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

                ENERGY AS A WEAPON: IMPLICATIONS FOR U.S. POLICY

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

                                 JOINT HEARING

                                   before the

                             SUBCOMMITTEE ON ENERGY
                                 AND RESOURCES

                                    and the

                       SUBCOMMITTEE ON NATIONAL SECURITY,
                      EMERGING THREATS, AND INTERNATIONAL
                                   RELATIONS

                                     of the

                         COMMITTEE ON GOVERNMENT REFORM

                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED NINTH CONGRESS

                                 SECOND SESSION

                                   __________

                                  MAY 16, 2006

                                   __________

                               Serial No. 109-204

                                   __________

           Printed for the use of the Committee on Government Reform

      Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                                   index.html
                          http://www.house.gov/reform

                                     ______

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                         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
    JON C. PORTER, Nevada                C.A. DUTCH RUPPERSBERGER, Maryland
    KENNY MARCHANT, Texas                BRIAN HIGGINS, New York
    LYNN A. WESTMORELAND, Georgia        ELEANOR HOLMES NORTON, District of
    PATRICK T. McHENRY, North Carolina       Columbia
    CHARLES W. DENT, Pennsylvania                    ------
    VIRGINIA FOXX, North Carolina        BERNARD SANDERS, Vermont
    JEAN SCHMIDT, Ohio                       (Independent)
    ------ ------

                          David Marin, Staff Director
                    Lawrence Halloran, Deputy Staff Director
                           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, Ph.D., Professional Staff Member
                              Lori Gavaghan, Clerk
              Richard Butcher, Minority Professional Staff Member
    ?

    Subcommittee on National Security, Emerging Threats, and International
                                   Relations

                    CHRISTOPHER SHAYS, Connecticut, Chairman
    KENNY MARCHANT, Texas                DENNIS J. KUCINICH, Ohio
    DAN BURTON, Indiana                  TOM LANTOS, California
    ILEANA ROS-LEHTINEN, Florida         BERNARD SANDERS, Vermont
    JOHN M. McHUGH, New York             CAROLYN B. MALONEY, New York
    STEVEN C. LaTOURETTE, Ohio           CHRIS VAN HOLLEN, Maryland
    TODD RUSSELL PLATTS, Pennsylvania    LINDA T. SANCHEZ, California
    JOHN J. DUNCAN, Jr., Tennessee       C.A. DUTCH RUPPERSBERGER, Maryland
    MICHAEL R. TURNER, Ohio              STEPHEN F. LYNCH, Massachusetts
    JON C. PORTER, Nevada                BRIAN HIGGINS, New York
    CHARLES W. DENT, Pennsylvania

                                   Ex Officio

    TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                  R. Nicholas Palarino, Ph.D., Staff Director
                            Robert A. Briggs, Clerk
                 Andrew Su, Minority Professional Staff Member

                                     (iii)

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on May 16, 2006.....................................     1
    Statement of:
        Harbert, Karen, Assistant Secretary for Policy and
          International Affairs, U.S. Department of Energy; and Paul
          Simons, Deputy Assistant Secretary for Energy, Sanctions
          and Commodities, Bureau of Economic and Business Affairs,
          U.S. Department of State...................................    12
            Harbert, Karen...........................................    12
            Simons, Paul.............................................    24
        Yergin, Daniel, chairman, Cambridge Energy Research
          Associates; Keith C. Smith, senior associate, Europe
          Program, Center for Strategic and International Studies;
          and David L. Goldwyn, president, Goldwyn International
          Strategies Low-Income Countries............................    53
            Goldwyn, David L.........................................    92
            Smith, Keith C...........................................    72
            Yergin, Daniel...........................................    53
    Letters, statements, etc., submitted for the record by:
        Goldwyn, David L., president, Goldwyn International
          Strategies Low-Income Countries, prepared statement of.....    97
        Harbert, Karen, Assistant Secretary for Policy and
          International Affairs, U.S. Department of Energy, prepared
          statement of...............................................    16
        Issa, Hon. Darrell E., a Representative in Congress from the
          State of California, prepared statement of.................     3
        Shays, Hon. Christopher, a Representative in Congress from
          the State of Connecticut, prepared statement of............     9
        Simons, Paul, Deputy Assistant Secretary for Energy,
          Sanctions and Commodities, Bureau of Economic and Business
          Affairs, U.S. Department of State, prepared statement of...    26
        Smith, Keith C., senior associate, Europe Program, Center for
          Strategic and International Studies, prepared statement of.    74
        Watson, Hon. Diane E., a Representative in Congress from the
          State of California, prepared statement of.................   130
        Yergin, Daniel, chairman, Cambridge Energy Research
          Associates, prepared statement of..........................    57

                ENERGY AS A WEAPON: IMPLICATIONS FOR U.S. POLICY

                                  ----------

                             TUESDAY, MAY 16, 2006

            House of Representatives, Subcommittee on Energy
                and Resources, joint with the Subcommittee on
                National Security, Emerging Threats, and
                International Relations, Committee on
                Government Reform,
                                                        Washington, DC.
        The subcommittees met, pursuant to notice, at 2:07 p.m., in
    room 2154, Rayburn House Office Building, Hon. Darrell Issa
    [chairman of the Subcommittee on Energy and Resources]
    presiding.
        Present from the Subcommittee on Energy and Resources:
    Representative Issa.
        Present from the Subcommittee on National Security,
    Emerging Threats, and International Relations: Representatives
    Shays, Van Hollen, Ruppersberger, and Lynch.
        Also present: Representative Cummings.
        Staff present: R. Nicholas Palarino, Ph.D., staff director;
    Robert A. Briggs, analyst; Larry Brady, staff director; Lori
    Gavaghan, legislative clerk; Tom Alexander, counsel; Dave
    Solan, Ph.D., and Ray Robbins, professional staff members;
    Andrew Su, minority professional staff member; and Cecelia
    Morton, minority office manager.
        Mr. Issa. Thank you all for being here. Noting that a
    quorum is present of this joint hearing of the Government
    Reform Subcommittee on Energy and Resources and Subcommittee on
    National Security, Emerging Threats, and International
    Relations, we will come to order.
        Gasoline is over $3 a gallon, and it is a very visible sign
    of our energy dependence. But far less visible and perhaps far
    more serious threat to our economic well-being and the pursuit
    of our vital national interest is the increasing constraint
    producing countries place on the full range of our foreign and
    domestic policy options.
        As we see these stress points on our ability to make
    independent domestic and foreign decisions, this committee has
    become increasingly concerned that oil is not only a weapon but
    is a viable weapon of those who have an agenda not in sync with
    the United States and perhaps not with the rest of the free
    world. Some producers have proven entirely too willing to use
    energy as a weapon, or as blackmail, in the words of Vice
    President Cheney. Others cannot resist the populist temptation
    to nationalize energy resources despite history's lessons that
    it undermines production over the long term and acts as a
    destabilizing force once prices drop.
        At this time, other producers are undermined by emerging
    groups seeking to cutoff energy supplies from world markets.
    Consuming countries are belatedly reassessing their options in
    a shifting world of geopolitics, and more cooperation must be
    and should be absolutely necessary. However, some consumers,
    such as China, have naively and seemingly stepped away from the
    open market and sought out long-term supplies through state-to-
    state agreements.
        We must address important questions in today's hearing.
    Have we allowed ourselves and our allies to become so boxed in
    by Iran, Venezuela, Russia, Nigeria, and Bolivia, that we
    cannot effectively counter the use of ``energy as a weapon?''
    We know that the current energy crisis is demand-driven and not
    as a result of any abrupt shock in the oil supply. But what if
    we did have an abrupt shock to the oil supply when we have, in
    fact, no spare production? What would a supply shock do to our
    economy and to those of our trading partners? How are the
    Departments of State and Energy, represented here today,
    working to ensure the supply of energy? And is the Federal
    Government doing enough to meet the challenges not just for
    today, but for tomorrow?
        It is my hope that today's hearing will not only more
    clearly identify the ramifications of our oil dependency on the
    economic and national security interest, but also begin to
    identify--and this is most important--how to deal with those
    ramifications. Last week, Chairman Davis and I released a
    majority staff report entitled, ``Securing America's Energy
    Future.'' The report contains aggressive recommendations for
    lessening our dependence on foreign energy supplies.
        Today we will hear from some of the best experts in the
    world on these issues. On the first panel, we are privileged to
    have here today Assistant Secretary of Energy and Policy for
    International Affairs Karen Harbert and Deputy Assistant
    Secretary of State Paul Simons.
        I will introduce the second panel later, and would ask for
    my ranking member to make his opening remarks.
        [The prepared statement of Hon. Darrell E. Issa follows:]

        [GRAPHIC] [TIFF OMITTED] T1181.001

        [GRAPHIC] [TIFF OMITTED] T1181.002

        [GRAPHIC] [TIFF OMITTED] T1181.003

        Mr. Lynch. Thank you, Mr. Chairman. I want to thank
    Chairman Shays and yourself, Chairman Issa, for holding this
    hearing. I can think of very few issues that are so prominent,
    so profound, and so immediate in the world today.
        I would also like to thank both our Secretaries and the
    collective witnesses on the second panel for helping our
    committee with its work.
        Throughout the past year we have witnessed a dramatic 38
    percent increase in the price of crude oil and, concurrently, a
    sharp rise in the average cost of gasoline to American
    families. In recent weeks, crude oil prices have risen to over
    $70 a barrel and, according to the Energy Information
    Administration, this week's average national price for regular
    grade gasoline is nearly $3 per gallon, a nearly 80 percent
    increase from a year ago. On the East and West Coast, the
    average price per gallon is actually over $3.
        Among the chief factors that have facilitated recent rises
    in oil prices has been increased worldwide consumption and
    demand as countries such as China and India have experienced
    significant economic growth. However, it is the United States
    that remains the world's leading oil consumer, consuming over
    20 million barrels of the roughly 80 million barrels produced
    worldwide each day, while producing only about 7 million
    barrels daily.
        Notably, our high oil consumption, coupled with the
    weakened reserve position, means that the United States for the
    most part, will continue to rely on the world markets for its
    crude oil supply. According to the Energy Information
    Administration's last International Energy Outlook, 70 percent
    of U.S. oil consumption is projected to be satisfied by crude
    oil and petroleum product imports by the year 2025.
    Regrettably, our growing dependence on foreign oil not only
    poses a substantial risk to our economic security, but may also
    serve to compromise the effectiveness of American foreign
    policy as high domestic demand leaves the United States
    susceptible to the threat of hostile oil-related political
    actions by foreign governments in oil-producing countries.
        Iran, for example, the second-largest producer within the
    Organization of Petroleum Exporting Countries, has repeatedly
    issued thinly veiled supply disruption threats in response to
    U.S.-led efforts to curb that country's uranium enrichment
    program. In addition, Venezuela President Hugo Chavez, whose
    country is the United States fifth-largest source of crude
    imports, has similarly asserted the possibility of retaliatory
    oil-related actions stemming from his opposition to U.S.
    policy. In April 2004, Hugo Chavez threatened to stop selling
    oil to the United States if we did not stop ``intervening in
    Venezuela's domestic affairs.'' And in February 2006, President
    Chavez again asserted that the U.S. Government should know that
    if it crosses the line it will not get Venezuelan oil.
        As evidenced by these examples, America's addiction to
    foreign oil means that our economy and foreign policy is
    extremely vulnerable to oil-related threats issued by, in some
    cases, rogue oil-producing states. Accordingly, I welcome the
    witnesses today, both our Secretaries in the first panel and we
    also have a very distinguished panel to follow. And I am
    enormously happy that you have been willing to help the
    committee with its work and I look forward to your testimony.
        Thank you, Mr. Chairman.
        Mr. Issa. Thank you. And as you know, this is a joint
    hearing. I feel a little guilty, both as a junior member and as
    the subcommittee chairman for Energy and Resources, sitting on
    the dais when in fact National Security Subcommittee chairman,
    Chris Shays, has really done the yeoman's work on the threat to
    national security. In many ways, this is less about energy and
    more about the threat to national security.
        With that, I yield to Chairman Shays.
        Mr. Shays. I thank the gentleman. I like being just where I
    am, and I thank you for initiating this hearing because I think
    it is one of the more important hearings I have been involved
    in all year.
        Dependency on foreign-supplied fuels is an emerging threat
    to our national security and to the security of the
    international community. Suppliers understand fuels such as oil
    or natural gas can be used to influence or compromise our
    policies. The U.S. economic growth is a key force that propels
    the world economy. Fuels supply the energy that helps nations
    increase their standard of living. Without fuel, obviously, the
    world would grind to a halt.
        In many cases, the supply of these fuels is threatened by
    individual groups and regimes opposed to U.S. policies, often
    located in the more politically unstable parts of the world.
    The former Primer Minister of Malaysia Mahathir Mohamad said,
    ``If we reduce oil output, prices will rise. Oil can be used as
    a weapon to protect the interests of Muslims.'' I find it
    interesting he used the word ``Muslims'' and not just his own
    folks.
        Al Qaeda's Osama bin Laden and his deputy al-Zawahiri have
    repeatedly called for attacks on key economic targets,
    especially energy sources. Ali Larijani, secretary of Iran's
    Supreme National Council, said ``we would not like to use our
    oil as a weapon. We would not like to make other countries
    suffer.'' Interesting way of saying, basically, they will.
        Regimes and volatile regions also threaten fuel supply, and
    Latin America's state-controlled energy sources limit the
    growth of global supplies by undermining or discouraging
    foreign investment. Russia's cutoff of natural gas to Ukraine
    was a successful effort to use fuel supply as political
    leverage. In Subsaharan Africa, poor governance and corruption
    threaten the supply of fuels, making others who would use it
    more powerful.
        President Bush highlighted the risks of foreign fuel
    dependency when he declared ``America is addicted to oil'' and
    insisted the United States ``break this addiction.'' While
    recognizing the problem is laudable, little has been done to
    solve it. We must break this addiction because suppliers
    exploit American energy dependency to influence our policies
    and terrorists see oil as our Achilles heel. Frankly, it is our
    Achilles heel.
        We are funding both sides in the war on terrorism,
    ironically--U.S. military and, on the other side, energy
    suppliers who support Islamic militants. Kicking the habit is
    an urgent necessity. Congressman Maurice Hinchey, a Democrat
    from New York, and I introduced the Energy for Our Future Act,
    which seeks to decrease U.S. dependency on foreign oil, protect
    the environment, build a market for renewable energy, and
    promote energy conservation.
        Our national security is threatened by our dependency on
    foreign countries that share neither our views on democracy nor
    our commitment to combat radical Islamist terrorists. With less
    than 3 percent of the world's oil but 25 percent of its use, we
    can never drill our way to energy security. Only by creating a
    forward-looking energy policy that reduces demand for fuels,
    especially oil, will we be able to lower gas prices and ensure
    a long-term independence.
        Today's hearing highlights the growing use of energy as a
    weapon and the risks it poses to U.S. national security.
    Congressman Issa, this is a good opportunity--frankly, a great
    opportunity--for our two committees to examine this important
    issue that speaks to the security and well-being of our great
    Nation, and I propose that we have a number of hearings on this
    issue.
        I just want to thank you for your efforts and your
    leadership, and I want to thank our witnesses for taking the
    time to appear before us today. I look forward to their
    testimony.
        Thank you, Mr. Chairman.
        [The prepared statement of Hon. Christopher Shays follows:]

        [GRAPHIC] [TIFF OMITTED] T1181.004

        [GRAPHIC] [TIFF OMITTED] T1181.005

        [GRAPHIC] [TIFF OMITTED] T1181.006

        Mr. Issa. Thank you, sir.
        I would ask, before we hear testimony, that the witnesses
    and anyone--this is a rule of the full committee--who might be
    advising our witnesses, please stand to take the oath.
        Mr. Shays. This is just on the first panel, correct?
        Mr. Issa. Right, just the first panel would probably be
    fine.
        [Witnesses sworn.]
        Mr. Issa. The clerk will report that both answered in the
    affirmative.
        OK, please have your seats and--oh, yes. We normally do 5
    minutes. We understand there is no way on a subject like this
    that 5 minutes is going to work. So even though it will cut
    into the remaining question time, 10 or so minutes would be
    ideal. If you are finished sooner, we will get to questions
    sooner, but it is up to you.
        Ms. Harbert.

    STATEMENTS OF KAREN HARBERT, ASSISTANT SECRETARY FOR POLICY AND
      INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF ENERGY; AND PAUL
     SIMONS, DEPUTY ASSISTANT SECRETARY FOR ENERGY, SANCTIONS AND
      COMMODITIES, BUREAU OF ECONOMIC AND BUSINESS AFFAIRS, U.S.
                          DEPARTMENT OF STATE

                       STATEMENT OF KAREN HARBERT

        Ms. Harbert. Well, good afternoon, and thank you. Thank you
    for indulging us with a few more minutes to deal with this very
    important and complex subject.
        It is a pleasure to be here today to talk about the
    administration's efforts to meet the energy challenges facing
    us today from both a national security perspective and an
    economic perspective. We believe that energy security is
    inextricably intertwined with our economic prosperity and our
    national security. Access to a secure, reliable, affordable
    supply of energy is fundamental to our national economic
    security. As such, and as the world's largest producer and
    consumer of energy, the United States must play a leading role
    in addressing the world's energy challenges and ensuring a
    secure energy future for all.
        The global nature of energy markets means that supplying
    adequate, affordable, and reliable energy services is a
    responsibility we all share and one that we must address as a
    global community. Actions taken by any country to misuse or
    mismanage its energy resources without considering the global
    implications of its actions will have a far-reaching, negative
    impact.
        As traditional energy resources become less available and
    more difficult to develop, energy security will become an even
    more critical component of economic security and national
    security. A few trends are of particular concern: The world's
    energy dependence on a few countries. Obviously, record-high
    oil prices. Resources that are now located in places that are
    geographically hard to reach, geologically difficult to
    develop, politically unstable, and unfriendly to new
    investment.
        So to cope with this, we have a full range of possible
    consequences because of these trends. So we must employ
    forward-looking policies that proactively address the energy
    challenges and maintain a U.S. diverse energy mix.
        The U.S. goals to achieve a more diversified world energy
    market to improve global security include: First, expanding
    global production to meet the needs of a growing global
    economy. We want to see the global economy continue to grow.
        Two, using technology to diversify the types of energy we
    consume, to improve energy efficiency, and to lessen the
    environmental burden of energy consumption.
        Three, improving investment climates in resource-rich
    countries and pursuing market-based pricing.
        And four, modernizing and protecting global energy
    infrastructure.
        The United States strongly believes in the power of open
    markets to most efficiently determine price, supply, and demand
    adjudication. However, there are other countries that do not
    ascribe to our philosophy. These are countries which do not
    appear to utilize their resources for the good of their
    citizenry and, instead, are showing increasing and strong
    tendencies toward using energy as a foreign policy tool to
    further their agendas around the world.
        So where are these resources? As you have said, the United
    States imports about 60 percent of its oil. The top 10
    suppliers to the U.S. market are currently Canada, Mexico,
    Saudi Arabia, Venezuela, Nigeria, Iraq, Algeria, Angola,
    Russia, and the United Kingdom. We import 15 percent of our
    natural gas, principally from Canada, Trinidad and Tobago, and
    Algeria.
        Now much of the world's untapped hydrocarbon resources are
    controlled by governments and national oil companies, with
    limited access afforded to United States and multinational
    energy companies. The new resources are concentrated in the
    Middle East, North Africa, Russia, and Central Asia. Saudi
    Arabia is estimated to have over 260 billion barrels of oil,
    while in Africa, Nigeria and Libya have about 75 billion
    barrels of oil reserves. Other countries with sizable reserves
    include Iraq, the United Arab Emirates, and Kuwait. And the EIA
    estimates that proven oil reserves are between 17 and 44
    billion barrels in the Central Asian Caspian region.
        As you know, Russia has proven oil reserves and they are
    conservatively estimated at about 60 billion barrels, and it
    has tremendous natural gas reserves. However, the true value of
    these reserves is not known, as they do not release their
    reserve data publicly. Russia has moved rapidly to consolidate
    its control over the energy sector and it has yet to enact a
    law outlining the terms for foreign investment. The lack of a
    predictable legal environment to attract investment is slowing
    investment and it is decreasing production.
        We can't forget that our most important energy partner lies
    right to our north, and it is Canada. It's our No. 1 supplier
    of oil and it provides more than 85 percent of all of our
    natural gas. We do have a very strong and stable relationship
    with this strategic ally.
        Venezuela sends about 60 percent of its oil exports to the
    United States, about 1.5 million barrels per day. One of the
    most important outlets for PDVSA, the Venezuelan state-owned
    oil company, lies right here on our shores. However, Venezuela
    production is now only 2.5 million barrels a day, and PDVSA
    production is down 50 percent from its peak. Venezuela has
    tremendous reserves, but it needs a tremendous amount of
    capital--we're talking upwards of $25 billion--and significant
    technological expertise to tap those resources. With the
    increased restriction on foreign investment in the oil sector,
    we are seeing declining investments, reduced production, and,
    certainly, not the available expertise that is needed to unlock
    those resources.
        So how is energy being manipulated today? Well, we see four
    recent trends, and these trends, we believe, are self-defeating
    and that the nations that employ them will ultimately pay the
    price, and not the energy market. The trends are: No. 1,
    limiting access to the resources for commercialization and
    thereby limiting supply. This ultimately impacts negatively on
    the economy of the Nation that is depriving its citizens of the
    revenue generated by the development of these assets.
        No. 2, renegotiating contracts or expropriating assets.
    This undermines a country's credibility and reduces incentive
    for investment in the country more broadly.
        No. 3, renationalizing assets. International energy
    companies have the needed capital and the needed technology to
    unlock challenging resources. Most--not all, but most
    government and national oil companies do not.
        Fourth, cutting off supply. This reduces a country's
    reliability as a supplier, deprives its population of needed
    revenue, and accelerates affected countries' plans for supplier
    diversification.
        And last, cheap petroleum. Countries that provide reduced
    price products or concessionary financing deprive their own
    economies of revenue and encourage an unhealthy reliance on
    non-market-priced oil, which is not sustainable over the long
    term.
        Many have said China's growing demand is a threat. Is it?
    China has responded to its growing need for energy through
    domestic policies such as increasing domestic oil production,
    increasing energy efficiency, and increasing the use of
    renewable energy. But, it has also sought to enhance its energy
    security by diversifying its energy supply through imports and
    acquiring new assets overseas. This has prompted concerns, as I
    have said, that their growing demand is a threat. We believe
    that these will not remove energy resources from the
    competitive market. We believe that these resources are
    actually going to be consumed by China, and the effects of
    these purchases should be economically neutral.
        So what is the real threat? The real threat is lack of
    investment. The International Energy Agency estimates that in
    order to meet world demand by 2025, $16 trillion of investment
    will be required. That investment largely depends on market
    transparency in producing countries. Complex, capital-intensive
    projects require stable, predictable investment climates. With
    long time horizons, investment is needed now--not tomorrow, but
    now.
        So what is the United States doing to address the
    situation? We believe we are increasing our energy security
    through engagement, cooperation, and diversity.
        We maintain frequent and regular contact with producing and
    consuming nations. Greater transparency among nations is
    necessary to avert surprises and instill confidence in the
    market. Just this month, Secretary Bodman met with his
    counterparts from Saudi Arabia and our No. 1 and 2 suppliers of
    oil, Canada and Mexico. We also are currently hosting a
    delegation from China to improve our cooperation on energy
    efficiency. We have to address both the producing and consuming
    part of this equation.
        As the administration engages in a dialog with both
    producers and consumers, we stress the need to work
    constructively to promote the removal of barriers, to encourage
    investment and trade, as well as the need for transparency,
    sanctity of contracts, and the establishment of clear laws and
    regulations that are consistent.
        I mentioned diversity. The administration has determined
    that, over the long term, our best energy strategy is one that
    is based on achieving diversity of supply--where we get it from
    and what it is. During his State of the Union address,
    President Bush outlined two new initiatives that are based on
    the belief that scientific discovery and technological
    advancement are the keys to maintaining America's economic
    leadership to meeting our future energy needs.
        In order to secure our energy future, we are working to
    transform how we produce and how we consume our energy
    resources. The Advanced Energy Initiative will accelerate
    investment into clean energy technologies in order to transform
    the way we produce energy in our homes, the way we use energy
    in our homes, our businesses, and our transportation sector.
    The AEI is focused on technologies that we believe hold the
    greatest promise for American taxpayers--solar, wind, biofuels,
    hydrogen, nuclear, and clean coal technologies.
        The second initiative, which was the American
    Competitiveness Initiative, the President has proposed to
    increase Federal investment in critical areas of research to
    ensure that the United States continues to lead the world in
    opportunity and innovation. As somebody said, we're not going
    to drill our way out of this challenge, we're going to innovate
    our way out of this challenge. We have to provide our children,
    the next generation of leaders, a strong foundation to carry
    this challenge forward.
        So in conclusion, the administration believes that access
    to a secure, reliable, and affordable energy is fundamental to
    national security. We also believe that a strong, stable, and
    prosperous global energy market can be created by all
    countries--those countries who choose market-based energy
    policies and the power of private investment.
        But moves by some countries to restrict foreign investment
    and increase the reach of state-run energy industries limit
    their ability to access capital for investment, restricting the
    development of access to energy supplies and infrastructure. It
    is a model that may hold patriotic appeal, but delivers less
    prosperity to citizens and less energy to markets.
        Thank you for the opportunity to address this and I look
    forward to answering all of your questions. Thank you.
        [The prepared statement of Ms. Harbert follows:]

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        Mr. Issa. Thank you.
        Mr. Simons.

                        STATEMENT OF PAUL SIMONS

        Mr. Simons. Thank you, Mr. Chairman.
        Chairman Issa, Chairman Shays, Congressman Lynch, it's a
    real pleasure to be here this afternoon to testify on the
    critical nexus of energy and national security. Let me ask that
    my full written statement be entered into the record and I will
    provide just a few short oral remarks.
        First of all, let me say that from the State Department
    perspective we welcome the attention being paid to this issue
    by the House and this committee. Mr. Chairman, in particular we
    appreciate your interest in this issue, demonstrated by your
    participation in the first oil ceremony inaugurating the
    opening of the Baku-Tbilisi-Ceyhan pipeline in Georgia last
    year. We also appreciate your active involvement in our energy
    diplomacy with Kazakhstan. I recall we were together last
    September in San Diego for an important conference.
        An important foreign policy success, the BTC pipeline, as
    you know, will not only enhance global energy security, but it
    will also go a long way toward strengthening the sovereignty
    and economic viability of the nations of that region. So by
    maintaining diversified sources of supply, as exemplified by
    the BTC pipeline, nations can help make their economies more
    resilient to disruptions in energy supply. Energy is, after
    all, a fundamental driver of economic growth and development
    around the world.
        As you've noted, as several of the committee members have
    noted, we're largely in a tight situation today that's been
    created by demand growth and basically global economic growth--
    which is a good thing. Greater wealth and prosperity may
    enhance national security by providing the underpinnings of
    more peaceful, democratic, and cooperative relations. But they
    also bring increasing pressure on world energy markets, which
    we've seen in the last couple of years, particularly the
    markets for oil, on which most of the world's transportation
    depends, and of course, more lately, on markets for gas as
    well, on which a growing share of the world's electric power
    production depends.
        So whether in relation to these tight market conditions, or
    an attempt to take advantage of them, we are witnessing, as the
    President has pointed out and as Secretary Rice has pointed
    out, we're witnessing which do engage in behavior which does
    undermine global energy security.
        In order to address this challenge, we need to develop a
    portfolio of both near-term, medium-term, and long-term
    measures. As is acknowledged in the very fine report that was
    submitted by this committee, energy is an issue that requires
    long lead times. So on a number of these issues we need to
    simultaneously pursue a short-term strategy, a medium-term
    strategy, as well as a long-term strategy. And as Assistant
    Secretary Harbert pointed out, the President has laid out
    elements of short-term, medium-term, and long-term, both in the
    State of the Union message as well as in his April 26th speech,
    where he recognized that the Nation is addicted to oil.
        The President did outline a plan in which we can broaden
    our energy options, and our mission in the State Department is
    to play the critical role to engage our friends and allies
    around the world in implementing this vision with us, to
    basically bring the international community on board for the
    President's vision. And we do this every day, in conjunction
    and in close cooperation with our colleagues in the Department
    of Energy as well as other U.S. Government agencies, through a
    number of different tools. And I think Assistant Secretary
    Harbert has laid out most of these. I don't think I'm going to
    repeat them in my statement, but I'll very briefly summarize
    five general areas which I think correspond closely to the
    areas that she has outlined.
        First, the promotion of diversified energy supply and
    transit options, this concept of diversification. Energy
    through diversification. And again, we appreciate the
    committee's report also made reference to this tactic.
        Second, enhancing the investment climate for energy
    exploration and development. This is something we work on every
    day, and we appreciate, again, the leadership of the chairman
    on the energy climate issue. And we have had some successes
    here. As you know, we work closely with the government of
    Kazakhstan, the government of Azerbaijan, more recently with
    the Libyans in the disassembly of our sanctions regime and the
    very positive announcement yesterday, and also with the
    government of Saudi Arabia, which has undertaken a major
    initiative to expand production. So we are looking at
    investment climate improvements across a wide variety of
    suppliers.
        Third, encouraging a transition to market pricing. This is
    extremely important, especially in an era when prices are high.
    We have to make sure that price signals are appropriately
    transmitted to the markets in all of the consuming countries
    around the world so we have the proper market response and
    market behavior. And this is something that we pursue through
    our USAID programs, through the multilateral development banks,
    and through bilateral dialogs.
        Fourth, advancing research and development of
    transformational energy technologies. The Department of Energy
    has the lead on a lot of this, but we've created some
    international partnerships, including the Asia-Pacific
    Partnership, where the State Department has a very active role
    on the technology side.
        And finally, improving energy efficiency. The President has
    laid out some important measures in the State of the Union and
    in the April 26th announcement--a plan, for example, to expand
    the use of plug-in hybrids and to expand tax benefits for
    hybrid vehicles. These are the kinds of steps that we would
    like to see expanded also elsewhere in the world.
        So let me conclude by saying that energy policy is very
    much an important foreign policy priority for this
    administration. It's a critical issue in our bilateral
    relationships with key consuming, producing, and transit
    countries. We work closely--we have a very good and strong
    interagency team that works on this, and we look forward to
    answering any of your questions.
        Thank you.
        [The prepared statement of Mr. Simons follows:]

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        Mr. Issa. Thank you. Thank you both for putting as much as
    you can into such a short period of time.
        Secretary Simons, because you have a short window, we will
    concentrate on your statement first, limiting ourselves,
    including myself, to 4 minutes each. And then we will do a
    second round. So Secretary Harbert, understand that it is not
    that all these questions wouldn't go for you, but I think we
    are going to try and respect the fact that you are not flying
    MilAir and it won't wait.
        Secretary Simons, I am going to be very brief in my
    questions. You and I have been interested in places in which we
    can expand not the quantity but also diversification of
    delivery and source. I am particularly concerned that, if I
    read this correctly, the areas that are down in production, may
    be there for a long time. Nigeria in 2006 appears to be down by
    550 thousand barrels a day. Venezuela down by 400 thousand
    under their new nationalized regime. Iraq, as you know, is down
    about 900 thousand. And for a number of explainable reasons,
    the U.S. Gulf was down about 325.
        That puts us about 2 million barrels down. How much of our
    $3 a gallon and $70 a barrel should we attribute to this group
    of circumstances versus, quite candidly, other forces in the
    world?
        Mr. Simons. Thank you, Mr. Chairman, for that question.
        As I think I pointed out in my opening statement, one thing
    I think we need to keep in mind is that oil investment has very
    long lead times and there are very, very long cycles that are
    involved. So the production that's coming on board today really
    comes about as a result of investment decisions that were made
    back in 1997, 1998. And the price of oil, of course, is very
    cyclical as well. So we had low prices in the late 1990's,
    throughout the 1990's, and we really had a deficit of
    investment. So we don't have the volumes coming onstream right
    now that take care of the expansion in global economic growth.
    But a lot of this had to do with the low price environment back
    then. Today we have, obviously, a much more robust pricing
    environment. Companies and countries are investing much more
    aggressively. But we do have to consider this lead-time issue.
        But to try to answer your question, I think, clearly, we
    are in a position now where we lack spare capacity. And the
    lack of spare capacity is contributing to the high price
    levels. We need to work very, very hard on a menu of countries
    that we'll be working with. I mentioned before the Azerbaijans,
    the Kazakhstans, the Nigerias, the Angolas, the Libyas, the
    Saudis, the UAE. We need to basically keep all our cylinders
    operating, because it is a little bit difficult to predict
    exactly where we may have a supply disruption problem.
        So I think the main issue and the main reason we have the
    high prices today is because of that low investment 10 years
    ago and also the fact that we've had very, very robust economic
    growth. I think if you had asked anyone in the energy industry
    a couple of years ago if oil prices had been up to $60 a barrel
    would we still have 4 percent global economic growth--which is
    what the IMF has predicted for this year--they probably would
    have said no, we would have had a slowdown. But in fact,
    countries are adopting and adjusting to the energy prices,
    they're improving their efficiencies, and to some extent,
    they've kept the global economy moving.
        So we do need to take steps. We need to take steps in the
    short run, the medium term, and the long run. But we also need
    to recognize that there are lead times and a number of the
    steps that we are working on today will probably benefit
    generations a little bit further out.
        Mr. Issa. Certainly. Just one followup, because you didn't
    mention Russia, and I am particularly concerned. It is
    estimated that Americans alone lost over $6 billion in the
    hostile or manipulated takeover of Yukos. Needless to say,
    Americans are not going to be likely to go back into the next
    IPO with the level of zeal that they went in with in the past.
    Looking ahead as the years go on--in addition to Russia's
    manipulation of their natural gas and their using oil as a
    weapon--is that absence of investment, world-class investment
    capability, likely to lead to the Russians' long-term ability
    to exploit their resources being significantly down?
        Mr. Simons. Well, thank you for that question. As you know,
    Mr. Chairman, from your experience in the region, Russia is an
    extremely important player in the global energy circles. It's
    the largest non-OPEC producer of oil, it has the largest gas
    reserves in the world, and it has a very important role to play
    as a reliable supplier to Europe and as a reliable supplier to
    global markets. So the way that Russia handles its energy
    sector is important to us. And we've raised a number of the
    issues that you cite this afternoon in our bilateral energy
    dialog with the Russians. Certainly we believe it's important
    that Russia undertakes the investments that they need basically
    to keep up their ability to play this reliable supplier role,
    and we're discussing with them now issues related to that.
        Again, I bring up again the issue of lead times, because it
    may be for the next couple of years that Russia can maintain
    levels of oil production. But if investments start to slow now,
    we may see in 5, 6, 8 years that curve start to fall off. These
    are the kinds of issues that we have raised with the Russians.
    The multilateral International Energy Agency has raised a
    similar set of issues. We think it's important for Russia and
    other market players to take a long-range view of their ability
    to play this leadership role.
        Mr. Issa. Thank you.
        Mr. Lynch.
        Mr. Lynch. Thank you, Mr. Chairman.
        Mr. Secretary, since you have to leave, I am going to
    direct my question principally to you. We have dealt in the
    past on several occasions, at least four major instances of
    having shock, oil shock, so to speak, and both actual and
    threatened disruptions of oil supply here in the United States.
    I think the most serious occasion was probably in 1973, when we
    had a concerted effort in the Middle East. But it does appear
    to me that, given the amount of potential disruption out
    there--I mean, if we look at right down the list, Nigeria,
    Venezuela, Bolivia, Iraq, Iran--given all of the potential out
    there for some significant disruption--and given the fact that
    our margin is very tight here, between what you call spare
    capacity or surplus production capacity that is out there, it
    is very, very limited. And I understand your opinion that we
    need to have some short-term, some medium-term, some long-term
    solutions.
        But when I go over what you have talked about
    diversification of supply and transit, enhancing the investment
    climate, energy efficiency, supporting new technologies--those
    all seem to be rather longer-term solutions. Although I agree
    they are solutions, they are mostly longer-term.
        What do we do? Let's just use Venezuela, for example. This
    past week the administration has said that they are going to
    ban arms sales to Venezuela. And President Chavez comes back
    and says he is going to sell 21 F-16s to Iran. And we go back
    and forth here. What happens if this brinksmanship goes to a
    point where, say, a significant supplier like Venezuela cuts
    off supply? What do we do?
        Mr. Simons. Thank you, Mr. Lynch. It's a good question.
    We've given a lot of thought to this inside the administration.
    And within the sort of short-term basket of options, I think
    the option that we try to keep most available and most ready to
    use is our coordinated use of our strategic stocks. And if you
    recall, during hurricanes Katrina and Rita last fall, we were
    able to work with the 26 member nations of the International
    Energy Agency, and within 24 hours we agreed to release 60
    million barrels of oil to meet that supply disruption that was
    actually caused by a natural occurrence here on U.S. shores.
    And we regularly, within the context of the IEA, conduct
    emergency response exercises. And lately, we've been bringing
    in the Chinese, the Indians, and other non-IEA consuming
    countries to participate in those exercises, to get them to
    understand the value of maintaining and utilizing strategic
    stocks. All the IEA member countries are required to keep 90
    days of imports of stocks on hand. And as you know, the
    President has led the effort to expand the U.S. strategic
    petroleum reserve, which has been increased substantially
    during this administration, so we have a more comfortable
    cushion.
        So for the very, very short term, we have, I think, a very
    agile mechanism available in the release of strategic stocks.
    We also have some global spare capacity--not enough, but we are
    working to have that get larger. And Saudi Arabia in particular
    has launched an aggressive investment program because, as the
    Saudi oil minister announced in his recent visit here, Saudi
    Arabia would like to see a larger cushion there as well. So a
    larger cushion is viewed as in the interests of the producing
    countries as well as the consuming countries.
        And finally, we do have energy efficiency and some of the
    targets the President announced, in particular his initiative
    to expand the tax credit on hybrid vehicles, which he announced
    on April 26th.
        So we do have some short-term elements in our tool kit. I
    really wouldn't mean to suggest that it's all focused on the
    medium and long term, but I think we have to keep the notion in
    mind that we do have to be moving ahead in all three areas at
    the same time.
        Mr. Lynch. Just a quick followup. It does concern me,
    though, that we dig so deep into our tool box on the first
    disruption. In other words, in previous instances of threatened
    disruption and actual disruption, we were able to replace
    production capacity by going to another international neighbor.
    In this case, you are saying that we may very well have to go
    to our own reserves immediately, which is sort of a backstop
    for defense purposes.
        Mr. Simons. Well, I think that's correct, but at the same
    time, I think we showed back in September that we can move
    fairly quickly and that we can have a rather rapid impact on
    the markets. You may recall, we had a spike up to a little over
    $70 and over $3 a gallon, and within a couple of weeks we were
    back down by at least $10 a barrel. So--
        Mr. Lynch. That was a 2-day storm, though.
        Mr. Simons. That's right, but I think the fact that the
    markets recognized that we have the stocks, the stocks can be
    made available, and that the process itself is agile, it's not
    overly bureaucratic, I think that ought to give some comfort.
        Mr. Lynch. Thank you, Mr. Secretary.
        Mr. Issa. That is a great line of questioning, and at some
    future hearing we will talk about the shortage of refining
    capacity that went on, obviously, beyond the 2 days when the
    refineries flooded.
        Mr. Shays.
        Mr. Shays. Thank you very much, Mr. Chairman.
        I am left with a feeling that we are totally and completely
    vulnerable. We are vulnerable because there is no way to
    increase supply noticeably in the short run and that we then
    empower each country--because it is just like if a bill passed
    by one vote, every Member can withhold their vote and stop the
    bill from passing. I get the feeling that there frankly is
    nothing that we can do in the short run. And what I would like
    to know is if you believe that is true. And if not true, then I
    would like you to tell me, in concrete ways, why it is not
    true.
        Mr. Simons. Thank you, Congressman Shays. I believe I
    responded to Mr. Lynch that we do have the strategic stock
    option available. We have a small amount of surge capacity
    internally.
        Mr. Shays. And explain--
        Mr. Simons. We have efficiency.
        Mr. Shays. How small an amount is that?
        Mr. Simons. Probably a million to 1.5 million barrels a
    day.
        Mr. Shays. So we consume 20 million barrels a day.
        Mr. Simons. I'm sorry?
        Mr. Shays. We consume 20 million barrels a day.
        Mr. Simons. That's correct.
        Mr. Shays. Just for transportation needs.
        Mr. Simons. Well, for transportation I think we're around
    13, if I'm not mistaken.
        Mr. Shays. So it is the total--20 million is the total we
    consume?
        Mr. Simons. About 22, I think, is our total consumption.
        Mr. Shays. So we have the capability to maintain a million
    barrels a day for how long?
        Mr. Simons. In terms of what we would release from our
    stocks?
        Mr. Shays. Yeah, increasing.
        Mr. Simons. Well, it's really--we have--the IEA requirement
    is 90 days worth of imports. We have actually about 115 days of
    full imports, which means that if we had a complete shut-down
    of imports, we lost all 13 million barrels a day, we could go
    for 115 days. Now, if we're looking at--
        Mr. Shays. Just wait a second, though, just so I am sure.
    We have a stockpile, but we have the capacity to just bring
    about a million a day?
        Mr. Simons. In terms of what the physical capacity is--
        Mr. Shays. Yes.
        Mr. Simons [continuing]. To evacuate the oil? Karen,
    Assistant Secretary Harbert, perhaps, can fill that in.
        Ms. Harbert. Just on the technical natures of the SPR
    itself, it has a drawdown capacity of closer to 4 million
    barrels a day operating at full capacity. And of course we're
    looking at ways to improve that.
        I think you should not lose sight of one thing. You
    mentioned the case of Venezuela, if Venezuela were to cutoff
    oil to the United States, it would be going somewhere else. The
    world oil market would still be supplied with the same amount
    of oil unless Venezuela decided to make a very uneconomic
    decision of--
        Mr. Shays. No, no, no. I--
        Ms. Harbert [continuing]. Not having that--
        Mr. Shays. Hold on. Hold on. Oil is fungible. We make
    assumptions that people think the way we think. And there can
    be such anger and hate that they don't care what it does to
    themselves if, in the process, it really screws us. And so all
    I am asking is the following: The strategic reserves, we have a
    capacity to draw down up to 4 million a day? Is that your
    testimony?
        Nodding heads doesn't get recorded.
        Ms. Harbert. Yes.
        Mr. Shays. OK. And we could sustain that for how long?
        Ms. Harbert. As Secretary Simons has said, between what we
    hold in the SPR and what industry holds, we have the ability to
    replace our imports for close to 115 days.
        Mr. Shays. OK.
        I was listening and I am not hearing the same thing. So are
    you saying that we have the capacity for 4 million barrels for
    115 days?
        Mr. Simons. We have a capacity for 13 million barrels a day
    at 115 days, so 4--I'm just doing the math here--4 million
    barrels a day could go about three times that long, more than a
    year at 4 million barrels a day.
        Mr. Shays. So our real challenge, then, is our capacity to
    draw it down?
        Mr. Simons. I think that's correct, but I think you're also
    making the assumption that we, as the United States, would be 4
    million barrels short in the event of a supply disruption.
        Mr. Shays. No. No, I make an assumption that you could have
    something happen in the Persian Gulf that could impact a
    significant amount of supply. I do make an assumption. I make
    an assumption because it could happen. I don't think it is any
    stranger than thinking that somebody could bring down the Twin
    Towers. I think it is a very real possibility, and I think the
    honest answer to my question is we are extremely vulnerable to
    a drawdown in the supply of world oil and that our only
    protection now is our strategic oil reserves to which we have a
    capacity to draw, at best, 4 million barrels a day. And then my
    question, which will remain to let the other Members go, would
    be so tell me what we are doing and we will get into that with
    Ms. Harbert.
        Thank you, Mr. Simons.
        Mr. Issa. Thank you. Great round. We are just sorry that
    you have to go to Holland so quickly.
        Mr. Van Hollen.
        Mr. Van Hollen. Thank you, Mr. Chairman. Thank you for
    holding this hearing. Thank both the witnesses today. And I
    thank you for laying out some of the short-term options,
    middle-term options, and long-term options.
        I would agree that our short-term options are pretty
    constrained. I do believe that it is a result of failure to
    have some forward-looking think as a nation many years ago. Our
    short-term options are constrained now because we failed to
    take significant steps early on. A very simple step we could
    have taken was to increase the CAFE standards. I think this
    Government--and I speak for Congress and the administration
    both--have been grossly negligent in not taking action much
    earlier to raise it above the 27.5 miles per gallon and closing
    the SUV loophole. There are things that we could have done that
    would at least limit the severity of the price hikes and reduce
    our reliance on foreign oil.
        I also think, as we talked about, that our dependence on
    foreign oil puts certain constraints on our foreign policy
    options.
        But if I can ask you, Mr. Simons, I am not sure I know--
    part of your title has to do with sanctions, and I don't know
    to what extent that fits in with our efforts with respect to
    Iran. But whether it does or does not, my question is this: We
    have been trying to work through the UN Security Council and
    with the permanent members, to pass some kind of resolution
    that would allow us to possibly impose economic sanctions
    against Iran. Russia and China have been resistant to doing
    that for a variety of reasons, but one reason may well be, at
    least with respect to China, that it has these oil contracts
    with Iran, that it is largely dependent going forward on
    foreign oil.
        In your experience, to what extent does that dependence of
    China limit our ability to persuade them to support our efforts
    in the international arena in Iran and elsewhere?
        Mr. Simons. Thank you, Congressman, for that question. I
    think it's a good one.
        We have been raising for some time the issue with China of
    how they conduct themselves on the world stage and particularly
    with respect to energy. Deputy Secretary Zoellick has led this
    effort inside the State Department and, in a major speech he
    delivered last year, challenged the Chinese government to act
    as a responsible stakeholder in the international community.
    And I think this responsible stakeholder concept gets to a lot
    of what's behind your question.
        We have been discussing in various dialogs with the Chinese
    what it means to be an investor in upstream oil, what
    responsibilities, what obligations, what approaches China ought
    to take, based to some extent on some of our experience over
    the last few years. And to some extent, China shares interests
    with the United States in working to improve investment
    climates around the world. China, for example, is a 40 percent
    investor in the Occidental Oil project in Ecuador, that the
    Ecuadoran government took steps just yesterday to cancel the
    contract. So we clearly enjoy a common goal with China to look
    for countries that hold oil reserves to take a responsible, an
    investor-friendly approach to their development.
        So I believe we do have some common interests with China.
    We're both large, growing, consuming countries. We're both
    interested in energy efficiency. And we have common efforts
    under way through this Asia-Pacific Partnership for clean
    energy, that State and the Department of Energy lead. We also
    have an active energy dialog with the Chinese led by Energy
    Secretary Bodman. So there are a lot of areas that we need to
    work on with the Chinese. One of them is precisely this, to get
    them to think more clearly about how they conduct their
    upstream investments in ways that don't upset some of our key
    geopolitical interests.
        Mr. Van Hollen. Thank you. Mr. Chairman, if I could just
    have one quick followup. Is that all right?
        Thank you for that, and I think, you know, clearly we have
    to work with the Chinese and our other partners. There are a
    number of factors, obviously, that go into whether they make
    decisions to support our efforts in Iran, but that is one of
    them.
        Just a quick possibility in terms of near-term actions. As
    we know, Brazil has been very successful at developing a non-
    gasoline-based--an ethanol-based fuel, I believe. About 75
    percent of their cars now run on it. We impose a tariff. I
    think it amounts to about 54 cents per gallon, I believe, on
    Brazilian ethanol. Why shouldn't we lift that tariff to make
    that fuel more available to try and diversify our energy
    sources, as you both have said is an important part of the
    strategy?
        Mr. Simons. Thank you, Congressman. I think the issue of
    ethanol is one that we're all paying a lot more attention to in
    the wake of the State of the Union message, where the President
    clearly laid out his vision in particular of cellulosic ethanol
    growing and replacing a lot of our transport fuels. In fact, we
    have even laid out a target of 5 million barrels a day of
    cellulosic ethanol by the year 2025, which would be very
    ambitious to reach. But I think there's a huge amount of
    interest in ethanol in the international community as well as
    here domestically.
        With respect to your specific question about Brazil, I
    believe both Secretary Bodman as well as the President have
    said this was something we ought to take a look at. So it's
    timely and I think it's something that we ought to begin to
    analyze and think about more seriously.
        Mr. Van Hollen. Is that something the administration
    supports, lifting the tariff?
        Ms. Harbert. Let me tell you that at the moment we get 16
    percent of the corn that we have in this country being used for
    ethanol right now. And if we look over the long term and we
    look for solutions that we're trying to actually make
    homegrown, we need to look for ways to actually increase that,
    and that's why the President announced the investments we're
    making in cellulosic ethanol.
        There are tremendous opportunities right now in the ethanol
    industry here in the United States. We have 35 new projects
    that are in various stages of investment and construction.
    We're encouraging those investments to take place in this
    country. We want to make sure that our domestic industry
    expands to meet the demand, both with corn and ultimately with
    other types of feedstock. We don't want to do anything that
    would hamper anybody's investment plans to expand our domestic
    production. So we have to keep that in mind.
        Mr. Van Hollen. I take that as a no, the administration
    does not support lifting the tariff--
        Ms. Harbert. I think that the Secretary and the President
    have said all options are on the table. No one is willing to
    take any option off the table. We have to be very mindful of
    the fact that we have created an environment where investments
    are taking place in the United States. Let us do nothing that
    would cause harm to those investment plans.
        Mr. Van Hollen. I understand that. I thought we had a sort
    of competition, free-market approach to things.
        But thank you, Mr. Chairman.
        Mr. Issa. You are very welcome.
        I just have one parting question for Secretary Simons.
        You and I look, obviously, at the World Trade Organization
    as an important free-market, free-trade organization. Has
    Russia's recent use of its pipeline--some might say coercive
    use of its pipeline--been consistent with WTO membership? Or
    would you, in reverse, say that clearly their historic actions
    would be inappropriate were we to grant them accession to the
    WTO?
        Mr. Simons. Mr. Chairman, the issue of Russia and its use
    of pipelines is one that we have discussed privately as well as
    publicly with the Russians. We think it's very important for
    Russia to think very carefully about its long-developed
    relationship as a good gas supplier to Europe and to ponder
    very carefully what it needs to do to keep up that reputation.
        Mr. Issa. Thank you very much. I won't assume a yes or a no
    at this point.
        Are there others who would like to ask a second round of
    questions for Secretary Harbert? Chris.
        Mr. Shays. I am unclear about the ability of a country to
    lock in prices and to lock in supply. And I need that explained
    to me. I realize that oil is fungible, but I don't understand
    why a country can't totally and completely lock in supply from
    one country. It seems to me they can.
        Ms. Harbert. Let's go back to the Venezuela example, if you
    will. Venezuela produces a very heavy type of oil that needs to
    be refined in a certain manner. We possess that capability
    here, so a great deal of their exports come to the United
    States for two reasons--proximity, which reduces cost; and our
    refining capacity. Now ultimately, if they decided they didn't
    want to ship oil to the United States, they wanted to ship it
    somewhere else, if the receiving country--
        Mr. Shays. Let's stop it there. I agree with that. They are
    locked into us, unfortunately, and we are locked into them. But
    China is literally going and trying to lock up contracts. Is
    that correct?
        Ms. Harbert. They are on an aggressive buying spree. But
    the amount of their investments is not overwhelming at the
    moment, but they are certainly canvassing a lot of new
    projects.
        Mr. Shays. Is what they are doing unique?
        Ms. Harbert. They have, certainly, the capital and the
    demand that's motivating them to do this. Many countries don't
    have the type of government-owned structure and the capital at
    their fingertips to do and to purchase this. However, they're
    not going to be able to use more than what they need. So even
    if they own the asset, if it is not something that is required
    for their domestic economy, it will obviously be returned and
    put onto the global market.
        Mr. Shays. They have the capability to lock up more than
    their supply and then resell it elsewhere?
        Ms. Harbert. If they were to purchase more or own more
    assets than what their domestic consumption would be, then they
    could return that to the global marketplace.
        Mr. Shays. Sell it wherever they wanted? I mean, what I am
    trying to think through is I do realize that oil is fungible--
    that I understand. We don't have a Saudi Arabia that is holding
    back?
        Ms. Harbert. The spare production capacity right now is
    between about a million and 1.5 million barrels per day.
        Mr. Shays. Which is basically at peak production?
        Ms. Harbert. Which means that we're operating a very razor-
    thin margin.
        Mr. Shays. Yes. You know, you are parsing your words in a
    way that makes me uncomfortable. I am not playing a game with
    you. And I know you want to make sure that I totally
    understand. But what it seems to me is that when we are done
    with this hearing, an honest assessment is that the United
    States is very vulnerable and so is the rest of the world. But
    given that we consume 20 to 25 percent of the world's energy,
    we are going to feel the impact the most. So it seems to me,
    one, is we are very vulnerable in the short run; we can use our
    strategic reserves, which will negate it somewhat. And the
    second thing, it seems to me, that I would gain from this
    hearing is that we have countries for the first time who are
    really aggressively, knowing that we are at peak production,
    trying to make sure they are not left out by guaranteeing a
    supply. China is doing it in a way that I don't think we have
    seen done before by such a large purchaser. Is that correct?
        Ms. Harbert. Well, I think in the short term, and your
    conclusion that there is little we can do, we certainly, as you
    said, have the strategic petroleum reserve. But we also can't
    forget the next best source of energy is the one that we
    currently waste. And there's a tremendous amount that we can do
    in energy efficiency and conservation in the short term. I
    think that the--
        Mr. Shays. I understand that, though what concerns me is
    that a slight reduction in energy, oil, can mean a huge
    increase in price. That is what I am left with. And that the
    market could really panic. So I am left feeling very
    uncomfortable about what Congress, admittedly, and the White
    House have done to get us into this position.
        Ms. Harbert. And I think we also have to keep in mind that
    there are number of producing nations out there, responsible
    producing nations, that understand that this high price
    environment is not in their interest, just the same as it's not
    in our interest. They don't want to see demand have a dramatic
    fall-off, and they understand that this could have an impact on
    economic growth. Saudi Arabia is a perfect example. They're
    trying to very rapidly increase their production ability by
    almost a third. Canada is doing the same thing. We've asked
    for, obviously, authorities over the long term to expand our
    production--the Arctic and other ways.
        As I said in my testimony, and Mr. Simons alluded to the
    same thing, these are complex energy projects and the
    investment is needed now to unlock those resources. Now, that
    may not satisfy our short-term demand, but we have to forecast
    that we are going to have an increased demand for energy if
    this type of economic growth is going to be sustained, which is
    in our interest. Where are we going to get the next source of
    supply? Working with those countries that it's in their
    interest to unlock those, use those revenues, and how can we
    actually help them do that with very good, honest capital?
        Mr. Shays. Just one last point. I have huge regret that
    after September 11th the administration didn't come in and
    basically say we are going to have a Manhattan Project, a
    Marshall Plan, you know, 10-years-in-getting-to-the-moon energy
    plan. Although this didn't happen, I think Americans wanted
    that to happen. And I am waiting to see when the administration
    is going to say that it is a demand/supply issue and we need to
    slow the growth of demand significantly by better conservation,
    better mileage. When is the administration going to weigh in on
    that side of the equation to say minivans, SUVs, and trucks
    need to be getting the same gas mileage as cars and we need to
    bring cars up significantly? When is that going to happen?
        Ms. Harbert. I think we've been very, very aggressive on
    the energy conservation, energy efficiency front. We have
    tremendous incentives out there for consumers to change their
    behavior. We have a philosophy of incentivizing change, not
    mandating change.
        Mr. Shays. Why? Why, why, why? Why would we do that? My
    daughter's life was saved because we mandated seat belts and
    air bags. It would not have happened soon enough if the market
    was to do it. Why is this administration only looking at the
    market without trying to add value to it by getting us to act
    sooner? Why, why, why? I don't understand it.
        Ms. Harbert. We believe in a balance, and there are certain
    things we're willing to mandate and certain things we're
    willing to leave to consumer choice. If you want to choose to
    buy a hybrid vehicle, you will then receive up to a $3,400 tax
    benefit. We have raised CAFE standards on light trucks. We have
    asked for the authority to reform and revise those standards
    for passenger vehicles. I hope we get that authority so that we
    can do that. There are things that relate to safety that make
    sense to mandate, and we will do that at every given chance.
        Things that affect consumer choice, we ought to incentivize
    that behavior and not force that behavior. That has worked very
    well in the energy markets and we think that's the way that we
    employ our policy here.
        Mr. Shays. And my last word, I think you put our Nation at
    risk by that policy. I think you put our Nation at big risk.
        Mr. Issa. And on that note, Mr. Lynch, you have some
    followup time.
        Mr. Lynch. Thank you.
        Madam Secretary, let me ask you, $3 a gallon--is that one
    of your incentive programs to get people to use less gas? Is
    that something you see as a way that the market works to
    curtail gasoline use?
        Ms. Harbert. Well, I think the President has been very
    clear when he has said that he's very concerned about this high
    price environment. The gas prices are going to hurt people's
    businesses, and their wallets. He's very concerned about that.
    That's why just last month, he unrolled another plan, a four-
    point plan, of how to address this. This is not something that
    is unnoticed.
        The problem is--and everybody wants us to have a magic
    bullet, a panacea--that we have that we're not willing to use.
    We don't have it. It takes a long time to get in this
    situation, as Mr. Van Hollen pointed out, and it's going to
    take us a long time to get out of it. We need to do everything
    we can in the short term to be better consumers of energy, and
    we need to have the foresight to make the investments now in
    those technologies that will help us over the long term to not
    be energy vulnerable.
        Mr. Lynch. I know I am preaching to the choir here, but
    this is so critical. I have to share Mr. Shays' level of--I
    would not say alarm but elevated concern. I think we are not in
    a crisis, but there is a looming crisis out there. And I
    appreciate the fact that it is in Venezuela's best interest to
    work with us to have agreements to sell oil.
        But you are assuming that their leader is working from a
    rational basis, and I have not really seen that from Mr.
    Chavez. I know it is probably in the best interests of Iran to
    work with us, but in the case of President Ahmadinejad, I don't
    see a lot of rational thought going on there, either. So I am
    very concerned.
        I want to read you something that--Mr. Yergin is coming up
    behind you, but there is a great quote in his book from a
    fellow named Fritz Schumacher. He talks about the nature of
    energy, and he says, ``There is no substitute for energy. The
    whole edifice of modern life is built upon it. Although energy
    can be bought and sold like any other commodity, it is not just
    any other commodity but the precondition of all other
    commodities, a basic factor with air, water, and earth.''
    Energy is so central to our way of life here that it concerns
    me greatly that we are really walking a very fine line here
    between having sufficient oil supplies. It almost looks like a
    perfect storm where the margins are so tight and we have so
    many wild cards out there right now in terms of Nigeria, Iran,
    Iraq, Venezuela, and Bolivia, that any one of them can sort of
    nudge us over that line.
        I am just very concerned that we do not have a viable plan
    out there right now to deal with that. I understand we will go
    to the Strategic Petroleum Reserve and we will try to fill in
    that gap, but it just could end up a real mess over this issue
    in a big hurry here in the United States. People are
    complaining about $3 a gallon, but I could see where this thing
    could go up in a big hurry. And I do not, frankly, see anything
    out there in the administration's plan book that is going to
    get those prices any lower any time fast. I see a whole lot of
    possibility out there that things could go the other way. We
    are looking at $4 or $5 a gallon if we have increased
    restriction on supply and we have continuing demand.
        China alone--China alone--over the last 4 years is
    responsible for 40 percent of the increase in global demand.
    One country. I guess it is how you look at it. China has a
    $1,100 a year median income right now, with over a billion
    people. This is a lot of potential growth there. They are
    responsible just in 4 years for 40 percent of global demand
    increase in oil. Do you see that as a short-term problem? Or do
    you see that as a long-term problem for energy prices globally?
        Ms. Harbert. I see it as a reality, and it is a reality
    that must focus our discussions, and it must focus our
    investments and it must focus our policies.
        If you look at what is happening with the price of gas
    right now, $3, that is due to a large number of things that are
    happening in the United States all at one time. It is our own
    little mini perfect storm. We are transitioning away from MTBE
    to ethanol. We have a number of new regulations that are coming
    into effect. At the same time, we have refineries that are down
    for operations and maintenance that we kept up and running to
    meet the outages from the hurricanes. We have a confluence of
    factors right now that are causing a very tight environment,
    which hopefully will ease toward the driving season.
        But you point out that we need to have options. That is
    what we need. We have an abundant source of coal here in this
    country. We need to be able to use it in a clean and
    sustainable manner. We need to be able to have more nuclear
    power. The President has a nuclear proposal on the table. We
    need to support the nuclear proposal.
        We have aggressive investments in renewables. We are
    helping India and China to be more efficient consumers of
    energy. It is in our interest if they consume less energy. We
    need to help them be more energy efficient. We need to be more
    energy efficient. We need to use solar. We need to use wind.
    There are all kinds of things that we have to keep on the table
    and we have to do the right thing by making those investments
    now so those technologies can actually be commercially viable
    in the medium term.
        Mr. Lynch. I just wanted you to answer that last question.
    Do you see the growth in India and China as a short-term
    problem? Because that governs the nature of our response. If we
    see it as a short-term problem, we deal with it in one way. If
    we see it as a long-term problem, then we deal with it in
    another way. You are the Secretary. You are here testifying,
    and I am just asking you. Do you view that problem as a short-
    term or a long-term problem? I know it is reality. But are you
    dealing with it?
        Ms. Harbert. We certainly do not see the growth abating,
    and we certainly hope to see global economic growth sustained.
    Is that an opportunity or is it a challenge? Is it a problem?
    As you said, it is a reality, and we have to make those
    adjustments.
        We wrote a report that was asked for by Congress in the
    Energy Policy Act by Congressman Pombo about whether China's
    appetite is a threat, and we wrote a very lengthy report about
    that does a very detailed analysis, and we will be happy to
    send a copy to your office.
        Mr. Lynch. I think I have it here. Thank you, Madam
    Secretary.
        Mr. Chairman, also, at the beginning of this hearing, I was
    supposed to ask that this report be submitted on the record. I
    would ask unanimous consent----
        Mr. Issa. Without objection, it will be included along with
    other pertinent information we want to include.
        Mr. Lynch. OK. This is the Pacific Institute Research for
    People on the Planet, testimony of Peter Glike. Thank you.
        Mr. Issa. Mr. Van Hollen, you had one followup question?
        Mr. Van Hollen. Thank you, Mr. Chairman. Thank you, Madam
    Secretary, for your testimony. I have one question on CAFE
    standards and then one other brief question.
        You mentioned that the administration is seeking authority
    to increase CAFE standards, but just for the record, I think it
    is important to be clear that the administration has proposed
    sort of a segmented approach to CAFE standards so that within
    each vehicle class you would have different standards. Would
    you acknowledge that the administration currently has the
    authority within the existing framework to increase the CAFE
    standards subject to a congressional veto?
        Ms. Harbert. We have raised CAFE standards for light
    trucks. We do not have the authority to raise CAFE standards
    for passenger vehicles. We have asked for the authority to do
    that in conjunction with a way to reform the system, which
    would allow us to do it on a fleet-based system, a footprint-
    based system, just like we do with light trucks, and we do not
    have that authority.
        Mr. Van Hollen. Well, my understanding is that you do have
    authority to do a lot more than you have done subject to
    congressional veto. We will check that.
        Let me ask you about Iran. We face a very tight oil market
    today, obviously, and you have talked about ways to try and
    loosen it up so it is not quite so tight, both on the supply
    side but also diversification of sources. Looking at the
    situation we are in today and acknowledging that if Iran was to
    cut back on its oil supply, it would obviously have an economic
    impact on Iran. I believe about 80 percent of its exports are
    to the oil market, and it also imports a fair amount of
    gasoline itself, refined products.
        But putting that aside, if they decided to use oil as a
    political weapon--and we have talked today about other
    countries that have used oil as a political weapon--and if
    today they were to significantly reduce their exports of oil,
    what impact would you see on the world oil markets and on
    gasoline prices at the pump here in the United States?
        Ms. Harbert. You know, the United States is a member of the
    International Energy Agency, which is a 26-member body, which
    in the case of a severe supply disruption exercises a
    consolidated approach to meeting the supply disruption. When
    you take all of the stocks that all the countries hold together
    within the IEA, we have the ability to meet a complete shut-off
    of Iranian oil for over 4 years. So if that was necessary, that
    would actually have to be employed.
        Mr. Van Hollen. Let me just make sure I understand your
    answer. You are telling me that if the Iranians today were to
    cutoff all exports of oil, there would be no increase of the
    price at the pump here in the United States.
        Ms. Harbert. No, the oil market is very volatile, and there
    would certainly be some sort of price reaction. What I am
    talking about is that we have an ability to respond to a supply
    disruption in Iran. The markets are tight. There would
    certainly be a price reaction. I cannot forecast how much that
    would be.
        Mr. Van Hollen. OK. I mean, you suggested that it would be
    fairly minimal, I thought. Is that what you are suggesting?
        Ms. Harbert. The industrialized nations--
        Mr. Van Hollen. You said we are prepared for a total cutoff
    of exports.
        Ms. Harbert. We have the ability to replace the amount of
    oil that would be taken off the market for a significant period
    of time if that is the position that Iran chose to take. We
    certainly do not think that would be responsible. We certainly
    do not think that is to the benefit of the Iranian citizens. We
    do not think it is to the benefit of the energy market.
        Mr. Van Hollen. No, I understand, but putting all that
    aside, I am just--
        Ms. Harbert. But the reason we have these oil stocks is to
    deal with severe supply disruptions.
        Mr. Van Hollen. OK. Thank you, Mr. Chairman.
        Mr. Issa. Thank you, and I will do the quick wrap-up here.
    You have been very, very kind with your time.
        I want to leave you with a couple of questions to respond
    to in writing, if you would, because you have been very
    generous with your time. We touched base on the China
    contracts, and I think this committee is interested in broadly
    knowing: Is what they are doing, potentially what we should all
    be doing? And I will pose a rhetorical question to you. If the
    United States and other consuming nations were to guarantee,
    hypothetically, 80 percent of their anticipated exports at a
    price which used to be considered at the high end of good.
    Would $35 a barrel, in fact, be a long-term impetus to
    investment and, as a result, production to meet those demands?
        Now, 80 percent is not magical; $35 a barrel is not
    magical. If I had said $35 a barrel when I first took the Chair
    here, I would have been drummed out of town as a friend of
    OPEC. Today, at half of the prevailing rate, it seems like a
    good deal.
        You are welcome to interject in your answer other base
    suggestions for how much the U.S. Government or an entity might
    choose to commit full faith to, because the United States does
    have the ability to commit the full faith and credit of the
    United States, even though it is not a country like China.
        You are certainly welcome to suggest what the correct
    incentive would be. I ask this because this Congress has had a
    long history of sometimes a controversial, sometimes a mutually
    agreed basis in various tax incentives that effectively create
    bases for production.
        In my home State of California, we obviously have the old
    Bakersfield and other oil fields that, if they were not bases,
    they would have had to shut down. As a matter of fact, at $9 to
    $18 a barrel, they were living on cogeneration and somebody
    agreeing to pay for the electricity, which did not always get
    paid for, but that was what made them viable oil wells. Today,
    I imagine the people that bought those things used from the big
    oil companies look like geniuses. So I would like you to
    respond to that.
        Last, although we talked about around 100 million barrels a
    day of world consumption; about 2 million barrels of potential
    surge capability; and 20 million barrels of U.S. production.
    When we dealt with the delta between the 20 million and the 13
    million used for mobile fuels, we did not deal with where the
    viable alternatives are that would allow us to reduce all or
    part of that 7 million barrels a day. And I would like you to
    answer, to the best of your ability, where you believe there
    should be investments in alternative energy sources; whether it
    is clean coal--I would like you to avoid natural gas, if you
    don't mind, but nuclear, wind, solar, any of the other non-
    petrochemicals that are not in short supply, and how we would
    potentially reduce by a million, 2 million, up to the 7 million
    our non-transportation use. I think that would be very helpful
    for the committee.
        And with that, I will have to tell you those are the only
    two questions that this dais did not ask the panel. If you have
    any closing remarks, otherwise, we are finished.
        Ms. Harbert. Mr. Chairman, thank you very much for the
    opportunity. I think we need to continue to have more dialog
    about what is a very important issue. This is clearly on the
    minds of the American people. It is on the mind of the
    President. We are doing everything we can with what limited
    ability we have in the short term, but we aggressively have a
    long-term strategy that we believe, put in place now, will
    secure ourselves and have the type of access to energy
    resources that our economy demands over the long term.
        Thank you very much for this opportunity, and I look
    forward to further exchanges.
        Mr. Issa. Thank you, Madam Secretary, and it has been a
    very good exchange, and we look forward to having you back.
        I am going to sponsor about just a 2-minute quick break for
    the next panel to come up.
        [Recess.]
        Mr. Issa. We will come back to order, a quorum still being
    present.
        I would like to introduce the second panel, which is an
    extremely impressive group. For everyone's well-being, I hope
    that we have exhausted some of our questions on the first
    panel, and I appreciate your remaining patiently through a long
    dialog.
        Dr. Daniel Yergin, chairman of Cambridge Energy Research
    Associates, who has testified many times before Congress, and
    we appreciate your being back.
        Ambassador Keith Smith, Senior Associate, Center for
    Strategic and International Studies.
        And Mr. David Goldwyn of Goldwyn International Strategies.
        I look forward to hearing from you today, and since I did
    not catch you the first time, I have to ask you to please stand
    for the oath.
        [Witnesses sworn.]
        Mr. Issa. For the record, all nodded yes.
        Having made our opening statements and having trimmed down
    the dais a little bit, I would like to open at this time with
    Dr. Daniel Yergin, if you would, please.

        STATEMENTS OF DANIEL YERGIN, CHAIRMAN, CAMBRIDGE ENERGY
     RESEARCH ASSOCIATES; KEITH C. SMITH, SENIOR ASSOCIATE, EUROPE
     PROGRAM, CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES; AND
     DAVID L. GOLDWYN, PRESIDENT, GOLDWYN INTERNATIONAL STRATEGIES
                          LOW-INCOME COUNTRIES

                       STATEMENT OF DANIEL YERGIN

        Mr. Yergin. Mr. Chairman, members of the committee, I too
    am very honored to be here to have the chance to join this
    discussion. As I listened to the previous session, I was very
    struck by the sense of urgency in the questions and the issues
    as you frame them and remind us that we really are in a
    somewhat precarious time. It is very important in such
    circumstances to try and connect the dots, and I would like to
    try and connect a few of the dots in my brief remarks today.
        It is clear from what you were talking about before that
    energy security today is not an abstract issue. It is a very
    real set of considerations. And it is also clear, whether you
    are talking about the price at the pump or you are talking
    about energy security, we are really talking about America's
    position in the world. It is important to see these issues in a
    global context.
        Energy security has repeatedly been an issue of great and
    paramount importance to this Nation. It is once again today. I
    think it needs to be rethought from what has been the set of
    ideas that developed and policies and procedures in 1930's,
    which are very sound and are part of the foundation. These are
    not enough today, and we need to include new factors.
        As part of connecting the dots to see that energy security
    needs to be seen within the context of our overall relations
    with nations and how they interact with each other, it is
    really about alliances and our friends and working with other
    nations and understanding their points of view. I think that
    was very evident, Mr. Chairman, in the report that was prepared
    for you and Mr. Davis, which I think highlights it. We have a
    study coming out tomorrow called ``The New Paradigm for Energy
    Security'' that we did with the World Economic Forum that tries
    to outline some of those things.
        We have already heard in the first session the number of
    issues that have driven this focus on energy security from the
    tight market to the politics. I think something that has become
    clear only in the last 6 to 12 months is in addition to
    everything else is this rebirth of a 1970's style resource
    nationalism. This is riding on the crest both of high prices
    and political calculation, and specifically, as you have
    already noted in the previous session, the rising tensions with
    Iran.
        Of course, energy security is not limited to oil. We have
    had power blackouts on the West Coast. We have had them on the
    East Coast. We have to pay attention to what that message is
    telling us. In terms of natural gas, we are about to become
    part of a world market, which is something that is new for the
    United States, new for North America.
        We certainly see a new range of vulnerabilities. Osama bin
    Laden has talked about attacking the hinges of the world
    economy, and by that he means the infrastructures, including
    energy. We see energy coming from new areas that need to
    develop security systems. If we look back at what happened last
    autumn with the two hurricanes, we see that we really had the
    first integrated energy shock we have ever had in which oil,
    natural gas, refineries, processing plants, electricity were
    all down, and I think drove home the way electricity is
    fundamental to the whole energy system.
        We know the list of events since the beginning of the year
    that have focused our attention on energy security, the
    mounting sense of it. As I said before, the principles that
    have governed energy security have been wise, beginning with
    diversification, but we need a sense of energy security that
    reflects the rapid evolution of the global energy trade, supply
    chain vulnerabilities, terrorism, and, as you have been talking
    the first session, the integration of these major new
    economies.
        I want to emphasize again and again, because it strikes me
    that it gets left out of the discussion, that so much of how we
    manage this problem will depend upon how we interact with other
    countries. We have to see it in the overall context.
        So let me briefly try and answer four questions.
        One, what do we mean in energy security for the 21st
    century? And in the testimony, I try and lay out 10 principles.
    They are really there for discussion. You might want to change
    them and think about them, but I urge you to at least reflect
    upon them: diversification; the need for a security margin;
    realizing that there really is only one global oil market; the
    importance of information; a subject you have already talked
    about, China and then India and Brazil and bringing them into
    the energy security system.
        I think it is very important that we understand the point
    of view of those countries and that we seek to work with them
    collaboratively and we keep things in perspective. China's oil
    production is 400,000 barrels a day, which is one-tenth of the
    production of one super major oil company. I don't think China
    is going to be able to preempt us in any serious way, and I
    think it would be more worrisome to us were the Chinese not
    investing in developing new resources with the way their demand
    is growing.
        I have mentioned the importance of protecting
    infrastructure and the energy supply chain. That was not
    something that was really thought about when the current energy
    system was created in the 1970's.
        I think one of the lessons to me--and it is a very strong
    lesson, which Mr. Lynch cited ``The Prize''--is the importance
    of flexible markets, that markets can respond and help mitigate
    crises. Everybody, even if they were born after the 1970's,
    remembers the gas lines, it seems. But those gas lines were to
    a large degree self-inflicted because of allocations and
    controls.
        Energy efficiency and conservation, as you all have
    emphasized, is terrifically important. We are 50 percent more
    efficient as a country, and we need to keep going on that.
        This question of the investment climate ought to be a very
    big question at the G-8 meeting--access, openness, where to
    encourage investment, I think that is critical.
        And finally, as we know, development and deployment of new
    technologies.
        The second question: Why have oil prices doubled during the
    past 2 years? And I think what I would say is that through
    2004, we had a demand shock. That demand shock has given way to
    a supply shock. We call it a slow-motion supply shock, an
    aggregate disruption, as you have already noted in these
    hearings, of about 2 million barrels a day.
        The third question is: Are we running out? And my answer to
    that is that this is actually the fifth time the world has run
    out of oil. The first time was in the 1880's, and the last time
    was in the 1970's, and production increased 60 percent.
        But we are moving--and the geographic imagery has gone from
    the oil mountain to the peak, but, in fact, we believe that the
    right way to see it is really as what we call a plateau, which
    is farther out. There will be a much larger role of technology,
    of non-conventional energy resources, and that the real
    problems right now and in the years ahead are not below ground.
    The real problems are, as you have already described in the
    first session, aboveground.
        And, finally, I will just say a word about the need to
    update the way we see reserves and evaluate them. With the G-8
    Summit approaching, one of the things that really struck me, as
    you talk in different countries, you find that everybody is
    more or less in favor of energy security. But it means very
    different things to different countries, and that might be
    something we can talk about. I think for a China or an India it
    is really about energy that they need to grow their economies
    to deal with social turbulence. It is not the same sort of
    issue.
        Russia's energy security, a lot of that means controlling
    the commanding heights of the energy industries and controlling
    the pipelines.
        United States, we talk about energy independence, but as we
    know, we have gone from a third to 60 percent of our oil being
    imported, and we are going to be importing a lot of gas.
        We are at a historic juncture. This great surplus of extra
    capacity that was a legacy of the 1980's is, at least for the
    time being, gone. The term ``spare capacity'' was used in the
    first session, and it is on that narrow band of spare capacity
    that so much of the drama of the world oil markets is playing
    out today.
        As I said, we like to talk about energy as though we are an
    island. We are not. We import more oil than any other nation
    consumes. And as we have heard, the balance between supply and
    demand is very tight. And as I pointed out, we have the
    aggregate disruption. Those numbers have already been quoted
    with Venezuela, Iraq, Nigeria, and the Gulf of Mexico.
        If you say what has made the difference in the last 3
    months, one is the disruption in Nigeria and the uncertainty
    about what is going to happen. And second is the ratcheting up
    of tension about Iran. Iran was not in the oil price at the end
    of last year. It is today, or at least partly.
        Third--and that is easing--is the too rapid switch from
    MTBE to ethanol; 270 days was too quick to do it, and we had
    logistical problems.
        We have talked about Iran. We should just note that 18
    million barrels a day of supply passed through the Strait of
    Hormuz.
        I mentioned earlier that we are going to widen the
    definition of what we mean by oil. Oil sands from Canada, we
    see the numbers from Canada going up, gas to liquids. It is
    also no secret that ethanol is going to be more important in
    the United States than one might have assumed even a year ago.
        But I think there, too, it is important to keep it in
    perspective. We hear that half of Brazil's motor fuel is
    ethanol, but that is equivalent to 3 percent of our gasoline
    supply. So what we have to keep in mind is the scale of our
    more than 20 million barrels a day of consumption. And while
    biology cellulosic ethanol may have a major impact, it is
    probably several years away. It is not something that is going
    to give us a quick fix.
        The last topic is that the whole system about how we know
    how much oil there is, the system of proven disclosures by the
    SEC really needs to be modernized. It is unbelievable. It is
    still based upon 1965 definitions of reserves, proven reserves,
    and as late as the 1970's, when the SEC put its system in
    place, the frontier for deepwater was 600 feet; now it is
    12,000 feet. Markets have changed dramatically. We are much
    more integrated. The kind of projects have changed. The
    complexity of projects has changed. People are spending
    billions of dollars on projects where the reserves cannot be
    recognized, and so this really gives misleading information to
    consumers, to investors, and about energy security.
        I would just say that the system that is in place now was
    put in place before there were cell phones or personal
    computers, let alone the Internet. It is as though you are
    telling oil companies today that you have to use invasive
    surgery, not CAT scans, or that financial reports to the SEC
    should be filed only using typewriters and carbon paper. We
    need to modernize that system to have a better understanding.
        So to tie this all together, as really the sense of this
    hearing and what you have defined, energy security is going to
    be one of the major challenges for U.S. foreign policy for some
    years to come--not only for years but for months, and in the
    immediate weeks. It really is front and center for us.
        Part of that challenge will be anticipating and assessing
    the what-ifs, connecting the dots, thinking not only the
    unthinkable but the semi-thinkable. And that requires not only
    looking around the corner, but also beyond the ups and downs of
    cycles to both the reality of an ever more complex and
    integrated global energy system, and certainly to the relations
    among the countries that participate in it.
        Thank you.
        [The prepared statement of Mr. Yergin follows:]

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        Mr. Issa. Thank you, Doctor.
        And since each of the witnesses is touching on Brazil, I
    might only note from the dais that when I became chairman of
    this committee a year and a half ago, one of the topics I was
    asked to take a look at was the 54 or so cents of tariff on
    Brazilian, and other countries, beyond their quota for ethanol.
    And now that the price of gasoline has gone up by $1, I do note
    it as interesting that it is still impossible to sell this
    ethanol even when the price of the end fuel has risen by over
    $1. So although I am sympathetic with the gentleman, Mr. Van
    Hollen, that I would like to see no tariffs, I did want to
    note--and perhaps you will note in your testimony--that it does
    not seem like any increase in price ever eliminates the
    complaint that a 54-cent tariff is a barrier to entry for
    competition.
        With that, Ambassador Smith.

                      STATEMENT OF KEITH C. SMITH

        Mr. Smith. Thank you very much, Mr. Chairman. It is a
    particular delight to be here because I have been writing about
    this subject for a couple of years, and most of the reaction
    has been a giant yawn, including a yawn by my colleagues.
        Mr. Issa. Be it noted that the committee staff has read
    every bit of it, and that is how you got to be here.
        Mr. Smith. Thanks. Well, you have seen most of what I have
    to say then, and I will just add a few points.
        For me, it was kind of interesting to see the reaction--and
    I am in Europe a lot--of the Europeans to the January 1st
    cutoff of natural gas from Russia to Ukraine. One thing to be
    noted, it is almost universally said that was a cutoff of
    Russian gas to Ukraine, but most of the gas that was cutoff was
    cutoff from Turkmenistan. So really, Russia cut of Turkmenistan
    gas to Ukraine, and that is something to keep in mind as we
    look at the politics of Russian energy policy. It is something
    that I think has been ignored in Europe. Unfortunately they
    have made themselves even more dependent on Russia because
    there is no concerted energy policy within the European Union.
    And there still isn't. After January, there has been an attempt
    by the European Commission to put together an energy policy, a
    common energy strategy in dealing with Russia, and there has
    been a very nice green paper that has been issued. But, quite
    frankly, you are faced in Europe with large countries who want
    to deal bilaterally with Russia and don't want anything to do
    with the Director General for Transportation Energy in the
    European Commission.
        So the chances of a really combined European strategy in
    dealing with Russia and energy politics I think is quite low.
    And, quite frankly, I haven't seen any reason to think--I am
    glad that the Government witnesses are gone, but that we
    ourselves are prepared to deal in, I think, a more realistic
    way with some of the Russian challenges.
        I do not consider myself a Russophobe. I, in fact, have a
    lot of very, very close friends in Russia, and some of them who
    are more critical of Russian Government energy policy than I
    am. I think in the long run it is important that we have very
    frank dialog with the Russians, and I think that the Russian
    Government is not in a position--or is not willing, I think, to
    react to any of this dialog until we create some realities on
    the ground, which is we set standards that they have to meet,
    reciprocity in investment policy, reciprocity as far as
    transparency. These are the kinds of things that I think will
    make Russia react.
        Russia is going through a very difficult psychological
    period right now. You have a very self-confident Kremlin, one
    that thinks--one that sees oil at $70 a barrel. It sees Europe
    preoccupied with trying to get energy from whatever source it
    can. It sees the United States preoccupied with terrorism and
    in Iraq. And it believes that it really can kind of call the
    shots when it comes to energy supply in certain markets.
        At the same time in Russia, you have a lot of insecurity. I
    mean, for one there is the insecurities that to some extent
    come from paranoia. They see the Orange Revolutions or the
    changes of government in Ukraine and in Georgia as threats to
    Russian security. After the Orange Revolution in Russia, there
    was a real feeling in Russia that Russia was next and that the
    Western powers, in fact, were going to try to topple the
    Russian Government. I mean, this was a real feeling in Moscow.
    Part of this was fed by the so-called political technologists
    who went from Russia to kind of manipulate the election in
    Ukraine in 2004 in support of Mr. Yanukovych. They lost. They
    tried to rig the election and they lost in the long run, and
    they had to go back to Russia and explain why they lost. And,
    of course, the explanation they came up with was, oh, these
    wily Americans with their nongovernmental organizations were
    able to kind of manipulate the electorate in Ukraine, just like
    they had done in Georgia, and we are next.
        So I think we are dealing with a very self-confident Russia
    in some ways, but a very insecure Russia in others, and it is
    going to be a challenge to the policymakers to deal with that.
        I think that some of the problems in Eastern Europe are
    problems self-induced. There has to be a push not just in
    Russia but in the receiving countries for more transparency,
    more business transparency, to prevent the corrupt elements on
    both sides from putting together these deals.
        I would also kind of lament to some extent that I think
    that the German Government is in a very key position to
    influence Russia and Russia's energy policy, but I think the
    new German Government, to my disappointment, has kind of
    carried on the energy policies of Mr. Schroeder, which are kind
    of independent of the rest of Europe and the concerns for their
    Eastern neighbors, and I think this is--I hope that we have a
    long-term dialog with the Germans in which we can kind of help
    the Central Europeans get past this.
        Basically, I think that is about all I have to say beyond
    what my remarks were, Mr. Chairman. Thank you.
        [The prepared statement of Mr. Smith follows:]

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        Mr. Issa. Thank you, and I would again ask unanimous
    consent that all opening statements be included in the record,
    without objection.
        Mr. Goldwyn, please.

                       STATEMENT OF DAVID GOLDWYN

        Mr. Goldwyn. Thank you, Mr. Chairman, members of the
    committee, for the honor of testifying today, and thank you for
    paying attention to this subject. As a citizen, I think there
    is no greater threat to U.S. national security, to our global
    influence in the world, and to our future than our energy
    dependence, that of our European and Asian allies, and the
    growing dependence of China and India. I don't think anything
    that we are doing right now is likely to make a significant
    impact on our dependency or theirs, and I think most of the
    answers lie in how we conduct our foreign policy as well as how
    we conduct our domestic energy policy.
        I have my own typology of the various kinds of problems,
    which are in my written testimony. You have asked me to focus
    on Latin America and Africa, which is what I will focus on
    right now.
        Obviously, both of these regions are very important to U.S.
    energy security. If we are going to have any diversity of
    supply, it has to come from someplace other than the Middle
    East and Central Asia. So that is Africa and Latin America.
        In the hemisphere, the most important countries are Mexico
    and Venezuela. There are other producers. In a tight market
    everybody is important. But they are the strategic suppliers.
    In Africa, it is Angola and Nigeria, followed by Chad and
    Equatorial Guinea.
        These two regions represent two very different kinds of
    threats. In Latin America, we are seeing this new rise of state
    control--not really a new rise of state control. What we are
    seeing is another cycle of political upheaval in Latin America,
    which tends to correspond with the price of oil. We have seen
    dictatorship to democracy. We have seen state control to
    privatization. And so we are seeing yet another of these
    cycles.
        This has three emerging threats, three consequences for the
    United States. First is the loss in shareholder value for those
    companies who are seeing their asset values cut in half or
    otherwise. I think they can take it, but that is a threat.
    Second, we are seeing either a flattening or a loss of
    production growth in both oil and gas across the hemisphere.
    This is not new in Mexico because they have had state control
    for a long while. But Venezuela's new model is not working
    particularly well for it, and Bolivia and Ecuador are the same.
    But the most important consequence, the most emerging threat,
    is the loss of U.S. influence in the region, the declining
    influence the United States has and the rising challenge from
    Venezuela.
        Briefly, on the fiscal terms, you know, we are seeing--this
    is part of a worldwide struggle for who gets these windfall
    profits from the increase in the price of oil. It impacts us
    because these new harsh terms, the increased government take,
    slows new investment and deepens instability and poverty in
    these countries. It is an old and pretty much a failed model.
    The only country which has increased its productive capacity in
    the last two decades, without the help of foreign companies, is
    Saudi Aramco. Nobody else has really been able to make this
    work. And so what we are seeing is energy sector investment is
    virtually frozen, despite the high prices. There have been no
    new projects under Venezuela's 1998 hydrocarbons law. No one is
    going to invest in Bolivia right now when they don't know how
    big the losses are going to be. Ecuador's investors are all
    mulling legal action and suspension of their investments.
        And there have been some success stories. Brazil, Colombia,
    and Peru have all had very attractive frameworks, but they are
    not the majority model. But the real political challenge comes
    from Venezuela, and there is no question that higher oil prices
    have enabled President Chavez to have enough revenue to meet
    his internal budget, capital budget for PDVSA, and a very
    generous program of assistance in lots of places the United
    States has not paid attention to in a while. So he is able to
    afford fuel assistance for the Caribbean, buying Argentina's
    debt bonds, helping Ecuador, even helping communities in the
    United States with heating oil, and high revenues enable him to
    do that. And he has a competing vision from the United States
    on a whole range of issues--on free trade, on Iran, on Iraq, on
    the very nature of democracy, a Bolivarian model which is sort
    of very different from our liberal model of democracy. And we
    are seeing the popularity of that model combined with that
    generosity. That is a political challenge, and that is a
    challenge to our foreign policy and how we deal with it.
        I don't think that makes Venezuela a threat or a moral
    threat to the United States. I don't think they are likely to
    halt oil sales in general or to the United States despite the
    rhetoric, because we are an important customer. They have
    managed to remain a reliable supplier even while using our
    money from oil and products that we buy to finance a campaign
    which runs counter to all the major elements of U.S. policy.
    But withdrawing oil from the market is going to hurt their
    friends in new markets also. It is going to cutoff money for
    the government, and, frankly, we could easily handle the loss
    of oil from Venezuela through the Strategic Petroleum Reserve
    for years if it was the only disruption to take place. So I
    think it is an ideological challenge which we should engage on.
        Africa is very different. There we are looking at the
    results of the oil curse. Largely, the first threat, I think,
    is internal unrest, mostly in Nigeria, potential unrest, I
    would say, in Angola and Equatorial Guinea and Chad. They are
    pretty stable, all of them, right now but they are countries to
    watch. We are seeing China and India's mercantile approach
    across Africa where they are trying to buy assets and lock in
    supply even at market prices but, as Mr. Yergin said, and
    Secretary Harbert, not enough to actually make a difference.
        We are seeing political competition, the ability of non-
    market economies to combine a railroad, a regular road, a
    factory, along with an oil bloc does two things that are not
    helpful for the United States. One is it distorts the
    competition because neither ExxonMobil nor the U.S. Government
    are throwing a railroad along with bidding for an oil bloc. So
    it makes the competition for acreage difficult. But the other
    thing it does is it undermines our foreign policy. We are
    trying to sell transparency to Angola and they can get a $3
    billion loan from China. We are going to have a hard time
    exercising any leverage on that country to push more
    transparency.
        Obviously, in Sudan, we are seeing, you know, a direct
    opposition to our efforts to provide regional stability. And we
    are seeing it in other countries as well, and I think this is
    somewhat immaturity on China's part in terms of seeing its own
    long-term interests. But it is a form of political competition,
    and I think that part need to be taken seriously.
        So what do we do about it? I think we do different things
    in different places. Overall, I think the real great challenges
    in terms of national security are in other parts of the world.
    I think Europe's dependence on Russia and I think Asia's
    dependence on the Middle East and the undermining of our allies
    to support our coalitions on proliferation, on terrorism, on
    other things, I think that is the core of the problem. I think
    those are major-order threats. I think these are second-tier
    threats.
        But I think we need to do two different things. In Latin
    America where there are expropriations, we need to contest
    them. I think the State Department's decision to withdraw a
    free trade agreement or to exercise any measures we have
    against Ecuador if they actually expropriate assets is
    perfectly appropriate. On the fiscal terms, I think we need to
    let the market respond. Oil companies have been fighting with
    countries for decades, if not centuries, over who gets the
    rent. And miraculously enough, the oil manages to get produced
    over time if there is access. And we have to keep it in
    context. In Venezuela, there is still access. In Mexico, there
    is no access. In Saudi Arabia, there is no access.
        So if the companies take shrinks but they still get in,
    that is a decision they make. If they can make money, they will
    stay. If they can't make money, they will leave. So I would say
    let the market sort that out, and I think while it does impact
    prices and, therefore, to some extent the U.S. economy, I think
    foolish economic policy is not a basis for U.S. Government
    intervention.
        What we do need is to fight back in the hemisphere. We have
    abandoned this hemisphere for other regions for a while. We
    have no positive agenda. We have no recognition of the things
    that have not worked with the Washington consensus. We do a
    free trade agreement with Colombia which wipes out Bolivia's
    soybean market. Do we do anything with Bolivia? Do we
    acknowledge the problem? No. What does Venezuela do? They say,
    ``We will buy your soybeans.'' Kind of hard to criticize that
    policy.
        The things we need to do is have something which supports
    our model. One is to recognize that there are social
    consequences to free trade, but we can deal with those. Another
    is to recognize that maybe our trade policy doesn't let these
    countries sell us the things that they make, and if we did
    that, they would have jobs and they would be bigger believers
    in free trade.
        I think we need to deal with things like migration issues.
    I think we deal with military-to-military contacts because in a
    lot of these countries, the military is the primary
    institution, and having them understand democratic norms is
    important. Scholarship programs, training the leaders of the
    future, letting them come to our schools here, letting them get
    visas so they can come here I think is critically important. We
    have so much capital around the world because current leaders
    were educated in our schools, so we have to let them back in,
    and I think deal with things like health and education and
    poverty by working through the World Bank or the Inter-American
    Development Bank on things like infrastructure. We have to
    recognize there are problems down there, and that is why people
    like the other model right now in some of these countries. And
    the answer is not that our model is no good. The answer is that
    we can make it better. And the answer isn't that we ought to
    withdraw and not talk to countries that are looking the other
    way. The answer is that we ought to be in there. We ought to
    have our programs, and we ought to explain why our model is
    going to work better. This is a competition, but this is a
    competition that I think we can win.
        I hope in the question-and-answer we can talk about
    Venezuela because Venezuela is a complicated case. But I think
    a lot of the rhetoric has been overheated.
        In Africa--I will not run on for too much longer--we also
    need a strategic approach to the region. The problems there are
    both security and poverty, and we need to figure out what we
    are for, I say largely better governance and capacity, what we
    are going to do to help the current problems, which is have
    some sort of a program on security; how we are going to do it,
    which is to commit a serious amount of money toward improving
    government capacity in these countries; and in particular, we
    need to pay a whole lot more attention to Nigeria. Every time
    the Nigerian President comes to our country or our President
    meets him, we talk about Darfur, the Africa Union, all the
    problems of the world. We hardly ever talk about Nigeria. You
    want to increase oil production? How about 600,000 barrels a
    day by dealing with the Niger Delta? You want to increase oil
    production by a million barrels, you could talk about security
    in Iraq as well.
        Foreign policy makes a difference in price, makes a
    difference in oil supply, and I think we need a combination of
    things in Nigeria. We need to deal with security, deal with the
    right people who are providing security, because the Nigerian
    military has had some serious problems, and you don't want to
    deal with everybody over there and give them arms. We need to
    deal with crude theft, and we need to deal with conflict
    resolution. And I think the time and the patience for waiting
    for Nigeria alone to deal with this problem internally is over.
    I don't think there is any way that a Nigerian Government alone
    can gain the confidence of the rebel groups there without
    external supporters and actors, and we should not be forcing
    anything on the Nigerian Government, but we can help.
        Now, the problem isn't that there isn't enough money. There
    is a huge amount of money flushing around the Delta. But the
    Governors have it, the Niger Delta Development Corp. has it,
    everybody has it, and nobody is spending it. They are not
    spending it on the right things. So I think this is a time when
    outsiders can help, but we can help with security and with
    conflict resolution.
        We need to deal with other countries, too. Europe has a
    bigger stake in Africa than we do. President Chavez and
    President Morales travel a lot through Europe. We want the
    democratic message to get to them. We should be working with
    our European allies on a common message. We need to bring China
    and India into the collective energy security system, and there
    are ways that we can do that. These regional approaches are
    really only tactical solutions.
        A final point, I think, and you have all mentioned it here
    in different ways. The only way we deal with this problem is
    strategically. It is changing the way oil matters in the global
    economy. It is significantly changing how the United States
    consumes it, how our allies consume it. It is a change in
    technology. It takes a long time, but I think as Congressman
    Van Hollen said, if we had started it 10 years ago, we would be
    in a different place right now. If we want to be in a different
    place 20 years from now, now is the time to start.
        Thank you.
        [The prepared statement of Mr. Goldwyn follows:]

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        Mr. Issa. Thank you. I want to thank all of you for your
    testimony.
        Mr. Goldwyn, I could not agree with you more on a great
    many things you said, particularly your analysis of the
    internal challenges faced both in South America and in Africa
    and how they relate--or how our foreign policy, even when we
    are trying to do something right in one area, can adversely
    affect it. I think that was very insightful.
        Perhaps because of last night's speech of the President, I
    did focus on one word. You threw in the statement about
    migration, but did not say much beyond it. Why is migration an
    issue--you were talking about South America--in the oil trade
    situation?
        Mr. Goldwyn. It is about Mexico. Mexico since its
    revolution has had a severe allergy to foreign capital.
    Mexico's production has flattened, and their growth looks
    pretty grim in the future unless they can muster enough
    external capital, capital somehow, to develop what would be
    very lucrative resources in the Gulf of Mexico on their side.
        The only way you do that in Mexico, I think, is to give
    Mexicans confidence that the changes that will come will not
    undermine their ability to control their natural resources,
    their ability to run the country. And a lot of that has to do
    with whether they are scared of us. And so how we deal
    respectfully with a country like Mexico, when we sell
    integration through NAFTA or integration through gas and
    electricity, we could sell integration through energy. But they
    have to believe that we are not going to squash them by the
    partnership. You know the expression when the United States
    sneezes, Mexico catches cold. And treatment of--one of the main
    ways they get remittances, one of the main ways their citizens
    are treated is a huge part of the confidence that they have.
    And so I think migration is probably--when we talk about what
    other countries are interested in, migration is what Mexico is
    interested in. If we want them to do what we want, we have to
    deal with what matters to them the most.
        The other thing I would say that would make a difference is
    convincing the national oil company and the Mexican legislature
    that they can control their resources and grow that, too. And
    that is actually where a Congress-to-Congress dialog might make
    a big difference, because it does not always work coming from
    the executive branch.
        Mr. Issa. I appreciate that, and I did think that was
    probably where you were going.
        It is interesting for this member that we focus, rightfully
    so, on Russia, which has actively used oil and petroleum
    transportation as a weapon. There is no question you can see
    their fingers all over a number of activities. But in Mexico,
    where 1 out of 10 people born in Mexico now lives in the United
    States, the largest source of revenue to the Mexican economy
    are Mexicans living in the United States sending money home.
        It is interesting that, in fact, you would note that there
    is a potential oil weapon from a country that has benefited by
    its existing migration, both legally and illegally. I think
    that is more than what we can deal with here today, but it is
    certainly a thought-provoking--
        Mr. Goldwyn. Mr. Chairman, I didn't mean to imply that
    Mexico would use oil as a weapon. I don't think that they
    would, and they haven't. But Mexico's ability to be a much
    greater supplier to the U.S. market, to be a much greater
    contributor to the global market, would be dramatically
    enhanced by a better relationship between our two countries. It
    is their allergy to foreign capital which is going to undermine
    their economy, and to some extent it won't be so helpful to us
    either. I don't think Mexico under any government would intend
    to use oil as a weapon.
        Mr. Issa. I see the difference. I do remember, though, that
    rather than take U.S. investment, they flared and continue to
    flare their natural gas because they are simply not going to
    allow their constitution to allow for direct foreign
    investment. It is interesting, though, that they changed their
    constitution to allow American citizens of Mexican ancestry to
    vote, which I find kind of interesting. If I were concerned
    about my sovereignty, I think I would be most concerned about
    people who have adopted a new country voting in the old
    country. It is sort of the Alamo in reverse.
        But before we run out of time, Ambassador, getting back to
    Russia--a known bad actor in the use of natural resources,
    particularly oil and natural gas--do you believe that they are
    accomplishing today, particularly with Germany and other
    Western European allies, the kind of pipeline imperialism that
    they couldn't succeed with in the Soviet era? And is that
    because, post-Soviet era, the purchasing became easy to do
    while, in fact, more or less Russia is still as evil as the
    Soviet Union, even if no longer the same empire?
        Mr. Smith. Well, I would say that during the Soviet period,
    the pipelines that were all set up--I mean, Russia dominated--
    it was the Soviet Union, but it was really Russia that
    dominated all the pipelines that went to the former Republics,
    the 15 Republics. They dominated the energy markets in the
    Warsaw Pact countries. It was just a given that they had
    control of all of that. We have only focused on it since the
    break-up of the Soviet Union, and I think rightly so.
        But beginning in 1990, Russia used the energy weapon,
    cutting off supplies to the Baltic States in an attempt to
    crush Baltic independence. In the winter of 1992, I was there.
    I had to sleep in my clothes in first-class hotels in Riga and
    Tallinn because the energy was cutoff in an attempt to prevent
    these countries from forcing out the remnants of the Russian
    soldiers.
        I have seen this firsthand. When I was the Ambassador in
    Lithuania Transneft cutoff the supply of oil nine times in 2
    years in an attempt to keep an American company from buying the
    Mazeikiai refinery.
        Part of why Russia is getting away with these acts is
    because Western Europe and the United States haven't paid
    attention to Russia's decisions. Western Europe didn't care
    what happened in the East, in Central Europe, even though
    Latvia and Lithuania are now members of the European Union, and
    members of NATO. They are officially members of the European
    Union. The European Union really doesn't pay attention to the
    fact when Russia cuts off the energy. It is when Russia cuts
    off the energy to Ukraine, to the pipeline which goes on to
    Western Europe that people begin to focus on this.
        They have not paid attention, and the fact that the Germans
    are willing to go ahead with this undersea--the Baltic pipeline
    system even to the detriment of their allies, their new allies
    in the EU to the East, and I think to the detriment of the
    German consumer in the long run, I think is a pity. And Russia
    has a lot of clout. It is the German industrialist association,
    the German banks and German industry which, in fact, are
    pushing these pipeline deals. I have listened to them tell me
    why it was all great, and the Northern pipeline system, which
    they have supported, will cost over $10.5 billion versus less
    than $3 billion for a Yamal II pipeline, which could go through
    the same route as Yamal I.
        Mr. Issa. OK. I will save the rest of my questions until
    after the other Members. Mr. Lynch.
        Mr. Lynch. Thank you, Mr. Chairman.
        First of all, thank you for helping the committee with its
    work. Dr. Yergin, I am a big fan of ``The Prize,'' your
    Pulitzer Prize-winning book. I actually had worked at the Shell
    Oil Refinery as a young man, and I have to say that I learned
    as much from your book about the oil industry as I did from
    actually working at a refinery, which says something.
        We talked about just the convergence of the whole energy
    question and foreign policy in a number of countries, and, Mr.
    Goldwyn, you mentioned a couple of examples: Angola, where, you
    know, the Chinese are going in, the Chinese Government is going
    in and giving massive loans, and in return I can imagine they
    are going to get some type of security in terms of a commitment
    to supply China with oil. It is a natural assumption.
        We have situations in Nigeria, for instance, where the
    Nigerian Government, with all that instability, has been
    looking to the United States and U.S. companies to help them
    develop a depot so they can export natural gas. They just do
    not have the infrastructure, they do not have the technology,
    they do not have the resources to do that.
        And it is beyond, as you have said, the capacity of
    ExxonMobil to go in there and build a railroad or a huge
    facility like that. It just is not going to work. But it is not
    beyond the U.S. Government to help that along in a significant
    way. I know that during the Second World War, Dr. Yergin, you
    talked about the collaboration between FDR and the Interior
    Secretary at the time, Harold Ickes, and they created this
    Petroleum Reserve Corp., where they actually envisioned--it was
    shot down by the industry at that time because they did not
    want the Government in the oil industry. But there was
    definitely the formation of a Government entity that would sort
    of facilitate these massive projects.
        Of course, at that time, they were interested in actually
    getting into the game and becoming an oil company, the
    Government, and that would not fly, and there are obviously
    some antitrust issues for a collaboration between multiple oil
    companies. But isn't there a role here where we can facilitate
    some of these larger projects to help these countries develop
    their own natural resources? Naturally, we're getting
    commitments to the United States for future supply contracts,
    but also to head off what China is doing. They are locking up
    Kazakhstan and they are over there in Angola, as you have said,
    and they are in Nigeria. They are building soccer stadiums in
    the Middle East. They are all over the place, and they are
    really making a very aggressive attempt at locking up future
    energy supply to fuel a very hot economy there.
        I can't help but see this as a zero-sum game, that there
    are limited reserves, limited new proven reserves coming
    online, and yet you have China and the growth there responsible
    for 40 percent of the world's growth in demand for oil. And we
    have not even mentioned India, which is on a similar track.
        I just think there has to be a role here for government to
    play to head off what China is doing. I do not see China as
    hostile, but I see them as a competitor for a very limited
    resource. I think we have to step in here because we cannot
    rely on ExxonMobil, these private corporations that owe their
    allegiance to their shareholder. I do not believe we can trust
    these oil companies to put the United States interests first.
        Mr. Goldwyn. I think there is an appropriate role for the
    Government. I think the first thing, though, is for the
    countries to realize that they will realize the greatest return
    for their acreage when they put it out for bid. They are likely
    to get more money for that, and if they want a road or a
    railroad or a soccer stadium, they will get the best price for
    that by tendering for that project also. And what they ought to
    do is not lump them together in a way that is relatively opaque
    and probably has them overpaying for what they are getting. But
    they ought to be transparent in the management of their oil
    sector, and they ought to be transparent in their Government
    procurement. That is the first lesson. And having the United
    States step up with financial resources and rhetorical support
    for something like the Extractive Industries Transparency
    Initiative, those corruption efforts which countries like
    Nigeria are now trying to implement, would be a first step
    because the countries will get more money.
        The second thing we can do is work through the World Bank
    to provide infrastructure loans, and they do a fair amount of
    that, and capital so that they could build power plants,
    distribution lines, roads and things like that. In order to be
    eligible for those loans you would have to clean up your act. I
    think that is the way to do it. We need to offer a program to
    help these countries with infrastructure but that's conditioned
    on their conducting their oil sector in a transparent manner. I
    think if we do those two things, then in terms of the bidding
    the Chinese will have a chance to bid. And if they want to
    overpay for those resources, God bless them. As long as they
    produce the oil, I don't think we care. But let's get them out
    of the business and get the countries out of the business of
    these opaque combinations of these two deals.
        Mr. Lynch. Dr. Yergin.
        Mr. Yergin. Thank you, and thank you for your kind words
    about ``The Prize.'' I thought the quote that you found from
    Mr. Schumacher really did put a framework for this hearing.
        I go back to the question you raise about how to approach
    this is very central, and I think the approach with the Chinese
    and others should be to be both prudent but collaborative at
    the same time. I think that the companies have the capacity
    often in partnerships to enter into $5, $7, $10, $12, $20
    billion projects. A critical thing that the U.S. Government
    could do is concentrate on the investment framework, the
    stability of the investment framework, because that is where
    the investment--that is part of the problem now in Venezuela.
    Who is going to invest when you do not know what the rules will
    be tomorrow?
        I have thought a lot about the question, Is it a zero-sum
    game with the Chinese? And looking at it, trying to see how
    they see it, and recognizing that for our times, one of the
    biggest questions that will define the era is: How is a rising
    China accommodated in the world economy, in the world political
    system? And this is at the very cutting edge of that question.
        I think at the end of the day, it will be shaped--the
    players, the actors will shape the outcome to that question. I
    don't think it needs to be a zero-sum game because, as David
    Goldwyn said, the Chinese are investing, if they are putting
    their dollars or their yuan into increasing supply, after all,
    there is only one world oil market, we are better off. And I
    would be a lot more concerned if this country, with $900
    billion of U.S. reserves, was not spending money on energy
    development, given where it is going. And I think in due course
    we will see these Chinese oil companies, which are owned both
    by the Chinese Government and by Americans' pension funds, in
    many cases--and, in fact, joining joint ventures with other
    companies, as is the way companies work today. I think the
    question of what is happening in Africa is overall--and the
    question of political influence is part of the question, but is
    a somewhat separate question. I think the more investment, the
    sooner, the better.
        Mr. Lynch. In conclusion, Ambassador, I do not want to
    leave you out here. I think you have offered much in this
    debate. But I would like to throw a wrinkle in here, and that
    is that if we are talking about strict game theory, I guess I
    would not say it is a zero-sum game because the wild card here
    is technology. If technology can allow us to get shale oil in a
    productive and cost-effective manner, that makes it different.
    If we developed an engine that gets 100 miles per gallon, then
    technology obviously changes the rules of the game.
        But I do want to ask you, every time we get one of these
    shocks, it seems that the standard or the typical response of
    Government, if it is on the demand side is--for instance, we
    just had a proposal to give everybody $100 because gas went to
    $3 a gallon. Well, that is just going to fuel $3 a gallon. That
    is what that is going to do. It is just going to allow people
    to buy more gas at $3 a gallon. So it really is inflationary in
    some respects.
        Is there a Government policy that you would look at--and I
    asked this question to the other two gentlemen--in a different
    way. What do you think should be the one thing that perhaps
    Government is not doing right now to address this problem in
    the near term?
        Mr. Smith. You mean the question of Russia or----
        Mr. Lynch. Or intervention, yes, intervention.
        Mr. Smith. Well, I am not an energy expert; obviously these
    two gentlemen are more of an expert. But, it is the realities
    on the ground that these other governments will react to. We
    can complain, we can say we are going to do things, but until
    we take some action which has an effect on world market
    prices--there is a very interesting article, I would recommend.
    Tom Friedman has written an article that was in the latest
    edition of Foreign Policy in which he includes a very crude
    graph, where he traces the increase in oil prices and the
    increase in authoritarianism around the world. And I was kind
    of taken by this graph. It is very good.
        But until we adopt measures which reduce the demand or
    through technology increase the supply in the United States,
    the Russians or Mr. Chavez have every reason to think they have
    the upper hand. I lived in Venezuela, I lived in Ecuador and
    Norway--three oil-producing countries--and it is natural that
    they think that they have the upper hand at the moment, with
    oil prices the way they are. And we are not doing much to
    address that issue.
        Once oil prices start coming down, I think we are going to
    see much more accommodation on the part of these countries. We
    may see Russia suddenly decide, well, maybe we will open up our
    pipelines to other users. Maybe we will sign the Energy Charter
    with the European Union. And maybe we will be a little bit more
    open as far as foreign investment--American investment in the
    Sakhalin area or the Shtokman field in the Barents Sea. These
    are things which will influence their behavior.
        Mr. Lynch. OK. Thank you, Mr. Chairman.
        Mr. Shays [presiding]. I thank the gentleman.
        Mr. Van Hollen.
        Mr. Van Hollen. Thank you, Mr. Chairman. Thank you all for
    your testimony. I think this is a very important issue and a
    long overdue discussion in our country, and I have a question
    for each of you gentlemen, and maybe I could just start with
    Dr. Yergin.
        You point out in your testimony the tightness of the
    international oil market and specifically talk about Iran's
    role in global oil markets and point out that any loss of any
    significant supply, including from Iran, would be a very
    serious concern. In fact, a lot of people believe that the $70
    price for a barrel of oil now already takes into account
    certain nervousness about what Iran may or may not do.
        Now, one of the earlier witnesses, Assistant Secretary
    Harbert, when I asked her what would be the impact of a total
    cutoff, hypothetically, in Iranian oil supply, seemed to have a
    fairly sanguine view that we were prepared to deal with the
    price impact. So my question to you is: Is that a rosy
    assessment or, in fact, do you share the view that we are
    prepared, we have this contingency plan in place, and it is not
    going to have much of an impact?
        Mr. Yergin. In January I participated in a simulation at
    the World Economic Forum in Switzerland with a disruption of
    oil and the price got to $134 a barrel, but somehow the world
    went on and the sharing mechanisms worked.
        I think there is probably $10 to $15 of security premium in
    the price right now. I think we have seen when the Iranian
    President issues his statements, the price of oil can move $1
    or $2 or $3, which tells you how tense it is.
        Were we to lose another half million barrels a day for any
    period of time or a million barrels a day for a short term
    involving Iran, Nigeria, or some other part of the world, we
    would probably be looking at $85 or $90-a-barrel oil unless the
    Strategic Reserves were used. And my bet is that they would be
    used pretty quickly at that level.
        It seems to me that it has only been in the last 6 or 8
    weeks that those dots are starting to be connected to the
    tightness of the oil market on one side and where Iran is in
    its nuclear program on the other side, and where these dots--
    where these lines are going to come together in a year.
        So, yes, we could deal with it, and I think it is important
    to recognize it is a two-way street. Iran needs those revenues,
    too. It needs its imported gasoline. It has its
    vulnerabilities. But there is plenty of room here for
    misunderstanding in both directions. I think Iran would pay--
    Iran does not have the reserves that Russia has, for instance,
    that would enable it to withstand it. But things can happen. Or
    what could actually cause more problems is not a cessation but
    let's say you lose 500,000 barrels a day. This would result in
    smaller interruptions, and the price would ratchet up without a
    sense of outright crisis. Then we could be looking at those
    higher prices.
        So I think we are moving into a dicey period, and the
    sooner we have alternative supplies, the sooner we take the
    pressure off the market with demand on a global basis, the
    better we will be. I think that high oil prices have a high
    geopolitical cost for the United States and tie our hands to
    some degree in terms of our international relations.
        Mr. Van Hollen. Thank you.
        Ambassador Smith, you mentioned talk in your testimony
    that, ``The Ukraine-Russian 'gas war' in January was only a
    continuation of Russia's petro-politics, that started with the
    fall of the Soviet Union in 1990.'' And then you point out,
    ``The U.S. and Europe's tolerance of these coercive policies
    and non-transparent business practices have helped signal to
    the Kremlin that the West needs Russian energy exports more
    than Russia needs the West's export revenue, energy financing
    and technology.'' And I agree that we have sent that signal.
        I guess the question is: In the context of all the
    different issues we are dealing with Russia about, how do we
    send that signal? In that context, I would just point out an
    article about a week ago that talked about President Bush
    making a telephone call to Putin, saying he wants Moscow's help
    on an array of issues, including preventing Iran from
    developing nuclear weapons. It says, ``Putin has joined Bush in
    pressuring Tehran but resists U.N. sanctions. Bush called Putin
    on Monday''--this is more than a week ago--``to lobby him on
    Iran. But during the call, Putin changed the subject and
    pressed Bush to finish negotiations allowing Russia into the
    World Trade Organization. Bush vowed to do so `soon.' Aides
    said there was no quid pro quo.'' It goes on.
        I guess my question to you is: If we agree with your
    assessment that we have failed to send a strong signal, what
    levers should we be using, given the whole mix of things we are
    trying to work with the Russians on? And to what extent should
    we use the upcoming July 15th WTO talks to say very clearly to
    the Russians on the issue you talked about, if you don't have
    more transparency in the energy area and in these other areas
    too bad with the WTO?
        Mr. Smith. Well, we have to have a little bit more
    consensus among the G-7. If we don't have consensus among the
    G-7, it is going to be very difficult to convince Mr. Putin to
    come along.
        One of our problems now is that everybody is going in their
    own direction. The United States is a little bit too optimistic
    about the arrival of Russian LNG from the Shtokman field in the
    Barents Sea. The Europeans are a little too optimistic about
    the increased gas production in Russia and what they are going
    to be able to pull in.
        The question is what we can do. I mean, we have leverage.
    Russia wants downstream access to American and European
    resources. They want to own companies, downstream companies in
    Europe and the United States. We should demand that Russia
    treats our companies just like we do theirs. They can buy 100
    percent of Getty Petroleum, and yet we cannot buy 100 percent
    of a Russian company.
        The non-transparency, the whole G-7 should demand, for
    instance, that Russia stop exercising its coercive policies on
    Uzbekistan, Kazakhstan, and Turkmenistan when it comes to gas,
    as wel as trying to prevent these countries from selling gas
    directly to Western Europe.
        For instance, Kazakhstan is trying to purchase the big oil
    refinery and port facility in Lithuania, a very big facility,
    the biggest facility on the Baltic coast. And Kazakhstan had
    signed an agreement with Transneft, the Russian monopoly
    supplier of oil. They had a right to ship oil to the Baltic
    coast in sufficient numbers to satisfy the Lithuanians so they
    could buy that refinery.
        When Moscow decided, ``no, we want to buy that refinery, we
    don't want that to get in the hands of the Kazakhs,'' they
    broke that contract. They unilaterally broke that contract.
    Well, that and the tying up of pipelines from Central Asia I
    think is a violation of the WTO and Russia wants WTO
    membership. We have a good reason to want additional Russian
    energy resources. We just have to make sure that the Russians
    understand that there is a quid pro quo here. It is not open
    season, and I am afraid the Germans have given the wrong
    signals. We are giving the wrong signals when we talk about how
    desperate we are to get additional Russian resources. And we
    give signals to Russia all the time that we are desperate for
    that LNG to come from the Shtokman field.
        Mr. Van Hollen. Thank you for that answer.
        Mr. Goldwyn, you mentioned in your testimony that you
    thought that there had been overheated rhetoric with respect to
    Venezuela. If you could elaborate on that statement, and maybe
    just flesh out a little bit more what exactly you think the
    United States should be doing with respect to Venezuela, given
    the important connection you mentioned between our foreign
    policy and the whole energy supply and energy market issues.
        Mr. Goldwyn. Thanks for the opportunity on that.
        I think the rhetoric has been overheated on Venezuela in a
    couple of ways. It has been overheated, frankly, on both sides.
    The Chavez government came in following a succession of
    Venezuelan governments that were not very democratic, pretty
    corrupt, and pretty poor at governing. They set out to do a lot
    of things that we would probably support in any other part of
    the world, which is put the government in charge, not the
    national oil companies, spend more social spending, which we
    tell African governments to do all the time. They set out to
    change the terms and change the transactions essentially that
    were structured when oil was $10. That is the kind of stuff
    other governments do.
        Where I think things went off the rail is that the way
    those renegotiations were done on the fiscal terms was pretty
    brutal and did not treat the companies as partners. It was a
    bit imperious, even if they had forecasted it. So that has not
    helped a lot.
        And I think the Chavez government has also been on a
    winning streak in terms of its own popularity for lotteries,
    including pretty much the collapse of the internal opposition
    to mount anything. But then it has taken a number of steps in
    terms of the press and in terms of prosecution of the
    opposition, which have been egregious.
        I think what has happened is the United States has
    basically stopped talking to Venezuela. We stopped a couple of
    years ago when there was a coup we more or less supported for a
    day, after decades of supporting democracy in the region. We
    handed that government not only some legitimate insecurity, but
    a bogeyman that has been enormously helpful.
        And I think the first thing we need to do is stop talking
    in the media and start talking directly.
        The second thing I think we need to do is to talk at a
    technical level because we have had a long relationship with
    Venezuela. It is going to be there for a long time, and we have
    some common interests.
        The other thing we need to do is we need to talk to both
    Europeans and countries in the region about the things that we
    have in common. We have spent a lot of attention on Venezuela
    talking about the fiscal terms and how they are treating the
    companies and stuff like that. As a government, that is not our
    problem. As a government, our issue is democratic institutions.
        Now, if we hold out that if they just go back to the old
    ways life would be grand, then we are not going to have any
    resonance with anybody who actually lives in Venezuela, because
    the old guys were not a whole lot better than the current guys.
    We need to talk about things that need to happen and things
    that are reasonable. We have to make it clear that we are not
    in favor of regime change in Venezuela, that the United States
    is not about to attack Venezuela so you don't need to arm
    everybody with a Kalashnikov in order to do it. But we have
    issues. We have issues with China. We have issues with Russia.
    We have issues with all kinds of countries. We need to engage.
        And that is why I say that our relationship with Venezuela
    right now is that we are competitors on the model. We are
    competitors over legitimate problems of poverty and social
    injustice and lack of infrastructure. So we need to pick up our
    game on that and stop demonizing Venezuela. The Venezuelans
    will have more political space in the country to debate what is
    going on there and whether they like it, rather than focusing
    the entire debate in Venezuela about the United States. I don't
    think that helps our interests or theirs.
        Mr. Van Hollen. Thank you. That is important advice, and
    they are clearly winning the PR game. I think your advice about
    some more quiet discussions probably would go a long way.
        Thank you, Mr. Chairman.
        Mr. Shays. Thank you.
        I am really excited to have this opportunity to learn from
    the three of you, and I appreciate you being here. I want to
    first ask you your reaction to the answers of the first panel
    regarding whether we are at a point where we have few margins,
    and that we are in fact very vulnerable to supply and demand
    issues. I would like to know your reaction. The general sense
    was we are not vulnerable really, I read it as we are not
    vulnerable really because we have--first off, I felt like they
    did not respond. Why would I be telling you what my reaction
    is? I want to know what your reaction is. Go right down, I
    mean, you were all three here on the first panel. And what I
    request are candid answers.
        Mr. Yergin. I wrote down your comment that your sense is
    that we are totally and completely vulnerable. I was mindful of
    that when I began my remarks. The oil market today is tighter
    than it was on the eve of the 1973 oil shock, so this is a
    vulnerable market.
        We have a series of mechanisms to deal with shocks, and we
    can see the potential for new shocks coming in front of our
    faces. So I think the risks are higher. We can manage them to a
    degree. The strategic reserves are not endless. They might give
    us, depending what the problem is, 3 months, 6 months, a year
    or something like that. There is a whole other range of
    measures, demand restraints and so forth that would come into
    play if there was a serious crisis. That is what I was trying
    to suggest, is a whole framework of issues about energy
    security that don't have to do with whether we are running out
    of oil or not, but managing the reality.
        I just want to recognize that these things do move in
    cycles. We are not going to have, I believe, high prices
    forever, and that we will see that markets will respond. We
    will see a buildup of supply. We should see demand. And things
    get more back into balance. The question is, is that a 2 or 3-
    year or a 5-year process, and then the longer term questions
    that Congressman Issa raised of technology.
        But right now, we are in a tight place, and if something
    else happens or something more happens, it would register in
    much higher prices. We don't have the maneuverability that we
    would have even 2 or 3 years ago. Let me just say in 2003
    Nigeria lost--David will know the number--but I think it is
    800,000 barrels a day, more than the 550,000, and it didn't
    matter. It didn't have the kind of impact that kind of loss
    would have today. So I think it is recognized that there really
    is a heightened degree of vulnerability. We have to look at the
    range of tools that we have to deal with it.
        Mr. Shays. You said it happened in the past but----
        Mr. Yergin. It happened in 2003, Nigeria had a similar type
    disruption, and more supplies were lost, 800,000.
        Mr. Shays. And today it would have impact.
        Mr. Yergin. Today it is 550,000, and it was 800,000, but
    that 800,000 really was not reflected in the price because
    there were other supplies to go to. Today there is nowhere else
    pretty much to go to in the short term.
        Mr. Goldwyn. Mr. Chairman, if I can take that 1 second. I
    think there is economic vulnerability and then there is
    national security vulnerability. I think in terms of national
    security we are very vulnerable, and all the trends are that
    things are getting worse. We are vulnerable because there are
    no short-term answers that will reduce our or anybody else's
    dependency. The second reason we are vulnerable is we don't
    have a plan to change that has any serious impact of making a
    difference. And it matters in ways that are really important.
    It matters on Iran. It mattered before on Iraq. It matters on
    Sudan. It matters on things that actually count.
        Economically, as Dr. Yergin said--and he wrote the hymnal
    from which we all sing--we have tools to deal with economic
    vulnerability. We are a wealthy enough country, their prices go
    too high, we could change LIHEAP to help people at the lowest
    end of the economic scale pay for their gasoline. In my view,
    frankly, $3 gasoline is the greatest national security benefit
    that we have had in two decades because as a Government we are
    incapable of actually doing anything to promote alternatives in
    technology or anything else, and prices having a huge effect.
        If you left it up to me--and I would never win a
    congressional race anywhere--I wouldn't let the price of
    gasoline drop below $2.75 for the foreseeable future. I would
    put a floor on it because the answer is going to be making
    alternative technologies commercial. There isn't a check the
    Government is going to write that is going to make this work.
    They have to believe that they can make money turning something
    else into fuel, or making a different car that is going to beat
    $2.75 in gasoline.
        Mr. Shays. I happen to agree with you. When I first ran for
    Congress, I suggested having a 50 cent gasoline tax. I
    suggested in the last campaign, in a close race, that we needed
    to have a gasoline tax for revenue for infrastructure, but I
    also saw it having impact elsewhere.
        What surprised me is we as elected officials will sweat a 2
    or 3 or 4 or 5-cent increase in the gasoline tax, and yet the
    public absorbed $1, 100 cents. I mean, I just don't quite get
    the disconnects that are happening.
        Mr. Yergin. I was going to say, so far it has been, to use
    a Alan Greenspan term, a conundrum, that we have had these
    price increases. It has caused a lot of pain for a lot of
    families. Yet overall, at least so far, it has caused pain for
    airlines, other industries, the delivery business, and yet we
    are looking at strong GDP. The IMF is predicting 4.8 percent
    global economic growth this year. Now, maybe it is because we
    could take $50 a barrel in stride because we are more energy
    efficient, oil has less leverage over our economy, central
    bankers are smarter, a whole host of things.
        Mr. Shays. I don't understand your point, oil has less----
        Mr. Yergin. Leverage. In other words, we only use half as
    much oil for every unit of GDP as we did in the 1970's.
        Mr. Shays. Right, OK.
        Mr. Yergin. So that means we have a whole big part of our
    economy that didn't exist in the 1970's, but we still have to
    see whether $70, where we are now, whether it has a more
    negative impact, but it does go to the overall point that $50
    was taken into stride quite surprisingly, more so than people
    who had been around the business, in all parts of the oil
    business around the economy for a long time would have thought.
        Mr. Goldwyn. Europeans are paying $5, Japanese are paying
    $5 a gallon. Their economies aren't as strong as ours, but life
    goes on.
        Mr. Smith. My wife is Norwegian and she says it is fine to
    pay $7 a gallon in Norway, and she can't understand why America
    is complaining.
        The only question I would have--and I am not an energy
    expert really--is the question of why would countries like
    Russia, Venezuela and other producers, Indonesia, why should
    they want to produce more energy at $70 a barrel? They can get
    the existing high prices without increasing production.
        Mr. Shays. You say they can get the existing income, not
    high price.
        Mr. Smith. Existing income, that is right.
        Mr. Shays. It is kind of like I couldn't get any high
    school kids to work at my house when I was renovating it, and
    finally, my daughter convinced four guys to come. This was
    about 8 years ago, and I said I would pay them $12. When they
    came I said, to want to keep them all day, I said, ``I will
    give you $20.'' And in the middle of the day they left. They
    said they had earned all they needed. [Laughter.]
        I got the exact opposite result.
        Mr. Yergin. I think you got it, Mr. Shays. That is it. In
    fact, it is when prices are lower, it is when countries worry
    about revenue, worry about investment, want Western companies,
    United States and other companies to come in and invest and
    increase capacity. When prices are high, they are looking at
    the dollar per barrel rather than the number of barrels, and
    they are doing fine. Russia has $200 billion of reserves. It is
    in a very different position than it was in 1998, and in fact,
    cutting production a little bit, letting it slide, seems to
    drive the price up, they make more money, just like those kids.
        Mr. Shays. Just elaborate--not in any detail--the economic
    versus the national security issue. You say national security
    we are vulnerable, economically we are not. And that is
    because?
        Mr. Goldwyn. That was my line.
        Mr. Shays. Do the rest of you agree? That sounds good.
        Mr. Goldwyn. Economically we are not because we can absorb.
    We have proved that we can actually absorb these price
    increases reasonably well without a major sacrifice in GDP
    because we have the financial resources to help the poor if
    they go higher, but let the Hummer drivers basically not be
    subsidized at the same time. We have tools that can ameliorate
    some of the price effects of an oil shock, such as using the
    SPR and taking some of the bite out of it. But we don't have an
    answer for reducing the national security vulnerability. We
    don't have a way to move Russia. We don't have a way to move
    France. We don't have a way to move Germany on some of these
    national security issues, or China while they are so dependent.
        Mr. Shays. Is the demand curve basically a straight line,
    or does it kind of curl, or what does it look like?
        Mr. Yergin. Well, you look at China, in 2004 Chinese oil
    demand grew by 16 percent, almost a million barrels a day. No
    country's demand had ever grown by that much, except the United
    States coming out of recession----
        Mr. Shays. You don't mean a million barrels a day?
        Mr. Yergin. Yes, I mean a million barrels a day.
        Mr. Shays. One year it was----
        Mr. Yergin. From 1 year to the next it grew by a million
    barrels a day.
        Mr. Shays. From 1 year.
        Mr. Yergin. From 1 year. The next year their demand--that
    year demand grew 16 percent. The next year Chinese demand grew
    by 2 percent, and so I think with these prices, the indications
    are that we are seeing that demand is responding to price to
    some degree around the world.
        Overall, as you all observed in the first panel, when you
    look out at Chinese per capita income being 10,000 or 12,000,
    you look at India and others, you certainly see that the world
    will need 30 percent or 50 percent more energy. 25 years from
    now it will probably use a lot more energy than it does today,
    but it will not necessarily move in a straight line.
        Mr. Shays. When I talk to constituents I say the United
    States has less than 3 percent of the world's oil reserves.
    Then I say we thought at one time Saudi Arabia had 25 percent,
    and Kuwait 10 or 9, and Iraq 10, in those ranges. But then I
    look at production capability, and we produced more in 2002
    than anyone else. And then in 2004, Saudi Arabia produced more.
    What am I to infer from that? I mean it strikes me that if out
    of 2.7 percent of the world's oil reserve we produce more, we
    mine more, why can't Iraq or whatever just----
        Mr. Goldwyn. OPEC for one. Non-OPEC countries tend to
    produce the maximum that they can, and the remainder of the
    world's demand for oil is the call on OPEC. They either supply
    all of it, some, at some level, depending on the price level.
        Mr. Shays. But does OPEC also restrict their future
    potential for capacity? In other words, Saudi Arabia has the
    capacity, at one time had the capacity to kind of rein it in or
    go back and forth. But I guess what I am struck with is why
    wouldn't a company want to--especially the short-term
    mentality, just want to produce as much as you could? I realize
    the argument, they get more money now so they have their need.
    But I look at a country and think, why don't they do what we
    do?
        Mr. Yergin. I think what you see in Russia is the
    government takes almost all the revenues above $25 a barrel in
    terms of tax, so a company operated in Russia really is only
    looking at up to $25. Therefore, we can see the investment
    numbers going down in Russia, and in the first half of this
    decade, as much as China grew in demand, Russia grew in output,
    but now that growth is really slowed down because the
    incentives aren't there.
        You are right. For some countries, maybe particularly who
    cannot influence the market as much, their game ought to be,
    from their own point of view, produce every barrel that you
    can, but you look at Iraq, and there was the talk before the
    war that it would produce 6 million barrels a day. Now it is
    well below what it even produced before the war, and it is
    going to take a long time to recover to get up to that.
        Mr. Shays. I have more questions I want to ask, but,
    Darrell, why don't you take some questions.
        Mr. Issa. Thank you. I think I will just try to summarize,
    and then hopefully get a universal agreement. I think we have
    some consensus, although not everyone in the administration is
    able to say yes in those terms, but first of all, that we are
    vulnerable to oil producers, and they have leverage on the
    United States. Even if technically we can make up for losses
    out of the strategic reserves, we in fact are vulnerable, and
    the producers in the world have leverage. Is that a fair
    universal statement?
        Mr. Yergin. If you take Russia, for instance, it is
    others--the Europeans are the ones who are now really worried
    about their dependence on Russian gas. I mean I think if you
    see us as part of a global energy market, as opposed to their
    ability to impact us the right way----
        Mr. Issa. And I do. Obviously, if Kazakhstan remains
    somewhat locked, as it is a landlocked country, it is only
    going to have influence to the extent that a pipeline goes to a
    particular place. I think it is fair to say that Canada, unless
    other produce a lot more LNG, to a great extent is a major
    influence to us in natural gas. That's just the nature of the
    transportation lines. But it is fair to say, both in oil and
    natural gas, that we have reached that point where supply is so
    close to demand and demand is growing at the present time every
    bit as fast or faster than the demand is growing, every bit as
    fast or faster than supply has historically, that in fact, it
    is a supplier's market.
        Mr. Goldwyn. Mr. Chairman, I am sorry, I couldn't agree
    with that statement the way you have put it for two reasons,
    and I think one is, taking gas, for example. I don't think
    actually we are in a situation where any single gas producer
    other than maybe Trinidad and Tobago at this point--or Canada--
    could have a significant impact on----
        Mr. Issa. No. I am talking globally. Everyone has their
    sources. But at the present time, leaving LNG out, the United
    States, for example, has a net deficit in natural gas
    forecasts, and the prices have been rising every bit as fast as
    oil has.
        Mr. Yergin. I think what we have seen with natural gas is
    it was rising, and if we had a cold winter, we would have had a
    very difficult situation. Now we see the difference between a
    market that is primarily a market, North American gas, and the
    prices are down in a market that is dominated where geopolitics
    are so important, and the prices are up. But I think you
    summarized it when you said today it is a supplier's market.
        Mr. Issa. Clearly, if we are to get in the short and long
    run away from $3 gasoline or higher, we are to get away from
    shortages that could occur if any significant supplier becomes
    unable to deliver to the world market. We are going to have
    to--and this is the summary that I am hoping I can get all of
    the elements--we are going to have to look at alternatives
    which include greater use of nuclear power, greater use of
    clean coal--and I emphasize clean coal--a continued investment
    in ethanol and other renewable resources; better use of
    emerging technologies in the way of renewables such as wind and
    solar, and in the case of our transportation industry; and we
    are going to have to look at either a mandated or an
    incentivized increase in CAFE standards. Would you say as a
    panel that all of those must be explored or we will continue to
    be more or less at the mercy of suppliers?
        Mr. Goldwyn. I would expand that list considerably. I think
    most of those are important elements for electricity. Only a
    few of those are important elements for oil, and that list for
    oil is not sufficient actually to make an impact, but you need
    to do all of those things. So I would say all those things are
    important for----
        Mr. Issa. I concentrated on the fact that in the
    neighborhood of 7 million barrels a day goes to non-
    transportation, and quite a bit of it to home heating, which
    obviously, we know we can heat homes with electricity.
        Mr. Goldwyn. All those things will be important elements of
    an energy security policy I would say.
        Mr. Issa. Ambassador Smith.
        Mr. Smith. I agree with that, and I agree with the list,
    but there are some political things which do affect the price.
    Monopoly practices in the energy industry, not everybody is
    necessarily talking about the U.S. energy industry, but I look
    at the Russian energy industry, I look at the European energy
    industry, there are companies and countries in Europe which
    resist in fact putting in inter-connectors between countries
    because they don't want the domestic competition. I think these
    are the kinds of things which do influence the market.
        The fact that Russia has the pipelines monopolies and
    refuses to sign the Energy Charter, particularly the transport
    section of the Energy Charter, that influences the price of
    energy in Europe, which influences the price of energy
    worldwide.
        There are a lot of issues like that. By locking up and
    preventing direct pipeline control from Kazakhstan to Europe,
    through Russia or through other countries, and fighting it
    through alternative routes effects the price of natural gas,
    and possibly oil in the long run.
        Now, those are maybe marginal, but I think they are
    important additions that I would put to this list.
        Mr. Yergin. Can I just add?
        Mr. Issa. Yes, Mr. Yergin.
        Mr. Yergin. I think that is a very reasonable broad energy
    list. You remember that book called ``The End of History?''
    There is a sort of view out there of the end of technology, and
    I don't see any reason why technology is over, and in fact, I
    think we are seeing an enormous bubbling of technology along
    the energy spectrum.
        I would add to that promoting an open investment framework
    to the degree we can with countries around the world is
    important. The only other thing I would add to that is
    respecting the flexibility of markets, which was a great lesson
    of Katrina. I think that we need diversification of sources,
    and that is what you are talking about.
        Mr. Issa. Thank you.
        And with that, Mr. Chairman, if you will finish your
    questioning and close.
        Mr. Shays. Thank you. I will be happy to.
        As you were talking with Darrell, I was just wondering
    about this issue. The implication is if you can buildup
    reserves, why would a country use its energy as a weapon, when
    in fact it would hurt itself? What you have really made an
    argument for, whether you intended to or not, is that when the
    price is so high they are getting the revenue and building
    reserves, is there a point where they can buildup so many
    reserves that they don't care what happens to the market for a
    while? And therefore, is there an incentive for them to truly
    use energy to change public policy?
        Mr. Yergin. I think David Goldwyn sketched out Latin
    America, it is not directly against us, but I saw today
    President Chavez said the North American empire is a paper
    tiger, and that he is using his energy prowess to pursue his
    Bolivarian revolution. So I think when prices are a certain
    level, and the people around you say, ``Oh, those prices are
    going to remain high forever,'' sir, you tend to believe it,
    and then you act on that.
        Mr. Shays. But I wasn't even saying that the prices would
    remain high forever. What I was talking about was the fact that
    basically you all have made an argument--or at least you didn't
    disagree with each other--that contrary to what I thought--more
    dollars, you know, let's really exploit our oil--you are
    saying, heck, they can work a half day and make as much as they
    made in a full day, so let's just relax.
        Mr. Yergin. But then it runs out, and there is a timeframe,
    so you have to sort of think out 5 years. Mr. Gorbachev and Mr.
    Yeltsin's bad luck with oil prices has been Mr. Putin's really
    good luck for oil prices and he is going to be able to ride on
    that current of prices through the end of his term because he
    will have built up the reserves.
        Mr. Shays. Right. And what strikes me is he can buildup
    tremendous reserves and not sweat what happens to the
    marketplace.
        Mr. Yergin. At least for a few years, but it catches up. A
    question is when will it catch up? I mean to hear President
    Chavez, he feels he will have these high cards forever.
        Mr. Goldwyn. You talk about reserves, but there is also
    production as a calculation.
        Mr. Yergin. You mean financial reserves, don't you?
        Mr. Shays. Yes, that is right. I mean financial reserves.
    You have built up such a body of wealth that you can absorb. I
    view oil reserves as just money in the bank ready to be
    utilized.
        Mr. Goldwyn. Well, they are not, or not quickly, is the
    problem. That is why when you are talking about oil reserves
    and production, countries and OPEC definitely calculate. There
    is a level where more production means lower prices and less
    revenue, and so restraining production makes a lot of sense.
        Mr. Shays. Right. I understand that.
        Mr. Goldwyn. And having a reserve----
        Mr. Shays. But we are not in that market.
        Mr. Goldwyn. Sorry?
        Mr. Shays. We are not in that market.
        Mr. Yergin. OPEC basically isn't functioning because
    everybody is producing flat out.
        Mr. Shays. That is my basic assumption, that we are flat
    out, so we are at the edge. That is why I wanted to know what
    the demand curve looked like.
        Mr. Yergin. So it is a question of whether you are flat out
    now with everything you can sell, but you don't worry as much
    about investing for the future as you might have if you thought
    prices were going to be lower sometime.
        Mr. Shays. Mr. Smith, your expertise is extensive. I would
    think that what Russia did with Ukraine was send a very
    chilling message to the entire world. But tell me this, did
    Ukraine just basically make a bad deal or did they make the
    best deal they can make?
        Mr. Smith. That is a hard one to decide, but if I had to
    come down on it, I would say they made a very bad deal.
        Mr. Shays. They panicked?
        Mr. Smith. They made a bad deal.
        Mr. Shays. No, but did they panic?
        Mr. Smith. There are a lot of explanations. There is a
    tremendous lack of transparency of how that deal was put
    together. There is a lack of transparency on the company that
    actually was named--Ros-UkrEnergo, which was named to be the
    monopoly supplier of gas to Ukraine. In the long run, if that
    deal is executed, Russia will accomplish what the basic purpose
    was. That was is to get control of the Ukraine's gas pipeline
    system, which is the major pipeline which takes gas from Russia
    to Europe. This has been a pattern that Russia has engaged in
    over the last several years, of getting control of these
    pipelines, often by pricing the energy going into that pipeline
    at a price that they know in the long run the country can't
    pay, so they accumulate enormous debts. Then in the end, Russia
    says, ``OK, we understand you cannot pay the debt, so we'll
    take it in kind, and the kind will be your energy facilities
    and your pipeline system.''
        That is exactly what they are doing right now. They are
    putting pressure on Belarus to turn over their pipeline system.
    They have just gained control of the pipeline system in
    Moldova. They have gotten the pipeline system in Armenia.
        Mr. Shays. This is what I don't understand. I intuitively
    think a pipeline goes from Russia, through a country, and it
    ultimately goes to Europe. So I would think Ukraine would have
    something over Russia.
        Mr. Smith. That is correct, and that is why Russia wants to
    stop that, and to prevent Ukraine from having that clout. They
    want to prevent that by controlling the pipeline system.
        Mr. Shays. But wanting to doesn't tell me how you logically
    can do it.
        Mr. Smith. I am sorry?
        Mr. Shays. Wanting to do it doesn't tell me how you can do
    it. Is it because Ukraine needs the energy that Russia is
    giving them?
        Mr. Smith. Ukraine needs the energy. The energy has been
    priced at a higher level than the Ukrainians can pay it. They
    have a very inefficient national energy company, a company that
    runs into debt month after month, and yet the head of it just
    bought a $200,000 Mercedes. I think all of this is that they
    are accumulating more and more debt to Gazprom, and in the end
    Gazprom will say, ``We want the pipeline system.''
        Just right now Russia controls three-quarters of the oil
    refining capacity of Ukraine. If the present system was
    implemented, including all these protocols that were part of
    the January 4th agreement, Gazprom will have control over the
    internal market in Ukraine, and probably within the next year,
    end up in control of a pipeline system.
        Mr. Shays. How soon will we see some excess supply in the
    market? When do we think we will see that?
        Mr. Yergin. It is hard to separate it from the politics
    because it goes to the question what is the picture of how
    things will look with Iran in a year, a year and a half. If you
    look at it primarily from an economic point of view, we would
    expect to see next year, if there are not more disruptions, the
    spare capacity number, which is that crucial number where the
    action is growing to maybe about 2\1/2\ million barrels a day.
    When we do our numbers on a field-by-field basis we see a
    buildup of supply that is quite substantial coming down the
    road, but it takes time for that to unfold.
        On the other half of the question is, what do these prices
    do to demand? If it is just a pure market or primarily a
    market, then I think this picture would improve, but we are in
    a very difficult and vulnerable straits right now.
        Mr. Shays. Mr. Smith.
        Mr. Goldwyn. I would be more pessimistic. I would say it
    might be 5 years at least before we see excess capacity more
    than 2\1/2\ million barrels a day, because I foresee that the
    instability in Latin America and the slowness in production
    will continue. When it picks up it is still going to be 5 to 7
    years before we see the results. I see basically the situation
    in Nigeria in particular, and in other places, also
    deteriorating. I don't see signs of greater stability. I see
    signs of more supply interruptions. This piece in Iraq would
    probably be the greatest big bump in global oil supply, but I
    don't see that happening, frankly, for the next 3 years or so
    either. In places like Libya, which has just opened, where you
    can have enhanced oil recovery and you can get near-term real
    increases in supply, I don't see a great leap forward there
    producing oil for at least 3 years. So all those are pretty
    negative on the supply side.
        On the demand side, absent a major act of terrorism
    collapsing demand someplace, I see the growth of China, the
    growth of India, progress that we want in developing Asia, and
    that locking in demand pretty high, and the technology factor
    which might change the way that we are consuming not really
    being able to kick in even if we changed our policies in the
    right way also for 3 to 5 years. So I don't see anywhere in the
    equation, absent a disaster, where we get excess capacity for--
    --
        Mr. Yergin. Can I round it out? Following from David
    Goldwyn's comments, certainly many of the trends in the Middle
    East are adverse, and those larger trends will affect what
    happens. I have given what we would use as our base scenario,
    but one thing maybe to counter a little bit, is what is
    happening to cost in developing new oil and gas fields. Costs
    are up 68 percent since 2000. So there are shortages of people
    and equipment too that if what I laid out doesn't happen--that
    will be also one of the factors that would retard it.
        Mr. Shays. But this isn't like where I lived in Stamford,
    CT where they determined they needed a hotel, and three people
    built a hotel, three different companies so you had three
    hotels, and the market just crashed. The same thing with the
    paper industry, they all built these large mills, and they only
    needed one, but like three did it or four or five, and the
    market crashed. You are not going to see that kind of issue
    in----
        Mr. Yergin. I think that there is little expectation that
    at least in the next period of time that you could see another
    period of $10 oil like we had in 1986 and 1998, not so long
    ago. And there is kind of, if you look at people's investment
    plans and what numbers they are using, they seem to assume that
    oil, that the floor now would be maybe around $35 a barrel,
    rather than $20 a barrel, which was a planning assumption a
    couple of years ago. If there were enough people and enough
    equipment and enough open doors around the world, you probably
    would get the hotel phenomenon, but there are enough blockages
    in the way that maybe we will end up with 1\1/2\ hotels.
        Mr. Shays. I turned off to the first panel because I just
    felt there wasn't an honest dialog. I felt like there was a
    statement of the position of an administration, and what I feel
    like is that we are walking on thin ice, that you could fall
    through at any time. It wouldn't take a significant disruption
    to cause a huge impact on our energy, higher prices and
    shortages. Is there anything that should dissuade me from
    feeling that way? I would like all three of you to answer.
    Should I have sympathy for the response to the first panel?
        Mr. Smith. This really is beyond my competence, but as a
    diplomat, I have never stopped that from making a comment.
        Mr. Shays. Why don't we just say that you have a tremendous
    amount of knowledge, but just not a lot of expertise.
    [Laughter.]
        Mr. Smith. OK. I don't really know the answer to the
    question, but how do we create incentives to increase
    production? I don't see any incentives to increase production
    or allow foreign energy companies into Russia, into Venezuela,
    into Bolivia, Indonesian markets, until the prices goes down.
    How do we get the price down? It is going to come down only
    when we create certain realities in our own countries which
    will bring the price down. With state-owned companies
    increasingly in control, the private energy sector is a smaller
    and smaller sector of the whole exploration and development
    area.
        Mr. Shays. I just have to tell you how I would react to
    this. I almost feel like someone is playing a game with me,
    because it is like my saying the greater the demand, the lower
    the price. It seems like a contradiction in terms to me,
    because intuitively, I would say OK, you get more money, you
    work to increase supply. I mean that is basically what I am
    hearing.
        And you are saying to me in essence, that the more money
    they have, countries aren't inviting folks who could really
    increase capacity, and they are going to bring people to come
    and increase capacity when they get lesser price.
        It is logical, but it is weird.
        Mr. Yergin. Yes. It is that they feel they don't need
    foreign investment, they feel they don't need foreign
    technology.
        Mr. Shays. They got enough money.
        Mr. Yergin. Yes, they got enough money, and they are fine,
    thank you. And the future will be like the present.
        I think in answer to your question I would say that a
    market that is this tight with the kind of geopolitical risks
    that are staring us in the face, is a crisis-prone market, and
    how big the crisis will be, whether it occurs, we don't know.
    That is why it really behooves us to ask what are the
    mechanisms we have in the short term and thereafter to cushion
    it and deal with it, and perhaps to get ourselves through this
    difficult period.
        Mr. Shays. Do you all agree with that answer?
        Mr. Smith. Yes.
        Mr. Goldwyn. Yes.
        Mr. Shays. Well, I will tell you how this politician thinks
    when I hear this. I think September 11th. I think Enron and
    WorldCom. I think Katrina. I think Iraq. And I say, no, thank
    you, I don't want any more crises. So it would strike me that
    we would be working our butts off to try to minimize the
    possibility of a crisis, and if nothing else, be able to
    demonstrate politically that we at least tried, I am not seeing
    a Marshall Plan, I am not seeing a Manhattan Project, and it
    just strikes me that you are going to have to----
        Mr. Goldwyn. If I could just offer this. People say energy
    policy is like the movie ``Groundhog Day'', you keep waking up
    and having the same nightmare over and over again. It is
    because we tend to characterize the crisis, as you put it, in
    terms of price. The fact is, in terms of price, we are not
    actually in a crisis, and we could absorb a little bit more.
    Where we are in a crisis is in national security, and we are
    heading for more of a crisis in national security. You need to
    frame the debate in terms of national security, not in terms of
    prices and shortages, because I think that is where U.S.
    vulnerability is greatest, and that is where the response needs
    to be.
        Mr. Shays. I am going to let you go in just a second here,
    but what I don't fully grasp is how you define a national
    security crisis.
        Mr. Goldwyn. A national security crisis is Iran getting a
    nuclear weapon because we cannot persuade any of our allies
    that they need that security more than they need their oil.
        Mr. Shays. Because they have oil.
        Mr. Goldwyn. Right.
        Mr. Shays. But it is not a security crisis because of lack
    of oil?
        Mr. Goldwyn. No.
        Mr. Smith. I agree with that, Mr. Chairman. It is not the
    price of oil. In fact, your original suggestion to your
    constituents of putting in the 50-cent additional energy tax or
    gasoline tax on, I think is a good idea. The question is, how
    do you sell it in America because an additional, say, $1 a
    gallon, would reduce the demand in the United States, and I
    think that has national security implications for us in the
    positive sense.
        Mr. Shays. The way I would have sold it if I were President
    of the United States, I would have said, after September 11th
    we are never going to be totally independent of foreign sources
    of energy, but we are going to be a hell of a lot less
    dependent. Therefore, we are going to not sweat bullets with
    what happens in the Middle East or anywhere else, because they
    don't have a noose on us.
        When I travel in the Middle East, I feel like they feel
    like they have the upper hand. That is kind of how I feel.
        Mr. Yergin. I think there is a price where the economic
    effects hit us hard, and perhaps cause panic in financial
    markets. If you had a disruption, things could unfold in ways
    that we don't expect. So I think in a sense it is looking at it
    in both ways. Part of the reason the whole energy security
    machinery was set up in the 1970's was really to protect GDP.
    It goes back to what I tried to emphasize, the importance of
    seeing this in terms of our overall foreign relations. And I
    think part of the message of your remarks, Mr. Chairman, is the
    importance of connecting the dots, and the dots bringing these
    things together.
        I think I have seen enough of these cycles--I ran a task
    force in the Department of Energy in the 1990's on energy R&D--
    we go up and down and up and down, and you know, there is a
    limit. It is not like you could just throw billions and
    billions and billions of dollars and get results, but you do
    need to put billions of dollars into it on a consistent basis
    and stick with it. The two biggest things we did in the 1970's
    were that we saved 2 million barrels a day with fuel efficiency
    standards, and we gained 2 million barrels a day with the
    Alaska pipeline. It isn't an either/or between supply and
    demand. They are both important. In the short term, there is
    probably a lot more that can be accomplished in demand.
        Mr. Shays. If a President talked about energy independence
    and he said, you are all going to get something you want and
    you are going to all have to give on something you don't want,
    we will ultimately get what we all want, a really substantial
    policy that moves us in a way that we are less dependent. The
    environmental movement, for example, doesn't particularly want
    nuclear power plants in the United States. I think you would
    see that. If CAFE standards go up, I think a President can put
    together a package like that.
        I have just one last issue, and that is whether it is
    conceivable that a country can lock up energy supply so that
    they have a guaranteed source of energy ad infinitum because
    they have locked into long-term contracts?
        Mr. Yergin. Of course, the LNG industry is really based
    upon 25, 30 year contracts, so gas goes from a field in
    Indonesia to a Japanese utility. There is a whole chain of
    investment that supports it.
        Mr. Shays. But not with oil.
        Mr. Yergin. Not with oil. I come back to the Japanese and
    others thought that they could buy supply positions----
        Mr. Shays. I just was wondering if you could corner the
    silver market, is kind of what I am asking.
        Mr. Yergin. Yes. I think that if the oil market is too big
    and too diverse and too many players, that you are not going to
    be able to have somebody preempt us. As I say, the way I turn
    it around is I would rather see the Chinese investing more
    money rather than less.
        Mr. Shays. Anything that you all think we should just put
    on the record before we go? Is there any question that we
    should have asked that we didn't that we just need to put on
    the record?
        [No response.]
        Mr. Shays. Thank you all for your patience. Thank you.
        This hearing is adjourned.
        [Whereupon, at 5:25 p.m., the subcommittee was adjourned.]
        [The prepared statement of Hon. Diane E. Watson and
    additional information submitted for the hearing record
    follow:]

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