[Senate Hearing 110-387]
[From the U.S. Government Publishing Office]
S. Hrg. 110-387
REVISED ENERGY OUTLOOK
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
TO
RECEIVE TESTIMONY ON THE ENERGY INFORMATION ADMINISTRATION'S REVISED
ANNUAL ENERGY OUTLOOK
__________
MARCH 4, 2008
Printed for the use of the
Committee on Energy and Natural Resources
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
JEFF BINGAMAN, New Mexico, Chairman
DANIEL K. AKAKA, Hawaii PETE V. DOMENICI, New Mexico
BYRON L. DORGAN, North Dakota LARRY E. CRAIG, Idaho
RON WYDEN, Oregon LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota RICHARD BURR, North Carolina
MARY L. LANDRIEU, Louisiana JIM DeMINT, South Carolina
MARIA CANTWELL, Washington BOB CORKER, Tennessee
KEN SALAZAR, Colorado JOHN BARRASSO, Wyoming
ROBERT MENENDEZ, New Jersey JEFF SESSIONS, Alabama
BLANCHE L. LINCOLN, Arkansas GORDON H. SMITH, Oregon
BERNARD SANDERS, Vermont JIM BUNNING, Kentucky
JON TESTER, Montana MEL MARTINEZ, Florida
Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
Frank Macchiarola, Republican Staff Director
Judith K. Pensabene, Republican Chief Counsel
C O N T E N T S
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STATEMENTS
Page
Bingaman, Hon. Jeff, U.S. Senator From New Mexico................ 1
Caruso, Guy, Administrator, Energy Information Administration,
Department of Energy........................................... 5
Domenici, Hon. Pete V., U.S. Senator From New Mexico............. 2
APPENDIX
Responses to additional questions................................ 37
REVISED ENERGY OUTLOOK
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TUESDAY, MARCH 4, 2008
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 10:03 a.m. in
room SD-366, Dirksen Senate Office Building, Hon. Jeff
Bingaman, chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW
MEXICO
The Chairman. Ok. Why don't we go ahead with the hearing.
Thank you very much for joining us today.
Mr. Caruso, thank you for being here. We're always glad to
hear from you, and look forward to discussing your
Administration's recently revised Annual Energy Outlook.
We know that EIA has just completed this year's energy
outlook last December. They had just completed it when the
Energy Independence and Security Act was signed into law. We're
very appreciative that on your own initiative you took the
effort to re-run those models so that we might all begin to
better understand the effects of the new energy legislation.
Because it is clear that the effects of the legislation
will be substantial, I believe we've made some great strides
toward reducing our energy dependence and curbing global
warming pollution. In 2006, 60 percent of our oil, gas and
other transportation fuels came from foreign sources. As I
understand your projections now in 2022, only 51 percent of
those fuels will come from foreign sources.
This is a substantial achievement. It reverses the long
standing trend of becoming more and more reliant on imported
oil. It appears that OPEC will meet tomorrow and decide not to
increase oil production despite new record high prices for oil.
We hit a new high of $103.95 per barrel yesterday. OPEC's
decision to sit by and watch as oil prices skyrocket highlights
how important it is to wean ourselves off of imported oil to
the maximum extent possible. This bill that was signed into law
takes a strong step away from oil dependency and toward greater
efficiency and home grown biofuels.
I'm also glad to see that your revised outlook suggests
that EISA will lead to substantially reduce--that's the
initials of that bill that was signed into law, will lead to
substantially reduce growth in greenhouse gas emissions.
Through the greenhouse gas emissions reduction requirements
included in that bill's renewable fuel standard. Congress
passed and the President signed into law the country's first
global warming legislation.
Your testimony states that you now expect energy-related
carbon emissions in 2030 to be 500 million metric tons below
what was published or expected prior to the passage of this
legislation. This again is a substantial change, a substantial
decrease and a step in the right direction. It demonstrates
that government policy can and will move toward reducing
greenhouse gas emissions. I hope we will use this first step to
build momentum toward more comprehensive global warming
legislation.
I also want to thank Mr. Caruso for his responsiveness to
Congress' request that EIA facilitate more transparency on
refinery capacity and utilization. Both Senator Domenici and I
co-sponsored an amendment that was adopted as part of the
recent legislation requiring EIA to analyze refinery outage
data and report its findings to the Secretary of Energy. EIA
has now decided to go one step further and publish aggregate
data on refinery outages every month in its Petroleum Supply
Monthly.
This kind of data transparency is critical to the free and
properly functioning markets that we depend upon. I applaud EIA
for making the efforts. Again, thank you for being here. Let me
call on Senator Domenici for his comments.
STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR FROM NEW
MEXICO
Senator Domenici. Mr. Chairman, fellow Senators, this ought
to be a red letter hearing. The crowd should fill this place
and reporters that are interested in reporting something good
that was done by Congress, not only good, but exceptionally
good, should be here. Because Mr. Caruso's agency is the best
in the world and they're probably as close to right on
predictions as anyone around.
The Administrator has come before us to discuss the law we
passed to change CAFE standards. In that same bill we added
biofuel production, as you may recall, and we also added some
additional appliance efficiencies. Those were your specialty,
Mr. Chairman.
Now the Administrator tells us that he is able to predict
the impact of changing the CAFE standards, adding to the
biofuels standard and improving appliance efficiency. He's
giving us a report on the impact of that law, and those
provisions, on America's energy consumption. It turns out that
for the first time, our use of crude oil that is imported is
going to come down, rather than continue its upward spiral.
Now, people will say, by how much? It's substantial. Two
million barrels a day less by the year 2030, a time when people
are expected to be using more oil elsewhere in the world.
Second, we didn't talk very much when we passed that bill.
Commerce did its part. We had a say in the rest of the bill,
but the Commerce committee worked on that provision.
By raising the CAFE standard, we said that we're going to
have a different kind of automobile mix in the next 10 years
and then thereafter. By doing that, we will save huge amounts
of carbon dioxide, Senator Craig. You know we're out talking
about what new thing we should impose on ourselves to reduce
carbon dioxide emissions. Of course there's going to be a
battle royal as to whether we're going to impose a substantial
cost on our economy or not.
But the energy bill we passed last year is going to cause
us to save. I've got it down here where you could understand
it: It's going to save in carbon dioxide emissions what 71,
500-megawatt coal plants would have emitted over that 23-year
period. Senator Bingaman, just think of that.
By changing those car standards we are going to reduce the
carbon dioxide by the equivalent of 71, 500-megawatt coal
burning plants. What they would have emitted over 23 years? Now
whatever else one wants to say about the excellent report that
Mr. Caruso and his agency have given us here today, it is
extremely important that we send our message out to the Senate
and all those who worked hard with this committee to pass the
major energy bill and the two that followed, that we can have
an impact on the deleterious effect of being so dependent on
crude oil.
But you can't change it quickly. Our dependence is
pervasive, and you've got to change it gradually. But we have
changed it forever just on the CAFE standard change.
Now if we can just look around and see if there's other
things where we can produce--more American owned resources--we
will truly be making some headway in terms of what we must do
for our country. We're not there, but I'm very positive that we
are making progress because we did do something that for years
said we couldn't.
We were told it would have a measurable effect. You recall,
Senator Bingaman, we were told by the expert from Oak Ridge
National Laboratory, were we not, that if we passed the CAFE
standard bill on an amendment of Senator Dianne Feinstein, that
would be the biggest step you can take in reducing carbon
dioxide and in reducing our dependence upon crude oil.
He was just theoretically telling us that. Now we did it,
and we have the experts saying what the result will be. We've
never passed anything to have this big an effect to your
knowledge, have we, Mr. Caruso?
Mr. Caruso. No, sir.
Senator Domenici. I have my additional remarks--a prepared
statement--that I will not give. I ask you to include them, Mr.
Chairman, as if read. Thank you very much.
[The prepared statement of Senator Domenici follows:]
Prepared Statement of Hon. Pete V. Domenici, U.S. Senator From
New Mexico
Administrator Caruso, I want to start by thanking you for your hard
work on this year's energy outlook. It is important that we take the
information that you provide into account as we seek ways to increase
America's energy security.
Our efforts in Congress have led to three pieces of landmark energy
legislation in the past three years. First we passed the Energy Policy
Act of 2005, then the Gulf of Mexico Energy Security Act of 2006, and
last year we passed the Energy Independence and Security Act of 2007.
That legislation will:
Raise CAFE standards;
Increase biofuels production; and
Improve appliance efficiency.
Each of these measures was intended in part to reduce America's
reliance on imported oil, which has grown steadily over the years.
When I first came to the Senate in 1973, imports accounted for 28
percent of our oil supply. Thirty-five years later, oil imports account
for more than sixty percent. EIA projects that level to diminish only
slightly by 2030, even as alternative fuels account for a much greater
percentage of our energy supply.
I am deeply concerned about the long-term impacts this dependence
will have--I believe it threatens our economic strength, our national
security, and our standing in the world.
In the 25 years preceding our most recent energy bills, Americans
spent $1.76 trillion on foreign oil. Looking forward, EIA has projected
that we will spend closer to $8.5 trillion over the next 25 years.
As we seek to reduce our dependence on imported oil, we must also
address global climate change. I believe the bipartisan legislation we
have passed in the last three years has, and will continue to, make a
difference on both fronts. EIA is projecting over 16 gigawatts of new
power plant capacity by 2030--that is a big deal. I also believe that
there is additional room for bipartisan solutions to address both
global climate change and our nation's dependence on foreign oil. This
week I will be introducing a bill that establishes a Clean Energy
Investment Bank. I expect bipartisan support for this measure which
seeks to facilitate substantial additional investments into clean
energy projects throughout the United States.
The energy bill we passed last December shows that Congress can
reduce greenhouse gas emissions without harming the economy or
increasing the price of energy--your data makes this clear. The five-
billion metric ton reduction that will result from our most recent bill
is equivalent to the carbon dioxide emissions that 71 500-MW coal
plants would have emitted over the same 23-year period. It shows that
our legislative options are not limited to a potentially devastating
cap-and-trade system.
The data in this year's Annual Energy Outlook is encouraging--it
shows that some progress has been made. These estimates would have been
worse in the absence of Congressional action. More importantly,
however, this Outlook should be seen as a warning for the future, and
an indication of the significant work that remains.
The price of oil reached an all-time high yesterday--$103.95 per
barrel. It broke a record that was set during a supply shock nearly 30
years ago. It will be a serious undertaking to address this growing
challenge. Equally daunting is our seeming inability to accurately
estimate the massive growth of the world's new energy consumers and the
difficulty of the world's producers to keep pace with rising demand.
Just four years ago, EIA estimated that the price of oil would rise
from approximately $24 to $29 per barrel by 2010. We must ask how our
estimates could be so far off the mark in such a short time. And, we
must re-examine our policies in light of these new factors.
It has never been more important to develop an effective energy
policy--one that will reduce our dependence on foreign oil and reduce
our carbon emissions.
In my view, such a policy will focus on three types of initiatives:
Those that increase production of our domestic resources;
Those that accelerate research, development, and deployment
of renewable and alternative sources of energy; and
Those that enhance our nation's ability to conserve energy.
In terms of production, EIA projects that a great deal of our
domestic oil will come from development of reserves in the Gulf of
Mexico. It is no coincidence that just two years ago the Congress
passed legislation to open more of this area. We are now seeing the
import-reducing benefits of that work in EIA projections.
With energy prices near all-time highs, it is time to revisit the
debate over responsible energy production on the Arctic Coastal Plain
of Alaska as well. It is time to inventory our resources and produce
more oil and gas on the Outer Continental Shelf--we must know what we
have to work with and then we must produce it.
At the same time, we should advance the next generation of fuels
and technologies, such as oil shale, coal-to-liquids, and advanced
batteries. As I mentioned, I plan to introduce legislation this week
that would establish a mechanism to help ensure that clean energy
projects receive the financing they need to find success.
I look forward to working with you, Mr. Chairman, on legislation
that will help many of these initiatives become reality.
The Chairman. Sure, we will include those in the record.
Mr. Caruso, why don't you go right ahead with your testimony?
STATEMENT OF GUY CARUSO, ADMINISTRATOR, ENERGY INFORMATION
ADMINISTRATION, DEPARTMENT OF ENERGY
Mr. Caruso. Mr. Chairman, members of the committee, thank
you very much for this opportunity to present the Energy
Information Administration's updated Annual Energy Outlook. As
you know EIA does not promote, formulate or take positions on
policies. Our views should not be construed as representing
those of the Department of Energy or the Administration.
My written statement provides an overview of the Annual
Energy Outlook 2008 reference case, which incorporates EIA's
assessment of portions of the Energy Independence and Security
Act of 2007. I'll refer to it as EISA 2007 that was enacted
last year. This 2008 reference case replaces the earlier
released version that we issued shortly before that enactment.
EISA 2007 provisions with the greatest effect, as Senator
Domenici just mentioned, are the new fuel economy standards for
light-duty vehicles, the new renewable fuel standard and new
efficiency standards for various types of equipment.
My oral presentation today focuses on highlights in the
areas of energy prices, consumption, production, imports,
renewable energy use and greenhouse gas emissions. As implied
earlier, our projections are based on current laws and
regulations that are in place as of February 2008. The updated
2008 reference case also includes additional revisions that
reflect historical data issued after the December early
release; our latest Short Term Energy Outlook, when these runs
were made, which was January 2008; a more current economic
outlook; and updates to correct modeling problems in the
earlier released version.
Starting with energy prices, real world oil prices in real
terms in the AEO2008 reference case decline gradually from
current levels to $57 per barrel in 2016, or about $68 when
looked at in nominal dollars. As expanded investment in
exploration and development brings new supplies to the world
oil market, we do expect prices will trend downward over this
period between now and 2016. As shown in figure 1 of my written
testimony, real prices then begin to rise after 2016 as demand
continues to grow and higher cost supplies are brought to the
market.
In 2030, the average real price of oil is $70 per barrel in
constant 2006 dollars or about $113 dollars per barrel in
nominal dollars. We recognize that there is uncertainty in our
long term price projections and due to unpredictable changes in
energy markets and geopolitical concerns. For this reason, we
project a range of oil prices using different assumptions from
what are in the reference case. Under our high-price case, for
example, oil prices in 2030 reach about $185 per barrel in
nominal dollars.
Projections for natural gas prices are also higher than
those in our 2007 outlook, but coal price projections have not
risen substantially. Electricity prices, which follow fuel
prices, are expected to rise in real terms through 2009 then
decline until 2015, before rising again through 2030.
Total energy consumption, as shown in figure 3, is
projected to grow by 19 percent between 2006 and 2030 at a rate
of about 0.7 percent per year or less than one-third the rate
of growth in gross domestic product, which we project to be 2.4
percent per year. Total consumption of liquid fuels, both oil
and renewable liquids, shown in figure 4, grows at an average
annual rate of 0.4 percent in the AEO2008 reference case,
increasing from 20.7 million barrels a day in 2006 to 22.8
million barrels per day in 2030, led by growth in
transportation fuels which account for 68 percent of total
liquid demand in 2006, increasing to 73 percent in 2030.
Total consumption of natural gas, shown in figure 5, is
projected to increase about 10 percent over its 2006 level by
2016, and then decline by about 5 percent from that 2016 level
by 2030. Industrial natural gas use is lower than in previous
editions of the outlook because of the higher delivered natural
gas prices, lower economic growth and a reassessment of natural
gas in the energy-intensive industries, which clearly are
increasing their efficiency in the use of natural gas.
Under current laws and regulations, natural gas is expected
to lose market share to coal in the electric power sector as a
result of a continued increase in natural gas prices in the
later half of the projection period and slower growth in
electricity demand, largely attributable to slower economic
growth.
Coal consumption is projected to grow at a faster rate
toward the end of the projection period, particularly after
2020, as coal use for new coal-fired generating capacity grows
rapidly under current policies.
Nuclear generating capacity increases from about 100
gigawatts in 2006 to 115 gigawatts in 2030, including more than
16 gigawatts of capacity at newly-built nuclear power plants
and 2.7 gigawatts expected from upgrades of existing plants.
These are partially offset by 4.5 gigawatts of retirements.
Total marketed renewable energy consumption is the fastest
growing segment of this outlook. It is projected to grow by 3
percent per year in the reference case. Rapid growth in the
projected use of renewable fuels in transportation in AEO2008
reflects the EISA 2007 renewable fuels standard.
Ethanol use grows from 5.6 billion gallons in 2006 to 24.3
billion gallons in 2030. This is about 16 percent of the total
gasoline consumption by volume in that year, and that's divided
between corn and cellulosic feedstocks in this outlook.
Biomass-to-liquids technology plays a significant role in
compliance with EISA 2007--its requirement for cellulosic
renewable fuels. While the situation is very uncertain at this
early stage, our current view is that available quantities of
cellulosic biofuels prior to 2022 will be insufficient to meet
the new RFS targets. As a result, the modification-of-
applicable-volumes provision included in EISA 2007 is expected
to be triggered, reducing the overall RFS target in 2022 from
36 billion gallons to about 32.5 billion gallons.
The use of renewable technologies for electricity
generation is stimulated by improved technology, existing State
RPS programs, the availability of the renewable production tax
credit for eligible generation placed in service before the end
of 2008, and higher fossil fuel prices. Total renewable
generation in the AEO2008 reference case, including combined
heat and power and end use generation, grows by 2.2 percent per
year.
Turning to liquid energy production and imports, U.S. crude
oil production grows from 5.1 million barrels per day in 2006
to a peak of 6.3 million barrels per day in 2018, primarily due
to increased production from the deep waters of the Gulf of
Mexico and from the expansion of enhanced oil recovery
operations in onshore areas supported by higher crude oil
prices. Domestic production subsequently declines to 5.6
million barrels a day in 2030 as increased production from
newer and smaller discoveries is inadequate to offset the
declines in large fields in Alaska and the Gulf of Mexico.
Total domestic liquids supply, which includes crude oil,
natural gas plant liquids, refinery processing gains and other
refinery inputs such as biofuels, grows from 8.3 million
barrels per day in 2006 to 10.5 million barrels per day in
2030.
Differences between the updated AEO reference case and the
prior early release version are driven largely by EISA 2007,
although they also reflect some of the other updates mentioned
earlier.
Net imports of crude oil and refined products in 2030 are
2.4 million barrels a day lower in the updated reference case
then in the early release version. The net imports share of
total liquid supplied, including crude oil and refined
products, is significantly affected by EISA 2007, dropping from
60 percent in 2006 to 51 percent in 2022 and then increasing to
54 percent in 2030, as shown in figure 9 of my statement.
Compared to previous AEOs, lower projected growth in energy
consumption and greater reliance on renewable fuels yields a
lower projection in energy-related carbon dioxide emissions. In
the AEO2008 reference case, greenhouse gas emissions are
projected to increase at an average annual rate of 0.6 percent,
as shown in figure 14. Over the period 2008 to 2030 projected
cumulative energy-related carbon emissions are 5.3 billion
metric tons lower in the updated AEO reference case than they
were in the early release version. Projected increases in
energy-related carbon emissions primarily result from continued
reliance on coal for electricity generation and on petroleum
fuels in the transportation sector.
In conclusion, Mr. Chairman, in addition to its work on
baseline projections that I have reviewed this morning, EIA has
also responded to a request from this committee and others for
analysis of the energy and economic impacts of alternative
proposals to limit greenhouse gas emissions and other policy
proposals. We look forward to providing whatever further
analytical support that you may require on energy-related
topics. We believe that such analysis can identify both
potential synergies and potential conflicts among different
energy-related objectives that are currently under discussion
in this committee and elsewhere.
This concludes my testimony, Mr. Chairman and members of
the committee. I would be happy to answer any questions you may
have. Thank you.
[The prepared statement of Mr. Caruso follows:]
Prepared Statement of Guy Caruso, Administrator, Energy Information
Administration, Department of Energy
Mr. Chairman and Members of the Committee: I appreciate the
opportunity to appear before you today to discuss the long-term outlook
for energy markets in the United States.
The Energy Information Administration (EIA) is the independent
statistical and analytical agency within the Department of Energy. We
do not promote, formulate, or take positions on policy issues. Our
mission is to produce objective, timely, and relevant data,
projections, and analyses that are meant to assist policymakers, help
markets function efficiently, and inform the public. The energy
projections that I will discuss today are widely used by government
agencies, the private sector, and academia as a starting point for
their own energy analyses. However, our views are strictly those of EIA
and should not be construed as representing those of the Department of
Energy or the Administration.
The Annual Energy Outlook 2008 (AEO2008) reference case discussed
today includes the impact of the Energy Independence and Security Act
of 2007 (EISA2007) that was enacted in December and replaces the early
release version issued shortly before that enactment. The specific
EISA2007 provisions that are modeled in AEO2008 include updates to the
renewable fuel standard (RFS) and to the corporate average fuel economy
(CAFE) standard for new light-duty vehicles; updated and new appliance
energy efficiency standards for boilers, dehumidifiers, dishwashers,
clothes washers, and walk-in refrigerators and freezers; lighting
energy efficiency standards; provisions to reduce energy consumption in
Federal buildings; and industrial electric motor efficiency standards.
Consistent with the general approach used in the AEO, the reference
case does not consider those sections of EISA2007 that require
appropriations for implementation or sections with highly uncertain
impacts on energy markets. The updated reference case also includes
additional revisions that reflect: historical data issued after the
early release version of the AEO2008 was completed, the EIA Short-Term
Energy Outlook released in January 2008, a more current economic
outlook, and updates to correct modeling problems in the early release
version.
The AEO2008 is intended to represent an energy future based on
given technological and demographic trends, current laws and
regulations, and consumer behavior as derived from known data. EIA
recognizes that projections of energy markets are highly uncertain and
subject to political disruptions, technological breakthroughs, and
other unforeseeable events. In addition, long-term trends in technology
development, demographics, economic growth, and energy resources may
evolve along a different path than expected in the projections. The
complete AEO2008, which EIA will release in April, includes a large
number of alternative cases intended to examine these uncertainties.
The following discussion summarizes the highlights from the AEO2008
reference case.
ENERGY PRICES
EIA has raised the reference case path for world oil prices in
AEO2008, although the upward adjustment is smaller than the last major
adjustment, introduced in AEO2006. In the AEO2008 reference case, real
world crude oil prices (defined as the price of light, low-sulfur crude
oil delivered in Cushing, Oklahoma, in 2006 dollars) decline gradually
from current levels to $57 per barrel in 2016 ($68 per barrel in
nominal dollars), as expanded investment in exploration and development
brings new supplies to the world market. After 2016, real prices begin
to rise (figures 1 and 2),* as demand continues to grow and higher cost
supplies are brought to market. In 2030, the average real price of
crude oil is $70 per barrel in 2006 dollars, or about $113 per barrel
in nominal dollars.
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* All figures have been retained in committee files.
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In developing its oil price outlook, EIA explicitly considered four
factors: (1) growth in world liquids consumption, (2) the outlook for
conventional oil production in countries outside the Organization of
the Petroleum Exporting Countries (OPEC), (3) growth in unconventional
liquids production, and (4) OPEC behavior. With the forces driving
demand outside the United States as strong or stronger than previously
expected and with global supply projections somewhat weaker, trends in
total world liquids production are similar to those in the Annual
Energy Outlook 2007 (AEO2007) reference case but the oil prices are
higher.
Current oil prices are above EIA's reference case estimate of the
long-run equilibrium price, driven by recent strong global economic
growth, shortages of experienced personnel, equipment, and construction
materials in the oil industry, and political instability in some major
producing regions. EIA's expectations regarding the ultimate size of
both conventional and unconventional liquid resources have not changed
since the AEO2007. Of course, geopolitical trends, the adequacy of
investment and the availability of crude oil resources and the degree
of access to them, and the market behavior of key OPEC producers are
all inherently uncertain. To evaluate the implications of uncertainty
about world crude oil prices, the AEO2008 includes alternative high and
low price cases (figure 2).
The price of natural gas also is higher in the AEO2008 reference
case. The real wellhead price of natural gas (in 2006 dollars) declines
from current levels through 2016, as new supplies enter the market.
After 2016, real natural gas prices rise to $6.56 per thousand cubic
feet ($10.52 per thousand cubic feet in nominal dollars) in 2030
(figure 1). The higher prices reflect an increase in production costs
associated with trends that were discussed in AEO2007 but not fully
reflected in its reference case. The higher natural gas prices also are
supported by higher oil prices.
Minemouth coal prices in the AEO2008 reference case, both
nationally and regionally, are generally similar to those in the
AEO2007 reference case. Average real minemouth coal prices (in 2006
dollars) fall from $1.21 per million British thermal unit (Btu) ($24.63
per short ton) in 2006 to $1.14 per million Btu ($22.51 per short ton)
in 2020, as prices moderate following a substantial run-up over the
past few years. After 2020, prices rise due to demand growth, reaching
$1.19 per million Btu ($23.24 per short ton) in 2030 (figure 1). In
nominal terms, the average minemouth price of coal in the AEO2008
reference case is $1.91 per million Btu ($37.29 per ton) in 2030.
Electricity prices follow trends in the delivered prices of fuels
to power plants. From a peak of 9.3 cents per kilowatthour (2006
dollars) in 2009, average delivered electricity prices in the AEO2008
reference case decline to 8.5 cents per kilowatthour in 2016 and then
increase to 8.8 cents per kilowatthour in 2030. In nominal dollars, the
average delivered electricity price reaches 14.1 cents per kilowatthour
in 2030.
ENERGY CONSUMPTION
Total primary energy consumption grows by 19 percent between 2006
and 2030 (figure 3), at a rate of 0.7 percent per year or less than
one-third the rate of growth in gross domestic product (GDP) (2.4
percent per year). Energy intensity, as measured by primary energy use
per dollar of GDP (2000 dollars), declines at an average annual rate of
1.7 percent from 2006 to 2030. Since 1992, the energy intensity of the
U.S. economy has declined on average by 2.0 percent per year, in part
because the share of industrial shipments accounted for by the energy-
intensive industries has fallen from 30 percent in 1992 to 21 percent
in 2006. In the AEO2008 reference case, the energy-intensive
industries' share of total industrial shipments continues to decline,
although at a slower rate, to 18 percent in 2030.
Population is another key determinant of energy consumption,
influencing demand for travel, housing, consumer goods, and services.
Since 1990, population has increased by about 20 percent and energy
consumption by 18 percent. Population in the reference case increases
by 22 percent from 2006 to 2030, compared to the aforementioned 19
percent growth in energy consumption. The rest of this section reviews
consumption trends for each major energy source.
Total consumption of liquid fuels grows at an average annual rate
of 0.4 percent in the AEO2008 reference case, from 20.7 million barrels
per day in 2006 to 22.8 million barrels per day in 2030 led by growth
in transportation uses, which account for 68 percent of total liquid
fuels demand in 2006, increasing to 73 percent in 2030 (figure 4).
Improvements in the efficiency of vehicles, planes, and ships are more
than offset by growth in travel.
EISA2007 requires new light-duty vehicles, including both cars and
trucks, to reach an average fuel economy of 35 miles per gallon (MPG)
by 2020, based on the Environmental Protection Agency (EPA) test value
used to measure compliance with the CAFE standard. The EPA CAFE test
value generally differs from the estimated MPG value on the fuel
economy label and typically exceeds the actual on-the-road fuel economy
of a new vehicle by a significant margin. Despite these differences,
the higher fuel economy standards in EISA2007 significantly improve the
in-use fuel economy of the stock of light-duty vehicles. In the
reference case, the average in-use fuel economy for the stock of light-
duty vehicles in 2030 increases to 28.0 miles per gallon, 38 percent
above its 2006 level. EISA2007 also results in a shift in the mix of
transportation vehicle fuels. Total biofuel consumption reaches 2.8
quadrillion Btu (29.7 billion gallons) in 2030 in the revised AEO2008
reference case, 2.3 quadrillion Btu (24.4 billion gallons) more than in
2006. This represents about 11.3 percent of total motor vehicle fuel,
on a Btu basis, in 2030.
Total consumption of natural gas increases from 21.7 trillion cubic
feet in 2006 to 23.9 trillion cubic feet in 2016, then declines to 22.7
trillion cubic feet in 2030 (figure 5). Industrial natural gas use is
lower than in previous AEOs because of the higher delivered natural gas
prices, lower economic growth, and a reassessment of natural gas use in
the energy-intensive industries in AEO2008. Under current laws and
regulations, natural gas is expected to lose market share to coal in
the electric power sector as result of a continued increase in natural
gas prices in the latter half of the projection and slower growth in
electricity demand.
Total coal consumption increases from 22.5 quadrillion Btu (1,114
million short tons) in 2006 to 30.1 quadrillion Btu (1,557 million
short tons) in 2030, growing by 1.2 percent per year. Coal consumption
grows at a faster rate toward the end of the projection period,
particularly after 2020, as coal use for new coal-fired generating
capacity grows rapidly. About 91 percent of the coal is currently used
for electricity generation. Coal remains the primary fuel for
electricity generation and its share of generation (including end-use
sector generation) is expected to increase from about 49 percent in
2006 to 54 percent in 2030. Growth in coal use by coal-to-liquids (CTL)
plants is lower than in previous AEOs as a result of EISA2007.
Investment dollars that would have previously gone into CTL capacity
now flow to biomass-to-liquids (BTL) capacity. However, there is a
great deal of uncertainty about this projection.
Total electricity consumption, including both purchases from
electric power producers and on-site generation, grows from 3,814
billion kilowatthours in 2006 to 4,974 billion kilowatthours in 2030,
increasing at an average annual rate of 1. 1 percent (figure 6). In
comparison, electricity consumption grew by annual rates of 7.3
percent, 4.2 percent, 2.6 percent, and 2.3 percent in the 1960s, 1970s,
1980s, and 1990s, respectively. The most rapid growth (1.7 percent per
year) occurs in the commercial sector, as building floorspace is
expanded to accommodate growing service industries. Growing use of
electricity for computers, office equipment, and small electrical
appliances is partially offset in the AEO2008 reference case by
improved energy efficiency.
Total marketed renewable fuel consumption grows by an average of
3.0 percent per year in the reference case, from 6.8 quadrillion Btu in
2006 to 13.7 quadrillion Btu in 2030. About 45 percent of the demand
for renewables in 2030 is for grid-related electricity generation
(including combined heat and power), and the rest is for dispersed
heating and cooling, industrial uses, or transportation uses.
The rapid growth in the use of renewable fuels for transportation
in AEO2008 reflects the updated RFS in Section 211(o) of the Clean Air
Act as amended by EISA2007. The updated RFS sets a requirement for 36
billion gallons of total renewable fuels by 2022, including 21 billion
gallons of advanced biofuels. Included are requirements for 1 billion
gallons of biodiesel by 2012 and 16 billion gallons of cellulosic
biofuels, both of which count toward the advanced biofuels requirement.
The remaining 4 billion gallons of advanced biofuels may come from any
source. The difference between advanced biofuels and total renewable
fuels may be met by corn ethanol. Diesel fuels that are derived from
biomass feedstocks count 1.5 times their physical volume as credits
towards meeting the RFS requirements owing to diesel's higher energy
content relative to ethanol.
While the situation is very uncertain, the current state of the
industry and our present view of projected rates of technology
development and market penetration of cellulosic biofuel technologies
suggest that available quantities of cellulosic biofuels prior to 2022
will be insufficient to meet the new RFS targets for cellulosic
biofuels, triggering both waivers and a modification of applicable
volumes as provided for by paragraphs 7(D) and 7(F), respectively, of
Section 211(o) of the Clean Air Act as amended by EISA2007. The
modification of volumes reduces the overall target in 2022 from 36
billion gallons to 32.5 billion gallons. The modified cellulosic
biofuel requirement is projected to be met by a combination of domestic
cellulosic ethanol, imported cellulosic ethanol, and biomass-to-liquids
diesel, but the specific mix is again highly uncertain.
Ethanol use grows from 5.6 billion gallons in 2006 to 24.3 billion
gallons in 2030 (over 16 percent of total gasoline consumption by
volume) (figure 7). Ethanol use for gasoline blending grows to 13.3
billion gallons and E85 consumption to 11.0 billion gallons in 2030.
The ethanol supply is expected to be produced from both corn and
cellulosic feedstocks, with corn accounting for 15.0 billion gallons of
ethanol production in 2030. The AEO2008 reference case also expects
strong growth in ethanol imports after 2010, reflecting the pending
expiration of the tariff on imported ethanol in January 2009. Biodiesel
use reaches 1.3 billion gallons in 2030 (about 1.6 percent of total
diesel consumption by volume). Consumption of diesel liquids produced
from biomass (BTL) grows to 4.2 billion gallons in 2030, 4.9 percent of
total diesel consumption by volume.
Excluding hydroelectric power, renewable energy consumption for
electric power generation grows from 0.9 quadrillion Btu in 2006 to 3.1
quadrillion Btu in 2030. The higher level of nonhydroelectric renewable
energy consumption in the AEO2008 reference case primarily reflects a
revised representation of State renewable portfolio standard (RPS)
programs, which require that specific and generally increasing shares
of electricity sales be supplied by renewable resources such as wind,
solar, geothermal, and sometimes biomass or hydropower. Previous AEOs
placed more weight on the ``escape clauses'' incorporated in many State
RPS programs, given that the consumer costs of these programs would
increase significantly if the Federal production tax credit (PTC) for
qualifying renewable energy expired as provided for under current law.
The new representation, which assumes that the State RPS goals will be
met absent a clear contrary indication, results in significant
additional growth of renewable generation from wind, biomass, and
geothermal resources.
ENERGY PRODUCTION AND IMPORTS
Net imports of energy are expected to continue to meet a major
share of total U.S. energy demand. The increased use of biofuels
resulting from EISA2007, much of which is domestically produced, and
the reduction in transportation fuel demand due to the new fuel economy
standards both serve to moderate growth in energy imports. Higher fuel
prices over the projection period also spur increased domestic energy
production and moderate energy demand growth, also tempering growth in
imports. Furthermore, the net import share of total U.S. energy
consumption in 2030 is 27 percent, a decline from the 30-percent share
in 2006.
Liquids and Other Petroleum Products
U.S. crude oil production grows from 5.1 million barrels per day in
2006 to a peak of 6.3 million barrels per day in 2018, primarily due to
increased production from the deep waters of the Gulf of Mexico and
from the expansion of enhanced oil recovery operations in onshore areas
supported by higher crude oil prices. Domestic production subsequently
declines to 5.6 million barrels per day in 2030, as increased
production from new smaller discoveries is inadequate to offset the
declines in large fields in Alaska and the Gulf of Mexico (figure 8)
Total domestic liquids supply, including crude oil, natural gas plant
liquids, refinery processing gains, and other refinery inputs (e.g.,
ethanol, biodiesel, BTL, and liquids from coal) grows from 8.3 million
barrels per day in 2006 to 10.5 million barrels per day in 2030.
The net import share of total liquids supplied, including crude oil
and refined products, drops from 60 percent in 2006 to less than 51
percent in 2022, and then increases to 54 percent in 2030 as crude oil
imports grow rapidly at the end of the projection to meet liquids
demand (figure 9). Net crude oil imports in 2030 are 11. 1 million
barrels per day in 2030 and net product imports (including net ethanol
imports) are 1.3 million barrels per day in 2030.
Natural Gas
Total domestic natural gas production, including supplemental
natural gas supplies, increases from 18.6 trillion cubic feet in 2006
to 20.1 trillion cubic feet in 2022 before declining to 19.6 trillion
cubic feet in 2030 in the AEO2008 reference case. While onshore
conventional production declines steadily from 6.6 trillion cubic feet
in 2006 to 4.4 trillion cubic feet in 2030, lower-48 offshore
production grows from 3.1 trillion cubic feet in 2006 to a peak of 4.5
trillion cubic feet in 2017 as new resources come online in the Gulf of
Mexico. After 2017, lower-48 offshore production declines to 3.5
trillion cubic feet in 2030. Lower-48 production of unconventional
natural gas, particularly gas from shale, is expected to be a key
contributor to growth in U.S. natural gas supplies, increasing from 8.5
trillion cubic feet in 2006 to 9.5 trillion cubic feet in 2030. The
Alaska natural gas pipeline is expected to be completed in 2020, later
than previously anticipated, because of delays in the resolution of
issues between Alaska's State government and industry participants.
Net pipeline imports of natural gas fall from 2.9 trillion cubic
feet in 2006 to 0.3 trillion cubic feet in 2030 in the AEO2008
reference case (figure 10), reflecting both resource depletion in
Alberta and Canada's growing domestic demand. Total net imports of
liquefied natural gas (LNG) to the United States increase from 0.5
trillion cubic feet in 2006 to 2.8 trillion cubic feet in 2030. U.S.
LNG regasification capacity increases from 1.5 trillion cubic feet in
2006 to 5.7 trillion cubic feet in 2009 with the addition of six new
regasification facilities that are currently under construction (four
along the Gulf Coast and two off the coast of New England). Given
global LNG supply constraints, overall capacity utilization at the U.S.
LNG import facilities is expected to remain below 50 percent through
2030. The future direction of the global LNG market, with many new
international players entering LNG markets and strong competition for
available supply, is one of the key uncertainties in the AEO2008
reference case.
Coal
As coal demand grows in the AEO2008 reference case, U.S. coal
production increases at an average rate of 1.0 percent per year (figure
11). On a Btu basis, 60 percent of domestic coal production originates
from States west of the Mississippi River in 2030, up from an estimated
49 percent in 2006.
ELECTRICITY GENERATION
Absent new environmental policy initiatives that would serve to
accelerate the retirement of existing coal-fired power plants, the
slowing rate of electricity growth reduces the need for new generating
capacity. In the AEO2008 reference case, the natural gas share of
electricity generation (including generation in the end-use sectors)
remains between 20 percent and 21 percent through 2017, before falling
to 14 percent in 2030 (figure 12). The coal share remains between 48
percent and 49 percent through 2018, before increasing to 54 percent in
2030. Net additions to coal-fired generating capacity in the AEO2008
reference case total 103 gigawatts from 2006 to 2030, including 4
gigawatts at CTL plants and 30 gigawatts at integrated gasification
combined-cycle plants. Given the assumed continuation of current energy
and environmental policies in the reference case, carbon capture and
sequestration (CCS) technology does not come into use during the
projection period.
Nuclear generating capacity in the AEO2008 reference case increases
from 100.2 gigawatts in 2006 to 114.8 gigawatts in 2030. The increase
includes 16.4 gigawatts of capacity at newly-built nuclear power plants
and 2.7 gigawatts expected from uprates of existing plants, partially
offset by 4.5 gigawatts of retirements. Total electricity generation
from nuclear power plants grows from 787 billion kilowatthours in 2006
to 917 billion kilowatthours in 2030 in the AEO2008 reference case,
accounting for about 18 percent of total generation in 2030. Additional
nuclear capacity is built in some of the alternative AEO2008 cases,
particularly those that project higher demand for electricity or even
higher fossil fuel prices.
The use of renewable technologies for electricity generation is
stimulated by improved technology, existing State RPS programs, the
availability of the renewable production tax credit for eligible
generation placed in service before the end of 2008, and higher fossil
fuel prices. Total renewable generation in the AEO2008 reference case,
including combined heat and power (CHP) and end-use generation, grows
by 2.2 percent per year, from 385 billion kilowatthours in 2006 to 654
billion kilowatthours in 2030 (figure 13).
ENERGY-RELATED CARBON DIOXIDE EMISSIONS
Carbon dioxide emissions from energy use in the AEO2008 reference
case increase from 5,890 million metric tons in 2006 to 6,859 million
metric tons in 2030, an average annual increase of 0.6 percent (figure
14). The energy-related carbon dioxide emissions intensity of the U.S.
economy falls from 520 metric tons per million dollars of GDP in 2006
to 339 metric tons per million dollars of GDP in 2030, an average
decline of 1.8 percent per year. Increases in carbon dioxide emissions
primarily result from a continued reliance on coal for electricity
generation and on petroleum fuels in the transportation sector.
CONCLUSION
As I noted at the outset, while EIA does not take positions on
policy issues, its data, analyses, and projections are meant to assist
policymakers in their energy policy deliberations. In addition to the
work on baseline projections that I have reviewed this morning, EIA has
also recently responded to requests from this Committee and others for
analyses of the energy and economic impacts of alternative proposals to
limit greenhouse gas emissions and other policy proposals. We look
forward to providing whatever further analytical support that you may
require on energy-related topics. We believe that such analyses can
help to identify both potential synergies and potential conflicts among
different energy-related objectives that are currently under discussion
in this Committee and elsewhere.
This concludes my testimony, Mr. Chairman and members of the
Committee. I would be happy to answer any questions you may have.
The Chairman. Thank you very much. Let me start with a few
questions.
You cite three areas that we legislated in as having
influenced the changes in your forecast. I think the CAFE
standard, the increased renewable fuel standard, and increased
efficiency standards for various appliances, lighting included.
Is there any way to give us a break down as to how much of the
reduction in greenhouse gas emissions that you are able to now
project, results from each of these three?
Mr. Caruso. One of the reasons it's very difficult to
disaggregate that is that there are a number of other factors
going on that I mentioned, including the reduced economic
growth outlook and a number of other modeling changes we've
made. So to isolate just those provisions would be very
difficult. I can tell you in broad terms that the CAFE
standards, by far, have the largest impact. We have almost two
and a half million barrels a day less oil demand in 2030 then
we had without them. The other major impact on greenhouse gas
emissions is the efficiency standards that were enacted for a
number of types of equipment, largely in the residential
sector. We have a significant reduction in demand in the
electricity sector. Much of the new electricity generated
beyond 2020 would have been coal so that has a significant
impact on emission levels.
I would be pleased to ask my team to provide a more
detailed break out, but I have to raise a little flag here in
that there's a number of other moving parts----
The Chairman. Right.
Mr. Caruso [continuing]. Making it often difficult to
disaggregate some of the effects of the law, for example, the
biofuels impact. We have more biofuels-to-liquids in this
outlook as direct result of the renewable fuel standard. One of
the things that did was reduce the amount of investments we see
going into coal-to-liquids, for example. That had an impact on
reducing greenhouse gas emissions.
We could make an attempt to actually quantify that. I'd be
happy to provide that for the record, Senator Bingaman.
[The information referred to follows:]
The energy impacts of the Energy Independence and Security Act of
2007 (EISA) and its individual provisions can be measured in several
different ways. For example, individual or grouped provisions can
either be added to a variety of Annual Energy Outlook baselines that do
not include EISA, or subtracted from a baseline that includes EISA.
Other impact measures can be obtained by assuming that both EISA
standards and those in existence prior to EISA are binding without
alteration throughout the projection period, so that energy impacts can
be calculated based on the difference in standards and measures of
equipment stock turnover and utilization. This latter approach, which
essentially adopts a ``frozen efficiency'' baseline reflecting the
existing standard, tends to produce larger estimates for the impact of
changes in efficiency standards.
EIA has made several different calculations to provide ranges of
impact estimates that would be suitable for a variety of purposes.
Using National Energy Modeling System model runs that add or subtract
EISA provisions to current baselines, EIA found that EISA reduces total
U.S. energy consumption between 3.2 and 4.1 quadrillion Btu (2.7 to 3.3
percent) in 2030. Those same calculations suggest that cumulative
energy-related carbon dioxide emissions between 2008 and 2030 are
reduced by 4.0 to 4.9 billion metric tons (2.7 to 3.2 percent). With
respect to the three groups of provisions in EISA that were represented
in the AEO2008 reference case projections for 2030, the renewable fuels
standard (RFS) reduces net petroleum imports by 0.3 to 0.6 million
barrels per day (1.9 to 4.9 percent), the energy efficiency standard
(EES) provisions reduce electricity use by 130 to 148 billion
kilowatthours (2.6 to 2.9 percent), and the Corporate Average Fuel
Economy (CAFE) standard reduces light duty vehicle consumption by about
1.2 to 1.4 million gasoline-equivalent barrels per day (12.1 to 12.9
percent).If measured against a frozen-efficiency standard, which the
National Highway Transportation and Safety Administration (NHTSA) and
the Office of Management and Budget (OMB) use--where vehicle efficiency
does not improve above the floor set by the previous CAFE standards,
the CAFE standard in EISA reduces light duty vehicle gasoline-
equivalent barrels per day by between 2.1 and 2.2 million barrels per
day (17.9 to 18.2 percent).
The Chairman. Let me ask about this change in your
projection as to the rate of growth of gross domestic product.
You're now projecting that it will grow at a rate of 2.4
percent per year between 2000 up to 2030. I think. Yes.
Mr. Caruso. Yes.
The Chairman. Between now and 2030. How much of a reduction
is that from what you had earlier thought? Is that consistent
with what OMB and CBO are projecting?
Mr. Caruso. The answer to the first part of the question is
in the earlier version of this outlook we were using 2.6
percent GDP growth. So we've reduced that by two-tenths of 1
percent. CBO and OMB typically only go out about 10 years. So
it's consistent with their projections. But not many
projections by public forecasters go out to 2030.
We've used our own, in-house, macroeconomic analysis as
well as the consulting firm, Global Insights, to come up with
these numbers. The main reason for the revision is the
macroeconomic analysts now are having a re-look at the impact
of productivity, which is such a big part of that sharp growth
we saw in the 1990s and even in the early part of this decade.
We now see less productivity over the next couple decades.
There also is some effect of the higher energy prices in
that lower GDP projection.
The Chairman. Let me just ask one final question. Do you,
in this projection, do you assume that the production tax
credit for renewable energy will be renewed or that it will
expire?
Mr. Caruso. We assume it will expire as the law currently
indicates. We have run cases in the past where if you assumed
extension in perpetuity it makes a huge difference in the
renewable fuel numbers that are in the outlook. They would be
significantly higher.
We have done that case in previous annual energy outlooks,
and extension beyond 2008 would make a huge difference.
The Chairman. All right.
Senator Domenici.
Senator Domenici. Thank you, Mr. Chairman. Let me start by
saying the EIA projects that increased oil production will
result in a gradually lower oil prices between now and 2016.
However we have recently seen financial sector analyses which
conclude that unprecedented investments will be required to
merely maintain existing production levels from aging oil
fields and projecting that 100 million barrel per day may be
the maximum production level possible in the near future. These
production constraints are combined with concerns that demand
appears to be increasingly inelastic.
At Deutsche Bank, for one example, is forecasting the
possibility of $150 per barrel of oil by 2015. I'm told that
this is higher than your high case for that year. Can you
explain the difference?
Mr. Caruso. Yes. I think the fundamental difference is that
we do believe that the higher prices will stimulate more
investment in the new development of liquid resources. I think
it's very important to make a distinction between crude oil
alone which I think the Deutsche Bank report really focused on.
For example, our latest outlook to 2015 indicates a total
liquid demand and supply for 2015 of about 97 million barrels a
day. Of that 97 million barrels a day only 77 million barrels a
day is crude oil. There's going to be a lot of unconventional
liquids, including biofuels and other contributors to the
supply--natural gas liquids for example.
All that having been said, the main point that Deutsche
Bank is making is that because of the decline rates in older
fields, which I mentioned in our reference case in Alaska and
the Gulf of Mexico, it still requires a huge investment effort.
I'm not in any way belittling the effort it's going to take.
But we think that companies, with the stimulus of higher
prices, will make those investments if access is available and
the above ground risk is permitted.
Senator Domenici. You identified LNG markets as a key
uncertainty associated with the 2008 outlook. Is the EIA
attempting to account for OPEC-like behavior among natural gas
exporting nations in your existing model or updates to it?
Mr. Caruso. We don't explicitly try to model a gas OPEC.
But one thing we do to try to capture that uncertainty is the
high and low natural gas price cases. For natural gas that
makes a huge difference.
With a high price case for natural gas you have a much
lower demand for LNG. We see LNG as the marginal supplier to
the gas market, so to the extent high, natural gas price
reduces demand, we think most of that will come out of LNG.
Another example of uncertainty is whether there will be an
Alaskan natural gas pipeline, which we have in this outlook
coming on stream in 2020 at two trillion cubic feet per year.
To the extent that that either comes on later or sooner, almost
all of that two trillion cubic feet per year would have to be
supplemented by LNG to the extent that it would fall short of
our timing or the volume.
Senator Domenici. Now that pipeline is the one we've
already approved.
Mr. Caruso. It's still being----
Senator Domenici. I mean we did----
Mr. Caruso. Yes, at the Federal level, but now it's----
Senator Domenici. The State hasn't completed----
Mr. Caruso [continuing]. The State government is
negotiating with the off-takers.
Senator Domenici. Are they ever going to get that done,
Senator? No, excuse me, I didn't----
Senator Murkowski. We are eternally optimistic. We are
encouraging it every step.
Senator Domenici. Great. Mr. Chairman, I have some
additional questions. I'll wait another round or submit them
for the record. Thank you. Thank you, Mr. Caruso.
Mr. Caruso. Thank you, Senator.
The Chairman. Thank you.
Senator Craig.
Senator Craig. Thank you very much, Mr. Chairman and Mr.
Caruso. I think the points that both Senator Domenici and our
Chairman made, are valuable for us to see that when policy is
put in place that you can take it into the out years and make
those kinds of projections. It is significant that a two
million barrel a day impact out there in 2030 is powerful
stuff.
You've cast some doubt as it relates to the ability to get
to where we want to get in relation to ethanol production or
the nonpetroleum liquids. Let me use this as an example because
our frustration has ended up in Senator Domenici introducing
the Clean Energy Investment Bank. I'm a co-sponsor of that
because we saw the Department of Energy, in our opinion,
falling short in its ability to move expeditiously once we
acted to bring on board loan guarantees, grants, those kinds of
things to go out to the outer edge of science and technology to
bring cellulosic production on line.
I have been watching very closely a facility in Canada that
is substantially financed. It now has a demonstration plant up
and running. It seems to be working at a capacity of about a
million gallons a day of cellulosic.
For the last 4 years this particular company has been
waiting for DOE loan guarantees and grant programs in order to
get the financial backing they need to move up into the next
level of commercial scale production. I guess my question comes
to that. Have you considered these types of delays in your
projections, those that might be tied to the ability of this
government to move expeditiously?
Have you considered that once proven on a commercial scale
there will be a significant influx of capital? For example,
into cellulosic, to get us to where we get in those out years
with the numbers we looked at, 32 billion and beyond in gallons
annualized. I think the only way we're going to get there to
meet those liquid energy non-hydrocarbon types of liquids is
moving in an expeditious way there. Have those factors gone
into consideration when you make these projections?
Mr. Caruso. Yes. We've tried to look as hard as we can at
the economics and the technology. We've worked closely with the
program offices in the Department of Energy--got their latest
assessment of how things are going and the time scale they're
on, particularly on cellulosic.
Senator Craig. Yes.
Mr. Caruso. Which as you point out is really critical to
being able to get to 36 billion gallons.
Senator Craig. Right.
Mr. Caruso. We've got the corn ethanol going up rapidly.
Senator Craig. Yes.
Mr. Caruso. Reaching 15 billion gallons as scheduled in the
EISA. It's the cellulosic component that we think may be
lagging behind a bit, and fail to meet the targets that were
set in EISA 2007 by 2014 and 2015.
There is a provision within the EISA as it amends the Clean
Air Act that if the targets are missed by 20 percent or more
for 2 consecutive years, the EPA Administrator can then adjust
the volumes--and we have that being triggered. That's the
reason why we think that the cellulosic volumes will fall
behind a bit, and that's the reason that we come up with the
conclusion that instead of 36 billion gallons of alternative
fuels in 2030, we project 32.5.
Senator Craig. So that's the shortfall?
Mr. Caruso. The shortfall is about 3.5 billion gallons from
meeting the targeted amount in the bill. It's largely the
result of our assessment of where the technology and economics
are at this point as we look out for 5 years. First of all to
get to the 2012 target that was set actually in the EPACT 2005.
Senator Craig. Yes. Yes.
Mr. Caruso. Then updated in EISA 2007. I think if someone
were here from the program office they would say that they are
really working extremely hard and spending a lot of money to
try to facilitate the breakthroughs in that technology. But as
of the time that we've consulted with them, we think this is a
pretty realistic assessment.
As time goes on we certainly would continue to work with--
--
Senator Craig. Yes.
Mr. Caruso [continuing]. NREL and other program offices to
update that.
Senator Craig. I don't disagree they're hustling now. But
as a result of some heavy pushing on the part of many of us
here and when I look at these numbers of dollars going offshore
everyday verses putting some risk capital out there. Not quite
sure where it takes us, but knowing that we've got to do it.
I look at that as a reasonable risk investment in relation
to bringing technology on line. I think many of us do here.
That's why we've urged it. Thank you.
The Chairman. Senator Barrasso.
Senator Barrasso. Thank you very much, Mr. Chairman. Thank
you very much, Mr. Caruso, for being here. You know the
Washington Post business section front page story forecast for
crude oil rise to $105 on new trading high was in today's
paper. They talk not just about supply and demand of oil, but
also supply and demand of dollars in the world currency market.
Do you try to take that into effect or into account as you try
to work on some of these things?
Mr. Caruso. As you can imagine, trying to relate the influx
of speculative money into the commodities market has been a
topic, really, of heightened interest. Most recently, the
direct correlation, it seems, between the decline of the dollar
and moneys flowing out of foreign exchange index funds into
commodity index funds--including oil--seems to have put some
upward pressure on the price of oil and other energy. We have a
short term modeling effort that we use to publish our short
term outlook.
In a hearing before Senator Dorgan 2 months ago, we tried
to look at what is the impact of some of these other, what we
would consider non-fundamental, factors. Our model does
continue to show the track pretty well of fundamental factors
with the trend of the price. But clearly during short-term
periods other factors, including commodity index funds and
geopolitical events do move that price above and below that
trend analysis.
To try to predict it is extremely difficult.
Senator Barrasso. Reading the report it almost seems like
you think this is almost at a high point now. Then we're going
to look at a decline over the next number of years, almost cut
in half of this price. So would this be something you would
consider a bubble now--that we're going to be able to work
through?
Mr. Caruso. Yes. I think it's difficult to say whether this
is the peak because there's so much uncertainty on the
geopolitical front and on some of the issues such as the value
of the dollar. In the longer run we do think, as I mentioned to
Senator Domenici, that high prices do stimulate investment on
the supply side. We've seen it in deep water in the United
States, Brazil and Angola.
We've seen it in unconventional gas with the shale gas,
Barnett Shale, and in the Piceance Basin unconventional gas
there. So we do think that over time the economics should
prevail, but----
Senator Barrasso. I mean you read the reports: does a
company make an investment? At $100 barrel oil it pays to put
in windmills, you know, solar panels all of these things that
lower prices that we may be predicting for the future then it
isn't as cost effective to do it in terms of the return on the
investment. So I'm trying to make that balance.
Mr. Caruso. Yes. That's why we do the high price case--to
say, what if we're wrong. You know, we've been wrong for the
last several years. So the track record is very clear.
Senator Barrasso. Last week we had some people here talking
about the Strategic Petroleum Reserve. I think they're putting
70 million barrel--70,000 barrels a day which is about a
million barrels every 2 weeks, 25 million barrels a year. The
paper today talks about as long the supply and demand are still
relatively tightly balanced there's not a lot of spare
production refinery capacity that, you know, any little
incremental demand can spook a market or can drive prices
disproportionate to that amount.
I know you don't make policy recommendations. But I don't
know if you share the information. Because we were discussing
whether this is the wise time to be paying $100 a barrel to put
70,000 barrels a day into the Strategic Petroleum Reserve when
we may be able to get it a lot cheaper next year or 5 years
from now.
Mr. Caruso. You're right. The direction is clearly upward.
Again referring back to Senator Dorgan's hearing in December, I
was asked had we, had EIA been asked to do an analysis and at
that time we had not.
So I went back and as I promised I asked our people to look
at that. I used 100,000 barrels a day as the hypothetical build
for the first 10 months of 2008. Our analysis shows that it has
about a $2-per-barrel impact on the global market based on our,
the same modeling effort that I mentioned. That's about four or
five cents per gallon converted into gasoline.
Senator Barrasso. Because it seems that just doing the
math. I'm out of time, Mr. Chairman. To get from the 750
million barrels we have there now to the 1.5 billion that
they're trying to get to.
You're going to be putting, I mean, 70 to 100 thousand
barrels a day for the next 25 to 30 years. So, ok. Thank you,
Mr. Chairman.
The Chairman. Thank you.
Senator Dorgan.
Senator Dorgan. Mr. Chairman, thank you very much. First of
all, Mr. Caruso, thank you for your report. I think I share the
thoughts expressed by Senator Domenici and some others. I think
there's some good news in this report.
I am struck however, you talked about trying to predict the
short term issues is very, very difficult. Then we predict
2030. You know, we don't know what's going to happen in 24
months let alone 24 years. What you have done is useful.
Keynes used to say in the long run we're all dead. We're
interested in the long run nonetheless, but I'm very interested
in the short run. I want to ask you a couple of questions that
relate to some things Senator Barrasso asked you because I have
been very interested in this.
When you did your modeling with respect to SPRO, taking oil
out of the supply, putting it underground, you talk about $2
per barrel of oil. Did you consider that this is sweet, light
crude as a subset and therefore will have a different impact on
the price of oil?
Mr. Caruso. Yes.
Senator Dorgan. You did.
Mr. Caruso. We did take into account the quality of the
crude. We looked at what had been the impact of the different
types of crudes, looking back over the past several years.
Senator Dorgan. There are some who estimate that because
it's sweet, light crude it has as much as a 10-percent
influence on the price. I want to talk about two things. I want
to talk about SPRO and I'll come back to that in a moment.
I want to talk about this issue of the markets setting the
price that have a disconnect to supply/demand. In today's
newspaper it talks about Lawrence Goldstein, an economist at
the Energy Policy Research Foundations says that yet,
ironically you're looking at triple digit oil prices because
the price is being set by non-physical investors. Wall Street
Journal has an article talking about hedge funds and the excess
speculation of hedge funds in the futures market.
It talks about investment banks and the new speculation in
the new futures market for oil by investment bankers who are
actually off buying storage, a new phenomenon. Investment banks
can take oil off the market, put it in storage and wait until
the price goes up. So you have a substantial amount of
additional speculation in the futures market.
We have Fadel Gheit who's an analyst with the Oppenheimer
Company said at this table. He says, ``There is absolutely no
shortage of oil. I'm convinced oil prices shouldn't be a dime
above $55 a barrel.'' That was 3 months ago.
Oil speculators include the largest financial institutions
in the world. I call it the world's largest gambling hall open
24/7. Unfortunately it's totally unregulated. This is like a
highway with no cops and no speed limit. Everybody is going 120
miles an hour.
I am fairly convinced and I'm not an expert in this area.
But I'm fairly well convinced that in the short term what we
have is an unbelievable amount of speculation in these futures
markets, which means, in the short term, that you move away
from the supply/demand relationships we are led to expect would
set the price. That we now have, as I related to this morning's
quote about the price being set by non-physical investors. Tell
me your analysis of that, Mr. Caruso.
Mr. Caruso. The way we've approached that, as I did at the
hearing in December, is looking at the short term factors, the
fundamental factors--typical macroeconomics, supply/demand,
inventory levels and spare productive capacity. We looked and
tracked that as to the history, and the tracking was reasonably
good in terms of the kind of modeling characteristics.
We were sometimes a little below, sometimes a little above.
Our trend-line analysis indicated that those fundamental
factors can explain most of the change in the price over the
last 5 or 6 years. That's what we've been using in our short
term outlook, which currently, by the way, is about a $90
price. So $100, $104, I think it may have reached today----
Senator Dorgan. Have you had a?
Mr. Caruso [continuing]. Means that there's something else
going on.
Senator Dorgan. Right.
Mr. Caruso. There's clearly been a surge in moneys coming
into commodity markets, including energy, which has had some
upward effect on the price above the trend line. Then we've
seen other periods where you see that money, the open interest,
actually go down. So there have been periods over this 5 to 6
year timeframe where it's actually gone above the trend and
also gone below the trend.
So I think something is clearly going on. As I mentioned
earlier it is very difficult to say whether that number is $5
or $10. But I would, I think, strongly disagree that it's $50.
Senator Dorgan. Yes. The implication of your answer is that
there's about a 10-percent increase as a result of speculation.
At least when you said your number is 90, it's 103.
Let me ask you. Have you reached out and talked to the
analysts who have been describing this publicly? Their
analysis, that as they review these things there's no
justification for the price above $50, $60, $70. Whatever it is
they conclude.
Have you reached out and talked to those folks to
understand their analysis?
Mr. Caruso. Yes. We talked to them all the time. In fact we
have them in and have what we call forecasting seminars to try
to understand what we find.
When we meet with many of them they really don't have a
quantitative assessment. It's mostly a qualitative assessment.
Senator Dorgan. You shook your head affirmatively when I
talked about the hedge fund positions in the futures market and
the investment banks. Investment banks buying storage. You know
all those things?
Mr. Caruso. We have the same information that is publicly
available. We don't have any, you know, we don't get any
reporting directly from those entities.
Senator Dorgan. You think that entry in those futures
markets on the demand side has an impact on price? The question
is just what impact.
Mr. Caruso. I think it has had some impact. As I pointed
out earlier, in some cases we've actually seen where that
impact has, compared to our trend line analysis, actually been
below it. When in some cases they've perceived for whatever
reason that they should go short and actually had to----
Senator Dorgan. I understand. But I'm talking as you----
Mr. Caruso. Right now it's been mostly upward.
Senator Dorgan. I don't mean to be talking about the manure
and you keep talking about the pony. But the fact is what we're
seeing at the moment is a trend line of substantial new
speculation in futures market that's putting upward pressure on
prices beyond that which would normally exist with the supply/
demand relationship.
Mr. Chairman, are you going to have a second round because
I do want to ask about SPRO at some length, but----
The Chairman. Yes, we certainly will.
Senator Murkowski.
Senator Murkowski. Thank you, Mr. Chairman. Thank you, Mr.
Caruso. I want to go back to the gas line that Senator Domenici
raised.
I think the last time we had the forecast that you
presented we were again pushed back an additional 2 years. As I
think I commented at that time that every time you come in and
calculate where the Alaska gas line in the natural gas
equation. We're 2 years further. I don't know if I want to see
you next year if that's going to be the prognosis.
Mr. Caruso. I think that's a safe assumption.
Senator Murkowski. I would like to think that we're going
to have this gas line. I do remain eternally optimistic that
the State and the industry will figure out how we advance this.
My question to you is what degree of confidence do you have
that Alaska gas does become part of that picture?
2020 is a ways off now. In the interim the economy of the
lower 48, the rest of the country is going to be seeking that
gas from somewhere. You've noticed some of the factors in your
report, extra LNG, re-gasification capacity.
If some of those issues can be worked out does the Alaska
gas get locked out of the market at some point in your
calculation if in fact those commitments have not been made?
Mr. Caruso. I don't really think so. The reason is that we
see the LNG as being more of a supplier on the margin because
there's such a long lead time, as you know, in the building of
that line.
There will be a large advance notice once the construction
starts. We're thinking it's, at least, probably a 9-year
process. So I don't think that just the existence of new re-
gasification terminals will deter the pipeline. As is noted in
our report, the ones that are under construction, under permit
and construction, are double what we think LNG imports will be
in 2030.
Senator Murkowski. What about domestic shale opportunities
that you've noted that you expect some increase in production
there?
Mr. Caruso. Shale gas?
Senator Murkowski. Yes.
Mr. Caruso. Yes, I think that's directly related to the
price, to the extent that the natural gas price stays high. We
could even see more shale gas under the reference case price
scenario. We have that as the fastest growing source of
domestic gas in this outlook.
So it is important, but I don't think it's enough to lock
out Alaskan gas. We think the economics of Alaskan gas under
our current estimate, which is, as you know, subject to change
as costs go up, still make it very attractive.
Senator Murkowski. Let me ask then about oil production.
Yes?
Senator Domenici. Can I ask for clarification? You and Mr.
Caruso were speaking about shale gas. That's not the shale oil
in Colorado. That shale gas, where does it come from?
Senator Murkowski. It's from Colorado, but there's some
newer opportunities over on the East Coast that is being
explored right now.
Mr. Caruso. The biggest places for shale gas right now are
in Texas and Oklahoma, the Barnett Shale. There's also some in
the Rockies as well. But it's not directly related to the shale
oil prospect.
Senator Domenici. Shale gas is just a gas that you can get
out of the ground----
Mr. Caruso. Exactly.
Senator Domenici. It's called----
Senator Murkowski. Oil deposits, yes.
Mr. Caruso. Yes, sir.
Senator Domenici. We're not using a version of shale.
Mr. Caruso. No.
Senator Domenici [continuing]. Up in Colorado, that's not
even in the equation yet.
Mr. Caruso. It's gas produced from a shale formation, much
like the Bakken shale in North Dakota is now producing a fair
amount of new oil.
Senator Domenici. Thank you, Senator.
Senator Murkowski. With the oil production you've indicated
that you expect to see domestic oil production rising because
of what we're seeing with the high prices. That's going to
encourage enhanced oil recovery but then we're going to see a
decline there. But we're not necessarily seeing any new areas
of production of domestic supplies of oil coming online.
So, what does it look like 10, 20 years from now, if in
fact, we have no new oil production domestically? Of course,
this will then lead to my next question about the Alaska
production. As you know there is a point where our Trans Alaska
pipeline reaches a level where the flow of oil within that gas
line requires or mandates that that line be shut down because
you cannot efficiently, you can't move it down the line.
So if we don't have increased production up North whether
through ANWR or NPRA or any of the other opportunities that we
have. We not only lose what remains up in the North Slope in
terms of the production that we've been seeing. Give me the
scenario for oil domestically if we don't see those new areas
of production.
You have the Alaska line going down. The way I describe it,
it sounds pretty grim. But can you speak to that?
Mr. Caruso. I think the only area where we see new
production coming on line in this outlook is the deep water of
the Gulf of Mexico. The other increase is in enhanced oil
recovery, which has been stimulated by the higher prices. We're
seeing some of that on shore.
But due to lack of access we really don't see any new
significant increases. As you pointed out that we have a
continued decline in Alaska, although we do have the line
continuing--the TAPS, Trans Alaska Pipeline System--continuing
to operate throughout this timeframe.
So, we have a short term gain which goes from about five
million barrels a day in domestic crude oil production this
year to a bit over six million in 2016. Then the decline
continues again so that by the end of the 2030 timeframe we're
about back to where we are now, a little over five million
barrels a day. So we have a short term increase in domestic
supply of crude and then a decline.
Senator Murkowski. Did you do a run to assess the impact on
prices if we were to be successful in opening ANWR in an
analysis in terms of the cost?
Mr. Caruso. We have not done that analysis, Senator.
Senator Murkowski. I know that you had done it in previous
years anticipating what----
Mr. Caruso. Oh, opening----
Senator Murkowski [continuing]. A million barrels of extra
production would be.
Mr. Caruso. I'm sorry. Yes, we did do that in previous
years. We have not done it for this Annual Energy Outlook. But
we had done that at the request of Congress. I think the last
one we did was 2007.
Senator Murkowski. There are many of us who still believe
that having an additional million barrels into production
domestically would help with the price in this country and make
a difference, so. Thank you, Mr. Chairman.
The Chairman. Thank you very much. Let me ask a few
additional questions. Then we'll just proceed here through our
second round.
I passed out a couple of things to you there. One is a
chart* that called U.S. mid range abatement curve. This was
developed by McKenzie and Company.
---------------------------------------------------------------------------
* Charts have been retained in committee files.
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It's included in a publication by McKenzie and Company that
the conference board came out with on reducing greenhouse gas
emissions. How much would it cost? The other chart is similar
but I'm trying to determine who prepared it. It looks like it's
prepared in Europe because it's Euros per ton of CO2
reduced.
I guess what my initial idea from reading these is that
this would be a very useful thing for us to have agreement on,
if we could, for purposes of making policy. If in fact these
are accurate and you can reduce greenhouse gas emissions much
more substantially through building insulation which is what
this one chart indicates, then you can through a voided
deforestation over here on the right or one other of the items
on the right. Then clearly that's where we ought to concentrate
our efforts; on the areas that the greatest bang can be
achieved for the dollar spent or the Euros spent or whoever
spending it.
Senator Domenici. Where did you find that?
The Chairman. I'm looking at this chart now. You see
building insulation is the on the far left hand which indicates
that you save substantial amount of money by investing in
building insulation, as I read this.
Senator Domenici. All those things.
The Chairman. Yes. All of those on the left you save a lot
of money by going ahead and doing. On the right it's going to
cost you money. Then you get into the question of whether it's
worth the cost involved to go ahead and do those things. I mean
in terms of the impact on the environment and other questions.
But I guess I have two questions. First whether you have
reviewed these particular charts and have any opinion on
whether they are valid or whether your agency is capable of
giving us an assessment of your own version of this so that we
could have that for policymaking purposes. I think it would be
very useful if we had a consensus within the Federal Government
and within the country on what abatement measures yield the
greatest results in terms of greenhouse gas emissions.
Do you have any reaction to this?
Mr. Caruso. Yes. I think the answer to your question is we
would certainly take a crack at it and do our best. The couple
comments are that some of these have already been implemented
in the EISA bill.
The Chairman. Right.
Mr. Caruso. Some of our people have been in contact with
the McKinsey analysts and have some disagreements as you might
expect. I don't know what the actual costs are. So clearly we
wouldn't--our numbers would be different and we'd be happy to
take a crack at it.
The Chairman. I'd appreciate it if you would. I would
request that you do that. You know one obvious example of where
I think we're not in agreement on how to make policy is the
President's budget suggests we eliminate the Weatherization
program.
If in fact the greatest bang for the buck is putting more
money into building insulation you would think we would want to
go ahead and do that. So that's----
Senator Domenici. If it was being done effectively.
The Chairman. Yes. I think you'd want to know that. But
presumably there's some assumption built in here that it can be
done effectively.
Senator Domenici. Oh, of course.
The Chairman. If it's done effectively you have tremendous
savings. I've never heard anybody argue that the reason we're
not funding weatherization at the Federal level this year is
because we don't think it can be effective. I mean it's just a
question of priority of that compared to other things we want
to put money into, as I understand it. So, at any rate I would
appreciate it.
Let me ask one other question.
Senator Domenici. Senator, what is it that you want him to
do?
The Chairman. I would like him to see if he could look at
these various graphs that we've distributed here and come up
with their own.
Senator Domenici. Ok.
The Chairman. So that they would be telling us that in
their opinion there are certain abatement measures we could
take that would be the highest yielding in terms of greenhouse
gas emission reductions. There are others that are going to
cost us a lot more.
Senator Domenici. I think that's an excellent idea in
general. Excuse me for interfering.
The Chairman. No, go ahead.
Senator Domenici. But I think some experts have concluded
that these are the effective items. Shouldn't he be permitted
to consider others?
The Chairman. Oh, sure. If there are some other measures
that you think make more sense than the ones on these charts.
But the McKenzie one, the way it was represented to me, is they
looked at 250 different options for abatement of greenhouse gas
emissions, and tried to rank those in order of highest
yielding--lowest or highest cost then lowest yielding.
If you can come up with more than 250, I'd be glad to have
you include more.
Mr. Caruso. Our comparative advantage, of course, is in
those options directly related to energy and some of these are
non-energy. But we will certainly do our best----
The Chairman. Ok.
Mr. Caruso [continuing]. Using what is in our database and
our technology database.
[The information referred to follows:]
The greenhouse gas abatement curve from page 20 of Reducing U.S.
Greenhouse Gas Emissions: How Much at What Cost by McKinsey and Company
is based upon a complex methodology and numerous assumptions. EIA is
working with McKinsey and Company to better understand the methodology
and assumptions used. The greenhouse gas emissions abatement options
contained in the report are based on energy projections contained in
EIA's Annual Energy Outlook 2007. EIA hopes to assess the impact of
updating the baseline to the Annual Energy Outlook 2008 reference case,
which reflects the Energy Independence and Security Act of 2007;
provide some insights on the general approach used in the McKinsey
report; and provide greenhouse gas marginal abatement supply curves
derived from National Energy Modeling System simulations. For now, EIA
recommends that reviewers carefully note the caveats contained in the
McKinsey report. For instance, McKinsey's analytical approach does not
consider the cost of regulation, implementation, and any related
Federal funds. For example, taking Chairman Bingaman's weatherization
example, the McKinsey study does not specify any of the policy options
that might be necessary to induce homeowners to improve building shell
efficiency, such as price incentives or mandated building standards. On
page xiv of the Executive Summary, under the abatement section that
would include weatherization, they state, ``While this category of
abatement options would cost the least from a societal point of view,
persistent barriers tomarket efficiency will need to be overcome.''
Similar caveats about costs and policy options appear on pages 3 and 32
of the report. Additionally, the savings shown in the McKinsey study
are based on optimal sequencing among demand-side and supply-side
options. EIA believes that the sequence in which carbon-mitigating
measures are implemented will have a bearing on their effectiveness and
costs. For example, if weather stripping and energy-efficient windows
are installed after wind-power generation is added to the grid
supplying electricity to that home, the carbon-saving value of the
weatherization program would be diminished.
The Chairman. That would be great. Let me just ask one more
question. Could you give us a sense of how much of EIA's
forecasted biodiesel consumption is expected to come from
imports?
I know that our domestic biodiesel industry is going
through a difficult period here. What do you project in the
future as far as imports of biodiesel verses domestic
production of biodiesel?
Mr. Caruso. In this particular outlook we don't have any
finished biodiesel imports as part of biodiesel supply. The
reason is because the $1 per gallon tax credit is set to expire
after 2008. The second reason is that the EISA requirement for
one billion gallons of biodiesels per year after 2011 is well
within the domestic biodiesel capacity.
So we think that the domestic biodiesel industry will be
able to provide supply competitively. Therefore we don't expect
finished biodiesel imports. We do expect perhaps some palm oil
imports which would then be used as an input or a feedstock to
create biodiesel. But in this outlook we don't have any
finished biodiesel imports.
The Chairman. All right.
Senator Domenici.
Senator Domenici. Mr. Chairman, I want to say to you that I
thought this was a very important hearing. For the first time
for this Senator, I was exceptionally pleased to find that we
have a credible agency finding that legislation that we spent a
lot of time on--that we were told would have a big impact on
American people in terms of oil imports and CO2
emission--that we did it, part of it after many years of
contrarianism. It is rather refreshing to find that what we did
is really effective.
I think Senators that worked on it with us ought to know
that there are certain things that we can do. They're hard, but
these were very effective. I think there are a few left. Lots
of them left when you get to CO2.
I still think our energy challenges could be devastating. I
want to close my remarks without a question by saying I
believe, as I've said publicly, that the cost of oil is so high
when compared to previous eras when we were so dependent and
oil was $10, $20 a barrel, that I think it is making us poor.
I think we are just literally getting poorer because so
much of our wealth must go for this. We get nothing. You know
there's no quid pro quo from the standpoint of our own growth,
and I think our dependence on foreign oil is causing very
serious consequences.
I think the people don't know what they're feeling, but
they're feeling this along with many other things. This is part
of the real hardship feeling among our people. I think it's
going to get worse.
That's why I think a little good news is important. This is
good news. Maybe if we find a few more, we should try to take a
chance on them. I want to say, one example would be the
offshore drilling that was such a success in bidding. You know,
some of the Floridian waters we released in a bill that we
fought hard for had had a moratorium on them.
I think it's incumbent upon us as energy leaders to see
what else we have in the offshore that we could take a look at.
I think to just leave it out there because people have been
crying moratorium is irresponsible. A moratorium made sense
perhaps with $10 a barrel oil. It may not make sense with 110
from the standpoint of an impact on the American people. Thank
you.
The Chairman. Thank you very much.
Senator Dorgan.
Senator Dorgan. Mr. Chairman, I would say to Senator
Domenici, the same principle I think holds true with respect to
a moratorium or an issue of filling SPRO. What might hold true
at $27 a barrel oil may not hold true at $103 a barrel oil. I
want to come back to the SPRO issue.
That is that when oil is bouncing around $100, $200 and $3
a barrel and you're pulling up to the gas pump and paying a lot
of money for a gallon of gasoline. I understand what you have
said today is that the activities of the Federal Government at
this point to put oil underground is increasing the price of
gas. You say about four or five cents a gallon right?
Mr. Caruso. Yes, sir.
Senator Dorgan. Five cents a gallon?
Mr. Caruso. Yes, sir.
Senator Dorgan. So, I mean, you look at the numbers of
this. Others say it has a higher impact because it's a subset
of oil, sweet, light crude which is pretty valuable subset of
oil. But at any rate, the decision by our government to at
record prices of oil be taking oil out of the supply side and
sticking it underground has the impact of increasing the price
of gasoline.
Mr. Caruso. That's correct, sir.
Senator Dorgan. I have a piece of legislation I've
introduced here in the Congress. I've changed it since I've
introduced it. I'm probably going to offer it to the bill
that's on the floor today that would shut down, have a pause
for at least 1 year if the price of oil is above $75 a barrel.
It seems to me that just as Senator Domenici talked about a
moratorium might be useful in one circumstance, but not
another. I happen to on the Lease 181, just to go back to that
point. I happen to think we ought to go back again and try to
get more of that.
We pared that back. You know the four of us that introduced
the original legislation to be able to get some additional
resources out of the Gulf of Mexico. It was a broader piece of
legislation which I support.
We had to pare it back in order to get it passed, but I
think with the price of oil where it is, we ought to go back
and revisit a portion of that and try to get more. If you look
at where the potential is, the Gulf, off the West Coast or
Alaska, by far the most significant capabilities come from the
Gulf if you just look at the three. So I'd like to see us go
back and get more of what was Lease 181.
But at least at the moment what I'm hoping we'll be
thoughtful as a Congress in how we address these things. The
issue of buildings as being the biggest bang for the buck in
conservation makes a lot of sense to me. So there's a lot of
things we can do.
But there's a lot of things we shouldn't do. We shouldn't
sit around and take a look at the increased speculation in the
futures market and say well, that doesn't matter. We don't
maybe understand it, but it doesn't matter. I think it does
matter with respect to the price of oil.
On this issue of SPRO, my belief is that at $100 a barrel
for oil, we ought not to be taking oil out of supply and
increasing gas prices. That ought not be an affirmative action
by the Federal Government. That's just dumb headed in my
judgment.
So I'm hoping that we can stop that. I'm hoping a group of
us would say this has nothing to do with the oil companies. It
has to do with the public policy by the Federal Government.
Now you've said earlier, Mr. Caruso, that you don't make
policy and you don't recommend policy. You come and give us the
numbers and I appreciate that. I did want to say that I think
your report does describe a couple of things that are
important.
I and some others on this panel felt that we should move on
CAFE. So we moved on CAFE standards. Your analysis is that's
going to have a significant impact going forward. We opened up
some additional production. That has an impact.
There's a series of things we've done with respect to
renewable fuels. Tell us again the significant portions of
policy from the legislation that we have completed here in the
Senate that you think give us the best opportunity in the
longer term to be less dependent on foreign oil.
Mr. Caruso. The three are the CAFE standards, and any
others that would improve vehicle efficiency, efficiency
standards for appliances and other equipment, and the renewable
fules standard that has already been passed in EISA. But as
Senator Bingaman indicated in this cost abatement curve there
are probably areas where more could be done.
Senator Dorgan. Lighting standards are important?
Mr. Caruso. Yes, sir.
Senator Dorgan. You know, we did, I believe SEER 13
standards for air conditioning. I mean those things sound like
a foreign language to people. But the fact is these required
efficiencies that we've been pushing on and been successful in
have made a big difference. Haven't they?
Mr. Caruso. They definitely have. I think the results are
clear with both the RFS and CAFE with 2.4 million barrels a day
less oil demand in this outlook than there was a year ago. The
cumulative reduction in carbon dioxide emissions which I
mentioned--you can attribute over five billion tons to the
energy bill that you've passed.
Senator Dorgan. Mr. Caruso, if you were running things, you
wouldn't be putting oil underground at this moment, would you?
Mr. Caruso. I have to defer that to my bosses at this
point.
Senator Dorgan. All right. Mr. Caruso, thank you.
The Chairman. Senator Sessions.
Senator Sessions. Thank you, Mr. Chairman. Mr. Caruso, I
likewise have been intrigued but I likewise have a concern
about storing this amount of oil at the current high prices.
Let me ask you about domestic production.
It seems to me we that have more interest in this country
than just CO2 reduction. Would you agree that
national security is an important issue for us?
Mr. Caruso. Definitely, sir.
Senator Sessions. That cost for the consumer is an
important issue?
Mr. Caruso. Yes, sir.
Senator Sessions. It seems to me that the producing of oil
and gas in this vast land of Alaska, ANWR or off our shores
meets those standards. It helps us be more energy independent.
It wouldn't be produced if the producers didn't think that they
could make a profit by producing it cheaper than we could buy
on a world market.
What about the national interest in maintaining more of our
wealth? If we don't produce oil and gas in our Nation, that
does not mean we won't utilize oil and natural gas. We're going
to see more natural gas imported. We're going to continue to
see a rise in imports of our oil.
For those who are trying to stop the utilization of oil, I
don't see how they're making any progress overall other than
denying us the right to produce what we have here.
Would you agree that there are a lot of economic and other
reasons for producing oil and gas at home rather than sending
our money to Venezuela and other places that seem to be hostile
to our interest?
Mr. Caruso. Yes. That's what our analysis indicates to the
extent that new regulations and law would support that--it
would reduce oil imports and reduce our trade deficit as well.
Senator Sessions. It would create jobs in the United States
instead of jobs in Saudi Arabia or Iran or Venezuela, the
countries that are producing so much of the world's oil and
gas.
Mr. Caruso. Yes, sir.
Senator Sessions. It creates revenue whenever there's a
production of oil and gas either to the Federal Government and
now to some degree in the Gulf of Mexico. The States are able
to receive some of those royalties from the sale of the oil and
gas instead of having those royalties go to a foreign country
when we consume it. We're helping those States with their
financial condition as well as the jobs created in those
States. Wouldn't you agree?
Mr. Caruso. Yes, I agree with you. We need a significant
amount of investment to meet the projected demands I mentioned
to Senator Murkowski--earlier that the decline rate in the
older fields alone requires significant new investments just to
maintain our production levels even at the level that they're
at now.
Senator Sessions. I just couldn't agree more. I just don't
agree with that we have an emotional feeling that if we produce
oil and gas off our shores and in Alaska and in throughout the
United States that we're not producing today that's somehow
this makes us more dependent on oil and gas than we would be
otherwise. Really I don't think that's true.
I think it helps our economy. It helps our Nation. It helps
create jobs.
To me one of the things that seems to be a possibility, a
real possibility, of a practical breakthrough solution of large
proportions would be the continual improvement of the hybrid
and a plug-in hybrid or fully electric automobile improved
batteries. Would you agree that we're making some progress
toward that? In your projections what kind of projections do
you make?
Mr. Caruso. We do have a significant increase in the
alternatively fueled vehicles in this outlook, including
hybrids. We do not have much if at all of the plug-in version
of the hybrids as of now mainly because battery technology
still is not sufficient to, we think to----
Senator Sessions. This day it's not. But there was an
article in, a big article, in Barron's recently about oil and
the problems with oil and the individual who promotes clean
fuels at Toyota, that's his job within the corporation.
If you read the article carefully, it concludes that the
future lies with plug-in hybrids. He indicated nuclear energy.
So the combination of clean nuclear energy that could charge
the batteries of our automobiles and could drive throughout the
day would be a huge breakthrough if that could be made a
reality, would it not?
Mr. Caruso. It definitely would be a huge potential if that
battery technology can be developed at a reasonable cost. So
many of our miles are driven fairly close to home, so plug-in
hybrids have great potential, but based on our current
assessment the battery technology isn't there yet.
Senator Sessions. If we continue to work it you would have
the potential of reducing CO2. You would have the
potential of reducing our dependence on foreign oil. Maybe,
break the tide of tight supplies a little bit and take us in
the right direction.
So it would help us meet our CO2 goals as well
as our economic goals. Thank you, Mr. Chairman.
The Chairman. Senator Salazar.
Senator Salazar. Thank you very much, Senator Bingaman for
this hearing. Director Caruso, I guess first I have some
questions concerning your charts. If I look at figure 2 where
you have world oil prices are higher in 2008. You have your
projections out into the future.
If I'm reading that chart correctly, now in 2008, what you
have us there is about $85 or so a barrel. Then moving on down
to 2015, it seems that we're around $58 or so a barrel. How
confident are you? What's the basis for you making that kind of
prediction that we're going to go down from $100, I guess it's
$103 today or something like that, down to $58 a barrel in
2015.
Mr. Caruso. This is our reference case. We use that as our,
you know, base case. So it's our view that the longer-term
impact of the current high oil prices and high prices we've
experienced for several years will lead to two things.
One, more exploration and development and investment in the
upstream that will bring on both conventional and
unconventional----
Senator Salazar. Let me ask you this question. I mean, from
my point of view, you know, and from many people I talk to,
we're looking at, I think at $100 a barrel oil today. We see
China coming into the market and competing for finite resource.
We see India and others, rest of the world coming on board.
I'm not confident in these projections in any way, shape or
form. I mean, it seems to me if we're at 100 dollar a barrel
oil today that we may very well be there in 2010 and 2012 and
2015. Now your conclusion, as the expert that's informing us is
that that's not the case. That by the year 2015 you think we'll
be down to $58 a barrel. Are you confident in that conclusion?
Mr. Caruso. No, I think the way I'd rather characterize it
is that that's one scenario. But we also recognize that we've
been wrong and been too low in our price projections in the
last several years. That's why we also do a high price scenario
which is in the same chart, where prices essentially don't
retreat. They just keep going up--in fact, reach in nominal
terms $185 by 2030.
So our view is we need to do this on a risk basis. We think
there's a significant risk that the reference case could be
wrong, and therefore we should look at the high price case.
Senator Salazar. Just a factual question for you on that
same chart why is it that you would have the high water mark
there for 2008 at approximately $80 to $83 a barrel when in
fact we've gone up to $100.
Mr. Caruso. That's the annual average, so it averages the
whole----
Senator Salazar. So if we look at the 2008 average that's
what you will predict it will be is around $80.
Mr. Caruso. That's our current assessment, $85.
Senator Salazar. Let me ask you, moving onto figure 4 on
the liquid fuel consumption, following up on my colleague Jeff
Session's comments there. I see us at, you know, approximately
15 million barrels per day in 2010 for the transportation
sector and that trajectory continues to move upward into 2020
and 2030. If we were able to move forward with some of the
policies that have been advocated by Senator Sessions, Senator
Bingaman, myself, with respect to advance vehicle technologies
and plug-in hybrids, could that projection come down?
Mr. Caruso. Yes, sir. Definitely. It's come down as I
mentioned earlier by about 2.4 million barrels a day just from
what you did in EISA 2007.
Senator Salazar. That was based on the increase in CAFE
standards.
Mr. Caruso. CAFE standards, yes, sir.
Senator Salazar. Ok.
Mr. Caruso. We do have a significant increase in
alternatively fueled vehicles as part of the fleet mix, but as
I mentioned to Senator Sessions, it doesn't include hardly any
plug-in hybrids. So a breakthrough in that area would change
that number and to the extent it changes it would really depend
on how significant the cost reductions would be in battery
technology.
Senator Salazar. So just a comment to my friend, Jeff
Sessions from Alabama, you know I always talked about the set
America free agenda as a way in which we could unify the
country especially because of the foreign policy and
implications here. I think that when we talked about these
advanced vehicle technologies and moving forward with hybrid
plug-ins and the like, I think it's an absolute agenda that's
an imperative for us. I hope we're able to do a lot more with
that.
Let me move to on figure number 7, you have set forth the
projections with respect to renewable fuels. We were very
active in pulling the RFS together out of this committee. Are
those projections that you have there for 2020 and 2030 around
the different items that are part of this RFS portfolio from
your point of view achievable?
Mr. Caruso. Yes, sir. The projections we have are
achievable. We do show a relatively small shortfall compared
with the EISA values.
As I mentioned, instead of 36 billion gallons in 2030 we
are in this outlook assuming or projecting 32.5 billion and the
main reason for that shortfall is the assumption on the ability
of the cellulosic portion of that EISA requirement to be met.
There are provisions that if along the way any component does
not meet the EISA requirements, the EPA Administrator has an
option to adjust that. Therefore, we have a small adjustment
around 2016 and then again in 2022.
Senator Salazar. Mr. Chairman, may I ask one more quick
question?
The Chairman. Sure.
Senator Salazar. The amount they have for cellulose based
ethanol. I look at 2020 and that looks, your projecting about
2.5 billion gallons. My understanding from those who are
involved at the National Renewable Energy Lab in Golden,
Colorado as well as the company that is putting forward a
demonstration project in Georgia, they believe they're about a
year away or so from being able to move forward with the
commercial deployment of cellulosic ethanol.
If they are correct that we are within a year or two from
being able to commercially deploy cellulosic ethanol would
these numbers change looking out at 2020 and 2030 with respect
to the green portion of the graph where you have those
allocations for cellulosic ethanol?
Mr. Caruso. I don't have the details of what the Georgia
company and the NREL have said, but we do think that if there
are significant breakthroughs in technology, these numbers
would change, definitely. They're based on our best current
judgment having talked to the NREL people as to where they are
right now and where they might be by 2014 and 2015 when they
have to meet these certain targets.
As of now this is our best judgment. But I definitely agree
that there's a great deal of uncertainty in this, and that if
some of these technological breakthroughs occur these numbers
would change upward.
Senator Salazar. Thank you very much, Administrator Caruso.
The Chairman. Thank you.
Senator Murkowski.
Senator Murkowski. Thank you. Mr. Caruso, on the
alternative energies and the renewables, you are predicting
some good increases and you just spoke to that to Senator
Salazar. But in terms of the market share that we see coming
from the renewable energy sector.
If I understand your presentation here, you only anticipate
it to grow by a few percentage points over the next couple
decades. Why is it that we don't see a more pronounced growth
then? You mentioned to somebody and it might have been to
Senator Dorgan that your analysis does not include a
continuation of the production tax credits that we have. Is
that part of the reason?
Mr. Caruso. It's definitely part of the reason, yes. The
assumption that the renewable, I mean the production tax credit
for renewables is allowed to expire at the end of 2008 makes a
huge difference in the----
Senator Murkowski. What would it look like? Did you do the
analysis?
Mr. Caruso. We have done it; I think Senator Bingaman has
asked us to do that. I would hesitate to want to give you a
number off the top of my head, but I remember it being a
significant change. I would be happy to provide that for the
record.
[The information referred to follows:]
In its Annual Energy Outlook 2008 (AEO2008) reference case, EIA
assumes, consistent with laws in effect as of January 1, 2008, that the
production tax credit (PTC) for new wind and other renewable generation
will expire at the end of 2008. The Congressional Joint Committee on
Taxation (JCT) requested that EIA model a scenario assuming a 10-year
extension of the PTC based on the current structure of the law. By
2018, the assumed PTC expiration date in the JCT analysis, wind
capacity with the extension is projected to grow to almost 72
gigawatts, compared to a 2018 capacity of approximately 31 gigawatts in
the AEO2008 reference case. Through 2030, wind capacity with a 10-year
PTC extension is projected at almost 74 gigawatts, suggesting little
additional growth after the 2018 assumed expiration, but still
significantly higher than the 40 gigawatts projected in the AEO2008
reference case by 2030. A 10-year extension of the PTC is also
projected to spur additional development in geothermal, landfill gas,
and open-loop biomass generation, although the impact on the additional
capacity of these resources is substantially less on an absolute basis
than for wind, with less than 3 gigawatts of additional combined
capacity for those resources by 2018 when compared to the AEO2008
reference case.
Senator Murkowski. I think that would be helpful to know
what that actually looks like----
Mr. Caruso. By----
Senator Murkowski [continuing]. Because a lot think that
continuation of those protection tax credits is going to be
very, very important. It sounds like you would agree in terms
of what's going on.
Mr. Caruso. It would be very important nationally as well
as for a lot of States that have their own RPS programs. I can
also say that even with these relatively conservative
assumptions on the production tax credit, the renewables
component is the fastest-growing segment of the energy mix in
this outlook. That's the first time I think I've been able to
say that in 6 years of presenting these outlooks.
Senator Murkowski. As I go back home, I don't care what
part of the State I am in, I am inundated with questions about
what are you guys going to do back here about the high price of
fuel? In some of my smaller and more remote communities, I was
out in a community just last week. They're paying seven bucks a
gallon for their gasoline. Home heating fuel is absolutely
through the roof.
If we were to do one thing short term that would reduce the
price of fuel, what would that be?
Mr. Caruso. The problem is that, as you know too well----
Senator Murkowski. Here's the silver bullet.
Mr. Caruso [continuing]. It's a long-term issue and that
involves requiring investment whether you're on the supply side
or on the demand side in terms of efficiency. So in the short
run it's really up to the consumer. They have to respond to the
prices, as you indicated. Sometimes it's not possible because
there is very little you can do in the short run.
Senator Murkowski. You don't have any choice. Yes.
Mr. Caruso. Yes.
Senator Murkowski. So what you're saying is that in reality
I can't tell my constituents that there is any one thing that
we can do short term, short of----
Mr. Caruso. Behavioral.
Senator Murkowski. Consuming less. But when it's 50 below,
it's kind of tough to tell people well, don't fill up your home
heating fuel tank, so.
Mr. Caruso. But the one thing you can say is that whatever
we do, we should start now with even long-term solutions. I
think what this outlook revision shows is that the EISA bill of
2007 was the beginning of many of these policy changes.
Senator Murkowski. We're making some headway. But to the
individual it looks pretty glum right now. So, thank you.
Mr. Caruso. Thank you, Senator.
Senator Salazar [presiding]. Senator Sessions.
Senator Sessions. Administrator Caruso, let me ask you a
little bit about a sore spot that I'm hearing. I'm not able to
give an answer to and that is why diesel fuel consistently is
substantially more expensive than gasoline. Historically, I was
under the impression that diesel fuel was a less expensive
product. How is this occurred?
Mr. Caruso. I think that's directly related to the refinery
tightness we have in this country, the lack of investments that
have been made in the refinery--sector that is, the secondary
conversion of the crude oil after it leaves the primary
distillation has been----
Senator Sessions. Explain that a little more.
Mr. Caruso. When crude oil goes into a refinery it goes
through the first process which is primary distillation. It
gets separated into broad categories of different products. But
then it has to be further refined to make more specific
products such as gasoline or diesel.
Senator Sessions. It takes more refining and costs more to
produce the gasoline.
Mr. Caruso. Yes, and not enough investment has been made to
increase the amount of the middle distillate part of the barrel
which is where the diesel comes from. That's led to the
tightest of supply.
Senator Sessions. If you were in the business of marketing
diesel fuel why wouldn't you want there to be a shortage of
refineries so that the price would spike up and you could do
well.
Mr. Caruso. The main reason I would want to make the
investments is that I could gain market share from my
competitor and would have a greater----
Senator Sessions. But it's not happening very effectively.
Would you agree? I mean something, it seems to be an aberration
in the marketplace to me.
This complaint about we can't find a place to build a
refinery, I don't think is accurate. I believe there are areas
in my State that would welcome a refinery if they were
confident that it was well managed. We have refineries already
in our State.
So I'm just a little bit unhappy about this. I hear it from
truckers. I hear it from consumers. You buy a car that's diesel
that gets better gas mileage and all of a sudden you're paying
40 cents more a gallon.
Why don't we have more diesel refineries?
Mr. Caruso. I think we will, but right now there's also a
global tightness. Europeans have moved very heavily into
diesel-powered vehicles. Therefore there really isn't enough
diesel availability.
Normally, when you have a market aberration as you
indicated, one solution is you could import that product from
abroad and that's what happens a lot with gasoline, but right
now there's very little excess diesel-making capability
available in refineries abroad such as in Europe or Singapore.
Senator Sessions. Are they buying our diesel fuel? Are we
shipping diesel to Europe?
Mr. Caruso. Not that I'm aware of. If it is, it's quite
small.
Senator Sessions. It seems to me then in our process what
happens in Europe is not so important.
Mr. Caruso. The reason it's important is that if our prices
got high enough to attract imports that would put downward
pressure on the price. That hasn't been happening, especially
in the winter time when that same middle distillate part of the
refinery output also supplies our home heating oil.
Senator Sessions. Let me cut to the core of the question.
Most of us try to understand that the free market works and
prices tend to work in. But with regard to diesel I'm baffled
why we're not seeing an adjustment. I am not such a pure free
market person as to believe they aren't aberrations and
dysfunctions that can occur within the system that would
artificially allow these prices to remain higher.
Do you see anything that we could do to encourage more
refining capacity or otherwise to bring diesel fuel to a more
natural price level?
Mr. Caruso. I think anything to facilitate investment. As
you pointed out, you think there are siting issues----
Senator Sessions. But you know you got to subsidize diesel
fuel when it's at this rate?
Mr. Caruso [continuing]. That would be subsidized----
Senator Sessions. There's something else in regulating or
so political things that are frustrating the production of
diesel fuel that leaves me concerned.
Mr. Caruso. I wouldn't recommend subsidies. I'm just saying
that right now there does appear to be an insufficient
investment in diesel-making capability and, to the extent that
there are any regulations or laws that are impeding that, I
would look there, but right now you've got peak heating oil
demand for that same part of the barrel.
Senator Sessions. From a global warming perspective the
Europeans have concluded and I'll ask you if you disagree that
diesel gets better mileage and has less CO2
emissions.
Mr. Caruso. Absolutely. The more than 50 percent of new car
sales in Europe are diesel as of----
Senator Sessions. We're less than 10?
Mr. Caruso. Way less than 10, we're probably less than 2.
Senator Sessions. So, one reason I think price is a factor.
Thank you. My time is up, Mr. Chairman.
Senator Salazar. Thank you very much, Senator Sessions.
Unless you have any additional questions we will conclude the
hearing. The hearing is adjourned. Thank you very much,
Administrator Caruso.
Mr. Caruso. Thank you, Senator Salazar.
[Whereupon, at 11:46 a.m. the hearing was adjourned.]
APPENDIX
Responses to Additional Questions
----------
Department of Energy,
Congressional and Intergovernmental Affairs,
Washington, DC, May 2, 2008.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Mr. Chairman: On March 4, 2008, Guy Caruso, Administrator,
Energy Information Administration, testified regarding EIA's revised
Annual Energy Outlook.
Enclosed are the answers to 11 questions that were submitted by
Senators Domenici and Dorgan for the hearing record.
If we can be of further assistance, please have your staff contact
our Congressional Hearing Coordinator, Lillian Owen, at (202) 586-2031.
Sincerely,
Lisa E. Epifani,
Assistant Secretary.
[Enclosures.]
Responses to Questions From Senator Domenici
Question 1. You noted in your testimony that previous ElA forecasts
assumed that the Federal Production Tax Credit for renewable
electricity would expire, thereby rendering renewable electricity
expensive enough to trigger the so-called ``escape clauses'' included
in many State RPS programs. However, in its 2008 assessment of
increased renewable electricity demand, EIA ``assumes that the State
RPS goals will be met'' even though the PTC is set to expire at the end
of this year.
Given that the federal PTC is set to expire at the end of 2008 and
numerous attempts to extend the energy tax credits have failed, why has
EIA assumed that State RPS targets will be realized? Why, wouldn't the
expiration of the PTC trigger the State RPS ``escape clauses'' as EIA
has predicted in previous forecasts?
Answer. This year's Annual Energy Outlook reference case continues
to assume, for modeling purposes, that the production tax credit for
renewable electricity expires as currently called for in the law.
However, we are now assuming that the States with renewable portfolio
standards will continue to try and stimulate renewables, even if the
tax credit is not extended. Extending the federal tax credit would
certainly make it less expensive for these States to do so, and make
renewables more attractive in all States, but we have not assumed that
this occurs in the reference case. It is certainly possible that the
expiration of the production tax credit might lead some utilities in
States with renewable portfolio standards to use alternative compliance
mechanisms, rather than building new renewable facilities, but we
believe that most would try to find ways to stimulate the required
renewables.
Question 2. If the PTC is extended by the end of this year, how
does that change EIA's renewable electricity forecast?
Answer. The impact would depend on the length of the PTC extension.
If the extension were only for a year to two, there might be a near-
term increase in renewable generation but the longer-term trend would
continue to be driven by the renewable portfolio standards that exist
in many States. A longer-term extension of the PTC could lead to
significantly larger growth in renewable generation than we currently
project in the EIA reference case.
Question 3. You testified that total renewable generation in the
reference case grows by 2.2% per year through 2030. How much growth can
be attributed to combined heat and power use? How much can be
attributed to end-use generation?
Answer. In absolute terms, most of the increase in renewable
ueneration between 2006 and 2030 occurs in the power sector as a result
of investment in new wind facilities. However, end-use renewable
generation does grow at a faster rate, 4.6 percent per year. Most of
the increase in end-use renewable generation is projected to come from
increased biomass use in biomass-to-liquids plants that also produce
electricity for sale, followed by a much smaller increase in
photovoltaic generation stimulated by programs to encourage the use of
roof-top solar systems.
Question 4. You testified that the slowing rate of electricity
growth reduces the need for new generating capacity. Has EIA examined
the role of Demand Response in contributing to this reduction?
Answer. It is very difficult to separate out all of the forces
contributing to slowing electricity demand growth. Across the country,
regional wholesale electricity organizations, State public utility
commissions, and the utilities that they regulate are trying to
increase their investments in demand side management programs. Reports
on these programs are generally available on each region's web site.
For example, information on New England's demand response programs is
available at http://www.iso-ne.com/genrtion_resrcs/dr/index.html, and
information on New York's is available at http://www.nyiso.com/public/
products/demand_response/index.jsp. Although the demand for electricity
continues to grow, the rate of growth has been slowing for more than 50
years. In the 1950s, the use of electricity increased 9.0 percent per
year. However, in every decade since then growth has slowed, falling to
7.3 percent per year in the 1960s, 4.2 percent per year in the 1970s,
3.1 percent per year in the 1980s, 2.4 percent per year in the 1990s,
and only 1.2 percent per year between 2000 and 2005. It is likely that
a portion of the slowing growth is due to utilities' investments in
demand-side management. EIA's projections continue to reflect this
trend, with the projected growth in electricity demand slowing further
to 1.1 percent per year between 2006 and 2030.
Question 5. According to the EIA forecast, the most rapid growth in
total electricity consumption occurs in the commercial sector. In its
assessment, has EIA included the anticipated energy savings from the
2007 Energy Independence and Security Act--including establishing a
Director of Commercial High-Performance Green Buildings and a Zero Net
Energy Commercial Building Initiative--on the electrical consumption of
commercial buildings?
Answer. The specific EISA2007 provisions that are modeled in
AEO2008 include the renewable fuel standard (RFS), new corporate
average fuel economy (CAFE) standard for new light-duty vehicles, new
appliance and lighting energy efficiency standards, provisions to
reduce energy consumption in Federal buildings, and new industrial
electric motor efficiency standards. Any anticipated energy savings
from the Federal buildings provisions and efficiency standards
affecting the commercial sector are included in the EIA projections.
Activities under the Zero Net Energy Commercial Building Initiative are
not included because they depend on future appropriations, which are
uncertain. The coordination, negotiation, and promotion efforts of the
Director of Commercial High-Performance Green Buildings are not
included because these activities are beyond the level of detail
modeled in AEO2008.
Question 6. Has EIA assessed the anticipated energy savings from
the efficiency portions of the 2007 Energy Independence and Security
Act (i.e., the appliance standards; lighting standards, including the
phase-out of incandescent light bulbs; federal building targets; and
commercial buildings)?
Answer. As noted in the answer to the previous question, the
specific EISA2007 provisions that are modeled in AEO2008 include the
renewable fuel standard (RFS), new corporate averne fuel economy (CAFE)
standard for new light-duly vehicles, new appliance and lighting energy
efficiency standards, provisions to reduce energy consumption in
Federal buildings, and new industrial electric motor efficiency
standards. EIA is currently developing separate impact assessments for
major EISA2007 components, however, results for these analyses are not
yet available.
Question 7. Your analysis asserts that in the absence of policy
changes, carbon capture and sequestration will not be deployed by 2030.
Increased oil production in the 2008 Outlook is, in part, attributed to
enhanced oil recovery using carbon dioxide, however. How significant is
the contribution of this enhanced oil recovery to domestic production,
and the CO2 comes from a man-made source, would EIA credit
those operations with reducing the amount of CO2 emitted in
the coming years?
Answer. In the reference case of the AEO2008, domestic oil
production from CO2-enhanced oil recovery is projected to
more than triple, increasing from 350,000 barrels per day (or 6.8
percent of total domestic production) in 2006 to 1.3 million barrels
per day (or 23.4 percent of total U.S. production) in 2030. However,
the projected use of CO2 from industrial sources is not
driven by emission requirements but, rather, is strictly an economic
decision to increase oil production. If a greenhouse gas reduction
policy were enacted, rules and procedures for measuring, monitoring and
crediting CO2 sequestered in oil fields would have to be
established. Once such rules were established, EIA would be able to
estimate how much of the CO2 sequestered in oil fields would
be credited against industrial emissions.
Question 8. Your testimony contends that the recently-passed
biofuels mandate will not be fully met and will require waivers and
other reductions. Has EIA looked at how much more significant our
biofuels shortfall will be if the tariff is, in fact, renewed and
imports are not available to make up the difference?
Answer. EIA has not examined the impact of extending the tariff
past 2009. If the tariff was extended, imported fuels would be more
expensive relative to domestically produced fuels and the level of
imports after 2009 would he lower than in the AEO2008 reference case.
Imports would not be likely to disappear completely, as the AEO2008
reference case projects imports of 800,000 gallons in 2008 compared to
460,000 gallons in 2007, with the tariff in place. Imported biofuels
are projected to contribute 3.4 billion gallons towards the Advanced
Fuels requirement in 2022, so to what degree this amount would decrease
is unclear. It is also possible that cellulosic ethanol or other
bioluel technologies would become more profitable relative to imports
and thus lead to more domestically produced bioluels.
Responses to Questions From Senator Dorgan
Question 1. The Energy Information Administration's budget request
for FY 09 is $110.6 million. The Senate had provided your full request
for FY 08 at $105 million but had to cut it back to $95.5 million to
get to the President's demand that we cut $22 billion across the board
for domestic programs. Can you explain your priority areas for your
increase in your Fiscal Year 2009 budget request?
Answer. The FY 2009 budget request increase supports five critical
activities that were deferred due to EIA's FY 2008 $95.5 million
program. Specifically, the $12.2 million increase in support services
for FY 2009 would allow EIA to: address critical and growing petroleum
survey data quality deficiencies, in order to reflect changes in the
industry and assure statistical validity, accuracy, and reliability
(+$3.7M); implement monthly ethanol and biodiesel surveys, as yell as a
weekly ethanol survey, mandated by the Energy Policy Act of 2005
(+$3.4M); resume replacing the aging National Energy Model, which is
critical to improving our ability to assess and project supply, demand
and technology trends impacting U.S and world energy markets (+$3.3M);
enhance the availability and timeliness of international oil, gas, and
coal markets data and analyses (+$1.1M); and provide for mandatory
Information Technology infrastructure upgrades and strengthen cyber-
security to protect market-sensitive data (+$0.8M).
Question 2. Your projections indicate that the U.S. will not
achieve the Renewable Fuels Standard targets that were recently
increased to 36 billion gallons by 2022 in the enemy bill signed by the
President in December. You assume we will produce about 8.6 billion
gallons of cellulosic ethanol by 2022. Let me remind you that since we
enacted the first renewable fuels standard of 7.5 billion gallons by
2012 in EPACT 2005, we are now on pace to exceed that goal in next year
in 2009. So if we can produce nearly 8 billion gallons of corn ethanol
in 4 years, what basis do you have to assume that we will only produce
8.6 billion gallons of cellulosic ethanol by 2022?
Answer. The recent expansion of corn ethanol capacity and
production was driven by favorable corn prices, high crude oil prices,
and the phase-out of methyl tertiary butyl ether (MTBE) as a gasoline
additive. The renewable fuels standard in the Energy Policy Act of 2005
may have reduced the risk of investment in corn ethanol capacity, but
it has not been the primary driver of the corn ethanol expansion over
the last two years as evidenced by the fact that ethanol use has
exceeded the EPACT 2005 requirement.
The production of ethanol from corn is a known technology. When
ethanol demand increased, reflecting both the elimination of MTBE and
the rapid increase in oil prices that increased the attractiveness of
ethanol as a volume enhance in conventional gasoline, investors
responded by adding capacity very quickly, which is still occurring.
Cellulosic ethanol is not currently cost-competitive with corn
ethanol. Significant technological advancements will be necessary
before cellulosic biofuel production will begin to penetrate motor fuel
markets. Another challenge arises from the saturation of the market for
EIO blends by existing and planned corn ethanol capacity. As more
ethanol is added to the market it must compete based on energy content
rather than volume. The Energy Department's first round of funding for
development of cellulosic biofuels technology is expected to result in
6 plants being built with a combined capacity of 140 million gallons of
cellulosic ethanol per year by 2011. A second round of funding is
expected to result in 3 more cellulosic ethanol plants with combined
capacity of about 6 million gallons per year by 2012.
Question 3. In your assumptions, you also indicate that the
existing 54 cent tariff on imported ethanol will not be renewed in
2009, leading to a significant increase of imported ethanol. What basis
do you have to make that assumption?
Answer. For modeling purposes, the Annual Energy Outlook 2008
reference case is based on the laws and regulations that were in effect
at the time the projections were formulated. Currently, the ethanol
import tariff is scheduled to expire in December 2008. In past editions
of the Annual Energy Outlook, the ethanol blending tax credit was
extended indefinitely past its scheduled expiration. Since the stated
purpose of the import tariff is to offset the blending tax credit for
foreign ethanol, the import tariff received the same treatment as the
blending tax credit. For the AEO2008 reference case, the assumption
regarding the ethanol blending tax credit was changed to make it
consistent with all of the other policies represented, i.e., based on
laws and regulations in place as of early this year. Without the
blending tax credit, the stated purpose of the import tariff is voided
and, therefore, the ethanol import tariff was also assumed to expire as
scheduled.