[Senate Hearing 110-602]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-602

                         WORKSHOP ON OIL PRICES

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

                                WORKSHOP

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                                   ON

WHY OIL AND TRANSPORTATION FUEL PRICES AND THIS WINTER'S EXPECTED HOME 
 HEATING FUEL PRICES WILL BE SO HIGH, AND WHAT CAN BE DONE TO ADDRESS 
                            THESE SITUATIONS

                               __________

                             JULY 17, 2008


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               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

                              ----------                              

                               STATEMENTS

                                                                   Page

Bingaman, Hon. Jeff, U.S. Senator From New Mexico................     1
Diwan, Roger, Partner and Head of Financial Advisory, PFC Energy.     7
Domenici, Hon. Pete V., U.S. Senator From New Mexico.............     2
Reid, Hon. Harry, U.S. Senator From Nevada.......................    10
Yergin, Daniel, Chairman, Cambridge Energy Research Associates...     3























 
                         WORKSHOP ON OIL PRICES

                              ----------                              


                        THURSDAY, JULY 17, 2008

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:05 a.m., in 
room SDG-50, Dirksen Senate Office Building, Hon. Jeff 
Bingaman, chairman, presiding.

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

    The Chairman. Why don't we get started? Let me welcome 
everybody.
    This is being held in the nature of an oil price workshop 
to talk about two issues, the way I see it: first, the high 
price of oil and the resulting high price of gas at the pump, 
which people are faced with today; and second, the high price 
for heating fuel which we are seeing and which we are expected 
to see more of as we get closer to the winter, particularly 
natural gas, propane, home heating oil.
    I think we are all aware. All of us hear from our 
constituents about the enormous burden that this is on families 
throughout the country, these increased prices and the dramatic 
increase in prices that they have faced in recent months, that 
we have all faced. Also, the burden that this is putting on our 
economy is obvious, and I am sure we will hear some about that.
    The question that we are going to try to grapple with here 
for the next few hours is what are our realistic options for 
dealing with these very real problems. My own view is that we 
have had a lot of political statements. We have not done enough 
perhaps to actually debate the real issues and what concrete 
actions could be taken that would have an impact that was 
positive for the American people.
    Three areas that we have all, I think, begun to focus on. 
One relates to the functioning of markets, the whole issue of 
speculation, the extent to which that is a factor in 
explaining, causing the high prices. Second, what could be done 
to further reduce demand. Are there steps that we could take as 
a policy matter in that regard? Third, what could be done to 
increase supply. I think those are three large areas that I 
continue to hear about, and I am sure some of you may want to 
add to that list.
    My sense is that the way forward will involve actions that 
the President and the Administration can take. Let me just 
mention and congratulate the BLM on the action they announced 
yesterday to have a large oil and gas lease sale in the 
northeast portion of the National Petroleum Reserve, Alaska. I 
think that is positive, and I compliment them on that 
announcement. So there are actions the Administration can take.
    There are actions that Congress can take, and of course, 
that is the purpose of today's workshop, is to explore those 
actions. One of those, of course, is the bill that Senator Reid 
is bringing to the Senate floor today and will be the subject 
of a lot of debate on the Senate floor, I am sure. Perhaps our 
colleagues or our witnesses will have some comments on the 
value of us trying to address this issue of speculation.
    Then the third area is actions that the American people can 
take to help with this problem. Of course, most of that falls 
in the area of reducing demand. I think there has, obviously, 
been a substantial reduction in demand that has already been 
reflected in statistics, but there may be a additional steps 
that can be taken there.
    So those are the subjects that I thought it would be useful 
to address.
    Let me just say something about the procedure and then 
defer to Senator Domenici.
    I think the way we were planning to do this, we have two 
excellent witnesses here, Dr. Yergin and Mr. Diwan, who are 
here to speak as experts. We are asking them to each take about 
10 minutes, give us their ideas as to the causes of the current 
high prices, and their recommendations for actions we ought to 
take.
    After they speak, I was hoping to ask a few questions. 
Senator Domenici may have questions as well, and then we open 
it up to everybody here just on a first come/first serve basis. 
Whoever has a question or a point of view or something they 
want to say, we are glad to hear it.
    So let me defer to Senator Domenici at this time.

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

    Senator Domenici. Senator Bingaman, first of all, you and I 
get to hear each often and we get to talk a lot. I hope we will 
hear from some others and I hope that perhaps we will hear less 
from you and I, not that we do not have a lot to offer, but we 
do get to talk about this subject frequently.
    I thank the two expert witnesses for coming.
    A little later on in the program, I will submit just a few 
quotes from experts of their caliber who have clearly said that 
the problem we have got with price is supply and demand. Yet, 
it seems like there are those who continue to think that we are 
going to fix this problem some way by a bill that the majority 
leader has in mind that has to do with speculation. I am 
perfectly willing, as one Senator--and I say that to Senator 
Bingaman right now--to consider legislation regarding the issue 
that I have just described.
    But I frankly believe that there is no question that we 
have a rare opportunity to share with the world some increased 
production potential of a pretty large dimension as a result of 
the offshore potential of the United States. With only about 15 
percent of that offshore having been put up for lease, with 
almost 85 percent--not all of it is great oil production 
property, but 85 percent not used, it seems to me we ought to 
be in a bipartisan mode sitting at a table and hand in hand 
trying to figure out how we get to a point where we can start 
to maximize the use of that great asset which we have before us 
which we have not used for 27 years. I mean, it is something to 
lock up an asset for 27 years and find out, all of a sudden, 
that the American people have found it along with us, and that 
we have got to do something about it.
    I hope we hear today about that, and I hope Senators 
express themselves on that subject.
    I for one introduced a bill 3 and a half months ago. I 
think many of you know about it. I believe if that bill would 
have been adopted or would be adopted now, that it would make a 
dramatic change in the way supply and demand came out in terms 
of the United States versus the assets that we own in the 
offshore that belong to our people.
    With that, I would like to put my statement in the record 
and say that I hope to learn from these experts whom I have 
read about and whom I think have stood pretty stalwart for the 
proposition that supply and demand is the problem that is 
affecting the price of oil and ultimately the price to 
consumers more than any other single thing. I thank them for 
all they have contributed, and I hope to hear more from them 
today.
    Thank you, Senator Bingaman.
    The Chairman. Thank you.
    Our witnesses are Dan Yergin who is the chairman of the 
Cambridge Energy Research Associates who is a frequent 
testifier before our committee and many congressional 
committees. We, obviously, welcome him back. Roger Diwan, who 
is a partner and head of Financial Advisory, PFC Energy. We 
very much appreciate you being here as well.
    So why don't you go ahead and go in that order, unless you 
have a reason to go in a different order, and give us your 
thoughts. After we hear from both of you, we will begin some 
questions.

STATEMENT OF DANIEL YERGIN, CHAIRMAN, CAMBRIDGE ENERGY RESEARCH 
                           ASSOCIATES

    Mr. Yergin. Thank you, Senator Bingaman and Senator 
Domenici. I am very pleased to be here to participate in this 
workshop, a very constructive way to try and address these 
basic questions. So I hope in my few minutes here I can provide 
a little bit of a framework for the discussion that will ensue 
over the next couple of hours.
    Obviously, the very fact that we are together shows the 
concern. There is no question as a country and as a world that 
we are living through an oil shock right now with tremendous 
impacts around the world.
    I think also, as suggested, we are, we might say, at a 
break point in terms of which we are starting to see some major 
changes which will play out over the next few years.
    I think, Senator Bingaman, your emphasis on energy 
efficiency, that that is one of the three things that we really 
need to focus on, is very much to the point.
    I will say a few words about how we got here and how we 
might get out of here, but I would want to say, in terms of 
policy, it seems to me as a country we need to get kind of 
beyond this either/or energy debate and instead take a sort of 
more ecumenical approach that recognizes the critical 
requirements of supplying energy to our $14 trillion economy.
    The second is to recognize that we really do have an 
investment problem in energy and we are playing a game of 
catch-up right now.
    The third is talking about the response of markets.
    The fourth, over the last several months, I have become 
persuaded that expectations about what is going to happen 3 to 
5 years from now are really having a very important impact on 
price formation.
    That we are in an oil shock is completely clear. It 
coincides with the credit crisis. That is why people, for the 
first time since the 1970s, are talking about stagflation 
again. That concept was supposedly banished after the 1970s. We 
hear predictions of $200 or $250 a barrel oil. So it is quite 
appropriate to ask what is happening and why is it happening.
    There is a tendency always to try and find a single 
explanation, but for something this complex, I think there is 
not a single explanation. A lot of things have come together, 
and to kind of make sense of it, I would like to sort of 
suggest the heading of the traditional fundamentals and the new 
fundamentals.
    The traditional fundamentals are what Senator Domenici 
referred to, supply and demand, basically the success of the 
global economy, 5 years of the best economic growth that we 
have had in a generation and rising incomes means rising energy 
consumption. Just one set of numbers shows between 1998 and 
2002, world oil demand increased by 4 million barrels a day. 
Over the next 5 years, it increased by 8 million barrels a day, 
and that was because of economic growth. So as a result of 
that, we are in a tight supply/demand. Lead times in the energy 
industry are long. Things do not happen overnight.
    But you might ask, well, why are things not happening 
faster? There, I think, are three big reasons for the rather 
slow supply response. One is the question of access around the 
world to areas for development. The second is the uncertainty 
about investment, fiscal, regulatory regimes again around the 
world. The third is something I will come back to, the shortage 
of people and equipment.
    I think the other major traditional fundamental is the 
familiar one of geopolitics. We have not had a mega-disruption 
like the 1970s. But when you add it up, there are 2 million or 
3 million barrels a day that are missing, and you start with 
Nigeria where, at some points, up to 40 percent of Nigerian 
supply is out. That is one of our major sources of imported 
oil. You can just go down the list of Venezuela, Iraq, Mexico, 
Russia, and you see this adding up of missing supply. When you 
have a tight market, it is vulnerable to the impact of 
disruptions. It is vulnerable to price.
    I think there is no question that the dangers and 
uncertainties related to Iran's nuclear program are a 
distinctive part of the oil market today, and there is clearly 
an Iranian risk factor in the price of oil today.
    So those are the traditional fundamentals.
    When I say the new fundamentals, what are they? I think 
there are two. One is this doubling of cost. Today if somebody 
goes out and wants to develop a new oil field, you are going to 
budget it at twice what you would have budgeted it at just 4 
years ago. It is a shortage. We created what we call IHS/CERA 
Upstream Capital Cost Index, and it shows that in fact, it is 
actually something over a doubling in the last 4 years. So that 
means every dollar only buys you half as much as it would have 
done 4 years ago.
    What is the reason? It is the shortage of engineers and 
scientists, labor, equipment, steel, commodities. Right now we 
are actually--although we talk about the oil shock, there is a 
steel shock going on. Since the first quarter of this year, 
steel prices globally have gone up 40 percent, and that again 
goes into the costs of development.
    So all these costs are up, and that then leads to delays, 
postponements, in some cases cancellations. In other words, we 
can think there is a supply issue and then there is the supply 
chain. It is these issues about the supply chain that are a 
part of the delay in terms of response. New equipment, new 
petroleum engineers get trained, all of that happens, but it 
does not happen overnight.
    The other issue--and this is one that is obviously very 
much on the minds of all the Senators here--is what we might 
call oil is the new gold; that is, oil is a storehouse of 
value. Increasingly the fact that oil, along with other 
commodities, has been seen as an asset class by financial 
investors as one that is not connected to what happens to 
equities, bonds, and real estate. It has always been there, but 
I think only in the last few years has it really emerged on the 
scale that we have seen.
    None of you need to be told that the role of financial 
markets in the oil price is a very controversial subject and 
the range of views is from that speculation is the heart of it 
to that it is all about supply and demand. I am struck by the 
fact that when we use the word ``speculation,'' it has so many 
different meanings. There is a technical meaning of those who 
provide liquidity in a futures market. It can suggest 
manipulators. It can suggest risk takers. It can suggest 
irrational exuberance. I think that the effort to get much more 
transparency and knowledge about the financial markets, 
whatever your point of view, is a very important part of this 
dimension.
    But it is worth considering that people have all different 
reasons as financial investors to be investing in commodities 
like oil. It is a hedge against risk. A pension fund might want 
to do it to hedge their portfolio against a conflict in the 
Middle East. There is a shortage psychology that the world is 
running out.
    I think what has happened with the dollar, particularly 
since last July, has had a big impact, and the U.S. credit 
crisis is part of why we have seen commodity prices high. So it 
is ironic to think that the crisis that started in the subprime 
mortgage market in the United States has traveled around the 
world and, through the medium of a weak dollar, has come back 
home to Americans in the form of high prices at the pump.
    The second point I just wanted to say is that we are at a 
break point I think. About 2 years ago, we did a scenario paper 
we called Break Point, oil getting to $120 to $150 a barrel. I 
think at that time most everybody, including us, would have put 
about a zero probability on it happening. But the question is 
what happens when you get to that level, and I think we are 
seeing it in terms of technology and the dramatic change 
particularly in what is happening in the focus of the 
transportation and the automobile industry. In fact, last year, 
we probably had peak demand in terms of gasoline in the United 
States. It is probably going down.
    The third point--and Senator Bingaman emphasized this--is 
we have a tremendous potential for energy efficiency, both 
short- and long-term. The U.S. has double its energy efficiency 
since the 1970s. Over the next couple of decades, why can we 
not double it again? I also wonder, in terms of a much more 
concerted in terms of communication, whether we could save 
600,000-700,000 barrels a day in gasoline with no discomfort to 
the American people through shaving, minor changes that people 
would make, and that would make a difference in the market.
    So I think the question, Senator Bingaman, you had in your 
speech yesterday, why is this not more highly focused upon, I 
think is a very appropriate question.
    So in terms of just conclusion on policy, as I said, I do 
think we ought to really avoid the either/or. We kind of do 
need everything. Renewables will become more important, but as 
they become more integrated into the existing energy 
infrastructure, it raises questions about how they get 
integrated into it. In the meantime, we look at, as I said, our 
$14 trillion economy. How do we run it? How do individuals, how 
do families continue to pursue their lives and their careers in 
that energy is central to it?
    I think the second question is encouraging timely 
investment, and that is an issue not only in the United States, 
but around the world. It is a vigorous game of catch-up. I 
think it needs to be thought of in terms of our overall foreign 
relations. The United States played a critical role in the 
1990s in terms of getting the Baku-Tiblisi-Ceyhan pipeline 
built, which brings 700,000 barrels of oil now to the 
Mediterranean. I think we ought to be asking where else in our 
foreign policy could we do things that would enhance supply.
    I think maybe it is just one of the concluding points. It 
is striking that we are both more integrated into the global 
energy marketplace than we have ever been before, and at the 
same time, we have less leverage over that marketplace because 
our share of the market has gone down. National oil companies 
really have the dominating position now, with over 80 percent 
of world reserves. The five super majors account for less than 
15 percent of production. China and India are becoming more 
important. All of this emphasizes the need for a cooperative, 
multifaceted approach to relations with other producers and 
certainly with other consumers.
    I think the last point I would just like to make is about 
expectations. As I said at the beginning, it seems to me that 
this tight market and concerns about Iran are two of the 
principal things in the price today. But there is this shortage 
psychology, a belief in two things: one, that demand is going 
to go through the roof in 4 or 5 years, looking at China; and 
second, that there is going to be a physical shortage in 4 or 5 
years. I think that is particularly strong in the markets, and 
things that are significant get discounted like these very 
large discoveries off the coast of Brazil, which are perhaps 
equivalent to a new North Sea. People do not pay attention to 
those. So I think thinking about expectations and their role on 
price would be constructive today.
    As I said, avoiding either/or, new supplies, renewables, 
greater efficiency, all of those come together. All of that 
would be a great contribution to reducing the pain and 
pressures that Americans are feeling at the pump and the 
difficulties faced by American businesses, small and large 
alike. I think this would be a fundamental contribution both to 
the prosperity of our Nation and to the prosperity of the 
global economy, of which we are such a central part.
    Thank you.
    The Chairman. Thank you very much.
    Mr. Diwan, why do you not go right ahead?

    STATEMENT OF ROGER DIWAN, PARTNER AND HEAD OF FINANCIAL 
                      ADVISORY, PFC ENERGY

    Mr. Diwan. Thank you for inviting me this morning. I would 
like basically not to repeat a lot of what Dr. Yergin has said 
because I agree with a lot of it, but really focus on a few 
points I think which could help us dive more into the subject. 
I would like, anyway, to provide a more detailed framework to 
understand price formation and how we got to $135-$140 oil.
    I think the important moment is really what happened 
between 2003 and 2005 where really the world faced two shocks, 
a supply shock and a demand shock at the same time, a supply 
shock where we had what were called rolling supply disruptions 
between Iraq, Venezuela, and Nigeria, which basically rolled on 
for a number of years and removed a lot of oil from the market. 
At the same time, we had this incredible demand surge not only 
in the emerging world but also, in the early part of this 
period, in the United States. These two shocks together have 
wiped out all the spare capacity which existed in the world.
    Basically between 1985 and 2005, OPEC had a lot of capacity 
which was unused. That unused capacity waited on the market. 
There was no reason for prices to increase because every time 
prices increased, OPEC added barrels on the market. By 2004-
2005, that spare capacity basically resided only in one 
country. All the other countries were producing at full 
capacity, and there were not any more members of the cartel, if 
you want. They were like any other producers. Only Saudi Arabia 
had spare capacity, and that number is open to debate. Saudi 
Arabia says it is around 2 million barrels per day, and let us 
assume it is 2 million barrels per day.
    When you have a market without spare capacity, we 
discovered that it works very differently because you have 
really risk only on the upside. You do not have down-side risk. 
You have fears of more supply disruption, fears of fields not 
coming on line, delays, et cetera. So suddenly the balance, 
when you are looking at oil prices, the chances that they would 
go up versus going down, is really skewed toward 90 percent 
going up. That has created, if you want, a lot more investment 
into the commodity directly.
    So this is the moment where you start to see the financial 
industry start to get interested in the commodity. Before that 
you had too much of an OPEC risk, if you want, that you would 
invest in and one OPEC country would do something and you would 
lose your money. That risk was too big.
    So that skewing of the risk on one side started to build 
up. Clearly the fundamentals were right, and that is really the 
core reason where we are here.
    But over the next few years, basically between 2004 and 
now, something which is very important happened in the market. 
In a way, Dr. Yergin talked a little bit about it. I would like 
to focus on it, which is the supply narrative. We do not have 
enough supply. There is not enough oil coming on line. Projects 
are always delayed. Access is completely closed. It is true, 
over the last 4 or 5 years, we have seen non-OPEC supply being 
very, very sluggish and barely increasing every year. That has 
created more and more talk about peak oil, especially in the 
non-OPEC area. Often these issues are misunderstood and put in 
fairly simplistic terms, but there is a clear concern here that 
supply is not rising on a global basis from non-OPEC. The only 
places where really we are investing in a massive way is places 
like Brazil or like Saudi Arabia right now.
    That supply narrative has changed the expectation, and this 
is why around the middle of 2006, you saw the long-term price 
expectation rise suddenly from $40 to $100, where suddenly the 
market started to price scarcity in the future. The scarcity 
narrative is extremely important to understand why you have 
financial players coming into the market. So the fundamentals 
have driven, if you want, what I call the financialization of 
oil markets. Suddenly when the financialization of oil 
markets--now oil is a financial asset. It is not anymore really 
purely a fundamental supply and demand play.
    In this environment, really you ended up with what I 
describe to my clients as really two set of news. You have the 
bullish news and prices will go up or the very bullish news 
where the price goes up very much. The market is only attuned 
to these types of news. You know, something happened off the 
coast of Brazil or a new field comes on line, it is completely 
discounted. The news which are counted on are only the ones 
which reaffirm your belief that we have a problem in the 
future, that demand is really rising very fast in China and the 
Middle East, that prices are not having an impact, and supply 
is not coming on line.
    That takes us to the next phase really where sometime early 
in 2006 suddenly oil has really become a financial asset, and 
it has almost left the supply and demand fundamentals because a 
lot of the players and the majority actually of the players on 
the futures markets are financial players. They are not what we 
call commercial players, airlines, oil companies, et cetera.
    In the data that CFTC released a few weeks ago where they 
really broke down a little bit the players, what you realize is 
the commercial players, oil companies and airlines, people who 
physically buy and sell oil, represent something like 27 
percent of the market right now. The rest is what you would 
call speculators, what I would call investors, if you want, 
where they decided that oil is an asset class and they are 
making constant arbitrage between the dollar, between inflation 
rates, between the expectation of different assets, and they 
are making portfolio assignments. They decided how much money 
they want to go into a commodity versus into dollars.
    The correlation is extremely strong, and Dr. Yergin alluded 
to that. But think about it. Between July and now, the negative 
correlation between oil and the dollar is something in the 
order of above 90 percent. So the primary driver of oil prices 
over the last 9 months has been the dollar value. It is people 
deciding to hedge their dollar, if you want, with oil as they 
do with gold and other commodities. The problem is oil is a 
small pool compared to the very large pool of money which is 
the dollar. The way I describe that you have a very large lake 
which is overflowing into a very small pond. This is the money 
flowing to the small pond, the small pond being the oil market.
    That notion that oil is an asset class--now you see it 
every day. I mean, when you look at the daily movement in oil 
prices, you cannot relate them to any fundamentals event. You 
can very often relate them to what I call the 
macrofundamentals, the dollar, the inflation expectation, what 
the Fed is doing, what the ECB is doing, et cetera.
    How did we get there? How come the financial players have 
taken over this market and represent really the largest section 
of it?
    In a way, what happened is we had a tight regulatory 
environment to allow or not allow financial players to come 
into the commodity market, but in a way we closed the door on 
that years ago. Sometime 10 years ago, we kind of opened the 
window, and they came back through window. What I call the 
window is the ability for index funds to be linked to 
commodities and bring money which is basically not regulated by 
the exchanges, where you do not have really position limits.
    So you talk to endowments, pension funds, I mean, probably 
all our pension funds here are now putting money in oil 
commodities rather than what they used to do in the past to put 
it in the equity and the stocks of the oil companies because it 
correlates in their portfolio. So they are making big bets and 
they are trying to basically hedge our pensions mostly for the 
decline of the dollar. We have allowed them to do that.
    The question is should we allow them to continue doing that 
or should we limit their ability to do that? Should we have 
them come back, if you want, in the regulatory environment 
which we had in the past, that each institution has a limited 
amount of commodity it can buy or not? Those are important 
questions.
    Obviously, they do not obviate the root cause of the issue 
here which is tight supply and demand where we still have 
demand growing at $140 oil and supply is not coming on line. In 
an environment where supply is not coming on line on $140 oil, 
the only way you can bring things in balance is push prices to 
the limit until you break demand. The reaction is coming from 
the demand side, not from the supply side in the short term, if 
you want. So the players keep pushing prices up until you break 
down demand.
    We are starting to see that in the U.S., but we do not see 
it on a major level globally. We still have good product demand 
growth between the Middle East and Asia, and that is keeping 
the supply balance very tight.
    So that is what I have to say today, and thank you for 
giving me the opportunity.
    The Chairman. Thank you very much. I thank both of you for 
your excellent testimony.
    Senator Reid is here I see, and maybe before I ask any 
questions or Senator Domenici does, did you have any statements 
you wanted to make or any questions?

          STATEMENT OF HON. HARRY REID, U.S. SENATOR 
                          FROM NEVADA

    Senator Reid. Mr. Chairman, I appreciate it very much. The 
Senate opens at 10 o'clock and I have to be there. So I 
appreciate very much you and Senator Domenici allowing me to 
say just a few words about this most important discussion that 
you are leading here today.
    With gas and oil prices setting record prices almost every 
day, it is clear that the American people are suffering and 
deserve our attention and hopefully some solutions. If there is 
one magic pill that will bring energy prices back to sanity--
there is not one. Of course not, but I am hopeful and confident 
that if we cast aside partisan divide that has enveloped 
Washington, we can begin to stem this growing crisis.
    The issue spreads far wider than the reach of the Energy 
committee alone. It is fair to say that nearly every committee 
here in the Senate has a piece of this intricate oil and gas 
puzzle, whether it is speculation, the weak dollar, political 
instability in the Middle East, growing cleaner, more 
affordable alternative fuels, tax incentives, increasing the 
efficiency of our transportation sector. So I am sure that 
other committees will follow your lead--or at least I hope they 
do--Mr. Chairman Bingaman, to join the process of finding cost 
effective, sensible solutions to our dangerous addiction to oil 
and the high oil and gas prices that are crippling our economy 
and affecting the world economy.
    The crossroads of record prices and every-increasing global 
demand for oil has brought our Nation and the world to a 
crossroads we knew would come 1 day. For America, the yawning 
gap between our meager petroleum resources and our enormous 
dependence on consumption of oil has caught up with us. We 
cannot continue forever to consume 25 percent or more of the 
world's oil when we have less than 3 percent of the world's 
supply. It is just simple math.
    With the many regionally based energy interests in our 
country, moving Congress toward a cleaner and safer energy 
future has never been easy. That critical task has been made 
more difficult in my opinion with a President that has not 
shown the necessary leadership to end our addiction to oil and 
move toward clean renewable fuels.
    That said, we did make progress last year, bipartisan 
progress. Was it enough? Of course not, but it was some 
progress. We worked to pass last year's landmark energy bill 
which moves us slowly in the right direction. We all know that 
that bill is only a small down payment on the transformation 
that must take place if we are going to meet the urgent 
economic, national security, and global warming challenges that 
we cannot afford to ignore any longer.
    So I hope today this event--and I am confident it will 
bring forward new ideas, sensible ideas that can help relieve 
the enormous burdens of high gas prices on consumers in the 
near term and the long term.
    It was just a few weeks ago that I was here testifying, and 
I looked next to me and there is T. Boone Pickens, one of my 
mortal political enemies for all these years. Suddenly because 
of what I had heard on public radio that morning, I realized he 
had become my political friend because here is a man who not 
only has helped us recognize there is a problem, but he is 
focused on a solution. I am so appreciative of T. Boone 
Pickens. He is an oil man, a staunch conservative, but he 
realizes the enormity of our energy crisis. That is a pretty 
good model for the kind of bipartisanship it will take to solve 
this problem.
    This week I have introduced one solution on the Senate 
floor, I hope, legislation to stem the excessive speculation in 
the energy markets that many economists believe accounts for 20 
to 30 percent, or more some say, of the price we pay at the 
pump.
    Eighteen years ago the Commodity Futures Modernization Act 
for the first time created a whole new class of traders to 
enter the commodities market without the same constraints faced 
by people trading in the actual physical commodities. Because 
of this new law--a mouse click--the energy market was born 
overnight. That means that right now Wall Street traders can 
raise oil and gas prices simply by logging onto their computers 
and executing trades without regard for anything but their own 
profits. Traders are bidding up prices by buying huge 
quantities of oil just to resell at an even higher price. The 
result has been a new class of investor getting rich by buying 
oil, only to turn around and sell it at an ever-higher price, 
only to stick consumers with the bill, never, ever intending to 
take control of that oil actually.
    Our legislation that was introduced yesterday will finally 
hold the energy futures market to the same standards of 
accountability that other futures market are held. This is a 
matter of fairness and common sense. We are not saying that all 
speculation is bad. It can be very healthy in a well 
functioning market. It can help the market find the most 
efficient price. But without proper market oversight, 
speculation has gotten out of hand, and that is one reason for 
record gas prices.
    As I have said, curbing excessive speculation is not the 
solution to our energy crisis, but it is one step, an important 
step, that we can take now to lower prices and ease the burden 
of this crisis for the American people.
    So, Mr. Chairman, I hope that our Republican colleagues 
will support our efforts. Part of the package that they 
introduced a week or 2 ago to solve the energy problems or to 
take a bite out of the energy problems of this country was 
legislation dealing with speculation. If my Republican 
colleagues do not like our speculation bill, let us hear from 
them how they want it changed. We will be happy to work with 
them.
    Speculation is, I repeat, a problem. It is a significant 
problem and we must address this. I would hope that if we can 
get a handle on this speculation issue by legislating, it will 
allow us to do other things.
    I have spoken to both Senator McConnell and Senator Kyl, 
saying let us find out what we can do on this. Let us determine 
what amendments you want to offer and we want to offer and let 
us see if we can work something out.
    But I say to all my friends and anyone within the sound of 
my voice, speculation is where we should start. There are other 
places we can go and we are happy to take a look at that 
perhaps at some time, but let us first look at speculation.
    I repeat for the third time here today, speculation is part 
of the problem that we have got to address. We have to start 
someplace. There is no one shop that we can go to and solve all 
the problems. There is no one area of the law that needs to be 
changed that solves all the problems.
    So I think that this workshop is an area where people can 
bring their ideas. If Republicans have other ideas, if 
Democrats have other ideas, we are all ears. Let us find out 
what we can do. So I appreciate very much you and Senator 
Domenici taking time to listen to all Senators. This is open to 
everybody, not only members of the committee. So I look forward 
to a productive workshop and a good bipartisan effort to find 
solutions for the American people.
    If I could be excused, I would appreciate it very much, Mr. 
Chairman.
    The Chairman. Thank you very much for being here and making 
a statement. Senator Domenici had one comment, and then we will 
go to questions.
    Senator Domenici. Mr. Chairman, before the distinguished 
Democratic leader leaves--and I understand he must leave--I 
would like to just comment to him so we do not have to be doing 
all of this with the media. We can do it between ourselves.
    Look, as one Senator who is somewhat in the leadership 
position on the Republican side, we are willing to look at 
speculation. We just want to make sure that our leader, you, 
understand that we think there are production issues involved, 
that the American people rightfully want us to produce more 
energy if we can. I just want you to know that we may very well 
work hard with you on the speculation issue. We may not come to 
a conclusion, but we are sure going to work at it.
    But we expect to bring before the Senate issues that relate 
to how we are going to use various Alaskan oil that might come 
on soon if we do things right offshore, which has now taken on 
a new breath of life which has been in the closet for 27 years. 
It is rather abundant. It is not a little, tiny piece of 
property. It is a big oil and gas property, and we would like 
you to know that we very much want an opportunity to present 
that. We will work with you in every way so we will have a 
chance to present that to you and to the American people.
    My last comment is--I do not know. I keep saying maybe the 
Democrats and Republicans can work together on something, and 
that might be possible. I leave you with that, fully 
understanding of the way I used to do business was that way. I 
wish it could come back on energy production, and maybe we 
could come up with something for our country instead of for our 
parties or for ourselves.
    Thank you very much for the way you are handling things, 
and just know that there are a lot of Republican Senators who 
want to get something done and want to work in a positive way 
to get that done.
    Thank you, Mr. Chairman.
    Senator Reid. Mr. Chairman, if I could just respond to my 
dear friend, Senator Domenici.
    The Chairman. Yes, go right ahead.
    Senator Reid. There is no stronger advocate anyplace in the 
Senate than Senator Bingaman for increasing domestic 
production. He has given a series of speeches the last couple 
weeks that have been, I think, really dramatically sound. So we 
look forward to--you know, it may even be that you have one 
alternative, to increase domestic production. We have another. 
But that does not mean that they are mutually exclusive. We can 
work together.
    My only point is that no matter what area we start in 
regard to doing something about the energy crisis, we have to 
start someplace. I chose speculation because I think it is a 
real problem. That does not mean that we cannot, on this piece 
of legislation, work on other issues. I have given Senator 
Bingaman the charge to come up with things that he believes, in 
keeping with what the country needs to increase domestic 
production and conserve and increase efficiency by maybe 
spending some money on new battery research. So we are speaking 
from the same hymnbook, but what we have to do is get on the 
same page or two so we work together.
    I repeat I would hope that we can have this speculation 
bill as the beginning to do something for the American people 
to let them know that we are focused on the economy. The 
economy has had a number of hits, not the least of which is 
energy, but not the least of which is housing. We have those 
two issues that we are going to try to make some progress on.
    So I appreciate the spirit of Senator Domenici's statement, 
and I look forward to working with him and all of his 48 
colleagues.
    The Chairman. Thank you very much again for being here.
    Let me just start with a question. Dr. Yergin, let me ask 
you. You made a reference that you thought there may be 600,000 
or 700,000 barrels of oil that could be saved through increased 
efficiency, as I understood it. Could you maybe elaborate a 
little bit as to what you are referring to there? There has 
been a reduction in usage by Americans faced with high prices. 
You are saying that there are other things that we could do to 
encourage even more efficiency without doing any damage to the 
economy.
    Mr. Yergin. Yes. You know, it is the things that we always 
hear that are sort of in our left ear as the tips about 
driving, but if you just look at the research people have done 
about three things, cold starts, tires, lead foot on driving, 
and you add up those numbers, you are talking 600,000-700,000 
barrels a day. That is not depriving anybody of anything.
    But I think there is a woeful lack of knowledge, and in 
fact, communicating that knowledge is not an expensive or 
difficult thing to do. It affects everybody's behavior. So we 
could be talking about 6 or 7 percent of gasoline consumption.
    The Chairman. So you are basically suggesting some kind of 
just public information campaign to raise people's awareness of 
the concrete steps they can take. Is that what you are saying?
    Mr. Yergin. Yes. I was struck in your remarks yesterday 
commenting that given all that is happening with this, how 
little effort there has actually been in terms of that kind of 
communication. Yet, of course, what individuals do really adds 
up because that is what energy consumption is. It is not 
dramatic. It is not building something. It does not take a long 
time to happen. But I think you can do that, and those kind of 
changes do not impose any burden except making sure we all 
check our tires.
    The Chairman. Senator Domenici, did you have questions of 
the witnesses?
    Senator Domenici. Yes, I have one.
    First of all, I want to say the idea of promoting 
conservation with the American people is an excellent one, and 
I think you have testified--you did, Dr. Yergin--that something 
is bringing conservation to the mind and hearts of the American 
people, and we are beginning to use less. I believe that is 
straight, pure cost. I think cost is having an impact on the 
American people and they are using less. But we maybe should do 
more at the executive branch and otherwise.
    I think Senator Bingaman has been constantly an advocate of 
this, and I think it is happening, according to the numbers we 
are getting.
    I would like to ask both of you. I have heard both of you 
testify that the root cause of high prices is the supply and 
demand imbalance. I heard Dr. Diwan express it in a very 
different way based on specifics that changed, and I laud him 
for that and thank him for helping us in that regard.
    But let me just say if that is the problem--the root cause 
of high prices is supply and demand imbalance--what can we do 
as policymakers to address this in your judgment. There are 
lots of things being discussed. Some have value, obviously. 
Some do not. Could you tell us what we ought to do in your 
opinion as policymakers now?
    Mr. Diwan. I mean, this is a tight market and it took 20 
years to get there. I think it is going to take a long time to 
unwind it.
    I spent most of my career looking at supply and demand 
numbers, and I have trouble to see the U.S. as an island 
removed from the world. So for me, globally how do you make 
sure that supply meets demand and how do you increase supply 
over a number years and how do you make sure that demand 
responds to prices? Because in a number of areas, prices are 
subsidized so that you do not have a response.
    It is very difficult for me to say if you move one piece of 
the puzzle, it is going to change the whole puzzle. How do you 
provide more access to the most prolific petroleum basin? It is 
actually probably the biggest thing which will matter in the 
long term. How do you have access to basically 80 percent of 
the reserve in the world, which are inaccessible to oil and gas 
companies, which belongs to national oil companies? The 
investment profile of these basins depend very much on State 
budgets. That is probably the bigger problem that you are 
facing.
    The second one is service sector capacity. Even if you open 
up more land or more water for exploration and production, it 
is not clear that we have what it takes right now to be able to 
go drill, explore, produce more. This industry has under-
invested for over 20 years. We got lulled by low oil prices. We 
liked them. They pushed a certain behavior in terms of 
consumption and supply. Basically we have shrunk this industry 
quite dramatically in terms of people and capacity and 
logistics to expand again.
    So what we are looking at here is a super cycle for 
investments, and for that, you really need the signal of the 
market of high oil prices to bring back petroleum engineers. I 
mean, we do not train a lot of petroleum engineers anymore.
    So it is a very big problem, and I have trouble to believe 
that you just move one element, it changes completely the 
puzzle.
    Mr. Yergin. I think there are lots of pieces in this 
puzzle. I think some of the things are in the realm of our 
relations with other nations in terms of access, encouraging 
steady development, encouraging a stable investment 
environment.
    I think clearly in this country, as per this discussion, we 
are having a debate about what is possible with outer 
continental shelf. I think we need to look at it, by the way, 
not only in terms of oil but in terms of natural gas because I 
suspect this winter you may be as concerned with what has 
happened with natural gas prices as you are with gasoline right 
now and with electric prices as a result of that. So our supply 
position for natural gas really will have to be part of that 
picture too, and that also fits into the discussion about 
opening up areas in this country.
    But it is a global question about access. I think it is a 
question about--I think the way Mr. Diwan expressed it that all 
news is interpreted in a certain way. There needs to be a sense 
that, yes, there is new supply coming on. For instance, I come 
back again to Brazil, which could be, some people say as big--5 
years ago or 6 years ago, nobody really thought there was this 
huge supply off of Brazil. Now people at least are saying this 
could be as big as the North Sea. Cumulative things like that 
start to change expectations, and if that happens, that would 
happen before--actually that oil is going to take some years to 
flow. So it is about what one anticipates for the future, as 
well as where we are now.
    Senator Domenici. Thank you.
    The Chairman. Senator Dorgan has to leave to chair another 
hearing. So let me call on him first. Then we will take the 
list of folks in the order they came and just see if any others 
have questions or comments or whatever.
    Senator Dorgan. Mr. Chairman, thank you. I have to chair a 
hearing at 10 o'clock, and I apologize to have to leave.
    But I thank both of the folks who have joined us today, 
obviously experts and people who know a lot about these issues.
    I think it is important that we not talk past each other on 
this committee or in the Congress. There is a danger of doing 
that. It seems to me that it is a false choice for anyone to 
suggest that doing one thing necessarily excludes doing another 
thing. I happen to think we have to everything. I think 
speculation is a big problem, but I think we have to do 
production. We have to do conservation. I would probably even 
measure conservation slightly ahead of production in terms of 
the cheapest oil that is available through conservation. 
Conservation, efficiency, production, renewables. We need to do 
all of that.
    But I want to ask about speculation, if I might, for the 
moment. Mr. Yergin, you indicated that you did a modeling 
recently, a year and a half--or was it 2 years ago--on $150 a 
barrel oil. What was the date on that?
    Mr. Yergin. That would have been September 2006.
    Senator Dorgan. So slightly less than 2 years ago. I think 
you said although you modeled $150 a barrel oil, you felt at 
that point probably almost a zero possibility or a zero 
probability.
    Mr. Yergin. Yes. It was ironic because in fact when we do 
these scenarios, we do not put probabilities on it. But I was 
going to say it was not the thing that people just said, oh, 
yes, that is exactly what is going to happen.
    Senator Dorgan. Right. But I think you said almost a zero 
probability, and I think most people would have believed that 
back then.
    So then the question is what has happened in the last 18 
months that went from a zero probability for an expert to 
actual $140-some a barrel oil.
    Mr. Diwan says that the people in this futures market 
affecting price, over two-thirds of them--73 percent I think 
you suggest--are what we call speculators, you said what you 
call investors. But nonetheless, they are people who are not 
hedging a physical product between consumers and producers of a 
physical product hedging risk. They are in this market because 
they view this as simply a new asset class. They have no 
interest in owning oil.
    So I guess the question I have is this. What has happened 
in the supply and demand fundamentals or expectations--because 
Senator Domenici said that both of you said that--I am not sure 
that you both said this--but the root cause is supply and 
demand imbalance. If that is the case, then what has happened 
in supply and demand expectations or changes in the last 18 
months that would justify the doubling, more than doubling, of 
the price of oil in the 18 months if it is not in some 
significant part attributable to speculation by those in the 
market that are not engaged in hedging a physical product?
    Mr. Yergin. Recently the Dallas Federal Reserve came out 
with a study looking at the increase in oil prices between 
2003-2007. I think they attribute about a third of the increase 
in the price of oil to the decline of the dollar.
    So one thing that has happened, if you look at when oil 
prices were bumping along at about $70-$80 a barrel at the time 
that the credit crisis began exactly a year ago. That is a 
point when you look at not only oil. Most all commodity prices 
really took off. So one thing that has happened is the decline 
in the value of the dollar, the loss of confidence in U.S. 
financial markets, loss of confidence in debt. So I think that 
is one big thing that has happened.
    A second thing that has happened is that Iran has continued 
to make progress. Its centrifuges continue to whirl. I think 
that the fear of something happening involving Iran--and I 
think Mr. Diwan would agree--over the last 2 years has become a 
more palpable factor in the market and people looking at those 
numbers of what passes through the Strait of Hormuz.
    I think the whole movement of the much greater interest of 
the financial markets in oil and other commodities is certainly 
part of it.
    Then the other thing that has happened--and when we did 
this scenario, it was premised on delays and postponements in 
supply because of the problems in the supply chain. We have 
seen no slowing down in the increase of costs in terms of 
development, and so this expectation of a shortage period in 
2012-2013 has become more a part of this sort of shortage 
psychology that is again, as Mr. Diwan said, part of the market 
outlook.
    So as we are saying, financial markets are part of a 
feature in which these other things are happening at the same 
time. We have seen Mexican supply go down. We have seen 
Venezuelan capacity go down. Iraqi production has not come back 
significantly.
    One other key factor, in the first half of this decade, the 
growth in Russian output more than outpaced the growth in 
Chinese demand. Russian production now maybe even is in decline 
slightly.
    Senator Dorgan. You have also seen the largest assessment 
of recoverable reserves ever measured in the Lower 48 just 
recently with the Bakken shale in Montana and North Dakota. I 
think it relates to what Mr. Diwan suggested, that the good 
news does not register apparently.
    But I appreciate your response. I have to go chair the 
hearing. But I think that speculation probably plays a much 
larger role, probably speculation around the very things you 
talked about, than does supply and demand.
    The Chairman. Let me just give a list of the first five 
folks here in the order they arrived so that they know they are 
going to be called on if they are still around: Senator Conrad 
first, then Senator Barrasso, then Senator Alexander, then 
Senator Craig, then Senator Allard. Why do we not start that 
way? Senator Conrad, thanks for being here.
    Senator Conrad. Mr. Chairman, thank you very, very much for 
holding this workshop. Thanks too to the ranking member, 
Senator Domenici, for doing this. I really think is exactly 
what we should be doing, putting a focus on this issue in a 
bipartisan way so that we can try to find a solution or a set 
of solutions that would make a difference both near-term and 
longer-term.
    I asked my staff yesterday to prepare a list of things that 
we have done in the Congress since 2004 trying to deal with 
what we all saw as an energy challenge to the country.
    In 2004, we provided $5 billion of energy tax incentives, 
biodiesel tax credits, ethanol tax credits.
    In 2005, we passed the Energy Policy Act of 2005, $14 
billion of tax incentives for energy efficiency and 
conservation, renewable energy, oil and gas incentives, clean 
coal projects. We had energy efficiency provisions to provide 
higher efficiency standards for appliances and commercial 
equipment.
    In 2006, we had the Tax Relief and Health Care Act of 2006, 
in which we also opened up part of the Gulf of Mexico, 8 
million acres there, for leasing for oil and gas.
    Then in 2007, we had the Energy Independence and Security 
Act providing, for the first time in over 20 years, an increase 
in fuel efficiency standards for the automobile and truck 
fleet, a dramatic expansion of the renewable fuel standard from 
9 billion gallons to 36 billion, with 21 billion to come from 
cellulosic. Again, we went back to energy efficiency, new 
energy efficiency standards for appliances and lighting, 
greater energy efficiency requirements on Federal and 
commercial buildings, carbon capture incentives.
    Then this year, the farm bill with over $1 billion 
dedicated to energy, trying to reduce our dependence on foreign 
oil, including a dramatic increase in research on cellulosic, 
which I think most of us understand is going to be critically 
important because corn-based ethanol has its limits.
    I say this by way of a preface that there have been a whole 
series of actions, many of them that do not take effect 
immediately. Perhaps the only thing that takes effect 
immediately is, to the extent speculation is involved here, 
steps to address that. But clearly, we do not have just a 
short-term problem, and speculation alone will not solve this 
matter. There is the issue of supply and demand and the long-
term perceptions, as the two of you have described.
    My question to you would be this. If you had it in your 
power to design a plan to get results to reduce our dependence 
on foreign oil, to reduce this dramatic run-up in prices which 
threatens the economy, what would you do?
    Dr. Yergin.
    Mr. Yergin. You have quite a list there that you have 
already established.
    I think I would want to look more on the demand side in 
terms of efficiency beyond what you have had. I think on the 
list, you had clearly one of the most important things was the 
fuel efficiency standards and the impact that they can have.
    About 10 years ago, I headed a task force at the Department 
of Energy on energy research and development, and at that 
point, there was not much interest in the subject. I have often 
thought if the kind of effort had been started then, we would 
not be in the kind of situation we are now.
    So without going into the specifics, the other thing is a 
long-term, consistent program of research and development 
across the energy spectrum. It does not bring results tomorrow, 
but that is what we need to diversify our energy mix and to 
build much more resilience into the system than we have today.
    Senator Conrad. On the production side?
    Mr. Yergin. I think that the issue you all are debating 
about what do you do about the outer continental shelf, that 
other 85 percent, and in an environmentally sound way opening 
up--I guess the starting point there is--as I understand, the 
money was appropriated to do a seismic survey but not 
conducted? I mean, the first thing would be to understand what 
kind of resource base we have.
    The Chairman. In fairness, I do not think money was 
appropriated. I do not think it was requested. So it was 
authorized and we directed in the 2005 bill that the 3-D 
seismic survey be done, but there was never any follow-up by 
the Administration or the Congress to get that done.
    Mr. Yergin. So the knowledge base in a sense is the 
starting point to know where the real leverage points are in 
terms of impact.
    Senator Conrad. As I hear you say it, you would be working 
all sides of this equation. You would be working on 
speculation. You would be working on production. You would be 
working on conservation. You would do something in all of those 
areas.
    Mr. Yergin. Yes, exactly. I go back to the fact that we 
have a $14 trillion economy, and it does not just rest on one 
leg to do it.
    I think we need further clarification. As I said in my 
remarks, we use the word ``speculation,'' and it is not clear 
often what that means. Clearly, the financial markets have a 
much bigger role than they did 3 or 4 years ago in this, as in 
other commodity markets. Will it turn out to be a bubble, as we 
have seen in other markets, or not?
    I think that the problem with the energy market, unlike, 
let us say, even housing or the Internet--those are not 
affected by geopolitical forces. You have this whole 
geopolitical uncertainty that hangs over the energy market 
specifically.
    Senator Conrad. Would you do something about the value of 
the dollar as well since both of you have identified the weak 
dollar as a key reason for the run-up in prices?
    Mr. Yergin. That is outside. I think that is outside the 
realm of energy policy, and I think you have the chairman of 
the----
    Senator Conrad. Yes. We have got to connect the dots.
    Mr. Yergin. Yes. But I think that we should recognize, if 
you look at all the commodities, the weakness of the dollar. If 
you go outside the United States, the significance of the 
weakness of the dollar and the flight--normally during times of 
instability, you have a flight dollar. In terms of currency 
instability, we have this flight commodity going on right now. 
So in principle, we have other problems in the country, but a 
stronger dollar I think would actually be a factor that would 
help ameliorate----
    Senator Conrad. Mr. Diwan, what would you do?
    Mr. Diwan. When I look at the energy policy of the United 
States--I am a European. So I am taking a slightly different 
perspective. In a way what we have done here in the last 25 
years, we encouraged consumption and we discouraged production. 
We need to fix both things in a way.
    We have allowed cars to become very large and very 
inefficient. We have not done much about it. I agree with Dr. 
Yergin that probably the most important element of legislation 
over the past few years was the CAFE standards. But think about 
it. We talk a lot about new technology and R&D, et cetera. But 
the average car efficiency in the United States right now is 
half of what it is in Europe. So we can talk about new 
technologies, but there is plenty of available technologies to 
get more efficient. So that is the largest problem.
    I mean, the United States consumes close to 50 percent of 
world gasoline. Those are a little bit scary numbers here.
    So we have allowed people to drive bigger cars further out 
in the suburbs, and we are paying the price. So we can say it 
is speculators, it is oil companies, it is this and that. At 
the end of the day, it is us. We need to be honest about it. I 
know it is difficult to say it is us. It is easier to say it is 
them, whoever they are, speculators, OPEC, et cetera. But we 
have done that to ourselves. So we need to look there. So I 
think it is both consumption and production in that sense.
    But that will take a long time. I mean, you have incredible 
infrastructure in this country. You have enormous installed 
capital, and to churn that capital to more efficient capital 
will take 10, 15, 20 years.
    So the question is what can we do in the short term, and 
the only thing we can do in the short term is try to do little 
things. I mean, look at the commodity laws and see how we got 
where we are and look at what I would call the investors, not 
the speculators, look at the little things we can do to improve 
the efficiency of the cars in the short term. Dr. Yergin talked 
about inflating tires. I think it is difficult to ask 300 
million people to do it, but we need to encourage those kind of 
things.
    So there is a lot to be done, but at the end of the day, we 
got our priority wrong in the last 25 years and we need to fix 
that.
    The Chairman. On our list here, I think several of the 
folks who I read off before are no longer here. Senator 
Barrasso is not here. Senator Alexander is not here. Oh, 
Senator Alexander is here.
    Senator Alexander. You can let someone else go ahead.
    The Chairman. I think the next one here would be Senator 
Allard since Senator Craig left. So Senator Allard, go ahead.
    Senator Allard. Thank you, Mr. Chairman and thank you for 
holding this--I guess you are not calling it a hearing, but 
discussion of what has actually been happening as far as the 
energy markets. I think you do bring in some interesting 
perspectives and whatnot.
    I would follow up with what Senator Conrad was approaching. 
Many times we are faced with an argument of more independence 
as far as the United States is concerned, less dependence on 
foreign sources of energy. If we are trying to become more 
dependent on just our own sources of energy and whatnot, you 
talked about conservation, but on the supply side, what can we 
do?
    One of the arguments that struck me is that we are the only 
country, for example, that limits offshore drilling. I do not 
know whether that is correct or not or whether you agree with 
that statement. But do we do that as compared to other 
countries? How does our controlling supply maybe differ from 
what other countries are doing?
    Mr. Yergin. Let me say, first of all, I think we import on 
a net basis about 58 percent of our oil and about 25 percent of 
our total energy. Of course, our two major sources of oil--two 
out of three--are our neighbors, Canada and Mexico. So it is 
kind of keeping that framework.
    So are we going to become energy independent or are we 
really going to focus on our energy security and resilience of 
our system? I think that is really where we ought to be.
    I think on the offshore, I was looking last week at a 
survey that said that Norway is the second greenest country in 
the world in terms of environmental policies. They produce 
about 3 million barrels a day entirely offshore in the North 
Sea in a pretty harsh environment. I think one question might 
be, how do the Norwegians manage this? I mean, if we want to 
see how other people are doing it. I think in this survey, the 
U.S. was ranked number 31 in terms of environmental countries. 
So I think there are messages there in terms of how other 
countries handle it.
    Of course, we have that very large energy complex in the 
Gulf of Mexico and then off Alaska. I mean, 27 percent of our 
oil now comes from the offshore. So it is not like we have not 
done it before.
    Mr. Diwan. I have a problem with the concept of being 
energy independent. After all, we are dependent for everything 
else. This is an open world. Even if the United States produced 
95 percent of its oil, if something happened in Venezuela or 
Nigeria or Iran, oil prices will increase here. Really it is a 
price impact. So no matter what happens anywhere else in the 
world, it is the butterfly effect. It will have a price impact 
in the United States. So at the end of the day, we are linked 
globally to everybody else who consumes and produces oil, and 
that is what is important.
    On the issue of producing more and in the offshore--and I 
agree with Dr. Yergin here--we can impose very tough 
environmental standards and look at what the industry can do. I 
agree that some countries have much tougher standards and have 
been able to produce with very little spill or risk of spill 
over time. So we can do things.
    A broader question here is, how do you fix a policy to both 
encourage production and consumption at the same time?
    Senator Allard. Many States in the West have a lot of 
public lands. Do you have any figures on the amount of known 
reserves that we have in public lands and any idea of what 
perhaps projected possible reserves might be on public lands?
    Mr. Yergin. I do not. The only thing I would say is that 
reserves is not a static concept. We have seen that technology 
changes and areas that were thought to be in decline or 
finished, in the Rockies, for instance, turn out to be 
significant producers, or we see unconventional natural gas. So 
technology itself expands the resource base. But I do not know 
what the current estimates are for the West.
    Mr. Diwan. Nor myself. I do not have a number.
    The Chairman. Yes, we can sure get all that information for 
you.
    Senator Allard. I appreciate that very much, Mr. Chairman. 
That concludes my questions.
    The Chairman. Senator Salazar.
    Senator Salazar. Thank you very much, Chairman Bingaman.
    I think over the last 3 and a half years on this committee, 
we have done some good things around energy. I think the three 
pieces of legislation we passed in 2005, 2006, and 2007 were 
good. The question now is what more we ought to do, especially 
given the pain that the people of America are feeling with high 
gas prices.
    I think there is broad agreement on conservation, I think 
on alternative fuels, alternative energy, I think broad 
agreement on new technologies, hybrid plug-ins, battery 
technologies, et cetera. But the big debate I think that will 
take shape here in the next week or 2 will be about additional 
supplies, putting more oil into the pipelines.
    My question to you, Dr. Yergin and Mr. Diwan, has to do 
with what those additional supply sources might do with respect 
to the high gas and diesel and jet fuel prices that we are 
paying in America today. I want to be specific.
    First of all, with respect to existing leases, there is a 
number out there that there is some 68 million acres of public 
lands that have already been leased, much of which is not in 
production. Is there anything that can be done to put those 
into production? What would be the impact in terms of energy 
prices?
    Second of all, the Alaska petroleum reserve. The Alaska 
petroleum reserve is there, proven reserves. Why can that not 
be put onto the market, and what would happen if the Alaska 
petroleum reserve did come on?
    Third of all, offshore. If we looked at the areas that do 
not have a moratorium in places off Alaska, if we were to push 
for those areas to be opened up, what impact would that have in 
terms of our energy prices?
    So maybe if you can just answer that last question, in 
terms of additional supplies where I think there might be 
agreement in terms of us moving forward and trying to push our 
production from those areas.
    Mr. Yergin. Of course, the offshore areas are the ones with 
the longest lead time. So in terms of physical oil coming on, 
if you start it today, there are several years. There is the 
question of the sense of expectations of new supplies coming 
on, and I think ultimately--we have seen it in the last 2 days 
I think. We have seen the price drop rather substantially. Who 
knows what will happen today?
    But it goes back to what Mr. Diwan is saying. When there is 
a kind of cumulative shift in the emphasis that from there is 
going to be a shortage to, in fact, that new supplies, new 
areas are going to open up--and, by the way, the expectations 
that people have, the pictures of demand from 2 years ago is no 
longer appropriate after these type of prices. Oil is not going 
to retain its monopoly position in transportation. You 
mentioned hybrids and so forth. We have mentioned biofuels. Oil 
will probably have the predominant role. That kind of shift, at 
some point, is what starts to bring the prices down. Maybe we 
are starting to see the demand responses specifically that will 
also reinforce that.
    Senator Salazar. Let me push you just a little bit on that 
question. When I look at information that we have on the 
Alaskan OCS that is not covered by the moratoria, the number 
that I have is that there are 918 million acres that are 
available out there. I think the numbers from the Minerals 
Management Service indicate 1.2 billion barrels of oil in that 
area, 17.8 trillion cubic feet of natural gas.
    If there was a major push to go into an area of that size, 
what impact would it ultimately have on energy prices here in 
the U.S.? Would there be an immediate impact? Would it be a lag 
impact? What kind of impact would it have?
    Mr. Yergin. I mean, it certainly would not have immediate 
impact in terms of supply because it would be a 5-, 6-, 7-year 
development program. I think if the sense that--and in other 
areas--you start to have a sense that new supply is coming on, 
that then changes the kind of expectations that are driving the 
market.
    I think that each of the companies--the reason they bid--
sometimes several companies will bid for a lease and sometimes 
no one will bid for it, and sometimes one person will bid--is 
because different companies will look at the geological 
potential. It is fairly--you know, we use the word 
``speculative,'' but speculative in a different way because you 
really do not know until you actually start serious 
exploration. So there is a lead time.
    Senator Salazar. I recognize the lead time because you make 
these lands available and it takes time to do the exploration 
and to do the quantification and do the development that it is 
going to take. But just making them available and getting on a 
program to actually get those leased, would that have an impact 
on price?
    Mr. Yergin. Yes. I think, if I understand your question, 
that the sense of new prospective territories being available 
and moving toward serious exploration I think would be one 
contribution to the mosaic of expectations.
    Senator Salazar. Thank you.
    I know my time is up. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Alexander.
    Senator Alexander. Thank you very much for really helpful 
testimony. I am sorry I missed the last 30 minutes.
    But I would like to go back to an understanding of this. Do 
I understand each of you to say that today's price for oil 
depends to a large extent upon the expected future supply and 
future demand of oil? Is that correct? How can I say that more 
accurately?
    Mr. Yergin. Yes.
    Senator Alexander. Because a lot of people say that this 
might take 5 years, and I think what I hear you saying is if we 
see a shift in demand, such as with plug-in hybrid electric 
cars, if this country, using 25 percent of all the oil in the 
world, suddenly got on a clear track toward electrifying a 
large portion of the cars and trucks, that that expectation 
from the future would affect today's oil price. Is that correct 
or wrong?
    Mr. Yergin. Yes. I want to make clear--and I think both of 
us agree with this--you have to start from where we are today. 
We have a tight supply/demand balance. We only have about 2 
million barrels a day. If something bad happens somewhere in 
the world and we lost a million barrels a day, that would have 
an immediate negative impact on the market. Part of what is in 
the market is the recognition that there is not much margin for 
error.
    On top of that, however, expectations today--I think we are 
both saying--have a larger impact on price than it might have 
at other periods because there is this sort of drum beat that 
in 2012, 2013, there is going to be a physical shortage of oil 
in the world. I find that widely believed when you talk to kind 
of a cross section of people who follow these things.
    Mr. Diwan. I will add one thing which is important in the 
psychology of if you provide more land, they might believe that 
the supply is going to increase and they stop putting in the 
expectation. You are going to have to do a lot to change the 
expectations because the problem is not only the access, but it 
is really the ability to go explore, build the facilities, and 
produce. The bottleneck in the service sector is such that even 
if you are putting more land and good land, which might have 
potential reserves, the skepticism vis-a-vis the ability to 
produce that in the next 5 to 7 years is very big.
    I mean, think about the large fields which are coming on 
line right now in the world in Angola and Nigeria and the Gulf 
of Mexico and Brazil, et cetera. All of these fields are 4 to 5 
years late, behind schedule. On average, they are 4 years 
behind schedule. All these fields were--basically we stopped 
working on them in the mid-1990s. So we have been waiting for a 
long time for that oil to come. That has really permeated the 
market. If an oil company tells you it is coming in 6 years, it 
is really coming in 10 years, maybe. The fact that often these 
fields coming on line are smaller than what they thought they 
would be.
    So the psychology has been really impacted by what happened 
over the last 5 years, all those delays and the incredible 
length of time it took to develop these deep offshore fields.
    Senator Alexander. But you are still saying that today's 
price depends upon the expected future supply and demand. Is 
that right? In part. A big part, small part?
    Mr. Yergin. I think that in this very tight market, these 
expectations loom larger than they would have maybe a few years 
ago. There is much more focus on this mid-term notion. You 
know, I would say there are four things. There is a tight 
supply and demand. There is Iran and these mid-term 
expectations about supply and China and demand growth. I think 
those are the kind of starting points that are shaping the 
psychology of price today.
    Mr. Diwan. One thing which is remarkable, if you look at 
the price growth, so if you look at oil prices 2, 3, 5, 10, 12 
years away, they are very close to today's price. So the market 
is having difficulties to understand all of that. We have a 
very flat curve in terms of oil prices. We do not have a very 
big shift in expectations which are reflected in the price 
curve. So the market is basically taking today's balance and 
the expectation in the future that not much is happening and 
pricing oil in the very long term.
    Senator Alexander. You mean locking in today's price at a 
future time.
    Mr. Diwan. Correct. I mean, if today's price is $135, 
prices 10 years from now on the futures exchanges are probably 
$137, which does not make a lot of sense in many ways because 
you would have very different expectation of----
    Senator Alexander. May I ask one other question? Have 
either of you made projections? I mean, there is talk about oil 
as a bridge to a future when we have a different kind of 
energy. As policymakers, how should we think about--how much 
oil is the United States going to need 10 years from now, 20 
years from now, 30 years from now or as we move to a different 
kind of energy future? Have you done projections of that kind?
    Mr. Yergin. I do not think so.
    Senator Alexander. Did you, sir?
    Mr. Diwan. I mean, the difficulty here is price is the most 
important function. Depending on prices, your projection will 
be very different. So if you believe it is going to be $140 oil 
going forward, I think you will see a big destruction of demand 
and a faster shift to other energies. If you had $20 oil, you 
can be sure that we would have a very steep forecast and demand 
increase. So price is what killed the price at the end of the 
day.
    Senator Alexander. Did you say while I was out of the 
room--you said that 27 percent of the activity of the buyers 
and sellers of oil today are financial people--or 27 percent 
are the people who actually take physical possession of the 
oil. Is that what you said?
    Mr. Diwan. Yes. The latest CFTC data, which really break it 
down, which is April I think, shows that between 27 and 29 
percent of the market is commercial.
    Senator Alexander. The rest are financial people.
    Mr. Diwan. Yes, different type of commercial----
    Senator Alexander. Did you say what you thought we should 
do about that, if anything?
    Mr. Diwan. What I said is what we have done is we have 
closed the door and at one point we opened the window. Perhaps 
it is time to close the window and make sure that all the 
players in the commodity market abide by the same rule of 
position limits.
    The Chairman. All right. Let me just go through the list so 
everyone knows. Some of the folks who were here earlier who I 
do not think are here now, Senator Barrasso, Senator Craig, 
Senator Voinovich, Senator Cantwell, Senator Chambliss, Senator 
Bennett. So the next who is here is Senator Corker.
    Senator Corker. Thank you, Mr. Chairman. As others have 
said, I think this has been most enlightening and I certainly 
appreciate the efforts of you and Senator Conrad and Chambliss 
and others to try to solve this problem.
    I have only been in this body for about 19 months and 
continue to be amazed at the way that we look at things here. I 
mean, we have had two experts and many others ad nauseam who 
tell us that the law of supply and demand continues to work in 
the year 2008, which is an amazing thing. It has worked for so 
long before.
    Yet, we began to talk about energy legislation instead of 
focusing on supply and demand issues. I appreciate so much your 
focus on conservation and lessening of demand. Where do we 
begin that discussion but with speculation, which is a symptom 
of the fact that we do not have the courage or ability in this 
country to do the tough lifting of supply and demand? So we 
want to do the easy things first, probably the wrong things 
first.
    I just find it amazing that the majority leader of the 
Senate was in here in this body earlier and was talking about 
what a great thing this was to have this summit but did not 
hear a single thing that was being said, and that is it is 
supply and demand. So we start way off here in another place. I 
can understand why this body has a 9 percent approval rating 
because we do not address the issues as they really are.
    Now, I will say this. Since it looks like we are going to 
talk about speculation--I do not have control of the agenda. 
Nobody here does other than the person who just left.
    I would like to understand what we mean about closing the 
window. It seems to me that what we ought to be concerned about 
in this country is if somebody is manipulating the market. I 
mean, at the end of the day, if there is ocean-front property 
and there is only so much of it, then it seems like the price 
is going to go up, and it seems like that we understand that. 
If there is not going to be additional supply and it is going 
to be bullish and we are not going to have hurricanes and 
things, that that is going to continue to go.
    So I guess I have a hard time understanding why we would be 
concerned about investors in the market. It seems like what we 
would be concerned about is manipulators in the market, and it 
seems like to manipulate, you would have to hoard supply 
somehow, hoard the product. But I would love for you, if you 
would, to expand just a little bit because I think we ought to 
try to do the right things and not try to find a bogeyman, if 
you will, to sort of pen off politically and make the American 
people think we are actually doing something when we are not. 
So if you could expand on that and help us, that would be 
great.
    Mr. Diwan. Yes. I do not think there is a bogeyman here.
    What I am trying to say is basically all the commodity 
exchanges in general had allowed two types of players on them: 
what we call the commercials, people who buy and physically 
need oil, sell it or buy it; and the non-commercial, which are 
the speculators, if you want. The idea is we need the 
speculators to provide liquidity to the market.
    In this market, we have traditionally set the position 
limit, how much each speculator by himself can hold--you know, 
what number of contracts they can hold. In oil it is 3 million 
barrels. So we had that legislation for very long.
    But we have allowed at one point in 1999 that index funds 
do not abide by that position limit. This is what I have called 
the window, if you want. So suddenly you have a new type of 
players which never bought and sold oil like university 
endowments and pension funds globally, not only in the U.S., to 
basically use oil as a financial asset, not as a physical 
commodity.
    We can reimpose that position limit so they would have to 
abide like the other speculators. I mean, hedge funds, for 
example, have to abide by that limit, but if you are buying 
through the index fund, you can basically go beyond your limit. 
So that is the one problem.
    Senator Corker. So that is a problem. So tell us 
specifically because we do really bad things here. Tell us how 
we solve that problem.
    Mr. Diwan. We do not know how big of a problem it is 
because we do not know if we have 500 pension funds which each 
of them actually is below the position limit or we have 20 of 
them which have massive positions. We do not know that.
    Senator Corker. OK. Let me ask you this. In solving a 
problem, it seems the first thing we would want to do is to 
know the answer to the question or we would want to know how 
many people are doing it. Is that correct?
    So let me just ask, would it not be wise for us to invest 
in staffing and ensuring that we have transparency and 
understanding the dynamics of the issue before we try to solve 
it? I would just ask you that question.
    Mr. Diwan. Sure. I think we need a lot more transparency 
and the data has been poor to dismal. This is right now 
probably one of the most important parts of the oil price 
formation, and we have very little ability to understand 
because the data provided by the regulator, CFTC, is 
inadequate. If you had a lot more data and transparency, we 
would be able to do a lot more analysis.
    But there is also an issue of do we need every single 
player to disclose publicly the data or the regulator by itself 
will have to look at these positions. What we know is basically 
that position limits do not apply if you come through one side 
of the market. That is what we know. We know that that section 
of the market right now, these swap dealers, if you want, 
represent the largest section of the market and they have grown 
very, very fast. Actually it is the only real increase in the 
open interest. It is coming from these players. So the money is 
coming in quite fast through that instrument, the index funds.
    Traditionally what speculators are bringing to the market 
is liquidity. They are buying and selling. The problem with the 
index fund, they only come on one side. They only buy long. 
They never are short. They are not allowed to. Quite often it 
is like a parking lot. They are here to park money. So in a way 
they are drawing liquidity away from the market.
    Senator Corker. Since we typically do not address the 
issues head on, if we were going to try to address this 
specific issue that you know more about than anybody on this 
panel, how would we do that?
    Mr. Diwan. You reimpose position limits for all players. So 
if you are coming through an index fund or you are coming 
directly to the market, the amount of oil that you can hold is 
the same as any other players.
    Senator Corker. Now, how do you impose position limits when 
this is done over the counter and there are not mechanisms in 
place to know what those limits are?
    Mr. Diwan. Those are in the future markets. The brokers, if 
you want, hedge these positions on the market. The exchanges 
regulate already the position limits of all the other actors. 
So they need the brokers to disclose data so they can regulate 
that.
    Senator Corker. So does something have to happen first for 
us to be able to do what it is you are suggesting?
    Mr. Diwan. We need to ask the regulator to regulate that 
aspect and to impose a position limit.
    Senator Corker. Thank you, Mr. Chairman.
    The Chairman. Senator Murkowski.
    Senator Murkowski. Thank you, Mr. Chairman.
    Gentlemen, thank you for your comments this morning. I 
think we have heard some--I do not know--I would call them the 
hard truths when you remind us that our policy in this Nation 
has really been to encourage consumption and to discourage 
investment. That is really a very big contributor to where we 
are today and why we are facing the prices that we are facing. 
Sometimes I think we hate to admit that it is us. We are 
looking for somebody to point the finger at when, in fact, we 
are part of the problem. I think that is sometimes a difficult 
reality. So I appreciate your reminding us of it.
    I also appreciate the comments about recognizing that it is 
not just about providing the access. When it comes to the 
supply side, we can go ahead and we can make more acreage 
available for leasing, but as we know full well up in Alaska, 
you can make that available but you might not see a return on 
that ever or it may be 10, 15, 20 years down the road.
    Shell put up over $2 billion in leasing. They have been 
held up because of litigation for two seasons now, and they are 
going to come back and try again next year. But our reality is 
that there are other impediments out there, and just suggesting 
that we can make more available--yesterday's news back home was 
that Interior has put up millions of additional acreage in the 
NPRA, and that is good. But that is not new news. That plan was 
released in May, but it was not as exciting an issue back in 
May because we were not looking at the prices in May that we 
are today. So I appreciate the perspective on that.
    What I wanted to ask about--and, Mr. Diwan, you mentioned 
it, I think, in talking about the supply/demand imbalance and 
the access to some 80 percent of the world supply. We know that 
right now what we are seeing is the direction that so many 
nations are taking in terms of nationalizing their oil assets 
and acting in their national interest as opposed to a global 
interest. We are talking about how much does market speculation 
increase the price. Do we have any idea how much this 
nationalization trend is influencing our prices?
    Mr. Diwan. I have been looking at prices for most of my 
professional life. I have never been able to break it down into 
this event has that type of impact and this event has that type 
of impact. I do not think I can. I do not know if you have 
looked at it differently.
    Mr. Yergin. As Mr. Diwan says, I do not know how to parse 
it specifically, but I can say that one feature of the current 
period is that so much money is flowing into the countries that 
control these resources. This year we estimated it might be a 
$2.3 trillion income transfer from consumers to producers. 
Those countries do not have a great sense of urgency about 
developing resources. They are making more money than they 
thought they would make. They have to decide where to put that 
money. There are lots of claimants domestically for that money. 
So they say, what is the rush? So it just takes longer. 
Decision-making is slower. Things do not get done. So I think 
that is one way that kind of nationalism, if you are saying it, 
or national control manifests itself. They just do not feel the 
urgency.
    Senator Murkowski. You see the front page of the Washington 
Post this morning about what Saudi Arabia is doing with their 
just incredible resource wealth in terms of creating a new 
economic--I do not remember exactly the specifics of it.
    But recognizing that trend, I think the comment was made 
that one-third of the price increase that we have seen between 
2003 and 2007 was attributable to what was going on with the 
dollar. In the past decade, we are seeing again this greater 
trend toward nationalism. I am assuming that it is your opinion 
that this will continue as opposed to shifting any other 
direction, that it is going to continue----
    Mr. Yergin. Until the price comes down. Prices at this 
level--again, it just takes that urgency. So this could be a 
while before that trend--I am sorry to interrupt.
    Senator Murkowski. No. Go ahead.
    Mr. Yergin. I was going to say that one area--and this gets 
into the area of diplomacy--is that the U.S., where it can, 
ought to be encouraging countries to be timely and expeditious 
in their decisionmaking.
    Senator Murkowski. When it is in their best interests.
    Mr. Yergin. When it is in their best interests.
    Senator Murkowski. Very quickly then and I will turn it 
over to my colleagues.
    In the short term, is it fair to say that the most 
immediate thing we could do to help reduce the prices that 
people are paying across the country is on the demand side from 
a conservation and an efficiency perspective?
    Mr. Yergin. Yes. I think that is because you are talking 
about physical barrels being consumed in the world and 
affecting that tight margin of supply and demand. Our gasoline 
market is bigger than the entire oil market of any other 
country.
    Senator Murkowski. Thank you.
    Mr. Diwan. We are already starting to see that. Gasoline 
prices are high because crude oil prices are high, but gasoline 
per se right now is not very expensive, I mean, the difference 
between gasoline and crude, if you want, the margin. One of the 
reasons is very simple. Supply has been growing. We are adding 
gasoline supply into the market because we have a growth in 
refining capacity. We have ethanol, and at the same time, 
demand is declining. So the gasoline portion of the price, if 
you want, is shrinking, but the crude oil price, which is 
really the base of the price, has risen dramatically.
    Senator Murkowski. Thank you, Mr. Chairman.
    Mr. Yergin. Senator Murkowski, could I just add? Just to 
reiterate, the reason we are all here today is the urgency of 
this because it goes back to the basic fact we are in an oil 
shock and this is a tremendous burden on our economy and the 
global economy. At prices at this level, we are running on a 
global basis very substantial risks.
    The Chairman. Let me just give the listing of folks that I 
have here that are here at the current time: Senator Sessions, 
Senator Lincoln, Senator Ben Nelson, Senator Menendez, Senator 
Isakson, Senator Whitehouse, Senator Tester.
    Jeff, why don't you go ahead?
    Senator Sessions. Was Senator Nelson ahead of me?
    The Chairman. Were you ahead? I was given a list here that 
said that Senator Sessions was here and then Senator Lincoln 
and then Senator Nelson.
    Senator Sessions. I would certainly be pleased to yield my 
time to Senator Nelson. I think he was here when I came.
    The Chairman. Why don't we go ahead with you then?
    Senator Sessions. I think that would be fair and just.
    The Chairman. We will do you. What about Blanche? Was she 
here ahead of you too?
    Senator Sessions. I do not know. I saw her in the hall. She 
left. She came back.
    The Chairman. We will go to Senator Nelson. Then we will go 
to you.
    Senator Sessions. Whether she keeps her place or not I do 
not know.
    The Chairman. Senator Cantwell was here ahead of all of 
you, but she stepped out and now she is back. But go ahead, 
Senator Nelson.
    Senator Ben Nelson. Thank you, Mr. Chairman. I have to say 
to my friend from Alabama that he is characteristically 
gracious and I appreciate that.
    As we think about drilling and the question to drill or not 
to drill or where to drill, you mentioned prolific basins or 
prolific areas. Do we have currently, with the appraisal that 
we have which is outdated, enough knowledge to know where the 
prolific areas are, No. 1?
    No. 2, would it even be better, though, to have a new 
appraisal, an assessment, a seismic assessment, to be helpful? 
How long would that take if we decided to wait or to go forth 
with a new assessment? Either one of you.
    Mr. Diwan. Globally we know that basically most of the 
world reserve goes from northern Iraq to the southern tip of 
Saudi Arabia on the east side. I mean, basically probably 70 
percent of world reserves are concentrated there.
    Senator Ben Nelson. Based on what we know right now.
    Mr. Diwan. Based on what we know right now and on the size 
of fields that we discover in the region and what we know of 
the previous surveys, for example, in Iraq where you have 
probably--of the eight largest fields which are not producing 
in the world, I think seven of them are in Iraq right now.
    So we know, with the existing technology we had over the 
last 20 years, where these prolific basins are. The United 
States is fairly well explored, if you want, because we have 
been allowing the oil companies to do a lot more work here, and 
in this country, we are willing to go get much smaller pockets 
of reserve than anywhere else in the world because the 
economics are profitable.
    But also we have new technology and sometimes new 
technology allows you to discover new reserves. Dr. Yergin was 
talking about in Brazil we just discovered the two largest 
fields of the last 10 years over the last 18 months.
    Senator Ben Nelson. We did not know that because we had not 
had the experience with that area in terms of seismic 
appraisal?
    Mr. Diwan. Correct. Yes.
    Mr. Yergin. The technology.
    Mr. Diwan. We did not have the technology. These reserves 
are below a layer of salt, and traditionally we have not been 
able to do good seismic through salt. So we might have the same 
in other places in the world.
    Senator Ben Nelson. So it would be good to have another 
assessment, and would that be true, let us say, of the outer 
shelf or the Gulf of Mexico if we are talking about offshore 
locations?
    Mr. Diwan. Sure. We have exploration in the Gulf of Mexico 
and we are discovering a big, new place. We had discovered one 
3 years ago which we have not really yet determined. It takes a 
long time to determine. You need to drill into depths that you 
have never done before. So you are always on the edge of the 
technology available at the time.
    The same in Brazil. What we discovered--anyway, we do not 
have yet the technology to produce. It is really at the edge of 
what we know.
    Senator Ben Nelson. In terms of the leases that the oil 
companies have today--let us say in the outer shelf, the Gulf, 
and on the continental United States--are those leases in areas 
that you would consider prolific enough for drilling to occur, 
for production to occur?
    Mr. Diwan. If you discover oil in the United States in 
these areas in any significant quantity----
    Senator Ben Nelson. What we have today.
    Mr. Diwan. Yes. If you have the option of spending money, 
you will spend it first in the United States because you will 
make more money on any barrel produced here than anywhere else 
in the world. So you have incentives to produce as much as you 
can in the United States.
    Senator Ben Nelson. Then if that is the case, why is there 
such an interest in more leases? Is it that the lease is always 
greener on the other side of the fence?
    Mr. Diwan. You want to have as much oil as possible to 
produce. The portfolio of the oil companies is fairly thin in 
reserves, if you think about it. They have 10 or 15 years only 
for future production in their portfolio. It is fairly thin.
    Senator Ben Nelson. Even with 68 million--I am not trying 
to be argumentative, but even with 68 million acres under 
lease, that is not much more than 15 years at best?
    Mr. Diwan. I am pretty sure that a lot of these acres 
have--we looked if they are prolific or not, and they are not. 
I mean, oil companies are going to drill what they know, and if 
there is oil, they will drill it. If there is no oil and gas 
under these leases, there is nothing to do about it. A lot of 
it is that. I mean, they are going to prioritize every year. 
They have a budget and they are going to spend as much as 
possible on these leases when they know there is oil and gas.
    Mr. Yergin. I think that is the key thing is they 
prioritize it. If they spend money to win it, they bid a lease, 
they are bidding against other people. They are doing it 
because they think there are resources there and then begins a 
couple of year or several year process to determine it. Then at 
the end of the day, they have a dry hole or they find 
resources, but it is not economic to develop or they find 
productive resources. I think in other parts of the outer 
continental shelf, our knowledge is maybe 30 years out of date 
because they were last looked at with technology of 30 years 
ago.
    Senator Ben Nelson. So would that be helpful to have a 
current assessment of the outer shelf?
    Mr. Yergin. I think so not only from an oil point of view 
but also looking at the degree to which this country has made a 
bet on natural gas for electric power generation----
    Senator Ben Nelson. Both oil and gas.
    Dr. Yergin [continuing]. That it is important from a gas 
point of view too because either we import the gas and LNG or 
we produce it in North America.
    Senator Ben Nelson. My final question goes to speculation. 
I think I heard you say 73 percent or near that number would be 
speculators. Everybody is a speculator, but it is speculators 
that have no interest in taking delivery. Is that fair?
    Mr. Diwan. Yes.
    Senator Ben Nelson. Five years ago, do we know what that 
percentage was?
    Mr. Diwan. Probably close to 50 percent.
    Senator Ben Nelson. Ten years ago, do we know what that 
percentage might have been?
    Mr. Diwan. I do not have it off my head, but the market was 
much, much smaller. The pie has multiplied by six over the last 
the last 6 years.
    Senator Ben Nelson. How much data do we need to collect to 
know that there is a problem? More data probably helps us 
narrow down what to do about the problem, but how much more 
data would we have to know to--when I say a problem, driving up 
the price of a barrel.
    Mr. Diwan. The data has to be a little bit more refined. We 
need smaller categories of players rather than these two big 
categories of commercial/non-commercial. You want to break 
these into smaller categories, which the CFTC has started to 
do.
    Senator Ben Nelson. How long will it take us to get that 
kind of data?
    Mr. Diwan. The data exist. We need to process it.
    Senator Ben Nelson. No. I understand that you would like to 
have refinement. We all would. Purely supply and demand--or 
ignoring the fact that so much of it is about future supply and 
future demand, that you cannot just say it is as simple as 
supply and demand. Oversimplistic responses like that are I 
think what are offending the public. They are sophisticated. 
They understand that this is a very complex situation. So those 
who just say supply and demand, find more, use less, that is 
clear that we need to do that, but it is a lot more challenging 
than that. Would you agree?
    Mr. Diwan. Yes. It is a very complex puzzle.
    Mr. Yergin. Maybe Mr. Diwan can elaborate on it. You have 
such a range of participants in the financial markets. You have 
people that you look at them and say those guys are speculators 
and then say that those people are 401(k)s who are trying to 
asset-allocate to protect the pensions of people down the road. 
So I hope that out of this process we will have some greater 
clarity as to this range of people who are the financial market 
players and some way to break it down more into categories.
    Senator Ben Nelson. I think it was Will Rogers who said 
about commodity speculation, when it is pure speculation, that 
it is people buying something they are never going to get from 
people who are never going to have it. But if that is the case 
and it goes to hedge funds and pension funds, that is the most 
challenging part that we have to deal with right now rather 
than those people who are going with forward contracts to lock 
in prices on something that they are going to take and 
something they are going to need.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Why don't we go with Senator Sessions, Senator Lincoln, and 
then Senator Cantwell? We will fit you back in since you were 
here earlier than the others.
    Senator Sessions. It is basically supply and demand. Is it 
not, Dr. Yergin? Is that not what is called the boom and bust 
in the oil industry for all these years that you so brilliantly 
wrote about in The Prize?
    Mr. Yergin. Thank you. I do think when I kind of finished 
The Prize and looked at all those hundreds of characters--and 
sometimes I think that the two more important characters in the 
book are--one is named supply and one is named demand.
    Senator Sessions. Where were the speculators when oil was 
at $25 a barrel?
    Mr. Yergin. Roger.
    Mr. Diwan. I think think you did want to play too much in 
that market when oil was $25 because you had 5 million per day 
of spare capacity in OPEC. If you bought or sold oil, basically 
you were betting on OPEC, which was a risky bet. When you 
removed that spare capacity from OPEC, suddenly it is supply 
and demand. It is not anymore OPEC.
    Senator Sessions. In other words, when there is a 
deficiency of supply as opposed to demand, the speculators can 
profit, and that is when they come out and are more visible and 
more aggressive. Prices are surging and they attempt to 
capitalize on that by buying contracts for delivery of oil. Is 
that not basically what happens?
    Mr. Diwan. If you think about the oil futures 6 or 7 years 
ago, it was small, fairly liquid and fairly contained with few 
players on it. You had sometimes--how could I say that--price 
moving in a bizarre fashion because it was small, fairly 
liquid. So some of the bigger players could do things.
    In the last 6-7 years, that market has really mushroomed. 
It is a very big, liquid market. So you brought a lot of 
liquidity from these financial players. So the whole structure 
of that market has changed.
    As you did that, you have brought what I call new 
fundamentals in it. Supply and demand, you are right. But 
supply and demand of dollars really matter here. The perception 
of inflation really matters.
    At the end of the day, it is supply and demand of paper 
barrels, and these paper barrels--what you have right now, you 
have created a structure where we have a lot of people who want 
to hold paper demand. You do not have a lot of people who are 
willing to provide paper supply. If you are an oil company and 
you believe that oil price is going to increase by $20 or $30 
because that money keeps coming in, you have little incentive 
to go sell forward your production. You would be doing a 
disfavor to your shareholders.
    So what we have seen is the commercial players, the ones 
who are on the long side who are providing, if you want, the 
supply on the paper market, have removed themselves from that 
market because it was too risky for them. So the futures market 
has become, if you want, the sandbox of mostly financial 
players.
    Senator Sessions. We could say that because of the shortage 
and increasing world demand, unusual forces have come into 
play. I would just say I do not have a religious objection to 
controlling future speculation. If somebody can come up with a 
decent idea, I am willing to consider it. Some have worked on 
that, but I do not think that is the fundamental problem.
    Mr. Yergin, your book--you talk about boom and bust. Some 
say that the world has changed. We are beyond peak oil and you 
can affect the stock market right now today. I will give you 
that opportunity.
    With the price surging to these record highs, consumption 
has dropped 3 or so percent already in the United States. 
Drilling and rigs are out at record levels today. Historically 
that has led, after a period of years, to a collapse in the 
price. What do you think?
    Mr. Yergin. I do not think today is the day to predict a 
collapse in the price of oil.
    I do think that--and is it at this level? Is it higher? 
What I said before, I mean, I think the question of the Middle 
East and particularly Iran looms quite large and the 
uncertainty about that.
    But I think in a sense if we, to some degree, put aside the 
geopolitical, I think the reaction to high prices has already 
begun, and we will see it in terms of demand and supply. So 
will prices spike higher? It depends upon events. It depends 
upon economic growth. It depends a lot upon the dollar. But I 
think we are in this break point world, as I said, when oil's 
position in transportation 5 years from now is not going to 
have the absolute dominance that it does today. Our automobile 
fleet is going to look different from 5 or 6 years ago than 
people would have thought 3 years ago.
    Senator Sessions. Nobody can predict the future, but I 
think there are some forces at work that could moderate the 
surge we have been seeing. Would you agree with that?
    Mr. Yergin. Yes, absolutely, and I think those forces are 
already at work.
    Senator Sessions. Now, I believe that the average family 
from my calculations is paying $100 a month more for gasoline 
this year than they were 1 year ago. This is after taxes, after 
house payment, after basic expenses. The little after-tax money 
they have is being depleted dramatically. I think the wealth 
transfer that is occurring out of the United States is 
unhealthy for our economy. That is a factor too. Is it not? For 
policymakers like us, Dr. Yergin, this wealth transfer to other 
countries?
    Mr. Yergin. I think so. We are seeing the kind of balance 
of the world economy being reshaped in front of our eyes.
    Senator Sessions. If there is a choice economically for the 
health of the United States economy, it is better produce our 
oil here, therefore, churning that money within our economy, 
than sending it to Venezuela or some Gulf kingdom.
    Mr. Yergin. Certainly what is it? It is going to be $600 
billion. Would that be the number you would use too? About $600 
billion a year flowing out this year, and if that number was 
$400 billion, it would be better for our economy.
    Senator Sessions. I thank both of you for being here. I 
think Chairman Bingaman is not afraid of the truth. He has had 
a lot of good panels and a lot of good hearings on these 
complex issues. We might as well get serious about it.
    As to speculation, I see it as a guy on a desert island. He 
is dying of thirst and bugs are biting him and flies are biting 
him. Somebody wants to shoo away the flies. What they really 
need to do is get him some water. I think this economy needs 
some more oil and continued reduction in utilization.
    I will confess that I think Republicans and a number of 
Democrats should have moved more quickly on CAFE standards but 
prices of oil were not very high. We were not worried about it.
    I think Democrats and some Republicans should have allowed 
more opening for drilling long ago. The pressure was not so 
high then. The prices were not so high.
    So I think we both made mistakes. But I do truly believe, 
Mr. Chairman, if we use less and produce more, we can beat the 
speculators and bring some semblance of reality back to this 
market that is hurting this country.
    The Chairman. Thank you very much.
    Senator Lincoln.
    Senator Lincoln. Thank you, Mr. Chairman. I would like to 
add my thanks for you and Senator Domenici bringing this 
together to have a good conversation and continuing the 
conversation of what our solutions need to be.
    We appreciate you two gentlemen in providing your 
expertise. We hope that you know that this is not the first or 
the last time that we will be calling on you to help solve this 
problem.
    I think that for our options here in terms of policy, we 
see a lot of focus on long term because we want to ensure, as 
Senator Sessions mentioned, that we do not miss these 
opportunities not just for what we can do immediately but that 
there is a lot more we can do in the long term that will 
hopefully eliminate us seeing a repeat of what we are going 
through right now. But this problem did not occur overnight and 
it is not going to go away--we are not going to solve it 
overnight. We have to face that reality.
    There are some of us, however, that come from States that 
are disproportionately low income working families, and they do 
need immediate relief. You all have mentioned certain things 
like cold starts, lead foot, tire checking, and other things 
like that. I am just curious to see if you have any other 
silver bullets that might be helpful to us, particularly for 
these low income working families that are getting hit really 
hard.
    I noticed in my State just over the Fourth of July, I took 
my kids to the lake, and listening to the radio, the radio 
announcers were pleading with people to please look at their 
gas gauges because there were so many cars that were on the 
side of the road out of gas, families who had nothing else to 
spend. This was their holiday. This was their time with their 
family, and yet, they were just trying to get home on that last 
little ounce of gas that they had and could not make it.
    So you have got a lot of people in dire straits out there 
in this country. When we get into talking about solutions, we 
kind forget that they are choosing between fuel and food and 
whether their kids are going to get to play Little League this 
summer, or a whole host of other things. So that, with the 
increased price of food, we have got a real situation on our 
hands. So if you have got any other ideas of how we protect low 
income in this circumstance that we find ourselves in.
    Also, if we were to move to an emergency situation, which I 
think we should, here in the Congress and take this as an 
emergency situation and begin to look at both the long-term 
solutions and the short-term solutions, what role do renewables 
play? We keep saying that is way out there, that is way out 
there.
    I have got an automobile parts plant that is going dormant 
right now. I mean, how unrealistic is it that we would look to 
automobile makers that are downsizing and taking plants 
dormant--can we not look toward maybe the production of greater 
fuel efficient vehicles, as well as the production of renewable 
fuel use vehicles, converted vehicles? I had a lot of farmers, 
when I was growing up, that used propane in their trucks.
    How quickly can we move to some of those interim solutions 
as we look toward increasing our ability to really see a fleet 
of vehicles that are more dependent or at least somewhat 
dependent on renewable fuels and the use of renewable fuels?
    Mr. Yergin. First, as you make clear, the abstract numbers 
about oil prices and share of family incomes do come down to 
very painful issues for many, many families across the country 
who are really living every day the oil shock. So I think that 
goes back to what Senator Bingaman was talking about. The value 
of an intensive information campaign is both the macro effects 
in terms of helping to moderate oil prices and the individual 
family effects of helping people manage their energy budget.
    Renewables. I am just in that section of my new book 
writing the chapter about renewables so I have been thinking 
very hard about it and the work that we have done on it. I 
think in a way we are crossing the divide that renewables are 
going to be a bigger--they will become almost conventional as 
time goes on, and I think particularly notable is wind, which 
does not address transportation but really is growing quite 
substantially.
    Senator Lincoln. It produces electricity.
    Mr. Yergin. Yes.
    Senator Lincoln. If we have electric cars.
    Mr. Yergin. Yes.
    So I think that I have never seen so much emphasis on 
innovation across the energy spectrum, and that includes the 
renewables. So I think we have to keep in mind the scale of our 
overall energy system, that you can have dramatic growth and it 
is still a relatively small part.
    On renewable fuels, today about 5 percent of our gasoline 
is renewable fuels. So if you look at that, a half million 
barrels a day is in itself a significant number, much higher 
than it was just a few years ago.
    Senator Lincoln. But is it feasible to think we can speed 
that clock up? What is the biggest obstacle to speeding that 
clock up? Delivering it to the consumer, providing the 
research, getting the automobiles retrofitted or----
    Mr. Yergin. A lot of different technologies are under the 
heading of renewables. I think it is what has already been 
addressed in this question, getting to the second or third 
generation of biofuels, and there is a lot of debate, even in 
the scientific community, about what the timing of that is 
going to be. I personally do think that biology will probably 
play a bigger role in energy 10 years from now----
    Senator Lincoln. Sure. We are looking at algae now as a 
feedstock.
    But what I am asking you is, is there any one thing that 
you would say or recommend that would speed up the clock of 
getting us to the idea that I am going to be able to pull up to 
a pump somewhere and plug in my car or fill up my tank with a 
renewable fuel that comes cellulosic ethanol or algae or 
switchgrass or whatever?
    Mr. Yergin. I think it comes down to research dollars and 
concentration of research dollars and making a lot of different 
bets rather than just betting on one particular thing. But I 
think people are awfully motivated to do that.
    Senator Lincoln. So if we could get those speculators to 
invest in that market, then maybe it might move quicker?
    Mr. Yergin. I think it is some of the same people. The 
speculators also some of your innovators.
    Senator Lincoln. Can I ask just one last question, Mr. 
Chairman, just quickly?
    The Chairman. Yes, go right ahead.
    Senator Lincoln. Thank you.
    We have seen certainly the sharp increase in the 
consumption of oil by China and India. Are there any tools in 
our tool box right now that are available to us to help us 
address the stress on energy demand on an international level?
    Mr. Yergin. Let me jump in there because I do think that 
that is a very central question because that is where the 
dynamo of growth is. I think it is striking that the Chinese 
themselves have put efficiency at the top of their list for 
energy. I think over the last couple years, we have observed a 
shift in how they are looking at it. I think the degree to 
which we can--it is happening, but intensively tie them into 
the research and what we are doing in terms of innovation, that 
is in our interest as well as it is in their interest.
    The degree to which--and I think some of this has happened 
already. The Chinese in particular, but the Indians too, need 
to feel confident that the kind of international energy 
security system that exists around the IEA would work for them 
too, that it is not rigged against them in terms of a crisis. 
The degree to which the Chinese come and we come to see that we 
are actually large importing consumers on the same side of the 
table and have similar interests in stable markets, similar 
interests in not seeing these kind of prices that we are seeing 
today, I think that will be beneficial. So it is an economic 
question. It is also very much a question of our overall 
relations.
    Mr. Diwan. I can add just one element to that. I totally 
agree. The question is how do you bring the consumers together 
to really think about it. In a way, the IEA is a little bit of 
an odd organization. It has been created 25 years ago as an 
OECD member. Why the big consumers are not really part and 
members of that organization? Why do we not transfer the IEA 
into a real consumer organization which can address these 
issues with India, China, Brazil inside rather than invited 
from time to time as guests?
    Senator Lincoln. Thank you, Mr. Chairman.
    The Chairman. All right. Thank you.
    Senator Cantwell.
    Senator Cantwell. Thank you, Mr. Chairman.
    Mr. Yergin, good to see you. Mr. Diwan, thank you for your 
testimony. I appreciate, Mr. Diwan, you saying that you think 
that the market is no longer controlled by supply and demand 
fundamentals. Mr. Yergin, thank you for dwelling on the asset 
class issue and talking about the need for more transparency. I 
appreciate that very much, and I will get to that question.
    But I have another question--we have a colleague who says 
the reason we should drill more is because it will have a 
psychological effect. The Energy Information Administration 
said it is not going to have much of an impact before 2030 and 
not much of a significant impact after that as well. So I am 
asking you what you think about this notion of whether saying 
that we are going to drill more would have that psychological 
effect.
    When we opened up Lease 181 in December 2006, which is 6 
million acres, a lot of people were saying it was going to be 
the most promising area for new production. Oil was at $57 a 
barrel, and we know where it is today. So, obviously, that in 
and of itself did not have much of a psychological effect.
    There were 500 million acres that were recently put out for 
bid on the Gulf of Mexico, and I think companies bid on 200 
million of them. Apparently companies are not ready for more 
drilling even though prices are high.
    So what do you think of this notion of a psychological 
impact? I will let you start with that.
    Mr. Yergin. I think the word I would use is 
``expectations,'' and I think that what happens with supply in 
the United States is part of this larger picture and larger 
framework of expectations. So if it appeared that there is the 
potential of more supply from the United States, as perhaps 
more supply from other countries, that that would be part of 
changing this kind of shortage psychology that seems to 
dominate the market today, which Mr. Diwan described.
    Senator Cantwell. Since there really is not a serious 
amount of supply in the United States and it is more expensive 
to get, will lifting the moratoria really have an effect on 
price?
    Mr. Yergin. I think the answer is we do not know. I think 
before we mentioned the example of Brazil. Ten years ago when 
Brazil was talking about opening their offshore, no one 
contemplated that there might be a new North Sea off Brazil. No 
one would, I think, speculate today that there is a new North 
Sea somewhere off the coast of the United States. But truly you 
do not know until you have done some exploration, and the 
technological revolution in the offshore is sort of space age. 
It is very different than it was 10 or 20 years ago.
    Senator Cantwell. I am just really struck by your answer to 
Senator Bingaman that you could reduce oil demand by 600,000 to 
700,000 barrels a day, essentially overnight, here in the 
United States by simply implementing measures like filling car 
tires.
    Mr. Yergin. I know. It sounds like tips.
    Senator Cantwell. The 600,000 barrels a day is three times 
what the Energy Information Administration says we would get in 
2030 from lifting the moratoria. This is overnight juxtaposed 
to something that could take place in 2030. So it seems to me 
that this notion of some psychological effect is basically a 
specious argument. Some of our colleagues are trying to sell 
the idea to people that lifting the moratoria is going to have 
some immediate effect when we really cannot affect the supply 
price here much in the United States, given our OCS resources.
    Mr. Yergin. I think I am not familiar with the specific 
estimates of the EIA. You look at the history of exploration 
around the world, you see examples where you have $2 billion 
dry holes off the United States. You also see examples where 
people are quite surprised to see additional supplies that they 
did not anticipate. Often when people first discover a field, 
the reserves are here. As time goes on, the reserve number 
grows as the knowledge of the field grows.
    But I know I would go back to where I started. To me it is 
not an either/or question. I mean, I think addressing the 
demand question quickly is extremely important, efficiency. But 
I think the supply is also part of the picture. We are not 
going to discover probably a new Persian Gulf off the United 
States. So it is only going to be part of this overall supply 
picture.
    Senator Cantwell. Yes, Mr. Diwan.
    Mr. Diwan. If I can just talk a little bit about 
expectation. It is very difficult to judge expectation. 
Clearly, if you believe that there will be more oil in 10 years 
in the United States has a lot less impact as your expectation 
of oil prices for tomorrow if you believe that we are going to 
go bomb Iran. So you are constantly looking at the whole range 
of expectation with some short lead time versus a very long 
lead time, and it is very difficult to say this has had this 
impact versus that had that impact. Clearly, when an Israeli 
minister says bombing Iran is unavoidable, it has a big impact 
on the oil market versus opening a lease which might produce 
oil in 10 years. So we constantly need to juggle and understand 
a little bit how did the market react to these issues.
    Senator Cantwell. What would be the psychological impact of 
saying to the futures market that we are truly going to have 
transparency on all U.S. trades?
    Mr. Diwan. I would not know how to answer that.
    Senator Cantwell. You do not think it would have an impact?
    Mr. Diwan. If you----
    Senator Cantwell. Dr. Yergin.
    Mr. Yergin. The question again?
    Senator Cantwell. Do you think saying to the futures market 
that you are going to have transparency on all U.S. traded oil 
futures would have an impact on the market?
    Mr. Yergin. Yes.
    Senator Cantwell. Thank you.
    The Chairman. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Thank you both for sharing your knowledge and for your 
staying power. I know you have had almost 2 and a half hours of 
this. So I want to thank you for that as well.
    I want to get back to some of your fundamentals so we can 
put all of your answers in context. You basically have made the 
case that, as it relates to oil, this is a world market. It is 
a global market. That means that global production is part of 
the element. Is that fair?
    Mr. Yergin. Yes.
    Senator Menendez. That means that global demand is part of 
the element.
    I would add a third element I think that you have referred 
to, which is global events, so that if you have unrest in 
Nigeria or if you have a hurricane in the Gulf, all of those 
things can affect prices. Is that fair to say?
    Mr. Yergin. Yes.
    Senator Menendez. All right. So with that having been said 
then, the fact is that how you affect these different elements 
are in some ways on the fringe unless you can have a massive 
effort either in the demand, reduction, or a massive effort in 
the production side, or if you could somehow calm the waters in 
a way that there would never be any uncertainty.
    So I think it is because of what you have said about how 
this is a global context that to some degree explains why even 
though we opened up Lease 181 about a year and a half or 2 
years ago, gas prices still went up. Even though Americans have 
reduced 800,000 barrels a day as a result of higher gas prices 
and the Saudis have produced 500,000 barrels more a day, a 
total shift of about 1.3 million, gas prices have still gone 
up. So is that a fair way of looking at this set of 
circumstances?
    Mr. Diwan. Yes. It is really a global picture.
    Senator Menendez. So, therefore, the suggestion by some who 
would have us believe that, for example, opening up the outer 
continental shelf tomorrow would immediately reduce gas prices 
today, would be a falsehood, would it not?
    Mr. Diwan. Yes.
    Senator Menendez. Now, I think you made comments before 
that part of our challenge here, another element of this 
challenge, is that because oil prices were lower during a 
period of time, investments in the necessary critical 
infrastructure to both drill, refine, lay the labyrinth of oil 
lines necessary and do all of the elements of what it takes to 
bring oil to the marketplace were not made. Is that fair to 
say?
    Mr. Yergin. They were made but there was a contraction 
going on, and particularly when you had two price collapses of 
$10 a barrel. The last price collapse was in 1998 just a couple 
of years before this huge demand surge started.
    Senator Menendez. So the investments did not keep pace 
ultimately with how this explosion took place.
    Mr. Yergin. That is right.
    Senator Menendez. In fact, we saw a lot of the resources by 
the companies, as they were making significant record profits, 
in buying back their own stocks, but not necessarily making the 
rate of investment necessary to pursue the type of production 
necessary.
    Mr. Yergin. But I think if you look back to that period in 
1998-2000 when you had the price collapse, what they were very 
preoccupied was with downsizing to accommodate what was 
expected to be a low price environment for some time to come. 
The high profits that you are mentioning really came when we 
went into this period of much higher prices and high demand.
    Senator Menendez. But it is true that much more was made in 
buying back stocks than it was in investments, if you look at 
the relative amounts.
    Mr. Diwan. Buy-back of stocks were quite high when prices 
really increased, and one of the reasons is actually the lack 
of investable options for some of these very large companies 
because they did not have access to these very prolific basins 
we are talking about. It is a scale issue.
    Senator Menendez. Now, because oil is, in fact, sold on the 
world marketplace, production does not guarantee it will get 
sold to the highest bidder, generally speaking. Is that not 
true?
    Mr. Yergin. I am sorry. I did not hear the----
    Senator Menendez. Because oil is a world market, is 
production largely not sold to the highest bidder?
    Mr. Yergin. Yes.
    Senator Menendez. So if that is the case, and then we also 
look at the Energy Information Agency talking about the 68 
million acres that is out there, I mean, I would say that, 
first, they do some survey--the Minerals Management Agency does 
some survey of this to give some sense of what is the 
opportunity. Of course, companies pursue what they believe is a 
reasonable opportunity. As you say, there may be some dry 
wells, but there is also the expectation that they will find 
opportunities. People just do not buy up leases for the sake of 
buying leases. Is that fair to say?
    Mr. Yergin. They acquire sort of public data and, on the 
basis of that, decide they will bid here and not there. Then if 
they win the lease, then they go through a much more extensive 
period of analysis.
    Senator Menendez. Is not cheaper to drill on land than it 
is offshore?
    Mr. Yergin. Yes.
    Senator Menendez. Now, finally, let me ask you two last 
questions. Is it not critical, in order for us to deal with 
this longer-range issue that you both talked about as part of 
it, that demand reduction, Dr. Yergin, you said could be 
probably the single most significant thing we can do in the 
short term, but in the long term, as we look for renewables, is 
having the tax incentives necessary to bring these renewables 
to the commercialization aspect not a critical element of 
meeting this challenge?
    Mr. Yergin. I think without the incentives that we have had 
sort of on and off since 1974 for renewables, I do not think we 
would see the renewable industry where it is today.
    Senator Menendez. In fact, creating a greater stability of 
understanding that those incentives are going to be there over 
the longer term would, in fact, help us commercialize a lot 
quicker. Would that not be true?
    Mr. Yergin. Are you talking about----
    Senator Menendez. The stability of the tax incentives.
    Mr. Yergin. I think, in general, stability of a tax regime 
in any branch of the energy industry promotes investment.
    Senator Menendez. Finally, the Securities and Exchange 
Commission has a proposed rulemaking that would allow oil 
companies to report reserves where they have not done any test 
wells. It also creates new classes of ``potential reserves'' 
and not just having oil companies report proven reserves.
    My question would be would this rule not make the leases 
that oil companies hold, but are not producing, more valuable?
    Mr. Diwan. What you have right now in a way is oil 
companies keep two books of reserves, the official SEC one and 
the one that they look at what is potential. I mean, you drill 
two wells. You find oil in both of them, and you know there is 
oil in the middle. You cannot book it under the SEC rule. Oil 
companies know there is oil in the middle. So they book it 
internally and they plan their next well. So what the SEC rules 
are doing in a way is coming closer to how the industry itself 
looks at its reserves.
    Senator Menendez. But clearly, there is----
    Mr. Yergin. Senator, could I----
    Senator Menendez. Yes, Dr. Yergin.
    Mr. Yergin. That adjustment by the SEC is absolutely on 
target because basically the rules for--this all goes back to 
what you are talking about now about understanding the 
financial markets. The rules for reserves were created in the 
1970s so that, among other things, we would have a better sense 
as a country of what is our reserve base, and then it was also 
adapted for the uses of investors. The thing is that the 
techniques that were used were the techniques of the 1970s when 
the deep water frontier was 600 feet, and today it is 12,000 
feet. So what the SEC is basically doing is modernizing a set 
of rules that were outmoded by vast changes in technology.
    Senator Menendez. I appreciate your answer, but could you 
answer the other part of the question? Will that not ultimately 
improve the value of that company's stocks by virtue of that 
reporting?
    Mr. Yergin. You said stocks or their ability to book 
reserves?
    Senator Menendez. Stocks.
    Mr. Yergin. Yes. Since investors judge oil companies and 
gas companies by their reserves and if their reserves capture 
what is there with modern technology, that would enhance their 
value.
    Senator Menendez. But that would do nothing, in fact, 
however, to necessarily increase supply.
    Mr. Yergin. It would do two things. One, it might increase 
their foundation for investment. Second, it meets the needs of 
investors by giving them a more accurate view of the companies.
    Senator Menendez. That would presume, however, that the 
investment would flow, that the moneys would flow, that the new 
higher stock price would flow not to create dividends but to 
plow back into investments.
    Mr. Yergin. I think like all companies, they have their 
obligations to do both. I think the point that Mr. Diwan made 
is a really important one and it goes back to this 80 percent 
of the world's resources are controlled by national oil 
companies. On a global basis, this question of access is 
critical for helping to bring on an investment into new 
resources.
    Mr. Diwan. I agree. I mean, just to come back to your 
question on the value of the company, a lot of the American 
companies who are ruled by these SEC rules, I mean, literally 
keep two books, one, in view of the technology that we have 
today, and often the analysts and the investors know these 
numbers. So there is not a huge discrepancy, if you want, with 
what they are putting in the SEC and what is known of their own 
reserve. So often people investing in these companies know what 
the company thinks about its own reserve even if it is not the 
way the SEC books it.
    Senator Menendez. Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Senator Whitehouse, you are the final Senator here who has 
not had a chance to ask some questions. I know Senator Domenici 
wants to make a statement. Maybe Senator Conrad or Senator 
Murkowski have other questions. But go ahead.
    Senator Whitehouse. I appreciate it, Mr. Chairman, and I 
thank you and the ranking member for allowing people from 
outside the committee to participate in this important hearing. 
It is a very nice thing.
    I just wanted to ask the two witnesses, given the emphasis 
on conservation, given the questions and the figures that 
Senator Cantwell had, what advice would you have for us as a 
Congress as to ways to increase conservation and encourage 
greater conservation? I do not see us policing the tire 
inflation of America's drivers. What are the best ways? Have 
you thought of ways for us to try to get our hands around the 
conservation opportunity, and what are the best recommendations 
that you have?
    Mr. Yergin. Obviously, Senator Conrad went through the list 
of things that you have done. I think it would be a question of 
examining, indeed, in the area of incentives, regulations, 
technology, just what are the panoply of things that can have 
an impact. The problem with conservation, the biggest single 
issue, is it not a thing. It is so diverse. So it is really how 
do you get the signals and the directions to move there.
    Now, obviously, we recognize price is one way to do that.
    So I do not have a list of specific things to do. I did 
mention just these short-term measures that have an impact. But 
I presume that this committee has looked at that and would say 
that is something to really kind of focus on, what is the 
inventory. If we just think about inventory of resources, what 
is the inventory of efficiency resources that we have.
    Senator Whitehouse. If you have a chance to, I would be 
delighted if you followed up on that after the hearing. It is 
something worth thinking a lot about.
    Mr. Yergin. I should say that we, within our company, have 
created a group that is trying to focus on how do you capture 
the efficiency potential that I think we are all convinced is 
there.
    Senator Whitehouse. Just one last quick question. I do not 
know. This may be a very quick answer. A measure of the run-up 
in oil prices for the U.S. has been the decline in the value of 
the dollar. As the dollar falls, oil prices increase. As oil 
prices increase, it has a weakening effect on the economy. The 
weakening effect on the economy can, in turn, cause the dollar 
to slip further. There is a potential negative feedback loop 
that could develop there, and I am wondering how robust you 
feel that negative feedback loop is, or are there enough off-
ramps on it that it is not something we need to worry about?
    Mr. Yergin. Yes, I would just say that I think you are 
absolutely right. What is the opposite of a virtuous circle?
    Senator Whitehouse. Vicious cycle.
    Mr. Yergin. A vicious cycle. That is partly getting into a 
cycle of stagflation, but I think that that is what we are 
actually seeing today and you see the divergence between the 
Federal Reserve and the European Central Bank and how they are 
kind of addressing these questions. So it does reinforce 
itself, and that is part of the reason, you know, the severity 
of this oil shock we are in and the kind of risks that we are 
carrying.
    Senator Whitehouse. Conservation would help interrupt that 
negative feedback cycle.
    Mr. Yergin. Absolutely.
    Mr. Diwan. In the short term, if I can add to that, I think 
this is the key driver of oil prices now. It is the perception 
of what the central bankers are doing about inflation. That is 
the most important fundamental in the driver of prices. This 
distinction we have what the central banks in Europe and the 
U.S. are doing, where we are fighting inflation in Europe and 
we are trying to promote growth here, is creating the further 
weakening of the dollar and further money coming to the oil 
complex. That is a very powerful cycle which has established 
itself in the last year.
    Mr. Yergin. If you look at gold, if you look at the other 
commodities, exactly what Mr. Diwan is describing, you have an 
inflationary cycle. Now, if you are outside the United States, 
you have a very strong sense of everywhere people are 
preoccupied with inflation. That is a time when commodity 
prices go up also.
    The Chairman. Senator Domenici, did you have a statement 
you wished to make here? I know Senator Murkowski has a 
question. Maybe Senator Conrad has a question.
    Senator Domenici. I have a combination observation and 
question.
    I would be remiss if I did not, once again, thank you both. 
We are pretty fortunate as a group--we, Senators--to have 
somebody of your quality give us a whole morning. I have not 
been here all morning. So I do not know what torture you have 
been through, but you both are smiling. So it must not have 
been too bad a morning.
    I have come to the conclusion that right here at the end of 
this year with the President lifting, by executive order, the 
executive moratorium on all of the offshore lands, coastal 
lands of America, and giving the Congress an opportunity to do 
likewise in whole or in part--it seems to me we can talk all we 
like about speculation and we can debate speculation on the 
floor.
    But I sense that the policy decision that we ought to make 
is to open as much of that offshore to production, and some of 
the American people are putting it in very simple language. 
They want some drilling on American property that is not taking 
place now. They do not even want us to use the sophisticated 
words of exploration. They say, drill. So I think we are free 
to use the word now. We were all scared of it 6 months ago, but 
it looks like Americans are saying that in larger and larger 
numbers.
    I am not trying to talk like I know the answer to this 
problem. This is the worst economic problem America has ever 
had in my 36 years. I think it is capable of destroying us. It 
is capable of making us poor. If we have to do it at a full-
blown high level, $500 billion to $700 billion a year for 8 or 
9 years, I do not think we can make it. I think something will 
happen. I am not going to ask you all that. I just will be 
satisfied in my own mind that it is a very big problem.
    I think we ought to go after the offshore and the Alaskan 
that is available right now with a vengeance, and we ought to 
pass whatever is necessary to open it up and see what happens.
    Now, let me just stop for a minute and say, am I being 
irrational as I look at what is coming in and have worked on 
this for so long, passed three very important bills? You know 
that. They are the important ones in the last few years. All 
three are the result of Senator Bingaman and Domenici working 
together. We had other Senators, obviously, but we did CAFE. We 
have done all the things we should have done 20 years ago. We 
have done them.
    The price is so high that between all of them, we are 
conserving like hell. I mean, we have never had such a big 
conservation effort without it being mobilized. Senators are 
talking about mobilizing it. It is taking effect. The price 
plus the things we put into law are causing us to lower 
dramatically our use. It could come down more.
    But I ask you, am I on the wrong track in saying let us 
proceed to get some of these properties released so they can 
put them out to bid and get started with the world knowing they 
are open?
    My whole goal is to pass laws up here that can say to you 
two men--you are writing your second book and you are saying, 
well, where are the new supplies? You can at least start with 
saying America has opened up the offshore and it is open. It is 
going to be used sooner or later here. I think it would be an 
important adjunct to anybody's analysis of where we are and 
what we ought to do. Am I mistaken or not?
    I want to say just before that, you have all told us--if 
200,000 barrels of Nigerian available got all messed up in a 
war, you tell us it has an impact on the market. Why would 
200,000 barrels of new oil and X million cubic feet of gas that 
are going to be put on the market by America on American 
property not have an impact on the price, as would the Nigerian 
situation with 200,000 barrels?
    Mr. Yergin. As I have tried to say, I think that a 
responsible further development of the OCS or part of the OCS 
is part of the overall picture. That is, it is supply and 
demand. We have got to look at both of them.
    I do not think that you are irrational at all in the larger 
concern that you are expressing. I mean, you have been through 
several of these cycles now, Senator. You know, wherever we are 
now, the risks of this could be worse. We could be looking at a 
worse situation. You can just go down the checklist of risks. 
There are a lot of them there today. So I do not think any of 
us would want to say you are irrational.
    Senator Domenici. What do you think?
    Mr. Diwan. We have been saying that we need to increase 
supply, and we need to increase supply everywhere. So I do not 
see how we can ask certain countries to do it only for us. We 
can decide the environmental standard we want to impose on 
these leases. We can change them. We can tighten them if need 
be. But increase supply globally is a good thing and globally 
includes the United States.
    Senator Domenici. I am going to close by stating in the 
record there is a new observation taking place by some 
Senators, and I am not being critical of them. That is good. 
They think they have found something here. They say these 
people that have leases, all these companies that have leases 
on the offshore, are going to either have to use it or lose it. 
I want to state for the record one more time they are subject 
to a ``use it or lose it.'' I see you nodding affirmatively. 
Every one of those leases says they are either for 5 years or 8 
years or 10 years. In the lease, it says if you do not start 
producing by the terminal date, you lose the lease. So that is 
a ``use it'' already. We do not have land out there that they 
can hold indefinitely and not use. They have to use it by the 
date on the lease or they lose it. So what we do is we have 
them out there doing the best they can to analyze.
    They just bid a bid on one piece of the offshore which must 
have hit both of your laptops with a pretty big bang, and that 
was the biding that was put forth on that little piece of 
property that we opened off of Florida. That was the highest 
bids we have had for any American leases in history. So they 
must think there is oil and gas there. Somebody says, why are 
they not producing it? They did not buy it to lose it. They are 
going to do it.
    Mr. Yergin. Also, one has to remember there are lead times 
here. There is a clock ticking, but you have to mobilize. You 
have to get the drill ships. You have to do the research. You 
have to do the seismic and all of that.
    Senator Domenici. Thank you very much.
    Thank you, Mr. Chairman.
    The Chairman. Senator Murkowski, why do you not go ahead?
    Senator Murkowski. A very quick question. Gentlemen, again, 
I appreciate your endurance.
    I have suggested that if the Congress were to lift the 
decades-old ban on ANWR and open that up for exploration and 
production, that even though the time for development may be 8-
10 years off, that there would be a psychological impact to the 
market, that that would be a signal that increased production 
is on the way.
    Senator Cantwell in her comments to you kind of challenged 
you on the aspect of the psychology, and you spoke to maybe it 
is psychology, maybe it is expectations.
    A couple of days ago when President Bush lifted the ban on 
OCS development, 2 days after his announcement, the prices of 
crude fell by $9.26 or 6.3 percent. What is that? Is that 
psychology? Is that expectation? I mean, what happened there? 
Am I right or is Senator Cantwell right? Or are you guys right?
    Mr. Diwan. I think it is very difficult to assign one cause 
for oil prices dropping like that over 2 days. I can come up 
with 20 different reasons, including the announcement that the 
United States will be negotiating directly with Iran. We can 
also look at what happened on the broader market and the fact 
that you had a very big sell-off, and some of these financial 
players had made money on oil and really needed cash to pay off 
what they were losing on the other side. So we can come up with 
10 or 15 reasons. Somebody like me who has been looking at oil 
markets for very long has a lot of trouble to accept there is 
one reason why thousands of people are going to do exactly the 
same thing at the same moment, selling oil.
    Senator Murkowski. But he makes an announcement and it 
drops by almost $10. Is that the signal that the market was 
looking for that there might be increased production and we 
respond to that? Is it psychology? Is it expectation? What is 
it?
    Mr. Diwan. No, it is not. I think announcing that Bill 
Burns was going to Switzerland to talk with the Iranians had a 
much bigger impact on the market than announcing that.
    Senator Murkowski. Do you agree with that, Dr. Yergin?
    Mr. Yergin. Yes. I think that also probably over the last 
couple of days, that sell-off, that sort of pessimism about the 
U.S. economy was a big factor.
    Senator Murkowski. So it is a combination.
    Mr. Yergin. It is a combination. It is all of the above.
    Senator Murkowski. So we are all right.
    Thank you, Mr. Chairman.
    The Chairman. Senator Conrad.
    Senator Conrad. I think that is the truth.
    [Laughter.]
    Senator Conrad. First of all, I want to thank very, very 
much the chairman of this committee and the ranking member for 
organizing this. A special thanks to Senator Bingaman, the 
chairman of the Energy committee, for really two outstanding 
witnesses. I do not know how many Senators we had here. I think 
more than 30. Perhaps as many as 40 Senators were here.
    Some of us had hoped that we would have an actual time out 
in the Senate for a thing like this because we had competing 
hearings going on while Senator Bingaman was conducting this 
workshop. I know committees on which I sit were meeting. I wish 
we would have had a time out so that others could have been 
here because this is exactly what we needed to hear.
    To the witnesses, we want to thank you for really I think 
outstanding presentations, and we are very fortunate to have 
people of your quality who are willing to take some time to be 
here to answer our questions.
    I thought, Mr. Diwan--is that the correct pronunciation?
    Mr. Diwan. Diwan.
    Senator Conrad. Diwan. Thank you. Mr. Diwan, at one point 
you talked about speculation, but you talked about at the heart 
of this is that over the last period of time, we have 
encouraged consumption and we have discouraged production. That 
takes us to where we find ourselves today. We have encouraged 
consumption. We have discouraged production. I mean, we have 
actually had tax credits to encourage people to go buy Hummers. 
What a bizarre policy that was. We had tax credits to encourage 
people to buy Hummers that give 8 miles a gallon or whatever it 
is. At the same time, we have held places were off limits to 
production.
    While it is obvious that we are in a global market and what 
we do on both of these equations will not be central to the 
overall equation, you also said that our fuel efficiency is 
one-half of Europe. It just seems to me it is so abundantly 
clear that we should work both sides of this equation. We 
should affect what we can affect. We should have more 
production. We should allow more access to this resource, and 
we should conserve more. We should accelerate what we did on 
CAFE standards last year to increase fuel efficiency because we 
are way behind. We are way behind.
    You indicated we are consuming half of the world's 
gasoline, Mr. Diwan, as I recall. You said your conclusion was 
it is us. It is us. We are the ones who are in charge of our 
own destiny. I hope very much the message that comes out of 
this is as clear as your testimony has been because as I have 
heard you say it, yes, speculation is part of what is occurring 
here, that we have a whole new series of actors that have come 
to this market with deep pockets who have put pressure on 
prices in the short term.
    But it is also true that we have had a set of policies that 
have discouraged production and encouraged consumption, and we 
have to reverse those. Did I hear you correctly?
    Mr. Diwan. Yes.
    Senator Conrad. Dr. Yergin, do you agree with that 
prescription, that we have got to reverse the longstanding 
policies we have had here to discourage production and 
encourage consumption, that we have got to go in just the 
reverse, that we have now got to encourage production and 
discourage consumption?
    Mr. Yergin. Yes.
    Senator Conrad. I do not know what could be more clear.
    Some of our colleagues just want to play on half the ball 
field. I mean, in both parties, I hear people that just want to 
deal on the consumption side and others who just want to deal 
on the production side. As far as I am concerned, both of them 
have it half right. Both of them have it half right.
    What we need is to get a strategy and a plan that deals 
with both sides of the equation. Now, maybe that is too 
simplistic, but it seems to me kind of basic. I think the 
testimony of you gentlemen has been about as clear as it can 
be. I appreciate it very much.
    I thank the chairman.
    The Chairman. Let me just also thank both of you. I think 
it has been very good testimony, very informative. I think a 
lot of Senators obviously have a vital interest in trying to 
find reasonable solutions, and I think you helped us. So thank 
you all very much.
    Why don't we conclude our workshop with that? Thank you.
    [Whereupon, at 11:55 a.m., the workshop was concluded.]

                                    

      
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