[Senate Hearing 110-6]
[From the U.S. Government Printing Office]



                                                          S. Hrg. 110-6

                           GEOPOLITICS OF OIL

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

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                                   TO

 RECEIVE TESTIMONY ON THE GEOPOLITICS OF OIL AND ITS IMPLICATIONS FOR 
                  U.S. ECONOMIC AND NATIONAL SECURITY

                               __________

                            JANUARY 10, 2007


                       Printed for the use of the
               Committee on Energy and Natural Resources


                               _________


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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman

DANIEL K. AKAKA, Hawaii              PETE V. DOMENICI, New Mexico
BYRON L. DORGAN, North Dakota        LARRY E. CRAIG, Idaho
RON WYDEN, Oregon                    CRAIG THOMAS, Wyoming
TIM JOHNSON, South Dakota            LISA MURKOWSKI, Alaska
MARY L. LANDRIEU, Louisiana          RICHARD BURR, North Carolina
MARIA CANTWELL, Washington           JIM DeMINT, South Carolina
KEN SALAZAR, Colorado                BOB CORKER, Tennessee
ROBERT MENENDEZ, New Jersey          JEFF SESSIONS, Alabama
BLANCHE L. LINCOLN, Arkansas         GORDON H. SMITH, Oregon
BERNARD SANDERS, Vermont             JIM BUNNING, Kentucky
JON TESTER, Montana                  MEL MARTINEZ, Florida

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
              Frank Macchiarola, Republican Staff Director
             Judith K. Pensabene, Republican Chief Counsel
              Tara Billingsley, Professional Staff Member
             Karen Billups, Republican Deputy Chief Counsel





























                            C O N T E N T S

                              ----------                              
                                                                TAB NO.

Bingaman, Hon. Jeff, U.S. Senator From New Mexico................     1
Birol, Dr. Fatih, Chief Economist, Head of the Economic Analysis 
  Division, International Energy Agency, Paris, France...........     6
Domenici, Hon. Pete V., U.S. Senator From New Mexico.............     2
Dorgan, Hon. Byron L., U.S. Senator From North Dakota............     5
Hormats, Dr. Robert, Vice Chairman, Goldman Sachs (International)    23
Leverett, Dr. Flynt, Senior Fellow and Director, Geopolitics of 
  Energy Initiative, New America Foundation, Washington, DC......    39
Salazar, Hon. Ken, U.S. Senator From Colorado....................     6
Sanders, Hon. Bernard, U.S. Senator From Vermont.................     4
Smith, Hon. Gordon H., U.S. Senator From Oregon..................     4
Stuntz, Linda, on behalf of a Council on Foreign Relations 
  Independent Task Force.........................................    20
Wald, Gen. Charles, U.S. Air Force (Ret.), Former Deputy 
  Commander, U.S. European Command, and Member, Energy Security 
  Leadership Council.............................................    32

                                APPENDIX

Responses to additional questions................................    67


























 
                           GEOPOLITICS OF OIL

                              ----------                              


                      WEDNESDAY, JANUARY 10, 2007

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:45 a.m., in 
room SDG-50, Dirksen Senate Office Building, Hon. Jeff 
Bingaman, chairman, presiding.

           OPENING STATEMENT OF HON. JEFF BINGAMAN, 
                  U.S. SENATOR FROM NEW MEXICO

    The Chairman. Why don't we go ahead and get started. I 
thank you all very much for coming. The Senate still is in the 
process of getting its organizing resolution done, so Senator 
Domenici is officially the Chair, but he has allowed me to go 
ahead today, as we had intended when we first thought about 
this hearing.
    Let me just point out the new members--and I know Senator 
Domenici probably wants to do the same--and welcome them. We 
have three new members on the Democratic side and three new 
members on the Republican side. Senators Lincoln and Sanders 
and Tester are our new members on the Democratic side. We 
welcome them. Senator Tester is here right now. On the 
Republican side, Senators DeMint, Corker and Sessions. And, of 
course, we welcome them as well.
    Let me just briefly go through an opening statement here 
and then defer to Senator Domenici.
    I think the idea of this hearing was to try to look at the 
big picture, begin the year with sort of an overview of the 
geopolitics of oil and I hope that that's a useful thing. There 
is a quote that my staff dug out of the files of the committee, 
from Scoop Jackson, when he chaired this committee back in 
1980, and he said, at that time, ``The world will witness a 
growing struggle for secure access to oil through the end of 
this century and into the next. This gathering energy crisis 
deserves the highest priority in the counsels of Government. 
Few other problems are more complicated, few other problems 
will be more difficult to resolve. Moreover, many of the 
policies we are currently pursuing to deal with the energy 
crisis are only making it worse.'' So that was Senator 
Jackson's view of things in 1980.
    I think, today, we still have the struggle for access to 
oil that he referred to. We also, of course, have a competition 
among consumers that has developed, particularly with the 
increasing appetite for oil in places like China and India. 
There are great implications for the United States in all of 
that, both for our economy and for our national security and 
the purpose of this hearing is to get some of the people who 
have thought about these issues to give us their views and then 
give us a chance to ask some questions.
    So let me defer to Senator Domenici for any comments he 
has.

       STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR 
                        FROM NEW MEXICO

    Senator Domenici. Thank you very much, Senator Bingaman, 
and thanks to the witnesses for helping us today with their 
presentations that the Senators were interested in. I think it 
is most beneficial that we put into perspective who owns access 
to the oil in the world today. It is rather frightening when 
you get just that picture before you and nothing more, to know 
how things have changed dramatically and how little of the oil 
of the world is owned by the American companies that we are 
constantly arguing with and how little these oil companies of 
America have access and/or control over these oils.
    I have had staff reduce the world's oil to a chart that 
shows where we are, and there is no question that private 
investors are already at a disadvantage. The rise in national 
oil companies has decreased access to reserves through the use 
of strategic energy agreements between governments. U.S. 
companies are being squeezed out.
    Examples are the Chinese national oil company's development 
of an energy production agreement in Sudan and Iran, Russia's 
re-claiming of oil producing assets from Yukos to form a state 
oil company and just yesterday, Venezuelan President Hugo 
Chavez called for the end to foreign ownership of crude oil 
refineries in the Orinoco region. This activity further limits 
investment opportunities for investor-owned companies.
    These trends are doubly concerning, given the many producer 
nations, political instability, and the lack of a legal system 
for enforcement of contract rights resulting in only a 
sufficient capital investment in the infrastructure necessary 
to sustain existing production, much less new capital on line.
    For example, the recent prediction by one scholar of the 
extinction of the Iranian oil exports by 2014-2015, will they 
allow it to happen or will it be forestalled by investments 
from other countries that are less than friendly to U.S. 
interests?
    I'd ask that the remainder of my remarks be made part of 
the record and thank you, Senator Bingaman, for opening the 
year with a bit of realism. Thank you.
    [The prepared statements of Senators Domenici, Smith and 
Sanders follow:]
       Prepared Statement of Hon. Pete V. Domenici, U.S. Senator 
                            From New Mexico
    I would like to call this hearing to order.
    No, you are not imagining things--this is the gavel in my hand.
    First, I'd like to congratulate Senator Bingaman on being elected 
Chairman of the Committee. I look forward to continuing to work with 
him in the fine bipartisan tradition of this Committee.
    Senator Bingaman has a commendable desire to get a running start on 
the Committee's work. When we scheduled this hearing, we didn't realize 
that he would not yet officially be Chairman.
    So, for the time being, you get to call me ``Mr. Chairman''--even 
though the role is strictly ceremonial in this case.
    I do appreciate Senator Bingaman planning this hearing on the 
Global Oil Balance and Its Implications for U.S. Economic and National 
Security. In a minute or two, I will hand the gavel over to him to 
preside. But first, I will share a few thoughts of my own.
    As I have stated many times before, energy security is a complex 
issue that cannot be reduced to a ``sound bite.'' That being said, I 
will briefly summarize what I think are some important issues facing 
this nation.
    I think it is useful that Chairman Bingaman is holding this hearing 
first. In this area, there is great risk in making decisions based on 
what we ``know'' to be true from the past--while the reality is that 
the world has changed.
    Today we will hear about the dangers of our dependence on foreign 
sources of oil. But what may be even more frightening--and difficult to 
deal with--is the ways in which the very structure of oil markets have 
changed.
    Most Americans, and many politicians, focus on large multinational 
corporations as the face of ``big oil.'' However, today we will hear 
that the reality is that National Oil Companies--those owned by foreign 
governments--control some three-quarters of the world's oil reserves.
    Thus, today, we are largely dependent on supplies of oil controlled 
by governments whose values and priorities are often in conflict with 
America's.
    Why do these changes in world oil markets matter with respect to 
our government's policy? Because approaches that focus on' the business 
practices of large private corporations will have little effect on 
world oil markets--other than to disadvantage private investment by 
U.S. companies and harm our consumers.
    Private investors are already at a disadvantage. The rise in 
National Oil Companies has decreased access to reserves through the use 
of strategic energy agreements between governments. U.S. companies are 
being squeezed out.
    Examples are:

   the Chinese national oil companies' development of energy 
        production agreements in Sudan and Iran; and
   Russia's reclaiming of oil producing assets from Yukos to 
        form a new state oil company.
   Just yesterday,Venezuelan President Hugo Chavez called for 
        the end to foreign ownership of crude oil refineries in the 
        Orinoco region.

    This activity further limits investment opportunities for investor-
owned oil companies.
    These trends are doubly concerning. In many producer nations, 
political instability and a lack of a legal system for the enforcement 
of contract rights results in insufficient capital investment in the 
infrastructure necessary to sustain existing production, much less 
bring new capacity on line.
    Thus, for example, the recent prediction by one scholar of the 
``extinction'' of Iranian oil exports by 2014-2015. Will this be 
allowed to happen? Or, will it be forestalled by investment from other 
states that are less than friendly to U.S. interests?
    One option we don't have is to simply pretend that these trends 
will go away by themselves. We must take a two-pronged approach: First, 
we must do what we can to work toward U.S. energy security.
    In 2005, we approved a comprehensive energy bill that is already 
showing results in many areas, including:

   the production and use of alternative fuels, and
   providing for a nuclear renaissance.

    Last fall, we passed OCS legislation that will open resource-rich 
areas of the Gulf of Mexico. However, there is more we can do. We must 
pursue a balance of increased efficiency and increased supply.
    For example, I would like to re-examine CAFE standards and whether 
we can be more forward-leaning on fuel efficiency mandates. Among other 
things, I continue to support authorizing the Administration to 
increase standards on passenger vehicles.
    While energy self-sufficiency is our ultimate goal, energy is--and 
will remain--a world market. We will always be directly impacted by 
production and consumption trends in other nations. Thus, it is 
appropriate that today we will gather information on how to engage our 
domestic and foreign policy to deal with the world as it is today.
                                 ______
                                 
  Prepared Statement of Hon. Gordon H. Smith, U.S. Senator From Oregon
    The price and availability of oil and natural gas affects every 
American. That's why it is important that the Energy Committee's first 
hearing of the 110th Congress is focused on the global oil situation 
and its implications for U.S. economic and national security interests. 
As a nation, we now depend on oil imports to meet sixty percent of our 
oil needs. Even modest disruptions in the world supply can result in 
price spikes at the pump, as we have seen in recent years.
    I read the testimony of today's witnesses with great interest, and 
noticed that--despite widely divergent backgrounds--they all had many 
recurrent themes. First, there is little surplus production capacity 
relative to global demand. Much of the current production is controlled 
by national oil companies that are often making political rather than 
economic decisions, and are not making the investments needed to 
maintain and expand production capacity.
    Second, much of world's oil is produced in politically unstable 
nations such as Iraq, Iran, Venezuela and Nigeria. Other nations, such 
as Russia, are beginning to use their vast energy resources to extract 
political concessions from their customers. The European Union has 
recently warned its members against relying too heavily on one supplier 
for oil or natural gas.
    The global oil market has fundamentally changed as emerging 
economies such as China and India face growing energy demands. China is 
now the world's fastest growing oil importer, and is seeking long-term 
supply contracts around the world. China and the developing nations in 
Asia are projected to account for 46 percent of the growth in global 
oil demand by 2030.
    Hurricane Katrina showed how vulnerable the United States is to a 
domestic supply disruption. It also helped us to understand how 
geographically concentrated U.S. refining capacity has become. All of 
these factors should lead us to reexamine our energy security strategy. 
We cannot reduce our dependence on oil without aggressively addressing 
the transportation sector. Transportation accounts for 70 percent of 
our nation's oil use, and the transportation sector is almost 
exclusively fueled by oil.
    CAFE standards for automobiles have been stagnant for more than a 
decade. In 2002, I joined with Senators Kerry and McCain to sponsor an 
amendment to the energy bill to increase CAFE standards to 36 miles per 
gallon by 2015. We were told at the time that this would harm the 
domestic auto industry and reduce consumer choice. Unfortunately, since 
that time the domestic auto and auto parts industries have lost over 
215,000 jobs. Consumers have not benefited either. They lose every time 
they go to the gas pump.
    We were able to use American ingenuity to put a man on the moon 
almost 40 years ago. We need to use that same spirit of innovation to 
get a family of five from Portland, Oregon to Yosemite National Park 
(approximately 740 miles) on one tank of gas. That's why I joined with 
several of my colleagues in the 109th Congress to introduce the Fuel 
Economy Reform Act, which sets a target of an annual increase of four 
percent a year for fuel efficiency gains. We intend to reintroduce this 
bill in the near future, and will press for its early consideration.
    I believe that the Energy Policy Act of 2005 provided many 
necessary incentives for the development of renewable energy resources 
and a new generation of cleaner, more-fuel efficient vehicles. We need 
to enhance these incentives and send signals to the investment 
community about our nation's long-term commitment to renewable 
resources and to cleaner, more fuel-efficient vehicles.
    I look forward to hearing from the witnesses today and to working 
with my colleagues to address these important energy security issues.
                                 ______
                                 
 Prepared Statement of Hon. Bernard Sanders, U.S. Senator From Vermont
    Good morning. I am pleased to be a member of the Energy and Natural 
Resources Committee and look forward to the excellent work that this 
Committee will be doing to ensure a more sane energy policy for our 
country. Whether it is requiring an increased commitment to renewable 
sources of energy in the electricity sector or to ensuring appropriate 
royalty payments from drilling on our public lands, this Committee has 
a tremendous responsibility.
    I sincerely appreciate Chairman Bingaman and Ranking Member 
Domenici bringing together such an astute panel for the first Energy 
Committee hearing of the 110th Congress. The geopolitics of oil is a 
topic that none of us can afford to ignore and while I don't agree with 
every idea put forward by today's witnesses, I thank them for their 
time to address us this morning.
    What is most striking to me is that, in the prepared testimony, 
each of the witnesses discusses the dire need to increase efficiency in 
our transportation sector. I believe--in no uncertain terms--that our 
failure to increase mileage standards has let the American people down. 
As consumers look to make each and every dollar go further, they find 
that, despite the technology being available, their automobiles get the 
same, or worse--even lower, gas mileage than they did twenty years ago. 
Additionally, as we grapple with global warming, I believe we must do 
everything we can to get the most out of each gallon of fuel because 
the emissions from our cars are simply off the charts. In fact, in 
Vermont, vehicle emissions are the single largest source of greenhouse 
gas emissions. I hope, with the help of the witnesses, that we can 
begin moving forward by starting with a serious discussion of 
increasing CAFE standards.
    Chairman Bingaman, Ranking Member Domenici, I look forward to your 
leadership on this Committee.

    The Chairman. Thank you very much for your comments, and 
your statement will be included, obviously, in the record.
    Senator Dorgan asked to be recognized for a minute, and if 
other Senators want to have a minute, they are certainly 
entitled to do that. This being the first hearing of the year, 
I do think we need to get to the witnesses fairly soon, but go 
ahead, Senator Dorgan, with any comments you have.

        STATEMENT OF HON. BYRON L. DORGAN, U.S. SENATOR 
                       FROM NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, thank you very much. I will 
be brief, but it is an important hearing. I'm really pleased 
that you've called it.
    There is an old saying, if you don't care where you're 
going, you'll never be lost. That's important to think about 
with respect to this country's energy policy.
    Oil is critically important. We will always use fossil 
fuels, always need oil. We suck about 84 million barrels out of 
the earth a day. Here, in the United States, with our 
population, we use \1/4\ of all the oil that is sucked out of 
this earth.
    We are overly dependent on foreign sources of oil, 
especially given the national security implications of that 
dependency, and yet I think we're baby stepping on these 
issues. We need much more aggressive approaches to reduce that 
dependency, much more aggressive approaches on renewables.
    Let me give you one example. In 1916, we put in place in 
this country tax incentives, robust permanent tax incentives 
for the exploration and drilling of oil. 1916, permanent. What 
have we done for production tax credit for renewables? Well, we 
put something in place in 1992, short-term. We've let it expire 
three times. We've extended it five times. We're baby stepping 
without major commitments and without a decision about where we 
want to head and how we want to get there.
    When we passed the energy bill of 2005, I was proud of it. 
It moves us down the road, but we need to be much bolder and 
much, much more aggressive, and I think what we will hear today 
is about the national security implications of us not doing the 
right thing and not being bold enough.
    So this is a good start, Mr. Chairman. Thank you for 
allowing me to say a few words and I hope this Congress will 
give us an opportunity to really be bold and be aggressive on 
these issues.
    The Chairman. Thank you very much.
    Are there other members that wanted to make an opening 
statement or would you rather go to the witnesses? Anyone else? 
Senator Salazar.

          STATEMENT OF HON. KEN SALAZAR, U.S. SENATOR 
                         FROM COLORADO

    Senator Salazar. Senator Bingaman, Chairman, and to Senator 
Domenici as well, I just wanted to say that I very much look 
forward to the work of this committee in continuing the 
bipartisan tradition that we worked on for the last 2 years, 
where we delivered on the 2005 Energy Policy Act and I look 
forward to working with our new colleagues, Senators Tester, 
Sanders, Lincoln, Corker and Sessions.
    I think that the energy issue, at the end of the day, Mr. 
Chairman, is one of the very most important issues, perhaps one 
of the top two issues that face our world today, and I think 
that this committee has the jurisdiction to help us move 
forward with the kind of vision and program that Senator Dorgan 
was talking about. And I look forward to working with my 
colleagues in achieving that vision.
    The Chairman. All right. Thank you very, very much.
    Let me go ahead with our first witness, Dr. Fatih Birol, 
who is the chief economist and the head of the Economic 
Analysis Division of the IEA, based in Paris. Thank you very 
much for being here. Why don't you go right ahead.

  STATEMENT OF DR. FATIH BIROL, CHIEF ECONOMIST, HEAD OF THE 
ECONOMIC ANALYSIS DIVISION, INTERNATIONAL ENERGY AGENCY, PARIS, 
                             FRANCE

    Dr. Birol. Thank you very much, Mr. Chairman. Good morning, 
ladies and gentlemen. First of all, let me thank you for the 
kind invitation.
    Looking at the next few decades, we think the world is 
facing twin energy-related threats. One is the increasing risk 
for energy security and the second one is the energy-related 
environmental concerns.
    For the sake of this meeting, I will focus on the energy 
security, but I should mention that energy and environmental 
policies are very much linked to each other. When I'm talking 
about energy security, we think there are two issues here. Not 
only oil but natural gas is also an important issue in terms of 
energy security and plays an important role in the geopolitics 
of energy as well. But again, for the sake of this meeting, I 
am going to focus on oil.
    We think the oil markets are going through profound 
changes, which would have a set of implications for our 
economic, for our domestic policies, as well as for our energy 
security.
    I would like to bring to your attention four aspects of 
this oil market. The first one is the changes in the demand 
side; second, in the supply side; the third one, what are the 
policy implications of these changes; and fourth, what can be 
done in order to address those policy implications.
    On the demand side, first of all, I think the general focus 
is on the supplier issues, but on the demand side, there is a 
major change happening.
    First of all, the bulk of the demand growth is coming from 
the developing countries. China and India together are 
responsible for about 50 percent of the oil demand growth in 
the last few years, and looking at the future, we expect China 
and India will be responsible for more than \2/3\ of the oil 
demand growth.
    Why? Very simple. In China today, ladies and gentlemen, 13 
persons out of 1,000 persons own a car compared with the United 
States, where 780 persons out of 1,000 own a car. With the 
increasing income levels in China, one of the first things they 
do is to buy a car, which in turn, fuels the oil demand growth.
    So the oil demand growth, mainly coming from the developing 
countries and--and both in developing countries as well as in 
the OECD countries, will be consumed by the transportation 
sector--by cars, trucks and jets. And this is a strategic edge 
to recognize that the bulk of the resources are in OPEC.
    Why is it important to note that the bulk of oil will come 
from the transportation sector? Because in the transportation 
sector, we do not have readily available alternatives to oil 
products. You cannot put coal into the tank of your car. And 
the situation is very different, therefore, from the 1970's and 
1980's, where we were using oil for many other purposes, for 
example, to produce electricity.
    But then we hit the price shocks in the 1970's and 1980's. 
We were able to switch from--in terms of electricity, from oil 
to nuclear or renewables or gas or other things. But in the 
case of transportation, there is a concentration, and from the 
consumers' point of view, our room of maneuver is very, very 
limited. Therefore, I do recognize that this is the Achilles' 
heel transportation sector of our current economic system, the 
lack of concentration on the demand side.
    On the supply side, we see concentration as well, the 
number of producers and who they are. We do recognize, in the 
energy article of the IEA, that in the next 10 years, none of--
the production will come to a peak and afterwards will decline. 
The difference between the global oil demand worldwide and the 
decline in--production will need to be made by a very few 
number of countries where you have the reserves.
    Who are those countries? Saudi Arabia, Iran, Iraq--these 
are three countries which have a lot of potential which could 
bring the oil to the markets. They have a lot of reserves and 
it is very cheap to bring that oil to the markets in those 
countries, and potentially, they are the three countries which 
can bring oil to the markets.
    However, there are very important issues related to this 
trend. First of all, the number of countries are diminishing. 
Whoever these countries are, it is always a bit useful to 
consumers if there is a concentration on the surplus side, that 
a number of countries are diminishing the suppliers, and they 
work together in certain decisionmaking processes. Second, most 
of those countries--all of them--come from a geopolitically 
unstable region. This is another issue that we should look at 
very carefully. And the third one is that the enlistment 
framework in those countries is completely different than we 
used to see in the past. In the past, we have seen that when 
the prices went up in the 1970's and 1980's, we received a lot 
of volumes, oil coming from the North Sea and the Gulf of 
Mexico, because money went there. The free money went there and 
as a result of that, production increased and oil came to the 
markets.
    But in this case, in Saudi Arabia, for example, the Saudis 
will decide how much oil production will grow and the oil 
purchase may not be the only determinant in their decision how 
the production capacity will grow.
    In the case of Iran, the situation is also similar. Iran 
desperately needs money in order to invest to increase the 
production capacity, but Iran does not have--unlike Saudi 
Arabia--domestic capital. It needs to get money from our side, 
but the geopolitical context in Iran will make the life very 
difficult for Iran to increase the production capacity.
    So these are the uncertainties, for the consumers: a number 
of supplies are diminishing that are coming geopolitical, the 
unstable region, and the investment market is a very new one. 
There is not free access to capital to those countries.
    What are the implications? I will just briefly mention the 
implications for this concentration on the demand side, on the 
transportation sector, and concentration on the supplier side, 
a very few number of countries. First of all, in terms--
relative to the process, we should be used to--they should be 
used to seeing that the process will be volatile and maybe more 
and more determined by the producers. The producers say, we 
have a higher rate in the future by looking at this picture.
    The risk for the supplier destruction will increase because 
of the very little number of suppliers, and in addition to 
that, the leverage of the producers is set to increase with the 
increase in share.
    I wanted to talk a bit on what to do, Mr. Chairman, but I 
see that I am out of the time. If you allow 2 more minutes, I 
would like to complete--
    The Chairman. Yes, why don't you go ahead and give us the 
short version of what we need to know. That would be great.
    Dr. Birol. OK. So I would like to suggest three areas in 
terms of domestically and internationally. The first one is 
boosting the domestic production, oil production in the 
country. Of course, looking at the sensitivities here and 
there, increasing the efficiency, especially in the 
transportation sector, which I recognize as the Achilles' heel 
of the system, and the alternative fuels, in terms of the 
transportation sector, such as biofuels, will be very 
important.
    Internationally, I imagine that the bulk of the oil is in a 
very few number of countries, but globally, we are looking at 
transparence of the reserves data. We are not sure how the 
reserves data is put together, how much reserve is left in 
which country and what are the terms there. I think there is a 
need to put some light, shed some light on the reserves 
transparency, and finally, perhaps, it may not be a bad idea if 
one would put some efforts in order to gain some access to the 
areas where it is legally bound to foreign capital, such as 
some key Middle East countries, perhaps within the context of 
WTO. So these are some areas that I wanted to highlight. Thank 
you.
    [The prepared statement of Dr. Birol follows:]
        Prepared Statement of Dr Fatih Birol, Chief Economist, 
                      International Energy Agency
    Mr Chairman, Members of the Committee, it is a privilege to address 
this Committee on the critical issue of the oil market outlook and its 
policy implications. The energy future which we are creating is 
unsustainable. If we continue as before, the energy supply to meet the 
needs of the world economy over the coming years will remain too 
vulnerable to failure arising from sudden supply interruption and will 
cause serious environmental problems. The oil market is a global one so 
it is important to provide a global context. To that end, this 
testimony draws upon the World Energy Outlook 2006,\1\ published by the 
International Energy Agency.
---------------------------------------------------------------------------
    \1\The World Energy Outlook series is the leading source for 
medium-to long-term energy market analysis and has achieved widespread 
international recognition. It is the annual flagship publication of the 
International Energy Agency. The latest edition was released on 7 
November 2006.
---------------------------------------------------------------------------
    This testimony will examine in turn the outlooks for Demand, Supply 
and Investment, followed by a look at the potential impact of 
Alternative Policies and Measures. I would first like to highlight the 
following key points:

          1. The world is facing twin energy-related threats: that of 
        not having adequate and secure supplies of energy at affordable 
        prices and that of environmental harm caused by its use. The 
        World Energy Outlook 2006 confirms that fossil-fuel demand and 
        trade flows, and greenhouse-gas emissions would follow their 
        current unsustainable paths through to 2030 in the absence of 
        new government action--the underlying premise of the Reference 
        Scenario. It also demonstrates, in an Alternative Policy 
        Scenario, that a package of policies and measures that 
        countries around the world are considering would, if 
        implemented, significantly reduce the rate of increase in 
        demand and emissions. Importantly, the economic cost of these 
        policies would be more than outweighed by the economic benefits 
        that would come from using and producing energy more 
        efficiently.
          2. Oil demand grows by 1.3% per year through 2030 in the 
        Reference Scenario, reaching 116 million barrels per day (mb/d) 
        in 2030--up from 84 mb/d in 2005. The pace of demand growth 
        slackens progressively over the period. More than 70% of the 
        increase in oil demand comes from developing countries (notably 
        China and India), which see average annual demand growth of 
        2.5%.
          3. The transport sector absorbs most of the increase in 
        global oil demand. In the OECD, oil use in other sectors barely 
        increases at all. In developing countries too, transport 
        contributes the bulk of the increase in oil demand. The lack of 
        cost-effective substitutes for oil-based automotive fuels will 
        make oil demand more rigid.
          4. Oil supply is increasingly dominated by a small number of 
        major producers, most of them in the Middle East, where oil 
        resources are concentrated. Non-OPEC production of conventional 
        crude oil is set to peak within a decade. OPEC's share of 
        global supply grows significantly, from 40% now to 48% by 2030. 
        Iran and Iraq have significant potential to expand their 
        production, but Saudi Arabia remains by far the largest 
        producer. The need for more transparent and comprehensive data 
        on oil (and gas) reserves in all regions is a pressing concern.
          5. The oil industry needs to invest a total of $4.3 trillion 
        (in year-2005 dollars) over the period 2005-2030, or $164 
        billion per year. The upstream sector accounts for the bulk of 
        this. Almost three-quarters of upstream investments will be 
        required to maintain existing capacity.
          6. A critical uncertainty is whether the substantial 
        investments needed in the oil production sector in key Middle 
        East countries will, in fact, be forthcoming. These governments 
        could choose deliberately to develop production capacity more 
        slowly than we project in our Reference Scenario. Or external 
        factors such as capital shortages could prevent producers from 
        investing as much in expanding capacity as they would like. As 
        demonstrated by a Deferred Investment Case, slower growth in 
        OPEC oil production drives up the international oil price and, 
        with it, the price of gas.
          7. The new policies analysed in the Alternative Policy 
        Scenario halt the rise in OECD oil imports by 2015. OECD 
        countries and developing Asia become more dependent on oil 
        imports in 2030 compared to today, but markedly less so than in 
        the Reference Scenario. Global oil demand reaches 103 mb/d in 
        2030 in the Alternative Policy Scenario--13 mb/d lower than in 
        the Reference Scenario. Additional policy measures to promote 
        improved fuel efficiency of cars and trucks, as well as a 
        greater market share for biofuels, therefore have the effect of 
        improving energy security.
          8. Our analysis demonstrates the urgency with which policy 
        action is required. Each year of delay in implementing the 
        policies analysed would have a disproportionately larger effect 
        on energy security. Yet there are formidable hurdles to be 
        overcome. It will take considerable political will to push 
        through the policies and measures in the Alternative Policy 
        Scenario, many of which are likely to encounter resistance from 
        some industry and consumer groups. Politicians need to spell 
        out clearly the benefits to the economy and to society as a 
        whole of the proposed measures. In most countries, the public 
        is becoming familiar with the energy-security and environmental 
        advantages of action to encourage more efficient energy use and 
        to boost the share of renewables.
                                 demand
    Primary oil demand is expected to continue to grow steadily over 
the projection period in the Reference Scenario, at an average annual 
rate of 1.3%. It reaches 99 mb/d in 2015 and 116 mb/d in 2030, up from 
84 mb/d in 2005 (Table 1). The pace of demand growth nonetheless 
slackens progressively, broadly in line with GDP, averaging 1.7% in 
2005-2015--only just below the average of the last ten years--and 1.1% 
in 2015-2030. Preliminary data for 2005 indicate that global oil demand 
rose by 1.3%--well down on the exceptionally high rate of 4% in 2004.

                                      Table 1.--WORLD PRIMARY OIL DEMAND\1\
                                            [Million barrels per day]
----------------------------------------------------------------------------------------------------------------
                                                                                                          2005-
                                                    1980     2004     2005     2010     2015     2030    2030\2\
----------------------------------------------------------------------------------------------------------------
OECD............................................    41.9     47.5     47.7     49.8     52.4     55.1      0.6%
North America...................................    21.0     24.8     24.9     26.3     28.2     30.8      0.9%
    United States...............................    17.4     20.5     20.6     21.6     23.1     25.0      0.8%
    Canada......................................     2.1      2.3      2.3      2.5      2.6      2.8      0.8%
    Mexico......................................     1.4      2.0      2.1      2.2      2.4      3.1      1.6%
Europe..........................................    14.7     14.5     14.4     14.9     15.4     15.4      0.2%
Pacific.........................................     6.2      8.2      8.3      8.6      8.8      8.9      0.3%
                                                 ---------------------------------------------------------------
Transition economies............................     8.9      4.3      4.3      4.7      5.0      5.7      1.1%
Russia..........................................     n.a.     2.5      2.5      2.7      2.9      3.2      1.0%
                                                 ---------------------------------------------------------------
Developing countries............................    11.4     27.2     28.0     33.0     37.9     51.3      2.5%
Developing Asia.................................     4.4     14.2     14.6     17.7     20.6     29.7      2.9%
    China.......................................     1.9      6.5      6.6      8.4     10.0     15.3      3.4%
    India.......................................     0.7      2.6      2.6      3.2      3.7      5.4      3.0%
    Indonesia...................................     0.4      1.3      1.3      1.4      1.5      2.3      2.4%
Middle East.....................................     2.0      5.5      5.8      7.1      8.1      9.7      2.0%
Africa..........................................     1.4      2.6      2.7      3.1      3.5      4.9      2.4%
    North Africa................................     0.5      1.3      1.4      1.6      1.8      2.5      2.4%
Latin America...................................     3.5      4.8      4.9      5.1      5.6      7.0      1.5%
    Brazil......................................     1.4      2.1      2.1      2.3      2.7      3.5      2.0%
                                                 ---------------------------------------------------------------
Int. marine bunkers.............................     2.2      3.6      3.6      3.8      3.9      4.3      0.6%
                                                 ---------------------------------------------------------------
World...........................................    64.4     82.5     83.6     91.3     99.3    116.3      1.3%
                                                 ---------------------------------------------------------------
European Union..................................     n.a.    13.5     13.5     13.9     14.3     14.1      0.2%
----------------------------------------------------------------------------------------------------------------
\1\ Includes stock changes
\2\ Average annual growth rate
* n.a.: not available

    Most of the increase in oil demand comes from developing countries, 
where economic growth--the main driver of oil demand--is highest 
(Figure 1*). China and the rest of developing Asia account for 15 mb/d, 
or 46%, of the 33-mb/d increase in oil use between 2005 and 2030, in 
line with rapid economic growth. At 3.4% per year on average, China's 
rate of oil-demand growth is nonetheless below the 5.1% rate of 1980-
2004. The Middle East, which experiences the fastest rate of demand 
growth, accounts for a further 3.8 mb/d. Higher oil revenues than in 
the last two decades boost economic activity, incomes and, together 
with subsidies, demand for oil. Demand in OECD countries, especially in 
Europe and the Pacific region, rises much more slowly. Nonetheless, the 
absolute increase in North America--5.9 mb/d over the Outlook period--
is the second-largest of any region, because it is already by far the 
largest consumer. The economies of non-OECD countries will remain 
considerably more oil-intensive, measured by the amount of oil used per 
unit of gross domestic product (at market exchange rates), than those 
of OECD countries.
---------------------------------------------------------------------------
    * All figures have been retained in committee files.
---------------------------------------------------------------------------
    The transport sector absorbs 63% of the increase in global oil 
demand in 2004-2030. In the OECD, oil use in other sectors hardly 
increases at all, declining in power generation and in the residential 
and services sectors, and growing in industry. Most of the increase in 
energy demand in non-transport sectors is met by gas, coal, renewables 
and electricity. In non-OECD countries, too, transport is the biggest 
contributor to oil-demand growth; but other sectors--notably industry--
also see significant growth.
                                 supply
Resources and Reserves
    According to the Oil and Gas Journal, the world's proven 
reserves\2\ of oil (crude oil, natural gas liquids, condensates and 
non-conventional oil) amounted to 1293 billion barrels\3\ at the end of 
2005--an increase of 14.8 billion barrels, or 1.2%, over the previous 
year. Reserves are concentrated in the Middle East and North Africa 
(MENA), together accounting for 62% of the world total. Saudi Arabia, 
with the largest reserves of any country, holds a fifth. Of the twenty 
countries with the largest reserves, seven are in the MENA region 
(Figure 2). Canada has the least developed reserves, sufficient to 
sustain current production for more than 200 years. The world's proven 
reserves, including non-conventional oil, could sustain current 
production levels for 42 years.
---------------------------------------------------------------------------
    \2\ Oil that has been discovered and is expected to be economically 
producible is called a proven reserve. Oil that is thought to exist, 
and is expected to become economically recoverable, is called a 
resource. Total resources include existing reserves, ``reserves 
growth''--increases in the estimated size of reserves as fields are 
developed and produced--and undiscovered resources. Comparison of 
reserves and resource assessments is complicated by differences in 
estimation techniques and assumptions among countries and companies. In 
particular, assumptions about prices and technology have a major impact 
on how much oil is deemed to be economically recoverable.
    \3\ Oil and Gas Journal (19 December 2005). Includes proven oil-
sands reserves in Canada.
---------------------------------------------------------------------------
    Proven reserves have grown steadily in recent years in volume 
terms, but have remained broadly flat as a percentage of production. 
Since 1986, the reserves-to-production, or RIP, ratio has fluctuated 
within a range of 39 to 43 years. A growing share of the additions to 
reserves has been coming from revisions to estimates of the reserves in 
fields already in production or undergoing appraisal, rather than from 
new discoveries. Some of these revisions have resulted from higher oil-
price assumptions, allowing some oil that is known to exist to be 
reclassified as economically exploitable and, therefore, moved into the 
proven category. The application of new technology has also improved 
reservoir management and boosted recovery rates. The amount of oil 
discovered in new oilfields has fallen sharply over the past four 
decades, because of reduced exploration activity in regions with the 
largest reserves and, until recently, a fall in the average size of 
fields discovered. These factors outweighed an increase in exploration 
success rates.
    Over the past ten years, drilling has been concentrated in North 
America, a mature producing region with limited potential for new 
discoveries. Less than 2% of new wildcat wells drilled were in the 
Middle East, even though the region is thought to hold over 30% of the 
world's undiscovered crude oil and condensates and is where the average 
size of new fields discovered in the ten years to 2005 have been higher 
than anywhere else (Figure 3).
    There has been a recent increase in the average size of new 
discoveries for each new wildcat well drilled, bucking the trend of 
much of the period 1965-1998. The size of newly discovered fields has 
continued to decline, largely because exploration and appraisal 
activity has been focused on existing basins. However, the application 
of new technology, such as 3D seismic, has increased the discovery 
success rate per wildcat well, particularly since 1998--boosted by 
rising global oil demand and a resulting increase in exploration and 
appraisal activity--and, to a lesser extent, since 1991, with the 
advent of deep-water exploration (Figure 4). Nonetheless, the average 
size of discoveries per wildcat well--at around 10 million barrels--
remains barely half that of the period 1965-1979. The reduction almost 
to zero of Middle East exploration, where discoveries had been largest, 
was the main reason for the lower average size of discoveries since the 
1980s.
    Exploration and appraisal drilling is expected to increase to 
offset rising decline rates at existing fields and the consequent need 
to develop new reservoirs--particularly in MENA, where some of the 
greatest potential for finding new fields exists. Proven reserves are 
already larger than the cumulative production needed to meet rising 
demand until at least 2030. But more oil will need to be added to the 
proven category if production is not to peak before then. According to 
the US Geological Survey, undiscovered conventional resources that are 
expected to be economically recoverable could amount to 880 billion 
barrels (including natural gas liquids, or NGLs) in its mean case 
(USGS, 2000). Together with reserves growth and proven reserves, 
remaining ultimately recoverable resources are put at just under 2300 
billion barrels. That is more then twice the volume of oil--1080 
billion barrels--that has so far been produced. Total non-conventional 
resources, including oil sands in Canada, extra-heavy oil in Venezuela 
and shale oil in the United States and several other countries, are 
thought to amount to at least 1 trillion barrels (WEC, 2004).

                                           Table 2.--WORLD OIL SUPPLY
                                            [Million barrels per day]
----------------------------------------------------------------------------------------------------------------
                                                                                                          2005-
                                                    1980     2000     2005     2010     2015     2030    2030\1\
----------------------------------------------------------------------------------------------------------------
Non-OPEC........................................    35.2     43.9     48.1     53.4     55.0     57.6      0.7%
                                                 ---------------------------------------------------------------
Crude oil.......................................    32.2     38.1     41.6     45.5     45.4     43.4      0.2%
                                                 ---------------------------------------------------------------
OECD............................................    14.6     17.2     15.2     13.8     12.4      9.7     ^1.8%
    North America...............................    11.8     10.2      9.8      9.4      9.0      7.8     ^0.9%
        United States...........................     8.7      5. 8     5.1      5.3      5.0      4.0     ^1.0%
        Canada..................................     1.2      1.4      1.4      1.1      0.9      0.8     ^2.2%
        Mexico..................................     1.9      3.0      3.3      3.1      3.1      3.0     ^0.5%
    Pacific.....................................     0.5      0.8      0.5      0.7      0.5      0.4     ^1.2%
    Europe......................................     2.4      6.2      4.8      3.8      2.9      1.5     ^4.5%
                                                 ---------------------------------------------------------------
Transition economies............................    11.5      7.7     11.4     13.7     14.5     16.4      1.5%
    Russia......................................    10.7      6.3      9.2     10.5     10.6     11.1      0.7%
    Other.......................................     0.8      1.4      2.2      3.3      3.9      5.3      3.6
                                                 ---------------------------------------------------------------
Developing countries............................     6.0     13.2     15.1     17.9     18.5     17.4      0.6%
    Developing Asia.............................     2.9      5.3      5.9      6.3      6.1      5.0     ^0.6%
        China...................................     2.1      3.2      3.6      3.8      3.7      2.8     ^1.0%
        India...................................     0.2      0.6      0.7      0.8      0.8      0.6     ^0.2%
        Other...................................     0.6      1.4      1.6      1.7      1.6      1.6      0.0%
    Latin America...............................     1.5      3.4      3.8      4.8      5.3      5.9      1.8%
        Brazil..................................     0.2      1.2      1.6      2.6      3.0      3.5      3.1%
        Other...................................     1.3      2.2      2.2      2.2      2.3      2.5      0.5%
    Africa......................................     1.2      2.6      3.5      5.2      5.5      4.9      1.4%
        North Africa............................     0.7      0.8      0.6      0.6      0.6      0.7      0.4%
        Other Africa............................     0.5      1.8      2.9      4.6      4.9      4.3      1.6%
    Middle East.................................     0.5      2.0      1.9      1.7      1.6      1.4     ^1.1%
                                                 ---------------------------------------------------------------
NGLs............................................     2.6      4.9      5.1      5.5      5.8      6.8      1.2%
                                                 ---------------------------------------------------------------
OECD............................................     2.3      3.7      3.7      4.0      4.1      4.4      0.7%
Transition economies............................     0.2      0.5      0.5      0.4      0.5      0.6      1.2%
Developing countries............................     0.1      0.7      0.9      1.1      1.3      1.8      2.7%
                                                 ---------------------------------------------------------------
Non-conventional oil............................     0.4      0.9      1.4      2.5      3.7      7.4      7.0%
                                                 ---------------------------------------------------------------
Canada..........................................     0.2      0.6      1.0      2.0      3.0      4.8      6.4%
Others..........................................     0.2      0.3      0.4      0.5      0.7      2.7      8.2%
                                                 ===============================================================
OPEC............................................    28.0     30.9     33.6     35.9     42.0     56.3      2.1%
                                                 ---------------------------------------------------------------
Crude oil.......................................    26.2     27.8     29.1     30.2     34.9     45.7      1.8%
                                                 ---------------------------------------------------------------
Middle East.....................................    17.9     19.5     20.7     22.0     25.7     34.5      2.1%
    Saudi Arabia................................     9.4      8.0      9.1      9.7     11.3     14.6      1.9%
    Iran........................................     1.5      3.7      3.9      3.9      4.4      5.2      1.1%
    Iraq........................................     2.6      2.6      1.8      2.2      2.8      6.0      4.9%
    Kuwait......................................     1.3      1.8      2.1      2.2      1.8      4.0      2.5%
    United Arab Emirates........................     1.8      2.2      2.5      2.7      3.1      3.8      1.8%
    Qatar.......................................     0.5      0.7      0.8      0.7      0.7      0.5     ^1.9%
    Neutral zone\2\.............................     0.8      0.6      0.6      0.5      0.5      0.5     ^0.6%
                                                 ---------------------------------------------------------------
Non-Middle East.................................     8.3      8.3      8.4      8.2      9.1.    11.2      1.2%
    Algeria.....................................     0.9      0.8      1.3      1.1      1.1      0.7     ^2.7%
    Libya.......................................     1.8      1.4      1.6      1.7      1.9      2.7      2.0%
    Nigeria.....................................     2.1      2. 0     2.4      2.5      2.7      3.2      1.2%
    Indonesia...................................     1.5      1.2      0.9      0.8      0.8      0.8     ^0.8%
    Venezuela...................................     2.0      2.9      2.1      2.2      2.8      3.9      2.5%
                                                 ---------------------------------------------------------------
NGLs............................................     1.8      2.9      4.3      5.4      6.3      9.0      3.0%
                                                 ---------------------------------------------------------------
Saudi Arabia....................................     0.7      1.0      1.5      1.9      2.0      2.7      2.5%
Iran............................................     0.0      0.1      0.3      0.4      0.6      1.1      4.8%
UAE.............................................     0.4      0.4      0.5      0.7      0.9      1.3      3.6%
Algeria.........................................     0.1      0.6      0.8      0.9      0.9      0.7     ^0.3%
Others..........................................     0.6      0.8      1.2      1.5      1.9      3.3      4.1%
                                                 ---------------------------------------------------------------
Non-conventional................................     0.0      0.2      0.2      0.3      0.8      1.5      8.8%
                                                 ---------------------------------------------------------------
Venezuela.......................................     0.0      0.1      0.1      0.1      0.2      0.4      5.8%
Others..........................................     0.0      0.1      0.1      0.2      0.6      1.2     10.5%
                                                 ---------------------------------------------------------------
TOTAL WORLD.....................................    64.9     76.5     83.6     91.3     99.3    116.3      1.3%
                                                 ===============================================================
Crude oil.......................................    58.3     66.0     70.8     75.7     80.3     89.1      0.9%
NGLs............................................     4.4      7.8      9.3     10.8     12.2     15.8      2.1%
Non-conventional oil............................     0.4      1.1      1.6      2.8      4.5      9.0      7.2%
Processing gains................................     1.7      1.7      1.9      2.0      2.3      2.5      1.2%
----------------------------------------------------------------------------------------------------------------
\1\ Average annual growth rate
\2\ Neutral Zone production is shared by Saudi Arabia and Kuwait.

Production
    In the Reference Scenario, conventional oil production continues to 
be dominated by a small number of major producers in those countries 
where oil resources are concentrated. The share of production 
controlled by members of the Organization of the Petroleum Exporting 
Countries, particularly in the Middle East, grows significantly.\4\ 
Their collective output of crude oil, NGLs and non-conventional oil 
grows from 34 mb/d in 2005 to 42 mb/d in 2015 and 56 mb/d in 2030, 
boosting their share of world oil supply from 40% now to 48% by the end 
of the Outlook period. Non-OPEC production increases much more slowly, 
from its current level of 48 mb/d to 55 mb/d in 2015 and 58 mb/d in 
2030 (Table 2). Conventional oil accounts for the bulk of the increase 
in oil supply between 2005 and 2030, but non-conventional resources 
play an increasingly important role (Figure 5). The projections to 2010 
take account of current, sanctioned and planned upstream projects.
---------------------------------------------------------------------------
    \4\ OPEC is assumed to be willing to meet the portion of global oil 
demand not met by non-OPEC producers at the prices assumed (see Chapter 
1). A special analysis of the effect of lower OPEC investment in 
upstream capacity is presented at the end of this chapter.
---------------------------------------------------------------------------
    Production in OPEC countries, especially in the Middle East, is 
expected to increase more rapidly than in other regions, because their 
resources are much larger and their production costs are generally 
lower. Saudi Arabia remains by far the largest producer of crude oil 
and NGLs. Its total output of crude and NGLs grows from 10.9 mb/d in 
2005, to 13.7 mb/d in 2015 and to 17.6 mb/d in 2030 (including Saudi 
Arabia's half-share of Neutral Zone production). Most of the rest of 
the increase in OPEC production comes from Iraq, Iran, Kuwait, the 
United Arab Emirates, Libya and Venezuela. Other OPEC countries 
struggle to lift output, with production dropping in Qatar, Algeria and 
Indonesia. These projections are broadly commensurate with proven 
reserves. OPEC's price and production policies and national policies on 
developing reserves are extremely uncertain.
    Outside OPEC, conventional crude oil production in aggregate is 
projected to peak by the middle of the next decade and decline 
thereafter, though this is partly offset by continued growth in output 
of NGLs (Figure 6). Production in several mature regions, including 
North America and the North Sea, which has been in steady decline in 
recent years, stabilises or rebounds in the near term. This reflects 
several factors, including the restoration of production capacity lost 
through hurricanes and other technical difficulties, and the impact on 
increased drilling to boost production in response to recent oil-price 
increases. But this trend is expected to be short-lived, as relatively 
high decline rates and rising costs soon drive output back down again. 
In the longer term, only Russia, Central Asia, Latin America and sub-
Saharan Africa--including Angola and Congo--achieve any significant 
increases in conventional oil production.
    A lack of reliable information on production decline rates makes it 
difficult to project new gross capacity needs. A high natural decline 
rate--the speed at which output would decline in the absence of any 
additional investment to sustain production--increases the need to 
deploy technology at existing fields to raise recovery rates, to 
develop new reserves and to make new discoveries. Our analysis of 
capacity needs is based on estimates of year-on-year natural decline 
rates averaged over all currently producing fields in a given country 
or region. The rates assumed in our analysis vary over time and by 
location. They range from 2% per year to 11% per year, averaging 8% for 
the world over the projection period.\5\ Rates are generally lowest in 
regions with the best production prospects and the highest RIP ratios. 
For OPEC, they range from 2% to 7%. They are highest in mature OECD 
producing areas, where they average 11%.
---------------------------------------------------------------------------
    \5\ These rates are based on information obtained in consultations 
with international and national oil companies, oilfield service 
companies and consultants. Observed decline rates are generally much 
lower, as they reflect investment to maintain or boost output at 
existing fields.
---------------------------------------------------------------------------
    The average quality of crude oil produced around the. world is 
expected to become heavier (lower API gravity) and more sour (higher 
sulphur content) over the Outlook period.\6\ This is driven by several 
factors, including the continuing decline in production from existing 
sweet (low-sulphur) crude oilfields, increased output of heavier crude 
oils in Russia, the Middle East and North Africa (Figure 7), and the 
projected growth of heavy non-conventional oil output. This trend, 
together with increasing demand for lighter oil products and increasing 
fuel-quality standards, is expected to increase the need for investment 
in upgrading facilities in refineries.
---------------------------------------------------------------------------
    \6\ However, upstream projects under development may result in a 
marginal reduction in the sulphur content and a small increase in the 
API gravity of installed crude oil production capacity in the next five 
years, according to the IEA's Oil Market Report (12 September 2006).
---------------------------------------------------------------------------
                               investment
    Cumulative global investment in the oil sector amounts to about 
$4.3 trillion (in year-2005 dollars) over the period 2005-2030, or $164 
billion per year, in the Reference Scenario. Investment relative to 
increases in capacity is highest in OECD countries, where unit costs 
and production decline rates are high compared with most other regions. 
Projected oil (and gas) investment needs in this Outlook are higher 
than in previous editions, largely because of the recent unexpected 
surge in the cost of materials, equipment and skilled personnel. Unit 
costs are assumed to fall back somewhat after 2010, as oil-services 
capacity increases and exploration, development and production 
technology improves. Upstream investment accounts for 73% of total oil-
industry investment.
    The required rate of capital spending over the projection period is 
substantially higher than actual spending in the first half of the 
current decade, which averaged little more than $100 billion per year. 
Investment needs increase in each decade of the projection period as 
existing infrastructure becomes obsolete and demand increases. Our 
analysis of the spending plans of the world's leading oil and gas 
companies through to 2010 shows that they expect their spending to be 
much higher in the second half of the current decade than the first.
Upstream Investment
    Upstream oil spending--more than 90% of which is for field 
development and the rest for exploration--averages $125 billion per 
year (Figure 8). Three-quarters of this investment is needed to 
maintain the current level of capacity in the face of natural declines 
in capacity at producing fields as reserves are depleted. This 
investment goes to drilling new wells, to working over existing wells 
at currently producing fields or to developing new fields. In fact, 
investment needs are far more sensitive to changes in natural decline 
rates than to the rate of growth of demand for oil.
Downstream Investment
    Cumulative investment in oil refining amounts to around $770 
billion ($30 billion per year) in the Reference Scenario. These 
projections include the investment needed to meet demand growth and 
additional spending on conversion capacity so that existing refineries 
are able to meet the changing mix of oil-product demand. Tighter fuel-
quality standards aimed at mitigating the environmental impact of fuel 
use are also obliging the refining industry to invest in new quality-
enhancement capacity. The required level of refining capacity, allowing 
for normal maintenance shutdowns, rises from 85 mb/d in 2004 to 117 mb/
d in 2030. The largest investments occur in the Middle East and 
developing Asia (Figure 9). Most new refineries will be built outside 
the OECD (see below).
    Although investment in oil tankers and inter-regional pipelines 
makes up a small proportion of total investment needs to 2030, the sum 
required rises rapidly throughout the projection period, because of the 
need to replace a large share of the world's aging tanker fleet. Total 
cumulative capital spending amounts to around $260 billion. Investment 
in gas-to-liquids plants in 2005-2030 is expected to amount to $100 
billion. Most of this investment occurs in the second half of the 
projection period. Investment in commercial coal-to-liquids plants, 
mostly in China, is projected to total over $30 billion.
Investment Uncertainties and Challenges
    Over the period to 2010, the total amount of investment that will 
be made in oil and gas infrastructure is known with a reasonable degree 
of certainty. Investment plans may change in response to sudden changes 
in market conditions and some projects may be cancelled, delayed or 
accelerated for various reasons. But the actual gross additions to 
supply capacity at various points along the oil-supply chain are 
unlikely to depart much from those projected in this Outlook. However, 
beyond 2010, there is considerable uncertainty about the prospects for 
investment, costs and the rate of capacity additions. The opportunities 
and incentives for private and publicly-owned companies to invest are 
particularly uncertain. Environmental policies could increasingly 
affect opportunities for building upstream and downstream facilities 
and their cost, especially in OECD countries. In the longer term, 
technological developments could open up new opportunities for 
investment and help lower costs.
    The availability of capital is unlikely to be a barrier to upstream 
investment in most cases. But opportunities and incentives to invest 
may be. Most privately-owned international oil and gas companies have 
large cash reserves and are able to borrow at good rates from capital 
markets when necessary for new projects. But those companies may not be 
able to invest as much as they would like because of restrictions on 
their access to oil and gas reserves in many resource-rich countries. 
Policies on foreign direct investment will be an important factor in 
determining how much upstream investment occurs and where.
    A large proportion of the world's reserves of oil are found in 
countries where there are restrictions on foreign investment (Figure 
10). Three countries--Kuwait, Mexico and Saudi Arabia--remain totally 
closed to upstream oil investment by foreign companies. Other countries 
are reasserting state control over the oil industry. Bolivia recently 
renationalised all its upstream assets. Venezuela effectively 
renationalised 565 kb/d of upstream assets in April 2006, when the 
state-owned oil company, PdVSA took over 115 kb/d of private production 
and took a majority stake in 25 marginal fields producing 450 kb/d 
after the government unilaterally switched service agreements from 
private to mixed public-private companies. The Russian government has 
tightened its strategic grip on oil and gas production and exports, 
effectively ruling out foreign ownership of large fields and keeping 
some companies, including Transneft, Gazprom and Rosneft, in majority 
state ownership. Several other countries, including Iran, Algeria and 
Qatar, limit investment to buy-back or production-sharing deals, 
whereby control over the reserves remains with the national oil 
company.
    Even where it is in principle possible for international companies 
to invest, the licensing and fiscal terms or the general business 
climate may discourage investment. Most resource-rich countries have 
increased their tax take in the last few years as prices have risen. 
The stability of the upstream regime is an important factor in oil 
companies' evaluation of investment opportunities. War or civil 
conflict may also deter companies from investing. No major oil company 
has yet decided to invest in Iraq. Geopolitical tensions in other parts 
of the Middle East and in other regions may discourage or prevent 
inward investment in upstream developments and related LNG and export-
pipeline projects.
    National oil companies, especially in OPEC countries, have 
generally increased their capital spending rapidly in recent years in 
response to dwindling spare capacity and the increased financial 
incentive from higher international oil prices. But there is no 
guarantee that future investment in those countries will be large 
enough to boost capacity sufficiently to meet the projected call on 
their oil in the longer term. OPEC producers generally are concerned 
that overinvestment could lead to a sharp increase in spare capacity 
and excessive downward pressure on prices. Sharp increases in 
development costs are adding to the arguments for delaying new upstream 
projects. For example, two planned GTL plants in Qatar were put on hold 
by the government in 2005 in response to soaring costs and concerns 
about the long-term sustainability of production from the North field. 
An over-cautious approach to investment would result in shortfalls in 
capacity expansion.
    Environmental policies and regulations will increasingly affect 
opportunities for investment in, and the cost of, new oil projects. 
Many countries have placed restrictions on where drilling can take 
place because of concerns about the harmful effects on the environment. 
In the United States, for example, drilling has not been allowed on 
large swathes of US federal onshore lands--such as the Arctic National 
Wildlife Refuge (ANWR)--and offshore coastal zones for many years.\7\ 
Even where drilling is allowed, environmental regulations and policies 
impose restrictions, driving up capital costs and causing delays. The 
likelihood of further changes in environmental regulations is a major 
source of uncertainty for investment.
---------------------------------------------------------------------------
    \7\ In mid-2006, Congress was considering a bill to open up 8% of 
ANWR.
---------------------------------------------------------------------------
    Local public resistance to the siting of large-scale, obtrusive 
facilities, such as oil refineries and GTL plants, is a major barrier 
to investment in many countries, especially in the OECD. The not-in-my-
backyard (NIMBY) syndrome makes future investments uncertain. It is all 
but impossible to obtain planning approval for a new refinery in many 
OECD countries, though capacity expansions at existing sites are still 
possible. The risk of future liabilities related to site remediation 
and plant emissions can also discourage investment in oil facilities. 
The prospect of public opposition may deter oil companies from 
embarking on controversial projects. Up to now, NIMBY issues have been 
less of a barrier in the developing world.
    Technological advances offer the prospect of lower finding and 
production costs for oil and gas, and opening up new opportunities for 
drilling. But operators often prefer to use proven, older technology on 
expensive projects to limit the risk of technical problems. This can 
slow the deployment of new technology, so that it can take decades for 
innovative technology to be widely deployed, unless the direct cost 
savings are clearly worth the risk. This was the case with the rotary 
steerable motor system, which has finally become the norm for drilling 
oil and gas wells. These systems were initially thought to be less 
reliable and more expensive, even though they could drill at double or 
even triple the rate of penetration of previous drilling systems. The 
slow take-up of technology means that there are still many regions 
where application of the most advanced technologies available could 
make a big impact by lowering costs, increasing production and 
improving recovery factors. For example, horizontal drilling, which 
increases access to and maximises the recovery of hydrocarbons, is 
rarely used in Russia.
    As well as lowering costs, technology can be used to gain access to 
reserves in ever more remote and hostile environments--such as arctic 
regions and deep water--and to increase production and recovery rates. 
New technology has enabled the subsurface recovery of oil from tar 
sands using steam-assisted gravity drainage and closely placed twin 
horizontal wells, while enhanced oil recovery has been made possible by 
injecting CO2 into oil wells and by using down-hole 
electrical pumps, to allow oil to be produced when the reservoir 
pressure is insufficient to force the oil to the surface.
    Although costs have risen sharply in recent years, much of the 
world's remaining oil can still be produced at costs well below current 
oil prices. Most major international oil companies continue to use a 
crude oil price assumption of $25 to $35 per barrel in determining the 
financial viability of new upstream investment. This conservative 
figure by comparison with current high oil prices partly reflects 
caution over the technical risks associated with large-scale projects 
and the uncertainty associated with long lead times and the regulatory 
environment.
    The current wave of upstream oil investment is characterised by a 
heavy focus on such projects, involving the development of reserves 
that were discovered in the 1990s or earlier. Unless major new 
discoveries are made in new locations, the average size of large-scale 
projects and their share in total upstream investment could fall after 
the end of the current decade. That could drive up unit costs and, 
depending on prices and upstream-taxation policies, constrain capital 
spending. Capital spending may shift towards more technically 
challenging projects, including those in arctic regions and in ultra-
deep water. The uncertainties over unit costs and lead times of such 
projects add to the uncertainty about upstream investment in the medium 
to long term.
Implications of Deferred Upstream Investment
    In light of the uncertainties described above, we have developed a 
Deferred Investment Case to analyse how oil markets might evolve if 
upstream oil investment in OPEC countries over the projection period 
were to increase much more slowly than in the Reference Scenario. This 
could result from government decisions to limit budget allocations to 
national oil companies or other constraints on the industry's ability 
or willingness to invest in upstream projects. For the purposes of this 
analysis, it is assumed that upstream oil investment in each OPEC 
country proportionate to GDP remains broadly constant over the 
projection period at the estimated level of the first half of the 
current decade of around 1.3%. This yields a reduction in cumulative 
OPEC upstream investment in the Deferred Investment Case vis-a-vis the 
Reference Scenario of $190 billion, or 25%, over 2005-2030. Upstream 
investment still grows in absolute terms.
    Lower oil investment inevitably results in lower OPEC oil 
production. This is partially offset by increased non-OPEC production. 
Higher oil prices encourage this increased investment and production in 
non-OPEC countries. They also cause oil demand to fall relative to the 
Reference Scenario. Higher prices for oil and other forms of energy 
also reduce GDP growth marginally, pushing demand down further. In 
2030, the international crude oil price, for which the average IEA 
import price serves as a proxy, is $19 higher in year-2005 dollars and 
$33 higher in nominal terms (assuming annual inflation of 2.3%) than in 
the Reference Scenario--an increase of about 34%.
    As a result of higher prices and lower GDP growth, the average 
annual rate of global oil-demand growth over 2005-2030 falls from 1.3% 
in the Reference Scenario to 1.1% in the Deferred Investment Case. By 
2030, oil demand reaches 109 mb/d--some 7 mb/d, or 6%, less than in the 
Reference Scenario (Figure 11). This reduction is equal to more than 
the current oil demand of China. Higher oil prices encourage consumers 
to switch to other fuels, use fewer energy services and reduce waste. 
They encourage faster improvements in end-use efficiency. In the 
transport sector, they also encourage faster deployment of biofuels and 
other alternative fuels and technologies, such as hybrids. The size of 
these effects varies among regions. It is highest in non-OECD 
countries, because the share of non-transport uses in final demand 
(which is relatively price-elastic) is higher there than in the OECD 
and because the share of taxes, which blunt the impact on demand of 
higher international oil prices, is generally lower.
    The drop in world oil demand that results from higher prices is 
accompanied by an equivalent decline in world production in the 
Deferred Investment Case. Unsurprisingly, OPEC oil production falls 
sharply in response to much lower investment (Figure 12). Including 
NGLs, OPEC output is just over 11 mb/d lower in 2030 than in the 
Reference Scenario, though, at 45 mb/d, it is still nearly 12 mb/d 
higher than in 2005. OPEC's share of world oil production remains 
essentially flat at about 40% over the projection period. In the 
Reference Scenario, the share rises to 48% in 2030.
    The fall in OPEC production is largely offset by higher non-OPEC 
output, which climbs to 64 mb/d--some 4 mb/d higher than in the 
Reference Scenario and 14 mb/d higher than in 2005. Higher prices 
stimulate faster development of conventional and non-conventional 
reserves in all non-OPEC regions, as marginal fields become more 
commercial. About 1 mb/d, or 15%, of the increase in non-OPEC output 
comes from oil-sands in Canada. As a result, the share of non-
conventional oil in total world supply increases from 2% in 2005 to 
more than 9% in 2030, compared with less than 8% in the Reference 
Scenario.
                      alternative policy scenario
    The Reference Scenario presents a sobering vision of the next two-
and-a-half decades, as the major oil-consuming regions--including the 
United States--become even more reliant on imports, often from distant, 
unstable parts of the world along routes that are vulnerable to 
disruption.
    In July 2005, G8 leaders, meeting at Gleneagles with the leaders of 
several major developing countries and heads of international 
organisations, including the IEA, recognised that current energy trends 
are unsustainable and pledged themselves to resolute action to combat 
rising consumption of fossil fuels and related greenhouse-gas 
emissions. They called upon the IEA to, ``advise on alternative energy 
scenarios and strategies aimed at a clean, clever, and competitive 
energy future''. The Alternative Policy Scenario presented in the World 
Energy Outlook 2006 is a direct response to that request, which the G8 
reaffirmed in July 2006 in St. Petersburg.
    The Alternative Policy Scenario analyses how far policies and 
measures currently under discussion\8\ can take us in dealing with the 
grave energy challenges now being faced. Information on more than 1,400 
proposed policies and measures has been collected and analysed. 
Sectoral and regional effects were also analysed in detail, in order to 
help identify the actions that can work best, quickest and at least 
cost.
---------------------------------------------------------------------------
    \8\ An example for the US would be the implementation of the reform 
of CAFE standards proposed by the National Highway Traffic Safety 
Administration.
---------------------------------------------------------------------------
    The results of this analysis are clear: First, implementing the 
policies and measures that governments are currently considering would 
lead to significantly slower growth in both fossil-fuel demand and 
CO2 emissions. Second, new policies and measures would pay 
for themselves--the financial savings far exceed the initial extra 
investment cost for consumers.
Demand in the Alternative Policy Scenario
    In the Alternative Policy Scenario, the implementation of more 
aggressive policies and measures significantly curbs the growth in 
total primary and final energy demand--a reduction of about 10% 
relative to the Reference Scenario. That saving is roughly equal to the 
current energy demand of China. Demand still grows, by 37% between 2004 
and 2030, but more slowly: 1.2% annually against 1.6% in the Reference 
Scenario.
    The reduction in the use of fossil fuels such as oil is even more 
marked than the reduction in primary energy demand (Figure 13). It 
results from the introduction of more efficient technologies and 
switching to carbon-free energy sources. Nonetheless, fossil fuels 
still account for 77% of primary energy demand by 2030 (compared with 
81% in the Reference Scenario).
    Global demand for oil in the Alternative Policy Scenario grows on 
average by 0.9% per year, reaching 103 mb/d in 2030--an increase of 20 
mb/d on 2005 levels, but 13 mb/d (11%) lower than in the Reference 
Scenario. In 2030, the share of oil in total primary energy demand is 
32% in the Alternative Policy Scenario, a drop of three percentage 
points compared to 2004. By 2015, oil demand will be 15% higher than in 
2004, compared to 21% in the Reference Scenario. Increased fuel 
efficiency in new vehicles, together with the faster introduction of 
alternative fuels and vehicles, accounts for more than half of the oil 
savings in the Alternative Policy Scenario. Most of the rest comes from 
savings in oil use in the industry and building sectors.
    These savings are equivalent to the current combined production of 
Saudi Arabia and Iran (Table 3). By 2015, demand reaches 95 mb/d, a 
reduction of almost 5 mb/d on the Reference Scenario. Measures in the 
transport sector--notably those that boost the fuel economy of new 
vehicles--contribute 59% of the savings over the projection period. 
Increased efficiency in industrial processes accounts for 13%, and fuel 
switching in the power sector and lower demand from other energy-
transformation activities, such as heat plants and refining, for 9%. 
More efficient residential and commercial oil use makes up the rest.

                        Table 3.--WORLD OIL DEMAND IN THE ALTERNATIVE POLICY SCENARIO\1\
                                                     [mb/d]
----------------------------------------------------------------------------------------------------------------
                                                                                               Difference versus
                                                                                                   Reference
                                                           2005     2015     2030   2005^2030   Scenario in 2030
                                                                                              ------------------
                                                                                                 mb/d       %
----------------------------------------------------------------------------------------------------------------
OECD...................................................    47.7     50.7     49.9       0.2%     ^5.2     ^9.5%
North America..........................................    24.9     27.2     27.7       0.4%     ^3.1    ^10.2%
    United States......................................    20.6     22.4     22.5       0.3%     ^2.5    ^10.1%
    Canada.............................................     2.3      2.5      2.5       0.5%     ^0.2     ^8.2%
    Mexico.............................................     2.1      2.4      2.7       1.1%     ^0.4    ^12.7%
Europe.................................................    14.4     14.9     13.9      ^0.1%     ^1.4     ^9.3%
Pacific................................................     8.3      8.5      8.2       0.0%     ^0.7     ^7.6%
                                                        --------------------------------------------------------
Transition economies...................................     4.3      4.7      5.0       0.6%     ^0.7    ^11.8%
Russia.................................................     2.5      2.7      2.9       0.5%     ^0.4    ^12.2%
                                                        --------------------------------------------------------
Developing countries...................................    28.0     35.6     44.7       1.9%     ^6.6    ^12.9%
Developing Asia........................................    14.6     19.4     25.8       2.3%     ^3.9    ^13.2%
    China..............................................     6.6      9.4     13.1       2.8%     ^2.2    ^14.5%
    India..............................................     2.6      3.6      4.8       2.5%     ^0.6    ^11.3%
    Indonesia..........................................     1.3      1.5      2.2       2.0%     ^0.2     ^7.5%
Middle East............................................     5.8      7.7      8.8       1.7%     ^0.9     ^8.9%
Africa.................................................     2.7      3.3      4.2       1.8%     ^0.7    ^14.4%
Latin America..........................................     4.9      5.3      5.9       0.8%     ^1.1    ^15.8%
    Brazil.............................................     2.1      2.5      2.9       1.3%     ^0.6    ^16.0%
                                                        --------------------------------------------------------
Int. marine bunkers....................................     3.6      3.7      3.8       0.2%     ^0.4     ^9.8%
                                                        --------------------------------------------------------
World..................................................    83.6     94.8    103.4       0.9%    ^12.9    ^11.1%
                                                        --------------------------------------------------------
European Union.........................................    13.5     13.8     12.8      ^0.2%     ^1.3     ^9.5%
----------------------------------------------------------------------------------------------------------------
\1\ Includes stock changes.
\2\ Average annual growth rate.

Supply in the Alternative Policy Scenario
    In principle, lower global oil demand in the Alternative Policy 
Scenario would be expected to result in a lower oil price than in the 
Reference Scenario. Production in higher-cost fields mainly located in 
OECD countries, would be reduced, declining even more rapidly after 
2010 than in the Reference Scenario. But concerns about the security of 
supply might encourage OECD and other oil-importing countries to take 
action to stimulate development of their own oil resources. For 
example, the UK government is currently considering such policies (DTI, 
2006) and the US Congress is considering allowing more offshore oil 
exploration and giving royalty relief for offshore production. For 
these reasons, we assumed that oil production in OECD and other net 
oil-importing countries--as well as the international crude oil price--
remain at the same levels as in the Reference Scenario. As a result, 
the call on oil supply from the net exporting countries is reduced in 
the Alternative Policy Scenario. OPEC members and major non-OPEC 
producing regions, including Russia, the Caspian region and west 
Africa, are most affected (Figure 14). OPEC production reaches 38.8 mb/
d in 2015 and 45.1 mb/d in 2030. The average growth of 1.2% per year is 
just over half the growth in the Reference Scenario. OPEC's share of 
the global oil market rises from the current 40% to nearly 44% in 2030, 
but this is five percentage points lower than that in the Reference 
Scenario.
    Crude oil production outside OPEC is projected to increase from 50 
mb/d in 2005 to 56 mb/d in 2015 and 58.3 mb/d in 2030 (though 1.8 mb/d 
or 3% lower than in the Reference Scenario). The transition economies 
are expected to account for half of this increase. Latin America and 
West Africa account for most of the remainder. Production in OECD 
countries is expected to decline steadily from 2010 onwards, as in the 
Reference Scenario. The share of non-conventional oil production in 
this scenario in 2030, at 8.7%, is an increase of 7.4 mb/d over current 
levels. The production of biofuels is also expected to increase 
substantially, especially in oil importing countries. Globally, biofuel 
production will grow almost 10 times, from 15 Mtoe in 2004 to 147 Mtoe 
in 2030. Most of the additional growth, over and above Reference 
Scenario levels, is expected to occur in the United States and the 
European Union.

    The Chairman. Thank you very, very much.
    Linda Stuntz is our next witness. Linda is a partner with 
Stuntz, Davis and Staffier and has been involved previously 
with the Department of Energy in a high position and, most 
recently, was part of the Council on Foreign Relations Task 
Force that worked up a report on the national security 
consequences of U.S. oil dependency. Thank you for being here, 
Linda.

STATEMENT OF LINDA G. STUNTZ, ON BEHALF OF A COUNCIL ON FOREIGN 
                RELATIONS INDEPENDENT TASK FORCE

    Ms. Stuntz. Thank you, Mr. Chairman and members of the 
committee. It is an honor to be before you today to discuss the 
report prepared by an independent task force organized by the 
Council on Foreign Relations, released this past October, 
entitled, as you described, The National Security Consequences 
of U.S. Oil Dependency. Today, let me highlight four points 
from this report.
    First, you will not find in this report support for the 
concept of energy independence for this country. As much as I 
know many of you on both sides of the aisle espouse this, it 
is, in fact, unrealistic. Barring Draconian measures, the 
United States will depend on imported oil for a significant 
fraction of its transportation fuel needs for the next several 
decades. Moreover, so long as we consume any oil, even if it is 
produced domestically, we will be affected by what happens in 
the global oil market, just as corn or other markets of that 
nature are affected. We cannot wall ourselves off for that 
market. Our allies are also dependent on this oil.
    Therefore, you will find support in what the task force 
focused on, reducing our dependence on all oil and on better 
managing the global energy interdependence, which I noted 
coincidentally, came up in some of my colleagues' testimony on 
the panel.
    One idea of many suggestions in the report is that the 
International Energy Agency would work perhaps to expand its 
membership to include new consumers, such as China, who until 
the early 1990's, were actually oil exporters. That is one of 
the many changes that has occurred in the global world market.
    Second, the constraints on foreign policy caused by energy 
require greater integration of foreign policy and energy 
policy. The newspapers this morning and every morning are 
replete, whether in Asia, Africa, South America or even Europe, 
with incidents of energy and foreign policy intermingling, yet 
the task force was unanimous in the view that energy issues 
have not received sufficient attention in the formulation and 
implementation of U.S. foreign policy.
    Among other things, the task force recommends that an 
energy directorate be established at the National Security 
Council, similar to those that exist now, for counter-
proliferation defense policy and international economics.
    Third, and it was highlighted by Senator Domenici in his 
opening speech, one of things that I believe has changed since 
Senator Jackson and I and some of you first began looking at 
this very difficult challenge of energy security is the 
increasing role of national oil companies. The reality today is 
that national oil companies control some \3/4\ of the world's 
oil reserves, as best we can tell. ExxonMobile, the largest 
privately owned oil company in the world, ranks fourteenth, 
roughly, on the list of proven reserve holders in the world. We 
are only beginning to come to terms, I would submit, with this 
development and what it means for world oil markets.
    Interestingly, with their access to reserves in other 
countries more limited, privately-owned oil companies, such as 
BP, Shell and others, are returning to those areas that remain 
open to them, including our U.S. Gulf of Mexico and the North 
Sea. Over time, however, given where petroleum reserves are 
located and by whom they are controlled, the world will become 
increasingly dependent on state oil companies to produce the 
oil that is needed. Some of these are highly efficient. They 
utilize advanced technology and they conduct their business in 
a transparent way on commercial terms that we would understand. 
Many, however, do not, and we have to determine how to deal 
with them and what their effects will be on the market.
    Fourth, in order to address the national security 
consequences of U.S. oil dependency, we need a comprehensive 
approach. And this will not be a surprise or news to this 
committee, but we need it all, we cannot focus on one or the 
other. We need to increase the efficiency of oil use, primarily 
in transportation fuels. We need to use alternative fuels. We 
need to diversify oil supplies, particularly outside the 
Persian Gulf, which includes in the United States. We need to 
make oil and gas infrastructure more efficient and secure. And 
we need to increase the investment in new energy technologies.
    The task force considered--and had a lively debate on--
increasing the gasoline tax, increasing CAFE requirements and a 
tradable permit program for gasoline allowances. Again, it will 
probably be no surprise to you that while the task force 
unanimously believed we needed to do one or several of these 
things, we did not have an agreement on which one of these 
should be pursued.
    With respect to alternative fuels, the task force was 
enthusiastic, in particular, about the possibility of plug-in 
hybrid electric vehicles using energy generated, in particular, 
by nuclear power, so that it could deal with some of the 
emissions issues, which, of course, are the flip side of all 
these energy issues.
    The task force also recommended specifically removing the 
54 cents per gallon tariff on imported ethanol so that U.S. 
consumers may have the benefit of biomass-derived fuels from 
countries such as Brazil, where ethanol can be produced at a 
lower cost than in the United States at this time.
    In conclusion, I very much hope that the task force work 
product will be of assistance to the committee as it deals with 
these important challenges and I look forward to discussing 
these matters further with you.
    [The prepared statement of Ms. Stuntz follows:]
   Prepared Statement of Linda G. Stuntz, on Behalf of a Council on 
                Foreign Relations Independent Task Force
    Mr. Chairman and Members of the Committee:
    It is an honor to appear before you today to discuss the report, 
``National Security Consequences of U.S. Oil Dependency,'' released 
this past October and authored by an independent task force organized 
by the Council on Foreign Relations. This task force was co-chaired by 
James Schlesinger and John Deutch, no strangers to this committee. 
Members of the task force included experts in foreign policy such as 
Graham Allison, leading economists such as Martin Feldstein, energy 
experts such as J. Robinson West, business leaders such as Norman 
Augustine and experienced energy legislators such as former Senate 
Energy Committee chairman Bennett Johnston. As a veteran of many energy 
policy battles myself and one who continues to believe (nonetheless) 
that, working together, we can improve our own energy security and that 
of our children, it was a privilege for me to participate in this 
effort.
    Every member of the task force has a separate view on what is most 
important in this report. I do not purport to speak for all of them 
today--the report does that. I would highlight four points from this 
report.
    First, you will not find support in this report for ``Energy 
Independence.'' Indeed, the first of several ``Myths'' highlighted by 
the report is this one. ``Barring draconian measures, the United States 
will depend on imported oil for a significant fraction of its 
transportation fuel needs for at least several decades.'' \1\ Moreover, 
so long as we use ANY oil, we will be subject to world oil market 
developments and so will our allies. We cannot wall ourselves off from 
the global oil market, much as we might wish to. Furthermore, policies 
that attempt to significantly reduce import dependence could 
dramatically drive up fuel prices. You will find support for reducing 
our dependence on all oil and on managing better our global energy 
interdependence, for example, by encouraging the International Energy 
Agency to work with new major energy consumers such as China and 
India.\2\
---------------------------------------------------------------------------
    \1\ P. 14.
    \2\ P. 52.
---------------------------------------------------------------------------
    Second, the constraints on foreign policy caused by energy require 
greater integration of foreign policy and energy policy. Whether in 
Asia, Africa, South America or even Europe, our foreign policy is 
directly affected by the role of that nation in the global energy 
marketplace. Yet, the task force was unanimous in the view that energy 
issues have not received sufficient attention in the formulation and 
implementation of U.S. foreign policy. Among other things, the task 
force recommends that an energy directorate be established at the 
National Security Council, similar to those that exist now for 
counterproliferation, defense policy and international economics.\3\
---------------------------------------------------------------------------
    \3\ P. 57.
---------------------------------------------------------------------------
    Third, one of the things that has changed most in global oil 
markets over the past two decades is the rise of National Oil 
Companies. The reality today is that National Oil Companies control 
some three-quarters of the world's oil reserves. Exxon Mobil, the 
largest privately owned oil company, ranks only l4th on the list of 
proven reserve owners.\4\ We are only beginning to come to terms with 
this development and what it means for world oil markets, but with 
their access to reserves elsewhere increasingly limited, privately 
owned oil companies are returning to those areas that remain open to 
them, including the U.S. Gulf of Mexico and the North Sea. Over time, 
given where petroleum reserves are located and by whom they are 
controlled, the world will become increasingly dependent on state oil 
companies to produce the oil that is needed.
---------------------------------------------------------------------------
    \4\ P. 18.
---------------------------------------------------------------------------
    Fourth, in order to address the national security consequences of 
U.S. oil dependency, we need a comprehensive approach that: 1) 
increases efficiency of oil use, primarily in transportation fuels; 2) 
uses alternative fuels; 3) diversifies oil supplies, particularly 
outside the Persian Gulf, 4) makes the oil and gas infrastructure more 
efficient and secure; and 5) increases investment in new energy 
technologies. The task force considered an increased gasoline tax, 
increase in CAFE requirements and a tradable permit program for 
gasoline allowances. While the task force unanimously endorsed the 
adoption of such measures to slow the growth in petroleum consumption, 
it did not reach agreement on which of these specific measures to 
employ. With respect to alternative fuels, the task force was 
enthusiastic about the possibility of ``plug in hybrid'' vehicles, 
particularly in conjunction with greater use of nuclear power. The task 
force also recommends removing the $0.54 per gallon tariff on imported 
ethanol so that U.S. consumers may have the benefit of biomass-derived 
fuels from countries such as Brazil, where ethanol can be produced at 
lower cost than in the U.S.\5\
---------------------------------------------------------------------------
    \5\ P. 39.
---------------------------------------------------------------------------
                               conclusion
    It has been my experience that the energy security debate is one 
particularly afflicted by misinformation and failure to define the 
problem being addressed. I commend the Committee for seeking the facts 
regarding the global oil market, our position in that market, what 
options are available to us in the near and longer term, and what the 
costs and benefits of those options are. I truly hope that the task 
force report can be of assistance to you in this effort and would be 
pleased to try to answer any questions you may have about the report or 
the matters it addresses.

    The Chairman. Thank you very much for that testimony.
    Next is Dr. Robert Hormats, who is vice chairman at Goldman 
Sachs (International) and has been a witness before this 
committee, and several Senate committees that I serve, on 
numerous times. We welcome you back and look forward to your 
comments.

  STATEMENT OF DR. ROBERT D. HORMATS, VICE CHAIRMAN, GOLDMAN 
                     SACHS (INTERNATIONAL)

    Dr. Hormats. Thank you very much, Mr. Chairman and members 
of the committee. It is a pleasure to be back here.
    Let me make just a few points about the situation we face 
today. First is that we have a history in this country of going 
through periods of great crisis followed by periods of 
prolonged complacency and that has caused energy policy to be 
sort of light switch--on/off.
    I remember my first time coming to this committee. I was 
economic advisor to Dr. Kissinger in the 1970's when we had the 
first big oil crisis, with long lines and the Arab oil embargo 
and high prices, and at that point, we thought the country 
would rally behind a very bold policy. Well, there were some 
major elements of progress in the 1975 Act under President 
Ford, where we had energy efficiency standards for cars. And 
after that, a lot of companies moved away from oil to burn 
other things to generate power and we used coal in other 
things, as opposed to oil, in the industrial part of the 
economy.
    But then we had other crises that followed, periods of 
concern, periods where people would say, we need bold policy. 
Then prices go down and we relax and forget about it. I think 
that point Senator Dorgan made a moment ago is that even now, 
we're just taking baby steps. These steps are not commensurate 
with the situation we find ourselves in today. And that is, 
people say, look, after 9/11, everything changed. Well, energy 
policy really has not changed very much. We're fighting a war 
on terrorism. We are spending money, lots of money, for oil. 
We're heavily dependent on countries that are very unreliable 
suppliers. A large portion of money is spent by us and other 
importers, and goes to countries whose interests are hostile to 
those of the United States. Some of that money finds its way 
into terrorist hands. We should accept the fact that that is 
the case.
    So what we're doing now is we're fighting in a post-9/11 
environment with a pre-9/11 energy policy. It is simply not 
sufficient to deal with the national security crisis that we 
face today. The crisis is a geopolitical one and the 
vulnerability of this country to disruptions--look what is 
happening in Nigeria today, kidnappings of people on these oil 
rigs. We have Venezuela making very tough statements about 
further nationalization. We have Russia using oil as a 
political lever. We have instability in the Middle East. If 
Iran deteriorates further in the relationship--that will affect 
oil. It has happened before. If Iraq deteriorates further and 
the civil war increases and other countries start getting 
involved, then you have additional tensions. If you have 
tensions between the Shiites on one side of the Persian Gulf 
and the Sunni on the other, that's going to make transportation 
of oil all the more vulnerable. And therefore, we have to come 
up with a much bolder set of energy policies for national 
security reasons.
    The thing about it is, it may be difficult to deal with 
some of these situations abroad, of which we have less control. 
We have it within the capability of the United States not to 
become energy independent. I think Linda has made a very good 
point: energy independence, at this point, is not possible, but 
we can manage our vulnerability a lot better than we are doing 
today and it's the vulnerability that is the huge problem.
    How do we do that? We have the capability, for instance, by 
insisting on tougher fuel standards for automobiles, to improve 
the efficiency with which we use oil. And it's quite possible 
to do. It's within the realm of technological possibility. Now 
there may be reasons why you can't go as fast as we would like, 
but there should be the target of much greater energy fuel--oil 
fuel efficiency standards with off-ramps in case there is an 
economic reason it can't be done or a technological reason it 
can't be done. There ought to be some way--exceptions for a 
period of time, but the goal ought to be to reduce the 
efficiency--to improve the efficiency of the use of oil as a 
transportation fuel because, by and large, in this country, oil 
is a transportation fuel and if we can't address that issue, 
we're not going to address the overall vulnerability issue.
    The second part of this is that there are a number of other 
elements there and the laws that are written and the 
regulations that come out of this Congress, many of them are 
too short-term. Many of the incentives have very narrow windows 
so companies can't take advantage of them. I've listed in my 
testimony some of these. These are, I think, very important.
    Second, some of these structures for the investments that 
we want to come into this sector are limited so that certain 
kinds of investors--individual investors in certain cases, 
institutional investors in other cases--cannot really put money 
in because of the structure of the law and the way the 
regulations are written. These are additional important points.
    Third, we've got to work with other countries, like China 
and other countries that are big consumers and growing 
consumers, not to have a big fight with China over energy, but 
we ought to try to find ways where we can use our ability to 
develop, for instance, clean coal technology to help other 
countries to utilize their energy resources more efficiently 
and in a way which is environmentally sound.
    The last point, generally--and I'll stop because I'm over 
my time--is we have the technological capability on the supply 
side. I've talked about the demand side, greater efficiency in 
the use of oil for automobiles and transportation vehicles. We 
have the capability, with the entrepreneurialism and the 
vitality of this country, as President Ford said in 1975 when 
he first talked about this, to utilize this capability in this 
country, to develop new, alternative sources of energy. And 
there was a lot going on. There is a lot more that can be done 
with the right kind of government incentives.
    And we also have to use the conventional sources of energy 
that we have. We have a lot of them. Environmental practices 
have improved a lot. We can't do it only by reducing the use of 
energy. We can't do it only by increasing the supply. But when 
you combine the two policies that increase our dependence on 
our own conventional and non-conventional resources, combined 
with greater efficiency of the use of oil in particular, we 
have the ability to reduce our vulnerability quite 
substantially.
    But we need a much bolder policy. It can't be a pre-9/11 
policy, it has to be a post-9/11 policy. We're in a war and oil 
is one of the elements of that. During World War II, the 
American people were called on to buy bonds. There were bond 
rallies. People asked, what can I do? How can I help? Now, what 
can Americans do? What they can do is support bold energy 
policy. If we are committed to a really tough policy, people 
ought to be supporting efforts to reduce the wasteful use of 
energy across the board. Thank you.
    [The prepared statement of Dr. Hormats follows:]
        Prepared Statement of Robert D. Hormats, Vice Chairman, 
                     Goldman Sachs (International)
    Mr. Chairman and Members of the Committee:
    Thank you for your kind invitation to testify on the critically 
important subject of the economic and national security implications of 
America's oil dependence.
    I speak to you today as a citizen concerned about our nation's 
increasing dependence on potentially unstable supplies of foreign oil. 
This dependence creates profound economic, political and security 
vulnerabilities. Also, a portion of the large amounts of petrodollars 
accumulated by a number of suppliers is used in ways that threaten 
American interests.
    By way of background, I was economic advisor to Dr. Henry Kissinger 
on the National Security Council staff in the mid 1970s when this 
country experienced its first energy crisis after the 1973 Yom Kippur 
War, and participated in his Middle Eastern shuttle diplomacy during 
the period that followed. At that time, I had high hopes that the Arab 
oil embargo, the sharp increase in the price of oil, and the long-lines 
at gas stations would produce a bipartisan consensus on energy policy 
and jolt our nation into a bold and effective effort to reduce oil 
dependence and future vulnerability. Indeed, some progress was made. 
The Energy Policy Conservation Act of 1975, championed by our late 
President Gerald R. Ford, launched a number of bold initiatives to 
achieve this goal. And the country did accomplish significant 
improvements in the efficiency of oil use through compulsory mileage 
standards for automobiles and because U.S. industry and power plants 
shifted dramatically away from using oil as a fuel.
    But when prices fell later in the decade, a sense of complacency 
set in. Then we were hit by another crisis that caused oil prices to 
spike at the end of the 1970s; that was triggered by the fall of the 
Shah of Iran and the Iranian Revolution. Complacency set in once again 
after that crisis receded and prices fell. Another oil crisis occurred 
in 1990 when Iraq invaded Kuwait, after which the sense of urgency 
about dramatic alterations in energy policy and use faded again. Decade 
after decade our dependence on foreign oil has risen. In the mid-1970s, 
35% of this nation's oil consumption was supplied by imports. Now, 
three decades later, it is 60%.
    After 9/11, again at the beginning of the current Iraq War in 2003, 
and again during the large price run-up in and the summer of 2006 the 
country had excellent opportunities and powerful incentives to confront 
energy vulnerabilities with a bold policy response. The 2005 Energy 
Policy Act contained a number of positive features--but these measures 
were not commensurate with the seriousness or the urgency of the energy 
challenge this country faces.
    American dependence on potentially vulnerable oil supplies 
continues to grow, with little prospect that it will change--despite 
the fact that we are engaged in a War on Terrorism in which oil imports 
by the U.S. and other nations provide funds to nations hostile to the 
U.S. and countries friendly to us. It is often said that ``9/11 changed 
everything!'' Sadly, in the area of energy policy it hasn't changed 
very much. American oil vulnerability continues unabated.
    There are several national economic and security consequences of 
this situation:

   If the situation in Iraq continues to deteriorate and other 
        oil producing nations become more involved, the risks increase 
        to oil supplies not only from disruptions in Iraq but also from 
        greater tensions between the Sunni nations on the western side 
        of the Persian Gulf and the Shiites on the eastern side, with 
        oil facilities and shipments becoming increasingly vulnerable. 
        Moreover, added western pressures on Iran over its nuclear 
        program could lead to oil disruptions or threats thereof;
   The American economy remains highly vulnerable to supply 
        disruptions in oil exporting nations; these could result from 
        acts or terrorism, political instability, efforts to use oil as 
        leverage, or natural calamities;
   High oil prices resulting from strong demand from countries 
        such as the U.S. and other major importers give countries such 
        as Iran and Venezuela added resources to take actions inimical 
        to American interests;
   Oil-dependent friends and allies feel more vulnerable to the 
        pressures and potential use of oil leverage from supplying 
        countries and therefore are reluctant to side with the U.S. on 
        key issues affecting those suppliers;
   Oil-related tensions and competition are likely to 
        intensify--as countries such as China seek to lock up scarce 
        supplies or make political deals to solidify long-term supply 
        relationships, or suppliers such as Russian and Iran use oil as 
        leverage to extract political concessions from consumers.

    My concerns about this untenable and dangerous situation led me--
together with a group of other concerned citizens to join the Energy 
Security Leadership Council in an effort to press for greater and more 
resolute national action on this matter--and for an end to the 
divisive, highly polarized debate that has stymied genuine progress on 
many fundamental issues. The Council, a project of Securing America's 
Future Energy (SAFE), is a nonpartisan group of business executives and 
retired military leaders. It recently unveiled a report entitled 
``Recommendations to the Nation on Reducing U.S. Oil Dependence.'' (I 
will discuss a few of these later in my testimony, along with a number 
of recommendations that I believe can also contribute to progress in 
this area.) The members of the Council believe that America's energy 
security is in a perilous state. Along with my fellow Council members, 
I am convinced that America's leaders must move quickly and steadfastly 
to confront our high level of oil dependence as a profound national 
security challenge.
                         energy interdependence
    Calls for ``energy independence'' offer a false promise to the 
American people. They also suggest a sort of xenophobia that implies 
that the U.S. can or should attempt to solve its energy problems with 
little regard for those of other nations. In fact, oil is a fungible 
global commodity, which means that events affecting supply or demand 
anywhere will affect oil consumers everywhere. A country's exposure to 
world oil prices or oil price shocks is a function of the amount and 
types of oil it consumes; the ratio of ``domestic'' to ``imported'' oil 
is only a portion of the problem. Even if the U.S. could substitute 
domestic energy for all foreign oil--a goal the Council believes to be 
impossible--American economic prosperity would still be linked to the 
health of a global economy dependent on international oil flows. So as 
we work to enhance our own energy security we should also be 
strengthening international cooperation with oil producers and 
consumers to improve global energy security, efficiency, and 
environmentally responsible production and usage.
    It is also important to make a distinction between dependence and 
vulnerability. There are numerous suppliers of oil that are very 
reliable and that use the funds earned in a constructive fashion. There 
are others whose facilities are vulnerable to disruption and that use 
funds in ways inimical to U.S. interests. But a large portion of the 
world's oil comes from this in the second category, posing a series of 
economic, political and security risks.
                          key recommendations
    The Council recommends a goal of cutting U.S. oil intensity the 
amount of oil it takes to produce a given amount of GDP--in half by 
2030. There is a favorable precedent for this objective. Since the mid-
1970s, the U.S. has managed to trim oil intensity by 50%, chiefly by 
raising the fuel efficiency of passenger cars, virtually eliminating 
oil as a fuel for electric power generation, and expanding less energy-
demanding sectors of the economy, particularly in the area of services. 
As a consequence, the U.S. now uses half the amount of oil to produce a 
dollar of GDP, in real terms, as it did just thirty years ago. 
Unfortunately, however, progress in this area has slowed in the last 
ten years.
    One key goal must be to make America's prosperity less dependent on 
a commodity the production level of which responds only very slowly to 
changes in price. Combine this price inelastic supply with 1) the 
vulnerability of oil supplies to various types of disruption, 2) the 
fact that some countries see oil as a political as well as an economic 
commodity, and 3) the fact that much of the world's production is in 
the hands of state owned oil companies, many of which use oil revenue 
for political or social ends rather than reinvest it in new production 
capacity, and you have the recipe for severe energy-related economic 
disorder.
    As a result of the halving of U.S. oil intensity since the mid-
1970s, the high oil prices experienced in the summer of 2006 
represented a smaller relative cost to the economy than in the past. 
Further reductions in oil intensity would provide a measure of 
insurance against some of the effects of sudden future oil price shocks 
or sustained high oil prices. In addition, by boosting the production 
of alternative sources of energy to displace oil, we can create more 
production capacity at home, keep more of our money in this country, 
create a great number of new, high quality jobs in industries that 
manufacture and utilize new environmentally responsible energy 
production and conservation technologies, and develop new export 
products that can be sold to an energy hungry and environmentally 
conscious world.
The Global Energy Challenge
    The global economy is in the midst of a period of extraordinary 
growth that promises to transform the lives of billions of people, 
bringing comforts and luxuries to regions where humankind has long 
struggled for subsistence. Creativity and the drive for a better life 
are the engines of this tremendous surge in output, living standards 
and productivity but like all engines they require energy to function.
    By 2020, world energy demand is forecast to jump by 50% over 2000 
levels, with most of the increase coming in developing countries. The 
safe and affordable delivery of all this energy is by no means assured. 
Even if resources turn out to be sufficient in the aggregate, their 
distribution will not map closely to the topography of demand. The 
resultant uncertainty of supply and upward pricing pressure will 
exacerbate international tensions stemming from non-energy issues.
    Oil provides only 40% of global energy, but, as the premier 
transportation fuel, it has emerged as the touchstone of the world's 
energy outlook. On both economic and psychological grounds, oil price 
spikes threaten the prosperity of many nations, including many of the 
poorest on this planet. They also sow the seeds of tension between 
exporting and importing nations, among consuming nations, and among 
different groups within countries. Indeed, since so much oil is used 
for personal transportation, oil prices have an enormous impact on the 
pocketbooks of virtually every American family. Correspondingly, policy 
efforts that impact oil's cost and availability must take into account 
the interests of the average American family and quickly become major 
political issues.
America's Clear and Present Dangers
    For much of the last century, surplus domestic oil production 
reduced U.S. vulnerability to oil disruptions elsewhere in the world. 
But America's oil production is now dwarfed by current consumption. 
Thus, while the U.S. remains the third largest oil producer in the 
world, domestic production can satisfy barely 40% of its requirements.
    The U.S. generates 28% of the world's goods and services while 
consuming roughly a quarter of its oil production. This may seem like a 
balanced, even favorable energy equation, but closer inspection reveals 
a different story. Despite considerable progress toward more efficient 
energy use, America requires substantially more oil to create a dollar 
of Gross Domestic Product (GDP) than is the case in most other 
developed countries. Some of this differential in ``oil intensity'' can 
be attributed to our nation's vast size, the dispersion of our 
population, and less reliance on public transportation. Global military 
obligations, which are inextricably linked to our commitment to secure 
the flow of oil for the benefit of all nations, further increase 
American consumption. But even with these extenuating factors, there 
can be little doubt that the U.S. can and must use energy far more 
efficiently.
    America's long-term supply and demand balance is no more 
encouraging. U.S. oil demand is expected to grow 24% over the next two 
decades, and even if new discoveries raise its current 3% share of 
global oil reserves, our nation will almost certainly still require 
substantial amounts of petroleum imports. Import dependence will also 
define energy security for our key allies and most of the world's 
manufacturing nations. Unfortunately, the developed nations that 
consume most of the world's oil are not in a good position to produce 
the fuels they need.
    A large portion of the world's oil reserves are owned by state-
owned or controlled oil companies in non-O.E.C.D. countries. It is 
worth underscoring this point--especially because when oil prices were 
rising last summer there were many accusations, misguided in my view, 
that this was a conspiracy among the big oil majors, when in fact the 
six largest state oil companies have ten times the reserves of the top 
six privately owned companies. Some of these state companies are highly 
efficient and well run, but others are highly politicized and are not 
able to utilize their profits to increase production or modernize 
capacity. Because of the large state company role in the world's oil 
markets, there is not a ``free market'' for oil. As a result, a 
substantial portion of production is politically influenced and 
production decisions and practices are frequently economically 
suboptimal.
    With each passing year, the global oil trends now at work--rising 
consumption, reduced spare production capacity, politicized spending 
decisions, and potentially high levels of instability in key exporting 
countries--all increase the likelihood of an energy crisis. The odds in 
favor of a crisis are further heightened by the rise of terrorist 
movements bent on targeting critical elements of the world's vulnerable 
oil production, processing, and delivery infrastructure.
    Given today's precarious balance between oil supply and demand, 
taking even a small amount of oil off the market could cause prices to 
rise dramatically. In Oil Shockwave, a cabinet-level oil crisis 
simulation conducted in 2005 by SAFE and the National Commission on 
Energy Policy (NCEP), a 4% global shortfall in daily oil supply--only 
3.5 million barrels in a 84 million barrel daily market resulted in a 
177% increase in the price of oil, to over $150 per barrel. The 
simulation was played out by men and women who have served in the 
highest ranks of the U.S. government; Robert M. Gates, our current 
Secretary of Defense, for example, filled the role of National Security 
Advisor. The hypothetical scenarios put before the participants were 
designed to simulate a decline in world oil production due to regional 
instability and to terrorism. The incidents were completely plausible, 
and some, such as unrest in Nigeria, have subsequently come to pass. 
But there was little these skilled officials could do to stop a gut-
wrenching increase in the price of oil. Indeed, one of the major 
lessons of the simulation was that the Strategic Petroleum Reserve 
(SPR), the emergency supply of federally owned crude oil, offers only 
very limited protection against a major supply disruption. Emergency 
reserves cannot sustain the United States through a prolonged crisis, 
and it will be extremely difficult to reach political consensus on when 
it is appropriate to begin using them.
    Even under normal conditions, oil dependence has severe economic 
consequences. In 2005, direct outlays for imported oil accounted for a 
third of the country's $800 billion current account deficit. In 2006 
prices, these outlays have gone still higher. By diverting funds away 
from domestic consumption and investment, oil imports put a drag on 
U.S. economic growth and undercut the nation's long-term competitive 
position. Oil dependence also adds billions to our defense expenditures 
by making overseas protection of oil supplies a high strategic 
priority.
China
    Before I turn to a discussion of recommendations, I want to touch 
upon the rise of China and how that impacts U.S. energy security. Some 
observers have insisted that clashes between the U.S. and China over 
energy are inevitable. Chinese companies are buying oil properties and 
concluding long-term supply contracts around the world. A few of 
China's deals are in countries such as Venezuela, Iran and Sudan, with 
which the U.S. has strained or no relations. Also, China's surge in oil 
demand was seen, incorrectly, by some as a reason for higher prices 
last summer. And China's increased coal production concerns U.S. 
environmentalists.
    But the fact is that the U.S. and China have many common interests 
in the energy area and thus many reasons to cooperate. Consider these 
facts:

   The U.S. is the world's biggest oil importer. China is the 
        world's fastest growing oil importer. High prices and supply 
        instability harm both nations. Price increases in the summer of 
        2006 primarily reflected the lingering affects of sluggish 
        world investment in production and refining in the previous 
        decade, and market perception of high political risk that could 
        disrupt oil deliveries, which both nations have an interest in 
        correcting.
   Chinese, like Americans, are concerned about their 
        environment. China faces colossal and urgent environmental 
        problems, as anyone who has visited Beijing during the winter 
        has experienced first hand. U.S. companies have great expertise 
        in clean energy technology that could help.
   The U.S. and China have a similar interest in open sea lanes 
        for oil.
   Both nations also desire a secure business and legal 
        environment for their energy investments in emerging economies 
        as well as stable and growing supplies from world exporters.

    When I look at China and the U.S., I see two nations that have an 
enormous interest in cooperation in pursuit of energy security. Several 
areas are ripe for a common effort.

   A Joint Business-Government Commission on Clean Coal 
        Technology; this could help China develop and utilize its 
        massive amounts of coal in an environmentally responsible way 
        and boost U.S. exports of technology and equipment in this 
        area.
   Joint research on alternative fuels, which should also 
        include experts from Japan, would draw on the best talent in 
        these three countries. This could lead to breakthroughs in, or 
        broader dissemination of, non-carbon based production and use 
        technologies.
   Strengthen U.S.-China cooperation in the context of the 
        International Energy Agency.
   Consultation with one another, and with other regional 
        nations, to maintain open sea lanes; that could reassure China 
        that the U.S. will not use its naval power to leverage China on 
        oil.
   Strengthen established regional groups that include China, 
        the U.S., and other Pacific nations to address environmental 
        and energy supply issues.

    Helping China to increase domestic energy output using state-of-
the-art, environmentally responsible, technologies would slow the 
growth of its oil import dependence, reduce imbalances in global 
markets, dampen global price pressures, and contain the process of 
global warming. And cooperation on these broad energy issues can 
strengthen broader U.S.-China ties. The alternative--frequent energy 
confrontations--benefits neither country.
There Are No Silver-Bullet Solutions
    Success in improving the nation's energy security posture will 
demand significant public and private investment--supported by 
meaningful tax and other non-tax incentives like loan guarantees--over 
a sustained period. Because of the volatility of markets and the 
strategic role of oil, a considerable amount of government support is 
needed to provide the necessary incentives through a supportive and 
reliable regulatory, and tax environment if we are able i) to reduce 
America's oil vulnerability; ii) strengthen this nation's capacity to 
produce oil and alternative sources of energy; and iii) utilize energy 
more efficiently and in an environmentally responsible way. The U.S. is 
capable of major breakthroughs if all elements of our society work 
together.
    The good news is that we Americans have it within our power and our 
technological and financial capacity to take meaningful steps to reduce 
oil dependence and increase energy security using both proven methods 
and technologies and our ingenuity and entrepreneurial capacity to 
develop new breakthroughs.

   Improving efficiency: In the view of the Council, the most 
        important thing the U.S. can do to lessen its oil dependence in 
        the near and medium-term is to utilize oil considerably more 
        efficiently. With the goal of once again halving oil 
        intensity--as in the 1980s and 1990s--in the space of two 
        decades, Americans can do much to protect the economy against 
        the effects of oil shocks that can be unleashed by forces 
        beyond our control. Improved vehicle fuel efficiency is the 
        single most important avenue for further cutting the nation's 
        oil intensity.
   We must face the hard fact that in the U S. oil is primarily 
        a transportation fuel; unless we can dramatically curb the use 
        of oil in our cars and trucks, we will be unable to reduce our 
        oil dependence. Currently the direction is not positive; 
        through 2030 oil usage by SUVs and light duty trucks is 
        expected to surge by roughly 77%. The transportation sector 
        accounts for nearly 70% of all the oil the country uses; and 
        oil fuels almost 97% of all transportation. With most of the 
        vehicles on the nation's roads operating at efficiency levels 
        far below what is achievable with currently available 
        technologies, there is a clear opportunity to realize sizable 
        fuel economy gains without overall loss of safety or functional 
        utility. We propose empowering the National Highway Traffic 
        Safety Administration (NHTSA) to mandate annual fuel efficiency 
        increases of 4% while allowing for these increases to be 
        postponed or constrained if economic, technical, or safety 
        impediments are demonstrated.
   Increasing stable supply. As a second means of improving 
        America's oil risk profile, the Council recommends efforts to 
        increase the production of oil in stable regions of the world, 
        including in the U.S., Canada, and Mexico. We must move beyond 
        the drill/don't drill debate for this simple reason: by 
        facilitating the discovery and recovery of conventional oil 
        resources, in conjunction with stricter environmental 
        standards, American investment and the capabilities of this 
        nation's formidable oil experts and oil service companies can 
        ease the tight supply conditions that unsettle oil prices and 
        lessen the probability that even modest supply shortfalls will 
        trigger an international oil crisis. By the same token, a 
        robust nuclear power program also makes great sense.
   Supplies abroad. Just as significantly, by working to ensure 
        the rule of law, sanctity of contracts, and stable investment 
        climates abroad, America can help to lower the likelihood of 
        future disruptions. There a great many potential projects that 
        can enable the world to diversify the sourcing of oil away from 
        its present growing concentration on the Middle East. By 
        utilizing groups such as the International Energy Forum--a 
        ministerial dialogue among major energy producers and consumers 
        established in 2003--the conditions for increased investment in 
        such projects can be enhanced.
   Developing alternatives. Third, America can lead the way in 
        expanding the availability of alternatives to petroleum-based 
        fuels. Diversifying our transportation fuel supply must be a 
        key part of any comprehensive effort to improve U.S. energy 
        security. Without an expanded supply of alternatives, 
        conventional petroleum will continue to power nearly all of our 
        motor transport. Such reliance on a single non-substitutable 
        input creates profound economic dangers. To date, through the 
        help of federal policies such as the Renewable Fuels Standard, 
        the phase-out of MBTE as an additive, and tax incentives, corn-
        based ethanol has developed as one of the most successful 
        domestic alternative transportation fuels. Production in the 
        United States rose from 1.4 billion gallons a year in 1995 to 
        about 4 billion in 2005.
          Although this growth rate is impressive, it is merely a drop 
        in the bucket when compared to this nation's annual gasoline 
        consumption of 140 billion gallons; it is equivalent in terms 
        of energy content to only 2% of our gasoline demand. At a 
        maximum, corn-based ethanol may be able to displace 10% of our 
        gasoline use before corn demand outstrips supply. Consequently 
        if we want to have a significant impact on reducing our 
        consumption of petroleum-based fuels, the federal government 
        must encourage the development and commercialization not only 
        of dedicated energy producing crops such as corn and sugar, but 
        also of other potentially large-volume bio-fuels like 
        cellulosic ethanol (which are low cost, do not compete with the 
        food chain, and provide another revenue stream for farmers) 
        that is generated from forest residue and agricultural waste 
        such as wheat straw, switch grass, and corn stover. 
        Technologies like cellulosic ethanol are poised to dramatically 
        raise bio-fuels production by shifting acreage-to output 
        ratios.
          However, to transform this promise into reality, existing 
        federal policies, like the federal loan guarantee program for 
        innovative technologies must be fully funded and implemented; 
        and new policies, which encourage and support investment in 
        commercial facilities and related transportation infrastructure 
        must be readily adopted.
          There are two specific policy changes that I believe would 
        enhance the development and commercialization of renewable 
        energy.
          The first is for Congress and the Administration to take a 
        longer term perspective in the way tax incentives are 
        structured. For example, with respect to the production tax 
        credit (PTC) for renewable energy sources like wind and 
        geothermal, the credit is available to projects that are placed 
        in service before January 1, 2009. Historically this credit has 
        been renewed only for short periods of time and often after 
        great uncertainty and delay. This on-again, off-again process 
        has added significant uncertainty to such projects and 
        increased their costs. Therefore a longer-term extension of the 
        PTC, say for five years would help to avoid such problems.
          The second is to alter the structure of tax incentives to 
        encourage investment from additional categories of investors, 
        including small investors, by enabling them to benefit from tax 
        incentives--thereby increasing the availability and lowering 
        the cost of capital for these projects. For example, the way 
        the law is now written retail investors and taxpayers paying 
        the alternative minimum tax cannot use the production tax 
        credit for investment in wind projects; allowing the use of 
        master limited partnerships for these types of projects would 
        broaden the group of investors who could help to finance them.
          It is worth noting that many of the new technologies being 
        developed involve high technical risk, significant costs, and 
        regulatory uncertainties--and that costs of demonstration 
        projects to show that these technologies can be deployed on a 
        commercial scale as well as those associated with their 
        commercial development are significantly greater than the 
        initial R&D costs. Therefore, maximizing the range of investors 
        supplying capital, providing reliable incentives, and creating 
        and funding policies that reduce the significant financial 
        risks associated with these projects are critical to advancing 
        the process of proving and commercializing innovative energy 
        alternatives.
   Managing risks: In the Council's view, we must manage risk 
        within the interdependent global oil economy. In our dangerous 
        world, threats are one commodity not in short supply. America 
        contributes far more than any other nation to protecting this 
        global infrastructure, and the time has come for other nations 
        to expand their own efforts. All nations have an interest in 
        the stability of the global oil infrastructure, and a variety 
        of international efforts could help to ensure the smooth flow 
        of oil. New multilateral accords should play a role, but there 
        are also opportunities for expanded reliance on existing 
        organizations such as the Gulf Coordination Council, NATO, or 
        ASEAN. A common interest in ``oil security maintenance'' in 
        partnership with producing nations offers real potential to 
        improve regional security in areas of rising geopolitical 
        competition by creating frameworks for pragmatic international 
        cooperation. Where appropriate, the U.S. should provide 
        exporting countries with diplomatic support as well as with 
        counter-terrorism training and other military aid.

    I urge you to review the Council's detailed recommendations, which 
are contained in our published report. We will be glad to provide any 
further clarifications you may require.
The Capabilities of the American People
    Last week, the nation mourned the passing of our 3 8th President, 
Gerald R. Ford--for whom I had the great privilege of working. 
President Ford left a legacy of honesty, integrity and decisiveness. 
These aspects of his leadership were particularly evident in his 
handling of energy security. In his 1975 State of the Union address, 
President Ford recognized the energy dangers threatening the country. 
He expressed a ``very deep belief in America's capabilities,''--its 
innovative capacity and technological skills to overcome its growing 
dependence on imported oil. He also rallied support for fuel efficiency 
standards. I share President Ford's optimism in the capacity of 
Americans to respond to the challenge of growing energy dependence, and 
his belief that Americans will rally around tougher energy measures, if 
they are given strong leadership.
    America has a long history of pulling together in the face of 
national security challenges. I am currently completing a book entitled 
The Price of Liberty: How America Pays for its Wars. In all the major 
national security challenges of the twentieth century, Americans 
demonstrated a remarkable willingness to make patriotic wartime 
sacrifices. During World War I and World War II, American's not only 
paid dramatically higher taxes but also participated in massive bond 
drives to mobilize billions of dollars to support out troops. 
Roosevelt's Secretary of the Treasury Henry Morgenthau, when asked 
about the significance of such drives, said that they were launched not 
only to raise massive amounts of funds, but also to respond to people 
who asked ``What can I do to help.'' Today, the answer to this question 
lies not in buying more bonds but in buying less gasoline.
    Since 9/11 there have been no major bond drives as in past wars--
and only limited steps to reduce our dependence on oil. The time has 
come to recognize that energy security is central to the national 
security challenges of twenty-first century, and to present the 
American people with the unvarnished truth regarding how oil affects 
the struggle in which we are engaged. We must meet the threats we face 
in the same spirit as our parents and grandparents during past wars--
with far-sighted patriotism and willingness to compromise narrow 
partisan, ideological, philosophical and economic positions in the 
long-tern national interest.
    There are enormous dangers in facing the challenges of a post-9/11 
world with a pre-9/11 approach to energy that relies so heavily on oil 
from some of the most vulnerable areas of the world and sustains price 
levels that benefit countries such as Iran and Venezuela that seek to 
undermine our interests and threaten our friends. American leaders and 
the American people have rallied the country in past wars; the 
challenge is to do so again,
    I thank you again for this opportunity to testify.

    The Chairman. Thank you very much.
    Next is General Charles Wald, who is the former deputy 
commander of the U.S. European Command, and he has been very 
involved with the Energy Security Leadership Council. We very 
much appreciate his being here today to give us his views.

 STATEMENT OF GENERAL CHARLES WALD, U.S. AIR FORCE [RETIRED], 
  FORMER DEPUTY COMMANDER, U.S. EUROPEAN COMMAND, AND MEMBER, 
               ENERGY SECURITY LEADERSHIP COUNCIL

    General Wald. Thank you, Mr. Chairman and members of the 
committee, for the opportunity to discuss the global oil 
balance and its impact on U.S. and national security.
    I recently retired from the Air Force after 35 years of 
service and during my career had the opportunity to fly combat 
over Vietnam, Cambodia, Iraq and Bosnia and learned much 
regarding how to use military assets to effectively solve 
national security problems.
    But I also learned that many believed the U.S. military is 
solely responsible for security. I like to call this the ``Dial 
1-800-The-U.S.-Military'' syndrome, because it reflects how 
people assume the U.S. military is a toll-free resource that 
can be called on to perform tasks that no one else has either 
the capability or will to execute.
    I recall a recent meeting with several major global oil 
company executives in Kazakhstan. Before we began our 
discussion, one of the executives thanked me and the U.S. 
military for protecting the free flow of oil around the world. 
The executive's world view included the expectation that the 
U.S. military will be there to provide worldwide security and 
to ensure the free flow of oil without any assistance from 
others. This struck me, and frankly, does not seem like a good 
model, particularly for the United States. The U.S. cannot and 
should not be everywhere to protect all the vulnerable 
components of the global oil infrastructure.
    With regard to the oil dependence issue, military response 
and capabilities are by no means the only effective tools 
available and in many cases are not appropriate. In fact, the 
single most effective step the United States can take to 
improve its energy security is to increase transportation 
efficiency.
    The transportation sector is responsible for nearly 70 
percent of the oil the United States consumes. CAFE standards 
legislated in 1973 during the Arab oil embargo were 
instrumental in helping America lower oil usage by the 1980's, 
but there has been little progress since the original mileage 
targets were met.
    As a consequence, America's light-duty vehicle fleet now 
has the worst average fuel efficiency in the developed world. 
America must do better in this area. That is why, as you 
mentioned, the Energy Security Leadership Council has 
recommended vehicle efficiency standards that require 4 percent 
annual improvements in mileage per gallon performance but with 
regulatory off-ramps.
    The National Transportation Safety Administration finds the 
4-percent requirement to be technically infeasible, unsafe or 
not cost effective.
    Some may be surprised to hear from a former General talk 
about fuel efficiency standards but they shouldn't be. In the 
military, we learned that forced protection isn't only about 
protecting weak spots, it's also about reducing vulnerabilities 
before you go into harm's way. That's why lowering the Nation's 
demand for oil is so critical.
    Nearly all of our U.S. military commands have some oil 
security tasks and in essence they provide a blanket of 
security that benefits all nations. Central Command guards 
access to the oil supplies in the Middle East; Southern Command 
defends Colombia's Cano Limon pipeline; Pacific Command patrols 
the tanker routes in the Indian Ocean, the South China Sea and 
the Western Pacific; and my last assignment, as deputy 
commander of European Command, which included, by the way, most 
of Africa. We patrolled the Mediterranean, provided security in 
the Caspian Sea and off the West Coast of Africa.
    During that assignment, I became more appreciative of the 
size and scope of the oil security challenge. While surveying 
that challenge, it became apparent that the U.S. military could 
not protect that vast infrastructure without partners--and 
trust me, there should be partners in this mission. The free 
flow is clearly in the best interests of people all over the 
world. These interested parties certainly cannot replicate all 
the capabilities of the U.S. military, but their contributions 
can free up military tasks that only the U.S. military can 
successfully accomplish.
    That's why we created a program to train local populations 
and militaries in the Caspian region, to develop effective 
policing capabilities. That's also why we worked and engaged 
international oil firms in creating programs for protecting our 
assets. At the end of the day, this cooperative government, 
industry and military approach is the only realistic way to 
address the growing vulnerability of our worldwide supply.
    The armed forces of the United States have thus far been 
successful in fulfilling our energy security mission and they 
continue to carry out their duties professionally and with 
great courage. As a result of this success, many have come to 
believe--and I believe, falsely--that energy security can be 
achieved solely by military means. We need to change this 
paradigm because the U.S. military is not the best instrument 
for confronting all the strategic dangers emanating from oil 
dependence. The 1973 oil embargo is the most famous example of 
the use of energy as a political strategic weapon.
    Currently, it has been Russia that has shown the most 
willingness to use oil as a political tool. At the beginning of 
2006, Russia suspended natural gas exports to the Ukraine, 
which, in turn, withheld natural gas destined for Western 
Europe. Again, just this week, Russia has stopped natural gas 
exports to Belarus, with much the same effect as the 2006 
event.
    In an oil-dependent world facing increasingly tight 
supplies, the growing power of oil exporting countries and the 
shift in strategic calculations of other important countries 
have all added up to lessen U.S. diplomatic leverage.
    Iran, which exports to the United States' European and 
Asian allies, has threatened the use of the oil weapon to 
retaliate against efforts to constrain their nuclear program. 
The European Union relies on Middle Eastern oil, and Russian 
gas continues to complicate U.S. foreign policy efforts, 
especially when considering our efforts to stop Iran from 
developing nuclear weapons. China, with its rapidly growing 
dependence on foreign oil also blocks U.S. diplomatic 
initiatives in an effort to strengthen its own ties with oil 
exporters.
    Given all these factors, it is imperative that the United 
States make energy security a top strategic priority. Toward 
that end, we should mobilize and leverage all of our national 
security resources, including our economic power, our 
investment markets, our technological products and our 
unsurpassed military strength.
    I've mentioned many specific recommendations in my written 
testimony. One recommendation I would like to mention here is 
to call for the U.S. Government to reorganize its bureaucracy 
to better address the needs of a comprehensive international 
energy strategy and I recommend the Department of Defense, as 
was mentioned earlier for the National Security Council, to 
designate an individual as their energy security policy expert 
and director.
    In sum, we need a comprehensive national security strategy 
for energy security. We must be prepared for sudden supply 
shocks triggered by terrorism or politics. We must promote 
greater diversity of fuel options while improving the 
efficiency of our Nation's fleet. Most of all, we must have the 
courage to shape the future rather than to succumb to the 
paralysis of resignation. It is time for America to lead the 
way in constraining oil consumption and boosting stable oil 
production, to work with other nations to secure its production 
of energy products and to maintain the military resources that 
will continue to be essential for ensuring energy security.
    These are not easy tasks. Making progress will take 
enlightened and courageous leadership. I thank you all for the 
opportunity to discuss this important issue to our national 
security.
    [The prepared statement of General Wald follows:]
  Prepared Statement of General Charles F. Wald, USAF (Ret.), Former 
 Deputy Commander, U.S. European Command, and Member, Energy Security 
                           Leadership Council
    Chairman Bingaman and Members of the Committee, I thank you for 
inviting me to talk to you about the global oil balance and its impact 
on U.S. economic and national security. My friend Bob Hormats has done 
a great job describing the work of the Energy Security Leadership 
Council on which we both serve, and let me say that I agree completely 
with his assessment that oil dependence is one of the most serious 
economic and national security challenges facing this nation.
    Please allow me the opportunity to explain. I retired from the U.S. 
Air Force last July after thirty-five years of service. During my 
career I flew combat missions over Vietnam, Cambodia, Iraq, and Bosnia, 
and I learned a lot about how to use military assets to effectively 
solve national security problems. But I also learned that a lot of 
people think the military is solely responsible for national security. 
I like to call this the ``Dial 1-800-The U.S. Military'' syndrome, 
because it reflects how people assume the military is a ``toll-free'' 
resource that can be called on to perform tasks that no one else has 
the capability for or the will to execute. I remember once I was 
introduced to some oil company executives in Kazakhstan, and before we 
began talking one of them thanked me and the U.S. military for 
protecting the flow of oil around the world. He was serious and sincere 
about this, and I was seriously concerned. This man's world view 
included the expectation that the U.S. military will be there to 
provide security all over the world to ensure the free flow of oil 
without assistance from others. It did not seem like a good model to 
me.
    And it's not just a matter of cost, though this approach does 
burden the military's budgets as well as its personnel and their 
families. It is really an issue of recognizing that true national and 
economic security must rest on a nation's full strength, not just on 
the backs of its military. This is necessary because some threats 
cannot be mastered through military means. In the case of the oil 
dependence problem, military responses are by no means the only 
effective security measures, and in some case are no help at all.
    In fact, the single most effective step the U.S. can take to 
improve its energy security is to increase transportation efficiency. 
The transportation sector is responsible for nearly 70% of all the oil 
the country consumes. Within the transportation sector, oil--nearly 13 
million barrels per day of it--accounts for 97% of delivered energy. 
More than 8 mb/d are used to fuel the over 220 million light-duty 
vehicles that Americans rely on for mobility. For thirty years, these 
vehicles have been subject to government-mandated Corporate Average 
Fuel Economy (CAFE) standards enacted in the aftermath of the 1973-1974 
Arab oil embargo. CAFE was instrumental in helping Americans lower oil 
usage by the early 1980s, but unfortunately its requirements for cars 
have remained essentially unaltered since they were put in place and 
those for light trucks have been improved only slightly. As a 
consequence, America's light-duty vehicle fleet now has the lowest 
average fuel efficiency in the developed world.
    America must do better in this area, and that is why the Energy 
Security Leadership Council has recommended vehicle efficiency 
standards that require 4% annual improvements in miles per gallon 
performance, but with regulatory ``off-ramps'' to protect manufactures 
and consumers if analysis by the National Highway Traffic Safety 
Administration (NHSTA) finds 4% to be technically infeasible, unsafe, 
or not cost-effective for a given year.
    Some in the audience may be surprised to hear a former general talk 
about fuel efficiency standards, but they shouldn't be. In the military 
you learn that force protection isn't just about protecting weak spots, 
it's about reducing vulnerabilities before you get into harm's way. 
That's why lowering the nation's demand for oil is so important. If we 
can lessen the oil intensity of our economy, making each dollar of GDP 
less dependent on petroleum, that will mean we're less vulnerable if 
and when our enemies do manage to successfully attack elements of the 
global oil infrastructure. The best ways to reduce oil intensity are to 
improve efficiency and to develop the ability to produce and use 
realistic amounts of alternative fuels such as ethanol.
    Political forces have often portrayed increased supply and 
decreased demand as mutually exclusive ambitions. As I have been 
saying, the U.S. needs a comprehensive policy for achieving genuine 
energy security. This policy should include increases in production in 
places like the Outer Continental Shelf along with strict new 
environmental protections. Increased production in the U.S. makes 
economic sense, since it will reduce the risk premium that currently 
inflates the global price of oil.
    Last but not least, they are energy security tasks that must 
involve the military, acting either alone or with partners around the 
globe. I'd now like to offer a bit of background in that area.
        the military's historical involvement in energy security
    The United States protects the global oil trade for the benefit of 
all nations. In part, this is because the U.S. has unmatched military 
capabilities. But another reason is that other nations know the U.S. 
military is out there doing the job.
    The implicit strategic and tactical demands of protecting the 
global trade have been recognized by national security officials for 
decades, but it took the Carter Doctrine of 1980, proclaimed in 
response to the Soviet Union's invasion of Afghanistan, to formalize 
this critical military commitment.
    The Carter Doctrine committed the U.S. to defending the Persian 
Gulf against aggression by any ``outside force.'' President Reagan 
built on this foundation by creating a military command in the Gulf and 
ordering the U.S. Navy to protect Kuwaiti oil tankers during the Iran-
Iraq War. The Gulf War of 1991, which saw the United States lead a 
coalition of nations in ousting Iraqi leader Saddam Hussein from 
Kuwait, was an expression of an implicit corollary of the Carter 
Doctrine: the U.S. would not allow Persian Gulf oil to be dominated by 
a radical regime--even an `inside force' that posed a dangerous threat 
to the international order. More recently, the security agenda in the 
Gulf has expanded beyond state actor aggression to include concerns 
about terrorist attacks on facilities and supply lines.
                             threats abound
    Since issuing his 1996 ``Declaration of War'' against the U.S. and 
its partners, Osama bin Ladin has warned of attacks on oil 
installations in the Persian Gulf. Last year, the world came close to 
experiencing an oil supply shock when an Al-Qaeda attack on the Abqaiq 
facility through which approximately 60% of Saudi Arabian oil exports 
pass was barely foiled. In addition to attacking physical 
infrastructure, Al Qaeda operatives have also targeted expatriates in 
their residential areas, in particular in Riyadh, Saudi Arabia (October 
2002) and in al-Khobar (May 2004).
    Iraq is also the scene of persistent insurgent and terrorist 
attacks on pipelines and pumping stations, especially in the North of 
the country. These attacks have severely limited Iraqi oil exports to 
the Mediterranean through Turkey, and they are a major reason why Iraqi 
oil production has stubbornly remained below its prewar peak. The lost 
output has cost Iraq billions of dollars at a time when it needs every 
dollar and while U.S. taxpayers have spent billions on the 
reconstruction of the country. But if violence continues, and 
especially if it spreads to the south, where most of the oil and export 
facilities are located, then all of Iraq's oil production could be at 
risk. The implications of this supply cut would be severe.
    The danger of attacks on shipping is proven--in October 2002, the 
French supertanker Limburg was rammed by a small boat packed with 
explosives off the coast of Yemen. Most oil shipments have to pass 
through a handful of maritime chokepoints. Roughly 80% of Middle East 
oil exports pass through the Strait of Hormuz (17 mb/d), Bab el Mandeb 
(3 mb/d), or the Suez Canal/Sumed Pipeline (3.8 mb/d). Another 11.7 mb/
d pass through the Straight of Malacca and 3.1 mb/d through the Turkish 
Straits. All of these passageways are vulnerable to accidents, piracy, 
and terrorism. Since alternative routes are lacking, the effect of a 
major blockage at one of these points could be devastating. Even 
unsuccessful attacks on tankers are likely to raise insurance rates and 
thus oil prices.
                      partnering for preparedness
    Nearly all of our U.S. military commands handle oil security tasks. 
Central Command guards access to oil supplies in the Middle East. 
Southern Command defends Colombia's Cano Limon pipeline. Pacific 
Command patrols tanker routes in the Indian Ocean, the South China Sea, 
and the Western Pacific. European Command is involved in oil security 
all the way from the Caspian Sea to West Africa.
    I happen to know more about European Command, because, in late 
2002, I was named its Deputy Chief. It was during this period of my 
service that I came to realize that I came face to face with the size 
and scope of the oil security challenge. The global economy relies on a 
massive oil infrastructure that stretches far beyond the Persian Gulf 
to pipelines in the Caucasus and offshore drilling rigs in the Gulf of 
Guinea. Surveying this situation, I realized that the U.S. military 
could not protect this vast infrastructure without partners. And, trust 
me, there should be partners out there, because the free flow of oil is 
in the best interest of many people all over the world. These 
interested parties certainly cannot replicate all the capabilities of 
the U.S. military, but their contributions can free up the military for 
tasks that only it can complete. That's why I made an effort to train 
local populations in the Caspian region to develop effective policing 
capabilities. It's also why I work to engage oil industry firms in 
protecting their assets. At the end of the day, this improved division 
of responsibilities will benefit the U.S. our Allies, and millions 
around the world.
                       military power has limits
    The armed forces of the United States have been extraordinarily 
successful in fulfilling their energy security missions, and they 
continue to carry out their duties with great professionalism and 
courage. But, ironically, this very success may have weakened the 
nation's strategic posture by allowing America's political leaders and 
the American public to believe that energy security can be achieved by 
military means alone. We need to change the paradigm, because the U.S. 
military is not the best instrument for confronting all of the 
strategic dangers emanating from oil dependence. This is particularly 
true when oil is used a political weapon.
    The 1973 Arab embargo is still the most famous example of the use 
of energy as a political strategic weapon. But in recent years, it has 
been Russia that has shown the most willingness to play this dangerous 
game, as at the beginning of 2006, when it stopped natural gas exports 
to the Ukraine, which in turn withheld the natural gas destined for 
Western Europe. The danger of conflict with a nuclear power like Russia 
should make it abundantly clear that there are limits on how we can use 
military power to guarantee energy flows. But we can take political 
steps to counter Russia's brandishing oil and natural gas as political 
weapons. Russia wants to join the World Trade Organization (WTO) as a 
full member. Russia's entry into this organization must be made 
contingent on its behavior. Russia must make a commitment to fostering 
energy security; there should be no reward for sowing insecurity.
    Of course, energy exporting governments don't need to resort to 
full-fledged embargoes to hurt the U.S. and other importers. Exporters 
can manipulate price through less drastic production cuts. Tellingly, 
after oil prices dropped from their 2006 peak of $78 to about $60 in 
the U.S. market, OPEC members began to cut back on production. 
Governments in oil-producing countries can also constrain future supply 
through investment decisions that lead to long-term stagnant or glowing 
growth in production and exports, or even decline. Often enough, future 
supply destruction is the unintended or accepted consequence of an 
insistence on government control of natural resources. Currently, an 
estimated 80-90% of global oil reserves are controlled by national oil 
companies (NOCs), which are highly susceptible to being constrained by 
political objectives, even if these undermine long-term supply growth. 
With this level of state-control, it's impossible to speak of a free 
market for oil.
    State-controlled production is frequently inefficient, relying on 
outdated technology and reserve management techniques. Consider the 
case of Venezuela. The demagoguery of Hugo Chavez led to a strike at 
that country's national oil company (PDVSA) in the winter of 2002-2003 
and then to the dismissal of thousands of well-trained petroleum 
engineers. Deprived of the services of expert personnel, Venezuela may 
suffer the permanent loss of hundreds of thousands of barrels per day 
of production. Chavez also worsened the financial terms for 
international oil companies operating in Venezuela, making it even less 
likely that emerging best practices will be employed in the country's 
oil fields.
    While major international oil companies and their advanced 
technology still maintain major stakes in Venezuela's oil industry, 
this is not the case in Russia, whose government has made it abundantly 
clear that it wants to maintain near absolute control over its energy 
resources. This power grab has curtailed foreign investment, and 
ultimately limited production as well.
    Russia's oil industry stands as a testament to the dangers of 
political meddling in oil production. After the collapse of the Soviet 
Union, Russian production plummeted to only 6 mb/d in the mid-1990s, 
but then the efforts of private companies helped push production back 
to over 9 mb/d, achieving 10% annual growth rates in 2003 and 2004.\1\ 
However, with the subsequent expropriations of private enterprises such 
as Yukos, the production growth curve has flattened. Government control 
over production in Russia will also adversely impact the massive 
Shtokman natural gas field and Sakhlain-2 oil projects. President Putin 
has determined that tight government control of resources is more 
important than the greater revenue that would accrue from increased 
production achieved through cooperation with Western oil companies.
---------------------------------------------------------------------------
    \1\ EIA, ``Country Analysis Brief: Russia,'' (January 2006), 
available online at www.eia.doe.gov/cabs/Russia/Full.html.
---------------------------------------------------------------------------
                   oil constrains u.s. foreign policy
    In an oil-dependent world facing increasingly tight supplies, the 
growing power of the oil-exporting countries and the shifting strategic 
calculations of other importing countries have lessened U.S. diplomatic 
leverage.
    Iran, which exports to the U.S.'s European and Asian allies, has 
threatened to use the ``oil weapon'' to retaliate against efforts to 
constrain the country's nuclear program. Russia's growing self-
assurance and assertiveness cannot be divorced from the leverage it 
enjoys because of its oil and gas resources.
    European Union reliance on Middle Eastern oil and Russian gas 
continues to complicate U.S. foreign policy efforts, especially as far 
as efforts to stop Iran from developing nuclear weapons are concerned. 
China, with its rapidly growing dependence on foreign oil, also blocks 
U.S. diplomatic initiatives in order to strengthen its own ties with 
oil exporters. Chinese opposition has helped thwart U.N. Security 
Council sanctions against Iran and prevented significant intervention 
in the Darfur region of Sudan.
                      confronting diverse dangers
    Giving all these factors, it is imperative that the U.S. make 
energy security a top strategic priority. Toward that end, we should 
mobilize all of our national security resources, including our economic 
power, our investment markets, our technology prowess, and our 
unsurpassed military strength. To borrow a metaphor from the energy 
sector, this broad approach will result in some dry-holes, but it 
should pay solid dividends over time.
    The U.S. can set an example with domestic actions. Curtailing 
demand is the most important security step we can take. But we should 
also demonstrate a willingness to increase domestic production in an 
environmentally-responsible fashion. The U.S. should also impress upon 
other major exporting countries that they need to more fully develop 
their oil and gas reserves. To enhance the global market's ability to 
respond to price signals and increase the reliability of global 
production, access to U.S. markets and global trade organizations 
should be contingent upon the granting of reciprocal access to foreign 
investment in energy production. Such access should then be protected 
by appropriate laws, regulations, and judicial systems that preserve 
the sanctity of contracts. In keeping with this reciprocity 
requirement, the U.S. must not take a protectionist stance when foreign 
nations seek to invest in U.S. oil companies, unless clear national 
security risks can be demonstrated.
    The U.S. should also encourage greater transparency and private 
ownership in the world's NOCs. This might mean promoting the creation 
of national oil companies in countries where oil ministries run energy 
operations, and promoting private majority ownership in those countries 
where state-run companies already exist. In the long-run, such efforts 
will depoliticize the decision-making process of oil investing and 
should lead to more exploration of oil in response to market demand.
    Iraq is the oil-exporting nation with which we have the most 
influence. It is also the country that could boost its oil production 
and exports most significantly in the medium and long-term (given some 
political stability). In fact, Iraq, the least developed OPEC country, 
has the potential to expand its oil production from the current 2.2 mb/
d to 6-8 mb/d over the next decade. It is also a country that 
desperately requires, and is eager for, foreign investment in its 
energy sector. The U.S. should encourage Iraq to take the steps 
necessary for increasing production. These steps should include 
improved energy infrastructure security efforts, increased capital 
expenditure in the energy sector, a viable Petroleum Law that will 
encourage necessary foreign investment, and a reconstituted NOC that 
more effectively excludes political considerations from its operations 
so as to boost operational efficiency.
    The U.S. government should also work with other governments to 
minimize the likelihood and impact of supply disruptions. In this 
respect, the U.S. should promote greater security of the global oil 
infrastructure, which includes everything from ports and tankers to 
well and pipelines. The keys to infrastructure security are protection, 
repair, and redundancy. This mission will require an expansion of 
contingency planning. Multilateral military and civilian rapid response 
teams should be formed to respond to attacks and repair damage. This 
will likely involve a good deal of American training of other 
countries' military and civilian agencies. It will also require the 
stockpiling of expensive spare parts in key strategic locations around 
the world. The U.S. and its allies should consider adding energy 
infrastructure protection as a role for NATO, for instance. Oil 
companies also need to be fully engaged in such an endeavor with 
funding and dedicated personnel.
    Arranging for oil-exporting nations to store more oil in or near 
major consuming nations whether in tankers, tanks or petroleum 
reserves--can serve as a way to minimize the impact of a supply 
disruption. The oil-producing countries could retain absolute control 
over that oil, including deciding when to release it and to keep 
profits from it. The is not a new idea; the U.S. Government and Saudi 
Arabia have at times raised the idea of storing Saudi oil in the United 
States, though the details were never worked out.\2\
---------------------------------------------------------------------------
    \2\ Patrick Clawson and Simon Henderson, ``Reducing Vulnerability 
to Middle East Energy Shocks: A Key Element in Strengthening U.S. 
Energy Security,'' Washington Institute for Near East Policy, policy 
focus #49 (November 2005).
---------------------------------------------------------------------------
    Among consuming nations, the U.S. should promote the build-up of 
strategic reserves in key locations across the globe. China and India 
are making some progress in this regard, but only very slowly; indeed, 
they are planning on building reserve capacity for only 15-20 days 
worth of imports, while the United States Government's Strategic 
Petroleum Reserve (SPR) now contains 700 million barrels, or the 
equivalent of about 60 days of imports. But building reserves is only 
half the task. There must be clear decision-making processes for when 
to use these reserves. These processes must be developed both 
domestically and internationally. Without clear release procedures, 
strategic reserves cannot offer maximum protection.
    One final recommendation that merits mention is a call for the U.S. 
government to reorganize its bureaucracy to suit the needs of a 
comprehensive international energy strategy. For example, in the 
Department of Defense, which has a salient role to play in global oil 
security, there is no civilian office that is dedicated to coordinating 
the efforts and needs of the military commands with respect to energy 
matters. An Office of Energy Security should be formed to do that.
    In sum, a comprehensive national security strategy must address 
numerous energy security issues. We must be prepared for sudden supply 
shocks triggered by terrorism or political action. We must also be 
ready to deal with the stagnation of global production and the 
increasing politicization of the global oil market. We must promote 
greater diversity of fuel options while improving the efficiency of our 
nation's vehicle fleet. Most of all, we must have the courage to shape 
the future rather to succumb to the paralysis of resignation. It is 
time for America

          1) to lead the way in constraining oil consumption and 
        boosting oil production;
          2) to work with other nations to secure the production and 
        flow of all energy products; and
          3) to maintain the military resources that will continue to 
        be essential for ensuring energy security.

    I thank you.

    The Chairman. Thank you very much.
    Our final witness this morning is Dr. Flynt Leverett, who 
is a senior fellow and director of the Geopolitics of Energy 
Initiative at the New America Foundation and also a visiting 
professor of Political Science at MIT. Thank you for being 
here.

 STATEMENT OF DR. FLYNT LEVERETT, SENIOR FELLOW AND DIRECTOR, 
   GEOPOLITICS OF ENERGY INITIATIVE, NEW AMERICA FOUNDATION, 
                         WASHINGTON, DC

    Dr. Leverett. Thank you, Senator Bingaman, Senator Domenici 
and members of the committee, for the chance to speak with you 
this morning. I will try to get to the heart of the topic for 
this hearing, namely the geopolitics of oil.
    I will start with a very stark assessment and that is, in 
my view, during the next quarter century, the most profound 
challenges to America's continued global leadership will flow 
from the strategic and political consequences of the structural 
shifts in global energy markets that previous witnesses have 
been laying out for you.
    And in the time that I have, I'd like to talk with you 
about what I see as those strategic and political consequences 
of the structural shifts in the global oil market and what they 
mean for American interests.
    On both the supply and demand side of the global oil 
market, we have seen strategic and political responses to the 
kinds of structural shifts that Dr. Birol and others have 
described for you.
    On the supply side, we've seen the rise of what a lot of 
folks call ``resource nationalism''. Resource nationalism is 
often defined as national government with oil and gas resources 
asserting their ownership rights over those resources in ways 
that work against the interests of international energy 
companies, something like Mr. Chavez's recent declaration about 
nationalizing projects to develop extra heavy crude in the 
Orinoco region.
    But there is another dimension to resource nationalism that 
I think is very important here and that is the use by energy 
suppliers of their status as suppliers in a tight market as a 
source of political leverage. Venezuela is a good example in 
this hemisphere, obviously Russia is an important example, but 
there are many others that you could lay out that are very 
important for American interests. Saudi Arabia, for example, 
using its unique status as the swing producer in the world oil 
market to cultivate a kind of alternative strategic partnership 
with China, as a hedge against a further deterioration in its 
traditional strategic partnership with the United States. This 
phenomenon, this aspect of resource nationalism will, I think, 
pose an increasingly serious set of challenges to American 
interests in coming years.
    On the demand side, we see an analogous phenomenon, what I 
describe as ``resource mercantilism'', namely the reliance of 
energy importing states, China and India being the outstanding 
examples, on national energy companies to secure access to 
overseas oil and gas resources on a more privileged basis than 
simple supply contracts.
    In terms of the significance of this phenomenon, I'm not 
particularly concerned about Chinese and Indian state-owned 
energy companies locking up some critical mass of oil and gas 
reserves and keeping them off of international markets. Today, 
the equity oil produced by the Chinese national energy company 
abroad amounts to less than .5 percent of all the oil that is 
produced in the world today. Even with the most optimistic 
assumptions of how many equity oil deals Chinese energy 
companies will be able to conclude around the world by 2020, 
you're still talking about no more than 2 percent of the oil 
that is going to be produced in the world.
    It's not so much the market impact, but it's really the 
geopolitical impact that is important. As Chinese and Indian 
state-owned energy companies go about pursuing these deals with 
the support of their governments, it basically puts these 
countries into competition for geopolitical influence with the 
United States and puts us into competition for influence with 
these countries in very strategically important regions--the 
Middle East, central Asia, Sub-Saharan Africa--and if present 
trends continue unchecked, this is going to become an 
increasingly important source of geopolitical tension around 
the world and an increasingly important source of challenges 
for U.S. interests.
    Now, resource nationalism and resource mercantilism pose 
significant challenges to American interests, each in its own 
way, but I would also point out that these two phenomena can 
intersect in some particularly challenging ways for the United 
States.
    One of the ways in which they intersect is in what I have 
described as a ``new axis of oil'', namely a loose coalition of 
states--energy-producing states and energy-importing states, 
loosely organized around a Sino-Russian axis. This axis of oil 
is bolstering Sino-Russian cooperation on a whole host of 
strategic issues and I believe this axis of oil is emerging as 
the principle counterweight to American hegemony in global 
affairs.
    Let me give you a couple of examples of what I mean. The 
axis of oil, this Sino-Russian axis of oil, has been quite 
successful over the last 2 to 3 years in essentially rolling 
back the projection of U.S. influence into central Asia 
following the September 11 terrorist attacks. Russia and China 
have cooperated in standing up the Shanghai Cooperation 
Organization, the world's largest regional security 
organization and the only such organization in the world in 
which the United States is not a participant. Working together 
in the Shanghai Cooperation Organization, Russia and China have 
basically been able to lock us out of central Asia.
    Another example of the way the axis of oil is working 
against American influence is the Iranian nuclear issue. As 
other witnesses have suggested, it is Chinese and Russian 
collaboration, particularly in the Security Council, but in 
other arenas as well, that is frustrating a very significant 
segment of U.S. policy objectives on the Iranian nuclear issue.
    Let me stick with Iran for a minute because I think that 
the geopolitical and geo-economic stakes go well beyond the 
nuclear issue, as important as that is. There is, I would 
argue, a broader strategic competition underway between the 
United States on the one hand and Russia and China on the other 
concerning Iran's economic and political role in the Middle 
East and global energy markets in coming decades. Essentially, 
the outcome of this competition hinges on which countries will 
assume leading roles in helping Iran develop its hydrocarbon 
resources.
    Iran's resource base is truly impressive. If you take its 
gas reserves--the second largest in the world--convert them 
into barrels of oil equivalent, and add them to their oil 
reserves--also the world's second largest--you basically have a 
situation in which the aggregate hydrocarbon reserves of Iran 
and the aggregate hydrocarbon reserves of Saudi Arabia are 
effectively the same. And each of those countries is 
significantly larger in terms of aggregate hydrocarbon reserves 
than Russia.
    What this means, given Iran's low rate of production, is 
that Iran is basically the only major energy producing country 
in the world that has the resource potential to increase its 
production of both oil and natural gas by orders of magnitude 
in coming decades. But to do that, Iran is going to have to get 
a lot of investment and a lot of technology transfer.
    U.S. policy bars U.S. energy companies from participating 
in that process. We threaten secondary sanctions against 
European companies that would consider participating in those 
projects. And all of that, combined with pretty lousy 
investment policies inside Iran, has had an effect. There has 
been serious under-investment in uranium production capacity. 
Some have even suggested that given the level of under-
investment, Iran is going to face a serious crunch in terms of 
its ability to meet its domestic needs and continue exporting 
in a significant way in coming years.
    But that assumes that Iran doesn't have an alternative and 
Iranian officials and energy executives will tell you that, 
increasingly, they think they do have an alternative. It's a 
three-pronged alternative. It means taking advantage when there 
are European companies that are prepared to do deals in Iran. 
Fine, let them do the deals. Second, it involves developing 
strategic partnerships with--let me call them generically 
third-world energy companies. Chinese energy companies are at 
the top of that list and Chinese energy companies are 
increasingly committing to put very, very significant sums of 
investment capital into the development of Iranian oil and gas. 
Then the third prong of this strategy, the most recent prong, 
is cooperation with Russia, particularly to help Iran develop 
its potential as a gas exporter. In return for that help, Iran 
has agreed to--the phrase that is used is to coordinate the 
marketing of its gas exports to ensure that Iran's emergence as 
a major gas exporter does not work against Russian interests. 
This is the strategy that the Iranians think will get them out 
of the box that they are in now. The United States and even 
Europe, to a large extent, are basically irrelevant to that 
strategy.
    The potential for Russian and Chinese cooperation to 
develop Iran's hydrocarbon resources, I think, the potential 
for that cooperation and its impact on American interests goes 
beyond Iran. Such cooperation has the potential, basically, to 
remake the geopolitics of all Eurasia; to establish Moscow as a 
leading energy supplier, not just to Europe, but also to Asia; 
to have Moscow as the major influence on energy trade in this 
part of the world and to consolidate the Sino-Russian axis of 
oil as the leading counterweight to American hegemony in 
regional and international affairs.
    Now, what can we do about this? I will briefly throw out 
three ideas.
    One is, we have to start taking energy seriously as a 
foreign policy issue and prioritizing energy security relative 
to other foreign policy objectives. Let me give you an example. 
Does it make sense for the United States to push for Ukrainian 
accession to NATO when domestic politics in the Ukraine do not, 
in the end, support that objective? It involves further 
strategic alienation between the United States and Russia. At a 
time when we're looking for Russian cooperation on energy, on 
Iran, on a whole host of other issues, does it make sense to go 
down that road or does it make more sense to incorporate energy 
interests in a broad strategic dialog with Russia and recognize 
that on some objectives that we have regarding Russia, that 
energy security may be more important than those priorities?
    The second point is, I think we need a grand bargain 
between the United States and Iran.
    Senator Domenici. What did you say that was, sir? Repeat 
that.
    Dr. Leverett. I think there needs to be a grand bargain 
between the United States and the Islamic Republic of Iran. My 
criticism of the Baker-Hamilton Iraq Study Group 
recommendations on engaging Iran is not that they go too far, 
but that they don't go far enough. Unless there is a 
comprehensive deal between the United States and Iran in which 
all of the major bilateral differences between the U.S. and 
Iran are resolved in a package, not only will there be no 
diplomatic solution to the nuclear issue, but basically, the 
United States will lose the race for Iran that I described to 
you a few minutes ago. I think it is very important that the 
United States embrace a comprehensive wrap approach with Iran 
as an important foreign policy objective.
    Third, I think it is critical that we take seriously the 
goal of encouraging the internationalization of Chinese and 
Indian state-owned energy companies. These companies are, 
despite their state-owned status, in many ways becoming more 
market-oriented, more profit-focused in their operations, in 
their strategies, in their planning, and they are increasingly 
willing, in significant ways, to operate autonomously from 
their national governments. This is a trend that we ought to be 
encouraging. In that regard, the political response in this 
country to the possibility that a Chinese energy company, which 
last year made a serious initiative to buy Unocal, I think, 
sent exactly the wrong message to the Chinese. We need to be 
encouraging the Chinese and the Indians to rely more on the 
market to meet their energy needs and, instead, in many of our 
political responses to them, we are sending a message that the 
United States will not let the market work in ways that will 
meet their needs, which will only encourage what are, from our 
perspective, the worst aspects of their current policies. Thank 
you very much.
    [The prepared statement of Dr. Leverett follows:]
Prepared Statement of Dr. Flynt Leverett,* Senior Fellow and Director, 
 Geopolitics of Energy Initiative, New America Foundation, Washington, 
                                   DC
---------------------------------------------------------------------------
    * Flynt Leverett is Senior Fellow and Director of the Geopolitics 
of Energy Initiative at the New America Foundation. He is also a 
visiting professor of political science at the Massachusetts Institute 
of Technology and a principal of Strategic Energy and Global Analysis, 
LLC. Previously, he served in government as senior director for Middle 
East affairs at the National Security Council, on the Secretary of 
State's Policy Planning Staff, and as senior analyst at the Central 
Intelligence Agency.
---------------------------------------------------------------------------
    Mr. Chairman, Senator Domenici, members of the Committee, thank you 
for the opportunity to speak with you about the global oil balance and 
its implications for America's national security and foreign policy.\1\ 
In my view, the most profound challenges to America's global leadership 
during the next quarter century are not posed by the risk of strategic 
failure in Iraq, further proliferation of weapons of mass destruction, 
or the growth and consolidation of extremist forces in the Islamic 
world. Rather, the most profound challenges to U.S. preeminence during 
the next 25 years flow from the strategic and political consequences of 
ongoing structural shifts in global energy markets, especially the 
global oil market. Most notably, cooperation between China and Russia 
on energy matters is bolstering Sino-Russian cooperation on strategic 
issues, effectively creating a Sino-Russian ``axis of oil'' as the 
principal counterweight to America's global hegemony.
---------------------------------------------------------------------------
    \1\ For more detailed presentations of the ideas offered in this 
testimony, see Flynt Leverett and Jeffrey Bader, ``Managing China-U.S. 
Energy Competition in the Middle East'', The Washington Quarterly 
(December 2005); Flynt Leverett and Pierre Noel, ``The New Axis of 
Oil'', The National Interest (Summer 2006); and Flynt Leverett, ``The 
Race for Iran'', The New York Times, June 20, 2006.
---------------------------------------------------------------------------
             resource nationalism and resource mercantilism
    The basic structural shifts in global energy markets I see boil 
down to two important trends:

   The first is the tightening of margins between global demand 
        for crude oil and installed upstream productive capacity. The 
        global oil supply has grown steadily in recent years, and there 
        is considerable evidence that it will continue to grow for many 
        years to come, given suitable oil prices and appropriate levels 
        of investment. But, in recent years, global demand for crude 
        oil has been growing faster than supply--in no small part 
        because of burgeoning energy demand from emerging economic 
        powerhouses in Asia, particularly China and India. In coming 
        years, demand is likely to continue bumping up against 
        installed productive capacity.
   The second important structural shift in the global oil 
        market is the progressive concentration of the world's oil 
        reserves under the control of national governments and national 
        oil companies, especially in the Middle East and the former 
        Soviet Union.

    Taken together, these two trends are generating strategic and 
political responses on both the supply side and the demand side of the 
global oil market. On the supply side, many have noted the rise of 
``resource nationalism''. Resource nationalism is often defined as 
national governments' assertion of ownership rights over oil and gas 
reserves against the interests of international energy companies. But 
there is another dimension to resource nationalism on which I want to 
focus--that is, national governments making decisions about the 
production and marketing of the hydrocarbon reserves under their 
control not only on the basis of economic factors, but also on the 
basis of strategic and political calculations.
    There are many examples of how resource nationalism can challenge a 
wide range of American interests. These include:

   Russia's application of energy ``levers'' to reestablish its 
        hegemonic position in the post-Soviet space and bolster its 
        strategic position vis-a-vis Europe and East Asia;
   Venezuela's exploitation of its dominant position as a 
        Western hemisphere energy producer and exporter to weaken 
        America's standing in parts of Latin America; and
   Saudi Arabia using its unique status as the ``swing 
        producer'' for the global oil market to cultivate a deepening 
        strategic relationship with China as a ``hedge'' against 
        precipitous deterioration in the Kingdom's traditional 
        strategic partnership with the United States.\2\
---------------------------------------------------------------------------
    \2\ On this point, see also Flynt Leverett, ``Reengaging Riyadh'', 
in Flynt Leverett, ed., The Road Ahead: Middle East Policy in the Bush 
Administration's Second Term (Washington, DC: The Brookings Institution 
Press, 2005).

    On the demand side, we are witnessing an analogous phenomenon, 
which I describe as ``resource mercantilism''--that is, the reliance of 
energy importing states on national energy companies to secure access 
to overseas oil and gas resources on more privileged bases than simple 
supply contracts. Resource mercantilist states provide various kinds of 
support to their national oil companies' efforts to acquire hydrocarbon 
assets abroad and, like resource nationalist states, often seem to base 
their actions in global energy markets on strategic calculations as 
well as on commercial and economic considerations.
    The outstanding exemplars of resource mercantilism today are, of 
course, China and India, both of which perceive increasingly acute 
vulnerabilities to their energy security stemming from their growing 
reliance on imported hydrocarbons to fill critical portions of their 
energy mix. And, there are a growing number of examples of how resource 
mercantilism can work against U.S. interests, although not in the way 
that many observers initially anticipated. In this regard, while 
increased demand from China and other rising Asian economies has had a 
very direct effect on global oil prices, there is little evidence that 
Chinese and Indian ``equity oil'' deals are keeping or will keep an 
economically or strategically significant part of the world's oil 
reserves ``locked up'' and unavailable to international markets.

   Currently, oil produced from Chinese and Indian overseas 
        equity assets represents less than one percent of the oil 
        produced and traded worldwide.
   If the most optimistic projections of Chinese and Indian oil 
        and gas acquisitions abroad prove correct, overseas equity oil 
        production by Chinese and Indian national energy companies 
        might represent roughly 2 percent of total worldwide production 
        in 2020.

    However, statist approaches in the external energy strategies of 
rising Asian economies are becoming a serious source of geopolitical 
tension.

   In East Asia, competition between Beijing and Tokyo over a 
        variety of specific energy deals, a bilateral dispute about 
        sovereignty over possible natural gas reserves in the East 
        China Sea, and jockeying over the ultimate destination of a 
        projected Russian oil pipeline to Asia have all contributed to 
        the deterioration of Sino-Japanese relations in recent years.
   Even more significantly, China's statist approach to 
        external energy initiatives has become a source of geopolitical 
        tension between China and the United States. In particular, 
        China's search for oil is making it a new competitor to the 
        United States for influence, especially in the Middle East, 
        Central Asia, and Africa. This, in turn, is creating new 
        foreign policy as well as commercial options for energy 
        exporting states at odds with U.S. foreign policy goals, 
        including Iran, Sudan, and Syria.\3\
---------------------------------------------------------------------------
    \3\ Statist strategies for accessing hydrocarbon resources around 
the world--with their associated inclination toward corruption, 
provision of ``soft'' loans, and offers of investment and aid in 
unrelated projects and sectors--also challenge the rules-based 
international order for trade and investment in energy that the United 
States has long championed and, in some cases, weaken the leverage that 
Western governments and international financial institutions can use to 
promote better governance and transparency in oil-producing countries.
---------------------------------------------------------------------------
                          the new axis of oil
    As separate phenomena, resource nationalism and resource 
mercantilism are posing increasingly serious challenges to U.S. 
interests around the world. But the challenge to America's global 
leadership becomes far more profound when these phenomena intersect, as 
they do in what I have called a ``new axis of oil'' that is acting as a 
counterweight to American hegemony on a widening range of issues. The 
heart of this undeclared but increasingly assertive axis is a growing 
geopolitical partnership between Russia (a major energy producer) and 
China (the paradigmatic rising consumer) against what both perceive as 
excessive U.S. unilateralism in world affairs. Sino-Russian 
collaboration provides the essential frame for a loose and shifting 
coalition of energy exporting and energy importing states that acts in 
specific ways to challenge U.S. leadership in world affairs.
    The impact of the new axis of oil on American interests has already 
been felt in the largely successful Sino-Russian effort to minimize 
U.S. influence in Central Asia. Sino-Russian cooperation has been 
critical to the rise of the Shanghai Cooperation Organization, the 
world's largest regional security organization (in terms of the 
populations and territory of participating states) and the only 
regional security organization in the world in which the United States 
does not participate. Working through the Shanghai Cooperation 
Organization, Moscow and Beijing have collaborated over the past three 
years to cap and then roll back the post-9/11 extension of American 
influence into Central Asia.
    The new axis of oil is also reflected in Sino-Russian cooperation 
to frustrate a significant segment of U.S. policy objectives regarding 
the Iranian nuclear issue. Both Russia and China have complicated 
policy agendas toward the Islamic Republic. To be sure, neither Moscow 
nor Beijing sees Iranian acquisition of a nuclear weapons capability as 
a Iran as a desirable turn of events. But both are prepared to tolerate 
a higher-level of Iranian nuclear development than the present U.S. 
administration. Moreover, each has other interests that it wants to 
pursue with Iran.

   For Russia, these interests include exporting civil nuclear 
        technology and conventional military equipment. For China, they 
        include cultivating Iran as an energy supplier.
   And, both Moscow and Beijing have interests in collaborating 
        with Tehran in Central Asia to manage Sunni extremist threats 
        there and minimize U.S. influence. To these ends, Russia and 
        China have now included the Islamic Republic in the Shanghai 
        Cooperation Organization as an observer.

    In this context, neither Russia nor China will support multilateral 
sanctions against Iran that would put these various interests at risk. 
As a result, there is no prospect of getting the United Nations 
Security Council to impose sanctions on the Islamic Republic that would 
be stringent enough to leverage changes in Iranian behavior on the 
nuclear issue.
    Even more significantly, Russia and China see the controversy over 
Iran's nuclear activities as an important issue on which to ``draw 
lines'' against what both Moscow and Beijing consider excessive U.S. 
unilateralism in international affairs. In this regard, Russian and 
Chinese leaders considered the Iraq war a dangerous precedent and are 
determined not to see that precedent repeated in Iran. In the end, the 
United States or others may use military force unilaterally to try to 
delay Iran's nuclear development, but Moscow and Beijing will use their 
status as permanent members of the Security Council to ensure that 
there is no plausible international legitimation for such unilateral 
action.
                           the race for iran
    The geopolitical and geoeconomic stakes at play in Iran go well 
beyond the nuclear controversy. There is now a broader strategic 
competition underway between the United States, on the one hand, and 
Russia and China, on the other, concerning Iran's economic and 
political role in the Middle East and global energy markets in coming 
decades. The outcome of this competition hinges in considerable measure 
on which countries will assume leading roles in helping Iran develop 
its enormous hydrocarbon resources.
    Iran's resource base is truly impressive. If one converts Iran's 
reserves of natural gas--the second-largest in the world, after 
Russia's--into barrels of oil equivalent and adds them to Iran's proven 
reserves of conventional oil--the second-largest in the world, after 
Saudi Arabia's--Iran's hydrocarbon resources are effectively equal to 
those of Saudi Arabia and significantly greater than those of 
Russia.\4\ Moreover, Iran's low rates of production of crude oil and 
natural gas, relative to its reserves base, suggest that the Islamic 
Republic is perhaps the only major energy-producing state with the 
resource potential to increase production of both oil and gas by orders 
of magnitude over the next decade or so.
---------------------------------------------------------------------------
    \4\ In its December 19, 2005 issues, the Oil and Gas Journal lists 
Iran's proven reserves of crude oil as roughly 133 billion barrels. The 
same source lists Canada as holding the world's second-largest oil 
reserves, roughly 179 billion barrels, putting Iran in third place. 
However, the reserves estimate for Canada includes 175 billion barrels 
of reserves in oil sands; this justifies the statement that Iran holds 
the world's second-largest reserves of conventional oil. When one 
converts natural gas reserves into barrels of oil equivalent (boe), 
Saudi Arabia has 302.5 boe in combined reserves of oil and natural gas 
and Iran has 301.7. By way of comparison, Russia's aggregate 
hydrocarbon reserves--the world's third-largest--are 198.3 boe. I am 
grateful to Bijan Khajehpour of Atieh Bahar Consulting for sharing the 
results of his calculations.
---------------------------------------------------------------------------
    Iran, however, cannot realize this potential without significant 
infusions of investment capital and transfers of technology from 
abroad. Since the mid-1990s, U.S. policy has sought to constrain the 
development of Iran's hydrocarbon resources by barring U.S. energy 
companies from doing business there and threatening European companies 
undertaking projects in Iran with secondary sanctions. These policies, 
combined with a problematic investment climate in the Islamic Republic, 
have limited investment flows and transfers of technology into Iran's 
oil and gas sectors. Recently, Iran's Oil Minister publicly 
acknowledged this.
    Some have suggested that insufficient investment in new productive 
capacity, along with the combined effects of the depletion of already 
developed oil and gas fields and the growth in its domestic energy 
demand has put the Islamic Republic's oil and gas exports into a 
precipitous decline. But, it would be a mistake to assume that, absent 
rapprochement with the United States, these trends will continue 
unchecked and put the Islamic Republic in an increasingly precarious 
economic and strategic position.
    Over the last several months, Iranian officials and energy 
executives have told me that Iran is developing an alternative strategy 
for increasing its production and exports of crude oil and natural gas, 
a strategy that does not rely on substantially improved relations with 
the United States or the West generally. This strategy has three 
principal elements.

   First, Tehran continues to explore the possibility of energy 
        deals with European energy companies that are willing to do 
        business in the Islamic Republic. While some significant 
        European energy companies are reducing their involvement in 
        Iran, there are still prominent Europe-based international 
        energy companies with upstream investments there that are 
        pursuing additional deals.
   Second, Iran is developing ties to state-owned energy 
        companies in other Islamic countries (i.e., Petronas in 
        Malaysia) and, more importantly, to national energy companies 
        in China and India. Chinese companies, in particular, are 
        making commitments to invest substantial amounts of capital in 
        Iran's oil and gas sectors.
   Third, Iran is exploring possibilities for cooperation with 
        Russia to develop its energy production and export 
        capabilities. In particular, Tehran is now willing to 
        ``coordinate'' the marketing of Iranian gas exports with Moscow 
        to ensure that Iran's emergence as a gas exporter does not work 
        against Russia's economic or strategic interests. In return, 
        Moscow has agreed to provide financial and technical support to 
        help Iran boost its natural gas production.\5\ In this context, 
        at the most recent summit meeting of the Shanghai Cooperation 
        Organization, Russian President Vladimir Putin and Iranian 
        President Mahmoud Ahmadinejad announced that their two 
        countries would explore possibilities for cooperating to 
        provide energy exports to Asia.
---------------------------------------------------------------------------
    \5\ According to both Iranian diplomats and current and former 
Russian officials, a high-level working group has been set up to 
oversee bilateral energy cooperation. On the Iranian side, the working 
group is headed by the Deputy Oil Minister; on the Russian side, it is 
headed by the chief of Gazprom's international activities.

    Privately, Iranian officials and energy executives acknowledge that 
this approach is not the optimal way to develop their country's 
hydrocarbon resources. But, as a senior Iranian diplomat put it to me 
recently, Iran ``cannot wait on the West forever.''
    The significance of Russian and Chinese cooperation to develop 
Iran's hydrocarbon resources goes far beyond its impact on the rate at 
which the Islamic Republic's oil and gas exports increase or decline or 
on the extent of Tehran's regional and international isolation. Such 
cooperation has the potential to help Moscow consolidate a position as 
the leading player in supplying energy resources to major markets in 
Asia as well as Europe, with considerable attendant strategic benefits. 
It also has the potential to consolidate a Sino-Russian axis of oil as 
the principal counterweight to U.S. hegemony in regional and 
international affairs.
               strategic challenges and policy responses
    There are other arenas in which structural shifts in the global oil 
market and strategic and political responses to those shifts pose 
serious challenges to America's leadership in international affairs. 
For example, how major energy exporting states--primarily in the Middle 
East and Russia--handle their enormous and growing current account 
surpluses is now as important to the management of global economic 
imbalances and the future of the dollar as the world's leading reserve 
currency as the decisions of China and other major Asian economies. 
Here, too, there is considerable potential for a variant of the axis of 
oil to develop considerable strategic leverage over the United States.
    Of course, the foregoing analysis poses the critical question: 
``What is to be done?'' The intellectually and politically facile 
answer to this question is to advocate ``energy independence'' for the 
United States. Unfortunately, this is not a serious response to the 
strategic challenges facing our country. Simply put, there is no 
economically plausible scenario for a strategically meaningful 
reduction in the dependence of the United States and its allies on 
imported hydrocarbons during the next quarter century. Reducing our 
dependence on domestically produced and imported hydrocarbons has many 
attractions as a policy goal, but we should have no illusions about how 
rapidly this can be achieved or how soon it can provide meaningful 
relief to the strategic challenges I have described.
    This means, above all, that we must begin to take energy security 
seriously as a foreign policy issue and prioritize energy security as a 
national security objective relative to other foreign policy goals. For 
example, how important is an abortive drive for Ukraine's accession to 
NATO to American interests compared to securing Russian cooperation 
with the United States and its allies on energy supplies, as well as 
cooperation on the Iranian nuclear issue and other pressing problems? 
Reasonable and honorable people can come up with different answers to 
this question and others like it, but to avoid addressing the questions 
is to avoid the responsibilities of political leadership.
    Beyond this general proposition, I would suggest two other concrete 
policy responses to the strategic challenges growing out of trends in 
the global oil balance. First, it is critical for the United States to 
pursue a ``grand bargain'' with the Islamic Republic of Iran--that is, 
a diplomatic process aimed at resolving all of the outstanding 
bilateral differences between the United States and Iran as a package. 
My criticism of proposals for issue-specific or step-by-step engagement 
with Iran, such as those presented in the Iraq Study Group report, is 
not that these proposals go too far but, rather, that they do not go 
far enough. By continuing to reject a grand bargain with Tehran, the 
Bush administration has not only foreclosed any real chance that Iran 
will accept meaningful long-term restraints on its nuclear activities; 
it has also put the United States in a losing position in the longer-
term geopolitical and geoeconomic struggle over Iran.\6\
---------------------------------------------------------------------------
    \6\ I have written elsewhere on the content and feasibility of a 
U.S. Iranian grand bargain; see Flynt Leverett, Dealing With Tehran: 
Assessing U.S. Diplomatic Options Toward Tehran (New York: The Century 
Foundation, 2006).
---------------------------------------------------------------------------
    Second, it is important to induce the leading resource mercantilist 
states, China and India, away from statist approaches in their external 
energy strategies, so as to reduce the chances that they will bolster 
their strategic commitments to an axis of oil as an international 
counterweight to the United States. In this regard, it is critically 
important to bring China and India into the International Energy 
Agency, the OECD's established ``club'' for major energy importing 
states. Similarly, it is important to encourage the 
internationalization of Chinese and Indian national energy companies. 
There is considerable evidence, especially in the Chinese case, that 
these companies are becoming more market-oriented and profit-focused in 
their strategies and operations, and are increasingly willing to 
challenge their national governments over external energy initiatives 
that d not make commercial sense. In many ways, these companies are the 
most promising channels for promoting more market-based approaches to 
external energy policy in China and India.

    The Chairman. Thank you very much.
    Let me ask just a few questions and then I'll defer to 
Senator Domenici and then we'll take Senators in the order that 
they arrived, going back and forth between the two sides.
    Dr. Birol, let me ask you first. You, I think, alluded to 
the need for additional transparency in the resource estimates 
or calculations that exist in some of these areas that are very 
important for us. My impression is, from your testimony, that 
there is very little, if any, exploration going on by Saudi 
Aramco at this time in that area, and I wonder if that is the 
case and also whether that indicates anything about the 
likelihood of them developing some of these reserves that they 
are understood to have. Is it possible also that we are 
misjudging the rates that we're going to see supplies decline 
from some of those areas?
    Dr. Birol. Thank you, Mr. Chairman. A reserve transparency 
is needed both for international oil companies and national oil 
companies. I would definitely suggest the point that some of 
the international oil companies recently went through difficult 
times because they didn't assess their own reserves the right 
way. But looking at the key resource holders, especially in the 
major producers in the Middle East, the amount of oil left in 
those countries, exact knowledge about the amount of oil left 
in those countries is very important knowledge for all of us, 
for everybody who is on this planet, as all the numbers show 
that the bulk of the oil in the future will need to come from 
those countries.
    Now, Saudi Arabia is a key player and will remain so for 
several years to come and the Saudis have the highest reserves 
in the world. We do believe that Saudi Arabia has enough oil to 
meet the growth in global oil demand. However, there are two 
important points here. One, we would like to be sure, as many 
people in world--I mean, analysts in the world, how much oil is 
there and what are the feet-by-feet production levels in Saudi 
Arabia so that we have an overview of the general picture, 
which would make everybody feel better and give more confidence 
to the investor.
    The second issue, which is, I think, even as crucial as 
this one, the growth which will come from Saudi Arabia will not 
be mainly as a function of their reserves but as a function of 
their willingness to increase the production capacity.
    Saudi Arabia has the reserves, Saudi Arabia has the money 
to transform these reserves to production, but whether or not 
in the future Saudi Arabia will increase the production as they 
did in the past, as much as the world demands from them, or 
they will leave their oil for the next generations. And Saudi 
Arabia is differently--they will decide what they are going to 
do. But it is also the consumers' right to recognize that one 
day, production from those countries in which we do not have 
excess, free, extra capital, to go directly into production, 
may change their policies and this may have serious 
implications for the consumers.
    The structure of the oil market is changing, Mr. Chairman. 
In the past, the money could have access to many oil deposits 
in the North Sea, the Gulf of Mexico, but in the future, it 
will not be the case. Therefore, how much oil will come will be 
decided by a very few number of national oil companies. And 
again, market conditions may not be the primary determinant 
when they are making those decisions. So, from that point of 
view, there are two major uncertainties: one, whether or not we 
will have the reserves and the money we'll need in the future, 
and two, it would be very good to have a more transparency on 
the reserves in all Middle East countries and the rest of the 
world.
    The Chairman. Let me ask Dr. Leverett, one of the 
suggestions you had is that we need to encourage--as I think 
you stated, encourage the internationalization of Chinese and 
Indian energy companies. Could you be a little more concrete as 
to what actions we have--what leverage does our Government have 
to actually bring that about? And how would you proceed, if you 
were in a position to do so?
    Dr. Leverett. It's a very good and important question, 
Senator Bingaman. You're right, the leverage of the U.S. 
Government in this area is limited. In the end, if American 
energy companies decide to pursue joint venture projects 
upstream, downstream, wherever, with Chinese or Indian state-
owned companies, they will ultimately make that decision on 
commercial grounds. But I think that the political climate and 
the policy framework that is established can have the effect of 
encouraging or discouraging this kind of cooperation.
    A couple of examples. I already mentioned the political 
response last year, with regard to the possibility of CNOOC 
taking over Unocal. I'm certainly not going to make a judgment 
about the relative merits of CNOOC's offer for Unocal versus 
Chevron's offer from the standpoint of what was better for 
Unocal shareholders, but the political response in the United 
States to just the possibility that CNOOC might take over 
Unocal, I think, essentially sent the wrong message to the 
Chinese, which is--and they are already very deeply suspicious 
about this--the United States encourages China to rely more on 
the market to meet its energy needs, but the Chinese have very 
profound doubts that when push comes to shove, we will really 
let the market, as a matter of policy, work in a disinterested 
way where their interests are a concern. And the political 
response to the Sino bid last year, I think, reinforced all of 
those suspicions on their part.
    I would also say, if you look at other countries where 
international energy companies are based, in many cases, 
particularly in Europe, these companies, with their 
governments' encouragement, are actively pursuing possibilities 
for joint ventures with Chinese and Indian companies. It has 
become an important part of the strategy for some European 
energy majors and there is a policy framework in Europe that 
encourages that.
    In this country, I would say the policy framework is, at 
best, ambivalent on the issue of how desirable it is for 
American energy companies to be cooperating with Chinese and 
Indian energy companies and I think it would be in our 
interests in the long run if we looked on those kinds of 
possibilities more favorably.
    The Chairman. Thank you very much.
    Senator Domenici.
    Senator Domenici. Thank you very much, Senator Bingaman. 
I'm sure that two of the witnesses having to sit and wait and 
get this short time to speak to us is rather boring. But I 
would like to tell you that, at least from my standpoint and I 
hope from the rest of the Senators, that we would conclude the 
same. This kind of hearing is very unusual for us. We don't 
usually take testimony of this type. We're usually arguing 
about who is buying what kind of car or what we should do about 
changing the rules regarding the amount of mileage average cars 
are going to be getting--all very important things, but what 
you've told us today is just absolutely startling with 
reference to the future.
    I don't know what we have to do to convince both ourselves 
and the American people that we must change and do things 
differently. I just don't know what we have to do besides 
listening to people like you who are spending your brain power 
trying to tell us what's going on, that just won't work for too 
long. And I want to thank you for it and only say that I'm 
really sorry that we don't have more time. And I commend our 
chairman for suggesting that we open our year this way. But I 
still don't think we're going to get it out of one hearing, Mr. 
Chairman. I don't know if we should pick four or five things 
that they recommend and say, ``These are things that came out 
of that, why don't we do something about them?'' I don't know 
yet, but I'm very, very concerned.
    Dr. Leverett, I'll invest a couple of minutes with you and 
then I'm going to go over to Linda Stuntz. You know, among all 
the important issues that you see occurring and accruing out 
there in the world, you came up with discussion of Iran and 
Russia; is that correct?
    Dr. Leverett. Yes. There are obviously a lot of specific 
issues that we could take up under this rhetoric, but I think 
that the question of the possibilities for Russian and Iranian 
cooperation on energy matters is an issue that has potentially 
very, very profound geopolitical and geostrategic implications 
for the United States. Russia and Iran together control almost 
half of the world's proven reserves of natural gas. If those 
two countries are cooperating, coordinating in terms of the way 
they develop and market their gas exports, they could be 
potentially twice as influential in the global gas trade as 
Saudi Arabia is in the global oil trade. And I think that 
within the last 18 months, Russia and Iran have announced their 
intention to begin cooperating in this area. There is a high-
level Russian/Iranian working group set up to do this. A senior 
official of Gazprom chairs it on the Russian side, the deputy 
oil minister of Iran chairs it on the Iranian side, and Russia 
and Iran are discussing an increasingly wide array of potential 
energy initiatives, marketing projects and pipeline projects 
that would increase both Iranian and Russian influence in 
regional energy markets.
    Senator Domenici. Well, let me say, from my standpoint, and 
you can try this on and then if you'd like to comment and 
critique what I've said, I'll ask a question about the 
nationalization of oil as an asset around the world. You and I 
are talking about Russia here and Iran and what they are doing 
together in their self-interests. Is Russia working as hard as 
it seems to me to regain its international powers in the 
region, in the large region that might be called Sino? Is it 
working as hard as I think and are they doing it with a lot of 
disregard for the rules because they don't necessarily want to 
follow them?
    Dr. Leverett. I think the short answer to your question is 
yes, they are working very hard to do this. President Putin has 
made it a cardinal element of his foreign policy to restore 
Russia to what he would see as its rightful status as a great 
power in world affairs. But in contrast to previous Russian 
leaders, he sees the economic aspects of power and indicates 
that Russia, particularly its energy resources, has the 
foundation for establishing--re-establishing Russia's role as a 
great power. I think he and his advisors are working very hard, 
very strategically to maximize Russia's international standing 
and influence.
    Senator Domenici. I want to say to my fellow Senators that 
about 7, 8, 9 years ago, until about 2 years ago, it was very 
easy to strike a deal with Russia, the remnants of the Soviet 
Empire. If we just had money to give to them, they'd give us 
almost anything.
    Dr. Leverett. Yes.
    Senator Domenici. That's gone. They have a new kind of 
identity. You can hardly talk to them about anything. They're 
not interested and they act about as affluent as they really 
are. If you want to deal on their terms, fine. If not, go home. 
And they act just like they have plenty of money in the bank, 
and it turns out, from what you've said, they do. And it's not 
from the deal that you're talking about, they've already put 
some together, pre-Iranian, and wait until they get it done.
    Linda, could I ask you, would you simply turn that map 
around and show us what's up there so we Senators can see that? 
Will you put that out for them, too?
    Now, Senators, right here in front of us, if there is 
anything--that's fine, go ahead and put it up where they can 
see it. If there is anything that has startled me in 
preparation for this hearing and in today's hearing, it's this 
chart here, which according to our staff, national oil 
companies control \3/4\ of the world's oil reserves. Now, 
national oil companies, the way we're defining it, kind of gets 
confusing to some of us. Owned by the state is what national 
means. So state-owned oil companies has \3/4\ of the world's 
reserves. Looking at this chart, you're going to see that the 
bars on the right reflect the size of the reserves held by the 
world's oil companies. National oil companies are in red and 
pink. Despite the fact that some focus on large U.S. 
corporations as the face of big oil in parentheses, ExxonMobile 
is the largest non-government-owned company and is at number 
14. The relative size of the reserves held signified by the 
length of the bar is also quite striking.
    Well, what I'm trying to tell you is that all this argument 
here in the United States about our oil and gas companies being 
so big, and so gigantic that they're taking us over, and so 
gigantic that we ought to rule them, and so gigantic that we 
ought to tax them more, well, if you want to come to your 
senses, just put this chart in front of you and it will tell 
you what's happening to America--the idea of companies owning 
oil and/or gas reserves, to provide that to the world in some 
kind of a capitalistic, free-market approach. Linda, could you 
tell me--and that's startling me in terms of the future of the 
world--does that bother you at all, the trend that is moving in 
the direction that that chart seems to show?
    Ms. Stuntz. It concerns me that we don't know about this, 
that there is so little awareness of this. National oil 
companies are not new. They have--Saudi Aramco has been around 
for a long time. What is different--and I think many of the 
themes were picked up by Dr. Leverett--is that with the price 
of oil where it is now and where it's been, they don't need 
Western capital in the way that they have before.
    Also, I think, particularly here in Washington, there has 
been the notion that they don't have access to technology, if 
they don't get it from Western companies. That's a bit of a 
myth also. There are global technology companies. There are 
fabulous engineers in other places in the world. I'm not going 
to say maybe it's quite as good, but I think we need to 
disabuse ourselves of the notion that these folks are somehow 
dependent on us. They're not, and all of the things you've 
heard, really, I think, is a striking agreement among the panel 
that we have to figure out how to deal with them.
    They are quite capable of making alliances with others and 
what that means for us then--I just think we need to get our 
head around that and figure out what that means for policy. So 
I appreciate your attention to this and I think it is something 
that needs to be more broadly understood.
    Senator Domenici. OK, thank you very much.
    The Chairman. Yes, thank you very much.
    Senator Tester is next.
    Senator Tester. Thank you, Mr. Chairman. I've got a 
question, as long you're warmed up, Linda. One of the first 
things you talked about was the issue of America's energy 
independence and how it wasn't achievable. There are a lot of 
different perspectives when you talk about energy and national 
security, affordability for regular folks, economic and so on. 
Is it that? And you talked about Draconian measures, as I 
recall, but it is that America's energy independence is not 
that important or it is that we don't have the technology to 
get it done at this point in time, or is it that, from your 
perspective, from a technological standpoint, it's simply not 
obtainable?
    Ms. Stuntz. I would say, from an economic standpoint, it's 
not achievable. We cannot--we could technologically, if we were 
willing to pay an unlimited amount for the price of gasoline, 
if we were willing to waive a lot of environmental 
requirements, impose speed limits and, I mean, a whole host of 
things which I think would be unacceptable to us as a public, 
we could, over some period of time, never import a drop of oil. 
My point is, that is not going to make us independent of what 
happens, of all these things that you've been hearing about 
this morning in global oil markets. It's not going to mean that 
we don't need to care about whether or not Russia is a reliable 
supplier to Europe because that matters to us, too. It's a 
fungible commodity.
    But we can't--just one more, quickly. I believe Dr. Hormats 
was right. The key is vulnerability. We need to make ourselves 
less vulnerable to those vagaries, even though we can never be 
completely independent of them.
    Senator Tester. OK, thank you.
    Dr. Hormats, you talked about development of alternative 
sources of energy. Just from your perspective, where do you see 
it--because there are a lot of different alternative energy 
potentials out there--where do you see the best opportunity?
    Dr. Hormats. Well, I think there are a number of ways. I'll 
just use a couple. Cellulosic ethanol, in my judgment, is one 
of the very interesting alternatives for several reasons. One, 
it doesn't compete with the food chain.
    The Chairman. I think maybe you could pull that microphone 
out or turn it on or something.
    Dr. Hormats. Yes, sorry. Thank you.
    Thank you, Senator. Cellulosic ethanol, I think, is one 
area that is very important for a number of reasons. It doesn't 
compete with the food chain. It is basically using waste 
material, corn stalks or switch grass or a whole variety of 
other things. And at this point there is not a large, 
commercially-viable production facility, but most experts think 
that with the proper amount of Government support, there will 
be.
    Also, the conversion rate is very efficient compared to 
things like corn or even sugar, so I think that's one area 
where the farm community benefits substantially. We reduce our 
dependence and it's a very efficient way of doing things, and 
with the right kind of incentives, I think you could do that.
    Wind energy, I think, still has a lot of potential in this 
country as well and there are a couple points that enhance this 
prospect.
    One is, if you take--let me just use one example with 
relationship to the production tax credit for renewable energy 
resources like wind or geothermal. Part of the problem is that 
there is a very narrow window for people to get that. If your 
project is not completed by the time the window is closed, then 
you don't get it. And the problem is that it's a very--in some 
cases, a very short-term window. So there are two or three 
things, or actually several ways in which--the way the laws are 
written and the way the incentives are written can be helpful 
in giving a longer-term time perspective to people who are 
going to invest in these new sources of energy and this would 
be one of them.
    Part of the problem is that when you get the price going 
down again, as it is today, people say, we don't really need to 
do this, the crisis is over, we can relax. The problem is, we 
really need a longer-term perspective and the way the law--the 
way the regs are written, the way the PTC is written, you 
should have a broad enough window to give people who are 
committing capital for a long period of time the assurance that 
it's going to be there when their project is complete. 
Otherwise you get a sort of on-again, off-again process.
    So the answer of cellulosic ethanol is one among several, 
but it is just one that I think happens to have a lot of 
potential at the moment, if we can develop it further and 
develop the technology and develop the regulatory and the tax 
support to do it. We've got the capability, because we've got a 
lot of switch grass and corn stalks and things, and a lot of 
States would benefit, not to mention national security.
    Senator Tester. Thank you. Just one last question. I don't 
know if any of you have had the opportunity to look at energy 
policy in other countries, and I know we're different than 
anybody else, but if you have, are there--I mean, I've heard 
three components here, listed fairly regularly, with the 
exception of Dr. Leverett's presentation, and that is, deal 
with domestic production efficiencies and biofuels. Are there 
any other components to other countries' energy policies that 
could be of benefit to this country? And it's open to anybody.
    Dr. Birol. The International Energy Agency, we have 26 
member governments and the United States is, of course, the key 
one. All the countries are faced with these twin energy traits: 
the subject of supply, which we are discussing today, and the 
second one is the environmental challenge, that we discussed a 
lot today. And in many cases, they are very much interrelated 
and many countries do look at--in addition to efficiency 
increase and the alternative fuel, such as biofuels and the 
wind and hydro, they also look at the nuclear power from very 
different angles. Nuclear power again is on the agenda of many 
countries, even the countries who didn't, in the past, for 
different reasons, ban nuclear in their system.
    The reason here is twofold: One, natural gas prices are 
very, very high, which makes the electricity production from 
natural gas very expensive, and the second, as we were 
discussing with Russia, one of the signals of what Russia gave 
with the Ukraine-Russia disputes there, security of the gas 
supply is a key issue and, as my colleagues mentioned here, 
Russia plus Iran makes about 50 percent of the proven gas 
reserves, two countries in the headlines of the newspapers for 
energy.
    So, therefore, from the security platform, many countries 
look at nuclear very closely. In Europe, in Asia, they are both 
in development in developing countries. But in most of the 
countries, there is one common denominator--it is the increase 
of energy efficiency. This is, I think, perhaps the most 
important one that we have to put the emphasis on, because it 
is very, very cost-effective and easier, compared to nuclear 
and the others, to implement and get the support of the public. 
Thank you.
    Senator Tester. Thank you, panel.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Senator Martinez.
    Senator Martinez. Mr. Chairman, thank you very much. I want 
to really commend you and the ranking member for calling this 
hearing. I think we always tend to say thank you for calling 
this important hearing, but some hearings are more important 
than others and I happen to think this one is tremendously 
important and timely and I thank the panel for being here 
today.
    I represent the State of Florida and we are vitally 
interested in developing alternative fuel sources in Florida, 
particularly, as you mentioned, cellulosic ethanol. We view 
ourselves as a State that can be a part of the future in that 
regard.
    One of the things that I hear is, in order for us to 
develop a domestic ethanol production capability, that 
maintaining the tariff on importing Brazilian ethanol is a good 
thing for us. And I know, Ms. Stuntz, you suggested that that 
tariff ought to be removed. Help me with those conflicting 
currents of encouraging domestic development of the industry 
while at the same time providing a tremendous challenge for 
that development by taking off the tariff.
    Ms. Stuntz. Senator, it's a good question. I think the 
realty is, today, the cost of cellulosic ethanol, according to 
analyses I've seen, are about five times the cost of corn-based 
ethanol and potentially even higher than biomass-based ethanol. 
So it's a significant cost premium today. We've got to do work 
demonstrations and development to bring that cost down because 
it clearly is the long-term answer.
    Removing the tariff so that low-cost Brazilian ethanol 
could come in and help us at the time, to give us--to me makes 
sense as a bridge, frankly, to give us time to do the work that 
is necessary to bring the cost of that cellulosic ethanol down. 
Because we're already seeing in the marketplace, as corn-based 
ethanol is ramped up, corn prices are at about an 11-year high. 
I was looking for Senator Dorgan, someone who would know better 
than I do offhand. And you're seeing some pressure, so why 
not--I don't believe allowing Brazilian or other sugar-based 
ethanol to come in would significantly slow the work that needs 
to be done. I think it would assist consumers in the bridge 
period.
    Senator Martinez. Would it also maybe help us in developing 
a distribution system? Because I know that's one of the areas 
in which we're also way behind.
    Ms. Stuntz. Absolutely. I think we have got to get to work 
on--again, as that market expands, we are nearing the limit of 
how far we can go with tanker transportation, barge 
transportation of ethanol. I know that Brazil ships ethanol by 
dedicated ethanol pipelines. I have been beginning to hear--and 
perhaps some of these in the funding--private sector funding 
are looking at the possibility of dedicated ethanol pipelines 
in this country. The technical issues may turn out to be less 
problematic than economic ones in terms of, ``Do you have a 
sufficient market to justify and be able to finance that?'' 
Perhaps Dr. Hormats could say more about that.
    But I think you're exactly right. It's all got to come 
together, and again, doing this in a way that allows that 
infrastructure to develop would make sense.
    Senator Martinez. Dr. Hormats.
    Dr. Hormats. Yes, Linda's point is an interesting and a 
very good one. I think part of the problem is if there is a 
gathering system, a distribution system for more conventional 
sources like corn, for instance. Corn has been marketed as a 
very commercial and efficient commercial marketing system. For 
things like switch grass or corn stalks or things like that, 
there is no efficient gathering system and the distribution 
process is sort of makeshift. There are lots of little local 
plants that will be developed, but we need to find a much more 
efficient way of getting it into the commercial system and 
distributing it in gas pumps and things like that. Therefore, 
the more volume there is, the more the incentive exists to 
develop the kind of things that Linda was talking about, to 
make a more efficient distribution, gathering and marketing 
system for these products.
    Senator Martinez. Shifting to the geopolitical implications 
of all of it, Dr. Leverett, I traveled to Georgia recently and 
saw firsthand not only the influence but the bullying, really, 
of Russia as it relates to a foreign policy interest merging 
with the supply of natural gas, particularly to that country. I 
was also intrigued by your recommendation of a very aggressive 
engagement with Iran. Some things come to mind as we look to 
that. I agree with you that in an unfortunate world, that would 
be a desirable thing. However, there seemed to be some very 
difficult, long-term goals that the Iranian government seems to 
be pursuing that might be very difficult for us to overcome. 
You say in your remarks that we have rejected negotiations with 
Iran--I'm not sure of the exact language you used, but 
something along those lines. I'm sure there has not been 
anything on the table from Iran for us to reject, and I wonder 
how we would deal with, No. 1, their nuclear ambitions and, No. 
2, their stated intent of the destruction of the State of 
Israel.
    Dr. Leverett. You've asked exactly the right questions 
about U.S. Iran policy, precisely because the problems between 
the United States and Iran are so difficult and there is such 
an enormous amount of baggage in this relationship on both 
sides that my argument is the only way this problem is going to 
be resolved is if it is resolved comprehensively. My own view 
is that Iran will not agree to strategically meaningful limits 
on its nuclear activities in the absence of what would, in 
essence, be a security guarantee from the United States, 
basically a commitment by the United States not to use force to 
change the borders or the form of government of the Islamic 
Republic of Iran. There is no way that an American 
administration can offer that kind of guarantee unless a range 
of other problems that we have with Iran--its support for 
terrorist organizations, its attitude toward the Arab-Israeli 
conflict and so on--are also dealt with. But there is no way 
that an Iranian government is going to deal with those issues 
unless there are things on the table relating to U.S. 
acknowledgement of an important regional role for Iran, 
normalization of relations, and lifting of U.S. sanctions. At 
this point, the issues have become so balled up with one 
another that you can't resolve any of the outstanding 
differences between the two countries, I think, without 
resolving all of them.
    In fact, in the spring of 2003, the Iranians offered to 
negotiate on the kind of comprehensive basis that I am 
describing and the Bush administration rejected that overture, 
did not pursue it. The United States and Iran did cooperate 
very, very extensively after 9/11, with regard to Afghanistan, 
for a period of almost 2 years, with the Iranians playing very 
constructively in that process. And again, it was the United 
States that terminated this dialog. There is much about Iran's 
behavior and its rhetoric that we rightfully find unacceptable 
and offensive, but the issue is, how are you going to go about 
changing that behavior and resolving problems?
    My position at this point is that you can't do it unless 
you're prepared to do it comprehensively. I think that the 
Iranian leadership, even with President Mahmoud Ahmadinejad in 
office, would be prepared to engage in a serious process with 
the United States if they believed it was really aimed at the 
kind of comprehensive resolution I've described. I think that 
would help us on the nuclear issue. I think that would help us 
in terms of the larger war on terror. I think it would help us 
regionally. And as I tried to indicate today, I think it would 
be enormously beneficial in terms of long-term energy security.
    Senator Martinez. Can I comment on that quickly?
    The Chairman. Sure.
    Senator Martinez. It will be very quick.
    The Chairman. Because we need to get some other questions 
in.
    Senator Martinez. This may be right and we may be able to 
get something if we have a broad dialog with Iran, I don't 
know. But I want to just go back very briefly to two points. 
One, we had excellent relations with the Shah. And the Shah, 
who we put on the throne, by the way, turned around during the 
middle part of the 1970's and did a lot of things that were 
quite harmful to America's energy interests. Point one is good 
relations with the country may be possible, but even the guy we 
put on the throne was very, very unhelpful in the middle part 
of the 1970's.
    The second point is, even if we were able to achieve these 
kinds of goals, which I think are noble goals, if we can work 
out all these things--I'm a little skeptical, but you know 
what? It's possible. The fact is, that shouldn't deter us one 
bit from doing the kinds of things we're talking about in this 
country, to develop new sources of energy, new measures of 
efficiency to reduce our vulnerability, should this not occur. 
So it is perhaps important, and I don't deny that maybe it 
could happen, but we've got a job to do domestically quite 
apart from that and we shouldn't think that that is an answer 
to the kinds of broader issues that we have been talking about 
because the best relations with a country in a given situation 
can turn very sour, as was the case in the Iran in the 1970's, 
and then again, after the fall of the Shah as well. So we 
shouldn't be complacent about these kinds of things.
    The Chairman. If we can go on to Senator Cantwell. We're 
trying to do 7-minute rounds and I think we can do one for each 
of the Senators still here, if we try to stick to that. Go 
ahead.
    Senator Cantwell. Thank you, Mr. Chairman.
    I think, Dr. Hormats, that's a great lead-in to the 
questioning that I'd like to go to. It was kind of brought up 
by the Chairman earlier about technology.
    First, let me just say thank you for all the panelists 
being here and thank you, Dr. Hormats, for talking about the 
extension of renewable tax credits for longer horizons. I 
personally believe as long as we're continuing to use oil at 
the level we are and only giving 2- or 3-year horizons to the 
renewables, not only are you only going to have limited 
development, you basically prevent any kind of the 
manufacturing from happening in the United States--so the job 
creation, so thank you, General Wald, for mentioning the 
efficiency standards for automobiles. I hope next week, in the 
Commerce Committee, we'll have a bipartisan bill that we can 
start working on and look at that.
    But my question goes to--coming from the Northwest, we kind 
of look at China as a market and not as a competitor. That's 
because of Microsoft and Boeing and agriculture, and now the 
Chinese are drinking lots of Starbucks coffee. So we look at--I 
think we even looked at President Hu's visit a little 
differently than the rest of the country did. But why not, 
given that China, I think, in 2009, will become the largest 
carbon dioxide emitter? A whole decade before, we'd thought 
we'd have all this pollution. Why not look at this technology 
issue, of technology transfer, Dr. Leverett and Dr. Hormats? 
Even from the Government's perspective of the energy efficiency 
technology that we have as intellectual property as a way to 
leverage the relationship with China, beef up the bilateral 
relationship to a substantive level and use that as at least a 
starting point to move not only a great economic opportunity 
for the United States but move China away from Iran?
    Dr. Leverett. I totally agree with you. I think that we 
need--I've put in my written testimony a number of elements of 
what I call the United States-China Energy Partnership, which 
could involve Japan or it could involve----
    Senator Cantwell. Or in Asia, the United States-Asia energy 
policy.
    Dr. Leverett. On many levels, United States-Asia--and there 
are a variety of reasons. The Chinese are increasingly 
dependent on imported oil and they are making these 
arrangements with Russia that you've described and it's 
bringing them closer to Russia since Russia is a big supplier. 
And, of course, the Middle East, they are conducting diplomacy, 
which is not entirely consistent with what we believe to be in 
our interests.
    On the other hand, there are a great many areas where our 
interests do converge, because they are more and more dependent 
on imported oil and it is important, I think, to get them to 
think like a consumer and work with the consumer groups, work 
with the IEA. There is another energy forum that has been 
developed at a ministerial issue.
    Senator Cantwell. Get them admitted to the IEA.
    Dr. Hormats. Yes. Part of the problem with the IEA is 
because you have to be a member of the OEC to be a member of 
the IEA, but it seems to me you can find some relationship to 
bring them closer, along with India and others, to work more 
closely with the IEA. And there is another ministerial form 
that has been developed, separate from the IEA, with producers 
and consumers.
    But your broader point is absolutely correct. We should 
look at China because of--as an opportunity, as opposed to a 
threat. They have environmental problems. We have developed in 
this country, and are developing now, some very efficient ways 
of using coal in an environmentally responsible way. Clean coal 
technology is being developed here. We have great technological 
capabilities that we're developing in our country. If we work 
with China, we would have a broader market to sell some of 
those, which would bring more capital to be available, in the 
first place, to help to develop them. And a broader partnership 
would be important across the board for coal, for new 
technologies, for new ways of developing efficient utilization 
of existing technologies and the cars that the Chinese are 
building, a large number of the cars are being developed.
    And it's a jobs argument here. This is the part of the 
problem that I think does not get enough attention. If we 
really get out in front in energy technology, it can be a great 
source of job creation in this country, for new types of 
energy, which we can use here and abroad, and therefore, a 
partnership at a very high political level.
    I had suggested to the State Department before the last 
summit, President Hu did a lot better in Washington than he 
did--your Washington than he did in this Washington. And the 
reason was because of the cooperative relationship that was 
developed on a commercial basis. That could happen in energy. 
We need a cabinet-level committee to do it. We had one with 
Japan in the 1970's, we can have one with the Chinese and this 
would be of huge benefit to reduce tensions, to avoid the 
conflicts over Sudan, Iran, Iraq and elsewhere, if we do it 
right. And give it a high level and have someone senior in the 
NSC do this, which I think is a good idea, and also in the 
State Department. The State Department has this idea, I know, 
because I've given it to them, and others have, but they've 
really not developed it at a high enough level.
    Senator Cantwell. Dr. Leverett?
    Dr. Leverett. I think you've really--you've hit on a 
potential win-win initiative. There is tremendous and growing 
interest in China now, both in the official community and the 
business community, about doing things to improve the demand 
side management part of their energy security equation. But 
part of it is, in a sense, being behind the curve 
technologically. And to some degree, there are still--I believe 
they are still are policy restrictions on exporting some of 
this technology to China. I think this could be an area where 
Congress could very constructively take initiatives that would 
drive policy in a constructive direction because this is part 
of the energy security equation. The Chinese, themselves, want 
to pay more attention, just as a brief indicator of that, and 
also kind of responsive to the questions Senator Tester asked, 
in terms of what other countries are doing. China's fuel 
efficiency standards for vehicles marketed in China are today 
more rigorous than those on the books in the United States.
    Ms. Stuntz. May I just comment very briefly, as maybe a 
little bit of a dissenting view. I think this is a great goal, 
but we need to go into this with our eyes open. Every 10 days, 
China is opening a coal plant with the capacity to serve a town 
the size of Dallas or San Antonio. Most of those coal plants 
are not controlled even as well as most of the plants in the 
United States. They don't even have the base technology that we 
are putting on right now. A fifth of them are actually 
characterized as illegal because they haven't been approved by 
the Federal Government of China. So there is, in part because 
they can't control all that's going on in the provinces. So I 
think it is a great aspiration, but we need to be clear about 
what is actually happening on the ground in China in terms of 
what's being built. And if we could just raise them up to even 
the sorts of levels that we're having here and then move beyond 
that for the future, I think that would be great.
    Dr. Hormats. I agree with that. They are going to do it 
anyway. We could help them make it more efficient and certainly 
better from an environmental standpoint.
    Ms. Stuntz. I hope we're not saying they should follow the 
same route that we have. I would hope that we're saying that we 
would help them leapfrog that process. I'm well aware, having 
led a delegation to China in November, and we were all excited 
because we had energy-efficiency technologies in a good form, 
but I noticed right next to us, at the same hotel, in a much 
larger venue, was the mining industry of China. So I know 
exactly the challenge, but to me, if we could help them 
leapfrog that, isn't that a great incentive for them to become 
a better economic interest with the United States and helping 
us? So instead of going to Iran to look for oil, they know that 
we can give them energy efficiency. And I think the Chinese do 
want to be more environmentally sensitive than they are today. 
They know they are going to get a black eye if they don't 
approach this issue.
    Dr. Leverett. There are enormous demonstrations in China, 
by the Chinese, because of the terrible environmental 
standards. And the health problem is horrible in China for that 
reason.
    The Chairman. Please make your comment sort of brief. We 
need to get on to some other questions.
    Dr. Birol. OK, just one comment. We work very closely with 
China and India, especially in the last couple of years, and 
just to let you know, at the last board meeting, we voted 
Chinese minister and Indian minister participants at the IEM 
meeting, which is very unusual for us. We just signed if we 
want to deal up the relationship with China and India in that 
format. And the second point, very briefly, is that there is 
already the partnership between China, India, the United States 
and Japan--the Asia-Pacific Partnership--in the technology area 
that I wanted to bring to your attention. Thank you.
    The Chairman. All right, thank you very much.
    Senator Smith.
    Senator Smith. Thank you, Mr. Chairman.
    Thanks to each of our witnesses.
    Ms. Stuntz, a question to clarify on the issue of corn-
based ethanol and its cost versus cellulosic ethanol. You said 
that it is more expensive; is that the case because it's 
inherently more expensive to produce into energy or because we 
don't have the infrastructure and the gathering of the 
materials in this country?
    Ms. Stuntz. With the technologies we have now, it is 
inherently more expensive to produce ethanol from the cellulose 
of these plant feedstock materials than the technology that we 
now have to produce it basically from the fermentation of corn.
    Senator Smith. In a country where they had such technology, 
is it more expensive to produce than corn-based ethanol? In 
other words, if we get it, if we get the infrastructure, what 
are the costs comparisons between corn and cellulosic?
    Ms. Stuntz. I believe that there are certain types of plant 
substances--switch grass and so forth--where the efficiency, 
the conversion efficiency looks like it will actually be better 
than it is from corn, but we just don't have the technology yet 
to do that. And I agree with Dr. Hormats, the infrastructure 
issue is actually on top of that in terms of what the cost 
would be. Actually, the ethanol infrastructure is still a bit 
immature also and could be optimized. Beyond that is an ability 
to gather all these sources of waste, which sometimes gets 
ignored. And I think a lot of work needs to be done on that, 
because it will have to be collected, it will have to be 
ordered from long distances. So it's a ways in the future, but 
I think there is a great deal of interest now, both by the 
private sector, importantly, as well as the Government, and it 
can happen.
    Senator Smith. I think everyone on the panel is saying it 
should be pedal to the metal on developing these 
infrastructures and a way to convert this, because that is one 
of the building blocks for how we get closer to energy 
independence.
    Dr. Hormats. Could I just say one thing?
    The Chairman. I think you need to turn on that microphone.
    Dr. Hormats. Sure, good point. Thanks.
    One difference is, when you're competing with corn, you're 
competing with the food stock of the country, and the price 
goes up. All this other stuff--the switch grass and the 
cornstalks and a lot of this other-- wood chips and things, 
those are essentially waste materials, so the starting point is 
much cheaper. The difference also is that there are some 
commercially-viable plants to do corn ethanol already. We 
haven't really gotten far enough down the chain to develop 
those commercially viable plants for this other stuff. Some are 
being--but they won't be quite ready. They're not ready quite 
yet, and that's why some greater degree of government effort is 
needed to help them get from the R&D stage to the development 
stage, because you can get better efficiencies once you get the 
volume.
    Senator Smith. And your view is that we don't retard R&D 
and infrastructure development if we take away the protection 
against importing----
    Dr. Hormats. I don't think so. I haven't really looked at 
the economics to that point, but I think that the competition 
from some of this other stuff, if we're in a country that 
believes in competition, that could help. But I would say the 
primary thing is to really get the Government incentives right 
to provide the capability----
    Senator Smith. And if we do that right, then the 
protectionism that currently exists----
    Dr. Hormats. Then you don't need it, right.
    Senator Smith. We don't need it. And, moreover, it would 
allow the industry to develop in this country in a way that 
doesn't create an artificial sort of price that is 
uncompetitive--grows to be uncompetitive with what the world 
market will ultimately be.
    Dr. Hormats. Exactly. And it can't be based just on the 
movement of prices from month to month because then that 
creates--this has to be a long-term strategy, to give the 
companies the incentive, and once you do get the critical mass, 
then you're in a much better position to resist this--to stand 
up to competition. And you're absolutely right, at that point, 
more and more people start using it and the volume enhances the 
efficiency so you don't have an artificially high price 
indefinitely.
    Senator Smith. One of the things that I think really needs 
to be emphasized by this Senate and you all with your voices is 
that American oil industries are not--they are not controlled 
by the Federal Government. They are private, for-profit 
industries. There are competitors in the world. An overwhelming 
percentage of the competitors to Chevron, Exxon, and all the 
others, now are nation-state oil industries. I guess one of the 
questions I really have for you and your insights is, what are 
these nation-state oil industries that are using energy as a 
political weapon against their neighbors? What kind of 
investments are they making for the future in terms of 
exploration, in terms of infrastructure, as opposed to American 
oil companies that don't have government control?
    Dr. Birol. They do also make investments and they make 
investments more or less to nation oil companies and 
international oil companies and the amount of investment they 
make is more or less the same in terms of dollars. But there is 
a small trick here. We just saw this picture, and this picture 
is a static picture. When we look at the future, the contrast 
will be even sharper because the oil companies own the 
reserves, which are declining. This is the point I wanted to 
say that the national oil companies have young fields and rich 
fields, so the difference between the international oil 
companies and national oil companies will change, and in favor 
of the Nation oil companies because international oil companies 
are losing reserves and they are not able to have major gains 
to access the new reserves.
    So, in coming to the investments, international oil 
companies are making a lot of investments in order to maintain 
the current production capacity, to replace what they have, 
because it is declining. They have to inject money to slow down 
the decline. And the national oil companies are making 
investments to increase the production capacity. So from that 
point of view, both of them are making investments, but in 
terms of the production growth, it is coming mainly from the 
national oil companies. And looking at the future, the picture 
will change drastically, especially after 5 or 6 years.
    Senator Smith. That brings me to my final point, and then 
I'll turn it back, Mr. Chairman.
    This is not a criticism, Dr. Leverett, but I found your 
testimony especially chilling in terms of national security 
implications for our country. It reminded me a little bit that 
we need to return to Dayton with Russia and others. I'm 
reminded that in doing that, in asking for energy cooperation, 
we essentially have to admit to their spheres of influence and 
tacitly agree to their conduct toward their neighbors.
    See, to me, whether Ukraine becomes a member of NATO is not 
our business. I mean, we get a veto, I suppose. That's the 
business of Ukrainians. And if they want to be free and they 
meet the qualifications, our policy is, they get to join. It's 
shared values. So to say we're not--we're going to say to the 
Ukrainians, you can't. I don't care--it's up to them. I don't 
really care if they join or not, but that's up to Ukraine, and 
I don't want to change the standard just because Russia is 
going to be offended. I don't know where Russia is going. I 
mean, Mr. Putin has made it very clear to this Senator that he 
wants his empire back. It's not going to be communist, but it's 
sort of a capitalist empire that basically is becoming more and 
more dictatorial and following its historic pattern.
    That really worries me. It would worry me if I were an 
Estonian or a Latvian or a Pole or a Ukrainian or a Georgian, 
and I don't think we can accede to that. I don't think we can 
bargain away those kinds of values that the United States has 
for the sake of energy security. So I want to say that is a 
concern.
    I think our focus needs to be domestically and then just 
have a really good military capacity to deal with this. When it 
comes to Iran, sitting down with them, they made it very clear 
what they would want from us and that is essentially a military 
domination of the Middle East. That is a horrifying prospect. 
If I was an Israeli, I know what that means: I'm gone, I'm 
exterminated. And I don't think we can accede to that in the 
name of energy cooperation. So I just wanted to say that. If 
any of you have a comment on that--I mean, those are the stakes 
and I don't think we can play in that game.
    Dr. Leverett. Senator, let me respond just briefly on 
Russia and Iran. First of all, on Iran, I'm not talking about 
acceding to Iranian military domination of the Middle East. 
First of all, frankly, Iran has no capability to project 
significant levels of conventional military capability much 
beyond its borders.
    Senator Smith. They'll get them. If they get the energy and 
we cooperate, they can reload their treasury with petrodollars.
    Dr. Leverett. They are reloading their treasury whether we 
cooperate with them or not. The issue for me is, in strategic 
terms, are we better off trying to have some influence over the 
way that those petrodollars are accumulated and recycled and 
invested and used, and how countries that have those kinds of 
sources of influence use those influences, or are we going to 
basically, as you say, not play in that game and let other 
countries play, and therefore, accrue the strategic benefits 
from that? Those are the trends that I see happening right now, 
with the emergence of the axis of oil. We basically cannot 
accomplish our policy objectives toward Iran, because other 
countries are playing in a game that we've essentially taken 
ourselves out of, and I don't think that's going to serve 
American interests in the long run.
    On Russia, you're right. In the cold war with the Soviet 
Union, we accepted the notion of spheres of influence, because 
basically we made a calculation that managing the nuclear 
balance and preserving international stability was a more 
important foreign policy interest of the United States than a 
quixotic effort to push the Soviets out of their empire before 
the natural course of events forced them out of their empire.
    I would argue we are in a somewhat analogous situation vis-
a-vis energy. Russia has this status and leverage as a major 
energy producer. They are using it to accumulate more and more 
regional and international influence. Do we want them to use 
that influence in ways that work against our interests or work 
in favor of our interests? If we want them to work in ways that 
support our broader policy objectives, we probably are going to 
have to accord some attention and some legitimacy to things 
that they care about. That is the nature of strategy. That is 
the nature of diplomacy.
    The Chairman. Senator Sessions, you're the clean-up hitter. 
Go right ahead. We're glad to have you on the committee.
    Senator Sessions. Thank you. It is a fascinating subject 
and I'm honored to be with you, and on this committee, and to 
participate with this panel.
    With regard to my friend Gordon Smith's comments, I was at 
Riga recently and there was sort of an off-the-record 
discussion over the former Soviet Republic being in NATO and 
one made the point that it's a question of values. Putin had 
announced that the greatest disaster of the 20th century was 
the collapse of the Soviet Union and they thought the best 
thing that happened in the 20th century was the collapse of the 
Soviet Union. So I guess I'll say to you, there are more 
matters than just economics. What might seem most rationale to 
us, our nations oftentimes act directly contrary to their 
national economic interests, and how we bring that kind of 
reasoned analysis to it, I don't know. But I do suggest, Dr. 
Leverett, that you made some very valuable points and it is 
true that we'd all be better off if we could accomplish what 
you suggested there. But it's not easy.
    It strikes me now that our national crisis--I think all of 
you will agree and I'll run down this quickly so we can wrap 
up--is driven by our dependence, is driven by our need for that 
fuel that goes into our mobile vehicles. I believe it was--you 
said that at the beginning--we've got electricity, we've got 
nuclear and coal in large amounts. So that's not a crisis and 
natural gas also is a player there.
    Ms. Stuntz, you suggested--I believe you stated and I think 
I recall that the Council on Foreign Relations' report 
indicated an increased role for nuclear power; is that correct?
    Ms. Stuntz. That's correct. We did not spend a lot of time, 
and did not have the ability to spend a lot of time on that but 
it seems to us, to get at our dependence on oil for 
transportation, we need to do all we can on biofuels, but it 
may not be enough. And if we could move to electric vehicles 
which then recharge at night--and we don't think a plug-in 
hybrid is as far away maybe as some others and there have been 
some exciting developments recently that we can take advantage 
of--clean coal and nuclear and fuels like that--and turn it 
into the transportation field and give us that kind of 
resiliency in the choices that we have now for electricity.
    Senator Sessions. And electricity, unfortunately we've 
gotten in the habit, in recent years, when natural gas prices 
were low, we were using a lot of natural gas to generate 
electricity and we could actually--and I think the D.C. busses 
use natural gas. I mean, natural gas is a possible, a mobile 
vehicle system. I think you'll agree. I see nods there. And 
it's also much cleaner, is it not, Dr. Hormats, in terms of 
global warming gases and carbon?
    Dr. Hormats. Sure, yes.
    Senator Smith. So, to me, that would make a nice move, to 
reduce the natural gas and electricity production and place it 
more in meeting this mobility challenge. Of course, you're also 
suggesting, several of you, that when you increase domestic 
production--I think is something we need to act on. We're doing 
it with the Gulf Coast. My area of Alabama is supportive of 
that and it's good for us. Biofuels, cellulosic ethanol is so 
exciting to me. We have the potential to grow a lot of switch 
grass. It's something I've been interested in and Auburn 
University has done a lot of research on.
    But it's that--as you suggested, is it a trend? Is the 
transformation of that cellulosic, dry material into a fuel 
that's driving the cost--and we're not quite there yet 
technologically and that's where we need to invest money, would 
you agree, Dr. Hormats?
    Dr. Hormats. Absolutely. We have to invest the money in the 
R&D but also in the development plans, to make it commercially 
viable. Yes, I totally agree. And it's very doable. The 
technology is there, it just needs to be expanded and 
commercialized.
    Dr. Birol. May I just add something on biofuels, why it is 
very important to develop the biofuels and giving incentives? 
We should put into perspective that the share of biofuels is 
today far from being a real alternative to oil products. Today, 
the share of biofuels in the global oil supply is less than 0.8 
percent--not even 1 percent. Just a perspective that there is a 
big room for improvement, therefore large incentives, a lot of 
time. It's not a very easy solution.
    Senator Smith. General Wald.
    General Wald. I think, first of all, I didn't get a chance 
to speak much here, but everything that has been talked about 
today has to happen to make this go away. The interesting thing 
about Iran that was discussed--and I don't disagree that dialog 
is a good thing, but the assumption is that Iran is going to 
potentially cooperate in any way. So that would be nice, but we 
have to plan that they won't. Like Mahmoud Ahmadinejad, the 
President of Iran, today has regulated and, via government 
subsidies, developed in 5 years their entire fleet of 
automobiles via natural gas in Iran. Now that's a strategic 
issue to me. And they're going in a direction of their own way 
on this thing.
    So I think, in a sophisticated way, we've been 
disadvantaged with Russia in our negotiations, but I think 
countries like Azerbaijan, as far as our relationship and vis-
a-vis Iran and our preparation for a consequence with Iran that 
will not be in our favor, needs to be addressed today. Now, if 
we were, today, to do everything that was mentioned today on 
this panel, it will still take us 15 to 20 years to get there. 
So we have a window of vulnerability for a decade or more that 
we have to pay attention.
    Then the last thing I'd like to mention on this, on the 
security aspect, is since 1980, the U.S. Government, through 
military application, has put about $50 billion to $60 billion 
a year into the Persian Gulf. That doesn't count the current 
Iraq war or the 1990 Iraq war. And that's good for our country, 
for security interests, but the problem is, we're subsidizing 
world energy. There is nobody else in the world doing this, and 
really, if you look at how much we're paying per gallon, me, as 
a U.S. citizen today, for gasoline, you could almost say it's 
$7 a gallon, based on the fact that we're subsidizing world 
security on this issue. So I think none of these things are 
silver bullets. We have to do all of them. And I would appeal 
to you, as the U.S. leadership and as Senators, to do something 
comprehensive, across the board, as soon as possible.
    Senator Sessions. Well, I think that's an excellent 
statement, General Wald. If you're familiar with Tom Freeman's 
theory that the more wealth these oil countries have, the worse 
they behave, both domestically and in foreign policy; do you 
agree with that? It seems to be true. He even had a little 
chart, the Freedom Chart, I think, that he put with that.
    General Wald. I know Tom and I think his ideas are pretty 
close. I mean, I'm not necessarily sure you can associate the 
oil wealth with bad behavior, because we have a lot too, but I 
do think what it does do is give countries that necessarily 
don't agree with us the freedom to act like they want to.
    Senator Sessions. It gives them the ability to increase 
benefits for that citizen by a small amount and use the extra 
to invest in military ventures and bad behavior, and it seems 
to be absolutely happening. I do agree. And I'm part of, with 
Senators Joe Lieberman and Lindsay Graham and a number of 
others, a caucus that says we should treat the energy question 
as a matter of national security, and I think some of the 
comments you've made here today are real chilling. As Senator 
Smith said, that drives that home, and this panel has made me 
more convinced that we do need to see that.
    Now, Mr. Chairman, I would just say that means a couple 
of--means one big thing. I'm a free market conservative. I 
don't believe in silly policies that drive up the cost to 
consumers for some vague, theoretical, feel-good thing. I'll 
just tell you, that's my view of it. However, if it is a matter 
of national security, then maybe we can justify spending more 
on this issue of transformation and alternative fuels and those 
kind of things than we would otherwise. And, in fact, I think 
we're at that point. I'm prepared to think critically as a 
member of this committee, Mr. Chairman, on how we can utilize 
our resources to enhance both our environment and our economic 
independence.
    Dr. Hormats. Can I just add one quick comment? Our group, 
the Energy Security Leadership Council, is putting together 
people like General Wald, financial people, business people, 
and a number of others to try to look at just that element of 
security. I think all the members, General Wald and myself and 
a number of others, Robbie Diamond, who is here, and others 
stand ready to work with you, because the security element is 
what makes this different from any other commodity. And it's 
not a market environment, so you have to come up with solutions 
where the Government plays a role simply because it is not a 
free market and is vulnerable to the whims of companies and 
countries whose interests are very much different from those of 
the United States.
    The Chairman. OK. Thank you very much, Senator Sessions, 
and thank you all again for being here.
    Let me mention two things. First of all, on this issue of 
biofuels, we've put out a notice that we're going to have an 
all-day conference that the committee is sponsoring, on 
February 1, to look at all the different aspects of the 
biofuels issue. Many stakeholders are already planning to be 
here. I just wanted to mention that again.
    There are quite a few Senators who came and were not able 
to stay and ask questions. If they have questions, we've 
advised them that their questions need to be in by the end of 
business tomorrow. Then we would ask, if any of them are 
directed at specific members of the panel, if you could try to 
respond in a couple of weeks. We would appreciate it very much. 
Thank you again for being here; it was a very useful hearing.
    Senator Sessions. Thank you, Mr. Chairman.
    [Whereupon, at 12 noon, the hearing was adjourned.]
                                APPENDIX

                   Responses to Additional Questions

                              ----------                              

    [The following questions were sent to the witnesses. When 
the answers are received, they will be retained in the 
committee files.]

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                  Washington, DC, January 17, 2007.
Dr. Fatih Birol,
Chief Economist, Head of the Economic Analysis Division International 
        Energy Agency, Paris, France.
    Dear Dr. Birol: I would like to take this opportunity to thank you 
for appearing before the Senate Committee on Energy and Natural 
Resources on Wednesday, January 10, 2007 to give testimony regarding 
the global oil balance and its implications for the U.S. economic and 
national security.
    I am enclosing a list of questions which have been submitted for 
the record. If possible, please respond to these questions by email to 
Amanda Kelly, 
amanda_kelly.energy.senate.gov, by Tuesday, February 6, 2007.
            Sincerely,
                                             Jeff Bingaman,
                                                          Chairman.
[Enclosure.]
             Questions From Senator Domenici for Dr. Birol
    1. Your written testimony indicates that your ``Alternative Case,'' 
includes savings from fuel-switching in the power sector. What types of 
power did you assume we would be switching to?
    2. At the hearing, you suggested that the chart showing the 
relative size of reserves held by the Nation's oil companies as a 
``static'' picture, and that a projection of future reserves would show 
an even more dramatic difference between reserves held by state-and 
investor-owned oil companies. We would appreciate any further 
information and data reflecting those projections.
           Questions From Senator Domenici for All Witnesses
    1. At the hearing, I heard concerns expressed regarding the lack of 
investment in major oil producing regions, particularly the Middle 
East, by investor-owned corporations. Even in those areas that have not 
been closed to private investment, political instability, and a lack of 
a legal infrastructure for entering into and enforcing contracts seem 
to be major obstacles. How can the U.S. convince other states that 
legal and business models that encourage private investment are in 
their interest as well as ours?
    2. Do you have any suggestions for how investor owned companies can 
position themselves to gain greater access to state-held resources? In 
the past, these corporations have had expertise that was valuable to 
the national oil companies. To what extent is this still true, and what 
can
    3. Is it inevitable that investor-owned companies are destined to 
simply fulfill the role of ``service companies'' to producers of 
nationally-owned resources'? How does that trend affect U.S. energy 
security'?
    4. The fact that an oil company is nationally-owned does not 
necessarily exclude the benefits of competition and foreign 
participation. An example is Norway, How can we promote that business 
model in the world'?
    5. Today we heard testimony that, as a result of the lack of access 
by investor-owned oil companies to the world's oil ``cheapest'' oil 
reserves, they are increasingly forced to pursue opportunities in older 
and more technologically challenging fields. Do you have any 
information regarding the level of investment on the part of investor-
owned companies that will be required for them to maintain their 
current levels of production? How does the cost to those companies 
required to maintain their current level of production compare to the 
investment required by the world's largest nationally-owned companies?
    6. Some analysts have suggested that the trend toward privatization 
occurred when prices were low, and governments wanted to spread risk. 
Now nationalization is occurring when prices are high, because 
governments want to capture the profits. There have been proposals in 
the U.S. to increase taxes on oil companies, which seems to be a 
different path to the same goal. Whether the policy is direct 
nationalization, or appropriation of profits through new taxes, doesn't 
this increase risk to investors, reducing the industry's ability to 
make new capital investment?
                    Questions From Senator Cantwell
      question one: impact of growing chinese fossil fuel demands
    The growth of China's energy economy is absolutely astounding. On a 
recent trip there I learned that they are building roughly 1,000 
megawatts of electrical capacity per week, most of it using outdated 
coal-fired technology. In a single year the Chinese are now putting up 
the equivalent electricity capacity as the entire Spanish electrical 
grid.
    I also learned that while China only became a net oil importer in 
1993, with their accelerating rush towards private vehicles--by 2010 
China is expected to have 90 times more cars than they did 1990--
Chinese exports in 2030 will match those of the U.S. today.
    It is also important to note that new projections predict China 
will overtake the United States as the world's largest carbon dioxide 
emitter by 2009, a full decade earlier than previous projections.
    I share the deep concern of several of our witnesses that if these 
trends continue, the results for both global oil demand and carbon 
emissions will be disastrous.
    That's why I believe we must proactively engage and collaborate 
with China on clean energy alternatives for both our nation's and the 
world's benefit. I am proud that my home state of Washington already 
has significant trade ties with China, and we view it as a vast 
potential export market for our homegrown clean energy technologies.
All Witnesses:
    How can the United States constructively engage China as a partner 
in securing a stable global oil economy?
    Senior Chinese officials I met with told they fully recognize the 
economic, environmental, and security vulnerabilities of their growing 
fossil fuel dependence, but said they saw few alternatives to meeting 
their country's incredible demand for energy. How can we help get them 
the clean energy technologies they want and we want to sell to them? 
Could Chinese adoption of these technologies create the economies of 
scale that would drive down the production costs of many renewable 
energy technologies?
    Are there likely to be other benefits of such energy collaboration 
with the Chinese in terms of other U.S. regional security objectives 
such as in North Korea, Iran, and the former Soviet Republics? For 
example, China is the number one importer of oil and gas from Iran and 
they are bound by energy deals valued at around $120 billion dollars.
    Dr. Leverett, what do you think the U.S. can the United States do 
to counter the Sino-Russian energy axis described in your testimony?
         question two: importance of reducing u.s. oil demand 
                        in transportation sector
    It is clear that targeting our transportation system's demand for 
oil is a key component of improving our nation's energy security. And 
in fact most future global oil demand is linked to transportation use. 
If we are going to make any difference in our increasingly dire oil 
addiction, we need a multi-tiered effort that both increases our use of 
alternative fuels and reduces our overall demand for fossil fuels.
Success of Vehicle Fuel Economy Standards
    According to the 2002 report by the National Academies of Science, 
gasoline consumption (and oil imports) would be 2.8 million barrels per 
day higher if CAFE standards had not been imposed in the mid 1970s 
following the Arab Oil Embargo. Unfortunately, after doubling the 
average gas mileage of U.S. vehicles CAFE standards stagnated and have 
not been increased since 1985.
    Next week, I look forward to joining a bipartisan coalition in 
reintroducing our ``Ten-in-Ten Fuel Economy Act,'' which would increase 
CAFE standards for all passenger vehicles, including light trucks and 
SUVs, by 10 miles per gallon over 10 years. This balanced and 
technically feasible bill would save 25 million barrels of oil per day 
by 2025, the same amount of oil we currently import from the Persian 
Gulf.

All Witnesses:
   How do you think a reduction in demand of 2.5 million 
        barrels per day would help improve our reliance on foreign oil 
        imports?
   Do you believe that increasing the demand for more efficient 
        vehicles in the largest car market in the world might affect 
        the efficiency of vehicles sold in other countries?
   A recent analysis by an Energy Department analysis found 
        that increasing CAFE standards to a combined fleet average of 
        35 miles per gallon could save as much as 0.5% of our Gross 
        Domestic Product--roughly $60 billion per year or $200 per 
        capita per year in the United States. Given this tremendous 
        benefit, why do you think it has been so difficult to increase 
        CAFE standards?
   Mr. Wald, you testified that increasing transportation 
        efficiency is the single most effective step the U.S. can take 
        to improve its energy security. Can you expand on why you 
        think, from a military and national security perspective, it is 
        critical that we increase the overall efficiency of nation's 
        transportation fleet?
   Mr. Wald, I also understand that the Defense Department 
        spends $10.6 billion annually on fuel, or 97 percent of the 
        federal government's use, and almost 2 percent of the entire 
        country's use. And that as much of 70 percent of our military 
        convoys in Iraq, which are increasingly at risk from roadside 
        bombs, are carrying fuel.

    Given these facts, how could the military benefits from more 
efficient vehicle technology? Would you say such technologies would 
qualitatively increase our nation's military strength?
Breakthrough technologies
   Do any of the witnesses see any groundbreaking or game 
        changing technologies that could dramatically change this bleak 
        future oil demand outlook?
   Plug-in hybrids promise to break the historic wall between. 
        the transportation and electricity sector and provide new and 
        diverse alternative energy sources to displace gasoline and 
        diesel.
   What role will biofuels have in replacing world oil demand?
   Would it be in the national interest to pursue an all out 
        effect in vehicle lightweighting technologies such as the use 
        of composites, or better battery technologies for vehicles?
            question three: mystery of high world oil prices
    The projected price of oil in competitive world market has been 
estimated by the Energy Department to be in the range of S 15 per 
barrel. And several sources estimate the most efficient OPEC 
production, in particular Saudi Arabia where the bulk of world oil 
reserves are, cost as little as $2 to S5 per barrel to produce. Just 
about four years ago OPEC's target world oil price was between $22 and 
$28 per barrels. Now we seem content with $50 to 60 per barrel oil, and 
would be happy if it stayed there for years to come!
All Witnesses:

   What caused this dramatic rebaselining in the world oil 
        price? How come $25 per barrel was okay for everyone a few 
        years ago, now consuming nations would be happy to pay double 
        that.
   What does this target price shift mean in terms of real 
        dollars transferred from U.S. consumers to OPEC and other major 
        oil producers?
   Are there ways we can achieve more stability in the world 
        oil price? Why are there no long-term price contracts in the 
        oil business? It would seem be in the interest of both 
        producing and consuming nations to know in advance how much 
        they would be spending or receiving for a certain amount of 
        oil.
   As you know, the United States manages a strategic petroleum 
        reserve and IEA maintains a shared strategic reserve. Have 
        these proven effective in securing reasonable pricing from 
        OPEC? Could larger reserves help stabilize world oil prices, or 
        at least prevent volatility or future supply shocks?
   What is the value in increasing domestic oil production in 
        environmentally sensitive US oil fields? Isn't this just at 
        best a drop in the bucket in terms of global oil supply?
    question four: need for collaboration among major oil consumers 
                      rather than military action
    For decades now, ensuring our nation's oil security has been 
pursued by both competitive economic means and political-military 
means. It now seems that the net effect of overt military action has 
proven to be at most of questionable value and may even be 
counterproductive and contributed to the current destabilization we see 
in the world oil market.
    Several witnesses have described that the geographic distribution 
of the world's fossil fuel reserves means that OPEC will only gain more 
leverage in setting future world energy prices. This dynamic, combined 
with the fact that National Oil Companies control 80 to 90 percent of 
the world's oil supplies, means to me that maybe it would be wiser to 
focus on collaborative action among major oil consumers, rather than 
continue to rely on military action.
All Witnesses:

   What do you think the net effect of the Iraq war on the 
        world oil price?
   What is the prospective effect of a total collapse of the 
        Iraq oil sector?
   Could an organization of major oil consuming countries 
        useful or feasible as a counterweight to OPEC?
   Could IEA form the nucleus of such an organization?
   How can we quickly allow China and other major oil consuming 
        countries to participate fully in and SEA framework?

Mr. Wald:
   In addition to being at odds with a collaborative approach 
        to oil conservation and carbon emissions reduction, do you 
        believe the use of US military power to guarantee oil security 
        feasible in world where OPEC members become nuclear weapons 
        states? How can one or two U.S. carriers project compelling 
        power against a nuclear-armed Iran?
           question five: iran's role in the world oil market
The ``Oil weapon''
    As was mentioned in witness testimony, Iran has threatened to use 
its oil supply as a weapon to achieve its strategic objectives, 
including building a nuclear energy, and probably a nuclear weapons 
program.

   How realistic is this threat and what can we do to counter 
        it?
   I understand that while Iran is a major oil exporter, they 
        have a severe refinery shortage and must import much of their 
        gasoline. Is this a potential leverage point for trade 
        sanctions against Iran?
Iran's oil sector evolution
    A recent article by Roger Stern suggests that Iran's oil export 
capacity might dry up within ten to fifteen years, essentially 
eliminating a vital government revenue source. This is in contrast to 
the testimony today which shows the potential of expansion to pre Iran-
Iraq war levels of over 6 million barrels per day.

   Do you believe the Stern analysis is credible'? Obviously 
        policy implications toward Iran are quite different if they are 
        really not going to be a major oil exporter within a couple 
        years.
Negotiating with Iran

   Dr Leverett's testimony suggests that the US needs to strike 
        a ``grand bargain'' with Iran. What would be the terms of such 
        a bargain as you envision them?
                     Questions from Senator Sanders
    1. For Ms. Stuntz--As I understand it, the National Security 
Council's energy task force has recommended an automatic 4% yearly 
increase in CAFE standards. I am interested in what factors were 
considered in making the decision on what the specific yearly increase 
should be.
    2. For All Members of the Panel--Unfortunately, not many of you 
mentioned climate change in your testimony and it only briefly came up 
during the hearing. This is a major concern for me because the ongoing 
burning of fossil fuels--most obviously oil--is leading to global 
warming. Global warming, in turn, is increasing pressure on natural 
resources across the globe, and many experts are already warning that 
this pressure could lead to increased civil unrest in many parts of the 
world, unrest that could lead to armed conflicts. The ``geopolitics of 
oil'' should at the very least mention the ``geopolitics of global 
warming.'' With this in mind, why is there not more emphasis on this 
important issue in your testimony?
                       Question From Mr. Sessions
    1. Many commentators have criticized the usage of the phrase 
``energy independence,'' pointing out that it sets up an unrealistic--
if not impossible or undesirable--goal for U.S. energy policy. Given 
the various priorities that we face when discussing our energy policy, 
particularly when we consider the issue as a matter of national 
security, how would each member of the panel articulate the over-
arching goal of our policy?
                                 ______
                                 
                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                  Washington, DC, January 17, 2007.
Mr. Robert D. Hormats,
Vice Chairman, Goldman Sachs (International), New York, NY.
    Dear Mr. Hormats: I would like to take this opportunity to thank 
you for appearing before the Senate Committee on Energy and Natural 
Resources on Wednesday, January 10, 2007 to give testimony regarding 
the global oil balance and its implications for the U.S. economic and 
national security.
    I am enclosing a list of questions which have been submitted for 
the record. If possible, please respond to these questions by email to 
Amanda Kelly, 
amanda_kelly.energy.senate.gov, by Tuesday, February 6, 2007.
            Sincerely,
                                             Jeff Bingaman,
                                                          Chairman.
[Enclosure.]
           Questions From Senator Domenici for All Witnesses
    1. At the hearing, I heard concerns expressed regarding the lack of 
investment in major oil producing regions, particularly the Middle 
East, by investor-owned corporations. Even in those areas that have not 
been closed to private investment, political instability, and a lack of 
a legal infrastructure for entering into and enforcing contracts seem 
to be major obstacles. How can the U.S. convince other states that 
legal and business models that encourage private investment are in 
their interest as well as ours?
    2. Do you have any suggestions for how investor owned companies can 
position themselves to gain greater access to state-held resources? In 
the past, these corporations have had expertise that was valuable to 
the national oil companies. To what extent is this still true, and what 
can
    3. Is it inevitable that investor-owned companies are destined to 
simply fulfill the role of ``service companies'' to producers of 
nationally-owned resources? How does that trend affect U.S. energy 
security?
    4. The fact that an oil company is nationally-owned does not 
necessarily exclude the benefits of competition and foreign 
participation. An example is Norway. How can we promote that business 
model in the world?
    5. Today we heard testimony that, as a result of the lack of access 
by investor-owned oil companies to the world's oil ``cheapest'' oil 
reserves, they are increasingly forced to pursue opportunities in older 
and more technologically challenging fields. Do you have any 
information regarding the level of investment on the part of investor-
owned companies that will be required for them to maintain their 
current levels of production? How does the cost to those companies 
required to maintain their current level of production compare to the 
investment required by the world's largest nationally-owned companies?
    6. Some analysts have suggested that the trend toward privatization 
occurred when prices were low, and governments wanted to spread risk. 
Now nationalization is occurring when prices are high, because 
governments want to capture the profits. There have been proposals in 
the U.S. to increase taxes on oil companies, which seems to be a 
different path to the same goal. Whether the policy is direct 
nationalization, or appropriation of profits through new taxes, doesn't 
this increase risk to investors, reducing the industry's ability to 
make new capital investment?
                    Questions From Senator Cantwell
      question one: impact of growing chinese fossil fuel demands
    The growth of China's energy economy is absolutely astounding. On a 
recent trip there I learned that they are building roughly 1,400 
megawatts of electrical capacity per week, most of it using outdated 
coal-fired technology. in a single year the Chinese are now putting up 
the equivalent electricity capacity as the entire Spanish electrical 
grid.
    I also learned that while China only became a net oil importer in 
1993, with their accelerating rush towards private vehicles--by 2010 
China is expected to have 90 times more cars than they did 1990--
Chinese exports in 2030 will match those of the U.S. today.
    It is also important to note that new projections predict China 
will overtake the United States as the world's largest carbon dioxide 
emitter by 2009, a full decade earlier than previous projections.
    share the deep concern of several of our witnesses that if these 
trends continue, the results for both global oil demand and carbon 
emissions will be disastrous.
    That's why I believe we must proactively engage and collaborate 
with China on clean energy alternatives for both our nation's and the 
world's benefit. I am proud that my home state of Washington already 
has significant trade ties with China, and we view it as a vast 
potential export market for our homegrown clean energy technologies.
All Witnesses:
    How can the United States constructively engage China as a partner 
in securing a stable global oil economy?
    Senior Chinese officials I met with told they fully recognize the 
economic, environmental, and security vulnerabilities of their growing 
fossil fuel dependence, but said they saw few alternatives to meeting 
their country's incredible demand for energy. How can we help get them 
the clean energy technologies they want and we want to sell to them? 
Could Chinese adoption of these technologies create the economies of 
scale that would drive down the production costs of many renewable 
energy technologies?
    Are there likely to be other benefits of such energy collaboration 
with the Chinese in terms of other U.S. regional security objectives 
such as in North Korea, Iran, and the former Soviet Republics? For 
example, China is the number one importer of oil and gas from Iran and 
they are bound by energy deals valued at around $120 billion dollars.
    Dr. Leverett, what do you think the U.S. can the United States do 
to counter the Sino-Russian energy axis described in your testimony?
         question two: importance of reducing u.s. oil demand 
                        in transportation sector
    It is clear that targeting our transportation system's demand for 
oil is a key component of improving our nation's energy security. And 
in fact most future global oil demand is linked to transportation use. 
If we are going to make any difference in our increasingly dire oil 
addiction, we need a multi-tiered effort that both increases our use of 
alternative fuels and reduces our overall demand for fossil fuels.
Success of Vehicle Fuel Economy Standards
    According to the 2002 report by the National Academies of Science, 
gasoline consumption (and oil imports) would be 2.8 million barrels per 
day higher if CAFE standards had not been imposed in the mid 1970s 
following the Arab Oil Embargo. Unfortunately, after doubling the 
average gas mileage of U.S. vehicles, CAFE standards stagnated and have 
not been increased since 1985.
    Next week, I look forward to joining a bipartisan coalition in 
reintroducing our ``Ten-in-Ten Fuel Economy Act,'' which would increase 
CAFE standards for all passenger vehicles, including light trucks and 
SUVs, by 10 miles per gallon over 10 years. This balanced and 
technically feasible bill would save 2.5 million barrels of oil per day 
by 2025, the same amount of oil we currently import from the Persian 
Gulf.

All Witnesses:
   How do you think a reduction in demand of 2.5 million bands 
        per day would help improve our reliance on foreign oil imports?
   Do you believe that increasing the demand for more efficient 
        vehicles in the largest car market in the world might affect 
        the efficiency of vehicles sold in other countries?
   A recent analysis by an Energy Department analysis found 
        that increasing CAFE standards to a combined fleet average of 
        35 miles per gallon could save as much as 0.5% of our Gross 
        Domestic Product--roughly $60 billion per year or $200 per 
        capita per year in the United States. Given this tremendous 
        benefit, why do you think it has been so difficult to increase 
        CAFE standards?
   Mr. Wald, you testified that increasing transportation 
        efficiency is the single most effective step the U.S. can take 
        to improve its energy security. Can you expand on why you 
        think, from a military and national security perspective, it is 
        critical that we increase the overall efficiency of nation's 
        transportation fleet?
   Mr. Wald, I also understand that the Defense Department 
        spends $10.6 billion annually on fuel, or 97 percent of the 
        federal government's use, and almost 2 percent of the entire 
        country's use. And that as much of 70 percent of our military 
        convoys in Iraq, which are increasingly at risk from roadside 
        bombs, are carrying fuel.

    Given these facts, how could the military benefits from more 
efficient vehicle technology? Would you say such technologies would 
qualitatively increase our nation's military strength?
Breakthrough technologies
   Do any of the witnesses see any groundbreaking or game 
        changing technologies that could dramatically change this bleak 
        future oil demand outlook?
   Plug-in hybrids promise to break the historic wall between 
        the transportation and electricity sector and provide new and 
        diverse alternative energy sources to displace gasoline and 
        diesel.
   What role will biofuels have in replacing world oil demand?
   Would it be in the national interest to pursue an all out 
        effect in vehicle lightweighting technologies such as the use 
        of composites, or better battery technologies for vehicles?
            question three: mystery of high world oil prices
    The projected price of oil in competitive world market has been 
estimated by the Energy Department to be in the range of $15 per 
barrel. And several sources estimate the most efficient OPEC 
production, in particular Saudi Arabia where the bulk of world oil 
reserves are, cost as little as $2 to $5 per barrel to produce. Just 
about four years ago OPEC's target world oil price was between $22 and 
$28 per barrels. Now we seem content with $50 to 60 per barrel oil, and 
would be happy if it stayed there for years to come!
All Witnesses:

   What caused this dramatic rebaselining in the world oil 
        price? How come $25 per ban-el was okay for everyone a few 
        years ago, now consuming nations would be happy to pay double 
        that.
   What does this target price shift mean in terTns of real 
        dollars transferred from U.S. consumers to OPEC and other major 
        oil producers?
   Are there ways we can achieve more stability in the world 
        oil price? Why are there no long-term price contracts in the 
        oil business? It would seem be in the interest of both 
        producing and consuming nations to know in advance how much 
        they would be spending or receiving for a certain amount of 
        oil.
   As you know, the United States manages a strategic petroleum 
        reserve and IEA maintains a shared strategic reserve. Have 
        these proven effective in securing reasonable pricing from 
        OPEC? Could larger reserves help stabilize world oil prices, or 
        at least prevent volatility or future supply shocks?
   What is the value in increasing domestic oil production in 
        environmentally sensitive US oil fields? Isn't this just at 
        best a drop in the bucket in terms of global oil supply?
    question four: need for collaboration among major oil consumers 
                      rather than military action
    For decades now, ensuring our nation's oil security has been 
pursued by both competitive economic means and political-military 
means. It now seems that the net effect of overt military action has 
proven to be at most of questionable value, and may even be 
counterproductive and contributed to the current destabilization we see 
in the world oil market.
    Several witnesses have described that the geographic distribution 
of the world's fossil fuel reserves means that OPEC will only gain more 
leverage in setting future world energy prices. This dynamic, combined 
with the fact that National Oil Companies control 80 to 90 percent of 
the world's oil supplies, means to me that maybe it would be wiser to 
focus on collaborative action among major oil consumers, rather than 
continue to rely on military action.
All Witnesses:

   What do you think the net effect of the Iraq war on the 
        world oil price?
   What is the prospective effect of a total collapse of the 
        Iraq oil sector?
   Could an organization of major oil consuming countries 
        useful or feasible as a counterweight to OPEC?
   Could IEA form the nucleus of such an organization?
   How can we quickly allow China and other major oil consuming 
        countries to participate fully in andMA framework?

Mr. Wald:
   In addition to being at odds with a collaborative approach 
        to oil conservation and carbon emissions reduction, do you 
        believe the use of US military power to guarantee oil security 
        feasible in world where OPEC members become nuclear weapons 
        states? How can one or two U.S. carriers project compelling 
        power against a nuclear-armed Iran?
           question five: iran's role in the world oil market
The ``Oil weapon''
    As was mentioned in witness testimony, Iran has threatened to use 
its oil supply as a weapon to achieve its strategic objectives, 
including building a nuclear energy, and probably a nuclear weapons 
program.

   How realistic is this threat and what can we do to counter 
        it?
   I understand that while Iran is a major oil exporter, they 
        have a severe refinery shortage and must import much of their 
        gasoline. Is this a potential leverage point for trade 
        sanctions against -Iran?
Iran's oil sector evolution
    A recent article by Roger Stern suggests that Iran's oil export 
capacity might dry up within ten to fifteen years, essentially 
eliminating a vital government revenue source. This is in contrast to 
the testimony today which shows the potential of expansion to pre Iran-
Iraq war levels of over 6 million barrels per day.

   Do you believe the Stem analysis is credible? Obviously 
        policy implications toward Iran are quite different if they are 
        really not going to be a major oil exporter within a couple 
        years.
Negotiating with Iran
   Dr Leverett's testimony suggests that the US needs to strike 
        a ``grand bargain'' with Iran. What would be the terms of such 
        a bargain as you envision them?
                     questions from senator sanders
    1. For Ms. Stunt--As I understand it, the National Security 
Council's energy task force has recommended an automatic 4% yearly 
increase in CAFE standards. I am interested in what factors were 
considered in making the decision on what the specific yearly increase 
should be.
    2. For All Members of the Panel--Unfortunately, not many of you 
mentioned climate change in your testimony and it only briefly came up 
during the hearing. This is a major concern for me because the ongoing 
burning of fossil fuels--most obviously oil--is leading to global 
warming. Global warming, in turn, is increasing pressure on natural 
resources across the globe, and many experts are already warning that 
this pressure could lead to increased civil unrest in many parts of the 
world, unrest that could lead to armed conflicts. The ``geopolitics of 
oil'' should at the very least mention the ``geopolitics of global 
warming.'' With this in mind, why is there not more emphasis on this 
important issue in your testimony?
                     question from senator sessions
    1. Many commentators have criticized the usage of the phrase 
``energy independence,'' pointing out that it sets up an unrealistic--
if not impossible or undesirable--goal for U.S. energy policy. Given 
the various priorities that we face when discussing our energy policy, 
particularly when we consider the issue as a matter of national 
security, how would each member of the panel articulate the over-
arching goal of our policy?
                                 ______
                                 
                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                  Washington, DC, January 17, 2007.
Dr. Flynt Leverett,
Senior Fellow, Director, Geopolitics of Energy Initiative, New America 
        Foundation, Washington, DC.
    Dear Dr. Leverett: I would like to take this opportunity to thank 
you for appearing before the Senate Committee on Energy and Natural 
Resources on Wednesday, January 10, 2007 to give testimony regarding 
the global oil balance and its implications for the U.S. economic and 
national security.
    I am enclosing a list of questions which have been submitted for 
the record. If possible, please respond to these questions by email to 
Amanda Kelly, 
amanda_kelly.energy.senate.gov, by Tuesday, February 6, 2007.
            Sincerely,
                                             Jeff Bingaman,
                                                          Chairman.
[Enclosure.]
                      Questions for All Witnesses
    1. At the hearing, I heard concerns expressed regarding the lack of 
investment in major oil producing regions, particularly the Middle 
East, by investor-owned corporations. Even in those areas that have not 
been closed to private investment, political instability, and a lack of 
a legal infrastructure for entering into and enforcing contracts seem 
to be major obstacles. How can the U.S. convince other states that 
legal and business models that encourage private investment are in 
their interest as well as ours?
    2. Do you have any suggestions for how investor owned companies can 
position themselves to gain greater access to state-held resources? In 
the past, these corporations have had expertise that was valuable to 
the national oil companies. To what extent is this still true, and what 
can
    3. is it inevitable that investor-owned companies are destined to 
simply fulfill the role of ``service companies'' to producers of 
nationally-owned resources? How does that trend affect U.S. energy 
security?
    4. The fact that an oil company is nationally-owned does not 
necessarily exclude the benefits of competition and foreign 
participation. An example is Norway. How can we promote that business 
model in the world?
    5. Today we heard testimony that, as a result of the lack of access 
by investor-owned oil companies to the world's oil ``cheapest'' oil 
reserves, they are increasingly forced to pursue opportunities in older 
and more technologically challenging fields. Do you have any 
information regarding the level of investment on the part of investor-
owned companies that will be required for them to maintain their 
current levels of production? How does the cost to those companies 
required to maintain their current level of production compare to the 
investment required by the world's largest nationally-owned companies?
    6. Some analysts have suggested that the trend toward privatization 
occurred when prices were low, and governments wanted to spread risk. 
Now nationalization is occurring when prices are high, because 
governments want to capture the profits. There have been proposals in 
the U.S. to increase taxes on oil companies, which seems to be a 
different path to the same goal. Whether the policy is direct 
nationalization, or appropriation of profits through new taxes, doesn't 
this increase risk to investors, reducing the industry's ability to 
make new capital investment?
                     Question From Senator Cantwell
      question one: impact of growing chinese fossil fuel demands
    The growth of China's energy economy is absolutely astounding. On a 
recent trip there I learned that they are building roughly 1,000 
megawatts of electrical capacity per week, most of it using outdated 
coal-fired technology. in a single year the Chinese are now putting up 
the equivalent electricity capacity as the entire Spanish electrical 
grid.
    I also learned that while China only became a net oil importer in 
1993, with their accelerating rush towards private vehicles--by 2010 
China is expected to have 90 times more cars than they did 1990--
Chinese exports in 2030 will match those of the U.S. today.
    It is also important to note that new projections predict China 
will overtake the United States as the world's largest carbon dioxide 
emitter by 2009, a full decade earlier than previous projections.
    I share the deep concern of several of our witnesses that if these 
trends continue, the results for both global oil demand and carbon 
emissions will be disastrous.
    That's why I believe we must proactively engage and collaborate 
with China on clean energy alternatives for both our nation's and the 
world's benefit. I am proud that my home state of Washington already 
has significant trade ties with China, and we view it as a vast 
potential export market for our homegrown clean energy technologies.
All Witnesses:
    How can the United States constructively engage China as a partner 
in securing a stable global oil economy?
    Senior Chinese officials I met with told they fully recognize the 
economic, environmental, and security vulnerabilities of their growing 
fossil fuel dependence, but said they saw few alternatives to meeting 
their country's incredible demand for energy. How can we help get them 
the clean energy technologies they want and we want to sell to them? 
Could Chinese adoption of these technologies create the economies of 
scale that would drive down the production costs of many renewable 
energy technologies?
    Are there likely to be other benefits of such energy collaboration 
with the Chinese in terms of other U.S. regional security objectives 
such as in North Korea, Iran, and the former Soviet Republics? For 
example, China is the number one importer of oil and gas from Iran and 
they are bound by energy deals valued at around $120 billion dollars.
    Dr. Leverett, what do you think the U.S. can the United States do 
to counter the Sino-Russian energy axis described in your testimony?
         question two: importance of reducing u.s. oil demand 
                        in transportation sector
    It is clear that targeting our transportation system's demand for 
oil is a key component of improving our nation's energy security. And 
in fact most future global oil demand is linked to transportation use. 
If we are going to make any difference in our increasingly dire oil 
addiction, we need a multi-tiered effort that both increases our use of 
alternative fuels and reduces our overall demand for fossil fuels.
Success of Vehicle Fuel Economy Standards
    According to the 2002 report by the National Academies of Science, 
gasoline consumption (and oil imports) would be 28 million barrels per 
day higher if CAFE standards had not been imposed in the mid 1970s 
following the Arab Oil Embargo. Unfortunately, after doubling the 
average gas mileage of U.S. vehicles, CAFE standards stagnated and have 
not been increased since 1985.
    Next week, I look forward to joining a bipartisan coalition in 
reintroducing our ``Ten-in-Ten Fuel Economy Act,'' which would increase 
CAFE standards for all passenger vehicles, including light trucks and 
SU-Vs, by 10 miles per gallon over 10 years. This balanced and 
technically feasible bill would save 2.5 million barrels of oil per day 
by 2025, the same amount of oil we currently import from the Persian 
Gulf.

All Witnesses:
   How do you think a reduction in demand of 2.5 million 
        barrels per day would help improve our reliance on foreign oil 
        imports?
   Do you believe that increasing the demand for more efficient 
        vehicles in the largest car market in the world might affect 
        the efficiency of vehicles sold in other countries?
   A recent analysis by an Energy Department analysis found 
        that increasing CAFE standards to a combined fleet average of 
        35 miles per gallon could save as much as 0.5% of our Gross 
        Domestic Product--roughly $60 billion per year or $200 per 
        capita per year in the United States. Given this tremendous 
        benefit, why do you think it has been so difficult to increase 
        CAFE standards?
   Mr. Wald, you testified that increasing transportation 
        efficiency is the single most effective step the U.S. can take 
        to improve its energy security. Can you expand on why you 
        think, from a military and national security perspective, it is 
        critical that we increase the overall efficiency of nation's 
        transportation fleet?
   Mr. Wald, I also understand that the Defense Department 
        spends $10.6 billion annually on fuel, or 97 percent of the 
        federal government's use, and almost 2 percent of the entire 
        country's use. And that as much of 70 percent of our military 
        convoys in Iraq, which are increasingly at risk from roadside 
        bombs, are carrying fuel.

    Given these facts, how could the military benefits from more 
efficient vehicle technology? Would you say such technologies would 
qualitatively increase our nation's military strength?
Breakthrough technologies
   Do any of the witnesses see any groundbreaking or game 
        changing technologies that could dramatically change this bleak 
        future oil demand outlook?
   Plug-in hybrids promise to break the historic wall between 
        the transportation and electricity sector and provide new and 
        diverse alternative energy sources to displace gasoline and 
        diesel.
   What role will biofuels have in replacing world oil demand?
   Would it be in the national interest to pursue an all out 
        effect in vehicle lightweighting technologies such as the use 
        of composites, or better battery technologies for vehicles?
            question three: mystery of high world oil prices
    The projected price of oil in competitive world market has been 
estimated by the Energy Department to be in the range of $15 per 
barrel. And several sources estimate the most efficient OPEC 
production, in particular Saudi Arabia where the bulk of world oil 
reserves are, cost as little as $2 to $5 per barrel to produce. Just 
about four years ago OPEC's target world oil price was between $22 and 
$28 per barrels. Now we seem content with $50 to 60 per barrel oil, and 
would be happy if it stayed there for years to come!
All Witnesses:

   What caused this dramatic rebaselining in the world oil 
        price? How come $25 per barrel was okay for everyone a few 
        years ago, now consuming nations would be happy to pay double 
        that.
   What does this target price shift mean in terms of real 
        dollars transferred from U.S. consumers to OPEC and other major 
        oil producers?
   Are there ways we can achieve more stability in the world 
        oil price? Why are there no long-term price contracts in the 
        oil business? It would seem be in the interest of both 
        producing and consuming nations to know in advance how much 
        they would be spending or receiving for a certain amount of 
        oil.
   As you know, the United States manages a strategic petroleum 
        reserve and IEA maintains a shared strategic reserve. Have 
        these proven effective in securing reasonable pricing from 
        OPEC? Could larger reserves help stabilize world oil prices, or 
        at least prevent volatility or future supply shocks?
   What is the value in increasing domestic oil production in 
        environmentally sensitive US oil fields? Isn't this just at 
        best a drop in the bucket in terms of global oil supply?
    question four: need for collaboration among major oil consumers 
                      rather than military action
    For decades now, ensuring our nation's oil security has been 
pursued by both competitive economic means and political-military 
means. It now seems that the net effect of overt military action has 
proven to be at most of questionable value, and may even be 
counterproductive and contributed to the current destabilization we see 
in the world oil market.
    Several witnesses have described that the geographic distribution 
of the world's fossil fuel reserves means that OPEC will only gain more 
leverage in setting future world energy prices. This dynamic, combined 
with the fact that National Oil Companies control 80 to 90 percent of 
the world's oil supplies means to me that maybe it would be wiser to 
focus on collaborative action among major oil consumers, rather than 
continue to rely on military action.
All Witnesses:

   What do you think the net effect of the Iraq war on the 
        world oil price?
   What is the prospective effect of a total collapse of the 
        Iraq oil sector?
   Could an organization of major oil consuming countries 
        useful or feasible as a counterweight to OPEC?
   Could IEA form the nucleus of such an organization?
   How can we quickly allow China and other major oil consuming 
        countries to participate fully in and IEA framework?

Mr. Wald:
   In addition to being at odds with a collaborative approach 
        to oil conservation and carbon emissions reduction, do you 
        believe the use of US military power to guarantee oil security 
        feasible in world where OPEC members become nuclear weapons 
        states? How can one or two U.S. carriers project compelling 
        power against a nuclear---armed Iran?
           question five: iran's role in the world oil market
The ``Oil weapon''
    As was mentioned in witness testimony, Iran has threatened to use 
its oil supply as a weapon to achieve its strategic objectives 
including building a nuclear energy, and probably a nuclear weapons 
program.

   How realistic is this threat and what can we do to counter 
        it?
   I understand that while Iran is a major oil exporter, they 
        have a severe refinery shortage arid must import much of their 
        gasoline. Is this a potential leverage point for trade 
        sanctions against Iran?
Iran's oil sector evolution
    A recent article by Roger Stern suggests that Iran's oil export 
capacity might dry up within ten to fifteen years, essentially 
eliminating a vital government revenue source. This is in contrast to 
the testimony today which shows the potential of expansion to pre Iran-
Traq war levels of over 6 million barrels per day.

   Do you believe the Stern analysis is credible? Obviously 
        policy implications toward Iran are quite different if they are 
        really not going to be a major oil exporter within a couple 
        years.
Negotiating with Iran
   Dr Leverett's testimony suggests that the US needs to strike 
        a ``grand bargain'' with Iran. What would be the terms of such 
        a bargain as you envision them?
                     questions from senator sanders
    1. For Ms. Stuntz--As I understand it, the National Security 
Council's energy task force has recommended an automatic 4% yearly 
increase in CAFE standards. I am interested in what factors were 
considered in making the decision on what the specific yearly increase 
should be.
    2. For All Members of the Panel--Unfortunately, not many of you 
mentioned climate change in your testimony and it only briefly came up 
during the hearing. This is a major concern for me because the ongoing 
burning of fossil fuels--most obviously oil--is leading to global 
warming. Global warming, in turn, is increasing pressure on natural 
resources across the globe, and many experts are already warning that 
this pressure could lead to increased civil unrest in many parts of the 
world, unrest that could lead to armed conflicts. The ``geopolitics of 
oil'' should at the very least mention the ``geopolitics of global 
warming.'' With this in mind, why is there not more emphasis on this 
important issue in your testimony?
                     question from senator sessions
    1. Many commentators have criticized the usage of the phrase 
``energy independence,'' pointing out that it sets up an unrealistic--
if not impossible or undesirable--goal for U.S. energy policy. Given 
the various priorities that we face when discussing our energy policy, 
particularly when we consider the issue as a matter of national 
security, how would each member of the panel articulate the over-
arching goal of our policy?
                                 ______
                                 
                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                  Washington, DC, January 17, 2007.
General Charles F. Wald,
USAF (Ret.), Bipartisan Policy Center, Washington, DC.
    Dear Gen. Wald: I would like to take this opportunity to thank you 
for appearing before the Senate Committee on Energy and Natural 
Resources on Wednesday, January 10, 2007 to give testimony regarding 
the global oil balance and its implications for the U.S. economic and 
national security.
    I am enclosing a list of questions which have been submitted for 
the record. If possible, please respond to these questions by email to 
Amanda Kelly, 
amanda_kelly.energy.senate.gov, by Tuesday, February 6, 2007.
            Sincerely,
                                             Jeff Bingaman,
                                                          Chairman.
[Enclosure.]
           Questions From Senator Domenici for All Witnesses
    1. At the hearing, I heard concerns expressed regarding the lack of 
investment in major oil producing regions, particularly the Middle 
East, by investor-owned corporations. Even in those areas that have not 
been closed to private investment, political instability, and a lack of 
a legal infrastructure for entering into and enforcing contracts seem 
to be major obstacles. How can the U.S. convince other states that 
legal and business models that encourage private investment are in 
their interest as well as ours?
    2. Do you have any suggestions for how investor owned companies can 
position themselves to gain greater access to state-held resources? In 
the past, these corporations have had expertise that was valuable to 
the national oil companies. To what extent is this still true, and what 
can
    3. Is it inevitable that investor-owned companies are destined to 
simply fulfill the role of ``service companies'' to producers of 
nationally-owned resources'? How does that trend affect U.S. energy 
security'?
    4. The fact that an oil company is nationally-owned does not 
necessarily exclude the benefits of competition and foreign 
participation. An example is Norway, How can we promote that business 
model in the world'?
    5. Today we heard testimony that, as a result of the lack of access 
by investor-owned oil companies to the world's oil ``cheapest'' oil 
reserves, they are increasingly forced to pursue opportunities in older 
and more technologically challenging fields. Do you have any 
information regarding the level of investment on the part of investor-
owned companies that will be required for them to maintain their 
current levels of production? How does the cost to those companies 
required to maintain their current level of production compare to the 
investment required by the world's largest nationally-owned companies?
    6. Some analysts have suggested that the trend toward privatization 
occurred when prices were low, and governments wanted to spread risk. 
Now nationalization is occurring when prices are high, because 
governments want to capture the profits. There have been proposals in 
the U.S. to increase taxes on oil companies, which seems to be a 
different path to the same goal. Whether the policy is direct 
nationalization, or appropriation of profits through new taxes, doesn't 
this increase risk to investors, reducing the industry's ability to 
make new capital investment?
                    Questions From Senator Cantwell
      question one: impact of growing chinese fossil fuel demands
    The growth of China's energy economy is absolutely astounding. On a 
recent trip there I learned that they are building roughly 1,000 
megawatts of electrical capacity per week, most of it using outdated 
coal-fired technology. In a single year the Chinese are now putting up 
the equivalent electricity capacity as the entire Spanish electrical 
grid.
    I also learned that while China only became a net oil importer in 
1993, with their accelerating rush towards private vehicles--by 2010 
China is expected to have 90 times more cars than they did 1990--
Chinese exports in 2030 will match those of the U.S. today.
    It is also important to note that new projections predict China 
will overtake the United States as the world's largest carbon dioxide 
emitter by 2009, a full decade earlier than previous projections.
    I share the deep concern of several of our witnesses that if these 
trends continue, the results for both global oil demand and carbon 
emissions will be disastrous.
    That's why I believe we must proactively engage and collaborate 
with China on clean energy alternatives for both our nation's and the 
world's benefit. I am proud that my home state of Washington already 
has significant trade ties with China, and we view it as a vast 
potential export market for our homegrown clean energy technologies.
All Witnesses:
    How can the United States constructively engage China as a partner 
in securing a stable global oil economy?
    Senior Chinese officials I met with told they fully recognize the 
economic, environmental, and security vulnerabilities of their growing 
fossil fuel dependence, but said they saw few alternatives to meeting 
their country's incredible demand for energy. How can we help get them 
the clean energy technologies they want and we want to sell to them? 
Could Chinese adoption of these technologies create the economies of 
scale that would drive down the production costs of many renewable 
energy technologies?
    Are there likely to be other benefits of such energy collaboration 
with the Chinese in terms of other U.S. regional security objectives 
such as in North Korea, Iran, and the former Soviet Republics? For 
example, China is the number one importer of oil and gas from Iran and 
they are bound by energy deals valued at around $120 billion dollars.
    Dr. Leverett, what do you think the U.S. can the United States do 
to counter the Sino-Russian energy axis described in your testimony?
         question two: importance of reducing u.s. oil demand 
                        in transportation sector
    It is clear that targeting our transportation system's demand for 
oil is a key component of improving our nation's energy security. And 
in fact most future global oil demand is linked to transportation use. 
If we are going to make any difference in our increasingly dire oil 
addiction, we need a multi-tiered effort that both increases our use of 
alternative fuels and reduces our overall demand for fossil fuels.
Success of Vehicle Fuel Economy Standards
    According to the 2002 report by the National Academies of Science, 
gasoline consumption (and oil imports) would be 2.8 million barrels per 
day higher if CAFE standards had not been imposed in the mid 1970s 
following the Arab Oil Embargo. Unfortunately, after doubling the 
average gas mileage of U.S. vehicles CAFE standards stagnated and have 
not been increased since 1985.
    Next week, I look forward to joining a bipartisan coalition in 
reintroducing our ``Ten-in-Ten Fuel Economy Act,'' which would increase 
CAFE standards for all passenger vehicles, including light trucks and 
SUVs, by 10 miles per gallon over 10 years. This balanced and 
technically feasible bill would save 25 million barrels of oil per day 
by 2025, the same amount of oil we currently import from the Persian 
Gulf.

All Witnesses:
   How do you think a reduction in demand of 2.5 million 
        barrels per day would help improve our reliance on foreign oil 
        imports?
   Do you believe that increasing the demand for more efficient 
        vehicles in the largest car market in the world might affect 
        the efficiency of vehicles sold in other countries?
   A recent analysis by an Energy Department analysis found 
        that increasing CAFE standards to a combined fleet average of 
        35 miles per gallon could save as much as 0.5% of our Gross 
        Domestic Product--roughly $60 billion per year or $200 per 
        capita per year in the United States. Given this tremendous 
        benefit, why do you think it has been so difficult to increase 
        CAFE standards?
   Mr. Wald, you testified that increasing transportation 
        efficiency is the single most effective step the U.S. can take 
        to improve its energy security. Can you expand on why you 
        think, from a military and national security perspective, it is 
        critical that we increase the overall efficiency of nation's 
        transportation fleet?
   Mr. Wald, I also understand that the Defense Department 
        spends $10.6 billion annually on fuel, or 97 percent of the 
        federal government's use, and almost 2 percent of the entire 
        country's use. And that as much of 70 percent of our military 
        convoys in Iraq, which are increasingly at risk from roadside 
        bombs, are carrying fuel.

    Given these facts, how could the military benefits from more 
efficient vehicle technology? Would you say such technologies would 
qualitatively increase our nation's military strength?
Breakthrough technologies
   Do any of the witnesses see any groundbreaking or game 
        changing technologies that could dramatically change this bleak 
        future oil demand outlook?
   Plug-in hybrids promise to break the historic wall between. 
        the transportation and electricity sector and provide new and 
        diverse alternative energy sources to displace gasoline and 
        diesel.
   What role will biofuels have in replacing world oil demand?
   Would it be in the national interest to pursue an all out 
        effect in vehicle lightweighting technologies such as the use 
        of composites, or better battery technologies for vehicles?
            question three: mystery of high world oil prices
    The projected price of oil in competitive world market has been 
estimated by the Energy Department to be in the range of S 15 per 
barrel. And several sources estimate the most efficient OPEC 
production, in particular Saudi Arabia where the bulk of world oil 
reserves are, cost as little as $2 to S5 per barrel to produce. Just 
about four years ago OPEC's target world oil price was between $22 and 
$28 per barrels. Now we seem content with $50 to 60 per barrel oil, and 
would be happy if it stayed there for years to come!
All Witnesses:

   What caused this dramatic rebaselining in the world oil 
        price? How come $25 per barrel was okay for everyone a few 
        years ago, now consuming nations would be happy to pay double 
        that.
   What does this target price shift mean in terms of real 
        dollars transferred from U.S. consumers to OPEC and other major 
        oil producers?
   Are there ways we can achieve more stability in the world 
        oil price? Why are there no long-term price contracts in the 
        oil business? It would seem be in the interest of both 
        producing and consuming nations to know in advance how much 
        they would be spending or receiving for a certain amount of 
        oil.
   As you know, the United States manages a strategic petroleum 
        reserve and IEA maintains a shared strategic reserve. Have 
        these proven effective in securing reasonable pricing from 
        OPEC? Could larger reserves help stabilize world oil prices, or 
        at least prevent volatility or future supply shocks?
   What is the value in increasing domestic oil production in 
        environmentally sensitive US oil fields? Isn't this just at 
        best a drop in the bucket in terms of global oil supply?
    question four: need for collaboration among major oil consumers 
                      rather than military action
    For decades now, ensuring our nation's oil security has been 
pursued by both competitive economic means and political-military 
means. It now seems that the net effect of overt military action has 
proven to be at most of questionable value and may even be 
counterproductive and contributed to the current destabilization we see 
in the world oil market.
    Several witnesses have described that the geographic distribution 
of the world's fossil fuel reserves means that OPEC will only gain more 
leverage in setting future world energy prices. This dynamic, combined 
with the fact that National Oil Companies control 80 to 90 percent of 
the world's oil supplies, means to me that maybe it would be wiser to 
focus on collaborative action among major oil consumers, rather than 
continue to rely on military action.
All Witnesses:

   What do you think the net effect of the Iraq war on the 
        world oil price?
   What is the prospective effect of a total collapse of the 
        Iraq oil sector?
   Could an organization of major oil consuming countries 
        useful or feasible as a counterweight to OPEC?
   Could IEA form the nucleus of such an organization?
   How can we quickly allow China and other major oil consuming 
        countries to participate fully in and SEA framework?

Mr. Wald:
   In addition to being at odds with a collaborative approach 
        to oil conservation and carbon emissions reduction, do you 
        believe the use of US military power to guarantee oil security 
        feasible in world where OPEC members become nuclear weapons 
        states? How can one or two U.S. carriers project compelling 
        power against a nuclear-armed Iran?
           question five: iran's role in the world oil market
The ``Oil weapon''
    As was mentioned in witness testimony, Iran has threatened to use 
its oil supply as a weapon to achieve its strategic objectives, 
including building a nuclear energy, and probably a nuclear weapons 
program.

   How realistic is this threat and what can we do to counter 
        it?
   I understand that while Iran is a major oil exporter, they 
        have a severe refinery shortage and must import much of their 
        gasoline. Is this a potential leverage point for trade 
        sanctions against Iran?
Iran's oil sector evolution
    A recent article by Roger Stern suggests that Iran's oil export 
capacity might dry up within ten to fifteen years, essentially 
eliminating a vital government revenue source. This is in contrast to 
the testimony today which shows the potential of expansion to pre Iran-
Iraq war levels of over 6 million barrels per day.

   Do you believe the Stern analysis is credible'? Obviously 
        policy implications toward Iran are quite different if they are 
        really not going to be a major oil exporter within a couple 
        years.
Negotiating with Iran

   Dr Leverett's testimony suggests that the US needs to strike 
        a ``grand bargain'' with Iran. What would be the terms of such 
        a bargain as you envision them?
                     Questions from Senator Sanders
    1. For Ms. Stuntz--As I understand it, the National Security 
Council's energy task force has recommended an automatic 4% yearly 
increase in CAFE standards. I am interested in what factors were 
considered in making the decision on what the specific yearly increase 
should be.
    2. For All Members of the Panel--Unfortunately, not many of you 
mentioned climate change in your testimony and it only briefly came up 
during the hearing. This is a major concern for me because the ongoing 
burning of fossil fuels--most obviously oil--is leading to global 
warming. Global warming, in turn, is increasing pressure on natural 
resources across the globe, and many experts are already warning that 
this pressure could lead to increased civil unrest in many parts of the 
world, unrest that could lead to armed conflicts. The ``geopolitics of 
oil'' should at the very least mention the ``geopolitics of global 
warming.'' With this in mind, why is there not more emphasis on this 
important issue in your testimony?
                       Question From Mr. Sessions
    1. Many commentators have criticized the usage of the phrase 
``energy independence,'' pointing out that it sets up an unrealistic--
if not impossible or undesirable--goal for U.S. energy policy. Given 
the various priorities that we face when discussing our energy policy, 
particularly when we consider the issue as a matter of national 
security, how would each member of the panel articulate the over-
arching goal of our policy?
                                 ______
                                 
                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                  Washington, DC, January 17, 2007.
Ms. Linda G. Stuntz,
Partner, Stuntz, Davis & Staffier, PC, Washington, DC.
    Dear Ms. Stuntz: I would like to take this opportunity to thank you 
for appearing before the Senate Committee on Energy and Natural 
Resources on Wednesday, January 10, 2007 to give testimony regarding 
the global oil balance and its implications for the U.S. economic and 
national security.
    I am enclosing a list of questions which have been submitted for 
the record. If possible, please respond to these questions by email to 
Amanda Kelly, 
amanda_kelly.energy.senate.gov, by Tuesday, February 6, 2007.
            Sincerely,
                                             Jeff Bingaman,
                                                          Chairman.
[Enclosure.]
             Question From Senator Domenici for Ms. Stuntz
    . There has been a great deal of attention paid to the so-called `` 
'98-'99'' contracts for oil produced in the Gulf of Mexico. These 
contracts did not contain price ceilings for royalty relief. This was 
clearly an expensive mistake, but the language is in valid contracts 
with multiple oil companies, some of which are owned by foreign 
entities. Some in the other body have proposals that would attempt to 
alter these contracts, contrary to our contract law. Do we run the risk 
of setting a bad example for other countries if we don't respect the 
sanctity of our own government's contracts?
           Questions From Senator Domenici for All Witnesses
    1. At the hearing, I heard concerns expressed regarding the lack of 
investment in major oil producing regions, particularly the Middle 
East, by investor-owned corporations. Even in those areas that have not 
been closed to private investment, political instability, and a lack of 
a legal infrastructure for entering into and enforcing contracts seem 
to be major obstacles. How can the U.S. convince other states that 
legal and business models that encourage private investment are in 
their interest as well as ours?
    2. Do you have any suggestions for how investor owned companies can 
position themselves to gain greater access to state-held resources? In 
the past, these corporations have had expertise that was valuable to 
the national oil companies. To what extent is this still true, and what 
can
    3. Is it inevitable that investor-owned companies are destined to 
simply fulfill the role of ``service companies'' to producers of 
nationally-owned resources'? How does that trend affect U.S. energy 
security'?
    4. The fact that an oil company is nationally-owned does not 
necessarily exclude the benefits of competition and foreign 
participation. An example is Norway, How can we promote that business 
model in the world'?
    5. Today we heard testimony that, as a result of the lack of access 
by investor-owned oil companies to the world's oil ``cheapest'' oil 
reserves, they are increasingly forced to pursue opportunities in older 
and more technologically challenging fields. Do you have any 
information regarding the level of investment on the part of investor-
owned companies that will be required for them to maintain their 
current levels of production? How does the cost to those companies 
required to maintain their current level of production compare to the 
investment required by the world's largest nationally-owned companies?
    6. Some analysts have suggested that the trend toward privatization 
occurred when prices were low, and governments wanted to spread risk. 
Now nationalization is occurring when prices are high, because 
governments want to capture the profits. There have been proposals in 
the U.S. to increase taxes on oil companies, which seems to be a 
different path to the same goal. Whether the policy is direct 
nationalization, or appropriation of profits through new taxes, doesn't 
this increase risk to investors, reducing the industry's ability to 
make new capital investment?
                    Questions From Senator Cantwell
      question one: impact of growing chinese fossil fuel demands
    The growth of China's energy economy is absolutely astounding. On a 
recent trip there I learned that they are building roughly 1,000 
megawatts of electrical capacity per week, most of it using outdated 
coal-fired technology. In a single year the Chinese are now putting up 
the equivalent electricity capacity as the entire Spanish electrical 
grid.
    I also learned that while China only became a net oil importer in 
1993, with their accelerating rush towards private vehicles--by 2010 
China is expected to have 90 times more cars than they did 1990--
Chinese exports in 2030 will match those of the U.S. today.
    It is also important to note that new projections predict China 
will overtake the United States as the world's largest carbon dioxide 
emitter by 2009, a full decade earlier than previous projections.
    I share the deep concern of several of our witnesses that if these 
trends continue, the results for both global oil demand and carbon 
emissions will be disastrous.
    That's why I believe we must proactively engage and collaborate 
with China on clean energy alternatives for both our nation's and the 
world's benefit. I am proud that my home state of Washington already 
has significant trade ties with China, and we view it as a vast 
potential export market for our homegrown clean energy technologies.
All Witnesses:
    How can the United States constructively engage China as a partner 
in securing a stable global oil economy?
    Senior Chinese officials I met with told they fully recognize the 
economic, environmental, and security vulnerabilities of their growing 
fossil fuel dependence, but said they saw few alternatives to meeting 
their country's incredible demand for energy. How can we help get them 
the clean energy technologies they want and we want to sell to them? 
Could Chinese adoption of these technologies create the economies of 
scale that would drive down the production costs of many renewable 
energy technologies?
    Are there likely to be other benefits of such energy collaboration 
with the Chinese in terms of other U.S. regional security objectives 
such as in North Korea, Iran, and the former Soviet Republics? For 
example, China is the number one importer of oil and gas from Iran and 
they are bound by energy deals valued at around $120 billion dollars.
    Dr. Leverett, what do you think the U.S. can the United States do 
to counter the Sino-Russian energy axis described in your testimony?
         question two: importance of reducing u.s. oil demand 
                        in transportation sector
    It is clear that targeting our transportation system's demand for 
oil is a key component of improving our nation's energy security. And 
in fact most future global oil demand is linked to transportation use. 
If we are going to make any difference in our increasingly dire oil 
addiction, we need a multi-tiered effort that both increases our use of 
alternative fuels and reduces our overall demand for fossil fuels.
Success of Vehicle Fuel Economy Standards
    According to the 2002 report by the National Academies of Science, 
gasoline consumption (and oil imports) would be 2.8 million barrels per 
day higher if CAFE standards had not been imposed in the mid 1970s 
following the Arab Oil Embargo. Unfortunately, after doubling the 
average gas mileage of U.S. vehicles CAFE standards stagnated and have 
not been increased since 1985.
    Next week, I look forward to joining a bipartisan coalition in 
reintroducing our ``Ten-in-Ten Fuel Economy Act,'' which would increase 
CAFE standards for all passenger vehicles, including light trucks and 
SUVs, by 10 miles per gallon over 10 years. This balanced and 
technically feasible bill would save 25 million barrels of oil per day 
by 2025, the same amount of oil we currently import from the Persian 
Gulf.

All Witnesses:
   How do you think a reduction in demand of 2.5 million 
        barrels per day would help improve our reliance on foreign oil 
        imports?
   Do you believe that increasing the demand for more efficient 
        vehicles in the largest car market in the world might affect 
        the efficiency of vehicles sold in other countries?
   A recent analysis by an Energy Department analysis found 
        that increasing CAFE standards to a combined fleet average of 
        35 miles per gallon could save as much as 0.5% of our Gross 
        Domestic Product--roughly $60 billion per year or $200 per 
        capita per year in the United States. Given this tremendous 
        benefit, why do you think it has been so difficult to increase 
        CAFE standards?
   Mr. Wald, you testified that increasing transportation 
        efficiency is the single most effective step the U.S. can take 
        to improve its energy security. Can you expand on why you 
        think, from a military and national security perspective, it is 
        critical that we increase the overall efficiency of nation's 
        transportation fleet?
   Mr. Wald, I also understand that the Defense Department 
        spends $10.6 billion annually on fuel, or 97 percent of the 
        federal government's use, and almost 2 percent of the entire 
        country's use. And that as much of 70 percent of our military 
        convoys in Iraq, which are increasingly at risk from roadside 
        bombs, are carrying fuel.

    Given these facts, how could the military benefits from more 
efficient vehicle technology? Would you say such technologies would 
qualitatively increase our nation's military strength?
Breakthrough technologies
   Do any of the witnesses see any groundbreaking or game 
        changing technologies that could dramatically change this bleak 
        future oil demand outlook?
   Plug-in hybrids promise to break the historic wall between. 
        the transportation and electricity sector and provide new and 
        diverse alternative energy sources to displace gasoline and 
        diesel.
   What role will biofuels have in replacing world oil demand?
   Would it be in the national interest to pursue an all out 
        effect in vehicle lightweighting technologies such as the use 
        of composites, or better battery technologies for vehicles?
            question three: mystery of high world oil prices
    The projected price of oil in competitive world market has been 
estimated by the Energy Department to be in the range of S 15 per 
barrel. And several sources estimate the most efficient OPEC 
production, in particular Saudi Arabia where the bulk of world oil 
reserves are, cost as little as $2 to S5 per barrel to produce. Just 
about four years ago OPEC's target world oil price was between $22 and 
$28 per barrels. Now we seem content with $50 to 60 per barrel oil, and 
would be happy if it stayed there for years to come!
All Witnesses:

   What caused this dramatic rebaselining in the world oil 
        price? How come $25 per barrel was okay for everyone a few 
        years ago, now consuming nations would be happy to pay double 
        that.
   What does this target price shift mean in terms of real 
        dollars transferred from U.S. consumers to OPEC and other major 
        oil producers?
   Are there ways we can achieve more stability in the world 
        oil price? Why are there no long-term price contracts in the 
        oil business? It would seem be in the interest of both 
        producing and consuming nations to know in advance how much 
        they would be spending or receiving for a certain amount of 
        oil.
   As you know, the United States manages a strategic petroleum 
        reserve and IEA maintains a shared strategic reserve. Have 
        these proven effective in securing reasonable pricing from 
        OPEC? Could larger reserves help stabilize world oil prices, or 
        at least prevent volatility or future supply shocks?
   What is the value in increasing domestic oil production in 
        environmentally sensitive US oil fields? Isn't this just at 
        best a drop in the bucket in terms of global oil supply?
    question four: need for collaboration among major oil consumers 
                      rather than military action
    For decades now, ensuring our nation's oil security has been 
pursued by both competitive economic means and political-military 
means. It now seems that the net effect of overt military action has 
proven to be at most of questionable value and may even be 
counterproductive and contributed to the current destabilization we see 
in the world oil market.
    Several witnesses have described that the geographic distribution 
of the world's fossil fuel reserves means that OPEC will only gain more 
leverage in setting future world energy prices. This dynamic, combined 
with the fact that National Oil Companies control 80 to 90 percent of 
the world's oil supplies, means to me that maybe it would be wiser to 
focus on collaborative action among major oil consumers, rather than 
continue to rely on military action.
All Witnesses:

   What do you think the net effect of the Iraq war on the 
        world oil price?
   What is the prospective effect of a total collapse of the 
        Iraq oil sector?
   Could an organization of major oil consuming countries 
        useful or feasible as a counterweight to OPEC?
   Could IEA form the nucleus of such an organization?
   How can we quickly allow China and other major oil consuming 
        countries to participate fully in and SEA framework?

Mr. Wald:
   In addition to being at odds with a collaborative approach 
        to oil conservation and carbon emissions reduction, do you 
        believe the use of US military power to guarantee oil security 
        feasible in world where OPEC members become nuclear weapons 
        states? How can one or two U.S. carriers project compelling 
        power against a nuclear-armed Iran?
           question five: iran's role in the world oil market
The ``Oil weapon''
    As was mentioned in witness testimony, Iran has threatened to use 
its oil supply as a weapon to achieve its strategic objectives, 
including building a nuclear energy, and probably a nuclear weapons 
program.

   How realistic is this threat and what can we do to counter 
        it?
   I understand that while Iran is a major oil exporter, they 
        have a severe refinery shortage and must import much of their 
        gasoline. Is this a potential leverage point for trade 
        sanctions against Iran?
Iran's oil sector evolution
    A recent article by Roger Stern suggests that Iran's oil export 
capacity might dry up within ten to fifteen years, essentially 
eliminating a vital government revenue source. This is in contrast to 
the testimony today which shows the potential of expansion to pre Iran-
Iraq war levels of over 6 million barrels per day.

   Do you believe the Stern analysis is credible'? Obviously 
        policy implications toward Iran are quite different if they are 
        really not going to be a major oil exporter within a couple 
        years.
Negotiating with Iran

   Dr Leverett's testimony suggests that the US needs to strike 
        a ``grand bargain'' with Iran. What would be the terms of such 
        a bargain as you envision them?
                     Questions from Senator Sanders
    1. For Ms. Stuntz--As I understand it, the National Security 
Council's energy task force has recommended an automatic 4% yearly 
increase in CAFE standards. I am interested in what factors were 
considered in making the decision on what the specific yearly increase 
should be.
    2. For All Members of the Panel--Unfortunately, not many of you 
mentioned climate change in your testimony and it only briefly came up 
during the hearing. This is a major concern for me because the ongoing 
burning of fossil fuels--most obviously oil--is leading to global 
warming. Global warming, in turn, is increasing pressure on natural 
resources across the globe, and many experts are already warning that 
this pressure could lead to increased civil unrest in many parts of the 
world, unrest that could lead to armed conflicts. The ``geopolitics of 
oil'' should at the very least mention the ``geopolitics of global 
warming.'' With this in mind, why is there not more emphasis on this 
important issue in your testimony?
                       Question From Mr. Sessions
    1. Many commentators have criticized the usage of the phrase 
``energy independence,'' pointing out that it sets up an unrealistic--
if not impossible or undesirable--goal for U.S. energy policy. Given 
the various priorities that we face when discussing our energy policy, 
particularly when we consider the issue as a matter of national 
security, how would each member of the panel articulate the over-
arching goal of our policy?