[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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