[Senate Hearing 110-260]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 110-260
 
  ENERGY SECURITY AND OIL DEPENDENCE--RECOMMENDATIONS ON POLICIES AND 
                 FUNDING TO REDUCE U.S. OIL DEPENDENCE

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

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            SPECIAL HEARING

                      MAY 8, 2007--WASHINGTON, DC

                               __________

         Printed for the use of the Committee on Appropriations


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                               __________
                      COMMITTEE ON APPROPRIATIONS

                ROBERT C. BYRD, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii             THAD COCHRAN, Mississippi
PATRICK J. LEAHY, Vermont            TED STEVENS, Alaska
TOM HARKIN, Iowa                     ARLEN SPECTER, Pennsylvania
BARBARA A. MIKULSKI, Maryland        PETE V. DOMENICI, New Mexico
HERB KOHL, Wisconsin                 CHRISTOPHER S. BOND, Missouri
PATTY MURRAY, Washington             MITCH McCONNELL, Kentucky
BYRON L. DORGAN, North Dakota        RICHARD C. SHELBY, Alabama
DIANNE FEINSTEIN, California         JUDD GREGG, New Hampshire
RICHARD J. DURBIN, Illinois          ROBERT F. BENNETT, Utah
TIM JOHNSON, South Dakota            LARRY CRAIG, Idaho
MARY L. LANDRIEU, Louisiana          KAY BAILEY HUTCHISON, Texas
JACK REED, Rhode Island              SAM BROWNBACK, Kansas
FRANK R. LAUTENBERG, New Jersey      WAYNE ALLARD, Colorado
BEN NELSON, Nebraska                 LEMAR ALEXANDER, Tennessee

                    Charles Kieffer, Staff Director
                  Bruce Evans, Minority Staff Director
                                 ------                                

              Subcommittee on Energy and Water Development

                BYRON L. DORGAN, North Dakota, Chairman
ROBERT C. BYRD, West Virginia        PETE V. DOMENICI, New Mexico
PATTY MURRAY, Washington             THAD COCHRAN, Mississippi
DIANNE FEINSTEIN, California         MITCH McCONNELL, Kentucky
TIM JOHNSON, South Dakota            ROBERT F. BENNETT, Utah
MARY L. LANDRIEU, Louisiana          LARRY CRAIG, Idaho
DANIEL K. INOUYE, Hawaii             CHRISTOPHER S. BOND, Missouri
JACK REED, Rhode Island              KAY BAILEY HUTCHISON, Texas
FRANK R. LAUTENBERG, New Jersey      WAYNE ALLARD, Colorado

                           Professional Staff

                               Doug Clapp
                             Roger Cockrell
                         Franz Wuerfmannsdobler
                        Scott O'Malia (Minority)
                         Brad Fuller (Minority)

                         Administrative Support

                              Robert Rich


                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator Byron L. Dorgan.....................     1
Opening Statement of Senator Pete V. Domenici....................     3
    Prepared Statement...........................................     4
Statement of Senator Larry Craig.................................     5
Statement of Senator Thad Cochran................................     7
    Prepared Statement...........................................     7
Statement of Hon. Alexander Karsner, Assistant Secretary for 
  Energy Efficiency and Renewable Energy, Department of Energy...     8
    Prepared Statement...........................................    10
S. 875, the SAFE Energy Act......................................    10
Energy Security Leadership Council Report........................    11
Achieving Energy Security........................................    12
Statement of R.M. ``Johnnie'' Burton, Director, Minerals 
  Management Service, Department of the Interior.................    13
    Prepared Statement...........................................    14
Statement of Fredrick W. Smith, Chairman, President and CEO, 
  FedEx Corporation..............................................    15
    Prepared Statement...........................................    17
Statement of Admiral Gregory G. Johnson, United States Navy 
  (Ret.), Former Commander, United States Naval Forces, Europe...    20
    Prepared Statement...........................................    22
Statement of Dr. Robert F. Wescott, President, Keybridge Research 
  LLC............................................................    25
    Prepared Statement...........................................    27
Energy Policy Assumptions........................................    28
Key Findings.....................................................    29
Supply Shock Insurance...........................................    30
Biofuels.........................................................    31
Fuel Efficiency..................................................    31
Energy Security..................................................    32
Oil Intensity....................................................    33
Biofuels Infrastructure..........................................    34
Current Resources................................................    37
Environmental Consequences.......................................    38
Oil Price Shock..................................................    38
Fuel Efficiency..................................................    40
Oil and Gas Development..........................................    40
Technology Development...........................................    41
CAFE Standards...................................................    42
Additional Committee Questions...................................    43
Questions Submitted to Hon. Alexander Karsner....................    44
Questions Submitted by Senator Pete V. Domenici..................    44
Loan Guarantee Program...........................................    44
Deployment of Technology.........................................    44
Voluntary Adoption of Alternative Energy Technology..............    45


  ENERGY SECURITY AND OIL DEPENDENCE--RECOMMENDATIONS ON POLICIES AND 
                 FUNDING TO REDUCE U.S. OIL DEPENDENCE

                              ----------                              


                          TUESDAY, MAY 8, 2007

                               U.S. Senate,
      Subcommittee on Energy and Water Development,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 2:30 p.m., in room SD-192, Dirksen 
Senate Office Building, Hon. Byron L. Dorgan (chairman) 
presiding.
    Present: Senators Dorgan, Domenici, Cochran, and Craig.


              opening statement of senator byron l. dorgan


    Senator Dorgan. We'll call the subcommittee to order today. 
This is the Senate Appropriations subcommittee hearing on 
energy and water development. I want to say good afternoon to 
all of you.
    We're here to take testimony and better understand the key 
steps and funding mechanisms that are necessary for reducing 
U.S. oil dependence and for future U.S. energy security.
    We'll also discuss the results of an analysis conducted to 
assess the economic impact of implementing the recommendations 
to the Nation on reducing U.S. oil dependence, a report that 
has been put together by the Energy Security Leadership 
Council. That's a group of distinguished business and military 
leaders who, like me, view U.S. oil dependence as detrimental 
to our long-term security interests as well as our economic 
health.
    I think it's safe to say that the goal for all of us is to 
improve the national economic and energy security of the United 
States. I'm a little tired, especially today, when I put 
gasoline in my vehicle, of thinking about how that price may or 
may not be computed.
    The oil cartel, the OPEC ministers, will sit around a 
table, presumably in a closed room, and make their production 
decisions. Then the major oil companies, always with two names 
now because of the mergers, larger and stronger with more 
muscle in the marketplace, exert that strength in the 
marketplace. I think of the spot market which has become an 
orgy of speculation rather than simply a market of liquidity.
    The majority of the oil that is sold and traded around the 
world is done so through corporations that are owned by nation 
states. So, whenever I hear people talk about the free market 
in oil, I have to suppress a grin because, of course, there is 
no free market in oil. There are a lot of influences that 
decide the price, most of which we don't know very much about, 
but it certainly is not what is called a classical free market.
    We are, this country, the top oil consumer in the world. I 
have a chart that shows oil consumption. Most of us know that 
we suck about 84 million barrels of oil a day out of this 
planet of ours. We stick little straws in the Earth and suck 
oil out, about 84 million barrels a day and we in the United 
States use fully one-fourth of it every single day. We are 
prodigious consumers of oil.
    Much of our oil comes from where it is most vulnerable in 
the world. Some very vulnerable regions of the country have a 
substantial amount of the resources. We are about 60 plus 
percent dependent on foreign sources of oil. That clearly, it 
seems to me, is not in our best interest.
    About 70 percent--just shy of 70 percent of the oil that 
comes into this country is used for transportation. We are 
unbelievably dependent, and growing in that dependence, on oil 
that comes from very troubled parts of the world. A substantial 
part, of which, after we import it, is used for transportation.
    And so God forbid there should be some terrorist attack 
some day that would shut off the pipeline of oil coming into 
this country. We would not only see dramatic increases in the 
price of that which we could import, but we would also see 
substantial disruption and substantial problems, and I think 
our economy would suffer a very serious long-term problem.
    Let me say that I also, coming from a State like North 
Dakota, have a pretty acute awareness of the energy issue, 
particularly with respect to oil. We drive exactly twice as 
much per person in North Dakota as New Yorkers do. That's just 
because we're a big, old State.
    It's not unusual for somebody to jump in a pickup truck and 
drive 200 miles, one way, to get some parts for the combine and 
drive 200 miles back and then go to work after that. We drive 
twice as much, per person, as a New Yorker does. That means, 
whether it's the price of oil or the tax imposed on a barrel of 
oil, it has twice the impact on a consumer in North Dakota. So, 
we're well aware of all of these issues and the issue of 
security, and the issue of availability of oil at a reasonable 
price--gasoline at a reasonable price.
    It seems to me that there are no silver bullets to address 
these issues, but there are plenty of good ideas that we need 
to embrace. We need to find ways to conserve. We need to find 
ways to produce more, domestically. And we need to encourage, 
especially, our home grown biofuels industry in this economy. 
With input from the Energy Security Leadership Council, Senator 
Craig and I have introduced something called, the SAFE Energy 
Act of 2007 that has four cornerstone principles, to reduce oil 
dependency.
    These include, first, increasing auto efficiency through a 
class based approach. I might say that as a member of the 
Commerce Committee this morning we actually marked up a bill 
and passed it out of the Commerce Committee, which is a 
striking thing for our subcommittee to have done today. That 
includes a portion of what we have included in the SAFE Energy 
Act. So, we're moving on that front.
    Second, expanded production and the use of biofuels like 
ethanol and biodiesel. We included that in our bill, but it's 
also the case that Senator Bingaman and Senator Domenici's 
leadership in the Energy Committee has been invaluable. As 
members of that committee, Senator Craig and I played a role in 
that, and we're moving on that front as well.
    We are working on producing more of our own oil and gas 
resources by allowing access to domestic reserves, particularly 
in the eastern Gulf of Mexico, while at the same time 
strengthening our environmental protections. And managing 
energy risks by enhancing diplomatic alliances and 
partnerships, including establishing a Bureau of International 
Energy Policy with the National Security Council, is something 
that we are concerned with. We have been making progress, 
working hard on these issues, and we look forward to hearing 
from our witnesses today on a number of them.
    This particular subcommittee, of course, has an integral 
interest, especially in the renewable fuels portion, in this 
issue. That is something that we've asked Secretary Karsner to 
discuss here today and we appreciate his presence. The area of 
the Energy Department in which he toils and works is the area 
concerned with issues of renewable fuels and biofuels.
    Let me wait on a description of the rest of our witnesses 
for a moment while I ask the ranking member to provide a 
statement and then I'll call on Senator Craig. Senator 
Domenici.


             OPENING STATEMENT OF SENATOR PETE V. DOMENICI


    Senator Domenici. Thank you very much, Mr. Chairman.
    I know you--Senator Craig and you have put together a 
proposal or a bill and obviously, Senator Craig, you would like 
to speak to it to the extent that it might not have been 
completely talked about by the chairman.
    But I would like to have a few words before I yield to you 
on the subject because--it is quite obvious to me that the 
three committees in the United States Senate that had something 
to do with the subject matter are busy at work. If we can just 
find a way, not to get into each other's way, but rather to 
produce something.
    We have the Energy and Natural Resources Committee, which 
is an authorizing committee. Senator Bingaman heads that. We 
are busy doing two of the things you spoke of today that are 
very important for the future of our country in terms of 
gasoline, gasoline prices, and the ability to have fuel for 
cars and to have new kinds of cars on our roads. We're busy at 
trying to do that.
    And so, what you've got here in this subcommittee, an 
Appropriations subcommittee, which I chaired last year. And I'm 
very pleased to be a member now and have you chairman of it.
    You have produced another approach which concentrates very 
heavily, as I see it, on production, which is interesting. This 
Subcommittee is trying to produce more fuel. Others around the 
Senate are trying to hold back and produce less fuel, but your 
bill is a fuel producing bill. And that makes me look with a 
little bit more optimism about the future because we need to be 
able to get together and get something very important done.
    Obviously, the witnesses that we have before us--already 
know what we have done. But I want to repeat, just for a 
moment, that--last year we produced a break through on 
offshore, natural gas and crude oil. For the first time in 25 
years we've broken through, on the off shore of Florida, with a 
very meaningful bill.
    While the United States Government agency, which handles 
the same, was busy trying to get theirs done, under your 
leadership, Madam Director--we have a very important offshore 
drilling proposal started. This bill moves ahead more 
dramatically in that area. I question whether all of it could 
be developed, but clearly, the members of the subcommittee are 
taking a strong position that we've got to produce off shore 
resources.
    And I commend you for putting that together. I join you in 
that regard and hope that we will be able to work together.
    My closing remarks that are directed at Director Johnnie 
Burton. Just yesterday you announced retirement at the Minerals 
Management Service (MMS). Johnnie has served in that position 
for the last 5 years, done an outstanding job in managing the 
MMS. I commend you for it. I'm very sorry that you're leaving.
    I asked you a moment ago, where are you going? In agreement 
with your terrific performance, you would be going perhaps even 
as far as New York to advise people back there, but you said, 
in your modest way, ``No, no, I'm going back to Wyoming.'' In 
any event, you will be helping somebody, I'm sure, on the 
subject matter you are so good at.
    With that--I want to make one last remark. Clearly the 
United States, this year, must get on with the proposition that 
is before this subcommittee and the one that is before Senators 
Bingaman and Domenici on the other committee. We just, must, do 
something about reducing gasoline use, where the gasoline is 
coming from overseas. No doubt about it, that's got to be done.
    Secondly, we must produce, wherever we can produce--in the 
correct way. That means much of the offshore that is not being 
used, that can be used, must be used. That's our natural gas 
and our oil and we must use it.
    We have leaders. Private sector leaders like you, Mr. 
Smith, who have many, many trucks, you need to help us with 
practical advice--that I hope you're going to give us today. As 
to how we go about changing the use and changing the kind of 
vehicle engines that we use over the next decade. We must do 
that or all would seem to be lost, in my opinion.
    Thank you, Mr. Chairman. I yield.
    [The statement follows:]

             Prepared Statement of Senator Pete V. Domenici

    Thank you, Senator Dorgan. On Sunday, the national average price of 
retail gasoline rose for the 14th consecutive day, staying above $3.00 
per gallon. Mr. Chairman, average prices around the country have risen 
91 of the last 98 days.
    I am certain that there is no magic bullet or immediate panacea to 
remedy this global problem of supply and demand economics. But this 
much I know--in order to strengthen our energy and economic security we 
must do more to reduce our dependence on foreign oil.
    That requires a common sense, balanced approach. It means that 
policies of drill-only or conserve-only are not enough. Instead, we 
must support policies that advance conservation and efficiency at home, 
additional domestic production in an environmentally sound manner, and 
diversification of the kind of fuels that power our lives. This 
complete approach to energy policy stressing efficiency, conservation, 
production, and diversification is something I have been promoting for 
many years.
    When I was chairman of the Energy Committee in 2005, we passed the 
most wide-ranging comprehensive energy policy in decades. This bill 
includes long-term innovative policies on efficiency, renewable energy, 
nuclear energy, electricity. It also established the first-ever 
renewable fuel standard which brought renewable biofuels into our mix 
to displace foreign oil and created literally thousands of jobs and 
millions of dollars in a revitalized rural economy in America.
    Last year, we passed the Gulf of Mexico Energy Security Act which 
opens up the 181 Area and 181-South Area in the Gulf of Mexico. In 
total, these 8.3 million acres are estimated to contain 1.26 billion 
barrels of crude oil and 5.83 trillion cubic feet of natural gas--
enough natural gas to heat and cool 6 million homes for about 15 years. 
This will provide much needed natural gas relief for our industrial and 
home consumers, and will bolster our energy security by increasing our 
domestic oil and gas production.
    Finally, this year, we have passed a biofuels and energy efficiency 
bill out of the Energy and Natural Resources Committee by a strong, 
bipartisan vote of 20-3. We have more work to be done, but I hope we 
can keep doing it in a balanced and measured way.
    I applaud Senator Dorgan and Senator Craig for their hard work in 
the area of energy policy. On the Energy and Natural Resources 
Committee they have been thoughtful legislators who know and appreciate 
the value of a balanced energy approach. This understanding led them to 
embrace the findings of the Energy Security Leadership Council. I hope 
by the end of today's testimony that we make believers of everyone at 
this hearing. I thank the witnesses for taking the time to be with us 
today, and look forward to their testimony on this important topic.
    Mr. Chairman, I would like to take a moment and recognize the 
service of Director Johnnie Burton. Just yesterday, Director Burton 
announced her retirement from the MMS. Johnnie has served in that 
position for the past 5 years and done an outstanding job in managing 
the MMS.
    Johnnie, I have enjoyed working with you during the passage of the 
Energy Policy Act and the Gulf of Mexico Security Act and I wish you 
all the best.

    Senator Dorgan. Senator Domenici, thank you very much. 
Senator Craig.

                    STATEMENT OF SENATOR LARRY CRAIG

    Senator Craig. Well, Mr. Chairman, thank you for holding 
the hearing today and focusing on--clearly, an extremely 
important issue to this country.
    Last night I intentionally drove out into Virginia, while I 
live here in the District. The reason I did was because I could 
buy gas for 5 cents a gallon cheaper, than I can buy it here on 
Capitol Hill. Even with that, I paid $3.05 a gallon. That's the 
bad news.
    Along with that bad news though, is some good news. That is 
that because of the $3.05 gas we're having this hearing today. 
And you all are in front of us and the room is full, and the 
television cameras are on. And the reporters are present. 
Laptops ablaze because Americans are growing increasingly 
concerned that we are phenomenally dependent on unstable 
foreign sources of oil.
    In Nigeria today, three pipelines blew up. Six Chevron 
employees held hostage. It is a very unfriendly world out 
there. And that unfriendly world in the name of Petro-
Nationalism has learned how to jerk the tail of the giant, us. 
And that's a tragedy for us, potentially, if we don't do 
something about it.
    And I must tell you, Mr. Chairman, that's what brought you 
and me together in a--what I think, is likely coalition, not an 
unlikely coalition at all because while I'm suggesting that 
North Dakota was never to be inhabited by European Americans 
like Idaho should be.
    The distances are very similar and those farmers and 
ranchers that drive back and forth many, many miles when we--
tell them that 60 percent of what's in their gas tank, and that 
chart is somewhere behind me, came from somewhere off shore. 
They grow very frustrated in not understanding why, we, as a 
country, have allowed that to happen. But we have. And we've 
done it for a lot of false and in some cases, real reasons.
    And that's what brought both Senator Dorgan and I together 
to introduce the SAFE Act. Dealing with a combination of things 
that are both in the area of efficiencies: the CAFE language 
that was marked up today in Commerce, the innovations, the 
biofuels that Senator Domenici and Senator Bingaman marked up 
last week in the Energy Committee and the production side of it 
that I want to concentrate on for a few moments today. Because 
we still have those, probably some in the audience today, who 
want to be ``political correct''.
    And being politically correct means somehow you don't 
produce as much as you should produce. You conserve your way or 
you efficiency your way through all of this. I am of the 
conclusion and I think the bill reflects it, that we need it 
all.
    It will be cleaner, progressively cleaner. It is safer, 
progressively safer. It is more environmentally sound than ever 
in our history, but to deny ourselves all of it makes us as a 
country, increasingly vulnerable. So, I bring up the chart that 
was requested by audience demand today, the No Zone chart.
    And I bring that up for you, Johnnie, because I know you're 
headed for retirement. And I don't blame this on you, not at 
all. Because you've been most successful in being the 
administer of a very critical and necessary resource. I bring 
it up today because it echoes back to a ghost of my childhood, 
the ghost of Santa Barbara, which one-third of the audience 
today doesn't know what in the heck I'm talking about because 
it was old news then and it is old news now, but it shaped 
American's policy off shore for decades.
    This country ought to know where every drop of oil is 
within our reach. Whether we go for it or not. And we ought to 
know how reasonable it is to get there and we ought to try to 
get there if we can.
    And Senator Domenici wove a very intricate web last year 
that got us to lease sale 181, that Johnnie is now 
administering over. That opens up another very large resource. 
But for this great Nation not to know what's in the No Zone of 
the east coast, not to know what's in the No Zone of the west 
coast, not to be optimizing that which is in the gulf, is a 
shame on us.
    And as a result of that, this legislation, I would hope 
moves us somewhat in that direction because it is not a matter 
of being selective anymore, Mr. Chairman. It is a matter of 
needing it all and that doesn't sense the greed at all that 
we're talking about. We're talking about a gross domestic 
product (GDP) that is 25 to 26 percent of the world GDP and 
therefore requirement of energy to feed it and to do so in an 
appropriate and responsible way.
    So, I think, that clearly, as we push forward in these 
areas and nudge all of these issues. The coalition that is 
embodied, in part, by those who are with us today, who sat down 
as an industry and as sensitive, knowledgeable people to the 
world around us, looked at realities and said, here's where we 
need to go. And here's the wise public policy that takes us 
there and the SAFE Act that we introduced is reflective of 
that. It is a substantial contribution to our effort here on 
this issue.
    So, thank you for the hearing. Thank all of you for being 
here. Johnnie, thank you for your tremendous service to our 
country, your responsible administering of the Outer 
Continental Shelf (OCS). As a westerner, I know why you want to 
go home to Wyoming. Thank you.
    Senator Dorgan. Senator Craig, thank you. I will refrain 
from responding to the insensitive remark about the habitation 
of the Northern Great Plains.
    But I'm tempted.
    Senator Cochran.

                   STATEMENT OF SENATOR THAD COCHRAN

    Senator Cochran. Mr. Chairman, thank you very much for 
holding this hearing to review the recommendations of the 
Energy Security Leadership Council for reducing our dependence 
on foreign oil. It's a very timely hearing; a very important 
subject. I ask unanimous consent that the balance of my remarks 
be printed in the record and we can go forward with hearing the 
testimony of our witnesses.
    Senator Dorgan. Without objection.
    [The statement follows:]
               Prepared Statement of Senator Thad Cochran
    Mr. Chairman, Thank you for holding this hearing to review the 
recommendations of the Energy Security Leadership Council on reducing 
the United States' dependence on foreign oil. I'd like to also thank 
the witnesses for being here to provide testimony and answer questions. 
Ms. Burton, I especially thank you for all your hard work as Director 
of the Minerals Management Service, to expand domestic energy sources 
such as the Outer Continental Shelf oil and gas leasing plan. I wish 
you well in your pursuit of new and workable initiatives to achieve 
energy independence.
    I am pleased that Chairman Dorgan and Ranking Member Domenici are 
bringing to light workable solutions to the unfortunate dependence the 
United States has endured upon foreign oil, which is located in some of 
the most unstable regions of the world. Investment in alternatives will 
not only strengthen the energy security of America, but will likely 
lead to innovative renewable and clean energy developments. It is 
imperative that we accelerate our initiatives to increase domestic 
supplies of energy. Thank you all for being here to discuss this 
important and timely issue.

    Senator Dorgan. I'm going to introduce all five, and then 
we will just have sequential testimony. I mentioned that Andy 
Karsner is with us today. He is the Assistant Secretary for 
Energy Efficiency and Renewable Energy and he has testified 
before the subcommittee previously. We welcome you, Andy.
    Also with us today are: Johnnie Burton, the Director of the 
Minerals Management Service, U.S. Department of the Interior. 
We welcome you and we thank you for your service as you 
announce your retirement.
    Frederick Smith, Chairman, President and CEO of FedEx 
Corporation. Mr. Smith, thank you for being here.
    Admiral Gregory Johnson, U.S. Navy, retired, former 
Commander of the United States Naval Forces in Europe.
    And, Dr. Robert Wescott, the President of Keybridge 
Research LLC.
    I do want to mention that Mr. Smith and Admiral Johnson 
were leaders in the Energy Security Leadership Council which 
produced the Securing America's Energy Future document. We 
welcome you to testify here on their behalf.
    So, Secretary Karsner, why don't you proceed? The entire 
statement submitted by each of you will be made a part of the 
permanent record and we would ask that you summarize.

STATEMENT OF HON. ALEXANDER KARSNER, ASSISTANT 
            SECRETARY FOR ENERGY EFFICIENCY AND 
            RENEWABLE ENERGY, DEPARTMENT OF ENERGY

    Mr. Karsner. Mr. Chairman, Senator Domenici, members of the 
subcommittee, thank you for the opportunity to testify before 
you today on Senate bill 875, the Security and Fuel Efficiency 
Energy Act of 2007 and on the policies and funding necessary 
for reducing U.S. oil dependence.
    In his 2007 State of the Union Address, President Bush 
challenged our country to reduce gasoline consumption by 20 
percent within the decade, the ``Twenty in Ten'' plan. The 
President called for a robust alternative fuel standard 
requiring the equivalent of 35 billion gallons of renewable and 
alternative fuels by 2017. Expanding the mandate established by 
the Energy Policy Act of 2005 is expected to decrease projected 
gasoline usage by 15 percent.
    Another 5 percent reduction in gasoline consumption can be 
achieved through the administration's proposal to reform CAFE 
standards. The ``Twenty in Ten'' plan holds the promise of 
diversifying the sources, types and volumes of fuels we use, 
while reducing our vulnerabilities and dependence on oil.
    S. 875, the SAFE Energy Act, shares the President's goal of 
significantly altering our Nation's energy portfolio. The 
administration has not had sufficient time to coordinate 
interagency views of S. 875, but I would like to offer some 
preliminary comments on the legislation.
    While the Department of Transportation has primary 
authority for addressing the President's call to reform and 
elevate CAFE standards, the Department of Energy invests in the 
vehicle technologies and attests to their availability to 
increase fleet efficiency. Those provisions of the bill that 
broadly support the President's vision of increasing efficiency 
alongside technologies to displace fuel consumption are 
integral to a comprehensive national strategy.
    Title II of S. 875 supports the President's goal of 
deploying increased volumes of renewable fuels. The 
administration believes, however, that we must have a 
manageable time frame for fuels and infrastructure deployment 
and that a 10-year goal is an ambitious and appropriate metric.
    Title II also contains provisions that focus on 
infrastructure development, which is a vital component of 
achieving energy security. The primary focus of S. 875 is on 
adoption of E85 infrastructure, an important end goal of 
ethanol deployment. Including provisions that also accelerate 
early adoption of intermediate fuel blends that range in 
intervals between E10 and E85 could serve as a useful bridge 
towards this ultimate goal.
    Finally, although S. 875 takes important steps toward 
energy security, the United States and all major oil-consuming 
countries currently rely on imported petroleum as our major 
fuel source. Development of alternative fuels reduces our 
vulnerability to a major disruption in worldwide oil supplies 
and assists in transforming our energy economy. Over the last 
30 years, we have invested in the Strategic Petroleum Reserve 
to provide us protection against these types of disruptions.
    While the Reserve is robust with an inventory of 690 
million barrels, and has provided relief to U.S. consumers 
after several shortages, our growth rates indicate that the 
reserve should in fact be much larger. The administration is 
taking steps to increase the inventory of the Reserve to 727 
million barrels, the current capacity. The administration 
believes that our energy security requires us to go further and 
authorize an increase in the size of the Reserve from 1 billion 
to 1.5 billion barrels.
    We also urge Congress to support the President's request 
for $168 million in fiscal year 2008 to fund its expansion.
    Today's hearing also addresses a recently released 
assessment of the economic impacts of implementing the Energy 
Security Leadership Council's recommendations to the Nation on 
reducing U.S. oil dependence. The analysis demonstrates the 
countless benefits that can be achieved, if we as a country 
commit to altering our energy portfolio. The Department is 
making progress toward that goal.
    The President's Advanced Energy Initiative and ``Twenty in 
Ten'' goal, along with the Energy Policy Act of 2005, 
contribute a substantial road map for energy security. The 
Department is implementing EPACT 2005, and we are already 
beginning to see its results.
    For example, the Council's recommendations include 
providing financial assistance for six or more biorefineries 
employing a variety of feedstocks located in various regions of 
the country. In fact, Secretary Bodman recently announced that 
the Department of Energy (DOE), under the authority provided in 
EPACT section 932 will invest up to 385 million for six 
commercial scale biorefinery projects over the next 4 years. In 
addition, just last week, Secretary Bodman announced the 
availability of up to $200 million for cellulosic biorefineries 
at 10 percent of commercial scale, also in accordance with 
EPACT section 932.
    Mr. Chairman, the question that is most urgently before 
this subcommittee, I believe, is how many Federal dollars will 
it take to satisfactorily address our addiction to oil. I 
suggest to you that there is no amount of Federal spending that 
can achieve this goal alone, without catalyzing private 
investment. If we are serious about changing our Nation's 
energy portfolio, we must unleash the vast potential and 
transformative power of our capital markets.
    The Federal Government's greatest contribution to energy 
security is the enactment of durable policy that signals to 
private investors our long-term commitment to alternative 
sources of energy and addresses market imperfections. 
Government funding alone will not be enough to bring about the 
magnitude of change at the rate required to address our 
critical security, economic, and environmental concerns.
    The challenge for large-scale, up-front investments and 
clean energy is that the potential for outstanding returns must 
be realized over an extended period of time or the life cycle 
of the technologies use. This is true whether dealing with the 
solar roof top, cellulosic biorefineries, large wind farms, 
nuclear powerplants, energy efficient products like the 
ubiquitous compact fluorescent light bulb, or even transmission 
linking our clean energy resources with our national urban load 
centers.
    Though the energy source is domestically available and 
generates little to no greenhouse gases, uncertainty over a 
technology's life cycle risk and cost severely retards the 
amounts and types of private capital available being deployed. 
Effective capital formation requires the Federal Government to 
provide the necessary policy predictability and economic 
climate that enables massive investments at an accelerated 
pace. Responsible leveraging of Federal tax dollars to catalyze 
and accelerate private infrastructure financing and capital 
flows is essential to enable our national strategy of a new 
clean energy economy.
    Mr. Chairman, this concludes my prepared statement and I'd 
be happy to answer any questions the subcommittee members may 
have.
    Senator Dorgan. Secretary Karsner, thank you very much.
    [The statement follows:]

              Prepared Statement of Hon. Alexander Karsner

    Mr. Chairman, Senator Domenici, members of the committee, thank you 
for the opportunity to testify before you today on S. 875, the Security 
and Fuel Efficiency Energy Act of 2007, and on the policies and funding 
necessary for reducing U.S. oil dependence.
    In his 2007 State of the Union address, President Bush challenged 
our country to reduce gasoline consumption by 20 percent in the next 10 
years, the ``Twenty in Ten'' plan. The President called for a robust 
Alternative Fuel Standard (AFS), requiring the equivalent of 35 billion 
gallons of renewable and alternative fuel in 2017. This goal is a 
significant expansion of the 7.5 billion gallon renewable fuel target 
now in law for 2012, under the Renewable Fuels Standard. Expanding the 
mandate established by the Energy Policy Act of 2005 (EPACT 2005) is 
expected to decrease projected gasoline use by 15 percent. Another 5 
percent reduction in gasoline consumption can be achieved through the 
administration's proposal to reform CAFE standards. The ``Twenty in 
Ten'' plan holds the promise of diversifying the sources, types, and 
volumes of fuels we use, while reducing our vulnerabilities and 
dependence on oil. Only through transformational technological change 
can these goals be achieved, and we believe that the administration's 
proposals provide the tools to achieve them.

                      S. 875, THE SAFE ENERGY ACT

    While the administration has not had sufficient time to coordinate 
interagency views of S. 875, the SAFE Energy Act of 2007, I am pleased 
to offer some preliminary comments on the legislation. While the 
Department of Transportation (DOT) has primary authority for addressing 
the President's call to reform and elevate CAFE standards, the 
Department of Energy (DOE) invests in the vehicle technologies and 
attests to their availability to increase fleet efficiency. Those 
provisions of the bill that broadly support the President's vision of 
increasing efficiency along side technologies to displace fuel 
consumption are integral to a comprehensive national strategy.
    Title II of S. 875 supports the President's goal of deploying 
increased volumes of renewable fuels. The administration believes, 
however, that we must have a manageable timeframe for fuels and 
infrastructure deployment, and that a 10-year goal is an ambitious and 
appropriate metric. However, the administration also believes that once 
a standard is set, the market should be allowed to determine which 
options succeed, and therefore, the President's proposal broadens the 
market by expanding the alternative fuel options that can meet the 
standard. In addition, the President's proposal also provides for a 
flexible means for industry to comply with the alternative fuel 
standard requirements. First, it includes a banking and trading system 
that allows participants to meet their obligations by purchasing 
credits from other complying parties. Credits could also be purchased 
from the Federal Government, thereby providing an automatic economic 
``safety valve.''
    In effect, credits would be offered for sale to entities subject to 
the AFS mandate--those who refine, blend and import gasoline--and they 
would have the ability to comply: (1) by using a sufficient amount of 
alternative fuel in motor vehicle and non road fuels they produce or 
import; (2) by buying credits that may be available in the private 
marketplace; or (3) by purchasing credits directly from the Government. 
This is intended to guard against ``price spikes'' where an 
insufficient supply of alternative fuel or alternative fuel credits 
drives up the prices.
    The credits available under the automatic economic ``safety valve'' 
in the President's proposal are for sale by the Government set at the 
price of $1.00 per gallon of ethanol equivalent. This feature provides 
some market certainty--businesses can calculate their maximum cost of 
compliance. They then can use their ingenuity to deliver value and 
minimize their compliance costs. The $1.00 safety valve does not 
protect against other factors that may cause increases in gasoline 
prices (e.g., geopolitical tensions or weather-related disruptions), 
but those can be addressed through administrative waivers if necessary.
    Title II also contains provisions that focus on infrastructure 
development, which is a vital component of achieving energy security. 
The primary focus of S. 875 is on adoption of E85 infrastructure, an 
important end goal for ethanol deployment. However, the administration 
also believes that government policy should not be dictating the fuel 
that the market adopts, but should allow diverse fuels to compete. 
Provisions that also accelerate early adoption of intermediate fuel 
blends could serve as a useful bridge toward the ultimate goal of 
energy security. We support those provisions of the bill that are 
consistent with the President's goals, particularly the areas of 
emerging biofuels and assessments of renewable fuels incentives.
    Finally, although S. 875 takes important steps toward energy 
security, the United States and all major oil-consuming countries 
currently rely on petroleum as a major fuel source. Development of 
alternative fuels reduces the vulnerability of this economy to the 
severe consequences of a major disruption in world wide oil supplies 
and assists in our long-term goal of transforming our energy economy.
    Over the last 30 years, we have invested in the Strategic Petroleum 
Reserve to provide us protection against these types of disruptions. 
While the Reserve is robust, with an inventory of 690 million barrels, 
and has provided relief to oil consumers after supply shortages, our 
projected growth rates indicate that the Reserve needs to be much 
larger. Even allowing for successful implementation of the legislation 
before the Congress, we must deal with the vulnerabilities associated 
with concentration of the world's petroleum reserves in unstable 
regions.,
    The administration is taking steps to increase the inventory of the 
Reserve to 727 million barrels, the current capacity, and to make the 
necessary expansions to reach 1 billion barrels as authorized under 
EPACT 2005. The administration believes that our energy security 
requires we go even further and authorize an increase in the size of 
the Reserve to 1.5 billion barrels. We urge Congress to support the 
President's request for $168 million in fiscal year 2008 to fund 
expansion. That funding will allow us to buy land and rights of way, 
and to do all of the detailed design and engineering work necessary to 
expand the existing Reserve sites at Bayou Choctaw, Louisiana, and Big 
Hill, Texas, as well as a new site near Richton, Mississippi, and NEPA 
work for expansion to 1.5 billion barrels.

               ENERGY SECURITY LEADERSHIP COUNCIL REPORT

    Today's hearing also addresses a recently released assessment of 
the economic impacts of implementing the Energy Security Leadership 
Council's Recommendations to the Nation on Reducing U.S. Oil 
Dependence. The analysis demonstrates the countless benefits that can 
be achieved if we as a country commit to altering our energy portfolio. 
We are committed to making progress toward that goal. The President's 
Advanced Energy Initiative (AEI) and ``Twenty in Ten'' goal, along with 
EPACT 2005, contribute to a roadmap for energy security. The Department 
is implementing EPACT 2005, and we are already beginning to see the 
results.
    For example, the Council's recommendations include providing 
financial assistance for six or more biorefineries employing a variety 
of feedstocks, located in various regions of the country. In fact, 
Secretary Bodman recently announced that DOE, under the authority 
provided in EPACT section 932, will invest up to $385 million for as 
many as 6 commercial-scale biorefinery projects over the next 4 years, 
subject to appropriations. These funds, combined with industry's cost 
share, could lead to more than $1.2 billion in public and private 
sector investment in these biorefineries. In addition, just last week 
Secretary Bodman announced the availability of up to $200 million, 
subject to appropriations, for cellulosic biorefineries at 10 percent 
of commercial scale, also in accordance with EPACT section 932. This 
effort will enable industry to resolve remaining technical and process 
integration uncertainties and allow for more predictable, less costly 
scale up of ``next generation'' biorefinery process technologies. The 
10-percent scale demonstrations have the potential to reduce the 
overall cost and risk to industry and contribute to the quicker 
commercialization of larger-scale facilities.
    EERE's Biomass Program is focused on making cellulosic ethanol 
cost-competitive by 2012, a target put forth in the AEI. In fiscal year 
2007, including funds appropriated under the Continuing Resolution, the 
Department has allocated approximately $200 million for EERE's Biomass 
and Biorefinery Systems R&D program to implement key activities 
necessary to achieve the 2012 goal for cost-competitive cellulosic 
ethanol.
    The Department is also working with public and private sector 
partners to encourage development and deployment of a biofuels 
distribution infrastructure in the United States. The Department is 
pursuing a number of infrastructure activities, including analyses of 
pipelines, water issues, and advanced vehicle technologies. The 
biofuels infrastructure team is also assessing the impacts of higher-
level intermediate blends of ethanol (e.g., E15 and E20), renewable 
fuels pipeline feasibility and materials research, and optimization of 
E85 alternative fuel vehicles. This work is being coordinated with the 
Department of Transportation, which sets and enforces standards for the 
safe transportation of petroleum products and hazardous liquids by all 
modes of transportation, including pipelines.

                       ACHIEVING ENERGY SECURITY

    The question that is most urgently before this subcommittee, I 
believe, is how many Federal dollars will it take to end our dependence 
on oil. I suggest to you, Mr. Chairman, that there is no amount of 
Federal spending that can achieve this goal. If we are serious about 
changing our Nation's energy portfolio, we must unleash the vast 
potential of capital markets. The Federal Government's greatest 
contribution to energy security is the enactment of durable policy that 
signals to private investors our long-term commitment to alternative 
sources of energy. Government funding alone will not be enough to bring 
about the magnitude of change at the rate required to address our 
critical security, economic, and environmental concerns.
    We have made great progress in the development of clean energy and 
energy efficiency technologies. Renewable sources of electric 
generation, like wind across the Great Plains and solar in the 
Southwest, are already cost competitive in many locations. Highly 
efficient buildings that generate as much energy as they consume are a 
reality and proceeding down the cost curve. Emission-free nuclear 
energy is postured to substantially contribute to both energy security 
and environmental stewardship. Carbon capture and storage will enable 
coal to retain its important contribution to the energy mix.
    The challenge for large scale, up front investments in clean energy 
is that the potential for outstanding returns must be realized over an 
extended period of time, or the ``lifecycle'' of the technology's use. 
This is true whether dealing with a solar rooftop, cellulosic 
biorefineries, large wind farms, nuclear power plants, energy efficient 
products like the ubiquitous compact fluorescent lamp, or transmission 
linking our clean energy sources with urban loads. Though clean energy 
sources are domestically available and generate little to no greenhouse 
gases, uncertainty over the necessary technologies' ``lifecycle'' risks 
and costs severely retards the amount and types of private capital 
being deployed. Rapid commercialization of clean energy technologies 
requires sophisticated capital risk management to facilitate complex 
financial transactions. That risk assessment is what the private sector 
does best. Effective capital formation requires the Federal Government 
to provide the necessary policy predictability and economic climate 
that enables massive investments at an accelerated pace. Responsible 
use of Federal tax policy to catalyze and accelerate private 
infrastructure financing and capitol flows is essential to enable our 
vision of a new clean energy future.
    The President's Advanced Energy Initiative and ``Twenty in Ten'' 
goal, along with full implementation of EPACT 2005, hold the promise of 
accelerating deployment of clean, renewable energy and energy 
efficiency technologies. To meet these challenges, cutting edge 
research and development must be supported by consistent, long-range 
policy actions, such as the proposal that the President articulated in 
the State of the Union.
    Mr. Chairman, this concludes my prepared statement, and I would be 
happy to answer any questions the subcommittee members may have.

    Senator Dorgan. Director Burton, you may proceed.

STATEMENT OF R.M. ``JOHNNIE'' BURTON, DIRECTOR, 
            MINERALS MANAGEMENT SERVICE, DEPARTMENT OF 
            THE INTERIOR
    Ms. Burton. Mr. Chairman and members of the subcommittee, I 
appreciate the opportunity to testify today on actions the 
Department of the Interior Minerals Management Service has 
taken to reduce U.S. oil dependence.
    Production from the Federal Outer Continental Shelf 
accounts for 25 percent of domestic oil production and near 20 
percent of domestic gas production--natural gas production. As 
energy demand continues, to increase these resources--is all 
the more important, to our national security and to our 
economy.
    The Energy Information Administration estimates that 
despite increased efficiencies and conservation over the next 
20 years, consumption is expected to grow more than 25 percent. 
Even with more renewable energy production expected, oil and 
natural gas will continue to account for the majority of energy 
used through 2030. Interior's domestic energy programs, 
particularly offshore oil and gas production, will remain vital 
to our national energy portfolio--for some time to come.
    Mr. Chairman, the administration is in the process of 
reviewing your proposed legislation which addresses access to 
oil and gas resources on the Federal Outer Continental Shelf in 
the Gulf of Mexico and authorizes an inventory of oil and gas 
resources in a portion of the Atlantic OCS. The administration 
recognizes there are many complicated issues associated with 
the development of these resources and is working hard to 
accommodate the needs of all stakeholders.
    On April 30, the Department of the Interior transmitted to 
Congress the 5-year Outer Continental Shelf Oil and Gas Leasing 
Program to guide domestic energy production--leasing and 
production, from 2007 to 2012. The program proposes 21 sales in 
eight planning areas. Twelve sales are slated for the Gulf of 
Mexico, eight for Alaska and potentially, one off the coast of 
Virginia. The Virginia coast would have a 50-mile buffer zone, 
as requested by the Governor.
    The program proposes annual lease sales in the central and 
western Gulf of Mexico. The Gulf of Mexico Energy Security Act 
signed by the President on December 20, 2006 requires oil and 
gas leasing in portion of Sale 181 area in the central gulf. 
That accounts for over 2 million acres. Another portion of Sale 
181 is in the eastern gulf. It accounts for about 550,000 
acres. And finally, there is an area south of 181, which 
accounts for 5.7 million acres. The total new areas in the gulf 
that will be offered in the next 5 years amount to about 8.3 
million acres.
    Under the 5-year program the portion of Sale 181 area in 
the central gulf will be included in the October 2007 lease 
sale and the portion of the eastern gulf would be offered for 
the first time in March 2008. The 181 south area is scheduled 
for 2009. All of these new areas require additional 
environmental work, which is what we're doing right now.
    The leasing program scheduled eight sales in Alaska, two in 
the Beaufort Sea, three in the Chukchi Sea, up to two in the 
Cook Inlet, and one in the North Aleutian Basin in an area 
that's about 5.6 million acres which were previously offered 
during Sale 92 in 1985. This is requested by the State of 
Alaska. This area would be subject to environmental reviews 
including pubic comment, extensive consultation with the State, 
local governments, and tribal organizations before any lease 
sale can proceed.
    The program also includes a proposed sale in the mid-
Atlantic planning area, out beyond 50 miles of the coastline of 
Virginia in late 2011. This area was included in the 5-year 
program at the request of the Commonwealth of Virginia. All of 
the Atlantic planning areas, including Virginia are presently 
under congressional moratorium and under Presidential 
withdrawal. No sale can occur unless these two edicts are 
lifted. The proposed sale excludes a 50-mile deep coastal 
buffer from leasing consideration, as well as a triangular 
piece of the entrance of the Chesapeake to protect that 
particular bay.
    Our analyses indicate that implementing the new 5 year oil 
and gas leasing program would result in a mean estimate of an 
additional 10 billion barrels of oil and 45 trillion cubic feet 
of gas over a 40 year timespan. And that would translate to 
about $170 billion in today's dollars in net benefits to the 
Nation.
    Through all of our programs, MMS works to ensure that the 
public receives the maximum benefit from America's OCS 
resources and Federal mineral revenues. As MMS moves forward in 
the new century, the importance of facilitating the Nation's 
management of the OCS lands and collecting and dispersing 
mineral revenues will remain our top priority.
    Mr. Chairman, this concludes my statement and I'm ready to 
answer questions at your pleasure.
    Senator Dorgan. Director Burton, thank you very much.
    [The statement follows:]

             Prepared Statement of R.M. ``Johnnie'' Burton

    Chairman Dorgan, thank you for the opportunity to appear here today 
to discuss with you the actions the Department of the Interior's 
Minerals Management Service has taken to reduce U.S. oil dependence and 
to protect the Nation against supply disruptions. This committee has 
played an important role in shaping our domestic energy program, 
particularly with regard to encouraging environmentally sound 
development of our domestic oil and gas resources on the Outer 
Continental Shelf.
    The Department and its agencies, including the Minerals Management 
Service (MMS), serve the public through careful stewardship of our 
Nation's natural resources. The Department also plays an important role 
in domestic energy development. One third of all energy produced in the 
United States comes from resources managed by the Interior Department.
    As energy demand continues to increase, these resources are all the 
more important to our national security and to our economy. The Energy 
Information Administration estimates that, despite increased 
efficiencies and conservation, over the next 20 years energy 
consumption is expected to grow more than 25 percent. Even with more 
renewable energy production expected, oil and natural gas will continue 
to account for a majority of energy use through 2030. Interior's 
domestic energy programs, particularly offshore oil and gas production, 
will remain vital to our national energy portfolio for some time to 
come.
    The Federal Outer Continental Shelf (OCS) covers 1.76 billion acres 
and is a major source of crude oil and natural gas for the domestic 
market. In fact, according to the Energy Information Administration, if 
the Federal OCS were treated as a separate country, it would rank among 
the top five nations in the world in terms of the amount of crude oil 
and second in natural gas it supplies for annual U.S. consumption.\1\
---------------------------------------------------------------------------
    \1\ EIA U.S. Imports by Country of Origin, 12-21-2006.
---------------------------------------------------------------------------
    Mr. Chairman, the administration is in the process of reviewing 
your proposed legislation, S. 875, Title III of which addresses access 
to oil and gas resources on the Federal Outer Continental Shelf in the 
Gulf of Mexico and authorizes an inventory of resources in a portion of 
the Atlantic OCS.
    The administration recognizes there are many complicated issues 
associated with the development of these resources and is working hard 
to accommodate the needs of all stakeholders.
    On April 30th the Department of the Interior transmitted to 
Congress the 5-Year Outer Continental Shelf Oil and Gas Leasing Program 
(5-year program), to guide domestic energy leasing on the OCS from 2007 
to 2012. The program proposes 21 lease sales in 8 planning areas. 
Twelve sales are slated for the Gulf of Mexico, 8 off of Alaska and one 
in the Mid-Atlantic Planning Area.
    The Program continues to schedule annual lease sales in the Central 
and Western Gulf of Mexico. The Gulf of Mexico Energy Security Act (the 
Act), signed by President George W. Bush on December 20, 2006, requires 
oil and gas leasing in portions of the ``Sale 181 Area'' in the Central 
Gulf (2,028,730 acres) and in the Eastern Gulf (about 546,000 acres) 
Planning Areas as well as the ``181 South Area'' (5,762,620 acres). The 
total acreage of new areas in the Gulf offered under the proposed 
program is 8,337,443 acres. Under the 5-year program, the portion of 
the ``Sale 181'' area in the Central Gulf would be included in the 
October 2007 lease sale, and the portion in the Eastern Gulf would be 
offered for the first time in March 2008. The 181 South area is 
scheduled for lease in 2009 following additional environmental studies 
and requirements under the National Environmental Policy Act (NEPA).
    The leasing program schedules 8 sales in Alaska: 2 in the Beaufort 
Sea; 3 in the Chukchi Sea; up to 2 in Cook Inlet; and 1 in the North 
Aleutian Basin--in an area of about 5.6 million acres that was 
previously offered during Lease Sale 92 in 1985. These areas would be 
subject to environmental reviews, including public comment, and 
extensive consultation with state and local governments and tribal 
organizations before any lease sale proceeds.
    The program also includes a proposed sale in the Mid-Atlantic 
Planning Area, beyond 50 miles of the coastline of Virginia, in late 
2011. This area was included in the 5-year program at the request of 
the Commonwealth of Virginia. This sale would only take place if the 
congressional moratorium is discontinued and the presidential 
withdrawal is modified for this area. This proposed sale area excludes 
a 50-mile coastal buffer from leasing consideration as requested by the 
Commonwealth of Virginia, as well as a No-Obstruction Zone at the 
entrance to the Chesapeake Bay where no leasing would take place. No 
lease sale would proceed without additional consultation and more site-
specific analysis of its environmental effects under the NEPA.
    Our analysis indicates that implementing the new 5-Year OCS Oil and 
Gas Leasing Program would result in a mean estimate of an additional 10 
billion barrels of oil, 45 trillion cubic feet of gas over a 40-year 
time span, and $170 billion, in today's dollars, in net benefits for 
the Nation.
    Mr. Chairman, this concludes my remarks. I would be happy to answer 
any questions you have at this time.

    Senator Dorgan. Next we will hear from Fred Smith, 
Chairman, CEO, of FedEx. Mr. Smith, thank you for being with 
us.

STATEMENT OF FREDRICK W. SMITH, CHAIRMAN, PRESIDENT AND 
            CEO, FEDEX CORPORATION
    Mr. Smith. Mr. Chairman, thank you very much. Admiral 
Johnson and I are here today to represent the Energy Security 
Leadership Council. I've submitted my testimony for the record. 
I'll just summarize it, if that's ok with you.
    As you mentioned, the Energy Security Leadership Council is 
a group of 20 business CEOs and retired military officers, 
who've been moved to action out of the conviction that oil 
dependence severely threatens the economic and national 
security of the United States. We would argue, in fact, that 
oil dependence is the most important security issue facing the 
Nation, with the possible exception of weapons of mass 
destruction.
    In December the council unveiled a set of recommendations 
to the Nation on reducing U.S. oil dependence. The report 
outlines a comprehensive energy security strategy based on four 
measures: One, new strength in vehicle fuel efficiency 
standards; two, increased domestic oil production in 
conjunction with expanded environmental protections; three, 
greater availability of alternative fuels; and four, improved 
international arrangements to secure global oil supplies.
    The recommendations replace the false hope of domestic 
energy independence with realistic policies for better managing 
the reality of global energy interdependence. We commend very 
much, you and Senator Craig and the other members of the 
subcommittee here, for facing up to the hard facts about energy 
security.
    We believe the time has come for Americans to unite behind 
an aggressive campaign to reduce our dependence on oil and 
increase domestic and global energy security. The 
recommendations we've made are balanced policies. As you noted, 
Mr. Chairman, we consume now, more than 20 million barrels of 
oil a day, one-quarter of the world's total.
    More than 60 percent of the oil we use is imported; 70 
percent of that oil goes toward transportation, which relies on 
oil for 97 percent of delivered energy with almost no 
substitutes available. As the CEO of an organization of 280,000 
people operating 677 aircrafts around the world and over 70,000 
vehicles, I can assure you this issue commands our daily 
attention.
    In the event of an oil crisis, transportation would break 
down and paralysis would spread into all economic sectors. A 
brief look at the history of Japan and Germany during World War 
II will illustrate the importance of energy vulnerability.
    The American people must recognize that the 21st century 
global oil market is well removed from the free market ideal, 
as you mentioned. By some estimates, over 90 percent of all oil 
and gas reserves are now held by national oil companies that 
are partially or fully controlled by governments, many of whom 
do not have America's best interest at heart.
    I'm certainly not one to--encourage regulation where market 
solutions are available, but the supply of oil is determined by 
a cartel, a group of people who gather together, including ways 
that would be illegal in the United States. Therefore 
Government intervention is not merely desirable; it is 
essential.
    The council's approach tackles oil dependence through many 
policies but basically those measured balanced approaches I 
mentioned. Key among them are new vehicle efficiency standards 
which require 4 percent more miles per gallon than the fleet of 
cars and light trucks sold a year before. These new standards 
are very different from the old CAFE standards. Vehicle classes 
should be determined by key attributes--the government will 
have the discretion to require different percentage increases 
for different classes of vehicles in pursuit of this 4 percent 
improvement.
    They--we recommend a variety of consumer and manufacturing 
tax credits that will help car makers and car buyers adjust to 
greater fuel economy. I should note that we recommend medium 
and heavy duty vehicles, along with light trucks and passenger 
vehicles be included in these new efficiency standards. It's 
very important given the growth of vehicle--oil consumptions 
and light truck and medium and heavy truck consumption.
    We believe that the development of alternative fuels is 
very important, but there is no way that we can grow ourselves 
out of this problem. And we believe that increased supplies of 
domestic oil are an equal part of this equation. The safety 
record of the U.S. offshore operators is truly dramatic--having 
produced 7 billion barrels of oil with a spill rate of .001 
from 1985.
    So, we believe Mr. Chairman, that we've made some very good 
recommendations. We've tried to quantify the security benefits 
of these policies. The council has worked with distinguished 
economists from the University of Maryland. And Dr. Robert 
Wescott, here, will summarize the results of these studies.
    With that, I'll conclude and be happy to answer any 
questions.
    Senator Dorgan. Mr. Smith, thank you very much.
    [The statement follows:]

                Prepared Statement of Frederick W. Smith

    I thank the subcommittee for this opportunity to testify about the 
dangers of oil dependence and about the policies this Nation can adopt 
to protect itself. I speak to you today on behalf of the Energy 
Security Leadership Council, a non-partisan group that I co-chair along 
with General P.X. Kelley (Ret.), the 28th Commandant of the United 
States Marine Corps. All totaled, the Council unites 20 business 
leaders and retired senior military officers who have been moved to 
action out of the conviction that oil dependence severely threatens the 
economic and national security of the United States. Indeed, we would 
argue that oil dependence is the most important security issue facing 
the Nation with the possible exception of weapons of mass destruction.
    In December, the Council unveiled a set of Recommendations to the 
Nation on Reducing U.S. Oil Dependence. This report outlines a 
comprehensive energy security strategy, which calls for strengthened 
vehicle fuel efficiency standards, increased domestic oil production in 
conjunction with expanded environmental protections, greater 
availability of alternative fuels, and improved international 
arrangements to secure the global oil supply. Crucially, it replaces 
the false hope of domestic energy independence with policies for better 
managing the reality of global energy interdependence. The suggested 
initiatives are aggressive while being balanced and credible. Where the 
market cannot be expected to provide solutions, government has been 
asked to apply workable standards capable of spurring the needed 
private-sector responses. The members of the Council have pledged to 
continue working until these policy recommendations are enacted into 
law.
    During the last few months, the Council has collaborated with 
Senator Byron Dorgan and Senator Larry Craig to design legislation 
based on the Recommendations. This collaboration has given rise to the 
``Security and Fuel Efficiency Energy Act of 2007 (the SAFE Energy 
Act).'' The fuel economy sections of this bill were subsequently 
introduced as the ``Fuel Efficiency Energy Act of 2007.'' I am grateful 
to Senators Dorgan and Craig for their leadership on this issue.
    But this entire subcommittee deserves to be commended for framing 
the oil dependence debate as an economic and national security issue of 
fundamental importance. The American people must be told the hard facts 
about energy security. Acknowledging the risks that lie ahead is just 
good sense, and I hope my contribution today can play a part in this 
``truth-telling'', so to speak. The time has come for Americans to 
unite behind an aggressive campaign to reduce our dependence on oil and 
increase domestic and global energy security. To succeed, we must move 
beyond the narrow interests, political polarization, and short-term 
thinking that have prevented meaningful national progress for the last 
20 years. Real progress is possible if we can come together around 
balanced policies that address both the supply and demand sides of the 
oil equation. The Council fully expects that all participants in this 
deeply entrenched debate will take issue with some of our solutions. We 
hope to secure the support of a bipartisan coalition that has the 
clarity of vision and courage of conviction needed to make hard 
choices.
    Unless we tackle these hard choices, I have no doubt that oil 
dependence will result in major economic disaster for this country. Oil 
is the life-blood of our economy. We consume more than 20 million 
barrels of oil per day, a quarter of the world total. More than 60 
percent of the oil we do use is imported. The numbers are even more 
disturbing when one considers how oil use is concentrated in vital 
economic sectors. Nearly 70 percent of our oil consumption goes toward 
transportation, which relies on oil for 97 percent of delivered energy 
with almost no substitutes available. As the leader of a global 
transportation and logistics company with 677 airplanes and 70,000 
vehicles, I know the transportation sector well. FedEx has grown 
because quick and efficient transportation creates value throughout the 
entire economy. In the event of an oil crisis, transportation would 
break down and paralysis would spread into all economic sectors. Just 
look at the histories of Japan and Germany during WWII. Transportation 
and oil were the Achilles's heels of those country's war efforts. The 
Allies recognized this weakness and waged war against the Axis's 
transport and oil capabilities. It stands to reason that America's 
enemies can recognize that oil dependence is America's Achilles's heel.
    The American people must also recognize that the 21st century 
global oil market is well removed from the free-market ideal. By some 
estimates as much as 90 percent of all oil and gas reserves are held by 
national oil companies (NOCs) that are either partially or fully 
controlled by governments. Oil markets are not only politicized, they 
are also distorted by the presence of large economic externalities such 
as military expenditures that are not factored into the retail price of 
consumer fuels.
    Given these hard realities, we must accept that market forces alone 
will not solve our oil problems. Instead, government must step in to 
spur and, in some cases, require private-sector responses. This is not 
a decision I came to easily, and I am certainly not one to encourage 
regulation where other effective solutions are available. But the fact 
is the supply of oil--the most valuable commodity in the world--is 
determined by a group of men who gather together and collude in ways 
that would be considered illegal in the United States. To combat such 
anti-competitive practices, government intervention is not merely 
desirable--it is essential.
    The Council's approach tackles oil dependence through many 
policies, but none is more crucial than reformed and strengthened 
vehicle fuel-economy standards. Under the Council's proposal, the fleet 
of new passenger cars and light trucks sold in the United States each 
year will have to get 4 percent more miles per gallon than the fleet of 
cars and light trucks sold the year before. The same improvement will 
be required for commercial trucks, which have never previously been 
subject to fuel-economy standards.
    Four percent is not an arbitrarily chosen number. It reflects the 
historical annual gains that were achieved when the Nation last 
committed itself to fuel economy. It is also perfectly consistent with 
expert forecasts of potential future fuel economy improvements.
    These new standards are very different from the CAFE standards of 
the past. They require continual improvement but they are also designed 
to be flexible when necessary. For instance, pickup trucks may not be 
able to obtain the same fuel-economy levels as SUVs or minivans, but 
the Council's proposal does not require them to do so. NHTSA will have 
the discretion to require different percentage increases for different 
classes of vehicles in pursuit of 4-percent annual fuel-economy 
improvement for the entire new vehicle fleet. Vehicle classes will be 
determined by key attributes, and under this approach freight-hauling 
vehicles could justifiably be held to a lower fuel-economy standard 
than would be applied to vehicles designed first and foremost for 
transporting passengers.
    Flexibility is further ensured by ``off-ramps'' that may be 
employed if NHSTA finds that 4-percent improvement in a given year is 
technically infeasible, unsafe, or not cost-effective. These are not 
loopholes, since it will require expert opinion and data to invoke 
them. But, together, the 4-percent annual improvement standard and the 
off-ramps give credit to American ingenuity and technological prowess 
while protecting business from unachievable or value-destroying 
mandates.
    Finally, the proposed legislation contains a variety of consumer 
and manufacturing tax credits that will help car-makers and car-buyers 
adjust to greater fuel economy.
    These measures will help us once again significantly reduce the oil 
intensity of this country. Oil intensity--the amount of oil needed to 
generate a dollar of GDP--has been cut in half since the oil shocks of 
the 1970s. The result is a U.S. economy that still sees steady growth 
despite high oil prices such as those experienced over the last few 
years. Unfortunately, progress in further lowering oil intensity has 
slowed noticeably in the last decade. We must do better.
    Overall, this approach aims for two highly desirable outcomes: 
improved energy security and a competitive domestic automotive 
industry. To improve energy security, America needs to get millions of 
fuel efficient cars on the road. But we must also have a secure source 
of these vehicles, and that's why we advocate incentives that expedite 
the needed transition of U.S.-based manufacturing capacity.
    I mentioned above that the Council wants to apply fuel economy 
standards to medium and heavy trucks for the first time in our Nation's 
history. Let me tell you why this is so important. Medium- and heavy-
duty vehicles account for over 10 percent of U.S. petroleum 
consumption, roughly a quarter of the amount used by passenger cars and 
light trucks. Moreover, the fuel consumption of these vehicles is 
expected to grow at a rate nearly 50 percent higher than what is 
expected for light-duty vehicles. Clearly, oil use by trucks is not a 
marginal consideration.
    The fuel economy of medium and heavy trucks is well below what it 
could be. A 2002 study conducted by the U.S. Department of Energy (DOE) 
found that currently available technologies could raise tractor-trailer 
mileage from 6 mpg to 10 mpg. A more recent analysis performed by DOE 
in 2005 suggests that an even higher level is feasible. Potential 
improvements for medium trucks run as high as 90 percent. For trucks 
driven in cities, hybrid power-trains offer the greatest opportunity. 
And, perhaps most importantly, these gains are not projected to have 
any negative impact on performance.
    So, you may be asking, why don't we have these trucks? Don't truck 
operators look to minimize costs by adopting cost-effective fuel-saving 
technologies? The answer, of course, is that some do and some don't. As 
with purchasers of passenger cars, it is often difficult for truck 
buyers to correctly value the financial benefit of fuel-efficiency 
investments that require large up-front investments and produce savings 
over an extended time. Lack of information about available technologies 
and their fuel saving potential may also slow adoption of fuel-saving 
technologies, especially since fuel efficiency depends on a combination 
of elements (e.g., engine, chassis, aerodynamics) that are often 
marketed by separate manufacturers. But if you ask me, the key reason 
for lagging truck fuel economy is that manufacturers have not made such 
vehicles available. The market failures that have worked against 
passenger fuel economy are also evident in the truck sector. Indeed, 
since the manufacture of commercial vehicles is even more concentrated 
than is the case for passenger vehicles, the effects of the market 
failure may be even more pronounced in this sector.
    To improve energy security, we must use oil more efficiently, but 
we must not stop there. Diversifying our transportation fuel supply 
should also be a key part of our national strategy to reduce oil 
dependence. 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.
    Corn-based ethanol is by far the most successful domestic 
alternative transportation fuel. At a maximum, however, corn-based 
ethanol may be able to displace 10 percent of our gasoline use before 
corn demand outstrips supply. Corn ethanol will undoubtedly remain an 
important alternative fuel, but we must also develop newer technologies 
that have the potential to loosen the constraint posed by limited corn 
supplies. Cellulosic ethanol is one of the most promising emerging 
biofuels, and the Council has put forth policies for fostering the 
growth of this industry. In addition, we have proposed plans for 
growing the demand-side of the biofuels market, in particular through 
incentives for developing the critical delivery infrastructure. 
Finally, we propose a system of variable subsidies that will husband 
taxpayer dollars by reducing government payments to the ethanol 
industry when oil prices are high and ethanol production is 
correspondingly profitable. If oil prices were to fall, perhaps through 
cartel actions, the subsidies would rise again to protect the biofuels 
industry as a strategic bastion of supply diversification. Our plan 
will also offer additional protections to biofuels production 
facilities that have not paid off their capital costs, especially if 
they employ emerging technologies.
    Biofuels are part of the solution, but we should not fool ourselves 
into thinking that America can ``grow'' its way out of this problem. 
America's fuel needs cannot be met with biofuels alone. Even Brazil, 
which has roughly the same land mass as the continental United States, 
but whose fuel requirements are only a small fraction of ours, still 
relies on oil for most of its transportation energy.
    The United States will continue to require oil for the foreseeable 
future, and, as such, I want to address the need for increasing the 
supply of secure domestic oil. Political forces have often portrayed 
increased supply and decreased demand as mutually exclusive ambitions. 
In fact, both goals are indispensable components of any comprehensive 
policy for obtaining genuine energy security.
    The United States plays a critical role in global petroleum 
production. Currently the third largest oil producer in the world after 
Saudi Arabia and Russia, America has produced more total oil than any 
other nation. Nevertheless, the United States is the world's largest 
consumer by far, accounting for 25 percent of the world's daily oil 
consumption while providing only around 10 percent of supply.
    Much of America's untapped resources are legally off limits to 
production. These production ``moratoria'' are often justified on 
environmental grounds, even though the oil production industry has 
amassed an excellent environmental record. From 1985 to 2001, U.S. 
offshore operators produced 7 billion barrels of oil with a spill rate 
of only .001 percent. More recently, 3,050 of the Gulf's 4,000 
platforms and 22,000 miles of Gulf pipelines were in the direct path of 
either Hurricane Katrina or Hurricane Rita. Despite the destruction of 
115 platforms, damage to 52 other platforms and 535 pipeline segments, 
and the near total shut-down of the Gulf's offshore oil and gas 
production, there were no major oil spills attributed to either storm.
    The Council believes it is sensible to increase access to 
exploration and production on the Outer Continental Shelf (OCS) as long 
as government and the oil and gas industry are willing to reasonably 
strengthen the legal and financial penalties that can be imposed in the 
event of any damage to the environment. To be sure, increased U.S. 
production on the OCS will not fundamentally shift the global 
distribution of oil resources, the majority of which will remain in the 
Middle East and under OPEC control. But by boosting production 
domestically, the U.S. can improve the flexibility and resiliency of 
the global oil market, especially in an increasingly tight market where 
spare production capacity is concentrated in a handful of countries.
    Let me restate the key component's of the Council's plan:
  --Reform and strengthen CAFE standards to require 4 percent annual 
        increases in fuel economy of the new vehicle fleet. These 
        standards should be applied to all on-road vehicles, including 
        medium and heavy trucks. While the standards must be strict, 
        they should contain ``off-ramps'' that will protect consumers 
        and manufacturers by relaxing the 4 percent annual increases if 
        they prove to be too costly, unsafe, or technically infeasible;
  --Build the market for alternative fuels, paying attention to 
        feedstock and infrastructure concerns;
  --Explore and develop this country's own oil and natural gas fields 
        in a rigorous but environmentally responsible and sensitive 
        manner; and
  --Where possible, design a more effective and efficient foreign 
        policy for securing the overseas oil that we still need.
    In order to quantify the economic security benefits of these 
policies, the Council worked with economists from the University of 
Maryland and Dr. Robert Wescott, former Chief Economist at the U.S. 
President's Council of Economic Advisors. The research team employed 
LIFT, a detailed general equilibrium simulation model that captures the 
effects of purchases and sales among nearly 100 industry groups. The 
point of departure for the study was a baseline scenario for the 2007-
2030 period that was generally consistent with the forecast contained 
in the U.S. Department of Energy's Annual Energy Outlook for 2006. A 
second scenario for the same period was then developed incorporating 
the Council's proposals for fuel conservation, expanded alternative 
fuel production, and increased domestic oil and natural gas supply.
    The results are being released today in a published report, but the 
key findings are easily summarized. If we can find the courage to act 
on this plan, the direct economic benefits will include higher energy 
productivity, reduced petroleum imports, and slightly lower global oil 
prices. These changes will translate into additional macroeconomic 
benefits that include higher real income and employment, a lower 
current account deficit, and a reduced federal government deficit. Last 
but not least, the program will buffer the economy against oil price 
shocks: that is, as the measures reduce the petroleum dependence of the 
economy, any given sudden spike in global oil prices will be less 
harmful to the economy than would have been the case without the 
policies.
    The Council is committed to working with the members of the 
committee and the entire Congress in bipartisan fashion to achieve 
these goals. Our Nation deserves no less.

    Senator Dorgan. Now we'll hear from Admiral Johnson. 
Admiral Johnson, you may proceed.

STATEMENT OF ADMIRAL GREGORY G. JOHNSON, UNITED STATES 
            NAVY (RET.), FORMER COMMANDER, UNITED 
            STATES NAVAL FORCES, EUROPE
    Admiral Johnson. Chairman Dorgan, Ranking Member Domenici, 
and members of the subcommittee, good afternoon. I thank you 
for the opportunity to testify along with Mr. Smith and I 
certainly endorse his assessment that oil dependence is one of 
the most serious economic and national security challenges 
facing our Nation. So, I want to use my time to talk to you 
about the threats to the global oil supply and argue that there 
is a compelling case to be made for increasing U.S. oil and 
natural gas production in conjunction with strengthened 
environmental protections.
    Ever since launching his war against the United States, 
Osama bin Laden has threatened attacks on oil installations in 
the Arabian Gulf region. Just last year massive oil supply 
shock was only narrowly averted when the al-Qaeda attack on the 
Abqaiq facility was barely foiled. Sixty percent of Saudi 
Arabia's oil goes through this facility. Two weeks ago the 
Saudi authorities again uncovered an al-Qaeda plot that 
threatened oil infrastructure targets.
    Iraq is also the scene of persistent insurgent and 
terrorist attacks on pipelines and pumping stations especially 
in the north of Iraq and in the offshore loading platforms in 
the northern Arabian Gulf. These attacks have curtailed Iraqi 
oil exports and cost the Iraqi government billions of dollars 
in revenue at a time when American taxpayers are spending 
billions on reconstruction.
    The danger of attacks in shipping is also quite real. In 
October 2002, the French supertanker, Limburg, was rammed by a 
small boat packed with explosives off the coast of Yemen. Most 
of all shipments from the Persian Gulf have to pass through a 
handful of maritime chokepoints. Fully one-half, 40 million 
barrels a day of oil, transiting our world's oceans go through 
restricted waterways: the Strait of Hormuz, the Strait of 
Mirlocca, the Strait of Babel Mandeb, the Turkish Straits, and 
the Suez Canal.
    All of our regional combatant commands handle all security 
tasks. For instance, the European command, where I commanded 
naval forces at the close of my career is involved in oil 
security tasks and missions from the Caspian Sea Transcaucasus 
region to the Gulf of Guinea in West Africa. And you just heard 
what happened there today in Nigeria.
    The armed forces of the United States have been 
extraordinarily successful in fulfilling their energy security 
mission but 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 that 
paradigm. The U.S. military is certainly not the only 
instrument, in many cases not the best instrument, for 
confronting the strategic dangers that emanate from oil 
dependence.
    This is particularly true when oil is used as a political 
weapon and we certainly all remember the 1973 oil embargo and 
the consequences of that. And that--we all know that Russia is 
beginning to exercise its commodity muscle as evidenced by the 
stop of natural gas exports to Ukraine, which, in turn, 
withheld natural gas destined for western Europe.
    Energy exporting governments don't need to resort to full 
fledged embargoes to hurt U.S. and other importers. They can 
manipulate prices through less drastic production--cuts and by 
foregoing improvements in their infrastructure. Witness what is 
happening in Venezuela. Currently an estimated 90 percent of 
global oil reserves are controlled by national oil companies, 
NOX, which are highly susceptible to being influenced by 
political objectives.
    European Union's reliance on Middle Eastern oil and Russian 
gas continues to complicate U.S. foreign policy efforts, 
especially with regard to stopping Iran from developing nuclear 
weapons. China, of course, exercises its interest in Sudanese 
oil by stymieing diplomatic efforts in Darfur.
    The U.S. Government must make comprehensive energy security 
a top strategic priority. And I am heartened to see that a 
broad wave of support is rapidly advancing the legislative 
process to substantially strengthen fuel economy standards. 
Unfortunately the same bipartisan realism is not fully 
coalesced around the issue of increased domestic supply.
    A congressional and Presidential moratoria to prevent oil 
exploration and production on most of the Outer Continental 
Shelf are usually justified by the need to protect military 
training areas, tourism, and the environment. While prohibiting 
oil and natural gas leases inside the military mission line in 
the Gulf of Mexico essentially blocks all production in the 
eastern Gulf of Mexico, an area that is estimated to contain 4 
billion barrels of oil and 37 trillion cubic feet of natural 
gas.
    Based on my 36 years of naval service, I think I'm in a 
position to say that the military can successfully train for 
and complete its mission without this sweeping prohibition. 
After all we routinely operate in the Arabian Gulf which has 
intense oil and gas infrastructure, as well as the North Sea 
and the littoral waters of the United Kingdom and Norway.
    As for tourism, let me present to you this telling fact: 
Adam Goldstein, the President of Royal Caribbean International 
Cruise Lines, certainly cares about maritime tourism, 
especially in Florida, where his company is headquartered. Yet, 
he has joined the Energy Security Leadership Council and 
supports the call for increased domestic production in the 
Outer Continental Shelf.
    Finally, let's talk about environment. As Mr. Smith 
mentioned in his remarks, oil exploration and production in 
this country have a remarkable safety record. The same is true 
for Canada, Norway, and the United Kingdom. All countries with 
strong environmental records, which do not limit offshore 
production to anywhere near the extent that the United States 
does. If you take a global perspective, oil production close to 
the U.S. market is arguably far safer to the environment than 
shipping equivalent quantities over thousands of sea miles in 
vulnerable tankers in an environment in which there have been 
notable mishaps at great--expense to our Earth's environment.
    The council is confident that well regulated U.S. oil 
industry can increase domestic production in an environmentally 
responsible fashion. And we have several suggestions in my 
prepared remarks.
    Mr. Chairman, I thank you for the opportunity to make 
comments and I'm willing to take your questions at any time.
    Senator Dorgan. Thank you very much, Admiral Johnson.
    [The statement follows:]

            Prepared Statement of Admiral Gregory G. Johnson

    Chairman Dorgan, Ranking Member Cochran, Senator Domenici and 
members of the subcommittee, I thank you for inviting me to talk to you 
about how we can reduce U.S. oil dependence and consequently improve 
economic and national security. Mr. Smith, who co-Chairs the Energy 
Security Leadership Council on which I serve, has forcefully described 
the goals of the Council and the pressing need for tougher vehicle 
fuel-economy standards. I won't recover this ground other than to 
express my complete agreement with his assessment that oil dependence 
is one of the most serious economic and national security challenges 
facing this Nation.
    I want to use my time to talk about the threats to the global oil 
supply. In turn, I will argue that there is a compelling case to be 
made for increasing U.S. oil and natural gas production in conjunction 
with strengthened environmental protections.
    Ever since he launched his war against the United States, Osama bin 
Ladin has threatened attacks on oil installations in the Persian Gulf. 
Last year, a massive oil supply shock was only narrowly averted when an 
al-Qaeda attack on the Abqaiq facility was barely foiled. Two weeks 
ago, the Saudis again uncovered an al-Qaeda plot that threatened oil 
infrastructure targets. This time, the operatives were in the final 
stages of preparing an attack, with little or no planning left to do. 
In addition to arresting over 170 individuals, advanced explosives and 
significant weapons caches were seized by Saudi officials.
    Clearly, we face committed enemies with the intent and capability 
to cause major disruptions. Some of their attacks on the Saudi oil 
economy have already succeeded, for instance their attacks on 
expatriate residential compounds in Riyadh in 2002 and in al-Khobar in 
2004.
    Iraq is the scene of persistent insurgent and terrorist attacks on 
pipelines and pumping stations, especially in the North of the country. 
These attacks have curtailed Iraqi oil exports and cost the Iraqi 
government billions of dollars in revenue at a time when American 
taxpayers are spending billions on reconstruction. If violence 
continues, and especially if it spreads to the south, where most export 
facilities are located, then all of Iraq's oil production could be at 
risk.
    The danger of attacks on shipping is also quite real. In October 
2002, the French supertanker Limburg was rammed by a small boat packed 
with explosives off the coast of Yemen. Most oil shipments from the 
Persian Gulf have to pass through a handful of maritime chokepoints. 
Even unsuccessful attacks on tankers are likely to raise insurance 
rates and thus oil prices.
    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 Columbia's Cano Limon pipeline. Pacific 
Command patrols tanker routes in the Indian Ocean, the South China Sea, 
and the Western Pacific. European Command, where I was in charge of all 
naval forces at the close of my career, is involved in oil security all 
the way from the Caspian Sea to West Africa.
    The armed forces of the United States have been extraordinarily 
successful in fulfilling their energy security missions, but 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 that emanate 
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 strategic political weapon. But in recent years, Russia 
has shown the most willingness to play this dangerous game, just as at 
the beginning of 2006 when it stopped natural gas exports to the 
Ukraine, which in turn withheld 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.
    Of course, energy exporting governments don't need to resort to 
full-fledged embargoes to hurt the United States and other importers. 
Exporters can manipulate price through less drastic production cuts. 
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 slowing 
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 percent 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. 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 million barrels per day in the mid-
1990s, but then the efforts of private companies helped push production 
back to over 9 million barrels per day, achieving 10 percent annual 
growth rates in 2003 and 2004.\1\ However, with the subsequent 
expropriation of private enterprises such as Yukos, the production 
growth curve has flattened. Government control over production in 
Russia will also adversely impact new natural gas field and 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.
---------------------------------------------------------------------------
    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 its nuclear program. Venezuala's Hugo Chavez incessantly 
brandishes the threat to cut off oil to the U.S. And 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 with 
regard to stopping Iran from developing nuclear weapons. 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.
    The U.S. Government must make comprehensive energy security a top 
strategic priority. Toward that end, we should mobilize a full range of 
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.
    As with national security as a whole, energy security requires a 
strong measure of domestic commitment and discipline. I am heartened to 
see that a broad wave of support is rapidly advancing the legislative 
process to strengthen fuel-economy standards. Unfortunately, the same 
bipartisan realism has not coalesced around the issue of increased 
domestic supply. But in my opinion, an opinion shared by the entire 
Energy Security Leadership Council, America must make greater use of 
its domestic oil and natural gas reserves in conjunction with expanded 
environmental protections.
    The congressional and presidential moratoria that prevent oil 
exploration and production on most of the Outer Continental Shelf are 
usually justified by the need to protect military training areas, 
tourism, and the environment. Let's run through these objections in 
order.
    Prohibiting oil and natural gas leases inside the Military Mission 
Line in the Gulf of Mexico essentially blocks all production in the 
Eastern Gulf of Mexico, an area that is estimated to contain 4 billion 
barrels of oil and 37 trillion cubic feet of natural gas. With my 35 
years of service as a naval aviator, I think I am in a position to say 
with conviction that the military can successfully train for and 
complete its mission without the sweeping prohibition. The navy and air 
force can work around platforms that have fairly small footprints, and 
with this cooperation we can advance two national security imperatives: 
the need for a highly trained military and the need for secure domestic 
energy supplies.
    As for tourism, let me present you with this telling fact: Adam 
Goldstein, the President of Royal Caribbean International cruise line, 
certainly cares about maritime tourism, especially in Florida, where 
his company is headquartered. Yet, Mr. Goldstein joined the Energy 
Security Leadership Council and supports the call for increased 
domestic production on the Outer Continental Shelf. He is confident 
that oil platforms will not harm his business. After all, his ships 
currently use sea lanes that are shared with oil tankers and that 
hasn't stopped people from booking cruises. If Adam Goldstein believes 
we can come to a workable compromise that increases energy security and 
does not harm tourism, that's good enough for me.
    Finally, let's talk about the environment. As Mr. Smith mentioned 
in his remarks, oil exploration and production in this country have a 
remarkable safety record. The same is true in Canada, Norway, and Great 
Britain, all countries with strong environmental records and which do 
not limit offshore production to anywhere near the extent the United 
States does. If you take a global perspective, oil production close to 
the U.S. market is arguably far safer to the environment than shipping 
equivalent quantities over thousands of sea miles in vulnerable 
tankers. And if you're interested in environmental stewardship, as I 
think all of us in this room are, ask yourself whether it's right to 
relegate oil production to less developed areas of the world where 
environmental protections are often sorely lacking.
    The Council is confident that a well-regulated U.S. oil industry 
can increase domestic production in an environmentally-responsible 
fashion. We call for lifting the moratoria blocking OCS oil and gas 
development, but we are also entirely supportive of more stringent 
environmental standards to protect OCS waters and adjacent state lands. 
We take issue with the moratoria because we consider them to be a 
needlessly one-sided answer to a complex problem that requires balanced 
solutions based on compromise. As all purchasers of insurance know, 
total coverage tends to be exceedingly expensive. As a result, most 
policy holders, even extremely risk averse ones, choose to accept some 
risk, for instance in the form of a deductible. In most cases, 
government also chooses to manage, rather than to eliminate, risk. The 
Council believes that it is sensible to increase access to exploration 
and production on the OCS as long as government and the oil and gas 
industry are willing to strengthen the legal and financial penalties 
that can be imposed on those who damage the environment. In terms of 
specific suggestions for improvements, the Council recommends:
  --increasing the size of surety bond requirements;
  --creating a new Federal entity (modeled on the Office of Federal 
        Inspector for the Alaska Gas Pipeline) to be responsible for 
        overseeing environmental laws with respect to drilling, 
        production, and transportation;
  --establishing/strengthening Citizens' Advisory Groups, equipped with 
        financial autonomy, to advise the oversight entity;
  --specifying stricter liability provisions to reduce the likelihood 
        of protracted litigation;
  --expanding environmental safeguards to protect against harmful 
        environmental damages associated with initial exploration and 
        drilling, recognizing that current regulations, such as those 
        enacted in the Oil Pollution Act of 1990 and EPA's Spill 
        Prevention, Control, and Countermeasure regulation, focus 
        principally on providing safeguards during development and 
        production phases;
  --strengthening the administration of the leasing program through the 
        Department of the Interior, employing an ecosystem focus 
        sensitive to cumulative impacts, to result in no significant 
        adverse effect on fish and wildlife, their habitats, 
        subsistence resources, or the environment, with seasonal limits 
        to protect breeding, spawning, and wildlife migration patterns 
        and, where appropriate, requiring the approval of plans by the 
        U.S. Army Corps of Engineers, EPA, and the U.S. Fish and 
        Wildlife Service; and
  --protecting coastal vistas using provable line-of-sight calculations 
        to measure the actual impact of offshore production facilities.
    The enhanced safeguards proposed by the Council should not be 
viewed as unconquerable obstacles to expanded production. To the 
contrary, we are convinced that such measures are essential to making 
additional domestic supply a far more practical and likely proposition, 
precisely because they address the legitimate needs of preserving the 
natural environment and building public confidence. This compromise, 
like the many others proposed by the Council, offers an achievable path 
toward improving the Nation's energy security.
    I thank you again for your consideration.

    Senator Dorgan. Finally, we will hear from Dr. Robert 
Wescott, who is President of Keybridge Research. Dr. Wescott, 
welcome and you may proceed.

STATEMENT OF DR. ROBERT F. WESCOTT, PRESIDENT, 
            KEYBRIDGE RESEARCH LLC
    Dr. Wescott. Mr. Chairman and members of the subcommittee, 
thank you for inviting me to testify today about the economic 
effects of U.S. energy policy options.
    Today I want to discuss an analysis that I helped undertake 
of the Security and Fuel Efficiency Act of 2007, which would 
reduce America's oil dependency. As someone who spent a number 
of years as an economic policymaker, including stints as Chief 
Economist at the Council of Economic Advisors and as Special 
Assistant to the President for Economic Policy, I appreciate 
that you need to evaluate many dimensions of a potential new 
energy policy package: its effects on national security, its 
effect on the budget, its effects on various industrial sectors 
and on the whole U.S. economy.
    Would a new energy policy be affordable? What would it mean 
for jobs and income? Could the economy keep growing while it 
was being implemented? And how might the vulnerability of our 
economy to an oil shock be reduced over time if we undertook 
good policies? These are the questions that I will focus on 
today.
    I want to describe for you an economic-model-based 
simulation analysis of the SAFE Energy Act that was performed 
by the Interindustry Forecasting Project or Inforum Project, in 
the Economics Department at the University of Maryland, and by 
my firm, Keybridge Research. We relied on Inforum's highly 
respected LIFT model, an inter-industry macro-economic model of 
the U.S. economy. This statistical model is especially well 
suited for a long-run energy policy study.
    And our University of Maryland, Keybridge modeling team, 
including Dr. Jeffrey Werling and Dr. Douglas Meade and myself, 
we have many decades of experience performing policy simulation 
studies with large scale economic models. The study was 
commissioned by the Energy Security Leadership Council, which 
I'll refer to as the Council. A project of securing America's 
future energy and it reflects the policy proposals that the 
Council published in December 2006.
    These policies have three--target three main changes, as 
Mr. Smith said: Reduced energy--petroleum demand, the 
transportation sector, expanded supply of renewable fuels and 
enhanced domestic production of petroleum and gas. These 
policies are broadly mirrored in the SAFE Energy Act of 2007.
    Let me highlight the key findings right up front. Our 
policy finds that with the council's policy package the U.S. 
economy will experience a number of beneficial impacts between 
now and 2030. With reduced oil dependency, household incomes 
and American employment will be higher and the U.S. trade 
deficit will be smaller. Typical U.S. households, for example, 
would enjoy about $1,100 more of real income in 2030 with the 
new energy policies. Employment in the manufacturing sector 
would be about 140,000 jobs higher by 2030.
    And even after paying for the subsidies and other measures 
to implement these policies, U.S. Government budget is expected 
to come out ahead in net terms because economic activity and 
the level of GDP will be higher. We estimate that the Federal 
Government's benefit cost ratio at about three. Probably the 
single most important conclusion of the study is that by 
substantially reducing America's oil dependency, the economy 
will be much better prepared to withstand a future oil shock, 
such as those that hit the U.S. economy in 1973-74, 1980-81 and 
1991, all of which caused recessions.
    That it is the council's energy package can be thought of 
as a self-financing insurance policy that will help make the 
economy more robust in good times and more resilient in the 
face of possible future energy shocks. Just a few more details 
on the key findings, we find that the policy package would make 
the U.S. economy substantially less oil intensive. By 2030, oil 
demand is projected to be 5.9 million barrels a day lower than 
if we didn't have the energy package. In cumulative terms 
between 2007 and 2030, the package would reduce overall U.S. 
consumption by about 22 billion barrels of oil. That's roughly 
three times our annual energy use--oil use today.
    One other thing the--with the conservation measures and the 
planned enhancements, we think that we would reduce crude oil 
imports by about 8.2 million barrels a day. That's about a 50-
percent reduction. Cumulatively over this 24 year period, that 
would mean about 32 billion barrels less of U.S. oil imports. 
And just for a comparison, the total proved U.S. reserves 
today, in the entire United States; there are about 30 billion 
barrels. So, it's about the same order of magnitude.
    I just--finally, just to talk about the transmission 
mechanisms. If we would put this package in place, first of 
all, we would be enhancing American productive capacity, 
especially the transportation sector. In simple terms we would 
be more efficient and our exports would be more competitive in 
world markets and imports would be lower. So, this would allow 
U.S. industry to take--grow faster.
    Second, Americans would transfer less income abroad that 
is, the OPEC tax would be lower. This would allow more income 
to stay at home and to be saved or to be used to purchase 
American goods.
    And third, we would have improved American productivity. We 
would be having more labor and capital available to increase 
production in the United States.
    Finally, let me just come back to this--idea that we could 
make the economy less susceptible to a problem in the future. 
We did simulation studies where we assumed that we had an oil 
shock in 2026 after these policies were put in place. And what 
we found is that the insulation properties of these policies 
could reduce the damage done by an oil shock, a doubling of oil 
prices, by 30 to 40 percent. Yes, the U.S. economy would still 
be hurt, but it would be hurt no where near as much if we put 
these policies in place.
    Thank you very much.
    [The statement follows:]

                Prepared Statement of Robert F. Wescott

    Chairman Dorgan and members of the subcommittee: I would like to 
thank you for inviting me to testify about the economic effects of U.S. 
energy policy options. My name is Robert Wescott and I am President of 
Keybridge Research LLC, a Washington DC-based economic research firm. 
Today I want to discuss an analysis that I have helped to undertake of 
the Security and Fuel Efficiency Energy Act of 2007 (the SAFE Energy 
Act), which would reduce America's dependence on oil. As someone who 
has spent a number of years as an economic policymaker, including 
stints as Chief Economist at the Council of Economic Advisers and as 
Special Assistant to the President for Economic Policy, I appreciate 
that you need to evaluate many dimensions of a potential new energy 
policy package--its effects on national security, on the U.S. budget, 
on various industrial sectors, and also on the whole U.S. economy. 
Would a new energy policy be affordable? What would it mean for jobs 
and income? Could the economy keep growing while it was being 
implemented? And how might the vulnerability of our economy to an oil 
shock be reduced over time if we undertook good energy policies? These 
are the questions I will focus on today.
    The study that I want to describe for you is an economic model-
based simulation analysis of the SAFE Energy Act of 2007 that was 
performed by the Interindustry Forecasting (Inforum) Project in the 
Economics Department at the University of Maryland and by my firm, 
Keybridge Research. We relied upon Inforum's highly respected LIFT 
model, an inter-industry macroeconomic model of the U.S. economy. This 
statistical model is especially well suited for a long-run energy 
policy study, because it captures the interactions among 97 different 
industrial sectors of the economy and shows their combined effects on 
GDP, consumption, employment, and energy use. Collectively the 
University of Maryland/Keybridge modeling team, including Dr. Jeffrey 
Werling, Dr. Douglas Meade, and myself, has many decades of experience 
performing policy simulation studies with large-scale econometric 
models of the U.S. economy.
    This study was commissioned by the Energy Security Leadership 
Council (ESLC), a project of Securing America's Future Energy (SAFE), 
and reflects the policy proposals detailed in the ESLC's 
Recommendations to the Nation on Reducing U.S. Oil Dependence, 
published in December 2006. These policies target three main changes: 
reduced petroleum demand in the transportation sector through more 
aggressive vehicle fuel economy standards, expanded supply of renewable 
alternative fuels, and enhanced domestic production of petroleum in 
conjunction with stricter environmental protections. These policy 
proposals are closely mirrored by the provisions of the SAFE Energy Act 
of 2007.
    Let me highlight our main findings right up front. The study finds 
that with the ESLC policy package, the U.S. economy will experience a 
number of beneficial impacts between now and 2030. With reduced oil 
dependency, household incomes and American employment will be higher, 
and the U.S. trade deficit will be smaller. The typical U.S. household, 
for example, would enjoy about $1,100 more in real income per year by 
2030 (2006 dollars) with the new energy policies, and employment in the 
manufacturing sector would be about 140,000 jobs higher. And even after 
paying for subsidies and other measures to implement these policies, 
the U.S. Government budget is expected to come out ahead in net terms, 
because economic activity and income levels will be higher. The Federal 
Government's benefit-cost ratio would be about three.
    Probably the single most important conclusion of the study is that 
by substantially reducing America's oil dependency, the economy will be 
much better prepared to withstand a future oil shock, such as those 
that hit the U.S. economy and contributed to recessions in 1973-74, 
1980-81, and 1991. That is, the ESLC energy package can be thought of 
as a self-financing insurance policy that will make the economy more 
robust in good times and more resilient in the face of potential future 
energy shocks.

                       ENERGY POLICY ASSUMPTIONS

    The first step in the study was to develop a baseline scenario for 
the period 2007 to 2030 that was consistent with the forecast contained 
in the U.S. Department of Energy's Annual Energy Outlook 2006 (AEO). A 
second ``energy policy package'' scenario was then developed for the 
same period that incorporated the fuel conservation, alternative fuel 
production, and domestic oil and natural gas supply assumptions of the 
ESLC proposals.
  --The fuel economy measures included mandated 4 percent annual 
        increases in fuel efficiency standards for passenger cars and 
        light-duty trucks, strengthened fuel efficiency standards for 
        medium-duty and heavy-duty trucks, and improved Federal 
        Aviation Administration traffic routing for airplanes. 
        Altogether it was assumed that primary oil demand could be 
        reduced by 5.8 million barrels per day (mbd) by 2030 with these 
        steps.
  --The study also assumed that expanded ethanol production could 
        contribute 0.7 mbd for transportation by 2030 and that 
        biodiesel could add 0.2 mbd to production, for a total of 0.9 
        mbd from biofuels.
  --Finally the study assumed that through a relaxation of moratoria on 
        oil and gas drilling in the outer continental shelf (OCS) and 
        through more rapid implementation of enhanced oil recovery 
        methods, domestic oil and gas production could be boosted by 
        2.5 mbd by 2030.
    This second ``energy policy package'' scenario required estimates 
to be made for the cost of policy compliance, the pace of technological 
innovation in energy use, the cost of alternative fuel production, as 
well as for other key inputs. The estimates were drawn from or 
corroborated by well respected sources, such as reports by the U.S. 
Department of Energy's Energy Information Agency and the National 
Academy of Sciences. We tried to make this energy policy scenario as 
realistic as possible. We assumed, for example, that in order to 
achieve higher fuel efficiency, new automobiles would require new 
engines/motors, advanced controls, electronics, new materials, and 
batteries and would cost about 10 percent more each year than they did 
in the baseline scenario. We also took into account the fact that 
higher ethanol production would require a growing share of U.S. corn 
production, and that the price of agricultural products would rise as a 
result, and that ethanol production itself would require inputs of 
fossil fuels. And we took into account the fact that higher fuel 
efficiency and growing household income levels would generate an 
additional demand for transportation that would eat away some of the 
initial reductions in primary oil demand. The two scenarios--the 
baseline scenario and the ``energy policy package'' scenario--were then 
compared to quantify the changes in energy and oil intensity, oil 
imports, production, employment, and income that result from the ESLC 
policy package.
    A second phase of analysis looked at what would happen if a large-
scale oil shock--featuring a doubling of oil prices--hit the U.S. 
economy starting in 2026, after the ELSC policy package was nearly 
fully implemented. While such a massive shock would be a negative 
development for the U.S. economy, we wanted to see if the ELSC policy 
package could help insulate the economy from the worst damage--that is, 
if it could have insurance benefits.

                              KEY FINDINGS

    Under the ESLC energy policy package, the study found that the U.S. 
economy will become significantly less oil intensive. By 2030 U.S. oil 
demand is projected to be 5.9 million barrels per day (mbd) less than 
in the baseline case, a reduction of 23 percent. In cumulative terms 
during the 2007 to 2030 period, the ESLC policy package reduces U.S. 
consumption by 22 billion barrels of crude oil equivalent through 
conservation and the use of alternative fuels. This aggregate figure is 
about 3 times the 7.4 billion barrels of crude oil consumed by the 
United States in 2006.
  --Oil intensity is the amount of oil used to generate a unit of GDP. 
        In 2006 the United States used 0.56 barrels of oil to produce 
        $1,000 of GDP, down from about one barrel of oil in the early 
        1970s.
  --In the baseline case, the AEO projects that the United States will 
        use 0.36 barrels of oil per $1,000 of GDP by 2030 (all figures 
        in 2006 dollars).
  --Our study calculates that with the ESLC policy package the United 
        States will need only 0.27 barrels of oil per $1,000 of GDP by 
        2030--about one quarter less than in the baseline case.
    Compared to the baseline case, the supply enhancements and 
conservation measures combine to reduce imports of crude oil by 8.2 mbd 
by 2030, a 47.3 percent decrease. Cumulatively during the 24-year 
period under consideration, the United States would import 32.2 billion 
fewer barrels of foreign oil. This figure compares to estimated 
remaining proved reserves of 4.3 billion barrels for Prudhoe Bay in 
Alaska and less than 30 billion barrels for the entire United States.
    Reduced U.S. demand on the global oil supply should lead to 
modestly lower world oil prices throughout the projection period. The 
baseline case assumes a nominal price of oil of $107 by 2030. This 
study estimates that the price of oil would be $95 per barrel, or about 
13 percent lower, with the ESLC policy package. Lower oil imports and 
lower world oil prices would mean that by 2030, oil imports will be 
lower by $278 billion per year. During the 2007 to 2030 period, the 
Nation's economy will avoid the expenditure of $2.5 trillion for 
imported crude oil. These savings can be spent on other imports, or 
they can stay at home--to be spent on domestic output or invested in 
domestic capital. This study estimates that, through 2030, the policy 
package will improve the United States current account deficit by about 
$175 billion dollars, or about 0.4 percent of GDP. (This figure assumes 
that approximately $103 billion of the savings from avoided oil imports 
will be spent on other imports.)
    Enhanced energy efficiency also provides a significant boost to 
real income. The rise in real disposable income is multi-causal and 
dynamic. First, productive processes, especially those involving 
transportation, become more competitive relative to the global 
marketplace. In essence, lower energy costs enhance exports and lower 
imports, thereby allowing U.S.-based industry and employment to grow 
faster. Second, Americans transfer less money abroad to petroleum 
exporters. The lowering of the ``OPEC tax'' comes about through both a 
lower volume of petroleum imports and lower global petroleum prices. As 
a result, more income stays at home to be consumed on domestically made 
items or saved and invested in U.S. productive resources. Finally, 
higher energy productivity and lower income transfers abroad help 
stimulate greater capital investment and labor participation within the 
U.S. economy. The availability of greater capital and labor resources 
means that the economy can reach a higher level of overall production 
without generating inflationary pressures.
    For all these reasons both U.S. real GDP and U.S. real income are 
higher with the energy policy package. U.S. real GDP is increased by 
0.2 percent by 2030 and the level of real personal disposable income is 
enhanced by 0.8 percent.
  --With the energy policy package, the typical U.S. household in 2030 
        should receive $1,103 (2006 dollars) more income than it would 
        without the energy policy package. Cumulatively during the 2007 
        to 2030 period, American households would experience an 
        increase in income of almost $1.7 trillion (2006 dollars)--
        money that could be spent on goods and services, or saved for a 
        more comfortable retirement.
  --By 2030 the typical U.S. household would be spending fewer dollars 
        directly on energy for transportation. The combination of 
        higher income and less spending on energy means that the 
        average household would be able to enjoy about $1,835 (2006 
        dollars) in incremental discretionary purchasing power. That 
        is, the typical household would have $1,835 more income to use 
        for savings or for the purchase of consumer goods and services 
        other than energy. The 24-year cumulative enhancement in this 
        ``non-energy purchasing power'' is nearly $2.9 trillion.
    Because of the higher levels of income and GDP that result from the 
energy policy package, the U.S. Federal budget balance would improve by 
a cumulative $578 billion (2007 to 2030) when compared against the 
baseline case. The ELSC group estimated that its energy policy package 
would represent a cumulative (2007 to 2030) nominal cost to the U.S. 
Treasury of $180 billion. That is, in Federal budget terms, the energy 
policy package would pay for itself 3 times over (i.e., have a benefit-
cost ratio of 3) during the course of the next 24 years if the ELSC 
cost estimates prove to be roughly correct.
    A stronger economy with lower energy dependency and higher levels 
of income will create more jobs. In the energy policy package scenario 
there would be an increase of 1.2 million jobs by 2030, or about a 0.7 
percent increase. Among the employment effects expected for 2030, the 
model projects 139,000 more manufacturing jobs, 91,000 more jobs in 
professional services, and 199,000 more jobs in travel and tourism. As 
mentioned, the study assumes that the cost of domestic motor vehicle 
manufacturing relative to the baseline increases steadily, reflecting 
higher costs for motors/engines, lightweight materials, advanced 
electronics, and other new technologies that help achieve higher fuel 
efficiency. This altered production pattern will cause these industries 
to see greater demand for their products and therefore higher 
employment levels.

                         SUPPLY SHOCK INSURANCE

    The adoption of the ESLC policy package can significantly reduce 
the economy's vulnerability to an oil supply shock. Simulations were 
conducted in which the price of oil was doubled in 2026, with the price 
remaining 66 percent higher in 2027 and 25 percent higher from 2028 
through 2030. Such a shock would harm the economy regardless of the 
energy policies in place, but the ESLC policy measures reduce the 
damage to income and employment by 30 to 40 percent.
  --Taking the AEO baseline as a point of departure, the oil price 
        shock produces a real disposable income loss of almost $600 
        billion in 2006 dollars by 2027. In contrast, the maximum 
        income loss under the ESLC policies is only $366 million, only 
        63 percent of the damage without reduced oil dependence. Under 
        the baseline, a doubling of oil prices results in the loss of 
        more than 4 million jobs by the second year of the shock, while 
        the loss under ESLC policies is just 2.5 million jobs.
  --The cumulative shock-induced negative impact on GDP over the period 
        2026-2030 is estimated at $1.3 trillion under the AEO baseline 
        but only $0.9 trillion in the ELSC case (all in 2006 dollars). 
        The cumulative negative impact on real disposable income over 
        the same period is estimated at $1.6 trillion in the AEO 
        baseline and $1.0 trillion in the ELSC case (2006 dollars).

                              CONCLUSIONS

    Econometric models are useful tools for studying long-run economic 
effects of energy policies. Simulation analysis with the University of 
Maryland's respected Inforum LIFT model shows that policies to reduce 
America's dependence on oil through fuel efficiency gains, further 
diversification into biofuels, and increased domestic production of 
conventional oil and natural gas can give a modest boost to household 
incomes and make the U.S. economy healthier in good times.
    From an energy security point of view, however, the biggest 
advantage of implementing policies to reduce America's dependence on 
oil is that they could make the United States less vulnerable during an 
oil price shock. If the United States were less dependent on oil, there 
would be fewer layoffs if oil prices doubled in a crisis period, fewer 
industries would close down operations, the Strategic Petroleum Reserve 
could backstop production for a longer period of time, and the negative 
consequences of an economic downturn could be significantly softened.
    I would like to thank you for your consideration of this analysis.

                                BIOFUELS

    Senator Dorgan. Thank you very much for being here. Let me 
begin asking a couple of questions, then my colleagues will 
certainly wish to ask questions as well.
    Secretary Karsner, you and I have discussed this issue at 
some length, particularly the biofuels issue. We have about 
16,000 flex fuel vehicles in North Dakota, my State. And we 
have, I think, 23 or 24 gasoline pumps, in a State 10 times the 
size of Massachusetts where you can get E85 and 16,000 flex 
fuel vehicles, so there's a dysfunction here. All of us want to 
have more flex fuel vehicles. We want to be able to drive up to 
pumps and draw a blend, perhaps of 20, 30, 40, or 50 percent 
biofuel, and especially of E85 fuel and yet we cannot as we 
have infrastructure problems. How do we solve those?
    Mr. Karsner. That's a great question, sir. In fact, the 
question focusing on E85 pumps and flex fuel vehicles is 
emblematic of the problem as a whole. The problem as a whole is 
that we have a sufficiently mature technology and availability 
of resources that can help us mitigate and hedge the security 
risk; but we haven't devised sufficient policy with a scale and 
a rate that would be commensurate with the magnitude of the 
challenge.
    So, with regard to E85 and flex fuel, last year we had a 
banner year--450 new stations added--equaling a total national 
capacity of 1,200 stations. So, even with 60, 70 percent growth 
year on year, 750 had been the total we had ever put out of 
flex fuel pumps. Even if we maintained that rate of 450 per 
annum--that record rate--of new E85 pumps across the Nation, it 
would still take us up to 100 years to get to a scale that 
would matter, 50,000 pumps available for the country.
    So, the truth is our current programming of voluntary 
stimulus falls short of the problem. Every little bit matters.
    Senator Dorgan. Secretary Karsner, is it the case that the 
so-called market system probably won't get us there because the 
major oil companies have very little interest in putting any 
E85 pump out on their island?
    Mr. Karsner. We have seen very little uptake by the majors 
in terms of E85 interest.
    Senator Dorgan. And so that is why there's an issue of 
public policy here and that's what I would like you to think 
about. I'm going to ask you again about the public policy menus 
that are available to us to marry up the dramatic increase 
production of renewable fuels which we're embarked upon. And, 
at the same time, what infrastructure is needed to pump that 
biofuel into a flex fuel vehicle?

                            FUEL EFFICIENCY

    I will come back to you in just a minute.
    Mr. Smith, tell me what prevents you--how many trucks do 
you have?
    Mr. Smith. We have about 77,000, a little more.
    Senator Dorgan. And what prevents you--you're a big 
purchaser of trucks, one of the Nation's largest, I assume--
from saying, ``You know what? I want more efficient trucks and 
so I'm going to make an informed choice as a purchaser and buy 
only this kind of truck.''
    Is it not available on the market at this point? Do we need 
public policy that moves on CAFE standards because the 
marketplace is not addressing it, or not providing it?
    Mr. Smith. Well, the short answer to that is, yes. The 
ability to improve fuel efficiency for trucks is very well 
proven, in a lot of studies and in the practical realm. We, 
along with Eaton Corporation and the Environmental Defense 
Fund, pioneered a new electric hybrid pick-up and delivery 
(PUD) vehicle. It produces about 50 percent greater fuel 
efficiency, about 90 percent greater emissions efficiency or 
emissions reduction over our traditional diesel powered PUD 
vehicles.
    Those vehicles are about 75 percent more expensive from a 
capital acquisition cost. So, obviously, being in a competitive 
business, we can't buy one set of vehicles if there is no 
economic return and someone that we may be competing with is 
not. So, it does require Government programs to get from here 
to there. In the case of the over the road vehicles, the fuel 
standards, as we've recommended them and by the Energy Security 
Leadership Council, in the case of hybrid vehicles for pick-up 
and delivery, tax credit expansion would also get the job done.
    Senator Dorgan. Have you had other business executives look 
at you cross eyed and say, ``What on earth are you thinking 
going to Washington asking for more regulation?''
    Mr. Smith. Well the short answer to that is, yes.
    As you may know, Senator, I've spent a lot of time up here 
over the last 30 years basically arguing against Government 
regulation. It took a considerable intellectual journey for me 
to come to the point of concluding that absent Government 
action, regulation, if you will, the problem can't be solved.
    Because as you said in your opening statement, the oil 
market is not a free market. It is governed by a cartel which 
controls price. And it is increasingly governed by supply 
demands--dynamics where proven oil reserves that are owned by 
state oil companies, over 90 percent.
    As the Admiral pointed out, many of these state actors 
understand the vulnerability of our economy. Some of them are 
not state actors too, like the terrorists. So, there really is 
no way to solve the problem unless you, in the Congress and the 
Government, move forward on some of these. And the record is 
pretty clear. In 1975, when the original CAFE standards were 
enacted under a Republican administration, they had dramatic 
effects on the fuel efficiency standards of the country. I 
mean, even Henry Ford, who at the time was the CEO of Ford 
Motor Company, in retrospect, acknowledged the country would 
never have become as fuel efficient as it did, absent those 
CAFE standards.

                            ENERGY SECURITY

    Senator Dorgan. I think, you know,--first of all let me say 
that the work that has been done by the Energy Security 
Leadership Council was work that I was unaware of until I, much 
earlier this year, had a whole series of meetings and was 
acquainted then with the SAFE Act. When Dr. Wescott talks about 
the reduction in oil intensity of our country, if we adopt a 
series of these recommendations, I think that this is really 
important work.
    The substantial relationship between the vehicle fleet, the 
transportation side in our country and imported oil had not 
occurred to me before. But nearly 70 percent of that which we 
are using goes for the transportation fleet and over 60 percent 
of our oil is now coming from other, often very vulnerable, 
places in the world. It's important to pull this piece out and 
take a look at it and begin to address it with a series of 
policies.
    This doesn't address electricity generation or transmission 
of power and so on. We have a lot of things to do on energy. 
We're working on all of those, but in this piece specifically 
with efficiency, CAFE standards, greater auto efficiency, 
renewables, through biofuels, increased domestic production and 
the issue of security through diplomacy. This, I think, is a 
significant contribution.
    And I think in many ways, Senator Craig and I are odd 
fellows here. He probably would shade more on the production 
side. I'd shade more on the efficiency side. But I think both 
of us recognize that we need some of each. We need the best of 
both and I think this plan gives us an opportunity to look at 
that in a very different and a very significant way.
    Dr. Wescott, can you tell me again your analysis of the 
reduction in oil intensity in this economy if we proceed on all 
four of these areas?

                             OIL INTENSITY

    Dr. Wescott. One of the ways to look at oil intensity is 
just raw oil intensity. How many barrels does it take to make 
$1,000 of GDP? In the early 1970s it took us a little over one 
barrel of oil to make $1,000 of GDP. In 2006, it took us about 
0.56 barrels of oil to make $1,000 of GDP. So, it's just a 
little over one-half a barrel to make $1,000 of GDP.
    The U.S. Department of Energy's, Energy Information Agency 
projects that in our business as usual case between now and 
2030, that by 2030 it would be taking about 0.36 barrels of oil 
to make $1,000 of GDP. When we did the simulation study here, 
we estimated that with the SAFE package, it would take about 
0.27 barrels of oil to make $1,000 of GDP. So, that's about a 
25-percent reduction, about a one-quarter reduction from the 
business as usual case.
    Senator Dorgan. Very significant. I'm going to call on my 
ranking member in a moment.
    I was sitting here thinking. My father ran a gas station 
while I was growing up. And so, as a young boy, as would be the 
case when your father runs a gas station, I pumped a lot of gas 
on weekends and nights. I did this all of my early life and 
some say my occupation hasn't actually changed very much.
    So, I recognize, having been out at the gas pump a lot as a 
kid, that service stations will do what is in their best 
interest.
    Secretary Karsner, let me come back to where I started to 
ask you: How did we get to the point where we are producing all 
of this biofuel quantity and have so few pumps to pump that 
into these vehicles?
    One of my great concerns is this, we're going to produce 
and produce more ethanol, and probably cellulosic ethanol, and 
so on, right up here. Then all of a sudden, people are going to 
understand that we have all of these flex vehicles on the road, 
but we don't have a market to get this from the pipeline into 
the gas tank. And all of sudden it's going to drop off the 
front edge about 5 years from now.
    So, tell me again your notion of how we deal with the 
infrastructure issues so we don't have a State like mine, with 
15,000 vehicles and 23 pumps pumping E85?

                        BIOFUELS INFRASTRUCTURE

    Mr. Karsner. I think you've characterized the most 
important aspect exactly correct. We may be facing a cliff when 
this country arrives at E10 or ends our splash blend 
penetration, which we're on a current trajectory to do in the 
next 5 years.
    What happens then? How do we move up the ladder? Is it to 
E12, E15, E20, E85 with one big massive jump, and are we doing 
the right things now to prepare for that?
    In many ways when you look through the entire supply chain 
of the problem for alternative fuels penetration, it's the 
easiest part of the puzzle, but it is the most intransigent. 
Also because, as you're indicating, you're fundamentally asking 
leaders of industry to voluntarily erode their profit margins, 
whether you're talking about adding extra equipment, $45 to 
$200 for flex fuel vehicles, or whether you're talking about 
adding extra pumps or pump modifications.
    And so the real question is how do we get industry to 
arrive at a profitable paradigm for which they would make those 
decisions? And we, in DOE's Vehicles Technologies Program, 
haven't focused sufficiently on this over the last decade 
because there was really no technological breakthrough 
necessary. But we need a far greater level of fleet penetration 
of all manufacturers that serve the market for flexible fuel, 
so that we have a more predictable, uniform, geographically 
distributed market. And the gas station owner can know what the 
traffic and numbers would be, so that they would welcome E85 or 
other intermediate blends.
    Senator Dorgan. Just one final point. We use, I believe, 
about 145 billion gallons of fuel a year. If every single 
gallon were blended with 10 percent biofuel or 10 percent 
ethanol, that's a total market of 14.5 billion gallons. The 
President wants to get to 35 billion. The Energy Committee 
wants to get to 36 billion. So, with the use of 14.5 billion at 
10 percent, you've got to blend.
    For that you've got to have blend pumps with 20, 30 and 40 
percent biofuel. You have to have E85 pumps. You've got to be 
using much, much more than we would use in a 10-percent blend. 
Otherwise you're going to build up then you're going to have 
the cliff and the market for ethanol is going to drop 
precipitately. And I want ethanol and the biofuels to be able 
to be used to extend our supply and to reduce dependence on 
foreign oil which is exactly what the SAFE plan is about.
    Well, I've used my time. Let me call on Senator Domenici.
    Senator Domenici. Well, Mr. Chairman, first of all let me 
say I think that whether you used your time or not, that this 
is kind of the way we ought to do business here. Is to just get 
involved and talking with each other, especially when you have 
a panel like this one. I consider your questions and their 
answers to be just as much in response to my concerns as his 
because it's pretty obvious that for the first time we're 
addressing about three issues that we just have to decide 
whether we're going to address them or not.
    And frankly, I was already convinced, but today puts the 
final frosting on it, that we have not been addressing the CAFE 
standards to the extent that they are a problem. We haven't 
been extending or addressing them in the various committees 
that have jurisdiction.
    Although, I understand that this very day, the Commerce 
Committee, may be, by a historic coincidence, has passed CAFE 
standards. They may have addressed the CAFE standards in much 
the same way that you did in your report. Is that correct?
    Senator Dorgan. Senator, we actually reported out a bill, 
favorably.
    Senator Domenici. Right.
    Senator Dorgan. Out of the Commerce Committee today, which 
is a real significant achievement in my judgment.
    Senator Domenici. So that's there while the Energy and 
Natural Resources Committee reported out a bill that on the 
biofuel side, is the maximum amount we can do and leaves 
hanging one big issue that we're talking about here today. We 
have to decide what must we do, in the bill that we carry 
forward.
    What are we going to do about infrastructure credits or the 
like for the new gasoline pumps that we're going to have to 
have by the thousands? What are we going to do about it? Are we 
going to sit by and watch while it does not happen or is there 
something significant we must do. And obviously, if there is, 
it ought to be in that same bill that produces the new mandate 
with reference to the CAFE standards.
    So, that's two of them, obviously there. We must do 
something about it. There is no question that we did not 
discuss here, but we must discuss sooner or later, the need for 
more refineries in our country capable of producing refined 
products. I don't know whether we'd do anything about it in a 
bill or whether the companies talk with us about what we must 
do to change the regulatory schemes that make it almost 
impossible for it to move in that area.
    And then the last, obviously, but not least, we have to 
decide exactly what the mix is going to be for biofuels. 
Although, I think the Energy Committee may have done that. We 
may have the right mix. It may be there.
    That's the end of my questions, merely my observations of 
what we ought to do. We'll decide. We'll get together with 
Senator Bingaman, chairman of the other committee that has 
jurisdiction over most of this.
    And I hope, Mr. Chairman, and Senator Craig, that we can 
all get together and decide what we want to do. Do it together 
and we have one bill, put yours in with it. It will be just as 
much yours as anybody else's, perhaps, more so. And let's 
decide if we're going to do something about CAFE.
    Senator Craig, I commend you. Heretofore, you have 
obviously not gone as far with CAFE standard modification as 
you have since this committee did their work. And I understand 
why you did. You told me why. And obviously, in the next 15 
minutes we'll hear from you, why, because I'll yield to you. 
But we keep hearing that from the automobile manufacturer and 
those----
    I'm from New Mexico so obviously we don't produce cars, 
yet. We have broad open countryside, just like you. Perhaps a 
little more growth in industry in our State than in yours, but 
we still have to----
    People like me are elected to address the Nation's 
problems, so clearly, we're going have to make--I'm going to 
have to join with people like you; and like you, Senator Dorgan 
and see what we can do about this particular area of concerns. 
And I just want to tell you and whoever is listening, I will.
    We're going to do something and then we'll see what the 
House decides to do. That will be another interesting stop over 
point at some point.
    Mr. Smith, I want to say to you, thank you for all the work 
you did in putting together your committee, time, effort and 
money you spent. I think you produced something rather extra 
special because it's brief. It's not 50,000 pages, so somebody 
might read it. That has to make decisions or might ask somebody 
to extrapolate from it what the five or six things we ought to 
be doing and we'll do them.
    And Mr. Secretary Karsner, thank you for your work. It 
seems like every time we turn around, you're up here 
testifying. I understand you do have people in your department 
that when you delegate, they do the work, even while you're up 
here. Is that correct?
    Mr. Karsner. That is correct, sir.
    Senator Domenici. Alright, I hope so. I would yield back, 
Mr. Chairman, thank you.
    Senator Dorgan. Senator Domenici, thank you very much and 
Senator Craig and I will then begin talking to you about co-
sponsoring our bill and we'll move it along.
    Senator Domenici. That's right.
    Senator Dorgan. We appreciate your work. Let me make one 
point before I call on Senator Craig. This is not the 
authorizing committee. We will appropriate money for renewable 
energy accounts and so on. So, that's an obvious interest of 
this subcommittee, but the authorizing committee has made great 
strides with the leadership of Senator Bingaman and Senator 
Domenici, just in the last 1\1/2\ weeks.
    So, that's good news for all of the things that we're 
talking about today. I appreciate Senator Domenici's work on 
that.
    Senator Craig.
    Senator Craig. Well, Mr. Chairman, thank you very much. All 
that we've heard today is projected outward, 10 years, 20 
years, 25 and 30 years and that's a reality of what it takes to 
retrofit to this phenomenal country of ours.
    One of the vice presidents for Chevron was in to visit with 
me today about the difficulties they're having in Nigeria. He 
said his president likes to say, and I think I'm quoting it 
accurately, ``We've invested $11 million a year for 100 years 
and it still isn't enough,'' speaking of his company. One 
hundred years of magnitude of investment to put that service 
station on every corner of America. And now we want to fix 
them, re-fix them, overnight.
    I don't disagree with you, Fred. I've been around here, 
some would say too long already, 27 years. And yes, my time 
here has been a bit of a journey, and I've changed, a bit as 
I've looked at where we need to get and the vulnerability of 
where we are. That's why Byron and I joined hands this year in 
a combination of things that you all brought to us that we 
thought was a very dynamic approach for dealing with a 
phenomenally important problem.

                           CURRENT RESOURCES

    But in that journey to where we want to get, we have to 
move along a pathway. We, in part, know how to deal with. 
That's increased production of current resources as we refine 
and improve and modify and change or we will become 
increasingly vulnerable if we fail to do that in this interim 
period.
    So, I want to turn to you, Johnnie, and visit for a few 
moments about a resource that we know is there, but politically 
we have been denied access to for a long period of time. And 
that's the Outer Continental Shelf. You added an area off the 
coast of Virginia to your most recent 5 year plan. You 
mentioned that. It looks like a little piece of pie.--Where's 
my chart? --I track you closely.
    If all goes well, you estimate it will take 20 years before 
we begin production. Something like that, I think. Question, 
how soon can production begin in the new lease 181 gulf area 
and why is that so much sooner than what we know could be done 
as it relates to the natural gas find 50 miles offshore 
Virginia.
    Ms. Burton. Well, one thing.
    Senator Craig. Your mike, please.
    Ms. Burton. Yes. Virginia is not ready to be leased. It has 
a congressional moratorium.
    Senator Craig. Explain the ready--not ready, I mean.
    Ms. Burton. We plan in October to have a sale in Sale 181 
areas in the central gulf. A company can bid for leases. They 
can lease areas in the central gulf and potentially could start 
exploratory drilling next year.
    Now it will take them several years to explore and to set 
their development plan and to produce. But let's say it will 
take 8 or 9 years at the most.
    Virginia, on the other hand, is not ready to be leased 
because there is a moratorium on those lands and there's a 
Presidential withdrawal on those lands. And until both of those 
things are changed, we can't even plan a sale. We can't even do 
presale work to get ready for a sale.
    So, we have tentatively scheduled a sale in 2011, assuming 
Congress would lift the moratorium. Assuming the President 
would modify his withdrawal--then we can start doing all of the 
environmental work. Then we can have a sale. So, the sale could 
not happen before 2011 and that is at the earliest.
    There is no infrastructure off Virginia's Coast. So, 
assuming they find something of interest, it will take a while 
for them to devise a production plan, a development plan and 
finally to bring the resource onshore. So, maybe 15 and upwards 
years before that can be feasible.
    This industry takes time to develop resources. Folks think 
that when we're going to have a sale next year; we're going to 
have production. That isn't the case. It may be the case 
onshore. It is easier, but not offshore.
    Senator Craig. Well, I thank you for expressing and 
explaining the lead time necessary in a frontier environment. 
The lead time necessary in a known environment and the light 
green is representative of 181 is still a time factor of 
substantial proportion.
    As you can see by the chart behind me, there's a line drawn 
in the ocean, beginning at Florida where no drilling is 
currently taking place. This--compromise No Zone is roughly 
one-third of the gulf. I know we haven't allowed--been allowed 
to survey in the Florida waters, but is there any reason why 
this area might not contain roughly the same amount of resource 
as the rest of the gulf. Are the patterns, the geologic 
patterns still there?
    Ms. Burton. So far as we know, sir, the geologic patterns 
do not respect political boundaries and therefore if there is 
deep water in the deep gulf discoveries and if a trend is 
shown, it is not going to stop where the line stops. So there 
is logically a great probability that the eastern gulf also 
carries a lot of resources.
    We do not know it because there has been no exploration. No 
work has been done in the eastern gulf for over 20 years. And 
so what we know of the eastern gulf is very, very sparse.

                       ENVIRONMENTAL CONSEQUENCES

    Senator Craig. Does exploration for the purpose of finding 
and developing knowledge of a resource not exploiting it but 
developing knowledge of a resource have any environmental 
consequence?
    Ms. Burton. It depends on what we call exploration. Seismic 
surveys, the main tool industry uses to learn more of what's 
under the surface of the Earth, does not carry very onerous 
types of environmental risk, but it carries enough that we 
would not give a permit without doing environmental studies.
    So, everything is protected as much as we can protect it. 
We do have the ability to give permits for seismic surveys, 
however seismic surveys are extremely expensive and industry is 
not willing to spend that kind of money unless they know they 
can then act on what they learn.

                            OIL PRICE SHOCK

    Senator Craig. Dr. Wescott, in Idaho, we already feel like 
we're in an oil price shock with all time high gas prices. 
There isn't a business out there or a family at this moment 
that isn't scratching their head because they didn't budget $3 
gas into their business plan or their family budget. However, 
this is occurring during--due to refinery shortages, oil prices 
and supplies are not even a part of that today.
    Question, can you please describe the effect of an oil 
shock, by that term. I think all of us are in a bit of shock 
today, but the shock in your study. What might cause this and 
how this might be mitigated with more U.S. production as well 
as more production in our own hemisphere, that is Cuba or 
somewhere like that beyond our known reserves?
    What's the cushion to a shock of the kind that you see in 
your study?
    Dr. Wescott. First of all I would just mention, you 
mentioned $3 a gallon. The ``Today Show'' this morning had 
signs that showed $4.33 in San Francisco this morning. So, 
prices are very high.
    When--if we just think about an oil shock hitting the U.S. 
economy as in 1973-74, as in the early 1980s, as in 1991, 
economists think about channels of influence or lines of impact 
on the economy. The first one, of course, is on the pocketbook 
of the average household.
    And energy, historically, has been somewhere between 3 and 
8 to 9 percent of the family budget. So, in the low oil price 
days of the early 1990s for example, when it was just 3 percent 
of the family budget, obviously that was a small piece of the 
budget. Now as we get up to 8 and 9 and 10 percent of the 
family budget it gets a more substantial piece. And if it 
doubles, then you're basically constraining the purchases that 
people can make of other things.
    And so, approximately one-half of all U.S. households are 
basically cash constrained, they don't have surplus funds. They 
don't have thousands of dollars in the bank. And so, right off 
the bat if you jump the price of oil and double it, as we did 
in this oil shock, you're forcing about one-half of American 
households to almost immediately cut back on their movies that 
they go to and their purchases of other items. So, that's one 
of the key channels of influence.
    Another key channel of influence is through the financial 
markets. And especially if it's caused by a terrorist attack or 
something a 9/11 or one of these sorts of events, it can have 
psychological effects. And so, we know that after 9/11, for 
example, the U.S. stock market fell by almost one-quarter. The 
Dow Jones average fell. So, that has wealth effects on people.
    People tend to consume about 3 to 4 percent of their wealth 
every year. And if suddenly their household wealth is sharply 
reduced because of a bad psychology or fear of terrorism or 
whatever that could also have a negative effect on the economy.
    The third way that it can affect the economy is direct 
industry effects. There is going to be some industrial 
activities that are just plain shut down immediately if prices 
double.
    And I don't know, Mr. Smith's exact business in details, 
but there are some activities when if the price absolutely 
doubles there are some flights that would not take place. Some 
airlines would cancel flights. Some chemical factories would 
shut down. They just couldn't--they couldn't physically run 
their business. They're tied into contracts or whatever and 
they would get less for selling their goods then it would cost 
them to make it. These would be some of the very disruptive 
effects of an oil shock.
    Now the second half of your question; what could be done to 
make a better outcome? The price of oil itself--is a world 
price. If we had a shock and the United States produced more of 
its oil, we would still have many of the same price effects, 
okay. So, it is not a magic here that would----but there's one 
big difference. If right now we're importing about 60 percent 
of our oil. If we were importing only 30 percent of our oil 
some of that--when we have a price shock domestic producers in 
Texas, off shore, whoever; some Americans are paying more for 
oil, but people--Americans are gaining about one-half of that. 
Let's say they would be getting 70 percent of it if we were 
only importing 30 percent. So, that actually flows into the 
American system and that doesn't--the American economy. It 
doesn't hurt it as much, but when we're heavily dependent on 
foreign oil, there's more leakage in the system. So, if the 
lower we could have the import component, the more insulated we 
would be even at a price shock.
    Now there's one other part of this story. That gets to just 
this raw constraint on supply. In 1973 we had an oil embargo 
and we just, plain, had the oil cut off from being shipped to 
the United States. That is why we had gas lines, as you well 
remember. So if we had more domestic production, we would 
presumably--would be at less risk of this sort of oil cutoff or 
shut off kind of risk.

                            FUEL EFFICIENCY

    Senator Craig. Thank you, Doctor.
    Mr. Smith, a couple of weeks ago, the Idaho State 
Snowmobile Association was in my office visiting with me. I say 
this, I think, in consort with Byron, as to a concern we hear 
about out in the rural States, like Idaho and North Dakota. One 
of the questions asked of me at that time by a member of the 
association was, well, Senator, we see you're supporting this 
legislation for CAFE standards. Don't you understand we need 
big trucks? I mean, we've got to pull our snowmobiles and our 
campers and put our family in them. We've got to go over the 
mountain and we need power.
    Your company that talks about efficiencies; drives toward 
efficiencies and yet, you need power. Is it possible to get 
higher efficiency trucks that still have the power, if you 
will, to pack the load that you need for long distance, that 
you need for recreation?
    You know, when I drive into a parking lot anywhere in 
Boise, Idaho, you would think I was in a SUV lot. That's Idaho 
today--or a truck lot.
    Mr. Smith. Well, Senator, we operate thousands of big 
trucks that are comparable to anything that anyone in 
recreational sector would need to move snowmobiles or boats or 
anything else. And there is a lot of research which is 
referenced in my full testimony that shows that there is the 
capability to significantly improve the efficiency of large 
trucks.
    And we do, in our recommendations to the Nation, therefore 
strongly suggest that the new fuel efficiency standards apply 
to this category of equipment as well as light trucks and cars.
    Senator Craig. Thank you. Mr. Chairman, thank you.

                        OIL AND GAS DEVELOPMENT

    Senator Dorgan. Senator Craig, thank you very much. Let me 
ask just a couple of additional questions.
    Admiral Johnson, you're probably familiar with the 
agreement we've described, lease 181 in the Gulf of Mexico, 
that was reached last year. Some had raised concerns we 
couldn't go further into the eastern gulf because of the 
military mission line. Is that line an impediment to further 
oil and gas development in your judgment in the Gulf of Mexico?
    Admiral Johnson. No, I don't think so. It's certainly a 
concern and something that would require close dialogue between 
the interested parties and the Department of Defense and our 
ability to conduct training there. It's become more important 
to us as a result of the closing of the training areas off the 
Vieques in Puerto Rico.
    And so, our training in some ways has intensified in this 
area, but I think that there with prudence, with careful 
dialogue, there's an ability to be able to do both. And again, 
because we operate in the Arabian Gulf; we operate in the North 
Sea and areas that are quite intense, and it creates a few 
restrictions. You have to do a little bit more prior planning 
to work around it, but I think in the long run, that they would 
be compatible.

                         TECHNOLOGY DEVELOPMENT

    Senator Dorgan. Mr. Smith, when I was a teenager I bought a 
1924 Model T Ford for $25 that was all rust and no wires and I 
restored it all over in about 2 years. And I was thinking you 
put gasoline in that exactly the same way you put gasoline in a 
2007 Ford. Nothing has changed.
    When we talk about CAFE standards and the greater 
efficiency of the system that powers our vehicles, I'm in 
support of that greater efficiency. But I guess my preference 
would be that this be a bridge to get to the next technology, 
hydrogen fuel cells, for example. What's your assessment of 
whether that's 20 years or 40 years from now?
    Mr. Smith. Well, Senator, I'm not qualified to assess the 
ability to get to some new technology like you mentioned. I am 
a believer that there will be technological breakthroughs. But, 
I think in our particular case what we have tried to do is to 
have very practical recommendations on what today's technology 
is rather than, to use an old aviation term, you know, have a 
wish and a prayer that these technologies will be produced in 
the future.
    I hope you kept that car. It would be worth a lot of money 
right now too, I bet.
    Senator Dorgan. I did not. I discovered as a junior in high 
school you couldn't date much in a 1924 Model T.
    So I sold it, regrettably.
    Let me also ask about the light, medium and heavy trucks. I 
share Senator Craig's issue here in the sense that North 
Dakotans don't want to go buy a Geo to go check the calves at 
30 below zero with a 40 mile an hour wind, you know. They want 
a durable heavy-duty vehicle out on the ranches and so on.
    But, as I mentioned earlier, we use twice as much gas per 
person as New Yorkers do. It seems to me that would make it 
very important that we have more efficient vehicles including 
more efficient large vehicles. But the industry would say to 
us: ``You know what? It's not possible. If it were possible to 
make more efficient vehicles, we'd be making them. We'd make 
them because Mr. Smith would love to buy them.'' Your 
assessment of that?
    Mr. Smith. Well, Senator, one of the members of the--
council, the CEO of Auto Nation, came by to see me long ago and 
he gave me a chart. He sells more automobiles than anybody in 
America. Overall fuel economy, now this is a little dated given 
the price of fuel at $4 a gallon in San Francisco, but let's 
see it was consideration number 12. After sound systems, 
interior conveniences, seating capacity, ergonomics, in fact, 
it was even after cup holders, so the same thing actually 
applies in the industrial truck sector because the market 
responds to what's here and now.
    And the important thing about the recommendations we made 
on these fuel efficiency standards, they're very different than 
the old CAFE standards. They are by category. So you can't make 
small Geos and average them out to have fuel thirsty SUVs in 
the category that constitutes the type of vehicles that your 
constituents need.
    You have to achieve fuel efficiency standards so your 
constituents are going to spend less money on the fuel for 
those vehicles and still be able to pull their agricultural 
equipment or whatever they need. Just like FedEx pulls these 
heavy loads of packages in freight.
    Senator Dorgan. Let me make one final point and then one 
question finally to Secretary Karsner.
    I did not respond as I should have. I view this as a 
bridge. I, and several others, have been pushing very hard to 
move more aggressively toward a different technology future 
using hydrogen and fuel cells, where you get water vapor coming 
out the tail pipe. You get twice the efficiency of power to the 
wheel and hydrogen is everywhere.
    And so, ultimately I want to disconnect from our need and 
demand for oil. Now that's not going to happen quickly but we 
need to make that happen at some point. And there is, as I've 
said from time to time, this notion in our country that only 
real men dig and drill. The only real energy future is a dig 
and drill.
    Boy, there's a lot to be gained by efficiency, by 
conservation and other things. I agree we need production in 
certain cases, but we need a balanced plan. And I especially 
want to find a way to pole vault to a different kind of energy 
future. More specifically from my standpoint, it ought to be a 
hydrogen fuel cell future.
    Now, Secretary Karsner, I like your work. I think you're 
well qualified for your job. You and I have had a chance to 
visit some. I hate to always ask you the tough question as the 
last question. But you probably know what I am going to ask.

                             CAFE STANDARDS

    The Commerce Committee today passed new CAFE standards. 
These are auto efficiency standards and I was a part of it. 
CAFE is a significant part of the SAFE Act, which I'm pleased 
about, but I know the administration will probably view this as 
a mandate, which in fact it is. What will be the 
administration's position?
    I know the President has indicated he would not support a 
mandate. He thinks it should be voluntary and so on. Are we 
going to be facing a veto threat? What are we facing from the 
administration as we try to push through automobile efficiency 
standards that are mandatory?
    Mr. Karsner. Well, I haven't seen this morning's 
legislation, but if it is in the spirit of what these gentlemen 
and what your legislation proposes in the SAFE Act, I don't 
think it would be the case that the administration would be 
hostile to those things that would modernize and elevate CAFE 
standards. In fact that is part of what the President's plan 
called for.
    I'm not sure what the antecedent was historically for that, 
but I think as your partnership with Senator Craig illustrates, 
we're long past old partisan divides on this issue. We need 
both increased alternative sources of supply and increases in 
efficiency.
    And so, from my perspective the administration looks 
forward to working with you all to integrate those.
    Senator Dorgan. But this will be regulatory and a mandate, 
although to be sure it has off ramps.
    Senator Craig. He said yes.
    Senator Dorgan. You know, I think, regrettably, that I know 
what will be said later, but I would like, Secretary Karsner to 
really urge the administration to take a new look. The last 
time they testified before the Commerce Committee on this 
subject not many weeks ago, the refrain was, ``Yes voluntary 
standards. Yes, improve it, but voluntarily. No mandates. No 
regulation.''
    It seems to me all of us have to give a little here. And 
the only way to make progress on efficiency is not by saying to 
the auto industry, please help us. I mean we've seen for 25 
years very, very little progress in this area. I think that 
this panel says it right and I think the Commerce Committee 
said it right this morning.
    It is time for us to take some aggressive and some bold 
action. And I hope you will pass that word back to the 
administration. We all ought to be working on the same sheet 
here and that is regulation. It should be mandatory with some 
off ramps and I worry very much that we will hear--not good 
things in the coming days about it.
    But I encourage you. You're a very accomplished person as I 
said to you before. I think you do a good job. You come to this 
with great skill and good knowledge in these areas. So help us, 
would you, with the President and the White House on these 
issues and the Office of Management and Budget (OMB)?
    Mr. Karsner. I think the President and certainly Secretary 
Bodman share your sense of urgency about getting some 
legislation passed that includes efficiency as well as the 
alternative supply.

                     ADDITIONAL COMMITTEE QUESTIONS

    Senator Dorgan. I want to thank all of the witnesses. Some 
of you have come a long distance today.
    Director Burton, I saw the announcement of your decision to 
leave public service, congratulations for your public service 
and we wish you well.
    Secretary Karsner, we look forward to continuing to work 
with you and Mr. Smith, and Admiral Johnson, thanks for your 
work.
    [The following questions were not asked at the hearing, but 
were submitted to the Department for response subsequent to the 
hearing:]
             Questions Submitted to Hon. Alexander Karsner
            Questions Submitted by Senator Pete V. Domenici

                         LOAN GUARANTEE PROGRAM

    Question. I understand that the inter-agency review of the draft 
regulations for the loan guarantee program is nearing completion and 
the regulations will be published for comment. When do you predict the 
draft regulations to be released, and when do you believe the final 
regulations will be implemented in order to make the first loan 
guarantee?
    Answer. On May 16, 2007, a Notice of Proposed Rulemaking (NOPR) was 
published in the Federal Register V. 72 Fed. Reg. 27471, for DOE's 
``Loan Guarantees for Projects that Employ Innovative Technologies.'' 
The NOPR provides for a 45-day public comment period which ends on July 
2, 2007. The final regulations will be promulgated as soon as 
practicable after the close of the comment period.
    Question. While DOE and OMB are working to develop the draft 
regulations, DOE is supposed to review the existing applications. Is 
the Department staff working on these applications, and have you been 
in contact with the applicants?
    Answer. The Department has begun both a technical and financial 
review of the pre-applications received in response to the initial 
Title XVII loan guarantee program August 2006 Solicitation 
(Solicitation No. DE-PS01-06LG00001). The Department will contact 
applicants when the Credit Review Board makes a decision on whether to 
invite the applicant to submit a full application or to inform the 
applicant that they will not be invited to submit a full application.

                        DEPLOYMENT OF TECHNOLOGY

    Question. What is the Department doing to encourage the deployment 
of innovative alternative fueled cars and trucks?
    Answer. The Department's approach to promoting new technologies 
couples technology push with market demand pull, and works to address 
barriers to the market adoption of advanced technologies through 
various program initiatives. One example is the Clean Cities activity 
within EERE's Vehicle Technologies Program. Clean Cities identifies 
fleets and other end users to demonstrate and deploy advanced vehicle 
technologies in the final research stages. This demonstration and 
deployment effort provides researchers and stakeholders with vital 
``real world'' performance data necessary to prove new technologies 
prior to a full commercial launch to the mass market. We also 
coordinate closely with States, universities, and industry partners to 
conduct validation and learning demonstrations of new vehicles, such as 
plug-in hybrids. In addition we are developing several projects to 
promote and recognize innovative vehicle and fuel technologies under 
EPACT section 1008 authority.
    In addition, the President recently signed Executive Order 13423 in 
January 2007. Among the requirements in the Executive Order is one 
requiring Federal agencies to reduce vehicle fleet consumption of 
petroleum products by 2 percent annually through 2015 and to increase 
non-petroleum based consumption by 10 percent annually. The Department 
is already required by EPACT 2005 to assure that 75 percent of all 
Federal Government vehicle acquisitions must be alternatively fueled 
vehicles. The Executive Order requires that there be 100 percent use of 
alternative fuels in those vehicles whenever those fuels are available 
and cost effective. The Department is currently working on a plan to 
accelerate the purchase and use of innovative alternative fuels at all 
DOE facilities and working to overcome barriers to alternative fuel 
use. The Department will communicate its experiences in implementing 
this plan to serve as an example to other Federal agencies with the 
same goals.
    Question. What is the Department doing to make sure the necessary 
infrastructure is in place to support biofuels or hybrid electric 
vehicles?
    Answer. The Department of Energy, with the help of many Federal 
agencies, is taking a leadership role in commercializing cellulosic 
biofuels that includes fuel production technologies, transportation and 
delivery infrastructure issues, and vehicle testing and optimization. 
The Department recently selected six advanced technology biorefinery 
demonstrations to validate cost competitive biofuels. These 
investments, including private capital, could infuse up to $1.2 billion 
towards commercialization of biofuels. Additionally, the Department 
just released a solicitation for up to $400 million, including private 
funding, to support the development of small-scale biorefineries that 
can quickly be moved to commercial scale.
    The Department is also formulating a biofuels infrastructure 
strategy that brings together our biofuels and vehicle technologies 
programs to examine vehicle performance impacts from operation on 
various biofuels blends. The Department is working with other Federal 
agencies, to identify and promote infrastructure needs that will be 
necessary to handle the rapid increase of ethanol through expansion of 
E85 or other blends necessary to meet the President's goal of 
displacing 20 percent of America's gasoline use in 10 years. To further 
support this goal, the Secretaries of Energy and Agriculture are co-
chairing a board of 10 Federal agencies to look at all aspects of a 
bio-fueled economy and publish a National Biofuels Action Plan that 
communicates the government's strategies for production, delivery and 
end-use necessary for widespread deployment and commercialization.
    No new infrastructure is necessary for conventional hybrid electric 
vehicles. As the Department performs the research necessary to enable 
plug-in hybrid electric vehicles, we are examining various issues 
related to the integration of vehicles into the electric grid. For 
example, many households do not have access to household electric 
connections (they park their vehicles on the street). Also, an initial 
study by DOE's Pacific Northwest National Laboratory has identified 
regional variations in the availability of off-peak electricity. We 
will conduct the necessary research and analysis to help identify and 
resolve such issues.
    The Department has developed a comprehensive Plug-In Hybrid 
Electric Vehicle (PHEV) Research and Development Plan to guide its 
efforts. The plan describes the activities that will be performed to 
develop the appropriate PHEV technologies, identifies analysis that is 
needed, and summarizes eventual deployment actions. The plan describes 
the studies that will be performed to determine if there will be any 
major impacts on our electricity infrastructure. Much of this work is 
already underway.

          VOLUNTARY ADOPTION OF ALTERNATIVE ENERGY TECHNOLOGY

    Question. Mr. Smith, with FedEx, in his testimony suggested that 
market forces weren't enough to encourage the adoption of alternative 
energy technologies and that Federal mandates would be a necessary tool 
to increase efficiency. Do you agree with this statement?
    Answer. Effective capital formation, at the rate and scale 
necessary to achieve our national objectives, will require durable 
policy signals from Congress. Private investors can and will deploy 
emerging energy technologies if the Federal Government makes clear its 
long-term commitment to a new energy economy. For life cycle returns to 
be recognized as secure, term project financing, which can be 
facilitated through loan guarantees under Title XVII, is indispensable.
    Question. What is the Department doing to help encourage the 
commercial deployment of new alternative energy technologies?
    Answer. The Department's approach to promoting new technologies 
couples technology push with market demand pull, and works to address 
barriers to the market adoption of advanced technologies through 
various program initiatives. By identifying markets where the life-
cycle costs of advanced energy technologies currently form a compelling 
economic argument, the Federal Government will create demand pull, 
which will increase the economies of scale and drive the technologies 
down the cost curve. The Department also stimulates the 
commercialization of advanced technologies by bridging the gap between 
R&D and the market place. To this end, the Office of Energy Efficiency 
and Renewable Energy has designated a Director of Commercialization and 
Deployment, located within the Energy Efficiency and Renewable Energy 
Program, to oversee and guide our commercialization and deployment 
efforts.
    On May 14, 2007, the President signed an executive order that will 
result in reducing carbon dioxide emissions. This will be accomplished 
by increasing the use of lower carbon fuels and increasing vehicle 
efficiencies, both leading to the reduction of petroleum consumption. 
In addition, the President's 20 in 10 policy initiative aims to reduce 
gasoline consumption by 20 percent over the next 10 years through a 
combination of increased alternative fuel use and improvements in 
vehicle fuel efficiencies.

                         CONCLUSION OF HEARING

    Senator Dorgan. I've read the report by the Energy Security 
Leadership Council a couple of times, most recently on an 
airplane, cover to cover. It's really well done. It's a good 
plan. And Dr. Wescott, thank you for evaluating it and giving 
us your analysis of what that evaluation shows in terms of the 
opportunity to contribute to this country. We appreciate your 
being here. This hearing is recessed.
    [Whereupon, at 4:10 p.m., Tuesday, May 8, the hearing was 
concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

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