[Senate Hearing 109-950]
[From the U.S. Government Printing Office]


                                                        S. Hrg. 109-950
 
                    OIL DEPENDENCE AND ECONOMIC RISK

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

                                HEARING



                               BEFORE THE



                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE



                       ONE HUNDRED NINTH CONGRESS



                             SECOND SESSION



                               __________

                              JUNE 7, 2006

                               __________



       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

Biden, Hon. Joseph R., Jr., U.S. Senator from Delaware, opening 
  statement......................................................     9
Greenspan, Hon. Alan C., President, Greenspan Associates LLC, 
  Washington, DC.................................................     3
    Prepared statement...........................................     7
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening 
  statement......................................................     1

              Additional Material Submitted for the Record

Podesta, John, president of the Center for American Progress, 
  prepared statement.............................................    39

                                 (iii)



                    OIL DEPENDENCE AND ECONOMIC RISK

                              ----------                              


                        WEDNESDAY, JUNE 7, 2006

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:00 a.m., in 
room SH-216, Hart Senate Office Building, Hon. Richard G. Lugar 
(chairman of the committee) presiding.
    Present: Senators Lugar, Chafee, Coleman, Voinovich, 
Alexander, Sununu, Murkowski, Martinez, Biden, 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. Let me mention at the outset that 
the Chair is aware of the vigorous schedules that Senators 
have, and I want to simply indicate that, for the record, we 
are likely to have a rollcall vote at about 10 a.m., and at 
that point the Chair will declare a recess of about 10 minutes 
in which the Senators may vote, so we'll have that 
interruption.
    Likewise, there will be a joint session of the Congress to 
hear the distinguished President of Latvia, and some Members 
may be joining that situation. The hearing, however, will 
continue here throughout that period of time because this is a 
serious endeavor and we are very grateful to have our 
distinguished witness with us this morning. So I, as the Chair, 
will try to accommodate the Members, but at the outset we know 
that we have these scheduling situations.
    Today the committee meets to continue our examination of 
the geopolitical consequences of energy imbalances and United 
States dependence on energy imports. In previous hearings, we 
have focused on quantifying the costs of U.S. energy dependence 
and examining options for improving our energy security. We 
also have explored in detail how energy is shaping our 
relationships with other nations, including India, China, and 
the Persian Gulf states. Later this month, we will have 
hearings that look at energy in the context of our 
relationships with Latin America and with Russia.
    Today, with the help of our esteemed witness, former 
Federal Reserve Chairman Alan Greenspan, we will have a unique 
opportunity to examine economic effects of United States energy 
dependence. We are delighted that Chairman Greenspan has joined 
us today. He has given extraordinary service to our country 
over many years, and no one speaks with greater authority on 
the United States economy. His presence here, for his first 
Congressional testimony since leaving the Federal Reserve, is a 
testament to the economic importance he ascribes to solving our 
energy dilemma.
    The Foreign Relations Committee has devoted intense 
scrutiny to energy issues because we believe that America's 
national security and our economic well-being depend on 
reducing our dependence on foreign oil and establishing more 
predictable, transparent, and cooperative relationships with 
both producer and consumer nations. To this end, I have 
introduced the Energy Diplomacy and Security Act which would 
strengthen United States diplomatic capabilities related to 
energy and encourage greater international cooperation on 
energy security.
    As Secretary Rice stated before this committee, our 
diplomatic activities around the world are being--and she used 
the term--``warped'' by petro-politics. Important foreign 
policy goals--from accelerating progress in the developing 
world and expanding trade, to preventing weapons proliferation 
and promoting democratic reform--are being undermined by 
international energy imbalances that have weakened our foreign 
policy leverage, while strengthening the hand of oil-rich 
authoritarian governments. In a speech in March at the 
Brookings Institution, I attempted to outline these dynamics in 
greater detail, and I ask those remarks be entered in the 
record.
    [Editor's note.--The aforementinoed speech appears at the 
end of this hearing in the Additional Material Submitted for 
the Record section.]
    As recently as 4 years ago, spare production capacity 
exceeded world oil consumption by about 10 percent. As world 
demand for oil has rapidly increased in the last few years, 
spare capacity has declined to less than 2 percent. Any major 
disruption of oil creates scarcity that will drive prices up. 
Our vulnerability was made clear to Americans after the 
devastation of Hurricanes Katrina and Rita. But even as 
supplies rebounded from those disasters, we experienced a 
continued upward trend in oil prices. Events such as the civil 
unrest in Nigeria, uncertainty over Iran's nuclear program, and 
worries over Venezuelan supply have kept the price of oil above 
$70 a barrel.
    Our capacity to deal with these energy vulnerabilities in a 
foreign policy context is shaped in part by the ability of our 
own economy to adjust to changing energy markets. Eventually, 
because of scarcity, terrorist threats, market shocks, and 
foreign manipulation, the high price of oil will lead to 
enormous investment in, and political support for, 
alternatives. The problem is that by the time sufficient 
motivation comes to the markets, it may be too late to prevent 
the severe economic and security consequences of our oil 
dependence.
    Today, we will have the benefit of Chairman Greenspan's 
insights into the risks of oil dependency to our economic 
prosperity. We are all interested in a clearer picture of how 
current energy prices are affecting our economy, how our 
economy may react to certain types of supply disruptions, and 
what steps we should take as a Nation to reduce the economic 
risks of our energy vulnerability.
    We welcome again Chairman Greenspan to the Foreign 
Relations Committee, and thank him for lending his expertise to 
our ongoing inquiry. At the time that the distinguished ranking 
member comes I'll recognize him, of course, for his opening 
comment and statements, but for the moment we want to make the 
best use of our time and we'd like to proceed directly to our 
distinguished witness. We're delighted to have you and we would 
ask you to proceed.

   STATEMENT OF HON. ALAN C. GREENSPAN, PRESIDENT, GREENSPAN 
                 ASSOCIATES LLC, WASHINGTON, DC

    Dr. Greenspan. Well, thank you very much Mr. Chairman, 
Senators. This morning I shall try to detail how the balance of 
world oil supply and demand has become so precarious that even 
small acts of sabotage or local insurrection have a significant 
impact on prices. American business, to date, has largely 
succeeded in finding productivity improvements that have 
contained energy costs. American households, however, are 
struggling with rising gasoline prices.
    Even before the devastating hurricanes of last summer, 
world oil markets had been subject to a degree of strain not 
experienced for a generation. Oil prices had been persistently 
edging higher since 2002 as increases in global oil consumption 
progressively absorbed the buffer of several million barrels a 
day in excess capacity that stood between production and 
demand. Today, world oil production stands at about 85 million 
barrels a day, and little excess capacity remains. Just how 
much excess capacity and of what quality oil, is a matter of 
debate. But no matter what the precise answer, the buffer 
between supply and demand is much too small to absorb shutdowns 
of even a small part of the world's production. Moreover, 
growing threats of violence to oilfields, pipelines, storage 
facilities, and refineries, especially in the Middle East, have 
increased the private demand to hold oil inventories worldwide. 
Oil users judge they need to be prepared for the possibility 
that at some point a raid will succeed, with a devastating 
impact on supply.
    For most of the history of oil, its producers and consumers 
determined its price. Only those who could physically store 
large quantities of oil had the ability to trade. But important 
advances in
finance have opened the market to a much larger number of 
participants. There has been a major upsurge in over-the-
counter trading of oil futures and other commodity derivatives. 
Thus, when in the last couple of years it became apparent that 
the world's oil industry was not investing enough to expand 
crude-oil production capacity quickly enough to meet the rising 
demand, increasing numbers of hedge funds and other 
institutional investors began bidding for oil. They accumulated 
it in substantial net long positions in crude oil futures, 
largely in the over-the-counter market. These net long futures 
contracts, in effect, constituted a bet that oil prices would 
rise. The sellers of those contracts to investors, when all of 
the offsetting claims are considered, are of necessity, the 
present owners of the billions of barrels of private 
inventories of oil held throughout the world--namely, the 
producers and consumers.
    Even though inventories of oil have risen significantly in 
recent years, persistent upward price movements have made it 
apparent that the rise in investors' ownership claims to the 
world's oil inventories has likely exceeded the inventory 
increase. This implies a reduction in the unencumbered 
inventory holdings of producers and consumers. In other words, 
some part of the oil in the world's storage tanks and pipelines 
is spoken for by investors. The extent of the surge in 
participation by financial institutions in claims on real 
barrels of oil is reflected in the near tripling of the 
notional value of commodity derivatives (excluding precious 
metals) during the four quarters of 2005 reported by U.S. 
commercial banks. Most of those contracts are for oil. The 
accumulation of net long positions in oil on the New York 
Mercantile Exchange by noncommercial traders, which is to say 
by investors, has exhibited a similar pattern.
    The new participants, investors, and speculators in the 
world's 2 trillion-a-year oil market are hastening the 
adjustment process that has become so urgent with the virtual 
elimination of the world supply buffer. With the demand from 
the investment community, oil prices have moved up sooner than 
they would have otherwise. In addition, there has been a large 
increase in oil inventories. In response to higher prices, 
producers have increased production dramatically and some 
consumption has been scaled back. Even though crude oil 
productive capacity is still inadequate, it too has risen 
significantly over the past 2 years in response to price.
    Hypothetically, if we still had the 10 million barrels a 
day of spare capacity that existed two decades ago, neither 
surges in demand nor temporary shutdowns of output from 
violence, hurricanes, or unscheduled maintenance would be 
having much, if any, impact on price. Returning to such a level 
of spare capacity appears wholly out of reach for the 
foreseeable future, however. This is not because there is any 
shortage of oil in the ground. The problem is that aside from 
Saudi-Aramco, few, if any, national oil companies which own 
most of the world's proved oil reserves are investing enough of 
their surging cash flow to convert the reserves into crude oil 
productive capacity. Only Saudi-Aramco appears sufficiently 
concerned, at least publicly, that high oil prices will reduce 
the long-term demand for oil, which could significantly 
diminish the value of Saudi Arabia's--or indeed, any 
country's--oil reserves.
    Although outlays on productive capacity are rising, the 
significant proportion of oil revenues held as financial assets 
suggests that many governments perceive that the benefits of 
investing in additional capacity to meet rising world oil 
demand are limited. Moreover, much oil revenue has been 
diverted to meet the perceived high-priority needs of rapidly 
growing populations. Unless those policies, political 
institutions, and attitudes change, it is difficult to envision 
a rate of reinvestment by these economies adequate to meet 
rising world oil demand. Some members of the Organization of 
Petroleum Exporting Countries (OPEC) have recently announced 
expansion plans. But how firm such plans are, is difficult to 
judge. They and other nations have rebuffed offers by 
international oil companies to help tap their reserves. 
Opportunities to expand oil production elsewhere are limited to 
a few regions, notably the former Soviet Union.
    Besides feared shortfalls in crude oil capacity, the 
adequacy of world refining capacity has become worrisome as 
well. Over the past decade, crude oil production has risen 
faster than refining capacity. A continuation of this trend 
would soon make lack of refining capacity the binding 
constraint on growth in oil use. This may already be happening 
in certain grades of oil, given the growing mismatch between 
the heavier and more sour content of world crude oil production 
and the rising world demand for lighter, sweeter petroleum 
products.
    There is thus a special need to add adequate coking and 
desulphurization capacity to convert the average gravity and 
sulphur content of much of the world's crude oil to the lighter 
and sweeter needs of product markets, which are increasingly 
dominated by transportation fuels that must meet ever more 
stringent environmental requirements. Yet, the expansion and 
modernization of world refineries are lagging. For example, no 
new refinery has been built in the United States since 1976. 
The consequence of lagging modernization is reflected in a 
significant widening of the price spread between the higher-
priced light sweet crudes such as Brent, which are easier to 
refine, and the heavier crudes such as Maya, which are not.
    To be sure, refining capacity does continue to expand, 
albeit too gradually, and oil exploration and development is 
continuing, even in industrial countries. Conversion of the 
vast Athabasca oil sands reserves in Alberta to productive 
capacity, while slow, has made this unconventional source of 
oil highly competitive at current market prices. However, 
despite improved technology and high prices, additions to 
proved reserves in the developed world have not kept pace with 
production; so those reserves are being depleted.
    The history of world petroleum is one of a rapidly growing 
industry in which producers have sought to provide consumers 
with stable prices to foster the growth of demand. In the first 
decade of the 20th century, pricing power was firmly in the 
hands of Americans. Even after the breakup of the Standard Oil 
monopoly in 1911, pricing power remained with the United 
States--first with the U.S. oil companies and later with the 
Texas Railroad Commission, which would raise limits on output 
to suppress price spikes and cut output to prevent sharp price 
declines.
    Indeed, as late as the 1950s, crude oil production in the 
United States (more than 40 percent of which was in Texas) 
still accounted for more than half of the world total. In 1951, 
excess Texas crude was poured into the market to contain the 
impact on oil prices of the nationalization of Iranian oil. 
Excess American oil was again released to the market to counter 
the price pressures induced by the Suez crisis of 1956 and the 
Arab-Israeli War of 1967.
    American oil's historical role ended in 1971, when rising 
world demand finally exceeded the excess crude oil capacity of 
the United States. At that point, the marginal pricing of oil 
abruptly shifted--at first to a few large Middle East producers 
and later to market forces broader than they, or anyone, can 
contain.
    To capitalize on their newly acquired pricing power in the 
early 1970s, many producing nations, especially in the Middle 
East, nationalized their oil companies. The full magnitude of 
the pricing power of the nationalized companies became evident 
in the aftermath of the oil embargo of 1973. During that 
period, posted crude oil prices at Ras Tanura, Saudi Arabia, 
rose to more than $11 per barrel, far above the $1.80 per 
barrel that had been unchanged from 1961 to 1970. The further 
surge in oil prices that accompanied the Iranian Revolution in 
1979 eventually drove up prices to $39 per barrel by February 
1981. That translates to $76 per barrel in today's prices.
    The higher prices of the 1970s abruptly ended the 
extraordinary growth of U.S. and world consumption of oil and 
the increased intensity of its use which were hallmarks of the 
decades following World War II. Since the more than tenfold 
increase in crude oil prices between 1972 and 1981, world oil 
consumption per dollar of real GDP equivalent of global gross 
domestic product (GDP) has declined by approximately one-third.
    In the United States, between 1945 and 1973, consumption of 
petroleum products rose at a startling average annual rate of 
4.5 percent, well in excess of growth of our real GDP. However, 
between 1973 and 2006, U.S. oil consumption grew, on average, 
at only a half a percent per year, far short of the rise in 
real GDP. In consequence, the ratio of U.S. oil consumption to 
GDP fell by half.
    Much of the decline in the ratio of oil use to real GDP in 
the United States has resulted from growth in the proportion of 
GDP composed of services, high-tech goods, and other less oil-
intensive industries. The remainder of the decline is due to 
improved energy conservation: greater home insulation, better 
gasoline mileage, more efficient machinery, and streamlined 
production processes. These ongoing trends seem to have 
intensified of late with the sharp, recent increases in oil 
prices.
    To date, it is difficult to find serious erosion in world 
economic activity as a consequence of sharply higher oil 
prices. Indeed, we have just experienced one of the strongest 
global economic expansions since the end of World War II. The 
United States, especially, has been able to absorb the huge 
implicit tax of rising oil prices so far. However, recent data 
indicate we may finally be experiencing some impact.
    Clearly, if the current almost nonexistent supply buffer 
were significantly increased through a step-up in supply or a 
stepdown in consumption, oil prices would fall, perhaps 
sharply. This would likely occur even if there were no decrease 
in the threat to oil facilities from attacks or hurricanes. A 
large enough buffer could absorb such contingencies with modest 
impact on price.
    But for good reason, holders of claims to the existing 
private inventories of oil apparently do not foresee a 
likelihood of change sufficient to alter the current outlook. 
This does not mean that oil prices will necessarily move 
higher, however. All of the concerns about future contingencies 
are already discounted in today's spot price. It will require a 
change in the outlook one way or the other to move crude oil 
prices. History tells us that will happen--often.
    The U.S. economy has been able to absorb the huge impact of 
rising oil prices with little consequence to date because it 
has become far more flexible over the past three decades owing 
to deregulation and globalization. Growing protectionism would 
undermine that flexibility and make our Nation increasingly 
vulnerable to the vagaries of the oil market.
    Current oil prices over time should lower to some extent 
our worrisome dependence on petroleum. Still higher oil prices 
will inevitably lead to more vehicle transportation to hybrids, 
and despite the inconvenience, plug-in hybrids. Corn ethanol, 
though valuable, can play only a limited role, because its 
ability to displace gasoline is modest at best. But cellulosic 
ethanol, should it fulfill its promise, would help to wean us 
of our petroleum dependence, as could clean coal and nuclear 
power. With those developments, oil in the years ahead will 
remain an important element of our energy future, but it need 
no longer be the dominant player.
    Thank you very much, Mr. Chairman, I look forward to your 
questions.
    [The prepared statement of Dr. Greenspan follows:]

  Prepared Statement of Hon. Alan C. Greenspan, President, Greenspan 
                     Associates LLC, Washington, DC

    Mr. Chairman, Senator Biden, and members of the committee. This 
morning I shall try to detail how the balance of world oil supply and 
demand has become so precarious that even small acts of sabotage or 
local insurrection have a significant impact on oil prices. American 
business, to date, has largely succeeded in finding productivity 
improvements that have contained energy costs. American households, 
however, are struggling with rising gasoline prices.
    Even before the devastating hurricanes of last summer, world oil 
markets had been subject to a degree of strain not experienced for a 
generation. Oil prices had been persistently edging higher since 2002 
as increases in global oil consumption progressively absorbed the 
buffer of several million barrels a day in excess capacity that stood 
between production and demand. Today world oil production stands at 
about 85 million barrels a day, and little excess capacity remains. 
Just how much excess capacity, and of what quality oil, is a matter of 
debate. But no matter what the precise answer, the buffer between 
supply and demand is much too small to absorb shutdowns of even a small 
part of the world's production. Moreover, growing threats of violence 
to oilfields, pipelines, storage facilities, and refineries, especially 
in the Middle East, have increased the private demand to hold oil 
inventories worldwide. Oil users judge they need to be prepared for the 
possibility that at some point a raid will succeed with a devastating 
impact on supply.
    For most of the history of oil, its producers and consumers 
determined its price. Only those who could physically store large 
quantities of oil had the ability to trade. But important advances in 
finance have opened the market to a much larger number of participants. 
There has been a major upsurge in over-the-counter trading of oil 
futures and other commodity derivatives. Thus, when in the last couple 
of years it became apparent that the world's oil industry was not 
investing enough to expand crude oil production capacity quickly enough 
to meet rising demand, increasing numbers of hedge funds and other 
institutional investors began bidding for oil. They accumulated it in 
substantial net long positions in crude oil futures, largely in the 
over-the-counter market. These net long futures contracts, in effect, 
constituted a bet that oil prices would rise. The sellers of those 
contracts to investors, when all of the offsetting claims are 
considered, are of necessity the present owners of the billions of 
barrels of private inventories of oil held throughout the world--
namely, the producers and consumers.
    Even though inventories of oil have risen significantly in recent 
years, persistent upward price movements have made it apparent that the 
rise in investors' ownership claims to the world's oil inventories has 
likely exceeded the inventory increase. This implies a reduction in the 
unencumbered inventory holdings of producers and consumers. In other 
words, some part of the oil in the world's storage tanks and pipelines 
is spoken for by investors. The extent of the surge in participation by 
financial institutions in claims on real barrels of oil is reflected in 
the near tripling of the notional value of commodity derivatives 
(excluding precious metals) during the four quarters of 2005 reported 
by U.S. commercial banks. Most of those contracts are for oil. The 
accumulation of net long positions in oil on the New York Mercantile 
Exchange by noncommercial traders, which is to say by investors, has 
exhibited a similar pattern.
    The new participants, investors and speculators, to the world's $2 
trillion-a-year oil market are hastening the adjustment process that 
has become so urgent with the virtual elimination of the world supply 
buffer. With the demand from the investment community, oil prices have 
moved up sooner than they would have otherwise. In addition, there has 
been a large increase in oil inventories. In response to higher prices, 
producers have increased production dramatically and some consumption 
has been scaled back. Even though crude oil productive capacity is 
still inadequate, it too has risen significantly over the past 2 years 
in response to price.
    Hypothetically, if we still had the 10 million barrels a day of 
spare capacity that existed two decades ago, neither surges in demand 
nor temporary shutdowns of output from violence, hurricanes, or 
unscheduled maintenance would be having much, if any, impact on price. 
Returning to such a level of spare capacity appears wholly out of reach 
for the foreseeable future, however. This is not because there is any 
shortage of oil in the ground. The problem is that aside from Saudi-
Aramco, few, if any, national oil companies which own most of the 
world's proved oil reserves are investing enough of their surging cash 
flow to convert the reserves into crude oil productive capacity. Only 
Saudi-Aramco appears sufficiently concerned, at least publicly, that 
high oil prices will reduce the long-term demand for oil, which could 
significantly diminish the value of Saudi Arabia's--or indeed, any 
country's--oil reserves.
    Although outlays on productive capacity are rising, the significant 
proportion of oil revenues held as financial assets suggests that many 
governments perceive that the benefits of investing in additional 
capacity to meet rising world oil demand are limited. Moreover, much 
oil revenue has been diverted to meet the perceived high-priority needs 
of rapidly growing populations. Unless those policies, political 
institutions, and attitudes change, it is difficult to envision a rate 
of reinvestment by these economies adequate to meet rising world oil 
demand. Some members of the Organization of Petroleum Exporting 
Countries (OPEC) have recently announced expansion plans. But how firm 
such plans are is difficult to judge. They and other nations have 
rebuffed offers by international oil companies to help tap their 
reserves. Opportunities to expand oil production elsewhere are limited 
to a few regions, notably the former Soviet Union.
    Besides feared shortfalls in crude oil capacity, the adequacy of 
world refining capacity has become worrisome as well. Over the past 
decade, crude oil production has risen faster than refining capacity. A 
continuation of this trend would soon make lack of refining capacity 
the binding constraint on growth in oil use. This may already be 
happening in certain grades of oil, given the growing mismatch between 
the heavier and more sour content of world crude oil production and the 
rising world demand for lighter, sweeter petroleum products.
    There is thus a special need to add adequate coking and 
desulphurization capacity to convert the average gravity and sulphur 
content of much of the world's crude oil to the lighter and sweeter 
needs of product markets, which are increasingly dominated by 
transportation fuels that must meet ever more stringent environmental 
requirements. Yet the expansion and modernization of world refineries 
are lagging. For example, no new refinery has been built in the United 
States since 1976. The consequence of lagging modernization is 
reflected in a significant widening of the price spread between the 
higher-priced light sweet crudes such as Brent, which are easier to 
refine, and the heavier crudes such as Maya, which are not.
    To be sure, refining capacity does continue to expand, albeit too 
gradually, and oil exploration and development is continuing, even in 
industrial countries. Conversion of the vast Athabasca oil sands 
reserves in Alberta to productive capacity, while slow, has made this 
unconventional source of oil highly competitive at current market 
prices. However, despite improved technology and high prices, additions 
to proved reserves in the developed world have not kept pace with 
production; so those reserves are being depleted.
    The history of world petroleum is one of a rapidly growing industry 
in which producers have sought to provide consumers with stable prices 
to foster the growth of demand. In the first decade of the 20th 
century, pricing power was firmly in the hands of Americans. Even after 
the breakup of the Standard Oil monopoly in 1911, pricing power 
remained with the United States--first with the U.S. oil companies and 
later with the Texas Railroad Commission, which would raise limits on 
output to suppress price spikes and cut output to prevent sharp price 
declines.
    Indeed, as late as the 1950s, crude oil production in the United 
States (more than 40 percent of which was in Texas) still accounted for 
more than half of the world total. In 1951, excess Texas crude was 
poured into the market to contain the impact on oil prices of the 
nationalization of Iranian oil. Excess American oil was again released 
to the market to counter the price pressures induced by the Suez crisis 
of 1956 and the Arab-Israeli War of 1967.
    American oil's historical role ended in 1971, when rising world 
demand finally exceeded the excess crude oil capacity of the United 
States. At that point, the marginal pricing of oil abruptly shifted--at 
first to a few large Middle East producers and later to market forces 
broader than they, or anyone, can contain.
    To capitalize on their newly acquired pricing power in the early 
1970s, many producing nations, especially in the Middle East, 
nationalized their oil companies. The full magnitude of the pricing 
power of the nationalized companies became evident in the aftermath of 
the oil embargo of 1973. During that period, posted crude oil prices at 
Ras Tanura, Saudi Arabia, rose to more than $11 per barrel, far above 
the $1.80 per barrel that had been unchanged from 1961 to 1970. The 
further surge in oil prices that accompanied the Iranian Revolution in 
1979 eventually drove up prices to $39 per barrel by February 1981. 
That translates to $76 per barrel in today's prices.
    The higher prices of the 1970s abruptly ended the extraordinary 
growth of U.S. and world consumption of oil and the increased intensity 
of its use which were hallmarks of the decades following World War II. 
Since the more than tenfold increase in crude oil prices between 1972 
and 1981, world oil consumption per real dollar equivalent of global 
gross domestic product (GDP) has declined by approximately one-third.
    In the United States, between 1945 and 1973, consumption of 
petroleum products rose at a startling average annual rate of 4\1/2\ 
percent, well in excess of growth of our real GDP.
    However, between 1973 and 2006, U.S. oil consumption grew, on 
average, at only \1/2\ percent per year, far short of the rise in real 
GDP. In consequence, the ratio of U.S. oil consumption to GDP fell by 
half.
    Much of the decline in the ratio of oil use to real GDP in the 
United States has resulted from growth in the proportion of GDP 
composed of services, high-tech goods, and other less oil-intensive 
industries. The remainder of the decline is due to improved energy 
conservation: greater home insulation, better gasoline mileage, more 
efficient machinery, and streamlined production processes. These 
ongoing trends seem to have intensified of late with the sharp, recent 
increases in oil prices.
    To date, it is difficult to find serious erosion in world economic 
activity as a consequence of sharply higher oil prices. Indeed, we have 
just experienced one of the strongest global economic expansions since 
the end of World War II. The United States, especially, has been able 
to absorb the huge implicit tax of rising oil prices so far. However, 
recent data indicate we may finally be experiencing some impact.
    Clearly, if the current almost nonexistent supply buffer were 
significantly increased through a step-up in supply or a stepdown in 
consumption, oil prices would fall, perhaps sharply. This would likely 
occur even if there were no decrease in the threat to oil facilities 
from attacks or hurricanes. A large enough buffer could absorb such 
contingencies with modest impact on price.
    But for good reason, holders of claims to the existing private 
inventories of oil apparently do not foresee a likelihood of change 
sufficient to alter the current outlook. This does not mean that oil 
prices will necessarily move higher, however. All of the concerns about 
future contingencies are already discounted in today's spot price. It 
will require a change in the outlook one way or the other to move crude 
oil prices. History tells us that will happen--often.
    The U.S. economy has been able to absorb the huge impact of rising 
oil prices with little consequence to date because it has become far 
more flexible over the past three decades owing to deregulation and 
globalization. Growing protectionism would undermine that flexibility 
and make our Nation increasingly vulnerable to the vagaries of the oil 
market.
    Current oil prices over time should lower to some extent our 
worrisome dependence on petroleum. Still higher oil prices will 
inevitably move vehicle transportation to hybrids, and despite the 
inconvenience, plug-in hybrids. Corn ethanol, though valuable, can play 
only a limited role, because its ability to displace gasoline is modest 
at best. But cellulosic ethanol, should it fulfill its promise, would 
help to wean us of our petroleum dependence, as could clean coal and 
nuclear power. With those developments, oil in the years ahead will 
remain an important element of our energy future, but it need no longer 
be the dominant player.

    The Chairman. Thank you very much, Chairman. I'd like to 
recognize now the distinguished ranking member of our 
committee, Senator Biden, for his opening statement.

 OPENING STATEMENT OF HON. JOSEPH R. BIDEN, JR., U.S. SENATOR 
                         FROM DELAWARE

    Senator Biden. Dr. Greenspan, thank you very much for being 
here. Today's headlines obviously make it clear just how 
important this hearing is. On the one hand, we have concern 
about inflation, led by the petroleum-based energy costs that 
has increased 61 percent at an annual rate in the first quarter 
of this year. And on the other hand, we have our financial 
markets roiled by the worry that the Federal Reserve's 
prescription--continuing a course of 15 straight rate 
increases--could put the brakes on an economy that is already 
slowing down some.
    We could not have clearer evidence, in my view, of our 
country's vulnerability to oil prices. I am pleased to be 
working with my colleague, the chairman of the committee, on a 
series of hearings relating to the cost of our dependence on 
imported oil, and joining with him and others in a search for 
alternatives.
    But today, it's a privilege to hear you. You've guided this 
Nation's monetary policy for almost two decades, and through a 
wide variety of domestic and international challenges, and 
through profound changes in our economy. In my view, no one in 
the world who spoke on economic affairs was more listened to 
than you were, Mr. Chairman. Not always understood, but 
listened to. It's a little daunting to have you before this 
committee, someone of your stature. You yourself once said, 
``If I turn out to be particularly clear, you probably 
misunderstood what I said.'' So your pronouncements, although 
they seem clear to me today, then as the Chairman has said, 
they can still move markets. And we appreciate your candor and 
your clarity and some guidance for us in the challenges we 
face.
    The last time you appeared before this committee, Mr. 
Chairman, you were facing--we were facing--the Pesos crisis, 
the first wave of international financial crises in the late 
1990s. The topic of today's hearing presents threats of a 
similar magnitude to our economy, in our view, and to our 
security. Today we're concerned about fundamentals, about the 
fuels that make our economy run, about the threats to our 
economic security, because we do not control--as you've pointed 
out very starkly, by going through the historical analysis--we 
do not control access to those fuels like we did in the 1950s 
and 1960s. And we're looking for ways that we can move to a 
more secure source in the near future.
    And it seems to me our failure to set a national energy 
policy and reduce our consumption of oil has handcuffed our 
foreign policy and weakened us economically. Global oil 
consumption--especially with the extremely rapid modernization 
of countries like China and India--is growing faster than the 
discovery and development of new supplies. And supply has never 
been so tight, as you point out, relative to demand. We now 
live in a world that consumes 85 million barrels every day. 
That's an enormous amount, and meanwhile the world's spare 
production capacity has shrunk to 2 percent of demand. And that 
means the slightest thing--a terrorist attack in Saudi Arabia, 
talk tough on Iran, violence in Nicaragua, even a bad storm in 
the Gulf--can cause oil markets to panic, for reasons you've 
stated in terms of it being controlled by private investors as 
well.
    Here in the Foreign Relations Committee, we deal every day 
in foreign policy implications of our dependence on imported 
fossil fuels. Most obviously, there are complex relationships 
with what Michael Mandelbaum calls, and others have called, the 
``Axis of Oil''--the oil-rich regimes around the world.
    This dependence has a pernicious effect, in my view, on our 
foreign policy. It literally helps us fuel terrorism--the very 
terrorism we're fighting--because some of the dollars we spend 
on crude wind up in the pockets of the radicals that we are 
worried about. It limits our options and limits our leverage in 
dealing with national security threats, because oil-rich 
countries can stand up to us and oil-dependent countries are 
afraid to stand with us.
    And it undercuts our hopes, in my view, of advancing 
democracy and freedom because repressive regimes, swimming in a 
sea of high-priced oil, can resist pressures to reform as we 
see right now in Iran.
    To cite just one example, Iran's most recent threats to 
disrupt oil exports--as a direct response to our attempts to 
deal with their nuclear ambitions--was immediately translated 
into an increase in oil prices, a jump to $73 a barrel. Not 
just economic forces, but political conflicts, drive the 
markets.
    I will not repeat what the Chairman has often mentioned 
about the ability of nation's to essentially indicate, or 
impact the security of other countries by threatening to and/or 
curtailing access to oil. It has a powerful, powerful impact.
    So we're here today to get a chance to talk to you about 
the economic impact of oil and gas prices. And during your long 
tenure, Mr. Chairman, oil and gas prices spiked dangerously 
several times.
    So you've repeatedly warned us about the potential impact 
of those fundamental energy prices on inflation as they worked 
their way through the economy, as well as the potential to slow 
economic activity as consumers and producers move limited 
dollars from other sectors to cover energy costs.
    In your last Monetary Report to Congress last year, Dr. 
Greenspan, you placed significant stress on the potential 
problems that could arise from a jump in energy prices.
    You reported then that the impact that could have on 
consumer spending--the hit to the average American pocketbook--
would depend on how much incomes were growing. On that front, 
the news is not encouraging. Yesterday's, I guess it was 
yesterday's, June 2nd Wall Street Journal piece on data 
suggests a rise in energy prices are hurting low income 
shoppers.
    On that front, as I said, it depends on how incomes are 
growing. The last reports from the job market show yet another 
disappointingly small increase in the number of Americans 
finding work. And the persistence of a very troubling notion of 
stagnation in wages. Something, it seems to me, is not going 
right. Thus far, in the economic recovery when the job picture 
is as weak at it appears to be, I wish you--I'm going to ask 
you to speak to that, if you will. Wages are still flat, up 
just a penny an hour. That's 40 cents for a 40-hour work week. 
And the cost of living, including the cost of gasoline, and 
everything made and transported with petroleum continues to 
grow faster than incomes.
    The cost of gasoline went up 2 cents a gallon last week. 
That's over 40 cents more for every 20 gallons of gas pumped. 
That means that the higher price of gasoline really hurt low-
income and middle-income families. Gas is pretty much a fixed 
cost for the average American family who can't switch cars or 
move closer to work. For them, it's is not an abstract 
discussion.
    As I said, I referenced the Wall Street Journal article 
saying ``Rising Energy Prices Pinch Low-Income Shoppers.'' Slow 
growth, flat wages--American households are part of the context 
we need to understand when we talk about the impact of oil 
prices.
    In the bigger picture, our dependence on foreign oil feeds 
a cycle of dependence on foreign lenders to finance our 
dependence on foreign oil. Our trade deficit, which you've 
often spoke to, through March of this year, is $192 billion--
that's 6 percent of our economy. Thirty percent of that 
deficit--$65 billion--was the cost of our petroleum imports. 
That number could grow, I'm told, to as high as $100 billion 
this year.
    To finance that trade deficit, we are borrowing from other 
countries, and supply of our debt will eventually outrun our 
demand, the way things are going. As we are already seeing, 
that means a weaker dollar, making imported oil--and the 
thousands of consumer goods from cars to computers--even more 
expensive.
    Until we do something about our dependence on imported oil, 
we will not be in control, in our view, of our economic 
security. Will we, are we going to be able to restore our 
energy security by reducing our consumption of oil? Will we, 
can we, how do we make the most progress in the shortest amount 
of time? If we focus on fuels that we put in our cars and 
trucks, 70 percent of the oil we consume is used in 
transportation. Can we immediately begin to reduce oil 
consumption by switching to fuels that we can grow at home and 
making better, and more efficient use of our energy that we 
consume?
    You pointed out that ethanol is not the answer, but it 
seems to me ethanol may be a way to begin to jump-start this 
process, as a logical element of the process of moving to 
cellulosic fuels and other fuels. I agree with you that we have 
to move faster in clean coal technology and nuclear energy.
    But it seems to me we have to make sure, first of all, that 
we're driving good cars by increasing fuel efficiency. By 
requiring that every car sold in the United States is a flex-
fuel vehicle that can run on alternative fuels like E85--85 
percent ethanol.
    Second, it seems to me, we need to make sure that we're 
using good fuels by requiring all major oil companies to add 
alternative fuel pumps to at least half of the gas stations 
they own.
    And finally, it seems to me, we need to put in place the 
market and the infrastructure for alternative fuels so that as 
new, more advanced fuel technologies like cellulosic and 
ethanol become more widely available, with the available cars 
and the pumps that we, hopefully, have already begun to have 
put in place.
    So, we've asked you here today to help us understand better 
the shape we're in today, and to draw on your experience, which 
is extensive, to understand how we manage this move into the 
future. So Doctor, your statement was enlightening. I'm looking 
forward to being able to ask you questions, and Mr. Chairman, I 
thank you for the courtesy of allowing me to make my statement 
at this point. Thank you again, Mr. Chairman.
    The Chairman. Thank you very much, Senator Biden. Let me 
just say that the Chair will try to make a pragmatic choice. We 
have a number of members here, and as I indicated earlier on 
we'll have a rollcall vote at 10:00, and of course, some 
members will be attending the joint session, which all members 
have been asked to attend.
    So with the concurrence of the ranking member, I'm going to 
suggest we have, perhaps, besides the two of us at the moment, 
maybe a 5 minute round so as many Senators can be heard during 
that period, and I plan to return after the vote and continue 
on, and the ranking member will too, so we can ask our 
questions more extensively then.
    So, we'll try a 5-minute round and begin with Senator 
Chafee.
    Senator Chafee. Thank you, Mr. Chairman, very much. And 
I've got my question here. In your prepared statement you said 
that much oil revenues have been diverted to meet the perceived 
high priority needs of rapidly growing populations, and maybe 
you could talk about what's happening in China and India. Those 
of us that have been to China see all the bicyclists, and I'm 
sure the Chinese are going to gradually change from bicycles to 
petroleum-based vehicles. One point three billion people, in 
India also, a billion people. How's that, what effect is that 
going to have on this issue?
    Dr. Greenspan. Well, Senator, as you're aware, the motor 
vehicle culture in China is gaining very rapidly. All you have 
to do is remember that it wasn't that long ago when there were 
traffic jams in Beijing with bicycles. And now it's just car to 
car, bumper to bumper, and they're producing cars at a very 
rapid pace and indeed coupled with their imports they're 
adding--the actual sales level is quite high.
    The problem in China is, even before this surge, is that 
their oil efficiency is half ours. Namely, the ratio of oil 
consumption to GDP is twice that of the United States, and 
there's a great deal of inefficiency, and obviously since their 
basic desire is essentially to move as fast as they can in the 
manufacturing area, the issue of fuel efficiency is not their 
highest priority even though they are aware of it, and 
obviously increasingly are aware of environmental problems that 
affect them.
    There's no question that fuel efficiency will increase in 
China as the economy gets more sophisticated. But because it 
starts at such a highly inefficient level, and because its 
growth rate is far faster than the world average, it's a major 
demander of oil and indeed it's the second largest consumer in 
the world and probably--talking about the contribution to the 
increase in the demand--it is by far the dominant force, and is 
very likely to be until they run into really serious congestion 
with respect to car saturation. But at the moment, the demand 
for gasoline is going up quite significantly.
    Senator Chafee. And India is similar? China and India have 
their own reserves, so as they come onto the market, 
transportation is 65 percent of our consumption--as these two 
colossus come onto the market, supply and demand has to be a 
factor.
    Dr. Greenspan. India has got, of course, a good deal less 
in the way of consumption levels than China. And although it's 
growing, it's not growing as fast as China, and the level of 
economic activity there is much less than in China. So, I would 
say India is possibly a concern, but China is by far the most 
important issue. The great irony, however, is that the two most 
rapidly growing consumers in crude oil in absolute terms 
recently is China and the United States, not India.
    Senator Chafee. Thank you, Mr. Chairman. I'd just note that 
I think in the grand scheme of things, as these two countries 
dip their straw into the world's reserves, their appetite is 
going to be enormous and that's just going to be a factor on 
the price.
    Dr. Greenspan. I think you're addressing a very important 
aspect of our future.
    The Chairman. Thank you, Senator Chafee, Senator Coleman.
    Senator Coleman. Thank you, Mr. Chairman, it's a great 
pleasure to have you here today, Chairman Greenspan.
    I had a chance about a week or so ago to review a 
presentation by the CEO of Alliance Bernstein, talking about 
the possibilities of lessening dependency, things like hybrids, 
in a couple of years Toyota may be out with a lithium battery 
that could sustain and have a tremendous impact on reducing the 
need for fuel for transportation, and then as you note--not 
just corn ethanol, but cellulosic ethanol--and the possibility 
of even going to 60 billion barrels of ethanol in some time in 
the not-too-distant future.
    And you end your presentation here, with those 
developments, oil in the years ahead will remain an important 
element of our energy future, but it would no longer be the 
dominant player. With the possibility of cellulosic out there, 
with the possibility, very short-term of hybrids--does that 
mean that we should be engaging on some kind of Manhattan 
Project to accelerate, quickly, the opportunity of cellulosic--
it's kind of at our fingertips but we're not there yet? And 
what would that mean, and how do we accelerate getting there?
    Dr. Greenspan. Well, the reason I raise the issue that corn 
ethanol is limited is merely the fact that you get 2.7 gallons 
of ethanol out of a bushel of corn. If you just do the 
arithmetic we produce 11 billion bushels of corn a year. If you 
convert that into actual gasoline equivalent, considering the 
fact that the BTU per gallon of corn ethanol is about two-
thirds that of gasoline, it's an important addition, and indeed 
it's of very significant importance, especially today.
    But over the longer run, it's going to have to be 
cellulosic where the real ethanol imprints are going to come 
from, because there you don't have the types of restraints--the 
more corn we put into ethanol the less we feed to hogs and 
that's a very important tradeoff. It's not the case with 
cellulosic ethanol and the advantage is there, if we can 
essentially start to make that productive and get anywhere near 
the increases in yields of acreage of switchgrass. For example, 
we've gotten in the grains over the last 15, 20, 30 years. The 
growth in agricultural productivity has been awesome--if we 
could associate that with switchgrass, we're going to have an 
awful lot of gallons of cellulosic ethanol, and I think that's 
important as where the edge is.
    Senator, the major problem that I think we have is that, as 
I pointed out in my prepared remarks, the United States 
controlled the world oil industry until, for the first 100 
years of the industry. We set the price, we decided, 
essentially, when there was a surplus or a deficit and 
corrected it, and the growth in the oil markets moved very 
significantly in pace.
    Starting in the 1970s, as I pointed out, we lost price 
control. We will never get it back unless we can find a way to 
refill the vacant reservoirs of east Texas which were filled 
with crude oil--we've used it all. In other words, our power 
over oil was the reserves we had in the ground in the United 
States. Despite Alaska, despite California, despite the Gulf of 
Mexico which has been a very major addition, we're out of it. 
We're out of the market, essentially, as a very critical player 
with respect to price.
    That means that if we are very significantly tied to 
petroleum for our way of life, which indeed we are--in other 
words, Senator Biden points out that people drive cars in a way 
which represents what they think of themselves as people--what 
their lifestyle is. It's hard to imagine disengaging an 
American from his car. We all squawk when the gasoline price 
goes up but there is no evidence that we reduce the mileages we 
drive. We eventually will buy cars which are more fuel 
efficient, use less gasoline, but it's not because we drive 
less. And therefore, I think the basic focus is to find ways to 
recognize that we are not going to be a world power in oil ever 
again. And the dramatic and very facile reduction in our oil 
use, I should say that the rising prices have been a very 
effective tool in compressing demand. Our demand has very much 
flattened out and we are gradually disengaging ourselves from 
petroleum. If it happens sufficiently, smoothly, then that's 
the best of all possible contingencies. What we have to make a 
judgment on is what happens if it doesn't go smoothly and what 
types of policies that we can address, and I think you point 
out the critical ones--how do we get consumption down basically 
on our highways--which incidentally use one out of every seven 
barrels consumed in the world every day.
    Senator Coleman. Thanks, Chairman.
    The Chairman. Thank you very much. Senator Voinovich.
    Senator Voinovich. Thank you, Mr. Chairman. It's nice to 
see you again, Chairman Greenspan.
    The last couple of years I've been very concerned about our 
dependence on foreign sources of energy. In fact I've called 
for a second Declaration of Independence, that is, to become 
less reliant on foreign energy sources because of our national 
security interests, and also our economic concerns. Several 
weeks ago I was in Brussels at a Thurman Marshall Fund meeting 
and I was quite taken back with the concern the Europeans have 
in terms of their energy vulnerability--Iran and also the 
practices and policies of the Russian Federation. They're very 
worried about how that's all going to work out.
    Your testimony this morning seems to give the impression 
that maybe things aren't as bad as some of us think they are. I 
really feel that this country needs to have a reaction like we 
had to Sputnik going up, in terms of becoming more energy 
independent.
    We had testimony here several months ago from a Dr. Luft 
and he said, ``Oil prices are not going down at any time, the 
rise in oil prices will yield large financial surpluses to the 
Middle Eastern oil producers. This petro-dollar windfall will 
strengthen the Jihadists while undermining the strategic 
relationship the region's oil producers have with the United 
States. Real concern about impact on security.'' We had other 
testimony, I'll quote from Hillard Harrington who heads the 
Energy Modeling Forum at Stanford, he said ``Many large scale 
models of the U.S. economy estimate that the level of real GDP 
could decline by 2 percent for a doubling of oil prices.'' 
Since the economy is growing more rapidly than 2 percent per 
year, that impact would not mean recession, basically going 
along with what you've said.
    Other researchers, however, think that these estimates 
underestimate the impacts, because they do not focus explicitly 
on sudden and scary oil price shocks. These other researchers 
think that our historical experience suggests that the level of 
real GDP would decline more than 5 percent for doubling of the 
oil price, and he goes on to say, ``My personal view is that 
the higher estimate may be closer to what actually would happen 
if we had a major disruption, and that would mean a 
recession.''
    So I'd be really interested in terms of our vulnerability, 
in terms of our security, and also the issue of what impact an 
interruption would have on our GDP and our economy.
    Dr. Greenspan. Well, Senator, I think those same models 
will indicate that the impact on the GDP is a function of how 
rapidly the prices change. In other words, at this moment, we 
are observing a fairly significant increase in oil prices, in 
fact energy prices generally. And until very recently, it is 
very difficult to find any serious impact on actual levels of 
real activity. There's been no significant cutback in 
consumption. In fact, seasonally adjusted, our weekly 20 
million barrels a day consumption in recent weeks has actually 
been edging up, not down. It's certainly the case throughout 
this year. We're a little bit slow and it's a small aberration, 
but there is no sharp correction and the reason is basically 
that we have developed a degree of flexibility in this economy 
which starts off in the 1970s with the bipartisan deregulation 
that we were all involved with, and which has carried forward 
to this day, especially in the financial area, and in the 
transportation areas, which has given us an ability to absorb 
shocks, of which energy is one, and come back readily.
    American corporations have been hit by a very large 
increase in energy costs. Yet, profit margins of nonfinancial, 
nonenergy corporations continue to grow. The reason in part is 
that there has been a large increase in cost, but the 
productivity that has been put in place in the last several 
years with respect to energy-saving equipment has apparently 
been enough to keep the actual unit cost of energy moving at a 
relatively modest rate. In other words, a goodly part of the 
price increase has been offset by improved productivity and 
coupled with other productivity gains, profit margins continue 
to grow, which means that we have not had the real serious 
impact.
    If you look at motor gasoline consumption--seasonally 
adjusted--gasoline which essentially is used in passenger cars 
and light trucks--it has not gone down. In fact, if anything 
it's tilted up slightly. The only serious area of reduction in 
energy use is apparently in diesel, where those big Class VII, 
Class VIII tractor trailers consume huge amounts--in fact, 20 
percent of total motor fuel on highways is consumed by heavy 
trucks. Those have cut back significantly. And for a number of 
reasons. Obviously, there has been efficiently in the way that 
goods are carried because of that.
    But there is, as yet, no really serious issue here with 
respect to the impact on the United States. If, however, we get 
a sharp increase in prices very quickly, because our capital 
stock, our facilities, still really are built, and were 
originally constructed with $20 oil in mind, and therefore 
there's not a great deal of efficiency built into our capital 
stock, so if we get a big shock it can create a significant 
contraction in our economy. It's very difficult to tell how 
much, because an awful large part of it is psychological. But 
if the flexibility is there, the flexibility that enabled us to 
get hit by 9/11, declined very sharply but for a very short 
period of time, and because of the flexibility of the system 
that we have built, we were able to absorb it. I'm not terribly 
concerned about that problem.
    So, as far as national security policies are concerned, I 
think it's important to one, make certain that we maintain a 
flexible economy and two, to find ways to one, recognize that 
we're not going to be a price setter in oil in any conceivable 
future--to find ways to wean ourselves off gasoline is a 
critical issue of energy. That applies very importantly on 
highway fuel, cellulosic, and ultimately applies gas-to-oil 
technologies, which if we ever get to natural gas hydrates 
which is a huge potential long-term source of methane--we can 
find ways to get ourselves away from the actual petroleum 
industry, but it will essentially require very considerable 
effort, and I think the most practical places are in cellulosic 
ethanol, and in hybrids. Because right now you get a hybrid 
car--you plug it in overnight, eight or nine hours--and you can 
get 100 miles a gallon on it. The technology is going to 
improve, but that is a very major saver of gasoline. And if you 
combine the new ethanols with that, it's a decline in 
convenience of the motor vehicle to drive it, but it is not as 
though we have a choice of good and bad. We've got a choice of 
not-so-good, and worse. We have to make a choice of one or the 
other.
    The Chairman. Thank you very much, Mr. Voinovich. Senator 
Alexander.
    Senator Alexander. Thank you, Mr. Chairman. Dr. Greenspan, 
thank you for being here. Thank you for your analysis and as I 
hear you, you're saying we were oil independent until the early 
1970s. The United States--quite a bit we make speeches about 
this goal--oil independence from foreign oil and we had it 
until the early 1970s. You're telling us we're not ever going 
to have it again, if I hear you right.
    Dr. Greenspan. I wish I could find the means to think my 
way through to such an eventuality. I've tried. I failed.
    Senator Alexander. But it helps that--so I assume by 
implication you're suggesting that our best government policy 
is probably not to join China in chasing around the world, 
tying up every oil reserve that we can. That is a long-term 
solution. That's probably not our most promising course. I 
think I also hear you saying that because of this enormous 
flexibility of our economy, and I heard you say it about 9/11, 
which was a revelation to me, that despite the dislocations of 
9/11, the economy absorbed those. And I think you're also 
saying to us that even with these relatively high prices for 
gasoline, our flexible economy is so strong that it seems to 
absorb those.
    The question I'm getting to is, what in the market is going 
to drive this transformation that logic would impel us toward? 
Based on your analysis, we should be finding something else to 
put in our cars and trucks other than petroleum-based fuel. And 
it's almost that simple, because you say we're not going to 
stop driving, and so we're going to continue to drive more, 
we're not going to compete with China for oil, so I guess my 
question is--if you're in our shoes, and we're looking for 
government policies, it seems to me our economy is so strong 
and flexible that there may be nothing in the market that will 
force us to make the changes that we need to make to find the 
alternate fuel.
    For example, you mentioned hybrids. Well, Mr. Goan, the 
President of Nissan, is renting Toyota's technology and not 
building many hybrids because he says when you build something 
that costs you $6,000 to put in the car, and customers are only 
willing to pay $2,000, you've got a problem. So what in the 
marketplace is going to drive this transformation for alternate 
fuel?
    Dr. Greenspan. I would think, Senator, that you have to 
start with the presumption that if you do nothing, what is 
likely to happen. And then ask yourself, would that outcome be 
acceptable, and how would you alter it? And I would put forth 
the projection of what would happen if you do nothing. If you 
do nothing, what we will find is that the pressures on price 
are very likely to continue. I don't necessarily think they 
need to go much higher, because we've already had--as I pointed 
out in my prepared remarks--the whole financial industry moving 
in advance of events, and they may have already created a price 
which already projects a goodly part of this future.
    But let's just say the prices are where they are--what is 
going to happen is that we're going to start to get major 
changes in fuel efficiency cars purchased by American 
consumers. Especially hybrids, and if the price goes higher 
which it very well may be, despite the fact that Americans say 
they do not like plugged-in hybrids--that's not what happens 
when the choices ultimately are there--people accept what is 
made available. We don't have the capability of, when I was a 
kid, 19 cents a gallon gasoline, huge gas guzzlers, vast 
sources of oil, never worry about energy--we don't have those 
choices, we have to make a judgment. As it stands now, it makes 
no sense to go out and basically try to find oil. The oil that 
really is available that is sufficiently cheap to essentially 
exploit is held by the nationalized oil companies.
    My judgment is that if you look at the trends that have 
developed since the early 1970s, we have been weaning ourselves 
off oil very considerably. We are now half as intensive as we 
were, and we will continue to be considerably less intensive.
    The critical area is clearly on highways, and there is 
where we have to figure one, how do you drive certain numbers 
of miles which American consumers want. And you can do that 
either by getting substitutes for motor fuels other than 
petroleum. It looks to me now like cellulosic ethanol is the 
largest potential--there is coal-diesel and a variety of 
others, other forms of bio-diesel which you can get--but it's 
either that or you change the nature of the motor. And here I 
think it's going to be both.
    If that is indeed the case, and we get, as Senator Chafee 
pointed out, continued increases in Chinese demand, in world 
demand, likely prices may very well move higher, and what will 
happen is that we will--the markets will force us, or more 
exactly, prices of gasoline will rise to a level where everyone 
will be very unhappy--they will not stop driving. They will pay 
the price, but they will buy much fewer gasoline-consuming 
vehicles in one form or another.
    That's where the future is, and indeed you can make the 
case that obviously petroleum will continue to be available in 
some significant quantities. And if there is a very substantial 
decline in consumption of oil in the United States, the price 
will come down worldwide. That will create a significant gap, 
because remember, we consume a quarter of the world's oil right 
now.
    If we are able to bring down our consumption by a number of 
means, that's where the world is likely to end up and I'm not 
sure that is all that bad, and from a national security point 
of view, we won't be literally disassociated from petroleum, 
but the problems that it's easy to be concerned about, namely 
all this huge amount of cash going to countries who are not 
friends of ours, it's a very serious issue. And the quickest 
way that you can shut that off is to open up a gap in spare 
capacity, and you can do that by increasing capacity which is 
very difficult, or lower consumption. That will lower the price 
significantly and if we're asking for a national security 
implication, because such a significant part of the price is 
probably the result of this new surge in demand for oil by the 
financial system, the financial system will turn around and 
prices will come down quite considerably, and that more than 
anything else I know, will shut off a goodly part of the very 
large cash flow which is going to those who do not have our 
best interests at heart.
    The Chairman. Thank you very much, Senator Alexander. Now, 
let me mention that Senator Biden and I will go to the floor 
temporarily. I will pass the Chairmanship over to Senator 
Sununu for his questions and he will exhaust that time on 
Senator Murkowski or Senator Martinez, then hopefully we'll be 
back so we will not lose----
    Senator Sununu [presiding]. Hopefully you'll be back so I 
don't have to serve as Chairman for too long. I think all of my 
colleagues will appreciate that.
    Dr. Greenspan, I served on the Budget Committee in the 
House. I'm on the Foreign Relations Committee here, and the 
Banking Committee, so I've seen you testify a fair number of 
times, and I want you to know I appreciate the novelty of your 
two word declarative ``I failed.'' It's not something that 
we've heard very often, and for good reason, but it's 
refreshing. It's always refreshing to hear someone be clear 
about what they know and what they don't know, what they can 
envision and what they have a hard time foreseeing.
    I want to begin by checking your math. You made a point 
about the fact that corn-based ethanol is almost certainly 
unable to have any significant role in supplanting petroleum. 
You mentioned 11 billion bushels, 2.7 gallons a bushel, roughly 
a two-thirds conversion factor, that translates in 18 billion 
gallons which sounds like a lot if we use every bushel of corn 
in America to produce a petroleum substitute. That's gallons, 
yes. Compared to national consumption--I did the quick math--on 
the order of 180 or 200 billion gallons, so we're talking about 
10 percent of the total petroleum usage in the country if we 
starved every hog in the country.
    I think that's important to emphasize here, while I 
understand the value of the ethanol program to farmers and to 
those that participate in it. But if we use every bushel of 
corn, we're still only talking about 10 percent of what we 
consume in petroleum.
    It seems to me that to the extent that we're concerned 
about this problem, I don't see a great national security 
threat by a family of four deciding to buy a mini-van that gets 
22 miles to the gallon instead of 28 miles to the gallon. I 
think as you point out, it's the choice they make and Americans 
enjoy driving cars--most of the oil, the vast majority, is used 
for transportation, and most of that is a consumer decision, a 
lifestyle decision.
    But what is important to avoid economic dislocations is the 
maintenance of the flexibility you talked about--the resilience 
in the economy. So, I think that the important question from my 
perspective is how do we maintain that flexibility, and are 
there things that we could do or might do that would hurt that 
flexibility. I am always worried about the unintended 
consequence. I would like you to comment on things that you 
believe might undermine that flexibility in general, and 
specifically about policies such as production tax credits, 
government R&D subsidies on fossil fuel technology, CAFE 
standards. Are those things that should be pursued, or should 
we have concerns about how they would affect this underlying 
resilience?
    Dr. Greenspan. Senator, the major threat to flexibility 
that we now perceive is twofold. The one that concerns me most 
is the very modest yet not large move toward protectionism in 
this country.
    Protectionism, to the extent that you block the free flow 
of goods, services, and finance--almost by definition 
undermines flexibility and the adjustment process. And to the 
extent that we engage in that, that we prevent the ability of 
everything to move when something else moves, which is what 
flexibility does, and what creates the type of resilience we 
saw in 9/11, and indeed in the stock market crash of 1987 and 
the crash of 2000--the economy barely went down in those 
particular areas, largely because of the considerable 
flexibility in the international area, but also in the 
financial area.
    The one great change that has occurred in the United 
States, and indeed the rest of the world, is the dramatic 
increase in international technology--which coupled with an 
extraordinary expansion in new types of financial products 
which laid off credit risk from highly vulnerable, highly 
leveraged financial institutions which made loans to those who 
were far more capable of absorbing risks. I'm speaking mainly 
of credit derivatives, but there are a whole series of other 
financial instruments that are relevant. That has given us a 
flexibility that if we try to overregulate that particular area 
it will reduce the flexibility, reduce our ability to make the 
types of adjustments that we've been able to make, and will 
create a problem that in the event of an oil shock or crisis, 
our ability to absorb it and reduce the impact on employment 
and output would be limited.
    Senator Sununu. I think that the impact of protectionism on 
our economy's flexibility is something that most Members of 
Congress can internalize pretty well. We understand the impact 
of setting up those kinds of tariffs and borders. But this is 
one that I'd like you to elaborate on a little bit. You're 
saying that the existence of a credit derivatives market 
contributes to that economic flexibility. You also mention in 
your testimony, though, the participation of the financial 
markets in the energy futures markets and commodities markets 
and is that also something that you see as increasing our--the 
resiliency and the flexibility of our economy? Has that been a 
positive step? Some people would view that as speculation, and 
speculation is always bad, but you view it as a positive step?
    Dr. Greenspan. I do indeed, Senator. And the reason I do, 
as I point out in my prepared remarks is the great advantage of 
speculation in the sense that it was originally supposed to be 
understood, is that when there are perceived imbalances in the 
future, speculation or investing or endeavoring to look for 
abnormal rates of return in the financial field tends to 
advance the adjustment process so that when the corrections 
actually occur, they are far less abrupt.
    And what we are seeing today because of the existence of 
hedge funds and others taking on fairly large positions in the 
oil-derivatives markets, and then effectively increasing the 
demand for real barrels of oil, is to move the price up and 
therefore to hasten the adjustment process which indeed is 
occurring--that is, we are literally seeing significant 
acceleration in energy productivity within the corporate 
sector. We are seeing a flattening out, not a decline, but a 
flattening out of gasoline demand, and indeed a decline in 
overall motor fuel consumption on highways because of price. 
And that would not have happened were it not for the financial 
system being involved, because prices would have been lower 
through a considerable amount--part of 2004 through most of 
2005, and if that were the case, the levels of demand would be 
higher, the pressures on the economy far greater, and we would 
have increased the risk of a shock.
    So, what the financial system has done is preventive 
medicine if I may put it that way.
    Senator Sununu. Thank you. Senator Murkowski.
    Senator Murkowski. Thank you, Chairman Greenspan. It's a 
pleasure to have you here this morning and to hear your 
testimony.
    I want to go back to a statement you had made to Senator 
Coleman. You indicated that the power over oil that we once had 
was what we had here in the ground in the United States and 
that gave us that ability to be somewhat energy independent, or 
oil independent--if you will--and we lost that after the early 
1970s.
    I want to hear a few comments from you this morning about 
the direction of natural gas, an area where I think we look to 
in this country as that next great area of possible dependence. 
Right now we're in a situation where our imports of LNG are at 
a pretty minimal level. I understand it's about 3 percent right 
now, but the increase--LNG imports have increased by 180 
percent in the past several years, still accounting for only 
about 3 percent of our U.S. imports.
    The concern that I have had is that we go in the same 
direction with natural gas as we are with oil--being dependent 
on foreign sources for an extremely important resource for us 
here in this country--and a recognition that we can do 
something about it, because we have that ability to grow that 
resource here.
    You've mentioned that, and this was in a hearing that we 
had before the Energy Committee a couple of years ago--that in 
order for us to meet our demand here in this country, we must 
rely on imported LNG. We're trying to move a project down from 
Alaska to get Alaska's natural gas to the rest of the United 
States. That project is not moving as quickly as we would like. 
We recognize that the country is counting on Alaska's gas to 
come down. We're trying to make sure that, in fact, that 
happens.
    I am very concerned that we take the approach with a 
resource like natural gas and say, ``Well, we simply can't 
produce enough of it here in this country. We must look to 
foreign nations for that resource,'' and we must put ourselves 
again in that position of being vulnerable, of providing cash 
to those countries--that as you point out--might be our friend 
today, but who knows where they're going to be next year.
    My question to you is where are we with the demand/supply 
picture with natural gas--how do we keep ourselves from getting 
in the same position with natural gas as we are with oil in 
terms of our reliance?
    Dr. Greenspan. Senator, you raise a very important question 
and indeed with the loss of production in the Gulf of Mexico as 
a result of Katrina and Rita last summer, we're not back to 
productive capability domestically that we had been.
    For a generation, we had looked to Canada for piped gas for 
about a sixth of our needs, and we were growing reasonably well 
and price was low--I remember when it was $2 per MBTUs. The 
problem is that the only outlook we really have got is 
liquefied natural gas. And there are several problems as to why 
we have not picked up as quickly as I think we need to in that 
particular area.
    First, of course, is that a goodly part of the liquefied 
natural gas market is on long-term contract around the world. 
And, for example, there's a very big contract, the biggest 
probably that I ever remember from the operations in Indonesia 
to Japan, which was a major source of their liquefied natural 
gas in the long-term contracts, and it worked exceptionally 
well.
    We have not been able to do that--we get a lot of our LNG 
from Trinidad and the Caribbean, but the size of what we are 
going to need and can very readily use right now has got to 
come from Qatar or from the Middle East or from other sources--
there's a big dispute as I'm sure you're aware now with respect 
to Russian gas going LNG to the United States. But our problem 
is that we've got to one, hopefully get longer-term contracts 
with the actual producers of the gas which will then ship it to 
us, and then we've got to be certain that we've got the 
terminals. Until fairly recently, the ``not in my back yard'' 
notion made it very difficult to bring LNG terminals into the 
United States for fear that there would be these tankers that 
would explode and a variety of other problems.
    Most importantly, we do not yet have a spot market in 
liquefied natural gas, and the reason we don't is, for example, 
the trade in crude oil represents such a--imports of crude oil 
worldwide represent effectively 60 percent of world 
consumption. The trade from one country to another is very 
large. The figure is only a fourth in natural gas, and a goodly 
part of that is piped gas, including the piped gas from Russia 
down into Europe. So, we don't have the degree of 
sophistication as of yet in international trade in LNG, but we 
are going to need to make this a viable source in the United 
States, essentially equivalent to how we handle crude oil.
    It's going to take a while, but if we can do that, we will 
then have the capability of converting gas into liquids with 
the new technologies that are coming on and this could be 
another source of replacement of petroleum, and may, indeed, be 
an actually significant possibility. So, the LNG issue has got 
a lot of facets to it, all of which are very important for the 
United States, for our national security and for the 
maintenance of, essentially, a car fleet on the roads not 
fueled by natural gas, but eventually fueled by the liquids we 
can derive from natural gas, provided we've got adequate 
capabilities to purchase it and import it.
    Because we do have the inklings--you remember, energy is 
not rising in real terms anywhere near energy consumption in 
the United States--anywhere near what our incomes are. So we 
have the capability of buying, we have the purchasing power 
that produces other goods and services which gives us the 
ability to buy a great deal of energy of the type that we would 
need, and that largely--in the natural gas field, is to 
accelerate the capabilities of getting contracts, long-term 
contracts, and deliverable supplies of LNG, and eventually the 
North Slope gas which would not be a small addition--as you 
point out--to the lower 48 States' consumption.
    Senator Murkowski. Mr. Chairman, I have to excuse myself 
and go vote. I appreciate you mentioning the North Slope gas, 
and I absolutely appreciate you mentioning the great potential 
with natural gas hydrates. I believe when we look to that as a 
long-term future, there's great potential there. It needs to be 
nurtured, but I do get concerned that we focus on imported LNG 
and we are in a situation with natural gas as we are currently 
with oil in terms of our dependency and our energy security and 
the vulnerability that we face.
    I'm trying to figure out a way to get our stuff down to the 
lower 48 to help in, I think, a significant way. I appreciate 
your comments.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Murkowski. At 
this point we'll have a second round of questioning and we'll 
have a 10-minute limit on questions in each round.
    Chairman Greenspan, in your testimony you mentioned the 
desirability of price increases in oil being gradual. In fact, 
you discuss that it's remarkable that the impact on the 
economy, even given fairly sharp increases, has not been 
greater. I would just ask--the reason in this context--one of 
the real problems of remaining too calm about all this, is that 
a great deal on the ground doesn't happen. We talked a little 
bit about the problems of corn ethanol and this is not a 
solution, and we decided to go on to cellulosic. But even in 
this interim period, the corn ethanol situation suffers from 
the fact that, despite a lot of plants being started, not much 
ethanol is being produced. And furthermore, even if it was 
being produced, the number of outlets in terms of filling 
stations and gas stations is de minimus at this point. The 
number of flex-fuel cars in the country, likewise, despite 
promises by automobile companies to produce half a million 
more, in the case of both Ford and General Motors this year--so 
that even that particular solution really needs urgency, and is 
clouded by the MTBE factor in which ethanol has been diverted 
off to California and New England, so the price of ethanol at 
the pump at one of these M85 stations, using market economics, 
is almost identical with the petroleum. Therefore the Mom and 
Pop people who have started these places, because the oil 
companies have resisted doing so, sometimes don't sell very 
much ethanol. It's hard to keep them in the game.
    On the cellulosic front, there are real problems in the 
Department of Energy, as I see it, just getting the regulations 
for the loan guarantees for our companies such as Iogen who 
wants to come into Idaho. I cite them because they are the only 
large candidate for production of cellulosic ethanol very soon, 
and they may not start until the end of this year or next year.
    Now, in the midst of this, what happens if, for example, an 
incident such as the Russians cutting off natural gas to the 
Ukraine, albeit for only 48 hours, but nonetheless, the shock 
waves through Europe were substantial from this--or other 
suggestions by countries. Picking up on that measure that they 
could simply stop production for a while. That it may be in 
their strategic interests not to worry about markets or 
pricing, but the availability.
    Leaving aside, as you point out, their lack of interest in 
going into their reserves, exploiting those, or trying to find 
capital around the world to do that--what I'm just wanting to 
examine for a moment is what are the possibilities or even the 
probabilities of shock therapy coming from national decisions 
that change the pricing situation abruptly, but with United 
States no more prepared, still fumbling about as we try to get 
these alternatives under way?
    Dr. Greenspan. Well, Senator, as you point out, in certain 
respects, Europe is in far worse shape than we are. Europe's 
solution to the Russian gas problem, in my judgment, is to have 
very substantial liquefied natural gas terminals on standby. 
With contracts, contingent contracts out there to import 
natural gas liquids. It won't pay Europe to do that, but what 
it will do is put a cap on the price. In other words, it will 
significantly restrain the issue of what is, largely equates to 
a monopolistic position that Russian has with respect to 
European gas. And if that standby facility is there, it will be 
costly to maintain. It will be costly to get it contingent 
contracts. It will also depend on an issue that I was 
discussing with Senator Murkowski, namely the advent and the 
emergence of a viable spot market in liquefied natural gas.
    But it strikes me that we ought to be in similar--try to 
create similar sorts of devices. But having said that, it's not 
terribly difficult to imagine--you remember the aborted 
insurgency raid on the major Saudi Arabian facility not too far 
from us, the gas processing facility. Had they succeeded in 
shutting that down, there would be an incredible impact on the 
world. We do have strategic petroleum reserves both here and in 
Europe which we would use and presumably it would obviously be 
the type of problem which is exactly what the reserve is for.
    The Chairman. What sort of procedures could we adopt--just 
to pick up your point--the Europeans have this rather expensive 
contingency factor, but take the Saudi example. If they had 
succeeded, this is a real problem for the world, quite apart 
from us, but I'm not certain, aside from our strategic oil 
reserves, what we've got that really is a stopper in these 
cases.
    Dr. Greenspan. We don't have much. If, however, we do not 
undercut the flexibility of our economy, we will take the 
shock. There's no way of avoiding the shock. Strategic 
petroleum reserve of 700 million barrels is not a small amount 
and when really--it very much depends on the extent of damage 
and how fast the systems can come back.
    But I can very readily envision a shock in which even if we 
can bring in strategic control in reserve, the market price 
will still go straight up. And as I pointed out with respect to 
the discussion with Senator Alexander on the issue of the 
impact on the American economy--rising prices per se need not 
have an effect on American economic growth if the rise is 
gradual and the adjustment process is able to take place.
    But a shock has got to be absorbed in one form or another, 
and at this particular stage, we don't have any backup other 
than the strategic petroleum reserve and our flexibility. We've 
got to find more ways to deal with this problem.
    The Chairman. In going a little further with this--if the 
shock occurred in our economy, and on various other days you've 
testified on these sorts of subject--we have already a fairly 
large Federal deficit. We have an even larger deficit in terms 
of our trade imbalance. We are dependent upon others to loan us 
money by our bonds essentially. It's sort of a grand bargain to 
keep the world economy afloat this way, so there is still some 
purchasing power elsewhere.
    But please explain what that kind of shock in our economy 
might mean, not only to us and our ability to cope with all of 
this, but to the world economy.
    Dr. Greenspan. Mr. Chairman, it's difficult to give you a 
definitive answer because there are lots of different ways in 
which that can unfold. We don't know to what extent the 
foreigners hold U.S. dollars, basically because under our 
constitution we protect foreigners' property rights as firmly 
as we protect our own. And if you're looking for a safe haven 
for resources, and you don't trust your own currency, your own 
economy, or any of a number of reasons, you do know that a 
deposit in the United States is safe. And a large part of the 
accumulation of U.S. Treasury securities are that. I won't 
mention who, but I had a very interesting conversation with a 
monetary authority person abroad who has very large holdings of 
U.S. dollars and he asked me at one point when there was some 
question about possible problems, whether the United States 
securities were safe? And I said, ``Of course they are.'' And 
he said, ``That's very important to us because that's the 
reason we keep our money with you.'' Now I don't know the 
extent to which--how much are the aggregate holdings, or the 
result of that and how much are just economic investments in 
real rates of returns and productivity.
    But that is a critical issue. It is basically that we are 
safe and I feel fine about that the Constitution is not going 
to be affected by a problem in the oil fields of the Middle 
East, but as an economic issue I would be concerned. I don't 
know any way to differentiate those particular issues. But I 
think you can reasonably well conclude that whatever the 
consequences are of a major shutdown of a Middle East facility, 
most specifically related to the processing of crude oil, the 
more the damage is to the world industrial structure. And the 
greater our flexibility, the greater our ability to absorb 
that. But there is no scenario which I am aware in which we get 
off scott-free. It's going to be a real serious problem, and I 
think the purpose of your deliberations in this committee is 
largely to make judgments as to what can this Government do 
to--not eliminate a potential shock--there is no way you can do 
that. But how do we set in place sets of policies which 
diminish its impact.
    The Chairman. Well, you've accurately stated our quest and 
there are obviously foreign policy and security implications in 
this, in addition to those issues covered by our Energy 
Committee or the Banking Committee or Armed Services 
Committee--each one of us has a role but we've tried really in 
these hearings to get a comprehensive view of our national 
security and the foreign policy aspects, and your testimony is 
helpful.
    Senator Biden.
    Senator Biden. Mr. Chairman, it's such a pleasure to have 
you. I mean it sincerely. You are so, the breadth of your 
knowledge is impressive and very much needed by this committee, 
and the clarity with which you talk about it, is extremely, 
extremely helpful.
    I'd like to focus on, in the short time we have, two 
pieces. One, by the way, not that it matters, but I couldn't 
agree with you more about the question if this is a 
Constitutional investment or an economic investment, and I have 
a feeling a significant part of it is--and I'm praying that 
this relates to the certainty of the investment as opposed to 
the economic return, which is a big, big piece as well. But as 
you said, no one's going to know until it ever gets tested, and 
pray God we don't get it tested that clearly.
    And in terms of flexibility--that's really what we're about 
here in this committee. The Senator and I had opportunities, 
both during the hearings and working our staffs together and us 
talking--we're really not naive enough to think that we're 
going to talk about and be able to be ``energy independent'' 
which is a phrase which is thrown around, but flexibility 
matters a great deal. Not only the broad flexibility of our 
economy, but flexibility as we build in flexibility to be able 
to deal with oil shocks, and it's a process--we're talking 
about a process to put in training.
    And I'd like to get to a point which is when we struggle--
not just the two of us, but others--including my colleague from 
Florida and my colleague from Ohio. We're all basically on the 
same page here. As we struggle with the notion of providing 
flexibility by having alternative fuels--and as you point out, 
the vast majority, you know, one in seven barrels of oil in the 
world is consumed on American highways--so obviously that's the 
biggest, biggest ticket item you could impact on. And 90-some 
percent of all of the refined oil is going into the engine or 
the tank of an automobile.
    Right now there's the economic incentive for alternative 
fuels to have a shelf-life. There's actually a lot of 
discussion on the street--which you've forgotten more about 
than I'm ever going to learn--about investments in alternative 
energy sources. There is a burgeoning industry that is--goes 
well beyond corn ethanol out there--and one of the worries I 
have--worries is the wrong phrase--one of the concerns I have 
is in the past when we controlled oil, figuratively speaking, 
in the sense you used it in the phrase, up until the early 
1970s, and now the cartel controls it. There has been this sort 
of self-interest realization on the part of oil that, if it 
gets too expensive, you're going to find yourself in the 
position where it's not beneficial for the industry in the 
long-run and those who hold the reserves--it clearly, 
notwithstanding the lip service, I should maybe not say it, 
clearly notwithstanding discussion on the part of major 
American oil companies about their interest in finding 
alternative sources of fuel--it is not really overwhelmingly in 
their interest that we would, in fact, make a major shift in 
consumption of oil.
    So here's my concern, and I'd like you to speak to it two 
ways. One, is it legitimate, the concern I'm about to express; 
and two, if it is--what do we do about it? I am concerned that 
as the decision to get the tens of, the billions of dollars, 
tens of billions of dollars over the next decade of investment 
needed to, in fact, produce or generate an alternative energy 
source, the kind of investment needed to make it--to give us 
the flexibility, where it takes up 20, 25, 30, 40 percent of 
our consumption, at least in automobiles, over the next decade 
or more--that it rests upon the price being competitive with 
oil. And I don't say this as, I'm not making a populist 
argument here. But it would seem to me to be in the naked self-
interest of the major energy producers--oil fossil fuel 
producers now--that if that became a genuinely competitive, 
alternative source of energy that allowed us not independence, 
but genuine flexibility, that it would be very much in the 
interest of the industry to drop the price. It doesn't take 
much for them to swallow losses for some time in order to have 
the effect of driving out of business what are essentially, 
great potential--cellulosic, for example--great potential, but 
in its infancy. Is that a concern that is not well-placed? Are 
the economic incentives for major oil, whether it's Saudi 
Arabia and OPEC, or specific energy companies--is that concern 
of mine misplaced? Are we still going to get the kind of 
investment which--we're talking the need of billions of dollars 
of capital to move into these alternative sources of energy to 
make them competitive, so we're producing billions of gallons--
equivalent gallons of oil by alternative sources.
    Is it a misplaced concern?
    Dr. Greenspan. Your concern that people in the oil industry 
concerned about competition coming in, would produce cellulosic 
ethanol at a subsidized price to drive out the competition? Or 
a----
    Senator Biden. Just in terms of simple flexibility. We had 
two very impressive panels that came before us about 3 or 4 
weeks ago. And they pointed out that in order for us to get to 
the point where there is really an alternative to fossil fuel 
for transportation, that you really have to acquire a scale 
sufficiently large in the existing oil industry now. You have 
to have, not just the kinds of plants that are bringing 
economic growth to Southern Indiana, producing four million 
barrels a year, roughly, equivalent--you have to get on the 
scale of the major oil refineries, in terms of production. And 
that is not necessarily in the immediate self-interest with oil 
at the price it is now and likely to remain, of those very 
companies.
    So where do you get the tens of billions of dollars of 
investment? And they gave it a--I realize it's more 
illustrative than--but they, one of the very well-respected 
figures we had before us, speaking about alternative energy, he 
gave a chart, it was kind of a wish list. He said, look, the 
projected ``if'' in switchgrass, we produce, we have the 
increased yield per acre, increased productivity we've had in 
corn just in the last 30 years. That if you devoted the 
prairies of--I think he picked South Dakota--to, that exist now 
to a higher yield but in an economically competitive 
switchgrass process by which you refine the switchgrass for, as 
you point out, that's the better bang for the buck in terms of 
a percentage of it that is usable and is closer to a BTU 
equivalent of oil, et cetera. He said, and he put up a chart, 
he said ``South Dakota would be the second largest producer of 
energy.'' And he was making a point that wasn't literal, but 
illustrative of the kind of thing that can happen if we put, 
for example, 60 million acres--as opposed to 110 million 
acres--60 million acres in ethanol-based fuels over the next 15 
years.
    And he made a statement--he said that as Australia tried to 
move to an ethanol-based system--as it began to take root, the 
price of oil was dropped significantly, making it uncompetitive 
without subsidies, and it really tanked. Whereas in Brazil, 
they--for reasons I realize that's a controlled economy, I'm 
not suggesting we emulate it or model it--but the bottom line 
is, Brazil really is at a place now where they have a distinct 
flexibility--an alternative. They do not have to listen to 
Chavez and his ranting and ravings about what he's going to do 
to them, cutting off access oil.
    And so the question is, is there any reasonably 
historically, or purely from an economic incentive standpoint, 
and I'm about to go over my time. I apologize, Mr. Chairman, 
but is there any concern about if we were to mandate in a 
process, flex-fuel automobiles, mandate ethanol-ready gas 
stations and so there's enough of an infrastructure so that if 
you build a car there's a place to fill it up--if we were to 
mandate more rational mileage for American automobiles. And we 
both come from UAW states, it's not something we're looking 
forward to going on and just looking for fights--but if we did 
all of those things, would you have to put, essentially, a 
floor on the, you know, of $30 or $35 or the equivalent of a 
barrel of oil in order to make sure that you've got investors 
who are willing to invest in the long-run and not worried if 
all of a sudden, oil drops to $26 a barrel and their 
investments tank?
    Dr. Greenspan. I think that's quite unlikely, and let me 
give you the reasons why I think so. It's a legitimate 
question, because I would say if you had raised that question 
20 years ago, it's a real question. And the reason it would be 
a real question is that at that particular point, it was quite 
apparent that you could get, let's say, a 5- or 6-year lead on 
significant amounts of crude oil out of potential unexplored 
reserves other than OPEC. That is no longer available. And, in 
fact, if you take a look at the far distant futures contracts 
now, for example, go out to December 2012--crude oil is $66 a 
barrel. Twenty, no 10 years ago, even 5 years ago, 6 years ago, 
that figure was $20 a barrel. The reason that has happened is 
that the full structure of the international oil industry is 
getting tighter and tighter and tighter. It started off in 1870 
and we have consumed an unbelievable amount of oil. And 
whatever there was, there is less, and it's beginning to show 
up in various different places. It's beginning to show up in 
inability on the part of those drilling in less hospitable 
places to get oil, and it's very costly.
    So what I think is going to happen here is we are already 
beginning to see private equity funds beginning to invest in 
ethanol. Just as the Chairman mentioned, this particular 
facility that is being put up and may be available, he said, by 
the end of the year--that will tell you what the potential cost 
runs are and what a good deal of the economics are. And if it 
appears to be credible, you'll begin to get an awful lot of 
financial assets coming in--not an insignificant part of what 
the oil industry, the hedge fund industry who are now investing 
in oil--I think they'd start to go into those particular types 
of projects.
    Especially if the numbers make sense, which I think they 
do, for reasons exactly why you point out. If that is indeed 
the case, there will be potential concerns of the type you 
raise, Senator. I cannot say with certainty that it will not 
all of a sudden be some pocket of weakness in oil prices which 
brings it all the way down.
    The real problem, strangely enough, is what happens to the 
price of oil if we succeed? Because, if indeed we get a real 
major displacement of gasoline use on U.S. highways, the world 
price will come down. My guess is, and I must tell you I can't 
argue that it's very much greater than a guess--it will not 
drop back to $20 a barrel. It will drop, but it will drop back 
to levels which will not undercut the economic viability of the 
cellulosic ethanol, and indeed it may very well be that the 
marginal cost and rates of return of cellulosic ethanol may 
very well be determining the crude oil price.
    Senator Biden. Well, I pray for that day.
    Dr. Greenspan. Well, we may inadvertently, all of a sudden, 
South Dakota may become the new energy czar.
    Senator Biden. It seems to me your view is one that's 
shared by most of us up here, that we're really reaching an oil 
peak here, and it seems to me that it's the end of cheap oil. I 
would love to envision the world being more secure. Enough that 
in fact we move back to that ``Bay of Cheap Oil,'' but in terms 
of the reserves available, in terms of what I look at there--
and I don't pretend--I think I know, I feel I know a lot more 
about foreign policy than I do about the oil industry. But the 
fact is, I don't see the near term, no matter how well we 
succeed, that there's so much stability in the oil-producing 
countries around the world in the next generation that we 
aren't going to find ourselves subject to--in bad need of 
flexibility.
    My time is up, I can't tell you how much I appreciate your 
being here, Mr. Chairman. Your views are welcome and greatly 
respected, and I thank you for taking the time.
    Dr. Greenspan. Thank you very much.
    The Chairman. Thank you, Senator Biden. Senator Voinovich.
    Senator Voinovich. Thank you, Mr. Chairman. I do share 
Senator Biden's appreciation of your being here today.
    Recently, I met with, a kind of reception with the chairmen 
of the three major U.S. auto companies, and they indicated that 
they definitely were going to go forward with more ethanol-
fueled vehicles. In fact, one of them said that 25 percent were 
going to be ethanol, E85. I have met with representatives from 
the oil industry and talked to them about the infrastructure 
needed to make this available, E85, and their response was 
that, number one, they weren't really interested in putting 
those pumps in. And the reason for it was that the cost of 
ethanol was high and that in some instances, higher than 
gasoline. And last but not least, that when people find that 
they're going to have to tank up more often with ethanol than 
with gasoline, they're going to be less inclined to use 
ethanol.
    The concern that I have is that there seems to be a 
collision, maybe going to occur between the auto makers who, by 
the way, get credit for their E85 even though you may not use 
E85, and the auto companies saying, you know, we're not that 
interested in it.
    We are thinking about--building on the last energy bill--of 
increasing the tax credit for building these pumps from 35 to 
50 percent. In other words, we're going to say, ``We're going 
to make it more worth your while to put these pumps in.'' And 
I'd be interested in what you think of that.
    Second of all, from your testimony, I got the impression 
that you really felt that the future was in cellulosic 
renewables, and that's puzzling to a degree, because if you 
look out in the marketplace, we're seeing tremendous 
investments in ethanol refineries. In my State when I was 
Governor, I tried to get them to build a refinery. I couldn't 
do it to save my soul, and we've got three that are underway 
and looks like we're going to have more. There's supposedly 38 
of them being built in the country, and the issue is for us, in 
terms of investment, should we be putting--or in terms of 
incentives--be putting more money into that, or should we spend 
a lot more of our dollars in moving in the area of cellulosic 
which I understand the technology still isn't there yet for 
cellulosic, and by the way, these ethanol plants aren't going 
to be able to handle cellulosics. They will have to add 
something or build new ones. And of course the other one is the 
hybrid that you made mention of, and that is the electric 
battery plus gasoline. I met with somebody recently and they 
were talking about diesel-electric for big trucks.
    So I'd be interested in your comments about some of these 
statements I've made and where do you think we're going and if 
you were in our shoes, where would you be putting your money?
    Dr. Greenspan. I think it's a very tough question and I'll 
tell you why. First of all, it's ultimately going to be the 
markets and technology which will determine what is what. The 
real problems with ethanol are one, that whenever you're 
dealing with a huge, say 9 million barrel a day gasoline 
market, and the inability to intertwine the two types of oils 
in the pipelines, because as you know you cannot put ethanol 
through oil pipelines because of the chemical----
    Senator Voinovich. That's the other thing they mentioned, 
they've got to truck it in to do it.
    Dr. Greenspan. Exactly. It's got to be. Ethanol has got to 
be until we find some solution to that, a generally local 
issue. In other words, what you've got to do is have your local 
refinery essentially working off local crops and delivered by 
trucks and you can't get huge volumes of that very easily right 
away. And I don't know enough about the actual details of what 
the costs are and the like, and the ability to shift from corn 
to cellulosic, but I do know that because corn is inherently 
limited in size, it has been a very useful additive to date, 
and is clearly that's all we've got. So, cellulosic is very 
nice, but it's hypothetical at this particular point.
    But, if ethanol is to be a really significant issue here, 
it's going to have to be cellulosic. And so I would think that 
what we'd want to do is to get up as quickly as possibly on 
technologies of cellulosic and find it----
    Senator Voinovich. So you would be, if you're--we're going 
to try to pass another, it's the second version of an energy 
bill----
    Dr. Greenspan. Yeah, I would move as quickly as I could to 
find out whether cellulosic is really a practical alternative. 
Because if it turns out that the plants actually work, are 
cost-effective and have potential, reasonably good capacity, 
with very few problems which invariably occur in these sorts of 
technology which we don't anticipate in advance. If you can 
find out if this stuff works rather quickly, I would try--
because of the inability to add/mix corn and cellulosic 
ethanols as far as the production facilities are concerned--to 
find out whether you've got something here. Because if you do, 
then I think you move ahead as quickly as you can in developing 
cellulosic, because that's the only thing that's going to 
create the volumes adequate to really be a major competitive 
thrust against gasoline.
    Then I'd also be trying to move as quickly as we can on 
liquefied natural gas, and the gas to liquids conversion 
capabilities, which are also beginning to work here----
    Senator Voinovich. Can I interrupt you just a minute. That 
gets into another issue and I'm sorry I missed the testimony--
your response to Lisa Murkowski's questions. But you know and I 
know that the high cost of natural gas has clobbered a part of 
our economy, the chemical industry, and they haven't been able 
to adapt as some others have.
    Dr. Greenspan. They've moved out of the country.
    Senator Voinovich. We're a net, right, we used to be a net 
exporter, now we're an importer. I had a company in the other 
day. They were in 3 years ago. They had 22,000 people in the 
United States, now they've got 14,000 and they basically said, 
``If you don't do something about these natural gas costs, 
we're going to lose more jobs.'' And in our home heating, I 
mean, we've increased lie heat dramatically to help people with 
their heating costs. We got a break this last winter because it 
wasn't as bad as what people expected, but we're now seeing the 
cost of natural gas go down quite a bit because I guess they've 
got a great deal of supply out there and----
    Dr. Greenspan. It's basically a weather phenomenon.
    Senator Voinovich. But you think it's a phenomenon, you 
think that the natural gas costs will ratchet up again?
    Dr. Greenspan. Well, we're now at about a little over $6 
for a million BTUs. We had been, of course----
    Senator Voinovich. $16, $14, $15, yeah.
    Dr. Greenspan. Really sharply, the problem is storage 
capabilities with gas are not obviously as efficient as with 
liquids, and when you have any commodity without inventory, 
like electric power or, even to a lesser extent natural gas, 
demand and supply variations create huge immediate changes in 
price, rather than work their way through the inventory system, 
which is what happens in oil.
    And so the gas issue here largely is going to rest--not on 
the current balances which we now have which is, you know, we 
import a large chunk of our gas from Canada. We produce a big 
chunk of it in the United States, although the production has 
come down because of the hurricanes--and it's liquefied natural 
gas where the answer lies.
    Senator Voinovich. Yeah, but can I ask you something? The 
question is, we talk about LGN--what I've been getting from 
talking to people, are they, is the infrastructure being put in 
the United States in order to bring in LGNs and I understand 
that some of the people overseas that provide LGN are wondering 
whether or not we're going to have the places where it can be 
brought in and stored.
    Dr. Greenspan. Yeah, we--our problem at the moment is 
actually less the terminals which we have a fairly large number 
that are planned, authorized, or under construction. It's 
getting the LNG to begin with. In other words, what we need to 
do is--because a lot of this stuff is on long-term contract, we 
have yet to get very substantial long-term commitments as the 
Japanese have with the Indonesian liquefied natural gas 
operations. And it's only when we start to get those longer-
term contracts or the LNG market becomes sufficiently large and 
sophisticated that there is a spot market, which there isn't to 
speak of now, and that's what our problem is. We need to get a 
more sophisticated market. But there is a lot of stranded gas 
out in the world which is available and if you can get a world 
market in LNG it could be rivaling a good deal of the oil 
market in certain respects.
    Senator Voinovich. I'm out of my time, but the real 
question is, is Mr. Jones in Cleveland, Ohio, whose natural gas 
costs have gone up astronomically, and he's saying to me, 
``Senator, what are you doing about bringing down my natural 
gas costs?'' and the question is what are the prospects, you 
know, in the next year or 2 years to see a situation where I 
can say to him, ``You know, I think that maybe you're going to 
see a 25 percent reduction in your natural gas costs.''
    Dr. Greenspan. Well, I think what you can say, Senator, is 
the fact that if we get this ``stuttering'' process of 
expanding liquefied natural gas on track, which we should be 
able to do, I hope, within a couple of years, then the price 
begins to reflect the marginal cost of bringing gas from a lot 
of different places in the world to the United States which had 
been--I don't know where it is now, but as of the last time I 
looked at the cost structure--is down in the area of $4 per 
million BTUs. Now, I don't know whether or not that 
automatically is what the price will become, but at some point 
it's going to be LNG imports which is going to set the price 
for all of the gas in the United States. It can't do it yet. 
It's only 3 percent of the total.
    The Chairman. Thank you very much, Senator Voinovich.
    Senator Nelson.
    Senator Nelson. Thank you, Mr. Chairman. Mr. Chairman, it's 
good to see you.
    Dr. Greenspan. Good to see you, Senator.
    Senator Nelson. Given the fact that we in the United States 
have about 3 percent of the world's oil reserves, yet we 
consume 25 percent of the world's oil production, certainly 
your testimony is well-received, and I think will go a long way 
in trying to jolt some people out of this oil dependence.
    But I'd like you to comment on an additional fact, just for 
the record, that 79 percent of the world's oil reserves are 
controlled by governments, suggesting that substantial amounts 
of proven global reserves could be subject to political 
decisions, not market forces.
    Dr. Greenspan. Well, I'm fearful that they're doing it now. 
And the real problem that I think we have is that vast amounts 
of reserves in the ground which could be extracted for just a 
few dollars a barrel. It used to be in a sense, it's gone up a 
lot, but it's still relatively negligible. The problem is that 
the incentives for the nationalized oil companies to do that 
are not very great. The sole exception, at least to those whom 
I've spoken with who really are concerned about the high price, 
are the leaders of Saudi-Aramco, who recognize that a 250 
billion reserve plus situation is very precarious if all of a 
sudden the United States, the big user, starts to switch to 
non-oil, non-petroleum means of energy, because what that will 
do in the long-run is lower the market value of their reserves, 
and they recognize that, and they're trying, essentially, to 
expand capacity to hold the prices down.
    But the vast proportion of those national oil companies 
rebuff the international oil companies--the ones with the 
technology and capability of going in--and if a deal could be 
made, some royalty or something like that, we could increase 
the crude oil capacity of the world very significantly with the 
effect of bringing prices down quite markedly. But there is 
very strong political resistance to do that, and even outside 
of OPEC. I mean, Mexico, its constitution prevents foreigners 
from having any commitment in the national patrimony which is 
their crude oil, despite the fact that PEMEX executives, 
Mexican national oil company, are petitioning their government 
to allow them to ask foreigners to come in so that certain 
particular fields deep in the Gulf of Mexico and deep down 
under the sands are there, but they don't have the technology 
to get there. And so far, nothing has happened. And that's true 
everywhere.
    And that's what our problem largely is. It's not as though 
the oil is not there, it's just that the capability of 
converting it into productive capacity to meet the growing 
demands from China, India, everywhere else in the world are a 
very big question, a very big problem.
    Senator Nelson. Well given that, we each year go through a 
drill up here where we try to increase CAFE standards, and we 
always get beat trying just to increase miles per gallon on 
SUVs, phased in over a number of years. Is this not the time, 
in addition to what you've testified about alternative fuels 
like ethanol, nuclear and so forth, is this not also the time 
for us to have the likes of a Manhattan Project where we go out 
and develop an engine for the future that will be totally 
independent of oil?
    Dr. Greenspan. I think the example of the Manhattan 
Project--that project was far more narrow than people realize. 
There was a specific technology that, as you know, there had 
been an early discovery that the uranium atom was unstable and 
that eventually led to the Chicago operation----
    Senator Nelson. Then let me substitute for Manhattan, an 
``Apollo'' project.
    Dr. Greenspan. Okay. That is actually a more relevant 
thing, because we're starting with much less knowledge. I would 
hope we don't have to do that, and the reason is that at the 
moment, I think the markets are working in the direction of a 
solution. If we create an ``Apollo Project'' it may fail, it 
may not fail, but one thing it surely will do is that it will 
eliminate all of the market incentives, because there would be 
no way for a private equity fund that wanted, for example, to 
invest in the cellulosic project to compete with unlimited 
funds of an Apollo Project.
    So, I would hope not, but not because I think it may not 
succeed. It might. But I'm almost certain that it would divert 
what is already working at this stage--to be sure slowly--and 
it's very frustrating, but it is working. And I'd like to see 
the market forces
continue, because they are working. We've seen the gradual 
disengagement of the United States from petroleum--it's been 
going on for 35 years. We've now reduced our dependence by half 
and we're still moving it down. And at some point we're going 
to get to a level where it's not going to be a national 
security question any more. And I would hate to divert that 
process.
    Senator Nelson. Reduced our dependence by half, and yet our 
consumption of foreign oil goes up as a percentage of our total 
consumption.
    Dr. Greenspan. That is correct, and indeed it will continue 
to do so. And this is the reason why if we can get a major 
shift in how we drive our motor vehicles--whether or not it's 
hybrid or plug-in hybrids, or whether or not it's cellulosic-
based ethanol--or whether we find we can work from liquefied 
natural gas of which there is a vast amount out there, 
converting that into liquids. There are an awful lot of 
alternate sources, and they're not mutually exclusive. So, 
we're on our way, gradually, to weaning ourselves off 
petroleum. It is slow, and I regret to say in many cases, it's 
like watching grass grow, but it is working. And I think we 
have to be careful to nurture that process.
    Senator Nelson. Final question, Mr. Chairman. Is your 
opinion the same with regard to the development of an Apollo-
type project for a new engine if you set a date certain in the 
future so that the market forces knew that within that 30-year 
period that you would not have the competition of this new 
engine?
    Dr. Greenspan. Senator, I don't think that this Congress or 
the next one can commit the United States to such a view. The 
pressures, as you know far better than I, when that particular 
deadline begins to grip, it would have very profound 
implications. A lot of constituents would become very strained 
as a consequence. I'm not sure how successful you would be to 
put that in place. I would hate to see it tried, because I 
don't think in the past when we've tried such things it ever 
really worked out very well.
    Senator Nelson. Is that to say that you are suggesting to 
us that over the course of the next 20 or 30 years that what we 
should do is reduce our energy consumption of foreign oil so 
that we're completely free of foreign oil over the course of 
the next two or three decades?
    Dr. Greenspan. I would say we reduce our consumption of 
petroleum. Because whether foreign or domestic, it doesn't 
affect the price. But what is necessarily the case, as far as 
the United States is concerned, if national security is the 
issue, is weaning ourselves off of those very serious sources 
of supply which create problems for us. The issue is to get off 
petroleum, not whether or not it's imported or not. And I think 
that where our ethics ought to be are in those promising areas 
where large possible changes are conceivable. And that's the 
reason why I would like to see us move as quickly as we could 
to find out whether the various forms of cellulosic ethanol are 
in fact feasible. Everyone thinks they are, everyone has 
figured out the acreages we need of switchgrass and the extent 
of types of significant crop yield changes that are required 
and the technology of converting these carbohydrates into oil 
is well known. Indeed, we used to use ethanol in American motor 
vehicles before the first World War, so it's not an unknown 
technology, but we don't know if we can make it work at the 
levels, the volumes, the huge volumes that are going to be 
required to make a very major--very major effect in motor 
gasoline consumption in the United States.
    Senator Nelson. Well, if it doesn't work, I'm going to be 
advocating for an Apollo Project.
    Dr. Greenspan. I hope it works, sir.
    The Chairman. Thank you very much, Senator Nelson. I have 
just one more question and this concerns an area we haven't 
touched upon today. Some in the coal industry believe that 
there are possibilities for believing there's a portion of the 
petroleum demand in the United States which is the use of coal. 
This then leads to other questions--quickly environmental 
considerations which many in our country believe that although 
there are large reserves of coal available they have 
environmental problems.
    Now this leads to a debate--we've been reading in the 
press--between various companies in the coal industry. Some are 
saying that it may simply be a prudential measure that at some 
stage the United States will require carbon sequestration and 
therefore if you're building a new power plant you ought to 
build one that takes that into consideration. Whereas others 
take a more traditional view. That is that all of this carbon 
sequestration is very expensive. Even the procedures are not 
altogether well established, they would claim. And then we have 
sort of the issue of the scientific evidence for climate 
change, global warming, which sometimes leaves the science into 
the almost theological as people dispute this in the country. 
So it swirls around the coal business in a big way.
    On the other hand, the discussion of coal can't be omitted 
from the conversation because from the United States' 
standpoint, we do have a lot of coal. As locally based in many 
places in our country and there are many persons who are 
prepared to build power plants under certain circumstances that 
sequester the carbon and might serve us for a long time.
    Have you given any thought to the place of coal in this? 
And the debate that I've just described abruptly here?
    Dr. Greenspan. Well, Mr. Chairman, it's fairly obvious that 
if the worst of all possible circumstances arose, we do have 
the technology to create, to build only plug-in motor vehicles, 
and to use only coal, whether it's cleaned, or otherwise, to 
generate electric power. We can keep our vehicle fleet on the 
road. Now I grant you that there will be a lot of required, re-
plug ins every hundred miles or thereabouts, but we could do 
it. That's the extreme fallback position.
    Less than that is obviously we are moving toward the 
sequestrated carbon and other clean technologies, but I don't 
think we've focused enough on nuclear. The technology of 
nuclear has changed dramatically since Three Mile Island. The 
French have been running three-fourths of their electric power 
system for decades on nuclear and it's worked quite fine. I 
think that our knee-jerk reaction against the issue of nuclear 
is in the full context of our environmental requirements, and 
indeed the health requirements involved in getting a very large 
coal economy, have got to be matched against nuclear. Nuclear's 
got problems, there are difficulties clearly with waste and a 
number of other issues, but we are developing technologies 
which can address it on an interim basis, meaning 100 years or 
something like that. Without putting nuclear into the mix here, 
I think we're making a mistake.
    But the one thing we can say with a reasonable degree of 
accuracy is that the energy abundance on which this Nation was 
built is over. We no longer have the choice of one abundant 
energy source versus another. We're now having to make choices 
as I put in before, between the non-good, and the still less 
non-good. We will not have the uninhibited lifestyle available 
to us that very low-cost and available energy enabled us to 
live up through the 1950s and the 1960s and indeed even today. 
Because what is happening is year by year we're getting closer 
to the point where we're starting to really run out of oil, 
even in the national oil companies. And at some point we're 
going to reach a peak of production, and it's going to start 
down. That doesn't mean that oil is going to go away. You can 
have a decline go on for a long period of time and still 
produce a good deal of oil, but oil is a finite resource. We 
have to remember that we tend to switch to a new major fuel 
before the other major fuel is dissipated. We moved to coal 
before we denuded the forests of wood, and we moved to 
petroleum before we ran out of coal. And I would surely presume 
we're going to move to the next set of energy technologies 
before we run out of oil.
    The Chairman. Senator Voinovich, do you have additional----
    Senator Voinovich. I do, Mr. Chairman.
    I'd just like to get back to that natural gas question 
again. From what I heard you say, it's probably going to be 3 
or 4 years before Mrs. Jones in Cleveland, Ohio, is going to 
see her cost of heating go down?
    Dr. Greenspan. I don't know what the time frame is. If you 
had asked me 2 years ago, I would have said we probably would 
be there by now--we haven't been. It's been a much more 
difficult, just plain institutional structure--it's got nothing 
to do with technology or anything like that. It's just that we 
haven't managed it in a way to lock in foreign sources of gas, 
find the appropriate tanker fleets, get the contracts written 
so certain numbers of deliveries are made to each LNG terminal 
per month, and have the gasification of the liquids structured 
in such a manner that it goes into the pipelines as we need 
them----
    Senator Voinovich. So, basically what you're saying is that 
the future in terms of getting our costs down are the liquefied 
natural gas, and we've got to move on that as quickly as we 
can.
    Dr. Greenspan. Yes, I can not envisage any way to get 
natural gas prices down in the United States other than through 
a significant increase in the imports of liquefied natural gas.
    Senator Voinovich. Well, you might be interested to know 
that the last energy bill did provide some significant 
incentives in clean coal technology to--we have an abundance of 
coal, 250 years of coal in this country to utilize that more 
than we're now doing it, and the other thing--I don't know 
whether you're aware of it, but I have a Nuclear Regulatory 
Commission under my subcommittee in another committee. We have 
19 applications. They are coming into the NRC, and so because 
of the incentives that we put into the energy bill, they're 
moving in that direction. So I think that's something that we 
should be----
    Dr. Greenspan. Are we getting to, yet, a standardized 
nuclear plant which everyone can basically deal with without 
waiting for the years and years of people fussing over----
    Senator Voinovich. Well, the technology's out there, and in 
addition to that, we've made it easier for them. They can now 
commit to their application with the technology and siting, and 
most of these are going to site them in areas that are already 
sited, so you don't have to deal with the ``not in my back 
yard'' syndrome that they run into, and the technology's pretty 
well accepted. A lot of it is European technology. Some of it 
has been used in South Africa--so I think that we're, we've got 
it, and I think the reason why we're seeing the applications is 
because we do have the technology that we can move forward 
with.
    The other question I have is dealing with--getting back to 
oil--after sitting in on hearings I start to sweat bullets 
about how vulnerable we are to some foreign power deciding to--
I mean, I thought what if Saudi Arabia becomes unstable? 
Somebody like Osama bin Laden gets elected and with their 
mindset, we're just going to cut it off and it doesn't make any 
difference whether we get the money or not, we're going to do 
what we're supposed to do. You have Chavez talking about it 
down in, you know, let's get at the United States--so I think 
we should be moving away from the Persian Gulf in terms of that 
area because it's not that stable, and God only knows where 
this whole terrorism thing's going to finally play out. We 
don't know. We're very uncertain about this.
    But if you take that into consideration, the next question 
is, we spend--according to testimony before this committee--
about $50 billion a year to protect our oil in the Persian 
Gulf. And if we gradually move away from that source, who's 
going to pick up the costs of protecting it? I mean, I don't 
think some of our European allies get it that we've been doing 
them a big favor for a long time of protecting that source of 
oil supply.
    So, the question is, if we move away from that--first of 
all, do you think that's a good idea? Second of all, if we do--
maybe this is beyond, you know, it may be a foreign policy 
question--what implication does that have in terms of our 
relationship with these countries in the Persian Gulf?
    Dr. Greenspan. First of all, Senator, I think that the 
issue is not from whom we purchase our crude oil. It's what the 
price is. Because we have an international market. And merely 
saying that we won't buy from one supplier or the other is 
really not terribly important, because the trade is so large 
and the interchange of crudes is so substantial that there's 
one price in the world for each particular grade adjusted for 
transportation and the like. And so whether we buy from Saudi 
Arabia, or from Venezuela, or from Canada doesn't matter. The 
question basically is what is the overall oil infrastructure 
supply and therefore, given the world demand, what is its 
price. And I think our interests and indeed I think I've always 
envisaged the reason why we have such large investments in the 
Middle East to protect oil is essentially that we are the major 
user. We consume 25 percent of the world production, but it 
doesn't matter where we get the oil. But what we do know is 
that if the Middle East gets shut down or places in the Middle 
East from which we get no oil shut down, the cost to us will go 
up the same. And so, our interest is in maintaining the supply, 
and indeed not only the Middle East, but actually the tanker 
shipments across the various oceans.
    So our interest has got to be, until we can reduce our 
consumption, to hope and protect if we can, the existing system 
until it eventually begins to peak--and it will go down of its 
own--I don't know whether or not it starts down in the 2040s as 
I gather the Energy Information Agency of the Department of 
Energy has been projecting, or whether some new technologies 
come in and reservoirs are capable of getting 80 percent 
recoveries--well above what it is now. Obviously, it increases 
the availability very substantially--it's hard to know where 
all of this is coming out, but what we do know is our interest 
is, so long as we are very critically determined on petroleum, 
to make sure that its aggregate supply is maintained. Not that 
it's maintained in any particular geographic arrangement.
    Senator Voinovich. Mr. Chairman, can I ask one more 
question? It gets back to your legislation. Tom Friedman 
recently suggested that we refocus our policy on developing an 
access of energy to compete with. He quotes it ``Access of 
Evil'' that would mean that India, China, and the United States 
get together and start talking with each other about this whole 
energy business. To talk about the supply and how we need the 
supply and what are some of the things that maybe we can do 
respectively to try to reduce the demand.
    Dr. Greenspan. I'm not sure what it is that that confab 
will conclude and what we can do to enforce the particular 
conclusion. If there is a, for example, a joint discussion to 
find ways in which we can all conserve on energy, and 
interchange ideas and abilities, there may be something to 
that. But it's not clear to me that the three of us combined 
somehow can be a cartel which will dictate to OPEC--doesn't 
sound credible to me. Because I don't think any of us has the 
capability of restraining our use of petroleum without 
impacting on our economies very significantly and it's only 
when we find alternate means and alternate solutions that we 
have that capability. So, Tom Friedman has got a lot of good 
ideas. I'm not sure this is one of his better ones.
    Senator Voinovich. Thank you, Mr. Chairman, and thank you, 
Mr. Chairman.
    The Chairman. Thank you, Senator Voinovich, and we all 
thank you again, Chairman Greenspan for your testimony today. 
It's been comprehensive and very, very helpful.
    I want to present for the record--a request by Senator 
Biden--the written testimony of John Podesta, President of the 
Center for American Progress, to be made a part of the record. 
Without objection, that insertion will occur.
    [Editor's note.--The previously referred to information 
appears in the Additional Material Submitted for the Record 
section at the end of this hearing.]
    Thank you again, we look forward to continuing our visits 
with you.
    Dr. Greenspan. Thank you very much, Mr. Chairman.
    The Chairman. The hearing is adjourned.
    [Whereupon, at 11:37 a.m. the hearing was adjourned.]
                              ----------                              


              Additional Material Submitted for the Record


    Prepared Statement of John Podesta, President of the Center for 
                           American Progress

    Chairman Lugar, Senator Biden, and members of the Senate Foreign 
Relations Committee, thank you for the invitation to submit testimony 
today on the critically important topic of our Nation's oil dependence 
and the risk it poses to our economy. The Center for American Progress 
has placed a high priority on developing policy solutions to a variety 
of energy-related issues, including the pressing challenge of our 
Nation's growing dependence on oil and the closely related threat of 
global warming.
    The United States is saddled with rising prices for gasoline and 
crude oil, escalating uncertainty in energy markets, and increasing oil 
importation stretching into the foreseeable future. These stubborn 
facts will not change without an aggressive policy response that 
promotes both radically increased energy efficiency in our vehicle 
fleet and a rapid shift to greater use of alternative renewable fuels. 
At the Center for American Progress, it is our belief that such a bold 
program to advance both new technology for conservation and greater use 
of biofuels to replace polluting fossil fuel will have a tremendous 
positive impact on jobs and economic growth, as well as securing 
improved national, economic, and environmental security. This moment 
holds both great risk and great opportunity.
    Let me quickly review the underlying fundamentals.
              supply is struggling to keep up with demand
    Today the cost of a gallon of gasoline remains well above $3 per 
gallon in many parts of the country, and the cost of a barrel of oil 
continues to hover above $70. Just a few years ago, these prices would 
have been unthinkable, and they are having a significant and regressive 
impact on working families and on our greater economy. The causes of 
these persistent high prices are clear. Global demand is outpacing 
supply and refining capacity, creating a tight market that leaves us 
and our allies increasingly vulnerable to disruptions in energy 
supplies from unstable and sometimes hostile countries (which adds a 
further premium to prices). Consumers have insufficient choices in fuel 
type, fuel efficiency, or even other transportation options, all adding 
to the economic strain on families.
    The United States is responsible for 25 percent of global oil 
demand, largely for our vehicle fleet, yet we possess less than 3 
percent of proven oil reserves. Clearly domestic supplies cannot solve 
this problem. Oil is a global commodity, and global demand will define 
our options as long as we rely on oil as the lifeblood of our economy. 
These patterns show few signs of declining. Today global oil demand has 
already surpassed 80 million barrels per day, and the Energy 
Information Administration (ETA) projects it to reach 103 million 
barrels per day in 2015 and nearly 120 million barrels per day in 2025. 
Projected increases in world oil demand would require an increase of 
more than 42 million barrels per day relative to 2002 crude oil 
production capacity, the equivalent of four Saudi Arabias, but global 
oil reserves are already being depleted three times faster than new 
reserves are being discovered, according to a 2004 Department of Energy 
(DOE) analysis.
    Domestically, our demand shows even more alarming trends. As the 
largest consumer of oil on the planet, we are most vulnerable to 
fluctuations in this market. Yet America's dependence on imported oil 
has grown steadily since 1972, when domestic output reached its peak of 
11.6 million barrels per day. Domestic production is now 9 million 
barrels per day and declining. Yet total oil consumption is nearly 21 
million barrels per day, and, absent change, projected to reach 29 
million barrels per day by 2025. Today, 66 percent of oil consumed in 
the United States comes from foreign sources, up from 58 percent in 
2000, with about 20 percent of those imports coming from the volatile 
Persian Gulf region. In spite of these alarming statistics, the 
efficiency of our vehicles is moving in the wrong direction. In 1987, 
the average fuel economy of U.S. auto and light truck fleet was 26 mpg; 
in 2004, that number had fallen to 25 mpg.
           reliance on oil has real costs to the u.s. economy
    In 2005, the United States spent over $300,000 a minute on foreign 
oil. Oil is the largest component of the U.S. trade deficit, which has 
reached an unprecedented cumulative level of $2.835 trillion during 
this administration. In 2005, our trade deficit reached $723.6 billion, 
a 17 percent jump over the previous year and twice the trade deficit of 
2001. Oil imports accounted for nearly 25 percent of the entire 
deficit, with rising crude oil costs adding an estimated $70 billion to 
the Nation's trade imbalance in 2005 and as much as $100 billion 
predicted in 2006. Volatility in the oil market creates further costs, 
estimated by the DOE at $7 trillion during the past 30 years. Together, 
these impacts mean that our reliance on oil is a substantial drain on 
our overall economy.
    Rising energy costs are also highly regressive. Working families--
who spend the largest share of their income on transportation and 
energy--are hit the hardest. A recent Center for American Progress 
analysis found that between March 2001 and May 2006, rapidly rising 
gasoline prices and flat minimum wages have resulted in a nearly 105 
percent increase in the cost for minimum wage earners of getting to 
work each week. On average, it now takes 11.2 hours of work--until 
Tuesday morning--for these low wage earners to pay to get to work, up 
from an average of 5.5 hours in March 2001. Amid these rising gasoline 
and oil prices, 23.2 million families with incomes of less than $24,102 
paid almost 8 percent of their annual income for gasoline in 2004, 
according to the most recent data from the Bureau of Labor Statistics. 
And that's before the recent jump in gas prices.
    Yet while consumers are taking a hit at the pump, oil companies 
have made record profits. In 2005, Exxon earned the highest profit ever 
recorded by a corporation: $36 billion. Large profits were reaped 
throughout the industry, with companies like Valero Energy--the 
Nation's largest oil refiner--posting record quarterly earnings of $849 
million. In light of the record-breaking profits and substantial social 
costs from energy prices, there is a need for increased Federal 
oversight on issues of market power and consolidation, market 
manipulation, and price gouging.
    A further cost to America's businesses and consumers has been the 
failure to put the full weight of public policy behind the transition 
to energy efficient and renewable energy technologies. U.S. auto 
manufacturers, who are hemorrhaging jobs, are losing market share to 
foreign competitors in the race to produce more fuel-efficient vehicles 
and could benefit from strong manufacturing conversion incentives to 
get more efficient and alternative-fuel cars on the road. The slow 
progress in bringing biofuels to scale delays the benefits to U.S. 
farmers and refinery and construction workers that will come from an 
emerging renewable fuels industry and upgraded infrastructure.
            reliance on oil poses serious national security
                   and diplomatic challenges as well
    Since 2001, America's dependency on foreign oil has steadily 
increased, even as the cost of oil has more than doubled. This 
dependence compromises our foreign policy objectives by compelling the 
United States to support or tolerate authoritarian regimes that pose a 
threat to its national security. An increasing share of the world's oil 
imports will come from these undemocratic countries, not from friendly, 
stable ones like Canada or Norway.
    These political risks both threaten our security and impose direct 
costs by driving an ever larger risk premium into the price of each 
barrel of oil. Osama bin Laden has identified the global energy 
infrastructure as an important target for his followers, and in 
February 2006, suicide bombers attacked a key oil processing facility 
in Saudi Arabia. The attackers failed to penetrate the heavily guarded 
facility's security perimeter, but nevertheless oil prices jumped 3.4 
percent. Likewise, Iran has to do no more than threaten to cut supply 
for oil prices around the world to spike, as it demonstrated once again 
this week.
    The defense of the global oil infrastructure is another cost born 
in large part by the United States. Around the world, the U.S. military 
is charged with protecting pipelines, refineries, and strategic sea 
lanes from terrorist or insurgent attack. The Department of Defense has 
stepped up its arms deliveries and training to forces in Angola and 
Nigeria. As long as American forces remain in Iraq, a significant 
number of them will spend their time guarding highly vulnerable 
pipelines, refineries, loading facilities, trucking routes, and other 
petroleum installations. The U.S. Navy is patrolling the vital tanker 
lanes of the Persian Gulf and the Strait of Hormuz, the South China 
Sea, and the Strait of Malacca. While these costs are not solely born 
in the defense of oil, our dependence on oil makes them essential.
    The Congress may have to vote again before the end of the year to 
raise the Federal debt limit, this time to $9 trillion. The combination 
of our unbalanced fiscal policy with a deepening trade deficit, a third 
of which came from imported petroleum products in 2005, is untenable. 
As we finance our deficits in global capital markets, we reduce our own 
flexibility in national security matters while increasing the leverage 
of our competitors. I do not want to overstate the importance of this 
development, but it is imprudent to think that the increase in our debt 
attributable to energy costs will not negatively impact our national 
security.
    Climate change--which is caused by excess emissions of heat-
trapping gases from the combustion of fossil fuels as well as other 
human activities--also poses a growing threat to our national and 
economic security. Scientists project that the earth's average 
temperature will increase 2 to 10+F (1.4 to 5.8+C) over the next 100 
years if the world fails to curb greenhouse gas emissions (of which the 
United States currently accounts for 25 percent). The U.S. State 
Department released a report
predicting that these increases in temperature would cause sea levels 
to rise (threatening the coastal areas where 53 percent of Americans 
live), more frequent and severe storms, the widespread destruction of 
ecosystems, and more frequent heat waves and droughts. One of the many 
lessons of Katrina is that the economic and social impacts of such 
natural disasters would be enormous.
    In much of the developing world, meanwhile, reliance on oil has 
already been devastating. The International Energy Agency (lEA) 
estimates that for every $10 hike in the cost of a barrel of crude, the 
economy of an oil importing country in sub-Saharan Africa is impacted 
more than 10 times as much as the United States. As a result, important 
gains reaped from sensible debt forgiveness initiatives are being wiped 
out by rising energy costs (see Annex 1). For example, the increase in 
the cost of imported oil from 2002 to the projection for 2006 for 
Ethiopia is over 10 percent of their total debt service relief granted. 
This increased cost of oil is equal to 4 percent of their GDP. To put 
that percentage in context, Ethiopia spends the equivalent of 2.6 
percent of their GDP on health care. The resulting squeeze on 
struggling developing world budgets can lead to serious consequences 
with international repercussions. Decreasing our reliance on oil and 
helping the developing world to do the same would reduce greenhouse gas 
emissions and global inequity, thereby ultimately increasing domestic 
economic security in our Nation and the developing world.
        leadership in moving away from oil dependence is needed
    To find a path forward that strengthens our domestic economy and 
increases our security, it is essential that the Senate continue to 
show real leadership in advancing policy solutions that break our 
dependence on oil in a manner consistent with the rising threat of 
climate change. These policies should encourage the domestic production 
of more efficient vehicles and the development of a domestic renewable 
fuels industry and infrastructure that decreases both oil consumption 
and greenhouse gas emissions.
    The American Fuels Act (S. 2446) written by Chairman Lugar and 
Senator Obama, for example, is a bipartisan measure that creates 
meaningful incentives for commercializing the next generation of 
ethanol and investing in new fueling infrastructure. The recently 
introduced Clean EDGE legislation (S. 2829) contains many building 
blocks for a rapid transition to a more secure energy future, including 
strong incentives for the rapid deployment of an E85 ethanol 
infrastructure for distribution and fueling stations, increased 
investment in commercialization of cellulosic ethanol, strong 
incentives and mandates for the deployment of flexible fuel vehicles 
and hybrid electric cars within the fleet, as well as manufacturing 
conversion incentives for domestic production of high performance cars.
    In addition, innovative policies that will ensure reductions in oil 
consumption, like the binding oil savings targets included in the 
Vehicle and Fuel Choices for American Security Act (S. 2025), or an 
increase in fuel economy standards, should be part of a meaningful 
policy program to break the grip of imported oil on the domestic 
economy. Senator Tom Daschle, a Distinguished Fellow at the Center for 
American Progress, and Vinod Khosla, who testified before this 
committee just last month, have recently proposed a Carbon Alternative 
Fuel Equivalent standard that expands on the traditional CAFE 
calculations to incorporate both fuel economy and the use of 
alternative fuels in a single metric that captures the benefits of 
reduced carbon emissions.
    Over time, ending our oil dependence will mean a stronger economy, 
more jobs, healthier communities, greater innovation, and a more 
efficient and productive workforce. These benefits should not be 
delayed. The economy of Brazil offers a compelling picture of what an 
alternative fuel future holds for the United States. Since the mid-
1970s, Brazil has saved $100 billion dollars by substituting 
domestically produced ethanol for imported oil. Ethanol now accounts 
for 20 percent of Brazil's transportation fuel market, and production 
of flexible fuel vehicles able to run on gasoline or ethanol has grown 
from less than 1 percent of the Brazilian new car market in 2001 to 
more than 70 percent today. The country of Sweden has proposed to do 
even more, setting a national goal to end their reliance on oil 
altogether over 15 years by 2020.
    The United States has had its own success with the recently enacted 
Renewable Fuel Standard (RFS). The RFS mandates that 7.5 billion 
gallons of ethanol be used in the U.S. fuel supply by 2012, but a 
rapidly growing ethanol industry is on track to meet that requirement 
well before the deadline. We need to nurture this success into an even 
larger market for renewable fuels from sources that minimize 
environmental impacts and greenhouse gas emissions. All opportunities 
to expand the market for clean renewable fuels should be pursued. For 
example, the Environmental Protection Agency's rulemaking on mobile 
source emissions presents a unique one. By replacing with ethanol the 
25 percent of our gasoline supply that is made up of aromatic 
compounds, we have the opportunity to improve air quality and protect 
public health while increasing our national and economic security.
    Clearly, there is much to be done, but as seen in the previous 
examples, much is possible. It is time for concerted effort to move 
rapidly toward increased energy independence by uniting the country 
behind a bold national goal as we did with the Manhattan Project or the 
Apollo space program. The American people are looking to you for 
leadership.
    Thank you for the opportunity to submit this testimony.

                                                              ANNEX 1: THE IMPACT OF HIGHER OIL PRICES ON SELECT HIPC COUNTRIES \1\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                                                        Total
                                                                                                                                          Cost of  Increase  Increase     Public       poverty
                                                   Debt service       Annual oil      Estimated cost    Projected cost    Increase in     oil in    in cost   in cost  expenditure    reduction
           Country                GDP (US$ in     relief granted   consumption (bbl      of oil to        of oil to      annual cost to   2006 as     as        as      on health   expenditures
                                     2005)             (US$)         in 2003) \2\     country in 2002  country in 2006   country 2002-    percent   percent   percent   as percent   as percent
                                                                                         (US$) \3\        (US$) \4\         2006 \5\        GDP      debt       GDP     GDP (2002)    GDP (est.
                                                                                                                                                    relief                            2006) \6\
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Mauritania...................  1.4 billion.....  1.1 billion.....  9 million.......  184 million.....  520 million....  336 million....      38.3      30.5      24.8          2.9           5.5
Sao Tome and Principe........  69 million......  200 million.....  0.2 million.....  5 million.......  14 million.....  9 million......      20.4       4.5      13.2          9.7          31.1
Guinea-Bissau................  280 million.....  790 million.....  0.9 million.....  19 million......  53 million.....  34 million.....      18.9       4.3      12.2          3.0           5.3
Sierra Leone.................  1.1 billion.....  950 million.....  2 million.......  50 million......  141 million....  91 million.....      12.5       9.6       8.1          1.7           4.9
Gambia.......................  429 million.....  90 million......  0.7 million.....  15 million......  43 million.....  28 million.....      10.1      31.1       6.5          3.3           5.0
Burundi......................  730 million.....  1.5 billion.....  1 million.......  23 million......  65 million.....  42 million.....       8.9       2.8       5.7          0.6           2.9
Senegal......................  8.0 billion.....  850 million.....  11 million......  238 million.....  671 million....  434 million....       8.4      51.0       5.4          2.3           8.6
Rwanda.......................  1.8 billion.....  1.4 billion.....  2 million.......  46 million......  130 million....  84 million.....       7.1       6.0       4.6          3.1          10.6
Ethiopia.....................  8.8 billion.....  3.3 billion.....  10 million......  207 million.....  585 million....  378 million....       6.6      11.4       4.3          2.6          17.0
Malawi.......................  2.0 billion.....  1 billion.......  2 million.......  42 million......  118 million....  76 million.....       5.9       7.6       3.8          4.0          15.4
Guinea.......................  3.6 billion.....  800 million.....  3 million.......  64 million......  182 million....  118 million....       5.1      14.7       3.3          0.9           3.3
Mozambique...................  5.7 billion.....  4.3 billion.....  4 million.......  84 million......  238 million....  154 million....       4.2       3.6       2.7          4.1          17.6
Tanzania.....................  12.1 billion....  3 billion.......  8 million.......  169 million.....  476 million....  308 million....       3.9      10.3       2.5          2.7          12.1
Niger........................  3.4 billion.....  1.2 billion.....  2 million.......  41 million......  117 million....  76 million.....       3.4       6.3       2.2          2.0           6.5
Burkina Faso.................  5.4 billion.....  930 million.....  3 million.......  61 million......  173 million....  112 million....       3.2      12.0       2.1          2.0           5.9
Uganda.......................  8.0 billion.....  2 billion.......  4 million.......  77 million......  217 million....  140 million....       2.7       7.0       1.8          2.1          10.7
Mali.........................  5.4 billion.....  900 million.....  2 million.......  33 million......  92 million.....  59 million.....       1.7       6.6       1.1          2.3           7.7
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ This survey includes only countries in Africa that have reached either their completion or decision points under the Heavily Indebted Poor Country Initiative (HIPC) and are 100 percent
  reliant on oil imports. These are 17 of the total 29 HIPC countries.
\2\ Calculations made assume 2003 consumption levels are representative of levels in 2002 and 2006.
\3\ Cost of oil to country in 2002 is calculated using CIA World Factbook figures for estimated 2003 country consumption levels and an average of 2002 weekly crude oil prices provided by the
  Energy Information Administration of the Department of Energy, or $20.99/bbl. Inflation since 2002 is assumed to be negligible.
\4\ The estimated 2006 world oil price, $59.31/bbl is the average of 2006 weekly world prices as of June 1, 2006, as provided by the Energy Information Administration of the Department of
  Energy.
\5\ Increase in cost of oil from 2002 to 2006 denotes a 183 percent increase.
\6\ What is considered ``Poverty Reduction Expenditure'' varies according to country, but primarily includes public spending on education and health. It may also include rural infrastructure,
  water works, roads, HIV, social safety nets, and agricultural research.

Sources: CIA World Factbook; U.S. Department of State, Bureau of African Affairs; The World Bank, Energy Sector Management Assistance Program and International Development Association;
  International Monetary Fund; Department of Energy, Energy Information Administration; United Nations Development Program.