[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:]
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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:]
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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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