[Senate Hearing 109-861]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-861
 
                         THE HIDDEN COST OF OIL

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

                                HEARING



                               BEFORE THE



                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE



                       ONE HUNDRED NINTH CONGRESS



                             SECOND SESSION



                               __________

                             MARCH 30, 2006

                               __________



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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......................................................    27
    Prepared statement...........................................    28
Copulos, Milton R., president, National Defense Council 
  Foundation, Alexandria, VA.....................................     4
    Prepared statement...........................................     7
Huntington, Dr. Hillard, executive director, Energy Modeling 
  Forum, Stanford University, Stanford, CA.......................    11
    Prepared statement...........................................    15
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening 
  statement......................................................     1
Yohe, Dr. Gary W., John E. Andrus Professor of Economics, 
  Wesleyan University, Middletown, CT............................    18
    Prepared statement...........................................    22

                                 (iii)

  


                         THE HIDDEN COST OF OIL

                              ----------                              


                        THURSDAY, MARCH 30, 2006

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:40 a.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Richard G. 
Lugar (chairman of the committee) presiding.
    Present: Senators Lugar, Hagel, and Biden.

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

    The Chairman. This hearing of the Senate Foreign Relations 
Committee is called to order.
    The committee meets today to consider the externality costs 
of United States dependence on fossil fuels. The gasoline price 
spikes following Katrina and Rita hurricanes underscored for 
Americans the tenuousness of short-term energy supplies. Since 
these events, there is a broader understanding that gasoline 
and home heating prices are volatile and can rapidly spike to 
economically damaging levels due to natural disasters, 
terrorist attacks, or other world events. But, as yet, there is 
not a full appreciation of the hidden costs of oil dependence 
to our economy, our national security, our environment, and our 
broader international goals.
    Today, with the help of experts who have thought a great 
deal about these issues, we'll attempt to more clearly define 
some of these costs. We're cognizant that this is a difficult 
and imprecise exercise. We're also aware that most, if not all, 
energy alternatives have some externality costs. But we're 
starting from the presumption that if we blithely ignore our 
dependence on foreign oil, we are inviting an economic and 
national security disaster.
    With less than 5 percent of the world's population, the 
United States consumes 25 percent of its oil. If oil prices 
remain around $60 a barrel through 2006, we will spend 
approximately $320 billion on oil imports this year. Most of 
the world's oil is concentrated in places that are either 
hostile to American interests or vulnerable to political 
upheaval and terrorism. More than three-quarters of the world's 
oil reserves are controlled by national oil companies, and 
within 25 years the world will need 50 percent more energy than 
it does now.
    These basic facts demand a major reorientation of U.S. 
policy aimed at reducing U.S. dependence on fossil fuels. Our 
goals must be to mitigate the short-term costs of our 
dependence on oil while pursuing energy alternatives that would 
reduce the international leverage of petro-superpowers, improve 
environmental quality, cushion potential oil price shocks, 
stimulate new high-tech energy industries, and ground the 
American economy on energy sources that will neither run out 
nor be cut off by a foreign supplier.
    There are at least six basic threats associated with our 
dependence on fossil fuels:
    First, oil supplies are vulnerable to natural disasters, 
wars and terrorist attacks that can produce price shocks and 
threats to national economies. This threat results in price 
instability and forces us to spend billions of dollars 
defending critical fossil fuel infrastructure and shipping 
choke points.
    Second, over time, finite fossil fuel reserves will be 
stressed by the rising demand caused by explosive economic 
growth in China, India, and many other nations. This is 
creating unprecedented competition for oil and natural gas 
supplies that drives up prices and widens our trade deficit. 
Maintaining fossil fuel supplies will require trillions in new 
investment, much of it in unpredictable countries that are not 
governed by democracy and market forces.
    Third, energy-rich nations are using oil and natural gas 
supplies as a weapon against energy-poor nations. This 
threatens the international economy and increases the risk of 
regional instability and even military conflict.
    Fourth, even when energy is not used overtly as a weapon, 
energy imbalances are allowing oil-rich regimes to avoid 
democratic reforms and insulate themselves from international 
pressure and the aspirations of their own people. In many oil-
rich nations, oil wealth has done little for the people, while 
ensuring less reform, less democracy, fewer free-market 
activities, and more enrichment of elites. It also means that 
the United States and other nations are transferring billions 
of dollars each year to some of the least accountable regimes 
in the world. Some of these governments are using this money to 
invest abroad in terrorism and instability or demagogic appeals 
to anti-Western populism.
    Fifth, reliance on fossil fuels contributes to 
environmental problems, including climate change. In the long 
run, this could bring drought, famine, disease, and mass 
migration, all of which could lead to conflict and instability.
    Sixth, our efforts to facilitate international development 
are often undercut by the high costs of energy. Developing 
countries are more dependent on imported oil, their industries 
are more energy intensive, and they use energy less 
efficiently. Without a diversification of energy supplies that 
emphasizes environmentally friendly options that are abundant 
in most developing countries, the national incomes of energy-
poor nations will remain depressed, with negative consequences 
for stability, development, disease eradication, and terrorism.
    Each of these threats comes with a short- and long-term 
cost structure, and, as a result, the price of oil dependence 
for the United States is far greater than the price consumers 
pay at the pump. Some costs, particularly those affecting the 
environment and public health, are attributable to oil no 
matter its source; others, such as costs of military resources 
dedicated to preserving oil supplies, stem from our dependence 
on oil imports. But each dollar we spend on securing oil 
fields, borrowing money to pay for oil imports, or cleaning up 
an oil spill is an opportunity missed to invest in a 
sustainable energy future.
    Certain types of costs are extremely difficult to quantify, 
and we understand that many national security risks are 
heightened by our dependence. But how, for example, would we 
assign a dollar figure to Iran's use of its energy exports to 
weaken international resolve to stop its nuclear weapons 
program? Yet, we should do our best to quantify the externality 
costs of oil so we have a clearer sense of the economic and 
foreign policy tradeoffs that our oil dependence imposes upon 
us.
    As the U.S. Government and American business consider 
investments in energy alternatives, we must be able to compare 
the costs of these investments with the entire cost of oil. 
Public acknowledgment of the billions of dollars we spend to 
support what the President has called our, ``oil addiction,'' 
would shed new light on investment choices related to 
cellulosic ethanol, hybrid cars, alternative diesel, and other 
forms of energy.
    As we address these questions today, we'll have the benefit 
of a distinguished panel of experts.
    Dr. Hillard Huntington is the executive director of the 
Energy Modeling Forum at Stanford University. He is a senior 
fellow and past president of the United States Association for 
Energy Economics. He recently coordinated two studies funded by 
the Department of Energy that evaluated the economic risks of 
oil price shocks.
    Mr. Milton Copulos is the president of the National Defense 
Council Foundation. He has advised Secretaries of Defense, 
Energy, and Interior, and was a member of the National 
Petroleum Council. He is widely published on military affairs, 
and has devoted much study to the military expenditures 
associated with ensuring the flow of oil.
    Dr. Gary Yohe is the John E. Andrus Professor of Economics 
at Wesleyan University. Professor Yohe is widely published on 
the adaptation and mitigation of climate change. He recently 
edited ``Avoiding Dangerous Climate Change,'' the collection of 
papers on the subject that were prepared for last year's G-8 
summit.
    We welcome these three distinguished witnesses. We look 
forward to their insights.
    And, first of all, I would like to recognize my colleague, 
Senator Hagel, for any opening thought or comment he might have 
this morning.
    Senator Hagel. Mr. Chairman, thank you. I do not have a 
statement. I look forward to listening to our witnesses.
    I think your focus on this issue at this time is not only 
appropriate and relevant, but one of the critical challenges 
that faces our country and the world over the next 25 years. 
So, thank you for your attention to this. And I thank, as well, 
our witnesses for giving us their expertise and time.
    Mr. Chairman, thank you.
    The Chairman. Well, thank you very much, Senator Hagel.
    I'll ask the witnesses to testify, starting with Mr. 
Copulos, then Dr. Huntington, and then Dr. Yohe.
    Let me say at the outset that your full statements will be 
made a part of the record, so that you need not ask permission 
for that to occur. Please either give the statements in full or 
summarize, as you wish. We will not have a rigid time limit. 
We've come to hear you. We want to hear your testimony, and 
then have opportunities to raise questions.
    Mr. Copulos.

  STATEMENT OF MILTON R. COPULOS, PRESIDENT, NATIONAL DEFENSE 
               COUNCIL FOUNDATION, ALEXANDRIA, VA

    Mr. Copulos. Thank you, Mr. Chairman. Bear with me. One of 
the few signs of advancing age is you need more than one pair 
of glasses. The other is, the barber spends more time on the 
ears than on the top of your head. [Laughter.]
    As you know, I'm Milton R. Copulos. I'm president of the 
National Defense Council Foundation. I would like to thank 
Chairman Lugar for giving me the opportunity to speak with the 
committee today. And I would also like to commend him for his 
leadership in addressing our Nation's perilous energy 
dependence. He ``gets it.'' And that's important. Because what 
he gets is that America is rushing headlong into a disaster, a 
disaster that threatens to leave us with the Hobson's choice 
between economic calamity and world-resource war. What's worse, 
it's a disaster of our own design. Like Pogo said, ``We have 
met the enemy, and they is us.'' More than three decades have 
passed since the 1973 OPEC embargo first warned us about our 
vulnerability to imported oil. And yet, nothing substantial has 
been done.
    As bad as things were then, the emerging economies of 
China, India, and Eastern Europe are increasing competition for 
scarce resources, making the situation even worse. Indeed, by 
the year 2025, the world will need an additional 40 million 
barrels of oil per day. And the simple fact is, it's not there 
to be found from conventional resources.
    But it's not just the physical shortfall that's the 
problem. It's also the problem of the instability of many of 
our sources. Out of our six top suppliers, four--Saudi Arabia, 
Venezuela, Nigeria, and Iraq--which supply 38.2 percent of our 
imports, 22.6 percent of total production, are of, at least, 
questionable reliability. Given the situations in these 
countries, it's virtually certain that sometime within the next 
3 to 5 years there will be an oil supply disruption. And unlike 
the disruptions of the past, the consequences could be far, far 
more severe. We estimated that the oil supply disruptions of 
the 1970s cost this Nation between $2.3 and $2.5 trillion. And 
I should note that Oak Ridge National Lab places the estimate 
at $4 trillion, so, if anything, we're conservative. However, 
the next oil shock, because of our higher dependence, because 
of our higher use, could cost this Nation $8 trillion, almost 
two-thirds of our GDP.
    And that's not the only concern that we have. One of the 
other most important ones is that oil, which has always been a 
vital military commodity, has now become much more of one. 
During the gulf war, a contemporary U.S. Army ``heavy'' 
division, to illustrate, used more than twice as much oil on a 
daily basis as an entire World War II field army. Indeed, the 
582,000 people we sent to the first gulf war used more than 
twice as much oil every day as the entire 2-million-man Allied 
Expeditionary Force that liberated Europe in World War II. But, 
as high as that use was, it's even higher now. There's been a 
20-percent increase in the amount of oil for a deployed soldier 
that we now require. It now is one barrel of refined products 
per soldier per day. And it's going to go up further from 
there.
    Well, these costs have long been a concern to our 
organization. In fact, in 2003 we published a large study, 
``America's Achilles' Heel: The Hidden Costs of Imported Oil,'' 
that entailed the review of hundreds of thousands of pages of 
documents, including the entire order of battle of the U.S. 
Department of Defense. We looked at historic data. We just did 
a massive review. And we concluded, at that point, that the 
hidden cost of defense and other externalities came to $304.9 
billion annually. That was equivalent, at that time, to adding 
$3.68 to the price of a gallon of gasoline.
    But much has changed since then. When we did that study, 
the refinery acquisition cost of a barrel of oil was $26.92. 
Indeed, in the base year, we spent $99 billion on oil imports, 
and thought that was high. Well, in 2005 we spent 
$251,619,000,000 on oil imports. And this year, as the chairman 
noted, even if prices don't go above $60 a barrel--and I 
suspect they could--we're going to spend at least $320 billion 
on imported oil.
    But that's not all that's changed. In 2003, we were 
spending $49.1 billion annually to maintain the capability to 
defend the flow of oil from the Persian Gulf. And I should 
note, this is a commitment that is not new. We have had this 
commitment since 1940--since February 14, 1945, when Franklin 
Roosevelt met with King Abdul Aziz of Saudi Arabia and 
basically came to an agreement that we'd protect their oil in 
exchange for access to it. Every President, Republican and 
Democrat, since then has reaffirmed it. But now, when you add 
in the supplementals for Iraq--and I should say that it is 
foolish to suggest there's no connection to oil in our 
involvement there--the total comes to $132.7 billion annually.
    So, what does this mean? Well, what it means is that the 
hidden cost in 2005 for our oil profligacy came to $779.5 
billion. Now, we looked at it two ways. We amortized it over 
the total volume of imports, and then we also looked at the 
Persian Gulf separately, because so much of the defense cost is 
loaded there. Well, if you look at it over the total volume of 
oil, it's like adding $4.10 to the price of a gallon of 
gasoline. In terms of the Persian Gulf, it's $7.41 to the price 
of a gallon of gasoline, which means, at our current purchase 
price, you're talking--the true cost is $9.53 a gallon for 
2005.
    But 2005 was just the beginning, because this year we're 
going to spend at least $320 billion on imports, as I said. 
That's a $70 billion increase in just 1 year. When we look at 
that, it raises the hidden cost to $825.1 billion. That's 
almost twice the President's request for the Department of 
Defense authorization for FY 2006. It also means that, 
amortized over the total volume of oil, the premium in 2006 
will be $5.04; looking at the gulf, $8.35. That means the real 
cost of a gallon of gasoline is about $10.86.
    To put it in perspective, if you drive a family sedan, a 
Toyota Camry, something like that, it's really costing you 
$217.20 to fill your tank. If you have a large SUV, like a Ford 
Expedition, you're spending $325.80 to fill your tank.
    Now, of course, the question is, you know, Can we do 
anything about it? Obviously, this is a drain on our economy we 
cannot afford. And yet, we have had to sustain it. Well, the 
good news is, the answer is, yes, we can do something.
    The simple truth is, our Nation does not lack energy 
resources. What we have lacked is the political will and public 
commitment to make full use of what we have. In the short term, 
we face one critical problem. We've got a short-term problem 
and a long-term problem.
    The short-term is, How do you fuel the 220 million 
privately owned vehicles that are on our roads today? They 
require some sort of fuel that will burn in a conventional 
internal combustion engine. In the out years, we need to look 
at how we can make that transition. So, there are some things 
that we can do, short term.
    First, we need to take full advantage of our offshore oil, 
oil in other places, where we can get at it--offshore, in 
particularly, because the access will be quicker. We need to 
expand our use of renewable fuels--alcohol and biodiesel. And 
that, I think we should really consider looking at opening up 
the Caribbean basin as a source of those fuels, lifting the 
tariffs that we have on fuel alcohol for that region, and let 
those nations gain some economic traction. There's depressed 
sugar prices now. Turning that sugar into alcohol would help 
enhance our supplies. And there's plenty to go around. It's not 
going to compete with domestic producers. We can use everything 
they have, and more.
    We also should look at nonpetroleum consumption. The fact 
that two-thirds of--nontransportation consumption--the fact 
that two-thirds of our oil goes to transportation also means 
one-third doesn't. And, in some ways, it's easier to fix that 
than it is to fix the auto fleet.
    For example, there's a fellow out in Moline, IL, a builder 
named George Bialecki. Small guy. He's building homes that are 
85-percent energy efficient, that use no oil whatsoever. They 
use geothermal heat pumps instead. And he's building for 20 
percent less than conventional builders that don't have the 
features his homes do. There's a new process that's been 
developed in Canada--they are using it; this is not R&D--that 
turns wood into fuel oil that can be used. There are many 
things like that. But to do this, we have leadership.
    And, in that regard, again, I want to note that Chairman 
Lugar and his colleagues, Senators Chafee, Coleman, Nelson, and 
Obama, deserve particular praise for their sponsorship of S. 
2025, the Vehicle Choices for American Security Act. It's based 
on the Energy Security Blueprint of the Set America Free 
Coalition, of which I have the honor of being one of the 
founding members. It's clear that this is the sort of 
bipartisan support for the issue that can help us avoid the 
Hobson's choice between economic catastrophe and global-
resource war.
    And one other point I really want to make sure we don't 
forget. Some portion of every dollar we spend on imported oil 
finds its way into the hands of people who would do us harm. At 
least $1.5 billion of it does. So, in essence, we're paying for 
both sides of the war on terrorism. We shouldn't have to.
    But the main thing to remember is, the situation is not 
hopeless. We have the resources necessary to provide our 
energy's--our Nation's energy needs. All we have to do is find 
the political will to do so.
    [The prepared statement of Mr. Copulos follows:]

 Prepared Statement of Milton R. Copulos, President, National Defense 
                   Council Foundation, Alexandria, VA

    My name is Milton R. Copulos, and I am president of the National 
Defense Council Foundation.
    I would like to thank Chairman Lugar for giving me the opportunity 
to speak with the committee today and I would also like to commend him 
for his leadership addressing our Nation's perilous energy dependence.

                     A HEADLONG RUSH INTO DISASTER

    America is rushing headlong into disaster. What is worse, however, 
is that it is a disaster of our own design.
    More than three decades have passed since the 1973 Arab Oil Embargo 
first alerted the Nation to its growing oil import vulnerability. Yet, 
despite this warning, we are now importing more than twice as much oil 
in absolute terms than we did in 1973, and the proportion of our oil 
supplies accounted for by imports is nearly double what it was then. 
What makes this dependence even more dangerous than it was three 
decades ago is the fact that the global market has become a far more 
competitive place with the emerging economies of China, India, and 
Eastern Europe creating burgeoning demand for increasingly scarce 
resources.
    Indeed, over the past decade the Chinese economy has grown at a 
frenetic pace, officially estimated at 9.2 percent in 2005. India's 
growth rate for that year was 7.1 percent. In Eastern Europe, Belarus 
grew at 7.8 percent, the Czech Republic at 4.6 percent, and the Ukraine 
at 4.4 percent. This compares with 3.5 percent for the United States, 
2.1 percent for Japan, and 1.7 percent for the European Union.
    As a result of this explosive growth, oil consumption in the 
developing countries is expected to increase at a rate of 3 percent 
annually over the next two decades. But even this figure may severely 
understate the problem. Indeed, China alone has accounted for 40 
percent of the total increase in world oil consumption over the past 
several years. Moreover China plans to add 120 million vehicles to its 
automobile fleet over the next decade, ultimately requiring 11.7 
million barrels per day of new crude oil supplies. India, too, is 
expected to continue to require increasingly large amounts of oil with 
projected increase of 28 percent over just the next 5 years.
    Even conservative estimates suggest that nearly 30 million barrels 
per day of new oil supplies will be required by the year 2025 just to 
service the developing world's requirements. When Europe and the 
Americas are included, the requirement is closer to 40 million barrels 
per day. It is doubtful that new supplies sufficient to meet this 
skyrocketing demand will be found from conventional sources.

                          UNCERTAIN SUPPLIERS

    Nor is it just the potential physical shortfall of resources that 
is a source of concern. An even greater concern lies in the instability 
of U.S. sources of oil imports.
    The top six sources of U.S. oil imports--Canada, Mexico, Saudi 
Arabia, Venezuela, Nigeria, and Iraq--account for 65.1 percent of all 
foreign crude reaching our shores and 38.9 percent of total domestic 
consumption. Of these four, Saudi Arabia, Venezuela, Nigeria, and Iraq, 
provide 38.2 percent of oil imports and 22.6 percent of total 
consumption. For a variety of reasons, none of the four I just 
mentioned can be considered a reliable source of supply.
    Venezuela's President, Hugo Chavez, is a vocal opponent of the 
United States who has twice threatened to cut off oil shipments to the 
United States.
    Nigeria's production has been repeatedly disrupted by civil unrest, 
and some 135,000 barrels of oil per day are lost to theft.
    Last month, a terrorist attack on the massive Saudi oil processing 
facility at Abqaiq was barely thwarted, but not before two of the 
terrorist's explosive-laden cars were detonated. Moreover, this was not 
the only instance of an attempt to disrupt the flow of Saudi oil. In 
the summer of 2002, Saudi Interior Ministry forces blocked an al-Qaeda 
plot to attack and cripple the loading dock at Ras Tanura which handles 
10 percent of the world's oil supplies.
    Attacks on oil facilities in Iraq are a frequent occurrence.
    Nor are the attacks on U.S. oil supplies a coincidence. In December 
2004, al-Qaeda issued a fatwa that said in part: ``We call on the 
mujahideen in the Arabian Peninsula to unify their ranks and target the 
oil supplies that do not serve the Islamic nation but the enemies of 
this nation.''
    The fatwa went onto declare: ``Be active and prevent them from 
getting hold of our oil and concentrate on it particularly in Iraq and 
the gulf.''
    Clearly, given the instability that characterizes four of our top 
six sources of oil, the question is not whether we will experience a 
supply disruption, but rather when. The disruption could occur as a 
consequence of a terrorist act, or could result from a politically 
motivated embargo. In the end, it doesn't really matter why a 
disruption occurs, because the consequences would be identical, and 
severe.

                     THE CONSEQUENCES OF DISRUPTION

    The supply disruptions of the 1970s cost the U.S. economy between 
$2.3 trillion and $2.5 trillion. Today, such an event could carry a 
price tag as high as $8 trillion--a figure equal to 62.5 percent of our 
annual GDP or nearly $27,000 for every man, woman, and child living in 
America.
    But there is more cause for concern over such an event than just 
the economic toll. A supply disruption of significant magnitude, such 
as would occur should Saudi supplies be interdicted, would also 
dramatically undermine the Nation's ability to defend itself.
    Oil has long been a vital military commodity, but today has taken 
on even more critical importance. Several examples illustrate this 
point:

   A contemporary U.S. Army Heavy Division uses more than twice 
        as much oil on a daily basis as an entire World War II field 
        army.
   The roughly 582,000 troops dispatched to the Persian Gulf 
        used more than twice as much oil on a daily basis as the entire 
        2-million-man Allied Expeditionary Force that liberated Europe 
        in World War II.
   In Operation Iraqi Freedom, the oil requirement for our 
        Armed Forces was 20 percent higher than in the first gulf war, 
        Operation Desert Storm, and now amount to one barrel of refined 
        petroleum products per day for each deployed service member.

    Moreover, the military's oil requirements will be even higher in 
the future. Therefore, a shortage of global oil supplies not only holds 
the potential to devastate our economy, but could hamstring our Armed 
Forces as well.

                    THE HIDDEN COST OF IMPORTED OIL

    While it is broadly acknowledged that our undue dependence on 
imported oil would pose a threat to the Nation's economic and military 
security in the event of a supply disruption, less well understood is 
the enormous economic toll that dependence takes on a daily basis.
    The principal reason why we are not fully aware of the true 
economic cost of our import dependence is that it largely takes the 
form of what economists call ``externalities,'' that is, costs or 
benefits caused by production or consumption of a specific item, but 
not reflected in its pricing. It is important to understand that even 
though external costs or benefits may not be reflected in the price of 
an item, they nonetheless are real.
    In October 2003, my organization, the National Defense Council 
Foundation, issued ``America's Achilles Heel: The Hidden Costs of 
Imported Oil,'' a comprehensive analysis of the external costs of 
imported oil. The study entailed the review of literally hundreds of 
thousands of pages of documents, including the entire order of battle 
of America's Armed Forces and more than a year of effort. Its 
conclusions divided the externalities into three basic categories: 
Direct and Indirect Economic Costs, Oil Supply Disruption Impacts, and 
Military Expenditures.
    Taken together, these costs totaled $304.9 billion annually, the 
equivalent of adding $3.68 to the price of a gallon of gasoline 
imported from the Persian Gulf.
    As high as these costs were, however, they were based on a crude 
oil refiner acquisition cost of $26.92. Today, crude oil prices are 
hovering around $60 per barrel and could easily increase significantly. 
Indeed, whereas, in 2003 we spent around $99 billion to purchase 
foreign crude oil and refined petroleum products, in 2005 we spent more 
than $251 billion, and this year we will spend at least $320 billion.
    But skyrocketing crude oil prices were not the only factor 
affecting oil-related externalities. Defense expenditures also changed.
    In 2003, our Armed Forces allocated $49.1 billion annually to 
maintaining the capability to assure the flow of oil from the Persian 
Gulf.
    I should note that expenditures for this purpose are not new. 
Indeed, last year marked the 60th anniversary of the historic meeting 
between Saudi monarch King Abdul Aziz and U.S. President Franklin 
Roosevelt where he first committed our Nation to assuring the flow of 
Persian Gulf oil--a promise that has been reaffirmed by every 
succeeding President, without regard to party.
    In 1983 the implicit promise to protect Persian Gulf oil supplies 
became an explicit element of U.S. military doctrine with the creation 
of the United States Central Command, CENTCOM. CENTCOM's official 
history makes this clear stating in part: ``Today's command evolved as 
a practical solution to the problem of projecting U S. military power 
to the gulf region from halfway around the world.''
    I am stressing the longstanding nature of our commitment to the 
gulf to underscore the fact that our estimates of military expenditures 
there are not intended as a criticism. Quite the opposite, in fact. 
Without oil our economy could not function, and, therefore, protecting 
our sources of oil is a legitimate defense mission, and the current 
military operation in Iraq is part of that mission.
    To date, supplemental appropriations for the Iraq war come to more 
than $251 billion, or an average of $83.7 billion per year. As a 
result, when other costs are included, the total military expenditures 
related to oil now total $132.7 billion annually.
    So, where does that leave us?
    In 2003, as noted, we estimated that the ``hidden cost'' of 
imported oil totaled $304.9 billion. When we revisited the external 
costs, taking into account the higher prices for crude oil and 
increased defense expenditures we found that the ``hidden cost'' had 
skyrocketed to $779.5 billion in 2005. That would be equivalent to 
adding $4.10 to the price of a gallon of gasoline if amortized over the 
total volume of imports. For Persian Gulf imports, because of the 
enormous military costs associated with the region, the ``hidden cost'' 
was equal to adding $7.41 to the price of a gallon of gasoline. When 
the nominal cost is combined with this figure it yields a ``true'' cost 
of $9.53 per gallon, but that is just the start.
    Because the price of crude oil is expected to remain at the $60 
range this year, expenditures for imports are expected to be at least 
$320 billion this year. That amounts to an increase of $70 billion in 
spending for foreign oil in just 1 year. That increase would raise the 
total import premium or ``hidden cost'' to $825.1 billion, or almost 
twice the President's $419.3 billion defense budget request for fiscal 
year 2006. If all costs are amortized over the total volume of imports, 
that would be equivalent to adding $5.04 to the price of a gallon of 
gasoline. For Persian Gulf imports, the premium would be $8.35. This 
would bring the ``real'' price of a gallon of gasoline, refined from 
Persian Gulf oil, to $10.86. At these prices the ``real'' cost of 
filling up a family sedan is $217.20, and filling up a large SUV, 
$325.80.
    But, can anything be done about this enormous drain on our economy?
    The answer to that question is ``Yes.''

                          SOLVING THE PROBLEM

    The simple truth is that we do not suffer from a lack of energy 
resources. Rather, what we suffer from is a lack of the political will 
and public consensus to use them.
    As Pogo said, ``We have met the enemy and they is us.''
    What then can we do?
    The first step is to recognize that we face a two-fold problem. The 
first part entails assuring adequate fuel supplies for the 220 million 
privately owned vehicles on the road today. These vehicles have an 
average lifespan of 16.8 years and the average age of our vehicle fleet 
is 8.5 years. Therefore, we will require conventional fuels or their 
analogs for at least a decade, even if every new vehicle produced from 
this day forth runs on some alternative.
    The second part of the problem is how to affect a transition to 
alternatives to conventional petroleum. This transition will take much 
longer than a decade--perhaps a generation or more--but the longer we 
delay beginning to make the change, the longer it will take to 
accomplish.
    In the near term, say the next 5 to 10 years, we essentially have 
two options. First, to make the greatest possible use of our readily 
accessible conventional domestic resources, particularly the oil and 
natural gas that lay off our shores. We should also consider using some 
of our 1,430 trillion cubic feet of domestic gas reserves as a 
feedstock for motor fuels produced through the Fischer-Tropsch process. 
Indeed, we currently have 104 trillion cubic feet of so-called 
``stranded'' natural gas in Alaska and a pipeline with some 1.1 million 
barrels per day of excess capacity. Stranded gas could be converted 
into clean burning motor fuel and transported in the existing pipeline 
to the lower 48 states.
    We can also expand our use of renewable fuels such as alcohol and 
biodiesel. A concerted program to make full use of them could 
significantly add to our motor fuel stocks within the stated timeframe.
    We should also encourage the acquisition of advanced vehicle 
technologies such as flex-fuel vehicles, hybrids and plug-in hybrids 
and vehicles that use propane or natural gas. At the same time, we 
should encourage the installation of biodiesel and E85 pumps in our 
Nation's filling stations so that the infrastructure for alternative 
fuels can keep pace with the growth of the alternative fuel vehicle 
fleet.
    Another point is to make sure that we do not forget to address 
nontransportation petroleum consumption. The fact that two-thirds of 
our petroleum is consumed in the transportation sector means that one-
third is not. The opportunities to reduce oil consumption from 
nontransportation are greater than you might expect.
    Take residential energy use, for example. Roughly 12 percent of 
distillate use goes to home heating, most of it imported from the 
Middle East. Yet, there are alternatives readily available that could 
totally eliminate this use, and at the same time save consumers money. 
For instance, a developer in Moline, IL, is currently building homes 
that are between 85-percent and 90-percent energy efficient, and meet 
their heating and cooling requirements with geothermal energy. More 
important, these homes are being sold for 20 percent less than 
conventional housing sold in the same area. So consumers are not only 
saving energy, they are saving enormous amounts of money.
    There is another commercial process that converts wastewood into a 
zero-sulfur industrial boiler fuel. Our Clean Forests Program that 
removes deadwood and debris from national forests to prevent fires is 
generating an enormous amount of such wastewood, and that is just the 
tip of the iceberg. Oak Ridge National Laboratory estimates that a 
total of 1.366 billion tons of biomass is available for energy 
production each year. Utilizing this process, it could be turned into 
5.6 million barrels of oil, per day, or close to 27 percent of our 
total domestic requirements.
    These, of course, are just two examples. Many more exist. The 
important consideration is that we have a wealth of options that could 
help in the near to intermediate term if we would only make use of 
them. To do this, however, we must have leadership.
    In this regard, I should note that Chairman Lugar and his 
colleagues, Senators Chafee, Coleman, Nelson, and Obama, deserve 
particular praise for their sponsorship of S. 2025, the Vehicle and 
Fuel Choices for American Security Act, which is based on the Energy 
Security Blueprint of the Set America Free Coalition, of which I was a 
founding member. It is focused on reducing our dependence on foreign 
oil, not by compromising the American way of life, but by encouraging 
fuel choice, utilization of the vast array of America's domestic energy 
resources and accelerated deployment of advanced vehicle technologies. 
It is clear that this sort of bipartisan effort is exactly the kind of 
action that is required if we are to make any progress on this critical 
issue.
    In the longer term, there are other domestic energy resources that 
can be brought into play. We have between 500 billion and 1.1 trillion 
barrels of oil contained in our huge oil shale resources. We have 496.1 
billion tons of demonstrated coal reserves--27 percent of the world 
total. We also have 320,222 trillion cubic feet of natural gas in the 
form of methane hydrates. This is equivalent to 51.1 trillion barrels 
of oil. Indeed one on-shore deposit in Alaska, alone, contains 519 
trillion cubic feet of natural gas. That is equal to 82.9 billion 
barrels of oil.
    We also have 4.85 billion pounds of uranium reserves. Harnessing 
this vital resource to provide electricity for our cities, towns, and 
farms is only common sense. Moreover, it could serve to reduce the need 
to use natural gas for electricity generation, preserving it for higher 
uses.
    There is one final point I want to make sure is not forgotten. Some 
portion of every dollar we spend on imported oil finds its way into the 
hands of individuals who wish to do us harm. The simple truth is that 
international terrorism stands on two financial pillars: Oil and the 
drug trade. To the extent that we reduce the revenues generated by 
either of these activities, we hinder the ability of terrorists to 
operate.
    To conclude, while our Nation is in dire peril due to its excessive 
dependence on imported oil, the situation is far from hopeless. We have 
the resources necessary to provide our Nation's energy needs if we can 
only find the political will to do so.

    The Chairman. Well, thank you very much for that testimony. 
A great start for our morning, and we appreciate it.
    I would just make the comment, parenthetically, that the 
President, in his speech yesterday at the Freedom House, in an 
extemporaneous response to a question on energy, gave a very 
passionate talk in which he touched upon each of the major 
themes that you, as witnesses, are going to be touching today. 
He indicated that there are many technologies available in our 
country to deal with energy challenges, and a sense of urgency 
if needed. He admitted that some are skeptical about his speech 
in the State of the Union and the ``oil addiction'' remark. He 
acknowledges that. But he says, in fact, ``They're wrong. 
That's where I am.''
    So, I appreciate that. It gives me some encouragement in 
holding this hearing this morning with my colleagues, that we 
have, I think, a President now who is very much interested in 
this. And so, we will make your statements available to the 
President so that he will have the benefit, as we have, of what 
you are having to say this morning.
    I'd like to call now upon Dr. Huntington.

STATEMENT OF DR. HILLARD HUNTINGTON, EXECUTIVE DIRECTOR, ENERGY 
       MODELING FORUM, STANFORD UNIVERSITY, STANFORD, CA

    Dr. Huntington. Thank you, Chairman Lugar and Ranking 
Member Biden and distinguished members of the committee. I 
appreciate the opportunity to discuss with you today the hidden 
cost of oil.
    As you've mentioned, tight oil markets with minimal surplus 
capacity have made world oil prices jumpy. Over the last 6 
months, a series of political and natural events have cascaded 
around the globe and left their impact on increasingly nervous 
oil-consuming nations. The list goes on. I have listed them in 
my handout, but, basically, suicide attack--thwarted suicide 
attack in Saudi Arabia, the Niger Delta speedboat attacks, the 
Venezuelan pipeline explosions, and, of course, the devastating 
hurricanes here in the United States. Each time, they have a 
sporadic nature to them, and it conveys an element of 
unpredictability and surprise.
    I have recently coordinated several studies for the Energy 
Modeling Forum at Stanford University that relate directly to 
this issue. I'd like to share a few observations that I think 
summarize the perspectives of many--certainly not all, but many 
of the participants who were involved in the studies.
    Our forum frequently brings together leading experts and 
advisors from Government, business, and universities and--to 
discuss how we can improve analysis of key problems that keep 
policymakers awake at night. I think this is clearly one of 
them.
    In this particular case, the work was done primarily for 
the U.S. Department of Energy, but we were asked to invite 
those individuals we thought would be leading people on the 
issue. So I think it's a good cross section of people working 
on the topic.
    Our two studies focused on two areas. One is the risk of 
another major oil disruption. And the second one is the 
economic consequences of those oil-price shocks. I am also 
submitting both reports that we did, and they certainly go into 
a lot more detail than I can remark here in my brief comments.
    I'll also just spend a little time talking about a third 
issue that we did not look at, and that is our dependence on 
the oil-producing cartel.
    Although these recent episodes have made oil-importing 
countries nervous, and have imposed some very high costs on 
people and infrastructure, they have yet to duplicate the kinds 
of shocks that we experienced during the 1970s and the early 
1980s--and the early 1990s. As a result, their economic impacts 
have been more tolerable than in the past. Despite recent oil 
price volatility, for example, we've still had very strong 
economic growth. GDP growth has maintained 3\1/2\ percent since 
the end of 2001.
    A number of knowledgeable experts, however, are concerned 
about the very real possibility of more damaging shocks in the 
future. A group assembled by Stanford's forum, of which I am 
the director, thought that the odds of at least one very 
damaging shock over the next 10 years, were higher than a 
continuation of today's events, where we have an oil market 
with a lot of volatility, but without such a disruption. And, 
although another major oil disruption is not a certainty, its 
likelihood is significantly high that, I think, we have to be 
quite worried about it.
    Basically, the way I describe our results is that your odds 
of drawing a club, a diamond, or a heart from a shuffled deck 
of playing cards are three out of four. In the EMF study that I 
referred to, the participants found that the odds of a foreign 
oil disruption happening over the next 10 years is basically 
that. It was actually a little higher, at 80 percent.
    And the disruption events that we looked at included 
surprise geopolitical, military, or terrorist turmoil that 
would remove at least 2 million barrels per day. That's about 
2.1 percent of the expected global oil production. And it could 
be more than that level, but it had to remove at least that 
amount.
    Foreign disruptions of this magnitude would have more 
serious effects on oil prices and the economy than we have seen 
with Katrina and Rita. Oil prices, however, would rise more, 
and longer than a few months in the heating season. And, 
basically, we thought of these episodes as perhaps doubling the 
price in a 3-month period.
    In the study, the experts estimated the amount of oil lost 
to the market is the number of barrels removed from the market 
by the initial disruption, minus any offsets from using excess 
capacity from undisrupted regions. So, if the disruption was 
not in Saudi Arabia, maybe they would have some extra capacity.
    We asked the experts to exclude any releases from the U.S. 
Strategic Petroleum Reserve, as these actions require separate 
decisions from the Government during an emergency.
    The approach identified four major supply regions where 
disruptions are most likely. And you can imagine what those 
regions were. They account for roughly similar shares of total 
world oil production, collectively. As a group, they account 
for about 60 percent of total world oil production. The study 
lumped in one region--Algeria, Angola, Libya, Mexico, Nigeria, 
and Venezuela--and called that group the ``West of Suez.'' 
Saudi Arabia was the second region. And other Persian States--
Iran, Iraq, Kuwait, and the other Persian Gulf States--were the 
third region. And, finally, Russia and the Caspian States 
comprised the fourth region.
    Of these regions, the riskiest areas were the Persian Gulf 
countries outside of Saudi Arabia, and several countries along 
the Atlantic basin, such as Nigeria and Venezuela. The least 
risky area, from a disruption point of view was Russia and the 
Caspian States. Though the participants found the possibility 
of disruptions was lower in Saudi Arabia than in the other 
regions, certainly disruptions there would tend to have larger 
effects, if they did happen.
    In the second study, on the economic consequences of a 
major disruption, we sought to understand how easily the 
economy could absorb such a shock. And figure 1 that's shown 
here, as well as in my presentation, shows that oil price 
shocks preceded 9 out of the last 10 recessions in the United 
States. The solid line indicates the path of the inflation-
adjusted crude oil prices since 1950. This is the line that's 
moving up and down on the chart. The gray bars on the slide, 
that are moving in a vertical direction, denote periods when 
the U.S. economy was experiencing recessions, as defined by the 
National Bureau of Economic Research. This finding was first 
advanced by Professor James Hamilton at the University of 
California at San Diego, and it's been confirmed by a number of 
other researchers. So, the price shocks occur before, rather 
than after, the recession.
    If a large disruption does occur, we can expect very 
serious economic consequences. Large disruptions, especially if 
they move inflation-adjusted oil prices higher than experienced 
recently, will cause unemployment and excess capacity to grow 
in certain key sectors. 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. That impact is on the 
level of real GDP. Since the economy is growing more rapidly 
than 2 percent per year, that would not mean, necessarily, a 
recession, but it would certainly slow down economic growth.
    Other researchers in the group, however, think that these 
estimates underestimate the impacts, because they do not focus 
explicitly on sudden and scary oil price shocks, which cause a 
different set of results.
    These other researchers think that our historical 
experience suggests that the level of real GDP would decline by 
more. And their estimate is at about 5 percent for a doubling 
of the oil price.
    My personal view is that this second estimate is probably 
closer to what would happen if the world actually had a major 
disruption, because I think they've taken the care to sort out 
shocks from other types of oil price movements. But if they are 
correct, it clearly means we're going to have a recession if we 
have a major disruption of this kind.
    Now, some people think that oil shocks may not be a 
problem, because the Federal Reserve Board could intervene and 
lessen the impact. I have a great deal of faith in the Federal 
Reserve Board. They've done a marvelous job in controlling 
inflation, which places the U.S. economy in a better position 
for offsetting oil disruptions than in previous decades. 
However, I'm not an expert on the Federal Reserve Board, but I 
am not yet convinced that they can compensate the economy for a 
large, devastating disruption. They would have to make some 
important decisions very quickly, at a time when fears were 
running rampant. They may also find it difficult to stimulate 
the economy, because the nominal interest rates are already 
very low, both here in this country, as well as abroad.
    For this reason, I think that the United States should 
seriously consider other types of insurance policies that would 
allow the Federal Reserve Board more leeway and flexibility in 
controlling our inflation rates.
    As a general rule, strategies that reduce our dependence on 
oil consumption are more effective than policies that reduce 
our imports. That may seem a little strange, but let me explain 
it this way. One should view the world oil market as one giant 
pool, rather than as a series of disconnected puddles. When 
events happen overseas anywhere in the market, they will raise 
prices not only there, wherever the disruption is, but also 
everywhere that connect to that larger pool. And since reducing 
our imports with our own production does not sever this link to 
the giant pool, disruptions will cause prices to rise for all 
production, including that originating in the United States. 
So, more domestic supplies, by themselves, do not really 
protect us from these price shocks. Reduction in our use tends 
to be more effective.
    Unfortunately, insurance policies are never free. I think 
we all recognize this. It will cost us something to implement a 
strategy that reduces our risk to a major oil disruption, but 
it will also cost us a lot of money and jobs if we do not adopt 
an insurance policy and the Nation faces another major 
disruption.
    Now, figure 2 in my presentation, which I don't have shown 
separately, shows that the Nation's oil use per dollar of gross 
domestic product can respond to oil prices. And, as a result of 
the 1970 oil price shock, we shifted away from oil in many 
sectors in the early 1980s, as shown by the top line in that 
chart. But that trend has slowed considerably since then.
    Moreover, transportation remains strongly tied to oil use. 
The dependence on transportation is shown by the bottom line in 
that chart. The dependence on oil in transportation not only 
affects households directly, through higher gasoline costs, but 
it also raises the cost of transporting goods around the 
country.
    Now, our most recent studies did not address a third issue 
that could influence the cost of using oil. And let me say a 
word about it. And that is that the United States could adopt 
policies that would try to minimize or break the oil-producing 
cartels' control over the market. Our forum, many years ago, 
addressed this issue, and, although the range of views was 
wide, the working group then conservatively estimated that the 
hidden cost of oil from this source might be something on the 
order of 12 cents per gallon. If you're used to thinking in 
terms of per barrel, it's $5 per barrel, or 12 cents per 
gallon.
    In their review of the corporate average fuel efficiency 
standards of several years ago, the National Research Council 
used a very similar estimate. That estimate is not trivial, but 
it is certainly not as large as some of the estimates I've seen 
for gasoline's hidden cost due to pollution, congestion, and 
automobile accidents.
    To summarize, I think the Nation is vulnerable to another 
major disruption, not because the economy necessarily imports 
oil, but because it uses a lot of oil, primarily for gasoline 
and jet fuel. Even if domestic production could replace all our 
imports, which I'm not advocating that we do, the economy would 
remain vulnerable to the types of disruptions discussed here. 
However, it is very appropriate for the committee to focus on 
oil, because I think it is essentially a foreign policy issue.
    Oil-importing governments have committed significant 
political and military resources to the Middle East over a 
number of decades in order to provide regional stability for 
the world oil supplies.
    Excessive exposure to our oil vulnerability risks in this 
country increases the cost of pursuing foreign policy. It's 
much--as you called--it's often used as a weapon against the 
oil-weak countries, I think, Senator Lugar, is the way you put 
it, very eloquently. And I think that's a very key concern, and 
it reduces our capacity to conduct the foreign policy in this 
way.
    Unfortunately, none of the estimates that I've seen can 
really put a number on that figure. And yet, it may be the most 
important issue of all. You've actually encouraged me to think 
more about this issue. Maybe we can try to develop something 
along that line.
    In sum, I would say it's a very important policy issue. I 
think that it's only right that you are concerned about it. And 
I am extremely pleased that you are concerned about it.
    Thank you.
    [The prepared statement of Dr. Huntington follows:]

   Prepared Statement of Dr. Hillard Huntington, Executive Director, 
        Energy Modeling Forum, Stanford University, Stanford, CA

    Thank you, Chairman Lugar, Ranking Member Biden, and distinguished 
members of the committee, for the opportunity to discuss with you today 
the hidden cost of oil.
    Tight oil markets with minimal surplus capacity have made world oil 
prices particularly jumpy over recent months. In the last 6 months, a 
series of political and natural events have cascaded around the globe 
and left their impact on increasingly nervous oil-consuming nations. 
These developments have been extremely varied and include the 
following:

   A thwarted suicide attack in February at the Abqaiq oil 
        processing facility in eastern Saudi Arabia;
   A string of turmoil in the Niger Delta highlighted by a 
        recent speedboat attack in January by gunmen on the riverside 
        offices of Italian oil company Agip;
   Antigovernment attempts to disrupt congressional elections 
        in Venezuela culminating in an explosion at an oil pipeline 
        connected to that country's largest oil refinery; and
   Devastating Hurricanes Katrina and Rita in the United States 
        in August and September.

    Their sporadic nature conveys an element of unpredictability and 
surprise.
    I have recently coordinated several studies for the Energy Modeling 
Forum at Stanford University that relate directly to this issue. I 
would like to share a few observations that I think summarize the 
perspectives of many (but certainly not all) participants who were 
involved in the studies. Our forum frequently brings together the 
leading experts and advisors from government, business, and university 
and other research organizations to discuss how we can improve analysis 
of key energy problems that keep policymakers awake at night. In this 
particular case, the work was done primarily for the U.S. Department of 
Energy, but we were asked to invite individuals we thought were the 
leading people on this issue.
    Our two studies focused on the risks of another major oil 
disruption and the economic consequences of oil price shocks. I am also 
submitting both reports that expand considerably over my brief remarks 
here today. I will also briefly discuss a third issue: Our dependence 
on the oil-producing cartel.
    Although these episodes have made oil-importing countries nervous 
and have imposed some very high costs on people and infrastructure, 
they have yet to duplicate the types of oil shocks that were 
experienced during the 1970s and early 1990s. As a result, their 
economic impacts have been more tolerable than in the past. Despite 
recent oil price volatility, for example, real GDP in the United States 
has grown strongly, by 3.5 percent annually since the end of 2001.
    A number of knowledgeable experts, however, are concerned about the 
very real possibility of much more damaging shocks in the future. A 
group assembled by Stanford's EMF thought that the odds of, at least, 
one very damaging shock over the next 10 years were higher than those 
of an oil market with some volatility but without such a shock. 
Although another major oil disruption is not a certainty, its 
likelihood is significantly high enough to be worrisome.
    Your odds of drawing a club, diamond, or heart from a shuffled deck 
of playing cards are three out of four. In the EMF study, the 
participants found that the odds of a foreign oil disruption happening 
over the next 10 years are slightly higher at 80 percent. Disruption 
events included surprise geopolitical, military, or terrorist turmoil 
that would remove at least 2 million barrels per day--an amount 
representing about 2.1 percent of expected global oil production. 
Foreign disruptions of this magnitude would have more serious effects 
on oil prices and the economy than we have seen with the Katrina and 
Rita hurricanes. Oil prices, however, would rise more and for longer 
than a few months or a heating season.
    In the study, experts estimated the amount of oil lost to the 
market as the number of barrels removed by the initial disruption, 
minus any offsets from the use of excess capacity from undisrupted 
regions. The experts were asked to exclude any releases from the U.S. 
strategic petroleum reserve, as these actions require separate 
decisions from the government during an emergency.
    The approach identified four major supply regions where disruptions 
are most likely. These regions account for approximately similar shares 
of total world oil production. Collectively, they account for about 60 
percent of total world oil production. The study lumped Algeria, 
Angola, Libya, Mexico, Nigeria, and Venezuela as the first region, 
called ``West of Suez.'' Saudi Arabia was the second region, and other 
Persian Gulf States--Iran, Iraq, Kuwait, Qatar, UAE, and Oman--were the 
third. Russia and the Caspian States comprised the fourth region.
    The riskiest areas were the Persian Gulf countries outside of Saudi 
Arabia and several countries along the Atlantic Basin, such as Nigeria 
and Venezuela. The least risky area was Russia and the Caspian States. 
Although the participants found the possibility of disruptions was 
lower in Saudi Arabia than in several other vulnerable regions, 
disruptions there would tend to have larger effects.
    In the second study on the economic consequences of a major 
disruption, we sought to understand how easily the economy could absorb 
such a shock. Figure 1 shows that oil price shocks preceded 9 of the 
last 10 recessions in the United States. The solid line indicates the 
path of inflation-adjusted crude oil prices since 1950. The gray bars 
denote periods when the U.S. economy was experiencing recessions as 
defined by the National Bureau of Economic Research (NBER). This 
finding was first advanced by Professor James Hamilton at University of 
California at San Diego and has been confirmed by numerous other 
researchers.



    If a large disruption does occur, we can expect very serious 
economic consequences. Large disruptions, especially if they move 
inflation-adjusted oil prices higher than experienced recently, will 
cause unemployment and excess capacity to grow in certain key sectors. 
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 a recession.
    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 GNP would 
decline by more, at 5 percent for a doubling of the oil price. My 
personal view is that the higher estimate may be closer to what would 
actually happen if we had a major disruption. That would mean a 
recession.
    Some people think that oil shocks may not be a problem because the 
Federal Reserve Board could intervene and lessen the impact. I have a 
great deal of faith in the Federal Reserve Board. They have done a 
marvelous job in controlling inflation, which places the U.S. economy 
in a better position for offsetting oil disruptions than in previous 
decades. I am not yet convinced that they can compensate the economy 
for a large devastating disruption. They would have to make some 
important decisions, very quickly, at a time when fears were running 
rampant. They may also find it difficult to stimulate the economy 
because nominal interest rates are already very low, not only here but 
also abroad. For this reason, I think that the United States should 
seriously consider other types of insurance policies that would allow 
the Federal Reserve Board more leeway and flexibility in controlling 
our inflation rates.
    As a general rule, strategies that reduce our dependence on oil 
consumption are more effective than policies that reduce our imports. 
One should view the world oil market as one giant pool rather than as a 
series of disconnected puddles. When events happen anywhere in the 
market, they will raise prices not only there but also everywhere that 
connect to that large pool. Since reducing our imports with our own 
production does not sever our link to that giant pool, disruptions will 
cause prices to rise for all production, including that originating in 
the United States. More domestic supplies do not protect us from these 
price shocks.
    Unfortunately, insurance policies are never free. It will cost us 
something to implement a strategy that reduces our risk to another 
major oil disruption. But it will also cost us a lot of money and jobs 
if we do not adopt an insurance policy and the Nation faces another 
major disruption.
    Figure 2 shows that the nation's oil use per dollar of Gross 
Domestic Product can respond to oil prices. As a result of the 1970 oil 
price shocks, we shifted away from oil in many sectors in the early 
1980s, but that trend has slowed considerably since then. Moreover, 
transportation remains strongly tied to oil use. The dependence on oil 
in transportation not only affects households directly through higher 
gasoline costs but it also raises the costs of transporting goods 
around the country.



    Our most recent studies did not address a third issue that could 
influence the costs of using oil. It is sometimes argued that the 
United States could adopt policies that would try to minimize or break 
the oil-producing cartel's control over the market. Our forum addressed 
this issue many years ago. Although the range of views was wide, our 
working group conservatively estimated that the hidden cost of oil from 
this source might be $5 per barrel, or 12 cents per gallon. Several 
years ago, the National Research Council used a very similar estimate 
in their review of the corporate average fuel economy standards for 
automobiles. That estimate is not trivial, but it is considerably 
smaller than various estimates for gasoline's hidden costs due to 
pollution, congestion, and automobile accidents.
    In summary, the Nation is vulnerable to another major disruption 
not because the economy imports oil but primarily because it uses a lot 
of oil, primarily for gasoline and jet fuel. Even if domestic 
production could replace all oil imports, which I am not advocating, 
the economy would remain vulnerable to the types of disruptions 
discussed here. However, it is very appropriate that this committee 
focus its energy on this issue. Oil-importing governments have 
committed significant political and military resources to the Middle 
East over a number of decades in order to provide regional stability 
that is critical to world oil supplies. Excessive exposure to oil 
vulnerability risks in this country increases these costs or reduces 
the capacity to pursue foreign policy objectives that are critical for 
mitigating nuclear proliferation, terrorism and other risks that reduce 
global security. I cannot provide you with an estimate for this 
political cost of using oil, but it is extremely important.

    The Chairman. Well, thank you, Dr. Huntington, for your 
contribution to this discussion this morning.
    We call now on Dr. Yohe.

  STATEMENT OF DR. GARY W. YOHE, JOHN E. ANDRUS PROFESSOR OF 
         ECONOMICS, WESLEYAN UNIVERSITY, MIDDLETOWN, CT

    Dr. Yohe. Mr. Chairman, members of the committee, thank you 
very much for your invitation to present testimony today on the 
hidden costs of oil.
    My task is to think about the hidden costs related to 
climate change that is buried in the background of petroleum 
costs that don't reflect that externality. And the idea is to 
try back out the share of oil to get the right order of 
magnitude in thinking about such things.
    I'm afraid that the answer to this deceptively simple 
question is the same as it is to just about every economics 
question that I've ever seen, and that is that ``it depends.'' 
And so, what I would like to do is spend a little bit of time 
walking you through some of the contexts of what it depends on 
and how much Mother Nature and scientific uncertainty plays a 
role in that.
    I will begin with a brief review of 100 published estimates 
of what is termed the social cost of carbon, which can be 
backed down to the social cost of the carbon content of 
petroleum.
    I will observe that those estimates vary all over the map, 
and offer some explanation of why.
    I will also try to provide an alternative way about 
thinking about the hidden cost of oil, and that is the notion 
that the climate is changing, may, in fact, turn out to be 
changing abruptly. There will be times, perhaps, in the future 
when we begin to recognize that, and sudden adjustments in 
climate policy will be required. The costs of those adjustments 
will be much smaller if we begin to hedge against those costs. 
And that gets us out of the realm of thinking about the 
uncertainty of climate damages and into the realm--which is 
still uncertain, but not quite as uncertain--the realm of 
estimating the economic cost of energy policy, per se. It also 
allows uncertainty to become a reason to do something in the 
near term, rather than a reason to delay, because this hedging 
strategy is essentially, as Hill just mentioned in another 
context, buying insurance, and the more risk you face and the 
wider the uncertainties; the more insurance you pay--the more 
insurance you buy at a particular premium. But uncertainty is 
the reason why you're doing something.
    I will, finally, argue that, perhaps another hidden cost is 
embedded in the investment decisions that are made in the 
public arena and in the private arena, that ignoring the social 
costs, climate costs of petroleum, systematically undervalues 
investment projects that would provide alternative fuels, like 
ethanol--I've heard that mentioned two or three times this 
morning already--and, perhaps more of concern, it overvalues 
investments in projects that would actually perhaps increase 
our reliance and consumption of petroleum.
    So, to wander through these thoughts:
    Economists may disagree on the number, but they do agree on 
the approach to thinking about the hidden cost, the climate-
change cost of carbon, and that is to think about the marginal 
cost of a unit of emissions at a particular point in time, as 
it's cast forward; and you try to track where the damages 
occur, and try to estimate those damages, and bring it back, to 
get some idea of was is the extrasocial damage created by those 
particular units of emission.
    Economists also, oddly enough, agree on something else. 
That is, that this social-cost estimate will rise, over time, 
at 2 to 3 percent per year, as the concentrations of greenhouse 
gases increase.
    Where they don't agree is, of course, on the estimation, 
per se. So, what I would like to do is provide a couple of 
glimpses of the sources of concern from the climate literature. 
On your right is a figure from the third assessment report of 
the Intergovernmental Panel on Climate Change. It is the 
summary of the lines of evidence of impacts of climate. And 
identified are five different reasons for concern. The color 
codes suggest the degree of vulnerability that systems around 
the world might face, even taking into account, to as much 
degree as possible, the ability of those systems to adapt to 
those external stresses. It goes from white, which is not much 
vulnerability, through yellow and orange, and up to red. In the 
red areas, it's essentially a judgment by the people who assess 
the literature that the capacity to adapt to these climate-
related stresses may, in fact, be overwhelmed by the stresses 
that are there.
    It's also important to notice that any one of those lines 
of concern, sources of vulnerability, are unevenly distributed 
around the globe. So, the second figure that I provided 
indicates two different possibilities for a picture in 2050. 
One calibrates vulnerability around the world to aggregate 
impacts, which is the second row on that particular--on the 
``Burning Embers'' diagram from the IPCC--it suggests that 
developing countries are, as according to the hypothesis, 
perhaps more vulnerable to climate change. But the developed 
world doesn't get away scot free either. If you calibrate the 
distribution in terms of something a little bit more urgent, 
like the risk of extreme weather events, the portrait for 2050 
again displays high vulnerabilities now in the developing world 
and significant vulnerability across the developed world, 
including North America, which sits up there, in an orange. And 
if you look over there, it's sort of on its way to being 
something to which we could begin to worry that even our 
ability to respond to the external stresses of these climate 
events might be overwhelmed by the events themselves.
    So, economists have then taken a look at these and tried to 
estimate them over time. I didn't have--I didn't ask that the 
third figure I provided be blown up, but there is a 
distribution indicated there of the estimates of the social 
cost of carbon across the hundred published estimates that are 
currently available, expressed both in dollars per ton of 
carbon emitted and also backed into dollars per barrel, based 
on the carbon content of petroleum.
    Now, the way to read the table, at least in terms of the 
numbers, is to think about your old days when you took SATs, 
and think about percentiles. Point A, for example, indicates 
the estimate of zero for the social cost of carbon. It's the 
14th percentile, indicating that 14 percent of these estimates 
actually had negative costs--i.e., benefits. How is that 
possible? Some of the estimates, some of the models, suggest 
some moderate benefit to some sectors of developed economies 
for very modest changes in climate. And a high discount rate 
that picks up very little of the downstream costs could end up 
with a benefit to climate. But the median estimate is point B. 
That's where 50 percent of the estimates are below that, at 
that number, and 50 percent are above that number. That comes 
out to about $2 a barrel. The 80th percentile is $9 a barrel. 
That means 80 percent are below that, but 20 percent of the 
estimates are above $9 a barrel. And the average across all of 
the estimates, because the distribution is skewed, is $11 a 
barrel. And to reemphasize, the notion is that those are for 
emissions in 2005, and that they would increase--those costs 
would increase at 2 or 3 percent per year.
    So, how do you interpret the content of that? Richard Tol, 
a friend of mine who's an economist at the University of 
Hamburg, looks at that distribution--he's actually the one who 
did the meta-analysis that produced it--and said that it looks 
like $50 a barrel is about the maximum reasonable number for 
the social cost of carbon.
    Tom Downing, who's a geographer at the Stockholm 
Environment Institute, however, looks at that distribution, and 
he's one that's spent a lot of time looking at vulnerabilities 
across Africa and developing countries, looking at the risks 
that peoples in those places face to changes in climate, and he 
thinks $50 is a threshold, as well, but he thinks it's the 
lower bound. He thinks the social cost of carbon is 
legitimately much above $50 a barrel.
    How do we get such a wide range? Well, there are a lot of 
different reasons. I already mentioned the discount rate. 
There's also the possibility of equity weighting: Do you really 
worry about the people in Africa versus the people in a 
developed world? These are choices that decisionmakers get to 
make, parameters they get to think about as they judge the 
opportunity cost and the degree to which they would like to 
pursue polices in terms of these particular problems.
    There are, however, a wide number of parameters underneath 
those estimates over which you do not have decisionmaker 
authority. These are essentially determined by Mother Nature. 
The major one is climate sensitivity, the degree to which the 
global mean temperature would increase if atmospheric 
concentrations were to double. The IPCC has reported that 
number between a degree-and-a-half and 4\1/2\ or 5\1/2\ 
degrees, depending on which report you read. But more recent 
research suggests that the historical data cannot reject the 
hypothesis that that climate sensitivity could be as high as 8 
or 9 or 10 degrees centigrade. And if you plug those climate 
sensitivities into a model, even if you have high discount 
rates and don't worry about equity at all, you still get a high 
social cost of carbon. So, decisionmakers cannot get out of it 
with respect to that.
    So, the question, I think, is: Given the range of 
uncertainty, and given the attempts to understand where it 
comes from, and recognizing that we simply don't know what 
Mother Nature has in store for us, how do we think about the 
social cost of carbon in a constructive way? And I would like 
to propose a second way, which, as I suggested earlier, was to 
think about hedging against the adjustment costs of making 
policy decisions in the near to medium term that would 
essentially have to abruptly change the way we consume energy.
    What might such a thing be? Abrupt climate change--it's 
called ``risks of large-scale discontinuities,'' in the jargon 
of the IPCC--is one place. Some work that I've done with 
Michael Schlesinger and some other folks suggests, for example, 
that if the global mean temperature were to increase another 2 
degrees from 2000 levels, that there would be a 50-percent 
chance of the collapse of the thermohaline circulation, 
otherwise known as the Gulf Stream. That's--you were talking 
about pulling cards out of a deck--that's a flip of a coin. 
Heads, it shuts down; tails, it keeps going. We're not quite 
sure exactly how that's going to happen, but that's the best 
that our scientific knowledge will tell us. And should it 
become clear that that's happening--and that's not an 
experiment we'd like to try on the only planet we have--there 
might come a time when we need to make a policy adjustment.
    So, my proposal is to think about minimizing the expected 
costs of making such policy adjustments. And, again, Michael 
Schlesinger and I and a couple of other people did a little 
thought exercise, in a very simple model that was actually 
motivated by an exercise that the Energy Modeling Forum put 
together 15 years ago, and came up with the notion that about 
$1.50 a barrel, starting now, as the reflection of a climate 
policy, but increasing persistently and predictably at the rate 
of interest over time, would be a reasonable hedge against the 
economic--abrupt economic costs of abrupt changes in policy. 
It's a very simple exercise. It only had one source of 
uncertainty--the climate sensitivity--so, I think that number 
is too low, but it's indicative of the notion that you can 
think about that as an insurance premium, as a hedge against 
something that we can predict and estimate a little bit more 
than climate effects. And it does, as I said before, as well, 
give uncertainty the reason to do something, rather than the 
reason not to do something.
    Last, the last hidden cost that I mentioned, it strikes me 
that if you do not include the environmental costs of 
petroleum, the climate costs of petroleum, in your evaluations 
of what it really costs the planet for you to burn a barrel of 
oil, for whatever purpose, you systematically undervalue 
conservation projects--programs, plans, policies--projects that 
would look for alternative energy sources, things that are more 
sustainable. And that is--and makes it less likely that those 
projects would be undertaken. Systematically, as well, you 
overvalue new sources of oil, you overvalue new sources of 
consumption of oil, simply because the energy required to drive 
it is not priced appropriately.
    So, if you ask me what a number would be, as I said, I 
think $1.50 is too low. I think $6 would be OK. That's the 
Downing/Tol threshold. Ten dollars might be OK. It's actually 
really less important what number starts the policy now. It is 
more important, and absolutely critical, that it increase over 
time at a predictable rate, like the rate of interest, which 
has some economic validation to it. It then becomes 
predictable. It's persistent, and it's incorporated in the 
planning and investment decisions that people would undertake.
    I would encourage the second risk approach to thinking 
about climate policy, get out of the cost-benefit-calculator 
mode and begin to think about managing risks in thinking about 
policy portfolios, and uncertainty becomes the reason to do 
something in the near term, and to continue to do something at 
an increasing rate over the medium term.
    I thank you very much for your attention.
    [The prepared statement of Dr. Yohe follows:]

  Prepared Statement of Dr. Gary W. Yohe, John E. Andrus Professor of 
             Economics, Wesleyan University, Middletown, CT

    Mr. Chairman, Senator Biden, and members of the Committee on 
Foreign Relations, thank you for your invitation to present testimony 
on ``The Hidden (Climate Change) Costs of Oil.'' It is indeed an honor 
to be here, today.
    The task that I accepted when I agreed to testify involves 
providing some insight into the economic cost of carbon emissions so 
that you can ``back out the share of oil to get the right order of 
magnitude.'' I am afraid, however, that this deceptively complicated 
question has the same answer as nearly every other question in 
economics: ``It depends.'' My testimony will, therefore, be directed at 
providing insight into the underlying factors upon which these costs 
depend. I will, however, also offer some thoughts about what the 
underlying uncertainty means for climate policy and the hidden cost of 
oil.
    I will begin with a brief review of the range of more than 100 
published estimates of what is termed the ``social cost of carbon''; 
this is the calculation by which we can attribute a share of cost to 
oil based on its carbon content (per unit energy). I will highlight why 
the range of these estimates is so large. I will suggest which of the 
factors that make the range so large can be influenced by political 
decisionmakers, but I will also focus attention on scientific factors 
that are beyond their control. Thinking about how we should cope with 
these scientific factors will lead me to identify two fundamental 
sources of hidden cost that may not be immediately obvious.
    I will, in particular, suggest an alternative way to calculate the 
hidden climate costs of oil based explicitly on hedging against the 
potentially severe economic costs of abrupt changes in policy. These 
policy adjustments may be required over the near to moderate term as we 
come to know more about the impacts and/or likelihoods of climate 
change (particularly abrupt climate change). It is important to 
recognize that many of these impacts have not yet been included in the 
direct calculation of social cost. Adopting a risk-management (hedging) 
approach to minimize the cost of future policy adjustments is, 
therefore, an appropriate, economically rational way to think about the 
social cost of carbon. Moreover, it makes uncertainty a reason to act 
immediately rather than a reason to procrastinate.
    I will, as well, argue that ignoring social costs calculated by 
either a tradition direct method or one derived from a risk-management 
approach systematically undervalues projects and programs that would 
reduce our consumption of petroleum (like investment in ethanol as an 
alternative source of energy) while it produces an symmetric 
overvaluation of projects and programs that would do just the opposite 
(like drilling in the Arctic National Wildlife Refuge).
    To begin, I recall ``burning ember'' diagram from the Third 
Assessment Report (the TAR) of the Intergovernmental Panel on Climate 
Change (2001) in Figure 1. It duplicates Figure TS-42 from the 
Technical Summary of the Third Assessment Report where five Lines of 
Evidence'' were identified. These are the five sources of concern, or 
indicators of vulnerability, that have captured our attention. Two are 
essentially economic indicators of aggregate impacts at the global and 
regional levels. They are dominated by estimates of the costs of the 
climate impacts in market-based sectors like real estate (in response 
to rising seas), agricultural, energy, and the like. As such, they do 
include evaluations of how various nations and even communities within 
nations might adapt to climate-related stress. It is important to 
recognize, of course, that these impacts are felt unevenly across the 
globe. Panel A of Figure 2 offers a representative portrait of a 
possible geographic distribution of vulnerability to climate impacts in 
2050 calibrated in terms of aggregate impacts. Developing countries 
show up as most vulnerable, but developed countries are surely not 
immune to climate risk even when their superior capacities to adapt are 
recognized.



    A third row in Figure 1 focuses attention squarely on ecosystems, 
although the IPCC did not provide the detailed assessment of ecosystem 
services that was so thoroughly documented in the recently completed 
Millennium Ecosystem Assessment. The last two rows reflect 
vulnerability to two potentially more significant areas concern: 
``Risks from Future Large-Scale Discontinuities'' and ``Risks from 
Extreme Weather Events.'' Figure 2 illustrates the uneven impact point 
by displaying a plausible global distribution of vulnerability in 2050 
calibrated to the risks of extreme weather events. Developing countries 
are still most vulnerable, but developed countries also face 
significant vulnerabilities from a more urgent ``source of concern.''
    Economists have been trying for some time to assign currency values 
to the impacts of climate change identified in Figure 1 by tracking 
their potential trajectories along long-term scenarios of how the 
future might unfold. Not surprisingly, economists do not agree on what 
that future might hold. They do, however, agree on what measure to use: 
``the social cost of carbon.'' What is that? It is the damage caused 
over time by releasing an addition unit of ton of carbon in the 
atmosphere discounted back to the year of its emission. That is to say, 
the social cost of carbon represents the ``marginal cost'' of 
emissions; alternatively, it represents the ``marginal benefit'' of 
unit of carbon emissions reduction. Most importantly for present 
purposes, the social cost of carbon, when modified by the carbon 
content of petroleum, is the hidden (climate change) cost of oil.



    Figure 3 displays the range of more than 100 estimates currently 
available in the published literature; it is derived from Tol (2005). 
Panel A of Figure 3 displays the social cost in dollars per metric ton 
of carbon; Panel B tracks the estimate to the hidden cost of oil by 
expressing social cost in dollars per barrel of oil.
    How should the data portrayed in Figure 3 be read? Percentile 
values are recorded up the vertical axis for cost estimates ordered 
from lowest to highest. So, for example, point A indicates that 12 
percent of the published estimates were below $0. Point B highlights 
the median estimate, suggesting that 50 percent of the estimates were 
below $13 per ton of carbon ($2 per barrel of oil), and 50 percent of 
the estimate were above this benchmark. Point C shows that 20 percent 
of the estimates were above $73 per ton of carbon ($9 per barrel of 
oil). Finally, the average across all of the published estimates is $85 
per ton ($11 per barrel of oil).
    How should the content of Figure 3 be read, given all of the 
disagreement that it reveals? Richard Tol, an economist from Germany, 
read the data to mean that $45 per ton should be interpreted as the 
upper bound for a reasonable ``best'' estimate of the social cost of 
carbon; this is $6 per barrel of oil. Thomas Downing (2005), a 
geographer from the Stockholm Environment Institute office in the 
United Kingdom looked at the same distribution through the lens of 
enormous experience in developing countries where changes in climate 
produce enormous displacement effects that cannot be quantified in 
terms of currencies. He read the data to mean that $45 per ton or $6 
per barrel of oil should be interpreted as a lower bound to the true 
social cost of carbon.
    I have been told that presenting such a figure in a political 
environment would allow people, who do not think that climate is a 
problem, to focus on the lower part of range and people who think that 
climate is a large problem to focus on the upper part of the range. 
Productive conversations between the two sides, I have also been told, 
would seldom be a product of such readings.
    For this, and a few other reasons, I now preach caution to all. To 
appropriately read Figure 3, we must work to understand what is going 
on behind the scenes. Why is the range so large? Which of the ``Lines 
of Evidence'' do the estimates include, and which do they miss? What 
combinations of underlying factors produce low or even negative 
estimates of social cost, and what other combinations support estimates 
on the high end of the scale? Answers to these questions can be 
enormously revealing.
    The choice of discount rate and the incorporation of equity weights 
are extremely important, and both lie within the purview of 
decisionmakers. High discount rates sustain low estimates because 
future damages become insignificant. Conversely, low discount rates 
produce high estimates because future damages are important. Meanwhile, 
strong equity weighting across the globe support high estimates because 
poor developing countries are most vulnerable. Conversely, weak or no 
equity weighting can produce low estimates because poor developing 
countries do not factor heavily in the overall calculation.
    It turns out, however, that several scientific parameters that 
decisionmakers cannot choose are even more important in explaining the 
variability depicted in Figure 3. Indeed, climate sensitivity (i.e., 
the increase in global mean temperature that would result from a 
doubling of greenhouse gas concentrations from preindustrial levels) is 
the largest source of variation. It is possible to derive high 
estimates for the social cost of carbon even if you assume low discount 
rates and almost no equity weighting. All that is required is the 
assumption that the climate sensitivity lies at the high range of the 
latest range of estimates. Andronova and Schlesinger (2001), for 
example, find that the historical record could easily be explained with 
climate sensitivities as high as 8 or 9 degrees Centigrade (even though 
the TAR reported an upper bound of 5.5 degrees).
    Moreover, none of the estimates from which Figure 3 was drawn 
include the economic costs of ``Risks from Extreme Climate Events'' or 
``Risks from Future Large-Scale Discontinuities.''
    To offer one glimpse at the role that these sources of concern 
might play, I can report the results of some more recent work that 
focuses on what we know about when the Atlantic thermohaline 
circulation (the Gulf Stream when it flows close to the United States) 
might weaken or suddenly collapse. Schlesinger, et al. (2006) put the 
chance of collapse at 50 percent if the global mean temperature were to 
climb by another 2 degrees Centigrade. Put another way, Yohe, et al. 
(2006) show more than a 40-percent chance of collapse by 2105 along a 
``middle-of-the-road'' emissions scenario. Imposing a global policy 
targeted at a $100 per ton social cost of carbon ($12 per barrel of 
oil) would reduce that likelihood to 25 percent if it were initiated 
immediately; but only to 35 percent if it were delayed by 30 years.
    At this point, it is essential to reemphasize the point that none 
of these critical scientific factors can be decided by committee 
deliberation and popular elections. Their values are up to nature to 
decide, and we simply do not know what she has in the cards for us. The 
bottom line is that the planet faces significant risks whose economic 
impacts have not yet been quantified. We have some idea of their 
likelihood, though, and so it is impossible to claim with certainty 
that they will not materialize as the future unfolds.
    What should we do? We should recognize that the climate policy will 
be adjusted over time as we learn more, especially if all (or even one) 
of the really bad news scenarios begin to materialize. We should also 
recognize that these adjustments could significantly, and immediately, 
change the economic environment in which we will be living. Moreover, 
we should recognize that these adjustments might be required sooner 
rather than later.
    All of this risk in the policy realm suggests an alternative method 
for estimating the social cost of carbon. Yohe, et al. (2004) conducted 
a simple ``act-then-learn'' experiment which showed that the expected 
discounted cost of global policy adjustment in 2035 could be minimized 
if a modest hedging policy were begun now. Their work suggests a risk-
based social cost of carbon in 2005 equal to about $10 per ton ($1.50 
per barrel of oil). And their approach makes uncertainty is the reason 
to act in the near term rather than a reason to delay.
    To be clear, tacking on $1.50 to the price of a barrel of oil will 
not do the trick. This risk-based social cost would increase over time 
at the rate of interest. So it would be $3 per barrel in 2020 and $5 
per barrel just after 2030. The critical component of the policy, and 
this estimate of social cost, is not the starting point. Consistent 
with the observation by Watkiss, et al. (2005) that the traditionally 
computed social cost of carbon increases over time, it is the 
persistent and predictable ratcheting-up of the effective price of 
carbon that would give the hedging strategy any traction at all.
    This observation brings me to my last point--identifying a second 
potentially expensive consequence of ignoring the hidden climate cost 
of oil. Failing to include estimates of the social cost of the carbon 
content of oil simply makes projects that use more oil or provide more 
oil more likely to go forward. Why? Because the calculations upon which 
the investment decisions would be made would inappropriately 
underestimate true costs. They would, in other words, show exaggerated 
benefit-cost ratios because the denominators would be too low. 
Conversely, failing to include the social cost of the carbon content of 
oil makes projects that conserve oil or provide alternative sources of 
energy less likely to go forward. They would simply show deflated 
benefit-cost ratios because the numerators would be too low.
    So, what if I had to pick a number? What would I say if asked to 
estimate place the hidden social cost of oil in perspective? I think 
that my $1.50 per barrel risk-based estimate is too low, since our 
analysis assumed immediate global participation in any policy response 
2005 and it captured only a very limited set of possible sources of 
uncertainty. Given all of the impacts that are not yet part of the more 
traditional approaches, though, I do not think that the $6 per barrel 
estimate that separated Tol from Downing is too high. If pressed, I 
would probably say $5 per barrel for 2006, but I could be just as 
comfortable with $10. Indeed, I would insist only that the social cost 
attributed to oil for its climate impacts increase over time at the 
real rate of interest.
    Again, thank you for the opportunity to be here today, and thank 
you for your attention.

    The Chairman. Well, thank you very much, Dr. Yohe, for, 
once again, a very informative and provocative discussion.
    I wanted to call upon the distinguished ranking member, 
Senator Biden, for an opening statement or opening comments 
that he might have for the hearing.

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

    Senator Biden. I'd just like to explain to this impressive 
panel that the reason I wasn't here, we have a markup in the 
Judiciary Committee, which I happen to be a member of, as well. 
And I apologize for being late.
    I look forward to reading all your statements. And, when 
it's appropriate, I will have a few questions.
    But, in the meantime, I'd put my statement in the record, 
rather than take the time now.
    The Chairman. Thank you. The statement will be placed in 
the record in full.
    [The prepared statement of Senator Biden follows:]

  Prepared Statement of Hon. Joseph R. Biden, Jr., U.S. Senator From 
                                Delaware

    Mr. Chairman, thank you for holding this hearing on the ``Hidden 
Costs of Oil.''
    For most of us, the costs of oil seem far from hidden. They are 
right up there on the signs at our gas stations, they are there in 
black and white on our heating bills.
    But as our witnesses will show us today, the price at the pump, the 
price on our heating bills, as bad as they may be, are only part of the 
story. Those prices conceal the hidden tax we pay to OPEC countries who 
use their pricing power to charge us more than they could get in an 
open international market for oil.
    In addition, those prices conceal the costs of the security 
commitments we face to protect the supply of oil from OPEC and other 
foreign sources. And they conceal the costs to our foreign policy, 
which has been handcuffed for over half a century by our dependence on 
oil from parts of the world with very different interests from our own.
    At the same time, the rising price of oil has created a cushion 
that props up despotic regimes and finances their militaries or allows 
other countries to put off hard decisions about democratic and economic 
reform.
    Finally, the price at the pump hides the long-term environmental 
damage--as well as the economic and social disruptions--that will come 
with global warming. The economic, social, political, and environmental 
costs we face today--and the costs of dealing with their repercussions 
in the future--will not stay hidden. There is no free lunch, as 
economists never tire of telling us. Somebody eventually has to pick up 
the tab.
    When we pay too much for oil--because OPEC can use its market 
power--we have less money for other priorities. That artificial 
inflation affects both domestic and imported oil, since there is 
essentially just one world market for oil. In turn, we pay too much for 
transportation and power. We pay too much for the plastics and other 
products derived from oil.
    That is a dead-weight loss for the entire economy. Every watt of 
electricity from our powerplants, every minute we run a refrigerator or 
air-conditioner, every trip to the store, everything shipped by truck 
or rail--all those parts of our everyday lives costs more than they 
should. That leaves us with less to spend on other priorities. It make 
us poorer--as individuals, as families, as a nation.
    Mr. Chairman, we often speak about the costs of our foreign 
policy--usually we are speaking metaphorically. We may talk about 
trading values or prestige in one area to secure influence or leverage 
in another.
    But there are real costs to our policies, too, of course. As hard 
as they may be to calculate, we must try to measure the economic costs 
of our reliance on oil, especially on imported oil, on oil from 
countries that are themselves unstable or that promote instability.
    That will be important testimony for the record of this committee, 
Mr. Chairman.
    Throwing our net a little wider, Mr. Chairman, from the 
quantifiable costs of oil to our economy, and the costs of our foreign 
entanglements to secure that oil, we come to the costs we will incur to 
cope with the climate change that will result from our use of oil and 
other fossil fuels.
    You and I share a concern about all of the foreign policy 
implications of climate change, Mr. Chairman. Climate change will alter 
growing seasons, redistribute natural resources, lift sea levels, and 
shift other fundamental building blocks of economic, social, and 
political arrangements around the world. It could spark massive human 
migrations and new wars over resources. We will pay a price for those, 
too.
    No other issue carries such a threat to our way of life. Putting a 
dollar value on that threat can show us what we are risking if we don't 
act now to slow global warming.
    In every one of the areas we will look at today, the near term 
prospects are grim. The rise of the massive economies of China and 
India will continue to put pressure on supply, will demand tens of 
billions in investments, will further complicate global oil and energy 
politics, and will accelerate the accumulation of carbon dioxide and 
other greenhouse gases.
    Half the world's population--3 billion people--live on $2 a day. 
Just to provide them with a little electricity to replace wood and 
kerosene for cooking, to pump water, to light a schoolhouse--will 
require more than our current energy system can provide.
    To meet the inevitable challenges built into our current fossil 
fuel economy, we must first start with the facts. Today we will learn 
the many ways the true costs of oil are hidden from us.
    To make clear choices, we need to have the right information. 
Hidden costs lead consumers to make the wrong choices. They distort 
investment decisions--we invest too much in systems that will make our 
problems worse, and we invest too little in solutions.
    This hearing will give us some of the facts we need to start making 
the right choices.
    Thank you, Mr. Chairman.

    The Chairman. Let me begin the questioning. We'll have a 
10-minute round, and perhaps several rounds, because there is 
so much to talk about.
    Let me begin with some topical references to what we're 
talking about today that I culled from the New York Times this 
morning. Three perspectives.
    The first deals with the problems in Ukraine following the 
election, but really going back to January 1, when Russia cut 
off some gas lines and delivery to Ukraine. Ukraine citizens 
then took some gas from lines that were going across Ukraine to 
Europe. A 48-hour contretemps occurred. The article describes 
the very unusual organization that was formed by Russia. It 
starts with the rather bizarre thought that the head of this 
organization is in a remote house, and no one has ever heard of 
him.
    The problem, however, is acute for the citizens of Ukraine, 
even as they try to form their government. In large part 
because the gas was shut off, it is apparent that President 
Yushchenko lost a great deal of authority. He lost it in two 
ways, one of which was that his country was cold. People were 
cold, physically. Their industry, which was fledgling, was 
stymied. I've described this, I hope in not ultradramatic ways, 
as waging war without sending the first troops across the line, 
or bombing or strafing. You can ruin, decimate a country by 
cutting off energy.
    Now, nevertheless, the world came to the rescue. Europeans 
said to President Putin, ``You're the head of G-8. You want to 
talk about energy this year. Don't do this to all of us,'' 
meaning Germans, Poles, others. We had the President of Poland 
here testifying what it's like when the pressure goes down in 
your country, because it's coming across Ukraine and it's being 
stolen there. Now, in essence, this is for real. This is not 
hypothetical anymore with regard to fairly large nation-states.
    However, the article points out that we're 90 days into the 
6 months of the deal that only lasts for 6 months. Some 
Turkmenistan gas mixed together with some Russian gas, with a 
very strange entity somewhere based in Switzerland, rather 
difficult for anyone to find--for President Yushchenko, for Ms. 
Tymoshenko, former Prime Minister, leader of the party that 
came in second, or for the former Prime Minister, whose party 
came in first. And the people of Ukraine try to weigh, How do 
you do this, at this point? You have a government that might be 
more sympathetic to Russia. And, therefore, perhaps the next 
deal, July 1, works out differently. Or, do you go with Ms. 
Tymoshenko, for example, who says, ``Down with the Russians. 
Independence. Investigation into all of this,'' and so forth?
    So, the implications we're going to see played out in the 
next few days--and April the 7th being the first day in which a 
government might be formed--will be interesting on some of the 
relevant problems here.
    At the end of the day, however, the pricing for Ukraine was 
$95 for the units of gas that used to cost $55. The Russians 
had demanded $220. They gave Belarus $47. And anyone--people 
talking about market forces here are up against the fact that 
we're talking about nationalized industries that use power 
plays for their advantage.
    Now, I mention that, because this comes in the same paper 
with the headline, ``Automakers Use New Technology to Beef Up 
Muscle, Not Mileage.'' And I hope I don't oversummarize by 
pointing out that, essentially--and the article points out as 
to why this is the emphasis--it says, in improving fuel 
economy, virtually everyone agrees that there is only one way 
to do it. There has to be a will. ``There's no shortage of 
technology,'' said a senior analyst at Environmental Defense. 
However, the fact is that the automobile companies have decided 
the most saleable product is more zoom in the cars. If you want 
to, at least have something that is marketable, a car that gets 
off the mark faster, rather than slower, is more desirable. 
Some would emphasize, ``After all, a large car is safer.'' A 
huge tank running down the street is probably more defensible 
than a small car.
    So, all things considered, the technology may be there, but 
the market strategy is really to sell something else, which is 
somewhat discouraging, you know, given our parlay this morning.
    Finally, there is a very interesting profile of the new 
president, or chief executive, of Exxon Mobil. It is 
flattering, in some respects, that he has indicated, for 
example--and I quote, ``He defends Exxon's record of investing 
to search for alternative fuels, saying, $100 million 
contribution to the Global Climate and Energy Project at 
Stanford University focused on long-term technological changes. 
``However,'' he said, ``we are looking for fundamental changes, 
but that is decades away. The question is, What are we going to 
do in the meanwhile?''
    Now, his suggestion is: Explore for oil and gas. And it 
commends finds in Indonesia, for example, which have been 
significant recently. But then, it also points out in the 
article that it's hard even for Exxon Mobil, with all of its 
resources, to find enough gas or oil, day by day, to replenish 
that which is already being produced. In other words, the 
precarious political position in Qatar, which is another find 
recently, is a very different one from that even 2, 3, 5 years 
ago, for this very large company. However, the article points 
out, getting back to what people would say is reality, is that 
Exxon Mobil, in terms of its per-share earnings, has been doing 
better than BP and Chevron, sometimes cited by 
environmentalists and others as being more ``with it'' and 
taking a look at the issues we're discussing today.
    In short, the Wall Street people, as the article points 
out, look at earnings per share, and give appropriate rewards 
for this situation, maybe the same way a motorist trying to get 
off to a fast start after a stoplight looks at the engineering 
that may give that kind of a boost.
    So, here we are discussing, today, a subject in which, 
topically, there are crises in the world that are observed by 
some. I give a speech about Ukraine, and my visits last 
September with President Yushchenko or Ms. Tymoschenko, and 
their apprehensions about all of this. They find much of this 
to be news, that actually there was a cutoff, that these things 
happen in the world. In other words, the transmission from 
people who are having academic discussions, or even Foreign 
Relations Committee meetings about this, to the grassroots, 
demonstrates that we still have a long way to go. And this is 
why the President's statement, ``We're addicted to oil, and we 
have to transfer 50 or 75 percent of our needs somewhere else 
in a while,'' is important, because it catches the attention of 
tens of millions of people all at once; whereas, we capture 
very few.
    I would just ask this, however. You've, in your papers, 
given some remarkable estimates of the costs involved in this. 
Now, for instance, Dr. Yohe, you've suggested, even without 
knowing, in the climate-change situation, what any of these 
catastrophes may mean. What I gathered was that we should be 
setting aside $1.50 a gallon as, I guess, an endowment fund or 
some type of emergency fund for the catastrophes to come; in 
other words, recognizing that the probability of catastrophe is 
very high, or high enough to merit this kind of public policy 
change. Is that right, essentially? Just physically in our 
budget policy, what should we do, have an account, let's say, 
for energy or climate-change catastrophe, or however you want 
to characterize this, and put that aside, in the same way we 
would do with, say, the Social Security reserve fund or 
something else that has a dedicated public notice?
    Dr. Yohe. It--my thought wasn't exactly that. I don't want 
to be flip, but I hesitate to tell Members of Congress, ``This 
is money you can do with what you want.'' It is essentially 
sending a price signal that the economic costs on the 
environment need to be incorporated in the cost of petroleum. 
How you do that, whether or not you tax petroleum at $1.50 a 
barrel or $10 a barrel, or you set up carbon permits so that 
the targeted price is that, the critical notion is that that 
``rent,'' that's reflected in the price, increase at a rate of 
interest. And were it taxed, and the revenue collected, then it 
would make sense, it seems to me, to think about what to do 
with that money--to encourage alternative sources of energy. 
There are adaptation funds being set up by the GEF under the 
Framework Convention on Climate Change that begin to try to 
help developing countries participate.
    One of the concerns in the Energy Committee is that we need 
broad global participation in a climate policy. Perhaps you 
could offer them climate insurance or climate variability 
insurance if they were willing to sign onto some mitigation, 
some best practices, in terms of their energy investments.
    The Chairman. The reason I raised it in this way is--for 
instance, Mr. Copulos has raised the point that we will be 
spending $320 billion or so, as I suggested it, at the $60 
level; and we already know, at least as of today, that the 
price has gone to $65, and who knows where from there? That's 
an amount of money that our country is spending somewhere else. 
The implications for our Federal budget that you have 
mentioned, Mr. Copulos, in terms of just the defense budget, go 
way up to $132 billion, or some such amount. This, we have to 
pay. We're appropriating money for defense; and, of that money, 
$132 billion is involved in the expense of this oil.
    Now, that's why it seems to me that if we're to get serious 
about this sort of thing, we could, as you say, simply put a 
tax on, of $1.50 or $6, whatever you've suggested, that 
translates into so much for a gallon, but that revenue would 
flow into our Treasury. It would help pay for either part of 
the $300 billion trade deficit or the $129 billion of domestic 
deficit, but really be lost in the shuffle, without any 
recognition that we think there's a problem here that probably, 
even if we don't know which of these disasters is going to 
occur, is going to cost us some money. For example, we've 
quickly cobbled together some money to help when the terrible 
storm came to Indonesia, because it's an emergency. People are 
dying. There's all sorts of difficulties there. Now, it may not 
have been climate change. Some would say the recurrence of some 
of these storms has some traces here. But it certainly would be 
a climate change if Bangladesh went underwater, at least 10 
million people. And what do we do then? Well, we quickly 
appropriate an emergency appropriation, from nothing. We just 
simply add to the deficit.
    That's why I just wanted, for the sake of argument, with 
this expert panel, to think, if we're serious about this, 
whether we try to identify, literally, an insurance policy, as 
you've suggested.
    And maybe we change the actuarial principles as time goes 
on, in the same way that you do, from yellow to red. If it's 
getting more red, maybe the thing goes up. But, at least, at 
that point there is some recognition in a public-policy way. 
For the moment, there is not.
    Essentially, without ascribing to Exxon Mobil their views 
on this, they are not unique in saying that, ``Of course there 
must be a problem out there. Clearly, something is happening. 
But we really don't know. The science is still--not necessarily 
vague, but in dispute. And, therefore, to change policies while 
this great public dispute is going on among academics and a few 
politicians would not be very sound in benefiting our 
stockholders or any prudent person in business.'' So, we are 
back to that again.
    Essentially, we're talking here about what we think is 
going to be catastrophe. Eventually, if any of you gentlemen 
are right, the catastrophe comes. Somebody will say, ``Why was 
there no vision? Why was there no courage? Why didn't somebody 
rise up?'' You know, this is the attempt to do that, to have 
hearings like this in which these questions are raised, and 
hopefully people who are expert, like you, inform us, who are 
learners and are trying very hard to see what sort of public 
policy ought to be adopted, or at least advocated by some of 
us, understanding that you have to be patient sometimes for 
some of these things get through two houses and be signed.
    Well, with all of that, let me turn to my colleague.
    Senator Biden. I agree. [Laughter.]
    Gentlemen, there used to be a song that was popular back in 
the late fifties, when I was in high school, and I forget who 
sang it, but the lyrics were--I remember, the lyrics went 
``Tick-a-tick-a-tock. Timin' is the thing. Timin' is 
everything.''
    And it seems to me--and I have been of the view that there 
is an environmental catastrophe in the making. And I've been of 
the view that that's been the case for the last decade. And I 
don't know nearly as much as all of you know, or any one of you 
know. But it seems to me we may--that famous--that phrase has 
become--title of a book's become a phrase that everybody's 
beginning to digest--we're maybe heading toward a ``tipping 
point'' here.
    But I don't get the sense that that has been in any way 
absorbed by the public. And those of us who think--the chairman 
being one--who think that we have got to deal, for a whole 
range of reasons, with the--our energy policy--environmentally, 
from a foreign policy standpoint, from a--from the standpoint 
of, in effect, developing entire new industries, if you look at 
it optimistically--the idea of an environmental tax is--you 
first have to convince people there's an environmental disaster 
in the making, or that they can somehow quantify, for average 
people--and the American people are pretty darn smart--to see 
the correlation between a $10-a-barrel tax, or whatever the 
number is, and their ability to breathe clean air or have--not 
have their roses grow in December in New York State.
    So, when you guys talk about this--it's not your 
responsibility, I acknowledge here, to do this--from a public 
policy standpoint and the sale-ability of this, I mean, what 
kind of feedback do you all get when you make this case to--and 
I know you're usually making the cases you're making here to 
public policy panels and/or to other academics, but, I mean, 
when you have this conversation at the barbeque in the backyard 
with your next-door neighbor, who works for the electric 
company or is--you know, is a salesman for whatever, I mean, 
what do you--how do you talk to them about it? Or do you?
    Mr. Copulos. Perhaps I could give you some indication, 
because I had a recent experience that really brought that home 
to me. I had an--I have an article, in the current issue of the 
American Legion Magazine, dealing with this, and possible 
solutions, and I've had probably 200--it only came out last 
week--200 e-mails from members of the legion around the country 
who'd read the article and responded. And, uniformly, they have 
expressed concern. They kind of understand it, but the problem 
is, they don't know what to do about it, and that's why they're 
asking--that, plus some rhetoric about brain-dead people in 
Washington not addressing the issue. And----
    Senator Biden. That resonates in my community.
    Mr. Copulos. Yeah. Yeah. [Laughter.]
    And--but the--but it's not that people don't ``get it.'' 
It's that they want to--Americans are doers. They don't--you 
know, they're--they don't want you to overwhelm them with some 
sort of rhetoric, or preach catastrophe. They know there's a 
problem. They're not stupid. What they say is, ``OK, now, what 
are you going to do about it?'' We're a practical people.
    I, earlier, had mentioned a good example of this, which I 
think shows the sort of thing we have to start encouraging. 
There's a fellow out in Moline, IL, in Senator--where Senator 
Obama just opened an office, actually. He had never built a 
doghouse in his life, no background in construction, was 
providing visiting nurses to retirement communities, and said, 
``You know, these people are really being taken to--these 
people are getting shafted. This is terrible. I--you know, they 
worry about locking their door. I could put my hand through the 
wall, it's so flimsy. They can--we can do better.'' So, he went 
out, and he looked up all sorts of environmental technologies, 
and he built his first development 2 years ago, homes that 
anyone would be proud to live in. And he built them for $130 a 
square foot, which is 20 percent less than the average in his 
area, and they're 80 to 85 percent energy efficient.
    The word got out on this little--in fact, in January and 
February 2005, when they had a very cold winter, the average 
utility bill for an entire unit--2,000-square-foot unit was 
$98. He's got some new units he's built that are 1,750 square 
feet. And during that recent cold snap they had in Moline, the 
heating bill for an average 1,750-square-foot home was $25. In 
fact, he was laughing that they had to pay more in community 
fees and taxes and hookup fees than they were for the actual 
energy to heat their homes. This uses no new technology. It's 
not--and this is a guy who's not an engineer or a--he said, 
``I'm going to go out and do something about it.''
    And that, ultimately, is what we've got to start 
encouraging people to do. If we point them in the direction, if 
we say, ``Look, you can do X, Y, and Z, and it makes real good 
sense''--because the American people are sensible. You say, 
``You know, this makes common sense. Just do these things, and 
you can save yourself''--geothermal heat pumps, for example, 
from the--day one of installation in every heating zone in this 
country, you save money if you use a geothermal heat pump.
    Senator Biden. OK. Now, what would some guy say--say, ``By 
the way, Charlie, I've just convinced the Congress to raise the 
price of a gallon of gasoline at the pump for you 35 cents or a 
dollar''? Is he going to say, ``Great, I--that's right up my 
alley, man''?
    Mr. Copulos. He's going to say, ``Who is that guy? I'm 
going to vote against him.''
    Senator Biden. That's right.
    Mr. Copulos. And the other thing we have to bear about--
bear in mind about that is, you know, we talk about high prices 
for gasoline. And, as I'm sure you Senators realize--you travel 
outside the United States--we don't pay high prices for 
gasoline. As a practical rule, because we are a very wealthy 
nation with a high median income, you would have to raise the 
price of gasoline so high to have an effect on consumption that 
it's impractical. I mean, say, $3-a-gallon gasoline, fine, the 
average person uses 1,000 gallons a year. The median income of 
this country is $44,000-and-change, almost $45. You're talking 
6 percent of gross income, maybe. And, also, against the 
background that 90 percent of all driving is nondiscretionary--
you have to go to work, you have to go to the grocery story, 
you have to take kids to school--so, you're only playing 
without about 10 percent there, one way or the other.
    Price increases, per se, are not going to change patterns 
of driving.
    Senator Biden. So, the only reason for the price increase, 
then, justified, would be for this, in effect, insurance 
policy.
    Dr. Yohe. Yeah, let----
    Senator Biden. Right?
    Dr. Yohe [continuing]. Let me respond to a couple of things 
I've just heard.
    First of all, I don't agree, as an economist, that a price 
signal won't work. Now, I admit that it won't work in anything 
that would be politically viable over the near term. But, 
remember, I was talking about a price that was persistently 
increasing, predictably increasing over time, so that 
investment decisions that private individuals make on 
automobiles, that industry makes on their plant and equipment, 
that government makes on their infrastructures, knows that the 
tax was 10 cents in 2005, but it's going to be 20 cents in 
2020, and 35 cents in 2025. And you build that into----
    Senator Biden. But do you think that----
    Dr. Yohe [continuing]. Into what's going on.
    Senator Biden [continuing]. That affects--I'm not----
    Dr. Yohe. I do.
    Senator Biden [continuing]. Behavior of consumer--the 
average consumer? I mean, I don't know any consumer, where I 
live, who thinks that their gasoline prices are ever going to 
go back down again. I don't know anybody--I don't know anybody 
who thinks, ``You know, Joe, we're going to get back down to, 
you know, 95, 85 cents a gallon.'' I don't know anybody who 
thinks we're going to get down to a dollar a gallon. And I 
don't--everybody that I know--now, I'm just a plain old 
politician now, not an economist, and I think I probably am 
better at this than you are at guessing what average people 
think they're going to do. It is presumptuous of me to say 
that, but I think most everybody here is. That's our living. 
And the fact is, I think everybody thinks the price is going to 
continue to go up. I don't know anybody who thinks that 10 
years from now they're not going to be paying more for a gallon 
of gasoline than they are today, a year from now, they're not 
going to be paying more--and, it may go from $3 down to $2.56 
or $2.36 and back up to $2.80, but it's going to go from $2.36 
to $3, and next year it's going to go from $2.42 to three-two, 
next year it's going to go from $2.75----
    I mean, so, I don't get your point that if you said to 
the--now, in long-term investment by, maybe a guy building a 
new warehouse and storage facility, I don't disagree with you. 
I don't--I think that will affect that kind of behavior. But 
the significant portion of the consumption is coming from 
nondiscretionary fuel costs that go into people driving 
automobiles, I think. And so, I'm always attracted by, I 
think--to take a name where--that's become a--very popularly 
associated with the gas tax, Tom Friedman. I have great respect 
for Friedman. I think he has been pretty prescient about a 
number of the things he has written about over the last 10-12 
years. But, on the gasoline tax, I kind of come out where you 
do, sir. I mean, I don't see any change in behavior or 
consumption when gasoline went to $3 a gallon. Did it? I mean, 
is there anything that--did people--even though it was 
temporary--but did anybody--I didn't notice much.
    Mr. Copulos. Senator, there is a waiting list--I'm on it--
for the Dodge Charger R/T S8.
    Senator Biden. Yeah.
    Mr. Copulos. It's got a 454 horsepower HEMI----
    Senator Biden. Yeah.
    Dr. Yohe [continuing]. Well----
    Mr. Copulos [continuing]. Little turn 13s. You know, 
that's--people are not concerned--the only times that you saw a 
change in the purchasing of automobiles related to mileage, 
when people really started basing their decisions--there were 
only two occasions--1973 and 1979--and they both were 
specifically tied to an absence of energy. We had gasoline 
lines, and people were shooting each other. And that gets down 
to a very fundamental point that we have to understand. And 
that is that the--it is the availability of energy that drives 
behavior, not the price. Whatever the price of energy is, we 
will adjust, sooner or later. The only times prices affect--I 
take that--there is one time it can be a factor, and that's if 
it's a shocking price. In Maryland, in several other States, we 
see electricity prices predicted to go up 72 percent this 
summer. Consumers are up in arms, because they see this as a 
huge spike. But, I'll tell you what, 6 months after it's in 
effect, people will have adjusted, and they won't have changed 
their behavior.
    Senator Biden. Well, I hope that's wrong, but I'm afraid--I 
worry you may be right, which leads me to--look, what--I'm 
asking--deliberately and intentionally asking topical questions 
here about how--because I don't disagree with what you're 
asserting as what the--the extent of the problem, the need to 
deal with the problem, and the fact that those boneheads here 
in Washington aren't paying attention to this, and we're going 
to all say, 2, 5, 10, 12 years from now, ``My God, why didn't 
anybody talk about this?'' So, we're all on the same page on--
in that regard.
    But let me--one of the things that seems to sell with 
average people, as it relates to the notion of whether or not 
their behavior will be affected by anything, is that--and I 
mean--and by behavior to be affected by: Should we be spending 
more Federal tax dollars investing in alternative energy 
sources? Should we be doing it through incentives? Should we be 
doing it through direct loans? Should we be doing it by 
generating it ourselves? The--whose statement it was--excuse 
me--Mr. Huntington's statement. He said, as a general--
strategies to reduce our dependence on oil are more effective 
than policies that reduce our imports. We should view the oil 
market as one giant pool, rather than a series of disconnected 
puddles. Whatever--when events happen anywhere in the market, 
they will raise prices, not only there, but also everywhere, 
that connect to the--that large pool. More domestic supplies 
will not protect us from these price shocks.
    The oil companies have this nice--and others--have this 
nice mantra that the way in which to drive down prices, the way 
in which to stabilize prices, is, ``We've got to go out and 
find more oil,'' and that the--the impression is, particularly 
if we found domestic oil--``If we found more domestic oil, 
then, you know, we're going to be--we're going to be, not home 
free, but we're going to have a lot more control. So, really, 
we should be, you know, investing our resources''--them--``as 
well as the Federal Government.''
    For example, we passed an energy bill--an energy bill at 
the time when the oil companies are having--and I'm not making 
the populist argument, but just a factual argument--when 
they're having these gigantic surpluses, in terms of profit. 
And we decided we needed to give them--what was it, $6 billion?
    Staff Member. Two and a half, overall.
    Senator Biden. $2\1/2\ billion? A $2\1/2\ billion incentive 
for them to go out and look for more oil. And people here--you 
know, they drank the Kool-Aid. You know, they said, ``Yeah, it 
sounds right, you know, because we've got to get more domestic 
oil.''
    Talk to me a moment about--all three of you, if you would--
about what benefit--let's assume we were able to discover and 
produce three times the amount of oil we are now producing 
domestically--and we found it overnight--that could come online 
over the next 4 years. We found it in--you know, in the middle 
of Delaware or----
    [Laughter.]
    Senator Biden [continuing]. You know, in Maine, in, you 
know, Washington State. I mean, we found it in unlikely places. 
We--boom--all of a sudden, we tripled, with essentially the 
same recovery cost. What would be the effect of that?
    Dr. Huntington. Well, Maybe I should jump in here, since--
--
    Senator Biden. Please.
    Dr. Huntington [continuing]. That was the comment that you 
took from me. I think it's very important to emphasize that the 
oil market can be in a couple of different kind of situations. 
The kind of situation I was talking about was when there is a 
disruption on the market. My point there was that the price is 
going to rise for everything, and just having more domestic 
supplies is not going to protect you from that----
    Senator Biden. Right.
    Dr. Huntington [continuing]. Price rise. But now, let's 
take the other state of the world, the state of the world where 
we live in most of the time, when we don't have a disruption. 
More domestic supplies is going to help pull down the price of 
oil on the market. Just by putting that more supply on, we will 
help the market out that way. So, the price will be lower. And 
so, that would actually be beneficial. If it was economic, it 
would be beneficial.
    The problem would come in if it was not economic. Then 
you're really hiding the cost, in a way. You're saying, ``Yes, 
I'm putting on more supply, but it's really costing the 
taxpayers a whole lot more money somehow, because we're giving 
it a subsidy for it to come on.''
    Senator Biden. If I can add onto that, if--we would have to 
find a heck of a lot more than twice or three times what we're 
producing now, wouldn't we, to meet our domestic energy needs? 
What would we have to do to meet our domestic energy needs, in 
terms of being ``totally self-sufficient,'' in--as it relates 
to oil and gas?
    Mr. Copulos. We'd have to roughly triple what--we use about 
20.8 million barrels a day, and we import 12-and-change of 
that, so it's about--two-thirds of what we use is imported, so 
we'd have to, roughly, have three times our production.
    But, I think one point we have to look at here, in terms 
of--the argument over domestic oil/foreign oil, kind of, in one 
way, misses the point, because we're going to run out of oil. 
That's a given. If you take a look at global demand, I don't 
care how much we produce. And you're--the Chinese are adding 
120 million cars. You look at demand, and it--just Third World 
demand alone, in 2025, is going to require an additional 30 
million barrels a day. When you add in the rest of us, it's 40. 
And there's no ``there'' there. Can't be done.
    What we need to do is to facilitate the transition away 
from a reliance on oil as a motor fuel and in other areas. But 
to do that, we have another problem. There are 220 million 
privately owned vehicles on the road today. They have an 
average age of 8\1/2\ years, an average life span of 16.8--
actually, it's a little longer than that, in reality. So, 
basically, for a decade, because people are not going to junk 
their cars, you're going to have to do something to provide 
them with fuel. That means you need something that can burn in 
those cars.
    Now, fortunately, we have some options. We've got alcohol, 
we've got biodiesel, which can help, to a degree. If we find--
if we can find a little more natural gas, we can actually turn 
some of that into a motor fuel if we have to. But, in the near 
term--I'm talking about 5-10 years--as we make the initial 
start of the transition, we really need to use domestic--we 
need to use oil and gas; to the extent we can do it 
domestically, we're actually better off. In the longer term, 
what we need to do is understand that that's a temporary fix 
that gets--keeps us from having an economic calamity, and then 
we start bringing in all the alternatives.
    Dr. Yohe. It's very----
    Senator Biden [continuing]. Well, my time is----
    Dr. Yohe [continuing]. It's--excuse me. The--both of these 
conversations are missing one of the fundamental points that I 
teach my students, that there are two sides to every market. 
And I think the simple answer to your question, ``What happens 
if we tripled our supplies?'' given in the context of what Hill 
put in his statement, is that we could join OPEC, that we would 
become a supplier of petroleum to the world, and that that 
would be something that would allow us to participate with 
respect to that.
    The other thing that's going--sort of, going back to the 
price-size business and the changes in behavior--Senator Lugar 
was speaking about more zoom in the car. A story that I can 
remember from a National Academy Panel Meeting 2\1/2\ years 
ago, where somebody fairly high up--and I don't know his name, 
so--that's probably good--from Ford Motor Company, said that 
they could not see any way that hybrid automobiles would become 
popular in the United States, and that Ford had no intention of 
creating them or marketing them.
    Senator Biden. I had a similar conversation with Chrysler.
    Dr. Yohe. And if you look lately, they are. And why? It's 
because the demand side of the market has responded, so that 
the political--part of the political leadership that is 
required is to alert people of these problems and get them to 
understand that it's--changes in their behavior, at a pace 
where it is not uneconomic to do it, will help the problem a 
good deal. You don't have to junk your 4-year-old car, but next 
time it's time to buy a car, go look at a Prius until Ford gets 
one that looks the same and works just as well.
    Senator Biden. Well, my time is way over. I appreciate it, 
Mr. Chairman. Let me conclude by recounting a similar example. 
1974, I was a young Senator in a garret in this office 
building, number 100 in seniority, and I got a call from a 
fellow named Mr. Ricardo, chairman of the board of the Chrysler 
Corporation, and Leonard Woodcock, the president of the AFL--of 
the--excuse me--the UAW, and asked if they could come to see 
me. And they sat in my office and jointly told me that I could 
not support--I had run--I was a bit of an environmentalist--I 
could not support the Clean Air Act, because the Clean Air Act 
was going to put restrictions, in some way, on tailpipe 
emissions of automobiles. I'll never forget Mr. Ricardo looking 
at me--this was 1974--and saying, ``You don't understand''--and 
I think I'm right about the numbers--``we now have 18 percent 
of the large-car market. It is our plan, in the next 5 years, 
to get 35 percent of the large-car market.'' So much for 
management vision about how they were going to move.
    Anyway, I thank you all very much. Thank you for your 
indulgence, Mr. Chairman.
    The Chairman. Let me just pick up a little bit on the 
conversation that you've had with Senator Biden and further my 
interest in what is being offered to American motorists in this 
particular year.
    The New York Times story that I mentioned, just to make the 
point, says that the 1975 Pontiac Firebird could get from zero 
to 60 miles per hour in 9.8 seconds. The 2005 Toyota Camry can 
make it in 8.1. Now, the point they're trying to make is that 
the developments in the last 30 years have been largely in 
terms of performance and the ``zoom'' speed, as I've described 
it. But, in this particular year, if we are hoping and holding 
our breaths that that is not where the technology is being 
focused, the point is that a 2006 Cadillac STS-V can reach 60 
miles per hour in 5 seconds. And that----
    Senator Biden. Helluva an engine.
    The Chairman [continuing]. Unfortunately, appears to be 
where the competition is. In the process of this--and I quoted 
the President from his speech yesterday--he talked about the 
technologies that are out there. And they are. I saw the 
distinguished president of Purdue University yesterday, Martin 
Jischke. He's very enthusiastic, at that university, about 
taking on all of these technologies in a comprehensive way. But 
automobile companies--in fairness--have some very talented 
people.
    Now, the dilemma here is described further in the New York 
Times story by someone who noted that he would like to get 
better gas mileage, but he's been driving, in essence, a truck 
for years, and he's comfortable in a truck. He doesn't want a 
Prius. He wants a truck. And, therefore, even though it does 
cost more, and he acknowledges $3 a gallon is more than he 
would like to pay for it--all things considered, that is sort 
of his habit, his comfort level, his feeling of safety. He 
doesn't want to zoom off at 5.1 for the first stretch after the 
stoplight, but he does really want to have safety and comfort.
    We've been talking, ``Does price at the pump influence 
people?'' Probably, somewhat. It did, for a while, bring a 
waiting list, and maybe still does, for the few Prius cars that 
are available now, or other hybrid cars. And people are 
mentioning this. We've had testimony from Jim Woolsey, in our 
committee, that the hybrid cars that we're now driving will be 
obsolete. The President himself went to see the battery factory 
in which somebody produced the technology for the first plug-in 
Prius or whatever else people have, and got--and the President 
mentioned, yesterday, in his remarks, off the top of the head--
40 miles, somebody could get in this community. I could drive 
from my home to the Senate Office Building and back, which is 
about all the driving I do in a day, and never use a drop of 
gas. And so, that's very attractive.
    And, as you've said, about 90 percent of driving may be 
mandatory, anyway.
    I'm trying, I suppose--and this is the purpose of the 
hearing--to say that all of this does not really take into 
consideration any of the hidden costs that you have 
illustrated, whether it is climate change, disruptions that are 
huge, or the strategic predicament that we have here.
    Now, I want to zero in on one of the strategic 
predicaments. And this really has to do with the thoughts that 
you had, Mr. Copulos, on the Armed Forces.
    You point out, just historically, that in 1983 the implicit 
promise to protect Persian Gulf oil supplies became an explicit 
element of U.S. military doctrine with the creation of the 
United States Central Command, CENTCOM. And their official 
history makes the point clear, you point out, and I quote, 
``Today's command evolved as a practical solution to the 
problem of projecting U.S. military power to the gulf region 
from halfway around the world.''
    Now, you point out, then, they further have refined the 
doctrine by saying, ``Without oil, our economy could not 
function.'' And, therefore, protecting our sources of oil is a 
legitimate defense mission. And the current military operation 
in Iraq really is a part of that mission.
    To date, supplemental appropriations for the Iraq war come 
to more than $251 billion--this is supplemental appropriations, 
on top of our regular military budget--an average of $83.7 
billion a year. As a result, when other costs are included, the 
total military expenditures related to oil now are $132.7 
billion annually. That is a big figure.
    It's not reflected, in terms of our market economy. The 
automobile companies have to make their own strategy. So do the 
oil companies. What I've suggested from the New York Times 
story is a strategy to use technology for so-called performance 
and safety, not for what we're talking about today with regard 
to disruption or the oil economy or what have you. Some oil 
companies, but not all--I've cited just one, because it's a 
very large one--say, ``Our job is performance for our 
stockholders, first of all, those who have invested in this 
place. And, second, it's to try to think about the future, and 
that is getting more of whatever we sell. We'll do a little bit 
of research on the side and genuflect in that direction. But 
that is very long term. Long term. Not this year. We are oil 
people.''
    Now, that is still, I'm afraid, the prevailing view among 
major players in this. What I'm trying to figure out--and I'm 
certain Senator Biden shares this thought--how do we get a 
recognition that our military doctrine, our national defense, 
now commits $132 billion a year to the protection of Middle 
East oil lines? Not just for us, but for everybody else, for 
that matter. I don't see this coming through. It's sort of 
buried in the supplemental. They don't have an account for oil 
there, nor is there a mention of 1983, which is now 23 years 
ago.
    I think you, in your paper, even go back to Franklin 
Roosevelt and his original meeting with the Saudi King in 
which, essentially, this is the assurance that came, ``If you 
produce it, we'll protect it.''
    Americans have not only spent money, but they've lost a lot 
of lives defending all of this. And that is not reflected in 
the market situations that we're talking about today. And I 
think one of the emphasis of this, from a foreign-policy, 
strategic standpoint is, How do we reflect that? That was why I 
raised the question. Do we make an explicit foundation or 
endowment in which we set aside so much? Because simply to add 
$1.50 to the price of a barrel or a gallon or so forth may not 
make it. It may be that my friend, who is in the article, says, 
``I still want the comfort of my truck.''
    So, in terms of a market choice, I'm not sure we get there. 
Maybe some administration will come along and say, ``Listen, 
folks, this is what our doctrine costs, $132 billion a year,'' 
explicitly, ``plus whatever lives we lose, whatever risks 
Americans take, to keep all this going. Do you want--do you 
like that, or not?'' As Senator Biden says, our constituents 
are saying, ``Why don't you guys do something about $3 gas?''
    Senator Biden. That's right.
    The Chairman. ``What are you--just sitting there in 
Washington, fiddling around?'' This is the big issue out here. 
If I had a dollar for every Republican banquet I've attended in 
which people, in February, March, or whenever a crisis occurs, 
come to me and say, you know, ``Why aren't you doing anything 
about that?'' Whatever----
    Senator Biden. Add a dollar for the Democratic banquets, 
too. We'll both get rich. [Laughter.]
    The Chairman. That's the politics of the country. Now, why? 
Because the public recognition of this problem is at that 
point, that $3 at the pump. They pay it, but they're irritated. 
And they think that we ought to perform and get it down.
    Now, we can say, theoretically, that's a part of the 
problem--it goes up, down. It's forgotten. People go through an 
upset period, but then they get over it. But, here, you're 
looking at climate change, which keeps it going on inexorably, 
you know, whether we're having this discussion or not. Or 
disruptions--you've illustrated those in your paper, Dr. 
Huntington, that are actual facts. Plus, you know, the huge 
problem that might have occurred in the Saudi refinery if the 
terrorists actually had gotten down the road and disrupted 13 
percent of the oil supply that day. You've indicated we could 
have as much as a 5-percent loss in GNP. Well, we don't have 5 
percent gain in GNP now. That takes us to a negative figure. 
That takes us to a huge unemployment in our country. The same 
motorist who wanted the comfort of his van is unemployed, and 
then the whole agenda of this government changes. How do we 
bring compensatory payments, safety nets, retraining? What in 
the world do we do at this particular point? And whatever is on 
these charts today is sort of forgotten, but it shouldn't have 
been, because this is the reason we got to that point.
    We're looking for you not to substitute for us as 
politicians and to try to think through what legislation, 
resolution, what have you, we offer. But, as a practical 
matter, how do we translate the wisdom of this testimony into 
measures that give us some protection? Maybe this endowment or 
this insurance policy, maybe the fact that we try some element 
of pricing that is different from what we do, without getting 
into all the political hazards that Joe Biden has discussed so 
well, you know, namely, woe be to the person that just suggests 
putting a quarter on it. They'd say, ``Why?'' Or the thought 
that you do a little bit more each year, that is even worse 
still, because you invite a congressional candidate or a 
President to come along and say, ``We've had enough of this 
kind of stuff. I'm going to reduce your taxes. And we're not 
going to take a look at a long-term feature.''
    So, can anybody give a little essay off the top of the head 
on this?
    Dr. Huntington.
    Dr. Huntington. Well, this will really be off the top of my 
head, but let's give it a try.
    One of the ways to look at this hidden cost component is as 
a tax put on people's purchase of gasoline. And I actually 
agree with Gary that you won't see a lot of effect in the first 
few years. The real effect you see is in the types of vehicles 
that people buy eventually, later on. Consumers may not realize 
this effect immediately, but the people who are selling the 
automobiles realize that they need to be more efficient when 
they produce the automobile. That is the important effect.
    But, step back for a minute. Let's say we've just decided 
that a tax is not the way we're going to go, and that we need 
another approach. The one way I look at this hidden cost is 
that it's a measure of how much you should do in an area. 
Suppose you want to discourage gas-guzzling vehicles in some 
manner, or you want to encourage a substitute fuel for 
gasoline. What it should tell you is that you shouldn't go 
above--suppose that Gary and I agree on a number, $10 a barrel, 
or something like this. It should tell you that you should not 
go above that level. If you're trying to give a subsidy you 
shouldn't provide a larger disincentive for people to use 
gasoline. You shouldn't make it more costly than whatever that 
hidden-cost estimate is. That's another way to look at that 
number.
    It's not a formal account that you would have, but it 
should tell you that you shouldn't be looking at very large 
policies above that level. I don't know if that helps you 
thinking about the issue, but I think that's one way to think 
about this issue.
    Senator Biden. Chairman, can I--not amend, but add on to 
your point, and maybe add this to the mix?
    It seems to me that American business and industry is much 
more sensitive to price than the consumer at the pump is to 
price. If, in fact, the major businesses in my State, or small 
businesses in my State, realize they can add literally a penny 
or two pennies to their bottom line by shifting--economically 
shifting to another source of fuel, they'll do it, in my 
experience. They're much more price sensitive--even though they 
pass on the price, they're much more price sensitive, because 
they're competing, than, I think, the consumer at the pump is. 
But--and, again, this is above my paygrade here. That's why 
we're having this hearing.
    If that's true, and even though that's a smaller percentage 
of the market that's--consumes energy in America, has anybody 
thought about strategies that deal with that smaller percent of 
the market, where you won't get as big a bang for the buck, but 
there--will be more likely to embrace the change that takes 
place--the incentive offered, or the disincentive?
    And I know that's not how we think about it, but has there 
been any studies done? Have you fellows looked at that?
    And the last piece is that it seems this hidden cost that 
the chairman is--in putting together this hearing to have you 
all speaking about, breaks--my staff just pointed out the 
DuPont companies recently saved $2 billion in energy by 
cleaning up climate emissions for them. I mean, to them, it's a 
big deal.
    But, at any rate, the other--in the hidden costs, there 
seems to be two hidden costs that fall--they fall in two 
categories that the American public could understand. One is 
the hidden costs relating to environmental costs. The other 
hidden costs is--are relating to defense costs. It seems to me 
we are much--the public is much more attuned and believes that 
the defense costs are more real, apparent, and immediate than 
the environmental costs, even though I think they know, and 
they think, that there are environmental costs. But one of the 
things we all say, in one form or another--I won't put words in 
the chairman's mouth, but obviously I would say--does anybody 
think we would be in the Middle East if, in fact, we were 
energy independent? Does anyone--would there be any American 
out there willing to, you know, give their son or daughter's 
life out there if, in fact, we, in fact, thought that we didn't 
need anything that the oil oligarchs had to offer? They get 
that pretty quickly. They get that pretty quickly.
    So, as you think through the things that we can, or should, 
be doing--and the point you just made, Dr. Huntington, that 
whatever we do, the price of accomplishing this independent--
not independence--greater flexibility can't be so high as to 
discourage that effort--what about focusing on the smaller end 
of the consumption continuum here--that is, industry? And what 
about a strategy relating to making the defense piece a more 
palatable or understandable argument as an incentive to change 
behavior?
    Dr. Yohe. I don't--I'll leave it to folks to talk about the 
expense stuff. And I'm--don't know how--the defense stuff. And 
I don't have specific references with respect to your business 
question.
    But it--the notion of providing the appropriate incentives 
for businesses to take a longer term view of what their energy 
costs are going to look like is the part of the persistent and 
increasing business. And if you look in my statement, there's a 
sentence that said, ``almost doesn't matter where you start 
it.'' You can actually even separate it from the social cost of 
carbon. What you need to do is get it in there, get the train 
out of the station so that people, as they make these 
decisions, begin to take it into account.
    With respect to its being small, over the long term it 
might not be to the degree that it influences infrastructure 
decisions and long--large capital decisions that businesses and 
governments take, that we will define the energy structure of 
the United States through 2060 by 2025. We will determine the 
energy structure of the United States by the--through the end 
of the century by 2050.
    Senator Biden. Right.
    Dr. Yohe. We are locked in. And so, if we haven't----
    Senator Biden. Right. That's why----
    Dr. Yohe [continuing]. If we haven't fiddled on that 
margin, we're stuck for a very long time.
    Senator Biden. What are some of the things you could do to 
``fiddle on the margin''?
    Dr. Yohe. Let me think about that. [Laughter.]
    Senator Biden. Well, that's what we have to do.
    Dr. Yohe. Yeah.
    Senator Biden. See? I mean----
    Dr. Yohe. No, I mean----
    Senator Biden [continuing]. When it gets down to it, we 
have to come up with concrete, specific ways to fiddle. I mean, 
you know, it is--it's not like--we can't generically talk about 
this. Assuming the Federal Government has any role to play in 
affecting this behavior.
    Dr. Yohe. The bill that's being discussed in the Energy 
Committee, which has this sort of ratcheting permit price idea 
that was vetted last spring, I think--and I think they're 
talking about it again--is an attractive idea. And, frankly, 
the $5 or $7, or whatever they're picking out for a ton of 
carbon, isn't going to--you know, isn't fixing the climate 
problem, but that it goes up at--I don't think it goes up fast 
enough, but it goes up at a nominal rate of interest, and 
there's a ceiling that's a little bit too low, and things like 
that, in terms of incentives that you want to create, but maybe 
the fiddling is in the specifications of how that evolves over 
time to make sure that it's persistent, predictable, and maybe 
invulnerable to political manipulation every 4 years.
    The Chairman. Let me just say, picking up on the word 
``fiddling'' that my colleague used, a couple of provisions in 
one bill that I and several others have offered says that all 
the cars produced in America ought to be flexible-fuel cars 
within a 10-year period of time. I don't know why it really 
couldn't be within a 2-year period of time. That's about a $100 
adjustment, in terms of the cost of the car. But it does, at 
least, give American motorists the same options Brazilian 
motorists now have, and have had for several years, as a matter 
of fact. And it does make possible, then, the practical notion 
of some amount of ethanol, whether it be corn-based, sugar-
based, or cellulosic or however one wants to get along with 
those projects.
    The other thing, which probably is our bailiwick and 
difficult to do is, is to find somebody close to the 
President--because we think this is a prime emergency--that 
coordinates all the missing pieces of this. And without going 
into laborious detail, for instance, in my State--and I suspect 
that's true in Delaware--there, we are encouraging people to 
produce ethanol--right now, from corn. And we have got one 
place that started up in 1983, in South Bend. There'll be two 
more places that will be producing ethanol, hopefully, in 
November, if the construction season goes well, and about five 
more the following year. And there are now 27 places, single 
tanks, in Indiana where you could use E85--that is 85 percent 
ethanol, 15 percent petroleum. This is out of several thousand 
tanks.
    Now, the dilemma here is that suddenly life is never 
simple. The demand for ethanol has increased so much that USA 
Today points out in many places that it's higher than 
petroleum-based. And you say, ``Well, how can this be? It's 
supposed to be 50 cents lower. This is the incentive.'' Well, 
it can be, because MTBE is being substituted by people in 
California and New England, a long distance away from Indiana. 
But suddenly at the very moment that we think about making 
these substitutions and trying to get flexible cars built fast 
enough--Ford's pledged 250,000; General Motors, likewise, 
250,000--suddenly we're not sure there is any ethanol to buy.
    And my point is that--and when I go back to my State, I 
say, ``Well, who is managing this whole thing?'' Well, it turns 
out it's some volunteer organizations----
    Senator Biden. Right.
    The Chairman. One lady, working out of her living room in 
Mooresville, IN, has more control over this than the Governor 
of the State or the President of the United States, in large 
part because we don't take it seriously. There is not really 
any leadership focus in all of this, despite all the pledges 
for people to do something.
    So, when I'm talking about ``fiddling at the margins,'' as 
opposed to the big picture, we're really thinking on the ground 
now, with some things that have some small alleviation.
    And I pick up your point, Mr.--I think you made it, Mr. 
Copulos--that we ought to begin thinking, in a foreign policy 
way, about our hemisphere. The Brazilian Ambassador came to 
visit me the other day. He's probably visited with Senator 
Biden and others. And he said, ``Now, we could furnish a lot of 
ethanol to you right now.'' The President, just to be 
provocative, told a small group of Senators this in the White 
House, you know, ``How about''--Well, my goodness, here you 
have people on the Agriculture Committee, and I've served on 
that distinguished committee, and they say, ``Not on your 
life,'' you know----
    Senator Biden. Yeah.
    The Chairman [continuing]. ``We have a sugar policy. There 
will be no amendment to the farm bill through 2007. As a matter 
of fact, we're not sure we want to see a change in 2008-09.'' 
You know, in other words, leaving aside the emergency we're 
talking about today--Americans sacrificing their lives--sugar 
comes first, or whatever it happens to be, in terms of our 
vested interest.
    This is the niggling business that we're dealing with. But 
it's very serious. And this is why the big picture you present 
is helpful to us for people who do take this seriously, which I 
think most of our colleagues do, when they are confronted with 
this.
    But I'm still back to Senator Biden's plea to you for 
suggestions for legislation, enactments, speeches, you know, 
action steps that may come from this conference today.
    Mr. Copulos. Well----
    The Chairman. Yes, sir.
    Mr. Copulos [continuing]. We've given a lot of thought to 
that, and actually have been very involved. We put together the 
first Alternative Fuel Vehicle Program at the Department of 
Defense in 1990, so--and I have done some work with the Tank-
Automotive and Armor Command up in Detroit--actually, 
Warrenville, Michigan. But there are some things we can do. And 
what we need to do, first of all, is to understand and 
recognize that the American people are practical. If you say, 
you know, ``Go do this. It'll do X, Y, or Z,'' they'll go do 
it.
    And there are some real simple things. I think your 
suggestion on having all new vehicles be flex fuel is 
excellent. There's no reason they can't do that next year. All 
you're doing is changing one chip and some fuel lines. It costs 
$100 in the factory. You could even--I would even go so far as 
to say give a tax credit to let people retrofit it. But when 
you do, you've got to make sure that Detroit doesn't turn 
around and void their warranties, because what's been happening 
is that people who might want to use more, they'll say, ``Well, 
that's fine, but under our warranty, if you use more than 15 
percent or 20 percent''--it varies by manufacturer--``your 
warranty is voided. And if your engines goes bad, it's all on 
you.''
    A second thing that we can do--the Department of Defense 
has this 21st-century-base program. The idea is to make bases 
sustainable, in terms of their own energy. Now, one of the 
things I've suggested is, under the Energy Policy Act rules, 
Federal vehicles are supposed to be, by now, 80 percent 
alternative fuels. They've managed to get around that by buying 
the flex fuel vehicle and not using flex fuels. But we need to 
solve that. But one of the other things is, why not put E85 
pumps--since they're supposed to be using it anyway in their 
civilian vehicles--in military installations, post offices, to 
fuel the Government vehicles, but then have them available to 
the public.
    One of the problems you've got now is infrastructure. If 
you want to use E85 or--where do you find it? Well, there's--
there are military and Government installations that have fuel 
depots in every city in every region of this country. You could 
very quickly begin to do that.
    Now, once you did that, what's going to happen is, the 
Exxons and BPs of this world are going to go, ``Well, wait a 
minute now, I don't want them buying that from the 
Government.'' [Laughter.]
    You know, ``God help us there.'' So, you're going to see 
those cropping up at regular filling--it's the same thing that 
happened with diesel in 1973. You couldn't find a diesel pump, 
to save your life, in 1973. Along came the boycott. All--they 
had to literally give out books with, ``This is where the pumps 
are, these truckstops.'' Every gas station you pull into today 
has a diesel pump.
    The Chairman. Let me just interrupt by saying that we've 
tried to--in a statesmanlike way--to write letters to all the 
major oil companies----
    [Laughter.]
    The Chairman [continuing]. Suggesting that they might want 
to put E85 pumps on the premises of stations that they have in 
our country. The letters that I receive back usually point out 
that, you know, ``Understand I'm well motivated,'' and, you 
know, there's some salutary----
    Senator Biden. You're a good man.
    The Chairman [continuing]. Remarks.
    Senator Biden. You're a good man.
    The Chairman. Genial, or whatever, but----
    [Laughter.]
    The Chairman [continuing]. At the same time, ``Let's get 
real. There are impurities with E85. To mix that stuff with 
what we're doing would just be terribly disruptive, to say the 
least.'' And, furthermore, those who are the most negative on 
it are not really sure that this alternative fuel business is 
not just a fad, ``It's almost like the spike to $3, but we'll 
get over it.'' So, therefore, to get serious about this, 
they're not prepared to do that. I have yet to get a single 
favorable response from any oil company that would put a single 
tank out there.
    I went out to Terre Haute, IN, last July to see the very 
first tank put aside two alternatives, with a sign in the 
middle of the road that showed that the ethanol would be $1.50, 
or something of that variety, as opposed to $2 at the tank that 
was next to it. And there was a speedway race driver there, who 
said, ``We're going to use that at the speedway.'' And so, that 
was helpful. And 200 people and the mayor. It was big--for one 
gas tank. But that doesn't mean that it's spread like wildfire. 
The 27 I'm talking about are not on major oil-company lots. 
They are mom-and-pop variety stores, that, as a matter of 
patriotism, have decided to do this. And many are losing money, 
for the reasons that I suggested; the ethanol is going to 
California to solve MTBE. And the number of flexible-fuel cars 
coming in Indiana, we can trace by the hundreds per month, not 
by the thousands. That's the real-life dilemma that----
    Senator Biden. Right.
    The Chairman [continuing]. You know, we face out here in 
these sort of situations.
    As you write more about this--and I hope that you all 
will--and reflect, if you can, how we solve the political 
problem--I think, you know, clearly, we have some 
opportunities, and we'll write to the oil companies again. And 
Senator Biden and I hope to be more persuasive as we do that.
    Senator Biden. Thirty seconds to reinforce your point. Our 
colleague, Senator Carper, when he was Governor, shifted all 
State vehicles to alternative fuels, made the farmers in my 
State very happy. They thought that was a good idea. People 
thought that was a good idea, too, but they can't go anywhere 
to get it, except to go to a government-sponsored facility, and 
they're not able to do that, to the best of my knowledge, now. 
So, you----
    The Chairman. Why can't they do that?
    Senator Biden. Well, I think it's--the answer is, I don't 
know. I don't know whether it's insurance or they're not--
availability or the physical access. I'm not sure what the 
reason is, to be honest with you, until it was raised a moment 
ago. I mean, I don't know what the--I don't think it's a policy 
prescription, but I think it's just--I simply don't know, to be 
honest with you.
    Mr. Copulos. The answer is really pretty--that's why we say 
put it on the fenceline--the answer is really pretty simple. 
After 9/11, they restricted access to military bases to people 
with an ID card, retired or active. I happen to have an ID 
card, so I can get on. If you can't, you can't get on----
    Senator Biden. This is State-owned. It's not a military----
    Mr. Copulos. Oh, OK.
    Senator Biden [continuing]. Facility.
    Mr. Copulos. Well, a lot of times----
    Senator Biden. Yeah, but----
    Mr. Copulos [continuing]. States all go----
    Senator Biden [continuing]. State--similar, yeah.
    Mr. Copulos [continuing]. They'll restrict----
    Senator Biden. I assume that's the reason. It relates to--
and the argument about, you know, access to, you know, 
insurance, covering anything that happened to citizen--I don't 
know. I truly don't know. But it's worth my finding out, now 
that I've raised it and acknowledged I don't know.
    Mr. Copulos. Well, that's amenable to a legislative fix, 
just like the warranty issue, but----
    Senator Biden. Yeah.
    Mr. Copulos [continuing]. Getting back, if I can, for a 
second, to the base point, I had said in my testimony that the 
fact that two-thirds of our oil is used in the transportation 
sector means one-third isn't, and we really need to look at 
that. And, yeah, there are couple of things. For example, there 
is a--several--but one technology I'm aware of, because I've 
looked at recently, it takes waste wood, turns it into a fuel 
oil that's perfect for--a perfect replacement for number 6--
zero sulphur, zero knocks, and so on. This is a company that is 
Canadian. Right now they're taking all of the dead wood from 
the pine bark beetle infestation. They're getting ready to 
convert that into oil substitute up--it is an oil, actually.
    We have a Clean Forest Program. We're taking enormous 
amounts of dead wood out of the forests and we're piling it up. 
And guess what? It's a fire hazard. Instead of piling it up, 
you could take that, all of that, and convert it into oil. And 
the nice thing about this particular unit is, it'll handle 400 
tons a day economically--it's economic in that size--which 
means that you can put a lot of little ones around our public 
forests, take all that oil, which right--all that wood, which, 
right now, we're paying $20 a ton to haul away, and I don't 
know what we're paying to get rid of it after that, or at least 
have it in dumps, and turn that into a boiler fuel that's so 
good that Alcoa, in Canada, has agreed to buy every bit of this 
they can get, because they had environmental problems with 
their stacks and their smelters, and this is going to lower 
emissions enough that they can meet Canadian standards.
    The Chairman. Yes, sir.
    Dr. Huntington. This issue that we've been talking about 
for most of the morning really comes down to whether people 
have the perception that these problems are real or not. And, 
actually, that's an issue that people at Stanford are beginning 
to look at--not myself, but other people who are trained and 
thinking of people's psychology and how do they learn about 
these problems. And so, hopefully this research will come out 
with some interesting, useful information.
    As I think about the problem--and I admit, it's a very 
simplistic way of thinking about it, it seems that we were 
successful in putting in fees on sulphur dioxide emissions, a 
number of years ago. What's different about that, as compared 
to higher gasoline prices or a gasoline tax, is, that the 
consumer sees the gasoline tax directly, but does not see 
sulphur dioxide emissions fees. The utilities squabble about 
them but they basically make the adjustment, and then they pay 
the higher cost. They charge the higher electricity price to 
the consumer, and the consumer pays the bill without carefully 
checking the bill. They're not as aware of the additional 
costs.
    And so, following up on this point--suppose you took Gary's 
suggestion of a very small tax, initially, that would rise 
gradually. If you put a fee in there that wasn't so visible, 
but did affect prices paid by anyone who used fossil fuels, 
perhaps as a fee that was based on the carbon content, you 
could almost make that work, much like the sulphur dioxide 
emissions fees, and it wouldn't be quite as a direct charge, 
that people wouldn't be coming up to you at cocktail parties 
and saying, ``Why did you raise my fee?''
    In the automobile sector, the one thing we have done is the 
corporate automobile efficiency standards or CAFE. I think that 
measure also works in a similar way. It forces automobile 
companies to make more expensive automobiles, perhaps, than 
they want to, if--particularly on the vehicles which have to 
meet those standards. If you combine CAFE standards with a 
little more flexibility, as proposed previously by the National 
Academy of Sciences, you could allow the trading of credits 
that would allow people to focus their attention on those 
vehicles that really could meet the standards less costly than 
others. Again, it wouldn't look like a direct tax to people. It 
has the nice advantage of being flexible. These kinds of 
policies are, more or less, ways of not hitting the consumer 
full on and saying, ``You are going to pay a higher tax.'' Such 
policies perhaps could be done for gasoline. They certainly 
have been done on other types of problems.
    The Chairman. Well, we thank all three of you for your very 
thoughtful papers and the facts that you have included, which 
will be a part of this record, and which we will try to 
transmit to our colleagues. We ask for your help in responding 
to additional questions that we have, and those of other 
members who were not able to attend, so that we may have as 
complete a hearing record as possible for those who are 
interested in this subject. And we hope that many are. I thank 
each one of you for your preparation and for being so 
forthcoming in your responses.
    Senator Biden. Gentlemen, thank you very much.
    The hearing is adjourned.
    [Whereupon, at 11:49 a.m., the hearing was adjourned.]

                                  
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