Staff present: Larry Brady, staff director; Lori Gavaghan, 
legislative clerk; Dave Solan, Ph.D., Steve Cima, and Chase 
Huntley, professional staff members; Krista Boyd, minority 
counsel; and Jean Gosa, minority assistant clerk.
    Mr. Issa. Good afternoon. A quorum being present, this 
hearing of the Government Reform Subcommittee on Energy and 
Resources will come to order. I want to thank all of our 
witnesses for being here promptly.
    A matter of housekeeping. It is likely that we will go an 
hour without a vote. If that occurs, we actually will get to 
hear all of your testimonies uninterrupted.
    I will begin with my own opening statement.
    Energy drives the U.S. and world economies. Our prosperity 
and way of life are sustained by energy. Affordable, reliable 
and sustainable energy supplies are essential to our national 
security and maintaining our global commitments. In the last 
decade higher global demand for energy, particularly oil and 
natural gas, has led to disturbing developments. As more 
nations increasingly depend on imports to meet their needs, and 
as the world approaches full oil production capacity, and some 
might say exceed, countries such as China are becoming more 
aggressive in pursuing energy agreements often with governments 
unfriendly to the United States. State-owned energy companies 
are becoming more assertive on the international market, 
creating an additional concern because of a lack of 
transparency in the contracting operations. New alliances and 
developments indicate a shift in energy geopolitics.
    And I might say that there is no question that what was 
once known has changed--and I particularly want to hear from 
Jim Woolsey, because of his tenure and position at the CIA.
    Domestically continuing high oil and gas prices are 
impacting families and businesses and could seriously affect 
our economic growth. Unlike other periods of price volatility 
over the last 30-plus years, today's period of price volatility 
is demand-driven. Because it is demand-driven, there is no 
person or group to blame for today's high prices. To a certain 
extent we are victims of our own success in that worldwide 
economic growth and development are raising the standard of 
living, but also dramatically raising the consumption of 
energy.
    In the second week of this administration, in 2001, with 
leadership and foresight, President Bush established the 
National Energy Policy Development Group and charged the group 
to develop recommendations for a national energy policy. Based 
on these recommendations, in the last Congress the House and 
Senate passed an omnibus energy bill, but reconciliation did 
not occur, and the bill was not enacted.
    It is now clear more than ever that we must adopt a 
comprehensive national energy policy and establish a long-term 
strategy to ensure the security of our economy and our national 
interest. At a minimum, such a policy must expand domestic 
opportunities for production of traditional and nontraditional 
sources of energy while expanding conservation and efficiency 
efforts.
    Today we will conduct a frank assessment of energy roles in 
our national security. We look forward to hearing from our 
distinguished panel, and today we are pleased to have the 
Honorable Clay Sell, Deputy Secretary of the Department of 
Energy. Secretary Sell previously served as special assistant 
to the President for legislative affairs, with an emphasis on 
energy; special assistant to the President for economic 
affairs, and staff director at the Senate Energy and Water 
Development Appropriations Subcommittee.
    We are also pleased to have the Honorable James Woolsey, 
former Director of the Central Intelligence Agency, and a 
Commissioner to the bipartisan, nongovernmental National 
Commission on Energy Policy. He is currently a vice president 
at Booz Allen Hamilton. His extensive administrative experience 
also includes time as Under Secretary of the Navy, general 
counsel of the Senate Committee on Armed Services, and delegate 
and advisor for diplomatic talks to reduce conventional and 
strategic arms in Europe.
    We are also pleased to be joined by Ambassador Robert 
Hormats, vice chairman of Goldman Sachs International. The 
Ambassador served in a number of administrations, holding 
positions as Deputy U.S. Trade Representative, Assistant 
Secretary of State for Economic and Business Affairs, and 
senior economic advisor to the National Security Council.
    Last and certainly not least, we are joined by Robert Ebel, 
chairman of the energy program, the Center For Strategic and 
International Studies. In addition to extensive private sector 
experience in the energy sector, he has been advisor to the 
U.S. Department of State on energy and diplomatic issues. He 
also served with the CIA for 11 years and spent 7\1/2\ years 
with the staff of the Office of Oil and Gas in the Department 
of Interior.
    We are delighted to have such a distinguished panel, and as 
is the custom of this committee, I would yield to the ranking 
member, Mr. Higgins, for such time as he may consume.
    [The prepared statement of Hon. Darrell E. Issa follows:]

    [GRAPHIC] [TIFF OMITTED] T0688.001
    
    [GRAPHIC] [TIFF OMITTED] T0688.002
    
    Mr. Higgins. Thank you very much, Mr. Chairman, for holding 
this very, very important subcommittee hearing on national 
energy policy and national security.
    I have two primary concerns. One is it is well established 
that our dependence on foreign oil for our national energy 
needs is a problem. It is a problem economically, and it is a 
problem in terms of national security. And that problem is, I 
believe, pervasive and growing. Economically, when the cost of 
foreign oil increases, historically since World War II our 
economy is more susceptible, more vulnerable to falling into 
recession, which is obviously of economic concern. Also, with 
respect to national security, I believe that as national 
security concerns are raised about the foreign terrorist 
threats, we have to look more at those things, those natural 
resources that can have a debilitating impact on our economy 
and, more importantly, our way of life.
    In western New York we are blessed with an abundance of 
fresh water. One-fifth of the world's freshwater supply is 
found in the Great Lakes and along Lake Erie. Also, the 
resources that we get from that great natural resource is an 
abundance of hydropower. In Niagara Falls we have the State's 
largest hydroelectric plant. Our concern regionally moving 
forward is that plant becomes increasingly threatened by 
terrorist attacks as an effort to debilitate our way of life in 
western New York.
    So I am hopeful that during this conference today, during 
this meeting today, we will hear from officials who can 
enlighten us as to the importance of energy policy, a real 
energy policy that addresses our national security concerns as 
well as our economic well-being moving forward.
    With that, Mr. Chairman, thank you very much.
    [The prepared statement of Hon. Brian Higgins follows:]

    [GRAPHIC] [TIFF OMITTED] T0688.003
    
    Mr. Issa. Now from our vice chairman, the gentleman from 
Georgia.
    Mr. Westmoreland. Thank you, Mr. Chairman. Thank you, 
Chairman Issa, for holding this hearing, and I am glad that 
this subcommittee is taking a look at the very important link 
between our economy energy prices and how national security is 
affected by both. I also appreciate the witnesses for taking 
your time to come and testify today, and I look forward to 
hearing what you have to say.
    As I said last time the subcommittee had a hearing, I think 
the bottom line to the problems that we are having with our 
energy is that we do not have an energy policy, and we 
desperately need an energy policy. I know that there have been 
two or three attempts made in the past several Congresses to 
come up with an energy policy. I also know that the House 
Energy and Commerce Committee is at the present time marking up 
the latest version of it.
    I am new to the Federal legislative process, but I will 
tell you that when I have been in the district for the past 2 
weeks over the Easter break, between doing Social Security 
hearings, even doing the town halls, the one thing I heard was 
about gas prices and the fact that they have just gone out the 
roof, and really that nobody seemed to be addressing it. And I 
had several people say, I went to bed last night and gas was 
$1.92, and I woke up this morning and it was $1.99. How do gas 
prices go up that quick? So that is something that I have to 
respond to my constituents about what we are doing about it.
    I think what we are going to hear today from this panel's 
testimony will bolster the argument even more that what we need 
is a national energy policy to set some regulations that we can 
look forward to that will guide us in this problem that we have 
been having.
    Mr. Issa. I would now ask that each witness and anyone who 
might be advising the witnesses please rise for the oath.
    [Witnesses sworn.]
    Mr. Issa. The clerk will note that the witnesses affirmed 
the oath.
    The committee appreciates the substantial written testimony 
that each of you has given. As you can imagine, we request it 
in advance so that our staffs have carefully gone over it. We 
undoubtedly have our questions based on your testimonies even 
before we get the privilege of hearing them. So although I will 
not chastise anyone who reads their testimony, it would be very 
much appreciated if you would skip through, ad lib, add to, 
make it as much those key items you want us to have; and then 
it is my fervent hope that we will have a good dialog of real 
questions to give you an opportunity for real answers.
    Mr. Kucinich, do you have an opening statement?
    Mr. Kucinich. Mr. Chairman, with your indulgence, I do. And 
if I could read a few excerpts from it and have it included in 
the record, I would be grateful.
    Mr. Issa. Without objection.
    Mr. Kucinich. I want to thank the chairman for holding this 
hearing on this critical issue. I think you will find there is 
widespread agreement on the nexus of energy and national 
security problems. Unfortunately, there are wide disagreements 
about the solution.
    The severe U.S. dependency on oil, 60 percent of which is 
imported, makes our Nation highly vulnerable to economic 
disruptions. Oil prices raced to all-time peaks this past 
Monday, climbing above $58 a barrel, which will send $250 
billion a year overseas, members of the committee. By 2025, 
U.S. daily oil consumption is expected to increase by 50 
percent to 29 million barrels, 75 percent of which is expected 
to grow from overseas.
    Now, the effect of oil prices can be directly seen in the 
escalating gas prices. The U.S. retail price for gasoline 
climbed to $2.22 cents a gallon. I am sure some of the members 
of this committee have had the experience in the last few days, 
you go to get a fill-up, we are paying anywhere from $25 to $30 
for a fill-up, and our constituents are paying those prices.
    Mr. Issa. You must have a small tank on your car.
    Mr. Kucinich. I do. I have a Ford Focus.
    There is a Goldman Sachs report that we are all concerned 
about talking about prices surging as high as $105 a barrel. 
And based on that analysis, it is estimated that our prices in 
this country could go to over $4 a gallon.
    We could come to an agreement on what the problem is and 
how we got there, but I would just like to add this. I am 
concerned about the administration's solution that they see it 
is to increase the supply of oil by increasing domestic 
drilling in the Arctic National Wildlife Refuge. The better 
solution is to reduce demand, and there are numerous ways that 
we can increase the efficiency of the oil we use, use 
alternative fuels and smarter transportation choices, and also 
work to eliminate the price gouging by oil companies. I have a 
bill I will be introducing to do that, Mr. Chairman.
    I want to submit the rest of this testimony for the record 
and ask you to do that by unanimous consent.
    Mr. Issa. Without objection, so ordered.
    [The prepared statement of Hon. Dennis J. Kucinich 
follows:]

[GRAPHIC] [TIFF OMITTED] T0688.004

[GRAPHIC] [TIFF OMITTED] T0688.005

[GRAPHIC] [TIFF OMITTED] T0688.006

[GRAPHIC] [TIFF OMITTED] T0688.007

[GRAPHIC] [TIFF OMITTED] T0688.008

    Mr. Issa. For all Members present and their staffs, if the 
Member is not present, we will hold up the record for 5 
legislative days for opening statements that were not given 
here and extensions, including extraneous materials, as you see 
fit.
    Mr. Kucinich. I have also have testimony from the NRDC that 
I would like to submit.
    Mr. Issa. Without objection, it will be entered in the 
record.
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T0688.009
    
    [GRAPHIC] [TIFF OMITTED] T0688.010
    
    [GRAPHIC] [TIFF OMITTED] T0688.011
    
    [GRAPHIC] [TIFF OMITTED] T0688.012
    
    [GRAPHIC] [TIFF OMITTED] T0688.013
    
    [GRAPHIC] [TIFF OMITTED] T0688.014
    
    [GRAPHIC] [TIFF OMITTED] T0688.015
    
    [GRAPHIC] [TIFF OMITTED] T0688.016
    
    [GRAPHIC] [TIFF OMITTED] T0688.017
    
    Mr. Issa. With that, Mr. Secretary, you get the opening 
statement of the people we came to hear rather than yourselves.

STATEMENT OF JEFFREY CLAY SELL, DEPUTY SECRETARY, DEPARTMENT OF 
                             ENERGY

    Mr. Sell. Thank you, Mr. Chairman and members of the 
subcommittee. I would ask that my written testimony be 
submitted as part of the record, and I would like to summarize 
that in about 5 or 6 minutes if that is OK.
    Mr. Issa. That would be excellent, and, without objection, 
all of your opening statements will be included in the record 
in addition to anything you say here.
    Mr. Sell. I am honored to be here before this subcommittee 
today. This is my first testimony before Congress since being 
confirmed as the new Deputy Secretary of Energy. The 
subcommittee has asked me to address American energy needs and 
their influence on national security policy.
    Energy is the backbone of our economy, and having a strong 
economy is essential to maintaining and strengthening our 
national security. Enacting comprehensive energy legislation 
would be a substantial step forward in the effort to address 
our economic and national security. Secretary Bodman and I are 
committed to working with both parties and Members of the House 
and Senate to finally enact energy legislation this year.
    President Bush believes that a sound energy policy must 
meet four major objectives while upholding our responsibility 
to be good stewards of the environment.
    I'm sorry Mr. Kucinich has left. In his opening statement 
he suggested a choice that the administration was for more 
production, and others were for demand reduction. I wish it 
were that simple, but it is not. We need both, and we need new 
technology as well, and that is what the President's 
comprehensive energy proposal involves.
    The first objective of the President's energy plan is to 
promote and improve energy conservation and efficiency. Ways to 
achieve this include, for example, providing tax incentives 
which we have proposed to promote the use and development of 
hybrid and fuel cell vehicles as well as supporting increased 
efficiency standards for consumer products.
    A second objective of a sound energy bill addresses both 
economic and national security concerns by increasing 
production here at home. The need is clear. Over the past 3 
years America's energy consumption has increased while our 
overall domestic energy production has actually decreased.
    I commend the Congress for taking action last year to 
address this problem through passage of the Alaska Natural Gas 
Pipeline Act and for steps taken this year already that may 
lead to production on the north slope of Alaska inside ANWR.
    Another action to increase production here at home involves 
nuclear power, which can generate huge amounts of electricity 
without ever emitting air pollution or greenhouse gases. The 
President has called for an expansion of this alternative 
source to the Nuclear Power 2010 Initiative, which will ensure 
nuclear power is available for generations to come.
    Also, any discussion of increasing domestic production must 
always begin with a firm commitment to America's most abundant 
energy resource. That is coal. As such, the President and 
Secretary Bodman have been clear that our Nation's extensive 
use of coal must not be a detriment to the environment. That is 
why the Clean Coal Power Initiative and the development of 
FutureGen technology to create electricity and hydrogen with 
zero emissions are so vital to ensuring efficient coal 
production in an environmentally responsible way.
    The third objective of a sound energy bill is to diversify 
our energy supply by developing alternative sources of energy. 
And this is--I want to briefly elaborate on this. Our 
transportation sector is highly dependent on hydrocarbons, on 
fossil fuels. Over the long term the President's vision is to 
dramatically reduce the dependence of the transportation sector 
on fossil fuels by moving to hydrogen fuel cell vehicles. That 
is a long-term goal. It is the most substantial policy proposal 
in place to significantly reduce our dependence on fossil fuels 
in the transportation sector.
    But over the near term, we need to do some other things. We 
need to reduce demand by increasing fleet fuel efficiency, by 
moving toward hybrid vehicles; and we also need to increase 
supply, that is in traditional drilling, but it is also in the 
greater use of biomass, agrifuels such as biodiesel and 
ethanol.
    The Hydrogen Fuel Initiative is very important. The 
President has committed $1.2 billion over the next 5 years to 
develop the technologies that are critical to our ability to 
realize that vision over the next 15 years. Also, technological 
advancements in providing clean renewable energy sources such 
as wind, solar, and biomass are being made every day, and we 
need to support that effort as part of our energy 
diversification policy.
    The fourth and final objective of a sound energy bill is to 
find better, more reliable ways to deliver energy to consumers. 
The Federal Energy Regulatory Commission has recently taken 
steps to address this objective by moving forward with 
regulatory action to accommodate the importation of liquefied 
natural gas. Also, on the electricity side, transmission lines 
are deteriorating as the amount of energy they support 
continues to grow. These strains on the system lead to higher 
prices and bottlenecks in delivery, and when just one piece of 
the power grid fails, it can instantly affect millions of 
people over thousands of miles, as we saw in the blackout of 
2003. I know, both Chairman Issa and Mr. Higgins, your 
constituents have individually witnessed those types of 
blackouts.
    The President has called for mandatory reliability 
standards and a modernization of the grid to address these 
problems.
    In sum, the President has set big goals for our energy 
policy. If Congress enacts energy legislation that meets the 
President's four objectives, then we will have gone a long way 
toward meeting America's energy needs and strengthening 
America's national security.
    Once again, I appreciate the opportunity to testify before 
you today. I look forward to your questions and further 
discussion. Thank you.
    Mr. Issa. Thank you.
    [The prepared statement of Mr. Sell follows:]

    [GRAPHIC] [TIFF OMITTED] T0688.018
    
    [GRAPHIC] [TIFF OMITTED] T0688.019
    
    [GRAPHIC] [TIFF OMITTED] T0688.020
    
    [GRAPHIC] [TIFF OMITTED] T0688.021
    
    [GRAPHIC] [TIFF OMITTED] T0688.022
    
    [GRAPHIC] [TIFF OMITTED] T0688.023
    
    [GRAPHIC] [TIFF OMITTED] T0688.024
    
    [GRAPHIC] [TIFF OMITTED] T0688.025
    
    [GRAPHIC] [TIFF OMITTED] T0688.026
    
    [GRAPHIC] [TIFF OMITTED] T0688.027
    
    Mr. Issa. Thank you for being the first of my witnesses to 
be under 10 minutes, which is a guideline that we always hope 
is achieved.
    Mr. Sell. Mr. Chairman in my previous life, I used to sit 
on the back row behind the dais, and I also appreciated a short 
opening statement.
    Mr. Issa. We will try to give the other half the same 
consideration, which is the short real questions rather than 
long statements, when it gets to be our turn.
    And with that we turn to Mr. Woolsey. I hate to say it, Mr. 
Woolsey, but as a former Director, do we still address you as 
Director?
    Mr. Woolsey. Mr. Chairman, I will answer to most anything. 
After having been CIA Director, anything that is not outright 
scabrous or scatological is just fine. Jim is fine.
    Mr. Issa. Thank you very much. Please take all the time you 
feel you need, but we would like to get to questions as soon as 
possible.

   STATEMENT OF R. JAMES WOOLSEY, FORMER DIRECTOR OF CENTRAL 
                          INTELLIGENCE

    Mr. Woolsey. Thank you, Mr. Chairman. I am representing the 
National Commission on Energy Policy today of which I was 1 of 
the 16 members. I am going to focus on oil security. That was 
our first chapter, and it was a very heavy part of our focus, 
and it is in many ways separable from the electricity issue, 
because only 2 percent or so of our electricity is produced 
from oil, whereas in the 1970's we could--by using renewables 
or nuclear power, we could reduce our oil consumption coming 
down from 20 percent of our electricity being produced by oil. 
Today one could have windmills, photovotaics, or nuclear power 
plants on every hill in the Nation, and it wouldn't really have 
any particular impact on our oil dependence except for a new 
development relating to plug-in hybrids, which I will get to in 
a moment.
    I think there are at least seven major reasons why 
dependence on petroleum for the lion's share of the world's 
transportation fuel, and it is not just ours, it is the 
world's, creates very special dangers. First of all, the 
transportation infrastructure is deeply committed to oil and 
built around oil in this country and in most countries, and as 
a result, one cannot substitute other fuels in the short run if 
oil prices go through the ceiling, as they are in the process 
of doing.
    One conclusion we grew from that in the Commission was that 
any new types of vehicles and any new types of fuels really 
ought to be compatible with the existing energy infrastructure, 
and we, therefore, focused on two approaches: One, increasing 
fuel efficiency by using currently available technologies that 
are compatible with the existing infrastructure, such as hybrid 
vehicles and increasingly, I believe, plug-in hybrid vehicles 
since they can use gasoline or ethanol, in time certainly 
diesel; and second, by utilizing alternative fuels that are 
affordable, that are available now or in the very near future, 
and that can be used also within the existing infrastructure. 
Cellulosic ethanol and compatible biodiesel are the two that we 
concentrated on, not hydrogen. We say quite explicitly that we 
do not expect hydrogen fuel cells to have any substantial 
impact on oil use in the next 20 years.
    The second major point is that the greater Middle East is 
going to continue to be the low-cost and dominant petroleum 
producer for the foreseeable future. It holds about two-thirds 
of the world's proven oil reserves and, of course, is the low-
cost producer. This puts the Middle East and Saudi Arabia in 
particular in the driver's seat with respect to oil prices for 
a long time.
    Third, the petroleum infrastructure is highly vulnerable to 
terrorist and other attacks. In the Middle East al Qaeda has 
called for worldwide attacks on the petroleum infrastructure. 
The opening scenario of Robert Baer, a former CIA officer's 
book, ``Sleeping With the Devil,'' includes a 747 being flown 
by a terrorist into the sulfur clearing towers near Ras Tanura 
in northeastern Saudi Arabia, taking some 6 million barrels a 
day out of production for a year or more. That devastates the 
world economy.
    Fourth, the possibility exists that under regimes that 
could come to power in the greater Middle East, we could have 
embargoes or disruptions of supply. The current governments 
there may have an incentive to sell what they can, but you 
don't have to sell very much if you want to live for most 
purposes in the seventh century. And bin Laden has stressed 
that he would advocate major reductions in oil shipments from 
the Middle East.
    Fifth, wealth transfers from oil have been used, and they 
continue to be used, to fund terrorism and its ideological 
support through wealthy families in the region of the Gulf, 
many in Saudi Arabia, and also because of the funds that have 
gone to the Wahhabi movement and sect in Saudi Arabia.
    Alexei, who understands these numerical issues about costs 
and Wahhabi spending better than anyone I know, says that some 
$85 to $90 billion, that is with a ``B,'' have been spent by 
the Saudis in the 30 years spreading Wahhabi beliefs around the 
world, into the madrassahs of Pakistan, the textbooks of 
Indonesia, even into mosques in the United States. That 
doctrine is hostile, angrily hostile, to Shiite and Sufi and 
most other Muslims, to Jews, to Christians, to women, to 
modernity and to much else.
    That doctrine, I believe, serves almost in the same way 
that the angry German nationalism of the 1920's and 1930's 
served as the ground in which nazism grew. Certainly not all 
Wahhabis or young men who have been to Wahhabi school become 
members of al Qaeda or terrorists, but that is the soil in 
which Islamic terrorism grows, and we are paying for it very 
substantially ourselves.
    Six, the current account deficits for a number of countries 
create risks ranging from major world economic disruption to 
deepening poverty for developing countries. We borrow about $13 
billion a week in the United States from the rest of the world 
to finance our consumption, and something over $2 billion a 
week that we borrow is over oil.
    Finally, global warming gas emission from oil use, of 
course, create at least the risk of climate change. In the 
Commission we focused on the importance of trying to come up 
with solutions that would save substantial amounts of oil. At 
least one we looked at passed our screen would save at least a 
million barrels a day by 2025. We looked at cost, 
administrative complexity and political feasibility.
    The solution we hit on was to go to a substantial increase 
in the CAFE standards, but to do so in a very different and far 
more flexible way than has been the case in the past for CAFE, 
and also to give American industry and American labor 
assistance in meeting some of these targets.
    We proposed, first of all, with the CAFE standard increase 
a safety valve mechanism in which the government could make 
extra CAFE compliance credits available to manufacturers at a 
predetermined price so that if the cost of reducing emissions 
exceeded estimates, it would not be a penalty to the 
manufacturers.
    With respect to manufacturer incentives, we proposed credit 
amounting to about 50 percent of the capital investment that 
would be required for manufacturers in this country, both 
foreign and domestic companies, all manufacturers in this 
country, to make the investments necessary to produce modern 
diesels and to produce hybrids and plug-in hybrids, and this 
totaled some $1.5 billion over 10 years, but it was more than 
recovered, in our assessment, by increased tax receipts as a 
result of maintaining domestic manufacturing jobs.
    One thing that we focussed on very much was safety. There 
has been for a long time a major argument against improved CAFE 
standards by saying you are going to force people into small, 
unsafe vehicles. The interesting things about hybrid gasoline 
electrics, in our assessment, is--and we took the four hybrids, 
the Ford Escape, the Honda Civic, the Honda Accord, and the 
Toyota Highlander, that today have counterparts in regular 
gasoline-burning internal combustion engines. In each case not 
only did the hybrid achieve substantial fuel savings, but 
greater horsepower at the same size. So this is not, not, not a 
proposal to drive people into smaller cars than they want to be 
in or into less well-performing cars than they want to be in. 
The hybrid gasoline technology does not make one make that 
choice.
    I would add that in the Rocky Mountain Institute's recent 
report, ``Winning the Oil End Game,'' the importance of 
construction using very strong carbon composites for vehicles 
is pointed out. That holds also the advantages of having 
lighter but even stronger vehicles, even safer vehicles with 
substantial fuel savings.
    I want to stress that with respect to hybrids, the recent 
book, ``The Bottomless Well,'' by Mr. Huber and Mr. Mills, 
point out the following: With today's nickel-metal-hydride 
batteries that are in hybrids, one can get about 6 miles of 
electrical propulsion by plugging in overnight and getting 
power from the grid to top off the battery. So one can go about 
6 miles before the hybrid gasoline electric feature cuts in. 
With lithium batteries, which are relatively new in technology, 
that number is 20 miles before one has to use the gasoline 
electric feature.
    Today in the United States residential electricity costs 
are 8.5 cents percent kilowatt hour. And in places that have 
differential costs at nighttime, it is 2 to 4 cents per 
kilowatt hour. Two cents per kilowatt hour electricity equates 
to 12-cent-per-gallon gasoline. That means that it is available 
in technology that is now being used, hybrid technology, by 
people in their garages themselves converting them to plug-in 
hybrids so they can top off with electricity from the grid. 
They are able to get transportation for maybe half or more of 
their vehicle use at the equivalent of 12-cent-per-gallon 
gasoline.
    I think once the advantages of plug-in hybrids are clear, 
then the financial incentives that one might need in order to 
help manufacturers get over the first step, that is hybrids are 
several thousand dollars more expensive to produce than other 
vehicles, will be something that American consumers should be 
very interested in.
    I will close, Mr. Chairman, simply by saying, because I see 
I am over my time, that cellulosic ethanol, ethanol from 
agricultural waste and prairie grass, and biodiesel from animal 
waste, used tires and other organic compounds, as a result of 
new technological work with genetically modified biocatalysts 
for cellulosic ethanol, and with respect to thermal processes 
for the creation of biodiesel, make those two fuels which are 
compatible with the existing infrastructure able to be 
produced, we believe in the Commission, relatively soon, 
considerably sooner than hydrogen fuel cell vehicles and 
hydrogen facilities for fueling, and should mark, together with 
hybrid gasoline electrics and advanced diesels--those two fuels 
should be, from our point of view, a major thrust of emphasis 
by the government as it moves into gasoline substitutes and 
other automotive power in the 21st century.
    Thank you, Mr. Chairman.
    Mr. Issa. Thank you, Mr. Director.
    [The prepared statement of Mr. Woolsey follows:]

    [GRAPHIC] [TIFF OMITTED] T0688.028
    
    [GRAPHIC] [TIFF OMITTED] T0688.029
    
    [GRAPHIC] [TIFF OMITTED] T0688.030
    
    [GRAPHIC] [TIFF OMITTED] T0688.031
    
    [GRAPHIC] [TIFF OMITTED] T0688.032
    
    [GRAPHIC] [TIFF OMITTED] T0688.033
    
    [GRAPHIC] [TIFF OMITTED] T0688.034
    
    [GRAPHIC] [TIFF OMITTED] T0688.035
    
    [GRAPHIC] [TIFF OMITTED] T0688.036
    
    [GRAPHIC] [TIFF OMITTED] T0688.037
    
    [GRAPHIC] [TIFF OMITTED] T0688.038
    
    [GRAPHIC] [TIFF OMITTED] T0688.039
    
    [GRAPHIC] [TIFF OMITTED] T0688.040
    
    [GRAPHIC] [TIFF OMITTED] T0688.041
    
    Mr. Issa. I would note that Mr. Marchant, a Member from 
Texas, has arrived. Your opening statement will be put in the 
record without objection, and then there will be time for you 
to provide the equivalent, if you would like, in addition to 
questioning.
    Ambassador, again, we are moving at a snappy pace. If you 
make it a triple play, I will just be shocked.

   STATEMENT OF ROBERT HORMATS, VICE CHAIRMAN, GOLDMAN SACHS 
                         INTERNATIONAL

    Mr. Hormats. I'll do my best.
    Thank you, Mr. Chairman. Let me make a few general points.
    One, I find myself very much in agreement with the other 
members of this panel. America's significant dependence on 
imported oil constitutes a major source of economic and 
security vulnerability. Particularly because a growing portion 
of U.S. imports comes from politically unstable parts of the 
world.
    Now, in the early part of my career, in the early part of 
the 1970's, I was Dr. Kissinger's economic advisor on the NFC 
staff when we had our first embargo, 1973, 1974. And at the 
time it seemed to me that was a wake-up call, or at least 
should have been, about our vulnerability. It turned out it was 
not.
    And I have a chart here which illustrates the various 
periods of time over the last 35, 40 years when there have been 
supply disruptions of various types, and we have done very 
little; a lot of rhetoric, but no consensus in this country and 
very little bold action. And since the 1970's when I thought we 
would have an energy policy, tragically we have not been able 
to come up with a bold enough one. As a result we are far more 
dependent on Middle East oil now than we were during the 1973, 
1974 embargo; a painful conclusion to reach, but unfortunately 
that's the reality.
    The other part of the problem is that it is not only the 
United States that has become increasingly vulnerable; many 
other parts of the world are also very vulnerable to supply 
disruptions. Many of these countries are, in fact, more 
dependent on imported oil than we are, and if there were 
disruptions in the supply, many of our major trading partners, 
many of our major allies would be hurt even more than we would 
be, which would affect our exports and our security in an 
indirect sense.
    The difficulty that we have is when we have a crisis, 
Americans tend to focus on the crisis. They reduce consumption, 
and then once the crisis is over, we revert back to gas 
guzzlers. We pay very little attention to production, 
conservation, efficiency and all those things, and this is why 
it's so hard to get a policy in concrete, because when the 
crisis passes, people pay very little attention to it. And the 
tragedy is the longer the impasse lasts, the greater the U.S. 
dependence becomes.
    And Jim Woolsey clearly has illustrated the kind of risks 
there are to oil capabilities in various parts of the world; 
that people such as bin Laden and other jihadists clearly want 
to drive the United States out of the Middle East by attacking 
facilities where Americans and foreigners are playing a key 
role, and undermine the oil infrastructure there, believing 
that it will bring down many of these governments and cause the 
kind of disruption in oil markets that will lead to major 
problems for a lot of countries, and then, as Jim indicates, 
take them over. And this, I think, is an enormous risk.
    I think it's important to realize that we're almost 
certainly more vulnerable today to oil price disruption and oil 
supply disruption than we have been at any time since the early 
1970's. I think this is important to bear in mind. This is not 
business as usual. This is not just another crisis. The risk of 
supply disruption now is the highest it has been since the 
1970's because we know that these radicals are directly 
targeting in a systemic way the suppliers and the supplies that 
are so vulnerable to the United States.
    Now, what is the problem? There are various aspects of the 
problem. I think it's important to understand what's happened. 
We had a period of time in the 1970's--and I have a chart that 
is somewhere in your--in the testimony I have given, I think 
it's page 8 or page 9, which illustrates the fact that during 
the 1970's, we had considerable investment in oil. I think it's 
page 9. It indicates that during the 1970's, we did have a lot 
of investment.
    In the 1980's, there was very little new investment, and in 
much of the 1990's, there was very little investment. If you go 
particularly from 1992 to the year 2000, very little new 
investment in the energy sector not just in the United States, 
but around the world. As a result we are dealing with the 
rapidly rising demand for oil up against a series of capacity 
constraints, capacity constraints in drilling, capacity 
constraints in refineries, a whole range of capacity 
constraints.
    The other part of the problem is that we are simply in the 
United States running out of available hydrocarbons that can be 
made available in a relatively inexpensive way. There are in 
the shale of the Rocky Mountains some great opportunities, 
Wyoming in particular, the Green River valley. There is a lot 
of opportunity there, but it tends to take a high price and the 
confidence that the price will remain high to get it out. 
Canada, there is a lot of capacity. There is a lot of potential 
in Alaska. Building the Alaskan pipeline is extremely 
important, and it is extremely important to move very quickly 
in part because the Canadians are interested in building the 
McKenzie Valley pipeline, as you may know. And given the supply 
of metals and the ability to produce pipes and get laborers, 
it's awfully hard to build two of those big pipelines at the 
same time. You run up against constraints. So moving ahead on 
Alaska does seem to me to be very important in part because we 
do have capacity in North America. We have potential capacity. 
It's a matter of making potential capacity real capacity.
    Jim has pointed out, I think very importantly, that there 
are other elements, too, that can be tapped. Biomass is a very 
important aspect of a potential source of energy, and I have 
read his Commission report. I think it is terrific and has a 
lot of very constructive ideas.
    Another point we need to bear in mind about security, since 
that is the focus here, is that since oil supplies tighten, 
there are oil exporters who have a greater opportunity to exert 
leverage over oil importers. Russia, for example, has a great 
ability to exercise leverage over Western Europe, which is a 
big user of Russian oil and gas; Venezuela, Iran, a whole host 
of countries; and we also get a number of countries like China 
which are trying to secure supplies around the world by buying 
oil facilities and buying properties. So in a world where 
energy supplies are tight, there is an opportunity for a lot to 
go on, particularly in terms of oil suppliers using their 
leverage.
    Let me make a couple of other quick points. One is this is 
not going to go away quickly. We are not going to see a 
dramatic reduction in the price of oil, as some people predict. 
And if you want one indication of that, it is what is called on 
the market sort of long-dated contracts, which are 5 and 10 
year contracts. Traditionally the price of those contracts 
throughout the whole period of the 1980's and the early part of 
the 1990's hovered around $18 to $20. Now they're around $45, 
$50, or a little bit less in some cases, a little bit more in 
others, but they are around the $45 level as a sort of base, 
which suggests that the market is not anticipating that these 
prices are going to be out any time soon, that they will stay 
up. So while people look at this and say, well, there's a lot 
of speculation here, from time to time perhaps there is a 
speculation on a given day or a given week, but that is not the 
fundamental problem.
    The fundamental problem, Mr. Chairman, is the problem that 
you outlined at the outset, and that is there is relatively 
little new capacity being laid on, and there is a big increase 
in demand in China, the United States and many other parts of 
the world. China is really the big marginal buyer, and if it 
weren't for China, prices may be a little bit lower, but we 
would still have this big imbalance of supply which has been 
constrained by insufficient investment and demand which is 
going up very, very rapidly.
    I think if you look at the market and you look at these 
long-term expectations in the market, and Chairman Greenspan, I 
believe, referred to it yesterday, those prices are likely to 
stay high for a long time, which leads us to conclude we can't 
expect some miracle to lead to price declines, and the price 
should be high enough to incentivize a lot of new production. 
The problem is a lot of people on the production side are very 
cautious about putting large amounts of money into new capacity 
because in the past they have been through periods where price 
has been high, and then it's declined, and they've invested a 
lot of money, and some of it has been lost.
    Let me just make a couple of quick other points to conclude 
with respect to the kind of remedies that are appropriate to 
deal with this situation. We have to look at oil primarily as a 
transportation fuel. Virtually 80 percent of oil in this 
country is used for transportation, either automobiles, 
gasoline, diesel fuel or jet fuel. So we really are not going 
to be able to deal with it, and Jim pointed this out a moment 
ago, to deal with the question of the demand.
    The coalition has come up with some very good ideas. I 
won't repeat those with respect to biomass, but there are a 
number of other areas that I will just touch on very quickly.
    Increased use of nuclear power. There are opportunities 
that didn't exist several years ago. Research funds for new 
technologies, wind, hydro, solar; incentives to increase use of 
mass transportation; methods of changing car-buying habits 
including allowing energy-efficient cars to use HOV lanes, 
giving them a discount in inspection fees while hiking 
inspection fees for inefficient vehicles; discounts on EZ Pass; 
avoidance of regulatory tax incentives for fuel-inefficient 
SUVs.
    These are just a few thoughts. I will conclude with 15 
seconds left. Thank you very much, Mr. Chairman, for the 
opportunity.
    Mr. Issa. Thank you.
    [The prepared statement of Mr. Hormats follows:]

    [GRAPHIC] [TIFF OMITTED] T0688.042
    
    [GRAPHIC] [TIFF OMITTED] T0688.043
    
    [GRAPHIC] [TIFF OMITTED] T0688.044
    
    [GRAPHIC] [TIFF OMITTED] T0688.045
    
    [GRAPHIC] [TIFF OMITTED] T0688.046
    
    [GRAPHIC] [TIFF OMITTED] T0688.047
    
    [GRAPHIC] [TIFF OMITTED] T0688.048
    
    [GRAPHIC] [TIFF OMITTED] T0688.049
    
    [GRAPHIC] [TIFF OMITTED] T0688.050
    
    [GRAPHIC] [TIFF OMITTED] T0688.051
    
    [GRAPHIC] [TIFF OMITTED] T0688.052
    
    [GRAPHIC] [TIFF OMITTED] T0688.053
    
    [GRAPHIC] [TIFF OMITTED] T0688.054
    
    [GRAPHIC] [TIFF OMITTED] T0688.055
    
    Mr. Issa. Ambassador, I particularly thank you for alluding 
to a piece of legislation recently passed by the Congress with 
my name on it. The hybrid being allowed by States to be put 
into HOV lanes previously has been, as bizarrely as it seemed, 
mandated that you couldn't do it without Congress' consent 
rather than at least allowing the States that flexibility.
    Mr. Hormats. It's a far better solution than, for instance, 
a gasoline tax, because this really is something people want. 
If they can get into HOV lanes, it saves them a lot of time. It 
is a great idea, and I commend you for it as someone who would 
like to use it in New York.
    Mr. Issa. As an owner of two hybrids, I have also pledged 
not to use that newfound ability to go into those lanes. Just 
to be McCain-esque, you create it, but you don't dare use it 
yourself, or it will look politically opportunist.
    Mr. Ebel, these gentlemen have all set a high mark for 
putting an awful lot of information in 10 minutes. It's a 
challenge.

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

    Mr. Ebel. I understand, Mr. Chairman. I feel like the bases 
are loaded, I'm batting cleanup, and I'm supposed to hit a home 
run. So we'll see what happens.
    Let me begin by noting that national security in today's 
context, national security and energy security are so closely 
intertwined that it's inconceivable we should consider them as 
separate issues.
    First, what do we mean by national security? I would 
suggest that the best answer, at least in my judgment, was 
provided a number of years ago by the eminent American diplomat 
George Kennan, who offered perhaps the least complicated 
definition. National security means the continued ability of 
this country to pursue its internal life without serious 
interference.
    Well, then what is meant by energy security? I think for 
the American consumer, and I suspect consumers everywhere, the 
answer is simple. He has only two concerns, price and 
availability. If the price is acceptable, and he can buy as 
much gasoline or as much fuel oil as he would like, then what 
is the problem, you might ask. Certainly the consumer cares 
little if at all as to where the oil he consumes comes from. 
Those are issues deferred to the wisdom of our government. But 
importing countries hold a different view from consumers. 
Policies adopted by importing countries stress security of 
supply through diversity of supply, through diversity among the 
kinds of fuels we consume and as well how the foreign oil and 
gas makes its way to our markets.
    Oil-exporting countries, on the other hand, seek security 
of markets, as has been alluded to. Why should we invest in the 
expansion of our oil-producing capacity, they ask, if we are 
uncertain as to whether there will be a market for this new 
oil? So unfortunately, adherence to this philosophy can only 
ensure a continued tight market and price volatility.
    Does diversity of supply provide the assurances we need, we 
seek? Not at all, because diversity of supply does not protect 
us from price volatility. We need to remind ourselves from time 
to time that the United States does not stand in isolation from 
the world oil market. We are vulnerable, as are all exporting 
and importing countries, to any event, anywhere, any time that 
impacts on supply and demand. When the price of oil goes up, it 
goes up everywhere.
    The question then arises what could we do, what should we 
do so as to be able to place our oil and our natural gas future 
back into our own hands? Well, we all know that last year was a 
year of surprises for the world oil sector, surprises that came 
because we sharply underestimated the growth in demand for oil 
in China, unexpected robust demand here at home. At the same 
time there are another group of other events, real or 
anticipated, that played out in a way that equally pressured 
oil supply. We had political uncertainties in Venezuela. We had 
civil war and strikes in Nigeria. We had the unfulfilled 
promise of Iraq. We had problems in Russia and possibility of 
terrorist acts in Saudi Arabia. Then along came a hurricane in 
the gulf coast, which took as much oil off the market as all 
these other supply factors combined. Additionally, we had to 
measure these factors against the disappearance of spare 
producing capacity worldwide.
    Now, Mr. Chairman, what do all these factors have in 
common? Let me emphasize that these factors were and remain 
outside our control, and, with only minor exceptions, steps 
that might be taken to resolve them are essentially outside our 
control as well.
    Every energy decision we make as individual consumers, 
every energy decision taken by our government has a tradeoff. 
These tradeoffs carry their own risks and costs. The public 
needs to understand that there is no energy option, and that 
includes renewable forms of energy, that can be described as 
risk or cost-free.
    Do we ever stop to consider whether these costs and risks 
justify the actions we would take? We are now confronted by the 
real impact of NIMBY-ism, don't build it in my backyard. We 
have a shortage of essential energy infrastructure, with that 
shortage in its own way propping up current prices. Is this 
tradeoff acceptable? Is it in our national interests? If, for 
environmental reasons, we can not drill in geologically 
attractive but unexplored areas, what's the tradeoff?
    Confronted with rising demand, we don't turn to demand 
management, we turn to imports. We find ourselves increasingly 
reliant on the ability and willingness of others to meet that 
rising demand. Our energy problem cannot be solved by 
concentrating just on the supply side; neither can successful 
resolution be secured by concentrating on efficiency, 
conservation and renewable forms of energy. What's the best 
means to achieve a secure and sustainable energy future? What 
policy options should we be looking at?
    Specific demand management recommendations should be 
adopted, including the use of mandates, commercial incentives 
and joint government/industry cooperation and coordination. 
Change our consumption patterns, accelerate the development and 
application of new technologies promoting clean fuel, 
streamline permitting and siting regulations, and, last of all, 
educate the consumer.
    What should be done to increase the availability of secure, 
affordable and environmentally benign domestic and foreign 
fuels? Accelerate technology development and make that 
technology available worldwide. Encourage alternative and 
nonconventional energy forms and their integration into a 
comprehensive energy delivery system. Reassess the management 
and use of inventories, and employ international diplomacy as 
the tool supporting the preceding options.
    Mr. Chairman, the question arises as to whether or not 
energy supply and demand should be managed differently than in 
the past as part of a larger effort to return to the consumer 
acceptable control over his energy future. A healthy economy 
supportive of a lifestyle that many have come not only to enjoy 
but to expect should reflect an energy supply that again is 
available, affordable, secure and environmentally benign.
    Are these criteria beyond reach, or are they just beyond 
reach of current energy policy? If we do not respond 
appropriately to these challenges, we risk being confronted by 
a future that is increasingly uncertain and defined by factors 
beyond our control or influence.
    Thank you, Mr. Chairman.
    Mr. Issa. Thank you, Mr. Ebel.
    [The prepared statement of Mr. Ebel follows:]

    [GRAPHIC] [TIFF OMITTED] T0688.056
    
    [GRAPHIC] [TIFF OMITTED] T0688.057
    
    [GRAPHIC] [TIFF OMITTED] T0688.058
    
    [GRAPHIC] [TIFF OMITTED] T0688.059
    
    [GRAPHIC] [TIFF OMITTED] T0688.060
    
    [GRAPHIC] [TIFF OMITTED] T0688.061
    
    [GRAPHIC] [TIFF OMITTED] T0688.062
    
    [GRAPHIC] [TIFF OMITTED] T0688.063
    
    Mr. Issa. We have done a wonderful job of getting a lot of 
testimony in a short period of time. I will lead off by setting 
a good example for my colleagues. I am going to limit myself to 
just one question that I think I heard again and again in one 
way or the other from each of you, and I just want a 
confirmation and as short as possible of what I think I heard, 
which was that there is no one solution, it has to be multiple 
energy sources, and it has to be multiple efforts at 
conservation. Included in that, I believe there was a pretty 
universal statement that attacking the oil problem is going to 
require perhaps not the old CAFE approach, but a new CAFE 
approach, one that has incentives and perhaps even funding to 
help us use less oil in our primary area of using it, which, of 
course, is internal combustion engines that move things down 
the road. Can I get a confirmation that there is no 
disagreement with this panel on that?
    Thank you. Mr. Secretary.
    Mr. Sell. Mr. Chairman, I think you have summarized well 
the testimony that we gave; and I concur in your conclusions, 
specifically on CAFE.
    One of the recommendations of the President's national 
energy policy was we requested of the Congress in fact more 
flexibility in order to set policies and increase fleet 
efficiency. We did increase the standard as it related to light 
trucks about a year ago or perhaps 2 years ago. But, as you are 
well aware, the politics in the Congress have severely 
restricted the ability to do anything on passenger vehicles or 
to move to a more flexible approach on CAFE standards. We would 
like to have that flexibility, and I think a new approach would 
be helpful in that regard.
    Mr. Issa. Thank you.
    Mr. Director.
    Mr. Woolsey. Mr. Chairman, yes. The Commission supports 
flexible CAFE standards in the sense of being--manufacturers 
being able to trade credits among different types of vehicles 
and among one another, much more flexible than the current 
standards. And, as I mentioned, this feature of a safety valve 
would mean that if one, say, set at slightly more than $55, 
which is the penalty that is required today for a vehicle, when 
a manufacturer has a fleet that exceeds the CAFE standards or 
doesn't meet the CAFE standards, it is--1 mile per gallon per 
vehicle is $55. If you take that or something slightly more as 
a transferrable fee, then we in the Commission would set a 
ceiling, let us say $60 per mile per gallon per vehicle.
    So, in the first instance, if Maserati wanted to exceed in 
the aggregate the CAFE standards, they could go to Toyota, 
which is not exceeding the CAFE standards, and buy credit. But 
to get new credits Maserati would never have to pay more than 
$60 from the government.
    That feature of a safety valve, which we also have with 
respect to carbon emissions in the electricity part of our 
report, we believe offers an opportunity for consumers, for 
corporations, for labor to all come together and say we don't 
have to guess exactly what the cost is going to be to get 
mileage improvements. We may be right. We may be wrong. If we 
are on the low side, then there is one consequence. If we are 
on the high side, there is another. But, in any case, it is 
never going to cost the manufacturer more than X dollars to get 
new credits from the government. And with all of that 
flexibility we were able to come together--corporation 
representatives, labor representatives, environmentalists 
representatives, odd ducks like me--on a single report.
    Mr. Issa. Thank you.
    Mr. Hormats. Yes. I am not an expert in this area, but I 
did read Jim's Commission's report, and it did strike me as a 
reasonable consensus. And I think that is the interesting point 
about it. As Jim pointed out, it is very hard--it has been 
traditionally very hard to get agreement up here on this; and I 
think if you have all these various elements who have an 
interest in reaching agreement, that is really an important 
step forward. And I find myself as, again, not an expert on it 
but someone who is impressed with the fact that they were able 
to get this broad-based consensus, which is what is desperately 
needed to get anything moving in this area.
    Mr. Ebel. Mr. Chairman, this country consumes about 9 
million barrels of gasoline every day out of a world total of 
oil consumption of 80 million barrels of oil a day. If we are 
going to do something about the oil problem in the United 
States, it has to begin with the internal combustion engine. We 
have had some ideas placed on the table this afternoon which 
work in that direction, but I think they need a little push, a 
little shove down the road.
    I had the opportunity Friday to drive a fuel cell car 
manufactured by a Japanese company. I won't say which one it 
was. It was not Toyota. It was Honda.
    Mr. Issa. I am glad you didn't say who it was.
    Mr. Ebel. It slipped. It is a 2005 model. I checked the 
tailpipe. Water was coming out of the tailpipe. You couldn't 
hear the motor. Acceleration was great. And I asked the 
engineer, what is the cost of this car? It was a million and a 
half dollars. When do you expect mass production; 15 to 20 
years. So we have to find something between now and then if the 
then is the hydrogen fuel cell.
    Thank you.
    Mr. Issa. Thank you.
    With that, I would yield to the ranking member, Mr. 
Higgins, for his questions.
    Mr. Higgins. I have no questions. Thank you.
    Mr. Issa. How about the gentleman from Texas?
    Mr. Marchant. Thank you very much. It is pretty unusual to 
have a panel before you that two people on the panel have 
degrees from Texas Tech.
    Mr. Issa. It is not unusual to note it, though, is it?
    Mr. Marchant. It is good to see you. Just a couple 
comments.
    Just recently in our Dallas Morning News we had--one of our 
respected personal financial analysts had basically wrote a 
story that discouraged anyone from buying a hybrid because he 
did this calculation of the cost for the hybrid and then the 
cost of the savings in miles per gallon and then basically came 
to the conclusion that, you know, no one really should buy one 
because of that.
    The interesting part of the testimony today is the part 
that I have never seen interjected, and that is the cost, the 
low cost of the electricity that you can achieve there. I never 
see that in any of the calculations, and I think that is an 
interesting fact that needs to be in the public domain.
    Mr. Woolsey. Congressman, a standard hybrid such as the 
Prius that I drive gets about 50 miles per gallon. Of course, 
it switches back and forth, just like the chairman's hybrids, 
between gasoline and electric power; and it charges the battery 
as it decelerates. And it depends. That financial analyst must 
not have been thinking at all about bin Laden or the Middle 
East or any of that. Because if he assumes a perfect market in 
oil that nobody is going to interfere with, then there may be 
something to the proposition that the added couple thousand 
dollars cost of a hybrid to 3,000 is not worth it.
    But there are some answers. One is what you referred to, 
which is adding this plug-in feature so that one can use grid 
electricity for short trips and thereby, instead of a 50 mile a 
gallon car, you have a 100 mile a gallon or more car, at least 
as far as petroleum fuel is concerned. And the electricity that 
you are getting off the grid is 12 to 25, maximum probably 50 
cent per gallon gasoline equivalent. So that ability to have a 
plug-in feature seems to me to be right at the heart of the 
attractiveness of hybrids.
    Now there are complexities here. The nickel metal hydride 
batteries, it wears batteries down a bit to charge them and so 
one probably needs a few more batteries in the vehicle. That 
would increase the cost. So some of the home tinkerers who are 
turning their hybrids into plug-in hybrids may be doing 
something that makes their warranty not as good, for example.
    But these are relatively small technical problems to 
overcome, even moving to advanced lithium batteries, compared 
to the extraordinary requirements of moving to something like 
hydrogen fuel cells which, you know, as was said up here a 
minute ago, is going to take many, many times a reduction in 
cost more than just a couple or $3,000. We are talking about 
going from $1 million more a car to something affordable. And I 
think that we have a chance here with advanced diesels, which 
soon will be able to meet our Tier 2 standards that came in 
2004.
    Europe is very heavily into diesels now, and we are 
somewhat more demanding on particulate emission standards than 
Europe. But the new diesels are very close to meeting our new 
standards. New diesels and hybrids, including hybrids with a 
plug-in feature, if incentivized by government policies seem to 
me to be just a natural.
    In Texas, the Austin utility, which is owned by the city of 
Austin, has taken the lead in going around to other city-owned 
utilities around the country and started going to the Big Three 
in Detroit and saying we, the utilities, will give a $1,000 
credit for the purchase of a plug-in hybrid because we want to 
be able to sell power at night when we need to sell it, off 
peak power, and we would be delighted to give everybody who 
buys a plug-in hybrid $1,000. You are a third of the way toward 
the consumers' credit that you need right there from utilities.
    Mr. Hormats. Can I just add a couple points?
    One, there is an additional advantage to the hybrid; and 
that is, because you get so many more miles to the gallon, you 
don't have to stop and fill up as much. So there is a time 
advantage.
    Second, an analyst who comes to that conclusion misses a 
broader point, and that is we have a structural supply demand 
imbalance. So oil prices are going to stay high for quite some 
time. If you thought perhaps the price was going to come down 
to $15 or $10, then maybe--but I didn't see the article, so 
maybe the economics works. But if you think oil prices, as I do 
and as the market does, thinks oil prices are going to remain 
very high for a period of time and may get higher and are 
subject to a lot of disruption, then it does seem to me you 
want to have a car that is very efficient and you can get more 
miles to the gallon when you fill your tank up.
    And the third, to the extent there is some price 
discrepancy, as this person pointed out, that is why you do 
things like open up the HOV lanes or make it cheaper to buy E-
ZPass membership if you have an energy efficient car or do 
things like a lower registration fee for energy efficient cars 
and a higher one for less efficient cars.
    So there are things that can be done to give these cars at 
least a temporary incentive. Once the volume begins to pick up, 
the price will come down, as for everything. And we have seen 
that. So there is room for public policy here to help the 
transitional process along.
    Mr. Marchant. Thank you, Mr. Chairman.
    Mr. Issa. Well, you guys may get off really, really easily 
here. But I do have a second round, a couple of questions.
    One of them that I kind of warned about ahead of time with 
the Secretary--and Ambassador I don't think I gave you a full 
heads up, but it was covered in your testimony--the windfall 
profits history, the 1979 to 1988 period. Oddly enough, your 
graph on page 9 shows that the peak of R&D was almost exactly 
when we put in the windfall profits tax, and from there it 
dropped precipitously.
    Mr. Sell. Correct.
    Mr. Issa. I am concerned, and Mr. Kucinich unfortunately 
was not able to stay, but he alluded to his legislation from 
the previous Congress that he plans on reintroducing, which 
would enact a windfall profits tax. So I think it is fair on 
his behalf and on mine to bring up the subject and say, what is 
the history of the windfall profits tax of 1979? And if not a 
windfall profit like that one, then since you have all alluded 
to incentives and each of you has come up with ideas and some 
positive ones, what do we do to ensure at this high level, one 
in which $8 a barrel oil is being taken out of the ground and 
being sold at $56 a barrel, what do we do to ensure that 
production rises so that, if that is not the correct supply, 
demand, that we reach that correct supply, demand equilibrium 
at some time in the future? In any order.
    Mr. Sell. Mr. Chairman, I do appreciate the early warning 
on the question.
    I think in the way you asked the question lies the answer: 
We should ask about the windfall profits tax, would it help, 
would it help the situation, the problems that have been 
described here today. And the view of the administration is it 
would not help. We believe in the power of competitive markets. 
It is incumbent upon the government to ensure the marketplace 
works. We think market forces, when working properly, determine 
an appropriate profit; and so a profit tax we think is anti-
competitive and therefore bad for the consumer. I do believe 
that $58 oil is a sufficient incentive for dramatic increases 
in production, and I think we will see that materialize over 
time.
    One situation that we have gotten into over the last decade 
is it now takes much longer for new reserves to be developed 
than it did in the past. In the past, you could typically count 
on a 2 or 3-year cycle, and now it is as long as 5 or 10 years 
to bring a new production on line. But today's prices do 
incentivize that.
    On the domestic side, there are additional things we can 
do. We can open up new areas to access, and we can also 
streamline the permitting process. And, in some cases, we have 
increased royalty benefits due to producers in portions of the 
Gulf of Mexico. So there are some things that we can do on the 
domestic side, but the administration does not believe a 
windfall profits tax is an appropriate policy.
    Mr. Hormats. I find myself very much in agreement with 
Secretary Sell on this. I do not think a windfall profits tax 
is appropriate. It is--the point that you raised in this chart 
demonstrates is that it really--I am not sure what the goal of 
it would be. The goal of American policy should be to increase 
production and not to impose incentives that takes money away 
from producers, it seems to me.
    I actually have just been finishing up a book on how we 
financed America's wars in the past, from revolution on, and 
during World War I and World War II we did have excess profits 
taxes. We were in war situations then where people were making 
money from munitions, so there was a feeling of public--that 
fairness would require you to take some of that money away 
because there was sort of a windfall as a result of that. It 
wasn't a very effective way of doing it, but it looked like it 
would satisfy public opinion.
    In this case, it seems to me it is a bad kind of signal to 
send. The objective--and Secretary Sell put it very well. The 
goal is to have them utilize their profits to produce more 
energy, not just gasoline, not just hydrocarbon fuels, but a 
whole range of other fuels. And I would make a couple points.
    One, I mentioned in Canada you have the oil sands. In 
Alaska you have a whole slew of potential production areas in 
the north slope. You have Wyoming, the Green River Valley. 
Plus, and I think it is another element to touch on here, and 
that is abroad there are a lot of opportunities.
    One of the goals should be to increase production here 
across the board in various kinds of new and old sources but 
also to help diversify global production of energy. That means, 
I think, working with groups like the World Bank and other 
institutions to improve the investment environment in a wide 
range of countries that have the capability of supplying more 
oil but don't because either their investment environment is so 
adverse to people who want to put money in they don't have 
proper regulations, they don't have proper transparency, the 
state controls too large a portion of their oil infrastructure. 
So it should be a global and a domestic process as well. The 
more diversification in oil supplies the better, because it is 
a global market. And none of these things would be advantaged 
by an excess profits tax.
    Mr. Ebel. The Ambassador raised a very important point. A 
major problem facing the international oil companies today is 
access. Where do you go to find the new oil you need to offset 
the oil you produced last year? Where do you go? West Africa? 
Venezuela? Iran? Iraq? Libya? Russia? Azerbaijan? Karzakstan?
    You can't really go into the Persian Gulf because those 
resources are held by the national oil companies. In fact, over 
70 percent of all the oil reserves are in the hands of national 
oil companies, and they are going to develop them themselves at 
the pace that they decide upon. They are going to be responding 
to market developments. They are not going to be ahead of the 
market.
    And what does that tell us? That we are going to have some 
difficult times ahead, unless you would have a collapse in the 
Chinese economy or the Indian economy or even here at home. 
That is the only way you are going to get a short-term decline 
in prices, is on the demand side.
    Mr. Issa. Oddly enough, we were having that discussion 
before the committee hearing. There is an obvious way that we 
will get that: If the U.S. economy collapses, then China's 
economy will collapse. So we have that to look forward to. It 
is not what I am hoping for.
    I am not here to give testimony, but uniquely--although, by 
the way, I also am a Clevelander by birth, so I have managed to 
be at two electrical power dropouts, the Cleveland side of me, 
where my family called and said, you know, is this a California 
curse you have bestowed on us, when it happened. And, of 
course, being from California, I have seen what happens when 
you don't have excess capacity.
    One of my questions, I am very interested in what I like to 
call mineral energy, which people always ask what it is and I 
say, well, it is nuclear. But it is a mineral, after all. It 
usually gets a laugh, not in such a serious situation.
    But we don't have the diversity of one of the No. 1 ways of 
forming electricity. It is not 2 cent electricity, but it is 
not too far from it if we do it right. There are no new license 
requests. There is no next generation of nuclear power. I have 
been to companies, I have seen their proposals for the next 
generation, but nobody is funding it. We are not putting a new 
nuclear power plant on line. We are not even putting a decent-
size research operation on line just to test the true proof of 
concept of, can they produce clean electrical energy with very 
reduced byproducts. And I am particularly sensitive to that 
since I sit on the other subcommittee that yesterday dealt with 
the Yucca Mountain and that stalled process.
    So even though this hearing has concentrated a great deal 
on petroleum, I think it is pretty obvious that not addressing 
nuclear guarantees that we will be addressing some hydrocarbon. 
And, you know, in California we have switched to almost all 
natural gas. As a result, natural gas will be the subject of 
another hearing that we will talk about how are we going to get 
natural gas. And places like Qatar and so on today would love 
to supply it to us, but what if that supply gets cutoff?
    If any of you want to deal with--I see you do.
    Mr. Woolsey. I will try to say a quick word about nuclear 
power.
    Our Commission report advocated resuming substantial 
research and development and work on nuclear power for 
electricity precisely because of its cleanliness and the fact 
that it doesn't put global warming gasses into the atmosphere. 
One does have a fuel disposal issue, which is a substantial 
problem that has to be dealt with.
    But I wanted to also note that we also focused on some of 
the new clean gasification technologies for coal, integrated 
gasification combined cycle. I think there are about eight 
plants in the world now that use that, and one or two others. 
The advantages there are with some new types of coal 
gasification, the CO2 comes off at a different temperature than 
the combustion; and that means the carbon is easy--relatively 
easy to capture. Once the cost of sequestration in geological 
formations is affordable and one can be assured that it works, 
then those several types--not all, but those several types of 
new coal gasification technologies are also not only clean but 
also can be made into something that sequesters carbon. So, in 
a sense, they become as desirable in most ways as nuclear, 
solar, wind, etc. So both nuclear and the new coal gasification 
technologies were very favorably regarded by the Commission.
    Mr. Ebel. Let me make two points on nuclear. One is that 
the United States gets about 20 percent of its electric power 
from nuclear power stations. Fifty percent of the fuel burned 
in those nuclear power stations comes from Russia. Now why in 
the world would we put ourselves in a position of depending 
upon Russia for such a vulnerable situation?
    That brings to my point that I raise in my testimony on 
tradeoffs. There is a tradeoff here, and the tradeoff is that 
we decommission nuclear warheads in Russia and use the fuel for 
our nuclear power plants; and, to date, I think well over 8,000 
nuclear warheads have been decommissioned. So when you tell 
this to the American audience and you say is that kind of 
tradeoff in our national interest, the answer is yes.
    The second point----
    Mr. Issa. So you are advocating that we develop the next 
generation and take those warheads and turn them into energy?
    Mr. Ebel. Absolutely. Well, the goal is to take out 12,000, 
I believe. We are moving toward that goal.
    The second point is, Mr. Chairman, if you were addressing 
an American audience anywhere in the United States, I think you 
could get agreement that nuclear power is the only nonpolluting 
form of primary energy that we have. I think all the hands 
would go up and say, yes, we support it. And then you would 
say, that is good, because the reason I am here is to find a 
site for a new nuclear power plant, and I found one about 15 
miles down the road. Now, can I have your permission to build 
it? Of course not. So it is a siting, permitting problem that 
we face, not only just the disposal of the spent fuel.
    Mr. Hormats. That is exactly the problem. Unfortunately, no 
one wants it near them. I do think nuclear--the technology has 
come a long way.
    The issue you get in addition to the disposal issue and the 
citing issue is the terrorism issue. As Congressman Higgins 
will know, we near New York City have had a constant running 
battle about a particular nuclear power plant in which the 
people around want to get closed and occasionally picket. It 
hasn't been closed, and basically it has passed the safety 
tests, but it is a controversial issue because of the concern 
that after September 11 someone is going to run a big airplane 
into it and blow it up.
    In addition to dealing with all the other issues, you have 
to make sure that these are hard and to the point where there 
is no question about vulnerability, that they are invulnerable 
to attack; and this adds yet another threshold that makes it 
more difficult and adds to the not-in-my-backyard question.
    I would just like to segue from that to another issue, just 
to touch on for a moment, because we have alluded to it very 
briefly, but it is a similar issue, and that is LNG imports, 
which are an opportunity for the United States. And there is a 
more diversified--there are a lot of additional suppliers of 
LNG around the world. It is one more part of a sound 
diversification strategy.
    We have four import terminals now. There is an 
opportunity--you will see from this map there are four little 
red dots, and all these yellow dots essentially are potential 
places where you can put it up. But the same problem occurs: 
one, people don't want it near where they live; and, two, there 
is a risk that some people perceive that someone could blow it 
up. And the siting issue in many of these things, where it is 
good for the country, the region that is given the opportunity, 
shall we say, to have it doesn't really want to take advantage 
of that opportunity and fears putting it near where they live.
    Mr. Issa. We have done a good job here. I am going to make 
my closing statement, which is I have the San Onofrie nuclear 
power plant in my district. I had approximately 80 percent in 
my district in a poll respond that they would support 
additional reactors at that existing site. So perhaps the 
NIMBYism comes when you are asking for a new site more than 
when you have an existing site with a good record.
    You are going to waive? OK. Having no other questions 
except all of those we will followup with you endlessly, I want 
to thank the panel for being here. I want to thank the majority 
and minority staff for not only arranging such a great panel to 
be here but, in all candor, suggesting a lot of good questions, 
and we got through some of them.
    I hope that you will accept our next invitation. This is 
not a subject on which we are going to have one hearing and 
move on. This is one that we want to stick with until it is 
resolved to a bipartisan conclusion.
    With that, this meeting is adjourned.
    [Whereupon, at 3:30 p.m., the subcommittee was adjourned.]
    [The prepared statement of Hon. Diane E. Watson follows:]

    [GRAPHIC] [TIFF OMITTED] T0688.064
    
    [GRAPHIC] [TIFF OMITTED] T0688.065
    
                                 
