[Senate Hearing 109-385]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-385
 
        HIGH COSTS OF CRUDE: THE NEW CURRENCY OF FOREIGN POLICY

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

                                HEARING



                               BEFORE THE



                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE



                       ONE HUNDRED NINTH CONGRESS



                             FIRST SESSION



                               __________

                           NOVEMBER 16, 2005

                               __________



       Printed for the use of the Committee on Foreign Relations


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                     COMMITTEE ON FOREIGN RELATIONS

                  RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska                JOSEPH R. BIDEN, Jr., Delaware
LINCOLN CHAFEE, Rhode Island         PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia               CHRISTOPHER J. DODD, Connecticut
NORM COLEMAN, Minnesota              JOHN F. KERRY, Massachusetts
GEORGE V. VOINOVICH, Ohio            RUSSELL D. FEINGOLD, Wisconsin
LAMAR ALEXANDER, Tennessee           BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
LISA MURKOWSKI, Alaska               BARACK OBAMA, Illinois
MEL MARTINEZ, Florida
                 Kenneth A. Myers, Jr., Staff Director
              Antony J. Blinken, Democratic Staff Director

                                  (ii)




                            C O N T E N T S

                              ----------                              
                                                                   Page

Hagel, Hon. Chuck, U.S. Senator from Nebraska....................     3
Lugar, Hon. Richard G., U.S. Senator from Indiana................     1
Schlesinger, Hon. James R., senior advisor, Lehman Brothers, 
  Washington, DC.................................................     5
    Prepared statement...........................................     9
    Thinking Seriously--About Energy and Oil's Future............    31
Sununu, Hon. John E., U.S. Senator from New Hampshire............     4
Woolsey, Hon. James R., vice president, Booz Allen Hamilton, 
  McLean, VA.....................................................    11
    Prepared statement...........................................    16


              Additional Material Submitted for the Record

Feingold, Hon. Russell D., U.S. Senator from Wisconsin, prepared 
  statement......................................................    31

                                 (iii)

  


        HIGH COSTS OF CRUDE: THE NEW CURRENCY OF FOREIGN POLICY

                              ----------                              


                      WEDNESDAY, NOVEMBER 16, 2005

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                     Washington DC.
    The committee met, pursuant to notice, at 10 a.m., in room 
SD-419 Dirksen Senate Office Building, Hon. Richard Lugar 
(chairman) presiding.
    Present: Senators Lugar, Hagel, Coleman, Sununu, and Bill 
Nelson.

 OPENING STATEMENT OF HON. RICHARD G. LUGAR, U.S. SENATOR FROM 
                            INDIANA

    The Chairman. This hearing of the Senate Foreign Relations 
Committee is called to order. The committee meets today to 
examine the effects of U.S. oil consumption on American foreign 
policy and on our wider economic and security interests. High 
oil prices have hurt American consumers at the gas pump, and 
record revenues flowing into oil producing nations are changing 
the world's geopolitical landscape. Increasingly, oil is the 
currency through which countries leverage their interests 
against oil dependent nations such as ours.
    Oil is not just another commodity. It occupies a position 
of singular importance in the American economy and way of life. 
In 2003, each American consumed about 25 barrels of oil. That 
is more than double the per capita consumption in the United 
Kingdom, Germany, and France and more than 15 times that of 
China. With less than 5 percent of the world's population, the 
United States consumes 25 percent of its oil.
    Higher oil prices have helped drive the consumer price 
index up 4.7 percent during the past year. Motorists felt this 
pinch at the pump long before the destruction of Hurricanes 
Katrina and Rita. This year, the United States has spent about 
$19 billion per month on oil imports. The cost of imported oil 
now accounts for approximately one-third of our trade deficit.
    In the short run, our dependence on oil has created a drag 
on economic performance at home and troubling national security 
burdens overseas. In the long run, this dependence is pushing 
the United States toward an economic disaster that could mean 
diminished living standards, increased risks of war, and 
accelerated environmental degradation.
    Up to this point, the main issues surrounding oil have been 
how much we have to pay for it and whether we will experience 
supply disruptions. But in decades to come, the issue may be 
whether the world's supply of oil is abundant and accessible 
enough to support continued economic growth, both in the 
industrialized West and in large rapidly growing economies like 
China and India. When we reach the point where the world's oil-
hungry economies are competing for insufficient supplies of 
energy, oil will become an even stronger magnet for conflict 
than it already is.
    Since 1991, we have fought two major wars in the oil-rich 
Middle East, and oil infrastructure and shipping lanes are 
targets for terrorism. In addition to the enormous dollar cost 
we pay for the military strength to maintain our access to 
foreign oil, our petroleum dependence exacts a high price in 
terms of foreign policy and international security.
    Massive infusions of oil revenue distort regional politics 
and can embolden leaders hostile to U.S. interests. Iran, where 
oil income has soared 30 percent this year, threatened last 
month to use oil as a weapon to protect its nuclear ambitions. 
At a time when the international community is attempting to 
persuade Iran to live up to its nonproliferation obligations, 
our economic leverage on Iran has declined due to its 
burgeoning oil revenues. Similarly, the Chavez government in 
Venezuela resists hemispheric calls for moderation, in part 
because it has been emboldened by growing oil revenues. Russia 
uses its gushing oil and natural gas income and reserves as 
leverage over new democracies in East Europe. Globally, 
critical international security goals, including countering 
nuclear weapons proliferation, supporting new democracies, and 
promoting sustainable development are at risk because of 
dependence on oil.
    Diversification of our supplies of conventional and 
nonconventional oil, such as Canada's tar sands, is necessary 
and under way. Yet because the oil market is globally 
integrated, the impact of this diversification is limited. Our 
current rate of oil consumption, coupled with rapidly 
increasing oil demand in China, India, and elsewhere, will 
leave us vulnerable to events in the tumultuous Middle East and 
to unreliable suppliers such as Venezuela. Any solution will 
require much more than a diversification and expansion of our 
oil supply.
    Despite the widening discussion of our energy 
vulnerability, the U.S. political system has been capable of 
only tentative remedial steps that have not disturbed the 
prevailing oil culture. The economic sacrifices imposed on 
Americans recently by rising oil prices have expanded our 
Nation's concern about oil dependence. But in the past, as oil 
price shocks have receded, motivations for action have also 
waned. Currently, policies for mediating the negative effects 
of oil dependence continue to be hamstrung in debate between 
supply-side approaches and those preferring to decrease demand. 
We must consider whether the political will now exists to 
commit to a comprehensive strategy.
    Our weak response to our own energy vulnerability is all 
the more frustrating given that alternatives to oil do exist. 
Oil's importance is the result of industrial and consumption 
choices of the past. We now must choose a different path. 
Without eliminating oil imports or abandoning our cars, we can 
offset a significant portion of demand for oil by giving 
American consumers a real choice of automotive fuel. We must 
end oil's near monopoly on the transportation sector, which 
accounts for 60 percent of American oil consumption.
    I believe that biofuels, combined with hybrid and other 
technologies, can move us away from our extreme dependence on 
oil. Corn-based ethanol is already providing many Midwesterners 
with a lower cost fuel option. Cellulosic ethanol, which is 
made of more abundant and less expensive biomass, is poised for 
a commercial takeoff. We made progress in the 2005 energy bill, 
which includes incentives to produce 7.5 billion gallons of 
renewable biofuel annually. I introduced legislation last week 
that would require manufacturers to install flexible-fuel 
technology in all new cars. This is an easy and cheap 
modification, which allows vehicles to run on a mixture of 85 
percent ethanol and 15 percent gasoline.
    We will get even greater payoffs for our investment in oil 
alternatives if American technological advances can be marketed 
to the rest of the world. Nations containing about 85 percent 
of the world's population depend on oil imports. These nations 
could reap many of the same security and economic benefits by 
breaking their oil import chains. Developing countries could 
improve their balance of payments and promote rural development 
by growing profitable biomass, while offering new markets for 
fuel technologies.
    We need to think creatively about cooperating with other 
countries to address today's global energy challenges. For 
example, earlier this month I introduced S. 1950, ``The United 
States-India Energy Security Cooperation Act of 2005.'' This 
bill would promote greater cooperation with India on clean coal 
technology, ethanol, and other energy sources.
    I am particularly pleased to welcome two old friends, 
today, who will assist us in our inquiry today. Dr. James 
Schlesinger, former Secretary of Defense, Secretary of Energy, 
and Director of Central Intelligence, has seen America through 
oil shocks and has remained committed to improving America's 
energy situation. He is a keen analyst of the geopolitical 
consequences of oil dependence, as well as an authority on 
America's energy future.
    Also joining us is Mr. James Woolsey, former Director of 
Central Intelligence. In 1999, Jim and I--and I would stress my 
dependance on his tutelage in this--coauthored ``The New 
Petroleum,'' an article in Foreign Affairs that laid out the 
case for a greater role for cellulosic ethanol. He has 
continued to serve as a leading advocate for forward-looking 
reforms of our energy policy. We thank our distinguished 
witnesses for coming and look forward to their insights.
    And let me say that after I recognize my colleagues we will 
ask both of you to testify. All of your statements will be made 
a part of the record. We will ask you to summarize, but don't 
summarize too much. We really want to hear from you, and hear 
the message this morning.
    Senator Hagel, do you have a greeting for our guests?

   STATEMENT OF HON. CHUCK HAGEL, U.S. SENATOR FROM NEBRASKA

    Senator Hagel. Thank you, and I, too, welcome our 
distinguished witnesses, and as you have appropriately noted 
their contributions to our country, their service, their 
continued service, and we look forward to listening carefully 
to what they have to say this morning. Thank you.
    The Chairman. Thank you Senator Hagel, Senator Sununu.

    STATEMENT OF HON. JOHN E. SUNUNU, U.S. SENATOR FROM NEW 
                           HAMPSHIRE

    Senator Sununu. Thank you Mr. Chairman, it's a pleasure to 
see both witnesses here today. I am interested to hear what 
they have to say. Clearly one of the long-term needs we have in 
this country, from a broad energy perspective, is to make sure 
we have a consistent clean reliable base load of electricity. A 
lot of the alternatives that are out there now, and I think 
that we'll hear from today, involve better use of the electric 
grid, off-beat power, and the like. And you know the base load 
that we have out there, being provided by coal, and the 
availability of nuclear energy is something that we need to 
consider, need to look at very hard today if we're going to 
take full advantage of these opportunities. We've been talking 
about oil independence in this country for literally decades 
but it remains a fact that the domestic price of gasoline is 
relatively very low. Consumers like to drive their cars, gas is 
relatively plentiful, very cheap compared to our peers in 
Europe. And as a result there isn't a great incentive right now 
for deploying some of these new and relatively more expensive 
technologies, although we hope with time the cost of these 
technologies will come down.
    And this is despite the fact that we have spent billion of 
dollars in Federal resources, subsidizing the development of 
some of these alternatives. The Synfuels Corporation is an 
example of this. The partnership for next-generation vehicle is 
an example of this, and now the billions that we're 
contemplating for the subsidization of developing hydrogen 
technology will again come into the mix. And I have raised 
questions in the past, and will continue to raise questions 
about whether that is the best public policy, when there are 
some alternatives that are already out there on the market that 
we'll hear about from our witnesses. And to the extent that we 
are putting billions of dollars in certain technologies, at the 
Federal level, we are discriminating against, and placing at a 
disadvantage, other ideas and technologies that might not come 
in for Federal subsidy.
    Finally, I think it is at least worth observing that from 
time to time, not only have we done things that aren't 
especially helpful in moving us toward oil independence, but we 
have done things that are counterproductive. And windfall 
profits tax, which has been talked about recently, is an 
example of this.
    When it was tried in the past, it resulted in lower 
domestic production, and higher levels of foreign imports of 
oil. It was certainly well intended, the concerns that were 
raised then, are many of the concerns we have now, but it was 
an initiative that had unintended consequences. And I think 
it's worth underscoring that principle. We want to make sure we 
do things that make the situation better, and not take steps 
that however well intended have counterproductive impacts.
    So, I welcome the witnesses and look forward to their 
testimony. Thank you, Mr. Chairman.
    The Chairman. Well, thank you very much, Senator Sununu. 
Secretary Schlesinger, will you proceed with your testimony.

STATEMENT OF HON. JAMES R. SCHLESINGER, SENIOR ADVISOR, LEHMAN 
                    BROTHERS, WASHINGTON DC

    Mr. Schlesinger. Thank you, Mr. Chairman. Thank you, 
Senator Hagel, Senator Sununu. I thank the committee for this 
invitation to discuss the quest for energy security, the 
implications of our heavy dependence on imported oil, the rise 
in oil prices, and their manifold political and economic 
repercussions for our Nation. In so many ways, the use of oil 
as our primary energy source turns out to be a two-edged sword. 
Actions that we take, may reduce supply or add to the resources 
of those who are hostile to us.
    Given that reality, the ramifications are too numerous to 
discuss in detail. Given the necessary limitations on time, I 
must be selective. Therefore, I shall only touch upon several 
salient points.
    First, Mr. Chairman, the problem of energy security is of 
relatively recent origin. When mankind depended upon windmills, 
oxen, horses, and the like, energy security was not a strategic 
problem. Instead, as a strategic problem it is a development of 
modern times and reflects most crucially the turn to fossil 
fuels as increasingly the source of energy. The Industrial 
Revolution in the 19th century, strongly reinforced by the 
rapid growth of oil-dependent transportation in the 20th 
century, unavoidably posed the question of security of supply. 
Imperial Germany took over Lorraine with its coal fields after 
the Franco-Prussian War to insure its energy security. When 
Britain, pushed by Churchill, converted its Navy to oil early 
in the 20th century, it sought a secure supply of oil under its 
own control in the Persian Gulf, which incidentally increased 
its concern for the security of the Suez Canal.
    For the United States, where the production of oil had 
started, in 1869, and for long was primarily located, the 
question of security of supply did not arise until the 1960s 
and 1970s. Since then, we have regularly talked about and 
sought, by various measures, to achieve greater energy 
security. Such measures, limited as they were, have generally 
proved unsatisfactory. The Nation's dependence on imported 
hydrocarbons has continued to surge.
    Mr. Chairman, until such time as new technologies, barely 
on the horizon, can wean us from our dependence on oil and gas, 
we shall continue to be plagued by energy insecurity. We shall 
not end dependence on imported oil nor, what is the hope of 
some, end dependence on the volatile Middle East with all the 
political and economic consequences that flow from that 
reality.
    That is not to say that various measures and inventions 
will not, from time to time, shave our growing dependence, but 
we will not end it. Instead of energy security, we shall have 
to acknowledge, and to live with, various degrees of 
insecurity. To be sure, we have certain short-term problems to 
which I shall--which Senator Sununu has reverted to--to which I 
shall presently turn. More importantly, we face a fundamental, 
longer term problem. In the decades ahead, we do not know 
precisely when, we shall reach a point, a plateau or peak, 
beyond which we shall be unable further to increase production 
of conventional oil worldwide. We need to understand that 
problem now and to begin to prepare for that transition.
    The underlying problem is that for more than three decades, 
our production has outrun new discoveries. Most of our giant 
fields were found 40 years ago and more. Even today, the bulk 
of our production comes from these old and aging giant fields. 
Ghawar in Saudi Arabia, for example, produced 7 percent of the 
world's petroleum all by itself. There are other examples. More 
recently discoveries tend to be small with high decline rates 
and are soon exhausted. Since the issue is crucial, and is not 
widely understood, I have prepared a chart which lays bare the 
problem.



    Mr. Chairman, and members of the committee, you can see 
that in the past we have had high discovery rates. Here, back 
in 1930, is the finding of the East Texas pool; then we opened 
up the Middle East, and the consequence is that we had 
substantial increases in reserves. For the last 30 years we 
have seen a downward trend in the same time that production has 
steadily increased with the exception, of course, of the 1970s 
when we saw the Arab oil embargo.
    The future is somewhat unknown, some people just think that 
future discoveries will dwindle away but it may be that we 
maintain a certain level of discovery. The problem is that 
demand and production continue to grow and the discoveries are 
not matching those increases. The fact of the matter is that 
unless we discover oil, we will not be able to produce it over 
time. And we have a growing gap between our discoveries and 
production, which will continue to increase. The consequence is 
that as we look to the future, and we begin to drain off those 
giant fields like Ghawar, like the Burgen Field in Kuwait, we 
are going to be faced with an oil stringency.
    Mr. Chairman, the upshot is quite simply, that as the years 
roll by the entire world will face a prospectively growing 
problem of energy supply. Moreover, we shall inevitably see a 
growing dependency on the Middle East, which you mentioned in 
your remarks, Mr. Chairman. We shall have to learn to live with 
degrees of insecurity--rather than that elusive security we 
have long sought. To be sure, some insecurity will be mitigated 
by the Strategic Petroleum Reserve, and other emergency 
measures. That will provide some protection against short-term 
supply disruptions, but it will not provide protection against 
the fundamental long-term problem.
    Second, in addition to the long-term problem of the 
prospective limit on conventional oil production, we have a 
number of short-term or cyclical problems that have contributed 
to the current stringency and current high prices. Spare 
production capacity has essentially disappeared. This reflects 
the volatility of oil prices, which has led to a low rate of 
investment in new capacity, as well as an unexpected surge of 
demand, particularly from China and the United States. For many 
years, we have had excess capacity in refining. That, too, has 
largely disappeared, and we lack capacity to refine the heavy, 
sour crudes that do remain available. Here in the United 
States, the problem has been amplified by the battering of gulf 
infrastructure by Hurricanes Katrina and Rita. We have also an 
added, self-inflicted problem of some 17 boutique blends of 
gasoline, mandated by state authorities.
    The insurgency in Iraq has prevented the increase in 
production, even to the prewar level, that many have expected. 
Long-term sanctions against Iraq, Iran, and Libya, both United 
States and international, have reduced their contributions to 
world supply. This has taken place against inelastic domestic 
production of natural gas. There are, in addition, problems of 
electric power generation and transmission. The point about all 
of these is that they are not inherent problems. In principal, 
they would all yield to additional investment. We must bear in 
mind that investment activity depends upon price signals, and 
that there is a long period of gestation before additional 
investment activity brings supply to market. Some of these 
problems may, however, be ameliorated by changes in law or in 
regulation.
    By about 2010, we should see a significant increase in oil 
production as a result of investment activity now under way. 
There is a danger that any easing of the price of crude oil 
will, once again, dispel the recognition that there is a finite 
limit to conventional oil. In no way do the prospective 
investment decisions solve the long-term, fundamental problem 
of oil supply.
    Let me turn now to the political and economic 
ramifications. Again, let me underscore that energy actions 
tend to be a two-edged sword. To some extent, the recent higher 
prices for oil reflect some of our own prior policies and 
actions. For example, the sanctions imposed upon various rogue 
regimes, by reducing world supply, have resulted in higher 
prices. Operation Iraqi Freedom, followed by the insurgency, 
has caused unrest in the Middle East. The consequence has been 
somewhat lower production and a significant risk premium that, 
again, has raised the price of oil.
    The effect of higher oil prices has been significantly 
higher income for producers. A much higher level of income has 
meant that a range of nations, including Russia, Iran, 
Venezuela, as well as gulf Arab nations have had their economic 
problems substantially eased. As a result, they have become 
less amenable to American policy initiatives. Perhaps more 
importantly, the flow of funds into the Middle East inevitably 
has added to the moneys that can be transferred to terrorists. 
As long as the motivation is there and controls remain 
inadequate, that means that the terrorists will continue to be 
adequately or amply funded. To the extent that we begin to run 
into supply limitations and to the extent that we all grow more 
dependent on the Middle East, this problem of spillover funding 
benefits for terrorists is not going to go away.
    Fourth, there are, of course, additional problems of an 
economic nature. We all understand that higher oil prices can 
depress spending on other goods and services--and thereby cause 
slower growth rates and possibly a worldwide recession. The 
reverse side of rising receipts for producers is, of course, 
rising out-payments by consumer nations. This can readily 
augment structural imbalances. This year, the American balance-
of-payments deficit looks to be almost three-quarters of a 
trillion dollars. As Everett Dirksen might say, a trillion 
here, a trillion there, and it begins to add up to real money. 
This is not small change. Of the well over $700 billion of that 
deficit, some $300 billion comes from oil and gas. It is 
recognized that the U.S. balance-of-payments deficit represents 
the locomotive that drives much of the world's economies. In 
performing this service--for which we get little thanks--the 
United States is steadily adding to its financial obligations 
to others. How long this process can continue is uncertain, but 
high oil prices add to the dilemma.
    Finally, Mr. Chairman, I must point to another problem. The 
United States is today the preponderant military power in the 
world. Still, our military establishment is heavily dependent 
upon oil. At a minimum, the rising oil price poses a budgetary 
problem for the Department of Defense at a time that our 
national budget is increasingly strained. Moreover, in the 
longer run, as we face the prospect of a plateau in which we 
are no longer able worldwide to increase the production of oil 
against presumably still rising demand, the question is whether 
the Department of Defense will still be able to obtain the 
supply of oil products necessary for maintaining our military 
preponderance. In that prospective world, the Department of 
Defense will face all sorts of pressures at home and abroad to 
curtail its use of petroleum products, thereby endangering its 
overall military effectiveness.
    In closing, Mr. Chairman, I trust that I have fulfilled the 
request in your letter of invitation to analyze ``the 
complexity of U.S. reliance on imported energy sources, 
particularly oil, and the difficulties the United States faces 
in mediating detrimental effects of this dependency.'' Even in 
the short run, actions that we take may substantially increase 
the resources and reduce the economic and political pressures 
on states that are hostile to us. In the longer run, unless we 
take serious steps to prepare for the day that we can no longer 
increase production of conventional oil, we are faced with the 
possibility of a major economic shock--and the political unrest 
that would ensue. The United States has just over 4 percent of 
the world's population and uses roughly 25 percent of the 
world's oil production. In a sense, that statistic, in itself, 
is misleading because the United States does produce roughly 20 
to 25 percent of the gross world product. Nonetheless, that 
statistic does underscore our potential vulnerability in an era 
that we may no longer be able to produce additional 
conventional oil worldwide.
    Thank you very much, Mr. Chairman. I shall be happy to 
answer your questions and those of any members of the 
committee.
    [The prepared statement of Mr. Schlesinger follows:]

 Prepared Statement of Hon. James Schlesinger, Senior Advisor, Lehman 
                        Brothers, Washington, DC

    Mr. Chairman, members of the committee, I thank the committee for 
this opportunity to discuss the quest for energy security, the 
implications of our heavy dependence on imported oil, the rise in oil 
prices, and their manifold political and economic repercussions for our 
Nation. In so many ways, the use of oil as our primary energy source 
turns out to be a two-edged sword. Given that dependence, the 
ramifications are too numerous to discuss in detail. Given the 
necessary limitations on time, I must be selective. Therefore, I shall 
touch only upon several salient points.
    1. Mr. Chairman, the problem of energy security is of relatively 
recent origin. When mankind depended upon windmills, oxen, horses, 
etc., energy security was not a strategic problem. Instead, as a 
strategic problem it is a development of modem times--and reflects most 
crucially the turn to fossil fuels as increasingly the source of 
energy. The Industrial Revolution in the 19th century, strongly 
reinforced by the rapid growth of oil-dependent transportation in the 
20th, unavoidably posed the question of security of supply. Imperial 
Germany took over Lorraine with its coal fields after the Franco-
Prussian War--to insure its energy security. When Britain, pushed by 
Churchill, converted its Navy to oil early in the 20th century, it 
sought a secure supply of oil under its own control in the Persian 
Gulf--which incidentally increased its concern for the security of the 
Suez Canal. For the United States, where the production of oil had 
started and for long was primarily located, the question of security of 
supply did not arise until the 1960s and 1970s. Since then, we have 
regularly talked about--and sought by various measures--to achieve 
greater energy security. Such measures, limited as they were, have 
generally proved unsatisfactory. The Nation's dependence on imported 
hydrocarbons has continued to surge.
    Mr. Chairman, until such time as new technologies, barely on the 
horizon, can wean us from our dependence on oil and gas, we shall 
continue to be plagued by energy insecurity. We shall not end 
dependence on imported oil nor, what is the hope of some, end 
dependence on the volatile Middle East--with all the political and 
economic consequences that flow from that reality. That is not to say 
that various measures and inventions will not, from time to time, shave 
our growing dependence, but we will not end it. Instead of energy 
security, we shall have to acknowledge and to live with various degrees 
of insecurity.
    To be sure, we have certain short-term problems to which I shall 
presently turn. More importantly, we face a fundamental, longer term 
problem. In the decades ahead, we do not know precisely when, we shall 
reach a point, a plateau or peak, beyond which we shall be unable 
further to increase production of conventional oil worldwide. We need 
to understand that problem now and to begin to prepare for that 
transition.
    The underlying problem is that for more than three decades, our 
production has outrun new discoveries. Most of our giant fields were 
found 40 years ago and more. Even today, the bulk of our production 
comes from these old--and aging--giant fields. More recent discoveries 
tend to be small with high decline rates--and are soon exhausted. Since 
the issue is crucial--and is not widely understood--I have prepared a 
chart which lays bare the problem.
    Mr. Chairman, the upshot is, quite simply, that, as the years roll 
by, the entire world will face a prospectively growing problem of 
energy supply. Moreover, we shall inevitably see a growing dependency 
on the volatile Middle East. We shall have to learn to live with 
degrees of insecurity--rather than the elusive security we have long 
sought. To be sure, some insecurity will be mitigated by the Strategic 
Petroleum Reserve, and other emergency measures. That will provide some 
protection against (short-term) supply disruptions, but it will not 
provide protection against the fundamental long-term problem.
    2. In addition to the long-term problem of the prospective limit on 
conventional oil production, we have a number of short-term or cyclical 
problems that have contributed to the current stringency and current 
high prices. Spare production capacity has essentially disappeared. 
This reflects the volatility of oil prices, which has led to a low rate 
of investment in new capacity, as well as an unexpected surge of 
demand, particularly from China and the United States. For many years, 
we have had excess capacity in refining. That, too, has largely 
disappeared, and we lack capacity to refine the heavy, sour crudes that 
remain available. Here in the United States, the problem has been 
amplified by the battering of gulf infrastructure by Hurricanes Katrina 
and Rita. We also have an added, self-inflicted problem of some 17 
boutique blends of gasoline, mandated by state authorities.
    The insurgency in Iraq has prevented the increase in production, 
even to the prewar level, that many expected. Long-term sanctions 
against Iraq, Iran, and Libya, both United States and international, 
have reduced their contribution to world supply. This has taken place 
against inelastic domestic production of natural gas. There are, in 
addition, problems of electric power generation and transmission. The 
point about all of these is these are not inherent problems. In 
principal, they would all yield to additional investment. Yet, we must 
bear in mind that investment activity depends upon price signals, and 
that there is a long period of gestation before additional investment 
activity brings supply to market. Some of these problems may, however, 
be ameliorated by changes in law or in regulation.
    By about 2010, we should see a significant increase in oil 
production as a result of investment activity now under way. There is a 
danger that any easing of the price of crude oil will, once again, 
dispel the recognition that there is a finite limit to conventional 
oil. In no way do the prospective investment decisions solve the long-
term, fundamental problem of oil supply.
    3. Let me turn now to the political and economic ramifications. 
Again, let me underscore that energy actions tend to be a two-edged 
sword. To some extent, the recent higher prices for oil reflect some of 
our own prior policies and actions. For example, the sanctions imposed 
upon various rogue nations, by reducing world supply, have resulted in 
higher prices. Operation Iraqi Freedom, followed by the insurgency, has 
caused unrest in the Middle East. The consequence has been somewhat 
lower production and a significant risk premium that, again, has raised 
the price of oil.
    The effect of higher oil prices has been significantly higher 
incomes for producers. A much higher level of income has meant that a 
range of nations, including Russia, Iran, Venezuela, as well as gulf 
Arab nations have had their economic problems substantially eased. As a 
result, they have become less amenable to American policy initiatives. 
Perhaps more importantly, the flow of funds into the Middle East 
inevitably has added to the moneys that can be transferred to 
terrorists. As long as the motivation is there and controls remain 
inadequate, that means that the terrorists will continue to be 
adequately or amply funded. To the extent that we begin to run into 
supply limitations and to the extent that we all grow more dependent on 
the Middle East, this problem of spillover funding benefits for 
terrorists is not going to go away.
    4. There are, of course, additional problems of an economic nature. 
We all understand that higher oil prices can depress spending on other 
goods and services--and thereby cause slower growth rates and possibly 
a worldwide recession. The reverse side of rising receipts for 
producers is, of course, rising out-payments by consumer nations. This 
can readily augment structural imbalances. This year, the American 
balance-of-payments deficit looks to be almost three-quarters of a 
trillion dollars. That is not small change. Of the well over $700 
billion of that deficit, some $300 billion comes from oil and gas. It 
is recognized that the U.S. balance-of-payments deficit represents the 
locomotive that drives much of the world's economies. In performing 
this service--for which we get little thanks--the United States is 
steadily adding to its financial obligations to others. How long this 
process can continue is uncertain, but high oil prices add to the 
dilemma.
    Finally, Mr. Chairman, I must point to another problem. The United 
States is today the preponderant military power in the world. Still, 
our military establishment is heavily dependent upon oil. At a minimum, 
the rising oil price poses a budgetary problem for the Department of 
Defense at a time that our national budget is increasingly strained. 
Moreover, in the longer run, as we face the prospect of a plateau in 
which we are no longer able, worldwide, to increase the production of 
oil against presumably still-rising demand, the question is whether the 
Department of Defense will still be able to obtain the supply of oil 
products necessary for maintaining our military preponderance. In that 
prospective world, the Department of Defense will face all sorts of 
pressures at home and abroad to curtail its use of petroleum products, 
thereby endangering its overall military effectiveness.
    In closing, Mr. Chairman, I trust that I have fulfilled the request 
in your letter of invitation to analyze ``the complexity of U.S. 
reliance on imported energy sources, particularly oil, and the 
difficulties the United States faces in mediating detrimental effects 
of this dependency.'' Even in the short run, actions that we take may 
substantially increase the resources and reduce the economic and 
political pressures on states that are hostile to us. In the longer 
run, unless we take serious steps to prepare for the day that we can no 
longer increase production of conventional oil, we are faced with the 
possibility of a major economic shock--and the political unrest that 
would ensue. The United States has just over 4 percent of the world's 
population and uses roughly 25 percent of the world's oil production. 
In a sense, this statistic in itself is misleading, because the United 
States produces roughly 20 to 25 percent of the gross world product. 
Nonetheless, that statistic does underscore our potential vulnerability 
in an era that we may no longer be able to produce additional 
conventional crude oil worldwide.
    Thank you very much, Mr. Chairman. I shall be happy to answer any 
questions that you or the members of the committee may have.

    The Chairman. Thank you very much, Secretary Schlesinger. 
In response to your question, you have indeed fulfilled our 
expectations with a remarkable paper. And I would simply 
indicate that the statements that you and Dr. Woolsey have 
brought to us are tremendously important statements. I doubt 
whether any information will be more important on Capitol Hill 
today. I'm hopeful that there will be wide circulation of both 
of those papers in full, quite apart from the excellent summary 
that you've given us.
    Mr. Woolsey.

STATEMENT OF HON. R. JAMES WOOLSEY, VICE PRESIDENT, BOOZ ALLEN 
                      HAMILTON, McLEAN, VA

    Mr. Woolsey. Thank you, Mr. Chairman. It's always a 
pleasure to appear before my coauthor of several years ago and 
his colleagues, of course. I thank you for the work you've done 
on these issues, you and the other members of the committee. I 
want to point out that the testimony I'm presenting today is in 
large measure of the substance of a paper by former Secretary 
of State, George P. Shultz, and I. We wrote and published it on 
the Web site of the Committee on the Present Danger, which he 
and I cochair this summer.
    There's a section on batteries and plug-in hybrids in the 
testimony that is somewhat expanded from that paper. It also--
the paper--has been around for a bit of time and has been part 
of the basis for the ``Set America Free'' Coalition's 
legislative proposals, which are being presented this morning, 
I believe, by a bipartisan group in the House of 
Representatives, and at noon by a bipartisan group in the 
Senate. I believe Senator Coleman among others is a cosponsor 
of that legislation.
    There are, Mr. Chairman, several important reasons why oil 
is different. I'm going to use my testimony just as talking 
points, essentially, if it's all right and point out why a pure 
market approach is something that will not work under the 
current circumstances.
    First of all the current transportation infrastructure is 
committed to oil and oil-compatible products. So there's no 
effective short-term substitutability. One simply has to eat 
whatever increases in oil prices come upon us. We can't shift 
as we can with many other commodities.
    Second, that dependance is one which operates today in such 
a way that the transportation fuel market and the electricity 
market are effectively completely separate things. In the 1970s 
about 20 percent of our electricity came from oil, so if one 
introduced nuclear power, or wind power, one was substituting 
them to some extent for oil use. Today that's essentially not 
true anymore. Only 2 to 3 percent of our electricity comes from 
oil.
    Whether you're a fan of nuclear power or wind or whatever, 
you can put windmills and nuclear reactors on every hilltop and 
you would have only negligible effect on our use of oil.
    So the transportation fuel market and the electricity 
market today are very different. Secretary Shultz and I focused 
on the importance of proposals that could get something done 
soon, as Senator Sununu suggested. And in that regard let me be 
very blunt. We should forget about 95 percent of our effort on 
hydrogen fuel cells for transportation. We found on the 
National Energy Policy Commission that ``hydrogen offers little 
to no potential to improve oil security and reduce climate 
change risks in the next 20 years.'' Hydrogen fuel cells have 
real utility in niche markets for stationary uses. But the 
combination of trying to get the cost of these one-to-two-
million-dollar vehicles that run on hydrogen down, at the same 
time one coordinates a complete restructuring of the energy 
industry so one has hydrogen at filling stations, and does a 
complete restructuring of the automotive industry so one has 
hydrogen fuel cells, is a many decades-long undertaking.
    Hydrogen fuel cells for transportation in the near term 
are, in my judgement, a snare and a delusion and we should stop 
spending the kind of money on them that we are spending now.
    The second point is that the Greater Middle East will 
continue to be the low-cost and dominant petroleum producer for 
the foreseeable future. If one looks at the coming demand 
growth from China and India, and the relatively high cost of 
production elsewhere, it is still going to be the case that the 
gulf--Saudi Arabia in particular--is going to be the swing 
producer and have a dominant influence on oil prices.
    If the Saudi fields are in the negative shape that Mr. 
Simmons and others have suggested in some of their writings it 
may be a bit harder for the Saudis to increase production 
quickly, drop the price of oil as they did in the mid-1980s, 
and bankrupt other approaches.
    But we should, in any case, focus on approaches toward 
alternative fuels that are inexpensive and that have real 
social value, such as cleaning up waste. That is one important 
way to avoid having Saudi production able to be turned on and 
drop the price so much that it makes other sources too 
expensive as they did in the 1980s.
    Third, the petroleum infrastructure is very vulnerable to 
terrorist and other attacks. My friend, Bob Baer, the former 
CIA officer, who wrote the recent book, ``Sleeping With the 
Devil,'' opens with a scenario in which a hijacked airliner is 
flown into the sulfur-cleaning towers up near Ras Tanura in 
northeastern Saudi Arabia. That takes 6 million barrels a day 
or so offline for a year or more. It sends world oil prices 
well over $100/barrel and crashes the world's economy.
    And that's not to speak of some of the vulnerabilities from 
attacks on shipping, from hurricane damage in the gulf and all 
the rest. So the infrastructure of oil worldwide is vulnerable 
both to accidents and certainly to terrorism. But neither 
Secretary Shultz nor I talk in terms of just oil imports. We 
don't solve anything in this country by importing a lot less 
from the Middle East and importing, say, more from Canada and 
Mexico, and then Europe importing more from the Middle East.
    To a first approximation there's one worldwide oil market, 
and it doesn't do anything particularly useful just to move the 
shipping patterns around. One needs to get at the underlying 
issue of oil use.
    Fourth, the possibility exists, particularly under regimes 
that could come to power in the Greater Middle East, of 
embargoes or other disruptions of supply. People sometimes say, 
whoever is in power in Saudi Arabia, they're going to need to 
sell the oil in order to live. Well, they don't need to pump 
that much of it if they want to live in the seventh century.
    Bin Laden has explicitly said that he thinks $200/barrel or 
more is a perfectly reasonable price for oil. And we should 
remember that in 1979 there was a serious coup attempt in Saudi 
Arabia. In this part of the world, however successful or 
unsuccessful, our current efforts to help bring democracy and 
the rule of law into that part of the world are, we are looking 
at a decade or two or three of chaotic change and unpredictable 
governmental behavior in the Middle East. And that bodes 
concern, at the very least, for the stability of oil supplies.
    Fifth, wealth transfers from oil have been used, and 
continue to be used, to fund terrorism and ideological support. 
The old Pogo cartoon line, ``We have met the enemy and he is 
us,'' is certainly true with respect to the funding of 
terrorism in the Middle East. For the ideological underpinnings 
of terrorism and the hate which is reflected in the al-Qaeda 
doctrine and related doctrines, we have only to look to the 
funding which takes place from Saudi Arabia and from wealthy 
individuals in that part of the world. Estimated generally at 
$3-$4 billion a year these funds go into teaching hatred in the 
madrassas of Pakistan, in the textbooks of Indonesia, in the 
mosques of the United States. We hear Prince Turki bin Faisal, 
the new Ambassador in Washington from Saudi Arabia and my 
former counterpart when he headed Saudi intelligence, say that 
we don't appreciate how much the Saudis are doing in fighting 
against terrorism. Well, in a sense they are. They are 
perfectly willing to cooperate with us in fighting al-Qaeda, 
but it is not because the underlying views of the Wahhabis in 
Saudi Arabia and those of the Salafist jihadis such as al-Qaeda 
are different: They are not. The underlying views are genocidal 
for both groups with regard to Shiite Muslims, Jews, and 
homosexuals and they are absolutely filled with hatred with 
respect to Suffi and other Muslims, Christians, those with 
other religious beliefs, and democracy. Both are on the side of 
terrible oppression of women.
    The underlying views are the same, in many ways, the way 
the underlying views of the Stalinists and the Trotskyites were 
the same in the 1930s. Both were revolutionary Marxists who 
believed in dictatorship, but they disagreed on one major 
point, which was whether or not tactically one should 
subordinate one's revolutionary zeal to the interests of the 
Soviet state--that was the Stalinists--or whether one should 
feel free to pursue revolution anywhere and everywhere--that 
was the Trotskyites. That's essentially the same difference 
between the Wahhabis and a group like al-Qaeda. The Wahhabis 
believe in subordinating the manifestations of their hatred to 
the interest of the Saudi state. Al-Qaeda believes in flying 
planes into buildings in New York and Washington.
    So what is taught as a result of the oil wealth that we 
help fund--what is taught in the madrassas of Pakistan and 
elsewhere--is essentially the same hatred that is fostered by a 
group like al-Qaeda.
    Sixth, the current account deficits for a number of 
countries create risks ranging from major world economic 
disruption to deepening poverty, and could be substantially 
reduced by reducing oil imports.
    The United States essentially borrows about $2 billion now 
every day, principally from major Asian states, to finance its 
consumption. The single largest category of imports is the 
approximately $1 billion per working day that we borrow in 
order to finance our imported oil.
    For developing nations the service of debt, for a country 
like Bangladesh, is a major problem that is heavily driven by 
having to import very expensive dollar-denominated oil. 
Needless to say we have a very important economic issue here in 
the United States. In the chairman's and my article of several 
years ago, we pointed out that every billion dollars of 
imported oil that is replaced by domestic fuel production 
creates something between 10,000 and 20,000 American jobs. Most 
of these are in rural America and areas where jobs are needed.
    Seventh, global-warming gas emissions from manmade sources 
do create at least the risk of climate change, and one 
important component of potential climate change is, of course, 
transportation and oil.
    Secretary Shultz and I suggested three proposed directions 
for policy in these circumstances.
    The first policy is to encourage improved vehicle mileage, 
using technology that is now in production.
    First, with modern diesel vehicles: One needs to be sure 
that they are clean enough with respect to emissions, but one 
of the main reasons that European fuel mileage is 42 miles a 
gallon for their fleet and ours is 24 miles a gallon, is 
because over half of the passenger vehicles in Europe are 
diesels; modern diesels.
    Second, of course, hybrid gasoline-electric vehicles which 
have substantial advantages with respect to fuel economy, and 
I'll come in a minute to this new development of plug-in 
hybrids, which is extremely important.
    Third, light weight carbon composite construction of 
vehicles. The Rocky Mountain Institute's publication of a year 
ago, ``Winning the Oil Endgame'' (WTOE) talks about this. This 
is a technology that is now in place for at least racing cars. 
Formula 1 racers are constructed out of carbon composites that 
are about 80 percent of the strength of aviation composites but 
about 20 percent of the cost. What that does is separate weight 
from safety. If one is in a light weight carbon composite 
vehicle like a Formula 1 racer it is extremely resistant to 
being crushed or damaged, many times better than steel. So 
having light-weight vehicles that are fuel efficient, but also 
strong enough that you don't have to worry that your family's 
going to get crushed if they get hit by an SUV, has some real 
advantages. Again, this technology is being used for racing 
vehicles today, so it is no stranger to the automotive 
business.
    The second policy we suggest is the commercialization of 
alternative transportation fuels--fuels that can be available 
soon, are compatible with existing infrastructure, and can be 
derived from waste or otherwise produced cheaply. The first is 
cellulosic ethanol. The chairman and I stressed it in the 
Foreign Affairs article that he mentioned. Ethanol of any kind 
can be used for up to 85 percent of the fuel in flexible-fuel 
vehicles. And as the chairman mentioned in his opening remarks, 
it is trivial to have a flexible-fuel vehicle. It means a 
slightly different kind of plastic in the fuel line, and a 
slightly different programming for the computer chip. It's a 
$100 cost or less for a new vehicle and there are millions on 
the road. Most people who have one don't even know that they 
have it. But by being able to use grass or straw or 
agricultural waste such as rice straw to produce ethanol the 
price can be substantially lower than would be the case for 
starch-based ethanol, and this also means an added crop, and 
added product, for farmers. If a farmer can sell not only his 
corn for feed grain, but also can sell the switchgrass that is 
mowed from the soil bank, the CRP lands, he has an added new 
crop. We looked in the National Energy Policy Commission at the 
availability of land issues and the price issues. I'd point you 
toward page 7 of my statement. The cost of cellulosic ethanol 
looks like it is headed down to well below $1 a gallon for 
production. Iogen is now in production with Shell Oil backing, 
at a cost of a bit over $1 a gallon in Canada--the first 
commercial cellulosic ethanol. If one focuses only on the soil 
bank lands, some 30 million acres are idled on farmers' 
property today. Two-thirds of this acreage is planted in 
switchgrass. If we look forward over the next 20 years, a 
gradual improvement in the mileage of our vehicles, up to say 
around 40 miles a gallon, short of where the Europeans are 
today, and we see a modest yield increase in prairie grass, 
switchgrass, its entirely plausible to have a doubling of 
yield, or tripling--we've had several times that increase in 
wheat, corn, and rice in the last 20 or so years--then one 
would be able, solely on the amount of land that is in the soil 
bank, to grow enough switchgrass to replace one-half of our 
gasoline. This would be essentially the gasoline that comes 
from the 55 percent or so of our oil that is now imported. 
Sometimes data bared on other assumptions make the land use 
requirements look huge, but that's not the way it looked to us 
on the National Energy Policy Commission.
    There are also new technologies for producing diesel 
encouraged in the Energy Act. It's called renewable diesel 
rather than biodiesel, because it focuses on waste products of 
all kinds as we said in the Energy Commission Report. These can 
be animal offal, agricultural residues, municipal solid waste, 
sewage, even old tires. We're talking about using waste that is 
organic in a chemical sense to produce diesel. In the Energy 
Policy Commission, we said the cost of that looked like it was 
headed to around 70 cents per gallon for production.
    Finally, Mr. Chairman, plug-in hybrids. The Toyota Priuses 
that are sold in Japan and Europe have a button on them, which 
if you push it you can drive all electric for a kilometer or 
so. For some reason those buttons are not put on the Priuses 
that are sold in the United States. But if one improves the 
capabilities of the batteries in a hybrid, and you can punch a 
button of that sort and drive for, let's say, 30 miles before 
the hybrid feature cuts in--that is the movement back and forth 
between gasoline power and electric power--and you have topped 
off the battery by plugging in the hybrid overnight, using off-
peak night-time power, you are driving on the equivalent of 
something between 25-cent and $1-a-gallon gasoline. Most cars 
in the United States are driven less than 30 miles a day. So, 
if that's the second car in the family, the car that's used for 
errands and taking kids to school and so forth, you could well 
go weeks or months before you visited the filling station. On 
the average that type of a feature makes my 50-mile-a-gallon 
Prius into about a 125-mile-a-gallon Prius. If you make that 
vehicle out of carbon composites, then instead of 125 miles a 
gallon you would be getting around 250 miles a gallon, because 
halving the weight would approximately double the mileage. And 
then finally, if you're running that vehicle on E-85, 85 
percent ethanol, because it is a flexible-fuel vehicle you're 
getting up in the range of 1,000 miles per gallon, of petroleum 
products. Now these technologies may not all work out as 
quickly as we might hope but just as a decent investment 
portfolio can make up for some shortcomings with yields in 
other areas, the same can happen here.
    Suppose some portion of these hopes don't bear out, but 
others do and maybe in a few years instead of 1,000-mile-a-
gallon vehicles we only have 500-mile-per-gallon vehicles, or 
300-mile-per-gallon vehicles. We've nonetheless done something 
very, very useful and important.
    And so, I would say, Mr. Chairman, there is a range of 
important objectives here--economic, geopolitical, 
environmental--that would be served by embarking on a path of 
encouraging these kinds of technologies, but one that is of the 
greatest importance is the reason Secretary Schlesinger pointed 
out, as did you in your opening remarks: We would be 
substantially more secure.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Woolsey follows:]

Prepared Statement of Hon. R. James Woolsey, Vice President, Booz Allen 
                          Hamilton, McLean, VA

    Mr. Chairman and members of the committee, it's a real pleasure to 
appear before this committee today on this issue. I am appearing solely 
on my own behalf and represent no organization. By way of 
identification I served as Director of Central Intelligence, 1993-95, 
one of the four Presidential appointments I have held in two Republican 
and two Democratic administrations; these have been interspersed in a 
career that has been generally in the private practice of law and now 
in consulting. The substantial majority of the points I will make today 
are drawn from an August 2005 paper by former Secretary of State, 
George P. Shultz, and myself, although I have updated some points due 
to more recent work; the two of us are cochairmen of the Committee on 
the Present Danger and the full paper may be found at the committee's 
Web site (www.fightingterror.org).
    Just over 4 years ago, on the eve of 9/11, the need to reduce 
radically our reliance on oil was not clear to many and in any case the 
path of doing so seemed a long and difficult one. Today both 
assumptions are being undermined by the risks of the post-9/11 world, 
by oil prices, and by technological progress in fuel efficiency and 
alternative fuels.
    There are at least seven major reasons why dependence on petroleum 
and its products for the lion's share of the world's transportation 
fuel creates special dangers in our time. These dangers are all driven 
by rigidities and potential vulnerabilities that have become serious 
problems because of the geopolitical realities of the early 21st 
century. Those who reason about these issues solely on the basis of 
abstract economic models that are designed to ignore such geopolitical 
realities will find much to disagree with in what follows. Although 
such models have utility in assessing the importance of more or less 
purely economic factors in the long run, as Lord Keynes famously 
remarked: ``In the long run, we are all dead.''
    These dangers in turn give rise to two proposed directions for 
government policy in order to reduce our vulnerability rapidly. In both 
cases it is important that existing technology should be used, i.e., 
technology that is already in the market or can be so in the very near 
future and that is compatible with the existing transportation 
infrastructure. To this end government policies in the United States 
and other oil-importing countries should: (1) Encourage a shift to 
substantially more fuel-efficient vehicles within the existing 
transportation infrastructure, including promoting both battery 
development and a market for existing battery types for plug-in hybrid 
vehicles; and (2) encourage biofuels and other alternative and 
renewable fuels that can be produced from inexpensive and widely 
available feedstocks--wherever possible from waste products.

                   PETROLEUM DEPENDENCE: THE DANGERS

1. The current transportation infrastructure is committed to oil and 
        oil-compatible products
    This fact substantially increases the difficulty of responding to 
oil price increases or disruptions in supply by substituting other 
fuels.
    There is a range of fuels that can be used to produce electricity 
and heat and that can be used for other industrial uses, but petroleum 
and its products dominate the fuel market for vehicular transportation. 
With the important exception, described below, of a plug-in version of 
the hybrid gasoline/electric vehicle, which will allow recharging 
hybrids from the electricity grid, substituting other fuels for 
petroleum in the vehicle fleet as a whole has generally required major, 
time-consuming, and expensive infrastructure changes. One exception has 
been some use of liquid natural gas (LNG) and other fuels for fleets of 
buses or delivery vehicles, although not substantially for privately 
owned ones, and the use of corn-derived ethanol mixed with gasoline in 
proportions up to 10 percent ethanol (``gasohol'') in some States. 
Neither has appreciably affected petroleum's dominance of the 
transportation fuel market.
    Moreover, in the 1970s about 20 percent of our electricity was made 
from oil--so shifting electricity generation toward, say, renewables or 
nuclear power could save oil. But since today only about 3 percent of 
our electricity is oil-generated, a shift in the way we produce 
electricity would have almost no effect on the transportation or oil 
market. This could change over the long run, however, with the advent 
of plug-in hybrid vehicles, discussed below.
    There are imaginative proposals for transitioning to other fuels 
for transportation, such as hydrogen to power automotive fuel cells, 
but this would require major infrastructure investment and 
restructuring. If privately owned fuel cell vehicles were to be capable 
of being readily refueled, this would require reformers (equipment 
capable of reforming, say, natural gas into hydrogen) to be located at 
filling stations, and would also require natural gas to be available 
there as a hydrogen feed-stock. So not only would fuel cell development 
and technology for storing hydrogen on vehicles need to be further 
developed, but the automobile industry's development and production of 
fuel cells also would need to be coordinated with the energy industry's 
deployment of reformers and the fuel for them.
    Moving toward automotive fuel cells thus requires us to face a huge 
question of pace and coordination of large-scale changes by both the 
automotive and energy industries. This poses a sort of industrial 
Alphonse and Gaston dilemma: Who goes through the door first? (If, 
instead, it were decided that existing fuels such as gasoline were to 
be reformed into hydrogen on board vehicles instead of at filling 
stations, this would require onboard reformers to be developed and 
added to the fuel cell vehicles themselves--a very substantial 
undertaking.)
    It is because of such complications that the National Commission on 
Energy Policy concluded in its December 2004, report ``Ending The 
Energy Stalemate'' that ``hydrogen offers little to no potential to 
improve oil security and reduce climate change risks in the next 20 
years.''
    To have an impact on our vulnerabilities within the next decade or 
two, any competitor of oil-derived fuels will need to be compatible 
with the existing energy infrastructure and require only modest 
additions or amendments to it.
2. The Greater Middle East will continue to be the low-cost and 
        dominant petroleum producer for the foreseeable future
    Home of around two-thirds of the world's proven reserves of 
conventional oil--45 percent of it in just Saudi Arabia, Iraq, and 
Iran--the Greater Middle East will inevitably have to meet a growing 
percentage of world oil demand. This demand is expected to increase by 
more than 50 percent in the next two decades, from 78 million barrels 
per day (bbl/d) in 2002 to 118 bbl/d in 2025, according to the Federal 
Energy Information Administration. Much of this will come from expected 
demand growth in China and India. One need not argue that world oil 
production has peaked to see that this puts substantial strain on the 
global oil system. It will mean higher prices and potential supply 
disruptions and will put considerable leverage in the hands of 
governments in the Greater Middle East as well as in those of other 
oil-exporting states which have not been marked recently by stability 
and certainty: Russia, Venezuela, and Nigeria, for example. Deep-water 
drilling and other opportunities for increases in supply of 
conventional oil may provide important increases in supply but are 
unlikely to change this basic picture.
    Even if other production comes on line, e.g., from unconventional 
sources such as tar sands in Alberta or shale in the American West, 
their relatively high cost of production could permit low-cost 
producers, particularly Saudi Arabia, to increase production, drop 
prices for a time, and undermine the economic viability of the higher 
cost competitors, as occurred in the mid-1980s. For the foreseeable 
future, as long as vehicular transportation is dominated by oil as it 
is today, the Greater Middle East, and especially Saudi Arabia, will 
remain in the driver's seat.
3. The petroleum infrastructure is highly vulnerable to terrorist and 
        other attacks
    The radical Islamist movement, including but not exclusively al-
Qaeda, has on a number of occasions explicitly called for worldwide 
attacks on the petroleum infrastructure and has carried some out in the 
Greater Middle East. A more well-planned attack than what has occurred 
to date--such as that set out in the opening pages of Robert Baer's 
recent book, ``Sleeping With the Devil'' (terrorists flying an aircraft 
into the unique sulfur-cleaning towers in northeastern Saudi Arabia), 
could take some 6 million barrels per day off the market for a year or 
more, sending petroleum prices sharply upward to well over $100/barrel 
and severely damaging much of the world's economy. Domestic 
infrastructure in the West is not immune from such disruption. U.S. 
refineries, for example, are concentrated in a few places, principally 
the gulf coast. The recent accident in the Texas City refinery--
producing multiple fatalities--points out potential infrastructure 
vulnerabilities, as of course does this fall's hurricane damage in the 
gulf. The Trans-Alaska Pipeline has been subject to several amateurish 
attacks that have taken it briefly out of commission; a seriously 
planned attack on it could be far more devastating.
    In view of these overall infrastructure vulnerabilities policy 
should not focus exclusively on petroleum imports, although such 
infrastructure vulnerabilities are likely to be the most severe in the 
Greater Middle East. It is there that terrorists have the easiest 
access, and the largest proportion of proven oil reserves and low-cost 
production are also located there. Nor is anything particularly useful 
accomplished by changing trade patterns. To a first approximation there 
is one worldwide oil market and it is not generally useful for the 
United States, for example, to import less from the Greater Middle East 
and for others then to import more from there. In effect, all of us 
oil-importing countries are in this together.
4. The possibility exists, particularly under regimes that could come 
        to power in the Greater Middle East, of embargoes or other 
        disruptions of supply
    It is often said that whoever governs the oil-rich nations of the 
Greater Middle East will need to sell their oil. This is not true, 
however, if the rulers choose to try to live, for most purposes, in the 
seventh century. Bin Laden has advocated, for example, major reductions 
in oil production and oil prices of $200/barrel or more.
    In 1979 there was a serious attempted coup in Saudi Arabia. Much of 
what the outside world saw was the seizure by Islamist fanatics of the 
Great Mosque in Mecca, but the effort was more widespread. Even if one 
is optimistic that democracy and the rule of law will spread in the 
Greater Middle East and that this will lead after a time to more 
peaceful and stable societies there, it is undeniable that there is 
substantial risk that for some time the region will be characterized by 
chaotic change and unpredictable governmental behavior. Reform, 
particularly if it is hesitant, has in a number of cases been trumped 
by radical takeovers (Jacobins, Bolsheviks). There is no reason to 
believe that the Greater Middle East is immune from these sorts of 
historic risks.
5. Wealth transfers from oil have been used, and continue to be used, 
        to fund terrorism and its ideological support
    Estimates of the amount spent by the Saudis in the last 30 years 
spreading Wahhabi beliefs throughout the world vary from $70 billion to 
$100 billion. Furthermore, some oil-rich families of the Greater Middle 
East fund terrorist groups directly. The spread of Wahhabi doctrine--
fanatically hostile to Shiite and Suffi Muslims, Jews, Christians, 
women, modernity, and much else--plays a major role with respect to 
Islamist terrorist groups: A role similar to that played by angry 
German nationalism with respect to Nazism in the decades after World 
War I. Not all angry German nationalists became Nazis and not all those 
schooled in Wahhabi beliefs become terrorists, but in each case the 
broader doctrine of hatred has provided the soil in which the 
particular totalitarian movement has grown. Whether in lectures in the 
madrassas of Pakistan, in textbooks printed by Wahhabis for Indonesian 
schoolchildren, or on bookshelves of mosques in the United States, the 
hatred spread by Wahhabis and funded by oil is evident and influential.
    On all points except allegiance to the Saudi State, Wahhabi and al-
Qaeda beliefs are essentially the same. In this there is another rough 
parallel to the 1930s--between Wahhabis' attitudes toward al-Qaeda and 
like-minded Salafist jihadi groups today and Stalinists' attitude 
toward Trotskyites some 60 years ago. The only difference between 
Stalinists and Trotskyites was on the question whether allegiance to a 
single state was required or whether free-lance killing of enemies was 
permitted. But Stalinist hatred of Trotskyites and their free-lancing 
didn't signify disagreement about underlying objectives, only tactics, 
and Wahhabi/Saudi cooperation with us in the fight against al-Qaeda 
doesn't indicate fundamental disagreement between Wahhabis and al-Qaeda 
on, e.g., their common genocidal fanaticism about Shi'a, Jews, and 
homosexuals. So Wahhabi teaching basically supports al-Qaeda ideology.
    It is sometimes contended that we should not seek substitutes for 
oil because disruption of the flow of funds to the Greater Middle East 
could further radicalize the population of some states there. The 
solution, however, surely lies in helping these states diversify their 
economies over time, not in perpetually acquiescing to the economic 
rent they collect from oil exports and to the uses to which these 
revenues are put.
6. The current account deficits for a number of countries create risks 
        ranging from major world economic disruption to deepening 
        poverty, and could be substantial reduced by reducing oil 
        imports
    The United States in essence borrows about $2 billion a day, every 
day, principally now from major Asian states, to finance its 
consumption. The single largest category of imports is the 
approximately $1 billion per working day borrowed to import oil. The 
accumulating debt increases the risk of a flight from the dollar or 
major increases in interest rates. Any such development could have 
major negative economic consequences for both the United States and its 
trading partners.
    For developing nations, the service of debt is a major factor in 
their continued poverty. For many, debt is heavily driven by the need 
to import oil that at today's oil prices cannot be paid for by sales of 
agricultural products, textiles, and other typical developing nation 
exports.
    If such deficits are to be reduced, however, say by domestic 
production of substitutes for petroleum, this should be based on 
recognition of real economic value such as waste cleanup, soil 
replenishment, or other tangible benefits.
7. Global-warming gas emissions from man-made sources create at least 
        the risk of climate change
    Although the point is not universally accepted, the weight of 
scientific opinion suggests that global warming gases produced by human 
activity form one important component of potential climate change. Oil 
products used in transportation provide a major share of U.S. man-made 
global warming gas emissions.

                  THREE PROPOSED DIRECTIONS FOR POLICY

    The above considerations suggest that government policies with 
respect to the vehicular transportation market should point in the 
following directions:
1. Encourage improved vehicle mileage, using technology now in 
        production
    Three currently available technologies stand out to improve vehicle 
mileage.
            Diesels
    First, modern diesel vehicles are coming to be capable of meeting 
rigorous emission standards (such as Tier 2 standards, being introduced 
into the United States, 2004-08). In this context it is possible 
without compromising environmental standards to take advantage of 
diesels' substantial mileage advantage over gasoline-fueled internal 
combustion engines.
    Substantial penetration of diesels into the private vehicle market 
in Europe is one major reason why the average fleet mileage of such new 
vehicles is 42 miles per gallon in Europe and only 24 mpg in the United 
States. Although the United States has, since 1981, increased vehicle 
weight by 24 percent and horsepower by 93 percent, it has actually 
somewhat lost ground with respect to mileage over that near-quarter 
century, In the 12 years from 1975 to 1987, however, the United States 
improved the mileage of new vehicles from 15 to 26 mpg.
            Hybrid gasoline-electric
    Second, hybrid gasoline-electric vehicles now on the market show 
substantial fuel savings over their conventional counterparts. The 
National Commission on Energy Policy found that for the four hybrids on 
the market in December 2004 that had exact counterpart models with 
conventional gasoline engines, not only were mileage advantages quite 
significant (10-15 mpg) for the hybrids, but in each case the 
horsepower of the hybrid was higher than the horsepower of the 
conventional vehicle.
            Light-weight carbon composite construction
    Third, constructing vehicles with inexpensive versions of the 
carbon fiber composites that have been used for years for aircraft 
construction can substantially reduce vehicle weight and increase fuel 
efficiency while at the same time making the vehicle considerably safer 
than with current construction materials. This is set forth thoroughly 
in the 2004 report of the Rocky Mountain Institute's ``Winning the Oil 
Endgame.'' Aerodynamic design can have major importance as well. This 
breaks the traditional tie between size and safety. Much lighter 
vehicles, large or small, can be substantially more fuel-efficient and 
also safer. Such composite use has already been used for automotive 
construction in Formula 1 race cars and is now being adopted by BMW and 
other automobile companies. The goal is mass-produced vehicles with 80 
percent of the performance of hand-layup aerospace composites at 20 
percent of the cost. Such construction is expected to approximately 
double the efficiency of a normal hybrid vehicle without increasing 
manufacturing cost.
2. Encourage the commercialization of alternative transportation fuels 
        that can be available soon, are compatible with existing 
        infrastructure, and can be derived from waste or otherwise 
        produced cheaply
            Biomass (cellulosic) ethanol
    The use of ethanol produced from corn in the United States and 
sugar cane in Brazil has given birth to the commercialization of an 
alternative fuel that is coming to show substantial promise, 
particularly as new feedstocks are developed. Some 6 million vehicles 
in the United States, and all new vehicles in Brazil other than those 
that use solely ethanol, are capable of using ethanol in mixtures of up 
to 85 percent ethanol and 15 percent gasoline (E-85). These are called 
Flexible Fuel Vehicles (FFV) and require, compared to conventional 
vehicles, only a somewhat different kind of material for the fuel line 
and a differently programmed computer chip. The cost of incorporating 
this feature in new vehicles is trivial. Also, there are no large-scale 
changes in infrastructure required for ethanol use. It may be shipped 
in tank cars (and, in Brazil, in pipelines), and mixing it with 
gasoline is a simple matter.
    Although human beings have been producing ethanol, grain alcohol, 
from sugar and starch for millennia, it is only in recent years that 
the genetic engineering of biocatalysts has made possible such 
production from the hemicellulose and cellulose that constitute the 
substantial majority of the material in most plants. The genetically 
engineered material is in the biocatalyst only; there is no need for 
genetically modified plants.
    These developments may be compared in importance to the invention 
of thermal and catalytic cracking of petroleum in the first decades of 
the 20th century--processes which made it possible to use a very large 
share of petroleum to make gasoline rather than the tiny share that was 
available at the beginning of the century. For example, with such 
genetically engineered biocatalysts it is not only grains of corn but 
corn cobs and most of the rest of the corn plant that may be used to 
make ethanol.
    Such biomass, or cellulosic, ethanol is now likely to see 
commercial production begin first in a facility of the Canadian 
company, Iogen, with backing from Shell Oil, at a cost of around $1.30/
gallon. The National Renewable Energy Laboratory estimates costs will 
drop to around $1.07/gallon over the next 5 years, and the Energy 
Commission estimates a drop in costs to 67-77 cents/gallon when the 
process is fully mature. The most common feedstocks will likely be 
agricultural wastes, such as rice straw, or natural grasses such as 
switchgrass, a variety of prairie grass that is often planted on soil 
bank land to replenish the soil's fertility. There will be decided 
financial advantages in using as feedstocks any wastes which carry a 
tipping fee (a negative cost) to finance disposal--e.g., waste paper, 
or rice straw, which cannot be left in the fields after harvest because 
of its silicon content.
    Old or misstated data are sometimes cited for the proposition that 
huge amounts of land would have to be introduced into cultivation or 
taken away from food production in order to have such biomass available 
for cellulosic ethanol production. This is incorrect. The National 
Commission on Energy Policy reported in December that, if fleet mileage 
in the United States rises to 40 mpg--somewhat below the current 
European Union fleet average for new vehicles of 42 mpg and well below 
the current Japanese average of 47 mpg--then as switchgrass yields 
improve modestly to around 10 tons/acre it would take only 30 million 
acres of land to produce sufficient cellulosic ethanol to fuel half the 
U.S. passenger fleet. By way of calibration, this would essentially 
eliminate the need for oil imports for passenger vehicle fuel and would 
require only the amount of land now in the soil bank (the Conservation 
Reserve Program (CRP) on which such soil-restoring crops as switchgrass 
are already being grown. Practically speaking, one would probably use 
for ethanol production only a little over half of the soil bank lands 
and add to this some portion of the plants now grown as animal feed 
crops (for example, on the 70 million acres that now grow soybeans for 
animal feed). In short, the United States and many other countries 
should easily find sufficient land available for enough energy crop 
cultivation to make a substantial dent in oil use.
    There is also a common and erroneous impression that ethanol 
generally requires as much energy to produce as one obtains from using 
it and that its use does not substantially reduce global warming gas 
emissions. The production and use of ethanol merely recycles in a 
different way the CO2 that has been fixed by plants in the 
photosynthesis process. It does not release carbon that would otherwise 
stay stored underground, as occurs with fossil fuel use, but when 
starch, such as corn, is used for ethanol production much energy, 
including fossil-fuel energy, is consumed in the process of 
fertilizing, plowing, and harvesting. Even starch-based ethanol, 
however, does reduce greenhouse gas emissions by around 30 percent. 
Because so little energy is required to cultivate crops such as 
switchgrass for cellulosic ethanol production, and because electricity 
can be coproduced using the residues of such cellulosic fuel 
production, reductions in greenhouse gas emissions for celluslosic 
ethanol when compared to gasoline are greater than 100 percent. The 
production and use of cellulosic ethanol is, in other words, a carbon 
sink.
            Biodiesel and renewable diesel
    The National Commission on Energy Policy pointed out some of the 
problems with most current biodiesel ``produced from rapeseed, soybean, 
and other vegetable oils--as well as . . . used cooking oils.'' It said 
that these are ``unlikely to become economic on a large scale'' and 
that they could ``cause problems when used in blends higher than 20 
percent in older diesel engines.'' It added that ``waste oil is likely 
to contain impurities that give rise of undesirable emissions.''
    The Commission notes, however, that biodiesel is generally 
``compatible with existing distribution infrastructure'' and outlines 
the potential of a newer process (``thermal depolymerization'') that 
produces renewable diesel without the above disadvantages, from 
``animal offal, agricultural residues, municipal solid waste, sewage, 
and old tires.'' (This has recently been designated ``Renewable 
Diesel'' in the Energy Act of this past summer.) The Commission points 
to the current use of this process at a Conagra turkey processing 
facility in Carthage, Missouri, where a ``20 million commercial-scale 
facility'' is beginning to convert turkey offal into ``a variety of 
useful products, from fertilizer to low-sulfur diesel fuel'' at a 
potential average cost of ``about 72 cents per gallon.''
            Other Alternative Fuels
    Progress has been made in recent years on utilizing not only coal 
but slag from strip mines, via gasification, for conversion into diesel 
fuel using a modern version of the gasified-coal-to-diesel process used 
in Germany during World War II.
    Qatar has begun a large-scale process of converting natural gas to 
diesel fuel.
    Outside the realm of conventional oil, the tar sands of Alberta and 
the oil shale of the Western United States exist in huge deposits, the 
exploitation of which is currently costly and accompanied by major 
environmental difficulties, but both definitely hold promise for a 
substantial increase in oil supply.
3. Plug-in hybrids and battery improvements
    A modification to hybrids could permit them to become ``plug-in-
hybrids,'' drawing power from the electricity grid at night and using 
all electricity for short trips before they move to operating in their 
gasoline-electric mode as hybrids. With a plug-in hybrid vehicle one 
has the advantage of an electric car, but not the disadvantage. 
Electric cars cannot be recharged if their batteries run down at some 
spot away from electric power. But since all hybrids have tanks 
containing liquid fuel plug-in hybrids have no such disadvantage.
    The ``vast majority of the most fuel-hungry trips are under 6 
miles'' and ``well within the range'' of current (nickel-metal hydride) 
batteries' capacity, according to Huber and Mills (``The Bottomless 
Well,'' 2005). Current Toyota Priuses sold in Japan and Europe have a 
button, that Toyota has removed for some reason on American vehicles, 
that permits all-electric driving for up to a kilometer; all that is 
really needed is to equip hybrids with adequate batteries so that this 
capability can be extended. Over half of all U.S. vehicles are driven 
less than 30 miles/day, so a plug-in hybrid that can obtain that range 
might go for many weeks without visiting the gasoline station. Other 
experts, however, emphasize that whether with existing nickel-metal-
hydride battery types or with the more capable lithium-ion batteries 
now commercially available for computer and other applications, it is 
important that any battery used in a plug-in hybrid be capable of 
taking daily charging without being damaged and be capable of powering 
the vehicle at an adequate speed and argue that battery development 
will be necessary in order for this to be the case.
    But the California experience with electric vehicles (EVs) in the 
1990s suggests otherwise. It demonstrated that batteries used in those 
vehicles, particularly the nickel-metal-hydride ones that were used in 
later EV models (some of which are still on the road), have easily 
shown the capability for being charged daily for a number of years. And 
at U. Cal. (Davis) Professor Andy Frank has been designing and 
operating plug-in hybrids for years that now, with commercially 
available batteries, operate all electrically for 60 miles at up to 60 
mph before the hybrid gasoline-electric feature needs to be used. 
Whether development is needed for some improvements to lithium-ion 
batteries or only financial incentives for mass production of them or 
the more mature nickel-metal-hydride batteries, such efforts should 
have the highest priority because plug-in hybrids promise to 
revolutionize transportation economics and to have a dramatic effect on 
the problems caused by oil dependence.
    Moreover the attractiveness to the consumer of being able to use 
electricity from overnight charging for a substantial share of the 
day's driving is stunning. The average residential price of electricity 
in the United States is about 8.5 cents/kwh, and many utilities sell 
off-peak power for 2-4 cents/kwh. When one takes into consideration the 
different efficiencies of liquid-fueled and electric propulsion, then 
where the rubber meets the road the cost of powering a plug-in hybrid 
with average-cost residential electricity would be about 40 percent of 
the cost of powering the same vehicle with today's approximately $2.50/
gallon gasoline, or, said another way, for the consumer to be able to 
buy fuel in the form of electricity at the equivalent of $1/gallon 
gasoline. Using off-peak power would then equate to being able to buy 
25-to-50 cent/gallon gasoline. Given the burdensome cost imposed by 
current fuel prices on commuters and others who need to drive 
substantial distances, the possibility of powering one's family vehicle 
with fuel that can cost as little as one-tenth of today's gasoline (in 
the U.S. market) should solve rapidly the question whether there would 
be public interest in and acceptability of plug-in hybrids.
    Although the use of off-peak power for plug-in hybrids should not 
require substantial new investments in electricity generation for some 
time (until millions of plug-ins are on the road), greater reliance on 
electricity for transportation should lead us to look particularly to 
the security of the electricity grid as well as the fuel we use to 
generate electricity. In the United States the 2002 report of the 
National Academies of Science, Engineering, and Medicine (``Making the 
Nation Safer'') emphasized particularly the need to improve the 
security of transformers and of the Supervisory Control and Data 
Acquisition (SCADA) systems in the face of terrorist threats. The 
National Commission on Energy Policy has seconded those concerns. With 
or without the advent of plug-in hybrids, these electricity grid 
vulnerabilities require urgent attention.

                               CONCLUSION

    The dangers from oil dependence in today's world require us both to 
look to ways to reduce demand for oil and to increase supply of 
transportation fuel by methods beyond the increase of oil production.
    The realistic opportunities for reducing demand soon suggest that 
government policies should encourage hybrid gasoline-electric vehicles, 
particularly the battery work needed to bring plug-in versions thereof 
to the market, and modern diesel technology. The realistic 
opportunities for increasing supply of transportation fuel soon suggest 
that government policies should encourage the commercialization of 
alternative fuels that can be used in the existing infrastructure: 
Cellulosic ethanol and biodiesel/renewable diesel. Both of these fuels 
could be introduced more quickly and efficiently if they achieve cost 
advantages from the utilization of waste products as feedstocks.
    The effects of these policies are multiplicative. All should be 
pursued since it is impossible to predict which will be fully 
successful or at what pace, even though all are today either beginning 
commercial production or are nearly to that point. The battery 
development for plug-in hybrids is of substantial importance and should 
for the time being replace the current r&d emphasis on automotive 
hydrogen fuel cells.
    If even one of these technologies is moved promptly into the 
market, the reduction in oil dependence could be substantial. If 
several begin to be successfully introduced into large-scale use, the 
reduction could be stunning. For example, a 50-mpg hybrid gasoline/
electric vehicle, on the road today, if constructed from carbon 
composites would achieve around 100 mpg. If it were to operate on 85 
percent cellulosic ethanol or a similar proportion of biodiesel or 
renewable diesel fuel, it would be achieving hundreds of miles per 
gallon of petroleum-derived fuel. If it were a plug-in version 
operating on either upgraded nickel-metal-hydride or newer lithium-ion 
batteries so that 30-mile trips or more could be undertaken on its 
overnight charge before it began utilizing liquid fuel at all, it could 
be obtaining in the range of 1,000 mpg (of petroleum).
    A range of important objectives--economic, geopolitical, 
environmental--would be served by our embarking on such a path. Of 
greatest importance, we would be substantially more secure.

    The Chairman. Thank you very much, Director Woolsey. We'll 
now have questions of the witnesses. We'll have a 10-minute 
round at this stage, and let me begin the questions by noting, 
Director Woolsey, that when we wrote the article 6 years ago, 
there was great enthusiasm. President Clinton came over to the 
U.S. Department of Agriculture. There was a celebration of a 
breakthrough of energy independence in our country. And I would 
note that I think the enthusiasm only lasted throughout that 
rally at USDA. Even though we tried to make the points that 
you've made today, 6 years later we are now sobered by war in 
the Middle East. And we are sobered by the fact, as you 
suggested, that in the future, events could make oil 
politically unavailable.
    But all the assumptions on which our economy and our 
security, are based have consequences on our external affairs, 
over which we may not have a great deal of control. Ditto for 
the oil wells or lines in Iraq. Even as we try to protect them, 
we are not bringing more oil into the world. We are struggling 
to get back to the levels under Saddam, if one's looking at it 
from just that standpoint. And we have a situation that I 
outlined, and that you have amplified, both of you, that we are 
threatened by Venezuela. Clearly the President had a very rough 
reception in Latin America, not simply because of resistance to 
so-called globalization, but because there's a push-back 
factor. It's based on money. There is a whole lot of it pouring 
into that country. The Russians are trying to pay off all their 
debts in the world. They have a reservoir. Ditto for the 
terrorists, with the $3 or $4 billion that they have financed, 
even while we struggle with our defense budgets in protecting 
our troops.
    You know, the gravity of all this has never sunk in. You 
mentioned today your Prius, and without blatant advertising I 
would say I like my Prius. You can't talk about this without 
thinking about how you physically can make a difference, even 
modest as it may be. And I'd like to have the plug-in feature. 
I would like to have all the features. I hope, as they come 
along, that they'll be available to modest persons like 
ourselves. But in the meanwhile, many of our constituents want 
very large, heavy cars. They would say, ``For my family, I want 
safety. I want protection, and, furthermore, I don't have the 
lifestyle, and I simply don't believe all of these intellectual 
types who come along to hearings like this and who predict 
doomsday. We heard that before.'' Even in the oil industry, 
until recently, people said, ``this is another scare situation 
in which you simply go around and sound the horn.''
    Let me just say, I hope that we're coming to a different 
conclusion. Hearings like this are designed to amplify the 
voices of everybody who wants to talk about the subject. I 
appreciate your practical suggestions. The things we're talking 
about sometimes require almost a generational gap as we wait 
for them.
    Current technology, current things that we have, include 
the harvesting of switchgrass for cellulosic fiber. There is 
lots of agricultural research on this, but very little 
followthrough. Thank goodness, finally, somebody is producing a 
potential gasoline for much, much less than the petroleum-based 
output. Even corn, an expensive product for the moment, has a 
lot of ethanol plants going up in Midwest States, and that will 
be helpful.
    The E-85 business is a nobrainer, but nevertheless the 
legislation I produced modestly says that over the next 10 
years, every car has to be so equipped for the 100 bucks that 
you have mentioned. I would hope that that would go by 
unanimous consent, but I doubt whether it will. Even the most 
modest sort of situation still faces resistance.
    Now, I ask the two of you: What sort of shock value is 
required, so that we will understand the world in which we 
live, and so that these modest suggestions will have some 
hearings, some legislation? You've already made some 
suggestions. I'll turn to Secretary Schlesinger for his try at 
that issue.
    Secretary Schlesinger. The shock value. The public does not 
really get interested in energy problems until such time as the 
price of gasoline runs up. Other than that it is indifferent. 
We move as a country from complacency to panic. Gasoline prices 
are high at the moment, they have risen and it has gotten the 
public's attention. Other than that, to get the understanding 
of the problem, you have supply interruptions so that you have 
gasoline lines, as we had in 1973 with the Arab oil embargo, 
and to some extent with the fall of the Shaw in 1979. That gets 
the public's attention.
    Pointing to the reality that we are--have this trend ending 
the period of vast discoveries of elephants, so called 
elephants, super giant fields in the Middle East doesn't do it, 
until such time as there's some impact. I hesitate to mention 
to you, gentlemen, that politicians don't usually like to be 
associated with bad news. And that is bad news and it is very 
hard to persuade people to emulate Jimmy Carter, and go out 
there and say there's a problem coming.
    Mr. Woolsey. I would think that $3-a-gallon gasoline, 
preceded by 15 of the 19 people who flew the planes on 9/11 
coming from the world's largest oil producer, would have done 
it. But the only thing I can say is that one wants to make 
these steps as palatable as possible. Both financially and in 
terms of people's lifestyles. And I see no reason why we can't 
largely do that. A family may need a large SUV. At one time in 
my life when I was driving boy scouts and soccer teams around, 
I had a big old Chevy Suburban and needed it. Maybe it got 12 
miles to the gallon. But if that Chevy Suburban is running on 
85 percent ethanol and is a hybrid, it could be a 100- to 200-
mile-per-gallon vehicle and still be large and heavy. If you 
make it out of carbon composites it can be large but not so 
heavy and still protect the people who are in it and double the 
mileage again.
    Cellulosic ethanol and renewable diesel are coming along at 
under a $1 a gallon production costs. Double that, as you go 
from production cost to retail price and it is still better 
than $2.50 to $3 a gallon gasoline. And electricity, my 
goodness, if you're using overnight power in most of the 
country, you are using 2-4 cent per kilowatt hour electricity. 
Where the rubber meets the road, that is the equivalent of 25-
cent to 50-cent-a-gallon gasoline.
    So, if people who are worried about the impact of $2.50 to 
$3 gasoline on their lifestyles, they can plug into their 
garage at night and be driving on power that's 10 percent 
essentially of that cost. That's a plus for them. And there are 
a number of things here that are like that. If you can tell the 
farmers of California and Louisiana who grow rice that you've 
got a way that, once they get the rice straw out of their 
fields, which they have to because it's toxic, they can make 
money by turning it into cellulosic ethanol, that's a plus for 
them. It's not a sacrifice.
    So, I think what one wants to try to do here, is use this 
opportunity that's been created by the higher gasoline prices 
and oil prices to make institutional changes with respect to 
things like production credits and so forth, that will get 
these things intrain and point out to people that we're not 
asking you for a sacrifice in a sense. We're trying to do a lot 
to make your lives easier.
    The Chairman. I think this is very, very good advice. I'm 
hopeful that we'll share that advice with other countries. We 
could be in a situation in which the Chinese, the Indians, and 
the European countries finally decide they are desperate. In 
the past, countries that were desperate often took over other 
people's territory. And we could say--well, we're in a small 
world. People are fighting world wars because they don't have 
energy. This could be a very unpalatable situation, even if we 
work out our predicament.
    Mr. Woolsey. This is an issue on which all us oil importers 
are in the same fix together. I would have thought it would 
have been a wonderful major topic for cooperative discussion 
between the President and the Japanese and the Chinese, that we 
could work on programs like this together. We have no reason to 
want China to need lots of oil. We'd rather have them happy 
with using their grass to drive home.
    The Chairman. Exactly. And each one of us who travel find 
hotels in African countries filled with people from India, 
China, as well as our own country, looking for the last acre on 
the preemptive possibility.
    Senator Nelson.
    Senator Bill Nelson. I'll go after Senator Hagel.
    The Chairman. Senator Hagel.
    Senator Hagel. Mr. Chairman, thank you. Senator Nelson, 
thank you. Your observations based on many years of real life 
experience in not only the energy business but all the 
interconnected dynamics to this issue which you each have 
presented, not only forcefully but very clearly brings us to 
the bigger issue here. And that is: How do we then take 
everything that the two of you have talked about in a way where 
we can address it, find solutions for it, develop the policy 
needed to do the things that you're talking about to avert the 
things that are coming down the track at us? Most of us who 
have any knowledge of what we're talking about this morning, 
through our own diligence, through our own travel, through our 
awareness, through our own study listening to people like you, 
are not unaware of the consequences that are coming, for our 
national security, for our international global markets, for 
all that each of you have laid out. We passed an energy bill 
this year; the President signed it into law. Neither of you 
mentioned that, I don't believe. I would like to have you each 
address it because in your opinions does it start to address, 
at all, what we must deal with here, and the decisions we're 
going to have to make in order to avert, I think, an 
international catastrophe that's headed straight at this 
country.
    I wonder whether the President of the United States should 
lift this above where we are now, and essentially put this on 
the same plain as a Manhattan Project which has been mentioned 
before. The seriousness of this I don't think takes second 
place to any issue. And yet, we seem to kind of be sleepwalking 
through this. Yes, we passed the bill, kind of interesting, 
good. I voted for it, I suspect most of my colleagues voted for 
it. It just doesn't, in my opinion, really address what you're 
talking about. And it is complicated. I understand that you 
talked to Secretary Schlesinger about, I think, 17 different 
blends of gasoline that our refineries have to deal with. You 
talk about, Director Woolsey, the Pogo quote. Much of this, I 
think, is self-inflicted because we have not had the courage in 
this country, administrations, Congresses, to deal with this. 
But these hearings, as important as they are, are not going to 
lift this up and do what we need to do to address this impeding 
disaster.
    So my question is: How do we then fix this? How do we 
address it. Maybe we start--you both start with the energy 
bill, whether that's really relevant to what needs to be done. 
Should the President come up here and sit down with the 
leadership of the Congress of the United States, and say now 
we're going to get it above this. We're going to make this a 
Manhattan Project, it is the focus of this country and the 
energy that we're going to harness, private public partnerships 
and get this done.
    Last point I'd make. We hear a lot of talk about, 
especially politicians, energy independence. It's in our press 
releases. We're going to get this country to a point where 
there's energy independence. I'd like to hear from each of you 
whether that's possible. How do you do that. I didn't hear 
anything too encouraging from either one of you today, about 
that's going to happen. We're living in this smoke-filled 
political world of--I don't think that is possible, nor do I 
think that's particularly important. Sure domestic independence 
as much as we can get is, but we live in an interconnected 
world, underpinned by a global economy.
    We need friends, we need alliances, we need relationships. 
I think we're destroying our forestructure in this country 
because of Iraq and because of overcommitments. We're 
destroying our budgets, but yet Rome burns. And as much of that 
is this issue that we're dealing with today.
    So, thank you again for your thoughts, and I would very 
much value your thoughts on my ramblings here and take any 
pieces of those as you would like. But I would like to hear 
from each of you, what we do now to fix the problem. Thank you, 
Mr. Secretary.
    Secretary Schlesinger. The first point is: No, we're not 
going to have energy independence until such time as we move 
away from oil as our principal source of transportation fuel. 
We do not have a long-term energy problem in this country. We 
have a long-term liquids problem. Some of the measures that Jim 
has discussed would help ameliorate that dependency on fuel 
liquids. That goes back to the energy bill and to the comments 
made by Senator Sununu. The energy bill was quite useful. But 
it dealt essentially with shorter term problems: The failure to 
build our infrastructure; the difficulty in stringing out 
transmission lines or pipe lines; it eased a number of those 
problems and that was desirable. But it doesn't, as your 
question implies, deal with this longer term problem that for 
two centuries we have been dependent on the growth of our 
economies and on the rise of living standards of the 
exploitation of a finite resource which is oil.
    How do we deal with that? I would hope that we can focus 
the national attention on this longer term problem and begin to 
prepare now to get through that transition that we face, 20 
years out, 25 years out, I don't know what the date is. That 
depends, of course, on Presidential leadership and the need to 
focus on the realities of that future and possibly to develop a 
number of what I'll call ``mini Manhattan Projects'' because 
there are a range of developments that can help. Hybrid cars, 
plug-ins, look most promising. But that is not going to happen 
unless we are prepared to contravene to some extent, at least, 
the decisions of the marketplace. Senator Sununu's concerns 
about electric power supply are appropriate. But once again 
until we can link up electric power and the transportation 
sector, we are not going to deal with the larger oil problem.
    Senator Hagel. And I appreciate that. And I don't know if 
there is an answer here. But we seem to be stuck here and 
understanding what you're saying, Mr. Secretary, and I agree 
with it. But then, what do you do to get it out of neutral, and 
take it up somewhere where we can start to put all these pieces 
together, bring some leadership, resources, harness, focus 
policy, that's--I think that's the real issue and we may be 
here in 5 years, and hearing the same kind of testimony and 
say, well, one of these days, we'll get at it. And maybe the 
answer is, you said it earlier in your remarks, there has to be 
some crisis. A big crisis. And I think the margins of error 
today in the world are so much different than they were when 
you were Secretary of Energy, to recover from such a crisis, 
that is a very frightening prospect if we don't get serious 
about this, and I think both political parties, the Congress, 
and the President, have this as its greatest responsibility.
    Secretary Schlesinger. That is absolutely right, Senator. 
We need to have a chorus of all political, almost all political 
figures, in Washington and throughout the country, Governors as 
well, pointing to this problem, that is something that we must 
address. And if we don't have that, we are not going to get on 
with these major adjustments that are necessary. We must 
remember and this is--we must remember that our societies have 
difficulty facing distant threats.
    We saw that in the case of Hurricane Katrina. For over a 
century we've known that sooner or later a CAT 4 or CAT 5 would 
hit a city that was below sea level. But it wasn't today's 
problem. Somebody has commented, it's like the fella who plays 
Russian roulette, and he spins five or six times, nothing 
happens, and he puts the revolver aside and says that's not 
dangerous. Well, we've been to two or three of those occasions, 
starting--possibly starting with the Suez crisis in 1956 and 
then, of course, with 1973 and 1979 and we've recovered from 
them and the reaction is like that fella with the revolver and 
Russian roulette.
    Senator Hagel. May I ask the indulgence of the committee if 
Director Woolsey would care to comment, and I appreciate that, 
Senator Nelson, since it's your time.
    Mr. Woolsey. I'll be very brief, Senator Hagel. I agree 
very much with what Jim said with respect to the energy bill. 
Energy independence is really the wrong phrase. We're not 
bothered by importing natural gas from Canada for example. The 
problem is oil, as Jim suggested. And it seems to me that with 
respect to oil, although there are other things that can be 
done, this ``Set America Free'' coalition bill that Senator 
Coleman is a cosponsor of, that's going to be announced at the 
Senate press conference today at noon, has a lot of very 
attractive features in it. Most of the things I detailed here 
today are encouraged in the Senate version of the bill. There's 
a House bill that's a little bit less ambitious with respect to 
targeted reductions. But the Senate bill calls for a 10-
million-barrel-a-day reduction over the course of the next 20 
years. That's approximately half of our oil use today. So given 
the likely growth in our oil use, that would not get us 
completely off imported oil, but it would certainly have a very 
substantial effect.
    So, I would think encouraging these alternative fuels of 
the sort that I've described, and encouraging things like plug-
in hybrids as that proposal does, would get us well started. 
Not every bill is going to be perfect, but that's a good 
beginning.
    Secretary Schlesinger. Encouraging is fine. But we must 
remember that we are working against the grain of the price 
mechanism, or the market economy. And that we are working 
against the predilections of the public and that's what makes 
it hard.
    The Chairman. Thank you, Senator Hagel. And let me mention 
that we have promised Director Woolsey that his participation 
will end at about 11 o'clock. We want to honor that. That will 
be ample time for questions, which may very well conclude our 
hearing.
    Senator Nelson.
    Senator Bill Nelson. Thank you, Mr. Chairman. I thank Mr. 
Secretary and Mr. Director for your public service. I wanted to 
follow up, Mr. Director, on one of your comments. You said 
everything doesn't have to work perfectly, but some of these 
things can work, and we are suddenly at a position that we're 
using half of the gasoline that we are using now. By a 
combination of all the things that you have very articulately 
laid out. Realistically, in what period of time would that be?
    Mr. Woolsey. Well, a lot would have to do with how fast the 
fleet of passenger vehicles turns over. I think the average 
American passenger vehicle is--stays in service for double 
digit years, I don't remember whether it's 10 years or 12 years 
or whatever. If you go to Japan all the cars look new. The 
reason is, they are because the tax system in Japan encourages 
people to get a new vehicle every 3 or 4 years. Changes like 
plug-in hybrids, and even adding flexible fuel vehicle 
capability at low cost generally require a new vehicle. Not a 
new kind of vehicle radically, not new factories but a new 
vehicle.
    So, I think basically, that for these changes the 
technology is here. For everything I've described, the 
technology is either here and being built in prototype, or in 
several cases beginning to come into the market. Take the 
alternative fuels. They're beginning to come into the market. 
So, it's not as if we need a Manhattan Project in the sense of 
inventing something. You would need that if you wanted to 
transition to a hydrogen economy. But for these steps that I've 
described, it's more a matter of encouraging via the tax system 
or otherwise some process whereby people who had older vehicles 
got some sort of a break in terms of turning them in. Most of 
them are gas guzzlers anyway. There is a social good here of 
trying to make it easier financially for people to move into 
new types of vehicles. There are things called feebates, for 
example. The concept is zero net income to the government, but 
requiring higher prices for low-mileage vehicles and lower 
prices for high-mileage vehicles--balancing it out. Some of 
these types of policies can incline the market toward faster 
turnover and toward fuel efficiency, while still doing 
everything one can to make vehicles comfortable for people; the 
kinds of vehicles they want to drive.
    Some people need SUVs. The problem isn't SUVs, if they're 
driving with 85 percent ethanol, and they are plug-in hybrids. 
They're going to be getting hundreds of miles a gallon in their 
big SUV. That's fine. If they need an SUV they should drive an 
SUV. So I think what we ought to do is try to figure out how we 
can accommodate people's needs, encourage financially the 
introduction of this new technology, and encourage relatively 
rapid turnover of the fleet of passenger vehicles. To me that 
would be the combination of policies that would help the most. 
And that moves you in these directions in a few years as 
distinct from 20, 30 years, I think.
    Senator Bill Nelson. And I will define a few years. If we 
really put our mind to it and if we had the Presidential 
leadership, that could be accomplished over the course of 5 to 
10 years.
    Mr. Woolsey. Single digit years, rather than double digit 
years.
    Senator Bill Nelson. And, as a result of that we would be, 
if at the end of that period of time, however long it is. We 
would be almost not dependent on foreign oil, and the question 
is: Are we going to be well on our way to that goal, or 
achieving that goal before the crisis comes that you mentioned, 
Senator Hagel? Because the crisis is coming. We just don't know 
how it's going to come. It may be that a terrorist sinks a 
supertanker in the Strait of Hormuz, or they blow up a 
refinery, or some other--maybe another major hurricane. And why 
we can't get the American public and the American leadership 
focused on this is beyond me. Now, I have spoken till I am blue 
in the face, and I have clearly been influenced by you, Mr. 
Woolsey, because you have shared these ideas before with this 
Senator. You and I come from--all three of us Senators come 
from agricultural States. What a benefit to farmers. You don't 
have to be a corn farmer just to think that you're going to 
benefit from ethanol, because you might be a corn farmer who's 
also participating in the land bank, and, therefore, make that 
unproductive land suddenly productive, not only for your own 
individual financial means, but for the good of the country. 
Then you've got a win/win situation.
    We've got a big timber industry in Florida, all throughout 
the southeastern United States. They go in and harvest the 
trees, but they're cutting off all the limbs. And they stay and 
they decompose right there in the forest. Well, you can use 
that now. You can use the animal waste, and you could go on and 
on and on. And why we are not recognizing this, for the life of 
me, I don't understand. I know it's what they've testified. 
That we have been seduced on cheap oil. And now it is so omni 
present in our system of distribution of energy that it's hard 
to change it, and it's going to take the crisis. It's going to 
force us to change. And that's sad. Now this Senator's going to 
continue to speak out, and I assume my colleague on the basis 
of your leadership, Mr. Chairman, are going to continue to 
speak out and let's see if we can influence whoever's occupying 
the White House for the next 3 years, and for the next years 
after that, whoever the new administration is, to see if we can 
break this stranglehold that we're in. I don't know what else 
to say.
    Mr. Woolsey. I think that says it, Senator.
    Senator Bill Nelson. I'm getting by the way, also--I have 
on order a hybrid. They're not easy to get, I might say. And 
isn't that an interesting commentary. That there is a waiting 
list a mile long. Why aren't the American Automobile 
Distributors supplying the marketplace with the demands of the 
marketplace. And so forth and so forth.
    The Chairman. Thank you very much, Senator Nelson. This 
committee is declaring intellectual independence, even if we 
can't declare energy independence. Let me just parenthetically 
try to conclude, although I would yield to my colleague. He has 
the final comments. I visited Ukraine in early September. That 
country has lots of possibilities. And we have all been excited 
about the revolution in Ukraine that brought democracy. We have 
been troubled by the fact that its government has been in 
conflict about how reforms occur, and how to maintain unity in 
that country of 50 million people. It is a very important 
country.
    But let me just say, the thing that all segments of Ukraine 
politics pointed to, were maps. They drew all sorts of oil 
lines to various countries, or gas, because of a sense of their 
independence conceivably being lost. The people who have the 
spigots and could turn them off could create a cause of war. 
They could create financial chaos in the meanwhile, a physical 
torture of the country. In other words, fortunately we are not 
in that condition. We are talking about a situation down the 
trail, but if you are in that condition as are many countries, 
either Ukraine or those coming to that point in this world. I 
stress again the international implications of our conversation 
today.
    Even as we get our own acts straightened out, and I think 
that we will, we must exude optimism. We must try to work with 
other countries, so that they do not face this crushing sense 
of dependence. This is critical, or we are going to be 
involved, I fear, in military conflict elsewhere in the world, 
trying to mediate either wars or disputes among others who did 
not work things out.
    And that is a very serious problem. For the moment, we're 
talking about competition with the Chinese, the Indians, 
everybody grasping for the last barrel, with the understanding 
that if they don't get it, and the dynamics of their public 
demand a good for their country, they may take means to get it. 
We have a strong need for diplomacy. I don't see it, and this 
is one reason for holding a hearing in this committee on a 
subject that others have talked about, and talked about 
brilliantly.
    I'm very indebted to both of you for remarkable papers, as 
well as for your testimony and for your leadership. And we hope 
to stay closely in touch. Senator Hagel, do you have a final 
comment?
    Senator Hagel. Only that I would say, Mr. Chairman, that 
you have clearly and succinctly framed the issue in the larger 
context of the international scope of this and I think you are 
exactly right in what you say, and I know our two distinguished 
guests here, this morning, understand what we're talking about 
and how you have said it. So thank you, Mr. Chairman. Thank 
you.
    The Chairman. So saying, the hearing is adjourned.
    [Whereupon, at 11:03 a.m., the hearing was adjourned]
                              ----------                              


              Additional Material Submitted for the Record


 Prepared Statement of Senator Russell D. Feingold, U.S. Senator From 
                               Wisconsin

    I thank the chairman for holding today's hearing to consider the 
interplay between our country's energy policy and our foreign policy. 
As I have said many times, we must move away from our dependence on 
oil, most of which comes from foreign soil, if we are to truly meet our 
responsibility to future generations. I would like to thank today's 
witnesses, James Woolsey and James Schlesinger, for appearing before 
the committee. Given their active role in bringing attention to the 
concerns surrounding dependency on foreign oil, I look forward to 
hearing their ideas for avoiding future policy crises through an 
intelligent, well-informed nonfossil-fuel-based energy policy.
                                 ______
                                 

              [From The National Interest, Winter 2005/06]

           Thinking Seriously--About Energy and Oil's Future

                       (By James R. Schlesinger)

    The run-up in gasoline and other energy prices--with its impact on 
consumers' purchasing power--has captured the public's attention after 
two decades of relative quiescence. Though energy mavens argue energy 
issues endlessly, it is only a sharp rise in price that captures the 
public's attention. A perfect storm--a combination of the near-
exhaustion of OPEC's spare capacity, serious infrastructure problems, 
most notably insufficient refining capacity, and the battering that 
Hurricanes Katrina and Rita inflicted on the Gulf Coast have driven up 
the prices of oil and oil products beyond what OPEC can control--and 
beyond what responsible members of the cartel prefer. They, too, see 
the potential for worldwide recession and recognize that it runs 
counter to their interests. But the impact is not limited to economic 
effects. Those rising domestic energy prices and the costs of fixing 
the damage caused by Katrina have weakened public support for the task 
of stabilizing Iraq, thereby potentially having a major impact on our 
foreign policy.
    What is the cause of the run-up in energy prices? Is the cause 
short term (cyclical) or long term? Though the debate continues, the 
answer is both.
    Clearly there have been substantial cyclical elements and 
``contradictions'' at work. For several decades, there has been spare 
capacity in both oil production and refining. Volatile prices for oil 
and low margins in refining have discouraged investment. The 
International Energy Agency, which expresses confidence in the adequacy 
of oil reserves, urges substantially increased investment in new 
production capacity and has recently warned that, in the absence of 
such investment, oil prices will increase sharply.\1\ Such an increase 
in investment clearly would be desirable, but it is more easily said 
than done.
---------------------------------------------------------------------------
    \1\ See World Energy Outlook 2005 (International Energy Agency, 
2005).
---------------------------------------------------------------------------
    In the preceding period of low activity, both the personnel and the 
physical capacity in the oil service industry have diminished--and it 
will take time to recruit and train personnel, to restore capacity and 
to produce equipment. It is interesting to note that the capacity of 
OPEC itself has shrunk in this last quarter-century from 38 million 
barrels per day (BPD) to 31 million BPD. The bulk of the shrinkage 
occurred in Iran, Iraq, and Libya, which have been the targets of both 
U.S. and international sanctions. Though knowledgeable people were 
aware of the shrinkage of spare capacity, it was still thought to be 
adequate--until the recent surge of demand, especially from China and 
the United States, brought us to the point that it was insufficient to 
satisfy the growing demand at prevailing prices.
    Two additional points should be kept in mind. First, crude oil 
production capacity has not been wholly exhausted. The minister of 
petroleum of Saudi Arabia, Ali Naimi, points to the unutilized 1.5 
million BPD in his country and states that he stands ready to serve 
additional buyers. The minister is making something of a rhetorical 
point: For the moment, that additional crude oil production capacity is 
unusable. There is a mismatch between the types of crude available and 
what refiners are able to process. For many decades there has been a 
marked excess of refining capacity--and very low margins in refining. 
There has been only a modest incentive to invest in additional 
capacity. With sufficient light crude apparently available, there has 
been little incentive to invest in capacity to process the heavy, sour 
crudes of the sort still available in Saudi Arabia. That is not to say, 
however, that there has been no investment. Here in the United States, 
far too much of the investment has been channeled into the capacity to 
produce the numerous boutique blends of gasoline, some thirty at last 
count--a foolishness mandated by the different state regulatory bodies.
    Second, it is the international oil companies (IOCs) that have lots 
of cash. Their inclination has been to invest in new production 
capacity, counting only on prices being in the range of $20 to $30 per 
barrel--and not necessarily expecting the current high prices to be 
sustained. But while the IOCs have the cash, it is basically the 
national oil companies (NOCs) that have the reserves. The IOCs seek 
equity oil, and for the most part, equity investment in reserves 
controlled by NOCs has not been permitted. So, there exists another 
mismatch between those who have the resources to invest and the 
availability of suitable places to invest.
    One additional point needs to be made. When gasoline prices are 
rising, public anger rises at least correspondingly. Public anger 
immediately draws the attention of politicians--and here in the United 
States it elicits a special type of political syndrome: Wishful 
thinking. It is notable that in the last election both candidates 
talked about ``energy independence,'' a phrase that traces back to the 
presidency of Richard Nixon and to the reaction to the Arab oil 
embargo. One should not be beguiled by this forlorn hope--and this 
brings us to the real problem for the foreseeable future. What is the 
prospect for oil production in the long term? How does it bear on the 
prospects for ``energy independence''?

                    THE DAY OF RECKONING DRAWS NIGH

    At the end of World War II came the period of the opening-up and 
rapid development of Middle East oil production, notably in the Arabian 
Peninsula. Both Europe and the United States embraced the shift from 
coal to oil as their principal energy source. The beginning of flush 
production in the Middle East coincided with and fostered the 
tremendous expansion of world oil consumption. In the 1950s and 1960s, 
oil production and consumption more than doubled in each decade. Annual 
growth rates in consumption of 8, 9 or 10 percent were typical.
    By contrast, no one, not even the most optimistic observers, 
expects a doubling of production in the decades ahead. The present 
expectation is markedly different. In increasing numbers, now 
approaching a consensus, knowledgeable analysts believe that the world 
will, over the next several decades, reach a peak--or plateau--in 
conventional oil production.\2\ Timing varies among these observers, 
but generally there is agreement on the outcome.\3\
---------------------------------------------------------------------------
    \2\ See, inter alia, Robert L. Hirsch, ``The Inevitable Peaking of 
World Oil Production,'' (Atlantic Council of the United States, October 
2005), which includes a range of different estimates for the peak year. 
For a more comprehensive analysis, see Robert L. Hirsch, Roger Bezdek 
and Robert Wendling, ``Peaking of World Oil Production: Impacts, 
Mitigation and Risk Management'' (National Energy Technology 
Laboratory, February 2005).
    \3\ One exception is a different view of oil's origins developed by 
Soviet scientists. Contrary to the standard view that oil, like coal, 
was laid down long ago and there is a finite amount available, the 
Russians argue that oil is a primordial product continuously produced 
deep in the earth's mantle. It comes to the surface when it can find a 
route to do so. Thus, there may be more oil to be found outside 
sedimentary basins. The theory remains highly conjectural. While this 
alternative view needs to be explored, it is notable that even the 
Russian Oil Ministry pays little attention to it in developing 
projections of Russian production.
---------------------------------------------------------------------------
    The implication is clear. Even present trends are unsustainable. 
Sometime in the decades ahead, the world will no longer be able to 
accommodate rising energy demand with increased production of 
conventional oil.
    It should be emphasized that that would pose not a general ``crisis 
in energy,'' but instead a ``liquids crisis.'' Problems in energy other 
than oil are infrastructure problems, solvable through appropriate 
investment. To talk of a general ``energy crisis'' aside from oil is to 
divert attention from the central long-term problem. Advocating the 
construction of nuclear plants, for example, may be desirable, but it 
does not confront the critical issue of the liquids crisis. Basically, 
there is no inherent problem in generating and transmitting electric 
power, for which the resources are available. The intractable problem 
lies in liquid fuel for land, sea and air transportation.
    We get clear indications regarding oil's future from those in the 
industry. Though the United States and other consuming nations seem to 
believe that Saudi Arabia can and should increase production as demand 
rises, when he was asked at a recent conference whether oil production 
would peak, Ali Naimi, the long-time head of Saudi Aramco, responded 
that it would reach a plateau. It is quite telling that when, in 2004, 
the Energy Information Administration (EIA) projected Saudi production 
in 2025 of some 25 million BPD to satisfy world demand, the Saudis 
demurred--and quite politely indicated that such figures were 
``unrealistic.'' The Saudis have never discussed a figure higher than 
15 million BPD.
    This is why David O'Reilly, CEO of Chevron has stated that the 
``era of easy oil is over.'' Projections by Shell and by BP put that 
plateau several decades out. BP now says that its initials stand for 
``Beyond Petroleum.'' Others, more pessimistic, suggest that the peak 
is much closer at hand--in the next decade. It is interesting to note, 
in light of the recent discussion of Chinese ambitions in acquiring oil 
assets, that the Chinese seem to believe that world production will 
reach a peak around 2012.\4\ So any indication of relative optimism is 
greeted with sighs of relief: The peak is not that near. For example, 
when Daniel Yergin of Cambridge Energy Research Associates recently 
stated that the peak will not come until after 2020, it was greeted 
with something approaching cries of elation: The threat is not that 
immediate!
---------------------------------------------------------------------------
    \4\ See Pang Xiongqi, et al., ``The Challenge Brought by the 
Shortage of Oil and Gas in China and their Countermeasures,'' a 
presentation at an international seminar in Lisbon, 2004. One may 
assume that such presentations do not depart significantly from the 
views of the Chinese government.
---------------------------------------------------------------------------
    What lies behind this now-changed view? In brief, most of the giant 
fields were found forty years or more ago. Only a few have been found 
since 1975. Even today the bulk of production comes from these old and 
now aging giant fields. The Ghawar oilfield in Saudi Arabia, discovered 
in the 1940s, is by itself still producing 7 percent of the world's 
oil. Would that there were more Ghawars, but, alas, that is probably 
not to be.
    Moreover, the announcement by the Kuwait Oil Company in November 
that its Burgan field, the world's second largest, is now past its peak 
output caused considerable consternation. The field's optimal rate is 
now calculated at 1.7 million BPD, not the two million that had been 
forecast for decades ahead. In addition, that announcement has called 
into question the EIA's estimate in its reference case that Kuwait 
would be able to produce five million BPD; it now appears likely that 
the emirate will not be able to produce over three million BPD.
    Recent discoveries have typically been relatively small with high 
decline rates--and have been exhausted relatively quickly. With respect 
to the United States, it has been observed: ``In the old days, we found 
elephants--now we find prairie dogs.''
    A growing consensus accepts that the peak is not that far off. It 
was a geologist, M. King Hubbert, who outlined the theory of peaking in 
the middle of the last century, basing it on the experience that as an 
oilfield passes the halfway point in extracting its reserves, its 
production goes into decline. Hubbert correctly predicted that 
production in the United States itself would peak out around 1970. 
Dissenting from that view are the economists, who have a deep (and 
touching) faith in the market mechanism--and a belief that over time 
market forces can adequately cope with any limits on oil supply.\5\ In 
the extreme, some economists have regarded oil supplies as almost 
inexhaustible.
---------------------------------------------------------------------------
    \5\ Many economists take great comfort from the conviction that 
there is always a price at which markets will clear, and that the 
outcome determined by supply and demand is not only inevitable, but is 
also politically workable and acceptable. An outcome in which the price 
of a crucial commodity like oil rises to a level causing widespread 
economic disruption, along with the political consequences that flow 
from such disruption, turns out to be a secondary consideration, if 
considered at all. One is reminded of the phrase used by Wesley Clair 
Mitchell and Arthur F. Burns in their classic, Measuring Business 
Cycles (1946), when they spoke scornfully of the ``Dreamland of 
Equilibrium.''
---------------------------------------------------------------------------
    The optimistic view is held by the Energy Information 
Administration of the Department of Energy, as well as the 
International Energy Agency. What lies behind it? While it is conceded 
that we have not been finding many new giants, it is contended that 
``additions and extensions'' of existing fields will sustain growth. 
There is some truth in that contention--in that new technologies have 
been the basis of much of the additions to existing fields--and the 
hope is always there that we can increase overall recovery from the 
already discovered fields.
    Optimists are buttressed in their views and are fond of pointing to 
the many earlier statements about ``running out of oil.'' Perhaps the 
most notable example was one by the director of the U.S. Geological 
Survey, George Otis Smith, who suggested in 1920 that we had already 
used up 40 percent of the oil to be found here in this country. That 
was a decade before the discovery in 1930 of the vast East Texas field, 
a bonanza that made oil supply so available that it drove oil prices 
below a dollar a barrel during the 1930s. A recent Chevron 
advertisement makes this substantive point quite dramatically: ``It 
took us 125 years to use the first trillion barrels of oil. We'll use 
the next trillion in 30.''
    Such past failed predictions are far less comforting than the 
journalists who cite them believe. The future may actually be different 
from the past. The optimists, mostly non-experts, seem unable to think 
quantitatively. Things are different now. In 1919 the world consumed a 
modest 386 million barrels of oil. Today the world is consuming some 
thirty billion barrels of oil each year. Statements like that of 
Director Smith were made before we had something approaching a billion 
automobiles worldwide, before we had aircraft and air transportation, 
before agriculture depended upon oil-powered farm machinery.
    Hubbert's peaking theory, based on observation of individual oil 
fields, was static in that it abstracted from improvements in 
technology. It also dealt strictly with conventional oil supplies. One 
notes that today those who are challenging Hubbert's Peak are changing 
the rules of the game. They rightly point to dramatic improvements in 
technology, most notably deep-sea drilling. Somewhat less legitimately, 
they include in their projections all sorts of unconventional oil, like 
the Canadian tar sands and the prospects for shale oil. For example, of 
late, estimates of Canadian oil reserves have jumped by 180 billion 
barrels, now including the tar sands of Alberta. This is not a 
refutation of Hubbert's theory (though it is frequently treated as 
such); it is simply a change in the rules that does not gainsay the 
fear that we will reach a plateau in conventional oil production.
    We must bear in mind that earlier estimates suggested that there 
were some two trillion barrels of conventional oil in the earth's 
crust. Now the estimate has grown to around three trillion. We have now 
consumed over a trillion barrels of oil. As indicated, we are consuming 
oil at the rate of thirty billion barrels a year. If one accepts 
Department of Energy projections, worldwide we would be consuming forty 
billion barrels of oil by 2025.
    At such rates of consumption, the world will soon have reached the 
halfway point--with all that that implies--of all the conventional oil 
in the earth's crust. At that point, the plateau or the peak will be 
near. And such calculations presuppose what cannot be assumed, that all 
the nations with substantial oil reserves will be willing to develop 
those reserves and exploit them at the maximum efficient rate. Both the 
Russian Federation and Saudi Arabia seem to intend to reach a plateau 
that they can sustain for a long time--the Russians at around ten 
million BPD, the Saudis up to but no more than 15 million BPD.
    In thinking about the problem, we need not more rhetoric but, 
instead, quantitative reasoning. We also need to add political wisdom. 
The inability readily to expand the supply of oil, given rising demand, 
will in the future impose a severe economic shock. Inevitably, such a 
shock will cause political unrest--and could impact political systems. 
To be sure, we cannot anticipate with any precision the year or even 
the decade that we will reach that plateau. Yet, as Justice Potter 
Stuart suggested, in seeking to define pornography, we shall know it 
when we see it.
    That brings us to the question of the transition away from 
conventional oil as the principal source of energy for raising living 
standards of the world's population. That transition will be the 
greatest challenge this country and the world will face--outside of 
war. The longer we delay, the greater will be the subsequent trauma. 
For this country, with its 4 percent of the world's population, using 
25 percent of the world's oil, it will be especially severe.\6\ The Day 
of Reckoning is coming, and we need to take measures earlier to cushion 
the shock. To reduce the shock, measures to ameliorate it should start 
ten years earlier at a minimum, given the length of time required to 
adjust the capital stock--and preferably much longer. The longer we 
delay, the greater the subsequent pain.
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    \6\ The high percentage of world production consumed in the United 
States is used by critics to point to our presumed wastefulness. It is, 
however, misleading in that the United States also produces between 20 
and 25 percent of the gross world product. Nonetheless, it does 
appropriately point to our greater vulnerability to a future period of 
oil stringency.
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    Both people and nations find it hard to deal with the inevitable. 
Even though it was long recognized that a Category 4 or Category 5 
hurricane would inevitably strike New Orleans, a city substantially 
below sea level, Hurricane Katrina reminds us that political systems do 
not allocate much effort to dealing with distant threats--even when 
those threats have a probability of 100 percent.
    We should heed a lesson from ancient Rome. In the towns of Pompeii 
and Herculaneum, scant attention was paid to that neighboring volcano, 
Vesuvius, smoking so near to them. It had always been there. Till then, 
it had caused little harm. The possibility of more terrible 
consequences was ignored--until those communities were buried in ten 
feet of ash.

                                  
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