[Senate Hearing 110-260]
[From the U.S. Government Publishing 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
__________
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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
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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\
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\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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